Ane Solesvik Oppedal [Type text] 06/05/2013 BACHELOR THESIS The EU Commission’s Communication on Trade, Growth and Development: Tailoring Trade and Investment Policy for Those Countries Most in Need? By: Ane Solesvik Oppedal 401970 Aarhus School of Business and Social Sciences 2013 EU-Kommissionens meddelelse om Handel, vækst og udvikling: Skræddersyet handels-og investeringspolitik for de lande der har størst behov? 1 Ane Solesvik Oppedal [Type text] 06/05/2013 Abstract This paper provides an analysis of the EU Commission’s 2012 Communication on trade, growth and development to evaluate the extent to which the discourse in the Communication is supported by actual policy implementation. A liberalist and social constructivist approach is used to shed light on the shortcomings of the Communication, which is evaluated in light of two cases. The case of biofuel production and consumption in the EU provides the reader with insight into the detrimental effects of EU support of local European farmers at the expense of foreign producers. This case demonstrates that policies, such as those related to the CAP, require revision before the EC can rightfully claim Policy Coherence for Development, which is a key aspect of the intention of tailoring trade and investment policy to those countries most in need. The case of the EU’s Economic Partnership Agreements with the African, Caribbean and Pacific countries demonstrates intrinsic flaws in the agreements which are magnified under a comatose Doha Round. These agreements, rather than facilitating pro-growth development, will result in a biased liberalization and a fiscal crunch for poor developing countries instead. The cases were selected on the grounds that they provide valuable insight into relevant global challenges, as well as bridging the conceptual gap between a variety of the themes of the communication and actual EU policy implementation. The methodological approach used is a quantitative approach and a hypothetical-deductive method, in which I made certain assumptions based on previous knowledge of the research topic. The empirical evidence was derived from a variety of sources, relying heavily on international research institutions as well as official EU documentation and reports. The findings in this paper suggest that the EU Commission’s ‘Communication on trade, growth and development: tailoring trade and investment policy to those countries most in need’ falls short of doing just this. If the EU hope to maintain legitimacy in their role as global economic leaders there needs to be greater coherence between development discourse and actual policymaking. 2 Ane Solesvik Oppedal [Type text] 06/05/2013 Table of Contents Abstract ------------------------------------------------------- 2 1.0 Introduction ------------------------------------------------------- 4 1.1 Problem Statement------------------------------------------------- 7 2.0 Theoretical Approaches to EU Foreign Policy-------------- 7 2.1 Liberalism---------------------------------------------------------- 7 2.2 Social Constructivism------------------------------------------- 8 3.0 Methodology--------------------------------------------------- 9 4.0 Overview of the Commission’s Communication on Trade, Growth and Development -------------------------------------------------------------- 12 5.0 Analysis------------------------------------------------------------- 13 5.1 The production and consumption of biofuels in the EU---- 13 5.2 Where is the CAP?-------------------------------------------------- 13 5.3 Climate Change and Energy Dependence-------------------- 14 5.4 Biofuels and the Global World--------------------------------- 16 5.5 The EU’s Economic Partnership Agreements with the ACP Countries under a Comatose Doha Round------------------------------------------- 18 5.6 The International Trading System----------------------------------- 18 5.7 Biased Liberalization and Fiscal Crunch---------------------------20 6.0 Perspectives ---------------------------------------------------------- 23 7.0 Conclusion------------------------------------------------------------ 26 Works Cited------------------------------------------------------------- 28 3 Ane Solesvik Oppedal [Type text] 06/05/2013 1.0 Introduction On 27 January 2012, the European Commission (EC) released the Communication Trade, growth and development: Tailoring trade and investment policy for those countries most in need (Overseas Development Institute, 2012). The communication is intended to set a trajectory of the European Union’s trade policy for the next decade, and is an update to the Communication on Trade and Development published in 2002. The communication is a response to the changing economic realities over the last decade and its profound implications for trade, development and investment policies (European Commission, 2012). Although globalization in itself is not new, the pace and scale of globalization today is unprecedented. The increasing globalization of the world economy over the last two decades presents the European Union with opportunities as well as challenges. The reshuffling of global Gross Domestic Product (GDP) shares over the last decade is giving rise to increasing concern that the EU is losing its role as a global economic leader to emerging economies like China, India and Russia. In the wake of the 2008 financial crisis the European Union acknowledges that they are facing domestic pressures in addition to the global challenges, and are aiming to adapt their economic strategies to accommodate the global economic transformation. Over the last half century the EU has been the largest importer and exporter of goods and services, and still enjoys a dominant role in the world economy as one of the largest global markets (Renda, 2013). However, disappointing economic performance by the 27 EU Member States combined with a gradual decline in productivity as well as in share of the markets has exposed some fundamental weaknesses in the EU economy. The developing energy dependence on the rest of the world is expected to intensify especially due to the rising energy demand as a result of technological development, and the increasingly ageing population of Europe is generating a gradual loss of competitiveness and adding considerable pressure on national public budget and welfare systems (Renda, 2013). The globalization trends are therefore posing significant threats to the European Union’s position in the global landscape. According to statistics from the Organization for Economic Cooperation and Development (OECD) the share of Brazil, Russia, India and China’s (BRICS) GDP combined rose from 17 % in 1990 to 28 percent in 2010. China’s share of the world’s GDP alone has already reached 17 percent, equal to the Euro zone, and only 6 percent 4 Ane Solesvik Oppedal [Type text] 06/05/2013 behind the US global GDP share of 23 percent (Renda, 2013). Based on these trends the OECD predicts that by 2030 the Euro area’s share of global GDP will decrease to only 12 percent, whereas China is presumed to hold 28 % of the world’s GDP shares, shifting the currently strong position of both the EU and US away from the west, and replacing both the EU and the US as the dominant economic player (Renda, 2013). In March 2000, in what later became known as the Lisbon strategy, European leaders committed the EU to become “the most dynamic and competitive knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion, and respect for the environment” (European Parliament, 2000). However, it soon became increasingly apparent that these ambitious objectives were not realistically obtainable in the current economic environment. In 2004, the European Commission established a High Level Group, headed by the former Prime Minister of the Netherlands, Wim Kok, in order to carry out an independent review of the progress made towards the Lisbon objectives, which accumulated in the report “Facing the challenges, The Lisbon strategy for growth and employment (Kok, 2004). According to Kok, the failure of the Member States to act with sufficient urgency on the Lisbon strategy coupled with external events