Trade Negotiations Insights

Trade Negotiations Insights From Doha to Cotonou Vol.6 No.4 July - August 2007 Contents 1 EPAs: entering the danger zone Christopher Stevens 6 Agreeing EPA rules of origin: a strategy unfolds Marc Pearson 9 Difficult deadline: challenges of the SADC EPA negotiations Talitha Bertelsmann-Scott 11 The complexities of negotiating a West Africa EPA Eric Hazard 14 EPA negotiations update Melissa Julian 16 Calendar & Resources In This Issue As Europe winds down for the traditional summer holidays, negotiators and experts in ACP countries are working hard behind the scenes to try to keep the EPA negotiations on track for the December deadline. However, many see the negotiations running out of time and have begun considering the alternatives come January 2008. Dr Christopher Stevens kicks off this issue by setting out which options could replace the Cotonou Agreement and analysing the appeal and the viability of each. Talitha Bertelsmann-Scott and Eric Hazard both pick up on this looming deadline, throwing the spotlight onto the specific challenges faced by the South African Development Community and West Africa in their bid to add substance to an EPA. Finally, ACP countries and the regions have been debating internally for years how to address rules of origin in the EPA framework. Mark Pearson gives us an overview of the current state of play and looks at the constraints many countries face in the negotiations with the European Union. EPAs: entering the danger zone The lengthy negotiations between the European Union (EU) and the African, Caribbean and Pacific (ACP) states on a new trade regime are running out of time ahead of its year-end deadline. The available options are all unpalatable or difficult. Depending on which is adopted, in the next six months many ACP states will see either the profitability of their exports to the EU decline - and in some cases collapse or, the EPA negotiations continue and the most critical details finalised. The problem The terms of trade between the EU and the ACP are established in the 2000 Cotonou Agreement, which specifies that a new regime must be agreed by the end of 2007. This date coincides with the expiry of a WTO waiver for the current EU-ACP trading scheme (see Box 1). In 2001, this waiver was granted by the WTO after the EU s trading preference with the ACP was found to contradict multilateral trade rules. As a result, current trade negotiations are focusing on Economic Partnership Agreements (EPAs), which aim, in part, to make the regime WTO compliant. The problem is that the EPAs will be very detailed agreements, specifying exactly what treatment will be accorded to thousands of different products. Yet discussion of these details has barely begun. It is now too late for agreements that are credible, negotiated and exhaustive to be in place by December 31 2007. Drawing on past precedent, such as the EU South Africa trade agreement, it would appear that the negotiations still have two to three years to run. The options Christopher Stevens 1 The available options presented from most to least problematic, are: 1. To replace Cotonou in January 2008 with the EU s next best trade regime whilst negotiations continue; 2. To agree to detailed schedules prepared by one party to the EPA talks without negotiation; 3. To seek an extension of the WTO waiver; 4. To create a better fallback, interim trade regime for the ACP than that which exists at present; 5. To agree to EPA deals that establish the key principles but leave the details open to further negotiation. This article will look at each in turn before focusing on the next best and fallback, interim trade regime options. The flawed options According to the statements made by European Commission officials and confirmed by industry sources, the next Available online at: www.ictsd.org/tni & www.acp-eu-trade.org/tni

TNI July - August 2007 best option will be the EU s default choice should the EPA negotiations fail to meet their year-end deadline. Come January 1 2008, EU customs authorities computers will cease to show a Cotonou tariff rate and, unless preventative action is taken, will apply tariffs to products from the ACP based on the regime applicable to all developing countries: the Generalised System of Preferences (GSP). One way to avoid this would be for all parties to agree and to sign a text produced out of the hat by one side as a fait accompli. While this seems unlikely, since it would impose formidable technical as well as political challenges for the EU, it remains possible, though undesirable. The problematic options Another alternative, favoured by some in the ACP and the European Parliament, would be to extend the WTO waiver that expires in December 2007. This option is not entirely objectionable, but it is problematic. Waivers have traditionally been the choice response of OECD states wishing to ensure the multilateral legality of their preferential accords. But the ACP regions face two other problems. First, the EU has a responsibility to act in the WTO, but it is the ACP that will suffer if it does not. GATT and WTO rulings were both against EU trade policy. A waiver to allow the prohibited practices to continue for an extra period of time can only be sought by the country that has broken the rules: the EU. The ACP may request the EU to act, but cannot ensure that it does. Second, the EU is reluctant to seek a new waiver, partly to avoid seeking an extension of policies already declared WTO illegal, and partly because other WTO members are demanding favours in return for agreeing to a waiver. The EU is unwilling to concede such requests which, even if it did, would only serve to erode ACP preferences further. However, one precedent could be useful: the introduction of the Cotonou waiver itself was delayed from 2000-2002 whilst the EU negotiated with objectors. Although this supports the EU Box 1: Why EPAs? The EU has had a special aid and trade regime with the ACP since 1975 under a succession of accords. The latest of these, the Cotonou Agreement of 2000, continues the traditional aid regime but foresees a major change on trade in response to adverse rulings in the GATT and WTO on its predecessor. It provides as the preferred option, though not the only one, the creation of EPAs by 2007, which inter alia require the ACP to liberalise their imports from the EU (in order to comply with WTO Art. XXIV). Whilst these are