Economic Partnership Agreements - trade.ec.europa.eutrade.ec.europa.eu/doclib/docs/2008/june/tradoc_139093.pdf · Starting point ... 8 Economic Partnership Agreements : drivers of

Economic Partnership Agreements :drivers of development

European Commission

LOUIS MICHELEuropean Commissionerfor Development andHumanitarian Aid

1

I have decided to write this booklet to answer themany questions which I have received on the EconomicPartnership Agreements since I took office as EuropeanCommissioner for Development policy and relationswith the African, Caribbean and Pacific Countries.

I trust that this book will answer most of yourquestions.

Louis Michel

2

Preface

Europe is the largest provider of development fundsin the world with €46 billion distributed per year; thatis around 100 euros per European citizen. This is arole we will continue to play and to strengthen in linewith our commitment to invest 0.70% of our GDP indevelopment aid by 2015. But development policy isabout much more than financial assistance. It is aboutsupporting sustainable integration into the worldeconomy. And based on our experience in Europe andthat of other regions in the world, we believe thatsupporting regional integration in the 78 countries ofSub-Saharan Africa, the Caribbean and the Pacific isan important means to facilitate this inclusion intothe process of globalisation.

The Economic Partnership Agreements (EPA) arepart of this approach. The trade preferences of theCotonou Agreement, while well intentioned, have notsucceeded in their objective of helping to integrate theACP countries into the world economy, nor protectedour trade relationship with ACP from challenge byothers in the WTO. This is why it was agreed, in theCotonou Convention, to replace the Cotonou tradepreferences by WTO compatible trade arrangements.

The new agreements will slowly and progressivelyopen up EU-ACP trade in goods: immediately forACP goods exported to the EU and gradually for EUgoods exported to ACP countries. But EPAs are

3

more than about trade in goods, and trade with theEU. They are about regional integration and otheraspects of trade integration (services, trade-relatedrules).

The aim of these agreements is not to open marketsfor European companies at the expense of ACPproducers, as has been wrongly claimed by some. Onthe contrary, EPAs should help developing countriesto build larger markets, foster trade in goods andstimulate investment. Opening up progressively toneighbouring countries, exploiting economies of scaleand reorganizing their industries will help preparethem for the bigger step of integrating into worldmarkets and taking greater advantage of theopportunities of international trade. For its part, theEU will remove the final restrictions to ACP exports,including in sugar and bananas. And we are changingour rules of origin to ensure that ACP countries canuse in reality the preferences they receive. We firmlybelieve that this is the way forward for developmentpolicy, enabling countries to help themselves to growrather than continuing to grant aid eternally in a"donor-beneficiary"-manner.

At the beginning of 2008, agreements have beenconcluded with countries from five regional blocs.One "full" EPA has been concluded with the wholeCaribbean region, covering all the above areas.Because more time was needed, interim agreementswere concluded with other regions or countries, with

4

negotiations on the remaining areas continuing in asecond phase.

To underpin this policy, the EU will continue to be atthe side of the ACP, on a regional basis as well asindividually, in supporting them as they reform anddevelop. Over the period 2008 to 2013, € 22 billionwill be mobilised in support of the ACP through the10th European Development Fund (EDF), or nearly€ 3.7 billion per year, against € 2.7 billion per yearunder the 9th EDF. €3 billion is pledged from 2010 todevelop economic infrastructures, an essentialcomponent to link regional markets and thus buildthe capacity to trade. €1.8 billion has been earmarkedfor so called Regional Indicative Programmes from2008 to 2013, the largest amount ever spent onregional aid during a similar period through theEuropean Development Fund (EDF) and 60% moreon an annual basis than the amount put aside forregional cooperation over the period 2003 to 2007.This amount will be largely devoted to economicregional integration – such as productive capacity building and regional infrastructurenetworks – and accompanying measures for theimplementation of the EPA, such as compensation ofnet losses of customs tax revenues and trade technicalassistance to reach foreign markets.

Fostering regional integration goes beyond tradeintegration. It is about strengthening regionalpolitical institutions and helping developing countries

5

tackle challenges with transnational issues such asAIDS, the management of natural resources ormigration. Regional integration has a positive role toplay in maintaining peace and preventing conflict,both conditions vital for trade and economicintegration to flourish. That is why EU policies acrossthe board support these goals – from sendingobservers to elections, to helping negotiate peaceagreements to bring conflicts to an end and toproviding aid in humanitarian crises.

The EU's approach to regional integration in the ACPis therefore a comprehensive one. And the EPAs – andthe possibilities they offer of market building andintegration into the global economy – are an integralpart of that strategy.

Louis Michel, European Commissioner for Development

Peter Mandelson, European Commissioner for Trade

6

Table of contents

1. Starting point......................................................8

A. Less than satisfactory results for Lomé preferences (1975-2000) ..................................8

B. Preferences incompatible with WTO rules....11

C. Status quo not a solution .............................14

2. The means: regional trade and development agreements........................................................16

A. Gradual, controlled and mutually advantageous liberalisation..........................16

B. An asymmetric liberalisation........................18

C. A liberalisation fully benefiting the ACP countries ......................................................22

1. Rules of origin ..........................................222. Sanitary and Phytosanitary Standards (SPS) ..23

D. Regional integration, a priority objective ...........24

E. Rules, a fundamental aspect .........................26

1. Investment................................................282. Competition .............................................283. Trade facilitation .......................................294. Public procurement....................................305. Intellectual property...................................31

F. Services: at the service of development .........32

7

3. EPAs and development cooperation ...................35A. Two pillars of the same policy .....................35

B. Substantial increase in development aid .......35

C. The issue of lost customs revenue ...................37

4. The negotiations................................................40

A. A long-standing commitment, often reaffirmed ...........................................40

B. A new WTO exemption was not an option......................................................40

C. The issue of regional configurations ............43

D. Current situation and outlook .....................45

Annex : Situation by region on 1 January 2008................................................................47

8

Economic Partnership Agreements : drivers of development

1. Starting point

A. Less than satisfactory results for Lomé preferences(1975-2000)

The ACP States are increasingly marginalised inworld trade. Thanks to the tariff preferences of theCotonou Agreement, 97% of ACP exports used toenter the EU free of duty. The Cotonou tradearrangements provided more extensive preferencesthan those which the other developing countriesnot classed as LDCs enjoyed under the GSP, thusaffording the ACP a competitive edge. Since 2002,all LDCs have even enjoyed total duty- and quota-free access to the European market under the"Everything But Arms" initiative.

