logo logo

Bilateral agreements are new messiah for world trade

Business Standard | 24 August 2009

Bilateral agreements are new messiah for world trade

Pallavi Aiyar / Brussels

Despite ongoing efforts to blow some life into the comatose Doha Round of WTO (World Trade Organization) talks, it is the bilateral agreements that have emerged as the new messiah for world trade. The past few years have seen every major economy scrambling to sign a raft of free trade agreements (FTAs), negotiations for which reached a fever-pitch this summer.

In August, India — despite its traditionally free-trade-averse stand — stole a surprise march over its western critics at the WTO with New Delhi signing significant deals with South Korea and the Association of Southeast Asian Nations (Asean) in the space of two weeks. The successful conclusion of these deals is in sharp contrast to the negotiations the same two entities have with the European Union (EU).

Negotiations between the EU and Asean that began in May 2007 have completely broken down over the non-trade issue of Brussels’ censure of human rights violations in military-ruled Myanmar, one of Asean’s 10 member nations.

Two-year-long talks with South Korea have fared better, yet despite being close to a deal, the EU finds itself unable to close it. A draft accord could not be agreed on by the Council of the EU in July, with a final decision once again being postponed. Talks will next be held in September. The deal was originally slated for signing in March this year.

Although some member states like the United Kingdom and Sweden are reportedly keen to conclude the FTA as soon as possible, others, notably auto-heavyweights Germany and Italy, are more reluctant.

The main issue of contention has to do with rules of origin that establish the level of permissible foreign content in products as well as duty drawbacks that allow for the reimbursement of tariffs. Under the current proposal, South Korean manufacturers would be able to purchase 45 per cent of car components from low-cost countries like China and claim the duties back when the vehicles are shipped to European markets. European auto makers are consequently up in arms at what they feel will be the unfair advantage enjoyed by their Korean counterparts.

Upcoming elections in Germany and a new Commission, expected by the end of the year, are likely to push back any conclusive agreement with South Korea even further.

Trade negotiators in Brussels often express their frustrations in private. Given that the EU is primarily an economic power, its inability to move faster to secure agreements is a real cause for concern, they say. Already emerging economies, most notably China, but also Asean, India and others have Brussels feeling less-than secure of its economic primacy, particularly given the current recession.

There is often a divide between the concerns and goals of the European Commission, the executive that is charged with negotiating and implementing trade deals, and the Council of the EU, the legislative body that represents the 27-member states and has the power to ratify these deals. To complicate matters, the European parliament, which comprises elected representatives from member states, also has a say on certain pieces of legislation.

While Parliament and the Council tend to lay more emphasis on human rights concerns in dealings with foreign countries, the technocratic Commission prefers to de-link technical matters like trade with “non-core” issues like human rights.

The result, sighs one official, is a crisis of identity for the EU. “Are we a trade body, an elected government or an NGO?” she asks. With countries like China and increasingly even India making trade deals based on a calculation of cold-blooded national interest with no political strings attached, there are those within the EU that question the wisdom of Europe’s current strategy.

The EU certainly does not have it easy. Protectionist trade unions, a coalition of 27-member states with divergent priorities, and a convoluted internal-decision making process do not make for quick results.

In this regard, India is Europe’s doppelganger. Cumbersome coalitions, powerful civil society organisations and conflicting interests amongst political constituencies are also a hallmark of the decision-making process in New Delhi. But European officials rarely acknowledge these parallels, choosing instead to unreflexively disparage India for faults the EU itself can be charged with.

“Unlike the Chinese, the Indians do not go to negotiations with a firm goal,” said one European negotiator in the context of discussing the ongoing India-EU FTA talks. “They are great at debating but lousy at practical give and take.” Yet, it is India, not the EU, that has actually managed to conclude trade negotiations with South Korea and Asean.

One caveat that must be made is that the EU’s proposed FTAs are far more ambitious than India’s. Thus, while the India-South Korea CEPA (comprehensive economic partnership agreement) only includes the phasing out of duties on 85 per cent of Korean goods and 93 per cent of Indian products, the EU-South Korea FTA would banish duties from 99 per cent of Korean imports in Europe and 96 per cent of European exports to Korea.

Yet, given that import duties in Europe on most products are already negligible, the road that the EU has to travel to meet its FTA targets is considerably shorter than the one India must go down to meet its. Few in Europe think that Brussels has anything to learn from New Delhi. But such thinking may just be hubris.

 source: Business Standard