CHAPTER 5: TRADE AND DEVELOPMENT
76. In line with our remit to scrutinise European
Union policy, we have taken this opportunity to consider two areas
of EU trade policy in detail: support for trade facilitation in
developing countries; and Economic Partnership Agreements. As
outlined in chapter two, the foundation of our approach is that
liberalisation has brought benefits to developing countries—an
approach supported by Mr Laurent who told us LDCs would be
able to generate funding to tackle domestic needs through trading
activity (Q 85). In addition, we note that Articles 177-181
of the EC Treaty require the Community and Member States to foster
sustainable economic development in developing countries.
77. Developing countries' share of world trade
has risen from 27% to 40% in the last twenty years, but the Least
Developed Countries' share is still below a peak of 1.5% achieved
in the 1970s despite recent increases (Q 98). However Lord
Mandelson, in his role as European Commissioner for Trade, and
Professor Winters commented that a lot of civil society (e.g.
non-governmental organisations) had turned against international
trade as a tool for development (QQ 28, 252) and Fairtrade
told us that the benefits of liberalisation did not accrue evenly
across the population of poorer countries (QQ 179, 204).
Ms Francis used a sporting analogy: cutting tariff barriers for
LDCs had been the equivalent of putting them on the tennis court,
but they had never been given lessons in how to play the game
(Q 346).
Aid for Trade
BOX 6
Aid for Trade
| Many poor countries lack the basic infrastructure to take advantage of opportunities resulting from trade liberalisation. The Doha Ministerial Declaration included technical support and trade capacity building as part of the development objectives of the Round, and at the December 2005 Hong Kong Ministerial Conference a new WTO work programme on Aid for Trade was created, and the WTO was subsequently given a monitoring and evaluation role.
In theory, the phrase "Aid for Trade" should only apply to work that is overseen through a WTO programme agreed under the Doha Round, but in practice it is already being applied to ongoing aid projects.
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78. Dr Razzaque noted that liberalisation
would not by itself bring growth in exports to poorer countries:
he gave the example of Vietnam, which has shown an export growth
rate much higher than that of Kenya, Tanzania or Bangladesh despite
having similar tariff regimes. He explained that other economic
policies were responsible for Vietnam's growth and also noted
that the country's economic diversification had allowed it to
move away from dependency on tariffs for tax income (Q 99).
In many LDCs, the priority for government and aid spending has
until now been improving health and education and increases in
trade capacity have been ignored (Q 349).
79. Most support and funding directed towards
developing countries for trade development is now being listed
under the "Aid for Trade" umbrella and this has generated
confusion (QQ 80, 92). Fairtrade's research into funding
under the heading had found a huge range of projects that had
been funded, including some infrastructure works—such as
road building—which would have previously been funded as
general development support and were not exclusively trade related
(QQ 184, 195). They had also found that funding was often
focused on big projects and larger companies and rarely reached
smaller producers (Q 184). Mrs Glenys Kinnock MEP noted
that some Member States were yet to match their promises to provide
support with actual commitments of cash (p 241).
80. Fairtrade noted that developed countries
had introduced Aid for Trade just two days before the Hong Kong
meeting because they hoped they would be able to use it as a "bargaining
tool" with poorer countries, and were not really committed
to the concept (Q 184). Dr Supachai was concerned that
this was still the case for some WTO participants (Q 402).
Professor Evenett suggested that this area was a risk for
the WTO: it had a convening role and was seen as the face of Aid
for Trade even though decisions on how much funding should be
given and on what it should be spent were not its responsibility
(Q 80). However Mr Lamy said it was the Organisation's
role to promote the principle, and it was an issue on which the
Organisation would lose influence should the Doha Round fall (Q 417).