Despite these preferences, the ACP countries' sharein the EU's imports has declined from 7% to 3%since 1975. Trade between the EU and the ACPcountries has continued to grow slowly, even at atime when world trade has been exploding, thegrowth in value of recent years being largelyattributable to the rising prices of raw materials,especially energy.

However, trade with the EU is important for theACP countries: all the ACP regions trade morewith the EU than they do between themselves andthe EU is the main trading partner of most ACPcountries. As the following table shows, Europe

Starting point

9

accounts for some 30% of ACP trade while tradebetween ACP countries in the same area is notmore than 10%.

Source: CEPII, 2007

Exports EU ACP Other Rest of same area ACP world

ECOWAS 31.9% 9.3% 1.2% 57.6%

CEMAC+ 37.4% 0.8% 3.2% 58.6%

COMESA 29.9% 9.2% 4.8% 56.1%

SADC 32.6% 2.1% 4.5% 60.8%

Caribbean 20.0% 8.9% 0.8% 70.3%

Pacific 15.4% 0.6% 0.5% 83.4%

All ACP 29.8% 6.7% 2.5% 61.0%

Imports EU ACP Other Rest of same area ACP world

ECOWAS 37.0% 10.5% 1.3% 51.3%

CEMAC+ 53.5% 1.4% 8.2% 37.0%

COMESA 22.4% 6.4% 2.7% 68.5%

SADC 23.3% 2.5% 4.3% 69.9%

Caribbean 18.1% 5.8% 1.4% 74.6%

Pacific 8.8% 1.3% 0.8% 89.1%

All ACP 27.9% 6.7% 2.4% 63.0%

10


However, with a population of around 730 million,the ACP countries accounted for only 2.9% of the EU'sforeign trade (and 2% of world trade) in 2006. In 2006,European imports from the ACP countries stood ataround EUR 40 billion (against EUR 70 billion fromjust Switzerland with a population of 7.5 million)while European exports to the ACP countries stood atsome 35 billion (against EUR 38 billion to Norwaywith a population of just 4.5 million).

Furthermore, trade is concentrated on a very smallnumber of products:- four products, all of them raw materials, accounted

for more than 50% of ACP exports to the EU in2004: crude oil (26%), diamonds (11%), cocoa (9%)and wood (4%). Nor have we seen anydiversification over the long term. On the contrary,in recent years, the rising prices of energy-producingraw materials has even increased the proportion ofcommodities in ACP exports.

- in the other direction, in 2006, three industrialsectors accounted for more than 50% of EU exportsto the ACP countries: machine tools (29%),transport goods (16%) and chemical products(10%).

Moreover, since 1990, foreign direct investment (FDI)in the developing countries have risen fivefold, noneof it, however, going to the ACP countries, which, interms of both flows and stocks, account for only 3%of European FDI.

Starting point

11

Preferences have nonetheless had a beneficial impact onsome production sectors and export patterns, particularlywhere the preference level was high compared with theGSP. Examples of this are cut flowers in Kenya, fisheryproducts in many coastal countries of West and EastAfrica and the Pacific countries, basic agriculturalproducts such as sugar, bananas and pineapples andprocessed agricultural and fishery products.

However, in overall terms, tariff preferences have notyielded the results hoped for in the development of the ACPcountries and most of those countries which haveexperienced a spectacular development over the last 30years thanks to the dynamism of their exports are notACP countries – and have not enjoyed the benefit ofgeneralised preferences. Furthermore, in the context ofthe general liberalisation of world trade through bothmultilateral (successive GATT/WTO rounds) andbilateral agreements, preferences have been slowly butsteadily eroded. They could not on their own serve as astrategy for the future. This is one of the reasons why, inthe Cotonou Agreement, the EU and the ACP countriesscheduled the expiry of the system of non-reciprocalpreferences on 31 December 2007.

B. Preferences incompatible with WTO rules

Not only broadly ineffective, the preferences granted tothe ACP moreover required a derogation from WTO rulesbecause they did not comply with Article I of GATT on

12


Most Favoured Nation treatment1 and were not coveredby the WTO provision known as the "GeneralizedScheme of Preferences (GSP) Enabling Clause".

According to the Enabling Clause, the developedcountries may grant unilateral preferences to thedeveloping countries. However, these unilateralpreferences must be generalised and extended toall developing countries, the only possibledifferentiation being between the levels ofpreferences for LDCs and non LDCs. Preferencesare thus granted for development reasons and noton a geographical basis or because of political orhistorical links. This principle of non-discrimination is a fundamental pillar of themultilateral trade system, a guarantee of equalitybetween all the WTO Member States2. The fact isthat, in the situation that obtained until 1 January

1 This clause obliges the member countries of the WTO to extend immediately andunconditionally all the advantages granted to one or more WTO Member Statesto all the Member States. It does not apply to the advantages granted in the contextof preferential trade agreements by developing countries, free-trade areas or cus-toms unions.

2 Some have contended that the "Enabling Clause" permitted the non-reciprocity ofcommitments by developing countries. However, beyond what is set out aboveconcerning this clause, the principle of non-reciprocity enshrined in paragraph 5of the clause applies solely in the context of multilateral negotiations. This is mo-reover what the European Commission does in the context of its negotiations in theDoha round, for example when it accords developing countries and the LDCs thepossibility of assuming commitments of a lower level than those of the developedcountries. By contrast, in the context of bilateral agreements between developingcountries on the one hand and developed countries on the other, such as the Eco-nomic Partnership Agreements, the Enabling Clause does not in general apply.There is therefore necessarily reciprocity between the concessions granted to satisfythe GATT rules.

Starting point

13

2008, non-ACP developing countries wereobjectively discriminated against compared withACP countries, some of which are considerablywealthier.

The EU and the ACP countries are bothfundamentally committed to multilateral trade rules.These rules are essential for protecting the poorestand weakest countries, according to the principle"Between the weak and the strong, it is freedomwhich oppresses and the law which sets free".

