Trade Negotiations Insights • Volume 9 • Number 1 • January 2010

EPA services negotiations: An ESA perspective

by Narainduth Boodoo

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Trade in services is bound to play a more prominent role in the economic development of the Eastern and Southern Africa (ESA) group of countries in the coming years. Unfortunately, however, not all countries in the region have so far realized the importance of services trade and its nexus with trade in goods. Special attention must also be given to strengthening capacity and improving competitiveness in African countries and providing appropriate flexibility in the sequencing of liberalisation commitments.

While services account for over 60% of GDP for some African countries, for most, the share varies between 30 and 50%. Those countries with a more developed services sector have tended to adopt an offensive stance in trade negotiations with the EU, while the majority of states have favoured a defensive posture. This latter group argues that liberalisation of services trade should be preceded by capacity building to develop the necessary regulatory framework, which is sorely lacking in many African countries, in addition to assisting them in developing supply capacity. Trade liberalisation is not, in their view, a magic wand that will automatically lead to the development of their nascent services sector, nor will it help increase exports of services in the future.

Services Negotiations in the EPA: Cotonou Agreement as a basis

This argument is substantiated by the provisions of Art 41(5) of Title II of the Cotonou Partnership Agreement, which stipulates that “the Community shall support the ACP states efforts to strengthen their capacity in the services sector. Particular attention shall be paid to services related to labour, business, distribution, finance, tourism, culture and construction and related engineering services with a view to enhancing their competiveness and thereby increasing the value and the volume of their trade in goods and services.”

Paragraph 4 of the same Article provides that the Parties (EU-ACP) “agree on the objective of extending under the Economic Partnership Agreements, and after they have acquired some experience in applying the Most Favoured Nation (MFN) treatment under GATS, their partnership to encompass the liberalisation of services in accordance with the provisions of GATS and particularly those relating to the participation of developing countries in liberalisation agreements.”

However, the point that has been emphasized by many is that strengthening capacity in the supply of services and enhancing competitiveness are prerequisites to be met before the ACP states actually engage in negotiations with the EU to progressively liberalise services trade.

Paragraph 3 of this same Article obligates the EU to “give sympathetic consideration to ACP States priorities for improvement in the EU Schedule with a view to meeting their specific interests.” This could be interpreted as an obligation on the EU to open up its market to the ACP countries without the latter having to reciprocate until such time that their capacity in the supply of services has been strengthened.

One of the many problems encountered in the negotiations so far is that the EU is not giving the required importance to the issue of strengthening capacity and improving competitiveness in ACP states. A commitment on the EU’s part to specify the amount of resources to be made available would therefore help unlock the current impasse in the negotiations. So far, however, there is a tendency on the part of the EU to focus only on trade liberalisation, while the development aspect has been sidetracked. This is the wrong approach. Market opening, however generous, will never deliver in the absence of the capacity to produce. It is a fact that the services sector is still at an infancy stage in many ESA countries. A binding commitment on the part of the EU to provide genuine support to develop the sector will send a strong signal that it is serious about encouraging a robust services sector in the ESA region. Unfortunately, this has yet to happen.

The ESA approach to the negotiations

The ESA approach to the negotiations is one based on the GATS architecture. Any attempt to adopt a different architecture based on a “modal approach” may lead to protracted negotiations. While the ESA proposal sets out common obligations and disciplines for the four modes of supply of services, the EU one establishes separate disciplines for each mode of supply and therefore departs from the GATS approach. So far both parties have agreed to work on a merged EC-ESA text, but unfortunately divergence on certain key elements like mutual recognition of qualifications and domestic regulations on the MFN clause continue to persist.

On mutual recognition, the ESA wants a binding commitment from the EU to recognise professional qualifications on the basis of an objective set of criteria. The EU, in contrast, is proposing a best endeavour clause that calls on the parties to encourage professional bodies to provide recommendations on mutual recognition. Regarding domestic regulations, the ESA wants a firm guarantee that measures relating to qualification requirements and procedures do not constitute disguised restrictions to trade. It further proposes that the two parties consult before the adoption of any new regulation on trade in services, amongst others.

The MFN clause remains one of the most contested proposals. According to this clause, any more favourable treatment on trade in services provided to a third party by either the EU or the ESA should automatically be extended to the other party. A similar proposal in the trade in goods chapter had given rise to severe criticism on account of its adverse impact on South-South cooperation, given that the ESA countries would have to automatically extend to the EU any more preferential treatment granted to countries like China, India or Brazil. The MFN clause remains highly controversial and any attempt to impose this clause may result into a stalemate.

The ESA is also expecting an ambitious commitment on the movement of natural persons with few strings attached. The EU has to recognise that so far the only sector where the ESA might have a comparative advantage is on mode 4 (movement of natural persons). Importantly, this is not in the narrow sense, as defined in the GATS, of the temporary movement of professionals in a clearly defined context, but rather in terms of skilled, semi skilled and unskilled workers which we have termed “enhanced mode 4”. The ESA position is for the EC to agree to the movement of natural persons in this broader category of labour to work in the EU temporarily.

As the ESA group consists predominately of Least Developed Countries (LDCs), it is crucial that they are provided with the necessary flexibility to sequence liberalisation in line with their national development plans and priorities. Indeed, some ESA countries may not be able to make any commitments on services liberalisation in the short term. All these concerns will have to be accommodated to ensure that the process is inclusive and preserves the unity of the group.

Furthermore, it is important to note that all ESA countries are also COMESA member states. COMESA has also launched its services negotiations and intends to liberalise the intra-COMESA services sector. The agenda is very ambitious, given the recognized importance of the services sector for the region. A framework agreement has already been agreed and key services sectors have also been identified. Sector specific negotiations are expected to begin this year. It is therefore believed by many that there must be an appropriate sequencing between the regional process and liberalisation with third countries if COMESA wants to develop an efficient and ambitious services market. While some tend to believe that any more ambitious agreement with the EC will undermine the regional integration process, those that have an offensive agenda argue that the EPA process and the regional initiative can be largely complementary and that the EPA process can be used as a strategic leverage to further develop the regional market and attract much needed investment to the region.

Notwithstanding the above, it is crucial that the ESA group concludes a full and comprehensive EPA that encapsulates services. The services sector can play a major role in unlocking the development potential of the ESA countries by supporting virtually all other sectors of the economy, be it agriculture, industry or the mining sector. Without adequate banking, transport or communication services, for instance, it is impossible to trade efficiently in agriculture or industrial goods. Therefore, an agreement to liberalise trade in services with the EU on a progressive basis coupled with financial assistance to develop the sector can only be a win-win situation. Hopefully, with some flexibility in the negotiations, we can achieve this.

Dr. Narainduth Boodhoo is the Deputy Director of Trade Policy, Ministry of Foreign Affairs, International Trade and Cooperation, Mauritius. He is also the Chairperson of the ESA Negotiating Group on Trade in Services.