John A Clarke is Former Director of International Relations and Trade at the European Commission, and former Head of the EU Delegation to the WTO and UN organisations in Geneva. The views expressed do not represent the position of the European Commission.
The Roman God Janus famously looked both backwards and forwards. In this article we take the same approach: looking both backwards at recent European Union (EU) trade policy and forwards to what can be expected in the years ahead, and how this could impact future EU-UK relations.
Historically, the EU has been reluctant to use trade policy and its trade agreements to achieve non-trade goals. For decades trade was considered as a legitimate end in itself and not the means to an end. EU trade policy sought to avoid mixing trade with other issues. “Render unto Caesar what belongs to Caesar” as one EU Commissioner once put it.
But this approach gradually changed by necessity. There was no one Eureka! moment but certainly a turning point was the World Trade Organisation (WTO) Seattle Ministerial in 1999, which collapsed in the face of violent NGO and Trade Union protests over the WTO allegedly riding roughshod over human rights, labour and environment (not discouraged by the host United States government at the time).
Whether the NGOs were right or not is not the point. It was clear from then on that trade agreements, be they bilateral or multilateral, would only get approval from governments, parliaments and citizens if they demonstrably supported sustainable development, a term that first appeared in the WTO rules in 1995.
After Seattle came numerous international and European initiatives to promote sustainable development, notably the EU’s Lisbon Treaty in 2010 which mandated the EU to promote sustainability in both domestic policy and in its international relations; and more recently, the adoption of the Sustainable Development Goals in 2015 which gave a strong, quasi-universal, political push to the concept.
One result of this has been that, over the last decade the EU has introduced ever more comprehensive and binding obligations on sustainability in its trade agreements, notably commitments to respect human rights and labour rights, ratify and implement a list of relevant international conventions ranging from International Labour Organisation (ILO) treaties to environment agreements such as the Convention on Biological Diversity, the Kyoto Protocol etc, animal welfare, gender and inclusion, indigenous rights, sustainable food systems (post 2021 UN Summit), and making binding Parties’ voluntary Paris Agreement pledges on carbon neutrality.
The apogée of this is the recently adopted EU-New Zealand Free Trade Agreement (FTA) which includes state of the art commitments on sustainability and food systems, in some respects even more far reaching and binding – and subject to Dispute Settlement – than the EU-UK Trade and Cooperation Agreement (TCA).
In parallel to FTAs the EU has introduced a battery of autonomous measures (your author prefers the word ‘autonomous’ which in the WTO lexicon is neutral, as compared to “unilateral” which in WTO is generally frowned upon), aimed at exporting the Green Deal, avoiding carbon leakage to third countries, and incentivising other countries to espouse the EU’s environment, climate and human rights agenda. One might say that the EU now exports not just champagne and BMWs but its values too. These instruments include The Carbon Border Adjustment Measure (CBAM), the recently adopted and now in force Deforestation Regulation, a Regulation prohibiting the placing on the EU market of goods, both domestic and imports, produced using Forced Labour; and the just approved – surprisingly – Corporate Sustainability Due Diligence Directive (CS3D for short), which requires companies in Europe with over 1,000 employees and €450 million of turnover to police all steps of their supply chains for human rights, labour or environmental infringements.
The objectives of these Regulations are understandable and worthy, recalling that all Partners signed up to the SDGs; and recalling too that it is essential, if we are to attain the 1.5C target, that other major emitters commit to net zero in time. If the EU is the only major region that meets its climate goals then the world will not achieve that target, since the EU accounts for only 9% of global Green House Gas emissions and this proportion is shrinking. So the EU has felt the need to use the leverage of its trade agreements and its attractive 450 million consumer Internal Market to push or incentivise partners to commit to Paris and other sustainability targets.
There is however a question now about whether the EU’s FTAs will actually bring about these changes in partner countries. How readily will other countries sign up to these ambitious goals?
In this author’s view, they may not. Several key FTA partners have made clear that the level of ambition set out in the New Zealand agreement should not be considered a template for the various FTAs currently under negotiation – Mercosur, India, Thailand, Indonesia, Australia etc., for various reasons.
First, some of the EU’s partners, e.g., Indonesia may be worried that they are simply incapable of meeting certain high-level commitments on environment, the climate or human rights, and do not want to risk being subject to trade retaliation through failure to comply.
Second, some partners may disagree with the EU’s ambition in substance or in principle. Some developing countries may conclude that they cannot afford the luxury of high environmental protection if their main goal is reducing extreme poverty. Environmental protection is a luxury of developed countries, the logic runs.
Others – India comes to mind – may object to what they see as an unacceptable intrusion into their regulatory sovereignty (I have written on this in the Tribune of India recently – see article here). Still others, e.g., Australia may be able to assume the various sustainability obligations but conclude – as it appears they did when negotiations broke down last autumn – that they are not being sufficiently rewarded in terms of agricultural market access concessions.