It was therefore decided that, when the derogationfor the trade provisions of the Cotonou agreementsexpired, a system would be set up which was fullycompatible with the WTO so as to retain and evenimprove the preference granted to the ACP comparedwith other developing countries. This system takesthe form of regional trade agreements inaccordance with Article XXIV of GATTconcerning free-trade areas.

There was no alternative to the EPAs. To respect theprinciple of non-discrimination, the EU could haveconsidered the possibility of bringing the GSPpreferences into line with those of the CotonouAgreement, which would have boiled down togranting the non-ACP non-LDCs the tariffpreferences given to the ACP countries. However, thisoption would have let countries like China or Indiaexport free of duty to the EU while the ACP countries

14


would have had face competition on many fronts andlost many of the competitive advantages they enjoyedin exporting to the EU.

The EPAs thus establish a new type of tradingrelationship between the EU and the ACP countriesbased on a partnership for development, not on thegranting of non reciprocal preferences. While thesubstance of the trade preferences is maintained, theywill no longer be based on an exceptional and nonreciprocal scheme but on a common internationalrule and will thereby be strengthened from the pointof view of legal certainty, itself a decisiveconsideration for traders.

C. Status quo not a solution

In a globalised world isolation is no solution as recentexamples of successful development show only toowell: 40 years ago, South Korea was poorer thanGhana. Today, the per capita GDP of Korea (USD24 000) is, in terms of purchasing power, nearly tentimes as high as that of Ghana (USD 2 800).

Given the persistent poverty, a way had to be found tohelp the ACP countries to develop their trade andenter into a virtuous circle of development. We mustnot bury our heads in the sand: to protect the existingproduction structures is to maintain the existing stateof poverty. Change is needed to create jobs and trade

Starting point

15

is an essential motor of development. The mostvulnerable people must of course be protected and theadjustment costs kept to a minimum but the primaryobjective of the Economic Partnership Agreements isto build new regional and international markets andthereby create sufficient opportunities and markets togenerate a process of investment and growth.

The EPAs thus constitute a new trading instrumentwhich should prove more effective than the existingsimple tariff preferences in achieving the ultimateobjective of development. To quote Article 34 of theCotonou Agreement on the objectives of economicand trade cooperation: "Economic and tradecooperation shall aim at fostering the smooth andgradual integration of the ACP States into the worldeconomy, with due regard for their political choicesand development priorities, thereby promoting theirsustainable development ".

16


2. The means: regional trade and developmentagreements

A. Gradual, controlled and mutually advantageousliberalisation

Trade liberalisation is a means of attainingdevelopment objectives. These objectives can only beachieved if such liberalisation is gradual and controlled.It is of course of capital importance that fragileindustries are protected and given the time to improvetheir competitiveness before prices of imports arereduced.

In this way, EPAs will do much to facilitate tradebetween the EU and the ACP countries in goods andservices, in terms of both imports and exports.However, the opening up of the ACP markets will bevery gradual and will afford enough flexibility toprotect sensitive sectors, especially agriculture, andoffer safeguard mechanisms for coping with unforeseenproblems.

In any case, there is no real competition between theEU and ACP economies: it is the other developingregions that are the ACP countries' main competitorsand the vast majority of the EU's exports consists ofgoods that the ACP countries do not produce. Thecompetition facing the local industries of the ACPcountries, whether well established or nascent, comesfar more from other developing or emerging

The means: regional trade and development agreements

17

countries. The ACP textile industries are threatenedabove all by very cheap imports from countries suchas China, India or Pakistan. At all events, whereverthere is competition (nascent industries or agriculturalproducts which are sensitive for the ACP countries),the EPAs will offer the ACP countries the necessaryprotection.

Having said that, the ACP countries cannot entirelyrefrain from an unavoidable amount ofliberalisation. To rule out any liberalisationcommitment for the ACP countries is also toproceed from the mercantilist principle thatexports are a good thing whereas imports areessentially harmful. This idea is false. The fact isthat the benefits of world trade also come fromimports of cheaper and more competitive inputsand consumer household products; exports are away of diversifying production in order to serveforeign markets and obtain the foreign currencyneeded to pay for these imports.

In addition, opening up to trade encourages thetransfer of technology and stimulates localbusinesses: exposed to competition, they willbecome more efficient. This increased efficiencywill have a knock-on effect on the national orregional economies. Most ACP countries have nobilateral trade balance problem with the EU: Thecoverage rate for their trade with the EU stands ataround 110% every year.

18


It should not be forgotten that, if correctly controlled,opening up to trade is a good thing for development. As arule, import taxes tend to discourage economic activityand development by pushing up the cost of goods thatare not produced locally. Many of these goodsareessential for development, whether it be for productiveinvestment (machinery, IT equipment, vehicles), asproduction inputs (intermediate goods, fertilisers,chemicals) or directly (medicines, water-treatmentsystems). Agricultural inputs, for example, are onaverage, taxed four times more highly in the ACPcountries than in South-East Asia, to the detriment ofboth farmers and poor consumers.

Liberalisation brings down the cost of inputs to localproducers, makes them more competitive and reduces theprices of consumer goods and food products. This realityhas been acknowledged by a certain number of ACPcountries, which have chosen to open up their marketsmore rapidly than required under the WTO rules. Forexample, Mozambique, an LDC, has pledged to open up78.5% of its market from 1 January 2008 and to liberalise82% over a period of 10 years.

B. An asymmetric liberalisation

There is no question of opening ACP markets up to the fourwinds. In the interests of development and a liberalisationthat is compatible with economic and social factors in theACP countries, the EU fully accepts the principle ofasymmetric commitments in the EPA negotiations.


19

The EU has no offensive interests. The agreementsalready initialled enshrine the comprehensive andimmediate opening up of the EU market to all ACPproducts, with transition periods for sugar and rice only.The least developed countries (LDCs) already enjoy thisaccess under the "Everything But Arms" initiative. Thisnevertheless remains the most generous offer ever made ina regional trade agreement. Though already very open,unliberalised trade from West Africa, for example,amounts to EUR 1 billion and that from Central Africato EUR 300 million. And many ACP countriesspecialise in agricultural products, some of whichcontinue to be subject to duties in the EU. The ACPcountries therefore have a lot to gain from the furtheropening up of the EU market. The end of customsduties will mean a substantial saving for producers andcreate major new trading opportunities.

