EPA negotiations general: Executive brief

Contents

Roots in the Cotonou Agreement

The scope of EPAs

Flexibility and the WTO

Addressing the external effects of the CAP

Market access for ACP agricultural products

Other EPA issues impacting on ACP agriculture

Least-developed countries and EPAs

The broad EU approach to EPA negotiations

The broad ACP approach to EPA negotiations

The structure of the negotiations

Progress of the negotiations up to August 2003

Overview of the outcome of Phase 1

The outcome of Phase 1 ACP-EU negotiations

• Introduction
• Market Access
• Agriculture and Fisheries Issues
• Development Issues
• Trade in Services
• Trade-Related Areas
• Legal Issues

The conduct of Phase 2 negotiations

Roots in the Cotonou Agreement

The European Commission's approach to Economic Partnership Agreement negotiations is firmly rooted in the provisions of the Cotonou Agreement. Indeed, the Commission maintains that EPAs should be subject to the overall objectives of the Cotonou Agreement and should contribute in particular to:

• the objectives of poverty eradication;
• sustainable development; and
• the gradual integration of ACP countries into the world economy.

The ACP are broadly in agreement on the basic objectives, although it differs significantly from the European Commission on where the emphasis is placed. For the Commission, integration into the world economy is seen as the driving force for poverty eradication and sustainable development, rather than a product of the transformation of ACP economies along more poverty-focussed and sustainable lines.

The scope of EPAs

The main pillar of the proposed Economic Partnership Agreements as envisaged by the Commission is the establishment of programmes of tariff reductions which, over a 10- to 12-year period, will lead to the creation of a free-trade area in line with Article XXIV of the GATT (covering essentially all trade). ACP countries will be allowed to exclude certain products provided that substantially all trade is liberalised (around 90%) by the end of the transition period. A longer transition period could be allowed, but only under exceptional circumstances.

In order to accommodate the needs of least-developed countries (LDCs) the Commission is willing to consider 'variable implementation of tariff phase-downs' among ACP countries that are signatories to the same EPA. For example LDCs could lower tariffs on imports from the EU at a slower rate than their non-least-developed country neighbours which participate in the same EPA.

The second pillar of the proposed economic partnership agreements is the removal of market segmentation, through the simplification and reduction of administrative obstacles to trade.

Thirdly, EPAs will cover trade-related areas. Negotiations will cover such issues as: liberalisation of capital movements; non-discrimination in investment; opening up of public procurement at all levels; mutual recognition agreements for various standards and the negotiation of equivalency agreement for sanitary and phytosanitary (SPS) standards.

Finally EPA negotiations will cover trade in services, seeking to build on existing international agreements.

For ACP countries to benefit fully from EPAs, the European Commission has recognised the need for appropriate 'flanking policies' and the adoption of appropriate development strategies. The Commission has also acknowledged that assistance is required to address infrastructural problems in ACP countries and the challenge of fiscal restructuring arising from the elimination of customs duties on EU imports. However, the Commission believes that these issues can be addressed within the existing institutional arrangements for managing and deploying EDF resources.

From the ACP perspective it is more important that the Cotonou Agreement requires that EPA negotiations should:

• be undertaken with ACP countries which consider themselves in a position to do so, at the level they consider appropriate and in accordance with the procedures agreed by the ACP group in the light of regional integration processes in the ACP;
• be aimed at promoting economic development, the reduction and eventual eradication of poverty and the smooth and gradual integration of ACP States into the world economy;
• build on regional integration initiatives and 'not undermine the regional integration processes and efforts'.

Flexibility and the WTO

The European Commission maintains that it is committed to accommodating the different levels of development of ACP countries and to adopting a differentiated approach to trade negotiations with individual ACP countries, particularly in terms of:

• the duration of transition periods;
• the final product coverage included in 'full' trade liberalisation;
• the range of 'sensitive' sectors and products excluded from the scope of liberalisation;
• the degree of asymmetry governing the extent of duty-free access granted by the EU to ACP exports vis-à-vis the duty-free access granted by ACP countries to EU exports.

However, given that the Commission sees WTO rules and Article XXIV of the GATT as the guiding principles for the EPA negotiations, variations can be allowed from the WTO established norm only in exceptional circumstances.

The principle of differentiation does not imply that LDCs will retain their rights to non-reciprocal trade treatment. If LDCs join EPAs they will be expected to give up their right to non-reciprocal trade preferences. In the Commission's view, LDCs would only be granted special treatment with regard to a delay in implementation and slower tariff dismantling. Nevertheless, the European Commission would be open to the possibility of suspending EPAs if particular difficulties arise.

Addressing the external effects of the CAP

The European Commission's approach to EPA negotiations gives little consideration to addressing the impact of CAP reform on ACP countries under moves towards free trade with the EU The only reference to these issues to date is a commitment to examine 'on a case-by-case basis, the potential impact of export-refund mechanisms on the process of trade liberalisation'. This is barely adequate given the impact which the shift away from price support to direct aid payments within the EU is having on the attractiveness of the EU market to ACP exports and the price competitiveness of EU products. For example Agenda 2000 reforms in the beef sector have already resulted in a 13% decline in average EU beef prices, so reducing returns on ACP beef exports to the EU market. In addition it is reducing the volume of exports as it becomes unprofitable to export certain lower quality cuts of beef to the EU market. (For beef exporters from the Southern African Monetary Union, and particularly Namibia, the 30% devaluation of the rand against the euro transformed this situation temporarily and resulted in high levels of rand earnings.) In the case of Southern Africa beef exporters between 1999 and 2002 average sterling prices on the UK market for their beef exports fell between 28% and 30%. For Swaziland the price declines were such that it simply became unprofitable to export lower graded beef cuts to the EU market, and so exports of these cuts of beef were discontinued, with a consequent reduction in Swaziland's utilisation of its beef quota.