being negotiated, the old unilateral Cotonou regime has continued. So far, the ACP countries are negotiating as six regional groups which will lead to six separate EPAs. In early 2007, it became clear that East Africa was debating whether to set up a seventh EPA, although this remains undetermined. argument that obtaining another waiver is now difficult, it also shows that the EU considers a continuation of Cotonou preferences legitimate for a couple of years. Thus, the waiver only needs to be under discussion by January 2008 - not agreed - to justify the continuation of the current trade regime. Failing an extension of the waiver, another potential solution is for a special tranche of the GSP to be extended and made available to the ACP. According to Cotonou, EPAs are the first option to be investigated, but they are not the only alternative. Article 37(6) commits the EU to consider providing states that do not join an EPA with a new framework for trade which is equivalent to their existing situation which would be in conformity with WTO rules. The problem is that the EU has agreed to an obligation that it cannot easily fulfil. When it signed Cotonou in 2000, none of its other trade regimes were equivalent to this Agreement. In the seven years since, the EU has failed to create such a regime. But one framework comes close: the GSP+. Table 1: Levels of tariff jump from applying the GSP to EU imports from the ACP All ACP Non-LDC ACP Number Share Number Share Number of CN8-digit trade code items facing no change in relative access 2,972 63% 2,582 64% Number facing maximum change between ACP and Standard GSP rates: a Less than 5% simple ad valorem 611 13% 505 13% => 5% but less than 10% simple ad valorem 773 16% 677 17% => 10% but less than 20% simple ad valorem 184 4% 149 4% 20% or more simple ad valorem 28 1% 23 1% Specific or compound duties b 120 3% 95 2% Notes: (a) Or MFN rate, if not covered by the Standard GSP. (b) Some of which are believed to have a very low ad valorem equivalent (AVE). Sources: UNCTAD TRAINS; UK Tariff 2007. 2

July - August 2007 TNI An innovative option December 2007 is an unattainable deadline for a normal trade agreement given the need to approve thousands of detailed tariff changes, yet it is not necessarily impossible for an accord that establishes key principles and leaves the detail for later. The ACP has asked for the negotiations to be extended for two or three years, something many fear might result in a loss of momentum. This could be avoided by a framework EPA that establishes: T h e i n t e n t i o n t o l i b e r a l i s e substantially all trade - a key WTO requirement (see Box 1); The date by which this would be completed. The Commission has indicated this could be as late as 2032; 2 The phasing in of liberalisation during this period by specifying the dates on which groups of products would be liberalised, as well as the Box 2: The WTO and a framework EPA For an EPA to be WTO-compatible, the minimum requirement is that it complies with Article 24 of GATT 1994, which requires duties to be eliminated on substantially all the trade with a plan and schedule for the formation of the trade agreement within a reasonable length of time. In other words, to reach a WTO compatible trade agreement by the end of this year, an EPA must provide a schedule for reciprocal tariff liberalisation, but not necessarily a list of which item falls into each of the sequential tranches provided in the schedule. An EPA does not need to include an agreement on services or trade related issues to ensure WTO compatibility. Source for Box 2: Bilal, San 2007. Concluding EPA Negotiations: Legal and institutional issues, report prepared for the Netherlands Ministry of Foreign Affairs, Policy Management Report 12, Maastricht: ECDPM. www.ecdpm.org/pmr12. Figure 1: Proportion of value of total trade represented by exports each accounting for 1% or more of the total which would experience a change in access

TNI July - August 2007 Box 3: Social impact: The case of Namibia and Kenya Around 70 percent of the Namibian population is wholly or partly dependent on agriculture, mainly livestock rearing. Secure access to the EU beef market has enabled the industry to pay premium prices to farmers and to invest heavily in the development of communal livestock production. Namibia s beef exports to the EU would pay tariffs equivalent to 142 percent if it lost the current preference, which would endanger the whole industry since supply to the EU is highly interlinked to its ability to enter other markets. The Kenyan horticulture industry, which employs around 135,000 people, will find it hard to continue exporting to the EU under GSP since its major competitors face zero tariffs. Its collapse would not only have severe social consequences but also undermine EU development aid programmes, such as those of UK and Denmark, which are supporting the horticultural Business Service Market Development Programme. dates for the parties to agree the precise list of goods to be liberalised in each group; Similarly broad provisions of principle on the development dimensions of an EPA and any other provisions, such as on services trade, to which the parties are willing to agree in principle with target dates for agreement on the details; Institutional and safeguard arrangements. This type of accord could be WTO compatible (see Box 2), provided that it represents a genuine commitment and is implemented according to its timetable. Such an approach has not been widely discussed, so its acceptability to either the EU or the ACP is unknown. To work, the ACP would have to agree on a framework without all the details being in place. They may be unwilling to do this even though the only real commitment is to deadlines. Subsequently, if no agreement is reached on the details, an ACP state could always withdraw and be no worse off than under the GSP option. If it withdraws after 2008, it might be possible to become a GSP+ beneficiary, thereby rendering an EPA unnecessary. The GSP: quantifying the damage of the next best option The Commission accepts that applying the GSP in January 2008 would not be an ideal solution. The Overseas Development Institute (ODI) has quantified the scale of the damage. 