As for the exclusion of sugar and rice, it is only temporary:the market access offered by the EU will thereforeultimately (2010 in the case of rice and 2015 in that ofsugar) enable the ACP countries to export freely theseproducts in which many of them are highly competitive.The opening up of the vast and profitable EU markethas led the Community to denounce the Sugar Protocolunder the procedure laid down in Article 10 thereof. Thisinstrument afforded the ACP signatories3 prices similarto those guaranteed EU producers. With the reform of

3 Barbados, Belize, Republic of the Congo (Brazzaville), Côte d’Ivoire, Fiji, Guyana,Jamaica, Kenya, Madagascar, Malawi, Mauritius, Mozambique, St Kitts-and-Nevis, Swaziland, Suriname, Tanzania, Trinidad and Tobago, Uganda, Zambiaand Zimbabwe.

20


the EU sugar market, European producers will seethis guarantee phased out. ACP producers willtherefore be treated in the same way and benefit fromEuropean internal prices that the EU will remain ableto manage. Moreover, to help them adapt to fallingEuropean prices, the Sugar Protocol countries willbenefit from EUR 1.24 billion in accompanyingmeasures over the period 2007 2013.

The market will be opened up to the ACP countries instages: - until 30 September 2009: the terms offered by the

Sugar Protocol will be maintained and marketaccess improved by increasing the tariff quotas;

- from 1 October 2009 to 30 September 2015: LDCswill have free access to the market (on the terms laiddown in the "Everything But Arms" initiative), theonly restriction being an automatic safeguard clausefor non-LDCs;

- from 1 October 2015: there will be free access to themarket for all ACP countries, with the generalsafeguard clause remaining applicable shouldimports from ACP countries violently destabilise theEU market.

This very extensive opening up has the added advantageof giving the ACP countries a maximum of flexibilitywithout breaching WTO rules. The EPAs comply withArticle XXIV of the GATT, and the EU has acceptedasymmetric opening up so that the ACP countries canprotect their sensitive products.


21

It is for the ACP countries to draw up this list of sensitiveproducts in compliance with Article XXIV of the GATT.In the agreements already initialled, the special protectionafforded such products takes the form of: - the total exclusion of the most sensitive products from the

tariff reduction. Many countries or regions have madeextensive use of the scope for excluding the mostsensitive products from all liberalisation commitments.According to their national and regional interests andtheir development priorities, Côte d'Ivoire, Ghana andthe EAC countries (Kenya, Tanzania, Uganda,Rwanda, Burundi) have thereby been able to definitivelyexclude almost 20% of their market from the scope ofliberalisation. The exclusion covers agriculturalproducts crucial to food security and the income ofrural communities, the products of the industries theyconsider most vulnerable and, in some instances, goodswhose import procures revenue considered essential forthe state.

- long transition periods for reducing tariffs. In theagreements initialled in December 2007, our partnersmade extensive use of the flexibility offered, spreadingthe liberalisation over a period of 10 to 15 years.Mauritius, for instance, chose to open up its marketalmost completely (95.6%) by 2022, therebyacknowledging the benefits of opening up trade. Thisliberalisation will, however, be very gradual, since it willonly have opened up 53.7% of its market by 2017. Thiswill enable the sectors concerned to build theircompetitiveness over the medium and long term.

22


- variable rates of tariff reduction according to a product'ssensitivity. The agreements initialled reflect thispossibility and the commitments already made whenestablishing regional markets, free trade areas andcustoms unions;

- safeguard clauses to protect infant industries, foodsecurity and rural development or any other productionsector in the event of disturbance by imports. All theagreements initialled contain such safeguard clauses.

C. A liberalisation fully benefiting the ACP countries

The EPAs will also give the ACP countries anopportunity to make the most of the market accessoffered by the EU through substantial improvements intwo areas seen by the ACP countries as major obstaclesto the development of their exports to Europe.

1. Rules of origin

Since the ACP countries enjoy preferential marketaccess, it is normal to ensure that it is indeed they whobenefit and that other countries do not have theirgoods shipped via an ACP country with the sole aimof obtaining preferential customs treatment. This iswhy there are rules of origin. Yet these rules shouldnot be so restrictive that they prevent the ACPcountries from taking their place in the internationaldivision of labour and capitalising on their


23

comparative advantages, including tariff preferences. Many ACP countries and some experts considered theCotonou Agreement's rules of origin too restrictive. In theEPA negotiations, the EU therefore adopted aparticularly pro ACP position by agreeing to negotiateand include in the agreements origin rules reflecting theACP countries' development needs and demands. Theresulting rules of origin are markedly more favourable todevelopment. The prospect of better rules in the fisherysector is, for instance, one of the Pacific region's keymotives in pursuing negotiations beyond the interimagreement concluded with Fiji and Papua New Guinea.The criterion of "simple processing" now used for textilesis one of the reasons why Madagascar, an LDC alreadyenjoying free access to the EU market, initialled an EPA.This country, which is not competitive in producingfabrics, will thereby be able to develop its textile industryby importing fabrics and so create wealth and jobslocally, something that is currently difficult under theCotonou or Everything But Arms rules of origin.

2. Sanitary and Phytosanitary Standards (SPS)

These sanitary and phytosanitary standards limit theinvolvement of developing countries in international trade.There can obviously be no question of the EU loweringits standards or taking a more relaxed attitude to importsfrom ACP countries. It is the health of Europeanconsumers that is at stake. The EU is nevertheless fullyaware of the importance of helping the developingcountries meet its sanitary and phytosanitary standards.

24


The EU already provides the ACP countries withconsiderable financial aid in this area and willcontinue to do so. The all ACP programmes of the9th EDF include, for instance, the EUR 28.8 millionPesticides Initiative Programme (PIP) and the EUR46.7 million programme "Reinforcement of theSanitary Conditions of the Fishery Products (SFP)",which is aimed at building the capacity of the ACPcountries to meet European SPS standards forfishery products.

With technical barriers to trade, this issue was apriority in the EPA negotiations. It is not just part ofthe full agreement concluded with the Caribbeancountries but of most interim agreements, too. Theprovisions of the texts initialled include commitmentson the exchange of information, consultations,cooperation and regional integration and cooperationin the competent international bodies.

