Oliver Wieck is the Regional Director of the International Economic Policy Department at the Bundesverband der Deutschen Industrie e.V. in Berlin. The opinions in this essay are those of the author, Oliver Wieck, and not of the Bundesverband der Deutschen Industrie.

1. Introduction

From the economic perspective of trade relations the EU appears to be in a good position. In recent years the region has expanded geographically and is still the world’s largest economy and exporter as well as the most important donor and recipient of foreign direct investment. During the last decade the EU was able to maintain its share of world trade at around 17.5%, whereas the USA registered a drop from 21% to 14%.

However, it is also true that during the same period the Chinese share increased from some 4% to an impressive 12%. And this will probably continue in the future, the growth impetus in Asia (9.4% in 2010) and Latin America (5.7%) being distinctly stronger than in the EU (1.8%) or the USA (+2.6%).

These countries have an enormous need to catch up in terms of infrastructure, energy supplies and consumption, and will continue to grow. Demographic developments also favour — in addition to all related challenges — the rapidly growing countries.  They are drivers for growth, innovation and competition, whereas Europe’s population is increasingly aging. The lack of skilled workers and experts is growing and the social systems are getting out of hand. Both the will and the willingness to implement reforms are low. The current debt crisis in Europe is an additional brake on growth, the return to a path of sustainable economic growth will be long and difficult. The EU’s current strategy assumes that by 2015 90% of global growth will be generated outside Europe, a third of it by China alone. In 2020 the developing and emerging economies will account for 46% of world GDP (currently 35%) and by 2030 for around 60%. The share could grow even more rapidly if the EU does not succeed in mastering its debts and stabilising the euro.

What impact will the suggested shifting of the worldwide balance have on EU multilateral and/or bilateral trade policies?

2. Multilateral: avert damage to the institution WTO

At the beginning of the millennium the EU still underlined giving priority to the multilateral path of trade liberalisation and focused almost exclusively on concluding the Doha Development Agenda (DDA) of the WTO. However, after ten years of talks it no longer seems likely that it will be possible to successfully conclude the DDA within the foreseeable future. Not even a schedule for the coming months was agreed upon at the 8th WTO Ministerial Conference (MC8) held in mid-December of 2011.

The differences seem irreconcilable: the EU and USA demand greater concessions from the major emerging economies, in line with their new strength in the global economy.  Vice versa, in view of their economic growth and their increasing significance in world trade, the emerging economies do not find it necessary to make additional offers as regards market access. Their argument that the Doha Round is a “development round” may be formally correct but does not take into account that after the financial crisis the weights in the world economy have clearly shifted towards the emerging economies.

Has the “multilateralisation” of trade reached its limits, are the large trade rounds outdated?

Despite all the difficulties, the multilateral approach is still the most appropriate and efficient approach for the German export industry to promote international trade and establish a worldwide rule-based trading system. In addition, it provides the best framework against protectionism which is currently on the rise again. However, as there will be no conclusion to the Doha Round in the near future, the WTO members should concentrate on what is possible. This would include opening the market for the least developed countries, agreeing on trade facilitation and reducing non-tariff trade barriers.

At the same time it is to be welcomed that the most important WTO members, i.e. the EU, USA and China, are in agreement not to let the “DDA crisis” become a WTO crisis. To prevent this the members should:

–    support the WTO as an institution, including its instruments, such as dispute settlement, monitoring of and reports on trade restrictions and monitoring of the implementation of the current bilateral and plurilateral agreements.

–    strive for a flexibilisation of the WTO concepts “single undertaking”, unanimity and the “bottom-up” approach. In the future, it should therefore be possible to conclude, inter alia, plurilateral sectoral agreements between interested countries, even if not “substantially all trade” is immediately included.

–    speedily take up what are know as the “Singapore themes”, these include trade and investment, trade and competition, and export restrictions.

Are bilateral free trade agreements a genuine alternative to ensure market access “on a smaller flame”, in particular for export-oriented German industry?

