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The Ministers of Trade of France and the Netherlands advocate for greater linkage of sustainability commitments with economic benefits in trade agreements

By gofb-adm on Wednesday, July 1st, 2020 in Uncategorized No Comments

According to media reports, earlier this month, the Ministers of Trade from France and the Netherlands urged the European Commission (hereinafter, Commission) to consider increasing tariffs against trading partners that fail to meet their commitments on sustainable development as agreed in the chapters on trade and sustainable development (hereinafter, TSD chapters) in the context of preferential trade agreements between the EU and those trading partners. This initiative follows a larger debate on the enforceability of TSD chapters in 2018, which has, so far, not led to any changes in the EU’s approach. Similarly, as EU trade policy cannot be expected to change from one day to the next, the Trade Ministers’ initiative will not lead to any immediate changes, but the European Commissioner for Trade Phil Hogan already indicated that he would take the proposal into account for his review of EU trade policy, which the Commissioner intends to publish by the end of the year. The issue of trade and sustainability and the linkage of sustainability issues to economic benefits is a highly sensitive issue and might bring a significant change to EU trade policy.

Addressing trade and sustainability in preferential trade agreements since 2010
Since the EU-Korea Free Trade Agreement, signed in 2010, all preferential trade agreements (hereinafter, PTAs) concluded by the EU include a ‘Chapter on Trade and Sustainable Development’ or provisions to that effect. Such chapters generally focus on two key areas: labour and the environment. The issue of sustainability and the TSD Chapters in the EU’s PTAs have become increasingly relevant and an important element of the EU’s efforts to regain public support for its trade negotiations.

According to media reports, the envisaged EU-Mercosur Trade Agreement, which is currently undergoing the final legal review, provides a rather innovative provision related to animal welfare, linking access to the EU quota for eggs to compliance with EU rules on laying hens, which would aim at ensuring high animal welfare standards. At the same time, the broader debate on the approach for the TSD Chapters now appears to pick up again.

A debate on a revised approach to TSD Chapters since 2017
On 11 July 2017, the Commission published a ‘non-paper’ on the Trade and Sustainable Development (TSD) chapters in EU Free Trade Agreements (FTAs) (hereinafter, ‘non-paper’), which was intended to stimulate discussion on the topic with the European Parliament and the Council of the EU (see Trade Perspectives, Issue No. 15 of 28 July 2017). The ‘non-paper’ provided an overview of the current EU’s approach on TSD and presented two options for discussion, further developing and refining said approach. The first option is entitled “a more assertive partnership on TSD” and essentially builds on the current approach. It would entail closer internal cooperation, among EU Member States and EU Institutions, and external cooperation vis-à-vis the EU’s trading partners. Furthermore, this option provides for a “more assertive use of the TSD dispute settlement mechanism”.

The second option is entitled “a model with sanctions”, thereby emphasising the main difference between the two options. This option takes up an approach currently used by the US and Canada in their respective FTAs, adding the possibility to apply sanctions at the end of dispute settlement proceedings in case of non-compliance and impacting trade or investment between the parties. In the case of the US, sanctions mean the withdrawal of trade concessions, while the FTAs concluded by Canada provide for monetary fines. Importantly, sanctions require and assume a natural link between sustainable development obligations and trade commitments, namely a “quantifiable harmful impact on bilateral trade or investment as a result of the FTA violation” and the resulting withdrawal of concessions or fines would reflect this quantified impact.

In February 2018, the debate on trade and sustainability reached the level of EU Trade Ministers, who discussed this issue for the first time (see Trade Perspectives, Issue No. 4 of 23 February 2018). In addition to the Commission’s 2017 ‘non-paper’, the issue had become increasingly important with respect to the EU-Viet Nam FTA, notably with respect to Viet Nam’s labour laws and Viet Nam’s adoption and implementation of certain conventions under the United Nations International Labour Organization (ILO).

France and the Netherlands refuelling the debate in 2020
In May 2020, the Ministers of Trade from France and the Netherlands reignited the debate on the approach in the EU’s TSD Chapters by sharing a proposal aimed at allowing parties to a trade agreement to withdraw tariff reductions vis-à-vis trading partners that fail to meet their commitments on sustainable development. More specifically, the Ministers maintain that “Parties should introduce, where relevant, staged implementation of tariff reduction linked to the effective implementation of TSD provisions and clarify what conditions countries are expected to meet for these reductions, including the possibility of withdrawal of those specific tariff lines in the event of a breach of those provisions”. The Ministers reportedly argue that such approach would allow trade policy instruments to provide additional leverage to the implementation of international environmental and labour standards, which they consider as currently being insufficiently enforced. Taking a step towards trading partners, the proposals also supports further “capacity building in the partner country” so as to (presumably) enable the EU’s trading partner to implement the TSD commitments it has undertaken.

