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99/2 - Renegotiation of the Lome Convention - May 1999

Introduction

Trade and development have been among QCEA's key concerns since it was founded in 1979. Our activities in this area seek to answer to the traditional Quaker concern for the right sharing of world resources. An important element of this work has been monitoring the progress and effects of the various Lomé agreements and contributing to the debate around their renegotiation.

We have written articles on aspects of Lomé for Around Europe, and an extensive report was produced for our Associate Members' Conference in 1997. We return to the subject now because we feel that the current negotiations face a crucial question: can a relationship attempting to balance trade and development elements survive the pressures of global trade liberalisation?

Background

The Lomé Convention is a framework for aid and trade between the European Union (EU) and 71 African, Caribbean and Pacific (ACP) countries. It has evolved from the relationship between EU countries (particularly France and Britain) and their former colonies. The first such agreement was signed in 1975 and the fourth will expire on 29 February 2000.

In November 1996, not long after Lomé IV was signed, the European Commission published a green paper or discussion document on what might follow next. This set out to build on the areas of dialogue which have proved valuable in the Lomé relationship, and announced the EU's intention to incorporate human rights and conflict resolution as components of development programmes. The green paper also had to face up to the changes in rules and attitudes in the international trading community which went with the founding of the World Trade Organisation (WTO) in 1994. Radical changes to the existing trade arrangements between the EU and ACP countries seem to be inescapable. Until now these arrangements have taken the form of exemptions from tariffs on imports into the EU, mainly for agricultural goods. There are special protocols on imports of bananas, rum, sugar and beef, which offer an EU market share to those ACP countries which have traditionally exported them.

Pressure for Change

Pressure has been applied for changes to these trade arrangements from the WTO, but also from within the EU. The current arrangements have not lived up to the original expectations for them. ACP countries have not been able to make best use of the market shares allocated to them. Their share of imports into the EU declined from 6.7% in 1976 to 2.8% in 1994. This is partly due to production and marketing limitations in the countries concerned, and partly to the dilution of the Lomé advantages themselves by globalisation and extensions of EU preferences to other countries, as we shall see. Furthermore, the rigidity of some of the rules, particularly the rules of origin (see Appendix), have made it difficult to derive maximum benefit from the preferences and fostered dependency on traditional agricultural products. The Commission acknowledges in its Green Paper that putting aid resources at the disposal of national governments has sometimes overstretched their ability to use those resources effectively.

It should be borne in mind that these statistics cover a trading relationship between the EU and 71 countries, some among the least developed in the world. Their accuracy in representing states of trade is limited. What the bland statistics do not represent is the divergence between the economies covered by those trade figures. A thorough analysis of the situation on a region or country specific basis reveals that some countries have been able to benefit from Lomé preferences, and diversify their economies using preferential access to EU markets as a base, where those preferences were of significant value.

Examples of sectors where ACP countries have attracted investment as a result of such preferences include fisheries, hides and leather products and cotton-based textiles and clothing, as well as agricultural and processed agricultural products. A case in point is the beef industry in Namibia, which has benefited from access to markets other than South Africa. The increasing production which resulted, and the investment this attracted, allowed the industry to diversify into tanning and leather goods.

This evidence serves as a useful corrective to the argument that existing preferences have proved ineffective in promoting economic development and diversification. It is also important that such arguments should not go unchallenged in the context of the ongoing Lomé renegotiations. However, within the broader context of world trade the value of preferences themselves is diminishing. We shall pursue this thought when dealing with the role of preferences in the context of the World Trade Organisation.

The EU's Negotiating Mandate, and negotiations thus far

The ideas in the Commission's green paper have developed into a "negotiating mandate" for its formal negotiations with the ACP countries which began in September 1998. QCEA contributed to the debate (see Around Europe no. 197). The Council of Ministers on behalf of EU member states agreed the mandate in July 1998 under the British presidency. The EU plans to comply with WTO regulations by organising Regional Free Trade Areas (FTAs) with the ACP countries. These would create Most Favoured Partner status (see appendix) between the EU and the various regional FTAs and the outcome would require the dismantling of tariffs on almost all goods traded between the EU and ACP countries. Within these regions, economic assistance and development programmes would aim to improve infrastructure and economic conditions, both to increase the competitiveness of products from the ACP countries and to raise the standard of living those countries, especially for the poorest.

