EU Trade Agreements

 

WEEKLY COMMENT 20-10-2016

By Barry Edwards

EU Trade Agreements

 

The European summit which finishes today in Brussels was meant to finalise the trade agreement with Canada referred to as the Comprehensive and Economic Trade Agreement (CETA). The announcement that the Wallonian regional government have rejected the terms of CETA has thrown a spanner in the works for the EU Commission. They have been trying hard to rewrite the sections they object to but last night, 20th October, the Wallonian’s rejected the latest offer.

The Wallonians are exercising their democratic right to raise concerns about the EU deal. One of the most important issues raised by them is how CETA would give power to foreign investors to sue governments for huge compensation if democratically agreed decisions to protect citizens or the environment interfere with their profits. Wallonia faces not only substantial financial liabilities, but also a serious impairment to its democratic decision-making powers. It is only normal that the region should have its say in this matter.

Secondly, the Walloon parliament has actually gone further than most other governments and parliaments in the EU: it seriously looked at the text of CETA and debated the pros and cons of such an agreement before taking a principled position. Similar criticism of CETA in Germany led to the drafting of an additional declaration to the agreement that acts as a palliative without addressing any of the issues raised, especially when it comes to the controversial investment chapter. The Walloons remain steadfast in their opposition as long as their concerns are not answered properly.

You can read the EurActiv news release and the background of CETA if you click on the link below (2 pages);

http://www.euractiv.com/section/trade-society/news/crisis-deepens-as-wallonia-rejects-new-offer-to-unblock-ceta/?nl_ref=23144373

The heart of the disputes which all kinds of non-government organisations have referred to is the Investor-state dispute settlement (ISDS) in bilateral investment agreements (BITs) of which there are about 50 signed with individual countries and the EU. CETA has improved on the ISDS section but the complaints have been intensified because the Trans-Atlantic Trade and Investment Partnership (TTIP) highlighted the power large companies would have over national law to protect their rights and profits.  There are various other problems with the TTIP and it now looks as though this agreement has little chance of being ratified by the EU members and the EU parliament in the near future.

The main point here is that these agreements struggle to get finalised because all 28 EU member countries have to ratify them and then the EU parliament has the last word. The process is over complicated and it is surprising that the other BITs managed to get signed although most of those were with smaller countries eager to have a deal.

It is clear that these deals are difficult to negotiate especially with larger developed nations and take a long time to be agreed. The UK will have the same problems that CETA and TTIP are having when the time comes to discuss a trade agreement. Many commentators are suggesting that the EU will not make life easy for the UK negotiators and that there may not be a temporary deal when the 2 year period allowed under article 50 expires because it has to be ratified by all 27 members which will not be forthcoming. That means that WTO rules will be temporarily adopted, even though the UK is not a member, until the trade deal is finalised.

That means that there will be tariffs of around 10% applied to most trade and financial services will not be sold to the EU by UK based companies; only the largest firms have fully capitalised subsidiaries in continental Europe. How negotiations evolve over the next few years will determine if that does happen but many commentators believe this is inevitable. When you analyse the interconnectedness of supplies for some industries, especially for assembly plants for cars and other products, this will have a big impact on selling prices. It will make them uncompetitive in the EU unless import substitution is undertaken for EU supplies to counteract the tariffs.

The government will have to extend the services it provides for import substitution to include financial guarantees for SME’s to build plants to fulfil this process since the banks will not support projects of this kind for SME’s. As we have stated before, the government will have to substantially increase infrastructure spending to stabilize the sharp reduction in business activity. The UK economy will suffer badly if the commentators are right and therefore measures like these will become vital to protect jobs and stimulate growth.

In my view, it does not look like many people have realised the potential damage to the UK economy if negotiations do not go well and the forward planning that should be undertaken now to make sure this does not happen should be implemented as soon as possible. We can only hope the forthcoming autumn budget statement includes proposals like this to encourage proper preparations to neutralise the effects of an unsatisfactory deal with the EU.

That’s all for this week, more observations next week.