EU's Regional Trade Strategy, the Challenges Ahead

Abstract

Notes

¹It would be more appropriate to refer to Preferential Trading Agreements (PTAs) rather than Regional Trade Agreements, since RTAs are increasingly concluded among non-contiguous countries. In this article however under the common definition of Regionalism we include bilateral, regional and plurilateral agreements. RTAs is thus a general definition which includes different kinds of agreements which have considerable differences among them. The most common are Free Trade Agreements (FTAs), which represent today almost 70% of the existing RTAs, in which trade restrictions are removed among member countries but each member maintains its own trade policies toward non-members. Custom unions—almost 8% of existing RTAs—are FTAs where members also adopt a common external trade policy. Deeper forms of integration include common markets and economic unions where respectively we have free movements of factor of production and some degree of harmonization of national economic policies. For a useful taxonomy on PTAs see Aggarwal and Fogarty (2004).

²Breslin and Hettne (2001) distinguish between Regionalism—defined as a state led project of cooperation, whose aim is to pool sovereignty to enhance sovereignty; and Regionalization—identified as a process driven by market forces of trade and investment flows.

³The OECD (2003) estimated that preferential trade agreements account for 43% of world trade and this figure is going to be something like 55% in 2005 if all RTAs under negotiation will be realized.

⁴The US has FTAs with: Israel, Canada, Mexico, Jordan, Singapore, Chile and five Central American countries and negotiating new bilateral agreements with many countries, particularly toward developing ones.

⁵Agreements involving developing countries represent today more than one-half of all the RTAs in effect or under negotiation, and almost 85% of the agreements that are currently under negotiation at world level involve developing countries (Schott, 2004).

⁶Tinbergen (1954) coined the terms negative and positive integration, which could be considered very similar to the shallow and deep integration definitions.

⁷However, Schiff and Winters (2003) state that trade barriers are still high enough to impart a “significant bias to international trade. Preferential reductions in these tariffs—through RIAs—will further distort trade and probably impose costs; even a discriminatory tariff of 5 percent can have significant effects on import sourcing if goods are highly substitutable. If discrimination extends to areas such as standards testing and enforcement, or to public procurement, trade diversion is likely to be even more significant” (p. 210).

⁸Not surprisingly, among those actors strongly advocating for the promotion of a deep integration agenda in trade negotiations are multinational enterprises (MNEs), since differences in national regulations segment markets and make internationally integrated production costly (Brenton, 2000).

⁹In 2003 China became the EU second biggest trading partner (after the United States) and, according to China's statistics, the EU became China's second biggest trading partner (roughly on the same level as the United States, behind Japan).

¹⁰However the share of exports to Africa in overall EU exports to the rest of the world declined sharply; the same could be said for the share of the Middle East in total external trade of the EU (Van Dijck and Faber, 2000).

¹²Estonia being the exception: in 1990s Estonia decided to open unilaterally its trade regime, thus the EU-Estonia agreements was in favor of the Union which maintained various quotas with respect to agricultural imports for example (Feldmann and Sally, 2002; Feldman, 2003).

¹¹Europe Agreements cover a large number of issues:

1. trade liberalization and other trade-related issues;

2. political dialogue;

3. legal approximation;

4. cooperation in industrial, environmental, transportation and customs areas.

¹³The Phare program has been an important instrument to prepare transition countries for accession promoting institution-building and facilitating the adoption of the acquis (Feldman, 2003).

¹⁴Albania, Bosnia-Herzegovina, Croatia, Former Yugoslav Republic of Macedonia FYROM, Serbia-Montenegro. Albania (2000), Croatia (2000) and FYROM (2003) are WTO members, while Bosnia-Herzegovina and Serbia-Montenegro started their accession process.

¹⁵The EU signed a Stabilization and Association Agreement with the Former Yugoslav Republic of Macedonia which entered into force on May 2004; the SAA with Croatia is under ratification; and negotiations are ongoing with Albania. Croatia in 2005 will start negotiations for the accession in the EU. The trade-related provisions of the agreement with Croatia are being enforced by means of interim agreement.

