By Frederik Stender and Tim Vogel / Part of the European Development Policy Outlook Series
Trade liberalisation, traditionally seen as a means to promote economic growth and prosperity, has increasingly come under scrutiny for its wider adverse impacts. Increased trade is now also held responsible for environmental degradation, fuelling climate change, and growing inequality, both between high-income countries and developing countries and within the latter. Issues such as child labour remain significant and unresolved, further highlighting the complex challenges associated with global trade practices.
Global trade policy is not blind to these problems. Many countries are making efforts to make their economies more sustainable by greening their production and trade. At the same time, however, multilateral solutions to this, for example through the World Trade Organization (WTO), are increasingly more of a distant dream than a reality. Instead, rising geopolitical tensions and the renaissance of industrial policy are taking centre stage in current trade policy in many countries – and with it the scramble to assert key national interests. This trend is clearly illustrated by the expanded the title of the new EU Trade Commissioner, which now includes the term “economic security”. Additionally, the mission letter to Maroš Šefčovič, the designated EU Commissioner for this position, places a stronger emphasis on security overall.
Big ideas, minimal cheers
But even before, the evolving trade policy landscape has led the EU Commission to steer its own trade policy towards a more “open, sustainable and assertive” direction, as outlined in the 2021 Trade Policy Review. In its wake, the EU introduced a range of “autonomous” policy instruments. Notable among these are provisions on foreign subsidies, anti-coercion, public procurement and mandatory prior screening of foreign investment, but the regulations on deforestation-free products, corporate sustainability due diligence, and the Carbon Border Adjustment Mechanism (CBAM) have attracted the most public attention.
Although the EU claims that these were introduced with good intentions and arguably in line with WTO rules, the EU has not received universal applause for the latter measures in particular. A common fear is that the EU’s strict standards create unfair barriers for developing countries and could potentially restrict their access to EU markets. Beyond doubts about the effectiveness and enforcement of these measures, there is also uneasiness in the Global South about the lack of voice partner countries have in setting the standards. This underscores suspicions that the CBAM, for example, was introduced not only to tackle the climate crisis (especially by preventing carbon leakage) but also to maintain the competitiveness of EU-based production. Similar concerns apply to deforestation regulations, which are perceived in many places as a de-facto ban on the expansion of industrial production.
The EU’s approach to mainstreaming sustainability in trade is also reflected in its trade agreements: These agreements now routinely contain chapters on Trade and Sustainable Development (TSD), featuring provisions on environmental protection and strengthening workers‘rights. However, reconciling these EU objectives with the economic interests of partner countries does not go smoothly with an increasingly assertive stance of the EU. While an agreement was signed with Kenya last year, negotiations with Indonesia and India are proving extremely difficult. The EU-Mercosur agreement faces significant opposition, partly due to disagreements on environmental protections and public procurement rules.
The EU is aware of the need to enhance acceptance of its TSD chapters in trade agreements and its autonomous measures. In her speech on “Trade Policy in a Changing World” in May this year, Director-General Trade, Sabine Weyand, emphasized the existing support for raising awareness and implementation in partner countries, but at the same time acknowledged that further efforts are needed.
Navigating rough waters
Improving external policy coherence – integrating trade, investment, and development cooperation – remains a challenge, however: The lack of coordination between actions of DG Trade and DG INTPA has long been flagged, also internally. As EU-level aid and member state aid seem to continue to pursue different objectives when supporting trade policy, the effective combination and coordination of measures at EU and member state level, known as the Team Europe approach, is another construction site.
The crucial element of external policy coherence is put under further stress by global shocks including climate change and COVID-19, and geopolitical shifts. With the budgetary situation already strained following the COVID-19 pandemic, the grim reality of the Russian aggression in Ukraine creates a need to both support Ukraine and increase own security spending. This shift in budgetary focus makes it unlikely that funding for trade-related measures in partner countries will be able to keep pace with the increasing demands for compliance with EU regulation.
At the same time, EU member states are increasingly pursuing their own national interests in global trade, often prioritizing access to critical raw materials. Germany, for example, is forming specific hydrogen partnerships with strategic export and import partners such as Namibia. EU member states could thus allegedly “invest” more in these individual relationships than on coordinated efforts to support EU trade policy in partner countries.
The trend of diminishing external policy coherence between EU-level actions and those of member states is further exacerbated by the shift towards more proactive industrial policies at national levels aimed at transitioning to net-zero economies and protecting commercial interests in an increasingly rougher global environment.
