House of Commons - International Development

Select Committee on International Development Fourth Special Report

APPENDIX

Memorandum from the Foreign and Commonwealth Office

THE GOVERNMENT'S RESPONSE TO THE INTERNATIONAL DEVELOPMENT COMMITTEE'S REPORT ON THE RENEGOTIATION OF THE LOMÉ CONVENTION

TRADE

20. Lomé trade preferences have failed to stem a decline in the ACP's trading position with the EU; such trade preferences, however generous, will in any event be ineffective if no action is taken to deal with the supply-side constraints which hinder the ACP economies from producing competitive goods (paragraph 66).

The Government agrees, as does the EU as a whole, that access to the Community market is only part of the picture. The EU needs to support developing countries in their efforts to diversify their economies, to build supply capacity and to develop their export markets. The mandate reflects this, for example in addressing the need to foster more favourable conditions for the effective development of trade and private investment.

21. It was necessary for the EU to negotiate a waiver for the current Convention from the WTO rules. This is because it provides trade preferences, in other words tariff reductions, to the ACP which are not available to all developing countries. This waiver will expire with the Convention in the year 2000 (paragraph 77).

The Government agrees.

22. Much of the evidence we received concentrated on the feasibility of the FTA option, as should be expected given the continuing emphasis placed on it by the Commission. A number of criticisms were made of the proposal:

that the economies of the ACP were not sufficiently developed to withstand the arrival of duty-free imports from the EU;

that the EU would not be willing to open up its market to ACP products, in particular those "sensitive" products protected by the Common Agricultural Policy (CAP);

that the timetable for the agreement of regional economic partnership agreements (five years from 2000 to 2005) was impossible to achieve and that the ACP countries lacked the capacity to enter into such negotiations.

that there was at present inadequate regional integration amongst ACP countries and thus no basis for the proposed regional economic partnership agreements (particular mention was made of the problem of the presence in a sub-region of countries at different stages of development);

that there was a danger of trade diversion resulting from the establishment of such FTAs which would hinder the process of global trade liberalisation;

that those non-Least Developed ACP countries which failed to join an economic partnership agreement would be faced with the alternative of the inferior preferences of the GSP (paragraph 82).

The Government shares some of these doubts about the FTA option—hence our determination to ensure that it should not be the only option.

23. It is also important to remember the "massive efforts of liberalisation" necessary for many ACP countries to enter such a FTA. Ghana for example would have to remove 60 per cent of their tariffs for the implementation of such a FTA. Mr Bloomer later gave the example of Swaziland where 80 per cent of the revenue spent on health and education came from import taxes. For such countries not only was there a threat to fledgling industry from a FTA with the European Union but also the prospect of significant loss of revenue for the Government, which might have undesirable social consequences (paragraph 84).

The Commission has agreed to carry out, in advance of negotiations, studies to assess the effect of FTAs on particular countries or regions, to ensure that there is full understanding of their likely impact on ACP partners. Negotiations will take account the level of development of the countries concerned as well as their capacity to adapt and adjust their economies in the face of liberalisation. But the Government also believes that well-managed liberalisation will bring beneficial economic development to poor countries. In the Government's view, all ACPs should be supported in efforts to liberalise and to integrate their economies with the global economy—whether through FTAs, through participation in multilateral trade negotiations in the WTO or both.

24. We do not accept that the negotiations towards FTAs between the EU and ACP proposed by the Commission are at present either realistic or desirable, since they are not in the interests of the ACP countries (paragraph 88).

The Government does not agree that all possible FTA negotiations are necessarily contrary to the interests of ACP countries. We have an open mind: if FTAs can be negotiated in conformity with the EU's own criteria and with WTO rules, it may be that some would be beneficial. But the Government certainly agrees that they are not a universal solution. Nor are they a substitute for multi-lateral liberalisation negotiated in the WTO. That is why we have worked to ensure that attractive alternatives will be available, both for LDC and non-LDC countries.

