A recent European Research Office (ERO) briefing considers the issues facing Botswana, Lesotho, Namibia and Swaziland in the EPA negotiations in the light of their membership of the Southern African Customs Union and the conclusion of the EU-South Africa Trade, Development and Co-operation Agreement.
It lists the options theoretically open to these countries in developing their future relations with the EU and explains why none of them are in fact open. This is because of the EU-South Africa TDCA and the fact that the BLNS countries are already de facto members of a free-trade area agreement with the EU as a result of their membership of the Southern African Customs Union. In this context the briefing evaluates the options that are open to BLNS governments in developing their future relations with the EU.
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Another ERO paper looks at the current profile of Botswana's exports to the EU, the issues arising in future market-access negotiations and the impact of CAP reform on these issues. It then goes on to consider the challenge of reciprocity facing Botswana under the EU-South Africa TDCA and asks what measures can be established to help Botswana respond to the challenge. It reviews the fiscal implications of the EU-South Africa TDCA for Botswana and ends with a review of the possible scope of agricultural safeguard provisions in the context of on-going CAP reform.
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This ERO paper looks at the current profile of Swaziland's exports to the EU, the issues arising in future market-access negotiations and the impact of CAP reform on these issues. It highlights the importance of developments of in the EU sugar sector to the national economic life of Swaziland and shows how a 25% reduction in the EU sugar price would reduce Swaziland's export earnings to the EU by around 19% and explains how wider developments in the sugar-products sector have undermined Swaziland's efforts to develop and diversify its sugar sector.
It then goes on to consider the challenge of reciprocity facing Swaziland under the EU-South Africa TDCA and asks what measures can be established to help Swaziland respond to the challenge. It reviews the fiscal implications of the EU-South Africa TDCA for Swaziland, showing that a 14% reduction in government revenues is likely. It ends with a review of the possible scope of agricultural safeguard provisions in the context of on-going CAP reform.
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This ERO paper looks at the current profile of Namibia's exports to the EU, the issues arising in future market-access negotiations and the impact of CAP reform on these issues. It highlights the extent to which CAP reform has already significantly eroded the value of trade preferences in the beef sector. It then goes on to consider the challenge of reciprocity facing Namibia under the EU-South Africa TDCA and asks what measures can be established to help Namibia respond to the challenge. It reviews the fiscal implications of the EU-South Africa TDCA for Namibia, showing that a 8.6% reduction in government revenues is likely. It ends with reviews of Namibia's experience of CAP distortions in the beef sector, and the possible scope of agricultural safeguard provisions in the context of on-going CAP reform.
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This ERO paper looks at the current profile of Lesotho's exports to the EU, highlighting how, unlike in other BLNS economies, issues in Lesotho's access to the EU market will largely need to be addressed through the development of the rules of origin to be applied under the EBA initiative. It does, however, also look at the likely impact of CAP reform on the attractiveness of EU agricultural markets.
It then goes on to consider the challenge of reciprocity facing Lesotho under the EU-South Africa TDCA and asks what measures can be established to help Lesotho respond to the challenge. It reviews the fiscal implications of the EU-South Africa TDCA for Lesotho, showing that a 12.9% reduction in government revenues is likely. The paper ends by reviewing the possible scope for safeguard provisions in areas of importance to Lesotho.
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With a firm time-frame for the introduction of free trade with the EU now established for the countries of the Southern African Customs Union, and with the BLNS countries facing a free-trade area with the EU by 2012, the experience of these countries will provide important insights into the kind of issues which other ACP countries will face over the period from 2008 to 2020. In the case of Lesotho it also highlights the issues which least developed ACP countries now face. Any solutions the BLNS can find to the problems created by moves towards free trade with the EU will offer important precedents for other ACP countries.
This ERO paper explores in some detail the options open to BLNS governments in the light of the existence of the EU-South Africa TDCA. Having discounted the nominal options open to all ACP countries the paper explores three options:
- de facto incorporation of the BLNS into the EU-SA TDCA;
- the negotiated accession of the BLNS to the EU-SA TDCA;
- the negotiation by the BLNS of a 'parallel' agreement.
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While the issues faced in the BLNS hold important lessons for the broader ACP group, the specific institutional framework within which the BLNS will need to address the issues faced will differ considerably from that of other ACP countries. This arises form the fact that the EU-South Africa Trade, Development and Co-operation Agreement is already in place and under implementation, and therefore the major problem confronting the governments of the BLNS is how to ensure that their specific needs and interests are fully addressed in a context which is unique amongst ACP countries.
