Joint memorandum submitted by Department
for International Development and Department of Trade and Industry
Summary
1. We welcome the Committee's decision
to hold an evidence session on the emerging Economic Partnership
Agreement (EPA) negotiations between the EU and African, Caribbean
and Pacific (ACP) states.
2. The Government is committed to ensuring that EPAs
produce real developmental benefits for the ACP states,
consistent with the aims and principles of the Cotonou Agreement.
EPAs will not be Regional Trade Agreements in the traditional
sense. They are intended to be new instruments that will promote
development through trade, by maintaining ACP preferential access
to the EU market, whilst assisting ACP countries to benefit from
further integration into the world trading system.
3. Negotiations of EPAs are still at an early stage
and therefore much of the substance of the agreements, such as
coverage, transition times and rules, have yet to be agreed. The
key challenge will be to ensure that the development objective
is central to the negotiations. This will include giving ACP countries
sufficient flexibility over the timescale and sectors in which
they are required to open their own markets to the EU and to their
neighbours. Given many of the ACPs' least developed or vulnerable
economy status, longer transition periods will be required than
in other trade agreements. This is essential if they are to promote,
rather than undermine, ACP countries' national development and
poverty reduction plans, and their regional integration efforts.
The negotiations must include the provision of capacity building
to support the ACP in negotiating the agreements, technical assistance
in implementing the agreements and trade adjustment support for
individual ACP countries.
4. The Government will continue to work
closely with the European Commission, other EU Member States,
ACP countries, NGOs and the private sector to achieve agreements
that help the ACP harness the potential of trade to promote economic
growth and sustainable development.
Cotonou Agreement and the Need for
Change
5. The Cotonou Agreement has three pillars: political
co-operation, trade growth and development assistance. Its objectives
are: 'To promote and expedite the economic, cultural and social
development of the ACP states, with a view to contributing to
peace and security and to promoting a stable and democratic political
environment. The partnership shall be centred on the objective
of reducing and eventually eradicating poverty consistent with
the objectives of sustainable development and the gradual integration
of the ACP countries into the world economy.[59]'
6. The Government is fully committed
to achieving these objectives. The UK Government's desired outcome
for the negotiations is to help the ACP better realise the potential
of trade to stimulate economic growth and development through
increased trade with the EU and with each other. The outgoing
European Trade Commissioner, Pascal Lamy, has described EPAs as
tools for development. The EU as a whole has made clear that we
do not have 'offensive' market access interests. In the 2004 White
Paper on Trade and Investment, the Government has made a clear
policy commitment that the UK will seek to hold our EU partners
to this.
The Failures of Preferences
7. ACP countries have enjoyed long-standing preferential
access to the EU market under successive Lomé conventions
and now the Cotonou Agreement. These preferences were designed
to benefit traditional ACP trading partners, more than half of
which are least developed countries (LDCs) and other vulnerable,
small island and landlocked states. The margins of preference
that resulted depend on both the EU's standard tariff for each
product (its MFN rate) and the preference granted to the ACP (for
example duty free or x% of the MFN rate). Preference margins vary
for each product but can be as high as 24% for some fisheries
products. However, preferences have failed to boost ACP exports
as intended, for a number of reasons, including supply side constraints
in the ACP economies and the erosion of preferences over time
due to multilateral trade liberalisation (that has reduced MFN
tariff rates). By 2002, only 3% of EU imports originated from
ACP states, as compared to 6.7% in 1976.
WTO Compatibility
8. In addition, these preferences are incompatible with WTO rules.
One of the central tenets of the WTO is non-discrimination. Developed
countries can apply lower tariff rates (i.e. offer preferential
access) to exports from developing countries, thereby discriminating
between developed and developing countries under WTO rules. However,
with the exception of the WTO recognised category of Least Developed
Countries (LDCs), they cannot discriminate between developing
countries. This is exactly what Lomé/Cotonou preferences
do, in discriminating between those developing countries that
are members of the ACP group and those that are not.
