Opening Market – Setting New Rules: Free Trade Agreements of the EU

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The EU is negotiating free trade agreements (FTAs) with many third countries, including Japan, Mexico, and the Mercosur states. Draft mandates for negotiating with Australia and New Zealand were submitted to the Council of Ministers in September 2017. Together with the liberalization of multilateral trade under the World Trade Organization (WTO), preferential trade agreements are a central pillar of the EU’s trade strategy.

In October 2015 the Directorate General for Trade of the European Commission presented a new trade strategy. While the WTO will remain the main forum for the EU to negotiate market access and to settle trade disputes, the Commission wants to conclude more trade agreements with important trade partners. Commission President Juncker stressed in the autumn of 2017 that he would like all ongoing FTA negotiations to be completed before his mandate expires in 2019.

Modern FTAs – including those with Canada, Japan, India, and the Mercosur states – are intended to do more than simply dismantle tariffs. Market access is to be improved by removing non-tariff trade barriers (for example, through regulatory cooperation), liberalizing trade in services, and opening public procurement markets. The trade agreements are to go well beyond the scope of the WTO. Rules on competition, the protection of foreign direct investments and sustainability issues (labour rights and environmental protection) are all to be included.

Competencies and Ratification

The years-long political tug of war in the EU over the FTA with Canada (CETA) called into question the efficiency and reliability of European decision-making processes and trade policy procedures. The international credibility and clout of the EU has been damaged. The opinion of the European Court of Justice in May 2017 on the FTA with Singapore made clear which elements lie within the sole competence of the EU and which require agreement at the level of the Member States.

Accordingly, future FTAs should be designed in such a way that they can be quickly and reliably ratified by European legislators and thereafter enter into force. This implies in the first instance that investor-state dispute settlement and portfolio investments (as well as other possible issues that lie within the competence of the Member States) are to be dealt with in separate agreements. Moreover, the parliaments of the Member States should be informed in a timely and comprehensive manner about FTA negotiations. To this end, among other things, the negotiating mandates of the Commission should be public. In principle, the Commission appears to want to follow this line. The European Council, however, has still not decided on a clear course. But decisions on Singapore and Vietnam are likely to be taken soon.

Until now, all FTAs have been ratified at the level of both the EU and the Member States. All ongoing FTA negotiations include parts that fall under shared competence. As long as an FTA is an integral component of a comprehensive political association agreement (for example, Ukraine), final ratification by the Member States in accordance with their respective procedures is required in any case. If necessary, those parts of the FTAs that lie within the sole competence of the EU can enter into force provisionally after being approved at the EU level (Council of Ministers and Parliament).

One Step Forward, one Step Back: Current State of Selected EU Negotiations

Most negotiations are anything but simple. In the case of some negotiating partners, the EU has been unable to make any progress for years.

Free Trade Agreements of the EU

Canada: In September 2014 the EU and Canada concluded the bilateral negotiations on the Comprehensive Economic and Trade Agreement (CETA) in a joint statement of then Commission President José Manuel Barroso and Stephen Harper, who at the time was the Canadian prime minister. CETA has been provisionally applied since September 21, 2017. Those parts of the agreement that come under the shared competence of the EU and the Member States, especially investor-to-state dispute settlement, will apply only when all Member States have ratified CETA in accordance with their respective procedures. Judging from the experience with the trade agreement between the EU and South Korea, final ratification by the Member States takes four to five years. With CETA, the Commission has presented one of the most comprehensive and ambitious free trade agreements that the EU has negotiated to date. In conformity with WTO rules, all trade between the EU and Canada has essentially been liberalised. Ninety-nine per cent of all customs duties will be abolished as soon as the agreement enters into force. Within seven years at the latest, industrial products will be entirely exempt from tariffs. The agreement with Canada supplements the WTO accords: CETA is not only more ambitious in its liberalisation aims (for example, in doing away with tariffs, liberalising services and protecting intellectual property), it features many WTO Plus areas such as investment, competition, regulatory cooperation, and public procurement).

India: The negotiations on the free trade agreement between the EU and India have stalled since 2012. In the autumn of 2015, the talks were put on hold at short notice by the Indian negotiators after the EU had rejected licensing pharmaceutical products made in India. Since then, there have been several summit meetings and exploratory discussions between the chief negotiators. In the current political climate in India, however, there seems to be little will to resume the negotiations and to make sufficient compromises.

Indonesia: In July 2016 negotiations on a bilateral free trade agreement (Comprehensive Economic Partnership Agreement or CEPA) were launched. Up to September 2017, three negotiating rounds had taken place. Among other things, the agreement is intended to reduce customs duties and improve access to public tenders.

