Palm oil harvesting in Thailand (Photo by Thierry Falise/LightRocket via Getty Images)
Artillery Row

Brussels sprouts protectionism

It’s no longer a dirty word in the EU

Since Brexit, taboos which surrounded the powers of the European Union have been broken. During the Covid crisis, the EU engaged in joint vaccine purchasing. Also in 2020, a new 800 billion euro EU fund was agreed, which differs from ordinary EU spending by the fact that it is financed not by member state contributions but by jointly issued EU loans — amounting to Eurobonds in all but name. After Russia invaded Ukraine, the EU financed for the first time the purchase and delivery of weapons and other equipment to a country that was under attack. With the energy crisis in full swing, the EU is now demanding powers to force companies to prioritise production of key products and stockpile goods, in case of an emergency.

Meanwhile, the EU’s core business is being neglected. EU state aid policies are becoming hopelessly politicised, and little progress has been made to open up trade between EU member states. Buying a car in another EU country remains complex, and much national protectionism remains in the insurance, energy and telecom markets, depriving Europeans of greater choice and lower prices.

Even the EU’s trade policy is getting protectionist

For a long time, the EU did a fairly good job when it came to securing trade deals, concluding deals with Chile, Egypt, Georgia, Israel, Japan, Mexico, South Korea, Ukraine, Singapore, Canada, South Africa and Vietnam. Now even here, the EU’s performance is getting into trouble. Already in 2016, attempts to conclude a trade deal with the United States failed, due to protectionism on both sides. The EU then managed to agree trade agreements with South American trade bloc Mercosur in 2019 and with China in 2020 — even if this was an all in all limited investment pact — but France is currently holding up Mercosur, whilst the deal with China has faced stiff opposition, also due to China putting MEPs on a blacklist.

Those seeing the glass half-full can point at the EU reviving trade talks with India, which seems a response to the UK making progress on trade talks with the emerging giant. The EU has agreed a deal with New Zealand and potentially soon also Chile, Mexico and Australia. Still, unfortunately, protectionist forces seem to be prevailing over those supporting more open markets. The EU is still continuing with its planned Europe’s “Carbon Border Adjustment Mechanism” (CBAM), which is an “external climate levy” on the import of commodities into the EU, yet another burden for Europe’s already hard-pressed consumers and importers. It may even violate WTO rules.

Overburdening of trade deals and hypocrisy

A complicating factor is clearly the EU’s tendency to overburden trade deals with extra conditions, as if opening up markets weren’t hard enough already. In June, the European Commission came up with a new policy proposal to demand the inclusion of “sustainability” chapters into trade deals. In practice this means the EU making the conclusion of a trade deal dependent on the other partner accepting the Paris climate accord, all kinds of International Labour Organisation (ILO) requirements or specifically tailored commitments. Apart from the question of whether such attempts to micromanage the domestic policies of trade partners will not simply make trade deals impossible, it should also be stressed that trade has tended to increase wealth, which in turn has increased environmental and labour standards in the countries concerned. The strategy of writing pledges on a piece of paper has not exactly delivered the same results.

Banning palm oil could worsen deforestation

Whilst requesting that there is no slave labour in companies’ supply chains makes perfect sense, the wisdom of this approach is much less clear when it comes to requiring other specifics from companies — for example, pledging to stop deforestation in supply chains. Earlier this month, the European Parliament voted in favour of sharpening up the European Commission’s original proposal on this topic, making it obligatory for companies to verify that goods sold in the EU have not been produced on deforested or degraded land anywhere in the world.

There’s significant hypocrisy here. A New York Times special investigation reports highlights how “Europe is sacrificing its ancients forest for energy”, as it is “burning timber for green power”, referring to EU-driven subsidies for biomass, which is marked as environmentally sustainable by the EU. Meanwhile MEPs are imposing “deforestation” obligations on companies support at the same time. According to KU Leuven Professor Olivier Honnay, “it is cheap to criticize deforestation in the global south when you can even not protect your own ancient forests”.

Palm oil producers — not to be found in the EU, but in places like Indonesia, Malaysia and Papua New Guinea — have become the target of EU policy makers. The original EU Commission proposal simply exempted rubber imports from the new requirements, probably because of lobbying, given the high EU demand for rubber, which is the main driver of deforestation in West and Central Africa.

At the same time, deforestation due to palm oil in Indonesia, Malaysia and Papua New Guinea has fallen to its lowest level since 2017, according to a satellite analysis released by Chain Reaction Research (CRR), a risk analysis group. According to a study by University of Bath researchers published in Nature, banning palm oil could worsen deforestation, as alternatives like sunflower or rapeseed oils require more land, water and fertiliser.

Protectionism is infecting the EU’s environmental policy. This is also the case with its so-called “Farm to Fork” strategy, which due to policy goals like “removal of 10 per cent of existing farmland from production”, threatens to “increase the number of food-insecure people in the world’s most vulnerable regions by 22 million”, according to the United States Department of Agriculture.

Arbitration under fire

Arbitration is a cornerstone of international trade, given how it provides investors with a mechanism to legally challenge government policies that violate earlier agreements. Without it, much less investment would happen. For a long time, the EU was firmly in favour of this arrangement, but this is changing.

Back in 2013 the Spanish government suffered multiple defeats in arbitration courts over its abrupt restricting of a financial support scheme for renewable energy investment. Not only is Spain refusing to comply, the European Commission is also urging it not to do so, claiming that complying with an arbitration ruling and paying out the compensation amounts to “illegal state aid”, as Spain had not notified the financial support scheme to the European Commission when it was rolled out.

Now is not the time to undermine international energy investment

This is a very wide and less than serious interpretation of state aid, and certainly a bit rich coming from an institution that barely bothers to police state aid when it is blatantly happening in front of its eyes.

In its quest, the European Commission is assisted by the EU’s very own highest court — the always power-hungry European Court of Justice. In 2018, it ruled in its “Achmea” judgement that investor-to-State arbitration in an intra-EU context was illegal, preferring the ECJ or state courts to serve as the relevant court.

A first victim of the EU’s hostile attitude towards arbitration may be the Energy Charter Treaty, a key agreement facilitating international energy investment. One would think now is not the time to undermine international energy investment but the EU, supposedly a driver for more open trade, is very much at the forefront of this.

“Strategic autonomy”

On top of all of this, the EU is also coming up with its so-called “strategic autonomy agenda”, which free trade-supporting EU policy think tank ECIPE compares with  “Donald Trump’s push for ‘America First’ policies” and “ambitions by China’s Communist Party to confront foreigners with new market access restrictions”. The think tank warns that the “new EU rules, bans, incentives and deterrents” that come with this agenda threaten to cause “important indirect and long-term costs”, including “changes in prices, availabilities and qualities of products and services, but also forgone investments and impacts on market access, innovation, and competitiveness”.

The question is whether EU Commission President Ursula von der Leyen and her team even still care about this, as ECIPE notes that “many policymakers in Brussels take a command-and-control view on autonomy and regional sovereignty”.

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