EU Trade Policy as Protection for Exporters: The Agreements with Mexico and Chile

Andreas Dür [email protected] School of Politics and International Relations University College Dublin

Abstract:

Recently, the EU concluded trade agreements with emerging markets in different regions of the world. What explains the EU’s pursuit of these agreements? I present an argument that suggests that exporters in the EU mobilise in response to discrimination abroad and push the EU to conclude trade agreements to protect their foreign market access. In two detailed case studies, I show that this protection-for-exporters argument offers a plausible account for the EU’s agreements with Mexico and Chile.

Word Count: 8,500

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Introduction

Since the mid-1990s, the EU has engaged in a series of trade negotiations with emerging economies in different regions in the world, a process that led to the conclusion of trade agreements with most Mediterranean countries, Chile, Mexico and South Africa. What explains the EU’s willingness to embark on these negotiations? Most likely, there is no single answer to this question, with the combination of causal factors needed for an explanation varying across different subsets of cases. My objective in this article is to establish an explanation for one of these subsets that stresses the lobbying activity of domestic economic interests. In particular, I argue that the defence of exporter interests was the EU’s most important motivation for the conclusion of trade agreements with Mexico (2000) and Chile (2002). The theoretical argument that I present suggests that under certain circumstances, EU exporters mobilise in response to discrimination abroad and push the EU to conclude trade agreements to protect their foreign market access. This “protection-for-exporters” argument (for this term, see Dür, 2007) builds on a substantial literature on the external political effects of regional trade agreements. Authors such as Richard Baldwin (2006) and Kenneth Oye (1992) have argued that countries excluded from a preferential trade agreement among foreign countries may feel compelled to react. The protection-forexporters argument presented in this article makes explicit the domestic logic that drives excluded countries to react by showing that exporters have a greater incentive to lobby against losses than in favour of opportunities. I then apply this reasoning to the case of the EU’s reaction to preferential trade agreements that have sprung up over the last few years and that threaten EU exporters’ access to the markets of emerging economies.

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So far, exporter lobbying has largely been neglected in explanations of the EU’s pursuit of preferential trade agreements, with studies stressing the importance of foreign policy objectives instead (Sapir, 1998). By applying the protection-for-exporters argument to the EU, I thus provide a counter-weight to the existing literature on EU trade policy-making. The article also contributes an in-depth study of the negotiating processes leading up to the EU-Chile and EU-Mexico agreements, which hitherto have received only scant attention in the scholarly literature. 2

The EU and Protection for Exporters

The protection-for-exporters argument starts with the assumption of office-seeking public actors who have to compete with opposition candidates (parties) to secure re-election. These actors know that organised societal actors that are not satisfied with past trade policy choices can jeopardise their electoral prospects by influencing public opinion and inducing voters to punish the incumbent politicians or parties. In this situation, public actors will try to achieve two goals. First, they make an effort to satisfy the demands voiced by societal actors. Second, in doing so, they are eager not to impose concentrated costs on any other societal group. This combined strategy helps them to avoid creating resistance to their trade policies, which potentially could strengthen opposition candidates. Evidently, this is a stark simplification of actual political processes, as political institutions and the preferences of decision-makers are likely to influence policy outcomes, as well. Even the addition of more complexity to make the argument more realistic, however, does not fundamentally change the prediction that domestic economic interests have at least some impact on trade policy formulation in democratic countries (Milner, 2002).

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One particular characteristic of trade policy is that it has strong distributional effects for two types of economic interests: exporters and import-competing interests. The former benefit from open foreign markets, as this should boost their exports, while the latter have a preference for high domestic trade barriers to keep foreign imports out of the own market. Most other interests, such as consumers and broad factors of production, may win or loose from trade policy changes, but these gains or losses are small for each individual actor, making collective action problems prohibitive (Olson, 1965). Exporters may push the government to make concessions with respect to domestic trade barriers in order to gain better access to foreign markets. Often, however, they fail to become politically active. One reason for this is that it is difficult for them to be fully attentive to opportunities in foreign markets, as scanning all potential foreign markets would be a costly undertaking. Even if they are aware of an opportunity, moreover, exporter lobbying is made difficult by the fact that foreign trade barriers are not under the direct control of the domestic government. Exporters thus can achieve the objective of more open foreign markets only by way of trade negotiations. Negotiations, in turn, create uncertainty: will the foreign government accept a reduction of trade barriers for the products of interest? And will the economic situation at the time when the agreement enters into force still favour the own exports? Finally, will the benefits of lower trade barriers really accrue to the own exports or rather to the exports from another producer? This uncertainty reduces the expected benefits from engaging in political activity, leading to a situation in which for exporters the costs of political mobilisation may outweigh the expected benefits of doing so. I thus expect exporter lobbying to be less extensive

