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: More Europe formore investments..

July 2012 A New Europe Special EditionIssue # 995

RodiKratsa

P. 02

The engine of growthfor China-EUrelations...

H.E. Mr.WuHailong

P. 03

A good blueprint forthe future...

RobertSturdy

P. 04

Unleashing the poten-tial of the market...

Leo Sun

P. 05

Trade: is engagementgood?

JuliaHarrison

P. 06

Chance for major re-think of investment...

DavidMartin

P. 07Sticking together,going ahead...

PawełZalewski

P. 08

A solid stepping stonefor growth beyond...

Chang-beomKim

P. 09

Trade liberalisationand standardization...

StevenBlockmans

P. 10

How to make tradeeasier...

DonaldKaberuka

P. 11

Does REACH have a‘chilling effect’ ...

LucasBergkamp

P. 12

Docking investmentin international ...

LisaBrandt

P. 13A transatlantic single market?

FabianZuleeg

P. 14

The financial crisisand EU-China trade...

ChenXin

P. 15

A fair trade for abetter globa...

MariaBadia iCutchet

P. 16

This is no time forcomplacency...

AntonioLopezIsturiz

P. 17

Why China can’t adjust...

MinxinPei

P. 18

All EU countriesdeserve the same...

MariettaGiannakou

P. 19

TradeInvestment

Copyright: L

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SPECIAL REPORT|

02 NEW EUROPE

Prospects for the global economy areslowly improving again, but growth is ex-pected to be weak, especially in Europehighlighting the role that trade and in-vestment can play in economic recovery.The European Union needs to get readyto gain new perspectives to achievegrowth, reduce disparities and create jobs.My own-initiative report "Attractivenessof investing in Europe" urges for an inte-grated and coherent strategy at both na-tional and European level in parallel withensuring fiscal consolidation and restoringconfidence of markets and investors in EUeconomies.

The EU remains the first investmentdestination globally but it faces growingcompetition from emerging economieswhile the prolonged sovereign debt crisisis weakening this position.

The EU is the first exporter of goodsand services globally (16% of world ex-ports in 2010 compared to 11.4% for theUS and 6.9% for Japan). However, there isa growing perception that trade protec-tionism is gaining ground in some parts ofthe world as a political reaction to currenteconomic difficulties. To address such de-velopments, Europe must remain commit-ted to its leading role in driving forwardthe global agenda on open and free trade,by addressing the current challenges in-cluding overcoming regulatory barriers,gaining better market access for servicesand investment, opening public procure-

ment markets, better protecting Intellec-tual Property Rights (IPR), and tacklingunnecessary barriers hampering the sus-tainable supply of raw materials. Towardsthis direction, negotiating and concludingfree trade agreements (FTAs) with majorpartners is a key to opening new marketsfor goods and services and increasing in-vestment opportunities.

Last month, the EU signed an ambi-tious and comprehensive Trade Agree-ment with Colombia and Peru, as well asan Association Agreement with CentralAmerica. Nevertheless, negotiations forfurther FTAs should be intensified, takinginto account the actions of other majorworld players. Today, emerging commer-cial actors take initiatives, such as Chinawhich agreed with the Mercosur countriesto take steps to boost exports and seek toincrease annual trade to $200 billion by2016. It would be of particular importancefor the two shores of the Atlantic Ocean,as well as for the global economy, to con-clude an agreement with the US, giventhat the EU and the US economies al-ready account together for about half theentire world GDP and for nearly a thirdof world trade flows.

The report further highlights the po-tential and opportunities offered by theEuropean Neighbourhood Policy inachieving prosperity, stability in the Northand South of Europe as well as investmentopportunities.

I have proposed the creation of an adhoc European Observatory for foreign

direct investments, established in theframework of the European Commission,providing a better monitoring of the poli-cies applied, evaluating the progressachieved and providing the appropriateelements to promote Europe as an in-vestment destination.

The report calls on the Commission toprepare a communication on the attrac-tiveness of investing in Europe, in com-parison with our main partners andcompetitors, identifying the advantages aswell as the weaknesses of the EU and de-velop an integrated strategy and specificpolicies and recommendations, to improvethe EU’s investment environment. Suchan integrated strategy aims to address thedisparities and divergences within the EU,such as the ones between North andSouth or between different EU regions.According to recent surveys, 26% of in-vestors consider Northern Europe, and theUnited Kingdom in particular, attractivedestinations, while just 3% of businessleaders are interested in investing inSouthern Europe. Trade imbalances arealso significant within the EU, accordingto the latest Eurostat data, given that Ger-many's exports represent 8.2% of worldexports, while many countries of theSouth hold a much smaller share (e.g.Greece: 0.31%, Portugal: 0.39%, Ireland1.04%).

The report also highlights the impor-tant role that structural funds and innova-tive financial instruments can play, such asproject bonds and the ones based on pub-

lic-private partnerships and sovereignwealth funds. I also advocate a greater rolefor the European Central Bank in the sec-ondary debt markets in order to inject liq-uidity and reduce excessive financing coststhat many countries face, as well as theEuropean Investment Bank for national orcross-border investment. At the sametime, the report is calling for greater fiscalcoordination on both the revenue and ex-penditure sides, including coordination oftax systems and social imbalances betweenMember Sates and strengthening cooper-ation of economic actors and complemen-tarities between EU economies.

The single market is one of the EU’smost significant advantages in developinga friendly and motivational environmentfor businesses and consumers. Moreover,the report highlights the importance ofthe completion of the internal marketgiven the added value of reducing bureau-cracy and obstacles in the EU. It alsostresses that encouraging institutional in-vestors to participate in European venturecapital funds can particularly benefit start-up companies, and hence boost entrepre-neurship and job creation.

Moreover, the EU and Member Statesare encouraged to invest more on educa-tion, research and innovation, highlight-ing their comparative advantages onhuman capital.

It is time for Europe to set "investing" atthe core of the EU2020 Strategy. Thismeans more Europe as well as more ofEurope in the global economy.

According to recent

surveys, 26% of

investors consider Northern

Europe, and the United

Kingdom in particular,

attractive destinations, while

just 3% of business leaders

are interested in investing in

Southern Europe. Trade

imbalances are also

significant within the EU,

according to the latest

Eurostat data, given that

Germany's exports represent

8.2% of world exports, while

many countries of the South

hold a much smaller share

03NEW EUROPE

Throughout the 37 years of history of diplo-matic ties between China and the EuropeanUnion, the economic and trade cooperationbetween the two sides have constantly deep-ened and expanded, serving as an importantengine of growth for China-EU comprehen-sive strategic partnership.

Europe has for a multiple of years beenChina’s largest trading partner, exportmarket and source of technology transfer.China, on the other hand, is Europe’slargest source of import and the fastestgrowing export market.

China is also Europe's second largesttrading partner and export market. Withthe size of around $70 billion, Europe isin accumulative terms China's largestsource of foreign investment. In 2011,Chinese companies made $4.28bn of in-vestment in Europe, making Europe thelargest destination of investment for Chi-nese companies.

During the international financial cri-sis, China and Europe have maintainedsound communication and co-ordinationand have worked hard to keep marketsopen. These efforts have generated favor-able opportunities for business co-opera-tion between China and Europe. Despitethe global economic downturn, our busi-ness cooperation have achieved positivegrowth. China has become Europe'sfastest growing major market. In 2010, bi-lateral trade between China and Europehas fully recovered the loss during the cri-sis and gained new grounds. In 2011,trade volume once again grew to a recordhigh, making business cooperation a

strong highlight in China-EU ties. Dur-ing this period, European companies haveseen remarkable growth in their businessin the Chinese market, making China themost important market for Europeanbusinesses.

China always has confidence in the Eu-ropean economy and the stability of theEuro. We believe that the EuropeanUnion has the ability to build agreementamong member states, maintain stabilityin the financial market, and promotegrowth and employment. We have nodoubt in Europe's ability to properly han-dle the sovereign debt crisis and toachieve sustained recovery of the Euro-pean economy.

China firmly supports the stability ofthe euro currency and the European econ-omy. We appreciate the efforts of the EUside to address the debt crisis and expectthe IMF and other major international fi-nancial institutions to play constructiveroles in assisting Europe.

China will continue to work with theinternational community and participatethrough various channels to help resolvethe debt crisis.

Since the beginning of this year, ourbusiness cooperation has experiencedsome downward trend due to the new de-velopment in Europe’s sovereign debt cri-sis. In the first four months of this year,bilateral trade only grew 0.3%. China’s ex-port to Europe declined by 2%.Rea l in-

vestment from Europe to China fell by28% year-on-year. In contrast, last year,the figure figure for the same period lastyear was a positive 23%. Such a situationdeserves the strong attention of our bothsides. By no means should we stand to letour cooperation decline. We must exhaustall measures to remove the obstacles inour trade and put our cooperation back onthe upward trajectory. We believe thatdoing so, both sides could achieve more ineconomic development, and Europe willbe in a better shape to address the debtcrisis.

China needs Europe to achieve devel-opment and vice versa. As we continue togrow our cooperation, China and Europehave become so highly interdependentthat it is absolutely essential for both sidesto tide over the difficulty together.

China is willing to work with the EUside to oppose protectionism, maintainour markets open, strengthen communi-cation and coordination in multilateral in-stitutions, and build a stable and openglobal business environment.

China is ready to strengthen coordina-tion with the EU side on trade and in-vestment facilitation so as to foster afavorable policy environment and to cre-ate more market opportunities for ourcompanies.

China will continue to intensify the ef-forts of opening up, attach equal impor-tance to import and export, and work to

promote basic balance in foreign trade.We will lower the import tax of some con-sumer goods and encourage more Chinesecompanies to import from Europe.

We welcome more reputable and high-end European businesses to benefit fromthe policy of the Chinese government toexpand domestic demand.

China will encourage more qualifiedChinese companies to make investmentand participate in merger and acquisitionand contribute to employment and eco-nomic growth in Europe.

At the same time, we hope that the EUwill be prudent in adopting trade safe-guarding measures, relax its control on hi-tech exports to China, and adopt convenientvisa policies for business travelers. We hopeto see more support and fair treatment andless misgivings and concern for Chinese in-vestment in Europe.

We strongly believe that as long as bothsides fully respect each other’s interest andconcerns, the two sides will be successfulin identify shared interest and commonground though dialogue and consultation.We have no doubt that the differences andproblems between China and Europe willnot hold back our cooperation.

We hope that business cooperation willcontinue to serve as a strong engine ofgrowth, and constantly adds new substanceand dynamism to the healthy, stable, anddurable development of China-EU com-prehensive strategic partnership.

