seminar eu with mateas part

8/3/2019 Seminar Eu With Mateas Part

1/33

The EU in the Global

Economy

LV 2185, WS 2011/12

Group 1:

Benjamin Doplbauer 0851347

Matea Deranja 1150603

Jan Kaiser 0350713

Common trade policy of theEU

Seminar paper Topic 1


2/33

Group 1: Common trade policy of the EU, The EU in the Global Economy, WS 2011/12

Table of Contents

I. Introduction ......................................................................................................... 2

II. Eu trade policy ................................................................................................... 4

A. Importance of international trade for European Union .................................... 4

B. Trade policy in historical perspective .............................................................. 5

C. Policy makers .................................................................................................. 9

1. European Commission ................................................................................. 9

2. Council....................................................................................................... 10

3. European Parliament ................................................................................. 11

D. World Trade Organisations cooperation with the Euuropean Union ............. 12

E. Regional trade agreements vis--vis broad liberalization and its benefits ....13

F. An overview of eu's trading negotiations ...................................................... 17

III. Foreign Direct Investment ............................................................................... 22

A. Introduction to the concept of FDI................................................................. 22

1. What is FDI? ............................................................................................... 23

2. Why does FDI take place? .......................................................................... 23

3. Advantages of FDI...................................................................................... 24

4. Theoretical explanations of FDI.................................................................. 25

B. Overview on FDI activities of the European Union ........................................27

1. EU direct investment abroad ...................................................................... 28

2. Direct investment in the EU ....................................................................... 29

IV. References ...................................................................................................... 30

I. INTRODUCTIONAs the worlds leading trade power, the EU has a strong interest in

creating conditions in which trade can prosper. Its position also gives it

responsibilities towards the rest of the world and therefore it plays a

leading role in international trade negotiations, working towards fair trade

and seeking to harness globalisation. Trade policy of EU which is the main

object of consideration in this paper has emerged and changed its

objectives over years. The main purpose of this paper is to show the

2


3/33


development of trade policy, its objectives, measures and its decision

making roles and powers. It is also pointed out that the multilateral

policies for free trade are in the best interest of European Union.

Nevertheless, the role of proliferation of regional trade agreements is

presented and its challenges and opportunities. It is argued weather the

promotion of free trade through preferential agreements can foster trade

liberalization and benefit economic development by integrating developing

countries into the world economy or the regionalism, will increase

discrimination via preferential agreements and undermine transparency

and predictability in international trade relations.

So far the EU is second most significant importer and exporter of goods

and services in the world, the import and export flows are shown as well

as their major characteristics. Different commodities traded between trade

partners are object of the EU imports and exports. Therefore the major

trading partners and trade relations with them are analysed.

Trade relations between EU and developing countries are very important

factor when considering multilateral trade system. In this context there isgiven a critical overlook on how the EU is providing support to developing

countries, also the ways of protecting its agricultural sector as well its

main arguments for doing so.

As one of the main characteristics of the world economy and the

globalization was a tremendous rise in foreign direct investments, this

paper shows and analyses the EU outward and inward FDI stocks and

flows, also the benefits of FDIs on european economy are pointed out.

3


4/33


II. Eu trade policyIn this first part of the paper the general facts of the European Union trade

policy will be introduced. The main facts about the EU's legal structure

regarding international trade, cooperation between the WTO and the EU

will be covered. Furthermore, the importance of trade liberalization is

pointed out and its main advantages for the EU. Next, the complex system

of trade preferences of the EU is discussed; regional trade agreements and

liberalization will be emphasized and its impacts compared.

A. Importance of international trade for European Union

Trade policy of European Union is one of the most important policies

European Union stands for as well as the EU represents the largest trading

bloc in the world, world largest exporter and the second largest importer

of goods, and it is the first trader of commercial services (European

Commission 2006). If the trade among the member states was included,

EU would be responsible for nearly 40 per cent of world merchandise

import and exports. In terms of trade composition, EU trade consistspredominantly of trade in manufactured goods, while trade in services is

mainly in travel and transportation (Tel, 2009). It should be pointed out

that the commodity structure of EU trade varies greatly across trading

partners. In particular, manufacture goods dominate EU trade with other

developed countries, while primary products figure more prominently in

trade patterns with developing countries.

When thinking about trade and European Union, it is worth mentioning

that the trade has a great significance for the foundation of European

Union, in fact of European Economic Community. Two of the original core

objectives of the European Economic Community were the development of

a common market offering free movement of goods, service, people and

capital. Free movement of goods was established in principle through the

customs union between its six member states on the most beginning. This

was a basic goal of the Union from the earliest days. In the 1960s, the

customs union between its member countries has been created (Gunter,

4


5/33


1999). In other words, any EU country could trade any quantity of goods

with any other EU country without having to pay customs duties and

tariffs.

In addition to internal trade, which is called Free movement of goods and

services, even more important for the European Union is its external

trade and its Trade policy (Common Commercial Policy) applying to

relations with third countries which is the main object of consideration in

this seminar paper.

The Trade Policy, often called Common Commercial Policy has been one of

the most important and dynamic fields of EU external relations. It is one of

the three common policies aimed in Treaty of Rome, besides agriculture

and transport (Gunter, 1999). Since its inception in 1957, the scope of the

Trade Policy has been enhanced in order to adapt to the new realities of

international trade and economic relations. During the past 20 years the

Common Commercial Policy was the subject of significant amendments

and changes in order to adapt to internal and international challenges that

EU is facing, such as globalization and the trend towards liberalization of

international economic regulation which is very much recommended by

WTO. Beyond trade in goods, nowadays EU Trade Policy includes 2 more

fields; trade of services and intellectual property.