since 2000 has slowed the progress towards reaching the goals set out by the European Commission in 2000. He argues that the key issue in the disappointing delivery of the overall strategy is the lack of determined political action (Kok, 2004). Europe today finds itself in a similar situation, facing many of the same challenges as described in the 2004 report. As stated in Kok’s report “Europe faces two enormous challenges – increasing global competition and a rapidly ageing population […] to safeguard and strengthen [Europe’s] distinctive economic and social model, it must adapt” (Kok, 2004). Currently, most of the targets set by the European Commission’s 2010 growth agenda “Europe 2020” will be impossible to achieve, as the economies of some of the largest European member states approaches or have already reached recession. And given the negative demographic of the European Union, without a boost in productivity—presently quite unlikely, very little growth seems attainable in the future (Renda, 2013). Globalization is rapidly putting pressure on the European Union in terms of maintaining its role as a global competitor, for example through the emergence of “global value chains”. The increasingly “sliced” process of producing goods, from raw materials to finished product, means that 5 Ane Solesvik Oppedal [Type text] 06/05/2013 each process can be executed wherever the necessary materials and skills are available at competitive cost (OECD, 2007). These trends force the EU to offshore and outsource industrial activities in countries with lower labor costs. As the EU is home to many of the world’s largest multinational companies, there are a lot of potential gains in offshoring and de-localization parts of the production process; however, it seems that the internationalization of industrial production has led to a declining contribution of the EU economy on total world output (Renda, 2013). The European Commission recently released the “European Competitiveness Report” in 2011, which claims that one of the main threats to EU competitiveness is the so called ‘industrial upgrading’ of China (as well India and Russia, albeit to a lesser extent) and their successful price competition in high-skill industries. In 2007 the share of EU imports in technology-driven industries from China was already higher than in intra-EU imports, while high-skills industries were also recording rapidly rising shares between 2000 and 2007, evidence of China’s rapid technological upgrade (EC, 2011). The EU needs to ensure that the high value-added phases of the production chains are not moved outside the EU, as this will result in the loss of the EU’s leadership in many industrial sectors. While US companies focus on the development of an American manufacturing strategy, European corporations, to the advantage of other regions, are seemingly losing control over key-industrial know-how. The result is that within certain sectors in the economy, such as the automotive industry, the EU is becoming more of an assembly regional block rather than a producing one (Renda, 2013). The EU is also struggling to maintain its competitive edge in the global market in terms of Research and Development and Innovation. Declining university systems combined with a reluctance to import new talents and attract highly skilled workers from abroad are affecting the business environment of Europe. The fact that most EU firms specialize in lowtech sectors is, according to the European Commission, one of the reasons for the EU’s innovation gap. The EU suffers from a weak position in terms of Information and Communication Technologies (ICT), and although the EU is still performing relatively well in nanotechnologies and biotechnologies, the US still continue to lead in these fields (Renda, 2013). The negative demographic of Europe, as also mentioned in Wim Kok’s report in 2004, is also a source of concern. According to the Commission’s Competitiveness Report extensive investment into education and research is needed to maintain sufficient competitiveness as 6 Ane Solesvik Oppedal [Type text] 06/05/2013 the number of elderly rapidly increases and the number of young people decreases over the next decades. In 2011 the EU’s population of working age peaked, whereas onwards the potential labor force is expected to decrease, putting immense pressure on the EU to find ways of financing living expenditures of elderly Europeans while maintaining its competitive edge in an increasingly competitive world (EC, 2011). 1.1 Problem Statement In the face of the above domestic and global challenges, the European Union still recognizes their international responsibility to the developing world. The EU maintains that trade policy is one of the most effective ways to bolster development, and their aim is to improve conditions for trade and investment in developing countries in the fight to eradicate poverty. This paper evaluates the extent to which the European Commission’s communication Trade, growth and development: Tailoring trade and investment policy for those countries most in need successfully confronts the global challenges of today, and whether its intention to promote economic growth in the EU and to accommodate trade and investment policy to least developed countries is successfully implemented in terms of actual political action. The paper explores two different cases of EU policy areas linked to trade, and analyze the implications of these polices on global trade and development patterns in light of the Communication. According to the communication international trade will both improve the economic situation within the EU as well as encourage sustainable development abroad, therefore two international theories of integration will be used to better evaluate both the intentions and the shortcomings of the EU’s trade and development trajectory as set by the European Commission. The liberalistic perspective focus on economic integration as a driving force in international relations, whereas the social constructivist perspective argues that other factors, such as ideological motivations impact the global environment. 2.0 Theoretical Approaches to EU Foreign Policy 2.1 Liberalism There are three theoretical frameworks dominating the contemporary field of international relations, realism, liberalism and constructivism. This paper focuses only on the last two, as they more accurately relate to the topic of EU’s international trade policy. The liberal 7 Ane Solesvik Oppedal [Type text] 06/05/2013 paradigm argues that states’ preferences are not stable, and that these preferences are based on two factors. First, preferences are adjusted if different societal actors win in domestic competition, and secondly, preferences change when individuals’ economic opportunities and interests are reconstructed in the face of changes in the global system. As states’ interests are defined economically, liberalists predict more interstate cooperation and international institution formation incentivized by increased economic interdependence as a result of globalization (Hix, 2005). In the liberal perspective societal actors and elites compete, their individual preferences driven by economic interest rather than geopolitical concerns, and in the international system state officials act rationally to pursue their economic preferences, which are shaped by the behavior of international and supranational institutions and developments in other systems (Hix, 2005). Liberalists maintain the primacy of economics and societal economic interests over politics and power relations. Generally speaking, liberals recognize the neoclassical economic assumption that the free market is the most efficient way of allocating resources, and therefore argue that in a world where individual economic interests are the driving force of politics, states should pursue free trade rather than protectionist policies. However, liberals also accept that government is important for the procurement of goods and services that would not be supplied in sufficient quantity by the market (Hix, 2005). 