CONFERENCE PAPER
NATHANIEL W. LALONE
CENTRE OF INTERNATIONAL STUDIES, CAMBRIDGE
The Variable Geometry of the Community’s Foreign Economic Relations:
The Common Commercial Policy and Effectiveness in International Trade Negotiations
Introduction
Studies of EU foreign policy usually dwell on ‘actorness’ or notions of ‘presence’ to discover if
the EU can claim itself to be an actor on the international stage. In the context of international
trade, it is tempting to think of this issue as settled; after all the Treaty of Rome specifically gives
the Community the competence to represent the Member States in international negotiations on
trade in goods, which the Commission has done since the 1960s. However, the rapidly expanding
terrain covered by the international trade agenda starting during the Uruguay Round in 1986 has
led to an extraordinarily complicated delineation of competence and representation between the
Member States and the Commission. So much so that the web of relationships (exclusive
Community competence, mixed competence, or cooperative arrangements between Member
States) is best described as a form of ‘variable geometry’ that changes depending on the subject
matter.
In the context of such a complex and confusing set of legal and institutional arrangements, how
can the Community’s effectiveness in international economic affairs be determined? This paper
adapts Ginsberg’s ‘impact theory’ of EU foreign policy to the Community’s membership of the
World Trade Organisation (WTO) as a partial step towards answering this question. The
analysis covers three case studies: EC-US trade disputes before the WTO Dispute Settlement
Body; the Financial Services Agreement negotiations of 1995 and 1997; and finally the WTO
Ministerial meetings at Seattle and Cancún.
By looking at these three instances in which the relative power of the Commission and the
Member States differs, this paper should present the beginnings of a methodical understanding of
the sliding scale of effectiveness in international trade: when is the Community most successful?
What conditions promote or impede the EC from obtaining its goals?
The Common Commercial Policy and the Actorness/Presence Debate
The two ‘indispensable’ qualities of being an international actor are ‘actorness’ and ‘presence’.1
It is often assumed that the EC possesses both, but it is not always clear, and may vary from one
policy area to another.2 Presence is defined as a way to explain the increasing role of the EC on
the international stage while at the same time recognizing that the EC is not a state; to have
presence, an actor must have considerable structure, salience, and legitimacy in the international
sphere.3 An international actor has been defined by Gunnar Sjöstedt as one who is delimited
Christopher Hill, ‘The Capability-Expectations Gap, or Conceptualizing Europe’s International Role’, Journal of
Common Market Studies, Vol. 31, No. 3 (September 1993), p. 308.
2
Charlotte Bretherton and John Vogler. The European Union as a Global Actor. London: Routledge (1999), p. 20.
3
Roy Ginsberg, ‘Conceptualizing the European Union as an International Actor: Narrowing the CapabilityExpectations Gap’, Journal of Common Market Studies, Vol. 37, No. 3 (September 1999), p. 448.
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CONFERENCE PAPER
NATHANIEL W. LALONE
CENTRE OF INTERNATIONAL STUDIES, CAMBRIDGE
from others and its environment, is autonomous and possesses certain structural prerequisites
such as legal personality, a diplomatic corps, and the ability to negotiate with other international
actors.4 Caporaso and Jupille identify the need for recognition by outsiders, the legal authority to
act, autonomy, and finally cohesion.5
While it is widely accepted that the EC has significant presence at the international level,6 the
EC’s status as an actor is less certain. It is generally accepted that the EC does possess presence
and enough actorness to count as an international actor in the realm of the Common Foreign and
Security Policy (CFSP).7 However, the abilities of the EC to act have been talked up to the point
that a capability/expectations gap has emerged, in which the EC finds itself unable to respond
effectively and in such a way as other actors have been led to expect. This has not been as
pronounced a problem in international economic relations until recently: for the first 30 years of
the common commercial policy, the Commission’s longstanding exclusive competence over
trade in goods has ensured that it is an actor.8
The European Community’s Common Commercial Policy (CCP) has a long history dating back
to the original Treaty of Rome in 1957. The major goal of the Treaty of Rome in setting up the
European Community was to create a common market, part of which included the creation of a
customs union with a Common Customs Tariff (CCT). The legal authority for this was provided
in Article 133 EC (ex Article 113) that granted exclusive competence in trade matters to the
Community.9 This clause of the Treaty quickly became the Treaty provision most frequently
used by the Community in its capacity as an international actor. As a result, the European
Community has become one of the most active members of the global trading regime with over
9,000 separate agreements and protocols with other countries and trading blocs. It has also
emerged as one of the two most powerful actors in international economic relations.10
This early experience with the common commercial policy offers us a mechanism to link legal
discourse with more traditional foreign policy concepts. Taking the example of Article 133 of the
Treaty of Rome, we see that there is a relationship between Community competence and
actorness/presence: the Community’s exclusive right to represent EC Member States on issues of
trade in goods gave the EC the legitimacy to become a very active and well-respected member of
the international trade system. Therefore, granting the Community competence in trade matters
can be seen as the proximate cause of both presence and actorness for the EC in this field.
4
Gunnar Sjöstedt, The External Role of the European Community. Farnborough: Saxon House, 1977.
James Caporaso and Joseph Jupille. ‘States, Agency, and Rules: The EU in Global Environmental Politics’, in C.
Rhodes, ed., The European Union in the World Community. Boulder: Lynne Rienner, 1998.
6
Bretherton and Vogler, supra n. 68, p. 46; Ginsberg, supra n. 71, p. 448.
7
Roy Ginsberg, The European Union in International Politics: Baptism by Fire. Oxford: Rowman & Littlefield,
2001. pp. 1-21.
8
Id. pp. 47-57 passim.
9
Article 113 of the original Treaty of Rome was renumbered in the 1990s and is currently Article 133. To avoid
confusion, the article will be referred to as Article 133. The text of the original article read as follows: ‘The
Common Commercial Policy shall be based on uniform principles, particularly in regard to changes in tariff rates,
the conclusion of tariff and trade agreements, the achievement of uniformity in measures of liberalization, export
policy, and measures to protect trade such as those to be taken in the event of dumping or subsidies’.
