EU’S TRADE: BETWEEN BENEFITS AND COSTS

10 mins read

EU’s ongoing trade negotiations can be either its salvation or its doom. Although trade expansion leads to numerous economic benefits, the social repercussions that this generates need to be properly addressed. 

Introduction

Trade agreements have significant repercussions on the economy of the signatory countries, not only in their labor markets but also in other socio-economic aspects. Most importantly, they can foment economic growth and technological innovation, but at the same time, they can be detrimental to other socio-economic factors. There are many types of agreements, but researchers usually separate them into two big categories: preferential trade and free trade treaties. The former does not force countries to remove trade barriers but only lower rates and provide preferential access to certain products. On the other hand, the latter removes all trade barriers for goods and services between countries. Similarly, the EU differentiates between Economic Partnerships, supporting the development and growth of less-developed countries, Free Trade agreements, generating reciprocal preferential access to markets and easiness to ship, and Association agreements, including political clauses.

Nowadays, the EU is negotiating various trade agreements that can help the economic recovery after the pandemic and other problems as well. Indeed, European businesses need to increase their international exposure and competitiveness to recover from the pandemic. Reducing the time and costs for international transit and opening new markets and investment opportunities through trade negotiations could generate a positive economic spiral for economic activities.

For example, Brussels is negotiating agreements with Australia and New Zealand while amending and expanding previous agreements with other countries like Chile. Furthermore, numerous treaties were concluded in the recent period and are waiting for ratification, like the ones with Mercosur, Mexico, and Vietnam, or waiting to expose their full potential and impact on the European economy, like the free trade agreement ratified at the end of 2018 with Japan.

Trade and Imports-Exports

Agreements between countries regulate the tariffs and flows of goods and services by amending customs duties. These flows are backed by payments in various currencies, especially influential ones like the dollar and euro. In particular, the EU is the largest trading bloc in the world, accounting for around 16% of world imports and exports, and is the top trading partner for more than 20 non-member countries. By opening new markets and lowering tariffs, EU businesses can sell their goods and services in other countries since now they will have a lower price. Further, European firms can send their goods even further since these agreements generate new, faster, or cheaper transits for goods.

Moreover, many EU policies focused on incentivizing and subsiding greener and more efficient transportation modes, like naval shipping. For consumers, imported goods from oversea now will cost less and, thus, will be more affordable, generating an increase in citizens’ welfare. However, the research on the effect of trade and trade policies on labor is still uncertain. Indeed, some scholars reviewed the literature and noticed that consequences are difficult to predict, measure, and identify due to their complexity and their spillover and feedback effects between each other. 

In turn, the increase in economic relations between countries leads to increased economic growth. For example, Our World in Data estimated a strong cross-country correlation between international trade and economic growth. The findings are still robust despite existing confounding variables, such as competition, economies of scale, and technological innovation. Furthermore, the literature is somewhat consistent in terms of the size of the relationship between the growth of exports and the increase in economic growth. Therefore, we can be confident that, at the country level, there is an increase in economic efficiency and growth due to trade, but new data and techniques regarding firm-level effects can open new suggestions regarding the distributional effects of these benefits. 

Trade and Labor Market

Labor markets and employment are deeply affected by trade agreements and negotiations. For example, the “EU is committed not only to use its common trade policy to generate growth and jobs in Europe but also to support countries worldwide to achieve sustainable development through trade.” The European Council calculated that around 30 million jobs in Europe depend on trade exports, thus around 15% of total employment in Europe. Furthermore, researchers demonstrated that trade supports the increase in wages and overall employment rate, but these benefits are shared between workers according to other factors like domestic policies, macroeconomic conditions, and individual and regional differences. From a social point of view, trade also foments gender equality in the workforce and boosts incentives for education and better school systems, thus accelerating structural and societal changes. 

Trade Agreements and Currencies

Exchange rates and currencies are also pivotal in trade relations because they are the mean of payment for goods and services. Therefore, the EU gave much attention to this aspect to maintain stable relations with countries. Article 111 of the Consolidated Versions of the EU Treaties crucially defended the continuity of previous monetary and exchange rate agreements. Indeed, this article left untouched all the treaties and principles regarding currency and exchange rates concluded before the foundation of the common currency – the Euro – with third countries.

These arrangements allowed for maintaining stable economic relations with multiple countries thanks to long-lasting exchange rates or the sharing of the same currency. As demonstrated by researchers and economists, the Euro promoted trade significantly mostly thanks to its direct effect on prices inside the EU and to the incentives for other businesses to reduce their prices to become competitive and enter European markets. 

The EU had a substantial trade surplus with the rest of the world for many years, which helped maintain the value of its currency. This aspect changed drastically in mid-2021 when Europe started to have a significant trade account deficit. Indeed, this led to currency depreciation, arriving at its remarkably low levels in recent months. Although this fall increased the prices of imported goods, such as energy, for consumers and generated malcontent among European citizens, this is also an outstanding opportunity for businesses that can now export their merchandise at lower prices to the rest of the world. This sort of “currency manipulation” can be even more beneficial if paired with extension in free-trade agreements and other similar arrangements with external countries.

Conclusion

The ongoing negotiations and trade agreements that the EU is currently managing can be pivotal for the economic recovery post-pandemic and after the Ukrainian crisis. As mentioned before, there are numerous advantages to expanding and deepening relations with external countries, especially nowadays, after years of increased uncertainty, fear, and closure. European firms can boost their revenues in a time in which investments and funds are desperately needed. Countries can foment new opportunities to increase their incomes and repay their elevated debts.

However, EU trade policies must be complemented by distributional policies that share the burden of these new treaties, reduce the losses for non-competitive companies that will close, and subsidize all other resulting spillover effects. This last aspect is particularly crucial at this moment. Indeed, there is growing discontent in the European population, bills are rising exponentially, and many families do not make ends meet. Trade expansion can be either the economic fuel for rampant growth or the socio-political anchor preventing it.

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