1 Status and Development Issues of the EC-CARIFORUM EPA

Status and Development Issues of the EC-CARIFORUM EPA Negotiations

Ambassador Dr. Richard L. Bernal Director General, Caribbean Regional Negotiating Machinery

Address to the Committee on Economic Development, Finance and Trade of the ACP-EU Joint Parliamentary Assembly of EU-ACP Parliamentarians

Sherbourne Conference Centre, Bridgetown, Barbados, 18 November 2006

Let me place on record my appreciation for the opportunity to address the ACP Parliamentary Group on the CARIFORUM-EC Economic Partnership Agreement (EPA) negotiations. This meeting is taking place immediately before the two regions commence the final engagement in the penultimate phase of the EPA negotiations and just before the formal and comprehensive review the EPA negotiations mandated in Article 37.4 of the Cotonou Agreement. This session therefore comes at a critical juncture in the EPA negotiations.

I will briefly outline the current status of the negotiations for a CARIFORUM-EC Economic Partnership Agreement and discuss the issues, which have emerged in these negotiations.

STATUS OF THE NEGOTIATIONS

The ACP-EU Partnership Agreement (Cotonou Agreement), signed in Cotonou in June 2000, establishes a comprehensive framework for future ACP-EU relations. The core objectives of the partnership are economic development, the reduction and eventual eradication of poverty, and the smooth and gradual integration of ACP States into the world economy.

These objectives are envisioned to be achieved by the conclusion of new WTO-compatible Economic Partnership Agreements (EPAs) between the ACP and the EU. Negotiations would be conducted during the period September 2002 and late 2007 to allow the EPAs to come into effect on 1st January 2008. The process began as scheduled with discussions at the ACP-EC level and the CARIFORUM-EC negotiations were launched on April 16, 2004.

The Plan and Schedule, jointly agreed by CARIFORUM and the EC to launch stated that an EPA between CARIFORUM countries and the EC should contribute to realising the following broad objectives:

1. Promotion of economic development that is socially and environmentally sustainable; 2. Enhancement of the ability of small Caribbean states to play a more meaningful role in the international community; 3. Facilitation of Caribbean structural transformation leading to a reduction in the region’s acute economic vulnerability and 4. Assist the adjustment of Caribbean economies in a manner and at a pace that is conducive to overall economic and social development.

The principles to guide the EPA negotiations express the means of attainment of the objectives. These include (1) promote sustainable development, (2) complimenting and advancing the region’s already ongoing integration, (3) special & differential treatment for

1 small and vulnerable CARIFORUM countries, (4) application of an asymmetrical approach to trade liberalisation (5) enhancement of international competitiveness and (6) assisting in capacity building by synchronizing the delivery of development cooperation with the process of trade liberalization and the adjustment.

The negotiations between the EU and CARIFORUM have adhered to the agreed schedule. There has been progress in a wide range of issues and specific disciplines which reflects a sense of common purpose and a genuine spirit of constructive engagement. However there are persistent divergences indicative of philosophical differences. At this time the process is at a critical conjuncture because there are several fundamental issues which must be resolved. The opportunity to achieve resolution and continue the momentum is the series of negotiations which culminate in a ministerial meeting 29-30th November 2006 in Brussels. If these meetings do not resolve the outstanding issues it would put in jeopardy the completion of the negotiations within the agreed schedule.

A delay in the completion of the negotiations will raise the question of a renewal/extension of the WTO waiver. Recent experience at the WTO demonstrates that it is increasingly difficult to secure waivers.

Delays would extend the period of negotiations and increase the cost of the negotiations in human and financial resources. This would be very onerous for the small states of the CARIFORUM. Since April, 2004 there have been 6 rounds of negotiations at the level of Principal Negotiators and 7 meetings of the technical negotiators as well as Ministerial encounters. These engagements are serviced by an extensive programme of consultative meetings in the CARIFORUM region and technical work by the Caribbean Regional Negotiating Machinery and other regional organizations.

CARIFORUM is committed to and will endeavour to forge an EPA within the schedule prescribed by the Cotonou Agreement and the terms of the WTO waiver. This commitment will be vigorously pursued but not at any cost. The negotiations will only be completed when CARIFURUM is satisfied that there is a development promoting EPA appropriate to its goals and circumstances supported by adequate development cooperation.

