Trade agreements are a set of commitments, undertaken by the European Commission (EC) on behalf of EU Member States, to remove or reduce customs tariffs with trading partners. The commitments are made in exchange for reciprocal or equally valued obligations by the partner country or countries involved. In practice, as the scope of these agreements broadens, their significance continues to grow (see below: Growing Scope of EU Trade Competence has proved Controversial). To various degrees, trade agreements function as economic, social and political tools of integration and/or alignment. In other words, there is a broad range of reasons why the European Commission may enter a trade agreement with a trading partner, including:
- to lower the entry costs to a protected market
- to gain better access to products or services
- to increase competition
- Social / Political:
- to support the economy of a developing country
- to transfer technology, know-how or best practice through preferential treatment
- to bring diplomatic influence to bear in a particular region
As EU trade agreements have begun to incorporate more and more areas of activity, so EU trade competence has become more controversial. It is no longer almost the exclusive concern of big business and anti-globalisation activists. EU trade policy is now more prominent in public debate and is being more closely scrutinised by lobby and interest groups – including environmentalists, social and economic interest groups, and local and regional governments. All these civil society actors interact with decision-makers and the public to express their views and concerns – although it must be said that their level of access to the key decision-makers and their degree of impact is variable.
The European Commission (EC) negotiates trade agreements on behalf of EU Member States. The EC initiates the process through public consultation and what is known as a scoping exercise. This assesses the potential economic outcomes of the proposed trade agreement. If these outcomes are considered positive, the EC recommends to the Member States that negotiations should begin. If the Member States agree, they must then provide what is referred to as the negotiating mandate. This defines the scope and broad objectives of the negotiations. The EC will then begin the negotiations with the proposed trading country or bloc. The EC is responsible for keeping the Member States - through the European Council - and the European Parliament regularly informed on how negotiations are progressing.
European Commission The EU Commissioner in charge of Trade – and who is therefore responsible for the Directorate General for Trade (DG Trade) – together with his or her civil servants draft trade policy. EU Member States Each Member State – through its relevant national ministry and its Permanent Representation to the EU – plays a fundamental role in validating the policy direction proposed by the Commissioner and his or her team. European Parliament The European Parliament – particularly through its Committee on International Trade (INTA) - plays an increasingly public role as a source of legitimacy for and potential scrutiny of EU trade policy.
Exclusive Competence / Mixed Competence Agreements At the end of several rounds of negotiations and depending on its content, an agreement will be labelled as either ‘exclusive’ or of ‘mixed competence’.
- ‘Exclusive Competence’ Agreements:
- These require the approval of the European Council – the executive branch of the Member States – and the European Parliament.
- ‘Mixed Competence’ Agreements:
- If the content affects areas that are of exclusive sovereignty to the Member States, the agreement will be deemed to be a ’mixed competence’ agreement and as such will require the additional approval of each Member State’s own legislative branch - i.e. national parliaments.
SMEs are partly represented by the direct work of governments in the European Council and by Members of the European Parliament. They are more directly represented: in the recommendations made by advisory bodies including
- the European Economic and Social Committee, which brings together economic and social interest groups across the EU;
- the Committee of the Regions, which brings the views of local and regional authorities to EU policy making;
- BusinessEurope or EuroChambers, associations that also represent the interests of large corporations;
- UEAPME (European Association of Craft, Small and Medium-Sized Enterprises) and CEA-PME (European Entrepreneurs CEA-PME);
There have been several key issues that have undermined EU citizen confidence in the EU’s trade policy:
- Democratic Accountability/Oversight: there has been criticism that there has been a lack of democratic accountability and that the oversight of the policy has been insufficient
- Transparency: there has also been much criticism, not least from civil society, about a lack of transparency throughout the negotiating process, particularly in relation to the EU’s trade deal with Canada (CETA), and its proposed deal with the United States (TTIP)
- Arbitration System: there has been criticism suggesting that the arbitration system used for a vast array of international investment agreements is deeply flawed (for further information click here and see section below on ISDS).
2. Key Definitions
The behind investor rights in the context of trade agreements is to provide foreign investors with extraordinary rights allowing them recourse for compensation outside of domestic (local) courts, in the event of unlawful expropriation and/or unjust compensation. The idea is highly contested. Concerns about the impartiality of judicial systems and the political nature of state-to-state dispute settlement are often cited as reasons for the establishment of one particular arbitration mechanism known as ‘Investor-State Dispute Settlement’ (ISDS) (see below). It was initially thought that ISDS would also provide an incentive for investment in developing nations; but research has since shown this not to be the case. ISDS provisions have been present mainly in bilateral investment treaties (BITs). Since their inception in the 1960s, these provisions have been controversial in developing countries. Even today, countries like Brazil refuse to grant such privileges; and other states have decided to terminate agreements precisely because of ISDS. The relentless and rising number of claims brought under the North American Free Trade Agreement (NAFTA) has placed the mechanism under public scrutiny in the developed world. In Europe, the controversy about ISDS reached new heights following the 2012 Vattenfall vs Germany case.
