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UNDERSTANDING INTERNATIONAL TRADE
A publication of the OECS Trade Policy Project aimed at students, businesspersons and the public that explains the operation of the trading system from the perspective of the Eastern Caribbean

Written for the OECS Trade Policy Project by Edwin Laurent. Editor: Paula Hippolyte. Published by: The OECS Trade Policy Project June 2006. Design layout and artwork: Media Publishing International, Edwin Laurent and EPO Belgium, Paula Hippolyte and T Lindsey-Bethune. Cover design by John Steele - InnaEye Art Studio - legend@hotmail.com Printed by: Enschedé-Van Muysewinkel June 2006. Valuable contributions, assistance and support received from: Hon Charles Cadet, Dr. Paul Goodison, Dr. Mark Griffith and Mrs Thérèse Louérat. For making this work possible: The OECS Trade Policy Project, the Canadian International Development Agency (CIDA) and the OECS Secretariat. Copyright, 2006 OECS Secretariat P.O. Box 179, Morne Fortune, Castries, Saint Lucia

Disclaimer: The ideas expressed in this publication are those of the writer and do not necessarily reflect the positions or views of CIDA, the OECS or any of its organs.

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ACRONYMS
ACP BFA BPOA African, Caribbean and Pacific Group Banana Framework Agreement Barbados Programme of Action (adopted in 1994 by the 1st UN conference on the sustainable development of SIDS). Common Agricultural Policy Caribbean Common Market Caribbean-Canada Agreement Caribbean Free Trade Area Caribbean Basin Initiative Common External Tariff MDGs MFN MTN NAMA NGO NIP NTB OECD OECS QR RTA SFA SIDS SSA STABEX SVE TBT TRQ UNCTAD USTR WIBDECO WINFA WIRSPA WISA WTO GDP GSP HTCI ICT ITC LDC LDC Gross Domestic Product Generalised System of Preferences Harmful Tax Competition Initiative Information Communication Technology International Trade Centre Least Developed Countries (UN) Less Developed Countries (CARICOM) Millennium Development Goals Most Favoured Nation Multilateral Trade Negotiations Non Agricultural Market Access Non-Governmental Organisation National Indicative Programme Non-Tariff Barriers Organisation for Economic Cooperation and Development Organisation of Eastern Caribbean States Quantitative Restrictions Regional Trading Arrangement Special Framework of Assistance Small Island Developing States Special System of Assistance (for bananas by the EU) Stabilisation in Export Earnings Small Vulnerable Economy Technical Barriers to Trade Tariff Rate Quota United Nations Conference on Trade and Development United States Trade Representative Windward Islands Banana Development Export Company Windward Islands Farmers’ Association West Indies Rum and Spirits Producers Association West Indies Associated States (Council of Ministers) World Trade Organisation

CAP CARICOM CARIBCAN CARIFTA CBI CET

COM or CMO Common Organisation of the Market (in the EU) COTED CSME DDA DFID DSB DSU DTI EBA EC ECCM EDF EEC EIB EPA ESM EU FAO FLEX FOB FTA FTAA GATS GATT Council for Trade and Economic Development Caribbean Single Market and Economy Doha Development Agenda. Department for International Development (UK) Dispute Settlement Body Dispute Settlement Understanding Department for Trade and Industry (UK) Everything But Arms Initiative European Community East Caribbean Common Market European Development Fund European Economic Community European Investment Bank Economic Partnership Agreement European Single Market European Union Food and Agriculture Organisation Fluctuation in Export Earnings Free on Board Free Trade Area Free Trade Area of the Americas General Agreement on Trade in Services General Agreement on Tariffs and Trade

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So all these letters really mean something then

Professor Vaughan A. Lewis1

PREFACE

This is an opportune time to publish this guide to the trade issues which shape the current situation of the OECS countries and the international economic environment. The fate of the banana and sugar industries, as the conditions for entering an increasingly integrated and expanded European market change, in the face of global trade rules change, has awakened many citizens of the islands to the dramatic, negative effects on their livelihoods that have already occurred and are still likely to occur. And this has certainly been forcing a discussion on the manner in which these countries should adapt to such changes, and on the extent to which such adaptation can be successfully achieved. It is now some twenty years since the European Community indicated to the participating states in the African, Caribbean and Pacific (ACP) grouping that its pursuit of a European Single Market and Economy would require full liberalization of trade within the Community, and that its intention with to achieve this by 1993. At first, it appeared to the OECS governments that, following the successful diplomatic effort which, in concert with others, had resulted in the 1975 Lomé Convention, a similar effort of negotiation with the Community could be undertaken. The essential objective of this would be to preserve the benefits accruing from the Convention, including the preferential arrangements by which their key products were facilitated entry into the markets in Europe. Early on, however, it became apparent that two processes had been taking place, which would affect the nature of the negotiations and their potential results: • First the expanding membership of the Community was effecting a change of Community sentiment away from its previous understanding of and response to particular concerns of developing states, to one of reduced sympathy for them. The developing view was that there should be no substantial discriminatory difference among Member States with regard to the conditions under which third party products could enter into Community markets. • Secondly, at the time of the European decision on its Single Market and Economy, the member-states of the Community were already deeply engaged in negotiations within the Uruguay Round for further liberalization of international trade, the extension of the principles of liberalization to the sphere of production, and the further extension of those principles to the spheres of agriculture and services. This orientation was being pushed with a certain anxiety and persistence by the United States of America. As the writer indicates, as they began their negotiations, the OECS and CARICOM exporters of bananas were caught somewhat by surprise at the extent to which their traditional diplomatic relationship with the United Kingdom was not enough to achieve a smooth consensus with the other member states of the EC. This certainly revealed the diminished capacity of the United Kingdom to act as a diplomatic broker on behalf of the ACP, and therefore Caribbean states, and to achieve, relatively intact, broader agreement in Europe on proposals reached between the UK and the Caribbean. Britain, of course, had itself been engaged in a policy revolution focused on the liberalization and deregulation of her own domestic economy under Prime Ministers Thatcher and then Major, and thus could not legitimately resist the extension of that process to the international economy as a whole. It is useful to recall at this point that the realization on the part of the OECS and CARICOM states that changing international conditions would require substantial “structural adjustment” and “diversification” of their own economies was not something of sudden origin. In fact in the mid-1960’s, the Governments of the time, shocked into recognizing the implications of Britain’s decision to apply for membership of the European Communities, had appealed to that country to seek to ensure that in the process some form of preferences for their agricultural exports would be maintained, and “compensation” or “support” for progressive “adjustment” of the economies of their states towards “economic diversification”.
1

Dr Vaughan Lewis is Professor of International Relations of the Caribbean at the University of the West Indies, St Augustine Campus, Trinidad. He was the first Director General of the OECS Secretariat and is a former Prime Minister of Saint Lucia.

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Consequently the long period of successfully negotiated successive Lomé Conventions with their arrangements for STABEX compensation for exports periodically affected negatively by market or production conditions, along with satisfactorily negotiated preferential arrangements, appears to have lulled Governments into a false sense of the security of those arrangements as props for their post-colonial mode of economic production and marketing. The rude awakening of Caribbean governments to the persistent push for liberalization of the European internal market, spurred on by commitments now made to the World Trade Organization (WTO), indeed revived the language, in Caribbean diplomacy of the 1990’s of compensation, adjustment, special treatment and gradual erosion of preferences, that had been prevalent since the 1960’s and 1970’s. And this has been persistently so, particularly as the WTO in general has shown no sympathy for ACP countries presumed status as requiring, in this case at least, “special and differential treatment”. Regional and International Relations The decision, of the CARICOM states to establish a Single Market and Economy, initially made in 1989 and formalized in 1992 was an indication of the compulsions moving the region towards principles of liberalization increasingly being implemented as a requirement of their receipt of assistance from the World Bank and the International Monetary Fund at a time of recession among, in particular, the More Developed Countries of the Region. This commitment, including reductions in the levels of the CARICOM Common External Tariff, intensified discussions in the region as a whole, on the necessity for domestic structural adjustment and liberalization, which Governments had been forced to undertake at the international level (at the level of EU-ACP relations). The requirements for compensation arrangements (including a Regional Integration Fund) and special treatment, which where being pleased for at that international level, were now re-echoed by Lesser Developed Countries (largely OECS States) within a regional context. Again here, the discourse led by OECS Governments has been strangely reminiscent of the “demands” made by Antigua and Barbuda and Montserrat at the time of the transformation of CARIFTA into CARICOM in 1973. These resulted in the “compensatory” arrangements for the establishment of the Caribbean Investment Corporation and a renewed commitment to focus the Caribbean Development Bank’s efforts on the Lesser Developed Countries efforts. The banana producing countries which have had to contend since the 1990’s with the fallout from changes in the banana marketing arrangements, and which have been taking this message to European capitals since then, in search of a viable solution to the decline in banana preferences, have now been followed in their diplomatic forays by Governments of the sugar producing states of the Region. In the early 1990’s, the view was taken that the Sugar Protocol, having been separately agreed, and agreed prior to the Lomé Convention, would be exempt from the pressures for change emanating form the liberalization process of the European Single Market and Economy. But ten to fifteen years later, Caribbean Governments have been shocked into recognition that the process of internationalization of decision-making on trade arrangements, (the WTO process) which ruthlessly negated agreements which the Banana producing countries continually negotiated and deemed as settled, has come to affect the status of their sugar exports. The European Union has had to bend to the mandates of the WTO, and our traditional “interlocutor valuable” or diplomatic broker, the United Kingdom, has not been able to roll back the waves of liberalization and deregulation in spite of her professed sympathy for our case. What all this raises, surely, is the extent to which, over the years of change in our conditions of international trade and production, the Caribbean countries are being forced to adjust to new trading conditions, either through the reorganization of their traditional economic (and in particular agricultural) activities, or the creation of new activities capable of penetrating existing international markets under the new conditions.
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Reform The European Union, in a prelude to elaboration of new proposals for what has become the formula of the Economic Partnership Agreement (EPA), had given a signal in its Green Paper (discussed in this Guide) that it had not been satisfied that the provisions of the Lomé Conventions, providing access to the non-agricultural sector of the EU economy, had been appropriately made use of. The EU observed that the extensive aid provided to ACP countries over the years had not resulted in sustained structural adjustment of their economies. The EU, now reaching into South and Central America in search of new markets and new locations for investment (through the establishment of free trade areas), is conscious that in doing so, it is required to conform to the disciplines attached to such trading arrangements, particularly those relating to the principles of reciprocity. It was therefore but a matter of time before the EU was to insist that reciprocity – mutual opening of markets - should underlie any new trading arrangement between itself and the ACP countries, irrespective of size of economy. And in turn Caribbean countries have felt compelled to raise the battle cry of the need for deliberate differentiation based on size and level of economy through mechanisms of special and differential treatment. As the writer indicates this is a discussion now in progress, and we are left to see what the translation of reciprocity into rules and regulations means for these self-categorized small-island developing countries (SIDS) in addition to the larger mainland producers of sugar (Guyana and Belize) and of bananas (Belize). In a sense, in this process the ball is now squarely in the court of the ACP countries – specifically the Caribbean states. For it is recognized that our negotiations for an EPA will not be diplomatically “mediated” by the United Kingdom in any substantial sense as were our negotiations towards the 1975 Lomé Convention. And that, further, our states cannot have the attention of the “traditional” European member states of the EU as they struggle with their new venture of simultaneous deepening and widening of their own internal market involving states with even less empathy for our objectives than the block of “liberalizing-inclined” EC states in the 1990’s. This raises an issue which goes beyond the reach of this Guide: the need to search for new diplomatic allies in the difficult situation where differences of orientation among developing countries themselves are tending to become evident – witness the stand of Guyana’s neighbour Brazil on the sugar issue. A further issue raised is that of the translation of the demand for assistance within the structure of a new EPA into efforts conducive to encouraging structural adjustment and sustainable development. The writer stresses the need for the detailed programming of EU funded projects to coincide with European expectations of visible progress in the structures of our economies. These issues are being negotiated at the Caricom regional level, and should presume an effective single economic space to meet the need for diversification on the basis of scale adequate to meet the demands of the competitive environment, and to permit diversification of economic activities and therefore exports. Charting a new course The OECS countries have recognized the need to systematically travel the road to some form of economic union and creation of a single economic space. The urgent question now is what form is the larger system to take in terms of creation of a Caricom single economic space, and the extent to which this is necessary to give the OECS countries a stronger base for economic diversification, or will affect their own process of economic union. This internal discussion needs to take place with some deliberation within our sub-Region at this time. As the author emphasizes, it requires extensive technical and financial resources.

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It is a prerequisite for adapting to both the new environments of the EU and the emerging free trade area agreements in our Hemisphere. The European Union is presently carrying out an experiment related to the adjustment of its new members of Eastern Europe, which in a sense speaks to the issue of the arrangements between lesser and more developed countries. As we approach them in our negotiations they will see us in constant comparison with their own circumstances, and match our progress against those circumstances. The insistence in the EU Green Paper on the need for more appropriate utilization of aid funds will undoubtedly remain a significant part of European diplomacy, and a condition of the success of our own diplomacy.And our success in this sphere will undoubtedly influence the nature of the relations that we work out in this Hemisphere as the United States pushes relentlessly on towards the creation of a free trade area, or a multiplicity of free trade areas here.

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FOREWORD
In an environment governed by global trade rules with a capacity for determining the economic and social progress of small states vulnerable to change, trade matters have within the OECS States become the business of everyone. This is particularly true for students about to enter a world of business which demands knowledge of such issues. Under an assistance Programme designed to Strengthen the capacity of the OECS sub-region to better participate within the regional integration and wider multilateral trade agreement processes, the OECS Trade Policy Project, funded by the Canadian International Development Agency, included in its activities an awareness component intended to create a general climate of understanding of the trade issues which will need to be addressed in this context. It is against this background that an allocation of resources from the awareness component of the CIDA/OECS Trade Policy Project was directed by the OECS Secretariat towards the preparation of this trade policy guide which, while specifically targeted at tertiary school students, is hoped will be found usefully informative by a wider public. Dr. Len Ishmael Director General OECS Secretariat

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Table of Contents
Glossary Introduction Section 1 Chapter 1 1.1 1.2 1.2.1 1.3 1.3.1 Chapter 2 2.1 2.1.1 2.1.2 2.1.3 2.1.4 2.1.5 2.1.6 2.1.7 2.2 2.2.1 2.3 Chapter 3 3.1 3.2 3.2.1 3.3 3.4 3.4.1 3.4.2 3.5 3.5.1 Section 2 Chapter 4 4.1.1 4.1.2 4.1.3 4.1.4 4.1.5 4.1.6 4.1.7 4.1.8 4.1.9 Chapter 5 5.1.1 5.1.2 5.1.3 5.1.4 5.1.5 5.1.6 .................................................................................................................................................................................... 10 .................................................................................................................................................................................... 13 TRADING SYSTEMS........................................................................................................................................... 15 ECONOMIC INTEGRATION IN THE CARIBBEAN.................................................................................15 THE OECS................................................................................................................................................................ 15 THE CARICOM AND THE CSME.....................................................................................................................15 Creating the CSME................................................................................................................................................16 HOW DO THE SINGLE MARKET AND THE SINGLE ECONOMY WORK ?...................................18 What is in the CSME for the OECS ?........................................................................................................... 18 BILATERAL / BI-REGIONAL TRADING ARRANGEMENTS...............................................................21 ECONOMIC PARTNERSHIP WITH EUROPE...............................................................................................22 The EPA negotiations and their policy context...................................................................................... 22 Background to EPAs.............................................................................................................................................23 What is the EPA?....................................................................................................................................................24 Criticism of EPAs...................................................................................................................................................24 Issues in the EPA negotiations.........................................................................................................................25 Matching up the two sides.............................................................................................................................. 27 Stop EPAs ?.............................................................................................................................................................. 28 FREE TRADE AREA OF THE AMERICAS.......................................................................................................28 Prospects and challenges..................................................................................................................................28 BILATERAL TRADE AGREEMENTS................................................................................................................. 29 A MULTILATERAL ALTERNATIVE - THE WTO........................................................................................30 ORIGINS AND EVOLUTION............................................................................................................................ 30 MULTILATERAL PRINCIPLES.............................................................................................................................30 The system.............................................................................................................................................................. 31 THE URUGUAY ROUND AND THE BIRTH OF THE WTO.................................................................... 32 THE WTO’S DISPUTE SETTLEMENT MECHANISM................................................................................. 32 The process............................................................................................................................................................. 33 OECS Participation in Panel Disputes.......................................................................................................... 33 THE WTO DOHA DEVELOPMENT AGENDA (DDA)................................................................................33 Small Vulnerable Economies............................................................................................................................34 THE OECS EXPERIENCE ....................................................................................................................................36 BANANAS –THE FIGHT FOR THE EU MARKET.....................................................................................36 The Banana Dispute.............................................................................................................................................37 The role of diplomacy........................................................................................................................................38 Resolution of the dispute and subsequent reforms..............................................................................39 Consequences for the Windwards................................................................................................................39 2004 – EU Enlargement.....................................................................................................................................40 More recent threats: Arbitration and the abolition of quotas.........................................................41 The CARICOM-OECS position........................................................................................................................41 Beyond Cotonou.................................................................................................................................................. 42 Charting a course for the future....................................................................................................................42 SUGAR...................................................................................................................................................................... 44 The Sugar Protocol.............................................................................................................................................. 44 Threats to the Protocol..................................................................................................................................... 44 Reforming the EU Common Market Organisation for Sugar............................................................. 45 Consequences for the Sugar Protocol Members.................................................................................... 46 Securing and using financial support...........................................................................................................46 What future for sugar ?......................................................................................................................................47

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Chapter 6 6.1.1 6.1.2 6.1.3 6.1.4 6.1.5 6.1.6 Section 3 Chapter 7 7.1 7.1.1 7.1.2 7.1.3 7.2 7.3

TOURISM AND OTHER SERVICES - THE ISSUES IN MULTILATERAL NEGOTIATION.........50 What are the OECS’ interests ?....................................................................................................................... 50 Tourism.......................................................................................................................................................................52 Financial services...................................................................................................................................................53 Information and communication technology (ICT)................................................................................53 Mode 4...................................................................................................................................................................... 54 Other negotiating aims.......................................................................................................................................54 THE WAY FORWARD......................................................................................................................................... 55 ADOPTING NEW APPROACHES................................................................................................................... 55 DIVERSIFICATION AND DEVELOPMENT......................................................................................................55 A role for the private sector............................................................................................................................ 55 The experience of external support............................................................................................................ 57 Was the support effective ?.............................................................................................................................57 TRADE AND ENVIRONMENT........................................................................................................................... 58 NEGOTIATION- USING TRADE DIPLOMACY TO ADVANCE NATIONAL/REGIONAL GOALS....60

Further reading ..................................................................................................................................................................................... 63 List of tables Table 1 Table 2 Table 3 Table 4 List of boxes Box 1 Box 2 Box 3 Box 4 Box 5 Box 6 Box 7 Box 8 Box 9 Box 10 Box 11 The building blocks of the CSME....................................................................................................................20 Department for International Development and Department of Trade and Industry Report.. 25 UK Parliamentary Report................................................................................................................................... 27 Trade policy reviews.............................................................................................................................................31 UNCTAD.................................................................................................................................................................... 34 The problem of different production costs between the ACP and Latin America.................. 37 CommonFund for Commodities..................................................................................................................... 47 Rum............................................................................................................................................................................. 48 Making Trade Policy..............................................................................................................................................49 The International Trade Centre.......................................................................................................................58 Millenium Development Goals (MDGs)..................................................................................................... 59 Supplies of Bananas to the EU 15, 1990-2002 (thousand tonnes).................................................... 36 Banana Export Values (fob) (US$ million).................................................................................................. 40 Contribution of sugar to employment and foreign exchange.......................................................... 44 Projected loss of earnings..................................................................................................................................46

List of figures and charts Figure 1. Merchandise trade in the OECS, 2004.........................................................................................................14 Figure 2. The position of the OECS within the global trading system.............................................................21 Figure 3. Average free on board (fob) prices, 1999.................................................................................................... 37 Figure 4. Number of active banana growers in the Windward Islands, 1993-2001, thousands.............. 39 Figure 5. Export values for bananas fob, 1991-2002, $US million....................................................................... 40 Figure 6. Services Trade of the OECS, 2003.................................................................................................................51 Figure 7. Tourist arrivals in the OECS, 2004 (thousands)........................................................................................52 Figure 8. Estim. value of expenditure, EC$ m, 2004.................................................................................................53 Figure 9. Estim. % total tourist expenditure, 2004................................................................................................... 53

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GLOSSARY
Adjustment Assistance: The financial and technical support provided for States, firms, workers and communities to help them adapt to and function satisfactorily in conditions of increased competition for their products in overseas and/or domestic markets. This assistance can include help to Governments to devise alternative revenue collection mechanisms to replace duties lost as a result of their reduction or elimination of tariffs on imported goods. Appellate Body: The WTO group that hears appeals against the conclusions of Dispute Settlement Panels. Asymmetry in the Trade Agreement: The treatment of the sides in a trading arrangement where the rate of tariff reduction undertaken by the Parties is different, or asymmetrical. One Party could be given a longer time compared to the other for completing the process. Alternately, a lesser percentage of its total imports could be subjected to tariff reduction and elimination, and also, different obligations on the rate or extent of removal of other barriers to trade could apply. Barriers to trade - (tariff and non-tariff): Restrictions placed by governments on imports that take the form of customs duties, charges, limitations on the volume and other measures, which are not borne by domestic products. These barriers can have the effect of making imports more expensive and/or reducing their volume. Beggar-thy-Neighbour Policy (Protectionism): A country seeking to strengthen the competitive position of its domestic production vis-à-vis imports through discouraging imports with high tariffs and other measures that restrict imports. The imagery stems from a side effect of the policy that exporters could lose the market and might well be impoverished. Bilateral: Negotiations, agreements or understandings between two countries. Binding: When countries agree in the WTO not to increase the rate of duty on a particular item imported from other Members, the rate is “bound”. The country cannot then charge duties at rates higher than the bound level; it would be violating the rules and action could be taken against it. There are, however, provisions for it to subsequently negotiate for increases in its tariff rate. A country is free to charge (apply) a lower rate of duty. Bretton Woods Institutions: The collective name for the International Monetary Fund and the World Bank. Named after the town in New Hampshire in the US where they were created in 1944. Caribbean Single Market and Economy: The single economic space among members of CARICOM in which there are no restrictions on the free movement of goods, services, labour and capital. Commodities: Widely traded bulk goods, often unprocessed and homogeneous. Commodity Protocols: The ACP-EU Agreements contain special arrangements regarding ACP trade in specific commodities like sugar and bananas. The aim is to provide additional provisions to the ACP that will support development and remunerative trade of these commodities. Common Agriculture Policy (CAP): The unified system operated by EU countries for conducting their agricultural programmes and policies that are based principally on price supports or subsidies and production quotas. Common External Tariff (CET): The schedule or list of import duties applied by all Members of a common market on imports from non-member countries. Comparative Advantage: The international trading system is based on this principle first elaborated in 1817 by the economist David Ricardo that a country should produce and export those goods and services in which it is most competitive internationally and import to satisfy its needs for those that it does not produce. Concessions: In negotiations, countries offer to reduce tariffs or other trade barriers, in exchange for, or to induce similar action from their trading partners. Consensus (decision making): Agreement is reached when there is no continuing objection by any participating member of the decision making group. This is in contrast with unanimity where agreement of all participants is actually ascertained. Contracting Party: A country that signed the GATT and accepted its obligations and benefits. Discrimination: Providing more favourable tariff or other treatment for goods and services imported from particular countries as opposed to others. Dispute Settlement Body: The grouping of representatives of all WTO Members that administers WTO rules, establishes Panels to adjudicate disputes and authorises punitive measures for countries that violate the rules. Diversification: Expanding the foundations of the economy to a wider range of production beyond reliance on a single or a narrow range of goods and services. This improves the prospects for economic growth and development. Erosion of Preferences: As importing countries reduce tariffs because of liberalisation, the advantages enjoyed by their suppliers with duty-free or reduced duty privileges are cut back. Everything but Arms Initiative: The package first offered to LDCs in 2001 in which Developed Countries and now Developing Countries in a position to offer it, are encouraged to grant products from LDCs unrestricted entry to their own markets by removing duties and quotas on all imports except for arms and ammunition.

