Trade policy review: How green is the future of EU trade?

The EU’s new trade policy strategy is said to be designed to address the modern challenges of our times. But does it deliver for climate and the environment?

On 18 February, the European Commission published the new EU trade policy strategy – ‘Open, Sustainable and Assertive Trade Policy’ – paving the way to recovery from the COVID-crisis. The strategy builds on the approach of ‘open strategic autonomy’ which emphasises the need for the EU to remain an open trading partner that both champions sustainable and responsible trade in cooperation with trade partners and also remains assertive against unfair trade practices.

Supporting sustainable value chains and setting global standards

The new strategy promises to support the green transition through trade by developing and backing a future policy framework that both bolsters the sustainability and resilience of the EU’s supply chains and also targets the sustainability of goods sold on the EU market.

Potential policy initiatives identified in the strategy to stimulate the greening of the EU’s trade include selected liberalisation of trade in sustainable goods and services and the use of sustainability standards throughout value chains. The strategy also highlights a number of autonomous policy measures (i.e. measures taken unilaterally by the EU) foreseen to support more sustainable trade, including the carbon border adjustment mechanism (CBAM), deforestation-free value chains initiative, and the upcoming due diligence legislative proposal to ensure responsible business conduct and traceability.

Furthermore, the EU is eager to take its place as a global standard-setter, committing to proactively pioneer new international regulations and standards for the green and digital transitions with EU standard-setting bodies. A key element of success is ensuring the uptake of these new standards, which will require cooperation with trade partners and coherence with the EU’s development cooperation schemes, such as Aid for Trade.

Taken as a whole, the above commitments are taking EU trade in the right direction. However, at the moment, the blueprints of these policy initiatives are not yet finalised, meaning we will not know how ambitious they will actually be to facilitate greener trade.

The success will also depend on how coherent of a regime the different individual initiatives manage to form, to deliver the best overall outcome for climate and the environment. While the strategy recognises a greater need for synergies between the EU’s internal and external policies shaping trade, it does not identify any concrete actions for achieving this. For example, IEEP’s past work has highlighted the urgent need to improve policy coherence between the EU Circular Economy Action Plan (CEAP) and EU’s trade instruments (e.g. Generalised Scheme of Preferences Regulation) to deliver climate benefits in a synergetic manner.

Greening EU free trade agreements

The strategy includes a number of concrete actions foreseen to improve the environmental and wider sustainability of the EU’s future free trade agreements (FTAs). It confirms that the Paris Agreement will become an essential element of future FTAs and introduces the inclusion of a new chapter on sustainable food systems. The strategy also explicitly states that the EU will prioritise effective implementation of the Convention on Biological Diversity as part of its FTAs.

However welcomed these new inclusions to EU FTAs may be, if they are not effectively implemented and enforced by both parties they will be all for nought. And unfortunately, this is the area where the EU trade policy regime is currently failing the most.

The strategy does not go beyond the current known measures aimed at strengthening FTA implementation and enforcement. It highlights the importance of existing initiatives such as the appointment of a Chief Trade Enforcement Officer, the establishment of a Single Entry Point monitoring tool, and use of the Aid for Trade scheme to support best practice and compliance in the developing economies. In a worst-case scenario, the introduction of new sustainability commitments in the FTAs without effective mechanisms or processes to hold trade partners accountable only ‘overloads’ the agreements with more unenforceable content.

A brief mention is made to reinforcing the ‘sustainability dimension of existing and future agreements in the implementation of all chapters.’ This could open the door for improved mainstreaming of sustainability throughout the FTA as opposed to limiting the scope of sustainable trade to the Trade and Sustainable Development (TSD) Chapters. IEEP supports further mainstreaming and ‘unboxing’ of sustainability commitments in EU FTAs, including making these commitments subject to the FTAs’ more stringent overall dispute settlement mechanism (see IEEP 2019 & IEEP 2020).

