Trade Negotiations Insights • Volume 9 • Number 2 • February 2010

Creating a pro-development EU trade policy in a post-preference world

by European Think-Tanks Group

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The European Union (EU) is losing the faculties with which it has created an integrated trade and development policy. But these can be regenerated: aspects of current policy can be reinforced whilst they still have some vigour and new tools, rooted in EU-level policies, can be provided. Yet time is of the essence. Unless the European Commission (EC) takes action now, the foundations on which a specifically ‘European’ position has been built could disappear altogether.

The EU’s integration of trade and development has been rooted in its responsibility for policy on most aspects of trade in goods and substantial, though shared, responsibility for other aspects of trade policy. Over the years, the EU has used this responsibility to provide commercial advantages to exporters in many poor and vulnerable states, most notably to the African, Caribbean and Pacific (ACP) States. These advantages have been made possible by the residual import controls maintained on some very competitive suppliers[ii]. As the EU continues to liberalise, whether multilaterally through the Doha Development Round or via Regional Trade Agreements (RTAs), this preferential treatment will disappear and so will the commercial advantages of its web of trade preferences.

Without new tools, rooted in EU-level policies, EU development policy will lose a fundamental link with trade. It can (and should) offer Aid for Trade (AfT) - but so can all the 27 member states’ development policies. What could form the new link to allow the EU institutions to continue projecting a distinctive ‘European’ position on trade and development? The answer is to be found in the powers that member states’ find it increasingly necessary to develop at a European level to ensure a barrier-free internal market. On this basis, the EC can revitalise existing preferences and create new ones in areas in which Europe does not yet extend free trade to all its partners. The EU can also develop more radical approaches in its delivery of AfT. While such an endeavour requires greater policy coherence and coordination within the EU, the institutional innovations of the Lisbon Treaty can play a major role in facilitating this process.

The erosion of preferences

Commercially useful EU trade preferences now apply to only a very small number of products - such as sugar, rice, horticulture and some clothing - exported by few countries. This is a positive consequence of European liberalisation. But it also means an end to policies that have allowed poorer countries to maintain or establish themselves in the European market without being threatened by more competitive producers. This is illustrated by the uneven take-up of EPAs: the countries that have signed include almost all the states that have a significant export dependence on preferences under the Cotonou Partnership Agreement and very few that do not.

Clothing - the only signiﬁcant manufacture for which preferences are still commercially valuable - will be the ﬁrst to go. By the time the WTO-approved transitional safeguards on China’s exports expire in 2013, the remaining tariff preferences may well have been eroded further by a conclusion to Doha or RTAs with India and Mercosur. Moreover, the next phase of reform to the Common Agricultural Policy (CAP) in 2013 could substantially alter the value of the remaining agricultural preferences if they have not already been eroded by RTAs that increase competition on the European market.

This loss of preferences has come at a bad time for many preference-dependent Least Developed Countries (LDCs) and Small, Vulnerable Economies (SVEs). These nations have been hit more severely than the average developing country by the global financial crisis, which illustrates the importance of trade and how much remains to be done to ensure that it serves development.

Breathing new life into preferences

Several EU trade-policy changes would allow a larger number of countries to benefit more substantially from those preferences that remain potentially useful. The most important of these are to the Rules of Origin (ROO) which determine whether or not a country can take advantage in practice of a preference that exists on paper. The fundamental problem with the EU’s ROO is that they do not take account of the radical globalisation of production in recent decades. They still require potential recipients to undertake levels of processing that are no longer commercially viable especially in states with small markets. The EPAs have introduced a very important improvement in this respect to the rules on clothing but more remains to be done to update the EU’s ROO - such as by allowing the use of more imported food inputs, which would help boost exports of processed foods[iii].

There is also scope to offer trade preferences on services and trade-related policy in all cases in which the EU is not yet ready to open up to imports from all sources, but is willing to liberalise towards certain developing countries. It has been possible to meet the second condition for goods because the recipients were either traditional suppliers of otherwise sensitive items or were too small to supply politically unacceptable volumes. Over time, these preferences have been extended to ever more competitive suppliers, allowing the EU to control the speed at which European producers had to adjust to import competition. Does the same apply to services and other aspects of trade policy? The EPAs certainly provide a framework within which to find out. For example, favourable quotas within EPAs for services exports under Mode 4 of the GATS (movement of persons), modelled on the idea of multilateral quotas for LDCs currently circulating, would be helpful.