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(although not completely absent) than would be expected from the opportunities provided by better foreign market access. Exporters’ incentives only change if they face a threat to their foreign market access. A threat that affects many exporters in a country is most likely to emanate from the establishment of a preferential trade agreement among foreign countries, which eliminates trade barriers among a subset of countries, but maintains barriers for imports from third countries. As a result, a preferential agreement has the potential to hurt exporters in third countries by way of trade diversion (Viner, 1950), a process that substitutes imports from third countries with production from within the borders of the agreement. The higher the trade barriers of a country that participates in a preferential agreement, the larger the potential for trade diversion. For two reasons, exporters are more likely to mobilise in response to a threat resulting from a preferential trade agreement than in pursuit of an opportunity. For one, exporters should be easily informed about a threat to their foreign market access. They already have a presence in the foreign market and only have to respond to warning signals, rather than to scan foreign markets pro-actively. What is more, in the reactive situation exporters know who will be affected by the losses of foreign market access: those who already supply a share of the foreign market. In this situation, an exporters’ political activity can focus on the reestablishment of the prior competitive conditions, without fearing that her efforts could benefit competitors. In short, whenever facing losses of market access as a result of the establishment of a preferential trading arrangement among foreign countries, exporters in third countries should increase their political activity. In support of this reasoning a survey concluded that “Britain’s top

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companies [...] admit they are not as good at spotting market opportunities [...] as they are at responding to threats” (as summarised in the Financial Times, 5 January 1995: 14). I. M. Destler (2005, p. 5) also backs the argument when stating: “It is the embattled losers in trade who go into politics to seek trade protection” rather than “[f]irms with expanding markets and ample profits.” Based on the assumptions set out above, governments should react to a mobilisation of exporters with an initiative aimed at the protection of exporter interests, most likely to be achieved by way of a reduction of the discrimination stemming from the preferential trading arrangement. At the same time, to maximise the chances of reelection, they should try to limit the costs imposed by such an initiative upon importcompeting interests. Even a mobilisation of exporters, therefore, will not lead to a complete reversal of the policies pursued by a government; the continued existence of import-competing groups will influence government policies as well. Applying this reasoning to the case of EU trade policy, the expectation is that the EU should pursue preferential trade agreements with emerging economies mainly in reaction to foreign initiatives that threaten to harm European exporters’ interests. Indeed, the European Commission itself states that it used free trade agreements “to attenuate the potential threat of others establishing privileged relations with countries which are economically important to us” (European Commission, 1995, p. 6). In the absence of a threat, by contrast, import-competing interests dominate over exporting ones, blocking trade policy-making in the EU. In some cases, it may be that neither exporting nor import-competing interests are mobilised, as the latter are little concerned about an increase in imports from a specific third country, and the former see no threat to their

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access to the foreign market. In such a scenario, decision-makers are free to pursue trade policies that are in line with their preferences; it is in this situation that geopolitical interests should have the largest influence. I examine the plausibility of the protection-for-exporters argument in a detailed analysis of the EU’s trade agreements with Mexico and Chile. I show that the timing of the start of the negotiations, variation in member state positions, declarations made by decision-makers, demands raised in the negotiations, and contents of the agreements all support the argument. The finding is that exporter lobbying in response to foreign discriminatory trade policies provides the most convincing explanation for the EU’s pursuit of these two trade agreements. The case studies thus serve as plausibility probes; they demonstrate that the protection-for-exporters argument can be usefully applied to some instances in which the EU pursued preferential trade agreements. The case selection, however, is not designed to allow for generalisations; further research is needed to exactly delineate the subset of agreements to which the present argument can be usefully applied. 3

The Agreement with Mexico

The defensive component was clearly important in the case of the EU-Mexican free trade agreement (Economist, 29 January 2000; Zabuldovsky and Gómez Lora, 2005, p. 6). A first indication for this is the timing of the agreement. When in 1988, two years after the country’s entry into the General Agreement on Tariffs and Trade (GATT), the Mexican President Carlos Salinas approached the European Community suggesting a trade agreement between the two sides, the Europeans were little responsive (Feinberg, 2003, p. 1024). By contrast, only one year after the United States (US), Canada, and Mexico

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Table 1: Imports in Mexico from the EU (selected countries and overall) (in million US$, and growth rates in percentages in parentheses) 1994 1995 1996 1997 1998 1999 2000 Germany 3100.9 2687.1 3173.7 3902.3 4543.4 5032.1 5728.4 (-13.3) (18.1) (23) (16.4) (10.8) (13.8) France 1526.9 979.2 1019.1 1184.4 1429.9 1393.7 1466.6 (-35.9) (4.1) (16) (20.9) (-2.5) (5.2) Spain 1338.3 694.1 629.5 977.7 1257 1321.8 1430 (-48.1) (-9.3) (55.3) (28.6) (5.2) (8.2) EUR 15 9007.7 6732.5 7740.9 9908.2 11699.4 12742.4 14745 (-25.7) (15) (28.1) (18) (8.9) (15.7) Source: European Union, 2002, Annex 4. announced the start of negotiations that eventually led to the establishment of the North American Free Trade Agreement (NAFTA) in 1994, the European Community concluded a Framework Agreement with Mexico in 1991. The agreement, however, merely reaffirmed Mexico’s most-favoured nation status. A more far-reaching agreement became essential once NAFTA entered into force, causing concerns among European exporters about the potentially harmful effects of this agreement for their interests. 3.1

Did NAFTA Threaten European Exporters’ Access to Mexico?