81. Several witnesses put forward suggestions
for how Aid for Trade funds should be targeted. Professor Evenett
and Dr Mendoza said that funds should be available to help
countries develop their supply-side capabilities (i.e. to help
them produce and transport export goods) and adjust to changes
in the world economy (QQ 63, 424). Fairtrade also highlighted
the supply-side constraints that smaller producers face but cautioned
that support for producers could be counter-productive: over-production
of coffee had depressed world prices in the past and damaged smaller
producers (Q 179). Specific practical examples of barriers
to trade were supplied by Ms Francis: a lack of sanitary and phytosanitary
organisations to certify exports, and of refrigeration at ports
and airports to store products awaiting shipment; a lack of information
about niche markets which could be exploited; and a lack of knowledge
of how to produce business plans (Q 350, pp 3, 5). Dr Mendoza
added that poorer countries also lacked the ability to carry out
the "real implementation" of trade agreements; for example,
many did not have a suitable institution to enforce commitments
under agreements on Intellectual Property (Q 427).
82. Mr Kamall MEP and Mr Laurent agreed
that funds should support economic diversification but Mr Laurent
added that this would require Aid for Trade to be more "creative"
than it has been to date (QQ 92, 224). Dr Mendoza emphasised
that developing countries should have a say in how money granted
to them should be spent (Q 424). Mr Kamall MEP also
supported expenditure on infrastructure; private enterprise was
unlikely to pay for this as it could not guarantee a long-term
return on investment (Q 210). Ms Francis added that infrastructure
alone would not provide a solution and that EU Member States should
encourage bodies such as UK Trade & Investment[27]
to provide more advice to potential exporters in developing countries
on how they can work with European importers and on basic issues
such as packaging requirements (QQ 351, 353).
83. Dr Mendoza also suggested that Aid for
Trade should include funding to help developing countries participate
more fully at the WTO, including the Dispute Settlement Mechanism
(Q 424). Ms Francis added that the private sector in developing
countries was often left out of decisions about spending priorities
and aid providers needed to do more to identify their needs (Q 351).
84. The Commission supported the principle of
Aid for Trade: Lord Mandelson, in his role as European Commissioner
for Trade, suggested that funds could be used to encourage poorer
countries to trade with their neighbours, as this would generate
economies of scale which would act as a "magnet" for
foreign direct investment (Q 253). The Government supported
the WTO's role as Aid for Trade convenor, and praised the Organisation's
work to galvanise donors, but stated that it was not the right
forum in which to hold donors to account (Q 580). Mr Thomas MP,
Under-Secretary of State for Trade and Consumer Affairs, told
us that the EU had committed to spend €2 billion per year
on Aid for Trade by 2010 but cautioned that some Member States
had been "late to the issue" (QQ 589-590). He highlighted
infrastructure constraints (including road, rail and power supplies)
and the need to reduce and harmonise customs procedures as areas
to which the Government had targeted funding (Q 590). He
also agreed that there was a need for donors to work with all
stakeholders within a country, and NGOs, to ensure that money
was spent effectively (Q 591).
85. Support for trade capacity building in
Least Developed Countries and other developing nations is required
in order to allow these countries to benefit from liberalisation.
While we congratulate the Government for their leadership role
to date, we are concerned that Aid for Trade has been in many
cases no more than a rebranding of existing or pre-planned development
aid. Funds should be directed towards tangible infrastructure
improvements and support and advice for potential exporters and
associated domestic supply chains.
86. Aid for Trade must not be allowed to become
a bargaining chip in multilateral trade talks: developed countries
should recognise the benefits of capacity building in Least Developed
Countries regardless of whether multilateral talks are continuing.
Economic Partnership Agreements
BOX 7
The history of Economic Partnership Agreements
| Under the 1975 Lomé Convention between the EC and African, Caribbean and Pacific (ACP) countries, the EC gave substantial trade preferences as well as aid and investment to the ACP signatories. While this was primarily aimed at the former colonies of European countries, the number of ACP signatories rose as the Convention was revised and expanded in the 1980s. In the 1990s, the WTO Dispute Settlement Body ruled the Convention incompatible with WTO rules. As a result it was replaced in 2000 by the Cotonou Agreement, a broader aid and development agreement between the EU and ACP countries.
