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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 and a 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. 1 “How to make EPAs WTO Compatible”, Bonopas Onguglo and Taisuke Ito, UNCTAD Secretariat, Geneva. 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). The Outcome of Phase 1 Until the end of phase 1 there was continued divergence on the need for a formal framework agreement to conclude the first phase of ACP – EU EPA negotiations. The ACP favoured the conclusion of a formal agreement which would be legally binding and which would guide phase 2 while the EU saw no such need for a formal agreement. Having initially rejected the need for any all-ACP-EU phase of negotiations, the European Commission accepted the inclusion of such a phase in the face ACP insistence. However from the outset the European Commission maintained that phase I was about “discussing and clarifying issues” and insisted that the completion of Phase I was not a pre-condition for the launching of regional negotiations. It was against this background that the European Commission felt that the aim of phase I should be the promotion of a “meeting of minds” and “not the conclusion of a legally binding agreement”. Nominally underpinning this European Commission position was a desire to leave flexibility for tailoring regional agreement to the needs of the parties concerned. The ACP insistence on the conclusion of a formal agreement at the end of phase 1 needs to be seen against the background of their deep concern that the EU would seek agreements with the “weakest” regional groupings first and then seek to use these as the “template” for similar agreements with other ACP regional groupings. In order to avoid this the ACP preferred to see the establishment of a formal agreement on the scope and content of any regional EPAs as an integral part of the conclusion of phase 1 negotiations. As it turned out the agreement concluded on October 2 nd 2003 was not legally binding and will only be a “point of reference” for phase 2 negotiations. This outcome is closer to the EU position than the ACP position on the outcome of phase 1. The only commitment the ACP have secured is a continuation of phase 1 talks in parallel to the commencement of phase 2 in an effort to hammer out remaining points of divergence. However, at the opening of phase 2 negotiations in West Africa, while Commissioner Lamy made reference to the wider context within which phase 2 EPA negotiations will take place, this focussed exclusively on the WTO context. No reference at all was made to the all-ACP-EU follow up mechanism, which from an ACP perspective, aims to both resolve the issues left outstanding under the phase 1 negotiations and provide a coordinating mechanism to maintain the negotiating strength of the ACP Group as a whole. This suggests a lack of EU commitment to the joint follow up mechanism established to oversee regionally based phase 2 negotiations. The Issue of Additional Funding Throughout the negotiations there was continued divergence on the need for additional resources to be made available to urgently address supply side constraints on competitiveness in ACP countries and to finance programmes to equip ACP enterprises to meet the challenges which the creation of a free trade area with the EU would throw up (challenges very similar, if not far more acute, than the challenges facing enterprises in new EU member states, in support of which so much pre-accession aid has been deployed). The EU maintains that there was no need for additional resources, while such large amounts of EDF funding remain unspent. The ACP for their part maintained that additional funding is needed to address supply side constraints and support restructuring and that such funding needs to be made available under procedures which allow rapid and effective deployment. This disagreement links to the wider debate on the development dimension of economic partnership agreements. The ACP always maintained the importance of EDF AID AND SUPPORT FOR ECONOMIC RESTRUCTURING There is much confusion over the issue of unutilised EDF funds with some estimates stretching to over Euro 15 billion. However such estimates pay no attention to the complicated process of EDF aid deployment. A review of EDF aid commitments and disbursement as of the end of 2000 found that while payments still needed to be made on a total of Euro 15,073 million, contracts had already been signed on Euro 2,802 million of these funds, and financing decision (the legally basis for all aid deployment) had already been taken on some Euro 8,983 million of these funds. This left only around Euro 6,090 million not actually legally committed to projects and programmes. In 2000 the EU approved decisions for new projects to the tune of Euro 3,757, million. At this rate all EDF funds outstanding under previous Lomé Conventions would have been legally committed to specific projects and programmes by the end of 2002. A date before the Cotonou Agreement was ratified by EU member state and thus before 9th EDF funds could legally be disbursed. By November 2002 of the Euro 10,000 million of 9th EDF funds earmarked for long term co-operation activities at the national level, some Euro 7,120.8 million had been deployed as “A” allocations to individual countries, while some Euro 1,749.5 million had been earmarked as “B” allocations to 45 ACP countries (32 ACP countries had not been informed of the size of their “B” allocation). The programming of the use of these funds was well advanced, with the conclusion of country support strategies and the signing of National Indicative Programmes (NIPs). Around Euro 1,100 million was however being held in reserve by the European Commission. Funds from the amount earmarked for deployment in support of regional co-operation activities were also being held in reserve. Of the funds programmed at the national level only relatively small amounts were earmarked for deployment in support of economic activities. By November 2002 a mere 0.1% of allocated NIP funds had been committed to trade development projects, only 1.1% of allocated NIP funds had been committed to agricultural sector projects and only some 7% of allocated funds had been allocated to the broad category of rural development projects. This hardly suggests that the European Commission has a major focus on support for economic projects. Indeed, various EDF evaluation reports suggest that the European Commission has a poor track record when it comes to support for economic projects. This provides the background to ACP concerns over the need for additional non-EDF funding for restructuring processes. clustering the development issues under one heading given the centrality of this issue to the overall objective of EPAs. The ACP pressed at an early stage for a dedicated meeting on “flanking measures”. Five months into the negotiations no such meeting had been held. The first meeting took place on February 21 st and was followed by further dedicated sessions on April 11 th, June 4th and 27th June. These discussions focussed on capacity building and infrastructure, industrial development and regional integration. ACP felt strongly that sufficient attention needed to be paid to the development dimension with additional resources being made available for the suggested policy measures. For the ACP it was seen as essential that the various aspects of any EPA agreements be accompanied by development support measures to build up the capacities of ACP enterprises to compete effectively under conditions of free trade. This is seen by the ACP as essential if the adjustment costs associated with the introduction of free trade with the EU are to be minimised and the benefits realised maximised. The European Commission for its part has always maintained that EPAs themselves will contribute to development by “enlarging the ACP markets and by establishing an open, transparent and reliable framework for trade, which will mobilise private initiatives and attract investment”. With regard to additional funding, given the resources which remain unutilised under the EDF the Commission has always believed restructuring support is an implementational issue, which needs to be addressed “through the identification and design of appropriate programmes and projects” and not an issue, which needs to be discussed in the context of a broad agreement. For the European Commission support for restructuring and addressing supply side constraints has always been seen as a “cross cutting” issue, which needed to be integrated into all levels of ACP-EU co-operation activities, including the negotiation of future economic partnership agreements. The problem has been that under phase 1 these “cross cutting” development issues have never really been integrated at all levels. Underpinning this discussion is the much broader issue of the efficiency of EDF aid deployment processes and the effectiveness of EU aid interventions in supporting economic restructuring. While there was no agreement on the need for additional funding both sides did agree on the importance of strengthening the regional dimension of European Commission support measures for ACP countries. This may in part be accounted for by the fact that the European Commission has far more discretionary power over the deployment of regional funds under EDF regulations than over the deployment of nationally allocated funds2. Regional Organisations and the EPA Negotiations Phase 1 of the EPA negotiations saw little clarification emerge on the actual regional content of the EPA negotiation process. For the ACP the issue of who would negotiate and sign EPAs was seen as an important issue. The need to assert national sovereignty over such a crucial area as national trade policy underpinned the ACP‟s rejection of any reference to Regional Economic Partnership Agreement (REPAs) in the text of the Cotonou Agreement. ACP governments recognise their own realities, whereby few ACP government have yet ceded or pooled their sovereignty over tariff policy in the same way as the EU has. Few regional bodies (if any) in the ACP yet have a mandate or the institutional capacity to actually negotiate EPAs on behalf of their member governments. ACP governments have thus made a conscious choice to retain the sovereign right to negotiate and sign trade agreements. If all ACP governments have retained the right to negotiate and sign trade agreement then this begs the question: what role for ACP regional 2 Witness the use of the regional financial envelope to extend assistance to the HIPC debt relief initiative and the Global Funds for HIV/AID, Malaria and TB. organisations in the negotiation of economic partnership agreements with the EU? It is this underlying reality, combined with the multiplicity of regional bodies to which ACP states in most ACP regions belong, which accounts for the delays in defining the geographical configuration for EPA negotiations at the regional level throughout the ACP. The European Commission however has insisted on regional organisations playing an active role in the negotiations maintaining that these regional organisations have the expertise required for such negotiations. However this assertion with reference to the human and institutional capacities of ACP regional organisations sits uneasily alongside the scale of the challenge faced in negotiating EPAs at a regional level. The reality is that a detailed process of intra-regional consultations and negotiations will need to take place within ACP regions before any detailed negotiations on trade in goods and services (not mention trade related areas) can take place with the EU. THE TRADE.COM PROJECT On July 25th 2003 the European Commission announced the approval of a Euro 50 million trade related assistance programme for Africa, Caribbean and Pacific countries. The trade.com project is seen as important to enhancing ACP participation in trade negotiations, integrating trade into development strategies, ensuring goods are produced to the requisite international standards and promoting ACP capacity to export. There are three main components to the trade.com programme: * strengthening local capacities to formulate trade policies, while encouraging the participation of all stakeholders in the process; * assistance for ongoing trade negotiations by establishing a unique network of ACP trade experts (this component is known as a “hub and spoke” programme) with the secondment of senior advisors – the hub - to regional organisations and experts in national ministries –spokes; * funding of pilot projects to address institutional and supply side constraints with a special emphasis on enabling ACP countries to meet technical standards and sanitary and phyto-sanitary requirements, which the Commission acknowledged “represent a major obstacle to improving their export performance”. The programme is to be implemented over a 6 year period. According to the Commission the aim of the programme is to create the necessary capacities in ACP countries to benefit from increased trading opportunities. In presenting the programme Commissioner Lamy highlighted how trade assistance is a key element of the EU-ACP Economic Partnership Agreement currently being negotiated. Significantly the key focus of the project is on the second element, the “hub and spoke” programme of assistance to trade negotiations. This is going to stretch the human and institutional capacities of existing ACP regional organisation to the limit and beyond. The European Commission appears to believe that the extension of technical assistance to ACP regional bodies can play an important role in addressing these human and institutional constraints. With this in mind the European Commission has just established a project in association with the Commonwealth secretariat and the equivalent body dealing with co-operation in francophone countries to support a network of trade advisors coordinated through selected regional secretariats to which senior trade advisors will be seconded. This initiative is being funded under the trade.com project (see box for details). While technical assistance support to ACP trade negotiating capacity is undoubtedly needed, concerns have been expressed as to the extent to which the trade.com project will give rise to a “shadow” team of negotiators. With many ACP trade negotiators being engaged in a multitude of trade negotiations the danger exists that the technical assistance provided to support the process of EPA negotiations under the trade.com project will come to displace national decision making. National negotiating positions could end up being formulated with reference more towards what is believed to be acceptable to the EU than with reference to particular countries and regions underlying trade and economic development interests. This is particularly a problem in those ACP regions where national structures for controlling regional decision making are under-developed. No ACP region has structures in place comparable to the EU‟s Article 133 Committee, which goes through all European Commission proposals for trade agreements with a fine toothed comb in order to ensure their consistency with national economic interests. In this context there are major concerns over “free floating” regional secretariats pre- empting national policy decisions in key economic policy areas. Unless very carefully managed the EU‟s trade.com project could feed these concerns and exacerbate tensions within regional organisations between national capitals and regional secretariats. This was evident at the launch of the second phase of EPA negotiations in West Africa where the European Commission received a far less warm response to its proposals than its dialogue with regional secretariats had led it to believe. Finally with regard to the regional dimension of EPA negotiations, while