The creation of NAFTA was perceived to be a key cause of the decline in the EU-15’s share of Mexican imports from 11.4 percent in 1994 to 8.5 percent in 2000 (calculated from data in Inter-American Development Bank, 2004, p. 69).1 In 1993 and 1995, moreover, EU exports to Mexico declined in absolute terms; in the case of 1995 the drop was by as much as 25.7 percent (see Table 1). These losses were particularly severe for Spain, the third largest EU exporter to that country in 1994, which lost 48.1 percent of its exports in one year. Only by 2000 did Spain manage to regain these export losses. France was hit very badly, as well, while Germany did relatively well. 1

Some scholars, however, are sceptical about the role of NAFTA in causing this decline. See Aussilloux and Pajot, 2002.

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NAFTA’s discriminatory effect was reinforced by the Mexican decision to increase its tariffs against non-NAFTA countries in 1995 and 1999, augmenting the tariff advantage for US and Canadian companies in the Mexican market. These tariff increases were possible because the tariffs that Mexico had committed itself to in the WTO were far higher than the applied tariffs. The 1995 increase mainly concerned imports of footwear and textiles, raising tariffs on these goods to between 25 and 35 percent. The 1999 revision of the tariff schedule increased the tariffs on all consumer goods by 10 percent and those on intermediary products by 3 percent. As countries with which Mexico had a preferential trade agreement were exempted from this step, their preference margins, and therefore the potential for discrimination, increased. The two steps made sure that the un-weighted Mexican average tariff rose from 12.4 percent in 1994 to 16.1 percent in 1999 (Preuße, 2000, p. 28). With US products already entering at a very low tariff, EU exporters’ disadvantage was substantial.2 For the EU economy as a whole, the discrimination created by NAFTA in the Mexican market was of little importance, as EU exports to Mexico accounted for only 0.14 percent of total EU exports. Only for iron and steel (0.35 percent) and automotive products (0.25 percent) did Mexico offer a market of slightly greater consequence (Busse, Huth, and Koopmann, 2000, p. 10). Nevertheless, for two reasons it is plausible to argue that the discrimination should have become politically relevant. On the one hand, in a political economy perspective, even losses that in the aggregate appear small can have major consequences if they are concentrated on a few players, giving them an incentive to engage in political activity. On the other hand, the numbers underestimate the political 2

Strict rules of origin, moreover, created incentives for producers in the Mexican market to source their intermediary goods from NAFTA partners, rather than the EU. This further added to discrimination against EU exporters.

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relevance of the discrimination because NAFTA also hurt European producers with subsidiaries in Mexico. The intermediary products that these companies imported form Europe faced a tariff, while US competitors could import intermediary products from the US tariff free. In the automobile sector, for example, European exports of engines, transmissions, bearings, and other intermediary goods to Mexico faced a tariff of up to 18 percent in 2000. Obviously, this put European producers in the Mexican market at a substantial disadvantage.3 In addition to exporters from Europe, therefore, also European multinationals with subsidiaries in Mexico had an incentive to lobby the EU for an agreement with Mexico that would undo the discrimination. 3.2

EU Exporter Concerns about NAFTA

As expected by the protection-for-exporters argument, in this situation European exporters voiced concerns about losses of market access in Mexico. The Financial Times (6 August 1996: 5), for example, noted “growing complaints in Brussels that European exporters have been put at a disadvantage by the North American Free Trade Agreement.” Initially, mainly European companies with investments in Mexico expressed fears about a loss of competitiveness. In 1995, the European Commission Delegation to Mexico conducted a survey among European companies with direct investments in Mexico and found that many of them were anxious about the effects of NAFTA (Sanahuja, 2000, p. 47). European subsidiaries in the automobile, chemical, pharmaceutical, telecommunications, and textile and footwear sectors were particularly worried about their continued competitiveness.

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This issue became particularly important from 2001 onwards, when Article 303 of NAFTA entered into force. This article made sure that Mexico could no longer allow the duty-free importation of inputs needed by subsidiaries from non-NAFTA countries.

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Increasingly also exporters in Europe became politically active, pushing governments to protect their interests in the face of discrimination. In Germany, the three main peak business associations, namely the Federation of German Industries (BDI), the German Chamber of Industry and Commerce (DIHT), and the Federation of German Wholesale and Foreign Trade (BGA), all stressed the competitive disadvantages they faced in the Mexican market vis-à-vis American competitors (Frankfurter Allgemeine Zeitung, 6 September 1999, p. 21; 26 October 1999, p. 26; and 8 November 1999, p. 18). They demanded the conclusion of a free trade agreement between the EU and Mexico both to protect European exporters’ access to that market and to resolve the problems that German subsidiaries in Mexico faced with respect to inputs. Mexico’s decision to increase its tariffs in 1999, according to them, made a free trade agreement between the EU and Mexico even more urgent (Frankfurter Allgemeine Zeitung, 8 November 1999, p. 18). One year later the President of the DIHT even declared “the reestablishment of equality of opportunities with companies form the US” in the Mexican market to be “the primary interest of the German economy” (Berliner Zeitung, 25 March 2000). Spanish exporters of leather products, shoes, and textiles – goods which after 1995 faced a tariff of 35 percent – were also concerned about the effect of NAFTA. Many Spanish companies also had made investments in the Mexican market, which in the face of discrimination appeared less viable. The President of the Spanish Council of Chambers of Commerce, therefore, vigorously defended the need for a free trade agreement with Mexico. Such an agreement, he declared, would be a “unique opportunity” to make sure that European exports to that country would face the same competitive conditions as exports from the NAFTA countries (Efe News Services, 24 May 1999).

