Free trade agreements of the European Union
Free trade is one of the major drivers of growth for the world economy. Both consumers and enterprises can derive great benefit from it - the history of the European Union shows this.
The Federal Ministry of Food and Agriculture (BMEL) supports the EU's efforts to negotiate comprehensive free trade agreements, in the form of association, partnership and cooperation agreements in cases where no material progress has been made in negotiations at World Trade Organization (WTO) level.
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From the European and German perspective, EU free trade agreements merely supplement the WTO negotiations. Concluding the WTO's Doha Development Round negotiations, which have been ongoing since 2001, and strengthening the multilateral trading system remain priorities for the BMEL. All agreements negotiated outside of the WTO have to be compatible with existing WTO requirements.
Studies show: free trade agreements can create new jobs and secure existing jobs. If tariffs are reduced or other unjustified trade barriers removed, for example through the cooperation of regulating authorities, this opens up new opportunities for the competitive German agri-food sector, especially for high-quality products.
Free market access also means there are advantages for consumers: The range of products available increases whilst consumer prices sink.
The BMEL advocates that the high level of European consumer protection should be maintained in the EU's negotiations with potential free trade partners. All products traded in the EU must, for example, comply with the applicable product safety standards. This also applies to imported goods. What is more, bilateral agreements offer the opportunity to work on specific issues which are difficult to adopt within a multilateral context. For instance, the EU is trying to incorporate environmental and social rules into its bilateral agreements. With regard to animal welfare, the EU also pursues the objective of codifying cooperation on animal welfare standards in the agreements.
The main goal for negotiations is to reach agreements with emerging countries as these countries are not only gaining importance in economic terms, they also often still protect their markets with high tariffs and other non-tariff trade barriers. Traditional trading partners and competitors among the industrialised countries are also attractive negotiating partners. For instance, negotiations with Canada have been completed. The agreements now need to be ratified by Canada, the Council of the European Union, the European Parliament and the Member States. In December 2015 negotiations with Vietnam were also officially concluded.
Negotiations with the USA on a free trade agreement
In the agricultural sector, the USA are one of the most important trade partners for the European Union. This also applies to the German agri-food sector. After Switzerland and before Russia the USA are our most important market outside of the EU. The free-trade agreement is intended to further stimulate this market. Comprehensive agreements governing mutual trade will have to be agreed upon in the forthcoming negotiations. The talks will focus on tariff reductions and the cooperation of regulatory authorities. Both partners are aiming to facilitate trade through, for example, reducing bureaucracy, whilst at the same time taking account of interests on issues of consumer protection.
Consumer protection and information are of great importance in Europe. The BMEL advocates that this should remain the case. For the BMEL it is clear that: Moving forward, the high level of consumer protection in Germany will continue to be defined by legislators and not by trade agreements.
The BMEL will also ensure that consideration is given to the competitive situation of the agricultural sector and the fact that European production must be in line with European animal welfare principles. Liberalisation limitations are to be put in place for certain products with particular competitive disadvantages Ultimately, the aim is to gain leeway for the European agricultural model based on the idea of a multifunctional agricultural sector. This does not only produce healthy food, create jobs and generate income. It also allows rural areas to be developed in a sustainable manner, conserves natural resources and contributes to the preservation of the countryside and to climate protection.
Trade agreements with EU neighbouring states
The European Neighbourhood Policy is geared towards strengthening the links with the EU's neighbouring states through trade agreements. The EU has agreed relevant Association Agreements with Ukraine, Georgia and Moldova which are already in effect for the EU and currently are being ratified by the Member States. The EU is also looking to cooperate more closely with neighbouring countries in the Mediterranean area through comprehensive development and trade agreements.
Trade policy as part of EU foreign and development policy
The already concluded negotiations with Central America and the Andean countries Columbia, Peru and Ecuador are also expected to generate synergies in foreign policy.
Despite the "free trade" concept the ACP states may protect themselves against EU imports when it comes to sensitive products, especially in the agricultural sector. This means they are able to further develop their own agricultural sector. The agreements are largely near the end of the negotiation stage and some are already in effect. For instance the regional economic Partnership Agreement (EPA) with the Caribbean CARIFORUM countries was signed in October 2008 and has been provisionally applied since December 2008. The EPA Southern Africa (SADC), including Botswana, Lesotho, Mozambique, Namibia, South Africa and Swaziland, was signed in June 2016 and has been applied provisionally since October 2016. Negotiations have been completed with West Africa (ECOWAS) and East Africa (EAC).
