Open Trade and Its Discontents

The following article was also published as an op-ed in the December 6th issue of the European Voice under the title ’Open trade is a two-way street’

The decision by the EU trade ministers to open free trade negotiations with Japan arrived on Thursday, after years of deliberation. Karel De Gucht, the European Commissioner of Trade, is unapologetically focusing on free trade agreements (FTAs) with the world’s largest trading nations – not out of bravery or foolhardiness, but out of necessity. The commercial attractiveness of the Single Market has always been the mainstay of Europe’s soft powers, which is inarguably in decline – Europe’s share of global economic output will be halved in fifteen years, and the EU is racing to secure FTAs while it still holds a leverage.

But the EU, despite being in trance to the mantra of growth and jobs, has so far struck free-trade agreements with countries that account for only 5% of its trade. Just three other countries in the same weight class – namely, the US, China and Japan (each with a gross domestic product of more than $5 trillion, or €3.8 trillion) – would have a meaningful impact on European recovery.

But large-scale trade liberalisation comes at a cost. The EU has so far been content negotiating trade agreements with countries far smaller than itself like Korea and Peru who could accept EU rules and standards on a wholesale basis, while not a single piece of EU legislation has been reformed. Such one-sided liberalisation simply won’t fly when European negotiators lock horns over product standards with the regional standard-setters like the US and Japan. Also, the EU’s protectionist concern for the car industry – the sector that accounts for the EU’s largest trade surplus with the world – gives rise to bemusement. This concern is the biggest hurdle against the EU-Japan FTA (although the EU runs a hefty half billion surplus against Japan), and some of the European affinity for a EU-US deal comes from a gleeful relief that Fiat and PSA would not complain about being exposed to more competition.

It is starting to dawn on European policymakers that the first priority for Chinese, Japanese or US businesses may not be to further open up zero-growth EU markets – the Obama administration puts the Trans-Pacific Partnership (TPP) above the Transatlantic High Level Working Group on Jobs & Growth; Japan, in its pre-election jitters, focuses on its Asian neighbours while the public support for TPP has also reached critical mass. In response, the new Chinese Politburo (the first where economists outnumber civil engineers) invited Korea and Japan into a three party trade agreement, putting a blind eye to recent territorial disputes. The China, Japan, Korea (CJK) agreement will merge with into a free trade area with ASEAN, India, Australia and New Zealand. By any estimates, both CJK and TPP will divert European exports to the extent which cannot be compensated Europe’s own FTAs – the infamous pivoting to the East is turning the once offensive EU trade strategy in a fierce battle to maintaining its market share.

Yet, the EU member states have failed to respond to Wen Jiabao’s offer to settle all their disagreements in a free trade agreement. That agreement is admittedly controversial for both sides. However, qualms about Japan’s ability to deregulate its markets were not the only cause of a recent face-off over a mandate on Japan – some European leaders have also misgivings as to whether the Common Commercial Policy is really in their short-term political interests. However, promote openness only when it benefits Europe and turn to mercantilism – a classic case of “do as we say and not as we do” – undermines their own long-term interests by legitimising the same behaviour against Europe.

Economic facts do not cease to exist because they are ignored. The EU is far better to grasp globalisation as it really is, than to remain in the past, however satisfying and reassuring it was.