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Exporters thus clearly mobilised in response to the threat created by NAFTA. The contents of their declarations and the timing of the lobbying efforts indicates that the political activity of these exporters was driven by loss avoidance rather than the pursuit of opportunities. Even though only a relatively small number of economic actors was affected by discrimination in the Mexican market, their lobbying effort could shift the balance of interests in the EU, as import-competitors’ opposition to a free trade agreement was negligible. With Mexico having a substantial trade deficit with the EU (even with respect to agricultural goods), only producers of shoes and textiles voiced some concern (Il Sole 24 Ore, 24 November 1999, p. 11). The balance of domestic interests in the EU thus clearly favoured an agreement with Mexico once exporters became mobilised in the aftermath of the creation of NAFTA. 3.3

Protection for EU Exporters in Mexico

When economic interests started to voice concerns, also decision-makers in the EU became alerted to NAFTA’s impact on European exports to Mexico. Already in April 1991, the European Parliament called upon its Commission for External Economic Relations to study the effects of NAFTA on European trading interests. One and a half years later, this Commission published a study in which it argued that the EU had to defend its commercial and investment interests that may be affected by NAFTA (European Parliament, 1992). Alerted to the issue, a large number of politicians from EU member countries visited Mexico throughout 1993, with the objective of discussing the consequences of NAFTA. The March 1993 trip to Mexico by Jacques Delors, President of the European Commission, equally had the purpose of assessing the relations between

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the EU and Mexico after NAFTA. The creation of NAFTA thus clearly increased the European interest in that country. This interest was soon translated into more concrete proposals for a new association between the two sides. In June 1993, during the European Council in Copenhagen, Delors argued that the Commission may ask for a mandate to engage in negotiations with Mexico (Agence Europe, No. 6007, 24 June 1993, p. 8). The next step was taken by the European Parliament, which in 1994 called upon the European Commission “to examine the possibility of negotiating a free trade agreement in the near future with its principal suppliers and clients in [Latin America]”, as “the application of the North American Free Trade Agreement (Nafta) will affect the nature of the European Union’s political, commercial and investment strategies with regard to Latin America, and above all Mexico” (European Parliament, 1994). By that time, the British, German, and Spanish governments also started to support such an agreement. In June 1994, the European Council in Corfu consequently expressed “its wish to strengthen its political and economic relations with [Mexico]” (European Council, 1994). Six months later the European Council in Essen asked the Council of Minister and the European Commission to concretise plans for a new agreement with Mexico. The Commission was internally divided on this issue. Manuel Marín, Spanish Vice-president of the Commission, was the main advocate of a far-reaching agreement with Mexico, while Leon Brittan, British Commissioner for External Affairs, was rather eager to limit the spread of preferential arrangements (Financial Times, 15 July 1996, p. 5). The two Commissioners’ attitudes were in line with the positions of their home country governments: Spain was the strongest supporter of a preferential trade agreement

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with Mexico, while the United Kingdom’s first choice was an agreement with the US (The Guardian, 6 April 1995, p. 13). On 8 February 1995, the European Commission reached an internal compromise between these positions and sent a communication to the Council in which it proposed a strengthening of the relations between the EU and Mexico in response to NAFTA by way of a preferential trade agreement. In its words: “[T]he existence of NAFTA risks hampering or even eroding economic relations with Mexico in the medium term” (European Commission, 1995, p. 11). In April 1995, the European Council in Luxembourg accepted this assessment, and soon after, on 2 May 1995, the EU and Mexico signed a “Joint Solemn Declaration” in Paris, which set out the objective of “progressive and reciprocal liberalization” of trade relations. In the following debates within the EU, the need to protect EU exporters’ access to the Mexican market was constantly mentioned as the main motivation for a free trade agreement. On 26 February 1996, for example, in a meeting of the General Affairs Council the Spanish government pushed the other EU member countries to accept a free trade agreement with Mexico in a one-stage negotiation process, arguing that European exports to Mexico would be hurt by NAFTA (Agence Europe, No. 6675, 26-27 February 1996, p. 6). The EU used to follow a two-stage process, which foresees the negotiation of a framework agreement first, and a trade agreement later. The Spanish government’s demand for a change in this procedure, therefore, is an indication of the importance that it gave to the issue. Although Spain was supported by Great Britain, Luxembourg, and Sweden, the meeting failed to achieve an agreement, as France, together with Austria, the Netherlands, and Portugal, opposed the Spanish proposal. Instead, these countries asked

