The Politics of Preferential Purchasing

Trade between the EU and Colombia and Peru seems poised to get a bit freer, as all 27 EU trade ministers agreed in principle on a new free trade agreement (FTA) with the two South American nations. Ecuador and Bolivia also have options to join, which would free trade between Europe and the resource-rich Andean region.

The pact’s text isn’t final yet, but that should happen quickly now that all EU states agree on the provisions—the major political hurdles seem cleared. EU, Colombian and Peruvian officials are expected to sign it later this year, and it should pass through the European Parliament quickly, taking effect later this year (provided all goes according to plan).

Colombian and Peruvian goods were already largely duty-free in the EU under preferential trade agreements expiring in 2013. The new deal will slash tariffs on both sides, saving about €500 million annually and likely increasing the flow of goods and services in both directions. It’ll also be easier for European firms to invest in fast-growing South America. In short, a win-win for all involved.

The agreement comes as free trade is at the forefront of European politicking. UK Prime Minister David Cameron, with backing from Spain, Italy and several Northern countries, is pushing a heavy free trade agenda. Their wish list includes bilateral or regional FTAs with India, Canada, ASEAN, MERCOSUR, Japan and the US, and deeper trade ties with Russia and China. But France blocked their efforts to add these goals to the official statement at March’s EU summit. President Nicolas Sarkozy is fighting for re-election, and free trade is a tough sell with French voters. He’s already lost significant support to the center-left and far-right, and blessing a free trade manifesto would likely have further dimmed his chances.

Sarkozy took that populist push one step further last week, making a campaign pledge to demand the EU enact a “Buy European” policy. Modeled after the US’s ultimately feckless “Buy American” policy, this would require EU states to give preference to EU-produced goods and services when making government purchases. In other words, the UK’s ministerial Priuses (Prii?) would be no more. If the EU doesn’t play along, he says he’d push for a “Buy French” provision instead (ignoring that unilateral trade barriers violate EU treaties) ... presuming he wins, that is, which is far from a done deal. The new proposal helped win back votes from far-right challenger Marine Le Pen, but that likely won’t help much in the May 6 runoff against his primary challenger, Socialist FranÇois Hollande, who leads second-round polls by nearly 10 points.

Hollande is similarly employing protectionist rhetoric, though it remains to be seen whether his words would match reality. Recall, Sarkozy called free trade “naïveté” in his 2007 campaign, has sounded protectionist rhetoric throughout his presidency and tried to kill the Doha round of world trade talks in 2008. But while he—or any European protectionist voice—says one thing, the EU’s executive arm (the European Commission) has frequently done another, the new South America deals being but one example. The EU also completed a deal with South Korea in 2011 and launched negotiations with Singapore and Malaysia in 2010. Trade talks with Canada progressed last week, when officials agreed to drop restrictions on beef, cheese and chocolate. Negotiations with India continue this year. In short, Cameron and his allies may not have gotten their wish list on official EU letterhead, but it seems their influence is winning out in practice.

So we may get another five years of French anti-trade posturing, but recent history shows one loud French voice can be about as effective protection as the Maginot Line. But unlike the WWII-era military defenses, in this case, France’s failing to erect significant trade barriers is actually a plus for all parties involved.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.