The political economy of EU Association Agreements

1. The political economy of EU Association Agreements By Pierre DEFRAIGNE Director of eur-IFRI

2. The EU pyramid of Preferences The pyramid concept is misleading: • With regard to tariffs indeed, such preferences used to range from the LDCs (Everything but arms) and the ACP (Lomé preferences) to the MFN countries (only 9 of them), with the Mediterranean and the neighbouring countries, the gsp-drugs and the standard gsp beneficiaries standing in between; • This was never true with regard to NTBs which matter more and more: e.g adoption of EU norms by neighbours or technical agreements and MRAs with advanced countries; TRTA is aiming to correct this bias in particular in EPAs • The volume of trade puts MFN countries, neighbours and Asian countries – with lowest preferences- among EU top partners and those whose market shares increase fastest

3. The EU pyramid of Preferences • Because the main EU preferential schemes - Lome, Med, drugs - have proved vulnerable to challenge in WTO (DSM), and because tariff preferences look less and less relevant (multilateral liberalization and growing importance of NTBs) EU is searching an alternative in the FTAs.

4. The shift towards FTAs • EU has been championing regionalism from the start through its agreement with former EFTA (UK and partners) for political and economic reasons relating to its own success story (peace, prosperity, bargaining power) • EU has initiated RTAs in all continents, but Asia, as a major policy option; • Now, it is mainly responding to other partners’ moves (US with strategic and commercial motivations; Japan for consolidating its global output chains in Asia and in Mexico), Chile, Thaïland, Korea and Singapour mainly for market access into large and emerging economies

5. EU rationale for FTAs • Motives behind EU initiatives are many: • development: EPAs with ACP • security (Balkans, Med countries), • strategic (initially EU positioning itself as ‘third force’ in Latin America; EU as a global soft power with Asean; EU in search of energy security with the Gulf Council and tomorrow with Russia and its neighbours; EU and South Africa stabilization after the end of apartheid), • primarily commercial ( either defensive – Mexico, Korea- , preemptive-Chile- or offensive –India) • political ( ‘good neighbour’ policy : rich and poor the same way; preparation or alternative to enlargement), • But regionalism reflects also a will to go beyond WTO‘s insufficient progress with regard to rules and disciplines (social and environmental norms, Singapour issues-competition , investment, public procurements- IPR effective protection) • So expect EU to come up with a strong ‘WTO plus’ agenda with whatever partner for whatever reason : deep versus shallow integration

6. EU preference for region-to-region deals • Each time, it has been confronted with the possibility , EU has aimed at a region-to-region deal: euro-med trade area ( by 2O1O), EPAs with ACP (by 2OO9), Asean , Gulf Countries Council, Mercosur, Andean Pact, Central America; • It is looking for full-fledged Customs Unions with a single negotiating authority, a dispute settlement mechanism and a wide coverage of intra-regional trade in services and investment; • Reasons are three-fold : development potential , economies of scale for operators and lower transaction costs for officials (streamlining of the negotiation in a context of traffic jam)

7. Region-to-region FTAs negotiationsThe state of play • Euro-med : so far , only Agadir (Marocco, Tunisia, Egypt, Jordan) contributes to ease south-south trade ; meanwhile US makes inroads in EU-Med partnership for security reasons (fighting terrorism) because it does not require any South-South integration; • Mercosur: negotiation is on the shelve until the completion of the DDA held hostage by US -and India- ( agriculture subsidies as a horizontal and therefore a multilateral issue; agricultural market access for Mercosur and the EU ‘single pocket’)…. And until further progress in Mercosur integration; • EPAs: still at an ‘embryonic industry’stage • Asean : a two-speed approach from the start… • Gulf Council : on the verge of implementation (post WTO)

8. The new generation of FTAs • After the freezing of new FTAqs during Lamy’s tenure , new mandates are entering into the pipeline of the Commission (dec 6, 2006) and of the Council (end first quarter 2007) :Asean, India, Korea, and hopefully Andean Pact and Central America; • New mandates will likely take into account what happened since the late 9O’s : Seattle failure on core-labour standards (1999); Cancun Ministerial dropping 3 Singapour issues off the DDA; Kyoto ( climate change); EU new priorities with regard to unfair tax competition and financial criminality; frustrations in the conduct of the Mercosur negotiation; • Sequencing will matter, as a first agreement will set a precedent for the next one.

9. FTAs main objectives and provisions The main thrust of EU policy is to achieve ‘deep integration ‘ through a ‘WTO +’ type of deal, with the degree of necessary asymmetry to take into account the differences in competitiveness among North and South partners • GOODS • Tariffs • Rules of origin • Trade facilitation (customs procedures) • TDI • TBT , SPS and MRAs • SERVICES • Investment • Public Procurements • Intellectual property rightd effective protection • Competition • TRTA and financial assistance ( infrastructure, capacity building at regional level)