Recent Developments in Trade Policies of the European Union

For the time being—and possibly for a considerable time to come—developments and prospects for the euro area are quite favorable. This upbeat outlook is underpinned by buoyant activity indicators and a supportive policy mix. High household and business confidence, rising capacity utilization and industrial production, strong job creation, and—so far—employment-friendly wage settlements point to sustained activity in the near term. Moreover, the macroeconomic fundamentals in the euro area appear much sounder than in previous recoveries.

Abstract

For the time being—and possibly for a considerable time to come—developments and prospects for the euro area are quite favorable. This upbeat outlook is underpinned by buoyant activity indicators and a supportive policy mix. High household and business confidence, rising capacity utilization and industrial production, strong job creation, and—so far—employment-friendly wage settlements point to sustained activity in the near term. Moreover, the macroeconomic fundamentals in the euro area appear much sounder than in previous recoveries.

1. Discussions on selected trade issues were held in Brussels on June 27-29, 2000 during a staff visit to European Union (EU) institutions.1 Meetings at the European Commission were attended by senior officials from the Directorate-General for Trade, the Directorate-General for Economic and Financial Affairs, and the Directorate-General for Development.

2. The Commission representatives confirmed the EU’s commitment to an early launch of a new global trade round—the Millennium Round—but admitted that the divergences that emerged in Seattle would require time to be resolved. Important differences of views persisted on the format and scope of negotiations, particularly on the inclusion of anti dumping, investment, competition policy, and “societal issues” such as health and environmental standards. While negotiations in agriculture and services had started officially in the framework of the “built-in agenda,” precise negotiating mandates and timetables had yet to be agreed. The Commission representatives welcomed the opening of these talks but indicated that their success could not be expected until they were integrated into broader negotiations. The staff encouraged the Commission to work with others toward resolving outstanding issues on the agenda in order to allow a prompt and effective start of new multilateral trade negotiations.

3. More broadly, the Commission officials reaffirmed the intention to pursue a more liberal trade regime. They noted that within the EU there was growing recognition that external trade liberalization and single market reforms were mutually supporting processes, fostering structural change and economic efficiency in the region. The mission acknowledged that, in the context of its WTO commitments, EU tariffs had continued to decline gradually, with a fall of the unweighted average tariff from 10 percent in 1995 to 7 percent in 2000, and a reduction in the average industrial tariff from 6 percent to 4 percent. However, sectors such as agriculture, processed food, textiles and clothing, footwear, and automobiles continued to enjoy a high level of protection, and anti-dumping activity seemed to be on the rise. In this connection, the mission also noted that slow progress in opening agricultural, textiles, and clothing markets frustrated many developing countries with a comparative advantage in those products, and that anti-dumping measures were concentrated in these sectors. High levels of protection in these areas are also a source of tension with industrialized countries, in particular as regards agriculture, which is often subject to high-profile disputes. The staff emphasized that the EU economy would derive substantial economic benefits from further liberalizing agriculture and other protected sectors because, as confirmed by recent studies,2 the gains from trade liberalization accrue predominantly from the reduction of a country’s own trade barriers.

Main Features of EU Trade Policies

Trade policies of the “Quad” trading partners (the EU, the United States, Japan, and Canada) are assessed every two years in the framework of the Trade Policy Review Mechanism of the WTO. The review is undertaken by WTO members, on the basis of reports by the Secretariat and the member under review. The latest review of EU trade policies was completed in July 2000.1 Key points emerging from this review are summarized below.

The Secretariat report confirms the gradual reduction of border protection in the EU. Markets for nonagricultural products are largely open, with an average tariff of about 4 percent and few quantitative restrictions for trading partners with “most favored nation” status. Tariffs for most industrial sectors are now very low, but sensitive areas such as textiles and clothing, footwear, certain chemicals, automobile and consumer electronics continue to enjoy substantial protection. The report also confirms the reduced incidence of quantitative restrictions, which have largely been removed as a result of the implementation of the Uruguay Round and the Single Market Program: the last voluntary export restraint agreement in place—the EU-Japan “consensus” on cars—elapsed at end-1999. However, in the view of some WTO members (particularly developing countries), the pace at which the EU is dismantling quotas inherited from the “multi-fiber agreements” remains a cause for concern. (Under the WTO Agreement on Textiles and Clothing, these quotas must be eliminated by 2005.) The EU maintains some product-specific quotas vis-à-vis a few non-WTO members, but these barriers are being reduced gradually. The Secretariat report notes that the three-fold increase in the number of anti-dumping investigations launched by the EU against third-parties in 1999 is likely to result this year in a marked rise in the number of anti-dumping measures in force.

