Beyond FTAs

POSITION | EXTERNAL ECONOMIC POLICY | FREE TRADE

Beyond FTAs On the Future of Trade and Globalization

Executive summary The current global situation requires new strategic approaches from politicians and concrete measures to ensure that Germany remains an industrialized, exporting, and innovative country. Germany and Europe must be able to act from a position of economic strength. A far-sighted economic policy and an internationally competitive European single market are the prerequisites for this.

The future of free trade and globalization Free, rules-based global trade is the basis for further economic growth and prosperity. The WTO remains indispensable for an international level playing field. However, given rampant protectionism, state intervention, and national solo efforts, new partners must be found for more free trade agreements.

The negotiations for these free trade agreements must progress more quickly, given current geopolitical changes. This situation requires the EU and its member states to boost incentives in order to increase the desire for further negotiations on the part of potential new partners and thus avoid rump agreements as far as possible. At the same time, national governments must emphasize geostrategic and geoeconomic implications more clearly to the public to secure the European population’s support for more free trade.

In addition, potential partners for trade agreements must be treated much differently. The EU Commission must situate its negotiating positions in the light of current geopolitical changes to a greater extent than before and prioritize concluding negotiations in line with the European Security Strategy in individual cases.

In addition, new forms of engagement, such as club models, must be created to make free and rulesbased trade more attractive and accessible. Finally, trade defense instruments and screening mechanisms with a sense of proportion and purpose are now increasingly needed to remain defensible regarding trade policy.

Cedric von der Hellen | External Economic Policy | T: +49 30 2028-1602 | C.Hellen@bdi.eu | www.bdi.eu

Beyond FTAs

Table of Contents Executive Summary ............................................................................................................................ 1 Globalization in transition .................................................................................................................. 3 Legal basis of multilateral trade............................................................................................................. 4 The EU's common trade policy ............................................................................................................. 4 Beyond FTAs: The future of free trade and globalization ............................................................... 5 Trade and economic policy measures must follow strategic approaches ............................................. 5 De-risking, the new paradigm of globalization ...................................................................................... 6 Beyond FTAs requires a flexible trade policy ........................................................................................ 6 Considering negotiating partners according to individual criteria.......................................................... 7 Trade policy resilience with measure and purpose ............................................................................... 7 Imprint .................................................................................................................................................. 8

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Beyond FTAs

Globalization in transition Globalization, the international integration of markets for goods, capital, and services, is the basis for economic growth and prosperity. German industry is one of the drivers of globalization. It has also proven to be a job engine for decades. The number of industrial jobs has remained consistently high over the last 15 years and has increased noticeably. The economic success of export-oriented German industry also contributes significantly to the continued rise in tax revenues and thus to the prosperity of society.

The challenges facing German industry are very significant. The current situation is worrying. The macroeconomic framework data for 2023 has deteriorated again compared to the forecasts formulated at the beginning of the year. The outlook at the end of 2023 is somewhat cautious. Companies in the manufacturing sector are seeing a significant decline in orders on hand. Industrial production fell by 0.9% in August/September 2023 compared to the previous period and by as much as 2% compared to last year. The BDI now expects production to stagnate in 2023. This difficult economic situation is now also impacting the labor market, which had remained robust. The data on direct investment shows how urgent it is to improve economic conditions: In 2022, around 125 billion euros more direct investments flowed out of Germany than were made in Germany in the same period. This is the highest net capital outflow ever recorded in Germany. Energy-intensive industries in particular are at risk of a massive exodus, with negative consequences for value chains and the economy as a whole. Excellent location conditions are and will remain an indispensable basis for the global success of companies in Germany and Europe. European trade and investment agreements to create or secure adequate market access in third markets and the representation of European interests in international bodies, e.g., at WTO or OECD level, are also significant for export-oriented German industry. At the same time, trade protection measures within the framework of agreements at WTO level can make a short-term contribution to creating fair competition but must be flanked by an active location policy that addresses the causes of the problem.