Outside the beef sector, the introduction of a 50% cut in the intervention price for rice is projected to lead to a 36% reduction in its market price by 2004 and a total decline in prices of 41.4% by 2009. This development in market prices will considerably reduce the value of the preferential access for rice exports which Guyana and Surinam have traditionally enjoyed under what is now declaration XXII of the Cotonou Agreement, and which least-developed countries have also recently begun to enjoy.

Similarly the European Commission has estimated that if reform of the sugar sector were to involve a 25% reduction in the EU sugar price, ACP sugar exporters could suffer annual losses in revenue of about US$250 million. This is clearly a matter for concern among ACP sugar producers who export not only under the Sugar Protocol and the Special Preferential Sugar arrangement, but also under the 'Everything But Arms' initiative.

Against this background the question arises: what will be the value to ACP exporters of preferential access to EU agricultural markets beyond 200 "8his is an issue to which ACP negotiators will need to give serious consideration in their approach to the EPA negotiations.

Turning to the question of the enhanced price competitiveness of EU exports, the impact of CAP reform can best be illustrated by considering developments in the cereals sector, where the process of CAP reform is most advanced. Average EU cereal prices have fallen by 55% since 1992, and the EU intervention price for maize, wheat and barley is projected to be at, or below, world market price levels in the coming years. This will have clear implications for the relative competitive positions of EU and ACP cereal producers, manufacturers of cereal-based value-added food products and pig and poultry producers. (Before the cereal-sector reform process, feed costs constituted 70% of the production cost of EU poultry farmers. An average 50% reduction in EU cereal prices has had profound effects on the competitiveness of EU poultry production, which has been reflected in a rapid expansion of EU poultry-meat exports.) There is a very real danger that ACP producers of these products could soon find their local markets undermined by growing volumes of low-priced EU exports.

Indeed in 2000, EU poultry-meat exports accounted for 15% of total EU exports to the Democratic Republic of the Congo. This constituted the single largest category of EU exports, three times larger than the second largest. It created serious disruptions to the marketing of locally produced chickens which simply could not compete on commercial markets with the import price of EU poultry meat.

This raises important issues related to the nature and effectiveness of the agricultural safeguard provisions to be included in any future EPA between the EU and ACP countries. A strong case would appear to exist for simple and easy-to-apply safeguard provisions, based on the existing Cotonou Agreement provisions, but applied reciprocally in the context of moves towards reciprocal trade preferences. Such provisions could establish prior consultations on trade in 'sensitive products', with pre-emptive measures being taken where a threat of serious market disruptions becomes apparent.

However it should be noted that the actual impact will be strongly influenced by the development of the US$€ exchange rate. EU projections in the June 2003 Prospects for Agricultural Markets in the European Union 2003-2010 show a significant reduction in the rate of increase in EU wheat exports compared to the projections from two years earlier (for wheat the projected increase is 8% below the projections for 2007 contained in the Commission's 2001 report while for coarse grains it is 5% higher). This reflects in part the weakening of the US dollar against the euro and the consequent decline in the competitive position of EU wheat exports.

Source: Prospects for Agricultural Markets in the European Union, 2003-2010, p. 16.

Nevertheless, against the background of these two major external effects of the CAP and given the importance of agriculture and agro-processing industries in ACP countries (agricultural products account for around 36% of ACP exports to the EU market), it is vital to identify and address the effects of the reformed CAP on the competitive position of ACP agricultural producers and agro-processing industries within any process of future ACP-EU trade negotiations.

There is clearly a need for a comprehensive assessment of the likely implications of the on-going process of CAP reform on different ACP countries. Where the external effects of CAP reform impinge upon the essential trading interests of ACP countries, it will be necessary to establish consultative mechanisms to establish how to minimise such negative effects of reform. This must, for example, influence the extent to which ACP imports of EU agricultural and processed food products are actually subjected to free trade.

These points were all taken up in the March 2002 ACP-EU Joint Parliamentary Assembly Declaration on 'Forthcoming ACP-EU negotiations with a view to new trading arrangements' (the 'Cape Town Declaration'). Such consultative mechanisms need not undermine the sovereign rights of the EU to determine its own internal agricultural policy. Rather they would simply acknowledge that the EU's internal agricultural policy has external implications, which, in the spirit of partnership, need to be addressed during the negotiations.

Market access for ACP agricultural products

In the initial draft of the European Commission's recommendations for a Council Decision on the negotiating directives it was proposed that: 'the Community should grant duty-free access to its markets to all products originating in the ACP countries, as from entry into force of EPAs.'

However, in the final Commission-approved draft negotiating instructions the commitment on market access for ACP countries is restricted to an expression of believe that: 'The Community should further improve current access to its markets for products originating in the ACP countries'.

Section 3.2. of the negotiating directives annexed to the recommendation for a Council Decision, despite stating that 'EPAs shall build upon and further enhance the market access conditions currently provided under the Cotonou Agreement', went on to say that for ACP countries this is only to be 'fixed in the course of the negotiations'.

This change in the Commission's position would appear to be the result of pressure from DG Agriculture which is fearful that the process of CAP reform will not be completed by 2008 and that as a consequence opening up the agricultural sector to all ACP exports by 2008 could create problems for EU agriculture. Thus on the issue of market access for ACP agricultural products and value-added food products the final version of the Commission draft mandate is less forthcoming than the preliminary draft mandate. This is significant because it suggests that any further improvement in market access for ACP agricultural or processed agricultural products will be phased in closely in tandem with processes of CAP reform which bring internal EU market prices down towards world market price levels. This will greatly undermine the benefits of any trade preferences granted to ACP countries in the agricultural sector.

On other non-tariff dimensions of market access the Cape Town Declaration, called for steps to be taken to ensure that 'while respecting EU concerns over food safety and animal disease control regulatory measures should be designed and implemented in ways which minimise the extra economic costs placed on small-scale ACP producers and exporters.'

It went on to suggest that: 'upon the request of ACP governments, the EU should initiate consultations on the application of sanitary and phytosanitary standards and other regulations, which act as an impediment to ACP exports, with a view to facilitating exports from ACP countries, whilst respecting underlying EU concerns.'

