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# 52012DC0070

**REPORT FROM THE COMMISSION Trade and Investment barriers Report 2012 /\* COM/2012/070 final \*/**

  

REPORT FROM THE COMMISSION TO THE EUROPEAN COUNCIL

Trade
and Investment Barriers Report 2012

1.         INTRODUCTION

In 2011, the
Commission presented its first Trade and Investment Barriers Report (TIBR) to
the European Council. The report was issued in follow up to an undertaking in
the Europe 2020 Strategy[1] which was subsequently taken up in the Commission's Communication "Trade,
Growth and World Affairs"[2]. The aim of the report was to "focus attention [at the
political level] on the common efforts needed on a selected set of market
access barriers" which prevent European companies from exporting to or
investing in third countries. The report aimed at raising awareness of the
importance of addressing such barriers in a focused and concerted way so that
European companies can reap the benefits of the global market in accordance
with what has been negotiated with the EU's trading partners at the multilateral
or bilateral level.

This document is the
second Trade and Investment Barriers Report. It provides an account of the
progress achieved on the 21 barriers identified in the first edition and also identifies
a number of new barriers which merit concerted action and political
prioritisation both by the Commission and Member States. As in the 2011
edition, this report focuses on market barriers in some of the EU's strategic
partners, i.e. China, India, Japan, Mercosur[3], Russia and the US[4].

The focus on some of
the EU's strategic partners does not mean, however, that barriers in other
markets will not be addressed. On the contrary, the Commission is actively
engaging with a broader group of trading partners including countries such as Vietnam, Indonesia, Ukraine or Turkey - where European companies are faced with a considerable
number of barriers - in order to improve market access conditions.

Removal of specific
trade barriers remains a corner-stone of the EU's relationships with third
countries and an important component of EU trade policy. This becomes even more
relevant in the present context of protracted economic crisis, which has a
severe impact on many European companies and citizens in the EU. In this
context, trade is a fundamental driver for stimulating economic growth and
creating jobs[5]. At the same time however, increasing risks of protectionism[6] pose a threat to
an open trading system. It is, therefore, in the EU's genuine interest to
promote and pursue trade openness in all fora - both multilateral and
bilateral.

With the prospects
of concluding the Doha Development Agenda in the near future waning, the EU has
refocused its trade strategy on bilateral negotiations. A very comprehensive
and ambitious Free Trade Agreement with South Korea provisionally entered into
force on 1 July 2011 and will provide significant economic benefits to European
companies and consumers. Bilateral trade negotiations were concluded with
Central America, along with Peru and Colombia. Negotiations are being concluded
with Ukraine, are well under way with Canada, India and Singapore and are ongoing with Malaysia and Mercosur. New FTA negotiations have been launched with Georgia and Moldova and discussions are being held with Indonesia, Vietnam, Thailand, the Philippines and Japan in view of possible negotiations. Russia's accession to the WTO
opens new perspectives for the ongoing negotiation of a New Agreement. With
regard to the US and China, the EU is engaged in high-level dialogues dealing,
inter alia, with market access barriers. Furthermore with regard to China, the EU is currently assessing the desirability and feasibility of a standalone
investment agreement.

With such a
comprehensive negotiating agenda, it is essential to make existing market
access commitments for European companies in third countries irreversible, as
well as even generate new market access. This also helps create stable and
predictable framework conditions for business activities worldwide. The successful
conclusion of negotiations, however, is only one side of the coin. The other
side – equally important - is making sure that opportunities created through
negotiations are indeed translated into real trade flows on the ground. All too
often, in practice, European companies are still facing considerable barriers in
entering foreign markets. These barriers are often in the form of non-tariff
barriers, such as technical regulations and standards, burdensome customs
procedures or weak enforcement of intellectual property rights. Increasingly,
since the start of the economic crisis in 2008, barriers proliferate in areas
where international trade disciplines are still rather weak – such as in
government procurement and export restrictions.

Trade negotiations
and enforcement must go hand in hand. Strengthening the negotiating agenda
inevitably triggers a stronger focus on enforcement. This is also underlined in
a recent Resolution by the European Parliament[7] which provides
valuable orientation for the work of the Commission and Member States on trade barriers. It reflects the rising political awareness that tackling trade
barriers is crucial for both the legitimacy and effectiveness of trade policy.
As a result, enforcement must be pursued as a matter of priority, especially in
times of economic crisis, including at the political level.

The key message of
this report is consistent with the core idea behind the Market Access Strategy:
Where Commission and Member States put their weight behind focused and
determined action in a coordinated manner, barriers in third countries can be
removed and European companies can get better access to foreign markets.
Success does not always come about quickly and is not always as far-reaching as
economic operators would wish. But when it does occur it can provide
considerable economic benefits to European companies and citizens.

This second edition
of the TIBR is structured as follows: Section 2 sets out the progress achieved
with regard to the barriers identified in the last report and identifies options
for further action where progress is not yet satisfactory. Section 3 proposes a
number of new barriers for priority action in the future. Section 4 outlines an
emerging tendency towards the introduction of trade-restrictive
industrialisation polices in some countries.

2.         2011
BARRIERS: WHAT PROGRESS WAS ACHIEVED?

