House of Commons - International Development

Select Committee on International Development Sixth Report

2 EPA negotiating arrangements, process and issues

Economic Partnership Agreements: can they be a tool for development?

10. The Cotonou Agreement mandates the creation of WTO-compatible Economic Partnership Agreements (EPAs) between the EU and regional ACP groups. EPAs will be Regional Trade Agreements (RTAs) between a group of developed countries - the EU, and groups of developing countries within the ACP. At present there are four such regional groups in Africa, one in the Caribbean and one in the Pacific. The ACP group will continue to exist, but its role and scope will be radically altered. The EU has said that EPAs will contain a strong developmental emphasis, but that they will also include reciprocity. The Commission has also said that this will be asymmetrical reciprocity which would allow the ACP regions to open their markets to the EU at a slower rate than the EU would open its market to the ACP.

11. RTAs are regulated under Article XXIV of the GATT which states that 'substantially all trade' must be covered and that full reciprocity is expected 'within a reasonable time frame'. The lack of precision in Article XXIV makes it difficult to come to a definite conclusion about WTO conformity, although the former has commonly been taken to mean 90% of all trade, and the latter provision 10 years. The EU-South Africa agreement includes asymmetrical reciprocity in favour of South Africa — 95% of goods imported into the EU from South Africa are covered, while only 86% of those imported from the EU by South Africa are included. The transition period in this case is twelve years.

12. In his evidence, Commissioner Mandelson said that: 'one of the rule changes that I want to promote in the WTO is a more flexible interpretation and application of Article XXIV in order to accommodate the sort of progressive, step-by-step market opening that is envisaged in these agreements.'[10] When pressed, he said that if necessary he would seek a revision of Article XXIV in order to incorporate his desire to create asymmetrical reciprocity over a considerable period of time, 'as befits the needs and the rate and the pattern of development of the ACP countries themselves in their particular regions.'[11]

13. The achievement by the EU of a more flexible WTO rule for developing countries entering RTAs with developed countries would be a major benefit. At present this is not a fait accompli. The ACP group have asked the WTO for clarification of the maximum length of transition possible for developing countries. They have also asked that this be consistent with the trade, development and financial situation of developing countries, but in any case not less than 18 years.[12] The WTO have now asked the ACP to reconsider this request — making the period for adjustment shorter.[13] It would reflect badly on the EU if promises were made to the ACP which then could not be achieved in the WTO. The UK Government should work to help the Commission achieve this more flexible interpretation of Article XXIV in the WTO.

14. Commissioner Mandelson has promised to create a review mechanism for the EPAs to ensure that they deliver on their developmental objectives.[14] However, the mechanism proposes to assess the roll-out of aid, related to the negotiations, rather than to review the negotiation process. It does not propose a formal mechanism for examining how the trade aspects of the EPAs impact on development. Peter Mandelson's response, when questioned by the Committee, was unclear. He said, 'the approach is comprehensive. The package we are trying to devise is comprehensive, and therefore the conversation that we keep having has to be comprehensive. What we are therefore monitoring and keeping under review is the effectiveness of what we are doing, the effectiveness of the agreement that we are seeking to operate.' And, 'I have decided that a new monitoring mechanism will be introduced, […] and that machinery is currently under design to make sure that we know that is happening, that we do not simply create a nice canvas, agree that it is all hunky-dory, press the button, retreat and do not bother to look again at how it is actually operating in practice.'[15] We welcome the setting up of a review mechanism, but it needs to monitor the implications of the EPAs for poverty in the ACP states. It should also incorporate a mechanism to address any negative impacts on poverty reduction.

