The EU - South Africa FTA and its effect on EPA negotiations: An examination of some options, opportunities and challenges. facing the BLNS countries

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1 The EU - South Africa FTA and its effect on EPA negotiations: An examination of some options, opportunities and challenges facing the BLNS countries Conference paper prepared for the European Community Studies Association in Southern Africa: The relationship between Africa and the European Union, University of Western Cape, January 22 nd -23 rd, Institute for World Economics and International Management (IWIM), University of Bremen mmeyn@uni-bremen.de The author would like to thank Tenu Avafia and Daniel Malzbender from TRALAC for their constructive comments on the early draft. The views expressed in the article remain solely those of the author.

2 Table of Content i I. List of Abbreviations ii 1. Introduction 1 2. Brief overview of BLNS EU trade relations 3 3. The BLNS countries and the TDCA 3.1. TDCA liberalization schedule with special focus on BLNS countries interests BLNS countries EPA negotiations with the EU. Topics that need to be addressed Preferences, chances and risks of different EPA configurations Conclusion and Policy Recommendations 19 References 22 Table of figures Table 1: BLNS countries export and import volumes and main trading products with the EU, Table 2: Duty free market access for South African products to the EU and European goods to South Africa in 2010 and 2012 respectively 5 Table 3: Main products offered for partial liberalization under the TDCA 6 Table 4: BLNS and South Africa s market access to the EU for selected products 8 Table 5: EPA configuration options for the BLNS countries 18 i

3 I List of Abbreviations ACP AfDB AGOA BIDPA BLNS CAP COMESA CU EAC EBA EPA EU FTA GATT GSP IDS LDC MFN NTB SACU SADC SPS TDCA USDA WTO Africa, Caribbean, Pacific African Development Bank African Growth and Opportunity Act Botswana Institute for Development and Policy Analysis Botswana, Lesotho, Namibia, Swaziland Common Agricultural Policy Common Market of Eastern and Southern Africa Customs Union East Africa Cooperation Everything but Arms Economic Partnership Agreement European Union Free Trade Agreement General Agreement of Tariffs and Trade General System of Preferences Institute for Development Studies Least Developed Country Most Favourite Nation Non-Tariff Barrier Southern African Customs Union Southern African Development Community Sanitary and Phytosanitary Standards Trade, Development and Co-operation Agreement United States Department of Agriculture World Trade Organization ii

4 1 Introduction When South Africa entered into a Free Trade Agreement (FTA) with the European Union (EU), the so-called Trade, Development and Co-operation Agreement (TDCA) in 2000, it locked neighbouring Botswana, Lesotho, Namibia and Swaziland (BLNS) into its liberalization schedule towards the EU. The BLNS countries, together with South Africa, form the Southern African Customs Union (SACU). Although the BLNS countries trade relations with the EU are fixed under the non-reciprocal Cotonou Agreement, they have to implement the TDCA liberalization schedule, as BLNS do not have the capacities to monitor indirect imports from the EU into their countries. 1 The Cotonou Agreement that provides for non-reciprocal trade relations between the EU and the 79 countries comprising group of African, Caribbean and Pacific (ACP) states, to which also the BLNS belong, is expiring by the end of Should the BLNS countries wish to ensure their market access beyond this time, they are expected to enter into so-called Economic Partnership Agreements (EPAs), which establish a reciprocal, WTO compatible, FTA. As the EU is not interested in negotiating 79 single FTAs, a geographical configuration of EPAs has been proposed that should ideally comprise the regional body the ACP states are involved in. However, many ACP countries are members of overlapping regional integration frameworks that often contain developing and least developed LDCs so that uncertainties about the formation of EPAs occur. 2 The BLNS countries face several challenges when entering into a de jure FTA with their most important trading partner. To choose the right configuration when negotiating an EPA can be essential for them to push through fundamental economic interests. Besides this, the BLNS countries have to take into account how their relation to the EU affects regional integration within SACU and the Southern African Development Community (SADC) to which all SACU countries belong. At this year s SADC summit in Luanda all BLNS countries have decided to negotiate an EPA within a SADC framework. However, despite this official statement there are different economic and political interests within the BLNS but also the rest-sadc countries that are likely to constrain the conclusion of a successful EU-SADC EPA. Moreover, one has to ask how far a SADC EPA makes sense for the BLNS countries from an economic and regional 1 Furthermore, trade is supposed to flow free within SACU and shall not be hampered by intra-regional trade controls. 2 LDCs can maintain their non-recirpocal relationship with the EU beyond 2007 under the Everything but Arms (EBA) initiative. First Draft 1