The TIBR 2011
identified 21 barriers in six trade partners/regions. These barriers were
considered to be of major importance for European business given the potential
economic or systemic impact and the strategic importance of the countries where
those barriers had emerged. These market access issues have been elevated to
key priorities in the EU's bilateral trade relations with the countries
concerned. The Commission has sought to systematically raise them in all
bilateral meetings including up to the highest political level where
appropriate (e.g. summits).

This section will
report on the most important actions carried out on the barriers, along with
the progress achieved in the course of 2011. A comprehensive summary of all
actions taken by the Commission, including at working level, is available in
the attached staff working paper. In some cases, progress has translated into the
full removal of a barrier. In other cases, while some improvement has been
achieved, part of the barrier remains. For a few barriers, the situation has
deteriorated as compared to last year notwithstanding the numerous actions
undertaken.

Analysis in this
section will be carried out along these three categories according to the
degree of progress achieved. For Russia, the upcoming WTO accession has the
potential of solving many longstanding market access issues; the state of play
of barriers in Russia will therefore be analysed under a separate category.

 2.1      Barriers
where substantial progress was achieved

Substantial progress
was achieved on two measures concerning India. First, success was achieved
in removing restrictions on the export of cotton, namely on
cotton yarn and raw cotton, which were introduced in 2010. In August 2011, the
Indian government ultimately lifted any remaining quantitative restrictions on
raw cotton. At present, no restrictions on the export of cotton are applicable.
Export restrictions on cotton and products thereof were of great concern due to
their upward pressure on world prices and the distortions they were causing on
security of supply. Moreover, India has remained one of the main EU import
sources for cotton products: in 2009, 23% of import for the products concerned
by the restrictions came from India. Therefore, lifting of this barrier is of
high economic importance for EU companies, particularly those in the textiles
sector. In the course of 2011, EU concerns were raised with the Indian
authorities on many occasions, including by the Director General of DG TRADE.

The second Indian
measure where substantial progress was achieved concerned the licensing
requirements introduced in 2010 for telecommunication equipment;
these were ultimately modified so as to eliminate most of the burdensome
conditions. According to the initial requirements introduced in 2009 and 2010
based on concerns relating to security, foreign telecom equipment providers
should have transferred their technology within the first three years of
contract and replaced their engineers with Indian ones within two years.
Moreover, certain sensitive information would have to be disclosed to the
Indian authorities for security reasons. Such requirements, however, departed
considerably from consolidated international practices. As a result of concerns
expressed by various actors and countries, including the EU, India finally discontinued the strict security rules, including requirements to mandatorily transfer
technology.

The actions
undertaken by the Commission during 2011 proved very effective: The issue was
raised on all occasions including by President Barroso at the EU/India summit
in December 2010. The progress achieved has contributed to solving the most
relevant issues for the EU industry. India's total telecom equipment market had
a value of around 16.7 billion € in the financial year 2010-11. The Commission
remains in close contact with the industry concerned and will follow up on some
technical issues which are still open.

2.2       Barriers
where some progress was achieved

Progress was also
achieved on a number of other barriers identified in the TIBR 2011.
Nevertheless, these issues are not yet completely solved and therefore will
remain on the list of priories for 2012. In some cases, barriers are of a
systemic nature and are longstanding issues in bilateral trade relations.
Therefore, the improvements achieved in 2011 are promising signals for what
could be further achieved this year. The Commission will continue raising these
issues in all fora, building on the good progress achieved in 2011, aiming at
reaching a full removal in 2012.

As regards China, the Commission's persistent action has paid off for one of the most systemic
issues on the list of bilateral trade irritants. Important progress was
achieved on the so-called 'indigenous innovation' policy which is based
on the principle of providing access to public procurement only for innovative
products whose intellectual property is of Chinese origin. After initial
positive indications already given at the meeting of the High Level Economic
and Trade Dialogue in December 2010, China made concrete steps in 2011 towards
de-linking procurement from requirements on the origin of intellectual
property, e.g., by removing any reference to indigenous innovation from the
draft implementing decree of the Government Procurement Law and by committing
to suppressing mandatory catalogues (including provincial catalogues).
Moreover, the Ministry of Finance (MOF) adopted a notice announcing the
abolishment of three national indigenous innovation-related policies. Finally,
at the US-China Joint Commission on Commerce and Trade meeting in November
2011, China made further concrete moves on the issue of ensuring implementation
of commitments at provincial level.

The Commission
acknowledges and welcomes the important progress achieved in 2011 as an
important step towards eliminating discriminatory provisions in an important
area as public procurement. The Commission will continue monitoring the
follow-up commitments made by the Chinese side, so as to ensure that these translate
into actual access to Chinese markets for European companies.

In the meantime,
positive developments can be reported on the EU's action to address Chinese export
restrictions on raw materials, in the framework of the dispute launched at
the WTO in 2009 regarding nine products[8]. The WTO Panel issued its
report in July 2011 which clarified that export restrictions, as applied by China on a number of raw materials, are inconsistent with China's obligations under WTO law. The
Panel found, in particular, that China's export duties on the raw materials at
stake were inconsistent with China's obligations under its WTO Accession
Protocol. The exports quotas imposed by China on this set of raw materials were
found to be violating the general prohibition to introduce quantitative export
restrictions. Moreover, the Panel found that the measures in question were not
justifiable on the ground of concerns on protection of the environment or on
shortage of an essential product. China appealed the Panel’s report and, on 30
January 2012, the WTO Appellate Body confirmed the illegality of the Chinese
quotas and export duties.  In the course of 2011, the Commission also continued
raising the broader issue of export restrictions on raw materials beyond the
specific WTO case, since this Chinese policy continues to cover a very wide
range of fundamental raw material components, such as rare earths. Following the
publication of the Appellate Body’s report, the Commission will consider how to
address this matter further.

