BEYOND THE RHETORIC OF

ECONOMIC PARTNERSHIP AGREEMENTS

Issues to Be Addressed in ACP-EU

Trade Negotiations

Dr Rob Davies (MP)

Dr Kaire Mbuende (MP)

FOREWORD

As trade negotiators prepare for an onerous and complex set of tasks, we need to ensure that the principle of partnership, which has always been the cornerstone of ACP-EU relations, is paramount. Our joint challenge is to ensure that future trade and economic co-operation arrangements contribute directly to the eradication of the poverty which plagues so many of the 638 million people living in ACP countries.

The negotiations, scheduled to begin in September 2002, offer a real opportunity to establish a comprehensive framework for the structural transformation of ACP economies in ways which will take forward the fight against poverty.

There is - as yet - no consensus on the way forward, and collectively we will need to resolve many difficult questions. In this context, elected representatives from the EU and the ACP have a critical role to play. We must make our voices heard so that during the long negotiations ahead policy makers, and trade negotiators, keep their eyes on the main objective – poverty eradication and sustainable development.

This presents a unique challenge to the ACP-EU Joint Parliamentary Assembly. It is a challenge which Dr Rob Davies MP from South Africa, and Dr Kaire Mbuende MP from Namibia, tackle in this thought-provoking text. As Joint Parliamentary Assembly members and Chairs of their respective Parliamentary Committees dealing with trade and economic development issues, Dr. Mbuende and Dr. Davies have already played active and central roles in monitoring the conduct of trade negotiations with the EU. They have, in addition, promoted and facilitated dialogue between governments and a range of stakeholders concerned with trade and economic development issues. This experience has been brought to bear on the current challenges facing ACP-EU policy makers as they prepare for the opening of negotiations.

I, naturally, welcome this text as a timely contribution, and an excellent insight, to the debate about future ACP-EU trade relations. Our task now is to work together to develop effective tools for development and security. We need to be imaginative and bold, and our over-riding objective should be a deal which contributes directly, and substantially, to the eradication of poverty in ACP countries.

Glenys Kinnock MEP,

Co-President of the ACP-EU Joint Parliamentary Assembly

BEYOND THE RHETORIC OF

ECONOMIC PARTNERSHIP AGREEMENTS

TABLE OF CONTENTS

INTRODUCTION4

THE CASE FOR FUNDAMENTAL CHANGE4

THE CASE FOR JOINING ECONOMIC 8

PARTNERSHIP AGREEMENTS

ECONOMIC PARTNERSHIP AGREEMENTS: 10

A MORE COMPREHENSIVE APPROACH?

PROTECTING THE RIGHTS OF LEAST 12

DEVELOPED COUNTRIES IN FUTURE TRADE

NEGOTIATIONS

RECIPROCITY, FLEXIBILITY AND THE WTO13

RECIPROCITY AND THE IMPACT ON ACP 14

GOVERNMENT REVENUE

INTEGRATING THE EXTERNAL EFFECTS 16

OF THE CAP INTO EPA NEGOTIATIONS

CONCLUSIONS17

ABBREVIATIONS 21

ABOUT THE AUTHORS22
INTRODUCTION

In the run up to the September 2002 launch of ACP-EU negotiations on trade relations, the debate around the future options for ACP-EU development, trade and economic co-operation arrangements is intensifying. In response to increasingly close questioning, the European Commission has developed a number of standard responses on the nature and scope of its proposed Economic Partnership Agreements.

However, detailed consideration of these European Commission responses reveals that they raise more issues than they actually resolve. Many of these issues relate to the likely practical impact of Economic Partnership Agreements under the actual conditions prevailing in ACP countries, rather than the theoretical benefits of free trade between economies of similar sizes and levels of development.

This paper seeks to go beyond the theoretical benefits which Economic Partnership Agreements could bring, to explore the issues which will need to be taken up and addressed if Economic Partnership Agreements are to contribute to the structural transformation of ACP economies in ways which lay the basis for poverty focussed forms of sustainable growth and development. It assumes that the approach underlying the Commission’s recent responses will be reflected in the draft negotiating instructions which the European Commission will submit to the EU Council of Ministers for their approval, in the run up to the formal opening of negotiations in September 2002.

This paper seeks to highlight from an ACP perspective the major issues which will need to be addressed within the future process of ACP-EU trade, development and economic co-operation agreement negotiations, based on the experience of the authors in monitoring and assessing the conduct of the EU’s trade negotiations with South Africa and in the light of the actual reality facing ACP countries.

We see this as an essential contribution to the debate about the nature and structure of future ACP-EU trade development and economic co-operation arrangements, which we believe should be designed to promote the structural transformation of ACP economies so as to lay the basis for sustainable forms of poverty focussed development.

