The future of Africa and Africans will be determined in large measure by the trade relationship with Europe. Before you dismiss this as a serious over-statement, consider Africa's past: the slave-trade, colonial protectionism, post-colonial hostility to economic nationalism, the imposition of market forces while Europe reinforced its Common Agricultural Policy. Even positive elements, such as the Lomé agreement, centred on trade, but now with the trade provisions of its successor the Cotonou agreement coming to an end at the beginning of 2008, Africa is faced – take it or leave it – with the idea of Economic Partnership Agreements (EPAs), whose core is regional free-trade agreements encompassing policy commitments in a range of trade-related areas and services liberalisation, and these will tie Africa into a dependent, some might say neo-colonial, relationship with Europe.1 Not even the most self-sufficient peasant is quite independent of the global market, as distortions of it, cemented by such trade agreements, determine the prices of inputs and any surplus sold.
But however important agriculture is to present economies, and however much the difficulties of successful industrialisation have multiplied, it is a counsel of despair to accept that Africa must forever remain solely a provider of cheap raw materials to the developed world (including a future China) – the modern equivalent of hewers of wood and drawers of water. Industrialisation has been a central component of all successful development experiences, and must be central also for Africa, if not now, then in the near future. But there is a real risk that EPAs (along with other developments discussed in this article), could be closing off even the most preliminary moves in this direction, as subsidised exports from Europe destroy local markets and predatory investment asset-strips its infant industries. This is not an argument against trade, rather a warning that Africa needs to determine the conditions under which it trades and the investment it welcomes, instead of allowing Europe to determine them, with its own farmers and companies the main if not only beneficiaries.
This paper is an expansion – in depth and range of issues – of the briefing with a similar title carried in ROAPE 111 ahead of key discussion on EPAs under the German Presidency of the EU in the first half of 2007.
In that briefing we discussed the broad approach to the EU's strategy, and we outline it briefly now before moving to a detailed discussion of the main issues in the negotiations, namely policies towards trade in goods, trade in services and other trade-related areas, and the development dimension of EPAs. The danger is that these agreements will lock African development into a pattern largely determined by Europe's external trade-policy agenda: as a supplier of cheap commodities, with a glass ceiling on value addition, and as cannon fodder in the battles on ‘behind border’ issues in the WTO. This could so constrain Africa's development options that the progress made through varying degrees of economic nationalism elsewhere in the developing world remains elusive in Africa.
The Broad Approach of the EU Trade Strategy
We have seen that there has been a continuity in EU trade strategy over some decades, and that CAP reform and trade policy have developed in parallel. This has continued, with appropriate adaptations whether or not talks in the GATT or the WTO were continuing. Throughout, processes of internal reform and market restructuring preceded moves to market liberalisation, although partners in any trade negotiations were usually pressed for reciprocal liberalisation commitments ahead of their own internal reform or market development (though not – until recently – in the case of least developed countries or LDCs). A process of change requiring 35 years in Europe was not often thought to need half that time in much less developed partners, despite in many cases their lack of basic infrastructure, or in the case of regions the immature level of regional integration ahead of free trade with the EU. We thus discussed: the link between internal policy successes and trade policy; ‘walking on two legs’: a long-standing approach; the sequencing of domestic policy change with market opening; the limitations of the EU's commitment to free trade; ‘do what we say, not what we do’.
We concluded that the the lessons from the lengthy time-frame the EU has required for its own internal adjustment to prepare for market opening (not to mention the vast financial outlays required in support of this process), are simply not being taken on board in determining an appropriate content and time-frame for trade liberalisation for African countries under the proposed EPAs between groupings of African countries and the EU. It is this which lies at the heart of the current disputes over the nature and content of EPAs.
The question arises: if the objective of African trade negotiators in the EPA negotiations is in fact (as stated in the ACP mandate) to contribute to the structural economic transformation of African economies through the promotion of greater local value-addition to goods and services for national, regional and international markets, to what extent does the EU's wider trade policy and its concrete manifestation in the EPA negotiations support the attainment of this objective? This is a critical question and one which this paper now seeks to address.
Main Issues in the EPA Negotiations
Background
There are three main clusters of issues of contention in Africa-EU EPA negotiations at this stage in the negotiations, revolving around:
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Trade in goods;
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The approach to trade in services and trade-related areas;
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The so-called ‘development dimension’.
FTAs are economically beneficial, especially where they help the EU to bolster its presence in the faster growing economies of the world, which is our overriding interest (EC, 1995 :6).
the EU has much to gain from an FTA with South Africa. The further opening up of the South African market in the context of such an agreement will create competitive advantages for EU exporters compared to exporters from the USA, Japan and other suppliers of South Africa. The price the EU would have to pay for such an improved position in terms of loss of customs revenues is relatively low, due to the high level of existing duty-free access for South African imports and the relatively modest average level of the remaining tariffs at the EU side (EC, 1996 ).
Once the broad parameters of this policy had been adopted by the EU Council of Ministers, the rhetoric around EU free-trade-area agreements began to change, with the EC's own economic interests and policy agenda being downplayed. In its place a quite different justification was advanced, with the emphasis being placed on the supposed benefits which ACP countries, including those in Africa, would gain from EPAs: support for regional integration; investment promotion; enhanced competitiveness; improved and assured market access.
