Select Committee on International Development Written Evidence

Memorandum submitted by Ian Gillson, Sheila Page and Dirk Willem te Velde, Overseas Development Institute (ODI)


  The ACP countries need to decide what they want from trade with the EU, and the best strategy to achieve this. They have several options:

    —  To do nothing: to use their current access.

    —  To concentrate on regional negotiations

    —  To negotiate undifferentiated EPAs as part of a region.

    —  For the LDCs: to negotiate a separate EPA, either with other LDCs within each region or with all other LDCs in the ACP.

    —  To negotiate an EPA, whether differentiated or not, then liberalise equally to other markets; this offers the benefits of any net increase in access, without trade diversion.

  Timing: Postponing EPA negotiations until after the completion of the WTO round, and of the various regional trading agreements could be a favourable strategy.

  Services offer more scope for increasing ACP access to EU markets than do goods, with less need to open ACP markets further.

  Agreements should have firm and enforceable commitments, and avoid allowing disputes on trade to affect decisions on aid.

  There could be separate agreements, reciprocal and non-reciprocal respectively, between the EU and the developing and between the EU and Least Developed members of each region, preserving a framework of a regional approach. Harmonising the WTO rules on regions by making those for trade in goods consistent with those for trade in services could give useful flexibility.

  ACP countries may need assistance in negotiations, but donors should prevent funding assistance from becoming unacceptable intervention.

  The use by LDCs of their preferential access to the US for clothing exports demonstrates the benefits of more liberal rules of origin, particularly for small economies.

  Reform of the EU sugar regime will benefit some ACP countries, with low costs and the ability to increase exports; it will require some to invest in cost-saving; it will force some to reduce production. The EU can provide long-term assistance by improving market access for other exports, especially tourism, and liberalising the movement of labour. Temporary financial assistance to assist those who lose income and to restructure production is justified as the EU will be ending an international agreement. This could be additional to normal aid. Postponing adjustment would not remove the problem and would impose costs on those developing countries and LDCs that can produce efficiently.

1.   What options are available for ACP states under the Cotonou Agreement? Are sub-regional Economic Partnership Agreements (EPAs) the most suitable development tool for all ACP states? What are the alternatives?

  The ACP countries need to decide what they want from trade with the EU, and the best strategy to achieve this. They have several options:

    —  To do nothing: to use their current access.

  Most ACP countries already have 0 tariff or preferential access in most of their major markets: the Least Developed Countries (LDCs) full access to the EU under Everything but Arms (EBA) and preferential access to the US, Canada, and Japan; many non-LDC African countries have access to the US under the Africa Growth and Opportunity Act (AGOA); the Caribbean have access to the US and Canada and the Pacific to Australia and New Zealand under special arrangements; all are members of at least one region, and have access to their neighbours.

    —  To concentrate on regional negotiations, to encourage CARICOM, COMESA, SADC etc, to concentrate on defining their own trade policies, including total or selective liberalisation to the rest of the world, so securing the benefits of liberalised imports, plus access under the existing arrangements.

    —  To negotiate undifferentiated EPAs as part of a region: leading to partial liberalisation to the EU, and possibly to increased access on services.

    —  For the LDCs: to negotiate a separate EPA, either with other LDCs within each region or with all other LDCs in the ACP.

    —  To negotiate an EPA, either separate or undifferentiated, then liberalise equally to other markets; this could secure the benefits of any net increase in access, without trade diversion.


  The Cotonou Agreement stipulated that EPAs would be negotiated during the period starting from September 2002 until 31 December 2007. Under Article 37 (7) of the Agreement, however, the EU commits itself to examining all alternative possibilities to EPAs, in order to provide the countries which decide that they are not in a position to enter into EPAs with a new framework for trade which is equivalent to their existing situation (ie the acquis of Lomé/Cotonou: non-reciprocal preferential market access) and in conformity with WTO rules. This assessment has been postponed to 2006, at the request of the ACP; it could be postponed again until the end of the EPA negotiations.

  The ACP countries must, of course, always be prepared for changes in the choices offered by the EU (and other trading partners) as the history of the last four years has demonstrated: Cotonou was signed in June 2004, and then EBA was offered in September; a WTO Round was aborted in 1999, restored in 2001, failed in 2003, and restored in 2004. There is already a history of delays and changes in approach, partly because the Prodi Commission was much less committed to regionalism as an ideal than its predecessors.