the European Commission has consistently stressed the importance of building stronger ACP markets before liberalising towards the EU, it is apparent that the ACP and the EU have very different time frames in mind when discussing this issue. The EU has a tendency to take the nominal commitments to regional trade liberalisation literally, as if they were an established regional reality, rather than “best endeavour” commitments, which are plagued by a multiplicity of implementational problems linked to the human and institutional constraints faced in many ACP regions. This leads the Commission to believe that there is sufficient time between the creation of regional markets and any opening up to the EU as envisaged under EPA negotiations. However in reality the time, which will in fact exist to build up industries to supply larger liberalised regional markets prior to any introduction of free trade with the EU is much shorter. This is leading the ACP to emphasise the importance of sequencing any opening up of markets to the EU with the successful development of industries to competitively supply larger regional markets. Dispute Settlement and Non-Execution Clauses With regard to dispute settlement and the non-execution clause the ACP favour using existing national and regional mechanisms in line with international norms and the establishment of a role for the ACP Group as a third party arbitrator. The EU favours establishing through mutual agreement specific procedures for dispute settlement based on similar provisions under other EU free trade area agreements. This would involve consultations prior to the invocation of a mutually agreed arbitration procedure (modelled on existing dispute settlement arrangements to which the EU is already a party). The ACP is deeply concerned that any non-execution clause could provide a basis for the EU to invoke trade sanctions should ACP states find the costs of introducing free trade with the EU too economically, politically and socially onerous. AREAS OF DIVERGENCE GENERAL ISSUES ACP EU Outcome of Phase 1 The ACP favoured the conclusion of a The European Commission always saw formal agreement, which would be legally phase 1 as a clarification phase with no binding to guide phase 2. The document need for a formal agreement, although its agreed on October 2nd 2003 is not legally is open to further discussion on this issue. binding and only serves as “a point of The outcome of phase 1 is closer to the reference” to “provide guidance” for EU „s preferred outcome than the ACP‟s phase 2. preferred outcome. Financing Believes additional funding subject to Believes that there can be no case for swift and effective deployment additional funds being made available unencumbered by the current delays until such time as existing EDF funds which plague the EDF is required to meet have been fully utilised. the challenges, which EPAs will pose for ACP countries. WTO Rules WTO rules need to be adjusted in order No need for modification of WTO rules, to accommodate the needs of ACP since existing WTO rules provide the countries under moves towards necessary flexibility to address ACP reciprocity between a group of developed concerns. economies and a group of least developed and developing economies. Agreement on Scope and Structure The ACP favoured an agreement on the The EU believed there was no need to scope and structure of EPAs as a specific formally agree on the scope and structure outcome of the phase 1 negotiations. of EPAs under phase 1 since this is covered by the minutes of the joint meetings. Dispute Settlement Favours using existing mechanisms in Favours mutually agreed procedures line with international norms and a role for involving consultations prior to the the ACP Group as a third party arbitrator. invocation of arbitration procedures. Non-Execution Clause ACP are concerned that any “non- Favours provisions based on articles 96 execution” clause should not provide a and 97 of the Cotonou Agreement. basis for the imposition of trade sanctions. AREAS OF DIVERGENCE Market Access - Overview Under phase 1 five areas related to market access were discussed: principles and objectives for access for non-agricultural products; the product coverage of any EPAs; the transition period for the phasing in of tariff reduction commitments; the nature of safeguard measures; rules of origin issues. - Principles and Objectives While there was agreement that future market access arrangements should not leave any ACP state worse off, there is a significant difference in how each party interprets this. For the ACP this objective should be respected “whether or not ACP countries participate in EPAs”. This ACP position implies a need for an EU initiative on alternative trade arrangements for ACP countries (particularly non-least developed ACP countries) who feel unable to sign up to any economic partnership agreement arrangements. The European Commission however to date shows no indication of a willingness to explore how a non-punitive alternative to EPAs for non- least developed ACP countries could be established in ways which ensure that no ACP state is worse off. The European Commission appears to believe that WTO rules do not allow for any other alternative but EPAs. Thus for the European Commission it appears as if economic partnership agreements are seen as the sole vehicle for achieving this objective. However, the European Commission has over the years begun to introduce a far more discriminating system under its GSP scheme based on the levels of development of beneficiary countries, which is nevertheless in line with WTO non- discrimination provisions. This even includes in the case of least developed countries complete unrestricted duty free access under the 'Everything But Arms' initiative. With proposals for the long term framework for the EU‟s GSP scheme still to be drawn up, it should be possible to formulate within this future scheme an arrangement which is far less punitive for non least developed ACP countries which do not feel themselves in a position to enter into economic partnership agreements, than the current GSP scheme. - The Question of Reciprocity In order to accommodate the very different types of free trade areas, which economic partnership agreements between the EU and groupings of least developed and poor developing countries should entail, ACP governments have argued for changes to WTO rules on free trade areas. The ACP has argued that the implementation of tariff dismantlement should be linked to the attainment of certain development indicators. Given the extent to which the African continent has been ravaged over the last two decades by civil conflict and the HIV/AIDS pandemic (particularly when combined with the ravages of malaria and the resurgence of TB), this would appear to be essential. Indeed the very concept of development – implying as it does a constant improvement in economic and social conditions – has been brought into question by the reversal in human development indicators which has been witnessed in recent years in large areas of the continent. The stock of physical capital has also been eroded by armed conflicts and civil unrest in many African countries. Given the erosion of the human resource base and the stock of physical capital, which has occurred the basis for competitiveness of many African economies has been seriously impaired. To open such economies to free trade with the EU in this context is likely to be a highly risky business, with a real danger that the costs of adjustment could far outweigh the potential benefits. Indeed it can be argued that it would be irresponsible to open up the vulnerable sectors of such economies to free competition with an economic giant like the EU, until such time as significant progress has been made in developing the physical and human resource base for internationally competitive forms of production. Despite the strength of this argument the European Commission remains firmly opposed to linking the implementation of tariff dismantlement with the attainment of specified development indicators. Indeed, while recognising the need to back load tariff reduction commitments on certain products the European Commission even opposes the ACP proposal that there should be a five year moratorium on the commencement of tariff dismantling by ACP countries. With regard to the product coverage of any economic partnership agreement, while there was agreement that the details of the product coverage and specific timetables for the phasing in of the provisions of any agreement should be subject to agreement at the regional or national level, the ACP felt that phase 1 negotiations could usefully establish some guidelines for the product coverage of economic partnership agreement. This issue links up closely to debates around WTO rules and agricultural issues however and the European Commission was firmly opposed to any legally binding commitments on the issue of product coverage in the first phase of negotiations. As a consequence no real framework was established under phase 1 with regard to the product coverage of regionally negotiated EPAs. - Rules of Origin Issues On the issue of the rules of origin whilst this matter was discussed the European Commission did not agree with the ACP contention that future rules of origin should recognise the increasingly global nature of input procurement and the need for ACP countries to base their industrial development initially on final stage processing of inputs procured elsewhere. The European Commission did however agree to continue discussions on rules of origin questions at the level of experts. While the European Commission‟s openness to a continued dialogue on rules of origin is to be welcomed, it is essential that discussions at the level of experts are guided by a clear political commitment from the EU Council of Ministers to opening up new market opportunities for ACP exports, based on substantive processing in ACP countries of non-originating raw materials. If this political commitment from EU member states is not forthcoming, then many opportunities for the development of value added processing activities in ACP countries will be held back by the arcane minutia of rules of origin and the lengthy and obscure workings of derogation provisions. THE COMPLEX ISSUE OF RULES OF ORIGIN AND DEROGATIONS Rules of origin define what goods can and cannot be given duty free access to the EU market under any preferential trade arrangement. The aim of rules of origin is to prevent third countries that do not enjoy preferential access from simply routing products to the EU market through preferred trading partners. Rules of origin generally specify what proportion of the final product must have been produced in the country (or in the case of the ACP, countries) to which the trade preferences have been extended. These local content requirements vary from sector to sector and from product to product, particularly for those products considered sensitive by the EU. The derogation provisions of the rules of origin allow exceptions to the general rules of origin. This allows non-originating products to be used to a greater degree than the normal rules of origin would allow, without losing the benefits of the trade preferences extended under the Cotonou Agreement. Derogations from the rules of origin have to be specifically requested through the ACP group. All derogation requests are subject to assessment and approval by the ACP-EU Customs Co-operation Committee. Derogation request may be granted where “the development of existing industries or the creation of new industries justifies them.” Once granted each derogation request is generally valid for five years and may be renewed provided that 3 months before the end of the derogation period proof is provided that the producer is still unable to meet the normal rules of origin requirements. - The Issue of Safeguards Turning to the question of safeguards while there is agreement on the need for safeguards there is as yet no agreement on the nature and scope of such safeguards. For safeguard provisions to be of value to ACP countries they need to be simple to apply and where ever possible pre-emptive. While the European Commission enjoys such pre-emptive safeguards under the Cotonou Agreement, the European Commission has yet to consider extending these types of safeguard arrangements to ACP countries in the context of the introduction of reciprocity. Yet such arrangements could considerably benefit ACP countries, particularly with regard to trade in agricultural and value added food products. ESTABLISHING SIMPLE AND PRE-EMPTIVE SAFEGUARD PROVISIONS The principal features of the current Cotonou Agreement safeguard provisions which could be usefully incorporated into safeguard provisions under reciprocal economic partnership agreements are that they allow action to be taken where imports: a) cause or threaten to cause serious injury; b) threaten serious disturbances in any sector; c) threatens to create difficulties, which could lead to an economic deterioration in a region. These provisions place emphasis on preventing disruption of markets through “statistical surveillance” and “prior consultations” in “sensitive” sectors. In “sensitive” sectors it also allows action to be taken without the need to document the damage being caused since the emphasis is on preventing “injury” “disturbances” or “difficulties”. These type of safeguard provisions could very usefully be applied to EU agricultural and value added food product exports to ACP countries in a context where CAP reform is enhancing EU price competitiveness by redesigning how agricultural support is extended. Establishing “monitoring and surveillance” arrangements in sensitive sectors under safeguard provisions mirroring those used by the EU could prevent severe market disruptions arising under future trade arrangements with the EU. The definition of sensitive products should include all agricultural and simple value added food products where ACP countries have a production interest and where the CAP policies influence production decisions and subsequent trade outcomes. AREAS OF DIVERGENCE MARKET ACCESS ACP EU Outcome on market Access No ACP state should be left worse off in No proposals have been forthcoming on the terms of market access “whether of not establishment of non-punitive alternative participating in an EPA”. trade arrangements for non-least developed ACP countries. Tariff Dismantlement Favours a five year moratorium on the Believes there is no need for a introduction of any tariff reductions by moratorium on tariff dismantlement and ACP countries under any EPA that sensitive sectors can be addressed agreement. through back loading tariff reductions where this is necessary. Link to Attainment of Development Indicators The ACP believe that the phasing in of tariff EU believes tariff reductions should be reductions should be linked to the successful linked to clearly defined timetables and attainment of pre-defined development not the attainment of development indicators. indicators. Believes the latter is incompatible with WTO rules. Rules of Origin The ACP want rules of origin which The EU wants rules of origin harmonised recognise the increasingly global nature across different agreements and does not of input procurement decisions and wants favour particular asymmetrical rules for rules of origin which open up substantive ACP countries. It is however nominally new export opportunities for ACP open to tailoring rules of origin to the manufacturers whilst still allowing needs of different regions. substantive value addition to place in ACP countries. Areas of divergence Agriculture and Fisheries Issues - Overview Under phase 1 six areas have been discussed: objectives and principles to guide negotiations on agricultural and fisheries issues; processing, marketing, distribution and