Understanding International Trade

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UNDERSTANDING INTERNATIONAL TRADE

A publication of the OECS Trade Policy Project aimed at students,businesspersons and the public that explains the operation of the trading

system from the perspective of the Eastern Caribbean

Written for the OECS Trade Policy Project by Edwin Laurent.

Editor: Paula Hippolyte.

Published by: The OECS Trade Policy Project June 2006.

Design layout and artwork: Media Publishing International, Edwin Laurent and EPO Belgium,

Paula Hippolyte and T Lindsey-Bethune.

Cover design by John Steele - InnaEye Art Studio - [email protected] by: Ensched-Van Muysewinkel June 2006.

Valuable contributions, assistance and support received from: Hon Charles Cadet, Dr. Paul Goodison,

Dr. Mark Griffith and Mrs Thrse Lourat.

For making this work possible: The OECS Trade Policy Project, the Canadian International Development

Agency (CIDA) and the OECS Secretariat.

Copyright, 2006 OECS Secretariat

P.O. Box 179, Morne Fortune, Castries, Saint Lucia

Disclaimer:The ideas expressed in this publication are those of the writer and do not necessarily reflect the

positions or views of CIDA, the OECS or any of its organs.

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ACP African, Caribbean and Pacific Group

BFA Banana Framework Agreement

BPOA Barbados Programme of Action(adopted in 1994 by the 1st UNconference on the sustainable

development of SIDS).CAP Common Agricultural Policy

CARICOM Caribbean Common Market

CARIBCAN Caribbean-Canada Agreement

CARIFTA Caribbean Free Trade Area

CBI Caribbean Basin Initiative

CET Common External Tariff

COM or CMO Common Organisation of theMarket (in the EU)

COTED Council for Trade andEconomic Development

CSME Caribbean Single Market andEconomy

DDA Doha Development Agenda.

DFID Department for InternationalDevelopment (UK)

DSB Dispute Settlement Body

DSU Dispute Settlement Understanding

DTI Department for Trade and Industry(UK)

EBA Everything But Arms Initiative

EC European Community

ECCM East Caribbean CommonMarket

EDF European Development Fund

EEC European Economic Community

EIB European Investment Bank

EPA Economic Partnership Agreement

ESM European Single Market

EU European Union

FAO Food and Agriculture Organisation

FLEX Fluctuation in Export Earnings

FOB Free on Board

FTA Free Trade Area

FTAA Free Trade Area of the Americas

GATS General Agreement on Trade inServices

GATT General Agreement on Tariffs andTrade

GDP Gross Domestic Product

GSP Generalised System of Preferences

HTCI Harmful Tax Competition Initiative

ICT Information Communication

Technology

ITC International Trade Centre

LDC Least Developed Countries (UN)

LDC Less Developed Countries(CARICOM)

MDGs Millennium Development Goals

MFN Most Favoured Nation

MTN Multilateral Trade Negotiations

NAMA Non Agricultural Market Access

NGO Non-Governmental Organisation

NIP National Indicative Programme

NTB Non-Tariff Barriers

OECD Organisation for EconomicCooperation and Development

OECS Organisation of Eastern CaribbeanStates

QR Quantitative Restrictions

RTA Regional Trading Arrangement

SFA Special Framework of Assistance

SIDS Small Island Developing States

SSA Special System of Assistance(for bananas by the EU)

STABEX Stabilisation in Export Earnings

SVE Small Vulnerable Economy

TBT Technical Barriers to Trade

TRQ Tariff Rate Quota

UNCTAD United Nations Conference onTrade and Development

USTR United States Trade Representative

WIBDECO Windward Islands BananaDevelopment Export Company

WINFA Windward Islands FarmersAssociation

WIRSPA West Indies Rum and SpiritsProducers Association

WISA West Indies Associated States(Council of Ministers)

WTO World Trade Organisation

ACRONYMS

2 So all these lettersreally mean something

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PREFACEProfessor Vaughan A. Lewis1

This is an opportune time to publish this guide to the trade issues which shape thecurrent situation of the OECS countries and the international economic environment. Thefate of the banana and sugar industries, as the conditions for entering an increasingly

integrated and expanded European market change, in the face of global trade rules change,has awakened many citizens of the islands to the dramatic, negative effects on theirlivelihoods that have already occurred and are still likely to occur. And this has certainly beenforcing a discussion on the manner in which these countries should adapt to such changes,and on the extent to which such adaptation can be successfully achieved.

It is now some twenty years since the European Community indicated to the participatingstates in the African, Caribbean and Pacific (ACP) grouping that its pursuit of a EuropeanSingle Market and Economy would require full liberalization of trade within the Community,and that its intention with to achieve this by 1993. At first, it appeared to the OECS governmentsthat, following the successful diplomatic effort which, in concert with others, had resulted inthe 1975 Lom Convention, a similar effort of negotiation with the Community could be

undertaken. The essential objective of this would be to preserve the benefits accruing fromthe Convention, including the preferential arrangements by which their key products werefacilitated entry into the markets in Europe.