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for an impact study, which should analyse whether Mexican exports to Europe could harm European competitors and whether the resulting agreement would be compatible with WTO law. This obstacle was removed once the Commission presented a study in April 1996, which showed that a EU-Mexico agreement could potentially hurt only few sectors of the European economy, and that a large part of agricultural imports from Mexico were of a non-sensitive kind (European Commission, 1996). The study also referred to the EU’s need to “safeguard its interests” in the Mexican market, since NAFTA gave US and Canadian exports a “significant competitive advantage”. In May 1996, the General Affairs Council consequently agreed on a negotiating mandate for the Commission (Agence Europe, No. 6727, 13-14 May 1996, p. 6; European Report, 16 May 1996). Spain and the other countries that were eager to see an agreement with Mexico were successful in pushing for a one-stage process, although with an intermediary step leading to an “Interim Agreement”. In June 1997, formal negotiations with Mexico started, aiming at a broad agreement covering political, economic and commercial issues. Already in November of the same year, COREPER approved the resulting agreement, which was signed on 8 December 1997. The agreement foresaw further negotiations to achieve a free trade agreement, which started in November 1998. One year later, the EU and Mexico concluded a far-reaching agreement that foresaw the liberalisation of about 95 percent of two-way trade. In February 2000, the Council of Ministers approved the result, and in March of the same year, the agreement was signed at the Lisbon Summit. Throughout these negotiations, decision-makers in the EU referred to the threat created by NAFTA when legitimising the need for an agreement with Mexico (El País,

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25 May 1999, p. 68; Sanahuja, 2000, p. 44). A report drafted for the European Parliament, for example, stressed that NAFTA tended “to squeeze out EU industrial exports” (European Parliament, 1998). At the member state level, Jean Daniel Tordjman, French ambassador, when defending the need for such an agreement, stated: [I]t is urgent for us to form a bond between the European Union and Mexico. Why? Because, due to NAFTA, the Americans and Canadians have a tariff advantage which, in many cases, is around 18 percent. The French exporters are pulverized by an 18 percent difference. Our interest, due to NAFTA, is to have an agreement with Mexico, and we are going to do it (Tordjman, 2000, p. 115). In short, the timing of the negotiations and the declarations made by decision-makers in Europe clearly confirm the plausibility of the protection-for-exporters argument for this case. 3.4

An Agreement to Achieve NAFTA Parity

The contents of the agreement and the negotiation demands made by the EU provide further support for the argument. Most importantly, the schedule of tariff reductions was specifically chosen to help European exporters re-establish equal conditions with the NAFTA countries as soon as possible (European Commission, 2000b). In the negotiations, the EU had demanded immediate free access to the Mexican market for 82 percent of its exports, and complete free trade in industrial goods by 2003, the year when US industrial exports would gain free access to the Mexican market. This demand was opposed by Mexico, however, which suggested four liberalisation stages until 2007 instead. The compromise foresaw that 52 percent of EU industrial exports should enter the Mexican market duty-free in 2003, with the rest being liberalised in 2005 and 2007 (European Commission, 2000a, p. 2).

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Importantly for the aim of achieving NAFTA parity as quickly as possible, the initial Mexican tariff reductions were very steep, as the EU had insisted on basing the reductions on the tariffs applied by Mexico in 1995, and thus before the two increases in 1995 and in 1999. This led to an immediate reduction of the average weighted tariff for EU products from 12.3 percent in 2000 to 5.7 percent at the time that the agreement entered into force. The tariff was further reduced to 4.37 percent in 2001, 2.46 percent in 2003, and 1.78 percent in 2005 (Varela Bellido, 2000, p. 35). By 2003, practically no EU exports of industrial goods faced a tariff of more than 5 percent, allowing the Commission to boost that it indeed had managed to achieve a level playing field with NAFTA. Other aspects of the agreement also support the protection-for-exporters argument. For one, the agreement included an accelerated schedule for the liberalisation of trade in intermediary products in the automobile sector (Section D of Annex II of the agreement), which foresaw the immediate reduction of tariffs on these products from 18 to 5 percent (EC-Mexico Joint Council, 2000). The purpose of this addition was to allow European subsidiaries compete at an even level with subsidiaries from NAFTA countries in the Mexican market. Moreover, the EU insisted on NAFTA parity with respect to public procurement, where especially the construction, energy, and petrochemicals sectors had been opened to competition from the NAFTA partners. In trade in services, the EU achieved NAFTA parity regarding the right to establish banks in Mexico. Not only the contents of the agreement, but also the declarations made when the agreement was concluded support the argument presented above. The European Commission, for example, declared that restoring the “competitiveness of EC exports to

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Mexico and secure equivalent access to that market” had been the EU’s “main objective” in negotiating an agreement with Mexico (European Commission, 2000a, p. 2). The EU’s Commissioner for Trade, Pascal Lamy, also praised the agreement for putting the EU “on a level footing with the US and Canada in the Mexican market” (Commission of the European Communities, 2001) and “neutralising the distorting impact of NAFTA” (Lamy, 2002). Indeed, the agreement achieved its stated purpose. It allowed EU exporters to recapture the share of total Mexican imports that they had held in 1994 (11.3 percent in 2005 as compared to 11.4 percent in 1994), mainly due to a sharp increase in imports from Spain (calculated on data from INEGI, 2007). 4

