Role Of Eu Trade Policy In Liberalization Economics Essay

It is often said that the European Union (E.U.) is “an economic giant but a political dwarf”. If the second statement seems controversial, the first one is verified. Indeed, the E.U. is a major trading power as it is the world’s largest exporter (16.2% of global exports [] ) and importer of goods and services, accounting for a fifth of world trade [] .

The European Union has been developing its internal market since 1993 and the “Single Market Program”. Following the principles of the GATT/WTO [] , which is “an organization for liberalizing trade” [] as it is written on the website, the E.U. has borrowed a liberal rhetoric based on the objective of liberalization. Associated with the neoclassical economic theory, the European liberalization could be defined as an “open market with free competition” (art. 119 Lisbon Treaty), without obstacles or barriers to trade. Article 206 of the Lisbon Treaty underlines the importance of the contribution of the EU to the “development of world trade” and to “the progressive abolition of restrictions on international trade”. The EU Trade policy, as a tool of access to the liberalization, is pursued by the Common Commercial Policy (CCP), which has been a part of the community competences since the Treaty of Rome. The underlying idea is that liberalization of trade has brought and will bring economic benefits and growth [] , which is the first step to a welfare system and a peaceful society.

The EU Trade policy aims to develop both multilateral liberalization and regional integration. The OECD defines the EU trade policy as: “Partly by necessity, partly by design, the EU’s trade policy has been ‘walking on two legs’ since its early days: multilateral liberalisation and regional integration.” [] The Lisbon Treaty considered that the CCP “shall be conducted in the context of the principles and objectives of the Union’s external action”. Therefore, the external dimension of the EU trade has consequences on the SM as the internal policy interplays with progress in the SM.

Nowadays, the E.U has become an attractive economic pole of nearly 500 million consumers, developing intra-EU and extra-EU exchanges. However, this attractiveness, this “magnet” effect (S. McGuire), has provoked a defensive reaction from the Member States (MS), fueling the need to protect the SM from external competition. [] The parallel of openness seems to be the containment of external threats which can destabilize the SM and the whole European economy. Many physical or administrative barriers still remain and the EU has even created new barriers as technical ones, linked to the so-called European values. If the EU is not a complete “fortress”, these obstacles are harmful and lead to circumvent world trade agreements. In such a case, the relations between Trade Policy and the liberalization of the SM are neither systematic nor monotone.

Sensitive goods: Would all sectors be totally liberalized? Tariffs and non-tariffs barriers to trade.

The EU remains stigmatized for using protectionist mechanisms for sectors such as agricultural products and textile and clothing. The EU is a main user of subsidies, anti-dumping measures and voluntary export restraints (VER) in order to protect the so-called “sensitive sectors” which still remain a source of tension between WTO members. Indeed, the external dimension of the EU Trade policy overlaps with the internal Common Agricultural Policy (CAP). The CAP has been created in order to protect the internal European agricultural market, restricting the market access to EU trade partners and subsiding exports [] .

This policy was applied in the framework defined by the Uruguay Round which created specific rules for agricultural-food products and textiles-clothing, allowing high tariffs on some products. Even if these rules have been weakened by further WTO legislation, the EU still applies a variety of techniques.

Price support and export subsidies

Export subsidies have became the main instrument of domestic price support in Europe. The sugar sector is one of the most conclusive example, being a major recipient of subsidies. To name a few, Tereos Group (France), Azucarera Ebro (Spain), Krajowa Spolka Cukrowa (Poland) received respectively about €178 million, €119.4 and €135 million in assistance in 2009 [] . 1.5 billion per year is spent on subsidising sugar sector, as a price of 632 euros per tonne can be guaranteed to producers [] . It makes two times the world price. The EU is one of the significant world’s exporter of sugar beet (EU was the first exporter before CAP reform [] ) even though its production cost is higher than in Brazil or Thailand. Also, tariff barriers are still imposed on cane-sugar exporters. According to this trade policy, third countries have a very restrictive access to the EU market access. Brazil, Thailand and Australia succeeded in bringing the case to the WTO dispute settlement. WTO assessed that EU sugar exports were “up to four times more subsidies each year than allowed under WTO agreements” [] , conflicting with the WTO agreemement on subsidies and countervailing measure (SCM).

To this extent, EU trade policy was regarded as protectionist, safeguarding the internal market from third-countries exportations. From the external dimension of the single market, the main goal of liberalization was not reached. On the other hand, internal integration suffered trade diversion. These types of regulations have created biaised competition and have only permitted to big producers who are capable of meeting high standards to enter the market, resulting in a very restricted liberalization [] .

