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EU EPAs could inhibit South-South trade integration, Brazil alleges

Bridges Weekly Trade News Digest | 20 February 2008


Brazil has alleged that a clause in the EU’s recent trade agreements with several former colonies could discourage these countries, among the world’s poorest, from pursuing deeper trade integration with other developing nations.

This would run counter to a WTO principle aimed at increasing poor countries’ participation in global commerce, Brazil claims, adding that it sits uneasily with the EU’s oft-stated commitment to promoting South-South trade.

The concerns raised by Brazil, though downplayed by the EU, underline another potential source of tension between the rapidly growing number of bilateral and regional trade arrangements and multilateral trade rules.

Under the so-called ‘MFN clause’ at issue, African, Caribbean, and Pacific (ACP) states that struck economic partnership agreements (EPAs) with Brussels late last year are required to extend to the EU any deeper market access terms that they negotiate with other significant economies in the future.

MFN clause discourages South-South FTAs

In Brazil’s view, this requirement would leave ACP countries “no incentive to negotiate agreements with other developing countries containing market access conditions that are more favourable than those the [EU] might enjoy.” It would “discourage or even prevent third countries from negotiating FTAs with EPA parties and will create major constraints to South-South trade.”

This, Brazil argues, goes against the WTO ‘Enabling Clause,’ a 1979 agreement allowing members of the GATT, the WTO’s predecessor, to grant favourable treatment to developing countries while not doing so to wealthy ones. In additional to North-South trade preference schemes, the Enabling Clause specifically refers to “regional or global arrangements entered into amongst less-developed contracting parties for the mutual reduction or elimination of tariffs.”

The Brazilian delegation voiced these arguments at a 5 February session of the General Council, the WTO’s top permanent decision-making body. It added that MFN clauses in EU EPAs would “severely undermine” the Enabling Clause, which would be “ironic, to say the least” in the middle of a ‘development round’. Several developing countries echoed Brazil’s concerns, including China, Pakistan, Paraguay, India, and Argentina. On behalf of the ACP group, Jamaica said that their concerns could be discussed further in the WTO’s new regional trade agreement transparency mechanism (although the EPAs would have to be formally notified to the WTO first).

Brazil has a direct interest in the MFN clauses, since it would stand to be affected by them if it negotiated a free trade agreement with any ACP country that already has an EPA with the EU.

Although the legal texts of most of the EPAs are still being finalised for formal signing, after being initialled in a hurry to beat a key deadline at the end of last year, the EU’s agreement with 15 Caribbean nations has been completed. Its terms limit the MFN clause to EPA signatories’ future agreements with “major trading economies” that account for over 1 percent of world merchandise exports, or blocs of states that account for over 1.5 percent. According to WTO data, Brazil accounted for 1.5 percent in 2006, compared to 16.4 percent for the EU and 11.5 percent for the US.

Other developing countries affected would include China, the source of 10.7 percent of world exports that year, as well as Mexico, Malaysia, India, and Indonesia, which also crossed the threshold, albeit by much narrower margins (between 2.8 and 1.1 percent).

EU defends policy

A European Commission official said that “the MFN clause does not contradict the Enabling Clause in any legal aspect. The Enabling Clause permits trade preferences among developing countries, but it contains nothing that prohibits the extension of such preferences to other WTO Members.” “The Enabling Clause does not cover free Trade Agreements,” the source claimed.

“The MFN clause only applies to concessions made under a free trade agreement between ACP countries and a ‘major trading economy’,” the European official continued. “Therefore, it has no effect on regional integration between ACP countries or agreements between ACP and other small or poor developing economies.”

Brazil and the EU are likely to have ample opportunity to repeat their arguments in the future, since Brazil is expected to ask for the issue to be placed on the agenda for the General Council’s next meeting. Legal action is less likely, not least because the Enabling Clause - an exception to standard GATT rules - is not an agreement covered by the WTO Dispute Settlement Understanding.

Systemic issue needs solving

Nevertheless, the MFN clauses in the EPAs do present a “real problem,” said Carmen Pont-Vieira Dos Santos, a former WTO official in charge of regional trade agreements, EU protestations notwithstanding.

Leaving aside the question of whether such a liberalisation requirement would be economically desirable, she said “the fact is that it is a disincentive to South-South [free trade] agreements.”

Under the MFN clauses, she explained, if Brazil reached an FTA with Cote d’Ivoire that included tariff phaseouts faster than those in the latter’s EPA with Brussels, then the EU would automatically be entitled to the same treatment.

“Brazil would be reluctant to make concessions in exchange for concessions that will be extended to the EU,” she explained. India would think twice about giving up anything in exchange for far-reaching, prompt access to an ACP country’s automobile market, if it knew it would have to compete on identical terms with European cars.

In effect, she suggested, the MFN clauses “‘unable’ the Enabling Clause in some cases.” While the EU was probably motivated by concerns that Japan and the US would gain better terms in trade agreements with the ACP, she conjectured, it was relatively less competitive “medium powers” such as Brazil and India who stood to be more affected.

She said that if such clauses “become a practice, it could contribute to fewer South-South agreements, and maybe more North-South agreements.”

Pont-Vieira Dos Santos said that instead of a legal problem, the tension between the EU EPAs and South-South agreements was a “systemic problem that could best be resolved in a global context.”

The same was true for the relationship between regional trade agreements and the WTO more broadly. “Many questions about RTAs exist beyond the definition of ‘substantially all trade’,” she said, in a reference to the woolly and untested WTO rules for determining whether a bilateral or regional trade accord is WTO-compliant. These questions can only be resolved by negotiation.

She expressed hope that Brazil’s complaints would “draw attention to the need for a negotiated solution to this and other issues before the end of the Doha Round.”

“Regional trade agreements could ultimately collide with the WTO or other regional trade agreements,” she said.

WTO Members “can’t leave this or other questions open forever.”

ICTSD reporting.

 source: Bridges