By the time when the Lomé renegotiations were launched in 1998 the EC approach had formally coalesced around the idea of region-to-region reciprocal preferential trade arrangements as the successor to the non-reciprocal Lomé Convention. ACP governments however were far from enthusiastic about such a radical change and in the course of the Lomé renegotiations ACP leaders succeeded in securing an extension of non-reciprocal trade preferences for a further eight years, alongside a commitment to the initiation in 2002 of negotiations on the establishment of WTOcompatible trading arrangements from 1 January 2008 onwards. For the EC these were always seen as essentially free-trade-area agreements.
The ACP however expected that WTO rules would be modified to support appropriate trading arrangements between geographically non-continuous regions consisting of groupings of countries at very different levels of economic development. Although they failed to alter the EC's focus on regional negotiations, they managed to gain the inclusion of a series of opt-out clauses from the various commitments on EPAs that the EC was seeking. Thus the formal provisions of the Cotonou Agreement state that EPAs will be negotiated with those:
ACP countries which consider themselves in a position to do so, at the level they consider appropriate and in accordance with the procedures agreed by the ACP Group, taking into account the regional-integration process within the ACP (ACP-EU, 2000 : Article 37.5).
The parties will regularly review the progress of the preparations and negotiations and, will in 2006 carry out a formal and comprehensive review of the arrangements planned for all countries (ACP-EU, 2000 : Article 37.4).
all alternative possibilities, in order to provide these countries with a new framework for trade which is equivalent to their existing situation and in conformity with WTO rules (ACP-EU, 2000 : Article 37.6).
The Trade-in-goods Dimensions
In broad terms the debate on the provisions of an EPA dealing with trade in goods revolves around four main issues:
1) The sequencing of the creation and consolidation of regional markets with their opening;
2) The extent of product coverage to be included in tariff-elimination commitments by African countries;
3) The length of the transition period during which tariffs should be eliminated in the agreed areas;
4) The treatment of ‘sensitive products’, where special arrangements are required.
Clearly the economic-adjustment challenges facing African economies as a result of EPAs will vary considerably depending on the extent of tariff elimination that they are expected to undertake and the length of the transition period over which they are expected to undertake it. This issue is also seen as critical to ensuring the proper sequencing of regional-market integration and consolidation and regional-market opening towards duty-free trade with the EU, and can best be illustrated with reference to the Eastern and Southern African (ESA) configuration's early draft proposals for an EPA with the EU.
The ESA Approach
These proposals sought to give concrete expression to the concept of ‘EPA-light’, which was seen to be the key to the proper sequencing of regional-market integration and consolidation with regional-market opening. The ‘EPA-light’ concept took as its starting point the objective of securing a WTO-compatible basis for ACP trade preferences. It does not buy into the EC case for the growth-and-development-promoting effects of extensive liberalisation per se, recognising first the need to build up the region's capacity to compete by addressing a variety of supply-side constraints. It recognises, however, that at an appropriate juncture market opening can and will play a vital role. From this starting point it seeks to address the issue: what minimal level of reciprocal trade liberalisation is necessary to secure WTO acceptance of a future framework for ACP-EU trade relations which maintains and enhances traditional ACP trade preferences whilst retaining the economic policy space for the creation and consolidation of functioning regional markets and promotes increased investment in the local production of goods and services for national, regional and international markets?
This concept, or variations thereof, gave rise to initial ESA proposals which envisaged limiting the extent of tariff elimination by ESA countries to 60% of current imports from the EU, while securing full duty- and quota-free access to the EU market for ESA exports (100% of current exports to the EU);3 together this would cover 80% of all trade and hence satisfy WTO criteria for ‘substantially all trade’, particularly where 12 of the ESA countries concerned were LDCs; extending the time-frame for tariff elimination over 35 years, consisting of a 10-year moratorium on tariff elimination for ESA countries and a 25-year phase-down period. This was felt to provide sufficient time for the development and consolidation of functioning regional markets prior to the opening of the regional market to duty-free trade with the EU.
Little consideration was given at this time to the treatment of ‘sensitive products’, other than through their complete exclusion from the process of tariff elimination, since it was felt that limiting the product coverage on the ESA side to 60% and allowing a total of 35 years for tariff phase-downs, alongside the provision of EPArelated adjustment support from the EU, would be sufficient to accommodate all regional sensitivities.
However, the EC has proved unwilling to consider a moratorium and such an extended time-frame for tariff elimination across all products (though a 25-year timeframe could be considered for the most sensitive products) and is pressing the ESA countries to abandon the demand for a moratorium on tariff phase-downs and to reduce the number of products excluded from tariff-elimination commitments. This EC resistance has led to a revision of the ESA proposals with revised drafts proposing only a 25-year transition period and the launching of an intensive process of internal consultations to trim down the number of product exclusions. Against this background consideration is now being given to greater use of special arrangements to deal with sensitive products. This currently focuses on two main areas: 1) products which are revenue sensitive and 2) products which are sensitive because of the impact of CAP instruments on production decisions and consequent trade outcomes.
