New EU Trade Strategy: European Commission Communication

Statement

New EU Trade Strategy: European Commission Communication (COM (2021) from 18.02.2021)

Bundesverband der Deutschen Industrie e.V.

Stand: 12.05.2021

Contents Conclusions ..................................................................................... 3 Objective and Scope of Action (Sections 1-2) .............................. 4 Medium-Term Direction of Trade Policy (Section 3) .................... 4 Six Critical Areas for Achieving the Medium-Term Objectives (Section 3) ........................................................................................ 6 1. WTO Reform (Section 3 and Annex) ....................................... 6 2. Green Transformation / Responsible and Sustainable Value Chains .............................................................................................. 7 3. Digital Transformation / Trade in Services ............................. 8 4. Regulatory Impact..................................................................... 8 5. EU Neighborhood, Enlargement, and Africa .......................... 9 6. Implementation and Enforcement / Level Playing Field ...... 10 Informed Discussion about Trade Policy (Section 4) ................. 12 About the BDI ................................................................................ 14 Impressum ..................................................................................... 14

Conclusions ▪

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The main focal points of the trade strategy are overall correct but missing one in particular – market access. The strategy remains largely on the macro level. Simple and predictable market access – i.e. the core ingredient of a successful trade strategy, a successful transformation of the global economy and a strong Europe in the world – does not play a central role anymore.

Trade policy can and must contribute to the green transition and overall sustainability. However, there is a danger that trade policy will be rendered incapacitated if overloaded by too high expectations and by policy objectives that mainly relate to other policy areas. For example, due to overly farreaching demands in the area of environmental protection and, as a consequence, long, unpredictable political processes it is difficult to find a feasible way forward that does not make Europe unattractive to third countries as an economic partner.

The regional orientation does not correspond to current economic and technological weights in the world; AsiaPacific and America are not sufficiently in focus. The EU needs strategic answers to challenges that arise, e.g. from regional agreements like RCEP and CPTPP and the growing global economic reach of competitors like China.

The green and digital transformation and the review of instruments should not fuel the global trend towards protectionism. Europe will not succeed in becoming an economic, technological, and environmental pioneer if it is hiding behind unjustified protective fences.

The focus on enforcement of trade rules and interests also should, wherever possible, avoid unnecessary protectionism and escalating trade conflicts. Furthermore, all legal instruments have to be designed carefully in order to achieve the political goals without damaging the European economy.

It is positive that the EU has dedicated a separate annex to WTO reform and presents here detailed, action-oriented recommendations and goals.

The Communication remains quite vague in terms of actions and next steps. The Commission needs to clarify soon which fora and alliances the EU is going to address and develop in order to work on implementing its strategy in the areas of the TPR (e.g. trade and climate, trade and emerging technologies). Business should be involved in the planning process at an early stage.

Objective and Scope of Action (Sections 1-2) The European Commission communication „An Open, Sustainable and Assertive Trade Policy,” aims to direct trade policy to adequately prepare Europe for the 2030s in a time of economic upheaval and geopolitical instability. It is well noted that the European Commission acknowledges the importance of China’s rise and the impact this has on the global economic and political order. The communication highlights the concept of open strategic autonomy that shall “emphasis the EU’s ability to make its own choices and shape the world around it through leadership and engagement, reflecting its strategic interests and values.” The concept encompasses three elements (1) resilience and competitiveness; (2) sustainability and fairness, and (3) assertiveness and rules-based cooperation. In general, the BDI welcomes the approach as defined in the communication: Europe must count on open markets and multilateral cooperation and show international leadership and value-driven commitment to assert its own interests, and also must position itself competitively and robustly. This is in line with the ambition of the European Commission to be geo-political.

Medium-Term Direction of Trade Policy (Section 3) The three core medium-term objectives of trade policy are defined as: 1. Supporting the recovery and fundamental transformation of the EU economy in line with its green and digital objectives, 2. Shaping global rules for a more sustainable and fairer globalization, 3. Increasing the EU capacity to pursue its interest and enforce its rights, including autonomously when needed.

In principle, he BDI supports the view that trade policy will play an increasingly important role in the structural transformation toward a sustainable (green and digital) economy. We welcome both the orientation towards rulemaking, particularly in the multilateral context, and the emphasis on the review of available instruments to enforce interests and trade rules.

However, in the core objectives, the classic function of trade policy that plays a central role for business, namely the opening of key third-country markets, is not sufficiently pronounced. This is regrettable in view of the fact that is

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emphasized in the analytical section: by 2024 around 85 percent of global economic growth will be achieved outside the EU. As a consequence, the market opening aspect plays only a minor role in the six areas designated as critical to achieving the medium-term objectives (see below).

