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# 52013DC0103

**REPORT FROM THE COMMISSION TO THE EUROPEAN COUNCIL Trade and Investment Barriers Report 2013 /\* COM/2013/0103 final \*/**

  

REPORT FROM THE COMMISSION TO THE EUROPEAN COUNCIL

Trade
and Investment Barriers Report 2013

INTRODUCTION

In 2012, the
Commission presented its second Trade and Investment Barriers Report (TIBR) to
the European Council. The report, as the first one, implemented a mandate given
in the Europe 2020 Strategy[1] which was subsequently
taken up in the Commission's Communication "Trade, Growth and World
Affairs"[2]. This Communication
committed to "produce from 2011 onwards an annual trade and investment
barriers report for the Spring European Council as our key instrument to
monitor trade barriers and protectionist measures and trigger appropriate
enforcement action".

The report is meant
to highlight a selection of key barriers faced by European Union (EU) companies,
and more generally to raise awareness on the importance of addressing trade
obstacles in such way that companies can fully reap the benefits of the global
market in accordance not only with what has been negotiated with the EU's
trading partners at the multilateral or bilateral level, but also with the
commitments taken in other fora to foster free trade, e.g. in the context of
G20 meetings.

In view of
protracted economic stagnation in the EU, this third report is all the more
important as a pillar of our market access strategy and as a complement to the
EU's ambitious negotiating agenda. As pointed out in the Commission Staff
Working Document on external sources of growth[3], the
contribution of external demand to economic development is bound to increase in
the future, as 90% of global economic growth is expected to be generated
outside the EU by 2015. Moreover, due to the generalisation of interdependent
regional and global supply chains, the EU must confirm its prominent role as a
key value-provider on a global scale be it in manufacturing, R&D, design,
logistics, etc. In order to fully consolidate this potential, stronger links
with the new global centres of growth – that have been largely covered in the
2012 edition of the TIBR – are therefore crucial in ensuring sustainable
economic recovery in the EU.

To this end, this
third edition of the TIBR (2013) provides an account of the progress achieved
on those barriers identified in previous editions of the TIBR (2011 and 2012) which
continue to be of concern to EU exporters and could not be fully solved to
date. Furthermore, the TIBR 2013 also highlights a number of new barriers which
appeared in 2012 and deserve concerted action and political prioritisation both
by the Commission and the Member States in certain key markets.

The focus of this
report on some of the EU's strategic partners does obviously not mean that
barriers in other markets should be neglected. On the contrary, the Commission
is actively engaging with a far broader group of trading partners to improve
market access conditions for EU companies still confronted with a considerable
number of trade obstacles.

Monitoring of trade barriers

The TIBR is one of the reporting exercises which assess, monitor and
address trade barriers faced by EU exporters. These reporting exercises pursue
different objectives, although they mechanically overlap to a certain extent:

First, and as mentioned above, the TIBR highlights a selection of
key barriers faced by EU companies in a limited number of markets. It aims at
raising awareness at the political level of the importance of tackling these
barriers as a priority.

Second, the monitoring of potentially trade restrictive measures[4]
(ninth report published in June 2012) is a broader exercise to identify measures
adopted in the context of the financial and economic crisis. This exercise demonstrated
that protectionism was on the rise in the markets of many of our partners
notably through the implementation in several emerging economies of
industrialisation policies often based on local content requirements and import
substitution practices.

Third, in the context of the Market Access Strategy, and starting in
2009 further to specific request by the Council, DG TRADE has also been
conducting a more comprehensive "Key barriers exercise". It resulted
in an overall selection of 220 barriers in 32 markets. The purpose is to prioritise
among trade issues, by establishing with input from Member States and business priority lists not exceeding 10 barriers per country, in order to focus on
the most economically and legally relevant ones. The list is regularly reviewed
and accompanied by hymsheets for Member States use in order to ensure that
concerted messages are conveyed. This exercise obviously includes barriers in
the six countries addressed in the TIBR report, as well as barriers in Ukraine, Indonesia, Mexico, Thailand or Israel for instance.

As in the 2012
edition, this report focuses on market access barriers in some of the EU's
strategic partners, i.e. China, India, Japan, Brazil[5],
Russia and the United States (US), for three main reasons. First, these
selected partners represent the EU's main exports markets, in terms of goods
(40.9% of goods exports in 2010), services (40.0%) and foreign direct
investments (41.1% of FDI outward stock): the US is the EU’s 1st
export market, China 2nd, Russia 4th, Japan 6th,
India 8th and Brazil 9th.

Second, among its
ten largest export markets, the EU already has preferential trade relations
with the other partners: Norway and Switzerland have access to the internal
market respectively through the European Economic Area and specific agreements;
the customs unions with Turkey; and since 2011 the Free Trade Agreement (FTA) with
South Korea. Trade relations with these four partners are therefore
facilitated by specific trade instruments that provide additional channels to
address trade barriers, as opposed to the six key partners identified in this
report.

Finally, these
strategic partners represent markets with strong growth potential for EU trade
and investment. Emerging countries such as Brazil, India, China and to a certain extent Russia, i.e. the so-called BRICs countries, will indeed continue to
provide an increasing share of future opportunities for EU businesses. Over the
2007-2011 period, China's GDP growth averaged 9.3%, India's 6.9%, Russia's 4.3% and Brazil's 2.7%, according to the World Bank[6]. Conversely the EU's GDP
declined by 0.2% on average over the period and may stall over the next three
years, with 0.4% of annual growth on average over the 2012-2014 period
according to the Commission's 2012 autumn forecasts[7].
This implies that exports to these countries is expected to play a pivotal role
in driving the EU's future exports growth which is estimated to average 3.6%
over the 2012-2014 period. Trade balance has not only mitigated the effects of
the crisis since 2010, it is also foreseen as the main growth driver in 2013,
as it was in 2011 and 2012.