During theinternational

financial crisis,China and Europe

have maintainedsound communicationand co-ordination and

have worked hard tokeep markets open.These efforts have

generated favorableopportunities for

business co-operationbetween China and

Europe

04 NEW EUROPE

One year ago, a landmark Free Trade Agree-ment (FTA) between the European Union andthe Republic of Korea entered into force. It wasbilled as a major coup for the EU, with eco-nomic gains for EU enterprise and industryand promises of exponential growth in tradebetween the two partners.

EU exporters were expected to immediatelysave some €850m on day one of the FTA andEU importers some €1.6bn annually from notpaying import duties. It was also predicted thatagricultural exporters would save some €380mevery year, while the EU textiles and clothingsector would immediately be relieved of almostall of its annual €60m in duties. Furthermore, itwas estimated that the agreement would pre-cipitate a 70 per cent increase in trade volumefor financial services alone, with all of these fac-tors expected to double trade between the twopartners over a 20 years period. Impressivethough these figures are, have these gains be-come a reality?

The numbers speak for themselves.Foreign Direct Investment between the two

partners increased for three consecutive quar-ters following the implementation of the agree-ment and jumped by 60% and EU exports toSouth Korea have increased by some €6.7 bil-lion or 35% compared to the same period since2007.

According to the European Commission, anumber of individual sectors have experiencedspecific trade bumps and seen faster than aver-age growth. EU exports of pork are up by al-

most 120%, which translates into new trade ofalmost €200 million and the trade in leatherbags and luggage has shot up by over 90%, or by€ 50 million. Similar trends have been observedwith regards to high end manufactured goodswith exports of EU machinery used for manu-facturing of semiconductors up by 75%, repre-senting €650 million in additional exports, andEU cars exports increased by over 70%.

There is strong evidence to suggest that theFTA was directly responsible for this increasein trade volume. Whilst EU exports to SouthKorea have increased at an average of 35%compared to 2007, EU exports to other coun-tries have risen by just 25% in the same time-frame.

Furthermore, when you compare the levelsof trade volume between the EU and SouthKorea with the level of trade liberalisation, thebenefits of the agreement becomes even morepronounced. Trade volumes of products thathad full tariff liberalisation increase by 46% andproducts with partial liberalisation saw a 36%increase. When one compares this to just a 23%

increase where the FTA offered no change, it ishard to argue that the FTA has been anythingbut a success.

The EU-South Korea FTA was the first ofa new generation of trade agreements aimed attaking advantage of the world's high growth re-gions. As, nearly 90% of world growth will begenerated outside of Europe, this move is es-sential if the EU wants to maintain its positionas the world's leading trading bloc.

As I write, EU negotiators are thrashing outagreements with major economies such as theUnited States, India, Canada, Japan and Sin-gapore. Many have championed the EU-SouthKorea FTA as a model for all future agree-ments, myself included. As the Parliament'srapporteur on the EU-South Korea FTA, I sawfirst hand the depth of trade liberalisation in-volved in agreement. However, the crowningglory of this agreement is the inclusion of a ro-bust bilateral safeguard clause, negotiated by theparliament, which strengthens the role of in-dustry and guarantees its confidence by pro-tecting sensitive sectors. The inclusion of said

safeguard clause certainly sets a precedent forany future trade deals.

Unfortunately, in reality, indications frommost of the ongoing negotiations suggest thatthey will not touch on this level of ambitionboth in terms of the scope and political will.Furthermore, it is apparent that domestic po-litical hurdles will be a major factor, as eachcountry represents its own specific needs interms of its economy, geography and politicalmake up. This does not mean that the frame-work of the EU-South Korea agreement can-not be used as a blueprint but just that it seemsthat this will be more aspirational than practi-cable. The difficulty of reaching similar agree-ments with other partners just goes to showhow well the EU and South Korea worked to-gether and the level of ambition and trust thatthe two partners have shown. However, it is nottime to stand around patting ourselves on theback. The real work did not end with the im-plementation of the agreement back in July2011 but it has only just begun. We must con-tinue to work with our Korean friends to makesure that the agreement is working as it shouldand to ensure that it is fully implemented.

There are still a number of crucial areas thatmust addressed, such as Non-Tariff barrierswhich are still detrimentally affecting trade be-tween the two parties, notably in the automo-tive industry. This is incredibly important notonly so that both sides fully reap the rewards ofour labour, but so that we can learn from anydifficulties for the many future agreements weare currently negotiating. Only then can wesafely announce 'mission accomplished'.

The EU-South Korea FTA was the first of a new

generation of trade agreements aimed at taking

advantage of the world's high growth regions.

EU negotiators are thrashing out agreements with major

economies such as the United States,

India, Canada, Japan and Singapore

05NEW EUROPE

New Europe speaks to Leo Sun, President ofHuawei’s Brussels off ice and European Pub-lic Affairs and Communications Department,about trade and investment issues between theEuropean Union and China.

Recent years have seen much investment byChina in Europe. How should that invest-ment be focused?I think it should be in the ICT sector – theIT is the focus for our company – but Ithink in general when we invest some-where, either there is a potential market,where you can expect high return in thebusiness part, or you have a very importanttechnology or competent, where the com-pany really need to keep the leading posi-tion or you have to combination of the two,that's a strategic consideration where youcan really improve your global standing.That's the sort of scenario when investingin Europe; the technology, high talent ofhuman resources, and the potential of themarket is also the focus of the company.

What makes you pick a potential market?Is it human capital and level of professionaldevelopment that Europeans are investingin their people?In the classic tech-com market, of coursethe human capital, the population, is verykeen. Of course, overall, the GDP level, isalso very important, but basically we see allover the world, what all the people, the fam-ilies, the companies, the communicationservices, people need to connect to eachother. That's why, in general, the Europe hasa 500 million population with the highestGDP in the world, so of course you canimagine the potential is very high. If youtalk about vertical market, especially like thebig enterprise the companies need, I thinkthat Europe is also in the leading position inthe world and this part of the market ismuch bigger that the emerging market, letssay, so the potential of European market isvery, very attractive.

Is the European economy is more robust,in trading terms, than perhaps some of themore negative analysts would suggest?I think you ask a very big question. Withthe telecom sector, in Europe the penetra-tion of the mobile services are over 80%among the different countries, which is al-ready sufficient penetration, but the growthis very flat. In emerging markets the pene-tration is very low. But I think the growth isin the emerging market. When you go upto the advanced valuating service like mul-timedia, like the enterprise and broadbandfor the video, for the high value services, Ithink that Europe is still very advancedcompared to other emerging markets. Wenoticed that some of the emerging countriesdevelop very, very quickly. When we talkabout investments, not only the companyinvest here to continue the level of service,the level of fiber infrastructures, everything.We think that overall Europe can do muchbetter than we do today. We take the infra-

structure as one example, I think today, dueto the investment and quality issues thingscan go much faster, while compared toJapan, Korea China or America, the fiberinvestment will go much faster.

In terms of fiber investment, for example,what can Europe do to change its policy?What needs to be done to ensure this speedyou are talking about?I think this is already a very topic that hasbeen discussed with all the operators, withall the industrial players, with the EuropeanCommission and member states, becausethis is important part of the agenda, whereare also required lots of financial invest-ments, so I think it's basically a combina-tion of everything, but in general I think,from country to country it's also very dif-ferent. I think in general, we should en-courage the investment, meaning bringmore confidence, in this case,they looking for more like Telephonica, andthey are looking for more comfortable re-turn in term of financial return , in 20 or 30years. So that's why I think in terms of thepolicy or regulation or even the financialsupport, we should reward investors with amore easy environment, and the flexibilityto manage their businesses. There has to besecurity in financial terms.

And how do we do that specifically? Howdo we encourage investment?I think there are a lot of proposals from theEuropean Commission. Fiber, mixed cop-per, all these different technologies to makethe investment happen quicker, and also thereward in matter who made the contribu-tion in the fiber investments. But I thinktoday the most important issue is that, ba-sically this is model for telecom operator,

this is not convincing in a fiber investment,because the investment really high and thereturn will be very long, maybe 20 years andthe most important thing once investing inthe fiber, the revenue will not fly due to thisinvestment, the offers to the consumer areflat. The requirement is very high, the peo-ple need high definition videos, mobilityeverywhere and an over the top companylike the internet giants are pushing a lot oftraffic into the infrastructure, but those kindof traffic, will not bring any revenue growthfor the operators.

Just for people who are not familiar withthis sort of standard, what are we talkingabout here...?If we put it in a simple way, the infrastruc-ture is a set for the operator to run theirservice. When you invest in a set, thisshould bring them all a revenue, I mean po-tential revenue. But in our case, this invest-ment of a set is kind of mandatory to keep

the current revenue instead of creatingsomething new. I think this is the funda-mental change of current business model;meaning they invest all the money into theinfrastructure to maintain what they gainedalready. So then it's creating the difficulty ofthe new investment. I think that somewhereindustry should work on the technologypoint of view, work on a new arena to makethe change in the industry more easy.

So it's about creating some sort of certaintyor confidence?This part, again, it's how to make sure to in-vest something where you can get more rev-enue. We also contribute through our angleto make a kind of technology innovation, sosomehow to ease the investment part,meaning that through the technology inno-vation you invest less or you invest equaltoday, but you can get much bigger the nat-ural capability or infrastructure capability.So this is our goal, to support this growth.

INTERVIEW | LEO SUN

So that's why I

think in terms of

the policy or regulation

or even the financial

support, we should

reward investors with a

more easy

environment, and the

flexibility to manage

their businesses. There

has to be security in

financial terms.

06 NEW EUROPE

Global economic developments are reshap-ing the way Europe, Europeans and Euro-pean companies think of trade. Trade hasnow joined IP and anti-trust as a funda-mental lever to ensure Europe maintains itsglobal economic standing. Businesses aretransitioning from a relatively narrow vision,essentially micro regulatory navel gazing onsector specifics, to a global view where theEuropean single market is but one (albeit alarge and dysfunctional one) piece of amuch bigger puzzle.

With the global crisis, trade flows andintra-regional impacts of economic policy arefinally getting the attention they deserve.

Europe, much like during the Cold War,continues to be the battle ground whereEast and West fight for economic su-premacy and political influence. No rela-tionships are under the spotlight morethan EU-China, where conspiracy theo-ries continue to abound. In reality Euro-peans remain quite open to Chineseinvestment in Europe. A census of EUpolicy-makers’ attitudes towards Chineseinvestment in the EU - conducted by FTIConsulting Brussels (unpublished) -demonstrated this openness whilst cau-tioning for a need for reciprocity.