B. Trade pol icy in historical perspective

Since the Treaty of Rome in 1957, EU member countries accepted to

speak with one voice in trade, transferring their sovereignty and its own

voice in this policy area to the supranational level. In Article 3b of treaty of

Rome, the EEC adopted the goal of introducing a Common Commercial

Tariff (CCT) and of establishment of Common Commercial Policy towards

third countries (Gunter, 1999). One of the provisions in Treaty of Rome is

The EEC shall contribute to the harmonious development of world trade

and to the gradual removal of both barriers to trade and of tariffs (The

Treaty of Rome, 1957). It is also worth mentioning that the cornerstone of

5


6/33


the CCP is Article 133. according to which the CCP establishes uniform

principles between all member states governing EU trade policy including

changes in tariff rates, the conclusion of tariff and trade agreements with

non-member countries, uniformity in trade liberalisation measures, export

policy and instruments to protect trade such as anti-dumping measures

and subsidies (Treaty of Rome, 1957).

The Common Commercial Policy (Trade Policy) was the only field where

external Community action was explicitly recognized in the original EC

Treaty (TEC). The drafters of the Treaty of Rome had recognized that the

Community should be granted powers in the field of external trade in

goods, so as to satisfy the need for external representation of the

European Community (EC) as a customs union (Cremona, 2002).

In 1968, the Customs Union entered into force among the six EU member

countries, remaining duties were eliminated among them, and a Common

External Tariff was introduced to replace national tariffs vis--vis non-

member countries. Since then, the scope of the trade policy, as mentioned

before, has expanded in two important dimensions: first, the members of

the Customs Union have increased to 27 by the moment; secondly, trade

policy has broadened to include trade in services and intellectual property

(Conconi, 2009). The expansion in these fields took some time. What

exactly encouraged the expansion of Trade policy will be introduced later

on. Although the tariff barriers were removed, many non-tariff barriers to

trade still remained. For example, different EU countries had different

administrative requirements and different rules on things like packaging

and labelling, all of which disrupted trade between them. Establishment of

CCP ended by 1970.

After the time gold convertibility was abolished in USA, the world economy

faced a lot of problems, as did Europe as well. Even some EEC countries

raised back trade barriers between 3rd countries but also within

themselves. Things became even worse on the end of seventies due to the

oil price shock. What followed was the internal adjustment in eighties andnineties; it means countries had negotiated free trade agreements with

6


7/33


their partners. The European Council provided leadership in relaunching

Europe in 1983/84. Governments have recommitted themselves to the

original programme of the Treaty of Rome, and thus convinced business

that the cosy times of protection were over. (Gunter, 1999) Import rules

ought to be harmonised and restrictions on Intra-Community trade were

gradually phased out.

Indeed, national measures of protection were discontinued in many areas

until 1992, and in areas such as textiles and clothing, agriculture,

automobiles, footwear and public procurement, policy makers opened up

Euro market considerably, although not always on permanent basis.

The establishment of the WTO in 1995 marked a new era and was the

main reason for instructing changes in the Common Commercial Policy.

The WTO Agreement not only provided new, more rigorous and

institutionalized framework for trade in goods, but it also established

international rules on trade in services and trade related intellectual

property rights. Recognizing the importance of the services sector as the

most dynamic economic sector and that supply of services beyond

national borders was an important aspect of it, the WTO Agreement took

the next step in regulation and liberalization of the world economy.

Furthermore, minimum levels of protection of intellectual property rights

were considered necessary for ensuring the effectiveness of trade rules.

The General Agreement on Trade in Services (GATS)1 and the Agreement

on trade-related aspects of intellectual property rights (TRIPS)2 become

next to the GATT part of a single undertaking requiring WTO Members to

subscribe to all of them, which had a big impact on CCP. (Conconi, 2009)

The scope of the Common Commercial Policy was amended by the

Amsterdam Treaty from 1997. However, instead of incorporating trade in

services and trade-related aspects of intellectual property in the Common

Commercial Policy, a new paragraph was added to Article 133 TEC, which

enabled the Council to extend the Common Commercial policy in these

fields by unanimous decision after consulting with the Parliament.1 General Agreement on Trade in Services

2 Agreement on Trade Related Aspects of Intellectual Property Rights

7


8/33


However, such decision was not taken until 2003, when the Treaty of Nice,

which amended again Article 133 TEC, came into force (Cremona, 2011).

The most important innovation brought by the Treaty of Nice is that it

established an express competence to negotiate and conclude

international agreements in the fields of trade in services and commercial

related aspects of intellectual property.

Later on, worth mentioning is the role and impact of The Lisbon Treaty

which is important milestone in the evolution of the Common Commercial

Policy and it surely introduces a new era in EU external relations. It

contributed to the development of a coherent, effective and all-embracing

commercial policy, reflecting in the field of external relations the degree of

internal economic integration. (Conconi, 2009). The Lisbon Treaty

expanded scope of Trade Policy to foreign direct investment, which made

EU more competitive in the world.

The way of emergence of Trade policy of European Union has not been an

easy process. A fair and transparent rules-based system has been built

and upgraded over years. Today EU trade policy covers even a broader

scope beyond trade liberalization. It is about updating and improving

international rules, and giving them a wider coverage to ensure fair trade

and harnessed globalization. It is about promoting an international agenda

that benefits the developing world, and addressing issues of general public

concern. One of the key challenges today is to ensure that trade rules take

account of non-market concerns, particularly the environment, public

services, food safety, agriculture and culture.

It is also important to mention that development of Trade Policy has been

influenced with global trade issues which are covered and conducted

under WTO. EU has also been participating in negotiating rounds and the

last round it has made a lot effort in pursuing the Doha Development

Agenda, which is still open issue. It is about ensuring that developing

countries can benefit from trade, and using trade as a key element of

every countrys drive to achieve poverty reduction and sustainabledevelopment, in that field EU is working hard and is very committed in

8


9/33


helping developing countries to go out of poverty, even the EU has opened

its markets totally to least developed countries.

C. Policy makers

Many institutions and individuals are involved in the decision-making

process within the framework of CCP. Preferences of member

governments, economic interest of lobbies, and policy ambitions of the

Commission may all pull the process in one direction. In this case thirdcountries have to face a tough bargaining partner.

