House of Commons - International Development

Select Committee on International Development Fourth Report

TRADE

Discussion of Commission trade proposals

76. The proposals of the Commission as contained in the Draft Negotiating Mandate have been developed from those in the original Green Paper and in the subsequent 'Guidelines'. Changes have been introduced in response to the comments both of member state governments and the wider NGO community. The basic recommendations remain, however, very much intact and the comments received by the Committee are as relevant to the current document as to its predecessors.

77. 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.

78. We have discussed above the various factors which will affect the trade sections of the next Lomé Convention, including the continuing weak performance of the ACP countries, the need for supply-side measures in addition to market access, the inevitable erosion in the value of current Lomé preferences to the ACP. Before examining in detail the Commission's proposals a further matter must be mentioned which will have a significant impact on the shape of the next Convention, and that is the application of WTO rules. The memorandum from the FCO summarises the issues well. The WTO supervises a rule-based multi-lateral trading system. Fundamental to the rules of the WTO is the principle of non-discrimination. The WTO rules forbid discrimination in the imposition of tariff between different exporting countries. There are, of course, exemptions. To quote the FCO, "The WTO system recognises the particular importance of market access to developing countries. Its rules also recognise that developing countries cannot always assume market opening obligations at the same pace as developed countries. Under a special exemption, developed countries may also discriminate, on a non-reciprocal basis, in favour of developing countries as a group provided that such discrimination does not discriminate between different countries. The one exception to non-discrimination is that the Least Developed Country Group can be given more favourable terms than the rest".[126]

79. One question therefore that must be addressed in discussion of the past-Lomé IV Convention is the extent to which it should be compatible with the rules of the WTO. An original contention of the Commission in its Green Paper was that the need for a waiver for Lomé IV created a climate of economic uncertainty for the ACP thus acting as a deterrent to much needed foreign investment. The Green Paper states that "The fact that the waiver only extends until the end of the present Convention, that it must be reviewed annually and that issues linked to the banana trade arrangements applied by the EU are still not solved, has undermined the principles underpinning the Lomé trade preferences, in particular those of non-reciprocity and stability. The security attached to those preferences has been accordingly reduced".[127] It later says that the next Convention should "achieve respect for the relevant WTO rules so as to provide the necessary security and stability on market access terms".[128]

80. Other witnesses questioned this view of the effect of a waiver on security. The University of Reading points out that the annual reviews of the waiver by the WTO are a formality,[129] a point confirmed by Mr Eglin in his evidence.[130] Moreover, they questioned who would gain from a challenge to a waiver and how effective such a challenge would be. The United States and Canada have both relied on WTO waivers for parts of their respective trading regimes. Mr Peter Pooley from the British African Business Association said, "I do not think that the existence of the preferences was a cause for uncertainty, nor do I think the fact that the preferences are now being eroded and in some cases are under challenge, though that is a cause of uncertainty, is a major element in terms of failure to attract inward investment or in terms of failure to trade".[131]

81. As was stated above,[132] the Commission proposes as an alternative to the status quo of another ten year waiver for existing preferences the creation of Free Trade Areas, compatible with WTO rules. Under Article XXIV of the GATT a FTA must be completed "within a reasonable period of time" (newly defined in the WTO as a period that "should exceed ten years only in exceptional cases") and that "duties and other restrictive regulations of commerce ... are eliminated on substantially all trade between the constituent territories".[133] Thus for the ACP a FTA has the advantage of offering duty-free access to the EU market for "substantially all trade", a significant advance in market access and of great value to their economies. The possible disadvantage, however, is that the process must be reciprocal. In other words, the ACP economies will also have to open up their own markets to EU imports.

82. 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:

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

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

(c) 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

(d) 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)

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

(f) 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.

ii. The impact of trade liberalisation on the ACP

83. Mr Bloomer from Oxfam said that "In terms of the impact of the free trade agreements, there will be very high adjustment costs for the ACP producers in those countries. It is pitching countries of extraordinarily different levels of development against each other and you can imagine the manufacturers, the very small number of infant industries in some of the African countries, that are going to be exposed to a free trade agreement where tariffs are removed: most of them are simply not going to be competitive enough to compete with the imports that will come direct from the European Union and swamp the market at a cheaper rate".[134] This would in his view mean a return for the ACP to dependence on primary products.