2.2 Social Constructivism In contrast to the rationalist foundations of liberalism, constructivism perceives international relations as dominated by cultural, ideological and ideational forces. Constructivists share three main assumptions about the social construction of international politics. Firstly, they argue that actor’s preferences cannot be explained without resorting to the ideological and/or cultural norms behind their positions. Secondly, the paradigm holds that actors are not strictly ‘rational’ in the constricted sense of the term used by liberals, due to the fact that they are bound by psychological or normative constraints, and are sometimes forced to take historical or symbolically determined actions. Thirdly, constructivists argue that as a result of social interaction and socialization, the behavior and preferences of actors will evolve. Constructivists believe that actors in international relations 8 Ane Solesvik Oppedal [Type text] 06/05/2013 are forced to adapt their preferences to the ‘constitutive’ norms of international institutional organizations and society, and that in this process, the preferences of foreign policy elites and the normative justifications for their actions are expected to merge (Hix, 2005). Based on these two theoretical approaches to foreign policy, liberalist will argue that EU foreign policy will be determined by EU external economic policies, and that this process is driven by the individual and sometimes rival economic interests of each member state. In the social constructivist perspective the interaction in and adaptation to the institutional and normative environment of the EU foreign policy making will change the preferences of the actors involved. This paper will explore the motivations behind, and implication of, the EU trade communication through both a liberalist and a social constructivist perspective, and evaluate the extent to which the objectives are reached in light of each paradigm. 3.0 Methodology The effects of increasing globalization and changes in the economic environment over the past couple of years are threatening the European Union’s position as a dominant economic force in the international system. The reshuffle of the world economic power, coupled with internal pressures, such as slow growth and an ageing population, has forced the EU to take a hard look at the challenges it is facing in the coming decades. The importance of the Commission’s report is significant because it lays down the trajectory for the EU’s trade over the course of the next decade, and it is designed in response to the current global as well as domestic situation. In a time when many are questioning the sustainability of a European union, the hope is that the EU will be able to reestablish themselves among the most competitive economies in the world. The report claims that effective trade policy will to boost jobs and growth in Europe as well as abroad. The impact of the EU’s trade policies will be extensive, abroad and in Europe itself, therefore, analyzing the Commission’s report provides valuable insight into the future of not only the European Union, but also the rest of the world. Due to the brevity of this paper, it is impossible to provide a comprehensive analysis on the entirety of the Commission’s report on trade and development. Rather the focus will be on two cases through which various aspects of the report will be discussed. This allows for a more thorough understanding of the issues behind, and the potential implications of 9 Ane Solesvik Oppedal [Type text] 06/05/2013 the statements in the report. The first case to be discussed is the production and consumption of biofuels in the EU and how it affects developing countries. This case was chosen because it touches upon a variety of important issues in the Commission’s Communication. Biofuel production is a response to the challenge of climate change, which requires collective action if the world hopes to manage its evolvement. The case of biofuels is interesting because it has been the center of discussions of everything from food price volatility, EU discrimination of foreign producers in the agricultural sector, to the environmental effects of indirect land use change. All of these factors can be tied directly up to statements in the Communication, providing the reader with a deeper understanding of the policies behind these statements. The second case discusses the EU’s Economic Partnership Agreements with the African, Caribbean and Pacific countries. This case also has the quality of tying in various statements in the Commission’s Communication, and provides the reader with insight into some of the major themes of the Communication, such as sustainable development, the multilateral agenda and the Doha Round as well as EU’s regional agreements. These two cases are not meant to be compared or contrasted, rather they allow for us to evaluate the discourse of the Communication in light of actual policy making. At a first glance the Communication seems an uncontroversial document which brings together a variety of content from across its different directorates in relation trade and development, and policy coherence for development. However, in light of the two cases, a visible gap between the statements in the Communication and the actual EU policies appears. As the EU Commission’s Communication on trade, growth and development is fairly recent, from 2012, it is still early to begin to discuss the far-reaching effects the Communication will have globally in any kind of certainty. However, this paper evaluates the cases based on emerging international tendencies, predictions based on statistics, historical perspectives and lessons from the past. In this way, the reader will gain a more thoroughly understanding of the global issues discussed in the Communication as well as the global implication of EU policies. Both cases are presented against the backdrop of relevant global challenges, and both cases demonstrate the good intentions of the EU’s trade and development agenda as well as the shortcomings of it. The analysis also includes a theoretical perspective on the aspects of the Commission’s Communication which relates to 10 Ane Solesvik Oppedal [Type text] 06/05/2013 the two cases. I have chosen a quantitative approach and a hypothetical-deductive method as I was already superficially familiar with the topic of research. The theoretical assumptions I made was that although the discourse in the Commission’s Communication on trade, growth and development fit both a liberalist paradigm as well as a social constructivist one, empirical evidence would most likely exhibit stronger liberalist tendencies than constructivist ones. The empirical data in this paper is derived from a variety of sources. The European Commission’s website has offered a wealth of information, in relation to relevant statistics and research papers, but also in terms of background information on EU policy. The EC itself has commissioned a vast amount of research reports to evaluate their own progress in various fields, and many of these have been essential in collecting data for the case studies in this paper. However, in order to avoid a biased presentation of the cases but rather objectively analyze them, I have also consulted research, reports and scientific articles produced by International Research facilities. News articles from major international news agencies are also part of the resources used in this paper. It is important to be critical to the information one collects in the process of writing an analytical paper, and I have tried to cross reference as much of the information as possible, and discard information from sources which do not appear legitimate. I have been critical to the objectivity of the authors of the various sources I have used, and I used a quantitative research approached, in the process of writing this paper. In cases where it is difficult to either prove or disprove certain aspects of the discussions, I have focused on providing relevant information about the development of the case, and provided the information I feel is essential to understand the issue at hand. The theoretical paradigms are not sufficient to accurately account for all the foreign policy decisions made by the European Union. However, the hope is that the theoretical approach to the Commission’s Communication on trade, growth and development will provide further insight into the implications of EU policy globally, and that this perspective adds to the understanding of the framework of the EU trade policy agenda. 