1. European Commission

In terms of the decision making process, the European Commission has

sole competence over the implementation of the CCP, proposing eventual

new initiatives to the Council and managing trade tariffs and other trade

policy instruments, and conducting trade negotiations (Burkhart &

Matthews, 2007). The Commission maintains the right of initiative, for its

proposals to be formally adopted, agreement has to be reached between

the co-legislators, while the European Parliament decides jointly with the

Council on the framework of EU trade policy through the ordinary

legislative procedure (European Commission, 2011).

When the EU is engaged in trade negotiations with third countries, its

members act as a single voice (Conconi, 2009). WTO is one of the only

international organizations in which the Union is itself a member and in

which EU member countries are represented by the European

Commission. Reaching a one voice in trade policy is often a complicated

process, since EU members have different trade policy interests and

agreeing on a collective policy and bargaining position requires

compromises among them (Tel, 2009).

9


10/33


It is to be pointed out that Council needs to approve what Commission

negotiates. The Commission is empowered to suggest negotiation

directions and conduct negotiations in consultation with a special

committee appointed by the Council for this purpose. For example, the

Commission negotiates on behalf of the member states in the WTO. The

Commission may sometimes interpret its decisions in a way with which

some member states may disagree, and this has been a source of tension

in the past.

Furthermore, before the inclusion of trade in services and commercial

aspects of intellectual property, the powers vested to the Community were

exercised by the Council and the Commission but after the Treaty of

Lisbon there were few changes regarding the decision making process.

These changes refer to decision-making power of Parliament and will be

discussed below.

2. Council

Trade policy takes place in the bargaining framework established by the

Council and Commission, therefore the role of the Council in decision

making process regarding trade is extremely high. It is a center of

decision-making. It retains power over setting policy goals and guidelines

for negotiations, over secondary legislation on and the implementation of

trade remedy laws, and over the conduct of negotiations (Gunter, 1999).

At the conclusions of the trade negotiations, the Council approves or

rejects the negotiated trade agreement. International agreements are

adopted by the Council, after the Parliament has given its consent.

Even though the Treaty of Rome allowed QMV (qualified majority decision)

in crucial policy issues, unanimity became the norm of conduct and is

required regarding trade in services, commercial aspects of intellectual

property and foreign direct investment where such agreements include

provisions for which unanimity is required for the adoption of internal rules

(Kleimann, 2011). Member states are assigned different voting weights,

which reflect the size of their populations, and ratification requires

approval by two-thirds of the votes.

10


11/33


The political legitimacy should rest in hands of Council, because guidance

has to originate there. Without strong influence the CCP would not be

effective at all.

3. European Parliament

Despite its legal empowerment, Parliament has a priori entered the

political arena as the weakest of the three institutional players. It for sure

lacks the experience in CCP formulation regarding working relations with

its institutional competitors on CCP issues and staff capacity; it is a

politically extremely fragmented institution. Parliament had no experience

whatsoever in the conduct of trade and investment policy-making.

The Commission and Council consult the EP, and this has become more

formal with the establishment of the International Trade Committee (INTA)

in 2004. There is a growing acceptance among policy makers that trade

can no longer operate in a hermetically sealed box, but must be more

open to scrutiny and debate (Woolcock, 2005).

The most important change brought by the Lisbon Treaty with regard to

decision making in the field of the Common Commercial Policy affects the

institutional balance and now it provides a more active role for the

European Parliament. Following the trend of granting a wider role to the EP

and enhancing the legitimacy of external relations, Article 207 alongside

Article 218 TFEU render the European Parliament a co-legislator in the

field of the Common Commercial Policy (European Parliament, 2011). The

European Parliament has the right to make amendments and also has a

final veto power with regard to internal measures (Krajewski, 2010).

Nevertheless, it has also gained a special right to be informed with regards

to negotiations of international agreements. Regarding conclusion of trade

agreements, the European Parliament needs to be consulted before the

Council concludes an agreement and hence it is not only a co-legislator for

the implementation of international agreements, but also needs to give its

consent to the conclusion of the agreement.

11


12/33


D. World Trade Organisations cooperation with the Euuropean

Union

The European Union has always supported the multilateral trading system.

It has played a major role in setting up the World Trade Organisation, and

it is a very active participant in the WTO. Although every member state

has the right to attend WTO meetings, it is only the European Commission

that represents the entire EU and acts as a single voice instead of all EU

countries.

The World Trade Organisation is the core of the international rules-based

system for world trade. Based in Geneva, it provides a forum for

multilateral negotiations on trade, together with a rule book and

mechanisms for ensuring that its members play by the rules. So far WTO is

standing for removing obstacles to trade, creating and enforcing global

rules and making them compatible with rules drawn up by other

multilateral bodies, and thus it facilitates and promotes the world trade.

As it was already mentioned above, the EU supports the work of the WTO

on multilateral rule-making, trade liberalisation and, sustainable

development and trough WTO it procures new markets for European

companies, observes the rules and makes sure others also play by the

rules (European Commission, 2011).

The EU is the largest and most comprehensive entity is the WTO. The EU

representative in WTO, European Commission, negotiates trade

agreements. When an agreement is negotiated at the WTO, the

Commission needs to get the formal authorisation of the Council andEuropean Parliament to sign the agreement on behalf of the EU. The

WTO's highest decision-making body is the Ministerial Conference, which

meets at least every two years, and on these meetings the EU Trade

Commissioner is representing the EU. The General Council of the WTO acts

on behalf of the Ministerial Conference. The Commission represents the EU

in the General Council as well as in the other formations of the General

Council which meet on a regular basis such as the Dispute SettlementBody or the Trade Policy Review Body. The Commission also represents

12


13/33


the EU in subsidiary WTO bodies such as the Council for Trade in Goods or

the Committee for Trade and the Environment.