Access to EU agricultural markets continues to be severely hampered by the Common Agricultural Policy (CAP).2 While the average tariff on agricultural imports has been reduced by about 8 percent since the end of the Uruguay Round, at over 17 percent it is more than four times higher than the average protection in the manufacturing sector. The highest tariffs affect imports of cereals, live animals, meat, dairy products, fresh fruits, sugar, and wine. Examples given in the Secretariat report indicate that duties levied on imports of fruits and vegetable juices range from 12 to 108 percent, while those on bananas range from 16 to 140 percent. The form of tariffication used by the EU (specific rather than ad valorem duties), while consistent with WTO rules, is cause for concern for many trading partners because it lacks transparency and is restrictive. On average, tariffs levied on processed foods are twice as high as those for raw agricultural products. In addition to border measures, agricultural markets remain distorted by pervasive CAP subsidies, accounting in 1999 for 45 percent of the EU budget (some US$50 billion).

The WTO report confirms that the EU and its member states are continuing efforts to liberalize access to EU services markets, although the degree of openness differs across sectors. In financial services, non-EU suppliers already benefit to a large extent from “single passport” provisions, allowing an institution licensed in one country to operate freely throughout the Union. The EU market for telecommunications services has also been opened considerably in the past three years, as a result of both domestic integration and the relevant WTO Agreement concluded in 1997. However, the benefits of single market liberalization have not yet been extended to other partners in the transport sector, and the EU continues to restrict its markets for audio-visual services.

The EU operates the largest network of bilateral trade agreements in the world. New agreements have recently been concluded with Mexico and South Africa. The WTO Secretariat report indicates that the EU trades on a most-favored nations basis with only eight countries in the world, although these countries account for more than half of the EU trade. The EU has recently been taking steps to strengthen the compatibility of its trade agreements with WTO rules, by increasing their scope and coverage. It is also engaged in a process aimed at granting duty- and quota-free access to the exports of the least-developed countries.

1 WTO Secretariat, Trade Policy Review of the European Union, forthcoming.2 The staff s view on the ongoing reform of the CAP in the context of Agenda 2000 are presented in SM/99/61.

4. The Commission representatives shared the staff’s concern that in many countries anti-dumping in practice was used too often as a tool of protectionism; they indicated that the EU was supporting a review of anti-dumping rules at the multilateral level. In textiles and clothing, they argued that the EU was already trading on a duty- and quota-free basis with many low-income countries in the context of preferential trade agreements, and that remaining quotas under the Multifiber Agreement would be dismantled by 2005. In agriculture, they indicated that the second reform of the Common Agricultural Policy would eventually translate into improved access for foreign products from all countries, but—in their view—negotiations should also take into account other dimensions such as rural development and environmental issues. The officials noted that the EU was prepared to discuss greater access for processed food imports and was carefully looking at the effects of tariff escalation in that area. However, they indicated that improved access for foreign products would only be acceptable to EU citizens if their concerns about food safety and consumer protection were being addressed during the negotiation.

5. The staff and the Commission representatives discussed the recent steps taken by the EU toward developing countries. Bilaterally, the EU was reorganizing its complex system of trade preferences with a view to gradually harmonizing the treatments offered to African-Caribbean-Pacific (ACP) countries and non-ACP countries, and making preferential access more compatible with WTO rules. First, for the higher-income ACP countries, unilateral preferences will be progressively transformed into WTO-compatible free-trade agreements. Second, these unilateral preferences will be re-oriented toward the least-developed countries (LDCs).3 The staff welcomed the planned extension of unilateral preferences currently available to least-developed ACP countries to all other LDCs, and efforts initiated by the “Quad4” (the EU, the United States, Japan, and Canada) in the WTO to grant LDCs duty-free access on “essentially all products.4” The staff and the Commission agreed that exceptions to such duty-free access should be minimized in order to make the offer economically meaningful. The staff hoped that, in the interest of the LDCs, rapid implementation of this initiative could be achieved and that it could be extended to include countries eligible for the HIPC Initiative.5 The Commission representatives pointed to other efforts undertaken by the EU in the multilateral context, in particular to grant developing countries more time to implement certain WTO Agreements, which was one of their main demands in Seattle, and to strengthen technical cooperation in support of LDCs to facilitate their integration in the global trading system.