11 Ane Solesvik Oppedal [Type text] 06/05/2013 4.0 Overview of the EC Commission’s Communication on Trade, Growth and Development The Commission’s Communication on trade, growth and development is divided into five parts. First off is a statement of purpose for the report. According to the Commission, “the present Communication updates the 2002 Communication on Trade and Development to reflect changes in economic realities, to take stock of the way the EU has delivered on its commitment and to outline the direction the EU’s trade and investment policies for the next decade” (EC, 2012, p. 2). Part two is a brief overview of recent changes in the global situation as well as lessons for trade and investment policies for development, for example acknowledging that trade alone is not a sufficient tool to foster development, and the importance of differentiating in the design and implementation of EU policies. Part three describes the efforts made by the European Union since 2002 in the areas of trade and investment, such as the Everything But Arms (EBA) initiative, Aid for Trade (AfT) and the Generalized System of Preferences+ (GSP+) which is a tool of EU trade policy in support of sustainable development, specifically targeting vulnerable developing countries. Part four, which is the main body of the report, consists of an outline of tasks for the next decade and ‘what Europe can offer’ (European Commission, 2012). This section can be summarized under six pillars: (1) more focused preferences; (2) better targeted AfT; (3) complementary instruments boosting Foreign Direct Investment (FDI); (4) comprehensive and modulated bilateral/regional agreements; (5) a values-based trade agenda to promote sustainable development; and (6) assisting developing countries in improving resilience to crisis. Additionally, this part includes a section focusing on domestic reforms and good governance as the key to trade-led growth, how external assistance and trade agreements can support this process and an outline of the multilateral agenda until 2020, such as delivering on the dimensions of the Doha Development Agenda (DDA), setting a firm basis for the future and tackling emerging challenges. Part five is a concise conclusion of the report (EC, 2012). Although the future may look bleak to the European Union itself, the Commission’s report attempts to confront the global challenges, committing to continue their work to promote growth in Europe as well as sustainable development abroad through effective trade policies. 12 Ane Solesvik Oppedal [Type text] 06/05/2013 5.0 Analysis 5.1 The production and consumption of biofuels in the European Union The Commission’s report contains many elements which have the potential to foster economic development in developing countries. However, even though the Commission’s communication on trade, growth and development proposes some interesting ideas for a new strategy for trade policy focusing on Least Developed Countries (LDCs) it also raises some major concerns. Considering the four years of crises in the EU, followed by what will most likely be anemic growth over the next decade, it is not surprising that these events have spurred those in the EU in favor of more mercantilist trade policy. An increasing number of EU members are paying higher attention to bilateral trade deals with big economies, which could potentially increase EU growth significantly. Despite establishing a good platform for effective use of trade policy, many of the tools in EU trade policy are still focused on promoting liberalization of strategic sectors in developing countries, rather than instituting meaningful market access options for developing countries. 5.2 Where is the CAP? One of the major critiques the Communication has received is due to its neglect in mentioning other EU policies, such as the Common Agricultural policy (CAP) which directly affects developing countries’ growth and trade patterns. The EU uses restrictions to its own market as a tool to protect local agricultural production in Europe at the expense of foreign producers. Although the CAP falls under the Directorate-General for Agriculture and Rural Development, it is an important aspect of the Policy Coherence for Development Act, aiming to accelerate the process towards obtaining the Millennium Development Goals. A Communication from the European Commission to the Council, the European Parliament and the European Economic and Social Committee in 2005, the Commission identifies twelve priority areas where the objective of obtaining synergies with development policy objectives is considered particularly relevant. In 2009, this list was reduced to five priority areas, security, climate change, food security, migration and trade and finance, in order to make the PCD more operational (EC, 2009). It is evident that the EU is well aware of the 13 Ane Solesvik Oppedal [Type text] 06/05/2013 importance of tailoring not only trade policies to encourage development, but also other policy areas, which may have far-reaching effects on the developing world. However, omitting to include a section regarding the Common Agricultural Policy reflects the Commission’s failure to comply with their own commitments to promote growth and development abroad. The following section is an analysis of the case of biofuel production and consumption in the EU, which is an example of how EU policy acts directly against its trade and development goals, by supporting local production at the expense of foreign producers. 5.3 Climate Change and Energy Dependence One of the global challenges of today is climate change. Handling climate change requires a joint international initiative, because it poses serious threats to international security and the well-being of human kind. Since the 1990s the European Union has established themselves as leaders in global environmental governance by encouraging rigorous international commitments (Oberthür, 2008). In 2011 the European Union was the world largest importer of energy, depending on foreign imports to meet over 54 % of its energy needs. The EU imports 60 percent of the gas and more than 80 percent of the oil it consumes, relying heavily on countries like Norway, Russia and Algeria which combined accounts for 50 percent of crude oil imports and 85 percent of natural gas imports (Institute for International and European Affairs, 2013). In 2007 the EU heads of state and government established an “independent commitment” to reduce EU greenhouse gas (GHG) emission by 20 percent from the 1999 levels by 2020, as well as agreeing to increase the share of renewable energy sources in the EU energy supply to 20 percent and the contribution of biofuels in transport to 10 percent in 2020 (Oberthür, 2008). The term ‘biofuels’ refers to a wide range of fuels derived from biomass, comprised of solid biomass, liquid biofuels and various biogases (Trinity, 2010a). Liquid biofuels for transportation can be made from a variety of feedstocks, many of which are generally used in the agricultural food chain. Bioethanol and biodiesel form the core of renewable transport fuels around the world, and whereas Brazil has been the world’s largest producer of bioethanol for the past 25 years, the EU leads in biodiesel production, which represents close to 80 percent of total biofuel production in the EU (Trinity, 2010a). Although initially 14 Ane Solesvik Oppedal [Type text] 06/05/2013 the concept of using biofules as a way of lowering GHG emission gained wide support, it is now raising concerns regarding the real reduction in CO2 emissions that biofules provide, and its impact on agricultural land and natural habitats, as well as its impact on the poor and global food prices. For example, the unintended carbon emissions linked