EU trade policies: Carrot-and-stick mechanisms in pursuit of non-trade policy objectives?

The EU is the world’s largest exporter of manufactured goods and services. It is also the biggest export market for many countries. The EU often conditions preferential access to its market on achievement of Non-Trade Policy Objectives (NTPOs), such as sustainable development, human rights and good governance.

It has been argued that trade policy is “the principal instrument of foreign policy for the EU” (Sapir 1998). Through trade policies, the EU can “export” its values to its trading partners. This idea is enshrined in the Treaty on European Union (TEU). Article 21 of the Treaty states, “[t]he Union’s action on the international scene shall be guided by the principles which have inspired its own creation”, including democracy, the rule of law and human rights. It also refers to the pursuit of NTPOs such as international security and sustainable economic, social and environmental development.

Ursula von der Leyen promised that under her leadership the Commission will further strengthen the use of trade tools in support of NTPOs. In her ‘Agenda for Europe’, she stressed, “Trade is not an end in itself. It is a means to deliver prosperity at home and to export our values across the world” including “the highest standards of climate, environmental and labour protection, with a zero-tolerance policy on child labour”.

In a recent paper (Borchert et al. 2020), we examined the extent to which the EU can promote NTPOs through its two principal instruments of trade policy: free trade agreements and the Generalised System of Preferences (GSP). We assessed whether these trade tools can be used as a ‘carrot-and-stick’ mechanism to incentivise trading partners to achieve NTPOs. The key question was whether preferential access to the EU market can be used to reward trade partners for ‘good behaviour’ on NTPOs (positive conditionality) and to punish ‘bad behaviour’ (negative conditionality).

NTPOs in EU trade policy

The first policy tool through which the EU can grant preferential access to its market is trade agreements. At present, the EU has the largest trade network in the world, with over 40 agreements in force. The legal basis for these agreements is Article XXIV of the General Agreement on Tariffs and Trade (GATT).

Figure 1 shows the evolution of NTPOs in these agreements using data compiled by Lechner (2016) in the context of the Design of Trade Agreements (DESTA) project. DESTA groups NTPOs into four main categories: civil and political rights; economic and social rights; environmental protection; and security issues. These are then scored according to the degree they are legalised in trade agreements. Average legalisation scores over five year intervals show that NTPOs have clearly gained prominence (and bite) in EU trade agreements since the 1990s. This trend has mostly been driven by the rise of labour and social/environmental provisions, whose average legalisation scores more than doubled during the last two decades.

Figure 1. Legalisation of NTPOs in EU trade agreements, 1970-2019

Note: Interval scores were computed by first summing the legalisation scores of all Non-Trade Policy Objectives (NTPOs) and then averaging these overall scores across the EU trade agreements concluded over the five years concerned. The average score for 2015-2019 is lower than that for 2010-2014 mainly due to the agreements concluded by the EU with different groups of African countries.

The GSP is the second policy tool that the EU can use to grant preferential access to its market. The legal basis for GSP schemes is the ‘enabling clause’ adopted under GATT in 1979, which allows positive, pro-development trade discrimination. It thus allows donor countries to offer better than Most-Favoured-Nation tariffs to developing countries, without extending the same treatment to developed countries.

Over the years, the EU has introduced in its GSP regulations several provisions aimed at pursuing NTPOs. In particular, the Special Incentive Arrangement for Sustainable Development and Good Governance (GSP+), introduced in 2006, grants developing countries full removal of tariffs on two thirds of all product categories, if they ratify and comply with a core set of international conventions on human rights, labour and environmental protection.

Table 1 summarises the evolution of NTPO-related provisions in the EU’s GSP programmes.

Note: The 1991 Drugs Arrangement and the 1998 Special Incentive Arrangements concerning Labour Rights and Environmental Protection were superseded by the 2006 Special Incentive Arrangement for Sustainable Development and Good Governance. GSP = Generalised System of Preferences; NTPO = Non-Trade Policy Objectives, ESRs = economic and social rights; EP = environmental protection, CPRs = civil and political rights.

Conditionality in EU trade agreements and GSP schemes

We argue that trade agreements are not an effective tool to incentivise trading partners to achieve NTPOs. The key reason is that the EU must comply with Article XXIV of GATT. This requires that countries negotiating preferential trading arrangements eliminate “duties and other restrictive regulations of commerce” on “substantially all the trade between the constituent territories in products originating in such territories”. Given that tariffs must be eliminated reciprocally across the board, the EU cannot extend or restrict preferential access to its market depending on the behaviour of a trading partner.

