Memorandum submitted by
the Overseas Development Institute (ODI)
Summary
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 the 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.
TIMING
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 (i.e.
the acquis of Lomé/Cotonou: nonreciprocal 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 2003-4, 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 2006-7.
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 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.
POTENTIAL CONTENT OF AN EPA
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).
GOODS
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, not a suitable
development strategy.
SERVICES
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, sign[1],
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.
ORGANISATION OF THE ACP FOR EPAS
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[2].
LDCS
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.
ACP
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).
WTO RULES
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.
EPAS AND DEVELOPMENT
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.[3]
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.
TRADE FACILITATION
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.
NON-WTO, TRADE RELATED ISSUES
The EC has argued strongly that EPA agreements should
include investment, competition policy, government procurement,
environmental agreements, and labour rules, i.e. 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 percent 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 percent
of total export earnings. In relative income terms the transfer
arising from the Sugar Protocol is most important for Guyana,
contributing approximately 10 percent 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, failing this, 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 ten 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 (e.g. 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 (e.g. loss of income transfers)
which could conflict with traditional aid criteria (e.g. 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 (e.g. 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
Dirk Willem te Velde
11th November 2004
Appendix
Services and ACP-EU Economic Partnership
Agreements
The Cotonou Partnership Agreement (CPA), signed in
2000 and ratified in 2003 by a sufficient number of states, allows
for the negotiation of Economic Partnership Agreements (EPAs)
between the European Union (EU) and African, Caribbean and Pacific
(ACP) countries in the area of services.
EU-ACP wide phase 1 negotiations started in Sept
2002; Regionally based phase 2 negotiations launched in 2003 by
ECOWAS (+ Mauritania), CEMAC (+Sao Tome), and in 2004 by ESA and
CARIFORUM (CARICOM +Dominican Republic) and others (in other Africa,
Pacific). Negotiations are set to be concluded by Dec 2008.
Key provisions on services include
n Extend
EPAs to encompass the liberalisation of services in accordance
with provisions of GATS (CPA, Art 41.4);
n Reaffirmation
of GATS commitments (41.2), progressive liberalisation (41.3)
and EC support for ACP export capacity (labour, business, distribution,
finance, tourism, culture and construction) (41.5);
n Need for
Special and Differential Treatment (SDT) for ACP suppliers (41.2
and 41.3);
n Special
sectors: Maritime Transport (Art 42) and ICT / Telecommunications
(Art 43), and Tourism (Art 24).
Phase 1 negotiations have so far concluded that services
liberalisation in an EPA should be progressive, based on a positive
list, adapted to the level of ACP countries and their sectors
and specific constraints, and underpinned by principles of S&D,
asymmetry and positive regional discrimination. The EC agreed
to discuss liberalisation in mode 4 (temporary movement of natural
persons) [4]
in the context of EPA negotiations. This issue is sensitive for
the EU but crucial to the ACP. The EU and the ACP also agreed
that support for the development of services sectors should be
provided to ACP countries within the context of EPAs, but there
is disagreement over the need for additional funds which can be
used flexibly and rapidly (ACP) as opposed to no additional (EU)
beyond existing EDF commitments. Finally, while the EU argues
for a GATS-plus agreement, the ACP group is unlikely to want to
go (significantly) beyond commitments in the GATS.
Several options remain for Phase 2 negotiations,
which include
n Do nothing:
no pain, no gain.
n No services
agreement but with focus on SDT.
n Reaffirm
GATS commitments under Cotonou and emphasise SDT (safeguards,
funds, etc); pressure to sign Telecommunications annex.
n GATS plus
services agreement with new commitments by both ACP and EU, and
with SDT.
There will be advantages and disadvantages associated
with each choice. Trade liberalisation with appropriate regulatory
framework is generally associated with gains, but these may not
occur in each sector, country of group of countries. In some cases
there may be enhanced export opportunities, but in others the
domestic services capacity or its export capacity in the region
may be at risk through trade liberalisation. It is thus important
to examine which options would provide the best outcome.
On the basis of existing EU trade agreements with
developing countries it is clear that the contents of services
agreements differ and thus these are in principle negotiable:
n Mode 4
provisions are more free in EU-CEECs (or CARICOM) than in EU-MEXICO
or TDCA.
n Some Mode
3 and investor protection provisions pre-establishment for EU-CEECs
and EU-Chile.
n Government
Procurement included in few.
n Depth
of commitments varies considerably, but is reciprocal, subject
to implementation periods. Limited depth in e.g. TDCA with South
Africa.
EPAs aim to be WTO consistent. There are provisions
in the General Agreement for Trade in Services that would most
likely make EPAs WTO compatible while still including the possibility
for offering flexibility (or special and differential treatment)
to the ACP in terms of coverage and removal of discrimination
(GATS article V: 1 & 3). However, since the Council of Trade
in Services has not yet ruled on any regional service agreement
it is impossible to be more precise.
The Caribbean (as is the case for many ACP countries)
are involved in a number of services negotiations
n CSME -
the Caribbean Single Market and Economy which include a negative
list (i.e. it has a list of restrictions which member states will
remove according to a fixed scheduled until 2005. Some countries
are moving faster than others.
n FTAA -
Free Trade Area of the Americas which includes a draft chapter
on services, but proposals by Caribbean are modest - was scheduled
to be finalised in 2005.
n Bilateral
negotiations such as Caricom-Costa Rica/Canada.
n GATS 2000
which is part of the Doha single undertaking; this has included
modest offers by St Kitts and Suriname, while EC has made request
from 11 Caribbean countries - scheduled to be finalised by 2005.
n CARIFORUM-EC
EPA negotiations until end of 2008.