The negotiations themselves are being conducted within four working groups covering aspects of the agreement under the headings of:

Political / Institutional Arrangements

Development Strategy

Commercial Partnerships

Technical Co-operation

In this report we concentrate on the commercial and developmental aspects of the relationship. Reaching agreement on the trade issues will be the determining condition for concluding a successor agreement to Lomé. It is clear that many fundamental difficulties remain in the commercial negotiations, but the EU stresses its intention to balance the trade and development elements within the overarching agreement. In practice this means emphasising the fight against poverty, alongside the objective of facilitating developing countries' participation in the global economy, within an integrated approach to achieving development. Strategies for enhancing developing countries' ability to participate economically will centre on promoting private sector development, and improving the viability of economic and political institutions.

The parties to the negotiation have resolved to co-operate within the WTO. It is recognised by both sides that regional agreements need to be compatible with WTO rules in the long term, but given the size and diversity of the ACP group there is a need for flexibility regarding the timescale involved. The EU also recognises that the trading relationship need not be symmetrical, in other words what is expected of the trading partners may vary according to circumstance and ability to participate. What this will mean for the banana, sugar, rum and beef protocols remains to be seen.

As an explicit measure to support the concept of differentiation between the countries involved, there will be a re-examination of the methods and goals of programme aid every 2 - 3 years. Shocks to the social and economic systems of ACP countries resulting from changes to the convention will thus be monitored.

The Generalised System of Preferences

The EU acknowledges that participation in Regional Free Trade Areas might not be in the interests of some ACP countries. It might be impossible for others, given such constraints as their geographical location, market orientation or current level of economic development.

The alternative envisaged for developing and least developed countries is that they should be included in the EU's Generalised System of Preferences (GSP).

A Generalised System provides for preferential tariff treatment granted on a non-reciprocal and non-discriminatory basis by developed countries to exports from developing countries. The system was developed under the auspices of the United Nations before the WTO was set up. There are various Generalised Systems offered by the US, Japan, and the EU among others. Although they specifically contravene the Most Favoured Nation provision (see Appendix), as do the Lomé preference systems, unlike those systems GSP has not been challenged within the WTO.

The EU's GSP is to be extended to all Least Developed Countries - most of them are already party to Lomé. There are suggestions that its provisions are likely to be enhanced to match current Lomé preferences in an effort to ensure that least developed countries do not lose out through the changes.

While this extension is to be welcomed, the change is likely to carry specific disadvantages for countries currently benefiting from Lomé preferences. One reason for this is that the Rules of Origin criteria (see Appendix) under Lomé are actually much simpler than those under the GSP. Unless the latter rules are reformed countries are likely to face restructuring costs simply to accord with changes in bureaucratic regulation.

Another problem with reversion to GSP relates to its very generalised and non-discriminatory nature. When speaking of the effectiveness of preferences within a development strategy, it is important to remember that their primary benefit is to give a competitive advantage to particular exports. In assessing whether a country will actually benefit from a given trade preference one must consider whether that country has the resources to use it. It is also important to consider the economic situation of countries exporting the same goods in competition, to see what real advantage any given preference confers.

The disadvantage with a blanket level of preferences, as reversion to GSP would entail, is that countries benefiting from Lomé preferences often depend on for their competitiveness on the preference itself. This competitiveness will be removed if all developing countries are offered preferences at the same level. The point at issue is not so much about the equitable treatment of developing countries as the effectiveness of trade preferences within development strategy. If certain preferences have enabled the development of sectors of a country's economy, to remove their competitive advantage would destroy whatever progress had been made. In countries where it is not a question of development of economic sectors, but of dependency on the preferential access of a single product, removing advantages would destroy not just those economic sectors but livelihoods and communities.