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Export subsidies: Payments by government to domestic exporters of goods and services. Such payments enable foreign sales to be at lower prices; hence they are more competitive than they would otherwise have been. The WTO therefore considers that such subsidies change trade patterns and distort trade. Factors of Production: According to economic thinking: land, labour and capital. Fairtrade: The production and marketing of goods according to stipulated criteria regarding working conditions, welfare of workers, acceptable environmental standards and the provision of fair returns to producers. Free Trade: The ultimate theoretical goal where there are no governmental barriers to international trade in the form of tariffs and other barriers to goods and services entering the country. Free Trade Area (FTA): A cooperative arrangement among a group of countries to remove tariffs and trade restrictions among themselves, but they keep their individual tariffs on imports from outside the area. CARIFTA was a Free Trade Area. Generalised System of Preferences (GSP): A system under which tariffs applied by developed countries on certain imports from developing countries are reduced or eliminated on the basis of agreed conditions. Gross Domestic Product (GDP): The total value of new goods and services produced in a country during a given year. Import quota : The maximum quantity or value of a particular product allowed to enter a country during a specified time period. Least Developed Countries (LDCs): These are countries classified by the UN on the basis of a range of criteria, principally their per capita income below $900 per annum. According to that criterion, none of the OECS countries are LDCs. The only LDC in the Americas is Haiti. LDCs are eligible for special trading privileges including the Everything but Arms initiative (EBA). Less Developed Countries (LDCs): CARICOM designates the OECS and Belize as LDCs in view of their small size, narrow resource base and low level of development. This designation makes them eligible for special support measures within CARICOM. Liberalisation: An underlying principle of the WTO and the earlier GATT that seeks the reduction and eventual elimination of tariffs and other measures that impede trade. Licensing: When Governments limit the volume of imports of a certain product they might grant permits or licenses to importers that provide them with approval, whether or not in a physical document, that grants them rights to import. Often specific conditions are stipulated. Licensing can also be operated for exports. Market Access: The availability of a national market to exporting countries. Mercantilism: The now discredited policy of the pursuit of trade surplus and the accumulation of monetary assets by promoting exportation and discouraging importation.

Mode 4: The temporary relocation of workers to another country where they are employed to provide a service. The farm worker programmes with the US and with Canada are examples. Most Favoured Nation (treatment): A cardinal principle of the Multilateral Trading System is that a country will automatically apply to all WTO Members the lowest tariffs or reductions it applies on imports from any source, whether another WTO member or not. Exceptions to this rule are possible, e.g. in FTAs. Multilateral: Negotiations, agreements or understandings among several countries or groupings. Multilateral Trade Negotiations: These negotiations among all WTO Members (previously GATT Contracting Parties) have been held at intervals to advance the attainment of the objectives of the WTO and are referred to as “rounds”. The current round is called the Doha Development Agenda (DDA) or Doha Round. National Treatment: The commitment to treat foreign products, sellers, businesses and those who provide services the same as domestic counterparts. Non- Tariff Barriers (NTBs): These are measures, other than import duties, taken by a government, that impose limitations on or impede imports. They can range from outright import prohibitions to onerous quality standards and labelling requirements. Preferences: Advantages extended to imports from selected trading partners in the form of lower or zero tariffs or exemption from certain NTBs. Quantitative Restrictions (QRs): The limitation of the import volume of specific products from the rest of the world or from specific countries. Quota Rent: When the importation of a particular product is limited by a quota, the restriction can sometimes lead to a scarcity that increases prices in the import market. The quota rent is the difference between the domestic price (net of the import tariff) and the world price. This value may be obtained by the exporters, importers or distributors or shared among them. Reciprocity: This is the principle that generally guides trade negotiations; where a country awards trade concessions, they are matched by the provision of equivalent advantages in exchange. Rule/s of Origin: The criterion that determines whether a particular item was produced in a country e.g. the production process or the amount of value added locally. Sanitary and Phytosanitary Import Measures: Controls and restrictions placed on imports, to protect human, animal and plant health. Single Undertaking: The requirement in a trade negotiation to accept the entire package rather than just particular elements of the agreement. Special and Differential Treatment: The principle that the award of benefits to developing countries and the demands made of them should be in keeping with their trade, financial and development needs and capacity.

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Supply-side Constraints: New trading opportunities cannot always be taken up by a country because it is unable to increase its competitive production due to a number of reasons (constraints) such as insufficiency of investment, lack of the required skilled labour, inappropriate public policy framework, limited land space, etc. Tariff: A tax on imports. This might be charged as a percentage of the value of the product (ad valorem) or a fixed charge per unit (specific). Tariff-Rate-Quota (TRQ): The application of a different tariff on imports of the same item with the higher rate levied on imports above a certain volume. This can have the same practical effect as a QR where the upper rate is so high that the imports on which it is charged would be made too expensive and therefore unsaleable with the result that imports do not actually take place. (The TRQ device became quite widespread in the mid-1990’s when WTO Members were required to end QRs on agricultural products and resorted to it in order to effectively retain their prohibition on imports beyond set levels, whilst ostensibly complying with the rules). The Singapore Issues: Investment, competition policy, transparency in government procurement and trade facilitation were four subjects that Trade Ministers meeting in Singapore in 1996 decided should be studied by the WTO.

Trade Diversion: The redirection of trade flows as a result of providing preferences to less efficient trading partners. Goods might be sourced from them because the trade preference could make them competitive with the more efficient exporters. Trade Facilitation: Reducing red tape and inefficient administrative procedures so as to enable goods to be imported and exported more easily, quickly and possibly cheaply. Vulnerability: The frequency and intensity with which a country is exposed to negative environmental events and other disasters and the extent of damage caused. A country can also be vulnerable to adverse economic developments from abroad such as a loss of export markets, decline in prices etc. The narrower the production and export base the more vulnerable the country. Waiver: The authorisation granted by the WTO to a Member permitting it to deviate from legally binding agreements or obligations. WTO-Compatible: An agreement, policy or practice that is in keeping with the rules of the WTO. Trade arrangements, agreements and policies of WTO Members are supposed to conform with its rules.

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Now I know what all these big words mean

Introduction
The world of international trade can appear abstract and far removed from everyday life. The very terms used, the WTO, the FTAA, the CSME, might seem designed to mystify rather than enlighten. Many people are therefore content to ignore trade negotiations, disputes and agreements, viewing those matters as concerning only Governments and big businesses. Increasingly, however, these processes are defining not only commercial and trading relations among countries, but economic activities within countries themselves. Quite ominously, they constrain Governments’ flexibility on an increasing range of economic policy issues. In the 21st century no country can expect to be an “island unto itself”, shut off from and indifferent to the outside world. This is nowhere more true than in the OECS countries2, whose economies have, from the earliest colonial times, been open to and reliant on international trade. The quality of life of their people, their security and standard of living have therefore always depended upon the international situation and developments. Rather than producing for themselves the things that they need, these islands have earned their livelihood through producing goods for sale abroad; initially a variety of commodities, ranging from cane sugar, rum and bananas, to light manufactured goods, and now, increasingly, to the provision of services for foreigners, principally tourism. Their exports of goods have been principally to Europe, the Caribbean and the USA. Their imports are more varied, coming from the USA, Japan, Europe, Latin America, China and several other sources. Services are sold principally to North America and Europe. The income from the sale or export of the narrow range of goods and services that they produce is used to purchase from abroad (to import) the diversity of goods and services they consume. Therefore, what happens internationally affects the lives of everyone locally and is thus of real concern. At the most basic level it determines what can be sold abroad and sets the prices that can be received and those to be paid for purchases from abroad. This publication seeks to demystify the functioning of the trading system and explores how international regulations impact on the trade and economic life of OECS countries. It also assesses whether very small countries can have any significant influence on the international processes that influence their future and whether they can be more than passive observers while their fate is being determined. Is the international system just a jungle in which only the fittest can survive and prosper? In the context within which they operate, economic and political power is important. However, the system is based on rules and democratic principles, so even the smallest Members can use their voices to safeguard and advance their interests. The experiences of the Islands over the last decade are used to examine these issues and questions, and the conclusion that emerges is that under certain conditions they can actually influence, to their benefit, the course of events. The first section of this publication assesses the trading position of the OECS, and reviews the origins of regional economic cooperation and the issues at stake for the OECS within the Caribbean Single Market and Economy (CSME), the Economic Partnership Agreement (EPA) with Europe, the Free Trade Area of the Americas (FTAA) and the World Trade Organisation (WTO). The second section studies the experiences of OECS countries’ principal foreign exchange earners. It also explores public and private sector roles in diversification and assesses the environmental considerations in the formulation of trade policy. Finally, drawing on experience in international negotiations and trade diplomacy, it makes recommendations regarding approaches to ensuring fuller benefit from the system.

Why participate in the multilateral trading system?
The members of the OECS have no option but to rely on and be open to the outside world for their survival and prosperity. They do not have the means to produce even a significant portion of the range of capital and consumer goods that their populations
2

The Membership of the Organization of Eastern Caribbean States (OECS) comprises of Antigua and Barbuda, Commonwealth of Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines with Anguilla and the British Virgin Islands as associate Members.

13

US $ million
14
Source : WTO
3

require to maintain the lifestyles that they are accustomed to. (The islands therefore cannot be self-sufficient). If the goods that they consume are to be obtained from abroad, then foreign exchange to pay for them must be earned through the countries’ own export of goods and services. OECS countries therefore have no choice but to trade: they have always been traders. The trend for OECS countries to import more than they export is illustrated in the following chart that highlights 500 their trade imbalance.
400 300

They face numerous constraints that make them particularly vulnerable to shocks from abroad and limit their 200 development prospects. The most decisive factors are their small 100 size, insularity and shortage of natural resources.3 These structural 0 constraints cannot be overcome and they combine to make it more difficult for the Islands to achieve economies of scale in several areas of production at the same Figure 1. Merchandise trade in the OECS, 2004 time. As a result, they have relied on mono-crop (or single industry) production. Economists however warn that a diversified production base is essential for sustainable development. It is within their constraints that the islands endeavour to grow and develop. But domestic policy measures alone will not be sufficient. The international environment, which is increasingly being shaped by regulations, must be favourable. The questions that they face are: what should they do, and can their efforts really have any impact?

Consequently, as countries seek to ensure that the conditions in the outside world are favourable to their economic well being, they work specifically for supportive trade rules and other regulations. This is the underlying reason why OECS Member States participate in negotiations, lobbying and economic diplomacy. These activities can be viewed as an essential complement to, as well as an extension of, domestic and OECS policy aimed at fostering economic security, growth and development and the improved welfare of their citizens. The review of the trading system is presented in this guide, in three sections. The first addresses the regional versus the global approach. In the first chapter it considers the experiences of cooperation within the OECS and CARICOM and in chapter two, with the EU. Chapter three examines the evolution and functioning of the World Trade Organisation (WTO). Section two reviews the actual international engagement of OECS countries from the perspective of the income generating activities on which their participation in the trading system is based. The experience of the banana dispute and the reform of the EU market, reviewed in chapter four offer valuable lessons for small developing countries. The impact on cane sugar exportation is considered in chapter five. Tourism and services in international negotiations are analysed in chapter six in an attempt to identify more precisely the interests and issues at stake. The final section is forward looking, beginning with the case for diversification in chapter seven, as well as the key role to be played by the private sector. The necessity for OECS countries to incorporate their environmental interests and concerns into the formulation of their national economic policies is also considered in the final chapter. It ends by drawing on OECS experiences and those of the writer to suggest how small countries can use trade negotiation and diplomacy to secure and advance their trading interests.

Conclusion of the World Bank in its Report No. 31725-LAC “A Time to Choose - Caribbean Development in the 21st century” 26 April 2005.
Tell me why I should bother

Trading Systems

Section

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1.1 The OECS

hapter 1

•The bilateral/bi-regional vs. the multilateral approach •OECS/CARICOM/CSME •ACP/EU & FTAA •The WTO

1

Economic Integration in the Caribbean

Working together in the Eastern Caribbean is quite understandable; proximity and small size make a compelling case for economic and institutional integration. Collaborating amongst themselves can promote efficiency and optimize the benefits of scarce human, institutional and other resources. This no doubt is the reason why historically, these neighbouring islands have shared institutions 4. The 1932 Closer Union Commission appointed by the British Government, proposed a Federation of all the Leeward and Windward Islands. This did not materialize but in 1938, the Moyne Commission repeated this suggestion. Not surprisingly, no progress was made during the World War that began in the following year. The Leeward and Windward Islands have always had a strong desire for cooperation both within the wider Caribbean grouping and among themselves. They all joined the 1967 Caribbean Free Trade Area (CARIFTA) but even before that, had set out to pursue closer coordination and integration among themselves. In the previous year, 1966, they created the West Indies Associated States Council of Ministers (WISA) to administer various common services. It met at the level of Heads of Government and had a small secretariat. Then one year after WISA, the Heads decided on a more ambitious programme of economic integration, the East Caribbean Common Market (ECCM). This was to be a mechanism to further the islands’ harmonious economic growth and development, improved standard of living and their closer economic relations. Specifically, they committed themselves to eliminating import duties and restrictions on trade amongst themselves; introduction of free movement of persons, services and capital, the coordination of currency and financial policies (they already shared a common currency); harmonisation of tax and incentive legislation, cooperation in transport and communications and agricultural policy. With their Common External Tariff (CET), single currency, judiciary and civil aviation authority, the islands would successfully operate a parallel but more advanced and closer unit within the broader regional integration grouping. When most of the islands had attained political independence from the United Kingdom, they decided to replace WISA by a unified institution backed by a treaty. This was the Organisation of Eastern Caribbean States (OECS), inaugurated on 18th June 1981 with the signing of the Treaty of Basseterre. The mandate of WISA was subsumed within the OECS, which expanded its scope to broader political cooperation and security issues, collaboration in the purchase of pharmaceuticals and formalised its joint overseas diplomatic representation. The ECCM agreement was annexed to the OECS Treaty so that their Common Market continued even within the wider Caribbean Common Market. Integration among the Windward and Leeward Islands has always been a step ahead of that in the wider Caribbean region, but their full participation in the Caribbean “family of nations”, has also played a central role in the national policy of OECS countries.

1.2 CARICOM and the CSME
The Leeward and Windward Islands had always pursued closer union among themselves in parallel with their ambitions for broader Caribbean unity. The following paragraphs trace the origins and changing nature of that wider relationship.
4

The Leeward Islands actually had a Federal Government from 1871-1956.
One for all and all for one!

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Evidence can be found of aspirations for Caribbean integration early in the last century. This desire was based on a widespread notion of a West Indian identity characterised by Norman Manley who said at the 1947 Caribbean Labour Conference: “Wherever there is an assembly of West Indians…you feel at home and as one…. The sense of unity in the West Indies… is so powerful and so rapidly growing today that the minor historical differences are irrelevant in the face of innumerable common ties.” Complementing this sense of identity was the recognition that on their own, Caribbean entities are too small to set and effectively pursue their own agendas particularly with respect to economic development and improved welfare of their populations. It was a desire to work together to improve prospects for economic success that prompted the current phase of Caribbean integration. Its actual conception can be traced to the meeting of West Indian leaders in Montego Bay in 1947 that formally explored the idea of “the closer association of the British West Indian colonies”. This meeting of Caribbean leaders actually predated the 1951 Coal and Steel Community, which was the predecessor to the European Common Market. The aspirations and ideas of unity eventually materialised in the form of the West Indian Federation. By 1962, however, the Federation collapsed after Jamaica and then Trinidad and Tobago withdrew, proceeding to political independence on their own. A last ditch attempt to persevere with a union of just the Leeward and Windward Islands and Barbados, the “Little Eight”, failed. Five years later, a fundamentally different approach was embarked upon: the 1967 Caribbean Free Trade Area (CARIFTA), which lifted duties on goods being traded within the Region. It is from this initiative that the origins of the CSME can be traced, though its direct institutional precursor was the 1973 Caribbean Community and Common Market (CARICOM). CARICOM was a major advance from CARIFTA, taken to strengthen the coordination and regulation of economic and trading relations among Members in order to advance their balanced development. The mandate of CARICOM institutions and the harmonisation of national regulations, however, stopped well short of the creation of a genuine single market. This, though, was not for lack of ambition. Caribbean economic integration was an unpredictable process conducted without the benefit of similar models or earlier experiences among small developing countries. Forbes Burnham, the then Prime Minister of Guyana, summarised the realism of Caribbean leaders when he said at the 1967 Conference of the Heads of Government of the Commonwealth Caribbean: “we cannot start off with some ideal or perfect arrangement. Neither can we hope to be so prescient of the future as to be able to determine all the consequences and difficulties of integration… This is the naked truth, either we integrate, or we perish, unwept, unhonoured.” When CARIFTA was born and later gave way to CARICOM, there was no detailed or rigid road map and timetable but leaders had a very clear vision of the direction in which they would steer the region. Such clarity among Caribbean Governments of the ultimate goal of regional integration was the critical factor in its evolution and survival. Having an agreed destination but with flexibility as to the “route and pace of travel” might well have assisted the region in surviving its most difficult period from 1975-1982. With their economies reeling from the impact of the global petroleum crises and many saddled with unmanageable debt, balance of payment problems and the region embroiled in the ideological conflict spawned by the Cold War, progress in regional integration was “left on hold”, but never abandoned. The stalemate came to an end at the Ocho Rios Summit in 1982 and the integration movement got back on track. By 1989, at their Summit in Grenada, CARICOM Heads decided to establish the Caribbean Single Market and Economy (CSME) in order “to deepen the integration process and strengthen the Caribbean community in all its dimensions” They envisaged . a single market that would allow the free flow of goods, services, people and capital across borders without tariff or other barriers or restrictions. They expected that it would permit the coordination and harmonisation of national economic policies covering foreign exchange and interest rates, taxation and currency policies among Caribbean countries.
That was one long road We are all on it though!

