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The CPTPP: a Benefit of Brexit

Jackson House — Wed, 04 Sep 2024 20:34:15 +0000

Britain is now a party to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which includes many of the world’s richest and most dynamic economies. This would have been impossible without Brexit, and it is a very different kind of agreement to being a member state of the EU. This article explains why.

Last week Peru became the sixth country to ratify the UK’s accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a trade agreement between 12 countries mostly surrounding the Pacific Ocean or the South China Sea, except for the UK. The agreement will come into effect on the 15th of December this year with the members who have ratified the agreement. So far that is Peru, Japan, Singapore, Chile, New Zealand and Vietnam. Hopefully, the other members (Australia, Brunei, Canada, Malaysia and Mexico) will finish their ratification process shortly.

The CPTPP includes some of the world’s most affluent and rapidly growing countries, with a total GDP of US$15.4 trillion in 2023.

No doubt the usual suspects will be complaining that the UK has given up its access to the EU for the CPTPP but that isn’t true. EU membership is very different from becoming a party to the CPTPP agreement. And the UK has retained its tariff-free and quota-free trade with the EU.

The CPTPP is focused on promoting market-driven economies and the elimination of tariffs and other trade barriers for manufactured goods, agricultural commodities, and services. It also establishes rules for investment and protection for investors, intellectual property, and communications, as well as transparency in government procurement. The CPTPP requires its parties to establish a committee to identify ways to assist SMEs in taking advantage of the commercial opportunities in the CPTPP and help them grow their exports. The CPTPP trade agreement has a chapter on the Environment, and it sensibly concentrates on achievable goals: protecting the oceans from ship pollution, overfishing, and illegal fishing; protection of wild flora and fauna, endangered species and their habitats; control of toxic chemicals, discharge of pollutants and environmental contaminants and protecting the ozone layer. These protections must be in each party’s legislation and be enforced by the members’ governments.

What the CPTPP is not is a group of countries moving towards a federal union. Unlike the EU, there is no CPTPP Commission, Parliament, Court, Flag or National Anthem and the UK doesn’t have to pay to be a member. The UK can determine its own VAT rates (and keep any money raised) and we are not forced to apply tariffs to goods imported from non-CPTPP countries – as we were when members of the EU. The CPTPP doesn’t even have one President, let alone five (like the EU). And most importantly the CPTPP does not require its members to adopt its regulations nor do UK courts have to defer to CPTPP laws above our own laws. And despite the social media rumours, the CPTPP won’t force the UK to give up its animal welfare regulations. (For the record, Chile does not allow cattle to be treated with hormone implants and it produces enough beef to fill the UK’s very small CPTPP beef quota.)

Quotas and tariff reductions
The usual suspects have also complained that the UK already has trade agreements with many countries in the CPTPP so there is no need to join. However, if these trade agreements were rolled over from the EU, then they will have had small quotas on many products that the UK needs to import but were in competition with other EU producers. When the UK left the EU we were generally given about 14% of the EU’s quotas with the CPTPP countries, this left us with small uneconomic tariff-free import allowances. And most of the EU’s trade agreements skipped over services – even though they are one of the UK’s largest export sectors.

The CPTPP goods liberalisation is generally better for UK consumers although the UK’s farmers have continued to get protection from CPTPP producers, even though they have no protection against EU producers. Inexplicably the UK has also limited rice and banana imports from other CPTPP parties.

But most UK import tariffs will be eliminated in full on CPTPP imports in December, at least from countries that have ratified the treaty. Although UK import tariffs on food that can be produced in the UK will be reduced more slowly. For example, imported beans will have their tariffs eliminated over 5 years, some types of apples will take 10 years, while dairy product tariffs will generally be lowered over 5 years although butter will take 11 years.

However, a lot of the UK’s protection from agricultural competition is unnecessary. The largest food exporters in the CPTPP are either in the southern hemisphere and so produce food in the opposite season to the UK or they are in the tropics and produce foods that cannot be grown in the UK climate. While the CPTPP’s two largest food exporters, Australia and New Zealand, have been limited to the quotas they received in their bilateral trade agreements with the UK so will not be eligible to use the CPTPP quotas.

This will be the UK’s first trade agreement with Malaysia, and it will allow the UK to import refined palm oil tariff-free directly from Malaysia rather than via EU refiners in the Netherlands, which import crude palm oil from Malaysia, refine it and then sell it to us (still!). While Malaysia will lower its 80% tariffs on imports of UK Whisky over 16 years (If you think this is unfair, please see the UK’s tariff reduction for Australia Beef or New Zealand Lamb).

Accumulation
Joining the CPTPP is particularly good news for UK manufacturers and exporters. The CPTPP’s process of accumulation allows imported materials, parts or semi-finished goods from other CPTPP countries to be counted as originating material if the finished product is exported to another CPTPP member.

Despite the delicious food and drink produced in CPTPP countries, they mostly export machinery and parts, electronics, oil and gas, minerals, chemicals, clothing and footwear. These products will probably become part of UK supply chains to benefit from the CPTPP’s process of accumulation. For example, if a UK fashion company uses wool or cotton produced in Australia, or cloth made in Malaysia, or manufactures their goods in a Vietnamese factory, these inputs count towards originating material under CPTPP rules so the finished products can be sold in other CPTPP countries at the CPTPP preferential tariff rate.

Similarly, if UK car manufacturers use Australian bauxite to make aluminium or car parts made in Malaysia, Japan or Mexico, then this will count as local content if the final vehicles are sold within the CPTPP. This is likely, as Brunei, Australia, Chile, Peru and New Zealand have no local vehicle producers and are dependent on imported cars, trucks, and mining vehicles.

Conclusion
It was very encouraging to see the new Trade Minister, The Rt Hon Douglas Alexander, announce the accession of the UK to the CPTPP. This coincided with rumours that the Prime Minister was trying to rejoin the EU by meeting with Chancellor Scholz in Germany and President Macron in France. If this was the aim of the meetings, it is misplaced. UK trade with the EU is doing fine but is hampered by the EU’s sluggish economies – not Brexit. While allowing the UK to fully benefit from increased trade with the dynamic economies of the CPTPP, will help the UK achieve the economic growth the Prime Minister is looking for.

To read the blog as it was published on the Briefings for Britain webpage, click here.

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Does the EU’s Exit From the Energy Charter Treaty Foreshadow the Demise of ISDS?

Antonio Mejia Hernandez — Tue, 20 Aug 2024 17:53:03 +0000

I. Introduction

Worldwide support for investor-state dispute settlement (ISDS) — a legal mechanism that permits foreign investors to pursue binding, third-party arbitration against a country over actions that harm their investments — has been under attack from Western democracies since at least 1998, when opposition by the U.S., Canada, and France led to the termination of negotiations toward a Multilateral Agreement on Investment (MAI). However, for more than two decades following this step, the EU and U.S. continued to negotiate bilateral investment treaties (BITs) and free trade agreements (FTAs) with ISDS provisions, including the 2015 Trans-Pacific Partnership (TPP) between the U.S. and 11 other nations and the 2016 Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada.

More recently, indications that new ISDS agreements may be coming to an end have proliferated, at least with the EU and U.S., as discussed in this report. But the most recent and, perhaps, clearest sign of ISDS losing its appeal for the largest capital exporting jurisdictions is the EU’s unanimous decision in April 2024, effective in May 2024, to withdraw from the 1994 50-plus member European Union Energy Charter Treaty (ECT). The fact that the ECT had been renegotiated in 2022 because of concerns about its inconsistency with government responses to climate change were apparently not decisive. For the EU, the ECT is essentially abandoned. The future of ISDS, even with substantial reforms, such as those being discussed by the seemingly endless United Nations Conference on Trade and Development’s (UNCTAD) Working Group III, remains uncertain, although many developing countries, such as Mexico, still see it as a valuable stimulus for foreign investment despite reservations.

The U.S. had concluded multiple FTAs and a few BITs as late as 2007. More recent agreements were the TPP and the United States-Mexico-Canada Agreement (USMCA). The U.S., under former President Obama, was among the principal supporters of the TPP in 2015 — an agreement that incorporated then-traditional ISDS provisions. However, the U.S. withdrew under the Trump administration in January 2017, and the TPP became the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The 2018 USMCA saw a radical reduction in the scope of investor protection, with ISDS eliminated between the U.S. and Canada entirely and circumscribed between the U.S. and Mexico, with the full range of enforceable protections limited to a handful of government concession agreements. Since 2018, the large majorities of the Democratic Party as well as many Republicans are opposed to new — and in some cases, existing — investor protection provisions, with the opposition led by former U.S. Trade Representative Robert Lighthizer and Democratic Sen. Elizabeth Warren of Massachusetts. While business groups continue to strongly defend ISDS provisions in U.S. FTAs, they have not prevailed over U.S. anti-ISDS policies.

That being said, the investment law bar and young lawyers who wish to join should take note: ISDS will be a feature of the international legal and investment world for decades to come. ISDS will still be of importance even if the U.S. avoids new agreements and withdraws from existing ones — the latter being difficult and, in my view, very unlikely, as discussed below — and if the EU and its members avoid new commitments. Why? Because worldwide, there are a total of about 2,222 BITs in force and 388 investment provisions in FTAs. Although a few International Centre for Settlement of Investment Disputes (ICSID) member countries, such as Bolivia, Ecuador, and Venezuela, have withdrawn from the ICSID Convention and terminated some of their BITs, the vast majority of ICSID members remain party. Several dozen new cases of BITs are still being registered each year.