  One important characteristic of the Cotonou negotiations has put pressure on the ACP to define and defend their interests: there is a clear, virtually month-by-month timetable; the EPA negotiation process has already gathered some momentum. For example, Phase I Negotiations took place during 2003-04, and have now officially concluded, although there are still areas of general ACP interest which will need to be decided. The launch of Phase II negotiations is taking place in each region, and in principle the target remains to complete these in 2007 and begin implementation in 2008. When these dates were set, however, the target date for completion of the Doha round of WTO negotiations was 2005. These dates would therefore have given countries time to consider what the EPA negotiations would need to include to give value added relative to the WTO and would have allowed them to make an informed choice of whether to agree an EPA or remain with existing trade access. That timetable would also have allowed countries with limited negotiating capacity to concentrate first on the WTO, then on the more important stages of the EPA negotiations. Now, the most important stages of the two negotiations are likely to be at the same time, in 2006-07.

  The WTO negotiations will deal with most of the same subjects as EPA negotiations, so that they will affect the net (WTO plus) impact of both what the ACP offer to the EU and what the EU offers to them. Any appraisal of EPA impacts must therefore be an iterative process that cannot be fully understood until the Doha Round is completed.

  There are other uncertainties. The EU is also negotiating with other, non-ACP, groups and countries. At present the negotiations with MERCOSUR (the Common Market of four countries in South America) appear to have stalled, but will resume in March 2005. Other negotiations, with Asian countries, are still at an early stage, but these could move further over the period of EPA negotiations. Any FTAs (Free Trade Areas) reduce the potential trade access value of either EBA or an EPA by reducing the degree of preference which it offers with respect to the rest of the world. This was well recognised in southern Africa when the EU signed its agreement with South Africa. And each of the EU's FTAs sets precedents for those that follow. The types of policy conditionality that first appeared in the South Africa agreement, for example, have influenced what the EU expects from EPAs. If there are innovations in including new issues in any of the other agreements under negotiation (MERCOSUR is resisting this; it is not clear what will happen in the others), these could influence what the EU asks during the EPA negotiations. Although the impact is more indirect, examples set in other FTAs, not involving the EU, will also influence what is seen as the norm for FTAs, particularly those set in other developed-developing country FTAs like those signed by the US. The increasing strength of investment provisions, the introduction of labour and environmental provisions, and the conditions on governance found in these influence what is expected. On the one hand, there would be advantages in delaying EPA negotiations so that the full effects of the others are clear, making the calculation of EPA effects more certain. On the other, the tendency for agreements to build on preceding agreements means that waiting may reduce the ACP countries' ability to influence the content of EPAs and increase the restrictiveness of any agreements. Some regions of the ACP have clearer interests in the EPA negotiations than others. The Caribbean countries do not have EBA to rely on, and they need agreement with the EU as a counter balance to their negotiations with the US. The African and Pacific regions have reasons to "wait and see". Postponing EPA negotiations until after the completion of the WTO round and of the various regional trading agreements, while using existing access, could be a favourable strategy.


  A basic characteristic of the negotiations is that the EU doesn't want much from them. There has never been much mercantilist interest in obtaining access to ACP countries. Only small or weak economies were allowed to be ACP members, so there are few large markets (Nigeria the only exception), and few are rapidly growing. There is some interest in not losing access relative to other exporters (notably to the US in the Caribbean, and, a weaker threat, in Africa under AGOA). While this means that any ACP group will not face strong demands for opening their markets, it also means that it will not have any strong leverage to extract gains from the EU.

  It was recognised early (even in studies commissioned by the EC itself) that there would be significant costs to any ACP region in signing an EPA, and uncertain gains, even before the EBA option existed. The value of any access could not be predicted: as MFN barriers come down, any regional or preferential access will be worth less; there were clear losses in tariff revenue and in trade diversion from offering discriminatory access to the EU countries; and the conventional welfare gains from liberalising ACP imports could be secured and increased through unilateral liberalisation. The ACP countries were therefore faced with quantifiable losses and uncertain gains.