Early on, however, it became apparent that two processes had been taking place, whichwould affect the nature of the negotiations and their potential results:

First the expanding membership of the Community was effecting a change ofCommunity sentiment away from its previous understanding of and response toparticular concerns of developing states, to one of reduced sympathy for them. Thedeveloping view was that there should be no substantial discriminatory differenceamong Member States with regard to the conditions under which third party productscould enter into Community markets.

Secondly, at the time of the European decision on its Single Market and Economy, themember-states of the Community were already deeply engaged in negotiations withinthe Uruguay Round for further liberalization of international trade, the extension ofthe principles of liberalization to the sphere of production, and the further extensionof those principles to the spheres of agriculture and services. This orientation wasbeing pushed with a certain anxiety and persistence by the United States of America.

As the writer indicates, as they began their negotiations, the OECS and CARICOMexporters of bananas were caught somewhat by surprise at the extent to which theirtraditional diplomatic relationship with the United Kingdom was not enough to achieve asmooth consensus with the other member states of the EC. This certainly revealed the

diminished capacity of the United Kingdom to act as a diplomatic broker on behalf of theACP, and therefore Caribbean states, and to achieve, relatively intact, broader agreement inEurope on proposals reached between the UK and the Caribbean. Britain, of course, had itselfbeen engaged in a policy revolution focused on the liberalization and deregulation of herown domestic economy under Prime Ministers Thatcher and then Major, and thus could notlegitimately resist the extension of that process to the international economy as a whole.

It is useful to recall at this point that the realization on the part of the OECS andCARICOM states that changing international conditions would require substantial structuraladjustment and diversification of their own economies was not something of sudden origin.In fact in the mid-1960s, the Governments of the time, shocked into recognizing theimplications of Britains decision to apply for membership of the European Communities, had

appealed to that country to seek to ensure that in the process some form of preferences fortheir agricultural exports would be maintained, and compensation or support for progressiveadjustment of the economies of their states towards economic diversification.

1 Dr Vaughan Lewis is Professor of International Relations of the Caribbean at the University of the West Indies, St AugustineCampus, Trinidad. He was the first Director General of the OECS Secretariat and is a former Prime Minister of Saint Lucia. 3


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Consequently the long period of successfully negotiated successive Lom Conventionswith their arrangements for STABEX compensation for exports periodically affected negativelyby market or production conditions, along with satisfactorily negotiated preferentialarrangements, appears to have lulled Governments into a false sense of the security of thosearrangements as props for their post-colonial mode of economic production and marketing.

The rude awakening of Caribbean governments to the persistent push for liberalizationof the European internal market, spurred on by commitments now made to the World TradeOrganization (WTO), indeed revived the language, in Caribbean diplomacy of the 1990s ofcompensation, adjustment, special treatment and gradual erosion of preferences, that hadbeen prevalent since the 1960s and 1970s. And this has been persistently so, particularly asthe WTO in general has shown no sympathy for ACP countries presumed status as requiring,in this case at least, special and differential treatment.

Regional and International Relations

The decision, of the CARICOM states to establish a Single Market and Economy, initiallymade in 1989 and formalized in 1992 was an indication of the compulsions moving the regiontowards principles of liberalization increasingly being implemented as a requirement of theirreceipt of assistance from the World Bank and the International Monetary Fund at a time ofrecession among, in particular, the More Developed Countries of the Region.

This commitment, including reductions in the levels of the CARICOM CommonExternal Tariff, intensified discussions in the region as a whole, on the necessity for domesticstructural adjustment and liberalization, which Governments had been forced to undertakeat the international level (at the level of EU-ACP relations). The requirements for compensationarrangements (including a Regional Integration Fund) and special treatment, which wherebeing pleased for at that international level, were now re-echoed by Lesser DevelopedCountries (largely OECS States) within a regional context.

Again here, the discourse led by OECS Governments has been strangely reminiscent of

the demands made by Antigua and Barbuda and Montserrat at the time of the transformationof CARIFTA into CARICOM in 1973. These resulted in the compensatory arrangements forthe establishment of the Caribbean Investment Corporation and a renewed commitment tofocus the Caribbean Development Banks efforts on the Lesser Developed Countries efforts.

The banana producing countries which have had to contend since the 1990s with thefallout from changes in the banana marketing arrangements, and which have been taking thismessage to European capitals since then, in search of a viable solution to the decline in bananapreferences, have now been followed in their diplomatic forays by Governments of the sugarproducing states of the Region. In the early 1990s, the view was taken that the Sugar Protocol,having been separately agreed, and agreed prior to the Lom Convention, would be exemptfrom the pressures for change emanating form the liberalization process of the EuropeanSingle Market and Economy.

