AWAITING THE GRIM REPA by nikeborome

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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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