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Preparing for Economic Partnership Agreements
Trade Analysis Handbook
Dr Christopher Stevens, Jane Kennan
Institute of Development Studies (IDS) / Sussex
May 2005
The report below describes the methodology used in the research project on EU-ACP trade issues.
Persons interested in accessing any of the country data sets for further analysis, should contact P.Jeffery@ids.ac.uk
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Introduction
What is the Handbook and who is it for?
The purpose of this Handbook is to support an informed national debate in members of the African, Caribbean and Pacific (ACP) group as they prepare their detailed positions for negotiating Economic Partnership Agreements (EPAs) with the European Union (EU). It is part of an Institute of Development Studies (IDS) project to help countries assess the implications of ‘reciprocity’ and to build a national consensus on the choices that have to be made.1
IDS has developed a methodology and set of databases that can be used by stakeholders in each ACP state to identify which products should be included or excluded from liberalisation under an EPA. Building detailed scenarios is very time consuming and requires specialist skills. The simple IDS methodology, which can be applied to the prepared datasets by anyone with competence in Microsoft Excel, fills a need for a widely usable tool which can facilitate discussions within and between countries. Such discussions can contribute to the definition of the very limited number of scenarios that it will be possible to simulate rigorously through general equilibrium modelling.
This Handbook is being made available electronically to all ACP organisations that request it, together with a dataset for the country concerned. The data cover the country’s imports from the EU and applied tariffs.2 They allow users familiar with Excel to build simple lists of EPA inclusions/exclusions on the basis of different assumptions on sensitivity.
IDS is also undertaking a demonstration exercise for each ACP state2 showing which items would be excluded from liberalisation if governments chose to avoid liberalising the products facing the highest applied tariffs. The exercise makes a small number of alternative assumptions about the proportion of imports that could be excluded. These worked examples are included in the datasets being supplied electronically to organisations in the ACP states concerned.
The project also includes two Briefing Papers. The first was completed in April 2005 and is available on IDS’s website (link to Briefing Paper 1).3 It describes in more detail the context in which the negotiations are taking place and introduces readers to the broader project. The second will be completed in May 2005 and will review the results of the analyses that IDS has undertaken on the complete set of ACP datasets that have been compiled. It will be emailed inter alia to all organisations that have requested this Handbook and the accompanying datasets.
The context for the Handbook
In 2000 the Cotonou Agreement committed signatories to replace by 2008 the trade regime that had governed exports from the ACP group to the EU for the last quarter of the twentieth century. Negotiations on a successor regime began formally in 2002, but only in the past year have they begun to address the details of what might be in EPAs between the EU and the countries in the six sub-ACP regions posted on the European Commission’s website (see Box 1).
There is a great deal of work yet to be done if a new, coherent and developmentally friendly regime is to be in place by the end of 2007. All ACP states have to prepare positions on:
- their ‘offensive’ agenda: what they seek from the EU;
- their ‘defensive’ position’: how they should respond to EU requests.
These preparations are needed even by least developed countries (LDCs) which will continue to have access to the EU market under the ‘Everything but Arms’ (EBA) provisions regardless of what happens to Cotonou. EBA gives these countries a ‘safety net’ – but without preparation of their ‘first best’ offensive and defensive positions they cannot know whether or not they should use it, or could do better by entering an EPA.
Under Lomй and Cotonou the ACP were required merely to treat the EU no less favourably than any other industrialised trade partner. In complete contrast, the new EPAs will offer duty-free access for ‘substantially all’ EU exports to the ACP. In
the jargon, the ACP are expected to offer ‘reciprocity’. This has been the focus of most discussion so far, but with little quantification.
The WTO requirement
The EU has expressed strongly the view that EPAs are required partly in order to justify within the WTO the continuation of preferences for ACP exporters. To achieve this they must be framed in such a way as to fulfil the requirements of WTO Article XXIV in relation to goods and the analogous GATS Article V in relation to services. These are the WTO provisions that allow members to discriminate in favour of each other (and, hence, against others) provided that they are creating a customs union or free trade area (FTA).
