Sustainability Standards as a Path to Rules-Based Connectivity between Europe and Central Asia
Central Asia is located in the heart of Eurasia. It is also in the middle of dynamic geopolitical processes and regional integration initiatives such as the Eurasian Economic Union and the Belt and Road Initiative. The region is a strategic partner for the European Union and the EU New Strategy on Central Asia adopted on June 17, 2019, has recently reconfirmed the interest of the EU in the region. The Strategy seeks to continue promoting regional cooperation, notably on environmental and climate issues, education, the rule of law, inclusive sustainable growth and trade. Within these priority directions, fostering sustainable, comprehensive, and rules-based connectivity is an important pillar of the Strategy.
In this blog, I will address connectivity from the perspective of EU-Central Asia trade relations in a global context which pursues a sustainability agenda in the form of the 2030 Sustainable Development Goals. Despite the impact of COVID, which created a very significant impact on the Sustainable Development Goals, the 2030 agenda will constitute the global framework which will underpin efforts to create greater connectivity. The title of the blog refers to this global agenda and the fact that the future of trade relations will be less about lowering tariffs but more about aligning standards in accordance with sustainable development.
The EU is Central Asia’s main trading partner, accounting for about a third of its overall external trade. However, Central Asian countries export to the EU only a few commodities, that represent less than 1% of the EU imports. This means there is a potential for growth in trade through diversification, and better connectivity can contribute to greater access to the EU markets.
Global value chains can be defined as the “full range of activities that firms and workers do to bring a product from its conception to its end use and beyond” (Gereffi & Fernandez-Stark, 2016). Today international production, trade and investments are increasingly organized within global value chains, which represent different stages of the production process located across different countries because firms try to optimize their production. Even the most simple of products such as coffee mug or a cotton t-shirt are made through global value chains.
Integration in these global value chains, and hence the global economy, is not so much conditional on tariff levels or price mechanisms but on compliance with international standards related to a range of issues related to products and production processes. Hence, the notion of (rules-based) connectivity goes beyond physical infrastructure and cultural ties. It is increasingly linked to the institutional dimension of connectivity that consists of agreements, rules and standards, which became a key prerequisite not only for trade but also for achieving the goals of sustainable social and economic development.
The key importance of achieving connectivity through compliance with a whole range of standards was very recently made clear by the EU president Charles Michel when he addressed the United Nations General Assembly last week. In his speech he stated:
“More than ever, the European Union is defending the rules-based international order and cooperation based on universal values. The European Union wants to be stronger, more autonomous, and firmer, to defend a fairer world. And it is in this spirit that we lead the implementation of the Paris Agreements. And that we have already integrated the objectives of the 2030 Agenda [referring to sustainable development] into our system of economic governance”. He continued: “We are now developing these values and this open model with greater awareness of our strength, with more realism, and perhaps less naivety. We have faith in the virtues of free and open economies, never in protectionism. But access to our large market - the second largest economic zone in the world, and the first in terms of international trade - will no longer be sold off. From now on, we will better enforce the level playing field, in a market open to those who respect its standards. Whether they leave our Union or want to move closer to it” [my emphasis].
This levelling the playing field implies that the EU will not lower their standards with regard to for example sustainability, but that trading partners should align upwardly their standards with those of the EU.
Because of this, the ‘institutional dimension’ of connectivity has even greater significance for the developing economies. In fact, many developing countries are excluded from global value chains due to their inability to comply with international standards owing to the high costs involved. This creates unequal access to markets in developed countries. This new form of exclusion and inequality should be addressed. Integration in global value chains can lead to social and economic upgrading generating additional income for countries and its citizens. If the aim is to achieve true connectivity this will imply changing production methods and processes to take into account sustainability.