The Agreement with Chile

Chile’s trade policy in the 1990s also created the threat of discrimination against EU exporters. In 1990, US President George Bush launched a proposal for a “Free Trade Area of the Americas” (FTAA), which would encompass all countries in the Western Hemisphere (besides Cuba) by 2005. A first step towards this aim was supposed to be the accession of Chile to NAFTA, which appeared imminent as early as 1996. Although due to the lack of negotiating authority on the US side this scenario did not become reality, the threat of discrimination continued because of the plans for the FTAA. Finally, in November 2000, the US and Chile agreed to start negotiations over a free trade agreement between the two countries, which were concluded in 2003. 4.1

Expected Losses for EU Exporters from a US-Chile Agreement

At first sight, it seems that a US-Chile agreement should not have created substantial discrimination against European exporters. Chile had a uniform tariff of 11 percent, which was reduced to 8 percent in 2001, and only 6 percent in 2003. With tariffs low,

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Table 2: Imports from the EU and NAFTA as share of total imports from EU in millions of dollars) 1991 1992 1993 1994 1995 1996 1997 NAFTA 25.2 24.6 27.4 28.4 31.6 32.4 32.2 EU 20.9 21.4 21.9 21.5 21.2 21.0 21.9 EU (absolute) 1,561 2,026 2,312 2,396 3,155 3,538 3,958 Source: Suárez Burguet and Cuadros Ramos, 2003, pp. 146-47.

Chilean imports (and 1998 1999 2000 31.4 28.6 26.5 22.5 20.3 17.1 3,850 2,848 2,880

discrimination should have been negligible, even if the US achieved preferential access to that country. The potential for discrimination, however, was more substantial than this low tariff level suggests because EU and US exports to Chile were very similar: mainly machinery and transport equipment, pharmaceuticals, and miscellaneous manufacturing (see Schiff, 2002, p. 75). The two trading entities thus engaged in direct competition in sectors such as automobile manufacturing, making even a 6 percent differential significant. It is no wonder, then, that quantitative studies of the potential consequences of a US-Chile agreement predicted substantial trade diversionary costs for the EU. One study envisaged a reduction in EU exports of machinery and equipments to Chile by about $600 million (Hilaire and Yang, 2003, p. 18). Another study came to the conclusion that an agreement between Chile and NAFTA would reduce EU welfare by between $156 million and $241 million (Harrison, Rutherford and Tarr, 2001, pp. 34-5), probably as a result of trade diversion. With EU exports to Chile declining from 1997 onwards (see Table 2), possibly as a result of Chile’s pursuit of preferential trade agreements with a series of countries, these predictions should have appeared particularly alarming to EU exporters. In short, EU exporters faced losses of exports to Chile, and had reason to expect further losses once Chile concluded an agreement with the US. The protection-for-

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exporters argument suggests that in this situation, EU exporters should have increased their political activity to safeguard their interests. 4.2

Exporter Concerns about the FTAA

Being a relatively small market, EU exporter lobbying for a free trade agreement with Chile was less visible than in the case of Mexico. Moreover, most political activity on this case was either linked to the negotiations with MERCOSUR, which took place in parallel and followed a similar logic, or embedded in expressions of concern about an FTAA more generally. This does not mean that exporter pressure was weak, however. Spanish companies were the strongest advocates of a free trade agreement with Chile, repeatedly asking the Spanish Prime Minister Jose Maria Aznar to push the issue within the EU (Efe News Services, 21 November 2000). In Germany, the BGA stressed the need for a far-reaching step towards the liberalisation of trade with Latin American countries in order not to lose further ground vis-à-vis the US in that region (Bundesverband des Deutschen Groß- und Außenhandels, 2002). Equally, the BDI called for negotiations with Chile and MERCOSUR, stressing the parallel negotiations by the US with that region (Süddeutsche Zeitung, 28 January 1999). French exporters also expressed concerns about the consequences of an FTAA for their access to Latin American markets (Le Figaro, 22 June 2000). Indeed, a survey of national chambers of commerce across the EU conducted by Eurochambers revealed wide-spread concerns, especially since in the opinion of many chambers the free trade agreement with Mexico “was agreed too late. As a result Europe has lost key markets which the US and Canada have gained through NAFTA (1994). It is therefore essential that current trade negotiations [with MERCOSUR and Chile] speed

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up” (Eurochambers, 2002). Interest among EU exporters in the negotiations with these countries is also evident from the fact that a 2002 conference on the EU-Mercosur and the EU-Chile negotiations organised by the European Commission drew some 70 participants from business associations and companies, including Eurochambers, UNICE, BASF, France Telecom and Renault. Some import-competitors opposed an agreement with Chile. Competition from Chile was expected especially in the agricultural sector, with 19 percent of Chilean exports of fruits and vegetables and 49 percent of wine exports going to the EU (Schiff, 2002, p. 30). As these exports were expected to increase, European farmer organisations were unenthusiastic about the free trade agreement with Chile (European Report, No. 2336, 29 July 1998). Nevertheless, this lobbying by import competitors was far weaker than the one by exporters. In short, European exporters became politically active in response to the threat of discrimination in the Chilean market, leading to the expectation that decision-makers should have engaged in policies aimed at the protection of exporter interests. 4.3

