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One Minute to Midnight: Is There Still Time to Rethink Economic Partnership Agreements?

One Minute to Midnight: Is There Still Time to Rethink Economic Partnership Agreements?

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Originally published in October 2007, this policy brief puts forward an alternative path to trade liberalization that would minimize costs while still addressing the WTO constraint and their developmental goals.
Originally published in October 2007, this policy brief puts forward an alternative path to trade liberalization that would minimize costs while still addressing the WTO constraint and their developmental goals.

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Published by: German Marshall Fund of the United States on Sep 22, 2010
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03/25/2012

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Summary: The European Union(EU) and the Arican, Caribbean,and Pacifc (ACP) countries areentering the fnal phase onegotiations on EconomicPartnership Agreements (EPAs),a set o WTO-compliant preer-ential trade agreements thatwill substitute the current non-reciprocal preerence scheme.Such agreements would liber-alize bilateral trade betweenthe EU and six ACP regionalgroupings. A proposed open-ing o ACP markets might wellprovoke trade diversion, causeserious government revenuelosses, and hamper regionalintegration. This policy brieputs orward an alternativepath to liberalization that wouldminimize these costs while stilladdressing the WTO constraintand their developmental goals.
Economic Policy Program
Policy Brie 
For the past ve years, the EuropeanUnion (EU) and the Arican, Caribbean,and Pacic (ACP) countries have beenengaged in reorm negotiations o the“Cotonou Agreements,” a set o tradeagreements that have continued thealmost 40 years o preerential marketaccess oered by the EU to the exportso its ormer colonies.This reorm was initiated to bring thesepreerential trade arrangements intocompliance with World Trade Organiza-tion (WTO) rules. Indeed, the WTOallows or preerences only when they are part o reciprocal ree trade agree-ments or when they benet developingcountries (DCs) on a non-discriminatory basis. And, as Cotonou preerences arenot reciprocal (EU exports do ace tariswhen entering ACP markets) and areextended to only some DCs (and notmany DCs in Asia and South America),they are not compliant with WTOlegislation. Until now, this situation wasmaintained through the granting o awaiver at the WTO. However, this waiveris due to expire on December 31, 2007.As a result, the EU is trying to convinceits ACP partners to conclude newWTO-compliant ree trade agreementsthrough the signature o the “EconomicPartnership Agreements” (EPAs). Suchagreements would liberalize bilateraltrade between the EU and six ACPregional groupings, among which reetrade would also be established.
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The logic behind the EuropeanCommission’s (EC) promotion o theEPAs also relies on the belie that thevirtues o regional trade integrationwould benet the ACPs: specialization,economies o scale, diminution o trading costs, and increased investment.
One Minute to Midnight:Is There Still Time to Rethink EPAs?
 
How the European Union and the Arican, Caribbean, and Pacifccountries can reorm preerential trade arrangements, comply withWTO rules, and promote development.
 
by Claire Delpeuch, Groupe d’Economie Mondiale at Sciences Po
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International Trade
1744 R Street NWWashington, DC 20009T 1 202 745 3950F 1 202 265 1662E ino@gmus.org
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Claire Delpeuch is a research assistant at the Grouped’Economie Mondiale at Sciences Po (GEM). GEM is anindependent and non-partisan European, Paris-based researchcenter that seeks to promote debate on international economicintegration – its real magnitude, oreseeable costs and benets.In particular, it aims to provide analysis o the impact o two keypolicy areas with wide-ranging eects: trade policy and regula-tory policy. This paper is largely based on a working paper byDelpeuch and Harb (2007). The author would like to thankP. Messerlin, Joe Guinan, Hilleary Smith, and Georges Harb ortheir very useul comments.
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These regional entities are: West Arica (Benin, Burkina Faso,Cape Verde, Gambia, Ghana, Guinea, Guinea Bissau, IvoryCoast, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal SierraLeone, and Togo); Central Arica (Cameroon, Central AricanRepublic, Chad, Congo, the Democratic Republic o Congo,Equatorial Guinea, Gabon and Sao Tome, and Principe); EasternArica (Burundi, Comoros, Djibouti, Eritrea, Ethiopia, Kenya,Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan,Uganda, Zambia, and Zimbabwe); Austral Arica (Angola,Botswana, Lesotho, Mozambique, Namibia, Swaziland andTanzania); the Caribbean (Antigua and Barbuda, the Bahamas,Barbados, Belize, Dominica, Dominican Republic, Grenada,Guyana, Haiti, Jamaica, St. Kitts and the Grenadines, Suriname,and Trinidad and Tobago); and the Pacic (Cook Islands, Fiji,Kiribati, Marshall Islands, Federated States o Micronesia,Nauru, Niue, Palau, Papua New Guinea, Samoa, SolomonIslands, Tonga, Tuvalu, and Vanuatu).
 