Europe’s own contrived economic pol-icy choices, or lack thereof, are creatingpressures on its traditional commercialpartners; and protectionist temptations -coupled with bitter in-fighting betweenmember states as to the direction to adopt- have created a political fog that breedsnervousness abroad. Concerns about theEurozone crisis are having an impact onupcoming US presidential elections due tothe fragile state of the US economy.Meanwhile, China-EU relations are com-plicated as China has not stepped up tothe plate on sovereign debt and Europe istrying to ensure it gets a level playing fieldacross a range of sectors and public pro-curement. Expect an even more difficultdialogue as European firms move out ofChina to more competitive productionsites and as Chinese officials grapple witha looming economic slowdown. Not tomention the implications that a hardlanding, in the form of a Chinese housingbust, would have for Europe and theworld at large. Signs are already showing.Bank of America Merrill Lynch has cutChina’s annual GDP forecasts from 8.6%to 8.0% and the three main drivers ofChina’s economic growth (investment, ex-ports and consumption) have all shownweak growth. According to the ChineseNational Bureau of Statistics, the Chineseeconomy grew at 8.1% between Januaryand March this year, the lowest figure inthree years.

For better or worse, FDI in Europe suf-fers. Markets are paying more attention

than ever to the issues at hand: FTI Con-sulting recently conducted an investorstudy (FTI Consulting: Global institu-tional investor survey, 2012) that high-lights this shift in interest and raises thekey question as to how EU policy deci-sions will impact the wider business com-munity. Tellingly, nearly two-thirds ofinvestors in the EU expect EU policy de-cisions to negatively affect their decisionsto invest in Europe, making it crucial thatthe European business community ac-tively participates in shaping Europeanpolicy at the most senior level.

If we consider the global economic out-look, investors in the European Union andNorth America are substantially morenegative about the consequences of polit-ical decisions that will be taken in thecoming five years than their Asian andLatin American counterparts. In the ab-sence of reliable information, 86% of in-vestors agree they are inclined to think the

worst of the situation in the Eurozone.It is also interesting to note that in

terms of the political sphere, 83% of in-vestors agree that upcoming political elec-tions of country leaders in the EU – andconsequently, a possible change to policies– add to uncertainty as to whether to in-vest in the EU at this point in time.

Western Europe does not fare well interms of regions in which institutional in-vestors see good opportunities arising overthe next 12 months: the large majority(71%) point to North America as a viableoption, followed by South East Asia(40%) and Latin America (38%) withWestern Europe trailing behind with34%.

59% of investors believe that in thecoming 5 years, decisions by politicianswill negatively impact their decisions toinvest in listed companies in the EU,while only a meager 13% believe in a pos-itive impact. For other markets institu-

tional investors are less negative: 42% ofinvestors believe that the decisions bypoliticians will negatively impact their de-cision to invest in the US, compared to31% for India and 31% for China.

The question is does the crisis warrant amore flexible approach? Should the Euro-pean trade modus operandi be revisited toshake Europe into a more dynamic ap-proach? Or should Europe remain wary ofnot making hasty decisions that may af-fect its global standing? A question thatcurrently plagues both trade and diplo-matic realms within the Commission.

Business faces an interesting dilemma.How to deal with a new world where thelines between public and private interesthave blurred, where economic sensitivitycan lead to market exclusion and whereseemingly local decisions have global im-plications?

The global financial turmoil has led toan increase in regulatory measures affect-ing investment opportunities and deci-sions and increased trade interest is notjust a passing trend which will simply re-cede as market conditions improve.

This begs the question – is businessmissing an out by not engaging more inareas such as EU trade? 91% of investorswant to see CEO engagement in the pub-lic policy debate on issues related to theirbusiness. Could business help EU growthby being more vocal on issues? Perhaps,but the incentives for them to do so on anindividual basis often remain elusive.

Tellingly, nearly two-thirds of investors in the

EU expect EU policy decisions to negatively

affect their decisions to invest in Europe, making it

crucial that the European business community

actively participates in shaping European policy at

the most senior level.

07NEW EUROPE

In the field of international trade there hasbeen a flurry of activity since 2009 whenthe Parliament acquired new responsibili-ties under the Lisbon Treaty. The GSPtrade scheme with developing countrieshas been revised; the Parliament endorsedtrade agreements with Morocco and withthe Pacific region but rejected the Anti-Counterfeiting Trade Agreement; and thesafeguard clauses in bilateral agreementswith Colombia/Peru and Central Amer-ica are being negotiated.

Perhaps less high-profile so far, but ar-guably even more important, is the up-coming agreement needed on investmentrules.

Investment rules have wide-ranging im-plications for the treatment of Europeaninvestors abroad as well as the environ-ment we create for investors in the EU.Under the Lisbon Treaty, foreign directinvestment (FDI) is now an exclusivecompetence of the Union. Currently aspaghetti bowl of over 1200 criss-crossingbilateral investment treaties (BITs) governinvestment rules between an EU MemberState and a third country, and the chal-lenge is to transfer these to one compre-hensive set of rules for the Union. Muchof the focus so far has been on creatingtransitional measures and maintaining therules of the bilateral agreements while aset of rules for EU investment is drawn up.But the focus now is shifting to the cre-ation of the EU-level policy.

Looking at the big picture is an oppor-tunity for a fundamental re-think aboutwhat kind of investment rules we want.Attracting investment to the EU is ofcourse a crucial part of our economic re-covery, but there is little evidence thatBITs in the past have been a major factorin investors choosing where they operate.Instead, investment rules come into playwhen a dispute arises, highlighting theneed to look closely at who is really win-ning and losing in these agreements. Theprotection of European investors abroadand the creation of a stable investment en-vironment within the EU should remainthe central aim. Well-established princi-ples which prevent states discriminatingagainst foreign investors is key here. Butincreasingly there is a fundamental imbal-ance in the power investors hold over na-tion-states. Investors are challenging lawsthat protect our environment, our publichealth and access to land and water. Andthey're winning.

The power these multi-national con-glomerates are wielding over states isbeing done through the investor - statedispute settlement mechanism (ISDS).This clause, which already exists in mostBITs, allows investors to challenge locallaws which they believe violate the princi-

ples of fair treatment and non-discrimina-tion. An arbitration panel then makes ajudgement, and when they agree that theinvestment agreement has been breached,the state is liable to compensate the in-vestor. Because previous attempts to regu-late investment on a global scale throughthe WTO and OECD have failed, thesechallenges are operating without the mainpublic spheres of trade rules and disputesettlements. Democratically adopted lawsare being privately challenged, often incomplete secrecy when the right to holdproceedings confidentially is allowed. Indeveloped countries this circumvents op-portunities to exhaust local remedies firstin highly-developed legal systems.

This is not a hypothetical situation. In-vestor to state disputes have increasedsharply over the past few decades, from 5cases in 1995 to 375 in 2010. Investors areable to choose the country in which theylaunch the challenge, often initiating itfrom a country with favourable BIT termsfor their cause. Cases have challenged lawson access to water and land, and have beenlaunched through the multilateral invest-ment agreement in the energy sector, theEnergy Charter. At stake is a state's abil-ity to legislate in the public interest on en-vironmental protection, access to essentialservices and public health, without beingchallenged by private investors. Of imme-diate concern is protecting the EU's abil-ity to uphold environmental legislationsuch as the Fuel Quality Directive, and inparticular the ban on importing tar sands.

In health policy, Philip Morris has re-cently launched arbitration against Aus-tralia from their Asian headquarters. Thetobacco giant claims the recently-passedAustralian law on plain packaging ciga-rettes, which is due to come into effect inDecember, violates the Hong Kong - Aus-tralia BIT. The outcome of this challengewill be watched with interest from the EU,both in terms of the launch of the EU To-bacco Framework Directive expected earlynext year, where many in Europe hopeplain packaging regulations will be pro-posed, and in the adoption of investmentrules in upcoming free trade agreements(FTAs) with Canada, Singapore andMalaysia.

Last year in the Parliament we adopteda report on the future of investment policy,and now is the time to defend these prior-ities in the investment chapters of FTAscurrently being negotiated with developedcountries.

In the Comprehensive Economic andTrade Agreement (CETA) with Canada,currently under negotiation, inclusion ofthe ISDS is not necessary, given the highlydeveloped legal institutions which bothparties can rely on. Indeed there are seri-ous concerns that an ISDS clause could beused against the EU ban on tar sands,which Canada opposes. In the broader re-form of investment policy with developedcountries, our key principles must be in-cluded to begin to redress the balanceaway from transnational corporations toallow states to protect genuine interests in

the public sphere. Indeed we have alreadyseen such a clause in the EU - CariforumEPA, which includes a commitment forparties not to lower environmental orlabour rights standards, and a provision onthe behaviour of investors to promote cor-porate social responsibility. A dual ap-proach is needed to fairly balance theresponsibility of the state to uphold fairand equal treatment of investors with in-vestor responsibility to respect reform ofthe public sphere in the interests of citi-zens. Opening up the arbitration processto public scrutiny and including far moreinput from civil society and trade unionswill begin to shed some much-neededlight on the power struggles that are hap-pening behind the closed doors of ISDScases.

The creation of an EU investment pol-icy is an important opportunity to learnlessons from the many BITs that MemberStates have been operating under and cre-ate a fair and effective set of European in-vestment rules to govern trade in the 21stcentury. Central to this is the creation ofbinding clauses in investment agreementsto allow states to regulate in the publicsphere for environmental protection, pub-lic health and labour rights without beingundermined by profit-driven litigation.Investors have shown they are headstrongin pursuing cases where pro-environmentor pro-health legislation provides an ob-stacle to increasing their trade. We musthave equally robust rules to allow the Eu-ropean Union to defend these interests.

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Nowadays, we seem to have landed in a pecu-liar set of circumstances when it comes to theEU trade: the focal points of trade keep mov-ing out of the Euroatlantic zone towards theEast China Sea area, the Doha round contin-ues to be in a deadlock, the EU fights the in-ternal crisis which largely impacts trade and thethree key European policy making institutionsare still in the process of redefining the practi-cal application of the shift in decision makingbalance that the Lisbon Treaty has broughtabout just a short time ago.

In addition, the functioning of the EU singlemarket hence the EU internal trade is being in-creasingly questioned, not as a concept butmerely "the daily manner" that dream is turnedinto action, though.

However, what is obviously of most interestto me, as the Vice-Chairman of the INTAcommittee at the European Parliament, is thefunctioning of the external trade of EU.

Most of the key players decided to pursue bi-lateral free trade agreements (FTAs) ratherthan wait for a positive outcome of the Dohanegotiations. Despite supporting multilateraltrade relations under the WTO regime, the EUis trying to catch up on concluding severalFTAs with the third countries.