  As a counter to this, the EU has increasingly emphasised that there would be other "non-trade" elements. The ACP mandate includes, although it does not have specific requests in, access on goods and services, subsidies, technical assistance rules of origin, customs procedures, safeguards provisions, assistance in revising ACP internal legislation, intellectual property, standards, SPS, infrastructure development, commodity processing, and compensation for costs of adjustment (ACP 2004).


  The EU's intentions about the content of EPAs have evolved. At the time Cotonou was signed, they were seen as simply Lomé access for the ACP regions into the EU (so still slightly limited) and access subject to significant exclusions for "sensitive" products (perhaps up to 10% of trade) for the EU to the ACP regions. All ACP countries would have had an incentive to negotiate them because without them they would revert to ordinary GSP access and it was assumed that continued better access would be "worth" at least some concessions on access by them to the EU. The offer of EBA to the Least Developed countries, however, changed the nature of the negotiations. The more than half of ACP countries which are Least Developed have much less to lose from not signing. Not only does EBA offer them similar access (fewer exclusions, slightly worse rules of origin), but it is clearly incompatible with the maintenance of the current sugar quota system, so even the countries which had special reasons for wanting to negotiate continued special arrangements with the EU lost this incentive (see comments on Question 4). One clear advantage does remain with EPAs: they would be indefinite and contractual, but this immediately suggested the alternative path of negotiating to "bind" the EBA offer. For non-LDC ACP countries, the new (October 2004) GSP regulations would give them better than current GSP access, but with some restrictions relative to Lomé access. The new provisions to avoid graduating small countries might (if they are not challenged in the WTO) protect the high-income Caribbean from losing access.

  While there would be formal agreement on reciprocity, there is increasing emphasis on a slow transition for all members of an EPA in removing their controls on EU imports, and LDCs would have a longer period than others. This suggests that LDCs might have to offer very little, if anything, immediately on access for goods.

  The rules for goods in regional arrangements (GATT Article XXIV, carried over into the WTO) require that "substantially all trade" be covered. This has never been defined, although the EC chooses to interpret it as 90% of tariff lines and argues that this can be an average of the exclusions of the members. As EBA means that there will be no exclusions for its imports from LDCs, this interpretation would allow LDCs to exclude up to 20% of imports which for most would include all significant high tariff imports from the EU. This interpretation may be legally challenged if a particular exporter finds itself badly affected, as India challenged one of the EU's other special preference arrangements. This is less likely for LDCs than for the EU's agreements with larger countries, but could happen. For non-LDCs, the EU is likely to offer close to 100% access (at least using its preferred measure, of the percentage of actual flows, not potential flows), so the impact would still be limited. Many ACP countries, however, particularly in Africa, are disproportionately dependent on the EU for export markets for historical reasons. To the extent that an EPA encouraged them to maintain or even increase their dependence, it would be increasing their vulnerability to a single market; this is not a suitable development strategy.


  In the EU mandate adopted in early 2002, the most significant addition compared to the initial descriptions was a strengthened emphasis on services, with mentions of information and communication and tourism. There is now to be "progressive and reciprocal liberalisation of trade in services . . . consistent with . . . Article V of the GATS" (EC 2002).

  The ACP as an organisation has been hesitant on services, and there have been few proposals except in the Caribbean, but this seems to be more because of lack of knowledge and preparation than outright opposition, so that it is possible that there will be increasing interest in including something on these.

  Several African countries have opened up some services extensively beyond their WTO commitments. They could make a substantial offer of liberalisation to the EU without going much beyond current arrangements. Most ACP countries would gain by seeking substantial access for labour (Mode 4 in GATS terms), which is not explicitly mentioned in the Cotonou agreement, but which the EU has now agreed to discuss in the EPA negotiations. Some African regions, for example, ESA (2004), have placed this on the agenda. EU barriers to this are particularly serious because of restrictions on short term workers and economic needs and other requirements for those that are permitted (te Velde, 2004). Restrictions tend to be tighter on less skilled workers, so that making access more equal across different skill levels would improve ACP access. There are still some country-specific regulations among EU members, so that this negotiation would need to allow for that. A services agreement would probably offer the greatest chances of gains in the EU market. A practical problem would be the lack of progress at regional level, so that it would be difficult to have a regional negotiation. Only CARICOM has moved to a common position on services in the WTO. The services which countries might want to include might be different at regional and EPA level, so a country-by-country agreement might be preferred. An agreement could take the form used for GATS, with each country plus the EU offering to open specific services, and with this negotiation happening at country level, potentially also with differentiation such that the EU opens more to LDCs than to others. (For a more detailed discussion of services, see Appendix.)

