Issue 28 | December 2013 ISSN: 1831-4473
EU trade negotiations from a global value
chain perspective
Summary
By Malgorzata Galar
Global value chains require a strong
global institutional framework to
trade framework under the
Introduction
address new challenges and further
WTO. Bilateral trade agree-
trade liberalisation going far beyond
ments can be supportive if
Global value chains which have
tariff reduction with services, in-
there are concluded with part-
vestment and regulatory issues
spread across the world econ-
ners of strongly integrated gaining on importance. The EU has
omy require a strong global
always been an advocate of a
economies within global value
institutional framework to ad-
strong WTO and the supremacy of
chains. These agreements
dress new challenges and fur-
multilateral liberalisation. However,
should however ensure the
ther trade liberalisation going
given that progress in multilateral
removal of trade barriers far
far beyond tariff reduction with
trade negotiations remains relative-
beyond what can be achieved
ly limited, the EU, like other econ-
services, investment and regu-
at the multilateral level in the omies has been engaged in bilateral
latory issues gaining on im-
trade negotiations. The revealed
short term and remain open for
portance. The EU has always
greater importance of bilateral
new members in order to sup-
been an advocate of a strong
trade in value-added terms with the
port positive spill-over effects
WTO and the supremacy of
US and Japan confirms an intense
to the global economy. This
multilateral liberalisation. How-
participation of these economies in
note looks first at EU trade
global production networks. In
ever, given that progress in
with its most important trading 2013, the EU launched free trade
multilateral trade negotiations
agreement (FTA) negotiations with
partners using value-added
remains relatively limited, the
both the US and Japan. FTAs be-
measures of bilateral trade.
EU, like other economies has
tween the largest developed econ-
Next, it sheds some light on
been engaged in bilateral trade
omies, if implemented according to
the currently negotiated FTAs
negotiations. This paper chal-
the plan, would bring economic
with the US and Japan. It con-
gains to the economies involved
lenges the view that bilateral
cludes by highlighting implica- and potential positive spillover ef-
agreements which are now un-
fects to the global economy. They
tions for policy and future re-
der negotiations by the EU with
would remain with no precedence in
search.
its most important trading
changing the global framework for
partners like the US and Japan
international trade.
will weaken the multilateral
The views expressed in the ECFIN Economic Brief are those of the authors only and do not necessarily correspond to
those of the European Commission.
ECFIN economic briefs are occasional working
papers by the European Commission s Directorate-
General for Economic and Financial Affairs
© European Union, 2013
which provide background to policy discussions.
Reproduction is authorised
They can be downloaded from:
provided the source is acknowledged.
ec.europa.eu/economy_finance/publications
KC-AY-13-028-EN-N
ECFIN Economic Brief Issue 28 | December 2013
1. EU bilateral trade relations from a both gross and VA terms, but the share in VA for EU
exports and imports from the US are higher in VA than
global value chain perspective
in gross terms. For exports, this could indicate a rela-
tively high proportion of VA created in Europe in total
Trade patterns in the world economy have been chang-
goods and services that end up on the US domestic
ing over the last decades reflecting new production
market. For EU imports, a higher share in VA than in
structures influenced by new technologies and demand
gross terms implies higher VA created by the US in EU
patterns, trade liberalisation and gradual integration of
total imports originating from different countries. The
economies into regional and global production chains.
opposite is true for China, being the second largest EU
Such an economic environment created increased op-
trade partner. China s share was lower in VA than in
portunities to relocate parts of domestic production
gross terms for both exports and imports. The differ-
abroad. International outsourcing changed the way
ence points at the Chinese role as an 'assembly factory'
trade flows occur now e.g. with an increased proportion
in Asia and the high content of VA in its export of other
of parts and components1 instead of final goods in for-
countries, in particular Japan. Relatively lower EU im-
eign trade of some countries.
ports from China in VA than in gross terms also reflect
the VA created in Europe embodied in Chinese exports.
However, gross trade statistics do not reflect the specif-
ic features of outsourcing, counting intermediate goods
Graph 1: EU exports in gross and value-added
several times when they cross borders. The new TiVA
terms, by partner country (% of total), 2009
database published by OECD and WTO in May 2013
which is based on international input-output tables, fills
in the gap by providing several relevant indicators, in-
cluding data on bilateral trade flows in value-added
(VA) terms for OECD and some non-OECD countries.
According to the OECD, the domestic VA content
of EU exports in 2009 stood at 86%. The relatively
high proportion indicates strong regional economic in-
tegration among Member States, however, the share
has decreased over time (from 90% in 1995) meaning
that also the global integration of the EU economy has
Source: OECD
not slowed down.2
Graph 2: EU imports in gross and value-added
Among different indicators included in the TiVA data
terms, by partner country (% of total), 2009
base, domestic value added in foreign final demand
measures value added exports of a country while for-
eign value added in domestic final demand is a proxy
for imports in value-added terms. Graphs 1 and 2 com-
pare EU-27 exports and imports in VA (as defined
above) to traditionally measured gross exports and im-
ports. Interestingly, the US is the largest partner in
1
See: ECFIN Economic Brief 2012: Competing within global
value chains, Issue 17/ December 2012 point 2.2 for more
Source: OECD
information about measuring trade in intermediate goods.
