APPENDIX 4
Memorandum submitted by the Overseas Development
Institute
WHAT THE
EC HAS PROPOSED
On 20 September 2000, the European Commission
issued a press statement, followed some days later by a draft
amendment to the GSP Regulation, proposing that Least Developed
Countries (an official UN designation, not a description) have
duty- and quota-free access for all products except arms, with
immediate effect (once approved by the Council) for most goods
and a three year phase-in period for bananas, sugar and rice.
The only restrictions were the usual ones on rules of origin and
provisions against fraud, plus provision for possible suspension
in case of "massive" increases in imports "in relation
to their usual levels of production and export capacity".
The formal proposal included the statements (required for EC proposals)
of the impact on business, with special reference to small and
medium-sized enterprises, and of the financial effect; the latter
looked only at customs revenue.
In informal discussions immediately after the
proposal, now apparently moving to formal discussions, it has
been suggested that the three-year phase-in could be extended
to five years and that the anti-surge provision be made more automatic.
(The original proposal was for a large increase only to be a "possible"
reason for imposing limits.) Timing of the "immediate"
provisions remains uncertain: the Council has the opportunity
to consider the proposal in December, but if it wants to see studies
of the impact on developing countries (which could in turn modify
the expected internal and financial impacts), the decision is
likely to be delayed into 2001.
THE POLICY
CONTEXT OF
THE PROPOSAL
Multilateral
The GATT Enabling Clause of 1979 allowed not
only special preferences for all developing countries, but additional
preferences for the Least Developed Countries. These are defined
by the UN. Countries are measured against quantitative economic
and social criteria every three years, and recommendations are
made to the General Assembly for countries to be added to or removed
from the list. Under these provisions, the European Generalised
System of Preferences has offered better access to Least Developed
for at least 15 years. Since 1997 the EU has proposed extending
this. The first proposal (presented as a policy objective, not
an official document) was for "all goods", but in all
official documents until September 2000 it has been phrased as
"essentially all".
The EU 1997 proposal was part of a WTO initiative
(initiated by the then Director General, Ruggiero). Following
the Uruguay Round of trade negotiations, analysis indicated that
most of the gains to developing countries had gone to the more
advanced (in particular the clothing exporters of Asia and some
natural resource exporters in Latin America), while some poor
countries, including many Least Developed, had actually lost (because
of the indirect effect of gains made by others). This led to disillusionment
with the trade regime on the part of poor countries and those
concerned with their interests, and various efforts both to counter
the possible economic damage and to demonstrate that the international
trading system could offer benefits. A conference in November
1997 on the Least Developed encouraged both developed countries
and the more advanced developing to make improved offers to the
Least Developed on trade and also to target technical assistance
to improve export capacity on these countries. As with "normal"
GSP, the actual offers were made unilaterally by individual countries
(the EU acting together), not negotiated. The US and Japan made
offers with lists of exceptions; some Asian developing countries
made offers on specific products. There was a proposal to include
negotiations on this in the draft agenda for the aborted Round
of WTO trade negotiations; in this the EU insisted on including
the word "essentially" to modify "all" in
order to permit exceptions. After the Seattle collapse of negotiations,
the new WTO Director General was concerned to keep Least Developed
Countries committed to the multilateral system through improving
and implementing the proposed concessions, and the EU, as a strong
supporter of a new Round, had a clear interest in trying to secure
support from all groups of countries for this.
EU-ACP relations
At the same time as this revival of interest
in preferential arrangements for the Least Developed at multilateral
level, the EU was negotiating with the ACP to find a successor
to the trade provisions of the Lome Agreement. Starting with the
Green Paper of 1997, the EU made it clear that it wanted to shift
from unilateral concessions to a negotiated agreement. While many
ACP countries doubted the economic advantages of this, especially
as it required them to "negotiate" to preserve their
current access, in return for giving the EU greater access, it
did appear to have one clear advantage: that an agreement would
be contractual, requiring both sides to observe it. The EU also
indicated very strongly that it supported regional agreements
among the ACP countries to strengthen their trading positions.
During the pre-negotiation phase, studies of the impact of reciprocal
trading agreements on the ACP countries noted the possible inconsistency
between improved concessional arrangements for the Least Developed
and uniform agreements with the members of regional groups. Every
potential regional group of ACP countries includes both Least
Developed and non-Least Developed countries. While the Least Developed
would gain nothing from an additional trade agreement with the
EU, the others would gain; both the Least Developed and the others
would lose from any splitting of regions by level of development.