Also with India, while FTA negotiations are ongoing, some progress was achieved in sanitary
and phytosanitary (SPS) issues, more specifically as regards bovine genetic
material, in respect of prospects of alignment to international standards.
However, further progress is needed in order to fully unblock exports from the
EU. Furthermore, in the food safety area, India provided ad-hoc guidelines in
October 2011, which will facilitate trade for several EU's agri-food products
exported to India. Overall, however, India still needs to further align with
international standards to fully open its market to EU products. Therefore, the
Commission will continue raising these issues in all multilateral and bilateral
fora with the Indian authorities building on the positive achievements of 2011.

In Japan, while preliminary discussions are progressing with the prospect of possibly launching
FTA negotiations in 2012, some progress was achieved on medical devices as
a follow-up of commitments taken by Japan at the 2009 EU-Japan Summit.
Following regular contacts with the Ministry of Health, Labour  and Welfare,
"pre-market" approval procedures applied in Japan for medical devices
were clarified and a small improvement in the conformity assessment process was
achieved for certain categories of medical devices (e.g. limitation of "on
site " audits to Class IV medical devices every two years only). The
Commission will be monitoring the implementation of this commitment and will
continue pursuing further improvement and simplification of the Japanese
conformity assessment procedures for ensuring they do not constitute an
unjustified obstacle to market access for medical devices, as well as for other
products.

Progress was
also achieved with Japan on the front of government procurement, in the
framework of the Government Procurement Agreement (GPA) negotiations that were
successfully concluded in December 2011. Japan in fact undertook the commitment
vis-a-vis the EU to apply the operational safety clause in railways
procurement in a transparent and non discriminatory manner. This commitment
should result in a non-discretionary use of the clause, thereby keeping
procurement in the railway sector open to foreign operators.

Progress was also
achieved as regards the “100% scanning” legislation of the US. As a result of a number of actions, including by the European Commission, the US Secretary of the Department of Homeland Security announced that she would seek the
postponement of the entry into force of this measure, which was initially foreseen
for 1 July 2012. This is a first step hopefully leading to the repeal of this
legislation by the US Congress. This followed actions taken in the framework of
the Transatlantic Economic Council (TEC), notably in 2010 and 2011, where the
issue of secure trade was addressed. Cooperation on supply chain security
between the EU and the US was spurred by a joint statement by US Homeland
Security Secretary Napolitano and Commissioners Šemeta, Kallas and Malmström on
23 June 2011. This statement provides a political framework for EU-US
cooperation, both bilaterally and in multilateral organisations such as the WCO,
International Civil Aviation Organisation (ICAO), International Maritime
Organisation (IMO), and the Universal Postal Union (UPU). At the November 2011
TEC meeting, the EU and the US followed up on the statement by completing their
preparatory work on mutual recognition of trade partnership programmes, which,
once signed and implemented in 2012, will form part of an alternative to the
100% scanning procedure.

There was also some
– albeit limited – success with regard to the “Buy American”
legislation. The stimulus package introduced during the financial crisis in
2009[9] which contained far-reaching “Buy American” provisions expired in
September 2011 and was not extended. Nevertheless, the tendency in the US
Congress and Administration of tabling legislative proposals with similar “Buy
American” provisions is still present in the currently critical economic
context. The most recent example is President Obama's announcement in September
2011 of the so called "American Jobs Act" proposal, which would
introduce a public spending programme in infrastructure, subject to “Buy
American” requirements. Prospects for the adoption of these initiatives remain
rather uncertain at the moment given the current political context in the US
Congress. The Commission, however, will remain vigilant on all possible
developments towards the adoption of “Buy American” provisions in new
legislation.

2.3       Russia – The implications of the WTO accession on longstanding market access            issues

Russia has concluded the 18 year process towards WTO accession and will
formally accede to the WTO in the course of 2012. Russia will, therefore, have
to implement multilateral disciplines which should help solve several
longstanding bilateral market access issues, while helping prevent the
introduction of any new measures running counter to its WTO commitments before
formally becoming a WTO member.

First, accession to
the WTO will also settle the Russian trade-related investment measures in
the sector of motor vehicles and their components. According to the agreed
terms of accession, the Russian investment programme will be exempt from WTO
rules until 1 July 2018, by when Russia will be phasing out these measures. At
the same time however, a bilateral agreement between EU and Russia establishes a compensation mechanism which would be triggered if EU exports in parts and
components of motor vehicles decrease as a result of the application of the
Russian measures.

