European Commission Trade Policy Review

The European Commission’s 18 February 2021 Trade Policy Review paper — WTO reform and much more proposed

In a 23 page communication from the European Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions dated 18 February 2021 [COM(2021)66 final] with an accompanying 19 page Annex that looks at WTO reform, the European Commission lays out its vision for EU trade policy moving forward. The communication, at pages 1-3 lays out the background and global trends leading to the trade policy proposals presented. The discussion is copied below (any emphasis in quotes is from the original text unless otherwise noted).

“Trade is one of the EU’s most powerful tools. It is at the centre of Europe’s economic prosperity and competitiveness, supporting a vibrant internal market and assertive external action. As a result of the openness of our trade regime, the EU is the world’s largest trader of agricultural and manufactured goods and services and ranks first in both inbound and outbound international investments. Thanks to the common commercial policy, the EU speaks with one voice on the global scene. This is a unique lever.

“With new internal and external challenges and more particularly a new, more sustainable growth model as defined by the European Green Deal and the European Digital Strategy, the EU needs a new trade policy strategy – one that will support achieving its domestic and external policy objectives and promote greater sustainability in line with its commitment of fully implementing the UN Sustainable Development Goals. Trade policy must play its full role in the recovery from the COVID-19 pandemic and in the green and digital transformations of the economy and towards building a more resilient Europe in the world.
Making the right policy choices in designing a trade policy for the world of 2030 means taking into account recent political, economic technological, environmental and social shifts and the global trends emerging from them1.

Global uncertainty is on the rise fuelled by political and geo-economic tensions. Instead of international cooperation and multilateral governance, there is growing unilateralism, with the consequent disruption or bypassing of multilateral institutions. These trends have their roots in several developments.

“First, globalisation, technological evolutions and the build-up of global value chains have had a dichotomous impact on economies and societies. On the one hand, they have created massive efficiency gains, fuelling sustained, trade-led economic growth in many parts of the world. This has helped to lift millions of people out of poverty. On the other hand, these developments sometimes have had a strong disruptive effect leading to growing inequalities and leaving some individuals and communities behind. What were expected to be transitory adjustment costs have sometimes turned into permanent losses in living standards, employment opportunities or wages and other working conditions. In many cases, governments are perceived to have been insufficiently responsive to economic adjustments and mitigating their negative impacts2. This has led to calls for de-globalisation and to the rise of inward-looking and isolationist reactions.

“Second, the rapid rise of China, demonstrating global ambitions and pursuing a distinct state-capitalist model, has fundamentally changed the global economic and political order. This poses increasing challenges for the established global economic governance system and affects a level playing field for European companies competing globally and at home.3

“Third, the acceleration of climate change, together with biodiversity loss and environmental degradation, paired with tangible examples of their devastating effects have led to the recognition of the green transition as the defining objective of our time.

“The European Green Deal is the EU’s new growth strategy which facilitates resetting our economic policy to better correspond to the challenges of the 21st century. Its overarching objective is the transition towards a climate neutral, environmentally sustainable, resource efficient and resilient economy by 2050, with the ambition to reduce GHG emissions by at least 55% by 2030 as well as the protection, conservation and enhancement of the EU’s natural capital. As such, it will be the driving force behind our competitiveness and will lead to a progressive but profound transformation of our economies, which in turn will have a strong bearing on trade patterns.

“The green transition needs to go together with social equity. A serious decent work deficit persists in global supply chains in many parts of the world4, from serious violations of freedom of association to poor working conditions5. Depriving workers of their fundamental rights puts downward pressure on social conditions globally and fuels people’s disenchantment with globalisation and open trade.