The WTO

As we see in the bananas case study, as elsewhere in this report, the hand which prompts and guides changes to the Lomé convention is that of the WTO. The renegotiation of the convention is taking place against the background of preparations for a new round of negotiations towards further liberalisation in world trade. There is an explicit recognition within the European Commission that enabling developing countries to participate in free trade at the regional level is a stepping stone towards the goal of their participation in the global economy.

The tendency towards trade liberalisation at the global level will further erode the value of preferences themselves. The acting EU trade commissioner, Sir Leon Brittan, has stated the aim of achieving 0% tariffs by 2020, and although this goal does not feature in the EU's proposals in approaching the next round of WTO talks, it is certain that tariffs will be lowered across a wide range of sectors. The value of preferences is that they exempt exports from certain countries from tariffs. If the tariffs themselves are being reduced and ultimately eliminated, as they are on a global basis, the value of preferences is similarly reduced. It is within this context that the restricted role of trade preferences within development strategy should be seen.

The EU is campaigning to ensure that the range of subjects under the jurisdiction of the WTO after the next round will include subjects like investment and competition policy, and that there should be broader provision for environmental considerations. The inclusion of these subjects would require substantial changes to the way the WTO regulates itself, and indeed the manner in which it conducts negotiations towards agreements.

Developing countries' concerns have been left on the margins of previous multilateral trade negotiations, notably during the "Uruguay Round" which concluded in 1993. Many developing countries find that their capacity to participate meaningfully even in routine WTO business is hampered by lack of staff and expertise. It is of great concern that they will be expected to enter into legally binding agreements on subjects where the agenda is set in accordance with the interests of developed countries, agreements with implications for international and regional relationships which will only become apparent when they come to be enforced.

In this context it is of vital importance that the EU negotiators in the WTO take into account the parallel activities of their colleagues working towards a co-operation agreement with the ACP countries. Through such coherence of approach, the EU can reduce the potential for conflict between their regional development strategy for the ACP states, and the agreements towards which they are working in the WTO, whose scope will be global. Failure to achieve this coherence will undermine the EU's development strategy, and further disadvantage ACP countries as they attempt to come to terms with a rapidly changing global regulatory environment.

Some ACP Concerns

ACP countries have voiced concerns over several aspects of the EU's proposals. They argue that the political unity and coherence of the ACP itself is threatened by the proposals for regionalisation. One of the enduring features of the Lomé conventions has been the existence of a single ACP secretariat in Brussels representing ACP concerns. Under the proposed changes, regional organisations could have representation which differed according to their economic and political capacity to participate in the new arrangement.

The timescale offered for establishing regional FTAs is another difficulty. The idea that they could be established successfully within the next twenty years ignores the vast political and economic differences which obtain between regions, and within countries themselves. ACP countries can point to the length of time it has taken to establish the EU as a regional market, and observe that without existing economic development, it is difficult to create a centre capable of or interested in supporting the periphery, or of generating economic momentum. Moreover, some of the more peripheral countries are dependent on customs duty as a source of income, which would be removed with the creation of FTAs. The year 2017 (an end-date quoted by Commission officials) appears to be optimistic if many of the ACP countries are not to suffer from the loss of their existing privileges.

The principle of conditionality enshrined in the prospective partnership is one to which the ACP countries object on the basis that it is one sided. The EU can make development aid conditional upon, for example, adherence to human rights or democratic clauses of agreements. ACP countries have argued that this capacity to act unilaterally undermines the idea of partnership on which the convention was founded, and have suggested that dialogue on such subjects should be reciprocal and involve subjects such as the coherence of EU policy.

Regionalisation

Regional integration has become a keystone of the EU's trade and development strategy. Certainly greater regional integration and stronger trade ties have much to offer. The creation of regional markets could offer countries an alternative to the export-oriented "cash crop" productions on which many are currently dependent. It could improve the security of food supply for many developing countries and reduce the transportation costs involved in importing and exporting both processed and unprocessed goods.