10
The other is, of course, the United States. For a good statistical summary of the Community’s increasing role in
international trade, see Charlotte Bretherton and John Vogler, The European Union as a Global Actor (London:
Routledge, 1999), Chapter 2, ‘The EU as an Economic Power and Trade Actor’.
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NATHANIEL W. LALONE
CENTRE OF INTERNATIONAL STUDIES, CAMBRIDGE
Unfortunately, this happy circumstance did not last for long. Although Article 133 (ex Article
113) of the EC Treaty grants exclusive competence in external trade policy to the Community,
this provision was written when the international trade regime only focused on trade in goods,
which remained the case throughout the 1960s and 1970s.11 This ensured that the Community
retained its competence in the foreign economic relations and maintained its attributes of
presence and actorness through the successive GATT negotiating rounds.12
By the 1980s, though, the Uruguay Round GATT negotiations began to address additional
issues, including trade in services (leading to the General Agreement on Trade in Services, or
GATS) and trade related intellectual property measures (TRIPs). This was a clear departure
from previous trade rounds, which focused exclusively on trade in goods. There were strong
differences of opinion between the Commission and the Member States regarding who had the
competence to negotiate these new issue areas. The Member States agreed to delegate
negotiating authority to the Commission for the duration of the Uruguay Round, without
however waiving their rights to take the matter before the European Court of Justice. After the
completion of the Uruguay Round, the Community’s competence was challenged before the
ECJ. The decision ended the Community’s exclusive competence over external economic
relations.13 In so doing, the ECJ opened a Pandora’s box of legal complications and they were
roundly criticised by European legal scholars.14
The ECJ’s Opinion 1/94, on the Agreement establishing the WTO, discussed the scope of the
common commercial policy, the implied competence of the Community, and the ‘duty of
cooperation’ between the Member States and Community institutions.15 The ruling established a
new system of ‘mixed competence’ in trade in services and trade in intellectual property, which
11
This brutally oversimplifies the path of the law during these years. In fact, the Court of Justice used its case law
to continually expand the field of Community competence to match the growth of international trade in goods issues
using a doctrine of ‘implied Community competence’. See especially, Case 22/70, Commission v. Council [1971]
E.C.R. 263 (‘ERTA’); Joined Cases 3,4 and 6/76, Kramer [1976] E.C.R. 1279 (‘Kramer’); Opinion 1/76 [1977]
E.C.R. 741; and Opinion 2/91 [1993] E.C.R. I-1061. There is an existing corpus of work that discusses these cases
in much more detail than space allows for here. See, e.g., Alan Dashwood, ‘The classic authorities revisited’, pp. 120; Alan Dashwood, ‘The Attribution of External Relations Competence’, in Alan Dashwood and Christophe
Hillion, eds., The External Relations Law of the E.C. (Cambridge: CELS, 2000), 115-138; Pierre Pescatore,
‘External Relations in the Case Law of the Court of Justice of the European Communities’, Common Market Law
Review 16 (1979): x-y; and Takis Tridimas and Piet Eeckhout, ‘the External Competence of the Community and the
Case-Law of the Court of Justice: Principle versus Pragmatism’, Yearbook of European Law 14(1994): 143-177.
12
This does not mean, of course, that the Member States were left out in the cold. Through the ‘113 Committee’ of
national representatives, the Member States approved negotiating texts and supervised the negotiating work of the
Commission. However, the adoption of the final text was done without approval by national parliaments.
13
Julio I. Baquero Cruz, ‘Disintegration of the Law of Integration in the External Economic Relations of the
European Community’, Columbia Journal of European Law 3 (Winter/Spring 1997): 258-259; Jacques H.J .
Bourgeois, ‘The EC in the WTO and Advisory Opinion 1/94: An Echternach Procession’, Common Market Law
Review 32 (1995): 779-782.
14
See, inter alia, Pierre Pescatore, ‘Opinion 1/94 on “Conclusion” of the WTO Agreement: Is There an Escape from
Programmed Disaster?’, Common Market Law Review 36 (1999): 387.
15
The following summary of the Court’s opinion that conforms to generally accepted scholarly interpretation. For
additional commentary, see, e.g., Tridimas, ‘The WTO and OECD Opinions’, pp. 50-55; Meinhard Hilf, ‘The ECJ’s
Opinion 1/94 on the WTO – No Surprise, But Wise?’, European Journal of International Law 6 (1995): 250-256;
and James Callaghan, ‘Who Will Call the Shots in the Areas of Services and Intellectual Property in the European
Union?’, Loyola of Los Angeles International Comparative Law Journal 18 (June 1996): 508-518.
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NATHANIEL W. LALONE
CENTRE OF INTERNATIONAL STUDIES, CAMBRIDGE
effectively fractures competence over external trade matters.16 The Commission claimed that
trade in services and intellectual property fell within the Community’s exclusive competence
either through Article 133 EC (ex Article 113) or by virtue of the Community’s implied powers
discussed in the Court’s previous case law.17 However, rather than continue to expand the
Community’s competence, the Court instead appeared to heed Member State objections and
limited the scope of Community competence regarding the WTO.18 In so doing, the Court made
a definitive break with its previous practice and ended its traditional role of extending the
common commercial policy.
For the first time, the Court explicitly awarded the Community exclusive competence over trade
in goods.19 This was the end of the good news for the Commission. The Court agreed with the
Commission that Community case law embraces a dynamic and evolutionary view of trade
policy.20 The ECJ agreed, saying that trade in services could not be excluded from the scope of
Article 133 EC (ex Article 113). However, the ECJ also analyzed the GATS agreement to
determine to what extent ‘services’ falls within the scope of Article 133 EC (ex Article 113).
