TOOL #26. EXTERNAL TRADE AND INVESTMENT

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1 TOOL #26. EXTERNAL TRADE AND INVESTMENT 1. INTRODUCTION External trade and investment are powerful engines for growth and job creation. As tariffs have largely been dismantled, disproportionate regulatory requirements or unnecessarily divergent regulations have become the main barrier to trade. It is more difficult to identify them and to quantify their impacts than it is for tariffs or measures applied at borders. This is particularly true for services which, given their intangible nature, are often hard to identify in statistics and other analyses. Regulations and standards adopted in pursuit of various public policy objectives may constitute technical barriers to trade (TBT), sanitary and phytosanitary measures (SPS) and other non-tariff measures (NTM) which can have significant impacts on both exports and imports, requiring firms to spend resources to adapt their products, duplicate testing of safety requirements, undergo burdensome certification procedures, interpret and comply with several sets of legislation, etc. EU legislation must comply with the EU s existing international legal commitments. The EU is legally bound by a large number of international trade agreements: first and foremost, the World Trade Organisation Agreements; but also bilateral and multilateral agreements containing provisions on trade in goods, services, intellectual property or investment matters, some of which go considerably further than the WTO Agreements. It is important, therefore, to ensure that EU legislative proposals are consistent with international legal commitments. While the IA certainly does not constitute a legal assessment of the WTO compliance of regulatory measures, it is important that services systematically take account of the broad legal obligations associated with our trading regime in the formulation of policy options. Any option which is clearly in breach of the EU s international legal obligations should be discarded at an early stage. 2. SCREENING OF OPTIONS AGAINST THE EU'S INTERNATIONAL LEGAL COMMITMENTS When designing the options, the following issues should be considered: Consistency with the WTO Agreements The WTO Agreements cover a wide range of issues. A full-fledged analysis of WTO compatibility can only be done by specialist lawyers. However, at the stage of identifying options in the context of an IA, it is important to rule out those that would in all likelihood lead to an outcome incompatible with WTO obligations. The IA should focus only on options that are, in principle, legally viable. In this regard, certain basic questions should systematically be considered when designing the options: Does the option allow imported goods or foreign service suppliers to enter the EU market?

2 Does the option ensure non-discrimination (legally or in fact) between imported goods or foreign service suppliers, and EU goods or EU service suppliers (national treatment principle)? Does the option ensure non-discrimination (legally or in fact) between goods or services of different third countries (most-favoured nation principle)? If the option involves product requirements that would be covered by the Technical Barriers to Trade Agreement 234, can you demonstrate that the requirements are proportionate to the objectives pursued? If the option regulates the movement of goods on sanitary or phytosanitary grounds, is it based on a risk assessment supported by sound scientific evidence? Is the option compliant with rules on subsidies, intellectual property and procurement? Box 1. Trade agreements and the pursuit of legitimate public policy objectives Article XX of the General Agreement on Tariffs and Trade (GATT) allows governments to adopt trade-restrictive measures in order to, among others, protect public morals and human, animal, or plant life or health, provided that they do not entail unjustifiable discrimination or constitute disguised protectionism 235. The Sanitary and Phytosanitary Measures Agreement or SPS WTO Members can set their own standards based on a risk assessment underpinned by science. Restrictive measures should be applied only to the extent necessary to protect human, animal, or plant life or health. They should not arbitrarily or unjustifiably discriminate between countries where identical or similar conditions prevail. WTO Members must rely on international standards, guidelines and recommendations where they exist. However, if those international standards do not achieve the required level of protection, WTO Members may use measures which result in higher standards if there is scientific justification. The SPS agreement includes provisions on control, inspection and approval procedures. Governments must provide advance notice of new or changed sanitary and phytosanitary regulations, and establish a national enquiry point to provide information. The Technical Barriers to Trade Agreement (TBT) The agreement seeks to ensure that technical regulations, standards, testing and certification procedures do not create unnecessary obstacles to international trade. Domestic measures shall not be more trade-restrictive than is necessary to fulfil a legitimate objective. Procedures used in order to decide whether a product conforms with relevant 234 Please refer to