The dispute settlement mechanism is also worth mentioning because of its

importance for the establishment of WTO and because it guaranties that

agreements negotiated will be respected. Since the establishment of the

WTO, the EU has been involved in many disputes, being on the offensive

more than on the defensive: between 1995 and 2008, it has acted as a

complainant in 77 cases and as a respondent in 59 cases. Some of these

cases have been widely publicized, such as the long-running disputes

between the EU and the Unites States over the EU tariff system for banana

imports or over the US subsidies to Foreign Sales Corporations.

At this point it is to be emphasized that EU and WTO have been working

long time on world trade issues, and were conducting negoriation rounds,

one of them is DDA, Doha development round which is still open question.

In this paper we wont go in detail within this topic due to its presence in

other member papers.

E. Regional trade agreements vis--vis broad liberalization and its

benefits

The conclusion of regional trade agreements may be driven by the search

to access to larger merkets, more if there is absence of willingness among

WTO members to liberalise further on a multilateral basis. RTA formation

could be also driven by economic, political even by security reasons,traditional welfare gains from preferential tariff reductions and because of

the market power benefits of forming a larger unit for tariff setting and

bargaining.

Even though EU operates according to trade rules that are set

multilaterally, actually the exchange of goods and services takes place

between the EU and its individual trading partners. However, what takes

place bilaterally and what happens at the multilateral level often reinforce

each other. The EUs bilateral agreements with individual trading partners,

13


14/33


or with regional groupings of countries, are often designed to pursue goals

that are subsequently achieved through multilateral negotiations. There

one can see many types of trade agreements: free, bilateral, regional,

plurilateral, those of preferential reciprocal nature, those notifies to WTO

and those which have not been notified yet.

Regional Trade Agreements are significant feature of the multilateral

trading system and have become an important trade policy tool for

European Union as whole. The number of RTAs as well as the world share

of trade covered under them has been steadily increasing over the last ten

years and this trend will be further strengthened by the many RTAs being

proposed and those currently under negotiation. From the next figure one

can see the EU map of regional agreements negotiated so far.

14


15/33


FIGURE 1: WORLD MAP OF PREFERENTIAL TRADE AGREEMENTS WITH EU

Data source: European Commission, 2011.

From the above figure one can see which countries have so far concluded

preferential trade agreements with EU, which countries are currently

committed in the negotiating process with EU and those with which the EU

is considering opening preferential agreements. Therefore it is obvious

that EU has developed a really huge network of trade agreements.

Initially, these were mainly with neighbouring countries and former

colonies, but they now extend to trans-continental agreements without

these geographical or historical rationales such as those with Latin

American countries.

One can ask whether such agreements represent a threat to the

multilateral trading system, therefore the answer lies in fact that WTO

allows the formation of regional trade agreements (RTAs) as long as trade

barriers on average do not rise after integration, tariffs and national trade

barriers are eliminated within the area on substantially all intra-regional

trade, and the project is notified to the WTO in time for it to determine

whether these conditions are satisfied. (Brlhart & Matthews, 2007).

As world trade becomes more liberalised, the preferential value of RTAs

could diminish. In the long term, it is very likely that all WTO members will

enjoy relative freedom of access to Europes market. EU products might,

however, suffer from discrimination created by other RTAs. To avert this

danger the EU is seeking conformity across the board to WTO rules. As a

result, its own RTAs are becoming less discriminatory, more insistent onreciprocity from the partner country and more broadly focused than in the

past. They address regulatory issues, right of establishment, foreign

investment, competition policy, financial aid and technical cooperation as

well as standard tariffs and import barriers per se.(Brlhart & Matthews,

2007).

The proliferation of RTAs in EU presents challenges and opportunities; one

can ask what is better for the growth of a country: weather to conduct

preferential agreements or open its market to international trade.

15


16/33


According to Vamvakidis and statistics in his paper which was issued by

IMF, it says that most of the countries grew faster after opening their

markets to international trade. Broad liberalisation has a significant effect

on growth even after controlling for participation in RTA. RTAs do not

appear to have an affective impact on growth. In contrast, countries have

grown faster after non-discriminatory liberalization. Also it is important to

empfasize that openness has a positive indirect impact on growth trough

investment (Vamvakidis 1998.) In contrast, RTAs are found to have

negative impact, even tought not always statisticaly significant, on both

growth and investment.

Preferential trade agreements it means regionalism practices regarding

trade could have some bad effects on multilateral liberalization and on

economy , they can promote trade diversion rather than trade creation,

thus reinforcing vested interests and increasing opposition to multilateral

trade liberalization, e.g. if there is trade diversion, a firm located in a

member country, although inefficient, may be able to overcome

competition from a more efficient firm located in a non-member state,

because it benefits from preferential tariff rates. Large countries maybenefit from signing preferential agreements with small countries, in

which they can use their market power to extract concessions on nontariff

issues, such as labor market or environmental standards, migration or

intellectual property protection. (Limao, 2007).This implies that large

countries may have an incentive to slow down multilateral liberalization, in

order to maintain their bargaining power vis a vis their partners

However, EU regionalism may instead be compatible with multilateral

trade liberalization. Regionalism and liberalisation do not need to be in

conflict, many EU countries are example of this fact. In particular, there

are at least three reasons to believe that the EU system of preferences

promotes trade rather than hinders, firstly, as mentioned above, although

very few countries conduct their trade with the EU on a purely MFN basis,

approximately three quarters of imports by the EU enter on non-

preferential terms; secondly, the expansion of the EU web of PTAs from

agreements with neighboring countries and former colonies to

16


17/33


transcontinental agreements that are not driven by geographical or

historical links implies that trade diverting effects are less likely to occur;

also, the progressive reduction in MFN tariffs has eroded the preferences

of beneficiary countries, reducing the risk of trade diversion (Conconi,

2009).

It needs to be emphasized that an open market is hard to develop, even it

brings for sure faster growth with itself, and therefore it is an elusive goal.