2
It should be noted that significant differences among
Consequently, bilateral trade balances in VA terms dif-
Member States exist also in this field. However, the
fer compared to gross bilateral trade balances, although
TiVA data base does not yet provide data for all the EU
the total trade balance of a country remains unaffected.
Member States.
Indeed, the EU bilateral trade balances presented
ECFIN Economic Brief Issue 28 | December 2013
from a VA perspective show quite remarkable differ- 2. Current priorities in EU trade negotia-
ences as compared to gross values in some cases
tions
(graph 3). For instance, the EU surplus with the US is
bigger in VA terms which mirrors value added created
In the long-lasting debate over the positive vs. negative
in Europe but exported to the US by other countries.
relationship between multilateral and bilateral trade
The opposite is true for Japan (higher deficit in VA
liberalisation which divided economists world-wide, a
terms). EU trade deficits with China and Russia were
consensus exists that the emergence of global produc-
smaller in VA terms in 2009 than in gross terms.
tion networks strengthens the case of multilateralism.
In this vein, preserving and reinforcing the centrality of
Graph 3: EU trade balances with trading partners
the multilateral trading system remains the EU's long-
in VA terms and gross 2009
term priority. However, given the relatively limited pro-
gress in multilateral trade negotiations, the most pre-
ferred and pragmatic policy option in the current envi-
ronment remains a proactive approach toward regional
trade liberalisation.
Ambitious and comprehensive trade negotiations
launched in 2013 with the US and Japan which will po-
tentially go far beyond tariff reduction have confirmed
the EU strategic reorientation towards a new generation
of free trade agreements. The revealed greater im-
portance of bilateral trade in value-added terms with
both the US and Japan confirms an intense participation
of these economies in global production networks and it
is rightly taken into account as the current priority of
Source: OECD
EU trade policy to simultaneously negotiate compre-
hensive FTAs with both partners. The scope and poten-
The new approach of measuring trade in VA reveals a
tial gains of the free trade agreements will be shortly
much greater share of services in international
discussed in the following section.
trade compared to gross measures. While services
comprise on average about two-thirds of GDP in most
The US
developed economies, they typically account for less
than one-quarter of total trade when measured tradi-
The EU and the US account for almost half of the world
tionally. Accounting for the value added produced by
GDP and one third of global trade flows. Although the
the services sector in the production of goods shows
US share in the EU market is falling gradually (as well
that the services content of total gross exports is over
as the EU's share in the US market), the US has re-
50% in most OECD economies.3
mained the EU's major trading and investment partner,
notwithstanding the rising role of China and other
The share of services in EU exports was 54% in
emerging markets. As shown in the previous section,
2009 (in VA terms) - almost twice as high as the
nearly one quarter of all EU exports in value-added
share in gross terms. Between 1995 and 2009, the
terms were destined for final consumers in the US in
share has increased by some 10pp.
2009, and over one-fifth of all EU imports in value add-
ed terms were sourced from the US.4 The share of ser-
vices in EU value-added exports to the US stood at
some 60%.
Negotiations of the Transatlantic Trade and Investment
Partnership (TTIP) between the EU and the US have
been officially launched at the G8 summit in London on
3
OECD (2013) Interconnected Economies: Benefiting from
4
Global Value Chains OECD TiVA database
ECFIN Economic Brief Issue 28 | December 2013
17 June 2013. The first round of negotiations took place posed by duplicative bureaucracy and regulations, as
in Washington in July where negotiating groups set out well as from liberalising trade in services and public
respective approaches and ambitions in some twenty procurement.
areas covered by the TTIP. Overall, the goal is to con-
clude the negotiations by the end of 2014.
Japan
The TTIP will aim to go beyond the classic ap-
Over the last decades Japan has enjoyed a strong trade
proach of removing tariffs and opening markets
surplus vis-Ä…-vis the EU. Even if bilateral trade between
on investment, services and public procurement.
the EU and Japan has become less imbalanced recently,
In addition, it will focus on aligning rules and technical
in value added terms, the EU deficit with Japan was
product standards which currently form the most im-
larger than in gross terms in 2009. Japan was the EU
portant barrier to transatlantic trade. The goals of the
4th largest trading partner in VA terms in 2009 with
TTIP can be summarized as follows:
some 5% and 6% shares in exports and imports re-
spectively.