Special Arrangements for Sensitive Products
The issue of losses to government revenue arising from the full implementation of EPAs is of great concern to all ACP countries which depend heavily on import revenues and have a strong import orientation towards the EU. This is particularly the case for LDCs in eastern and southern Africa. Concern about the long-term revenue implications of eliminating tariffs on products which contribute significantly to government revenues is having a profound effect on the level of reciprocity which ESA LDCs are willing to accept within the overall regional tariff-elimination offer to be made to the EU. This is leading to an extensive list of exclusions of tariff lines from the regional tariff-elimination offer. As a result, this is greatly reducing the volume of trade covered by the likely ESA tariff offer, leading some to question whether such EPAs would meet the WTO ‘substantially all trade’ requirement.
Against this background one option for addressing this problem is to draw up a list of ‘revenue sensitive’ products on which a tariff-elimination offer is made, as an integral part of the EPA agreement, but where implementation of the tariff phasedown schedule is only activated once successful programmes of revenue diversification have been implemented.
A similar special arrangement could be envisaged for sensitive food-and-agricul-tural products, benefiting from EU export refunds and other forms of export support. On these agricultural and value-added food products a schedule of tariffelimination commitments would be included in the EPA agreement, but the implementation of this schedule of tariff-reduction commitments would only begin after the abolition of EU export refunds and the removal by the EU of other forms of public support ‘having an equivalent effect’. This would provide ACP countries with at least an extra five-year breathing space (assuming the EU lives up to its Doha commitment to end export subsidies by 2013) and could serve to provide an adequate time-frame for the nurturing of regional food-processing industries if coupled with the ‘back-loading’ of tariff-elimination offers in these sensitive areas.
This approach is not as radical as it at first appears. There is a precedent for this kind of ‘linkage’ in the EU tariff-elimination commitments on fisheries products contained in the EU-South Africa Trade, Development and Cooperation Agreement (TDCA).
A further tool which could be included in any EPA to deal with sensitive agricultural and food products would be the establishment of lists of products on which the ESA region retains the right to impose safeguard duties, should a threat of market disruption emerge. To be effective such provisions would need to include mechanisms for the monitoring of trade flows in designated sensitive products and would need to allow for the speedy deployment of pre-emptive safeguard measures should a threat of market disruption emerge. Such provisions would also need to allow neighbouring countries to invoke such safeguard arrangements should a threat to intra-regional trade emerge from increases in EU exports of the designated products.
State of Play
The current EC response consists of trying to limit product exclusions and the length of the transition period, in the belief that liberalisation ultimately will deliver better long-term development gains by facilitating the more efficient use of economic resources. It is not however currently open to the inclusion of ‘conditional tariffelimination offers’, despite resorting to such tools in an earlier agreement with South Africa.
Trade-related Areas & Trade in Services
The emphasis on ‘behind border’ issues which are given such prominence in the new EC trade strategy, have long been seen by the EC as an integral part of EPA negotiations. Indeed the 2002 EC negotiating directive for the EPA negotiations called for:
a progressive and reciprocal liberalisation of trade in services aiming at assuring a comparable level of market-access opportunities, consistent with the relevant WTO rules … taking into account the level of development of the ACP economies concerned (EC, 2002 ).
On trade-related areas the negotiating directive reaffirmed the ECs commitment to include competition policy; protection of intellectual property rights; standardisation and certification; sanitary and phytosanitary (SPS) measures; trade and environment; trade, labour standards, investment; public procurement, and data protection in the negotiations.
The ACP for its part highlighted how trade-related areas such as competition policy, intellectual property rights, standardisation and certification and SPS measures should be addressed under the negotiations. However the emphasis was somewhat different. The emphasis was in line with existing Cotonou commitments on cooperation and dialogue in these areas, not on the conclusion of binding agreements, an element which is seen by the EC as critical in getting the ‘right policy framework’ in place, with a credibility which then attracts foreign investment.
This fundamental difference in emphasis is a constant source of ambiguity, uncertainty and tension in EPA negotiations around these issues. It is likely to be exacerbated by the new trade strategy's emphasis on these issues.
The extent of this basic division in Africa-EU EPA negotiations is illustrated by developments in the SADC-EU EPA negotiations following the Hong Kong WTO Ministerial. In early February 2006 Commissioner Mandelson visited southern Africa and after ‘excellent’ exchanges with the South African government addressed the South African Institute for International Affairs, where he spoke of the need to ‘lock together consistently’ the SADC EPA negotiations and the TDCA review, and for South Africa to play a larger role in the former. In this context he spoke of how ‘the TDCA review should aim to create new market access, new business, new growth’. This required ‘a step-change into services, investment and procurement – the hardwiring of dynamic modern economies’ and a greater focus on ‘technical barriers to trade, customs, trade-facilitation and competition’ (Mandelson, 2006b). This statement represented a clear call to place these issues at the centre of both the TDCA review and the SADC EPA negotiations.
