Andean Community Vice-Ministers of Trade April 24th 2007

1. Andean CommunityVice-Ministers of TradeApril 24th 2007 The political economy of the trade negotiation with the EU by Pierre Defraigne Director eur-IFRI

2. The world context is changing • A major restructuring of the world economy is taking place in a context of a world growth driven by East-Asia • A new international division of labour is shaping up : • the rise in commodities and energy consumption leads to more trade and higher prices in the short/medium term with positive fall-out for commodities producers whose terms of trade are provisionally on the rise; • The Chinese factor ( China as the global ‘powerhouse’) brings manufactured goods down with positive effects on consumers (lower inflation) and negative ones on wages and profits in importing countries ; • Advanced economies are responding through a three-pronged strategy: • Climbing up the value-added chain through technological innovation and product differentiation (in manufacturing, services and agriculture niches for EU) • Creating alternative jobs in non-tradable services • Relaxing the energy constraint by wide-range policy: energy efficiency, renewable sources of energy, diversification of carbon energy supplies (from the Middle East to Russia and Central Asia)

3. A new international trade paradigm is materializing: global firms set up global output chains with transnational fragmentation of production stages both in manufacturing (China) and in services (India) , trying to maintain control on R-D, design, quality control, brand and finance, with clusters in high-tech sectors ( silicon valley, route 128, City , Milano, Tokyo) • More than one third of international trade is intrafirm trade which allows firms to use transfer pricing and thereby to dodge tariffs barriers and to optimize taxation….even within the EU!

4. The EU is striving for adjusting to this changing environment • The Lisbon Strategy (2000) provides the framework of an ambitious agenda of economic reforms extending to EU and to Member-states policies; • completing the Single Market in financial services and in utilities; • expanding EU and national R-D and innovation policies with an emphasis on eduction • reforming labour markets and the welfare states so as to increase flexibility and mobility of labour with th view of adjusting more quickly to technology and external shocks • reducing the level of public indebtedness so as to improve the public finance capacity of coping with the ageing constraint • those reforms meet a fierce resistance in some countries and as a consequence the process is a very protracted one

5. As a result the EU trade policy is changing focus since it is more and more seen as a tool for strengthening EU competitiveness in order to preempt protectionist moves within the EU, and consequently among its partners.

6. Over the last decade EU performance in terms of growth and jobs has • been a mixed one but as The Economist ( March 2007) says , • the EU economy…..

7. The EU trade policy focus changes both with regard to topics and regions • The EU aims at strengthening the competitiveness of its firms and at easing their moving up the value added ladder; • Therefore its focuses both • on innovation in manufacturing and services which calls for economies of scale and on product differentiation • on exploiting to the full the flexibility provided by the global output chain world wide

8. Therefore what the EU is seeking, through its new trade policy, is a set of countries where global firms – of all sizes- can either export their final products, or conduct their international operations in safe, reliable and cheap conditions ( labour and logistics) with the view of using this country as a platform for exporting towards third countries; • The trade policy focus then goes on investment, services, intellectual property protection, norms and quality control , brand including geographical indications, competition policy and public procurements, all concerns of great importance for the European business constituency; • But because of the growing interest among the EU public opinion with regard to environmental and labour standards , the EU is also trying to insert social and green clauses in its bilateral deals in particular through the SIA procedures • The EU is looking for a level playing field ‘behind the border’ : it aims at deep integration (WTO plus)

9. In terms of targeting geographical markets, the EU is now catching up on its main competitors Japan and the USA in fast growing East Asian markets and even trying to preempt them in India, a rather bold move indeed • This being said , the EU remains very much faithful to its multilateralism creed which is perfectly consistent with its own experience at home and with its main interests and values; the Doha Round successful conclusion would help to keep the USA-EU trade relationship on a safe path whereas it would ease the conclusion of some critical regional or bilateral deals either in the making or in preparation : Mercosur, GCC, Russia (when it joins the WTO), India

