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Alternative (to) EPAs: Possible scenarios for the future ACP trade relations with the EU

European Centre for Development Policy Management

Alternative (to) EPAs Possible scenarios for the future ACP trade relations with the EU

Sanoussi Bilal and Francesco Rampa
April 2006
Policy Management Report 11
Maastricht: ECDPM

The full report is available here

Executive Summary

Since 1996, when regional, reciprocal free-trade agreements were suggested to replace the Lomé regime on non-reciprocal trade preferences granted by the European Union (EU) to the African, Caribbean and Pacific (ACP) States, the possibility of alternative trading arrangements to these economic partnership agreements (EPAs) has been considered. The Cotonou Partnership Agreement (CPA), which defines the new framework for the relationship between the EU and the ACP over the period 2000-2020, explicitly provides for the negotiation of EPAs, due to enter into force by 2008, as well as for the consideration, if necessary, of alternatives arrangements.

With the preparation for the EPA negotiations and their formal launching in September 2002, most attention has been focused on the possible framework, configuration, content and impact of such EPAs. Although some progress has been achieved since the start of the negotiations, the prospect of EPAs has also raised serious concerns related to a range of issues, including the development dimension of these EPAs and their impact on poverty, on the regional integration process of the various ACP regional groupings, on the unity of the ACP Group, as well as the merits of reciprocal market opening, the capacity of ACP countries and regions to negotiate and implement EPAs and the linkages and coherence with parallel trade initiatives, notably at the World Trade Organization (WTO) with the ongoing Doha Round. Addressing these concerns in the context of EPA negotiations has proved a difficult challenge, and increasing consideration has been given to possible alternatives to EPAs, mainly (but not only) from actors in civil society.

What would happen if some ACP countries or regions chose not to conclude an EPA with the EU? What trade regime could the EU offer to accommodate their needs and interests? Even in the case of ACP states interested in entering into an EPA, how can they assess whether the EPA negotiated is a good one or not? To what can the newly negotiated regime be compared, to which alternative? To address these questions, ACP countries, as well as the EU, should consider alternatives to EPAs for two main reasons: (1) as a fallback position in case an EPA is not concluded, and/or (2) as a benchmark scenario against which the outcome of EPA negotiations can be evaluated. Although the former is the case most commonly referred to, EPA negotiators need to consider possible alternatives as benchmarks to assess their efforts.

The purpose of this Study is to provide an overview and assessment of possible alternatives to EPAs in order to clarify the choice of alternative options that ACP countries have, to inform the policy debate and help increase the understanding of the different participants in the negotiations. It is important as well to specify what this Study is not about. It does not intend to assess the merits of EPAs. Nor does it attempt to assess whether alternatives are preferable to EPAs or to rank alternative scenarios according to their desirability or likelihood. These are tasks left to the interested stakeholders in ACP-EU relations.

After a brief Introduction, the Study starts in Chapter 2 by introducing the key legal framework for the negotiations of EPAs and possible alternatives, as defined in the Cotonou Partnership Agreement, and the debate it has generated. This is intended to help define the context in which alternative scenarios to EPAs have to be envisaged.

A key condition for any new regime governing ACP-EU trade relations is that it must comply, by 2008, with WTO rules. Chapter 3 reviews what the conditions imposed by the WTO rules are, particularly on regional trade agreements (Article XXIV of GATT 1994) and special trading arrangements involving developing countries (the Enabling Clause), as well as the prospect of altering these rules under the current Doha Round of multilateral negotiations. This joint ACP-EU commitment to making their trade regime compatible with WTO rules poses a serious challenge in regard to the design of EPAs or alternative arrangements.