9. The preferences are currently covered by a WTO waiver until
the end of 2007, hence the planned timetable for EPAs to come
into force in 2008. The waiver was only secured after lengthy
and difficult negotiation. The EU could seek to have this waiver
renewed, which would require the agreement of all 148 WTO members.
However, the European Commission, and the Government, judges that
the consensus required to extend the waiver is unlikely to be
forthcoming due to the high probability of a challenge from non-ACP
developing countries.
10. The existence of a WTO waiver is not in itself sufficient
to protect these preferences. The Philippines, Thailand and Indonesia
successfully challenged the EU's preference for some ACP fish
exports on the grounds that this discrimination against non-ACP
developing countries was harming their domestic industries. The
situation was resolved through the creation of a specific quota
for these Asian exporters. By extending preferential access to
the EU market, the value of the ACP preferences was reduced, thereby
affecting the profitability of ACP industries.
Options available to ACP States under Cotonou
11. EPAs, linked to support for trade related capacity
building and wider development assistance, are intended to support
ACP countries' integration into the global economy on a more sustainable
basis than continuing dependence on eroding trade preferences.
The intention is to promote structural transformation and diversification
of ACP economies into sectors in which they have a longer-term
comparative advantage. The stated objective is that they should
enhance "the production, supply and trading capacity of
the ACP countries as well as their capacity to attract investment'.
EPAs
12. The Cotonou Agreement provides the framework
for this integration and within it, the ACP and EU have chosen
to negotiate RTAs with self-selected groupings of ACP countries.
To be WTO-compatible, these RTAs must include reciprocity. [See
paras 19-25.] However, EPAs go beyond conventional RTAs, as they
will be negotiated within the broader development framework of
the Cotonou agreement. Any change to current trading arrangements
is of significant concern to ACP countries, as the EU is the major
trading partner for most, particularly African members.
13. The ACP regional groupings and the EU have agreed
to 'roadmaps' for the EPA negotiation[60]
which reflect the 'stepping stone' approach to ACP market opening
to the EU. The first stage in the negotiations is regional
economic integration. The Cotonou Agreement explicitly states
that the new trading arrangements must help accelerate the process
of regional integration among ACP states as a basis for their
further integration into the multilateral trading system. It also
includes a phased approach to ACP tariff reductions to 'remove
progressively barriers to trade between [the EU and ACP] and enhance
cooperation in all areas relevant to trade'.
Alternatives to EPAs
14. LDC members of the ACP already have full tariff
and quota-free access to the EU market under the Everything-but
Arms (EBA) regime. Many LDCs at present choose to use Cotonou
preferences, rather than the theoretically more generous EBA access.
This is because Cotonou rules of origin (ROOs) are more generous
than EBA rules, allowing ACP countries to source inputs (cumulate)
from any other ACP country.
15. Article 37.6 of the Cotonou Agreement states
that, in the case of non-LDC ACP states, all WTO compatible alternatives
should be considered in 2004. The Commission has subsequently
agreed to postpone this review until 2006 at the request of the
ACP. The roadmaps contain opt-out clauses should an ACP region,
or any country within it, wish to pursue an alternative arrangement
instead of an EPA. The Cotonou Agreement states that should this
occur, the ACP country should enjoy no worse market access
to the EU than they currently enjoy under the Cotonou preferences.
Possible alternatives include:
EBA access for all ACP
16. The EU could grant greater preferential access
to ACP non-LDCs through the Generalised System of Preferences
(GSP). The GSP is currently being reviewed with a revised GSP
coming into force in 2006. 'Everything but Arms' (EBA), is an
arrangement within the GSP that gives all LDCs duty and
quota free access to the EU market (including for sugar, rice
and bananas by 2009). A further proposed arrangement within the
GSP, GSP+, will give close-to-EBA access to developing countries
that ratify key international conventions, such as human rights
treaties, ILO conventions and good governance agreements. Extending
EBA access to non-LDC ACPs through either the GSP+ or EBA itself,
would therefore fulfil the commitment in the Cotonou Agreement
that any ACP states unable to enter into an EPA should enjoy no
worse market access to the EU than they currently do. The Government
will work closely with the Commission to ensure that the renegotiated
GSP could be amended to provide a viable alternative to an EPA,
should any country wish not to join one.