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Economic Policy Program
Policy Brie 
According to the EC’s ocial line, EPAs would thus retain thecore objectives o previous EU-ACP trade arrangements: toreduce poverty and enhance development in ACP countries. EUocials represent the resulting additional trade liberalizationwith ACP countries as simply a means to achieve developmentgoals, together with the deepening o regional integration, theenhancement o market access or ACP products in the EUmarket, and increased cooperation on services and trade-relatedissues. However, this reintroduction o reciprocity into EU-ACPtrade relations is a major political shit, one that could haveimportant economic consequences.
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 Since the mid-1990s, the necessity o reorming EU-ACP traderelations has been increasingly apparent. Academics and policy experts have responded to this by highlighting the opportunitiesand risks associated with various reorm options.
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They haverecently been joined by NGOs, civil society representativesrom ACP countries, and at times even representatives o EUmember states. Criticisms expressed by opponents o EPAsusually concentrate on the project o establishing a ree tradezone between the EU and ACP regions. In short, they ear thata surge in imports o European products (especially subsidizedagricultural goods) could harm local industries and ACPagricultural sectors; that regional integration could be hamperedrather than encouraged; and that ACP government revenuesrom tari collection could all signicantly. As these lost rev-enues are not easily substitutable, they might ultimately result indiminished investment in areas that are critical to development,such as education and health, or even production and tradeinrastructures.
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Moreover, as ACP countries already enjoy nearly complete tari-ree access to EU markets, the EU can beperceived to be asking or a lot while oering very little in return.The time available to nd a resolution to these quandaries is very limited: the EC is pressing ACP countries to sign new agree-ments beore the end o the year. Should these negotiations ail,the result would be very harmul to the economies o the ACPcountries as the EC is oering only one alternative: a reversionto the substantially less generous General System o Preerences(GSP) oered to all DCs, with all the shocks that would entail.
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 In all likelihood, this would also prove politically costly orthe European Union: a host o experts and NGOs stand ready to point out that the EU, with its sel-image as a developmentchampion, would thus have become the rst o the developedcountries to raise taris against some o the world’s mostvulnerable economies.Identiying the least costly solution has become urgent. Thispolicy brie thereore aims to: summarize the constraints acingcurrent EU-ACP trade arrangements and the issues which any reorm must tackle (Section 1); assess the costs that would beimposed by the EU’s current EPA proposals (Section 2); andput orward an alternative path to liberalization which wouldminimize these costs while still addressing the concernsidentied in Section 1 (Section 3).
The need to reform
 
1.1 The European Commission’s credo
 Since 1996 and the publication o a “Green Book on theRelations between the European Union and the ACP Countrieson the eve o the 21
st
Century” (EC, 1996), the EC has acknowl-edged the ailure o its preerential scheme in avor o its ex-colonies. Despite 99 percent tari-ree exports and commodity protocols,
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ACP countries’ share o the EU market declined rom6.7 percent to 2.8 percent between 1976 and 1999, and rom 14.8percent to 4.1 percent o the EU’s total trade with DCs. (Raven-hill, 2002) Trade even ell in absolute terms between the 1980sand the 1990s. ACP countries’ dependency on primary productshas remained high, while the relative prices or these productshave declined. Several countries still rely on one single productor over 40 percent o export revenues. (Ribier, 2007)Furthermore, trade preerence schemes are eroding as multi-lateral trade liberalization is deepening.
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By the time EPAsenter into orce, the benets o preerences might have beensignicantly reduced. One o the EC’s ocially-proclaimedmotivations in proposing EPAs, is the critical need to addressthe preerence erosion question.The EC’s argument in pursuing EPAs urther relies on the intentto oster liberalization gains in ACPs via the interaction betweenenhanced regional integration among ACP countries and theestablishment o a ree trade area with the EU. According tothe Commission, this would allow the creation o an enlarged
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The rst trade agreements between the EU and the ACP countries (the Yaoundé Convention) did implyreciprocity, but this was suppressed as o 1975 (with the replacement o the Yaoundé Convention with theLomé Convention). See Grilli (1993) or a detailed historical analysis o EU-ACP trade and cooperation.
4
Page, Stevens, and Kennan, among others, have contributed to launching the debate as early as 1998.
5
EU development assistance unds are envisaged to overcome those losses. This however, raises seriousconcerns over ACPs’ increasing political dependence on the European Union.
6
Least Developed Countries (LDCs) would enjoy more generous preerences under the “Everything ButArms” (EBA) initiative, a special GSP scheme dedicated to them. It has operated since March 2001 andprovides ree market access to the EU or all products, with the exception o arms and ammunitions.However, this preerence scheme is still less generous than the current Cotonou preerences — especiallyin terms o critical Rules o Origin provisions. However, EBA might be preerred as an alternative to EPAsby countries or which liberalization with the EU would be too costly.
7
The commodity protocols allow ACP countries to export specied amounts o the concerned commodities(bananas, bee, sugar, and rum) at reduced levels o duty and at guaranteed domestic prices, on the EU market.
8
The value o a preerential scheme, o course, depends on the number o countries receiving trade preerences.
 