transportation (PMDT) issues in the field of commodities; rules of origin; export subsidies; sanitary and phytosanitary measures; fisheries. There was agreement on: the importance of agriculture and fisheries issues to poverty eradication and sustainable development in ACP countries; the importance of PMDT issues; the need to address SPS issues; the need for disciplines on export refunds; the importance of building on the existing acquis; the importance of considering the impact of CAP reform on the EPA negotiations; the importance of safeguard provisions; the need for regional fisheries agreements. However, the areas of agreement mask significant divergences on the specific measures, which can and should be taken as an integral part of preparing the ground for the negotiation and implementation of EPAs. - The Scope and Importance of Agricultural Issues For the ACP the contribution of agriculture and fisheries is seen as fundamental. However the European Commission for its part is extremely reluctant to engage in discussions on agricultural trade policy questions in the context of trade negotiations. This has been a long standing feature of EU policy both in bilateral negotiations (e.g. with MERCUSOR) and, appearances to the contrary notwithstanding, in international negotiations in the WTO. The ACP for its part sees it as essential that the productive capacity of ACP agricultural and value added food processing industries be built up prior to the introduction of tariff liberalisation. Underpinning this position are deep concerns that large swathes of ACP agricultural and agri-based industries will be wiped out by an increasingly export orientated EU agricultural and food products industry. For the ACP this concern is intimately linked to the trajectory of CAP reform within the EU. For this reason the ACP want discussions on agricultural issues to go beyond the straight jacket which would be imposed if these issues were to be discussed solely within the negotiating group on market access. The ACP cannot see how the European Commission can recognise the need to discuss agricultural issues separately in the WTO but then reject separate discussion of agricultural issues in the context of EPA negotiations. The ACP struggle to see how the European Commission can reconcile the agreed need to diversify the export base of mono-crop dependent ACP economies and assist ACP enterprises in moving up the value chain, with a reluctance to discuss agricultural policy changes which, by making EU agricultural and value added food product exports more price competitive, are squeezing out certain potential sectors for agri-based industrial development in ACP countries. This directly relates to the discussions on support to processing, marketing distribution and transportation (PMDT) which took place during phase 1 of the negotiations. On the issue of PMDT the ACP believe that effective programmes of support in this area are essential for the transformation of ACP economies. The EU for its part believes that PMDT can only have any real impact if there is a dynamic private sector in the ACP countries concerned operating within an enabling environment. An enabling environment, which in the EU‟s view, can best be created by the conclusion of the European Commission‟s proposed Economic Partnership Agreements. Yet again therefore there is a fundamental disagreement on the sequencing of tariff liberalisation and the establishment and implementation of EU supported flanking measures. It remains to be seen if at the regional level this disagreement and fundamental divergence of views can be resolved. The omens however are not good, with an ever smaller proportion of NIP funds being allocated in support of agricultural and trade development programmes. This suggests that few concessions are likely to be made by the European Commission on the sequencing of tariff liberalisation and the establishment and implementation of EU supported flanking measures. - SPS Issues With regard to SPS measures both sides recognised the importance of the issue. Once again the ACP felt there was a need for assistance in getting to grips with the various dimension of the SPS challenge. One of the proposals put forward by the ACP has been for a standstill on EU SPS measures for five to ten years and the establishment of a detailed dialogue on how genuine EU health concerns can be addressed without imposing excessive burdens on ACP suppliers, which make the exploitation of market opportunities impossible or uneconomic. This would then provide the basis for the elaboration of specific programmes of measures to enable ACP producers to overcome the challenges posed by increasingly strict EU SPS standards. However the European Commission has rejected this idea of a standstill as wholly impractical given the on-going elaboration of EU policy on food safety, as progress continues in moving from general principles to operational measures in each sector. In this context the ACP raised the issue of equivalency agreements, whereby on the basis of mutual agreement recognition is granted to each other‟s food safety standards. The European Commission however argued that such “equivalency agreements” are not possible with ACP countries given the weaknesses, which exists in ACP testing and verification arrangements. While this may be the case for many ACP countries, it is far from the case for all ACP countries, in a number of which considerable investments have been made in bringing local food safety standards up to first world levels. GETTING TO GRIPS WITH THE SPS CHALLENGE In order to develop policy responses there is a need to clearly understand the different trade policy issues arising from SPS measures. The problem needs to be addressed at 4 levels: standard setting; the costs of technical compliance; the costs of verification; transitional arrangements. While many EU standards are already fixed, where new standards are under formulation ACP governments should seek a dialogue with the EU to ensure that in protecting EU human, animal and plant health, regulations are designed and implemented in ways which minimise the creation of obstacles to ACP exports. High fixed costs are often associated with ensuring compliance with EU food safety standards and SPS regulations. This has been recognised by EU Agricultural Ministers who were concerned that the costs associated with such high standards could result in a loss of price competitiveness for EU producers. In May 2003 the European Commission announced the creation of four schemes to support EU farmers in meeting the higher costs associated with these regulations. In 2004 some Euro 248 million has been allocated to financing these measures. However ACP suppliers receive no such assistance and have to carry all these costs on their own account. This is reducing the attractiveness of EU markets, particularly where CAP reform is bringing down prices. ACP governments should thus seek the establishment of sectoral support programmes to assist ACP producers in meeting the costs of compliance with EU SPS standards. In addition given that larger volumes are increasingly needed in order to reduce the unit cost of compliance, consideration needs to be given to reviewing the rules of origin to allow greater use of non-originating material. Even where products comply with EU standards ACP exporters can face problems in securing proper verification of compliance as a result of short comings in public institutions. ACP governments should thus request additional financial assistance to public institutions to establish the institutional capacity to efficiently and cost effectively verify compliance with stricter EU standards. Finally a range of transitional problems are being faced, for example those arising from the EU‟s pesticide review. Under this review some 430 pesticides will have been withdrawn from the market. For tropical user this is often because the size of the market does not justify defending the product. This can result in the withdrawal of authorisation even where no alternatives exist. ACP governments need to make the case for the type of “temporary derogations” which are to be applied in certain EU member states for some „essential uses‟, where no safety concerns arise. Nevertheless, all ACP countries will have to face the higher costs in certifying and verifying compliance to EU standards, which the absence of equivalency agreements will bring. These cost increases could make exporting uneconomic. Any failure to get to grips with the challenges posed by increasingly strict EU SPS standards is likely to see the value of EU trade preferences in the agricultural and food products sector progressively undermined, as ACP producers find themselves increasingly prohibited from supplying the EU market on food safety grounds (see box). - The External Effects of CAP Reform Overall under the phase 1 negotiations there was only limited discussion of the implications of CAP reform for the ACP, despite the centrality of this issue to the future value of ACP trade preferences and the competitive threat which will be posed by the introduction of duty free access for EU agricultural and value added food products to ACP markets. The only issue the European Commission was willing to discuss was the question of export refunds. However this issue is of declining significance, as a result of the shift in agricultural support away from systems of price support to systems of direct aid to farmers. The shift to systems of direct aid to farmers is allowing EU prices to fall, without undermining farm incomes or production. Since 1992 for example, in the cereals sector average prices have fallen by between 50% and 55%. However this dramatic reduction in EU prices has not seen a corresponding reduction in EU production, with the new system of direct aid payments actually allowing EU cereals production to increase some 26% by 2000. What the process of reform has done is substantially reduce the need for export refunds in the cereals sector, by reducing the gap between EU and world market prices. Indeed, had it not been for a weakening of the US $ against the Euro the need for export refunds in the cereals sector would have been entirely eliminated under the impact of CAP reform. With the type of reforms implemented in the cereals sector being extended to virtually all other sectors (with even consideration being given to this option in the sugar sector) by 2008 the EU will largely have eliminated the need for export refunds. This however is unlikely to significantly reduce EU production compared to current levels. Under pressure from member states most direct aid payment schemes are likely to be designed in ways, which avoid any land abandonment. Given the annual improvements in average yields which have occurred in most arable sectors within the EU this policy commitment seems likely to lead to an expansion rather than a contraction of EU production compared to current levels. Significantly this production will take place on the basis of much lower market prices. It is these price effects of CAP reform, which is the central concern to ACP countries in any dialogue on agricultural issues within the EPA negotiations. These price effects have an impact on both the income ACP countries earn from temperate agricultural exports to the EU and the competitive threat posed to ACP agricultural and food product industries under any moves towards free trade with the EU. The impact of CAP reform on the value of trade preferences granted to ACP countries is already being felt. In the beef sector, where Southern African suppliers have traditionally enjoyed considerable preferential access to the high priced EU market (a total of 44,378 tonnes from four countries on which a rebate of 92% of the special duty is granted), the process of CAP reform has seen the value of these preferences eroded. This was the result of the EU decision to reduce the intervention price for beef by 20% in three stages as part of the Agenda 2000 round of CAP reform. This exerted a downward pressure on market prices in the EU. Between 1999 and 2002 Southern African beef exporters saw the £ price of their exports to the UK market fall between 28% and 30%. EU Agricultural Commissioner Fischler has noted how fully 2/3 of these price reductions were the result of the Agenda 2000 reforms in the beef sector and only 1/3 of these price reductions were accounted for by the market effects of the BSE and Foot and Mouth Disease crisis. Swaziland Meat Industries reported how the UK price of chilled steak cuts fell from £ 4.05 per kg in the 1995/96 season to £ 2.91 per kg in the 2002 season, (a 28% decline), while the price of forequarter frozen cuts fell from £ 2.10 per kg to £ 1.40 per kg (a 30% decline). Similar price declines are reported on Namibia’s and Botswana’s beef exports. For Namibia the prices received in £ sterling in 2001 compared to their first year of export to the UK resulted in an estimate income loss of N$ 60 million (or 6 million euro). In the case of Swaziland this resulted in the termination of exports of frozen fore quarter cuts when the EU price fell below £1.60 per kg. This is resulting in an under-utilisation of allocated quotas. A similar situation is now developing in the rice sector. A 50% reduction in the EU intervention price for rice will result in a dramatic reduction in EU market prices. Estimates suggest that by 2004 EU rice prices will be 34% lower than at present and that by 2009 prices will have fallen to 41% below current levels. This will dramatically reduce the earnings on ACP rice exports from Guyana and Surinam, both of which currently benefit from preferential access to the EU market under Declaration XXII of the Cotonou Agreement. Similarly it will greatly reduce the value of rice sector preferences currently being phased in for least developed countries under the “Everything But Arms” initiative. A similar situation will be faced in the sugar sector, should EU member states opt for the “fall in price” option for sugar sector reform. The scenario for the “fall in price” option for sugar sector reform set out in the Commission Staff Working Paper would lead to income losses to ACP Sugar Protocol exporting countries equivalent to over Euro 300 million per annum. ACP countries exporting under Special Preferential Sugar arrangement would face proportional losses (of around Euro 45 million), while newly emerging EBA exporters would have similar losses on the quota‟s they would enjoy by 2008 and even greater losses on potential exports which would have occurred once full duty free access was granted in 2009. ACP SUGAR PROTOCOL EARNINGS UNDER THE “FALL IN PRICE” SCENARIO Country Sugar Protocol Current Earnings After Earnings After Quota (tonnes) earnings Stage 1 Reform Stage 2 Reform Euro (Euro 435.0/t) (Euro 290/t) (Euro 523.70/t) Belize 40,349 21,130,771 17,551,815 11,701,210 Congo 10,186 5,334,408 4,430,910 2,953,940 Cote D‟Ivoire 10,186 5,334,408 4,430,910 2,953,940 Fiji 165,348 86,592,747 71,926,380 47,950,920 Guyana 159,410 83,483,017 69,343,350 46,228,900 Jamaica 118,696 62,161,095 51,632,760 34,421,840 Kenya 0 0 0 0 Barbados 50,312 26,348,394 21,885,720 14,590,480 Madagascar 10,760 5,635,012 4,680,600 3,120,400 Malawi 20,824 10,905,528 9,058,440 6,038,960 Mauritius 491,031 257,152,935 213,598,485 142,398,990 Uganda 0 0 0 0 St Kitts & Nevis 15,591 8,165,007 6,782,085 4,521,390 Surinam 0 0 0 0 Swaziland 117,845 61,715,426 51,262,575 34,175,050 Tanzania 10,186 5,334,408 4,430,910 2,953,940 Trinidad & 43,751 22,912,398 19,031,685 12,687,790 Tobago Zambia 0 0 0 0 Zimbabwe 30,225 15,828,832 13,147,875 8,765,250 Thus while paying lip service to building on the existing acquis and taking into account the impact of CAP reform, the European Commission is not recognising the extent to which CAP reform is undermining the economic value of the acquis. The European Commission is thus