Moreover, it is important to stress that companies should be able to decide themselves on their global supply chains. They are best placed to assess the risks, costs and need for action in their respective markets and products. The EU and the EU Member States should not intervene in these processes but should focus on creating the right framework conditions, e.g. an ambitious and open EU trade policy.

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Six Critical Areas for Achieving the Medium-Term Objectives (Section 3) 1. WTO Reform (Section 3 and Annex) ▪

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It is appropriate and timely that the EU seeks to strengthen the WTO and further develop international trade rules. The WTO must fully functionally operate again, albeit reinforced by significant reforms in the areas of sustainable development, dispute settlement, rulemaking and monitoring.

To this end, the EU must work closely together with key partners. According to the Communication, the cooperation with the U.S. and Japan should focus on all elements of the reform process to achieve maximum convergence, with a special emphasis on better addressing competitive distortions through state intervention. The EU also recommends better engagement with African countries on the integration of SDGs and on SDT. By the MC12, the EU Communication notes that an agreement should be reached on reinvigorating WTO work on trade and the environment, work launched on the development of rules on competitive neutrality, and progress made in the plurilateral initiative on e-commerce.

At the MC12, the multilateral moratorium on e-commerce should be renewed, a plan made on improving the WTO regular work function and on transparency, and an agreement made on export restrictions in agriculture, all alongside a Ministerial Declaration with a political commitment to reform. The BDI finds these rules ambitious but doable, rightly addressing all key pillars of the WTO. Rulemaking, e.g. on industrial subsidies, SOEs, e-commerce and sustainability and trade including trade rules for climate policy, should be furthered. Moreover, the EU supports an approach for special and differential treatment (SDT) which both effectively addresses the capacity constraints of developing countries and fully commits high-income and strong export countries in future negotiations. This is in line with the BDI position to tie SDT to clear economic criteria.

In liberalization, e.g. of „healthcare products” or of more sustainable solutions (goods, services, procedures), it is important to learn from the experiences of the EGA (Environmental Goods Agreement, suspended for 4 years already) and to develop targeted approaches with a focus on Seite 6 von 14

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healthcare products and on the basis of the most objective criteria possible.

The proposal for an advisory committee on important developments, comprised of representatives of business and civil society, is also to be welcomed.

2. Green Transformation / Responsible and Sustainable Value Chains ▪

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The EU should press ahead with the further development of multilateral rules at WTO level, the climate negotiations, the G7 and the G20. “Trade and climate” should be a central theme here and the private sector involved as early as possible in order to develop feasible solutions.

Protectionism and trade conflicts are to be avoided.

The BDI is of the view that the EU should enshrine international sustainability goals into its trade and investment agreements while not overburdening the process with too ambitious demands or policy objectives that have nothing to do with trade. Sustainable commitments must be anchored by mutual agreement with the trade partners instead of being imposed on them.

The BDI is in favor of fully implementing the 15-point action plan on the implementation and enforcement of Trade and Sustainable Development (TSD) Chapters in trade agreements before reviewing it already this year. In particular, the BDI remains skeptical towards a dispute settlement system for the TSD Chapter that provides the possibility of economic sanctions.

The development and use of unilateral measures must be carefully examined. The technical and institutional conditions must be created where necessary.

Carbon leakage protection is imperative but must consider the needs of complex value chains and export competition.

CBAM or alternative approaches must be designed to meet these requirements. In any case, a potential CBAM must be effective and efficient in achieving carbon leakage protection, especially if the CBAM is designed to replace traditional carbon leakage instruments (e.g. free allocation).Necessary preconditions (e.g. CO2 footprints, allocation rules) must be developed before implementing CBAM. In addition, trade-relevant measures like CBAM must be coordinated internationally in advance (e.g. in the relevant WTO bodies) in order to avoid trade conflicts and Seite 7 von 14

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countermeasures. Unilateral measures, e.g. CBAM, musts be accompanied by multilateral or at least plurilateral initiatives to have a significant impact on climate change.

German industry views national and European legislative processes for due diligence obligations of companies along the supply chain with apprehension. Varying rules, incalculable liability and image risks and new bureaucratic costs threaten international business and favorable supply options, particularly for medium-sized enterprises.

In its claim to pioneer sustainability goals, the EU must have a realistic strategy and should not distance itself too far from its partners and must therefore communicate with them from an early stage about the proliferation of these standards in other states/regions.