Once tariffs are eliminated following the entry into force of a trade agreement, there is no positive conditionality. In other words, trade preferences cannot be used as a ‘carrot’ to reward a trading partner’s good behaviour on NTPOs. In terms of negative conditionality, the EU could in principle trigger the ‘essential elements’ clause in case of severe NTPO violations, which could lead to suspension or termination of the trade agreement. However, this clause only applies to some NTPOs (human rights, democracy, the rule of law and security), excluding provisions on labour and environmental standards. Moreover, the EU has rarely activated the ‘essential elements’ clause, and even when it has it has never suspended or terminated the trade agreement. This may be partly because the ‘stick’ is too drastic. Given the reciprocal nature of a trade agreement, its suspension or termination can be extremely costly, not only for the trading partner but also for the EU. This is not to say that the EU cannot use negative conditionality in trade agreements, but that the sanctioning mechanism itself cannot rely on trade policy instruments.

By contrast, the EU can use GSP programmes as a carrot-and-stick mechanism to promote NTPOs in developing countries. The key difference between GSP and trade agreements is that GSP preferences are offered on a unilateral basis, which affords more leeway in using conditionality by preference-granting countries. Through its GSP programmes, the EU can reward countries that make progress on NTPOs, by offering lower tariffs and broader product coverage. For example, in 2014 the Philippines was upgraded from the GSP to the GSP+ programme. This increased the number of products eligible for zero tariffs from 2,442 to 6,274. If a trading partner violates NTPOs, the EU can respond by suspending part or all GSP preferences. For example, in 2010 the EU withdrew Sri Lanka from its GSP+ programme due to shortcomings in Sri Lanka’s implementation of three UN human rights conventions: the International Covenant on Civil and Political Rights, the Convention Against Torture, and the Convention on the Rights of the Child. Similarly, violations of labour standards have led to temporary withdrawals of preferences from Myanmar and Belarus. Since labour standards would be outside the scope of the ‘essential elements’ clause, these cases demonstrate that the scope for negative conditionality is much broader in GSP than in free trade agreements.

The European Commission has reported many instances of noncompliance with NTPOs. However, application of negative conditionality to GSP recipients has been scattered. Restraint is usually justified by the desire to limit harmful impacts on the target population. A less altruistic explanation of selective enforcement is linked to trade partners’ economic size: the EU might refrain from using negative conditionality for fear of retaliation, or to avoid an increase in the cost of sourcing key inputs, when violations occur in larger emerging markets such as India, Pakistan or China.

Concluding remarks

The literature on issue linkage suggests that large trading blocs such as the EU may seek to enter into free trade agreements with smaller countries to exchange market access concessions with concessions on non-trade issues (Limão 2007). Conconi and Perroni (2012) found that trade agreements can help small countries achieve domestic policy objectives. These studies rely on the idea that trade policy can be used as a ‘carrot-and-stick’ mechanism to enforce commitments in other policy areas. We argue that there are important legal and economic limitations to both positive and negative conditionalities in trade agreements.

Our analysis suggests that, if the EU wishes to rely more on trade policy to promote such objectives, it should focus on GSP programmes. The unilateral nature of these programmes implies that the EU can use them to enforce NTPO commitments by its trading partners. However, conditionality in GSP schemes should be administered in a more consistent and rules-based way, with beneficiary countries regularly monitored and their trade preferences more systematically revoked or suspended in cases of non-compliance with NTPO commitments.

References

Borchert, I., Conconi, P., Di Ubaldo, M. and Herghelegiu, C. 2020. The pursuit of non-trade policy objectives in EU trade policy. CEPR Discussion Paper 14655. London: Centre for Economic Policy Research.

Conconi, P., Perroni, C. 2012. Conditional versus unconditional trade concessions for developing countries. Canadian Journal of Economics, 45: 613-631.

Hachez, N. 2015. ‘Essential elements’ clauses in EU trade agreements: Making trade work in a way that helps human rights? Working Paper 158. Leuven: Leuven Centre for Global Governance Studies.

Lechner, L. 2016. The domestic battle over the design of non-trade issues in preferential trade agreements. Review of International Political Economy, 23: 840-871.

Limão, N. 2007. Are preferential trade agreements with non-trade objectives a stumbling block for multilateral liberalization? Review of Economic Studies, 74: 821-855.

Mavroidis, P. C. 2016. The regulation of international trade: GATT (Vol. 1). Cambridge: MIT Press.

Sapir, A. 1998. The political economy of EC regionalism. European Economic Review, 42: 717-732.

About the authors
Dr Ingo Borchert, Senior Lecturer in Economics, University of Sussex Business School and Fellow of the UK Trade Policy Observatory (UKTPO)

Paola Conconi, Professor of Economics, Université Libre de Bruxelles (ECARES); and CEPR Research Fellow.

Mattia Di Ubaldo, Research Fellow, University of Sussex Business School; Fellow of the UK Trade Policy Observatory (UKTPO).

Cristina Herghelegiu, Postdoctoral researcher, ECARES, Université Libre de Bruxelles.

Read the full magazine issue

Square pegs in round holes? Using trade policy for non-trade objectives – Volume 9, Issue 2, 2020

European Union (EU) trade policies increasingly link access to its market to compliance with Non-Trade Policy Objectives (NTPOs), such as human rights.

02 July 2020