The combination of these "negotiating theatres"
requires a focused and consistent approach, where sequence is
important. While there may be barriers to services exports to
the EU, it may be that the reduction in such barriers can be negotiated
under GATS (through own or other countries' interests and requests).
On the other hand, some services could be better treated as an
EPA issue. There also appear to be direct links between the FTAA
and EPA: according to CPA Annex V, Art V, offers to FTAA would
need to extend to the EC.
One issue emphasised in the CPA is the need to apply
SDT to ACP suppliers. It is important to examine how this can
best be operationalised e.g. bv mode, sector, or country?
n Financial
support for services export capacity building (e.g. services export
promotion in ITES, or compensation for brain drain?).
n Facilitate
recognition of professional credentials using one-stop shops (EUROPASS
and ACPPASS).
n Information
centres in and for ACP service exporters.
n Increase
technology transfer to ACP using "home country measures"
(e.g. PROINVEST, EIB INFAC).
n Full credit
for ACP autonomous liberalisation.
n Fewer
or no new services commitments by ACP (affirming GATS commitments).
n EU commitments
in areas of ACP export interest
n Mode 4
for less-skilled workers; determination of quotas: ACP business
travel card (see Box 1).
n Safeguard
and remove mode 1 (and 3) commitments in various sectors.
n Inclusion
of (parts of) EU government procurement.
n Operationalise
Emergency Safeguard Measures.
n Flexible
implementation time period (e.g. recognition of credentials, inventories
of trade rules required for progressive liberalisation).
In order to obtain at least modest gains from a services
agreement, the ACP regions would need to table specific SDT options:
requests for the lifting of certain barriers in the EU, for resources
in specific areas, etc. Now is the time to begin thinking about
which specific options are likely to be most effective, considering
that this process may be lengthy one. It is potentially costly
to wait and be unprepared until other have been finalised, as
different requests (for the lifting of barriers, or other SDT
options) can be made under Cotonou while the end of other negotiations
are not in sight. It would also take time and effort to formulate
and assess the costs and benefits of national and regional offers
and requests on full or partial liberalisation in certain sectors
or modes.
Box 1 Introducing an ACP Business Travel Card
The EU restricts the temporary movement of various
categories of natural persons in GATS mode 4. In particular, medium
to lower skilled workers from the ACP will find it difficult to
enter the EU to supply services. Some higher skilled workers will
be subject to quotas. Some new thinking is required so that the
EU admits temporary movement of natural persons in all categories
as long as some basic conditions are fulfilled. It has so far
not been advanced, but a proposal to set up an ACP business travel
card may help to facilitate and operationalise market access in
mode 4. As a similar example, the APEC business travel card has
been successfully introduced. Under an ACP business travel card
there could be
? Visa free or visa-at-border entry for business
development purposes,
? Create multiple-entry visa,
? Common service standards for processing (minimum
time) of temporary entry visa,
? An expanded range of professions under 'business
visitor',
? An expanded range of support staff, in particular
applying to less-skilled workers.
There could be a pilot scheme running for a number
of years (covering certain ACP countries, regions or sectors).
Cardholders would be required to present their passports, but
are not required to submit separate applications for business
visitor visas. Participating economies would commit to implementing
the scheme and would be free to maintain existing visa requirements
for business visitors. They would also have the responsibility
of avoiding abuse of the ACP business travel cards by registering
bona fide ACP employers (and avoiding overstaying temporary entry).
All economies retain the right to refuse an individual without
providing reasons, or to refuse entry to ACP Business Travel Card-holders
at the border. The concept could be introduced at the ACP level,
but the precise implementation could be left to regional negotiations,
as ACP regions are interested in different services sectors.
Bibliography
ACP Secretariat (2004) Guidelines for the Negotiations
of EPAs
ESA States (2004) Negotiating Mandate for the ESA-EU Economic
Partnership Agreement with the European Union, final version,
Grand Bay, Mauritius, 6 February 2004.
Julian, Melissa (2004) 'EPA Negotiations Update: State of Play
of the Negotiations', Trade Negotiations Insights Vol.
3 No. 4.
Velde, Dirk Willem te, Ian Gillson and Sheila Page (2004), Special
and Differential Treatment in Post-Cotonou Services Negotiations,
final report for the Dutch Ministry of Foreign Affairs.
WTO (2004) Developmental Aspects of Regional Trade Agreements
and Special and Differential Treatment in WTO Rules: GATT 1994
Article XXIV and the Enabling Clause, Communication by the
Mission of Botswana on Behalf of the ACP Group of States, TN/RL/W/155,
26 April.
1 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
2
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
3
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
4
Mode 1. Cross-border supply: when a service crosses a national
border. An example is the purchase of insurance or software by
a consumer from a producer abroad.
Mode 2. Consumption abroad: when a consumer
travels abroad to consume from the service supplier, such as in
tourism, education, or health services.
Mode 3. Commercial presence: when a
foreign owned company sells services (e.g. foreign branches of
banks).
Mode 4. Temporary movement of natural
persons: when independent service providers or employees of a
multinational firm temporarily move to another country.
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