Impact of European Union Trade Policy on World Economy

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Table of Contents

Introduction
EU Trade Policy – An Overview
Impact of EU trade Policy on member countries
Impact of EU trade Policy on Non members
Conclusion
Refernces

Introduction

European Union is regarded as the largest trading bloc of the world (Oli Brown, 2005). European Union plays an important and defining role in the trade scenario of the European region and the world. The establishment of the commission in the year 1955 was an attempt to build a community of the nations that could be commented through trade because trade is the tools that can be used as a powerful driver to accelerate the growth of economy, to reduce the poverty within the countries, to promote the regional integration and to create non military ways of settling the disputes between countries. (Oli Brown, 2005) But to use this powerful tool in an effective manner it is very necessary that there must be a framework of some fair rules that can lead to trade between the countries on equal terms and can contribute towards the settlement of the disputes.

In order to fulfill this need, the creation of the European Commission occurred with the intention of providing the member countries a fair and balanced frame work of managing the trade operations and settling their disputes (OECD, p8, 2000). The trade policy of EU are mainly focused on the principles of trade liberalization and regional integration however it is also observed that some of the trade policies of EU are not conflict sensitive in nature and the member and nonmember countries have some reservations over the trade policies of the commission. In this context the trade policy of the commission and its effects on the member and non member countries is an important issue. This paper is aimed at analyzing the effects of the EU trade policy on the world economy. In this regard the discussion is focused on the effects of the EU trade policy both on the member nations as well as the non member states.

EU Trade Policy – An Overview

Being the largest trading bloc the trade policies of the European Union play important role in the international trade operations and the trade policy of EU possesses great importance in the commencement of the international trade operations. As far as the decision making on the foreign trade policy is concerned it is observed that it is largely centralized at the EU level and the two main pillars upon which the UE trade policy based are “multilateral bilateralism and regional integration”. (OECD, p8, 2000) In order to attain these two basic goals the commission remained involved in different regional preferential agreements and other activities that led to integration and enlargement. Moreover since its establishment the organization has appeared as an active participant of the multilateral liberalization efforts. In this regard the commission is credited with an important achievement and this is to include agriculture in the trade liberalization negotiations (Mark et al, p54, 2004). EU remains involved in the global trade liberalization agenda through the import of the agriculture goods from the developing countries to the developed ones.

The trade policy of EU is considered very supporting for the trade liberalization because the commission has taken many steps that have contributed towards the reduction of trade barriers and as a result the developing countries specially are provided with some flexibility in the trade. There are many examples that can be cited for instance in the year 2003, EU took the initiative of setting up the “Forest Law, Enforcement, Governance and Trade (FLEGT) Law. This law was implemented as an attempt to create a licensing system for the identification of the legal timber products that can be exported in the European Union countries. As a result of formulation and implementation of this law there was expected reduction in the illegal timber trade that was contributing share of 10 percent in the total€150bn annual trade of timber. (Mark et al, p54, 2004) In the same way the role of EU is very vital in Kimberley Process that resulted in the creation of the certification scheme in 2003 related with the trade of the conflict diamonds.

Though these policies reflect the support of EU for the developing nations but at the same time there are many trade policies implemented by EU that cause unfair competition in the EU markets and despite easy entry in the EU markets, the developing countries fail to grab major share is the trade volume and their economic instability remained at the same level. This double standard in the trade policy of European Union is also criticized by the economic experts and in the briefing paper of Oxfam, the European Union was given the top place in the “Double Standard Index” by charging that the Union implemented the free trade and trade liberalization policies to open the doors of the agriculture sectors of the developing countries and then enter in their markets by pouring highly subsidized agricultural products that lead to high trade profit to the EU countries. In this way there is gap found in the theory and practice of trade liberalization and assistance to the LDCs in gaining economic stability. (Oxfam Briefing paper, p10, 2002)