However, trade with
the strategic partners identified in this report, although very significant, is
far from having delivered its full potential, partly because these markets are
growing extremely quickly and will most likely continue to do so, but mostly
because they are not sufficiently open to EU exports. The fact that this trend
has been confirmed in 2012 and that the situation has further deteriorated in a
number of these key markets justifies this year's renewed focus on this limited
number of partners.

All too often, EU companies
still face considerable barriers entering these foreign markets. Obstacles
usually take the form of non-tariff barriers (NTBs), such as technical
regulations and conformity assessment procedures, burdensome customs procedures
or weak enforcement of intellectual property rights (IPR). The EU has been
effectively addressing these matters in the framework of the Market Access
Partnership. Considering, however, that these barriers often proliferate in
areas where multilateral trade disciplines are still rather incomplete – such
as in government procurement, and export restrictions – the further development
of disciplines going beyond the current WTO rulebook through our trade
negotiations agenda remains an overarching priority.

Over the past year
and in parallel to its enforcement efforts, the EU has therefore proactively
pursued its ambitious negotiating agenda. The FTA with Korea entered into force on 1 July 2011 and has already started to provide significant
economic benefits to EU companies and consumers. Bilateral trade negotiations
were concluded with Central America, along with Peru and Colombia and these agreements received the consent of the European Parliament in December
2012. Negotiations for a Deep and Comprehensive Free Trade Agreement (DCFTA)
including far-reaching disciplines on technical and regulatory issues have been
concluded with Ukraine and in December 2012 negotiations on an FTA with Singapore were completed. Trade talks with Canada are in their final phase. Meanwhile,
negotiations are still on-going with India, Mercosur, Malaysia, Armenia, Georgia and Moldova, and have been launched with Vietnam in 2012. In December
2011, the Council authorised launch of DCFTA negotiations with Morocco. With regard to Japan, further to a fruitful scoping exercise including specific
provisions related to NTBs, the Council authorised the launch of FTA
negotiations, in November 2012. With regard to the US, the EU's first trading
partner, preparations are now underway to launch FTA negotiations. Indeed the High
Level Working Group on Jobs and Growth has now delivered its final report,
recommending negotiations on a comprehensive Transatlantic Trade and Investment
Partnership.

Preparatory talks
have started with Tunisia, Jordan, Egypt and Morocco with a view to launch
DCFTA negotiations once the countries are ready. Finally, discussions are also being
held with Indonesia, Thailand and the Philippines in view of possible trade
talks that would complement this challenging FTA agenda in the ASEAN region. Russia's accession to the WTO, an important trade event in 2012, has opened new
perspectives for the on-going negotiation of a New Agreement designed to
replace the Partnership and Cooperation Agreement (PCA). Further to discussions
at the EU-China summit, preparatory work is on-going with a view to launch talks
on a stand-alone investment agreement. Finally, with regard to the two largest
economies in the world, the US and China, the EU is engaged in high-level
dialogues with both dealing, inter alia, with market access barriers.

Trade negotiations
and enforcement efforts must go hand in hand to guarantee the EU's insertion in
global value chains and ensure stable and predictable framework conditions for
business activities worldwide. Without an assertive enforcement strategy,
implemented simultaneously through trade diplomacy, dispute settlement and
negotiations, and implying action at different levels including at the highest
political level notably in summits with third countries, the EU cannot
guarantee the level playing field it owes to its business community on the
global market. The Commission, Member States, and industry must continue to
work together in accordance with the Market Access Strategy to ensure that
barriers in third countries are removed, and that attempts to apply new
barriers are challenged. This way, EU companies will benefit from better access
to rapidly expanding foreign markets and effectively contribute to the EU's
economic recovery.

This third edition
of the TIBR is structured as follows: Section 1 describes progress achieved
with regard to barriers identified in the last report and options for further
action where progress is not yet satisfactory. Section 2 identifies a number of
other barriers for priority action in the future. Section 3 reflects on how to
combine available tools to tackle trade barriers in the most efficient manner.

1.
2012 BARRIERS: WHAT PROGRESS WAS
ACHIEVED?

The TIBR 2012
identified 25 barriers in six trade partners / regions (US, China, Japan, India, Russia and Brazil / Argentina). These barriers were considered to be of major
importance for EU 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. This means that the
Commission has systematically raised them in all bilateral meetings, often up
to the highest political level (e.g. summits). In addition, it should also be
mentioned that Russia's WTO accession on 22 August 2012 has triggered a
potential for solving many longstanding market access issues, although new
barriers have been erected in the course of this process.

This section will
report on the progress achieved in the course of 2012. In some cases, progress
has translated into the full removal of a barrier. In other cases, some
improvement has been achieved, while part of the barrier remains. For a few
barriers, the situation has deteriorated as compared to last year
notwithstanding the numerous actions undertaken. The analysis in this section
will be carried out on these three categories according to the degree of
progress achieved.

a.
Barriers where substantial progress was
achieved

For China, positive developments can be reported on the EU's action to address export
restrictions on raw materials. A WTO dispute settlement case was
initiated on 23 June 2009 by the EU and US, followed by Mexico. On 31 January 2012, the Appellate Body report upheld all the key claims raised by
the EU, and confirmed the findings made by the panel in July 2011. It confirmed
that China's export restrictions on several industrial raw materials were in
breach of China's WTO commitments and that the restrictions could not be
justified for reasons of environmental protection or conservation policy. This was
a very significant economic and systemic success, enforcing the rules that China has agreed to abide with when acceding to the WTO. China had been granted until 31
December 2012 for implementation and has announced at the end of the year
implementation measures which remove the export duties as well as the quotas. However,
China subjects almost all products previously subject to a quota to export
license requirements. The Commission will continue to monitor closely the
situation and the development of exports, and in particular the newly
introduced export licensing requirements.

On 13 March 2012, a
second case was launched against China, as the EU, US and Japan requested consultations on China's export restrictions of rare earths, tungsten and
molybdenum. A panel has been set-up and a ruling is expected towards the end of
2013.

