Economic Partnership Agreements Between the EU and Africa: The Importance of Trade and Development - PDF

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International Food & Agricultural Trade Policy Council IPC Issue Brief 23 July 2007 Economic Partnership Agreements Between the EU and Africa: The Importance of Trade and Development 1616 P Street NW,
International Food & Agricultural Trade Policy Council IPC Issue Brief 23 July 2007 Economic Partnership Agreements Between the EU and Africa: The Importance of Trade and Development 1616 P Street NW, Suite 100 Washington, DC / USA / tel / fax / Economic Partnership Agreements Between the EU and Africa IPC finds practical solutions that support the more open and equitable trade of food & agricultural products to meet the world s growing needs International Food & Agricultural Trade Policy Council All rights reserved. No part of this publication may be reproduced by any means, either electronic or mechanical, without permission in writing from the publisher. Published by the International Food & Agricultural Trade Policy Council Layout and Design: Yvonne Siu Membership of the International Food & Agricultural Trade Policy Council Piet Bukman (Chairman), The Netherlands Marcelo Regúnaga (Vice-Chairman), Argentina Bernard Auxenfans, France Malcolm Bailey, New Zealand Joachim von Braun, United States David Blackwell, United States Csába Csáki, Hungary Pedro de Camargo Neto, Brazil Luis de la Calle, Mexico Leonard Condon, United States H.S. Dillon, Indonesia Cal Dooley, United States Franz Fischler, Austria Michael Gifford, Canada Tim Groser, New Zealand Shannon Herzfeld, United States Carl Hausmann, United States Jikun Huang, China Nicolas Imboden, Switzerland Rob Johnson, United States Hans Jöhr, Switzerland Timothy Josling, United Kingdom Rolf Moehler, Belgium Raul Montemayor, Philippines Nestor Osorio, Colombia Carlos Perez del Castillo, Uruguay C. Joe O Mara, United States J.B. Penn, United States Michel Petit, France Per Pinstrup-Andersen, Denmark Henry Plumb, United Kingdom Caspar Ridley, Switzerland Eugenia Serova, Russia Hiroshi Shiraiwa, Japan Jiro Shiwaku, Japan James Starkey, United States Jerry Steiner, United States Robert L. Thompson, United States Carlo Trojan, The Netherlands M. Ann Tutwiler, United States Ajay Vashee, Zambia July 2007 Economic Partnership Agreements Between the EU and Africa: The Importance of Trade and Development 1 T he European Union has longstanding trade and development ties with its members former colonies, referred to as a group as the ACP African, Caribbean and Pacific countries. The found ing treaty of the European Community of the original six member countries, The Treaty of Rome of 1957, included a provision to extend cooperation with some 22 countries and territories, all of which still had colonial ties to EC member states. In 1964, the Yaounde Convention was signed between the EC and some eighteen independent African states, followed by Yaounde in 1969 with some eighteen African states. The Lome Convention signed in 1975 included a number of substantial changes. With the UK having joined the EC, the Lome Convention was negotiated with some forty-six African, Carribbean and Pacific Countries, thus including Commonwealth countries. Moreover, the Lome Convention instituted unilateral EC trade preferences to the ACP, whereas up until 1975 the emphasis had been on reciprocal free trade. The basic provisions were not significantly altered through the various Lome Conventions: Lome II ( ); Lome III ( ), and Lome IV, which ran from , although the number of ACP signatories increased every five years. 2 While building on the preceding Lome Conventions, the signing of the Cotonou Agreement in 2000 with 77 ACP countries signaled a number of important changes in EC-ACP relations. On the trade front, it was agreed that the EC would negotiate Economic Partnership Agreements with regional groupings to be concluded at the end of 2007, an objective which was confirmed by the May 2007 ACP-EC Joint Council of Ministers, despite acknowledgement by both sides that the negotiations are behind schedule. The EPA negotiations are taking place at the same time as the multilateral Doha Development Round negotiations, and in fact are covering more territory, including the so-called Singapore issues (investment, competition, government procurement) in addition to trade facilitation, which were dropped from the Doha Development Agenda due to opposition from developing countries. Moreover, the EPA market access negotiations unlike the Doha Negotiations - are from applied rather than bound tariff rates and require commitments also from least developed countries. With the exception of a FTA established with South Africa in 1999, these are the first free trade areas the EU is negotiating with Sub Saharan African countries. The US embarked on FTA negotiations with the Southern African Customs Union (SACU), but these talks were put on hold after insufficient progress was made. The EPAs which will be free trade areas - are a novel and ambitious