The EU therefore modified its original proposal (that Least Developed
in a region would lose their Least Developed access), and the
Cotonou Agreement needed to include a mention of the plans for
the Least Developed: it recognised that the EU intended to grant
access for all Least Developed Countries for "essentially
all" goods. While neither "at most" nor "at
least" appeared as a modifier of "essentially all",
it was clear from the previous EU use of the term (in the multilateral
negotiations) that the intention was to limit access for some
goods. The proposal to offer "all" three months later
was, therefore, a unilateral change in what had been negotiated.
(In WTO terms, it might have been considered a `nullification
or impairment' of an existing agreement, and therefore challengeable.)
The Cotonou Agreement contained provisions for the ACP countries
to be consulted through an ACP-EU Ministerial Trade meeting prior
to any proposals to change the agreement; there had been no consultations
before September 2000.
Status of Proposal
The proposal made in September 2000 was a proposal
for formal implementation of an existing policy objective, not
a new initiative in an unexplored area. It was reasonable to expect
that its consequences, direct and indirect, had been considered
before the draft was submitted (in formal terms, that the required
impact assessments had been done), and that it would take account
of existing policy commitments. There may be circumstantial explanations
for the failure to take official account (through consultations
or an impact assessment) of either the interests of all other
developing countries or the consequences for the existing commitments
under the Cotonou Agreement. The moving of formal responsibility
for trade with the ACP countries from the Development DG to Trade
may have reduced appreciation of the development implications
of trade measures. There has been an apparent reduction in Commission
enthusiasm for regional agreements in general and those proposed
with the ACP in particular. Securing support for a new WTO Round
has become the priority for the Trade DG. These considerations,
however, should not affect either formal obligations or the commitment
to help all developing countries.
Sugar
The proposal to reform the EU sugar regime has
the same timetable as the Least Developed proposal (in its original
three-year form), with no proposals yet for the post 2003 regime.
The quota regime for the ACP countries plus others, including
India, continues unchanged for at least these three years. Under
this, the countries are obliged to offer and the EU is obliged
to buy fixed quantities at the European price (substantially above
the world price). Legally, the Sugar Protocol is not part of the
other arrangements with the ACP countries, but an agreement of
"permanent" duration. Therefore, increased sugar imports
under the Least Developed proposal could not displace imports
under the sugar quota: the EU remains committed to purchase these
indefinitely at above market prices, even if their market is reduced
by imports at much lower prices from the Least Developed. This
could imply high budgetary costs (to subsidise re-exporting or
otherwise disposing of the quota sugar). These would come at a
time when the agricultural policy and the budget were under pressure
from production in the accession countries. This has caused fears
on the part of sugar producers that the Protocol may not be as
less long-lasting as foreseen in previous commitments. These fears
are strengthened by the reaction of the EU (and informally of
the UK government) to their complaints about the short duration
of the transition for sugar under the Least Developed proposals:
that the ACP countries with sugar quotas need to adapt to a changing
international regime. Expectations about policy are clearly important
in determining how investors both in Least Developed and in other
countries will respond to the new opportunities. Wrong expectations
that the Protocol would continue could lead to preserving capacity
that will not be used. Wrong expectations that it will end could
lead to underinvestment. Both Least Developed Countries and quota-holders
need certainty.
ECONOMIC EFFECTS
The effect of removing trade barriers to one
group of countries, leaving others unchanged, is to increase imports
from the favoured group; some of these will replace production
in the EU (if it is now more efficient to import); others will
replace imports from other countries (if the removal of the barrier
creates competitive advantage). The first, "trade creation",
is a clear benefit to both the EU (lower prices) and the Least
Developed (higher income). The second is a benefit to the Least
Developed, a cost to the non-Least Developed, and, depending on
assumptions about how traders price and whether the other countries
pay tariffs or not, a potential cost or benefit to the EU. It
is recognised under WTO rules that free trade areas or customs
unions among members can damage the trading interests of non-members
through trade diversion. Therefore, although FTAs or CUs are permitted,
they are required to offer compensation to non-members for any
anticipated trade diversion. While the calculations are necessarily
arbitrary and subject to error, the provision has been followed,
for example with each enlargement of the EU. There is no similar
requirement when preferences are granted. The original concept
was that preferences were offered by all developed countries for
all developing. Therefore any diversion would be from other developed,
and these had agreed to bear any costs for the benefit of developing.