With regard to India, the TIBR reported last year that progress had been achieved against
quantitative restrictions introduced in 2010 on the export of cotton,
namely on cotton yarn and raw cotton. In August 2011, the Indian government had
indeed lifted all remaining quantitative restrictions on raw cotton. However,
this progress was threatened immediately after the TIBR publication in 2012
since a new partial ban was introduced on 5 March 2012 prior to a formal
removal on 4 May. Following bilateral and sectoral talks with the Indian
Government, the EU obtained commitments from the Indian side not to introduce
export restrictions in the next season.

In Japan, some progress had been reported in last year's TIBR. Following the EU-Japan summit
in May 2011, a scoping exercise was launched with a view to exploring the range
and level of ambition of future FTA negotiations. In 2012, a comprehensive list
of NTBs was discussed in the context of this scoping exercise. On some of these
identified problems the scoping exercise has already produced results, and the
following NTBs included in the list have now been solved: organic food, liquor
wholesale licensing, transparency, expansion of Japan-EU mutual recognition
agreement on good manufacturing practices on pharmaceuticals to 12 new EU Member
States, and designation of two food additives, while good progress have been
made towards the resolution of issues related to pyrotechnic safety devices in
the car sector and the predictability of pricing of pharmaceuticals. Japan has also decided to lift the ban on import of beef from France and the Netherlands for animals of less than 30 months. The applications from other Member States
are now being examined. It is expected that the effective opening would take
place during spring 2013. In a number of other cases, such as radio equipment,
medical devices, automotive or pharmaceuticals, further steps to address the
EU's concerns should be taken by Japan before end of March 2013. For the
remaining issues, the future FTA negotiations should enable further progress to
be made.

With the WTO
accession of Russia on 22 August 2012, the Russian import tariffs were
bound for the first time. The main impact was the removal of the tariff hikes
adopted in 2008 during the crisis.

b.
Barriers where some progress was achieved

The TIBR 2011 had
indicated that the Commission's persistent action had paid off for one of the
most systemic issues on the list of bilateral trade irritants with China. Important progress was indeed achieved in the first half of 2011 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.

The Ministry of
Finance had repealed 3 basic regulations early July 2011, and political
announcements were made at the highest level. However, there is still evidence
that pieces of legislation that call for the synchronization of technology
standards with indigenous innovation developments are being published at the
regional level (e.g. Guangdong government regulation which came into force in
March 2012). Similarly, elements of indigenous innovation continue to reappear
under one form or another, whether on information security standards developed
in support of the Multi-Level Protection System (MLPS), or new government
procurement catalogues, such as cars for officials or party leaders, or the new
draft catalogue by the National Development and Reform Commission (NDRC) on
strategic emerging industries. Progress therefore remains fragile: decoupling
between indigenous innovation policy and public procurement does not seem to be
a fully established policy, and detailed monitoring remains required,
especially as recent legislation appears to be increasingly sophisticated.

In the area of
standardisation and technical regulation, Chinese barriers in the information
security sector that were identified as a priority (e.g. Office
of the State Commercial Cryptography Administration [OSCCA] regulation
on commercial encryption and the MLPS) continued to cause concern. Some limited
progress[8] has been made but
difficulties remain on obtaining OSCCA certification for products with
encryption, and implementation of the MLPS continues.

Other issues of
concern are Chinese export financing conditions and subsidies.
China uses export credits which raise questions with respect to the OECD /
WTO disciplines, in order to boost national champions' exports in
capital-intensive, often high-tech, sectors. Some progress was achieved in 2012
since China has signalled its willingness in principle to enter into
international negotiations regarding export financing conditions. A first meeting
of an international working group was held in November 2012, and China has offered to host the next session in May 2013. The negotiation process has not had
an easy start however. In order to allow the participants in the international
working group to discuss export credit issues further at an informal level the
EU will host in the meantime a technical meeting in March 2013.

Last year, the TIBR
mentioned that no substantial progress had been achieved in India on opening to foreign investment certain sectors, such as retail, legal
services, accountancy, insurance, banking and financial services. Equally,
concerns persisted over the reform of the postal sector and potential negative
impacts on express delivery services. However, in 2012, the government appears
to have embarked on an economic reform agenda. Some concrete results of this
process are opening of retail (single and multi-brand) to FDI and the decision
to increase FDI in airlines. Other reforms being considered by Parliament are
banking reforms and opening of insurance to FDI, both of which would confirm
the intention of government to continue on the path of economic reform.

Also in India, some limited progress was achieved on telecoms security clearance
requirements. First, concerning the security requirements introduced in
2010 for telecommunication equipment: these were finally modified in order to
eliminate the most burdensome conditions in particular removal of the initial
requirement to escrow source codes. There are still concerns regarding the
requirement to certify equipment deemed of security concerns in India, contrary to international practices which work on mutual recognition criteria. India has also been implementing a certification regime by the Bureau of Indian Standards
(BIS) on imported and exported tyres for a long time. In September 2012,
India removed one of the most burdensome elements of the scheme, notably the
prohibition of selling IS-marked (Indian Standard) tyres outside the Indian
market. This had been a long standing request of the EU industry. However, a
number of problems on the certification of tyres remain (fees charged per tyre,
lengthy procedures, factory inspections, and required bank guarantees, etc.).
Regarding BIS certification of steel products, India has postponed the entry into force of the certification requirements for some
products until March 2013 (previously September 2012). However, the
certification requirements remain disproportionate and not in line with
international practices in this area (factory inspections, long deadlines,
excessive testing, fees). The certification regimes for both tyres and steel
products have been notified by India under the WTO Agreement on Technical
Barriers to Trade (TBT Agreement) and are regularly being discussed in the
framework of the TBT Committee.

In the US, the progress reported in last year's TIBR has been confirmed. The TIBR had
indicated that progress had been achieved as regards the "100% scanning"
legislation. Indeed, as a result of a number of actions, including from the EU,
the US Department of Homeland Security delayed the requirements for 100%
container scanning that were scheduled to take effect in July 2012, for two
years. In their trade policy review, the US confirmed that the deadline for
100% scanning will not go into effect until 1 July 2014. The statutory
requirement still applies but the deadline for implementation has been changed.
The Secretary of Homeland Security has the authority to extend it again at that
time but no decision on such a further extension has been reached yet.

