European Union’s green reality check

The European Union (EU) has issued a bolder call for its approach on sustainability to be implemented in trade deals. A new document issued in February, calls for tougher enforcement of trade and sustainable development chapters in its agreements, which currently have little legal weight.

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At the same time, Brussels has made a bold call for a carbon border tax. In simple terms, this will require the taxation of imported goods from countries that don’t put a price on carbon - most of the world.

"Although opposition to the agreement has been presented as being about environmental concerns, there is a healthy dose of agricultural protectionism involved also.”

So, what do both policy initiatives mean?

First, the EU’s broader trade policy document - An Open, Sustainable and Assertive Trade Policy - essentially puts the EU’s Green Deal front and centre in any trade agreements. Within the policy document one idea is key: increasing the enforceability of trade and sustainable development (TSD) chapters within trade agreements.

TSD chapters generally don’t have the same legal weight as other agreements, as they don’t cover trade liberalisation commitments; they recognise the importance of other treaties and provide a platform for cooperation on sustainable development.

The EU is attempting to change this by including commitments in other treaties– such as climate change and human rights treaties - in its trade agreements as binding, enforceable and grounds for dispute settlement. This would be backed by a Chief Trade Enforcement Officer.

Second, the carbon border adjustment mechanism (CBAM), is a proposal to ‘equalise’ the cost of imported goods that are produced in countries that don’t have a price on carbon. The idea is that because European manufacturers are paying for that externality via a carbon tax, this creates a penalty for European manufacturers.

The scope for the CBAM is yet to be determined, however, it is likely to be focused on heavy and carbon intensive industry such as steel production. Other areas such as agriculture may be included; the EU has generally taken issue with agricultural products from countries with higher levels of deforestation. This may, however, get complicated as it could raise the cost of some farming inputs such as fertiliser and feed.

Regulatory reach

The broader trade policy approach is in some ways a response to anti-trade sentiments in Europe; there is a push to increase the palatability of trade deals. But it is also about the EU seeking to extend its regulatory reach into other markets.

Although the principles may be noble, Brussels’ approach has had significant reality checks both internally and externally.

Internally, the EU-Mercosur Agreement has been completed, but yet to be signed and ratified. There is significant opposition to ratification among member states. France and Austria have both said they won’t approve the EU's completed trade agreement because of sustainability concerns. The additional ‘enforcement’ push by Brussels may not be enough to ameliorate concerns among member states.

Although opposition to the agreement has been presented as being about environmental concerns, there is a healthy dose of agricultural protectionism involved also, particularly around the meat trade.

Externally there have been other reality checks. Negotiations for new agreements, such as the Australia-EU agreement and Indonesia-EU agreement were already difficult, but the new emphasis on sustainability and environment has by a number of accounts caused further wrinkles in the negotiations. They have also been put offside by the idea of the CBAM; better market access for goods could be completely undone by a new and unpredictable tariff at the EU border.

But the largest is the completed EU-China investment agreement, which now looks dead in the water. The agreement had been hailed – particularly in Beijing – as a key plank for expanding trade and investment between the EU and Asia. This has become particularly important for EU exporters as they seek new markets to the East, and since China has become the EU’s largest trading partner. 

Reoriented strategy

The agreement was already going to face some level of scrutiny in Brussels over human rights concerns, but this has been complicated further by EU brands such as H&M ceasing to use Xianjiang cotton for the same reason. The Chinese government has effectively sanctioned a boycott of these brands for their stance. EU and Member State policymakers will now question the value of the agreement if any attempt to uphold ‘European values’ is blocked.

However, these developments place a check on exactly how far the EU can push its ‘non-trade’ agenda through its trade deals. On one hand, EU Members need sustainability concerns to make agreements more palatable for its constituents; on the other, the rest of the world doesn’t consider these a priority. If the EU wants to tap into emerging markets – and not rely on a sclerotic Eurozone -- it may need to reorient its strategy.

One such re-orientation being supported by a number of countries – including the US, Australia and Canada – is reducing trade barriers on goods that have a positive impact on environmental outcomes, such as components for energy efficiency and renewable fuels. This has had significant political support across intergovernmental forums such as APEC, and is currently being championed by Trade Minister Dan Tehan as part of his current road-trip to Europe.

The logic here is simple: it’s about reducing trade barriers rather than raising them.  

Khalil Hegarty, Kristen Bondietti and Jon Berry are Directors at ITS Global

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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