This framework strengthens the competitiveness of companies in global competition. Still, it is under increasing pressure: Geopolitical competition is rising, multilateralism is in crisis, and the abuse of trade policy to enforce one-sided national interests is becoming more prevalent. In addition, global society is facing the civilizational challenge of accelerating climate change. In addition to these enormous challenges, economic headwinds, resource competition, increasing state intervention, and pressure for unwanted economic decoupling require political action.

The global and political landscape gradually changed after 2007 due to the global financial crisis, increasing tensions between the US and China, and high pressure on global supply chains due to the Covid-19 pandemic. In addition, the Russian war of aggression against Ukraine has brought economic complications as well as human suffering. As a result, market-oriented and rule-based economies are being forced to combat increasing fragmentation. With this position paper, the BDI attempts to outline answers to the challenges described.

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Beyond FTAs

Legal basis of multilateral trade The membership of Germany and other countries in the World Trade Organization (WTO) is based on specific conventions and agreements of the WTO. Of particular importance is the “Agreement Establishing the World Trade Organization,” the so-called “Marrakesh Agreement.” This agreement was signed on April 15, 1994, in Marrakesh, Morocco, and came into force on January 1, 1995.

It forms the basic framework of the WTO and contains the principles and rules for international trade.

An essential component of the Marrakesh Agreement is the General Agreement on Tariffs and Trade (GATT), which has enabled the dismantling of trade barriers and facilitates international trade. In addition, the General Agreement on Trade in Services (GATS) regulates trade in services and promotes the liberalization of this sector. Furthermore, the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) lays down the rules for protecting intellectual property in international trade.

The WTO represents the multilateral trading system and lays down fundamental rules for international trade. All WTO member states are contractually obliged to comply with these rules. This includes the most-favored-nation rule, national treatment, and transparency in trade regulations. WTO membership provides members with a framework for settling trade disputes and the opportunity to lodge complaints against other members.

Free trade agreements (FTAs) have a specific legal relationship with the WTO membership of Germany and the EU. The WTO and FTAs are interlinked, but they also complement each other. FTAs are bilateral or multilateral agreements between countries or trading blocs that facilitate trade and economic relations between the parties. FTAs can include rules on market access, the reduction or elimination of tariffs and trade barriers, and cooperation in various financial areas. These agreements may contain specific rules that go beyond the general WTO rules.

The legal link between FTAs, Germany’s WTO membership, and the EU is that FTAs are generally designed to be consistent with WTO obligations. FTAs must respect the basic WTO rules. This means that FTAs can complement WTO obligations but must remain consistent with them. In addition, FTAs can consider the specific interests and needs of the countries or trading blocs involved.

The EU negotiates FTAs on behalf of all its member states. These FTAs respect the EU legal framework and WTO commitments. An FTA often contains specific provisions that facilitate trade between the EU and a third country.

The EU’s common trade policy The EU’s Common Commercial Policy (CCP) is part of the TFEU and forms the basis for the EU’s trade policy. It regulates how the EU negotiates and implements trade agreements, including FTAs. Under the EU Treaties, FTAs must be ratified by the European Parliament and the Council of the European Union, representing the member states. This approval process ensures that FTAs are in line with the EU Treaties. The CCP sets out principles and objectives for negotiating FTAs, including promoting free trade and compliance with international norms and standards.

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Beyond FTAs

Some specific chapters and topics must be included and regulated in most FTAs to facilitate and promote trade between the parties. These include, for example, market access for goods, investment protection, dispute settlement, customs clearance and procedures, labor and labor standards, sustainable development, intellectual property, trade in services, competition rules, and trade facilitation.

These legal requirements and agreements ensure the coherence of and compliance with EU trade policy, particularly in the design and implementation of FTAs with other countries. It is important to note that the provisions in individual FTAs may vary, depending on the negotiations and the interests of the parties involved.

Beyond FTAs: The future of free trade and globalization Given the challenges described above, German industry welcomes the strategies for integrated security for Germany and economic security for Europe presented by the German Federal Government and the European Commission in the summer of 2023. Based on the descriptions of the current global situation contained therein, the German government and the European Commission must now take concrete measures to permanently strengthen the role of Germany and Europe in a highly dynamic international environment.

