ACP-EU trade: into the new millennium
Full text of an article from The Courier ACP-EU
No. 166, November-December 1997: pages 64-67
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DG Development
Eighteen months before the expiry of Lomé IV on February 29 2000, ACP and EU states will staff negotiations to define a new relationship. This will involve a major overhaul of their cooperation system and particularly of trade arrangements. Gearing up for these talks, the European Commission has launched a wide debate starting with the publication of the 'Green Paper' last autumn. The author of this article, who is one of the Commission's specialists, describes the implications for ACP nations of the rapidly changing global trends. He takes stock of past trade achievements of the ACPs and the challenges and constraints ahead as they seek further integration into the international economy.
Globalisation is rapidly transforming the world economy. The phenomenon results from technological advances that reduce international transaction costs and from rapid liberalisation of international exchanges of goods, services, and capital. At the same time, access to international markets is becoming more complex and dependent on other trade-related issues. In the market access equation, tariff levels are lessening in importance and other factors such as competition policies, standards, subsidies, anti-dumping and countervailing policies, environmental and social regulations, intellectual property laws, and investment codes, are increasingly coming to the fore as major determinants of market access. Despite thy considerable success of multilateral liberalisation in the wake of the Uruguay Round agreement, many of these trade-related areas are still insufficiently regulated by the World Trade Organisation (WTO). This could give rise to discriminatory action by multinational corporations and trading nations, impairing access to international markets.
The Uruguay Round of the General Agreement on Tariffs and Trade (GATT), the forerunner to the World Trade Organisation (WTO), has not slowed the interest in regionalism which gathered pace in the late 1980s. Trading nations, industrial and developing alike, fuelled by their desire for freer and fairer trade and for more certainty and harmonisation in the new trade-related areas, are, it seems, looking beyond the achievements of the Uruguay Round to a more limited geographical sphere.
A distinctive feature of this renewed interest in regionalism is that North-South trading arrangements, involving both developed and developing economies, are now viewed as bringing for both parties in many areas so-called 'non-traditional' benefits (of a trade, economic and political nature), on top of direct trade creation.
The added benefits include enhanced security of market access and increased policy credibility for the less developed countries (LDCs) that are involved. The arrangements offer higher investment; both domestic and foreign, increased competition, better resource allocation, fuller use of economies of scale, improved access to technology and an insurance about future policy developments in trade-related areas. Furthermore, North-South regional integration, by providing an external anchor - or, in economists' jargon, 'agency of restraint' - enables less developed countries to lock in economic policy reforms and make credible signals to economic agents, both domestic and foreign, about their commitment to reform and to a private sector environment. This is because of the importance of sanctions in the event of policy reversal.
Multilateral liberalisation and the growing move towards regionalism change the economic playing field for the less developed countries. Those that have traditionally benefited from non-reciprocal preferential treatment under the GSP or other preferential regimes like Lomé, are seeing a gradual erosion of trade preferences.
Meanwhile, LDCs excluded from regional blocs, (as is the case for the Caribbean and some of their Latin American neighbours vis-à-vis NAFTA), are likely to face losses due to trade and investment diversion, and higher tariff and non-tariff barriers to market access in regional bloc markets.
In a nutshell, there are developments on the international scene at two levels. Multilaterally, trading nations are pushing ahead with an agenda within the WTO, whereas regionally, three major trading blocs seem to be emerging and consolidating - around the USA, the EU and the Asia-Pacific region. Clustering around these groups meanwhile, are the regional schemes of other developing countries. Such schemes are proliferating, leading to the creation of viable economic spaces seeking 'hooks' and 'anchors' with the major blocs to secure market access and insure against adverse trade policy developments.
For LDCs, increased integration towards a global economy, either down the multilateral or unilateral road, can yield potentially high rates of economic growth, if accompanied by sound internal policies. This is because a definite empirical association is proven between openness, integration (speed and level) and growth. On the whole, less developed countries have actively participated in globalisation of the international economy and have experienced high growth rates enabling some of them to close the gap with more mature industrial economies.
However, there are marked differences in this good overall performance. Countries presently more fully integrated into the world economy, show higher rates of growth. Conversely, many less developed nations (notably ACPs), have experienced both low growth and further marginalisation in the global economy
LDCs that lag in the growth and integration stakes need to reverse the negative trends and have to make difficult decisions about how much and at what pace they should liberalise. In particular, they must choose the best strategy of integration into the world economy; the multilateral or unilateral way? Alternatively, should they engage in regionalism and if so, should they opt for South-South and/or North-South links? Or, would a combination of these options be more preferable? And what about the ACP group in particular?
Over successive Lomé Conventions, ACP nations have failed to increase, or even maintain, their share of the EU market, while less preferred exporters have been able to raise theirs. The European market remains relatively important for the ACP countries. Between 1990 and 1992, the latter depended on the EU for an average of 41% of their export earnings. Trade dependency on the EU varies among ACP regions, being higher for Africa (46%) than for the Caribbean and the Pacific (18% and 23%, respectively). By comparison with the group of less developed countries as a whole, the ACPs trade performance over the last decade has been modest . Between 1986 and 1992, ACP exports to the world rose at just 5.7% as compared with 13% for the LDCs taken together.