The principal difference, in terms of trade, between the Lomé Convention and the Cotonou Agreement was the ending of non-reciprocal trade agreements between the EU and the ACP countries: reciprocal Economic Partnership Agreements (EPAs) would be introduced instead. However, Least Developed Countries in the ACP could instead choose to trade under the terms of the EU's "Everything But Arms" initiative: this gives them duty and quota free access to European markets on all products other than weapons. The Cotonou Agreement stated that the Economic Partnership Agreements would come into force in January 2008; however the Agreements were not finalised by this deadline and, on the whole, remain outstanding. The Cotonou Agreement also states that the EPAs should be signed on a regional basis (via the East African Community, the Southern African Development Community, the Central African Economic and Monetary Community, the West African Economic and Monetary Union, the Caribbean Forum of ACP States, and the Pacific region).
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87. Many witnesses were critical of the EU's
approach to the EPA negotiations. Ms Page and Dr Stevens
described the draft agreements as "a mess" (Q 18).
While they acknowledged that some of the delay had been because
the ACP participants were happy to take their time (Q 16),
they suggested that the Commission officials able to make policy
decisions had not been engaged in the negotiations until early
2007 (Q 17); and because the Commission had been slow to
make its position clear, ACP countries had been unable to draw
up negotiating strategies or consider applying for an alternative
trading status (QQ 22, 25).
88. Mrs Kinnock MEP criticised the Commission
for initially treating the EPAs as "conventional free trade
negotiations based on market opening, rather than tools for development".
She highlighted research findings that the Agreements will decrease
ACP exports to the EU by €6.5 billion per year by 2035 (p 3).
Fairtrade told us that the Commission had not involved its development
staff in the process until NGOs had put pressure on them to do
so in the last two years (Q 201).
89. Professor Winters highlighted the proposed
EPAs' complexity and the amount of the developing countries' limited
negotiating capacity they had taken up (Q 46); this problem
was confirmed by Ambassador Mathurin (Q 533). Mrs Kinnock
MEP, Mr Laurent and Dr Supachai noted that the EU had
taken the chance to reintroduce some of the Singapore issues despite
their removal from the WTO agenda (p 1, QQ 100, 403). He
added that some proposed texts required market opening at a pace
quicker than that felt suitable by the developing countries, which
either needed more time for their domestic industry to adjust
or were currently dependent on tariffs for government funding
(Q 101). Mr Kamall MEP agreed that the EU had been too
aggressive, giving an example from the proposed Caribbean EPA
that states that the signatories are not allowed to have ownership
restrictions, thus ruling out joint ventures between local firms
and overseas organisations (Q 217).
90. Dr Mendoza outlined research that the
ICTSD had undertaken on the content of the proposed EPA with Caribbean
countries, and the contrasts with the bilateral agreements which
the EU had negotiated with developing countries in the recent
past. He had found that the EPA would grant the Caribbean countries
deeper and more stable access to EU markets and longer periods
to phase out tariffs than the previous agreements. The EPAs required
more commitment from the developing countries in the areas of
intellectual property, services and investment (Q 429).
91. Ambassador Mathurin discussed her country's
EPA. The Jamaican government believed the Agreement would help
modernise the country's economy and raise living standards. However
it also came with many challenges such as increased competition
for the country's exports and an uneven distribution of benefits
within the country's population. The Ambassador estimated that
the combined cost to Caribbean nations of implementing the EPA
(i.e. the policy and regulatory changes and loss of tariff revenue)
would be €400 million (QQ 520-522).
THE REGIONAL APPROACH
92. The provision in the Cotonou Agreement requiring
negotiations on a regional basis was particularly criticised.
Witnesses suggested that this "divide and rule" approach
put pressure on states to work together in a way that they were
not used to doing (QQ 20, 46). Fairtrade noted that regional
blocs required countries which were otherwise approaching war
to work together (QQ 186, 197), although this had not been
an issue in the Caribbean where countries used to working together
had achieved more in the negotiations (QQ 197, 200). Mr Erixon
questioned the approach as poorer countries had little to gain
from accessing each others' relatively small markets (Q 291).
Mr Kamall MEP noted that the Commission was attempting in
its negotiations to "almost replicate" the EU and create
regional assemblies (Q 219). More practically, we heard that
draft regional texts did not cover products of significance to
some countries in that region, and were inconsistent with public
pronouncements on the subject (QQ 18, 197). We have also
noted during our scrutiny of the interim texts published to date
that there are significant issues arising from the overlapping
membership of regional associations in Africa.