Progress is also
expected in the area of customs practices. Concerns that arose in the
context of the customs union formation have partially been solved thanks to
close contacts between the Commission and Russian authorities and to a transitional
period in the implementation of the new Customs Code. New customs practices
have, by and large, not translated into further barriers to market access as
originally feared. Nevertheless, issues such as arbitrary interpretation of
customs legislation by Russian authorities continue to remain a cause of
concern. Russia's accession to the WTO is expected to bring a number of
improvements, as Russia becomes subject to WTO provisions and to such
agreements as the WTO Agreement on Customs Valuation, all of which will
contribute to trade facilitation. Work has also started with a view towards
implementing the objectives of the EU-Russia Strategic Framework for Customs
Cooperation, aiming to achieve maximum trade facilitation while ensuring
security and safety.

Progress is also
expected on intellectual property right matters (IPR) where the
bilateral EU-Russia Intellectual Property Dialogue should continue to prove very
useful in dealing with enforcement-related problems.

Finally, progress on
the many SPS issues should be expected since Russia needs to ensure full
compliance with international standards and apply them in a non-discriminatory
manner. Russia should further ensure that its SPS measures are based on the
principles of transparency and scientific justification, and that they are
proportionate and non-discriminatory. Pre-accession discussions on SPS matters
at the WTO have already led Russia to make a number of commitments and adopt
several texts - including at the level of the customs union with Belarus and Kazakhstan - in order to prepare the full alignment of SPS norms with international
standards by the date of accession. Other decisions or norms have been adopted
or are in preparation[10]. The implementation of
these acts and other legislation in conformity with WTO/SPS rules needs to be
closely monitored in order to ensure that Russia is in full compliance with its
SPS obligations as soon as it joins the WTO, in particular as regards
non-discrimination and proportionality. In parallel, the Commission continues
bilateral discussions with Russia, as well as its customs union partners,
regarding necessary further adaptation of Russian and customs union disciplines
to international norms.

With Russia's WTO accession, a very important step has been taken towards solving many of the
longstanding trade barriers encountered by European companies in the Russian
market. Monitoring Russia's implementation of its WTO commitments against
progress on these barriers will be high on the EU's enforcement agenda in 2012 and
beyond.

2.4       Barriers
where no progress was achieved in 2011

In spite of action
undertaken by the European Commission during 2011, including taking issues to
the highest political level in some cases, no significant progress was achieved
on some barriers. These will remain on the list of priorities for 2012.

For instance, China has not offered progress on two of the barriers identified in the TIBR 2011.
Investment continues to be a crucial area in bilateral relations with China, given the vast potential offered by this country. Nevertheless, investment barriers
persist and the picture has not improved in 2011. Adding to the existing foreign-direct
investment (FDI) screening mechanisms, in February 2011 China adopted a National Security Review Mechanism which allows for the vetting of mergers and
acquisitions involving foreign investors against national security
considerations (see section 3). Its overly broad and ambiguous scope has raised
concerns over new potential future barriers for foreign investors in China. This signal was confirmed by the long-awaited draft revision of the Investment
Catalogue issued by the National Development and Reform Commission in April
2011, which did not meet expectations regarding further opening of China
foreign investment, for instance in the area of telecommunication, financial
services[11], construction, retail,
express delivery or some manufacturing sectors such as cars, notably in the electrical
vehicles subsector. Commissioner De Gucht raised this issue on the occasion of
the Joint Committee of July 2011 and the Commission provided detailed comments
to the Chinese authorities at the technical level. The Catalogue was adopted on
24 December 2011 with no substantial changes from the April draft.

The Commission
continues to actively work on overall investment relations with China. Following the launch in 2010 of a bilateral EU-China taskforce on investment,
discussions are ongoing to work towards the potential launch of negotiations of
an EU-China investment agreement that should include market access aspects as
well as the highest standards of protection for investment and would include
further transparency mechanisms to increase legal certainty for EU investors in
China.

In the area of
standardisation and technical regulation, Chinese barriers in the ICT
security sector that were identified as a priority (e.g. OSCCA[12]
regulation on commercial encryption and the Multi-Level Protection System -
MLPS) continue to cause concern. The Commission has undertaken many efforts in
2011 by raising this issue at Ministerial level. On all occasions - and more
specifically with regard to the revision of the OSCCA regulation - the
Chinese authorities have signalled that the revised regulation will be
published for stakeholders' consultation ahead of adoption, will address
industry concerns and will be more open to foreign technology. Nevertheless,
the timeline of the new regulation's adoption, which was expected for 2011,
remains unclear. In the meantime, the OSCCA regulation and the MLPS continue
being used as legal basis for the adoption of measures related to information
security, such as in the case of 6 standards for IT appliances. In 2012, the
European Commission will continue raising this issue on all occasions and will
pursue its efforts to try and reach all relevant Chinese authorities involved
in this very complex web of measures.

No substantial
progress was achieved in India on opening up certain sectors to foreign
investment, such as legal services, accountancy, insurance, banking and
financial services. Equally, concerns persist over the reform of the postal
sector and potential negative impacts on express delivery services. These
issues are being dealt with mainly in the context of current FTA negotiations. Proposed
legislation currently under discussion for adoption would allow foreign
investment in retail and distribution services. Investment in multi-brand
retail, on the other hand, was swiftly put on hold sine die due to a negative
political and social reaction. In Japan, limited progress was achieved
on some of the TIBR 2011 barriers despite the intensification of bilateral
activities in the course of 2011. Following the last EU-Japan Summit in May
2011, a scoping exercise was launched with a view to exploring the scope and level
of ambition of future FTA negotiations. This exercise provides a useful forum
for raising specific barriers with the Japanese authorities. While some
progress was achieved on conformity assessment procedures for medical devices
and government procurement (see section 2.2.), the state of play has remained
unchanged on financial services.

