EU Trade Policy after Hong Kong

As Trade Commissioner, I want to be an optimist. It is not always easy: the Doha Round is slow and Hong Kong was rather disappointing. For me it was like the child’s birthday party that you look forward to for so long, only to find it spoiled by all your friends turning up, with the same present you never wanted in the first place.

But in terms of the global economy, objectively 2006 should be a time of hope. We are fortunate to live in an age of unprecedented opportunity - and for most of us Europeans, abundance. High rates of world growth; technological progress; rising longevity; political, economic and monetary stability in much of the world; an economic revolution in Asia and Latin America; more integrated markets creating new wealth.

Trade is the motor of this opportunity - its competitive stimulus, its transmission belt of change. As barriers have fallen over six decades, international trade has outpaced the growth of national economies by on average about 2.5% each year. So when the world economy grows by 2.5%, trade grows by double that amount, about 5%. The difference, after sixty years, is exponential.

Liberalisation brings new wealth, spreads knowledge, speeds innovation, and creates new jobs that replace those that have been lost to progress. And trade liberalisation is not a zero sum game where the gain of one is at the expense of another. There is advancement and mutual benefit for parties at both ends of an exchange.

Of course the picture has its darker side too. My point is that there has perhaps never been a better moment to tackle the profound challenges of humanity: excruciating poverty in too many places; the scourge of diseases that could be cured if they were treated properly; the avoidable loss of life from lack of food; the hopelessness of inequality borne not from difference in talent but from divergent opportunity.

So, there is much to do - and no better time to do it.

Yet in Europe we are prone to look inwards. We are too defensive about changes in the world. Most of us expect our economic prospects to deteriorate in the years ahead. It is true, compared to post war growth rates, our continent is not doing so well. Levels of structural unemployment are unacceptably high. Our universities are falling behind. Scientific research is migrating out of Europe. Our capacity to innovate and to generate wealth for future generations is gradually being eroded. There are questions about who will pay for the pensions of our elderly in twenty years time. There is the dilemma of a continent that has exhausted most of its energy resources, and is conscious of the need to face up to the challenge of climate change.

These issues come down to: how we choose to respond to globalisation. And nowhere is this in sharper relief than in the trade policy we choose to pursue.

Do we want to turn our backs on the forces driving and shaping the world economy? Is our hard-earned wealth preserved better by ring-fencing our economies from the outside world, or by trading with it? And the inevitable question will arise if we do confer protection on a sector. Then which one? And what about the other sectors that also face international competition: what do we say to their workers when they ask for equal treatment and protection? And then, at the next turn, how do we respond to trading partners who have identified precisely these sectors as their export priorities, and in return are ready to open their own markets to our goods and services?

Europe has to face up to hard choices. Of course, structural change is painful and I believe we must be a social Europe equipped with a modern industrial policy, and other labour market instruments, to help manage change and ease the transition for those at the sharp end of change.

But we cannot demand of the rest of the world improved access in their markets for the specialised, top quality goods and services we produce, if at the same time we put up unreasonable resistance to increased access for the mass produced agricultural and industrial goods which developing countries want to sell in our markets. The shape of our trade is changing: our policies must reflect this.

I am not being absolutist on this. I am not, for example, advocating a world in which societies cannot make legitimate choices to sustain a living countryside. Since the start of the European Community in 1957, after the devastation and hunger of the Second World War, the EC’s first leaders wanted to guarantee food supplies at stable prices, as well as the livelihood of our farming communities.

Europe still wants, and needs, a sustainable agricultural sector. But the underlying reasons to establish the Common Agricultural Policy in 1957 have evolved, and we are responding to that change.

Reform is real and is happening now. Most recently we agreed, with difficulty, to cut European sugar production by about a third. And reform will continue in the future.

We long ago recognised that we cannot justify the CAP if it creates surpluses that we must dispose of artificially on the world market. We have also accepted that our payments to farmers should not distort trade.

We are removing artificial production incentives. As a result, Europe’s agricultural base is shrinking, creating trading space for others’ exports. The CAP’s focus is shifting to more specialist foods; to less polluting production and to rural development. And, whatever our critics imply, we have become the largest importer of food from developing countries. We take in much more than all the other OECD countries put together - the US, Canada, Japan, Australia included - both in volume and on a per capita basis. So I have little time for lectures from others about Europe’s alleged discrimination against agricultural producers in developing countries.

The value of multilateralism

Today’s global economy is different from the post-war era – more interdependent, diverse and dynamic. That is why in Europe, we support a rules based system of international trade. This is an idea, coupled naturally with a belief in multilateralism, that has been a core value for me since my earliest days in politics.

It means two things. First, without being exclusive, or ruling out bilateral initiatives, I believe it is right for Europe’s first loyalty in trade policy to be to the WTO and the success of the Doha Round. We have a profound commitment to its success. We have shown again and again - without due recognition - that we are prepared to pay to keep the multilateral system on track.

