Trade traps Why EU-ACP Economic Partnership Agreements pose a threat to Africa s development

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Trade traps Why EU-ACP Economic Partnership Agreements pose a threat to Africa s development TOGO I EPA zones in Africa: Southern African Development Community (SADC) Angola, Botswana,
Trade traps Why EU-ACP Economic Partnership Agreements pose a threat to Africa s development TOGO I EPA zones in Africa: Southern African Development Community (SADC) Angola, Botswana, Lesotho, Mozambique, Namibia, Swaziland, Tanzania Central Africa (CEMAC) Cameroon, Central African Republic, Chad, Congo (Republic of), Equatorial Guinea, Gabon, São Tome and Principe West Africa (ECOWAS) Benin, Burkina Faso, Cape Verde, The Gambia, Ghana, Guinea, Guinea-Bissau, Côte d Ivoire, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone, Togo Eastern and Southern Africa (ESA) Burundi, Comoros, Congo (Democratic Republic of), Djibouti, Eritrea, Ethiopia, Kenya, Malawi, Mauritius, Madagascar, Rwanda, Seychelles, Sudan, Uganda, Zambia, Zimbabwe MOROCCO WESTERNT SAHARA A ALGERIA LIBYA EGYPT CAPE VERDE MAURITANIA SENEGAL GAMBIA GUINEA BISSUA SIERRA LEONEN GUINEA LIBERIA COTE D'IVOIRE MALI BURKINA FASO EQUATORIAL GUINEA NIGER NIGERIA C ON REP. OFF CONGOO GABON CHAD CENTRAL AFRICAN REP. SUDAN RWANDAD BURUNDI DEMOCRATIC REPUBLIC OF CONGO UGANDA ERI TANZANIA REA ETHIOPIA KENYA DJIBOUTI SOM IA SOMALILAND SEYCHELLES COMOROS ECOWAS ANGOLA ZAMBIA MALA UE AR CEMAC ESA SADC NAMIBIA BOTSWANAA LESOTHO SWAZ. M M MAURITIUS SOUTH AFRICA 19 F 39 fighting poverty together Trade traps Why EU-ACP Economic Partnership Agreements pose a threat to Africa s development Contents Acronyms and abbreviations Executive summary 1 Introduction 2 EPAs: the European Commission s main arguments 3 EPAs: the impact of reciprocity on development and poverty reduction in Africa 4 EPAs: the impact on African government revenues and public services 5 EPAs: investment and other Singapore issues 6 EPAs: the impact on African regional integration 7 EPAs: the negotiations are flawed 8 EPAs: the alternatives 9 Conclusions and recommendations References fighting poverty together 1 Acronyms and abbreviations ACP Africa, Caribbean and Pacific group of countries IMF International Monetary Fund ADB African Development Bank IPA investment promotion agency AU African Union KACFC Kenya Agro-Chemicals and Food Company BIT Bilateral Investment Treaty MDG Millennium Development Goal CAP Common Agricultural Policy MIGA Multilateral Investment Guarantee Agency CEMAC Central African Economic and Monetary Community NAFTA North American Free Trade Agreement COMESA Common Market for Eastern and Southern Africa NIC Newly Industrialising Countries CPA DRC EAC EBA EC ECOWAS EPA ESA EU FAO FDI FTA Cotonou Partnership Agreement Democratic Republic of Congo East African Community Everything But Arms initiative European Commission Economic Community of West African States Economic Partnership Agreement Eastern and Southern Africa (Economic Partnership Agreement group) European Union Food and Agriculture Organization (United Nations) Foreign Direct Investment Free Trade Agreement OECD PTA RTA SADC SADCC SAP SDT TDCA UNCTAD Organisation for Economic Co-operation and Development Preferential Trade Area for Eastern and Southern Africa Regional Trade Agreement Southern African Development Community Southern African Development Co-ordination Conference Structural Adjustment Programme Special and Differential Treatment Trade, Development and Co-operation Agreement (EU-South Africa) United Nations Conference on Trade and Development GATS General Agreement on Trade in Services UNDP United Nations Development Programme GATT General Agreement on Tariffs and Trade UNECA United Nations Economic Commission for Africa GDP Gross Domestic Product VAT Value Added Tax ICOUR ICSID Irrigation Company of the Upper East Region (Ghana) International Centre for the Settlement of Disputes WAEMU WTO West African Economic Monetary Union World Trade Organization 2 fighting poverty together Trade traps Why EU-ACP Economic Partnership Agreements pose a threat to Africa s development Executive summary Proposed Economic Partnership Agreements (EPAs) between the European Union and African, Caribbean and Pacific (ACP) countries constitute a major threat to poverty reduction and development. They will: construct new and unfair trade rules by creating free trade areas between the EU and regional groupings of ACP countries reduce the policy space that ACP countries need to develop their economies and eradicate poverty lead to significant losses in ACP fiscal revenues lead to de-industrialisation in ACP countries undermine African regional integration grant European corporations greater rights over African economies. This report challenges the European Commission s argument that free trade EPAs are the only way to meet WTO requirements and to integrate African countries into the global economy. Developing countries