not yet willing to explore what new arrangements can be established in order to maintain the value of the acquis. Until such time as the European Commission recognises these realities, the broad agreement on the need to maintain the acquis and address the impact of CAP reform, will have little impact on ensuring that ACP countries continue to gain real benefits from the system of trade preferences the EU establishes for agricultural and value added food product exports from ACP countries. Turning to the issue of the impact of price reductions on the export competitiveness of EU agricultural and value added food product industries the concerns arising are much more profound. The processes of reform are lowering the prices of domestically produced raw materials and significantly reducing the prices of simple EU value added food products. Since these products often constitute the first stages of agri-industrial development in ACP countries the impact this process of reform has on trade outcomes is a source of growing concern. Its implications can perhaps best be seen by looking at what has happened with regard to EU exports of simple cereal based value added food products under the impact of cereals sector reform. Between 1996 and 1998 EU exports to ACP countries of products falling under customs codes CN 11 (“products of the milling industry”) and CN 19 (“preparations of cereals”) increased 67% and 54% respectively. This saw the ACP market for EU exporters of these products grow in importance. For “products of the milling industry” the importance of the ACP market rose from 12.6 % to 20.5% of total EU exports, while for “preparations of cereals” the importance of the ACP market rose from 4.5% of total EU exports of these products to 7% of total EU exports of these products. While WTO limits on export refunds for value added food products began to have an effect towards the end of the decade, this trend could resume once the mid term review round of CAP reforms in the dairy sector kicks in. It will further gain pace once the EU bites the bullet of sugar sector reform. Such trade developments in a context of further tariff liberalisation could profoundly affect the scope for agri-based industrial development in many ACP countries, with profound consequences for efforts to reduce dependence on basic commodity production by expanding value added processing for national and regional markets. Unfortunately the European Commission has proved itself singularly unwilling to discuss this dimension of the impact of CAP reform under the first phase of EPA negotiations. The EU maintains that the new systems of support the EU is setting in place are less trade distorting and even non trade distorting when compared to traditional systems of support (European Commission officials can slip easily between the two when referring to the same system even within a single speech). This is despite the fact that the new systems of support have production and trade outcomes, which simply would not occur in the absence of such public aid programmes. As a consequence these issues remain unresolved as smaller less powerful ACP regional groupings now enter into economic partnership agreement negotiations with the EU. - Fisheries Issues In the area of fisheries the EU is opposed to the conclusion of framework ACP-EU fisheries agreements setting out the need to address the sustainable management of ACP fisheries resources, obligatory landings and other issues linked to ensuring that the ACP maximise the long term benefits from their increasingly valuable yet vulnerable fisheries resources. AREAS OF DIVERGENCE AGRICULTURE AND FISHERIES ISSUES ACP EU Processing, Marketing, Distribution and Transport PMDT programmes will only work if the right PMDT programmes are essential to the policy framework is in place and so should transformation of ACP economies and should be only be established once the implementation in place before the phasing in of free trade. of EPAs is underway. SPS Issues 5-10 year standstill on new SPS measures EU has sovereign rights to establish its health and initiation of detailed dialogue on how to rules through SPS measures. SPS measures are an meet genuine EU health concerns without integral part of EU food safety policy. placing undue burdens on ACP exporters. Equivalency agreements with ACP governments not possible because of institutional weaknesses in the ACP. Export Refunds Exports refunds should be comprehensively Willing to address export refund issues on a addressed as should the production and case by case basis. New forms of trade distorting outcomes of the new CAP agricultural support are less trade distorting policy instruments. or non trade distorting, so no problems arise. Maintaining the Acquis Maintaining the acquis should relate to Commitment to ensuring under EPA maintaining the value of preferences arrangements that no ACP country is worse off in (including under the commodity protocols), terms of current market access. not just specific measures the value of which is being eroded by the process of CAP reform. Taking Account of CAP Reform There is a need to address as an integral part Willingness to discuss the implications of of EPA negotiations, the distorted production CAP reform for EPA negotiations, within the and trade outcomes arising from the new framework of recognition of the EU‟s shift forms of CAP support the EU is moving from more trade distorting to less trade towards. distorting forms of assistance. Fisheries Relations Wants the establishment of a framework, See‟s no need for such a framework fisheries ACP-EU fisheries agreement incorporating agreement, preferring to adopt a case by fundamental principles on responsible and case approach to fisheries arrangements with sustainable fisheries management and ACP states (given the on going evolution of obligatory landings and other measures to EU policy in this area). promote local fisheries sector development. Development Issues - Overview To date only general principles relating to the development issues to be addressed as part of the EPA negotiations have been discussed. This is reflected in an agreement on generalities but fundamental disagreement on substantive practical issues. To date there is agreement that: EPAs should not be seen as an end in themselves but as a means to the achievement of wider objectives; EPAs should take account of the capacity of ACP economies to adjust to the introduction of free trade with the EU; EPAs should contribute directly to the development of ACP countries and be accompanied by appropriate development support measures so as to enable ACP countries to maximise the benefits they gain from EPAs; EPAs should be mainstreamed into ACP policies and into EU development co-operation programmes; EPAs should be accompanied by general capacity building measures; EPAs should support the industrial development of ACP countries; EPAs should be consistent with and supportive of regional integration processes. However, beyond these general statements there is little agreement about what this should mean in practice when it comes to concrete programmes and policy initiatives and the sequencing of the various policy changes and support programmes envisaged or under discussion. The major areas of disagreement are on: a) the need for additional resources to finance the many and varied programmes which will be needed to equip ACP economies in meeting the challenges of free trade with the EU; b) the institutional arrangements and aid deployment procedures for the deployment of restructuring assistance; c) the “sequencing” of the deployment of additional assistance to specifically designed “flanking measures” with the implementation of tariff reduction commitments. For the ACP it is seen as essential that any tariff reduction agreements are accompanied by development support measures, which are implemented prior to the opening up of ACP markets to duty free access for EU goods. The European Commission for its part maintains EPAs themselves will contribute to development by “enlarging the ACP markets and by establishing an open, transparent and reliable framework for trade, which will mobilise private initiatives and attract investment” (thereby reducing the need for publicly financed assistance programmes). There is therefore something of a fundamental disagreement on the extent to which restructuring assistance will be required. The ACP believes that the scale of the restructuring challenge under moves towards free trade with an economic giant like the EU will be such as to require major new investments. There is some concern in the ACP that this should not divert financial resources away from existing development co-operation priorities, particularly those associated with the achievement of the Millennium Development Goals. It is for this reason that the ACP is highlighting the need both for additional funding and a dramatic improvement in the rate of deployment and effectiveness of EU aid instruments. The European Commission for its part sees no need for additional funding to be made available so long as so much of the existing committed EDF funding remains unspent. For the European Commission the problem of addressing the development dimension of EPA negotiations is more a problem of the actual implementation of existing measures “through the identification and design of appropriate programmes and projects”, than an issue which should be discussed separately within the EPA negotiations. In this context the European Commission claims to agree with the importance of the development dimension of EPAs but believes that it should be seen as a cross cutting issue which should be integrated into all levels of negotiations and be addressed through existing development co-operation instruments. For the European Commission more attention at this stage should be paid to getting the policy context right (i.e. through signing EPAs) before designing and implementing restructuring programmes, for, so it is maintained by the European Commission, without an appropriate policy framework restructuring assistance is likely to be wasted. There is therefore also something of a fundamental disagreement not only on the need for additional funding but also the sequencing of restructuring assistance and the phasing in of tariff reduction commitments. Perhaps not surprisingly therefore while under phase 1 negotiations the European Commission maintained the need to view the development dimension as a “cross cutting” issue, there was little evidence that the cluster of issues grouped under the heading “development dimension” were ever really integrated at all levels. In part this reflected the European Commissions insistence that these issues be addressed through existing institutional frameworks for co-operation using already pledged funding (i.e. existing EDF resources). In looking at this apparently fundamental impasse there is a need to look a little bit more closely at the scale of the development challenges facing the ACP under moves towards free trade with the EU, in the light of the review of existing aid deployment and utilisation outlined earlier. - Dis-aggregating the Challenge Faced In looking at the development challenges facing ACP countries under moves towards free trade with the EU it is useful to make a distinction between, on the one hand, the general development challenges faced and the appropriate responses to these and on the other hand, the specific new or intensified challenges arising as a result of moves towards free trade with the EU and the possible appropriate responses to these challenges. The first constitutes a challenge for general co- operation instruments, where as a consequence of planned moves towards free trade existing efforts to address the problems faced will need to be intensified. This will require a review of the efficiency and effectiveness of existing instruments aimed at addressing these challenges in ACP countries in order to improve both the uptake and effectiveness of already pledged funds. The second constitutes a challenge for which specific new policy tools and instruments will need to be introduced, although these will need to build on the positive experiences of existing instruments and initiatives where these have proved effective. This can be looked at with reference to: the infrastructural constraints faced; the human resource constraints faced; the management constraints faced; the financial constraints faced. - The Infrastructural Constraint In terms of the infrastructural constraint in many ACP countries serious constraints are faced by local enterprises in producing goods competitively, as a result of the developing nature of the economies of which they form a part. These constraints range from the unreliable provision of public utilities (e.g. electricity, and water supply) and poor public infrastructure (run down roads and railways) through weak institutional and policy frameworks (leading to fluctuating exchange rates and high inflation) to low labour productivity (arising from poor education, health and housing provision). Effectively addressing these supply side constraints is fundamental to getting to grips with the challenge of structural transformation which ACP economies face. Addressing these supply side constraints on production in a systematic and comprehensive way in the very different circumstances facing ACP economies will be one of the fundamental challenges faced under any future ACP-EU economic partnership agreements. Unfortunately, there is little evidence that the European Commission possesses the capacity to get to grips with these challenges. To date while EU aid programmes have for many years been heavily focussed on addressing the public infrastructure constraints (particularly transport sector constraints) and more recently on promoting policy reform through the deployment of structural adjustment assistance3, problems of low labour productivity and public utility provision have received relatively minor attention4. Yet these broader issues are central to the ability of ACP enterprises to take advantage of trade preferences. This can be seen from the current debates around the EBA initiative. 3 th This focus has in large part continued into the 9 EDF with 30.7% of currently programmes NIP funds being allocated to structural adjustment and 21.4% being allocated to transportation projects. 