Two trade mantras are dominating this month: economic security and Latin America. We dig into the Commission’s long-awaited strategy to “de-risk” the EU’s economic relations, and on President von der Leyen’s tour to support trade talks with Mercosur, Mexico and Chile.
In the meantime, EU’s trade policy has been both reviewed by the WTO and criticised by the US and China. Similarly, spats with Indonesia and Malaysia over sustainability in trade are continuing.
Also, don’t forget to take a look at our calendar of trade events and political milestones.
One Big Thing.
De-risking the dragon (and the bear) part II
On 23 June, the Commission released its economic security strategy. Perhaps nowadays we are more accustomed to security being a more common concept in our lives. This is only normal after enduring the COVID-19 pandemic, brittle supply chains and Russia’s invasion of Ukraine. But there used to be a time when “economic” and “security” did not go together. So, it’s worth taking a more detailed look. The keyword is “de-risk”: supply chains, critical infrastructure, proprietary technology leakage. Economic coercion and over-reliance on individual trading partners will also be tackled. To those ends, the Commission will establish a structured dialogue with the private sector, a common risk assessment framework or a common strategic technology platform, among others. A revision of export control rules will also take place by the end of the year. Moreover, the Commission wants to intensify economic security cooperation with partners and allies and, on as wide a basis as possible, leaving room for FTAs.
Zoom In: If it sounds like you’ve heard it all before it’s because you have. Some elements in the strategy have been developed to tackle China’s trade practices. And this comes at a time when the business community seems to be losing confidence in investing in China.
Zoom Out: Countries around the world have developed their own economic security strategies. Japan, for example, puts an emphasis on tackling China’s regional influence. Understandably so. Germany, on the other hand, mentions that China is a valuable partner in tackling some global challenges, though it also states that it is a growing rival. EU businesses agree with this.
The Next: This should be viewed as a long-term political process. European leaders will discuss the strategy during their meeting on 29-20 June. The agenda also mentions “strategic discussion on China”.
Second in line.
FiveEyes on China
The US and its allies are keeping the anti-coercion topic warm, most recently with a statement released by the Five Eyes alliance (Australia, Canada, New Zealand, the UK and US) and Japan following the annual OECD meeting in Paris. Just like the G7 text, the statement didn’t name China as its target, but used all techniques in its discursive arsenal to point fingers at Beijing: including, but not limited to, calling out the use of state-sponsored forced labour in supply chains. The saga continues, with China vehemently denying the accusations and describing the authors’ actions as “hegemonic […] bullying”. With all this drama on the world stage, the EU is quietly building up its own measures to react to economic coercion. After reaching a political agreement on the legislation early in June, the instrument is now on track to enter into force later this year.
A tour around Mercosur
Latin America has been higher than ever on the Commission’s agenda this month, as President von der Leyen toured Brazil, Argentina, Chile and Mexico to push the EU’s trade agenda. As we previously mentioned, the deal with Mercosur is the biggest and most complicated one in the region. The benefits are known: the EU would get to export more services and manufacturing goods, while Mercosur would boost its agri-food exports. But not everybody stands to gain, European farmers being the main veto power. The other contentious point is the additional protocol on environmental stumbling block. According to POLITICO, a meeting between the two negotiating teams, supposed to take place later this month, was cancelled. This is in line with what President Lula, once welcomed as a possible facilitator for the FTA, reiterated to von der Leyen: the protocol should clearly exclude environmentally-motivated sanctions. Access to the Brazilian procurement market, much desired by European companies, is also a thorny issue. Meantime, Lula is in Paris trying to mitigate France’s agri-environmental reluctance on the deal.
On the other hand, von der Leyen announced €10 billion investments in Latin American infrastructure, with €2 billion directed to the green hydrogen sector in Brazil. Moreover, the EU signed a partnership on raw materials with Argentina, while Chile and Brazil are expected to follow (lithium being the main target for the EU). Regarding Mexico, Presidents Lopez Obrador and von der Leyen committed to “a quick finalisation of the FTA”.
Will this stick and carrot approach work? The EU-Mercosur deal is certainly a space to watch for international companies: we’re talking about the EU’s most important FTA in terms of the population covered (773 million) and the estimated gains from tariff cuts (over €4 billion for the EU). Now, two things to monitor: the upcoming Spanish Presidency of the Council (Madrid being a big fan of EU-Latin America relations) and the summit between the EU and the Community of Latin American and Caribbean States (CELAC) on 17 and 18 July. Hopefully, the roadmap will be clearer after those milestones.
WTO reviews EU trade policy. US, China and Pakistan voice complaints
Time for report cards for EU trade policy, as the World Trade Organization published its assessment earlier this month. Every year, the WTO carries out a review of each member’s trade policy, which is also an important occasion for exchange of feedback on trade measures. The overall outcome was positive, withthe EU still perceived as one of the world’s main traders in goods and services, as well as the single largest investor abroad.
However, some concerns have arisen. China and Pakistan, unsurprisingly, expressed dissatisfaction with the Carbon Border Adjustment Mechanism (CBAM), which will force EU companies to pay a tax when importing certain carbon-intensive products. In particular, Pakistan accused Brussels of not considering the needs of developing countries.
The Foreign Subsidies Regulation is another source of criticism. New scrutiny and reporting obligations do not please foreign companies operating in the EU market.
Washington didn’t hide its frustration, either. US Ambassador to the WTO Maria Pagán underlined barriers to entry for US companies, especially in agriculture (through environmental requirements such as Farm2Fork) and cyber (through the new rules privileging European cloud companies in procurement). The unfortunate coincidence is that it happened right after the 4th EU-US Trade and Technology Council: another sign that the transatlantic talks are progressing in certain areas, but trade is not really one of them (learn more here).