“Fourth, the digital transformation is another key enabler of sustainable development, but also a space of competition and inadequate multilateral governance. As it embarks on its Digital Decade, supporting Europe’s digital transformation is a priority both in internal and external policies including trade policy and instruments. At the same time, the nature of trade will continue to evolve. It will become more innovation-driven, supported by intellectual property (IP) protection, with an increasing role of services trade compared to goods.6 Services not only contribute directly to the value chain (financial services, telecommunication, IT, transport and logistics) but – often even more importantly – they contribute by being incorporated in manufacturing products. The servicification of the economy and the rise of digital technologies have created well-paid and high quality jobs and have fuelled economic growth.

“The COVID-19 pandemic has accelerated and focused attention on these shifts, while creating challenges of its own. It has highlighted the interconnected nature of economies, which rely on stable and predictable international rules and resilient transportation channels. It has exposed the risk of a breakdown of global cooperation and trust. It has also raised questions regarding the right policy mix in terms of diversification of domestic and external sources of supply and the build-up of strategic production capacities and reserves. It has also shown the importance of expanding production of health products in a crisis situation and the need for cooperation to ensure equitable access for the more vulnerable populations. Moreover, it has led to a significant increase in government support and involvement in the economy, which is necessary to rescue healthy companies and protect jobs, but may not be sustainable in the long-run and may generate tensions.

“Finally, the economic outlook across the globe needs to be factored in. The EU will remain a global economic power and a leader on sustainable growth. The latest OECD long-term forecasts indicate that real GDP in the euro area will increase by 1.4% annually (compounded annual growth rate) over the next 10 years7. Nevertheless, these growth prospects will be eclipsed by developments in other regions, and Europe’s relative position in the international economy will change. Already in 2024, 85% of the world’s GDP growth is expected to come from outside the EU. The continued rise of China will impact heavily on global economic developments over the next 10 years – the OECD predicts Chinese GDP will grow by 4.7% annually.

“EU trade policy has to take into account these global trends and challenges to reflect the political ambition of ‘a stronger Europe in the world’8. It should also respond to the expectations of stakeholders as signalled in discussion with Member States, the resolution adopted by the European Parliament9 and the views expressed in the public consultation10.

“1 The Commission’s 2020 Strategic Foresight report analyses the impact of the COVID-19 pandemic on the dynamics of some relevant megatrends, COM(2020) 493 final. The Commission’s 2021 Strategic Foresight Report will focus on open strategic autonomy.

“2 At the EU level, the European Globalisation Fund aims at making a contribution to deal with such adjustment costs; cf Regulation (EU) No 1309/2013 of the European Parliament and of the Council of 17 December 2013 on the European Globalisation Adjustment Fund (2014-2020) and repealing Regulation (EC) No 1927/2006. A new regulation is being adopted, allowing the Fund to continue supporting workers and self-employed persons whose activity has been lost.

“3 This challenge is particularly visible in the area of energy intensive industries and notably the steel sector, where global solutions are needed to address the immense imbalances on the world market negatively affecting European companies and undermining the successful green transition of this ecosystem.

“4 According to the International Labour Organization (ILO), an estimated 25 million people remain in forced labour, 152 million are victims of child labour and 2.78 million workers around the world die from work-related accidents or diseases every year; Sources: Global estimates of modern slavery: forced labour and forced marriage, ILO (2017); Global Estimates of Child Labour, ILO (2017) and ILO website.

“5 Commission Staff Working Document: Promote decent work worldwide, SWD(2020) 235 final.

“6 In 2016, taking both goods and services into account, 80% of EU imports and 82% of EU exports were generated by the IP-intensive industries. IPR-intensive Industries and Economic Performance in the European Union, Industry-Level Analysis Report, joint EPO/EUIPO study, 3nd edition, September 2019.

“7 OECD (2020), Real GDP long-term forecast (indicator).

“8 Political guidelines for the next European Commission 2019-2024.

“9 European Parliament resolution on the EU Trade Policy Review (2020/2761(RSP).

