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Economic Partnership Agreements (EPAs) - guide

31 October 2007
by eub2 -- last modified 31 October 2007

The negotiations leading to the Economic Partnership Agreements (EPAs) were launched in Brussels on 27 September 2002 to be conducted in two phases. The first phase is conducted at "All-ACP"-EU level and takes on board cross-cutting themes of interest to all parties concerned, mainly: legal matters, the development "dimension" of the EPAs, Agriculture and Fisheries agreements, services, market access and trade-related matters. The Second phase is conducted at ACP national and regional level with spotlight on specific commitments.


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1. What do Africa, Caribbean and Pacific countries stand to gain? 
 
Put simply, after more than thirty years of bilateral trade with Europe, the ACP still exports just a few basic commodities, most of which fetch lower prices than they did twenty years ago. Old recipes have not promoted diversification, competitiveness, growth. And they are no longer compatible with WTO rules that preference schemes must not discriminate between countries at the same level of development.  They  have been successfully challenged and new WTO compatible solutions are necessary and urgent. 
 
The EU’s Economic Partnership Agreements are the new trade arrangements that the EU is negotiating with the six African Caribbean and Pacific regions.  These will replace the trade chapters of the Cotonou Agreement when the trade preferences of this agreement expire at the end of 2007.  We have until that date to negotiate new agreements that are WTO compatible. 
 
The EPAs will be broad agreements, helping first of all to build regional markets and diversify economies in the ACP regions before opening up trade.  They will build increased, balanced and sustainable trade between the two regions. They will change our relationship from one that offers tariff preferences - an eroding lifeline - to one that builds lasting and more efficient regional and international markets for the ACP. 
 
2. Why should regional agreements work any better than the existing arrangements?
 
Regional integration is at the heart of the ACP’s own development strategies.  The fact is that ACP economies are too small to go it alone and most trade more with Europe than they do with their neighbours. Take the case of Ghana where 49% of their exports go to the EU or  Cameroon, where the EU accounts for 61% of exports and 55% of imports.  Among the reasons for this are the lingering barriers to trade between ACP countries and tariffs on South-South trade.  Developing countries pay more duties on their exports to other developing countries than they do to the OECD.  Regional integration has the potential to eliminate barriers between neighbouring countries, favour local trade exchanges and boost economic growth.  It would also
create bigger markets more attractive to investors and facilitate trade with landlocked countries. 
 
The pace of regional integration and the choice of regional grouping is an ACP choice and the EU interest is to verify arrangements are legally and practically feasible. Where an ACP region is preparing for a customs union, such as in West and Central Africa, this will boost the potential of the EPA and we welcome it.  We will not push for a customs union to be formed if the countries are not considering or are not ready for it.
 
3. What has the EU offered in terms of Market Access in the EPA negotiations? 
 
The EU has offered to remove all remaining quota and tariff limitations on access to the EU market for all African, Caribbean and Pacific regions. This offer covers all products, including agricultural goods like beef, dairy, cereals and all fruit and vegetables. It will apply immediately following the signing of an agreement - with a phase-in period for rice and sugar. The only exception will be South Africa where a number of globally competitive products will continue to pay import duties. 
 
This offer will give all African Caribbean and Pacific countries the same access to EU markets under EPAs that Least Developed Countries have under the "Everything But Arms" duty and quota free system. It also means all ACP countries would have the same market access conditions as each other.  This encourages collaboration in regional markets and supply chains and responds to the concerns of agricultural exporters in countries like Kenya or Ghana that they face a disadvantage compared to their neighbours. 
 
4.  Why ask ACP regions to liberalise their tariffs?
 
If ACP traders are to get the legal certainty they need and the ACP are going to enter the trade mainstream then the EU and ACP need to negotiate the tariff reductions necessary to arrive at a WTO compatible Free Trade Agreement.  Although this means removing duties on "substantially all trade", the precise way in which this is done will be set by mutual agreement.  Liberalisation is no EU ideological imposition – on the contrary the EU priority is to work within the limits set by
WTO compatibility to help the ACP maximise development benefits.
 
There was never any question that the EU market access offer would be tied in any way to the requirement of equivalent openness from the ACP countries. In fact the greater liberalisation that the EU undertakes then the less liberalisation is expected of the ACP.  A 100% EU market
access offer also means that, under WTO rules, the ACP can phase in liberalisation slower and have greater flexibility to protect local producers where liberalisation could threaten livelihoods.  Peter Mandelson has made clear he will both defend such exemptions in the WTO and support longer transition times than those used in existing EU Free Trade Agreements.
 
This doesn't mean the change is easy – it involves a shift from the current situation where most of ACP exports enter the EU at zero tariff duty but most EU products exported into the ACP are charged duties.  But experience in emerging Asian economies also shows this shift can bring benefits as a progressive and targeted reduction of customs tariffs helps both consumers and companies.  Lower prices mean wages go further and cheaper machinery, raw materials and parts for assembly help local products stay competitive compared to foreign competition. 
 
Although the EU is often accused of having an aggressive liberalisation agenda in ACP markets it is important to bear in mind that the EU exports to ACP markets represent a tiny fraction of its external trade, and most agricultural goods from the EU already enter at low or zero tariff rates. It has no mercantilist agenda in these markets. We have made clear that we will remove export subsidies on any product where the ACP removes tariffs.
 
5. Will the EU address ACP concerns about Rules of Origin?  
 
Rules of Origin are used to ensure that ACP producers benefit from access to EU markets and ACP countries do not simply become a transit channel for exports from third countries.  ACP people need permanent jobs not simply the repackaging of goods to help others avoid paying EU duties.  To ensure EPAs deliver the maximum benefit and the ACP can source inputs where they need them, the European Commission has begun discussions with the 6 ACP regions on simpler, more transparent and easier to apply "Cotonou+" Rules of Origin.
 