But secondly, the point of multilateralism is to multiply the benefits of what you do internationally above what you can achieve bilaterally or alone. Some say "shouldn’t you do things that are in any event good for you without waiting for others to do things that are good for them"? I argue the contrary. In trade, the best economic and development effects are achieved when in a multilateral negotiation we all move together, and multiply the gains. At the political level it is easier to defend necessary but unpopular measures of market opening and adjustment when others are making similar efforts. That’s why it is unreasonable for others to demand unilateral steps from Europe alone.

Doha’s importance

Against that background, let us look at where we go now after Hong Kong. Is the Doha Round going somewhere, or just going round in circles? It is clear that much of the heavy lifting has been carried over to this year. But, in averting a complete breakdown in Hong Kong, as happened in Cancun, we also managed to avoid a worse fate. The situation is serious, but not desperate.

Still, I frequently ask myself whether the Doha Round is worth all the time, effort and political drum-beating. Will it deliver on its promise to be a Round for development? Is an ambitious result still feasible, or must we resign ourselves to something more modest and more easily attainable? Can the WTO deliver benefits for all or only for those who are most competitive or producing certain goods?

The European Union has from the start argued in favour of a broad, comprehensive Round covering both improved market access and strengthened international trade rules to promote investment. No other member of the WTO has made offers or concessions that remotely match ours. These have been predicated on the assumption that a broad ambitious Round would deliver the greatest economic gains for all participants, as well as creating the largest palette of issues to facilitate the necessary trade-offs; and on the assumption that others would respond.

Yet we have had to accept a constant narrowing of the agenda from the outset.

At the WTO Ministerial, in Cancun in 2003, the EU agreed to drop three major new areas for negotiation: the development of liberal rules on investment, public procurement and competition policy. For reasons many of which I believe are ill-founded, developing countries felt that these subjects were somehow anathema to them, a Trojan horse set to reduce their legitimate "policy space", even though such rules are vital for good governance and for development. The US chose to stay on the sidelines.

As a result the Doha negotiations are now reduced to a much more familiar and beaten track: improving market access in the traditional sectors of trade in goods and services.

Nonetheless, a good result can still inject new blood into the world economy and that’s what we must work for. But we absolutely cannot afford to jettison any more parts of the negotiation as we reach the final bend.

The agriculture fallacy

One highly misleading proposition is that all that stands between the stalemate we are in and a successful, pro-development conclusion of the Round is the need for a further agricultural market access offer by the EU.

At the beginning of the year, the Australian Foreign Minister was reported as saying in Brasilia that the Doha Round’s success depends on this - that a "fair system of international trade" depends on access to EU farm markets. Hey presto! As if balanced growth of word trade and trade justice for the poor and needy - as opposed to well-off farmers in the outback - could be achieved by such simple means. There are no such turnkey solutions to trade justice, although there is no greater imperative to drive our efforts.

World Bank research is sometimes cited to buttress the argument that the greatest benefits in Doha for developing countries will come from freer farm trade. But this research is often misquoted or distorted. For example, a lot of the World Bank's research is based on the potential benefits of full agricultural liberalisation - including the removal of all farm tariffs in the developing world, where farm tariffs are higher than in Europe.

No model, World Bank or otherwise, can express all the possible outcomes of this round - and no model in my opinion comes close to capturing the complex reality of global trade and development.

Crucially, though, simply citing the potential gains from the Round does not tell you where those gains would go. The World Bank's own research suggests that the bulk of benefits from agricultural liberalisation will go to the developed world, which has the capacity to exploit it. In the developing world, new market access would be snapped up by a few highly competitive agricultural exporters. The costs of eroding existing preferential trade arrangements for the poorest developing countries, as tariffs come down, do not even figure in their analysis.

So measurements of potential gains - for somebody - may be real but they are no measure of development outcomes. We do well to remember that.

It is also worth noting that the World Bank's own researchers are clear that liberalising trade in manufactures would easily match the benefits for developing countries of lowering barriers to farm trade - a finding backed up by other studies. They also suggest that the gains for developing countries from services liberalisation and trade facilitation are potentially very high, and higher than from agriculture. So the argument that Doha’s contribution to development depends on agriculture - and in particular a further move on one element of the EU’s agriculture policy - is flimsy. The developing countries that have grown the most in recent years are the ones that have moved out of agricultural commodities and into manufacturing and services.

Trade justice for the poorest

We should also not forget that the EU has already granted completely free, 100% access to all products from the least developed nations, and for most of the exports of some thirty odd other developing countries as well. Perhaps the most remarkable achievement of the Hong Kong Ministerial was the acceptance by other developed countries to follow us some of the way by granting duty free/quota free access to 97% of the products originating in least developed countries, allowing for significant product exclusions. Emerging economies also accepted to contribute on a less ambitious scale.

