How effective is the EU in promoting trade and regional integration?
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Almost three decades after the formation of the European Union, it has become an uncontested power in the international economic system; this is no surprise considering that trade is the EU's raison d'etre (Meunier & Nicolaidis 2017, p.210). One of the populist anti-EU movement's critical drivers is the idea that the trading bloc is a 'protectionist racket' that does more to hamper trade than it does to promote it (BBC 2018). This perception ultimately culminated in the United Kingdom's exit from the EU. Notwithstanding this pressure, the EU has continued to pursue greater integration whilst also attempting to kindle relations with non-EU members to expand market access on a bilateral and multilateral level (Europa 2020).
This paper seeks to evaluate the effectiveness of the EU in promoting trade relations and pursuing regional integration. Using the theory of neo-functionalism to explain the process of integration, the essay will assess the Single Market as a vehicle for promoting trade between the EU Member States and the extent to which this system of economic interdependence has led to greater integration in other spheres (Haas 2004). In doing so, this essay will shed light on the difficulty in finalising multilateral agreements in the context of the EU's commitment to 'Anglo-Saxon neoliberalism (Rhodes & Apeldoorn 1997). Next, this paper will evaluate the effectiveness of the EU in promoting bilateral relations, principally with the EU's dominant trading partner, the United States of America. Altogether, this essay will show that while the EU has effectively promoted trade between Member States, it has retreated away from multilateralism and failed to live up to expectations at the bilateral level. The lack of appetite for more deep integration at the Member State level will illuminate the limits of neo-functionalism in explaining the slowdown of European integration.
Neofunctionalism argues that international cooperation may advance and develop its own 'logic' due to three forms of spillover. Firstly, the functional spillover, which entails that the inter-connectedness of modern economies will lead to the inseparability of functional sectors (Haas 2004). If states integrate one functional sector, for instance, coal and steel, this would inevitably lead to spillover into energy and transport sectors (Rosamond 2000, p.60). Secondly, the political spillover assumes that as sectors integrate, interest groups representing ideas, actors, and interests in that sector would forcibly mobilise at the European level to lobby the governing institutions (Haas 2004). Finally, the cultivated spillover entails that the European Commission is in a unique position to manipulate domestic and international pressures on national governments to advance the process of European integration (Haas 2004). This encourages the formation of Europe-wide interest groups and cultivates links with national bureaucracies resulting in the need for 'further harmonisation of policies' (Eilstrup-Sangiovanni 2005, p.123). The transfer of power to Europe is framed as being in the interests of the continent and so is viewed as irreversible (Rosamond 2000).
The EU's Economic Power
With the ongoing trade war between the USA and China, it is an oft-neglected fact that the EU is the main actor of world trade to this day (Meunier & Nicolaidis 2017). In 2019, the EU 27 accounted for 16.5 per cent of world trade in goods and services instead of 13.0 per cent and 13.7 per cent for China and the USA, respectively (Table 1). This is up from 16.3 per cent in 2015, which may seem unremarkable at first sight (European Commission 2016). However, following Brexit, and the 0.7 per cent and 1.1 per cent falls in relative global trade share for China and the USA in the same period are revealing. This is because it indicates that the EU has fared much better in preserving its economic prowess than its trading partners (EU Commission 2020, p.20).
This can be explained by the European Single Market's expansiveness, which attracts the outside world 'for the possibilities it offers and from the fear of being excluded' (Meunier & Nicolaidis 2017, p. 211). In line with neofunctionalist theory, the EU's economic power extends to its ability to export its regulatory practices to the rest of the world. For instance, the European Economic and Social Committee (EESC) underlined the importance of the EU Regulatory Framework for Financial Services in speeding up the completion of a Capital Markets Union (CMU) (Europa 2016). The CMU will complement the Banking Union and eventually finish the Economic and Monetary Union (EMU) to address the 'insufficient integration of capital markets in Europe (Lannoo & Thomadakis 2019). The CMU is predicted to attract 2000 billion dollars more into European capital markets in the long-term (William & Bax 2016). It is clear from such initiatives that there is a desire to ensure that the EU remains a site of globalisation by promoting free movement of capital alongside labour, goods, and services as envisioned by the 1958 Treaty of Rome. More so, with protectionism on the rise in the USA, the EU has placed itself at the forefront of the charge to reassert neoliberal values of free exchange.