93. We were alarmed to hear from Mr Laurent
that some countries felt that they had no choice but to enter
into an EPA because the alternative—a loss of duty-free
entry into Europe for products—would be "an economic
disaster" (Q 103). Dr Supachai said that this had
led to divisions between those countries able to agree to the
terms offered to their region and those still wishing to negotiate
(Q 403). Mrs Kinnock MEP stated that the Commission
had thus "splintered" the regions, with some countries
liberalising trade with the EU before liberalising trade with
their regional neighbours; she supported stronger regional trading
relationships (pp 3, 5).
94. Professor Lehmann was in favour of poorer
countries working together within their regions. Although the
EPA process had been venomous (Q 469), he highlighted the
fact that Sub-Saharan Africa was experiencing a population explosion
and it was important to make the region as economically efficient
as possible. He was concerned about the possibility of a trade
diverting "economic trade war" between China and the
West in Sub-Saharan Africa (Q 476).
95. We welcome the recent decision taken by members
of the Common Market for Eastern and Southern Africa (COMESA),
the East African Community (EAC) and the South African Development
Community (SADC) to form a unified trade bloc covering 26 countries.
THE COMMISSION AND GOVERNMENT'S
VIEWS
96. We discussed some of the comments of other
witnesses with Mr Douglas Brew, Expert/Negotiator, DG Trade,
European Commission. He said that the LDCs in each region had
felt under no pressure to sign an agreement as they knew that
they would benefit from Everything But Arms and this had undermined
efforts by the regional groupings to commence their work. He emphasised
that the EU did not want to put countries under any pressure to
negotiate and had extended the offer of duty- and quota-free access
to countries outside the LDC category while negotiations continued.
He admitted that the atmosphere in 2007 had become "very
poisonous" but said that progress had been made this year
since the need to meet an immediate deadline had been removed.
Mr Brew emphasised that the Commission would not press any
region into commitments they were unwilling to accept (Q 160).
Another target for the Commission was the promotion of "value
added" product processing in ACP countries rather than them
exporting unprocessed raw materials (Q 161).
97. Mr Brew also defended the decision to
work with regional groupings; the Commission hoped that it would
encourage countries within the regions to work together on trade
facilitation and speed the flow of goods through ports (Q 161).
The Commission saw itself working with the regional groupings
over an extended period of 15-20 years and did not see the EPA
signing as a one-off event but the catalyst for continuing development
(Q 162). Ms Koke added that the Commission would support
regional free trade areas within the ACP countries and hoped that
the EPAs could promote these (QQ 163-164). Lord Mandelson,
in his role as European Commissioner for Trade, said the promotion
of regional development strategies was at the "philosophical
and policy core" of the EPAs and was "a better development
paradigm" and "a more modern 21st Century approach to
combining development and trade strategies" (Q 253).
He conceded that countries did not want to be "told what
to do" by the EU and that there were political tensions between
countries which hindered economic integration (Q 254).
98. Mr Thomas MP, Under-Secretary of
State for Trade and Consumer Affairs, admitted that the negotiating
process had been "bumpy", in part because of disagreements
between Member State governments over the EU's position. In hindsight
these difficulties had had a silver lining: trade and development
issues had been promoted to prime and finance ministerial level
which was "enormously helpful". He also noted that the
EU had overestimated the negotiating capacity of the ACP countries.
He welcomed the introduction of the EPAs and said they had two
major benefits: duty- and quota-free access to European markets
for developing countries outside the LDC classification, and improvements
to the Rules of Origin (QQ 583-586). (Rules of Origin are
explained in Box 8, below) Lord Mandelson, Secretary of State
for Business, set out why regional integration was a "key
part of development strategy: "when you are considering different
locations in which you might want to invest you are going to go
for bigger markets and economies which are joined and have fewer
barriers between them" (Q 613).