The Study then proceeds, in Chapter 4, to outline the key development objectives of EPAs as perceived by the various stakeholders (EU, ACP and civil society). In doing so, it highlights some of the issues that have surrounded the EPA negotiation process, the mounting frustration of some of the actors and the increasing interest in alternatives trading arrangements. Assessing the economic impact of EPAs has proved a difficult task, as illustrated by the survey of regional studies in Section 4.1, raising concerns not only about the potential negative effects of the creation of ACP-EU free-trade areas (notably in terms of loss of fiscal revenues and threats to ACP regional-integration processes), but also about the little guidance provided by such impact studies on the ultimate benefits of EPAs (notably because of data and methodological limitations). The question remains, therefore, as to whether EPAs will effectively foster development. While all parties agree that EPAs should, first and foremost, be tools for development of the ACP, the EU and ACP approaches are not yet in line, as discussed in Section 4.2. The ACP would like to see, in parallel, greater emphasis on development measures accompanying and linked to the trade negotiations. Some ACP and European officials and politicians, as well as representatives of civil society, have increasingly questioned the development dimension of EPAs, and a large coalition of North and South non-governmental organisations (NGOs) has even campaigned to ‘Stop EPA’. These concerns have prompted a debate, summarised in Section 4.3, over the opportunity and merits of alternatives to EPAs.

With these considerations in mind, the remainder of the Study identifies a range of alternative scenarios to EPAs and offers a systematic discussion of their key characteristics (summarised in Table 6). This latter constitutes the core of the Study and is the part the reader should refer to in order to grasp the basic reasoning and key controversies behind the debate on possible alternative(s) (to) EPAs. Abstracting from the debate over the merits of EPAs and their possible alternatives, Section 5.1 stresses the usefulness for all parties, irrespective of their perspectives or official positions, of considering alternatives. However, to be fruitful, a discussion requires clarity. The debate on EPAs has often been confusing, particularly regarding what an EPA should be. Without a clear definition of an EPA, the identification of alternatives becomes more difficult. As argued in Section 5.2, it is useful to consider that an EPA must entail (some elements of) reciprocity in the liberalisation of substantially all trade among the parties (according to what was originally agreed upon in the Cotonou Partnership Agreement). As such a trading arrangement may take various forms (notably related to the level of reciprocity), this Study identifies various alternative EPAs, which thus have to comply with GATT Article XXIV (in its current or revised form). Should the new trade regime deviate from the reciprocity principle, and thus fall outside the scope of GATT Article XXIV, it would then clearly constitute an alternative to EPAs. Chapter 6 then proceeds to present these two broad families of scenarios, identifying a range of alternative EPAs in Section 6.1 and alternatives to EPAs in Section 6.2, outlining their main features and discussing their main implications.

The benchmark scenario (6.1.1) is the basic EPA currently proposed by the European Commission. It is a reciprocal WTO-compatible FTA where ACP countries would have to liberalise around 80% of their trade with the EU (with differences between regions due to different trade balances between the parties), and the EU would probably offer duty-free access to ACP countries over a period of around 12 years, according to the standard interpretation by the EU of ‘substantially all trade’ and ‘reasonable length of time’ as per GATT article XXIV. The agreement would strengthen regional integration initiatives (based on the EU integration example) and would also include liberalisation of services, as well as investment, competition, trade facilitation and other ‘behind the border’ provisions (which would make it an FTA+).

A minimalist approach to EPA would consist of an ‘EPA light’ (6.1.2), a reciprocal FTA focusing, in a first stage, on the opening of ACP markets to the minimum level necessary to secure WTO compliance while seeking to limit the potentially negative effects of any significant liberalisation by the ACP. Provided the EU granted duty-free access to all ACP countries, these countries could commit to liberalising only 50%-60% of their trade with the EU over a longer transition period (20 years or more). In a second stage, negotiations with the EU could centre on a long-term approach to address supply-side capacity constraints in the ACP (including through investment, competition, etc.), building effective regional markets, as well as further liberalisation from the ACP side. This scenario is on the border line of WTO compatibility under existing rules, and by de-linking market-access negotiations from broader trade and trade-related issues, it may fail to deliver on the development promises of EPAs (in part by diminishing the bargaining chips of the ACP because the major concession they can offer to the EU is the opening of their markets).