D. Regional integration, a priority objective

The ACP countries' economies and national markets aresmall and fragmented: the economy of the 78 ACPcountries, which have 730 million inhabitants, is 35 timessmaller than that of the 27 EU Member States. While theACP countries have a combined GDP more or less equalto that of Belgium, their markets remain basicallynational and, therefore, particularly small because mostACP countries have fewer than 5 million inhabitants.


25

There are many non tariff barriers hamperingtrade between neighbouring African countries.Though there is solvent demand, administrativeand transport difficulties deter, for instance,Cameroonian traders from exporting bananas tothe neighbouring Central African Republic. Tradefacilitation is therefore crucial if the ACP countriesare to reap the benefits of regional integration. Thebenefits resulting from economies of scale andspecialisation on the basis of comparativeadvantages have been estimated at EUR 1 billion ayear for Africa alone. Bigger markets, which alsomake the region more attractive to regional andforeign investors, will also have a positive impacton growth.

Promoting deeper regional integration meansbuilding regional markets that become a tangiblelegal reality, capable of attracting privateinvestment to sectors other than natural resources.The objective that the EPAs must help achieve is asituation in which each EPA region is based on asingle market (with a customs union and freemovement of goods) and harmonised regionalrules on services, investment, etc. For Africa, theseregional markets would be a step towardscontinental integration, in line with the Treaty ofAbuja signed by the African countries.

With the EPAs, the aim is not to promote mereregional free trade areas confined to trade in goods

26


but to integrate the economies concerned in depth.Such integration calls for the establishment ofregional systems of economic rules promoting goodgovernance and for the establishment of commonpolicies, according to the partner regions' respectiveintegration agendas.

In addition to the potentially considerable economicgains, the political benefits of regional integrationshould also be emphasised. The European exampleremains a historical exception. Its politicalimplications can nevertheless inspire regionalintegration on other continents, especially in regionsthat have experienced or are experiencing conflictsthat are sometimes extremely long and painful.Regional integration is, by definition, a first steptowards reconciliation and serves to gradually lay thefoundations for closer cooperation. This regionalpolitical stabilisation brings in return economicbenefits in terms of a stable business climate andlower risks.

E. Rules, a fundamental aspect

Growth is built on investment. And investors need rules.Trade facilitation, investment, competition, publicprocurement and intellectual property are thestandards of economic governance, vital to long termdevelopment, that the ACP countries need. What ismore, drafting these rules on a regional basis helps


27

consolidate regional markets that are currentlyfragmented as much by a failure to harmonise rules asby physical (infrastructure) and tariff barriers. Theobjective is not therefore to win preferential access tothe market for European investors. This liberalisationwill come later, when the ACP economies are ready(and attractive).

The EU recognises the current limits of regionalintegration in these areas and the inability of certainregions and countries to make commitments in the shortterm. In this context, a gradual approach is conceivablewhich offers a degree of flexibility to adjust to eachregion's specific difficulties, even if it entails transitionor temporary variable geometry arrangements. The EUwill be particularly careful to take account of regionalagendas in these areas. The aim is to build regionalmarkets before opening them up.

At any rate, no EPA will be signed unless all theparties agree, so there can be no question of the EUimposing these issues on its ACP partners. This isreflected in the agreements already initialled. The fullEPA with the Caribbean contains provisions oninvestment, competition and public procurementprecisely because these subjects concern the region.In other regions these subjects are not covered by theinterim agreements. But the EU and its Africanpartners believe these subjects belong in the EPAsbecause they can serve the development of regionsconcerned and the ACP countries.

28


1. Investment

Investment agreements would offer security toinvestors, be they regional or European. At presentthe ACP countries are not sufficiently attractive toEuropean investors. Solid and transparent rules willhelp persuade them to invest in the development ofstrong and balanced economic sectors outside thetraditional fields of mining and oil.

The Caribbean EPA is the first to contain marketaccess provisions for investment, including investmentin sectors other than services. In a public documenttargeting the private sector4, the region explainedwhat it hoped to gain in terms of predictability andtransparency. It also stressed that the EPA will giveregional investors (for instance, in the tourism sector)preferential access to the EU's single market. Lastly,the region points out that the EPA containsprovisions to ensure that investors observe highstandards with regard to protecting the environmentand workers' rights.

2. Competition

Countries with no competition rules pay more theirimports and for goods and services produced locally.Cartels target such countries and cost the ACP countrieshundreds of millions of dollars. In 1997 it is reckoned

4 Caribbean Regional Negotiating Machinery: What’s in the EPA for the privatesector? 19 December 2007


29

that price agreements between suppliers covered almost9% of the poorest countries' imports. In 1999 cartels inthe heavy engineering sector overcharged Kenya andZimbabwe by 270 million dollars.

The cost of an effective competition policy is thereforenegligible when set against the gains it would bring.Competition policy must not be seen as a luxuryreserved for rich countries. Kenya is a very goodexample: 70% of the national competition authority'soperating costs have been covered by the dismantlingof just one cartel (in the vitamins branch). Setting upregional competition authorities would further limitthe costs and increase the benefits.

Thus, the agreement concluded with the Caribbeanincludes provisions imposing the establishment ofappropriate legislation where there is none,prohibiting the abuse of dominant positions andagreements and fostering exchanges of information.

3. Trade facilitation

Customs procedures engender considerable costs fornational and foreign traders. The EPAs will make tradeeasier by improving communications, cutting red tapeand simplifying customs rules for importers andexporters. The World Bank believes that the ACPcountries stand to gain billions of dollars in this area.It takes, for example, an average of 18 signatures tounload a freighter in Africa, compared with just three

30


in the OECD. It costs as much to clear a ship throughthe port of Dakar as to send it to Europe, and thedelays can add 10% to the cost of ACP exports,namely two to three times as much as the average rateof customs duties imposed by the EU on non ACPcountries. In other words, if the ACP countries are tomake the most of the preferential margins they enjoyover their competitors, administrative and logisticinefficiencies must be reduced to a minimum.