Because they would involve reciprocal tariff cuts, the EU claims that EPAs would pass the Article XXIV test. This, it argues, will allow Europe to continue discriminating in favour of the ACP in its trade policy. In return, the ACP will have to discriminate in favour of the EU in their own trade policy. Hence the need for reciprocity.
A thorough knowledge of the WTO requirements is very important. It sets the standard that EPAs must reach and, hence, establishes parameters for what is negotiable. EPAs will not achieve the aim of providing a WTO defence for the EU’s preferences towards the ACP if they do not meet the requirements of Article XXIV.
Formal requirements – and actual practice
What, exactly, are the requirements of Article XXIV? The formal requirements for an agreement to be treated as an FTA are fairly straightforward, but practice is not so clear cut. This is because Article XXIV is vague — by design rather than by accident, because members have been unwilling to restrict themselves through a more precise formulation. One salient requirement of Article XXIV is that the FTA must be completed ‘within a reasonable length of time’ (defined in the WTO as a period that ‘should exceed ten years only in exceptional cases’). Another is that ‘duties and other restrictive regulations of commerce ...
are eliminated on substantially all the trade between the constituent territories’ [GATT 1947: Part 3, Article XXIV, paras 5(c) and 8(b); WTO 1995: 32; emphasis added].
There is a similar difference between the formal requirement for legitimising any proposed regime (clear cut) and practice (murky). The formal hurdle for approving an agreement as in conformity with Article XXIV is high. The agreement must have the universal support of members because of the WTO practice of requiring a consensus for all decisions. But in the past a failure to achieve a consensus has not proved to be a barrier to those countries wishing to create an FTA.
The first step is for the parties to the agreement to notify the WTO following signature of an FTA. Such notification will be followed by the referral of the FTA to the WTO Committee on Regional Agreements (CRTA) for consideration. Membership of the CRTA is open to any country that feels it to be in its interests to belong. In theory the CRTA will produce a report on the compliance, or otherwise, of the FTA with Article XXIV for adoption by consensus of the WTO membership. But practice, things are a lot less clear cut: definitive verdicts on whether or not a specific agreement complies with Article XXIV are rarely given.
But this does not mean that countries can sign up to anything and just call it an FTA. In the absence of clear guidance from the Committee, it would still be open to any aggrieved WTO member to file a complaint under the dispute settlement mechanism. This could pass to a quasi-judicial body the task of defining such terms as ‘substantially all’ trade. In other words, approval or disapproval of an EPA is likely to happen by default. Unless a WTO member challenges it on the grounds that it does not comply with Article XXIV, WTO compatibility will never be tested.
Implications for EPAs
In case a challenge is made, it is important that the requirements of Article XXIV be taken seriously in structuring any EPAs. But it is difficult to be sure what all this means for the structure of EPAs in the absence of either CRTA verdicts or ‘case law’ from dispute settlement. Some guidance on what the EU will push is available from the EU–South Africa Agreement on Trade, Development and Co-operation (TDCA). This makes clear what the EU interprets Article XXIV to require.
The EU has stated consistently in GATT/WTO committees that it believes the Article XXIV requirement that an FTA must cover ‘substantially all’ trade can be fulfilled if both parties reduce to zero tariffs on products that account for 90 percent on average of the current trade between them. It has also indicated that it believes this average figure can be achieved asymmetrically, with the EU liberalising on more than 90 percent and its partner on less. In the specific case of the EU–South Africa TDCA, South Africa has liberalised on products accounting for 86 percent of its imports from the EU while Europe has liberalised on 94 percent. The agreement also indicates that the EU believes the Article XXIV requirement that liberalisation occur ‘within a reasonable period of time’ can be achieved through a transitional period of up to 12 years.
This Handbook (and the supplied datasets) allow users to ‘play’ with these thresholds. Alternative scenarios can be created quickly to apply the 86 percent, or different, thresholds in varying ways.
Footnotes:
- The project is supported by the UK Department for International Development. The views expressed are
those of the authors alone, and do not necessarily reflect those of DFID.
- Subject to data availability – for details see Appendix I.
- http://www.ids.ac.uk/ids/global/pdfs/CSEPARECBP1.pdf.
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