Renewal and Reform: The future of European trade policy

Image from the European Parliament, via flickr

In this post, Edward Knudsen and Inga Runarsdottir explore the future of European trade policy under the new Commission, arguing that key priorities under the new Commission will be reinvigorating the multilateral system and reforming the WTO. This post is the first of a three-part series examining the future of European geoeconomics. Subsequent posts will discuss EU regulatory and sanctions policies.

Trade as a geopolitical tool

The new Ursula von der Leyen-led European Commission, which took its seats in November, has pledged to be a ‘geopolitical commission’, flexing the EU’s foreign policy muscles in an increasingly competitive global environment. Given the EU’s lack of traditional military ‘hard’ power capabilities, however, Europe’s efforts to gain prominence on the world stage will largely take the shape of geoeconomics. One of the sharpest geoeconomic tools that the Commission possesses is its exclusive competency regarding the EU’s trade policy.

As the world’s largest single market, the EU wields enormous leverage in writing the rules of global commerce. The newly-seated EU Trade Commissioner, Phil Hogan, intends to use this bargaining power as a way to advance the Commission’s ambitious agenda for the future – tackling challenges such as climate change and rising inequality. To this end, a key component of the EU’s foreign policy over the coming years will be using its economic heft to shape a greener, more inclusive, and multilateral trading future.

In order to achieve these goals, the ability of the Commission to convince member states of the benefit of trade deals will be critical. Any new deal trade is all but certain to be ‘comprehensive’ (accounting for investment and non-tariff barriers in addition to traditional tariff reduction), and therefore require the approval of all national parliaments as well as the European Parliament. The new Commission must therefore balance its desire to use trade agreements to shape dramatic policy changes with the need to convince sceptical member states that such shifts are to their benefit.

Priorities for European trade policy

As trade becomes more important for the EU’s Global Strategy, it is also marked by increasing tensions around the world. Europe will attempt to navigate this uncertainty by employing specific strategies towards each of its key trading partners. Specifically, the European Union is likely to seek to partner with the US to reinvigorate transatlantic trade, to balance cooperation and competition with China, and to expand the market for European goods with other key economies around the world.

One of the most critical priorities for EU trade policy under the new Commission will be addressing the trade tensions with the United States. Although President Trump has delayed the decision about whether to impose 25% tariffs on automotive imports from the EU, the steel and aluminium tariffs from 2017 persist and the threat of further tariffs looms, particularly after France’s tax on digital services. A priority of the European Union’s trade policy will be defusing tensions and seeking a way to reduce tariffs on manufactured goods. The EU must tread lightly here, however. While a recent poll demonstrated support for free trade within the EU, a revamped ‘TTIP 2.0’ could reignite the protests that characterized the first attempt at a US-EU FTA.

The EU also faces the daunting task of tackling China’s unfair trade practices while delicately navigating the trade dispute between the US and China. In June 2018, the EU launched a case against China at the World Trade Organisation (WTO) and the European Commission labelled China a ‘strategic competitor’ in March of this year. However, only a month later, the EU and China agreed to deepen trade ties and work together on WTO reform. This tension between viewing China as both a competitor and a key economic partner is unlikely to be resolved in the near future. The EU can be expected to oscillate between the two positions and try to find a way to reconcile them without fully committing to either.

In the rest of the world, the European Union is all but certain to continue its ambitious pursuit of FTAs. An agreement with Singapore entered into force on November 21st, which then-Trade Commissioner Malmström hailed as the sixteenth trade deal implemented since 2014. She stressed the importance of seeking new agreements, arguing that “at a time when the fundamentals of open and rules-based global trade are put into question, we need agreements like this more than ever.”

The EU and the future of the multilateral order

More important to the EU than the trading relationship with any one nation or trade bloc is the future of the World Trade Organisation and the multilateral system as a whole. Since the collapse of the Doha Round negotiations in 2008, it has been apparent that one of the key operations of the WTO – serving as a forum for multilateral trade discussions – was no longer functional. Countries and trade blocs, with the EU prominent among them, effectively circumvented this roadblock by increasing their pursuit of bilateral and plurilateral trade deals.

However, a more acute crisis has recently come to the fore: the impending paralysis of the WTOs Appellate Body and the dispute settlement mechanism over which it rules. Although he did not begin the practice, under President Trump the US has blocked appointments to the court. After two judges’ terms end on December 10th, the appellate body will no longer have the minimum three justices necessary to make a ruling. Given the upcoming impasse, Von der Leyen has specifically directed Trade Commissioner Hogan to “lead the reform of the World Trade Organisation”.

United States Trade Representative Robert Lighthizer recently announced a reform plan, but his proposal would serve to hamstring the body by holding the WTO’s budget hostage. Lighthizer, who favours bilateral settlements, may be willing to let the appellate body’s functioning cease, but the EU is working with Canada and Norway to find a way around this eventuality. Ensuring that an alternative mechanism is functional, and attempting to find a way to resolve the ‘urgent’ impasse at the WTO, promises to be the chief concern on the EU’s trade policy in the coming months and years.

At the same time, it is not all doom and gloom. The EU has maintained a degree of unity in the Brexit negotiations, while successfully pursuing trade deals with small and medium sized countries. Strengthening ties with like-minded middle powers may provide a model for future multilateralism. Relations with the US and China have been strained, but Europe can still successfully balance competition and cooperation. The decline of the WTO may be cause for alarm, but it also presents an opportunity for much-needed reform. And if the EU successfully manages to guide the multilateral system towards a reformed future, it will be a key first step toward establishing itself as a true geopolitical player.

Edward Knudsen and Inga Runarsdottir are Research Associates with the Dahrendorf Forum. Edward is based at the Hertie School and Inga is based at the London School of Economics and Political Science. 

The opinions expressed in this blog contribution are entirely those of the author and do not represent the positions of the Dahrendorf Forum or its hosts Hertie School and London School of Economics or its funder Stiftung Mercator.