Each agreement still needs to be ratified by the individual countries. Interim EPAS have been concluded with individual states (Papa New Guinea, Fiji, Mauritius, Madagascar, Zimbabwe, Seychelles and Cameroon) in the Pacific, South-East Africa and Central Africa regions. These are also already in force. Negotiations continue at regional level. Notwithstanding the above the least developed countries are given entirely tariff and quota-free market access for their goods in the EU.
- As of:
Germany is the world’s third largest exporter of agricultural goods. German products are popular and in demand. The film on "Quality made in Germany" shows why. In approximately three minutes, the film shows the wide range of products offered by the German agri-food industry – in the fields of seed and planting stock, animal genetics, agricultural machinery, raw materials (cultivation and production), and semi-finished and finished products.
Germany stands for a modern, productive and at the same time sustainable agri-food industry. The film shows how the industry meets the high quality standards that apply in all sectors. These quality standards guarantee that all exports are of top quality.
show video: Tradition – Innovation – a Devotion to Detail …
Agricultural products in Germany at a glance (infographics)
Germany’s agricultural sector is among the four largest producers in the European Union. No other country in Europe produces more milk, grows more potatoes or produces more pork. Just over half of our arable land is dedicated to growing cereals alongside other crops such as maize, rape, sunflowers and sugar beet. Apart from cattle, pigs and chickens, livestock farming also includes turkeys, sheep and other farm animals. Fruits, vegetables and wine are produced in regions that enjoy particularly favourable climate and soil conditions.
The lack of progress in multilateral trade negotiations does not imply that global integration is stagnant. In fact, governments across the globe are as active as ever in negotiating new regional trade agreements (RTAs). For example, in the year to October 2009, as the global financial crisis raged, 25 new RTAs were notified to the WTO. The new agreements bring the total number of RTAs in force to nearly 300. This has led many economists to worry that regionalism could be undermining the multilateral trading system (Bhagwati 2008, Limao 2006).
In recent research (Freund and Ornelas 2010), we ask whether the expansion of regionalism should be celebrated or a cause for concern.
Assessing the impact of RTAs
Regional trade agreements imply both trade liberalisation and trade discrimination. While there is a near-consensus among economists that trade liberalisation is desirable, the same cannot be said of trade discrimination. Such discriminatory trade liberalisation is beneficial when it promotes a shift of resources from inefficient domestic suppliers to more efficient producers within the region, i.e. when there is so-called “trade creation”. In contrast, a trading bloc is likely to be harmful if it generates a shift of resources from efficient external producers to inefficient producers within the region, i.e. when there is so-called “trade diversion”.
There are theoretical arguments that support the primacy of trade creation and trade diversion under similar circumstances. Thus, which effect dominates is an empirical matter. Unfortunately, estimating trade creation and trade diversion is no easy task – it requires knowledge of the counterfactual, i.e. what would have happened to trade if there were no trade agreement. As this is unknown, assumptions must be made.
A variety of approaches have been employed. While results inevitably vary depending on the methodology, the time period, the trading bloc in question and the level of aggregation in the data, two general messages arise from the large set of studies investigating trade creation and trade diversion in RTAs around the world:
- First, trade creation tends to be the norm in RTAs – and trade diversion is the exception.
- Second, when trade diversion is observed, its magnitude is normally relatively small.
Trade creation vs. trade diversion
Why is there such a dominance of trade creation? It seems that governments are choosing their partners well. For example, variables that suggest greater gains from a bilateral deal (such as proximity between the members, a similarity in their GDPs and a large difference in their factor endowments) are also sharp predictors of whether the two countries actually have a common RTA (see for example Baier and Bergstrand 2004).
Moreover, when countries form an RTA, their governments not only lower tariffs vis-à-vis their RTA partners; they also tend to reduce tariffs on imports from countries outside the bloc. Governments liberalise externally because they choose to – there is no reciprocity from the non-members. Such external trade liberalisation following an RTA appears especially important in developing countries (Estevadeordal et al. 2008 analyse Latin America in the 1990s). The lower external tariffs provide a double blessing. They imply that RTAs are responsible for more trade liberalisation than they mandate – amplifying trade creation – and for less trade discrimination than might be expected – limiting trade diversion.
