Inter-regional externalities from trade and EU’s external financial instrumentarium: Towards sustainability or claiming self-interest?

Inter-regional externalities from trade and EU’s external financial instrumentarium: Towards sustainability or claiming self-interest?

(Kalpakchiev, 2020)

Keywords: Global Trade, Supply Chains and Networks, Negative externalities, policy spill-overs and feedbacks, identify governance levels (from multilateral to local), actors (actors (e.g. governmental, private sector, civil society) to address policy-driven displacement effects), unintended policy driven displacement effects, propose potential policy and governance interventions for increased sustainability in tele-coupled systems.

Aim

Investigate the externalities of EU’s trade-environment nexus with regards to particular goods, as well as the actions triggered, as well in how far arising problems from trade openness are targeted by the EU’s blending and external investment funds.

Telecoupling

According to Liu et al., 2013, „Telecoupled systems are hierarchically structured, so the telecoupling framework takes a multilevel analytic approach. At the telecoupled system level, it includes an interrelated set of coupled human and natural systems that are connected through flows among them“[1]. Telecoupling traces the causal linkages between effects of social (e.g. institutional instruments in trade, aid, development) and ecological (land use, food security, labour stability, environmental degradation) systems, as the first often trigger negative externalities, subsequent outbreak of international attention and corrective feedback stabilizers. Thus, it can be viewed as a network of systems with flows policy, good and effects among them. From a regionalism perspective, the agents, causes and effects of EU’s responsible trade regime and its review could therefore be undermined by the increasing role China, Russia and their trade partners (within the institutionally strong, yet regulatory loose Eurasian Union, its external trade partners and the non-institutionalized, but geographically wide RCEP), as they altogether are said to be attempting to alter the principles of functioning of world trade. Besides mapping existing institutions and actors, the project would therefore aim to define the values, priorities, agendas and the necessary conditions for their effectiveness on the ground (social, political or legal pressure)[2].

Politico-Economic context

The proliferation of such Unions follows a pattern from constructivism towards functionalism, whereby socially constructed regions gradually transform to regulatory units through the creation of institutions. These post-sovereign entities have engaged in shaping global trade in ways that fit the structure of their economy, e.g. through restricting imports of goods produced domestically, embedding or circumventing international agreements. Some of them, such as the EEU, AU and Mercosur are heading a step further into regional integration, e.g. by creating common internal markets among groups of states – a stepping stone towards common external tariffs. Although the WTO[3] is the cap of these establishments, it has been shaped in turns by the US, EU’s Doha Rounds and most recently – China, through its numerous disputes and increased presence in the institution. The overall pattern of regionalism towards regional integration is thus inherently influenced by the multilateral institutional setup, which is an arena for influence on how to shape global trade. Thus effectively, we are experiencing juxtaposition between EU and Eurasian Union (EEU), availed by the accelerated expansion of the Chinese Belt and Road Initiative, including towards South America. The EEU itself is consolidating a mixture of protectionism and supranational external trade regime built on customs union (Vunokinov, 2017) that reaches out to countries such as Vietnam, China, Israel, Egypt, Singapore, Chile, South Korea (many of these have overlapping regimes with the EU). It is thus aiming to create an alternative trade regime, built on the Chinese-led Regional Comprehensive Economic Partnership and EEU’s external trade agreements.

The grand Chinese Belt and Road Initiative, supported by the benevolent rhetorical claims of China that it supports global development through win-win solutions, is rather a loans-based development that attempts to diplomatically align Eurasia, East and Central Africa and Eastern Europe into supporting its priorities in multilateral agreements (incl. MEAs) through solidifying the long-term financial dependency of the developing world. Additionally, many claim that Russia, through its replication of EU’s attempts to structure globalization through regionalism, is attempting to create an alternative world trade order that derives its rules internally, rather than downloading them from multilateral institutions.