GATS offers a quadripartite definition of services.21 The Court held that only the first mode of
supply, cross-frontier supplies, falls within the scope of Article 133 EC because the services,
and not persons, are moving, much like what happens with trade in goods.22 The Court also
rejected the Community’s exclusive competence to conclude the TRIPS agreement. The major
problem here was procedural. The Community’s competence to harmonise intellectual property
16
For those of you who want to know more details about mixity, here goes: mixed agreements come in three types.
First, ‘horizontal mixity’ exists when the Community has competence for one part of a given agreement and
Member States for another part. In areas within their own powers, Member States do not need to follow Community
procedures. Second, ‘vertical mixity’ exists when the Community does not have the ability to administer all aspects
of an agreement in a field which otherwise comes within its exclusive power. This agreement does not affect the
division of powers, and vertical mixity has also been called ‘false mixity’ because the Member States have no
autonomous power to conclude the agreement. The third type of agreement refers to situations in which powers
overlap. In this case, while Member States do not technically have to follow Community procedure, their
overlapping nature requires that Community procedure be applicable. For a more thorough review, see Nanette
Neuwahl, ‘Joint Participation in International Treaties and the Exercise of Power by the EEC and its Member
States: Mixed Agreements’, Common Market Law Review 28 (1991): 717-.
17
See supra n.11 for references dealing with the doctrine of implied competence. For a good summary of the legal
issues presented to the Court of Justice, see Piet van Nuffel, ‘WTO Agreement’ (Case Note), Columbia Journal of
European Law 1 (Spring 1995): 338-354.
18
Meinhard Hilf, ‘Unwritten EC Authority in Foreign Trade Law’, European Foreign Affairs Review 2 (1997): 440.
19
Which is the subject of an overly cheerful commentary by Alec Burnside, ‘The Scope of the Common
Commercial Policy Post Opinion 1/94: Clouds and Silver Linings’, in Alan Dashwood and Christophe Hillion, eds.,
The External Relations Law of the E.C. (Cambridge: CELS, 2000), 152-159.
20
The Commission was referring to a passage from Opinion1/78, Natural Rubber Agreement [1979] E.C.R. 2871
which held that the CCP covers not only trade liberalization measures but also other instruments regulating
international trade. Opinion 1/78, Natural Rubber Agreement [1979] E.C.R. 2871.
21
The quadripartite definition of services is as follows: (1) cross-frontier supplies, which does not involve any
movement of persons, (2) consumption abroad, in which the consumer moves to the country in which the supplier is
established, (3) commercial presence, in which a company establishes a local presence in the country in which the
service will be supplied, and (4) the presence of natural persons from a WTO member country, which allows a
supplier from one member country to supply services within the territory of any other member.
22
The Court seems to define the Common Commercial Policy as a method of avoiding deflections of trade; it would
be impossible to maintain an internal market if each Member State could follow its own commercial policy.
Services provided on a cross-border basis are more susceptible to deflections of trade than other modes of supply,
which gives the close relationship to trade in goods, and therefore inclusion inside the CCP.
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CONFERENCE PAPER
NATHANIEL W. LALONE
CENTRE OF INTERNATIONAL STUDIES, CAMBRIDGE
laws internally was based on Treaty articles that provide for specific voting rules and
procedures. Therefore, exclusive competence would allow the Commission to adopt the TRIPS
agreement and thus harmonise internal intellectual property laws while bypassing the procedures
required in the Treaty.23
The final relevant part of the Opinion is the so-called ‘duty of cooperation’.24 Because the Court
refused to accept the Commission’s argument that GATS and TRIPS fell within the
Community’s exclusive competence, the Court concluded that the Community and the Member
States were jointly competent to conclude both agreements. The Court went on to set out the
duty of cooperation: ‘where it is apparent that the subject-matter of an agreement…falls in part
within the competence of the Community and…the Member States, it is essential to ensure close
cooperation…both in the process of negotiation and conclusion and in the fulfilment of the
commitments entered into’.25 Thus, the Court requires that, in cases of mixed agreements, the
Member States and the Community act together.26
The Court’s reasoning severely complicates our understanding of the Community’s presence
and actorness in international economic relations. Beyond ‘mode 1’ services and counterfeit
policy, the Community does not have exclusive competence in any of these new fields. Because
Member States are involved in the adoption of any final negotiated treaties under this ‘mixity’,
they retain a more important role than in traditional trade in goods issues. This creates an almost
limitless sliding scale of competence across different issue areas, with differing roles for the
Commission and the Member States in each.
This raises two possibilities that run the risk of disrupting the Community’s ability to function
effectively in international trade negotiations. The continuing role of the Member States in the
negotiation and conclusion of the agreements could make the Community an inflexible player,
immobilised by internal dissent. This could lead the EC to undertake a ‘bump-on-a-log’ strategy
in which Community negotiators offer a take-it-or-leave-it agreement with no room for
bargaining. Similarly, periods of Community immobilisation could be further complicated by an
23
The Court held that only rules prohibiting the release of counterfeit goods into free circulation falls within the
Common Commercial Policy because they were measures to be applied at the external borders of the Community
and had counterpart internal legislation.
24
For a general introduction on the difficulty of coordinating the Member States and the Community, see Jorn Sack,
‘The European Community’s Membership of International Organizations’, Common Market Law Review 32 (1995):
1227-1256.
25
Opinion 1/94, ¶ 108. For a thoroughly exhaustive (and exhausting) explanation of this duty regarding the
common commercial policy, see Joni Heliskoski, ‘The “Duty of Cooperation” between the European Community
and its Member States within the World Trade Organization’, Finnish Yearbook of International Law 7 (1997): 59133.
