<p>DRAFT VERSION</p><p>THE TRADE ISSUES OF SIDS IN THE CONTEXT OF THE MULTIPLE TRADE NEGOTIATIONS THEATERS</p><p>By Dr Jean-Michel SALMON, University of French West Indies and Guyana and STRADEVCO1</p><p>2nd AIMS Regional Meeting on the BPOA+10 Review 8th-10th January 2004 Berjaya Mahe Beach Hotel, Seychelles</p><p>Contents</p><p>1. A short remainder of the economic analysis of SIDS through two recent WTO Secretariat Notes 2. Several conceptual approaches in international for a: SIDS, Small States/Economies, Vulnerability, Islandness 3. The multiple trade negotiations theatres and the trade interests of SIDS: multilateral, bilateral and unilateral issues 4. A tentative (and very provisory) selection of major trade interests of SIDS</p><p>1 [email protected] or [email protected] ; tel/fax +596 596 63 51 48 1. A short remainder of the economic analysis of SIDS through two recent WTO Secretariat Notes</p><p>The economic analysis of SIDS goes back to the early eighties or even to the sixties if we include the old kuznetsian reference on the first analysis of the economic impact of country size. An interesting review of the literature on Small Economies has recently been proposed by the WTO Secretariat2 : it reaffirms that smallness per se has no clear influence on the economic performance of nations, i.e. on the GDP growth rate or on the income per capita, according to the several econometric analyses available in the literature, among which the Easterly and Kraay (2000) one. This comes to confirm what the World Bank economist Srinivasan concluded in 1986 when saying that ‘smallness is neither a necessary nor a sufficient condition for bad economic performance’. And of course SIDS could not be satisfied with such a conclusion which overlooks the peculiar constraints faced by SIDS in their development path : thus this very first WTO Secretariat Note was not encouraging in relation to the issue of the justification for a special treatment of SIDS within the international trade rules (see 2.). Several critics have been made to these statistical analyses as well as to the international political economy lessons that are sometimes derived from them (see for example Salmon, 2002a for more details), among which the idea that SIDS or small economies should not deserve any special attention from the international economic institutions (to the contrary of the poorest countries, i.e. the LDCs).</p><p>Fortunately enough the WTO Secretariat deepened its own analysis by looking at the influence of size on the external trade process and performances of small economies in a subsequent Note3. A substantially different tune is developed there : mainly the argument goes in three steps like this: (i) smallness when combined with remoteness imply small diseconomies of scale and higher unit costs of production, (ii) hence a limited or reduced competitiveness in a large range of products/sectors, particularly at the export level, (iii) thus the repositioning of small economies in the context of the globalisation is much more difficult to achieve. Even if the WTO Secretariat analysis stopped here, its conclusion obviously calls for some specific provisions to help small economies manage these difficulties, that have yet to be precised and decided within WTO rules.</p><p>2 document WT/COMTD/SE/W/4, July 23, 2002, downloadable from www.wto.org</p><p>3 document WT/COMTD/SE/W/5, October 23, 2002. 2. Several conceptual approaches in international for a: SIDS, Small States/Economies, Vulnerability, Islandness</p><p>Before going to the core issue of the trade negotiations from a SIDS point of view, it is important to recall the several conceptual approaches that are use within the different international for a to characterize the economies concerned : they may be interpreted as conflicting whereas they are rather complementary since being used for international politics reasons.</p><p>The first conceptual approach well known in this meeting is the SIDS one : this is of course the one used within the UN system, back at least to the SIDS programme of UNCTAD of the early eighties. It has been developed through many UN fora (BpoA, Johannesburg & Monterrey Summits, see also the UN General Assembly resolution n°57/262) and it is also used at the WTO but only within the Agriculture Negotiations. Let us notice here that any true characterization of SIDS shall mention smallness and remoteness or costly accessibility implied by isolation/distance and islandness, so that the economic analysis of SIDS can not be reduced to that of small size per se.