South Africa responded to this invitation to play a larger role by leading the public presentation of the ‘SADC framework for the EPA negotiations’. However this document, while recognising the importance of these issues to economic governance, once again rejected the idea of concluding binding agreements in these areas. It noted that ‘there is no compulsion to negotiate the so-called ‘new-generation’ trade issues under the EPA to meet the requirement of WTO compatability’, since ‘neither the Cotonou Agreement nor the TDCA contain any obligations in these areas.’ It noted that ‘some new generation trade issues are currently under negotiation in the WTO (services, IP and environment), while others have been excluded (investment, competition, procurement, labour) … SADC EPA member states have limited institutional and negotiating capacity’ in these areas, while ‘new-generation trade issues would pose serious policy challenges as SADC has no common policies in these areas.’ It was argued that ‘negotiating these subjects under such conditions runs the risk of delivering unbalanced outcomes that may be prejudicial to national development objectives and to prospects for deeper integration in SADC.’ Specifically it expressed concern that ‘outcomes could result in obligations that go beyond those agreed in the WTO (WTO+) and introduce into the bilateral context, issues that contributed to the failures in Cancun (investment, competition and government procurement) and in Seattle (labour and environment).’
This response highlights the fundamental divergence, for it is precisely the WTO+ outcome which the EC now wishes to secure through bilateral FTA negotiations so as to provide a platform for re-launching these issues within the WTO. Against the background of this wider policy agenda, local concerns over the national ability to engage on these issues are likely to get short shrift from the Commission. This is the case even where a commitment is made to ‘engage these issues in an appropriate framework … [focusing] … on technical exchange and cooperation where the EU could assist in the development of SADC institutional, policy and legislative infrastructure.’ However it was clearly stated that ‘such cooperation arrangements would not extend to negotiations nor involve any substantive obligations’ (EC, 2006).
While Commissioner Mandelson insists that ‘there is no question of forcing the ACP to accept rules they don't want’ (Mandelson, 2006a), he has however expressed his disappointment at the lack of willingness of the SADC to ‘talk about these issues’. This somewhat misrepresents the SADC position: they are not adverse to talking to the EC, but want to intensify dialogue and cooperation with the EU on these issues. However their focus is on building national and regional policies, regulatory frameworks and institutions first, not on negotiating binding commitments in traderelated areas and services liberalisation with what is still the region's main international trading partner. Yet this latter dimension is seen by the Commission as vital. Nominally its importance stems from its impact on investment flows, since it provides assurances on the permanence of policy reforms introduced in these areas. However, it would appear to have far more to do with the EU's own strategy for jobs and growth (as the new trade strategy paper so clearly articulates) than the needs of African countries.
This is the context in which the EC's insistence that ‘the EU is only interested in deep free-trade agreements across the full range of sectors’ needs to be seen. SADC's pragmatic approach of cooperation and dialogue on building national and regional policies, regulatory frameworks and institutional capacities first, is unlikely to receive a sympathetic response from the EC unless EU member states consolidate their support behind the UK government's position that no obligations be placed on ‘ACP countries to negotiate rules on investment, competition and government procurement, unless they specifically request it’ (Financial Times, 2006).
The Development Dimension of EPAs
There are three distinct aspects of the development dimension in the context of EPAs: 1) the basic structure and content of an EPA which has a profound impact on the scale of the adjustment challenge faced (the extent of product coverage; the timeframe for the elimination of tariffs; the special treatment to be accorded ‘sensitive product’ areas; how to deal with trade-related areas and trade in services); 2) the development programmes to be set in place to address supply-side constraints on competitive production (e.g. infrastructure and energy constraints) and 3) the financial mechanisms to be set in place to address specific EPA-related adjustment costs.
To date the EC has demonstrated only a partial grasp of the ‘structure and content’ dimension of EPAs, assuming that since liberalisation is good for growth, the more liberalisation ACP countries can be encouraged to undertake the better. However, this ignores the transitional costs which can arise, costs which can be so high as to negate any long-term benefits. Clearly the longer the time-frame for the introduction of change the easier it will be to manage the process of adjustment. The EC's insensitivity on this point is somewhat surprising, since managing the transition where policy reforms are being implemented is an area in which the EC internally has devoted considerable attention and significantly larger financial resources. This is particularly the case in the agricultural sector, where extensive programmes of public-financed support (currently totalling €55 billion per annum) are deployed to establish the preconditions for liberalisation to take place. These minimise the adjustment costs for farmers and food processors within the EU when liberalisation eventually takes place.
Thus if EPAs are to become tools for economic transformation in Africa then the EC and EU member states will need to pay far greater attention to their structure and content so as to minimise transitional costs to ACP countries and maximise longterm benefits. In October 2006 UK ministers sent a letter to Commissioners Michel and Mandelson calling for ACP countries to be allowed ‘as much time as they reasonably need to open their own markets, while providing effective safeguards to prevent unfair competition from subsidised European products undermining African products on their own doorstep.’ Unfortunately there is little evidence that other EU member states are taking up this challenge.
The need for development programmes to be set in place to address supply-side constraints on competitive production in ACP countries is now recognised in the EU. The EC has begun to move on this issue, setting in place a range of ‘horizontal envelopes’ which can be seen to be relevant to addressing some of the supply-side constraints on competitiveness.4 These EPA-related horizontal envelopes are financed from European Development Fund (EDF) resources and have resulted in over €1 billion being deployed through such instruments since 2000, more than the level of EDF funding deployed through regional indicative programmes (RIPs). Indeed in total all such ‘horizontal envelopes’ since 2000 have been allocated more than three times the level of funding made available through RIPs. These horizontal facilities are accounting for a growing percentage of EDF spending.