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1.2.1 Creating the CSME

The CSME was built on an institutional base already created by CARICOM. To appreciate the scope and nature of the change, it is necessary therefore to recognise what was already in place. The 1973 Treaty establishing CARICOM committed its Members to the removal of restrictions on intra-regional trade in goods. Under Articles 15, 17, 18, 20 and 21, they agreed, with certain exceptions, to remove import duties and other restrictions on goods produced in other Member countries. They also decided to apply the same level of duty on the goods that they imported from non-CARICOM sources and to co-ordinate economic policy more fully and effectively. The initial aims of the Treaty with respect to the free movement of capital and labour were quite limited. In the case of capital, it was simply “to examine” the introduction of a scheme that regulated movement, whilst the Treaty explicitly excluded any requirement for permitting the free movement of persons. Having just free movement of goods but not of capital and labour meant that CARICOM could not be a full common market. Work however continued on achieving the objective of creating a genuine common market and the Treaty was revised on 5th July 2001. Countries for the first time committed themselves to the goal of free movement of labour and agreed to the immediate removal of restrictions on the free movement of certain categories of workers. In a fundamental shift from the original CARICOM Treaty, they now agreed in Article 46 paragraph 3 that the revised Treaty should not inhibit Member States from permitting free entry of persons from the rest of CARICOM5. This distinction was not of mere semantic significance but reflected a fundamental shift in labour migration policy between 1973 and 2001. Progress was also made with respect to the movement of capital. In a real common market, funds must be able to flow freely for investment and for payment of goods and services. CARICOM States agreed in 2001 not to impose any new restrictions on the movement of capital (Art. 39) and in Art. 40, they agreed to the removal of all restrictions on the movement of capital and current payments. The other key area of liberalisation, which had been largely ignored in the original Treaty, was that of services. Here, restrictions were to be lifted on the establishment of businesses by nationals and firms from other CARICOM States. Persons travelling to other Member States to provide paid services would not be restricted and steps would be taken to develop common standards and recognition of qualifications. The Treaty Revision of 2001 achieved two critical objectives: - It extended the scope of CARICOM to include the free movement of capital and of labour and to liberalise the trade in services; and - It enshrined the principle of “national treatment” in all areas. Goods, services, capital and labour were not merely to be given preferential treatment to those originating from outside of the region but treatment that is not less favourable than that given to local counterparts.
5

The original Treaty (Art.38) had explicitly stated that countries would not be required to grant free movement. 17

The revised Treaty though, would not itself create the Single Market and Economy. The Governments’ mere agreement to grant certain freedoms and promises to carry out measures do not make them happen; additional institutional and administrative measures would also need to be taken. Most importantly, domestic laws and regulations might need to be passed for certain of the arrangements to be implementable and enforceable within each country.

1.3 How do the Single Market and the Single Economy work ?
The two components of the CSME are explained separately. Firstly the Single Market: it allows goods, services, people and capital to move among the participating countries without any restrictions at the border. The Single Economy on the other hand, seeks to harmonise economic, monetary and fiscal policies and measures in an attempt to have region-wide policies in those areas. It is expected that foreign exchange and interest rate policies, tax regimes and certain laws will be coordinated and harmonised6.

1.3.1 What is in the SME for the OECS ?
The idea from the outset of Caribbean economic integration was for the eventual creation of a genuine Common Market, foreseen under the CARIFTA agreement as “a viable community of Caribbean Territories”. In 1974 what the Leeward and Windward Islands joined was however only a partial Common Market but which they all expected would be completed eventually. In joining they would grow and develop as part of the “viable community” with their neighbours. The 2006 CSME is really a stage (albeit a crucial one) in Caribbean regional integration rather than the completion of a process. The question to be addressed is: having already largely achieved free movement of goods is there anything that is substantially new for OECS countries ? First, what is the theoretical case? The economic justification of the CSME is founded on classical economic principles of the gains from expansion of economic size, freedom of trade and competition. OECS countries expect to build on the benefits of economic integration in various ways including having a larger market for their domestic goods and services. Instead of being limited to their home island, they have free access to the wider regional market. Hence, production that would otherwise not have been possible, can take place because of the expanded consumer base. Removal of restrictions on capital flows should contribute to more optimal decision making on the location of investment as well as the pooling of regional resources with the effect of increasing the impact of investment and promoting competition or the consolidation of regional firms. Similarly freedom of movement of workers should promote flexibility of the labour markets and make for more efficient use of the region’s pool of skills. But will this yield concrete benefit? Of course OECS countries do not have as extensive a range and volume of products available for export as the more developed countries (the MDCs) in the region, hence, the trade benefits of the CSME both intra-regionally and extraregionally might be disproportionately shared out. In a speech delivered in November 2005, the Barbados’ Prime Minister pointed out that inequality among Members of the grouping could lead to fragmentation. It was agreed therefore that a cohesion fund would be made available for the LDCs (OECS and Belize) that would provide them with financial and technical assistance to help them catch up. The other means through which the CSME is intended to benefit the OECS is via enhanced functional co-operation among the countries and stronger positions in external negotiations.
6

Courtesy WINFA

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“Deepening Caribbean Integration: Barbados in the CSME.”A production of the Ministry of Foreign Affairs & Foreign Trade of Barbados.

The realisation of benefits in these areas will depend on a number of factors, including the appropriateness of the actual joint regional policies and the adequacy of their incorporation as well as the reconciliation of the interests of all Members. The benefit for the OECS countries would therefore depend on the effectiveness of their participation in regional policy formulation. The ability of the grouping to articulate joint positions is expected to secure greater external influence and benefits for CARICOM. However for joint negotiations to actually lead to better outcomes for the individual countries, the following features must characterise the development and articulation of regional positions: - Adequacy of incorporation and reconciliation of the interests of all countries and full national involvement, transparency in decision-making and effective monitoring and oversight. - Certainty of full and consistent support by all Members for the regionally agreed positions. - Full accountability by spokespersons, whether or not they are representatives of governments or institutions. - Competent and effective articulation, negotiation and advancement of positions. For a regional approach to negotiations to be of greater effectiveness than the individual country approach, the individual States would need to continue to be actively involved in the process so that they could contribute to the attainment of the negotiating aims through their continued political backing and support. January 2006 marked a crucial milestone in the integration of the Caribbean. It was not the conclusion but rather work in progress on the construction project that was set in train in 1973. It also represented the coming to fruition of a much earlier Caribbean dream of a single economic space in the region. The case for the CSME ultimately rests on its ability to improve regional welfare through the removal of barriers to allow the free flow of goods, services, capital and labour within the region that is expected to lead to greater efficiency of production, thus enhancing international competitiveness. The CSME is therefore expected to provide a boost to economic development of the participating states. On the 30th January 2006 only Barbados, Belize, Guyana, Jamaica, Surinam and Trinidad and Tobago signed the instruments and formal declaration launching the CSME, but its Membership will eventually increase. The OECS group of countries has indicated that they will join by 30th June 2006, when all their Members would be ready. Montserrat, as a British dependency, requires an “instrument of entrustment” from the UK in order to join.

There must be something in it for all of us.

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Box 1

The building blocks of the CSME

The transition from a Common Market to a Single Market and Economy was made possible by amendments to the CARICOM Treaty that centred on nine new elements or Protocols having legal force within each CARICOM State that, in certain cases, require changes to domestic legislation. They are: Management New Community organs7 and institutions have been gradually introduced in recent years, intended to make the functioning of the community more efficient. New procedures were also agreed upon, a most notable one has been the replacement of the unanimity rule by qualified majority voting, except for decisions by the Heads of Government where it has been retained. Right of establishment, provision of services and movement of capital This Protocol creates a regime for trade and services that will facilitate investment by businesses and persons in other Member States as well as the free movement of services, capital and selected categories of labour. This will have the most dramatic impact on business since it will ensure that CARICOM citizens and businesses will, with few exceptions, be able to establish in any country and enjoy the same treatment as locals. The complete removal of certain of the restrictions such as the free movement of all categories of labour, as well as common education standards and mutual recognition of certificates/qualifications is to be achieved over time. Industrial Policy This Protocol harmonises industrial policy and seeks to promote industrial production through integration and the establishment of enterprises with branches, subsidiaries or joint ventures in more than one Member State. A key instrument of this Protocol that will stimulate intra-regional investment is the Regional Double Taxation Agreement. In order to improve the quality of goods and provide a basis for regional participation in international standard-setting negotiations, the CARICOM Regional Organisation for Standards and Quality (CROSQ) has been established. Trade Policy This Protocol builds upon and consolidates existing provisions such as the CET, rules of origin and customs cooperation that are aimed at enabling the free movement of goods by removing all tariff and non-tariff barriers. Agriculture The aim here is to strengthen and upgrade cooperation in diversification and transformation of the agricultural sectors in keeping with Member State goals of greater efficiency in production and marketing, employment, poverty alleviation and Food Security. Transport policy Member States commit themselves to cooperate in the development of enhanced air and maritime transport systems and the uniform application of regulatory practices among themselves. Disadvantaged countries A special regime is provided for disadvantaged countries, regions and sectors that need assistance in order to become viable. The OECS countries along with Belize and Guyana have, in addition to Haïti, been designated as “disadvantaged” . They are to benefit from a package of measures including financial assistance to facilitate their economic adjustment to and full participation in the CSME as well as to provide special transitional arrangements and a programme to attract investment. Competition This Protocol seeks to harmonize legislation on competition policy and fair-trading across the region and to promote and preserve conditions for competition, as well as promoting and protecting consumer rights. Disputes Through this Protocol, a comprehensive system for the settlement of disputes that begins with referral to good offices, followed by mediation, consultations, conciliation and finally arbitration and adjudication has been established. The Caribbean Court of Justice has been given compulsory and exclusive jurisdiction to hear and determine disputes relating to the interpretation of the Treaty.

7

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Including “Council for Finance and Planning” (COFAP), Council for Foreign Community Relations” (COFCOR), and “Council for Trade and Economic Development” (COTED).
Together we will take on the world!

C

hapter 2
Bilateral / Bi-regional Trading Arrangements

Economic integration of the OECS and CARICOM has been against a backdrop of a deep-rooted sense of Caribbean identity and long-standing aspirations for closer unity, which was driven by the desire to reap the benefits of the pooling of resources and markets. The regional experience from WISA/ECCM to OECS, and from the West Indies Federation to CARICOM and now the CSME, can be understood in terms of these factors. Beyond the region, however, trade and economic relations are instead generally motivated by the desire to secure and advance national interests. In interacting with the rest of the world, the question facing OECS, CARICOM and many countries is what route to follow, should they deal selectively with other countries or groupings, and seek to develop trade and remove barriers exclusively among themselves, i.e., bilaterally? Or, should they pursue the multilateral route, as advocated by the WTO, and remove restrictions on imports from all sources? The two alternatives are examined in this section. Although OECS countries have not yet opened up their markets to other countries beyond CARICOM, they are in the process of negotiating to do so. This chapter reviews those negotiations and their implications. The multilateral alternative, too, is explored later on. The choice of which approach or combination of the two should be followed, will have to be based not on ideological considerations or political pressure, but rather on the sovereign decision taken by the countries themselves as to what is in their best interests. Current OECS policy is based more on the bilateral/regional rather than the multilateral approach. The chart below illustrates the position of the OECS within the global system. It shows the OECS within CARICOM and maintaining trading arrangements that are currently non-reciprocal with the EU (Cotonou), set to be replaced by an Economic Partnership Agreement (EPA) by 1st January 2008. It also indicates their relations with the USA through the Caribbean Basin Initiative (CBI), and with Canada, via Caribcan, and various bilateral arrangements with neighbouring countries that are to become reciprocal over time. With the exception of Cuba, all of these bilateral initiatives can be expected to be superseded by the Free Trade Area of the Americas (FTAA). The chart shows the OECS and CARICOM falling within that designated zone. All of the countries operate within the WTO; hence their relations are subject to its strictures. Then there is the rest of the world, with countries that do not belong to the WTO such as Russia, Seychelles, and many islands in the Pacific like Vanuatu and the Cook Islands. In the Caribbean only The Bahamas is not yet a Member of the WTO.

REST OF THE WORLD

Figure 2. The position of the OECS within the global trading system

So that is how it works !

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2.1 Economic Partnership with Europe
When the UK joined the European Economic Community (EEC) in 1973, it had to give up the system of trade preferences that existed throughout the Commonwealth. Under these arrangements, the Commonwealth had operated as a sort of exclusive trading club where Members exempted each other’s imports from duties or charged them at rates lower than those applied on imports from non-Commonwealth countries. At the time, most of the former French African colonies were in a similar trading arrangement with the EEC, via the Yaoundé Convention. They were able to export duty-free to the EEC and waived duties on imports from it (i.e., this was a reciprocal arrangement). Rather than simply seeking to continue the Yaoundé Convention and having it extended to the ex-British colonies, the two sets of former colonies banded together to negotiate a radically new trading arrangement and called themselves the African Caribbean and Pacific Group (ACP). At a time of great insecurity in global commodity markets and the height of the Cold War, these countries were able to conclude an arrangement that was based on the principles of special and differential treatment. The arrangement would provide them with financial and technical assistance and duty-free entry to the EEC for most of their exports. The ACP did not have to offer the same facility to the EEC. It was non-reciprocal. This accord adopted the name of the West African city of Lomé where it was signed in 1975. It lasted for five years and was renegotiated at regular intervals until the fourth Convention, which entered into force in 1990 and had a ten-year life. At the outset OECS countries were not yet independent and were not able to negotiate the first Lomé Convention that came into effect in 1975. However, because of their political association with the UK they were able to participate in the trading arrangements and enjoyed certain benefits. When the various islands achieved independence they were then able to participate fully in the negotiations with Europe. With OECS economies so very open to outside influences and their trade and economic relations extending beyond the confines of the Caribbean region, they are obliged to secure their economic interests by seeking agreements further afield. So far the relationship with Europe has been central. Since their independence they have been full Members of the ACP group of countries and were party to the Lomé trade and aid Conventions, which, in 2000, were succeeded by the “Cotonou Partnership Agreement”. That relationship has been a foundation of their participation in international trade. Over the years a major portion of their exports, principally of agricultural goods, have been exported to the European Union (EU)8 where they enjoy duty-free entry, whereas competitors often face high duties. In other words, they enjoyed trading preferences. Also, they have been receiving considerable financial and technical assistance for their development from the EU, via its various grant and loan facilities; the National Indicative Programmes (NIP), Regional Indicative Programme (RIP) and the Stabilisation of Export Earnings (STABEX) which was replaced in 2002 by the Fluctuation in Export Earnings (FLEX) facility. With other ad hoc programmes like the Special Framework of Assistance (SFA) for bananas or for rum and the €2.2 billion Investment Fund that is administered by the European Investment Bank (EIB), the EU is overall the largest single aid donor to OECS countries. That link with Europe has been so extensive, enduring and deep-rooted that it sometimes appears as an integral and permanent fixture of the architecture of the international system in which the islands operate. However, in reality, there is nothing certain or permanent about that relationship. Indeed, negotiations are currently ongoing that will fundamentally refashion their trading dimension.

2.1.1 The EPA negotiations and their policy context
Ever since the signing of the 1st Lomé Convention of 1975, OECS countries have been able to export to the European Common Market virtually anything that they produce, which meets the rules of origin9. In certain cases, as with sugar and bananas, special arrangements provided them with additional support that ensured that this trade was viable and could actually take place even when the islands might have been producing at much higher cost than their competitors.
8 The EU replaced the EEC with the signing of Treaty of European Union, at Masstricht in the Netherlands on 7th February 1992. We really have been My mother wasn’t 9 with these Europeans See glossary. even born yet ! for a long time.

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The current system, the Cotonou Agreement, under which OECS countries can export to the EU without having to pay customs duty, expires at the end of 2007. A new trading system therefore has to be agreed upon to permit OECS countries to continue their duty-free exports to the EU from 2008. Negotiations that are aimed at replacing the current arrangements with a new structure for trade and economic relations between Caribbean countries and Europe are ongoing. It is essential to recognise that despite the negotiations for new Economic Partnership Agreement (EPA), the current Cotonou Agreement itself has a life of 20 years, expiring by 2020. Therefore the financial aid provided in five-year cycles under the Financial Protocols is to continue independently of the outcome of these EPA talks. This is significant since the decision on the EPA can be based on an objective assessment of its own value rather than a false perception that concluding it is necessary for the safeguarding of funding from the EU. Given the tremendous importance to OECS economies of their trade and economic relations with Europe, the new arrangement will be of major significance for future economic performance, income and employment. Hence, the negotiations between the ACP and EU, launched on the 27th September 2002 that will define the new arrangements are of overwhelming political importance. While the EPA negotiations have focussed on preparing new WTO-compatible trading10 arrangements aimed at progressively removing barriers to trade and enhancing cooperation in all areas relevant to trade, their agreed objectives are broader and rooted in the wider development objectives of the Cotonou Agreement. These are the reduction and eventual elimination of poverty in ACP countries, the promotion of sustainable development and, as a tool for achieving these objectives, the progressive integration of ACP countries into the world economy. A clear appreciation of the background and broader context of these negotiations on which the Caribbean and the other ACP regions have embarked with the EU is vital. The progress and their implications for OECS countries are reviewed below.

2.1.2 Background to EPAs
The conceptual origins of EPAs can be traced to the European Commission’s 1997 “Green Paper on relations between the European Union and the ACP countries on the eve of the 21st century”. It took a critical look at the ACP- EU relationship in the light of global developments following the end of the ‘Cold War’ and also the changing international economic environment, notably the greatly strengthened regulation of the multilateral trading system under the leadership of the WTO. New approaches to political and financial cooperation were explored, but the most radical thinking related to the options for trade. The Commission appreciated that the successful challenge to certain aspects of the European banana import regime by Latin American countries and the USA during the 1990s, had exposed the vulnerability of the preferential trading arrangements to challenge within the WTO. Currently ACP countries export their eligible products to the EU market without paying duty; however, they charge duty on imports from the EU. In other words there is no reciprocity since trade is not free on both sides. The European Commission wanted change. The clear preference of the 1997 Green Paper was for a reciprocal trading arrangement with the ACP countries. (In other words, exports both from the ACP and Europe would have duty free entry into each other’s markets). This was consistent with the orientations in the Commission’s 1995 staff paper on Free Trade Areas, which proposed a twin-track approach to the promotion of EU trade and economic interests – through multilateral trade liberalisation at the WTO and through the conclusion of bilateral and regionally-based free trade area arrangements, which secured better treatment for European exports i.e., trade preferences for EU exporters. By 1998, the European Commission received a mandate from the EU Council of Ministers to negotiate the replacement of the non-reciprocal trading system with a new trading arrangement that would be in conformity with WTO rules, particularly GATT Article XXIV11. Since the ACP already enjoyed duty-free access for most of their exports to the EU,
10 11

See Glossary: “WTO Compatible” The General Agreement on Tariffs and Trade (GATT 1947), Art’ XXIV ‘Territorial Application – Frontier Traffic – Customs So they want Unions and Free-trade Areas’ sets out inter alia the rules governing Regional Trading Arrangements (RTA). to change things

23

But the change must be good for us too.

the innovation in the proposed trading relationship would essentially be that EU products would now also enter the ACP on a duty-free basis. Some sceptics saw this as a one-sided change offering new benefit to the EU but not the ACP. The Commission, however, insisted that the EPA was not about market opening per se, but rather, development’. It argued that the EPA would achieve this by promoting ACP integration both regionally and into the global trading system, it would build trading capacity, be based on principles of asymmetry with more favourable or special and differential treatment for the ACP and review the rules of origin. Their contention was that ACP countries would gain overall from concluding EPAs with Europe.

2.1.3 What is the EPA?
This question continues at the heart of the negotiations, but fundamental differences in perception persist between the ACP and EU sides. Commission negotiators tend often to operate on the premise that an EPA is essentially a free trade area agreement, which, according to conventional WTO practice on free trade areas, must: a) b) c) d) Involve the removal of import duties and taxes on “substantially all trade” between the countries that sign the agreement. This is generally considered to cover as much as 90% of current imports and exports; Be fully in place within a 10 to 12 year transition period; Exclude no economic sector from the coverage of the free trade area; and Include agreements on trade in services and trade related areas.

However, if EPAs are to support economic development and contribute to the elimination of poverty in the OECS (and other ACP) countries, they cannot simply be classical free trade area agreements in which all that happens is that OECS markets are opened up. They must also include measures to promote and support structural transformation and economic growth. Given the different levels of economic development of EU and OECS economies, particular care needs to be taken in devising the EPA. It evidently is important that the removal of duties and other restrictions on imports from Europe does not cause local industries to collapse under the pressure from increased competition from imported EU goods; which would undermine economic development prospects. The rest of the ACP have similar concerns to the OECS and expect EPAs to be more than classical free trade area agreements, with a little bit of extra financial assistance provided.

2.1.4 Criticism of EPAs
The EPA negotiations have been criticized virtually from the outset. First there were isolated complaints within the ACP group and then more widely among Non-Governmental Organizations (NGOs) who have been conducting a vociferous “stop EPA” campaign. They argue that a disadvantageous deal12 for the ACP would detract from, rather than advance, economic development.
12

Christian Aid briefing 2004, “Why EPAs Need a Rethink”, www.epawatch.net

24

In May 2004 Botswana’s President, Festus Mogae said, “We fear that our economies will not be able to withstand the pressures associated with liberalisation as prescribed by the World Trade Organisation. This therefore challenges us all as partners to ensure that the outcome of the ongoing EPA negotiations does not leave ACP countries more vulnerable to the vagaries of globalisation and liberalisation, thus further marginalizing their economies”. The debate over the likely impact on the ACP of EPAs, received renewed impetus from two reports released in the UK. Firstly, in March 2005, the Department for International Development (DFID) and Department of Trade and Industry (DTI) released a joint report entitled ‘Economic Partnership Agreements: making EPAs deliver for development13. It questioned the contribution of EPAS, as they are currently being negotiated, to the development of ACP countries. Then, in the following month, the Cross Party International Development Committee of the House of Commons (The Select Committee), released its own highly critical report of the EPA negotiating process.

