Select Committee on International Development Written Evidence

Joint memorandum submitted by Department for International Development and Department of Trade and Industry


  1.  We welcome the Committee's decision to hold an evidence session on the emerging Economic Partnership Agreement (EPA) negotiations between the EU and African, Caribbean and Pacific (ACP) states.

  2. The Government is committed to ensuring that EPAs produce real developmental benefits for the ACP states, consistent with the aims and principles of the Cotonou Agreement. EPAs will not be Regional Trade Agreements in the traditional sense. They are intended to be new instruments that will promote development through trade, by maintaining ACP preferential access to the EU market, whilst assisting ACP countries to benefit from further integration into the world trading system.

  3.  Negotiations of EPAs are still at an early stage and therefore much of the substance of the agreements, such as coverage, transition times and rules, have yet to be agreed. The key challenge will be to ensure that the development objective is central to the negotiations. This will include giving ACP countries sufficient flexibility over the timescale and sectors in which they are required to open their own markets to the EU and to their neighbours. Given many of the ACPs' least developed or vulnerable economy status, longer transition periods will be required than in other trade agreements. This is essential if they are to promote, rather than undermine, ACP countries' national development and poverty reduction plans, and their regional integration efforts. The negotiations must include the provision of capacity building to support the ACP in negotiating the agreements, technical assistance in implementing the agreements and trade adjustment support for individual ACP countries.

  4.  The Government will continue to work closely with the European Commission, other EU Member States, ACP countries, NGOs and the private sector to achieve agreements that help the ACP harness the potential of trade to promote economic growth and sustainable development.


  5.  The Cotonou Agreement has three pillars: political co-operation, trade growth and development assistance. Its objectives are: "To promote and expedite the economic, cultural and social development of the ACP states, with a view to contributing to peace and security and to promoting a stable and democratic political environment. The partnership shall be centred on the objective of reducing and eventually eradicating poverty consistent with the objectives of sustainable development and the gradual integration of the ACP countries into the world economy." [1]

  6.  The Government is fully committed to achieving these objectives. The UK Government's desired outcome for the negotiations is to help the ACP better realise the potential of trade to stimulate economic growth and development through increased trade with the EU and with each other. The outgoing European Trade Commissioner, Pascal Lamy, has described EPAs as tools for development. The EU as a whole has made clear that we do not have "offensive" market access interests. In the 2004 White Paper on Trade and Investment, the Government has made a clear policy commitment that the UK will seek to hold our EU partners to this.

The Failures of Preferences

  7.  ACP countries have enjoyed long-standing preferential access to the EU market under successive Lomé conventions and now the Cotonou Agreement. These preferences were designed to benefit traditional ACP trading partners, more than half of which are least developed countries (LDCs) and other vulnerable, small island and landlocked states. The margins of preference that resulted depend on both the EU's standard tariff for each product (its MFN rate) and the preference granted to the ACP (for example duty free or x% of the MFN rate). Preference margins vary for each product but can be as high as 24% for some fisheries products. However, preferences have failed to boost ACP exports as intended, for a number of reasons, including supply side constraints in the ACP economies and the erosion of preferences over time due to multilateral trade liberalisation (that has reduced MFN tariff rates). By 2002, only 3% of EU imports originated from ACP states, as compared to 6.7% in 1976.

WTO Compatibility

  8.  In addition, these preferences are incompatible with WTO rules. One of the central tenets of the WTO is non-discrimination. Developed countries can apply lower tariff rates (ie offer preferential access) to exports from developing countries, thereby discriminating between developed and developing countries under WTO rules. However, with the exception of the WTO recognised category of Least Developed Countries (LDCs), they cannot discriminate between developing countries. This is exactly what Lomé/Cotonou preferences do, in discriminating between those developing countries that are members of the ACP group and those that are not.

  9.  The preferences are currently covered by a WTO waiver until the end of 2007, hence the planned timetable for EPAs to come into force in 2008. The waiver was only secured after lengthy and difficult negotiation. The EU could seek to have this waiver renewed, which would require the agreement of at least three quarters of the 148 WTO members although in practice waivers of a magnitude such as this are usually adopted by consensus. However, the European Commission, and the Government, judges that the consensus required to extend the waiver is unlikely to be forthcoming due to the high probability of a challenge from non-ACP developing countries.

