Trade Negotiations Insights • Volume 7 • Number 2 • March 2008

MFN provisions in EPAs: a threat to South-South trade?

Do More

Download this issue

See also

Brazil has raised serious concerns that a clause in the Economic Partnership Agreements (EPAs) between the European Union (EU) and African, Caribbean and Pacific (ACP) countries could pose a serious threat to improving trade between developing nations. The Latin American country, which voiced its fears during the WTO General Council in Geneva on February 5, pointed to the negative effects of the so-called ‘most-favoured-nation’ (MFN) clause included in both the Caribbean and interim EPAs.

This controversial MFN clause requires that any ACP country which has concluded a deal with Brussels must automatically extend to the EU “any more favourable treatment” (i.e. deeper market access) that the region or any of its member states grants to any other major trading economy in future free trade agreements (FTA). Under the terms of the regional MFN clause included in the Caribbean text, a ‘major trading economy’ is defined as any developed country which accounts for more than 1% of world merchandise exports, or groups of countries which collectively account for over 1.5%.2

It was swiftly denounced by a number of WTO members who saw it as putting in place a European strategy aimed at maintaining and increasing its share of a regional and continent-wide market that it had not yet been able to tap. Even before Brazil’s sensational intervention at a WTO session where it warned of the dangers of including the MFN clause - not only for the ACP but for all developing countries - this issue had been the subject of intense debate. From the Caribbean to the Pacific, regions in negotiation with the EU have been guarded and mistrustful of the prospect of including such a clause in their EPAs. The first fall-out was felt in the Pacific, where Australia made clear to the EU’s Trade Directorate that it disliked its inclusion and expressed its intention to open up regional discussions, along with New Zealand, in order to ensure that its exporters would not suffer.

Brazil claims EPAs hamper South-South trade

According to Brazil, this MFN requirement contradicts the WTO ‘Enabling Clause’, designed to increase developing country participation in global trade (see Box 1). The main objective of this clause was to increase trade between developing countries on a preferential basis. This possibility was clearly stated in the second paragraph of the ‘Enabling Clause’ which refers to “regional or global arrangements entered into among less-developed contracting parties for the mutual reduction or elimination of tariffs.”3
Brazil has raised serious concerns that a clause in the Economic Partnership Agreements (EPAs) between the European Union (EU) and African, Caribbean and Pacific (ACP) countries could pose a serious threat to improving trade between developing nations. The Latin American country, which voiced its fears during the WTO General Council in Geneva on February 5, pointed to the negative effects of the so-called ‘most-favoured-nation’ (MFN) clause included in both the Caribbean and interim EPAs.

This controversial MFN clause requires that any ACP country which has concluded a deal with Brussels must automatically extend to the EU “any more favourable treatment” (i.e. deeper market access) that the region or any of its member states grants to any other major trading economy in future free trade agreements (FTA). Under the terms of the regional MFN clause included in the Caribbean text, a ‘major trading economy’ is defined as any developed country which accounts for more than 1% of world merchandise exports, or groups of countries which collectively account for over 1.5%.2

It was swiftly denounced by a number of WTO members who saw it as putting in place a European strategy aimed at maintaining and increasing its share of a regional and continent-wide market that it had not yet been able to tap. Even before Brazil’s sensational intervention at a WTO session where it warned of the dangers of including the MFN clause - not only for the ACP but for all developing countries - this issue had been the subject of intense debate. From the Caribbean to the Pacific, regions in negotiation with the EU have been guarded and mistrustful of the prospect of including such a clause in their EPAs. The first fall-out was felt in the Pacific, where Australia made clear to the EU’s Trade Directorate that it disliked its inclusion and expressed its intention to open up regional discussions, along with New Zealand, in order to ensure that its exporters would not suffer.

