AWAITING THE GRIM REPA?

A REVIEW OF THE OUTCOME OF THE FIRST PHASE OF ACP-EU TRADE

NEGOTIATIONS

December 2003

TABLE OF CONTENTS

FOREWORD

INTRODUCTION

PURPOSE AND STRUCTURE OF THE NEGOTIATIONS

-Introduction

-Getting Agreement on Basic Principles and Objectives

-Sequencing and the Link to WTO Rules

-The Outcome of Phase 1

-The Issue of Additional Funding

-Regional Organisations and the EPA Negotiations

-Dispute Settlement and Non-Execution Clauses

AREAS OF DIVERGENCE

-Market Access

  • Overview
  • Principles and Objectives
  • The Question of Reciprocity
  • Rules of Origin Issues
  • The Issue of Safeguards

-Agriculture and Fisheries Issues

  • Overview
  • The Scope and Importance of Agricultural Issues
  • SPS Issues
  • The External Effects of CAP Reform
  • Fisheries Issues

-Development Issues

Overview
  • Dis-aggregating the Challenge Faced
  • The Infrastructural Constraint
  • The Human Resource Constraint
  • The Management Constraint
  • The Financial Constraint
  • The Fiscal Challenge

-Trade in Services

-Trade Related Areas

CONCLUSIONS AND RECOMMENDATIONS

INTRODUCTION

In their approach to the EPA negotiations the ACP identified six areas within which the negotiations should be conducted:

  • market access issues;
  • agriculture and fisheries issues;
  • development issues;
  • trade in services;
  • trade related areas;
  • legal issues.

While the European Commission favoured a different approach this paper seeks to review the progress made in each of these six areas from an ACP perspective. It will begin by looking at major issues faced with regard to the purpose and outcome of the negotiations and the areas of convergence and divergence around these issues. It will then look at the areas of convergence in the five substantive areas which the ACP wished to see discussed during this first phase of the negotiations, namely: market access issues; agriculture and fisheries issues; development issues; trade in services and trade related areas. The areas of divergence in each of these areas and the basis and implications of this continued divergence will then be explored.

Throughout the text the paper will look at the major issues faced from a development perspective, given the importance to the ACP of any future trade agreement with the EU contributing to the structural transformation of their economies in order to lay more solid foundations for the progressive eradication of poverty. This will then provide the basis for recommendations on the position development NGOS and other concerned non state actors should take on the major issues faced in the negotiations.

THE PURPOSE AND STRUCTURE OF THE NEGOTIATIONS

Introduction

From an ACP perspective the issue of the purpose, structure and outcome of the first phase of EPA negotiations were addressed through the preparations of the negotiating group on legal issues. The substantive issues discussed in this area included:

  • principles and objectives;
  • the structure and content of economic partnership agreements (EPAs);
  • compatibility of the proposed economic partnership agreements with WTO rules, particularly those governing the establishment of free trade areas;
  • the outcome of Phase 1;
  • who would actually negotiate and conclude economic partnership agreements (EPAs);
  • modalities for the entry into force of EPAs;
  • the possible inclusion of and scope of dispute settlement and non-execution clauses.

Getting Agreement on Basic Principles and Objectives

While there was a broad agreement on the principles and objectives (since these are largely enshrined in the Cotonou Agreement which provides the basis for the EPA negotiations) there are significant differences in emphasis between the EU and the ACP on which objectives take precedence. In addition while often the same words are used each party can attach very different meanings to them. Furthermore in a group as large and diverse as the African, Caribbean and Pacific (ACP) group, it is very difficult to attain a thoroughgoing consensus on the complex issues being addressed under EPA negotiations.

Nevertheless one thing, which can safely be asserted is that for the ACP the top priority in the negotiations is to secure an agreement which actively contributes to poverty eradication and sustainable development. For a number of ACP governments this is taken to mean that such an agreement must contribute to the transformation of the basis for the integration of ACP economies into the world economy.

For the European Commission further integration of ACP economies into the world economy through the pursuit of progressive liberalisation of trade in goods and services on its own is seen as the best vehicle for the promotion of poverty eradication and sustainable forms of development, since this will, it is believed, lay the basis for the growth of a dynamic private sector.

This difference of emphasis is commonly blurred over but is in fact fundamental to many of the unresolved issues in the ACP-EU negotiations, for its relates to the sequencing of liberalisation with other broader support measures.

For the EU the primary concern is for ACP countries to “get the policy framework right” by committing to liberalisation. Within this context the necessary support measures can then be put in place to assist ACP private enterprises in meeting and exploiting the challenges and opportunities generated by the creation of a larger market encompassing an expanded EU.

