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TWN Info Service on WTO and Trade Issues (May11/03)
13 May 2011
Third World Network

Dear friends and colleagues,

We are pleased to share with you the following two TWN Briefing Papers prepared for the LDC-IV Conference in Istanbul (9-13 May 2011), also available at http://twnside.org.sg/LDC-IV.briefings.htm

1. Brief analysis of the likely impact of the WTO’s Doha Round on LDCs (attached); and 

2. Outline of ways in which LDCs can be affected by EPAs (Economic Partnership Agreements) (below).

Thank you.

With best wishes,
Third World Network

Third World Network Briefing for LDC-IV (Istanbul, 9-13 May 2011)

Outline of ways in which LDCs can be affected by EPAs*

Introduction

A number of least developed countries (LDCs) are negotiating economic partnership agreements (EPAs) or free trade agreements (FTAs) with developed countries.[i][i] LDCs have market access to the European Union (EU) via the Everything But Arms (EBA) program. However African, Caribbean and Pacific (ACP) countries which are not LDCs no longer receive preferential market access into the European Union (EU) since the Cotonou trade regime (and the World Trade Organization (WTO) waiver which covered it) were allowed to expire on 31 December 2007. To retain market access in the EU, the EU has asked the ACP non-LDCs to sign reciprocal EPAs. Since many of the LDCs in the ACP are in customs unions with non-LDCs, in order to preserve these customs unions, a number of LDCs are negotiating EPAs with the EU.

This note briefly highlights some of the main implications for LDCs of agreeing to FTAs or EPAs with developed countries.[ii][ii]

Goods chapter

LDCs already face frequent import surges, for example in agricultural products.[iii][iii] Since the EU does not remove its agricultural subsidies in EPAs or FTAs and interim EU-EPAs with some LDCs involve the LDCs removing tariffs on more than 80% of products from the EU,[iv][iv] these import surges are likely to increase. Farmers in a number of African countries have already had difficulty competing with subsidised EU agricultural products, even before the tariffs are removed under an EPA. (For example when Ghana reduced its tariffs on chicken, subsidised chicken from the EU was sold in Ghana for below the local cost of production of chickens and Ghanaian chicken farmers fell from supplying 95% of the Ghanaian market to 11%).[v][v]

In addition, removal of tariffs on products from developed countries via an FTA or EPA makes it more difficult to industrialise. As the former Head of the Macroeconomics and Development Policies Branch, United Nations Conference on Trade and Development (UNCTAD) notes, no country (except Hong Kong, China) has managed to industrialize without going through the infant-industry-protection phase.[vi][vi] If LDCs have to cut their tariffs via FTAs/EPAs (or in the WTO’s Doha Round, for example due to being in a customs union with a non-LDC which is required to cut its tariffs), this will reduce their ability to use infant industry protection to industrialise the way that today’s developed countries did.  

Furthermore, cutting tariffs in an FTA/EPA (or at the WTO) will result in a permanent loss of tariff revenue. According to the International Monetary Fund (IMF), some LDCs rely on tariff revenue for more than 76% of their government revenue.[vii][vii] (Whereas in countries in the Organisation for Economic Co-operation and Development, tariff revenues represent on average 1% or less).[viii] If LDCs cut their tariffs, according to IMF economists, low-income countries are at best likely to recover 30% or less of this lost tariff revenue from other taxation sources.[viii][ix]  They note that a value-added tax is not proven to make up for the lost revenue from lowering tariffs.

Moving to a reciprocal trade agreement from unilateral preferences by the EU is also likely to worsen the balance of payments in LDCs, many of which already have chronic balance of payments difficulties.

The EU is also likely to ask LDCs to stop using export taxes and other restrictions on exports. This is because as the EU notes, ‘Over 50% of major mineral reserves are located in countries with a per capita gross national income of $10 per day or less.’[ix][x] As it says in its Raw Materials Initiative, ‘Access to and affordability of mineral raw materials are crucial for the sound functioning of the EU's economy.’[x][xi] LDCs may wish to impose export taxes and other restrictions on these raw materials to help develop value added industries or for revenue raising or other purposes. For example Indonesia successfully transformed into the largest plywood exporter in the world (from 4% of market share to 80%) in a few years due to a combination of export taxes, export restrictions and government procurement of domestic plywood.[xi][xii][xii] (Similarly when the EU was industrialising, a number of European countries used export taxes to industrialise).