1) Market access the goal is a full removal of
tariffs. It should be noted that although tariff
In November 2012 the Council of the EU gave the
protection is relatively low in transatlantic trade
Commission a green light to start trade negotiations
(WTO estimates are: 5.2% for the UE and 3.5%
with Japan. The negotiations started in May 2013 and
for the US on average), still high tariff peaks
were preceded by an intense preparatory period when
exist in certain sectors (food is a good exam- negotiating agenda and specific roadmaps for the re-
ple). Trade in services should be liberalized to
moval of barriers and market opening were established.
the extent foreseen in the other FTAs recently
Similarly to the TTIP, an EU-Japan FTA will aim at a
signed; the same applies to liberalization in in- number of market access issues, including tariffs, non-
vestment. New areas (like transport services)
tariff measures affecting trade in goods (including tech-
are part of the negotiation agenda, as well as
nical barriers to trade and sanitary and phyto-sanitary
liberalization of public procurement.
issues) and trade in services, further market access for
2) Regulatory issues/ non-tariff barriers (NTB)
services, investment and public procurement as well as
the aim is to align as far as possible or mutually
specific chapters on investment protection, competition
accept standards and procedures, by negotiat-
and intellectual property rights. Two rounds of negotia-
ing an ambitious agreement on sanitary and
tions have been concluded so far (mid October 2013)
phyto-sanitary (health and hygiene standards,
which were mainly focused on the negotiated text of
for example for food products) as well as tech- the agreement in 14 areas.
nical barriers to trade. In addition, regulatory
compatibility in specific sectors (such as chemi-
The estimated impact of the FTA with Japan, when fully
cal, automotive, pharmaceutical, and other
implemented, is expected to benefit the EU economy by
health sectors such as medical appliances) re-
some 0.3-0.8% of GDP (conservative and ambitious
mains the crucial part of the negotiations.
asymmetric scenarios). The assumptions on trade lib-
3) Common rules: on issues of mutual interest
eralisation are different in the case of Japan and the US
incl. i.e. trade facilitation, IPR, competition poli-
agreements but in both cases the results achieved dur-
cy, environmental issues and other policy are-
ing negotiations with Korea form the benchmark. The
as.
asymmetric scenarios are designed to approach more
closely the actual negotiating priorities of both sides,
The economic impact of the TTIP on both economies is
where EU priorities, notably the reduction in the nega-
not negligible. According to a CEPR study, a compre-
tive trade effects of Japan's NTBs, will be negotiated
hensive free trade agreement aiming at full tariff aboli- against Japanese priorities, notably EU tariffs.
tion and a reduction associated with NTB of 25% for
goods and services and 50% in case of public procure-
ment is estimated to add a permanent increase of
around 0.5% of the EU GDP. The crucial part of the
gains is associated with the reduction on non-tariff bar-
riers (NTB). According to the study, some 80% of the
total potential gains would come from cutting costs im-
ECFIN Economic Brief Issue 28 | December 2013
3. Conclusions and policy implications References:
Free trade agreements between the largest developed CEPR (2013) Reducing Trans-Atlantic Barriers to Trade
economies like the EU, the US and Japan, if implement- and Investment, March 2013, at:
ed according to the plan would remain with no prece- http://trade.ec.europa.eu/doclib/docs/2013/march/trad
dence in changing the global framework for internation- oc_150737.pdf
al trade. If the parties involved agree i.e. on ambitious
schedules for opening in goods and services sectors,
CEPR (2013) Transatlantic Trade: Whither Partnership,
public procurement and approximation of market regu- Which Economic Consequences? Policy Brief No 1- Sep-
lations, limiting the scope of carve-out areas for which
tember 2013
progress in multilateral context remains limited, the
FTAs could change the way further multilateral negotia-
Commission Staff Working Document (2012): Impact
tions under the WTO function. If the FTAs between ma-
Assessment Report on EU-Japan Trade Relations, ac-
jor developed economies remain open for new mem-
companying the document: Recommendation for the
bers, bilateral solution and commitments in areas which
Council Decision authorising the opening of negotiations
have been blocked so far within the Doha round could
on a Free Trade Agreement between the European Un-
potentially become multilateral and their geographical
ion and Japan
coverage could potentially become global.
http://trade.ec.europa.eu/doclib/docs/2012/july/tradoc
_149809.pdf
FTAs with the US and Japan bode well for the future
integration of the economies and even stronger compe-
ECFIN Economic Brief 2012: Competing within global
tition between European, American and Japanese com-
value chains, Issue 17/ December 2012
panies within global value chains. An increased level of
economic activity and productivity gains created by the
EC (2013) Transatlantic Trade and Investment Partner-
agreements should also benefit labour markets and
ship. The Economic Analysis Explained. DG Trade, Sep-
consumers. For the TTIP, the CEPR study reveals an
tember 2013
increase in wages for both skilled and less skilled work-
ers by some 0.5%, while labour displacement between
Kommerskollegium (2013) Global Value Chains and the
sectors will take place but should be lower than natural
Transatlantic Trade and Investment Partnership
labour market movements within an economy. Addi-
tionally, positive spillover effects to the world economy
OECD (2013) Interconnected Economies: Benefiting
should be expected due to potential acceleration of
from Global Value Chains
economic growth within the integrated area. Lower
trade burdens and approximation of rules within the
markets should also reduce costs for businesses from
third countries.
Finally, it should be noted that even if the attention is
currently concentrated on the above discussed FTAs
with the US and Japan, the EU continues trade negotia-
tions in many regions. Even if the discussion goes be-
yond the scope of this analysis, the ASEAN region is
with no doubt an important subject for further research
from the perspective of dense regional and global value
chains, high trade dynamics with the EU and the on-
going FTA negotiations between the EU and some of the
ASEAN countries.
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