Let me make you here a side remark. Re-cently, we have entered a new era in the balanceof power between the EU institutions, as theEuropean Parliament (EP) is finally on theequal terms with the Council and the Com-mission in most of the policy areas includingtrade. What is more, under the Lisbon Treaty,the EU Trade Policy has become the exclusivecompetence of the EU. I am personally verypleased with the fact that the EP has a strongerposition on international trade because I deeplybelieve that the EU needs the right system ofchecks and balance in this area especially inview of the current challenges such as the rise ofChina and the financial crisis.

Coming back to the FTAs, our role is tomake sure that negotiated FTAs are truly com-petitiveness-driven as the Commission in-tended. These agreements have to be a steppingstone rather than a stumbling block, by tack-ling issues that are not ready for multilateraldiscussions. Last year, we started our trade withSouth Korea under the new FTA regime andI am keen on receiving the first comprehensiveassessment of its implementation later on thisyear.

A number of negotiations - with theASEAN, Canada, GCC (Gulf CooperationCouncil), India, Malaysia, Singapore, Merco-sur and Central America - are under way. Ihope we will have concluded the agreementwith Singapore by the end of July. The negoti-ations with the ASEAN seem to have stuck.In the case of the EU-Canada deal, that is themost ambitious attempt yet to reduce non tar-iff barriers between two mature economies, theoutstanding issues are rules of origin and sup-ply management of agricultural goods. Never-

theless, the agreement is still expected to be fi-nalized within this year.

It is also worth mentioning that the EU ini-tiated a new generation of FTAs so-calledDeep and Comprehensive Free Trade Agree-ments (DCFTA) which go far beyond whathas been traditionally negotiated within a typ-ical FTA framework by addressing issues suchas competition, IPR, services, approximation oflaws, mutual recognition of standards and pub-lic procurement. In March, we initialled aDCFTA with Ukraine which has become atemplate for the negotiations with countriessuch as Moldova, Georgia or Armenia. I amparticularly proud of the EU - UkraineDCFTA for I have always opted for a conclu-sion of the agreement while being aware of the

rule of law issues in that country and sharingall concerns about it. I believe stopping theagreement would neither be beneficial to us norto Ukraine. The EU simply cannot turn itsback on Ukraine now; what we need to do is toencourage them own ability to solve themselvesissues by implementing the necessary reforms.

Not only do we have work to do in terms ofUkraine, but also in the Mediterranean re-gion. The current Association Agreementswith these countries (excluding Syria) onlycover essentially trade in goods, which is notsufficient. I think the proposals laid out in the"Euro-Mediterranean Trade Roadmap be-yond 2010" are a good start. We should reallydo our best to complete and reinforce the net-work of Free Trade Agreements in the Euro-

Mediterranean Region.As much as I support our drive for FTAs, we

cannot be content with them alone. During therecent European Think Tanks forum in Berlin Icalled for establishing an EU geo-economicstrategy that will enable us to compete withChina and tackle the economic crisis. Some ofthe Members States seem not to remember thatthat they are too small to compete with thepower of China, Japan and South Korea or so-called “emerging countries”. In my opinion, pur-suing national geo-economic policies by theMember States is a vicious circle that under-mines our Common Foreign Policy. In order toface all the challenges and find our new role inchanging geometry of geo-political and geo-economic balance, we need to stick together.

It is also worth mentioning that the EU initiated a new generation

of FTAs, so-called Deep and Comprehensive Free Trade

Agreements (DCFTA), which go far beyond what has been

traditionally negotiated within a typical FTA framework by addressing

issues such as competition, IPR, services, approximation of laws, mutual

recognition of standards and public procurement

08 NEW EUROPE

09NEW EUROPE

It has been almost two months since I ar-rived in Brussels as Ambassador to theEU. In this short time, I witnessed effortsby European leaders to overcome theeuro-zone crisis and limit its impact onthe European economy. I have also seenfirsthand their resounding commitment tothe vision of “integrated Europe”. This re-minds me of the past history of Europeanintegration when European countries pur-sued closer cooperation in order to securepeace and prosperity for their people, whosuffered greatly from the devastatingWorld War. This long march towards anintegrated Europe started with trade lib-eralization and subsequently incorporatedmany other fields.

Similarly to trade liberalization thattook place in Europe during the 1950s and1960s, I am confident that the Korea-EUFTA, which has been in effect since 1stJuly 2011, will be a cornerstone in our bi-lateral relations, and a solid stepping stonefor economic growth which is essential inovercoming the euro-zone crisis. Coinci-dentally, my tenure as Ambassador has co-incided with the first anniversary of theFTA.

My belief is corroborated by the latesttrade statistics between Korea and the EU.However, it is premature to assess the fullimpacts of a comprehensive agreementlike the FTA only one year after its im-plementation.

That being said, I would like to sharemy assessment of the FTA’s effects.

Firstly, the FTA serves as a model forseeking economic growth and job creationthrough trade and investment liberaliza-tion.

According to Commission statistics re-leased on 27th June, EU exports to Koreaincreased by €6.7 billion, or 35% com-pared to the same period since 2007. Par-ticularly, exports of products for whichtariffs were eliminated (such as wine, somechemical products, textiles, clothing, ma-chinery, appliances, iron and steel prod-ucts) increased by 46% or €2.7 billion.Likewise, exports of partially liberalizedproducts and products with no tariffchange grew by 36% and 23% respectively.

The increase of EU exports to Korea isalso shown in Korean statistics. EU ex-ports during the past eleven months fromJuly 2011 to May 2012, increased by14.8% compared to the same period be-tween 2010 and 2011. Conversely, Koreanexports to the EU decreased by 11.5%.This seems to imply that the FTA favorsonly the EU. However, this statementshould be taken with caution since exportsof Korean products for which tariffs werefully or partially eliminated have increasedrelatively high. For this reason I believethat the FTA is mutually beneficial.

I wish to highlight another trend whichindicates the Agreement’s effects. Inboundinvestment from the EU to Korea hasgrown by 60.5% or $3.6 billion betweenJuly 2011 and March 2012. I believe thatthis can be attributed to the high qualityof Korea’s human resources, advanced in-frastructure and geographical proximity tothe world’s second and third largest mar-kets. Additionally, the FTA networkswhich Korea has been establishing withmajor trading partners (including the US,India and ASEAN) are playing an impor-tant role in encouraging investment in-flows.

Secondly, the impacts of the FTA arenot limited to bilateral relations, but alsoreach out to regional and global trade poli-cies of both sides.

As for Korea, the effectuation of theFTA was followed by the Korea-US FTA,which opened a new horizon for Korea’sposition as a FTA hub. Korea has advo-cated for a multilateral trading system

while continuing to expand its FTA net-work.

In light of these assessments, I believethat the Korea-EU FTA will provide aneeded boost to economic recovery andaccelerate bilateral trade. Of course, suchpositive developments will not be achievedby themselves. We shall ensure that theAgreement will be implemented effec-tively and work together to prevent pro-tectionist measures from expanding.Furthermore, we will continuously try tomake a breakthrough at the stalled multi-lateral trade negotiations at the WorldTrade Organization Doha DevelopmentAgenda.

Thirdly, the FTA serves as one of thetwo pillars of the strategic partnership be-tween Korea and the EU, together withthe Framework Agreement (FA) signed inMay 2010.

Since the conclusion of the FTA andFA, we have established various channelsof dialogue at different levels, rangingfrom high political to civil-society level.

Issues for discussion extended from poli-tics, security, and economics to develop-ment cooperation, climate change, andmany others. This is a sea of change com-pared to the time of the establishment ofbilateral relationship in 1963.

In this regard, year 2013, which will becommemorating the 50th anniversary ofour bilateral relationship, will be a mean-ingful occasion. It will be a good opportu-nity to take stock of major achievementssuch as the FTA and FA, and allow us tofurther explore how to chart out our fu-ture relationship for the next 50 years.

I am confident that the EU will over-come the current crisis, even though itmay take some time. Consequently, theEU will provide the world with a renewedinsight how economic integration, includ-ing trade liberalization, can bring welfareand peace to its citizens, as it already did50 years ago. I am sure that Korea, whoshares with the EU basic values of democ-racy, market economy and rule of law, willbe a good partner towards this end.

Inbound investment from the EU to Korea has grown by

60.5% or $3.6 billion between July 2011 and March 2012. I

believe that this can be attributed to the high quality of Korea’s

human resources, advanced infrastructure and geographical

proximity to the world’s second and third largest markets

As the world’s largest trading bloc, the EU isscrambling to maintain its position on interna-tional markets and increase its competitiveness.The rise of the BRICS, the re-direction of USattention towards the Pacific and the protractedEurozone crisis have substantially weakenedthe European Union’s international profile. By2015, shifts in trade flows will mean that 90%of global trade will be generated outside of theEU, mainly in Asia.

Against this background, the European Uni-versity Institute (EUI) and the Centre for theLaw of EU External Relations (CLEER) re-cently organized an expert meeting whichbrought together members of the EU institu-tions (European Parliament’s INTA Commit-tee; Cabinet of Trade Commissioner DeGucht), think tanks and academia to explorethe challenges which the EU is facing in theareas of trade liberalisation and standardisation.

One general lesson drawn from the discus-sions was that the European Union’s ‘low pol-itics’ of trade and investment negotiations andits export of standards continue to play an im-portant role in shaping the role of the EU atthe international stage. Whereas the EU – amember of the World Trade Organization andan actor that (allegedly) speaks with one voicein all of its trade and investment relations – pro-fesses multilateralism, it has in reality consis-tently pursued a policy of entering intopreferential trade agreements at bilateral andinterregional levels. In fact, this trend followsgeneral international trade practice. Global eco-nomic instability and a stagnant multilateralsystem (cf. the deadlocked Doha Round) havestrengthened the pursuit for bilateral trade re-lations as governments realise that the futuregrowth and stability of their economies rests onthe unimpeded trade in goods and services. Forthe same reason, both eurosceptics and eu-rofederalists can agree to the EU pursuing anopen market agenda through enhanced bila-terism. Globalization’s profound impact on theEU’s internal market has resulted in a growing‘spaghetti bowl’ of trade arrangements and acontinued drive towards the harmonisation oflaws, so as to secure EU market access in thirdcountries and create regulatory convergenceand interoperability. To boost global competi-tiveness of European industries, regulatory con-vergence has been revived and revamped as apolicy objective in EU-led trade talks by aim-ing for increased standardisation and mutualrecognition.