26
Common Market Law Review editorial comment, ‘The aftermath of Opinion 1/94 or how to ensure unity of
representation for joint competences’, Common Market Law Review 32 (1995): 387. The editorial was of course
referring to the difficulties that the Community has faced in managing its duty of cooperation within the framework
of the Food and Agriculture Organization. See, e.g., Joni Heliskoski, ‘Internal Struggle for International Presence:
The Exercise of Voting Rights within the FAO’, in Alan Dashwood and Christophe Hillion, eds., The External
Relations Law of the E.C. (Cambridge: CELS, 2000): 79-99; Christiaan Timmermans, ‘Organising Joint
Participation of the EC and Member States’, in Alan Dashwood and Christophe Hillion, eds., The External Relations
Law of the E.C. (Cambridge: CELS, 2000): 239-247. For a more positive view, see Stephen Hyett, ‘The Duty of
Cooperation: A Flexible Concept’, in Alan Dashwood and Christophe Hillion, eds., The External Relations Law of
the E.C. (Cambridge: CELS, 2000): 248-253.
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NATHANIEL W. LALONE
CENTRE OF INTERNATIONAL STUDIES, CAMBRIDGE
inability for the Community institutions – Commission and Member States – to ratify a treaty
due to a veto by a dissenting Member State during the ratification stage. This would risk making
the Community seem unable to make good on negotiated commitments. Taken together, these
problems pose a threat to the Community’s actorness and could even begin to chip away at its
presence in foreign economic affairs. Therefore, while the Community can certainly claim
presence in international economic relations, its claims to full actorness must be understood as
limited by the continuing role granted to the Member States by the ECJ’s Opinion 1/94.27 The
potentially fallout from these legal complications is mind-boggling. This paper restricts itself to
the WTO because the permanent presence of mixity and its institutionalised structure makes it an
ideal way to assess the effects of mixed competence on the Community’s actorness.
An ‘Impact Theory’ of Community Effectiveness
Given that we are restricting our analysis to the World Trade Organization, it is clear that the
problems encountered by the Community will not be as pronounced as in the so-called ‘fourth
pillar’ of trade-related issues. Therefore, the debate regarding presence and actorness is relatively
settled: they both exist, although Community ‘actorness’ is limited by the institutional hurdles
thrown up by the Court in Opinion 1/94. A good way of assessing the constraining effects of this
mixity is by asking: how effective is the Community as an international economic actor in the
WTO?
To begin answering this question, we must turn to what is meant by ‘effectiveness’. Roy
Ginsberg’s study of European foreign policy (EFP) in The European Union in International
Politics outlines a useful theory that is then applied to traditional security- and defence-based
policy areas. Ginsberg argues, convincingly, that one of the reasons that the European Union 28 is
not taken seriously as an international actor is because international relations scholars try to
measure the EU using a Westphalian yardstick. Because the EU is not a nation-state, it cannot be
a surprise that it fails to meet traditional IR expectations.29 Even more distressing, the EU often
does not trumpet its foreign policy successes because of fear of a political backlash from
Member States and Euro-sceptic public opinion.
Therefore, Ginsberg proposes an impact theory of EFP actions. When talking about the EU
having external political impact, he means that the EU is able ‘to effect a change or modification
in the behaviour or domestic, foreign, or security policy of a non-Member’.30 It does so either by
what the EU ‘is’ or what it ‘does’. The ‘is’ is related to notions of presence: the size, assets, and
resources of the Community make it consequential. In trade terms, the enormous size of the
internal market and the desire for third countries to gain access to it gives the EC impact. The
‘does’ refers to the activities of the Community; when the EC has political impact for what it
does, this demonstrates actorness as well as the potential for actor significance.31
27
For a good overview of the current state of play in the powers between Member States and the Commission, see
‘Trade Talks: Who Negotiates and How?’, http://trade-info.cec.eu.int/doclib/html/116420.htm.
28
Ginsberg uses the EU as the relevant European actor in his study; this is appropriate, given that CFSP is part of
the second, and therefore non-Community, pillar of the Union. I will continue to refer to the Community because
the EC – and not the EU – has membership in the World Trade Organization.
29
See Ginsberg, op cit, p. 5.
30
Id. at 49.
31
Id. at 52.
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NATHANIEL W. LALONE
CENTRE OF INTERNATIONAL STUDIES, CAMBRIDGE
It is this notion of actor significance that is the point of departure for this paper. The theory here
is adapted to take into account two shortcomings in Ginbserg’s analysis. First, it is Ginsberg’s
desire to move beyond the actor/presence debate that drives his focus on significance; however,
he restricts himself to simply measuring the level of the impact of EC foreign policy outputs on
third countries. He deliberately chooses not to gauge these outputs in terms of the goals set by
the EC. This may well be understandable for traditional foreign policy actions, where there is a
significant capability-expectations gap. However, it is rather inapposite for looking at the World
Trade Organization; rather than operating in a vacuum, the WTO provides a series of repeated
interactions and negotiations within a well-established intergovernmental structure.
Additionally, as mentioned above, international economic affairs is the longest-lasting and most
successful of all EC foreign policy ventures. Therefore, Ginsberg’s notes of caution need not be
repeated for international trade issues and it would be wiser to raise the bar of the analysis and
match foreign policy outputs with the goals set by the EC in trade matters.
The second adaptation to the theory is to de-emphasize the ‘is’ part of the impact theory.
Because of the enormous size of the internal market, the mere existence of the EC makes it a
consequential member of the WTO. According to Ginsberg’s rubric of levels of impact, the size
of the internal market is such that the EC’s simple existence ensures that it has significant
impact on third parties – already the most potent category in Ginsberg’s analysis. Indeed, for a
very long time, the intense internal bargaining that was required to reach an agreed set of trade
negotiating instructions gave the EC precious little room for manoeuvre.32 This lowestcommon-denominator approach meant that, because of what the EC ‘was’, it could remain a
stationary player and bend other actors to its will.33 The EC was in fact so powerful that its
inability to adjust to ‘deal-breaking’ American demands at the end of the Uruguay Round led the
Clinton Administration to back off its repeated threats to scupper a final agreement.34 Because
of the EC’s vast potential as an actor in the WTO, it is certainly too complacent of us to allow
this type of stationary inactivity to be evidence of significant impact. Rather, it is more
worthwhile to assess how active the EC is in obtaining its goals. This has two advantages: first,
it shows a certain confidence that the EC is not simply a roadblock to international agreements
that must be gotten over, and second, it raises the level of expectations for the EC. To be
effective, then, is to be in active pursuit of defined goals and then to obtain them.
