Commentary Type

The International Trade and Investment Policy of the European Union in the Next Decade

Karel De Gucht (European Commissioner for Trade)

Speech delivered at an event held at the Peterson Institute for International Economics, Washington


Ladies and gentlemen, it is always a pleasure to be in Washington, but for anyone with an interest in trade policy, it's a particular treat to be here at the Peterson Institute. You are not just the who's who of trade economists in the United States but speaking at the Peterson Institute is clearly now a rite of passage: They told me that I would not be accepted into this strange, international club of trade ministers unless I've spoken at the Peterson Institute! So I am very honored-and indeed perhaps a little relieved-to have your invitation today.

It comes at the right time. While in Washington I will discuss trade policy issues with US Trade Representative Ron Kirk-both the Doha Round and our bilateral issues-and I will co-chair the Transatlantic Economic Council with Mike Froman. And to round off what has been a very busy year, I'll go this weekend to Beijing with European Commission colleagues to meet with the Chinese Vice Premier Wang Qishan on the China-EU trade and economic relationship.

I would like to start with a quote used by US President John F. Kennedy, addressing students of Berkeley in 1962. President Kennedy referred to French official Marshal Lyautey, who in the 19th century asked his gardener to plant a tree. The gardener objected that the tree was slow-growing and would not reach maturity for a hundred years. The Marshal replied, "In that case, there is no time to lose, plant itthis afternoon."

The story is very fitting for trade policy today. It takes time to launch and then nurture a negotiation, and it also takes patience. The fruits of the trees we planted so many years ago-in the Kennedy Round, the Tokyo Round, the Uruguay Round-are all around us-from lower tariffs to the World Trade Organization and the body of world trade rules. But the other part of the message is that precisely because it takes time, we have to get on with it. Because the deals we make today take time to flow through the system, we have to show confidence in the future; we have to move ahead.

And there is plenty of work to be done.

Right up until the economic crisis, which swept over us, global trade grew rapidly. From 1999 until 2008 the value of world trade in goods grew by 73 percent. It has been estimated that about a quarter of that growth is thanks to policy: traditional tariff cuts as well as other measures that reduce nontariff barriers. That is a very significant result.

Of course, some might argue that if trade, up until the crisis, has done so well, do we actually need the Doha Round or more trade deals generally? The answer is yes. We estimate the benefits that would flow from the trade agreements currently under negotiation to be considerable-for the European Union, completing what's on the table in Doha and with all our future free trade agreement (FTA) partners would amount to around 0.5 percent of GDP. This would be a major contribution to growth and jobs in Europe.

But even then, it's only part of the story. We have to do much more to tackle nontariff barriers.

Consider these examples:

A recent study suggests that getting rid of half of existing nontariff barriers between the European Union and the United States would boost the European Union's GDP by €125 billion per year.

The current regulatory divergences between the European Union and the United States in a sector such as cosmetics are equal to an import tax of around 33 percent. And different standards and regulations for cars and transport equipment in Japan represent a 45 percent additional cost for EU manufacturers.

In the telecom sector the overall cost of regulations and deviation from international standards represent the equivalent of a 50 percent tax on EU operators.

We have calculated in fact that we could boost EU GDP by another 0.5 percent if we can make real progress on nontariff barriers (NTBs) and regulatory issues with our major trade partners such as the United States and China.

And what's the framework for all these efforts? I hope I don't surprise you with my answer.

The current crisis has tested and proved the value of the multilateral trading system. The World Trade Organization, with clear rules and a system to make sure that members stick to them, has been a major factor in deterring countries from erecting trade walls or pursuing the tit-for-tat protectionism of previous periods.

The WTO estimated that, between October 2008 and October 2009, new import restrictions introduced by G-20 members affected not more than 1 percent of world imports. At a peak of the crisis, nearly 2 percent of the EU goods exports were affected.

Significantly, the few protectionist measures we have seen either affected areas not covered by the WTO, such as government procurement, or were introduced by countries that are not yet part of the WTO system.

This "insurance value," the ability of the multilateral trading system to prevent protectionist backlashes, is not always fully appreciated. But it is for this reason that the European Union and also the United States are eager to have Russia join the WTO. It will help those in Russia who want to embed their country solidly in the WTO multilateral governance system. With WTO accession, Russia will become part of a web of rules and disciplines, as well as considerably reduce its current levels of protection, based in large part on the bilateral accession protocols that both you and we have negotiated with them. This is very good news.