Impact of EU trade Policy on member countries

There is an important feature of the EU Trade policy that for most of the matters related with the trade of goods and services, the main decision is taken by the commission’s council set up for this purpose. Although the member states also take decisions at their own but most of the times the foreign trade policy for the members countries of UE is decided centrally (Macartan, p71, 2003). This feature of the EU trade policy ensures the functioning of the internal market in the region and thus centralization of decision making is the strength of the European Commission in the context of international trade. This centralization of the decision making and negotiation has direct impact on the member countries as well as the non member countries and trading bodies. The commission under took the negotiation and decision making process related with the international trade operations of the member countries through different clubs constituted by the commission. If the members of the clubs have different opinions regarding the particular matter then the entire process proceeds very slowly and vise versa. (OECD, p5, 2000)

Moreover the commission has also worked out for the New Transatlantic Agenda that has resulted in the elimination of the trade barriers and after the implementation of this agenda the EU countries get access to Atlantic countries market as well. This agenda pave new ways of trade for the member countries and in turn the economic effects of this agenda is also positive for these countries as they get more revenue from the export of their commodities to the countries across Atlantic.

The impact of the trade policies of European Union is most of the times favorable for the countries of the European Union because one of the main objectives of the organization is to safeguard the trade interests of the member countries. As a result the positive economic impact of the trade policies of the commission can be clearly seen on the economic conditions of the member countries. The trade policy of European Union is objected to make EU the strongest as well as the most competitive single economy of the world. The impact of the trade policy of the commission on the economies of the member countries can be sought from the fact that the 27 member countries of the European commission represent just 7 percent of the population of the world but at the same time these 27 countries account for more then one fifth of the import and export of the global trade operations. (EU Homepage, 2007) European Union strives to design and implement such trade policies that can maximize the influence of the member states on the international trading scenario. In order to achieve this objective the member states of the European Union speak with one voice on the international and regional trade matters.

The member countries also face some problems as a result of the trade liberalization policy of the commission. These problems of the member countries are claimed on the basis that the commission uses to heavily subsidize its own producers and as a result they have to export their products even on the price that is below to their cost price. (Ian and Paul, n.p, 2003) As compared with the others, the EU countries are taking the benefits of the EU policies in better way for example the farmers in the EU countries get high subsidies for their agricultural products. This subsidy is high because in the year 2003 the spending of EU on the agricultural subsidies reached to a massive level of $41 billions (Vorley at al, p20, 2004). In turn the farmers in EU started getting hundred times greater subsidy as compared with the annual income of the African farmers. EU use to allocate this amount of subsidies to the farmers in order to encourage the agricultural production in the member countries. Although EU has exercised the Common Agricultural Policy to grant equal subsidy to the producers of the agricultural products but it is a fact that despite the policy, the EU producers are getting higher subsidies as compared with the other developing and least developed countries and as a result of the agricultural reforms implemented by the EU, most of the benefits are enjoyed by the EU countries (Paul, p2, 2003)

Impact of EU trade Policy on Non members

An important initiative was taken by EU in February 2001. The “Everything but Arms – EBA) initiated become the key stone in grating the duty free access to the import of different products from the Least Developed Countries – LDCs. These countries were given this facility with out any qualitative restrictions however arms and munitions were not allowed to be imported under this initiative. From this step there were many countries benefits and among these LDCs most of the countries were not the member of EU including the African and Asian countries. (Macartan, p71, 2003)

The commission has also formulated some policies with the intention of helping out the countries that have faced the natural disasters or conflicts, by assisting them in their economic reconstruction process. After the massive disaster of Tsunami in Asia in the year 2004, The European Commission takes the step to reduce the tariffs from the affected countries so that they can get help in recovering their economic losses. In the same way the commission also reduced the import tariffs from the countries that are facing some conflicts so that these countries can get the support in their growth and economic development process. (Paul and Ian, p3, 2003)