Finally, no
improvements were obtained on the barriers identified in 2011 for the Mercosur
countries, where, on the contrary, the continuation of some protectionist tendencies
was observed, notably with regard to the measures in place in Argentina and Brazil[13].
For some of these barriers (e.g. restrictions in maritime transport and
export restrictions on raw materials in Argentina and Brazil), the FTA negotiation is the main framework where issues are currently being discussed;
therefore such issues will be prioritised in that context. The Commission has,
in addition, raised these irritants with Argentina and Brazil bilaterally and will continue to do so in 2012.

In the case of Argentina 's non-automatic import licenses (NALs), the system has remained
in place and the situation has not improved. In fact, in March 2011, Argentina extended the application of non-automatic import licences to a list of 178 new
tariff lines[14]. As a result, the
non-automatic licensing system now covers 589 tariff lines, thereby affecting
12.3% of EU exports to Argentina. While the exports from the EU has been hit by
these measures relatively less than exports from other countries like the US,
China or Brazil, the loss for European companies estimated from the application
of this licensing regime amounts to USD 147 million from January to September
2011. The Commission has raised this issue with Argentina on various occasions
both bilaterally and together with a large number of other countries in
relevant WTO bodies.

Following
interventions by the Commission, the Argentine government has shown some
limited readiness to find solutions on a case-by case basis. This has somewhat
contributed to alleviating the most acute cases for European companies. The
problem, however, remains very serious in particular because Argentina has forced companies into import/export compensation plans, whereby, for every peso
imported, companies have to export the same monetary amount thus seriously
distorting business decisions. Given the seriousness of the situation, the
Commission is examining all possible options, including launching a WTO dispute
settlement case. This also includes consultations with other countries affected
by this.

The situation also
worsened as regards access to government procurement in Brazil. In 2010, Brazil introduced a horizontal 25% preference margin in its national
public procurement law which was immediately applied to the ICT sector. The
issue was raised on several occasions, such as the Joint Committee, in the
course of 2011. Nevertheless, in the meantime, the Brazilian government
announced that the preference margins will be applied to health, communication
and high-tech equipment as well.

All barriers
mentioned in this section deserve particular attention for enforcement action
in 2012. The Commission will vigorously work on these barriers and further step
up action at all levels, including – where appropriate - at bilateral summits,
through FTA negotiations or dispute settlement procedures so as to ensure
tangible progress can be registered by the time of the next report in 2013.

3.         NEW
SIGNIFICANT BARRIERS IN OUR TRADE RELATIONS

In addition to the
barriers identified in the TIBR 2011 as unsolved, a number of new market access
barriers emerging in 2011 merit being included in the list of priorities for
enforcement action for 2012.

China undertook important developments concerning investment, also in
conjunction with the adoption of the 12th Five Year Plan which outlined
priorities for industrial development to be achieved in the following five
years. In this context, China adopted a national security review mechanism
for mergers and acquisitions involving foreign investors in February 2011,
whereby China could block foreign acquisitions on the ground of national
security considerations. Judging from the text of the measure and the provisional
indicative list of sectors that could potentially be included in the scope of
this mechanism, it appears that the notion of national security is very broad
and could extend to economic policy considerations. The sectors considered
important for national security include some going beyond "classic"
notions of security related sectors such as defence or energy by including, for
instance, medical devices mail, delivery, warehousing, and retail and wholesale
services.

Another issue of
concern are Chinese export financing conditions and subsidies. China uses export credits not in conformity with the OECD/WTO disciplines to boost its
national champions' exports in capital-intensive, often high-tech sectors. This
increasingly poses serious challenges for very large, global and competitive EU
companies and threatens sectors that are significant for the EU's economy, not
only in third markets, but also in Europe itself. In addition, many industries
are subsidised in a non-transparent way, including through the activities of
state-owned enterprises (SOEs) and banks, as well as through the provision of
subsidised land, materials and energy. This issue is not new. Nevertheless,
action to tackle these anti-competitive practices must be intensified and these
issues need to be systematically raised at the highest level given the
implications these practices have in terms of hindering market access in many
sectors, as well as of distorting competition on international markets.

India is in the process of introducing a new National Manufacturing
Policy (NMP), which was approved in October 2011 by the Union Cabinet of
Ministers. The NMP still has to be approved by the Parliament. The plan
mentions measures aimed at developing indigenous manufacturing such as
incentives - in the form of tax concessions and government subsidies - for
development of technology and preferential purchases by government agencies of
indigenously developed products and technologies. Moreover, the government will
consider the use of public procurement in specified sectors with stipulation of
local value addition in such areas as solar energy equipment, electronic
hardware, fuel efficient transport equipment and IT based security systems.
Although the NMP is still in draft status, its provisions are already being
transferred to several sectoral plans. The Indian Ministry of Communications
and Information Technology is in the process of finalising three separate, but
inter-related, national policies concerning electronics, information technology
and telecommunications which were issued in October 2011 for public comments.
The Commission has already taken action in order to express the EU's concerns:
Vice-President Kroes and Commissioner De Gucht sent a letter to their Indian
counterparts. Moreover, in a recent visit to India, Vice-President Kroes
discussed the issue with several concerned authorities.