Also in the US, while this legislation remains problematic as such, there had been some success with
regard to the "Buy American" legislation. The stimulus package
introduced during the financial crisis in 2009 which contained far-reaching
"Buy American" provisions expired in September 2011 and was not
prolonged.

On 25 January 2013,
8 months after the launch of the WTO dispute settlement consultations on
trade-restrictive measures, Argentina repealed the non-automatic import licences.
This is an important move and a result of EU's continuous efforts to bring Argentina into conformity with its WTO obligations, and an indication that the WTO dispute
settlement mechanism serves its purpose. However, it does not address the
entire set of trade-restrictive measures in force in Argentina. Accordingly,
the EU has requested on 28 January 2013 a WTO panel to seek removal of two
other illegal measures (see next section).

c.
Barriers where no progress was achieved
in 2012

In spite of action undertaken
by the EU during 2012, including in some cases addressing issues at the highest
political level, no significant progress could be achieved on a number of
barriers which will remain on the list of priorities for 2013.

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 barely improved over the past year. The Foreign
Investment Catalogue that was revised at the end of 2011 was disappointing in
the sense that it indicated liberalisation in only a limited number of areas,
while in some other areas market access was even further restricted. An example
of deterioration is foreign investment in "components manufacturing"
for the automotive industry that had been legally "unrestricted"
until the adoption of the 2011 Foreign Investment Catalogue. The end 2011
catalogue now restricts investment for electric vehicle batteries to a maximum
of 50%. Although at the EU-China summit of 20 September 2012 both sides
reconfirmed willingness to prepare towards the launch of investment
negotiations, preliminary contacts between the two administrations continue as
internal preparations on both sides are still on-going. 2012 has seen numerous
official statements on further opening to investments, particularly in the area
of services. It remains to be seen whether this will be followed up in
practice.

In the course of
2011, China adopted a national security review mechanism for mergers
and acquisitions involving foreign investors, whereby China could block foreign acquisitions on the grounds of national security considerations.
The final mechanism was adopted in September 2011. The problem is not the
introduction of such a mechanism per se (such mechanisms also exist in
certain EU Member States), but that it has a very broad application – both with
regards to sectors and the definition of national security – extending far
beyond agreed international (OECD) principles. No progress can be reported and
we are aware of a recent case involving a joint venture with an EU company that
is currently going through the FDI screening mechanism where procedures and
rules are still unclear and unpredictable, thus generating high uncertainty and
discouraging potential investors.

India's new policy framework on telecoms is still in the process
of being developed but some already published parts of the policy contain local
content requirements (minimum 30%) which favour domestically produced equipment
and electronic products in procurement procedures. Similar provisions exist in
other industrial areas, such as renewable energy and the solar energy
production. While India is not a party to the Government Procurement Agreement,
these policy developments are rather worrying, in particular in the context of
the current FTA negotiations, as they confirm India's intention to promote
national champions in key industrial sectors where EU operators have
significant stakes in India. These policies could therefore endanger the
current business opportunities in India. As another worrisome development, it
is also important to note that India plans to impose local content requirements
in private procurement of telecom equipment in relation to security sensitive
considerations, a project which is of high concern to the industry.

As reported last
year some progress was achieved in 2011 with India on Sanitary and
phytosanitary (SPS) issues. More specifically, improved prospects of
alignment to international standards were obtained on bovine genetic material
(semen). However, despite India's commitment to amend these import conditions,
no significant real progress was seen in 2012. The Commission continues to
follow-up closely with India on this issue but remains worried about the
general approach of India of keeping unjustified and unnecessary SPS measures
as a way to maintain its agri-food market closed to imports.

In 2011, no
improvements had been obtained on the barriers identified for the Mercosur countries,
where, on the contrary, we had observed the continuation of some protectionist
tendencies notably with regard to the measures in place in Argentina and Brazil. For some of these barriers (e.g. restrictions in maritime transport and
export restrictions on raw materials in Argentina and Brazil), the FTA negotiation was envisaged as the main framework for these issues to be
discussed. Although negotiations with Mercosur have progressed very slowly, on
26 January 2013 the parties agreed at ministerial level that an exchange of offers
will take place no later than the last quarter of 2013.

Overall, import
restricting measures are increasing. Argentina's policy on
re-industrialisation and import substitution is on-going and discriminates
imports. In February 2012, Argentina implemented a new single electronic window
for all imports with an obligation of sworn prior importer declarations on all
imports, subject to discretionary approvals of various State Agencies. This adds
to already serious delays of imports in many sectors. In April 2012, this
system was extended to the services sector. Foreign companies are also
increasingly affected by restrictions of transferring foreign currencies,
dividends and royalties. In addition, importers have to respect import
balancing requirements. These measures are at odds, in particular with the
prohibition to institute quantitative restrictions as well as the obligation of
non-discrimination and national treatment principle under the GATT 1994 and the
rules of the Agreement on Import Licensing Procedures. On 25 May 2012, the EU
requested WTO dispute settlement consultations on non-automatic licenses (which
were repealed in January 2013 – see above), sworn prior importer declarations
and import balancing requirements but the consultations of July brought no
results. On 6 December 2012 the EU asked the WTO to rule over the legality of Argentina's trade-restrictive measures and to establish a panel. The US and Japan have requested the establishment of a panel on the same day on the same measures.

Argentina also maintained 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
restricts market access by only authorising national companies or
locally-established branches of foreign companies to provide reinsurance
services in the country. No progress has been achieved.

The situation did
not improve as regards access to government procurement in Brazil. In 2010, Brazil introduced a 25% horizontal preference margin in its
national public procurement law, which was immediately applied to the Information
and communications technology sector. No progress has been made in 2012.