New episodes in the EU-Mercosur soap opera
The path for the ratification of the EU-Mercosur FTA has hit new obstacles. First, a step back. The parties agreed on the trade deal in 2019, but concerns remained on the European side regarding sustainability standards. The Commission then proposed an additional protocol to address these issues, which hadn’t been welcomed by Mercosur. Further challenges emerged recently. First, the EU institutions are proceeding with the deforestation legislation, which would significantly impact Latin America’s chances of exporting to the EU. Secondly, opposition from NGOs remains staunch, and not just for environmental arguments, but also democratic ones. Criticism emerged against the Commission’s intention to split the deal to facilitate the approval of the pure trade part.
FTA supporters have a couple of reasons to cheer, though. We’re only one month away from the Spanish Presidency of the Council, and Madrid has always been the main advocate for trade relations with Latin America. Secondly, EPP, the largest group in the Parliament recently called for quick ratification of the deal. The German Chancellor, Olaf Scholz, has also renewed the push of Europe’s biggest economy for a swift ratification. The story is tangled, but the chance to create the EU’s largest trade zone makes it worth following.
The Deforestation Law sets EU relations with South East Asia on fire
This week, the EU’s new deforestation regulation is proving to be far from popular internationally, outside environmental activists’ circles. The legislation bans imports of goods resulting from deforestation practices. However, this environmental goal could sour trade relations with some countries. Indonesia and Malaysia expressed strong opposition to the new rules, which would heavily impact them as big palm oil producers. In particular, they are worried about the damage to small producers, who will have a hard time complying with traceability duties and data requirements– leading trade MEP Bernd Lange published an editorial to address these and similar concerns. Furthermore, the EU law will likely inspire similar measures in the US. Within the EU, policymakers proudly refer to the tendency for EU rules to become international standards as the ‘Brussels effect’. Yet, recent environmental rules affecting trade are resulting in heavy criticism against the bloc. Countries such as Brazil, Argentina, Ghana, Nigeria and Canada have argued the EU measures are protectionist and against WTO principles, with Indonesia’s Coordinating Minister for Economic Affairs even describing CBAM (explained above) as ‘regulatory imperialism’. The EU has to be mindful of such accusations, while negotiations on FTAs with Indonesia and Mercosur are ongoing.
The IRA saga continues in disguise
This week, the EU’s new deforestation regulation is proving to be far from popular internationally, outside environmental activists’ circles. The legislation bans imports of goods resulting from deforestation practices. However, this environmental goal could sour trade relations with some countries. Indonesia and Malaysia expressed strong opposition to the new rules, which would heavily impact them as big palm oil producers. In particular, they are worried about the damage to small producers, who will have a hard time complying with traceability duties and data requirements– leading trade MEP Bernd Lange published an editorial to address these and similar concerns. Furthermore, the EU law will likely inspire similar measures in the US. Within the EU, policymakers proudly refer to the tendency for EU rules to become international standards as the ‘Brussels effect’. Yet, recent environmental rules affecting trade are resulting in heavy criticism against the bloc. Countries such as Brazil, Argentina, Ghana, Nigeria and Canada have argued the EU measures are protectionist and against WTO principles, with Indonesia’s Coordinating Minister for Economic Affairs even describing CBAM (explained above) as ‘regulatory imperialism’. The EU has to be mindful of such accusations, while negotiations on FTAs with Indonesia and Mercosur are ongoing.
On our radar.
26 June I German MP Anton Hofreiter will give his take on IRA and the Net Zero Industrial Act at the upcoming Bruegel event.
26-27 June I INTA meeting with an exceptional menu: vote on anti-coercion, debate on the impact of sustainability legislation on trade relations, hearing on the FTA with New Zealand, debriefing on the last TTC (with guests stars Dombrovskis and Vestager). We’ll follow them for you.
27 June I Ahead of the 13th WTO ministerial, the European Commission will host a civil society dialogue to discuss the organisation’s reform.
27 June I CEPS is hosting an event on EU strategic autonomy in the face of dynamic global security landscape.
28 June I Civil society will have a chance to gossip with the European Commission about the trade-related aspects of sustainable development in the context of the EU-Central America Association Agreement.
29 June I For the 2nd TTC stakeholder assembly and debrief, the European Commission will zoom in on trade-related work achieved at the last ministerial.
1 Jul I Beginning of the Spanish Presidency (with everything it implies on trade and beyond)
14 Jul I In spite of all the criticism it faced, the EU-Canada trade deal (CETA) turned 5 this year. DG TRADE opened a tender for a study on its economic and sustainability impact across these first years of application.
17-18 Jul I To complete the Mercosur story, keep an eye on the EU-CELAC Summit. Real milestone for the Commission’s trade agenda with Latin America.
What we’re reading.
Please, EU, do more on digital trade. That’s the invitation from BusinessEurope. In a recent position paper, they ask for more ambition on digital chapters in FTAs and in digital partnerships. Progress on thorny WTO issues (like on e-commerce and duties on electronic transmissions) are also much needed to ensure smooth data flows.
Still hungry for digital and trade? If you want a quick recap on the latest EU-US TTC, we unpacked the main announcements (and lack thereof) for you.
Big news on EU-Africa trade. On 19 June, the EU and Kenya concluded negotiations for an FTA. Brussels will slash tariffs on Kenyan exports (minerals are of particular interest), while the process will be gradual for Nairobi. Signature and ratification will be probably a matter for the next Commission and Parliament. You get the trend: diversification from Russia and China. The 8th biggest African economy adds to the list of new partners.
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