Finally, some new
measures have been introduced in the Mercosur area, with Brazil being particularly active during 2011. On 15 September 2011, Brazil increased the tax
on industrial products (IPI) for manufactures of automotive vehicles and
trucks that do not meet certain conditions of local production. In order to
benefit from fiscal relief, 65% of the vehicles' components must be produced in
Brazil; companies have to invest at least 0.5% of their gross sales in R&D
in Brazil and must carry out a number of essential manufacturing processes in Brazil. The measure became applicable on 12 December 2011 and is meant to remain in force
until 31 December 2012. The Commission has already bilaterally raised this
issue with Brazil and in relevant WTO bodies together with other affected
partners.  It will remain in contact with affected firms for appropriate
further action in order to minimise the negative impact for EU firms.

Brazil also tightened its procedures for imports of textiles and
clothing by means of stricter customs controls. Textiles and clothing
imports are now passing through the grey and red customs procedures. This means
that goods are subject to physical inspection and samples can be subject to
laboratory tests. As a result, time for imports to be released could take as
long as 90 days (+ 90 additional days if need be). Moreover, a higher number of
certificates are being requested by customs authorities.

Argentina introduced new restrictions in the reinsurance services sector.
In February 2011, the Argentine insurance regulator (Superintendencia de
Seguros de la Nacion or SSN) issued a resolution modifying the regulatory
framework for reinsurance. Among its main provisions, the new regulation only authorises
national companies or locally-established branches of foreign companies to
provide reinsurance services in the country. By way of derogation, companies
can request a waiver from this obligation when they can prove that the degree
of risk cannot be covered in the local market. In May 2011, a new resolution
slightly eased the regulatory framework by allowing cross-border supply of
reinsurance services both for risks above USD 50 million and for retrocession
services. Nevertheless, other important restrictions still remain in place,
e.g. reinsurance abroad of life insurance and transfer abroad of more than 40%
of premiums of local reinsurers are not allowed.

4.         A
TENDENCY TOWARDS TRADE-RESTRICTIVE INDUSTRIAL POLICIES          IN EMERGING
ECONOMIES

From analysis of the
broader context of the barriers reported, it emerges that measures are often
part of national industrial plans containing discriminatory provisions against
foreign products, services and investment. This reflects a general tendency
that has appeared in the course of the past two years, notably in emerging
economies. Between 2008 and 2009, at the beginning of the financial and
economic crisis, many countries resorted to public intervention in order to
counter the negative effects on demand. Yet, in a number of cases, those
measures did have a potential distortive effect on trade. To a certain extent,
those measures were aimed at protecting sectors which were particularly
suffering from the negative effects of decreasing global demand. Generally,
there was a clear relationship between the crisis and the measures introduced,
which were in fact meant to remain in force only temporarily while waiting for
the economy to pick up.

However, the recent wave
of trade-restrictive measures, notably in emerging economies, is of a different
nature. The measures are no longer crisis-related since these countries have
solidly recovered from the crisis and have been witnessing high growth rates (at
least since 2010). Consequently, the measures concerned are not of a temporary
nature, but are embedded in national industrial plans that are here to stay for
longer periods and are aimed at structurally changing the production pattern of
national economies building on potential comparative advantages. It is
unquestionably a right of emerging economies to adopt industrial policies in
order to structurally change and improve their production patterns; however,
these policies should be solidly based on the principles of non-discrimination
and a level-playing field.

China has a long tradition of favouring national industrial development
on the basis of discrimination against foreign operators and unfair
competition. This is also reflected in the 12th Five Year Plan adopted
in March 2011. The Plan represents a qualitative shift from what was considered
an 'expansionist' model of development to one aiming at industrial
consolidation, energy efficiency, increased productivity and an emphasis on
quality upgrading with an overall objective of moving up the value chain of
manufacturing and making China's growth more sustainable. In addition the 12th
Five Year Plan places an even greater emphasis on the strengthening of the
services sector indicating a further shift in China's policy.

Against this
background, China is likely to continue providing support to selected
"strategic emerging industries" (e.g. clean energy, electrical
vehicles, ICT and broadband, pharmaceuticals industries), including through
steering investment (often in the form of mandatory requirements for technology
transfer) and financing. The 12th Five Year Plan and the provisions of the
investment catalogue have already been reflected in several sectoral plans at
central as well as provincial levels. As regards plans established at central
level recently, the 12th Five Year Plan on National Scientific and
Technological Development was issued, which is built up around the principle of
enhancing independent innovation capacities. Moreover, there were indications
that the new electrical vehicles plan being developed by the Ministry of
Industry and Information Technology (MIIT) would mandate forced technology
transfer requirements in joint ventures where foreign investors would hold a
minority share. Moreover, concerns were voiced that the MIIT would introduce
the requirement that by 2015 all electric cars sold in China would have to be Chinese brands. Recently however, the Chinese provided assurances that they
do not intend to maintain measures mandating the transfer of technology or any
requirement for foreign-invested companies to establish domestic brands in China. In light of these positive signals and the positive steps taken on the issue of
indigenous innovation, the Commission encourages China to promote innovation in
respect of such principles as levelling the playing field and protection of
intellectual property. At the same time, however, subsidies and export
financing are still there to play a big role in fostering the innovative
industrial development of the country.