Protecting EU Exporters in Chile

The timing of the shift in European policies vis-à-vis Chile supports the protection-forexporters argument. The European Council in Essen in December 1994 asked the European Commission to draw up a report on “the extension of relations with Chile”. Responding to this call, the Commission published a document, in which it cautioned that integration of Chile in NAFTA may lead to “a deflection of trade that would affect European exports of capital and consumer goods” (European Commission, 1995). Chile’s policy of concluding preferential agreements could lead to “a loosening of both

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commercial and economic ties between Chile and the EU.” In light of this threat, it proposed that Chile should be integrated in the negotiations between the EU and MERCOSUR. Soon after, the Commission started negotiations with Chile for a Framework Cooperation Agreement, which were concluded in June 1996. The agreement mentioned the aim of reciprocal trade liberalisation, but did not yet specify steps towards an agreement. At this stage, the Commission needed a negotiating mandate to engage in the negotiations that would lead to a free trade agreement with Chile. As these negotiations were supposed to take place in parallel to those with MERCOSUR, both mandates were debated at the same time in the Commission. Similar to the case of Mexico, the Commission was no unitary actor, with the Austrian, French, and Irish Commissioners most reluctant, and the Spaniard Marín most in favour. This division reflected a similar battle line in the Council of Ministers. On 8 July 1998, several Commissioners, including the President of the Commission Jacques Santer, opposed the draft mandates that had been presented by Marín (Europe Agri, 24 July 1998). After the decision on the mandates was postponed by two weeks, Marín’s spokesman stressed the urgency of the issue by referring to the threat created by the proposed FTAA, arguing that the EU “must win the battle for trade” (quoted in Europe Agri, 24 July 1998). On 22 July 1998, finally, the Commission internally agreed on a proposal for the negotiating mandates, even though four Commissioners, among them the Agricultural Commissioner and the two French Commissioners, voted against. The majority of Commissioners, however, was convinced that “the pace of trade liberalisation in the Americas [is] such that a decision on negotiations with the EU has to be taken”

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(European Commission, 1998). In the Council, France and Ireland were most opposed to the proposed mandates, with Spain, Portugal, Sweden and Denmark being most favourable. The debate, which went on for over a year, was about when to start the negotiations and how far-reaching the resulting agreement should be. A compromise was put forward in a report by the Delegation for the European Union of the French National Assembly in June 1999, which clearly supported agreements with Chile and MERCOSUR (Barrau, 1999). It referred to the threat created by the FTAA and also compared the situation to the one the EU faced in Mexico: “The establishment of NAFTA, in 1994, slowed down the growth of European exports to Mexico, to the benefit of its partners to the North of the Rio Grande. The still possible accession of Chile to NAFTA […] could have comparable effects” (Barrau, 1999, p. 63, my translation). Its recommendation, therefore, was to start negotiations on non-tariff barriers immediately, but to postpone the negotiations on tariffs. On 21 June 1999, the General Affairs Council accepted this compromise and specified 1 July 2001 as starting date for the tariff negotiations. It also stipulated that the negotiators should keep in mind the schedule for establishment of the FTAA (Agence Europe, No. 7491, 21-22 June 1999, p. 8). The compromise came about mainly because of the need to find a common position before the First Summit of Heads of State and Government of the EU and Latin American and Caribbean countries in Rio de Janeiro from 28 to 29 June 1999. In this summit, the EU, Chile, and MERCOSUR reaffirmed the aim of negotiating agreements that would liberalise trade across all sectors. Although no end date for the negotiations was specified, again the participants stressed the need to bring them to a close by 2005, when also the FTAA would be concluded.

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Throughout this process, decision-makers emphasised the importance of protecting European exporters’ access to Latin American markets as the main reason for the negotiations. The Spanish Foreign Minister, Abel Matutes (1998/99: 11), for example, argued that the FTAA may displace the EU from Latin American markets, creating a need to react. Equally, the European Commission showed itself concerned that the US may gain an advantage in these markets by way of the FTAA: “The absence of an agreement with the European Union will benefit US exports to Mercosur and Chile, to the detriment of European industrial interest” (European Commission, 1999). The FTAA would “entail major risks for the EU’s agribusiness, manufacturing and services”. 4.4

The Aim of FTAA Parity in the EU-Chile Agreement

From 1995 onwards, the negotiations with Chile had been expected to run in parallel to those with MERCOSUR. After the launch of the negotiations in November 1999, however, it became clear that the two negotiations would have to be conducted at different speeds. In June 2001, consequently, the German Chancellor Gerhard Schröder stated that there was “no absolute link” between the two sets of negotiations (Berliner Zeitung, 2 June 2001: 127). As by that time the US had started negotiations with Chile, an agreement with Chile appeared more urgent than one with MERCOSUR. The Chilean Ministry for External Relations concluded that “the progress of the Chilean negotiations with the United States have induced a faster political rhythm into the negotiations with the European Union” (Ministerio de Relaciones Exteriores, Dirección General de Relaciones Económicas Internacionales, Dirección de Estudios, 2001, p. 39, my translation). In fact, the negotiations with Chile could be concluded in April 2002, one year before the Chilean agreement with the US.