chapter in EU-ACP trade relations, and as such involve considerable challenges. Some six months prior to their planned conclusion, major issues remain outstanding, among them market access and accompanying measures, in particular development finance and EPA related adjustment costs, and it is possible that a framework agreement is concluded by the end of the year in order to meet the deadline, but that some outstanding issues will be dealt with as part of a built-in agenda. Critics of EPAs have argued that it is inappropriate to set up free trade areas between a group of developed and developing countries. This paper focusing primarily on Africa - will examine the major trade elements of the negotiations and argue that a more ambitious approach may in fact serve the ACP countries well. However, this is not because African countries stand to gain a lot of additional access to the EU market. Rather, the major potential benefits would result from their own liberalization and regional integration. It would be wrong, however, to expect that liberalization alone can integrate Africa into the world economy, promote 1 This paper was finalized by Charlotte Hebebrand following discussions of a previous draft at the IPC plenary meeting held June 2-3, 2007 in Lusaka, Zambia. Economic Partnership Agreements Between the EU and Africa sustainable development, and contribute to poverty eradication. The reality is that the very significant supply constraints that continue to exist in Africa cannot be overcome through trade liberalization alone. Trade Issues What can the EU offer in market access? The ACP already enjoys good market access to the EU, which places the EU into a bit of a bind since it is not able to offer significant market access incentives for concluding the EPAs. Among the 77 ACP countries, there are 41 LDCs and 36 developing countries and each EPA grouping includes both developing and least developed countries. All LDCs, including those in the ACP, already benefit from the EU s Everything But Arms Scheme (EBA). Adopted in 2001, the EBA provides duty free access to imports of all products from LDCs except arms and munitions. Imports of certain commodities were phased in for bananas (January 2006), and are still being phased in for sugar (July 2009) and rice (September 2009). The EBA does not include any quantitative restrictions with the exceptions of tariff rate quotas, which are being enlarged annually in sugar and rice until they are completely liberalized. The EBA was incorporated into the EU s GSP scheme, where it is now one of five arrangements, and clearly the most far-reaching. 3 ACP LDCs therefore do not stand to gain from an EPA as far as increased access to the EU market is concerned, since they already enjoy the EU s most generous preferences. The EU s announcement of April 4, 2007, that it is prepared to extend EBA status also to the non- least-developed ACP countries is a welcome development, since it provides that set of countries with improved market access as a result of concluding an EPA. A number of EU member states originally called for this step but it was not included in the final Council Mandate for the negotiations, which demonstrates the sensitivities on the European side. Although the ACP developing countries presently enjoy better preferences under the Cotonou Agreement than other non-acp developing countries under the EU s four non-eba GSP arrangements, and around 98% of ACP exports to the EU already come in duty free, 4 there are remaining restrictions on sensitive temperate zone agricultural products and sensitive processed products. 5 Longstanding commodity protocols between the EU and the ACP for sugar, bovine meat and bananas represent another set of trade preferences while these also provide duty free or reduced duty market access to the EU for a set amount of imports, they also guarantee the payment of EU level prices. The Cotonou Agreement states that the Parties agree on the need to review the commodity protocols in the context of the new trading rules, so as to make them WTO compatible, but also with a view to safeguarding the benefits derived from them. The banana protocol is already being dismantled following several successful WTO challenges against it. The sugar protocol provides quota-restricted duty free access and the beef quota provides quota restricted access with reduced special duties and both offer the internal EU price, although those prices have declined due to CAP reforms. Beneficiaries of the commodity protocols will possibly end up with larger or no quotas, but also with tougher competition and further declines in price. Although the EU s offer to extend EBA market access to all ACP countries is to be welcomed, it will be important to accompany it with improved rules of origin than those presently in place for EBA beneficiaries, which are in fact more strict than those presently applying under the Cotonou Agreement. The less favorable rules of origin under the EBA arrangement versus Cotonou has in fact led some ACP LDCs to export under the July 2007 Cotonou