The National
Manufacturing Policy (NMP) recently introduced by India is another case of industrialisation policy partially based on discriminatory
principles. This plan sets the target of reshaping the economic and employment
landscape of India by enhancing the share of manufacturing in GDP from 16% to
25% by 2022, with a focus on indigenous production.   As set out above (section
3), the plan combines elements of preference for domestic products in
government procurement and local content requirements in purchases of private
operators, with tax concessions and government subsidies benefitting the
development of indigenous technologies. It will therefore be crucial to
carefully monitor the implementation of NMP and the relevant sectoral plans[15]
in terms of compatibility with international rules.

National
industrialisation plans have also been recently adopted in Brazil and Argentina. In Brazil, for instance, the "Plano Brasil Maior" was
adopted in August 2011 as a general plan aimed at fostering industrial
development of the country. Problems arise to the extent that the plan's
specific measures foresee such instruments as indirect subsidization or fiscal
exemptions benefitting specific manufacturing sectors (e.g. textile and
footwear, mobile and software industry, among others). One element of the Plano
Maior is extension of the 25% preference margin in government procurement to
the ICT sector, which is likely to be extended to other sectors such as health,
defence, communications and high-tech equipment.

Argentina's trade policy has been characterised over the last years by moves
towards "managed trade" and import substitution policies, including
through measures affecting import and export – and NALs are certainly at the
core of this policy - reflecting short-term solutions to underlying
macroeconomic problems. Parts of the recently introduced "Industrial
Strategic Plan 2020" reflect the attempt of Argentina to develop a
longer term vision on such sectors as automotive, capital goods, footwear,
agricultural machinery, construction materials, medicines, chemicals and
textiles, but also confirm the import restricting elements described above.
There is a therefore a danger that measures such as non-automatic import
licensing remain in place in the future as part of a broader industrialisation
policy based on import substitution.

Besides national
development plans, individual trade-distortive measures are adopted with the
aim of fostering industrial development also stand out in many countries. Most
of the measures that are indicated as priorities in this report indeed belong
to this industrialisation pattern. Local content requirements, often in
connection with investment and government procurement, appear to
be one of the most used kinds of trade-distortive instruments in the context of
industrialisation. Besides the Indian National Manufacturing Policy and the
related sectoral plans, another relevant measure in this respect is the
so-called localisation initiative for the automotive sector in Russia, whereby foreign investors have to gradually implement local production
thresholds using a defined proportion of local contents. This measure will be
phased out by 2018, following Russia's accession to the WTO. Among the new
measures, Brazil's application of the tax on industrial products for
automotive sector entails local production requirements in order to benefit
from a 30% reduction of the tax.

Standardisation
and conformity assessment requirements also appear
to be a frequently-used instrument to foster industrial development. The
approach of China to standard-setting is a case in point. In spite of
the high ambitions in terms of industrial development and innovation, China still has a very domestically-based approach to standards setting and technical
requirements[16]. This represents a
serious market access barrier effectively shielding domestic industry from
foreign competition. The ambitious goals set in the 12th Five Year Plan of
becoming world leader in certain products or sectors will require China to change its behaviour and become more integrated into the international framework
of standardisation and technical rules. The case of IT security in China is an example of how the current approach to technical regulation and conformity
assessment seriously hinders access to the Chinese market. On the basis of
national security concerns, China has developed conformity assessment
procedures requiring overly burdensome testing and procedures which, in most of
the cases, must be performed by national laboratories. Moreover, in order to
obtain the necessary certifications to enter the Chinese market, disclosure of
proprietary information and the use of domestic technology are mandatory
requirements.

The same approach is
being followed by India in the telecommunication sector, since the
original proposal of security measures for telecom equipment, which were
subsequently modified, contained the requirement of source codes disclosure in
order to obtain certifications. The revised proposal does represent an
improvement from previous proposals; yet, it still provides for mandatory
testing in Indian laboratories and other burdensome testing requirements.
Additionally, the recent draft National Telecommunication Policy encourages the
development of national standards and, especially for security-related aspects,
the draft makes reference to the development of an Indian-specific way to technical
requirements and standards setting.

Finally, the most
straightforward way of protecting local production is by restricting imports
of competing products, as well as exports, notably of raw material, in
order to lower costs for domestic manufacturing. As regards export
restrictions, there is a general upward tendency and, in fact, the WTO
qualified this as one of the most worrying tendencies in trade of last year.

The examples set out
above testify to the growing importance of trade-restrictive measures as
elements of national industrialisation policies. This is a cause for serious
concern since measures taken in the context of such plans are likely to be
structural and to stay for a longer period of time. The Commission will monitor
these developments very thoroughly and take appropriate action.

5.         CONCLUSION

Ensuring access for
European companies to third country markets is a central element of the
external dimension regarding European policy for growth. By negotiating FTAs,
engaging strategic partners in high level fora and vigorously enforcing the
rights under multilateral and bilateral agreements, EU trade policy makes an
important contribution to the Europe 2020 objectives of smart, sustainable and
inclusive growth.

