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The European Commission’s Trade Sustainability Impact Assessments : a critical review

Mathilde Dupré & Thomas Dauphin, 11 May 2022

[English] [français]

This study looks at and evaluates the European Union’s Sustainability Impact Assessments (SIAs) carried out in the framework of trade negotiations involving the EU. SIAs are a tool used by the Directorate-General for Trade (DG Trade) of the European Commission (EC) with the objective to assess the potential economic, social and environmental impacts of a future trade agreement, inform the negotiations and shape the final agreement accordingly.

The first SIA was conducted for multilateral trade negotiations when at the turn of the millennium the World Trade Organization (WTO) wanted to expand its trade regime. Over the two following decades, the EU perpetuated the use of SIAs for its bilateral trade agreements and institutionalised it so as to become, in the words of the Commission, a “key instrument for the formulation of sound, transparent and evidence-based trade policies”.

At the time of writing, 31 SIAs have been completed and four are being conducted.
This study is based on a review of the most recent SIAs, academic literature and interviews with civil society actors involved in SIAs. It aims to establish the state of play of the EU’s use of SIAs more than 20 years after they were first implemented. It gives insight into both the way SIAs are made and the role they play in the making of trade agreements.

Part 1 of the study explains the purpose of SIAs and how they were developed and then institutionalised by the EU over the last 20 years. It then describes the general features of SIAs in terms of the content and the consultation, as well as the role of the European Commission at the end of the process.
A SIA is a multi-year process consisting of two main elements: research carried out by external consultants and a consultation process of stakeholders (businesses, trade unions, NGOs, etc.). After the consultants mandated by the European Commission publish their final report, the process ends when the Commission responds with a Position Paper in which it describes how it intends (or not) to take into account the results of the SIA and address the recommendations.
This study finds that, despite the EU guidelines according to which SIAs should be conducted “hand-in-hand with negotiations” in order to steer them and “ensure that policy choices are optimised”, the timing of SIAs has been much less optimal in practice. The tendering process is usually launched after the start of the negotiations and final SIA reports tend to be published two to four years after the start of negotiations. In some cases, the SIA was incomplete (EU-Vietnam) or was delivered after the end of the negotiations (EU-Mercosur trade agreement). These failures
to deliver a proper and timely SIA were condemned several times by EU institutions. In 2014, a report conducted by the European Court of Auditors on the practice of the first 15 years showed that the European Commission did not always comply with its own guidelines, did not carry out SIAs or did so incompletely or too late. In 2016 and 2021, the EUOmbudsman found that the handling of two SIAs by the European Commission constituted maladministration. It should also be noted that the European Commission itself decides which recommendations it will take into

Part 2 takes a more fundamental look at the way SIAs are carried out. It critically reviews the methodology of the studies, in particular the economic modelling which forms the cornerstone of SIAs. The second section focuses on the limitations of the assessment of the environmental and social dimensions (methods and models used, assumptions on which they are based etc.) and examines the statements made by the SIAs for their correctness and completeness.

SIAs use the Computable General Equilibrium Model (CGEM), a tool that aims to simulate the impacts of policies - such as a new Free Trade Agreement (FTA) - on the economy. As with any model, the CGEM makes assumptions regarding the way the economy works and economic agents behave. Being grounded in neoclassical economic theory, the CGEM is particularly far from reflecting the way the economy works in reality. The most problematic assumptions of the CGEM are those which postulate perfect competition within markets, the rationality of economic agents, a demand for commodities and services created by supply, as well as a full-employment situation. These constitute major loopholes which influence the results of the simulations. Yet the studies do not sufficiently discuss the assumptions or the validity of the results derived from the model.
With the biases of mainstream economics being a built-in feature of CGE models, the simulation turns out to be a tautological exercise: since it is taken for granted that increasing international trade flows, removing tariffs and regulations is positive per se, the outcome of the simulation can only turn out in favour of the agreement that proposes such changes, thus supporting the initial hypothesis. However, given the already high initial level of liberalisation, the expected results naturally tend to be reduced, and therefore the arguments of economic gains are weak.
While they are presented as neutral, SIAs have a biased framing that significantly influences the study. They never discuss or challenge the merits of the objectives set out by the agreements (increase international trade flows, open markets by slashing tariffs and regulations, etc.), nor do they engage in a discussion about the model of trade and the criteria necessary for a sound trade policy.
Another major limit of the CGEM in SIAs lies in the way they incorporate the impact of changes other than tariffs and quotas, the so-called Non-Tariff Measures (NTMs). These include national regulations to protect citizens’ and consumers’ health, guarantee the quality and safety of products and a certain level of environmental standards. While the non-tariff measures play a key role both in the modelling parameters and the claimed benefits of the agreements, their estimation is found to lack robustness and be unreliable.