OPENING AGRICULTURAL MARKETS

15. NGOs and other commentators fear that unless liberalisation is monitored for its poverty and social impact, allowing EU agricultural products to enter ACP markets duty free could be harmful to small, vulnerable producers, as well as to household welfare in largely agrarian ACP states. Consequently, some NGOs have argued that the demand for reciprocity should be withdrawn.[16] DFID have said the ACP states should be protected from import surges of EU agricultural products. The WTO is developing a Special Safeguard Mechanism (SSM) which developing countries could use for protection. In addition, under the EPAs, the ACP states will be permitted to identify sensitive products for which they do not have to open their markets to the EU. However, in general, the EU and UK Government position is that trade liberalisation has greater potential than it has disadvantages, although the Development Commissioner did acknowledge that, in the first phase of liberalising, social catastrophes often occurred.[17]

16. Our main concern is that much of the EU's production and exports are subsidised through the CAP; ACP markets cannot withstand such competition. Christian Aid raised an example of when subsidised processed tomatoes from Italy competed with a Ghanaian tomato processing factory.[18] ODI note that the aggregate impact of the EU support programme for tomatoes on the industry and on world markets is small and the Mediterranean countries of the EU would continue to be significant tomato processors even without the current subsidy system. But, without the processing subsidy, the EU industry would be smaller, benefiting competing tomato processors in other countries, although it is not clear that these would be developing countries.[19]

17. The successful completion of the current WTO Doha Round depends to a large extent on the outcome of the agricultural trade negotiations. Dubbed, by OECD countries, including the UK, the 'development' round, these talks, which began in 2001, encompass a revision of the 1994 Agreement on Agriculture (AoA). The AoA called for reductions in agricultural subsidies, now estimated to be over US$300 billion per year in industrialised countries, and which distort agricultural trade by artificially lowering world prices for agricultural commodities and depressing incentives for production, particularly for developing countries. The AoA set out a schedule for reductions on which progress has been limited, especially in the US and the EU. Given the slow pace of CAP reform, we do not believe that ACP states should be asked to open their markets to such EU products until all trade-distorting subsidises have been removed. The transition period for full reciprocity in the agricultural sector should be explicitly linked to CAP reform.

SERVICES FOR DEVELOPMENT

18. Liberalisation of the services sector is important to some of the more economically developed ACP states, and because of the way the General Agreement on Trade in Services (GATS) operates, offers fewer costs to the ACP.[20] The East South African (ESA) group and the Caribbean have put forward proposals for liberalising their tourism and financial market sectors. Nevertheless, the ACP as a whole has been reluctant to make offers in the services sector, possibly because of lack of knowledge and preparation. The EU negotiating mandate asks for 'progressive and reciprocal liberalisation of trade in services, consistent with Article V of the GATS.'[21]

19. Most ACP states would benefit from access for the temporary migration of labour in services sectors (GATS Mode 4). In our report 'Trade and Development at the WTO: issues for Cancún'[22] we urged the UK Government and the EU to consider seriously developing country requests for progress on Mode 4.[23] Our report on Migration and Development[24] also points out that while this is a politically sensitive issue, enhanced migration, particularly temporary, unskilled migration, would benefit many developing countries.

20. The ACP states have requested further discussion of GATS Mode 4 in the EPAs but this has not met with much enthusiasm in the EU. Evidence we received from ODI suggests that the EU could provide long-term assistance to the ACP by including GATS Mode 4 in the EPA negotiations.[25] DFID was uncertain that other EU countries would be amenable, and pointed out that different member states had country-specific regulations.[26] Peter Mandelson responded more positively saying, 'I am open to that, because it has a basis in the WTO, it has a basis in the negotiations…so I see no inconsistency or no incompatibility between our Doha agenda approach and our EPA approach in respect of Mode 4.'[27] We welcome this response. We consider that Mode 4 should be an issue on which the UK government seeks progress in the EPA negotiations.

INCLUDING THE SINGAPORE ISSUES

21. The Singapore issues are trade facilitation, investment, competition and government procurement. After the collapse of WTO talks in Cancún, WTO members agreed to drop all the Singapore issues except trade facilitation from the Doha Round. On trade facilitation, they recognised the need for a long lead-in period in some developing countries. In the Cotonou Agreement, competition and investment are referred to in Articles 21.1, 21.5 and 75 as areas which Cotonou will support in the context of regional and national economic development, but there is no clear commitment to negotiate on them with the EU. The Cotonou Agreement does not mention government procurement. The EU negotiating mandate includes all the issues. Both Commissioners Mandelson and Michel have stated that they consider these issues to be important for development and that although they were rejected in the WTO, this does not mean that they would be wrong for the EPAs. Of course, the point is, that ACP states should be able to decide.