In an effort to capitalize on the opportunitiesthat ‘the rise of the rest’ has to offer, the EU ne-gotiated the first of a new generation of FreeTrade Agreements (FTAs) with the Republicof Korea. South Korea is the EU’s eight largesttrade partner and the EU has become SouthKorea’s second largest export destination. Theimplementation of the FTA is expected todouble trade between the two partners in thenext 20 years. The agreement has been hailedby policy-makers as the most comprehensive of

trade deals ever concluded by the EU. Besidesprogressively eliminating duties on nearly alltrade in goods, the agreement addresses non-tariff barriers to trade, many of which wereidentified as particular obstacles. It also includesprovisions on issues ranging from services (in-cluding financial services and telecoms) and in-vestment protection, competition (bothanti-trust and state aids), public procurement,intellectual property rights (including patentsand geographical indications), transparency inregulation, to sustainable development. To en-sure enforceability of commitments, the FTAincludes strong clauses setting up mediationand dispute settlement mechanisms. Over time,this will lead to a new branch of FTA jurispru-dence. The agreement also established variousinstitutional bodies to monitor the implemen-tation, such as the EU-Korea FTA TradeCommittee, a Customs Committee and sev-eral working groups. As such, the FTA does in-deed represent an ambitious approach to trade.

To be sure, the progressive lowering of tariffswill only be felt after a longer time period, andas most of the regulatory changes have yet tobe implemented, the trade benefits of theagreement can only be assessed with certaintyafter five or ten years. Yet, evidence gatheredfrom its first in operation shows that the FTAis indeed proving its worth.

The conclusion of this new generation FTAis a key part of the EU’s growth strategy andwill be replicated for other trade partners: ne-gotiations are on-going with Canada, India,Singapore and Mercosur. Also, the EU has ini-tialled a so-called ‘Deep and ComprehensiveTrade Agreement’ with Ukraine and it foreseesto conclude similar agreements with other

neighbouring countries in the east (Armenia,Georgia and Moldova) and to the south of theMediterranean (Egypt, Jordan, Morocco andTunisia). In parallel, an Economic PartnershipAgreement has been concluded with Carifo-rum, the first of a kind aimed at going beyondthe classic FTAs with (regional groupings of)African, Caribbean and Pacific countries by alsofocussing on sustainable growth and poverty re-duction. Less forthcoming is the strengtheningof trade relations with the EU’s two biggesttrading partners: the US and China. With theEU being the top export destination for Chi-nese goods, China Europe’s second, and theEU’s desire to reduce Chinese trade irritantslike a lack of enforcement of intellectual prop-erty rights, inconsistencies in regulatory prac-tices and the maintenance of non-tariff barriers,there is a mutual interest in deepening the EU-China trade relationship. Yet, high-level dis-cussions aimed at concluding a comprehensivePartnership and Cooperation Agreement havegone on for more than five years and still ex-pose a hiatus in positions on many importantchapters.

Further trade liberalisation with the US hasalso been difficult for years. Whereas mutual

agreements based on transatlantic regulatoryconvergence in hitherto unregulated markets(e.g. nanotechnology, electronic vehicles, e-health) are setting global thresholds in stan-dardisation, diverging regulatory philosophies,different risk assessment systems and differ-ences in the implementation of internationalstandards, to name just a few, are holding backa boost in trade between the partners. Yet, themost exciting trade prospects are still to befound across the Atlantic. After all, no othertrade relationship in the world is as integratedas that between the EU and the US.

In sum, the deadlock in the Doha Round isproviding the EU with cover to enhance its bi-lateral and interregional deals with trade part-ners. The EU has made use of this by activelypursuing a more tailor-made approach in itstrade policy so as to prevent a further slump inEuropean growth. The first signs of this tradepolicy show that the EU is getting returns on itsinvestment. Perhaps it is time for the EU to alsostop paying lip-service to reviving the DohaRound and find alternative ways to live up to itsconstitutional obligation to promote multilat-eral solutions to global challenges in trade anddevelopment.

10 NEW EUROPE

Globalization’s profound impact on the EU’sinternal market has resulted in a growing

‘spaghetti bowl’ of trade arrangements and acontinued drive towards the harmonisation of laws, so

as to secure EU market access in third countries andcreate regulatory convergence and interoperability

11NEW EUROPE

WASHINGTON, DC – The world isnow in the fourth year of the Great Re-cession. So far, the economies belongingto the World Trade Organization have re-sisted the kind of widespread protection-ism that would make a bad situation muchworse. But protectionist pressures arebuilding as weary politicians hear moreand more calls for economic nationalism.

The WTO’s best defense of open tradeis a good offense. A new WTO Trade Fa-cilitation Agreement would benefit all byincreasing developing countries’ capacityto trade, strengthening the WTO’s devel-opment mandate, and boosting globaleconomic growth. More than a decadeafter the launch of the Doha Round ofglobal free-trade talks, this agreementcould be a down payment on the commit-ment that WTO members have made tolinking trade and development.

Developing countries stand to gain themost from improving trade facilitation.The right support would help traders inpoorer countries to compete and integrateinto global supply chains.

There are rich opportunities for gains.Inefficiencies in processing and clearinggoods put traders in developing countriesat a competitive disadvantage. Outdatedand inefficient border procedures and in-adequate infrastructure often mean hightransaction costs, long delays, opportuni-ties for corruption, and an additional 10-15% in the cost of getting goods to market– even more in landlocked countries.

Research by the World Bank suggeststhat every dollar of assistance provided tosupport trade-facilitation reform in devel-oping countries yields a return of up to$70 in economic benefits. When funds aredirected at improving border-manage-ment systems and procedures – the veryissues covered by the trade-facilitation ne-gotiations – the impact is particularly sig-nificant.

Projects aimed at boosting efficiencyand transparency, supported by develop-ment banks and bilateral donors, havemade a dramatic difference. In EastAfrica, procedural improvements have re-duced the average clearance time for cargocrossing the Kenya-Uganda border fromalmost two days to only seven hours. InCameroon, some of our organizationshave worked with the World CustomsOrganization to help the customs author-ity reduce corruption and increase collec-tion of revenues – estimated to be morethan $25 million a year.

On the Laos-Vietnam border, a sub-re-gional cross-border transport agreementhas cut cargo transit times from fourhours to just over one hour. A new cus-toms component to a highway project be-

tween Phnom Penh and Ho Chi MinhCity helped increase the total value oftrade through the Moc Bai-Bavet borderby 40% over three years. In Peru, some ofour banks have worked with internationalfreight forwarders to connect remote vil-lages and small businesses to export mar-kets through national postal services,turning more than 300 small firms intoexporters, most for the first time.

The outlines of a new WTO Trade Fa-cilitation Agreement are already clear, butsome technical differences remain on spe-cific provisions.

Developing countries want a crediblecommitment to support implementation,such as technical assistance and capacity-building. A World Bank study estimatesthat the costs of implementing the meas-ures likely to be covered by a Trade Facil-itation agreement would be relativelymodest – $7-11 million in the countriesstudied, spread out over a number of years– especially when compared to the ex-pected benefits.

Capacity-building and financing pro-grams for governments that want to im-prove their trade facilitation are availablealready. Major donor countries and inter-national development organizations haveput a priority on, and increased invest-ment in, trade facilitation. According tothe OECD, from 2002 to 2010, trade fa-cilitation-related assistance increased ten-fold in real terms, from almost $40 millionto nearly $400 million.

The African Development Bank, theAsian Development Bank, the EuropeanBank for Reconstruction and Develop-ment, the Inter-American DevelopmentBank, the Islamic Development Bank, andthe World Bank stand ready – alongsidethe WTO – to assist developing countriesthrough the process of full and effectiveimplementation of the agreement. Thatmeans helping countries to assess theirtrade-facilitation needs on a case-by-casebasis, match those needs with the re-sources required, and broker partnershipsbetween recipient countries and develop-

ment allies to ensure that support is pro-vided quickly and efficiently.

In international negotiations, there isalways a way forward if the benefits of anagreement are shared by all. Trade facili-tation offers a development dividend forall countries. It is time for WTO mem-bers to make progress on issues wherethere is room to do so. It will be a downpayment on a solid investment.

Ahmad Mohamed Ali Al-Madani is Pres-ident of the Islamic Development Bank.Donald Kaberuka is President of theAfrican Development Bank. HaruhikoKuroda is President of the Asian Devel-opment Bank. Thomas Mirow is Presi-dent of the European Bank forReconstruction and Development. LuisAlberto Moreno is President of the Inter-American Development Bank. Robert B.Zoellick is President of the World BankGroup.Copyright: Project Syndicate, 2012.www.project-syndicate.org

By Ahmad Mohamed Ali Al-Madani, Donald Kaberuka, Haruhiko Kuroda,

Thomas Mirow, Luis Alberto Moreno, and Robert Zoellick

In 2006, the EU adopted the ‘REACH’ (‘Reg-istration, Evaluation and Authorization ofChemical Substances’) Regulation. REACHestablishes a system of restrictions on the de-sign, manufacture and use of chemicals, andimposes information, registration and disclo-sure requirements including supply chain com-munication, all to protect the environment andhuman health. As was widely feared, it has re-cently become clear that this regime is not goodnews for trade and investment.

The idea behind REACH was novel and un-precedented: comprehensive life-cycle regulationof all chemical-related risks, with industry bear-ing the duty and burden of ensuring and, in somecases, demonstrating chemical safety. REACHalso encourages and requires manufacturers tosubstitute dangerous chemicals with safer onesand to avoid vertebrate animal testing of sub-stances. The REACH framework is imple-mented and overseen by a newly establishedEuropean Chemicals Agency (ECHA), the Eu-ropean Commission, and national authoritiesfrom all 27 Member States. REACH’s extra-territorial coverage of both chemicals-in-bulkand chemical-based-products (ranging fromclothing to electronics) is effectively reshapingglobal industry supply chains.

Industry’s response to REACH andREACH compliance has been observed to dis-tort capital flows to and within Europe. WithREACH’s registration program currently infull swing, EU chemical producers and im-porters have already submitted thousands oflengthy substance dossiers to ECHA, and arerequired to submit many more by prescribedJune 2013 and June 2018 deadlines. REACH’sauthorization program for substances of veryhigh concern (‘SVHCs’) is also now underwayand will soon begin to impose significant newrestrictions on chemicals. Arguably, REACHprovides disincentives for investment in theEuropean chemical industry, and, in fact, in-vestments have dropped off. One recent Euro-pean Commission-sponsored study reflectsthat REACH compliance has thus far cost in-dustry at least €2.1 billion, while another studyhas shown that REACH obligations are hav-ing a ‘chilling effect’ on chemical substance andproduct innovation.

Furthermore, REACH has had widespreadeffects on international trade in bulk chemicalsand other products containing chemicals,notwithstanding EU commitments to ensureREACH’s consistency with international traderules overseen by the World Trade organization(WTO), to which the EU member states areparties. Indeed, REACH has triggered con-cerns from EU trading partners ever since itwas first introduced, and uncertainties remainconcerning whether REACH, as implemented,meets the demands of international trade law.Three recently issued WTO tribunal decisionsinterpreting the Technical Barriers to Trade

(TBT) Agreement have reaffirmed WTOMembers’ sovereign right to regulate for theprotection of human health and the environ-ment at their chosen level of protection. Butgovernments may not freely employ technicalregulations in a discriminatory manner or asunnecessary obstacles to trade.

