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EU trade policies: Carrot-and-stick mechanisms in the pursuit of non-trade policy objectives?

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EU trade policies: Carrot-and-stick mechanisms in the pursuit of non-trade policy objectives?

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EU trade policies: Carrot-and-stick mechanisms in the pursuit of non-trade policy objectives?

The EU is the world’s largest exporter of manufactured goods and services and the biggest export market for many countries. It often conditions preferential trade access to its market on the achievement of non-trade policy objectives (NTPOs), such as sustainable development, human rights, and good governance. 

It has been argued that trade policy is “the principal instrument of foreign policy for the EU” (Sapir 1998) through which the EU can “export” its values to its trading partners. This idea has been enshrined in the Treaty on the European Union (TEU). Article 21 states that the “[t]he Union’s action on the international scene shall be guided by the principles which have inspired its own creation” – including democracy, the rule of law, human rights – and shall promote other NTPOs such as international security and sustainable economic, social, and environmental development.

Ursula von der Leyen promised that under her leadership, the Commission will further strengthen the use of trade tools in support of such NTPOs. In her ‘Agenda for Europe’, she stressed that “[t]rade is not an end in itself. It is a means to deliver prosperity at home and to export our values across the world” including “the highest standards of climate, environmental and labour protection, with a zero-tolerance policy on child labour.” 

In a recent paper (Borchert et al. 2020), we examine the extent to which the EU can promote NTPOs through its two principal instruments of trade policy: free trade agreements and the Generalized System of Preferences (GSP). We assess whether these trade tools can be used as a ‘carrot-and-stick’ mechanism to incentivise trading partners to achieve NTPOs. The key question is whether preferential access to the EU market can be used to reward ‘good behaviour’ on NTPOs by trading partners (positive conditionality) and to punish ‘bad behaviour’ (negative conditionality).

NTPOs in EU trade policy

The first policy tool through which the EU can grant preferential access to its market are trade agreements. The legal basis for these agreements is GATT Article XXIV. At present, the EU has the largest trade network in the world, with over 40 agreements in force.

The evolution of NTPOs in these agreements can be depicted using data compiled by Lechner (2016) in the context of the Design of Trade Agreements (DESTA) project. DESTA groups NTPOs into four main categories – civil and political rights (CPRs), economic and social rights (ESRs), environmental protection (EP), and security issues – and offers scores with regard to the degree of legalisation of NTPOs in trade agreements. Looking at average legalisation scores over five-year brackets, NTPOs have clearly gained prominence (and bite) in EU trade agreements since the 1990s (Figure 1).1 This trend was mostly driven by labour and social/environmental provisions, whose average legalisation scores more than doubled during the last two decades.

Figure 1 Evolution of legalisation of NTPOs in EU trade agreements

EU trade policies: Carrot-and-stick mechanisms in the pursuit of non-trade policy objectives? 2

The Generalized System of Preferences (GSP) is the second policy tool through which the EU can grant preferential access to its market. The legal basis for GSP schemes in the GATT/WTO system is the Enabling Clause of 1979. This legalises a positive, pro-development form of trade discrimination, as it allows donor countries to offer better than most-favoured nation (MFN) tariffs to developing countries, without extending the same treatment to developed countries.

Over the years, the EU has introduced in its GSP regulations several provisions aimed at pursuing NTPOs. In particular, the Special Incentive Arrangement for Sustainable Development and Good Governance (GSP+) introduced in 2006 grants developing countries full removal of tariffs on two thirds of all product categories, conditional on their ratification of and compliance with core international conventions on human rights, labour, and environmental protection. Table 1 summarises the main reforms of the EU’s GSP schemes and the gradual expansion of NTPOs in these schemes. 

Table 1 Evolution of NTPOs related provisions in the GSP programmes of the EU

EU trade policies: Carrot-and-stick mechanisms in the pursuit of non-trade policy objectives? 3

Conditionality in EU trade agreements and GSP schemes

We argue that trade agreements are not an effective tool through which the EU can incentivise trading partners to achieve NTPOs. The key reason is that the EU must comply with Article XXIV of the GATT/WTO, which requires countries that negotiate preferential trading arrangements to eliminate “duties and other restrictive regulations of commerce” on “substantially all the trade between the constituent territories in products originating in such territories.” Given that tariffs must be eliminated reciprocally across the board, the EU cannot extend or restrict preferential access to its market, depending on the behaviour of the trading partner. 