Despite all of these initiatives, there are many economic experts that criticize the role of the European Commission and blame that it is playing a role in propelling the rapid polarization of rich and the poor because in many of the cases the developing countries fail to become the part of the EU trade markets as they are excluded from there on certain grounds due to which the developing countries fail to accelerate their economic growth by accessing to the EU market. (Ian and Paul, n.p, 2003) For example the share of the Africa’s trade dropped almost by two third from 1975 to 1995 when it became just 2.7 percent as compared with 6.7 earlier. Although the African countries remain involve in many of the trade agreements with EU but despite all these agreements and treaties the African countries specially the Sub Saharan African, failed to make good share in the EU trade and ultimately they find no way to came out from the poverty and economic instability. As a result of the unsuccessful trade relations the annual growth of these countries also decline and there is increased likelihood of civil war in these countries (Emily, p2, 2004).

In the same way there is major difference in the agricultural subsidies given to the EU member countries and the non member countries. When the farmers in the least developed countries get low subsidies for the production of the agricultural goods, they get low prices for their products and as a result the market share of their product also remain very low and they face an unfair competition with the agricultural producers of the developed countries. An example of difference in the subsidies and cost of production is the sugar industry. In the European Union countries the sugar costs three times higher as compared with India and five times higher then Zambia but despite this important fact EU is the second largest exporter of sugar in the world. According to a research study conducted on the subsidies of the sugar industry it is found that the sugar producers of EU countries get €2.7 billion as subsidies on the production of sugar and at the same time there are high restrictions on the other countries on the export of sugar to the UE countries. This policy shows the double standard in the European standard and provides some evidences that the trade policies of the union are not only intended to support the economic development of the least developed and the developing countries but some of the policies make these countries weaker and the member countries stronger (Paul, p2, 2003)

Although the commission strives to provide trade facilities to the developing countries by reducing the tariffs and this is also proved from an independent research study that as compared with the other trade blocs, the EU has the lowest market access barriers (Natalie, p65, 2003) however the reduction of the trade barriers can not help the developing countries through out the trade operations. The developing countries get the opportunity to access the EU markets due to the reduced tariffs however even after entering the EU trade markets, the developing countries fail to successfully operate because of rapidly changing trade regulations that are very complex for the non member countries specially.

In order to comply with the emerging regulations of the EU markets, the developing countries become aware that they have to pay high cost for getting independent certification. An important reason behind the failure of many of the developing and Least developed countries in the EU trade market it that, these countries don’t have adequate knowledge about the market and they also lack the technical capacity due to which these counties are unable to take the advantages of the opportunities available in the EU markets. In the same way there are many strict rules of origin that play an important role along with the bureaucratic hurdles and result in the preferential treatment of small percentage of the products in UE markets that come from the developing countries (Natalie, p65, 2003). This is due to strong internal lobbying of the EU member counties for the safeguard of their interests.

The trade policies of UE draw strong impact on the economies of the non member countries. As discussed above there are some double standards in the trade policy of European Union due to which the developing countries face unfair competition and difficulties in surviving in the EU markets. These difficulties result in the massive volatility as well as decline in the price of the primary commodities in the developing countries that is considered as a serious threat to their economic development. There is also decline in their export products due to which the employment rate also went on decline due to lesser jobs created in the export sector. Moreover there is little attraction for the inward investors and the opaque flow of the revenue most of the times lead towards the rise in the corruption as well as poor governance. For instance in the sub Saharan African region there are 17 countries that are dependent upon the export of the non oil sectors for the development of their economies and as a result of failure in getting major export revenue these countries face high level of risk of violent conflicts and at the same time the chances of the civil war also rise. The effects of EU trade policy on the sub Saharan region is also reflected from the UN estimate that half of the aid received by the sub Saharan countries is lost due to the trade terms deterioration. (Paul and Ian, p3, 2003)

Ethiopia and Burundi are the other example examples of the effects of EU trade polices. These countries rely on the export of coffee up to la larger extent and 60% and 80% of the export earning of these countries is contributed by the expert revenue of coffee. When there is decline in the price of coffee up to two third during the time period of 1980 to 2000, the livelihood of these countries is badly affected and the health and educational programs are almost stopped because the government had to pay high price for the payment of the debts. The decline in the price of the coffee was contributed by the price policies of EU that in term resulted in the bad economic condition of these countries and as a result poverty and worst health and education conditions prevailed in these countries. (Paul and Ian, p3, 2003)