The Investor-State Dispute Settlement mechanism (ISDS) is a mechanism that gives the right, under certain international agreements, for investors from one country to bring a claim before an arbitration panel against the country in which that investor has invested. On occasion, ISDS has effectively allowed privileged companies and individuals to sue countries (but not vice versa) before a tribunal of for-profit arbitrators, with the entire process being excluded from judicial review. In these cases, ISDS has been used directly to undermine democratically instituted measures protecting health, environmental and social standards and financial stability; or indirectly by interfering with or undermining existing regulatory processes. The Investor Court System (ICS) - foreseen in CETA - is based on the Investor-State Dispute Settlement (ISDS) mechanism. It has been presented as an improvement on the extensive list of loopholes that continue to allow the systematic abuse of ISDS provisions. Unfortunately, while several of the proposed changes could potentially limit some of these abuses, the changes fail to improve fundamentally the nature of the system. The European Association of Judges quickly called into question the premise of the proposal on the basis of a non-existent legal competence to do this and a grossly inadequate approach to the selection of judges/arbitrators. The German Judges Association went further, clearly stating that creating special courts for certain groups of litigants was a mistake. n the context of trade agreements is to provide foreign investors with extraordinary rights allowing them recourse for compensation outside of domestic (local) courts, in the event of unlawful expropriation and/or unjust compensation. The idea is highly contested. Concerns about the impartiality of judicial systems and the political nature of state-to-state dispute settlement are often cited as reasons for the establishment of one particular arbitration mechanism known as ‘Investor-State Dispute Settlement’ (ISDS) (see below). It was initially thought that ISDS would also provide an incentive for investment in developing nations; but research has since shown this not to be the case. ISDS provisions have been present mainly in bilateral investment treaties (BITs). Since their inception in the 1960s, these provisions have been controversial in developing countries. Even today, countries like Brazil refuse to grant such privileges; and other states have decided to terminate agreements precisely because of ISDS. The relentless and rising number of claims brought under the North American Free Trade Agreement (NAFTA) has placed the mechanism under public scrutiny in the developed world. In Europe, the controversy about ISDS reached new heights following the 2012 Vattenfall vs Germany case.
In this context, regulatory cooperation refers to the setting up of bilateral structures to achieve regulatory harmonisation (see below) or approximation between trading partners. The EU describes this formalised exchange as a voluntary dialogue between regulators and legislators – EU and US American in the case of TTIP; and EU and Canadian in the case of CETA – who would receive and debate opinions from interested parties on potential regulatory and standard-setting activities which they perceive to limit trade. Such structures would lie midway between the democratic ‘checks and balances’ of national and EU level processes and the detached technical discussions of global bodies. This situation does not make the process more effective; quite the contrary, as it presents a real threat that special interest groups could exert tremendous pressure on national, EU and global regulatory processes. The vagueness of the dialogue format for these regulatory cooperation fora; the scope of their recommendations and issue areas; as well as the open-nature of the activity of the fora could make them a liability in ensuring responsive decision-making that balances economic, environmental and social outcomes. Highly structuralised bilateral regulatory dialogue could be detrimental to global harmonisation efforts and a costly feature of an expanding transatlantic bureaucracy.
Regulatory Convergence, in the simplest terms, is the harmonisation of different countries’ (or, in the EU’s case, bloc’s) regulations. The idea is to increase their effectiveness by avoiding unnecessary duplication, thus creating consistent production and consumption chains, which lead to bigger and more competitive markets. The successful reduction of global tariffs through the General Agreement on Tariffs and Trade (GATTS) would make regulatory convergence play an increasingly important role in international trade. Standardisation in the European Single Market is a clear example of successful regional regulatory convergence. At the global level, this convergence is driven by international agencies (the International Standardization Organization – ISO – for example) that work independently of government or are part of frameworks such as the World Trade Organisation (WTO) or the United Nations (UN) system. These agencies enable regulatory dialogue leading to equal or compatible technical and administrative frameworks, standards and even regulatory implementation across borders. But there remain fundamental differences between what is done at EU level and what is done at global level. Regulatory convergence in the EU – and its Member States – occurs within the framework of democratic ‘checks and balances’ between the executive, the legislative and the judicial branches of government, the desired aim being balanced social, economic and environmental outcomes. Global regulatory convergence, meanwhile, lacks such oversight and hence focuses on a slower, voluntary process of gradual improvement and consolidation of technical aspects, done through specialised dialogue and driven by agencies or career public officers. While regulatory convergence provides competitive benefits for businesses looking to expand beyond their borders without the need to modify their production processes or output, it is not without challenges. These range from specific issues such as the effect of convergence – or harmonisation - on cultural diversity; to general issues of ‘downward harmonisation’, in other words what some have described as a regulatory ‘race to the bottom’.
