Kittivisian Life

The issue of recently signed Economic Partnership Agreement (EPA) with the European Union is of such significance to that region, that we have decided to provide a local perspective as well as The View from Europe. We invite readers to engage in the ongoing debate on this important issue to all of us in the Caribbean.

One of the hot topics today in the news is the recently concluded trade negotiation between the European Commission (EC) and CARIFORUM (CARICOM and the Dominican Republic) on December 16 in Barbados. On a wider level, the negotiations were conducted between the EC and the African Caribbean and Pacific (ACP) group of countries. The ACP group was divided into six ‘regional’ sub-groupings – four in Africa, one in the Caribbean, and one in the Pacific Islands.

Both the EC and the ACP group had earmarked the end of 2007 as the deadline to conclude the signing of comprehensive trade agreements. There was therefore a sigh of relief when all major issues of the agreement had been agreed to by all parties in the wee hours of the morning. This article will examine the EPA between the EC and our region, specifically designated CARIFORUM, which comprises CARICOM Member States plus the Dominican Republic. It will also briefly address opportunities and threats that accompany our signing of this landmark agreement.

EPAs – what are they?
The Economic Partnership Agreement (EPA) is essentially a free trade agreement between the European Communities and the ACP. Such agreement covers the free movement of goods and services among the various countries of the economic space, similar to what we have achieved with the CSME initiative. The EPA also contains a chapter on Investment, Government Procurement and Intellectual Property Rights.

Within the EPA, there is a strong emphasis on regional integration as the preferred tool by which economic development could be achieved. Regional integration has therefore been identified as one of the pillars on which the agreement would be based. The EC has contributed significantly to regional integration initiatives. This is of course in their interest, as a single market space would be in the interest of their investors and exporters to the Caribbean.

The EPA is an upgrade to the longstanding economic relationship between Europe and its former colonies countries in Africa, the Caribbean and the Pacific regions. The relationship was embodied in successive Lome Conventions spanning a period of roughly thirty years. The ACP has since that time benefited from preferential access to the European market for specific products – sugar, bananas, rice and rum.

Not only were these products allowed duty free access into Europe, but the ACP countries were guaranteed a special price, usually above the global market value. By applying high tariffs and quotas to non-ACP producing countries the arrangement discriminated against other producers like Brazil, Australia and Thailand in the case of sugar, and Ecuador, Nicaragua and other banana producers in Latin America. The same treatment applied to rice and rum.

Winds of Change
The establishment of the World Trade Organisation (WTO) in 1995 was a major turning point in the nature of the trade and economic relations between Europe and the ACP countries.  It was recognised that the preferential access granted to the ACP countries for a limited number of products was a violation of multilateral trade rules and would therefore need to be reformed to comply with the rules of the WTO.

The EC has on two occasions successfully negotiated a waiver from the WTO that allowed it to keep the limited preferential trade agreement in place for a period of five years. These waivers however came at a very high price as countries negatively affected by the scheme had to be compensated for their restricted access to the EU market. The EC has indicated that it had no intention to request an extension to the waiver that expired on December 31 2007.

I must note here that preferential trading agreements, where countries are allowed to discriminate against non-members are allowed in the WTO. They are the exceptions to the rule of non-discrimination. There is an abundance of such agreements; close to 200 have been notified to the WTO. CARICOM, Mercosur and NAFTA are examples of such arrangements. The agreement must however pass the GATT Article 24 test. It must cover “substantially all [of the] trade” between the Members of the preferential trade agreement. Although there is no exact definition as to what constitutes substantially all trade, the practice has been that at least 90 per cent of trade in goods must be liberalised. In the case of the EC-CARIFORUM negotiations, both sides have agreed to liberalise 92 per cent of the trade over a 25 year period. The schedule below provides the basis for tariff liberalisation.  

Level of Liberalization in EC CARIFORUM EPA Agreement

The above schedule indicates that 13.1 per cent of our imports from the EU will be excluded from tariff liberalisation. These items have been placed in an “exclusions basket”, which is essentially a sensitive list based on their value in generating revenue and the need to promote industrial development. The remaining 86.9 per cent of tariff lines will be liberalised over a twenty-five year period, in five year increments.