“10 https://trade.ec.europa.eu/consultations/index.cfm?consul_id=266&utm_source=dlvr.it&utm_”

The European Commission then lays out its vision of how the proposed trade policy supports the EU’s open strategic autonomy, identifies “[t]hree core objectives for trade policy for the medium term” which are (1) “supporting the recovery and fundamental transformation of the EU economy in line with its green and digital objectives,” “shaping global rules for a more sustainable and fairer globalisation,” and “increasing the EU’s capacity to pursue its interests and enforce its rights, including autonomously where needed”. Communication at 9-10. The communication then lays out “six areas that are critical to achieving the EU’s objectives in the medium term”, Id. at 10. The six areas are listed on page 11 and then described in significant detail in the remainder of the communication:

  1. “Reform the WTO
  2. “Support the green transition and promote responsible and sustainable value chains
  3. “Support the digital transition and trade in services
  4. “Strengthen the EU’s regulatory impact
  5. “Strengthen the EU’s partnerships with neighbouring, enlargement countries and Africa
  6. “Strengthen the EU’s focus on implementation and enforcement of trade agreements, and ensure a level playing field”.

The communication is embedded below.

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The Annex provides a detailed explanation of what the European Commission intends to pursue as part of the WTO reform area but lists two “Headline actions” in the communication (id at 11).

“The Commission will:

“1. Seek the adoption of a first set of reforms of the WTO focusing on enhancing the WTO’s contribution to sustainable development, and launch negotiations on reinforced rules to avoid distortions of competition due to state intervention. It will
give priority to enhancing transatlantic cooperation on WTO reform.

“2. Work to restore a fully-functioning WTO dispute settlement with a reformed Appellate Body.”

For the other five actions listed above, the European Commission outlines areas for focus. Several include actions to be pursued at the WTO — including environment, sustainable development and digital trade (actions 2, 3 above).

On the action of strengthening the EU’s focus on implementation and enforcement, The European Commission reviews a range of action steps dealing with enforcing existing agreements, also reviews the FDI screening regulation, a modernized export control regulation and then identifies some new tools that need to be developed “to confront new challenges” and lists four such potential new tools (id. at 20-21):

“Nevertheless, the EU needs to develop its tools to confront new challenges and protect European companies and citizens from unfair trading practices, both internally and externally.

“ The Commission will propose a new legal instrument in the area of trade policy, to protect the EU from potential coercive actions of third countries.

“ The Commission will propose a legal instrument to address distortions caused by foreign subsidies on the EU’s internal market.

“ To enhance reciprocal access for EU operators in public procurement the Commission will seek to advance the International Procurement Instrument and calls on the Council to finalise its work as a matter of urgency.

“ Finally, to ensure a better level playing field for EU businesses on third country markets, in which they increasingly have to compete with the financial support foreign competitors receive from their governments, the Commission will explore options for an EU strategy for export credits. This will include an EU export credit facility and enhanced coordination of EU financial tools. In line with the Green Deal objective to phase out fossil fuel subsidies, it will also incentivise climate friendly technology projects and propose to immediately end support for the coal-fired power sector, and to discourage all further investments into fossil fuel-based energy infrastructure projects in third countries, unless they are fully consistent with an ambitious, clearly defined pathway towards climate neutrality in line with the long-term objectives of the Paris Agreement and best available science.”

These issues will generate significant interest among trading partners (either supportive, such as the U.S. for tools to deal with coercive actions and possibly ability to address distortions on the domestic market by foreign subsidies to U.S. businesses, or in opposition, such as China on the same two items).

Annex

The Annex is entitled “Reforming the WTO: Towards a Sustainable and Effective Multilateral Trading System” and reviews the challenges in all three pillars of the WTO (negotiations, dispute settlement and monitoring of trade policies) as well as the U.S.-China trade conflict. The European Commission reviews the lack of a common purpose among the WTO Members and the multiple challenges posed by multiple crises including the pandemic, climate change, increased unilateralism and more. The EC’s view on how to restore trust and a sense of common purpose is presented in part 2 of the Annex (portion copied below from pages 3-4).