Despite much liberalisation, the EU continues to maintain strong defences

against sensitive imports such as agricultural products. Regionalism is still

a strong focus of EU trade policy. This framework of regionalism, with its

discriminatory stance against third countries, might be at the expense of

the stability of the multilateral trading system. But still there are notable

advantages of regionalism. Encouraging regional integration enlarges

markets, reinforces healthy competition between neighbouring countries

of comparable levels of development and competitiveness, favouring

industrialisation, development and regional stability. It is less an

alternative to multilateral liberalisation, and should rather be seen as

complementary. Europe needs to decide which way to choose but so farEU is balancing good in both, regionalism and liberalisation.

F. An overview of eu's trading negotiat ions

As already mentioned the EU has negotiated a number of trade

agreements with other countries. It has recently shifted to a trade policy

which is a greater user of Free Trade Agreements (FTAs). In particular the

EU is working on a number of new FTA initiatives. Policy statements also

reiterate the EUs commitment to multilateralism in trade and to the

completion of the Doha Development Agenda.

The EU is committed to ensuring that its agreements are compatible with

WTO obligations. The EU expects the same of other WTO members and

hopes the current international negotiations under the WTO will be a

useful opportunity to clarify rules in this field for the benefit of all

17


18/33


members. The next table presents the list of agreements the EU has

negotiated on preferential basis.

The EUs network of preferential trade

agreements 2007

Type of trade

agreement

Name of agreement Countries involved

Single market EEA Iceland, Liechtenstein,

Norway

Customs Union Turkey, Andorra, Sam

Marino,

Free Trade Area Switzerland, Israel,

South Africa, Mexico,

Chile, Faroe Islands

Euro-Med Association

Agreements

Algeria, Egypt, Isreal,

Jordan, Lebanon,

Morroco,

Palestinian Authority,

Syria,

Tunisia

Partnership and Co-

operation

Agreements (MFN

treatment)

Russia, Ukraina,

Moldova

Non-reciprocal

contractual

preferences

First generation

Mediterranean

Agreements

Lom/Cotonou

African, Caribbean,

Pacific countries

Non-reciprocal

autonomous

preferences

Stabilisation and

Association Agreement

(SAA)

Other developing

countries plus

members of CIS and

18


19/33


Western Balkan

countries

Purely MFN

treatment

Australian, Canada,

Japan, New Zealand, Taiwan, Hong Kong,

Singapore, United

States, South Korea

Free Trade

Agreement to

enhance existing

cooperation

FTA ASEAN, South Korea,

India

Table 2: The EUs network of preferential trade agreements. Data Source:

(Brlhart & Matthews, 2007).

As it is notable fom the table above EU has negotiated trade agreements

among the whole world.

The United States is by far the EUs biggest trading partner, accounting for

nearly 22 % of the EUs total trade (exports plus imports). The EUs

relationship with Japan is also of high importance. The EUs focus here is

on the need for Japan to open up its market more to European goods and

investments and to get the government to take effective action to reflate

the economy.

The EU is also negotiating the establishment of a free trade area with the

six members of the Gulf Cooperation Council (GCC), which is the regional

organisation grouping Bahrain, Kuwait, Qatar, Oman, Saudi Arabia and the

United Arab Emirates.

It is examining ways of promoting bilateral economic relations with Iran

through a trade and cooperation agreement which is under negotiation. In

addition, the EU has concluded partnership and cooperation agreements

with Russia and a number of other countries of the former Soviet Union

Azerbaijan, Kazakhstan, Kyrgyzstan, Moldova and Ukraine. Theagreements with Moldova, Russia and Ukraine are part of a process that

19


20/33


could lead to the establishment of a free trade area between them and the

EU. (Jeffrey, 1998)

The EU has recently been very active in its trade relations with Latin

America. A free trade agreement with Mexico came into force in July 2000.

This agreement will give EU exports the same access to the Mexican

market as those coming from the United States and Canada, its partners in

the North American Free Trade Agreement (NAFTA). The EU is scheduled

to remove all duties on imports from Mexico by 2003, while Mexico will lift

all duties on EU goods by 2007.

Together with Chile, EU has recently concluded the negotiations for an

association agreement, delivering the most ambitious and innovative

results ever for a bilateral agreement by the EU.

Negotiations are currently under way to liberalise trade with Mercosur, the

South American Common Market consisting of Argentina, Brazil, Paraguay

and Uruguay. The EU is already the most important trading partner of the

Mercosur countries and the biggest foreign investor in the region. The

negotiations will cover not only the liberalisation of trade in goods andservices, but also public procurement, intellectual property rights,

competition policy and foreign investments.

South Africa concluded a bilateral agreement with the EU on trade,

cooperation and development in 2000. According to this agreement, within

12 years, South Africa and the EU will grant free trade status to each

others exports(Brlhart & Matthews, 2007).

The deeper integration proposed by the EU should result in

improvements in regulation and competition. In particular bilateral

measures that promote enhanced transparency and regulatory best

practices are consistent with multilateralism. When it comes to specific

regulatory norms or standards however, the EU should ensure that its

FTAs seek enhanced compliance with existing international norms or

standards rather than introduce specific new standards in the bilateralagreements. Also, to be emphasozed is that globalisation of trade must

20


21/33


not attack poorer countries. The EU wants to commit and find ways of

helping these countries to catch up with the rest of the world, and running

away from poverty trough trade. Improving their access to global markets

for agricultural and industrial goods and services is crucial for its further

development.

21


22/33


III. FOREIGN DIRECT INVESTMENT

This part of the report will be concerned with foreign direct investment(FDI) activities of the European Union. Firstly, a brief introduction to the

concept of FDI will be given in order to provide the reader with a solid

understanding for the upcoming chapters. Secondly, EU outward and

inward FDI stocks and flows will be analyzed and explained. Furthermore,

an analysis of the economic activities the investments were made in is

covered in the upcoming chapter.

A. INTRODUCTION TO THE CONCEPT OF FDI

One of the main characteristics of the world economy and the

globalization was a tremendous rise in foreign direct investments (FDI) of

multinational companies in foreign lines of businesses over the past 20

years (Raff 2006). This was mainly done by founding a subsidiary abroad

or by investing substantially in existing companies. While the worldwide

GDP has tripled during that time, FDI flows have increased more than

thirty times, which points out again the rising importance of this method of

investment (Raff 2006).