Negative listing is an approach requiring parties to a trade agreement to identify which specifics of a sector will not be covered by the trade agreement being negotiated. In essence, it requires a regulator to know - at the time of making a commitment – the regulatory needs of the future. This approach has been described by some as reckless, as it involves governments making commitments on issues and in areas that do not yet exist. The ‘opposite’ of this system is known as Positive Listing, by which a specific list of items, entities, products etc. to which the agreement applies is drawn up – with no commitment to apply the agreement to anything other than what appears on the list. For the first time in the history of EU trade agreements, CETA has taken the ‘negative list’ approach to commitments in services. The most widely used approach in trade agreements has so far been positive listing, which clearly identifies the sectors to be covered and allows for the gradual, controlled and responsible removal of barriers.
The difference between a ‘trade’ and a ‘non-trade’ barrier might seem small and technical but it is the most fundamental distinction to understand globalisation – and anti-globalisation - protectionism and the need for a positive, inclusive and forward-looking policy agenda for trade. o ‘Trade Barrier’: traditional border tariffs and quota regimes designed to limit the entry into a country or territory of foreign goods. o ‘Non-Trade Barrier’: everything else that can be understood to interfere with the exchange of goods and services. Examples of ‘non-trade barriers’ include: language, culture, custom procedures and forms, production standards, content requirements, regulations, labour protections, environmental compliance rules, etc. The unlimited capacity to frame any policy change in terms of its trade impact is a key feature of the debate surrounding the World Trade Organisation. The universal scope of a non-trade barrier presents in itself a barrier to a sustainable development approach to trade as it forces us to look at all policy decisions in terms of their commercial impact. A broader, more comprehensive vision that incorporates clear and effective democratic scrutiny is required.
3. A Closer Look at some of the Key Issues
The Directorate General for Competition (DG Competition) and the Directorate General for the Internal Market, Industry, Entrepreneurship and SMEs (DG GROW) are the EU bodies - alongside Member States - that work to ensure equitable conditions for businesses in the European Single Market. Despite achievements in the Single Market project, a host of challenges continues to affect its functioning. Member States, for example, can sometimes undermine fair competition by allowing so-called ‘social dumping’ – encouraging worker exploitation as employers seek to gain a competitive advantage through undermining or evading existing social regulations - or by allowing or encouraging particular tax policies - the Luxembourg leaks, the Malta leaks and the European Commission investigation into Apple’s illegal tax benefits in Ireland to name a few, high-profile cases. Among many other issues, the speed at which the EU institutions are able to improve the Union’s competitive environment – e.g. ensuring adequate transposition across Member States and establishing effective monitoring of implementation - might not live up to the speed of its international trade commitments; nor consider its implications. Extensive liberalisation commitments in trade agreements could exacerbate existing economic structure gaps between EU Member States. The EU has reacted to the challenge of globalisation for employment transition – although some have described these type of measures as ‘too little, too late’. The European Globalisation Adjustment Fund (EGF) is a programme under the Directorate General for Employment, Social Affairs & Inclusion (DG EMPL) which aims to support the reintegration to the economy of workers and employers displaced by major structural changes in world trade patterns. Unfortunately, the limited funding provided by the EGF; the short fund-implementation periods; the mixed track record of this funding programme; and the strict conditions of applicability continue to pose a challenge when it comes to the effective use of this compensatory tool by the ‘losers’ in the globalisation game.