to indirect land use change (ILUC) are proving rather significant. Farmers responding to the increased crop prices to maintain the food supply-and-demand balance are clearing natural lands to replace the food crops that have been diverted to biofuel production. Because natural lands store carbon in the biomass of plants and in the soil, the clearance of wilderness translates into a net increase in greenhouse gas emissions. The biofuel industry in the EU is awarded with subsidies, based on three official objectives justifying this support. First off, because it will reduce carbon emission from transport, secondly, because it will support rural development in the EU, and thirdly, because it will improve energy security (Asmelash, et al., 2013). According to research conducted by the International Institute for Sustainable Development, government subsidies have been an excessively costly way of moderating climate change. Even though the production of Ethanol does increase emissions savings it comes at a high cost, and in the case of biodiesel, if the ILUC factor is considered, then it no longer provides any emission reduction, emitting two million tonnes of CO2 equivalent emissions more than its fossil-fuel-based equivalent (Asmelash, et al., 2013). In terms of rural development, there is no tracking in official EU data on jobs generated by the biofuel industry, hence the accuracy and value of job multipliers is slightly imprecise and requires closer and more official monitoring. However, based on a simple survey of attendant jobs and country-level production figures, the majority of biofuel-related jobs were located in EU countries containing the more prosperous Competitiveness and Employment Regions, while on 31 percent of jobs from Ethanol and 35 percent of jobs from biodiesel were located in EU classified undeveloped Convergence Regions (Asmelash, et al., 2013). In regards to energy security, the role of biofuels have, so far, been limited, the production of biofuels in the EU effectively replaces only the output of two or three large fossil-fuel refineries (Asmelash, et al., 2013). The data shows that the actual benefits of biofuels in the EU require closer monitoring, and are so far either unclear or marginal at best. 15 Ane Solesvik Oppedal [Type text] 06/05/2013 5.4 Biofuels and the Global World In addition to the insufficient domestic benefits of EU biofuel production, the impact of biofuel policy in the EU on developing countries, both in terms of production as well as consumption. The consumption of biofuels in the EU creates considerable opportunities for farmers around the world, and roughly 80 developing countries grow and process sugarcane which can be used for bioethanol while an increasing number of countries are establishing biofuel industries (Trinity, 2010a). However, Africa has very little biofuels development, and considering that most of the countries on the UN’s list of Least Developed Countries are on the African continent, very few opportunities are available to them in terms of exports to the EU. Of course, biofuels has the potential to revitalize land use and livelihoods in rural areas globally which would lead to increased yields and incomes, but still, in areas where competing resource claims exists, the rapid expansion of biofuel production has resulted in poorer groups losing access to land on which they depend for their livelihood. There are also major concerns that production of biofuels in developing countries is triggering numerous environmental problems, such as water pollution, water use, land degradation and deforestation (Trinity, 2010a). The EU subsidizes biofuel production domestically, and combined with tariff barriers these measures are distorting the global biofuel trade at the expense of developing countries. For example, the EU’s tariff on ethanol average 60 percent, which far exceeds the more common 17 percent average for EU agriculture tariff protection (Trinity, 2010a). These policies have a negative impact on developing countries efforts towards sustainable development, because they not only undermine developing-country competitiveness, but may also damage their potential for environmental management and poverty reduction (Dufey, 2007). Other concerns regarding the potentially negative impact of biofuel production and policies in the EU include the proliferation of various environmental, technical and social standards and regulations for biofuels. Because these standards are developed by industrialized nations, with little participation by producer country stakeholders, the social and environmental priorities of these developing countries will not be reflected in these policies, which directly affect them (Dufey, 2007). 16 Ane Solesvik Oppedal [Type text] 06/05/2013 Tariffs and non-tariff barriers to the European Union’s market are heavily criticized, especially by developing countries, who correctly point out that these protectionist policies are creating market distortions, with far-reaching negative impacts, socially, economically and environmentally. The International Institution for Environment and Development has called for a restructuring of the biofuel trade policies in order to create a win-win framework which will merge the social, economic and environmental agendas of developing countries on a global scale. Trade facilitation in biofuels will then allow developing countries to benefit substantially from the opportunities available from the predicted increase in biofuel demand in the European Union and support the positive contribution of biofuels to sustainable development abroad (Dufey, 2007). The Commission’s Communication on Trade and Development states that from the outset of the global economic and financial crisis, the EU was committed to refrain from protectionism (EC, 2012). Furthermore, the Communication declares the Commission’s intention to ensure a ‘values-based trade agenda to promote sustainable development’ (European Commission, 2012, p. 13), for example through initiatives like promoting ‘the elimination of tariff and non-tariff barriers on goods and services that can deliver environmental benefits’ (EC, 2012, p. 14). Avoiding protectionism, from a liberal theoretical perspective, will ensure economic growth as a direct result of gains from trade, in which all parts benefit. This neoclassical economic assumption is evident throughout the Commission’s report and in the European Union’s trade policy, for example through the creation of the various existing Free Trade Agreements. However, the above analysis of biofuel production and consumption within the EU, as well as an evaluation of the implications of both tariff and non-tariff barriers on imports of biofuel to the EU, demonstrates the shortcomings of the EU to comply with the Commission’s statement of promoting free trade and sustainable development. The market distortion as a result of trade barriers to the EU market has far-reaching negative effects, economically and environmentally on developing countries. In the introduction of the Communication on trade, growth and development, the Commission states that trade policy “can be a powerful engine for development, in line with the EU principle of Policy Coherence for Development” (EC, 2012, p. 3). However, the neglect in mentioning the CAP in this communication effectively undermines the credibility 17 Ane Solesvik Oppedal [Type text] 06/05/2013 of the entire report, as the example of biofuel trade demonstrates EU policies which directly affect global trade and restricts the access of developing countries from potentially beneficial trade opportunities. Although the European Union deserves acknowledgment for addressing the global challenge of climate change, and applause for pursuing alternatives to fossil fuel energy sources, their position as international leaders in the environmental cause and their claim of promoting sustainable development through trade should be reflected in all EU policies, not selectively in only some policy areas. 