The European Commission’s new approach to trade agreements: The impact on EU-ASEAN FTAs

On 22 June 2022, European Commissioner for Trade Valdis Dombrovskis presented the Commission’s new approach to Free Trade Agreements (FTA). As one of its main features, the plan seeks to strengthen the binding nature of Sustainable Development provisions and rules within EU FTAs. This is particularly relevant in view of the EU’s FTAs and trade negotiations with ASEAN and its members.

The European Commission first redefined its FTA strategy in 2010 by widening the scope of its agreements. In addition to tariff rate quotas, custom duty removal, or sectorial-market liberalisation, these “new generation agreements” (NGAs) imposed stricter sanitary and phytosanitary norms, and inserted Trade and Sustainable Development (TSD) provisions covering international labour conventions’ compliance, environmental protection provisions and intellectual property protection. Adding a new binding layer to its agreements, the European Commission’s overall 2022 strategy consists of taking a step forward towards “greener, fairer and more sustainable” FTAs. On 30 June 2022, a week after the “New Approach” was presented, the EU-New Zealand FTA was unveiled as the first one designed with respect to the Commission’s new approach.  

Considering already enforced FTAs with Asian countries, their evolutions, and the EU’s new approach to trade agreements, the scope of future trade agreements with ASEAN countries will likely differ from those already in force. In the light of longstanding issues hampering negotiations, this EIAS Op-Ed provides an insight on the current EU trade strategy with respect to ASEAN, and on the design and provisions of potential FTAs with the four ASEAN countries with which the EU has not yet found an agreement: Indonesia, Malaysia, Thailand and the Philippines (ASEAN4). 

The EU-ASEAN Free Trade Agreement(s)

One of the very first debates of the regional EU-ASEAN FTA negotiations initiated in 2007 was to determine the scope of the agreement, and ascertain which countries to be involved. One risk of such a region-to-region agreement was to involve regional members with significantly different levels of development. For instance, Cambodia, Laos, Brunei and Myanmar represented only 2.05% of ASEAN total trade in goods in 2009 and 3,42% of ASEAN’s gross domestic product (GDP) between 2007 and 2009. In order to avoid significant destabilisation of the economies of Cambodia, Laos, Myanmar and Brunei and not to annihilate their tariff preferences –granted under the Generalised Scheme of Preferences (GSP)–  the choice was made to exclude them from the following EU-ASEAN FTA negotiations.

In 2021, the picture had not changed significantly. Malaysia, Singapore, Thailand and Vietnam were still the main destination of EU exports to ASEAN, representing 78% of its total share, while 76.3% of EU goods imports from ASEAN originated from these four countries. Cambodia, Laos, Myanmar and Brunei’s (CLMB) weight represented respectively 2.3% and 6.1% of ASEAN imports and exports of goods with the EU, whereas the contribution of CLMB to ASEAN’s GDP accounted for 4.22% in 2020. The CLMB are also still benefiting from the EU’s GSP scheme. Therefore, if any region-to-region FTA negotiations between the EU and ASEAN were to resume, it is likely that they will adopt a similar EU-ASEAN6 (ASEAN4, Viet Nam and Singapore) standing, excluding the CLMB.

An inter-regional take-off for a bilateral landing

ASEAN members’ economic and trade heterogeneity not only reflects a development gap between them, it also emphasises the lack of consensus on specific and non-conventional trade aspects that EU FTAs usually cover. At the time of the negotiations with the region between 2007 and 2009, the ASEAN6 members adopted a common position on traditional trade features such as tariff rate quotas or market sectoral openings in trade in goods. However, they lacked a cohesive stance in non-traditional trade features like non-tariff trade barriers, investments or services. This heterogeneity has been one of the main drivers for the failure of the region-to-region EU-ASEAN FTA negotiations. Instead, the EU decided to undertake bilateral negotiations with ASEAN members as of 2009. Two FTAs have since then been signed, respectively with Singapore in 2018 and with Vietnam in 2019. Investment Protection Agreements (IPA) were also signed with the two countries but, to date, only the EU-Singapore IPA has entered into force –as the EU-Viet Nam IPA still requires ratification by the EU. 