17. The UK Government argued strongly for an ambitious
result on market access in the development of the Commission's
negotiating mandate for EPAs and a statement to this effect, supported
by the Danish Government, was annexed to the text.
Bilateral Trade agreements
18. A further option would be for the EU to enter into bilateral
RTAs with those ACP states that choose not to enter into a regional
EPA. However, such an agreement would have to meet the same WTO
rules on RTAs as EPAs. Although the individual ACP state would
have greater scope to tailor the provisions to its specific needs,
a single country would be in a much weaker negotiating position
with the EU than within a regional grouping. Under a bilateral
RTA, an ACP state would neither gain nor cede market access to
other ACP states. This would at best bypass and at worse obstruct
autonomous moves towards greater regional economic integration.
RECIPROCITY IN EPAS
19. NGOs have expressed strong concerns that reciprocal opening
of ACP markets to EU exporters will expose them to unfair competition
in domestic and regional markets and endanger fragile regional
integration processes. Some argue that the ACP should not be obliged
to offer any degree of market opening to the EU.
20. The Government's view is that in the longer-term, prospects
for economic growth and development in ACP countries will be boosted
if they open their own markets. Poor consumers in ACP countries
stand to benefit from cheaper imports, from other ACP countries
as well as from the EU, as do ACP businesses. These gains will
not accrue if ACP states fail to liberalise their economies. However,
neither will they materialise if liberalisation is implemented
without careful consideration of the poverty and social impact
of trade reforms. Social safety nets and transitional assistance
will be essential to cushion the most vulnerable and to assist
ACP producers exploit new trading opportunities.
21. In the framework for the current
round of WTO negotiations agreed in July, LDCs, unlike all other
WTO members, will not be required to make further commitments
to reduce their tariff levels. However, LDCs that join non-LDCs
in a regional ACP grouping to negotiate an RTA/EPA with the EU
will be required to offer a degree of reciprocity to both the
EU and other developing countries within its regional grouping.
22. The coverage and pace of reciprocal
market opening between the EU and ACP under EPAs must comply with
the WTO rules in this area. These rules are contained in Article
XXIV of the GATTS. This includes the coverage of an RTA (i.e.
what % of trade should be covered) and the period over which trade
should be liberalised. However, the actual wording in the rules
on both these issues is vague. With respect to coverage, they
state that RTAs should cover 'substantially all trade'. With respect
to timescale, they state that reciprocal market opening within
an RTA should take place 'within a reasonable amount of time'.
The rules do not preclude asymmetrical reciprocity, that
is, allowing developing countries more time to liberalise and
include less of their trade in the RTA than the developed country
members.
23. As the Commission has acknowledged,
the need for a flexible approach to reciprocity in the design
of EPAs will be critical to their ability to complement ACP countries'
national poverty reduction plans. Further analysis will need to
be done to look at which sectors, and on what timescale, reciprocal
market opening by the ACP would best meet their development needs,
whilst remaining compatible with WTO rules.
24. The ACP have submitted a proposal
to reform these particular WTO rules to clarify the terms of asymmetrical
reciprocity between developed and developing country members of
an RTA. The Commission's view is that the rules already provide
sufficient flexibility for RTAs between developing and developed
countries to take account of the special needs of the latter.
The ACP proposal does indicate that the ACP concern is not necessarily
the principle of reciprocity per se, but the nature of that reciprocity.
25. A further element of 'asymmetric'
liberalisation is that ACP farmers should be protected from import
surges of EU agricultural products, which threaten their livelihoods
and domestic industries (whether unfairly subsided or not). WTO
members have agreed to develop a Special Safeguard Mechanism (SSM)
that developing countries could use for this form of protection.