The debates and controversies surrounding the proposed EU-US trade agreement (known as the Transatlantic Trade and Investment Partnership – or TTIP) and the EU-Canada Comprehensive Economic and Trade Agreement (CETA) have highlighted considerable discontent with trade policies on both sides of the Atlantic. This is particularly true of the highly controversial Investor-State Dispute Settlement (ISDS) mechanism (see section on ISDS and ICS above); and what are perceived to be agendas that favour large corporations. In France and the United States, the election of new and unorthodox political figures would seem to be a reflection of this discontent. This change in political paradigms - irrespective of their individual ideologies - makes international trade a core topic of national concern while signalling the need for substantial change. Trade policies and agendas of the future need to function as vehicles for the “new economy”; to strengthen global climate and social commitments; and to ensure the appropriate limits between harmonisation towards fairer competition and the intrinsic democratic need to keep decisions as close as possible to EU citizens. An important milestone in this quest was the Alternative Trade Mandate to develop an alternative vision of European trade policy that “puts people and planet before big business” (developed by the Alternative Trade Mandate Alliance – an alliance of development and farmers’ groups, Fair Trade activists, trade unions, migrant workers, environmentalists, women’s groups, human rights groups, faith groups and consumer rights groups from across Europe). The Trade for All strategy released by the European Commission in 2015 may be a relevant first step in the right direction.
Proponents of significant change to the EU’s trade policy argue that secrecy throughout the entire negotiating process for a trade agreement – from the drafting of general objectives to its final technical wording – is detrimental to the legitimacy of the process, the quality of the content and the broad acceptance by the wider business and civil society of the negotiated outcome. The transfer of competences from the national to the EU level is based on the principle of subsidiarity. The core idea is that certain issues are more suited to be handled at the EU level. At the same time, it is the responsibility of the EU to ensure that decision-making takes place as close as possible to EU citizens. For trade agreements, this means ensuring that elected national and European authorities are at the core of the process; that there is a free-flow of information; and that appropriate feedback from these authorities is taken into account. Democratic accountability is not a one-time transfer of power, but an ongoing process of consultation. Transparency is also fundamental to ensuring the balanced presence of interest groups and the adequate intake of their opinion. Basic measures needed to achieve this goal would include an effective EU transparency register - compulsory throughout institutions; the improvement of civil society dialogue mechanisms – in Brussels and across Member States; and the continuous support and protection for a pluralistic civil society role in accordance with EU values.
This is the quintessential debate surrounding economic globalisation – and to which there may well be no definitive answer. On the one side, there is ever-increasing pressure to liberalise global trade, reduce ineffective government intervention and allow the overall growth of wealth. On the opposing side, there is a rejection of the paradigm of constant economic growth, the curbing of the effective power of global corporate actors and the accompanying explosion in social inequality. This is a debate that plays at an economic, social, and even value-driven level. Trade agreements are market integration tools that facilitate exports and through which governments commit to interfere less in their markets in ways that are supposed to favour home-grown businesses. Exporting activity – compared to economic activity in general – is dominated by big players that also have the resources to make their voices heard by political decision-makers. It is tempting to generalise and conclude that trade agreements do pit small economic players against large ones. But this simplification undermines the content of the debate and the differences that are increasingly apparent in business models. Because of the enlarged scope of trade agreements like TTIP and CETA, the conflict is moving beyond the ‘big vs small’ dynamic. Trade agreements will be redefined by how effectively they balance trade promotion with sustainability goals and the promotion of future-proof business models in the digital and social economy.
4. TTIP & CETA Transatlantic Trade & Investment Partnership (the proposed trade agreement between the USA and the EU) Comprehensive Economic & Trade Agreement (the trade agreement between Canada and the EU)
TTIP and CETA are important because of their potential to reconfigure – for better or worse – the EU economy and indirectly affect the institutional evolution of the EU and its member states. The greatest potential impact of these agreements is not on economic growth, but rather on economic (re-)distribution. The North American and European economies are the two most interdependent regional blocs in the world. The already mature economic relations between the EU, the US and Canada ensure that any potential gains in increased total output remain small and – in the best-case scenario – spread across several decades. But the anticipated rise in trade volumes reflects the already significant portion of transatlantic trade arising from intra-company exchanges. This is confirmed even when looking at optimistic scenarios like those used by the European Commission’s DG Trade. There has been much debate around the economic assessments of both TTIP and CETA: supporters defend current methodological approaches; revisionists say there is a need for a closer look at real-world impact. This debate was a driving force behind the request - yet to be fulfilled - from the European Economic and Social Committee for an in-depth analysis of the impact of TTIP on SMEs across Member States. Furthermore, some observers have commented that the non-trade dimensions of the agreements would make them a fundamentally distortive instrument for the growth of forward-looking regulatory environments in the EU. The increased bureaucratisation and scope of influence for regulatory cooperation/alignment is controversial because of the potential for abuse: the long-standing, tried-and-tested so-called precautionary principle used in EU policy, for example, could well be undermined. (EU definition of the Precautionary Principle: “an approach to risk management whereby if there is the possibility that a given policy or action might cause harm to the public or the environment and if there is still no scientific consensus on the issue, the policy or action in question should not be pursued”.)