Hence, in order to fully understand the trade-institutions-sustainability nexus that shapes globally telecoupled systems, one should review cases that lie in the interlace between the foreign policy (to be read in holistic manner, e.g. including trade, external environment and development policies, also scientific diplomacy) of the traditional West (e.g. USA and EU) and the growing East (e.g. China and Eurasia). Further rationale behind the selection of case countries, where the author has knowledge of the institutional, geographical, political and policy setup, is the fact that regulatory liability[4] is stronger, when the information asymmetry between the regulator, supplier and client is lower, resp. knowledge is higher.

The expectation is that the Chinese loan-based „win-win“ development fosters economic growth through loans, while ensuring its resource sovereignty. This dependency could transliterate into pressure for diplomatic alignment in multilateral trade and environmental negotiations towards a more liberal regime that effectively discards the complexities of EU’s „hybrid multilateralism“ both due to the exclusion of non-state actors as legitimate counterparts, as well as the removal of thresholds to liberal trade and deflects imports of goods and resources towards the BRI and EEU cores. In essence, the BRI can therefore be viewed as a strategy that substantiates the resource sovereignty of China and its partners.

The EU’s complex external trade and environmental policies lie on set of policy premises (see table below), as well as judicial and values-based principles (polluter pays, extended producer responsibility, improved participation, responsible extraction, production and consumption, etc.), oftentimes borrowed from its internal policy construct.

Table 1. Instruments of EU’s External Action with relation to the trade-sustainability nexus (compiled by Author)

InstrumentCountriesPotential Displacement Effect
New Trade Agreements (reciprocal + regulatory export + responsibility)Canada, Japan, Singapore, KoreaNorth-South divide
Trade of Environmental GoodsChina, Japan, USA, South AfricaCompetitiveness concerns, flooding  of EU with goods produced with raw materials that are not controlled
Circular Economy MissionsChina, Colombia, South Africa, ChileAccumulated expertise not brought back home, resource sovereignty, local sourcing might not be sustainable
EU Conflict Minerals RegulationMyanmar, DR Congo, predominantly LDCsDeflection towards other countries (lithium and jade towards China), moving to cash crops, etc.
SanctionsRussia, Belarus, North Korea, South Sudan, Zimbabwe, Venezuela, etc.Re-export and avoidance of rules of origin principles, pariah states alter diplomatic alignment
Generalised System of Preferences (+)Georgia, Armenia, Kyrgyzstan, Philippines, etc.Improper implementation, preference for regimes not requiring compliance, quotas might have externalities
Multilateral Environmental Agreements (COP)France, Germany, Morocco, etc.Diplomatic alignment due to competitive aid delivery could transliterate in altered trade patterns
Waste import ban, Waste governanceENPI East, Sub-Saharan AfricaAccumulation of waste, import of secondary materials by other countries (e.g. China)
FLEGT (and illegal fishing)Côte d’Ivoire, DRC, Indonesia, Laos, Malaysia, Vietnam, China, HondurasOverlaps with REDD+, trade diversion
Emissions TradingUkraine, Georgia, Kazakhstan, China, Korea, USA, etc.Rising production costs and loss of competitiveness, political obstruction

Research Premises

The starting point of the research will be EU-centric and categorize the different types of EU trade agreements in terms of technical depth, degree of barrier removal, as well as requirements for conformity with multilateral commitments. EU’s expansionary trade regime interlaces strongly with the Eurasian Economic Union and the Chinese-led Regional Comprehensive Economic Partnership (underpinned by the Belt and Road Initiative). This is especially evident as the countries that befall broadly in EU’s periphery are the ones that are still acceding to the WTO (Table 2). It can thus be claimed that they will be the ones most prone to changes in the regulatory landscape, or case-based developments[5]. China officially supports the autonomy of these regions, while Russia attempts to incorporate them into the external trade domain of the Eurasian Union.

Table 2. Source: WTO Webpage

1st Hypothesis: In lieu with the principle of subsidiarity, the EU is supporting multi-level environmental governance that improves implementation.

