part ii access of the african epa-countries’ exports to...

Economic Partnership Agreements between Africa and the European Union:

What to do Now?

Full Report on Implementing Interim EPAs

Part II

Access of the African EPA-Countries’

Exports to the EU Market

March 26, 2009

Poverty Reduction and Economic Management (PREM)

Africa Region, World Bank

3

Full Report on Implementing Interim EPAs

Part II: Access of the African EPA-Countries’

Exports to the EU Market

Table of Contents

Page

6. The African EPA-Countries‟ Exports to the European Union 5

7. EU Tariff Preferences for African Countries: Interim EPAs, GSP, and the

EBA Program 15

A. The European Union‟s MFN Tariffs 15

B. The EU‟s Tariff Preferences for African Non-LDCs: the Cotonou Regime,

GSP, and Interim EPAs 21

C. The EU‟s Tariff Preferences for African LDCs: the Cotonou Regime, the

EBA Program, and Interim EPAs 36

D. The Duration and Certainty of Preferential Access to the EU Market 40

E. The Overall Impact of Interim EPAs on the Access of African Countries to the

EU Market 42

8. Liberalization of the Interim EPAs‟ Rules of Origin 45

9. Other Non-Tariff Market-Access Issues 63

A. Agriculture-Specific Market-Access Issues 63

B. The EU‟s Technical, Sanitary, and Phyto-Sanitary Product Standards 72

10. Inadequacy of Tariff Preferences Alone for Accelerating Export Growth in the

EPA-Signatories 75

A. Little Apparent Impact of the EBA Program on the Exports of African LDCs

to the EU 75

B. Preference Erosion 82

C. Conclusion: The Bottom Line on Market Access 86

5

6. The African EPA-countries’ Exports to the European Union

Although the greater flexibility of the revised EPA-design has permitted accommodating

the diverse economic conditions, interests, and preferences in the various regional EPA-groups, a

number of issues will require continued attention during the implementation of the interim EPAs.

Part II of this report analyzes the access of the EPA-countries to the EU market under interim

EPAs and the alternatives of the EU‟s MFN trade regime, its Generalized System of Preferences

(GSP), and its Everything-but-Arms Program. Part III goes on to discuss the reciprocal

elimination of the EPA-countries‟ tariffs on 80-85% of their imports from the EU and the policy

reforms that need to accompany this, the complementary reforms and supporting development

assistance necessary to generate a strong supply response, and the opportunities and risks

presented by interim EPAs.

This chapter opens Part II by examining the structure and performance of the African

EPA-countries‟ exports to the EU. It establishes the empirical context for the subsequent

discussion of market access issues. The following four chapters in Part II then consider the

implications of interim EPAs for tariff preferences for Africa‟s exports to the EU, the

liberalization of the interim EPA‟s rules of origin, other non-tariff market-access issues, and the

limitations of tariff preferences alone for accelerating export growth and diversification in the

EPA-countries.

The Importance of the EU Market for the EPA-Countries’ Non-oil Exports

As discussed in Chapter 2, the relative importance of the EU market is significantly

greater for the African EPA-countries‟ non-oil exports than for their total exports. Although the

share of the EPA-countries‟ non-oil exports going to the European Union has fallen steadily from

67% in 1985 to 49% in 2007,1 the EU is by far the largest single market for the non-oil exports

of the African EPA-countries, accounting for 49% ($26 billion) of the total in 2007, a share that

is six times the 8% shares of each of their two second largest markets (the US and China) for

their non-oil exports. The EPA-countries‟ non-oil exports to the EU grew at 5% annually from

1997 to 2007, and African countries remains quite dependent of the European Union as a market

for their non-oil exports. 2

The EU is the African EPA-countries‟ the largest market for most of their major non-oil

exports (Graph 6.1 and Table 6.1). The EU is a particularly important market for the EPA-

countries‟ exports of aluminum (97%), shellfish (96%), vegetables (82%), iron ore (81%), sugar

(80%), wood (73%), natural rubber (72%), fruits and nuts (70%), precious stones and pearls

(68%), coffee (66%), cocoa (65%), and fish (63%).

1 See Graph 2.5 in Chapter 2.

2 See Table 6.2.

6

Graph 6.1: Shares of the African EPA Countries' Major Non-oil Exports

Going to the European Union in 2007

(as a % of the EPA-counties total exports of these products)

0 10 20 30 40 50 60 70 80 90 100

Copper

Tobacco (raw, wastes)

Total garments

Fish (live, fresh, chilled, frozen)

Cocoa

Coffee and coffee substitute

Pearls and precious stones

Fruits and nuts (fresh, dried)

Natural rubber and latex

Wood (simply worked)

Sugar, mollasses, and honey

Iron ore and concentrates

Crude vegetable materials, n.e.s.

Shellfish (prepared, preserved)

Aluminium

%

Notes: South Africa is not included in the totals for the African EPA-countries in this graph. The products shown

are the 15 products in Table 6.1 which have the highest export values to the EU and are listed in decreasing order of

market share..

Source: Authors‟ calculations from UN COMTRADE (SITC 3 mirror data, accessed December 2008).

The Composition of the EPA-Countries’ Non-oil Exports

Ferrous and non-ferrous ores and metals (particularly, copper, aluminum, nickel, iron ore,

and uranium) were the largest category of the EPA-countries‟ non-oil world exports in 2007,

amounting together to $13.2 billion and accounting for 6.7% of total merchandise exports (Table

6.1). Cocoa was the EPA-countries‟ second largest non-oil export and the single largest

agricultural export, accounting for 2.8% of the EPA-countries total merchandise exports to the

world, with two thirds of cocoa exports going to the EU and the ECOWAS EPA-group supplying

7

Table 6.1: The African EPA-Countries' Largest Non-oil Merchandise Exports to the World, the European Union,

and the Rest of the World in 2007

SITC

CodeProduct Name

Exports to

World ($m)

Exports in

SITC as % of

Total Merch.

Exports to

World

Exports to EU

($m)

Exports in

SITC as % of

Total Merch.

Exports to EU

Exports to

EU as % of

Exports to

World, in

SITC

Exports to

RoW ($m)

Exports in

SITC as %

of Total

Merch.

Exports to

RoW

68 Non-ferrous metals 6,730.8 3.4 3,130.6 6.5 46.5 3,600.2 2.4

681 Silver and platinum, etc. 0.5 0.0 0.1 0.0 10.4 0.4 0.0

682 Copper 3,123.5 1.6 598.9 1.2 19.2 2,524.6 1.7

683 Nickel 542.2 0.3 17.6 0.0 3.2 524.6 0.4

684 Aluminium 1,994.0 1.0 1,942.6 4.0 97.4 51.4 0.0

685 Lead 33.7 0.0 5.0 0.0 14.9 28.7 0.0

686 Zinc 475.3 0.2 400.3 0.8 84.2 75.0 0.1

687 Tin 8.0 0.0 0.3 0.0 4.0 7.7 0.0

689 Misc. non-ferrous base metal 553.5 0.3 165.8 0.3 30.0 387.7 0.3

28 Metal ores and metal scrap 6,463.4 3.3 1,620.9 3.3 25.1 4,842.5 3.3

281 Iron ore and concentrates 815.3 0.4 658.4 1.4 80.8 156.9 0.1

282 Ferrous waste and scrap 212.9 0.1 19.8 0.0 9.3 193.0 0.1

283 Copper ores and concentrates 1,056.7 0.5 101.7 0.2 9.6 954.9 0.6

284 Nickel ores and concentrates 1,166.1 0.6 18.9 0.0 1.6 1,147.2 0.8

285 Aluminium ores and concentrates 953.1 0.5 476.6 1.0 50.0 476.5 0.3

286 Uranium and thorium ore and concentrates 148.0 0.1 0.0 0.0 0.0 147.9 0.1

287 Base metal ore and concentrates, n.e.s. 1,648.1 0.8 128.3 0.3 7.8 1,519.8 1.0

288 Non-ferrous base metal waste, n.e.s. 336.2 0.2 195.5 0.4 58.2 140.7 0.1

289 Precious metal ore and concentrates 127.0 0.1 21.5 0.0 16.9 105.5 0.1

072 Cocoa 5,411.3 2.8 3,580.6 7.4 66.2 1,830.7 1.2

667 Pearls and precious stones 3,607.8 1.8 2,488.6 5.1 69.0 1,119.1 0.8

03 Fish and shellfish, etc. 3,069.3 1.6 2,244.0 4.6 73.1 825.3 0.6

034 Fish (live, fresh, chilled, frozen) 1,504.9 0.8 950.2 2.0 63.1 554.7 0.4

035 Fish (dried, salted, smoked) 52.9 0.0 7.6 0.0 14.3 45.3 0.0

036 Crustaceans and molluscs, etc. 729.3 0.4 534.2 1.1 73.2 195.1 0.1

037 Shellfish (prepared, preserved) 782.1 0.4 752.1 1.6 96.2 30.1 0.0

84 Total garments 2,678.9 1.4 1,163.5 2.4 43.4 1,515.4 1.0

841 Men and boys wear, woven 566.8 0.3 183.7 0.4 32.4 383.1 0.3

842 Women and girls clothing, woven 409.0 0.2 77.8 0.2 19.0 331.3 0.2

843 Men and boys wear, knit and crocheted 200.5 0.1 56.9 0.1 28.4 143.6 0.1

844 Women and girls wear, knit and crocheted 232.1 0.1 76.2 0.2 32.8 155.9 0.1

845 Articles of apparel, n.e.s. 1,216.2 0.6 731.4 1.5 60.1 484.8 0.3

846 Clothing accessories 38.1 0.0 27.3 0.1 71.7 10.8 0.0

848 Headgear and non-textile clothing 16.1 0.0 10.1 0.0 63.0 5.9 0.0

8

Table 6.1 (continued): The African EPA-Countries' Largest Non-oil Merchandise Exports to the World, the European Union,

and the Rest of the World in 2007

SITC

CodeProduct Name

Exports to

World ($m)

Exports in

SITC as % of

Total Merch.

Exports to

World

Exports to EU

($m)

Exports in

SITC as % of

Total Merch.

Exports to EU

Exports to

EU as % of

Exports to

World, in

SITC

Exports to

RoW ($m)

Exports in

SITC as %

of Total

Merch.

Exports to

RoW

247 Wood (in rough, squared) 1,740.1 0.9 461.3 1.0 26.5 1,278.8 0.9

057 Fruits and nuts (fresh, dried) 1,466.0 0.7 1,022.5 2.1 69.7 443.5 0.3

071 Coffee and coffee substitute 1,410.8 0.7 934.5 1.9 66.2 476.3 0.3

248 Wood (simply worked) 1,351.0 0.7 980.7 2.0 72.6 370.3 0.3

121 Tobacco (raw, wastes) 1,315.3 0.7 562.4 1.2 42.8 752.9 0.5

263 Cotton 1,311.0 0.7 140.0 0.3 10.7 1,171.1 0.8

292 Crude vegetable materials, n.e.s. 1,031.4 0.5 837.7 1.7 81.2 193.6 0.1

231 Natural rubber and latex 935.1 0.5 675.2 1.4 72.2 260.0 0.2

061 Sugar, mollasses, and honey 865.5 0.4 691.6 1.4 79.9 173.9 0.1

054 Vegetables (fresh, chilled, frozen) 644.3 0.3 457.8 0.9 71.1 186.5 0.1

525 Radio-active etc. material 593.4 0.3 344.7 0.7 58.1 248.8 0.2

074 Tea and mate 551.1 0.3 214.5 0.4 38.9 336.6 0.2

634 Veneer and plywood 532.0 0.3 393.7 0.8 74.0 138.3 0.1

222 Oil seeds (soft oil) 443.5 0.2 53.4 0.1 12.0 390.2 0.3

27 Crude fertilizer and mineral 435.5 0.2 205.9 0.4 47.3 229.6 0.2

611 Leather 434.6 0.2 310.9 0.6 71.5 123.7 0.1

512 Alcohols, phenols, and derivatives 400.0 0.2 161.3 0.3 40.3 238.7 0.2

89 Misc. manufactures, n.e.s. 392.1 0.2 147.8 0.3 37.7 244.3 0.2

661 Lime, cement, and constuction material 360.3 0.2 9.0 0.0 2.5 351.4 0.2

65 Textile yarn, fabric, and articles 290.4 0.1 88.6 0.2 30.5 201.8 0.1

001 Live animals, except fish 279.9 0.1 18.6 0.0 6.6 261.3 0.2

42 Fixed vegetable oils and fats 254.9 0.1 121.6 0.3 47.7 133.3 0.1

72 Industry special machine 246.6 0.1 57.2 0.1 23.2 189.5 0.1

55 Perfume, cosmetic, cleanser 236.4 0.1 26.2 0.1 11.1 210.2 0.1

671 Pig iron etc. ferrous alloy 231.0 0.1 148.5 0.3 64.3 82.5 0.1

044 Maize, except sweet corn 217.6 0.1 4.3 0.0 2.0 213.3 0.1

78 Road vehicles 216.4 0.1 21.4 0.0 9.9 195.0 0.1

Total value of largest non-oil merchandise exports 46,147.7 23.6 23,319.3 48.1 50.5 22,828.4 15.5

Other non-oil merchandise exports 6,944.5 3.5 2,827.2 5.8 40.7 4,117.3 2.8

Total non-oil merchandise exports 53,092.2 27.1 26,146.5 54.0 49.2 26,945.7 18.3

Oil exports (SITC 3) 142,133.3 72.6 22,257.6 45.9 15.7 119,875.8 81.4

Total merchandise exports 195,792.9 100.0 48,447.9 100.0 24.7 147,345.0 100.0

Notes: South Africa is not included in the totals for African EPA-countries in this table. Products are arranged in descending order based on their export value to

the world in 2007. "Largest exports" are measured here as those product categories with a world export value of $200 million or more in 2007. All largest

exports in 1998 are also largest exports in 2007.

Source: Authors‟ calculations from UN COMTRADE (SITC 3 data, accessed December 2008).

9

most of these. Precious stones (including diamonds) and pearls ranked third at 1.8% of

merchandise exports to the world, with 69% of these exports going to the EU and the SADC and

ESA EPA-groups supplying most of the exports. Fish exports were the fourth most important,

contributing, 1.6% of the EPA countries‟ world export earnings. Fish sales, like most other non-

oil exports, are also heavily concentrated in the EU market, which absorbs 73% of African fish

exports, with all EPA groups other than CEMAC being important suppliers.

Non-traditional Exports. In contrast, clothing, the largest labor-intensive manufactured

export, ranked only fifth at 1.4% of global exports. Because of increasing clothing exports to the

US under the trade preferences granted by its Africa Growth and Opportunity Act, the EU has

become, a relatively less important market for African EPA-countries‟ clothing exports than for

other non-oil products, accounting for 43%. The ESA and SADC EPA-groups are Africa‟s

largest suppliers of clothing, accounting separately for over 90% of the EPA-countries‟ global

clothing exports. 3

Exports of a few other manufactured products – primarily, initial processing of primary

copper, aluminum, and precious and semi-precious stones – also developed during the last

decade. Among the EPA-countries‟ non-oil exports, in addition to these manufactures, are a few

non-traditional agricultural exports, such as prepared fish, cut flowers, and some fruits and

vegetables that have benefited from growing world demand in contrast to the less dynamic

markets for traditional agricultural commodities such as coffee, cocoa, and sugar.

Loss of Market Share in the EU for Non-oil Exports

Disappointing Overall Growth Performance. The nominal value of the African EPA-

countries‟ non-oil exports to the European Union stagnated at about $15 billion from 1990 to

2000 but, helped by rising commodity prices, rose steadily from 2000 onwards reaching $26

billion in 2007 (Graph 6.2).4 However, the already small share of the EPA-countries‟ non-oil

exports in the EU import market dropped further from 1% in 1990 to 0.5% in 2007 as non-oil

imports from other regions grew more rapidly.5 The inclusion of South Africa,

3 See the chapter on the economies of the regional EPA-groups in the forthcoming report on full EPAs for data on

and a more detailed discussion of the composition of the exports from the five regional EPA-groups. 4 See also Annex A, Graph A.3: Nominal Annual Growth Rates of the European Union‟s Total, Oil, and Non-Oil

Merchandise Imports for the African EPA-Countries, 1990-2007. 5 See Chapter 2, Graph 2.2. The African EPA-countries‟ total oil and non-oil imports have followed a similar trend.

Over the ten years from 1997 to 2007, the EPA-countries total nominal oil and non-oil exports to the EU grew at an

average rate of 9% annually, less than one-half the 19% growth rate of their total nominal exports to the world

(Table 6.2). The EPA-countries‟ share in total oil EU merchandise imports from 1.5% of the EU‟s total oil and

non-oil imports in to 1% in 1997 and has stagnated at that level since then (Graph 6.3). From 1990 to 2002, the

EPA countries‟ total exports (including oil) to the European Union fluctuated between $20 billion and $25 billion

but then nearly doubled from $25 billion in 2002 to $49 billion in 2007 with booming commodity prices (Graph

6.2). The same trends have been observed for each of the five regional EPA-group separately, although there is

some variation in nominal growth rates of merchandise exports among the EPA-groups over this period, depending

in particular upon the relative importance of oil in each regional EPA-groups‟ exports (see the forthcoming

companion report on full EPAs for a further discussion of export trends in the regional EPA-groups).

10

Graph 6.2: The European Union's total, non-oil, and oil merchandise imports from

African EPA-Countries

(US$, billions)

0

5

10

15

20

25

30

35

40

45

50

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

US

$,

bil

lio

ns

0

5

10

15

20

25

30

35

40

45

50

US

$, b

illion

s

Total imports Oil imports Non-oil imports

Notes: South Africa is not included in the totals for the African EPA-countries in this graph.


Graph 6.3: The European Union's Total, Non-oil, and Oil Merchandise Imports from the

African EPA-Countries as shares of its Total Merchandise Imports

(in %)

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

%

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

%

Total imports Non-oil imports Oil imports

Notes: South Africa is not included for the African EPA-countries in this graph.


11

Table 6.2: Growth Rates in Current Prices of the African EPA-Countries' Largest Merchandise Exports to the World, the

European Union, and the Rest of the World, 1998-2007

SITC Code Product Name

Exports to

World ($m,

2007)

Annual

Compound

Growth Rate of

Exports to

World (98-07)

Exports to EU

($m, 2007)

Annual

Compound

Growth Rate of

Exports to EU

(98-07)

Exports to

RoW ($m,

2007)

Annual

Compound

Growth Rate of

Exports to

RoW (98-07)

68 Non-ferrous metals 6,730.8 19.3 3,130.6 18.8 3,600.2 19.7

681 Silver and platinum, etc. 0.5 -10.5 0.1 -13.4 0.4 -10.0

682 Copper 3,123.5 21.5 598.9 17.3 2,524.6 22.8

683 Nickel 542.2 21.8 17.6 -5.0 524.6 27.5

684 Aluminium 1,994.0 21.9 1,942.6 23.1 51.4 4.7

685 Lead 33.7 65.3 5.0 44.5 28.7 77.0

686 Zinc 475.3 54.8 400.3 61.7 75.0 39.3

687 Tin 8.0 22.4 0.3 -6.1 7.7 32.3

689 Misc. non-ferrous base metal 553.5 7.3 165.8 6.7 387.7 7.5

28 Metal ores and metal scrap 6,463.4 18.1 1,620.9 8.8 4,842.5 24.9

281 Iron ore and concentrates 815.3 12.0 658.4 10.0 156.9 30.9

282 Ferrous waste and scrap 212.9 29.9 19.8 8.7 193.0 39.3

283 Copper ores and concentrates 1,056.7 50.4 101.7 123.5 954.9 48.9

284 Nickel ores and concentrates 1,166.1 70.9 18.9 n/a 1,147.2 70.6

285 Aluminium ores and concentrates 953.1 5.5 476.6 6.0 476.5 5.0

286 Uranium and thorium ore and concentrates 148.0 136.5 0.0 n/a 147.9 136.5

287 Base metal ore and concentrates, n.e.s. 1,648.1 20.5 128.3 0.8 1,519.8 27.2

288 Non-ferrous base metal waste, n.e.s. 336.2 14.5 195.5 20.0 140.7 9.8

289 Precious metal ore and concentrates 127.0 18.5 21.5 -0.7 105.5 77.9

072 Cocoa 5,411.3 5.2 3,580.6 4.1 1,830.7 7.7

667 Pearls and precious stones 3,607.8 5.4 2,488.6 3.1 1,119.1 13.8

03 Fish and shellfish, etc. 3,069.3 4.9 2,244.0 5.4 825.3 3.8

034 Fish (live, fresh, chilled, frozen) 1,504.9 8.1 950.2 10.6 554.7 5.0

035 Fish (dried, salted, smoked) 52.9 6.0 7.6 10.5 45.3 5.4

036 Crustaceans and molluscs, etc. 729.3 1.6 534.2 2.1 195.1 0.3

037 Shellfish (prepared, preserved) 782.1 3.5 752.1 3.3 30.1 12.9

84 Total garments 2,678.9 5.6 1,163.5 2.1 1,515.4 9.7

841 Men and boys wear, woven 566.8 3.0 183.7 -1.2 383.1 5.9

842 Women and girls clothing, woven 409.0 9.0 77.8 -0.2 331.3 13.5

843 Men and boys wear, knit and crocheted 200.5 6.7 56.9 -3.9 143.6 21.7

844 Women and girls wear, knit and crocheted 232.1 12.7 76.2 4.7 155.9 21.4

845 Articles of apparel, n.e.s. 1,216.2 7.6 731.4 4.0 484.8 18.2

846 Clothing accessories 38.1 -14.8 27.3 -1.3 10.8 -23.5

848 Headgear and non-textile clothing 16.1 12.2 10.1 14.6 5.9 9.2

247 Wood (in rough, squared) 1,740.1 4.1 461.3 -3.7 1,278.8 10.1

12

Table 6.2 (continued): Growth Rates in Current Prices of the African EPA-Countries' Largest Merchandise Exports

to the World, the European Union, and the Rest of the World, 1998-2007

SITC Code Product Name

Exports to

World ($m,

2007)

Annual

Compound

Growth Rate of

Exports to

World (98-07)

Exports to EU

($m, 2007)

Annual

Compound

Growth Rate of

Exports to EU

(98-07)

Exports to

RoW ($m,

2007)

Annual

Compound

Growth Rate of

Exports to

RoW (98-07)

057 Fruits and nuts (fresh, dried) 1,466.0 6.2 1,022.5 7.2 443.5 4.1

071 Coffee and coffee substitute 1,410.8 -4.2 934.5 -4.9 476.3 -2.4

248 Wood (simply worked) 1,351.0 5.7 980.7 4.2 370.3 11.6

121 Tobacco (raw, wastes) 1,315.3 3.7 562.4 1.2 752.9 6.2

263 Cotton 1,311.0 -2.2 140.0 -11.6 1,171.1 0.1

292 Crude vegetable materials, n.e.s. 1,031.4 10.2 837.7 10.4 193.6 9.0

231 Natural rubber and latex 935.1 14.7 675.2 15.2 260.0 13.4

061 Sugar, mollasses, and honey 865.5 3.6 691.6 3.4 173.9 4.4

054 Vegetables (fresh, chilled, frozen) 644.3 10.1 457.8 8.7 186.5 14.5

525 Radio-active etc. material 593.4 13.0 344.7 7.0 248.8 113.8

074 Tea and mate 551.1 -0.7 214.5 -1.4 336.6 -0.2

634 Veneer and plywood 532.0 7.0 393.7 7.3 138.3 6.3

222 Oil seeds (soft oil) 443.5 5.0 53.4 -3.8 390.2 7.2

27 Crude fertilizer and mineral 435.5 3.7 205.9 13.4 229.6 -0.7

611 Leather 434.6 7.0 310.9 4.8 123.7 16.6

512 Alcohols, phenols, and derivatives 400.0 50.2 161.3 47.1 238.7 52.8

89 Misc. manufactures, n.e.s. 392.1 5.7 147.8 5.9 244.3 5.6

661 Lime, cement, and constuction material 360.3 11.3 9.0 -4.4 351.4 12.4

65 Textile yarn, fabric, and articles 290.4 -0.5 88.6 -6.5 201.8 4.3

001 Live animals, except fish 279.9 7.4 18.6 3.4 261.3 7.8

42 Fixed vegetable oils and fats 254.9 0.7 121.6 -3.9 133.3 9.0

72 Industry special machine 246.6 12.3 57.2 9.4 189.5 13.3

55 Perfume, cosmetic, cleanser 236.4 11.8 26.2 5.2 210.2 13.1

671 Pig iron etc. ferrous alloy 231.0 2.2 148.5 3.4 82.5 0.3

044 Maize, except sweet corn 217.6 15.7 4.3 20.5 213.3 15.6

78 Road vehicles 216.4 12.0 21.4 3.0 195.0 13.8

Total value of largest non-oil merchandise exports 46,147.7 7.0 23,319.3 4.6 22,828.4 10.2

Other non-oil merchandise exports 6,944.5 7.0 2,827.2 8.8 4,117.3 5.9

Total non-oil merchandise exports 53,092.2 7.0 26,146.5 5.0 26,945.7 9.4

Oil exports (SITC 3) 142,133.3 22.2 22,257.6 18.8 119,875.8 23.0

Total merchandise exports 195,792.9 15.5 48,447.9 9.2 147,345.0 18.9 Notes: South Africa is not included in the totals for the African EPA-countries in this table. Products are arranged in descending order based on their export

value to the world in 2007. "Largest exports" are defined as those product categories with a total export value to the world of $200 million or more in 2007. All

largest exports in 1998 were also largest exports in 2007.


13

SSA‟s largest economy and exporter, which has a separate free trade arrangement with the EU,

has no effect on the trend in non-oil export shares to the EU market, although it raises Africa‟s

export share by about 0.5%.6

How did the performance of the African EPA-countries‟ non-oil exports to the EU, where

the EPA-countries benefited from the Lomé-Cotonou trade preferences, compare with the

performance of their exports to the rest of the world, where they faced generally higher MFN

tariffs or less favorable preference schemes? Overall, from 1997 to 2007, their non-oil exports to

the EU grew at 5.0% annually in nominal terms barely more than one-half the 9.4% growth rate

of their non-oil exports to the rest of the world.