6. Since the discussions in Brussels, the Commission has tabled a new proposal providing for full, duty- and quota-free access of LDCs exports (except arms) to the EU market. This proposal goes beyond earlier plans as exceptions—limited in the Commision’s proposal to sugar, rice and, bananas-—would be phased out within three years.6 The proposal is expected to take effect as soon as it is adopted by the EU Council, and will be implemented unilaterally and immediately upon adoption.

7. With regard to trade agreements, the staff noted that the EU had continued to negotiate free-trade agreements with a range of countries and regions. It had recently concluded negotiations with Mexico and South Africa and opened new talks with Chile and MERCOSUR. The reform of trade arrangements with ACP countries will also involve new free-trade agreements. In this context, the staff expressed concerns about the risks of pervasive trade diversion, in particular for those countries which traded with the EU on a most-favored nation basis. The staff also noted likely difficulties in managing an unwieldy pyramid of preferences. In reply, the Commission representatives reaffirmed their commitment to multilateralism but argued that free-trade agreements represented for many countries a first step toward integration into the world economy. They agreed that the EU system of preferences required increasing coordination within the Commission, but noted that the level of preferences tended to diminish as a result of multilateral liberalization.

8. Overall, the staff acknowledged the key role that the EU could play in achieving greater stability and openness in the world trading system. It welcomed the Commission’s support for the launch of an ambitious round of global trade talks, and its initiative in providing free-access for exports of the world’s poorest countries. In this connection, it is hoped that the latest proposal for duty- and quota-free access to the EU market for LDC exports is adopted promptly. In the staffs view, the EU could in addition step up efforts to resolve outstanding issues that have delayed the start of constructive, multilateral trade negotiations, including by addressing the most restrictive aspects of its own trade regime. From this angle, faster liberalization of agricultural markets—with a view to reducing costs to EU consumers and taxpayers, and to provide access to efficient exporters from developing countries—would be particularly desirable. In the same vein, a review of anti-dumping policy aimed at restricting its role to correcting non-competitive practices while preserving the benefits of negotiated market access would also be helpful. The EU, like all its trading partners, is encouraged to continue to bring its trade disputes to the WTO Dispute Settlement Body and to abide by its rulings. Finally, the staff urged the Commission to minimize incentives for trade diversion by pursuing regional and bilateral trade agreements in parallel with—and, if possible, at the same pace as—multilateral trade liberalization.

9. The staff intends to follow up on selected EU-trade policy issues in the context of its regular contacts with, and periodic visits to, EU institutions.

1

A comprehensive review of EU trade policies was recently completed by the World Trade Organization (WTO) (see Box 1 and www.wto.org for the Concluding Remarks by the Chairperson of the relevant WTO meeting). This note focuses on issues of particular interest to the Fund. The mission team comprised Messrs. Deppler (Head), Zanello (EU1), and Auboin (PDR).

2

See for example, The Millennium Round: An Economic Appraisal, European Commission (1999).

3

These include the 48 countries in the United Nations definition, for which exceptions to WTO permit differential treatment.

4

In May 2000, “Quad” members, as well as other members of the WTO, committed themselves to provide bound duty-free treatment to LDCs exports. The EU described its offer as one of the most generous, with exceptions limited to a few agricultural products. Textiles and clothing will be covered by the EU offer. Regarding the timing of implementation, the Commission indicated that EU Ministers will soon decide but expected support for a relatively rapid implementation,

5

There are ten WTO Members that are currently HIPCs but are not in the United Nations list of LDCs.

6

The trade preferences by the EU to ACP countries, which account for the bulk of the LDCs, already provide duty-free access on nearly 90 percent of the EU tariff lines. However, the preference system is complex, and contains numerous exclusions and exceptions in areas of interest to the countries concerned, particularly in agriculture.