Another worrying trade trend is that the ACPs have not managed to diversify their exports significantly and most still depend on a few primary products. Their ten top products accounted for no less than 61% of total exports to the EU between 1988-92. Compared with other LDCs' performance in manufacturing and processing, the ACPs are also clearly trailing.
Between 1988-1993, they registered negative growth rates in trade for such products, while other LDC exports grew by almost 9% (taken from 'Europe's Preferred Partners', ODI 1995 report).
From the mid-1980s to the early 1990s, Foreign Domestic Investment (FDI) to African ACP countries doubled in percentage terms reaching 1.18% of GDP. However, Africa's share of all FDI to the LDCs (excluding China) dropped from 6% to 4%. In addition, it should be noted that most foreign investment destined for Africa goes to the oil-producing countries led by Nigeria - which absorbed 44% of all FDI to the continent between 1991 and 1993. Caribbean countries and some Pacific ones managed to attract significantly more FDI at the beginning of the 1990s.
When measured against the World Bank's set of integration indicators (Global Economic Prospects, 1996), as far as the ACP group is concerned, sub-Saharan Africa (SSA) appears marginalised. This poor integration performance is reflected in the low income levels, worsening poverty and poor growth performance of SSA countries during the last decade.
Over the period 1971 to 1991, SSA achieved GDP growth rates below the average for all the less developed countries (3.4% as against 5.2%). More recently, between 1991-1994, their relative performance deteriorated further. Allowing for population increases, the performance was particularly dismal. Between 1974 and 1990, SSA recorded annual GDP growth per capita of -0.7 %. By contrast, the figure for the world as a whole was 1.2%.
Three key principles underpin Lomé trade preferences; stability, 'contractuality' and non-reciprocity. The last-mentioned is linked with a non-discrimination clause which states that ACP countries should not offer better treatment to exports from other developed countries than those granted to the KU. Stability and contractuality are essential elements of Lomé trade preferences, since they provide a degree of security for access of ACP exports to the EU market. This is unmatched by any other existing non-reciprocal preferential arrangements (such as the GSP schemes). For economic operators, this takes away some of the risk involved in investing in export oriented activities.
Lomé trade preferences continue to be of great value to ACPs. In addition to complete duty-free access for manufactured and processed exports, and the exemption of the preferences granted on textiles and clothing from MFA disciplines, many ACP countries have benefited from the generous prices and guaranteed access for specific quantities of products under the Lomé Commodity Protocols (bananas, sugar, beef and veal, and rum).
However, the value of the preferences has been eroded over time by multilateral liberalisation, by the pre-EU membership arrangements with the countries of Central and Eastern Europe, and by the surge in EU-centered regional trade arrangements (in particular the Euro-Mediterranean agreements, and other preferential arrangements in the pipeline with Latin-American countries). Various studies and evaluations also cast doubt on the contribution of Lomé preferences to achieving their primary goals growth and diversification of exports. What stands out is the deterioration of ACP countries' export performance and of their capacity to attract FDI over the period they have enjoyed these preferences.
The impact of the Lomé preferences is not all negative. There are individual success stories of export growth and diversification. Several areas of export, that have enjoyed relatively large preferential margins in terms of tariffs and quota exemptions, have expanded. And a few countries that have made the fullest use of the preferences - have attracted significant amounts of FDI. Mauritius, Botswana, Côte d'Ivoire, Jamaica, and Zimbabwe, are among those in this category that have gained, either through direct benefits under the protocols, or by diversifying.
No single reason explains the poor overall export and growth performance of the ACP countries. Political instability, poor resource endowments, lack of infrastructure, weak entrepreneurship, scarce physical and human capital, low levels of savings and investment, and undeveloped financial sectors have all limited, on the supply side, the benefits that could be derived from preferences. Added to these are high dependency on a few basic commodities subject to major price fluctuations, and a substantial deterioration in the terms of trade.
On top of these commonplace, but relevant explanations, it is widely believed that sound policies play a major role in influencing exports and growth. Macroeconomic stability, realistic and stable exchange rates, good institutions and good governance, efficient resource allocation policies and, in particular, stable and credible import and tax regimes which allow transparent transmission of world price signals to domestic producers, are significant determinants of competitiveness and export performance.
As a group, the ACPs, and many SSA countries, in particular, have failed to fulfil the preconditions for achieving export-led growth. With poor initial resource endowments, they have also failed in the past to adopt the right policy mix. Implementation has been lax and they have frequently reversed policies. Consequently, SSA countries' economic policies, and eventual policy reforms, suffer from very low credibility in the eyes of domestic and foreign investors. This situation undermines and blunts not only the supply response to trade preferences, but also any future policy reform.
