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Economic Partnership Agreements and the WTO

Date
Time (GMT +00) 15:30 16:45

Speakers:

Chris Stevens, Fellow, Institute of Development Studies
Roger Liddle, Cabinet of the EC Commissioner Peter Mandelson

Chair:

Simon Maxwell, ODI Director

Roger Liddle started the discussion by noting the complexity of the topic of trade and the fact that he is not a trade specialist, but an administrator of a broader range of European topics. The learning curve over the past year has been very steep for both Commissioner Mandelson and himself. For instance, very general statements and arguments used in public debate that used to be accepted in the past (e.g. that a removal of the CAP would solve all the problems of the world), have now been analyzed and proven incomplete.

On the state of the Doha Round, Liddle said that they are determined to achieve the maximum positive results possible, but are disappointed at the prospect of what the Hong Kong ministerial will most likely achieve. They have conceived that the Doha Round will be a grand bargain, where the EU will offer the world increased market access to agriculture, and will ask in return for access to new markets without or with very low tariff barriers, into which Europe can sell top quality products and services. In terms of politics, the EU is looking at pro-jobs and growth in Europe and pro-opportunities for the poor in the developing world.

Analysis of agricultural liberalisation has made clear to the EU that the most competitive farmers come from both the developed and developing world - it will benefit countries as diverse as Brazil, Argentina, Canada the US and Australia. Only a quarter of developing countries would benefit from complete agricultural liberalisation, principally in Latin America, with many more losers in Sub-Saharan Africa. This is because the preferences the EU presently offers would be eroded. He continued by saying that in order for the EU to agree to further liberalisation, Brazil and India must move on their current stance on access to services in their economies. Until there is a response by these major actors to the 60% liberalisation offer of the EU, the Doha Round will most likely be stalled. In terms of the policies of Europe, there is no way that the EU can offer more unless there is this serious negation on the other side.

In terms of economic partnership agreements (EPAs), it was a commonly held view a year ago, mainly by NGOs, that EPAs were a way in which the EU would be forcing liberalisation on the rest of the world. After looking into this, the EU had come to the conclusion that EPAs are, in fact, a good thing for multiple reasons. First of all, they attempt to promote regional economic integration. Secondly, they enable countries to address key issues in development which are not part of the Doha Round but that are equally valuable to growth (e.g. fair rules for public procurement). Thirdly, EPAs offer an opportunity for a better link between trade and aid through the creation of an asymmetric timetable for progressive liberalisation and the better use of development aid. Progressive liberalisation is what the EU thinks is the best for developing countries.

Chris Stevens started by saying that the statements by Roger Liddle were rather relieving as they confirmed his thinking on the link between EPAs and the WTO, and thanked him for the report.

 Chris Stevens started out by naming ways that the outcome Doha Round could affect EPAs.

1. If there were a fantastic success at Doha, this would reduce the stakes under which EPAs were to be signed, both the need and pain of ACP countries;

a. It would seriously erode preferences to ACP to the European market and reduce the attractiveness of further agreements under Cotonou;
b. But any multilateral liberalisation by the ACP would also reduce the adjustment costs of EPA reciprocity.

2. One specific agenda item being brought to Hong Kong is the renegotiation and clarification of Article XXIV, a vague provision which governs the legality of FTAs and customs unions. It does not include what should be done to meet its provisions. There is currently movement underway to clarify this at Hong Kong.

The relationship also works in the opposite way. The EU wants to include a lot of things, particularly the Singapore Issues, in EPAs, which are being resisted in Doha. The EU is also pushing for a radical services agenda with ACP countries. The argument, then, is that if the Doha process continues and if the EU can manage to convince a majority of the membership of the WTO to liberalise their services and accept the Singapore Issues, then it will alter the balance of power in the WTO. On the other hand, if the Doha Round, breaks down, this could lead to a surge of regional trade agreements.

The links between EPAs and the DDA are there, but they are not strong. To the extent to which the WTO is affecting the EPA's agenda, it is much more through the dispute settlement mechanism (DSM), defining what is currently legal and illegal. The main sources of ACP preference erosion are not WTO liberalisation; instead, they are change to EU agricultural policy and the GSP+. If the GSP+ were to be taken up, the EU would be offering preferential access to every country in the world except the OECD countries and 14 more (mainly large developing countries), moving away from a preference system and into a system of discrimination. On the other hand, opposition is strong and it is very unlikely that Article XXIV will actually be clarified.