Bilateral negotiations as a breeding ground for an inter-regional agreement

Considering that the EU’s New Generation agreements cover a wider set of topics, an EU-ASEAN agreement concluded on a region-to-region basis would be inconsistent with the trade and political reality of ASEAN. While the EU has a single market and an exclusive competence in trade at the supra-national level, ASEAN has preserved its intergovernmental shaping in negotiations and its single market remains a project in the making. The EU’s approach to first lead bilateral negotiations with ASEAN countries and complete FTAs with the ASEAN4 is expected to further stimulate trade exchanges and create incentives for both sides’ stakeholders to do business with one another in multiple sectors. In parallel, ASEAN members are stimulated to adopt European market and sustainable development standards. As European norms and standards inserted into the different individual FTAs remain similar to one another, the ASEAN member countries are more likely to adopt similar trade standards vis-à-vis the European Union. This will bypass, to some extent, the lack of ASEAN members’ consensus on non-traditional trade issues raised during the 2007-2009 negotiations and, ultimately, favour negotiations for a potential future EU-ASEAN6 region-to-region FTA. 

Trade in goods and services

Amidst this long-term strategy, certain features of potential agreements with the ASEAN4 may be predictable to some extent. As regards trade in services, it is likely that delivery, telecommunication, financial and legal services would be covered by the agreements, as well as travel, transportation and manufacturing services. Besides these provisions, ASEAN4 countries will have to respect rules of origins and reform their legal system in order to comply with specific origin procedures applied by the EU.

Regarding trade in goods, the EU is likely to negotiate ASEAN4 sectoral liberalisation in machinery and electrical equipment, transport equipment, chemicals and pharmaceuticals as well as medical instruments and metals. Being the five main sectors of EU exports to Indonesia, Malaysia and Thailand, these are also the key domains covered in existing EU FTAs with East and South-East Asian countries. In addition, ASEAN4 countries would be expected to push for additional manufactured goods –which count for a significant share in their trade exports– to be covered. These would include electrical equipment and machinery, optical and photographic goods, as well as vehicles or rubber and plastic.

However, tariff elimination on animal and vegetable fats and oils goods are part of a wider trade dispute between the EU, on one side, and Indonesia and Malaysia on the other, especially with regard to palm oil. As the two primary world producers of palm oil, representing 59% and 25% of palm oil global production, Indonesia and Malaysia’s exports of crude palm oil (CPO) amount respectively to 44.6% and 25.2% of the EU’s total CPO imports. Following the adoption of the EU’s Renewable Energy Directive II in December 2018, phasing out of palm oil-based biofuels’ imports to the EU and its use between 2023 and 2030, Indonesia “filed a lawsuit to the World Trade Organisation” (WTO) in March 2020 on the basis of alleged trade discrimination from the EU against palm oil imports. Malaysia filed a similar lawsuit to the WTO in July 2021. While the palm oil disputes hamper FTA negotiations, the dialogue will likely become more difficult amidst the adoption of the new Deforestation Regulation by the European Parliament on 13 September 2022, which targets imports of commodities that cause deforestation –such as soy, palm oil, beef or coffee.

Future trade negotiations will mainly rely on the outcome of the palm oil dispute, especially as regards the final ruling of the WTO panel and whether or not either party decides to make an appeal of the decision to the WTO Appellate Body, which is  since December 2019 no longer effective. FTA negotiations with Indonesia and Malaysia appear to be in a deadlock, as the EU strategy seeks to extend its trade partnerships in the Indo-Pacific while pursuing greater sustainable objectives commercially affecting its partners in the region.