This is an issue of considerable importance to ACP agricultural producers since a study financed by the Department for International Development (DfID) in 2002 found that sanitary and phytosanitary standards and other associated regulatory measures constitute the most significant barriers to access to the EU market, not only for ACP exporters but also for non-ACP developing countries and economies in transition.

Other EPA issues impacting on ACP agriculture

While the Commission's approach acknowledges that there will be some consequences for ACP government revenues as a result of moves towards free trade with the EU, there are no signs that it intends to address the consequent fiscal challenges within the process of EPA negotiations. Fiscal losses arising from moves towards free trade may have important implications, especially in rural areas in ACP countries, not only through the direct effects on government spending but also through its impact on levels of public sector employment.

In a number of ACP countries wage remittances from those employed in government service serve to sustain the rural economy. Cut backs in public-sector employment resulting from fiscal difficulties would be likely to have important consequences for purchasing power in rural areas and consequently local demand for agricultural products. While the EU recognises that the proposed EPAs will involve adjustment costs, including those associated with fiscal reform, the Commission argues that these problems can be addressed through the deployment of existing EDF instruments. This was questioned in the Cape Town Declaration which called for EPAs to make 'provision for the extension of assistance with fiscal adjustment in ACP countries' including the establishment of specific mechanisms to ensure that the poor and women are insulated from the impact of fiscal restructuring.

The Commission has also acknowledged that it will be necessary to address supply-side constraints such as through the establishment of sector-based development programmes. Once again it is the Commission's view that existing EDF instruments are adequate to this task, and again this is questioned by the Cape Town Declaration which calls for: 'a systematic review of the successes and failures of existing programmes intended to address supply side constraints with a view to ascertaining the effectiveness of various types of interventions under different circumstances' and 'a review of existing institutional arrangements for extending assistance to addressing supply-side constraints, so as to determine which institutional delivery mechanisms have proved most effective.'

Both of these demands are relevant to existing EU interventions in the agricultural sector in ACP countries, where in many instances the expected benefits of investments fail to materialise within the planned time frame. If ACP agricultural sectors are to compete effectively under conditions of free trade this is an issue that needs to be addressed urgently.

Least-developed countries and EPAs

In terms of the future basis for their trade relations with the EU, least-developed and non-least-developed ACP countries are in quite different situations. Least-developed ACP countries have a recognised right under WTO rules to non-reciprocal trade preferences. Unlike the case with the trade provisions of the Cotonou Agreement, this right is not subject to any challenge at the WTO.

In fact the EU has recognised this right through its 'Everything but Arms' initiative, which grants full duty-free, special-levy-free and quota-free access to the EU for all originating products, except arms, munitions and (on a transitional basis) sugar, rice and bananas, for which full duty-free access will be granted by 2008.

However, despite the rights to non-reciprocal trade preferences which LDCs enjoy, the European Commission in its approach to EPAs is expecting least-developed ACP countries to give up this right in favour of the regional negotiation of reciprocal preferential EPAs. Under such agreements ACP least-developed countries would then be expected to carry all the same reciprocal tariff reduction obligations as the non-least-developed ACP countries which are also parties to such region-to-region agreements.

In addition it is not clear what additional benefits least-developed countries will, in reality (as opposed to theoretically), gain from participating in regionally negotiated EPAs. Least-developed ACP countries already enjoy full duty-free, levy-free and quota-free access to the EU market for all originating products through the EBA initiative. It is therefore difficult to see how EPAs could generate additional market-access benefits.

The European Commission maintains that EPAs will allow a more comprehensive approach to the supply-side constraints that are inhibiting competitive production in ACP countries. However, it is insisting that this will be financed using existing EDF resources and instruments. In this context the question arises:

what benefits would ACP least-developed countries gain from EPAs which would not also be available simply by improving the deployment of existing EDF funds and instruments?

The Commission also maintains that agreements on services and trade-related areas could improve the domestic policy and investment climate in ACP countries. Yet such benefits could be gained through the conclusion of specific agreements in these areas, without the risks associated with granting preferential duty-free access to imports originating in the EU.

Finally the Commission claims that EPAs will 'lock in' policy commitments and attract foreign investment. However, it should be borne in mind that the EU is signing free-trade-area agreements with different countries and regions all over the world. So the question arises: why should a potential investor choose an ACP LDC instead of one of these other countries or regions?

Against this background the market-access issues facing LDCs are somewhat different from those facing other ACP economies. Whether ACP LDCs actually enjoy better access to the EU market under the EBA than under the Cotonou trade provisions will depend on the addressing of such issues as:

• the establishment of rules of origin for LDC exports, which take account of the production constraints faced in most LDCs and that are designed to enable individual LDCs to take advantage of the nominal duty-free access granted under the EU's GSP schemes for LDCs (EBA);
• the derogation procedures to be followed under the EBA by LDCs seeking to establish or extend new industries;
• the cumulation provisions to be applied to LDCs that form an integral part of regional-integration initiatives involving non-LDC ACP developing countries;
• the administrative arrangements to be established to allow duty-free access for products to which strict sanitary standards are applied.

Overall this suggests that while the adjustment costs facing least-developed ACP countries will be a hard reality under any moves towards free trade with the EU, many of the benefits which least-developed countries could theoretically gain from participation in EPAs are likely to remain elusive in practice. Against this background LDC governments will need to seriously assess the actual costs and benefits involved in entering into economic partnership agreements with the EU.

The situation of ACP LDCs is further complicated by their existing involvement in regional-market integration initiatives with neighbouring non-LDC ACP countries. If LDC governments stand back from the EPA negotiations with the EU in such cases, they could find themselves facing free trade with the EU through the 'back door'. Thus if the EU goes ahead and concludes EPAs with non-least-developed ACP countries which are part of regional free-trade-area arrangements with ACP LDCs, then EU goods could enter the non-LDC duty free, lose their EU identity and transit through to the LDC free of any duty. The simple solution to this is to have rules of origin in the regional free-trade area between the ACP members which prohibits goods imported from the EU from being imported into the LDC without the payment of the duty due. However the reality of most ACP LDCs is that they lack the administrative capacity to enforce such rules of origin and so such provisions would largely remain a dead letter.

