The backlash against free trade and globalisation came in 2016. That year, Britain’s vote to leave the European Union, the election of Donald Trump and the Walloon-inspired near-death experience suffered by the Canada-EU trade deal (CETA) all raised questions about the trajectory of global trade and the EU’s role in it. But after this ‘annus horribilis’, the European Commission attempted in 2017 to reclaim the initiative. Spurred on by positive results in the French and Dutch elections, Commission President Jean-Claude Juncker declared in September that the EU had the “wind in its sails”. On trade, the Commission agreed deals with Canada and Japan, and is now in talks with Mexico, Australia and the member-states of Mercosur. Others are lining up. Meanwhile, the US president has withdrawn from the Trans-Pacific Partnership (TPP), a mega-deal that included 12 Pacific Rim economies; challenged NAFTA; threatened to withdraw from the WTO; raised trade barriers against Canadian lumber and airplane imports; and has initiated trade investigations against China. In comparison, the EU looks in good shape. But despite the Union’s positive momentum, a number of challenges lie ahead for 2018.
According to a Bertelsmann Stiftung survey from November 2016, 45 per cent of EU citizens - 40 per cent in the Netherlands - see globalisation as a threat. And support for globalisation is inextricably linked to support for the European Union. After all, the EU is an experiment in globalisation at a regional scale: an integrated market without tariffs or regulatory barriers but with freedom of movement of people and capital to facilitate the spread of ideas and economic opportunity. The free and fair exchange of goods, services and ideas lies at the heart of the EU project. Besides, trade tends to generate economic growth, strengthen ties between countries and cultivate a shared interest in the equal application and enforcement of mutually agreed rules, or global governance for short. And so, growing protectionist sentiment among European citizens sets off alarm bells in Brussels.
It is in this context that the European Commission in May 2017 published a reflection paper entitled ‘harnessing globalisation’. In it, the Commission describes a number of steps by which it aims to “shape globalisation”, addressing the concerns of those Europeans that feel ‘left behind’, and by doing so counter protectionist arguments put forward by Eurosceptic populist parties. The paper proposes, amongst other things, stronger trade defence instruments and enhanced scrutiny of foreign investments, and it seeks to promote fair, not just free, trade. But more needs to be done. Three issues stand out.
Firstly, the EU is likely to sign more trade deals in the coming period, yet this will not likely translate into more public support for the EU. Quite possibly, it could undermine it. Arguably the most important development for EU trade policy in 2017 was the European Court of Justice’s ruling on the division of competences in the EU-Singapore trade agreement. The Court ruled in May that most of the content of the agreement is an “exclusive competence” of the EU, meaning that it can be signed and ratified at the EU level only; by EU government leaders and the European Parliament. The Court said that only portfolio investment and investment protection, including investor-state dispute settlement, are ‘mixed competences’ that require national ratification.
Future EU trade negotiations will therefore likely be split into two parts; discussions on investment protection and non-direct foreign investment will be carved out, while the bulk of a trade deal can be agreed and adopted without mandatory scrutiny from national parliaments.
In 2016, the transatlantic trade negotiations (TTIP), CETA and the association agreement with Ukraine generated significant public resistance in countries such as France, Germany, Belgium and the Netherlands. Imagine how much easier it would be if trade agreements need only be ratified by one parliament, instead of 37 national and regional ones? The Singapore ruling now sets a precedent for future trade negotiations; it has certainly already helped the trade deal with Japan move ahead more quickly than expected.
But this comes at a cost. Trade liberalisation has distributive effects. It produces winners and losers. In addition, the empirical record on the ability of trade liberalisation to create jobs is unconvincing. Without adequate compensation, retraining or adjustment mechanisms, those that may already feel ‘left behind’ may be the most negatively affected by trade deals.
In itself this is not sufficient reason to abandon trade liberalisation, and the EU is right to have set up a Globalisation Adjustment Fund to help displaced workers. But the political effects can be more damaging if the distance between the average European citizen and the politicians that decide on the trade agreements that could put that citizen’s job at risk increases. The Singapore ruling does that. The European Parliament will play an increasingly important role on trade, while the role of national parliaments becomes weaker still. A surge ahead on trade talks could backfire, making the EU vulnerable to populist arguments that the EU is steaming ahead without involving its citizens.
Fundamentally the problem is that many Europeans still feel little identification or loyalty with the European Parliament. Either it should become more active in engaging with national audiences on trade; or EU heads of government need to ensure that national parliaments have their role to play in scrutinising trade agreements. If this is not addressed, scepsis towards the EU and its trade policy could grow, regardless of the economic benefits that trade liberalisation brings. Member-states where the support for Eurosceptic parties has increased – or where they are in government – could also start challenging the principle that trade agreements are agreed on the basis of a qualified majority vote and demand unanimity, provoking greater institutional friction.