A more direct threat to the preferences has come from the world trade body. The legal battles fought by the EU and the ACP, initially in the GATT following the setting up of the single market for bananas, prompted the European Community in 1994 to seek a 'waiver' for the Lomé Convention's entire trade package. This followed the conclusions of a first panel - not adopted by the GATT Council - that the Lomé Convention was inconsistent with GATT rules due to its non-reciprocal nature. This meant that it could not be considered as a Free Trade Area and it was also found to be discriminatory vis-à-vis other LDCs and thus not covered by the enabling clause permitting GSP schemes. The principles underpinning the Lomé trade preferences in particular that of non-reciprocity now permitted by the waiver are undermined by the fact that this lasts only until the end of the present Convention. Also, like all other waivers, it must be renewed every year. To cap it all, the banana conflict has finally concluded with a definitive WTO ruling against the EU relating to this specific system.
As they look ahead to the next century, the ACPs have to ensure optimal integration into a world economy which is undergoing rapid change. Some of the trends and features of the new global situation, notably the need to comply with stricter GATT rules, make the simple continuation of traditional non-reciprocal preferences an unlikely option. Other options, such as multilateral and regional liberalisation, will result in the gradual erosion of the value of the preferences. EU-centered regionalism leads to a further weakening of the beneficial impact of the preferences as other EU partners are offered more stable and secure trade and investment deals. This creates a potential for trade and investment diversion to the detriment of the ACPs.
Furthermore, the burgeoning of international and national regulations implemented by the EU, as well as other major trading nations on new issues like the environment, social standards, competition policy, and technical and health standards, impose new obligations on all developing countries including the ACPs. These could well develop into new non-tariff barriers and obstacles to trade. Such obstacles, likely to increase in importance in the short and medium term, are becoming more relevant as the ACPs attempt to diversify their exports, and they are wholly outside the scope of Lomé's traditional preferential package. Thus, the latter appears increasingly irrelevant to the integration needs of the ACP group.
Regionalisation, driven by other major developed economies, is pulling apart the various ACP regions, in particular, the Caribbean and the Pacific which are not such 'natural' trading partners of the EU. On the one hand, they are confronted by the erosion of traditional, non-reciprocal, preferences. On the other, they have to make difficult choices between competing integration strategies in order to preserve, consolidate or establish trade positions in respect of emerging trade blocs.
The new EU-ACP trade arrangement after the year 2000 should be assessed according to its ability to meet the challenges, constraints and problems the ACP countries have to confront in the new world context. It should comply with GATT rules to provide the necessary security and stability in the trade regime. It should also preserve the current level of market access, taking account of the differentiation of ACP countries in terms of their level of integration into the global economy, their level of development and their priorities. And it should secure, as far as possible, in compliance with the WTO, the benefits provided by the commodity protocols. The new system needs to offset the impact of preference erosion as well as the trade and investment diversion effects resulting from multilateral liberalisation and EU-led regionalism. It should provide an international anchor of enhanced credibility, certainty and stability for the trading and regulatory framework of the ACP countries, as a precondition to achieve better export performance and attract FDI - and, ultimately, obtain higher growth rates. It should actively promote and facilitate the success of regional integration among 'natural' ACP partners, as well as help ACP countries to insure against the proliferation of national and international regulations, in new trade-related areas, which may give rise to additional obstacles to market access. Different ACP regions must also be allowed to join different - even overlapping - trading arrangements if they convenient to their development needs and geographical location, providing a counterweight to the pull they would experience from new regional blocs.
The Commission's Paper lays down a series of options for a future trade regime between the EU and the ACP countries. It considers possible integration strategies (status quo, unilateral liberalisation, multilateralism, South-South and North-South regional integration) and assesses how well each of these would meet the challenges, constraints, and problems that the ACP group faces at the eve of the 21st century. However, it does not state a preferred option.
This article was written prior to the Commission's decision on a negotiating mandate for submission to the Council and the European Parliament. But from the debate on the Green Paper trade options, the general conclusion one can draw at this stage is that, faced with the challenges, risks and opportunities of globalisation, both partners should be attempting to formulate a more proactive trade arrangement. This implies integrating a wider spread of trade, trade facilitation and FDI considerations, beyond simple tariff concessions, thus enabling ACP countries to formulate sound integration strategies, adapted to their level of development, geographical location and trade patterns.
Three themes have recurred in the debates. The first is the need to secure full compliance with the WTO rules. The second is to take account of the diverse nature of ACP countries - which entails assessing the need and convenience of keeping non-reciprocal preferential treatment for the Least Developed Countries (both ACP and non-ACP), graduating other less (but not least) developed ACP countries into the GSP, and bringing the more developed ACPs into reciprocal arrangements. It also means enhancing the credibility of ACP countries' economic reforms as a precondition for achieving higer levels of investment (foreign and domestic), and hence a stronger supply response. Last but not least, a reasonable transition period is needed to switch from the present trade regime to a new one.
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