THE CASE FOR FUNDAMENTAL CHANGE

The European Commission believes that the past system of non-reciprocal trade preferences extended to ACP countries has manifestly failed to deliver the expected results in terms of broader economic and social development. For the European Commission the failure of non-reciprocal trade preferences to deliver broader social and economic development lies primarily in the policy failings of ACP governments. It is the over-riding imperative to address these internal policy failings which, implicitly in the Commission’s view, requires a fundamental shift from non-reciprocal trade preferences to reciprocal preferential trade arrangements, which serve to “lock in” policy reforms.

At a superficial level the European Commission’s analysis of the failure of ACP non-reciprocal trade preferences appears to be soundly based. Certainly between 1976 and 1992 the ACP’s share of imports into the EU fell from 6.7% to 3.7%. While ACP exports to the EU grew on average at 2% per annum over the period, exports from Mediterranean and Latin American countries grew at an average of 6% per annum, while exports from Asian developing countries grew at an average of 12% per annum. As a result of these divergent export growth rates, by 1992 Asian countries had replaced the ACP as the main developing country exporters to the EU. This appears to provide a strong case for arguing that Lomé trade preferences failed to promote strong growth in ACP exports and that therefore a new approach is needed. However, there is a logical fallacy at work here. The Commission has taken two facts, the existence of non-reciprocal trade preferences and the relative poor export performance of ACP countries taken as a whole, and has then implied a causal relationship between these two facts. Unfortunately, no attempt has been made by the Commission to assess systematically the underlying factors which have prevented individual ACP countries and regions from effectively exploiting the available tariff preferences or to assess the wider trends which have had such a strong bearing on the overall ACP trade performance. Were the European Commission to undertake such an exercise, a very different set of conclusions would be likely to emerge.

Even simply in terms of the narrow trade picture, it is apparent that the Commission’s prevailing analysis presents a very distorted view of the trade performance of individual ACP countries. Within the ACP, a limited number of ACP countries, exporting a limited range of primary products, dominate the aggregate ACP trade picture. Looking at the trade statistics at an aggregate level thus gives a very distorted picture. In reality the ACP group is highly diverse, with individual ACP economies having widely differing trade performances. In order to capture this reality, it is necessary to dis-aggregate the ACP trade performance. If this exercise is undertaken, then a very different trade picture emerges.

Some 26 ACP countries have enjoyed higher export growth to the EU than the average for Mediterranean and Latin American developing countries. Some 8 ACP countries have enjoyed higher export growth to the EU than the average for Asian developing countries. Certain ACP countries have:

  • developed entirely new manufactured and non traditional agricultural and horticultural exports;
  • expanded significantly the export of existing manufactured goods;
  • experienced export growth rates for certain manufactured exports in excess of the rates achieved by other regions of the developing world.

Areas where an expansion of manufactured exports have been encouraged through high tariff preferences include: textiles (Zambia, Zimbabwe, Ivory Coast, Mali, Madagascar); clothing (Mauritius, Zimbabwe, Jamaica, Ivory Coast, Madagascar, Namibia); furniture (Swaziland, Ghana, Zimbabwe).

Areas where export growth has exceeded the average for developing countries include: wood products (Ghana, Ivory Coast, Cameroon); leather (Nigeria, Kenya, Ethiopia); fish products (Senegal, Mauritania, Mozambique, Seychelles, Ivory Coast, Namibia).

Areas where entirely new exports have been encouraged through high tariff preferences include: Methanol (Trinidad and Tobago); clocks and watches (Mauritius); cortical hormone derivates (Bahamas); cyclic amides (Benin)

In many respects a more appropriate basis for judging the significance of ACP trade preferences would be to look at how individual ACP countries have performed in those areas where they enjoy significant margins of preference. As the EU has acknowledged, the domestic economic and political situation in ACP countries has a more important bearing on trade performance than trade preferences do. In this light the question arises as to whether it is really appropriate to compare the trade performance of the war drained economies of Southern Africa with the trade performance of East Asian tiger economies.

The utility of trade preferences could probably better be measured by comparing the trade performance of individual ACP economies in areas where no preferences are enjoyed, with their trade performance in those areas where significant preferences are enjoyed. On this basis a very different conclusion with regard to the importance of ACP trade preferences can be reached. While ACP exports to the EU as a whole increased in volume terms between 1988 and 1997 by only 3.6% compared to 76% for non-ACP developing countries, in those products where the trade preferences provided margins of preference greater than 3%, the expansion in exports in volume terms was 61.9% - an export performance 17 times better than the general export performance. This suggests that trade preferences played an important role in slowing down the marginalisation of ACP economies within the world economy.