SIAs use overly aggregated data that provide no information on the distribution of projected gains or losses among countries, economic sectors, and population deciles. Trade agreements, like other policies, do not have homogeneous effects. SIAs do not sufficiently acknowledge or measure the differentiated impacts.

The study also finds significant limitations in the assessment and analysis of the expected environmental and social effects of trade agreements, which are largely derived from the economic impact. Given the modelling assumptions and parameters, as well as the gradual decrease in expected economic gains due to the already strong liberalisation, the economic impacts tend to be limited and therefore the environmental impacts understated. In addition, there are significant shortcomings in the analysis of some impacts, such as climate change: the SIAs use a very narrow and incomplete scope of GHG emissions since they do not take into account emissions related to international transport, land-use or land-use change.

For all other relevant impacts that cannot be modelled, such as deforestation, biodiversity loss and human rights, the SIA infers a qualitative analysis from the results of the economic modelling. The content of these sections is even less standardised, and the quality varies from one subject to another and from one study to another. The analysis often tends to be superficial and speculative.

By relying extensively on economic modelling, SIAs establish an implicit hierarchy between the economic part and the social and environmental parts of the assessment. This leads to several pitfalls: an excessive association between economic indicators and well-being; some economic impacts being depicted without reason as economic or social benefits; positive impacts of regulations being ignored; negative environmental impacts being minimised. Finally, SIAs are sometimes based on outdated data, do not consider cumulative effects, and show discrepancies in the treatment of NTMs.

Part 3 gives an account of the experience of stakeholders involved in SIA processes. By relating the flaws they identify, it questions the purpose and usefulness of SIAs.
Stakeholders are consulted but can at best only provide rudimentary mitigation. Interviews held with different stakeholders who participated in the SIAs - including umbrella organisations for worker’s and farmer’s union, a consumer organisation and other NGOs - indicate a general dissatisfaction with both the consultation process and the content of SIAs, with some being more critical than others. The main criticisms are focused on the late timing of some SIAs, which arguably renders the entire exercise meaningless.
Doubt is also cast on the sincerity of the Commission’s will to use SIAs as a tool to inform and influence the negotiations. The link between SIAs and negotiations seems at best tenuous, not least because SIAs are in practice not seen as a tool capable of influencing or challenging the core of the agreement. In several SIA processes, stakeholders have noticed little impact from their contribution to the SIA and to the final outcomes of the agreements. Moreover, the stakeholders interviewed questioned the ability of the consultants mandated by the European Commission to carry out such thematically wide and extensive studies. Finally, participants share the impression that SIAs are a burdensome process. The complexity and length of the studies together with low expectations of their results
and impact led some interviewees to question altogether the usefulness and relevance of their participation, although they admit that SIAs remain a useful channel for monitoring and dialogue with the EU institutions.

Part 4 makes recommendations to improve the content, the methodology and the process of SIAs and to create a more relevant, impactful tool for policymakers and citizens.
SIAs need to be overhauled to become a useful tool for citizens and policymakers. The study ends with the conclusion that the entire methodology of SIAs needs to be overhauled in order to better encompass qualitatively and quantitatively the potential impacts of trade agreements and better inform policymakers and citizens. A legal analysis of the main provisions of the agreements would also be very helpful in order to assess their potential impacts on sustainable
development. In addition to recommendations for improving the methodology, the study provides suggestions to enhance the process and use of SIAs.

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