The European Union is negotiating a series of free trade deals, with India, Latin American countries, South Korea, China and West Africa. Are these likely to be models of internationalism? Or are they unequal treaties, like those of colonial times…
A model of colonialism: the European Union’s unequal treaties
WORKERS, MAY 2009 ISSUE
In the European Union–South Africa trade agreement of 1999, the EU negotiated “special treatment” for itself by agreeing to cut tariffs on just 25 per cent of the goods South Africa exports to the EU while getting South Africa to cut tariffs on 40 per cent of the goods the EU exports to South Africa.
The reduced tariffs on agricultural and industrial goods, which went well beyond South Africa’s World Trade Organisation (WTO) commitments, increased imports from the EU, with a negative impact on South Africa’s current account balance. As well as cuts in jobs, wages and employment conditions, the removal of tariffs makes it far harder for South Africa to develop value-adding industries, making the country reliant on export of raw materials.
With the South African deal, European companies can freely export higher technology products. Without government intervention, it is difficult to see how South Africa could develop higher technology industries. Any infant industries face stiff competition from the EU’s more advanced producers of higher technology goods.
South Africa’s increased trade deficit with the European Union has made the country more vulnerable to international debt – particularly to destabilising short-term capital flows. Imports of certain goods such as processed foods and electronics have harmed South African producers. With unemployment already at 40 per cent, South Africa is struggling.
There’s a pattern to all this.
The EU started pursuing a trade deal with Mexico after European exports to Mexico fell when the North American Free Trade Agreement (NAFTA) between Mexico, the US and Canada was signed in 1994. Although NAFTA increased trade and foreign investment in Mexico, it did not improve economic performance. In fact, economic growth, employment and wages all fell. Small farmers have been devastated by US subsidised agricultural imports; two million people have had to leave the land as the price received for growing maize-corn has collapsed.
Distorting economies
The EU–Mexico trade agreement also liberalised trade in services. It allowed European companies 100 per cent ownership of banks in Mexico, leading to higher interest rates and reducing lending for productive activities, especially for local small and medium sized enterprises. This has led to a Mexican economy focused on foreign investment and industrial assembly of goods imported then re-exported to the US, at the expense of developing the domestic economy.
The principal gainers from the EU’s bilateral trade agreements with Mexico and South Africa have been European companies. Signing a trade deal with the EU is not consistent with a sound development strategy. Instead it keeps developing countries in their place as exporters of low value commodities (except in products where the EU provides agricultural subsidies) and importers of western manufactured goods, western technology, western services and western capital.
Under the bilateral trade agreements, Mexico and South Africa are agreeing, with the world’s most powerful economic bloc, to liberalise well beyond their WTO commitments. This “locked-in” liberalisation undermines the ability of governments to pursue effective development strategies.
To develop, countries need export subsidies, directed credit, patent and copyright infringements, domestic-content requirements on local production, high levels of tariff and non-tariff barriers, public ownership of large segments of banking and industry, and controls on capital flows, including foreign direct investment.
By contrast, the IMF, World Bank, WTO and European Commission want the trade policies of developing countries to include stopping government intervention in trade by removing the following: trade taxes, regulations on multinational companies, government subsidies and constraints on exports. Further, they want liberalised capital flows and privatised state-owned industries and services, including public services such as electricity and water.
Instead of trade agreements between unequal countries at very different stages of development, a better strategy is to develop regional trade cooperation between countries that are closer (both economically and geographically) whilst selectively protecting producers from imports from larger, wealthier economies like the EU.
During the late 19th and early 20th centuries, most developing country regions were forced to practise free trade, either due to colonialism, or free trade treaties pushed on nominally independent regions such as Latin America and Thailand by European colonisers. For example, Britain banned the use of taxes on imports in all its colonies. All Latin American countries had free trade treaties with European countries, which did not allow trade taxes to go above a very low level.
More recently, the EU has developed its Global Europe strategy to do the same job. Developing countries are required to do the following; remove regulations on European companies (services, investment, non-tariff barriers); allow European companies to sell more of their goods or services (import tariffs on goods and agriculture, government procurement, services, investment); give European companies easier and cheaper access to raw materials (end export restrictions); and give European companies more strictly enforced property rights for ideas from which they can earn vast profits (intellectual property).
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2007 protest by South Korean farmers outside the Berlaymont, the headquarters of the European Commission in Brussels.
Photo courtesy www.bilaterals.org |
The South African government wants to reduce the more harmful effects of the EU–South Africa trade agreement. However, the European Commission wants to expand the agreement, not reverse it. In a 2006 visit to South Africa, Trade Commissioner Peter Mandelson said, “the [FTA] review should aim to create new market access, new business, new growth.” This, he claimed, requires “a step-change into services, investment and procurement” and a greater focus on “technical barriers to trade, customs, trade facilitation and competition.”
The danger of trade agreements is that they lock in policies beyond the scope of democratic control. Decisions are made to limit the use of policies such as trade taxes, without knowing what the precise effects will be, or whether governments will need to use such policies in the future. And as Mandelson’s comments suggest, the lesson is: once a trade deal is done with the EU, there is only one direction, more liberalisation. There is no turning back.
In June 2007, the European Commission and the government of India started negotiating a far-reaching Free Trade Agreement, which could have significant effects on the Indian economy and poverty reduction efforts.
India is seeking lower levels of liberalisation than initially proposed, in order to protect its sensitive sectors, and wants to exclude key areas – for example government procurement – from the negotiations altogether. Thus far, the EC has rejected these proposals and has insisted that India and the European Union (EU) are ‘equal players in this negotiation and should have a high level of ambition’.
Yet India’s GDP is 6 per cent of the size of the EU’s and it has the largest numbers of poor people of any country in the world. Nearly three-quarters of the population, 792 million, live on less than a dollar a day. This is equivalent to the entire population of Africa, the Caribbean and Pacific countries combined. For the EU, trade with India makes up 2 per cent of its total trade, while for India the EU is its largest trading partner, making up 20 per cent of its total trade.
Developing countries entering into trade agreements with richer country partners which lock in far-reaching liberalisation and de-regulation commitments face serious risks to their vulnerable sectors – such as small farmers, small and medium enterprises (SMEs) and workers – as well as reduced flexibility to implement national policies.
A wide range of sectors are vulnerable to immediate risks from liberalisation – from dairy and other agricultural products to light manufactured products such as paper. In the auto-parts sector the EU’s own assessment predicts that the FTA will have a ‘notably negative’ short-run impact and cause a significant loss of jobs.
Less government revenue will raise pressure on the Indian government to cut public spending or increase taxes.
The potential for India to use its vast government procurement market to address inequalities by directing spending towards marginalised sectors could be curbed. And India would find it harder to oblige banks to lend loans to SMEs and rural customers – it has done in the past.
North–South FTAs harm the less developed partner – because they reduce the national self-reliance that is vital to the growth of domestic industries. The proposed EU-India FTA – based on the EU’s Global Europe strategy – would strip India of the policy tools that it needs to grow and to reduce poverty.
The EU sees its free access to other countries’ natural resources as its right. The EU’s Global Europe strategy is an aggressive agenda to secure access for European companies to markets in the developing world. It strengthens the EU’s drive to reduce tariffs in third countries and to attack national regulations that it calls ‘barriers to trade’. It wants ‘the ability to invest freely in third markets’ on behalf of its companies and to be able to open public procurement markets to its companies. The Global Europe strategy is about as close as it is possible to get to a plan for entrenching European economic dominance without using the military.