3. Bilateral Free Trade Agreement only for genuine “value added”

The bilateral approach gained considerable importance by the middle of the last decade at the latest. The EU already complemented its trade policy with this bilateral component in 2006 within the framework of the “Global Europe” strategy.

What has been achieved since then? The EU concluded a free trade agreement (FTA) with Korea; after the EU Parliament gave its assent in February 2011 the agreement will still have to be ratified by the Member States. The talks with Peru, Columbia and Central America have also been concluded, and the EU is currently negotiating free trade agreements with India, Singapore, Malaysia, Canada, the Mercosur and Ukraine. Over the last few years the EU has also concluded association agreements with a number of EU neighbours in North Africa and the Middle East.

From German industry’s perspective, bilateral agreements are to be welcomed if they do indeed provide greater market access than the current WTO agreements. However, bilateral agreements also present a number of challenges for companies: Varying tariff rates and transition times in the various agreements, differing “rules of origin” or differing levels of intellectual property protection make life difficult for small and medium-sized enterprises, in particular for those trying to sell their high-tech products on the various growth markets throughout the world.

In addition, there is the EU Commission’s approach to combine negotiations on free trade agreements with issues outside trade policy. In their communication on “Trade Policy as a Core Component of the EU’s 2020 Strategy” this is to be linked via the interfaces “smart growth” (investment protection, public procurement, ITR, freedom of movement), “inclusive growth” (include the population) and  “sustainable growth” (climate, environmental-raw material issues). At the same time, trade and outside interests should also mutually complement and strengthen one another; here the specific issues are human rights, social and environmental standards, trade sanctions, preferential agreements and export controls.

This approach appears to be successful, at least partially. For example, the EU Commission was able to integrate a sustainability chapter in the free trade agreement with Korea, which creates an institutional framework for bilateral cooperation on issues such as environmental and social standards. However, it is also true that the Korean side has a vested interest in making this concession, i.e. the step-by-step removal of the 10% tariff in the EU automotive sector.

Whether a sustainability chapter can also be agreed on in the talks with India would appear more than questionable. There is no 10% tariff in the EU on vehicles from India; India manufacturers are also not yet competitive enough to actually profit from enhanced access to the European automotive market. However, the case of foreign car manufacturers — mainly from Japan and Korea –which are already producing on the Indian market is quite different. In the future they would also be able to boost their exports to the EU via the Indian market. The EU therefore has scarcely anything to offer the Indian side to motivate it to reduce the sometimes prohibitive tariffs in the automotive sector and beyond. The conclusion of a sustainability chapter on social and environmental standards appears even more unlikely and would probably only be achieved — if at all — at the cost of additional market access for European companies.

4.  Transatlantic alliance required

In this context, the EU is faced with the question of how it wants to view its future trade policy in terms of external relations. It is an indisputable fact that it is an integral part of the EU’s external relations and may therefore not stand in contradiction to external policy objectives. However, these objectives should be oriented more strongly to the changing realities and not only to what is politically desirable. This also includes the shifting of trade equilibria and the associated own ideas on the “new” trade nations from Asia, Latin America and other regions.

These countries expect to be met on equal terms and also that agreements on areas beyond trade policy be drawn up jointly with due attention paid to their own ideas. The chances of success are high: China and India, inter alia, have a vested interest in a clean environment and social peace, citizens’ expectations of the state are increasing along with their countries’ increasing prosperity, not only regarding environmental and climate protection, but also social security and functioning financial systems.

It therefore makes no sense to use trade policy as a vehicle where other foreign policy approaches have failed or have not been successful enough. Examples include the failed climate negotiations of the UNFCCC, the inadequate implementation of ILO standards and the unsuccessful attempt to extend the OECD standards for multinational enterprises and/or state export credit insurances to include non-OECD countries such as China and India. It cannot be the task of trade policy to remedy deficits in other areas via market access. Rather, the homework should be done where there are shortcomings, i.e. within the framework of a climate agreement, either the ILO or the OECD agreement.