And it is only one aspect of the importance of the WTO. The Doha Round is vital-but the WTO as a whole is fundamental to the construction of an international rules-based system for trade. We've seen how important that is during the crisis, and it's still a work in construction.

Ladies and Gentlemen, on November 9 I set out a new, assertive European trade strategy. There is much continuity in our trade policy agenda for the years to come. This reflects our commitment to delivering the trade deals that are already underway and maintaining the momentum established in tackling barriers to trade and investment. We are not trying to reinvent the wheel.

But our policy also needs to reflect that the world is changing very quickly, and we too must evolve in response.

Cutting import tariffs is still important but the bulk of trade barriers now lies elsewhere. As well as removing regulatory barriers, this means market access for services and investment, opening up public procurement, better protection of intellectual property, and more reliable supplies of raw materials and energy. Let me mention the key elements of our future trade policy:

Firstly, at a time of economic crisis, we have to step up our efforts to ensure that trade delivers more jobs and more growth in the years to come. This is the number one challenge for trade policy. Trade must be part of the strategy to exit the current economic crisis.

In terms of our negotiating agenda, this means:We will continue to work for an early Doha deal; we hope to turn the political engagement of the G-20 summit into genuine momentum. What we need here is actually rather simple: we need to build on the progress achieved in 2008, which means that all parties will now have to engage in genuine give and take. If this happens, I think we have a really good chance to conclude a better and more ambitious deal in 2011.

In parallel, on the bilateral front, we are focusing on the emerging countries, because that's where so much of current and future growth is being generated. Today, the Group of Seven emerging countries: China, India, Russia, Brazil, Mexico, Indonesia, and Turkey, also called the E-7, have a total GDP that has already reached one-third of that of the G-7 (G-7 = United States, Japan, Germany, United Kingdom, France, Italy, and Canada). By 2025, the combined GDP of the E-7 countries will represent 91 percent of the G-7 total GDP.

It is obvious that part of the success of the export-oriented emerging countries is due to the openness of markets in the United States and the European Union. This has led to an extraordinary phenomenon over the last 10 years. In 1999, the United States accounted for 21 percent of world trade. Ten years on, US imports and exports of goods account for less than 14 percent of world share-despite a steady growth of almost 2 percent. The obvious explanation is that global trade was growing at a faster pace. China alone saw its exports surge ahead by 17 percent per year on average. So it's perhaps commonplace to say so, but the BRICS (Brazil, Russia, India, and China) are clearly centrally important partners to both the European Union and United States.

We will work to complete the process of approval of trade deals with South Korea, ACTA, and-toward the end of next year-with Central America, Peru, and Colombia.

We will also be working hard to conclude all ongoing negotiations, particularly those most advanced at this stage-India, Canada, Singapore, Ukraine, and Mercosur. We also hope to continue the process of launching bilateral negotiating tracks with more of our partners in the Association of Southeast Asian Nations (such as Malaysia and Vietnam) and stand ready to move ahead with partners in our near neighborhood whenever the conditions are right.

Secondly, of course the BRICs are increasingly important, but we will never forget the importance and intensity of our relationship with the United States, our largestand our most important trade and investment partner. This is why many other EU Commissioners will join me in the rejuvenated Transatlantic Economic Council (in short, the TEC) tomorrow. Mike Froman will be accompanied by four members of President Obama's Cabinet and the heads of some key US regulatory agencies. We should not underestimate the technical difficulties to address regulatory divergences between the United States and the European Union. There are some famous examples out there, such as chicken. But I would like the TEC to focus on two things: firstly, the barriers that count in terms of the economic burden on both sides of the Atlantic; and secondly, to address the technical regulations before they are enacted into law. This means a strong transatlantic policy approach-trying to address each others' concerns at an early stage, which is relatively much easier than trying to amend a regulation already in force.

I can't overstate the importance of the TEC.

This is a strategically important, high-level dialogue that is central to what I want to do in trade policy in the European Commission. I don't want to overburden the TEC with expectations, but I am determined to use it to drive a step change in the trade and economic relationship between the European Union and the United States.

In the meantime we are both, of course, hard at work with other partners. In particular, of course, Korea: As you know, we signed two months ago a Free Trade Agreement with Korea. The agreement with Korea will enter into force in July 2011, virtually eliminating all import tariffs and most nontariff barriers, creating new business opportunities in services and through investment, generating at least €19 billion of new trade.