Japan: Following the withdrawal of the United States from the Trans-Pacific Partnership (TPP) agreement, the negotiations between the EU and Japan on the Economic Partnership Agreement have received new impetus. First and foremost, Japan aims at a removal of EU import duties, above all, those on automobiles. The EU points at non-tariff barriers in Japan as considerable market access impediments. Ahead of the negotiations, the EU was able to get Japan to make improvements in non-tariff areas. In July 2017, the negotiating partners announced that they had reached an agreement in principle on completing the negotiations. However, investment protection and handling data flows remain areas of contention. With regard to data flows, the EU does not have a clear strategy, while as far as investment protection is concerned, Japan is not inclined to go along with the new EU system of an investment court system. The BDI favours dealing with investment protection in a separate agreement. Furthermore, the negotiation partners should quickly agree on a liberal approach towards data flows that safeguards European data protection standards.

Mercosur: The European Union and the Mercosur states began negotiating an association agreement as early as 2000. The negotiations were suspended in the autumn of 2004, mainly owing to differences over market access for industrial and agricultural products, and resumed in May 2010. More recently, the negotiations appear to have picked up pace. In October 2015, Mercosur had proposed a market access offer for more than 87 per cent of all products, which was initially rejected as insufficient by some EU Member States. In May 2016, the two sides exchanged serious market access offers for the first time in years. For the EU, the most sensitive issue is meat import quotas. The announced agreement in principle on concluding the accord by the end of 2017 is ambitious. A trade agreement would link together two of the largest markets in the world. The Mercosur region, whose full members are Brazil, Argentina, Uruguay and Paraguay, has almost 270 million inhabitants and the EU has over 500 million.

Mexico: Mexico and the EU have agreed to modernize the global agreement they concluded in 2000. This means reaching a free trade agreement. The negotiations, which were launched in 2016, aim for modern and ambitious accords in areas that until now have not been regulated bilaterally, including investment and public procurement. The goal is to draw up an agreement that it compatible with CETA.

Singapore: The negotiations over a free trade agreement between the EU and Singapore were launched in 2010 and formally concluded in September 2013 (investment protection in October 2014). Thereafter, the EU Commission requested that the European Court of Justice (ECJ) examine the agreement in order to clarify whether it fell under the competence of the EU only (pure trade agreement) or under the competence of the Member States as well (mixed agreement). In May 2017 the ECJ ruled that in its current form, the agreement constituted a mixed deal. The sole reason for this ruling was the provisions on portfolio investment and investor-state dispute settlement. It is expected that the European Commission will now include the mixed parts in a separate investment protection agreement. For what would then be a pure trade agreement, the approval of the EU Council of Ministers and the European Parliament would suffice; for a mixed agreement covering invest-ment issues, the approval of all EU Member States would be needed as well. In Germany, the Bundestag and, where appropriate, the Bundesrat are the competent bodies. However, the Council of Ministers has the last word regarding the design of the agreement and thus could insist on maintaining its mixed character. What course the Council intends to pursue is not yet clear.

Turkey: The customs union between the EU and Turkey, established in 1995, numbers among the early trade agreements concluded by the Union with a third country. The agreement is limited to industrial goods and processed agricultural products – raw agricultural commodities as well as coal and steel products are excluded from the accord. Furthermore, neither trade in services nor more recent trade policy issues such as public procurement, investment, and intellectual property rights are regulated under the customs union. Trade restrictive measures taken by Turkey and its increasingly incoherent foreign trade policy have led to ever more trade disputes between the EU and Turkey. In the spring of 2015, the two parties agreed to a timetable for modernizing the customs union. Services, public procurement, and most agricultural products are to be covered by the revamped customs union. Meanwhile, the Commission has finished its impact assessment and drawn up a negotiating mandate. Owing to the political tensions with Ankara, important countries such as Germany have followed the lead of the European Council in October 2017 by speaking out against launching negotiations for the time being.

United States: Since mid-2013, the EU and the United States have negotiated a comprehensive trade deal, the Transatlantic Trade and Investment Partnership (TTIP). Since the presidential elections in the United States in November 2016 and the change of administration, negotiations have been on hold. Owing to U.S. President Trump’s critical stance towards free trade and his ‘America first’ strategy – including in public procurement (“Buy American, hire American”) – a continuation of the negotiations on the same basis as before is unrealistic. Nonetheless, it is important to continue the dialogue with the U.S. administration in order to avoid trade conflicts and seek viable strategies for a trade policy rapprochement.

Vietnam: Since February 2016, the text of the EU-Vietnam free trade agreement has been available to the general public. The negotiations were completed at the beginning of December 2015 in a joint statement by the EU and Vietnam. According to statements by the European Commission, 99 per cent of customs duties on products will be abolished under the agreement within ten years. Market access for services and public contracts will be significantly improved for European companies. The agreement includes an updated chapter on investment protection. Among other things, a permanent investment court is to be introduced and appeal proceedings enabled. The agreement is now being examined by lawyers and will subsequently be translated. Thereafter it will be submitted to the Council and the European Parliament for ratification. It is expected that, as in the case of Singapore, the Commission will propose to move investment protection, including portfolio investment, into a separate accord.