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As in the case of Mexico, the contents of the resulting Association Agreement shows the objective of protecting European exporters. For one, the EU insisted on steep tariff reductions from the beginning, which made sure that EU industrial exports would not face discrimination in that market. Indeed, 91.7 percent of EU industrial exports entered the Chilean market tariff free from 1 February 2003 onwards (Subdirección General de Coordinación y Evaluación Comercial, 2002, p. 12). Only 3.7 percent of exports would face tariffs until the end of a 7-year period in 2010. The agreement also liberalised trade in services, investments, and government procurement. With respect to government procurement the potential for discrimination was particularly large because Chile had not signed the WTO Code on Government Procurement. The EU, however, also stood in for some import-competing interests, exempting some Chilean agricultural exports from the agreement. In addition, the EU insisted on a Wines and Spirits Agreement, which by protecting geographical indications offered some shelter for European producers. The agreement was lauded as a move that averted an outcome in which EU exporters would have faced discrimination. The Spanish Ministry for Commerce, for example, declared that “the EU managed to advance [the US] by a step, what will help avoid the problems that were caused in Mexico when that country signed the NAFTA agreement with the U.S. and Canada” (Subdirección General de Coordinación y Evaluación Comercial, 2002, p. 19, my translation). In fact, the EU maintained its position in the Chilean market even during Argentina’s financial crisis, when the devaluation of the Argentine Peso made exports from that country more competitive. The US, by contrast, suffered substantial losses, with its share of Chilean imports falling from

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15 percent in 2000 to 11 percent in 2003. In 2004, by contrast, after the US-Chile agreement entered into force, US exports picked up very rapidly. 5

The Role of State Autonomy, Foreign Policy Objectives, and Commission Activity

Throughout I have argued that the agreements with Mexico and Chile were a response to EU exporters’ concerns about their access to these markets. This interpretation is not uncontested. For one, it is possible that state actors acted independently from exporter lobbying, with their preferences simply coinciding with those of exporters. The available evidence cannot exclude such an interpretation; it provides some indications to the contrary, however. In particular, the parallels between exporter demands and policies implemented are remarkable, and difficult to explain with reference to coincidence only. In addition, with the impact of the two agreements for the European economy negligible and the public salience of the negotiations low, it is not clear what kind of objective politicians could have pursued with the negotiations, if not to satisfy exporter interests. Some authors point to political objectives as politicians’ motivation, especially in the case of Mexico (Szymanski and Smith, 2005). Indeed, the agreements were of a broad type, and there was some discussion about Mexico’s acceptance of the democracy clause included by the EU in all of its Association Agreements. The importance of this issue can easily be exaggerated, however (Zabludovsky and Gómez Lora, 2005, pp. 15-16).4 Most of the debate in the EU was about the commercial aspects of the agreements, not their political features. Moreover, the fact that the EU concluded agreements with specific countries rather than regional trade blocs runs counter the EU’s foreign policy rhetoric, which stresses the importance of inter-regionalism. 4

Jaime Zabludovsky was Mexico’s chief negotiator in the talks with the EU.

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What role did the European Commission’s attempts at maximising its competences play in these negotiations? It could be argued that the Commission pushes member states into broad trade negotiations to extend its authority into areas where the EU’s treaties do not endow it with exclusive competence. Indeed, some conflicts between member states and the Commission over the conduct of the negotiations are evident. With respect to both the EU-Mexico and the EU-Chile agreements, however, it has become obvious that the Commission did not act as a unitary actor with preferences that diverge widely from those of the member states. Individual Commissioners often defended different positions, with nationality ostensibly influencing the Commissioners’ positions. Given that the process of selecting Commissioners is highly politicised (Wonka, 2007), the observation of such a selection effect is not astonishing. 6

Conclusion

I have argued that in some cases, EU trade agreements should be seen as policies aimed at the protection of exporter interests. Exporters are not always mobilised to the same extent; rather, they increase their political activity whenever they face losses of foreign market access, and push their governments to engage in policies that secure their foreign market access. The two case studies of the negotiations with Mexico and Chile have confirmed the plausibility of the causal mechanism elaborated in the theoretical part. European exporters pushed for these agreements as they faced threats of discrimination as a result of NAFTA and the plans for an FTAA, respectively. Later, decision-makers constantly referred to the objective of protecting exporter interests when engaging in negotiations with Mexico and Chile. Finally, the contents of both agreements clearly demonstrate the aim of achieving NAFTA and FTAA parity.

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Although the case selection does not allow for a generalisation of these findings, it seems plausible that other negotiation processes may have followed a similar logic. With respect to the negotiations with MERCOSUR, for example, the EU’s Commissioner for Trade Pascal Lamy boosted in 2001 that these negotiations were “at least a year ahead of talks between Mercosur and the FTAA” (quoted in Bridges Weekly, 17 July 2001). This reference clearly indicates competition between the EU and the US for this market. The aim of safeguarding EU exporters’ access to the markets of the ASEAN countries in the face of regional integration may also have played a role in the EU’s announcement that it would seek a trade agreement with this trading entity (Financial Times, 17 May 2006, p. 6). Further research could thus examine to which extent the protection-forexporters argument can be applied to other preferential trade agreements pursued by the EU. 7

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