4. Public procurement

Transparent rules on public procurement are a keyfactor in cutting costs. A number of examples suggestthat the savings made average a third of the amountof contracts, thereby freeing considerable publicfunds for development while helping reducefavouritism and corruption. Once again, establishingsuch rules at regional level increases competitivenessand reduces costs. Public spending accounts for asubstantial share of national wealth, and moreeffective public spending makes it possible, at a givenlevel of taxation, to provide more public services(water, sanitation, hospitals) and to invest more inpublic amenities (education, infrastructure).

In the Caribbean EPA, the public procurement provisionsare based primarily on transparency aimed at fosteringthe emergence of a regional market. A rendezvous clausemeans that the scope of the agreement could one day beexpanded by decision of the Cariforum countries.


31

5. Intellectual property

Intellectual property is important for development andthe EPA provisions must cover issues of protection,application, cooperation and policy at regional level.It is clear that poor countries suffer more than othersfrom trade in counterfeit products, such as medicines orspare parts, which have adverse and sometimes deadlyeffects on the people concerned.

The EPA with the Caribbean region guarantees aneffective and appropriate level of protection, in linewith international standards, for intellectual,industrial and commercial property rights and forother rights, such as the protection of geographicalindications. This reduces trade distortions andbarriers and fosters investment and economicdevelopment. The development of a regional capacityto handle intellectual property issues is also covered,based on regional policy in the matter, and there is achapter on innovation to foster exchanges ofexperience, technology and know how.

The mutual recognition arrangements established bythe Caribbean EPA will open up considerable tradingopportunities for the region's countries. They will, forinstance, permit the development of geographicalindications, which are seldom used at present in the

4 Caribbean Regional Negotiating Machinery: What’s in the EPA for the privatesector? December 19, 2007

32


Caribbean and ACP countries in general. Yet suchregional indications, especially if they are identifiedand applied in a regional framework, are a vector fordevelopment in that they enable producers tohighlight the quality and specificities of theirproducts and therefore to "go upmarket" and addvalue to their exports.

F. Services: at the service of development

The need for rules is just as great in the service sector,which remains underdeveloped in most ACP countries.Services are, however, essential to any economy,regardless of its level of development. It is also thesector in which international trade is growing fastest.

Bringing services into the framework of the EPAs mustalso enable discussions to begin on temporary access forACP citizens supplying services in Europe ("Mode 4" inWTO speak), a field in which the ACP countries havemuch to gain and considerable potential. With theCaribbean, the EU has shown itself flexible and receptiveto the region's demands. In this sensitive area it haspledged to open up its market to the contractual servicesuppliers (CSS) in 29 sectors and to independentprofessionals in 11 sectors. This is both a motor withconsiderable potential for the region's development anda major innovation by the EU, which had never beforeaccepted such a level of international commitment in thisarea, either at the WTO or in free-trade agreements.


33

More generally, the liberalisation of certain services,and in particular business services, will help cutbusinesses' costs and develop new skills. Establishingmore transparent, stable and liberal rules on sectorscrucial to development could considerably reduce theexcessive costs currently borne by businesses andconsumers. The excessively high cost of services cansometimes increase the cost of industrial products byas much as 20%. In the Kenyan and Tanzanianmarket gardening sector, transport and servicesaccount for half of all costs: any reduction in thesecosts would be matched by a commensurate increasein the sector's competitiveness and create wealth andlocal jobs. Moreover, it is small countries that bearthe most exorbitant service costs, above all fortransport. It therefore costs more to transport maizefrom Tanzania to Zambia than from the UnitedStates to Tanzania.

The EU therefore considers it in the ACP countries'interests to open up infrastructure service sectors, suchas telecommunications, transport, banking andinsurance. These basic sectors are vital to allbusinesses. They are part of a country's basiceconomic infrastructure and pivotal to itscompetitiveness.

The agreements on services are, of course, reciprocal:in the agreement initialled with the Caribbean, theEU has opened up more than 90% of sectors, creatingconsiderable opportunities for the region's service

34


sectors on the world's largest market. The EU hasgone beyond the multilateral commitments given inthe General Agreement on Trade in Services (GATS),thereby according a preference to countries that havesigned an EPA.

The principles of asymmetry and flexibility are alsoobserved: as a memo published by the regionindicates, the Cariforum countries have partiallyopened up 65 to 75% of their markets, focusing onsectors with the greatest impact on development andthose where the region's need for investment andtransfers of technology and know how is greatest.This opening up is gradual in a number of sectorssensitive for the Caribbean countries.

At any rate, liberalisation will not affect basic servicesto the community: health, education, water, etc. TheEU has made no requests in these areas, and theagreement with Cariforum excludes pubic services,also maintaining exceptions for small and mediumsized enterprises in a certain number of areas.

EPAs and development cooperation

35

3. EPAs and development cooperation

A. Two pillars of the same policy

Financial aid, like the EPAs, should promote thedevelopment of the ACP States. We therefore need to findthe greatest possible synergy between these two pillars ofEuropean development policy. Financial aid isprogrammed in parallel with the EPAs in accordancewith the Cotonou Agreement and the negotiatingdirectives given the Commission by the Member States.It is the Regional Preparatory Task Forces (RPTF) ineach EPA region that have the job of linking thenegotiations and the aid requirements they throw up.

Development financing can stimulate industry and helpcompanies in fields such as compliance with EUstandards. But good rules and reforms are also crucial.The "development" component of the EPAs is muchmore than just extra money: they offer a way to improvethe business environment and diversify the economies ofACP countries. Development financing is only a meansto this end. So it is especially important that the ACPStates incorporate trade related issues into their nationalas well as regional development strategies.

B. Substantial increase in development aid

The 10th EDF (2008-2013), the sole Communityinstrument for financing aid to the ACP States, is 35%bigger than the 9th EDF and stands at almost

36


EUR 23 billion. The 10th EDF regional programmes,which by definition support regional integration andtherefore the EPAs, have been allocated EUR 1.75billion -- twice as much as under the 9th EDF.

Thanks to this overall increase in resources, the focus onother priorities such as health and education can bemaintained while investment under the EPAs ineconomic structures and economic governance can beboosted, which should prevent the ACP countriesfrom being definitively sidelined in the worldeconomy.

Total aid from the Member States to the ACP Statesstood at more than EUR 12 billion in 2005 and this willrise considerably if the Member States fulfil thecommitments they have often repeated.