This is the approach taken in this paper: rather than simply an impact theory based on measuring
the effects of the EU on third parties, this theory has been strengthened to reflect the higher
This is because the Community’s collective position can be so easily captured by the most conservative Member
State and the threat of defection by any one Member State can immobilise the entire Commission delegation. See
Sophie Meunier, ‘What Single Voice? European Institutions and EU-US Trade Negotiations’, International
Organization, vol. 54, No. 1 (Winter 2000): p. 132.
33
This could be done for a variety of reasons, including a deliberate strategy of hands-tying or simply due to the
demands of the most conservative Member State, whose opposition could scupper any potential deal. Meunier,
‘Single Voice’, p. 106.
34
This refers to the failed ‘Blair House Accord’ where the EC negotiator, Sir Leon Brittan, made a commitment to
US Trade Representative Mickey Kantor regarding agricultural and audiovisual policy which was then disowned by
the French government. The failure to reach unanimity in the Council meant that the US was unable to obtain the
concessions it needed to secure passage through Congress. Nevertheless, President Clinton had to back down
because there was no other deal available given the institutional deadlock in the Council.
32
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NATHANIEL W. LALONE
CENTRE OF INTERNATIONAL STUDIES, CAMBRIDGE
expectations we should have for the EC in the context of the WTO. The theory also takes into
account the challenges posed by mixity in that the institutional and legal burdens placed on the
EC within the framework of the WTO could impede the effective use of its power. We now
move on to three case studies that will assess the level of EC effectiveness in the WTO and
whether and how this effectiveness has been compromised by mixity.
Case 1: The Financial Services Agreement of 1995
Trade in financial services was originally meant to be part of the conclusions to the Uruguay
Round. However, no agreement could be reached by the end of the negotiations, due to
American reluctance to open its financial markets in the absence of serious liberalizing
commitments from participating countries.35 Instead, negotiators managed to cobble together an
interim agreement that essentially extended the deadline for negotiations to 1 July 1995; 36 this
meant that the ensuing negotiations were done under the ECJ’s system of mixed competence.
These negotiations took place within the Trade in Services committee of the World Trade
Organization and were a fully multilateral initiative on the single issue of financial services.
There were factors militating both for and against an active, constructive role by the EC. The
creation of the single market in financial services instituted during the late 1980s as part of the
Single Market Programme meant that the Member States were already used to cooperating in this
area and had already adopted common rules to govern the policy sector.37 This would suggest a
high potential for policy convergence among Member States and a consequent minimisation of
internal dissent. Nevertheless, the EC’s reluctance to address financial services issues during the
Uruguay Round and the inability to force issue linkage, it would have seemed unlikely that the
EC would play an active, or even constructive role in the FSA.
During the course of the 1995 negotiations, the United States continued to press other
participants – principally developing countries and Japan – to table better liberalising offers than
those put forward during the Uruguay Round. Despite this pressure and a public appeal from the
WTO Director General38, in June 1995 the United States announced that it would not offer mostfavoured nation status in trade in financial services.39 This was not a withdrawal, as is
sometimes thought; rather, it meant that though the United States would sign the deal, it would
not open its financial markets any further in order to maintain bargaining leverage for the future.
This abrupt US volte-face raised the ugly spectre of one country after another bailing out of the
financial services accord and thereby shattering the credibility of the fledgling World Trade
35
U.S. Department of the Treasury. National Treatment Study. Washington, D.C.: GPO, 1998. p. 113.
Roger Kampf, ‘Liberalisation of Financial Services in the GATS and Domestic Regulation’, International Trade
Law Review, vol. 5 (1997), p. 155.
37
This need not have been the case. See, e.g., the failure to cooperate in the Multilateral Agreement on Investment
negotiation. Alasdair Young, Extending European Cooperation: The European Union and ‘new’ international trade
agenda. Manchester: Manchester UP (2002), pp. 85-109.
38
Renato Ruggiero, ‘WTO: Framework for financial freedom’, Wall Street Journal, 22 June 1995, p. A16.
39
‘U.S. rejects WTO plan on opening financial markets’, Wall Street Journal, 30 June 1995, p. A9.
36
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NATHANIEL W. LALONE
CENTRE OF INTERNATIONAL STUDIES, CAMBRIDGE
Organization.40 The European Union, sensing that it would be best to lock in the current offers
and maintain some political momentum in the WTO, moved quickly to salvage the negotiations.
The Council of Ministers held an emergency meeting in Geneva and agreed that negotiations
should be extended for four weeks, and tasked the Commission with finding a solution to the
crisis. Strikingly, the only debate within the Council would be the eventual duration of another
interim agreement; there were no substantive disagreements among the Member States regarding
the need for financial services rules at the international level. The EC worked tirelessly to
hammer out an agreement that would maintain the liberalisation offers made before the US
abandoned the negotiations. One trade diplomat said: ‘It’s the WTO minus the US’, as the
mantle of leadership dropped by Washington was rapidly picked up by Brussels.41
The EC moved quickly to shore up support among participating countries via a ‘potent mixture
of diplomacy, public cajoling and hard bargaining’.42 Although the EC was able to convince 30
countries to extend the negotiations by four weeks, the US proved too much in thrall to domestic
pressures and remained on the sidelines. Further holdouts included Japan, South Korea,
Thailand, and India. Steady EC pressure brought the latter two into the fold, and US pressure on
Japan and South Korea forced them back to the negotiating table. One day before the expiration
deadline, with Japan and South Korea committed to signing the accord, an interim deal was
concluded that locked in – and even made some improvements in – the commitments made prior
to the US withdrawal.43
There can be no question that the EC demonstrated effectiveness in this negotiation. By any
standard, this was an enormous success for the EC. The Wall Street Journal proclaimed that
‘now Europe is the leader’, and the final agreement a ‘coup for the European Union’.44 The EC’s
success earned grudging respect even from representatives of American Express, who noted
Europe’s leadership as ‘a signal departure from past practice’.45 Referring back to our theory, the
EC’s actions must be judged on both the relationship between goals and outcomes as well as the
EC’s level of pro-activity.