5 integration point of view and whether a SACU EPA would be a more suitable option. 3 However, the mere accession to the TDCA is not in the interest of the BLNS countries, as it would mean a sharp deterioration of their current market access. 4 The question is therefore which conditions of the TDCA and the Cotonou Agreement are in the interest of the BLNS countries and which factors under these two agreements are likely to constrain their export option to the European market. This contribution has been designed to evaluate options and difficulties for the BLNS countries to negotiate an EPA with the EU. 5 The article is structured as follows. After the introduction, section 2 gives a brief overview of the BLNS countries trade relationship with their main trading partner, the EU. The structure of the BLNS economies is still rather resource based, with diamonds and few agricultural commodities accounting for the major share of their exports to the EU. Furthermore, labor-intensive commodities, such as garment and apparels are (potentially) important export products for the BLNS countries to the European market. In section 3, considering the structure of BLNS exports to the EU, the TDCA liberalization schedule will be selectively investigated and compared with the BLNS countries market access under the Cotonou Agreement. For which products do the BLNS countries enjoy preferential market access under Cotonou and are there commodities, important for the BLNS countries, where South Africa has the same or even more beneficial entry conditions to the EU? Section 4 discusses the options and limitations for the BLNS countries entering into EPA negotiations with the EU. Although the EU formulated the requirements for entering into EPAs very general, so that theoretically several formations are conceivable, it is only the SACU or SADC configuration that would be an option for the BLNS countries. In this regard, the chances and risks of these two options are explored and weighed. The final conclusions in section 5 summarise the findings and draw policy recommendations, arguing that the SACU EPA would be the most beneficial option for the BLNS countries when entering into a de jure FTA with the EU. 3 In this context a SACU EPA is defined as a parallel agreement to the TDCA, collectively negotiated by the BLNS with the EU in consultation with South Africa. The EPA would provide for the official implementation of the TDCA liberalization schedule but differ with respect to South Africa s and BLNS countries market access to the EU. 4 According to Weed (2002: 6) the extension of the TDCA to the BLNS after 2007 would result in a reimposition of import duties of more than 50% for some products currently exported to the EU. This would most seriously concern Swaziland and Namibia, where 50 and 70% of their respective products exported to the EU would be affected (European Research Office 2002:12). 5 This article discusses BLNS-EU relations for trade in goods only. It should however be noticed that BLNS countries in EPA negotiations are also confronted with a range of trade-related issues, such as trade in services, protection of investment and intellectual property rights, and government procurement. First Draft 2

6 2 Brief overview of BLNS - EU trade relations The EU is, with exception of Lesotho (which trades almost exclusively with South Africa and the USA), the second largest trading partner of the BLNS countries. 6 All BLNS countries show a positive trade balance towards the EU: in 2002, BLNS exports to the EU accounted for 2,460.5 million and were more than seven times higher than their imports (European Commission 2002). The main export commodities for Botswana and Namibia are diamonds and beef. Swaziland, which above all, exports sugar, sugar products and beef to the EU, benefits highly from the Cotonou Sugar Protocol that guarantees the purchase of 117,844 tons of sugar per annum at a pre-determined price. 7 All three countries benefit furthermore from the EU Beef and Veal Protocol that allows them to export guaranteed quantities at duties reduced by 92%. 8 Within the BLNS countries, Lesotho can be described as an exception regarding its structure and location of exports. Due to Lesotho s lack of primary resources, it exports above all textiles and garment, mainly destined for the US market. 9 The BLNS countries main import products are capital and knowledge intensive goods, such as transport equipment, machinery and electronic products. Although the official figures, as displayed in table 1, state that the BLNS countries receive only between 2-9% of their total imports from the EU, it is assumed that this figure is in reality much bigger due to imperfect supervision of the rules of origin. Unrecorded imports from third countries are a problem for all BLNS countries, as they receive the vast majority of their imports via South Africa (WTO 2003:A5-312). 6 Whereas for the EU the BLNS countries are only a marginal trading partner, responsible for around 0.1% of total European imports and less than 0.05% of total European exports (European Commission 2001b). 7 Moreover, Swaziland supplies a quota of 52,200 tons of EU special preferential sugar. Sugar prices are subject to annual negotiations. The Sugar Protocol runs without expiration but can be cancelled with two years notice from 2005 on (Cotonou Agreement, Protocol 3). In total, Swaziland delivers around 28% of its annual sugar production to the EU (Swaziland Sugar Association 2002). However, due to reforms of the EU sugar regime it is assumed that the current price of /t is going to decrease to 290/t in 2007 (Agritrade 2003a). Although this reform might result in higher world market prices for sugar (Trade & Development Studies Centre 2000:13), it remains doubtful whether a small supplier like Swaziland can compete with big suppliers like Brazil or Thailand. 8 The quota of boneless beef is 18,916 tons p.a. for Botswana, 13,000 for Namibia and 3,363 for Swaziland (Cotonou Agreement, Protocol 4, Art. 2). However, none of the countries fully utilize the quota. In the period , Namibia used in average 72% of its quota, Botswana 66% and Swaziland not even 12% (European Research Office 2001:14). Reasons for this underutilization are problems with sanitary and health regulations (e.g. food and mouth disease), droughts and poor livestock as well as unattractive European prices (Meyn 2004). 9 Lesotho benefits highly from the US African Growth and Opportunity Act (AGOA) and delivered 74% of its total exports to the USA in 2002, which were almost exclusively garments and apparels (AGOA.info 2003). First Draft 3

