Interview | The New Wave of Defensive Trade Policy Measures in the EU
A guest post by Oscar Guinea, European Centre for International Political Economy (ECIPE)
Recently, Fredrik Erixon, Oscar Guinea, Philipp Lamprecht, Vanika Sharma, Renata Zilli from the ECIPE published a report analysing the design, structure and trade effects of the ‘new wave’ of defensive trade policy measures in the EU.
You can find the full report here.
The publication could not be more topical. On 4 May, the European Parliament and the Council of the EU adopted their positions on the Foreign Subsidies Regulation proposal — just a year after the Commission issued the initial proposal. This latest tool is one among the many trade defence instruments which the report reviews. The report is 142-pages long, so we asked Oscar Guinea, a senior economist at ECIPE, to give us an introduction to the report and guide us through the changes in the EU’s trade policy toolkit.
Oscar previously worked as an Economic Adviser at the Scottish Government in the Office of the Chief Economic Adviser on topics ranging from monetary policy to the impact of Brexit and migration on the Scottish and UK economy. He led the macroeconomic modelling team working with Computable General Equilibrium Models. Prior to that, he worked for the European Commission as a national expert on energy poverty and the impact of price deregulation in retail energy markets. Oscar has experience appraising and assessing regulation as a government economist and private consultant.
The New Wave of Defensive Trade Policy Measures in the European Union
The global economy is going through a turbulent period. Developments over the past decade like the rise of China and climate change have changed traditional dynamics in international trade – and, lately, the Covid-19 pandemic has unleashed concerns in Europe and elsewhere about countries being too dependent on other countries for the supply of critical goods and technologies. A growing chorus of voices consider Europe badly equipped for a new world of geopolitical frictions and declining relevance for global institutions that previously guarded the rules for trade and other forms of exchange.
Recently, the context for the future direction of the geopolitics of trade shifted markedly. In February 2022, Russia started a full-scale war against Ukraine. Europe, along with its allies and partners, has responded with an unprecedented package of sanctions that will have very deep effects on the Russian economy. Restrictions on the provision of financial messaging services, export ban of dual-use goods, semiconductors, aircraft, spare parts, and related services, prohibition on investments, the use of euros, and closing Europe’s air space or Europe’s public procurement market are examples of these measures. Europe is starting to prove it is a serious geopolitical actor, and other countries are noticing that Europe is prepared to act with great resolve and accept the costs of its own actions.
Consequently, the EU is currently in the process of building for itself an arsenal of new defensive trade instruments. These instruments have the capacity to radically change the way in which the EU trades and relates with the rest of the world.
Novelty sometimes breeds confusion, and there is a degree of confusion of how some of the proposed instruments actually will work. Who will make decisions about activating a new defensive policy instrument? Who is responsible for implementing a measure? Our latest ECIPE report seeks to better understand the design, workings, and implications of EU’s new trade defence instruments. It takes an extensive look at the objectives of the instruments, their legality, proportionality, and subsidiarity, the working of the instruments and the division of labour between institutions, as well as their enforceability in conjunction with existing multilateral and bilateral rules affecting the EU. It also attempts to capture the impact and potential for retaliation for the EU and its partners as a result of the implementation of the instruments. The report, however, comes with a note of caution. In their current state, all instruments are at different stages of development. Some have been approved while others need to be negotiated by the co-legislators. The instruments have the potential for change and development, presenting a moving target for the writing of this report, which at this point offers a snapshot of the current status and implications instead of concrete results set in stone.
Table 1 [accessible here, p.8-9] provides a summary of the findings for each of the measures.
The new policy instruments covered in our report are the Anti-coercion Mechanism (ACI), the International Procurement Instrument (IPI), the Carbon-border Adjustment Mechanism (CBAM), the Foreign-Subsidy Instrument (FSI), the Updated Enforcement Regulation, the Corporate Sustainability Due Diligence Directive, Level-playing Field Provisions (LPF) in the EU-UK Trade and Cooperation Agreement and the Deforestation Initiative.
Many of the defensive measures covered in our paper have been presented as deterrence measures: Europe would lay down a policy that hopefully would never be used as other countries would accommodate Europe’s reaction before they act in bad faith. Moreover, The EU has certain discretion in the application of some of these measures. Some countries will complain at the lack of consistency in the application of the norms but ultimately it is up to the EU to decide in which countries it wants to apply the International Procurement Instrument, the Foreign Subsidy Instrument, the Updated Enforcement Regulation, or the Anti-Coercion Instrument.
In contrast, other measures will apply to all EU trade partners in exactly the same way. Some of these measures like the Carbon Border Adjustment Mechanism, the Corporate Sustainability Due Diligence, and the Deforestation Initiative will impose costs to all companies, rewriting the conditions that foreign firms need to fulfil to export to the EU. However, the harsher geopolitical reality, unleashed after the Russian invasion of Ukraine, also requires new thinking about the effects that the measures presented in this study have on Europe’s closer allies. These proposed defensive measures would have consequences for trade with allies such as the United States and some will especially hurt exports from countries like Ukraine, which may undermine other EU’s geopolitical objectives.
In analysing the impact of these instruments on the EU and its partners, it is important to understand the regularity with which each instrument might be used since the frequency of use will determine the impact of the instruments. For instance, if the Anti-Coercion Instrument is used regularly for minor trade disruptions, it could have a larger effect on EU imports compared to when it is used more sparingly to counter coercive activities. As mentioned before, for the Carbon Border Adjustment Mechanism, the Corporate Sustainability Due Diligence, and the Deforestation Initiative instruments, the frequency of their use is well defined as they will become a regular requirement when trading with the EU.
While the implementation uses restrictions to the EU market as the main policy lever, the objective is not just about creating an equal playing field but also ensuring that the rest of the world follows EU rules. The EU’s new policies go beyond the Brussels Effect as popularised by Anu Bradford in her book of the same name. Through the Brussels Effect, EU regulation was adopted indirectly – through the lobby of non-EU companies to non-EU governments – but this time the EU aims at regulating non-EU companies directly out of EU policies. This regulation of non-EU companies is also being undertaken unilaterally by the EU, instead of in collaboration with partner countries. These interferences in partner country policies increase the risk of retaliation. Therefore, EU policies are not just defensive, but also risk increased protectionism and conflict through trade if used in a non-transparent way and if they are implemented in a way that is incompatible with WTO rules.
Many of the new proposals cover policy instruments that are novel in the EU hemisphere: they are policy innovations. Some of them are also new in a global context, which may complicate matters as their compliance with the rules of the World Trade Organisation (WTO) may be in doubt. Most measures have consequences for the agreements that the EU has signed with other countries, but there are doubts about how the EU plans to address frictions with third countries that will arise as a consequence of the new instruments. These doubts need to be resolved before the instruments are approved.
To conclude, each instrument is relevant in its own context and might not on its own seem to present a significant change to EU’s trade policy. However, taken together these instruments have the potential to substantially change the Union’s trade practices – and more so the measures that established new trade restrictions or costs than measures that are contingent and specific only to one country. In their totality, these measures would have the effect that Europe would produce more for itself and be less dependent on both exports and imports. This is a significant policy shift which may lead to a contradiction between an EU which talks about open trade and the importance of multilateralism, international norms, and organisations while it builds an arsenal of defensive unilateral trade policy measures which will eventually be used to achieve its own autonomous goals.
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