3 There are three levels of GSP tariff: the standard (which would apply to all ACP except the least developed), the Everything But Arms (EBA) regime (covering all least developed countries (LDCs), including those that are ACP), and the GSP+ (for which no ACP states are currently eligible). The standard GSP regime is much less favourable than Cotonou for many ACP exports. ODI s research has found that all non-ldc ACP states would experience a jump in the EU tariff applied to some of their exports. 4 Although many of the increases would be relatively small, 267 of the goods they export will experience a tariff jump of at least 10 percent ad valorem and/or the imposition of new or increased specific or compound duties, some of which are very high (see Table 1). Nearly two-thirds of non-ldc ACP states would see tariffs increase over 25 percent by value of their current exports to the EU; for just over one-quarter the proportion affected will be over 50 percent (see Figure 1). Countries with a relatively high proportion of exports in products will face the steepest tariff jumps: twenty states affected on over 25 percent of their exports will face very or moderately high tariff jumps. Belize, Kenya, Namibia, Suriname and Swaziland will be particularly badly hit (see Box 3). In theory, any new tariff results in taxes being paid to the EU by the importer, but in practice (through a cut in the price paid) by the ACP. ODI calculates that new tariffs of 10 percent or less would result in a transfer from the ACP to the European treasuries of some 156 million per year. For example, this is equivalent to almost three times EuropeAid s commitments to health projects in all ACP states in 2005. When specific duties and tariffs of over 10 percent are included, the EU s tax take would be even greater: Namibia could find itself paying four times as much each year in tax to the EU as it receives from EuropeAid. 5 But in such cases these high taxes are unlikely to be paid for the simple reason that ACP exports will collapse. The tariff will be so high that ACP exports will become uncompetitive, especially as competitors continue to receive more favourable, non-reciprocal access. In the end, this option would not create a WTOfriendly level playing field: EU trade policy would continue to discriminate in favour of trade partners richer than the ACP. Those who support GSP claim current rules require the EU to take positive action if Cotonou preferences are to be extended into 2008. But with 27 members, the necessary political will is absent and the EU will instead do what it has never done before: raise tariffs whilst trade negotiations (which always overrun) continue. 4

July - August 2007 TNI If the EU sets a precedent of ending low tariffs on imports from very poor and uncompetitive countries, its ability to liberalise elsewhere could be thrown into question. For example, it might undermine the credibility of assurances that the EU would ratify any Doha deal which would liberalise towards very competitive states. Extending the GSP+: the fallback, interim regime Would the GSP+ be an acceptable alternative to Cotonou? The answer depends on whether it is considered a temporary expedient or a permanent solution. In either case, the EU must take the lead. The GSP+ is currently only available to the 15 countries that applied by December 2005 and meet its criteria. They are 11 Andean/Central American states plus Georgia, Sri Lanka, Moldova and Mongolia. None of the ACP applied by the deadline given that, at the time, Cotonou was preferable and the beneficiary lists are now closed until 2009. The EU does have the power to reopen the lists if it so chooses. There are two sets of criteria for GSP+ eligibility: one based on vulnerability, and one based on human/ labour rights and environmental/governance principles. The first is not problematic: all the ACP states appear to be eligible. On the second, the 2005 Regulation required countries initially to have ratified at least 23 out of 27 relevant conventions and to have ratified and implemented all by the end of 2008. But the existing beneficiaries of the scheme that GSP+ replaced (all Latin American) were deemed automatically to fulfil the initial requirement in order not to disrupt trade, even though 3 of the 11 appear not to have done so. This is critical: the EU could offer the same initial flexibility to avoid trade disruption to the ACP (12 of which already appear to have ratified more than the initially required number of conventions, whilst a further 29 are missing only 1 or 2). It would be building on its own precedent, not bending the rules. The most problematic products are almost exclusively agricultural or processed agricultural goods. These include beef, dairy products, fish, rice, horticulture, sugar, processed fruits and cigarettes. However, GSP+ would be more useful if it were not only accorded temporarily to all non-ldc ACP states from January 2008 but also extended to cover the limited number of goods for which Cotonou is more favourable. This opens the case for GSP+ as either a temporary or a permanent option. If permanent, it would be difficult for the EU to avoid offering the extensions that are necessary to make GSP+ attractive to the ACP to all beneficiaries. But this could seriously erode ACP preferences: the cure would almost equal the disease. If temporary (with a review in 2009 when the whole scheme is reassessed), it might be possible to only offer the additional preferences to the ACP. What needs to change? The most problematic products are almost exclusively agricultural or processed agricultural goods. These include beef, dairy products, fish, rice, horticulture, sugar, processed fruits and cigarettes. These goods are either not covered by GSP+ at all, or would receive less favourable treatment under GSP+ than under Cotonou. Not extending GSP+ to cover sensitive products would be of limited benefit to countries like Kenya, Namibia, and Swaziland. As important exporters of these goods, they have the most to fear. If the EU were to make an extended GSP+ temporarily available to the ACP it would avoid short-term disruption to trade whilst giving all parties breathing space either to finalise an EPA or to ratify and implement the remaining conventions needed to establish permanent eligibility - or both. Since these actions are wholly autonomous, the GSP+ option is unlike the WTO waiver option: the solution is entirely in the hands of the EU. But, like the waiver, the problem is the EU s unwillingness to act. Again, a major casualty will be the EU27 s credibility as a liberalising force. Endnotes: 1 Dr Christopher Stevens is Director of International Economic Development Programmes at the Overseas Development Institute (ODI), London. He has been researching EPAs for 10 years; this article is based partly on evidence in his report The Costs to the ACP of Exporting to the EU under the GSP, prepared for the Netherlands Ministry of Foreign Affairs, London: Overseas Development Institute. www.odi.org.uk. 2 As suggested by Peter Mandelson (2007) at the ACP EU Development Council meeting in Bonn on 13 March 2007, the EPA schedule for the ACP could comprise bands of liberalisation which would give transition periods up to 25 years for sensitive products. 