This danger is only too real, as the experience of least-developed Lesotho testifies, for as a result of its membership of the SACU and the EU-South Africa TDCA, Lesotho is already de facto a member of free-trade-area arrangements with the EU.

In this context the ACP and EU negotiators face a major policy challenge in their conduct of the EPA negotiations, namely:

how can free-trade-area arrangements between the EU and regional groupings of ACP countries be structured so as to fully accommodate the needs and rights of least-developed ACP countries?

This in turn raises a number of important questions:

• will modifications of WTO rules on regional free-trade-area arrangements be required in order to accommodate the needs of least-developed ACP countries?
• how can ACP governments coordinate their positions in Brussels and Geneva in order to bring about such a modification of WTO rules?
• are economic partnership agreements a realistic policy option given that the majority of the ACP population live in LDCs?
• should the EU be devoting more attention to elaborating alternative trade arrangements for non-LDC ACP countries, given the importance of respecting the rights and addressing the needs of ACP LDCs?

The broad EU approach to EPA negotiations

When EU foreign ministers adopted the Commission's guidelines for the impending ACP-EU trade negotiations on June 12th 2002, particular emphasis was placed on the important role EPAs would play in 'tackling non-tariff barriers to trade, strengthening regional trade integration and enhancing the competitiveness of ACP economies through a comprehensive package of aid and trade measures'. Commissioner Poul Nielsen maintained that EPAs would extend the 'fight against the fragmentation of the markets and economies of developing countries' which 'discourages investment and hinders trade'. The Commissioner spoke of the ambitious time frame for negotiations and the 'flexibility' the European Commission intends to adopt to respond to 'the differing needs and conditions within each ACP country or region'. The Commission identified a number of key elements in its negotiating strategy, namely:

• enhanced market access to the EU for ACP exports;
• the gradual and managed liberalisation of ACP economies;
• support for regional integration;
• encouraging more beneficial investment;
• discussions on trade in services;
• the adoption of a comprehensive approach linking trade and development co-operation.

The broad ACP approach to EPA negotiations

ACP Heads of State and Government adopted a decision on the negotiation of EPAs with the EU on July 19th 2002 which endorsed the ACP negotiating guidelines and called on the 'ACP Council of Ministers to ensure that the EPAs contribute effectively to the development of ACP States'. These ACP guidelines which had earlier been adopted by ACP ministers, stressed the importance of the negotiations addressing comprehensively:

• the external effects of the CAP;
• the supply-side constraints facing ACP producers;
• the fiscal consequences of moves towards free trade with the EU.

In its guidelines the ACP highlighted the need to structurally transform ACP economies and the basis of the their integration into the world economy and emphasised that, given the possible adverse effect of reciprocity on domestic production, ACP countries cannot a priori accept reciprocity as the main objective of the forthcoming trade negotiations with the EU. The ACP guidelines expressed a concern that existing WTO rules are unbalanced and suggested a need for more flexibility in WTO rules in order to better accommodate moves towards reciprocal preferential trade arrangements between developing and developed economies.

Against this background the hope was expressed that the EU and ACP could co-operate in the WTO to bring about a change in WTO rules on regional trade arrangements. However to date there is little evidence that the EU is willing to consider such a joint initiative. Indeed, the December 2002 European Commission submission to the WTO on Special and Differential Treatment strongly suggested an unwillingness on the part of the EU to consider different rules for developing countries and least-developed countries, with the EU preferring the more flexible application of such rules. This stands in stark contrast to the emphasis placed in the ACP guidelines on how under ACP regional integration initiatives Special and Differential Treatment is accorded to the less developed or more vulnerable members of a regional grouping. The ACP hoped to see this principle fully applied in the negotiation of EPAs, with such agreements being designed with the vulnerabilities of less developed and more vulnerable parties being fully taken into account.

The ACP was firmly committed to a two-phased approach to EPA negotiations, with issues of common concern to all ACP countries (some 22 areas of common concern have been identified) being addressed collectively in the first phase, leading to the conclusion of a framework agreement, which would then provide the basis for sub-regional negotiations with the EU. The ACP initially favoured phase 1 extending for a two-year period, but the EU firmly resisted this. A compromise was then reached in which the first phase would run from September 2002 to September 2003, with the second phase beginning in September 2003. However, the EU remained opposed to the conclusion of a framework agreement as the main outcome of phase 1, preferring to limit discussions in phase 1 to a general exploration of issues of concern.

The structure of the negotiations

At the special session of the ACP Council on September 25th-26th 2002 it was decided that the negotiations with the EU would be conducted at three levels: ministerial, ambassadorial and technical. At both the ministerial and ambassadorial level negotiations were to be led by a troika of countries, and it was decided that the substance of the negotiations would be dealt with through six negotiating groups, with responsibilities being divided as set out below:

Technical preparations for the negotiations are undertaken by the ACP Secretariat under the supervision of the Committee of Ambassadors. On the EU side it is clear that the European Commission is the most important actor. This was evident at the start of the negotiations, when Commissioner Lamy took the lead at all levels, speaking on behalf of the European Union at the technical, ambassadorial and ministerial levels. During the EPA negotiations, the Commission drafts specific proposals based on the mandate that the European Council gave it on June 17th 2002. These proposals are then presented to the 15 EU member state representatives in the Article 133 Committee and the Development Working Group, where the member states' representatives can share their opinions with the Commission. The Commission also reports on the state of the negotiations in the different working groups to the EU General Affairs and External Relations Council. The unity of command on the side of the EU compared to the ACP is striking. The position of the European Commission as the single interlocutor adds to the existing imbalance in means and expertise.