have a right to special and differential treatment under WTO rules: any new trade agreement between the EU and ACP countries must preserve and expand this right. New research by ActionAid in Ghana and Kenya refutes the European Commission s argument that EPAs would aid poverty reduction and promote sustainable development. On the contrary, reciprocal trade liberalisation under EPAs would lead to a decline in manufacturing and agro-industrial development. Agroprocessing industries, such as the Ghanaian tomato and Kenyan sugar industries are particularly vulnerable. Eliminating tariffs would create significant revenue losses for a typical sub-saharan African government leading to either severe cutbacks in public services or increased taxes on poor people. The EU is using the EPA negotiations to push through agreements on investment, government procurement and competition policy that developing countries rejected at WTO negotiations in These agreements would reduce the policy space available to African governments. EPAs threaten regional integration, a central plank of African development strategy since political independence. This strategy has sought to ameliorate the economic problems created by the colonial fragmentation of Africa into many nation states with little economic coherence. The EPAs configuration process has created new regional groupings that are inconsistent with, and undermine, existing African economic and political blocs. Reducing regional integration to trade liberalisation undermines the broader socio-economic and political objectives of existing bodies. ACP concerns have been marginalised while the European Commission has employed divide-and-rule tactics in the EPA negotiations. The European Commission ignored ACP concerns during the first phase of the negotiations and continues to meddle in internal ACP negotiation processes under the guise of capacity building. There are viable alternatives to EPAs, such as extending the Everything But Arms scheme to all ACP countries or revising WTO rules to allow for truly pro-poor and prodevelopment EPAs. ActionAid calls on British and European governments to change the European Commission s EPA negotiating mandate, and withdraw demands for reciprocal trade liberalisation and agreements on the Singapore issues. Both EU and ACP countries must push for the reform of WTO rules to allow for pro-poor and pro-development trade agreements between developing and developed countries. The European Commission must begin an immediate examination of all possible alternatives to EPAs. fighting poverty together 3 1. Introduction Three decades after the first Lomé convention set the trading relationship between the European Union and African, Caribbean and Pacific (ACP) countries, new economic partnership agreements (EPAs) are being negotiated that constitute a major threat to poverty reduction efforts and the development prospects of some of the world s poorest countries. New research by ActionAid in Ghana and Kenya shows that the proposed EPAs would harm African industrialisation efforts by forcing fledging industries to compete with established European corporations. Lost revenues from indiscriminate and premature trade liberalisation would create a strain on government finances and public services. EPA investment agreements would restrict the ability of African governments to pursue nationally prioritised economic and social objectives. Trade with the EU is very important for Africa. The EU is a far more important market for Africa than the US or Japan. 1 For historical reasons, the EU is sub-saharan Africa s single largest trading partner, receiving about 31% of Africa s exports and supplying 40% of its imports. 2 Between 1975 and 2000, trade between the EU and ACP countries was governed by the Lomé conventions, 3 which granted ACP countries better access to the EU market than other developing countries. 4 The preferences granted to ACP countries under these conventions were non-reciprocal: ACP countries did not have to extend similar or other preferences to the EU in return. This was based on the recognition that, because of the vast differences in economic development between the EU and ACP countries, any fair trade arrangement between them had to treat ACP countries differently. With the expiry of the Lomé preferences, the EU and ACP countries signed a cooperation accord known as the Cotonou Partnership Agreement (CPA) in 2000, which provides for the negotiations and establishment of new trade agreements between the EU and regional ACP groupings by 1st January EPA negotiations are one set of a series of bilateral negotiations taking place in parallel to the multilateral WTO talks. 5 The growing influence of developing countries at the WTO, particularly of larger countries such as China, India and Brazil, has made it more difficult for the EU and US to dictate terms to the rest of the world. 