22. Evidence from a member of the Common Market for Eastern and Southern Africa (COMESA) says that: 'we will do what we think is best for us in terms of regional integration at the regional level and I hope we will not let negotiating positions taken at the WTO level derail regional integration efforts.'[28] He goes on to say that East South African (ESA) countries are not willing to start to negotiate the Singapore issues under EPAs, but they are addressing these issues at the regional level: 'Although we see the necessity of addressing these issues in the context of regional integration, we are yet to decide on whether there is a value added in negotiating these issues with the EU.'[29] More recently Mr. Falkenberg from DG Trade was told by a number of African ACP trade ministers that the Singapore issues should not be in the EPAs.[30] Their inclusion in the EPAs has already been the subject of disagreement in the Joint ACP-EU Parliamentary Assembly.[31]

23. In our post-Cancún trade report[32] we expressed our concern that the UK Government should have done more to persuade the EU to drop the issues in the WTO. In its evidence DFID acknowledged that the EU mandate went beyond the Cotonou Agreement, and that DFID intended to discuss this with the Commission.[33] DFID also said that each EPA could be different and that each issue need only be included if it was thought to be useful to the ACP region concerned: 'we want to see evidence for how these could be useful and in what way could investment, competition be usefully included in the EPA negotiations.'[34] Commissioner Mandelson did not provide evidence of the beneficial impact of including the new issues in the EPAs;[35] nevertheless, he insisted that he wants to return to these issues and to create a framework in which they can be addressed in a development-friendly way.[36]

24. Many ACP regions are working towards creating common rules for investment and competition, as part of their own regional integration processes in their own way, at their own pace. Peter Mandelson has said that there are no European firms knocking on his door demanding access to the ACP markets.[37] If that is the case, it is not clear why the EU would wish to push these issues. In addition, there are high implementation costs. The ODI points out that the EU has only added these issues to intra-regional trade as it has acquired the competence to deal with them. They were not part of the Treaty of Rome. While some ACP states are moving towards these, they are not treating them as issues which are essential at the early stages of regional integration.[38]

25. The ACP states are already negotiating with limited capacity and under considerable duress. In respect of the Singapore issues we were told: 'what they fear is that the EU will twist their arm to accept with the EPAs things that they would never have to accept on a more level playing field.'[39] The assumption is being made by both the UK Government and the EU that the ACP can reject these issues if they wish and that agreements will not be imposed on the ACP if they do not have the capacity to negotiate them. But this is not the case. The ACP have collectively disagreed with the EU about the inclusion of the issues.[40] Some ACP representatives have now reiterated concerns about their inclusion. But the relationship is a highly unequal one: unlike the EU, the ACP have much at stake in the negotiations. Peter Mandelson has said that the Singapore issues would have to be agreed by the ACP states in order to be included in a regional EPA, effectively passing responsibility to the ACP. However, given that both the Commissioners for Trade and Development have publicly declared that they believe the new issues to be developmentally beneficial, it will be difficult for the ACP to argue otherwise.

26. It is incumbent on the EU to demonstrate that the beneficial effects of the new issues exceed the costs of implementation before ACP states should have to consider them outside their own regional context. DFID has said that, 'the EU must protect the right of ACP countries to regulate their economies, and support, not supersede, regional progress on these issues.'[41] We agree with this. The EU is in danger of jeopardising progress on the EPAs if they do not listen to the concerns of the ACP. We are concerned that the EU is abusing its position in the partnership to persuade the ACP states that these issues are essential for development and that they will be doing themselves a disservice to reject them. We think that the Commission, as a show of good faith, should step back from its endorsement of the Singapore issues and only negotiate on them at the request of a specific ACP region. [42]

27. There is no basis for including government procurement on the basis of non-discrimination in the EPAs since it is not in the Cotonou Agreement. The UK Government should make this clear to the Commission.