A memorandum setting out the positive impact of EU enlargement on third countries was released by the European Commission on March 27th 2003. It emphasised that from the day of accession the new member states would have to apply the EU's common commercial policy in its entirety, including the common external tariff, EU preferential trade agreements, WTO commitments and EU trade defence mechanisms. Access to an EU market of 455 million consumers operating under one single regulatory regime, was seen as the main benefit. With the new EU member states currently having average weighted tariffs higher than in the EU, particularly in the case of agricultural products, the main external benefit for third countries would be lower tariffs. EU standards on services, investment, subsidies, intellectual property rights and public procurement will also apply from the day of accession of the new members.
- European Commission memo (MEMO/03/72 - 27/03/2003)
Lower tariffs on agricultural exports in acceding countries would be the main benefit which ACP countries would gain from enlargement.
The European Commission released a 200-page paper reviewing its six impact analysis studies in February 2003. The conclusions drawn relate to what would have been the case without the implementation of the Commission's reform proposals. It noted that the 'results should not be interpreted as changes relative to the current situation in 2003'. The Commission also noted that in DG Agriculture's analysis it was assumed that de-coupled payments would have 'no impact on production decisions of farmers'.
These case studies suggested the following impacts at the product level, compared to the situation which would prevail in 2009 if no reforms were implemented:
an 8.3% average price reduction;
a reduction in total cereals production, with rye and durum wheat being the most severely affected;
slower growth in cereals consumption;
a significant fall in EU cereal exports;
a significant drop in cereals stocks.
a decline in beef production of between 3% and 8%;
a rise in producer prices of between 6% and 8%;
a fall in domestic consumption of between 1% and 3%.
Sheep: a decline in sheep production of between 3% and 6%;
a rise in producer prices by between 8% and 12%;
a fall in domestic consumption of 3%.
In the rice sector the assessments of the impact of reform varied widely. Nevertheless a 50% reduction in the support price for rice is projected to translate into a sharp decline in EU domestic prices towards world market price levels. This, it is felt, would boost the competitiveness of EU rice, while reducing the attractiveness of the EU as an export market. While a short-term surge in rice imports is foreseen, by 2009 it is envisaged that rice imports will be a third to a tenth of the projected level without the implementation of rice-sector reform. With sharp price declines a strong increase in rice consumption is foreseen.
In terms of agricultural incomes a favourable though limited impact is foreseen compared to the baseline. The February paper explains the various models used and sets out in detail the findings of each study under different scenarios. Wide variations in trends in production, consumption, exports and price levels arise from the different assumptions and techniques used in the various modelling exercises.
On March 25th 2003 two new impact analyses of the Commission's proposals for further CAP reform were published. According to the Commission the studies show that the proposal to sever the link between production and subsidy (decoupling) would 'favour the extensification of production and would secure significant income gains for EU farmers'. At the sectoral level the Commission maintains that the studies show for the EU-15:
a 2% fall in cereal production;
a 2.7% decline in meat production;
a 2% rise in milk production;
an increase in farm incomes of 8.5% compared to 2001.
Unlike the case with the February paper this March paper does not explicitly set out the assumptions on which the conclusions are based or explain what are the baseline assumptions which are referred to. It restricts itself to bold statements on the level of decline of EU production under the reform scenario.
- Full text of the Commission's review of six impact studies (February 2003)
- Full text of the Commission's Impact Analysis (March 2003)
- Commission press release on Impact Analysis (IP/03/429 - 25/03/2003)
It should be noted that when talking of trends in production the European Commission calculates the change with reference to the hypothetical level of production which would be attained by 2009 in the absence of reform. However when looking at trends in income, the impact analysis compares the post reform situation to the current level of farm incomes. If the basis for comparison for production levels were current levels of production or predicted production levels at the outset of reform then the conclusions would be somewhat different, with EU-15 production in 2009 being projected as higher than at the beginning of the reform period.
For example, in the rice sector, by comparing production in 2009 post reform with the hypothetical level of production in 2009 without the implementation of the proposed reforms, the Commission concludes that a 14% decline in EU production will occur. However the European Commission's own figures annexed to the Impact Analysis show EU rice production increasing from 1,388,000 tonnes in 2004/05 to 1,476,000 tonnes in 2009/10, an increase of over 6% rather than a decrease of 14% (this represents a 2.8% increase in production compared to the levels of milled production in 2000/01).
Similar, though less pronounced trends are apparent for other cereals. It is this reality of increased EU production relative to levels at the beginning of the reform period which is important to ACP countries, since it is likely to mean increased export competition from the EU at prices lower than those currently prevailing.
Data on the agricultural situation in the EU from 2002 is available on the Commission website. This provides figures on production, exports by product which provides the current baseline against which the impact of implementation of CAP mid term review proposals can be judged.