When differentiation for the Least Developed was introduced, the
implicit assumption was that it was harmless to offer them higher
preferences because they would be unable to increase their exports
very much, and therefore that any diversion would be negligible.
The question of whether it was right for individual developed
countries to be able to decide to impose diversion on some developing
for the benefit of a different class of developing country was
not considered. At the time, developing country participation
in trade negotiations was very limited.
Effects on the Least Developed
How quickly and effectively will they respond
to the new opportunities? If the proposal is modified or restricted
before it is implemented, and particularly if the implicit threats
to restrict imports are activated, then the failure of Least Developed
to take advantage of their opportunities will be a self-fulfilling
prophecy. This anti-surge provision could, of course, prevent
any Least Developed country from making effective use of the new
access to increase their export and production capacity, and could
be inconsistent with the recognition in the proposal of the need
for assistance to the Least Developed to improve their capacity
to export. It appears to be intended to avoid damage to EU producer
interests, not to prevent damage either to EU budgetary costs
or to the exports of existing suppliers to the EU. But if the
proposal is not restricted, previous experience suggests that
some countries will increase some exports very strongly. Bangladesh,
exempted as Least Developed from controls on clothing and textiles
by the EU (but not by other developed countries, so its experience
is a very close parallel with the current proposal) saw an increase
in the share of clothing in its exports from 0.01 per cent in
1977 to 51 per cent in 1991. It was able to increase its exports
partly because both producers and purchasers with experience in
the restricted countries encouraged the development of the Bangladeshi
industry. The increase did not, therefore, rely on existing production
or exporting capacity in the country. Some sugar producers in
quota countries are already involved in Least Developed (for example
Mauritius in Mozambique), so that the links to markets can be
quickly established. If Least Developed are able to obtain a price
higher than the world price (even if lower than that on quota
sugar), then they will have the incentive to import supplies for
domestic consumption and export their total production to the
EU.[1]
The greater the uncertainty over the future of the Sugar Protocol,
the greater the incentive for purchasers and investors to move
into the Least Developed countries. The size of the effect (and
its distribution between the Least Developed countries and outside
investors and purchasers) cannot be calculated simply by looking
at existing sales (as is done in the financial impact assessment
in the Commission proposal). It is a basic error to assume that
the level of a restricted import will not rise when the restriction
is removed. It is necessary to look at the natural conditions,
including transport and other infrastructure for trading and at
the potential to change these.
Effect on other ACP and other developing countries
Until the potential for shifting trade to the
Least Developed has been assessed, it is not possible to assess
the effect on ACP countries. But, particularly in Africa, there
are many cases of neighbouring countries (Malawi and Zambia with
Zimbabwe; Uganda and Tanzania with Kenya) where the exports of
the Least Developed are likely to compete directly with those
of the ACP.
For those products where there are still some
restrictions on ACP exporters (including sugar, but also some
other CAP products, horticultural products, etc.), the Least Developed
may gain immediately. (See Box for some indications of the effect
on Caribbean countries.) After 2008, if the non-Least Developed
do not sign an agreement which renews their access to the EU under
the Cotonou Agreement, the Least Developed will gain on all products
on which developing countries still pay tariffs. They will gain
on these immediately compared to non-ACP, non-Least Developed
countries. The gains in sugar may represent trade creation and
an increase in efficiency (although the convoluted nature of the
sugar market will make it impossible to be certain, and make it
unlikely that EU consumers or quota-holders will benefit from
the increase in efficiency). Where the gains come because the
competitors of the Least Developed face restrictions, there will
be trade diversion, and loss of tariff revenue without a corresponding
gain in efficiency in the EU.
Effects on Caribbean
Sugar is probably barely viable long-term without
the Sugar Protocol—Caribbean countries could live with the
gradual decrease in European prices but not with Least Developed
competition from Asia. This will force St Kitts,Trinidad and Tobago
and Jamaica out of sugar entirely. St Kitts will lose all production:,
like Antigua but without the mass tourism or airline hub.