An alternative approach would be to introduce as much flexibility as possible in an EPA, in the form of explicitly recognised special and differential treatment (SDT) (6.1.3). This reciprocal FTA+ would include services and ‘behind the border’ provisions, as in the benchmark scenario, but with flexibility for the ACP to liberalise much less and over longer implementation periods than the EU. This might be done either in the context of the existing WTO rules (convincing the EU to change its self-defined criteria for WTO compatibility) or by amending GATT Article XXIV in the negotiations of the Doha Round (as outlined in a formal proposal by the ACP Group to reform current rules to cater for development concerns and SDT in regional trading agreements). The major drawbacks of this scenario are the uncertainty related to the first option (the greater the flexibility introduced in an EPA, the greater the risk that an aggravated WTO member would challenge it under the WTO dispute-settlement mechanism) and the unlikely possibility of a consensus at the WTO on reform of article XXIV.

Another unusual type of market opening characterises an EPA with binding provisions for development-related liberalisation (6.1.4). This scenario would envisage binding provisions in the new trading arrangements, making successive stages of tariff reduction for the ACP conditional upon the achievement of development thresholds (once an ACP country reached a certain development level, it would be deemed ready to further open its markets) and/or the delivery by the EU of EPA-related development cooperation. Such conditional reciprocal FTAs fall outside the definition of a free-trade area or regional trade agreement as currently envisaged in the WTO.

A fifth scenario (6.1.5) could be an EPA for ACP non-LDCs only and the ‘everything but arms’ (EBA) initiative for the ACP LDCs (i.e., duty- and quota-free access to the EU). Considering the negative effects of reciprocal trade liberalisation, ACP LDCs already benefiting from EBA under the EU GSP (WTO compatible under the Enabling Clause) may decide not to provide reciprocity. ACP Non-LDCs need, instead, to find an alternative trade regime to the current Lomé/Cotonou preferences, and assuming that the GSP does not offer market access as advantageous as the current regime, the only option for ACP non-LDCs to maintain or improve on their level of preferences for the EU market would be to enter into an EPA. It would be difficult under this approach for any ACP region to effectively implement regional-integration programmes because the group would be split between the (non-LDC) countries that enter an FTA+/EPA with the EU, and those (the LDCs) that maintain their trade barriers against the EU (without addressing ‘behind the border’ issues).

In the ‘menu approach’ (6.1.6), the different components of an EPA (trade in goods and in services, investment, possible sector-specific arrangements as in fisheries, and so forth) could be covered under separate individual agreements, and countries in one region would be offered a ‘menu’: all would sign a ‘master agreement’ establishing the principles to govern the EPA relationship but individual countries would be allowed to join only those specific ‘subsidiary agreements’ they are prepared to commit to. Potentially very different treatment of different countries under market-access arrangements (as well as non-trade areas) risks breaking up the ACP regions, and the WTO compatibility of such a scenario is, at best, uncertain.

Although ACP countries have all opted for a regional configuration to enter EPA talks, negotiations might lead to the conclusion of country-specific EPAs (6.1.7). These would be reciprocal FTAs+ with the EU at the national level, in line with article XXIV, with country-specific levels of reciprocity, implementation schedules and treatment of trade-related issues. This could provide greater flexibility for some countries that seek SDT in an EPA or it could impose more rigorous constraints, depending on a number of factors, including bargaining power and particular country characteristics like the size of the economy. Unless coordinated at the regional level, country-specific EPAs may seriously disrupt regional integration.

At the opposite extreme of the range of available geographical EPA configurations is an all-ACP EPA (6.1.8), a unique reciprocal FTA+ that would be conducive to both regional integration and ACP unity on issues of common interest. The feasibility of such a scenario is questionable given that regional EPA negotiations are currently entering into the details of a possible agreement, with marked differences between regions in terms of both progress and content.

The second family of scenarios presented in Section 6.2 comprises alternatives to EPAs as they deviate from the reciprocity principle, envisaging either no liberalisation for the ACP at all or different types of market opening (i.e., not only vis-à-vis the EU). For this reason and because such approaches would in general not affect regional integration, they are favoured by those concerned with the potentially negative impact of EPAs. Another key feature is that they would not include liberalisation of services and ‘behind the border’ provisions, which, according to the EU, are an important developmental aspect of an agreement while for other stakeholders constitute an additional burden for ACP negotiators (and too advanced stages of liberalisation). On the other hand, these alternatives to EPAs would require changes in either the existing WTO rules or the preferential tariff schemes of the EU, which implies strong political will in Europe (a policy shift) and a higher degree of ACP-EU cooperation in multilateral fora.