</p><p>However the concept of Small States and Small Economies has been re-utilized recently in international fora for political economy reasons : we refer here firstly to the very important activities developed by the World Bank/Commonwealth Secretariat Joint Task Force on Small States, with their very interesting 2000 final report, and more importantly to the creation of the Working Group on Small Economies within the WTO system, as requested by Member States at the Doha Ministerial Conference of November 2001 (paragraph 35 which called for the creation of this working group in order to frame answers to the identified trade issues of small and vulnerable economies aimed at contributing to their full integration within the multilateral trade system). This Working Group has been very active, as shown by the circulation of communications from a series of small economies to be discussed within the group, with the final objective of framing concrete recommendations to be sent to the Trade and Development Committee and then to the WTO General Council. A statement on behalf of the Small and Vulnerable Economies has been prepared for the Cancun Ministerial of September 2003. The concept of Small Economies is also used within the Free Trade Area of the Americas (FTAA) Negotiations, as theses economies call for a Special and Differential Treatment (SDT) within the future agreement. It should be also added here that within the trade arrangements of the CARICOM, the so-called ‘less developed economies’, i.e. member countries that benefit from such SDT, are not selected from the GDP income per capita criteria but rather from their smallest size: they are indeed the smallest islands of the OECS (lesser Antilles).</p><p>As it appeared above, the WTO is also now using the concept of vulnerability, along the smallness one. Economic Vulnerability is an approach developed from the mid-nineties, as UNCTAD requested Pr Briguglio from the University of Malta to elaborate an index able to assess this higher economic vulnerability of SIDS, as a alternative way to make the case for the specific development assistance needed by SIDS (whereas their income per capita level do not necessarily qualify them for a special treatment : many of them belong to the medium income range of the World Bank classification). Other indexes have been elaborated since then, among which the Commonwealth Vulnerability Index (CVI) and the Economic Vulnerability Index (EVI) of the UN4. The latter has gained political importance since the Committee for Development Policy (Ecosoc) is now using the EVI as one criterion among others to identify LDCs ; qualitative vulnerability profiles of countries are also used by the CDP when considering the eventual graduation of some LDCs. These consideration already helped to avoid a sudden graduation of LDC SIDS, such as Vanuata or Maldives, that would have meant the losing of associated economic and financial advantages. Since LDCs benefit from special trade disciplines within the WTO rules, and that the UN EVI is used to identify them, it is clear that the vulnerability concept has been benefiting from an acknowledgement within the WTO, even if implicitly. The fact that the Doha §35 mentioned the category of Small and Vulnerable Economy reinforced this acknowledgement.</p><p>The concept of islandness is of course not new in the social sciences5. The EU through its partnership with the ACP countries clearly used this concept within the Lomé Convention and now in the Cotonou Agreement as well : the vulnerability of island States is mentioned</p><p>4 See annex 1 for a comparison of the three vulnerability indexes of the ACP IOC member states ; as it shows, the ranking can be very sensitive to the methodology used. It is possible to think that the UN EVI has been designed (logically) more as a index for LDCs than for SIDS (see Salmon, 2002a for more details), since one of the EVI elements is the share of industry and services over GDP. Used as a measure of diversification (away from agriculture), hence a reduced vulnerability, which is quite acceptable for a large (eventual rural based) LDC, it could be hiding a continuously concentration process of a typical SIDS economy, since the economic development of the latter typically often comes from any booming non-agricultural single sector (notably in tradable services such as tourism or financial services), which increases the concentration of the economy, hence its vulnerability (whereas the ratio of industry and services over GDP is much higher). Mauritius for example appears much less vulnerable with the EVI than with other vulnerability indexes (see annex 1). 5 The World Development review indeed published a special issue on Island back in 1980, with an editorial note of Paul Streeten. several times along with the landlocked one within the latter Agreement, which takes as a fundamental principle of the objective of taking it into account (Article 2). Article 89 is entirely dedicated to Island ACP States, and should be recalled here: “Specific provisions and measures should be established to support island ACP States in their efforts to overcome their natural and geographical difficulties and other obstacles hampering their development so as to enable them to step up their respective rates of development”. This applies to the trade and economic cooperation, which shall, according to article 35.3, “take due account of the vulnerability of the small landlocked and island countries” ; EPAs are obviously concerned here (see Salmon, 2002a and 2002b for more details). Please also notice here one of the few times where the Cotonou Agreement mentions smallness.