Secondly, the EU has taken a new approach to investment protection, but it may not be enough to satisfy the trade-sceptics. During the TTIP talks, the Investor-State Dispute Settlement (ISDS) came under heavy scrutiny. ISDS, an ad-hoc arbitration system through which companies can seek compensation in the event that government policy adversely affects their interests, has been standard practice in most bilateral trade agreements involving European states since the 1960’s. But it was the main issue around which TTIP’s critics rallied as it sparked questions about the limits of a country’s sovereign right to regulate and the accountability of foreign companies. In order to break the deadlock, the Commission suggested a permanent multilateral investment court as an alternative to ISDS. It has been discussed with Singapore, Vietnam and Canada and the Commission referred to it in its ‘harnessing globalisation’ paper. The Court’s Singapore ruling, however, has put progress on investment protection on ice.
This is welcome as it makes it less likely that trade deals collapse over an objection to an investment protection clause, as almost happened to CETA in October 2016. Most countries will still be interested to negotiate with Europe even if an investment protection clause is off the table; though for some this raises new questions. A UK-EU trade agreement following Brexit, for instance, will likely contain chapters on portfolio investment and investment protection, and therefore will be mixed. This could create delays during the ratification process, something UK and European firms should prepare for.
It remains to be seen how a multilateral investment court will develop and if it will ultimately convince its critics. What is certain, however, is that investment protection was not the only reason people objected to EU trade deals. Prior to its campaign against ISDS, the anti-TTIP lobby focused on the impact a transatlantic deal could have on Europe’s audiovisual sector, EU geographic indicators and chlorinated chicken. ISDS was one of the lightning-rods in the TTIP talks. But it was not the only issue publics and parliaments were concerned about. It would be naïve to assume that carving investment protection out of future EU trade deals will silence well-funded, and well-organised anti-trade groups.
Thirdly, the EU can only go so far to achieve its objectives on global trade without the US. Trump’s trade policies mean the US is no longer seen as the global champion of free trade and of the multilateral institutions on which it relies. On the face of it, this makes the European Union look good. Indeed, countries like Japan, Mexico and Australia have decided to fast-track their trade talks with Brussels. But ultimately, transatlantic cooperation is both desirable and necessary.
One of the key priorities,-- and mentioned in the Commission’s ‘harnessing globalisation’ paper -- is the need to create a ‘level playing field’. The Commission is right to push for a more fair global trading system. Chinese exporters undercut European producers with lower wages, generous state aid and less stringent labour or environmental protection standards. These unfair trade practices have a direct effect on popular European support for globalisation. If China is able to undercut European firms by relying on lower environmental and labour standards, this undermines support in the EU for free trade.
The Commission wants more trade defence measures to stop Chinese dumping. By agreeing higher trade standards through its deals with others, pressure is increased on Chinese exporters to follow them as well. TPP may continue without the United States, and more major economies may reach agreements with the EU, but will it be enough to persuade the Chinese to observe higher norms and standards of trade when the United States, the world’s largest economy, chooses to go its own way? Besides, transatlantic discord on trade liberalisation harms the credibility of the EU as well as of the United States, and makes it more difficult for either one to play a leadership role on global economic issues.
On the face of it, the United States and Europe think increasingly alike on various trade issues. On trade defence, for instance, the European Commission’s ‘harnessing globalisation’ paper says faster, more resilient and more effective trade measures are needed. In the United States, the Trump administration is challenging the WTO’s dispute settlement mechanism on the same grounds. French president Emmanuel Macron has talked about a ‘Buy European’ act, just as the United States has long had a ‘Buy American’ act. The EU wants to emphasise reciprocity in its trade relations, and so does the US. The European Commission wants a framework to screen foreign direct investments while the US already has such a framework. Though similar, without better transatlantic coordination, this will reinforce the trend of greater transatlantic divergence on trade.
There are major disagreements between the US and Europe about the means to address global trade imbalances. The EU wants more multilateral governance and takes a ‘softly, softly’ approach. Trump is more ‘bull in a china shop’. The White House’s focus on reform of the appellate body at the World Trade Organisation could undermine the WTO, while the EU would like to see the WTO strengthened and abhors the prospect of a trade war.
These differences stand in the way of transatlantic cooperation. Yet it is also worth remembering what Trump has not done, as it has become very convenient for European politicians to point the finger at Washington. The TTIP transatlantic trade talks are not ‘in the freezer’ because of Donald Trump; he has kept quiet on TTIP since he came into office. Instead, this was a result of a decision by the French and German ministers of trade, both social-democrats, who eyed the elections of 2017 and feared they could not sell TTIP to their constituencies. Mathias Fekl and Sigmar Gabriel pulled the plug on the talks in late August 2016. At the time, not Trump, but Hillary Clinton was expected to become the new US president. This suggests that the door for cooperation with the White House on trade remains ajar, even though it may be deeply unpopular at home for a European politician to walk through it.
Nevertheless, the EU should explore options to work with the US to push back against Chinese dumping and move global free and fair trade forward. Not only does the EU share Washington’s sense of urgency, but a trade war precipitated by US unilateral action could wreak havoc on the global trade system. The EU and its member-states have an interest to avoid this from happening. Whether the US is willing to listen is a different matter entirely. The inconvenient truth is that Europe’s ability to harness globalisation may ultimately depend on Washington as much as on Brussels.
About the authors
Rem Korteweg is Senior Research Fellow at the Clingendael Institute and Head of the Europe in the World unit. He works on European external policy with a specific focus on the intersection between foreign policy, trade and security issues and Brexit.