Traditional Commodity Exports. Some significant differences in the growth rates of

exports of traditional commodities and non-traditional products to the European Union and the

rest of the world are worth noting (Table 6.2). Exports to the rest of the world (RoW) of some

important traditional commodities grew much more rapidly than to the EU: metal ores and metal

scrap (24.9% annually to RoW vs. 8.8% annually to the EU), precious stones (including

diamonds) and pearls (13.8% annually to RoW vs. 3.1% to the EU), cocoa (7.7% annually to

RoW vs. 4.1% to the EU), and wood (+10.1% annually to RoW vs. -3.7% annually to the EU).

Non-traditional Exports. The comparative performance of exports of non-traditional

products to the EU and RoW is a mixed picture. On the one hand, sales to the rest of the world

(primarily, the US) of the EPA-countries‟ one important labor intensive manufactured export,

garments, grew very much faster, 9.7% annually, than their sales to the EU, 2% annually. On

one hand, exports of aluminum to the EU, which is the primary market for these, experienced a

quite high annual growth rate, 23%, over the period 1997-2007. The average annual growth

rates of exports to the EU have also been somewhat faster than those to RoW for fish (5.4% vs.

1%) and for cut flowers.

The Challenge for EPAs: Improving the Performance of the EPA- signatories’ Exports

Overall, despite the Lomé-Cotonou trade preferences, African EPA-countries have

steadily lost market share for non-oil exports to the European Union. This declining trend in

market share appears to have been caused by a combination of factors: (a) slow growth in the

mature European market for some major primary commodity exports such as coffee, cocoa, and

tea; (b) the Lomé-Cotonou Agreements‟ tariffs on sensitive agricultural and processed

agricultural process and their restrictive rules of origin, which inhibited expansion into non-

traditional agricultural and manufactured exports as discussed below in Chapters 7 and 8; and (c)

competitiveness problems and supply constraints in the EPA countries themselves as discussed

in Chapters 12 and 13 in Part III. The central challenge for EPAs is to address these constraints

and accelerate export growth and diversification in Africa well beyond what has been taking

place under the Lomé-Cotonou regime.

6 See Annex A, Graph A.15: The EU‟s Total and Non-oil Imports from the African EPA-Countries and South Africa

as Shares of its Total Merchandise Imports, 1985-2004.

14

The subsequent chapters in Part II analyze the options that the African countries have for

accessing the European Union‟s market with and without EPAs. The next chapter analyzes the

Europe Union‟s MFN tariff, the tariff preferences under EPAs versus those under the GSP

alternative for non-LDCs and under the EBA alternative for LDCs, and the duration and

certainty of preferential market access. The following three chapters examine the EU‟s rules of

origin and other non-tariff market access issues and give an overall assessment on the advantages

and disadvantages of the EPA-countries‟ different options for accessing the EU market. Part III

goes on to discuss the trade policy and other supply-side constraints to increasing the output of

exportables.

15

7. EU Tariff Preferences for African Countries: Interim EPAs, the GSP,

and the EBA Program

This chapter analyzes the various tariff preferences available to Africa‟s LDCs and non-

LDCs for accessing the European Union‟s market after the expiration of the Cotonou trade

preferences at the end of 2007. It starts with an overview of the level and structure of the EU‟s

current applied MFN tariffs, which determine the maximum preference margins (and the

products to which these apply) that it can grant to other countries, whether through

bilateral/regional trade agreements or through unilateral preferences. The chapter then compares

the preference options now open to African LDCs and non-LDCs.

A. The European Union’s MFN Tariffs

At the HS 8-digit level, the EU‟s applied MFN tariff has 10,099 tariff lines with an

unweighted average ad valorem tariff rate of 4.5% (Table 7.1) and a standard deviation of 5.1.

This average tariff, however, does not include the ad valorem equivalents of specific duties,

which are levied on a number of agricultural and other products and can be quite high. The 4.5%

average is thus an underestimate of the combined price effects of the EU‟s ad valorem and

specific tariffs.

The Structure of Tariffs at HS 8-Digit Level

Products with Tariffs of 5% or Less. Of the EU‟s 10,099 tariff lines at the HS 8-digit

level, 2,765 tariff lines -- 27% of the total -- have a zero MFN tariff rate. Tariff preferences are

irrelevant for these products since they can be imported duty free from any WTO member. The

zero tariff rates fall mainly in the raw materials and unprocessed goods categories, with some

manufactured goods also included. Another 1,842 tariff lines (18% of the total) have tariff rates

of less than 3%, and a further 1206 tariff lines (12% of the total) have tariff rates of 3-5%. Thus,

58% of the EU‟s tariff lines have rates of 5% or less, and for these products only small or zero

preferences are available.

High Tariff Products. For the remaining 42% of tariff lines, significant preferences are

potentially available. Tariff rates in the range of 5-10% are applied to 2,235 tariff lines (22% of

the total), and 767 lines have rates between 10-15%. Peak tariff rates exceeding 15% are applied

to 315 lines, for which potentially large preferences could be provided.

The remaining 969 tariff lines (9.6% of the total), most of which are agricultural and

related processed products, have specific duties. Many of the specific duties for agricultural

16

products are equivalent to high ad valorem tariff rates.7 In cases where an ad valorem and a

specific tariff are both levied on an import, the resulting compound tariffs can be even higher.8

Potentially large preferences could also be provided for these products.

Table 7.1 Summary of EU HS 8-digit MFN Tariff Rates,

2005

Tariff rates % # of Tariff Lines As % of total tariff lines

0 2765 27.4

0-3 1842 18.2

3-5 1206 11.9

5-10 2235 22.1

10-15 767 7.6

>15 315 3.1

Specific duties 969 9.6

Total:10,099 100.0

Source: WITS/TRAINS

Structure of Tariffs at the HS 2-Digit Level

Average MFN Tariffs. Unfortunately, the UN COMTRADE data set does not give

imports at 8-digit level, which would correspond to the HS-8 tariff lines shown in Table 7.1.

However, Table 6.2 reports data for 2005 on the European Union‟s applied MFN tariff rates at

the HS 2-digit level, which contains 97 product categories. The unweighted and trade-weighted

average tariff rates in this table include both ad valorem tariffs and the ad valorem equivalents of

specific duties. The average of the tariffs at the 2-digit level in Table 7.2 is 9%, double the rate

of 4.5% at the 8-digit level reported above, indicating that the ad valorem equivalents of the

many specific duties, which were not included in the 8-digit level calculation, are probably quite

high.

Products with Tariffs of 10% or Less. As a result of several rounds of GATT/WTO

tariff reductions, the EU, like other industrial countries, has low tariffs for many manufactured

products. Forty percent of total EU imports have MFN tariff rates of less than 5%, and a further

51.7% of total imports have MFN tariff rates between 5-10%.

7 A simple procedure for calculating the ad valorem equivalents (AVEs) of specific duties is to divide the specific

tariff by the international price of the commodity. However, depending on the choice of the international price to

use and the availability and accuracy of the price data, widely different results can be generated by this procedure.

Possible proxies for the international price include world import unit values reported by the UN, country-specific

c.i.f. import prices in cases where there are competitive volumes of imports despite the specific tariff, the commonly

accepted benchmark price for a commodities from the leading exchange where a commodity is traded, and f.o.b.

prices from the leading (most competitive) exporter. The basic formula for calculating AVEs is:

AVE=ST/(UCF*IP*XR), where ST is the specific tariff, UCF is the quantity unit conversion factor needed to

express the specific duty and the import unit value in the same unit, IP is the proxy chosen for the international

price, and XR is the currency exchange rate for converting the world import unit value reported by the UN in US

dollars. 8 In some cases where an imported product is subject to an ad valorem and a specific tariff, only the higher of the

two may be levied on the import.

17

High Tariff Products. However, the remaining 7.8% of the EU‟s total imports have

tariff rates over 10%. Of the 97 product categories at the HS 2-digit level shown in Table 7.2, 25

categories have unweighted average tariff rates exceeding 10%. Many textiles and clothing

imports have unweighted average MFN tariff rates well above 10%, and a substantial number of

sensitive agricultural and processed agricultural goods well above 20%. The relatively high

tariffs on these products tend to reduce import demand for them so that their 7.8% share in total

imports underestimates their relative economic importance.

All of the EU‟s specific and combined specific and ad valorem tariffs are levied on

products in these 25 HS 2-digit categories. Eleven of these categories have unweighted average

tariffs above 20%. All of these eleven categories are agricultural products, apart from beverages

and spirits with an average tariff rate of 40%. Two categories – cocoa preparations and live

animals – have average tariffs in the 15-20% range. Another twelve categories have average

tariffs between 10-15% (mostly textiles and clothing, fruits and vegetables). Although the

remaining 72 categories have average tariff rates of less than 10%, there is no HS 2-digit

category in which the maximum tariff rate on one or more products does not exceed 10%. In

fact, the average maximum tariff is 57% for HS-1 categories with average tariff rates of 5-10%

and is 45% for categories with average tariff rates of 0-5%.

The highest average ad valorem MFN tariff applies to beverages and spirits (40%),

followed by dairy products (38%), tobacco (37%), sugar (34%), and meat products (30%). As in

some other industrial countries, the EU levies relative low MFN tariffs, below 5%, for the

imports of most raw materials but very high tariffs to protect its agricultural sector. In particular,

the Common Agricultural Policy (CAP) in the EU was designed to protect its own farmers by

high import tariffs as well as budgetary support.9 Many agricultural products are subject to

specific duties that are equivalent to high ad valorem tariffs, and some agricultural products are

subject to combined specific and ad valorem duties as mentioned above. For example, raw sugar

for refining has a tariff rate of 117%. Cocoa and cocoa preparations have ad valorem equivalent

tariffs of 183%, some dairy products 160%, and some vegetables 166%. Tobacco and prepared

vegetables have ad valorem equivalent tariff rates of 75% and 34%, respectively. Fish, which

are a very important source of employment and income for some African countries, have a

relatively low average tariff rate of 5% (at the HS 2-digit level). However, imports of some

specific fish products, for example, tuna, face 24% MFN tariffs. Many prepared vegetables and

fruits have 21% tariffs.

Implications for EPAs

Significant preferential margins are thus potentially available for a wide range of

products covering virtually all HS 2-digit categories. An interesting topic for further research

would be to analyze, at the most detailed HS level, the list of products facing peak tariff rates of

15% or more to determine which of these might be profitably produced in the EPA-countries.

9 See Chapter 9 for a discussion of the EU‟s CAP, its CAP reform, and their effects on agricultural trade.

18

Table 7.2: The EU’s Average Applied MFN Tariff Rates

at the HS 2-digit Level, 2005

Product Name

Unweighted

Average

>20%

Trade

weighted

Average

Standard

Deviation

Maximum

Rate

S or C

duties*

Imports

EUR

millions

% of

total

imports

Beverages/spirits/vinegar 40 36 52 268 Yes 764 0.36

Dairy products/birds' eggs/natural honey 38 40 41 160 Yes 463 0.22

Tobacco/manufactured tobacco substitutes 37 41 46 230 Yes 558 0.26

Sugars/sugar confectionery 34 36 33 117 Yes 349 0.16

Edible meat 30 38 26 254 Yes 566 0.26

Prepared meat/fish 27 20 23 102 Yes 252 0.12

Products for milling industries 26 24 20 97 Yes 179 0.08

Preparation of cereal/pastrycooks 24 24 21 95 Yes 617 0.29

Edible vegetables 21 23 23 166 Yes 562 0.26

Miscellaneous edible preparations 21 25 22 268 Yes 1113 0.52

Preparations of vegetable/fruit/nuts 20 19 17 109 Yes 601 0.28

Average/ Sub-total 29 30 30 170 6024 2.81

Product Name

Unweighted

Average

10-20%

Trade

weighted

Average

Standard

Deviation

Maximum

Rate

S or C

duties*

Imports

EUR

millions

% of

total

imports

Cocoa/cocoa preparation 18 19 25 183 Yes 842 0.39

Live animals 16 42 29 131 Yes 115 0.05

Edible fruit/nuts/peel of citrus 13 17 22 110 Yes 1358 0.63

Apparel & clothing accessories, not knitted 13 14 7 50 Yes 1666 0.78

Apparel & clothing accessories, knitted 13 14 6 44 Yes 1433 0.67

Live tree/other plants/cut flowers 13 12 14 80 Yes 303 0.14

Knitted or crocheted fabrics 12 11 8 70 694 0.32

Made-up textile articles/worn clothing 12 15 12 70 611 0.28

Carpets/other textile floor coverings 12 14 14 70 312 0.15

Cereals 11 13 16 70 Yes 408 0.19

Gums/resins/other vegetable extracts 11 40 22 86 78 0.04

Furniture 11 12 13 70 2845 1.33

Coffee/tea/spices 10 11 15 92 446 0.21

Special woven fabrics 10 12 8 70 542 0.25

Umbrellas/walking-sticks etc. 10 13 12 70 31 0.01

Footwear 10 12 7 49 1181 0.55

Animal/vegetable fats/oils 10 18 20 261 Yes 685 0.32

Toys/games 10 10 13 70 945 0.44

Essential oils/perfumes 10 13 14 70 1639 0.76


Note: Yes = Import category contains either specific or combined specific and ad valorem duties. Otherwise, the import

category contains only ad valorem tariffs.

19

Table 7.2 (continued): The EU’s Average Applied MFN Tariff Rates at the

HS 2-digit Level, 2005

Product Name

Unweighted

Average

5-10%

Trade

weighted

Average

Standard

Deviation

Maximum

Rate

S or C

duties*

Imports

EUR

millions

% of

total

imports

Articles of leather/travel goods 9 11 9 40 626 0.29

Headgear/parts 9 11 10 70 72 0.03

Vehicles 9 13 12 78 20762 9.68

Explosives materials 9 8 9 68 50 0.02

Articles of stone/plaster/cement 8 8 14 70 946 0.44

Wadding/felt/non-woven/yarns 8 10 12 70 601 0.28

Man-made filaments 8 8 12 70 1357 0.63

Cotton 8 10 11 50 1572 0.73

Glass and glassware 8 9 9 65 1735 0.81

Albuminoidal substances/starches/glues 8 14 16 106 571 0.27

Arms and ammunition 8 3 9 28 330 0.15

Paper/paper products 8 9 11 70 5187 2.42

Manufactures of straw 7 7 6 20 24 0.01

Prepared feathers and artificial flowers 7 14 6 33 38 0.02

Railway/tram parts and products 7 6 8 40 824 0.38

Miscellaneous articles of base metal 7 8 9 50 1774 0.83

Plastics 7 10 9 70 11112 5.18

Miscellaneous manufactured articles 7 8 8 68 557 0.26

Ceramic products 7 9 6 39 1025 0.48

Aircrafts 7 5 11 50 936 0.44

Articles of iron or steel 7 10 9 70 5990 2.79

Man-made staple fibers 7 8 5 40 1194 0.56

Impregnated and coated textile fibers 7 10 7 38 1097 0.51

Aluminum 7 6 8 62 3522 1.64

Residues/waste from the food industry 7 9 18 67 1326 0.62

Clocks and watches 6 9 7 56 150 0.07

Metal tools 6 8 6 46 1169 0.55

Ships and boats 6 7 7 40 2280 1.06

Other vegetable textile fibers 6 14 9 70 188 0.09

Soaps 6 7 6 52 1150 0.54

Wood/articles of wood 6 6 7 43 2224 1.04

Electrical machinery and equipment 6 6 8 70 31046 14.48

Organic chemicals 6 7 9 70 2664 1.24

Chemicals 6 6 7 70 1276 0.59


Note: Yes = Import category contains either specific or combined specific and ad valorem duties.

Otherwise, the import category contains only ad valorem tariffs.

20

Table 7.2 (continued): The EU’s Average Applied MFN Tariff Rates at the

HS 2-digit Level, 2005

Product Name

Unweighted

Average 0-

5%

Trade

weighted

Average

Standard

Deviation

Maximum

Rate

S or C

duties*

Total

imports,

EUR

millions

% of

total

imports

Fish/crustacean/mollusks/other 5 5 9 100 648 0.30

Oil seed/oleagenous fruits 5 10 13 96 328 0.15

Tanning/dyeing extracts 5 7 5 34 2182 1.02

Miscellaneous chemical products 5 8 7 42 2423 1.13

Photographic/cinematographic goods 5 7 9 70 405 0.19

Rubber 5 7 7 70 3147 1.47

Nuclear reactors and appliances 5 6 7 70 33277 15.52

Iron and steel 5 8 7 56 5951 2.77

Fur skins/artificial fur 5 12 7 58 153 0.07

Musical instruments 5 6 6 45 59 0.03

Lead 5 3 8 70 94 0.04

Products of animal origin 5 11 7 33 228 0.11

Copper 5 6 6 56 1041 0.49

Optical, photo, measuring products 4 5 5 44 4429 2.07

Silk 4 10 6 40 22 0.01

Wool/animal hair 4 6 6 38 701 0.33

Printed books/newspapers/pictures 4 4 7 50 1184 0.55

Fertilizers 4 4 5 41 618 0.29

Zinc 4 3 5 25 187 0.09

Vegetable plaiting materials/products 4 3 6 16 7 0.00

Cork/articles of cork 3 6 4 13 31 0.01

Raw hides/skins other than fur skins 3 6 4 38 1319 0.61

Natural/cultured pearls, precious stones 3 6 6 45 382 0.18

Tin 3 3 4 20 29 0.01

Works of art and antiques 2 0 9 70 92 0.04

Mineral fuels 2 2 7 70 19325 9.01

Nickel 2 2 4 25 115 0.05

Pharmaceutical products 2 2 4 17 6100 2.84

Other base metals 2 1 3 11 204 0.10

Salt/sulfur/earth/stone 2 3 7 46 868 0.40

Ores/slag/ash 1 0 2 13 830 0.39

Pulp of wood 1 1 3 20 561 0.26


Note: Yes = Import category contains either specific or combined specific and ad valorem duties. Otherwise, the import

Category contains only ad valorem tariffs.

Source: Staff calculations using UN COMTRADE data.

21

B. The EU’s Tariff Preferences for Africa’s Non-LDCs: the

Cotonou Regime, GSP, and Interim EPAs

African EPA-countries currently have access to the European Union‟s market under

several preferential arrangements: the Generalized System of Preferences (GSP), the Everything

but Arms (EBA) Program, and interim EPAs. These arrangements differ in terms of the tariff

preferences granted, coverage of products, eligibility of different groups of countries for tariff

preferences, rules of origin, and the duration and certainty of the preferential access provided.

The preferential arrangements for LDCs and non-LDCs differ significantly. The two groups of

countries thus faced different choices as they compare the market access benefits of EPAs to the

alternatives available after the expiration of the Cotonou tariff preferences at the end of 2007.

This section starts with a brief overview of the former Cotonou tariff preferences and

then reviews the preference programs now open to Africa‟s non-LDCs: the EU‟s Generalized

System of Preferences and interim EPAs. The following section discusses the preference options

now open to African LDCs: the Everything-but-Arms Program and interim EPAs.

The Cotonou Tariff Preferences

Up until their expiration at the end of 2007, the most important of the EU‟s unilateral

trade preferences for non-LDCs were those granted under the Lomé-Cotonou Regime. Under

this regime, all manufactured imports from the ACP countries could enter the EU market tariff-

free, although eligibility for this tariff-free access was restricted by rules of origin that were, as

discussed in Chapter 8, very demanding for small low income economies to meet. For

agricultural exports from Africa‟s thirteen non-LDCs, the most important of the European

Union‟s trade preferences were those extended to sugar, bananas, and beef under the EU‟s

commodity protocols discussed in Annex C.10

In addition, many agricultural products entered

tariff-free with exception of 919 tariff lines covering agricultural and processed agricultural

products produced in the EU, which were granted only small tariff preferences instead of tariff-

free entry. Some of these excluded sensitive agricultural products bore very high MFN tariffs so

that the small tariff preferences for them under the Cotonou Agreement were not that significant,

for example: the MFN tariffs were 46% on malt, 61% on olive oil, 57 % on wine lees,11 and

100% on other oils from olives. In contrast, the Cotonou tariff preferences became much less

important for Africa‟s 33 LDCs than for its 13 non-LDCs since 2001 when the LDCs were

granted complete tariff-free, quota-free access to the EU market under its Everything-but-Arms

Program discussed in the following section.

10

As explained in Annex C, the foregoing three products accounted for 6% of the African EPA-countries‟ total

exports to the EU in 2004. Earnings from exports of the three protocol commodities were important for Mauritius

and Swaziland (sugar), Cameroon and Côte d‟Ivoire (bananas), and Botswana and Namibia (beef). 11

Wine lees are dead yeast cells that collect at the bottom of a fermentation container during wine making, prior to

bottling. Leaving the lees in the wine before bottling enhances wine flavor.

22

The EU’s Generalized System of Preferences (GSP)

In 1968, UNCTAD recommended that developed countries adopt generalized systems of

trade preferences for exports from developed countries; and, in 1971, the European Union

became the first to adopt such a preference scheme. Since its inception in 1971, the EU‟s GSP

has been revised several times.12

The current GSP has, in principle, been authorized to run until

2015. Substantial changes in GSP provisions are, however, often made at interim reviews, as

happened in 2004-2005.13

The first interim review of the current GSP took place in 2008, some

changes were made then, and additional ones are possible both then and at the subsequent review

in 2011.

The EU‟s current GSP includes three different preference programs: (a) the standard

GSP for which all developing countries are eligible, (b) the GSP+ for selected developing

countries that are both “dependent and vulnerable” and are implementing specified core

international labor and environmental standards, and (c) the Everything-but-Arms program for

LDCs. Total EU preference-receiving imports under each of the three GSP programs in 2007

and the approximate value of the preferences provided are shown in Table 7.3.

Table 7.3: EU Preference-Receiving Imports under its GSP Regime in 2007 and the

Resulting Nominal Reductions in Duties Paid

2007 GSP Preferential Imports

(€ millions)

Nominal Reduction in

Duties

(€ millions)

Average Saving as a

% of Preferential

Imports

Standard GSP 47,848 1,542 3.22

GSP+ 4,900 501 10.22

EBA 4,302 505 11.74

Total 57,050 2,548 4.46

Notes: The value of tariff preferences is measured in table 7.3 in terms of the nominal reduction in duties paid

compared to if the same products had been imported and duties paid under the EU's standard MFN conditions of

access. The above figures do include tariff preferences leading tom reductions in specific duty rates applied and

slightly underestimate the value of GSP preferences for this reason.

Source: European Commission (2008) and authors‟ computations.

Since all developing countries are eligible for the EU‟s standard GSP program, the EU‟s

imports from the countries eligible for standard GSP are much larger than its imports from the

smaller ACP group of countries that is eligible for the more generous Cotonou preferences. In

2005, total EU imports from developing countries eligible for its GSP program were $794 billion

in contrast to EU imports of only $67 billion from the ACP countries. This large difference

reflects both the broader country coverage of the standard GSP and the much greater size of

12

The accession to the EU in 2005 of 10 central and eastern European countries extended the coverage of the GSP

to their markets, and thus increased the attractiveness of the EU‟s GSP. 13

For a discussion of those changes in the GSP, see Stevens and Kennan (2006).

23

some economies that are eligible for the EU standard GSP program (such as Brazil, China, and

India) in contrast to the limited country coverage of the Cotonou regime and the small size of the

ACP economies.14

When the Cotonou Agreement‟s trade preferences expired in 2007, any of the EPA-

countries that did not enter into EPAs automatically reverted to the European Union‟s GSP or its

EBA program. The following two sub-sections discuss the two preference schemes for which

the thirteen African non-LDCs would be eligible if they do not enter into EPAs: the standard

GSP and the GSP+. The EBA Initiative and the access Africa‟s 33 LDCs to the EU market are

considered afterward.

Standard GSP The European Union‟s standard GSP provides preferences for which all developing

countries are eligible and is more favorable for some products than the EU‟s MFN tariffs paid by

industrial countries. The standard GSP hence establishes the base-line tariff level against which

to assess other preference schemes for developing countries. The recent version of the standard

GSP ran from January 1, 2006, to December 31, 2008, when its provisions were reviewed and

revised. The GSP preferences were review and revised in 2008, and the new slightly revised

preferences run from 2009 to 2011.

The European Union argues that its GSP program is the most generous of all developed-

country GSP systems. Imports by the EU from developing countries under its GSP amounted to

E40 billion in 2004, compared with E22 billion by the US under its GSP, the second most widely

used. The value of EU imports under its GSP is also greater than the total value of imports

under the US, Canadian, and Japanese GSP programs combined.

Coverage of Standard GSP. The EU reports that of the 10,300 tariff lines in its Common

Customs Tariff, roughly 2,100 products have a MFN tariff rate of zero. Tariff preferences are

only relevant for the 8,200 tariff lines that have non-zero MFN rates.15

GSP covers roughly 7,000 of the EU‟s 8,200 tariff-lines that have non-zero MFN tariff

rates. Some of the 1,200 or so tariff lines with non-zero MFN tariffs that are not covered by the

14

However, for a few specific products, such as bananas and tuna, the ACP countries are large suppliers to the EU

import market, as discussed in Annex C on the EU‟s commodity protocols. 15

European Commission – External Trade, “Generalized System of Preferences – User‟s Guide to the European

Union‟s scheme of Generalized Tariff Preferences.” The EU Common Custom Tariff is based on the Harmonized

System nomenclature and supplements it with its own subdivisions referred to as Combined Nomenclature (CN)

subheadings. Each CN subdivision has an eight digit code number. The first six digits refer to the HS headings and

subheadings. The seventh and eighth digits represent CN subdivisions. The EU reported a total number of

approximately 10,300 tariff lines of the Common Custom Tariff in contrast to the 10,099 tariff lines reported in

Table 7.1 above. The data in Table 7.1 are from WITS/TRAINS based on HS codes and show some slight differences.

In our calculations in Table 7.1, 2,762 products have zero MFN tariffs out of 10,099 total tariff lines and account for

27.4% of total lines in contrast to the 20.4% of lines having zero MFN rates as reported by the EU. This

discrepancy may be due to different reporting/collecting years for the data – the EU data are based on 2003 while

the WITS/TRAINS data are based on 2005. For details of the EU‟s Common External Tariff, see the European

Commission‟s website, EUROPA, activities of the European Union – summaries of legislation (customs).

24

GSP fall into HS chapter 93, arms and ammunition; and others are very politically sensitive

agricultural and manufactured products.

Of the 7,000 tariff lines that are covered by GSP, 3,300 lines are classified as non-

sensitive products and 3,700 are classified as sensitive. Non-sensitive products are granted duty-

free access under the GSP, but sensitive products receive only a tariff reduction of 3.5 percentage

points.