This report shows
what focused action at different levels, including at the political level where
necessary, can achieve in terms of removing barriers in third country markets.
Moreover, concerted action of the Commission and the Member States can make a decisive difference. Where important economic interests are at stake, the Commission
and Member States should not shy away from using all available means to pursue
the EU's interests in a well coordinated manner. In this context, the European
Council called repeatedly for improved synergies between the European Union and
national levels, consistent with the provisions of the Treaties, for enhanced
coordination between institutional actors, for better integration of all
relevant instruments and policies, and for summit meetings with third countries
to be used more effectively. The Commission and the Member States should thus continue reinforcing respective actions in a coordinated manner also by
strengthening the instruments of the Market Access Partnership and by
vigorously following up on the TIBR. Moreover, when the EU's partners do not
respect their international obligations, recourse to dispute settlement and
well-targeted retaliation, when necessary, will be on option.

The lessons learned
from the cases presented in this report are clear: there are no easy solutions
to many of the barriers encountered by European companies in third country
markets. Removal of these barriers requires persistent and concerted action by
the Commission and Member States. This work may not always be visible to the
general public but it has a very concrete and tangible impact for European
companies and citizens.

[1]               Europe
2020, A European strategy for smart, sustainable and inclusive growth.                 http://europa.eu/press\_room/pdf/complet\_en\_barroso\_\_\_007\_-\_europe\_2020\_-\_en\_version.pdf

[2]               Trade,
Growth and World Affairs, COM (2010) 612,
9.11.2010.                 http://trade.ec.europa.eu/doclib/docs/2010/november/tradoc\_146955.pdf

[3]               Argentina and Brazil.

[4]               On Strategic Partners in general see: European
Council Conclusions of 16 September 2010 point 4.:  “The European Union’s
strategic partnerships with key players in the world provide a useful
instrument for pursuing European objectives and interests. This will only work
if these partnerships are two-way streets based on mutual interests and
benefits and on the recognition that all actors have rights as well as duties.”

[5]               Commission
Staff Working Document "Trade as Driver of Prosperity"
accompanying the Commission's Communication on "Trade, Growth and
World Affairs".

[6]               World
Trade Organisation, Overview of developments in the international trading
system, 21 November       2011; World Trade Organisation, Report on G20
Trade Measures (May  to mid-October 2011), 25        October 2011; DG Trade, Eighth
Report on Trade Restrictive Measures – October 2011-September         2011,
October 2011 http://trade.ec.europa.eu/doclib/docs/2011/october/tradoc\_148288.pdf

[7]               Report on trade and investment barriers (2011/2115 (INI)),
Committee on International Trade o the European Parliament, Rapporteur: Robert
Sturdy.

[8]               On
23 June 2009, the EU and the US, followed by Mexico, requested WTO
consultations with China                regarding Chinese export restrictions
on nine products: bauxite, coke, fluorspar, silicon carbide, silicon            metal,
zinc, magnesium, manganese, yellow phosphorus. In particular, the EU asked for
consultations          on China's export duties and quotas and its measures for
quota administrations and licensing as well as          on China's system of a minimum export price. A Panel was established in December 2009.

[9]               On
13 February 2099, The Congress passed a 790 billion $ American Economic
Recovery and            Reinvestment Act (ARRA) including two Buy America(n)
provisions, which prohibit funds                appropriated by ARRA: (i) to be
used for a project for the construction, alteration, maintenance, or         repair
of a public building or public work unless all of the iron, steel and
manufactured goods used in   the project are produced in the United States (ii)
and/or to be used for the procurement by the          Department of Homeland
Security of a detailed list of textiles items (e.g. clothing, tents, cotton and
              natural fibres, etc) unless the item is grown, processed in the
United States.

[10]             These
norms would provide guarantees on transparency, proportionality,
non-discrimination,           equivalence, risk assessment, veterinary control
and certification, import and transit permits among      others.

[11]             Insurance for instance still belongs to the 'restricted'
category of investment.

[12]             Office of State Cryptography Administration.

[13]             DG
Trade, Eighth Report on Trade Restrictive Measures – October 2011-September
2011, October               2011
http://trade.ec.europa.eu/doclib/docs/2011/october/tradoc\_148288.pdf

[14]             The
extended scope now also includes some cars and parts thereof, motorcycles,
bicycles and parts               thereof, textiles, metallurgical products and
some electric products.

[15]             Besides
the draft National Telecom Policy Plan (section 3), another relevant one is the
Jawaharal Nehru          National Solar Mission (National Solar Mission)
adopted in 2008, which appears to condition     investment in certain projects
to develop solar energy infrastructure on “domestic content          requirements,"
entailing that certain solar equipment used by developers in such projects have
to be                 manufactured in India. Moreover, India would offer subsidised rates when purchasing solar power generated by projects under
the National Solar Mission; nevertheless, developers may only get these      subsidized
rates if it complies with the local content requirements of the plan. Still in
the field of                 renewable energy, the Ministry of New and
Renewable Energy published draft guidelines in September                 2011
requiring suppliers of wind turbine generators of a capacity in excess of 15 MW
to set up         manufacturing facilities in India, thereby effectively
excluding foreign suppliers.

[16]             There are, for instance, restrictions in relation to
the participation of foreign-invested companies in several sectors, ICT being
one of them.

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