This mechanism is being developed through the current round of
WTO negotiations and DFID has commissioned the International Centre
for Trade Sustainable and Development (ICTSD) to assist in the
formulation of this concept.
'New Issues' in EPAs
26. Some suspect the EU of using the
EPA negotiations to pursue through the 'back door' the Singapore
Issues (including investment and competition) that will not now
be part of the single undertaking in the current WTO negotiations
(apart from trade facilitation). The European Commission has stated
that regional trading agreements are 'necessarily WTO plus', as
integration at the regional level is both broader and deeper than
at the multilateral level.
27. To ensure that EPAs are true 'tools
for development', the EU must therefore protect the right of ACP
countries to regulate their economies and support, not supersede,
regional progress on these issues. Building on what is happening
within ACP regions, further detailed analysis is needed into how
these issues might best be incorporated into EPAs to help ACP
states benefit from both regional and multilateral trade and investment
flows. Given the sensitivity of investment and competition within
the WTO, the ACP will expect the EU to also understand these sensitivities
in the context of how these issues may be included within an EPA.
28. Inclusion of these issues in an
EPA does present potential gains for the ACP; and a predictable
and transparent set of rules governing investment will inspire
greater confidence in potential investors. The UK already has
bilateral Investment Promotion and Protection Agreements (IPPAs)
with 29 of the 77 ACP countries. Research is now being undertaken,
for example by the Commonwealth Secretariat, to consider how investment
provisions may be most beneficially incorporated into an EPA.
Negotiations on trade facilitation measures within EPAs will need
to complement those within the WTO. This entails an explicit link
being made between the implementation capacities of ACP countries
and the progress of the negotiations in this area. It also means
that the EU will need to support trade facilitation through well
co-ordinated support for technical assistance and capacity building.
Rules of Origin
29. The Government believes that simplification
and improvement of rules of origin are essential to enable all
developing countries to take advantage of the preferences offered
to them. Restrictive and complicated rules of origin (ROOs) not
only reduce the value to developing countries of current preference
schemes, but also inhibit their export competitiveness. LDCs do
not take full advantage of quota and tariff free access to the
EU market under EBA (Everything But Arms), both because of supply-side
constraints and restrictive ROOs. EBA ROOs are the same as those
of the Generalised System of Preferences (GSP) that apply to other
developing countries.
30. Under these ROOs, LDC producers
cannot easily use inputs from any other country if they want to
claim duty free access to the EU market. Lomé/Cotonou rules
are slightly more favorable in that they allow the ACP to source
inputs from other ACP suppliers, but far less so from non-ACP
developing countries. As a result of the restrictive ROOs that
apply to EBA, GSP and Cotonou, ACP clothes manufacturers cannot
buy the best-priced cotton from other developing countries in
South or East Asia. This either increases the cost of their exports
or stops exports altogether. An example of the development gains
of more flexible ROOs is the US AGOA (African Growth and Opportunity
Act) preference scheme. Under a derogation from normal rules,
these ROOs allow eligible African countries to buy from any developing
country. In the case of Lesotho, this has attracted stable foreign
investment in the garments industry. Exports have trebled in three
years, making the industry the largest employer in the country,
especially of women workers.
31. Restrictive EBA ROOs should not
be used as a stick to compel LDCs to join EPAs. To deliver on
the commitments made at the Evian Summit, the EU should ensure
that ROOs 'do not inadvertently preclude eligible developing countries
from taking advantage of preference programmes'. For this to happen,
ROOs must be sufficiently flexible to enable ACP countries to
source inputs from the most competitive source, which may be outside
the EPA region. This is necessary to facilitate the development
of globally competitive industries in the ACP. The Commission
is currently consulting on amendments to preferential rules of
origin and the Government has submitted proposals for their simplification
and improvement.