¹⁶Based on http://europa.eu.int/comm/trade/issues/bilateral/regions/balkans/index_en.htm, accessed July, 2004.

¹⁷The EU maintains tariff quotas only on imports of wine, baby beef, and certain fishery products. Quotas are also applied on textiles imports from Serbia-Montenegro.

¹⁸In 2001 the countries of the region (Albania, Bosnia-Herzegovina, Croatia, Former Yugoslav Republic of Macedonia FYROM, Serbia and Montenegro, plus Romania and Bulgaria and Moldova) signed “Memorandum of Understanding on Trade facilitation and liberalisation”, under the auspices of the Stability Pact for South Eastern Europe. In this Memorandum, the countries involved committed themselves to concluding, before end 2002, a network of bilateral free trade agreements. Integration among these countries is deepening and FTAs have actually been signed.

¹⁹EFTA was established in 1960 by: Austria, Denmark, Norway, Portugal, Sweden, Switzerland, and the United Kingdom. Iceland joined in 1970, Finland in 1986, and Liechtenstein in 1991. Today EFTA members are: Iceland, Liechtenstein, Norway, and Switzerland (but the latter decided not to participate to the EEA after a referendum). Austria, Finland, Norway, and Sweden negotiated accession agreements immediately after the EEA was established.

²⁰In addition to the obligation to accept Community acquis in the fields of the four freedoms, the Agreement contains provisions to allow cooperation between the Community and the three EEA-EFTA States in a range of activities: in research and technological development, information services, the environment, education, social policy, consumer protection, small and medium-sized enterprises, tourism, the audio-visual sector, and civil protection.

²¹Mediterranean countries are: Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, the Palestinian Authority, Syria, Tunisia, and Turkey. In origin Mediterranean countries were 12, but since May 2004 Cyprus and Malta joined the EU.

²²Association Agreements (AAs) have already been signed with eight of the Mediterranean countries and negotiations are under way with Syria (Turkey has a custom union with the EU). AAs between the EU and each of the Mediterranean partners provide the institutional framework for bilateral relations in the political, economic, social and cultural fields. Agreements draw on both European Community and Member States’ competencies, and in order to enter into force they need to be ratified by the partner country, the European Parliament, and all EU Member States, a process which may take several years. In certain instances, the European Community and the partner have agreed to an interim agreement that covers only trade matters and that can enter into force rapidly (European Commission, 2003), Euro-Med Partnership, Regional Strategy Paper.

²³The consequences are of two kinds: the exclusion can diminish the potential gains of the agreement, and can slow the economic development in the Mediterranean countries because they are encouraged to reinforce tradition low-value added productivity sectors.

²⁴ In 2002 partners decided to harmonize rules of origin in order to enable MED to participate to the pan-European of System of rules of origin, allowing the cumulation of origin throughout the region. “Cumulation of origin rules would therefore improve both access to the EU market and sourcing possibilities and thus intraregional trade among the MPCs [Mediterranean Partner Countries], which currently accounts for only 5 per cent of their total trade” (Baert, 2003).

²⁵To improve regulatory harmonization, in 2002 partners launched the Euro-Mediterranean Market Mechanism, during the Fourth Euro-Mediterranean Conference for Industry, the goal being to determine the most important areas where partners should start to promote a harmonization policy.

²⁶The issue of trade in services is quite intricate both because it involves sectors of strategic importance for the domestic economy, and because services liberalization outcomes spill over into other areas such as the intellectual property rights and foreign direct investment (Tussie and Lengyel, 2002).

²⁷The EU is interested in deepening service liberalization (apart the right of establishment issues—i.e. mode 4—which is one its most sensible issues towards Mediterranean partners); while Mediterranean countries seem to be less interested in taking new commitments in the services sector. For those MED which are not WTO members an agreement similar to GATS is included in the Association Agreement.

²⁸This is due to the fact that EU member states have not agreed yet to share the competence at the Community level, so investment remains one of the few areas where there is an inter-governmental approach.