To sort all this out, this report is structured as follows:

Section II summarizes the content of typical BITs and their evolution in recent years.
Section III analyzes the driving forces that led to the ICSID Convention’s establishment in 1964.
Section IV traces the proliferation of BITs and FTA investment provisions after the ICSID went into force, to the golden age of awards, effectively spawned by the 1994 North American Free Trade Agreement (NAFTA).
Section V addresses forces leading to the demise of ISDS, clearly in the U.S. and EU but not necessarily in other major capital exporting countries, such as Japan and Canada, and emphatically not with China.
Section VI offers brief conclusions.

The reader should keep two major caveats in mind. First, the U.S. and EU, while leaders in foreign direct investment (FDI), are not the only sources, and EU and U.S. dominance in the investment field likely will decrease in the future with the expanding participation of South Korea, Singapore, China, and other major economies in Asia. Second, ISDS has been the subject of thousands of articles and hundreds of books. Any attempt, such as this one, to address these issues in a single piece, will reflect some critical omissions, for which I apologize in advance.

II. Content of Typical Investment Treaties and the EU Energy Charter Treaty

NAFTA and Its Successors

In this discussion, it may be useful to set out what we are discussing when we use the term “ISDS.” For this purpose, we will begin with NAFTA’s Chapter 11, as the standard example, in large part because it has been widely copied elsewhere, not only in subsequent agreements concluded by the three NAFTA parties. In the interest of brevity, procedural provisions and scope issues will be set aside as they are available by reviewing the text and voluminous academic and other commentary.

Key protections of NAFTA’s Chapter 11 include the following:

Guarantees of national treatment.
Most-favored-nation treatment.
Minimum standard of treatment.
Ban on performance requirements.
Flexibility in the appointment of senior management.
Financial transfer rights.
Protection against direct and indirection expropriation.
Exceptions for certain industries or sectors, depending on the agreement.

For purposes of this discussion, Section B: “Settlement of Disputes between a Party and an Investor of Another Party” of NAFTA’s Chapter 11 is also relevant, because it provides detailed rules for mandatory third-party arbitration of disputes between a NAFTA investor and another NAFTA government (ISDS).

While there have been many changes over the more than 20 years between NAFTA and TPP negotiations, the most significant updates relate to environmental concerns. For example, the TPP and many other investment chapters incorporate the following language: “Non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect expropriations, except in rare circumstances.”

The Energy Charter Treaty

The original ECT as amended is more limited in scope, perhaps reflecting an early objective to encourage multilateral cooperation among many countries in the energy sector as the Cold War appeared to have disappeared. Key provisions include:

Freedom to select key personnel for positions in an investment project.
Compensation for losses related to war or other armed conflict.
Protection against direct and indirect expropriations.
Freedom to transfer funds.
Subrogation of government investment guarantors when the host country has taken action covered by an investment guarantee.

However, the ECT does not provide national treatment, most favored nation treatment, or a guarantee of fair and equitable treatment like many more traditional ISDS agreements. It also contains specific recognition of “state sovereignty and sovereign rights over energy resources” and rather weak language on “sustainable development” and avoidance of environmental degradation. After briefly addressing transparency, taxation, state enterprises, and coverage of subnational authorities, along with certain exceptions and provision for economic integration agreements — e.g., FTAs and customs unions — the treaty also incorporates a broad investor right to international arbitration. In a major departure from BITs and FTA investment chapters, which usually provide only for actions by foreign investors against host government, the treaty provides for settlement of disputes between the state parties also via third-party arbitration.

III. The International Centre for the Settlement of Investment Disputes

The ICSID Convention, according to one of its principal negotiators and advocates, the late Andreas F. Lowenfeld, Herbert and Rose Rubin Professor of International Law Emeritus at New York University, reflected a lengthy debate in the U.N. between two main entities:

Developing countries, most of which advocated “Permanent Sovereignty over Natural Resources” and rejected the application of international law to investment disputes.
Capital-exporting countries, which sought mechanisms that would provide third-party arbitration for investment disputes and accept the international requirements inter alia of prompt, adequate, and effective compensation.

Industrial states, which were the principal donors at the World Bank, were no longer providing sufficient capital for development; rather, such funding depended increasingly on private investors. The result was a mechanism for addressing investment disputes, but no agreement on the principal obligations of host states to investors. After several years of debate on the idea of a convention, the World Bank’s executive directors approved a draft of what would become the ICSID in 1962. As Aron Broches, then the World Bank’s general counsel, noted, “If the parties had agreed to use the services of the Center for arbitration as the sole means of settling their dispute, the government party should not be permitted to refer the private party to the government’s national courts, and the private party should not be permitted to seek the protection of its own government and that government would not be entitled to give such protection … Finally, … the Convention would provide that such awards would be enforceable in the territories of the countries adhering to the Convention.”

Significantly, as the italicized phrase demonstrates, the parties to ICSID are not, by becoming parties, obligated to accept third-party arbitration under the ICSID Convention. Rather, consent must be registered separately, typically under a BIT, under a dispute settlement chapter of a trade agreement — such as NAFTA’s Chapter 11 discussed above — in an investment contract, or in an agreement between an investor and ICSID party for resolving a particular dispute.

The requirements and procedures for ICSID arbitration have been widely discussed elsewhere, including but not limited to ICSID’s own website. The treaty entered into force in 1966, and as of 2024, it includes 158 contracting states.

IV. The Golden Age of ISDS

While NAFTA itself resulted in more than 60 notices of arbitration and some 30 final arbitral decisions from 1994 through June 30, 2023, the total number of known treaty-based ISDS claims as of July 31, 2022, is reported to be 1,229. NAFTA was unusual for its time in that it provided for ISDS between two developed nations, Canada and the U.S. Over the period of NAFTA’s reach — January 1994 to June 2020 — there were more claims between Canada and the U.S. than between any other two parties. In the past, as noted earlier, the general assumption had been that ISDS would typically take place between developed country investors and developing country host governments. While this has certainly been the predominant pattern worldwide, several other major international agreements with ISDS provisions were concluded after NAFTA, including the ECT, which included most European and many developing nations, and the TPP, which is also a mix of developed and developing countries.

As an academic observer during most of this period and an arbitrator in two ISDS proceedings, my sense is that the explosion of ISDS cases under NAFTA and elsewhere was driven by a variety of factors, including increasing volumes of private FDI across borders. These included, in many cases, decisions by host governments to change the conditions under which the investments were originally made unilaterally and to increase environmental protection after mining concessions had been negotiated and granted, particularly with the installation of new, more environmentally conscious governments. In my view, the creativity of many U.S. and international investment lawyers was probably a factor as well, particularly under NAFTA. It is also significant that many developing countries have been persuaded that the existence of a BIT or FTA investment chapter with a capital-exporting country can be a major factor in attracting FDI in an increasingly competitive world.

This latter conclusion is sometimes reached despite the lack of any clear data, suggesting that the treaties were a controlling factor in attracting FDI, rather than simply one aspect of creating a favorable investment climate. As an UNCTAD summary noted, “Overall, developing countries stand to benefit from engaging in IIAs in terms of increasing their attractiveness for FDI, and therefore the likelihood that they receive more FDI. … Furthermore, — and this point cannot be emphasized enough — the conclusion of IIAs needs to be embedded in broader FDI policies covering all host country determinants of foreign investment. IIAs alone cannot do the job.”

This view seems supported by anecdotal evidence. For example, there is no investment treaty between the U.S. and China, Brazil, or India, yet U.S. investors over the past several decades have flocked to all three countries, at least as long as other aspects of the host country’s investment climate were generally positive — true in some periods but not in others — and the potential for financial gains was robust. That being said, it seems self-evident that an investment protection agreement can in some instances be decisive in encouraging an investor to pursue a project in a given country, with Mexico’s experience in NAFTA being a good example, as discussed below.

As of June 2024, the total number of cases submitted to ICSID arbitration was 1,020. However, while the first case was registered in 1972, no more than four cases were registered annually until 1997. From 1997 to 1999, 9 or 10 cases were registered each year, for a total of 29 cases. ICSID usage continued to expand in the 21st century, with 12 in 2000, 14 in 2001, 18 in 2002, and 57 in 2023. Twenty-one cases were registered in the first five and a half months of 2024. The expansion probably reflected several factors, including the pressures of multinational enterprises on their lawyers, and the replacement of public foreign investment with private FDI. Still, the most important reason for the increase may have been the proliferation of BITs and investment chapters of FTAs. According to the UNCTAD Investment Policy Hub, by 2024, 2,835 BITs had been negotiated, and 2,222 were in force, while another 462 investment provisions in trade agreements have been agreed upon, of which 388 are in force.

V. Summary of Forces Behind the Demise of ISDS

EU members’ opposition to the ECT and other investment protection agreements with ISDS chapters seems to have been fueled significantly by a broadening populist trend that favors “sovereignty.” In this respect, a major critique of ISDS is that it authorizes private arbitrators rather than democratically chosen national or EU judges to make binding decisions. A widespread belief exists that ISDS is unfair because of the following:

Is nontransparent.
Is overly expensive leading to the exclusion of all but the largest enterprises.
Allows investors to ignore or downplay environmental concerns.
Does not offer workers and environmentalists a similar opportunity to seek arbitration against host governments.

However, in my opinion, a series of highly publicized arbitrations between developed European countries along with several decisions of the Court of Justice of the European Union (CJEU) seeking to prevent intra-EU arbitration are also responsible. While the European Commission (Commission) abandoned traditional ISDS in the CETA negotiations in 2015 in favor of its investment court mechanism, as discussed below, and has continued to advocate for a multilateral investment court, no EU member or other country has endorsed the project, as far as I am aware.