Moving away from the ACP level to the SADC level, we find that, whereas overall SADC exports to the EU in volume terms have declined by 5.4%, in those areas where margins of preference over GSP beneficiaries were greater than 3%, SADC exports to the EU have increased by 83.6%. This suggests that, despite the difficult circumstances faced by Southern Africa in the past decades, trade preferences have helped certain sectors of SADC economies to buck the generally poor trend in overall export performance. Indeed, in those areas where trade preferences are most significant, export growth to the EU has exceeded the average for non-ACP developing countries.

This has been achieved despite the retention in place of tariff and quota restrictions in areas which the EU continues to consider sensitive (agricultural and processed agricultural products) and which happen to coincide with areas where ACP countries have or could develop a real comparative advantage. In Southern Africa those products where market access restrictions remain in place range from off-season seedless grapes to high sugar content value added food products, where the EU sugar regime requires the imposition of supplementary duties based on the sugar content of the value added product.

Overall, this suggests that the debate around the effectiveness of trade preferences is far more complicated than the European Commission approach implies. These complexities need to be carefully considered and taken into account in the formulation of any future trade arrangements to succeed the current non-reciprocal Cotonou trade preferences.

In particular any future ACP-EU trade, development and economic co-operation arrangements should seek to take into account the underlying economic trends which have impacted on ACP economies and to design arrangements to support the structural transformation of ACP economies which will enable them to escape the consequences of these trends.

To date the European Commission’s analysis ignores important underlying trends which will need to be addressed if the structural position of ACP economies is to be transformed. The reality is that the ACP trade picture continues to be dominated by a small range of primary products, demand and prices for which are stagnant or declining. Two vitally important factors need to be taken into account when considering the trade performance of ACP economies, namely that:

  • the Lomé trade preferences provided the ACP countries with either zero or very limited preference over their major competitors for the greater part (by value around 64%) of their exports;
  • ACP exports are more heavily concentrated on poorperforming commodities than those of developing countries as a whole.

According to the Stevens and McQueen[1] study conducted in the early 1990s, only approximately 7% of ACP exports to the EU enjoyed a significant preferential margin (greater than 5%) compared to the tariffs applied to other developing countries. Significantly, since this observation was first made, the growth of ACP exports in areas where margins of preference are greater than 5% has been impressive and these exports now account for substantially more than 7% of total ACP exports to the EU. However, it will take many years before the growth in these new areas begins to have a significant impact on the overall ACP trade picture.

The challenge faced is to establish a basis for future ACP-EU trade relations which is supportive of structural change in ACP economies and which enables them to move away from the production of internationally traded goods with low demand growth and stagnant price trends, towards the production of goods for expanding domestic, regional and international markets, with strong and favourable price trends. The question arises: will the proposed Economic Partnership Agreements be supportive and promote this type of structural change in ACP economies?

This question needs to be carefully considered in the light of the actual realities facing diverse ACP economies and cannot simply be asserted on the basis of general economic theories and assumptions, many of which simply fail to hold water in the case of the specific circumstances of individual ACP economies.

THE CASE FOR JOINING ECONOMIC PARTNERSHIP AGREEMENTS

The European Commission appears to believe that the debate around the benefits of Economic Partnership Agreements has become too narrowly focussed on issues related to access for ACP exports to the EU market. Quite rightly the European Commission has pointed out that market access by itself is not sufficient to boost trade. However, it has gone further by arguing that maintaining and improving ACP trade preferences is not the main purpose of the proposed Economic Partnership Agreements. For the European Commission the wider benefits which ACP countries can gain from being part of a larger integrated economic area with predictable, stable and transparent policies are far more important than any immediate export gains. According to the European Commission the creation of this larger economic area will bring benefits, with regard to:

*the exploitation of economies of scale;

*the development of increased specialisation;

*increased competitiveness;

*attractiveness to foreign investment;

*increased intra-regional trade flows;

*increased trade with the EU;

*increased trade with the rest of the world.

This, it is maintained, will ultimately promote more sustainable forms of economic and social development in ACP countries.

The arguments put forward by the European Commission in terms of the wider benefits ACP countries can expect as a result of concluding Economic Partnership Agreements require careful consideration in the light of both the circumstances facing ACP countries and the wider developments in EU trade policy. Significantly the economies of scale benefits, which the Commission highlights as one of the principal benefits of the proposed EPA approach, can only be gained by ACP countries if measures are set in place to assist ACP countries in comprehensively addressing the supply side constraints currently faced. If existing supply side constraints are not addressed, then ACP enterprises will find it very difficult to realise the economies of scale benefits which production for a large market allows. Clearly, however, EU based companies will face no such constraints on exploiting the opportunities opened up by the creation of larger integrated markets. Indeed, this consideration is at the heart of the EU’s free trade area policy and has been since the launch of the Commission’s 1995 paper “Free Trade Areas: An Appraisal”.