Furthermore, a large number of controversial theoretical approaches and

surveys about the determinants and consequences of FDI show the high

economical and also political interest in the topic. This is spurred by thefact that this form of investment has become one of the most important

sources of finance for foreign companies and states, since it covers for a

vast proportion of their capital needs (Groht 2005).

The following section of this paper tries to give a comprehensive overview

on theoretical approaches to FDI in order to provide the reader with a solid

understanding about the concepts involved.

22


23/33


1. What is FDI?

According to Groht (2005) a financial situation can be classified as foreign

direct investment if an investor directly holds more than 10 % of the

shares of a company including their subsidiaries and branches. Also all

subsequent transactions between affiliated companies can be regarded as

FDI (Eurostat 2007). However, for some economists the striking

characteristic of FDI is that the financial relationship involves also a degree

of control. In this scenario, a foreign subsidiary does not only have

financial obligations against its parent enterprise but is also part of the

organizational structure. This is also advantageous for the controlled

company, since a long-term business relationship can be expected(Krugmann 2003).

In fact, FDI can be made in various forms. Firstly, a new company in the

target country can be founded which is called a Greenfield-Investment.

Secondly, an alternative is to take over an existing company or buy at

least 10 % of their shares. This method, commonly referred to as Mergers

and Acquisitions is the most common form of FDI worldwide. However, if

we have a closer look at developing countries, one will discover that

Greenfield-Investments rank first, while also Mergers and Acquisitions

are becoming more popular. Thirdly, credits and any other form of

financial benefits which strengthen the financial power of the foreign

company are regarded as FDI (Groht 2005).

2. Why does FDI take place?

There are two main reasons why investors engage in direct investment

relationships: vertical and horizontal FDI. Clearly, also a mixture of these

two forms is possible and in fact rather likely (Eurostat 2007).

Both Greenfield-Investments and Mergers and Acquisitions can be

further split up into horizontal and vertical FDI. If both parent company

and subsidiary produce the same good or service the underlying

relationship is horizontal. This method is often used when markets are

23


24/33


highly competitive and import costs are too high in order to participate

effectively. Then horizontal FDI acts as a substitute to trade providing the

investor with strategic market access and reduced delivery time (Eurostat

2007).

Nevertheless, if a company splits its production chain up sourcing

intermediate products from countries with lower costs we can speak about

a vertical investment which is carried out in the form of a value chain

(Otto 2005).

3. Advantages of FDI

There are several advantages arising from FDI that cause investors to

engage in this method of investment. From the investors point of view,

FDI is a reasonable way of entering a new market and of gathering

experience in it. Furthermore in some service industries (e.g. banking) a

local representation of the company can be a prerequisite for serving the

market. Last but not least, lower input costs for labour, raw materials or

intermediary goods often play an important role in the decision whether to

invest in a foreign country (Eurostat 2007).

Nonetheless, FDI entails not only benefits for the investor, but also for the

investee. Most importantly, the direct investment enterprise can expect a

long-term relationship with the investor. FDI flows are less liquid and

tradable than portfolio investments and hence less volatile. Especially in

the case of emerging countries, this fact decreases the risk of speculationand liquidity crises. Moreover, as FDI increases the competition in the

target country it is likely that also its rivals improve their efficiency and

product quality. The foreign expertise might also lead to technology

spillovers, influence management skills and employment and

consequently growth (Eurostat 2007).

At this point it needs to be pointed out that FDI has not only advantages

but also downsides like increased economic and political dependence or

possible externalities on the labour market (Economy Watch 2010).

24


25/33


However these disadvantages are outweighed by the positive effects of

FDI and hence shall not be further discussed in this paper.

4. Theoretical explanations of FDI

There are numerous research papers trying to explain the reasons for

direct investments across borders. This part of the paper tries to give a

brief and comprehensive explanation for the existence of FDI using trade

models.

a) Neoclassical theories

The first attempt to explain FDI was Ricardos theory of comparative

advantage. Nevertheless, this theory failed to explain the rising share of

FDI. In fact, the theory, which is based on two countries with two different

products and immobile production factors could not even allow FDI. Also

the Heckscher-Ohlin model which is built on the Ricardian model faces the

limitations of immobile production factors. Consequently, other models

such as the portfolio theory were used to describe the ongoing situation.

Also this attempt failed since the portfolio theory only explains foreign

investments as part of a portfolio and not directly (Hosseini 2005).

Interestingly, international investments were not really common at the

time those classic models were invented hence there was no need for

them to explain the rationales behind FDI.

b) Production cycle theory of Vernon

Vernon came up with his production cycle theory in 1966 which was

another attempt to capture foreign investments in a model. He believed

that there are four stages of production cycle: innovation, growth,

maturity and decline. In the first stage of the production cycle a

multinational company has an advantage by possessing new technologies

but as the product is launched also the technology is known. Therefore the

25


26/33


initial producer starts to standardize the product and others will copy it.

This forces the multinational firm to perform production facilities on the

local market in order to compete with its competitors in terms of costs

(Vernon 1966).

c) The Eclectic Paradigm of Dunning

Basis of this theory developed by professor Dunning is the existence of

different advantages and prerequisites in order to engage in FDI (Dunning

1973).

Ownership advantages: This refers to intangible assets, such as unique

technology, certain management skills or simply a patent or brand owned

by the multinational company, which give a strong competitive advantage

at the foreign market.

Location advantages: A production facility abroad has a location

advantage compared to site at home which makes it more favorable for

the company to shift its production abroad. This can be determined by the

political framework (subsidies), cost advantages or also trade barriers

(quotas, tariffs).

Internalization advantages: Supposedly the first two advantages exist then

it must be worthy for the company to use these advantages in

collaboration with some factors outside the country of origin. A reason

might be the existence of market failures producing costs that are higher

than shifting production to the foreign country.