So, the likelihood of the EU signing ambitious FTAs with far reaching sustainable development commitments is receding. And on the autonomous instruments, although on paper fully WTO-consistent, implementation will be a challenge. As your author’s former boss European Trade Commissioner Pascal Lamy used to say, “God is in the Detail”. Several WTO members – US, Canada, Brazil, Indonesia, India, etc., – are already signalling disquiet with the Deforestation Regulation and are considering taking the EU to the WTO dispute settlement mechanism for a breach of WTO obligations.
The upshot of this is that the EU may need to moderate its sustainability agenda both in FTAs and in the autonomous instruments if it is to achieve its longer-term goals. It would be the worst of both worlds if the EU were unable to conclude economically useful FTAs and at the same time be unable to develop common ground and a cooperation agenda with partners on sustainability. The EU has already started signalling recognition of the need to moderate its ambition if certain FTAs are to cross the line, while consideration is also being given to delaying the implementation of certain of the autonomous instruments to give other countries more time to bring themselves into compliance.
What may this all mean for the future EU-UK trade relationship and especially the review of the Trade and Cooperation Agreement in 2025? Much of course will depend on the attitude of the newly elected Labour government, and to a lesser extent the future political orientation of the next European Commission and European Parliament, and even whether Donald Trump or Kamala Harris (assuming her almost certainnomination as Democrat candidate) win in the USA in November.
As regards the CS3D Regulation a series of challenges and risks seem to present themselves. First, it is obvious that implementation over the next three years will be quite complex, and it may be a challenge to remain WTO consistent (in terms of requirements on proportionality, transparency, least trade restrictiveness and non-discrimination between firms and countries). So, there is at least a potential risk of WTO litigation. Implementation of the Deforestation Regulation gives equally little room for comfort, and the Commission faces considerable resource and staff constraints in implementing this highly complex legislation.
Second, there may also be a question as to which legislation to apply – the CS3D or various lex specialis rules on forced labour or biodiversity loss or deforestation. The overlap may not be easy to disentangle.
Thirdly, CS3D is not a Regulation but a Directive, thus giving considerable leeway for EU Member States to interpret and apply it, with attendant risks to Internal Market coherence and a temptation for a race to the bottom between different Member States wanting to give domestic companies affected a competitive advantage.
The UK will be affected by CBAM, not least in terms of the compatibility between its own CBAM legislation now being finalised. The UK – or its companies one should say – will also be impacted by the CS3D, and to a lesser extent the Deforestation and Forced Labour regulations. Companies will face challenges to comply, and already there have been complaints and expressions of concern.
The question has even arisen as to whether the WTO will challenge any of these EU measures either through the Dispute Settlement provisions of the TCA or in the WTO? The UK, presumably at the USA’s behest, has not joined the MultiParty Interim Arrangement – a voluntary system of dispute settlement and arbitration intended to substitute for the currently inoperative Dispute Settlement System of the WTO, which is currently inoperative because the US has blocked the appointment of its appeal body judges resulting in the system ceasing to function.
This author doubts that the UK will go down this road, for several reasons. First, he who casts the first stone – the UK may not be blameless itself when it comes to respecting the sustainability commitments of the TCA. The Rwanda scheme (although this has been dropped by Labour), its own CBAM, the rolling out of Freeports (explicitly geared to giving a competitive advantage via relaxed labour or environmental laws or tax breaks that would amount to a challengeable subsidy) – any of these could fall foul of the TCA. Even water pollution if the policy choices leading to this were to be regarded as a breach of the human right to safe water access.
Secondly, the first signs are that the newly elected Labour government is keen to pursue the route of cooperation with the EU and not confrontation and litigation. It will wish to build bridges and not burn them. That was clear from the UK-hosted European Political Community meeting held at Blenheim in July.
In an ideal world the 2025 review of TCA implementation could be the occasion to address several key issues on which the UK and EU would be well advised to develop their relations, including mutual recognition of professional qualifications, mobility arrangements especially for youth, financial services regulatory rapprochement, UK access to Erasmus and Copernicus, reciprocal granting of cabotage for road and air transport, mutual recognition of conformity assessment, Sanitary and phytosanitary measures (SPS), veterinary equivalence, or the launch of a digital and AI Strategic Dialogue, among other important policy areas.
But only relatively few of these issues are likely to be pursued in 2025, for a range of reasons. One must first of all bear in mind that the review of the TCA scheduled for next year is explicitly a review of its implementation, and not its renegotiation, so there are limits to the extent to which it can be used to fix differences in substance on sustainable development or address the other areas noted above. In addition, the UK may not at first be able to identify or put on the table issues of interest to the EU – be it defence and security cooperation, mobility, or EU citizens’ rights – in order to create incentives and trade-offs for the EU to negotiate or expand the narrow focus of the TCA review agenda. All negotiations need issues of interest to both sides.