3 See speech by Commissioner Peter Mandelson (2007) at the plenary session in Strasbourg on 23 May 2007. See ODI (2007b) op. cit. (f/n 1) for detailed results. 4 ODI. 2007. The Costs to the ACP of exporting to the EU under the GSP. Final Report, March 2007. London: Overseas Development Institute. Available on-line: www.odi.org.uk. 5 ODI (2007) The end of current EU preferences for Namibia: Economic and social impacts, Project Briefing, London: Overseas Development Institute. 5

TNI July - August 2007 Agreeing EPA rules of origin: a strategy unfolds Mark Pearson 1 It is essential for the African, Caribbean and Pacific (ACP) Group of countries negotiating the Economic Partnership Agreements (EPAs) with the European Union (EU) to agree rules of origin that are both liberal and clear. Such rules, which establish the origin of traded products, determine which goods can benefit from the lower tariffs conferred by a given preferential trade arrangement. Thus, while strict rules of origin can effectively act as barriers to trade, more liberal allowances can serve to stimulate exports. In the context of the EPAs, if these rules are difficult to fulfil, cause significant delays or involve high costs for exporters, many of the potential advantages of the trade agreements will be cancelled out. The EU s current relatively strict requirements for rules of origin are considered by many to have stifled exports from developing countries, and thus hindered their economic development. Introducing a more liberal set of rules in the forthcoming EPAs could act as a critical tool to stimulate growth in many of the world s poorest nations. One coherent framework It is equally important that the rules of origin negotiated under the EPAs are either the same, or similar, for all six ACP regions. Fundamental differences of approach would hinder cumulation - the notion of treating a group of states as a single coherent entity for the purposes of determining eligibility for enhanced market access - and as a consequence, would act as a barrier to inter and intra regional trade in Africa. Different rules of origin would also block regional and continental economic integration, thwarting one of the expected outcomes of the EPA by failing to build on the regional integration initiatives of the ACP. The ACP therefore decided to negotiate one set of rules of origin that will be common to all the EPAs, rather than pursue six different arrangements. However, during the 2006 ACP Council in Fiji, ministers agreed that, given the tight deadlines, regional structures would be the best place to advance the cause in a timely fashion with the European Commission. Hence, each negotiating group was given the green light to parley rules of origin at the regional level. To avoid the obvious pitfall of widely differing proposals emerging, it was also agreed that the ACP Secretariat would prepare a template set of rules to guide each region s talks. The ACP decided to negotiate one set of rules of origin that will be common to all the EPAs, rather than pursue six different arrangements. Template to guide talks This template, presented in the form of a table, sets out the current rules of origin which exist in the Cotonou Agreement by chapter and tariff heading. It presents the tariffs applied to Cotonou countries next to those applied to countries covered by the Most Favoured Nation (MFN), Generalised System of Preferences (GSP) and GSP+ schemes. It also details the level of exports from each of the six ACP negotiating regions to the EU and offers some suggestions for rules of origin changes on a product-specific basis. However, during a debate on the first draft of this template in Brussels in October 2006, ACP experts decided to go one step further and ask the ACP Secretariat to establish a draft model protocol to be used in all EPA negotiations with the Commission. Initially, it was proposed that this protocol should be based on an acrossthe-board Value Added method of conferring origin on products (see Box 1). Ministers believed that using Value Added criteria would be simpler and less time consuming than a Change of Tariff Heading approach - which would need to be tackled on a tariff-heading by tariffheading basis. This view was not shared by all the regions, several of which claimed that the additional complications of the second approach would be worth it in the long term. Therefore, in January 2007, ACP experts agreed that either of two the criteria could be chosen and used by the regions. Commission selects single criteria The Commission, on the other hand, decided to base its proposals for changing rules of origin on the Value Added criteria alone. The 2005 proposal from the Commission s department for tax

July - August 2007 TNI and customs (DG Taxud) calls for a single, across-the-board criterion for determining the origin of non-whollyobtained goods based, subject to further impact assessment, on a certain threshold of value added in the beneficiary country (or, where appropriate, regional group) concerned. 