EU Trade: Where To Now?

port compressedLast October, the EU signed the Comprehensive Economic and Trade Agreement (CETA) with Canada. This occurred just days before Donald Trump won the US presidential election with a campaign frequently attacking US trade deals as hurtful to the US. Many trade advocates in Brussels and across the EU have breathed a sigh of relief that CETA has continued its journey towards full ratification within the EU. They have claimed this proves that the EU’s trade policy has found renewed purpose to help counter Trump’s protectionist policies, even with regard to China. In fact, the EU remains committed to expanding its trade relations. But despite recent overtures to Beijing by the EU Trade Commissioner, China will present some of the same challenges for Brussels that have been at issue in the US.

The latest step toward CETA ratification took place on 15 February, when the agreement was approved by the European Parliament. The deal is expected to be implemented from April on a provisional basis, but it still needs to pass 38 national and regional parliaments across the EU before it is ultimately ratified. (In October, the Belgian region of Wallonia temporarily blocked the signing of CETA as it sought reassurances notably over investor-state dispute settlement (ISDS) provisions. Wallonia will also have to approve the ratification of CETA, but a veto is unlikely).

European civil society and NGOs have not given up their fight against global trade in general or CETA in particular, although their protest activity is apt to significantly dwindle now –perhaps in part from confusion, as anti-trade and anti-globalisation groups find themselves standing alongside Donald Trump on the issue. In any case, CETA is likely to be ratified and represents an important trade achievement for the EU. It is a ‘high standard’ trade deal, which goes beyond tariff reduction and tackles the behind-the-border regulatory issues that are the real drag on global trade.

Looking to Asia

top-trading-partners-of-the-euIn fact, CETA is not the EU’s first high standard FTA — that was the FTA between the EU and South Korea, which entered into force in July 2011. The EU has since struck deals with Singapore and Vietnam and there are hopes to finalise a deal with Japan this year. Talks are ongoing with Malaysia and the Philippines and are set to begin with Australia and New Zealand. These negotiations are consistent with signals from the European Commission and Europe’s trade powerhouse Germany of a possible pivot to Asia. European trade deals with Asia appear increasingly important as Trump’s US takes a more protectionist world view and the EU-US trade deal (TTIP) is put on ice.

The European Commission has even given clear signals to Beijing that it could be prepared to work with China to fight global protectionism as Trump pushes his ‘America first’ policy. If agreed, Brussels’ plan to phase out its anti-dumping duties on Chinese manufactured solar panels in the next 18 months should be seen as such a conciliatory gesture.

China has long wanted to start trade negotiations with the EU, seeing that as a sign of prestige and full acceptance into the top-tier of the global trade club. But China has until now been held at arm’s length by the EU over concerns that Beijing interacts unfairly with its key trade partners, a point regularly underlined by the EU Chamber of Commerce in China. But in the new Trump era, the fear of increased trade protectionism from the US could be to China’s advantage. Beijing is likely to press harder upon Brussels to start trade talks (most likely via backdoor approaches to the capitals of receptive member states) and the EU may well warm to the idea.

However, closer EU-China trade relations are likely to be complicated by the investment side of the relationship. In mid-February, Germany, France and Italy called upon the EU’s trade commissioner to grant them veto rights over Chinese acquisitions of domestic high-tech companies. At least parts of Europe share concerns with the US over Chinese investment in sensitive industries. But whereas the US (and other countries, like Australia) have very clear powers to block investments on national security grounds, no such EU rules exist.

The issue has come up before: there was a failed attempt in 2013 to create a mechanism to be able to block outside investment in the EU’s public procurement market unless there was a reciprocal openness and access in that company’s home market. Among the intended targets of that effort were Chinese state-owned telecoms companies, and the goal was to prevent the Chinese from involvement in building the networks that keep everything from nuclear power plants to water supplies running. The proposal was rejected as ‘overly protectionist,’ with the UK and its northern EU trade allies leading the resistance. It turned out that the UK and China had plans for Beijing to participate in the building and running of the UK’s next-generation nuclear power plants.

With the UK now leaving the EU, China’s most important ally in Europe will be out of the game. So the idea of a national veto on high-tech takeovers may be in play again. But that would put Brussels at odds with Beijing and could undermine Brussels’ efforts to build an anti-protectionist alliance with China.

Wary of Trump

No matter how the EU’s trade relationship develops with its Asian partners, the arrival of Donald Trump is a blow to the EU’s vision of global co-operation on trade. Even though Trump’s rejection of the Trans Pacific Partnership (TPP) is an opportunity for the EU to build its Asian trade relations, it still laments the loss of global US leadership and the influence such a deal would have had on China and on shaping future trade rules.

Trade strategists in Brussels and capitals across the EU will be trying to judge the prospects that Trump’s anti-trade rhetoric blows up into actual trade wars with China and Europe. His shots at Germany’s car industry in particular have been poorly received by Germans, and Europeans more broadly. His complaint that Americans on 5th Avenue all have Mercedes Benz cars but there are few Chevrolets in Germany was met with disdain, and the response that he should not blame Germany for building the best luxury cars in the world. Dieter Kempf, who heads Germany’s BDI industry association, has suggested that US car manufacturers were themselves to blame, since they failed to adapt their cars to the European market and consumer.

Despite US Vice President Pence’s nod toward maintaining strong EU-US relations during his recent first visit to Brussels, Trump’s comments suggest years of transatlantic economic co-operation could be in the balance, while the European response suggests that their businesses and governments are prepared to hit back if provoked.

FTI Senior Advisor John Clancy was EU Trade spokesperson from 2010-2014.

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