Trade and Sustainable Development

Within the June 2022 European Commission’s new approach to trade agreements, both the scope and the binding nature of TSD provisions have been reconsidered. TSD chapters usually commit parties to adopt and pursue the objectives of international labour, environmental and intellectual property treaties and create civil society advisory groups to monitor the TSD chapters’ implementation. In contrast, the EU-New Zealand FTA sets additional provisions on the ratification of the Discrimination Against Women ILO convention, the involvement and the reduction of fossil fuels public subsidies. As regards agreements with the ASEAN4, adding these new standards would require greater bargaining from the EU which would have to concede more in terms of tariff elimination, quotas or services. 

To the difference of previously concluded FTAs, the EU-New Zealand FTA offers the possibility for the EU and New Zealand to suspend their obligations under the agreement or to adopt trade restrictions if TSD commitments are breached. TSD chapters are important features of EU FTAs, which makes them unlikely to be removed or restricted. Removing them would lower European standards to favour trade, a “race to the bottom” that the TSD chapters seek to avoid. As per TSD provisions, the signing parties commit to cooperate, including “with a view to reducing deforestation”. In the frame of the palm oil disputes, trade agreements excluding the Indonesian first and Malaysian fourth source of revenue of GDP is a major issue. Although the ASEAN4 countries could consent to further standardisation at the cost of greater market concessions from the EU, it would intensify the binding nature of the TSD chapters and would convolute negotiations. In addition, EU Commissioner for Trade Dombrovskis stated that to favour a “tailor made approach” when applying the brand-new strategy. Therefore, future trade negotiations are likely to rely on a more traditional approach to trade, and a simpler Trade and Sustainable Development chapter than the EU-New Zealand FTA’s one.

Human rights and Democracy

Including additional political provisions in FTAs with the ASEAN4 countries also has a deeper meaning in view of recent political and human rights events in the region. For instance, while FTA negotiations with the Philippines were officially launched in 2015 no further steps have appeared on record since February 2017. The EU institutions have raised human rights and democratic concerns, especially with regards to extrajudicial killings by the Philippines National Police in the frame of then Philippines President Duterte’s “war on drugs”. As a result, in a resolution adopted on 2 February 2022, the European Parliament called on the European Commission to start the suspension procedure of the GSP+ trade facility granted to the Phlippines under the GSP+. Despite the EU Ambassador to the Philippines meeting with the new president Ferdinand Marcos Junior on 30 June 2022, re-starting negotiations on a trade agreement has not been on the table thus far. In the absence of an official statement on the topic from President Marcos Junior, the priorities of the Philippines are seemingly not aimed at such an achievement with the EU.  

In a comparable way, FTA negotiations with Thailand were launched in March 2013 but suspended after the June 2014 military coup and their resumption is conditioned by the return to democracy and the respect of human rights and fundamental freedoms. This call was reiterated in 2017 and a Joint Committee under the EU-Philippines Framework Agreement on Partnership and Cooperation discussed the (sole) prospect of continuing further negotiations in January 2020.

Trade negotiations with the ASEAN4 countries are subject to a complex entanglement of disputes and relational tensions. However, trade remains a powerful tool for the EU to ultimately foster political relations with third countries. In the position of the EU as a whole, the exclusive competence granted to the European Commission to conduct the Union’s common external trade policy has a greater geopolitical dimension. While ASEAN remains a key partner for the EU in the Indo-Pacific region, successful free trade agreement negotiations with ASEAN4 countries rely heavily on normative issues. Looking at the founding treaties of the European Union, sustainable development, democracy, the rule of law or labour rights constitute the very roots, principles and values of the Union and its market. The stance adopted by the European Union conditions the outcome of EU-ASEAN4 agreements and, ultimately, an inter-regional EU-ASEAN FTA fulfilling trade and political achievements outlined in its Indo-Pacific strategy. As a result, the EU will have to find a delicate balance in its relations with ASEAN4 member countries in order to maintain a political dialogue which will favour its positioning in the Indo-Pacific and secure its economic interests.

Author: Adrien Padovani, EIAS Junior Researcher

Photo Credits: Pixabay