Spokespersons for other ACP regions have alluded to or called for an extension to the EPA negotiation schedule. The position of the CARIFORUM in no way is prejudicial to the deliberations on this question by the Joint Review of EPA.

ISSUES TO BE RESOLVED

There are four major issues where there are divergent views. These need to be resolved in the negotiations later this month if the EPA negotiations are to proceed on schedule. These issues are:

A. REGIONAL INTEGRATION This is an area of long-standing difference between CARIFORUM and the EC and one of the most important issues to be settled.

There is a strong conviction on both sides that one of the key objectives of an EPA is to strengthen the CARIFORUM regional integration process, however different perspectives

2 persist over the eventual regional configuration and pace of integration. This has implications for the nature of the commitments, which will be assumed on the CARIFORUM side.

1. Variable Geometry of Regionalism In the negotiating sessions to date, the EC has sought to persuade CARIFORUM to pledge to establish regional arrangements which could assume common commitments in all disciplines, including market access schedules, SPS and TBT regimes, services, investment, government procurement, intellectual property, competition policy and dispute settlement mechanism.

CARIFORUM’s approach to the regional economic space is that of a variable geometry which recognizes differentiation. The CARIFORUM position is based on the fact that there is no intention at this time to create a common economic space such as that provided by a customs union. The CARIFORUM-EC EPA must therefore take account of the reality of the co-existence of 3 streams of economic regionalism: namely (a) the Caribbean Single Market and Economy (CSME) involving 12 countries, (b) the CARICOM-Dominican Republic Free Trade Agreement (FTA) and (c) the Bahamas which is not currently a participant in either of these arrangements but is a member of the Caribbean Community. Within the CSME the Organization of Eastern Caribbean States enjoy certain derogations and Haiti is yet to assume full commitments the CSME.

The CARIFORUM negotiators have repeatedly reiterated the principle of “variable geometry” because (a) it is the existing situation with respect to the region’s economic space, (b) it reflects the differences scope and the extent of implementation between the CSME and the CARICOM-Dominican republic FTA and (c) recognition that there is no contemplation at this time of creating a seamless economic space among CARIFORUM countries. It should be recalled that Article 28 of the Cotonou Agreement states “Cooperation shall provide effective assistance to achieve the objectives and priorities which the ACP States have set themselves”. An EPA must not re-shape ACP integration schemes but reinforce them while respecting their integrity.

In response, and to its credit, the EC has dropped its proposal that CARIFORUM configure itself as a customs union as the basis for assuming EPA commitments. The EC nevertheless, has continued to stress that optimal levels EU development support could be realised only when CARIFORUM moves in the direction of constituting itself as a single seamless economic space.

B. DEVELOPMENT The overarching objective of the CARIFORUM-EC is the promotion of sustainable economic development. All concerned with EPA must disabuse themselves of the notion an EPA should have a development dimension because this does not sufficiently recognize the centrality of development. To ensure that development infuses all aspects of the EPA, CARIFORUM has secured EC agreement to inserting a development chapter. Despite this concurrence one of the principal issues on which CARIFORUM and EC negotiators differ is how to make the EPAs development promoting instruments. While both parties share a common objective that the EPA should be a tool for CARIFORUM development, they advocate very different paths towards the ultimate goal. Three issues urgently require resolution:

3 1. Divergent Concepts The EC views development as a process that is driven by strengthened regional integration and trade liberalization, coupled with more stringent trade and investment rules, and accompanied by EU support for trade-related capacity building measures. This view of development does not give sufficient attention to the various structural deficiencies and supply-side rigidities that afflict small vulnerable economies. The challenges facing CARIFORUM are further exaggerated by the fact that the region comprises a series of small countries separated from each other by hundreds of miles of ocean. This complicates the process and adds to the costs associated with regional integration.

CARIFORUM has a more comprehensive vision of development, which is sustainable, facilitates structural transformation and reduces vulnerability. This can only be accomplished if development infuses all facets of an EPA, and incorporates the provision of special and differential treatment commensurate with CARIFORUM’s level of development and size, flexibility in applying trade rules, more effective CARIFORUM access to EU markets, well- designed and executed trade capacity building measures and binding commitments on EU development support aimed at responding expeditiously and fully to CARIFORUM needs. The CARIFORUM experience has been that rules that allow for access to markets are not – of themselves – effective tools for development when profound supply side constraints exist which prevent the effective utilization of such access.