The enforcement of EU regulations and standards at and behind the border must be feasible and should not unnecessarily obstruct trade and logistics. Technical solutions to support non-discrimination and reduce bureaucratic burdens must be developed (without endangering confidential business information).

3. Digital Transformation / Trade in Services ▪ ▪

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BDI supports the European Commission’s focus on digital trade and e-commerce.

However, other high-tech fields (biotechnology, low-carbon technologies, artificial intelligence, etc.) should not be neglected. Trade policy solutions for phenomena related to the increasing servicification of trade in goods are long overdue (“mode 5 services”) The U.S. fits as a natural partner for possible bilateral initiatives.

4. Regulatory Impact ▪

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Especially in international regulatory cooperation, ambition and cooperation with industry by the EU would be desirable, also in light of the standard competition it is in with other regions. Therefore, the Commission’s focus here is welcomed.

BDI supports the bilateral mutual recognition of test procedures and certificates for identical requirements.

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regulatory systems so that, together with the harmonization of technical standards, the recognition of conformity assessments from the respective other market area becomes possible. Moreover, the mutual recognition of test and inspection results of testing bodies operating in the same economic area should be clearly regulated.

Strategic cooperation in the creation of standards and norms in the field of new technologies (hydrogen, digitalization, etc.) must not be neglected.

In addition, the EU and its Member States must contribute sufficient capacities to multilateral standard-setting organizations.

We view planned export bans for products not approved in the EU with concern, which could result, for example, from the EU’s “chemical strategy for sustainability.”

5. EU Neighborhood, Enlargement, and Africa ▪

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The potential for economic cooperation with the EU’s neighbors, especially Africa is far from exhausted. A stronger commitment in these regions is both politically appropriate and offers business opportunities. However, local conditions are often difficult, and not only for SMEs. The goal of a stronger economic relationship should not be undermined by too strict or impractical due diligence requirements leading to less instead of more engagement in the region due to increased legal risks.

However, to tap the economic potential of the African continent in the area of innovation, digitization and new technologies, a joint, coherent new EU-Africa strategy is needed with focus on those aspect. Trade policy facilitating market access must pay an active role in this strategy.

Reliable and enabling legal and economic policy framework conditions, larger markets with strong intra-African value chains and a better infrastructure, as well as enhanced efforts in the field of trade facilitation and skilled workers are crucially important for more investment and trade.

Aligned to the Agenda 2063 and the regional development strategies, the implementation of the African Union's PanAfrican Free Trade Area (AfCFTA) should be put high on the EU’s agenda.

Economic Partnership Agreements (EPAs) with African states are important instruments to boost economic relations between Africa and Europe but also to encourage the creation of regional value chains. We therefore support the Seite 9 von 14

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Commission in using EPAs as building blocks to continental free trade in Africa.

We note with regret that the Commission’s Communication does not offer any perspective on cooperation with Russia.

The regional chapter of the strategy is limited to EU’s direct neighborhood. In this respect, we welcome the political will to progress relations with the six Western Balkan countries on their way towards EU membership. However, German industry would have wished for more attention on Asia (ASEAN, India) and the Americas (U.S., Latin America) in the strategy (beyond just mentioning it as important to create the conditions to ratify current trade agreements in the section on level-playing-field). These partners are economically and strategically even more decisive than the regions described in greater detail (there are only short references to these regions in the context of FTAs in the following section).

These other partners should not fall from view when seeking a global network of democratic, social market economies.

The EU must bolster its resilience through diversified supplier networks.

Differentiated strategic approaches are essential in dealing with autocratic regimes. However, no “decoupling” should take place.

European Business needs an EU mandated financing tool aligned with ECAs’ support helping them to address projects which are highly interesting but occupied through state supported competition from P.R. China and others. The new Multiannual Financial Framework 2021-2027 of the EU could with their approaches be a good vehicle to address EU business community need and arrange the necessary blending/financing instruments including the establishment of a risk mitigation product called the “External Action Guarantee”.

6. Implementation and Enforcement / Level Playing Field ▪ ▪ ▪

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The EU should advocate for international cooperation, rulesbased trade and investment with its economic partners, and open markets of third countries and at home.

Concluding new agreements to open up important markets plays only a minor role in the trade strategy but needs to remain a focal point.

BDI emphatically supports the striven-for simplification and harmonization of rules of origin in EU agreements.

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However, in general the strategy does not pay enough attention to simplify international trade for small and big companies (there is only a small SME section at the end of the document). Everyday problems of our companies are not sufficiently dealt with, such as rising shipping or sourcing costs or travel and visa restrictions.