Agreement rather than EBA. 6 While rules of origin for the EC s different preference schemes vary, they all extend to products wholly obtained in the beneficiary country and products derived from the donor county of origin, i.e. a product from Europe, which is processed in an ACP country, does have coverage under the preferences. Products from third countries processed or manufactured in an ACP country are only considered as originating from an ACP country if they have undergone sufficient processing or manufacturing. What constitutes sufficient processing or manufacturing varies not only among the EC s different preference schemes but also within them, i.e. they can differ among different chapters of the EC s customs code and even within different tariff headings within those chapters. These requirements can be in the form of technical criteria, added value or other economic criteria or a change in tariff heading. 7 The EPA rules of origin should allow for regional cumulation of origin, which allows products manufactured in or with inputs from two or more EPA grouping countries to qualify for preferential market access, and thus fosters regional integration. Moreover, given the plans to establish an African Economic Community by the year 2028, this cumulation of origin should also apply to all countries in the four African EPAs. The fact that EPA groupings include both LDCs and DCs, and these categories may end up with different access to the EU market, such rules for cumulation of origin risk becoming complicated. Although rules of origin are intended to ensure that preferences for beneficiary countries are not exploited by third countries by requiring a substantial value added in the beneficiary countries, and thus have been thought to foster greater processing in developing countries, the evolution of global trade and the rise of global value chains necessitates a rethinking of this requirement. Technological advances in information, logistics, and production have enabled corporations to divide value chains into functions performed by foreign subsidiaries or suppliers and to become more footloose. The availability of real-time-supply-chain data has allowed for the shipping for large distances not only of durable goods, but also components for just-in-time manufacturing and important for developing countries such as those in Africa perishable goods. The result has been the rapid growth of intra-industry trade network trade relative to the more traditional inter-industry trade of final goods and services. In this environment, it is hard to imagine that the future of Africa s economic development can be isolated from these networks. 8 This network trade has led to an increasing number of globally dispersed production systems, and often encompasses labor-intensive goods, including apparel and food. What this means in practice, therefore, is that if the value added requirements in rules of origin are not lessened, Africa risks being left out of this increasingly important trade network. Put in other words, rules of origin that are intended to encourage high domestic value are outdated in today s world of global sourcing. The debate surrounding this reality is demonstrated by the US trade preferences for African countries under the so-called African Growth and Opportunity Act (AGOA) enacted in The impressive increase in African apparel exports to the US stem from the third country fabric provision, which contrary to the EU rules of origin - allows African countries to use fabric from third countries in their garment production. Originally set to expire in September 2007, the provision has been extended until The European Commission stated in a March 2005 Communication that it planned to draw up new simpler rules of origin scheme. A major announced change is that the new scheme will use the added value test as its most important way of assessing what constitutes a sufficient amount of processing or manufacturing. Given Economic Partnership Agreements Between the EU and Africa the changes in global processing and trade, the EU would be well advised to set low value added thresholds for its new rules of origin. The Blair Africa Commission report proposed a simple 10% value added criterion for the EU s new scheme. 10 A recent study by the Overseas Development Institute shows that the current value added thresholds used under the Cotonou Agreement tend to be much higher than the actual value added taking place in low-income countries, and argues for a significant downward revision of added value percentage requirements. 11 The EU should be encouraged to include a simplified set of rules of origin for the EPA regional groupings. Such a simplification should encompass a reduced administrative burden on recipient countries, allow for cumulation of origin among all countries in an EPA region, but also allow more liberal use of products from third countries or conversely, relaxed requirements on the amount of processing or manufacturing that is required in ACP countries. The World Bank has also stressed the importance of simple rules of origin, which would increase the benefits of preferences by making several export products competitive in the European market. 