Select Committee on International Development Minutes of Evidence

Examination of Witness (Questions 113 - 119)




  Mr Defraigne, it is very kind to give us of your time this morning. As you probably know, we are a Committee of the House of Commons and our task is to monitor and scrutinise the work of the UK Department for International Development. As a very substantial proportion of that Department's budget is spent by the European Union, we are always interested in the workings of the institutions of the Union, not least the Commission. We are also particularly interested at the present moment about trade, I think we are very conscious that trade is one of the key routes to development, and we have all been watching with interest the recent debates about the WTO and the possibility of a new round being a development round, and we are very conscious that this Directorate General is in a pretty good position to observe the workings of the external relations family within the Commission. We would be extremely grateful if we were able to ask some questions which really would throw into focus some of these issues. If it is all right with you, I am going to ask my colleague, Tony Worthington, to start the process.

Tony Worthington

  113. We were all very encouraged to see the mainlining of development, with developing going into DGs like your own. Could you just spell out for us where trade and development come into contact? Some of it is obvious in terms of development, and the WTO has been mentioned, but would it be possible for you to say where you come into contact with each other as various DGs?
  (Mr Defraigne) You mean in practical terms or in terms of coherence of policies?

  114. Both really.
  (Mr Defraigne) I would say our starting point is, to sum up a very complex matter in a few sentences, we believe what makes the difference for developing countries is, first of all, the quality of the internal policy and, secondly, in that order, the sort of support we can provide them with both for aid and trade and investment. When I talk about trade I always include foreign direct investment, because nowadays those two flows are intertwined and it is impossible to sort them out. We have with both our bilateral and multilateral policy at the EU level now put the integration of developing countries at the forefront of both policies for an obvious reason. In a way, despite what is being said on the trade dispute with the US on hormone beef, bananas, even FSCs, which are major items indeed, these are things we can manage with the present system and come out with practical results in a reasonable span of time. When it comes to integrating the developing countries in the world economy, it is a complicated business, and you have to make an extremely important effort because the gap is so wide, partly because they do not conduct the right policies to take advantage of what is offered to them through globalisation, but also partly because in many sectors where they have comparative advantages we have maintained barriers which deprive them of taking advantage of their comparative advantages. That is obviously true in the agricultural field, in the textile field, and in many perhaps less known but interesting sectors, where tariff escalations or tariff peaks may be quite effective in preventing them from exporting towards us. Moreover, things have got more complicated because we are not talking any more about tariffs or even non-tariff barriers, we are talking of complex legislation which we issue in order to protect our environment, consumer health and cultural diversity. We have a lot of legislation which matters a lot for our people and which acts as barriers to entry for those countries because the cost of getting conformity with our requirements is high for them. It calls for institutional capacity they do not have and it means extra cost for the exporters to have the right standards. Food is a good example but there are many others actually. So it means that in order to integrate them we have to do a series of things, first of all to improve market access through both agendas, bilateral and multilateral. The bilateral agenda is the rationale behind the Cotonou Agreement and we are going to start negotiations in September with groups of countries, which are building up potential regional groupings, with a view to setting up a sort of free trade area which will, I am afraid, be pretty asymmetrical for a while. That is a good thing because they will not have the shock of a reciprocal trade area. We are completing a round with Chile, and hopefully we will be able to initial the agreement in Madrid at the Latin American/European Summit. The negotiation on Mercosur is more complex and the end could coincide with the end of the present round. That is what is said in our mandate. Their reason is of course the agricultural side of the Mercosur Agreement. With Euro Med we have the idea, which is more than an idea but whose implementation is getting difficult as we draw near the completion date, which is 2010, of building up a free trade area for the whole region—north and south of the Mediterranean region. In the meantime we have set up a free trade area, by the way, with South Africa and with Mexico; that is done. So there is this full market access in terms of the bilateral agenda. Now when you come to Doha, it is much more complex because in a way developing countries have felt they were cheated in the Uruguay Round—for the reasons I have said, we maintain a lot of barriers in the sectors they were interested in. In the meantime, something new has taken place, which is the preferential treatment we are granting to some of them, including through GSP, for example Everything But Arms, which is a wonderful idea to open up our markets without any restrictions but for sugar, rice and bananas until 2006. But those countries now have second thoughts. They believe that any multilateral liberalisation is a threat to their preferential access because it erodes their preferential margins in terms of tariffs. So in a way some of them are quite active now in making our life pretty complicated in Geneva so as to slow down the process of putting in place the framework for the negotiation. We should normally by the end of this month have the Trade Negotiation Committee in place with the chairman, hopefully Michael Moore, but a lot of African countries say, "Why do we need such a committee, can we not use the normal WTO committee? Why do we need Moore? Should we not have a rotating presidency?" All tactics which, if we were following them, would make the whole process much less effective and therefore impossible to complete by 1 January 2005, which is the deadline, but it is a political deadline of course. That is the first difficulty we encounter with them. The second is of course to make sure that we are able to deliver because we are, in a way, now exposing the most defensive interest we have in Europe, and it is awfully difficult, and it is the same in the US. If you look at the fast track, which is not completed yet but which is half way through Congress, which is to give the authorisation to the President to negotiate for the Doha Round, the senators have put restriction on the fast track for some sectors, including textiles, for instance, very specifically on citrus, so it is not very different. It is not going to be that easy. Here in the Union we have chosen, at least on paper, so far a very offensive line vis-a-vis developing countries, that is to say we are going to turn this round into a real break through for development. This is the strategic objective of the Union and we are agreed on that. In order to back this up we are now mobilising funds for the so-called trade related technical assistance and capacity building, which is becoming a huge programme here within house. It will be run by AIDCO but with the concourse of our people.