EU/ACP regional and sub-regional
negotiations
32. EPA negotiations were launched in
September 2002 with an agreement to sequence the negotiations
in two phases. Phase I consisted of negotiations at the all ACP
level addressing 'horizontal' non-country specific issues. Phase
II will consist of region specific negotiations. See Annex
I for details of the self-selected ACP regions. Some in the
ACP wanted the outcome of Phase I be made into a binding commitment
before moving on to Phase II, but this was not agreed to by the
EC. The European Commission did not see any added value in this
approach given that EPAs are part of the binding commitment of
the Cotonou Agreement itself. Discussions at all-ACP level are
continuing in parallel with Phase II through the all-ACP-EC Technical
Monitoring Committee. Dispute settlement and the 'non-execution
clause' have already been discussed. Future discussions will focus
on rules of origin, trade facilitation and sanitary & phytosanitary
standards.
33. Phase II negotiations between the
EC and six regional and sub-regional groupings were originally
expected to start in September 2003, but the last set of negotiations
were launched in the second half of 2004. The process of defining
their negotiating groups has been long and complicated for ACP
states, especially in Southern Africa. This is because of their
overlapping memberships of different regional groups (SADC, COMESA)
and SACU (South Africa Customs Union).[61]
In other cases, the self-designated negotiating groups have broadly
followed the lines of existing regional groups, such as CARICOM
(Caribbean) and ECOWAS (West Africa). The reality of EPAs negotiations
has forced the pace of rationalisation of regional groups - when
choices now have real economic consequences.
34. The initial phase of all six regional
negotiations is focusing on developing regional markets.
This reflects the Cotonou commitment to foster regional economic
integration within the ACP. The EPA negotiations need to help
the process forward, but at a pace acceptable to the different
ACP members. If EPAs are to help promote regional economic integration
on a sustainable basis, the EU needs to recognise that a one size
fits all European model will not work in very different regional
and sub-regional contexts. Substantive negotiations on the content
of the trade agreements will begin early in the New Year.
Challenges for the ACP
35. Besides the complexities of liberalising
trade within emerging regional economic groupings, EPAs pose a
number of challenges to the ACP. Major challenges face the ACP
on substantive trade adjustment issues. They include finding alternative
sources of revenue as tariffs come down; introducing reforms (e.g.
regulating domestic service industries in a way that best suits
their domestic economies); avoiding trade diversion, as EU imports
become cheaper, and addressing underlying supply-side constraints
and the need to diversify their economies.
36. ACP negotiating capacity will
be stretched thin with simultaneous negotiations in the WTO, and
regional trade agreement negotiations with other trade partners
(such as the US) as well as within their regional groupings. Progress
in the Doha Round will have far-reaching implications on the shape
of EPAs. In some areas (e.g. realising the EU's commitment to
eliminate agricultural export subsides), progress in the EPA negotiations
will follow progress in the WTO. The negotiating process will
need to be an organic one that builds on the phased approach of
the regional road maps, and responds to developments in the WTO.
In article 39 of the Cotonou Agreement, the EU and ACP agreed
'to co-operate closely in identifying and furthering their common
interests in international economic and trade cooperation in particular
in the WTO'. The EU should continue to consult and work with ACP
countries to further their integration into the world trading
system and to ensure that a successful outcome to the current
Doha Round is achieved.
Support for Trade Adjustment
37. It is clear that some ACP members,
that are more heavily dependent on EU preferences in specific
sectors, will need additional, targeted assistance to help the
adjustment process. The challenge for the international community,
as set out in the Government White Paper on Trade and Investment,
is to ensure that the transitional assistance, which will be needed
by these countries, is guaranteed, credible and additional, as
well as being delivered in a timely fashion.
38. With respect to reform of the Sugar
Regime, we await detailed Commission proposals, but it is expected
that the EU will offer assistance to those ACP countries most
affected through both aid and trade provisions. EPAs are the most
likely vehicle for the latter. Different sources of finance for
this transitional assistance need to be considered, to make sure
that we meet the White Paper challenge.