First, technical regulations cannot be de-signed or applied in a manner that accords im-ported products less favourable treatment than‘like’ domestic or third country products. Whilenot overtly discriminatory, REACH could po-tentially be applied in an ‘uneven-handed’ man-ner to impose a disproportionate impact onnon-EU products that is sufficiently detrimen-tal to affect the fundamental conditions ofcompetition for ‘like’ chemical-based productsin EU markets. The diverging interpretationsof REACH, such as the ongoing disagreementregarding the application of the communica-tion requirements for substances in articles,could possibly subject imported products tomore extensive and costly restrictions relativeto EU products, which could render them lessprofitable, and thus, less competitive in EUmarkets. A recent EU Commission-sponsoredstudy found that REACH’s allocation of com-pliance and enforcement responsibilities to EUMember States has yielded non-uniform, un-even results, including with respect to customsagency inspections. Such variations could po-tentially impose relatively greater administra-tive burdens and costs on non-EUmanufacturers that place their products at acompetitive disadvantage vis-à-vis local com-panies. Non-EU small-and-medium-sized-enterprises (SMEs) without Europeanpresence or negotiating leverage are likely to bemost affected.

Second, technical regulations may not im-pose unnecessary obstacles on trade that aremore trade-restrictive than necessary to fulfil alegitimate objective, considering the risks non-fulfilment would create. REACH’s aim of pro-tecting human health and the environmentwould qualify as a legitimate objective. A seriesof problems, however, including ineffective riskcommunication, the lack of substance prioriti-zation, budgetary limitations and ECHA’s per-functory compliance checks and infrequentdossier evaluations indicating relatively fewharmful substances will be adequately exam-ined, collectively raise questions about the ex-tent to which REACH, in fact, contributes tothe fulfilment of that objective. Moreover, a re-cent EU Commission-sponsored report detail-ing the considerable costs and administrativeburdens imposed by REACH’s registration anddata gathering requirements, and another studyanalyzing reasonably available less trade restric-

tive alternative chemicals regulatory systemsstrongly suggest that such requirements aremore trade-restrictive than necessary to achieveREACH’s objective. Other programmes, suchas Canada’s and Japan’s chemicals managementregulatory processes, arguably provide lesstrade-restrictive alternatives. These regimes fea-ture less expensive and more efficient iterativescreening approaches that permit regulators toset aside many substances and uses from the be-ginning on the grounds that they are unlikely tocause unacceptable risk.

In sum, REACH was designed with ambi-tious goals in mind, but its implementation mayultimately prove market-distorting and non-compliant with international trade rules. Andeven if REACH is ultimately found to beWTO compliant, it would not appear to be themost appropriate instrument for reducingchemical risk in a cost-effective and balancedway.

12 NEW EUROPE

Lucas Bergkamp is a lawyer, medical doctor and a partner in the Brussels officeof the international law firm of Hunton & Williams. He is editing a book onthe law and practice of REACH, which will include a chapter on REACH’s ef-fects on international trade authored by Lawrence Kogan.

Lawrence A. Kogan is a Managing Attorney of The Kogan Law Group, P.C.,a New York City-based multidisciplinary professional services firm, and thePresident/CEO of the Institute for Trade, Standards and Sustainable Devel-opment (ITSSD), a Princeton, NJ-based non-profit legal research, analyticsand educational organization. His analysis of REACH in light of recent WTOjurisprudence will appear in the next issue of the American University Inter-national Law Review.

Nicolas Herbatschek is an associate in the Brussels office of Hunton & Williamsand studies chemistry at Hull University.

13NEW EUROPE

I spy with my little eye something begin-ning with “I”...it is about trade and itmoves across borders.

No, one would probably not guess “in-vestment” in response. Foreign direct in-vestment is neither visible nor tangible.Yet, reaching $2.4 trillion globally in 2009according to UNCTAD, the result of it is.Investment generates jobs and is a vitalcomponent in promoting welfare and eco-nomic growth. It is also an inseparablepart of global supply chains. A global pol-icy approach is thus needed.

Trade policy has not kept pace with theincreasing importance of investment ininternational trade. There is much focusin Europe and the United States on bal-ances for trade in goods, or rather, on im-balances. But trade is no longer mainlyabout large containers of goods beingshipped across borders. Instead, compa-nies invest on location to set up offices,production and distribution channels. Incontrast to the past, it is not primarily aquestion of avoiding custom duties at theborder. Market presence is vital in com-petitive and rapidly changing markets.Companies seek to reach out to theirclients, consumers and entrepreneursabroad. According to the World Bank,around 55-60% of the total trade volumein the world is related to commercial pres-ence, i.e. foreign direct investment.

Investment is also a crucial component inthe internationalisation of productionchains. The scale of the trade within com-panies as well as between companies in thesame sector is significant, particularly in in-ternet- and technical services. OECD fig-ures show that intra-firm trade representedalmost 50% of U.S. total imports in 2009,and almost 30% of total export.

Despite the significant increase in in-vestment flows, a wide range of restric-tions and regulations limit investment inforeign markets, including everythingfrom taxes on imported goods, local con-tent requirement for goods or services,certificates and testing requirements, andobligations for companies to invest pro-ceeds in R&D activities in the host coun-try. Moreover, as companies move abroad,they often want to bring workforce, atleast at a first stage. However, cumber-some procedures and restrictions for visasor work permits imply significant costs.This has a particularly hampering effecton the internationalisation of small andmedium-sized enterprises.

Companies need predictable and secureenvironments if they are to invest. Firmsare obviously not interested in completelyunregulated markets, but basic regulatoryaspects such as transparency and non-dis-crimination. In light of recent events in

Argentina, companies must be guaranteedthat their invested capital is protectedagainst expropriation without compensa-tion or other malpractices. There mustalso be forums to settle legal disputes, incase commercial conflicts arise betweencompanies and state authorities.

The question is how to bring about a co-herent international regulatory frameworkfor investment. Even if the multilateralDoha negotiations were to resume in theWTO, ‘trade and investment’ has not beenon the table since the so called ‘Singaporeissues’ were dropped in 2004. Naturally, pol-icy makers from developed countries havebeen seeking other venues to respond tobusiness’ interests. Preferential trade agree-ments and bilateral investment treatiestherefore dominate alongside the generalprovisions in the Agreement on Trade Re-lated Investment Measures (TRIMs),GATT and in GATS.

Global welfare could benefit from a de-fragmentation of the present patchwork ofinvestment regulations. It is particularlyimportant to get the emerging economieson board. Foreign direct investment is in-creasing rapidly to the BRICS countries.FDI inflows to China increased by 8% in2001, and 31% to India, according toUNCTAD. The emerging economies are

however the ones that apply the most re-strictive barriers to investment as part oftheir national industrial policies. But it isin their interest, as well as in everybodyelse’s, to address these issues in a compre-hensive international rules-based systemfor investment. Such an accord wouldhelp countries attract foreign assets andknow-how. It would also reassure compa-nies that are considering expanding theirbusiness and investing abroad.

The recent initiative between the EUand the US on Shared Principles for In-ternational investment can be a flagshipin the spreading rules-based and trans-parent practices. This is a positive devel-opment particularly in light of the EU’sstruggle to form a coherent investmentpolicy since the Lisbon Treaty placed in-vestment under exclusive communitycompetence. Being the biggest players inthe field of foreign direct investment, EU-US mutual investment stocks amountingto over €2 trillion, their leadership inspreading good practices is vital. Suchprinciples can be extended to form thebasis on an international agreement in thenear future. In a world of changing eco-nomic patterns and power structures, safe-guarding the principles of a rules-basedsystem is of ever so great importance.

Companiesneed

predictable andsecure

environments ifthey are to invest.

Firms are obviouslynot interested in

completelyunregulated

markets, but basicregulatory aspects

such astransparency and

non-discrimination

The economic relationship between theUS and the EU has certainly not been freeof conflict in recent years, be it chlorinatedchickens, alleged favourable treatment fordomestic manufacturers such as Airbus orthe inclusion of international aviation inthe ETS. Europeans often complain aboutalleged disregard of health, social and en-vironmental standards while the US ac-cuses the EU of trying to close its markets.The ongoing increased emphasis on secu-rity after 9/11 by the US and more protec-tionist rhetoric on both sides in the wakeof the economic crisis have recently alsoweighed on this relationship. Currently, theUS is exasperated by the failure to get theEurocrisis under control and is looking in-creasingly to China while the Europeansstill see the US as an obstacle for interna-tional financial sector reform and for deci-sive action to combat climate change.

Reading this list of grievances - andthere are many more – might suggest thatthere is something fundamentally wrong inthe relationship of the US and the EU. Infact, the opposite is true: the EU-UStransatlantic economic space is the mostimportant engine of the global economy,bar none. Not only are there huge tradeand investment flows between the US andthe EU, by and large they share commonvalues and economic interests at the globallevel. This transatlantic relationship gen-erates significant economic activity onboth continents, generating jobs andgrowth which both the US and the EUdesperately need.

The underlying strength of this relation-ship, should, however, not trigger compla-cency. Rather, both the EU and the USmust realise the dormant potential whichlies in deepening and broadening this re-lationship, especially at a time when posi-tive impulses are hard to find in the globaleconomy. There are still many opportuni-ties for the EU and the US (as well as thecountries connected to both of these trad-ing areas through EFTA and NAFTA). Intime, the goal should be the creation of atransatlantic Single Market which wouldcreate the biggest economic block in theworld for some time to come.

A recent joint report, ‘The Case for Re-newing Transatlantic Capitalism’ by arange of Think-Tanks highlights the areaswhere the most significant potential liesfor the future, be it in addressing unfin-ished business, such as the elimination ofremaining tariffs, in deepening and broad-ening cooperation and coordination inareas such as financial sector reform, re-search and innovation or macro-economicpolicy, or in developing a transatlantic eco-nomic space for the future, including thedigital economy.

The case for a deeper and broader eco-

nomic relationship between the US andthe EU seems clear. But decisive action, sofar, is missing. Yes, there are various foraand initiatives which are pursuing deepereconomic integration, such as the EU-USpartnership for growth and jobs, butprogress is, at best, slow. We should learnfrom the experience of the 1992 CommonMarket project: setting an ambitious jointvision, followed by an equally concrete andcomprehensive implementation plan.