Enforcement and dispute settlement

  As the ACP regions will be weaker than the EU, securing firm and enforceable commitments will be one of their principal aims in an EPA. The interpretation of what the EU is proposing varies. In its other FTAs, which are not with regions, the EU has had some elements of "cross conditionality", by which failure on the part of one of the signatories to observe one element of the agreement could trigger retaliation on another. This is particularly sensitive and potentially uncertain where there are clauses on good governance or democracy. ESA (2004) asks that the human rights and corruption clauses in the Cotonou agreement not be applied to EPAs, but only to political cooperation.

  For a regional agreement, there is an additional question of whether any dispute, and therefore retaliation, for example through a reduction in aid, would be treated as between that country and the EU or between the region and the EU. As the legal instrument is likely to be an agreement which each country, not the regions, signs[60] it would be more consistent to treat disputes as between each country and the EU. It would not be impossible to include in such an agreement an authorisation to take action against a third country if two countries are in dispute, but this would be highly unusual. Applying it to aid would also subordinate aid criteria such as poverty to a trade or governance condition, which would go against the normal approach of aid agencies.


  There could be separate agreements, reciprocal and non-reciprocal respectively, between the EU and the developing and between the EU and the Least Developed members of a "region", preserving a framework of a regional approach, perhaps with provision for countries to "graduate" to the full agreement. This would present clear difficulties to the WTO rules at present, but may not be impossible to negotiate. The negotiating mandate contains provision for special treatment for Least Developed, small, landlocked, island, and post-conflict countries so that any principle of universality has already been dropped[61].


  An alternative approach, if two-track regions were not possible, would be separate agreements of the LDCs in each region with the EU and of the non-LDCs with the EU, with rules of origin that allowed cumulation and perhaps a common structure for any regulatory elements. This is a possibility to be explored if the regional negotiations do not progress, and if, in 2006, when the provisions for the non-LDCs are reviewed, a substantial number of them take their option of asking for a different agreement from an EPA. On services, it might have the advantage that, as with EBA, the EU could offer substantially better preferential arrangements in services to LDCs.


  For some areas, as was agreed when the first year of EPA negotiations was designated to be at all-ACP level, this is the obvious common interest group. The ACP has identified some issues which continue to require all ACP negotiation, including adjustment costs, investment, competition policy, government procurement, commodity protocols, data protection, dispute settlement, and rules of origin. Other issues clearly only to be dealt with at ACP level include the sugar protocol and dispute settlement. Some need probably to be discussed both there and at regional level, including which areas should be covered and adjustment costs. It will be necessary in the end to decide whether these common interests can be best encouraged by having common elements in a number of EPAs or having an ACP-EU agreement for those issues and regional agreements for the others. The problem with the common provisions solution is that agreements rarely stand still, and elements that are common when they are initially signed could be renegotiated, in inconsistent ways, as different regions move in different directions. There are, of course, advantages in such flexibility, but it may be necessary to institutionalise the need also to look at all-ACP interests.

Sugar producers or other special interest groups

  If a solution to the different levels and interests within the ACP countries is found in subject agreements, for example regulations at all ACP level, services for the LDCs, etc, it might seem reasonable to negotiate as interest groups on goods. This would not, however, be WTO compatible (because of the substantially all trade rule).


  At present, most ACP regions are effectively exempt from WTO scrutiny under the Enabling Clause which offers special treatment to purely developing country regions. This allows regions to have more limited coverage than "substantially all trade". SADC, because it includes South Africa, is being notified under the more stringent rules of Article GATT XXIV. Any agreement of an ACP region with the EU would also come under this.