²⁹For the Mediterranean countries a major problem is on the one side the difficulties in implementing such rules and regulations; and on the other side the lack of “competition culture.” So far no rules have been adopted, but in perspective they are deep and far-reaching rules.

³⁰“A hub and spoke system essentially consists of a set of bilateral trade agreements. Because there is discrimination between members of such a system, less liberalization is likely to result than under an FTA. Moreover, it may be more difficult to reduce the extent of sectoral exclusions and loopholes over time. Because a hub-and-spoke system involves separate agreements between the hub country and the spoke countries, there is more scope to exclude the sensitive sectors from the coverage of each bilateral agreement. […] Under a hub-and-spoke system, the potential for maintaining policies that imply an effective reduction in liberalization of internal trade will also be greater. If each country maintains contingent protection options (AD, safeguards) against member countries, powerful import-competing industries in the hub country will have an interest in including wide-ranging safeguard clauses and relatively stringent rules of origin.(Hoekman and Kostecki, 2001, pp. 358–9/61).

³¹However, a positive signal came from the conclusions—on January 11, 2003—of the negotiations of the Agadir agreement for the creation of a regional free trade agreement among its four partner countries: Egypt, Jordan, Morocco, and Tunisia, that is expected to be signed next March.

³² Hoekman and Konan (2001) investigating the effect of the creation of the FTA between the EU and Egypt, argue that

“Given Egypt's diversified trading patterns, a shallow PTA with the EU (limited to elimination of Egyptian tariffs) will lead to a small welfare decline. This reflects the fact that Egypt already has duty-free access to the EU for manufactures the loss in tariff revenues that will be incurred outweighs any trade creation that will result. Large welfare gains from a EU FTA are conditional upon the elimination of regulatory barriers and red tape. If deep integration efforts are pursued that deliver such an improvement in the business environment, the welfare gains may be substantial, from 4 percent to upwards of 20 percent growth in real GNP” (p. 2).

³³The GCC was established in 1981 by six countries, namely: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE).

³⁴The GCC's common external tariff has been introduced in January 2003 (5%).

³⁵The 1991 Treaty of Asunción established the birth of MERCOSUR between: Argentina, Brazil, Paraguay, and Uruguay. The ambition of MERCOSUR member countries is to become a common market, in the short term the objective is simply to establish a complete and effective custom union. On January 1, 1995 the Common External Tariff (CET) was established, but the custom union should be fully implemented only in 2005. The MERCOSUR agreement doesn’t envisage the creation of central institutions, but simply of intergovernmental organs with decisions made by consensus.

³⁶The main elements of the latter agreement are: i) political dialogue, at various levels (heads of state, governments, ministers, and senior officials level); ii) cooperation; iii) trade issues.

³⁷Mexico concluded agreements with: Chile (1991); APEC (1993); the United States and Canada (1994); Colombia (1995); Venezuela (1995); Bolivia (1995); Costa Rica (1995); Nicaragua (1998); Uruguay (1998).

³⁸Among the GSP beneficiaries are: China (33.1 % of the total volume of EU GSP imports), India (11.5 %) and Indonesia (4.8 %) were the main exporters to the EU in 2002, with Bangladesh (3.6 %) ranking 8th as the first representative of the beneficiaries of the Everything But Arms Initiative. In the case of the ACP countries, the main exporters were Nigeria (16 % of total EU ACP imports), followed by Ivory Coast (9 %) and Angola (7 %).

³⁹There were five different GSP schemes before:

1. the general GSP scheme;

2. the special GSP scheme for the protection of labour rights;

3. the special GSP for the protection of the environment;

4. the special GSP to combat drug production and trafficking;

5. the special GSP scheme for least developed countries (LDCs): the Everything But Arms (EBA) Initiatives.

⁴⁰EBA grants duty and quota free access for all imports except for arms and ammunitions and sensitive goods as rice, bananas, and sugar. Duties on those products will be gradually reduced until duty free access will be granted for bananas in January 2006, for sugar in July 2009, and for rice in September 2009. In the meantime, there will be duty free tariff quotas for rice and sugar.