Trade and economic policy measures must follow strategic approaches With the European Economic Security Strategy, the EU Commission emphasizes using trade control instruments to increase economic security. This is necessary because interdependence in globalized trade flows has created vulnerabilities. At the same time, Europe’s economic security strategy lacks a positive trade agenda. Clear concepts are needed to open relevant markets and diversify supply chains. The plan also lacks proposals for attractive location conditions, a forward-looking industrial policy, and incentives for economic cooperation.

The German government’s strategies for increasing security and dealing with China, published in 2023, go further in this regard. In the German government’s China strategy, which is based on the German security strategy, the German government places a clear strategic focus on greater diversification of sales and procurement markets. Critical dependencies on raw materials or primary products must be reduced as quickly as possible in the face of growing geopolitical tensions. At the same time, it is recognized that China will remain an important trading partner. Germany and the EU need a comprehensive and long-term strategy for diversification. This can only succeed with close partnership between politics and industry. We need more flexibility in trade policy and must be more responsive to the wishes of our partners in Asia, Latin America, Africa, and elsewhere.

Based on these strategic concepts, the German government and the EU Commission must strengthen Germany’s competitiveness as a business location. In the long term, the decisive factor in international competition is how well we are positioned offensively. Europe, as a business location, must become more resilient, attractive, and dynamic to encourage investment. Only as a robust internal market and global driver of innovation will the EU be able to deal with competing industrialized countries in a selfdetermined manner. The emphasis on “de-risking” instead of “de-coupling” is therefore correct. It addresses geopolitical risks while at the same time emphasizing Germany’s interest in, for example, substantial economic relations and cooperation with China in order to overcome global challenges.

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Beyond FTAs

De-risking: The new paradigm of globalization The de-risking strategy is gaining acceptance in trade policy worldwide as a response to the geoeconomic and geopolitical challenges mentioned above. In the future, global value chains should no longer be structured according to efficiency but should be more strongly oriented toward the criterion of resilience. This approach should strengthen supply chains and create incentives to minimize risks.

However, implementing this political vision will be a substantial undertaking. It will require multifaceted action and, at the same time, a much more differentiated approach in various areas along the entire industrial value chain.

First and foremost, trade per WTO rules must remain a fundamental principle and objective for the EU and its member states to ensure economic growth and prosperity. Multilateral trade agreements also remain the trade policy benchmark for German industry. Although the WTO is currently in crisis, there is room for maneuver. The EU and Germany should lead and support initiatives that focus on plurilateral agreements between WTO members, address the challenge of trade-distorting subsidies, and seek solutions in the context of the Dispute Settlement Body together with the United States.

Secondly, the international trading system would achieve more stability and resilience by implementing existing agreements and negotiating new FTAs. In this sense, and given current geoeconomic and geostrategic developments, the EU Commission is called upon to conclude further deep and comprehensive FTAs. However, the conclusion of FTAs is not an end. On the one hand, it aims to create fair framework conditions for companies and investments on both sides. Such progress promises mutual gains.

On the other hand, concluding additional FTAs takes work. Partners willing to cooperate ⎻ with individual states or economic alliances ⎻ and who are able to recognize the advantage to themselves must be found. The EU and some member states, such as Germany, have recently become less attractive as trading partners than other regions. High energy prices, bureaucracy, reporting obligations, and a demographically aging society are discouraging international investment.

Going beyond FTAs requires a flexible trade policy However, the current course of the various FTA negotiations reveals the practical obstacles to rapid diversification. Some states in emerging economies, or countries of the so-called Global South, are becoming increasingly self-confident. It is not uncommon for the EU Commission to be accused of Western colonialist behavior. High European ESG standards are justified but often perceived as obstacles to agreement in current negotiations. High European standards make negotiations difficult, even with so-called value partners, and agreements no longer appear to be a matter of course.

As a result, it seems evident that we should move away from the approach of “deep and comprehensive” trade agreements and reduce complexity. In individual cases, it makes sense to conclude socalled rump agreements and, for example, negotiate sustainability chapters later. However, a modular approach can only be a sensible alternative in exceptional cases where both sides still have incentives to renegotiate. In this respect, a differentiated view of each agreement is necessary, particularly in the political debate in Germany.