Opposition to ISDS is shared by the CJEU because the justices appear to view it as a usurpation of CJEU authority, although currently their case law applies only to intra-EU member arbitrations. As one international law firm explained in 2023,

“The European Union’s (‘EU’) policy against arbitration of intra-EU investor-State disputes remains largely cabined to its borders. Arbitral tribunals continue to reject objections to their jurisdiction on the basis of the CJEU’s Achmea, Komstroy and PL Holdings judgments, the sole exception being the Green Power decision, in which the tribunal was seated within the EU. The EU’s attempt to renegotiate the Energy Charter Treaty by, among other things, carving out intra-EU arbitration did not succeed, and the EU is now advocating for a coordinated withdrawal instead. And while EU Member States courts have set aside intra-EU awards issued by tribunals seated in their jurisdictions, U.S. courts have allowed requests for enforcement of intra-EU awards to proceed, showing that investors can still obtain relief outside the EU.”

This policy seems to have expanded despite the fact that some arbitral tribunals have refused to recognize the applicability of Achmea and related cases, although such rejection may not be absolute. For example, in Green Power v. Spain, the arbitral tribunal decided it had no jurisdiction over the claimant’s claims and dismissed the case, essentially on grounds that an arbitral tribunal operating under the ECT cannot override EU law, as reflected in the CJEU decisions, because EU law is lex superior.

To the best of my knowledge, no similar ISDS tribunal has taken this approach. However, in June 2024, the Commission and EU members formally declared that the ECT “cannot and never could serve as a legal basis for intra-EU arbitration proceedings,” further limiting the scope of ISDS as it affects EU member states. As no EU members remain party to the ECT and increasingly respect the CJEU rulings, there will be fewer opportunities for intra-EU arbitrations, although arbitrations under existing BITs with non-European countries remain available.

Significantly, under the Treaty of Lisbon enacted in 2009, EU member states were no longer authorized to negotiate their own BITs, FTAs, or many other international agreements. As a result, not only was intra-EU arbitration precluded by Achmea, but the change led the Commission to promote and seek to implement a new approach to ISDS, consisting of a permanent investment court and appellate mechanism. The investment court mechanism was initially included in the CETA and the FTA with Vietnam. However, a decade after entering into force provisionally, this CETA remains under provisional application, with the application of the investment provisions excluded. Ten of the 27 EU members have refused to approve it in part because it includes the EU’s novel investment court and appellate mechanism for resolving investor-state disputes, believed by many to be a challenge to national sovereignty like a traditional ISDS.

EU FTAs with Vietnam and Singapore that originally were to include ISDS mechanisms were restructured to isolate the ISDS provisions, which remain in limbo with Vietnam’s agreement, or shelved indefinitely for later negotiations with Singapore’s. While the Commission does not seem to have abandoned its investment court mechanism, no significant progress toward bringing the mechanism into force appears to have been made beyond agreeing with Canada on rules that would govern the investment tribunal, mediation, and binding interpretations, along with a code of conduct for the judges.

As far as the ECT is concerned, as of January 2024, Denmark, France, Italy, the Netherlands, Poland, Slovenia, and Spain had or were in the process of withdrawing from the ECT, with the Commission endorsing the withdrawals of all EU members. Regarding actual disputes, the ECT secretariat reported that as of May 2023, 158 known cases had been instituted under the treaty. Of these, as of June 2022, Russia, the Ukraine, or Moldova were respondents in only eight cases; more significantly, among the largest EU members, Spain was the respondent in 51 cases, Italy in 13, Poland in 5, and Germany in 4, while France and the U.K. were the respondent in no cases.

The ECT is one of a relatively few ISDS agreements, along with NAFTA, where one developed country’s investors can bring a claim against another developed country. Before NAFTA and the ECT, such claims were rare at best, mostly under BITs and FTAs, where despite reciprocal provisions, the principal purpose was to protect capital exporting country investors from arbitrary actions in developing countries with weak legal systems.

U.S.

Similar anti-ISDS views are prevalent in the U.S. Notably, U.S. Trade Representative Katherine Tai recently commented: “President Biden does not believe corporations should receive special tribunals in trade agreements that are not available to other organizations, and he opposes the ability of private corporations to attack labor, health, and environmental policies through ISDS. I share these views, and the United States is not currently pursuing any trade or investment agreements that would establish ISDS.”

Although such opposition did not represent a significant majority position in the U.S. Congress and with U.S. presidents until relatively recently, its origins go back at least as far as the negotiation of NAFTA in 1991–92. In a more recent statement at the time of the USMCA negotiations, such organizations as Public Citizen attacked the ISDS provisions of NAFTA as a “stunning corporate power grab: NAFTA grants rights to thousands of multinational corporations to bypass domestic courts and directly ‘sue’ the U.S., Canadian and Mexican governments before a panel of three corporate lawyers.” Sen. Warren has opposed ISDS in trade agreements at least since the TPP negotiations in 2015, while Lighthizer’s public opposition is somewhat more recent — albeit for different reasons — with the USMCA negotiations. As he observed in 2017, “The bottom line is business says ‘We want to make decisions and have markets decide. But! We would like to have political risk insurance paid for by the United States’ government.’ And to me that’s absurd. You either are in the market, or you’re not in the market. They’ll come in and say ‘Ambassador, the market’s dictating we go to Mexico to invest in certain things.’ And my reaction is, ‘Then go to Mexico and invest. That’s what the market’s for.’” What is most significant is that — for sharply differing reasons as noted in the introduction — the U.S. left and right has strongly opposed ISDS in both current and future trade agreements; many also are eschewing all significant trade agreements entirely, as has been the Biden administration policy.

However, strong opposition to the elimination of ISDS in existing and future agreements is widespread among business groups. As a letter from the Business Roundtable, National Association of Manufacturers, and the U.S. Chamber of Commerce at the time of the USMCA asserted: “ISDS does not infringe U.S. sovereignty. Rather, it upholds the same fundamental due process and private property guarantees protected by our Constitution, and it obligates other countries to uphold these precepts as well. ISDS 2 cannot overturn U.S. laws or regulations: All arbiters can do is award compensation when a government expropriates property or otherwise tramples on the rule of law.”

Such opposition has not been limited to business groups. A commentary published by the independent, nonpartisan Center for Strategic and International Studies (CSIS) has also advanced strong reservations, suggesting that administration and congressional opposition to ISDS is based on “shaky and short-sighted premises”; it argues that “the legal certainty and stability provided by ISDS mechanisms will prove critical in facilitating cross-border investment,” particularly with privately financed wind, solar, hydro, and nuclear power projects.

Still, under the circumstances, and despite the potential adverse impact on green power projects worldwide, in my view, it will be very surprising if the U.S. under either a Harris or a Trump administration negotiates any new ISDS provisions or other trade agreements in the foreseeable future.

Mexico

Although Mexico remains very much a developing country with a commitment to ISDS — weakened considerably in the case of the ISDS under the USMCA — Mexico merits discussion of its historical relationship to ISDS in NAFTA, the USMCA. and other agreements. Prior to the NAFTA negotiations, Mexico had long been legally and constitutionally committed to the Calvo Clause, which stipulates that disputes with foreign investors must be resolved by national courts and tribunals. It also bars recourse by foreign investors to the diplomatic protection of their home countries.

In the course of the 1991–92 NAFTA negotiations, Mexico’s adherence to the Calvo Clause was largely abandoned, with Mexico accepting ISDS in NAFTA’s Chapter 11, even though it did not become party to the ICSID Convention until 2018. This sea change in Mexico’s investment policies occurred apparently because officials were convinced that Mexico would not benefit fully from NAFTA’s duty-free, quota-free access to the U.S. and Canadian markets unless foreign investors had greater confidence in Mexico’s investment climate and the rule of law. Chapter 11 addressed, inter alia, the weakness of Mexico’s domestic foreign investment legislation, the mandatory requirements for majority Mexican ownership, and the uncertainty the existing system offered to foreign investors. Foreign investors won other major incentives in NAFTA, including commitments to national treatment of foreign investors and improved protection for intellectual property, which Mexico fulfilled.

Mexico has concluded 36 BITs, all post-NAFTA, as of 2021, including 15 with the U.K., Switzerland, and other European countries. In addition to Canada and the U.S., Mexico has trade agreements with nearly 50 countries, most of which include investment protection provisions. Two of the most important are trade agreements with the EU concluded in 2000 and Japan in 2004. The agreement with Japan incorporates an investment protection and ISDS chapter. The EU-Mexico Economic Partnership Agreement does not include this chapter, presumably because, as noted above, many of the then-existing EU members had separate BITs with Mexico.

Mexico is currently in FTA negotiations both with the EU and the U.K. A public draft of the EU-Mexico Global Agreement from 2018 indicates that the FTA, which was approved by the EU Council in September of 2020, incorporates the usual protections for foreign investors, but no ISDS. A separate statement on the agreement from the EU indicates that the Commission intends to include the investment court system in in its agreements with Mexico. However, efforts by the EU to amend the agreement in 2022 were apparently opposed by Mexico, which among other things wanted modernized investment protection to be included sooner rather than later, suggesting continued support for ISDS. Presumably, any ISDS provisions will be in a separate agreement when and if the trade agreement is concluded to avoid the delays experienced among EU member states in ratifying CETA.

The U.K. and Mexico signed a “continuity agreement” in 2021 which essentially replicates the 2000 agreement with the EU; negotiations of a broader FTA with or without ISDS provisions were initiated in July 2022 but apparently have not progressed.