Voluntary export restrictions (VER)

Export subsidies can be associated with voluntary export restrictions. VER have been outlawed according to WTO rules. However, it remains a tool of EU trade policy, using as a barrier against the flow of chinese textile imports for example. VER are quantitative restriction as the famous example is the agreement for limitation of Chinese textiles quantity authorised on the EU market. China “voluntary” accepted to restrict its imports helping EU industries to face competition. Even if import quotas ended in December 2008 with the Multiple Fibre Arrangement (MFA) leading to further liberalization, VER are still used protectionist tools.

Anti-dumping measures

According to the WTO website, dumping “occurs when goods are exported at a price less than their normal value, generally meaning they are exported for less than they are sold in the domestic market or third-country markets, or at less than production cost” [] . Article 6 of GATT/WTO allows country to develop anti-dumping duties (ADD) if unfair competition results from. But the EU circumvents the WTO framework, using arbitraly fair trade rules. The European Union uses the “Community interest” to justify the imposition of ADD which can last up to five years [] . However, voices have risen against a protection abuse of these policies. The EU initiated 287 anti-dumping cases in ten years, between 1998 and 2008 [] . According to L. Davis, “59% of cases have involved Asian exports, 22% from China alone”, especially because of the higher competition in chemical and metal sector increasing with the development of Asian economies [] . China is now the biggest producer of washers and bolts and this led to impose anti-dumping on its imports: for instance, tariffs for steel and iron fasteners are risen from 26.5% to 85%, as we can see on the pie chart below [] .

The developpment of anti-dumping cases underlines the “subsitution effect” from tariffs to non-tarrifs barriers [] . The rhetoric of liberalization hides an underlying protectionism.

Source: L.Davis, “Ten years of anti-dumping in the EU: economic and political targeting”, Ecipe working paper, No. 02/2009.

The policies applied to these sensitive sectors exemplifie what Professor M. Monti called “the ambivalent feeling (of the EU) about the external dimension of its single market” [] . Certainly, according to B.-T. Hanson, it can be possible to liberalize the internal market associated with external protectionism. However, the main goal of EU trade policy is defined as liberalization of the world’s market. This contradiction between theory and facts is underlined by the essential controversial nature of the link between liberalizing external trade policy and creating a single market for 27 countries [] . If what is often called “the Fortress Europe” does not exist, tendencies to protectionism are still crucial in defining EU trade policy. The statement of Pearce, Sutton and Batchelor in 1985 remains relevant: “Even if the European economies revive, and there is no upsurge in protectionism elsewhere in the world, lack of international competitiveness will continue to generate pressure to protect some sectors in some or all member states. The inclination if governments to yield to these pressures will probably not change much” [] . Then, if a weak link between EU trade policy and single market liberalization can be found, the contribution of EU trade policy to the liberalization of the SM is not obvious and even seems an obstacle to further external liberalization.

Preferential Trade Agreement

The Union supports trade liberalization through multilateral negotiations within the GATT/WTO, which are based on principle of non-discrimination. Beyond WTO framework, the EU has signed numerous bilateral agreements with countries and regional organizations based on article 24 GATT. For example, the EU is currently negotiating a Free Trade Area (FTA) agreement with ASEAN.

EU creates its own pyramid of preferences that divide its “trading partners into friends, lesser friends and foes” [] . These agreements create different levels of trade liberalization. It can be deep integration as it is established in Europe (EEC) or free trade agreements as with Mediterranean countries. The EU has also signed partnership agreements with many African, Caribbean and Pacific (ACP) countries or has established Generalized System of tariff Preferences for the poorest countries. “ [] 

In general they are called Preferential Trade Agreements (PTA) and can be defined as “a variety of arrangements that favour member parties over non-members by extending tariff and other non-tariff preferences”. [] Existence of such preferential treatment can threat the liberalization of global trade by causing trade diversion. Trade diversion exists because countries within trading blocs will rather trade between them even if the countries outside the bloc would have a natural comparative advantage. [] The most known case of favouring the regional preferences was the Banana case when the ACP countries have enjoyed preferential access to the EU market even if the producers from Latin America were the cheapest. This caused a surplus loss in economic terms. The SM undergoes external factors that limited complete liberalization.

However, the complex system of preferential trade policy does not always have the only perspective of trade liberalization. As for example, under economic reasons are often hidden political ones: protections of human rights or labour standards go beyond the pure trade issues [] . These agreements are often asymmetric, between powerful EU and the developing countries, which is in a weaker economic and political position and cannot really impose its requirements. Trade policy can be seen as a tool of promoting development and aid to poor countries as in the case of ACP-EU Partnership agreement: “Everything but Arms” program. The last one is a good example of agreement which in the name of “trade preferences is granting zero-tariff access to EU’s market for all products from these nations, except arms and munitions, but in reality the most competitive goods from these countries as bananas or sugar are excluded from the deal.” [] The agreements of this type do not promote the benefits of further liberalisation to developing countries, but are protecting their own interests. [] 

The last controversial points about application of common commercial policy are non-trade values used by EU to protect internal market. EU values such as health, labour standards, environment, rural development or cultural diversity are reasons of restricting the imports from other countries. [] We can refer to the ban on importation of meat from USA that is known to be treated with hormones. EU argues that there are possible health risks linked to immune system damage in children. [] Concerning this issue we need to stress the importance of precautionary principle which is defined by the Commission as “the precautionary principle applies where scientific evidence is insufficient, inconclusive or uncertain and preliminary scientific evaluation indicates that there are reasonable grounds for concern that the potentially dangerous effects on the environment, human, animal or plant health may be inconsistent with the high level of protection chosen by the EU”. [] By using this principle EU can restrict the importation of goods from its trading partners on the basis of protection of consumers.