3 technical regulations have to be fair and equitable. The agreement discourages methods that would give domestically produced goods an unfair advantage and encourages mutual recognition of standards and procedures. WTO Members are required to establish national enquiry points and to keep each other informed through the WTO. Around 900 new or changed regulations are notified each year. Consistency with the EU s Free Trade Agreements or the customs union with Turkey The EU has free trade agreements (FTAs) 236 or other trade agreements with many countries in the world (South Korea, Colombia, Peru, Central America, Southern Mediterranean countries, Chile, Mexico, South Africa, etc.), and is currently negotiating several others. The more recent agreements contain detailed provisions on regulatory matters, some dealing with specific sectors (cars, electronics, pharmaceuticals etc.). They also regulate in more detail than the WTO Agreements trade in services, investment or intellectual property; and often have further-reaching provisions on procurement. The customs union with Turkey focuses mainly on border measures, but also seeks to promote the convergence of laws in areas such as intellectual property rights (IPR) and competition. Consistency with investment protection provisions/agreements Investment protection provisions can be found in Member State agreements 237, and in the Energy Charter Treaty; and will be found in FTAs currently under negotiation or in future specific investment agreements. Generally, they cover discrimination against investors and their investments, unlawful expropriation (including indirect expropriation) without a public purpose, compensation provisions and arbitrary treatment of the investment. Any option that is clearly in breach with the EU international legal obligations should be discarded upfront. Other legal effects Two additional elements should be considered when designing the options. Through Agreements on Conformity Assessment and Acceptance of Industrial Products 238 (ACAAs) with some neighbouring countries, the EU has expanded its regulatory space in some particular sectors. In these sectors, ACAA-countries have aligned their law to the EU acquis and would, therefore, be affected by any legislative changes. When designing an option in a sector covered by an ACAA, attention should be paid to the administrative capacity of partner countries to implement this new EU legislation. 236 For further detail, please refer to For a list of investment agreements between Member States and third countries, see For more on ACAA, please see 186

4 On the other hand, the EU has concluded Mutual Recognition Agreements (MRAs) with some trade partners (US, Japan, Canada, Australia, New Zealand, and Switzerland) which cover some specific sectors. In some situations new EU rules (for example on testing of products) might not apply to all our imports. 3. HOW TO ASSESS IMPACTS ON EXTERNAL TRADE AND INVESTMENT A series of questions should be examined when analysing the potential economic impact of the options considered: Which economic agents should be considered? A regulation may have a trade impact on various types of firms. Producing firms are also consumers of intermediate goods and services produced by other firms (such as raw materials, components or business services). The linkages between firms (the so-called value chains) are growing in importance as firms increasingly outsource parts of their production to subcontractors, often abroad. The impact analysis should therefore not restrict itself to the direct effects of the options on the specific sector concerned, but should also consider the sectors and firms along the value chain. The EU s main trading partners are US, China, Russia, Switzerland, Norway, Turkey, Japan, and Canada. It is also important, for instance when consulting stakeholders in the IA context 239, to provide equal opportunities for third country operators and EU importers to express their views. Open trade, and the competition it generates, usually benefits retailers and wholesalers, allowing them to increase sales and/or profits and/or create jobs. Firms that need to source goods or services abroad for their production activities similarly benefit. Some operators may however be negatively affected by exposure to greater competition from foreign firms. Consumers as a group generally benefit from open markets, which increase choice. They may also benefit from lower prices (though this will be dependent on the price sensitivity of the market). How will the options affect European exports? Exporters will be directly affected by measures which increase the costs of production in the EU, and thus either reduce their profit margins or render their products more expensive (i.e. less competitive) in third markets. Exporters which are part of value chains and dependent on inputs from third countries will also be affected by barriers affecting their imports (see 3.3). 240 How will the options affect European imports, and value chains in general? The costs of compliance with a new regulation may make imported products or operators uncompetitive and have, therefore, the effect of an indirect trade barrier, even if the legislation as such is not (formally) restrictive or discriminatory. Many EU firms are dependent on inputs from firms based in third countries. Shutting EU firms off from 239 See Tools #53, #54, and #55 on stakeholder consultation 240 See Tool # 20 on Sectoral competitiveness 187

5 global value chains may jeopardise economies and jobs (importers also contribute to jobs and growth in Europe). As a general rule, the analysis should consider effects throughout the whole value chain, in respect of EU firms dependent on imports but also EU firms competing with imports. The relationship between sectors within the EU can be found in EUROSTAT s inputoutput table, while the relationship between sectors in the EU and sectors in third countries can be found in the UN Broad Economic Categories (BEC) classification (see also How will the options considered affect investment flows? Could the options considered affect costs to such a degree that it could have an impact on investors foreign direct investment (FDI) decisions? For both EU and foreign firms, there is a risk of relocation if a regulation is thought to be too costly. Conversely, if a regulation is seen as comparatively inexpensive to comply with, it can provide incentives for further FDI in the EU. 241 Policy options may also affect decisions on investment location through other means than costs. For an example of an IA analysis of investment flows, please see the Impact Assessment on an investment agreement between the European Union and the Republic of China. 242 Does the option affect the potential for trade in services? Trade in services differs in character from trade in goods in that it may be invisible and non-tangible. Virtually all commercial services are tradable, if not by traditional crossborder trade, then by accessing the foreign market as an investor and selling services through a local affiliate. Assessment of policy options affecting service providers from third countries should be undertaken. Could developing countries be affected? Article 208(1) of the Treaty on the Functioning of the European Union (TFEU) sets a legal obligation to ensure policy coherence for development (PCD) by providing that the EU shall take account of the objectives of development cooperation in the policies that it implements which are likely to affect developing countries. Developing countries are very heterogeneous. The 2012 Communication on Trade, Growth and Development sets new policy orientations for the EU s policy on trade and development for the next decade. In particular, it prioritises Least-Developed Countries (LDCs) and other countries most in need. 243 The following questions should be examined in particular: (1) Are the products covered by the proposal disproportionately produced in developing countries, particularly LDCs and other countries most in need? 241 See Tool # 20 on Sectoral competitiveness 242 The IA report is available at See Tool #34 on Developing countries 188