10. The same holds true for its commitment towards trade and development. But here the emphasis is shifting from liberalization ‘at the border ‘(EBA, GSP, GSPplus) towards liberalization ‘behind the border’ where most obstacles to trade and development are standing now, particularly in the area of services .Preferential margins on tariffs are eroding and moreover they can be canceled out by non tariff barriers (see TBT and SPS) ; therefore , the target is to substitute to a certain extent, deep regional integration deals among countries and with the EU , to autonomous tariff concessions. • The accent is placed on supply-side factors as it appears that trade preferences are best used by competitive exporters (and clever importers ! ). The trade and development nexus is rather complex and domestic policies and reforms receive more and more attention . In that respect both TRTA covering a vast range of trade-related issues ( institutions, infrastructures, specific training for officials and entrepreneurs, use of e-technology with respect to marketing, handling, transportation of goods and customs clearance ) and regional integration are gaining in importance. • Regional integration proves indeed, when it is effective, both a powerful tool for the trade negotiation and an incentive to improve the effectiveness and the convergence of neighbouring economies’ policies

11. EU benchmark for a NS region to region agreement • A RTA should always be WTO compatible (essentially all trade and no increase in protection) • A region to region agreement calls for a customs union : harmonized tariff, supranational authority, effective DSM through a regional court • Reciprocity should be asymmetrical: exemptions and transitions • Financial transfers should back up reforms (incl TRTA) and supply side policies as well as supporting FDI

12. To date, no single RTA fits in 100% with the benchmark • The only fully successful RTA so far is with the EEA (Norway, Liechtenstein, Iceland)…but it is a N-N deal • Pre-enlargement RTA’s (the so-called Europe Agreements with Eastern and Central EU new M-S) were very much close to that ideal , but they were a transition towards their joining the EU • Successful FTA’s were concluded but with individual countries: from Switzerland and Turkey – the latter a member of the EU customs union- to Mexico, Chile and South Africa (with some asymmetrical features) • The Euro-Med FTA still lacks its South-South leg but for the Agadir deal • The ACP countries could bring one or two EPA’s which would fit the picture • ASEAN is far from constituting a real CU and it is made up of very diverse economies ( from Singapore to Laos and Myanmar) • Mercosur is still unsure of where it is heading for despite its attractiveness

13. Can the RTA with the CAN and the CA countries fulfill the benchmark conditions? • A priori, the case is difficult for a set of reasons: • virtual integration is more advanced than real integration : tariffs, transborder crossing, litigations, • Membership is not stable • Policies diverge among countries with regard to • State versus market roles • opening versus protection • willingness to address social inequalities • There is no obvious success story despite the wide range of national experiences • Moreover the perception in Europe about the genuine difficulty of integrating the region and yet more the fair and serious understanding of what national governments –left wing or right wing -are really trying to achieve are flawed or missing. Latin American policies are often caricatured and ill-judged • There is a serious credibility gap which has to be addressed, but it goes beyond presentation: a CAN project with all governments converging along the same strategic guidelines would meet a great deal of interest nowadays at world level

14. Yet Latin America still arouses a deep interest in Europe • Latin America remains and will remain forever the brother-continent of EU mainly for cultural reasons; • But the empathy is more with the people than with the elites who resist coping seriously with the scourge of the region - the social and sometimes the ethnic divide- which is probably the main cause for Latin America present backwardness which contrasts more and more with the East Asian boom; • Growth episodes in LA have had indeed more to do with external demand booms than with domestic reforms and anyway they do not prevent deterioration of terms of trade over the long term; • The only way for LA to undergo modernization is to upgrade and diversify its productive basis by improving infrastructures, education –for all- and , broadly speaking, the business or more exactly the entrepreneurial environment; • A regional move towards shared goals within a custom union would bring LA back at the forefront of the international scene;

15. Could a trade deal with the EU trigger off such evolution ? • The answer is No ! Regionalism could only come from inside the region for strategic reasons discussed among political, economic , social and intellectual forces • But would such a move take place , it would have a strong impact on the negotiation with the EU; • In principle EU trade and external policies are carried out through parallel channels (different legal basis and policy-making procedures); and mercantilism prevails most often in trade negotiating rooms, if only because of the fear for a precedent; • But a genuine move towards real integration could blur that distinction and contribute to a better trade deal ;