However, there is a gap between the capability of the EU and the expectations placed upon it. If the EU is to supplant national governments as the highest legislative body, then a high degree of institutional coordination is demanded to maximise the coherence of policies (Gebhard 2017). There are two dimensions to 'coherence': strategic convergence and procedural efficiency (Gebhard 2017, p.127). Despite being first mentioned by Jean-Claude Juncker in 2014, the CMU has failed to progress since its mid-term review in 2017 (European Commission 2017). The sheer length of time it takes to finalise policies to promote trade suggests that integration in this area will be staggered. Lengthy negotiations risk the erosion of political capital, and the loss of enthusiasm for policy directives as political dynamics change across the EU, meaning the elections of new governments in Member States could lead to a new policy agenda with altogether new preferences.
Integration in this area is delayed due to the likelihood of 'divergent transpositions of EU directives into national legislation and inconsistent enforcement of EU rules' (Angelova 2017, p.9). Unlike the Banking Union, the Capital Markets Union project encompasses different member states with different legal backgrounds and does not entail complete harmonisation (Dinov 2020). Suppose the EU is to remedy the problem of market fragmentation. In that case, capital markets will need convergence and equal access to financial services and equal treatment to have any hope in integrating financial markets, which is not on the horizon (European Central Bank 2015). This defies the expectations of neofunctionalist theory. It reveals that the European Commission may not ever have 'ultimate authority on integration', and Member States sometimes decide whether to integrate or not based on a calculation of their interests (Eilstrup-Sangiovanni 2005, p.98). In the case of the CMU, the pause in integration could have been due to the prioritisation of national issues, rising political tensions, or the weakening incentive for financial reform stemming from nascent growth to the Eurozone. Thus, neo-functionalism may be guilty of being too optimistic about integration and so ignores the agency of Member States and the potential negative impact of the European context on integration (Eilstrup-Sangiovanni 2005, p.98).
Despite this, trade is the one area in which the EU's legitimacy is undisputed (Elsig 2002). In response to the challenges it faces in developing trade policy, the EU has continuously encouraged debate over 'competence' and 'representation' to remedy weaknesses in decision-making (Meunier & Nicolaidis 2017, p. 216). The Lisbon Treaty extended the scope of trade policy to FDI for the first time. It broadened the use of Qualified Majority Voting (QMV) to increase the efficiency of the trade policymaking process (Meunier & Nicolaidis 2017, p. 216). The Lisbon reform also paved the way for greater parliamentary control as Article 207 stipulated that the framework for implementing Common Commercial Policy (CCP) had to be jointly adopted by the Council and Parliament (Meunier & Nicolaidis 2017, p. 216). Notably, Article 207 of the Lisbon Treaty has created a stable equilibrium by demarcating Member States and the EU's respective powers in forming trade policy. So this could reduce conflict between Member States and EU Institutions (Meunier & Nicolaidis 2017, p. 216). While there is no guarantee that the Single Market will be completed, it is expected that the Lisbon reforms will enhance the credibility of the EU decision-making process and increase the cohesiveness of EU trade policy (Burghof 2011; Gebhard 2017).
These measures seek to facilitate deeper economic integration by getting Member States on the same page as EU institutions. However, in the context of European affairs today, this is a chimaera. In the latest stage of EU strategic thinking – The Road to Sibiu – the intention was to discuss integration along five potential pathways, including 'harnessing globalisation' and 'deepening economic' and 'social' integration (Financial Times 2019). However, with the UK's imminent exit from the EU, all the energy was on disintegration instead. The perceived divergence of Member State national identity from a consciously constructed European identity lay at the heart of the Brexit vote (Albinger 2020). The extent of European integration can be seen in terms of the 'Europeanisation of the national identity and the degree to which Member States are willing to legitimise constructed values, norms, and rules (Nielsen 2019, p.19). While this may seem troubling for proponents of integration, the uniqueness of the British case must be borne in mind. Britain's 'island identity' and its stronger ties to countries outside Europe have fed into considerations for varying (dis)integration proposals. This geopolitical context is not replicated anywhere in continental Europe (Whittaker 2018). This provides hope for those aiming to reassert integration atop the EU's agenda.