So, what does this all mean for EU-Central Asia trade? Today the EU imports mainly raw materials and low value-added manufactured goods from Central Asia (oil from Kazakhstan, Turkmenistan; gold from Kyrgyzstan; aluminium and textiles from Tajikistan; chemicals and textiles from Uzbekistan). EU is the biggest trade partner of Central Asia representing 30 % of the region's total trade and €62 billion of direct investments that go largely to Kazakhstan (EU Strategy for CA). Yet, the region has advantageous natural endowments in terms of soil, water resources and climate for producing high value-added and ecologically clean agricultural and food products.
Moreover since agriculture is the main source of employment and income of people in Central Asia, who largely live in rural areas, accessing the global value chains can have significant impact on people’s lives. Europe is the world's largest importer of processed fruit and vegetables in the world, absorbing more than 40% of the global supplies. Around 50% of Europe’s imports originating from outside the EU come from developing countries. However, the competition is fierce, and the requirements are strict.
To access the European markets and global value chains, it is essential to comply with a whole range of public standards and international law but also with a range of voluntary sustainability standards (VSS). The importance of compliance with a whole series of standards is excellently detailed in the recent book by Anu Bradford (2020) In her book, Bradford argues that the EU has become a global governance actor in its own right through exporting its standards and norms through trade and integration in the global economy. Via the mechanism of the activities of multinational enterprises which dominate global value chains and adhere to European standards, European standards are getting spread and diffused throughout the world. Complying with them means access to the European market, but also integration in global value chains.
Europe attaches crucial importance to standards within the EU but also for the cross-border trade with non-EU countries as highlighted in the quote by EU President Charles Michel. In the EU, it is important for the functioning of the single market. For trade with non-EU countries the EU aims to level the playing field by exporting its standards to other countries. This compliance with standards and rules takes in practice many forms, both for governments as well as producers and farmers. Let me single out one for each, GSP/GSP+ and voluntary sustainability standards.
The foremost EU trade instrument to pursue sustainable development is the European Union’s Generalised Scheme of Preferences (GSP). GSP is a preferential trade arrangement by which the EU grants unilateral and non-reciprocal preferential market access to goods originating in developing countries. The preferences are given in the form of partial or entire suspension of import tariffs. The EU has operated a scheme of generalised tariff preferences since 1971, with the objective of “assist[ing] developing countries in their efforts to reduce poverty, [and to] promote good governance and sustainable development” (European Commission, 2016, p. 2). The scheme consists of three arrangements which distinguish between developing countries on the basis of their development status and needs, thus providing for different levels of preferential market access. The three arrangements are: (1) the general arrangement (the “Standard GSP”); (2) the special incentive arrangement for sustainable development and good governance, known as the “GSP+”; and (3) the special arrangement for the least-developed countries (LDCs), known as “Everything But Arms” (EBA).
Under “the special incentive arrangement for sustainable development and good governance” (GSP+), a country which is already included in the list of GSP beneficiaries and which qualifies as a vulnerable country, may gain, subject to certain conditions, duty free access to the EU for essentially the same and more products as those covered by the Standard GSP (European Commission, 2016, p. 2). In broad terms, the duty-free access is conditional on the ratification and implementation of 27 international conventions concerning human and labour rights, environmental protection, and good governance. As disclosed by the name of the arrangement (“the special incentive arrangement”), the GSP+ aims at spreading and promoting the values and principles of human rights protection, sustainable development and good governance. The additional preferences are intended as a form of compensation, or reward, for having signed up to, and for implementing the relevant international law. In other words, the GSP+ “fosters the achievement of its goals by offering the ‘carrot’ of preferences” (European Commission, 2016, p. 3).
In terms of integrating in the GSP scheme, and establishing connectivity, Central Asia is doing well. Kyrgyzstan is already included in GSP+ and Tajikistan and Uzbekistan will graduate in. So three out of 8 countries which will be included in the ambitious GSP+ scheme are from Central Asia. This will strengthen the institutional connectivity between the EU and Central Asia and might contribute to a better compliance with the standards the EU wants to uphold.