  For goods, there are no special rules for regions which include developed and developing countries, but Article V of the General Agreement on Trade in Services (GATS), which was adopted after such regions had begun to emerge, does allow asymmetric liberalisation and absence of "substantial coverage". Therefore, an agreement that covers only some services would be allowable. Relaxing the rules for goods could make it easier to have an asymmetric relation with the EU, but could also make it easier for other regions to take measures that could damage ACP countries. There are many more regions of which they are not members than those of which they are members. The simplest proposals are to harmonise the treatment of goods and services by introducing a provision into Article XXIV to cover mixed regions. This could modify the rules on substantially all trade, the limit on the transition period (limited to 10 years, de facto although this can be prolonged if a region requests it), and the rule that the restrictions on other countries should be "not on the whole higher" thus permitting different rules of origin.


  For many countries, particularly in Africa, the principal policy needs are domestic. Therefore, while they must give sufficient attention to the EPA negotiations to avoid accepting undesirable changes, this is not as much of a priority as domestic policy, the WTO and its existing regional arrangements.

  While there are important technical questions which can be discussed according to a timetable and managed at regional and official level, countries must retain clear political (ministerial) interest and control of the negotiations until the answers to the principal questions can be settled: will they gain sufficiently from an EPA relative to the trade arrangements they have already to be worth any costs? What is the best group to negotiate with? The first cannot be settled until the WTO Round is complete and until the coverage of the EPA is clearly specified (in particular, which services); the second is more political than technical, this means continuing high-level supervision.

  This logic suggests that the negotiations could and should take longer than has been allowed. The obvious negotiating reason is the delay in the WTO negotiations: if the EPAs are to be "WTO plus", negotiators have to know what the base is on to which they add the "plus", and any agreements need to be consistent with any new or revised WTO rules. The lack of capacity is another reason, both to avoid overburdening the limited number of officials and to give those who are negotiating time and experience. Evidence on WTO negotiations suggests that delegations with more experience perform better, and as all negotiations with the EU began only in 1997, following the Green Paper, all ACP negotiators are inexperienced in this context.

  Countries cannot allow trade negotiations to be over-influenced by donors who are themselves trading partners. The EPA negotiations have been highly unusual in the degree of contact and direct financing between the negotiating parties, the EU and the ACP countries. In other developed-developing country regional negotiations, when there have been countries that needed substantial assistance, there have been mediating organisations (such as the Inter-American Development Bank in the Free Trade Area of the Americas negotiations). In EPA negotiations there has been direct assistance, EU presence at consultative meetings, and direct funding, as well as the indirect and less open to abuse arrangements through the EU-ACP Project Management Unit, the PMU. There is a need for technical discussions among officials and member countries, and in any negotiation good relations are essential, but it should be clear that these are negotiations, from opposite sides of the table, not areas where technicians would work together. The rules should prevent funding assistance from becoming unacceptable intervention. Other donors, within the EU and other preference-givers, are also active in trade support, and their interests must also be treated with caution.

  The high dependence of regional organisations on donor funds suggests that these organisations are given more priority by donors than by their members. If they are of value to their members, the members could contribute to them, out of donor funds if this were permitted. This would both allow member countries to decide how much priority to give to them and make them more directly accountable to their members in their activities.

  Although the direct revenue costs of an EPA could be limited by excluding high-tariff imports, they would come on top of the much larger losses from regional integration, so that there may be a need for support for the revenue lost. This is particularly true if an EPA would benefit some members of a region, but not all. If it appears that some countries would have major benefits from an EPA, and if all countries want also to preserve a regional approach, then there would be a case for donors to provide assistance to the losers to adjust to the revenue consequences. [62]

2.   What are the implications for the ACP states of including the "new issues" of investment, competition, government procurement and trade facilitation in the EPAs?

  As the EU stresses, an EPA would not need to be confined to the same issues as the old Lomé agreements, but could include services, as discussed above; the same trade related extensions as the WTO (intellectual property, trade facilitation, etc); and also those not yet covered by it, such as investment, competition policy, government procurement, the relationship between trade and environmental rules, and labour conditions.


  There are no specific proposals on this, but both the EU and some ACP regions, such as COMESA and CARICOM, offer examples of how regional coordination can reduce the costs of trading, through common documentation, common transit insurance regimes, etc. This proved a useful and low cost first step in ACP integration, and might be a possible focus for EPAs, replacing the emphasis on tariff negotiations.