Oftentimes, EU trade agreements are overly complex for SMEs to use. Complex rules, not only with regards to rules of origin, can lead to economic operators not utilizing trade preferences.

The new focus on implementation and enforcement is one step in the right direction. International trade rules and EU economic agreements with third countries must be properly enforced and the Single Market protected from unfair competition by third parties. Enforcement of market access provisions should be at the center of work of the CTEO. Trade defense instruments need to remain tools against unfair trade that are only imposed after careful examination and if the required criteria are met.

In order to ensure an international level playing field, the EU’s trade policy must be assertive. This requires effective and balanced instruments that protect European companies from unfair market behavior and enable the EU to enforce international rules (e.g. anti-coercion instrument, IPI, but also trade defense instruments).

The search for new instruments is thus understandable.

However, when designing and applying these instruments, the EU must not encourage the international trend towards protectionism. Respective instruments must be designed carefully to strengthen and not to weaken European industry.

It must also be ensured that any new instrument is WTO compliant. European export and import interests must always be taken into account and the use of the instruments carefully weighed.

As a general point – too much protection would do more damage than good to geopolitical ambitions (e.g. in the area of investment screenings). BDI believes that open strategic autonomy must not lead to tighter screenings on foreign investments in the EU; the EU and its Member States must remain open to investments from third countries. Investment screenings must be limited to protecting national security.

The EU should also review its design of finance products to support the EU business community to execute international projects to address the 17 UN SDG´s.

German industry supports examining stronger European cooperation and an EU facility in the area of export credits.

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The aim should be to reduce economic disadvantages for our companies compared to competitors in export financing and insurance from abroad, inside and outside the OECD. It has to be recognized at EU level and in the member states that aligning ECA covered financing and insurance with EU blending tools (e.g. under the MFF 2021-2027, External Action Guarantee and the NDICIC) would help EU businesses to gain projects especially in markets and business sectors which are in need of addressing the megatrend and mega-topics of this planet such as the UN SDG´s, sustainable infrastructure, public health, public transport and mobility, and all projects related to climate change, energy transition and renewable energy.

A European facility ideally provides the full range of financial support for projects, especially direct lending, tied aid and cover instruments. It should be designed to act on stand-alonebasis as well as supporting entity for existing institutions of member states, which should not be replaced. This ensures a level playing field within the EU and allows for strong answers in foreign markets. Lean procedures should be implemented to ensure practicability and predictability.

The EU should aim to strengthen its position towards nonOECD Consensus bound countries. BDI would welcome the examination of instruments outside the scope of the OCED Consensus, since foreign competitors receive such support from their governments.

Since the EU identified digitization to be key, the newly established facility should strive to provide financing support for digital products. Innovation is necessary on both, a technical as well as a financing perspective.

Informed Discussion about Trade Policy (Section 4) ▪ ▪ ▪

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BDI supports the close dialogue between the Commission and all relevant stakeholders, as well as its efforts towards better data and analysis.

Those stakeholders primarily affected by trade policy, companies and branches of industry engaged in international trade, should be particularly closely consulted.

These efforts must contribute to transparent processes, informed decisions and effective achievement of objectives.

Trade policy should not be overburdened by too miscellaneous expectations, concerns and unrealistic goalsetting.

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Protective interests must be taken seriously and weighed carefully but must not lead to protectionism and an inability to act. Europe thrives off open and rules-based trade and must represent its interests and values on the global stage through international trade agreements. This aspect must be emphasized by the European institutions even more clearly.

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About the BDI The BDI communicates the interests of German industry to political decisionmakers, thereby supporting companies in global competition. It has an extensive network across Germany and Europe, in all important markets and in international organization. The BDI provides political support for international market development, as well as information and economic policy guidance on all industry-related issues. The BDI is the umbrella association of German industry and industry-related service providers. It speaks for 40 industry associations and more than 100,000 companies with around 8 million employees. Membership is voluntary. 15 state representatives represent industry interests at regional level.

Impressum Bundesverband der Deutschen Industrie e.V. (BDI) Breite Straße 29, 10178 Berlin www.bdi.eu T: +49 30 2028-0 Contacts Eckart von Unger Deputy Head of Department, External Economic Policy Bundesverband der Deutschen Industrie e. V. (BDI) T: +32 2 7921011 e.vonunger@bdi.eu Katherine Tepper Senior Manager, External Economic Policy T: +49 30 20281499 k.tepper@bdi.eu

BDI Dokumentennummer: D 1383

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