Conclusion

The above discussion unfolds various aspects of the European Trade policy and discusses the impact of these policies on the world economy. In this regard the impacts of the EU trade policy are discussed on the member states as well as on the economies of the non member countries. It is revealed from the above discussion that the European Union is playing an integral role in the scenario of the international trade and its policies are directly affecting the international trade operations. The main agenda of the European Union is to promote trade liberalization and regional integration and for this purpose there are many polices, strategies and agendas are formulated and implemented by EU that have resulted in the reduction of the trade barriers and at present there is open trade policies implemented in most of the regions of the world. These polices are intended to give access to all the countries to the international market so that the developing and the least developed countries can enter the international and European Union market and can get assistance in the development of their economies.

There are many positive impacts of polices of EU that can be observed at international trade level like the entrance of the developing countries in the EU market and their participation in the export and import operations. The member countries are getting special benefits from the trade policies of the commission because the main intention of EU along with the others, is to work for the member states and for this purpose it has designed many policies that result in the increased benefits of the member states and ultimately the non member countries find them in more bad economic conditions due to unfair trade competition at EU market. UE grand high rates of subsidies to the producers of the member countries and as a result these producers get high rate of revenue and in turn the economies of the member countries is flourishing.

On the other hand the impacts of the EU policies on the non member states are not all positive. Though the commission has taken many steps to permit the entry of non member and least developed countries in the EU market but after getting the entry due to low tariff, these countries face many other problems in form of complex and changing trade regulations. Most of the least developed countries also have lack of technical and market knowledge due to which these countries face problems in complying with the complicated regulations and restriction of UE. At the same time the low rate of subsidies also hinders these countries in getting high rate of export revenues due to which the economic destabilization of these countries went on rising and despite getting the advantage from the policies of European Union, the least developed countries face many problems and the gap between the developed and developing countries is further widened. The entire discussion can be summed up with the conclusion that EU is playing a significant role in the international trade scene by implementing different trade liberalization and regional integration policies however the member states are getting more benefits from these policies and the least developed countries are facing new economic constraints as a result of these policies.

Refernces

Emily Fripp (2004), FLEGT and Trade: what will the impacts be? Chatham House RIIA, Web.

European Union – Delegation of the European Commission to the United States, 2007. Web.

Ian Bannon and Paul Collier ‘Natural Resources and Violent Conflict: Options and Actions’ World Bank, 2003.

Mark Halle, Jason Switzer and Sebastian Winkler (2004), “Trade, Aid, Security – elements of a positive paradigm”, the International Institute for Sustainable Development (IISD), p54-76, 2004.

Macartan Humphreys (2003), “Economics and Violent Conflict”, (Harvard University, 2003, p8-71.

Natalie Pauwels, (2003), “War economies: EU policy options’ in Europe in the World – essays on EU foreign, security and development policies, BOND 2003, pp. 65-71.

Oli Brown (2005), EU Trade Policy and Conflict, International Institute for Sustainable Development (IISD), 2005.

Oxfam Briefing Paper ‘Europe’s Double Standards – how the EU should reform its trade policy with the developing world, Briefing paper 22, 2002, p. 10.

Paul Brenton, ‘integrating the Least Developed Countries into the World Trading System: the current impact of EU preferences under Everything but Arms’ World Bank, 2000. Web.

Paul Collier and Ian Bannon (2003), “Natural Resources and Violent Conflict – Options and actions”, World Bank, 2003, p3.

Vorley, Bill and Tom Fox (2004), “Global Food Chains – Constraints and Opportunities for Smallholders”, paper presented at the Prepared for the OECD DAC POVNET Agriculture and Pro-poor Growth Task, Team Workshop, Helsinki, 2004, p20.

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