Comment

A pie in the sky

Oscar Guinea / Jun 2020

Phil Hogan, European Commissioner for Trade. Photo: European Union, 2020

 

Self-sufficiency isn’t a good policy nor a realistic option, or as European Commissioner for trade Phil Hogan put it “a pie in the sky”. No country on its own could have produced as many medical supplies as it needed during the Covid-19 crisis. Thankfully, they don’t have to ‑ that’s the beauty of specialisation. If a country were to produce a product that has previously bought from abroad, it’s likely to cost more than the imported good. There is also an opportunity cost of the resources – capital and labour – shifted to produce goods that Europe currently buys from other countries. It’s fanciful to argue that Europe’s long-term competitiveness lays in the production of facemasks.

There is a better way. Policymakers don’t need to choose between resilience and global supply chains. Trade makes our societies more resilient to changing circumstances and EU trade policy should include policies that promote trade. A good way to start would be to support harmonised standards and the recognition of technical regulation from countries outside the EU. The world didn’t close down to fight this pandemic – quite the opposite. Most countries – including the EU – opened their markets and relaxed their regulation in response to Covid-19.

The European Commission public consultation on its new Trade Policy Review includes the word standard 14 times. For example, the document states that “Trade policy’s role on the internal European side includes supporting the competitiveness of our industries (through export opportunities and standard setting)”. But why is Europe so keen to promote its standards?

Covid-19 offers a clue to answer this question. On March 2020, when it was clear than the production of medical supplies was not enough, the European Standardisation Bodies made 11 standards on medical goods free of charge. The International Standard Organisation (ISO) did the same and made 28 standards on medical products freely available on its website. The EU and ISO wanted to support new companies to start producing medical goods by making the technical specification of these products free to download.

If you ever read a standard, the first thing that may come to your mind is that the document wasn’t written for policymakers but for engineers. A standard is simply a technical document. It describes the steps to make a certain good: the amounts and quality of the input and the size and technical features of the finished products.

This is because a standard is not a regulation. Standards are documents prepared by standardisation bodies or company associations to put in writing the technical requirements of a product. Businesses can decide to follow these standards or not. Most of the time, they do. Many firms produce components that are part of a larger supply chain managed by multinationals which require products to be standardised. On the other hand, standards can be included in a regulation. The European Commission regularly requests European standardisation bodies to produce standards to complement certain regulations.

Standards can be national, regional (i.e. European), or international. National Standardisation Bodies can adopt the same regional or international standards to make their technical requirements equivalent or identical. For example, when two countries adopt an ISO standard, then a product can be produced for the domestic market and for sale in each other’s market.

The EU and the EU member states are pretty good at adopting and influencing international standards. Firstly, European Standardisation Bodies are active adopters of international standards. Besides, when an international standard is adopted at the EU level, member states have to adopt it too. Secondly, EU national standardisation bodies have the resources, technical expertise, and the numbers in the ISO committees to influence international standards. It’s a bit like the Brussels Effect – when EU regulations are adopted outside the EU - but in disguise. This has positive effects on trade. On average, international standards increase trade flows by 0.67%.

But 0.67% does not seem like a lot for all the troubles that it takes to harmonised standards. As a comparison, Free Trade Agreements increase trade by 12%. Again, Covid-19 offers another clue to explain the limited trade impact of harmonised standards. Most of the ISO standards that were made available for free to increase the production of medical goods had only been adopted in Europe. Neither the US nor China has adopted any of these international standards. The EU may be good at applying ISO standards but it does not matter much if other countries don’t follow these international standards too.

Even a crisis like Covid-19 has a certain sequence and asymmetry that allows to ramp up production in different locations. Any initiative that facilitates trade and supports global value chains will make Europe more resilient. International standards can play a role in Europe’s Open Strategic Autonomy but for that, international standard need to become global standards. As a shortcut, the EU – like the US did – can also accept other countries standards and regulations unilaterally. It’s by widening the pool of suppliers – rather than closing it – that Europe can build its resilience to random shocks like Covid-19.

 

Oscar Guinea

Oscar Guinea

June 2020

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