Why voluntarily lower tariffs?
Given the political pressures, it may seem counterintuitive that governments would voluntarily lower their external tariffs. But it makes sense. Suppose for political reasons the government sets relatively high tariffs, which benefit the domestic import-competing industry. If subsequently the country enters in an RTA, export-oriented firms benefit because of the better access to foreign markets, whereas purely domestic firms suffer from the tougher competition from the RTA partners. This weakens the import-competing firms’ stance on protection against non-members. The reason is that the free access to the domestic market enjoyed by the partners’ exporters lowers the market share of the domestic industry. As a result, the RTA makes any price increase generated by a higher external tariff less valuable for the domestic industry. Now whenever the government attempts to help domestic producers through higher external tariffs, the partners’ producers absorb part of that surplus.
In other words, the RTA creates “leakage” in the trade-policy redistributive channel. External protection also becomes more costly, because of the costly trade diversion that accompanies the RTA. As a result, external tariffs tend to fall after the formation of an RTA, both because the economic marginal cost of external protection rises and because the political-economy marginal gain from external protection falls.
Empirical research supports this rationale for developing countries. But results for the US and the EU indicate that they are less likely to reduce external tariffs on goods where preferences are offered (Limao 2006). But since the tariffs of both the US and the EU are very low to start with, and cannot be raised because of their WTO commitments, there is little room for change anyway.
Are regional trade agreements welcome?
The benign view that trade creation dominates trade diversion does not imply that regional trade agreements are necessarily welcome. Some commentators argue that the reason multilateral negotiations at the WTO are stuck is because RTAs are spreading. One concern is that if officials are busy negotiating bilateral agreements, they will be unable to focus on more evolving multilateral negotiations. Another concern is that RTAs may create interest groups that block further liberalisation initiatives.
There are also arguments indicating that the opposite may be true. A simple argument is that negotiating RTAs helps officials develop the expertise to implement international trade agreements, which could be useful at subsequent WTO negotiations. Moreover, RTAs also destroy rents in parts of the economy. If the rent-holders who lose with RTAs were the ones slowing down multilateral talks, then RTAs can actually provide a boost to multilateral negotiations. As Baldwin (1994) puts it, liberalisation (regional or multilateral) begets more liberalisation.
When faced with opposing theoretical results, the solution is typically to scrutinise the divergent predictions empirically. The problem here is that the nature of the question – whether regionalism helps or hinders multilateralism – does not lend itself easily to testing. Simply put, at any point in time we observe a single realisation of WTO negotiations. Would they have been any faster, or easier, had there been fewer (or more) RTAs? This is a very difficult question. As a result, to date empirical scrutiny has not been able to help us distinguish good (that is, empirically relevant) from bad (empirically inconsequential) theories.
To the extent that we can measure it, the increasing wave of regionalism has been largely beneficial to the world trading system. Most empirical analyses indicate that trade creation, not trade diversion, is the norm, both because governments choose well when forming RTAs and because they adjust other trade policies to moderate the distortions from discrimination.
Although it is possible that regionalism could endanger multilateralism, at the moment we just do not know. Since regionalism has become, and will probably remain, the preferred form of reciprocal liberalisation for most countries – no matter what we economists say – we should therefore focus on ways to integrate regionalism with multilateralism more effectively.
Bhagwati, J. N. (2008), Termites in the Trading System: How Preferential Agreements Undermine Free Trade, Oxford: Oxford University Press.
Baldwin, Richard (1994), Towards an Integrated Europe, CEPR, Chapter 2.
Baier, Scott and Jeffrey Bergstrand (2004), “Economic Determinants of Free Trade Agreements”, Journal of International Economics, 64:29-63.
Estevadeordal, Antoni, Caroline Freund, and Emanuel Ornelas (2008), “Does Regionalism Affect Trade Liberalization towards Non-members?”, Quarterly Journal of Economics, 123:1531-75.
Freund, Carolone and Emanuel Ornelas (2010), “Regional Trade Agreements”, CEP Discussion Paper No. 961 and forthcoming in the Annual Review of Economics 2: 139-67, September.
Limao, Nuno (2006), “Preferential Trade Agreements as Stumbling Blocks for Multilateral Trade Liberalization: Evidence for the US”, American Economic Review, 96:896-914.
Topics: International trade
Tags: regionalism, multilateralism, regional trade agreements