5.5 The EU’s Economic Partnership Agreements with the ACP Countries under a Comatose Doha Round The EU Commission’s communication on trade, growth and development touches upon an important global issue in terms of the comatose Doha Development Agenda (DDA). The Doha Round is the latest round of trade negotiations among the World Trade Organization membership. The overall objective is to achieve major reforms of the international trading system by introducing revised trade rules and through lowering trade barriers. Because it aims to improve the trading prospects of developing countries, it is unofficially know as the Doha Development Agenda. The Doha round is a ‘single undertaking’ as virtually every item of the negotiation is part of an indivisible package where nothing can be agreed separately. The Doha round was initiated in 2001 and negotiations continued for almost a decade before it collapsed in 2008. The talks stalled over a divide on the issue of agriculture, which officials blamed on India, China and the US failing to agree on import rules. The current EU Trade Commissioner in 2008, Peter Mandelson, called the collapse a “collective failure” and warned that the consequences would “fall disproportionately on those who are most vulnerable in the global economy, those who needed the chances, the opportunities most from a successful trade round” (BBC, 2008). 5.6 The international Trading System According to the Communication “The multilateral agenda remains a priority for the EU. The DDA is in serious deadlock but holds too much potential for developing countries in general and LDCs in particular to be abandoned” (EC, 2012, p. 16). In addition, the Communication recognizes that the global shift in economic power among major trading 18 Ane Solesvik Oppedal [Type text] 06/05/2013 partners has resulted in a growing imbalance between the contributions that large emerging countries make to the multilateral trading system and the benefits they derive from it. This tendency was already tangible at the launch of the DDA, and the current deadlock of the DDA continues to reveal a fundamental weakness in the World Trade Organization (WTO) setting, which is not evolving in line with economic realities (EC, 2012). In light of these global economic changes, the Commission reiterates their commitment to conclude Economic Partnership Agreements (EPAs) with all interested African, Caribbean and Pacific (ACP) countries and regions interested. This will be done in line with the Cotonou Agreement’s objective to facilitate and support deeper regional integration, modernizing the economic relationship between the EU and ACP countries and using trade to promote economic growth (EC, 2012). Furthermore, the Communication declares that “We confirm our offer of free access to the EU market and improved rules of origin for those ACP countries that have in the past received Cotonou trade preferences, while the ACP countries liberalise partially and gradually” (EC, 2012, p. 13). However, despite the good intentions of the EPAs, the current situation with a comatose Doha Development Agenda, are exposing some intrinsic flaws in the agreements which are damaging to ACP development. The cooperation between the EU and the ACP countries can be traced back to 1975 to the signing of the Georgetown Agreement, which was the foundation of the Lomé Convention the same year. The Convention was signed by the then nine EU member states and 46 ACP countries, and was renegotiated at five year intervals. The successive Lomé agreements were the structure in which non-reciprocal duty-free access to the European market was granted to products originating in ACP countries. In 2000 the Lomé Convention Agreement was replaced by the Cotonou Agreement. Because the non-reciprocal preferences granted by the EU was incompatible with WTO regulations, the Cotonou Agreement established negotiations for Economic Partnership Agreements (EPAs), which were concluded in 2007 (Khorana, 2012). The EPAs between the each of the six regional ACPs and the EU are designed to promote ACP regional integration to create larger regional markets and facilitate their integration into world markets, while also promoting trade and achieving general development goals. These EPAs are reciprocal agreements between the EU and the ACP countries that have to open their markets to a limited extent, averaging 80 percent within 15 19 Ane Solesvik Oppedal [Type text] 06/05/2013 years, in return for access to EU markets. The ambition is, over time, to establish quasi dutyfree and quota-free market access and more simple rules of origin in the European Union (Khorana, 2012). 5.7 Biased Liberalization and Fiscal Crunch The deadlock in the Doha Development Agenda has currently left Preferential Trade Agreements (PTAs) as the only negotiating instrument left to open a domestic economy to foreign competitors (Messerlin, 2012). However, history shows that PTAs are not an effective instrument for this purpose. In the period between the mid-1980s and mid-2000 PTAs have delivered roughly 10 percent of total tariff cuts, whereas unilateral liberalization stands for 65 percent of tariff cuts in the same time period (Messerlin, 2012). Small developing economies are especially fragile under a comatose Doha Development Agenda. Many of these countries will deliberately negotiate ‘shallow’ PTAs, in the sense that they do not open the signatories’ key economic sectors. These sectors are the ones which could potentially benefit the most from exposure to foreign competition. A 2011 WTO Trade Report showed that two-thirds of peak tariffs, that is, tariffs higher than 15 percent, which have been left intact after unilateral or multilateral liberalizations, have also escaped PTArelated cuts (Messerlin, 2012). As these sectors, which are generally highly protected key sectors, do not derive the benefits from external competitive forces to increase their efficiency, they continue to exact high costs on consumers. Other countries will turn to ‘deep’ PTAs, but as negotiating dynamics tend to favor the large negotiating partner, small developing countries suffer from bilateral trade agreements where the agenda set by the larger partner often includes topics of little or no relevance to the developing country. The limited range of potential trade-offs when there are only two negotiating partners, as supposed to the 156 countries in the WTO forum, makes a potential agreement harder to reach, and in bilateral agreements there is no possibility of building coalitions with other small countries to raise the negotiating leverage with respect to the larger partner (Messerlin, 2012). The EU’s EPAs with the African, Caribbean and Pacific countries, despite their good intentions, have intrinsic flaws detrimental to ACP development because they will generate a ‘biased liberalization, fiscal crunch’ outcome (Messerlin, 2012). In his paper ‘An EU 20 Ane Solesvik Oppedal [Type text] 06/05/2013 development-friendly trade policy under a “Comatose Doha”’ Patrick A. Messerlin argues that instead of liberalizing the ACPs in a pro-development way, which is one of the EU’s main objectives, as stated in their Communication on trade, growth and development, the EPS will systematically exaggerate preexisting distortions in the ACP economies for two mutually reinforcing reasons (Messerlin, 2012). First off, because the EPAs allow the ACPs to maintain their current tariffs on imports from the EU for about 20 percent of their tariff lines, ACP sectors which are highly protected will continue to be fully protected in relation to trade with both EU and non-EU producers. These sectors will remain protected from competition from the EU and the rest of the world, and ACP producers will have no incentive to cut costs, decrease their prices or improve their production. In addition, the domestic capital and labor will either be induced to remain in these protected sectors or attracted to them. The protection of key sectors of the economy will therefore result in a lack of incentive to support the EPA process. Simultaneously, other ACP sectors will be subject to full competition from the EU, as the EPAs require the elimination of current tariffs on EU imports for the roughly 80 percent of remaining tariff