Sensitive Products. The sensitivity of a product is determined by whether or not it is

produced in the EU and by how competitive European producers of the product are. The non-

sensitive category covers most manufactured products.16

But some labor-intensive and

processed primary products of current or potential interest to African exporters – such as textiles,

clothing and footwear – are classified as sensitive. In addition, agricultural products covered by

the EU‟s Common Agriculture Policy are deemed to be too sensitive to be granted duty-free

market access from any potentially large and competitive suppliers. Thus, the same 990

agricultural lines that are considered sensitive under the Cotonou preferences are also considered

sensitive under the GSP but are granted smaller preferences under GSP than under the Cotonou

Agreement.17

For the 3,700 sensitive products, the tariff preference is a flat 3.5 percentage point

reduction from the corresponding ad valorem MFN tariff rates. For example, reduction in a

MFN rate of 14% by a flat 3.5 percentage points results in a preferential duty rate of 11.5% (the

reduction from a 14% to an 11.5% tariff is a 25% preferential margin, or a 25% reduction in the

MFN duty). If the MFN tariff rate is 7%, a reduction by 3.5 percentage points results in a

preferential duty rate of 3.5% (the reduction from 7% to 3.5% is a 50% reduction of MFN tariff).

The flat 3.5 percentage point reduction does not apply to the textile and clothing sectors. For

these sectors, the reduction is 20% of the applicable MFN tariff rate.18

Anti-dumping and Import Safeguards. The European Union, like most other WTO

member countries, has three general types of import defense instruments – anti-dumping, anti-

subsidies, and import safeguards. Both anti-dumping and anti-subsidies complaints can be

initiated by EU firms. But safeguard actions must be initiated by an EU member state, and the

industry concerned must represent a large proportion of total EU production. Decisions on and

measures to impose anti-dumping and anti-subsidies can be reached via a simple majority in the

EU Council, while decisions on safeguard actions must be reached via a qualified majority.

Overall, about 85% of the EU import defense measures recently used against third countries

imports have been anti-dumping measures, 14% have been anti-subsidies, and 1% have been

16

HS chapters 25 to 99, excluding chapter 93, arms and ammunition. See the European Commission website on

trade, GSP. 17

We were not able to find any published figures on the EU‟s imports under GSP falling into the sensitive and non-

sensitive categories. In principle, with some data processing work, it would be possible to estimate the shares of

GSP imports falling into these two categories, but doing so could be a time consuming exercise. 18

Basic GSP also provides for a 30% reduction in specific duties except for ethyl alcohol, for which the reduction in

the specific duty is 15%. Where both ad valorem and specific tariffs are levied on a product, only the ad valorem

tariffs are reduced. However, for many products that have specific duties, ad valorem duties are zero. See Stevens

and Kennan (2006) for further details.

25

safeguards.19

In addition to the products affected by the special agricultural safeguards discussed

in Chapter 9, other sectors to which import defense measures have primarily been applied are

chemicals, steel, textiles, and electronics. The countries most affected have been China, India,

and Russia.

In addition to its MFN import defense measures, the EU‟s GSP has its own safeguard

provisions to protect domestic producers from competing imports. Whenever imports from a

GSP beneficiary country increase enough to cause “serious difficulties for the EU producers of

like or directly competing products,” the EU can apply the GSP safeguard measure, that is, re-

institute MFN tariff duties for the specific country and export product concerned. The procedure

for re-introducing MFN tariff balances thorough investigations with the “need for rapid action.”

The Commission may, under exceptional circumstances after informing the Generalized

Preferences Committee, implement any preventative measures without notification or

investigation. There is also a temporary withdrawal clause in the EU‟s GSP. Temporary

withdrawal of preferences can be applied at any time to any beneficiary country regarding some

or all its export products if unacceptable practices occur, such as fraud or failure to co-operate in

the verification of certificates of origin. Temporary withdrawal can also be implemented

because of serious and systematic violations of the principles of ILO labor rights conventions.

Under GSP (and EBA to which the same provisions apply) disputes are thus essentially decided

unilaterally by the European Union.

Graduation of Export Products from GSP. There is a graduation clause in the standard

GSP scheme, which was applied at the GSP review in 2008. The graduation clause states that

GSP preferences will be withdrawn for exports of a given product group (section of the custom

code) for any country for which exports of a product group exceed 15% of total EU imports of

the same product group under the GSP over the previous three consecutive years. In the special

case of textiles and clothing, the threshold for withdrawal of standard GSP preferences is

somewhat lower, 12.5% of the EU‟s total imports of textiles and clothing under the GSP.

Countries that graduate from the GSP for a particular product group will, by definition,

no longer contribute to the EU‟s imports of that product group under the GSP. Therefore, if the

graduation thresholds of 15% and 12.5% remain unchanged, total imports of the product group

under the GSP will become smaller as more countries graduate. Some GSP beneficiaries that

currently fall below the preference withdrawal thresholds may be above the threshold after 2008,

even if their exports have not increased in absolute terms – a process referred to as “graduation

creep” by Stevens and Kennan (2006).

The Revised Standard GSP Program for 2009-2011. As a result of the EU‟s review in

2008 of experience under its standard GSP program in 2005-08, a new provision was introduced

for the re-instatement of preferences (“de-graduation”) for exports product groups from

developing countries for which these had previously been suspended (graduated) if their shares

in EU imports declined in the period 2004-06. The new “de-graduation” provision led to the re-

19

See the WTO and European Commission websites on anti-dumping and safeguards measures. The 1% figure

cited here for safeguards refers to trade in manufactured goods. Safeguard measures have, for example, been

applied to the steel sector. This 1% figure for standard safeguards does not include the special agricultural

safeguards discussed earlier in this chapter.

26

instatement of standard GSP preferences for imports of transport equipment from South Africa,

for imports of one product group each from five non-African developing countries (Algeria,

China, India, Indonesia, and Thailand), and for imports of two product groups from Russia.

Imports from Vietnam of footwear, headgear, and umbrellas were graduated. Otherwise, the

standard GSP scheme for 2009-11 is largely unchanged “in response to desires expressed by

users of GSP to ensure continued stability, predictability, and transparency” (European

Commission 2008).

Comparison to other EU Trade Preferences. Although more attractive than the EU‟s

MFN tariff regime, standard GSP grants less favorable preferential access than the Cotonou

Agreement previously provided, including smaller preference margins, narrower product

coverage, special safeguard procedures, graduation of export products, and slightly more

restrictive rules of origin as discussed in Chapter 8. The tariff-free, quota-free access accorded

to LDCs under the EBA program is much more favorable than standard GSP. Market access

under the EU‟s various free trade agreements with both developing and developed countries is

also more attractive than standard GSP.20

The GSP+ Program

The European Union also adopted a GSP+ program for 2006-2008, which provided

additional preferences for “vulnerable and dependent” non-LDCs that complied with a list of

international conventions on human rights and the environment, and for which some African

non-LDCs might eventually be able to qualify.21

The GSP+ tariff preferences are more attractive

than the standard GSP preferences but not as attractive as the full tariff-free, quota free access

provided for LDCs under the EU‟s Everything but Arms program.

Product Coverage. The GSP+ program grants preferential access to the EU market for

imports from eligible developing countries for the same 7000 products as the EU‟s standard GSP

scheme. But all products enter at zero rate ad valorem duty under the GSP+ program, rather than

some at a zero ad valorem rate and some at a reduced rate from the MFN ad valorem tariffs as

under the standard GSP program. However, when a tariff line is subject to both an ad valorem

and a specific duty, only the ad valorem duty is waived.

20

See Annex A, Table A.3, for a listing of these trade agreements. 21

The design of the GSP+ program was motivated in part by an unfavorable WTO ruling against a previous EU

scheme providing special preferences for selected developing countries that were actively implementing anti-

narcotics programs. In 2002 India brought a complaint against the previous version of the EU‟s GSP to the WTO.

It alleged that extra tariff preferences (that is, in addition to those under basic GSP) provided to selected developing

countries actively implementing anti-narcotics programs were incompatible with WTO‟s enabling clause, which

permits distinguishing between only two categories of countries – all developing countries and LDCs – when

granting trade preferences. WTO‟s appellate body under its dispute settlement mechanism ultimately ruled that

“different preferences may be given provided that the difference responds „to a widely-recognized development,

financial, [or] trade need.‟ … But it also found that the justification given for the [EU‟s] antinarcotics regime failed

to satisfy this criterion” (Stevens and Kennan 2006).

Although the European Union lost this case, the dispute panel‟s ruling stated that it is permissible to differentiate

among non-LDCs as long as the distinctions among countries are based on “a widely-recognized development,

financial, [or] trade need.” Accordingly, the European Union‟s new GSP for the period 2006-08 provides for greater

preferences (GSP+) for dependent and vulnerable non-LDCs meeting specific widely recognized criteria including

ratification and implementation of international conventions on sustainable development and good governance.

27

Country Eligibility Criteria. In order to be eligible for the GSP+ program, a country

must first be classified as “dependent and vulnerable” by satisfying the following two criteria: (a)

a country cannot be classified as high income and its five largest sections of its GSP-covered

exports to the EU must account for over 75% of its total GSP-covered exports; and (b) GSP-

covered exports from the country must represent less than 1% of total EU imports under the

GSP.

Then to qualify for the additional preferences under the GSP+ program, a dependent and

vulnerable country had to have ratified and effectively implemented twenty-three of the

following international conventions by the end of October 2005: sixteen core conventions on

human and labor rights plus seven out of eleven conventions related to good governance and the

protection of the environment. Any unratified conventions – including the Kyoto Protocol, the

Convention on International Trade in Endangered Species, and the UN Convention against

Corruption – needed to be ratified by December 2008. In addition to ratification of these

conventions, the country is required to provide comprehensive information concerning

legislative and other measures it takes to implement them. It must commit itself to accepting

regular monitoring and reviewing of its implementation record. Finally, the country must have

made a formal request to qualify for GSP+ before October 31, 2005. As of December 2005,

fifteen countries were listed as eligible for the EU‟s GSP+ program for 2006-2008: eleven

Central and Latin American countries plus Moldova, Georgia, Mongolia, and Sri Lanka.22

The criteria of the GSP+ program for determining dependence and vulnerability appear to

have been drafted with the ACP countries in mind, and Stevens and Kennan (2006) point out that

all of the ACP countries do, in fact, satisfy them. However, the labor and environmental

conditions for qualifying for GSP+ are not as low hurdles as they might at first appear to be.23

Although fifteen countries have satisfied the GSP+ criteria and been granted GSP+ preferences

by the EU, none of these are African or other ACP countries. No African non-LDCs were able

to meet the eligibility criteria for the GSP+ in 2008 when the list of eligible countries was

revised. Thus, although GSP+ may be a longer term possibility for some African non-LDCs, for

all of them standard GSP remains the immediate alternative to entering into an EPA with the EU.

Limitations of the GSP+ Program. In addition to specific country-eligibility criteria, the

GSP+ program has also some significant limitations. First, like the standard GSP, the GSP+

program does not cover 1,200 of the EU‟s tariff lines that have non-zero MFN tariff rates.

Products deemed very sensitive like beef and other meats, dairy products, some processed fruits

and vegetables, oils and processed sugar, are not covered by the GSP+ program. Second, like

standard GSP, the GSP+ program also has low thresholds for graduation out of the system and is

subject to “graduation creep.” Third, it has stringent rules of origin as discussed in Chapter 9.

Fourth, the implementation of some of the international conventions required for eligibility for

GSP+ may not be an immediate development priority in some low income countries and may

22

The eleven Central and Latin American countries are Bolivia, Colombia, Costa Rica, Ecuador, Guatemala,

Honduras, Nicaragua, Panama, Peru, El Salvador and Venezuela (see Official Journal of the European Union,

L337/50, December 22, 2005). 23

Only two countries – Moldova and Sri Lanka – satisfied similar conditions for the protection of labor rights under

the previous version of the EU‟s GSP, and no countries satisfied its environmental protection conditions.

28

distract attention and effort from other higher priority reforms needed to accelerate growth and

poverty reduction.

Revisions in the GSP+ Program for 2009-11. Countries (including the 14 beneficiaries

in 2006-08) wishing to qualify for GSP+ for 2009-11 needed to submit applications before

October 31, 2008. Sixteen non-African developing countries qualified for GSP+ for 2009-11.24

The two African countries that applied, Nigeria and Gabon, were, however, not accepted because

they failed to meet the criteria. Out of the 27 international conventions on human rights, good

governance, and sustainable development, Nigeria had not ratified one (genocide) and Gabon

two (child labor and trade in hazardous waste.)

In addition, the new GSP+ regulation provides for consideration of additional applicants

in mid-2010 so that they will not have to wait three years to be able to reapply. Otherwise, the

GSP+ program is unchanged for 2009-11.

Implications for African Non-LDCs. Despite the GSP+ program‟s limitations, it is an

improvement over standard GSP. Two (Gabon and Nigeria) of the three African non-LDCs that

have not yet entered into an EPA are close to satisfying the conditions for entry into GSP+ , and

it is probably worth their wile to try to satisfy the remaining few conditions for the 2010 review.

Comparison of Cotonou and Standard GSP Preferences for Non-LDCs

The value of Cotonou preferences and its Commodity Protocols relative to the European

Union‟s standard GSP, and hence the impact of reverting to the latter, varied considerably among

the thirteen non-LDCs in Africa. Table 7.4 compares, using 2005 data, the value of preferences

under the Cotonou Agreement/Commodity Protocols with standard GSP preferences for exports

from the thirteen African non-LDCs. (Note that, depending on the structure of the markets for

individual products, the preference margin for a product may be captured by the exporter or the

importer or split between them.)

24

The 16 developing countries that qualified for the EU‟s GSP+ are Armenia, Azerbaijan, Bolivia, Colombia, Costa

Rica, Ecuador, El Salvador, Georgian, Guatemala, Honduras, Mongolia, Nicaragua, Paraguay, Peru, Sri Lanka, and

Venezuela. The eligibility of two countries, however, is currently the subject of an investigation by the European

Commission into the implementation of certain UN and ILO conventions.

29

Table 7.4: Comparison of Cotonou/Commodity Protocol Tariff Preferences with

Standard GSP Tariff Preferences for African non-LDCs, 2005

Description

GSP Prefs (as % of

total exports to EU)*

(a)

Cotonou Prefs (as % of total exports to EU)

(b)

Change from

Reverting to GSP= (a) - (b)

Exports to the EU as a % of

total exports

Swaziland (94% of benefit comes from sugar protocol.)

Sugars and sugar confectionery 0.00% 46.70% -46.70% 78.8%

Preps. of vegetable, fruit, or nuts 0.50% 2.40% -1.80% 80.6%

Edible vegetables and certain roots 0.00% 0.10% -0.10% 69.8%

Top 3 exports to EU 0.60% 49.20% -48.60% 79.0%

Total 0.70% 49.50% -48.80% 18.0%

Mauritius (74% of benefit comes from sugar protocol.)


Articles of apparel & clothing accessories 0.70% 3.50% -2.80% 74.7%

Preps.of meat, fish or crustaceans 0.00% 1.60% -1.60% 95.5%

Top 3 exports to EU 0.70% 22.10% -21.40% 83.4%

Total 1.00% 23.10% -22.10% 72.6%

Seychelles (81% of benefit comes from bilateral fish agreement, mainly tuna)

Preps. of meat, fish, or crustaceans 0.00% 12.90% -12.90% 99.3%

Fish & crustacean, mollusc & other 0.30% 3.00% -2.70% 45.3%

Rubber and articles thereof 0.00% 0.00% 0.00% 75.3%

Top 3 exports to EU 0.30% 15.90% -15.60% 76.4%

Total 0.30% 15.90% -15.60% 70.8%

Zimbabwe (61% of benefit comes from sugar protocol.)


Tobacco and manufactured tobacco 0.60% 1.30% -0.70% 19.0%

Live trees & other plants; bulbs, roots 0.30% 0.80% -0.60% 89.3%

Top 3 exports to EU 0.90% 8.10% -7.30% 33.2%

Total 2.10% 9.80% -7.70% 26.6%

Kenya (not a protocol beneficiary)


Live trees & other plants; bulbs, roots 0.90% 2.80% -1.90% 92.2%

Preps of vegetables, fruits, nuts, etc. 0.20% 1.10% -0.90% 95.0%

Top 3 exports to EU 3.80% 7.70% -4.00% 93.7%

Total 3.90% 9.70% -5.80% 40.3%

Notes: 1. Assuming no reduction in quantities and no drop in preference utilization rates at

lower levels of preferences

2. The figure for each country in the last row of the far right column is that country‟s total

exports to the EU as a percentage of its total exports to the world.

30

Table 7.4 (continued): Comparison of Cotonou/Commodity Protocol Tariff Preferences

with Standard GSP Preferences for African non-LDCs, 2005

Description

GSP Prefs (as % of total

exports to EU )*

(a)


(b)

Change from Reverting to

GSP = (a) - (b)

Exports to the EU as

a % of total exports

Namibia (56% of benefits comes from beef and veal protocol)

Meat and edible meat offal 0.00% 3.20% -3.20% 83.7%

Fish & crustacean, mollusks, & other 0.60% 2.30% -1.70% 72.3%


Top 3 exports to EU 0.60% 5.60% -5.00% 74.4%

Total 0.60% 5.70% -5.10% 64.1%

Cote d'Ivoire (42% of benefit comes from banana protocol.)

Edible fruit and nuts; peel of citrus 0.10% 2.20% -2.10% 71.3%

Cocoa and cocoa preparations 0.60% 1.60% -0.90% 57.3%


Top 3 exports to EU 0.70% 4.60% -3.90% 61.0%

Total 0.90% 5.30% -4.30% 2.2%

Ghana (37% of benefit comes from bilateral fish agreement.)

Preps, of meat, fish, or crustaceans 0.00% 1.60% -1.60% 99.6%



Top 3 exports to EU 0.30% 3.50% -3.20% 66.7%

Total 0.60% 4.30% -3.70% 57.0%

Cameroon (83% of benefit comes from banana protocol.)

Edible fruits and nuts; peel of citrus 0.00% 2.50% -2.50% 99.6%

Aluminum and articles thereof 0.00% 0.30% -0.30% 94.6%


Top 3 exports to EU 0.00% 2.90% -2.80% 90.5%

Total 0.10% 3.00% -2.90% 72.7%

Botswana (100% of benefit comes from beef and veal protocol.)

Meat and edible meat offal 0.00% 1.00% -1.00% 81.2%

Articles of apparel & clothing access. 0.00% 0.00% 0.00% 15.4%

Electrical machinery and equipment 0.00% 0.00% 0.00% 59.9%

Top 3 exports to EU 0.00% 1.00% -1.00% 52.9%

Total 0.00% 1.00% -1.00% 75.2%

Notes: 1. Assuming no reduction in quantities and no drop in preference utilization rates at

lower levels of preferences

2. The figure for each country in the last row of the far right column is that country‟s total

exports to the EU as a percentage of its total exports to the world.

31

Table 7.4 (continued): Comparison of Cotonou/Commodity Protocol Tariff Preferences

with Standard GSP Preferences for African non-LDCs, 2005

Description

GSP Prefs (as % of total

exports to EU)*

(a)


(b)

Change from

Reverting to GSP= (a) - (b)

Exports to the EU as a % of total

exports

Gabon (not a protocol beneficiary)

Wood and articles of wood 0.70% 0.90% -0.10% 47.0%

Fish & crustacean, mollusks, & other 0.20% 0.40% -0.10% 94.5%

Plastics and articles thereof 0.00% 0.00% 0.00% 95.1%

Top 3 exports to EU 1.00% 1.30% -0.30% 48.6%

Total 1.00% 1.30% -0.30% 12.8%

Congo (not a protocol beneficiary)

Tobacco and manufactured tobacco 0.00% 0.20% -0.10% 88.8%

Fish, crustaceans, mollusks, & other 0.10% 0.20% -0.10% 79.4%

Wood and articles of wood 0.00% 0.00% 0.00% 43.8%

Top 3 exports to EU 0.20% 0.40% -0.20% 45.7%

Total 0.20% 0.40% -0.20% 5.7%

Nigeria (not a protocol beneficiary)

Fish, crustaceans, mollusks, & other 0.00% 0.10% 0.00% 97.9%

Cocoa and cocoa preparations 0.00% 0.00% 0.00% 83.2%

Raw hides and skins 0.00% 0.00% 0.00% 78.0%

Top 3 exports to EU 0.10% 0.10% 0.00% 83.4%

Total 0.10% 0.10% 0.00% 22.3%

Notes: 1. Assuming no reduction in quantities and no drop in preference utilization

rates at lower levels of preferences 2. The figure for each country in the last row of the far right column is that country‟s

total exports to the EU as a percentage of its total exports to the world.

Source: Hoppe (2007) and World Bank staff calculations based on EU preference data and UN

COMTRADE.

Note: Another column could be added on the far right of table 4.1 giving the change from reverting to GSP as a

% of each country‟s total exports to the world.

32

Greatest Beneficiaries of the Cotonou Preferences. Of Africa‟s thirteen non-LDCs,

Swaziland, Mauritius, and the Seychelles have benefited the most under the Cotonou regime

relative to standard GSP. For these three countries, the value of the tariff savings under the

Cotonou/Commodity Protocol preferences in 2005 exceeded those from standard GSP

preferences by 49% of the value of total exports to the European Union for Swaziland, 22% for

Mauritius, and 16% for the Seychelles. However, Swaziland sends only 18% of its exports to the

EU whereas Mauritius and the Seychelles ship, respectively, 73% and 71% of their exports to the

EU. Hence, relative to each country‟s total (world) exports, the value of the Cotonou preferences

was greater for Mauritius (16% of world exports) and Seychelles (11%) than for Swaziland

(9%). For Swaziland and Mauritius, the bulk of the tariff savings came from the sugar protocol.

Sugar accounted for 47 percentage points of Swaziland‟s 49 percentage points in total tariff

savings on its exports to the EU and for 17 percentage points of Mauritius‟s 22 percentage points

in total tariff savings. Savings on products benefiting from the Cotonou preferences but not the

commodity protocols were much smaller, at 2% of exports to the EU for Swaziland (primarily

prepared vegetables, fruits, and nuts) and 5% of exports to the EU for Mauritius (primarily

clothing under the Cotonou preferences). For the Seychelles, virtually the entire tariff savings of

16% of its exports to the EU came from its fish exports under a special bilateral EU-Seychelles

fishing agreement.

Significant Beneficiaries of the Cotonou Preferences. For six other African non-LDCs,

the differences between the value of the tariff savings under the Cotonou Agreement/Commodity

Protocols and those under the standard GSP were smaller than those of the three countries noted

above but still significant. For these six non-LDCs – Cameroon, Côte d‟Ivoire, Ghana, Kenya,

Namibia, and Zimbabwe – the differences in the tariff savings between the two preference

schemes ranged from 3% to 10% of the value of their total merchandise exports to the EU, and

from 2% to 3% of the value of their total world exports. The commodity protocol products again

accounted for much of the benefit – bananas for Cameroon and Côte d‟Ivoire, sugar for

Zimbabwe, and beef for Namibia. Ghana, like Seychelles, benefited from a bilateral fish

agreement. Of the non-protocol products, preferences for exports of fish and fish products

benefited the most countries, appearing in the list of the top three products benefiting in seven

countries. Kenya is the only non-LDC in Africa not benefiting from a commodity protocol or

bilateral fish agreement that obtained tariff savings under the Cotonou Agreement of more than

3% of the value of its total exports to the European Union.25

Incidental Beneficiaries of the Cotonou Preferences. For the remaining four African

non-LDCs – Botswana, Congo, Gabon, and Nigeria – the tariff savings from the difference

between Cotonou/Commodity Protocol and GSP preferences were 1% or less of the value of

their exports to the EU and 0.8% or less of their world exports. Of these countries, only

Botswana benefited from a commodity protocol (for beef and veal). This generated tariff savings

for it equivalent to 1% of total exports to the EU and 0.8% of its world exports. The exports of

25

Price Waterhouse Coopers (2007) noted that Kenya‟s cut flower (rose) exports to the EU enjoyed a zero tariff

under the Cotonou preferences. Under the GSP, the tariff on cut flowers is 5%. Kenya‟s main competitors such as

Egypt and Morocco have bilateral trade agreements with the EU. Egyptian exports of roses to the EU have a zero

tariff from January to April but face a 5% tariff in May and an 8.5% tariff from June to September. Moroccan

exports of roses to the EU have a zero tariff within a 3,180 tons quota between November and May but pay an 8.5%

tariff between June and October. The Price Waterhouse Coopers report argued that the Kenyan cut flower (rose)

export industry would collapse without the Cotonou preferences

33

Congo, Gabon, and Nigeria to the EU are mainly oil and minerals that have MFN tariff rates of

zero. The preferences under the Cotonou Agreement were, thus, largely irrelevant for these three

non-LDCs; and their benefits from them were virtually nil, less than 0.3% of their exports to the

EU and 0.04% of their world exports in each case.

Overall Impact of Reversion to GSP Status. Thus, in the medium term, four of the

thirteen non-LDCs in Africa would have lost little or nothing in terms of reduced market access

from reverting from the Cotonou preferences to the European Union‟s standard GSP when the

Cotonou preferences expired at the end of 2007. Another six countries would have been

moderately but not seriously affected in macro terms, although the impact on the specific export

sectors concerned could have been substantial. Perhaps more importantly, reversion to GSP

could also have inhibited export diversification to the extent that any exports of new products

eligible for Cotonou preferences did not receive equivalent preferences under the GSP. In

addition, under the Cotonou preferences there was no graduation provision as there is under the

GSP.

Interim EPAs and Non-LDCs

Under interim EPAs, the European Union is providing both participating LDCs and non-

LDCs with full tariff-free, quota-free market access similar to that previously provided only to

LDCs under its Everything but Arms program. All EPA-signatories will thus have the same

market access conditions, allowing neighboring countries “to collaborate and helping build

regional markets and supply chains.”26

The only country exception is South Africa, which will

continue to have to pay import duties on a “number of globally competitive products” under its

existing free trade agreement with the EU. For all other EPA-countries, full tariff-free, quota-

free access was implemented on day one – January 1, 2008 – with short transition periods only

for sugar and rice to ensure consistency with the EU‟s CAP reform program.27

Interim EPAs also effectively replaced the European Union‟s commodity protocols.