2. Restoring trust and a sense of common purpose: the WTO’s contribution to sustainable development

“The collapse of the Doha Development Agenda in 2008 exemplified the lack of common purpose of the WTO membership. Despite the success in concluding the Trade Facilitation Agreement at the 9th WTO Ministerial Conference in Bali and the Decision on agricultural export competition at the 10th WTO Ministerial Conference in Nairobi, the WTO membership has become increasingly divided as to what it expects from the WTO. While part of the membership has argued that the ‘centrality of development’ in the WTO means that there should be a focus on exceptions and flexibilities from agreed and future commitments, another part has grown increasingly frustrated at the failure of progress in WTO negotiations and shifted its attention to bilateral trade agreements. Without a sense of common purpose, it has been extremely difficult to find a way forward for any initiative and to ensure that the WTO evolves in line with the changes in global trade.

“However, the vast majority of the membership remains committed to the idea of multilateralism, fully cognizant of the benefits of a rules-based system for global trade and development. The instability of the last few years, the climate and environmental crisis, the increased use of unilateral measures and now the COVID-19 pandemic have led to a clear realisation that the WTO is a vital component of healthy global economic governance but that reform is necessary. The G20 Leaders’ statement4 in Riyadh contains the strongest commitment to reform yet, at the highest political level.

“As global challenges proliferate, WTO members should be able to coalesce around the objective of addressing the most pressing problems they face: economic recovery and development, free from competitive distortions, as well as environmental and social sustainability as part of the green transition of economies. Addressing these problems would be in line with the objectives of the UN Sustainable Development Goals (the ‘SDGs’), to which all WTO members have committed. Such a focus could offer the sense of common purpose that the WTO has lacked in recent decades and rebuild trust among the membership. It could generate the confidence needed to modernise the WTO rulebook in a manner that isresponsive to the challenges of digitalisation and greening, as well as preventing and defusing conflicts caused by trade-distorting state intervention in the economy.

“4 Leaders’ Declaration G20 Riyadh Summit November 21 – 22, 2020.”

The EC mentions completing the fisheries subsidies negotiations, taking action on the trade and health initiative put forward by the Ottawa Group and developing a trade and environment work program. The EC also addresses issues of importance to many countries including the United States, such as revising how special and differential treatment (S&DT) is handled, and developing new rules to address distortions to competition from state intervention. However, the EC’s approach calls for a case by case approach on S&DT though recognizes that various countries should not be eligible for S&DT including many of the groups identified by the Untied States and doesn’t seek a convergence approach for non-market economic systems but rather seeks an approach to address distortions flowing from the different systems.

Not surprisingly, the EC places a high priority on restoring the full functioning of the WTO dispute settlement system. Throughout the communication and Annex, the EC calls for increased outreach to the United States and finding common approaches. On dispute settlement, the EC is waiting for a signal from the U.S. that it will address its concerns and seek solutions. In other communications, the EC has seemed to acknowledge that U.S. concerns on overreach and a need to limit the Appellate Body to the parameters of the Dispute Settlement Understanding could be addressed by the EU. I have previously posted my belief that with the extensive record compiled by the prior Administration, it would be appropriate for the U.S. to pursue modifications to the WTO dispute settlement system under the Biden Administration. See, e.g., December 12, 2020, The Incoming Biden Administration and International Trade – Katherine Tai, nominee for U.S. Trade Representative, https://currentthoughtsontrade.com/2020/12/12/the-incoming-biden-administration-and-international-trade-katherine-tai-nominee-for-u-s-trade-representative/ (“The U.S. has been correct in my view in insisting that the problems flagged with the WTO Appellate Body’s operation need to be fixed before the U.S. releases its blockage of appointment of new members. What has been lacking to date has been a specific set of proposals from the U.S. that would address their concerns and rebalance rights and obligations. While it will likely take the Biden Administration time to determine how to proceed on the Appellate Body issue, the U.S. can and should indicate that it will be providing its proposals for reform of the Appellate Body hopefully during the first half of 2021.”). Hopefully the U.S. will engage on reform needs later this year after the full trade team is in place for the new U.S. Administration.