Box 2

D e p a r t m e n t fo r I n te r n at i o n a l D eve l o p m e n t a n d D e p a r t m e n t o f Tr a d e a n d I n d u s t r y R e p o r t

This report advanced the view that developing countries can gain in the long run from trade liberalisation only if they have in place the infrastructure and capacity to trade competitively. In this context it urged the EU to pursue a non-mercantilist approach to the negotiations and avoid resorting to traditional market-opening tactics. It called for ACP regional groupings to be provided with maximum flexibility for their own market opening for European goods and services and called for the EU to offer an unconditional transition period of a minimum of twenty years. It made the case for additional financial assistance to develop the supply-side capacity of ACP economies and to support necessary trade reforms required to build competitiveness. Finally the report called on the EU to work within the WTO for a review of GATT Article XXIV in order to reduce the requirements for reciprocity and for the Commission to provide an acceptable and non-punitive alternative to EPAs. This would ensure that any ACP state choosing not to enter into an EPA would not be left worse off14. (The provisions of the Cotonou Agreement require this alternative so that countries would have a real choice when deciding to accept the EPA or otherwise).

2.1.5 Issues in the EPA negotiations
There are a number of issues of underlying concern in the EPA negotiations that will have to be addressed and reconciled between the two sides. These include: The adjustment costs of EPAs and Policy responses: A particular concern arises when formerly protected industries are no longer able to compete with imports following the removal of tariffs. This lack of competitiveness can lead to factory closures and job losses. If the introduction of EPAs is not accompanied by new and competitive domestic production for the local, regional or international markets, then the negative effects on producers can outweigh the benefits gained by consumers and importers from the introduction of free trade with Europe. A key issue in determining the extent of adjustment costs is the level of trade on which tariffs are to be eliminated and the pace at which this is to be done. It is important that this provision for asymmetry in the EPA is fully utilised by the Caribbean, with both the time frame for tariff reductions and elimination being as long as possible and the number of products that they exclude from tariff reductions being maximised. Development focus: The initial intention of both sides was that the EPA would have a clear development purpose, rather than being a classical free trade area with negotiations aimed simply at market opening and trade expansion. The concept of “development” in the EPA was intended to be more than a rhetorical device or merely the provision of additional financial resources. Rather it is a shared commitment of the EU and ACP sides to construct an agreement that in its operations would actually promote sustainable development. For the EPA to contribute to development, it would have to support the expansion on a sustainable basis of domestic production and exports. The key impediments to achieving this are the range of supply-side constraints facing the OECS and other ACP countries. Addressing these constraints on competitive production in a systematic and comprehensive
13 14

www.dti.gov.uk/ewt/epas.pdf ACP-EU Agreement of Cotonou, Art.37 Para’ 6.

I better open my eyes wide - wide !

25

way is the fundamental challenge of the negotiations and is essential if ACP countries are actually to benefit from EPA’s. There is the need therefore, for the establishment of co-ordinated and integrated country-specific programmes of assistance to address supply-side constraints, which reach beyond the current instruments and approaches. The fiscal impact of an EPA: This is an area of concern to the OECS and many ACP countries where revenue from import duties is a principal contributor to government income. Imports from the EU into all OECS countries are high and the elimination of duties would therefore result in a major reduction in overall customs revenues and have significant adverse effects on total Government revenues. Consequently, alternative revenue sources need to be developed before the fiscal losses actually occur. An immediate challenge to the OECS in an EPA would be to establish cost-effective alternative revenue collection mechanisms. These would have to generate enough additional revenue to compensate for losses resulting from the lifting of duties on imports from the EU. If a budgetary crisis is to be avoided, such programmes of fiscal restructuring must be effectively in place before the full implementation of any reciprocal free trade area arrangements with the EU. Such restructuring, however, will be costly. Work undertaken by the Commonwealth Secretariat suggests that approximately €3,300 million is required15 for the ACP as a whole to finance programmes of restructuring and avoid the revenue losses envisaged under an EPA. It is important to stress that this is a transitional rather than a long-term net-economic cost. The erosion of the value of traditional protocol preferences: Of concern to the OECS has been the severe deterioration of their trading position with the EU, even before an EPA. This was due to erosion of the value of the traditional trade preferences granted through the commodity protocols of successive Lomé Conventions and the Cotonou Agreement. For example, the value of the Rum Protocol was lost by the decision of the EU following agreement with the US in 199616 to phase out the import duties that had been protecting Caribbean rum. Also, the value of the banana preferences for the Windward Islands has been undermined by the 1st January 2006 reform of the banana regime that replaced the quota system by a single tariff and begun the phasing out of the historical-based licensing system for ACP bananas. Finally, the commercial benefits provided by the sugar protocol to the Caribbean17 will be drastically cut back by the impact of the November 2005 reforms of the EU sugar regime. The future value of the commodity exports that have traditionally been the foundation of the OECS trade relationship with the EU is now quite bleak. For the OECS, the critical issue is to secure trading benefits from the EPA, but they must have competitively priced goods and services to export. Of course, OECS countries can obtain net benefit from EPAs even if their exports to Europe decline. However, this would require the development of exports to other markets and possibly the replacement of some imports by domestic production. WTO compatibility: Complying with WTO rules constrains the flexibility of the negotiation of EPAs. The Cotonou Agreement commits the EU and ACP to defending, within the WTO, the arrangements that they have reached between themselves. Compatibility is therefore to be assessed in terms of anticipated, not current, WTO rules. The Cotonou Agreement uses the words “in conformity with WTO rules then [sic] prevailing.”18 This clearly implies that the negotiations do not necessarily have initially to be in conformity with the existing WTO rules. The understanding enshrined in the Agreement is that the negotiations would not necessarily be strictly within the scope ‘prescribed by’ current WTO rules, their flexibility or interpretation; rather negotiators could anticipate dynamism in the rules, conclude an agreement and then seek acceptance at the WTO19. It is the eventually concluded EPA, not the negotiations, that needs to be in keeping with WTO rules. These stipulations of the Cotonou Agreement are not a matter of mere semantics, but vital to the ACP for achieving their goal of negotiating EPAs that could be to their economic advantage. A related concern is that the changes to WTO rules required by the ACP need to be secured during, not after the Doha Round, since once it has been completed, the ACP will have no immediate and realistic prospect of getting adjustments to the rules to rebalance them in their favour.
15

26

This does not include transitional budgetary support, but solely the financing of programmes to restructure the revenue base of the state, diversify exports and enhance/adapt skills and employment. “Zero for Zero” Agreement on liberalizing the trade in White spirits between the US and the EU signed in Singapore in 1996. 17 OECS countries no longer export sugar to the EU. 18 ACP-EU Agreement of Cotonou, Art.37 Para’ 7. 19 ACP-EU Agreement of Cotonou, Art.37 Para’ 8, “The parties shall closely collaborate in the WTO with a view to defending the arrangements reached, in particular with regard to the degree of flexibility available.”
16

2.1.6 Matching up the two sides Considerable differences in position exist between the ACP and EU sides. The ACP negotiations are being conducted by regional teams that are fragmented and under-resourced. They face a European Commission with an integrated negotiating structure operated by well-trained, organised and experienced personnel who are backed by considerable institutional resources for their preparation and conduct of the negotiations and who have a clear and precise policy mandate. For the EC side nothing is left to chance; interests and objectives are meticulously coordinated and agreed by the Member States in which the views and positions of all are first accommodated or reconciled. From this political consensus, precise and detailed directions are provided to the Commission. As a team, EC negotiators are amongst the most formidable in the world with considerable experience in tough bilateral and multilateral trade negotiations aimed primarily at prising open foreign markets and safeguarding the economic interests of Europe. With the advantages in the negotiations overwhelmingly on the side of the Commission, it is not surprising that the ACP has been lagging behind in securing ‘victories’ or breakthroughs. The presentation in this stark manner of the relative power of the Commission should not prompt pessimism or defeatism, but rather encourage realism, closer policy oversight and spur fuller and more professional preparation for the negotiations. Certainly the ACP regionscan improve their prospects for success by being precise in defining their goals, as well as coherent and forceful in pursuing them. They can fully utilise their resources and learn relevant lessons from their experiences in multilateral trade negotiations. Since ACP regions have different objectives from the Commission, they do not intend simply to accept the EU positions. However, if they are to have any hope of actually changing those positions on the EU side that they consider unacceptable, a reappraisal of their organisation, preparation for and conduct of the negotiations, as well as their deployment of political and other resources would be essential.

Box 3

U K Pa r l i a m e n t a r y R e p o r t

This report of the Cross Party Select Committee of the UK Parliament on EPAs was very strongly worded. The Committee took evidence from a range of institutions and individuals, including the EU Commissioners for Trade and for Development. The Committee observed that the relationship between the EU and the ACP is not and indeed never has been an equal one. The ACP countries lack the negotiating capacity of the EU. ACP regions, most notably the Caribbean, are stretched to negotiate simultaneously in the WTO and various other regional negotiations. The ACP countries are also economically weak compared to the EU. The negotiating process should therefore recognise this disparity in power. It called for far greater substance to the development dimension of the EPA negotiations. For example, it noted that EU Trade Commissioner Mandelson told the Select Committee that he is in favour of promoting a more flexible interpretation of GATT Article XXIV (which deals with Regional Trading Arrangements) in order to accommodate progressive market opening as envisaged under the EPAs. However EC negotiators in the WTO have given little support to ACP efforts to secure such flexibilities under WTO rules, including the minimum eighteen-year transition sought by ACP regions before they would have to open their markets to the EU. In the absence of strong EU support, the ACP proposals have been poorly received by other WTO members, despite the numerical strength of the ACP and the EU together in the WTO. With regard to alternatives to EPAs, the report recognised that to date none has been devised and proposed to the ACP, despite a clear requirement of the Cotonou Agreement. The availability of a satisfactory alternative to EPAs is essential since it would permit ACP governments to assess any EPA agreement on its own merits and allow them to reject such an agreement if it did not support their economic development. The UK Government was asked to press the Commission to ensure that alternatives for non-LDC-ACP States guarantee the same level of market access of the current Cotonou arrangements. The Select Committee felt that it would not be sufficient for the European Commission to present the alternative as a second best option, with no developmental component. This is an important issue for the OECS since its Members are not classified in this context as LDCs. Overall, the Select committee expressed concern that the EU is approaching the negotiations as if they were “a game of poker” and refuses “to lay its cards on the table”. (Such an approach it felt might of course be acceptable for partners with comparable hands but in this particular case where the ACP is negotiating at a serious disadvantage, the EU’s approach merely reinforces the unequal nature of the process.)

But if we don’t have anything to sell, where is the free trade ?

27

2.1.7 Stop EPAs ?
Despite the implicit presumption of the NGO-led “Stop EPAs” campaign, that ACP States cannot secure, through negotiations, the type of economically beneficial EPA provided for and envisaged under the Cotonou Agreement, the ACP believe that it is in fact possible to conclude EPAs that make them better off. The challenge is for the various ACP regions to effectively negotiate and secure acceptable outcomes in the EPA and related WTO negotiations. Although the challenge facing the ACP can seem overwhelming, the Caribbean and other ACP regions have some bargaining chips that they can, and will need to deploy if the outcome is to reflect their own vision and aspirations, rather than being limited to the level of ambition envisaged by the Commission’s negotiating mandate. In the end, when the negotiations are complete each OECS and ACP country will have to assess the balance sheet of costs and benefits of the final package and determine where its national interests lie. But OECS countries do not have to await the completion of the negotiations to then decide on the value to them of the deal. Rather, during the course of the negotiations, they can ensure that their interests are adequately reflected in regional positions and safeguarded and advanced during the actual conduct of the talks. An approach to the negotiations as outlined above in which the Caribbean and other ACP negotiating teams effectively articulate and negotiate their developmental interests are essential for an outcome that meets the objectives of both sides. It is evident that this is in the interests of the ACP. Less evident but also true is that this is what the EU also wants. Having economically strengthened ACP regional partners is in the long-term political and economic interest of the EU. The process of arriving at the EPA is through negotiation hence the EU quite correctly expects ACP negotiators to make the case for the arrangement that will contribute to their sustainable development. This explains the considerable support being provided by the EU for capacity building in trade negotiations; it has already approved “Trade.com”, a €50 million facility, and the “Hub and Spoke” programme of €18 million that is being managed by the Commonwealth Secretariat. In other words the EU will not simply hand over an EPA that contributes to ACP development but leaves it to them to negotiate the satisfactory terms for themselves.

2.2 Free Trade Area of the Americas
The push for economic integration throughout the Americas to include North, Central and South America and the Caribbean, was motivated by both economic and political concerns. In December 1994, the then United States President, Bill Clinton invited all Heads of Government of the Western Hemisphere to a Summit meeting in Miami, pointedly excluding the Cuban leader. They all decided to create a Free Trade Area of the Americas (FTAA) that would link their countries, within which barriers to trade and investment would be progressively removed. The negotiations, they agreed, would be completed by January 2005. This would be the largest FTA in the world with a Gross Domestic Product (GDP) of over US$ 10 trillion and a population of 800 million. They instructed their Trade Ministers to make the necessary preparations. These held four meetings and agreed upon a structure and guidelines for the negotiations. By April 1998, all was ready and negotiations were launched at the Summit of Heads of Government held in Santiago, Chile. They formally agreed that the negotiations would be balanced, comprehensive and in conformity with WTO rules. Quite importantly, the intention was to end up with a single undertaking. In other words at the end of the negotiations, Governments would be faced with a comprehensive and indivisible package of rights and obligations which they would accept, or could indeed reject, but only in its entirety. Countries would not be able to pick and choose aspects of the agreement that would apply to them. The combination of the comprehensiveness of the mandate and the fact that it would be a single undertaking, make the FTAA negotiations of particular concern to the OECS countries since the outcome would have direct and indirect implications for several aspects of their economic life.

2.2.1 Prospects and challenges
The prospect of the creation of this massive free trade area was initially enthusiastically welcomed. Its backers emphasised the enormous size of the market that would be created,
Hmmm...

28

That is one big supermarket !

with benefits for trade creation, improvement to living standards and working conditions and protection of the environment. With the plans to have an agreement finalised by January 2005, a Trade Negotiations Committee was set up to oversee the negotiations and an array of working groups was established to deal with the substantive areas. However OECS Members, fully involved with EPA negotiations as well as the WTO and CSME talks, were being stretched. The problems faced by the OECS were not unique but were also affecting other Caribbean countries. They therefore agreed to joint participation in the FTAA talks since, on their own, they did not have the personnel and other resources to individually service the range of meetings. They therefore worked closely together and their positions were often articulated by a single spokesperson. But the FTAA project itself was in trouble, global political and economic conditions had been changing dramatically since 1995, when the decision to launch the negotiations had been taken. Ten years later differences in vision had emerged and there was a serious rethinking in several countries. Nonetheless, up till November 2003, Ministers had been speaking as if the FTAA was still on track and only Venezuela expressed a reservation on the reaffirmation of the commitment to complete the negotiations by 2005. The differences were over the scope of the talks and the linkages with the WTO Doha negotiations. The FTAA talks therefore effectively went into cold storage, though attempts to revive them continued. Whenever negotiations recommence, the countries that initially joined the FTAA project, will be deciding on their positions according to their assessments of their interests. For the OECS the specific questions can be expected to focus firstly on whether the original idea of open markets for the Americas will provide them with net advantages and opportunities from which they would actually benefit. Secondly whether any compensating measures provided will be adequate to ensure that they do not lose but gain overall from the FTAA. They would also be expected to consider the alternative, i.e. the cost of staying out of a FTAA in which possibly the rest of the Caribbean (specifically CARICOM) and the Americas are involved. Their decision will have to be based on a carefully calculated assessment of the costs and benefits of joining or not and their judgement of where their national interests lie.

2.3 Bilateral Trade Agreements
As Members of CARICOM, the OECS also participates in free trade area arrangements with Costa Rica, Colombia, Venezuela and Cuba. These provide duty-free access for the OECS but they do not immediately have to grant reciprocal duty-free entry to imports from these Latin American countries. A longstanding arrangement with Canada, Caribcan provides dutyfree access for exports from CARICOM. The future of these bilateral agreements might well be influenced by the creation of the FTAA.

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C

hapter 3
A Multilateral Alternative - The WTO

All the independent OECS Members belong to the World Trade Organisation (WTO) and the others apply its rules and benefit from its provisions because of their constitutional relationship with the UK, which is also a WTO Member. Its principles and enforceable rules dominate international trade and major segments of domestic production and commerce. This system has a major influence on shaping the global trading environment and defining the scope for policy flexibility for all its 150 Members. As a consequence, the WTO plays a determining role in national economic performance, employment and well-being, especially in small islands that are heavily dependant on trade. It is therefore essential to understand this institution that, during the last decade, has become one of the most powerful entities on the world stage and whose regulations have a major impact on OECS countries.

3.1 Origins and evolution
The conceptual origins of the World Trade Organisation can be traced back to 1947. The previous decade had witnessed a most severe global economic depression followed by a world war of unprecedented horror and devastation, for which the mercantilist policies that had characterised international trading relations were partly to blame. The leaders of the major non-communist nations who were behind this initiative were determined to avoid repetition of the chain of disastrous events that led to the war. This would be achieved by a new approach to economic relations among States that would be based on rules. Negotiations were then launched to create a regulator; the International Trade Organisation (ITO). The ITO was expected to regulate trade, employment, restrictive business practices, commodity agreements, investment and services and prevent protectionism. It was the ambitious mandate of the ITO that anticipated what eventually became the World Trade Organisation (WTO) on 1st January 1995; an organisation that is committed to the liberalisation of trade and oversees the bulk of global trade. Whilst negotiations for the ITO were still ongoing, 23 countries decided that they should reduce tariffs on a range of imports and committed themselves not to raise them in the future i.e., to “bind” them. They called this the General Agreement on Tariffs and Trade (GATT) and it came into force on 1st January 1948. Three months later, the ITO Charter was signed in Havana, Cuba. It however made no headway and when in 1950, the US, the world’s foremost trade and economic power, announced that it would not be ratifying, the ITO’s fate was sealed. It was the GATT that would manage trade rules and whose principles would shape the evolution of the multilateral system for the next half a century.

3.2 Multilateral Principles
The principles on which the GATT was founded, have certainly evolved and adapted to changing circumstances but their essence of promoting fair competition remains at the heart of the WTO system. The mandate to promote free trade was enshrined specifically in the GATT preamble. It achieves this objective through the following key principles. Most favoured nation treatment (MFN) According to this rule, all Members must be treated equally. (Of course non-Members can be and often have been discriminated against, e.g. China before it joined the WTO in 2001). If an import tariff is lowered for one country or it is granted a trade concession, then, unless special authorisation is received, the tariff must be lowered equally for all other WTO Members, or they too must be granted the same trade concession. Hence, although the bulk of tariff negotiations under the GATT were conducted among a few countries, the benefits were made available to all Members. A notable exception to the MFN rule is in Regional

30

So that war was so important ? Ancient history.

At least nothing like that happened again.

Trading Agreements (RTA) such as CARICOM, where Members can be authorised to provide better treatment to fellow participants than to those that are not, even if they are WTO Members. National treatment The GATT requires that both foreign and locally produced goods be treated equally once duties on the former had been paid. No additional charges or impediments are to be imposed on foreign goods that are not also borne by the same type of local products. Predictability This is achieved through transparency and binding20 by which a country undertakes not to increase its tariff above an agreed level so an exporter from abroad (or indeed a local importer) knows what tariff his goods will face. It is true that such ceilings on tariffs can be raised but only after negotiating with trading partners (and often providing them with compensation). Transparency is an important factor in ensuring predictability. Whilst tariff reduction negotiations may be conducted within restricted groups, their results must be notified to all Members. Also, government policy is scrutinised under the regular Trade Policy Review mechanism. A joint review of the trade policy of the OECS Members that belong to the WTO was conducted in June 2001.21 Supporting development Initially the GATT did not differentiate among its Members. The presumption was that trade liberalisation and provisions to promote competition and equal treatment would suffice in enabling all countries to gain from trade. However by the early 1970’s the inherent competitive disadvantage of some countries was becoming evident. If the rules were to be applied in the same manner to all, then those whose economies were already more advanced and stronger would be in a better position to take disproportionate advantage of the new opportunities. Liberalisation that did not take account of inequality could therefore lead to skewed sharing of benefits. This idea was given concrete effect in 1974 with the incorporation of a new Part IV to the GATT that recognised the weaker position of developing countries and provided them with special and differential treatment.