4 This being said the EU’s emphasis on extending economic co-operation into trade in services is seen by some in the European Commission as the first step in getting to grips with shortcomings in public utility provision by opening up state run monopolies to competition from the private sector. Studies suggest that LDC‟s (the bulk of which are ACP members) have limited supply side capacities in the areas where new preferences have been extended. This has led to the conclusion that if least developed countries are to exploit the improved market access made available under the EBA initiative, then existing supply side constraints will need to be addressed5. However to date the European Commission‟s Development Directorate has taken no initiatives to establish targeted programmes of support designed to address the supply side constraints confronting LDCs, so as to enable them to exploit the new trade preferences granted. In part this reflects the relatively poor record, which the European Commission has when it comes to financing and implementing development programmes designed to enhance ACP productive capacity and the ability of ACP enterprises to trade and market their goods6. While there are individual examples of good projects and programmes which have assisted ACP producers in getting to grips with supply side problems there is little evidence that lessons are being learnt from these experiences, to inform wider programmes and allow the development of a systematic and coherent approach. Against this background there would appear to be a need for the establishment of co-ordinated and integrated country specific programmes of assistance to address supply side constraints, which reach beyond the current instruments and approaches applied under existing ACP-EU co-operation arrangements. As the ACP-EU Joint Parliamentary Assembly pointed out in its Cape Town Declaration this will require a systematic review of the successes and failures of existing programmes intended to address supply side constraints, with a view to ascertaining the effectiveness of various types of interventions under different circumstances. It will also require a review of existing institutional arrangements for extending assistance to address supply side constraints, so as to determine which institutional delivery mechanisms have proved most effective. On the basis of 5 For two very different approaches which reach the same conclusion in this regard see “The EU‟s “Everything But Arms” Initiative and Least Developed Countries”, World Institute for Development Economic Research (WIDER) Discussion Paper No.2003/47, June 2003 (http://www.wider.unu.edu/publications/dps/dps2003/dp2003-047.pdf) and the USDA GAINS review of the EBA Initiative GAINS REPORT (E23149-08/06/2003) http://www.fas.usda.gov/gainfiles/200308/145985702.pdf 6 EU Evaluation of the Country Strategy 1996-2000, April 2001 http://europa.eu.int/comm/europeaid/evaluation/reports/acp/951584.pdf EU Evaluation of the Country Strategy 1996-2000, December 2000 http://europa.eu.int/comm/europeaid/evaluation/reports/acp/951571.pdf Ex-Post Evaluation Small Holder Development projects in Zambia, June 1998 http://europa.eu.int/comm/europeaid/evaluation/reports/acp/951342.pdf Evaluation South Africa Country Strategy,1995-1999, August 1999 http://europa.eu.int/comm/europeaid/evaluation/reports/acp/951477.pdf Evaluation Uganda Country Strategy 1996-2000 http://europa.eu.int/comm/europeaid/evaluation/reports/acp/951585.pdf Evaluation Dominican Republic Country Strategy http://europa.eu.int/comm/europeaid/evaluation/reports/acp/951554.pdf this review steps can then be taken to more swiftly deploy available assistance and more effectively target support in addressing supply side constraints. Once these problems of effective aid delivery begin to be addressed the real needs in terms of funding for restructuring will then emerge. In all probability this will greatly exceed available uncommitted EDF resources. Making available the additional funding required however will only be a part of the problem. Reforming aid delivery mechanisms to make them more recipient friendly, so that the intended beneficiaries can more swiftly access available assistance and make better use of it, will pose a far more fundamental challenge, striking as it does at the very way EU assistance programmes are managed. - The Human Resource Constraint Turning to the human resource constraint, in many ACP countries this can pose a major impediment to competitive production. For example a shortage of formally trained workers can have an impact on the technological choices made when considering investment. Particularly in Africa where the AIDS pandemic is having such a severe effect on the human resource base, shortages of particular types of skilled labour can lead companies to invest in older technologies rather than the latest technologies. Given the skills shortages the choice of the older technology represents the only rationale choice if installed capacity is to be effectively maintained and fully utilised. This can constitute a serious impediment to internationally competitive production. This is only one dimension of the economic and trade consequences of the human resource constraint, other dimensions relate to the efficient running and maintenance of basic public infrastructure (from roads and railways to water and electricity provision). The existence of these human resource constraints was one of the justifications for the EU’s initial extension of non-reciprocal trade preference to the developing countries of the ACP. This human resource constraint in many countries remains as severe as ever. Indeed, in recent years under the impact of HIV/AIDS, Malaria and TB it has become even more acute in certain countries. Since the underlying conditions have not changed which justified the initial granting of non- reciprocal trade preferences, the question arises: what developmental justification is there for moving away from non-reciprocal trade preferences? Clearly if ACP economies are to effectively compete under moves towards free trade with the EU, efforts will need to be redoubled in addressing the human resource constraint through investment not only in basic education and training but basic health services. FINANCIAL IMPLICATIONS OF RE-TRAINING SUPPORT Individually re-training initiatives would not be expensive. However if replicated across all affected countries the overall amount of funds required would be significant. For example if an average of Euro 5 million per country were made available for retraining schemes, this would require the deployment of over Euro 380 million in support of re-training initiatives. It is increasingly widely recognised that investments in basic health provision can bring immense economic benefits. For example low cost measures to prevent malarial infections (through the provision of impregnated nets and the clearing of malarial reservoirs) can greatly improve labour productivity and agricultural yields. Intensifying basic investments in these areas can bring very clear economic benefits to producers in ACP countries, with implications for the international competitiveness of ACP production. Clearly efforts in this area of ACP-EU co-operation need to be intensified. A start has already been made in this regard with the European Commission playing a leading role in efforts to combat Malaria, TB and HIV/AIDS. However once again problems related to the efficient and effective delivery of aid resources need to be addressed if progress is to be made within the timeframe envisaged for the implementation of moves towards the free trade in ACP-EU trade relations. EDUCATION: A PARTICULAR CHALLENGE FOR ACP-EU CO-OPERATION Improving aid deployment in support of improved education in ACP countries is particularly important in the case of the EU. In recent years EU aid to the education sector has fallen to historically low levels at around 3% of total aid compared to an average for other donors of around 10.3%. This is being partially addressed within the 9th EDF programming exercise where currently 6% of planned expenditures are earmarked for deployment in the education sector. Nevertheless this is below the average for other donors. Against this background a strong case can be made for substantially increasing both the annual level of EU aid committed to education and training projects and the level of assistance actually deployed annually in support of education and training programmes. This however may well require the development of “fast tracking initiatives” for education sector programmes. A multi-donor initiative in this regard targeting 5 ACP and 2 non-ACP countries is already underway under the Education for All Fast Tract Initiative7, aimed at providing all children in the targeted countries with a complete quality primary education by 2015. The European Commission is contributing to the initiative through re-allocating fund within existing country programmes. At the country level this does not increase aid flows, it simply targets existing aid commitments on the education sector. So far the Commission initiative has received a relatively cool response from ACP governments. If such an initiative is to have any long term impact it will need to be systematically implemented, broadened out (to more countries) and deepened (beyond basic primary education). 7 For a summary of the initiative in favour of Burkino Faso, Guinea, Guyana, Mauritania, Niger and Honduras and Nicaragua, see IP//1774, can be found at: http://europa.eu.int/rapid/start/cgi/guesten.ksh?p_action.gettxt=gt&doc=IP/02/1774|0|AGED &lg=EN&display= An Education fast track initiative is also envisaged for Ethiopia, Ghana, Mozambique, Tanzania, Gambia, Uganda and Zambia. There are also specific steps, which need to be taken to address the human resource constraints on the restructuring required as a consequence of moves towards free trade with the EU. This should include incorporating human resource development aspects into all sector based restructuring programmes, be it linked to meeting increasingly strict hygiene standards, adaptation to new technologies or skills development in packaging, design and marketing. These human resource development requirements will need to be sector specific and programme specific. It needs to be recognised however that many of the skills, which will be required as an integral part of restructuring efforts will not be readily available within the local workforce and specific provision will need to be made for the development of appropriate skills pools. A further specific area where human resource development programmes could usefully be established to ease the costs of restructuring is with regard to the establishment of re-training programmes for workers in sectors adversely affected by the introduction of free trade with the EU. Assessment of the implications of the EU- South Africa free trade area arrangement on the neighbouring economies of Botswana, Lesotho, Namibia and Swaziland suggest that sectors employing around 12,000 people could be adversely affected by moves towards free trade with the EU. This has given rise to calls for the establishment of a Retraining Fund for those retrenched, with the EU making available funds for this purpose. Similar such re-training initiatives may well be appropriate in a wider range of ACP countries and could include provisions for: retraining retrenched workers for new formal sector employment; retaining retrenched workers for self employment; a small loans facility for the creation of small scale and micro-enterprises. Taken together, extending additional support in these areas across the whole of the ACP could carry important financial implications. - The Management Constraint Looking beyond the general human resource constraint there is an additional factor, which needs to be borne in mind related to the nature of the local indigenous business sector. In many ACP countries locally owned enterprises are either sole traders, partnerships or private companies. There are only a limited number of public limited companies. Most of the locally owned companies are tiny by European standards and are managed by individuals or families, with no real professional managerial cadre outside of family members. The small size of the management base and the relative shortage of a local professional managerial cadre tends to generate a certain inflexibility within these companies in responding to changed market conditions. That is to say at the management level the opportunity cost of re-deploying staff to get to grips with the various dimensions of the restructuring challenge (be it identifying new markets, staying on top of SPS issues, developing new products or redesigning packaging) is relatively high, since they are being pulled away from day to day management tasks. This lack of flexibility in responding to market conditions is often compounded by the range of other human resource constraints related to the availability of both formally trained skilled labour and a range of support services which are routinely available in Europe, but which can be in short supply in ACP countries. Against this background there would appear to be a need for the development of specific programmes targeted at easing the management constraints on the restructuring challenges, which will be faced in ACP countries under moves towards free trade with the EU. One option in this regard, building on existing practices, would be the widespread use of Cost Sharing Grant Schemes. CURRENT EDF ASSISTANCE TO PRIVATE SECTOR DEVELOPMENT While in recent years within the framework of ACP-EU co-operation a wide variety of programmes have been established under different institutional frameworks for the promotion of private sector development, these various initiatives are relatively un-co- ordinated and commonly lack a strategic direction at the country or regional level. The best practices from this existing experience needs to be identified and evaluated to determine how best they could be replicated. This could then provide a basis for strengthening these on-going programmes of support to ACP private sector development. Cost Sharing Grant Schemes provide grants to enterprises to enable them to use a wide range of business support services in order to help them increase their competitiveness. The grant component varies from scheme to scheme, but generally the range is between 50% and 70% of the total cost of the agreed services to be provided or the activities to be undertaken. Cost Sharing Grant Schemes have four principal advantages as a vehicle for extending assistance to necessary restructuring processes at the enterprise level. Firstly, they provide resources direct to the applicant companies. So those who need the assistance clearly obtain it. Secondly, Cost Sharing Grant Schemes are an effective means of introducing companies to what for many of them are relatively new experiences in business development. This serves to develop a more dynamic and innovative response to the challenges posed by moves towards free trade. Thirdly, the fact that companies have to put up their own money and make their own contribution (since only between 50% and 70% of funds are reimbursed) means that the companies only use services which they genuinely believe will bring direct benefits to the operation of the enterprise. This serves to ensure that funds are used cost effectively in promoting the objectives of the restructuring process. Fourthly the scheme usually serves to consolidate the capacity of local business service providers. Thus, developing the support service infrastructure in the country concerned to the benefit of the wider economy. The key to the scheme working effectively is the swift processing of applications for grants, with payments taking place no longer than 2 weeks after submission of all the appropriate supporting documentation. These advantages of the Cost Share Grant Scheme would appear to make it an appropriate vehicle for extending support to the restructuring of ACP enterprises faced with the challenge of responding to the introduction of free trade with the EU. FINANCIAL IMPLICATIONS OF COST SHARING GRANT SCHEMES Here again, individually, Cost Sharing Grant Schemes would not be expensive. However if replicated across all affected countries the overall amount of funds required would be significant. For example if an average of Euro 5 million per country were made available for Cost Sharing Grant Schemes this would require the deployment of over Euro 380 million in support of such schemes. Assistance could also usefully be deployed in support of trade development and export diversification programmes, designed to provide assistance at the sector and firm level with the identification and development of new trading opportunities. Here again there is some experience under the EDF. Some EDF financed trade development schemes in their early years have been relatively successful in helping local companies penetrate new markets and develop products better suited to their target markets. However, there have also been a number of trade development projects, which have singularly failed to develop trade and promote exports 8. FINANCIAL IMPLICATIONS OF TRADE DEVELOPMENT PROJECTS Here again, individually, trade development projects would not be expensive. However if replicated across all