12 Regional Integration While market access gains to the EU for African countries may be limited, the negotiations focus on regional integration may well be a much more important benefit. The EPAs are being negotiated between the EU and regional groupings among the ACP countries; by negotiating with groupings that already are or will commit to establishing regional free trade areas or customs unions, the EU is emphasizing the need for South-South integration given the limitations posed by small and segmented markets. Through this regional approach, the EU wishes to foster the integration of the ACP into the world economy, provide for economies of scale, stimulate investment and lock in required trade reforms. Greater regional integration for political but also economic purposes in Africa is certainly not a new idea and has been seen to be a viable instrument for increasing Africa s economic and bargaining power. The Organisation of African Unity (OAU) adopted the Lagos Plan of Action in 1980, which was complemented in 1990 with the Treaty establishing the African Economic Community (AEC). With the aim of promoting economic, social and cultural development as well as economic integration, the AEC Treaty called for the AEC to be set up by the year 2028 in stages via coordination, harmonization and the progressive integration of the activities of existing and future regional economic communities (RECs) as building blocks. Existing RECs were the Arab Maghreb Union (AMU), the Economic Community of Central African States (ECCAS), the Common Market of Eastern and Southern Africa (COMESA), the Southern African Development Community (SADC) and the Economic Community of West African States (ECOWAS), and there are now some 14 RECs. As pointed out by the FAO, despite the multiplicity of groupings, however, African regional groupings have not been very effective in creating trade and economic growth. Among the reasons cited by FAO are the following: Intra-regional trade in Africa as a share of total foreign trade has traditionally been low compared to other regions. Most African states have suffered from severe macroeconomic disequilibria, foreign debt service bur dens, over-valued currencies, lack of trade finance, and a narrow tax base, with customs duties a sub stantial source of revenue. The protective import substitution strategies adopted by most countries since independence resulted in a host of regulations restricting trade such as licensing, administrative foreign exchange allocation, special taxes for acquiring foreign exchange, advance import deposits etc. July 2007 Thus the economic context has been unfavorable to the development of regional commitments. The design of African integration schemes around inward-looking industrialization meant that the eco nomic costs of participation for member states are often immediate and concrete (in the form of lower tariff revenues and greater import competition), while the economic benefits are long-term and uncer tain and are often unevenly distributed among member states. The dominance of a few countries and the huge disparities in size among members of regional group ings led to concerns about the distribution of benefits. Regions have found it difficult to address the equitable distribution of gains and losses from integration. Mechanisms to provide compensation to the less developed members of groupings have been either absent or ineffective. The dependence of many African countries on their former colonial powers tended to work against vi able regional groupings. The importance of North-South linkages (Franco-African and Commonwealth links and various Lomé Conventions) may have distracted commitment from intra-african groupings. Regionalism has been driven from above by public sector organizations and has lacked the support and involvement of the private sector and the general public. Cooperation has been seen as involving bloated and expensive bureaucracies, rather than opportunities for growth and development. Institutional weaknesses, including the existence of too many regional organizations, a tendency to wards top-heavy structures with too many political appointments, failures by governments to meet their financial obligations to regional organizations, poor preparation before meetings, and lack of follow up by sectoral ministries on decisions taken at regional meetings by Heads of State. Integration is hampered by the existence of weak states and political opposition to sharing sovereignty. Integration arrangements are not characterized by strong supranational bodies and virtually all integra tion institutions are intergovernmental. 13 In 2004 the United Nations Economic Commission for Africa painted a picture of mixed performance, indicating that some regional economic communities had undergone substantial liberalization, with others falling short and called f
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