</p><p>So we are here with several simultaneous and complementary strategic approaches that should be considered each of them supportive of the other, e.g. the UN SIDS approach shall be supportive of the WTO Small and Vulnerable Economies (SVE) approach, not be trying to replace it since specific trade arrangements for these economies are to be negotiated in the right fora (see below). Whereas the SIDS should not be confused with the eventually larger Small Economies grouping, the issue of definition (and the associated criteria) of would-be beneficiary economies has been carefully postponed until a consensus is reached on the legitimacy of flexible trade rules for these economies.</p><p>To finish with conceptual approaches, a few words shall be written on the special case of the so-called outermost regions of the EU6 : these regions are totally integrated within the EU and as such must apply and respect all EU common policies. But at the same time their special characteristics (remoteness, islandness, small area, topographic and climate difficulties, economic dependence on a few products) have been acknowledged within the EU Treaty (and new draft constitution) as permanent and being detrimental to their development process, so that the EU law can be adapted within these regions, including the EU common policies such as the trade policy, the fiscal policy, the competition policy and so on. Hence this eventually allows for policy space or flexibilities ACP SIDS should keep in mind when it comes to the forthcoming trade negotiations with the EU (EPAs). Indeed they should be benefiting from the same rationale, already acknowledged by the WTO Secretariat (see above) : small island economies face the hampering consequences of their natural and</p><p>6 Sometimes also called « ultraperipheral regions », there are seven of them : the four French Overseas Departments (Guadeloupe, French Guyana, Martinique, Reunion Island), Canary Islands, Açores and Madeira. geographical characteristics, as mentioned in the Cotonou Agreement and as much as the outermost regions, and shall be receiving a special treatment within trade rules in order to help them mitigate these consequences.</p><p>3. The multiple trade negotiations theatres and the trade interests of SIDS: multilateral, bilateral and unilateral issues</p><p>When quickly looking at trade negotiations complexities, a good start to be simple as much as possible is to be distinguish between the multilateral, bilateral and unilateral levels.</p><p>At the multilateral level we are referring to the WTO trade talks, negotiations and agreements, and the several committees or discussions concerned, among which: - Agriculture, which on-going negotiations are based on the same three pillars of the Uruguay Round Agreement on Agriculture (1994) : Market Access, Internal Support and Export Subsidies, - Non Agricultural Products Market Access (NAMA), which refers to tariffs and non-tariff barriers on industrial product markets, - Rules, which includes negotiations on the rules on (non-agricultural) Subsidies and countervailing measures, on Fisheries and on the Regional Trade Agreements rules (article XXIV GATT), - the Singapore Issues (Competition, Investment, Government Procurement and Trade Facilitation), - Several transversal issues, such as Small and Vulnerable Economies, Special and Differential Treatment, Implementation issues.</p><p>At the bilateral level, we are referring to the several FTA Agreements and Negotiating Process, i.e North-South ones (FTAA, EPAs, and so on) as well as south-south regional groupings (Comesa, Picta, Caricom…). </p><p>Finally the unilateral level refers to the Generalized System of Preferences (GSP)7 and should not be overlooked since its impact on third parties can be very significant. The</p><p>7 It is unilateral in the sense that it is totally and freely elaborated from any country that implements a policy in this regards : it is not binding (except for ‘moral’ engagement) and a such is subject to be modification or even elimination any time. extension of preferential tariffs to a larger group of countries, as well as the implementation of north-south FTAs are eroding preferential margins to a very large extent. This is regularly observed, as recently with the canned tuna case. The same effects can appear with internal reforms within large developed countries, as with the reforms of the EU Common Organisation of Market for Banana (already approved by the EU Council) or for Sugar (still in discussion) : the former already hurt a lot the bananas exports from the Caribbean smallest islands, whereas the sugar big interests of a few big SIDS exporters (Mauritius, Fiji) are much threatened in the medium range.