The relationship with goals and outcomes is relatively clear-cut. The EC obtained an agreement,
which is certainly better than not having had any agreement at all.46 Furthermore, the agreement
not only locked in liberalisation commitments, the EC was able to wrest a few improvements
‘WTO extends financial services talks as US balks at opening markets further’, Wall Street Journal, 3 July 1995,
p. A4; ‘Financial services agreement vital’ (Letter from Mats Hellstrom, Swedish Minister for Foreign Trade),
Financial Times, 26 July 1995.
41
‘EU ministers agree rescue plan for global financial services pact’, Financial Times, 1 July 1995.
42
‘EU plans drive to back financial services deal: Diplomatic offensive aims to win over US’, Financial Times, 3
July 1995.
43
‘Global trade deal agreed over financial markets: Japan and South Korea to join pact to open markets’, Financial
Times, 27 July 1995.
44
‘Trade official is “close” to limited pact to liberalize global financial services’, Wall Street Journal, 25 July 1995,
p. A2; ‘WTO countries agree to relax curbs on foreign banking, financial services’, Wall Street Journal, 27 July
1995, p. A2.
45
Brian Woodrow, ‘The World Trade Organization and the Liberalisation of Trade in Insurance Services’, Etudes et
Dossiers, Working Paper Series of the Geneva Association, no. 204, p. 25.
46
Indeed, the Agreement was criticised for not being much more than a commitment to maintain current levels of
liberalisation. Piritta Sorsa, ‘The GATS Agreement on Financial Services – A Modest Start to Multilateral
Liberalization’, IMF Working Paper WP/97/55 (May 1997): p. 12.
40
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NATHANIEL W. LALONE
CENTRE OF INTERNATIONAL STUDIES, CAMBRIDGE
from Members with significant market share in financial services. The interim deal also
breathed life into the World Trade Organization, which stood to lose a great deal of credibility if
the negotiations had completely collapsed.47 By ensuring the success of an interim agreement,
the EC set the stage for the permanent Financial Services Agreement signed in 1997. It is
tempting to want to dock a few points because of the clearly inadequate nature of the
liberalisation commitments, but it seems that the real desire of the negotiators was to ensure a
lock-in of existing commitments and maintain the legitimacy of the WTO.
The EC’s level of activity is also undoubtedly proactive. Rather than sit on the sidelines and let
its intransigence speak for itself, Sir Leon Brittan and the Commission proved themselves to be
flexible, adaptable, and effective negotiators by taking the initiative away from the United States
and securing a deal. There are two caveats to this conclusion. First, because the Community
already had instituted a European-level financial services policy and was only promising to
maintain that current level of openness, the scope for potential Member State conflict was very
low. The convergence of Member State opinion on this issue, and their desire to obtain an
agreement established what could be called a ‘purposive unity’ – a near-unanimous intra-EC
agreement on priorities and acceptable outcomes – between Member States and the Commission
and they were able to work together effectively.
Secondly, we should not overstate the extent to which the EC became the leader of the
international trade regime. During the 1997 agreement, the EC played a much lower-profile role;
after all, they had signed the 1995 interim accord, so the EC’s demands were essentially already
met. After 1995, even in financial services, leadership in the sector returned to the United States,
who was the driving force behind the 1997 Final Agreement. Therefore, even though the EC
demonstrated an impressive capacity for global trade leadership in the WTO, this capacity was
conditioned on the absence of the United States.
Case 2: US-EC Trade Disputes
One of the major innovations of the Uruguay Round agreements was the creation of the Dispute
Settlement Body (DSB). In trade dispute matters, Community competence is mixed, for the
simple reason that each of the twenty-five Member States retains membership in the WTO
independent of that of the EC itself.48 While not a court as commonly understood, the DSB
nevertheless hears cases and issues opinions on matters brought before it by Members. There
have been several challenges that have taxed the DSB, the most visible of which is the
continuing difficulty securing compliance in contentious cases between the EC and the US.49
47
The value of which cannot be underestimated; WTO officials clearly believe that the ability to salvage the
Agreement averted certain disaster for the international trade regime. Interview, WTO Council in Trade and
Financial Services, Geneva, 2 April 2004.
48
There is no doubt that Member States play a role in the DSB process. The question is the degree and quality of
such mixity, which is actually a rather difficult determination to make. For the ease of analysis, the paper assumes
that the Member States retain an important role in DSB issues in conjunction with the Community. Future research
may prove this to be an unwarranted conclusion.
49
B.L. Brimeyer, ‘Bananas, beef, and compliance in the World Trade Organization: the inability of the WTO dispute
settlement process to achieve compliance from superpower nations’, Minn. J. Global Trade, 10 (2001): pp. 133-168.
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NATHANIEL W. LALONE
CENTRE OF INTERNATIONAL STUDIES, CAMBRIDGE
What has happened with these trans-Atlantic standoffs? During the 1990s, there were four major
disagreements between the US and the EC; two brought against the EC and two against the US.
These tended not to be small matters, either: n fact, the trans-Atlantic trade disputes have had
seriously political overtones, as one economic giant strove to gain leverage over its rival. Two
cases – Bananas and Section 301 – were settled relatively amicably, if imperfectly.50 The WTO
banana dispute began in 1995; a panel was established and issued a report finding that the EU
banana import regime violated certain WTO rules. The EU appealed the report. The Appellate
Body upheld the panel’s principal findings. After extensive negotiations, counter-proposals and
arbitration, in April 2001 the US and EU reached an agreement on the progressive phasing-out of
the European banana regime. In the Section 301 case, the WTO panel found that Section 301
(the principal U.S. domestic trade law addressing foreign trade barriers) is fully consistent with
our WTO obligations, both as a legal matter and in its implementation. Both the EU and the US
declined to appeal and claimed victory after the panel ruling. The systemic implications of the
dispute were considerable, with no fewer than 16 WTO members engaged as third parties.