Box 4

Tr a d e P o l i c y R e v i e w s

Transparency is central to the operation and integrity of the WTO system. Member countries need to know that their trading partners are abiding by the rules or when they are in breach of any of them. Transparency is essential for the smooth operation, predictability and confidence in the system. This is achieved by two means. One is a voluminous and extensive set of notifications or selfdeclarations by governments to be prepared on a regular basis and submitted to the WTO. The other device is the periodic Trade Policy Review. It has three aims: 1. To increase transparency and understanding of countries policies and practices through regular monitoring; 2. Improve the quality of public and inter governmental debate on the issues; and 3. Enable the Members to assess the effects of policies. The WTO staff conducts an independent assessment, the Governments make a report and there is the opportunity for all countries to peruse the reports and ask questions. The largest WTO Members, the “Quad”- the EU, US, Japan and Canada- are reviewed every two years, the next largest 16 others, every four years and the others every six years. In 2001 the six OECS States who were Members of the WTO were reviewed together. The OECS countries were given a good rating but areas of concern were signalled, notably subsidisation practices and certain internal taxation measures and import restrictions. This joint review was an innovation for the WTO. Since the experiment worked well, the approach of simultaneous review of similar and neighbouring developing countries has since been frequently practised.

3.2.1 The system
By the early 1990’s the independent Member States of the OECS had become GATT contracting parties. But before, while still colonies and later Associated States of the UK, they had been subject to the rights and obligations of the GATT. Upon independence they continued to exercise and enjoy them on a de facto basis until they all individually formally became contracting Parties in their own right. All but St. Kitts & Nevis and Grenada were founding Members of the WTO. 22
20 21 22

See Glossary. OECS-WTO Members Trade Policy Review; Vols 1& 2. Report Published Geneva. January 2002. Grenada and St Kitts & Nevis had not ratified the WTO Agreement before the end of 1994 and became Members on the 22 February 1996 and the 21st February 1996 respectively.

31

A key feature of the GATT/WTO system was the use of Rounds of multilateral trade negotiations (MTN). Members all come together to negotiate both separately with each other (bilaterally) and all together (multilaterally). Initially they were exclusively concerned with tariff reduction and binding. The sixth cycle of negotiations, called the Kennedy Round (1964-1967) made tentative forays beyond tariffs on goods and addressed anti-dumping measures. The Tokyo Round (1973-1979) was even more ambitious, drastically reducing tariffs on industrial products, but also tackling non-tariff measures that restrict imports. This Round came up with a number of agreements that were signed by only some of the GATT Contracting Parties.

3.3 The Uruguay Round and the birth of the WTO
The eighth Round of trade negotiations was launched in Punta del Esté, Uruguay in 1986, and dragged on till 1994, taking twice as long as originally expected. But its agenda was ambitious, covering all the perceived outstanding trade policy issues. Not only would the traditional subjects be tackled - tariff reduction and binding, non-tariff barriers and anti-dumping and subsidies - but also the hitherto “no go” subjects of agriculture, textiles and clothing and services. The list of subjects also included a review of GATT Articles, Dispute Settlement, the GATT system and trade in tropical products. The talks frequently ran into difficulties and deadlock, particularly over agriculture. It was only when the US and the Europe settled their differences over agriculture in November 1992 in a deal known as the “Blair House Accord,” that progress in other areas could really have taken place. Resolution of the other subjects took just over a year with agreement reached on 15 December 1993. Although the talks had formally ended, the Members agreed to reopen and continue formal negotiations in agriculture and services, in what was termed the “built-in agenda”. This “new creature”, the WTO, the most far-reaching outcome of the Uruguay Round, was really a metamorphosis of the old GATT that had emerged as a larger and more powerful global institution that would be exercising control over a broader area of economic regulation and management. Its most decisive feature was its binding dispute settlement mechanism. So unlike its predecessor it had real power to oversee its regulations; it had teeth!

3.4 The WTO’s Dispute Settlement Mechanism
The resolution of disputes is of such importance in the overall system that it needs to be fully explained. It was an ostensibly small change in the procedures regarding the adoption by the WTO of the reports of Panels that resulted in a fundamental revolution in the regulation of the multilateral system and permitted the enforceability of its rules. Prior to the WTO the GATT had provisions for the settlement of disputes. A country could complain that another was violating the rules and an adjudication Panel of experts would be set up. It would report to the Contracting Parties and the membership would have to adopt the conclusion for it to be enforceable. The catch was that this decision needed to be by consensus. In other words no one objected. Unless this happened the report would not be adopted. It can well be understood that agreement of all countries would therefore be very difficult. At the very least, the Party ruled against would be unlikely to support the finding and it alone could prevent unanimous agreement to the decision. Not surprisingly, very few GATT Panel decisions were actually ever adopted. The real upheaval in the system was the change to the consensus rule for the adoption of decisions at the Dispute Settlement Body made up of Member States. Now, the Panel ruling would be adopted unless it was rejected by consensus, not, as before, approved by consensus. Rejection of a Panel finding has therefore never happened and it seems unlikely that every Member, including the winner of the proceedings who has achieved victory after going through the cost and burden of the case, would reject the findings. Hence the Panel process has become akin to the domestic judicial process. A complaint is made, a trial follows to determine whether an infringement of the rules has taken place and an enforceable decision is arrived at. Another innovation that was introduced was the extension of the mandate of the Dispute Settlement Body (DSB) to include intellectual property and services.23
23

32

This is why the US, although not a banana supplier, was able to lodge a complaint in 1995 against the EU Banana Regime in order to “safeguard” the interests of its service suppliers.

3.4.1 The process
The Dispute Settlement process begins when a Member or a group lodges a complaint (the Complainant/s) that another is not respecting one or more trade rules. A 60-day period for consultation and possible mediation follows when the countries are to seek to settle their differences. If they cannot, the WTO Director General, often through a nominee, tries to help them reach a mutually agreeable solution. If this also fails, the Complainant/s can, within 45 days, ask for the establishment of a Panel. Other countries that have an interest in the matter can request to be Third Parties. That gives them specified rights including making submissions and participating in certain of the meetings. The Panel, normally made up of three experts (can also be five) from different countries, examines the evidence and makes a ruling. It normally has six months24 to consider the case and prepare its report, with a further 3 weeks to present it to WTO Members. If either or both Parties do not appeal against the ruling within 60 days, it is presented to the DSB for adoption. (The approval of the DSB would invariably be a formality because of the practical impossibility of obtaining a consensus in favour of rejection). In the event of an appeal, the matter is referred to the Appellate Board made up of seven judges. Three of them would be assigned to the case reviewing the points of law. This, they do in 20 days and the DSB has 30 days to adopt the report. Panel and Appellate Body decisions, once adopted by the DSB, are mandatory and enforceable. Should the Party ruled against refuse to comply or compensate the winner, the latter can obtain approval to invoke sanctions that either compensate for non-compliance or punish the offender so as to encourage compliance. However given international political and commercial realities, most countries are loathe to impose sanctions, particularly against those that are more powerful.

3.4.2 OECS Participation in Panel Disputes
Although some legal assistance is available to developing countries, bringing or defending a case is very costly and can constitute a tremendous strain on the limited financial and personnel resources of small countries like those of the OECS Members. They have, however, participated actively as Third Parties when they perceived their vital economic interests as being under threat viz. the Windward Islands in the series of Banana Panels appeals and related complaints over the last decade and St Kitts & Nevis in the case against the EC export subsidies on sugar brought by Australia, Brazil and Thailand. In only one instance has an OECS State been a complainant in a dispute. Antigua and Barbuda initiated proceedings against the US in the 2003 case on “Measures affecting the cross-border supply of gambling and betting services.”

3.5 The WTO Doha Development Agenda (DDA)
This still ongoing Round of WTO negotiations warrants special attention. It was launched at Doha in November of 2001 and was to have been concluded no later than 1st January 2005. During that time it would continue to expand the liberalisation agenda of the WTO and address the concerns of developing countries.
24

In cases of perishable goods, the period for the Panel to review a case can be reduced to 3 months.
This is world government !

33

Although the Uruguay Round had given rise to the WTO and ushered in an era of unparalleled liberalisation particularly in agriculture, textiles and clothing and services; the process that had been set in train was nonetheless viewed by the major trading nations as unfinished business. They considered that markets were still too restricted and WTO disciplines were still not being applied to a sufficiently broad range of economic and commercial activity such as investment, competition and trade facilitation. However, the majority of developing countries, many of whom were becoming more assertive in the WTO, were not enthusiastic. They felt that far from benefiting from the Uruguay Round changes and the WTO, they were losing from liberalisation. The few that were benefiting wanted to first consolidate their gains before further changes were contemplated. Following prolonged political activity, a decision to launch the Round was finally agreed upon at Doha in 2001. But in order to win developing country support, it was to be different from all of its predecessors. Whilst the Round would continue the ongoing work of market opening and expanding the scope of WTO regulation, it would also seek to rebalance the operation of the system in favour of developing countries and facilitate their participation and fuller integration into the system. However the scope of the Ministerial Declaration at Doha was broad and had at its core support for development, even if the actual negotiations are largely preoccupied with market opening. The actual focus has been principally over the terms of a final agreement on agriculture that will eliminate export subsidies by 2013, reduce import duties on agricultural imports and domestic support for farmers. With respect to non-agricultural trade (NAMA), work has been progressing on alternative approaches to the phased reduction of import duties. Services negotiations, which have been taking place on a “request and offer”25 basis, are to be intensified. So far, the development dimension of the negotiations has been largely focused on the concerns of the LDCs (the WTO uses the UN’s income per capita criterion to determine which country is part of that category. That excludes the OECS).

Box 5

U N C TA D

The United Nations Conference on Trade and Development (UNCTAD) has achieved a high profile since it was born in 1964 in response to the need for a UN conference specifically to consider the problems of developing countries and identify international actions. That conference meets every four years. A formal structure and Secretariat were established in Geneva with the Argentinean economist Raoul Prebisch as its first Secretary General. Its mandate was to promote the beneficial integration of developing countries into the global economy. UNCTAD would serve as the focal point in the UN system for the integrated treatment and attention to trade and development and related issues of finance, technology and sustainable development. It would conduct research and analysis and provide technical assistance to developing countries. The regular Ministerial and other conferences and meetings would serve as a forum for intergovernmental discussion and consensus building. Among the notable initiatives successfully championed by UNCTAD, has been the Generalised System of Preferences (GSP). This was an arrangement under which developed countries would, under certain circumstances, provide non-reciprocal trade preferences to developing countries. The qualifying imports from the developing countries would enter at a reduced or zero rate of import duty. The distinguishing feature is that the developing country does not have to offer any trade benefit in return. Another innovation was the international commodity agreements championed by UNCTAD. Some like the cocoa agreement have been thriving whilst attempts to create an international banana agreement never materialised. Work on the control of restrictive business practices did not result in any concrete institutions but evolved into competition policy, which is now on the WTO agenda. The current Secretary General, Dr. Supachai Panitchpakdi, was appointed in 2005.

3.5.1 Small Vulnerable Economies
The OECS are among those developing country Members of the WTO with specific difficulties stemming from the small size of their economies. Reference has increasingly been made in the negotiations to “small vulnerable economies” (SVEs). This is quite positive since it indicates recognition of those countries’ concerns. However, whilst the focus has been very much on the SVEs as a group with shared interests in the DDA, so far there is little progress on the acceptance of concrete initiatives that would actually benefit them, such as those provided to benefit LDCs. The key factor is that the group is open and membership has essentially been on a self-selection basis. The result is that some countries that are not generally considered as small and vulnerable have joined the group. Its composition now
25

34

Participating countries place on the negotiating table lists of the market opening and other measures that they wish other countries to take (their requests) and volunteer market opening and other measures of their own (offers).
A lot of fancy talk

reflects a broad range of sizes and economic power in which the negative impact and the constraints of smallness apply with varying degrees of intensity among its members. WTO Members are understandably unwilling to grant any real trade benefits unless they can be clear which countries will benefit. All attempts though, to determine the composition of the group, have been frustrated by the objection of those countries that participate in the group but might not qualify under any particular definition of SVEs that is being considered. In addition, paragraph 35 of the Doha Declaration stated that a new category of members was not to be created, so it has often been conveniently used for frustrating progress. Whilst representatives of small countries might be pleased to have secured references to SVEs in negotiating texts, success needs to be measured instead by the tangible benefits that are actually being secured. For instance references to LDCs only became meaningful when backed by special provisions like the Everything but Arms (EBA) initiative, special access to international finance including the Integrated Framework and now priority under the Aid for Trade initiative.

Conclusion
The international trading system, based on rules and principles of free trade and competition, was not established to satisfy the needs of small countries like the OECS but they can use it to secure their interests. Despite their numerous constraints they can participate in and have a voice in rule making and the management of the system. More fundamentally they can gain from the application of the core principles of the WTO. Free competition assures that correct signals will be sent to investors resulting in the rational allocation of resources, something that is most beneficial from an economic standpoint. It is true that the system has shortcomings; maybe the most glaring is that the rules are sometimes selectively applied so that the full gains from trade are not realised because liberalisation is only partial. Given that the vast majority of countries belong to the WTO including virtually all of the trading partners of the OECS, the latter cannot afford to be left out because the costs and obligations of the rules would be applied to them anyway but they would enjoy none of the safeguards, rights or benefits of membership. Meaningful protection of their interests can only be assured within the system.

?

Hmmm...

35

The previous sections have reviewed the working of the international trading and regulatory system and the operation of the OECS countries within it. This section deals with the varying experiences of the major foreign income earners and seeks to draw lessons from those experiences.

The OECS Experience
•Bananas, Sugar, Rum •Tourism and other Services

Section

C
Courtesy WIBDECO

2

hapter 4
Bananas –The fight for the EU market

The cultivation of bananas for export to the United Kingdom market was gradually introduced into the Windward Islands starting from the late 1950s and steadily supplanted sugar cane. Two decades later, it had come to dominate agricultural production in Dominica, Saint Lucia and Saint Vincent and the Grenadines, and was making a major economic contribution in Grenada. The Islands’ share of the UK market grew steadily because of strict restrictions placed on the import of cheaper bananas from Latin America. At the start of the 1990s, production had peaked in the Islands, but by then, threats to the foundations on which that trade could continue, were emerging. In particular, the high profile and long-running transatlantic dispute on the trade in bananas, with its diverse mix of participants that included the EU and ACP on the one hand and the US and Latin American exporters on the other. At the centre, were the Windward Islands, who were among the most determined and active, and as a result, had a decisive bearing on the evolution of the banana regime. This chapter examines their performance, the implications for them of the outcome of the dispute and the lessons to be learnt, amongst the most intriguing of which is that smallness does not preclude States from actually being more than passive onlookers in the processes of international decision-making that determine their future. In 1986, the European Communities (EC) decided to unify the various national markets by 1st January 1993, thus creating a Single European Market (SEM). Prior to this, the various Member States had operated their own import arrangements for bananas, often applying a variety of tariff and quota restrictions. As that date approached, a struggle began over the nature of the regulation of that Single Market and the extent to which it would restrict cheaper Latin American bananas, thereby permitting European and ACP bananas to be sold. The following table indicates the changing origin of bananas supplied to the EU before and since the single market. It shows that the countries that have been most forceful in seeking reforms have been the ones whose exports have increased the most.
EU DOM ACP Of which: Caribbean ACP* 384 342 384 374 328 340 362 Ivory Coast 95 116 144 161 149 160 181 Cameroon 78 115 110 147 158 165 167 Dominican 4 10 39 62 86 75 61 Republic Dollar 2363 2641 2731 2560 2450 2405 2470 Of which: Colombia 421 518 533 452 511 557 653 Costa Rica 643 608 520 565 727 564 604 Ecuador 381 646 745 651 612 632 686 Panama 649 591 601 569 427 416 311 Total 3722 3936 4117 3951 3762 3827 3955 Source: European Commission, DG Agriculture. * Traditional suppliers 1990 737 622 Table 1 Supplies of Bananas to the EU 15, 1990-2002 (thousand tonnes) 1991 1992 1993 1994 1995 1996 1997 1998 1999 699 706 644 585 658 685 811 786 729 596 680 748 727 764 800 693 655 676 295.4 166 157 49 2462 569 603 738 358 3966 273 158 155 56 2426 541 640 569 417 3867 278 193 161 42 2522 552 663 697 422 3927 2000 782 756 288 200 205 60 2543 617 656 691 389 4081 2001 767 730 207 218 216 86 2561 2002 791 726 185 211 230 97 2611

644 665 634 686 702 829 347 307 4058 4128

36

Green gold !

Box 6

T h e d i f f e r i n g p r o d u c t i o n c o s t s - AC P a n d L a t i n A m e r i c a

An underlying complication in the EU banana market is the substantial differential in the production and shipping costs of its various suppliers. The large and highly capitalized plantations of Central and South America benefit from favourable climatic and other conditions, such as vast expanses of suitable flat land with deep fertile soils and most especially, economies of scale in production and shipping. These plantations, which in general enjoy low unit labour and related costs, are able get their bananas to Europe at substantially lower costs than those produced by the ACP or the overseas European producers of the Canary Islands, Martinique or Guadeloupe (DOM). By contrast, production costs in the Windward Islands are high, due to a variety of factors including their hilly and difficult terrain, the small size of the severely under-capitalized, family-owned and operated farms, unfavourable rainfall patterns and limited availability of arable land, all of which preclude any ability to benefit from economies of scale. Their competitive disadvantage is compounded by susceptibility to storms and hurricanes, and a wage and social cost structure that are significantly more burdensome than the average for plantations in the Americas and Africa. The following table shows the differences in cost of production in 1999 among a sample of producers.

Average 1999 f.o.b. prices of a sample of suppliers (US$ per tonne)
Ecuador Belize Jamaica Dominica St. Vincent Saint Lucia 235 419 558 547 500 498

Sources: FAO Year Book and Windwards Islands Banana Development Company (WIBDECO)

It is evident that being so much cheaper, "dollar" bananas (as the Latin American bananas are popularly known), would, unless impeded by regulation, quickly supplant European and most ACP bananas on the EU market. To prevent this happening and to permit European bananas and those from the ACP, to be sold, various national tariff and non-tariff barriers were introduced.

4.1.1 The Banana Dispute
The ACP banana suppliers, felt under threat as the 1993 Single Market approached. They were concerned that Europe could introduce a liberal regime that would so dilute their effective preference that they would not be able to compete with bananas from Latin America. On the other hand, producers in these countries and the companies that marketed their fruit, principally Chiquita, Dole, Del Monté and Noboa, were keen for a more liberal regime that would permit greater Figure 3. Average fob prices, 1999 access for "dollar" bananas.
600 500 400

Sources : FAO and WIBDECO

300 200 100

The first skirmishes of the "banana war" were therefore over the nature of the unified regime. The EC had an import duty rate on bananas of 20%, but given the low price of “dollar bananas”, it was clear that such a tariff on its own would be insufficient to permit continued marketability of Europe’s own and ACP bananas. In the end, the Common Organisation of the Market (COM) in Bananas, enshrined in EC Regulation 404 of 1993, maintained overall protection by transforming the existing national regimes into a unified system. It allotted tariff rate quotas (TRQs) for Latin American bananas totaling 2.2 million tonnes, and each ACP traditional exporter was assigned a maximum exporter

0

St. Vincent

Dominica

Ecuador

St. Lucia

Belize

Selected banana suppliers

Cost of Bananas

Jamaica

37

was assigned a maximum tonnage within an autonomous quota for the ACP. There was no price support given to ACP exporters, although the European suppliers were subsidized up to maximum volumes per region. In an attempt to further unify the market and provide an inducement for traders to handle the more costly ACP and European bananas, a system popularly referred to as the "B" license system was established. It gave importers, a share of import licenses for the cheaper Latin American bananas, according to the volume of ACP and European bananas that they handled. They could then cross-subsidise the more expensive fruit with their larger profits from the cheaper fruit. This system was challenged from the outset; five Latin American countries (Colombia, Costa Rica, Guatemala, Nicaragua and Venezuela) were able to get a GATT Panel established in 1993 to review the quota system. Following negotiations with the Commission, all except Guatemala withdrew their complaint and later signed the Banana Framework Agreement (BFA), which gave them fixed country quotas and the consequent potentially lucrative power to control their exports to Europe. However the 1994 BFA itself did not end the dispute since it excluded one of the WTO complainants, Guatemala, which enthusiastically pursued the dispute.