From one perspective, CETA is a priority – albeit a controversial one – because it would normalise and legitimise a huge expansion of the effective area of competence of trade policy. From another perspective, like all trade agreements, TTIP and CETA carry an undeniable geopolitical symbolism that deserves consideration. The proposed CETA and TTIP agreements move beyond mere rules of commerce (tariffs, quotas, customs facilitation etc.) by encompassing, for example, broad investment commitments; further institutionalising transatlantic regulatory convergence; and by including discussions on sustainability dimensions within the context of economic activity. As the EU’s first such broad treaty with an industrialised country, CETA has been described by the European Commission as the ‘gold standard’ for all its future trade agreements. Thus, in short, CETA will set out what can be done by common external trade policy; define what is and what is not an acceptable deregulatory commitment; and determine what remains under the direct competence of EU and national decision-making bodies. The long-term strategic significance of transatlantic relations is a key element of the global political edifice. But its relevance as part of these trade agreements should not be exaggerated and misinterpreted. For example, the successive failures - from 1995 to 1998 - to launch bilateral trade negotiations between the EU and the US did not hamper the economic and strategic importance and growth of the EU-US relationship; nor did these failures undermine the strength of EU-US security arrangements. To imply that they would now indeed be hampered and undermined were TTIP and CETA not to be concluded seems at the very least unrealistic, not to say misleading or even alarmist.
Beyond political anxieties or wishful thinking, there is no unequivocal answer to this question. Moving towards an increasingly informed answer depends greatly on the economic models used to calculate the impact of the agreements; the integration of a sustainability dimension to this calculation; and ultimately weighing up the impact on the winners and losers. TTIP and CETA raised the profile of several self-contained discussions in civil society and academia. One of those related to the limits and reliability of economic modelling tools. This debate has spawned a wealth of studies on the potential effects of the agreements. The results range from slightly beneficial to outright negative for the EU economy. Integrating a comprehensive sustainability dimension to these commerce-driven models is a challenging but necessary step if trade policy is to be modernised. The Trade Sustainability Impact Assessments (TSIA) carried out at the behest of the European Commission (EC) are important in terms of moving towards the effective modernisation of trade policies. Unfortunately, their timing and substantive shortcomings impede their potential impact. Likewise, the view that compensatory or redistribution programmes – like the European Globalisation Adjustment Fund (EGF) - are a blanket solution to harmful or unintended consequences of trade provisions ignores the balance of social, environmental and commercial interests for a sustainable economy.
Yes. The different economic structures within and across Member States as well as the multitude of administrative – tariffs, quotas and regulatory differences – and non-administrative factors – historical ties and preferences, geography, type and form of production, etc. - affecting trade with North America make these differences inevitable. The Trade Sustainability Impact Assessments (TSIA) for both TTIP and CETA explore this question to various degrees. In the case of TTIP, the minimal growth gains are largely concentrated in a handful of economic core EU Member States alongside a negligible but nonetheless clearly evident growth in inequality across the EU. Studies like the one commissioned by the Bertelsmann Foundation take the question one step further by looking at how TTIP would redistribute trade relations within the Single Market. The results of this study paint a clear picture of net and marginal beneficiaries and a serious concentration of trade flows towards the US replacing trade within the Single Market. In the case of the TSIA for CETA, impacts across EU Member States are not highlighted as the EU is taken as a whole – despite considerable disaggregation of results by province for Canada. One problem seems to be that the comprehensive scope of these new trade agreements is based on an acceptance of insufficient economic evidence. CETA, for example, was approved by the European Council and the European Parliament before the economic assessment of the negotiated outcome was released - a fact that did not escape the attention of the Employment and Social Affairs Committee of the European Parliament which highlighted several shortcomings of CETA as their reason for withholding consent to the agreement.
The withdrawal of the United Kingdom from the EU will have long-lasting consequences on all policy fields. Without a doubt - regardless of the ‘divorce’ format - EU trade policy will be affected directly at the negotiating table by the loss of the UK market, and possibly indirectly by the loss of a known voice in favour of a neo-liberal trade agenda. The loss of the UK market – in terms of consumption and production of goods and services – de facto diminishes the negotiating power of the EU. While substantial enough – particularly now in terms of financial services – the decrease would arguably be noticeable only in a handful of cases against economically significant partners, namely the USA, China and Japan. Nevertheless, the change would arguably not be enough to reconfigure the balance of power in negotiations and could likely be offset by a different configuration of trade priorities in line with a post-UK EU vision. As CETA was agreed upon before the triggering of Article 50, it continues to apply to the UK. The future implementation of CETA however is likely to depend on how the UK government upholds international treaties agreed upon during its 40+ years as a member of the EU framework. If the UK does not uphold its commitment to CETA, it will create an imbalance in the calculated agricultural quotas that may force a renegotiation and possibly delegitimise the whole agreement itself as one of its ‘champions’ refuses to accept it. In the case of TTIP, Brexit is unlikely to be a significantly negative factor in terms of the US and the EU returning to negotiations. A US-UK bilateral trade agreement is not a priority for the US administration.