While the ACP favoured conducting negotiations through the six negotiating groups (outlined above) the European Commission favoured conducting negotiations around four clusters of issues:

• market access;
• rules-related issues;
• the toolbox for the promotion of regional economic integration;
• the procedures for the organisation of the regional phase of the negotiations.

Significantly, from an agricultural perspective, the Commission rejected the establishment of a dedicated negotiating group on agricultural issues preferring to treat these issues under the general topic of market access. This, however, does not allow many of the complex issues related to agricultural trade (for example SPS issues and the impact of EU agricultural-support policies on international and domestic EU markets) to be included.

Overall, the Joint ACP-EU Ministerial Trade Committee is responsible for monitoring and reviewing the progress of the negotiations.

Progress of the negotiations up to August 2003

In the negotiations in Phase 1 the European Commission demonstrated a marked reluctance to address issues of common and substantive concern to the ACP at an all-ACP level. The Commission was keen to move as quickly as possible to regional level negotiations. This posed something of a problem for the ACP. With the Commission unwilling to enter into substantive discussions at the pan-ACP level on issues of common concern, it was extremely difficult to make progress on an ACP-EU framework agreement which could have provided the basis for regional level negotiations.

The European Commission demonstrated a reluctance even to discus agricultural issues in a separate negotiating group, preferring to include these issues under the general discussions on market access. This however, allowed the Commission to avoid any discussion of the wider issues linked to the external effects of its reformed common agricultural policy. A further bone of contention was the EU's unwillingness to accept the need for additional resources to address the restructuring challenge which ACP economies will face under moves towards free trade. The EU and ACP also remained as divided as ever on the intended outcome of the first phase with the ACP favouring the conclusion of a framework agreement while the EU merely wanted a general exploration of the issues with any formal agreements being deferred until the second phase.

The Commission's apparent refusal to discuss substantively the issues of common concern to the ACP generated considerable frustration on the ACP side. This was apparent at the March 2003 meeting of the ACP Ministerial Trade Committee where a number of ACP ministers reportedly questioned the advisability of launching the second phase of the negotiations at the sub-regional level in September 2003, given the failure to make progress on major issues of concern to the ACP at the level of pan-ACP-EU negotiations.

In May 2003 the ACP Secretariat noted that while there was convergence on general principles, namely that EPAs should take full account of local circumstances, should fully support regional-integration processes and should be built on the wider objectives of the Cotonou Agreement, major divergences of views and approach still remained. These most notably related to:

• whether a reform of WTO rules was required to allow the necessary flexibility in the EPA negotiations;
• the nature of the all-ACP phase and its outcome;
• the need for additional resources.

In contrast to the EU's up-beat reporting of the outcome of the May Joint Council of Ministers meeting the ACP Secretariat presentation noted that ACP Ministers 'expressed concern over the slow progress in achieving the objectives of the phase 1 of the negotiations'.

Referring to the specific regional dimension of EPA negotiations the ACP paper noted that 'the EU is still wedded to its idea of REPAs' but that on the ACP side many issues still needed to be clarified, most notably:

• the regional configuration for the second phase negotiations;
• who would actually negotiate - i.e. would it be regional secretariats or member-state governments backed up by the regional secretariats?
• where such negotiations would take place - in Brussels or regional secretariats HQs?;
• the role of the Brussels ambassadors and Brussels structures;
• the definition of 'sensitive products' under liberalisation processes;
• the length of transitional periods before full reciprocity is introduced;
• the impact of reciprocity on fiscal revenues;
• how the problem of revenue losses can be addressed;
• the measures which can be adopted to protect vulnerable sectors and industries.

With regard to the reform of the CAP, ACP Ministers called for studies to be undertaken urgently on a product-by-product basis on the production and trade implications of CAP reform and on the impact of CAP reform on net-food-importing ACP countries.

ACP Ministers also gave support to the west and central African initiative around cotton and called for compensatory mechanisms to be set in place for ACP countries which suffer income losses as a result of CAP reform.

Overview of the outcome of Phase 1

Following its July-August meeting ACP ministers reiterated:

• their commitment to ending the phase 1 negotiations with a binding agreement;
• the need for issues of common concern to be addressed under phase 1;
• the need for addistional resources and for improvement of EDF disbursement procedures;
• the need for a modification of WTO rules to allow for flexibility in the negotiation of EPAs;
• the need for ACP indebtedness to be addressed within the EPA negotiations.

However, ACP Ministers also acknowledged that ACP regions and states which felt they were in a position to do so, could commence phase 2 negotiations in September 2003. This means that issues of common concern now have to be addressed in parallel with the conduct of phase 2 negotiations, giving the European Commission little incentive to address the substantive issues raised under phase 1. In any case the Commission was always sceptical about the value of phase 1 negotiations and would have preferred to move immediately to phase 2 negotiations. A situation seems to be emerging in which phase 1 is not so much concluded as overtaken by events. This would suit the European Commission's underlying agenda.

The outcome of Phase 1 ACP-EU negotiations

Introduction

In their approach to the EPA negotiations the ACP identified six areas within which the negotiations should be conducted:

• market access issues;
• agriculture and fisheries issues;
• development issues;
• trade in services;
• trade related areas;
• legal issues.

While the European Commission favoured a different approach this section seeks to review the progress made in each of these six areas from an ACP perspective.

Market Access

Areas addressed under market access

Under phase 1 five areas have been discussed:

• principles and objectives for access for non-agricultural products;
• the product coverage of any EPAs;
• the transition period for the phasing in of tariff-reduction commitments;
• the nature of safeguard measures;
• rules-of-origin issues

Areas of convergence

It has been agreed that future market-access arrangements should not leave any ACP state worse off than is currently the case; in fact market-access arrangements should build on and improve the current acquis. It has also been agreed that the details of product coverage of individual EPAs and the specific structure of the transition period for the implementation of individual EPAs should be agreed at the national or regional level. It is also agreed that all EPAs should incorporate appropriate safeguard provisions.