CARIFORUM and the EC have agreed on a two-tiered approach where the EPA related development cooperation would involve (a) horizontal provisions on development cooperation and (b) an outline of potential areas for cooperation in the various disciplines. Both sides agreed that such areas would be regularly reviewed after the entry into force of the EPA.

2. Alleviating Supply-side Constraints Small developing economies are encumbered by constraints which affect their ability to produce internationally competitive goods and services. These emanate from small size which deprives production of economies of scale and scope, limits the nature of competition in markets, leads to the predominance of nano-firms which are minute by global standards, higher import costs and sub-optimal public sector support services. Such supply-side constrains cannot be overcome by improved access to external markets. One of the lessons of 30 years of ACP-EU cooperation, centred on preferential access to the EU market is that market access is necessary but not sufficient. Market access must be supported by measures and development cooperation which promotion international competitiveness.

An appropriately designed EPA will provide improved access to the EU market and promote CARIFORUM regional integration but market the resulting market enlargement will not be enough to ensure greater efficiency, attract investment and promote development in the region. The EPA must address the critical supply-side constraints, institutional weaknesses and structural rigidity problems, which are additional impediments to competitiveness and development in CARIFORUM and other ACP regions.

Effective EPA implementation requires addressing the need to upgrade production facilities, structural adjustment, competitiveness, mitigating the fiscal impact of reduction in customs duties, adjustment to sectors that are exposed to increased competition and erosion of tariff preferences and installing institutional trade capacity measures

4 3. Special & Differential Treatment for Small Economies Special and differential treatment (S&D) for developing countries and the LDCs is a core principle of the WTO agreements. Special considerations for the least developed and island states have been a feature of the ACP-EU relationship since the first Lomé Convention. This tenet was maintained throughout subsequent Lomé Conventions and the Cotonou Agreement, where there are a number of references to “taking due account of the vulnerability of small, landlocked and island countries”.

The meaningful expression of the principle of S&D is particularly important to CARIFORUM consists of small and vulnerable developing island economies. Every effort must be made to translate the commitment to S&D into measures, which are specific, practical, justicable and easily implemented. Best endeavour language is not acceptable.

4. Export Promotion and Diversification If the region is to successfully accomplish a strategic repositioning in the global economy it must develop internationally competitive capabilities in new and existing production of goods and services. Based on its demonstrated comparative advantage many of the best prospects for the future will be in services. If the EPA is going to be an effective instrument the enhancement of economic development it must given particular attention to the promotion of services exports. With this in mind CARIFORUM is concerned that modalities for liberalization of trade in services are yet to be completed. The EC has cautioned that some of the sectors in which CARIFORUM have expressed interest are sensitive sectors namely, energy, health, culture and entertainment. The region would like to see a more flexible response to its proposals on Mode IV.

5. Innovation for Competitiveness The intensification of competition and constant upgrading of competitiveness in response to new technology is inherent in globalization. The imperative for small developing economies is to meet this challenge and avoid the impoverishment that is often the result of marginalization from the dynamic of the global trade and investment. Consequently regional and national systems of innovation warrant immediate attention. To this end the EU can contribute to the funding and operationalization of arrangements and programmes which target innovation, entrepreneurship, employment and growth patterned on its own Lisbon Strategy.

C. ADJUSTMENT Two important issues:

1. Fiscal Dislocation In the small developing economies of the CARIFORUM region tariffs on imports represent a major source of government revenue, indeed in the smallest countries it is the largest source of government revenue. Since CARIFORUM countries depend on tariff revenues to fund essential social programmes, such as health care, education etc., the sudden loss of this revenue is likely to create much hardship and possibly lead to social dislocation, as the burden will fall disproportionately on the poor.

The pace of tariff liberalization must take account of this acute problem. In addition, some form of development assistance mechanism to address the loss of government revenue resulting from EPA-induced trade liberalization and the reorientation of the taxation systems

5 must also be considered. Fiscal displacement is a suitable target for the EU, which has been promoting “Social Cohesion” which the EU has been employing as a key aspect of its cooperation with developing countries.