25. Should, however, negotiations take place on the establishment of economic partnership agreements leading to FTAs, we consider it vital that proper consideration be given to the vulnerability of the less developed economy and that, as appropriate, liberalisation of tariffs take place asymmetrically. The current Draft Negotiating Mandate hardly mentions this possibility. We recommend that the final version of the Mandate contain specific assurances on this point and we trust the ACP will press hard for such asymmetric liberalisation in any subsequent negotiations. (paragraph 89).

The Government agrees that the vulnerability of the least developed economies should be taken into consideration. However, it is important to remember that the EU already offers duty-free access on the great majority of goods from all ACPs, and highly preferential access on goods not entering duty-free. By contrast, ACP tariffs on imports from the EU are widespread and, in many cases, high. Given this initial asymmetry, any FTAs will involve much more liberalisation by the ACPs than by the EU.

26. The Commission's proposals for FTAs are unacceptable without a clear commitment from the EU to reform the CAP, reduce its export subsidies and open up its markets to sensitive agricultural products. If, contrary to our recommendations, negotiations are opened on FTAs, an agreed timetable must be established to co-ordinate any economic partnership agreements with CAP liberalisation. More generally, we recommend that the Commission conduct impact assessments of CAP reform proposals for the developing countries and the ACP in particular. On the basis of such assessments further assistance should be given to developing countries particularly vulnerable to any adverse effects of CAP reform (paragraph 94).

Negotiations to take further the process of fundamental agricultural reform will begin in the WTO early in 2000. In preparation for that the EU is now considering proposals for important reforms in the cereals, beef and dairy sectors. The Government is firmly committed to securing major reform of the CAP. At the same time it recognises that, although overall this is clearly in the interests of developing countries as well as EU consumers and producers, reform could have particular adverse impacts on individual developing countries. Recognising this, it has commissioned its own studies of likely impacts and would welcome similar action by the Commission.

27. Negotiations on the establishment of reciprocal liberalising agreements leading to FTAs will have behind them the threat of an increase in tariffs for ACP countries. To put the matter crudely, ACP countries will have the choice of either opening up their markets to EU products or suffering an increase in taxes on their exports to the EU. A number of witnesses pointed out that this amounted to blackmail and was certainly not an appropriate way to encourage regional integration and trade liberalisation (paragraph 99).

Thanks to the agreement the Government obtained in the Council, all LDCs should enjoy duty-free access for essentially all products by 2005, and that non-LDC ACPs unable to join FTAs should be offered a new trade framework equivalent to their existing situation under the Lomé Convention. For the latter group, the Commission have given a commitment that they will pay particular attention to the necessary transition to the new arrangements.

28. We accept that in the long term there may be a benefit to ACP countries in a liberalisation of their markets and greater openness to foreign imports. The arguments presented to the Committee have, however, convinced us that the pace of liberalisation should not be forced and that to do so could do serious damage to the ACP economies. It is immoral for the EU to misuse its economic strength to dictate clearly unfavourable terms to the ACP. Regional integration and subsequent liberalising agreements with the EU should take place on a genuinely voluntary and consensual basis, not out of fear at the prospect of migration to an unenhanced GSP. The timetable proposed in the Draft Negotiating Mandate for the negotiation of economic partnership agreements is wholly unrealistic (paragraph 104).

The Government agrees that it would be wrong to impose unfavourable terms on ACPs. Given the alternatives which are to be made available, the risk of this is much reduced.

29. The Draft Negotiating Mandate is unacceptable in its current form. Much more emphasis should be placed on the option of significantly improved GSP for the ACP non-Least Developed Countries. We support fully the efforts of the United Kingdom Government to increase the importance of this option in the negotiating mandate and recommend that the Government argue strongly in the EU for the improvement of GSP to Lomé levels (paragraph 105).

The Government agrees and believes that the Committee's analysis contributed to the successful conclusion of the mandate.

30. We recommend that the EU bind the enhanced GSP in the WTO. This will maintain the predictability and stability of tariff arrangements that the ACP enjoys under the Lomé Convention (paragraph 106).

