Impact of Free Trade Agreements in the EU

The EU has recently published a detailed review on the “Impacts of EU trade agreements on the agricultural sector.” The paper is published, in the Commission’s own words, against a background of rising protectionism within the EU and its main trading partners. Together with a detailed review of some of the EU’s main free trade agreements (FTAs), the report aims to aid the debate on the pros and cons of trade liberalization.

This article discusses some of the key principles.

The first is that the Commission reiterates its strong pro-trade policy which is underpinned by the following economic reality. That the EU is the single largest exporter of agri-food products, with exports reaching €129 billion in 2015. This export performance has been driven by agricultural policies, technological advances and EU trade policies. In the next decade, the European Commission estimates that 90 per cent of additional food demand will be generated outside of the EU. The Commission therefore expects to continue its support for FTAs.

Against that background, whilst the report considers agri-trade broadly, it focuses on three, specific EU FTAs with Mexico (2000), Switzerland (2002 and 2005) and South Korea (2011). Mexico as one of the earlier, more basic FTAs focusing on tariff and quota reduction. Switzerland as the largest, neighboring trading partner for food and agri products. And South Korea as one of the most ambitious and far-ranging EU FTAs.

The second message is that the FTAs have had a strong, positive effect on the EU’s economy. The Commission estimates that these three FTAs alone have increased EU agri-food exports by more than €1 billion and supported at least 20,000 jobs in the agri food sector and around 8,000 jobs in related activities. The FTAs impacted mostly in the areas one would expect – tariff concessions; rules of origin; regulatory harmonization; import procedures; and dispute resolution.

However, whilst that overall result is in line with the EU’s support for FTAs, the third key point is that there are limits to the effectiveness of FTAs in the broader economic, political and legal context.

Even in the comparatively simple area of tariff reduction, whilst the general picture is that the EU’s FTAs have led to significant tariff reductions on a large percentage of product lines, two points stand out

• First, the trade weighted picture (i.e. considering tariff reductions weighted for volume of imports and exports) is not so clear. In fact, trade-weighted tariffs for EU exports have not reduced line with the tradeweighted tariffs on EU imports. That is, in simple tariff numbers, these do not seem to be favorable FTAs for the EU.
• Secondly, growth in exports under the FTAs (apart from Switzerland) seems in large part to be in product lines that were already successful EU exports, rather than benefitting other product lines or sectors that were liberalized under the FTA.

In this second aspect, the Commission acknowledges that supply side, demand side and market-specific, socalled “bilateral”, factors can have as much or more effect than the FTA itself. For example

• Supply – how much competitive advantage does the FTA give EU exporters compared with other FTAs? How much knowledge do producers/exporters have about trade agreements? Where is their competitive advantage? Do they have access to efficient distribution channels? Are there high fixed costs to entry?
• Demand – can I export a product to suit local consumer tastes? To what extent are consumers happy to substitute local products for imported ones?
• Bilateral factors – factors like language and culture that lead certain countries to trade more naturally with each other.

The report supplements these relatively intuitive observations with fairly rich data and case studies. For example, EU/Mexico agri trade has grown steadily throughout the period of the FTA but, outside of the high end market, French wine exporters, for example, have failed to grow market share. Part of the reason is bilateral factors – the common language and historical and cultural ties with Spain, Chile and Argentina aligns marketing and preferences more closely with Mexican consumers. The other is access to distribution channels. The French exporters are relatively small and fragmented compared with, for example, the large Australian exporters, so have not been able to market and distribute as effectively in Mexico.

The two lessons from the report overall are that first, whilst a lot of political attention and public opinion focuses on FTAs themselves, a large part of the equation lies outside of their terms. Secondly a number of these other factors can be supported by local policy and administration (e.g. education of exporters to improve awareness of FTAs and how best to take advantage of their terms; public support for co-ordinated marketing and distribution overseas).

The last point to note is that the Commission displays a realistic appreciation of the advantages and limitations of FTAs in posing the question:“The central question in this study is: do trade agreements create trade or is the EU just making agreements where trade is growing anyway?”