So far, there is little appetite on eitherside of the Atlantic. Deeper integration al-ways implies some losers of the processwhile the benefits are much more diffuseand longer term. The economic crisis isalso demanding immediate answers fromdecision-makers, with the result that longterm, strategic planning suffers. Politically,in the US Presidential election the candi-

dates do not seem to perceive further inte-gration with Europe as an electoral bonuswhile in Europe many people feel that fur-ther ’concessions’ to the US are the wrongsignal, given the role US banks played inthe crisis. There also seems to be muchless willingness to compromise; negotia-tions are seen as an adversarial process withwinners and losers, rather than a positivesum game where everybody can benefit.Above all this looms China, which manysee as the economic model of the future, sowhy invest political capital in the mori-bund economies of the West?

This way of thinking is short-sighted anddangerous. Europe and the US still share acommon destiny: neither can survive theglobal economic, environmental and politi-cal challenges without the other. It is hightime to not only reinvigorate the economic

partnership but to push it to a higher level.Further economic integration, starting witha full partnership agreement, to boost in-vestment and trade should be a first step.After all, in the current environment, thetangible benefits of generating additionalgrowth and jobs must surely be of interest topoliticians on both sides of the Atlantic. Buthere high level leadership is needed – amuch stronger push from the US Presidentand real Member State pressure, startingwith Europe’s traditional trading nationssuch as Germany, is needed. In the longerterm, a strengthened economic partnershipshould also be a first stepping stone to fur-ther cooperation. In the new globalisedeconomy, even the EU and the US will be-come too small to defend their interests un-less they can work together even more thanthey have in the past.

The underlying strength of this relationship, should,

however, not trigger complacency. Rather, both the EU and

the US must realise the dormant potential which lies in

deepening and broadening this relationship, especially at a time

when positive impulses are hard to find in the global economy.

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Bilateral trade volume between China andthe European union, reached €567 billionin 2011, the highest record of China-EUtrade, in the context of the ongoing Eu-ropean Sovereign Debt Crisis. China's ex-port to the EU in 2011 was €356bn, with14% growth, and import from EU is 211billion USD, increased 25%. The fasterexpanding of import from EU also meansa China's support to European economyto overcome the crisis.

The decline of the EU share in China'strade

Although China-EU trade reached itshighest level in 2011, we can still see aslight decline of the EU's weight inChina's trade since the financial crisis.The bilateral trade volume in 2009 tookthe highest share of China's external tradein recent 20 years, with 16.5%. Since then,it takes a downward turn, and in 2011 itdropped to 15.6%.

The EU share of Chinese exportsreached its peak in 2008 with 20.5%, butsince then it has also declined. In 2011 itrepresented 18.7% of the China's export.EU's share in China's import declinedfrom 12.7% in 2009 to 12.1% in 2011.The declining share in China's trade doesnot necessarily mean that EU is less im-portant for China, but means China'strade is expanding in other markets,which reflects China's multi-market strat-egy.

The increase of China's share in EUtrade

From the EU side, there is an interest-ing tendency happening. From the bilat-eral point of view, the EU is China'sbiggest exporting market, and at the sametime China is the EU's biggest import re-source. And if we add the US to the pic-ture, another interesting tendencyappears. Based on the data from Eurostat,in the share of the EU's import, Chinaobviously is a steadily expanding, with a10% increase from less than 8% in 2000to more than 18% in 2010.

At the same time, we can see that theUS share in EU imports is almost in adown turn, with 10% decrease from closeto 21% in 2000 to near 11% in 2011. In2006, China for the first time surpassedthe US and became the EU's biggest im-port resource. On the other hand, in theshare of EU export, in the latest 10 years,the US share has been experiencing a sim-ilar 10% drop, from 28% in 2000 down to18% in 2010, and in 2011 it turned to17%. At the same time, China's share inEU exports has been one of consistent ex-pansion, from 3% in 2000 reached close to9% in 2011.

If we see the trade flows between EU-

US and EU-China, the picture wouldprovide a very sharp comparison. In 2000,EU-China trade was around €100bn, andby 2011 it turns to more than €400bn.However, EU-US trade had some wavesaround €400bn in the latest 10 years.China's catching-up in trade is at so fast apace, which leads China will soon becomethe EU's biggest trading partner, and inthe next 10 years China will be the EU'sbiggest export market.

What does it mean? It means that the trade and economic

interdependency is going deeper anddeeper between EU and China. And theinterdependency has experiencing a slightadjustment since the financial crisis. Itmeans not only does China count on theEU, but also the EU counts on China aswell. China does matter for the EU.

The declining share in China's trade does not necessarily

mean that EU is less important for China, but means

China's trade is expanding in other markets, which reflects

China's multi-market strategy.

EU-US and EU-China bilateral trade volume

Since the Lisbon Treaty came into force,international trade relations have becomea core piece of EU actions and policies. Tothis extent, European institutions haveadapted their organisation and widen itsfunctions in order to cope with the greatchallenges ahead related to this actionfield.

Indeed, the European Parliament (EP)has gained full competences in the defini-tion of these policies. All EU trade legisla-tion and international trade agreementsmust be debated and voted within the In-ternational Trade Committee (INTA) andlater ratified by the plenary before enter-ing into force.

EU trade policy is based on a compre-hensive approach that addresses the chal-lenges of globalisation by working for fairand balanced trade relations between theEU and third countries and watching oversocial and labour standards. Furthermore,its actions are driven by EU key targets,gathered under EU2020 Strategy: creatingsustainable economic growth and jobs inEurope and improving living and workingconditions of people in Europe and in ourtrading partner countries.

To this extent, when negotiating tradeagreements, EU is always demandingabout the fulfilment of these very essentialprinciples as it is also extremely respectfulto its international commitments, particu-larly with those within the World TradeOrganisation (WTO). In the context ofthe crisis and the rise of protectionism,multilateralism under the WTO rule is EUpriority work system. Indeed, EU standsfor supporting and improving the role ofWTO as the best equipped and most so-phisticated body of global economic andtrade governance.

EU also promotes regionalism as a wayto deepen trade partner countries' integra-tion and development and to push forwardcomprehensive and ambitious trade agree-ments. However, this alternative approachshould be carried out in a way that multi-lateralism is not undermined.

With regard to the challenges of tradeagreements, fighting against dumpingpractices, seeking for a balanced policy re-garding trade aspects of Intellectual Prop-erty Rights (IPR) and removing oftrade-related hindering measures such asnon-tariff barriers are among the most rel-evant ones.

Recent debates have focused on balanc-ing international trade regulations and EUindustrial policies in a complementary waythat so that European and partner coun-tries' industries gain protection and widenits growth perspectives.

IPR is also in the spotlight, especiallyfollowing ACTA (Anti-CounterfeitingTrade Agreement) debate in the EP and its

rejection. On this sensitive matter, EUshould take the lead and revise EU IPREnforcement Directive raising a balancedand innovative proposal that can meetboth IPR right-holders concerns and citi-zens' rights.

Besides, EU actions to promote devel-opment through trade are also among thetop current priorities. In this regard, EPhas been working on important pieces oflegislation and relevant reports on EUtrade relations with neighbouring coun-tries, those included in the EuropeanNeighbourhood Policy (ENP) and alsothose undergoing important political tran-sition processes in the aftermath of the so-called Arab Spring.

One of the top EU concerns since thebreak of this major event is giving supportto these countries so that they can success-fully achieve a true democratic reform andguarantee basic human rights, equality andjustice. And, it is precisely in this context

where trade can play a crucial role. With appropriate rules and conditions,

trade can contribute to tighten up EUlinks with its partner countries. Addition-ally, EU trade policy is an exclusive com-mon policy that allows a true Europeancoordination in order to deal with thechallenges and needs that those countriesshould face.

Therefore, the European Commissionestablished the "more for more" principleso that any democratic development beinglaunched in the neighbouring countriesshould receive trade and economic com-pensations from the EU. In other words,the deeper their commitment withdemocracy is, the stronger EU coopera-tion will be.

This principle also applies to the EUmechanisms and instruments to turn itsobjectives and priorities towards neigh-bouring countries into specific actions,such as the European Neighbourhood

Instrument (ENI) which provides fund-ing and economic backing to each coun-try, according to its needs and itseconomic situation.

Throughout the implementation ofthese mechanisms and regulations, EU alsoseeks to fulfil its essential principles,namely social and labour standards. To thatextent, EP has always raised its concernwhenever a trade partner country or a po-tential one may breach InternationalLabour Organisation (ILO) conventions.This also includes a strong commitment tofight against child labour and to protectchildren rights.

In short, international trade is indeed acore EU policy and has become a verypowerful European tool to serve to ourmost basic values and contribute to createa fairer world and to spread respect to fun-damental rights and enhance the livingconditions of EU and partner countries'citizens.

EU trade policy is based on a comprehensive approach that

addresses the challenges of globalisation by working for fair

and balanced trade relations between the EU and third countries

and watching over social and labour standards.

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New Europe recently spoke with MEPAntonio Lopez Isturiz, Secretary Gen-eral of the European People’s Party(EPP), and asked his opinions on tradedevelopments in the European Union andbeyond.

According to Commissioner Barnier,furthering integration to our internalmarket is going to be accomplished. Andthis is going to be a very attractive marketfor outsiders. We have to go further intothe market integration. Barnier is work-ing now against the clock in order toachieve this, with the help of the Euro-pean Commission, with the help of theEuropean Parliament and I expect thatEuropean Council governments, they alsoperform, because we have to go furtherinto this, this will help a lot. Outsiders, in-vestors, they have to find this as a singlemarket economy. That has to be beforeeverything. This will create real growthand jobs.

The so called emerging powers are alsosuffering from this crisis. This crisis hastaken a toll in everybody, if not, ask Pres-ident Obama, it's taking a toll in the USbecause of this, unemployment is going upin the United States and this could bejeopardize in Obama's campaign, so thisis happening to everybody. Much of thefocus is now in Europe, because we have28 separate reactions. What we are tend-ing to do now is have a single reaction, soit will be good to achieve that. From othermarkets, with India, China, so on, UnitedStates, there has been a single responses,but they are not performing as well aspeople think. So this is a general crisis, it'snot about Europe.

And Europe, due to the attacks that suf-fered the euro is now reacting in more Ibelieve, in a better way. To others, who arenow sleeping, thinking that theireconomies will survive this, my messageis: be aware. This is going to be a longstanding crisis. It's been now for three,four years going on, and my belief is thatEurope will see before others the begin-ning of growth, and employment, becauseof the actions that are taken now.

Of course, no one can explain, that theyare living in the city of London, in the fi-nancial city that they not respond to Eu-ropean supervision or anything, this willtake out credibility, the city. This is thesecond time, the first was 2008, now it'sagain, so that's why I'm saying the reac-tion of Cameron government is good andthe European reaction also has to be veryquick, because we will loose credibility,because in the end they are as integratedto the European system as everybody andthis is not the case unfortunately, they donot respond to European quality and su-pervision. So, now is the time also for the

financial city of London to react and workwith us together. If not, we'll fail.