Despite these last activities, for Mexico the most important consideration for foreign investors is not the availability of ISDS, but the fact that the López Obrador government has been highly critical and dismissive of foreign investment, even though the continuing viability of Mexico’s economy depends on it. President-elect Claudia Sheinbaum may be able to moderate the anti-capitalist rhetoric but could be unwilling or unable to change significantly Mexico’s dismal investment climate. She is promoting a new doctrine known as “Shared Prosperity Plan,” and no one knows what impact, if any, it would have on investors and their capital. Add to this the possibility of another Trump presidency, with its strong opposition not only to ISDS but to U.S. investment outside the U.S., and one wonders whether even significant actions by Sheinbaum to improve the investment would have the desired effect, at least for U.S. and other enterprises seeking to sell their products in the U.S.

Canada

Canada’s approach is more difficult to fathom. Canada has not concluded a new BIT since 2018, a few weeks after the USMCA was signed. In the USMCA negotiations, it agreed to eliminate ISDS between Canada and the U.S. entirely, although ISDS with Mexico is available under the revised CPTPP, as both countries are parties. Canada concluded a BIT with China in 2012 with modified ISDS provisions. The country concluded CETA with the EU in 2017, with the EU’s still pending arbitration court/appellate mechanism, and published a model BIT in 2021 with contemporary ISDS provisions.

There appear to be no trade or investment agreements concluded by Canada since December 2018. Still, as the 2021 model BIT indicates, Canada has not necessarily rejected ISDS for the future.

Elsewhere

China is the country with the most BITs concluded, as recently as 2023, as noted earlier; 146 are reportedly in existence, although some are not in force. It is not known how many are currently under negotiation. Japan, another major capital exporting nation, has negotiated only 38 BITs, the most recent in 2023; thus, it is too soon to predict whether Japan’s policy is under review. South Korea also appears active regarding BITs, with its most recent agreement concluded in 2023, the 105th it has negotiated. Singapore, another developed economy, remains a leader in concluding investment agreements with ISDS, including its 53 BITs and 42 FTAs, most recently concluded in 2023.

In the U.K., opposition exists to the ECT, as in the EU. However, views on ISDS seem unclear; in any event they have not been clearly articulated by the new Labour government. The U.K. accepted traditional ISDS in the negotiations with the CPTPP and in the continuation agreement with Canada. As one analysis concludes, “The UK’s position on the inclusion of ISDS seems ambivalent.”

VI. Conclusions

As noted earlier, several countries have withdrawn from the ICSID. Others such as South Africa, Brazil, and India have eschewed agreements with traditional ISDS provisions. But even if the EU continues to insist on their unique investment court and appellate mechanism approach to ISDS, many countries, including Canada, China, Hong Kong, Japan, Singapore, and South Korea, have not followed suit. If the capital exporting countries that are part of the EU and the U.S. oppose ISDS agreements in the future, and the Commission has no more success with its investment court mechanism than it has in the past, this could have a significant impact in the body of investment treaty law in the coming decade.

The impact on several thousand existing and new BITs and FTA investment provisions would be minimal, at least in the short and medium term, since renegotiation or termination of most such agreements is problematic. It is also possible that future U.S. policies may seek to broaden restrictions on outbound investments to China, Hong Kong, and Macao beyond current law for national security or other reasons.

EU or U.S. investors’ decisions to reduce their activities in countries where they enjoy no ISDS protection, whether for green energy or other long-term projects, would be more significant in their impacts. Given the fact that there are currently thousands of U.S. and EU private sector investments in China, Brazil, and India — where ISDS protections do not exist for the U.S. and in most cases for the EU — one hesitates to make such predictions. However, as long as the EU countries and U.S. investors account for a disproportionate share of FDI, the U.S. and EU countries, including former member the U.K., represented five of the top 10 foreign investors, with the others being Hong Kong, China, Japan, and Canada. Per World Bank data from 2012–22, the six accounted for 70% of the total — the anti-ISDS policy changes could ultimately have a significant impact.

A promise by developed countries to provide $100 billion annually to developing countries for climate action has not materialized. Thus, ironically, broad opposition to ISDS from environmental groups concerned with “sovereignty” or other related issues could backfire by discouraging new green investment, particularly in countries where the rule of law is uncertain, as in Mexico as well as much of Latin America and Africa.

To read the report as it was published on the Rice University’s Baker Institute for Public Policy webpage, click here

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Imposing Tariffs on Chinese Electric Vehicles Will Make the EU’s Transition Slower and More Expensive

Thomas Nielsen — Thu, 13 Jun 2024 13:42:15 +0000

On 12 June, following an anti-subsidy investigation, the European Commission disclosed that it would provisionally impose import tariffs ranging from 27.4 to 48.1 per cent on electric vehicles (EVs) from China. This comes a month after the United States announced that their own tariffs on Chinese EVs would rise to an unprecedented 102.5 per cent.

The Commission’s actions on EVs may not be the last taken against clean technology from China, with trade measures having recently been considered for two more major pillars of Europe’s energy transition.

An anti-subsidy probe into Chinese solar panel manufacturers bidding for a public project in Romania was closed after the targeted companies withdrew from the process.

An investigation into Chinese wind turbine suppliers is ongoing. Both were launched under the new Foreign Subsidies Regulation.

The risks of tariffs on decarbonization technologies

The EU is anxious to protect its companies from what it sees as unfair competition. It has bitter memories of the early 2010s, when cheap Chinese panels all but destroyed the European solar industry.

The EU is right to identify clean technology as a crucial strategic industry, and to take action to mitigate the negative consequences of surging imports from China. Against a volatile geopolitical backdrop, it can be worth paying a premium for goods made at home.

But decarbonization technologies like solar panels, wind turbines and electric vehicles share a characteristic that sets them apart from other traded goods. When swapped for fossil fuel alternatives, they reduce the quantity of planet-warming gases being pumped into the atmosphere. They are needed in vast quantities, and in very short order, to give any chance of avoiding the worst impacts of climate change.

The EU has a legally binding target of net zero greenhouse gas emissions by 2050, and an intermediate target of at least a 55 per cent reduction by 2030, relative to 1990 levels. A target of 90 per cent has been proposed for 2040.

These targets are ambitious, even if they are insufficient to limit warming to 1.5°C. With 2022 marking a reduction of 32.5 per cent, accelerated and sustained action will be needed. This implies deploying mass-market clean technology products like solar panels and electric vehicles in very large numbers.

The costs of European manufacture

The EU wants these to be manufactured within its borders. In her 2023 State of the Union address, Commission President Ursula von der Leyen was unequivocal: the EU’s clean tech future should be made in Europe.

The Green Deal Industrial Plan, announced in early 2023, seeks to do this by cutting red tape, increasing access to finance, boosting skills, and promoting fair trade. The Net Zero Industry Act sets a target for the EU to manufacture at least 40 per cent of the so-called strategic net zero technologies it deploys each year, by 2030.

The Act proposes to achieve this through measures including requiring public authorities to consider non-price ‘sustainability and resilience’ criteria when procuring renewable energy. This would in theory increase the attractiveness of goods made on European soil.

However, this requirement can be disregarded if it implies ‘disproportionate’ additional costs. It is therefore doubtful it will be enough to offset the large difference in production costs between Chinese- and EU-made solar panels, for example.

Building the factories needed to hit the Act’s manufacturing targets for solar panels and batteries is estimated to require nearly $70 billion by 2030.

But unlike in the United States, where the Inflation Reduction Act offers lavish subsidies, the EU’s Green Deal Industrial Plan provides little in the way of new finance.

The Plan loosens state aid rules, enabling member states to subsidize green industry, and proposed a new EU-level fund for investing in strategic clean technology projects.

However, the return of EU-wide fiscal rules will restrict government spending, including on the transition; the European Sovereignty Fund was scaled back and ultimately became a platform to mobilize private finance.

Current levels of investment in the EU’s transition fall far short, with the annual climate investment deficit estimated at €406 billion, or 2.6 per cent of GDP – implying that climate finance will need to roughly double to meet 2030 targets.

A June 2023 report by the European Court of Auditors found ‘no information that sufficient financing will be made available to reach the 2030 targets’. Climate-focused public spending is also likely to get squeezed by an increasing focus on security and defence.

With financial resources constrained, and the timeframe tight, the unit cost of each product needed to achieve the transition becomes an extremely important variable.

And when it comes to cheap, clean technology, China is the undisputed world leader. Two decades of consistent and targeted industrial policy, combined with the benefits of a huge domestic market, mean that China today produces extremely competitively priced, high-quality, low-carbon goods.

In 2023, solar modules in China were being manufactured at a cost of $0.15 per watt, compared to $0.30 in Europe. In France in 2023, the cheapest electric vehicles were priced between €22,000 and €30,000 ($24,000 – $32,500) while in China, over 50 electric models were retailing locally for less than CNY 100,000 ($15,000). Analysis by think tank Transport & Environment found that European automakers have prioritized large, premium electric vehicles at the expense of compact, affordable models.

All else being equal, anything which stems the flow of the cheapest low carbon products will increase the cost of the transition and slow it down, increasing the risk of the EU missing its emissions reduction targets.

These are not the only risks, however. If solar panels and wind turbines become more expensive, it will ultimately feed through into higher electricity prices, increasing the cost of living for citizens and exerting a downward pull on the fragile competitiveness of European industry.

To read the full expert comment as it was published by Chatham House, click here.

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The US Steel Deal is a Test of Friendshoring—And the US is Failing

Thomas Nielsen — Mon, 08 Jan 2024 17:00:48 +0000

In mid-December 2023, US Steel announced that it agreed to be bought by Nippon Steel for approximately $14.1 billion, a 40 percent premium over its stock price at the time of the announcement. The deal would quickly catapult the Japanese company to second place in the global steel production league charts, accounting for 4.5 percent of annual global crude steel production, behind China Baowu Group’s 7 percent. Such a merger could unlock efficiency-promoting technology—including advances in green production techniques—while providing Nippon Steel with the size and resources necessary to act as a counterweight to Chinese dominance in the global steel industry. Six of the largest ten steel producers are Chinese, as are twenty-four of the forty-six companies worldwide that produce at least ten million tons of steel per year.