Brazil also tightened its procedures for
imports of textiles and clothing by means of stricter customs controls
since the last quarter of 2011. Textiles and clothing imports are 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. No
progress can be reported.

2.
OTHER SIGNIFICANT BARRIERS INCLUDING
PRIORITIES FOR THIS YEAR'S TIBR

In addition to the
barriers identified as unsolved in the 2012 TIBR, a number of new market access
barriers that have emerged this year have been included in the list of
priorities for enforcement action.

a.
New barriers

The 2012 TIBR
reported that in September 2011, Brazil had increased the tax on
industrial products (IPI) on sales of automotive vehicles and trucks that
do not meet certain conditions of local production. The temporary IPI rules of
2011 were replaced by new rules in October 2012 for the period 2013-2017, with
further conditions and requirements (the so-called INOVAR-AUTO support
programme). Local manufacturers will be able to benefit from reductions on the
IPI tax if they comply with conditions concerning, among other things,
investment in R&D and performance of an increasing number of manufacturing
steps in Brazil. Tax reductions are granted in the form of an incremental tax
credit that is linked to the use of domestically produced car parts. Brazil has therefore prolonged, in essence, the discriminatory tax regime initially put in
place in 2011. The 2013-2017 regime continues to provide incentives for local
production to the detriment of imports.

The use of indirect
taxes to afford protection to Brazilian manufacturers against imports is
not limited to the automotive sector. Problematic measures have been reported
also in other sectors, such as electronics and telecommunication equipment.
There is concern about the possible extension of questionable tax practices to
more areas, including with the aim of subsidising Brazilian exporting companies.

The problems
detected with regard to internal taxation are further compounded by Brazil's decision, in October 2012, following a Mercosur summit decision, to raise
tariffs on a 100 lines up to WTO bound rates as an exception to the common Mercosur
tariff. While this is not in breach of WTO commitments, the decision does not
conform to the G20's political commitment to refrain from taking import
restricting measures. Many products are included, such as ceramic products and
refractories, paper, viscose yarns, processed potatoes, chemicals, etc., many
of which are of significant economic importance for the EU. An additional
tariff hike of 100 lines as exception to the common Mercosur tariff is expected
in early 2013.

On cars there is a trend
in Brazil to implement own domestic regulations and own certification
procedures for car parts whereas in the past UNECE certified and marked
products were accepted in Brazil without additional testing, certification or
marking. Ideally, Brazil should join the multilateral agreement on the adoption of uniform technical prescriptions and reciprocal recognition
of approvals for cars and car parts (UNECE 1958
Agreement) but political will to do so is not secured. Alternatively ways to
facilitate the acceptance by Brazil of conformity assessment procedures
(testing and audits) carried out in the EU would help EU manufacturers.

The local content
requirements trend mentioned in the case of Brazil and India as detailed above can also be observed in China, although local content requirements
are generally not published in national or local Chinese regulations. That does
not mean that they do not exist, but rather that they have become more
sophisticated and hidden than in the past. In recent years, government
procurement has also arisen as a major area of concern. Public procurement in China is mainly governed by two laws – the Government Procurement law (estimated market
value CNY 1.13 trillion, and which does not apply to State owned enterprises [SOEs])
and the Bidding and Tendering Law (estimated market value CNY 8.3 trillion, and
which applies to SOEs). In some cases local governments have stipulated local
content requirements of 70%. In practice, the requirement of "domestic
goods" in bidding documents and the lack of clear guidance on the
definition of such "domestic goods" have prevented foreign invested
companies established in China from having equal access to public procurement
contracts.

In Argentina , the government has worryingly and actively pursued that certain sectors
and industries increase local content in their production process in the
last years. As a result, a wide range of sectors and industries are bound by
local content requirements including: mining, automotives, footwear,
agriculture, machinery, construction materials, medicines, chemicals and
textiles. Services sectors are also highly concerned by the government policy:
bank, insurance and media services are bound by heavy local content
requirements.

In April 2012, in Argentina, the Government took the decision to expropriate 51% of YPF shares owned by the
Spanish company Repsol and 51% of the shares in Repsol YPF GAS S.A.,
owned by the Spanish company Repsol Butano S.A.. First, this expropriation may
be discriminatory as only one shareholders' shares in YPF were expropriated,
not others. Second, contrary to the Spain-Argentina Bilateral Investment Treaty
provisions, Argentina has not provided any compensation for the loss of the
former owner.

India has recently
notified the TBT Committee of its intention to impose a compulsory
registration scheme on electronic and information technology goods. The
system at stake (e.g. obligation to test the products in Indian laboratories as
of April 2013) establishes a conformity assessment procedure which is stricter
than necessary as regards the risks non-conformity would create. In the EU,
such products are considered low risk products and are therefore subject to
suppliers' declaration of conformity. EU-India trade on these products can be
significantly affected.

A further case of
concern is China’s VAT exemption for domestically produced regional aircraft.
This exemption raises serious difficulties under the non-discrimination WTO obligations
and hampers market access for foreign producers. The issue will be further pursued
so that China brings itself into compliance with its international commitments.

b.
Russia – new barriers upon WTO accession,
in addition to longstanding market access issues

Russia has concluded its 18 year negotiation process towards WTO accession
and formally acceded to the WTO on 22 August 2012. This accession is welcomed
as a milestone in the improvement of trade relations with this country. However,
in the run up of its accession Russia maintained or adopted a series of
protectionist measures, the majority of which are not in compliance with Russia's WTO commitments.

As regards the cars
recycling fee for vehicles, as from 1 September 2012, new framework
legislation and its implementing decree came into force, establishing a
recycling system with recycling fees for vehicles to be put in circulation.
Domestic manufacturers can give a guarantee concerning the recycling of their
vehicles instead of paying the fee, while foreign suppliers must pay the fee as
a condition for the registration of the imported car – a clearly discriminatory
measure. Bilateral negotiations are on-going with a view to finding a solution
on this issue. If no results can be achieved, the EU will consider launching a
WTO dispute settlement proceeding.