Nonetheless, neither the US nor the EU chose to jeopardize the panel’s delicate compromise by
appealing the decision,51 instead opting for ‘strategic restraint’.52
There were also two very high-profile cases in which neither the US nor the EC showed such
restraint, and both the US and the EC have generally failed to comply with adverse rulings. In
January 1996, the United States requested consultations with the EU on its directive that
restricted imports of meat produced with hormones (Beef Hormones). The panel reported that
the EU ban was inconsistent with the WTO Sanitary and Phytosanitary Agreement; the Appellate
Body upheld its central findings. When the EU failed to change the directive, the DSB
authorized suspension of concessions in that amount. On July 27, 1999, the USTR announced
duties of $118M authorized by the DSB. In comparison, the EU challenged a sacred cow of the
US government’s trade policy: taxation of foreign sales corporations (FSC). On March 20, 2000,
the WTO ruled that the FSC provisions of U.S. tax law provided an export subsidy that is
inconsistent with WTO obligations. The US amended its offending legislation, but the EC found
it unsatisfactory. The EC received authorisation to impose roughly $1 billion in trade sanctions
per year, which it has not yet implemented (it originally asked for $13.5 billion in sanctions).
If one is keeping score as between the US and the EC, it would seem likely that the EC has given
slightly more than its gotten through the DSB. Having to dismantle the banana import regime as
well as the adverse ruling on beef hormone imports and the attendant US retaliation were severe
blows to the EC. These were not recompensed by the Section 301 ruling, and though the EC
scored a huge victory in FSC, the dispute has been sitting in limbo for several years with no clear
prospects for resolution. If we look beyond simply high stakes cases, it would seem that in a
majority of cases – 21 of 32 disputes by 2003 – the defendant conceded, and 16 disputes were
The summaries below draw on Lenore Sek, Trade Retaliation: The “Carousel” Approach. CRS Report RS20715,
Congressional Research Service, 5 March 2002.
51
Commission of the EC, ‘WTO Report on Section 301: A Good Result for the EU and the Multilateral System’,
Press Release (24 December 1999); and USTR, ‘WTO Adopts Panel Findings Upholding Section 301’, USTR Press
Release 00-06 (27 January 2000).
52
The notion of ‘strategic restraint’ is explored by Garrett and Smith, who argue that the choice to lodge a complaint
and then to pursue it is often tempered by the need to maintain the authority of the Dispute Settlement System.
Geoffrey Garrett and James McCall Smith, ‘The Politics of WTO Dispute Settlement’, UCLA International Institute.
Occasional Paper Series. (July 2002): 2-3.
50
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NATHANIEL W. LALONE
CENTRE OF INTERNATIONAL STUDIES, CAMBRIDGE
resolved before going through the motions of a full panel.53 And looking beyond just transAtlantic relations, both the US and the EU have shown roughly the same willingness to comply
with adverse rulings.54
This should not, however, detract too much from considerations of the EC’s effectiveness in
transatlantic trade disputes. Has the EC achieved its goals? In the two cases that it launched, it
obtained a clear victory over the United States, and continued to press its case even after the US
had changed the offending legislation. While the EC did not prevail in the Section 301 case, this
was not for lack of legal reasoning; the benefits of a positive ruling had to be weighted against
the goals of a functioning, legitimate dispute settlement system. There was a real fear that if
either the US or the EC pushed the Section 301 issue, it could put the DSB into a systemic crisis.
Therefore, one major goal had to be downgraded to achieve another; this is hardly a critique,
though, as the US was forced to adopt the same stance.
In considering the EC’s level of activity, the EC has proven itself to be an equal to the United
States. While it has been put in a reactive position (Bananas and Beef hormones) it has fought
for its position strenuously, and has not shrunk from pursuing the United States with equal
vigour. This may reflect a ‘purposive unity’ among Member States and the Commission to
remedy unfair or undesirable American trade practices. The comfort level with such a proactive
stance was reflected when the EC spearheaded the global challenge to the Bush Administration’s
illegal steel tariffs. Therefore, in the most challenging aspect of dispute settlement, the EC has
proven itself to be a vigorous, active, potent force that has not backed down and has taken its
place alongside the United States as an equal player.
Case 3: The Doha Round
The new round of WTO trade negotiations is different from the other cases in that it combines
both a multilateral venue with a panoply of issues at stake. It is during these negotiating rounds
that the EC is traditionally the least flexible. Given the number of issues in play, intra-EC
negotiations often lead to such a delicate compromise that the EC has very little room for
manoeuvre. As illustrated above with the collapse of the Blair House Accord, this does not mean
that the EC does not get what it wants; to the contrary, this can induce even the most powerful
negotiating partners to give in. However, any successes obtained by this intransigence strategy
are often not the result of any meaningful negotiation and therefore are more a factor of mere
presence than of actorness, which is not sufficient to establish effectiveness.
The two most famous ministerial meetings of the round were the twin collapses at Seattle in
1999 and Cancún in 2003. In the run-up to the Seattle ministerial, hopes were high that the WTO
members could jump-start the then-called ‘Millennium Round’. However, the Clinton
Administration that brought the meeting to a catastrophic end. In an effort to shape an ambitious
agenda to liberalize trade and broaden the mandate of the WTO, President Clinton sought to add
environmental and, most controversially, labour standards to the organisation’s agenda; he did
Marc Busch and Eric Reinhardt, ‘The Evolution of GATT/WTO Dispute Settlement’, in Trade Policy Research
2003, John Curtis and Dan Ciuriak, eds. Ottawa: Department of Foreign Affairs (2003), p. 166.