Drawing on these huge sums, the EU has decided thattrade-related assistance should rise to EUR 2 billion by2010: EUR 1 billion from the Member States and EUR1 billion from the Commission. When adopting the"Aid for Trade" strategy on 15 October 2007 theMember States pledged to devote around 50% of theincrease in aid to the ACP States. In implementing thisstrategy, we must be prepared to make the best use ofthese additional resources. The Commission and theMember States are working to improve synergies andget agreement in the course of the year on regionalpackages of EU trade aid to support the implementationof the full regional agreements that are concluded.


37

If the regions so decide, a new financial instrument(EPA fund) may be created. Depending on specificregional circumstances, an existing instrument couldbe assigned the function of financing support for theEPAs . This would fit well with the priority ofmaking existing instruments – including the EDF –more efficient, and collaboration with the MemberStates and other donors more effective. West Africaand Central Africa are the regions most interestedin this possibility: the interim agreements signedwith these regions, and those with the Caribbeanand Southern Africa, refer explicitly to the settingup of such funds.

But the key is for our partners to take ownership oftrade issues in their development strategies. This isshown by the fact that 31 of the 51 NIPs adopted in2007 contain a trade/EPA component and that thetotal volume of aid for trade in the 10th EDF NIPsadopted to date is EUR 3.5 billion. some EUR 3billion for economic infrastructure and EUR 576million for trade/EPAs and productive sectors, i.e.three times more than the 9th EDF.

C. The issue of lost customs revenue

This is an issue of course, but not one that should beoverestimated. First, we need to look at the netbudgetary impact of the EPAs. That cannot be doneuntil the ACP States' tariff commitments are decided.

38


With the interim agreements concluded with a fewcountries at the end of December 2007 we canbegin impact studies and flesh out our analysis.

In the absence of agreements, most studiesoverestimated the potential problem by supposinga rapid and total liberalisation. However, there willbe long transition periods and customs tariffs willnot be removed from all products. And thebeneficial impact of increased trade flows has tobe taken into account: VAT and customs duties onnew imports, plus a fall in the cost of importedgoods and services, will generate more economicactivity. Lower customs duties will also reduce theopportunities for corruption and trafficking,possibly bringing whole swathes of the economyback into the formal sector. Overall, it is not at allcertain that EPAs will erode public revenue.Indeed, the increased activity generated by theEPAs may well help boost it.

Whatever the case, customs reform in the interestsof better yields is a priority for many countries. Theduties actually collected are usually less than halfof the duties theoretically due. In Ghana the figureis as low as 20%. In Mozambique, after two yearsof reform, the speed of customs throughput wasmultiplied by 40, and customs revenue increasedby 40% while customs duties were significantly cut.Generally speaking, a reform of taxation is oftendesirable and necessary. Too great a dependence on


39

customs revenue is not sustainable and is anindicator of unbalanced public revenue. The EU isready to support these efforts. Its budgetarysupport is the main instrument for supportingreform of public finances. Regional solidarityefforts in the form of special regional funds tosupport such reforms may also be envisaged. Hereagain, the Commission is ready to finance suchfacilities.

40


4. The negotiations

A. A long-standing commitment, often reaffirmed

Let us remember that the date of 1 January 2008 for theentry into force of the EPAs is not an arbitrary one, it isspecified in the Cotonou Agreement. This deadline seemedremote when Cotonou was signed in 2000. While thenegotiations on the substance of most of the EPAs firstgot under way towards the beginning of 2007, thedeadline was known well in advance by all the parties.

This deadline was all the more pressing as any delay waslikely to increase the marginalisation of the ACP States.It was crucial, therefore, to seize the opportunities createdby the new ACP EU trade arrangements to reverse thismarginalisation. The ministerial meetings which tookplace in February and March 2007 for each EPA, theinformal meeting of EU and ACP ministers on 13 March2007 and the final text of the Article 36(4) reviewprovided for in Cotonou, were all occasions where theshared commitment to conclude the negotiations by the endof 2007 was reiterated.

B. A new WTO exemption was not an option

Extending the deadline would have meant putting thefuture of ACP EU trade in the hands of other WTOmembers. A new formal exemption ("derogation")would have been needed to prolong the Cotonou

The negotiations

41

preferences. The other WTO members would havetaken the opportunity to get trade-offs for thisexemption. So the cost of the exemption was likely tohave been intolerable. It should not be forgotten thatthe "derogation" in force until the end of 2007 wasobtained only by dint of concessions to non-ACPcountries, in particular on bananas.

Without a "derogation", the Cotonou preferencescould have been challenged at any moment by anyWTO member that considered itself injured by thesepreferences. A panel, that is a decision by WTOjudges, would have subjected ACP EU trade relationsto unbearable legal uncertainty, and Europeanimporters would have stopped buying to avoid anyrisk.

Action by other developing countries is not beyondthe bounds of possibility. Ecuador, for example, hasalready initiated a WTO procedure against the EUpreferences granted to ACP bananas and, in theabsence of agreements on goods, such procedurescould proliferate, leading to a rapid and verydetrimental erosion of ACP preferences precisely inareas where they bring the greatest benefits.

The only alternative to the EPAs or interim EPAscompatible with WTO rules would be to apply theGeneralised Preferences System (GSP) to the ACPStates, the least developed countries continuing to beeligible for "Everything But Arms" market access. The

42


GSP is much less favourable than the Cotonoupreferences, however. For West Africa, for example,EUR 1 billion's worth of exports to the EU (almost10% of non LDC exports to the EU) would be subjectto higher customs duties, thus entering intocompetition with the exports of other developingcountries. For some countries, the share of theexports affected by tariff increases would be muchbigger, only 1% in the case of Nigeria (15% for non oilexports) but 25% for Ghana, 36% for Côte d'Ivoireand up to 69% for Cape Verde. The hardest hitproducts would be fish, canned tuna, shrimp,pineapples, cocoa butter and paste, bananas,vegetables, aluminium and textiles/clothing.

At this stage, few non-LDCS have not initialled atleast an interim agreement, at this point Nigeria,Congo (Brazzaville), Gabon and seven Pacific States.These countries have therefore been under the GSPsince 1 January. But the commercial and economicimpact is still small. Gabon has announced itsintention to sign an interim agreement, the Pacificcountries in question trade very little with the EU,and the exports of Nigeria and Congo mainly consistof oil and other raw materials not subject to customsduties under the GSP.

