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Cross-border cooperation

Deep integration

by Simone Claar, Andreas Nölke
It often makes sense to harmonise internationally the rules that apply to business activity, but doing so tends to be politically controversial. Poorer nations could benefit from extra market opportunities, stable conditions and technology transfer. However, the successful model of the European Union cannot simply be replicated. In bilateral trade talks with third parties, the EU and the USA should refrain from using their power to push through their own standards. [ By Simone Claar and Andreas Nölke ]

Deep integration is moving higher on the agenda of north-south trade talks. The term “deep integration” means trade agreements which do not only contain rules on tariffs and conventional non-tariff trade restrictions, but which also regulate the business environment in a more general sense. Issues of deep integration include competition policy, investor rights, product standards, public procurement and intellectual property rights, for instance.

Traditionally, trade talks centred on tariffs, which are generally essential only for a handful of enterprises. Deep integration, in contrast, means that the rules that govern the entire economies of different nations are brought in line. From the free-trade perspective, it hardly matters whether the original rules were passed for social or environmental reasons or to protect local companies. Deep integration always affects many interests and may have vast socio-political effects. Accordingly, policymakers are likely to run into all sorts of blockades and should prepare for social tension.

The potential advantages of successful deep integration are obvious. Larger, uniform markets
- offer more opportunities to businesses and consumers in all countries concerned,
- attract direct investments from abroad,
- accelerate the transfer of technology, and
- facilitate integration into global value-added chains, which leads to additional jobs and income.

Less apparent – but potentially even more important – is, that deep integration improves the regulatory and institutional environment for doing business in developing countries. Deep integration results in a relatively stable business environment, because trade agreements bind governments more stringently than national ad-hoc measures can. When a state credibly commits to a trade agreement, the resulting level of reliability is comparatively high.

Nevertheless, deep integration is contentious in north-south trade talks. Indeed, there often is a clear imbalance of power in north-south relations, so deep integration is usually not about mutual rapprochement, but about the weaker parties signing up to the rules of the economically stronger ones. Therefore, people tend to suspect that harmonisation mainly benefits the economically dominant side.

It is for reasons such as these, for example, that the EU’s talks with the Andean Community of Nations (Peru, Colombia, Ecuador and Bolivia) are difficult. Bolivia’s government refuses to negotiate some issues of deep integration, saying that doing so would breach its new constitution.

In the meantime, aspects of deep integration also mark the “neighbourhood policy” through which the EU wishes to regulate its relations with its Mediterranean and Eastern European neighbours. In this context, there has been no major upset. The reason is probably that geographical proximity to the EU makes cooperation with the EU particularly appealing.

Europe – the trailblazer

Europe’s single market is probably the best example globally of successful deep integration. EU members have not only eliminated all tariff barriers, they have also harmonised product and service standards in past decades. The same is true of rules on investments, patents and competition policy. This deep integration has time and again proved to be a highly effective engine of growth and development.

The model, however, is not easily copied. Deep integration is hardly making headway within the World Trade Organisation, for instance. Investment, competition, government procurement and trade facilitation are called the “Singapore issues” in WTO jargon. Developing countries have successfully refused to discuss them in the current Doha round. In earlier talks, it had been very difficult to find agreements on intellectual property rights – and these agreements lag behind the wishes of the rich nations.

As a result, the “deep” issues are now on the agenda of bilateral and (inter-) regional trade talks. Once again, there are tensions. In North America, “deep integration” even became something of a combat term. Plans for a “Prosperity Partnership of North America” failed because of protests, after governments and business had moved ahead with talks without, however, involving Canada’s Parliament, for example.

Various projects for deep integration between the EU and the USA were less controversial, but were not particularly productive either. One of the main successes was that the US now recognise the accounting standards of the EU-backed International Accounting Standards Board. Other initiatives, for instance, the attempt to harmonise the rules for the chemical industry, failed, however.