⁴¹Graduation will be applied when a group of products from a particular country exceed 15% of total EU imports of the same products under GSP over the last three consecutive years. For textiles, the threshold would be 12.5%.

⁴²Lomé I (1975–80), Lomé II (1980–85), Lomé III (1985–90), Lomé IV (1990–95), Lomé IV bis (1995–2000). Before 1975 relation between the EU and ACP were governed by the Yaoundé Agreements. Both Yaoundé and Lomé Conventions were primarily developmental in focus, but were also reflecting historical colonial legacies.

⁴³The EU is willing to negotiate within EPAs also the Singapore Issues—Investment, Competition, Trade Facilitation and Government Procurement—but ACPs seem unwilling to do so. The core negotiations with individual ACP regions will begin next year.

⁴⁴Asia as a whole accounts for 21% of the EU's external exports, and is the EU's third-largest regional trading partner, after European countries outside the EU (31%) and NAFTA (28%). This means that the region is ahead of the Mediterranean, South and Central American, Gulf, and ACP countries combined (17.1%). Asia is also the fourth-largest regional destination for outward investment from the EU, accounting for 6.8% of total EU outward FDI in 1999—coming after NAFTA (67.5%), Central and South America (15.1%), and Europe outside the EU (7.5%).

⁴⁵Asian countries involved in the ASEM are: Brunei, China, Indonesia, Japan, South Korea, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. The EU did not want to include Laos, Cambodia and Myanmar in the ASEM framework for their lack of respect of human rights.

⁴⁶Every year there is a meeting between the private sector representatives of the two regions within the Asia-Europe Business Forum (ASBF).

⁴⁷APEC is a multilateral forum encompassing the Pacific Rim as opposed to just East Asia. It is also atypical for a regional institution in that it is informal and loosely structured. The APEC forum has pioneered the idea of “open regionalism”, i.e. the principle that regional agreements must adhere to GATT/WTO consistency. In 1994, member countries committed to achieve free trade and investment by 2010 for developed countries and by 2020 for developing countries.

⁴⁸Standard trade theory holds that trade and migration are substitutes so that increased trade integration is likely to reduce income wage differentials and decrease labor migration flows. More recent analysis however have shown that North-South trade and migration may well be complements so that integration may not lower migration, especially of unskilled labor (Schiff and Winters, 2003).

⁴⁹Northern EU members are concentrated on the policy towards Eastern countries; while Southern ones are mostly concerned of the Mediterranean Basin. In particular, Germany worked and lobbied to obtain a coherent policy towards Eastern European countries which brought to the conclusion of the European Agreements. While Spain, Portugal France and Italy were the sponsors of the necessity of strengthening relation with the Mediterranean advocating the establishment of a zone of peace and prosperity.

⁵⁰EU-MED Partnership has also been influenced by the pressure of Mediterranean countries themselves, affected by the re-direction of EU resources towards Eastern Europe. Therefore, EU-MED Partnership could be considered also as a demonstration of the Domino Theory of Regionalism (Baldwin, 1995).

⁵¹The author continues: “Although the basis of and motivations for such a commitments may differ, a PTA will most likely fail in its absence. […] The strength of PTA members’ political commitment will be dependent upon the broader governance and economic policy environment” (Bouzas, 1999, p. 198).

⁵²Australia; Canada; Chinese Taipei; Hong Kong China; Japan; South Korea; New Zealand; Singapore, and the United States.

⁵³The United States alone is EU's leading trade partner, accounting for 24.7% of exports in 2000, and 19.2% of imports, about the same as in 1999 (WTO, July 2003).

⁵⁴ Farrell (1999) points out that: “Extra-community trade is determined by a hierarchy of preferential trading relations, where the highest levels of preference have been granted to countries or regions whose product constitute the smallest share of EU imports. In practice, the largest share of EU foreign trade is with countries where no preferential agreements exist, such as the United States” (pp. 15–16).

