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As recent estimates show, deepening relationships between the EU i and its key trading partners can contribute significantly to Europe's recovery. If the EU pursues its ambitious external trade agenda, this could boost the EU's GDP by 2% or more than €250 billion. This is equivalent to adding an economy of the size of Austria or Denmark. An ambitious agenda could also help create more than 2 million jobs across the EU.

By 2015, 90% of economic growth will be generated outside Europe, with one third in China alone. Hence, tapping into the markets of our key trading partners will play an increasingly significant role for Europe's growth in the future.

More than two-thirds of these gains in growth and jobs would materialise through trade agreements with the US and Japan. On 18 July the European Commission requested the EU's Member States' approval to open negotiations with Japan. In June 2012, the interim report of the EU-US High Level Working Group on growth and jobs underlined the benefits of a comprehensive trade agreement between the EU and the US. A recommendation should follow later this year on prospects for launching negotiations.

What are the prospects of the EU's current trade negotiations?

This year, free trade agreements (FTAs) are within reach with Canada and Singapore. Both are important precedents for other potential agreements with similar or neighbouring countries. A positive dynamic with other member countries of the Association of South East Asian Nations (ASEAN) would reinforce the EU’s position in Asia.

On-going FTA negotiations with large emerging economies such as India or the Mercosur countries, albeit being very challenging, are important to prepare for the future. The key question for the EU remains whether we will be able to conclude these agreements within a realistic timetable and at an acceptable level of ambition.

All this would form an agenda of bilateral negotiations of an unprecedented scale - probably the most ambitious trade and investment agenda in the world today.

Despite difficulties in moving forward in the multilateral context of the World Trade Organisation (WTO), the EU has not stood still in the face of rapid changes in the global economy and is moving ahead to further connect to new global growth centres: FTAs covered less than a quarter of EU trade before 2006; concluding on-going negotiations with Canada, Singapore, India and other ASEAN states would bring this figure up to half; and moving forward with the US and Japan would bring it up to two-thirds.

Stepping up the pace of negotiation and ratification would be essential to reap the benefits of external trade.

How strong is the EU's trade performance?

The EU remains the world’s largest exporter, importer, source and recipient of foreign direct investment. The EU has managed to hold on to its 20% share of total world exports despite the rise of China, whereas Japan and the US have seen significant declines in their shares.

The EU has a massive manufacturing trade surplus of €281 billion, a figure that has increased five-fold since 2000 and has more than compensated for the increase in the energy bill over the same period. The EU’s surplus in services has expanded by a factor of 17 in 10 years, to stand at €86 billion in 2010. On agricultural products, the balance has shifted from a deficit of €3.3 billion in 2000 to a surplus of about €7 billion in 2011.

About 30 million jobs in the EU, or more than 10% of the total workforce, depend on sales to the rest of the world, an increase of almost 50% since 1995.

What contribution can trade make to growth?

Robust external demand is the main source of growth for the moment, as domestic demand components (public or private) remain weak. Only the contribution of trade to GDP in 2012 (+0.7 percentage points) should enable the EU economy to avoid falling back into recession this year, as the contribution of domestic demand and inventories is expected to be negative (-0.4 and -0.3 points respectively, according to the European Commission's Economic Spring Forecast 2012).

The contribution of external demand to economic growth is bound to increase in the future, as 90% of global economic growth by 2015 is expected to be generated outside Europe, a third of it in China alone¹. To be sustainable, economic recovery will therefore need to be consolidated by stronger links with the new global growth centres.

More trade also benefits growth via the supply side of the economy. Trade liberalisation is a major structural reform in itself, creating new opportunities for innovation and stronger productivity growth. Trade and investment flows spread new ideas and innovation, new technologies and the best research, leading to improvements in the products and services that people and companies use. Long-term evidence from EU countries shows that a 1% increase in the openness of the economy leads to an increase of 0.6% in labour productivity². Therefore deep and comprehensive, truly transformative agreements with our largest trading partners can be powerful catalysts for economic change.

By operating on both supply and demand at the same time, the leveraging of trade policy is a condition for the success and sustainability of any recovery strategy. It is an essential complement to other internal EU instruments such as industrial policy tools or financing instruments for investment. It is essential for jobs as well.

