EU Relations with China and Russia: How to Approach New Superpowers in Trade Matters

• Author: Dr Rafael Leal-Arcas
• Position: Senior Lecturer in Law & Deputy Director of Graduate Studies, Queen Mary, University of London
• Pages: 22-52

This paper was first published in Kierkegaard, S.(2008)Dynamics of Trade .IAITL.pp.184-213.

Page 22

1. Introduction

This paper aims at understanding the potential of partnerships of the European Union (EU) with China and Russia (two emergent global¹ actors and major new leading powers (NLP)), focusing on international trade law and policy. Although the power base of Russia and China-the two main BRIC countries²-is their respective region, there may be specific policy areas in which their influence might be global.³ With this in mind, the paper raisesPage 23 interesting questions: is the EU an attractive partner for the new leading powers? Does the EU want cooperation with these two BRIC countries?⁴ What can the EU expect from cooperation with these two BRIC countries? What are the characteristics of these partners? What are the EU's priorities in its foreign trade policy? With which partners should the EU cooperate in which policy areas? With which instruments can the EU engage these partners and how can the EU internal coordination be ensured?

The paper argues that the EU's objective of engaging with China and Russia on trade matters is to establish peace, security,⁵ and prosperity in the XXI century. Trade creates economic ties and generates more wealth;⁶ thus it contributes to peace and security, since nations that trade with each other do not go to war.⁷ An example is the EU integration project. The same argument is true multilaterally: before the creation of Doha Round in 2001, developing and least-developed countries had been marginalized in the world trading system,8 which brought with it, serious economic implications. In 2001 in Doha (Qatar), developing countries were promised inclusion in the world trading system in order to achieve a higher level of justice and equity in the world.⁹ That is why the Doha round is called the development agenda.¹⁰ The argument is that a more open and equitable trading system¹¹ brings peace to the world and, in this sense, the Doha round should not be approached as a zero-sum game-as many developing countries seem to perceive it-but as a win-win situation.¹²

To achieve this, a new and better global economic governance framework is needed.¹³ In this sense, leaders of the so-called G-20¹⁴ have acknowledged the importance of expanding the voice of developing countriesPage 24 in the World Bank and in the International Monetary Fund.¹⁵ It follows from this statement that the Bretton Woods institutions,¹⁶ which are outdated,¹⁷ need to be reformed and improved.¹⁸ Moreover, according to Jim O'Neill's predictions, "rather than suggesting our [Goldman Sachs's] BRIC dream may be derailed by the global recession, the notion that the BRICs can become collectively bigger than the G-7 by 2035 is becoming more plausible."19 Isn't it time to propose a proper reform of global economic governance?

It will also be argued that the attitude of the BRIC countries to multilateralism and responsibility in global economic governance is questionable or unclear. For example, China, India, and Brazil seem to lean against "traditional" powers (mainly the U.S.),²⁰ and tend to focus on South-South regionalism. Evidence of this is the trilateral developmental initiative among India, Brazil, and South Africa (IBSA).²¹ It is therefore necessary to pave the way for responsible multilateralism for the common goal,²² i.e., the establishment of peace, security, and prosperity in the XXI century.

The research method used has been an interdisciplinary qualitative approach to the analysis of law, international political economy, and international relations, thereby moving away from the textual-formalistic reading of law. It is my conviction that significant answers to legal questions can be found only in a wider political, economic, and social context.

The paper is divided into seven parts: after the introduction and some general remarks, the paper presents the EU's unilateral approach to international trade law in relation to China and Russia, followed by a multilateral approach when dealing with these two countries on trade issues. A bilateral/regional approach to China and Russia follows, with an examination of both countries in their relations with the EU on trade matters, before the conclusion.

2. General Remarks

Why is trade important in the political arena? A trade agreement is often considered to belong to a bilateral political agreement, even if the scope might be rather limited (e.g. Asian bilateralism). Trade is about money, and money is a powerful instrument to foster political relations. Trade can be used as a "carrot" or as a "stick." As a "carrot," when preferences for certain countries create competitive advantages versus third parties. This is not possible multilaterally due to the most-favoured-nation (MFN) treatment. The most-favoured-nation treatment (GATT Article I, GATS Article II and TRIPs Article 4), is the principle of not discriminating between one's trading partners. In other words, the MFN principle is about treating other WTO members equally. Under the WTO Agreements, countries cannot normally discriminate between their trading partners. If you grant someone a special favour (such as a lower customs duty rate for one of their products), then you have to do the same for all other WTO members.

Page 25

This principle, known as MFN treatment, is the core principle of the WTO Agreements. It is so important that it is the first Article of the GATT, which governs trade in goods. MFN is also a priority in the GATS (Article II) and the TRIPs Agreement (Article 4), although in each agreement the principle is handled slightly differently.23 Some exceptions are allowed, namely the so-called enabling clause²⁴ and the preferential tariff treatment for least- developed countries.²⁵ For example, countries can set up a free-trade agreement²⁶ that applies only to goods traded within the group - discriminating against goods from outside. Or they can give developing countries special access to their markets. Or a country can raise barriers against products that are considered to be traded unfairly from specific countries. In the case of services, countries are allowed, in limited circumstances, to discriminate. The agreements, however, only permit these exceptions under strict conditions. In general, MFN means that every time a WTO country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners - whether rich or poor, weak or strong.

Certain exceptions²⁷ are, however, envisaged in the context of specific service activities within the framework of a list of exemptions from the MFN requirement. Work on this subject started in 2000. When the GATS came into force in 1995, WTO members were allowed a once-only opportunity to take an exemption from the MFN principle of non-discrimination between a member's trading partners. The measure for which the exemption was taken is described in a member's MFN exemption list, indicating to which member the more favourable treatment applies, and specifying its duration. In principle, these exemptions should not last for more than ten years. As mandated by the GATS, all these exemptions are currently being reviewed to examine whether the conditions which created the need for these exemptions in the first place still exist. And in any case, they are part of the current services negotiations. In fact, each government has included in its schedule the services for which it guarantees access to its market by setting out the limits it wishes to maintain for such access.

Trade can also be used as a "stick." For example, 1) to deny preferences to a certain country when granting them to others, thereby creating discrimination and trade diversion; 2) through trade defense instruments28 such as antidumping and safeguard measures; 3) the WTO-dispute settlement system.

As we will see later, trade agreements often include some non-trade policy objectives. This is the case of cooperation agreements that relate to sustainable development, human rights, good governance et cetera. These agreements are usually aimed at lesser-developed countries. Examples of cooperation agreements²⁹ are the one signed with the Andean Pact (today Andean Community)³⁰ as well as with the Association of South-East Asian Nations (ASEAN)³¹ in 1980. Agreements were also designed to help some Asian countries address problems arising from the loss of certain preferences from the Commonwealth.³² This was the case with India,³³ Pakistan,34 Sri Lanka,³⁵ and Bangladesh.³⁶

Page 26

In the case of the EU's neighbourhood, there were clear foreign policy objectives. With Eastern Europe, there was a strong role of trade policy in fostering foreign policy objectives. The re-integration of Eastern Europe into the EU has been facilitated by offering access to a huge market. With other countries in the European neighbourhood, similar but not equally large economic incentives are offered in order to attain foreign policy goals such as security, stability, and peace. This is the case of North Africa and the Middle East.

Let us know tackle the three legal instruments or types of liberalization used by the EU: unilateralism, multilateralism, and bilateralism/regionalism.

3. Unilateralism

While the practice of unilateralism is the oldest form of international state action, its legal relevance has arisen mainly as a result of-and in contrast...