84. It was 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.[135] Mr Bloomer later gave the example of Swaziland where 80 per cent of the revenue spent on health and education came from import taxes.[136] For such countries not only was there a threat to fledgeling 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. Trade taxes typically account for between 15 and 50 per cent of government revenues.[137] Furthermore, the 60 per cent of ACP imports from outside the EU would be threatened by such a FTA as "the main effect of discriminatory liberalisation in favour of the EU would be to divert ACP imports away from lower-cost third country sources. This would imply a loss of tariff revenues".[138]

85. Not all evidence suggested that it would be harmful for the ACP economies to remove duty on imports. The memorandum from Mr Simon Maxwell and Mr Henri-Bernard Solignac Lecomte from the Overseas Development Institute pointed out that "Import liberalisation may be a key element of economic reforms, and many ACP countries still need to proceed further with such reforms to overcome pervasive supply-side constraints".[139] The DTI memorandum stated that "In cases where EU imports are the main competitors to ACP production, removal of trade barriers against the EU would create trade, promote competition, lower prices to ACP consumers and business users, encourage ACP producers to improve efficiency and ultimately boost ACP incomes".[140] DFID considered that one macro-economic policy element required for sustainable growth was "trade liberalisation aimed at reducing the cost of imports to consumers and producers, to foster specialisation in line with comparative advantage".[141]

86. One at least partial solution to some of the harmful effects of the liberalisation of ACP markets would be for the reciprocal liberalisation of ACP and EU markets to take place "asymmetrically", recognising the greater vulnerability and adjustment costs for ACP economies. The Draft Negotiating Mandate speaks, somewhat vaguely, of an economic partnership which "will be strengthened gradually, taking account of each partner's level of development and the ACP countries' political commitment to regional integration".[142] Mr David Batt, Head of the International Economic Policy Department in DFID, explained that, under the WTO rules, the process of reciprocal liberalisation "can be asymmetric... you do not have to have both parties opening up their markets at the same rate. Indeed, there is not any objection to the eventual free trade area including an asymmetric component; a greater proportion of trade in one direction may continue to be subject to trade barriers than in the other direction. So you can have an asymmetric process and an asymmetric result. You need to cover, in the result, substantially all trade".[143] It is possible, in other words, for the result to cover substantially all trade, but for a higher percentage of commodities to enjoy preferences from the developing country to the EU than in the reverse direction.

87. Mr Rob Davies, Chairman of the Portfolio Committee on Trade and Industry in the South African Parliament, told the Committee that this question of asymmetry had been raised in the negotiations between the EU and South Africa on the establishment of a Free Trade Area. The obligations in a reciprocal arrangement should take account of the fact that it is "between countries or regions of very different levels of development and that they ought to be skewed so that they are less onerous on the least developed partner. This has been accepted in the South African negotiation; I do not see this point emerging prominently in the current debate on the future of Lomé".[144]

88. 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.

89. 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.

iii Access to the EU market and CAP reform

90. The point has been made above that in the longer term it will be to the advantage of the ACP countries to reduce their tariffs on imports. This will allow both ACP consumers and producers to benefit from cheaper and easier access to goods and products. In the short term, however, there are dangers to the ACP economies. The DTI memorandum having mentioned the advantages of liberalisation adds that the trade creation resulting from a removal of barriers "implies some short term loss of production for the ACPs. Unless the agreements are accompanied by additional export opportunities for ACP producers, they may face adjustment problems that would have to be addressed".[145] Similarly, Mr Rob Davies said that "If you have liberalisation without capacity development, it can very often be a recipe for de-industrialisation".[146]