Brazil claims EPAs hamper South-South trade

According to Brazil, this MFN requirement contradicts the WTO ‘Enabling Clause’, designed to increase developing country participation in global trade (see Box 1). The main objective of this clause was to increase trade between developing countries on a preferential basis. This possibility was clearly stated in the second paragraph of the ‘Enabling Clause’ which refers to “regional or global arrangements entered into among less-developed contracting parties for the mutual reduction or elimination of tariffs.”3

trade is with developing countries. Moreover, it is important to be aware that the EU is currently negotiating FTAs with Central America and the Andean Pact – Brazil’s natural market - with the strong likelihood that these will contain similar MFN provisions.
Others claim that Brazil has only received backing on the issue from other Latin American countries because they want to pressure the EU to grant greater concessions in their respective bilateral FTA negotiations. But this did not make the Brazilian position any less relevant.

Economic rules and obligations plus political and economic sovereignty

The MFN clause is the cornerstone of the principle of non-discrimination that underlies the entire international trading system: it is accepted by WTO members as it makes sense within this context. However, if it has stirred up controversy in the EPAs, it is because it has no place as part of them. Europe is within its rights to demand trading preferences from ACP countries on the same basis as those it grants to them. But the EU goes too far when it asks that the ACP gives in return all that it might ‘one day’ grant others, regardless of what those others might give them. This is certainly a ‘pre-emptive’ injustice for ACP countries and Brazil was justified to point it out.

But over and above the legal arguments, certain African leaders are making a more political point. In an open global economy, or as a consequence of the long drawn-out multilateral negotiations, States might well enter into more bilateral agreements between countries or groups of countries, granting each other ever more favourable terms. As such, signing a bilateral agreement containing an MFN clause might be risky.

A number of actors in Africa believe that the European demand is intended merely to quash any desire to diversify among trading partners - a process that the African countries have been engaged in for several years and that is beginning to bear fruit. Europe is therefore eyeing the increasing importance of trade between Africa and China - and with good reason.

The best-informed experts stress that the decline in trade between Europe and Africa on traditional postcolonial terms is structural in nature. Lulled by the comfort of its existing trade positions, its monopoly situations and its almost total stranglehold on the means of production and distribution in most African countries, Europe has had a brutal awakening and has realised that “the world of trade has changed drastically, and in future it must pay a fair price for its consumption, and it must do this in competition with others.”9

The rise of China

China is now the third biggest trading partner on the African continent. Even though Africa remains a minor partner for China, representing only 3% of Chinese global exports and 3.7% of its imports, the Asian giant replaced Germany as the continent’s biggest supplier in 2005.10

The current assessment is that the strengthening of trading links between Africa and China has coincided with an increase in the rate of growth in Africa. A number of studies show that overall, African countries are benefiting from the increased presence of China.12 Of course, some rightly point out, that this presence also poses a number of individual and collective risks for African countries. But it is up to Africa to decide which partner is more or less advantageous to them. This is why many African leaders find the European MFN clause both politically and strategically unacceptable.

ACP concerns

Given that many ACP will continue to negotiate a comprehensive EPA throughout 2008, the issue remains highly sensitive. Some members of SADC have voiced strong criticism of the clause, claiming that acceptance of such a provision has strong potential to negate the balance of the negotiated EPA.13 According to the ECOWAS Ministerial Committee, the MFN clause present in the Ivory Coast and Ghana interim agreements has been tabled under “issues to still discuss.”

Ultimately, it is up to the ACP to convince its European partner that it is inappropriate to include this clause in the EPA. This must be done through a vast campaign at the WTO and in other forums to rally remaining countries to this cause. Brazil has already chosen which camp it sits in. African public opinion has done so too. But the experience of the Caribbean and other ACP regions, where the MFN clause was strongly resisted yet imposed by the EU, is not encouraging.

Concrete implications?

Brazil is now expected to ask for the issue to be placed on the agenda for the next WTO General Council’s meeting. Concerns related to bilateral trade arrangements are then usually discussed at the WTO committee on Regional Trade Agreements. However, formal discussions can only happen once the EPAs have actually been notified to the WTO. For the moment, the ‘legal limbo’ surrounding the EPAs, none of which have been officially notified, would make it difficult to conduct a thorough examination of their provisions.

If the European Commission chooses to maintain its position on MFN, it will find it very difficult to claim that its only goal in the EPA is to seek compatibility with the WTO and to encourage integration within ACP regions.