⁵⁵Often importers prefer not to take advantage of preferential treatment because the MFN duty results to be less costly compared to the complications of complying with rules of origin and other requirements (Grether and Olarreaga 1998).

⁵⁶EU policy toward Asia has long emphasized human rights and good governance, but ASEAN observers view that practice with suspicion. Many fear EU attempts to impose Western values and discredit disfavoured regimes. Indonesian President Megawati Sukarnoputri alluded to the issue in her ASEM keynote address, encouraging Europe to “accept and respect differences.” (Ciorciari, 2003).

⁵⁷Africa in particular needs more action: 34 African countries ranked among the least developed countries in the world in 2000, while in 1996 there were 27. In addition, aid to Africa has fallen in the decade 1989–1999 from US$24.2 to 14.2 billion; and FDI flows fell by 40% in 2001 (before the September 11 crisis) (Gavin and Langenhove, 2003).

⁵⁸In addition the hub has the unique access to the markets of all spokes, which contributes to its attractiveness as an investment location, and industries in the hub can better exploit economies of scale and increase competitiveness.

⁵⁹In a speech to members of the newly formed coalition (MEFTA), former US Trade Representative, Robert Zoellick, said that the US could soon begin free trade talks with the United Arab Emirates and Oman as part of its plans for a regional free trade agreement in the Middle East by 2013. The United States already has FTAs with Israel, Jordan, Morocco, and Bahrain. Zoellick told the groups that a MEFTA-US partnership could help fight terrorism and ease anger simmering over US foreign policy in the region. The United States has also identified Qatar and Kuwait as candidates for free trade pacts.

Agreements with larger Saudi Arabia and Egypt are more remote prospects that depend on Saudi Arabia's WTO accession negotiations with the United States and on the progress of Egypt's economic reforms. Zoellick also expressed hope for a peace agreement that would permit US free trade with a Palestinian state some day, saying that potential free trade partners in the Arab world must end their boycott on trade with Israel.

⁶⁰“Given that the EU share of total Mexican trade shrunk from 10.6% in 1991 to 6.5% in 1999, and given the considerable gap between Mexico's average applied most favoured nation tariff (8.7%) and the preferential NAFTA tariff (less than 2%), there was also a clear concern about trade diversion” (Sampson and Woolcock 2003 p. 12). The EU included in the FTA with Mexico the same deep integration addressed in the NAFTA agreement. That's why EU-Mexico's FTA covers an “unprecedented” 95% of total current trade, but most importantly 62% of agricultural trade which is remarkable for the Union.

⁶¹We can see the EU pursuing these objectives in the Mediterranean, in the Gulf Cooperation Council, with the ACPs. While MERCOSUR countries started the integration process and then engaged with the EU for the establishment of an Inter-regional Association Agreement.

⁶²Frequently RTAs have a leading or hegemonic actor within it (Aggarwal and Fogarty, 2004). In Europe there is the EU; in the Western Hemisphere the United States; in Asia the growing power of China is threatening the historical dominance of Japan (and regional initiatives are proliferating also to try to counteract China's growing power). When there is an unbalanced power among partners, the hegemon is able to enforce the rules and/or behind the border issues and partners are willing to respect them because the gains of being part of the club are high. Bhagwati and Panagariya (1996) already pointed out that we could witness to the emergence of two major “hegemon-centred” trading blocs, based on the EU and the United States.

⁶³Many authors point out that when the regional integration strategy entails a deep integration agenda RTAs could work as a laboratory to experiment cooperation on very relevant and complex issues (Lawrence, 1996; Hoekman and Kostecki, 1996). According to Lawrence (1996), “Regional arrangements, dealing with international governance need not be second best—they could be first best” (p. 26).

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Additional information

Notes on contributors

Paolo Guerrieri

Professor of International Economics at the University of Rome “La Sapienza”, Italy and at College of Europe, Bruges, Belgium.

Irene Caratelli

Irene Caratelli is a Researcher at the Istituto Affari Internazionali (IAI) in Rome, Italy.