2 However, to date, there have been no official recommendations for what percentage of imported parts or materials should be allowed under the Value Added criteria. As part of the Commission s ongoing impact assessment of the changes to rules of origin, it circulated a paper to the European Industry Association asking whether they preferred thresholds of 30 percent, 45 percent or 55-60 percent for local content under the Generalised System of Preferences (GSP) scheme. The Commission suggested that a 30 percent threshold for the Everything but Arms (EBA) scheme was more likely to enhance development and subsequently should also be applied to EPAs, but the issue has moved no further. Development-friendly thresholds? Whether rules of origin based on a local content percentage threshold of 30 percent or above can enhance development of the ACP is debateable. The Blair Commission and the World Bank have both recommended an optimum threshold of 10 percent. Analysis from Christopher Stevens, 3 suggests that Value Added thresholds should vary from product to product, but that for ACP countries the range should fall between 5 and 30 percent. The lower the threshold for the content value, the more redundant rules and procedures regarding cumulation become, further simplifying the rules of origin debate. The Commission considers that a threshold of 60 percent value Box 1 Where two or more countries have been involved in the manufacture of a product, the general concept applied in formulating rules of origin is that the product has origin where the last substantial transformation took place. In practice, there are three main methods of determining whether substantial transformation has occurred: 1. The Value Added Test: which requires that the last production process has created a certain percentage of added value; 2. The Change in Tariff Heading Test: which confers origin if the activity in the exporting country results in a product that is classified under a different heading of the customs tariff classification than its intermediate inputs 3. The Technical Test: which sets out certain production activities that may (positive test) or may not (negative test) confer originating status Source: Falvey, R. E. and G. V. Reed, Rules of Origin as Commercial Policy Instruments, Centre for Research on Globalisation and labour markets, School of Economics, University of Nottingham, Research paper 2000/18. added in the beneficiary country is broadly equivalent in effect to the current Cotonou rules of origin for most industrial products. It is therefore reasonable to hypothesise that the Commission is confident that a 30 percent threshold would be an improvement on existing rules of origin. One area where the Commission and the ACP do see eye-to-eye is the need to negotiate rules of origin in phases. A two-step process One area where the Commission and the ACP do see eye-to-eye is the need to negotiate rules of origin in phases. In the first stage, talks should be based on the existing Cotonou rules of origin, building on the Aquis (Article 37.7 of the Cotonou Agreement) in a bid to improve current market access. In a second phase, there could then be a review clause in the EPA which would allow for a more comprehensive revision of the rules at a later date. This would mean that in January 2008, when the EPAs come into force, the ACP regions will apply both the Value Added and the Change in Tariff Heading criteria, while the EU will work from the Value Added basis alone. Nevertheless, even these first stage Cotonou+ rules of origin, must grant improved market access for ACP countries into EU markets. Some regions have therefore suggested that 7

TNI July - August 2007 additional criteria should be considered, including the possibility that rules of origin be made asymmetric, (i.e. that the rules of origin governing EU exports into ACP markets should be more stringent than those applicable to ACP exports into EU markets). There have also been calls for full cumulation to apply. However, although the Cotonou Agreement states that market access with a review of rules of origin must be improved as part of the EPA negotiations, there is no such provision to discuss broader changes to rules of origin. The ACP group s immediate objective is to work out how to adjust the existing Cotonou rules of origin in order to enhance access and boost exports into EU markets. In order to do this, they must use the template prepared by the ACP Secretariat to identify where change is most needed. Regional progress The regions themselves are already engaged in identifying which rules of origin they would like to see applied to EPAs. The Eastern and Southern Africa (ESA) region is shaping its request on the rules of origin for the Common Market for Eastern and Southern Africa (COMESA), and tailoring them with both the Value Added and the Change of Tariff Heading approach. The South African Development Community (SADC) is modifying its proposal to take into account the interests of its most recent and developed member: South Africa. The Caribbean Forum (Cariforum) is believed to have prepared a full proposal, although negotiators are remaining tight-lipped over the content. The Pacific Forum has unveiled a proposal on fish and fisheries products, but is still working on remaining issues. Central Africa (CEMAC) and Western Africa (ECOWAS) are both believed to be on the verge of finalising their proposals. As it was only agreed to adopt a phased approach to overhauling rules of origin in the past few months, none of the regions have decided to take the Cotonou rules of origin as a basis for negotiation. Therefore, in order to improve EU market access, it is imperative for regional The ACP group s immediate objective is to work out how to adjust the existing Cotonou rules of origin in order to enhance access and boost exports into EU markets. ACP negotiators to collaborate with the private sector and scrutinise which of the current rules are restricting trade and for which products. As a starting point, it would be constructive for these groups to concentrate on chapters and tariff headings for existing exports to the EU which do not already fall under the zero MFN tariff. A difficult demarche Preparing the first phase of negotiations must take place in parallel to work on a more complete and permanent set of EPA rules of origin. EPA negotiators must emphasise, as comprehensively as possible, the existing restrictions on ACP exports to the EU caused by rules of origin. They must then propose changes on a product-specific basis to remove, or at least reduce, these constraints without allowing trade deflection, (i.e. without allowing non-epa countries to transit products through ACP countries and profit from the preferential access to the EU without benefiting local industry). In order for the ACP to improve current market access and to negotiate all the relevant rules of origin with the Commission, this work must be done over the next two to three months and be brought together into one coherent proposal that is backed up with a firm plan of the administrative tools which will be used to implement the rules. As the end of the year deadline looms, it remains to be seen whether the regions can navigate the minefields accordingly. Endnotes: 1 Mark Pearson is the Programme Director for the Regional Trade Facilitation Programme, http://rtfp.org. 2 To read the proposal in full see: http://eur-lex.europa.eu/lexuriserv/ s i t e / e n / c o m / 2 0 0 5 / c o m 2 0 0 5 _ 0100en01.pdf. 3 See previous article Entering the danger zone for details of the author. Further suggested reading: Current issues in EPA negotiations, Paul Kalenga, Trade Policy Advisor RTFP secretariat, 23 May 2007, Mauritius. http://www.ictsd.org/dlogue/2007-05-24/kalenga.pdf Comparing EU free trade agreements - Rules of origin, Naumann, E. 2006, (ECDPM in Brief 61), Maastricht : ECDPM http://www.ecdpm.org/inbrief61 EPA Rules of Origin and Value Added Methodology, Gitonga, Lynette, ongoing trade negotiations, EPA. http://epa.tralac.org/scripts/content.php?id=6240