One might think that US policymakers would welcome this announcement. It is a “win” for policies that have protected domestic production through tariffs; Nippon Steel’s offer to US Steel reflects its desire to expand steel production capacity in the United States to serve North American markets through domestic (and therefore tariff-free) production. Those concerned about industry consolidation and antitrust issues should prefer this deal to other potential buyers, such as Cleveland-Cliffs and Nucor, which are both major domestic competitors of US Steel. In contrast, Nippon Steel has very few production capabilities in the United States.

The acquisition will preserve more than fourteen thousand US jobs, and Nippon Steel is better positioned than was US Steel to invest in advanced technologies necessary to keep production profitable and growing. The company has ambitious goals to increase its global production to one hundred million tons a year, and therefore will likely invest in plant expansions that will create new jobs for US workers. The prospect of job creation and the fact that US Steel would retain its name and Pittsburgh headquarters would usually be seen positively in an election year. The outcome might, for example, be viewed as a sign of a booming domestic steel industry with lucrative employment opportunities in the industrial Midwest, an area of the country with outsized influence over presidential election outcomes.

The transaction is also a “win” for “friendshoring” policy objectives, which were first announced by US Treasury Secretary Janet Yellen in April 2022 at the Atlantic Council. These objectives emphasize cultivating closer trade and investment connections with reliable geopolitical allies, especially for critical supply chains. There is very little risk that Nippon Steel would offshore production, as the business rationale for the acquisition rests on serving North American markets and low US production costs due to low energy prices compared to prices in Europe or Japan. Instead, the company’s expansion into the US market can help provide both the United States and other countries the ability to further diversify their steel supply needs away from China. As Biden administration officials have repeatedly admitted, the United States cannot reduce its reliance on Chinese-made critical inputs alone.

Despite all the benefits of the deal, some policymakers have voiced vociferous opposition to it, arguing that the deal is bad for union workers and also a danger to US national security. Several members of Congress have requested that the Committee on Foreign Investment in the United States (CFIUS) review and potentially block the transaction. The Biden administration has also expressed wariness, saying that the deal needs “serious scrutiny.”

A CFIUS prohibition would be a mistake. First, CFIUS is supposed to be narrowly focused on national security risks, not broad economic competitiveness or national prestige concerns. It is very hard to credibly argue that a Japanese owner of a US business would suddenly stop selling steel to US buyers, particularly since the business rationale for the acquisition is so that Nippon Steel can more competitively serve the North American market. Washington blocking such a sale to a close Group of Seven (G7) partner would indicate that CFIUS has veered from narrow national security concerns to the business of broader economic protection. This would invite retaliation against US companies abroad and undermine US messages about the importance of an open, market-oriented, and rules-based economic system.

Second, US leaders are understandably concerned about China’s willingness to use its control over critical supply chains to engage in coercive economic practices. To address these concerns, the United States needs other countries—and particularly its closest allies—to trust that it remains an open and welcoming place for their businesses. If Washington won’t allow this transaction—involving a buyer from a G7 country—then what foreign buyer would it see as a permissible owner? A block would communicate that the steel industry is completely closed off to foreign investors. Allied and partner countries and their companies would understandably lose confidence that the US market will remain open to them. A lack of trust has the potential to frustrate efforts to invest resources in restructuring these critical supply chains at global volume to effectively insulate the United States and its friends from coercive Chinese trade practices.

Finally, there is one concern regarding foreign acquisitions in critical industries that is worth considering. Because Nippon Steel is listed on the Tokyo Stock Exchange, this deal would likely cause US Steel to delist from the New York Stock Exchange, which would limit the power of the US Securities and Exchange Commission (SEC) to regulate the company. Many Japanese-listed companies that have acquired US businesses voluntarily provide annual financial disclosures to the SEC, as should Nippon Steel.

More importantly, because Nippon Steel is listed in Japan, it is subject to Japanese corporate governance rules rather than US ones. The US government may worry about the national security implications if the company acquires US Steel and then is subsequently acquired by a more problematic third party, such as a Chinese entity. If Japan had weak corporate governance practices, this would be a more relevant concern. However, Japanese corporate structures are notorious for guarding against hostile takeovers, making this scenario exceedingly unlikely. Still, other countries don’t always have as strong protections; rather than blocking transactions with close allies, the United States should be engaging in greater outreach to allies and partners with weaker corporate governance structures to encourage reforms that alleviate these kinds of worries.

Sarah Bauerle Danzman is a 2023-2024 scholar-in-residence at the Atlantic Council’s GeoEconomics Center’s Economic Statecraft Initiative and an associate professor of international studies at Indiana University, Bloomington.

To read the full blog post, click here.

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European Union Grain Imports From Ukraine: The Right Decision and a Cynical Rebellion

Rafael Centeno — Wed, 20 Sep 2023 18:43:06 +0000

The European Commission was right to let restrictive measures on Ukrainian grain lapse, but the decision has had negative side-effects.

On 15 September, the European Commission allowed a temporary ban on Ukrainian grain imports (maize, wheat, rapeseed and sunflower seed) to expire. The ban had been introduced on 2 May 2023 under pressure from five EU countries bordering Ukraine (Bulgaria, Hungary, Poland, Romania and Slovakia), which feared their own producers would be harmed. Initially set for one month until 5 June, the ban was subsequently extended.

It is unclear what impact the end of the ban will have as Hungary, Poland and Slovakia have also introduced unilateral bans. Nevertheless, ending the EU-level import restrictions (which applied only in the five countries) was the right decision for several reasons.

First, Ukraine, which has been fighting Russian aggression for more than a year and a half, deserves exceptional support from the EU, also in the economic and trade spheres. Grain is one of Ukraine’s most critical exports. Russia has largely blocked the maritime export route since it withdrew, on 17 July 2023, from the United Nations sponsored Black Sea Grain Initiative (BSGI). Thus, facilitating exports to the EU, and via the EU to third countries, provides a respite for Ukrainian agriculture producers and the country’s balance of payments.

Second, the temporary ban introduced in May was problematic from the point of view of the integrity of the European single market and the EU’s common trade policy. In the long run, it was ineffective because grain imports from Ukraine could enter the ‘bordering’ countries via other member states within the EU customs union and common market.

Third, it was good that the Commission did not give in to the aggressive pressure from some EU countries, which demanded an extension of the ban until the end of 2023. The Commission’s decisions should be determined by the EU Treaties and EU strategic interests in the long run, rather than attempts to please various lobbies in individual countries and to meet their short-term political needs.

Fourth, advocates of the extension used disputable economic arguments. In particular, there is little evidence in the available statistics for the supposed massive influx of Ukrainian grain to the EU. Volumes of the two main grain import items (wheat and maize) were declining from their peaks in Q4 2022 and Q1 2023 already before the introduction of the temporary ban.

In the 12 months from August 2022 to July 2023, total EU imports from Ukraine amounted to the equivalent of 4.6% of EU average wheat production and 22.2% of average maize production in 2018-2022. However, EU maize production in this period decreased by more than 20 million tonnes compared to 2021 because of a bad harvest. The imports from Ukraine only compensated partly for this gap. Meanwhile, the EU increased its grain exports to African countries, so global grain export flows were just rerouted.

Fifth, the Commission’s decision is good for stabilising global food markets and keeping global food prices affordable, especially in the context of the expiry of the BSGI. This is a critical issue for food security in developing economies, particularly in Africa and the Middle East.

However, the Commission’s decision also has drawbacks.

As a condition for not extending the EU import ban, Ukraine was forced by the Commission to introduce export control measures “…to prevent any market distortions in the neighbouring Member States”. What is meant by “any market distortions” remains unclear and may be a subject of arbitrary interpretation. Incidentally, distortions can be caused by internal policies and institutional solutions in EU countries, rather than imports from Ukraine.

The Commission’s press release suggests export licensing as an instrument of export control in Ukraine. This is not a good policy tool, especially in Ukraine’s imperfect institutional environment where it may encourage corruption.

Most likely, this was an attempt by the Commission to reach a compromise with the five bordering EU countries. Unfortunately, this attempt failed. The continuing unilateral import bans in Hungary, Poland and Slovakia also extend the restricted food product list. Ongoing election campaigns in Poland and Slovakia do not help in making rational policy decisions.

The unilateral bans are grave policy mistakes. First, they are an open infringement of the EU Treaties, according to which trade policy is the exclusive competence of the EU governing bodies. Second, they undermine the EU policies on Ukraine. Third, they partly undermine the impressive records of the three rebelling countries (and their societies) in supporting Ukraine. They bring into question their solidarity with the struggling nation and their sincerity in endorsing Ukraine’s EU membership aspiration.

Ukraine has filed lawsuits against the three countries at the World Trade Organisation, and is considering introducing retaliatory import bans. In response, Hungary, Poland and Slovakia have withdrawn from the Coordination Platform, which monitors Ukrainian grain exports. Poland’s prime minister Mateusz Morawiecki threatens to introduce additional trade sanctions against Ukraine. Such a scenario can only please the Kremlin.

Dr. Marek Dabrowski is a Non-Resident Scholar at Bruegel, co-founder and Fellow at CASE – Centre for Social and Economic Research in Warsaw and Visiting Professor at the Central European University in Vienna.

To read the full first glance, click here.

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The EU Should Use Its Trade Power Strategically

Courtney Brown — Tue, 04 Jan 2022 17:18:19 +0000

The European Union’s internal debate has involved a lot of navel-gazing lately. Feeling squeezed between the United States and China, yet not fully equipped to take a leading role in the neighborhood, European leaders are pondering the challenge of becoming more autonomous and more geopolitical.