4.1.2 The role of diplomacy
The safeguarding of their banana industry was the top foreign policy goal of the Windward Islands. Initially they had hoped that UK support would have assured a favourable consensus among Member States. They soon realized that despite its tremendous value in the articulation and promotion of their interests in Council, the UK’s voice was only one among several. They therefore had to learn quickly and adjust their strategy to persuading, not just one “old friend” but instead targeting the whole grouping both individually and collectively. Consequently from the outset, they were at the forefront of the coalition seeking to ensure that the COM would effectively limit imports of "dollar bananas" so as to ensure a tight market and high enough prices. Their message was clearly and consistently articulated by their diplomatic representatives to the EU but most importantly also, by senior political figures who were quite visible and vocal campaigners in Brussels, London and Washington. The coalition appreciated that securing a favourable position in the European Council of Ministers, which had the decision-making authority, would require winning over public opinion and enlisting the support of various groups including the Commission, the EU Parliament, national Governments and Parliaments, NGOs, church groups and journalists, among others. Since EU banana trade policy would not be made in isolation, the campaigners targeted important third parties that would be exerting pressure on Europe for liberal reform. Hence, they were active in Washington focusing principally on the Congress. Also, direct though limited contact was maintained with Latin American supplying States and the multinational companies themselves in the hope of at least tempering their opposition to a restrictive banana regime. It was the economic and social threat and danger posed to the Windward Islands that provided the moral legitimacy and rationale for the campaign. The ACP group itself had become more active in the dispute with a prominent role for the OECS, as the Ambassador of the three Windward Islands began presiding over the ACP Working Group on bananas and became the group’s Ambassadorial spokesman on bananas. ACP participation in the dispute process was organized and a legal defence of the contested provisions was prepared. A legal consortium was engaged which worked closely with officials. Indeed, two of the legal advisers were included on the delegation of Saint Lucia to one of the Panel Hearings in Geneva. The Panel expelled them on the grounds that they were not full-time employees of the Government. This prompted the leader of the delegation to walk out in protest at what he condemned as an unjust ruling. He complained that this would disempower small State Parties that cannot afford to retain the required specialists on a permanent basis and must rely on outside expertise to assist in the presentation of their case before a Disputes Panel. Denying them that possibility would entrench their disadvantage in WTO disputes. This ruling by the Panel would have been appealed by Saint Lucia and the Caribbean but as Third Parties, with limited rights, they could not introduce independent grounds of appeal. Even if the Appellate Body did not explicitly overturn the contentious ruling, it reaffirmed

38

That was real war.

the sovereign right of countries to determine the composition of their delegations to its meetings. In effect, it implied dissent from the Panel's ruling. As a result, subsequent WTO practice has allowed Parties to disputes to engage outside experts. This facility has since been used in many instances by developing countries. Indeed, the WTO Advisory Law Centre was subsequently created in recognition of that capacity gap in developing countries.

4.1.3 Resolution of the dispute and subsequent reforms
In an attempt to conform to multilateral trade rules, following the successful WTO challenge to the regime by the Latin Americans, the EU introduced a new system on 1 January 199926 that among other things abandoned the “B” licences. However, the new system was once again successfully challenged, this time by Ecuador, which claimed that the EC had still not complied with the previous Panel's decisions. The earlier defeats in the WTO compounded by the US imposition on the EU of US$191 million worth of trade sanctions (the US levied duties of 100% on a range of imports from the EU), more than anything else, completely changed the attitude of Member States. With the dispute now costing their exporters, they were determined to end it and directed the Commission accordingly. In a surprise announcement on 11th April 2001 the Commission and the US Trade Representative jointly confirmed that agreement was reached to end the dispute. Ecuador, the winner of the last Panel, incensed that a deal was struck without its involvement, threatened to initiate new proceedings in the WTO. To avert this, the EU quickly started discussions with Ecuador. They were formally concluded on the 30th April 2001 with an agreement that left intact most of the US/EU deal but made some minor changes to the proposed reform. The Agreements were reflected in a new set of import rules enshrined in a Commission Regulation adopted on 2nd May 2001 and the licensing system was changed to allocate shares differently among operators. The EU undertook to replace the TRQ system by 1st January 2006 with a single tariff that would not impact negatively on Latin American bananas. With the implementation of the Agreement, the US ended its sanctions and along with Ecuador agreed to support the EU application within the WTO for a waiver for the EU-ACP Cotonou Partnership Agreement. This was done at the Doha Ministerial Conference of the WTO on 14th November 2001, and the EU was authorized by a “waiver”27 to grant trade preferences to ACP countries.

4.1.4 Consequences for the Windwards
The Windward Islands, through their marketing company WIBDECO, controlled sufficient import licenses to be able to handle their exports. However production was declining sharply, due principally to the reduction in the number of farmers and the abandonment of farms. The following shows the declining number of growers in the Windward Islands, falling from 24,100 in 1993 to 7,300 in 2001. The consequences of such a decline on rural employment and income were massive since there is no evidence of sufficiently widespread establishment of alternative productive activities.
Sources : FAO and WIBDECO
26

Figure 4. Number of active banana growers in the Windward Islands, 1993-2001, thousands

The EC implementation measures are contained in the following regulations: i) EC Regulation No. 163/1998 amending the contested parent EC Regulation No. 404/1993 which established the Common Organization of the Market in bananas ii) EC Regulation No. 2362 of 1998 which laid down the detailed rules for implementing Regulation 404 of 1993. EC 1998 Regulations, No’s 1637 and 2362 were applied from 1 January 1999. 27 See Glossary.

39
We did all that.

It was not only the loss of direct and indirect employment (at the ports, in transportation, production of packaging materials, etc.), which resulted from the decline in banana production, but also the loss of national income due to declining export earnings from banana exports. The following table (table 2) and chart (fig. 5) show what has been happening, in constant US dollar terms.
Table 2 Banana Export Values (fob) (US$ million) Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Dominica 32 32 26 24 18 18 18 15 15 12 8 ... Windward Islands St. Lucia St. Vincent Grenada 60 34 4 72 40 3 55 25 2 49 17 52 25 2 52 22 1 37 16 37 22 34 20 28 19 16 13 ... ... ... 45 Jamaica Total 130 147 107 92 97 93 71 74 69 59 36 ... 49 40 36 46 46 45 45 36 29 23 ... ... Belize 7 10 12 15 22 29 26 25 27 .. ... ... Surinam 10 10 11 11 8 9 24 15 21 ... ... ...

Source WIBDECO (Windward Islands 1992-2002) FAO Yearbooks vols 47, 50, and 53. Values for Jamaica, Belize and Surinam for 1999 and 2000 are from NERA.

Figure 5. Export values for bananas fob, 1991-2002, $US million

Source : WIBDECO

The economic consequences of such a massive loss of earnings by a sector whose income rapidly circulated within the rural and national economies, was quite catastrophic. The ACP Ministerial spokesman on Bananas, Senator Julian Hunte, addressing the 28th ACP-EU Council of Ministers in May 2003 stated, "Dominica, one of the most vulnerable suppliers, has been so damaged by the falling prices and resultant export volumes that its economy is literally on the verge of collapse. It had to have recourse to the IMF but a turnabout would only be possible if the country can again begin to earn sufficient foreign exchange".

4.1.5 2004 – EU Enlargement
In May 2004, 10 new Members acceded to the Union and in keeping with its WTO commitments to MFN suppliers and the new Member States themselves, the EU increased the "dollar" quotas. However, this still did not contribute to increasing the volume of exports from the Windward Islands. The ACP quota had been left unchanged and in any event Windward’s production and export had continued to decline, in part due to previous reforms and falling investment as many farmers lost confidence.
That is a lot of people to lose their work

40

4.1.6 More recent threats: Arbitration and the abolition of quotas
After a period of relative calm following the 2001 EU/US and EU/Ecuador understandings, the next challenge for Windward Island bananas came with the dismantling of the tariff rate quota system and its replacement by a flat or single tariff in 2006. Just one tariff was to be levied on all MFN imports. Given the differences between costs of production in the Windward Islands and the most competitive "dollar" suppliers, unless the tariff is sufficiently high, the former would not be able to find buyers for their bananas because their bananas would be too expensive. Whilst the Windwards required a high tariff under the 2006 flat tariff regime for their duty free bananas to be competitive, the Latin American producers resisted that. The lowest cost Latin Americans such as Ecuador feared that a high tariff would increase prices and depress demand, hence their exports would decrease. The higher cost producers were concerned that they would lose market share to the lowest cost ACP suppliers. Many of the trading companies envisaged that they would lose income as quota rent disappeared.28 Quite early, the Commission embraced the idea of placing a ceiling on the volume of ACP bananas that would be eligible for duty-free entry under the new system. This could partially appease the Latin Americans and the European producers, the Latin Americans and the European producers, who were concerned about the expansion of exports from West Africa. This, though, would cause problems of its own for the ACP, unless adequate safeguards were introduced, since the restriction of the growth of overall exports would lead to the displacement of other, more vulnerable Members of the ACP Group. According to the agreement reached at Doha in 2001, the EC, upon request, would enter into consultations with any interested Member of the WTO that had interests in the EU banana market. The Latin American suppliers had the right to take the issue to arbitration if they were not satisfied with the proposed tariff level. The outcome that the Windward Islands dreaded was that the tariff could be too low to provide a sufficient margin of preference to permit their bananas to be saleable.

4.1.7 The CARICOM-OECS position
Facing such a grave threat to the banana industry that could well result in their complete inability to continue to sell bananas to Europe from the start of 2006, CARICOM appointed the Prime Minister of Saint Vincent and the Grenadines, as “the lead Head of Government on bananas”. He quickly organised an International Banana Conference in Kingstown in June of 2004 to assess the prospects for the industry and chart the way forward. Its varied list of participants included Prime Ministers and other high level representatives from the other Windward Islands. The conference renewed the islands’ firm commitment to the continued production of bananas and to securing the future viability of the industry by taking the necessary measures to safeguard it and ensure its sustainability. A detailed domestic strategy was drawn up, and it included the minimization of costs and maximisation of efficiency at all stages of production, handling, transportation, ripening and wholesale distribution; the application of more innovative production and marketing techniques, as well as product differentiation such as Fair and Organic Trade, and the greater utilisation of the tourist and regional market for bananas. The conference agreed upon a “comprehensive, focused, action oriented, lobby and political awareness campaign aimed at bringing about a more informed and favourable attitude to our interests among decision makers in the EU.” 29 For this purpose a series of actions were initiated, including a letter campaign to key EU leaders. To assist the CARICOM Spokesman in coordinating the political campaign and to complement the work on bananas of the Windward Islands Diplomatic Representatives, a Special Envoy to the EU was appointed.
28 29

See Glossary. Extract from Communiqué following the International Banana Conference,St. Vincent & the Grenadines, 10 June 2004.
Just sticks and stones against their big guns

But we had guts too!

41

The Special Envoy assessed and analysed the prospects for safeguarding market access and recommended strategy and tactics to be pursued by the Windward Islands. He managed a lobby campaign directly targeting European and UK Parliamentarians and leading journalists, NGOs and others with influence in policy formulation in the EU. A website, www.bananasontheline.com, was created to assist in getting the message to a broader audience. An informal alliance that eventually became know as “The Friends of Status Quo” was established, comprising selected Ambassadors, representatives of the European producer organisations, trade union representatives, NGOs and certain marketing companies. Information was regularly fed to and exchanged among the group. Other activities of the Office of the Special Envoy included monitoring and analysing the rapidly changing developments and reporting on them to Governments and providing advice on preferred strategy and options. Towards the end of 2004 the MFN suppliers and the Commission began consultations for setting the level of the flat tariff that they had agreed would be implemented in 200630. The talks, though, made little progress. The Latins were arguing for a tariff at a maximum level of €75 per tonne whilst EU producer interests were advocating tariffs ranging from €275 to €300 per tonne. The ACP had been seeking a tariff of €275 but initially did not insist on its right to be fully associated with these consultations. The Commission announced at the end of January 2005 that it would set a tariff of €230 and the MFN suppliers immediately had recourse to WTO Arbitration and the WTO Director General appointed a three-Member Panel. It was only at this stage that the ACP sought full participation. However, it was not successful and was relegated to Third Party status. Two Arbitration procedures were conducted during 2005 in Geneva, during which the EU defended its tariff proposals of €230 and €187 respectively.31 Both ended in favour of the MFN countries, and against the EU and the ACP who required a high rate in order to maintain their access to the EU market. In the end, the Commission unilaterally imposed a tariff of €176 euros on MFN imports, and decided that ACP imports should continue to enter under a quota that was increased from 750,000 tonnes to 775,000 tonnes. This did not satisfy the Latins, who contested the figure and raised the matter at the 6th WTO Ministerial Conference, held in Hong Kong in December 2005. The Conference did not rule on the level but set up a monitoring mechanism, under the supervision of the Trade Minister of Norway to assess the impact of the new rate on imports from MFN suppliers. Despite this arrangement some of Latins have had recourse to the Dispute Settlement mechanism of the WTO.

4.1.8 Beyond Cotonou
By 2008, the current Cotonou trade preferences for ACP countries would have expired. Whatever replaces them will be determined by the current negotiations between the ACP and the EU for new Economic Partnership Agreements (EPAs). However, the prospects for the continued marketability in the EU of Windward Island bananas will depend not only on the level of duty on “dollar” bananas and the nature of the preferences secured but also the structure of the banana market in place at the time, which will impact on market prices and security.

4.1.9 Charting a course for the future
The aim of the small Caribbean traditional banana suppliers at the start of the last decade was simply to secure continued access to the EU banana market on a viable basis. They sought to ensure that the changes to the regulatory system would be sufficiently benign to ensure adequate preferential margins and high enough market prices. This was in the context of general appreciation of the need for drastic restructuring of their banana industries to substantially reduce costs of production to make the industry more competitive. Of greater long-term significance was the acceptance that the agricultural sector and wider economy would need to be restructured to create new sources of income and employment. Despite their small size and lack of power in the traditional commercial and political sense, these islands, through commitment and perseverance, were able, along with their allies and supporters, to ensure that the banana import regime retained its preferential character
30 31

42

Annex to WTO decision on the waiver for EC-ACP Partnership Agreement - 14 November 2001 Doha. The Arbitrator’s first decision indicated that the EU’s proposal of €230 did not maintain total market access for MFN countries and the EU made a second proposal of €187.

and that the market continued to be regulated so that prices remained remunerative for their farmers. Their problem however is that despite advances in efficiency, reflected in reduced costs and improved quality, the differential between the competitive Latin American producers and the Windward Island producers remains wide. Whilst these islands have achieved a considerable measure of success in the battle over the regulation of the system, they have been losing market share with their exports falling drastically, from 274,000 tonnes in 1992 to 99,000 tonnes by 200232. The result has been an increase in unemployment and sharp declines in foreign earnings. If the Windwards are to avoid the complete loss of the market before alternative productive activities have been developed, they will need to ensure that regulatory changes to the market over the next few years preserve the required favourable and preferential access terms essential to their ability to dispose of their bananas in Europe. For their long term economic stability and growth, it will be essential that continued attention is paid to minimizing costs of production at all levels in order to reduce as much as possible the cost handicap which they face. Most importantly, renewed commitment and efforts will need to be put into diversification into new lines of agricultural and non-agricultural production and services. The long banana fight by the Windward Islands, their supporters and allies, was not to change the underlying economic and commercial realities militating against the Islands’ lack of competitiveness. However, the real achievement was to “buy them time” that could be used to undertake the required diversification and economic restructuring.

32

Source: Windwards Islands Banana Development Company (WIBDECO) 43
Sold down the river...again !

C

hapter 5

Sugar

For centuries the Leeward and Windward Islands had earned their livelihoods from the production of cane sugar. The islands began to leave the industry from the 1950s and by the beginning of the last decade only St. Kitts/Nevis remained in production. Its sugar exports to the European Union were made possible by special guaranteed preferential arrangements enshrined in the Sugar Protocol of the ACP-EU Cotonou Agreement. The secure earnings from this trade contributed to stability of rural incomes and earnings from sugar exports, which were the foundation for national economic growth and development. However, threats to the regulatory basis on which this trade operated began emerging within the last decade. The background and the recent experiences and challenges that faced St Kitts/Nevis exports and those of other ACP producers are explored in this chapter.

5.1.1 The Sugar Protocol
The sugar industry is a dominant force in the economies of most of the ACP supplying States. The following chart summarises its contribution to foreign earnings and employment.
Table 3 Contribution of sugar to employment and foreign exchange Contribution to Foreign Earnings Country Year % of agricultural exports 100% 22% 67.4% 65.2% 48.7% 11.2% 89.6% 92.3% 34.4% 18.2% 7.6% % of total exports 12.5% 19.6% 23% 22.6% 8% 9% 19.5% 21.8% 9.4% 0.6% 3.3% Share of Employment % of employment in Agriculture 52.6% 51.2% 12.8% 32.2% 16.4% 5.5% 80.2% 58.27% 80.9% 61.7% 7.8% % of total employment 1.8% 14.1% 7.3% 9.7% 2.9% 1.3% 6.4% 8.45% 8.6% 4.8% 2.1%

Barbados Belize Fiji Guyana Jamaica Malawi Mauritius St Kitts/Nevis Swaziland Trinidad & Tobago Zimbabwe

2001 2001 2001 2000 1999 2001 2001 1999 2001 2001 2000

Source: compiled from Third Party Submission by the ACP Sugar Industries, to the WTO Panel. 18 March 2004.

The Sugar Protocol, originally signed on 28 February 1975, committed the European Communities (EC) “for an indefinite period to purchase and import, at guaranteed prices, specific quantities of cane sugar, raw and white which originate in the ACP States and which these States undertake to deliver to it.”33 This arrangement initially boosted the development of the sugar industry in St Kitts/Nevis and other ACP States and provided them with guaranteed market access at predictable and stable prices, which for several years have been significantly in excess of world market prices. The latter had, in general, been too low to cover costs of production and offer a remunerative return to ACP producers. Between 1990 and 2001, average EU prices were 61.14 US cents/kg as opposed to a 22.20 US cents/kg on the world market.34 The key elements of the Sugar Protocol from its Members’ standpoint are the guaranteed purchases of a fixed quantity of sugar (1.3 million tonnes from ACP and India) and the annually “negotiated” price, whose level is to be “within the price range obtained in the community taking into account all relevant economic factors.” The preferential arrangements for the ACP and India are part of a much broaderstructure, the Common Market Organisation (CMO) for sugar in the EU.35 If for whatever reason changes in the character or operation of the Sugar Protocol result in significant price declines, exporting countries will be obliged to reduce costs of production, find new sources of replacement income or both.

5.1.2 Threats to the Protocol
Whilst the legal integrity of the Protocol has so far not been explicitly challenged, its ability to continue to provide prices that are sufficiently remunerative, has been undermined.
Protocol 3 of the ACP-EU Partnership Agreement, Cotonou, Benin, 2000. Milner C. R. and Morgan L.W. “The impact of the ACP of the reduction by the EU of import export subsidies on Sugar”. 35 This system also encompasses a production quota scheme, guaranteed price and intervention mechanism, export refund programme and production levies operating within a unified and interlinked structure. That was a sweet deal
33 34

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It is dependent on the EU’s CMO which is being reformed, causing drastic price cuts. Change is being forced by both internal and external pressures, the latter coming principally from the mandate set out in paragraph 13 of the WTO Doha Ministerial Declaration of 14 November 2001. Negotiations that made reform imperative had already been launched in the WTO since 2000 under Article 20 of the Agreement on Agriculture,36 but were given new impetus when, in the following year, Ministers launched the Doha Development Agenda with its ambitious plan for agriculture, to “establish a fair and market-orientated trading system through a programme of fundamental reform encompassing strengthened rules and specific commitments on support and protection in order to correct and prevent restrictions and distortions in world agricultural markets.” Based on that objective, Ministers in their Declaration, committed to “comprehensive negotiations aimed at: substantial improvements in market access; reductions of, with a view to phasing out all forms of export subsidies; and substantial reductions in trade distorting domestic support.”37 Even as these negotiations were proceeding, Australia and Brazil on 27th September 2002 filed a complaint in the WTO, alleging that export subsidies in excess of the EC’s approved ceilings were being granted and that the provision of the guaranteed price, since it is available only to domestic producers, violates the national treatment provisions of GATT Article III. The complaints were followed by fruitless consultations and eventually a Panel, the “European Communities - Export subsidies on sugar” was established on 29th August 2003 by the WTO’s Dispute Settlement Body and was composed on the 23rd December of the same year with Thailand joining in as a complainant. The ACP sugar suppliers were Third Parties to the dispute and provided both written and oral testimony. This dispute was less about the ACP than about Europe’s own production support and subsidisation policies, the principal beneficiaries of which were its own farmers who supplied the bulk of the market. Even if the ACP’s share of the EU market was small, the exports were of overwhelming importance to the countries. The quota allocation of St Kitts/Nevis was 14,800 tonnes accounting for virtually all of its exports to Europe. This is why St Kitts & Nevis and the other Sugar Protocol Members were so determined to secure a favourable result from the Panel proceedings. The Panel ruled in favour of the complainants. The report was presented to the Parties in the first week of August 2004 and the ruling was appealed, but the Appellate Body found that certain EU sugar exports benefited from cross-subsidisation and that the EU had been exceeding its export subsidy commitments. Reform of the CMO for sugar became clearly inevitable and was being forced on Europe by the final outcome both of this dispute and of the ongoing WTO Agriculture negotiations.

5.1.3 Reforming the EU Common Market Organisation for Sugar
Anticipating these pressures and obligations to “liberalise”, the EU Commission, in July 2004, announced plans for reform of the CMO. In a communication to the European Parliament on the fourteenth of the same month, the Commission proposed: “A significant reduction in two steps of the institutional support price for EU sugar with the abolition of intervention and the introduction of areference price. This reference price will serve in the establishment of the minimum price for sugar beet producers, the trigger level for private storage, the level of border protection and the guaranteed price under the preferential import mechanism.” It also noted that: “In addition, the proposal will provide the basis for initiating a structured dialogue with EU partners in the developing world on the sugar sector, in order to consider the manner in which the EU can best contribute to necessary and inevitable adjustment in sugar production in African, Caribbean and Pacific countries (ACP) and India.” As the EU Agriculture and Rural Development Commissioner, Mrs Fischer-Boel said to the EU Parliament in June 2005, “The need for change is born of forces working both at home and abroad.” That month, her Directorate put out a public document summarising the imperative for reform as being driven by: • The unacceptability of artificially high prices, currently three times those on the world market. The reform would promote more market-orientation while the restructuring of the sugar sector takes place. Ultimately market prices will revert to their intended role of being
36 37

“Continuation of the Reform Process” Article 20; WTO Agreement on Agriculture; Marrakesh 15th April 1994. Doha Ministerial Declaration, 2001, paragraph 13.