While all these initiatives have been jointly approved by the ACP-EU Council of Ministers, their establishment reflects a strong EC preference for deploying money in support of addressing supply-side constraints and economic-adjustment needs through ‘horizontal envelopes’ and not through RIPs. Why this is so can be seen if one considers the management of these facilities. Actions financed under these instruments are subject to ‘calls for projects’. This leaves the final power over decision-making as to which projects are financed firmly in the hands of the EC and takes it out of the context of the national and regional programming dialogue. This potentially provides enormous scope for the EC to determine spending priorities for support aimed at addressing supply-side constraints, rather than such decisions being in the hands of African government or regional bodies in Africa (see Box below).
With regard to EPA-related adjustment costs, the EC has yet to get to grips with this issue. Indeed the EC is largely in denial as to the existence of these costs, seeing them as purely transitional with the unleashing of market forces seen as eventually more than compensating for any transitional cost in its view. It has however acknowledged that in particular cases certain types of transitional assistance will be needed. Yet Commissioner Mandelson has made it clear there that can be no blank cheque, particularly when the proper foundations for benefiting from EPAs have not been laid. For Commissioner Mandelson ‘development aid … is a means to an end – it's a way of translating policy reform into practice’, with the adoption of the ‘right policy framework’ (Mandelson, 2006a) being the critical consideration. This means a policy framework which includes binding agreements on investment protection, competition policy, public procurement, good governance, indeed, all those ‘behind border’ issues which are being given increasing prominence within the EC's ‘new’ trade strategy.
This EC analysis of the limited EPA-related adjustment needs stands in distinct contrast to the findings of the analysis of EPA-related adjustment costs financed by the Commonwealth Secretariat (Commonwealth Secretariat, forthcoming). The latter identified four distinct clusters of impacts of EPA and hence areas of EPA-related adjustment support needs, namely: fiscal adjustment, trade facilitation and export diversification, production and employment adjustment, skills development and productivity enhancement.
In each of these four clusters it is held that new support programmes will need to be set in place in order to assist ACP countries to respond to the economic challenges which will arise with the implementation of an EPA agreement.
Two examples can illustrate this broad point. With regard to fiscal adjustment, new systems of taxation will need to be developed to replace any tariff-revenue losses associated with the full implementation of an EPA. This is not a cost-less exercise. Alternative systems of taxation will need to designed and established operationally, new institutions and arrangements for tax-collection will need to be set in place and the staff recruited and trained, with recurrent costs being built into the budgets of the departments concerned. A constant process of improving systems of collection and staff training will need to be set in place to ensure continued efficiency in revenue collection and to close loopholes in revenue collection. All of this will require substantial amounts of financing, an estimated €2.4 billion over ten years for sub-Saharan African countries according to the Commonwealth Secretariat analysis.
With regard to trade facilitation, in one specific area alone – meeting EU food safety standards – entirely new government departments will have to be established in some ACP countries to guarantee food safety compliance while in others, existing departments will need to be upgraded. Even in the EU itself, with its sophisticated government infrastructure, €250 million was set aside for the upgrading of food safety enforcement capacity in EU member states as an integral part of the development of the policy. Meeting this food safety challenge effectively in ACP countries is essential, for any failure in this area could lead to the closure of EU markets to food-and-agricultural exports from the ACP country concerned.
Here again this is not a cost-less exercise. A study by the Technical Centre for Agricultural and Rural Cooperation (CTA) suggests a minimum initial requirement across the ACP as a whole of €187 million, simply to establish the appropriate legislative and institutional framework in each ACP country. To this will need to be added the capital costs of upgrading testing facilities, the operational costs of maintaining the entire system and the private-investment needs in upgrading production facilities and practices to EU levels of food safety. To date, the only EC response has been to establish a €30 million facility to support food safety capacitybuilding in developing countries which will come on-stream in 2007. This is likely to be limited to financing diagnostic studies and limited training programmes, rather than the provision of financial support to concrete programmes of institutional capacity-building for food safety compliance.
Similar needs arise in the areas of production and employment adjustment, skills development and productivity enhancement. Overall, on the basis of existing World Bank-supported programmes in countries of similar sizes facing similar challenges, the Commonwealth Secretariat has estimated that for the four African regions of the ACP, across the four clusters of areas of impact of an EPA, a minimum level of €7,429 million in financial support will be needed over the next ten years (see Table 1 opposite). It is recommended that some 60% of this support should be front-loaded to the first five years of implementation of an EPA (assuming a 12-year implementation period).
| Regions | Fiscal adjustment | Trade facilitation & export diversification | Production & employment adjustment | Skills/prod. enhancement | Total adjustment costs |
|---|---|---|---|---|---|
| CEMAC | 270 | 257 | 153 | 200 | 880 |
| ECOWAS | 955 | 712 | 422 | 700 | 2,789 |
| ESA | 825 | 752 | 415 | 695 | 2,687 |
| SADC | 340 | 261 | 217 | 255 | 1,073 |
| Total | 1,530 | 1,982 | 1,207 | 1,850 | 7,429 |
| Source: Milner (2005), ‘The European Development Fund and Economic Partnership Agreements’, Commonwealth Secretariat, 2006. |
These needs cannot be met from existing EDF funds without diverting resources away from other agreed priority areas. In this context the need for a dedicated EPArelated adjustment facility with various windows, administered at the regional level in line with national and regional priorities is overwhelming. While many in the EC baulk at the provision of this level of funding to African countres, such support could easily be mobilised from within existing EU member states' commitments to increase development-assistance flows. There is however a more fundamental institutional problem facing the EU, namely the constraints on the administrative capacity of EC services.