Turning to producers and voluntary sustainability standards, there is an important challenge to create more connectivity by adopting more what the United Nations Forum on Sustainability Standards call VSS/Voluntary sustainability standards. “VSS comprise a collection of organisations that certify producers and production processes, taking sustainability standards into account. The United Nations Forum on Sustainability Standards defines VSS as “standards specifying requirements that producers, traders, manufacturers, retailers or service providers may be asked to meet, relating to a wide range of sustainability metrics, including respect for basic human rights, worker health and safety, the environmental impacts of production, community relations, land use planning and others.”
Voluntary standards comprise many different initiatives. Among the most prominent and representative examples of these private regulatory initiatives are the Fairtrade Labelling Organization (FLO), the Forest Stewardship Council (FSC), the Fair Labour Association (FLA), Social Accountability International (SAI) and the Marine Stewardship Council (MSC). The FSC, set up in 1993, is an international, multi-stakeholder, consensus-based sustainable forestry initiative. It guarantees that a wood or paper product has been made using material from a sustainably managed forest. Additionally, GLOBALG.A.P is one of the leading VSS in agriculture and certifies farms according to a set of good agricultural practices which include health and safety issues and social and environmental issues.
Once standards are developed, VSS put systems in place to assess conformity with standards and monitor compliance with standards by rule-takers. When producers meet these standards, they receive a certificate or a label that is used in external communication intended for consumers and other companies. The past few years have seen a significant increase in such initiatives. Some sources now count more than 450 VSS (Ecolabel Index).
Contrary to governmental standards, which can be either mandatory or voluntary, private standards are voluntary by definition. As such, compliance to these standards is not legally required by national governments or multilateral regulations, but they are increasingly a requirement to enter global value chains and hence be integrated in the global economy. With regard to VSS, Central Asian countries can step up their action. In a report I just wrote for the UN Forum on Sustainability Standards, we analyzed adoption dynamics of VSS and show that Central Asian countries are not ranked highly with regard to the presence and use of VSS.
For example, currently, only 15 standards apply to Kyrgyz exporters of agriculture, fish, and processed food willing to access the EU market. Of these 15 standards, only a few are truly private/voluntary sustainability standards used in global value chains. Some others are more general guidelines and commitments like the UNGlobal Compact. The fact that Kyrgyz’s producers only comply to 15 standards might constitute a significant barrier for their inclusion in global value chains. The flagship report shows that in general Central Asia is to a degree excluded from standard dynamics and actually ranks low in terms of using and being integrated in the global dynamics of private sustainability standards.
VSS have established themselves as significant governance mechanisms to govern transnational economic activity and value chains. Therefore for developing countries, it might be important to learn the rules of the game. You may ask me: Why make the task difficult and not simply stick to the traditional neighboring markets? Why bother? First, certification of the quality and sustainability of the product gives access to the markets with higher purchasing power and possibly generate a price premium. Second, going through the certification systems can increase countries’ business ties and produce positive spillovers of being part of the rule-based system. The third, and by far the most important, argument is that the EU is increasingly using and integrating these private and voluntary schemes in their pursuit of global standards. Free trade agreements refer to them, there is a discussion on the pro’s and con’s of integrating them in GSP, some market access regulations like the conflict minerals, EU Timber regulation or renewal energy directive refer to them. This example is followed by others. For example South Korea, in its new timber act refers to VSS and the EU to establish market access. Hence VSS are ‘blended in’ into public regulation.
Failing at complying with standards undermines the capacity of the country to exploit advantageous trade possibilities. Standards and compliance with standards can be a catalyst for trade.
A lack of knowledge and structured information about standards might one of the key challenges of Central Asian exporters. Lack of a systematized approach might make international trade difficult. Therefore for trade cooperation and EU-Central Asia connectivity to take off, it is essential to develop the necessary the capacity to fully engage with sustainability issues and standards. This will, I believe, enhance connectivity between EU and Central Asia.
Axel Marx is Deputy Director at the Leuven Centre for Global Governance Studies, KU Leuven.
The text is a revised version of the opening address given at the second International Conference on Central Asia: “Between Europe and Asia: Emerging Central Asia and its Multi-Faceted Role in the Era of Connectivity”