lines. Formidable EU competition in these markets will most likely result in ACP producers avoiding these markets, as they are less likely to provide the same wages or capital returns as the highly protected ACP markets. These tendencies will produce long term economic costs for the ACP. The structure of the EU’s EPAs with the ACP countries is unable to support the pro-growth development agenda of the ACP countries, because they make it extremely difficult to achieve economic diversification in terms of productions (Messerlin, 2012). The so called ‘fiscal crunch’ which Messerlin refers to in his report is to be expected from the elimination of ACP tariffs on imports from the EU. The loss of income as a result of the cut of tariffs on imports of the roughly 80 percent of tariff lines will have massive negative implications for various ACP government budgets. Although the EU has stated their intentions to provide compensations, there is no legal obligation to do so, and in the light of the current domestic economic situation in the EU, the promise of compensation seems unlikely. The combination of this ‘fiscal crunch’ and the biased liberalization as described above are likely outcomes of the EU ACP Economic Partnership Agreements, and are potentially extremely detrimental to the ACP countries. The intrinsic flaws of these EPAs will 21 Ane Solesvik Oppedal [Type text] 06/05/2013 magnify preexisting conditions in the ACP countries, rather than provide pro-growth development as intended. The EU Commission’s communication on trade, growth and development claims that despite their current economic situation they will refrain from protectionism (EC, 2012). This is line with the liberalist paradigm which argues that opening up markets to global trade is the best way of allocating resources. However, as developing countries continue to point out, the EU is still protecting their own markets, especially in the agricultural sector. The deadlock in the talks of the Doha Round demonstrates the importance of protecting national economic interest. The World Trade Organization was established as a forum for negotiating countries’ economic interests, which is one of the most important aspects of the foreign policy of nations. The complex nature of attempting to unite the economic agendas of widely different countries is proving increasingly difficult, especially in the current global economic environment. The EU recognizes the importance of these multilateral trade negotiations, and their potential benefits for developing countries as well as developed countries, but their efforts to create trade agreements outside the WTO forum, despite their good intentions, sometimes fall short of achieving one of the main EU trade objectives which is to promote growth and development abroad, as seen in the case of trade agreements with ACP countries. The social constructivist school of thought argues that the preferences of actors in the international system cannot be explained without “recourse to the ideological and/or cultural norms behind their position” (Hix, 2005, p. 377). This is evident in the Commission’s communication on trade, growth and development, and it is clear that EU employs its external economic policies as tools to promote political and economic progress in the developing world. One of their main priorities, as stated in the Communication, is to tailor trade and investment policy for those countries most in need. The EU is, according to the Communication, “guided in all its external action by the core values underlying its own existence, including the respect and promotion of human rights” (EC, 2012, p. 3). The problem is not in the intentions of the Communication, but rather in the implementation of policies to obtain the objectives put forth in the report. In the case of the EPAs with the African, Caribbean and Pacific countries, the trade agreements may have long term damaging effects to these developing economies, instead of supporting their growth and 22 Ane Solesvik Oppedal [Type text] 06/05/2013 development. If the EU wants to live up to their word to promote inclusive growth and sustainable development in these regions, a review of the current trade agreements and their actual impact is necessary in order to better tailor these agreements to the economic realities of these countries. 6.0 Perspectives The EU Commission’s Communication states as one of the basic objectives of the EU agenda is to ‘ensure that economic growth and development go hand in hand with social justice, including core labour standards, and sustainable environmental practices’ (EC, 2012, p. 13). Yet, for all its benevolent discourse on trade and development, there is a gap between the statements in the Communication and the actual policies which are being implemented. The current global economic situation and the reshuffling of economic power is requires swift and decisive action from the EU if it wants to preserve its place as one of the dominant economic forces in today’s world. The ideology behind EU trade policies is that liberalization of the world markets will help promote growth and sustainable development throughout the world, and these intentions are clearly reflected in the language of the Communication on trade, growth and development. However, it becomes clear that when trade is driven by a mercantilist rationale, the logics of trade and development are intrinsically at odds. Although the EU should be applauded for their continued commitment to the developing world, the overall feeling is that the Communication stops a step too short of tackling the challenges of today. The protection of the EU’s agricultural sector continues to attract attention and critique, especially from the world’s developing nations, who stand to benefit the most from access to this market. The fact that the CAP was not mentioned in the Commission’s communication demonstrates that the EU still needs to work to reach real Policy Coherence for Development. Current CAP instruments such as direct payment and export subsidies to boost the production and income of EU farmers tends to reduce the attractiveness of the European market for developing countries, as well as reducing overall world prices. EU import tariffs distort the market and puts developing countries at a disadvantage as import prices in the EU are kept artificially high by their trade policies. Attempting to isolate 23 Ane Solesvik Oppedal [Type text] 06/05/2013 domestic markets from fluctuations in world market prices may only further contribute to increasing world price volatility. The case of biofuel production and consumption in the EU clearly demonstrates the detrimental effect of certain EU policies on developing countries. Although biofuel was originally intended as an environmental alternative to fossil fuels, with the added benefit of decreasing the EU’s dependence on energy imports, research shows that the greenhouse gas emissions of biofuel related production are not necessarily less than those of burning fossil fuels. And restricting the access of foreign importers through various tariff and non-tariff barriers prevents developing countries from taking full advantage of the potential benefits of the increasing demand for biofuels. In light of these findings, it becomes clear that the EU need to revise their Common Agricultural Policy and create a policy framework allow more access to the European agriculture market. In a commentary to the Commission’s Communication on trade, growth and development Nicola Cantore of the Overseas Development Institute (ODI) proposes four suggestions to the directions that the EC should consider in terms of the Communication. First of all, the aim should be a liberalized agriculture market in Europe through the abolition of subsidies for EU farmers because they create market distortions. The EU must find other ways of effectively meeting food security than supporting EU farmers. Funds could be diverted from EU farmers and used to implement agricultural development programs both within the EU as well as in developing countries, which would be more consistent with the EU’s PCD. Secondly, a policy shift away from subsidies to EU farmers and towards sustainable global agriculture would be an unambiguous declaration of prioritizing food security, which is lacking in the current Communication. Thirdly, in the cases where EU policies harm developing country exports and growth, full compensation is a necessary measure. And lastly, European governments need to endorse the greening proposals contained in the EC reform proposal, because greening has the potential to help in dealing with challenging global changes and reducing the risk of natural disasters in developing countries, which is one of the priorities stated in the Communication itself. Although the EC Communication declares its intention to better assess the impact of trade initiatives on the EU and its trading partners, including developing countries, there is no mention of compensation mechanisms for developing countries in cases where EU policies are damaging to them (ODI, 2012). 