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Manoeuvering at the Margins of an EPA Deadlock: Will the EAC bow down to EU Pressure?

16-10-2014

Njehu, F. 2014. Manoeuvering at the margins of an EPA deadlock: Will the EAC bow down to EU pressur?e. GREAT insights Magazine, Volume 3, Issue 9. October/November 2014.

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Why the EAC pursued an EPA?

When the African, Caribbean and Pacific (ACP) group of states and the European Union (EU) signed the Cotonou Partnership Agreement on 23rd June 2000, both parties affirmed their commitment to work together towards the achievement of the objectives of poverty reduction, sustainable development and the gradual integration of the ACP countries into the world economy. In their elaborate preamble, both parties further reaffirm their willingness to revitalise their special relationship and to implement a comprehensive and integrated approach for a strengthened partnership based on political dialogue, development cooperation and economic and trade relations.

Over the last decade or so, there has been pervasive condemnation by smallholder farmers, civil society organisations, parliamentarians, media and religious group on the design and structure of the Economic Partnership Agreement (EPA) between the East African Community (EAC) and the EU. Smallholder farmers argue that negotiators and the private sector have focused extensively on commercial interests without focusing on major aspects of labour, standards, human rights, environment and climate change as well as development as it was envisaged by the Cotonou Partnerships Agreement.

Guided by the principles of the Cotonou Partnerships Agreement, EAC went into these negotiations with a view to integrating themselves gainfully into the global economy, sustaining their economic development and reducing poverty with an eventual intention of exterminating it later. By accelerating the already existing economic integration, EAC hoped to remove barriers to trade in the region and build bigger markets as well as inspire the necessary investments and productivity expansions that will drive development. 

EPA concluded after a decade of sensitive negotiations

The EAC-EU EPA was finally initialed on 14th October 2014. Over the last decade, the EAC has been very busy pursuing regional integration through consolidating both the common market and the customs union. The EU has been through the same journey before and is quite aware of this.

The EAC region has of recent past experienced concerted diplomatic tactics from the EU pushing for a signature of the interim EAC-EU EPA concluded at the end of 2007. The decade-long negotiations can be attributed to a failure to agree on outstanding issues between the negotiating parties. The outstanding issues among the negotiating partners were genuine and should have been treated as such. Issuance of deadlines to EAC partner states through withdrawal of the market access offer to the EU market for Kenya from 1st October 2014 did not lead to a timely conclusion of an agreement, but only spurred tensions between the EU and the EAC. The areas that remained highly contentious until the end included the levels of liberalisation the EU demands; export taxes; the MFN clause; infant industry and safeguards; community levies; development cooperation/aid and the issue of whether there are new funds or only a recycling of existing funds etc.

(i)  Market access

By 2033, EAC has committed to liberalise up to 82.6% of all its imports from the EU. In as much as this has been agreed, EAC feels that the level of liberalisation is high with a likelihood of having negative implications on livelihoods, employment, shrinking of the policy space, and on our efforts to industrialise and integrate meaningfully into the global economy. This extensive liberalisation is based on the argument that the region needs cheap intermediate goods to be used as inputs in the production processes thus enhancing competitiveness; and finished products whose availability at lower costs is deemed to have consumer welfare-enhancing effects. However, permanent removal of tariffs on these products makes it extremely difficult for EAC to produce them in future thus curtailing the industrialisation process and relegating the region to the perpetual production of raw materials.

(ii) Duties and taxes on exports

Under this clause, the EU would disallow the EAC partner states to impose new export taxes or increase existing ones unless they can justify special needs with regard to revenue, food security, or environmental protection. Export taxes[1] are an essential development tool that can be used in promoting industrialisation and employment creation, and in creating incentives to add value to local products rather than exporting them in their raw form. For the  EAC, export taxes remain very critical after the discovery of oil, natural gas and other minerals. It is worth noting that the EU disciplines in EPAs on export taxes emanates from its Raw Material Initiative which states that “Access to primary and secondary raw materials should become a priority in EU trade and regulatory policy. The EU should promote new rules and agreements on sustainable access to raw materials where necessary, and ensure compliance with international commitments at multilateral and at bilateral level, including WTO accession negotiations, Free Trade Agreements, regulatory dialogue and non-preferential agreements’’. However, raw materials security for the EU should not be at the cost of the EAC’s development ambitions.

(iii) Economic and development cooperation

The main outstanding issue under this chapter was how to treat the EAC EPA Development Matrix. The Development Matrix indicates costed priority projects to address the supply side constraints in the region, the envisaged adjustment costs and other trade related infrastructure so as to enable the region to take full advantage of the market access granted by the EU.

The EAC position was that the Development Matrix should be part and parcel of the EPA agreement. However, the EU has repeatedly stated that it will contribute to the EPA under the European Development Fund (EDF), Aid for Trade (AfT) and the EU budget. These funds are obviously insufficient. The EDF is not only already committed with only relatively small funds earmarked to support capacity constraints, but it is also cumbersome to access. In addition, AfT and the EU budget are still a nebulous concept, lacking specificity on the exact amounts available. It is argued that the revenue losses and the adjustment costs will be offset from the increase in trade arising from the increased market access under the EPA. However, the benefits accruing from the EPA are elusive yet the obligations are certain and legally binding.