Additionally, the Ministers request the EU to pursue a “more streamlined EU notification mechanism to respond to possible breaches of TSD-commitments” and strong reliance on the work of the EU’s new Chief Trade Enforcement Officer. Finally, the Ministers request the Commission to inform EU Member States more regularly on the impact of trade agreements on EU employment and domestic industries and that a commitment to the Paris Agreement on climate change must be a pre-requisite for any trade agreement. The latter might clearly be directed at any discussion on a trade agreement with the US, as the current US Administration withdrew from the Paris Agreement.

The delicate issue of linking trade with trade-related issues and concerns
The withdrawal of tariff preferences to motivate compliance or punish incompliance with sustainability commitments can be considered as an economic sanction. In its 2017 ‘non-paper’, the Commission had indicated its concerns with introducing sanctions into the TSD Chapters. The Commission noted that such a more confrontational approach might jeopardise the relations with the relevant trading partners and thereby put the effectiveness of the TSD Chapter as a whole at risk. It appears that not all EU Member States consider that imposing possible sanctions on the EU’s trading partners would be the appropriate approach. The issue is delicate, as it connects trade with non-trade, but trade-related, issues and concerns. However, it should be noted that the EU’s own Generalised System of Preferences (GSP), which provides unilateral preferences to developing countries, already provides in its GSP+ iteration for the temporary suspension of preferences or even their withdrawal if the beneficiary country does not comply with certain provisions (in this context, see Trade Perspectives, Issue No. 8 of 24 April 2020). The connection between trade (i.e., economic and commercial commitments or concessions) and sustainability (i.e., environmental, social and/or labour commitments) is clear. The trade-offs within preferential trade agreements are and must be, first and foremost, economic in nature. Any equation that does not recognise this simple premise, will not work.

On the one hand, it appears absolutely natural that, if a country, or group of countries like the EU, wanted to link some of its preferential market access concessions to its trading partners’ commitments on sustainability (i.e., environmental, social, labour obligations or human rights), it should be allowed to take action (e.g., withdraw the preferential market access concessions) in case its trading partners do not comply with their sustainability commitments. As indicated, this is already the case under the EU’s GSP+ scheme.

On the other hand, the opposite must also be considered: trading partners within a preferential trading arrangement that have committed to comply with often costly and legally, economically and commercially challenging obligations on sustainability, should be rewarded with stable, effective and non-discriminatory preferential market access conditions to the other party’s market if they comply with the sustainability obligations that they have signed up to. Should their market access be distorted or prevented, such trading partners should be allowed to address this trade imbalance either by withdrawing some of their own commercial concessions or be given compensation.

EU industries, NGOs and public opinion at large find it increasingly difficult to accept the granting of market access concessions if the countries benefitting from them do not then comply with their own commitments, often in the area of environmental, social and labour standards and protection. Developing countries often find it burdensome to comply with strict sustainability schemes that they sometimes consider not developmental priorities, that are costly to implement, or that are unilaterally imposed by importing countries. Some countries also find it difficult to accept that, while they are asked to make such efforts to comply, they then find their products competing on markets, such as the EU market, with products of third countries that allegedly are not subject to or violate the same sustainability obligations.

A legal, but also very political issue
The issue is political, as much as it is legal and economic in nature. The trade and legal instruments, to make trade and sustainable development work, do exist (e.g., preferences, sanctions, compensations, standards, conformity assessment procedures, etc.) and can be innovatively used. It remains to be seen how this issue will be reflected in Commissioner Hogan’s report on EU trade policy to be published by the end of the year.

The EU’s trading partners should see the proposal reportedly made by France and the Netherlands with optimism. Tying sustainability commitments with specific trade concessions should work to the benefit of both parties to a PTA. On one end, the party committing to certain sustainability requirements, ideally negotiated by the two parties and inscribed in government-to-government standards, technical regulations and conformity assessment procedures that make integral part of the PTA, will know that ‘in exchange’ for compliance with such requirements it will enjoy preferential and lucrative access to the EU market. On the other side, the EU will know that it has both the ‘carrot’ to encourage third countries to meet ambitious sustainability standards (i.e., the preferential access to its market) and the ‘stick’ to take away those preferences should compliance not occur or be suspended by the trading partner.

Both parties would have economic benefits and this is, in itself, a much welcome development in the process of making international trade more sustainable and a positive force in fighting climate change, protecting the environment, advancing labour standards or pursuing other societal objectives. Too often sustainability fails because the economic incentive is not there, especially when it is expected from small-holders, micro-, small- or medium-sized enterprises and developing countries’ producers. Formalising and ‘weaponising’ that economic dimension of TSD Chapters is a long-awaited development and it is good to see some EU Member States finally advocating it. This system must be properly and fairly constructed, but its potential to become a force for good is significant.

Source:
Fratinivergano – European Lawyers
Trade Perspectives – Issue No.10