99. As part of our scrutiny function, we have
considered the Caribbean, West African, Central African and Southern
African interim Economic Partnership Agreements. We have noted
that the proposed African Agreements do not cover every country
within the blocs; the Commission has chosen to press ahead with
those countries that are able to sign. In their explanatory memoranda
for the documents, the Government emphasises that it is working
with those African states which have not signed up to ensure their
concerns over the Agreements are dealt with.[28]
100. While scrutinising these documents, we have
noted that the Government have significant concerns regarding
the Southern African interim EPA. The interim EPA covers only
some of the states within the existing Southern African Customs
Union (SACU), and thus has the potential to disrupt the customs
union, with implications for regional integration. South Africa,
the largest SACU member, has not initialled the interim EPA and
the Government is concerned about the feasibility of free circulation
of goods in the union. The SACU agreement also prevents members
from concluding new trade agreements without the consent of all.[29]
This issue highlights the difficulties posed by the regional approach
when there is no unanimity within the region.
101. In their Explanatory Memoranda, the Government
also highlight concerns raised by some African countries over
the inclusion of "Most Favoured Nation" clauses in the
interim EPAs. These clauses would require the ACP countries to
offer the same trade terms to Europe as they wish to offer to
any other trading partner. They are not required for the Agreements
to comply with WTO rules.
102. The Commission's initial handling of
the EPA negotiations was far from perfect, but improvements have
been made. In particular we welcome the extension of the offer
of duty-free, quota-free access to negotiating partners to remove
the pressure of time on the talks. The desire to encourage ACP
countries to work together in regional blocs is commendable and
we hope it will lead to lower tariffs within the blocs.
103. Where the regional approach is clearly
not working we recommend that the Commission scales back its hopes
for integration and instead works with individual countries: this
could take place within a common framework which would enable
any future regional integration. The Commission should also do
more to explain its reasons for this regional approach to its
critics.
104. We recommend that the Government monitor
the remaining negotiations closely and provide the House with
regular Written Statements on the progress towards agreement of
the remaining EPAs, and in particular the steps they are taking
to ensure that signatories are satisfied with their content.
Rules of Origin
BOX 8
Rules of Origin
| "Rules of Origin" are the tests applied to an import to determine where it was produced, for tariff purposes. The exact rules vary from country to country, and they are used to avoid third country exporters circumventing an import tariff by sending their products via a partner in a country against whom the importing country levies a lower tariff or higher quota. Tests that are applied include an examination of whether there has been a substantial transformation or the degree of local content in the country from which the import is arriving.
|
105. Dr Gasiorek called on the EU to make
the rules of origin "significantly easier" for developing
countries (Q 44). Mrs Kinnock MEP supported the World
Bank and Commission for Africa recommendations that the EU should
apply a "value added" rule of 10% to ACP imports, allowing
African producers to import low-cost inputs, undertake some work,
and then qualify for duty-free access (p 5).
106. Ms Koke told us that work is continuing
on reform of the rules of origin (Q 175). Lord Mandelson,
in his role as European Commissioner for Trade, told us that he
would favour more simplicity and flexibility in the rules in order
to allow firms in developing countries to undertake final production
of products before they are exported to the developed world. He
said that this, tied with the trade facilitation support provided
under Aid for Trade, would allow developing countries to become
part of a global supply chain and would encourage these countries
to move away from reliance on exports of raw materials. However,
his pro-trade stance had met opposition from European industry
which feared that increased flexibility would lead to very small
transformations (the Commissioner gave the example of simply adding
a garment label) being sufficient to meet the Rules and which
would thus expose European markets to goods from major developing
countries channelled through the smaller countries (Q 253).
107. Lord Mandelson, in his role as Secretary
of State for Business, noted that the Government had a similar
view but recognised the potential loopholes that "big exporting
countries, and China … comes to mind" would seek to
exploit (Q 609). He added that "some within the European
Commission arguably have yet to be fully persuaded of the virtues
of their revision" (Q 611).
108. While the detail remains to be finalised,
we support in principle moves towards a more flexible Rules of
Origin regime for LDCs.
The EU and development
109. Thus far in this chapter we have considered
three specific trade and development issues to which many witnesses
referred. However, we also sensed an underlying theme to witnesses'
criticism of the Commission's policies on trade and development,
which we now discuss. This theme was one of a lack of coherence
in trade and development policy: supportive measures were undermined
either in their own poor execution, or by other policies. For
example, criticism was levelled at the Commission's and the Government's
approach to supporting developing countries' trade negotiations:
Ms Page said that the EU had tried to be present at the meetings
of ACP regions when they were planning their EPA negotiating strategies
(Q 22). She suggested that training should instead focus
on how a government trade department might work.