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EU farmer repeated their opposition to key elements of the Commission's CAP reform proposals on April 11th 2003, maintaining they would only accept minor modifications before 2007. Farmers leaders accepted some degree of modulation but felt on-going reform was generating too much uncertainty. Strong opposition was expressed to decoupling of farm aid payments, a key component of the reform package. In the face of this opposition some member states are advocating partial decoupling.
- Press Report
Partial decoupling is likely to offer the way forward for CAP reform. This however is likely to act as a stimulus to EU production, since if production is threatened member states can call for product-specific support.
Addressing the 40th Anniversary Conference of Agra Europe on March 31st 2003, the Agricultural Commissioner Franz Fischler expressed a lack of concern over the failure to meet the March 31st deadline on agricultural modalities, emphasising instead the need to 'keep the process moving' so that an agreement can be reached in Cancun in September.
He reiterated the principal objectives of the negotiations on agriculture which are to 'establish a fair and market-oriented trading system that corrects and prevents restrictions and distortions in world agricultural markets. Commissioner Fischler expressed disappointment at the revised Harbinson draft, particularly with regard to:
the absence of non-trade concerns;
the absence of a 'peace clause';
the inadequate provision for disciplining certain types of export subsidy (export credits);
the failure to tighten the de minimus loophole;
the lack of balance in the treatment of developing countries, with the weaker and more vulnerable developing countries gaining little and facing the erosion of their preferential access.
Commissioner Fischler claimed that the EU has progressively opened its markets to third-country exports in recent years and has continued to move away from the most trade-distorting forms of support.
- Agra Europe Speech (SPEECH/03/166 - 31/03/2003)
- Fischler Press Release (IP/03/457 -31/03/2003)
- Lamy Press Statement (IP/03/468 -01/04/2003)
The cornerstone of the Commission's critique of the Harbinson proposal is securing acceptance of EU definitions of what constitutes trade distorting, less trade distorting and non-trade distorting forms of support . The Commission's aim is to secure universal acceptance of its definitions, thereby giving the EU maximum lee-way within which to pursue its chosen path for agricultural sector reform, while constraining the agricultural support policies of other OECD countries. The emphasis on ensuring balance in the treatment of developing countries by insulating vulnerable economies from preference erosion, appears to have as much to do with establishing a defence against Australian and Brazilian challenges to the EU sugar regime as the actual maintenance of trade preferences for preferred suppliers such as the ACP. This analysis is supported by the fact that at the present time the process of CAP reform itself is actually a greater threat to the erosion of the value of ACP trade preferences than the process of multilateral trade liberalisation. (Evidence for this can be seen in developments in both the beef sector, where EU prices for Southern African beef are down 28-30% compared to 1999, and impending developments in the rice sector, where EU market prices are set to fall by around 34% in the course of 2004. Both these developments will significantly erode the value of existing ACP trade preferences).
The European Commission requested Australia on March 31st to enter into formal WTO consultations on its quarantine system for imports of agricultural products. This move is based on the EU belief that the Australian system successfully restricts imports.
- Press Release (IP/03/464 - 31/03/2003)
Any successful EU challenge to the Australian import regime could open up new market opportunities for Pacific ACP countries in Australia.
At the EU Agricultural Council meeting on April 8th 2003 the French initiative for sub-Saharan Africa was discussed. The Commission expressed the view that it is important to improve preferential market access for sub-Saharan African countries but felt that this required careful scrutiny. The Commission also welcomed the French proposal for a moratorium on all forms of export refunds for goods destined for Africa.
- Results of the EU Council meeting (MEMO/03/82 -09/04/2003)
In response to this initiative the ACP Group could usefully put together a dossier of specific market-access improvements which ACP states have been seeking under Declaration XXII and other agricultural trade provisions of the Cotonou Agreement. Such a dossier could be presented to the EU Council of Ministers in the context of further discussions of the French initiative. Possible improvements might include the ending of all quota restrictions on ACP exports of such products as grapes and lamb.
It should be borne in mind that the Commission's welcome of a moratorium on export refunds to Africa was conditional upon it being applied by all countries to all types of export support including export credits, food aid and the operations of state enterprises. As a consequence little is likely to flow from the Commission's apparent warm response.
In addressing the Agra Europe Conference at the end of March 2003 Commissioner Fischler set out the likely impact of reform on the beef sector, where production was expected to decrease by 3% by 2009 while producer prices were expected to rise by 7%, leaving EU beef farmers better off. He expressed the view that this scenario was far better than having higher interventions stocks, more export refund expenditures, lower beef prices and a continued incentive to produce intensively.