market “governed by a stable, transparent and predictableramework or trade [that] will allow or economies o scale,will improve the level o specialization, will reduce productionand transaction costs and will, altogether, help to increase thecompetitiveness o the ACP region.(EC, 2002) All o this, inturn, would positively aect both domestic and oreign invest-ment. On a more political level, EPAs are seen as a “check valve”that would help eciently address the ragmentation o ACPmarkets, their over-protection, and the lack o harmonizationin the legislation governing them. EPAs would also oster thebargaining power o ACP countries on the multilateral scene by locking-in their reorm processes and increasing their credibility.The EU would help acilitate this transition with nancial aidand development assistance.At its core, however, the EC’s argument or the EPAs rests largely on the need or WTO compliance. This argument serves bothto justiy the need to reorm the Cotonou Agreement and, mostimportantly, to determine the type o agreement that might beadopted as a replacement or the current scheme.
1.2 WTO obligations
The need to become compliant with WTO rules implies twomajor constraints on EPA negotiations. First, that they must beconcluded by December 31, 2007. And second, that they shouldcomply with the two exceptions to the most-avored nation(MFN) general rule o the General Agreement on Taris andTrade (GATT), which deals with regional trade.On the one hand, regional trade agreements (RTAs) are permittedi they comply with a number o provisions, which are meant tomake them inoensive to non-party countries. Article XXIV o the GATT (1947) allows or the creation o ree trade agreements(FTAs) and customs unions (CUs), but only on the conditionthat they “acilitate trade between the constituent territories” anddo not “raise barriers to trade o other contracting parties withsuch territories.” These RTAs are thus considered WTO-compat-ible i trade barriers are eliminated by all contracting parties or“substantially all trade” within a “reasonable length o time.On the other hand, the 1979 “enabling clause,” ocially named“Decision o Dierential and More Favorable Treatment,Reciprocity and Fuller Participation o Developing Countries”allows developed countries to grant preerential access to allDCs, or to all least developed countries (LDCs), under the GSP.To conorm to WTO legislation, uture EU-ACP agreementswould thereore need either to (i) imply reciprocity or (ii) extendthe scope o the beneciaries to all DCs (or to all LDCs) by deep-ening market access granted under GSP. The latter option wouldimply tremendous preerence erosion or ACP countries, and hasthereore not been envisaged in the EPA negotiations by the ECor ACP countries — who clearly preer the rst solution.In this context, WTO conormity would thus require ACPsto liberalize “substantially all trade” with the EU within a“reasonable length o time.” The EU understands this denitionquantitatively, in terms o a minimum share o trade volume.With reerence to previous RTAs between the EU and DCs, theEU considers “substantially all trade” as 90 percent o its volume,without equality between parties. In this precise case, as ACPcountries are being oered 100 percent tari-ree market accessto the EU, they would have to liberalize about 80 percent o theirtrade. Thus, 20 percent o their trade volume could still be pro-tected, so as to exempt “sensitive products” rom liberalization. Itshould be noted that the 90 percent threshold and its breakdownbetween the EU and the ACPs refect the EC’s interpretation o Article XXIV, but these two interpretations are not shared by allWTO members.
Assessing current EPA proposals 
2.1 Insights into the potential impacts o EPAs
Even though EPAs are still in negotiation, we can saely assume that they will involve, roughly-speaking, a two-levelintegration process: a rst level pertaining to the integrationbetween ACP countries and the EU — a North-South integra-tion — and a second one aecting trade relations among ACPcountries — a South-South integration.One o the key issues in the analysis o regional integration, madein Viner’s pioneering work (1950), is that preerential agreementsare benecial as long as they allow shits toward more ecientproducers. In this case, consumers will benet rom reducedprices and increased consumption. This is called trade creation.So long as European producers do not replace more ecient or-eign producers who are supplying ACP countries beore the EPAsenter into orce, the latter should be trade creating. Wheneverthis is not the case, ACP countries would suer rom costly tradediversion. Indeed, the government will lose previously collectedtaris on diverted trade. The net outcome then depends on thebalance between trade creation and trade diversion.The loss o tari revenue is o particular importance or someACP countries, notably the least developed Arican countries.
Economic Policy Program
Policy Brie 
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