  115. Can I give an example of an area where it seems to me there may be a gap between trade and development, and that is added value. You talked about freedom of access to markets and you talked about foreign direct investment, a lot of the foreign direct investment may lead to people on poverty wages in factories rather than in the fields. Is there anything that the European Union is doing to get the processing work, the added value work, done in developing countries so that the wealth that is created by that overwhelmingly stays in those countries?
  (Mr Defraigne) This is an extremely delicate matter. Frankly, I believe it is not, contrary to some assumption, foreign direct investment that poses in the most crucial way that sort of problem. If you want to get foreign direct investment in, you have to let the benefits go out, that is very clear. If not, nobody will come. The funny thing is that in many developing countries those who export the capital are the rich people of the country themselves. Just take the case of Argentina which is absolutely stunning, the external debt is 155 billion dollars and the private financial assets outside are probably 120 billion dollars. So here you have the real issue when rich people do not trust their country, do not invest in their country, most of them benefit from rents originating in large estates, which result from unfair distribution of land ownership, but also originating very often from cosy cartels and monopolies which have been granted to them by the government because of cronyism. There are plenty of examples and those who are familiar with the setting in developing countries, know how easy it is to get rich just because you are the only one allowed to produce a very simple good, such as a bicycle or some basic tools; but if you are the only one you are likely to make money, and sometimes you share that with your workers. So I would say, be careful in handling that question of foreign direct investment. A major initiative of this Commission when we realised we were not going to go anywhere in Doha on the so-called social clause front—in effect the only area where we have failed in Doha has been the linkage between trade and labour rights where we have not been able to achieve any progress at all—was to opt for an alternative route, which is to reinforce the capacity, provided the will exists, of the ILO to enforce its own labour core conventions, and to discipline the multinational corporations to make them display more social corporate responsibility, as we call it. That is to say, the idea is to have them behave in developing countries as they would behave here, both in terms of the environment and in terms of social conditions. In that respect, one could expect that foreign direct investment is not only going to be a vehicle of capital technology and so on but also better social conditions. The truth is that when you look in most cases, foreign subsidiaries in developing countries pay on average higher salaries and offer better labour conditions than the local businesses. It is a fact.

Mr Colman

  116. Perhaps I can follow up a little on what Tony was talking about, which is your relationship with DG Development in terms of the way you see yourself interacting with EuropeAid and DG External Relations. I notice you are on the board of EuropeAid.
  (Mr Defraigne) Yes.

  117. Is DG Development in some way involved with your organisation? Is there a direct link between the two, an institutional link?
  (Mr Defraigne) The link is, first of all, at the Commissioner level. There is that RELEX group chaired by Chris Patten, they meet at least twice a month, sometimes three, sometimes four times a month, in a very informal forum, which is a weekly breakfast, a weekly RELEX breakfast, just before the Commission. It is the five Commissioners, just the five Commissioners. I think it is the most important thing we have achieved in this Commission, more important than what I am going to talk about, because that is where people discuss frankly issues coming ahead of the agenda so they can take action. There is a very good relationship among the members—Patten, Nielson, Lamy, Verheugen and Solbes—and Solbes is very important because he has a connection with the international financial institution of Bretton Woods, so in a way he is central in many programmes. They also meet every six weeks on a more administrative agenda with their aids, chefs de cabinet and director generals, to prepare a series of practical communications for running the RELEX sector or things they would like to put to the Commission. Then, besides this, you have the AIDCO board. That is chaired again by Chris Patten with the four other Commissioners, and they are acting as a board for AIDCO, Mr Patten being the chairman and Mr Nielson being sort of a CEO, if I may say, but it is more complex than that in practice because Mr Patten has a more hands-on attitude than a normal chairman would have, whereas Mr Nielson would concentrate more within AIDCO on his own geographical area, ACP, and on humanitarian aid. That is the way it works in practice. So it means basically that the strategy is really a collective decision by the five Commissioners and also by the Commission. Usually, when they go to the Commission they get what they want, that is the way it works. When the five of them agree on something, their colleagues are not going to play games, they usually say, "Okay, that is fine". So it is very important to achieve that unity.

  118. And trade policy is discussed there, is it?
  (Mr Defraigne) It is discussed, very much so. For example, you have that negotiation with the Mercosur and there are three aspects to that—the political volet, the aid or co-operation volet and the trade volet. It is very clear that we are going to push in the co-operation volet things which matter so as to make trade effective, for example, on sanitary and phyto-sanitary standards. If we can help the Mercosur to set up a laboratory which can and should quality-control, that would allow us to agree that what is certified as good by their laboratory is accepted by us without further control. That is a major request. We can do that when we combine the co-operation volet with the trade volet. So that integrated strategy works pretty well in some sectors. I would say it is true now for ACP and certainly Mercosur.

  119. So the loss of the DG Development specialist to DG Trade has not meant that the trade needs of developing countries have been lost because those officials have moved across to you?
  (Mr Defraigne) No, I would say quite the contrary in a way, because the trade people in DG Development were not often the driving seat whereas we consider them as key players and they have regained in a way their authority and prestige vis-a-vis their colleagues in Dev and AIDCO because now they are in the limelight because of the importance of the trade policy nowadays.

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