  10.  The existence of a WTO waiver is not in itself sufficient to protect these preferences. The waiver will provide protection against challenges based on specific provisions of the WTO agreements mentioned in the waiver but would not protect the EU against challenges based on other provisions not specifically referred to in the text of the waiver. The Philippines, Thailand and Indonesia successfully challenged the EU's preference for some ACP fish exports on the grounds that this discrimination against non-ACP developing countries was harming their domestic industries. The situation was resolved through the creation of a specific quota for these Asian exporters. By extending preferential access to the EU market, the value of the ACP preferences was reduced, thereby affecting the profitability of ACP industries.


  11.  EPAs, linked to support for trade related capacity building and wider development assistance, are intended to support ACP countries' integration into the global economy on a more sustainable basis than continuing dependence on eroding trade preferences. The intention is to promote structural transformation and diversification of ACP economies into sectors in which they have a longer-term comparative advantage. The stated objective is that they should enhance "the production, supply and trading capacity of the ACP countries as well as their capacity to attract investment".


  12.  The Cotonou Agreement provides the framework for this integration and within it, the ACP and EU have chosen to negotiate RTAs with self-selected groupings of ACP countries. To be WTO-compatible, these RTAs must include reciprocity. [See paras 19-25.] However, EPAs go beyond conventional RTAs, as they will be negotiated within the broader development framework of the Cotonou agreement. Any change to current trading arrangements is of significant concern to ACP countries, as the EU is the major trading partner for most, particularly African members.

  13.  The ACP regional groupings and the EU have agreed to "roadmaps" for the EPA negotiation[2] which reflect the "stepping stone" approach to ACP market opening to the EU. The first stage in the negotiations is regional economic integration. The Cotonou Agreement explicitly states that the new trading arrangements must help accelerate the process of regional integration among ACP states as a basis for their further integration into the multilateral trading system. It also includes a phased approach to ACP tariff reductions to "remove progressively barriers to trade between [the EU and ACP] and enhance co-operation in all areas relevant to trade".

Alternatives to EPAs

  14.  LDC members of the ACP already have full tariff and quota-free access to the EU market under the Everything But Arms (EBA) regime. Many LDCs at present choose to use Cotonou preferences, rather than the theoretically more generous EBA access. This is because Cotonou rules of origin (ROOs) are more generous than EBA rules, allowing ACP countries to source inputs (cumulate) from any other ACP country.

  15.  Article 37.6 of the Cotonou Agreement states that, in the case of non-LDC ACP states, all WTO compatible alternatives should be considered in 2004. The Commission has subsequently agreed to postpone this review until 2006 at the request of the ACP. The roadmaps contain opt-out clauses should an ACP region, or any country within it, wish to pursue an alternative arrangement instead of an EPA. The Cotonou Agreement states that should this occur, the ACP country should enjoy no worse market access to the EU than they currently enjoy under the Cotonou preferences.

  Possible alternatives include:

EBA access for all ACP

  16.  The EU could grant greater preferential access to ACP non-LDCs through the Generalised System of Preferences (GSP). The GSP is currently being reviewed with a revised GSP coming into force in 2006. "Everything But Arms" (EBA), is an arrangement within the GSP that gives all LDCs duty and quota free access to the EU market (including for sugar, rice and bananas by 2009). A further proposed arrangement within the GSP, GSP+, will give close-to-EBA access to developing countries that ratify key international conventions, such as human rights treaties, ILO conventions and good governance agreements. Extending EBA access to non-LDC ACPs through either the GSP+ or EBA itself, would therefore fulfil the commitment in the Cotonou Agreement that any ACP states unable to enter into an EPA should enjoy no worse market access to the EU than they currently do. The Government will work closely with the Commission to ensure that the renegotiated GSP could be amended to provide a viable alternative to an EPA, should any country wish not to join one.