It is unclear what the commitment to ensuring that no ACP country is worse off will mean in the area of agricultural market access where the process of CAP reform is eroding the value of ACP preferences by systematically reducing the prices paid on the EU market for a range of basic commodities which the ACP export to the EU (including products as diverse as beef and rice). This is compounded by the process of preference erosion resulting from multilateral trade liberalisation through the WTO.

Equally the agreement that the details of the product coverage and specific timetables for the phasing in of the provisions of any agreement should be subject to agreement at the regional or national level would not prohibit the conclusion of guidelines for such arrangements as an integral part of the conclusion of phase 1 of the ACP-EU EPA negotiations (although effectively this issue has now been superseded by events). This issue could have been addressed as an integral part of any formal and legally binding ACP-EU framework agreement concluding phase 1 of the negotiations. However no such legally binding agreement has been concluded, merely a set of common conclusions which will provide ' a point of reference' to 'provide guidance' in the phase 2 negotiations.

While there is agreement on the need for safeguards, there is as yet no agreement on the nature and scope of such safeguards (for example, whether they can be pre-emptive, involving the monitoring and surveillance of trade in sensitive products, and allow for swift and effective measures should a potential threat of market disruption emerge).

Areas of divergence

While there is agreement that future market-access arrangements should not leave any ACP state worse off, the ACP position includes the specification that this objective be respected 'whether or not ACP countries participate in EPAs'. This ACP position implies a need for an EU initiative on alternative trade arrangements for ACP countries (particularly non-LDC ACP countries) who feel unable to sign up to any economic partnership agreement. The Commission, however, has to date shown no indication of a willingness to explore how a non-punitive alternative to EPAs for non-least developed ACP countries could be established in ways which ensure that no ACP state is worse off. The European Commission appears to believe that WTO rules do not allow for any alternative to EPAs.

The EU, while recognising the need to back-load certain products under any EPA, does not agree with the ACP proposal that there should be a five-year moratorium on the commencement of tariff dismantling by ACP countries.

Equally the EU does not agree to ACP proposals that the implementation of tariff dismantlement should be linked to the attainment of certain development indicators by ACP countries, in order to ensure that ACP countries are adequately equipped to meet the challenge of free trade with an economic giant like the EU.

Equally there is no agreement on any modification of the current rules of origin for ACP products to recognise the increasingly global nature of input procurement and the need for ACP countries to base their industrial development initially on final-stage processing of inputs procured elsewhere. Although the EU has agreed that this issue should be subject to more detailed discussions by relevant groups of experts, there is a need for such discussions to be guided by a clear political commitment to opening up new market opportunities for ACP exports, based on substantive processing in ACP countries of non-originating raw materials.

Agriculture and Fisheries Issues

Areas addressed under agriculture and fisheries issues

Under phase 1 six areas have been discussed:

• objectives and principles to guide negotiations on agricultural and fisheries issues;
• processing, marketing, distribution and transportation (PMDT) issues in the field of commodities;
• rules of origin;
• export subsidies
• sanitary and phytosanitary measures;
• fisheries.

Areas of convergence

There is agreement on:

• the importance of agriculture and fisheries issues to poverty eradication and sustainable development in ACP countries;
• the importance of PMDT issues;
• the need to address SPS issues;
• the need for disciplines on export refunds;
• the importance of building on the existing acquis;
• the importance of considering the impact of CAP reform on the EPA negotiations;
• the importance of safeguard provisions;
• the need for regional fisheries agreements.

Areas of divergence

However, the areas of agreement mask significant divergences on the specific measures which can and should be taken as an integral part of preparing the ground for the negotiation and implementation of EPAs.

On PMDT issues the ACP believes that effective programmes of support in this area are essential for the transformation of ACP economies. The EU for its part believes that PMDT can only have any real impact if there is a dynamic private sector in the ACP countries concerned operating within an enabling environment, which in the EU's view, can best be created by the conclusion of the proposed EPAs.

On SPS issues the ACP wants to see a standstill on EU SPS measures for five to ten years and the launching of a meaningful dialogue on how genuine EU health concerns can be addressed without imposing excessive burdens on ACP suppliers, which might make the exploitation of market opportunities impossible or uneconomic. The EU is of the belief that equivalency agreements are not possible with ACP countries given the weaknesses which exists in ACP testing and verification arrangements. This means that ACP countries will face high costs in certifying and verifying compliance to EU standards, costs which can make exporting uneconomic.

While the EU recognises the need to address export refund issues on a case-by-case basis it is not willing to recognise the importance of addressing the trade consequences of new forms of CAP distortions linked to the new systems of farm support that the EU is creating. This is because the EU maintains that such systems of support are non-trade-distorting despite the fact that they have production and trade outcomes which simply would not occur in the absence of such public-aid programmes.

While paying lip service to building on the existing acquis and taking into account the impact of CAP reform, the EU is failing to recognise the extent to which CAP reform is undermining the economic value of the acquis and hence the need for new arrangements in order to maintain its value. Until such time as the EU recognises these realities, the broad agreement on the need to maintain the acquis and address the impact of CAP reform, will have little impact on preventing the erosion of the real benefits that ACP countries gain from the system of trade preferences established for agricultural and value-added food-product exports to Europe.

In the area of fisheries the EU is opposed to the conclusion of framework ACP-EU fisheries agreements setting out the need to address the sustainable management of ACP fisheries resources, obligatory landings and other issues linked to ensuring that the ACP maximises the long-term benefits from their increasingly valuable yet vulnerable fisheries resources.

Development Issues

Areas addressed under development issues

To date only general principles relating to development issues in the EPA negotiations have been discussed. This is reflected in agreement on generalities but fundamental disagreement on substantive practical issues.