The EU and Multilateral Trade Relations
The EU is one of the most influential advocates of a deep trade agenda at the multilateral level. It is expected that the enlargement process will increase its bargaining power in trade negotiations because access to a larger Single Market becomes more desirable to outsiders, and the opportunity costs of missing out are augmented. Successive EU enlargement programmes since 2004 have increased the EU population by 109 million, its geographical area by 1,143,677 km², and GDP by 1032.8 Billion US Dollars (Figure 1; Figure 2; Figure 3). With this enhanced power, the EU has used the Doha Round infant stages as an opportunity to 'manage globalisation' according to the doctrine outlined by former Trade Commissioner Pascal Lamy (Jacoby & Meunier 2010). However, the EU has failed to overcome differences on the make-or-break issue of agricultural reform. Despite claiming to prioritise multilateralism and imposing an informal moratorium on new bilateral agreements, the EU has acted differently. Instead, it focuses on concluding bilateral agreements with as many states as possible (European Parliament 2020, Leblonda & Viju-Milijusevicb 2019).
The failure to reconcile differences over agricultural reform was crystallised by the collapse of the WTO Cancun 2003 meeting over cotton (Narlikar & Wilkinson 2004). This exposed a clash between the EU, which insisted that the design of multilateral rules should reflect its Anglo-Saxon values and the rest of the world, which 'views trade rounds as fora for the exchange of reciprocal conditions' (Rhodes & Apeldoorn 1997; Meunier & Nicolaidis 2017, p.224). The EU's commitment to neoliberal institutions is difficult to reconcile with proposals to promote trade with countries such as China which do not fully share the EU's philosophy of trade liberalisation. In this context, it is no surprise that countries not adopting the Anglo-Saxon economic approach may not budge on trade practices such as dumping, as demonstrated by the EU-China wine dispute (The Telegraph 2013).
The EU's promotion of multilateral trade faces external and internal challenges. Internally, some Member States have a fundamental distrust of the Commission's role in representing the Community in international negotiations and keeping the Member States abreast of what is going on (Patijn 1997, p.39; Ludlow 1997, p.52). The reason for this distrust can be found by looking at several events in the past when the Commission negotiated without the necessary transparency vis-à-vis Member States, as happened, for instance, in the negotiation of the Blair House Agreement (Niemann 2012, p. 12). In response to this, the EU has sought to cultivate a 'more cooperative setting' which generates a deeper understanding of trade interlocutors' ideas and norms so that the Member States can present a united front to potential trading partners (Niemann 2012, p. 14). The institution of this learning process, along with greater deliberation, could play a role in the ignition of integrational dynamics in the sphere of trade. However, so far, the EU has enjoyed weaker success than expected at the multilateral level.
Figure 1 - Impact of Enlargement on Total EU Population (Source: Eurostat 2020).
Figure 2 - Impact of Enlargement on Total EU Area Size (Source: Eurostat 2020).
Figure 3 - Impact of Enlargement on Total EU GDP (Source: Eurostat 2020).
The EU and Bilateral Trade Relations
The Directorate-General for Trade (DG Trade) claims that bilateral free trade negotiations are now at the core of its work (European Commission 2015c). The most ambitious of these is the bilateral trade negotiation with the USA that began in 2013, the Transatlantic Trade and Investment Partnership (TTIP) (Meunier & Nicolaidis 2017, p. 229). The EU and the USA are still each other's main trading partners and investors, with trade flows of $1.9 billion across the Atlantic every day. So there is a growing recognition by the USA of the EU's role as an interlocutor with Member States (Meunier & Nicolaidis 2017, p. 230). TTIP aims to increase trade by facilitating easier market access, increasing regulatory coherence and ensuring cooperation in standard-setting (European Commission 2015). However, negotiations have collapsed due to the inability to overcome regulatory divergence on GMOs and data privacy and failure to reach unanimity at the Member State level (Financial Times 2017). The failure to finalise an agreement with the USA can be traced back to the aim of the Lisbon Treaty to enhance input legitimacy by increasing the role of the European Parliament (EP) to a co-legislator (European Parliament 2020).