How constraining is Article XXIV, in terms of what the EU does? What actually will go into the EPAs is yet to be seen. Stevens disagrees with Liddle's view that EPAs are a good thing but they need not be a bad thing: the WTO does not require this; if the EU twists arms to make them bad it will not be because of the constraints of the WTO as these have been interpreted so far by the EU (which is the only basis for analysis in the absence of clarification either through negotiation in Doha or dispute settlement.

To answer the question of the impact of EPAs, IDS has analysed the precedent set by past FTAs concluded by the EU in order to estimate the least constraining outcome that will result. In doing so, two methods have been applied:

1- Have applied the formula the EU has used in its definition of substantial trade to 55 ACP countries to work out the amount of liberalisation a country would have to go through to meet that definition.
2- They are systematically going through the provisions of existing agreements in order to find what they think are the 'best' provisions to find 'the minimum' EPA.

This way of modelling cannot show what exactly will happen as the EPA negotiations go forward, but it can show that there is nothing in the EU's interpretation of Article XXIV that requires them to include radical change. If radical change is included, it would only be because the ACP has decided to embrace it or has been brought in that direction forcefully. He pointed out, however that using force is never the best tactic, even if it is believed that those provisions at stake are in the best interest of developing nations.

In terms of how much ACP countries will have to liberalise, an FTA is only an FTA under Article XXIV if there is liberalisation on 'substantially all' trade. The EU precedent states that this is numerically calculated through the value of traded goods, with 90% of the total value of trade being liberalized with 10% left untouched. Australia and New Zealand have argued that this definition is a faulty one and have instead proposed one allowing countries to liberalise on a number of lines instead of percentage of traded goods. Stevens used the value formula from the EU to ACP imports to identify the 'marginal tariff.' From this, they can conclude that Article XXIV (as it currently stands) need not result in any major liberalisation at all. Stevens has also gone through all of the issues that tend to go into these agreements and has identified which one has the least constraining provisions. Taken these two tests together, it can be said that there is no reason why the EPAs will necessarily require any substantial change, unless the EU takes the view that its past agreements are wrong. The EU then has three options:

1- To try and persuade the ACP to go further
2- To lean on them (e.g. to threaten to cut preferences on exports such as sugar)
3- To tell ACP countries that on reflection they think that Article XXIV is much more severe than previously thought

Because no one is sure as to what will happen, it would be unfair to say that EPAs are benign. Stevens believes that the most adverse feature of EPAs is that they are causing total confusion within the ACP region. They have already led to a split of SADC and are likely to lead to a further split of SADC. The Caribbean is having severe problems with the implementation of a single market economy as well. What it does mean, is that Article XXIV does not require very much and that there is the opportunity cost of a huge investment in EPA negotiation may turn out very high, for both ACP and EU countries.

The Chair started the question period with debate around the WTO tariff cuts. He opened the floor to discussion on the 60% cut proposed by the EU and the fact that the Brazilians and the Indians had yet to move on their negotiations.

Sheila Page (ODI) noted that the a speaker in another meeting in this series (Pascal Kereins - 23 November) said that Brazil's list of services for liberalisation meets the numerical target that the EU has set, yet the EU has said these are not the services they wanted. She asked why the EU had established a numerical target of services this might not produce the appropriate offer based on the European services sector.
 
She also questioned Liddle's statement that only a quarter of developing countries would benefit from agricultural liberalisation, and asked if the EU had instead looked at the number of people affected by that liberalisation instead of the number of countries, noting that the size of the countries has been neglected from these findings. She said that she felt the EU was hiding behind a concern for developing countries and simply saying they were doing something for the sake of other people when the figures show otherwise. The best way to help people is through a transfer of resources, not through these complex negotiations that are essentially going nowhere.  
Roger responded by noting two studies on the impact of Doha (CEPII and Carnegie Endowment for International Peace). He said that both papers had concluded that the benefits to developing countries are as much if not more as a result of industrial liberalisation as they are from agricultural liberalisation. Various audience members agreed on the importance of NAMA for developing countries. He noted the large winners with liberalisation were countries like China and India, but that Sub-Saharan Africa will lose in both industrialisation and agricultural. He then asked Page whether she believed that if the EU was serious about ending poverty in Africa it would be better to stop talking about trade and figure out means of achieving more and better aid.

Page said that trade is important because there are beneficiaries from liberalisation, but that the most important thing to look at is aid for most African countries. Ensuing debate included several other audience members: the general spirit of the debate was that the EU has left a large margin of room for negotiations and that nothing can truly be analysed until the negotiations are done.