There is a growing appreciation amongst some EU member states that if additional funding is to be provided in support of EPA-related adjustment needs in ACP countries, it cannot be provided through the EDF, the traditional instrument for financing ACP-EU cooperation activities. The EDF is seen as being incapable of delivering effective and timely assistance to what are time-sensitive adjustment processes. Indeed, the EC does not have a good record in this regard. Just how bad can be seen from the experience of EPA-related adjustment support in Botswana, Lesotho, Namibia and Swaziland (BLNS), which are six years into the 12-year implementation of a free-trade-area agreement with the EU as a result of their membership of SACU and the conclusion in 1999 of the EU-South Africa TDCA.
After an impressive early start in trying to get to grips with economic adjustment needs, particularly in the sphere of fiscal adjustment, the EC's track record has proved nothing short of dismal. A review of its ‘aid for trade’ response to EPArelated adjustment needs in the BLNS undertaken for the Dutch development NGO ICCO, concluded that:
the EC's response to date has been piecemeal (addressing some issues not others), inconsistent (issues are addressed in some countries and not others), and not sustained (initiatives discontinued at an early stage of the adjustment process – e.g. fiscal adjustment in Swaziland) (ICCO, forthcoming )
there is an institutional impediment to the EC elaborating an effective policy response to EPArelated adjustment needs arising from the dilemma it finds itself in: ‘the more the EC acknowledges the EPA-related adjustment challenges which ACP countries will face and hence the EPA-related adjustment needs arising, the more difficult it will be to persuade ACP governments that EPAs are really in their long-term development interests … a way out of this dilemma urgently needs to be found if EPAs are to be turned into instruments for the structural transformation and development of ACP countries.
It should be emphasised that the principal constraint on the delivery of the necessary EPA-related adjustment support to ACP countries is not financial, but lies in the administrative-capacity constraints of the EC, which as a result of its procedures is poorly placed to provide time-sensitive EPA-related adjustment support.
Against this background of the unresolved issues in Africa-EU EPA negotiations and the EC's ‘new’ trade strategy, what is likely to be the outcome of the current EPA negotiations and what will be the implications for Africa's structural economic development? These issues are taken up in the final section.
The EC Trade Strategy & EPAs: Likely Outcomes & Implications
Likely outcomes have been discussed in some detail already in the paper in the last issue of the Review(March, 2007, No.111). We will summarise them briefly here before moving to a discussion of the likely implications of the EC strategy.
The central unresolved issue relates to the structure and content of the proposed EPAs. What one could summarise as ‘EPA light’ – being the absolute minimum in trade in goods required to ensure WTO acceptance – versus what Trade Commissioner Peter Mandelson refers to as ‘ambitious bilateral agreements’, with some added development finances.5 Clearly the EC's ‘new’ trade strategy favours ‘ambitious bilateral agreements’, which include a range of binding commitments in trade related areas and as much tariff liberalisation within a 10-12-year period as African countries are willing to agree to.
What this will mean in practice will depend on the one hand on how ruthless EC negotiators prove to be and what leverage they are willing to exert on ACP governments to get them to sign on to ambitious EPAs and on the other hand how strong and united ACP negotiators and their principals prove to be in resisting EC pressure and mobilising EU member-state governments to get the EC to back down on its agenda of ‘ambitious bilateral agreements’ in the context of trade negotiations with Africa.
The EC has two major points of leverage over ACP countries to get them to sign up to ‘ambitious’ EPAs, namely: 1) the lapsing of the existing non-reciprocal trade preferences on 1 January 2008 and 2) the engineered convergence of the final stages of the EPA negotiations with the programming of 10th EDF aid resources.
The longer the negotiations drag on without any major resolution of the outstanding issues in favour of African positions and demands, the more pressure will mount on governments in key African countries to sign on to the EC version of EPAs. In some non-LDCs there is high dependence on the Cotonou Agreement's tariff preferences. That is to say their exports to the EU are disproportionately concentrated6 in products where ACP trade preferences provide significant margins and where their withdrawal would have serious commercial implications. For Mauritius this applies to 72.4% of exports to the EU, while for Kenya the figure is 59.0% and for Swaziland it is 91.7%.
This means that as the 1 January 2008 deadline approaches pressure will increase on trade ministers to conclude EPA agreements so as to maintain existing commercial relationships. The EC is aware of this reality and is quietly encouraging private sector operators in these and other countries to take a more active interest in the progress of the negotiations.