For the ACP the issue is to put in place the necessary support measures so that ACP countries can fully benefit from any further trade liberalisation by expanding value added processing and diversifying their export base, thereby transforming the basis for their integration into the world economy to the benefit of the poor.

This debate around the “sequencing” of liberalisation with broader support measures has a tendency to become polarised. On the one hand those who advocate policy reform first, seem at times to imply that such reforms will automatically lead to a sudden disappearance of the physical constraints on competitive production (from unreliable public utility provision, through an unhealthy and poorly trained workforce to poor transport infrastructure) which ACP economies face. On the other hand those that tend to argue for the establishment of effective development programmes to address the supply side constraints on competitive production can appear to ignore the vital role that public policy can play in creating an enabling environment. The issue of sequencing is clearly more complex than these polarised views would suggest.

To give but one small example, the EU in its practice vis a vis new EU member states clearly recognises that measures need to be taken to assist enterprises in new EU member states in meeting EU standards prior to their entry into the EU. Indeed, for this single purpose alone, the EU has over the last five years made available Euro 1.33 billion in assistance to food sector enterprises in new EU member states. These measures are designed to ensure that agricultural and food processing enterprises in these countries are in a position to effectively participate in securing the benefits of an enlarged EU market.

Clearly these policy initiatives by the EU recognise the importance of “sequencing” assistance to agricultural and food sector enterprises with the incorporation of these economies into the single EU market. In a context where even more acute supply side constraints are faced than in the new EU member states, the issue of correct “sequencing” would appear to be even more crucial. Yet it is an area to which the European Commission in the EPA negotiations with ACP countries has so far paid little attention to. Not surprisingly the ACP are insisting on far greater priority being accorded to this issue.

For their part many ACP governments both unilaterally and in consultation with international financial institutions have been undertaking policy reform for almost a decade. Often struggling to get the policy framework right for the launching of pro-poor growth in a context of highly unfavourable economic trends (e.g. declining commodity prices). Many ACP governments thus recognise the importance of establishing the “right” policy framework.

Sequencing and the Link to WTO Rules

There are some in the ACP who have attempted to reconcile the tendency towards polarisation by suggesting that the phasing in of liberalisation be linked to the attainment of certain key development indicators, so that some of the complexities of “sequencing” can begin to be addressed. However, many in the EU argue that such a “flexible” approach to the creation of a free trade area would be incompatible with WTO rules. This is in part why the ACP maintain that there is a need for greater flexibility in WTO rules in regard to free trade areas between a group of highly advanced and integrated developed economies and groupings of least developed and poor developing countries who are only now beginning the first stages of market integration amongst themselves.

THE VIEW OF THE UNCTAD SECRETARIAT

A recent study conducted by two UNCTAD trade specialists Bonopas Onguglo and Taisuke Ito noted “there exists an important legal lacuna in terms of the availability of special and differential treatment for developing countries in the WTO rules regarding North-South Agreements”[1]and how the “reciprocity as would be required under prevailing WTO rules on regional trade agreements is likely to pose greater adjustment costs on the part of ACP states that decide to become party to an EPA”. The paper argues that if future EPAs are to be legally valid and economically viable, then provisions must be made under Article XXIV for the application of the “special and differential treatment” principle to free trade areas between a developed economic giant like the EU and groupings of developing countries which include least developed countries. This is of vital importance to the ACP group of countries if moves towards free trade with the EU are to promote economically, politically and socially sustainable forms of trade liberalisation.

However while the European Commission has acknowledged that EPAs will create new forms of free trade areas, which were not envisaged when WTO rules on free trade areas were formulated, it has rejected the argument that new WTO rules are needed to accommodate these new forms of free trade areas. Instead the European Commission maintains that sufficient “flexibility” already exists within the present WTO rules. Given that existing WTO rules would not allow liberalisation of trade between groupings of least developed and poor developing countries anda group of highly advanced and integrated developed economies to be linked to the attainment of key development indicators, the “flexibility” allowed under existing WTO rules would appear to be far more limited than that which many in the ACP believe is required. This would suggest that if the “flexibility” is to be secured to build the attainment of key development indicators into the structure of EPAs then a modification of WTO rules on free trade areas is urgently needed. Unfortunately the European Commission appears far from favourably disposed towards a joint ACP-EU initiative for the modification of WTO rules on free trade area agreements.