Trinidad and Tobago and Barbados will probably
benefit and further diversify their economies. In Jamaica the
risk of social unrest and political instability is acute. Unlike
Belize and Guyana, where there are prospects (and existing investments)
to modernise the sugar industry and make it viable regionally,
Jamaica cannot really produce cane sugar economically given its
costs. Even in Guyana, where the Indo-Guyanese community supply
the labour and depend on sugar and rice exports, the three years
does not leave enough time to adjust.
On rice, Guyana is getting more efficient and
can compete with Vietnam for regional if not world markets. But
if the Asian Least Developed get effective preference, it won't
break into the world and won't hold the regional market.
Rum is quite detached from the sugar issue (except
historically) because the Caribbean industry (fragmented between
the islands and Guyana, mostly with old plant) imports the molasses
rather than using unreliable local sources. Because of the original
EU protectionism in Lome I to help French DOMs, they took the
route of bulk rum exports while the only successful cases went
for brands (Cuba, then Bermuda/Bahamas). Barbados now has a little
branding in Int. Distillers' Malibu but it is mainly too little
too late.
Already Bangladesh is exporting bulk rum and
eating into that world (and EU) market. Ever since the 1996/97
zero for zero white spirits deal, on which the ACP were again
not consulted, the EU have recognised they hurt the Caribbean
ACP. These producers are now making common cause with the French
to extract a few extra subsidies out of the EC. This can be done,
though not on the sort of proportions which would be required
for sugar.
But Guyana possesses some fantastic potential
sugar brands eg Demerara (and speciality sugars within them) which
have never been exploited. EU money might be better spent on marketing,
design, market research, and strategy to turn commodities into
products which feed off the rest of the Caribbean's USPs eg tourism,
entertainment and youth, than in producer subsidies.
Calculating the impact
It is a truism to say that it is difficult to
forecast the future. But both governments and investors have expectations
about the consequences of their actions, and where these are diffuse
(many products, affecting many countries, at different times,
in different directions), it is useful to project in a systematic
way. Even if large areas of uncertainty remain, the direction
of effects, and in some cases their likely magnitude, can be specified,
and where there seem to be either serious risks or large uncertainties,
monitoring can be put in place to check the effects as the policy
proceeds. It is for this reason that many governments establish
procedures (which are recognised to be imperfect) for requiring
"impact assessments" of any policy proposal, at a minimum
of the likely financial implications and the effects on identified
vulnerable groups (the poor, small business, the environment),
In the UK, of course, these also apply for domestic implementation
of European measures. The EU and UK provisions do not include
a requirement to consider the impact on developing countries,
and the WTO does not require it for preferential agreements, but
it was precisely because it was recognised that liberalisation
to other countries by the EU had already affected the ACP countries
and might do so in the future that provision for consultation
after assessment was included in the Cotonou Agreement. The difficulties
of doing it may seem large, but are no greater than those for
any regional arrangements (they will be required when the accession
countries join the EU) or than those done for the proposed regional
partnerships with the ACP countries which were done in 1998-99.
That the Commission has now said that it is willing to do the
studies indicates that it does not consider them impossible. As
the policy proposal is already three years old, it is not clear
why it has now become so urgent that it is impossible to take
the time to do the studies.
The impact assessments on finance and business
which were included with the proposal implicitly make forecasts
about the impact on the Least Developed: effectively very small,
except for some unquantified words about the "dynamic, long-term
effect on spurring trade on new products for the LLDCs".
The effects on other countries will therefore be correspondingly
small. Giving an explicit assessment of the effects on Least Developed
and other countries, however, would require spelling out the assumptions
that must have been made. If the analysis of the impact on Least
Developed was not done with sufficient care, then the assessment
of the financial and SME effects, which is legally required, must
be deficient.
POVERTY EFFECTS
The justifications for giving special preferences
for the Least Developed countries (over and above those for other
developing) are that their needs for special treatment to gain
access to markets are greater and their greater poverty means
that any "costs" (in trade bargaining terms) to developed
countries of preferences should be concentrated on them. Both
arguments need examination because the current definition of Least
Developed countries is not designed as a direct measure of either
poverty or trade disadvantage. The UN definition excludes countries
with a population above 75 million (except Bangladesh which was
already included when this limit was imposed) and has three components,
income per capita, human resources[2],
and economic vulnerability[3].
A Least Developed country must be below the cut off points on
all three, or on income plus one of the others plus special factors.