The only means of outwitting such manoeuvres is for there to be close cooperation between African trade ministers, finance ministers and heads of government to ensure that such unscrupulous tactics cannot be used and for there to be close public scrutiny of the 10th EDF programming process in the coming months to ensure that no such financial leverage is exerted. Some would argue that this is a highly unlikely outcome and that as a consequence Africa-EU EPAs will end up closely resembling the EC's ambitious bilateral agreements, with a few develop-ment-assistance sweeteners thrown in. This leads on to the final question: what would it mean if the EC got its way and secured ‘ambitious bilateral agreements’ under EPAs?
Likely Implications
There is concern about the likely implications of ‘ambitious bilateral agreements’ in seven main areas:
1) The undermining of government revenues;
2) The promotion of the privatisation of public utilities in ways which reduce access to services and increase costs to citizens;
3) The prospects for accelerated de-industrialisation in some African regions;
4) The inhibiting of the development of increased value added processing and disarticulation of agro-processing activities form local agricultural production;
5) The undermining of the regional benefits of regional economic integration;
6) The promotion of the economic ‘re-colonisation’ of Africa and the implications this could have for efforts to promote the structural economic transformation of African economies;
7) The undermining of national policy tools for the promotion of national exploitation of economic resources and the development of a dynamic and competitive national private sector.
Undermining Government Revenues
There are major concerns in African countries over the impact of EPAs on government revenues. Studies from west Africa suggest that in some countries the revenue losses could be up to 20% of government revenue (see Table 2 below). Across the continent the UNECA has concluded using the WITS/SMART simulation that annual losses to government revenue as a result of the implementation of EPAs could total $1,972 million an amount in excess of annual average EU aid payments under the 8th EDF to the whole of the ACP and almost double the total annual payments under the combined national indicative programmes of African ACP countries.
| EPA configuration | ECOWAS | ESA | CEMAC | SADC |
| Revenue losses | $980.2 | $472.9 | $365.1 | $153.4 |
| Source: Economic and Welfare Impacts of EU-Africa Economic Partnership Agreements, Africa Trade Policy Centre, UNECA, Briefing No. 6, May 2005. |
While some argue that low collection rates lead to an overstating of the revenue effects, the likely effects of trade diversion could largely cancel this out. The need for support for the establishment of effective forms of non-trade-based taxation are increasingly urgent, since revenue reform is inevitably a long-term process in developing countries. Without support to early and effective reform large holes could start emerging in government financing, with consequences for the provision of basic services, from health and education to the provision of public infrastructure.
This is a matter of major concern for African governments. Unfortunately it is not such a matter of concern to the EC which is increasingly looking to the private sector to provide a range of services which previously were seen as the exclusive domain of the state.
The Promotion of Privatisation
In the EC's view, improving access to clean water and hence protecting public health is seen as a critical development challenge, as is improving access to financial services, transport and communications infrastructure and low-cost energy provision. The key to this is not public financing but harnessing the resources of the private sector through setting in place the ‘right’ policy and regulatory framework to attract private investment into the provision of these services. Liberalisation of trade in services is thus seen by the EC as a critical part of the development puzzle.
This is why a significant feature of the EC approach to EPAs is the emphasis being placed on trade in services and trade-related areas. However it should be borne in mind that this focus on ‘behind border’ issues is seen as being directly relevant to opening up economic opportunities in those sectors where EU companies are strong. Opening up markets and securing binding commitments on the treatment of foreign investment is thus seen as of vital importance to the continued growth and development of this increasingly important sector of the EU economy. Indeed it is the central component of the EC's new trade strategy.
It is in this context that the absence of a coherent EC response to the revenue implications of EPAs is viewed with concern. Could the EC really be more concerned with promoting business opportunities for European service providers in electricity, water and sanitation, than the accessibility of such services to citizens in ACP countries? At times this appears to be the case, with the ideology of privatisation often being pursued at the expense of a realistic appraisal of the scope for efficiency gains, given the human-resource constraints on technical and managerial efficiency and the limitations of the local market.
Accelerated Deindustrialisation
Currently concerns over the deindustrialisation effects of EPAs are most acute in west Africa. The October 2003 working draft of the EC financed EPA impact assessment study for west Africa warned of ‘potential economic consequences of market access liberalisation’ including:
the collapse of much of the manufacturing sector, which at the moment constitutes the backbone of the modern economy in the region and is the main employer in urban centres … increased weakness of the financial sector, of insurance companies and services linked to these manufactures. An increase in the informal sector to provide employment, food and services to the urban population with the consequence of non-performing micro enterprises working more on the survival mode than on the development mode (PriceWaterhouseCoopers, 2003 ).
Impact on Agricultural Value-chain Development
These deindustrialisation concerns are closely linked to fears over the emergence of a ‘glass ceiling’ for value addition in the agricultural value chain. It is also in west Africa where the first signs of the disarticulation of agro-processing from national agricultural activities have emerged. The expansion of EU tomato-paste exports to Senegal, has served to sever the links between food processors who use tomato paste as an input from domestic and regional tomato production. For a range of Dakar-based food-processing companies it is easier and cheaper to purchase such inputs from Europe than it is to buy them from national or regional suppliers. This has led to the closure of tomato-processing plants in the region and increased price volatility on fresh-tomato markets, since there is no longer an outlet for surplus production at harvest time.