The theory states that only if all three advantages exist at the same time

an investor will engage in FDI (Dunning 1973).

d) Conclusion

Empirical evidence shows that there is not a unified theory which is

capable of fully explaining FDI and it is unlikely that such a theory will

emerge in the future.

26


27/33


However, neoclassical theorists could not explain the existence of Multi

National Corporations. The underlying theories were able to define

portfolio investments by looking at interest rate differences in two

countries but failed to show causes for FDI. Vernon stated in 1966 that it is

the competitors who set essential incentives that make a company invest

abroad. Empirical evidence, though, show that there was not always a

clear link between FDI and technological advantages but investments were

still made.

Finally, after various neoclassical attempts to explain FDI Dunning

proposed a conceptual framework which was widely accepted in the

literature. Although also his theory had some weaknesses it was used until

very recently.

B. OVERVIEW ON FDI ACTIVITIES OF THE EUROPEAN UNION

In 2006 world FDI inflows (excluding intra-EU flows) accounted for EUR 774

bn which meant an increase of 56 % compared to the previous year.Interestingly, in this very year the EU overtook the United States in terms

of FDI inflows receiving about 20 % of the worlds total (USA 18 %).

Furthermore, while the share of inflows to developing countries droped

slightly the amount of direct investments made in developed countries

increased to 54 % (Eurostat 2008).

Table 1: World FDI flows by recipient, 2001-2006, EUR bn, Source: Eurostat

2008

Regarding the world FDI outflows by investor country it is obvious that

developed countries account for the largest share with approximately 80

% of the total flows in 2006. The share of the EU was with 34 % slightly

bigger than the amount invested by the United States. Compared to 2005

27


28/33


this meant only a slight increase which is due to the extraordinarily high

share in the previous year.

Table 2: World FDI-flows by origin, 2001-2006, EUR bn, Source: Eurostat

2008

1. EU direct investment abroad

Since 2002, direct investments made by the 27 member states of the EU

increased to EUR 260.2 bn in 2006. More precisely speaking, this is an

increase of 11 % compared to 2005 and is the highest level reached since

2001 (Eurostat 2008).

55 % of EU FDI outward flows went to the American continent in 2006

which is a total of EUR 141.9 bn in absolute terms. Unsurprisingly, the

United States accounted with 28 % for the majority of total EU FDI outward

flows followed by Canada with 12 %. Non-EU Europe attracted investment

flows of EUR 66.8 bn (26 %) in 2006. This is a drastic decline relative to

the previous year but only because there was such an extraordinarily high

investment flow in 2005 which was due to a recovery of flows to

Switzerland. In 2006, Switzerland ranks third as a target country for EU

outward investment receiving 8 % of the total flows.

Table 3: Extra-EU outward flows, by main continents, EUR bn, Source:

Eurostat 2008

Regarding EU FDI outward stocks the distribution on the different

continents is quite similar. North America ranks first with 39 % of total

stocks followed by non-EU Europe holding 22 %. As can be seen on the

following table Africa and Oceania remain very unattractive for EU FDI.

28


29/33


Consequently only 5 % and 3 % respectively of the investment stock is

allocated in those continents.

Table 4: EU-25 FDI outward stocks by main destination, Source: Eurostat

2008

Main investors among the member states are the United Kingdom, France

and Germany. These three accounted for considerable 45 % of the total

outward stock. While the most important partner of all three countries is

the United States, France also has a large share of investments in

Switzerland (9 %) and Japan (8%) (Eurostat 2008).

2. Direct investment in the EU

The EU is a fairly attractive region for foreign countries to invest in.

Although direct investment in the EU experienced a sharp decline in 2004,FDI inward flows jumped by 118 % and 24 % respectively in the following

two years resulting in a total of EUR 157.1 bn in 2006. Concerning the

distribution of this amount the picture is quite similar to the one gained

from outward investments. The United States is with 48.1 % by far the

leading investor which equals a total investment of EUR 75.6 bn expressed

in absolute numbers. This position was strengthened by big strategic deals

that were put in place in 2006. These included acquisitions in the field oftelecommunications, hotels, banks and pharmaceuticals (UNCTAD 2007).

Switzerland ranks second (10.6 %) and Japan (8.7 %) takes the third place

in this statistics. Interestingly, if we have a more aggregated look at the

origins of EU inward investment it is obvious that also Asia has a

considerable interest in European investments. In fact, Asia was the

second largest investor in 2006 with a share of 19 % compared on a

continental level.

29


30/33


Table 5: Extra-EU inward FDI flows, by main continents, EUR bn, Source:

Eurostat 2008

Furthermore, it is worth mentioning where these FDI inward stocks exactly

went to. As a matter of fact, the United Kingdom was by far the major

recipient in 2006 hosting 19.5 % of the total stocks. The Netherlands is the

second most attractive country for foreign investment (8.5 %) closely

followed by France (7.9 %) and Germany (7.8 %) regarding FDI inward

stocks.

With a closer look to FDI inward flows it becomes evident that alsoLuxembourg is an attractive country for foreigners to invest in. In this

statistic the small country ranks second with a share of 20 % of total

inflows. The reason for the countrys importance can be easily explained

by its position as a centre of financial intermediation activities (Eurostat

2008).

Table 6: Share in EU-27 FDI inward flows from extra-EU 2004-2006,

Source: Eurostat 2008

IV. REFERENCESDunnning, J. H. 1973, The determinants of international production,

Oxford economic papers 25.

Economy Watch 2010, Disadvantages of Foreign Direct Investment,

[Online], Available: http://www.economywatch.com/foreign-direct-

investment/disadvantages.html [15 November 2011].

Eurostat 2007, European Union foreign direct investment yearbook 2007,

Luxembourg.