  The EC has argued strongly that EPA agreements should include investment, competition policy, government procurement, environmental agreements, and labour rules, ie all the additional trade related issues on which it was not able to secure agreement within the WTO. These are all issues which the EU itself has decided to regulate, at least in part, at regional level, and it therefore considers them a necessary part of regional coordination. It also argues that they are relevant subjects for development. The arguments are that investment and competition, and therefore rules, are particularly important for small countries, even if larger countries are right to exclude them from the WTO, and that the EU and the ACP share common values, so can reach agreement more easily than in the WTO.

  The EU, however, has a much higher share of intraregional trade and other contacts than any EPA would have; the EU has only added these responsibilities as it has acquired experience of dealing with trade integration and as integration has deepened; they were not part of the Treaty of Rome in 1957; some ACP regions seem to be moving towards these, but are not treating them as basic at the beginning of trade integration. The arguments for incurring the potentially higher costs of including them now in an EPA are therefore weaker than for including them in the EU. Their inclusion has already been subject to disagreement in the Joint ACP-EU Parliamentary Assembly (Julian, March 2004).

  It is not yet clear whether what the EU wants is more than informal cooperation. If strong new obligations were on the table, these could restrict countries' ability to design an economic policy; this might not restrict current policies, but would be a constraint on future policies. On the other hand, they might help countries to design internationally compatible policies at an early stage of development. Which argument prevails would depend on countries' general development policy.

3. The extent to which rules of origin discourage some LDCs from using the Everything But Arms agreement and membership of an EPA will compel them to open their markets to the EU, what options are available to such states?

  While the rules of origin (the requirements imposed on the use of imported inputs by any regional or preferential agreement) of the Cotonou agreement are less onerous than those imposed by the EU in its FTAs or for GSP, they are more restrictive than the rules offered by the US under AGOA, the African Growth and Opportunity Act, to "low income" African countries (a broader category than Least Developed), particularly for clothing. As many small African countries can be competitive in clothing but do not have national textile industries, this has meant that exports to the US have increased much faster since the introduction of AGOA than have exports to the EU. Liberalising EU rules could not only increase ACP exports, but help ACP countries to move more into manufactured exports, reducing their vulnerability to primary commodities.

4. After the WTO ruling against the EU Sugar Regime, and by implication the ACP Sugar Protocol, what adjustment mechanisms are possible for states heavily dependent on preferences?

  The common organisation of the market in sugar (COMS), or the Sugar Regime, was first introduced in 1968. Although it is part of the Common Agricultural Policy (which has undergone numerous reforms since its creation in 1958) the basic market support system for sugar has changed very little. The COMS provides price support to producers through measures to control the supply of sugar to the domestic market (restrictions on sales, import quotas and requirements to export fixed quantities of sugar), direct subsidies for production and export, and intervention buying if the domestic price of sugar falls below an intervention price. The COMS is financed primarily by EU consumers (who pay higher than world prices) and levies on EU sugar production (paid to the EU budget) intended to cover the cost of exporting any surplus production over domestic consumption. In 2004, the EU budget for the sugar sector was

1.721 billion.

  The first change to the COMS occurred in 1975 following the UK's accession to EU in order to take account of its commitments to a number of former colonies (under the Commonwealth Sugar Agreement) and at a time of world sugar shortage and brief Third World commodity power. Annexed to the Lomé Convention, the Sugar Protocol provides for fixed quantities of preferential imports of cane sugar (raw or white) to the EU market at guaranteed prices from 19 ACP countries (and India). The terms of the initial Sugar Protocol were not amended when the standing agreement between the EU and the ACP was renewed at Cotonou in June 2000.

  The total transfer to the ACP Sugar Protocol countries associated with quota access to the protected EU market is about US$ 500 million or about 60% of the value of these countries' sugar exports to the EU. Mauritius receives over a third of the total transfers and the five largest quota-holders (Mauritius, Fiji, Guyana, Jamaica and Swaziland) receive over three-quarters of the total transfer. The Sugar Protocol makes a significant contribution to foreign exchange earnings in Guyana, Mauritius, Fiji, Swaziland, and St Kitts, where it accounts for over 5% of total export earnings. In relative income terms the transfer arising from the Sugar Protocol is most important for Guyana, contributing approximately 10% to GDP.