The unprecedented level of scrutiny of the TTIP negotiations has encouraged rigorous debate on the economic impact of this agreement. Most notably, it has brought into mainstream discussion the known shortcomings of the economic modelling tools used to predict the outcomes of international trade agreements. Despite sometimes polarised findings, this has led to a more realistic discussion on potential economic consequences. At the same time, it has showcased the further need to scrutinise and complement existing analytical approaches to incorporate social and environmental impacts. Economic assessments are constructed on the principle of an economic model. An economic model is a representation of the world wherein certain processes – e.g. the exchange of goods and services - and behaviours – e.g. the supply and demand of the good and services - are assumed in a certain way; and a set of variables – e.g. tariff reductions, regulatory harmonisation - are given a monetary value and contrasted to predict a likely outcome. TTIP and CETA have their own set of officially commissioned economic assessments. Equally a wealth of assessments has also been carried out by industry, civil society, think tanks and academia. The European Commission favours the use of a Computable General Equilibrium (CGE) model to assess trade agreements. This model centres on the interaction between the production and trade of goods and services while taking problematic assumptions on full employment, high labour mobility, market-clearing prices and the absence of social or environmental costs for productive activity. As such, CGE models are under constant challenge for their failure to provide real-world reliable estimates. In the context of the TTIP & CETA debate this has led to modified CGE models and to alternative models based on different premises and assumptions.
5. TTIP & CETA The View of European SMEs
Engaging with international markets is a way for businesses of all sizes to diversify their sources of income, making their business more profitable, stable and resilient to economic shocks. SMEs have their own unique ways – that differ from those deployed by large enterprises - for achieving internationalisation (how a business goes about engaging with and breaking into non-national markets) with their own distinct set of challenges. In general, the bigger the enterprise, the higher its propensity to export. The smaller the enterprise, the less flexible its operations. This is why challenges such as access to finance and enabling second chances for entrepreneurs are of pivotal importance in returning EU SMEs’ performance to pre-2008-crisis levels. The 2014 EU SME Performance Review is the latest comprehensive report by the EU to look at SME internationalisation. It found that: -
- 42% of EU SMEs are internationally active in some form – exporting, importing, subcontracting or engaging with foreign direct investment;
- 25% of EU SMEs export to other EU countries;
- 3% of them export outside of the EU;
- 7% export to the US.
The potential positive effects of trade agreements on SMEs are limited by an array of factors that are unrelated to trade agreements themselves. This does not mean that trade agreements are inconsequential for SMEs. It means that, without adequate evidence, they should not be assumed to be natural tools of SME internationalisation. While there is merit in encouraging SME exports, overly positive opinions connecting SMEs with specific trade agreements overlook the particular challenge of SME internationalisation; this confuses the development of international trade with the scope and content of bilateral trade agreements. Trade agreements can create opportunities for SMEs if the SMEs are positioned to take advantage of them. As such, the effect of a trade agreement is likely to be limited to those businesses which are already engaged in a particular market; businesses that already enjoy a solid network of clients and/or suppliers in that market; or businesses which already understand their potential product intake and have re-structured their business model without the existence of a trade agreement. The communiqués from the European Commission hailing the benefits of TTIP and CETA for SMEs focus exclusively on this particular type of enterprise. Unfortunately, this approach prolongs misconceptions about the effect of trade agreements on SMEs in general and delays a much-needed, serious consideration of how SME-oriented goals could be incorporated into the trade agenda. Without serious acknowledgement of these limitations – and SME-centred research - it is impossible to turn trade agreements into sustainability-oriented tools for the internationalisation of SMEs.