While thinking about how to become a stronger foreign policy player, Europe should use the leverage that it already has—trade.

No country has more trade agreements than the European Union (50 in force or provisionally applied). As a superpower in trade with the only real internal market in the world, the European Union possesses an attractive negotiating asset. A free trade agreement (FTA) with the European Union gives its trading partners access to a unified market with one set of rules for 27 countries and 450 million consumers. Trade agreements facilitate trade and investment, which leads to jobs and growth.

But such agreements also create conditions for deeper cooperation and alliances while allowing Europe to project its values and standards, strengthening what has been called the Brussels effect. For example, EU trade agreements include a chapter upholding international conventions on environment, labor rights, and human rights.

That said, the European Union does not fully utilize its vast network of trade agreements. Europe seeks reform of the World Trade Organization (WTO) with like-minded countries within the so-called Ottawa group, but there is room to do more to create stable alliances to shape global trading rules. Europe should develop and deepen existing agreements and sign and ratify those ready to be completed with Mexico and Chile, both of which have close cultural and historical ties with Europe. Chile also supplies lithium and cobalt, which would help the European Union diversify the source of materials needed in electric cars, reducing dependence on China. Negotiations with Australia and New Zealand have lost momentum during the COVID-19 crisis and should be sped up.

Half-done agreements with Indonesia and Malaysia should also be finalized, and the European Union must conclude an investment agreement with Taiwan announced back in 2015. Impact assessments and preparations have already been completed, so not moving ahead would only show weakness.

The European Union should also seek to enter the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and convince the United States to do the same. The European Union already has agreements with most members of the CPTPP, but an FTA would signal the European Union’s readiness to strengthen global trading rules with its partners.

MORE CLOUT NEEDED IN FOREIGN POLICY

At her first press conference, Ursula von der Leyen, president of the European Commission, said she wanted to lead a “geopolitical commission.” Her comments underscored the European Union’s debate over how to confront increased global tensions and its own foreign policy limits. The new German government also states that the European Union needs a common foreign minister and that decisions in this area should be taken by qualified majority. At present, decisions are taken by consensus among 27 member states, which makes it hard to reach strong joint positions on strategic matters, sanctions, and human right violations. This handicap also makes it difficult to agree on a common strategy toward China. But decisions on trade are taken by qualified majority of EU members, and the negotiations are led by the Commission, giving it a strong voice in that area.

When former US president Donald Trump declared that trade wars were good and easy to win, for example, Europe’s disagreement was clear. In the face of his contention trade agreements that could only be win-lose arrangements, the European Union concluded trade negotiations with Canada, Japan, Singapore, Vietnam, Mexico, and the four countries of the South American customs union Mercosur (Argentina, Brazil, Paraguay, and Uruguay). A handful of smaller regional agreements were also signed between Europe and countries in Africa and Central America. Ambitious free trade agreements were also forged with eastern neighbors Ukraine, Georgia, and Moldova, promoting European values and standards while countering Russian influence near its borders.

EUROPE MUST OVERCOME SEVERAL TRADE ROADBLOCKS

One would think—with the United States and China still at odds over trade, even under President Joseph R. Biden Jr., and with the WTO remaining in crisis—that the European Union would use its influence to lead. But no. Protectionism is also growing in Europe. The agreements with Mexico and Chile are ready to ratify but are blocked by individual member countries. The Mercosur agreement will have to be slightly amended in the section regarding forestry and environment protections, as several countries distrust the policies of the Brazilian president.

Another roadblock has arisen over the Comprehensive Agreement on Investment (CAI) signed between China and the European Union last January after seven years of negotiations. The agreement focuses on aligning rules and regulations, and China does commit to increased disciplines on state-owned companies and transparency. But before it could take effect, the CAI was suspended by the European Parliament after China imposed sanctions on several European citizens, including members of Parliament and independent researchers. China’s action was provoked by US, EU, Canadian, and UK sanctions on four Chinese individuals involved in atrocities against the Uyghur minority in the Xinjiang Region. The CAI is not likely to be back on the agenda soon. The European Union and China must still work together on climate issues and reform of the WTO, while making common cause with the United States on human and labor right issues, including forced labor in that province.

A free trade agreement between the United States and the European Union is not realistic for the time being, despite the billions in goods and services that flow across the Atlantic every minute. But incremental progress is possible, in areas such as standards, artificial intelligence, and semiconductors, as outlined in the new Trade and Technology Council, which held its first meeting in 2021.

PROTECTIONISM MAKES EUROPE POORER AND LONELIER

In a troubling trade development, however, the European Union has lately sought to “strengthen its autonomy” with the use of trade defense instruments, such as retaliatory tariffs, and the establishment of a trade enforcement officer.

Just before Christmas, the European Commission proposed an anti-coercion instrument that would provide a tool for retaliation against countries such as China and Russia over their crackdowns on dissent. This proposal could potentially serve as a powerful instrument to deter such behavior as China’s economic punishment of companies or countries that have spoken out against human rights violations. Adopting this proposal would increase the autonomy and strength of the European Union. On the other hand, the proposed tool should embody criteria that are transparent and non-discriminatory. A separate proposal for an export ban on products made in an environmentally unsustainable way could easily become an excuse for discriminating against trading partners.

The Europeans need to employ trade defense instruments while still promoting open trade, as trade is essential to the recovery after the COVID-19 crisis. Autonomy can easily backfire, decreasing Europe’s goal of shared prosperity.

The European Union is right to think about strengthening its foreign policy influence by changing the decision-making process towards more majority decisions. The West faces urgent challenges, including Russia’s threatened invasion of Ukraine. All the more reason why Europe should focus on the impact it has—trade. Not using that strength is making Europe less autonomous and geopolitically weaker.

Cecilia Malmström was a former member of the European Commission and the European Parliament, and joined the Peterson Institute for International Economics as nonresident senior fellow in June 2021.

To read the full commentary from the Peterson Institute for International Economics, please click here.

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Cod Quotas Shake The Svalbard Treaty

Jake O'Keeffe — Tue, 07 Dec 2021 16:50:43 +0000

Brexit and the allocation of cod quotas re-opened old wounds. Now, Norwegian authorities risk conflict with other states about the extent of the Svalbard Treaty, professors argue.

Vessels with flags of all shapes and colors sail in Svalbard waters chasing cod. For a long time, this went on with hardly any friction at all. However, when Great Britain left the EU, the fight over fishing rights around Svalbard resurfaced.

Norwegian authorities argue that the Svalbard Treaty only applies in the 12 Nautic miles from land zone, and that further out, the Law of the Sea applies, granting Norway sovereign rights.

In 1975, coastal states were granted the right to a 200 miles exclusive economic zone. When Norway requested support from its allies to create such a zone around Svalbard, it faced resistance.

In 1977, Norway chose to establish a fisheries protection zone around Svalbard with quotas granted to countries that had historically fished in these waters. This was to avoid conflict with other states about the interpretation of the Svalbard Treaty applied to the ocean areas.

“This has worked for a long time, however, today we risk conflict. Brexit ripped open old wounds”, says Professor Geir Ulfstein at the Institute of Public Law at the University of Oslo.

May cause trouble on land

Following Brexit, the EU and Great Britain divided the historic EU quota amongst themselves. Following on from this, the EU made it clear that it is of the opinion that the Svalbard Treaty applies in the 200 miles’ zone off the coast of Svalbard.

The understanding that the treaty partners may set their own quotas for fisheries if Norway does not provide equal treatment in the fisheries protection zone opens up a risky play about Svalbard, argue Geir Ulfstein, Tore Henriksen and Alf Håkon Hoel in an article published on Rett24.no.

“Then the implication will be that every time other states disagree with quotas, they can set their own quotas. And if all countries are to set their own quotas, that would be a recipe for chaos, over-fishing and depletion of the fish stock”, Geir Ulfstein says to High North News.

Can the cod issue with the EU have consequences for the Svalbard Treaty too?

“It may have consequences for the treaty itself. In this conflict, it is all about fish qoutas, however, if the EU and other countries argue that Norway alone cannot set the quotas, that can be considered a threat against sovereignty over the archipelago too. A signal that one does not accept Norwegian regulations, that one does not agree with Norwegian regulations, one can do as one pleases. That would be a worst-case scenario. It is currently only about fisheries in the 200 miles’ zone around Svalbard”, Ulfstein responds.

If Norway has dreaded conflict regarding the ocean around Svalbard, why then did the authorities chose to disregard the cod quota about which the EU and Great Britain agreed?

“That is probably a question of whether or not Norway had a choice, as the EU and Great Britain were operating on their own. So far, the conflict only applies to the EU as nothing has come from Great Britain yet. The Norwegian line is based on historic fisheries and still applies to the countries that remain”, Ulfstein explains.

All about respect

State Secretary Eivind Vad Petersson at the Norwegian Ministry of Foreign Affairs says the cod conflicts is about respecting Norwegian sovereign rights and Norway’s right to regulate in Norwegian areas.

“The Svalbard Treaty does not regulate fisheries in the fish protection zone around Svalbard. When the EU has granted itself quotas in the fish protection zone all of its own, that is a violation of Norway’s sovereign rights according to the UN Law of the Seas”, he says.

After the cod conflict, the EU has also criticized Norway and Russia for grating more cod quotas in their joint areas in the Barents Sea than what is sustainable, despite the Norwegian-Russian governance being based on scientific advice from the International Council on Marine Research.

The State Secretary says the cod stock in the Barents Sea is one of the world’s best governed fish stocks in the world.

“The EU approach undermines responsible resource management. It serves no one in the longer term, nor the EU”, Petersson says.