39. The European Commission has rejected
the ACP request for additional financial resources to accompany
EPAs. However, joint EC-ACP Regional Preparatory Task Forces (RPTFs)
have been established to ensure that the EU's development
assistance supports the process of change in implementing EPAs.
This will include considering both the priority given to trade
in EDF (European Development Fund) allocations, as well as in
the development assistance of EU Member States and other donors.
DFID will be urging other EU donors to work together to coordinate
their assistance to the ACP as an integral part of their engagement
on EPA issues.
40. The EU has provided €22.8 million
to help strengthen ACP capacity to negotiate effectively. This
has been used to fund over 50 impact studies, confidential to
the ACP, to help inform their negotiating positions. In addition,
the EC is funding Sustainability Impact Assessments (SIAs), which
aim to help both the EU and ACP to frame EPAs in the most developmentally
and environmentally beneficial way. The UK has expressed concerns
to the EC that there is a risk that the approach to the SIAs and
their timing may limit their usefulness in informing the negotiations.
DFID has provided some input to the methodology and stands ready
to contribute expertise, based on its experience of Poverty and
Social Impact Assessments (PSIAs). The ACP will also have access
to the EC's relatively new €50 million trade-related capacity
building facility, 'Trade.Com' for EPA-related initiatives.
UK Support to the ACP
41. DFID is providing support to strengthen
the trade policymaking process in ACP countries through a number
of bilateral, regional and multilateral programmes. These include
£4 million+ to assist sub-Saharan African countries to integrate
trade issues into their poverty reduction strategies and to develop
proactive negotiating positions based on their strategic interests;
£1.6 million to support the Caribbean trade Regional Negotiating
Machinery; and some £270,000 to EPA-specific capacity building
support though the European Centre for Development Policy Management.
42. More generally, DFID is supporting
a new research programme on the Global Trade and Financial Architecture
aimed at generating new ideas on how best to address the adjustment
needs of developing countries to trade liberalisation. This includes
identifying funding mechanisms for trade adjustment and ways of
translating these ideas into meaningful Special & Differential
Treatment provisions within specific WTO agreements. The work
is co-ordinated by a Steering Group chaired by former Mexican
President, Ernesto Zedillo and its membership includes the South
African chair of the WTO Development Committee.
43. DTI and DFID are working closely
together to ensure that EPAs deliver their developmental potential.
DFID is stepping up its engagement on EPAs with the ACP, the European
Commission, other EU Member States, and NGOs in the North and
South. DTI and DFID we are working closely with EC officials and
have participated in various regional meetings to better understand
ACP members' views and the support they require.
44. DFID, in close collaboration with
DTI and NGOs is currently developing a programme of research on
EPAs. Our objective is to contribute to EU and ACP thinking on
how to achieve the best development outcome from the negotiations.
Analysis will be conducted into priority ACP concerns, such as
reciprocity, the inclusion of investment and competition and transitional
assistance. In line with the Government's commitment made before
the Select Committee on International Development in 1998 on the
renegotiation of the Lomé Convention, we will also undertake
technical research into possible alternatives. This analysis will
be shared with ACP members, the Commission and EU partners and
could contribute to more in-depth examination of the alternatives
in 2006, should any ACP country opt out of an EPA.
45. DFID has recently commissioned work
to develop a general framework for analysis of potential regional
trading agreements and will consider a Caribbean EPA as one of
its case studies. DFID is also considering where we might best
complement existing EPA-related technical assistance, in response
to ACP demand. Our aim is to invest resources in providing timely
support to ACP members as they develop negotiating strategies
consistent with their regional road maps.
November 2004
59 Article 1, Cotonou Agreement, 2000 Back
60
Each ACP region has developed a 'road map' for Phase II of the
negotiations. These detail the negotiating structure, priority
issues and indicative schedule of negotiations. Back
61
Malawi, Zambia and Zimbabwe have opted to negotiate as part of
a 16-strong COMESA group; 7 are left in SADC; with 16 in the West
African; 15 in the Caribbean and 14 in Pacific regional groups. Back
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