54
Naboth van den Broek, ‘Power Paradoxes in Enforcement and Implementation of WTO Dispute Settlement
Reports’, Journal of World Trade, vol. 7, no. 1 (2003): 145-148.
53
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NATHANIEL W. LALONE
CENTRE OF INTERNATIONAL STUDIES, CAMBRIDGE
not find a shred of support.55 Clinton’s strategy was to form an alliance between the US and
developing world to tackle Europe on labour standards, which the EC did not want to address
during the round.56 How did the EC respond? It’s hard to tell – despite a few loud grumbles
about outdated negotiating architecture, focus remained on the protestors and the disastrous
Clinton gambit. There is no evidence that the EC rallied to oppose the US or take advantage of
Clinton’s miscalculation. The EC seemed rather to have taken no active role, an unfortunate
confirmation that the Community is very often hamstrung by internal divisions and a warning of
things to come.
At Cancún in September 2003, the tables were very much turned: the EC was blamed for poor
leadership and the talks collapsed. While there were many controversial items up for discussion
in Cancún – agriculture being one – the meeting in fact collapsed because of EC intransigence
over the so-called ‘Singapore issues’.57 In the run-up to the ministerial meeting, the EC and
Japan were the strongest advocates of starting negotiations on the Singapore issues at Cancun.58
It is laudable that the EC wanted to take a proactive stance, unlike in Seattle. However, it was
very clear that many developing countries have been against a Cancun decision to launch
negotiations on these issues. No less than 68 of the WTO's developing country members
explicitly opposed the launch of negotiations on the Singapore issues at Cancún.
During the negotiations, the EC continued to push to reach consensus on the Singapore issues,
and continued to meet stiff resistance. The meeting ended while the chairman, Mr Derbez,
struggled to reconcile opposing views on the Singapore issues. African countries demanded that
their representative, Kenya, withdraw, and not even a last-ditch concession from Mr Lamy on
investment and competition, the most controversial issues, failed to appease them.59 Months
later, as the WTO tried to restart negotiations, the European Union again held things up as
developing countries would not allow the talks to progress until Brussels let go of the Singapore
issues.60
The EC failed miserably at Cancún, and as a result the Singapore issues appear dead. It is clearly
difficult for the EC to take a proactive role in pushing a controversial agenda in multilateral trade
negotiations while it is immobilised by the difficulties of delicate internal compromises. By the
time that the EC was able to start making concessions, it was too little, too late. The meeting had
ended and the EC’s priorities had become a lost cause. Therefore, a proactive strategy without
purposive unity renders the EC a relatively ineffective player in multi-issue, multilateral
negotiations. While the EC could find purposive unity in single-issue or bilateral relations, the
complexity of the Doha Round have proven to be too intricate. This is perhaps not surprising,
given the EC’s difficulty in maintaining Member State support for the Uruguay Round results in
55
The US was accused of trying to tailor global trading system to its competitive strengths and to characterise the
US position as protectionism in guise of idealism in order to obtain union support for then-Vice President Al Gore's
presidential campaign.
56
‘Clinton sabotaged any chance for success at the WTO summit’, Seattle Post-Intelligencer, 15 December 1999.
57
Investment, competition, transparency in government procurement, and trade facilitation.
58
Anecdotal evidence is confirmed when Lamy argues that these issues are not ‘European hobby-horses’ nor
bargaining chips but legitimate issues to debate. Pascal Lamy, ‘Making Trade Work for All’, The World Trade
Brief: The Fifth WTO Ministerial Conference at Cancún, London: Agenda Publishing, 2003. p. 12.
59
‘Breakdown means no end in sight to Doha round’, The Guardian, 16 September 2003.
60
‘WTO admits hope of reviving Cancun talks is fading’, The Guardian, 10 December 2003.
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NATHANIEL W. LALONE
CENTRE OF INTERNATIONAL STUDIES, CAMBRIDGE
the early 1990s. Nevertheless, the problem remains: given the high likelihood of future ‘package
deals’ or multi-issue negotiations, the EC may find its actorness severely challenged by internal
dissent that precludes an effective negotiating strategy.61
Conclusion
This brief analysis of the problems besetting the delineation of competence within the EC’s
legal/institutional framework for external trade relations reveals several insights. The difficulties
of mixed competence can be drastically limited if the Member States and the Commission can
achieve a ‘purposive unity’ in order to give their negotiators the necessary flexibility and
adaptability to conclude an agreement. The more focused the issue and the more convergent the
opinions of the Member States are, the more likely the EC will be effective because it can be
both a proactive as well as a mobile actor in the negotiations.
The analysis has also revealed that it is possible to raise the bar and the level of expectations for
the EC and not be disappointed. The EC has performed generally well during this study, and
many of its flaws are not much different from the difficulties normally found in traditional
Westphalian members of the WTO. In the aftermath of the failure by the US Congress to extend
fast-track authorisation and the unilateral Bush foreign policy, the traditional US leadership in
trade issues has begun to falter; the EC has however proven itself unable to capitalise on this
opening and wrest the mantle of trade leadership from the US. Nevertheless, the EC has shown
itself capable of moments of extraordinary leadership as well as establishing itself as an equal
player in WTO dispute settlement. Therefore, although the EC is often eclipsed by the US, it still
comes a very close second. If the EC can find some way of endowing its WTO negotiators with
the purposive unity found in the first two case studies, there is no limits to the effectiveness and
leadership the EC could provide to the international trade regime.
See also, Meunier, ‘What Single Voice’, p. 132 (‘the growing uncertainty that the concluded deal will hold may
weaken the long-term credibility of the Commission and render its negotiating task more difficult in the future’).
61
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CENTRE OF INTERNATIONAL STUDIES, CAMBRIDGE
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CENTRE OF INTERNATIONAL STUDIES, CAMBRIDGE
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CENTRE OF INTERNATIONAL STUDIES, CAMBRIDGE
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