_ Yuri Kofner, junior economist, MIWI – Institute for Market Integration and Economic Policy. Munich, 14 November 2020.
Region-to-region cooperation as an answer to Brexit and COVID
In 2020 the economies of the EU, Germany, and especially Bavaria will experience a double shock.
Firstly, according to the joint forecast of leading research institutes, German GDP will fall by 5.5 percent in 2020 due to the corona restrictions, while the European Commission assumes that the EU economy will decline by 7.4 percent. This is the biggest economic crisis of the post-war Western world.
Second, a “hard Brexit”, which is most likely to be a “hard” one, will result in a significant welfare loss for both Europe and the UK. According to various simulation studies by the Munich ifo Institute, the average GDP loss in the EU27 will between 0.25 and 0.6 percent. Depending on the Brexit scenario, the UK’s exit from the EU will reduce German national income by 0.5 to 0.8 percent.
In order to compensate for the negative effects of the corona crisis and of Brexit, the German Federal Government, the European Commission, and also Bavaria in particular, as a heavily export-dependent region, should use the postcovid restart of the world economy to intensify international discussions with the participation of policymakers and experts for the implementation of new and the acceleration existing European foreign trade initiatives.
Particular attention should be paid to the increasingly important issue of trade and economic region-to-region cooperation, particularly with five macro-regions: the EAEU, the USA, the African Union, ASEAN, and MERCOSUR.
The aim of this article is to summarize the significant export and welfare gains, which the EU, Germany, and Bavaria can harness from a renewed region-to-region free trade agenda.
Eurasian Economic Union
Due to sanctions and trade restrictions, there is a large but unrealized mutual trade potential between the EU and the EAEU. The current EU export potential on the EAEU markets is at least EUR 45.3 bln. Goods with strong export potential are mainly products with high added value: chemicals, pharmaceuticals and vaccines, cosmetics, electronic devices, cars and trucks, airplanes and helicopters, medical devices and instruments.
According to a study by the ifo Institute, such a free trade area would increase German exports to the Eurasian markets by 60 percent (by EUR 31 bln). As a result, such a free trade agreement would increase Germany’s gross domestic income by 0.1 to 0.3 percent, which would make every German EUR 28 to 91 richer per capita.
The German sector with the highest value-added growth rates of 3.4 percent (EUR 2.4 bln) would be the automotive industry that is also very important for Bavaria. This sector would account for around a third of the total increase in net value-added growth in Germany. Relatively high growth is also expected for metal products (1.8 percent) and machines (0.5 percent). German service sectors such as public services and real estate would also benefit from such an EU-EAEU free trade agreement.
The fact that the Eurasian Economic Commission has decided to autonomously apply up to 90 percent of the European technical regulations and standards for intra-union goods trade already creates an important technical basis for a potential free trade area between the EU and the EAEU.
In 2017, the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU came into force. It removed almost 98 percent of the pre-existing tariffs, prescribed mutual recognition of technical regulations and standards, protection of intellectual property, and introduced a, rather controversial, investor-state dispute settlement mechanism between the parties. Concurrently, USMECA, a renewed version of NAFTA and equality deep and comprehensive free trade agreement as CETA, came into force in July 2020.
With a new president in the White House, whoever it may be, it may be time to return to the question of complementing the EU-Canada CETA agreement with a revised preferential trade and investment agreement between the EU and the United States, which would redress the controversies about the Transatlantic-Trade and Investment Partnership (TTIP) initiative.
In 2016, Washington stopped the TTIP negotiations. The American side was concerned about possible adverse effects on domestic industrial workers, while European experts pointed out many controversial aspects of the agreement, including a lack of transparency in the negotiations, a likely lowering of food safety and labor standards, the controversial “Arbitration Court for the Protection of Foreign Investments”, which could have overruled national and EU law.
In August 2020, the US and the EU were able to agree on a temporary end to their trade war, as well as on mutual tariff cuts, which raises hopes for a possible improvement in Transatlantic trade relations.
According to estimates by the ifo Institute, the CEPII (Center d’Etudes Prospectives et d’Informations Internationales), the CEPR (Center for Economic and Policy Research) and the Swiss Federal Institute of Technology (ETH) in Zurich, a preferential trade and investment agreement between the EU and the United States would increase the German real per capita income by an average of 3.1 percent, almost double German exports to the US (by 93 percent) and create between 100,000 and 181,000 new jobs in Germany.
In 2019, the USA was Bavaria’s second most important export destination after the EU and accounted for 11.3 percent of Bavarian exports (EUR 21.3 bln). Bavaria’s main export goods to the USA were high-tech goods with high added value: passenger and transport vehicles (EUR 6.5 bln), medical equipment and pharmaceuticals (EUR 2.5 bln), machines for power generation (EUR 1.2 bln), and aircraft (EUR 830 mln).
The African Union (AU), which includes the 55 countries of the African continent, are moving towards the creation of the African Continental Free Trade Area (AfCFTA), which, according to estimations by the World Bank, will boost Africa’s income by 7 percent by 2035 and increase intra-continental exports by USD 560 bln.