6 As a result both economic superpowers have increasingly focused on bilateral and regional trade negotiations in order to secure new markets for their goods and services and obtain concessions from poor countries that would be difficult to achieve at the WTO. EPAs are premised on the assumption that indiscriminate trade liberalisation and market deregulation are best for achieving development. This model of development was forced upon many developing countries in the 1980s and 1990s through policy conditions imposed by the World Bank and the IMF, with disastrous consequences. 7 Under this model, the number of people living below the poverty line continued to rise rather than decline, with 1.2 billion people in the developing world living on less than US$1 a day by In Africa, the number increased from 217 million in 1987 to 291 million (46% of the total population) in Stevens, C. and Kennan, J. (2004) Comparative Study of Preferential Access Schemes for Africa, Report on a DFID-commissioned study, IDS: April 2004, p Hinkle, L. and Schiff, M. (2004) Economic Partnership Agreements between Sub-Saharan Africa and the EU: a development perspective, World Economy, Vol.27, Issue 9. 3 They remain in place under a WTO waiver until December 2007 when they must either be replaced by another trade agreement or be extended through another WTO waiver. 4 Guaranteed quotas and prices and/or duty free market access, in certain agricultural products, especially sugar, beef and bananas. 5 There are 6 EPA regions in total: 4 for Africa, 1 for the Caribbean, 1 for the Pacific. 6 Although rich countries still do their best to get their way by using dirty tricks and underhand tactics. See ActionAid (2004) Divide and Rule: the EU and US response to developing country alliances at the WTO. 7 On the failure of the Washington Consensus see, Kohsaka, A. (2004) New development strategies: Beyond the Washington Consensus, Palgrave, Macmillan; Stewart, F. et al (1987) Adjustment With a Human Face, UNICEF, New York; UNCTAD (2002) Economic Development in Africa, UNCTAD, Geneva. 6 World Bank (2001) Attacking Poverty, Oxford University Press, Oxford. 4 fighting poverty together Trade traps Why EU-ACP Economic Partnership Agreements pose a threat to Africa s development In a series of studies, Harvard University economist, Dani Rodrik, has shown that there is little evidence that trade liberalisation is correlated with economic growth. He has shown that whilst no country has developed successfully by turning its back on international trade, none has developed by simply liberalising its trade either. The critical balance lies in each country adopting its own trade and investment policies and strategies, in line with its development needs. 9 A growing body of evidence supports Rodrik s work. For instance, the Africa Economic Report 2004 concludes that trade liberalisation alone will not boost growth and poverty reduction in Africa. 10 Instead, the report argues that the successful integration of Africa into the world economy will require better-educated and healthier workforces, improved economic and political governance, better quality infrastructure, and dynamic trade policies, including gradual and targeted trade liberalisation. A recent report by the United Nations Conference on Trade and Development (UNCTAD) draws a similar conclusion. 11 Trade liberalisation plus enhanced market access does not necessarily equal poverty reduction: most poor countries undertook extensive trade liberalisation in the 1990s, and also received some degree of preferential market access from developed countries, but performed dismally in reducing poverty. UNCTAD warns that if past trends continue, the poorest countries in the world will continue to lag behind the rest in 2015, the year by which the international community hopes to halve the proportion of the global population living in extreme poverty. Evidence from successful developers including the US, UK, other European countries and the Asian tigers shows that protecting infant industries was an important part of early trade and industrial policy. 12 Careful use of protection together with other policies to encourage backward and forward linkages, learning and adoption of technology will be needed by African countries to overcome the many market failures that exist in their economies. Successful developed countries did not accept the economists notion of fixed comparative advantage in producing and exporting particular goods; rather, they developed comparative advantage as they went along. For example, Taiwan was transformed from a tiny Japanese colony in the 1940s to a global leader in steel and micro-processors in a single generation. Successful development needs a dynamic, long-term policy approach, which Africa will lose if it locks itself into free trade with Europe. ActionAid believes that trade and markets can be important instruments for achieving economic development and poverty reduction. But they must be managed fairly to enhance opportunities for the poor and to protect the vulnerable. ActionAid calls for the demands for full reciprocal trade liberalisation and negotiations on investment, competition policy and public procurement to be dropped from the EPA negotiations. Alternatives to EPAs must be sought. 