A more radical way forward: beyond Aid for Trade

Although the EU institutions are simply a large actor in the efforts of 28 European donors, the existence of the trade framework created by EPAs, Euro-Med and future RTAs will facilitate the creation of an innovative programme. For instance, the EPAs provide an excellent opportunity to re-orientate aid. They provide a framework to focus AfT on the ‘three Cs’ that underpin successful integration into the world market: competitive production of goods and services reflecting consumer tastes, exported to countries with buoyant demand. However, diversifying both products and markets requires heavy investment not only in infrastructure (vital though it is) but also directly to firms and in knowledge management (for example, related to market access requirements, and product or process standards).

The EU should build this in to its own decisions. One way to prepare countries for the erosion of trade preferences is to take this into account when the EU makes its own tariff-cutting commitments. There have been proposals, for example, to backload cuts on developmentally sensitive sectors and use the revenues generated during the phase-in to provide predictable compensation for preference erosion. The harmonisation of EU standards needed to remove internal trade barriers also creates an opportunity to do so in a way that provides help to poor country exporters. The new rules, for example, should be framed so as to recognise supply realities in these countries.

Help the private sector move up the value-chain

It is private rather than public rules that are now the dominant influence on what Europe imports from developing countries and how much producers gain from the trade. Private voluntary standards, such as the Global Partnership for Good Agricultural Practice (GlobalGAP), include standards that go beyond the EU’s harmonised mandatory market access requirements. Most large fresh fruit and vegetable retailers do not even consider buying from producers who do not adhere to the private code on ‘good agricultural practices’.

What is wrong with that? Setting appropriate safety, labour or environmental standards must be good for consumers and for workers. The problem is that compliance costs usually falls on the producers. This reduces trade gains for developing countries and excludes small operators unable to meet the high fixed costs[iv]. What is needed is a framework of public regulation that encourages pro-development private rules (for example, by making clear when labels that appear to support development actually risk the opposite).

The new EC has an opportunity to use its powers over internal market regulation to benefit development. Particularly when combined with AfT (perhaps within an EPA framework), it offers a distinctive EU approach to trade and development that also offers a unique solution to the issue of preference erosion. It may also have positive spillover effects as ACP suppliers are better able to export to other high-standard markets.

Using the Lisbon Treaty to improve policy coherence and coordination

Widening the scope of pro-development trade policies in this way reinforces the need to improve coherence and coordination - a process that can be supported under the new institutions created by the Lisbon Treaty, most notably the High Representative for Foreign Affairs and Security Policy. With the Lisbon Treaty, the EC can engage more actively and systematically with member states on external relations towards greater complementarity.

Nonetheless, it is a challenging task. Each body has its own well-embedded mode of operation. Ensuring consistency at the EU level - as the Lisbon Treaty demands - will require that all EC directorates and relevant stakeholders concerned be consulted at an early stage and involved in the discussions. The EU’s approach towards the promotion of regional integration in Africa may also need to be rethought in order to become more supportive of endogenous integration efforts, including those between regions.

One step is to build on existing forums that bring together trade and development specialists from the Member States and the EC, such as the informal trade and development experts group of the ex-Article 133 (now Trade Policy) Committee. But these discussions must also feed into the formal arena. The imminent European External Action Service (EEAS) can facilitate a fully joined-up approach. By working more concretely at the level of implementation, it can help feed the perspectives of partners into European policy processes. This may contribute to the task of ensuring that trade and regional integration are given adequate importance in both the Union’s policies and in its delegations’ operations, and that both are supportive of local initiatives.

[i] This article draws from Chapter 7 of the joint publication “New challenges, new beginnings: Next steps in European Development Cooperation” produced in February 2010 by DIE, ECDPM, FRIDE and ODI and is accessible on the institutions’ respective websites.

[ii] This is a major reason why the policy has been controversial.

[iii] Stevens, C. Meyn, M. and Kennan, J. (2008), ‘EU duty- and quota-free market access - what is it worth for ACP countries in 2008 and beyond?’, report prepared for DFID. London: Overseas Development Institute. Available at: http://www.odi.org.uk/resources/ download/3157.pdf

[iv] For a review of the impact of de facto mandatory standards for agricultural producers in poor countries see: Ellis, K., Keane, J. (2008), ‘A Review of Ethical Standards and Labels: Is there a gap in the market for a new Good for Development label?’, ODI Working Paper 297, London: Overseas Development Institute. Available at: http://www.odi.org.uk/resources/ download/2457.pdf