  17.  The UK Government argued strongly for an ambitious result on market access in the development of the Commission's negotiating mandate for EPAs and a statement to this effect, supported by the Danish Government, was annexed to the text.

Bilateral Trade agreements

  18.  A further option would be for the EU to enter into bilateral RTAs with those ACP states that choose not to enter into a regional EPA. However, such an agreement would have to meet the same WTO rules on RTAs as EPAs. Although the individual ACP state would have greater scope to tailor the provisions to its specific needs, a single country would be in a much weaker negotiating position with the EU than within a regional grouping. Under a bilateral RTA, an ACP state would neither gain nor cede market access to other ACP states. This would at best bypass and at worse obstruct autonomous moves towards greater regional economic integration.


  19.  NGOs have expressed strong concerns that reciprocal opening of ACP markets to EU exporters will expose them to unfair competition in domestic and regional markets and endanger fragile regional integration processes. Some argue that the ACP should not be obliged to offer any degree of market opening to the EU.

  20.  The Government's view is that in the longer-term, prospects for economic growth and development in ACP countries will be boosted if they open their own markets. Poor consumers in ACP countries stand to benefit from cheaper imports, from other ACP countries as well as from the EU, as do ACP businesses. These gains will not accrue if ACP states fail to liberalise their economies. However, neither will they materialise if liberalisation is implemented without careful consideration of the poverty and social impact of trade reforms. Social safety nets and transitional assistance will be essential to cushion the most vulnerable and to assist ACP producers exploit new trading opportunities.

  21.  In the framework for the current round of WTO negotiations agreed in July, LDCs, unlike all other WTO members, will not be required to make further commitments to reduce their tariff levels. However, LDCs that join non-LDCs in a regional ACP grouping to negotiate an RTA/EPA with the EU will be required to offer a degree of reciprocity to both the EU and other developing countries within its regional grouping.

  22.  The coverage and pace of reciprocal market opening between the EU and ACP under EPAs must comply with the WTO rules in this area. These rules are contained in Article XXIV of the GATT and the 1994 Understanding on the Interpretation of Article XXIV of GATT. This includes the coverage of an RTA (ie what percentage of trade should be covered) and the period over which trade should be liberalised. However, the actual wording in the rules on both these issues is vague. With respect to coverage, they state that RTAs should cover "substantially all trade". With respect to timescale, they state that reciprocal market opening within an RTA should take place "within a reasonable amount of time". The 1994 Understanding states, however, that the reasonable length of time for moving to a free trade area or a customs union should exceed 10 years only in exceptional cases. Where the parties to an agreement believe that 10 years would be insufficient they are required to provide a full explanation to the WTO Council for Trade in Goods of the need for a longer period. The rules do not preclude asymmetrical reciprocity, that is, allowing developing countries more time to liberalise and include less of their trade in the RTA than the developed country members.

  23.  As the Commission has acknowledged, the need for a flexible approach to reciprocity in the design of EPAs will be critical to their ability to complement ACP countries' national poverty reduction plans. Further analysis will need to be done to look at which sectors, and on what timescale, reciprocal market opening by the ACP would best meet their development needs, whilst remaining compatible with WTO rules.

  24.  The ACP have submitted a proposal to reform these particular WTO rules to clarify the terms of asymmetrical reciprocity between developed and developing country members of an RTA. The Commission's view is that the rules already provide sufficient flexibility for RTAs between developing and developed countries to take account of the special needs of the latter. The ACP proposal does indicate that the ACP concern is not necessarily the principle of reciprocity per se, but the nature of that reciprocity.

  25.  A further element of "asymmetric" liberalisation is that ACP farmers should be protected from import surges of EU agricultural products, which threaten their livelihoods and domestic industries (whether unfairly subsided or not). WTO members have agreed to develop a Special Safeguard Mechanism (SSM) that developing countries could use for this form of protection. This mechanism is being developed through the current round of WTO negotiations and DFID has commissioned the International Centre for Trade Sustainable and Development (ICTSD) to assist in the formulation of this concept.


