Single Market

Green-taping the single market?

The von der Leyen Commission marked a sharp departure from previous EU trade strategies. Gone were the days of cooperative sustainability efforts. Instead, the EU took a hardline approach, blocking market access to countries not conforming to its sustainability agenda.

In 2021, the EU’s Trade Policy Review underscored an assertive stance, aiming to intertwine trade with sustainability through stringent regulations on conflict minerals, deforestation, and forced labor. Topped off by a corporate sustainability due diligence directive, this has transformed the EU market into a fortress of sustainability, placing the burden of enforcement on private companies. These unilateral measures, dubbed 'green tape', however, might hinder global trade and strain international cooperation.

The implications are profound: global standards could shift, developing countries might suffer economically, and small businesses could struggle with compliance. As the EU tightens its grip on sustainability, the world watches closely. Will this approach lead to true global progress, or merely complicate international trade?

While the previous EU Commissions followed a trade-for-all strategy, the von der Leyen-Commission drastically changed its approach. Instead of promoting sustainability through cooperative approaches and incentives, the past years were marked by unilateral measures, blocking market access by enforcing global conformity with the EU’s sustainability agenda.

Driven by a series of treaty changes in the late 1990s and 2000s, the EU realized that it gained the ability to broaden its trade agenda by including certain, non-economic issues. In a first step, the Generalised Scheme of Preferences + (GSP+) was introduced. This offered additional tariff preferences for developing countries to ratify and implement 27 core labor and environmental conventions. In line with this, Trade and Sustainability (TSD) chapters were launched with the EU–Korea Free-Trade-Agreement in 2009. Albeit differing in content, TSD chapters aimed at furthering specific areas of ‘sustainability’. This broad umbrella term developed to includes issues such as labor, human rights to biodiversity commitments, as well as the Paris climate accord. With ample development over the past decade, the most far-reaching provisions can be found in the new EU-Kenya Economic Partnership agreement, which will enter into force next month. Nonetheless, the GSP+ and TSD chapter approach was only partly successful, as most TSD chapters still lack a sanctioning mechanism and the combined number of countries who joined both regimes rests at 26 and therefore lacks broad coverage.

Realizing this shortfall, the EU Trade Policy Review from 2021, titled ‘An Open, Sustainable and Assertive Trade Policy’ outlines a way to ‘shape global rules for a more sustainable and fairer globalization’. Most notably the bloc aims at ‘using all EU trade policy tools at its disposal to support social fairness and environmental sustainability’. Actions speak louder than words and during the past five years, regulations on conflict minerals, deforestation, carbon border adjustment, a ban on products made with forced labor, as well as the corporate sustainability due diligence directive were adopted. These all served to inseparably link the EU’s trade with its sustainability agenda.

This drastic change in approach transformed a rather weak system of enforcement into strong market entry barriers. Shifting from state-centered implementation to one where private companies are delegated the enforcement of provisions. Effectively, the EU has resorted to use the sheer importance of its market as a means to deny countries and products access if they do not comply with European perceptions of sustainability. While the EU should be commended for its active engagement in those areas, it does so with little to no outside engagement, neither from foreign companies nor governments.

This is why these unilateral EU trade and sustainability measures can be conceptualized as ‘green tape‘; just as red tape, they lead to burdening bureaucratic requirements. Without proper mitigation, ‘green tape’ might pose significant obstacles not just for importers, but for the future of EU trade as a whole.

The question is: WTO cares?

What all of those measures have in common is that they all aim at ‘making globalization more sustainable and fairer’ while disregarding the role of international cooperation and incentives. Moreover, even though the EU continuously stresses the importance of a rules-based multilateral trade, it seems that the absence of the WTO Appellate Body since 2019 has empowered the EU to put its own ambitions at center stage.

Introducing far-reaching market entry barriers under the veil of sustainability might open the door for other countries to follow suit. While this might be an intended outcome, other countries might use ‘green tape’ for protectionism disguised as sustainability legislation in the future. Given the fact that the WTO currently has no mechanism to fend off potential protectionist intentions, Europe might add insult to injury, as it will also have a harder time to go against these measures on a normative basis.

Setting global standards or leaving markets up for grabs?