Crowbar

Nils Kristian Sørheim Nilsen is Director of the North Norway European Office in Brussels.

He says there is much that goes to indicate that the EU wants to test jurisdiction around the Svalbard Treaty. At the same time, this is quite likely a political game from the EU’s side. Great Britain takes its quota with it when leaving the EU, and the EU has a too large fishing fleet and too small quotas for starters.

“The EU uses this as a crowbar to test legal rights and clarify who holds the right to set quotas”, Sørheim Nilsen says.

What can the EU do to stress this issue?

“It has threatened sanctions against Norway. Limiting market access to fish may be one way [of doing it]”, he says.

Sørheim Nilsen compares the cod quota issue with the snow crab conflict that made it all the way to the Norwegian Supreme Court. As does Andreas Østhagen of the Fridtjof Nansen Institute.

He argues that the cod quota issue, like the snow crab issues, helps clarify Norway’s position on these ocean areas.

“The snow crab case has made the Norwegian bureaucracy even more aware of what the Norwegian interest in this area is. I have spoken to many who say this is a core are of interest for Norway. We do not negotiate about fish management and ocean rights”, he says.

More resources

In many ways, this conflict is bigger than just cod. There are more resources in the ocean and on the seabed around Svalbard. On the shelf outside Svalbard, an area that the EU as well as other countries do not recognize as Norwegian, there may in addition to crabs be oil and gas.

“At the end of the day, Norway regulates fisheries in the protection zone”

State Secretary Eivind Vad Petersson (Labor) of the Norwegian Ministry of Foreign Affairs

In a 2019 ruling, the Norwegian Supreme Court ruled that Norway is within its full right when refusing to grant the EU snow crab quotas inside the protection zone which Norway argues to be Norwegian territory.

According to an article by Journalist Professor Rune Ottosen of Forsvarets forum [Defense forum], the Latvian company that lost the supreme court case has taken matters further and it carries the potential of ending up before the International Court of Justice in the Hague.

Shipowners taking the state to court

While the snow crab is a new resource related to the seabed, cod fishing has a long history in the Svalbard zone.

16 shipowners from the EU and Great Britain have now sued the Norwegian state as represented by the Ministry of Trade, Industry and Fisheries in the cod quota case. They argue that the Norwegian state was wrong in reducing fish quotas following Brexit and again refer to Norway’s acting in violation of the Svalbard Treaty which, they argue, also applies to the 200 miles zone.

Oslo District Court says a new planning meeting has been scheduled for 6 January and main negotiations will take place in the period 7 to 11 March 2022.

Ulfstein, Tore Henriksen and Alf Håkon Hoel write in their Rett 24 article that the disagreement about quota rights for other states in the fish protection zone as well as the relationship to the Svalbard Treaty are more suited for treatment on inter-state level.

States are obliged to solve their disputes through peaceful conflict resolution mechanisms. It may happen through both political as well as legal means. Initially, negotiations are often the first go-to method. If that does not lead anywhere, the dispute may – at the final instance – be brought before an international court of law ruling with a legally binding decision.

Hoping for solution through dialogue

The Norwegian Ministry of Foreign Affairs refers to the Ministry of Trade, Industry and Fisheries when it comes to questions about how Norwegian authorities will manage the issue onwards.

State Secretary Vidar Ulriksen says there was a quite peculiar situation in the fall of 2020, when the EU and Great Britain were negotiating their future relationship and would not prioritize other issues. Both the EU and Great Britain were nevertheless informed about how we planning to proceed with setting the 2021 quotas for the fish protection zone around Svalbard.

How will you follow up this conflict?

There has been a lot of contact between Norway and the EU throughout the year regarding this issue, however, and the end of the day, Norway regulates fisheries in the protection zone Ulriksen responds.

Norwegian authorities hope the dispute can be solved through dialogue.

“However, if anyone would want to bring it before a court of law, we have no fears” Ulriksen says.

Quotas filled up

In September, Norwegian daily Aftenposten wrote that Norway stated that the country would send in the Coast Guard to arrest fishing vessels fishing more than the quota set by Norway.

When High North News contacted the Ministry of Trade, Industry and Fisheries on Thursday 2 December, the EU had caught 98 percent of its 2021 quota in Norway’s economic zone, including the Svalbard zone. Vessels from Great Britain had caught 99 percent of their quota.

Ulriksen says the fisheries have been stopped for vessels from both the EU and from Great Britain. The Coast Guard routinely monitors what goes on at sea, as it does now, which is quite regular. The Ministry assumes that the authorities in charge do not want to encourage illegal actions.

Did the EU announce sanctions and restrictions to market access for Norway due to the conflict related to cod quotas in the Svalbard zone?

“No, we have not been informed about any such thing”, Ulriksen says.

Wold it be relevant for Norway to increase EU quotas next year?

“The regulation of the cod fisheries in the protected zone is not set yet”, the State Secretary responds.

Line Nagell Ylvisåker is a freelance journalist and author, living in Svalbard. Line has a bachelor’s degree in journalism from the Oslo Met and a master’s degree in journalism from the University of Oslo.

To read the full commentary by High North News, please click here.

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Resolving the Transatlantic Partnership in Time

Jude Althagafi — Tue, 28 Sep 2021 13:51:36 +0000

And that in turn depends on their ability to deal with the weight of the past, to navigate the fog of the present and to tackle the challenges of the future. Before it proves too late.

The Weight of the Past

Time often turns back on itself. When Joe Biden met European Commission President Ursula von der Leyen and European Council President Charles Michel for the first time as president in Brussels on June 15, the two sides knew they had to turn the page—on four tumultuous years of Donald Trump, but also on four years of Transatlantic Trade and Investment Partnership (TTIP) negotiations, which had stirred a hornet’s nest of European public discontent at the mistaken idea that this free-trade agreement would allow Washington to determine EU regulatory protections.

So they turned, almost unknowingly, to earlier models of collaboration, and particularly the one embodied in the Transatlantic Economic Council (TEC), created when Chancellor Angela Merkel came to Washington at the beginning of the German presidency of the EU in 2007. Critically, in agreeing to launch the new TTC, the Biden administration signed on to an idea the EU proposed in December 2020 as it welcomed the change in U.S. leadership.

As the wheel turns and Merkel is about to depart the stage, this reversion could be good idea, as the TTC ensures that five ministers (Secretary of State Antony Blinken, Secretary of Commerce Gina Raimondo, US Trade Representative Katherine Tai, and European Commission Executive Vice Presidents Valdis Dombrovskis and Margrethe Vestager) personally oversee collaboration in ten working groups, covering such priority issues as climate change, national security and trade, the digital economy, and global trade rules.

That said, the ministers hopefully will avoid the TEC’s fate and refuse to become enmeshed in petty disputes, such as the 2008 chlorinated chicken debacle that helped sink TTIP.

But, as much as they might wish, they cannot avoid the need to address the two disputes now roiling the transatlantic economic relationship: the Trump administration’s misguided decision to use national security as a pretext to place punitive tariffs on steel and aluminum imports, and the European Court of Justice’s misguided decision to throw out the EU-U.S. Privacy Shield arrangement. Neither issue is on the Trade and Technology Council agenda, yet failure to resolve them poisons work on others.

The Fog of the Present

The irony is that these issues and others are resolvable if the two sides can recapture the vision of the “barrier-free transatlantic marketplace” they once wanted to create to make U.S. and EU firms and workers more globally competitive. This vision stems from an understanding (now seemingly lost) that their economic relationship is based on investment, not trade. Indeed, the $4.5 trillion companies from the two sides have invested in in one another drives the $1 trillion in goods and services traded across the Atlantic each year, half of which is within the same firm.

Understanding this symbiotic relationship could help lead to a decision to reframe Trump’s “national security” tariffs on steel and aluminum into a “safeguard action” that phases out after five years (so in March 2023). It could also help resolve the long-standing Boeing-Airbus dispute for, while the two sides in June suspended the punitive tariffs they had levied on $11.5 billion in bilateral trade after the World Trade Organization ruled they had both illegally subsidized their large aircraft manufacturers, they did not resolve the underlying problems: European jealousy that Boeing benefits from huge U.S. defense and space programs, and U.S. concern that Airbus has not repaid its risk-free launch aids. This, even as both companies loudly advertise how deeply engaged they are in the other economy, and shudder at the even larger supports China gives its fledgling aircraft manufacturer.

A vision of an integrated transatlantic economy would allow the EU and the United States to grant each other full access to their defense procurement markets, while Airbus repays its loans over a generous period. And, knowing the transatlantic economy depends on transfers of personal data, the European Commission could adopt a risk-based approach to enforcing the European Court of Justice decision, pending an inevitable further ruling in which the court clarifies it did not really intend to prohibit all such transfers absent a change in U.S. national security law or to force those transfers to take place under a derogation (which would effectively vitiate the EU’s vaunted approach to data protection).

The Challenges of the Future

A vision of the integrated transatlantic economy the EU and the United States want to build is also essential as the Trade and Technology Council considers next steps, both between them and in their relationship with the rest of the world.

Bilaterally, the lesson of TTIP should not be to abandon ambition but to separate trade and regulatory issues. A Transatlantic Zero Agreement—the idea that arguably started the TTIP debate many years ago—still has merit, but findings of regulatory equivalence can only be done by the responsible regulators working with oversight from the European Parliament and the U.S. Congress, as has been the case in the EU-U.S. agreements on aviation safety, organic products, and pharmaceutical manufacturing. It was precisely this sort of cooperation that helped the U.S. Food and Drug Administration and the European Medicines Agency to quickly approve novel vaccines in response to the coronavirus pandemic.