  26.  Some suspect the EU of using the EPA negotiations to pursue through the "back door" the Singapore Issues (including investment and competition) that will not now be part of the single undertaking in the current WTO negotiations (apart from trade facilitation). The European Commission has stated that regional trading agreements are "necessarily WTO plus", as integration at the regional level is both broader and deeper than at the multilateral level.

  27.  To ensure that EPAs are true "tools for development", the EU must therefore protect the right of ACP countries to regulate their economies and support, not supersede, regional progress on these issues. Building on what is happening within ACP regions, further detailed analysis is needed into how these issues might best be incorporated into EPAs to help ACP states benefit from both regional and multilateral trade and investment flows. Given the sensitivity of investment and competition within the WTO, the ACP will expect the EU to also understand these sensitivities in the context of how these issues may be included within an EPA.

  28.  Inclusion of these issues in an EPA does present potential gains for the ACP; and a predictable and transparent set of rules governing investment will inspire greater confidence in potential investors. The UK already has bilateral Investment Promotion and Protection Agreements (IPPAs) with 29 of the 77 ACP countries. Research is now being undertaken, for example by the Commonwealth Secretariat, to consider how investment provisions may be most beneficially incorporated into an EPA. Negotiations on trade facilitation measures within EPAs will need to complement those within the WTO. This entails an explicit link being made between the implementation capacities of ACP countries and the progress of the negotiations in this area. It also means that the EU will need to support trade facilitation through well co-ordinated support for technical assistance and capacity building.


  29.  The Government believes that simplification and improvement of rules of origin are essential to enable all developing countries to take advantage of the preferences offered to them. Restrictive and complicated rules of origin (ROOs) not only reduce the value to developing countries of current preference schemes, but also inhibit their export competitiveness. LDCs do not take full advantage of quota and tariff free access to the EU market under EBA (Everything But Arms), both because of supply-side constraints and restrictive ROOs. EBA ROOs are the same as those of the Generalised System of Preferences (GSP) that apply to other developing countries.

  30.  Under these ROOs, LDC producers cannot easily use inputs from any other country if they want to claim duty free access to the EU market. Lomé/Cotonou rules are slightly more favorable in that they allow the ACP to source inputs from other ACP suppliers, but far less so from non-ACP developing countries. As a result of the restrictive ROOs that apply to EBA, GSP and Cotonou, ACP clothes manufacturers cannot buy the best-priced cotton from other developing countries in South or East Asia. This either increases the cost of their exports or stops exports altogether. An example of the development gains of more flexible ROOs is the US AGOA (African Growth and Opportunity Act) preference scheme. Under a derogation from normal rules, these ROOs allow eligible African countries to buy from any developing country. In the case of Lesotho, this has attracted stable foreign investment in the garments industry. Exports have trebled in three years, making the industry the largest employer in the country, especially of women workers.

  31.  Restrictive EBA ROOs should not be used as a stick to compel LDCs to join EPAs. To deliver on the commitments made at the Evian Summit, the EU should ensure that ROOs "do not inadvertently preclude eligible developing countries from taking advantage of preference programmes". For this to happen, ROOs must be sufficiently flexible to enable ACP countries to source inputs from the most competitive source, which may be outside the EPA region. This is necessary to facilitate the development of globally competitive industries in the ACP. The Commission is currently consulting on amendments to preferential rules of origin and the Government has submitted proposals for their simplification and improvement.


  32.  EPA negotiations were launched in September 2002 with an agreement to sequence the negotiations in two phases. Phase I consisted of negotiations at the all ACP level addressing "horizontal" non-country specific issues. Phase II will consist of region specific negotiations. See Annex I for details of the self-selected ACP regions. Some in the ACP wanted the outcome of Phase I be made into a binding commitment before moving on to Phase II, but this was not agreed to by the EC. The European Commission did not see any added value in this approach given that EPAs are part of the binding commitment of the Cotonou Agreement itself. Discussions at all-ACP level are continuing in parallel with Phase II through the all-ACP-EC Technical Monitoring Committee. Dispute settlement and the "non-execution clause" have already been discussed. Future discussions will focus on rules of origin, trade facilitation and sanitary and phytosanitary standards.

