The EU Should Sign New Trade Agreements to Revive Long-term Economic Growth

Fortunately, recent times have seen senior European leaders giving more support to new trade agreements than we have been used to in the past decade. The ratification process of the EU-Mercosur agreement has finally started. Ursula von der Leyen, the Commission President, pointed to the same agreement in her State-of-the-Union address last week and yet again surfaced ambitions for closer alliances with like-minded partners, such as the CPTPP. This is promising. Confronted with an unreliable and protectionist US administration, the EU leadership seems to understand that signing new agreements and improving market access with other economies are important for Europe’s economic growth.

And yet… why I am not convinced that the EU is about to seize the moment and move forward with more trade agreements? Clearly, there is an underlying tone in statements and commentary that is defensive and sometimes dismissive of new trade agreements. It’s notable, for instance, that Mario Draghi poured cold water on Europe’s long-term economic strategy of prospering through more international trade. In his report on the Future of European Competitiveness – which turned one year old two days before von der Leyen’s address (see two birthday greetings here and here by my colleague Andrea Dugo) – Draghi says he doesn’t think new trade has much to show for itself. In a later piece for the Financial Times, he took his analysis one step further. Europe’s trade openness, he argued, is unusually high and, in effect, a problem (Oscar Guinea and I responded to Draghi). He rather wants a stronger focus on domestic measures raising European demand and he prefers a Europe that is more like the US economy and relies much less on global trade.

There is an artificial character to this argument. In the first place, there is not a switch that EU leaders have forgotten to flip that suddenly would generate a lot new demand growth, leading to much more sales growth “at home”. Nor is there a conflict between a stronger market at home and openness towards the world economy, assuming the policy for a stronger home market is based on deepening the Single Market and reducing internal barriers and regulations. In fact, internal and external liberalisation usually stand and fall together. There may not be that much internal liberalisation coming if the price for it is external protectionism. The economics behind it is also dodgy – considering that more than 90 percent of all new demand growth in the world happens outside the EU and that the relative size of the EU economy is rapidly shrinking.

I’m bringing Draghi and his perspective on trade up because it’s an increasingly common view and, more to the point, it betrays a misguided view of the European “model” of economic growth. My proposition – not very original for those who have laboured in the field of European and international economics – is this: international trade openness is an important basis for promoting economic growth. We can think of it as a matter of scale and specialisation. Trade openness is important for both European countries and the EU to offer a market of scale that motivates investment, specialisation, and development. Most European countries are too small to offer scale advantages. The EU now is experiencing the same fate. Deepening the Single Market is important because it expands the scale of the European market, but even in the best of worlds it would not be enough – and getting to that “best of worlds” would require knocking down barriers to trade that are difficult to influence (e.g., language differences). Europe’s trade openness is an argument for investing in the EU because this means you can access foreign markets and get larger scale opportunities than you otherwise would get. In short, Europe is a big trader because it is good at trading and because many companies invest in it. Therefore, when the relative size of the EU market is declining, it is even more important that it boost scale opportunities through new trade agreements.

This takes us to the current trade agenda – and key policies that the EU should pursue. The EU is already involved in trade talks with several countries, including Australia, India, Indonesia and the Philippines. Fast-pedalling these and other trade negotiations is important for the EU and should take centre stage in the broader agenda for better competitiveness and reviving long-term economic growth. In my view, advancing the talks with India has priority – and there is now a good moment to get the deal to a close.

The EU and India launched negotiations for a bilateral trade agreement back in 2007, but it was not possible to take them very far. There are several reasons why these talks failed, including protectionism in India and the EU’s inclination to make its model FTA an enemy of pragmatic improvements. Some of this has changed, other hasn’t. But India’s economy has grown a lot, meaning that improvements in market access leads to bigger results now. Its economy has also modernised substantially and there are several more sectors now where there are stronger integration benefits. India’s outward-oriented sectors have grown a lot – in fact, they are the sectors that have propelled general supply-side growth – and they are far more open to the world economy now than they were 20 years ago. If Europe wants to add to its trade-scale advantage in the next 30 years, getting a trade agreement with India should be pretty high on the list.

Both Europe and India are under pressure from US protectionism. They need to find new trading partners to compensate for losses of trade with the US, and they need ideally to find it with countries where sectoral substitution is high: the specific trade they lose with the US can be balanced by the specific trade they gain with others. For India, there is no other economy in the world with that immediate substitution capacity than the EU. Just like for Europe, India has to manage an unpredictable US given various security cooperation. Even if US-India security relations are far less intimate than in the North Atlantic, maritime and naval security cooperation, to take one example, are important for India’s defence. Yet India is now in a position where the economic and strategic value of deeper trade relations with Europe matter more.