7 Table 1: BLNS countries export and import volumes and main trading products with the EU, 2001 Export volume in million US$ and % of total exports Botswana 1,925.0 (84.7%) Lesotho (0.08%) Export products to the EU Diamonds (82.7%), Beef and beef products (8.2%), Machinery (4.3%), Textiles (3.3%) (1.5%) Namibia (55.1%) Diamonds (52%), Beef and beef products (46.2%), Swaziland (18.5%) + Trade figures of Prepared foodstuff (72.5%), Textiles (7.8%), Wood articles (3.5%) Import volume in million US$ and % of total imports (9.2%) 90.6 (6.9%) 17.0 (1.9%) Import products from the EU Machinery (39.1%), Transport equipment (38.1%), Jewellery (8.9%), Optic instruments (2.7%) Transport equipment (62%), Machinery (34%) Transport equipment (36.9%), Machinery (24.9%), Agriculture (8.6%), Jewellery (4.9%), Chemicals (4.5%) Machinery (22.1%), Chemical products (16.3%), Base metals (15.3%), Agriculture (11.6%), Transport equipment (8.3%), Miscellaneous manufactures (8.1%), Source: European Commission (2001). Figures of trade volumes are obtained from national trade statistics as cited in WTO In summary it can be said that trade between the BLNS countries and the EU is characteristic for trade relations between developing and industrialized countries. BLNS exports to the EU are dominated by primary and labour-intensive manufactured goods, while their imports are predominately capital-intensive manufactures. The next section investigates BLNS countries market access for their main export products under its current trading regime with the EU, the Cotonou Agreement, and compares it with the conditions they would face when acceding to the TDCA. For this purpose, the TDCA liberalization schedule will be shortly presented, focussing on products that are of interest for the BLNS economies. First Draft 4

8 3 The BLNS countries and the TDCA 3.1 TDCA liberalization schedule with special focus on BLNS countries interests The parties agreed in the TDCA that 95% of all South African exports will enter the European market duty free after a transitional period of 12 years, while 86% of all European exports will enter the South African market duty free after a transitional period of 10 years. In 2010 the EU will have reduced its average tariffs for South African products from 2.7 to 1.5%, while South Africa will have decreased its average tariffs for European products from 10 to 4.3% in 2012 (Eurostep 2000:10). The parties agreed to place sensitive products, including beef and sugar, on a reserve list. 10 Products on the reserve list are excluded from substantially all trade stipulated in Art. XXIV, GATT (1994). 11 However, the reserve list is subject to further liberalization and will be negotiated at the mid-term review due to take place in Table 2: Duty free market access for South African products to the EU and European goods to South Africa in 2010 and 2012 respectively Duty Free market access for Cumulative Coverage South Africa In 2010 Industrial goods 99.98% Agricultural goods 62% (plus 11.5% partial liberalization) EU In 2012 Industrial goods 86% (plus 3% partial liberalization) Agricultural goods 81% Source: Council of the European Union 1999, Annex II, list 1-8, Eurostep One reason for the exclusion of these products was to avoid a preference erosion for ACP suppliers due to South African competition. 11 To be WTO compatible any regional integration framework must be in conformity with Art. XXIV, GATT (1994). According to this provision any FTA/CU between WTO members has to liberalize substantially all trade, which is generally interpreted as 90% of total trade, should not exclude any sector and should be implemented within a period of years. First Draft 5

9 As table 2 shows, the EU is going to liberalize almost 100% of its industrial market for South African goods until 2010 but only 62% of its agricultural commodities. The European reserve list is large, comprehending 26% of all South African agricultural export products, including beef, sugar, some dairy products (incl. milk, butter, and whey), sweet corn, maize and maize products, rice and rice products, starches, citrus, apples, pears, grapes, bananas, tomatoes, vermouth, ethyl alcohol and fish. However, the EU has offered an additional, partial liberalization of 11.5% of all agricultural commodities South Africa is exporting to the EU (TDCA, Annex IV, list 5-6). For these products, such as cheese, wine, cut flowers, strawberries, canned fruits, and fruit juices quotas and/or reduced duties have been granted, as summarised in table Table 3: Main products offered for partial liberalization under the TDCA Main products offered for partial liberalization at EU side - Several cut flowers (roses, orchids, chrysanthemums, proteas ): 1,600 tons p.a., half duty - Strawberries: 250 tons p.a. duty free - Several canned fruits: 60,000 tons p.a., half duty - Several fruit juices: 5,700 tons p.a., half duty - Wines: 32 million litres p.a., duty free Total of 44 tariff positions, representing 1.7% of total imports from South Africa Main products offered for partial liberalization at South Africa side - Footwear and leather: Gradual tariff reduction, end-rate 10 or 20% - Some automotive: Gradual tariff reduction, end-rate 6-11% - Several textiles and clothing: Gradual tariff reduction, end-rate 5-20% - Tyres: Gradual tariff reduction, endrate 10-15% Total of 2011 tariff positions, representing 2.8% of total imports from the EU Source: European Commission 1999:9-10. South Africa, on the other hand, is going to open its market for 86% of all European industrial products and 81% of agricultural products. 11% of European industrial products do not have duty free access to the South African market, including petroleum and petroleum products, some chemical products, textiles and automotives. These products show an average tariff of about 4% (TDCA, Annex III, list 6). Agricultural products that are excluded from South Africa s liberalization schedule are mainly those that are recipient of high European subsidies, such as beef, sugar, sweet corn, 12 A final percentage of 0.5 of all European agricultural products is definitely excluded from the TDCA as these products are protected by geographical indications like port, sherry, parma ham etc. First Draft 6