- Agra Europe Speech (SPEECH/03/166 - 31/03/2003)
This suggest that ACP beef suppliers can expect some recovery in EU beef prices over the longer run (though this is likely to be marginal compared to the 28% decline in prices experienced since 1999).
The 2004 EU budget has introduced a 4% increase in funding in the beef sector. This increase will support beef export refunds and various premium schemes. Suckler cow and beef special premium schemes will be increased by around 10%, while the slaughter premium is set to rise 45%. There will also be an extra 14% for extensification schemes.
- Press report March 19th 2003
To the extent that the increased budget allows an increase in export refunds competition with ACP suppliers on domestic and third country markets could increase.
Press reports indicate that the governments land reform programme has led to a virtual collapse of the commercial beef sector. Zimbabwe used to earn around US$50 million per annum from commercial beef exports, with 80% of this meat coming from the commercial beef sector. However the commercial herd has now shrunk by some 60% in recent years to less than half a million head of cattle. Not only have export markets in Europe been lost but there is now a shortage of beef on local markets. Commentators suggest a recovery in commercial beef production could take up to ten years.
- Press report
Whether the Zimbabwean beef industry will ever export to the EU again is an open question. The recent granting of duty-free access to ACP least-developed country beef exports under the 'everything but arms' initiative has not led to any new exports, since SPS standards for beef now constitute a significant barrier to trade. Many of the arrangements for SPS compliance in Zimbabwe will need to be rebuilt from scratch, and the investment costs that this entails could make exports to the EU unprofitable in the light of the declining prices in EU beef markets since 1999.
Options for reform of the EU sugar regime were reported by the UK Sugar Traders website on March 25th 2003 following receipt of the first of two studies. These studies are intended to lay the basis for Commission proposals in July 2003 for reform of the EU Sugar regime. This first report raises doubts about the data used as the basis for the modelling exercises undertaken within the framework of the study, including doubts about whether the model used gives an accurate guide to the likely impact on sugar-sector reform on ACP countries and EBA sugar beneficiaries. The EC's own review, looking at four options for the future of the sugar regime, can be accessed via the Sugar Traders website.
The first option considered is the 'status quo' option involving extending the current regulatory framework beyond June 30th 2006. In the context of the EBA, WTO limits on export refunds and a successful challenge to the EU's 'C' exports, the report suggests that sugar production in Europe would be gradually abandoned if the 'status quo' is maintained.
The second option considered is a 'liberalisation' option, involving 'abolishing domestic price support for sugar and beet, as well as ending production quotas and quantitative and tariff restrictions on trade'. It concludes that 'in the absence of any protection, domestic sugar prices would fall into line with world market prices. At that price level the European market would remain attractive to the most competitive exporters, such as Brazil. Their exports would come to replace the majority of preferential exports from ACP countries, India and LDCs, whose production costs are considerably higher'. It is concluded that the 'liberalisation' option would 'lead to a reduction in sources of supply, which would expose the European and world markets more directly to the consequences of a single large exporter country's climatic, economic and political risks.' If EU sugar farmers were to be compensated in line with CAP reform in other sectors then the budgetary costs would prove to be very high given the scale of the price reductions which would occur. In addition the report points out 'it would be necessary to examine the need for measures to alleviate the effects of the drastic fall in income derived from preferential imports at guaranteed prices by ACP countries and LDCs'. The report points out that 'if liberalisation were implemented gradually, with a sufficiently long transitional period, the accompanying measures could be more limited; in particular, it would be possible for them not to include financial compensation'. In terms of down-stream linkages, European manufacturers would find their profitability severely jeopardised, with closure of isolated production units leading to a complete cessation of beet cultivation in some areas.
A third option considered is that of returning to a system of 'fixed quotas'. This would require going back on commitments made under the EBA. According to the report 'returning to fixed quotas would entail considerably lower production quotas than at present. Preferential imports would also be subjected to quotas again. The quotas to be negotiated would without doubt have to consolidate the highest export levels attained while taking into account the investment entered into by a number of partners with a view to accessing the European market from 2009 onwards'. Under a return to the 'fixed quotas' option continued tariff protection would be required and, domestic prices would remain lucratively high, which would be good news for some ACP countries. However, it could allow for 'a moderate and gradual fall in guaranteed prices'. Indeed, 'if the reduction in prices were linked to the introduction of direct income subsidies, the option could bring the regulatory system for sugar gradually into line with the support arrangements provided for by the reformed CAP'.