For a wide range of
products including used vehicles, paper, car bodies and several others, Russia
is applying since its WTO accession import tariffs that are higher than
the committed (so-called bound) levels (e.g. by adding a specific duty in the
form of a minimum import price to the existing ad valorem duty)[9].
These measures which are in breach of WTO commitments should be terminated
rapidly. Bilateral negotiations are on-going. Some progress has been achieved
toward the amendment of a number of tariff lines by 1 March 2013, but not as
regards tariffs on car bodies.

On TBT, a
number of technical regulations (e.g. alcoholic drinks, cars and textiles) have
been recently prepared in the context of the Russia, Kazakhstan, Belarus
Customs Union (CU). If these are approved in the current form they will amount
to difficulties for EU operators to place their products on the Russian market.
Russia has been asked to comply with its obligations under the WTO TBT
Agreement by notifying draft technical regulations at an early appropriate
stage in order to give an opportunity to other WTO Members to analyse and
comment on them. Two notifications (on alcoholic drinks and cars) have been
received so far but Russia did not provide the opportunity for other WTO
Members to comment on it as requested by the TBT Agreement. The problems with
alcoholic drinks and textiles have been discussed extensively at bilateral and
multilateral level.

Progress on many SPS
issues was expected upon Russia's WTO accession, since Russia should normally ensure from day-one full compliance with the WTO SPS Agreement and
the relevant international standards. It should ensure in particular that its
SPS measures are based on the principles of transparency and scientific
justification and should guarantee that they are proportionate and justified.
However, new barriers were put in place, and some existing restrictions still
remain. Since 20 March 2012, Russia has banned the import of live animals from
the EU. The disproportionate ban on slaughter pigs was justified by Russian
authorities because of irregularities found in the health certificates of
certain shipments from the EU. EU food producers still face extremely long
delays or refusal to be newly authorised for exports to Russia or the CU, and Member States are invited to request audits of their system. Bilateral
negotiations are on-going but so far without any satisfactory results. Recently
Russia started a series of new SPS measures concerning ban of chilled meat and
potato seeds from Germany. The EU is worried by the systemic use of bans
towards its product by Russia as soon as one problem arise, without taking into
account the WTO principles of justified and proportionate actions for SPS
measures.

With regard to wood
imports from Russia, the EU-Russia bilateral agreement concerning two
tariff-rate quotas (TRQs) for spruce and pine should have allowed EU operators
to import these wood species at significantly reduced export duty rates as of
September 2012. However, the issuance of export licences was seriously delayed
and the EU had to raise the issue on several occasions to remove the most
important obstacles. After months of delay, the issuance of export licences has
finally started and imports of wood under the TRQs are now increasing
significantly. The EU will ensure that this trend is not reversed in 2013.

c.
Implementation of the FTA with South Korea

The FTA between the
EU and South Korea has been provisionally applied since July 2011[10].
It is the first of a new generation FTA and is characterised by its
far-reaching and comprehensive nature. It is also the EU's first trade deal
with an East Asian country.

The main
conclusions, based on a comparison of data for the first year of implementation
of the agreement (July 2011 – June 2012) with an average of the data from the
past four years (the "reference period") suggest that EU exports to
South Korea increased by 37% overall. At the same time, EU imports from South Korea have only marginally increased (1%).

With regard to the
remaining obstacles to trade, the agreement's institutional structure has
enabled the Commission to raise important concerns such as, inter alia, South Korea's ban on EU beef imports as well as South Korea’s refusal to accept international UNECE
marking on certain car parts. The Commission will continue its efforts to
resolve these and other market access problems to the benefit of the EU
industry. Since the entry into force of the FTA, there have already been some
positive developments e.g. in the automotive sector, with regard to tyre
marking, acceptance of UNECE type-approval certificates for cars which belong
to the same family, car part manufacturer registration, emissions measurement
and electric vehicle standards.

d.
Other barriers on the markets of selected
strategic partners

In a number of
cases, significant progress was observed in relation to a number of barriers
which had not been reported in the 2012 TIBR.

On the long-standing
issue of Computer Reservation Systems (CRS), China has, with the
entering into force of the Interim Regulations, at last put a legal framework
in place to enable foreign CRS providers to operate in the Chinese market. Difficulties
in the implementation of this new framework still seem to exist, and the
Commission will continue to closely monitor the situation in the light of China's WTO commitments.

Regarding cosmetics
in China, difficulties still persist regarding the approval of new
ingredients, and of products containing new ingredients. However, some progress
can be reported on other cosmetics issues. For instance, during the bilateral
talks with the EU on 25 October 2012, the State Food and Drug Administration
(SFDA) confirmed that after extensive consultations with the industry and with
trade partners, they had decided to postpone the intended legislation on
reclassification of a considerable number of product categories from
"non-special" to "special" products[11].
Such reclassification would have entailed significantly more burdensome
requirements. Future plans will be considered in the context of the revision of
the CHMR (China cosmetics basic regulation) which is planned for 2013-2014. China has indicated that they may consider moving away from a pre-market approval system to
a notification regime system. However, it remains unclear whether this would be
the case for all cosmetic products.

Regarding Chinese
CO2 / fuel efficiency regulations the Ministry of Industry and
Information Technology (MIIT) stated that plans for a uniform consumption
target were shelved and that MIIT would use a corporate average system instead
(as in the EU). However, MIIT also indicated that in calculating these averages
it would not be possible to pool domestically produced fleet with imported
fleet, which is problematic since imported vehicles tend to be the bigger,
up-scale, and niche vehicles, which are often heavier and consume more. The
inability to pool may make it difficult to reach the average target for the
imported fleet.

Finally, China postponed the NDRC draft pricing policy on implantable medical devices
which stipulated a price cap on advanced medical implants and also foresaw a
complicated but discriminatory maximum price calculation between domestically
produced and imported products. There is a risk that the measure is raised
again after the leadership transition, but for the moment these pricing plans
are not being pursued.