Those non-LDCs that entered into interim EPAs will have tariff-free, quota-free access to the EU

markets in 2008 for the commodities governed by commodity protocols, instead of a fixed

amount of tariff-free access as under the protocols‟ tariff-rate quotas. Such quota-free access

will permit the non-LDCs in Africa to export to the European Union as much as they can

produce and sell these exports at the higher protected prices prevailing in the EU market.

However, as explained above, it will also expose them to greater competition from non-African

ACP countries and from non-ACP LDCs, which will have similar tariff-free quota-free access to

the EU market under EPAs and the EBA program respectively.28

26

This quotation is from “EU Offers Full Market Access to Africa, Caribbean and Pacific Regions in EPA

Negotiation,” European Commission Press Release, IP/07/476, Brussels, April 4, 2007. 27

Differential treatment under EPAs between the exports of LDC and non-LDC members of the same regional trade

area might in some cases slow the growth of the region‟s exports and the development of the regional trade area as a

whole as discussed in Chapter 17 on regional EPA issues in Part I. 28

See Annex C on the EU‟s commodity protocols and the EPA-process for a further discussion of this point.

34

Comparison of Alternative EU Tariff Preferences for African Non-LDCs

For African non-LDCs, entering into interim EPAs providing for full tariff-free, quota-

free access had two effects on their tariff preferences. First, the potential losses from termination

of the Cotonou/Commodity Protocol preferences and reversion to standard GSP preferences in

2008 were avoided. Second, the non-LDCs gained from moving from the Cotonou/Commodity

Protocol preferences to full tariff-free, quota-free access under interim EPAs. This subsection

looks at each of these two effects separately and then at their combined impact.

Cotonou versus GSP Preferences. The potential losses from termination of the

Cotonou/Commodity Protocol preferences and reversion to standard GSP preferences could have

been substantial for three non-LDCs, as discussed above and summarized in column “B–A” of

Table 7.5. For Swaziland, Mauritius, and the Seychelles, the value of the tariff savings from the

Cotonou/Commodity Protocol preferences exceeded those from the standard GSP by 49%, 22%,

and 16%, respectively, of the value of their exports to the EU in 2005 and 11%, 16%, and 9%,

respectively, of the value of their exports to the world. Avoiding (or finding a way to

compensate for) these potential losses was an important consideration. For six other non-LDCs,

the potential losses were smaller, ranging from 3-10% of the value of their exports to the EU in

2005 (equivalent to 2% to 3% of the value of their world exports) but could have caused serious

problems for some of the negatively affected export sectors. The other four non-LDCs would

have lost little (0.8% of total exports for Botswana) or nil (for the three oil exporters).

Cotonou versus EPA Preferences. In addition, the non-LDCs could potentially gain

from moving from the previous Cotonou/Commodity Protocol preferences to full tariff-free,

quota-free access under interim EPAs. However, the immediate gain (column “C-B” in Table

7.4) for most of the thirteen non-LDCs‟ existing exports was quite small. For eleven of the non-

LDCs, the immediate gain was tiny, 0.2% or less of the value of their exports to the EU in 2005.

The other two non-LDCs, Cameroon and Côte d‟Ivoire, gained significant tariff savings from

moving from the Cotonou/Commodity Protocol preferences to full tariff-free, quota-free access

under interim EPAs: 2.5% to 3.2% of the value of their exports to the European Union in 2005

(equivalent to 1.3% to 2.3% of their world exports, respectively).

EPA versus GSP Preferences. The combined effects of avoiding the losses from

reverting from Cotonou/Commodity Protocol preferences to standard GSP (the situation for non-

LDCs without EPAs in 2008) and of moving to full tariff-free, quota-free access under interim

EPAs is shown in the column “C-A” of Table 7.5. For the thirteen non-LDCs as a group, 85% of

the combined gain – 3.4% out of a total of 4.0% of their exports to EU – came from avoiding

reverting to GSP status. Shifting to full tariff-free, quota-free access had only a small additional

initial impact, generating tariff savings of only 0.6% of the non-LDCs‟ exports to the EU. The

largest combined tariff savings went to the three non-LDCs that avoided large losses from

reverting to GSP status: Swaziland (combined tariff savings equal to 49% of exports to the EU),

Mauritius (22% of exports to the EU), and Seychelles (16% of exports to the EU). Four other

non-LDCs had combined tariff savings equal to 6-8% of their exports to the EU: Zimbabwe

(8%), Ivory Coast (7%), Cameroon (6%), and Kenya (6%). Namibia and Ghana had combined

35

savings in the 4-5% range. For three non-LDCs – Congo, Gabon, and Nigeria – that did not

initial interim EPAs plus Botswana, which initialed an interim EPA, the combined tariff savings

were 1% or less of the value of their exports to the EU. These marked differences in the benefits

for individual non-LDCs created similar differences in their negotiating incentives. In particular,

the nine larger potential losers from reverting to GSP status had much stronger negotiating

incentives than the other four non-LDCs.

Table 7.5: Comparison of the Value of GSP, Cotonou, and EBA Tariff Preferences for the

13 African Non-LDCs in 2005

A: Prefs. if

only GSP used (as % of exports

to EU)

B: Current Cotonou

Prefs (as % of exports

to EU )

C: Prefs.

under EBA (as % of

exports to EU)

B-A: Difference between Cotonou

and GSP

C-B: Difference between

EBA and

Cotonou

C-A: Difference between

EBA and GSP

Botswana 0.00% 1.00% 1.10% 1.00% 0.10% 1.10%

Cameroon 0.10% 3.00% 6.20% 2.90% 3.20% 6.10%

Congo 0.20% 0.40% 0.40% 0.20% 0.00% 0.20%

Gabon 1.00% 1.30% 1.30% 0.30% 0.00% 0.30%

Ghana 0.60% 4.30% 4.40% 3.70% 0.10% 3.80%

Ivory Coast 0.90% 5.30% 7.80% 4.40% 2.50% 6.90%

Kenya 3.90% 9.70% 9.70% 5.80% 0.00% 5.80%

Mauritius 1.00% 23.10% 23.10% 22.10% 0.00% 22.10%

Namibia 0.60% 5.70% 5.90% 5.10% 0.20% 5.30%

Nigeria 0.10% 0.10% 0.10% 0.00% 0.00% 0.00%

Seychelles 0.30% 15.90% 15.90% 15.60% 0.00% 15.60%

Swaziland 0.70% 49.50% 49.50% 48.80% 0.00% 48.80%

Zimbabwe 2.10% 9.80% 9.80% 7.70% 0.00% 7.70%

Average * 0.50% 3.90% 4.50% 3.4% 0.6% 4.0%

Notes: Calculation of preferences is based on current utilization rates and assumes no increase/decrease in quantities

or utilization rates at higher or lower levels of preferences. *The average in the last row is total tariff savings for all

countries in the column divided by their total exports to the EU.

Source: Hoppe (2007) and World Bank staff calculations based on 2005 EU preference data and UN

COMTRADE.

Longer Term Effects. To accelerate their long term development, however, the non-

LDCs need to obtain improved and secure market access through EPAs to create better

opportunities for diversifying and expanding exports. The figures in Table 7.5 cover only

existing export products and quantities – they do not take into account the effect of improved

prices or market access on either the expansion of existing exports or the diversification into new

products that would be possible with secure tariff-free, quota-free access to the EU market.

Sugar is an example of an export product of which some non-LDCs could export significantly

36

more with tariff-free, quota-free access under EPAs. The relatively small gains for current

exports for eleven of the thirteen non-LDCs from upgrading from the Cotonou preferences to full

tariff-free, quota-free access under interim EPAs also underline the importance of addressing

other constraints to export diversification. These constraints include both external ones -- the

EPAs‟ restrictive rules of origin, compliance with technical regulations and standards, and

international transport costs -- and internal ones -- competitiveness and supply problems in the

non-LDCs themselves.

C. EU Tariff Preferences for African LDCs: The Cotonou

Regime, the EBA Program and Interim EPAs

In addition to the trade preferences granted to the ACP countries under the Cotonou

Agreement and its Commodity Protocols, in March 2001 the European Union also adopted

special preferences for all LDCs under its Everything but Arms program. Thus, for the 33

African LDCs, the alternative to EPAs for maintaining preferential access to the EU market after

the Cotonou preferences expired at the end of 2007 was the EBA program, rather than the less

favorable GSP option faced by the non-LDCs.

The EU’s Everything-but-Arms Program

Under its EBA program, the European Union unilaterally granted to 49 least developed

countries full quota-free and tariff-free access to its market for all products, except arms,

satisfying its rules of origin without requiring the LDCs to give reciprocal preferential market

access to the European Union in return.29

The EBA program is part of the European Union‟s

Generalized System of Preferences. It is compatible with the WTO‟s enabling clause as it grants

special preferences to the one permissible sub-grouping of developing countries, the LDCs.

Unlike standard GSP and GSP+ preferences, EBA preferences are valid for as long as a

country remains an LDC without being subjected to periodic reviews. In fact, the only changes

in the EBA program as a result of the EU‟s 2008 review are that the planned full liberalization of

sugar imports has been postponed for three months from July 1 to October 1, 2009, and a

minimum price arrangement for sugar will be applied from October 1 to 2009 to September 2012

to ensure consistency with the outcome of the EPA negotiations (European Commission 2008).

The EPA program thus provides greater certainty for potential investors about the future

continuation of preferences than do standard GSP and GSP+.

For LDCs, the EBA program eliminates the tariffs on 919 agricultural and processed

agricultural products (representing about 11% of the EU‟s 8,200 tariff lines with non-zero MFN

29

Myanmar is the 50th

country on the UN‟s current list of least developed countries. The European Union

suspended preferences for Myanmar under its GSP in 1997. This suspension also applies to EBA preferences.

37

tariffs) that were still subject to tariffs under the Cotonou Agreement.30

Under the EBA

program, implementation of full market access was immediate except for transition periods for

bananas, rice, and sugar. Tariff-rate quotas restricting LDC exports of these products to the EU

are to be fully phased out by 2009. Full free market access was implemented for bananas in

January 2006 and will be provided for sugar and rice in 2009. For manufactured products,

however, the EBA program substitutes the GSP‟s somewhat more restrictive rules of origin for

those under the Cotonou Agreement (see Chapter 8 on the interim EPAs‟ rules of origin).

The EBA program eliminated the previous preference margin of all ACP countries

relative to non-ACP LDCs (including, in particular, Bangladesh, which is a large exporter of

clothing and other labor intensive manufactures). It will also permit the non-ACP LDCs to

compete quota-free in the product markets currently governed by commodity protocols when the

last of the tariff-rate quotas for LDCs (the one for sugar) is phased out in 2009.

The EBA program complicated the EPA process by creating different market access

alternatives and negotiating incentives for the 33 LDCs and thirteen non-LDCs in Africa that

were eligible for EPAs. The access to the EU market by the 33 African LDCs benefiting from

the EBA program would not be significantly reduced if they decided not to enter into interim

EPAs (except possibly in a few isolated cases as a result of the EBA program‟s somewhat more

restrictive rules of origin than the Cotonou Agreement‟s as discussed in Chapter 8). In contrast,

the thirteen non-LDCs had to enter into interim EPAs in order to obtain tariff-free, quota-free

access to the EU market and reverted to less favorable GSP status if they did not.

Country Graduation from LDC Status. In contrast to standard GSP, the EBA Initiative

runs for an unlimited period and is not subject to periodic reviews. EBA preferences last for as

long as a country retains its status as an LDC. Market access is thus more secure under the EBA

program than under standard GSP. For this reason, it is presumably more likely to encourage

investment in new exports.

However, countries can graduate from LDC status, as Cape Verde has just done, and thus

lose their eligibility for the EBA program. Since 1971, the United Nations has produced the

official list of the Least Developed Countries as determined by its Committee for Development

Policy (UNCDP). The UN uses three criteria for determining LDC status: (a) per capita income

(based on a three-year average of gross national income per capita) of less than $750 for addition

to the list of LDCs and of more than $900 for graduation from the list; (b) underdeveloped

human assets; and (c) economic vulnerability.31

Table 7.5, taken from the most recent UNCDP

report (UN 2006), shows the economic and social indicators used to measure these three criteria

for African LDCs.

30

These 919 tariff lines represented only 0.5% of total LDC exports to the EU, but the historically low levels of

exports of some items could have been a reflection of the prohibitive levels of the EU‟s protective tariffs on these in

the past. 31

In addition, in 1991 the UN Committee for Development Policy (UNCDP) recommended that larger developing

countries with populations significantly exceeding 75 million should not be considered for inclusion in the list of

least developed countries. This recommendation has not been followed in subsequent reviews. Bangladesh, with a

population of 141 million, is on the current list of LDCs as is Ethiopia, the largest African LDC with a population of

77 million.

38

In 2006, the UN‟s list of 50 LDCs included 34 African countries. However, as LDCs

develop, they may graduate from LDC status. Cape Verde, for example, was recommended by

the UNCDP in its 2003 review for graduating from LDC status, and the General Assembly

decided that it should graduate at the end of 2007.32

Cape Verde would thus have lost its

eligibility for the EBA preferences at that time but has been granted a temporary three year

extension by the EU.

To be considered for graduation from the UN‟s list of LDCs, a country must reach the

threshold levels for graduation for at least two of the UN‟s three criteria, or its income per capita

must exceed twice the threshold level and this level of income per capita must be sustainable. To

actually be recommended for graduation, a country must be found eligible for graduation in two

consecutive triennial reviews but should not graduate until its development prospects have

significantly improved. The UN Economic and Social Council and ultimately the General

Assembly make the final decision on whether or not a specific country should graduate.

Table 7.6 reports the data for national income per capita, the human asset index, and the

economic vulnerability index used by the UNCDP. The figure for gross national income per

capita is a three-year average. The human asset index is a combination of four indicators –

percentage of population undernourished, the mortality rate for children aged five and under, the

gross secondary school enrollment ratio, and the adult literacy rate. The economic vulnerability

index combines seven indicators – population size; remoteness; concentration of merchandise

exports; the share of agriculture, forest and fisheries in GDP; homelessness owing to natural

disasters; instability of agricultural production; and instability of exports of goods and services.

The most recent UNCDP report (UN 2006) included 65 countries classified as low-

income countries in its review of adding countries to or graduating them from LDC status. The

per capita income threshold for inclusion on the list was a three-year (2002-2004) average gross

national income per capita of $745 or below. This criterion was established using the World

Bank‟s threshold for classifying countries as low income. The threshold for graduation was set

20% above the threshold for inclusion at $900. For the human asset index, the threshold for

inclusion as an LDC was the value of this index that separated the highest and second highest

quartiles of the values for the 65 countries; and the threshold for graduation was set at 10%

above the threshold for inclusion as an LDC.

In 2006, the threshold on the human asset index for inclusion as an LDC was 58 and that

for graduation was 64. Similar procedures were applied to determine the thresholds for inclusion

and graduation for the economic vulnerability index: that is, for inclusion, the threshold was the

value between the lowest and next to lowest quartiles of the values of the economic vulnerability

index for 65 countries, with the threshold for graduation set 10% lower. In 2006 the threshold

for inclusion was an economic vulnerability index of 42 and that for graduation was 38.

32

The UNCDP also recommended the inclusion of Zimbabwe in the list of LDCs in its 2006 review. However, the

government of Zimbabwe refused to give its consent to being “downgraded to LDC status” (UN 2006).

39

Table 7.6 Selected Economic and Social Indicators for African LDCs, 2004

Country Population

millions

Per capita, gross

national income

US$

Human

assets

index

Economic

vulnerability

index

Equatorial Guinea 0.5 3,393 56 71

Cape Verde* 0.5 1,487 82 58

Djibouti 0.8 943 45 60

Angola 15.9 823 29 43

Lesotho+ 1.8 623 61 51

Senegal 11.7 557 39 42

Sudan 36.2 463 49 50

Benin 8.4 450 40 52

Comoros* 0.8 450 38 64

Guinea 9.4 433 36 35

Mauritania 3.1 403 46 41

Zambia+ 11.7 390 35 46

Sao Tome & Principe* 0.2 333 64 58

Togo 6.1 323 46 46

Tanzania 38.3 313 33 34

Burkina Faso+ 13.2 303 25 47

Mali+ 13.5 300 22 43

Central African Republic+ 4.0 277 27 51

Gambia 1.5 277 42 56

Madagascar 18.6 273 42 42

Uganda+ 28.8 253 49 47

Chad+ 9.7 237 22 63

Mozambique 19.8 220 26 44

Rwanda+ 9.0 220 34 59

Niger+ 14.0 203 13 50

Somalia 8.2 193 5 68

Sierra Leone 5.5 190 16 64

Eritrea 4.4 163 34 64

Malawi+ 12.9 163 41 49

Guinea-Bissau 1.6 143 26 66

Liberia 3.3 117 29 68

DR of Congo 57.5 103 21 43

Ethiopia+ 77.4 100 27 39

Burundi+ 7.5 90 20 60

Notes: + indicates land-locked; * indicates small islands.

Source: UN Committee for Development Policy (2006), "Overcoming Economic Vulnerability and Creating

Employment."

In the 2006 UNCDP review, Equatorial Guinea had national income per capita of about

$3,400, almost four times the graduation threshold. Equatorial Guinea did not reach the other

two thresholds for graduation and was considered highly vulnerable as measured by economic

vulnerability index. However, the UNCDP recommended Equatorial Guinea for graduation as

40

its income level substantially exceeded the maximum limit of two times the $750 per capita

threshold and appeared sustainable. The UNCDP also noted that the level of the human asset

index in Equatorial Guinea has improved since the previous review in 2003, 56 relative to the

threshold for graduation of 64 in 2006, compared with 47 relative to 61 in 2003.

Overall, it is very unlikely that any African countries other than Cape Verde and

Equatorial Guinea will graduate from the list of LDCs status – and hence from eligibility for the

EU‟s EBA program -- in the medium-term. Most African LDCs have national income per head

well below the threshold of graduation (Table 7.6). Djibouti, with a gross national income per

capita of $943, and Angola, with a gross national income per capita of $823, are the only African

countries other than Cape Verde and Equatorial Guinea that are close to the graduation threshold

of $900 per capita income. However, Djibouti has a human asset index of 45, which is well

below the threshold of 58, as well as a high economic vulnerability index (Table 7.t). Angola

has an even lower human assets index of 29 and an economic vulnerability index of 43. Lesotho

and Sao Tome and Principe, with relatively high human asset indexes of 61 and 64 respectively,

are the two African LDCs closest to the graduation threshold of 64 for the human asset index.

But both of these countries still have low levels of gross national income per head, $623 and

$333 respectively, and high economic vulnerability indexes, 51 and 58 respectively.

Potential Improvements in Markets Access for LDCs under Interim EPAs

Interim EPAs give the nine participating African LDCs secure tariff-free, quota-free

access to the EU‟s market. However, since they already had such market access under the

Everything but Arms program, they gained nothing new in terms of lower tariffs on their exports

from entering into reciprocal free trade with the European Union under interim EPAs. For

participating LDCs to obtain any improvement in market access under interim EPAs in return for

providing tariff-free access to their own markets for imports from the EU, EPAs will need to

offer trade benefits beyond those provided by the EBA program. More favorable rules of origin

and greater duration and certainty of market access are two such potential benefits. These are

taken up below and in the next chapter on the non-tariff aspects of the African countries‟ access

to the EU market.

D. The Duration and Certainty of Preferential Access

to the EU Market

In addition to differences in the level of tariff preferences and the rules governing market

access, there are significant differences between unilateral preferences and EPAs in the duration

and certainty of preferential access. The most important of these differences are permanent

versus temporary/renewable preferential access, graduation mechanisms and risks both for

countries and for individual export products, the security of the legal basis for preferential

market access, and import defense measures and dispute settlement procedures.

41

Limitations of the EU’s Unilateral Preferences

As discussed earlier, the European Union‟s GSP (the alternative to EPAs for non-LDCs)

is reviewed every three years, and countries and products can lose their preferential treatment

after a review. The European Union‟s GSP and its EBA initiative differ significantly in these

respects.

GSP. The European Union‟s GSP (the alternative to EPAs for non-LDCs) is reviewed

every three years, and countries and products can lose their preferential treatment after a review.

Particular products can lose their eligibility because, for example, exports exceed a specific

threshold or protectionist lobbies successfully oppose renewal of the preferences for these

products. Even entire countries may be dropped because, for example, they fail to meet general

governance, environmental, or labor standards criteria or they graduate as a result of rising GDP.

Uncertainty about renewal makes GSP preferences a risky basis for the private sector to

undertake substantial long term capital expenditures and thus acts as a deterrent to the very

investments that are needed for developing countries to benefit from the preferences.33

The EBA Program. In contrast, the EBA Program (the alternative to EPAs for LDCs)

runs for an unlimited period and is not subject to periodic reviews. EBA preferences last for as

long as a country retains its status as an LDC. As LDCs develop, they may eventually graduate

from LDC status and lose their eligibility for the EBA program as Cape Verde has just done.

However, as explained earlier, no other African LDCs are currently close to graduating from

LDC status. But, if some of the more advanced LDCs grow rapidly for the next five to ten years,

they could become candidates for graduation. Nevertheless, market access is much more secure

under the EBA program than under GSP. For this reason, it is presumably more likely to

encourage investment in expanding exports.

Potential Advantages of Economic Partnership Agreements

In contrast, equivalent preferential market access provided under free trade agreements

like EPAs is more stable and certain, resulting from a treaty rather than unilateral political

decisions, and is not subject to periodic revisions and renewal. Nor would successful African

EPA-countries face a risk of graduating from preferential treatment. Economic Partnership

Agreements thus provide a more secure basis for investments necessary to expand and diversify

export production than the EU‟s current GSP and EBA programs.34

In addition, EPAs could, in principle, also restrain the use of the EU‟s safeguards and

import defense measures and increase resistance to pressures from lobbies for domestic interests.

As far as we have been able to determine, import defense measures have never been employed

specifically against an ACP country, probably because their exports have been too small or too

limited by other measures (such as the quotas under the sugar protocol) to cause, or even threaten

33

The preferences extended under the United States‟ African Growth and Opportunity Act suffer from the same

uncertainty caused by periodic reviews. 34 However, that the EU has, if it wishes to pursue it, the option of unilaterally reforming its GSP and GSP+ to

increase the duration and certainty of the market access provided under them, although any such improvements

would apply to all GSP or GSP+ beneficiaries, not just to the ACP countries as in the case of EPAs.

42

to cause, a significant injury to EU firms. However, as African countries develop, it is possible

that as a group their exports of some “sensitive” products such as garments or fruits and

vegetables could become large enough to provoke anti-dumping or safeguard actions.

Hence, in the ongoing EPA process it would be worth considering how to limit the future

application of such measures to the EPA-countries‟ exports. EPAs could establish dispute

settlement mechanisms providing for more consultations and longer notification periods before

any punitive safeguard measures are applied. An essential feature of dispute settlement should

be that neither the EU nor the ACP states can unilaterally take protective actions without

consulting with the others.35

E. Overall Impact of EPAs on the Access of African

Countries’ Exports to the EU Market

Overall, the combination of EPAs and the EU‟s EBA and GSP programs that has resulted

from the agreements reached to date will maintain Africa‟s preferential access to the EU market

and avoid significant disruption of current Africa-EU trade as summarized below and Table 7.6.

Countries Signing Interim EPAs

The 19 African countries that have signed interim EPAs now have full tariff-free, quota-

free access for all exports to the EU (with transition periods for rice and sugar until 2010 and

2015, respectively) together with less restrictive rules of origin for clothing and, in some cases,

fish products. For the ten non-LDCs that signed interim EPAs, the tariffs under the EPAs are

lower than under the Cotonou regime, which still maintained tariffs on 919 lines, mostly in the

agricultural sector.36

For the nine LDCs signing interim EPAs, which would have tariff-free,

quota-free access under the EBA program in any case, any significant gains in market access

under the EPAs will come largely from liberalization of the European Union‟s rules of origin as

explained in Chapter 8. More liberal rules of origin are also a key market access improvement

for the non-LDCs. For both LDCs and non-LDCs, the preferential access to the EU market

under EPAs will also be permanent and more legally secure than it was under the Cotonou

regime.

LDCs Not-signing Interim EPAs

The 24 African LDCs that did not sign interim EPAs still have full tariff-free, quota-free

access to the EU market under its EBA program. As under the interim EPAs, the full tariff-free,

35

See Chapter 13 in Part III for a further discussion of the interrelated policy credibility, enforcement, and dispute

settlement issues. 36

For these ten non-LDCs, the gain in market access from their EPAs is an even larger improvement over the GSP

preferences to which they would have reverted in 2008 when the Cotonou preferences expired.

43

quota free market access under the EBA program is more generous than under the Cotonou

preferences, which retained tariffs on 919 agricultural lines. The EBA program is also WTO-

compliant and thus more legally secure than the Cotonou and GSP preferences. However, some

rapidly growing countries could, in the long term graduate from LDC status and thus from

eligibility for the EBA program. The EBA program‟s RoO for clothing and fishery products are

also more restrictive than those under EPAs as explained in Chapter 8.

Non-LDCs Not-signing Interim EPAs

Of the four non-LDCs that did not sign interim EPAs, South Africa has experienced no

change in its access to the EU market, which has been governed by its free trade agreement (the

Trade, Development, and Cooperation Agreement or TDCA) with the EU both before and after

the expiration of the Cotonou preferences.37

Congo (Rep.), Gabon, and Nigeria have reverted

from the Cotonou preferences to the EU‟s GSP regime. But, as large oil and other primary

product exporters, these three countries have not been significantly affected by this change.

Thus far, the only reported losses of tariff preferences are those experienced by exporters of

processed cocoa from Nigeria, which account for a small percent of Nigeria‟s total exports.

Additional small impacts are possible. Congo, Gabon, Nigeria, and South Africa still have the

option open to them of negotiating EPAs if they desire to improve their access to the EU market.

The EPA process has, thus, successfully achieved the immediate objective of replacing

the Cotonou tariff preferences with alternative, WTO-compliant arrangements that provide

equivalent or improved market access for all African countries. The remaining market access

issues concern primarily the EPAs‟ restrictive RoO.38

37

The provisions and implications of the TDCA are discussed further in the chapter on regional EPA-issues in the

forthcoming companion report on full EPAs. 38

See Chapter 9 for a discussion of other non-tariff barriers to market access such as sanitary and phyto-sanitary

standards, anti-dumping measures, and import-defense provisions.