The Government fully supports the objective behind this recommendation. It is already our policy to work towards binding duty-free access for LDCs in the WTO as Mr Ruggiero has proposed. However, the technical position is that GSP is an autonomous and non-reciprocal arrangement, and there is no provision in the WTO for binding GSP commitments. The obstacle could be overcome, given sufficiently widespread political will—as we hope it will be for the Ruggiero proposal. We have some doubts about whether political agreement to bind GSP commitments more generally could be achieved or achieved at an acceptable price. For example, it would not be worth doing if the result was bound duty rates higher than the applied rates. But the Government will consider this further.

31. We recommend that the Government continue its efforts to achieve reform of the GSP category of developing countries with greater differentiation possible according to level of development (paragraph 107).

The Government will look further into this question, taking into account also the scope for extending "graduation" of the more developed beneficiaries out of GSP.

32. We conclude that a five-year waiver may well prove inadequate time for ACP countries to prepare for migration to the GSP. We see no difficulty in the waiver being a 10 year period. We recommend that the decision on the length of waiver requested be made in the light of the terms of the revised GSP, with five years as the minimum period (if the GSP is revised to Lomé levels) and 10 years as the maximum (if there is no significant improvement in the terms of the revised GSP) (paragraph 111).

Any waiver will have to be negotiated in the WTO and it cannot be assumed that its length can be freely extended. However, the outcome of the mandate negotiations, including the commitment to a Lomé-equivalent alternative, is consistent with the Committee's line.

33. We welcome the extension of Lomé-style preferences to those Least Developed Countries which are not members of the ACP (paragraph 112).

The Government agrees.

34. We welcome the Ruggiero proposal to remove all tariff and non-tariff barriers in OECD countries for the products of Least Developed Countries. We recommend that the United Kingdom and the European Union strongly support it (paragraph 114).

The Government agrees that all OECD countries and some richer developing countries should be encouraged to do as the EU is committed to do by 2005, that is to remove tariffs on essentially all exports from LDCs.

35. We recommend that the revised GSP include more generous and simpler rules of origin to allow greater cumulation and thus promote the development of processing and manufacture in ACP countries, in particular small—island economies, and greater regional integration (paragraph 116).

The Government agrees.

The 29 June General Affairs Council made a commitment to simplify and review the rules of origin, including cumulative provisions, for LDCs. The Government expects the same issues to be considered in relation to non-LDC beneficiaries, at the latest in the 2004 GSP review.

36. We recommend that current revision of the GSP reduce non-tariff barriers to Lomé levels (paragraph 117).

The Government agrees with the spirit of this recommendation insofar as it relates to rules of origin, though it does not believe there is a realistic prospect of achieving new rules of origin for non-LDC GSP beneficiaries in the current GSP review. The Committee also mention non-tariff barriers on the import of clothing. The Government has recently achieved agreement to certain derogations of origin rules in the textiles and clothing sector.

37. We welcome the proposal in the Draft Negotiating Mandate of an investment facility to promote the private sector in ACP countries. We recommend that particular attention be given to the development of small medium-sized enterprises and co-operatives. Further development of the supply-side capacity should be considered a priority in the country strategies and aid allocations for each ACP country (paragraph 121).

The Government agrees. The mandate says that "particular attention will be paid to the needs of micro, small and medium-scale enterprises."

38. We recommend that post-Lomé IV aid to the ACP include technical assistance and funding for effective representation in the WTO and other international organisations (paragraph 124).

The Government agrees that technical assistance should be offered to enable ACPs—and non-ACP developing countries, particularly LDCs—to participate fully in the WTO.

39. We recommend that the Commission urgently prepare studies of the likely impact of CAP reform in beef and sugar on developing countries. On the basis of these studies we recommend that concerted action be taken to provide assistance to enable ACP countries to deal with the necessary adjustments (paragraph 133).

The sugar regime will not be reviewed until 2000-01. In formulating any proposals then the Commission will take into account the effects of reform on ACP suppliers, who receive a guaranteed price under the Lomé protocol.

The Government believes that cuts in the EU's sugar price are inevitable, as a result of pressures exerted by WTO disciplines on agriculture and by the enlargement of the EU to the East. We have been advising the ACPs for some time of the need to improve the efficiency and competitiveness of their industries in preparation for that.