Under Phase 1 of the EPA negotiations the EU’s insistence that existing rules already allow sufficient flexibility, led the Commission to reject ACP proposals for the establishment of a joint ACP-EC Steering Committee on WTO negotiations. The European Commission saw no need for a Brussels based structure to coordinate on WTO issues preferring to work through existing Geneva based coordination mechanisms. This was despite the fact that more ACP countries are represented in Brussels than in Geneva and that many smaller ACP countries Ambassadors to Brussels are also responsible for WTO discussions in Geneva. Underlying the Commission’s rejection of the creation of a Brussels based structure was a desire to avoid any focussed discussion on the WTO issues faced in the EPA negotiations, since, for example, the issue of reform of WTO rules on free trade areas would have become a focal issue in the deliberations of any Brussels based coordination structure on WTO issues.

This Commission position was wholly consistent with the EU desire not to see any changes to WTO rules on free trade areas, which would create greater flexibility. Indeed after the Doha WTO Ministerial meeting in 2001 the European Commission came out strongly in favour of tightening up WTO rules on free trade areas. In response to ACP insistence on this point the European Commission did however maintain that it was willing to consider any substantial arguments put forward by the ACP on the need for a modification of WTO rules. However it was argued that “the ACP would have to demonstrate to the European Commission that current WTO rules did not allow enough flexibility for EPAs to respond to ACP development needs and constraints”. This remains the Commission position on this issue at the opening of phase 2 negotiations with ACP regional groupings.

FLEXIBILITY AND WTO RULES ON FREE TRADE AREAS

Current WTO rules on free trade areas require such arrangements to:

*cover substantially all trade (the European Commission sees this as 90% of all trade);

*be fully implemented within 10 to 12 years;

*exclude no sector.

The question arises: do these rules provide sufficient flexibility for ACP countries to defend those sectors which they consider sensitive and central to their economic and social development, most notably their agricultural sectors? This question is intimately linked to the changing pattern of EU public subsidies to its agricultural sector, which is greatly enhancing the price competitiveness of EU agricultural and value added food product exports and freeing such exports from the constraints previously imposed by WTO rules on export refunds.

In the case of the Democratic Republic of the Congo, when using 2000 as the reference year, provisions, which would allow the exclusion of only 10% of currently trade goods, would not even allow the Congolese government to fully exclude EU poultry meat exports from the coverage of a free trade area agreement, a sector crucial to peri-urban subsistence activities.

In a context where in some ACP countries EU food and agricultural products already account for nearly a quarter of all EU exports to what are agriculture dependent ACP economies, the issue of the product coverage of any future free trade area agreement becomes crucial.

This European Commission position has implications for the scope and coverage of any economic partnership agreements. It will require such agreements to cover “substantially all trade” – a provision interpreted by the European Commission at the end of phase 1 negotiations as covering 90% of all currently traded goods. It will require tariffs to be eliminated on “substantially all trade” within 10 years, with in exceptional circumstances this being extended to 12 years and it will require that no sector be excluded from this process of tariff elimination.

A Flexible Interpretation of Flexibility?

Following the Doha WTO Ministerial meeting, the European Commission expressed the view that the Ministerial resolution in Doha allowed negotiations to start on “clear and quite strict rules defining the conditions to be met for free trade areas and regional agreements to be WTO compatible”. If this is the case, then it is difficult to reconcile the Development Directorate’s commitment to “defending” flexibility in ACP-EU economic partnership agreement negotiations, with the Trade Directorate’s efforts to ensure that “clear and quite strict rules” are drawn up on what is a WTO compatible free trade area arrangement. Indeed, the EU’s commitment to “clear and strict rules” would appear to run counter to the need for “flexibility” in order to accommodate within economic partnership agreement negotiations the very different economic and social constraints facing ACP countries.

These WTO rules on free trade areas could place serious constraints on the development of agri-based food processing industries in ACP countries aimed at national, regional and international markets. This is the case since:

a)agriculture is the foundation of most ACP economies;

b)in some regions EU exports of agricultural and simple value added food products account for 1/5 of the total value of EU exports;

c)the provision of substantial EU public assistance under a reformed CAP is dramatically improving the price competitiveness of EU agricultural and value added food product exports (whilst freeing exports from the constraints of WTO disciplines on export refunds);

d)the development of agri-based industries in ACP countries offers opportunities for lifting tens of millions of the rural poor out of poverty.

This potentially strikes at the heart of ACP aspirations to move up the value chain and reduce their dependence on declining commodity markets. It is against this background that the debate around the modification of WTO rules on free trade areas needs to be seen. It is a discussion closely linked to the wide ranging debate on agricultural issues which the ACP have been trying to initiate with the EU and which the European Commission has been seeking to restrict to a narrower discussion of market access questions (see later section on Agriculture and Fisheries Issues in the Negotiations).