Labour standards and environmental protection are often used to condition the conclusion of bilateral or regional agreements. « The EU is firmly committed to promoting core labour standards and decent work for all in its trade policy, and routinely includes cooperation initiatives and incentives to better working conditions in the trade agreements it negotiates. []  »

Services

Services became a subject of international negotiations only on the Uruguay Round (1986-1994) and resulted in the signing of General Agreement on Trade in Services (GATS). Members committed themselves to avoid any discrimination in the application of its standards or criteria for the authorization, licensing or certification of services suppliers and to not restrict trade in services [] .

Despite this declaration, “the liberalization of services is still in its infancy” [] . Covering more than 70% of EU’s GDP [] , services are rather secondary in its trade patterns. Only 20% of services, produced in 27 Member States, are provided abroad (including intra-trade) [] .

Szymon Bielecki, Sylvie Gori. EU27 international trade in services declined in 2009 following the onset of the global financial crisis. Eurostat Statistics in focus. 37/2010, p. 4.

Service liberalization is not achieved even on the internal level of the EU. Monopolies still exist in European countries. For example, each national railway company tends to preserve dominant position on domestic market. It leads to tensions and competitive disadvantages for other possible suppliers, e.g. such a case has recently occurred between SNCF and DB for the access to the French network [] .

Regardless the adoption of “Service Directive” [] , which aimed to promote the freedom to establish a business in another MS and the freedom to provide services in other MS, the situation with liberalization of EU Trade in services did not change significantly. This directive does not only have considerable gaps in regulation of numerous services, but also does not concern third countries [] . The EU permanently feels the lack of the cohesive trade policy in services. A divided service market is damaging for an economy mostly knowledge-based and service oriented. We should also take into account the interdependence of services and thereafter the negative knock-on effect of barriers [] .

Technical barriers

EU Trade Policy is closely related with other policies, which also contribute to further restrictions. For instance, the protection of the Intellectual Property Rights implies that both trading parties respect and protect intellectual rights. It resulted in the toughening of EU Customs regulations [] and in a creation of a list of priority countries in which situation with IPR protection seems “the most detrimental to EU competitiveness” [] .

Other barriers are tax-related. The EU has a highly fragmented tax landscape that creates the loopholes for the double taxation or tax discrimination of consumers and companies. Another case is the cross-border e-commerce, limited due to the differences in consumer protection rules, rules on VAT, recycling fees and levies [] .

The most costly and difficult to overcome are administrative restrictions. According to EU law a service “provider” should have its registered office, central administration or principal place of business within the Community [] , which almost automatically eliminate any foreign supplier from the domestic market. It prevents countries or companies from “expanding their outputs in sectors where they have a comparative advantage” [] . SMEs (“the backbone of the European economy” [] ) find themselves in even worse situation than the big companies. The proportion between the previously mentioned costs and their size is so huge, that they cannot equally compete with domestic suppliers and will probably refuse to provide cross-border services. “Now only 8% of SMEs are engaged in cross-border trade and only 5% have set up subsidiaries or joint ventures abroad” [] . According to the survey, the most important barriers for SMEs met in exporting are, to name a few, the establishing of a commercial presence abroad (16% of all respondents), the lack of international standards for services (14%), taxation issues (10%) [] .

These restrictions have multiple negative effects. They reduce competition between domestic and foreign suppliers that cause higher prices and lower choice for consumers. There are still “missing links” or “bottlenecks” in the Single Market, which exists in theory, but, in reality, it is constrained by multiple barriers and regulatory obstacles [] .

Conclusion

Despite the declared EU Single Market goals for the future, such as “openness to global trade and investment”, “rejection of protectionism”, “the removal of behind-the-border obstacles” and “greater attention to the international dimension” [] in preparing the new regulations, in practice EU countries resemble the half-open doors. Generally they have a free entrance, but the width of the passage varies considerably depending on the EU’s “pyramid of preferences”. the EU is often accused of having an ambivalent attitude towards the GATT/WTO.

Simultaneously it actively supports trade liberalization via Rounds and the building up of a world trade law, but refuse to thoroughly implement it.

Homes bias + state’s different policies.