For SMEs oriented towards sub-national markets, trade agreements have little direct positive impact and in some scenarios, create severe challenges as a result of increased competition. Bearing this in mind, healthy scepticism of the current role and scope of trade agreements should not be confused with a rejection of the need to encourage and enforce continuously the formation of fair, sustainable rules for international trade practices. The response needed is not to wall up markets but rather to ensure that possible trade agreements are consistent with the growth of future-proof business models. Looking directly at SMEs, the 2014 EU’s SME Performance Review shows that 70% of micro-enterprises, 60% of small and 47% of medium-sized ones are concentrated in economic sectors with a ‘very low’ (less than 5% of revenue dependent on exports) to ‘low’ (less than 10% of revenue dependent on exports) propensity to export. This means that more than 60% of SME value added and employment is concentrated in areas where SME exports are limited, not by market barriers but by economic activity itself. Indirect trade (as part of a supply chain or through the overall growth of the economy) can have positive effects, even in non-export oriented sectors such as construction. Thus, a 10% increase in EU exports across economic sectors would, for example, increase the output of construction by 0.2% - but its effect is negligible and would not replace the need of sector-specific policy responses.
The issues that hamper EU SME trade with Canada and the US are not dissimilar to those that affect SME internationalisation in general. This often means that solutions cannot be obtained through bilateral means alone but rely heavily on global and national efforts. Nevertheless, three key areas stand out in the transatlantic context: access to information and clients; administrative burdens; and regulatory differences. Business support organisations – led by government initiatives, chambers of commerce, business associations and/or international institutions – are key enablers of market access. For example, the Enterprise Europe Network - the EU flagship programme for business support already working in the US and Canada - facilitates international partnership through contact and event organisation, and provides expert advice on market expansion opportunities. In the EU alone, research highlights that there are over 800 support organisations working across EU, national, regional and municipal levels. There are however significant challenges: the coordination of these programmes appears to be ineffective; their outreach very small; and the creation of new structures – like that of the TTIP SME Chapter – has been described by some as a dangerous bureaucratic sinkhole. As it has long been noted by the UN’s International Trade Centre, complicated custom procedures are a significant barrier to SME internationalisation, given SMEs’ limited capital and human resources. For that reason, the recent entry into force of the WTO’s Trade Facilitation Agreement (TFA) represents an important step in streamlining international trade for small businesses. The TFA is unique in the sense that it aims to create a global playing field that reduces unnecessary administrative complexity without compromising regulatory independence or creating trading funnels - as bilateral trade agreements can do. Regulatory differences were a key concern of an SME survey conducted by the European Commission regarding TTIP. While the controversial interpretation of these findings in the context of TTIP’s TSIA is inadequate for the whole SME population, the survey does highlight how differences in sanitary and phytosanitary measures (SPS) and specific technical barriers - like redundant certification or inspection requirements - can be particularly punitive for SMEs. Technical agreements have offered a solution to specific issues in the transatlantic context in the past. At the same time, the limits of bilateral regulatory approximation must be understood in light of often irreconcilable political and policy approaches – e.g. EU and US car emissions and GMO legislation.
On the one hand, trade agreements create incentives that prioritise or deepen the economic relationship between two or more markets. On the other hand, trade agreements have not proven themselves to be tools that incentivise SMEs to become exporters. It is not surprising that SMEs themselves have only recently started sporadically to appear as part of trade agreements. In the case of the United States, it has been noted that trade agreements might actually have the exact opposite effect on SME internationalisation, with SME shares of export actually decreasing once a trade agreement is in place. As the Commission’s communiqués on TTIP and CETA show, there are several SMEs – particularly export-oriented, medium-sized ones – that could have easier access to the US and Canadian markets. Unfortunately, and despite these anecdotal cases, without a serious integration of an SME test methodology into trade agreements, it is not possible to consider and debate fully the potential effects on opportunities and growth for SMEs. This is why, back in 2015, the European Economic and Social Committee requested a comprehensive review of TTIP and its impact on SMEs. Unfortunately, there has been no response to this request as yet. Ultimately, the expansion of SME capacities beyond the EU market is likely to be a function of an increased efficiency of the existing tools and programmes that enhance overall SME internationalisation.
To assess any changes in the EU market brought about by TTIP and CETA – and trade agreements in general – there need to be key debates on trade creation, trade diversion and unequal effects across EU Member States. Yet, considering the historical relevance of the EU market as a platform for social and political integration as well as a breeding ground for EU SME internationalisation, it is surprising to see how little attention has been given to these issues. Understanding how EU trade policy can potentially complement the improvement of the Single Market is perhaps the main challenge for producing an SME-oriented trade policy that balances sustainable growth with an ambitious trade agenda. Unfortunately, the prevailing silo-mentality – whereby maximising exports seems to be the sole measure of the success of a trade policy – could well lead to this very valid question being dismissed out of hand. According to this approach, any potential overall gain trumps how everything else is affected. During the last US presidential election in particular, challenging this mentality was a heated topic of expert political debate. Only one publication in the TTIP debate (none in the CETA debate) looked in detail at how the EU market would be affected if the TTIP goals were to be achieved. The report found that although small gains in trade flows would take place, these would be concentrated in a handful of countries at the economic core of the EU. Furthermore, the study found that TTIP would significantly decrease trade volumes between EU countries – e.g. Germany’s total trade with Greece, Spain, Italy, Ireland and Portugal would decline by as much as 30%. This concentration of trade would intensify the structural asymmetries between EU Member States, thus further fuelling economic inequalities.