Within the EU treaties, resp. Art. 5 (3) TEU, subsidiarity is used „within non-exclusive competences and as long as action can better achieved“, while theoretically, it „guarantees a degree of independence for a local authority when powers are shared” (Panizza, 2018[6]) and is „understood primarily as a principle for allocating powers to different levels of governance“ (Jachtenfuchs & Kritsch 2016[7]). It is a way to formally structure the levels of implementation and provide for division of labour between multilateral, regional, national, local, non-governmental and non-state actors through hierarchy, thus also deal with complexity and uncertainty stemming from the diffusion with unformal rules, as they „intersect in volatile ways“[8]

2nd Hypothesis: The EU’s GSP+ mechanism and the engagement of civil society as an actor improving the accountability of institutions is a way to identify and address externalities of trade.

The generalised system of preferences (+) creates preferential regimes for poverty and vulnerability-stricken countries and aims to ensure sustainable development and good governance through putting into practice multilateral conventions[9]. However, compliance is oftentimes ineffective.

3rd Hypothesis: The elaboration of blending mechanisms and external investment funds by the EU is triggered by political momentum, while private participation is incentivized by access to human and natural resources.

During my time spent in DEVCO and as a fellow to the 5th AU-EU Summit I have noticed that EU’s financial blending was contrived in a top down manner, while companies are seeking optimization and legitimization of their actions. While I myself worked mostly on urban revitalization for sustainability, a further interesting point to investigate would be the participation of Chinese STOs and Development Banks mostly in infrastructure projects and manufacturing, as it follows a logic that facilitates trade and stabilization of political illiberalism. At the same time the EU is using inclusivity as much as possible to identify the most pressing needs and is catering also for security problematics and human development even if no direct financial rationale is present.                                                                                                                                

Theoretical Framework:

  • I would begin by using the most useful IR concepts within the EU studies domain, which attempt to categorize EU as a normative actor (Manners, 2002) that engages in „institutional processes of norm diffusion and policy transfer“ through modes of hierarchy, networks and competition (Lavenex & Schimmelfennig, 2009). Thus one would expect that through the proliferation of its trade regime and new form of trade agreements, the EU could be engaging in embedding solutions to tele-couplings that address, e.g. excessive emissions arising from long-distance diesel-powered maritime transportation through commitments supporting bio-regionalism and local sourcing. Naturally, though, these will be against the „everything but arms“ principle governing trade with least developed countries and will only be applicable to the rest of the countries befalling within the Generalized System of Preferences. Thus one can speak of an incompatibility of such normative aspirations and non-reciprocity of governance innovations such as the „graduation threshold“ (no product can accumulate more than 15% of exports) meant to reduce extensive trade deflection and provide leverage in negotiations (Siles-Brügge, 2014).
  • Keeping in mind that the EU is a complex and inclusive machinery that engages in macro-negotiations (e.g. as a post-sovereign entity itself with sovereign state partners), but also supports numerous other dimensions (sub-state actors such as city twinning networks, and non-state ones such as business-to-business contacts through its Circular Economy missions, NGOs, etc.), it will be viewed as a  multi-level, multi-arena polity (Challies, 2017) that engages horizontally in forms of „hybrid multilateralism“ (Bäckstrand et al., 2017), thus effectively substituting traditional multilateralism.
    • Their importance has grown due to the fact that between Kyoto and Paris, commitments have been non-binding, resp. have not led to any form of liability or coherent implementation. Thus, by taking the timeframe between COP15 and COP23, the research will investigate the evolution of a) sub-state and non-state actors’ role b) the innovation is EU’s institutional governance (such as including the environmental domain in the EU’s global strategy, creating Circular Diplomacy Missions or organizing inclusive forums for connectivity of state and non-state actors.
  • I claim that the EU diffuses the governance of its external policy domains (e.g. trade, development, enlargement, environment policies) thus effectively adopting the successful solutions and principles from one area to another, while catering for additional complexities. Besides financial blending and external investment funds, it engages in creating „trans-governmental networks“ of experts, funded through the Twinning and TAIEX instruments in the nexus between enlargement and development that the neighbourhood policy is, „facilitate the transfer of technical standards and promote legislative convergence“ in the neighbourhood (Shyrokykh, 2017), also called „regime transfer“[10]. The process is also legally embedded into the DCFTA and is highly dependent on the costs of domestic adjustments. This innovation, however, has acted as a stepping stone towards strengthening the governance of particular domains through creating horizontal networks of experts and actors of change within softer interregional formats that are supported financially by the EU, such as the AU-EU Summits, Asia-Europe Meetings, EU-MERCOSUR trade and policy dialogues. These would ultimately support the proliferation EU’s normative polity and principles (such as bio-regionalism, circularity, preferential trade, networked access to resources, etc.). In effect, this process can be viewed as a form of „external spill-оver“, in other words a continuation of the domestic one, conceptualized by E. Haas.
    • In order to address the issues of coupled value chains and decoupling resource usage from economic growth, one should select a good that can be up-scaled along the chain, as well as countries, which are having high amounts of input and output trade. For that purpose, I would take three goods (Alternative 1: gemstones, cotton and dairy / Alternative 2: soybeans, palm oil, biomass), as well as five cases – Armenia, Belarus, Ethiopia, Nigeria and Vietnam. Their importance lies in the fact that country.
      • 1) Armenia is trying to balance its East-West divide by adopting agreements (GSP+) and potentially signing a reduced Association agreement with the EU (today at the Brussels Eastern Partnership Summit),
      • 2) Belarus is an example of the alternative trade governance that the Eurasian Union and China are trying to establish and also a WTO acceding,
      • 3) Singapore is an emblematic case of coupling, which combines economic liberalism with strong role of the state in countering the effects of globalization locally,
      • 4) Ethiopia is the seat of the African Union, which is marked by extensive Chinese influence and is important due to the projected creation of an African Common Market.
      • 5) Nigeria is one of the biggest and richest ECOWAS members and is struggling to balance security issues with the pressing need for economic diversification.
  • As, besides particular cases, the project contemplates large-scale inter-regional arrangements, it will be crucial to delineate among the different layers of scale that co-exist under interregional partnerships. These are created by the civil society, business and city networks which are increasingly shadowing such forums.
    • From an organizational ecology point of view[11], interregional cooperation competes for limited resources and assembles complex transboundary tools that complement trans-local and governmental forms in order to legitimize itself (such as inclusion of various actors and their coordination), thus creating vertical interactions and information flows alongside the standard horizontal ones[12]. This is especially important, as GVCs governance is spread among networks of cities, private certifying operators that shadow political initiatives (often foreign as legislation in the developing world is oftentimes weak) and CSOs that scrutinize the process[13], effectively a form of transnational delegation for action[14]. The political forms initiated by the EU exhibit more contiguous membership and spatial ambit[15], with exceptions often stemming from the lack of interest towards or the lack of fulfilment of criteria for membership.

Research Approach

The principle of sustainability will be reviewed in its definition as a concept that caters for the present, without jeopardizing the future of the next generation, as well as in terms of ecological sustainability, the integration of the principles of functioning of the natural world into the technical world, as well as the decoupling of economic growth from the usage of resources.

My approach as a social scientist would involve: Process Tracing, Interviews, Usage of secondary literature, Mapping of actors (Agents, causes and effects) and study trips to institutions. Additionally, I would make the best possible use of my skills in graphic design (Photoshop), Microsoft Excel and attempt to recompile existing secondary data on trade through software (e.g. https://trase.earth/, R – open source statistical computing, Trade Sift).

Process tracing would be used to study diplomatic alignments in MEAs and FTA agreements of EU, Russia and China to uncover overlaps, as well as to review EU’s positions towards environmental and trade governance in the case studies both bilaterally and multilaterally. An attempt would be made to explain the evolution of integrating institutional, labour and environmental requirements into trade agreements. Explanation could be sought in the principle of parallelism between EU’s internal and external affairs that has been reached through case 22/70, Commission vs. Council, European Road Transport Agreement, ECR 263, CMLR 335[16], as well as in the processes of policy uploading from EU‘s Enlargement into EU’s Neighbourhood Policy and then to EU’s External Trade Policy and principle of ownership, updated most recently in EU’s Global Agenda, as well as EU’s New Consensus of Development.

