Assessing the effectiveness of EU trade deals

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BrusselsReport.eu
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By Giacomo Da Ros, Istituto Bruno Leoni, an Italian member think tank of the EPICENTER network

Among economists, there is widespread consensus on the benefits of free trade. However, what are its tangible effects on a country’s economy? Hereunder, I will take a closer look at the Free Trade Agreements (FTAs) agreed between the EU and trade partners.

International Institutions such as the World Bank and the WTO agree thatthe reduction of trade barriers has been one of the main causes of the impressive global economic growth after World War II. While trade as a share of world GDP doubled from 1970 to 2020, global GDP quadrupled. The introduction of Free Trade Agreements has freed up the world economy’s potential, as it incentivised specialisation, and also offered products to individuals that are both cheaper and of a better quality.

However, as evidenced by Epicenter’s 2021 Raising Barriers report, the advantages of FTAs are not equally distributed. While consumers are generally better off, international competition might damage producers that do not sufficiently adapt to the changed circumstances. Also, often well-organised interest groups have an easier time making their voices heard as compared to the great majority of largely disinterested consumers.

Negotiating FTAs has been an exclusive competence of the European Union since 1968. This enables it to speak with a single voice, representing more than 400 million citizens and a GDP of over 15 trillion dollars.

As of 2022, 78 EU trade agreements are in force, with 24 awaiting ratification and 5 currently being negotiated. The European Commission provides ex post analyses of these agreements, which all show their effectiveness.

Hereunder, I highlight the effectiveness of selected Free Trade Agreements the EU has signed with South Korea, Japan, Canada and 11 South American countries. Their dates of entry into force are listed below.

 

Country: Entry into force:
South Korea 1 July 2011
Japan 1 February 2011
Canada 21 September 2017
Mexico goods: 1 July 2000; services: 1 March 2001
Chile 1 February 2003
Peru, Colombia, Ecuador –     1 March 2013

–     1 August 2013

–     1 January 2017
Central America (Honduras, Nicaragua, Panama, Costa Rica, El Salvador, Guatemala) 1 August 2013 – 1 December 2013

 

The practical effects of EU trade deals

The EU-South Korea deal contributed to European exports to grow by 55%,  during the first four years (2011-2015), from 30.6 billion euros to 47.3 billion euro: European imports of Korean products, on the other hand, grew faster than those of the rest of the world. The sectors that benefited the most from the agreement have been vehicles (+ 206%), and services (+ 60%). Machinery and chemical products also grew considerably (respectively, + 24% and +21%). Noticeable progress was furthermore made on the front of tariffs. Starting from 2011, 55% of related costs (1.6 billion euros in 2010) have been eliminated. Furthermore, relevant reductions can also be witnessed when it comes to compliance- and regulations-related costs, thanks to legislative harmonisation.

The EU-Japan agreement came into force in 2019. For this agreement, data related to its effectiveness is still limited and, also as a consequence of Covid-19, businesses have not yet fully been able to take advantage of new opportunities. For instance, only 35% of industrial products benefited from preferential rates created by this FTA, due to the complexity of the related supply chains. Over time and as supply chains will adapt, however, businesses tend to be able to profit from the new, more favourable conditions.

We are also able to appreciate significant improvements in other areas. In the agri-food sector, which strongly profits from preferential rates (86% of products), European exports grew by 4% in 2019. As far as non-tariff barriers go, since 2019, Japan has adopted a simplified customs procedure for requesting preferential rates.

“CETA” was signed in Brussels between the EU and Canada in 2016. It is partially active since 21 September 2017, pending ratification from 12 of 27 Member States. However, tariff reductions – amounting to 98% of pre-deal tariffs – are already in force and have had considerable results.

European exports to Canada grew by 15% in 2018, with the chemical, mechanical and mining sectors being the biggest beneficiaries. By the end of 2019, trade flows were 24.5% larger than in 2017. Preferential rates utilisation also grew rapidly, and businesses are able to benefit from a three-year retroactivity window.

 

Finally, the Union entertains preferential relations with 11 Latin American countries, regulated by 4 different treaties. All of these have had excellent results: in the last five years, European exports to these countries have grown by 12%. It should also be mentioned that also due to the EU’s regulatory influence which comes with these trade deals, the preferential treatment granted by the EU helps curtail the rising influence of China in the region.

These case studies indicate how Free Trade Agreements come with strong advantages both for the European Union and its trading partners. Trade flows and European soft power are undoubtedly bolstered by such agreements. Last but not least, these also promote the EU’s geopolitical role and European values.

A more comprehensive look at the matter is provided by the author in this report by Istituto Bruno Leoni, in Italian.

 

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