The EC also identifies modernizing WTO rules to cover digital trade, services and investment, “addressing imbalances between members’ market access commitments,” and moving forward at least selected agricultural issues (domestic support reform).

The EC also makes a push for “integrating open plurilateral agreements in the WTO” by making it easier to add such agreements without needing consensus and avoiding free-ridership. In previous posts, I have argued for permitting plurilaterals that are open to all but where benefits are limited to the signatories. See, e.g., January 18, 2021, Revisiting the need for MFN treatment for sectoral agreements among the willing, https://currentthoughtsontrade.com/2021/01/18/revisiting-the-need-for-mfn-treatment-for-sectoral-agreements-among-the-willing/ Section 4.2 of the Annex (pages 11-12) is copied below.

“Although the WTO cannot regain its credibility and effectiveness without modernising its rules, it is abundantly clear after 25 years that such modernisation cannot be achieved through multilateral agreements based on a single undertaking. In parallel, a great number of bilateral or regional trade agreements are being negotiated, including on issues for which the WTO has so far failed to produce multilateral outcomes, for example on digital trade or on state-owned enterprises. The most positive development in recent years has been the interest of a growing number of countries to develop such rules in the WTO framework through open, plurilateral negotiations. If no effective formula is found to integrate plurilateral agreements in the WTO, there would be no other option than developing such rules outside the WTO framework.

“The WTO Agreement provides for plurilateral agreements to be incorporated into the legal architecture of the WTO in Article X:9, whereby the Ministerial Conference may decide by consensus to add trade agreements concluded by a group of WTO members to the list of WTO plurilateral agreements in Annex 4. However, Article X:9 has not been used since the WTO’s establishment. Reaching consensus on adding a plurilateral initiative to Annex 4 has been perceived to be an insurmountable difficulty, even if the rights of non-participants were not diminished by the plurilateral commitments taken by a group of WTO members. The methodology used to integrate plurilateral agreements in the WTO architecture so far has been for every participant to incorporate the additional commitments unilaterally into their schedule of commitments, as was done for the Understanding in Financial Services Commitments and the Reference Paper on Telecommunications. However, this has its drawbacks. Not every additional commitment fits neatly into a schedule of commitments. In addition, non-participants could bring dispute settlement proceedings against a participant for breach of these additional commitments, even if they, as non-participants, are not bound by such commitments.

“Meaningful WTO reform will have to recognise this reality and the Commission will call for a reflection on how to create an easier path for plurilateral agreements to be integrated in the multilateral architecture. The EU would favour an inclusive approach to open, plurilateral agreements that facilitates participation by developing countries and allows them to decide whether they wish to join the agreement, leaving the door open for them to join in the future. That is not to say that the WTO should accommodate all plurilaterals. Discussions could identify certain principles that plurilaterals should comply with in order to be incorporated into the WTO framework. These principles could relate to openness to participation and future accession by any WTO member, facilitation of the participation of developing countries, transparency of the negotiating process, as well as means of protecting the existing rights of non-participants while avoiding free-riding.”

The EC makes various proposals for the improvement of the functioning of the WTO system including “Reinforcing the monitoring and deliberative functions of the WTO” (an issue with strong support from the U.S. and others), “The role of the Director-General and the WTO Secretariat,” and “More effective stakeholder engagement: Business and civil society.”

The EC recognizes that reform at the WTO requires alliance building and that objectives for the next Ministerial Conference (likely in December 2021) have to be realistic. Section 6.2 of the Annex lays out the EC’s views on what can be achieved by the next Ministerial (MC12)(pages 17-18). The section is copied below (emphasis is in original).