  33.  Phase II negotiations between the EC and six regional and sub-regional groupings were originally expected to start in September 2003, but the last set of negotiations were launched in the second half of 2004. The process of defining their negotiating groups has been long and complicated for ACP states, especially in Southern Africa. This is because of their overlapping memberships of different regional groups (SADC, COMESA) and SACU (South Africa Customs Union).[3] In other cases, the self-designated negotiating groups have broadly followed the lines of existing regional groups, such as CARICOM (Caribbean) and ECOWAS (West Africa). The reality of EPAs negotiations has forced the pace of rationalisation of regional groups—when choices now have real economic consequences.

  34.  The initial phase of all six regional negotiations is focusing on developing regional markets. This reflects the Cotonou commitment to foster regional economic integration within the ACP. The EPA negotiations need to help the process forward, but at a pace acceptable to the different ACP members. If EPAs are to help promote regional economic integration on a sustainable basis, the EU needs to recognise that a one size fits all European model will not work in very different regional and sub-regional contexts. Substantive negotiations on the content of the trade agreements will begin early in the New Year.


  35.  Besides the complexities of liberalising trade within emerging regional economic groupings, EPAs pose a number of challenges to the ACP. Major challenges face the ACP on substantive trade adjustment issues. They include finding alternative sources of revenue as tariffs come down; introducing reforms (eg regulating domestic service industries in a way that best suits their domestic economies); avoiding trade diversion, as EU imports become cheaper, and addressing underlying supply-side constraints and the need to diversify their economies.

  36.  ACP negotiating capacity will be stretched thin with simultaneous negotiations in the WTO, and regional trade agreement negotiations with other trade partners (such as the US) as well as within their regional groupings. Progress in the Doha Round will have far-reaching implications on the shape of EPAs. In some areas (eg realising the EU's commitment to eliminate agricultural export subsides), progress in the EPA negotiations will follow progress in the WTO. The negotiating process will need to be an organic one that builds on the phased approach of the regional road maps, and responds to developments in the WTO. In article 39 of the Cotonou Agreement, the EU and ACP agreed "to co-operate closely in identifying and furthering their common interests in international economic and trade cooperation in particular in the WTO". The EU should continue to consult and work with ACP countries to further their integration into the world trading system and to ensure that a successful outcome to the current Doha Round is achieved.


  37.  It is clear that some ACP members, that are more heavily dependent on EU preferences in specific sectors, will need additional, targeted assistance to help the adjustment process. The challenge for the international community, as set out in the Government White Paper on Trade and Investment, is to ensure that the transitional assistance, which will be needed by these countries, is guaranteed, credible and additional, as well as being delivered in a timely fashion.

  38.  With respect to reform of the Sugar Regime, we await detailed Commission proposals, but it is expected that the EU will offer assistance to those ACP countries most affected through both aid and trade provisions. EPAs are the most likely vehicle for the latter. Different sources of finance for this transitional assistance need to be considered, to make sure that we meet the White Paper challenge.

  39.  The European Commission has rejected the ACP request for additional financial resources to accompany EPAs. However, joint EC-ACP Regional Preparatory Task Forces (RPTFs) have been established to ensure that the EU's development assistance supports the process of change in implementing EPAs. This will include considering both the priority given to trade in EDF (European Development Fund) allocations, as well as in the development assistance of EU Member States and other donors. DFID will be urging other EU donors to work together to coordinate their assistance to the ACP as an integral part of their engagement on EPA issues.

  40.  The EU has provided

22.8 million to help strengthen ACP capacity to negotiate effectively. This has been used to fund over 50 impact studies, confidential to the ACP, to help inform their negotiating positions. In addition, the EC is funding Sustainability Impact Assessments (SIAs), which aim to help both the EU and ACP to frame EPAs in the most developmentally and environmentally beneficial way. The UK has expressed concerns to the EC that there is a risk that the approach to the SIAs and their timing may limit their usefulness in informing the negotiations. DFID has provided some input to the methodology and stands ready to contribute expertise, based on its experience of Poverty and Social Impact Assessments (PSIAs). The ACP will also have access to the EC's relatively new

50 million trade-related capacity building facility, "Trade.Com" for EPA-related initiatives.