Actors would be mapped on a number of levels – macro (regional institutions[17], such as IFIs and development banks), meso (member state agencies), micro (sub-state and non-state bodies), as well as how these are embedded in regional and interregional (EU, EEU, ASEAN, etc.) and trans-local setups (scientific and policy networks). Additional efforts will be put to delineate overlaps or conflicts in policies being advocated.

Literature review would be used to study whether trade arrangements are open/closed (common market or customs unions), what kind of governance mechanisms are included in agreements, what displacement effects have been already identified, whether subsidiarity is existent.

Interviews in institutions (Brussels, Bonn, Geneva) will be used to adjust the mapping and potentially to drill for opinions based on statements acquired via literature review. This will be done through the Q methodology (a bottom-up method in which interpretation of qualitative results is constrained by statistical analysis; no predefined questions, instead interaction with statements on a 13-point scale from -6 to +6)


[1]Liu et al.  (2013), Framing Sustainability in a Telecoupled World, Ecology and Society 18(2): 26, https://www.ecologyandsociety.org/vol18/iss2/art26/

[2] Hallie Eakin, Ximena Rueda and Ashwina Mahanti, Transforming governance in telecoupled food systems, Ecology and Society 22(4):32, p.2-6

[3] Many argue that the WTO is outdated, increased Chinese influence within the institution

[4] Leonard Seabrooke & Duncan Wigan, The governance of global wealth chains, Review of IPE, Volume 24, 2017 – Issue 1: Special Section: Global Wealth Chains

[5] Although having travelled extensively in Eurasia and Africa, due to long-term investigation of the institutional and policy setup of EU’s Eastern Neighbourhood, I feel most comfortable with cases in the latter. Although the proposed cases will be from that region, an additional adjustment will be done after an analysis of trade flows, as the research requires global outreach.

[6] Roberta Panizza, The Principle of Subsidiarity, Fact Sheets on the European Union – 01/2018 http://www.europarl.europa.eu/ftu/pdf/en/FTU_1.2.2.pdf

[7] Markus Jachtenfuchs, Nico Krisch, Subsidiarity in Global Governance, Law and Contemporary Problems, Vol. 79, 2016, https://bit.ly/2HledX3

[8] Peter Dauvergne and Jennifer Clapp, Researching Global Environmental Politics in the 21st Century, Global Environmental Politics 16:1, February 2016, p.4

[9] GSP+ Conventions, http://trade.ec.europa.eu/doclib/docs/2013/december/tradoc_152024.pdf

[10] Mathieu Rousselin, The Power of Legitimation: The Role of Expert

Networks in Global Environmental Governance, Journal of Environmental Policy & Planning 2015, p.12

[11] Kenneth W. Abbott, Jessica F. Green, and Robert O.Keohane, Organizational Ecology and Institutional

Change in Global Governance

[12] Tobias Boehmelt, Gabriele Spilker, The interaction of international institutions from a social

network perspective, p.71

[13] Simon R. Bush*, Peter Oosterveer, Megan Bailey, Arthur P.J. Mol, Sustainability governance of chains and networks: a review and future outlook, Journal of Cleaner Production, 2014, p. 1-12

[14] Jessica F. Green, Transnational delegation in global environmental governance: When do non-state actors govern?, Regulation & Governance (2017), doi:10.1111/rego.12141, p. 2

[15] Joerg Balsiger, Miriam Prys; Regional agreements in international environmental Politics, Int Environ Agreements (2016) 16:239–260, see p.249

[16] European Union Law in a Global Context: Text, Cases and Materials, p. 228

[17] An initial indication of the how the supranational authority of the European Commission is involved in this process is the fact that a number of DGs – TRADE, ENVI, GROW, AGRI, etc. and EEAS are involved in the policy programming of countering externalities related to coupling. After providing a comprehensive account of the institutions, the PhD research will attempt to explain the dynamics through Liu et al.’s prism (graphically represented on p.1).

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