EU trade policy in troubled times

Amid increasing headwinds, EU trade policy should focus less on the ‘invisible hand’, more on the hand of friendship.

Over the past five years, European Union trade policy has been under severe pressure. Trade disputes with the United States, the negotiation of Britain’s departure from the bloc, the Covid-19 pandemic, the Ukraine war and rising geopolitical tensions have presented the European Commission with enormous challenges.

International trade relations have been severely affected by multiple crises, raising questions about the shape of globalisation and engendering new ideas such as ‘autonomy’ and ‘relocation’. The state is playing an increasingly important role and many countries are once again pursuing industrial policies. Trade policy is being used as a geopolitical instrument to safeguard national interests.

Orientation retained

The commission’s 2021 strategy for an ‘open, sustainable and determined trade policy’ set the course for the coming years. It continues to regard the liberal and rules-based trading system as the best solution to current challenges. As in the past—after the financial crisis and the debates surrounding the Transatlantic Trade and Investment Partnership and the Comprehensive Economic and Trade Agreement with Canada—openness and ‘free trade’ have been retained as the dominant basic orientation, with few additions and adjustments.

The new strategy nevertheless introduced three changes. First, trade should promote the European Green Deal and the digital strategy. Secondly, trade rules should foster more sustainable and fairer trade. And, thirdly, the EU wanted to act more ‘assertively’, pro-actively representing EU interests.

What sounds like a geopolitical orientation of the EU is though more of a geopolitical colouring of trade policy. ‘Assertive’ refers primarily to the pursuit of interests and the affirmation of rights within the multilateral World Trade Organization system and in bilateral agreements with like-minded states.

The EU strategy also lays out proposals for WTO modernisation. A successful reform and revitalisation of its dispute-settlement system would strengthen the EU and compensate somewhat for the creeping loss of importance of the union, especially vis-à-vis China and the US. The EU has also tried to make value chains more resilient, inter alia by building up trade networks with reliable neighbouring countries and in Africa. Last but not least, the ‘Brussels effect’ has been invoked, in particular with respect to spreading European sustainability standards.

Sobering picture

At the end of this five-year legislative period, the picture is sobering. WTO reform remains out of reach, as an inconclusive WTO conference last month once again underlined. The US, thought to be a safe partner for more free trade under Joe Biden’s administration, remains restrictive in its trade policy towards China and has lost interest in the WTO.

US tariffs on EU steel and aluminium have been partially suspended but a final solution has yet to be found. A joint trade and technology council has been the only transatlantic initiative.

The expansion of bilateral EU free-trade agreements has meanwhile stalled: a new agreement has been concluded only with New Zealand. The agreement with Chile was renewed, while Kenya had to consent to an agreement to retain trade preferences. Negotiations with Australia have failed; others with India and Indonesia are proving difficult. The Mercosur agreement with some Latin American states remains unresolved and negotiations and summits with the African Union and African countries individually have fallen short of any significant progress.

The EU has scored points on sustainability through unilateral activities such as rules for deforestation-free supply chains and the (not yet finalised) corporate-sustainability due-diligence directive, as well as legislation for a carbon border adjustment mechanism (CBAM) and a proposal for a new sustainability chapter in free-trade agreements. These measures aim to utilise the ‘Brussels effect’ and spread EU standards as a form of geopolitics.

Despite their positive intentions and potential, the regulations have though caused resentment among third countries, especially in the global south, where they are perceived as not only unilateral but protectionist. A more co-operative solution, with greater involvement of these countries, would be appropriate.

Inclusive approach

In view of the expected shift to the right in the European Parliament elections, the EU could well depart from a rules-based trade order. An active geopolitical use of trade policy with new instruments and industrial policies would then be within the realms of possibility. This would however require the union to have clear geopolitical objectives. The costs and benefits are uncertain.

So far, the commission has shied away from measures that could have negative consequences for individual member states. The sanctions against Russia are an exception—in this case, there is a clear geopolitical objective.

An alternative approach would pursue more collaborative agreements with trade partners, which would not only promote trade and investment through clear and enforceable rules but also enable more democratic, sustainable and fairer global production and trade systems, particularly between the EU and the countries of the global south. Though this appears difficult in the current EU political climate, the risk of continuing with business as usual is that the union will increasingly be perceived as a neo-colonial free rider in the global south, mainly seeking access to raw materials and export markets under the guise of democracy and ‘western values’. This would also have a negative impact on the EU’s Green Deal and digital-transformation policies.

In contrast, offers from the EU for substantial integration into EU-led value chains and more proactive technology transfer on favourable terms could facilitate a dialogue with the global south. In short, against the backdrop of more confrontational international relations, EU trade policy should promote a co-operative and inclusive approach in the years to come.

This is part of our series on a progressive ‘manifesto’ for the European Parliament elections