10 maize and maize products and some dairy products. All in all, the EU placed 304 tariff positions on the reserve list, representing 3.4% of its total imports from South Africa, while South Africa placed 120 tariff positions on the reserve list, representing 10.9% of its total imports from the EU. The partial liberalization contains at EU s side 1.7% of total imports from South Africa and at South Africa s side 2.8%, as displayed in table 3. To summarize, it can be stated that South Africa (and thus the BLNS countries) opened its agricultural and food product market much more extensively than the EU. South Africa agreed to this asymmetry in favour of the EU to improve its market access for industrial products. For the BLNS countries, whereas, market access has not improved yet. Besides, it would not help them to receive an improved market access for industrial products, as their export base is dominated by minerals, agricultural and agro-processed goods. 13 When considering the accession of BLNS countries to the TDCA, the perpetuation of the status quo, i.e. the market access under the Cotonou Agreement, would therefore be a minimum requirement. This would imply the inclusion of the Protocol commodities for the BLNS countries. Other products that are of relevance for the BLNS and are either excluded or only partially liberalized under the TDCA are fish (excluded), fresh fruits (reduced tariffs, quotas) and prepared and canned fruits and fruit juices (reduced tariffs, quotas) whereas, the BLNS countries currently enjoy preferential market access for these products under the Cotonou Agreement. However, although meat, preserved meat products, sugar, high sugar content products as well as cereals are excluded from the TDCA, associated value added products have often not been exempted. This is the case for processed meat products, flour based products, canned fruits and jam and sugar based products (such as chocolate and biscuits) so that increased competition in the southern African market can be expected. Furthermore, the inclusion of processed commodities to the TDCA, which are strongly associated to the BLNS countries main agricultural products and are also beneficiaries of high subsidies in the EU are likely to have an indirect detrimental effect on the BLNS economies. Taking sugar containing products, such as chocolate and biscuits as example: although these products are not produced by Swaziland 14 but South Africa, the increased competition in the South African market is likely to harm Swaziland, too, since it results in a decreased purchase of Swazi sugar by South African manufacturers (Meyn 2004). As Swaziland exports more than 55% of its sugar into the (protected) SACU sugar market (Swaziland Sugar Association 2002), it 13 Except Lesotho, where textile and garment exports are dominating. 14 Cadbury Swaziland produces only high sugar content products (chewing gum and candies) that are excluded from the TDCA (Meyn 2004). First Draft 7

11 would be forced to sell its sugar to the world market and face income losses, since world market prices are substantially lower than internal SACU prices. As table 4 shows, there are some products where South Africa is going to receive the same or even more beneficial market access under the TDCA than the BLNS under Cotonou. This is e.g. the case for grapes, lamb meat, sausages and textiles and garments. Table 4: BLNS and South Africa s market access to the EU for selected products Product Fresh, chilled, frozen deboned meat Market access for BLNS to EU 92% tariff preference for quota Market access for RSA to EU MFN duty, excluded from the TDCA Sugar Fixed quantity and price MFN duty, excluded from the TDCA Grapes Quota of 900 tons p.a. and Free market access by only seasonal market access. Textiles and garments Duty free market access if precondition of double transformation is fulfilled. Free market access by 2003/2006 (depending on product). Double transformation is prerequisite. Lamb Quota of 600,000 tons p.a. Quota of 600,000 tons applies now for southern Africa and has to be shared with South Africa Confectionery Sausages Fresh and frozen fish Canned tuna and tuna loins 12.9% plus a supplementary sugar duty 65% reduction of MFN duty for a quota of 500 tons p.a. Free market access. All materials used must be wholly obtained. Limited cumulation options with South Africa (Cotonou Agreement, Annex XIV to Protocol 1) Annual quota of 8,000 and 2,000 tons respectively. MFN duty, excluded from the TDCA Free market access by For other processed meat products: free market access by % tariff. Tariff concessions will only take effect once a fisheries agreement has been concluded. Tariff concessions will only take effect once a fisheries agreement has been concluded. Relevant for Namibia, Botswana, Swaziland Swaziland Namibia All BLNS countries Namibia Swaziland Namibia, Botswana, Swaziland Namibia Namibia Source: European Commission (2000), Council of the EU (1999), Meyn (2004). First Draft 8