44

Source: European Commission website

45

8. Liberalization of the Interim EPAs’ Rules of Origin

The EU‟s generous provision of full tariff-free, quota-free market access for all imports

has resolved all issues concerning its preferential tariffs under EPAs. However, in addition to

tariff preferences, the African EPA-countries‟ access to the EU market is significantly

constrained by a number of its non-tariff trade and trade-related policies. The most important of

these constraints are the rules of origin determining a product‟s eligibility for tariff preferences

under EPAs, which are the focus of this chapter.39

The following chapter examines other non-

tariff market access issues.

The Rationale for Rules of Origin

When tariffs and quotas are lowered or eliminated in a preferential trade arrangement,

rules of origin (RoO) are needed to ensure that only goods actually produced in beneficiary

countries are granted preferential access. Otherwise, products from third countries could be

transshipped through the preference-receiving country to evade tariffs in the preference-granting

country. Such transshipment of products through a preference receiving country is referred to as

trade deflection. Avoiding trade deflection is generally in the interest of the preference-granting

country so that it does not give up tariff revenues to support the exports of unintended

beneficiaries in third countries. Avoiding trade deflection may, in some cases, also be in the

interest of the preference-receiving country whose exports might otherwise be displaced or have

their price advantage eroded by the deflected exports from third countries not eligible for

preferences.

Typical Provisions in EU Rules of Origin

Product Eligibility Criteria. The eligibility of products for favorable treatment under the

EU‟s various preference programs thus requires satisfying the rules of origin for the preference

program concerned. It is usually straightforward to determine the origin of goods that are

produced entirely within a preference receiving country. But problems in determining origin

arise when goods are produced in a preference receiving country using imported inputs. In these

cases, “substantial transformation” of the imported inputs in the production process is usually

required and defined using one or more of three standard criteria: a change in tariff heading in

the production process, the amount of domestic value-added in the production process, or the

specific processing steps taking place in the production process in a preference receiving

country.

Cumulation. Many countries‟ rules of origin also contain provisions permitting

“cumulation” of processing in specified countries. Cumulation can potentially be important in

39

Paul Brenton and Mombert Hoppe provided important analytical and substantive inputs used in preparing this

chapter.

46

expanding the scope of preferential trade and its impact on regional integration (Naumann 2007).

It can enable a preference receiving exporting country to count inputs produced in specific third

countries in complying with origin requirements for trade preferences if these inputs are further

processed in the exporting country claiming the preferences see Box 7.1 for an explanation of the

different types of cumulation.

Manipulation of RoO for Protectionist Purposes.

Although rules of origin for trade preferences are necessary and serve a legitimate

purpose, in practice RoO are usually determined by the preference giving country and are often

manipulated to achieve other objectives, mainly protecting domestic producers. When domestic

interests are allowed to influence the terms and the scope of RoO, the rules tend to be far more

restrictive than necessary to prevent trade deflection. Product-specific rules of origin, in

particular, tend to be systematically captured by producer interests in the dominant partner in a

preferential trade agreement. Too often, RoO seriously limit the actual improvement in market

access resulting from a preferential trade agreement; and the objective of promoting the exports

of the preference receiving country is thus undermined.

De Melo, Yagci, and Dijofack (2007) note that the design of product specific rules of

origin have been particularly subject to capture by special interest groups in the stronger partner

countries in preferential trade agreements, which are typically far better organized and able to

much more effectively defend their interests in the negotiation process than small nascent

exporters in weaker trading partners. In the case of NAFTA, for example, the main beneficiaries

of product-specific rules of origin for clothing were US firms producing textiles needed as inputs

by Mexican producers of clothing sold in the US market. As a result of NAFTA‟s rules of

origin, Mexican exporters of apparel to the US saw their preferential tariff margins eroded by the

higher costs of textiles that had to be sourced from US firms to qualify for the NAFTA

preferences. In the case of the European Union‟s many preferential trade agreements with

developing countries, it has been EU firms that have benefited from the product-specific rules of

origin. This pattern is also evident in other preferential agreements where one country dominates

the trade relationship. De Melo, Yagci, and Dijofack (2007) cite, as an example, the case of

SADC, where very restrictive RoO were put in place for the benefit of South African firms.40

The Cotonou Rules of Origin

Length and Complexity. For the past three decades, the ACP countries‟ preferential

access to the EU market under Lomé and Cotonou Agreements‟ was governed by their rules of

origin that were complex and protectionist for many products. The detailed RoO under the Lomé

and Cotonou Agreement ran more than 360 pages in length. They included both general rules,

applying to all categories of goods, and product-specific rules. The general rules of origin

included minimum value added requirements, provisions specifying the conditions under which

value added could be cumulated among the ACP countries, tolerance thresholds specifying

permissible maximum import content, and duty drawback provisions.

40

For a more detailed discussion of the SADC case, see Erasmus, Flatters, and Kirk (2006).

47

Box 8.1 Cumulation under Preferential Trade Arrangements

Types of Cumulation. Cumulation is the combining of value added (or of specified steps

in the production process) in two or more countries for the purpose of satisfying the production

requirements set out in the rules of origin in free trade agreements. Partial (also called diagonal)

cumulation allows inputs originating in any country eligible for cumulation to be counted toward

origin requirement in the country incorporating them in its exports. Originating means that the

inputs themselves fully satisfy the rule of origin in the country where produced. Full cumulation

is more generous than partial cumulation. It permits any processing activity carried out in an

eligible country to be counted as qualifying content irrespective of whether or not the processing

is sufficient to confer originating status on these processing activities. Full cumulation allows

for greater division of production processes and greater integration among participating

countries. Although full cumulation itself is less restrictive than partial cumulation, the

documentation required from exporters is usually more complex under full cumulation. It

requires value added information for the entire value chain whereas partial cumulation requires

only proof (based on certificates of origin) that the inputs concerned originate in an eligible

country.

Cumulation Provisions in EU Preferential Trade Arrangements. Free trade agreements

normally provide for at least partial cumulation among their member countries and may also

allow for partial cumulation with selected non-member countries.41

The Cotonou Agreement

allowed for full cumulation among all ACP countries. The cumulation provisions of the rules of

origin for the EBA Initiative, which are identical to the rules of origin under the European

Union‟s GSP, are slightly more restrictive than those under the Cotonou Agreement.42

They

provide for more limited partial cumulation within ASEAN, SAARC, CACM and the Andean

Pact, but not within the ACP countries.

Limitations of Cumulation. Cumulation provisions are usually intended to partially

offset the depressing effect on exports of restrictive rules of origin and to encourage regional

integration. However, cumulation provisions complicate the administration of rules of origin for

both governments and the private sector. Cumulation provisions are really helpful for integration

only if they cover countries that are current or potential sources of competitively priced inputs.

There is little empirical evidence that cumulation provision among small low income economies

contributes to their trade integration. Preference margins are now so small in most cases that the

firms in developing countries that face high indirect transactions and other costs have little scope

for also using non-competitive inputs. Thus a provision allowing cumulation across a number of

least developed and other low income countries with similar non-diversified production

structures and little prospect for becoming competitive input suppliers in the medium term does

little to offset the effects of a demanding value added requirement of 30-40% or other restrictive

rules of origin.

41

See Cadot, de Melo, and Tumurchudur (2005). 42

For a more detailed description and analysis of rules of origin, see O.Cadot, J.de Melo, and B. Tumurchudur

(2005): The Rules of Origin Facing ESA Trade: Analysis and Proposals for EPA Negotiations, Report prepared for

the World Bank, mimeo, 2005. This study vividly illustrates the complexities and the resulting non-transparency of

rules of origin and their use as instruments of trade protectionism.

48

Likely Effect of Full Liberalized RoO. If the liberal rules of origin recommended in the

text -- a uniform 10% value added requirement or a change of tariff subheading at the HS-6 level

-- are eventually adopted for EPAs, cumulation provisions will be largely irrelevant because the

more liberal RoO will restrict exports much less. Maintaining the Cotonou Agreement‟s

provision for full cumulation among the ACP countries in EPAs might be helpful in a few cases

but is likely to be far less important in practice than adoption of fully liberalized rules of origin.

Protectionist Product-Specific Rules. Product-specific rules of origin differed by

product category in terms of their restrictiveness – for example, the required percent of value

added or the required number of processing stages that must be completed in the exporting

country. Many of these sector-specific processing requirements were included to protect

producers of similar products in the European Union. These imposed very demanding

requirements for small low income economies like those in Africa to meet and substantially

limited the benefits of even tariff-free, quota-free access to the EU market.

For agricultural products, the Cotonou Agreement‟s origin requirements specified that

products must be wholly produced or obtained in the exporting country. Livestock must have

been born and raised within the exporting country to be deemed to have originated there; fruit

and vegetables must have been grown there; and fish must have been caught within a country‟

territorial water by its own or EU boats (Naumann 2007).

The origin rules in the fisheries sector, in particular, showed unambiguous protectionist

intentions on the part of the EU. Fish products constitute one of the largest export categories for

many ACP countries. Rules of origin for exports of fish products employed both the demanding

“wholly obtained” criterion and also imposed restrictions on the vessels used to harvest a

country‟s fish stocks, in some cases even requiring proof of the nationality of the crew as well as

the ownership and origin of the boat.

For the manufacturing sector, Brenton and Ozden (2007) point out that another major

restriction imposed by the Cotonou rules of origin was the production requirements used to

define “substantial transformation” of inputs. Numerous individual manufactured products –

particularly labor intensive manufactures and processed agricultural products, where lower cost

foreign competitors were feared – were governed by processing requirements that specified in

detail the production steps that needed to take place in an ACP country for a product to be

eligible for preferential tariffs. For many products (including almost all sensitive products), the

definition of “substantial transformation” was linked to the sourcing of raw materials and

intermediate inputs. Clothing exports, for example, had to be made from fabrics produced

domestically or in other ACP countries or the European Union. A clothing producer in Africa

who imported fabrics from Asia was not eligible to receive preferences and was thus denied the

competitive cost savings from sourcing input materials from low cost fabric producing countries

in Asia. Similarly, a cannery could not use fish or agricultural products originating from outside

the exporting country; and a producer of bakery products could not use imported flour.

49

Negative Overall Impact of Restrictive RoO. The EU‟s rules of origin effectively

restricted the scope of the Cotonou preferences and constrained exports from both African LDCs

and non-LDCs (Brenton 2003). The rules denied producers in developing countries the freedom

to choose the source of their inputs, and global sourcing of inputs was not possible. As a result,

export industries using imported inputs (such as the production of clothing from imported

fabrics) that could have had a substantial economic and development impact were denied

preferential access to the EU. In some cases, the result of these restrictions was that investment

in such export industries may not have taken place. Brenton and Ozden (2007) further point out

that restrictive rules discriminated most strongly against small developing countries where the

possibilities of local sourcing were most limited. More importantly, the experience and evidence

of the past 30 years has shown that restrictive rules of origin in preferential trade arrangements

have done nothing to stimulate the development of integrated production structures in developing

countries. Rather, in a globalized world, they constrain firms in developing countries from

integrating into global and regional production networks.

Rules of Origin for GSP and the EBA Program

The rules of origin under the EBA initiative are the same as those under the European

Union‟s GSP. These are as complex and restrictive as those under the Cotonou Agreement were

and also have somewhat less favorable provisions for cumulation.43

Even when it is

economically feasible to comply with the demanding production requirements of the European

Union‟s rules of origin, problems in proving origin due to weaknesses in customs administration

and costly documentation requirements have stopped exporters from taking advantage of tariff

preferences.44

The Debate over Liberalizing Rules of Origin for EPAs

The Need for Non-Restrictive RoO. African EPA-countries, particularly the least

developed ones, face much higher trade-related costs than other countries in getting their

products into international markets. Trade preferences can provide a temporary cost advantage

allowing firms in African EPA-countries to offset these higher costs and establish an export

presence and ultimately global competitiveness in industries in which they have a comparative

advantage.

The magnitude of the potential savings from tariff preferences depends on the level of the

MFN tariffs in the preference granting country. As a result of several rounds of MFN tariff

reductions under the GATT and WTO, tariffs, and hence potentially available preference

margins, are now fairly low in most non-agricultural sectors in the European Union as noted in

Chapter 7. Depending upon the structure of the market for a particular product, part of the

preference margin may also be captured by importers in the European Union instead of by the

exporting country.45

Moreover, the small size of ACP markets and similarity of their production

43

The primary differences between the Cotonou and GSP rules of origin are their provisions governing cumulation

discussed in Box 8.1 above. 44

Documenting cumulation further increases the administrative costs of complying with rules of origin. 45

For example, Ozden and Olarreaga (2005) find evidence that only one third of the rents potentially available for

African exports of clothing to the United States under AGOA actually accrue to the clothing exporters.

50

structures makes vertical integration uneconomic as discussed in Chapter 2, in Part I, on the

economies of the EPA-countries and the chapter on the economies of the regional EPA-groups in

the forthcoming companion report on full EPAs. Consequently, the quality and price penalties

resulting from mandatory use of domestic or regional ACP inputs instead of more competitive

imported ones can easily exceed the savings from the EU‟s tariff preferences. To take advantage

of current relatively small preference margins to offset other transactions costs, nascent export

industries in Africa need to have access to imported inputs from the most competitive global

supplier.

Inefficient, high cost domestic or regional input suppliers can completely undermine the

competitiveness of infant export industries. When inputs of competitive quality and price are

available locally, domestic firms will almost always chose to use these to avoid the

transportation and other transactions costs of even duty-free imported inputs. In the rare cases

where it might be economic to further encourage the use of locally produced inputs by export

industries, countries and regional trade areas can levy tariffs on competing imports. However,

the scope for doing so is likely to be extremely limited as the preference margins from which

export industries benefit are small, and declining over time; and the various indirect costs, which

raise the costs of exports and which the small trade preferences available need to help offset, are

large.

Of course, liberal rules of origin alone are unlikely, in most cases, to accelerate export

growth and diversification in Africa. Other policy instruments – creation of a favorable

investment climate, infrastructure investment, education and training of the work force – also

need to be deployed over the long term to first promote simple assembly type operations and

then to move from these to more sophisticated manufacturing processes.

Uneconomic and Unlikely Creation of Backward Linkages Imposed by Restrictive

RoO. Since the objective of trade preferences is to promote development, what argument is

there, other than protecting domestic producers in industrial countries, for not substantially

liberalizing rules of origin? The most common objection to simplified, non-restrictive rules of

origin is that such liberal rules may lead to creation of superficial assembly production and

employment with little domestic value added and few backward linkages (so called “screw-

driver” industries).46

Advocates of restrictive rules of origin argue, therefore, that more

demanding rules of origin are required to force exporters in preference receiving countries to

establish backward linkages to domestic and regional input suppliers.

Despite the substantial empirical evidence of the protectionist effects of many of the

EU‟s rules of origin, the European Commission‟s trade negotiators have often maintained that

the objective of the rules or origin under the Cotonou Agreement, its GSP, and the EBA initiative

is industrial development and regionally integrated production processes in beneficiary countries.

They have contended that the rules of origin under economic partnership agreements thus need to

46

For example, this argument was used to rationalize the provision in the AGOA agreement that requires African

clothing exporters to start utilizing fabrics produced in Africa or imported from the United States in 2004 (a deadline

which was subsequently postponed to 2007 and then further postponed to 2010), allegedly in order to “develop their

textile industries,” whereas in fact this provision is designed to protect U.S. clothing producers and promote exports

of U.S. fabrics to Africa.

51

have high value added requirements to provide preferences for regional input suppliers and to

launch a “dynamic” regional integration process providing lasting benefits from using domestic

inputs. The Commission staff has cited as evidence the cases of import-substituting textile

manufactures in Lesotho and Bangladesh, who would like to see their countries‟ clothing

exporters forced to buy their non-competitive (higher cost and lower quality) fabrics instead of

imported ones. Furthermore, Commission staff has argued that investment in a foot-loose

clothing industry that is not tied to domestic textile suppliers is risky because such industries can

quickly flee when market conditions change as, for example, when the Multi Fiber Agreement

expired in 2004.

Restrictive rules of origin are an inefficient instrument for trying to achieve backward

domestic or regional linkages. African export industries will develop backward linkages when it

is economically efficient to do so. Forcing exporters to backward integrate when it is

uneconomic to do so is more likely to simply stifle exports than to create input industries and to

make export-oriented industrialization more problematic by raising the prices of intermediate

inputs. In most of Africa, the alternative to expanding manufactured exports based on simple

assembly operations is likely to be no new manufactured exports at all, as has been the case

under the Lomé-Cotonou regime, rather than development of vertically integrated manufacturing

export industries. In labor intensive-industries, high value added requirements also discriminate

against countries (generally poorer ones) with low labor costs. In any case, if it were

economically beneficial to develop vertically integrated export industries, the exporting countries

would do so and would not require the “incentive” of restrictive rules of origin whose real

objective is to protect the domestic industries in the importing industrialized country.

The Empirical Evidence on the Effects of Non-Restrictive RoO

The empirical evidence of the ineffectiveness of restrictive rules of origin in inducing

export diversification and regionally integrated production networks is strong. As the data

reviewed in Chapters 2 and 6 illustrate, three decades of restrictive rules of origin under the

Lomé-Cotonou agreements have not stimulated industrial development, regional integration, or

export diversification in the African EPA-countries. To cite an industry specific example, rules

of origin requiring the use in clothing exports of regionally produced fabrics have not led to the

emergence of an efficient export-oriented textile industry in the African EPA-countries despite

substantial cotton production and exports from several countries, although other factors have also

contributed to this outcome. Dissatisfaction with trade performance under the Cotonou-Lomé

regime – of which restrictive rules of origin have been an important element – was, in fact, one

of the primary rationales for shifting from unilateral preferences to economic partnership

agreements.

Because rules of origin have been so restrictive for so long, there is plenty of negative

evidence, as noted above, of little improvement in export performance under them. But

restrictive rules of origin are only one of several factors (such as lack of infrastructure, poor

investment climate, weak institutions, etc.) contributing to this outcome. What positive evidence

is there that, when rules of origin are less restrictive, export performance may improve?

52

The two most telling examples illustrating the potential benefits from liberalizing

restrictive rules of origin come from the clothing sector. The first is Mauritius‟s successful

exporting of knitted products to the European Union, which gets around the European Union‟s

two-stage processing rule of origin governing clothing exports by producing knitted garments

directly from imported yarn.47

The second and more telling example, and the one that ultimately

motivated the EC to act, is the successful expansion of clothing exports from the African EPA-

countries under a provision of the U.S.‟s Africa Growth and Opportunity Act‟s (AGOA) trade

preferences. The AGOA rules of origin permit (as an exception to the U.S.‟s standard rules of

origin under free trade agreements) African clothing exporters to utilize, for a temporary period,

fabrics imported from third countries outside Africa, instead of having to source the fabrics from

within Africa or the United States (See Box 8.2).

There are so few cases of liberalization of restrictive rules of origin under preferential

trade arrangements that it is hard to find many other examples of the effects of doing so for

industries other than clothing. The fisheries sector, however, provides another example of the

potential effects of relaxing rules of origin. As noted earlier, fishery exports to the EU are

subject to very onerous origin requirements stipulating where fish are caught, the ownership and

flag of the fishing vessel, and the nationality of crew and captain. A study of the tuna trade by

Block and Grynberg (2007) showed that the EU protects not only its own fishing fleets but also

its fish- processing industry. The Cotonou Agreement‟s RoO prevented ACP countries from

using fish caught by foreign (non-EU) vessels to produce exports of tuna loins or canned tuna

that could be qualified for trade preferences. Since the economics of tuna fishing require larger

vessels than most ACP countries had, to satisfy the Cotonou RoO, ACP tuna canneries had to use

tuna caught by EU vessels, mainly French and Spanish. The high operating costs of EU vessels

made fish caught by them much more expensive than those caught by vessels from some third

countries such as Taiwan. The fact that ACP canneries could not use sources of supply other

than ACP/EU fish reduced the competitiveness of ACP cannery production. In addition, the EU

does not require its own domestic tuna processors to use fish caught by EU vessels. Instead,

through a zero tariff on fish imported for further processing, EU fish processors are granted full

flexibility in sourcing their supply from the most competitive source available. This preferential

treatment of EU tuna processors relative to ACP tuna processors clearly illustrates how the EU‟s

rules of origin protect EU domestic interests rather than promoting export development in the

ACP countries. Relaxing rules of origin, by substantially increasing the derogation quota, would

be a great help for African tuna canneries (Block and Grynberg 2007).

47

The success of Mauritius‟s garment exports was also due to the quota restrictions imposed on the clothing exports

from many competing developing countries under the Multi-Fiber Agreement.

53

Box 8.2: Comparison of the Growth of Clothing Exports

Under AGOA and under the EBA Initiative*

A comparison of the performance of African countries in exporting clothing under

AGOA with that under the EBA Initiative clearly illustrates the restrictive effect of the EU‟s

rules of origin for clothing. Graph 8.1 below shows that exports of clothing from African LDCs

to the European Union have stagnated despite the introduction of tariff-free, quota free market

access under the EBA initiative in 2001, whereas exports to the United States under similar

AGOA tariff preferences have grown very strongly. In 2000, exports of clothing from African

LDCs to the EU and the United States were about equal; but by 2004 clothing exports to the

United States were almost four times the value of those to the EU.

Graph 8.1: EU and US Imports of Clothing from African LDCs, 1995-2007

(in millions of US dollars)

0

100

200

300

400

500

600

700

800

900

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

US

$,

mil

lio

ns

0

100

200

300

400

500

600

700

800

900

EU Imports US Imports

Source: Adapted from Benton and Hoppe (2006) and updated with UN COMTRADE SITC 3 data, accessed

in September 2008.

The key factor explaining the different growth rates is the different rules of origin

governing AGOA and EBA preferences. EU rules of origin for clothing stipulate production

from yarn. This provision requires a double transformation process in the beneficiary country,

with the yarn first being woven into fabric and then the fabric utilized in producing clothing.

The use of imported fabric is prohibited, although cumulation provisions under EBA allow for

the use of fabrics produced in the EU or other LDCs. Beneficiary countries may not use fabrics

from the main fabric-exporting countries in Asia and still qualify for EBA preferences -- a

binding restriction, since few LDCs have competitive fabric industries. In contrast, as a

temporary exception to the U.S.‟s standard rule of origin requiring that clothing be produced

54

from domestic or U.S. fibers, yarns, and fabrics, AGOA permits African LDCs to source fabrics

globally – and all of the successful African exporters have done so.

*This box is from Brenton and Hoppe (2006).

Revisions to the Cotonou Rules of Origin under Interim EPAs

The Cotonou Agreement provided for it rules of origin be reviewed as part of the EPA

negotiations. In the various discussions and negotiations since 2002, relaxing the restrictive

Cotonou rules of origin has been actively debated. Progress was initially slow on the EU-side in

formalizing a new more liberal approach to rules of origin. The ACP group was also unable to

effectively articulate a united view on the need for more liberal RoO for EPAs. Eventually, in

the second half of 2006, the EC indicated willingness to consider liberalizing the Cotonou rules

of origin. The absence on either side of a clear, bold vision of more liberal rules of origin

resulted in only limited ad hoc revisions of the Cotonou RoO in a few sector-specific areas.

Apart from these sector-specific changes and some minor changes in cumulation provisions, the

RoO under the interim EPAs remain the same as those under the Cotonou Agreement.

Changes in Sector-Specific Product Processing Rules. Under interim EPAs, the

Cotonou Agreement‟s product-specific rules of origin have been relaxed somewhat for textiles

and clothing, fish, and a few processed agricultural products. The changes are the most

significant in the rule governing textile and clothing. The new rule takes into account the global

dynamics of value-chain prevailing in the textiles and clothing sectors. It switches from the

Cotonou Agreement‟s “two stages processing” criterion to a “single-stage processing” criterion

for EPAs – that is, the local conversion of non-originating yarn to fabric or non-originating fabric

to clothing is now sufficient to confer origin.48

This change will enable clothing exporters to

source competitively priced fabric worldwide as permitted under the rules of origin for AGOA.

It is a fundamental and important improvement over the Cotonou RoO.

Under interim EPAs, the rules of origin for fishery products have also been relaxed in a

few selected cases. First, the requirement that the crew of the vessel catching the fish must be of

at least 50% local or EU nationality has been removed. Second, Mauritius, Seychelles, and

Ghana have been granted an automatic within-quota derogation to permit the processing of non-

originating fish, including in tuna canning.

Lastly, some changes have been made in the rules of origin for processing of selected

agricultural products. All African EPA-signatories are to benefit from the more liberal

agricultural processing rules granted to the Caribbean except in the cases of tobacco and fruit

juice. These changes include permitting processing of third country wheat to make flour rather

than requiring sourcing wheat locally; requiring 60% instead of 70% of the tobacco in cigarettes

and cigars to be sourced locally; and changing the limit on the use of sugar imported from third

countries sugar in chocolate, jam, and fruit juices from 30% of the value of the final product to

48

There is, however, a limitation in the case of the Caribbean countries. The single-stage transformation only

applies to knitted/crocheted fabric, not to woven fabric. For the other ACP countries, the single stage processing

rule applies to all fabrics.

55

20% of the weight of the final product. Some additional improvements in the rules of origin

apply only to African EPAs: the relaxation on sugar content is extended to dairy products, fruits

and nuts, corn flakes and tapioca; the value-added requirement for gums and resins is reduced;

the value added requirement for processing plants and flowers is eliminated as long as the plants

themselves are “wholly obtained” within the exporting country; most edible oils can use third-

country raw materials rather than only sourcing these locally as long as the processing leads to

change of tariff heading; and, for food waste and miscellaneous edible preparations, a value-

added criterion replaces the former change of tariff heading criterion.

Modifications in Cumulation Provisions. In addition to the changes in the sector-

specific product processing rules for textiles and clothing, fish, and selected processed

agricultural products, the EU‟s cumulation provisions have been slightly modified for the interim

African EPAs (and the full Caribbean EPA). The cumulation provisions in the interim EPAs are

basically the same as those under the Cotonou Agreement, with the exception that the EPAs

limit cumulation to the countries that have signed an EPA instead of extending cumulation to all

ACP countries as the Cotonou Agreement does. Cumulation is also allowed between EPA

signatories and South Africa, subject to the same restrictions as under the Cotonou Agreement.49

Overall Effect of the Revisions. The above actions are constructive initial reforms.

