THE FREE TRADE AGREEMENT BETWEEN MEXICO AND THE EUROPEAN UNION, FROM THE PERSPECTIVE OF A COMMON TRADE POLICY.

Luis Fernando Lobejón

THE FREE TRADE AGREEMENT BETWEEN MEXICO AND THE EUROPEAN UNION, FROM THE PERSPECTIVE OF A COMMON TRADE POLICY.
The long and complex process of European integration, moving toward a huge bloc comprised of 28 countries –including the UK, which is currently negotiating its exit–, has determined the type and depth of its relationship with other economies, including Mexico’s. Understanding the nature of this integration and its changes is indispensable if we wish to explain the evolution and perspectives of trade between Mexico and the European Union.

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The countries belonging to the European Union and those belonging to the European Single Market (ESM) are obligated to adopt a common trade policy. As a result, their transactions with the rest of the world have had to adhere to it and adjust to its evolution. In this article, we will identify the most important traits of this evolution, going on to analyze the way in which these traits have conditioned the institutional environment in which exchanges with Mexico have developed. In the first section, we will review of what has taken place since the creation of the ESM, up until the 1997 signing of the trade agreement in effect between Mexico and the European Union. The second section will focus on what has happened since, on the eve of a new agreement.

 

From the Treaty of Rome to the Free Trade Agreement

During the decades following the signing of the Treaty of Rome, exchanges outside of the European Community that were the object of greater interest, and the only ones that benefited from trade preferences, were those established between the ESM and two groups of developing countries: the African, Caribbean and Pacific Group of States (ACP), and the beneficiaries of the Generalised Scheme of Preferences (GSP). The former was comprised of economies with special ties to ESM countries, inherited from the colonial period, and which translated into a de facto free trade situation. On its own part, the European Union’s GSP attempted to react to the claims of a group of developing countries, through the United Nations Conference on Trade and Development (UNCTAD), in order to obtain privileged access to the markets of more advanced economies.

During this period, Latin American countries –with the exception of the Caribbean nations of the ACP and some beneficiaries of the GSP– were not the object of great interest for the ESM. However, in the early 1970s the ESM began signing trade agreements with some Latin American countries. The first was singed with Brazil in 1971. The initial agreement with Mexico was signed in 1975.

 

The incorporation of Spain and Portugal into the ESM can be understood as an inflection point, the most important result of which was to grant greater importance to contact with Central and South American countries

 

Although these agreements were an important cornerstone in the proximity between the ESM and Latin America, it is important to underline that they were severely limited, and that essentially they did not respond to the most important claim of Latin American economies: the concession of preferences that would ease access to the ESM.

The situation, dominated by a relative amount of discrimination toward those economies, as compared to the preferences enjoyed by those that formed part of the aforementioned groups, began to change after countries with a historical connection to Latin America and hence a greater likelihood to build ties, such as Spain and Portugal, joined the ESM. Their incorporation into the ESM can be understood as an inflection point, the most important result of which was to grant greater importance to contact with Central and South American countries. Despite this fact, trade preferences didn’t surface for another 10 years. The first agreement to incorporate them was signed in December 1995 between the European Union and the Mercosur trade bloc countries. Later came agreements with Chile and Mexico, in June 1996 and December 1997, respectively.

 

 

The latter agreement (the Economic Partnership, Political Coordination and Cooperation Agreement between the European Community and Mexico) is still in effect today. It came into effect in October 2000 and, since then, the Mexico and European Union updated the Free Trade Agreement (FTA EU-MX) , its expression in trade matters, has spurred the liberalization of merchandise exchange, energizing it and contributing to its increased relevance in the European Union’s foreign trade (see Chart 1). In addition, Mexico and the European Union have experienced positive derivative results in other areas, thanks to the work carried out by the European Union-Mexico Joint Council. These areas are highly relevant in the recent evolution of the institutional global institutional regime involving the European Community: the exchange of services, the liberalization of investment, respect for property rights, and dispute settlement.

 

From the Signing of the Free Trade Agreement to Now

Throughout the period spanning the more than 20 years since the Agreement was signed, the European Union’s trade policy has experienced important changes. While some of these changes respond to transformations within the European Union, the most significant ones have involved adjustments to the institutional framework of international trade.