Thirdly, a mismatch of expectations is quite possible. The UK government may have ambitious objectives in terms of its reset of the relationship, but from the EU’s perspective the TCA is working reasonably well, and does not need root and branch reform. The fact that the UK despite its pledge to diverge from the EU’s acquis has not (yet) done so in key areas reduces the incentive further for the EU to negotiate. Conformity Assessment is a case in point. The UK has continued to accept CE marked products on its market so the EU sees no urgency or major incentive at this point to grant mutual recognition.
Fourthly, the EU has other priorities than the UK, and limited resources to implement those priorities. The next European Commission and Parliament will be preoccupied with the consequences of the war in Ukraine, funding a future European defence policy, managing the future financing of the EU, navigating the US-EU-China relationship, continuing its policy of de-risking and strategic autonomy, maintaining the flagging momentum of the Green Deal and its net-zero target, implementing workable policies on illegal migration, keeping democratic institutions robust in some of the countries on its eastern flanks, and remaining relevant to the digital revolution. All of these and more are higher priorities than relations with the UK.
And last but not least, notwithstanding the certain goodwill that there will be towards the Labour government, there is considerable “Brexit fatigue” in the EU, and above all a trust deficit that will take 3-5 years to redress. The EU is wary of cherry-picking tendencies or Johnsonian cakeism and will do nothing to reward Brexit or give a signal that relations can be as they were prior to 2016, “pour décourager les autres”.
A prime example of this is in the field of veterinary inspections/SPS equivalence for foodstuffs or plants and animals crossing the borders. A Mutua Recognition Agreement (MRA) like the one between EU and New Zealand ordinarily should be a no-brainer but the UK has postponed health and safety checks several times, sometimes waving trucks through at Dover, sometimes inspecting, sometimes charging, sometimes not (a parenthesis here: charging hauliers inspection fees for a service not actually rendered would be incompatible with the UK’s legal obligations under both the TCA rules and under Article VIII of the General Agreement on Tariffs and Trade). So in this area of veterinary controls, either the UK has too limited human resources or infrastructure to check imports, in which case it certainly lacks them to check the safety of exports to the EU. Or else pre-election the then Conservative government, as seems to be the case, had decided to avoid any policy that could increase food prices or delay the delivery of food even more. Whatever the reason, neither is conducive to building the necessary confidence between regulators that is a prerequisite for a successful SPS equivalence agreement.
Against this background and in view of the likely limited scope of the TCA review, it may be useful to offer some pointers or advice to the new Labour Business Secretary Jonathan Reynolds on how to deal with the EU and the TCA review. For the present five pieces of advice seem useful.
First, adopt the Chinese leader Deng Xiaoping’s wises adage, “Bide your time, conceal your capabilities”, i.e., be modest, avoid arrogance pace David Davis. Because in this relationship the UK does not always hold all the cards.
Second, more Chinese wisdom. “Cross the River by Feeling the Stones”. In other words take it step by step, bottom up – no ‘big bang’ or top down drama approach. EU does not do big bangs anymore, not since 1992 or the EU-10 enlargement. The EU is often compared to a bicycle (you need to keep moving just to stay upright). That may or may not be true, but it is certainly more like a supertanker that takes time to alter course.
Third, ‘win-win’, mutual benefit in this and indeed any trading relationship is key. The UK must eschew the – largely discredited – approach best set out in Donald Trump’s book The Art of the Deal which could be characterised as zero sum, or “I win, you lose….”
Fourth, a related point, understand that you negotiate with, and not against, your counterpart. A fatal mistake of the UK in the Brexit Withdrawal Agreement negotiations was to regard the EU as an adversary, not a partner with whom to work to help to solve a common problem.
Fifth, the importance of transparency and widespread stakeholder consultations – be it Parliaments, business, civil society and so on. One’s stakeholders should be informed and consulted systematically so that at the end of the process there are no nasty surprises and the final results will be accepted. In a recent Financial Times Article (The Art of the Deal? Ten Steps to Fruitful Trade Talks. Financial Times Opinion page. Thursday 7 March 2024 – see article here) on how to negotiate trade agreements this author urged would-be negotiators to avoid what is known in the trade as the “Champignons de Paris” approach to one’s constituencies. In other words, do not treat your stakeholders like champignons de Paris, consigned for month on end to a dark cellar with buckets of s**t poured over them from time to time!
There are many other lessons, other areas of advice to share in due time but the above may constitute a practical guide for the UK minister or his/her negotiators as they prepare for next year’s TCA review, determine how to manage some potential friction around the sustainability and trade agenda, and assess the best way forward for the mutual longer-term health of UK-EU relations. One hopes they are listening.
the European Advocate 