EU – New Zealand FTA: Towards a new approach in the enforcement of trade and sustainable development obligations

 On 30 June 2022, the President of the EU Commission and the New Zealand Prime Minister jointly announced the successful termination of the negotiations for the creation of a new free trade area (FTA) between the European Union and New Zealand.

As for New Zealand, the commercial liberalization provided by the new FTA would determine a major economic impact since the EU is currently the 4^th largest commercial partner of the country. In particular, the tariff elimination planned in the agricultural and seafood sectors would grant to New Zealand’s producers an immediate saving roughly amounting to 110 million dollars per year. On the whole, an annual growth of 1.8 billion dollars is expected in the New Zealand economy by 2035.

The scale of the event has a different importance from the perspective of the EU. Even if New Zealand is just ranked 50^th among the EU trading partners, the conclusion of the negotiations breathes new life into the EU external commercial policy, and in particular it strengthens the Commission’s Trade for all strategy. After a couple of years of deadlock due to the health emergency of COVID-19 pandemic and, more recently, to the Russian Federation’s aggression of Ukraine, the conclusion of the negotiations with New Zealand will hopefully lead the EU to a new season of commercial relations with third States. In this regard, the next steps will possibly be the conclusion of the negotiations launched in 2018 with Australia and the definition of the Agreement with MERCOSUR, currently agreed only in principle.

The results of EU-New Zealand negotiations in terms of sustainable development

The provisional text of the commercial agreement between EU and New Zealand is now waiting for the final signature. Despite the minor modifications, which the text will still possibly undergo in the current phase, an innovative approach in terms of trade and sustainable development is clearly noticeable and deserves a closer analysis. It is not by chance that the Commissioner for Trade, Valdis Dombrovskis, declared that the new FTA “contains the most ambitious sustainability commitments in any trade agreement ever”.

According to Chapter 19 – entitled “Trade and Sustainable Development” (TSD) – the parties commit themselves to protect and promote both labour and environmental interests. In particular, with regard to the first aim, the parties agree to observe core labour standards, to strive to ratify the fundamental ILO Conventions and to abstain from waiving or derogating national labour statutes in order to encourage trade and investments. With regard to the latter aim, the effective implementation of multilateral environmental agreements already ratified is requested, having particular regard to sensitive issues, such as the control of climate change and the protection of biodiversity. Moreover, the parties shall cooperate in the sustainable use of natural resources and in the conservation of forests and marine ecosystems.

While many of these substantive obligations are similar to those already couched in the EU “new generation” FTAs concluded in the last decade, the most remarkable innovation of the EU-New Zealand agreement concerns the enforcement of the TSD chapter. The “new generation” FTAs, in fact, traditionally submit disputes on sustainable development issues to a peculiar collaborative system, which entails the appointment of a panel of experts charged with adopting non-binding recommendations and excludes the use of economic sanctions in case of failure of their observance. The first – and so far only – example of such a proceedings is the case EU v. South Korea on freedom of association, closed in January 2021.

Instead, the EU-New Zealand Agreement embraces a fundamentally new approach. Article X.2 of Chapter 26, for the first time, provides a uniform dispute settlement system, which applies also to the violation of sustainable trade obligations. In particular, the party claiming a breach of the FTA may request the establishment of a panel, whose members will be selected from different lists of candidates depending on the matter of the dispute. The panel is expected to deliver an interim report, open to the parties’ comments, and later on a final report which eventually ascertains the FTA’s violation and addresses the responsible party with mandatory recommendations. In the case of a lack of execution of the final report within a reasonable period of time, Article X.16 of the same Chapter authorizes the complaining party to adopt temporary measures, which may consist in a request for compensation or in the suspension of the application of other FTA’s obligations. In both circumstances, the reaction shall be proportionate to the original violation. Breaking with the EU traditional approach, the new FTA extends the application of such temporary measures also to sanction the infringement of major sustainable trade obligations, i.e. the violation of core labour standard and the adoption of any action or omission which defeats the Paris Agreement on climate change. A similar direction in terms of economic sanctions had been previously taken by the EU-UK Trade and Cooperation Agreement, the commercial treaty concluded in 2020 between EU and United Kingdom following the Brexit. In this case, the dispute settlement system applicable to the TDS Chapter maintains a collaborative nature, but Article 410.3, of the Agreement admits the possibility to suspend the observance of commercial obligations when the experts’ final report is not properly observed.

The paradigm shift in the EU approach towards sustainable development

The outcome of the negotiations between the EU and New Zealand marks a significant paradigm shift in the EU approach to the enforcement of TSD chapters. In this regard, it is noteworthy that the EU Commission embraced the traditional collaborative system in the first draft version of the agreement, elaborated at the time of the launch of negotiations in 2018, but eventually abandoned it in favour of a more effective enforcement mechanism, supported by New Zealand as well. Besides, such a paradigm shift has been openly confirmed by the Commission with the Communication of 22 June 2022, which elaborates six policy priorities for “a green and just economic growth”. Among them the Commission proposes “to further align TSD enforcement with general state-to-state dispute settlement” in combination with “the possibility of trade sanctions as a matter of last resort, in instances of serious violation of core TSD commitments”.

Several circumstances possibly contributed to such a change of perspective. First, the traditional collaborative approach has always been object of strong criticism both at political, academic and civil level. Although the EU v. South Korea proceedings turned out to be successful and South Korea duly and promptly observed the panel of experts’ final report though the ratification of three fundamental ILO Conventions and the reform of national labour law, serious doubts on the effectiveness of the collaborative systems still survived among members of the civil society and have been collected by the Commission through an Open public consultation in 2021.

Second, the US attitude in terms of enforcement of sustainable trade commitments possibly influenced EU commercial policy. Starting from the Perù Trade Promotion Agreement of 2009, in fact, the ordinary arbitral proceedings apply to all the disputes arising from the violation of labour and environmental obligations enclosed in US commercial agreements. The USMCA, which replaced  NAFTA by 1 July 2020, finally confirmed the use of an uniform enforcement mechanism.

Lastly, the change of perspective as for the enforcement of TSD chapters should be read in connection with the wide range of initiatives, which the EU, in the last years, autonomously developed in support of social and environmental interests. Just to mention a few examples, the European Green Deal’s purpose of achieving climate neutrality by 2050 was made a binding goal for EU member States in 2021. At the same time, an interim and ambitious goal of 55% emission reduction by 2030 has been fixed. As for the external dimension, on March 2022 the Council approved the Carbon Border Adjustment Mechanism, which is intended to fight the carbon leakage and prompt third States towards a more effective carbon reduction policy. Finally, a significant innovation in terms of private entities’ obligations will be introduced by a new Directive on corporate social responsibility, currently under discussion.

Conclusions

Unquestionably, the new enforcement strategy for the TSD chapters brings the EU closer to a successful implementation of the UN 17 Sustainable Development Goals. Hopefully, this new path towards a more effective implementation of sustainable development values will be consistently followed by EU also in future negotiations with other major trading partners. The Commission seems at last to be seriously intentioned to go in this direction, if one should judge from the Communication of June 2022 previously mentioned. However, the final result is far from obvious. If New Zealand had demonstrated to share EU sensitivity over sustainable development imperatives, the same cannot be taken for granted as to the other trade partners of the EU. In this regard, it is to expect that some challenges would probably arise within the negotiations with India and Indonesia in the light of their national policies on labour and environmental rights.