45

the (undistorted) factor in the allocation of resources and investment decisions. • The ruling of the WTO’s Appellate Body against certain of the practices of the EU’s sugar regime. • The need to replace the existing sugar regime that is set to expire on the 30th June 2006. Given EBA commitments and the WTO ruling, continuation of the existing system was rejected as an option. As outlined in the European Commission’s June 2005 statement, “The European Sugar sector- Its importance and future”, it will “Substantially cut back sugar exports and export refunds, abolish intervention, reduce EU production and the informal sugar price and grant a de-coupled payment to sugar beet farmers”. According to the projections of the Commission, support prices will drop by 36% over three years. The negative economic consequences of such a major fall in prices and hence revenue will be considerable. (There will be no increase in overall volume since the country allocations under the Protocol are fixed). The Commission confirmed that it will assist the Protocol countries and India to adapt to the new market conditions with programmes for improving the competitiveness of the sugar sector, where it is economically viable, and provide support for diversification, when improvements in competitiveness in the sugar sector are not sustainable.

5.1.4 Consequences for the Sugar Protocol Members
St Kitts/Nevis and the other beneficiaries of the Sugar Protocol are all small economies and their very heavy traditional dependence on the income from their sugar exports to Europe makes them particularly vulnerable, since changes to the system that result in income loss or contraction of the industry are greatly magnified and can have severe consequences for the entire economy. The Technical Centre for Agricultural and Rural Cooperation based in the Netherlands computed the likely impact on national earnings for ACP States of the Commission’s reforms. The following table summarises the projected loss of earnings.
Table 4 Projected loss of earnings Country Belize Congo Ivory Coast Fiji Guyana Jamaica Barbados Madagascar Malawi Mauritius St Kitts/ Nevis Swaziland Tanzania Trinidad & Tobago Zimbabwe Sugar Protocol quota(tonnes) 40,349 10,186 10,186 165,348 159,410 118,696 50,312 10,760 20,824 491,031 15,591 117,845 10,186 43,751 30,225 Current earnings euros (€523.70/t) 21,130,771 5,334,408 5,334,408 86,592,747 83,483,017 62,161,095 26,348,394 5,635,012 10,905,528 257,152,935 8,165,007 61,715,426 5,334,408 22,912,398 15,828,832 Earnings After Stage 1 reform (€329.0/t) 13,274,821 3,351,194 3,351,194 54,399,492 52,445,890 39,050,984 16,552,648 3,540,040 6,851,096 161,549,199 5,129,439 38,771,005 3,351,194 14,394,079 9,944,025 Income losses from reform euros - 7,855,950 - 1,983,214 - 1,983,214 -32,193,255 -31,037,127 -23,110,111 - 9,795,746 - 2,094,972 - 4,054,432 -95,603,736 - 4,313,432 -22,944,421 - 1,983,214 - 8,518,319 - 5,884,807

Source: “Agritrade,” a publication of the Technical Centre for Agricultural and Rural Cooperation

The economic impact of such massive loss of income will be considerable and will force ACP countries to adapt. Already St Kitts/Nevis has found that it is unable to continue under these circumstances and has abandoned the industry altogether.

5.1.5 Securing and using financial support
At a meeting with CARICOM Trade Ministers in Guyana in January 2005, EU Commissioner Mandelson spoke of the early provision of restructuring assistance that would assist countries to prepare for the anticipated changes rather than seeking to adjust subsequently.

46

So they wanted cheap sugar

The Commission put out a working document in the following month indicating its preference for funding and delivery of assistance through country-specific sugar adjustment strategies in the form of budgetary support. Project funding would also be possible but considered to require too much bureaucratic effort. A compensation figure for the ACP of €40 million was included in the Commission’s 2006 budget. Caribbean and other sugar suppliers protested vigorously that this sum was inadequate. The actual figure has since been increased to €165 million in 2007, gradually increasing in later years and ending at €190 million in 2013. Though substantial, this figure falls short of the earnings that the ACP envisages that it will lose as a result of the reforms. It could be narrowly argued that St Kitts/Nevis, having given up the industry, no longer would be entitled to support for restructuring and diversification. It will take the country a considerable amount of time to replace the income and employment from sugar cane with new productive activities. Consequently a long-term programme of assistance is justified and substantial external funding will be required. The challenge to the country will be to demonstrate that even if it no longer has an industry to restructure, it remains fully entitled to EU support for diversification.

Box 7

C o m m o n Fu n d fo r C o m m o d i t i e s

The common fund for commodities is an inter-governmental financial institution that was negotiated in UNCTAD during the 1970s. It came into force in 1989 and has 106 Members. It provides financing for development projects, with a commodity rather than country focus. It currently is operating a five-year development plan (2003-08) with activities geared to benefiting commodities of interest to LDCs and the poorer strata of the population and small holders as well as small and medium sized industries involved in processing and trade. Projects that have been funded include cocoa quality improvement, pilot facility for coconut coir processing, organic banana promotion, use of cassava in animal feed, cassava processing, forest product processing. The executive office of the Fund is located at P.O. Box 74656, 1070 BR Amsterdam, The Netherlands, tel: 31 205 754 949, fax: 31 206 760231; e-mail: themanaging.director@common-fund.org

5.1.6 What future for sugar?
The ACP Sugar Protocol Members, especially St Kitts/Nevis will need considerable and multi-faceted external financial and other support for the adjustment of their economies as income and employment in the sugar industry decline or disappear. An essential component of the adjustment process will be diversification of their economies. However a most serious obstacle is the inadequacy of access to risk capital on affordable terms for entrepreneurs in productive enterprises. Unless this obstacle is overcome, diversification programmes will either fail or make unacceptably slow progress. The offer made by the Commission to initiate dialogue with the ACP sugar suppliers and to draw up tailor made assistance programmes, needs to be seized upon. This will ensure that the programmes are consistent with national economic policies and that the scope and terms of support are adequate. Also, it is for the countries to ensure that the funding and support programmes are devised and administered in such a manner that they can have real impact as intended. There is already experience with external support for adaptation and diversification of the banana sector using Special Framework of Assistance (SFA) and Special System of Assistance (SSA) funds. It would be in the interests of ACP sugar suppliers to learn from that record.

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Box 8

Rum

The Rum Protocol of the ACP-EU conventions of Lomé had given to the ACP, essentially the Caribbean, a quota for duty free entry of bulk rum to Europe, where it was bottled. However, in 1996, the Protocol was effectively abandoned. In that year, the quotas on ACP rum were lifted and the Caribbean was therefore for the first time able to freely export rum to the EU, including bottled rum. The advantage did not last very long and in March of the following year, Europe and the US agreed to lift their tariffs on four of the eight customs classifications of rum. This would considerably reduce the tariff preference that the Caribbean had previously enjoyed. This was the result of an agreement reached in the margins of the WTO Ministerial Meeting in Singapore known as “zero for zero”. This EU/US trade deal, reduced duties over a phased transitional period (2000-2003) not only between the two parties, but also on imports from all other WTO Members in keeping with the MFN principle.38 Caribbean Governments and the West Indies Rum and Spirits Producers Association (WIRSPA), who only learnt of the deal subsequently, were incensed that the US and the EU had arrived at it in secret. Following vociferous Caribbean protests and intensive negotiations the EU agreed to provide support for the ACP rum producers. A Declaration, number XXV, was agreed upon and appended to the Cotonou Agreement. It was aimed at providing support for the rum industries of the ACP sector to achieve the following: - Enhancement of the competitiveness of existing exporters of rum; - Assistance in the creation of rum marques or brands by ACP region or country; - Enabling of marketing campaigns to be designed and implemented; - Assistance of ACP rum producers to meet environmental and waste management standards and other norms in the international markets including the Community market; - Assistance of the ACP rum industry to move out of bulk commodity production into higher value branded rum products. The most innovative feature of this €70 million EDF support scheme was that it was managed by the private sector rather than being channelled through the public sector. The Caribbean rum industry used this support to help in its branding, bottling and marketing, which has permitted a greater degree of value addition in the region itself and secured greater economic benefit for exporters. The aging, blending and bottling processes permit substantially higher selling prices and earnings than from the export of bulk rum. A new threat however is looming. The EU is determined to proceed with the liberalisation of those remaining rum tariff lines on which it still maintains duties but had agreed with the US that it would lift. This would complete the elimination of the remaining tariff preference enjoyed by Caribbean rum exports to the EU. The Caribbean exporters argue that they do not oppose liberalisation but urge the EU to avoid the precipitate lifting of the remaining protective tariffs. This, they fear, would have a devastating impact on the industry by exposing it to increased competition from other producers like Brazil.

Conclusion
The recent experience of commodity trade has been mixed. However the economic contribution of those productive activities is undeniable. The essential problem that the OECS faces however, is that largely because of relatively high labour costs, small size and difficult terrain, they are high cost producers of agricultural goods - not only the traditional crops. This is a key policy concern to them. The factors that have prompted traditional commodity production to be caricatured as “sunset industries” would equally constrain the achievement of international competitiveness in other areas of agriculture.

Sunset industries or economic base?

38

See GATT/WTO principles, chapter 3:2.

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Box 9

M a k i n g t ra d e p o l i c y

Like other national policies, trade policy is conceived and developed by the Government administration, principally the Ministry responsible for foreign trade, with the involvement of other Ministries, though the extent varies from island to island. The Ministry takes into account the interests of the country as a whole and seeks to reconcile views of the business community, professional organisations, workers, consumers, and others. In the end therefore, the policy is one to which not just the Ministry has ownership, but the entire Government, and it enjoys national commitment. National policies often have to be taken to a higher level, that of the OECS. Here, they have to be reconciled, refined and coordinated. The institutional mechanisms for those tasks are the Trade Negotiations Committee, which meets at the level of officials and the Trade Ministers, who meet periodically. The supreme rule-making body is the Authority of Heads of Government. Via this route, OECS-wide policies are devised. The OECS Secretariat and its Trade Policy Project facilitate this intergovernmental coordination. The OECS might often wish its policies to be incorporated into wider CARICOM policy or alternatively, to influence development of the latter. The organ with the principal responsibility for policy coordination at the CARICOM level is the Council for Trade and Economic Development, (COTED) which meets regularly at Ministerial level. All OECS countries are represented on COTED. The Regional Negotiating Machinery coordinates negotiations and regional positions.

So that is how they do it.

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C

hapter 6
Tourism and other Services The issues in multilateral negotiation

With the combined effects of the erosion of preferences for traditional agricultural exports and the islands’ relatively high wage structure making it difficult to compete in agriculture and labour-intensive manufacturing, the services sector is widely seen as the hope for the future of the OECS. After all, world trade in services has been growing at an average of 9% since 2000, reaching a value of US $2.1 trillion in 2004. Conventional wisdom might suggest that increased focus should therefore be placed on services in trade negotiations. One of the prerequisites for success in multilateral negotiations is clarity and precision of interests and goals. However, since the multilateral services negotiations have already begun and are being conducted along set principles, the OECS has to draw up its position to fit into the already existing framework. Hence, its strategy must be fully informed by and coherent with the broader negotiating processes. This section reviews the issues and considers the options for the OECS. The fundamental aim of the WTO’s General Agreement on Services (GATS) is the liberalisation of trade in services. In other words, the removal of governmental restrictions on trade and the promotion of international competition, the fuller extension to services of the most favoured nation (MFN) principle and ultimately subjection to the other principles of non-discrimination and national treatment. The negotiations have been about the removal of restrictions both through changes to the Agreement in which negotiators have been seeking to more fully reflect core WTO principles in the framework for services regulation and on a “request and offer” basis. Here, participants volunteer to reduce, remove or phase out the restrictions that they place on foreign service-suppliers and their services and make specific requests for improved access for their own service exports to identified markets.

6.1.1 What are the OECS’ interests?
The services sector in the Caribbean has been growing steadily over the last half century, at an average rate of 5% per annum, and OECS countries have been sharing in that

50

growth. The following chart (fig. 6) indicates the value of services trade to the islands and illustrates that unlike trade in goods, the islands all earn more from their export of services than they pay for those that they import.
Figure 6. Services Trade of the OECS, 2003

Source: WTO

Not surprisingly, given the region’s natural beauty, proximity to North America and Western Europe, the perception of a relaxed “sun, sea and sand” island lifestyle, the Caribbean is the most tourism-intensive region in the world and has an absolute international competitive advantage in tourism. To illustrate, the North American tourist will choose to buy a Caribbean holiday, but the European finds the Windward Island banana too expensive. As a result of the heavy international demand for Caribbean holidays, tourist arrivals increased by an average of 2.9% since 1990 and, according to the World Travel and Tourism Council (WTTC), the region hosted 30 million visitors in 2003. Other service activities that have been growing include offshore education. Currently, 70% of the international medical graduates entering US colleges are trained in the Caribbean with the majority trained at schools in Grenada and Dominica. The temporary movement of workers to Canada and the US under farm labour schemes is also important. This is considered as a trade in services and is referred to as Mode 4 in WTO terminology. Another area that is considered to offer promise is that of financial services, which currently account for 5.2% of world services trade. All OECS countries have special legislation to attract and regulate international financial services. Opportunities have also been sought in Information and Communication Technology (ICT). The questions facing the OECS are what role, if any, would multilateral negotiations play in advancing the development of these sectors and how should they be approached ?

We can use our brains too

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6.1.2 Tourism
Tourism plays a vital role in the island economies as mentioned earlier. The following figures (figs. 7 to 9) indicate the importance of the sector, showing the large numbers of visitors and the considerable income that the sector generates.
Figure 7. Tourist arrivals in the OECS, 2004 (thousands)

Source: ECCB

Even before deciding on the stance to be adopted in negotiations, interests and consequent goals need to be clear. The first question to be addressed is therefore what does the OECS need from tourism? The goal is growth and development of the sector and its fuller linkage with and integration into the rest of the economy. The realisation of these objectives is dependent largely on investment decisions, domestic policy and regulation and relative attractiveness of the destination. Whilst the WTO negotiations can impact on the foregoing, they do not directly influence growth and the development of the tourism sector in the islands. They may, however, constrain the flexibility of governments to use certain policy measures aimed at promoting expansion of the sector and its fuller contribution to the domestic economy. The ongoing WTO negotiations pertaining to “Tourism and Travel Related Services” are not about growth and development per se. Members have, instead, been addressing the extent to which initial offers tabled can contribute to advancing such aims as the facilitation of movement of natural persons supplying services in Tourism and recognition of their qualifications; elimination of anti-competitive practices and unfair competition; elimination of requirements for commercial establishment or presence and of nationality or residency requirements. A key objective of OECS Governments is to ensure that the relative attractiveness of the islands as a destination for foreign investment is maintained. In this regard, an important factor can be the support granted by governments for the establishment of hotels. OECS Governments provide exemption from income tax and from import duty on building materials and equipment for hotels. This device has been a key incentive in their hotel development strategy. These are seen as being in breach of current WTO rules on subsidies, even if the rules on subsidies in the services sector are subject to negotiation. It could be argued that given the attractiveness of the islands for tourism, the hotels would have been built anyway and by exempting the sector from certain taxes, the islands have been depriving themselves of well-needed revenue. The retort might be that the investment might then have been sited on another island. However investors can oblige the islands to compete against each other in their pursuit of maximum fiscal advantage.
We have a paradise here

52

If the tax and duty waivers (subsidies) were prohibited in all countries, such implicit competition that benefits the investor at the expense of the State would not be possible. No island would suffer any change in its relative ability to attract hotel investors. On the premise that the Caribbean is an attractive tourist destination, overall investment in the industry should not be affected. Of course even if such adherence to the disciplines prohibiting illegal subsidies is accepted, OECS countries might need to seek a grace period to satisfy their legal obligations to existing investors and adapt their investment promotion strategies.
Figure 8. Estim. value of expenditure, EC$ m, 2004. Figure 9. Estim. % total tourist expenditure, 2004

Source: ECCB

6.1.3 Financial services
Exploiting certain niches in the area of financial services seems to promise benefit for the islands. However these opportunities can be inherently unstable since very often they depend on specific provisions in existing legislation and regulation in particular foreign countries that provide an advantage to individuals and firms to deposit in, transit funds or conduct business through offshore jurisdictions. Should that advantage or facility disappear or be reduced by changes to the legislation in the source countries or because of international regulation, e.g. via the OECD’s Harmful Tax Competition Initiative (HTCI), then the niche itself could cease to exist. The survival and growth of offshore financial services is subject not to multilateral negotiation in the WTO but rather to policy in source countries and international groupings like the OECD where OECS countries have little direct influence.

6.1.4 Information and communication technology (ICT)
Information and communication technology (ICT) had been perceived as offering promise for investment in the islands. Hence negotiating deregulation and liberalisation that remove restrictions in this area should make sense. However, the OECS has not demonstrated substantial ability to attract and retain such investment. A recent example was that of Call Centres Antigua Ltd, which was set up as a joint venture with the Government. Its goal of creating a skilled workforce of 800 was not met, the most it ever employed was 200 and it eventually closed. Another service industry in which Antigua and Barbuda ventured is Internet Gaming that was providing high-tech jobs of US $750 per week. However various US federal and state laws that prohibited the cross-border supply of gambling and betting services hampered the operations. Antigua and Barbuda took the matter to a WTO Dispute Settlement Panel and won, then, through an Appeal process where its case against the US was largely upheld. However, there is no indication that the US will revoke the restrictions. The lesson of this case is that the continued viability of such an industry is largely at the mercy of policies in other countries over which OECS countries are likely to have no control.

I know where the real money is

53

6.1.5 Mode 4
The temporary movement of workers from the OECS has been going on for many years within bilateral agreements (for example the farm labour programmes with Canada and the USA). Since access is not made available to workers from all countries, the conformity of these agreements to WTO principles of non-discrimination can well come under closer scrutiny. It is therefore in the interests of the OECS to promote and campaign for the extension of the authority for such agreements.

6.1.6 Other negotiating aims
The OECS would also have concerns regarding the ability of its professionals to operate in other countries but, given issues of small size, this is not a major negotiating aim. It also has defensive interests regarding the protection of certain domestic services (such as small scale retail, utilities, construction etc) that are not yet in a position to withstand full international competition. Fortunately, these concerns are shared by the many other developing countries, such as the rest of the ACP and the LDCs. Hence there is a block of Members already arguing for those safeguards and policy flexibilities that OECS countries wish to have reflected in the rules.

Conclusion
Services negotiations are of key concern to OECS countries. However, their interests are largely defensive, viz. to ensure that their “policy space”39 and the bilateral arrangements from which they benefit are preserved and their “infant” service sectors are not wiped out by premature exposure to full deregulation. The development of the services sector is of major importance to the OECS countries but mere participation in current multilateral negotiations aimed at liberalisation will not make any substantial direct contribution to that goal. Rather, the growth of the services sector will be facilitated by the appropriateness of domestic policies, the adequacy of investment and whether international conditions are favourable.

39

The scope for flexibility that is available to governments to select and use policies of their choice.

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Earlier sections have sought to explain and demystify the working of the trading system. This final chapter explains some of what the islands need to do in order to ensure that they can actually benefit from the multilateral system.

The Way Forward
•Diversification •Environment •Tools of Negotiation

Section

3

C

hapter 7

Adopting new approaches

7.1 Diversification and development
7.1.1 A role for the private sector
Whilst Government representatives deal with the regulations and structures of international trade and economic relations, in free market economies like those of the OECS, investment in productive activities is principally undertaken by the private sector. It actually produces the goods and services that are traded. Hence, the success of diversification ultimately depends on their adaptation and the creation of production structures. Reliance on trading in just one traditional commodity, tourism or one of the new service sectors will not be enough to secure the economic future of OECS countries. Instead, the islands need a range of productive activities that generate employment and income. This is so even if small size and limited natural resources make it hard for them to be competitive in a range of activities. The key reason is that economies of scale are often required in several areas, but the islands might not have the capacity to produce the minimum volumes that would permit them to be internationally competitive. As a result they have relied on mono-crop (or single industry) production. Their specializing permits them to be able to produce at the lowest unit price and thus helps them minimise their size disadvantage. However, external shocks and slowdowns in specific export sectors are inevitable; so if the economy relies for its income on a range of activities, it could continue to make overall progress and grow, even when one particular industry slows down or suffers a reversal. A diversified production base is essential for balanced and sustained economic growth and development of the OECS. Furthermore, the traditional sources of income and employment, bananas and cane sugar, are being lost. Admittedly, it was rational to seek to maintain for as long as possible the preferential arrangements that permitted these commodities to be sold at relatively high prices in the secure and protected EC market. The strategy of seeking to prolong the protection, which defined policy for many years, has contributed to the continuation of the arrangements that permitted the marketability of their bananas. However, with the reforms set in train by the EC, the advantages that permitted their traditional exports to be sold on a remunerative basis are disappearing. St Kitts/Nevis has had to abandon the sugar industry and the prospects for Windward Islands bananas are bleak. To view the policy of safeguarding current marketing arrangements as a substitute for diversification could be a mistake. Instead it was the countries’ attempt to “buy time” during which diversification could take place in a stable environment without the catastrophic shocks of massive employment and foreign exchange losses that would result from the sudden demise of these traditional industries. However, diversification is not easy for very small single-commodity exporters. In fact, their economies were structured that way in the first place largely because, given their size, such extreme specialisation permitted them to make fullest use of their limited scope for economies of scale. The process of diversification, though, is not simply switching reliance from one existing industry to another single crop or industry. If the countries are to develop, the production base will have to be extended to a mix of industries turning out a range of
Don’t put all your eggs in one basket

55

goods and services in which they have an international competitive advantage. Even if actual investment in productive and income-generating activities is undertaken principally by the private sector Government has an indispensable role in providing support and creating an environment that is conducive to business and risk taking.

