Europe’s Trade Policy: Can a Phoenix Rise From the Ashes?

Sebastian Dullien

When the European heads of state and government meet at the European Council this week and discuss EU trade policy, it will be very hard to gloss over one obvious fact: that policy lies in shambles.

There is little hope to rescue the Transatlantic Trade and Investment Partnership (TTIP) with the United States, an arrangement once envisioned to be a ground-breaking agreement between the world’s two largest economic blocs. Public protests against TTIP also seem close to bringing down the Comprehensive Economic and Trade Agreement (CETA) with Canada and it is uncertain whether even this deal, which was not thought to be controversial, will be ratified.

The damage goes beyond single trade agreements. The past year and a half have damaged the European Commission’s influence over trade issues. While the Commission‘s legal powers to negotiate comprehensive international trade agreements were increased as recently as 2009 with the Lisbon Treaty, Europe’s executive body seems now to enjoy less clout than ever before to push these agreements through.

How did we get here?

Part of the blame clearly lies with the Commission. The Commission failed to see that it has long become a political actor. It can no longer behave as if it were a mere body of technocrats.

In her early days in office, Trade Commissioner Cecilia Malström repeatedly declared that national governments had given her a mandate to negotiate, and that she could therefore legitimately follow her agenda, regardless of public disgruntlement. Commission officials at that time repeatedly underlined that one cannot look after concerns of single member states such as Germany when the EU’s responsibility was to negotiate for the 28 member states.

It must have been very painful for the Commission to learn that, while the argument was legally correct, for trade agreements, the Commission needs the consent of the European Parliament (EP), the members of which are more or less directly elected by the population and hence are rather receptive to strong popular feelings. Similarly, while technically it is correct that the Commission negotiated for the 28 members, the scope of the recent agreements arguably made them so-called mixed agreements that require ratification by all member states.

Had the Commission accepted earlier on that it needs to engage civil society in single member states, taking pains to gain and sustain public support, they might not now be facing the failure of one and perhaps two ambitious trade agreements.

In another grave mistake, the Commission stonewalled even the perfectly legitimate concerns over single elements of the negotiations agenda. Criticisms of the investor protection provisions, and especially of the investor-state-dispute-settlement (ISDS) rules in the first version of the CETA treaty, were completely justified. Discontent with existing ISDS rules had already grown for years in international organizations such as the United Nations Conference on Trade and Development (UNCTAD), as well as among governments of emerging markets and developing countries. The current global system is replete with unjustified claims made by corporations against legitimate regulations by national governments, as well as questionable rulings and panels that convey the suspicion of an existing bias. Worse, the network of differing ISDS treaties has failed to create the legal security it was designed to provide. The rules in the original CETA agreement might have been better than some of the existing ISDS set-ups, but not by much.

Instead of hearing out legitimate concerns, Commission officials first said that worries about ISDS were not justified, that the current text was great, and that they did not see any need to renegotiate this chapter. Moreover, officials said that the Canadians would not be willing to reopen the draft. However, when the EP made clear that it would not accept the current draft, the Commission quickly returned to the negotiating table and quickly offered a completely revised and much improved set of rules for ISDS, agreed to by the Canadians. This enforced U-turn shattered confidence in the Commission’s judgement: Was it really convinced that the first version was perfect, as it claimed in early 2015? If yes, why did it later claim that the revised version was the “best set of ISDS rules” on the planet? If no, why did it not give in to criticism?

A further mistake was the way in which moderate critics of CETA and TTIP were dealt with. Calling political opponents bad names has a long tradition, and it can work if you manage to paint your adversaries as untrustworthy or unelectable. Yet, when you use this strategy against moderates, the danger is that you drive them into the opposite camp and tip majorities against your position. This is exactly what happened to the Commission. In a number of instances, EU officials complained about “anti-Americanism” and “protectionist” reflexes in Germany to explain German resistance against TTIP. Suddenly, conservative German journalists and even German judges saw themselves unjustly tossed together with the fringes of the political left. As they actually had a very good idea of which elements of TTIP they were up against, their trust in the Commission was damaged, and their skepticism against TTIP only hardened.

Even today, Commission and pro-TTIP commentators claim that they have to fight an uphill battle against anti-Americanism and protectionism. Yet, surveys show that the issue is much more complicated than this.

In a survey conducted by the Bertelsmann Foundation, 71 percent of Germans said that increased trade with other countries is positive for Germany. Sixty-one percent of those surveyed said that increased trade with the US would be positive for Germany (with 22 percent seeing a negative impact). Yet only 17 percent said that they believed that TTIP would be positive for Germany (with roughly double that number seeing negative impacts of TTIP).

These numbers show that — rightly or wrongly — the criticism of TTIP was not a blanket condemnation of the US or of transatlantic trade. Dealing with such criticism requires a more nuanced approach than simply labelling opponents “protectionists.”