The idea of regionalisation is not new to ACP countries, however. A lesson to be drawn from the history of economic co-operation at the regional and sub regional level is that for such co-operation to bear fruit a whole range of social and political conditions have to favour it. It is not only that sub regional organisations have tended to flourish where there are existing academic and financial institutions capable of overseeing and managing their conduct and progress. The current drive towards regional co-operation is set against a background of political instability in countries whose participation is foreseen in the plans, and whose exclusion is likely to undermine the regions themselves. The most striking example of a region incapable of following the FTA model is that of the Great Lakes, and it is no coincidence that regional initiatives towards a community of the Great Lakes have been the least successful of any attempted on the African continent to date.

The sheer number of African countries currently involved in violent conflicts of one sort or another serves as the strongest indicator that external pressure towards economic regionalism of itself will not be sufficient to bring stability. Violent conflict is the most extreme, but by no means the only example of political instability, and political stability is a precondition for regional partnership. Time limits imposed by the EU or WTO are unlikely to act as factors enabling mediation in cases of domestic or regional strife.

Regional politics is not the only factor likely to provide obstacles to successful regional free trade areas. Whether one thinks of politics, geography or levels of economic development, it is difficult to see a great number of cases where ACP countries cohere easily into regions. In addressing this issue some commentators have observed that African neighbours tend to have competitive rather than complementary economic structures, and this presents an obstacle to their participation in effective economic regions. It is perhaps more appropriate to say that the distinction between competitive and complementary economies only makes sense when set in a broader political and economic context where pressure towards convergence exists.

In the most plausible of cases, where strong regional markets already exist, it is not always obvious that forming a regional trade arrangement would be in the best interest particularly of the weaker economies at this stage. The danger is that existing imbalances within regions will be accentuated where some countries are better positioned to take advantage of open regional markets. Yet more worryingly, the gulf between those countries capable of entering into regional arrangements and those not would widen. The danger for such countries is that they will be further marginalised. Where development strategy sets itself the goal of global integration, what will happen to countries unable to participate?

Generating Local Economies

As we have seen, a central place in the EU's plans for enabling development is given to generating diversified local economies. Large questions remain as to how this is to be achieved, especially within the context of WTO rules. The situation poses different problems for different members of the ACP group. We give two examples, Nigeria and the Windward Islands.

The chief difficulty for relatively prosperous countries such as Nigeria is not shortage of indigenous capital, but lack of investor confidence in the institutions of government and economic management. Pumping capital into countries like this will not be sufficient to transform micro enterprises into small businesses of itself. Although the EU provides support for programmes of governmental structuring and reorganisation, it is legitimate to worry that the time constraint for achieving progress in these fields is being set in association with the EU's need to create integrated regional economies. Achieving the requisite domestic confidence is dependent on a variety of social and political considerations, and can only be achieved within the countries themselves.

Given the political uncertainty surrounding many African countries it is difficult to see them fitting neatly into EU plans for economic regionalisation. Nigeria provides a good example of a country looked to as a source of stability within its region, and yet facing a transition to democratic government against an economically difficult global backdrop.

On the economic level, plans for generating vibrant local economies are not benefiting from a propitious global regulatory environment. Current WTO rules make it increasingly difficult to protect nascent industries against established foreign competition. Protectionist techniques used by some Asian countries to develop their economies are now not allowed under WTO rules. Although there is much debate as to when it is beneficial for economies to be opened to foreign competition, it is clear that small enterprises stand little chance of gaining ground where they are exposed to competition from established foreign enterprises and multinationals. We await EU plans for developing such local enterprises with critical interest.

The Windward Islands of the Caribbean provide an illustration of the constraints certain ACP countries face when it comes to participating in Regional Trade Areas. These small island economies are situated in the hurricane belt and are heavily dependent on revenue from their traditional agricultural export-bananas. The Windwards comprise the islands of Dominica, St. Lucia, St. Vincent and Grenada, and rely on bananas for 60% of their export earnings. Farm size is typically under 5 acres, so the producers suffer from economies of scale, and transportation costs are higher than for their Latin American competitors.