At our insistence, the Lomé negotiating mandate agreed by the Council acknowledges the special status of the sugar protocol which, unlike the other commodity protocols, does not expire along with the rest of the current Convention.

On beef, if the full reduction in the support price proposed under the Agenda 2000 CAP Reform proposals (39 per cent over three years) is reflected in the market price, the commercial viability of ACP imports could be significantly reduced because of increased competition at the lower end of the market from domestic production. The beef protocol, unlike the sugar protocol, does not grant the ACP a guaranteed price. Furthermore, a reduction of this order in EU market prices might eventually lead to unsubsidised (and therefore unlimited) EU exports, which in turn could have an impact on the domestic markets in developing countries.

The Commission has already taken account of the impact of the beef regime on developing countries, for instance when cutting export refunds to destinations in Africa. The Government would support further impact assessments. However, the fact that ACP quotas have only ever been partially filled suggests that other factors could be limiting sendings. The Government would support development assistance aimed both at easing any adjustment made necessary by CAP reform and at addressing these other factors limiting the ACP's trade performance.

40. We support the efforts being made by the Government, the EU and the ACP to agree a new Banana Protocol to begin in the year 2000. Any request for a waiver to the WTO should be carefully drawn up so as to ensure that it remains possible and profitable for banana producers and suppliers to grow and import ACP bananas into the EU market. We also recommend that the Government urge the WTO to consider the inclusion of a "vulnerability"/"small state" category in its rules which might qualify for special and discriminatory treatment (paragraph 138).

The negotiations on revisions to the EU banana regime required following certain adverse WTO findings were concluded in the Agriculture Council on 26 June. These honour existing and anticipated Lomé commitments and should provide stable continuing access for ACP banana producers to the EU market. They are due to be reviewed in 2004. A continuing waiver will need to be negotiated in the WTO covering their operation after 2000. The Government agrees that this will need to be carefully drawn up.

The Government is well aware of the particular problems faced by small island developing states; their vulnerability is covered in the mandate. We do not believe, however, that a special category in the WTO would be appropriate, although we are ready to look sympathetically at technical assistance to help them meet their WTO obligations.

POLITICAL CO-OPERATION

41. We agree that sustainable development can only take place within a framework of the rule of law, good governance, democracy and respect for human rights (paragraph 142).

The Government agrees.

42. We welcome the provision of an enhanced GSP to those countries implementing certain core labour and environmental standards. This positive use of trade preference is a good example of the conditionality to which the Lomé Convention should aspire (paragraph 145).

The EU mandate puts the accent on partnership with ACP countries, aiming to replace the concept of conditionality with that of a contract, based on mutual obligations and a shared vision of the policy to be implemented.

43(a) Conflict prevention and post-conflict reconstruction must be taken into account wherever relevant in all aspects of development thinking, including trade policy. They must therefore be included in the priorities and provisions of the Lomé Convention and we welcome their treatment in the Draft Negotiating Mandate (paragraph 149).

Conflict prevention and support for post-conflict situations are included among the over-arching principles and objectives of the mandate which are intended to inform all aspects of co-operation.

43(b) More practical detail is necessary of how the Lomé Convention can contribute to conflict prevention and post-conflict reconstruction. We recommend further attention be paid to the development of an early warning system, efficient models for discussion and possibly mediation within the framework of the ACP-EU Council and Joint Assembly, an effective post-conflict aid and reconstruction strategy, the training of Commission personnel, both in Brussels and in the delegations, in conflict issues and how they relate to development (paragraph 149).

The Government agrees that further work is needed and will be fully involved in discussions with member states and with the ACP.

43(c) The development of a Lomé strategy for conflict prevention must be within a framework agreed with other significant international bodies, such as the UN and the OAU (paragraph 149).

The Government agrees that the paramount responsibility of the UN for conflict prevention must be respected. Co-operation with other regional organisations is essential.

44. We see a value in a forum at ACP-EU level where the voices of civil society and the private sector can be clearly heard. It would seem preferable for any forum to be annexed to the meetings of the Joint Assembly (paragraph 151).