Looking at the poorest countries, I am proud of the fact that the EU is the largest donor in Africa by a very wide margin. Now, we are negotiating Economic Partnership Agreements with all ACP countries. These are, above all, development instruments that combine capacity building, regional integration and progressive, gradual market opening. We are not driven by a desire for reciprocal market access, although we want the Agreements to offer more than is available between other WTO members. Free access to our market for ACP goods is not in itself sufficient to deliver growth. We believe that we must work dynamically with new and better economic instruments and conditions to foster regional integration and foreign investment so as to generate a more hopeful future for people otherwise relegated to dependence and to the margins of our world.

But let me also say this on the development question. In my view, a policy of differentiation between developing countries is now realistic, necessary and will help development. It will enable developing countries themselves to calibrate what they can contribute to the Round according to their means. And it will generate South-South trade with the strongest shoulders carrying the heavier burden. So we have to break the politically correct fallacy that developing countries are all alike and have the same interests. The G20 and the G90 do not have identical interests and capacities in trade. Some are major economic players and exporters on the world stage: others need all the help we can give them.

Investment in services promotes development

As I have already demonstrated, for development, agriculture is not the whole story. Investment in services is also vital for development, yet there is a resistance to this logic, encouraged by many NGOs. To them I ask: how can developing countries be expected to create a sound financial, telecommunications, distribution or transport base for their economy if not through foreign investment? Where is the technology going to come from? How are the know how and management skills going to be transferred otherwise? Liberalisation, within a stable, national regulatory framework, will help attract companies that will otherwise go elsewhere.

The central issue is this: well managed, progressive liberalisation of trade by emerging economies with growing productive capacity is as much in their interest now as it was in ours when we did it. Regrettably too many NGOs, anti-reform ministers in developing countries and others with local vested commercial interests prefer to argue that protectionism is the answer to development. It is a short term, self-defeating view. Ask India : they tried it and found out the hard way. It does not work.

The Doha Bargain

This brings me to the key question for the Doha Round. How are we going to construct the grand multilateral bargain that will unlock progress to the ambitious outcome the EU still wants?

We are in a classic negotiating dilemma. A large portion of the WTO membership feels, or claims to feel, that the rich world, including the European Union, has not put enough concessions on the table. They say, for example, that agriculture must "catch up" further with previous rounds and that we should envisage even deeper cuts in protection and subsidies than those already tabled.

Never mind that CAP subsidy reform already outstrips any other in the developed world. Or that exports to the EU from countries like Brazil have doubled in the last 10 years, and that our trade deficit in agriculture with that country alone has grown to over €8 billion.

Those WTO members go on to say that what is on offer since last October does not justify reducing their own protection in any real and meaningful sense, in all sectors, agriculture, industrial goods and in services. At best, they agree it might justify renouncing the possibility of returning to higher tariffs at some later date. In WTO parlance, this amounts to "binding existing market access." There would be no new market access in these emerging economies in exchange for the actual additional market access we would be giving.

In other words, just a permanent cut in those countries’ paper tariffs, in agriculture and industrial goods, against real cuts in the tariffs we actually apply. This is not a viable bargain to conclude the Round. I cannot sell a deal in which Europe give but gets nothing in return. That is not a negotiation, that is a capitulation. I won’t do it - who would? Europe is ready to give more than others. But it is not willing to get nothing in return.

The need for ambition

In my view, we can only escape from our present negotiating trap if we are more ambitious. And in agriculture, the EU has proved its ambition.

We are ready to eliminate our much-criticised export subsidies completely, by 100%, which will put export markets out of reach for many of our farm producers.

Other forms of domestic subsidies that distort trade will be cut by 70%, leading to lower production in Europe.

The tariff cuts we propose will increase imports. We have accepted these cuts will be on the basis of the formula suggested by the G20 - "the higher the tariff the greater the cut". Their effect can be predicted because we have accepted that in the higher bands the cuts have to be applied with no flexibility whatsoever except when a product is classified as sensitive.

Tariff cuts will be a full 60% in the highest bracket.

And for the so-called sensitive products - not more than 8% of our tariff lines - we are prepared to accept tariff cuts that will be about half of what will apply to other products, and to include new quotas that allow significant additional market access. So let me underline, sensitive products are not excluded from EU cuts.

This offer applies to actual and future tariffs, not just past tariff ceilings. There is no "water in our tariff" - the cut you see is the cut you will get. And we have made equally generous proposals in other sectors - industry and services. The EU will have no tariff peak above 15% in the entire industrial sector after a successful Doha Round, and possibly even no duty above 10%.