To be fair to the Commission, one has to admit that the broader political and economic environment did not help: TTIP and CETA were discussed at a point when the longstanding left-right consensus about European integration was shattered by the fallout first of the global financial and economic crisis of 2008-09, and then by the euro crisis that followed. Over decades of European integration, the project was sold to liberals and conservatives as a way to get rid of the worst excesses of national politicians’ meddling in the economy and markets and hence to lift the efficiency gains of less heavily regulated markets. To the left, European integration was sold as a bulwark against the forces of globalization. According to this narrative, any of the European countries alone would be too small to influence its fate in a world of globalized trade in goods, services, and most importantly, financial capital. By joining forces inside the EU, Europe would again be able to shape globalization. For several decades, the Union seemed to make good on this promise.

This consensus between supporters for European integration from the left and right, however, was shattered during the euro crisis. Those who expected to be sheltered from globalization’s destructive forces were disappointed as financial markets managed to push the common currency to the brink of collapse, and as politicians’ answer was to impose harsh austerity programs across the Continent which led to record levels of unemployment in many parts of Europe. Those who had seen the European project as a force to break away from discretionary political meddling had to swallow rescue packages for other countries’ governments worth hundreds of billions of euros.

With the European Union being perceived as having failed on its promises of prosperity, its executive institutions were increasingly scrutinized. This made the Commission’s position in selling trade agreements more difficult to defend than in the past, but one could have hoped that seasoned politicians — as most EU Commissioners are — would have seen this coming.

The way the conflict over TTIP has escalated over the past year has now put trade policy very much in the spotlight. It is highly unlikely that in the near future, any major trade agreement can be passed without a high degree of scrutiny and criticism.

Good deal, bad deal

So, what is the way out for European trade policy? Given the degree of devastation at the moment, the primary aim now must be damage control.

First, the Commission and the European Council should kill TTIP as soon as possible; it cannot be rescued. Beyond the strong resistance in some member states, the EU has gotten itself into an inescapable catch-22. The EP has made clear that it will not accept a set of ISDS rules in TTIP with standards below those seen in the latest version of the CETA treaty. To the praise of many independent experts on international investment protection, CETA foresees the establishment of an investment court, with permanent judges and a procedure for appeal. Yet the US Congress has so far never allowed for American policies (and potentially judicial decisions) to be subject to scrutiny by an international court. TTIP hence seems trapped between non-ratification in Europe and disagreement with the US. Better to end this misery sooner than later.

Second, CETA should be defended and ratified. While killing TTIP can be pegged to a failure to reach an agreement with the United States over a fundamental issue, a failure to ratify CETA would damage the EU’s ability to negotiate future trade agreements with other countries. If it does not manage to get CETA through the internal ratification process despite the renegotiations of ISDS rules and additional concessions by the Canadians, other countries will ask themselves whether it is really worth putting all the effort into negotiating any trade agreement with the Commission at all. CETA could also be used as a monitored test-case with a promise to evaluate impacts and potential problems after five years, showing skeptics that their concerns are not bluntly ignored.

Third, for the foreseeable future, the Commission needs to practise moderation when negotiating trade agreements. Instead of aiming at the most comprehensive or most modern set of rules, it should pick as many of the low-hanging fruits as possible.

The Commission might also be well advised to rethink its strategy of signing bilateral trade deals, and put more effort into pushing multilateral negotiations within the framework of the WTO. Any agreement on the WTO level will be a much easier sell. These agreements tend not to be as comprehensive as bilateral deals, and hence fall completely under the undisputed jurisdiction of the EU. Furthermore, the interests of poorer countries are much better represented in the WTO process, so these agreements cannot be as easily painted as being beholden to “the interest of big business.” While such an approach might feel like a defeat for those in the Commission who have pushed for ambitious bilateral trade agreements, it might actually provide a chance to revive the stalled WTO process. After all, Europeans have in many areas long been defenders of multilateral approach in which all countries have their say, and WTO negotiations fit well into this value frame.

Fourth, the Commission and Council would be well advised to include stakeholders such as NGOs and civil society representatives early on in the drafting of mandates and positions for trade negotiations. While not all of what these groups contribute might be considered valid arguments, this process would address some of their concerns early on and prevent them from going viral among the broader public.

Finally, in order to regain the trust of the European population, the Commission should focus on improving social conditions and bringing unemployment down. Trade policy definitely is not the best instrument to this end, as its effects are small and slow to materialize. But in order to regain a relatively free hand in the trade arena, this aspect needs to be tackled.

In a few years, when unemployment has come down in Europe and public distrust of the European institutions has diminished somewhat, the Commission can again propose ambitious trade agreements. Now it is time to count its losses and make a tactical retreat.

This article first appeared on Real Clear World.

Sebastian Dullien

Sebastian Dullien is research director of the Macroeconomic Policy Institute (IMK) in Düsseldorf. He recently published a policy brief on European industrial policy as a tool for enhancing the EU’s strategic autonomy (jointly with Jonathan Hackenbroich).