Looking ahead
As global power dynamics shift, developing countries are becoming more confident in forming new international partnerships. South-South collaborations, such as the expansion of the BRICS group and China’s Belt and Road Initiative, highlight the changing landscape. To remain an attractive (trading) partner – and to secure both access to critical resources and partners for maintaining a functional multilateral system – the EU must present a compelling offer amidst the increasing geopolitical competition. Initial efforts have been made to promote this offer through the “Global Gateway” initiative, which consolidates significant investments in developing countries. However, in view of the abovementioned pressure on the financial support scope and geopolitical competition, the EU must also adapt its trade policy mindset. This could include:
Prioritization
- To attract countries as partners for sustainable trade, agreements with defined standards such as the Economic Partnership Agreement (EPA) between the EU and Kenya must deliver benefits for both sides. Due to the complexity of such agreements, technical and financial support during implementation is key, but not necessarily a sure-fire success. Given the potentially shrinking financial space, the EU should thus allocate its resources for accompanying measures in a more strategic and coherent manner. It is therefore crucial to identify policy priorities and institutional and technical capacity bottlenecks in trade policy implementation accurately and collaboratively, taking into account partner countries’ national development strategies. Without such improved fine-tuning in implementation support, the expanded scope of trade agreements and the associated need for implementation support is at risk of reducing the effectiveness to facilitate trade of the funds provided.
Flexibility:
- Given divergent initial conditions with regard to sustainability standards in partner countries, more flexibility in the design of EU trade agreements is also possible. If interests are not fully aligned in comprehensive trade agreements, the EU and its partners could pursue smaller, modular agreements that prioritize areas of high interest for each party. Existing examples include sectoral agreements on Green Steel or larger Green Economy Agreements. Alternatively, parts of more comprehensive agreements could be backed by joint target measures. Inspiration could come from the recently concluded agreement between India and the European Free Trade Association (EFTA), which includes targets for employment and investment, making not only sustainability but also economic benefits traceable. The EU could also consider bundling parts of the agreements into offers in the areas of technology transfer and security cooperation.
Inclusive collaboration:
- Lastly, it is prudent for the EU to take a more collaborative approach in the development of its regulations in order to better align with its stated objective of promoting “balanced partnerships of equals“. More specifically, while the EU’s recent policy efforts are valuable in the wider context of achieving more sustainable trade, setting and applying standards should be based on mutual consultations or, ideally, adopted from international standardization bodies. Despite current obstacles, the WTO should remain a crucial platform for cooperation and discussions on multilateral solutions beyond those implemented unilaterally. In addition, reinvesting CBAM revenues for the decarbonisation of low- and middle-income countries’ exports can increase credibility and counter accusations that the EU is exploiting power asymmetries in its trade policy.
Is the above menu just wishful thinking? Some elements seem more likely than others. The Draghi report, referenced in Šefčovič’s mission letter, already calls for greater flexibility in trade policy to achieve the EU’s policy objectives, which makes this direction seem plausible. With the tightening of fiscal constraints on development cooperation, there will inevitably be some form of prioritization – the key question is how coherently this can be reconciled with trade policy.
The biggest challenge, however, lies in the inclusivity of EU trade policy. The Draghi report embraces a further move away from multilateralism, which raises the question of what place developing countries will have on the EU’s agenda. Reconciling trade and development policy will undoubtedly remain a complex task for the EU – if not become even more difficult. Competition with large economies such as China and the US could push the EU towards more pragmatic approaches as described above.
Frederik Stender is an economist and a Senior Researcher at the German Institute of Development and Sustainability (IDOS). His research focuses on trade policy.
Tim Vogel is a Post-Doctoral Researcher and economist at the German Institute of Development and Sustainability (IDOS). His work focuses on trade policies in a development context.
Image: Julius_Silver under a free licence on Pixabay
This blog post was adapted from a new IDOS publication with contributions on priorities for the next EU leadership: Hackenesch, C., Keijzer, N., & Koch, S. (Eds.). (2024). The European Union’s Global Role in a Changing World: Challenges and Opportunities for the New Leadership (IDOS Discussion Paper 11/2024). Bonn: German Institute of Development and Sustainability (IDOS). https://doi.org/10.23661/idp11.2024. It gives the views of the author, not the position of the EADI Debating Development Blog or the European Association of Development Research and Training Institutes.