Alternatives to the EPAs

28. The Cotonou Agreement says that the EU will assess the situation of any non-LDC which, after consultation with the EU, decides it is not in a position to enter an EPA, and 'will examine all alternative possibilities in order to provide these countries with a new framework for trade which is equivalent to their existing situation.'[43]

29. At the Joint ACP-EU Council in July 2004, the ACP requested a postponement of the review of alternatives until 2006. We were told that the alternative to the EPAs for non-least developed ACP states will be the Generalised System of Preferences (GSP) or the recently proposed GSP+ scheme, which provides additional tariff preferences for specified products to countries if they ratify key international conventions on human rights, labour good governance and the environment. At present, the draft proposal for a regulation for the GSP+ scheme only provides a detailed implementation regime for the period 2005-2008.[44]

30. Despite the benefits of non-reciprocity, the GSP is non-contractual. This means that the EU can rescind it at any point. In addition, imports are subject to limits, and the rules of origin (RoO) are more restrictive than those which the ACP currently enjoys. In particular, the rules of origin do not offer regional or cross-regional cumulation which would allow ACP states to source raw materials and components in other ACP states and regions.

31. Preliminary assessment of the GSP+ scheme indicates that while Least Developed Countries would continue to have duty free access for most of their products under the EBA, non-LDC ACP states eligible for the GSP+ scheme would face higher levels of tariffs than they do at present.[45] Thus if the GSP+ scheme is intended as the alternative arrangement for those non-LDC ACP states which do not sign EPAs, then it falls short of the promise to provide no worse market access than under the Cotonou preferences. The UK Government should continue to push the Commission to ensure that the alternatives for non-LDC ACP states guarantee the same level of market access as the Lomé arrangements. They should not face higher levels of tariffs in the EU market than they do at present.

32. Commissioner Mandelson has changed the tone of the debate to say that the alternatives are a 'second best' option rather than a real alternative as promised in the Cotonou Agreement: 'Why would one want to discuss second best alternatives at this stage?'[46] When pressed, Peter Mandelson insisted that the GSP was 'in no sense comparable to the sort of partnership agreements which are developmental tools rather than simply market access tools.'[47] In contrast, DFID had said that the alternatives 'had to be developmental and beneficial' and that, 'the government is absolutely determined, it has committed itself in the White Paper to make sure these are development-led.'[48] Market access arrangements on their own would not achieve the poverty reduction objectives of the Cotonou Agreement. We are concerned that in presenting the alternatives as a second best option, with no developmental component, the Commission is going against the spirit of what was agreed in Cotonou. It places the ACP in the position of having no real choice, and reinforces their unequal position in the negotiating process. Development should be integral to any trade options presented to the ACP, even when they are not the first choice of the EU. The UK Government should continue to work to ensure this is the case.

10 Q 52 [Peter Mandelson, European Commissioner for Trade]. Back

11 Q 51 [Peter Mandelson, European Commissioner for Trade]. Back

12 WTO, ACP submission on Regional Trade Agreements, 28 April 2004, pp. 3-4. Back

13 The Commission for Africa report has suggested that, if necessary, a twenty year period for adjustment should be considered [Our Common Interest, Report of the Commission for Africa, March 2005, chapter 8, paragraph 112, www.commissionforafrica.org]. The DTI Written Ministerial Statement (22 March 2005, Official Report, 62WS) also recommended a 20 year period. Back

14 Putting development first: EU-ACP relations, EPAs and the Doha Round, Statement by EU Trade Commissioner Peter Mandelson at the Press Conference, Georgetown, Guyana, 6 January 2005, available at http://europa.eu.int/comm/commission_barroso/mandelson/speeches_index_en.cfm. Back

15 Q 58 [Peter Mandelson, European Commissioner for Trade]. Back

16 ActionAid, Trade Traps, p. 32, see footnote 9. Back

17 Q115 [Louis Michel, European Commissioner for Development and Humanitarian Aid]. Back

18 Christian Aid, 'A rotten trade: Ghana's tomato farmers face unfair EU competition', November 2002, available at www.christianaid.org.uk/campaign/trade/stories/ghana2.pdf. Back

19 Note from Sheila Page, ODI. We know from our own visit to Ghana that not every ill of the Ghanaian tomato processing industry can be blamed on the EU. Inefficiency and mismanagement are also issues. Back

20 Ev 58 [Gillson, Page and Willem te Velde, ODI]. Back

21 Ev 58 [Gillson et al]. Back