UK Support to the ACP

  41.  DFID is providing support to strengthen the trade policymaking process in ACP countries through a number of bilateral, regional and multilateral programmes. These include £4 million plus to assist sub-Saharan African countries to integrate trade issues into their poverty reduction strategies and to develop proactive negotiating positions based on their strategic interests; £1.6 million to support the Caribbean trade Regional Negotiating Machinery; and some £270,000 to EPA-specific capacity building support though the European Centre for Development Policy Management.

  42.  More generally, DFID is supporting a new research programme on the Global Trade and Financial Architecture aimed at generating new ideas on how best to address the adjustment needs of developing countries to trade liberalisation. This includes identifying funding mechanisms for trade adjustment and ways of translating these ideas into meaningful Special and Differential Treatment provisions within specific WTO agreements. The work is co-ordinated by a steering group chaired by former Mexican President, Ernesto Zedillo and its membership includes the South African chair of the WTO Development Committee.

  43.  DTI and DFID are working closely together to ensure that EPAs deliver their developmental potential. DFID is stepping up its engagement on EPAs with the ACP, the European Commission, other EU Member States, and NGOs in the North and South. DTI and DFID we are working closely with EC officials and have participated in various regional meetings to better understand ACP members' views and the support they require.

  44.  DFID, in close collaboration with DTI and NGOs is currently developing a programme of research on EPAs. Our objective is to contribute to EU and ACP thinking on how to achieve the best development outcome from the negotiations. Analysis will be conducted into priority ACP concerns, such as reciprocity, the inclusion of investment and competition and transitional assistance. In line with the Government's commitment made before the Select Committee on International Development in 1998 on the renegotiation of the Lomé Convention, we will also undertake technical research into possible alternatives. This analysis will be shared with ACP members, the Commission and EU partners and could contribute to more in-depth examination of the alternatives in 2006, should any ACP country opt out of an EPA.

  45.  DFID has recently commissioned work to develop a general framework for analysis of potential regional trading agreements and will consider a Caribbean EPA as one of its case studies. DFID is also considering where we might best complement existing EPA-related technical assistance, in response to ACP demand. Our aim is to invest resources in providing timely support to ACP members as they develop negotiating strategies consistent with their regional road maps.

November 2004

Annex 1

Regional Grouping:
West Africa CEDEAO + Mauritania (ECOWAS) Central Africa CEMAC + STP (CEMAC) East South Africa (ESA) (COMESA minus) Southern Africa (SADC minus)Caribbean (CARIFORUM) Pacific (PIF)

  1BeninCameroon BurundiAngolaAntigua Cook Is
  2Burkina FasoCentral Africa ComorosBotswanaBahamas Fed Micron
  3Cape VerdeChad Congo (Dem Rep)Lesotho BarbadosFiji
  4GambiaCongo DjiboutiMozambiqueBelize Kiribati
  5GhanaEquat Guinea EritreaNamibiaDominica Marshall Is
  6GuineaGabon EthiopiaSwazilandDominican Rep Nauru
  7Guinea BissS Tome Princ (STP) KenyaTanzaniaGrenada Niue
  8Ivory Coast MalawiGuyana Palau
  9Liberia MauritiusHaiti PNG
10Mali Madagascar Jamaica Samoa
11Mauritania RwandaSt Lucia Solomon Is
12Niger SeychellesSt Vincent Tonga
13Nigeria SudanSt Kitts & Nevis Tuvalu
14Senegal UgandaSuriname Vanuatu
15Sierra Leone ZambiaTrinidad & Tobago
16Togo Zimbabwe

1   Article 1, Cotonou Agreement, 2000. Back

2   Each ACP region has developed a "road map" for Phase II of the negotiations. These detail the negotiating structure, priority issues and indicative schedule of negotiations. Back

3   Malawi, Zambia and Zimbabwe have opted to negotiate as part of a 16-strong COMESA group; seven are left in SADC; with 16 in the West African; 15 in the Caribbean and 14 in Pacific regional groups. Back

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