9 See Rodriquez, F. and Rodrik, D. (1999) Trade Policy and Economic Growth: A Sceptic s Guide to the Cross-Country Evidence, Centre for Economic Policy Research, Discussion Paper Series 2143; Rodrik, D. (2001) The Global Governance of Trade As If Development Really Mattered, UNDP; Rodrik, D. (2002) Trade Rout: Reform in Argentina, Take Two, New Republic, 14th January UNECA (2004) Africa Economic Report 2004, UNECA, New York. 11 UNCTAD (2004) The Least Developed Countries Report, UNCTAD, Geneva. 12 Chang, H-J. (1993) The Political Economy of Industrial Policy in Korea, Cambridge Journal of Economics, Vol.16, No.2; Amsden, A. (1989) Asia s Next Giant, OUP, Oxford. fighting poverty together 5 2. EPAs: the European Commission s main arguments The European Commission advances two main arguments in support of its demand for the creation of free trade agreements (FTAs) between itself and regional groupings of ACP countries. The first is legal that this is the only arrangement acceptable to the WTO. The second is economic that such FTAs will stimulate economic development in ACP countries. 13 We deal with each of these in turn. WTO compatibility: the European Commission s legal argument The Cotonou Partnership Agreement (CPA) that provides for EPA negotiations explicitly links them to the WTO, stating that: The Parties agree to conclude new WTO-compatible trading arrangements. 14 In the early 1990s, the non-reciprocal trade preferences under Lomé governing trade relations between the EU and ACP countries were increasingly challenged: they were seen to discriminate against other developing countries and were therefore deemed incompatible with certain WTO rules. There was also concern that the trade preferences had failed to integrate many ACP countries into the global economy and were less likely to do so because of increasing preference erosion (a decline in the value of the Lomé preferences as a result of multilateral trade liberalisation). 15 This was the context under which EPAs were proposed. EPAs fall under the WTO rules on regional trade agreements (RTAs). The most important of these is Article XXIV of the General Agreement on Tariffs and Trade (GATT) 1994, a founding document of the WTO, which states that: 5. (c) any interim agreement shall include a plan and schedule for the formation of such a customs union or of such a free-trade area within a reasonable length of time 16 The WTO s understanding of a reasonable length of time is that: The reasonable length of time referred to in paragraph 5(c) of Article XXIV should exceed 10 years only in exceptional cases. In cases where Members parties to an interim agreement believe that 10 years would be insufficient they shall provide a full explanation to the Council for Trade in Goods of the need for a longer period. 17 Article XXIV goes on to say that: 8. (b) A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories 18 The European Commission interprets the above clauses to mean that 90% of the trade in goods between the two parties must be liberalised over a period of years 19 an interpretation first used during the EU-South African trade negotiations in There are a number of problems with the EU s conception of reciprocity in EPAs. Firstly, the principle of reciprocity as intended in the GATT/WTO does not necessarily carry over to North-South trade agreements, since small countries have not been required to offer 13 Lamy, P. (2004) Opening of the negotiations for the Economic Partnership Agreement (EPA) between the Caribbean Forum of ACP States (CARIFORUM) and the European Union, Statement by Pascal Lamy, Kingston, Jamaica, 16th April 2004, 14 Article 36.1 of the Cotonou Partnership Agreement (2000). 15 Mbuende, K. and Davies, R. (2002) Beyond the Rhetoric of Economic Partnership Agreements, 16 WTO (1994) General Agreement on Tariffs and Trade: Article XXIV : 17 WTO (1994) Understanding on the Interpretation of Article XXIV of the General Agreement on Tariffs and Trade 1994, 18 WTO (1994) General Agreements on Tariffs and Trade: Article XXIV, 19 European Commission (undated) interpretation of Article XXIV, also based on EU-South Africa Trade, Development and Co-operation Agreement liberalisation timescale. 6 fighting poverty together Trade traps Why EU-ACP Economic Partnership Agreements pose a threat to Africa s development reciprocal concessions to industrial countries in multilateral negotiations. 20 The 1979 Enabling Clause calls upon industrialised countries not to seek reciprocal concessions inconsistent with the development, financial and trade needs of individual developing countries. Secondly, reciprocity between developing and developed countries can be very damaging to the former because
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