The separation of investment protection and FTAs can contribute here. The protection of European investments abroad is essential. However, the complex negotiations on FTAs often fail due to the mutual requirements of the negotiating partners around investment protection. To reduce complexity, investment protection should be negotiated separately.

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Beyond FTAs

In addition, the German government must make the geostrategic and geoeconomic implications clear to the public to secure democratically legitimized support for more free trade. De-risking can only succeed if new agreements open new value chains and sources of supply.

Considering negotiating partners according to individual criteria In this respect, a trade policy “beyond FTAs” goes hand in hand with the end of the blanket political approach to new trade agreements and treaties. The EU Commission and the German government must consider each negotiating partner according to individual criteria and treat them according to the specific requirements on both sides. This approach also implies that their negotiating positions must be considered more strongly than before, considering current geopolitical changes. In individual cases, priority must be given to concluding negotiations quickly in line with the European Security Strategy.

The EU Commission must maintain its position in the race to open new markets.

In addition, the EU Commission must pursue other forms of engagement and strengthen essential relationships. The “Free and Fair Trade and Investment Club” proposed by Business 7 at the B7 summit in Tokyo in May 2023 could be a blueprint for creating new growth poles. The club intends to develop a framework for trade and investment with the G7 members and the EU at its center.

Trade policy resilience with measure and purpose Finally, a geopolitical Europe should maintain a level playing field regarding its open strategic autonomy. Trade defense instruments are an integral part of asserting its interests. These should not only ensure fairness and security but also assertiveness.

Investment protection and promotion agreements (IPAs/BITs) and FTAs are the most suitable instruments for opening foreign markets to investors. The dialogue in the WTO and within global governance formats such as the G7 or G20 must lead to more openness. In individual cases, it should be possible to link foreign company acquisitions with the removal of investment barriers in the foreign investor’s country. Regarding foreign investments in critical infrastructure, localization requirements should be possible if this makes sense regarding security policy (e.g., data storage and the necessary technical equipment only being permitted within the EU). Strict care must be taken not to lapse into permanent investment protectionism.

In addition to the implantation of trade protection instruments, the expansion of investment controls is also increasingly being discussed and promoted. The control of investments abroad is playing an increasingly important role. While the US has already issued a series of regulations designed to take a closer look at investments in China, the EU Commission will likely submit a regulatory proposal by the end of 2023.

Introducing state controls on foreign investment would significantly intervene in business decisions and international investment flows. German companies open new sales markets worldwide with their foreign direct investments. This has also strengthened the German economy, secured jobs, and promoted prosperity. Therefore, the BDI is fundamentally opposed to introducing state controls on foreign investment. However, decision-makers must consider that multinational companies with subsidiaries in various fields of work in different countries could become the subject of investigations in several countries, depending on how the instrument is structured. Against this background, additional obligations would significantly paralyze economic dynamics and thus hurt competitiveness.

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Beyond FTAs

The export control instrument should effectively prevent any outflow of technology in safety-critical areas as existing goods controls can already consider technology transfers. Compared to controlling entire investments, this would also be a less invasive intervention in the market. The BDI suggests evaluating the existing mechanisms at EU and national levels before introducing stricter conditions for checking European investments abroad.

The existing instruments should be implemented over a certain period to ensure they are thoroughly applied and evaluated. Where existing instruments may not be sufficient, why they are ineffective should first be ascertained. Only in exceptional cases, when serious safety concerns are proven, could state control intervention be a last resort. Officials must at least consult the business sector to ensure that the measures adopted are effective and affect competitiveness as little as possible.

Imprint Federation of German Industries – BDI Breite Straße 29, 10178 Berlin www.bdi.eu T: +49 30 2028-0 German lobby registry number: R000534

Editorial Matthias Krämer Head of External Economic Policy T: +49 30 2028-1562 m.kraemer@bdi.eu

Cedric von der Hellen Senior Manager External Economic Policy T: +49 30 2028-1602 c.hellen@bdi.eu

BDI document number: D 1810

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