2. Trade liberalization With respect to trade liberalisation in goods, the major area of divergence relates to the EC proposal seeking a single starting line for all members of CARIFORUM. The crucial implication of the Commission’s approach would be the establishment, at the beginning of the implementation period (January 1, 2008), of a common regional tariff for goods imported from the European Union. This is not a realistic expectation given the coexistence of different streams of regionalism.

The EC has recently tabled a new proposal, which is being studied by the region’s technical team. The new proposal involves the harmonization of 174 HS six digit tariff lines where there is a 5% dispersion of the applied rates among the CARIFORUM countries. This number of tariff lines accounts for 3% of the tariff universe but 70% of CARIFORUM imports. Apart from the value of trade involved the range of tariffs for many products is considerable. For example, the range for frozen cuts is from duty-free to 184 percent.

The CARIFORUM approach comprises number of phased baskets, rather than any single starting line, and would start with a region-wide list of products to be excluded from trade liberalization and fifteen national lists of zero-basket items. CARIFORUM also indicated the need for a range of transition periods up to 25 years for some sensitive products so as to allow adequate time for adjustment.

D. DEVELOPMENT COOPERATION Concerns include:

1. Synchronization The ability of CARIFORUM countries to assume obligations under an EPA will be depend in large measure the availability of adequate development cooperation. CARIFORUM has therefore argued strongly that there should be binding commitments on EC development cooperation similar to those applied to market access and trade rules. The implementation of the EPA must be synchronized with EU development cooperation. There must be a financial protocol encompassing binding, actionable EC commitments, which is appended to the EPA.

2. Disbursement Delays The implementation of the EPA and the development cooperation which must complement and assist must operate in tandem. The disbursement of development cooperation must be synchronized with the implementation of the EPA. The experience to date gives cause for concern.

For example, the Regional Preparatory Tasks Force (RPTF) has not delivered, to date. The RPTF was established as the link between the EPA negotiations and development cooperation, but its failure either to bring any urgency to the delivery of EPA-related support or to secure alternative resources has been one of the major disappointments associated with the CARIFORUM-EC EPA process. In effect, the RPTF has been stymied by the extremely cumbersome EDF procedures and the resulting lack of national/regional enthusiasm for the RPTF’s potential contribution.

Many of the project proposals, which have been “stuck in the pipeline” somewhere between the RPTF and the Commission’s Services, are intended to bolster CARIFORUM capacity in the those specific areas which the Commission, itself, had hitherto identified as the type of institutional weaknesses that EPAs are supposed to address - areas such as Sanitary and Phyto-sanitary (SPS) requirements, competition policy, industrial and services standards, and best practices in trade facilitation.

EU Member States also seem to have some concerns about the RPTFs and a number of these Member States are calling for the Commission and ACP regions to improve the functioning of the RPTFs or their equivalent bodies so that Member States may be able to increase their engagement, financial and otherwise, in the EPA process.

3. Adequacy and Appropriateness The establishment of an EPA Adjustment Facility would avoid the burdensome EDF procedures and accelerate the funding of EPA-related projects. The Facility would have access to funds which were not already earmarked for other regional projects and it would guarantee the availability of regional development resources beyond the expiration of the Cotonou Agreement.

The Cotonou Agreement is replete with commitments to provide development assistance and there is no reason to question the sincerity of the EU. However, the pressing problems of the availability and timely disbursement of financial resources remain serious stumbling blocks. The establishment of an EPA Adjustment Facility could help to resolve both of these challenges.

The CARIFORUM states propose that the EPA Adjustment Mechanism could be operated on a time-sensitive basis to support priority ACP trade capacity needs and ACP regions and EU member states would jointly manage the projects thereby obviating the onerous EDF procedures. In addition, these jointly-managed projects could be funded through regional development banks so that, not only would the procedures be less time-consuming, but regions would also have a greater sense of ownership in the process.

4. Targeting It is firms that trade not governments and therefore the enhancement of international competitiveness and export diversification must focus attention and resources on building capacity, entrepreneurship and innovation in local firms. Financing the reorganization and creation of local firms is a task to which EU could be directed by funding lending schemes operated through the Caribbean Development Bank and commercial banking systems. The Cotonou Investment Fund managed by the European Investment Bank is a vehicle which could be adapted to the purpose suggested.