But this isn't some sort of contest between the European Union and the United States, as some have said: I am personally very pleased that KORUS now looks well on the way to becoming a reality, not least as it also shows that the US trade policy machine is alive and kicking.

Thirdly, we are also determined to find creative ways to address other essential issues, such as public procurement. The financial crisis put "buy national" measures at the center of the trade debate. Why should the purchase of a computer for a government official be considered differently than the purchase of the same computer for a bank employee? The value of public procurement is too big to be ignored.

In fact, the EU public procurement market is considerably more open than those of major trading partners. Around €312 billion of EU public procurement is open to bidders from member countries of the WTO agreement on procurement. There is a big asymmetry between what we offer and what other WTO members offer: in the same agreement, the value of US procurement offered to foreign bidders is just €34 billion and €22 billion for Japan. And there is the even bigger issue of more symmetry in opening of public procurement markets vis-à-vis those E-7 economies that are not even members of the GPA.

The EU openness in public procurement gives EU taxpayers more value for their tax money, but it also reduces EU leverage in trade negotiations on access for EU exporters to public procurement markets in other countries.

This is why Commissioner Michel Barnier and I will propose to set up an instrument to encourage our partners to be as open as we are.

Fourthly, another important area is foreign investment. Foreign investment is anengine for job creation in the European Union and abroad. More than 4.6 million people work for US and Japanese companies in the European Union alone. I want to address the needs of EU investors outside the European Union. We will look at negotiating comprehensive investment provisions with key trading partners, most urgently with some of those-like India, Canada, and Singapore-where trade negotiations are already well advanced. We also need to do far more on investment, which plays a bigger and bigger role in the global economy: a vital channel for innovation and job creation. Europe is the biggest destination for foreign direct investment: Today in Europe more than 4.6 million people work for US and Japanese companies. Of course it is also an export booster: About half of world trade is between a mother company and its subsidiaries.

The legal investment framework in the European Union is one of the most open; an investor based in Ireland can operate in the whole European Union, foreign companies are allowed to merge with European companies and participate in our government procurement with essentially no restrictions. This open system makes the European Union an attractive place to invest, to our benefit, and we must stay open.

EU companies are also the largest investors abroad, particularly in the United States: We invest around eight times more here than in India and China put together. More than 4 million Americans work in majority-owned European companies based in the United States, with 37 percent in the manufacturing sector. EU investment accounts for more than two-thirds of all jobs generated by foreign companies here. As you know, this is because our global companies are determined to build a global production chain. But for this to work, they need a transparent and predictable investment framework to compete in a globalized world.

We are now in a position to push this forward. Following the Lisbon Treaty, the European Union has new responsibilities to negotiate investment agreements with third countries. Our member states have more than 1,200 bilateral investment agreements covering only investment protection. These agreements do not provide certainty about where, or in what, you can invest; whether you are obliged to operate in joint ventures or through a local partner; or how to protect your intangible assets such as patents. These are the issues we need to address, so our plan is to integrate investment chapters into our ongoing FTA negotiations with Canada, Singapore, and India. We also consider stand-alone investment agreements with other major trade partners such as China and Russia.

Finally, this is my fifth key point: I want to stress an issue that I know is also viewed as very important here in Washington. And that is that we have to complete the negotiations; we have to implement them; and we have to enforce them. It simply won't wash with EU citizens any more than with US voters to have agreements that are not respected. Our motto is: We should be open, but not naïve.

We are therefore committed to monitoring implementation and enforcement of commitments. We will also continue to use our trade defense instruments as appropriate to counter unfair subsidies or dumping. I am proud of the European Union's openness to trade and investment-indeed it is a fundamental tenet of the EU economy-and one of my principal goals is to keep it that way.

But the rules must apply to all and be applied by all. In trying to convince our citizens about the positive economics of trade, we also have to address the sometimes tricky politics of trade.

Ladies and gentlemen, let me conclude. The long-run orderly growth of the world economy requires both the European Union and the United States to be active trade policy partners in resisting protectionist temptations and promoting further trade and investment liberalization. The world has changed a lot-but the world still looks to us to provide the lead: in the WTO, in the G-20, and elsewhere. And we can also lead by example. The EU-US economic relationship is the largest, deepest, and most stable economic relationship in the world. We have reached a high level of business integration, mutual benefit and trust, generating millions of jobs on both sides of the Atlantic. The European Union and United States must join forces to stimulate growth and create jobs in key emerging sectors and technologies. This would be a very useful and important contribution to not just our own, but global, economic growth in the next decade.

Thank you very much.

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