12 Despite the preferential conditions under the Cotonou Agreement, duty free market access for the BLNS countries is restricted for agricultural and processed agricultural products that fall under the EU s CAP. 15 The EU is mainly interested in importing unprocessed, primary products (such as fresh fish, de-boned beef, and sugar) but protects its market against processed agricultural products (e.g. fish fillets, sausages and candies). Namibia s approach to change the Beef Protocol under the Cotonou Agreement into a Meat Protocol, which would allow the country access for a large choice of processed meat products derived from a wide range of livestock has been blocked by the EU (Trade and Development Studies Centre 2000:21). 16 The problem of tariff escalation, which means the increase of tariffs with each processing stage, constrains the value addition of production in BLNS countries. The import of chocolate for instance, a processed sugar-based product that would offer diversification options for Swaziland, is subject to a 12.9% ad valorem duty plus a supplementary sugar duty, as sugar is the main ingredient (USDA 2003:4-5). Although it is argued that the policy of tariff escalation (including the re-export of finished subsidised products into developing countries) is in contradiction to Europe s development goals, there have not been any ambitions to improve developing countries market access for processed agricultural products yet (Windfuhr 2002). However, due to the special situation of BLNS there is scope for negotiations. The BLNS countries can claim that they already have to bear the negative effects of an FTA with the EU without receiving improved market access and that their situation does therefore differ from those of the other ACP countries. This argument could also help the EU to defend a differential treatment for BLNS countries, granting them superior market access than other developing ACP economies. In contrast to the other BLNS countries, improved market access is not a concern for Lesotho, as it already receives duty free access under the European Everything but Arms (EBA) initiative. 17 The fact that Lesotho nevertheless hardly trades with the EU suggests that indirect market access issues, such as restrictive rules of origin and insufficient cumulation, high quality standards and complex administrative arrangements constrain its exports to the EU (UNCTAD 2001). 15 Further qualifications to receive duty free market access under Cotonou are compliance with the rules of origin and that the ACP exports do not harm European producers (safeguard provision). See Cotonou Agreement Chapter 1, Art. 1). 16 Namibian beef producers also explore the option to abolish the remaining 8% levy on their exports for de-boned beef to the EU. They argue that this concession should be made, taking the trade distorting effects under the CAP into account (European Research Office 2002:18). 17 The EBA, which has been introduced in 2001, grants immediate market access for LDCs to the European market for all products except armution (and sugar, bananas and rice which are liberalized after a transitional period only). First Draft 9

13 3.2 BLNS countries EPA negotiations with the EU. Topics that need to be addressed Since the TDCA does not include any provisions for the accession of BLNS countries, this would need to be jointly agreed by the EU and the South African government (European Research Office 2003). However, South Africa has already asked the BLNS countries to take the accession to the TDCA into consideration and the EU has also signaled acceptance of this idea (Meyn 2004). This offers the option to negotiate a SACU EPA at the mid-term review of the TDCA in It is well documented that the TDCA liberalization schedule implies several challenges for BLNS countries, such as substantial revenue losses and increased competition in the European and South African market for several products. 18 However, as the TDCA makes clear that no additional protection measures will be discussed but only further liberalization, there is no room for BLNS to negotiate on this matter. There is, nevertheless, the option to improve the safeguard provisions of the TDCA. This is especially important considering BLNS countries high dependency on the agricultural sector 19 and the trade distortions arising from the European Common Agricultural Policy (CAP). Currently the BLNS countries cannot apply directly for safeguard measures under the TDCA but only through South Africa (TDCA, Art. 24.3). The official accession to the TDCA would therefore improve BLNS countries ability to defend their agricultural sector in case of serious disturbance through European imports (TDCA, Art. 16). 20 Regarding the issue of improved market access, one has to take into account that BLNS countries access to the European market is not only restricted by quotas and the problem of tariff escalation for processed agricultural products but even more by strict rules of origin, high sanitary and phytosanitary standards (SPS) 21 and administrative barriers. The following issues should therefore be addressed when negotiating a SACU EPA. 18 E.g. for poultry, dairy products, flour based products, canned fruits and jam and sugar based products. Compare Goodison (1999) and BIDPA/IDS (1998) for a detailed analysis of the impact of the TDCA on the BLNS countries industries, competition situation and revenue losses. 19 Although the agricultural sector contributed in average only 13% to BLNS countries GDP in 2000 (World Bank 2001), more than 60% of the population depend directly or indirectly on income generated in the agricultural sector, which is seen as an important factor for poverty alleviation (AfDB 2002). 20 It is however claimed that the safeguard clause of the TDCA should be modelled on the existing safeguard clause of the Cotonou Agreement to provide better protection for BLNS countries. Besides, consultation and statistical observation should be established to allow the early discovery of serious disturbance of sectors (European Research Office 2002:20-1). 21 Human and animal plant protection measurements. First Draft 10

14 Rules of Origin and restricted cumulation Detailed rules of origin hamper BLNS countries market access to the EU for labour-intensive manufacturing products. Regarding textile products, specific processing requirements are formulated in order to be granted originating status (Annex IX to Protocol 1, Cotonou Agreement). To enter the European market duty free, BLNS countries clothing exports have to meet the precondition of double transformation. This refers to two stages of production, i.e. the transformation from yarn to fabric and from fabric to clothing must take place within any ACP country. 22 The clothing industry in the BLNS countries is therefore forced to source inputs from ACP countries (that are not the cheapest option) or to risk loosing its preferred market access. In any case, this results in a decline of BLNS countries clothing industry competitiveness. The EU brings forward the argument that the requirement for double transformation should help the ACP countries to build-up their own textile industry or make existing textile industries more competitive. Still, none of the BLNS countries does currently have a textile industry and none is, in the light of the world wide competition situation for textile production and the limited protection options for domestic industries, in a position to develop one The TDCA offers (theoretically) the option for BLNS countries to source fabrics from South Africa, manufacture them into clothing and export them under the Cotonou Agreement duty free to the EU. This provision, called full cumulation, which has been created to link the SACU countries closer to each other, implies that any value added in BLNS can be added to the value added in South Africa and jointly the two countries can meet the origin specification. The full cumulation provision has the potential to become an important feature for the BLNS countries, as it offers them the chance to diversify their exports to the EU. However, due to missing concurrence to the TDCA from all BLNS countries, the necessary customs arrangements have not been put in place, 23 so that the requirements for full cumulation cannot be met yet. Thus, inputs used in the production of BLNS exports destined for the EU market are not allowed to enter the EU under the duty-free access provisions. An exception has been made by agreeing on a value-tolerance rule, in terms of which up to 15% of the value of the final product is allowed to originate from outside the jurisdiction of ACP states Or within a number of countries from Africa, the Pacific or the Caribbean region that are not ACP members as stated in Annex XV to Protocol 1, Cotonou Agreement. 23 The BLNS countries are requested to concur officially to the TDCA before the provisions of full cumulation can be put in place. 24 With exception of fishery and tobacco products as well as alcohol, spirits and textile products where the value-tolerance rule is 10% of the value of the final product (European Commission 1999:12). First Draft 11