This process of disarticulation of domestic food processing from domestic agricultural products has also been apparent in other regions at certain times under the impact of the deployment of CAP instruments. The early 1990s saw a rapid and large-scale expansion of EU exports of low-quality beef at give-away prices to the South African market (as a result of the levels of export refunds provided). This led for a couple of years to the canned meat market being completely dominated by EU sources of supply, effectively closing this market to locally produced meat. Only changes in EU export-support levels in response to the BSE crisis and the closure of international markets to EU beef, saved the regional beef industry from severe market disruption. Similar problems periodically emerge in the value chain for sugar, with the current round of EU sugar-sector reforms, quadrupling the volume of sugar-containing value-added food products which can be exported using existing export-refund allocations. The February 2005 revised SIA also expressed concerns over the cereals sector where:
In the meat sector: Trade flows in the poultry sector were directly attributable to outside pressure to remove import restrictions in the context of claims of the non-trade distorting effects of new CAP supports. EPAs are likely to increase pressures for agricultural-trade liberalisation despite the fact that neither the WTO nor EPA negotiations are getting to grips with the production-distorting and hence trade-distorting effects of new forms of EU agricultural support. The knock-on effects of disruption of individual product markets all point in one direction: a limiting of value-added agricultural processing for national and regional markets.Impact on Regional Trade
The deindustrialisation effects and the ‘glass ceiling’ emerging on value addition within the agricultural value chain, both point towards a situation where regionalmarket integration will primarily benefit external suppliers rather than internal producers. Already in southern Africa EU consumer goods are entering South Africa at reduced duties, losing their EU identity and flowing freely onto regional markets, through the regional retail chains whose central purchasing is carried out in South Africa. Increased regional trade is taking place in the affected products, but often in the form of re-exports and not to the benefit of regional producers. In this context, many of the conventional investment and production benefits attributable to regional-market integration may fail to materialise, unless a proper sequencing is agreed between regional-market integration and consolidation and regional market opening towards the EU. Unfortunately, this is an area not yet fully addressed under EPAs, where the EC persists with the concept of ‘open regionalism’ as the guiding priority.
Economic Re-colonisation: Threat or Opportunity?
The concerns which arise around the economic ‘re-colonisation’ of Africa which is underway under the twin effects of CAP reform and the EU's free-trade-area policy and its consequences for the structural development of national economic sectors can be illustrated in South Africa by the spate of take-overs which took place in the dairy sector in the middle of the 1990s, in the expectation of the impending conclusion of an EU-South Africa free-trade-area agreement. Within an 18-month period, two-thirds of South Africa's dairy-processing sector had been taken over or was in partnership with European dairy companies, with the major European players Danone and Parmalat actively competing with each other to buy up most of the sector. The experience in each case was however very different.
In the case of Parmalat, the focus was on the integration of the South African operations into Parmalat's international operations. The Bonnivale milk-powder plant was closed down and Parmalat exploited EU CAP supports to import milk powder into South Africa (warehousing it in the former processing plant). The closure of the milk-powder plant increased the price volatility of milk in the Cape since there was no longer a ready outlet for surplus milk. More seriously, Parmalat began to look to using the distribution network which its acquisitions had brought it to distribute imported Parmalat products into the South African retail sector. These activities were cut short however by the financial scandal surrounding the parent company. The pattern of activities initiated following the Parmalat ‘investment’ inhibited the structural development of the dairy sector in the Cape.
In contrast in the case of Danone, a partnership was launched with the Durbanbased Clover Dairy company to develop a range of value-added dairy products to target the growing health-conscious consumer market in South Africa. This expanded the range of diary-products produced in South Africa, increased demand for fresh milk and supported and sustained the dairy price in the KwaZulu-Natal region. This European investment promoted the structural development of the dairy sector in the KZN region of South Africa. Similar issues are raised at the regional level in the sugar sector following the take over of Illovo by Associated British Foods (ABF). Will the extensive knowledge of an integrated food-products company such as ABF be used to promote greater sugar-based valueadded processing in southern Africa for national, regional and international markets? Or will the wider ABF corporate strategy seek to lock the Southern Africa sugar sector in as a reliable supplier of low-cost raw sugar to ABF affiliates in Europe, with the value addition taking place in Europe and part of this output being re-exported to the southern Africa region?
Maintaining Policy Space for Structural Development
The recent experience in Southern Africa highlights the need for a distinction to be made between structural investment and measures which promote structural economic transformation and predatory investment which can inhibit this process. Structural investment promotes greater local value addition within the product and service chain, supporting increased local employment and income growth. Predatory investment makes no contribution to the structural transformation of African economies and simply integrates the sector into the global economic network of the company concerned, with decision-making driven by considerations of narrow corporate profit maximisation rather than the needs of structural economic development.
It is in order to enable Africa governments to be able to deploy policy tools which promote the former and discourage the latter that there is a marked reluctance within the EPA negotiations to go beyond the commitments envisaged under the WTO in trade-related area and services. This is particularly the case since these issues are seen as complex and having far-reaching implications which African governments currently have little institutional capacity to fully comprehend and get to grips with. In Africa there are major concerns that the kind of binding commitments on marketopening in services and a range of agreements in trade-related areas (including on investment protection) which the EC is seeking could seriously compromise the scope for state support to processes of structural economic transformation.