A fourth option considered is the 'fall in price' option, modelled on the current rice-sector reform. In this option the Commission points out that 'reducing the domestic price would make it possible to satisfy the external constraints while exerting less pressure on the production level. Depending on the price-level chosen, the European market would become less attractive for quite a large proportion of exporters with high production costs - including a significant proportion of ACP countries'. Under this option the guaranteed price for beet would be abolished. Prices would be determined by negotiations between farmers and millers. To compensate farmers, direct support de-coupled from production would be introduced. However it is recognised that some form of production-linked payments would probably be needed to maintain refineries in certain areas (giving rise to a partial decoupled system). Under this option it is argued that 'in the interests of fairness and to reduce its budgetary cost, direct aid could be modulated and fall rapidly beyond a certain size of holding or amount of direct payment'. In addition 'production quotas would be abolished gradually once the levels of imports and production had stabilised, or could be abolished immediately if part of the compensation per hectare remained linked to the introduction of a maximum area.' Again this option would have to include compensation to ACP sugar suppliers.
- UK Sugar Traders report (April 14th 2003)
- European Commission summary
Any option allowing the regulatory system for sugar to be brought into line with that applied to arable crops would be consistent with the Commission's desire to bring sugar into the single decoupled farm payment scheme. Some decline in EU sugar prices does appear to be inevitable regardless of the actual option pursued by the European Commission.
The April SKILS sugar-sector news review covers Kenya's restructuring of its sugar sector, the impending demise of the Barbados sugar sector, new sugar sector investments in Zambia, the sale of governments share in sugar estates in Uganda, as well as developments in Brazil and within the EU.
USDA projections suggest that there will be a 4% decline in global rice production this year. Predictions for global rice stocks suggest levels 21% below a year earlier and the lowest since 1987/88. A decline in Indian rice production is the major factor in this global decline, with the 2002/03 rice forecast showing the lowest output in India since 1992/93. Continued drought in Venezuela also saw production down by a third, while Mexican production saw an even steeper decline (44%) caused by low prices and reduced use of inputs.
However, US rice exports are projected at a record 109 million cwt. The report also contains details of price trends and country-by-country production and consumption trends.
Expanding US rice exports are bad news for ACP Caribbean rice producers who are currently looking for new regional markets to replace the EU market, where prices are set to fall by over a third by 2004 (and where production is set to increase despite these price reductions as a result of the shift over to a direct aid payments system of farm support in the rice sector).
The EC called on coffee-producing countries on April 11th 2003 to diversify in response to the 30-year low in coffee prices. Indeed, the Commission sees this as a pressing need in all traditional commodity sectors, where 'alternative non-traditional product chains' need to be developed. It pointed out that countries affected by the commodity crisis could apply for compensation under an EU fund set up for countries whose export earnings are being harmed.
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Calling on coffee-dependent economies to diversify raises the question: into what products should ACP producers diversif "yt has been diversification into coffee by countries such as Vietnam which has contributed to the depth of the coffee crisis. With diversification being seen as a challenge across a range of traditional commodity exports, a situation could well arise where non-traditional agricultural product markets (such as cut flowers and horticultural products) become glutted, leading to price collapse and further calls for diversification. The challenge faced in this context is compounded by the EU's CAP-reform policies which are systematically lowering prices for temperate agricultural products on EU markets.
It needs to be borne in mind that small-scale producers face much greater difficulty in diversifying, as their marketing opportunities are severely limited. There are growing call for the European Commission to make more targeted assistance available to identify new market opportunities for small-scale producers. This needs to focus on the specific supply-side constraints they face by virtue of the small scale of their production and their distance from reliable transport routes.
The USDA 2002/03 cotton forecast projects record global cotton use for the fourth consecutive year. World cotton consumption has risen 50% since 1981/82, largely reflecting growth in developing country markets, such as China. China's share of world cotton consumption has risen from 22% to 29%, and it expects to consume 50% more cotton this year than in 1998/99. This year will be the first year of significant net imports into China since 1997/98, with demand previously having been supplied from domestic production. While, in the face of lower cotton prices, production in India and Pakistan (two other major producer/consumers) was expected to be lower this year, rising Chinese import demand and growing world consumption has seen cotton prices rising 45% in the year up to March 2003.
- USDA Cotton and Wool Outlook (April 2003)
Rising global consumption of cotton driven by demand in China, India and Pakistan stands in stark contrast to declining consumption of cotton in developed country markets such as the EU, USA and Japan. The changing geographical profile of world demand has important implications for ACP cotton producers, with developments in Chinese production and consumption increasing price volatility. This price volatility falls particularly heavily on ACP producers since producers in developed countries such as the EU and US are insulated from price fluctuations by agricultural support policies which maintain high levels of production despite declining global prices.