affected countries the overall amount of funds required would be significant. For example if an average of Euro 6 million per country were made available for trade development activities this would require the deployment of over Euro 456 million in support of such schemes9. Overall it appears as if the closer the projects are to the intended beneficiaries at the level of firms and the sector, the more effective such programmes tend to be. This would appear to be an important lesson to carry into the debate on restructuring assistance. While it may well be appropriate to mobilise funds for such trade development initiatives at the regional level (an increasing focus for the European Commission in terms of the deployment of trade development support) such programmes will need to be implemented at the national level in close consultation with the intended beneficiaries. If programme design, management and implementation are not decentralised then the benefits arising from such programmes are likely to be greatly reduced. In the absence of such assistance in addressing the management constraint on restructuring the more “natural” response of the majority of ACP enterprises would be 8 The most criticised EDF funded trade development project in this regard was the “ACP-EU Trade Development Project”. For a summary of the criticisms made see: http://europa.eu.int/comm/europeaid/evaluation/evinfo/acp/951437_ev.html 9 The recently publicised Trade Development Project in Jamaica was a four year Euro 6.8 million programme. For details see “Case Reports of EU Trade Development Projects Around the World”, which can be found at: http://europa.eu.int/rapid/start/cgi/guesten.ksh?p_action.gettxt=gt&doc=IP/03/206|0|RAPID&lg=EN&di splay= to downsize and to concentrate on their core business activities. This might be accompanied by the development of their own trading operations to serve their existing client base on the basis of cheaper imported products. Either way the net effect would be a contraction of productive economic activities and the closing off of possibilities for the structural development of the sector in the ACP country concerned. - The Financial Constraint Finally there is the financial constraint on addressing the restructuring challenges, which are likely to be faced. As previously indicated given the structure of ownership many ACP private sector business enterprises tend to be risk averse. Their “natural” response to increased competition is to down size and concentrate on their core activities and/or develop a trading arm with which to serve their existing client base. In this context if dynamic restructuring in response to the challenge of free trade is to be encouraged then financial facilities will need to be established to reduce considerably the risk borne by individual entrepreneurs in trying to respond positively to an evolving market situation. This is particularly the case given the fundamental inequalities involved in the competition between relatively tiny ACP enterprises and relatively huge EU enterprises. Against this background careful attention will need to be paid to the development of the rules and regulations of the new Investment Facility to see to what extent the instruments to be created under this facility can be specifically geared towards easing the financial constraint on a dynamic response to the challenge of restructuring. Currently a range of concessional loan financing is available to ACP public and private enterprises under the newly constituted Investment Facility, in the form of "risk capital" and "own resource" loans. The terms and conditions of loans extended can vary considerably. In the past one major problem with EDF financed loans was that they were denominated in European currencies, with repayments of interest and the principal being made in the currency in which the loan was denominated. While this posed no problems in an era of fixed exchange rates, in a era of rapidly changing exchange rates (almost invariably to the detriment of most ACP countries), this has often resulted in the "real interest rate" charged in local currency terms being substantially more than the nominal rates set down in the ACP-EU agreement. This is a particular problem for enterprises whose production is primarily geared to serving domestic markets, and where earnings are primarily in local currency. The issue of the "exchange rate risk" is thus central to the actual degree of "concessionality" involved in the extension of loans under the EDF. Any concessional loan facility designed to support the restructuring of ACP enterprises facing increased competition from EU exports on domestic markets should ensure that the exchange rate risk is not carried by the ACP enterprise. This element of EDF financed loan packages will need to be re-thought if EDF financed loan instruments are to be made relevant to ACP enterprises facing the challenge of increased competition from EU exports to local markets. An additional issue, which will need to be taken on board in designing an appropriate concessional financing facility to assist the restructuring process, is the size of the loans to be made available. In the past the minimum size of loans extended to individual ACP enterprises was so high as to exclude all but the largest ACP enterprises10. While the EIB has sought to address this problem through the extension of "global loans" to intermediate financial institutions, for on-lending to individual enterprises, the issue of the minimum and maximum size of loans which can be made available to restructuring enterprises will need to be carefully determined as will the terms and condition under which such funds can be on-lent to individual enterprises. Experience to date suggests that intermediate financial institutions do not always take advantage of the full range of concessional loans, which can potentially be extended under the provisions of EDF loan financing11. The full range of possible concessional loan facilities will need to be fully exploited if loan financing is to effectively support the restructuring of ACP enterprises facing increased competition on their domestic markets as a result of the introduction of free trade with the EU. In developing appropriate financial assistance instruments to support economic restructuring ACP governments will need to consult closely with business chambers and sectoral associations and will need to fully exploit the flexibility which exists under the existing provisions of the Cotonou Agreement. While the operational modalities of any concessional loan facilities to assist restructuring will need to be sensitive to local needs and constraints and will need to be developed in close consultations with the parties concerned a number of principles should guide its establishment of such facilities, most notably: simplicity of design and operation; a commitment to local management and administration; a commitment to being open to all affected enterprises and sectoral associations. The foregoing constitutes a brief overview of areas where either new instruments are needed or existing co-operation instruments are in need of reform. It is by no means a comprehensive overview. Indeed papers prepared as background to regional ACP meetings at the request of the Commonwealth Secretariat have identified no less than 22 separate areas where practical changes or new initiatives could be introduced to support ACP countries in restructuring to meet the challenge of moves towards free trade with the EU. - The Fiscal Challenge In addition to these development dimensions there is the impact that moves towards free trade with the EU will have on government revenues in ACP countries. The fiscal implications of moves towards free trade with the EU could be particularly profound 10 Indeed, often the large ACP enterprises are affiliates or subsidiaries of European enterprises. 11 This is in part because such operations would directly compete with their own loan operations. for least developed ACP countries, which constitute the majority of ACP members and where 60% of the population of ACP countries live. In many ACP countries, revenue from the imposition of import duties on traded products are a principal source of government income. Where the EU is the major trading partner, duties imposed on imports from the EU often represent a significant proportion of total customs duties raised by ACP countries. The progressive elimination of import duties on goods from the EU could thus have significant adverse effects on total government fiscal revenues. This is most notably the case for African ACP economies, given their trade orientation towards Europe. It is less of a problem in the Pacific and the Caribbean, where the EU is generally a less important source of imports. The severity of the consequences for government revenues can perhaps best be illustrated by consideration of the situation of four ACP countries which already find themselves in a free trade area with the EU, namely, Botswana, Lesotho, Namibia and Swaziland (BLNS). Estimates contained in a study financed by the EU and commissioned on behalf of the BLNS by Swaziland on the impact of the EU-South Africa trade agreement on the BLNS suggested the following minimum total revenue losses for each of these governments arising from the implementation of the tariff reductions set out in the EU-South Africa Trade Development and Co-operation Agreement12: Botswana 5.3% Namibia 8.6% Lesotho 12.9% Swaziland 13.9%13 In the case of Namibia the losses faced are equivalent to nearly two and a half times the current Namibian government budget deficit. In Namibia it is felt that such a big gap in the basket of revenues available to the Namibian Government would constrain the ability of the Government to fund important social and economic activities, unless major improvements in the efficiency of government service delivery were achieved in the coming 12 years. The immediate problem facing the government of Namibia and those of the other BLNS countries is thus twofold: how to improve the efficiency of government service delivery and how to establish efficient and effective alternative systems of revenue collection to compensate for fiscal losses arising from moves towards free trade with the EU. This is seen as a major challenge for, in the case of Namibia, preliminary assessments suggest that even if additional revenues are generated on all likely and 12 The BLNS find themselves in a free trade area with the EU as a consequence of their membership, alongside South Africa, of the Southern African Customs Union (SACU) and South Africa’s decision to conclude a bilateral free trade area agreement with the EU. The EU-South Africa Trade, Development and Co-operation Agreement has implications for the customs revenues accruing to the BLNS, since customs (and excise) revenues in the SACU are paid into a common pool and distributed following a set formula which calculates each members share. 13 “The Economic Impact of the Proposed European Union-South Africa Free Trade Area Agreement on Botswana, Lesotho, Namibia and Swaziland”, BIDPA, Gaborone, Botswana, and IDS, Sussex, UK, July 1998. viable taxation options this would still not be enough to substitute for the revenues lost as a result of the introduction of free trade with the EU14. A substantial expenditure review is thus held to be essential. With a number of ACP countries being even more dependent on customs duties charged on imports from the EU than is the case for Namibia, the foregoing example provides some indication of the scale of the fiscal restructuring challenge which a number of ACP governments will face under moves towards free trade with the EU. In this context the EU needs to recognise the profound fiscal implications, which can arise as a consequence of the introduction of free trade in ACP-EU trade relations. The EU furthermore needs to recognise that where the introduction of free trade occurs at a pace which is more rapid than the envisaged process of multilateral tariff reductions, then this will result in customs revenue losses in excess of those which would have occurred solely as a result of the multilateral process of trade liberalisation. This will clearly exacerbate the problems of fiscal adjustment, which ACP governments will face. Following on from this, there is a need for the EU to recognise the particular responsibility, which stems from this in terms of assisting ACP governments with the difficult process of fiscal restructuring. The ACP should look to securing from the EU a firm and binding commitment to on-going assistance to ACP programmes of fiscal restructuring. More specifically the ACP should look towards securing from the EU a clear and binding commitment to supporting such measures as: * comprehensive tax and expenditure reviews in each ACP country where trade taxes form a major portion of government revenue and the EU is a major trading partner; * detailed analysis of the viability of various possible reforms in the specific context of each ACP country facing fiscal adjustments, with a view to identifying optimal solutions in the light of wider poverty reduction objectives; * specific programmes of tax reform, possibly including support for the establishment of independent revenue authorities. Where the fiscal implications of moves towards free trade with the EU are particularly severe the EU should even look to providing additional direct budgetary support to the government affected. An implicit commitment in this regard has already been made in the case of least developed Lesotho in the context of the implementation of the EU-South Africa Trade, Development and Co-operation Agreement. While this could offer a useful precedent for other ACP least developed countries facing serious problems of fiscal restructuring under moves towards free trade with the EU it should be noted that this commitment has yet to be put into effect, given the failure to move ahead with the “Economic Integration Support Programme for the BLNS”. In addition it should be noted that this commitment is restricted to least developed countries and is explicitly ruled out for non-least developed countries regardless of the depths of the fiscal problems created by moves towards free trade with the EU. 14 “The Future Namibia-EU Trade Relations”, Report Of The Workshop of The Parliamentary Standing Committee On Economics Of The Namibian Parliament, April 2001. Moving beyond the macro-economic level, if the adverse effects of moves towards free trade on the poor and vulnerable are to be minimised then this will need to be taken up and addressed within the process of fiscal restructuring. What this could mean in practice has been elaborated on in the APRODEV supported study “EPAS: What‟s in it Women. Women in Zimbabwe: Issues in Future Trade Negotiations with the EU”. In looking at the fiscal implications of moves towards free trade this study noted how “the first sectors to face budget cuts when government revenue are reduced are the social sectors of health and education15”. The study went on to note how with “cut backs in the health budget and the introduction of „user fees‟, the take up of ante natal and post natal services declined considerably and this saw an increase in both infant and child mortality rates and maternal mortality rates, which rose from 100 deaths per 100,000 in the late 1980s to between 200 and 250 deaths per 100,000 in 199216”. The study highlighted the importance of “insulating the health services of greatest importance to women from the worst effects of budget cut backs17”, since this can “quite literally be a matter of life and death for poor women in Zimbabwe18”. It went on to make three specific recommendations, namely that: “Work should be initiated as soon as possible on identifying possible alternative sources of government revenue and improving the efficiency of existing government expenditures. Steps should be taken to identify those expenditures of greatest importance to the poor and women with a view to insulating these areas of expenditure from the budget cuts; Support should be extended to revenue incidence analysis to identify the impact of new revenue measures on the poor and women19”. The implementation of these kind of measures should form an integral part of European Commission assistance to the difficult processes of restructuring which will be faced under moves towards free trade with the EU. However to date under phase 1 negotiations these issues have yet to be substantively discussed. Not surprisingly the ACP would like to see these issues comprehensively addressed as an integral part of the EPA negotiations. However, the European Commission still wants to discuss what needs to be discussed in a regional context. Therefore the prospects of making earlier progress towards ACP objectives do not appear very favourable. 