Now both the EU and the USA are pressing ahead with deep integration in talks with other parties on bilateral and regional trade agreements. In a way, they are in competition with one another, trying to enforce their respective standards in as many other countries as possible. In the long run, doing so serves their bargaining clout in trans-Atlantic relations.

Tough EPA talks

This trend is particularly evident in the negotiations on Economic Partnership Agreements (EPAs), which the EU is holding with former colonies of its member countries in Africa, the Caribbean and the Pacific (ACP nations). South Africa has also been involved since 2007.

The EPAs were initially supposed to replace the Cotonou agreement at the end of 2007. That agreement linked the EU to ACP nations, but is not compatible with WTO rules. To date, however, the EU has only concluded a single complete EPA with the Caribbean nations (Cariforum). Transitional arrangements apply to trade with the other regional groups of states. Generally speaking, the EPA talks are inching ahead with difficulty, not least because deep integration issues such as investment and intellectual property are on the agenda.

It is a problematic reality that the EU links deep integration topics with other issues such as market access and development aid. The EU is increasing its pressure on partners, but is not gaining any credibility. This is all the more so as the standards under discussion are controversial anyway. In general, they are geared towards free-market or “neo-liberal” doctrines. The EU’s negotiation stance does not agree with a strong role for governments, but in developing countries, such a strong role is often believed to be essential. Moreover, the relevance of government action even in rich countries has recently become very clear once more in the course of the global financial crisis.

Developing countries are particularly sensitive to potential restrictions of their economic leeway. Research, however, has long shown that there is no ideal version of capitalism, and that different models with very different institutions can operate quite well. Accordingly, it seems problematic to forsake options and leeway at the national level. South Africa is a good example of how rules and institutions can make sense in spite of being inconsistent with EU principles (see box I).

Differences of this kind make treaties and agreements difficult. Transition periods can help span gaps, but, for obvious reasons, they too tend to be controversial politically.

South-south tensions

In regard to deep integration, conflict lines do not run only between north and south. In fact, there are also major differences between developing countries on regulatory issues. For example, South Africa is the only country in southern Africa with a clearly defined competition law. Nor are there any collective rules on intellectual property rights within the Southern African Development Community (SADC), to which South Africa belongs. This, of course, makes regional integration difficult.

In West Africa, moreover, Nigeria is not in favour of the EPA drafts. The government argues that, without a strong development dimension, the combined market of the Economic Community of West African States (ECOWAS) would not be competitive. It also worries that deep integration in the EPA context would reduce the scope for national economic policymaking and hinder agreements with third parties such as the USA.

A particular distorting effect of the EPA process, moreover, is that membership to regional negotiating groups is not consistent with membership to regional economic communities. Some countries are members of more than one regional community. Accordingly, the EPA process is running the risk of actually exacerbating fragmentation within existing coalitions rather than leading to greater regional integration (see box II).

Outlook

Deep integration in north-south trade agreements has the potential to significantly boost development by
- facilitating market access for producers from the south,
- integrating them into global value chains, and
- creating a predictable and reliable regulatory environment.
Nevertheless, deep integration also goes along with certain risks, including
- the loss of policy space,
- incompatibility of essential institutions with development needs, and
- tensions within regional associations of developing countries.

Many of these risks would be drastically reduced if the European Union and the USA abstained from taking advantage of their comparative power in talks on deep integration in order to push through their respective regulatory principles. Instead, it would make sense to negotiate basic standards in a multilateral framework, and thus reduce the regulatory competition between the EU and the USA.

These new standards, of course, would have to be sufficiently flexible to allow countries to have institutions that suit their specific needs. In addition, developing countries should be given more expert advice because many governments are not familiar with the challenging topics of deep integration. Many are overburdened by trade negotiations.

Above all, however, there must be no possibility of trade talks resulting in standards that hinder development of poor countries. Ruling that out will require a lot of research on which institutions are necessary for developmental progress, which rules are compatible with them, and which are not.