The most concrete foreseen measure in the strategy to improve implementation of FTAs is the announcement of a review of the TSD Chapter 15-point action plan that promises to elaborate on further measures to improve implementation and enforcement. The review is foreseen to take place early this year, however, until then we must just wait and see.

Perhaps the most encouraging elements in the strategy are those aimed at strengthening the underpinning processes of FTAs such as the review of the Civil Society Dialogue mechanism and a deepening of analytical and data collection efforts, including environmental ex-post assessments of FTAs. Both these processes could greatly contribute to ensuring the delivery of environmental protection and/or benefits under FTAs if given adequate resources and explicit guidance.

Timely stakeholder engagement – domestically and in the partner country – would bolster the environmental components of trade agreements with up-to-date knowledge of critical issues provided by environmental stakeholders. Greater data quality and analytical rigour would provide better insights into the FTAs’ impact on the environment, with ex-post assessments supporting stakeholders to monitor the effects of the FTA and hold their government accountable.

Multilateralism and a rules-based trading system to deliver green transition

Alongside making EU trade more sustainable, the strategy reaffirms the EU’s support for a rules-based trading system and greater cooperation with its trading partners. This is in order to deliver ‘more responsible and fairer globalisation’ and also to support green transition and sustainable development globally. A key element in achieving this is the reform of the World Trade Organisation (WTO).

Reforming the WTO is foreseen to both strengthen the rules-based trading system by unblocking the WTO dispute settlement mechanism – ensuring compliance with global trading rules – and support multilateralism by re-establishing the WTO as a forum for dialogue on not only trade measure issues but also on issues of sustainable development.

In more concrete terms, the strategy anticipates the EU to make way in seeking further commitments from the G20 partners and its network of bilateral trade agreements with regards to climate neutrality, biodiversity and circular economy.

EU’s decision to promote multilateralism in trade as a means to further the green transition globally is a sensible counterpart to complement the different domestic policy initiatives outlined above. In particular, the EU wishes to further deepen its economic ties with African countries, Eastern Partnership countries, the South Mediterranean countries and Western Balkans, as well as strengthen its regulatory cooperation with other like-minded countries.

The strategy also pays ample attention to the EU’s plans to navigate China’s global rise in importance. However, it provides no clear direction regarding our trade relations with other South-Eastern Asian trading partners. In recent years, the EU has made progress establishing bilateral trade relations with countries such as Indonesia, the Philippines, Singapore and Vietnam and, consequently, it would make strategic sense for the EU to build on these trade relations, especially in light of the recent regional trade agreements that have come to fruition between these trade partners and other Western Countries (see CPTTP and RCEP).

These South-Eastern Asian trade relationships will particularly come under the spotlight with the development of the EU’s environmental policy initiatives such as the deforestation-free value chains initiative and the CEAP. Under the former initiative imports with embedded deforestation will likely face more scrutiny and restrictions. This will especially affect Indonesia and Malaysia, which are current deforestation hotspots due to palm oil production (see IDH report). Equally, Indonesia and Malaysia are currently among the primary destinations for EU exports of plastic waste. Under the CEAP, the EU aims to establish circularity standards for goods, seeking to minimise waste production and halt the export of EU waste to third countries. Both above policy initiatives will alter future trade flows, therefore, it is necessary to secure an open dialogue with our South-Eastern Asian trade partners to further the global circular economy transition, ensure regulatory cooperation and tackle deforestation.

How green will the future be?

At first glance, the new strategy has been polished and aligned with the EU Green Deal objectives, incorporating consistent rhetoric on mainstreaming sustainability into the EU’s trade policy and providing initiatives to back up those commitments. Unfortunately, however, the strategy only scratches the surface on challenges linked to FTA implementation and enforcement and ensuring policy coherence between the EU’s internal and external policies shaping trade. The future shade of green of the EU’s trade policy will therefore depend on the extent to which the EU provides more details and takes concrete steps to address these issues.