Given the current structure of the EPA-countries‟ exports, the liberalization of the rule of origin

for textiles and clothing is clearly a significant improvement that will hopefully have the same

kind of impact on Africa‟s clothing exports to the EU similar that the AGOA rule discussed in

Box 8.2 has had on Africa‟s clothing exports to the US. The changes in the product-specific

rules for fish and selected processed agricultural products will also provide some benefits in a

few cases. However, taken together, the product specific changes fall well short of the kind of

dramatic liberalization that is needed to provide a strong market-access incentive for the

domestic reforms necessary to really accelerate export growth and diversification in Africa‟s

LDCs and its other small low income economies.

Plans for Reviewing the Interim EPAs’ Rules of Origin. The EU‟s October 23, 2007,

communication about the revised approach to EPAs leaves the possibility of further liberalization

to future negotiations: “… the new EPA Rules of Origin should be reviewed after a period of

time to be agreed on in a manner that takes account of the development needs of the ACP region

concerned but with a view to a move to Rules of Origin consistent with the general reform of the

EU preferential Rules of Origin” (European Commission 2007b). The interim EPAs thus include

a provision for reviews of their rules of origin beginning no later than three years after signature.

These reviews are to cover both technical amendments and improvements.

The EC is also in the process of carrying out a thorough review of the rules of origin

under all of the EU‟s various preference arrangement. This review was launched in 2003 with

the intention that revised rules of origin would be implemented in January 2009 along with the

revisions to the GSP. The objective was to have a single uniform value added criteria for most

49

As under the Cotonou rules of origin, value-added in an EPA-signatory must exceed the value-added in South

Africa. In addition, those South African products (including some agricultural products, fish products, sugar, tea,

and cocoa), exports of which to the EU are still subject to tariffs and quotas under the existing EU-South Africa free

trade agreement, are excluded from cumulation under the Cotonou Agreement and EPAs

56

products with exceptions in some special cases. However, some EU member states objected to

this approach; it was not possible to put the new rule in place in January 2009. The review of the

EU‟s rules of origin was still ongoing as of this writing, and the existing rules of origin remain in

force.

At present, it is unclear how much the EU may be willing or able to eventually liberalize

its rules of origin for imports from EPA-signatories. However, if a high (30-40%) value-added

criterion, reportedly under consideration, is adopted, the potential for developing new export

sectors under EPAs could be quite limited or suppressed altogether.

Options for Further Liberalizing the EPA’s Rules of Origin

Three basic options are available for substantially liberalizing and simplifying the rules of

origin under EPAs: a uniform value added rule; a general change of tariff subheading rule; and

elimination of all rules of origin for imports with MFN tariffs of 5% or less. These three options

could be adopted separately or in combination.

A Single Uniform Value Added Rule. As noted earlier, the Cotonou Agreement‟s rules

of origin stipulated that to be eligible for tariff preferences products must satisfy the specific

processing requirements for those products. One approach to liberalizing the Cotonou RoO

would be to eliminate all of the product-specific processing requirements and establish a

reasonably low, uniform value-added requirement applying to all products. For example,

Canada applies a uniform value-added requirement of 40% across all products (except for

textiles and garments, which require only 25% value added) and allows for full cumulation with

all developing countries, including China. Adoption of a uniform value added rule -- together

with elimination of all of the European Union‟s product- specific processing rules -- with a low

required percentage of value added would significantly reduce the restrictiveness of the rules of

origin and increase their transparency. Reductions in and simplification of documentation

requirements could also cut administration costs and processing delays.

The Commission for Africa (2005), also known as the “Blair Commission,” proposed a

liberal interpretation of the above approach for EPAs. Its report recommended that the European

Union‟s complex rules of origin be replaced by a uniform 10% value-added requirement in

EPAs. This proposal would eliminate all the product specific rules of origin such as the two-

stage transformation requirement for clothing that has prevented an expansion of LDC clothing

exports to the European Union under the EBA program.

Although a uniform 10% value-added requirement would provide much more open

market access than the Cotonou Agreement‟s current rules of origin, the implementation of

value-added requirements does pose some administrative problems for low income countries. As

part of the World Bank‟s work on rules of origin for its Customs Modernization Handbook (De

Wulf and Sokol 2005), a survey was sent to all general directors of customs. Forty-eight

completed questionnaires (a response rate of 30%) were received, with the great majority (43) of

the replies coming from developing countries. Over 80% of the respondents reported that, of the

different methods of conferring origin, value-added rules were particularly difficult to implement

administratively. Domestic value-added calculations can also be sensitive to exchange rate

57

variations so that firms close to a 10% value-added limit could shift back and forth between

eligibility and ineligibility for preferential access with fluctuations in the exchange rate.

A Simple Change of Tariff Subheading Rule. An administratively simpler rule of origin

than even a uniform value-added requirement would be a rule that requires only a change of

tariff subheading at the six digit HS level. Such a rule would require only that an ACP country‟s

export to the EU fall under a different six digit HS tariff subheading from the imported inputs

used in producing it. A change-of-tariff-subheading rule could, in particular, allow clothing

exporters to utilize third country fabrics, a provision which the experience under AGOA has

demonstrated to be very important for expanding clothing exports.

Note, however, that the HS level to which a change-of-tariff-heading rule applies

significantly affects the rule‟s restrictiveness. On one hand, applying a change-of tariff-heading

rule at the more disaggregated HS 8-digit level instead of the HS 6-digit level would make the

rule less restrictive as the differences between product categories would be smaller. On the other

hand, applying the rule at the more aggregated HS 4-digit level would make it more restrictive as

the differences between product categories would be larger.

A simple change-of-tariff-subheading rule of origin has some important advantages,

particularly for LDCs with limited administrative capacity, compared to even a 10% uniform

value added rule. Documenting compliance with a change-of-tariff-subheading rule of origin is

much simpler in practice for both governments and private firms in low income countries than

documenting a uniform value-added rule. Thus, it is easier and less expensive for the exporting

firms to comply with and for the importing country‟s customs authorities to administer. For this

reason, a change-of-tariff-subheading rule is also more transparent and less vulnerable to

disputes than a value-added rule.

There are two potential drawbacks to a change-of-tariff-subheading rule. First, there may

be some potential exports from the African EPA-countries which would have domestic value

added of 10% or more but which would fall under the same HS6 heading as some of their

imported inputs. These exports would be eligible for tariff preferences under a 10% value-added

rule but not under a change-of-tariff-subheading rule. Second, import competing industries in

industrial countries often view change-of-tariff-subheading rules as too liberal and threatening

and insist on numerous product specific exceptions, which can result in a set of rules that is more

complex and restrictive than a uniform value added rule. Hence, it may turn out to be desirable

to preserve a uniform value-added rule as an alternative to use in cases where a change-of-tariff-

subheading rule would be problematic.

Elimination of all RoO for Imports with MFN Tariffs of %5 or less. De Melo, Yagci,

and Dijofack (2007) make an additional useful suggestion for liberalizing the EU‟s rules of

origin. They recommend that under EPAs the European Union completely eliminate rules of

origin for most goods on which the EU‟s MFN tariffs are 3-5% or lower so and hence for which

even a zero tariff under EPAs would create a maximum preference margin of only 3-5%. For

most products with such small preference margins, trade deflection is not likely to be a problem,

as the cost for third countries of transshipping these through Africa is likely to exceed the

potential tariff savings from doing so except for a few products with very high value to weight

58

ratios. As discussed in Chapter 7, 57% of the EU‟s MFN tariff lines at the 8-digit level have

tariff rates of 5% or less. Completely eliminating rules of origin for these products would spare

African exporters the administrative costs of compliance with rules of origin for these products

and preserve more of the small available preference margin for them. De Melo, Yagci, and

Dijofack (2007) also call for replacing the EU‟s product specific rules of origin with simple

transparent across-the-board rules of origin governing all products.

An Optimal Development Friendly Approach. The most development-friendly rule

approach for EPAs, and the first-best option, would be to eliminate the Cotonou Agreement‟s

multitude of different product and sector specific criteria for different products and instead allow

African exporters the choice between meeting a change-of-tariff-subheading rule at the six digit

(or even 8 digit) HS level or a uniform 10% value-added rule. Exporters in African countries

would thus be able to choose for each export (or even shipment) either a simple change of tariff

heading at the six digit HS level or a uniform value-added rule, whichever is easier for the

exporter to comply with. Different export industries would then be able to utilize whichever rule

is more favorable for them. A clear definition of how value added is to be computed and

technical assistance for implementing the value-added option would also be needed. The

foregoing steps could be complemented by eliminating rules of origin requirements for all goods

on which the EU‟s MFN tariffs are 5% or lower.

The Cumulation Debate. Some authors argue further that a major shortcoming of the

RoO under interim EPAs is that the broad cumulation previously permitted among all ACP

countries by the Cotonou Agreement is now limited to the smaller group of EPA-signatories.50

The objective of regional economic integration, these authors contend, will be very much

undermined by the fragmented country coverage of interim EPAs and the limitation of

cumulation to only EPA-signatories. In our view, however, the cumulation provisions of EPAs

are a secondary concern in terms of their effects on both export development and regional

integration. Cumulation among African countries under the Cotonou Agreement was quasi, if

not totally, non-existent; and no one has yet cited even a single case of cumulation that will be

disrupted by the modified cumulation provisions under the interim EPAs. Medium-term

prospects for cumulation among African LDCs and the region‟s other small low-income

economies are also quite limited because of the similarities in the structures of their exports.

Extending the coverage of the EPA‟s cumulation provisions to all African countries (including

South Africa), rather than limiting it just to EPA-signatories, could be helpful in the long run.

However, the steps to liberalize the EPAs‟ rules of origin discussed above are a much higher

priority for improving export performance and would also greatly reduce the need for improved

cumulation provisions. Regional integration can also be much more effectively pursued through

measures other than improved cumulation provisions as discussed in the forthcoming companion

report on full EPAs. If, however, the EU were to eventually adopt a value-added criterion of

20% or more, permitting cumulation with all developing countries (including, specifically, all the

major competitive exporters of inputs such as China, India, and Brazil) would be a helpful

second-best measure.

Second-Best Alternatives. If protectionist pressures in prove to be too strong, the

European Union may ultimately turn out to be unwilling to go as far as the liberal rules of origin

50

See, for example, Stevens and Bilal (2008) and Nauman (2008).

59

recommended above for EPAs. In this case, as a second best, a low uniform value-added rule

could be substituted for the change-of-tariff-subheading rule in particular sectors where the latter

might be problematic, and the EPA-countries should press for some partially offsetting

concessions. For example, the Cotonou Agreement and the European Union‟s GSP both have a

“general tolerance” rule. This rule allows non-originating materials to be freely used provided

that they do not exceed a specified percent of the ex-works price. The tolerance level is 15%

under Cotonou and 10% under GSP. Increasing the general tolerance limit by, for example,

doubling it to 30% under the EPAs would facilitate ACP exports. Allowing full cumulation

among all developing countries could, as noted above, also be helpful. The foregoing measures

would be improvements over the current RoO for interim EPAs but would not be not nearly as

development friendly as the first-best change-of-tariff subheading or 10% value added option

together with elimination of rules of origin requirements for products subject to an MFN tariff of

5% or less and elimination of all product-specific rules of origin.

In contrast, trying to identify revisions in specific processing requirements that constrain

exports of new products that are potentially important for EPA-signatories would be a decidedly

inferior option. Doing so would require an expensive time-consuming research effort that is

likely to be largely speculative and inconclusive plus willingness on the part of the EU to accept

ad hoc changes in its standard approach to RoO in preferential trade agreements with developing

countries. The pay off from such a minimalist (defeatist) approach is thus likely to be small, and

implementing it would divert effort and attention from discussion of the fundamental issues

involved.

Importance of Fully Liberalizing the EPA’s Rules of Origin

Improving the EPA‟s current RoO will be critical to the ultimate success of the EPA

process as complete liberalization of the EPA‟s rules of origin could substantially increase the

benefits of the tariff-free, quota-free market access under interim EPAs. There is substantial

scope for further liberalization of the EPAs‟ rules of origin, and the ultimate effect of EPAs on

the access of participating countries‟ exports to the EU market will depend greatly upon the

decisions that the EU takes when revising its RoO. Liberalization of the EPAs‟ rules of origin

would increase the effective market access of the EPA-countries and provide important benefits

for African manufactured and processed agricultural exports.51

Liberalization of rules of origin

is particularly important for the diversification of Africa‟s exports to the European Union

because restrictive rules of origin typically prevent the development of simple non-traditional

exports as illustrated in the examples cited above. It would also be an important stimulus for

foreign direct investment in export sectors where utilization of tariff-free, quota-free access to

51

If the US experience with liberal rules of origin for clothing exports under AGOA (Box 8.2) is any guide, the

market access gains from a full liberalization of the EPAs‟ restrictive rules of origin are potentially substantial,

although of uncertain magnitude and probably unquantifiable. Attempting to quantify the benefits from a

liberalization of this type would require a time consuming, expensive research effort that is likely ultimately turn out

to be inconclusive. The potential risks from liberalizing the EPAs‟ rules of origin are, however, virtually nil. As

noted earlier, the most common objection to simplified, non-restrictive rules of origin is that such liberal rules may

lead to creation of superficial assembly production and employment with little domestic value added and few

backward linkages (so called “screw-driver” industries). However, decades of experience have shown that in small

low-income countries restrictive rules of origin have generally blocked potential exports without creating significant

backward linkages.

60

the EU market is currently blocked by the EPAs‟ RoO and is a necessary enhancement for the

investment provisions of full EPAs as discussed in the chapter on liberalizing trade in services

and foreign direct investment in the forthcoming companion report on full EPAs. Full

liberalization of the EPA‟s rules of origin would have additional benefits if African countries

could take advantage of the good practice precedent for RoO that would be set by the EU to

adopt similar standardized, liberal rules of origin in the EPA process for the various regional

trade areas in Africa as discussed in the chapter on regional trade issues in the companion report

on full EPAs.

In addition, the WTO‟s approach to special and differential treatment in the Doha round

has put the RoO problem at center stage for future trade negotiations between LDCs and

developed countries as explained earlier in Chapter 5. By setting an excellent precedent for

non-restrictive rules of origin under EPAs, the European Union would give leverage to the LDCs

for persuading other industrial countries to adopt similar favorable rules of origin for the

improved preference schemes called for in the declaration of WTO‟s Hong Kong ministerial

meeting in 2005. EPAs offer the best opportunity that African countries will have for addressing

this issue in a favorable forum and for setting a good precedent for subsequent negotiations with

other developed countries, and it is in their interest to aggressively pursue such liberalization in

future negotiations over the implementation of interim EPAs and the design of full EPAs.

Furthermore, the value of tariff-free, quota-free access of EPA-signatories to the EU

market will gradually be reduced by preference erosion as tariffs on imports from other sources

are cut as discussed in Chapter 10 below. Full liberalization of the RoO is the only instrument

available for further improving the market access of EPA-signatories and providing a continuing

strong incentive for the implementation of EPA-related reforms. Unless the rules of origin are

liberalized and simplified under EPAs, the benefits of even full tariff-free, quota-free access to

the EU market may be minimal. Since Africa accounts only for 1.7% of the EU‟s merchandise

imports, the EU could easily absorb the kind of adjustment that would be required by fully

liberalizing its rules of origin for imports from the EPA countries. For example, the increases in

exports of textile and clothing under AGOA have, for example, created hardly any disturbances

in the US market. Liberalizing the EU‟s rules of origin should thus be a priority for all

concerned if the EPAs‟ objective of accelerating the development of the African countries is to

be achieved.

Conclusion: A Package of Three Key Reforms for Liberalizing the RoO under EPAs

In summary, the following three reforms would encourage the development on new

export industries and the expansion and diversification of the EPA-countries‟ exports:

a. Elimination of all the current complex product- and process-specific RoO. This reform

would greatly increase transparency, simplify administration, and lower costs.

b. Elimination of the requirement for certificates of origin for products having preference

margins of five percentage points or less. This reform would reduce the cost of

compliance for obtaining small preferences. It would create only minimal scope for trade

61

deflection, which in practice would be more costly than the value of the small tariff

preferences that could be obtained through it.

c. Adoption of a uniform change of tariff subheading at the HS 6-digit level or ten percent

value-added rule, with the choice between these two criteria left to the exporter

concerned. This rule would be both far easier for exporters in EPA-signatories to comply

with and far less restrictive than the current complex product- and process-specific RoO.

Together, the above reforms would allow African exporters to become part of global production

chains and source inputs at the most competitive prices globally. Global sourcing of

competitively priced inputs is not possible under the EPAs‟ current rules of origin and will not be

possible in many potential new export sectors if a higher (30-40%) value added criterion,

currently under discussion, is adopted.

63

9. Other Non-Tariff Market-Access Issues

In addition to the EPAs‟ rules of origin, the EU has several other non-tariff trade polices

that affect the access of the EPA-countries‟ exports to its market. Principal among these are the

EU‟s special safeguards for imports of agricultural products, agricultural export subsidies, and

agricultural domestic production support, and its technical, sanitary, and phyto-sanitary product

standards. This chapter takes up each of these issues in turn.

A. Agriculture-Specific Market-Access Issues

The European Union‟s trade policies affecting agriculture are more distorted than those

for manufactured goods and pose some special issues for EPAs. Although all African EPA-

countries could obtain full tariff-free, quota-free access for their agricultural exports under EPAs

as the European Union has announced, the EU‟s import defense, export subsidies, and domestic

production support programs could significantly limit the benefits of such market access for

some sensitive products.

The EU’s Special Agricultural Import Safeguards

The European Union frequently uses its Special Agricultural Safeguards, which are

permitted under WTO rules. These safeguards are contingent restrictions on imports used to

protect some sensitive commodities when the price of competing imported goods falls below a

specified level or the quantity imported rises above a specified amount. Under WTO rules,

import safeguard measures must be applied evenly to imports from all sources and cannot be

used to target imports from a particular country or group of countries. Special safeguards differ

from standard safeguards in two respects: (a) no proof of injury is required and the safeguard

duties can be triggered automatically; and (b) no compensation is required to the affected

exporting countries.

The European Union has reserved the right to invoke special safeguards for most types of

agricultural goods. It has notified the WTO of the activation of the special agricultural

safeguards for three groups of commodities: sugar, fruits and vegetables, and poultry and meats.

The domestic producers of these commodities often benefit from substantial subsidies and are

protected by high barriers to entry of competing imports, including specific and seasonal tariffs

as well as high ad valorem MFN tariffs. Hallaert (2005) reports that based on WTO estimates,

the ad valorem equivalent of the EU specific duty on beet sugar reached 114%; and duties on

meat exceeding 100% were numerous.

Hallaert (2005) also points out that many products on which the EU can impose special

safeguards are already protected by tariff rate quotas. In 2004, the average over-quota tariff on

agricultural commodities in the EU was 79% compared with an average in-quota tariff of 17%.

The EU has reserved the right to invoke the special safeguard measures for 90% of its

64

agricultural tariff lines protected by tariff rate quotas. Applying a special safeguard measure to a

commodity already protected by a tariff rate quota magnifies the protectionist impact of tariff

rate quotas because the additional duty can only be imposed on over-quota imports.

The US Department of Agriculture reports that the WTO notification numbers show that,

between 1995 and 2003, the European Union used special agricultural safeguards 296 times: 28

times on animals and animal products, 201 times on fruits and vegetables, 66 times on sugar and

confectionary, and once on eggs.52

Hallaert (2005) further points out that the numbers of special

agricultural safeguards actually used in many industrial countries may be higher than the

numbers notified to the WTO.53

The EU‟s use of Special Agricultural Safeguards would thus appear, prima facie, to be a

significant constraint to imports of the specific products to which they have been applied. No

data were available on how the use of these safeguards has affected imports from ACP countries.

However, some of the commodities to which the safeguards have been applied – sugar, fruits and

vegetables, and meat (beef and veal) – are significant exports for some African countries. For

sugar and beef, since ACP exporters were granted shares of the tariff-rate quota under the EU‟s

sugar protocols, ACP exporters were spared from the negative effects of the special safeguards

on these products.

Since the expiration of the Cotonou trade preferences and the commodity protocols at the

end of 2007, EPA-signatories have full tariff-free, quota free access for all products (with short

transition periods for sugar and rice), and Africa LDCs receive the similar tariff-free, quota-free

market access under the EPA program. Agricultural imports from the three African non-LDCs

that did not signing interim EPAs (Congo (Rep), Gabon, and Nigeria) are, in contrast, subject to

the EU‟s special agricultural safeguards.

Recommendation. If imports under interim EPAs and the EBA program are subject to

special agricultural safeguards, the impact of these on African exports of sugar, fruits,

vegetables, and beef could be significant. And, irrespective of how important a problem the use

of these safeguards has been in the past, it would be prudent to try to find, if possible, a way

under EPAs to shelter ACP exports from special agricultural safeguards in the future so that new

or expanding exports are not disrupted by them.

EU Subsidies for Its Agricultural Exports

The EU granted agricultural export subsidies totaling E3.1 billion in crop marketing year

2002-2003 (Table 9.1) for agricultural products including dairy products, butter and butter

products, sugar, beef, poultry meat, cheese, and wine. Dairy products have received the largest

52

See the spreadsheet AgUse.xls on the USDA website, www.ers.usda.gov/briefing/globalfoodmarkets/data/

specialsafeguards. 53

Of course, the EU is not alone among industrial countries in employing agricultural safeguards. In the same 1995-

2003 period, the US used special agricultural safeguards 397 times: 218 times on dairy products; 74 times on

coffee, tea, cocoa and spices; 40 times on sugar; and 25 times on cereals. Japan used the measures 148 times and

South Korea 49 times. South Korea has not notified to the WTO about its special agricultural safeguards since

2001, the EU since 2002, and the US since 2003 (USDA website www.ers.usda.gov/ briefing/globalfoodmarkets/

data/specialsafeguards).

http://www.ers.usda.gov/briefing/globalfoodmarkets/data/%20specialsafeguards



http://www.ers.usda.gov/%20briefing/globalfoodmarkets/%20data/specialsafeguards



65

amount of export subsidies, with milk products, butter, and cheese together receiving E1.7

billion. Processed produce, mostly fruits and vegetables, received E414 million, followed by

sugar with E292 million, and beef with E285 million (Table 9.1).

Table 9.1 EU Export Subsidies for Agricultural Products,

2002-2003

Product

Actual export

subsidies,

millions Euro

Utilization of

maximum

permissible

export

subsidies, %

Other milk products 592.2 85.5

Butter and butter oil 545.1 57.5

Sugar containing products 413.6 99.7

Sugar 292.5 58.6

Beef meat 285.1 22.7

Cheese 267.7 78.3

Coarse grains 167.0 16.0

Skin milk powder 163.0 59.1

Wheat and wheat flour 141.2 10.9

Poultry meat 90.5 99.8

Alcohol 90.4 94.1

Rice 24.9 67.7

Wine 17.9 45.7

Fresh fruit and vegetables 15.3 29.0

Pig meat 14.6 7.6

Eggs 5.1 11.7

Processed fruit and vegetables 3.1 37.3

Total 3,129.2 42.7

Note: (a) Data are for the marketing year 2002-2003; (b) see footnote 15 ??? for the definition of

utilization rate.

Source: Kasteng (2006), Table 6.

The degree of utilization of maximum WTO permitted levels of export subsidies varies

across products (Table 9.1).54

On average, the EU‟s utilization rate of the maximum WTO-

54

The utilization rate is the ratio of actual subsidies to the maximum permitted level. The Uruguay Round

Agreement on Agriculture imposed disciplines on agricultural export subsidies. Twenty-five countries agreed in this

round to evaluate, declare, and reduce export subsidies. These countries made commitments to limit both the volume

of subsidized exports and budgetary expenditures on these subsidies. Developed countries committed themselves to

reducing subsidized exports by 21% in volume and 36% in budgetary value by year 2000. The level of the EU‟s

66

permitted level of export subsidies for agricultural products is 43%. The highest utilization rates

are for poultry meat, 99.8%, and processed produce, 99.7%, followed by alcohol, 94.1%, milk

products, 85.5%, and cheese, 78.3%.

In analyzing the effects of EU subsidies for its agricultural exports, it is useful to

distinguish between subsidies for EU exports products of which there is little or no economic

domestic production in an African country (and no prospect for developing this in the medium

term) and subsidies for EU export products which compete with, or substitute for, economic

domestic production in the African country concerned. In the former case, EU export subsidies

are not a concern because they benefit consumers in the African country without doing any harm

to domestic producers, of whom there are none. In the latter case, consumers in the African

country benefit, but producers may be harmed.

For African producers, the most damaging of the European Union‟s subsidies for its

agricultural exports appear to be those for meat and cereals. The EU‟s export subsidies for sugar

may also have had a negative impact on some sugar producing and African countries that have

not benefited from preferential access to the EU market under the sugar protocol.55

Subsidies for

dairy exports may in a few selected cases also have harmed African producers, although the

producers‟ losses could have been offset by welfare gains to African consumers. Examples of

subsidized EU exports to Africa countries in 2005 are given in Table 9.2. Several subsidized

agricultural products were shipped to Nigeria (butter and butter oil, skimmed and whole milk

powder) and Senegal (butter and butter oil, whole milk powder, and sugar), subsidized beef was

shipped to Angola and Congo, and subsidized sugar to Sudan and Togo.

Table 9.2: EU Subsidized Agricultural Exports Shipped to

African EPA-Countries in 2005, Tonnes

Source: Kasteng (2006), p.28.

export subsidies actually provided depends on production, exchange rates, and world food prices. The level of

subsidies thus fluctuates. Normally, when world food prices go up, subsidies fall, and vice versa. For more

detailed information about export subsidies, see Peters (2006). 55

See Annex C for a discussion of the sugar protocol. Subsidized sugar exports --“dumped” sugar-- from the EU to

some African countries may reduce the trade opportunities among African countries as African sugar exporting

countries may not be able to compete with “dumped” sugar from the EU in some African importing countries.

Country Beef

Butter

and

butter

oil

Skimmed

milk

powder

Whole

milk

powder Sugar

Angola 11,555

Congo-Brazzaville 11,555

Ivory Coast 3,120

Nigeria 3,660 5,650 29,190

Senegal 2,790 18,960 57,650

Sudan 53,618

Togo 32,774

67

Recommendation. The European Union has stated that for EPAs “we will remove export

subsidies on any product where the ACP removes tariffs” (European Commission 2007).56

The

EPA-signatories could further request in ongoing EPA negotiations that this offer be broadened

to immediate elimination of European export subsidies on all exports of all products to EPA-

signatories, including those on which tariffs are not removed.57

Any net food importing EPA-

signatories that benefit significantly, on balance, from European agricultural subsidies could

request increased funding under the EU‟s aid for trade or development assistance programs to

offset the loss of subsidized food imports under EPAs.

