A challenging agenda for the new Trade Commissioner

Tricky trade negotiations, a crippled World Trade Organization, an unruly global trading environment, a persistent pandemic. New Trade Commissioner Valdis Dombrovskis has his work cut out for the next three years.

Following Phil Hogan’s resignation, the European Parliament approved Executive Vice-President Valdis Dombrovskis as the new European Commissioner for Trade on 7 October 2020. At the hearing held on 2 October before the Parliament’s Committee on International Trade (INTA), Dombrovskis presented a broad trade agenda: the continuance of trade negotiations and specific trade relations (i.e. an investment agreement with China, a trade deal with the UK, relations with the US), the ratification of the EU-Mercosur Trade Agreement, the pursuit of open strategic autonomy for Europe, the fight against unfair trading practices, the greening of trade, and the reform of the World Trade Organization (WTO). The last four goals are particularly important as they will define European trade policy in the long term, and thus the EU’s international role.

All in all, Dombrovskis has many hurdles to overcome if he is to achieve this ambitious trade agenda.

Open strategic autonomy

The European economy relies heavily on international trade, which in turn has supported economic growth and created millions of jobs. However, the COVID-19 pandemic has slashed global trade, and the ensuing health and economic crises have exacerbated crucial challenges. Over-reliance on foreign suppliers of certain crucial equipment exposed the EU to critical risks. Moreover, trade policy will have to support the EU ‘open strategic autonomy’ in line with the European industrial strategy. This means reaping the benefits of free trade while reducing the dependence on others (especially in crucial sectors like strategic digital infrastructures) and fighting unfair practices.

In light of this, the European Commission launched a review of its trade policy for a stronger Europe in June 2020. The review foresees a public consultation with stakeholders which will run until mid-November. Based on the inputs, the Commission will deliver a policy communication in early 2021, to elaborate a medium-term strategy for EU trade policy.

Unfair practices and level playing field

In order to achieve open strategic autonomy and build resilience, Dombrovskis’ new trade policy will have to fight against unfair trade practices more assertively and thus safeguard the global level playing field as much as possible. Swiftly approving the upgraded enforcement regulation would arm the EU with an important tool to deter its trading partners from implementing illegal measures by exploiting the fact that the WTO’s Appellate Body can no longer judge trade disputes.

Foreign subsidies

The fight against unfair practices must also address the issue of foreign subsidies that distort global competition. For example, a non-EU company that receives generous state aid can pay a higher price to acquire an EU company. The WTO Agreement on Subsidies and Countervailing Measures is inadequate as it does not affect trade in services nor financial flows.

In 2019, the EU adopted a regulation to set up a framework for the screening of foreign direct investments which can threaten EU security or public order by targeting critical assets (i.e. critical infrastructures or technologies). However, the new instrument does not affect the wider distortions of subsidies. For that reason, the Commission published the White Paper on levelling the playing field as regards foreign subsidies in June 2020.

The White Paper proposes three new instruments against foreign subsidies called “Modules”. The first two models foresee in-depth investigations, followed by “redressive measures” to eliminate distortions to competition. In addition, the assessment on foreign subsidies would consider their contribution to key EU objectives (i.e. security, public order, environmental protection, digital transformation). Module 2 deals specifically with acquisitions by extra-EU subsidised companies.

Trade and sustainable development

The EU currently boasts free trade agreements (FTAs) with 76 countries. Meanwhile, negotiations are ongoing with Australia, New Zealand and China (more specifically, an investment agreement). Nevertheless, the enforcement of FTAs is not always smooth. This is particularly evident for EU trade agreements’ Trade and Sustainable Development chapters (TSD). These aim to guarantee labour rights and environmental sustainability standards in the partner countries.

One example is making the ratification of International Labour Organization conventions mandatory. Here, the EU does not pursue a sanction-based model, so the provisions are not enforceable in dispute settlement procedures, nor can financial sanctions be imposed in the case of breaches. Shifting towards a sanction-based model may not be the solution as there is little evidence that it actually improves enforcement. Nevertheless, TSD implementation must be sped up and reinforced. In this context, the Commission appointed the first Chief Trade Enforcement Officer to implement FTAs more strongly.

The EU should focus its efforts on the preratification phase of FTAs to establish clear commitments in advance. This worked quite well, for example, in its FTA with Vietnam regarding labour rights.

Trade and green transition

Trade policy can be a tool for a ‘greener’ world, in support of the European Green Deal. A carbon border adjustment mechanism could enforce EU climate ambitions. However, its legislative process could also be lengthy given the difficulties with developing this new instrument (e.g. administrative burden, compliance with WTO rules).

A decisive action of support for Europe’s green strategy might be to make the ratification of the Paris Agreement mandatory for future FTAs. This would also renew the credibility of said trade policy’s climate commitments, as many sustainability concerns are being raised over the EU-Mercosur FTA. The deforestation of the Amazon rainforest worries civil society and EU member states. During the INTA hearing, Dombrovskis stated that “lasting solutions for the Amazon region” must be found before the deal is ratified.

The World Trade Organization

The new Commissioner must strive to reform the WTO. In the first instance, a new Director-General (DG) must be nominated. The EU should fight for a new DG who considers key European strategic interests, especially the climate challenge. Dombrovskis convincingly seems to be giving a ‘green touch’ to his new trade policy by announcing a WTO “climate initiative”.

The WTO’s Appellate Body is also yet to be fixed. A binding dispute settlement mechanism is essential for a rules-based international trade system. In the meantime, the EU has established a voluntary multiparty interim appeal arbitration which can solve trade disputes if the Appellate Body is not operational. 22 WTO members have joined.

Lastly, the WTO must resume its negotiating function and develop responses to the world’s new challenges. A comprehensive WTO reform should envisage new rules on unfair practices, including foreign subsidies. The digital revolution (partially accelerated by the COVID-19 crisis) requires setting global standards for e-commerce and/or e-services. The EU should play a leading role in this revolution by leveraging the size of its internal market (i.e. 450 million consumers) to shape global standards, including on data flows. This attempt should build on its General Data Protection Regulation 2016/679.

Selling trade

The EU trade agenda is quite full, with its fair share of key challenges. Some will depend on the result of the US election, for example, regarding the Appellate Body. More generally, the trading environment has radically changed. As recently outlined by EPC Chief Executive Fabian Zuleeg, the COVID-19 crisis has triggered a loosening of state aid rules, which has consequences for global and internal competition. In addition, open strategic autonomy seems crucial, but if it leads to protectionist reshoring and increased barriers, it will actually harm consumers. In light of this, clear and shared policy objectives are required. The EU and its member states must find a political consensus on how to coordinate trade policy, industrial policy and single market rules. Such a coherent approach is crucial to achieving the digital and green transition.

Ultimately, trade policy must be inclusive. The EU populations’ acceptance of the benefits of free trade can no longer be taken for granted. Indeed, trade can impact economic inequalities, enforcing FTAs is evidently not always easy, and unfair practices routinely hit businesses. Therefore, trade negotiations, including on the investment agreement with China, must be as transparent as possible. Valdis Dombrovskis will have to engage with civil society, stakeholders and member states in order to create a strong consensus for his trade policy, and thus continue the EU’s global success story in this area.

Francesco De Angelis is Programme Assistant for the Europe’s Political Economy programme.

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