July - August 2007 TNI Difficult deadline: challenges of the SADC EPA negotiations Talitha Bertelsmann-Scott 1 As Europe winds down for its traditional summer break and the number of working months in 2007 rapidly diminish, many involved in the South African Development Community (SADC) EPA negotiations are starting to question the viability of finalising a deal before the end of the year. Looming deadline Observers at the SADC Secretariat are concerned there has been little or no movement since the launch of the SADC EPA talks with the European Union (EU) in July 2004. The inclusion of South Africa in the SADC-EPA group has contributed to addressing the region s market access issues, but it has also been responsible for much deadlock and delay. During the latest round of negotiations, Botswana, Lesotho, Namibia and Swaziland (the BLNS) made it clear that they were basing their market access offer on South Africa s previously negotiated Free Trade Agreement with the EU, and that Angola, Mozambique and Tanzania (the AMT) were preparing a separate proposal. However, South Africa is not a fully-fledged member of the ACP group and only participates as an observer. The EU agreed to include South Africa in the SADC EPA negotiations given that the BLNS and South Africa are part of the Southern African Customs Union (SACU) and need to have one unified agreement with the EU. Despite European Commission claims that progress has been significant and that hard work and commitment can secure the endof-year deadline, more sober voices are looking at possible alternatives for January. Businesses, many of which have lead times on contracts of at least three to four months, are already seeking clarity on the type of EU market access they might achieve in the absence of an EPA. As things stand, neither side can confidently say it knows what the content of the SADC-EPA will be. And if, by some gargantuan effort, SADC and the EU do meet the December deadline, it would be some time before both sides could ratify the process. A framework agreement? As an alternative to the EPA, some have suggested both parties sign a framework agreement to come into effect on January 1 2008. This interim measure, which would overcome the main problem of the expiry of the WTO waiver, 2 would simply state that the parties have agreed to liberalise the trade in goods over a period of x number of years, and that all products which currently enjoy zero MFN tariff rates would constitute the first tranche of liberalisation. While this is a feasible option, it leaves the door open for the least developed countries (LDCs) to abandon the EPA negotiations and opt for Everything But Arms (EBA) access - a move which would exempt them from making any reciprocal offer. Until now, the LDCs have been tempted to the negotiation table by discussion of regional integration and development concerns, despite the Commission s insistence that such additional funding would not necessarily be on offer if ACP countries signed up to an EPA. Under the scenario of a framework agreement then, the development carrot would crumble, and with it the hope that the EPA can be a vehicle for regional integration in Southern Africa. No regional integration through the SADC EPA Yet, achieving regional integration through the EPAs is in doubt even if the LDCs in the SADC region do decide to sign up to an EPA. As it stands, there will be four different market access arrangements in the SADC EPA one for SACU (South Africa, Botswana, Lesotho, Namibia and Swaziland) and one each for Angola, Mozambique and Tanzania. This throws into question the likelihood of agreeing a SADC Customs Union (CU) by 2010, given that members of the same customs union cannot offer different sets of market access arrangements to different trade partners. In other words, either the entire SADC region has to have one cohesive agreement with the EU - an unlikely prospect given South Africa s involvement - or it will have to abandon 9 the idea of a SADC CU. Many believe that a SADC CU by 2010 is in any case an unrealistic objective, given that SADC has no roadmap or real commitment to such a Union. But signing a SADC-EPA, and introducing four different market access arrangements, will only place a further stumbling bloc in front of SADC s regional goals and objectives. Development component Since the inception of the EPA negotiations, the development element has been a controversial issue. After 10 years of discussing the future of the EU-ACP relationship, the parties seem no closer to understanding one another on the interpretation of development and its link to trade in the region. While the EU maintains that the financial package falls under the Cotonou Agreement and that development within the EPA context refers to other aspects of development such as the conclusion of an investment agreement the SADC-EPA group believes a specific chapter should be included in the EPA to ensure binding EU commitments to the region s development beyond the expiry of Cotonou. For the EU, the development dimension lies in the asymmetrical design of the EPA, meaning that it would carry the larger burden of liberalising more products, more swiftly, than SADC. In addition, the EU firmly believes that the inclusion of the new generation (NG) trade issues will also contribute to the region s development. It is therefore willing to negotiate the NG issues services, competition, investment, environment, intellectual property and labour with development in their design, and again, take on more commitments than its counterpart. For SADC, the success of any development component of the EPA lies in both the design and the sequencing of national and regional agendas, including a strategy to achieve the Millennium Development Goals (MDGs). Furthermore, the EPA development component should be closely

