EU wrestles with free trade principles

The year 2016 left two trade policy issues unresolved and they will haunt EU politicians for years to come – the granting of market economy status (MES) to China and the type of commerce relations the UK will have with the EU once it leaves the bloc in 2019.

By granting MES to a country, the EU would recognise a level playing field under the commerce terms set out by the World Trade Organization (WTO), but China does not fulfil most of the five criteria* set out by the EU to have MES.

Although initially the Commission – the EU’s executive body – seemed friendly to the idea of closer trade ties with China, the pressure from manufacturers in the EU has pushed it towards a more protectionist stance.

On 10 May, lobbying from EU steel producers provided an example of this pressure. “A large part of this ballooning import share [of steel coming into the EU in the first quarter of 2017] has to do with the dumping of unfairly cheap steel from third countries,” said trade group Eurofer.

European chemicals firms have been, however, more contained or straightforward against implementing tariffs or protectionist measures against China. Many European chemical companies have facilities in China and the trade surplus in this case works in the EU’s favour.

“VCI rejects protectionist measures; they are obviously unsuitable from the perspective of a globalised industry like chemistry,” said the powerful German chemical trade group in late 2016.

EU-wide trade group Cefic said on 12 May in a written response to ICIS that “basically, there is no such thing as China-MES.” It argues there is no issue anymore, and that the political debate had moved on. “Around 1% of Chinese imports into Europe are subject to dumping measures, therefore we support the Commission in its balanced and country-neutral new anti-dumping methodology proposal,” said Rene van Sloten, director for industrial policy at Cefic.

UNCERTAIN TERMS FOR BREXIT

Aside from the Chinese relationship with the EU, the UK’s future trade relationship with the EU has just started to be explored. A few voices have expressed concern about chemicals trade and how quitting the EU’s Reach could affect health and environment.

UK Prime Minister Theresa May said before the snap election on 8 June that the UK would come out of the EU’s 500m people-strong single market, in order to free the UK from the jurisdiction of the European Court of Justice (ECJ) which safeguards the common trade rules within the bloc.

However, chemicals are too important for the UK’s manufacturing sector not to comply with the EU’s Reach regulatory framework once the country leaves the bloc. More than 60% of UK chemical exports go to the EU, while complying with Reach is considered a given – otherwise, trade with the EU would not be possible.

Under the ECJ’s rules, all countries with the EU or trading with it must comply with Reach. However, jurisprudence of the ECJ in the UK is likely to end.

May had opted for a “hard Brexit”, breaking all legal ties with the EU. However, the snap election had the unexpected result of May’s Conservative Party losing its majority in parliament, giving hope for a “softer Brexit”. Yet on 21 June, the UK government announced its intention to exit the EU customs union – different from the single market but still an important aspect of trade.

The conundrum of how to comply with Reach, without being in Reach has brought up a new acronym – Breach.

However, the debate has just started and different actors have begun to lobby for the UK to continue its membership of Reach.

A Member of Parliament (MP) from the opposition Labour party in the UK said in an interview with ICIS in April that his party would ask for assurances that the country will continue to produce and trade chemicals under the “current regime” so corporates and consumers could be sure that standards will not be lowered once the UK withdraws.

“Once we leave the EU, we would be in a much weaker position to strike our own trade deals with other countries. Facing the US, for example, where they have a lot of chemicals in the market which wouldn’t be allowed under Reach, we’d be in a weaker position to impose high health and safety standards,” said the MP Geraint Davies.

RELATIONSHIP WITH THE US

After years of negotiations between the EU and the US to sign a free trade deal, known as TTIP (Transatlantic Trade and Investment Partnership), the election of a new US President in November and the protectionist winds that followed killed off the deal and put it to rest.

The new US President Donald Trump has no appetite for trade deals with trading blocs, but prefers to negotiate from a stronger position with countries individually.

The demise of the free trade policies that guided the US in the last 60 years also prompted Trump to sign the country’s withdrawal from a trade deal with countries in the Pacific – TPP (Trans-Pacific Partnership) – which would have anchored its economic influence in the region.

Interestingly, the head of petrochemicals at Spain’s energy and petrochemical major CEPSA said to ICIS in March that the US has always been very protectionist, so he was not too surprised about the current trend in Washington.

“The US has always been a very protectionist country and it’s fascinating how you have this duality of being an open country supporter of liberties, but on the other hand has tendencies to look inwards, like in trade,” said Jose Manuel Martinez. The US seems to be in retreat in global trade.

The EU, a champion of free trade and in favour of its expansion, may be prompted to revise that position and turn more protectionist.

Fascinating times of change are ahead, especially as many thought global free trade trends were irreversible.

DUTY AND REGULATORY BULLETIN

This article appears in the 1st ICIS Duty and Regulatory Bulletin which focuses on developments in the chemicals and fertilizers regulatory space. The bulletin includes insights on spotlight products, along with interviews with lawyers and policymakers, covering the implications of Trump, Brexit, and China’s bid to be recognised as a market economy. The bulletin also provides an insight on shipping trends and freight rates for main trade routes in Europe and globally. Download and sign up for the bulletin at: www.icis.com/contact/icis-duty-and-regulatory-bulletin