15 Nevertheless, it remains shady what BLNS countries concurrence to the TDCA means. If it only implies BLNS governments official recognition of the TDCA, BLNS would still have a different external tariff with the EU than South Africa so that customs arrangements could not be facilitated. If the concurrence to the TDCA, whereas, implies BLNS countries official acceptance not being in a position to assess indirect imports coming from the EU, it means that the BLNS countries implement the TDCA liberalisation schedule unilaterally (as they are not part of the agreement). This again, would infringe upon the WTO mostfavourite nation clause, as BLNS discriminate in favour of the EU without an according agreement. As a result there would be the risk that any other WTO member could request the same access to BLNS countries markets. It remains therefore doubtful that the provision of full cumulation can be implemented before the BLNS countries have their own reciprocal agreement with the EU that follows the liberalization schedule of the TDCA. Health regulations and harmonisation of standards BLNS countries claim that health regulations and product standards in the EU are acting as non-tariff barriers (NTBs). For instance the EU refuses to import canned beef from Botswana and Namibia due to disease control conditions although the countries offered to treat the beef according to the same sanitary standards applied by the EU (Meyn 2004). Another problem for the BLNS countries is the harmonisation of product standards in the EU. Although this procedure is generally desirable, as the unification of standards raises transparency levels for BLNS producers, the problem is that the most stringent rules are applied. The EU harmonised for instance its standard regarding the black spot, a harmless fungus on citrus fruits. While Swaziland was in earlier days allowed to export citrus fruits showing black spots to the northern European countries, the stringent rules for southern Europe are now valid in the entire EU region. 25 The Swazi Citrus Board has commissioned a study, arguing that the black spot does neither harm consumers nor spread in Europe, as the climatic conditions are different. However, so far the EU has not indicated any intention to compromise in this respect. In Swaziland, this resulted in a decline of fruit exports, leading to closing down of citrus fruit farmers businesses, which have diversified into cane sugar as a result (Meyn 2004). 25 South Africa faces the same problem with its citrus exports to the EU, although the black spot is only a problem in northern provinces, while the southern and western parts of the country do not battle with black spot. South Africa asked the EU to recognise that parts of the country are black spot free but is still waiting for a final answer (Meyn 2004). First Draft 12

16 Administrative barriers and erosion of preferences Moreover, the BLNS countries are struggling with administrative barriers that are often more trade restrictive than necessary to achieve consumer information (Agritrade 2003b). Namibia for instance is interested in marketing its beef as Organic Kalahari Beef in order to serve a higher value market in the EU. However, this requires a costly certification procedure. Besides, Namibia is, like all ACP countries, not allowed to export boned-in meat to the EU due to disease control provisions. As a result, the de-boned premium cut sold to the EU is destined for the low-value pub market, 26 whereas high-valuable products like T- bone steaks are not allowed to be exported (Meyn 2004). Another problem for the BLNS countries is the erosion of preferences: in 2000, more than 50% of BLNS countries exports to the EU enjoyed preferences exceeding 3% (Trade and Development Studies Centre 2000:27). These preferences are eroding for three reasons: - reform of the European Common Agricultural Policy (CAP) which is going to lead to cheaper consumer prices and thus to reduced returns for BLNS countries. This will most of all reduce the value the Protocol commodities; - the European Everything but Arms (EBA) initiative that allows all least developed countries (LDCs) duty free market access, resulting in increased competition in the European market. Sugar exports from LDCs are still exempted but will be liberalised from 2009 on, thus affecting Swaziland, as price declines can be expected due to increased supply the European approach to establish manifold FTAs with developing countries, such as South Africa, Mercosur, Chile, Morocco, Turkey and others. Since these countries are now largely enjoying the same market access as the BLNS countries, competition for BLNS suppliers increases and prices decline. Altogether there are a number of difficulties for the BLNS countries to export to the EU and improve their accessibility of the European (agricultural) market. As the BLNS countries have to remodel their trade relations to the EU by 2008 at the latest, moving from a de facto into a de jure FTA, the question must be posed in which configuration they will have the best chance to push through their primary interests. 26 Prices for de-boned beef, premium cut, declined from 3.50/kilo in 1999 to 1.85 in 2003 (Meyn 2004). 27 See Malzbender (2003) for a detailed analysis of the different reform scenarios of the EU sugar regime and their impact on SADC countries. First Draft 13