15 “EPAS: What’s in it Women. Women in Zimbabwe: Issues in Future Trade Negotiations with the EU”, APRODEV, September 2002. 16 ibid 17 ibid 18 ibid 19 ibid AREAS OF DIVERGENCE DEVELOPMENT ISSUES ACP EU Funding Believes additional funding will be required EU believes no case can be made for using simpler and swifter aid deployment additional funding until existing EDF procedures, so as not to divert funds from funds have been fully utilised. existing priorities. Sequencing Restructuring assistance should be made The policy context should be right with available and programmes implemented moves towards free trade being before free trade is introduced, so that implemented before restructuring ACP economies are equipped to meet the programmes are designed and challenges posed by moves towards free implemented, since only if a dynamic trade with the EU. private sector operating in the right policy context exists will such assistance be effective. Support to Fiscal and Economic Restructuring The ACP wants to see a comprehensive The EU believes more detailed approach adopted to addressing the discussions are needed on this issue issues of both fiscal and economic before any commitments are made on the restructuring as an integral part of any policy and programme response required. moves towards free trade with the EU, with the negotiations giving rise to specific instruments and programmes designed to address these challenges. Trade in Services To date there has been little progress in negotiations on trade in services. The Cotonou Agreement commits the ACP to incorporating trade in services into economic partnership agreements after appropriate experience has been acquired. However no date for the incorporation of trade in services into economic partnership agreements was set down. The joint report of the negotiating group on trade in services similarly set no deadlines for the commencement of negotiations in trade in services. However, the joint report does indicate an agreement that in 2006 a decision will be taken on the date by which negotiations on trade in services should be started. Even here however it should be borne in mind that the reports of the negotiating groups are not legally binding but are only a “point of reference”. There is thus in contrast to economic partnership agreement negotiations on trade in goods considerable flexibility in dealing with negotiations on trade in services, with no fixed deadlines for the commencement or conclusion of negotiations on trade in services and no agreement on the rules on modalities to be followed in negotiating liberalisation of trade in services. This reflects the flexibility contained in Article V of the GATS, which deals with regional arrangements (this contrasts sharply with the equivalent provisions under Article XXIV of the GATT on regional arrangements for trade in goods). The ACP have stressed the need for the development of the service sectors in ACP countries, prior to any liberalisation of the service sectors. The ACP have proposed that any agreements on specific objectives and the principles and modalities for any moves towards liberalisation of services should be sequenced with programmes of assistance for the development of ACP service sectors. The EU agrees with the ACP that support for the development of service sectors should be provided to ACP countries within the context of EPAs. The EU agrees that the ACP should be placed under no fixed obligation to liberalise services, but believe that it is in their best interests to do so. The EU agrees that the regional dimension of service development should be taken into account, with liberalisation of services being deferred where this could support the development of service provision at the regional level. Both parties agree on the importance of establishing supportive regulatory frameworks for service sector development. There is disagreement whether additional funds should be made available to support service sector development in ACP countries. Additional funds with rapid and flexible deployment procedures are felt to be essential by the ACP. The EU sees no need for additional resources above and beyond existing EDF funds to address the issues of support for service sector development. Once again this comes down to the question of the utilisation of existing EDF resources. It should be noted that under the terms of Article 41.5 of the Cotonou Agreement the EU commits itself to supporting “the ACP States efforts to strengthen their capacity in the supply of services”. However, this is not significantly reflected in the utilisation of NIP resources under the Cotonou Agreement. While EDF finance is being provided to individual initiatives linked to tourism and the development of construction and related engineering services (mainly through preferential tendering arrangements), this does not constitute the comprehensive and integrated approach the ACP feels is required to meet the challenge of service sector development faced in ACP countries. The European Commission for its part feels that concrete programmes of assistance to service sector development could be designed based on the needs identified by the proposed Regional Preparatory Task Forces, which the Commission proposes should deal with all aspects of the second phase EPA negotiations. The EU does not favour the opening up of service supply through the opening up of movement of natural persons, preferring to allow access only in certain sectors for university trained persons or those with equivalent levels of training. For ACP countries the movement of natural persons in all areas of service provision is seen as an essential element of any agreement on liberalisation of services. For the EU this touches on the sensitive issue of migration. An additional area of divergence is the scope of trade in services negotiations. The EU favours a WTO-Plus approach, whereas the ACP does not want to go further than anything negotiated in a multilateral context. AREAS OF DIVERGENCE: TRADE IN SERVICES ACP EU Additional Funds Additional funds with rapid and flexible No additional resources are needed any disbursement procedures are needed to programmes required can be funded from support ACP service sector development. unspent EDF funds. Free Movement of Natural Persons ACP wants to include discussion on free The EU wants a more restricted approach movement of natural persons as an to this issue since it touches on the integral part of any reciprocal sensitive issue of migration. liberalisation of trade in services. Scope of Negotiations The ACP does not want to go beyond the The EU favours a WTO+ approach to commitments their governments are trade in services negotiations. willing to make in a WTO context. Trade Related Areas Only an initial exchange of views has taken place on trade related issues, with three areas of convergence and two areas of divergence having been identified. There is agreement on the importance of trade related areas to ensuring smooth trade flows and the minimisation of transaction costs. There is a shared recognition of the importance of having clearly defined and transparent regulatory frameworks and efficient and well functioning institutions for the design and implementation of measures in trade related areas. There is considerable divergence over the scope and coverage of the issues to be addressed under EPAs in the sphere of trade related areas. The EU wants to go beyond the trade related areas listed in the Cotonou Agreement to include issues such as government procurement and data collection, although no explicit reference is made to any of the areas to be covered in the final report on the all ACP-EU phase of EPA negotiations. The only reference made was to the Cotonou Agreement having defined the framework for the discussions. With the final report not being legally binding the European Commission could afford to make a tactical retreat on these and other issues, which remain an open sore in trade negotiations in the immediate post-Cancun context. TRADE RELATED AREAS LISTED IN THE COTONOU AGREEMENT The Cotonou Agreement contains provisions on a range of trade related areas, with the EU committing itself to assisting ACP countries in strengthening their regulatory frameworks with regard to: * competition policy; * intellectual property rights; * standardisation and certification; * sanitary and phytosanitary standards; * trade and environmental issues; * labour standards; * consumer policy. The European Commission would in addition like to see existing Cotonou commitments translated into region specific rules, with these rules being operationalised and made concrete. This would go substantially beyond the limited commitments ACP governments made in the Cotonou Agreement, which focussed on the establishment of co-operation arrangements in these areas to strengthen ACP capacities. For the ACP there is felt to be an urgent need to acquire the necessary expertise before entering into negotiations on these complex areas. This is based on the fact that many ACP countries possess neither the human nor institutional capacity to deal with trade related areas. In addition their legal frameworks are inadequate for the implementation of complex trade related measures. Against the background of these human, institutional, legal and even infrastructural constraints the ACP believes only some of the issues listed in the Cotonou Agreement dealing with trade related areas should be addressed within EPA negotiations. There is further more disagreement on how far commitments on trade related areas should go. The EU favours a WTO-Plus approach, whereas the ACP are reluctant to go beyond anything which their governments would agree to in a multilateral context. In the first phase of the EPA negotiations the ACP reiterated its stand that unless and until multilateral trade rules have been crafted in the additional trade related areas proposed by the EU (data protection and government procurement) and on competition policy, investment and trade facilitation then ACP countries and regions will not be amendable to negotiating these matters in an EPA context. Once again of course, there is considerable disagreement over the sequencing of the provision of capacity building support in trade related areas and the negotiation of rules on trade related areas under economic partnership agreements. AREAS OF DIVERGENCE: TRADE RELATED AREAS ACP EU Coverage of Trade Related Issues The ACP believe only some of the trade The EU wants to go beyond the trade related issues mentioned in the Cotonou related areas listed in the Cotonou Agreement should be covered in EPA Agreement to include procurement and negotiations and only where the ACP have the data protection. necessary expertise. Scope of Trade Related Issues The ACP do not want to go beyond The EU wants negotiations on trade related anything which their governments have areas to go beyond commitments made in the agreed to at a multilateral level. WTO, the so called WTO+ approach. Sequencing of Assistance and Negotiations The ACP would like to see capacity The EU would like to see agreement on building support programmes for the trade related areas first with specific development of specific service sectors programmes being designed and under implementation before entering to implemented in the light of these negotiations. agreements. CONCLUSIONS AND RECOMMENDATIONS PREPARING THE BASIS FOR NEGOTIATIONS Outcome Of Phase I The failure to conclude a formal legally binding agreement on the substantive issues raised by the ACP under phase 1 of the EPA negotiations is to be regretted. The “template” approach to negotiations, which the Commission appears to be pursuing, whereby negotiations with the weakest ACP regions are prioritised, so as to establish the base line for all other agreements, should be avoided at all costs. In this context the European Commission and EU member states should fully commit themselves to a continuation of negotiations at the all ACP level in order to address the major issues of common concern to all ACP countries. The principles established at the pan-ACP level should then guide the regionally based EPA negotiations in these areas of common concern. Sequencing Of Supply Side Measures And Reciprocity The supply side constraints and development challenges facing the majority of ACP countries are such as to require the establishment and implementation of programmes to address these problems prior to the introduction of reciprocity in their trade relations with the EU. In the absence of substantial progress in addressing the physical constraints on competitive production, the productive base of ACP economies is likely to be undermined by moves (under current WTO rules) towards WTO compatible free trade area arrangements. This is inconsistent with the wider development objectives of the Cotonou Agreement, particularly with regard to the promotion of poverty eradication and sustainable development. Modification Of WTO Rules The ACP and the EU should work together in the WTO to bring about a modification of international rules on free trade areas agreements, with a view to introducing greater flexibility on the product coverage and the length of the transition period for the phasing in of free trade between developed economies and mixed groupings of developing and least developed economies. Such a modification of WTO rules is essential if future economic partnership agreements are to be WTO compatible and socially, politically and economically sustainable. Such a modification of WTO rules would allow a return to the concept of economic co-operation agreements, the half way house between non-reciprocity and full reciprocity, proposed by EU Development Commissioner Pinheiro towards the end of the 1990s in the Development Directorate‟s first set of proposals for the future development of its trade relations with the ACP. This concept of economic cooperation agreements was however subsequently removed from Commission proposals under pressure from the Trade Directorate, which saw it as inconsistent with the EU‟s wider trade policy agenda being pursued through the WTO. Establishing Non-Punitive Alternatives The European Commission should use the formulation of a new 10 year GSP regulation to introduce still further differentiation between developing countries, based on objective and non-discriminatory criteria, with a view to the establishment of a non-punitive alternative to EPAs for those non-least developed ACP countries which do not feel themselves in a position to conclude reciprocal preferential trade arrangements with the EU. The European Commission should be able to devise a revised GSP scheme which allows the extension of non-reciprocal trade preferences to non-least developed ACP countries in ways which prevent any re-imposition of import duties on products in which the ACP countries concerned have an export interest. Conduct Of