Areas of convergence

To date there is agreement that:

• EPAs should not be seen as an end in themselves but as a means to the achievement of wider objectives;
• EPAs should take account of the capacity of ACP economies to adjust to the introduction of free trade with the EU;
• EPAs should contribute directly to the development of ACP countries and be accompanied by appropriate development-support measures so as to enable ACP countries to maximise the benefits they gain from EPAs;
• EPAs should be 'mainstreamed' into ACP policies and into EU development co-operation programmes;
• EPAs should be accompanied by general-capacity building measures;
• EPAs should support the industrial development of ACP countries;
• EPAs should be consistent with and supportive of regional-integration processes.

However, there is little agreement about what beyond these general statements imply in terms of concrete programmes and policy initiatives and the sequencing of the various policy changes and support programmes envisaged or under discussion.

Areas of divergence

The major area of disagreement is on the need for additional resources to finance the many and varied programmes which will be needed to equip ACP economies to meet the challenge of free trade with the EU. The ACP does not want to see funds provided to meet such costs of adjustment reduce funding to existing development co-operation priorities. Equally the ACP would like to see a dramatic improvement in the deployment and effectiveness of EU aid instruments.

The European Commission for its part sees no need for additional funding to be made available so long as so much of the existing committed EDF funding remains unspent. Equally the Commission believes that it is important to get the policy context right (i.e. through signing EPAs) before designing and implementing restructuring programmes. There is therefore a fundamental disagreement between the ACP and the EU on the issue of the sequencing of restructuring assistance and the phasing-in of tariff reduction commitments.

The issue of EU assistance to fiscal and economic restructuring and social programmes associated with the implementation of EPAs is yet to be substantively discussed. The ACP side would like to see these issues comprehensively addressed as part of the negotiations. The EU believes these issues still need to be thoroughly discussed before the approach to dealing with them can be determined.

Trade in Services

Areas addressed under trade in services

The ACP have put forward proposals for the development of the service sector in ACP countries. This is seen as a priority to be promoted prior to any liberalisation of the service sectors. They have proposed specific objectives and principles and modalities for any moves towards liberalisation of services, with the sequencing being the key consideration. The EU has not responded to these ACP proposals, in part preferring to see the outcome of the Cancun Ministerial negotiations before determining its specific EPA proposals.

Areas of convergence

The EU agrees with the ACP that support for the development of service sectors should be provided to ACP countries within the context of EPAs, and agrees that the ACP should be placed under no fixed obligation to liberalise services, but it believes that it is in their best interests to do so. It also agrees that the regional dimension of service development should be taken into account, with liberalisation of services being deferred where this could promote the development of service provision at the regional level. Both parties agree on the importance of establishing supportive regulatory frameworks for service-sector development.

Areas of divergence

There is disagreement as to whether additional funds should be made available to support service-sector development in ACP countries. Additional funds with rapid and flexible deployment procedures are felt to be essential by the ACP. The EU sees no need for additional resources above and beyond existing EDF funds.

The EU does not favour extending the liberalisation of service supply to the movement of natural persons. For ACP countries this is seen as an essential element of any liberalisation of services, while for the EU it touches on the sensitive issue of migration.

An additional area of divergence concerns the scope of trade in services. The EU favours a 'WTO-plus' approach, whereas the ACP does not want to go further than anything negotiated in a multilateral context.

Trade-Related Areas

Areas addressed under trade-related areas

Only an initial exchange of views has taken place on trade-related issues, which has identified three areas of convergence and two areas of divergence.

Areas of convergence

There is agreement on the importance of trade-related areas for smooth trade flows and the minimisation of transaction costs. There is a shared recognition of the importance of clearly defined and transparent regulatory frameworks, and efficient and well functioning institutions for the design and implementation of measures in trade-related areas.

Areas of divergence

There is considerable divergence over the scope and coverage of the issues to be addressed under EPAs in the sphere of trade-related areas. The EU wants to go beyond the trade-related areas listed in the Cotonou Agreement to include issues such as government procurement and data collection. For the ACP there is felt to be an urgent need to acquire the necessary expertise before entering into negotiations on these complex areas. The ACP believes only some of the issues listed in the Cotonou Agreement dealing with trade-related areas should be addressed within EPA negotiations.

There is further disagreement on how far commitments on trade-related areas should go. The EU favours a 'WTO-plus' approach, whereas the ACP are reluctant to go beyond anything which their governments would agree to in a multilateral context. There is also considerable disagreement over the sequencing of the provision of capacity-building support and the negotiation of rules on trade-related areas under EPAs.

Legal Issues

Areas addressed under legal issues

Under phase 1 seven areas have been discussed:

• principles and objectives;
• the structure and content of EPAs;
• the parties to EPAs;
• the outcome of Phase 1;
• compatibility with WTO rules;
• modalities for the entry into force of EPAs;
• dispute settlement and non-execution clause.

Getting agreement on basic principles and objectives

While there is a broad agreement on the principles and objectives (since these are largely enshrined in the Cotonou Agreement which provides the basis for the EPA negotiations), there are significant differences in emphasis between the EU and the ACP on which objectives take precedence.

For the ACP, top priority has to be given to the promotion of poverty eradication and sustainable development, with the basis for the integration of ACP economies into the world economy being structured with the promotion of these objectives in mind.

For the European Commission further integration of ACP economies into the world economy through the pursuit of progressive liberalisation of trade in goods and services is seen as the best vehicle for the promotion of poverty eradication and sustainable forms of development.

This difference of emphasis is commonly glossed over but it is in fact fundamental to many of the unresolved issues in the ACP-EU negotiations, for its relates to the sequencing of liberalisation with other broader support measures. For the EU the primary concern is for ACP countries to get the policy framework right by committing to liberalisation, within this context the necessary support measures can then be put in place. For the ACP the issue is to put in place the necessary support measures so that ACP countries can fully benefit from any further trade liberalisation to the benefit of the poor and the objective of the promotion of sustainable forms of development.

Areas of convergence

During Phase 1 it has been agreed that:

• there should continue to be some kind of all-ACP-EU mechanism for the coordination and monitoring of phase 2 negotiations (which in certain regions have now been launched);
• ACP members will be the parties to the EPAs, with the role of regional organisations depending on the mandate given to these bodies by their constituent ACP members.