6 The ACP-EU Partnership Agreement 244 obliges the EU to inform the ACP States in good time of any intention to take a measure which might affect their interests. The CARIFORUM-EU Economic Partnership Agreement contains a similar obligation with regard to bananas, rice, rum and sugar. (2) Will the proposal have an impact on the competitiveness of exports from developing countries, particularly LDCs and other countries most in need? Developing countries should not face obstacles that make their preferences (preferential access to the EU market through lower or zero tariffs) impossible to use in practice, i.e. situations where their cost competitiveness from the preferences is eroded by the costs imposed on them by the regulations. Adjustment costs are normally much higher and may be prohibitive for firms in developing countries. This needs to be considered when enacting regulations for products which are important exports for developing countries. Such an analysis is particularly important for LDCs and other developing countries very dependent on a few export commodities and therefore easily affected disproportionately by the proposal. Particular attention should be paid if vulnerable groups in the developing countries are affected negatively. Will the proposal increase or decrease regulatory convergence with the main trading partners? Unnecessary regulatory differences between the EU and its trading partners can reduce or even prevent trade and investment. Beyond the internationally applied regulations and international norms or agreements with which the EU is legally bound to comply (e.g. the WTO TBT, SPS agreements), it is important to verify whether the proposal will be in line with any other non-binding international arrangements between the EU and third parties, or with initiatives which the Commission or Member States are pursuing at a global level (i.e. harmonisation of technical regulations or standards in UNECE, ICAO or ITU). It is also important to assess whether the options considered will contribute to greater regulatory convergence with the EU s main trade partners (such as US, Japan, China). When developing a new regulation or standards, the analysis should include an assessment of the main regulations affecting the products/services covered by the proposal in major third countries markets, and a comparison between these regulations and the options considered. 4. HOW TO MINIMISE NEGATIVE IMPACTS ON EXTERNAL TRADE AND INVESTMENT Unnecessary trade distortions can be avoided or minimised by considering the following elements: 244 Article 12 of the Cotonou Agreement, signed in Cotonou on 23 June 2000, revised in Luxembourg on 25 June 2005 and revised in Ouagadougou on 22 June

7 When the European Commission gives a mandate to standardisation bodies to develop a new standard, those bodies should be instructed to consider, as a basis for European standards, international standards that are in use in the global marketplace. This is in line with the WTO TBT Agreement. The TBT and SPS agreements in the WTO require all WTO members to notify draft technical regulations and conformity assessment procedures that might have a significant impact on international trade to the WTO TBT and SPS committees for scrutiny. This forum provides a good opportunity to avoid unnecessary trade friction with third countries before technical regulations are adopted and develop into barriers. The Commission has a number of regulatory dialogues or high level platforms with third countries in a multitude of areas, ranging from product safety, information society, raw materials and energy to financial services, in particular with the US, but also with China, Japan and Russia. If the issue to be addressed by the draft legislation is discussed in some form by an existing regulatory dialogue with a third country, it will be useful to take account of the state of play of discussions so as to avoid any contradictory outcomes and unnecessary trade barriers. 5. INFORMATION SOURCES AND BACKGROUND INFORMATION For further DG TRADE support, documents and guidance please find a dedicated functional mailbox: trade-and-investment-impacts@ec.europa.eu For information about WTO rules, see For a list of EU trade agreements see and for a list of investment agreements between Member States and third countries see Information is available from the following freely available databases about: which countries produce and export to the EU the goods or services covered by an initiative and what is the value of this trade (EU imports) to whom the EU exports the goods or services covered and the value of the trade which countries invest in the sector/s in the EU affected by the legislation and what is the value of these flows and stocks of investments EUROSTAT COMEXT that include the EU28 imports and exports of goods with all partners and all products disaggregation (see WITS and UN COMTRADE that cover trade in goods of all countries in the world with all the partner countries. 190

8 EUROSTAT Balance of Payments statistics that covers trade in services and FDI by partner country and product (see To distinguish between final goods and input goods, please refer to the United Nations Broad Economic Categories (BEC). Hyperlink to Communication on Competitiveness proofing 191