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INTA Discusses Upcoming Trade Policy Review

On 12 October the Committee of International Trade (INTA) held its 5th Trade Policy Day. Chair of the Committee Bernd Lange opened the floor to key speakers; President of the Kiel Institute for World Economy Prof. Gabriel Felbermayr, Professor Joseph Shapiro from UC Berkley, Director General of Trade Sabine Weyand, and other stakeholders and speakers of the EU Commission. The speakers addressed major hot topics such as the upset supply chains during the recent pandemic, creating more diversification in international trade so as not to rely too heavily on a single country for imports, addressing a Carbon Border Tax and some of the raw realities of the creation and implementation of the upcoming Trade Policy.

Mr. Felbermayer presented first, opening with the effect that COVID19 has had on trade. The pandemic has shown there are risk related hazards that can interfere with the supply chains but many risks exist regardless of pandemic interference, such as bankruptcy, technologies, and critical infrastructure, which all require different policies. The EU will need policies to mitigate these risks and can adapt when they materialise. The latest research shows that trade helps deal with shocks, in particular natural disasters, which is what COVID19 can be compared to. Trade can help us “ride out the shock” if it is synchronised. Mr. Felbermayer mainly addressed the level of EU dependency on imports from outside of the European Union, and how one would quantify this.

In the EU-27, 91% of all products at the six-digit level are imported from 10 countries. These 91% amount to 99.3% of the EU import revenue as of 2018. However, some products have few suppliers - which hurts diversification. For example, there are about 80 imported products out of 5000 where there are only 1 to 3 suppliers or supplying countries, and they amount to a total of $350 million US dollars. Some of these materials are uranium ore, thalium and beryllium, which are incredibly important industries as outlined in the EU Green Deal. Other products are chemical substances such as those used in medicines. These products need to be addressed with the most care. Mr. Felbermayer states that the single market is best assurance for special relationships outside of the EU. Austria, for example relies on one extra EU supplier for many products. The single market gives each country access to the whole EU supply network. He stresses the importance of diversification where it can be done, focusing on the circular economy in areas that diversification is not as strong and creating consistent EU policy.

Professor Joseph Shapiro states that reforms to trade policy after COVID19 can help the environment, in particular regarding the Border Carbon Adjustment (CBA). Researchers agree that ideal climate change policy will have the same carbon price in all countries such as a cap and trade market, like the EU emissions trading system, or a carbon tax. However, only 20% of global carbon emissions today face any price and those prices are low and heterogenous. In the presence of incomplete regulation, an important concern is that climate change policy may relocate carbon emissions rather than decrease them (carbon leakage). A CBA would be the ideal solution to this, though it is not without risks. For instance, if the US or China responds with their own trade policies this can lead to policy conflicts or trade war. Additionally, it can be difficult to accurately measure the amount of carbon produced.

Mr. Shapiro states that an additional recommendation would be a broader set of trade reforms which can be used alongside a CBA. He is concerned that levels of trade protection are much higher on clean goods and lower on energy intensive (cement, steel) goods, which is “incentivising the wrong industries”. Each country may be subsiding climate change by encouraging production in trade in “dirty” energy intensive goods. EU countries are implicitly subsidising climate change through trade policy more than almost any other country in the world. If countries reform trade policy with similar levels of protection on clean and dirty goods, some calculations suggest it would have a similar effect on global climate change as the EU emissions trading system already has.

Additional stakeholders during the INTA meeting brought up how the trade policy will affect SMEs, climate change and the EU Green Deal. In particular, CEO of Euro Chambers Ben Butters stated that last month the EU Commission published the Euro Barometer survey on SMEs, which was conducted from February through May. The results revealed the export potential of international markets remains largely untapped by many SMEs in the EU. 26% of EU SMEs export their goods or services outside their national market. Of that percentage, 9/10 export to other EU countries; the smaller the business, the less likely it is to export. 41% of the exporters outside their national country do so outside of the EU borders, and only 20% of micro businesses. There's clearly a strong correlation between SMEs with previous and planned growth and a willingness and capacity to export. Euro Chambers fully supports open markets underpinned by free and fair trade and believes they are fundamental to the EU Commission and fully supports the EU's strong position on a rules-based multilateral trading system that will open fair, open and predictable trading environment. A coherent economic diplomacy process must be considered in the policy and a free trade agreements must continue to have a strong SME chapter to increase opportunities and capitalise on what the FTAs allow. 

In response, the Director General of Trade Sabina Weyand addresses four needs from stakeholders to establish an effective trade policy. Firstly, stakeholders should respond to the public consultation by the 15th of November. Secondly, they should engage in debate across Europe at the local levels. MEPs, civil society and businesses must engage locally across member states to address all issues outside of the EU bubble. Thirdly, Ms. Weyand would like stakeholders to avoid “simplistic answers to complex problems” and move beyond the headlines: for example, do not simply bring up that the EU needs a resilient and robust supply chain, but provide real and practical solutions for doing so. Lastly, Ms. Weyand asks for evidence and data to support what “actually works” for companies that addresses real problems.

Ms. Weyand addresses points made by many speakers at the INTA meeting stating that the EU does not have that many tools to weigh global affairs and shape the world in line with our values and interests. One of the key economic tools they do have is to externally project the strength of the internal market. She states “a lot has been said about the ‘Brussels Effect’; you do not win the race for shaping globalisation by playing defensive but by being global leaders. She addresses Mr. Shapiro’s concerns about tariffs on “dirty” industries being quite low compared to greener industries, stating that this is a side effect of tariff escalation rather than intentional subsidisation. As the EU are specialised on the downstream production of high value-added goods which tend to be cleaner, they have higher tariffs to protect their internal protection. Since there is a higher need for intermediate products and raw materials, the EU will have no or lower tariffs on the dirty or “brown” goods. This does need to be addressed through the WTO in trade and climate initiatives, such as eliminating tariffs on climate mitigation products and services.

She concludes the INTA committee meeting by reminding everyone that 75% of C02 emissions is related to production, and this needs to change on a global scale. The way to change production methods is not through trade, but through cooperation, technical assistance, and working together globally on these issues.

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