ISDS is only insubstantially reformed through CETA. As far as SMEs are concerned, the MIC – the proposed replacement for ISDS - focuses on expanding access to the system through reducing or subsidising costs. While this issue is worth considering, it is only a minor one compared to the larger ones at hand, namely: the utility of ISDS-type systems in general as an investment promotion tool; and the effective implementation of SME principles in trade policy. The Fair Economy Alliance has been particularly critical of the EU’s current assessment of the impact on SMEs because it fails to take these two crucial issues into account. The narrative of the MIC proposal and the focus on entry costs as the sole barrier and concern for SMEs is an indication of just how far EU trade policy still is from being truly SME-friendly. It is a fact that with average litigation costs of US$8 million, ISDS is inaccessible for all but the wealthiest enterprises and individuals. Yet, knowing that more than 80% of the costs of ISDS are linked to legal counsel and expert advice already tremendously undermines the EU’s claim that it will reduce costs by reducing the number of arbitrators/judges in SME cases. Capping legal counsel fees would bar SMEs from accessing certain service providers; and subsidising costs using tax-payers’ money would incentivise legal firms to continue raising frivolous claims – even if these would ultimately be dismissed. Taking the US SME classification, we see that as many as 50% of all ISDS claims have been brought by SMEs. This information is taken from an OECD report which - based on the poor level of financial information publicly available - could not distinguish between mail-box companies and SMEs as defined by the EU. The inconsistency between US and EU rhetoric on SMEs’ ISDS use is as much an outcome of their different classification systems as it is a result of a wide range of issues such as treaty shopping, parallel claims and third-party financing abuse. These are issues that have been well documented by civil society throughout the current debate.
Regulatory cooperation as envisioned in TTIP and CETA has both proponents and detractors. Proponents emphasise the potential long-term benefits; detractors highlight how these benefits are unlikely to take place through these structures. Global regulatory harmonisation has brought benefits to SMEs as direct exporters and as part of global value chains. Yet, the promotion of bilateral structures might affect these by creating intermediate points that are neither fully technically oriented nor fully directly democratically accountable (see section above: Regulatory Cooperation: what is it and how does it work?). Transatlantic regulatory cooperation has a long history with few concrete results but constant voluntary dialogue. At the core of this difficulty to move forward is the singular nature of the federal regulatory processes in both Canada and the USA. Unlike the centralised standardisation processes in the EU, the federal systems in Canada and the USA employ a great number of decentralised agencies where each State or Province might be allowed to employ different procedures from those set at the federal level. The reality that the US federal government does not have the authority to enforce a vast number of standards across the USA is a driving point of why regulatory cooperation is highly unlikely to provide results for SMEs.
The TTIP SME chapter - hailed as an achievement of the negotiations – consists of two proposals. One covers the creation of an SME portal to facilitate information exchange. The other involves the creation of an SME committee of EU and US public servants to monitor the implementation of the SME portal and have a structured dialogue on SME-related issues. The reality, however, is that these two ‘solutions’ are basically a duplication of existing efforts. From a practical point of view, they are independent of the implementation of a trade agreement and are symptomatic of how poorly the trade agenda takes into account the concerns of SMEs. An SME portal for information exchange is literally the mandate of the Enterprise Europe Network (see section above: What currently hampers EU SMEs when trading with Canada or the USA?) which already works in the US. Creating another agency for the exact same purpose would be a textbook case of bureaucratic mismanagement. If unexplored business opportunities demand the creation of a specialised agency - like the EU SME Centre in China – this does not need to be attached to the implementation of a trade agreement. If this were indeed the case for TTIP or CETA, an SME information agency should not be constrained by the existence of a trade agreement. Research by the American Chamber of Commerce in the EU – that has an unshakable trust in the positive effect of TTIP – was critical of the limited effectiveness of this SME chapter and urged the inclusion of SME provisions on each specific chapter. In essence what the research correctly calls for is that SME issues should not be isolated and boiled down to a single response; but rather that they should be incorporated into the core of the substantive elements of the agreement.
Author: Miguel Galdiz, Research & Advocacy officer, Fair Economy Alliance
Editor: Sean Klein
(Completed July 2017)