6. How will the ACP replace the revenues they lose by reducing tariffs and continue to pay for public services?
 
This question is not as acute as some would have it and answers are available. Replacing customs tariffs by other sources of fiscal revenue is a reform most countries have made because it is more efficient for the economy as a whole and the government. Other forms of taxes provide far better incentives to promote growth and a far more sustainable tax base to finance much needed basic social services such as health and education. 
 
Unfortunately tariff revenues trap small and poor countries into taxing the goods they need.  This restricts growth and leaves them little opportunity to shift to measures such as excise duties, sales taxes or taxes on profits.  EPAs are a chance to change this by setting in place a slow and
managed change processes.  By boosting trade, building markets and promoting regional integration EPAs can also help increase the tax base, giving a secure platform for reform.  
 
Some studies have overestimated the impact of tariff reduction on fiscal revenues, without considering other aspects. The assumption of rapid liberalisation on the ACP side is clearly mistaken.  Where there are high tariffs, these also encourage smuggling and corruption, and theoretical revenues are often lost through derogations and irregularities. Lower tariffs would reduce the incentive for these practises and offset initial losses. 
 
This said, the EU is ready to assist with fiscal reform and adjustment to any net fiscal losses observed as a result of EPAs and has the means to do so. We have increased our budget support, which is the most appropriate way to assist in this transition. We are also ready to discuss regional financing mechanisms where this is the most appropriate channel.
 
7. Why should EPAs include rules related to investment? 
 
Asia and Latin America are channelling foreign investment into infrastructure and job creation. The October 2006 UNCTAD report on global investment in developing countries highlighted the extent to which Sub Saharan Africa in particular is falling  far behind in this aspect of development. Africa is trapped by barriers to inward investment, nationalised industrial fiefdoms and fractured regional markets. Africa's own investors choose to invest outside of the continent. 
 
A key ambition of Economic Partnership Agreements is to change this, to help create integrated regional markets, attract inward investment and keep investment from flying abroad. The EU is ready to help improving conditions in ACP economies for inward investment: clearer rules and rights for all companies. Policy frameworks at  regional level will further help consolidating national markets, making them individually and collectively more attractive. 
 
The UNCTAD report offers the clearest argument why EPAs are a pro-development agenda. Those who dismiss the EU's position in these negotiations as "forcing open" these markets to unwanted EU investment misrepresent the EU's intentions.
 
8. Does the alternative to Cotonou have to be EPAs? 
 
In theory, no but all the ACP regions said clearly at the May ACP-EU Joint Council of Ministers that they will negotiate EPAs and do not believe any alternative offers the same development benefits or market access to Europe.  There is no realistic alternative to EPAs that has the same content and potential to support development.
 
9. What happens if negotiations do not conclude on time? 
 
After the WTO waiver covering the Cotonou preferences expires on 31st December 2007, the EU can no longer continue current trade arrangements.  ACP Least Developed Countries can get duty free access to the EU under the EBA (Everything But Arms) scheme but would lose out on all the regional integration benefits, trade related rules and Rules of Origin linked to EPAs.  
 
The non-Least Developed Countries would access the less generous general GSP (Generalised System of Preferences) scheme as none of them invoked a clause in the Cotonou agreement asking the EU to consider alternatives.  But even the GSP is not a good alternative.  For the West Africa region, more than €1 billion of trade would be affected, as the average GSP tariff is 20% compared. A third of exports from Ivory Coast (€700 million) would face a tariff of 27% as
opposed to 0% and for Ghana 25% of exports (€240 million) would be similarly affected. For Central Africa, the equivalent figure is about €360 million worth of exports. 
 
10. Can we extend the WTO waiver? 
 
In practice, this would be extremely difficult. The WTO waiver to allow EPAs to be negotiated was obtained on a time-limited basis and cannot be extended. The idea of a new waiver sometimes comes up. But those who know the WTO will know that it's far from clear we could even obtain a new waiver. It wasn't in the deal at Doha in 2000. Non-ACP developing countries, some of whom are actually poorer than some ACP countries, already resent the favourable  discriminatory benefits we provide the ACP.
 
The original Cotonou waiver was secured by agreeing to cuts in the preferential access granted to ACP countries. Any new waiver would only come at a hefty price in the form of further ACP preference erosion. The best we could hope for would be a few more years of a failing agreement secured on weaker terms, with ACP countries paying the long term price. The way out of poverty and commodity dependence for the ACP is to play a full part in a rules based multilateral trading system – not in avoiding it or seeking derogations.
 
11. The ACP doesn't get enough Aid for Trade money linked to EPAs? 
 
EPA finance goes far wider than "aid for trade" covering fiscal reform and regional integration for example.  The EU and ACP agreed negotiations will move in parallel to match emerging EPA content with finance needs.   There is no evidence we are short of money and all requests so far have been accommodated by the EDF (European Development Fund) or EU Member States.   The EDF will increase by 35% from 2008, providing the ACP with € 22 billion of development finance over the next five years, including EPA related support such as infrastructure and private sector development.  Within the EDF, ACP  regional programmes that support regional
integration in general and EPAs in particular will increase by more than 75% to € 1.75 billion
 
EU Ministers also agreed to prepare a strategy setting out the delivery of €2 billion per year of further aid by 2010 to help developing countries put in place new trade policies to boost their growth and help them integrate into global markets. They agreed that a substantial part of this
increase in aid will be specifically targeted to African Caribbean and Pacific countries, with a priority given to measures that help put in place Economic Partnership Agreements. 
 
Source: European Commission


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