In the future the EU should also take into account that it is hardly possible for it to provide greater market access in the talks on free trade agreements. There is only little leverage: in the industrial area tariffs average 4%, in the non-tariff area restrictions are reasonable. The same applies to the service-providing sector, public procurement, etc. It should therefore be in the EU’s own interest to place a special focus on those areas of the negotiations dealing with bilateral free trade agreements which are of particular interest to the European export industry. These interests lie in the areas of market access for goods and services through the removal of tariff barriers and non-tariff trade barriers, the opening of the service-providing area, and mutual recognition of standards and norms.

However, the EU is under increasing pressure from the public, the EU parliament, and in part also from the Member States, to also take up sustainability issues in the talks on free trade agreements. This includes the climate, environmental and social standards and human rights. The USA has recently had similar experiences with their free trade agreements with Korea, Panama and Columbia. After years of stagnation the US Congress approved the agreement in October 2011, social standards and human rights in Columbia were particularly criticised. For internal policy reasons this resulted in the two other agreements being concluded only after considerable delay.

Between the EU and the USA there should be no similar difficulties. The initiative to intensify economic ties recently launched on both sides of the Atlantic is all the more interesting.  At the EU-US summit in Washington at the end of November 2011 the US administration and the EU Commission agreed to set up a high-ranking working group to boost jobs and growth. By the end of 2012 it is to draw up concrete proposals to stimulate transatlantic trade and create jobs, including agreements to reduce tariff and non-tariff trade barriers, for regulatory cooperation, investment, services and in the area of public procurement. However, there is still a long way to go; the presidential election campaign, which will reach its peak in November 2012, will certainly not help accelerate the processes. In addition, joint solutions ultimately have to be found for the “old cases” relating to transatlantic economic relations, i.e. subsidies for the aviation industry, the handling of hormone-treated meat and/or genetically modified seed.

European and US-American business representatives support close transatlantic cooperation and have signalled their willingness to cooperate closely to help reduce trade barriers to transatlantic economic ties. The potential is vast, together the EU and USA represent 42 percent of global gross domestic product, 28 percent of worldwide exports, 34 percent of worldwide imports and they combine for 70 percent of worldwide direct investment in their respective countries. According to various studies, reducing tariff and non-tariff trade barriers between the USA and the EU could generate additional growth of up to three percent.

However, with US President Obama’s recent announcement that US-American policy will be placing a stronger focus on the Asia-Pacific region, the USA’s commitment appears rather to be moving away from Europe and towards Asia. But on closer examination a slightly different picture emerges: President Obama’s statements appear to be driven in particular by the US administration’s idea to provide the Asia-Pacific region with a security, foreign and economic policy alternative to China. China’s initial critical reactions indicate how difficult and protracted this process will be. The Chinese influence on the policies, economies and societies of the region’s countries is already vast and is increasing. And it is also not the USA but China which, as the Asian countries’ immediate geographic neighbour, will do everything to stabilise and extend its influence in the region. The current transatlantic initiative – based on far more common ground, thus making it possible to implement it far more speedily – could fit into the time gap of a lengthy intensification of transpacific relations.

Conclusion:

New trading powers and centres have appeared on the stage of the world economy. Not all of them have already found their final position or are still trying to discover their own potential. However, several of these countries are already making it unmistakably clear that they are no longer prepared to only follow the industrialised countries. They want to be taken seriously as negotiation partners on equal terms and have their own ideas on trade, social, environmental and climate policy.

The EU and its Member States should take this into consideration when they have talks with these countries on free-trade agreements or other agreements. They should concentrate on the basics, not overload the negotiations with other political issues, as well as their very own interest in a comprehensive market opening in the countries with high growth potential to focus more on boosting competition. Only then would there be a good chance that European companies, and thus also German companies, could have the same access to these growth markets in the future as competitors from other countries.

The EU and USA could not only deepen economic cooperation between both sides of the Atlantic through a new transatlantic initiative, but at the same time set a clear signal for the emerging markets: this positive effect would result in a genuine market opening, as an offer to join the “Club of Free Traders” and simultaneously as a supporter of further strengthening the WTO.