91. Thus a key question in assessing the impact of liberalisation on the developing ACP economies is how much more generous will be their access to the EU market. Greater access and advantages for their exports to the EU could well offset the adverse consequences of greater competition from EU products on the domestic market. It is again important to look at the recent experience of South Africa in its FTA negotiations with the EU. The issues and problems that have arisen will no doubt recur and be writ large in any post-Lomé IV negotiations. In his memorandum to the Committee Mr Davies noted that in the Guidelines "the absence of any specific commitment to significantly improve access to the EU market, including in sectors where ACP countries are currently most competitive, is a notable lacuna. The fact that South Africa is still facing an uphill battle to ensure improved access to the EU market for key agricultural products (and on a worst case scenario could find 40 per cent of current agricultural exports excluded from an FTA) shows that an FTA that is WTO and CAP compatible can still severely limit access to the EU market".[147] In oral evidence he expanded on the agricultural protectionism of the EU. In sectors where developing countries were most competitive they faced "significant barriers into entry into the European Union and also the subsidies which are paid for agricultural products are a major problem to our sectors in third country markets".[148] He gave the example, also cited by a number of other witnesses, of cheap subsidised beef from the EU causing problems for South African and Namibian beef producers in their markets.

92. The prospect of Common Agricultural Policy (CAP) reform, discussed in the Commission document 'Agenda 2000', has been mentioned previously as one reason why, in the future, current Lomé preferences will further lose their value for the ACP. CAP reform was necessary to meet the EU's commitment to export subsidy reduction under the GATT Uruguay Round and the challenges of a new trade round to start in the WTO in 2000, as well as enlargement to the east and certain budgetary constraints. Ms Penny Fowler from the Catholic Institute for International Relations (CIIR) also noted the silence in the Commission's Lomé documents on the opening up of the EU market to ACP products and cited the South African example. Not enough attention had been paid to the negative net effects of the CAP on developing countries. These effects included the disposal on the world market of the surplus production of particular commodities. This had the effect of depressing world prices for agricultural commodities which harmed certain developing country producers. Moreover, sometimes these surplus commodities were subsidised, causing additional problems for competitors. There were also, of course, the restrictions on market access into the EU for "sensitive products".[149] Ms Fowler did not think that the Agenda 2000 proposals at present offered significant improvement in access to the EU market for developing countries. Nor did the document seriously address the negative impact of the CAP on developing countries.[150] Dr Stevens commented, "The very limited approach of the EU towards South Africa illustrates that the Union does not currently possess the political will to agree substantial trade liberalisation in key product areas, notably the Common Agricultural Policy".[151]

93. Not all aspects of the CAP had a harmful impact on developing countries. Ms Fowler mentioned the beef protocol as one example, which we will consider below. Moreover, any increase in prices on the world market as a result of CAP reform, whilst helping ACP producers, could well hit ACP consumers. Ms Fowler thought that in anticipation of such an outcome the EU should focus some technical and financial resources on the boosting of domestic food production in vulnerable countries.[152] Ms Fowler also made the point that the Agenda 2000 had to be seen as only a first step along the road of agricultural liberalisation for the European Union.

94. Reform of the CAP is of fundamental importance not only to the farmers and producers of the EU but also to the developing world. It is certainly inextricably linked to the trade proposals of the Lomé Convention. Yet the documents issuing from the Commission on these two issues hardly refer to this interrelationship. This makes a mockery of the Maastricht commitment to policy coherence (Article 130v). 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 coordinate 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.

iv. Regional capacity

95. The timetable contained in the Draft Negotiating Mandate envisages negotiation of regional economic partnership agreements taking place between 2000 and 2005.[153] There was considerable doubt as to whether this was realistic. South Africa with greater administrative capacity than many ACP countries had taken over four years. Five years was therefore a minimum.[154] The British African Business Association argued that a "lengthy transitional period" was necessary for any negotiations.[155] Mr Davies also mentioned the question of administrative capacity to negotiate such an agreement with the EU. He doubted whether any of the sub-regional groupings had "either the mandate or the capacity to negotiate agreements with third parties with tariff implications".[156] The DTI worried that the Commission proposals "would inevitably divert EU and ACP negotiating effort away from multi-lateral liberalisation initiatives at a time when there is likely to be a weighty international trade agenda".[157]