The income level, at US$900, ensures that all least developed
countries are poor, but the population limit and the economic
and human resource components exclude some poor countries (notably
India, Pakistan, and Kenya) from the classification. Countries
which meet the standard of a low share of advanced products in
their exports are often the least likely to face trade barriers,
while the UN index naturally does not distinguish between specialisation
in primary products vulnerable to EU protection for CAP goods
and specialisation in tropical agriculture or minerals, which
are largely free of barriers. Offering special access to the Least
Developed therefore excludes some countries which a poverty-focused
policy would want to target, and may damage them if they suffer
from trade diversion to Least Developed competitors.
SYSTEMIC EFFECTS
The EC initiative shared one of the purposes
of the WTO initiatives for Least Developed, to counter Least Developed
Countries' dissatisfaction with the multilateral system. There
is a risk, however, that it will increase the dissatisfaction
of other developing countries, either because they consider the
discrimination in favour of Least Developed "unfair":
they also are poor or feel that they suffer some other serious
disadvantage (island, landlocked, vulnerable to natural disasters
. . . ), or because it appears to go against an existing agreement,
the Cotonou Agreement, and therefore to weaken the role of law
in the international system. One of the few advantages of the
Uruguay Round perceived for all developing countries was the strengthening
of international rules and the mechanisms for enforcing them.
A predictable and enforceable international system is most important
for the weakest countries (as is true of national rule-of-law).
Thus even the least developed countries have an interest in preserving
correct procedures. It will be more difficult for the EU to negotiate
with the non-Least Developed countries in the eight years of the
Cotonou negotiations if they feel that the June 2000 agreement
has already been violated, and it may be more difficult to have
their support in the WTO. On a practical negotiating level, the
developing countries which have been treated as negotiating leaders
both by other developing countries and by the developed are all
non-Least Developed, for example India, South Africa, Brazil,
Egypt, but also, for the smaller countries, Mauritius. These were
included in the "Green Room" procedures in Seattle;
they have mobilised support for continuing negotiations since
then. If they believe that the initiative is economically damaging
(trade diversion) and fails to respect existing agreements, negotiating
with them will be more difficult.
QUESTIONS TO
BE ANSWERED
If the initiative is expected to have important
developmental effects on the Least Developed Countries, both they
and other developing countries need clear analysis of what these
will be. Even if the initiative is considered to be entirely within
the control of the EC, such an assessment is essential. Without
this, business and consumers in Europe, who have the legal right
to such analysis, cannot have a credible assessment of impact.
Such an analysis will require assumptions
or forecasts of other EU policy: if all trade barriers are
expected to fall within period of 10 years (sometimes argued by
DG Trade), then any preferences may give only a temporary advantage:
a new producer has compensation for the costs of setting up, but
an uncompetitive one does not have a long-term advantage. This
implies one pattern of reactions in Least Developed Countries
and in other developing countries. If barriers are assumed to
be long-term, this implies different reactions. Does including
sugar in the initiative indicate that the European market for
sugar and all CAP products will be completely uncontrolled after
2003, or will there be the current system plus Least Developed
exports?
In the context of both the multilateral trade
regime and the bilateral relations of the EU with the ACP countries,
it is now necessary to clarify what types of special treatment
for developing countries can be treated as purely concessional,
a benefit to the recipient with "essentially" no costs
except to the donor (aid, at one extreme, but also benefits given
equally to all developing countries), and types that affect other
countries, whether directly, through significant trade diversion,
or indirectly, by damaging confidence in the predictability of
international rules. Non-Least Developed countries also have legitimate
trading interests and risk being alienated by actual or perceived
diversion of preferences to the least developed.
In the context of EU-ACP negotiations, regardless
of the legal advice to the Commission on the exact obligations
of the Cotonou Agreement, the Commission needs to reconsider its
interpretation of what measures require consultation and to accept
that most observers interpret consultation as meaning ex ante
consultation, not ex post.
1 The argument sometimes used that consideration of
food security would prevent this is unlikely to hold: sugar is
not normally considered a staple food commodity and producers
from non-Least Developed countries will be able to offer a complete
service of supplying the local market and obtaining good prices
for exports. Back
2
Including indicators for nourishment, education, and mortality. Back
3
Including indicators of export concentration, industrial development,
instability of exports and production and population size. Back
|