Europe insists on reciprocity

These proposals have a real political price for EU Member States. Taken together over the present reform cycle, they will have a considerable impact on people’s jobs and people’s lives. European agriculture - cereals, poultry, beef and much besides - will contract and there will be a significant loss of employment. So they are costly to us.

That is why I am compelled to say again to our WTO negotiating partners: Europe cannot envisage a Doha Round that would be concluded on the basis of "real cuts by Europe, paper cuts by others." Ambition for Europe. Inhibition for everyone else. This is a political non-starter, as well as a bad economic recipe for world trade growth. We must work for a result that means something for traders on the ground. If not - and I must make this clear - any developed or emerging economy that thinks it can come to the Doha table empty handed, will, I’m afraid, go home the same way.

We cannot, for example, take post-dated cheques written on a promise by the United States Administration that Congress will reduce their domestic and export subsidies in agriculture on an unquantified basis at some unspecified point in future. The same goes for Australia, Canada and New Zealand in respect of their export monopolies. We need these partners to show the same commitment to reform that we are showing in agriculture. It is out of the question that we consider another move in agriculture without a much clearer picture of the final result of the negotiation - and a real commitment by others to open their markets further.

Let me for one moment illustrate this political point with technical detail. In the case of trade in industrial goods, my negotiating team has calculated that if, in the agreed tariff-reduction formula, the emerging economies were to operate a coefficient of 15 with a permitted 10% flexibility for excluded products, this could give us no significant new market access in countries like India or Brazil. Yet, these rapidly growing countries are suggesting far greater latitude for themselves, through a co-efficient of 30, not 15.

Let me go further on this, because it is important to realise what lies behind the technical talk in real trade terms. Brazil, for example, has a total of 9000 tariff lines. If it excludes 10% of these lines from the proposed tariff reduction - as the DDA draft texts allow - that would remove 900 lines. The entire sectors of motor vehicles and their parts, information technology products, steel products, and footwear, could be put into this excluded category! And in other areas currently applied tariffs would hardly be touched. So you will understand the EU’s refusal to envisage such an outcome that could deny us new market access in our key export sectors.

A bold deal

So if others - emerging economies and developed countries like the USA - share my ambition to achieve a Doha Round that is worthy of the name, I believe we must work for a bolder deal: one that ensures that the Round commits all participants, except the poorer developing and especially least developed countries, to offer real and new access. These parameters should ensure that cuts in bound nominal tariffs will lead to a reduction of the tariffs that are operating now: anything short of this would mean that the Round has failed to deliver.

We must develop technical parameters that achieve this, and I intend to discuss this with WTO partners.

Let me try to bring all this together, at the risk of being blunt. Europe is united in wanting the Doha Round to succeed. We are also united in believing that the key to that success no longer lies in Europe. The blockage in the Round is not in Brussels, but in those countries failing to come forward with an offer on industrial tariffs and services that goes anywhere near responding to the seriousness of our offers in all sectors of the Round.

The EU remains completely committed to going as far as we can, including in agriculture, provided there is comparable effort elsewhere - taking full account of course of differences in levels of development. There must be comparable ambition in agriculture and industry, as the Hong Kong ministerial declaration itself now demands. I hope those who presently believe Doha should be a single or mainly agriculture dominant Round will not ignore this principle of comparability. The concept of a "single undertaking" - all sectors negotiated together - is an agreed objective of this Round and at the heart of the WTO negotiating process. So we will need to see the same kind of progress in services, on new rules governing products with Geographical Indications and on anti-dumping, as we see in NAMA or agriculture, if this Round is to succeed in the time available.

Conclusion

Let me be clear. I still want an ambitious result. But everyone has to recognise that this will not be achieved through shifts of European agriculture policy alone. There is no place in this multilateral negotiation for further unilateral concessions from Europe. I am ready to test whether there is an appetite - on the basis of balance between agriculture and industry, with services not left behind, progress on GIs and a measured but real improvement in the way trade defence instruments are used - to reach out for a result that does much more than bind existing liberalisation. But Europe cannot do this alone: talk to any European government, talk to European business, you will not find a European willing to give more while getting nothing in return.

Now is the moment for some intense, concentrated bilateral contacts to take place between key trading partners, to see if we can raise the level of confidence between us in a way which can bring a final agreement of this sort within reach.

In Hong Kong, we set a fresh deadline of end April. This is, indeed, make or break time for Doha. Europe has done its share of the making - we will not be blamed for the breaking. Away from the glare, there is work to be done. We can make it if we want to. And I want to. The question I cannot answer today is: do others?

Our negotiating partners need to stop pretending they have nothing to lose - before they lose it. There is no alternative to negotiation. That is why I say to my negotiating partners: negotiate or you get nothing.

I am sure Europe is willing to move faster and go further where that is appropriate - but not in a race with ourselves.