17 4 Preferences, chances and risks of different EPA configurations EPAs are supposed to be asymmetrical in both, time frame and content, taking the enormous economic imbalance between the EU and the ACP countries into account. However, as EPAs have to be WTO compatible, they will include around 90% of total trade and allow a time frame of years for liberalization (according to interpretation of Art. XXIV, GATT). Thus, there is only limited scope for asymmetry and ACP countries have to cope with inherent challenges, such as substantial loss of revenue and increased competition. Considering that the liberalization schedule of the TDCA started already in 2000, the EU will have free market access to the BLNS economies by 2012 instead of 2018/20 as to other ACP countries. Due to the expiration of the Cotonou Agreement by the end of 2007, BLNS countries have several options to develop their future trade relations with the EU. They could either a) apply for existing non-reciprocal preferences under the GSP/EBA, 28 b) negotiate a bilateral EPA at a national level or within a regional framework, or c) enter into a regionally negotiated EPA (European Research Office 2003). However, the first option, to apply for existing non-reciprocal preferences, is not attractive for the BLNS countries, as it would imply a deterioration of market access for Botswana, Namibia and Swaziland and the maintenance of the status quo for Lesotho. Besides, such a non-reciprocal arrangement would not be of contractual nature and could be withdrawn at any time. The second possibility, to opt for a bilateral EPA at a national or regional level, would have the advantage that country specific concerns could be adequately addressed. However, this also would mean that each BLNS country had to negotiate with the EU on its own, which overextends their negotiations capacities and highly biases the negotiation power in favour of the EU. Furthermore, the EU made clear that its preferred option is to negotiate EPAs with a regional body and not with individual countries (European Research Office 2003, 2002). It is therefore the third option, to enter into a regionally negotiated EPA, which can be regarded as best option. However, this again raises the question for which formation the BLNS countries should opt. All of them are SACU and SADC members. Additionally, Swaziland and Namibia, 28 General System of Preference / Everything But Arms. Both preferences are non-reciprocal and noncontractual. While the GSP is granted to all developing countries but is less generous than the Cotonou Agreement, the EBA has granted immediate market access for LDCs to the European market since First Draft 14

18 are COMESA members (although Namibia has announced its intention to withdraw from COMESA and will do so in 2004). COMESA that plans to become a customs union by 2008 proposes the configuration of a Southern-Eastern Africa EPA. However, to join a Southern- Eastern Africa EPA would not be feasible for the BLNS countries, as only two SACU members belong to COMESA. The SACU Agreement 2002, which is currently ratified and supposed to enter into force by mid-2004, states that no member state is allowed to enter into new trade agreements or amend existing trade agreements unilaterally (SACU 2002, Art. 31). Regarding the option of a SACU EPA as opposed to a SADC EPA, one could argue that the BLNS countries have a stronger weight in a SADC EPA, as SADC is a (potentially) huge market that comprises 14 countries 29 and over 100 million people. On the other hand, BLNS countries trade with SADC is tiny and SADC countries have not made much progress to facilitate intra-regional trade so far (Tekere/Ndlela 2003). The low level of economic integration within SADC and the absence of an institutional structure that would allow negotiations at a regional level are further likely to constrain negotiations. 30 Particularly for agricultural products, the high divergence of economic development within SADC, resulting in very different economic interest, is problematic. Some countries would appreciate the import of certain (subsidised) agricultural products, as they do not have an accordant industry and hope to reap consumer benefits as well as to promote the production of locally processed value added products. The same commodities are, however, sensitive in other SADC countries that seek to protect their industries against European competition. As neither the exclusion of single sectors nor the creation of extreme long exclusion lists would be WTO compatible, it is very difficult for SADC countries to find a compromise. In this context it is also SADC countries exclusions of goods from the Trade Protocol that were considered as main revenue generators that would be problematic (Tekere/Ndlela 2003:10). Another problem BLNS countries face when opting for a SADC EPA is the uncertainty of the treatment of commodity protocols. Up to now it is not clear whether EPA members can maintain different preferences and treatment vis-à-vis the EU (IDS/BIDPA 2003:13). If for instance Swaziland and Zimbabwe are not able to fulfil the SPS to export beef to the EU, would this also imply that Botswana and Namibia are not allowed to export their beef to the European market, though being able to accomplish the according requirements? In this case, a SADC EPA could imply the de facto abandonment of the Beef Protocol. 29 However, the Seychelles have withdrawn their SADC membership and will leave SADC in Although SACU does not have a collective negotiation mechanism either, the countries have developed already (at least to a certain extent) common negotiation positions for FTA negotiations with the USA, EFTA and Mercosur (Meyn 2004). First Draft 15