The need for support
Governments have an essential role in creating favourable conditions for private sector led diversification and can make the following contributions: 1- Provide a predictable, stable and supportive environment for business (both local and foreign); 2- Provide institutional support and investment incentives for marketing, exporting and improvement in technology and standards; and 3- Promote the upgrading and adaptation of the labour force and of managers through adequate investment in appropriate technical education and skills training. For certain of these activities Governments will invariably require donor assistance. At the national level there is need for clear commitment to diversification and the support for investment in new areas of productive activity where the OECS is competitive. A key role for Governments will be to devise and administer investment incentives and inducements that are coherent with their policies for diversification into new areas in which the countries have existing or potential advantage. The signals sent to investors in existing and new industries, through incentives etc., must be rational and clear with no masking of market realities pertaining to international competitiveness. Incentives that promote investment will be essential but where the beneficiaries are in activities with no economic future, they will invariably prove to be counter-productive. Even though the right signals and institutional and other support facilities are available, entrepreneurs, particularly in new or non-traditional activities often face severe obstacles, the most widespread of which is inadequate access to financing. This manifests itself in three ways: 1) Exorbitant cost of capital in terms of interest rates; 2) Repayment periods that are too short in relation to the project’s envisaged incomegeneration patterns; 3) Excessive collateral requirements; i.e. the security required to borrow from banks. External grant and concessionary funding can be used in such a manner as to overcome these impediments. These difficulties are quite common among developing countries and to varying degrees have been recognised by international institutions such as the Commonwealth Secretariat and even the European Investment Bank. It will be essential that arrangements be devised to ensure that entrepreneurs can access investment funds on a reasonable basis that does not place them at a disadvantage to their international competitors.

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7.1.2 The experience of external support
The Windwards have received considerable financial support from Europe for their diversification. Firstly, the EU introduced the Special System of Assistance (SSA) in 1994 by Regulation 2686/94. The amount provided under the SSA was €78 million during the entire four year programme. The Special Framework of Assistance (SFA) established by EC Regulation 856/99 replaced this system in 1999. Funds averaging €45 million were made available every year. A study by external consultants40 to evaluate the efficiency, effectiveness, impact and viability of the arrangements recommended that priority in future should be given to diversification. Steps were certainly taken to implement the recommendations, for whilst diversification projects accounted for 12% of SFA funds in 1999, by 2002 they were using up to 64% of the total. During the four years 1999 to 2002, out of a total of €176.18 million, the bulk of the funds, €118.33 million, nonetheless went into projects aimed at boosting productivity. Diversification projects accounted for €14.84 million in Dominica, €24.9 million in Saint Lucia, and €6.10 million in St. Vincent.

7.1.3 Was the support effective ?
According to the European Commission, the Windward Islands,41 which received a substantial portion of the total assistance, have not made considerable progress in diversification.42 In a 2003 evaluation of the SFA, the UK based consultancy firm, Landell Mills Ltd., highlighted various short-comings including unclear objectives, which permitted considerable influence of individual decision makers with negative consequences, unrealistic expectations and an ill-defined approach to diversification. By the end of the last decade, there was much greater enthusiasm and commitment but, nonetheless, the pace of actually getting the projects operational has been slow. This was due to a number of factors, but it should of course be appreciated that it is only a few years since the Islands’ serious acceptance of diversification as a policy imperative. Given that diversification in single-commodity exporting countries is a long-term process, it probably is too soon to expect dramatic results in the Windward Islands. However, there might have been scope for more result-oriented management of the process, particularly assisting and encouraging investment in new areas of productive activity and ensuring the transmission of clearer market signals to entrepreneurs. The experience of banana suppliers to mobilise and apply EU funding for diversification provides useful guidance, not for replicating the experience but learning from it so as to avoid pitfalls and errors and building on its lessons. Maybe the most important lesson is the need for genuine commitment in the country to economic diversification. This might seem superfluous, but without such commitment there cannot be the consistency of policy or the adequacy of institutional support and facilitation needed for what would invariably be a particularly challenging enterprise. This entails fundamental economic restructuring, and not simply the selection and introduction of a replacement crop or service activity. The search has to be for a range of new areas of productive activity in which the country has or can realistically expect to develop a comparative advantage. Such identification and development of new industries requires long term vision and programming with implementation within a consistent policy framework. Indeed, the Commission itself recognised this as essential and, in its report to the European Parliament on the 23 December 2002, undertook to explore the possibility of devising multi-year action plans. The islands, however, face severe impediments that make it more difficult to switch to and develop new industries. These include: - Labour market rigidities. Although the OECS has surplus labour there is inadequate flexibility in the labour force; workers do not move rapidly from one industry to another; this is in part because they lack the skills and training; - Undeveloped capital markets that do not mobilise sufficient funds for investment or in general make risk capital readily available for new ventures on reasonable terms, particularly to entrepreneurs who are not yet established; - The small size of the domestic market that obliges reliance on exports even in the current context of the decline of trade preferences and the intensification of international competition.
Hubbard M, Herbert A and Roumain de la Touche/ Evaluation of EU assistance to ACP banana producers. Except for Grenada which has an historical trade in spices and cocoa. 42 Gary Melville, “Situational analysis of the Agricultural Sector of the OECS Member Countries”. Dec. 2002
40 41

If not bananas, what else ?

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Conclusion

Diversification is a prerequisite for the development of small mono-crop or single industry developing countries. That will only come from investment in new enterprises that creates income, employment and growth, the task of the private sector. The banks are essential for mobilising and providing risk capital on acceptable terms to entrepreneurs. Governments however have a crucial enabling role in creating and sustaining a climate that is conducive to productive investment and risk taking and must provide support for the development of the private sector.

Box 10

I n t e r n a t i o n a l Tr a d e C e n t r e

Whilst UNCTAD operates at an intergovernmental and Public policy level dealing with such issues as helping governments formulate diversification policies, the ITC works with the business community. Like UNCTAD it was set up in 1964 and supports firms in developing countries to develop exports with an emphasis on competitiveness. The ITC is located in Geneva and uses several hundred consultants to actually provide the specialised assistance required by the business community, particularly small and medium sized enterprises. The governments of beneficiary countries provide the liaison services for the ITC. Hence business people needing assistance contact first the Trade or other designated Ministry in their home countries.

7.2 Trade and environment
As small islands that are prone to natural disasters and most vulnerable to the adverse consequences of climate change, OECS countries have a keen interest in ensuring that the multilateral trading system supports rather than detracts from environmental protection. A brief assessment is undertaken below of the linkage between international trade and environmental issues and concerns. Environment and sustainable development issues are an integral part of the agenda of the multilateral trading system. Even though not currently at the centre of the debate, in devising the long-term regional negotiating strategy, these issues will have to be given due prominence. The question is how will the focus on environmental and sustainable development concerns improve the OECS’ trading position or how could the islands benefit from incorporating these concerns into their trade policies? Such a focus has the potential to create additional opportunities for growth and expansion. Examples can be the production of environmentally friendly products from timber and non-timber forest products using Dominica as a base and targeting developed country markets. Closely related to this would be a range of issues including intellectual property, the protection of traditional knowledge etc. Where there is recognition of environmentally- sound and sustainable production methods, exports can attract higher prices e.g. organic fruit and vegetables. Also in certain disputes and negotiations, it can provide valuable “moral” leverage for a country.43 Eventually international regulation of environmental measures can provide advantages in the case of restriction of market access due to non-compliance. The critical issue for the region, in this context, is to ensure that measures are put in place to facilitate their effective participation in the international standard setting processes so that their concerns are addressed and that the necessary resources and conditions are put in place to assist them in complying with the international standards embraced by the multilateral trading system. A laissez-faire approach to environmental and sustainable development issues on the agenda of the multilateral trading system could well work to the disadvantage of all countries in the long term. At the initiative of Barbados, the United Nations held a conference on Environment and Development in 1990, which called for attention to be paid to addressing the vulnerabilities of Small Island Developing States (SIDS) and the promotion of their sustainable development. A specific work programme, the Barbados Plan of Action (BPOA), was adopted that recognised the special environmental security and development requirements of SIDS. A UN Summit held in Mauritius in 2005 adopted a strategy for the further implementation of the BPOA. In view of the UN’s recognition of SIDS as a special case for environment and development, there is also a case for special attention, within the WTO work programme on Small Economies, to address the needs of SIDS, as defined by the UN. The WTO, though, has not recognised the special needs of SIDS as distinct from those other small economies.

43

In order to capitalize on this Dominica is working on being categorized as an Organic Island.
Keep it clean and tidy

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This would, however, demand greater clarity of the criteria for determining which countries should be categorized as SIDS. Definitional precision is a key element in advancing the interests of SIDS in the multilateral trading system, since it would be difficult to formulate a Work Programme for them without a clear understanding as to whom the Programme is being designed to benefit. From the SIDS’ standpoint, two essential concerns emerge in the debate; firstly, that trade should not cause environmental damage, degradation or loss of biodiversity; and secondly, that the multilateral system makes provision that accommodates the special vulnerability of small islands like the OECS. Several studies have been undertaken and negotiations conducted within the framework of the WTO to seek to better understand the relationship between trade and the environment. A lot of the emphasis was placed on ensuring that environmental protection would not be misused as an excuse to impede trade. As the negotiations and the understanding of the issues have progressed, certain goods and services have been classified as “environmental”. Their production and trade can have a positive or negative impact on the environment. An example is those plants that can be important for halting erosion on hillsides. Campaigners have therefore advocated that special incentives should be provided to support production, trade or regulation of the products of such plants. A service with major environmental impact is tourism. Large numbers of stay-over and cruise ship visitors and the facilities that support them can place a strain on the fragile environment of small islands. Hence governments seek to ensure that they retain enough policy flexibility to adequately regulate the industry to prevent it from undermining the environmental integrity of the islands. For instance, one of their aims is that international rules do not preclude the imposition of environmental taxes. A related area could be the restriction or prohibition of the export of certain items to avoid damage to the environment or depletion of particular resources or the loss of bio-diversity. Examples could be restrictions on removal and export of coral from reefs or trade in endangered plant or animal species. In the contexts of the debates over the EU banana and sugar regimes, OECS countries had argued that their production of bananas and sugar cane fulfil a particular role in safeguarding their environment. They pointed out that these plants slow down soil erosion and given their short production cycles and rapid regeneration following wind and flood damage, are ideally suited for islands that are located in the hurricane belt. The argument they have advanced is that even if production that is environmentally friendly is more expensive, the cost should be taken into account in the selling price of the end product. Alternatively preferential terms to support trade of products that benefit the environment could be provided.

Box 11

M i l l e n n i u m D eve l o p m e n t G o a l s ( M D G s )

The UN Millennium Summit of September 2000 unanimously adopted a Declaration “of values, principles and objectives for the international agenda for the twenty first-century”. It acknowledged collective responsibility of Governments to uphold human dignity and recognised equality and equity. It pledged to eliminate extreme poverty. Whilst the Summit agreed to work for open and non-discriminatory multilateral trading and financial systems, also set specific targets, the MDGs as a way of monitoring the implimentation of those goals. The following is a list of those goals and indicates how Latin America and the Caribbean have so far been performing.

Source: UN MDGs report 2005

Goal 1 Reduce extreme poverty by half- Off target Reduce hunger by half - On target Goal 3 Promote gender equality/ empower women On target Goal 5 Reduce maternal mortality by 3/4 Off target Goal 7 Ensure environmental sustainability Progress mixed

Goal 2 Achieve universal primary education On target Goal 4 Reduce child mortality by 2/3rds On target Goal 6 Combat HIV/AIDS- halt and reverse Off target Goal 8 Develop global partnership for Development

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7.3 Negotiation- Using trade diplomacy to advance national/regional goals
The economic prospects of small open economies like those of the OECS are largely fashioned by external, forces and developments. If their aspirations for development are to be realised, then the external environment must be benign. But such small developing countries often feel powerless and overwhelmed in the face of major international developments and trends, and even more so during the current wave of global trade liberalisation. The result is that they can be hesitant about seriously and constructively engaging in international trade diplomacy because they might privately view efforts on their part as largely futile. It is true that a vast portion of multilateral regulation and negotiation could be beyond the means of individual OECS countries realistically to actively and effectively manage. Formal negotiations take place within the WTO framework in Geneva, as well as between the ACP and European Union in Brussels, for the FTAA, within the CARICOM etc., in addition to the plethora of informal and ad hoc negotiations. For all of this, the required skilled manpower and financial resources are not always available. An additional challenge is that, in general, small countries like the OECS Members lack significant political and economic power to back up their negotiating stances; hence outcomes for them are primarily dependent on the actual performance of their negotiators at the table.

Courtesy Alec Singh

Since OECS countries must seek to survive and develop, no matter how hostile the international environment, they need to find the means of bringing about change that is conducive to their interests. Their key method is collaboration and cooperation within the OECS and CARICOM regions. This entails the preparation and articulation of joint positions, which greatly assist individual countries by permitting their interests to be represented and advanced by fellow Members of the grouping, even when they cannot be physically present. Of course, to be meaningful, this arrangement must be accompanied by effective prior agreement on reconciliation and incorporation of national positions into the sub-regional or regional positions. Facilities for oversight, monitoring and reporting to the national authorities are essential. It is though still necessary to prioritise and be selective regarding the activities to be pursued. After all, even the collective resources of the sub-region and the region are inadequate for the effective and consistent representation of the countries’ interests in all areas of international economic negotiation. Based on experience and lessons of the past, the following principles have been identified and can provide guidelines in the use of trade diplomacy to achieve national and regional goals of small countries like the OECS: • Small size and consequent lack of commercial and political power do not, on their own, preclude countries from exercising influence in international decision-making and over events that impact on their vital national interests. As a very first step in becoming effective, the representatives must fully understand and appreciate what is in their real national interests. They would then define clear, readily articulated and comprehensible objectives to which combined national effort can be devoted in a coherent and consistent manner.

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• Achieving the ambitious task of securing favourable international conditions and or change by any country or group requires substantial and continuous political and diplomatic commitment. For small developing countries, with limited political and commercial power, visibility or influence on the international stage, the amount of resources to be invested would be considerable which, given their limited human and financial resources, would invariably constitute a major portion of what is available nationally. The implication is that if they are to have real influence, small States are obliged, whether alone or with their allies, to concentrate their efforts on achieving their priority goals. • It is a truism that the stronger the international opposition to the particular goal/s being sought, the greater the commitment of resources and effort that will be needed. Though the formulation and skilful presentation of valid arguments are essential prerequisites for changing or influencing the positions of governments and of major institutions, particularly for small States, considerable effort beyond the negotiating table is also required.44 The frequently encountered unwillingness of negotiators, when facing weaker partners, to concede even if presented with irrefutable arguments, could be due to a number of factors including a resistance to change already endorsed decisions or positions (sometimes simply bureaucratic inertia). Also, it is often the case that the representatives sent to negotiate on behalf of major countries or institutions are not the real decision makers but are instructed by superiors and influenced by other entities such as national Parliaments, public opinion or even third countries, international institutions or the business community. When presented with convincing arguments that conflict with their original national or institutional mandates or perceived interests, these interlocutors who engage in international negotiations would of course be expected to seek adjustment to their brief or national position. However, when they face relatively weak States that lack coercive or retaliatory power, they might not feel the necessity to undertake the required negotiations with and/or persuasion of their superiors, legislatures, business and other interest groups in order to be able to accept the position that the small States have successfully championed but are in conflict with their own. • Partly as a result of the above, as the OECS seeks, through lobbying and negotiation, to change the position of more powerful countries, it will need to employ more than the tools of traditional diplomacy in which the target is not just the executive arm of the host Government and the interlocutors at the negotiating table. In contemporary developed democratic societies, influence over decision-making is diffused; hence the alternative approach of public diplomacy aimed at generating favourable public opinion would need to be added to the arsenal if campaigns are to be won. This approach also applies when the target for influence is an international institution. • The historical association of many small States with major powers can sometimes result in an over-reliance on and trust in international goodwill and dependence on friendly developed countries to secure their interests. Whilst there is evidence of such principled commitment, it could be uncertain in the long-term or when the small States' aims are in conflict with the national interests or priorities of their "benevolent partners". Hence, the OECS countries have the ultimate responsibility for achieving, through their own domestic and concerted international action, the outcomes which they desire, whether or not they require mobilizing international support and working with allies. • As has already been explained, securing change at the international level can be very demanding and likely to be proportionately difficult for small developing countries. Hence, in order to be able to commit the required resources, they need to effectively mobilize and engage all their national capacity. Their political, diplomatic, business, NGO, academic and other emissaries who will articulate and advance the identified goals must be very well briefed and able to present persuasive, consistent and coherent arguments. Senior Ministers and even Heads of Government need to be enlisted to use their influence and the opportunities that arise or are deliberately created for interaction with and persuading decision makers in target countries and institutions. This can be very beneficial since such political representatives are likely to be able to offer a broader range of concessions and can interact with their high level counterparts where a greater scope for compromise and accommodation is often possible. • In their pursuit of favourable decision-making at an international level, OECS States can obtain leverage through working with allies and benefiting from the support of friendly
44

This includes the optimal use of and deployment of limited human and other resources. Targets of advocacy and lobbying must include potential supporters and allies.

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countries and institutions. However, actually securing the desired objectives will need effective preparation of positions and arguments and skilful negotiation by their representatives. Hence, it is essential that they field skilled and committed tacticians and negotiators who can actually win debates and change the views even of the experienced and highly competent negotiators and representatives of the developed countries and the multilateral institutions. The methods to ensure that capability will be long term and entail a combination of specialized training, careful recruitment, development and retention. • To be successful in the pursuit of their objectives, small countries like those of the OECS have no option but to be ambitious and courageous. They will even have to be prepared when necessary to seek to change the premises of the debate, expanding it to encompass more fundamental issues such as development considerations, equity and the right of all countries to participate on a sustainable basis in the global trading system. Conclusion In the contemporary world it is countries themselves, regardless of size, that are ultimately responsible for their welfare and advancement. This review has sought to assess whether OECS countries can effectively participate in international negotiations and successfully defend their interests and if their participation in the negotiating exercise is not futile. The experiences of OECS Members and their prospects have been examined in this paper. They demonstrate that small size and minimal resources pose serious challenges. However, the resulting difficult situation is not an insurmountable impediment to success, but rather a challenge to be overcome. Though it is not an easy task, with ingenuity, commitment, determination and an enlightened strategic and tactical approach to negotiations, they can, in certain circumstances, be effective players and actually influence the course of international developments to their advantage. Within a system based on rules in which all participants have a voice, even small countries like those of the OECS can be more than mere spectators or “cheerleaders”. They can be active participants in and contributors to the international processes that shape their future. But for that, new thinking and innovative approaches, are essential.

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This is David and Goliath again

But David won !

We will in the end

Girl, to win you must work hard and run faster than them

Further reading
Arthur The Rt. Hon Owen, “The Caribbean Single Market and Economy.” Published in the Integrationist Vol “No. 1 June 2004. Bilal S. & Rampa F., Alternative (to) EPAs, Possible scenarios for the future ACP trade relations with the EU, Policy Management report 11, ECDPM, February 2006. Christian Aid briefing 2004, “Why EPAs Need a Rethink”, www.epawatch.net. East Caribbean Central Bank, http://www.eccb-centralbank.org/Statistics/index.asp Hall K., Re-inventing CARICOM: The road to a new integration, 2003. Laurent E The Banana Dilemma: The Challenges Facing CARICOM” Published by the UWI/CARICOM collection of studies “Appropriate Adaptation to a Changing Global Environment”. December 2004. Laurent E., Bananas: What future? March 2005. Laurent E., Beyond EU sugar reform: financing diversification in ACP sugar exporting countries, Trade Hot Topic, No 39, Commonwealth Secretariat, 2004. Stiglitz J., An agenda for the development round of trade negotiations in the aftermath of Cancun, Commonwealth Secretariat, 2004. World Bank, A time to choose: Caribbean Development in the 21st Century, April 2005. World Trade Organisation, Understanding the WTO, 3rd edition, September 2003. World Trade Organisation, Trade Policy Review, OECS-WTO Members, volumes 1 & 2, 2001. World Trade Organisation, Trade Profiles 2005.

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