  Although the Sugar Protocol does not expire and cannot be changed unilaterally, the COMS to which it is linked and on which it depends can be amended. Unilateral decisions to change the COMS, which affect the EU price of sugar, will have an impact on EU-ACP sugar trade. There are a number of pressures for reform. First, concerns both over the high cost of the CAP to EU consumers (mainly food processors) and the need to accommodate new Member States in Central Europe which are beet producers (especially Poland) have resulted in the Commission making proposals for reform of the COMS to begin in 2005. The main impact of the reform will be to reduce the level of support prices by a third over three years. Second, on 4 August 2004, a WTO panel ruled in favour of Brazil, Australia and Thailand condemning EU export subsidies on sugar. The complainants had focused their case on showing the EU to be subsidising sugar exports excessively in violation of their WTO reduction commitments under the Uruguay Round Agreement on Agriculture. As part of the ruling, they successfully argued that imports (1.6  million tonnes) of raw sugar from the ACP (and India) were being refined in the EU, treated as domestic surplus and re-exported with the aid of subsidies. If the EU decides to implement the panel decision this could reduce the guaranteed prices in the COMS. However, the EU has already decided to appeal and, if this fails, implementation of any changes to comply with the ruling could be drawn out for several years. Third, the Everything But Arms Initiative will allow unrestricted duty-free access to the EU market for sugar produced in Least Developed countries by 2009. These imports are currently subject to quotas. EBA benefits Least Developed ACP countries with no previous allocation under the Sugar Protocol against the quota holders in the Caribbean, Mauritius, Swaziland and Fiji because it will not be possible to increase sugar imports from LDCs without reducing EU production, Sugar Protocol quotas or guaranteed prices. Finally, a longer-term threat to the COMS is the negotiation of free trade agreements between the ACP and the EU to replace non-reciprocal preferences under the Cotonou Agreement. Such Economic Partnership Agreements could extend duty free access to non-Protocol sugar-producing countries.

  Reform of the COMS will reduce the real price offered to ACP Sugar Protocol producers. This will result in sugar production in a number of higher-cost ACP Protocol countries (Barbados, Côte d'Ivoire, Jamaica, Madagascar, St Kitts and Trinidad) becoming less profitable without effective investment in cost-saving production. Other countries (Guyana, Fiji and Mauritius) may have to reduce their production levels in order to concentrate on their most lucrative markets and efficient producers or restructure in order to remain competitive. However, production in a number of ACP countries which are classified as Least Developed (e.g. Republic of Congo; Zambia) or with sufficient exports to non-EU markets (Côte d'Ivoire) may gain from an EU-reform-induced rise in the world price of sugar or unlimited access to the EU market (via Economic Partnership Agreements or the Everything But Arms Initiative).

  The European Commission has indicated that it will be proposing specific measures to assist the Sugar Protocol countries in adjusting to changes in the COMS. In determining whether such an offer for transitional assistance is justified, an important consideration is each country's fiscal, balance-of-payments and debt positions. This is particularly relevant to the Caribbean which, although containing seven of the 10 most heavily indebted countries in the world, consists mostly of middle-income countries which are not among the poorest. However, assistance can be justified under the EU's international obligations because it is partially withdrawing from a binding undertaking which was of unlimited duration. In its absence, countries suffering from the change in the regime may attempt to delay reform to the detriment of those countries which stand to gain.

  Transitional assistance measures could take the form of trade or financial mechanisms or a combination of both. Delaying reform cannot be classified as transitional assistance since countries must still face the costs of transition. Nevertheless, postponing reform of the COMS is attracting increasing support from a number of Caribbean countries and sympathy from the European Commission. On the one hand, the Caribbean ACP argue that costly restructuring and sugar-related diversification efforts have already started in a number of countries (mostly so in Guyana, to some extent in Belize, but less so in Jamaica). The cost savings from these efforts are still coming into effect and will not be fully realised by 2005 (in the case of Guyana they will be realised around 2007). In addition, loans (financed by current income transfers) have already been secured to make the necessary investments. On the other hand, delaying reform of the COMS would be unsustainable given the pressures for reform and the widespread global view that the COMS distorts international trade and is developmentally wrong because it adversely affects those producing-countries (often poorer than in the Caribbean) that do not benefit from the preferential arrangement. Beyond delaying reform of preferences, options for trade-based assistance are available. These would improve market access for other products, especially services (eg tourism) which could encourage diversification into more profitable activities. There are also high estimates for potential developing country gains arising from developed countries liberalising mode 4 (temporary movement of natural persons) under the GATS. If mode 4 liberalisation were possible, such gains could reduce the net losses for a number of ACP sugar-producing countries, but would require the EU's Member States to show unprecedented political tolerance in allowing increased imports of foreign labour.