Of all the modifications experienced by the European Union during this period, the most important ones have undoubtedly been those stemming from its new configuration. The 15 countries that once formed part of the Community in 1997 have increased to 28, nearly duplicating the number of member nations. The European Union’s new profile has had repercussions on its trade policy; among the most noteworthy, is the redefinition of the region’s relationship with the new geographical environment, which finds its expression in the European Neighborhood Policy.

 

Of all the modifications experienced by the European Union during this period, the most important ones have undoubtedly been those stemming from its new configuration

 

As for the evolution of the institutional framework for international trade on the whole, it is safe to say that it has been highly conditioned since the late nineties as a result of the effects produced by the creation of the WTO, as well as of the agreements singed at the Uruguay Round of multilateral trade negotiations. It is important to underline that:

1. A great many number of countries have adhered to the rules of the game that came about as a result of the Round.

2. Protective tariffs have continued to decrease.

3. The application of these regulations has consolidated thanks to the efforts stemming from the Dispute Settlement Understanding (DSU).

 

 

As a result of these improvements and, in particular, of the last two, the relationship channels between less developed countries (ACP and GSP) that traditionally benefitted from a more favorable trade policy, and the European Union, have weakened. The decrease in the European Union’s mean protective tariff to levels below two percent (see Chart 2), has reduced the preferences once enjoyed by the beneficiaries of the GSP to its slightest expression. This factor has had an important bearing on the loss of relevance of this mechanism in common trade policy, as well as on its transformation (through the so called GSP+) into a formula essentially designed to either help very poor countries, or to reward very concrete measures, such as those involving the war on drugs.

The virtual obligation to adopt the commitments agreed upon within the framework of the DSU as a result of the Uruguay Round, has been a decisive factor in the disappearance of the favorable treatment bestowed by the European Union upon ACP countries. Some members of the WTO that do not form part of that group –Brazil, among them– complained of the irregular nature of the treatment, given that it did not abide by the enabling clause that since 1979 had authorized preferences such as those granted by the GSP. Their arguments were upheld by the WTO, and thus a new framework for European Union-ACP relations, was created (the Cotonou Agreement) in which non-reciprocal preferences have disappeared.

The loss of relevance of the mechanisms such as those mentioned, has meant a shift of focus from common trade policy toward other geographic areas. The growing interest in relations with Mexico can be better understood within this context. In 2012, the European Union expressed its intention of improving the current regime of its relations, on the basis of a new, more modern trade agreement, one more in tune with the current global institutional environment, and, particularly, with the two first characteristics previously underlined: the participation of a great many countries and the significant decrease in tariffs.

 

 

In 2012, the European Union expressed its intention of improving the current regime of its relations, on the basis of a new, more modern trade agreement, one more in tune with the current global institutional environment

 

Although the former factor seems like an important achievement, it can be stated that it is also a serious obstacle in the pursuit of the liberalization of trade relations at the heart of the WTO. Negotiations among such a great number of countries such as those that form part of that institution are rather complicated, as shown by the tortuous development of the Doha Round. As in the case of other economies, those that belong to the European Union understand that it is more practical to liberalize their transactions with other countries through new treaties signed with their main trade partners. These new treaties demonstrate an awareness of the second trait of the evolution of the global environment: the reduction of tariffs in general, particularly those applied by the European Union (see Chart 2). A significant boost in exports and imports requires fighting against non-tariff protection, particularly that deriving from the existence of differing domestic regulations.

 

 

A significant boost in exports and imports requires fighting against non-tariff protection, particularly that deriving from the existence of differing domestic regulations

 

The negotiations aiming to harmonize those regulations face opposition from a part of the European Union population that understands that in order to liberalize trade the legislation of the most permissive trade partner must be taken as a reference, resulting in a perilous position for the interests that are currently protected by European regulations. The defense of those interests has contributed to the indefinite stalling of the TTIP with the United States, and will complicate the definitive application of the Comprehensive Economic and Trade Agreement (CETA) with Canada. It also helps to understand why there has been a delay on the trade agreement with Mexico, the details of which continue to be negotiated.