In the interests of the Bavarian, German and European economy, Bavaria could initiate an international discussion on the possibility of a comprehensive free trade agreement between the EU and the African Union (AU) or its individual member states.
In 2019, Bavarian exports to Africa accounted for almost EUR 3 bln or 1.5 percent of Bavaria’s total exports.
In the medium term, Africa’s role as a sales market and production location will become even more important for German and European companies. The workforce in Africa will rise from 400 million in 2018 to one billion in 2050 – that is one in four people in the labor force worldwide. Unfortunately, the trade barriers for doing business with and in Africa are still very high.
Lowering tariff and non-tariff barriers would promote German-African trade relations and investment. According to estimates by the MIWI Institute (Institute for Market Integration and Economic Policy), based on data from the International Trade Center, Germany’s export potential to the AU through trade liberalization amounts to EUR 15.1 bln. A free trade agreement between the EU and the AU could increase German exports to Africa by 67.8 percent.
In addition, the increased economic prosperity resulting from the conclusion of a free trade agreement between the EU and the African Union can also reduce the migratory pressure from Africa to Europe. A study recently carried out by the Kiel Institute for the World Economy showed that a 1 percent increase in the gross domestic product according to purchasing power parity in developing countries lowers the emigration rate by almost 1 percent.
Association of Southeast Asian Nations
The gravitational center of the world market is shifting to Asia. The Association of Southeast Asian Nations (ASEAN) is an important emerging economic region. During the past decade, it has become the sixth-largest collective economy in the world with an average GDP growth rate of 4.5 percent. 
In 2019, Bavarian exports to the ASEAN countries amounted to over EUR 4 bln. The main export goods were highly developed: engines, cars, bodies, electronic devices, and machines for generating electricity.
In the interests of the Bavarian, German and European economy, Berlin and Brussels should speed up negotiations on closer trade and economic cooperation between the EU and ASEAN or its individual member states.
Negotiations for a free trade agreement between the EU and ASEAN began in 2007. To speed things up, Brussels agreed in 2009 to split negotiations with the ASEAN member states. As a result, trade agreements with Singapore came into force in 2019 and with Vietnam in August 2020. Negotiations with Indonesia are continuing actively. Investment agreements are planned.
Export and investment growth from Europe to ASEAN is hampered by high non-tariff trade barriers. In addition to average tariffs of over 5 percent, Indonesia and the Philippines ranked 3rd and 15th of the countries with the most trade and investment barriers for EU companies in 2019.
In a study commissioned by the European Commission, it was estimated that a preferential trade and investment agreement with ASEAN would increase EU exports to the ASEAN states by 1.1 percent, European real wages by 0.2 percent, and the GDP of the EU could increase by 0.2 percent. The European industries that would benefit most from such an agreement are the automotive sector and mechanical engineering, both of which are of central importance to the Bavarian economy.
The Southern Common Market
In June 2019, after almost 20 years of negotiations, an agreement was reached between the EU and MERCOSUR on the goods trade part of the Association Agreement.
In 2018, MERCOSUR was Germany’s tenth-largest export market outside the EU. Over 240,000 jobs in Germany depend on exports to the MERCOSUR region.
In 2019, Bavarian exports to the MERCOSUR countries amounted to over EUR 1.6 bln. The main export goods were again highly developed: engines, automobiles, bodies, lifting and handling equipment, mining and construction machinery.
Tariff reductions with the MERCOSUR countries still hold great trade potential. MFN tariffs applied to EU exports range from 9.6% for Paraguay to 13.4% for Brazil. The trade agreement with MERCOSUR will result in considerable tariff cuts through the gradual abolition of tariffs on 91% of all goods. The planned free trade with the South Americans highlights the comparative advantages of the two world regions: According to estimates by the ifo Institute, the classic industrial sectors in Germany would benefit to the greatest possible extent, while the European agricultural industry can expect losses. And vice versa. In 2018, primary goods accounted for 74% of MERCOSUR’s exports to the EU, while finished goods accounted for 80% of EU exports to this region.,
According to a study by the Bank of Spain, the EU-MERCOSUR agreement would increase German exports to the MERCOSUR countries by 0.6 percent and German real income by 0.1 percent.
In this regard, Berlin and Munich could take the initiative on foreign trade policy and initiate renegotiations on the association agreement between the EU and MERCOSUR so that it does justice to the interests of German and Bavarian agriculture.
The Bavarian Farmers’ Association (BBV) criticizes the likely exposure to much tougher competition due to the expected increase in EU agricultural imports. Beef, chicken, and sugar-producing companies would be particularly affected. As a result of the extensive concessions for highly sensitive agricultural products, the already difficult economic situation in the sectors concerned would continue to deteriorate and the existence of numerous domestic farmers would be endangered.
As a result, the full implementation of such a broad trade liberalization strategy on the conclusion of region-to-region trade and economic agreements between the EU and the EAEU, the United States, the African Union, ASEAN, and MERCOSUR could increase the export-dependent national welfare of Germany by a remarkable 4.1 percent.
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