The US has announced that in 2013 the longstanding final rule on Bovine Spongiform
Encephalopathy (BSE) will be published and the Classical Swine Fever
rule will enter into force. Besides, end 2012, the proposed notice for swine
vesicular disease, which will recognise some Italian regions free of this
disease, was published for public comments. The EU expects that soon after the
publication of these rules, EU exports to the US of bovines, pigs and their
products will resume. However, the EU remains worried by the extremely long
delays in treating other SPS export applications submitted by the EU, e.g.
apples, pears and bell peppers.

Brazil has announced that the SPS measures related to the imports
of ruminant animals (e.g. bovines, ovines) and their products from the EU,
related to Transmissible
Spongiform Encephalopathies (TSE), could soon be aligned with the relevant
international standard and allow trade. On the other hand, Brazil made no significant progress on executing their own calendar of visits to EU Member
States. This continues to negatively and very seriously affect the exports from
the EU, mostly of added-value products of animal origin.

3.
HOW TO COMBINE AVAILABLE TOOLS TO TACKLE
TRADE BARRIERS

This section aims to
provide an overview on how to use the combination of the different tools at the
EU's disposal.

a.
Trade diplomacy

Trade diplomacy is an important element of the EU’s external relations and conducted
both at working level within EU institutions, in close cooperation with EU Delegations
in the field, and Member States administrations, and as an exercise undertaken
at the highest political level, for example during summits and bilateral
contacts. The way the EU conducts its trade diplomacy and external economic
relations reflects the call by the European Council for improved synergies
between the EU 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. Trade diplomacy is part of
the EU’s coherent approach on external action.

Trade diplomacy is
usually the fastest way to tackle trade barriers as it does not require a
specific context, as in the case of FTA negotiations, or a long and complex
litigation strategy as in the case of trade disputes. Direct contacts with
local authorities can be sufficient to highlight barriers, and point to the
inconsistency of certain measures with WTO obligations.

In addition, such a
way to address trade barriers is indeed a diplomatic tool, as its objective is
precisely to solve issues, suggesting that no party has to lose while the other
wins. This avoids the risk of escalation in the disputes and retaliatory
measures, legal or not.

However, the
efficiency of trade diplomacy depends on the possibility to convince the
country concerned that it is in its own interest to address barriers at stake. This
depends in particular on:

·
the possibility to demonstrate convincingly that
removing the barrier would create benefits for its consumers and companies, to
an extent that would exceed losses for other companies in direct competition
with the EU companies that suffer from the barrier.

·
the EU’s capacity to provide convincing
alternative solutions, concrete proposals, ideally based on its own experience
and the wealth of experience in its Member States and lessons-learnt.
Regulatory cooperation or dialogues are a very useful tool to do so. Such
cooperation should be fully integrated in and support the overall external
economic agenda of the EU vis-à-vis a particular country, thereby
complementing trade negotiations and facilitating market access[12].

·
the possibility to bring the matter to Court: it
can be successful if the threat of litigation create a sufficient deterrent to
prompt the country to remove the barrier. In that sense, a credible and
efficient dispute settlement process is crucial to deliver results on the trade
diplomacy front.

This demonstrates
that effectiveness of trade diplomacy is much higher when used in combination
with other instruments, as the most practical tools can only deliver if they
are backed by credible sanctions mechanisms.

b.
Dispute settlement

In terms of dispute
settlement, the EU has been among the most active WTO members over the past
17 years, since the creation of the Dispute Settlement Body (DSB) in 1995[13].
Over the last two years, the EU launched five new offensive disputes. The EU is
currently challenging rules on local content, discretionary import licensing,
export restrictions and the abuse of anti-dumping and countervailing duties
imposed by third countries against EU exports.

Over the same
period, the EU has gained significant victories in WTO dispute settlements: the
EU won an important case against China's restrictions on the exportations of
raw materials and ensured that EU spirits in the Philippines benefit from
non-discriminatory treatment. The EU has also settled the long-standing dispute
with the US on the "zeroing methodology" on anti-dumping. The broad
litigation with the US on Large Civil Aircraft continues, and the EU has
obtained important WTO rulings against US' illegal subsidies to Boeing.

To further
strengthen the enforcement pillar of EU trade policy, the Commission has also
recently proposed improved rules to enforce EU's rights under international
trade agreements[14]. The objective is to
allow the EU to react swiftly and efficiently in order to defend its rights. The
Commission is proposing a Regulation to establish a clear and predictable
framework for adopting implementing acts following international trade disputes
that have a negative economic impact on the EU.

c.
Effective use of WTO Committees

With regard to
technical regulations and conformity assessment procedures, the EU is, along
with the US, the most active WTO Member in the TBT and SPS Committees. TBT
Committee meetings in Geneva are an effective tool for highlighting the EU's
concerns with technical regulations introduced by other WTO Members, enhancing
the transparency of such requirements, raising awareness and building alliances
with other WTO Members affected. The March 2012 meeting of the TBT Committee
witnessed discussion on 65 specific trade concerns – the highest number ever –
of which the EU raised or supported 35.

The EU's pro-active
approach is not limited to the TBT and SPS Committees and extends to all other
WTO Committees. Import Licensing Procedures and Trade Related Investment
Measures (TRIMS) Committees are the most relevant ones with regard to the trade
barriers mentioned in this report.

d.
FTA negotiations

Preferential
trade agreement negotiations, and notably FTAs and
DCFTA, but also WTO accession negotiations can be a useful instrument to
address certain specific trade disruptive measures in third countries, in
conjunction with the other instruments mentioned above. Among the six countries
and regions discussed in this report, the EU is currently negotiating FTAs with
two, namely India and Brazil / Argentina (as part of Mercosur) and will enter
into negotiations with Japan soon and possibly with the US within the next few months. These negotiations, along with the New Agreement talks with Russia, can set a positive framework to address trade barriers, for a number of reasons:

First, in
negotiations the EU's position as a key export destination provides it with an
opportunity to extract concessions from third countries which have a strong
incentive to negotiate with a 500 million consumer-strong integrated market.