30
http://www.economywatch.com/foreign-direct-investment/disadvantages.htmlhttp://www.economywatch.com/foreign-direct-investment/disadvantages.htmlhttp://www.economywatch.com/foreign-direct-investment/disadvantages.htmlhttp://www.economywatch.com/foreign-direct-investment/disadvantages.html


31/33


Eurostat 2008, European Union foreign direct investment yearbook 2007,

Luxembourg.

Groht, V. 2005, `Warten auf den Boom Direktinvestitionen in den

osteuropischen Beitrittslndern`, Wunschdenken und Fakten, Berlin.

Hosseini, H. 2005, An economic theory of FDI: A behavioral economics

and historical approach, The Journal of socio-economics, 34, pp. 530-531.

Krugmann, P. R. 2003, Internationale Wirtschaft, 6. Aufl., Mnchen.

Otto, A. H. 2005, Makrokonomische Effekte der Direktinvestitionen, in

Hasse, Band 33, Frankfurt am Main.

Raff, H. 2006, `FDI: Theory and Evidence`, Institut fr

Volkswirtschaftslehre an der Christian-Albrechts-Universtitt zu Kiel,

[Online], Available: http://willmann.com/~gerald/awsem/voss.pdf[30

October 2011].

UNCTAD 2007, World Investment Report 2007, [Online], Available:

http://www.unctad.org/en/docs/wir2007_en.pdf[15 November 2011].

Vernon, R. 1966, International investment and international trade in the

product cycle, Quarterly journal of economics 80, pp. 190-207.

Matea:

Bjelic, P. 2005, Trade Policy of the European Union as a Factor of Regional

Trade Integration in Southeast Europe, Discussion Paper No. 36, Centre

for the Study of Global Governance, London School of Economics and

Political Science, London.

Brlhart, M., & Matthews, A. 2007, EU External Trade Policy, World Trade,

921-967.

31
http://willmann.com/~gerald/awsem/voss.pdfhttp://www.unctad.org/en/docs/wir2007_en.pdfhttp://willmann.com/~gerald/awsem/voss.pdfhttp://www.unctad.org/en/docs/wir2007_en.pdf


32/33


Chen, N. 2002, Intra-national versus international trade in the European

Union: Why do National Borders Matter, Discussion Paper No. 3407,

Centre for Economic policy research, London.

Conconi, P. 2009, The EU common commercial policy and global/regional

trade regulationULB Institutional Repository 2013/13344, ULB, Universite

Libre de Bruxelles, Bruxelles.

Council of the European Union, 2007, General Secretariat, Enhancing EU

support for trade-related needs in developing countries, Brussels.

Cremona, M. 2002, The external dimension of the internal market, The

Law of the Single European Market,Oxford University Press, p. 354-355.

Cremona, M. 2011, External Relations and External Competence of the

European Union: the Emergence of an Integrated Policy, Oxford University

Press, 2nd edn, chapter 9.

Deutsch, K.G. 1999, The politics of freer trade in Europe, Center on

Transatlantic Foreign and Security Policy Studies, Freie Universitt Berlin,

Department of Political Science, Munster.

European Commission 2003, Reviving the DDA Negotiation the EU

PerspectiveCommunication from the Commission to the Council, to the

European Parliament and to the Economic and Social Committee, Brussels.

European Commission 2011, EU Trade Policy towards Developing

Countries, [Online], available:

http://trade.ec.europa.eu/doclib/docs/2010/february/tradoc_145762.pdf[22 October 2011]

European Parliament, [Online], Available:

http://www.europarl.europa.eu/sides/getDoc.do?

pubRef=-//EP//NONSGML+COMPARL+PE-

456.679+01+DOC+PDF+V0//EN&language=EN [29 October 2011].

European Union, 2008, Consolidated version of the treaty on the

functioning of the European UnionOfficial Journal of the European Union,

(C 115/47), 47-200.

32
http://trade.ec.europa.eu/doclib/docs/2010/february/tradoc_145762.pdfhttp://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+COMPARL+PE-456.679+01+DOC+PDF+V0//EN&language=ENhttp://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+COMPARL+PE-456.679+01+DOC+PDF+V0//EN&language=ENhttp://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+COMPARL+PE-456.679+01+DOC+PDF+V0//EN&language=ENhttp://trade.ec.europa.eu/doclib/docs/2010/february/tradoc_145762.pdfhttp://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+COMPARL+PE-456.679+01+DOC+PDF+V0//EN&language=ENhttp://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+COMPARL+PE-456.679+01+DOC+PDF+V0//EN&language=ENhttp://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+COMPARL+PE-456.679+01+DOC+PDF+V0//EN&language=EN


33/33


Hohler, W. 2002, Issues of US-EU trade policy, Working Paper, Institut fr

Volkswirtschaftslehre, Linz.

Holmes, P. 1991, Europe 1992: From the Common market to the Single

Market Politicised economic choice, Lancaster.

Kleimann, D. 2011, Taking Stock : EU Common Commercial Policy in the

Lisbon Era, Policy Analysis, Bruxelles.

Krajewski, M.2010, The Reform of the Common Commercial Policy, in A.

Biondi and P. Eeckhout (eds), European Union Law after the Treaty of

Lisbon, Oxford: Oxford University Press, (forthcoming).

Limo, N. 2007, Are Preferential Trade Agreements with Non-trade

Objectives a Stumbling Block for Multilateral Liberalization? Review of

Economic Studies 74, 821-855.

Organisation for Economic Co-operation and development, 2011, [Online],

available: http://www.oecd.org/home/ [21 October 2011]

Vamvakidis, A. 1998. "RTAs versus Broad Liberalisation." International

Monetary Fond. WP/98/40. P. 29.

Woolcock, S. 2005, European Union trade policy: domestic institutions

and systemic factors, In: Kelly, D. and Grant, W., (eds.), International

political economy series. Palgrave, Basingstoke, UK, pp. 234-252.

Young, A. & Peterson, J. 2006, The EU and the new trade politicsJournal

of European Public Policy, pp 795-814.
http://www.oecd.org/home/http://www.oecd.org/home/

seminar eu with mateas part

Documents