Beyond the impact on multilateralism, it is also important to look at the significant role that EU companies play in developing countries by creating better-paying jobs and promoting better working conditions. Given early economic analyses based on the German and French due diligence laws, it seems probable that supply chains and the list of suppliers will be shortened. Companies might be incentivized to move away from faraway markets into those closer to the EU to be able to fulfill certain human rights and environmental rules and, most importantly, monitor them. Coincidentally, this will promote business in the Mediterranean and forge closer relationships with ‘like-minded‘ countries. As the recent letter from the US to the EU Commission highlights, some countries might not be able or willing to comply with strict reforestation or labelling requirements. This might have a severe impact particularly for countries with a high dependence on the agricultural sector. This could redirect needed investments and trade from countries with ample need of diversification.

Additionally, the impact for small and medium sized enterprises in Europe and abroad should not be understated. Even though the corporate sustainability due-diligence directive is only applicable to companies with an annual turnover of over EUR 450 million, according to a survey close to 60 percent of medium sized companies were handed down documentation requirements. Due to their smaller size, these companies lack the resources and support to properly implement the growing sustainability regime.

Simultaneously, ‘green tape’ also has the potential to foster sustainable business practices worldwide. It provides templates to improve business accountability and encourage long-term thinking over short-term profits. Multinational companies might prioritize climate and ESG goals, integrating them into corporate policies, eventually promoting greater responsibility within the EU and internationally.

At the same time, the non-tariff barriers introduced might reinvigorate the importance of FTA’s, as administrative cooperation might resurface through the need for compliance. Nonetheless, in a world of geo-economic tension, stringent environmental and human rights standards will come with the withdrawal from certain markets. This will leave some countries more susceptible to takeovers by American or Chinese companies, which may not adhere to the same.

A working plan for real sustainable trade

‘Green tape’ is here to stay. Once the EU has ventured into a sector it is unlikely that it will retreat from it. In an increasingly fragmented world, the EU needs more trade partners to stay competitive and relevant. Ongoing free-trade agreement negotiations and especially Trade and Sustainability chapters should be revised to avoid the Mercosur dilemma. Here, the Latin American side argued that the deforestation regulation was imposing additional market barriers, particularly for goods such as beef, soy and coffee. This led to temporarily halt in ratification and the drafting of an additional protocol targeting deforestation-related measures.

The next EU Commission has to engage with current FTA-partners, as well as business in Europe and abroad to make sure the regulations reflect realties and various actors are actually able to implement them. This is particularly necessary in case of recently concluded negotiations, for example with Chile, New Zealand, Mexico and Kenya.

Moreover, GSP+ needs to be reformed to better reflect recent green tape measures and implementation guidance. Actually, there could not be a better time, as the GSP+ scheme has only been provisionally been extended to remain valid until 2027. Similarly, the EU also has to step up its game in donor coordination. New Team Europe initiatives and national development aid should be increasingly geared towards helping domestic producers to comply with green tape.

Moreover, looking at the different schemes becomes obvious that most of the regulations were drafted by different departments in the EU Commission, with trade only as a minor consideration. Rather than drafting new rules, the new EU Commission should aim at finding a streamlined approach for unilateral trade and sustainability measures – a working plan for real sustainable trade. This could include a one-stop-shop at the Commission for information requests, a single digital platform with harmonized documentation as well as a single national competent authority for trade and sustainability.

The EU views itself as a champion of standards that promote global well-being. By assertively upholding its values on a global stage, it seeks to differentiate itself from other players like China and the USA, whose foreign policies are primarily perceived as self-serving. It should realize, however, that this might come at the cost of contributing to its own isolation. Through notions of ‘friend’ and re-shoring, it appears that  sustainability might after all just act as  a veil for other geopolitical motives. Without countering those narratives, the EU risks becoming indistinguishable from what it criticizes most.

A recent study published Friedrich-Naumann-Foundation for Freedom summarizes the overall implications of ‘green tape’. It is the first time that a paper treats all measures as one comprehensive package in order to analyze its economic impact, as well as potential WTO compliance issues.

Akim van der Voort is Policy Advisor for Free Trade, Markets & Globalization at Friedrich Naumann Foundation for Freedom (FNF) in Berlin.