The EU’s Support Programs for its Domestic Agricultural Producers

In addition to export subsidies, the European Union, like the US and some other

developed countries, also provides various kinds of trade-distorting production support for

agriculture. The removal of such agricultural production subsidies is, as discussed in Chapter 5,

one of the most politically contentious issues faced in the Doha Round.

The EU‟s financial support for its domestic agricultural producers is far larger than its

export subsidies, amounting to more than 25 times the level of export subsidies in 2004. A

report by the Department for Environment, Food, and Rural Affairs in the U.K. government

(DEFRA 2005) found that total EU support to its agricultural producers amounted to E108

billion in 2004, of which E51 billion was direct payments to producers and E57 billion was

market price support (including export subsidies of E4 billion). The category of direct payments

includes payments based on output, area planted/animal numbers, and input use. E4 billion in

output based payments (direct production subsidies) went mainly to the production of olive oil

(E2.3 billion), tobacco (E924 million), bananas (E233 million), and peas and field beans (E72

million). E30 billion in subsidies based on area planted and animal numbers went largely to

cereals (E10.8 billion), followed by dairy cows and beef (E4 billion), and oilseeds (E1.4 billion).

The EU‟s support to its agricultural producers accounted for 33% of the total gross farm receipts

in the EU in 2004.58

Kasteng (2006) provides details of the EU‟s product-specific subsidies.

Table 8.3 lists the products benefiting from these trade distorting subsidies and the amount of the

subsidies relative to WTO‟s 1986-88 reference prices (see the important notes to Table 8.3 for an

explanation of the meaning of these calculations).

Implications for EPAs. Both export subsidies and other forms of domestic support to

agricultural exporters in the EU will need to be addressed in the EPA process if African farmers/

agricultural producers are to be able to compete on a level playing field with imports from the

EU of those products on which tariffs are eliminated under EPAs. Domestic support for

agriculture, which affects African agricultural trade, will be particularly difficult to deal with the

EPA context as the EU‟s agricultural support programs distinguish neither between import-

56 One of the agreed objectives of WTO‟s Doha Round is also to eliminate all subsidies for agricultural exports. See

Chapter 5 for a discussion of the interactions between the Doha Round and EPAs. 57

The termination of such subsidies was part of the French proposal to the G8 in its action plan for Africa in June

2002. 58

The highest percentages of subsidies in total gross farm receipts in 2004 were in Japan, 56%, followed by the EU

at 33%, Canada at 21%, and the US at 18% (DEFRA 2005).

68

competing and export-oriented producers nor between those exporting to Africa and those

exporting to other parts of the world.

Table 9.3 Estimated EU Product-Specific Support for Agricultural

Products

Products

Estimated

Subsidies, millions

of Euros, 2001-

2002

Estimated

Subsidies,

millions of Euros,

2003-2004

Beef 9,709 -1,111*

White sugar 5,732 5,610

Butter 4,444 5,012

Olive oil 2,676 2,649

Apples 2,060 2,625

Tomatoes 1,944 1,888

Barley 1,640 1,860

Skimmed milk powder 1,371 1,602

Common Wheat 1,237 1,455

Tobacco 952 924

Wine 892 638

Pears 543 584

Cumbers 535 781

Peaches/nectarines 472 398

Rice 397 421

Maize 380 391

Oranges 321 329

Total 35,302 26,056

Notes: (a) Estimated subsidies are based on the Aggregate Measure of Support (AMS). (b) The data for marketing

year 2003-4 were preliminary as of the writing of Kasteng (2006) and had not yet been published in a WTO

notification at that time. (c) The subsidy for each product is calculated by multiplying the “price gap” by the

production volume. The price gap is calculated as the difference between a specified external reference price and

the applicable administrative price. The administrative price is usually higher than the external reference price,

which is based on average data for 1986-1988. If the administrative price was, for example, unchanged in 2004 and

the external price was fixed at the level of base period, the price gap in 2004 would be the same as in the 1986-1988

base period, even if the actual world market price had declined and the subsidy relative to current market prices had

increased. *In the case of beef in the marketing year 2003-2004, the administrative price was lower than the

reference price in the base period because of CAP reform. Therefore, the price gap for beef, and the "support" for

beef as thus measured, appears to be negative in 2003-2004, even though the subsidy relative to current world

market prices could have been substantial.

Source: Kasteng (2006), Table 5.

69

Reforms in the EU’s Common Agricultural Policy (CAP)

In parallel with the Doha Round and the EPA negotiations, the European Union has been

proceeding gradually since 2003 with unilateral reforms of its common agricultural policy

(CAP)59

The CAP reforms originated, in part, from EU‟s own budget constrains but are

important for African countries that are current or potential exporters of the products affected,

The CAP reforms are intended to change the way the EU supports its farm sector. The

new CAP is supposed to give EU farmers the freedom to produce what the market wants, and the

system is to give greater weight to the interest of consumers and taxpayers. Most subsidies are

intended to be paid independently from the quantities of production, that is “decoupled” from

production. However, to avoid abandonment of production, EU member states may choose to

maintain a limited link between subsidies and production under “well-defined conditions and

within clear limits.”60

The “single farm payments,” which entered into force in 2005, are, as the CAP reform

intends, independent of production and are linked instead to the protection of the environment,

food safety, and animal welfare.61

More money will be available to farmers to promote

environment protection, improve the quality of food and animal welfare, and meet EU

production standards. A reduction is being made in direct payment to big farms and the money

saved will be used to finance rural development. A “financial discipline mechanism” has been

introduced in order not to overshoot the EU‟s farm budget, which has been fixed until 2013.

The 2003 CAP reforms also include revising market policy for milk, rice, cereals, wheat,

and nuts. Support price reductions are being implemented in the dairy sector, including a

reduction of 25% in intervention price for butter over four years and a 15% reduction in the price

of skimmed milk powder over three years. The monthly price interventions in the cereals sector

are also being cut by half. However, the intervention prices for these products are not being

abolished.

The CAP reforms for bananas, sugar, fruit and vegetables are particularly relevant for

African countries, which are significant current or potential exporters of these.

Bananas. Bananas that are grown within the European Union account for 16% of its

total supply. Most of the domestically produced bananas (14% of total supply) come from the

EU‟s outermost regions – that is, the overseas territories belonging to France, Portugal, and

Spain – which are geographically remote from the European continent, small in size, and

economically dependent on a few products. Under a compensatory aid scheme, banana growers

59

To the extent that CAP reform leads to lower internal prices in the EU market, it could also lead de facto to some

erosion in the value of preferential access to the EU‟s agricultural market. 60

This potentially significant loophole implies that the quantity of production and the size of subsidy payments may

not be completely decoupled. 61

The single payment scheme replaces a number of direct subsidy schemes – the arable area payment; beef special

premium; extensification payment scheme; sheep annual premium scheme; suckler cow premium scheme; slaughter

premium scheme; veal calf slaughter premium scheme; dairy premium; dairy additional payments; hops income aid,

and seed production aid (www.defra.gov.uk). Some member states are permitted to delay applying the single farm

payment until, at the latest, 2007.

http://www.defra.gov.uk/

70

in the outermost regions have been automatically compensated for price drops. The reform of

the banana production support regime announced by the European Commission in September

2006 proposes replacing this compensatory aid scheme by adding money to its POSEI program

(Programme d‟Options Spécifiques à l‟Èloignement et l‟Insularité), which provides financial

support for agricultural production in its overseas provinces and territories. Other banana

growers are to be transferred to the single payment scheme. POSEI will become the main

instrument for supporting banana growing in the EU. The Commission will undertake a review

of the workings of this scheme by the end of 2009 (or earlier if there are substantial changes to

the economic conditions affecting the livelihoods of the outermost regions). Note, however, that

changes in the EU‟s banana import tariff regime discussed in Annex C will affect the prices of a

much larger share (84%) of the EU‟s total banana supply and will have more impact on ACP

banana growing/exporting countries than the reforms in the support system for domestic banana

producers.

Sugar. Implementation of the sugar sector reform under the CAP started on July 1, 2006.

The key reform is a 36% cut in the guaranteed minimum sugar price – which was three times the

world market price -- to encourage the most uncompetitive sugar producers in the EU to leave

the industry with financial compensation. In 2008, the EU is also opening its sugar markets

completely for the 49 LDCs under the EBA program and the Caribbean and African EPA-

signatories. The 36% cut in the guaranteed price will have negative effects on sugar exporting

earnings for those ACP countries that had received the guaranteed price for their sugar exports to

the EU under the Sugar Protocol (see Annex C). However, the EU‟s domestic sugar production

is also expected to fall by between 6 and 7 million tonnes (with a reduction of 2 to 3 million

tonnes of sugar in the first year). This decline in domestic production would create some room

in the EU sugar market for increased imports from LDCs and Caribbean and African EPA-

signatories. In addition, EU sugar exports should fall dramatically, reducing pressure on the

world sugar price. It is possible that sugar producing and exporting EPA-countries may capture

some of the markets, particularly in Africa, that used to be supplied by the EU.

Fruits and Vegetables. The EU‟s current financial support to fruit and vegetables sector

includes subsidies to producers on the basis of the quantity of produce delivered to the

processing industry, direct aid to processors and to producers, and subsidies for the fruit and

vegetables production based on land area. This financial support system covers tomatoes, citrus

fruit, pears, peaches/nectarines, dried figs, prunes, and dried grapes. The reforms of the sector

proposed by the European Commission in January 2007, and scheduled to enter into force in

2008, include abolishing export subsidies; integrating the sector support measures into the single

payment scheme; requiring a minimum level of spending on environmental measures; providing

higher EU funding for organic production and promotion; encouraging more growers to join

producer organizations; and offering the latter a wider range of tools for crisis management.

Implications of CAP Reform for EPAs

Overall, the EU‟s CAP reforms are intended to change the basis on which direct

payments are made to farmers. By removing the link between direct subsidies and production –

decoupling -- they should be less trade distorting. However, in a number of sectors, direct

payments are not being completely decoupled from production. The DEFRA report (2005)

71

found that around 40% of EU expenditure for direct payments to agricultural producers would

remain linked to production after the 2003 reforms are fully implemented. Most importantly, the

CAP 2003 reforms do not change the amount of money allocated to direct payments and do little

to affect the level of market price support.

How will the EU‟s CAP reforms, even limited, affect developing countries? A number of

studies have been made of this issue. An excellent summary is contained in the DEFRA report

(2005). Broadly speaking, three groups of developing countries will be affected differently: one

group -- including Brazil, South Africa, and a few sub-Saharan African countries -- is well-

placed to gain immediately from expanding exports of, for example, some fruits, vegetables, and

nuts and sugar; a second group may gain in the longer term, but capacity constraints are an

overriding near term problem; and a third group is likely to lose out, at least in the near term

because of increased competition and preference erosion.62

Recommendation. In the EPA-process African countries should seek elimination of EU

export subsidies on products of interest to them and also identify existing and promising

potential agricultural exports to the EU market that are important for them (such fruits,

vegetables, nuts, and cotton) and request that these specific products receive priority treatment in

the European Union‟s decoupling of its domestic agricultural support from production.

However, because of the political sensitivity of these issues on the EU-side, what may actually

be achievable in agriculture in the EPA-process will depend heavily upon how far the Doha

negotiations go.

Realistically, EPAs are not likely to make much progress in reducing the EU‟s domestic

production support for agricultural products that compete with African exports, whether in the

EU market or third countries‟ markets. However, they could explicitly allow African countries

to offset the effects of production subsidies on the EU‟s agricultural exports to them. In the

Doha round discussions it has been agreed that developing countries should have the right to

designate “an appropriate number” of tariff lines as sensitive products and to use import price

and quantity triggers to promote “food security, livelihood security, and rural development.” In

the EPA negotiations African countries could similarly seek to maintain defensive safeguard

measures against any subsidized agricultural exports from the European Union and other sources

as envisaged in the WTO discussions.

EU Cotton Policy: A Priority for Reform to Support EPAs

Cotton is an example of an African export product that could be given priority in the full,

and more effective, de-linking of EU domestic agricultural support from production. Although a

relatively small player in the world cotton market compared to the US, the European Union is

still a significant market for African cotton exports, buying about 20% of these. The EU

accounts for only 2.5% of total world cotton production (concentrated in Greece and Spain) and

62

For some of these countries, the negative effects of increased competition and preference erosion may not be that

serious in the longer term. Numerous studies have shown that EU preferences for the ACP countries have not

resulted in increases in the latter‟s international trade nor in acceleration of their development. These economies

are unlikely to develop if they remain trapped in non-competitive and distorted production supported by trade

preferences as discussed in Chapter 10.

72

3.3% of world cotton exports but provides around 13% of total world cotton subsidies. With an

average of $800 million of assistance over the past years, European cotton growers have received

the highest level of support per ton of production, amounting to two-thirds of the world price and

enabling European cotton production to almost triple over the past two decades and supplanting

imports that could come from the African-EPA countries.63

The European Union has publicly emphasized its willingness to help address the problem

of cotton subsidies. EPA-countries should follow up on this offer in the ongoing EPA-process.

The EU‟s partial decoupling of its cotton subsidies from production appears insufficient thus far

to correct the current distortions in its internal market. The 35% of subsidies that would remain

directly linked to cultivated cotton area after decoupling is still too high (both per hectare and per

ton) to lead to a significant reduction of cotton production in the European Union, as noted by

the European Commission itself in its proposal. A reform creating a more level playing field for

the EPA-countries‟ cotton exports to the EU would aim at 100% decoupling of income support

from cotton production levels and ensuring that the “decoupled” income support is given in a

form that does not in fact provide any incentive for further cotton production.

However, the primary issue concerning the EPA-countries‟ cotton exports to the rest of

the world is the impact of US subsidies on world cotton prices, a problem which will need to be

addressed in the WTO rather than through EPAs.

B. The EU’s Technical, Sanitary, and Phyto-sanitary

Product Standards

The European Union‟s product standards are another non-tariff restraint on market access

that could usefully be addressed in the EPA process. In particular, the increasing coverage and

sophistication of the EU‟s sanitary and phyto-sanitary (SPS) measures, driven by the increasing

awareness and concern about food safety, in some cases limit the ability of developing countries

to benefit from their preferential trade arrangements with EU in the medium term.

Broadly, standards are of two types: market driven standards which are negotiated

between market participants and which Africa suppliers must necessarily meet; and government

regulatory standards, which are mandated by governments. The vast majority of these standards

reflect reasonable market or public demands for quality and safety assurance. Neither the

Cotonou Agreement nor the European Union‟s GSP/EBA programs provide for preferential

treatment in the application of its SPS measures. EPA-countries wishing to export to the EU

have no realistic choice other than to comply with these standards, however difficult it may be to

do so.

63

European Commission, Directorate General for agriculture, 2003 working paper on the cotton sector accessed on

the European Commission‟s web site.

73

Difficulties in Satisfying Export Standards

Meeting the EU‟s demanding SPS standards and the multiplicity of requirements across

different product markets is very challenging for any exporter, especially for small African ones.

The failure of one exporter in a country to meet the required standards may also have

repercussions for all exporters from that country.

Two example of the seriousness of these difficulties are EU-ACP trade in fish and beef.

The EU‟s MFN tariff on canned tuna (HS 160414) is 24%, which gives a substantial preferential

margin to ACP countries in this important market.64

However, only 24 ACP countries currently

qualify under the EU‟s sanitary standards, an indication of the difficulty that many low-income

countries have in meeting these standards (De Melo, Yagci, and Dijofack (2007)). Similarly,

Botswana is one of the few ACP countries that are currently able to satisfy the EU‟s sanitary

standards for beef imports.

For horticultural farms and exports in Kenya, the EU‟s phyto-sanitary traceability,

testing, and certification requirements impose serious production challenges and costs for its

horticultural trade with the European Union. Ogambi (2005) reported that, in the marketing year

June 1999 to June 2000, 13,708 tons of Kenya produce was rejected by the EU because of the

presence of pests and diseases. In the following year, June 2000-June 2001, 120 tons of produce

were rejected because of the presence of regulated harmful organisms. In the subsequent two-

year period from June 2001 to June 2003, 150 tons of assorted plant materials were rejected.

The technical demands of meeting the EU‟s health and environmental standards and the

requirements of its supermarkets has resulted in the shifting of production and exporting of

Kenya fresh vegetables to large firms and farms. This trend has marginalized small and

medium-size exporters and farms (Ogambi 2005).

Recommendation. Shortages of human, financial, and technical resources in African

countries make it difficult for them to meet some of the safety requirements imposed by the

European Union‟s SPS measures and to satisfy the commercial quality requirements of EU

importers. Technical and financial assistance to help African countries implement both existing

and new standards will be essential for expanding and diversifying exports. It should be a

central feature of the EPAs‟ aid for trade/development assistance component, as discussed in

Chapter 13, in Part III, on the actions necessary to generate a strong supply response to improved

market access.

Minimizing the Potential for Protectionist Use of Standards

Although most of the EU‟s technical standards and SPS measures are reasonable,

standards can also be manipulated for protectionist purposes. Protectionist bias in the setting or

administration of product standards can be a significant constraint on imports of some products.

64

Since 2003, as a settlement for the disputes between the EU and Thailand and Philippines, the EU has also

allocated a tariff-rate-quota of 25,000 tons of canned tuna at 12% tariff rate for imports from Thailand, Philippines,

and Indonesia.

74

The key question about the EU‟s official SPS measures, particularly those that exceed

international norms and codes, is to what extent these are actually scientifically based and tested.

Does the EU have more SPS-related measures and higher standards than internationally accepted

norms? How much more does it cost for African countries to comply with such standards?

Unfortunately, little reliable data are yet available that address these questions, and substantial

further research will be needed.65

Compliance with product standards and SPS measures is a horizontal requirement

applying to all exports to the EU market from all sources (Doherty 2006). Issues concerning

SPS standards and technical barriers to trade are therefore generally discussed multi-laterally in

the WTO and are difficult for any specific group of exporters, irrespective of their status, to

resolve bilaterally. The mutual recognition of equivalent standards can, in principle, play a

useful role in expanding market access under bilateral trade agreements.

Scope for Cooperation on Administration of Standards in the EPA-Process. There is

some scope for cooperation on administration of standards in the ongoing EPA-process. Doherty

(2006) suggests focusing on the mechanisms (timing/phasing, technical assistance) of the

introduction of standards and other measures. The EPA-countries could, for example, request

formal representation in the European Union‟s standard setting processes, impact studies of

likely effects of new standards on African countries, and consultations before adoption of any

proposed changes. The EPA-countries could also request a country and product-specific

appeal/waiver process for relief from any existing or proposed standards that limit African

exports in an unreasonable way.

Given the current wide disparities in technical, administrative, and governance capacity

between the EU and the African EPA-countries, the scope for convincing the EU to recognize

African-determined standards is probably quite limited at present. Nevertheless, the EPA-

countries might try to identify a few specific products for which recognition of African standards

might be successful and ask for inclusion of a pilot knowledge and capacity building approach to

standards administration for these. In such cases, both parties would need to aim at agreeing on

what is required for acceptance of African standards and for competency with respect to testing

and certification of compliance with both African and international standards. Both parties could

then also agree not to introduce new SPS-related measures that would adversely affect the

exports from the other of products that already have mutually accepted standards without

following agreed procedures for revising these standards.

65

Mirvate, Wilson, and Otsuki (2001) found that African countries lost $670 million in exports of cereals, fruits,

vegetables and edible nuts due to EU because of its higher standards on aflatoxin, relative to the internationally

accepted Codex norm. How many lives does this higher standard save in Europe? The number estimated by Mirvat,

Wilson, and Otsuki (2001) is minuscule, 2.3 lives per billion. Any attempt to quantify the impacts of regulatory

measures is, of course, very difficult, if feasible at all. The foregoing study lacks neither short-comings nor critics.

But it does provide some indication of the potential costs that could be faced by developing countries because of

abusive use of standards by developed countries.

75

10. Inadequacy of Tariff Preferences Alone for Accelerating Export Growth in

the EPA-Signatories

So, what is likely to be the effect of tariff-free, quota-free access to the EU market on the

exports of the EPA-signatories? For guidance, this chapter reviews the performance of the

exports of African LDCs since they received similar tariff-free, quota-free access to the EU

market in 2001 under the EU‟s Everything-but-Arms Program. It then examines the likely

erosion over time of the value of preferential market access by the EU‟s entering into additional

bilateral and multilateral trade agreements and the implication of this preference erosion for the

competitiveness of the EPA-signatories exports. This chapter then summarizes the advantages

and disadvantages of EPAs in comparison to the European Union‟s unilateral trade preferences.

A. Little Apparent Impact of the EBA Program on the

Exports of African LDCs to the EU66

What has been the impact on the exports of the 33 African LDCs of moving from the

Cotonou preferences to full tariff-free, quota-free access to the EU market under its EBA

program? Unfortunately, only limited data are available from the European Commission on the

EU‟s imports from African LDCs under the Cotonou and EBA preference regimes from 2001 to

2007. However, aggregate data on EU imports from African LDCs does yield some revealing

insights. This section analyzes these two data sets to see what they show about the performance

of the exports of African LDCs to the EU since the introduction of the EBA program.

EU Imports from African LDCs under the Cotonou and EBA Preference Regimes

Initial Impact of the EBA Program in 2001-2002. Brenton (2003), using European

Commission data on imports under the EBA program in 2001-2002, made an initial assessment

of its immediate impact. The EBA program became effective on March 1, 2001. Brenton found

that as a result of lack of information about EBA, administrative costs, inertia, and long lead

times, African LDCs made little use of EBA preferences and continued to export to the European

Union under Cotonou in 2001-2002. Initial low usage of EBA preferences may have also

reflected the limited near term possibilities in African LDCs for producing the 919 agricultural

66

This subsection is based on analytical inputs provided by Paul Brenton and Mombert Hoppe.

76

and processed agricultural products that are subject to tariffs under the Cotonou Agreement but

on which tariffs were eliminated under the EBA program.67

Lack of Data for 2003 to 2004. In 2003, the European Commission stopped publicly

releasing detailed data on its imports under the EBA program that are needed for making a

definitive assessment of the program‟s impact. For 2003 and 2004, the EC did not publish any

data at all on the utilization of its various tariff preference programs.

New EU Data Series on Preferential Imports for 2005 Onward. But in 2006 the EC

resumed publishing aggregated current, but not historic, data on the usage of its preferences,

starting with the year 2005. When it resumed publishing data on its imports receiving tariff

preferences, the Commission explained that, since the EU‟s different preferential regimes

overlap in many cases, often it cannot accurately determine which preference scheme has been

actually been used. The European Commission now classifies information on MFN and

preferential imports into the EU into only four categories: (i) imports with a zero MFN tariff rate;

(ii) imports with a non-zero MFN tariff rate and a zero preferential tariff rate under any

preferential regime; (iii) imports with a non-zero MFN tariff rate and a reduced but non-zero

tariff preferential rate under any preferential regime; and (iv) imports with a non-zero MFN rate

not eligible for any preferences and thus subject to the full MFN rate.

With the EU data currently being published on preferential imports, it is difficult to

determine what the actual impact of the EBA program has been. Imports from LDCs in the ACP

group may enter the EU with a zero preferential tariff (category ii) under EBA, Cotonou, or even

standard GSP. Similarly, imports from non-LDC ACP countries may enter at zero preferential

rate (category ii) or a reduced preferential rate (category iii) under Cotonou or GSP.

Furthermore, the EC data are for preferences that importers applied for but may or may

not have actually received. When an importer requests a preferential tariff rate for an import into

the EU having a non-zero MFN tariff rate, this request is automatically compared by the EC with

the country and product eligibility criteria to determine if, prima facie, it satisfies these criteria.

If it does, then the EC data set assumes that the product will receive the requested preferential

rate. However, requests from importers for preferential tariff rates are examined by customs

officers. If a shipment is determined to be ineligible for any reason (such as failure to comply

with the EU‟s rules of origin or product standards or inadequate documentation of compliance

with these), the request for preferences may be denied. Information is not collected on whether

requested preferences are actually granted, and the EC data set does not distinguish between

preference requested (claimed) and those actually granted (received). The EC, however, argues

that tests by member states on a sample of imports have shown that differences between

preferences requested and preferences actually received are not significant.68

67

The rules of origin for the EBA program are also somewhat different from those that apply to Cotonou

preferences. Continuing to export under the latter, at least temporarily, may have been more attractive for African

exporters of some products that face low tariffs under Cotonou than switching immediately to EBA with its zero

tariffs but different rules of origin. 68

The EU reportedly also has a procedure whereby an exporter in a preference-eligible country or the EU importer

may ask for a binding advance determination of preference eligibility before shipment in order to minimize the risk

of the tariff preference‟s being denied.

77

In addition, in some cases importers may not request preferential tariff rates even if the

imports are eligible because adequate documentation for the request is not available or the cost

of obtaining it would exceed the value of preference. As a result, in some cases potentially

available preference may be under-utilized.

EU Imports from African LDCs in 2005 under the MFN, Cotonou, and EBA

Regimes.69

Despite the limitations of the currently available published data on the usage of EU

preference programs, Brenton and Hoppe (2006) are able to draw from them a few conclusions

about the utilization of EBA and Cotonou tariff-preferences by LDC exporters to the EU. Their

study analyzes for 2005 each LDC‟s total exports to the EU, the shares of its exports entering the

EU with zero and non-zero MFN tariff rate, the share of the LDC‟s exports receiving preferences

in its total exports to the EU, and the degree to which available EBA/Cotonou preferences

actually appear to have been requested.

Large Shares of Products with Zero MFN Tariff Rates. Brenton and Hoppe (2006) find

that for 30 LDCs of the 50 LDCs, more than one-half of their exports to the EU enters at a zero

MFN tariff rate. For 17 of the 50 LDCs (including 15 African LDCs), more than 90% of exports

to the EU had zero MFN tariff rates in 2005. For another seven LDCs, the share was between

75% and 90%; and for six more LDCs the share was between 50% and 75%. For countries with

such large shares of exports entering with zero MFN tariff rates, tariff preferences may not have

much immediate impact because of the small share of their exports to which the preferences

apply.