Nita Deerpalsing (a Member of Parliament from Mauritius) took the debate in another direction. She commented on the fact that there is at least one LDC country included in each EPA and wonders why the EU is doing this if it is only a waste of time. Secondly, she brought up the sugar reform as released by the EU the day before, and said that ACP countries are very angry at what they were offered, saying that the reform would lead Mauritius from falling from a middle income developing country to a low income country. She thought that ACP countries would have a similar reaction to offers made in the WTO round. She believes that there is a single-minded approach to looking at developing countries and the eradication of poverty, pointing out the unique features and developments in Mauritius alone. She feels as if the EU farmers are being given an unjustly disproportionate amount of compensation compared to the farmers of the ACP countries.

Stevens took up her debate by saying that the CAP reform and Doha (today's topic) are completely different. With the CAP reform, there are no winners because the EU is remaining as protective as it has always been. Subsidies are remaining the same, but the way in which they are allocated is changing. The developing countries lose without being compensated. Discussion ensued about where the extra money was then going.

Adrian Hewitt (ODI) intervened by stating that he didn't think Mauritius would actually fall from a middle income country to an LDC, due to their strong democratic government and prior efforts to diversify the economy in the many years prior to the reform. Those actually at risk are those smaller Caribbean and southern Pacific countries, some of which are examples of sugar-dependent fragile states. Hewitt also clarified Stevens' point on the sugar price cuts, stating the proffered cut of 39% over two years has now been watered down to 36% over four years and that, as a consequence, shares of Tate and Lyle would rocket today.

The Chair noted that the shares had reached a seven-year high at the end of the trading day.

Discussion about compensation for preference erosion came about as a potential outcome from the Hong Kong ministerial in the form of Aid for Trade.

David Roberts (of CBEA) commented that he believed Steven's model of no gains from CAP reform was incorrect and that there would be some gainers from the CAP reform.

Liddle took the floor again to comment on the more political nature of the trade debate. He noted that the sugar regime in Europe needs deep reform, but that it is currently at a place of start. He also said that compensation does need to be there for losing countries and that the politics within the Council make this process very difficult. A more rational model of sugar needs to be looked at the Europe in the future.

Matthew McQueen (University of Reading) made three points directed at Stevens' work. First, he pointed out that most empirical studies show only tiny welfare gains and mainly significant welfare losses to developing countries. Secondly, under the scenarios created in the paper where high tariffs are kept and all others are reduced, protection is actually increased which leads further to the degradation of the export sector. Finally, he looked at revenue effects, asking what the government will do. This all paints a fairly grim picture, unless someone can come up with a model that actually produces significant gains. He asked if Chris's advice would be to abandon this approach and concentrate further on the WTO and GSP+.

Hewitt commented that the work that Stevens and his team was very useful and is now being used by 14 of the 55 ACP countries through the ODI Fellowship Scheme to think more critically of their part in trade negotiations. Secondly, he mentioned that Stevens dismissed trade facilitation as merely a customs issue, whereas it was much broader than that and had a lot of potential to help developing countries. In his last point, directed at Liddle, he noted that trade and aid are linked and that they have been for many years; this is not a new issue, as Liddle asserted. Hewitt pointed out that Liddle needed only to review what Commissioner Cheysson asserted in the 1970s about the Lomé Convention to realize that historically the aid-trade hybrid on which the EPA model draws is three decades old.

Dirk Willem te Velde (ODI) pointed out the possibility of including aid for trade issues within trade agreements. He referred to the agreement with South Africa which does just this. Another possibility would be including preferences and services within those agreements as well.

Stevens responded to both Hewitt and te Velde's points, explaining that the measures they were proposing are desirable - but their implementation does not require there to be an EPA. One way, though, to make the EPAs relevant would be to make the implementation of ACP trade policy changes conditional upon the EU providing effective help.

Liddle had the final word by saying that the outcome all depends on how the negotiations are pursued. He then invited ODI and IDS to Brussels to present a briefing paper to discuss these points further.

The Chair concluded the session by thanking both the speakers and audience for the thought-provoking and timely debate.

Description

This event discussed economic partnership agreements (EPAs), which attempt to promote regional economic integration; address key issues in development which are not part of the Doha Round but that are equally valuable to growth (e.g. fair rules for public procurement); and offer an opportunity for a better link between trade and aid through the creation of an asymmetric timetable for progressive liberalisation and the better use of development aid.