6.2 What can be achieved by MC12 – the next steps

“The agenda for WTO reform must be ambitious, but it must also be realistic. The different work strands of WTO reform need to be properly sequenced. Not all elements can or should be deployed simultaneously, but rather different components will follow different processes and be brought forward in different configurations – be it multilateral or plurilateral – and with different groups of members. The next WTO Ministerial Conference will be key for the WTO reform process, both in terms of delivering a potential package of outcomes and in launching new processes and areas of work that can serve as a springboard for the reform agenda.

“Three areas where work should intensify prior to MC12 are trade and health, fisheries subsidies and the reform of the dispute settlement system.

“In addition, the following outcomes could be achieved by MC12:

“1. An agreement should be reached to reinvigorate WTO work on trade and environment in view of mainstreaming sustainability issues in the WTO’s work. Ideally, this should be done multilaterally, although certain elements may only be pursued by subgroups of interested WTO members, such as the liberalisation of selected climate-mitigating goods and environmental services.

“2. Work should be launched amongst interested countries on the development of rules on competitive neutrality, including modernised rules on industrial subsidies.

“3. Substantial progress should be recorded on the plurilateral initiatives on e-commerce and investment facilitation. The Joint Statement Initiative on services domestic regulation could be concluded at MC12.

“4. The renewal of the multilateral e-commerce and TRIPS moratoria should be ensured at MC12.

“5. Improvements to the WTO’s regular work function, through agreements on the horizontal transparency in notifications and trade concerns proposals.

“6. On agriculture, a package of transparency improvements across the board and on export restrictions could be agreed at MC12. The initiative on the exemption of the World Food Programme humanitarian purchases from export restrictions could also be part of such an outcome. The EU is open to discuss how to progress after MC12 on the main aspects of the negotiations, in particular on trade distorting domestic support.

“Beyond these outcomes, a Ministerial Declaration articulating a political commitment to reform would be a significant additional element to support future work. This Declaration could focus on issues such as improvements of the negotiating, monitoring and deliberating functions of the WTO; and look into institutional improvements in the functioning of the Organization. The Ministerial Declaration could establish a Working Group on WTO Reform to consider these issues and guide the membership towards delivering outcomes. MC12 should thus set the agenda for further work on the medium to long-term areas of reform, some of which should be completed before the subsequent Ministerial Conference (MC13).”

The text of the Annex is embedded below.

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Conclusion

The European Commission’s communication and Annex lay out a thoughtful and interrelated set of objectives and action steps to try to achieve EU objectives. The Annex is an excellent document in laying out EC’s objectives for WTO reform and articulating priorities for the rest of 2021.

The Biden Administration in its first month in office has indicated support for many of the areas of interest contained in the European Commission’s trade policy, including addressing climate change, working to help the world come through the pandemic and restore economic growth. Many of the WTO reforms identified by the European Commission are consistent with where the U.S. and many other countries would like to see reform occur, although some take a more practical (and more limited) approach than the approach teed up by the Trump Administration (S&DT, need for convergence by state capitalist economies). While dispute settlement reform will be complicated, hopefully the WTO membership can coalesce around modifications that address the full array of U.S. concerns including the failure of the Appellate Body in fact to respect its limited role, the creation of rights and obligations through disputes contrary to the express limitations which of necessity upset the balance of rights and obligations agreed to during the Uruguay Round, and will address correcting major overreach situations from the first 25 years. While one would expect much greater cooperation between the U.S., the EU and other countries in the coming months ahead of MC12, meaningful progress at the WTO is far from certain. A number of the issues raised by the EU (and supported by others) are controversial and actively opposed by some Members. However, the proposals reflect the reality of a changed global economy from 1995 when the WTO commenced operations.

The incoming Director-General should find the EC’s Annex a useful document for understanding EU priorities and objectives. It should also help many other Members decide to compile their own lists to help move the WTO reform process forward.