Developed countries often seek commitments from developing countries or LDCs in FTAs or EPAs which go beyond liberalisation of trade in goods. If LDCs or developing countries agree to such provisions, some of the implications are listed below.

Services and investment chapter(s)

Developed countries may also ask LDCs to liberalise their services and investment sectors on a negative list (where everything is liberalised unless listed as an exception. This is something typically sought by the USA) or positive list (where only the sectors listed are liberalised, as the EU usually requests) basis. This can have a number of implications including: difficult-to-reverse liberalisation (for example if it turns out to be a mistake or circumstances change), a worsening of the balance of payments, loss of control of strategic sectors such as oil and gas, limitations on the ability to regulate and difficulty in requiring: technology transfer, joint ventures and employment and training of locals in the sectors which are liberalised.

There is also usually a requirement for free movement of capital with insufficient ability to impose capital controls. This is despite the recognition by the Commission of Experts on Reforms of the International Monetary and Financial System convened by the United Nations General Assembly President,[xii][xiii] the International Monetary Fund[xiii][xiv] and more than 250 eminent economists[xiv][xv] of the need for capital controls.

LDCs may also wish to use maritime cargo-sharing arrangements (where trade between an LDC and Country B is done on the LDC’s or Country B’s ships to ensure the shipping value-added is enjoyed by the LDC as much as possible). However, since such arrangements lock out third parties such as EU shipping companies, based on its past FTAs and EPAs, the EU is also likely to ask for cancellation of all existing maritime cargo-sharing arrangements and a prohibition on any future cargo-sharing arrangements.

Further analysis of the development implications of the services provisions typically sought by the EU in its FTAs and EPAs can be found in a paper by Law Professor Kelsey.[xv][xvi]

Government procurement

Government procurement of goods and services can be 30% of the gross national product and a powerful tool for development. For example, when directed to local producers, suppliers and products, it can: assist local producers and suppliers generally; assist disadvantaged groups (including women) or regions within the country; improve the balance of payments and be a major stimulus to the local economy to counter a recession.  However, developed countries may also seek access to LDCs’ government procurement through FTAs/EPAs via the government procurement (and possibly the competition) chapter. Agreeing to this would mean less of the limited amount that LDC governments have to spend would benefit producers and suppliers from the LDC.

Conclusion

One of the ways that LDCs can avoid the impacts above is for the EU to provide EBA treatment to all African countries. This can be done through a waiver at the WTO, as the USA has obtained for sub-Saharan African countries via its African Growth and Opportunity Act (AGOA)[xvi][xvii].

This paper has been prepared by Third World Network for the LDC-IV Conference in Istanbul, May 2011.  For further information and details please contact Sanya Reid Smith, sanya@twnetwork.org


[viii] http://r0.unctad.org/ditc/tab/publications/itcdtab31_en.pdf



[i] (Some have already initialled (and some have also signed) interim EPAs and are in the process of negotiating more comprehensive EPAs).

[ii] More detailed information can be found at www.twnside.org.sg/title2/par/CARIFORUM.Feb09.doc

[ix] ‘Tax Revenue and (or?) Trade Liberalization’, Baunsgaard and Keen, June 2005, IMF Working Paper, WP/05/112, http://www.imf.org/external/pubs/ft/wp/2005/wp05112.pdf.

[xii] See www.twnside.org.sg/title2/par/Export_Taxes.doc for further information

[xiii] Its 2009 Report noted that ‘Agreements that restrict a country’s ability to revise its regulatory regime—including not only domestic prudential but, crucially, capital account regulations—obviously have to be altered, in light of what has been learned about deficiencies in this crisis.’ http://www.un.org/ga/econcrisissummit/docs/FinalReport_CoE.pdf.

[xiv] See for example http://www.imf.org/external/pubs/ft/spn/2010/spn1004.pdf and Deborah E Siegel, ILSA Journal of International & Comparative Law [Vol 10:297].

[xvi] ‘Legal Analysis of Services and Investment in the CARIFORUM-EC EPA’, Research Paper 31, July 2010, www.southcentre.org

[xvii] See WTO document WT/L/754

 


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