Written by Stephen C. Tupper

In March 2011, the European Commission published its first annual report, to the European Council, on trade and investment barriers in third world countries. This is the latest round in a long-standing campaign on the part of the Commission to find a way to eradicate trading obstacles faced by EU exporters in a number of key international markets that are not replicated when non-EU exporters seek access to the EU market. Evidencing signs of frustration over the lack of progress to date, the Commission states: “A key message of the new EU trade strategy is that in parallel to the negotiating agenda, our renewed trade policy must take a more assertive approach, not least to ensure that European companies are not deprived of legitimate market access opportunities and that our rights are properly enforced to ensure a level-playing field.” What this “more assertive” approach is going to mean in practice is the key question.

The report focuses on a small number of key strategic partners: China; India; Japan; Brazil/Argentina (viewed together); Russia; and the US Together these countries represent 45% of the EU’s trade in goods and commercial services and 41% of the EU’s foreign direct investment. The Commission dissects each in turn. This Alert focuses on the Commission’s remarks concerning the US (see below). The report then goes on to examine the problems on a more horizontal basis (i.e. one category at a time). We have singled out public procurement.

The United States

It will not come as a surprise to learn that the US is by far the EU’s largest trade and investment partner. In 2009, exports of EU goods and commercial services to the US amounted to €322 billion (20.6% of total EU exports) while imports of goods and services from the US amounted to €281.9 billion (17.6% of total EU imports). Commendable though that is, however, the Commission does not believe it is good enough. Citing a recent report, the Commission argues that elimination of only half of existing non-tariff barriers and regulatory divergences between the EU and the US would boost the EU’s GDP by €122 billion a year.

The Commission goes on to highlight the US’s government procurement markets as being particularly protected. Only 3.2% of US procurement is open to competition via the WTO agreement on government procurement (“GPA”) compared to 15% of the EU’s equivalent markets. The “Buy American” initiative and the US’s treatment of inverted companies (i.e. businesses that are originally American that have changed tax jurisdiction and inverted to another country’s tax system) are also singled out for creating fresh obstacles.

The gap between what the EU has opened to non-EU participation in procurement markets (i.e. €312 billion) compared to what is open to foreign bidders in the US (i.e. €34 billion) is growing.

It is a problem that the Commission wants to fix via negotiation, particularly through encouraging more countries to sign up for the GPA – currently only 14 countries are parties to the agreement – and by seeking to regularise the existing asymmetries in terms of how much of their respective procurement markets participant countries open to foreign competition. To improve its bargaining position, however, the Commission announces in its report that it will be adopting a legal instrument to help clarify the rules governing access to the EU’s public procurement market for third world country goods, services and companies. Not exactly a full blown trade war but signs that the EU will be seeking to level the playing field from both ends.

It is clear that the Commission is determined to fix this problem. What the US will have to consider, ultimately, is whether it sees greater gain in a closed US market than in an open one. It is unlikely, however, to be permitted the luxury of having both.