96. Related to this point was the argument that few if any sub-regions were at a level of integration where a Free Trade Area agreement with the EU was conceivable in the near future. Mr Jones Parry from the FCO had doubts about the Commission's proposal "because within a region there is no homogeneity, it is an artificial assumption that you can have a free trade arrangement with, say, Africa".[158] The memorandum from the Overseas Development Institute said that "there are no real trade areas for the EU to sign a FTA with".[159] Mr Davies said that it was unclear whether a sub-regional liberalisation of trade would be on the basis of the trade strengths of the stronger members of the sub-region or the trade weaknesses of the weaker. Would, for instance, South Africa be granted the same access for its product as was granted to non-LLDCs in the Southern Africa region under the beef and sugar protocols? Or would those non-LLDCs have to forego such advantages in joining a sub-regional FTA with South Africa?[160] There were, moreover, concerns as to how LLDCs would be treated within a sub-regional agreement, particularly with regard to rules of origin (a subject to which we shall return).[161]

v. Trade diversion

97. A further concern was that the Commission proposals would result in trade diversion. Mr Jones Parry said, "a proliferation of free trade areas risks undermining - that may be too strong a word - or it certainly brings into question a global trade arrangement. It would be far better if, in the end, we had global free trade everywhere. If you end up with a whole range of different agreements, all you are going to do is make things ... far too complex".[162] This point was strongly supported by Mr Richard Eglin from the WTO who thought that "it would be an enormously complicated system to try to administer and it is one fraught with possibilities for protectionism, for halting trade liberalisation... for interfering with multilateral trade liberalisation because you are introducing far more pieces of sand into the wheels which is at some point likely to jam them".[163] He added, "governments need to think very carefully about how regional agreements sit alongside multilateral trading systems".[164] In his view the rule-based system operated by the WTO was in the long run a safeguard for the trading interests of the weaker and smaller states. The introduction of more discrimination into the system (and FTAs discriminate between countries in terms of access) could well harm the interests of the least developed countries. Mr Maxwell and Mr Solignac Lecomte from the Overseas Development Institute considered that the benefits of trade liberalisation were less "if ACP countries open only to imports from Europe rather than to all their existing or potential economic partners. There are risks of trade diversion that would impede the diversification of their import sources, and in particular from the most dynamic economies in Asia and America".[165] The DTI warned that "A multiplicity of trade arrangements can distort trade and discriminate between countries of equal need in an arbitrary way. Such distortions risk long-term damage to the very economies they are intending to help".[166]

vi. The GSP alternative

98. These are clearly substantial criticisms of the current Commission proposals. The Commission does, of course, have a fall-back position for those ACP countries that fail to negotiate an economic partnership agreement within the proposed timescale. The Draft Negotiating Mandate says that the Convention "will stipulate that non-LLDC ACP countries will continue to benefit from the Community's GSP after the five year period in accordance with Community legislation and taking account of the changes which will be introduced in the context of the intended revision exercise".[167] This bland statement in fact is at the heart of the controversy over the future EU-ACP trade relationship. Lomé preferences are to end in 2005 and, in the absence of an economic partnership agreement, an ACP country will have their trade preferences, and thus market access to the EU, reduced to the level of the Generalised System of Preferences available to all other developing countries.

99. Thus 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. Despite the claim that the economic partnership agreements were voluntary, Mr Davies considered that in practice "the proposals introduce a powerful element of compulsion...a significant worsening of the terms of access since Lomé offers better access terms than GSP."[168] Many quoted recent research of Dr Jane Kennan and Dr Chris Stevens in the Institute of Development Studies who had concluded that "if the non-LLDC ACP were transferred to the GSP they would pay to the EU treasury an amount in tariffs equivalent to over 40 per cent of the EDF aid disbursed to the entire group in 1994."[169] The `total foreign exchange foregone' would be in the region of ECU 767 million per year.[170] The Secretary of State told the Committee in evidence that her Department accepted these findings.[171]

100. Drs Kennan and Stevens warn in their paper that "An accurate assessment of the potential effects of these changes in relative access is extremely difficult, and probably impossible to undertake across the board".[172] Nevertheless the general point is clear - that the Commission's current proposals amount to a threat of protectionism. It was this that in Clare Short's view made the case for an "enhanced GSP".[173] The sentence quoted above from the Draft Negotiating Mandate mentions the "intended revision exercise" for the GSP. This revision is due to take place this year. The view of the United Kingdom Government in its Position Paper was that new trade arrangements "should be based around the extension of EU preferences under a single and more generous GSP scheme for all developing countries ... the new single GSP scheme would grant much more generous treatment than the existing GSP. The UK would be happy to support the levelling-up of GSP preferences to the existing Lomé level. But we recognise this may not be realistic".[174] In oral evidence Clare Short explained, "We have worked from the beginning to bring up the enhanced GSP alternative and now at least it is being considered as an alternative, but at the moment it is talked about as a second best residual fall back. We want it to be promoted as an equal possibility ... Once we get there ... we will work to press for that option to be beneficial".[175]