The formal involvement of the EP in trade policymaking will likely lead to a greater emphasis on issues related to consumer protection and safety, such as data privacy protection (Meunier & Nicolaidis p. 216). However, this is one of the issues that crippled TTIP in the first place. So the attempt to reduce the EU's democratic deficit inadvertently constitutes a potential roadblock to trade progress. Neofunctionalist theory argues that economic interdependence should spill over into regulatory coherence and follow integration (Buonanno 2017). However, TTIP remains frozen partly due to opposition at the societal level, with particular pressure on those Member State politicians where TTIP mobilisation is most intense (Bollen, De Ville & Orbie 2016). In states where TTIP has become most politicised, namely Austria, Germany, and the UK, the openness-protectionism dichotomy is of minor importance (Bollen, De Ville & Orbie 2016). Instead, the debate is dominated by arguments about sovereignty and regulatory paradigms. These arguments suggest that the EU should not raise its hopes too much with the new Biden administration. The latter will do very little to placate detractors of globalisation on the societal level.
Under the Lisbon Treaty, the EP was granted more extraordinary powers to scrutinise and co-decide on trade legislation. The most substantial impact of this was on the reform of EU commercial instruments, notably anti-dumping policy (Woolcock 2014, p.400). The use of trade-defence instruments can trigger major disputes with trading partners, as was the case with the EU's imposition of anti-dumping duties on Chinese solar panels in 2013 (Woolcock 2014, p.400). The Commission wields considerable discretionary power in trade dispute investigations. Trade liberals have criticised this as providing scope to use anti-dumping duties as a form of contingent protection and by the EU industry for failing to defend it sufficiently against unfair competition (Woolcock 2014, Aggarwal 2012). The institution of new comitology procedures means that there must be a qualified majority against a proposal to block it (Woolcock 2014). If an act is blocked, then the expectation is that a compromise will be worked out so that an appeal committee can adopt the act by QMV (Woolcock 2014, EUR-Lex 2020). However, the EU-China anti-dumping case demonstrated the fragility of a united front orchestrated by Brussels. Germany led the many Member States to oppose punitive duties on imported Chinese solar panels (Financial Times 2013). This threatens to undermine the EU's ability to combat unfair competition and suggests that EU-wide unity can be undermined by intense commercial lobbying by Beijing or others.
The EU has not had to pursue economic integration stealthily as it has been forced to in other policy areas (Kaunert & Léonard 2019). This provides it with legitimacy to act on behalf of Member States in the sphere of trade. In contrast to the success of the Single Market for goods and services, capital markets are likely to remain fragmented since there is little appetite for the complete harmonisation of legal systems across Member States that this would require. It was expected that EU enlargement phases would correlate with more significant successes in finalising multilateral trade agreements, but this has not been the case. The EU's embedded liberalism has weakened its ability to finalise agreements with states that adopt alternative trade philosophies.
Nevertheless, EU efforts to finalise bilateral agreements have enjoyed mixed success. Over 200 Free Trade Agreements signed, but little progress in regional agreements with the USA or China, the two competing economic powerhouses. This analysis has revealed that this is due to a confluence of societal pressure to retain national sovereignty and Member States failing to find a single voice because their cost-benefit calculations induced varying policy preferences. Neofunctionalism has proved successful in explaining EU integration, particularly when state actors share values and norms, but is not as successful when this is not the case, and integration slows down. Altogether, neo-functionalism is guilty of being too optimistic about integration because it neglects Member State agency and the potential negative impact of the European context. Despite this, it remains a profoundly helpful framework for analysing contemporary European integration.
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