Opportunities
Like any free trade agreement the EPA will bring about market access opportunities through the removal, or reduction of tariffs and non-tariff barriers. Producers from CARICOM and the Dominican Republic will be allowed to export their goods free of duty to the European Union. Without having to contend with the tariff, our producers can sell their goods at a more competitive price in the EU market. Small producers can now consider more seriously Europe as a niche market for their specialty products and build brand recognition and competitiveness beyond the free trade area.

Access to the European market is easier than we think. The island of St. Maarten/St. Martin is only twenty minutes away by air. The French overseas territories of Guadeloupe and Martinique are within close proximity to all OECS Member countries as well. These two countries are politically and economically part of the European Union and should be considered a natural gateway to mainland Europe.  

Producers in Europe will have similar access to our market, as most of the products will arrive into our market free of import duty. Goods from the EU will generally become cheaper given the advantage of not having to pay the import duty at the border. This is the basis of a reciprocal trade agreement where both parties stand to benefit from favourable market access conditions. There is therefore potential for increased trade between Europe and the Caribbean as a result of the signing of the EPA.

Service providers in the Caribbean will also have temporary access to the EU market to provide services. Their terms of access are more favourable than granted to non-members of the EPA. This offers opportunities to our professionals and service providers as they can now access the European market under easier terms. By virtue of the reciprocal nature of the free trade agreement, European service providers will have access to our market in the Caribbean. Competition provided by European service providers could serve as a strong incentive for our service providers to improve their quality. It is therefore a wise investment for them to attain certification from international standards setting bodies and professional associations. By attaining such international recognition, our domestic firms and service providers will place themselves in a position to compete with service providers from Europe.

Threats
1. Loss of revenue from import duties
Any initiative that affects the generation of revenue is generally considered a threat to the economy. All free trade agreements require members to liberalise trade by reducing tariffs and removing non-tariff barriers. St. Kitts and Nevis, like most other countries within CARICOM depends heavily on import duties as a main source for government revenue. The EPAs will have a direct impact in the sense that the applied tariff rates will be cut in five year intervals over a twenty-five year period. A significant number of tariff lines have been reduced from ten and five per cent to zero.

Stringent efforts were made to minimize the negative impacts on the revenue generation by placing the most sensitive items in the exclusion basket and by phasing out the less sensitive items in five year intervals.

Based on the scheduled illustrated earlier, CARIFORUM has until 2013 to remove tariffs on 56 per cent of imports from Europe. By 2023, this figure should increase to 82.7 per cent before the ultimate level of 86.1 per cent.

The transitional period for tariff reduction should be seen as an opportunity for us to find other creative ways to generate government revenue, as well as strengthen our capacity to collect outstanding revenues.

2. Competition from European Firms and Service Providers
Competition can be viewed as a double-edged sword. On one hand it can spur our domestic and regional producers to improve their products and services, while on the other, it can enable European entrants into the market to engage in predatory practices which kill domestic producers and abuse their dominant position in the market. Fortunately, the EPA contains a chapter on Competition Policy, which forces business enterprises to comply with rules of competition and consumer protection. The OECS Competition Authority and the Caribbean Competition Commission will play an active role in enforcing the rules of competition in the implementation of the CSME and EPA Agreements.

Conclusion
The signing of an Economic Partnership Agreement between the European Commission and CARIFORUM is a landmark agreement, which provides an opportunity for our producers and service providers to access the European market on more favourable terms than currently is the case.

Of the six sub-regions, CARIFORUM is the only one to conclude the signing of a comprehensive free trade agreement involving goods, services, investment, government procurement and intellectual property rights.

The other regions have signed “interim agreements”, limited to trade in goods. The African and Pacific groups will use 2008 to agree on the other critical areas of the EPA.

The successful conclusion of an agreement ushers in new dispensation in the political and economic relations between the European Union and the Caribbean. The onus is on both sides to monitor the implementation of the agreement to ensure that the increased market access translates into real benefits for all parties.

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