But even with this small cost, it is important tounderline the advantages offered by EPAs to non-LDCS as well as LDCs. Admittedly, they will keepEBA market access preferences in any event. But

The negotiations

43

EPAs are not limited to preferences and all theother EPA advantages would be lost, in particularlegal certainty (EPAs are binding internationaltreaties whereas the EBA scheme is a unilateralarrangement), rules, regional integration, access tolarger regional markets and solidarity with theirneighbours. On this point it is significant that anLDC, Haiti, is party to the only full EPAconcluded, that with the Caribbean. Similarly, thecommitment of the four LDCs of the EAC(Eastern African Community) together withKenya (a non-LDC) clearly shows that thesecountries believe in regional integration and theprospects that conclusion of an EPA opens up forthe whole region.

C. The issue of regional configurations

This issue is undeniably complicated. In severalEPA regions, notably East and Southern Africa,there are countries belonging to different regionalorganisations that have contradictory tradeobjectives. This problem of regional formations wasnot caused by the EPA negotiations, it predatedthem. However, decisions taken on the substanceof the EPAs could have an impact on the choicesof ACP countries. Indeed, in a number of casesthere is a clear clash between membership of theEPA negotiating group and membership of theregional organisation. For example, in East and

44


Southern Africa there are three regionalorganisations, each proposing trade integrationand a customs union: the EAC (customs unionsince 1 January 2005), COMESA (scheduled for2008) and the SADC (scheduled for 2010). Somecountries are members of more than oneorganisation. These overlapping memberships willbecome incompatible when the customs unionprojects of COMESA and the SADC areimplemented since it is not possible to participatein more than one customs union, each withdifferent external trade policies. The AfricanUnion has started a consultation process to solvethis problem.

But on this point the principle is clear: the EU isneutral as to the make-up of regional integrationareas, this matter is a sovereign decision of the ACPstates. The EU supports regional integration forthe benefits it offers and seeks to promote practicalsolutions: - As a partner in the negotiations, the EU has

merely tried to draw attention to practical andtechnical constraints and confined itself to that.It pointed out, for example, that a country cannot,as sometimes happens in Africa, be part of twocustoms unions at once.

- The EU believes that less red tape is good foreveryone and that single sets of simple tradearrangements and clear agreements betweenregions are essential.

The negotiations

45

The negotiations have not miraculously solved thiscomplex problem. But the example of Tanzaniashows that they have made some countries thinkabout their interests and make choices. Tanzaniainitially negotiated with Southern Africa (SADC), butwhen the EAC split from the ESA, it joined thisgroup. This was a logical move as the EAC alreadyhas a customs union.

D. Current situation and outlook

Apart from the Caribbean, negotiations on full regionalagreements could not be completed before the expiryof the Cotonou trade arrangements on 31 December. Itwas important, therefore, if we were to maintain tradebetween the EU and the non-LDC ACP States whilecomplying with Cotonou and our multilateral tradecommitments, to conclude trade agreementscompatible with WTO rules. This is why interimagreements were concluded with EPA regions or someof their members.

In turn, the EU kept its promises and adopted on 20December 2007 a market access regulation whichoffered effective duty free, quota free access to theEuropean market from 1 January 2008 to countriesthat had concluded an interim or full agreement. Interms of market access, this has improved thesituation of the 35 signatory countries (see annex),maintained the EBA preferences of the 33 non-

46


signatory LDCs, and applied GSP preferences to the10 non LDCs. Given the nature of the non LDCs'exports (oil in the case of Nigeria, Gabon and Congo)or the small volumes involved (Pacific countries), theeconomic impact of the transfer to the GSP is small.

In regions such as West Africa and Central Africa,where individual agreements have been signed, theinterim agreements are by definition only a first stage.All the agreements concluded include a commitmentto continue negotiations that should lead to a fullregional EPA before the end of the year (June 2009for the EAC). In West Africa the negotiations withCôte d'Ivoire and Ghana, for example, wereconducted with extensive involvement of the regionalorganisations and other regional partners with an eyeto the forthcoming regional negotiations. In no waydo these interim agreements reflect any desire todivide regions; they were designed to offer an solutionto the awkward situation in which some countrieswere likely to find themselves, with the cooperationof all the stakeholders.

Annexe 1

47

Annex : S

ituation by region on 1 January 2008

Signatories

(LD

Cs in

bold)

Non-

signatories(non L

DC

sin bold)

Caribbeans

Antigua &

Barb,

Baham

as,B

arbade, Belize,

Dom

inique, Rép.

Dom

., Grenade,

Guyane, H

aiti,Jam

aïque, StK

itts & N

evis, StL

ucie, St Vinc &

Gren., Surinam

e,Trinité &

Tob.

West A

frica

Côte d'Ivoire,

Ghana

Benin, B

urkina,C

ape Verde,

Gam

bia,G

uinea,G

uinea-Bissau,

Liberia, M

ali,M

auritania,N

iger, Nigeria,

Senegal, SierraL

eone, Togo

Central

Africa

Cam

eroon

Central A

frica,C

ongo, Gabon,

Eq. G

uinea,D

RC

, Sao Tom

e,C

had

East A

frica(E

AC

)

Burundi,

Kenya,U

ganda,R

wanda,

Tanzania

P.m. initially

negotiated in the E

SAfram

ework

Eastern andS

outhernA

frica(E

SA

)

Seychelles,Z

imbabw

e,M

auritius,C

omoros,

Madagascar

Djibouti,

Eritrea,

Ethiopia,

Malaw

i,Som

alia,Sudan, Z

ambia

SouthernA

frica

Botsw

ana,L

esotho,Sw

aziland,N

amibia,

Mozam

bique(5)

South A

frica(T

DC

A),

Angola

Pacific

Fiji, P

NG

Cook Islands,

the Solomon

Islands,K

iribati,M

arshallIslands,M

icronesia,N

auru, Niue,

Palau,Sam

oa,Tonga,T

imor,

Tuvalu,

Vanuatu (13)

Documents

Economic Partnership Agreements - trade.ec.europa.eutrade.ec.europa.eu/doclib/docs/2008/june/tradoc_139093.pdf · Starting point ... 8 Economic Partnership Agreements : drivers of