Once tariffs are eliminated following the entry into force of a trade agreement, there is no positive conditionality, i.e. trade preferences cannot be used as a ‘carrot’ to reward good behaviour on NTPOs by trading partners. In terms of negative conditionality, the EU could in principle trigger the ‘essential elements’ clause in cases of severe NTPOs violations, which could lead to the suspension or termination of the trade agreement. However, this clause only applies to some NTPOs (human rights, democracy, the rule of law, and security), excluding provisions on labour and environmental standards. Moreover, the EU has activated the ‘essential elements’ clause very rarely, and even in these cases it has never suspended or terminated the agreement.2 This may partly be due to the fact that the ‘stick’ is too drastic: given the reciprocal nature of a trade agreement, its suspension or termination can be extremely costly, not only for the trading partner but also for the EU.3 This is not to say that the EU cannot use negative conditionality in trade agreements, but that the sanctioning mechanism does not involve trade policy.4

By contrast, the EU can use GSP programmes as a carrot-and-stick mechanism to promote NTPOs in developing countries. The key difference with trade agreements is that GSP preferences are offered on a unilateral basis, which affords more leeway in using conditionality by preference-granting countries. Through its GSP programmes, the EU can reward countries that make progress on NTPOs, offering lower tariffs and a broader product coverage. For example, in 2014 the Philippines was upgraded from the GSP to the GSP+ programmes, which increased the number of products eligible for zero tariffs from 2,442 to 6,274. In case of violations of NTPOs, the EU can instead punish trading partners, by suspending GSP preferences partially or even entirely. For example, in 2010 the EU withdrew Sri Lanka from its GSP+ programme. This decision was based on the findings of an investigation by the Commission that identified shortcomings in the implementation by Sri Lanka of three UN human rights conventions (the International Covenant on Civil and Political Rights, the Convention Against Torture, and the Convention on the Rights of the Child). Violations of labour standards have led to a temporary withdrawal of preferences from Myanmar (EBA) and Belarus (GSP). Since labour standards would be outside the scope of the ‘essential elements’ clause, these cases demonstrate that the scope for negative conditionality in GSP is much broader than in FTAs.

The European Commission reports many instances of “noncompliance [with NTPOs] on the ground”. However, the application of negative conditionality to GSP recipients has been scattered. Restraint is usually justified with a desire to limit the harmful impacts on target population. A less altruistic explanation of selective enforcement is linked to trade partners’ economic size: the EU might refrain from using negative conditionality for fear of retaliation, or to avoid an increase in the cost of sourcing key inputs, when violations occur in larger emerging markets such as India, Pakistan, or China.

Concluding remarks

The literature on issue linkage suggests that large countries such as the EU may seek to enter into FTAs with smaller countries to exchange market access concessions with concessions on non-trade issues (Limao 2007). Conconi and Perroni (2012) show that trade agreements can help small countries to achieve domestic policy objectives. These studies rely on the idea that trade policy can be used as a carrot-and-stick mechanism to enforce commitments in other policy areas. We argue that there are important legal and economic limitations to both positive and negative conditionality in trade agreements.  

Our analysis suggests that, if the EU wishes to rely more on trade policy to promote such objectives, it should focus on GSP programmes. The unilateral nature of these programmes implies that the EU can use them to enforce NTPO commitments by its trading partners. However, conditionality in GSP schemes should be administered in a more consistent and rules-based way, with beneficiary countries being regularly monitored and their trade preferences being more systematically revoked or suspended in case of non-compliance with their NTPO commitments.

References

Borchert, I, P Conconi, M Di Ubaldo and C Herghelegiu (2020), “The Pursuit of Non-Trade Policy Objectives in EU Trade Policy”, CEPR Discussion Paper 14655.

Conconi, P and C Perroni (2012), “Conditional versus Unconditional Trade Concessions for Developing Countries”, Canadian Journal of Economics 45: 613-631.

Hachez, N (2015), “Essential Elements’ Clauses in EU Trade Agreements: Making Trade Work in a Way that Helps Human Rights?”, Leuven Centre for Global Governance Studies Working Paper No. 158.

Lechner, L (2016), “The Domestic Battle Over the Design of Non-Trade Issues in Preferential Trade Agreements”, Review of International Political Economy 23: 840-871.

Limão, N (2007), “Are Preferential Trade Agreements with Non-Trade Objectives a Stumbling Block for Multilateral Liberalization?”, Review of Economic Studies 74: 821-855.

Mavroidis, P C (2016), The Regulation of International Trade: GATT, Volume 1, Cambridge, MIT Press.

Sapir, A (1998), “The Political Economy of EC Regionalism”, European Economic Review 42: 717-732.

Endnotes

1 The scores shown in Figure 1 are computed by first summing legalization scores across all types of NTPOs and then taking averages of these overall scores across EU trade agreements concluded over five-year intervals. The average score for the 2015-2019 period is lower compared to the 2010-2014 period mainly due to agreements concluded by the EU with different groups of African countries.

2 The EU has activated negative conditionality only in the context of the Cotonou Partnership Agreement, with African Caribbean Pacific (ACP) countries, following coups, flawed elections, and grave human rights violations. Instead of lifting tariff preferences, the EU suspended technical co-operation programmes (Hachez 2015). 

3 Another reason may be that, if the EU did suspend its tariff preferences vis-à-vis a trading partner, this action could be challenged at the WTO as being inconsistent with Article XXIV (Mavroidis 2016).

4 For instance, in its Association Agreements, the EU can limit or terminate financial and technical assistance if the trading partner violates NTPOs.

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