110. Mr Brew did not accept this criticism.
He said that the Commission studied what each country required,
funded their attendance according to their needs, and was "very
very conscious" of the need to support the countries. He
noted that the EU traded more with Switzerland than with the entire
ACP region and that commercial interests were not driving EU support
for these countries or their development programme more generally
(Q 168). Mr Kamall MEP noted that NGOs provided advice
to smaller countries and did not always have a pro-liberalisation
agenda (QQ 216-217).
111. Professor Winters and Dr Gasiorek
were particularly critical of the EU's attitude and rhetoric towards
developing countries, as demonstrated specifically by the EPA
process and its failure to follow through on proposals to reform
the rules of origin (Q 47). Professor Evenett agreed
and suggested that the EU could help build relations with the
"rising emerging powers" who sometimes see "the
WTO as the 'Western Trade Organisation'" (Q 64). He
also called for more funding towards support for developing countries
at the WTO (QQ 70-71).
112. Dr Supachai told us that a valuable
role for the EU and its Member States would be to provide more
support to those countries that are relatively poor but do not
qualify for LDC status. While LDCs were targeted for support,
there was a risk that some lower "middle income" countries
would drop into the LDC category as they were being largely ignored
by the developed world. The high level of support for LDCs was
such that some feared graduating from the category (QQ 398-399).
113. Fairtrade was concerned that the advocates
of sustainable trade within DG Trade were drowned out by their
colleagues whose role was to promote European business interests:
"the real issue is business. There is a lot of talk about
development but it does not happen" (Q 190). The ITC
also cautioned the Commission against the use of trade policy
to meet other objectives, such as environmental policy, and warned
that the emergence of private standards, such as the Soil Association's
suggestion that air freighted imports should not receive organic
certification in the United Kingdom, was undermining the EU's
"well-intentioned pro-development" trade initiatives
(p 4).
114. Ms Koke explained that DG Trade's Trade
& Development Unit's remit is to look at how DG Trade can
ensure that policies relevant to sustainable development are "being
served optimally" by the EU trade policy. She said that trade
should be part of a country's wider development strategy including
the development of social security systems and improved infrastructure
(Q 155). Sustainable development was defined by the Commission
as broad economic and social development, rather than in simple
environment terms (Q 169) and we heard some examples of how
poorer countries are taken account of when other policies are
being considered. The EU has never taken a trade defence measure
against an ACP country and, in the likely event of a complaint,
would consider development issues in balance with the economic
interests of the complainant (QQ 170-172). We were also told
that all bilateral agreements are subject to a "trade sustainability
impact assessment" which examines the knock-on effects on
LDCs before the agreement is concluded. This is made available
to negotiators and is designed to ensure that no proposals will
be agreed if they have a deleterious effect (QQ 174-175).
115. We asked Lord Mandelson, as Secretary of
State for Business, whether he accepted that development policy
in the Commission suffered from effectively being the subject
matter for more than one DG.[30]
He told us that he did not think it was the case and described
the "alliance" that he had had with Commissioner for
Development Louis Michel (Q 613).
116. We are satisfied that the Commission
continues to work towards the EU's Treaty-based objective to support
sustainable development of developing countries. We are also reassured
that DG Trade and DG Development work together to consider the
development implication of trade and liberalisation decisions.
However, the Commission could do more to promote its development
work.
27 UK Trade & Investment is a Government organisation
with responsibility for marketing the UK overseas, promoting British
exports and attracting inward investment. Back
28
The interim and "stepping stone" EPAs are documents
7505/08, 8012/08, 11852/08, 11862/08, 11913/08, 11958/08, 11959/08,
13314/08, 13386/08. The Government's Explanatory Memoranda are
available at http://europeanmemorandum.cabinetoffice.gov.uk/search.aspx Back
29
Explanatory Memorandum 13314/08, 13386/08, submitted by the Department
for International Development, 10 October 2008. Back
30
DG Development leads on development and relations with ACP countries.
DG Trade, DG Enlargement and DG External Relations also handle
development issues. Back
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