Zero Preferential Tariff Rates Available for All Other Imports. Because of the EBA

program, virtually all of the imports from LDCs not having a zero MFN tariff rate were eligible

for a zero preferential tariff rate. For African LDCs, total exports to the EU in 2005 were E 10.1

billion, of which E 7.7 billion entered the EU at a zero MFN tariff rate. Of the African LDCs‟

E2.4 billion in exports with non-zero MFN tariff rates, E2.3 billion (99.7%) were eligible for a

zero preferential tariff rate under the EBA program.70

Low Average Utilization Rate of Potentially Available Tariff-Preferences. However,

Brenton and Hoppe (2006) also find that of the LDCs‟ exports eligible for a zero preferential

tariff rate under the EBA program, only 67.5% actually requested the preferential zero tariff rate.

Another 21.3% of LDC exports entered the EU at non-zero MFN tariffs and would thus appear

to have been unaffected by the EPA program despite its intended universal coverage of EU

imports from LDCs.71

The preference-request rates were surprisingly low for a number of LDCs

and varied greatly by HS-chapters. Among the 49 eligible LDCs, only five had preference-

request rates of more than 90%, another nine had reguest-rates of 80% to 90%, and four had

request-rates of 70% to 80%. Brenton and Hoppe (2006) suggest that the preference-request

rates of under 70% in the other 31 LDCs may have been due to incomplete documentation or

non-fulfillment of rules of origin. The absence of data on the preference status of the remaining

11.2% of LDC exports, however, complicates the precise interpretation of the available data. At

69

It would be useful to do further research to update this analysis to 2007-2008. 70

Most of these products were also eligible for zero-rate preferential tariffs under the Cotonou regime. 71

Some of these products were also potentially eligible for preferential tariffs under the Cotonou regime as well as

under the EBA program, but their importers apparently did not request either of the two preferences.

78

the extreme, if all the unclassified exports actually received the zero preferential tariff-rate, the

average preference-request rate would have been 78.7% instead of the estimated 67.5%.

Aggregate EU Imports from African LDCs since the Introduction of the EBA Program in 2001

The European Commission has not publicly released data on its imports under the EBA

initiative after 2002, which are needed for making a definitive assessment of the impact of EBA

to date; and only the above fragmentary data are available on EU imports under different

preference regimes from 2005 onward. However, a fairly clear idea of the EBA program‟s likely

impact can, nevertheless, be gained from an analysis of published data on the EU‟s aggregate

imports from African LDCs (that is, total EU imports from African LDCs under all customs

regimes – the EBA program, the Cotonou/Commodity Protocol preferences, GSP, MFN, etc.).

Graph 10.1: EU Non-oil Imports from African LDCs, 1995-2007

(as a % of total EU Non-oil Imports)

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

%

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

%

Total Non-Oil Manufactured Goods Agricultural Materials Other Primary Products

Notes: Aluminum and sugar are included in the manufactured goods and agricultural materials categories,

respectively.

Source: UN COMTRADE (SITC 2 data, accessed September 2008)

Overall Perfomance of the African LDCs’ Non-oil Exports to the EU. There is little

evidence in aggregate data that the EBA program has stimulated non-oil exports of African

LDCs to the EU. Since the implementation of the EBA program in March 2001, the nominal

79

value of the EU‟s non-oil imports from African LDCs has increased only from E7.3 billion in

2001 to E7.8 billion in 2007.72

The share of the EU‟s non-oil imports coming from African

LDCs has thus continued its steady long-term decline, falling from an average of 0.35% in 1995-

96 to 0.25% in 2006-2007 (Graph 10.1).73

Moreover, African LDCs‟ exports to the EU remain

highly concentrated and are still very sensitive to changes in a few product categories.

Graph 10.2: Composition of African LDCs’ Exports to the EU-15

(at current prices in billions of euros)

0

0.5

1

1.5

2

2.5

3

3.5

4

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

bil

lio

ns

EU

R

0

0.5

1

1.5

2

2.5

3

3.5

4

textiles and clothing oil manufacturing sugar agriculture

Notes: UN COMTRADE data in dollars have been converted to euros at the average annual exchange rates and may

differ slightly from corresponding trade figures reported in euros by the EU because of intra-year exchange rate

fluctuations and the timing of import flows from African LDCs. However, trends in EU imports from the African

LDCs are similar when measured in dollar terms as shown in Graph A.16, Annex A.

Source: UN COMTRADE (SITC 3 mirror data, accessed August 2008)

Performance of the African LDCs’ Agricultural Exports to the EU. For African LDCs,

the improvement in market access under the EBA program was in the 919 tariff lines for

agricultural and processed agricultural products that are subject to tariffs under the Cotonou

Agreement but are tariff-free, quota-free under the EBA program, although the potential

improvement in market access for processed agricultural products was limited the continuation

of restrictive rules origin under the EBA program as discussed in Chapter 8. (Both the Cotonou

and EBA preferences provided tariff-free, quota-free access to the EU market for manufactures).

Hence, looking separately at the EU‟s agricultural imports from African LDCs should give a

72

Trends in EU imports from the African LDCs are similar when measured in dollar terms as shown in Graph A.16,

Annex A. 73

EU oil-imports from the African LDCs have, in contrast, increased sharply from an average of E0.5 billion per

year in 1995-99 to E3.4 billion in 2007 as shown in Graph 10.2.

80

clearer picture of the impact of the EBA Initiative than the data on the EU‟s total non-oil

imports.

EU imports of agricultural goods from African LDCs stagnated at about E2.5 billion per

year from 1995 to 2001, when the EBA Program was launched, and remained at this level

through 2007 despite the EBA program (Graph 10.2). Sugar, however, was an exception to the

general stagnation in agricultural exports from African LDCs to the EU, as exports of it doubled

from under E0.1 billion in 2000-01 to E0.2 billion in 2007 (Graph 10.2), although the overall

level of sugar exports to the EU was still quite small in both relative and absolute terms in 2007.

Increases under the EBA program in the EU‟s allocations of its preferential tariff-rate quota for

sugar to African LDCs have elicited a supply response in a few of these countries. Incentives to

supply sugar to the highly distorted EU market were strong because internal prices in the EU

were two to three times the world price. Thus, sugar exports from some LDCs (Malawi,

Tanzania, and Zambia) have started to expand since they got improved market access for sugar

as a result of the EBA program. However, it remains to be seen how effectively African sugar

exporters will be able to compete in the EU market as the EU‟s inflated internal sugar prices are

reduced due to CAP reform.

Performance of Manufactured Exports from the African LDCs. Exports of manufac-

tured goods from the African LDCs experienced a decline from E2.6 billion in 2001 to E1.6

billion in 2003 and then recovered gradually to the E2.6 billion level by 2007. Exports of textile

and clothing to the EU have also continued to stagnate at about E0.4 billion since the

introduction of the EBA Program in 2001, whereas the exports of these to the US have

responded strongly to the incentives offered under its Africa Growth and Opportunity Act.

Since 1997 the most dynamic component of the African LDCs‟ exports of manufactures

to the EU has been the rapid expansion of aluminum exports from Mozambique. Exports of

aluminum to the EU started to increase before the EBA program was introduced and rose from

close to zero in 1999 to E734 million in 2004. By 2004, Mozambique‟s aluminum exports

amounted to 19% of the African LDCs‟ total exports of manufactures, other than textiles and

clothing, to the EU. Exports of aluminum from the ACP countries were already duty-free under

the Cotonou Agreement, and the EBA program did not change the market access conditions for

aluminum for ACP countries.74

African LDC Exports with Non-Zero MFN Tariffs. Another way to assess the likely

impact of the EBA program on the EU‟s non-oil imports from African LDCs is to distinguish

between products for which no tariff preference is available, because the MFN tariff rate is zero,

and those for which MFN duties are levied and a preference is potentially available (Graph

10.3).75

As noted earlier, the largest share of the African LDCs‟ non-oil exports to the EU is

composed of products which face a zero MFN tariff rate and the tariffs on which, therefore,

would not be affected by a shift from Cotonou to EBA preferences. Many LDCs, in fact, receive

little current benefit from the EBA preferences because their exports are still dominated by

primary commodities that have MFN tariff rates of zero.

74

Aluminum imports are subject to a 6% MFN duty in the EU. 75

A more detailed analysis would require information on the size of the tariff preference and the extent to which the

available preferences are actually utilized. The data necessary to make such an analysis were not available.

81

Graph 10.3:

Exports of SSA-LDCs to the EU by MFN tariff

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

2002 2003 2004

trade in lines with MFN=0

dutiable trade

dutiable trade excl aluminium

Source: Brenton and Hoppe (2006).

EU imports of African LDCs‟ products with non-zero MFN duty rates, which might

potentially have been affected by adoption of the EBA Initiative, remained basically constant

from 2002 to 2004, the last year for which data were available at the time of Brenton‟s and

Hoppe‟s 2006 analysis cited above.76

However, this stable level of total dutiable imports

included the rapid increase in aluminum imports from Mozambique which, as explained above,

started four years before the adoption of the EBA Program. Excluding aluminum, the euro value

of total EU imports of dutiable products from African LDCs declined from 2002 to 2004.

Hence, there is no evidence in the trends in imports of dutiable products from African LDCs, on

which a change in preference regime might have had an effect, to suggest that the EBA program

has been successful in raising EU imports from African LDCs.

Non-Tariff Constraints to Expanding Exports. Overall, there is little in aggregate trade

flow data to suggest that the EBA program has led to a significant increase in the exports of

African LDCs to the EU.77

There are three primary reasons why EBA has not led to substantial

increases in African exports. First, as discussed below in more details, the EBA program

maintains the GSP‟s restrictive rules of origin, which are difficult for LDCs and small low

income countries to comply with. Second, long lead times are often required for expanding

production and exports of agricultural products, on which tariffs were reduced. And, third, a

wide range of supply-side constraints in African LDCs has inhibited a strong supply response to

the improvement in market access for agricultural products under the EBA program.

76

It would be useful to update Graph 10.3 to 2007; to substitute line graph format for the bar graph, which will not

work with three additional years; to add 2000 and 2001 to the new graph; and to check what happened to the

corresponding variables measured in dollars instead of euros. 77

It is, of course, theoretically possible that without the EBA program the exports of African LDCs would have

fallen even further.

82

Similarly, improved market access alone is unlikely to be enough to substantially

accelerate the growth and diversification of the EPA-signatories‟ exports to the EU. Most of

Africa‟s non-LDCs face many of the same types of supply constraints and competitiveness

problems as its LDCs. Thus, unless these constraints are effectively addressed, the immediate

impact of tariff-free, quota-free market access under interim EPAs on most of the non-LDCs‟

exports to the EU is not likely to be much greater than the EBA program‟s impact on the LDCs‟

exports.

B. Preference Erosion78

In addition to having limited impact without complementary supply-side reforms,

preferential market access, whether obtained via unilateral preferences or free trade agreements,

is subject to erosion by both bilateral and MFN trade liberalization. Since the early 1990s, the

European Union has had an active program of negotiating bilateral free trade agreements with

European countries, Mediterranean countries, and selected developing countries from other

regions (Chile, Mexico, and South Africa). GSP, EBA, and EPA trade preferences are all

equally subject to such preference erosion as a result of the EU‟s implementing bilateral and

multilateral trade agreements with other countries.

Bilateral Tariff Reductions79

In 2004, more than a quarter (26%) of the EU-15‟s total imports came from countries

participating in the EU‟s various preferential trade arrangements or countries receiving unilateral

trade preferences, with the total being about equally split between the countries in the two groups

(Table 10.1). EU imports from the African EPA-countries of $30 billion in 2004 accounted for

only 3.5% of the EU‟s total imports of $848 billion from preference receiving countries.

EU Imports under Bilateral PTAs. One-half of the EU‟s imports from preference-

receiving countries -- 13% of its total imports -- came from countries having bilateral free trade

agreements with the EU-15: 10% of total imports came from other European countries under

bilateral free trade agreements, 2% from Mediterranean countries, and 1% from selected

developing countries.

The shares of imports actually entering duty free under free trade agreements were

somewhat smaller. The above figures are for total preferential and non-preferential imports from

countries having bilateral free trade agreements with the EU. Outside of the European area,

typically about 10% of bi-lateral trade has been excluded from liberalization under the EU‟s

“free” trade agreements and continues to be subject to MFN tariff rates so that only about 90%,

of the trade with countries having “free” trade agreements with the EU is actually tariff-free,

rather than 100% as their “free” trade moniker would suggest Allowing for the 10% of imports

excluded from duty free treatment under bilateral free trade agreements, about 11-12% of the

78

It might be useful to update the data, and the discussion of them, in this section from 2004 to 2007 or 2008.

83

EU‟s total imports (90% of 13%) entered duty free under bilateral free trade agreements in

2004.80

Excluded products are usually the most sensitive ones bearing the highest MFN tariff

rates -- agricultural products and labor intensive manufactures.

Table 10.1: EU-15 Imports from Countries Participating in EU Free Trade Agreements

(FTAs) or Receiving Unilateral Preferences, 2000 and 2004*

EU15 Imports

(US$ billions)

Share of EU15 Imports

(%)

2004 2000 2004

Bi-lateral PTAs

European PTAs

Accession 10 154.1 3.7 4.7

Other Europe 192.2 5.6 5.9

Total Europe 346.3 9.2 10.5

Non-European PTAs

Euro-Med 50.1 1.7 1.5

Chile and Mexico 17.1 0.5 0.5

South Africa 18.8 0.6 0.6

Total non-Europe 86.0 2.8 2.6

Unilateral EU Preferences

GSP (non-ACP, non-EBA) 375.6 9.4 11.4

EBA (non-ACP) 7.0 0.2 0.2

Total Non-European, Non-ACP 382.6 9.6 11.7

African ACP 29.6 1.0 0.9

Other ACP 4.0 0.1 0.1

Total ACP 33.6 1.1 1.0

Grand Total of Imports from All

Preference Receiving Countries

848.5 22.7 25.9

New Agreements being negotiated 67.1 2.0 2.0

Notes: *For more detailed information on preference countries and their preferential trade arrangements with the

EU, as well as data sources, see Table A.3, Annex A.

Source: Table A.3, Annex A.

80

A significant percentage of this bi-lateral free trade was probably in products that had MFN tariff rates of zero as

well as preferential zero-rate tariffs.

84

EU Imports under its Unilateral Preference Schemes. The other half of the EU‟s

imports from preference-receiving countries -- another 13% of its total imports -- came from

countries benefiting from the EU‟s unilateral preference schemes in 2004. One percent of total

imports came from the ACP countries, 0.2% of total imports came from the non-ACP LDC

beneficiaries of the EBA Initiative, and 11% came from non-ACP, non-LDC developing

countries participating in the EU‟s GSP program. Only part of the 11% of total EU imports

coming from non-ACP, non-LDC developing countries participating in the GSP was actually

eligible for the GSP‟s preferential tariff rates. Many of these rates, although somewhat lower

than the corresponding MFN tariffs, are still significant. Unfortunately, no published data are

available on the EU‟s imports of products that actually receive GSP preferences as a percentage

of either the EU‟s total imports from GSP beneficiary countries or as a percentage of its imports

from all sources. However, with further research it might be possible to make rough estimates of

these figures from the EU‟s published data on the utilization of preferences discussed on page 76

in section A of this chapter.

Additional Bilateral Trade Agreements under Negotiation. Additional bilateral trade

agreements were under negotiation with countries accounting for another 2% of the EU‟s

imports in 2004. Since then, the EU and India have announced their intentions to negotiate a

free trade agreement, and the EU has also expressed interest in opening negotiations with China.

Every additional bilateral agreement increases the volume of goods that enter at preferential rates

and erodes the value of the preferences accorded under existing agreements for the tariff lines

that the new agreement covers. Implementation of the EU‟s GSP+ scheme could also increase

competition between the GSP+ beneficiaries and the EPA-countries.

MFN Tariff Reductions

If the WTO‟s Doha round is eventually concluded successfully, the schedule of MFN

rates to which the European Union agrees in the round, rather than its current MFN rates, will

determine the maximum preference margins that ACP countries will actually have under the

EPAs.81

Some ACP countries have thus been concerned about potential for further preference

erosion resulting from any MFN tariff reductions in the Doha round.82

African countries export

only a narrow range of labor-intensive manufactures, processed and unprocessed agricultural

products, and primary products. Hence, it will be the reduction of the EU‟s MFN tariffs on these

specific tariff lines (and those on potential new exports that might be developed in the next 15-20

81

As discussed in Chapter 5, Part I, bound and applied MFN tariff rates are generally equal in the EU -- except in

the agricultural sector -- and, where not equal, are much closer than in Africa. Hence, any reductions in the

European Union‟s non-agricultural bound MFN tariff rates in the Doha round are likely to lead to corresponding

reductions in its applied non-agricultural MFN tariff rates. 82

Although the European Union will gain from preferential access to African markets under EPAs, these gains will

be quite small relative to total EU trade. The EU will probably not experience any preference erosion in the markets

of LDCs signing EPAs as LDCs are likely to be exempted from having to make any reductions in applied tariffs in

the Doha Round as discussed in Chapter 5. In Africa‟s non-LDCs, the erosion of any small gains in market by the

EU under EPAs by MFN liberalization is likely to be to small to be a significant concern for the EU.

85

years) rather than the general reduction in the EU‟s MFN tariff rates, that will erode the current

preference margins on the EPA-countries‟ exports.83

As discussed in Chapters 7 and 9 and Annex C, some important ACP exports to the

European Union are experiencing significant preference erosion from implementation of reforms

resulting from WTO‟s Uruguay round, particularly the termination of the European Union‟s

commodity protocols for sugar and bananas and the expiration of the Multi Fiber Agreement

(MFA) governing textiles and clothing. In addition to these changes, the European Union‟s

unilateral reforms in its common agricultural policy are leading to some reductions in its

domestic agricultural prices and thus in the value of preferential market access for imports of the

agricultural products concerned.84

Any additional reductions in the EU‟s applied MFN tariffs

resulting from the Doha round would also reduce current preferential tariff margins by lowering

the barriers to imports from non-preference receiving countries. Some erosion of the value of

existing preference margins could also come from increased competition from new and

expanding developing country suppliers in the unilateral-preference receiving-group as these

countries take advantage of new opportunities offered by EBA and GSP+.

The Necessary Adjustment to Preference Erosion

Because of concern about continuing preference erosion, some of the ACP countries

originally demanded that the European Union freeze existing preference margins in the EPAs.

This demand was unrealistic. It would have required that the EU permanently halt all further

multilateral and bilateral trade liberalization, an action that would have been seriously

detrimental both for the EU and for all of the non-ACP countries with which it trades.

Adjustment to preference erosion is going to be necessary sooner or later in any case.

Long-term competitiveness and sustainable development cannot be built solely upon special

preferences that allow African countries to benefit from current distortions in world trade

policies. In the long term, multilateral and bilateral trade liberalization are likely to make

continuing progress. Hence, preferential access is best viewed as a temporary competitive

advantage to help developing countries to overcome the various learning and fixed costs in

starting to export and to gain footholds in markets before being subjected to the full rigors of

international competition.

The EPA process provides an opportunity to commence the necessary adjustment to

preference erosion in favorable circumstances. Improvements under the EPAs in the European

Union‟s rules of origin and other non-tariff aspects of market access could help offset the effects

of erosion in tariff preferences. In addition, the development assistance and aid for trade

accompanying the EPAs could be used for providing adjustment assistance for any countries

facing significant transitional costs from preference erosion, as well as to help them to take

advantage of new market opportunities.

83

For a few countries, preference erosion might conceivably reduce or eliminate the incentive to implement a back-

loaded EPA. 84

See Chapters 5, 9, and Annex C for a further discussion of possible reforms in the EU‟s agricultural trade policies

and it common agricultural policy.

86

C. Conclusion: The Bottom Line on Market Access

So, what is the bottom line on market access? On balance, what are the potential benefits

from EPAs relative to the alternatives offered by the European Union‟s EBA program and its

GSP? This concluding section draws together separately for LDCs and non-LDCs the potential

market access benefits of the alternatives in terms of tariff preferences, rules of origin, and the

duration and certainty of market access.

Market Access for African LDCs

LDCs Signing Interim EPAs. For the nine Africa LDCs that have signed interim EPAs,

any significant gains in market access will come from the liberalization of the EU‟s rules of

origin for clothing and selected exports of fish and a few processed agricultural products since

LDCs already have tariff-free, quota-free access under the EBA program. The EPA trade

preferences are also more secure than those under the EBA program as they are based on a

treaty, rather than unilateral legislation, and are of indefinite duration.

Liberalization of the EPAs’ Rules of Origin. The one element of EPAs that could

provide significant improvements in market access for LDCs would be the European Union‟s

adopting substantially more liberal rules of origin such as the change-of-tariff-heading (at the

HS-6 level) or uniform 10% value-added rule recommended earlier in this chapter. It is,

however, an open question whether or not the European Union is prepared to liberalize its rules

of origin enough to deliver meaningful additional market access to African LDCs.

LDCs Not Participating in Interim EPAs. Since the expiration of the Cotonou

preferences at the end of 2007, all African LDCs still continue to have full tariff-free, quota free

access to the EU market under the EBA program. The 29 LDCs that did not enter into EPAs

thus have nothing to gain in terms of tariff preferences under EPAs. Nor are these LDCs likely

to gain much from EPAs in terms of the duration and certainty of preferential market access.

The EBA program is of indefinite duration and not subject to periodic review and renewal,

although there will always be a small risk that the European Union could unexpectedly reverse

its unilateral preferential trade policies. The only LDCs that might benefit significantly in the

medium term by extending the duration of their preferential access beyond that available under

the EBA program are those that are likely to grow fast enough in the next five to ten years to

graduate from LDC status and, hence, from the EBA program. For those LDCs that have not

signed EPAs but may consider doing so in the future the key considerations on the export-side

will be (a) the current and any future improvements in the EPA‟s rules of origin, (b) the greater

security of indefinite market access provided by an EPA treaty relative to the unilateral EBA

program, and (c) the risk of a LDC‟s graduating from the EBA program if it is successful in

accelerating its growth rate.

Market Access for African Non-LDCs

Non-LDCs Signing Interim EPAs. In contrast to the LDCs, for the ten African non-

LDCs signing interim EPAs, tariff-free, quota-free market access is an improvement over their

87

previous Cotonou preferences and an even larger improvement over the GSP preferences to

which they would have reverted in 2008 after the Cotonou preferences expired. The elimination

under EPAs of the Cotonou Agreement‟s tariffs on 990 agricultural and processed agricultural

product lines could be important for some non-LDCs having a good agricultural resource base

and the capacity to diversify into new agricultural exports. Some non-LDCs not currently having

quotas for sugar, bananas, and beef exports under the commodity protocols may benefit from

increased market access for these products. EPAs could also substantially increase the duration

and certainty of the non-LDCs‟ preferential access to the EU market as the GSP preferences are

subject to review and renewal every three years.85

Liberalization of the EPAs’ Rules of Origin. Liberalization of the EPAs‟ rules of origin

is as important an issue for the non-LDCs as it is for the LDCs. Tariff-free, quota free access to

the EU market with current rules of origin would provide some benefits for commodities like

sugar and non-traditional agricultural products, imports of which were restricted under the

Cotonou regime as discussed above. But, as their export performance under the Lomé-Cotonou

regime has shown, the non-LDCs in Africa have been no more able to overcome the European

Union‟s restrictive rules of origin in the manufacturing sector than have the LDCs. Unless the

European Union‟s rules of origin are substantially liberalized under EPAs, African non-LDCs

are likely to make little progress under them in diversifying into and expanding exports of labor

intensive manufactures and processed agricultural products to the EU market.

Non-LDCs Not Participating in Interim EPAs. Of the four non-LDCs that did not sign

interim EPAs, South Africa has experienced no change in its access to the EU market, which

continues to be governed by its existing free trade agreement (the Trade, Development, and

Cooperation Agreement or TDCA).86

Congo (Rep.), Gabon, and Nigeria have reverted from the

Cotonou preferences to the EU‟s GSP regime. But, as large oil and other primary product

exporters, these three countries have not been significantly affected by this change. Congo,

Gabon, Nigeria, and South Africa still have the option open to them of negotiating EPAs if they

desire to improve their access to the EU market.

Overall Access of the African EPA-Countries to the EU Market

The combination of EPAs and the EU‟s EBA and GSP programs that has resulted from

the agreements reached to date will thus maintain Africa‟s preferential access to the EU market

and avoid significant disruption of current Africa-EU trade. The EPA process has, thus,

successfully achieved the immediate objective of replacing the Cotonou tariff preferences with

alternative, WTO-compliant trade arrangements that provide equivalent or improved market

access for all African countries. If the EPA‟s initial rules of origin can be replaced with a

uniform change of tariff heading or 10% value added rule as recommended above, significant

new market access could be provided to the EPA-countries.

85

However, as noted earlier, the EU does have the option of unilaterally improving the terms of its GSP+ schemes;

and doing so could create market access opportunities almost as attractive as EPAs for some non-LDCs. 86

The provisions and implications of the TDCA are discussed further in the companion report on full EPAs.

88

Inadequacy of Tariff Preferences Alone

However, improved market access alone is unlikely to be enough to substantially

accelerate the growth and diversification of the EPA-signatories‟ exports to the EU: and, over

time, the size of the tariff preference margins resulting from EPAs will be gradually eroded as

the EU implements additional bilateral and multilateral trade liberalization agreements. The

performance of the EPA-countries‟ exports was weak under the previous Cotonou preference

regime. Moreover, tariff-free, quota-free access to the EU market under the EBA program

starting in 2001 for the 990 tariff lines of agricultural and processed agricultural products

previously subject to tariffs under the Cotonou regime has thus far had a minimal expansionary

impact on the exports from Africa‟s LDCs because a wide range of supply-side constraints in

these countries has inhibited a strong supply response. Most of Africa‟s non-LDCs face many of

the same types of supply constraints and competitiveness problems as its LDCs. Thus, unless

these supply-side constraints are effectively addressed, the immediate impact of interim EPAs on

most of the non-LDCs‟ exports to the EU is not likely to be much greater than the minimal

impact that the EBA has had on the exports of African LDCs. In the longer term, however,

economic gains from full tariff-free, quota-free market access could be substantial if the EPAs‟

rules of origin can be dramatically liberalized and supply-side constraints can be overcome as

discussed in Parts III and IV of this study.

part ii access of the african epa-countries’ exports to...

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