TNI July - August 2007 linked to the Aid for Trade (AfT) strategy which was recently advanced within the WTO context. Accordingly, SADC needs to define national developmental strategies. These should include the AfT dimension and clarify topics ranging from Trade Policy Regulation and Building Productive Capacity to Trade Related Adjustment and Infrastructure. The region needs to introduce a system that ensures policy is adjusted to be able to implement - and benefit - from the new opportunities the EPA might provide. Throughout the negotiations, many ACP states have tried to approach development by looking at regional means of furthering domestic trade. Some, such as the Eastern and Southern Africa (ESA) EPA group, put forward a so-called Development Matrix of objectives and actions that it would like to see included in the final Agreement. However, some caution against SADC asking for specific development projects in the text, on the grounds that the region could lose some of its sovereignty to decide appropriate strategies. The Commission itself is no more in favour of including a Development Matrix, although it is open to discuss the contents during future rounds of talks. Finding the best means to approach development is not clear cut even in Europe. Many EU member states are seemingly willing to fund trade orientated capacity building projects, but are waiting for the ACP to identify which ones. This overarching confusion, even in the definition, has led to the conclusion that it would take longer than six months to iron out the problems of the development component. Development through services and NG? While South Africa is adamant that services should not be included in the EPA agreement, several other SADC EPA states think they should. It is believed that the inclusion of a services and an investment agreement in the EPA could promote supply efficiency in the SADC states and attract foreign investment into key infrastructure services like telecommunications and transport. These services, also called producer services, are essential to boost production in the economic sector. As such, greater efficiency in the service sector would help SADC strengthen its domestic production capacity and its international competitiveness. SADC (excluding South Africa) generally agrees with the liberalising rational of including services and NG issues, but argues that: The EU s stance is controversial. Whereas the EU is calling for the inclusion of NG issues, some of these were firmly rejected at the WTO, meaning SADC states are therefore being asked to negotiate on issues that go beyond the multilateral agenda. EPA agreements do not need to include NG issues to be WTO compatible. If services are included, the ensuing agreement must have substantial coverage to comply with WTO rules, which almost makes it preferable to exclude services and follow the WTO process at this stage. The gains from including services and NG issues are not automatic; Research has shown that some critical preconditions good domestic legal, administrative and regulatory capacities are necessary for success. This should perhaps be addressed in the development component first, as they are not yet sufficient to support the proposed liberalisation. Research also suggests that there is no link between an investment agreement and an increase in Foreign Direct Investment (FDI). Finally, as there has been little liberalisation within the region itself, SADC countries do not yet have a harmonised approach. Without this, it will be difficult to formulate a unified offer to the EU and any dream of a regional agreement for SADC slips even further away. Perhaps the best way forward for the EU, which is keen to open up services and NG issues, would be to remain flexible and not to apply pressure on SADC to liberalise at break-neck speed. In the interim, the EU could provide sufficient support to address structural and institutional challenges as well as supply-side constraints. In turn, SADC should not shy away totally from making commitments on NG issues and should try and negotiate agreements that 10 back up current WTO commitments and provide the basis for future negotiations with the EU. A role for non-state actors There are concerns that the EPAs are being negotiated exclusively by government officials, with very limited input from civil society or the private sector. Collectively known as non-state actors, these groups were mandated to play a role in the negotiations in the Cotonou Agreement. But regionally there has been little consultation with business. Trade negotiating forums have now been established in Botswana, Lesotho, Namibia and Swaziland in a bid to create the chance for government to consult a range of economic and social partners, but these channels work better in some countries than in others. The SADC- EPA group as a whole has also launched a project to establish official avenues through which non-state actors can give input on both the EPA negotiations and trade policy in general. Nevertheless, the move comes at a late stage. An impossible transition? Overall, it appears that time is running out. Although there is commitment to the process by both the SADC countries and the EU, giving substance to the EPA in the short time left seems impossible. Progress has been made on the market access aspect of the deal, but parties remain far apart on the inclusion of services and the NG issues of investment and government procurement. On development, there is still no agreement on a definition, let alone how to include a development chapter. Nevertheless, hope remains that the parties can agree some kind of strategy to smooth the transition in January and to ensure that trade flows increase - not end - with the WTO waiver. This article is based on contributions made at the SAIIA/RTFP/ECDPM Conference of the same title, held in Brussels on 26 June 2007. www.ecdpm.org/trade/sadcconference and www.saiia.org.za. Endnotes: 1 Associate Researcher, South African Institute of International Affairs (SAIIA) 2 See article by Christopher Stevens in this issue.

