EU Growth and Trade Liberalisation in Asia

In times of low growth and fiscal austerity amid the ongoing recovery from the sovereign debt crisis, free trade agreements (FTAs) are an increasingly important tool for generating new sources of dynamism in Europe. Despite the high profile economic challenges of recent years, the European Union (EU) remains the world's largest exporter, importer, foreign direct investor and recipient of foreign direct investment. In 2012, the contribution of trade to the gross domestic product (GDP) helped to reduce the depth of the EU recession by a factor of four and offset sharp declines in domestic demand.

As the EU and Japan embark on FTA negotiations, both parties share the belief that with deregulation, enhanced competition and the opening-up of home markets, trade agreements can act as catalysts to reduce inefficiencies in domestic economic structures. Indeed, it is often overlooked that trade liberalisation is itself a major structural reform that creates new opportunities for innovation and stronger productivity growth. For this reason, trade policy is a key component of the EU's growth compact. Recent European research shows that trade deals with key partners could boost the EU's GDP by 2% or by more than €250 billion, the equivalent of adding an economy the size of Denmark to the EU. It must be noted that more than two-thirds of predicted gains would come from trade agreements with the United States and Japan (Note 1). According to the European Commission reports, 30 million jobs in the EU depend on sales to the rest of the world, and an ambitious free trade agenda could create more than two million new jobs.

Of course, predictions of strong growth and rising employment levels are harder to achieve in reality than in econometric models. The European sovereign debt crisis has illustrated that not all EU member states perform equally well in the global market. In Europe over the last decade, we have witnessed the emergence of competitive imbalances driven by divergent developments in wages, productivity and technology utilization. Unfortunately, it has taken a crisis for the necessary reforms to begin, but there now can be little doubt that Europe is tackling the root causes of competitive divergences. This is a painful process, but there are already encouraging signs that imbalances are narrowing as economic adjustments take place. Countries with high current account deficits have been steadily regaining cost competitiveness and are enjoying rising exports and an improvement in their current account position. Much will depend on how these competitiveness reforms proceed if Europe is to be able to fully benefit from the exciting prospects of the increasing trade opportunities in Asia.

Among FTA negotiations that have been successfully concluded by the EU recently, one can mention Colombia and Peru as well as the Association Agreement with Central America which covers six countries (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama). Meanwhile, negotiations with Canada are also close to finalisation. In the framework of the Eastern Partnership, the text of an FTA has been finalized with the Ukraine while talks are underway with Georgia, Armenia and Moldova. Looking towards Asia, the FTA with South Korea has already come into effect and is already having very clear effects on bilateral trade. Meanwhile, the EU also concluded FTA negotiations with Singapore on 16 December 2012, and both parties will now seek approval for the deal from their respective political authorities. Singapore is the EU's largest trading partner in the Association of Southeast Asian Nations (ASEAN) and is also Asia's second largest investor in the EU after Japan. EU Trade Commissioner Karel De Gucht said that "after our agreement with South Korea, sealing this deal with Singapore clearly puts the EU on the map in Asia. But we do not intend to stop here - I hope it will open the door for FTAs with other countries in the ASEAN region". FTA negotiations have started with Malaysia and Vietnam, while discussions are under way with Thailand and Indonesia on how to strengthen trade and investment relations. A goal further down the line will be to create a region-to-region agreement between the EU and the ASEAN region. ASEAN as a whole represents the EU's third largest trading partner outside Europe (after the United States and China) with more than €206 billion of trade in goods and services in 2011. The EU is ASEAN's second largest trading partner after China, accounting for around 11% of ASEAN trade. FTA negotiations with India are on-going (the EU is historically India's largest trading partner). While emerging markets offer untapped potential for EU exporters, the significance of such deals are also strategic in helping to reinforce the EU's presence in Asia.

An FTA between the United States and the EU would be among the most complex and ambitious trade agreements ever attempted, covering an economic relationship that is the world's largest at around €700 billion of annual trade in goods and services. Tariffs between the EU and the United States already are low--on average, less than 2%--but the volume of annual trade in goods between the United States and Europe, around €450 billion a year, would yield hefty overall savings. The European Commission estimates a bilateral FTA with the United States tackling tariff, investment and regulatory issues could raise the EU's GDP over the long term by 0.52%, or about €120 billion.

The EU and Japan are the largest and fourth largest economies in the world respectively, and together account for more than a third of global economic activity. Japan is one of the EU's top strategic partners, but, nevertheless, EU-Japan bilateral trade is declining according to the statistics. Japan's was the EU's seventh trade partner in 2011 (3.6%), while the EU (27) was Japan's third trade partner (11.1%). Japan's share in the total of EU imports fell from 10% in 1991 to 4% in 2011, while Japan's share in the total of EU exports fell from more than 5% in 1991 to 3.2% in 2011. This decline in the weight of each other's trade comes from increased trade flows with others, but there is consensus that EU-Japan trade has significant potential to grow.

According to the impact assessment conducted by the European Commission, an FTA with Japan would have a considerable positive impact on the EU economy: EU GDP would increase by 0.8% and EU exports to Japan could increase by 32.7%, while Japanese exports to the EU would increase by 23.5%. One needs to remember that the bulk of this increase for the EU would come from the elimination of non-tariff barriers (NTBs), and this could potentially generate an additional 420,000 jobs in the EU. Gains for the EU on the tariff side come from the elimination of tariffs in the agriculture sector (including processed food) and on certain industrial products (petroleum, textiles, clothing and leather). Benefits for Japan would derive from the elimination of tariffs on automotive products and consumer electronics.

NTBs are notoriously difficult not only to identify but also to eliminate, hence the magnitude of the task lying ahead of us should not be underestimated - in particular, given the fact that attempts to make progress on regulatory reform in Japan have not produced much results over the last 15 years under the EU-Japan Regulatory Reform Dialogue. After one year of intensive discussions, in May 2012, the European Commission agreed with Japan on an ambitious agenda for the negotiations covering all EU market access priorities. The Commission also agreed with Japan on specific 'roadmaps' for the removal of non-tariff barriers as well as on the opening up of public procurement for Japan's railways and urban transport market. On 29 November 2012, the European Council gave the European Commission 'the green light' to start trade negotiations with Japan. This long preparatory work culminated with the announcement on March 25 of the official launch of negotiations with Japan. One should stress two important points in this mandate given to the European Commission: firstly, it has to do with parallelism between the elimination of tariffs and the elimination of NTBs (which means that tariff elimination will not take place unless NTBs have been removed). The second point is on the "review clause" based on which a stock taking exercise will take place one year after the start of negotiations. This provides both sides excellent motivation to make significant progress in the coming year.

Much has been made of the supposed choice of growth or austerity in Europe, but this is an artificial distinction. There is a political consensus in Europe that sustainable growth cannot emerge from steadily growing deficits and debts; instead we must focus on structural reforms, and one of the most effective is that of trade liberalisation. While the EU remains committed to the success of multilateral trade agreements and is working hard to achieve success in the Doha round of the World Trade Organization (WTO) talks, there is also an opportunity to push ahead on working on bilateral agreements which go deeper that what could be achieved on a multilateral level. With Japan declaring its intention to join the Trans-Pacific Partnership (TPP) talks as well as starting negotiations with China and Korea on a trilateral agreement, this is an exciting time for trade liberalisation in Asia, and the EU is set to play a proactive and positive role in developments.