19 Although there is the theoretical option of a SADC EPA being negotiated within the provisions of the SADC Trade Protocol, thereby taking the different economic development levels of the SADC countries into account, this approach would not be, like the EPA negotiation on a national level, in the interest of the EU. Moreover, it would complicate SADC-EU trade relations, dividing the SADC countries in at least tree blocks: 1) The BLNS countries that are locked into the liberalization schedule of the TDCA and have de facto liberalised their markets towards the EU by 2012, 2) the LDCs within SADC that are potentially 31 able to retain their un-reciprocal trade relations with the EU under the EBA initiative and 3) the remaining SADC developing countries (Mauritius, Seychelles and Zimbabwe) that are supposed to establish asymmetric FTAs with a years liberalization schedule starting in Moving on to the configuration constraints, it remains doubtful whether all SADC countries are consistently moving towards a SADC EPA. Although the countries officially opted for a SADC EPA at the SADC Summit in Luanda in 2003, Malawi, Mauritius, Zambia and Zimbabwe also consider entering into a Southern-Eastern Africa EPA (Meyn 2004). 32 A compromise could be that all SADC countries receive the improved market access granted to the LDCs under the EBA initiative and are in return ready to liberalise their markets according to the TDCA schedule. However, it is rather unlikely that non-sacu SADC countries would agree to this proposal, as it forces them to liberalise their markets until 2012 instead of 2018/20. It is furthermore uncertain whether the EU is ready to equate LDC and developing countries market access in SADC. Although the EU proposed in its initial draft of EPA negotiation guidelines a commitment to grant all ACP countries immediate duty free market access for all products when entering into an EPA, this approach is only supported by the Swedish, Danish and British government (European Research Office 2002:8). Last but not least, this deal would not be in the interest of the SADC s LDCs, as it implies the erosion of their preferences and increased competition in the European market. Taking SADC s constraints to form a common position and the divergent economic interests into account it is argued that BLNS countries negotiation position is stronger in a 31 Lesotho is a member of SACU and Tanzania of the East Africa Cooperation (EAC) that is going to become a CU in As both, SACU and EAC, also contain developing countries that are supposed to enter into an EPA with the EU it is not possible for Lesotho and Tanzania to keep their nonreciprocal trade arrangement with the EU, unless they leave their CU. 32 This formation is also favored by the final report of a Trades Centre study prepared for SADC. See Tekere/Ndlela (2003) First Draft 16

20 SACU than in a SADC framework. The BLNS countries can claim that they are already coping with the negative effects of the TDCA (revenue losses, increased competition, industrial restructuring) without receiving improved access to the European market or technical assistance. 33 Based on the fact that this situation arose from EU s unilateral decision to transform its trade relations with BLNS from non-reciprocal to reciprocal there is also a moral responsibility to address BLNS countries needs and grant generous assistance. 34 Furthermore, neither the EU, nor South Africa is pleased with the fact that SACU does not have a common trade regime with its main trading partner. Considering SACU s new agreement, which provides for stronger cooperation and harmonisation of policies as well as SACU countries negotiations as a trade block with the USA, EFTA and Mercosur, it is only logical to harmonise SACU s trade relations with the EU, too. If the BLNS countries would on the other hand separately negotiate an EPA in a SADC (minus South Africa) framework this would bear the risk of creating a complex set of tariffs, preferences and rules of origin that could lead to trade distorting effects. However, an important feature of a SACU EPA must be that it supersedes the market access South Africa receives under the TDCA as well as BLNS countries current market access under the Cotonou Agreement. This does not necessarily require the reopening of the whole TDCA but has to go further than the inclusion preferences obtained under the Beef and Sugar Protocol. As the European Research Office (2003:7) points out, the geographically restricted nature of a SACU EPA allows the BLNS countries to argue for the extension and enhancement of their preferences (e.g. in the field of processed agricultural products and the increase of quotas) without facing the risk that these preferences are eroded by other ACP countries seeking to become part of the agreement. All in all the pros and cons of different EPA formations for the BLNS countries can be summarised as stated in table The BLNS countries were supposed to receive a funding of 6 million under the Economic Integration Support Programme for the BLNS Phase 1, helping them to implement policies to cope with challenges of the TDCA and take advantage of new opportunities. In this respect, support for budgetary assistance, the evaluation of restructuring needs for industries and training programmes was planned (European Research Office 2002:14). However, the money has not been released yet, as the concurrence of all BLNS countries to the TDCA is still outstanding. Besides this, the original project proposal needs to be restructured due to the delay (Meyn 2004). 34 Although one could argue that the EU acted only in accordance to WTO rules when reorganising its trade relationship with South Africa, one also has to consider that the TDCA liberalization schedule applies for South Africa and the BLNS without considering their different development stages or including the BLNS countries into negotiations. First Draft 17

21 Table 5: EPA configuration options for the BLNS countries Option Pro Contra Advisable EPA on national level GSP/EBA Southern-Eastern Africa EPA SADC EPA SACU EPA - national concerns can be best taken into account - no negotiations would be necessary - many countries, potentially big bargaining power - The non-existent common external tariff would make it easier to apply the principle of differential treatment among SADC members - a joined market access to the EU could support regional integration efforts - de jure acceptance of the TDCA liberalization schedule - common external tariff would facilitate - small size of country, very limited bargaining power - EU made clear that it is not interested in negotiating individual EPAs - limited market access - unsuitable as BLNS countries have opened their markets already as a result of the TDCA - no contractual agreement, can be withdrawn at any time. - high diversity of interests, difficult to find common interests - fragmentation of interests between BLNS, LDCs and developing countries leads to limited bargaining power - EU is presumably not interested in negotiating with three different blocks and implementing three different liberalization schedules - Which parts of the TDCA should be renegotiated and how far does South Africa support this approach? No No Not feasible, as only two BLNS countries, Swaziland and Namibia (until 2004), are members of COMESA. Rest-SACU members will not concur to an Southern-Eastern Africa EPA. Second Choice. First Choice. First Draft 18