July - August 2007 TNI The complexities of negotiating a West Africa EPA Eric Hazard 1 With only a few months remaining until the scheduled deadline for the negotiations on the Economic Partnership Agreement (EPA) between the 16 countries of West Africa and the European Union (EU), West African negotiators are under enormous pressure. In addition to the increasing demands from civil society, further tensions linked to the cycle of the negotiations are beginning to crop up, while questions remain as to whether or not ECOWAS has the ability to properly negotiate a deal. If no new agreement is reached by January 1 2008, the 13 least developed countries (LDCs) of the Economic Community of West African States (ECOWAS) will automatically join the European market under the Everything But Arms (EBA) initiative. 2 On the other hand, the non- LDC countries, i.e. the Ivory Coast, Ghana and Nigeria, will fall under the EU s Generalised System of Preferences (GSP) scheme, under which exports from these three countries will be subject to a substantial increase in EU tariffs. 3 The EU is the most important trading partner for ECOWAS, which is one of the poorest areas in the world. At the same time, the EU is also the region s biggest competitor. Therefore, from both an economic and social point of view, the EPA stakes are extremely high for West Africa. Given these realities, what is the current status of the negotiations between these two parties? Are the prerequisites for the conclusion and signature of a true partnership in place? If not, how much room for manoeuvre exists in order to reach a deal? New challenges for West Africa West Africa s awareness of international trade negotiations is a relatively recent phenomenon. Interest began to surface around the year 2000, which was approximately the same time the region began to reassert itself after several years of weak administration and structural adjustment. Decision makers found they faced two major challenges: preparing to negotiate an EPA with the EU, as well as taking part in the launch of the Doha Round of global trade talks. While it is true that West Africa has been able to play a rather active role in certain aspects of the dialogue at the WTO, particularly in the case of cotton, the dynamics of having simultaneous negotiations has caused problems. Participation in EPA and WTO discussions has created a tug-of-war for the scarce resources available to negotiators, states, and the region. For example, the EPA initial impact studies for the region were only started four years after the signature of the Cotonou Agreement with the EU. Such research should have begun in 2000 in order to better inform the negotiating process. But even if these factors help explain some of the reasons negotiations are behind schedule, there are structural and strategic elements which must be considered as well. Difference of ability and perception Speculation and concern about the negotiating capacity of West Africa has dogged the region since the inception of EPA negotiations in 2004. With only a few months left before the end-of-year deadline, there is a wealth of analysis which points to the unfairness of this situation. The mid-term review, adopted by both parties in Brussels on February 28, signals a difference of opinion on whether or not to include a development chapter in the EPA and the link between trade and development. It also questions the state of readiness of the region and the effectiveness and efficiency of the structures of negotiation. 4 However, despite the findings of the mid-term review, this lack of qualified manpower and capacity is not considered a major structural constraint in the negotiations, and as such, the original cutoff date for a deal has not been revised. At the same time, little attention has been paid to the raft of reforms that must be carried out before an EPA can even be implemented. Both of these issues have been identified as major stumbling blocks in an independent mid-term review 11 conducted by the West African Farmers and Agricultural Producers Organisation (known as ROPPA). 5 Moreover, regional integration, an essential goal of the road-map agreed at Accra in 2004, was barely even mentioned in the European Commission s review. Indeed, the section devoted to regional integration concludes rather tersely that various fields of regional integration have been looked at in-depth during the first phase of the negotiations, and that the EPA is therefore an important contribution to the dynamics of regional integration, but fails to explain either the ways or the means of how integration can be put into practice. It is interesting to point out that apart from the Ivory Coast, none of the ministers in charge of regional integration at the local level are involved in the EPA negotiations. This begs the question of whether or not regional integration will play a role in a final agreement at all. West African farmers have asked their governments not to sign an EPA and, through ROPPA, have threatened to boycott elections as a means to keep up the pressure 6. EU negotiators, on the other hand, continue to talk of December 31 2007 as an inevitable deadline. Peter Thompson, a Director of the European Commission s department for trade in Brussels, recently called upon the representatives of ECOWAS and the Economic and Monetary Union of West Africa (UEMOA) to put forward proposal texts on market access and services. Nevertheless, if we wish to stick to our ambitious calendar - and I believe it is important that we do, if we are to avoid any negative impact on trade for certain West African states - then we must intensify our efforts in the months to come, he said. The EU turned these words into action when it put an EPA proposal on the