Potential for diversification is limited, not only by the constraints just mentioned, but by the need to grow crops which are likely to recover from the effects of hurricanes in time for harvesting. Bananas have this virtue, and furthermore represent a relatively stable consumer market. The shippers who carry, ripen and market the bananas also add stability. They provide transportation links whose loss would further isolate the islands. In this situation it is difficult to see how the Windwards can participate in a regional free trade area in a meaningful way, such that their dependence on an EU market share for income can be reduced. Although it is possible to argue that the islands should be encouraged to improve their competitiveness by increasing farm size and reducing labour costs, social reorganisation structured to compete with a Chiquita brand plantation would come with a human cost many would find unconscionable.

These considerations lead directly to the central question for the EU's Lomé plans-should global integration and trade liberalisation really be the ultimate aim of development policy? The prevalent dogma of today's political class seems to be that free trade is of universal benefit. Accepting this is a precondition for joining the club, or being taken seriously within it, whether the club in question is the WTO, the EU, or any party of government in the developed world. Once this position is accepted the debate concerns practical arrangements for ensuring the flow of goods and services. It is not asked whether the model suits people, but how best people can be squeezed into the model.

In making political decisions, to paraphrase Gandhi, one should have a care for "the last person". This point was made in our QCEA Council Meeting and is particularly apposite in the current negotiations. The idea that investment benefits all within regions equally, or that it "trickles down" to the poorest by some form of economic or osmotic inevitability is supported by no evidence. Our concern remains that the poorest countries, and the poorest people within countries will not benefit from the proposed changes, and that, conversely, the removal of existing trade regimes on which many are economically dependent will put them at a greater disadvantage.

APPENDIX

The WTO and Bananas:

In 1997 the Dispute Settlement Panel of the WTO found against the EU's banana regime in a case brought by the US and Latin American countries, acting under pressure from multinational banana producers, notably Chiquita brands. The existing convention on bananas has been found to contravene two WTO principles, those of the Most Favoured Nation and Reciprocity (see below). The EU redesigned its banana protocol to remedy the situation, but this failed to satisfy the opponents of the regime, who challenged it again in the WTO. In a parallel move, the US threatened to impose retaliatory sanctions on EU products to the value of revenue Latin American bananas would otherwise have accrued. Another Dispute Settlement Panel has since ruled that the changes made to the banana regime fail to bring it into line with WTO rules, but also that the US had overestimated the dollar value of the sanctions it could impose.

The EU has yet to formally decide whether to challenge this latest decision, and has indicated that it might take until next January to find a solution. These are uneasy times for ACP banana growers.

Most Favoured Nation and Reciprocity:

The WTO principles which Lomé provisions were found to violate are those of the Most Favoured Nation (MFN) and reciprocity. According to the MFN principle any trade concession or preference extended by a WTO member to another or others must be extended to all WTO members automatically. Since Lomé preferences are offered to some members and not others, they are in violation of MFN.

Associated with this principle is that of reciprocity, which obliges countries to extend trade concessions to countries which have extended them such concessions, i.e. concessions must be granted in both directions. The Lomé preferences violate this principle since they give free access to the EU for certain quantities of ACP products and allows them to maintain tariffs on imports.

Rules of Origin:

These are designed to ensure that preferential access afforded to products applies only where those products may be said to "originate" from a country included in a given system of preferences. They often prevent developing countries from diversifying away from production of primary goods i.e. crops or minerals. This is because such goods cannot be incorporated into finished products which contain materials imported from other countries. In many cases primary goods from these developing countries are exported to be processed abroad.

This Short Report is issued by the Quaker Council for European Affairs, an AISBL under Belgian law (Moniteur Belge no 11 732/80). A hard copy of this report is available. Any enquiries should be made to the address below.

Quaker Council for European Affairs
Square Ambiorix 50
B-1000 Brussels
Belgium

Tel: +32 2 230 4935
Fax: +32 2 230 6370
email: info@qcea.org

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