Externally, the TTC should take a page from the TEC and rebuild strategy into the transatlantic relationship with an off-the-record principals-only discussion of how the EU and United States should address the China challenge.

Five of the TTC’s ten working groups point to the national security and trade nexus with China, most particularly those on export controls, investment screening, and supply-chain security (semi-conductors). This suggests an ambition to build serious cooperation in this sensitive nexus. The vision of how this would work could be quite simple—if either side sees the risk of a certain technology getting into the wrong hands in a way that would have national-security implications, it would tell the other, and both would act to prevent this through controlling the export of those technologies, or preventing their acquisition.

If that is a simple vision, the execution is anything but—not least because the EU has no competence over national security.

For collaboration to work here, the two sides will need to change their traditional approaches to one another. The United States must realize that it cannot just work with a few member states on this; it must also accept that the EU itself plays an essential role, because otherwise the technology can easily leak out through any member of the Single Market. It also needs to accept that it will need to share classified information with the EU and its member states. The first step in the TTC working groups should be to dust off, update, and use the information-sharing agreement concluded in 2007 to permit this.

On the EU side, the European Commission needs to accept that the member states must be actively engaged in the conversations. This would be in its interest as over time this will help expand its role in developing the EU’s autonomous list of controlled technologies. And the member states need to accept that not all of them can be at the table—they will need the rotating presidency troika and the Council secretariat to represent them.

If the EU and the United States can get beyond some of these bureaucratic hurdles, they can then get down to the real issues of understanding the national-security threats they face, identifying the key dual-use technologies and the specific countries and firms of national security concern.

Resolving in Time

Despite the tragedy of Afghanistan, the fracas over the French submarine contract with Australia, and the like, the EU and the United States are partners. They are deeply invested in one another and in the democratic values they share. They can build a robust transatlantic economy and globally competitive firms in a worker-centric economy.

But for all this to happen, the Biden administration and its European counterparts need to know this and to build a shared strategic vision that matches it. The first meeting of the Trade and Technology Council will be a success if it restarts this process. With global changes coming quickly, the two sides do not have much time.

Peter Chase joined GMF’s Brussels office in September 2010 as a non-resident fellow and became a resident senior fellow in May 2016. His work focuses on the transatlantic economy with particular attention to trade and investment, digital and energy policies, and the EU’s economic relations with third countries.

To read the full commentary from The German Marshall Fund, please click here.

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Speaking Different Languages

Jude Althagafi — Tue, 07 Sep 2021 12:58:03 +0000

Last week, Politico featured an interesting article about EU trade negotiations by Barbara Moens, titled, “Europe’s Glory Days of Trade Deals Are Over.” The piece began on a gloomy note:

That [negotiating trade deals] seems a distant memory now for the world’s biggest trade bloc. Concerns about human rights in China and fears about deforestation in Latin America mean that the EU’s free trade agenda is running out of steam.

Doing trade deals is no longer just about keeping German carmakers and French farmers happy — which was often challenge enough. EU trade officials must now also please young climate marchers, union leaders and human rights activists — and that’s before they even start to haggle over tariffs and quotas with the negotiators across the table. The growing litany of public objections to trade means that the European Parliament and EU capitals are increasingly unwilling to sign off on deals that the Commission has struck.

What intrigues me most about this is that you could take out “EU” and insert “United States,” and it would still make perfect sense. Clearly, there has been a sea change in thinking about trade, perhaps not by the majority of people (U.S. polls continue to show strong support for trade), but certainly among the people that make the most noise.

This debate over trade is not new—the older folks reading this will remember Seattle in 1999—but the argument has evolved. In the early days, the focus was on what the activists were against—most trade agreements, which were deemed to be tools of big corporations that exploit the workers. Now it has turned a useful corner, and the trade skeptics, while still seeing a corporate conspiracy, are talking about what they are for rather than what they are against. This is a hopeful sign because it permits a more constructive conversation, although we have yet to have it.

The fact that these concerns are international is also not new. It was obvious during negotiations on the Transatlantic Trade and Investment Partnership (TTIP) that the agreement was in more trouble in Europe than in the United States, as activists convinced European consumers that the deal would be a giant regulatory downgrade that would imperil their health and safety. (This concern is also not new. One of my favorite headlines from the 1980s appeared in a Canadian paper attacking the proposed U.S.-Canada free trade agreement: “Free Trade Called Threat to Day Care.” It’s on the wall in my office.)

Sadly, these ideas have not gotten better with age. They were wrong then, and they are wrong now. Overall, trade creates benefits. It leads to more jobs and more growth. As every economist will tell you, however, trade agreements, while net positives, produce both winners and losers, and as politicians will tell you, the losers make the most noise. Historically, the answer was to design programs like trade adjustment assistance that compensated the losers. For a variety of reasons, those programs have not been as successful as we would like, and the debate has turned from compensation to prevention—let’s not have trade agreements that don’t do what we want.

The list of things we want has also grown longer, to include worker rights in other countries, avoidance of forced labor and other human rights concerns, climate change mitigation, opportunities for women, and more. These are all worthy objectives, consistent with administration goals and values the United States has long advocated. (The Scholl Chair has recently completed analysis on three of these issues—the role of women in trade, climate and trade, and forced labor in Xinjiang.)

Where I get off the boat is with the insistence that these are more important than other trade priorities, and we should oppose agreements that do not contain them. In that regard, I am admittedly old fashioned. Trade agreements should be about trade. Their goal is to promote the exchange of goods and services to the benefit of all parties in the agreement. There are millions of Americans who have a stake in the global economy (whether they know it or not) because they grow things, make things, or provide services that are exported. Improving market access will enhance their prosperity and grow our economy.

The trade activists seem to have forgotten this, and the administration seems to be forgetting it as well. They will be reminded of it if they ever launch a trade negotiation, because I can guarantee the other party will bring it up because it has its eyes more clearly on the prize. That does not mean we should give up on these other important goals. They are fair game in negotiations, but we should be realistic about how much we can obtain and not forgo agreements that provide important market access because they don’t give us everything we want on other issues.

There is a disconnect here. Trade negotiations are incremental—get what you can and come back later and try again for more. Environmental, labor, and human rights activists are pursuing a moral agenda. They want the whole loaf because it is right and just and are willing to sacrifice the agreement if they don’t get what they want. The two groups speak different languages. Here at the Scholl Chair, we’re dedicated to bridging that divide. I hope the administration will attempt to do the same.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

To read the full commentary from the Center for Strategic and International Studies, please click here.

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How much investment do we need to reach net zero?

Jude Althagafi — Wed, 25 Aug 2021 13:23:37 +0000

To become climate neutral by mid-century, the European Union and other major economies must substantially reduce their greenhouse gas (GHG) emissions during this decade. The EU aims to reduce its emissions by 55 percent by 2030 compared to 1990 levels with a wide range of policies recently proposed in the ‘Fit for 55’ package. Meanwhile, the United States (US) aims to reduce its emissions by 50-52 percent by 2030 compared to 2005 levels, and China wants its CO2 emissions to peak before 2030. To achieve this, serious investments will be needed.

Below, we review the multiple estimates of the investment required to reach climate goals and discuss the macroeconomic relevance of investment on top of what will already be spent to replace existing infrastructure.

Global energy investment trends

Global energy investments currently stand at around $2 trillion per year or 2.5 percent of global GDP, according to the International Energy Agency (IEA). In an illustrative pathway they recently developed, this will have to rise to $5 trillion or 4.5 percent of GDP by 2030 and stay there until at least 2050 to reach net zero CO₂ emissions by 2050 (Figure 1). Much of this will be spent on electricity generation and infrastructure to electrify new economic sectors and to make the electricity system more suitable for much higher volumes and variability of renewable energy.

Other net zero pathways point to similar orders of magnitude (Figure 2). The International Renewable Energy Agency (IRENA) frontloads the necessary investments to the current decade, resulting in investments of $5.7 trillion per year until 2030, though less thereafter. Bloomberg New Energy Finance (BNEF) estimates average investment requirements to be between $3.1 trillion and $5.8 trillion per year until 2050.

In the EU, the European Commission estimates that reaching the 2030 climate target will require additional annual investments of €360 billion on average, starting now. This will raise relevant investments from an average of €683 billion per year in the last decade to around €1,040 billion per year. Roughly a third of the additional investment is in transport, by far the largest component because of large vehicle replacement needs. Apart from transport, the emphasis seems to lie more on doubling investment in residential heating, but smaller components like power grids and plants still have to increase by a factor of two (Figure 3).

According to all these estimates, reaching climate neutrality by mid-century will require additional investments in energy and transport systems amounting to roughly 2 percentage points of GDP than current levels.

The size and scope of the required investments means that their macroeconomic implications will be significant. We will analyse these implications in a series of forthcoming publications, based on a new Bruegel research project into the macroeconomics of decarbonisation.

Klaas works at Bruegel as a Research Assistant. He holds a Master in Economics from the KU Leuven and in European Economic Studies from the College of Europe. Additionally, he spent one semester at Uppsala University.

Simone Tagliapietra is a Senior fellow at Bruegel. He is also Adjunct professor of Energy, Climate and Environmental Policy at the Università Cattolica del Sacro Cuore and at The Johns Hopkins University – School of Advanced International Studies (SAIS) Europe.

Guntram Wolff is the Director of Bruegel. Over his career, he has contributed to research on European political economy and governance, fiscal, monetary and financial policy, climate change and geoeconomics. Under his leadership, Bruegel has been regularly ranked among the top global think tanks and has grown in influence and impact with a team of now almost 40 recognized scholars and around 65 total staff. Bruegel is also recognized for its outstanding transparency.

To read the full commentary from the Brugel Newsletter, please click here.

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