101. There are a number of advantages to improving GSP to the Lomé levels. One is that the resulting system would be compatible with the WTO rules since there would no longer be any discrimination between developing countries.[176] Thus it would not be necessary to apply for a waiver. Those non-LLDCs which failed to join an economic partnership agreement would not be penalised by a sudden increase in tariffs as they migrated to the GSP. The superior market access under Lomé would be extended to other developing countries, a significant opening up of the EU market to the developing world. ACP countries would, of course, face greater competition from other developing countries but there would appear to be a net gain to poorer countries from this proposal. The improvement of the GSP as an alternative to the FTAs was supported by Dr Stevens, who pointed out that for an improved GSP to be an acceptable successor to Lomé not only would tariff reductions have to be improved but also rules of origin and other non-tariff barriers, for instance on imports of clothing.[177]

102. The problem with this alternative of GSP improvement is that no one believes it likely that the GSP will be improved to Lomé levels. The UK Government admitted that such an ambition may "not be realistic"[178] and Dr Stevens said that "the EU has given no indication of a political willingness to extend deep preferences to the more competitive, larger developing countries".[179]

103. Not only is there a political difficulty attached to any significant improvement in the GSP. The point was also made that the GSP option "abandons the contractual nature of the Lomé preferences and places ACP countries under the unilateral decision of the GSP regime".[180] Dr Stevens thought "partnership and contractuality" were two key characteristics which distinguished Lomé from the GSP and which allowed the ACP "to unite to offset their inherent weakness vis-à-vis the Union".[181] The University of Reading also pointed out that the GSP is neither negotiable nor contractual. Thus for ACP countries to migrate to the GSP would mean "a loss of security of preferences".[182]

104. We have outlined above the complicated arguments surrounding the future trading relationship between the EU and the ACP. 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.

105. The Draft Negotiating Mandate is unacceptable in its current form. Much more emphasis should be placed on the option of a 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.

106. We recognise that GSP involves in effect the removal of the setting of tariffs from the Lomé Convention. The problem with the GSP is that it can be suspended unilaterally by the EU and has to be renewed annually. It does not, therefore, provide ACP countries with the predictability and stability of the Lomé Convention. The solution would be for the EU to bind the enhanced GSP in the WTO. This would mean the EU made a binding commitment to WTO members not to increase its tariffs above the level of the enhanced GSP. The General Affairs Council of the EU concluded on 31 March 1998 that the post-Lomé IV trade arrangements "should at least maintain the current market access for ACP and must be WTO-compatible". Given the difficulties of the Commission's FTA proposal, this commitment of the General Affairs Council will not be honoured unless the GSP is significantly improved and then bound in the WTO. 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.

107. We have made clear that our ideal is for the level of preferences under the revised GSP to be no worse than those currently available under Lomé. Government evidence made clear that persuading the other EU member states to revise the GSP up to Lomé levels would be a difficult task. Thought was being given therefore to alternative approaches. The GSP at present recognises a single category of developing countries, allowing distinct treatment only for the sub-category of `Least Developed Country'. Clare Short suggested that it might be possible to grant a more generous GSP for "a smaller group of developing countries that are not least developed but in the next category". There would then be "graduation through the system as countries got stronger".[183] Finally there would be "graduation of the more advanced developing countries out of the GSP, based on objective criteria related to level of development".[184] It appears consistent with a poverty-focussed development strategy to have trade preferences graduated according to level of development. Whether it is an immediately practical alternative for post-Lomé arrangements is more doubtful. It is both a technical and controversial proposition. Nevertheless, our inquiry has suggested that the current GSP category of developing countries should be further refined. 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.

126 Evidence p.4 Back

127 Green Paper p.18 Back

128 Green Paper p.34 Back

129 Evidence p.247 Back

130 Q.71 Back

131 Q.454 Back

132 Para 70 Back

133 Evidence p.118 Back

134 Q.184 Back

135 Q.184 Back

136 Q.195 Back

137 Evidence p.286 Back