I don't know if they are so reliableeconomies as they say, still, China is a dic-tatorship, India is going through difficul-ties. But it's going also througheconomical problems, so I believe this is amove, that does not respond to reality. Ithink and I will invite investors to thinkdouble, about getting out of Europe, be-cause Europe, in the end, will come to so-lution of this crisis as has been done sincethe 1940s. We have faced many crisis, thisEurope has faced many crisis and theyhave always overcome, because at the endgovernments realize, the people, that moreof the integration is needed, everyone ofthis crisis, so finally the response will be aunited one, this time from the economi-cal side.

There are two, three different kinds ofpeople that think that United States is acompetitor, the other thinks it the Asianmarkets, it's not clear between the experts.For me more than competition the UnitedStates we have to have closer economical

relations, we can do together. Unfortu-nately Obama is a president that has morethe Asian approach, because he was edu-cated in Hawai, so he is closer to Asianmarkets than to European ones and thisis a mistake, I think we should be closertogether.

Economically, the relation has beengood. It's operative and it's good that wehave an economical relation, like we havewith Turkey and other countries, I believein privilege partnership, not further en-largements of the European Union, whichnow, citizens of the European Union don'tunderstand, especially now in the frame-work of the crisis, but privilege partner-ship commercial, trading with thesecountries is vital.

We are working now against the clock,with Georgia, Azerbaijan, Armenia, wehave accepted civil parties from thesecountries now, we are now helping withthe political landscape of these countries,because we want to have an economicalprivilege partnership with all these coun-tries, also to help the internal market.

To others, who

are now

sleeping, thinking

that their

economies will

survive this, my

message is: be

aware. This is

going to be a long

standing crisis

CLAREMONT, CALIFORNIA –China’s current economic slowdown hasno shortage of causes: Europe’s financialturmoil, sputtering recovery in the UnitedStates, and weak domestic investmentgrowth, to name the most commonly citedfactors. Since exports and investment ac-count, respectively, for 30% and 40% ofChina’s GDP growth, its economy is par-ticularly vulnerable to weakening externaldemand and accumulation of non-per-forming loans caused by excessive andwasteful spending on fixed assets.

But China’s vulnerability to these fac-tors, as serious as they are, is symptomaticof deeper institutional problems. Untilthese underlying constraints are ad-dressed, talk of a new consumption-basedgrowth model for China, reflected in thegovernment’s recently approved 12thFive-Year Plan, can be no more than lipservice.

After all, China’s major trading part-ners, international financial institutionssuch as the World Bank and the Interna-tional Monetary Fund, and senior Chi-nese officials themselves have longrecognized the structural vulnerabilitiescaused by excessive investment and lowhousehold consumption. And, for nearlya decade, China has been urged to under-take reforms to redress these economicpatterns, which have undermined the wel-fare of ordinary Chinese and strained theglobal trading system.

The best-known feature of China’smacroeconomic imbalances is heavy de-pendence on exports for growth, which istypically attributed to weak domestic de-mand: as a middle-income country, Chinalacks the purchasing power to consumethe goods that it produces. With nearlyunlimited access to advanced-countrymarkets, China can tap into global exter-nal demand and raise its GDP growth po-tential, as it has done for the past twodecades.

If this view is right, the solution isstraightforward: China can correct its im-balances by increasing its citizens’ incomes(by cutting taxes, raising wages, or in-creasing social spending), so that they canconsume more, thereby reducing theeconomy’s dependence on exports. Indeed,nearly all mainstream economists pre-scribe this approach for China.

But there is another explanation forChina’s excessive export dependence, onethat has more to do with the country’spoor political and economic institutions.Specifically, export dependence partly re-flects the high degree of difficulty ofdoing business in China. Official corrup-tion, insecure property rights, stiflingregulatory restraints, weak payment dis-cipline, poor logistics and distribution,

widespread counterfeiting, and vulnera-bility to other forms of intellectual-prop-erty theft: all of these obstacles increasetransaction costs and make it difficult forentrepreneurs to thrive in domestic mar-kets.

By contrast, if China’s private firms sellto Western multinationals, such as Wal-Mart, Target, or Home Depot, they do nothave to worry about getting paid. Theycan avoid all of the headaches that theywould have encountered at home, becausewell-established economic institutionsand business practices in their export mar-kets protect their interests and greatly re-duce transaction costs.

The Chinese economy’s institutionalweakness is reflected in international sur-vey data. The World Bank publishes anannual review of “the ease of doing busi-ness” for 183 countries and sub-nationalunits. In its June 2011 survey, China wasranked 91st, behind Mongolia, Albania,and Belarus. It is particularly difficult tostart a business in China (151st), pay taxes(122nd), obtain construction permits(179th), and get electricity (115th).

Faced with such a hostile environment,Chinese private entrepreneurs have beenforced to engage in “institutional arbi-trage” – taking advantage of efficient

Western economic institutions to expandtheir business (most export-oriented busi-nesses are owned by private entrepreneursand foreign firms).

Unfortunately, as China has alreadyclaimed a large share of the world’s mer-chandise exports (10.4% in 2010) andeconomic stagnation in the West is con-straining external demand, this strategycan no longer work. But reorienting theirbusinesses toward the Chinese domesticmarket requires far more than governmentpolicies that put more money in con-sumers' pockets.

In order to enjoy the same low transac-tion costs that they have in exporting,China’s entrepreneurs need a much betterbusiness environment: an effective legalsystem, a sound regulatory framework, agovernment that protects their brands byfighting intellectual-property theft, de-pendable logistics and distribution net-works, and a graft-resistant bureaucracy.

China cannot create such an environ-ment quickly. In essence, the Chinese gov-ernment must transform a predatory stateinto a nurturing one, and treat private en-trepreneurs as creators of wealth ratherthan targets of extraction. In nearly allother countries, such a transformation wasaccomplished by establishing the rule of

law and/or moving from autocracy todemocracy.

The impossibility of sustaining growthin the absence of the rule of law and polit-ical accountability presents the ChineseCommunist Party with an existentialdilemma. Ever since it crushed the pro-democracy movement in TiananmenSquare in 1989, the party has vowed not tosurrender its political monopoly. The in-vestment boom and the globalization div-idend of the last two decades allowed theParty to have its cake and eat it – main-taining its rule on the basis of economicprosperity, while failing to establish the in-stitutions critical to sustaining such pros-perity. Today, this is no longer possible.

So in a sense, the Chinese bubble – asmuch an intellectual and political bubbleas an economic one – has burst. AsChina’s economic deceleration exposes itsstructural vulnerabilities and flawed poli-cies, the much-hyped notion of “Chineseexceptionalism” – that China can continueto grow without the rule of law and theother essential institutions that a modernmarket economy presupposes – is provingto be nothing but a delusion.

Copyright: Project Syndicate, 2012.www.project-syndicate.org

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New Europe speaks to Marietta Gian-nakou MEP (EL, EPP) about investmentprospects in Greece.

Do you think the investment and tradeplan has improved?

The atmosphere is different, but is itstable? With the government comingfrom three parties, there is a governmentdedicated to implementation of the pro-gramme, with some changes. The govern-ment has to discuss with the Troika. Ithink everybody is satisfied with this, be-cause they had, people were very worriedabout the two elections and the unstablesituation that was created between theelections. Also they were very anxious

about this question of the election, it wasa kind of referendum, yes or no to theeuro, at least, or yes or no to Europe. Nowthey are satisfied and pressing for the im-plementation of the programme, they askfor reforms and that is normal, the stateneeds to be reformed and modernised andon the other side they have to try for theprivatisation and to find a way to elimi-nate deficit and to create a country, a statecapable to face the problem of the debt it-self.

Greece is just one of the 27 countries,how do you think the economic crisis hasaffected the investments in the Europe?

It is true, that the intention for invest-

ments is missing for the moment. So Imention the modernisation of the state,for example a tax low stable for year inorder to create stable atmosphere for theinvestors. And a state that will be capableto react very fast to the demands of themarkets, investors, state etc. This is one ofthe biggest problems, the Greek state wasbig concerning the number of people inthe public sector, but not so capable, notso modern, not so effective.

Following the recent summit, do youfee all of the European countries are partof a common policy?

The summit is a real step for the inte-gration of Europe, the decisions are posi-

tive concerning the growth and the cre-ation of jobs, decisions are important, butthe European Commission has to give aguideline what kind of growths are weready to prepare, and the other side thecreation of jobs is not that easy, becausewe are in the time of society of informa-tion, so many companies use other tech-nology, more than the human resources.

If you want to be just, to give the sameopportunities to different countries, allthe countries have the right to use thisnew mechanism. Finance Spain and Italy,and Greece also has a right to not havethe recapitalisation of banks, to not havethe capitals to be added to the debt if inGreece, they implement the programme.

INTERVIEW | MARIETTA GIANNAKOU

In late 2009, European CommissionPresident José Manuel Barroso and theIndonesian President Susilo BambangYudhoyono tasked a Vision Group of rel-evant persons from both Indonesia andEU to produce recommendations on howto take relations to the next level.

The recommendations of the VisionGroup were presented to the EU TradeCommissioner and the Indonesia TradeMinister on 4 May 2011 in Jakarta.

The joint final Report underlining theVision Group's recommendations waspresented to the public during the dis-

semination event held in Brussels on 28June 2011.

EU Commission Trade Spokesman,John Clancy, told New Europe, “In-donesia is the largest economy in SouthEast Asia, blessed with natural resourcesand offering a sizeable domestic marketwith a growing middle class. The EU hastherefore interest in opening negotia-tions for a comprehensive free tradeagreement.

As in the on-going negotiations withSingapore and Malaysia, the EU aims atan agreement that would cover goods, in-

cluding tariff and non-tariff barriers,services, investment, public procure-ments, competition, intellectual propertyrights and sustainable development, etc.”He continues.”

Some of these areas might prove chal-lenging for Indonesia and it is thereforein the process of consulting its stake-holders and finalising the 'socialisation'of an EU-Indonesia Vision Group Re-port calling for the launch of a 'Compre-hensive Economic PartnershipAgreement' between the two sides, tak-ing into account its experiences with the

liberalisation of trade within ASEANand other major trading partners. Thisprocess is continuing under the newMinister for Trade.

Once this exercise is over, the Euro-pean Commission hopes that Indonesiawill be ready to confirm its interest instarting the preliminary discussions toprepare the launch of FTA negotiations”.

Indonesia is the strongest economy inASEAN with half of its GDP and pop-ulation (240 million inhabitants) andwith a bilateral merchandise trade whowas reaching €20 billion in 2010.