Concretely, how will the trade agreements currently negotiated impact on Europe's economy?

The impact of all on-going and potential negotiations taken together could provide an increase of about 1.2 percentage points of GDP or some €150 billion to the EU economy in the short to medium term (table 1). Productivity gains stemming from trade integration further increase the impact of trade agreements by more than half. Once taken into account, the longer-term effect of all on-going and potential negotiations could amount to 2% of GDP or more than €250 billion.

On-going negotiations with the ASEAN countries, Canada, India, and Mercosur would generate almost a third of total potential GDP gains, while possible agreements with Japan and the US would account for more than two-thirds. This would of course depend on the actual outcome of the negotiations.

Table 1: Potential impact of trade agreements on GDP, exports and jobs in Europe

Source: Based on studies commissioned by DG Trade. Comparisons between different agreements should be done with caution due to different methodologies used. Note: Absolute figures refer to EU GDP and trade figures for 2011.

• * 

  This study does not simulate any reduction in tariffs, only in non-tariff barriers. A DG Trade simulation of an EU-US 100% tariff removal estimates EU real income to increase by 0.02% or €3.3 billion.

** An increase in trade exposure of 10 percentage points (here assumed to equal exports + imports over GDP) could lead to an increase in output per working-age person of 4 per cent, see OECD (2003), The Sources of Economic Growth in OECD Countries.

*** The Jobs figures are based on the coefficient of 16700 jobs embodied in each €billion of extra-EU exports as presented in Sousa, N. &al. op. cit.

How does the EU's trade policy fit with new economic realities?

Today, many products are no longer made in one place from start to finish. Instead, they are put together in a long series of steps, often in different parts of the world. This new organisation of production along global supply chains is blurring economic frontiers and transforming trade relations. For example a German export is very often also an export for the Czech Republic, Belgium or Poland. A significant amount of the value of a Chinese export is often produced in Europe. Nokia smartphones are made in China, but contain 54% European added value. Even an iPhone, designed in California and manufactured in Shenzhen, China, has a 12% European contribution. The same pattern is repeated in other production processes, from children’s toys to passenger jets.

This means that national exports and imports can no longer be approached from a narrow mercantilist angle. Not only are exports essential to economic growth and job creation, countries also increasingly need to import in order to achieve these. Two-thirds of EU imports are raw materials, intermediary goods and components needed for the EU’s production process. The share of foreign imports in the EU’s exports has increased by more than 60% since 1995, to reach 13%.

The fundamental changes in global supply chains mean that we need to look more closely at where value is added to products and less at where exports are booked. The core objective of the EU’s trade policy then becomes to maintain, and where necessary, re-invent, Europe’s place in global supply chains.

How can we ensure that trade agreements translate into new opportunities for businesses on the ground?

While trade negotiations are essential to prepare for the future, the most effective way to boost the contribution of trade to growth in the short term is to ensure the enforcement of our existing rights under current rules. The EU makes full use of the trade instruments at its disposal to ensure that rules are respected, from diplomatic and political contacts to negotiations, regulatory cooperation, and WTO and bilateral mechanisms.

Overall, analysis shows that the EU has been as successful as the US over the past five years in defending its interests before the WTO, with a slightly lower number of cases initiated, but a higher rate of success. Over the last ten years, the EU launched the same number of offensive WTO cases as the US. We are now changing gear in the implementation of FTAs to make sure that the benefits materialise.

Further information

External sources of growth: Progress report on EU trade and investment relationships with key economic partners, July 2012

http://trade.ec.europa.eu/doclib/docs/2012/july/tradoc_149807.pdf

Trade negotiations step by step and overview of the EU's FTAs (fact sheet):

http://trade.ec.europa.eu/doclib/docs/2012/june/tradoc_149616.pdf

European Council Conclusions, 28-29 June 2012:

http://consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131388.pdf

¹ :

IMF economic forecast by 2015:

http://www.imf.org/external/pubs/ft/weo/2012/01/index.htm

² :

European Commission, Raising Productivity Growth: Key Messages from the European Competitiveness Report 2007