24 Ane Solesvik Oppedal [Type text] 06/05/2013 Analysts say that the collapse of the Doha Round could symbolize the end to multilateral agreements (BBC, 2008). The EU however, recognizes the importance of a strong multilateral trading system, and its vitality to developing countries’ long-term interests, and continues their work to preserve and strengthen this system and reach a resolution to the Doha Round (EC, 2012). A comatose Doha leaves developing countries, especially the smaller economies, in a vulnerable position. Losing the advantage of negotiating in a multilateral forum, developing countries are at a disadvantage when the only tool left to open a domestic economy to foreign competition is through Preferential Trade Agreements. Although the EU’s ambition is to promote sustainable development through trade, it is evident that there are severe shortcomings in their trade policy and trade agreements which are detrimental to developing countries’ growth and development, as seen in the case of EU’s EPAs with the African, Caribbean and Pacific countries. The EPA negotiations also demonstrated the asymmetrical power relationship between the EU and these countries, and because most imports from the ACP already enters the EU market duty free, the only offer the EU has in return for the major changes it seeks in ACP trade is a negative, which is not imposing new tariffs on ACP exports which would hamper existing trade. Because the EU has failed to correctly evaluate the implications of their EPAs with ACP countries, these countries are likely to suffer fiscal crunches and bias liberalization as described in the analysis of these agreements above. If the EU successfully manages to reopen negotiations on the Doha Development Agenda there are still discussions about how multilateral liberalization may affect developing countries. For example, one major concern is the extent to which the reduction of multilateral barriers by developing countries erodes the preference margins to those developing countries which already have preferential access to the EU markets (Krishna, 2012). Because ACP countries benefit generously from preferential access to EU markets, they face significant losses in the case of tariff reduction being agreed upon in the Doha Round, because it would also mean a reduction in preferences for them. Whether through multilateral tariff reductions or through unilateral reform of the CAP, the erosion of preferences will result in losses for the ACP as well as for the Least Developed Countries. Some studies predict that ACP countries stand to lose over $2bn from preference erosion and that the benefits of the EBA initiative for LDCs will be greatly decreased. Although other 25 Ane Solesvik Oppedal [Type text] 06/05/2013 studies are more optimistic, suggesting that aggregate losses will be small, they still predict that a small number of countries will face significant losses (Trinity, 2010b). The issue of trade preference in the international trading system demonstrates the challenge the EU faces in the time to come, and the urgency with which it must act to ensure that its own policies related to trade and development will not be detrimental to developing countries sustainable growth. It is clear that the EU faces many challenges in its pursuit of liberalization of world markets, both with and without a resolution to the Doha Round. The EU Commission’s Communication on trade, growth and development is an optimistic trade strategy for the next decade, but unfortunately it fails to be explicit in declaring how it intends to reconcile its values and trade agenda with its own trade interest. If the European Union wants to maintain is role as an essential international actor in a rapidly changing global context and abide by its promise of an integrated approach to trade and development in its external action, the EU will have to be more ambitious in confronting the various political and economic challenges ahead. 7.0 Conclusion This paper is a thorough analysis of two cases of policy development and implementation in the European Union and their effect on the global trade patterns. The rapid pace of globalization and the increasing economic interconnectedness of nations provide challenges and opportunities. The EU is currently struggling with domestic issues such as slow growth and in the face of the rapidly emerging economies the EU must make some serious changes if they hope to stay relevant as an economic power on the global stage in the decades to come. The EU Commission’s Communication on trade, growth and development was an attempt to adopt the EU trade strategy to the changing economic realities of today. However, although the discourse in the Communication states the EU’s commitment to promoting growth and sustainable development abroad, the implementation of policies demonstrate that vital parts of EU policy is intrinsically at odds with the very essence of their trade and investment strategy. The CAP is not mentioned anywhere in the Communication, for which it has received critique, because under the Policy Coherence for Development, which is referred to in the report, the EU commits to tailoring 26 Ane Solesvik Oppedal [Type text] 06/05/2013 all policy areas to encourage development. The case of the biofuel production and consumption in the EU shows that the EU acts directly against their trade and development goals, by supporting local production at the expense of foreign producers. In addition, the EU further eliminates competition in its agricultural sector by imposing high quality criteria, which effectively prevents producers in poor developing countries from competing with European farmers. It becomes even more difficult for the EU to continue to justify the subsidies of European biofuels as research demonstrate that the environmental benefits of biofuels may not be as significant as previously thought, and that biofuel production abroad is linked to a number of environmental concerns such as deforestation and ILCU. The rising demand of biofuel consumption in Europe represents economic opportunities for farmers and producers in developing countries, but the various tariff and non-tariff barriers to the European market prevents them from taking advantage of this demand. EU trade agreements with the ACP countries may initially seem as initiatives to promote development through trade. However, the consequences of the collective failure of the global community to conclude the Doha talks are falling disproportionately on the poorest countries. Under a comatose Doha round, and despite their good intentions, the intrinsic flaws in the EPAs are detrimental to the ACP countries’ development, and instead facilitating pro-growth development, these agreements are creating a biased liberalization and fiscal crunch, which in the long run is extremely detrimental to developing countries and will hinder their regional integration as well as integration into world markets. The EC’s Communication on trade and development fall a step too short in fulfilling the promises of tailoring their trade and investment policies to those countries most in need. 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