  The EU's commitments under the Cotonou Agreement to ensure the continued viability of the Protocol sugar industries will be difficult, if not impossible, to maintain in higher-cost countries following reform of the COMS. Other solutions must be found that do not suffer the threat from future preference erosion. One option would be for the EU to abandon its past reservations and to accept the need to provide some form of direct aid to sugar producers to compensate them for loss of preference. There are, in principle, two (not mutually exclusive) ways to use transitional assistance for preference erosion arising from reform of the COMS.

  First, compensation could be provided for lost income transfers arising from preference erosion but there is no justification on welfare grounds to give additional income to groups who are damaged by trade over those who are damaged by other shocks or are simply poor. Compensation also perpetuates dependence but at a national level this is often accepted and satisfactory since it can be used to pension off employees in declining sectors. Moreover, compensation may actually provide adverse incentives if it is used to delay restructuring and diversification.

  Second, support could be provided for restructuring production either to increase the competitiveness of the sugar sector where production remains viable (including the development of branding and niche marketing opportunities) or to develop new sectors. Niche markets (such as Fair Trade or organics) provide a price premium which could allow some ACP to maintain production. In the long run, however, diversification into other activities is the best strategy for high-cost ACP sugar-producing countries to reduce their dependence on preferences following reform of the COMS. The main benefits of diversification away from sugar (which also applies to primary commodities in general) would be reduced risk and more stable export revenues. The Caribbean has already shown some success in diversifying into tourism and financial services (especially in the Windward Islands where the growth of tourism has more than offset the decline in banana export earnings resulting from successive revisions to the EU's Banana Regime).

  Financial assistance could be provided by increasing aid, including through the IMF's Trade Integration Mechanism, but this might not be justifiable since the allocation among countries would need to be based on trade factors (eg loss of income transfers) which could conflict with traditional aid criteria (eg by level of development). Alternatively it could be made through the creation of a new fund in the form of special payments (like the Global Environmental Fund) and administered multilaterally (eg by the WTO) or, if such a solution was found not to be possible in the timeframe available, bilaterally between the EU and ACP.

  A crucial decision would concern the length of the transition period and duration of support. On the one hand, there are arguments that preference erosion is permanent, in contrast to temporary balance of payments shocks (like those for commodity price volatility or natural disasters), and that permanent differences in the structure of some economies (vulnerability, smallness, remoteness) serve to raise the costs of production (and trading) obstruct the reallocation of resources into new sectors and reduce the number of diversification opportunities. On the other hand, trade policy is not permanent and cannot be treated as such. Expectations will adjust following the reduction of preferences and economies will restructure. An adjustment period of 10 years, with transitional support declining in a pre-determined and predictable way, has been proposed as a reasonable estimate but some countries will be able to adjust more quickly than others.

Ian Gillson, Sheila Page, and Dirk Willem te Velde

November 2004

60   Only a customs union could sign a collective trade agreement with the EU, and the ACP regions are Free Trade Areas, some with customs union as an objective. Therefore, the legal form of an EPA is likely to be an FTA among the EU and individual members of each ACP region. Back

61   In Cotonou, the "Least Developed" are specified by list, not by reference to the official UN list. At present they are in fact the same, but this leaves open the possibility of conflict in the future: WTO rules use the UN list. Back

62   In the WTO negotiations, the problem that what would be a beneficial settlement to most people in developing countries might cause damage to a few is now recognised. The principal example is from preference erosion: that any general liberalisation, while benefiting those countries which were not previously beneficiaries of major preferences, might damage some who were. Back

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