Area of divergence

Until the end of phase 1 there was continued divergence on the need for a formal framework agreement to conclude the first phase of the negotiations. The ACP favoured the conclusion of a formal agreement which would be legally binding and which would guide phase 2 while the EU saw no need for such a formal agreement. The EC preferred to leave flexibility for tailoring regional agreements to the needs of the parties concerned. The ACP were deeply concerned that the EU would seek agreements with the 'weakest' regional groupings first and then seek to use these as the 'template' for similar agreements with other ACP regional groupings. This is why the ACP preferred to see the establishment of a formal agreement on the scope and content of any regional EPAs as an integral part of the conclusion of phase 1 negotiations. As it turned out the agreement concluded on October 2nd 2003 is not legally binding and will only be a 'point of reference' for phase 2 negotiations. This is closer to the desired outcome for phase 1 of the EU than the ACP. The only commitment that the ACP have secured is a continuation of phase 1 talks in parallel to the commencement of phase 2 in an effort to hammer out remaining points of divergence, of which there are many.

There is continued divergence on the need for additional resources with the EU claiming that there is no need for additional resources while EDF funds remain unspent and the ACP maintaining that additional funds are needed which can be spent swiftly and effectively under procedures which are not subject to the delays which currently plague EDF aid deployment.

There is continued divergence over the need for any modification of WTO rules. The ACP believe that WTO rules need to be adjusted in order to accommodate the needs of ACP countries under moves towards reciprocity between a group of developed economies and a group of least developed and developing economies in order to fully accommodate the development needs of the less developed partners (specifically with regard to the extent of product coverage, the length of the transition, the link to progress with the attainment of development objectives, and safeguard provisions). The EU believes there is no need to modify WTO rules on free-trade areas, since existing WTO rules provide the necessary flexibility to address ACP concerns. However this EU position is inconsistent since the Commission acknowledges that WTO rules do not allow the linking of the phasing-in of tariff reductions with the attainment of specific agreed development objectives, a linkage which the ACP have called for.

With regard to dispute settlement and the non-execution clause the ACP favour using existing national and regional mechanisms in line with international norms and the establishment of a role for the ACP Group as a third-party arbitrator. The EU favours establishing through mutual agreement specific procedures for dispute settlement based on similar provisions under other EU free-trade area agreements. This would involve consultations prior to the invocation of a mutually agreed arbitration procedure (modelled on existing dispute settlement arrangements to which the EU is already a party). The ACP is deeply concerned that any non-execution clause could provide a basis for the EU to invoke trade sanctions should ACP states find the costs of introducing free trade with the EU too economically, politically and socially onerous.

The conduct of Phase 2 negotiations

The European Commission is proposing a four-part approach to the phase 2 EPA negotiations. The first initial phase would run until the end of 2003 and would involve:

• identifying the main objectives, policies and tools for regional integration;
• reviewing priority issues for in-depth discussion;
• discussing and agreeing on the negotiating structure and exact timetable for the conduct of negotiations for the next 15 months;
• establishing immediate research and capacity-building priorities;
• establishing regional task forces for the coordination of the regional dimension of the negotiations;
• a rolling programme of seminars with regional negotiators;
• reaching out to regional networks of non-state actors.

The second phase 'Convergence on strategic approach' would run from 2004 to mid-2005 and would involve:

• analysing regional trade and production data;
• reviewing tariffs and revenue implications;
• reviewing regulatory frameworks and regional policies;
• identifying priority issues for regional integration around six issue groups;
• (presumably these six issue groups would be agriculture, non-agricultural market-access issues, SPS and TBTs, trade in services, trade and investment facilitation and trade-related areas);
• reviewing current tariff structures as the starting point for liberalisation;
• putting in place assistance for research and capacity building;
• developing regionally based trade-related support programmes through the ninth EDF mid-term review process;
• the organisation of sector issues based on consultative meetings.

The third phase 'Structuring and consolidation' would run from mid-2005 to mid-2006 and would involve:

• agreeing on the structure of EPAs;
• consolidation of the outcome of discussions on EPAs and the channelling of the agreements reached into draft texts;
• a close focus on sensitive issues in order to find solutions;
• continued capacity building and outreach work.

The fourth phase of 'Finalisation' would run from mid-2006 to the end of 2007 and would as the name suggests involve the finalisation of the whole process.

While to date there has been little public debate on these proposals for the conduct of phase 2 negotiations an important issue for the ACP will be to try to ensure that priority is given to identifying and addressing sensitive issues at a much earlier stage in the negotiations. Thus priority ACP concerns would be addressed before details can be agreed on areas where the EU perceives its greatest interests to lie.

In terms of the structuring of the conduct of negotiations Commission proposals would appear to follow a similar structure to that used under phase 1. That is there would be technical, senior official, and ministerial level negotiations.

Technical groups would be set up on specific issues and the deliberations of these technical groups would then feed into the high level EPA negotiating groups. These technical groups would consist of small groups (four to six people) and would look at:

• trade in goods;
• core sectors;
• statistics;
• trade in services;
• investment;
• competition etc.

The high-level EPA Steering Group ('trade co-ordinating meeting'), would work on the overall structure of the proposed EPAs and would guide the deliberations of the technical working groups. It would also provide the link to the all-ACP level and the progress of negotiations in other ACP regions.

The supreme decision-making body within the process would be the ministerial level meeting whose mandate would be to guide negotiations and agree on the final results. Ministerial meetings should include representatives of all regional member governments. Meetings would be held alternately in Brussels and the regions concerned.

In parallel with these structures, support would be extended to regional preparatory task forces. These would seek to coordinate national preparations at the regional level and would be responsible for harmonising and coordinating assistance to both national and regional processes of preparing for the EPA negotiations.

Importance is attached to the convening of consultative meetings with groups of stakeholders to work on social dimensions of EPAs, impact on specific sectors, the environmental and gender dimensions.