</p><p>4. A tentative (and very provisory) selection of major trade interests of SIDS</p><p>We will be simply mentioning a few major trade interests of SIDS back from a transversal approach here, which means that these interest, at least some of them, may have to be supported within the three levels of negotiations or discussions referred to above. Hereunder we will be referring to SIDS notwithstanding the existence of the several conceptual approaches described above: this is meant for the sake of simplicity, and not as a suggestion to change conceptual approaches in any fora.</p><p>(i) First one is the Market Access Preferences enjoyed by SIDS in the western countries markets (Tariff-Rate Quotas and Preferential Tariffs): they are of the uttermost importance and must be secured or as a second best, in case of erosion or elimination, be compensated through well designed financial programmes (Kennes, 2000),</p><p>(ii) Second one is the Market Access in SIDS : these states should be allowed to smooth their own market liberalization process, in terms of liberalization speed as well as product coverage; this applies to agriculture (see Salmon, 2003, for a thorough analysis of indian ocean SIDS interests within agriculture negotiations) as well as industrial products, services, and regional trade agreements. In the latter case, some additional flexibility should be given to SIDS in terms of degrees of reciprocity or asymmetry within FTAs, in order both to support local activities in the context of strong competitive disadvantages due to diseconomies of scale and transport costs and to help contribute to the limitation of the public finance gap8,</p><p>8 The latter could be rapidly emerging since many SIDS remain largely dependent on customs duties. (iii) the negotiations on subsidies and countervailing measures as well as the discussions on the Singapore issues should take due account of the special characteristics of SIDS,</p><p>(iv) finally technical assistance and aid issues are to be mentioned here: - the specific concessionary finance for SIDS principle already approved by the World Bank shall be maintained and extended to other donors whenever necessary, - The Vulnerability index shall be consolidated and the Vulnerability qualitative profiles should be systematically used and extended to all SIDS to make the case for their specific vulnerability, whereas they should be maintained as elements of decision within the graduation process, - Trade technical assistance shall be increased in SIDS, possibly with a specific ‘Integrated Framework’ such as the one already existing for LDCs ; some support to the AIMS ACP islands trade negotiations, particularly for EPAs, should also be welcome.</p><p>Conclusion</p><p>SIDS are facing high risks associated with Trade Negotiations and preferences erosion: they appear to have much more to lose than to gain so far, whereas their constraints, being from a natural and geographical origin, are on a permanent basis and obviously will remain strong in the future. Hence they should be receiving a special treatment that help them mitigate these constraints : only then would they be able to ensure the supposed gains of a full integration with the world economy to further their sustainable development.</p><p>References </p><p>Commonwealth Secretariat, World Bank (2000), Small States, Meeting Challenges in the global Economy, Report of the Joint Task Force on Small States, March.</p><p>Easterly W., Kraay A. (2000), “Small States, Small Problems? Income, Growth, and Volatility in Small States”, World Development, vol. 28 n°11.</p><p>Kennes W. (2000), Small Developing Countries and Global Markets, Mac Millan, London. Salmon J-M. (2003), The Indian Ocean Case Study, in UNCTAD, Agriculture Negotiations and the Specific Needs of SIDS, forthcoming.</p><p>Salmon J-M. (2002a), Mission d’identification des thèmes relatifs aux petites économies insulaires et vulnérables pour les négociations des futurs accords de partenariats économiques UE/ACP, Secrétariat de la Commission de l’Océan Indien, mai. Salmon J-M. (2002b), The Treatment of Small and Vulnerable Island Economies in the EPA Negotiations, Comesa EPA Seminar, Lusaka, Zambia, 31st October – 1st November.</p><p>Annex 1</p><p>A comparison of the vulnerability indexes in the ACP IOC member states</p><p>Briguglio UN CDP Commonwealth (1995) 2000 Secretariat 1999</p><p>Vulnerability Vulnerability Vulnerability Index & Index (EVI) & Index (CVI) & rank rank rank</p><p>(3 (1) (2 Comoros 0.602 55.36 5.425</p><p>17th 24th 43th</p><p>Madagascar 0.428 26.75 4.772 </p><p>62th 105th 90th</p><p>Mauritius 0.614 35.21 6.510</p><p>14th 86th 27th</p><p>Seychelles 0.756 57.02 6.375</p><p>3th 14th 28th</p><p>NB : the ranking of vulnerability of countries is of decreasing order.</p><p>Source : Salmon (2002a) .</p>