One option is an incomplete FTA with embodied liberalisation vis-à-vis the rest of the world, not only the EU (6.2.1). ACP countries would enter into EPAs with the EU but would be required to liberalise against all trade partners (MFN liberalisation) and not fully (liberalise, for instance, to a uniform 10% MFN duty). Although this would avoid the trade-diverting effects of an EPA, for this scenario to be feasible, WTO rules would have to be changed, either Article XXIV or the Enabling Clause, because this proposal is obviously in violation of both provisions.

A different scenario is the modification of the EU GSP (6.2.2), since the existing scheme (that many, especially EC officials, consider the only real alternative to EPA) would offer worse preferential access to ACP non-LDCs than Lomé/Cotonou, thereby violating the provisions of the Cotonou Agreement. An ‘enhanced’ GSP to incorporate all ACP exports and (where they are inferior) to improve market-access preferences to the Cotonou level would constitute a WTO-compatible alternative to EPAs, with definite appeal for ACP non-LDCs as well. One of the main advantages of this scenario is that the EU would justify it at the WTO-not under Article XXIV but under the Enabling Clause. On the other hand, ACP non-LDCs would be treated as other developing countries and face problems of preference erosion.

A simpler scenario is the extension of EBA (6.2.3), whereby non-reciprocal free market access could be granted to all ACP countries, the G90 group of poorer countries, or all developing countries. The first two options violate the existing Enabling Clause because they discriminate among developing countries (since both ACP and G90 are arbitrarily defined groups, not recognised by the WTO); the third does not, but it is an unrealistic outcome because it would open the EU market also to large and highly competitive developing countries.

A last option (6.2.4) would be to prolong the current Lomé/Cotonou regime beyond the end of the 2007 deadline, which would require either a new waiver at the WTO, with the likely opposition of some WTO members, or a joint ACP-EU proposal to change WTO rules to allow for the perpetuation of the Lomé/Cotonou preferences. Both the EU and several WTO members seem unwilling to follow such an approach.

The final part of the Study covers important methodological issues in regard to the possibility of assessing different EPA scenarios, as well as the process of taking EPA negotiations forward (Chapter 7), and offers some conclusions (Chapter 8). Section 7.1 emphasises that the scenarios discussed in Chapter 6 present too many uncertainties around possible EPA provisions to be used to predict their economic impact or to be ranked according to developmental outcomes, which would be determined by the exact content of the agreement(s) and the specific implementation steps a Government would take. Although some attempts have been made to provide first estimates regarding the market-access dimension of EPAs or their alternatives, as described in Section 7.2, the uncertainties surrounding a more in-depth assessment of the economic and developmental impact of EPAs and alternatives to them call for more efforts from all parties to research and discuss these issues more thoroughly. This would also mean strengthening the participatory approach towards EPA negotiations and urgently coming up with comprehensive national positions on EPAs (to be compromised at the regional level) in line with key development strategies. Section 7.3 describes a possible approach to achieve that through the use of development benchmarks.

Chapter 8 concludes that while it is difficult to assess a priori the development prospect of each scenario, thus preventing any formal ranking of more desirable options, criteria can be set to consider their main characteristics: the degree of market-access opening (including the level of reciprocity and duration of the transitional period), compliance with WTO rules, the influence on regional integration, the scope for development-oriented outcomes and political feasibility. It also suggests a possible way forward in assessing the development dimensions of the range of scenarios proposed: to define development benchmarks. Once a sound methodology has been put in place, this approach should allow each ACP country and region to identify its own benchmarks-those that would guide its EPA negotiations-and the relevance of various alternative trade regimes for its development. In this context, it is recommended that all concerned stakeholders seize the opportunity of the 2006 Review of EPAs to assess the whole process of the EPA negotiations so far, make changes where necessary within the negotiations and, if needed, propose alternative routes.

 source: ECDPM