Regional Based Negotiations National governments of ACP member states must remain the primary intermediary in the conduct of EPA negotiations. While recognising the importance of regional co-operation and regional market integration amongst ACP countries to economic development, it needs to be recognised that these processes of regional co-operation and integration are at a relatively early stage. In this context asserting a primary role for ACP regional structures in EPA negotiations runs the risk of undermining and setting back still fragile processes of regional co-operation and market integration. In this context while the Secretariats of ACP regional bodies should be closely associated with the process of EPA negotiations, these regional structures should not be encouraged to substitute for national decision making processes. The processes of regional integration between ACP countries should be given priority over the negotiation of EPAs. Regional markets should first be established and industries serving these markets consolidated, before regional ACP markets are opened up to free trade with the EU. This “sequencing” of regional market integration and regional market opening is seen as crucial if ACP economies are to fully gain the benefits of regional market integration with their neighbours. ISSUES IN THE NEGOTIATIONS Addressing Supply Side Constraints There is a need for the EU to: - undertake a systematic review of the successes and failures of existing programmes intended to address supply side constraints, with a view to ascertaining the effectiveness of various types of interventions under different circumstances; - review existing institutional arrangements for extending assistance to address supply side constraints, so as to determine which institutional delivery mechanisms have proved most effective; - support the establishment of co-ordinated and integrated country specific programmes of assistance to address supply side constraints, which reach beyond the current instruments and approaches applied under existing ACP-EU co-operation arrangements. This will then provide a basis for identifying the real scale of the need for additional restructuring assistance in the face of moves towards free trade with the EU. It will also provide a basis for reforming aid instruments targeted at assisting the private sector in meeting the challenge of restructuring. The specific package of measures required will vary from country to country, region to region and sector to sector and so should be subject to discussion at the appropriate level. However the EU should make a clear commitment to establishing such programmes of assistance to address both general supply side constraints and support targeted restructuring processes, as a prelude to the introduction of any reciprocal preferential trade arrangements. This being said if the economic competitiveness of ACP economies is to be enhanced to the benefit of the poor, these types of targeted programmes of assistance to address supply side constraints will be needed regardless of whether ACP countries sign up to economic partnership agreements. Additional funding will need to be made available to assist ACP countries in meeting the restructuring challenges, which will be thrown up under moves towards free trade with the EU. Overall, with rare exception, EDF procedures leave the European Commission poorly placed to assist ACP private sectors in responding to the challenge of restructuring which will be faced under moves towards free trade with the EU. There is a need to systematically review the experience of support to private sector based programmes of economic restructuring, with a view to identifying what procedures and instruments have most effectively extended support and what changes will be required to make assistance to private sector based restructuring programmes more timely and effective. Substantially more funding will also need to be deployed in addressing the underlying supply side constraints on competitive production faced in ACP countries. It needs to be recognised however that this is a long term task, which will require moves towards free trade to be linked to the actual progress made in addressing these supply side constraints. Phasing In Reciprocity The implementation of tariff reductions in sensitive sectors should be linked to the attainment of specified development indicators, which reflect an improvement in the underlying basis for competitiveness in the ACP economies concerned. This will require a modification of WTO rules on free trade area agreements and a closer coordination between the deployment of restructuring assistance and general development assistance and the attainment of key development indicators defined in the context of regionally based negotiations. Simple Safeguards The European Union should commit itself to allowing ACP countries recourse to simple and pre-emptive safeguards, modelled on those the EU potentially has recourse to under the Cotonou Agreement. This should include the establishment of monitoring and surveillance mechanisms for sensitive products, allowing the pre-emptive deployment of safeguard measures where trends suggest a danger of market disruption. The definition of sensitive products should include all agricultural and simple value added food products where ACP countries have a current or emerging production interest and where the deployment of financial assistance under the CAP has an influence on production decisions and subsequent trade outcomes. Rules Of Origin Negotiations around rules of origin issues need to be guided by a clear political commitment from the EU Council of Ministers to opening up new market opportunities for ACP exports, based on substantive processing in ACP countries of non-originating raw materials. Taking Account Of CAP Reform Given the importance of agriculture to the economies of most ACP countries, the effects of CAP reform on ACP economies need to be comprehensively addressed as an integral part of EPA negotiations. In addressing the external effects of CAP reform the EU should look towards both the provision of financial assistance for restructuring to ACP sectors affected by the introduction of reforms and the rapid introduction of compensatory trade measures, designed to eliminate all the remaining residual market access restrictions on ACP agricultural and value added food product exports to the EU. A start could already be made on eliminating all the remaining residual market access restrictions on ACP agricultural and value added food product exports to the EU by more fully utilising the existing provisions contained in the Cotonou Agreement for the modification of the product coverage of declaration XXII. This could, for example, remove all quota restrictions on Namibia‟s grape exports as part of a package of “compensatory trade measures” put together in response to the erosion of beef sector preferences arising as a result of CAP reform. Whilst recognising the sovereign right of the EU to protect human, animal and plant health, this should be achieved in ways, which place minimal obstacles in the way of ACP exports. In this light there is a need for a comprehensive ACP-EU dialogue on SPS issues in order to address the various dimensions of the problems faced. This is essential if the value of the trade preferences extended to ACP countries in the agricultural sector is not to be undermined as ACP producers find themselves increasingly unable to comply with EU standards at an economic cost which makes exporting profitable. Fisheries Agreements The EU should conclude a framework ACP-EU fisheries agreement setting out in broad terms how future bilateral fisheries agreements will promote the sustainable management of ACP fisheries resources and the measures that should be taken to ensure that the ACP maximise the long term benefits from their increasingly valuable yet vulnerable fisheries resources. Addressing Fiscal Issues In the light of the importance of customs duties to total government revenues in many ACP countries and the importance of the EU as a source of imports (particularly for African ACP countries) there is a need for the EU to adopt a comprehensive approach to assisting processes of fiscal restructuring which ACP governments will face under moves towards free trade with the EU. More specifically there is a need for the EU to make a clear and binding commitments to support such measures as: - comprehensive tax and expenditure reviews in each ACP country where trade taxes form a major portion of government revenue and the EU is a major trading partner; - a detailed analysis of the viability of various possible reforms in the specific context of each ACP country facing fiscal adjustments, with a view to identifying optimal solutions in the light of wider poverty reduction objectives; - specific programmes of tax reform, possibly including support for the establishment of independent revenue authorities. In addition, where the fiscal implications of moves towards free trade with the EU are particularly severe the EU should even look to providing additional direct budgetary support to the governments affected. A clear policy commitment should be made by the EU in this area at an early stage in the EPA negotiations. Incorporating The Gender Dimension Throughout the whole process of EPA negotiations close consideration needs to be given to the impact of changes on women, in the light of the gender relations in the countries concerned. This is central to the issue of ensuring EPAs contribute to poverty eradication, since in most ACP countries women constitute the bulk of the poor. In many ACP countries women face systematic discrimination in terms of access to economic resources, which seriously disadvantages them as economic actors in responding positively to the changes which will be brought about under moves towards free trade with the EU. Tariff commitments entered into should acknowledge and take into account the different access men and women have to economic resources and where necessary should be accompanied by flanking measures designed to empower women as economic actors in responding to the challenges and opportunities arising under moves towards free trade with the EU. While in many instances primary responsibility will lie with the governments of the ACP states concerned, the EU should stand willing to play a supporting role. Given the major role women play in the agricultural sector in African ACP countries particular care will need to be taken in developing future ACP-EU agricultural trade relations. Looking beyond the role of women as economic actors to their social roles within the prevailing gender division of labour, particular attention will need to be paid to the impact of fiscal adjustments on women. Ideally efforts should be made to “ring fence” services of greatest importance to women and the poor within processes of fiscal adjustment. More specifically the following steps should be taken as an integral part of the preparations of EPA negotiations: - “Work should be initiated as soon as possible on identifying possible alternative sources of government revenue and improving the efficiency of existing government expenditures. - Steps should be taken to identify those expenditures of greatest importance to the poor and women with a view to insulating these areas of expenditure from the budget cuts. - Support should be extended to revenue incidence analysis to identify the impact of 20 new revenue measures on the poor and women ”. The European Union should then support any remedial measures identified as necessary in minimising the adverse impacts of fiscal adjustments on poor women in ACP countries. Trade in Services The current flexibility in how to deal with negotiations on trade in services should be maintained. ACP governments should not be pressed to make commitments on trade in services in the context of EPA negotiations, which they are unwilling to make commitments on in a WTO context. 20 ibid In dealing with negotiations around trade in services, priority should be accorded to establishing programmes of support to the development of indigenous service sectors in ACP countries. In the light of limited programmes of assistance currently in place for the development of services in ACP countries, this will required the mobilisation of additional resources. Careful consideration will need to be given to liberalisation of services in areas where ACP economies have a comparative advantage, namely those requiring relatively low skill levels. Trade Related Areas ACP governments should be allowed to select on a case by case basis the trade related areas in which they would like to negotiate agreements with the EU in the light of their needs and capacities in these areas. Once again ACP governments should not be pressed under EPA negotiations to make commitments in trade related areas, which their governments have proved unwilling to address in a WTO context. Before entering into negotiations on trade related areas priority should be accorded to developing the human and institutional capacity of ACP governments to deal with these issues. In this context priority should be accorded to giving content to the commitments made in the Cotonou Agreement to establishing co-operation arrangements in trade related areas to strengthen ACP capacities. Overall Conclusions Overall economic partnership agreements of the kind envisaged by the European Commission, - that is free trade area agreements established under current WTO rules which were designed for free trade between neighbouring developed economies – will be developmentally negative for most of the least developed and developing countries of the ACP Group. This arises from the developing and least developed nature of ACP economies. This leaves enterprises in ACP countries poorly placed to respond to the challenge of free trade, since they face difficulties in competitively producing and marketing as a result of the various supply side constraints, which arise from the developing and least developed nature of the economies of which they are a part. Unless the supply side constraints faced in ACP economies can be eased prior to the introduction of free trade with the EU then the costs of free trade with the EU are likely to outweigh the benefits gained by access to an expanding EU market. Against this background it seems highly inappropriate for the current EPA negotiations to focus on the negotiation of trade liberalisation commitments by ACP governments. Attention should first be paid to modifying WTO rules to ensure that reciprocity is gradually phased in, linked to the successful implementation of measures designed to address the supply side constraints faced by diverse ACP economies. Establishing a partnership framework for the development of integrated programmes of support for addressing long term supply side constraints will need to form a major component of economic partnership agreement negotiations. Only if this becomes a focus for the current negotiations will economic partnership agreements contribute to the economic transformation of ACP economies, in ways which lay the basis for poverty focussed forms of sustainable development. In addition given the importance of the agricultural sector to many ACP economies, liberalisation of trade in agricultural and value added food products, in areas where individual ACP countries have a current or potential production interest, should be deferred until such time as the EU has dismantled systems of agricultural support which impact on production and trade outcomes. Indeed, given the perverse external effects of CAP reform, agricultural dependent ACP economies should be allowed recourse to simple, pre-emptive safeguard provisions in areas where they have a current or emerging production interest.
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