Second, such
agreements are precisely designed to address a large number of barriers
simultaneously and where possible, to include stricter disciplines than
existing international trade rules. For this reason, the EU aims at obtaining
more through these discussions than from simple enforcement of existing rules.

Finally, new
generation FTAs can facilitate trade disputes resolution as they include
bilateral dispute settlement mechanisms, based on the WTO model. FTAs also set
up a comprehensive structure of sectoral and thematic working groups and
committees to ensure proper implementation of the agreement, and to prevent new
barriers for being erected in the future.

However, as a market
access tool, preferential trade agreements have also their limitations. For
instance, there are one-off occasions: barriers which will not have been solved
through the process, or which emerged afterwards, will have to be addressed via
other channels. In addition, the time needed to negotiate and adopt FTAs does
not always provide a good match for much faster business cycles. Finally, the
balance of concessions is difficult to find and often means that not all trade
barriers can be addressed at the same time and specifically and some have to be
given priority to reach an overall satisfactory agreement.

5.         CONCLUSION

Trade is expected to
drive most of the EU's economic growth for the years to come. It will also
provide one of the most important tests for our continent's competitiveness on
global markets via our industry's capacity to consolidate regional value
chains and be an integral part of global ones. In this context, the Commission
intends to further strengthen its partnership instruments under the Market
Access Strategy to address trade and investment barriers worldwide to make sure
the playing field is levelled for our economic potential to be fully unleashed.
In order to make the collective trade diplomacy efforts conducted by the
Commission, EU Delegations and Member States on the ground in third countries
more effective, the Commission will in particular regularly review and update
the list of key barriers in the markets of our main trading partners and
provide Member States with hymsheets allowing them to convey concerted
messages in their contacts with the authorities of the countries concerned. Trade
diplomacy will benefit from optimising the use of all
relevant instruments and policies, and of summit meetings with third countries and
the EU’s external relations across the board – the EEAS shall support these
efforts and work towards greater consistency.

The EU remains the
world's largest exporter, importer, foreign direct investor and recipient of
foreign direct investment. It has managed to hold on a share close to 20% of
total world exports[15] over the years in spite
of the economic crisis and the dramatic changes that have shaped world trade
over the last 30 years. Our massive manufacturing trade surplus of €281 billion
– a figure that has increased fivefold since
2000 – has more than compensated for the increase in our energy bill over the
same period. EU surplus in services has been multiplied by more than 20 in 10
years at €108 billion in 2011 and the EU's agricultural trade balance has
shifted from a deficit of more than €3 billion in 2000 to a surplus of about €7
billion in 2011.

In support of this
telling track record, the Commission together with the Member States will
continue to step up its efforts to remove barriers in third countries through
concerted action and by using in combination all means available to ensure fair
market access. Besides trade diplomacy conducted from Brussels and on the
ground, this includes using in an effective way WTO Committees, enforcing
commitments taken under multilateral and bilateral agreements also via well-targeted
dispute settlements, when necessary, when the EU's partners do not respect
their international obligations, and taking best advantage of FTA negotiations
to solve trade barriers in a systemic way.

[1]               "Starting in 2011 and then annually before
the Spring European Council, a trade and investment barriers report identifying
ways to improve market access and regulatory environment for EU companies"
in Europe 2020, A European strategy for smart, sustainable and inclusive
growth, ec.europa.eu/research/era/docs/en/investing-in-research-european-commission-europe-2020-2010.pdf

[2]               Trade, Growth and
World Affairs, COM (2010) 612, 9.11.2010., eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2010:0612:FIN:EN:PDF

                trade.ec.europa.eu/doclib/docs/2010/november/tradoc\_146955.pdf

[3]               Commission Staff Working Document on external
sources of growth, Progress report on EU trade and investment relationships
with key economic partners, 2012, trade.ec.europa.eu/doclib/docs/2012/july/tradoc\_149807.pdf

[4]               trade.ec.europa.eu/doclib/docs/2012/june/tradoc\_149526.pdf

[5]               And in some cases Argentina / Mercosur

[6]               data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG/countries?display=default

[7]               ec.europa.eu/economy\_finance/publications/european\_economy/2012/pdf/ee-2012-7\_en.pdf

[8] A China Compulsory Certification for Information Security
Products (CC-IS) was granted to a foreign-owned enterprise (FOE) in May 2012,
on the basis of an Encryption Testing licence from OSCCA. This was the first
time an Encryption Testing license had been granted by OSCCA to a FOE. However,
certification was contingent on a need for the chip used on the smart card to
be produced by a Chinese semiconductor manufacturer with embedded Chinese national
encryption algorithms (Source: European Union Chamber in China Position Paper
2012).

[9]               It should be noted that a similar situation could
occur in the case of Ukraine, which is in the process of revising certain of
its applied rates. Besides, Ukraine has also initiated WTO procedure for
revision of its bound rates for a large number of tariff lines, which could create
an unfortunate precedent.

[10]             The FTA is provisionally applied in the EU until all EU
Member States have ratified it. The state of play of the ratification can be
checked on the Council's Agreements website: www.consilium.europa.eu/policies/agreements/search-the-agreements-database?command=details&id=&lang=en&aid=2010036&doclang=EN

[11]             WTO TBT notification G/TBT/N/CHN/887

[12]             As detailed for instance in the Single market review in
2007 – ec.europa.eu/citizens\_agenda/docs/sec\_2007\_1519\_en.pdf

[13]             Out of 452 disputes brought to the DSB as of November
2012, the EU has been involved in 87 offensive cases (and 73 defensive cases)[13], i.e. 19.2% of all cases, 66
of which against one of the six countries / region identified in this report
(32 against the US, 4 against Brazil, 8 against Argentina, 10 against India, 6
against Japan, 6 against China, none against Russia so far), i.e. 75.9% of EU
offensive cases.

[14]             trade.ec.europa.eu/doclib/press/index.cfm?id=856

[15] Trade in goods, oil and gas excluded, source UN-COMTRADE database

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