(iv) More favorable treatment (MFN) resulting from economic integration agreements

Under this provision, the EAC is obliged to extend to the EU any more favorable treatment resulting from a preferential trade agreement with a major trading economy/country. This circumscribes EAC’s external trade relations and will undermine the prospects of South-South trade which EAC is aspiring to promote. In addition, the clause is contrary to the spirit of the World Trade Organization (WTO) Enabling clause that promotes special and differential treatment for developing countries and South-South cooperation.

(v) Agriculture

The most contentious issues under this chapter were the agricultural subsidies provided in the EU; and the weak safeguards provided for in the EPAs. The EU has rejected for years the discussion of its subsidies in the EPAs on the grounds that this is a WTO issue. However, EAC argued that the issue of subsidies has not been addressed in the WTO as developed countries, including the EU have failed to live up to what was agreed during the WTO Hong Kong Ministerial to eliminate export and trade distorting subsidies by 2013.

There is ample evidence to show that agricultural subsidies in the EU have led to dumping of agricultural products with far-reaching implications on Africa’s agricultural production and agro-processing. It is a “conventional” example of a destruction of the extraterritorial obligation of governments to respect the right to food.

The decision at last by the EU to remove agricultural export subsidies in the context of the EPAs, announced earlier this year, is good news. But may not cater for all distorting agricultural subsidies in Europe, to the detriment of EPA countries.  

How bad is losing EU market preference versus how bad is the agreement to be ratified?

A study[2] by South Center shows that EAC is more competitive than the EU on only 10% of tariff lines. As a consequence, this would mean that the majority of products that are currently produced will be put at risk due to tariff elimination in the EPA, and the EU being more competitive, producers will lose market share to EU imports as well in home markets and other EAC markets.

The study further shows that 51.3% of tariff lines/products where there is current local production will be put at risk, perhaps even damaged (1,100 tariff lines out of 2,144) as these are lines where liberalisation will take place and the EU is more competitive on these lines than EAC. Taking into account potential future production (tariff lines where there is no current production), 2,366 tariff lines will be liberalised making the possibility of having future production in these products questionable. In total, 68.8% of all tariff lines or products could be put at risk (current and future production).

Further, a short list of sectors where there is current production which could be jeopardised and tariff lines where there is at present regional trade which could be compromised by the EPA as the EU is more competitive includes: processed oil products; chemical products for agriculture; commodity chemicals; medicines, vaccines and antibiotics; intermediate industrial products; final industrial products; vehicle industry; agricultural products; and books, brochures and other printed material.

What next for EU-EAC EPA Negotiations?

The 1st October 2014 date had a strong message. It was either the EAC signs and begins the ratification process of its interim EPA concluded in 2007 (no longer an option for EAC) or EAC countries conclude a new regional EPA if they wish to continue enjoying market access to the EU. Otherwise, Burundi, Rwanda, Uganda and Tanzania have to rely on the Everything But Arms trade regime where they have duty free quota free market access to the EU, while Kenya has to trade under the less preferential EU generalised system of preferences (GSP). EAC has been flexible in its market access offer to the EU given the asymmetrical nature of the negotiating parties. But EPAs are only a free trade area, with no additional financial package attached to it to address fiscal challenges EPAs could bring, and a limited focus on development.

The deadline issued was not the EAC’s but the EU’s and the talks should have been based on mutual ‘how to conclude the talks’. In order to have a “win-win” outcome of negotiations, then the EU should have been willing to support the development pillar that addresses supply side constraints. In addition, special and differential treatment should have been part and parcel of the developmental EPA. The EAC negotiators were right to keep pushing for an extension of the EU deadline under the EU Market Access Regulation 1528/2007 to such a period where the negotiations can be concluded or an alternative trade arrangement could be initiated. The EU should have shown flexibility and not penalise EAC countries and Kenya in particular, which fell back to GSP from 1st October 2014, though it can now be reinstated with the EAC-EU EPA deal reached on 14th October 2014.

To save on the back and forth, the focus of the talks should have been on development. This development should be sustainable and defined by EAC and agreed by both negotiating partners. In the current trade diplomacy, trade is not only about tariffs, it is about regulation, standards and norms, licensing practices, domestic taxes and investment. More importantly, trade is not only about market access, it is about human rights, corporate accountability, and environment and labour rights. So, it is crucial that we look at the future trade relationship between Africa and Europe in a broader yet detailed context.

Fredrick Njehu

Fredrick Njehu is Program Advisor-Trade Justice at Kenya Human Rights Commission (KHRC).

Footnotes

[1] United Nations Economic Commission for Africa, 2013 Addis Ababa, Ethiopia

 
This article was published in GREAT insights Volume 3, Issue 9 (October/November 2014).

Economic Transformation and TradeTrade Policy and Economic Partnership AgreementsEast African Community (EAC)Economic Partnership Agreements (EPAs)East Africa

External authors

Fredrick Njehu