But ten to fifteen years later, Caribbean Governments have been shocked into recognitionthat the process of internationalization of decision-making on trade arrangements, (the WTOprocess) which ruthlessly negated agreements which the Banana producing countriescontinually negotiated and deemed as settled, has come to affect the status of their sugarexports. The European Union has had to bend to the mandates of the WTO, and ourtraditional interlocutor valuable or diplomatic broker, the United Kingdom, has not beenable to roll back the waves of liberalization and deregulation in spite of her professedsympathy for our case.

What all this raises, surely, is the extent to which, over the years of change in ourconditions of international trade and production, the Caribbean countries are being forced to

adjust to new trading conditions, either through the reorganization of their traditionaleconomic (and in particular agricultural) activities, or the creation of new activities capableof penetrating existing international markets under the new conditions.

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Reform

The European Union, in a prelude to elaboration of new proposals for what has becomethe formula of the Economic Partnership Agreement (EPA), had given a signal in its GreenPaper (discussed in this Guide) that it had not been satisfied that the provisions of the LomConventions, providing access to the non-agricultural sector of the EU economy, had been

appropriately made use of. The EU observed that the extensive aid provided to ACP countriesover the years had not resulted in sustained structural adjustment of their economies.

The EU, now reaching into South and Central America in search of new markets and newlocations for investment (through the establishment of free trade areas), is conscious that indoing so, it is required to conform to the disciplines attached to such trading arrangements,particularly those relating to the principles of reciprocity. It was therefore but a matter oftime before the EU was to insist that reciprocity mutual opening of markets - shouldunderlie any new trading arrangement between itself and the ACP countries, irrespective of sizeof economy. And in turn Caribbean countries have felt compelled to raise the battle cry of theneed for deliberate differentiation based on size and level of economy through mechanismsof special and differential treatment.

As the writer indicates this is a discussion now in progress, and we are left to see whatthe translation of reciprocity into rules and regulations means for these self-categorizedsmall-island developing countries (SIDS) in addition to the larger mainland producers of sugar(Guyana and Belize) and of bananas (Belize).

In a sense, in this process the ball is now squarely in the court of the ACP countries specifically the Caribbean states. For it is recognized that our negotiations for an EPA will notbe diplomatically mediated by the United Kingdom in any substantial sense as were ournegotiations towards the 1975 Lom Convention. And that, further, our states cannot have theattention of the traditional European member states of the EU as they struggle with theirnew venture of simultaneous deepening and widening of their own internal market involvingstates with even less empathy for our objectives than the block of liberalizing-inclined EC

states in the 1990s.

This raises an issue which goes beyond the reach of this Guide: the need to search fornew diplomatic allies in the difficult situation where differences of orientation amongdeveloping countries themselves are tending to become evident witness the stand ofGuyanas neighbour Brazil on the sugar issue.

A further issue raised is that of the translation of the demand for assistance within thestructure of a new EPA into efforts conducive to encouraging structural adjustment andsustainable development. The writer stresses the need for the detailed programming of EUfunded projects to coincide with European expectations of visible progress in the structuresof our economies.

These issues are being negotiated at the Caricom regional level, and should presume aneffective single economic space to meet the need for diversification on the basis of scaleadequate to meet the demands of the competitive environment, and to permit diversificationof economic activities and therefore exports.

Charting a new course

The OECS countries have recognized the need to systematically travel the road to someform of economic union and creation of a single economic space. The urgent question now iswhat form is the larger system to take in terms of creation of a Caricom single economic space,and the extent to which this is necessary to give the OECS countries a stronger base foreconomic diversification, or will affect their own process of economic union.

This internal discussion needs to take place with some deliberation within our sub-Regionat this time. As the author emphasizes, it requires extensive technical and financial resources.

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It is a prerequisite for adapting to both the new environments of the EU and the emerging freetrade area agreements in our Hemisphere.

The European Union is presently carrying out an experiment related to the adjustment ofits new members of Eastern Europe, which in a sense speaks to the issue of the arrangementsbetween lesser and more developed countries. As we approach them in our negotiations they

will see us in constant comparison with their own circumstances, and match our progress againstthose circumstances.

The insistence in the EU Green Paper on the need for more appropriate utilization of aidfunds will undoubtedly remain a significant part of European diplomacy, and a condition of thesuccess of our own diplomacy.And our success in this sphere will undoubtedly influence thenature of the relations that we work out in this Hemisphere as the United States pushesrelentlessly on towards the creation of a free trade area, or a multiplicity of free trade areas here.

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FOREWORD

In an environment governed by global trade rules with a capacity for determining theeconomic and social progress of small states vulnerable to change, trade matters have withinthe OECS States become the business of everyone. This is particularly true for students about

to enter a world of business which demands knowledge of such issues.

Under an assistance Programme designed to Strengthen the capacity of the OECS sub-regionto better participate within the regional integration and wider multilateral trade agreementprocesses, the OECS Trade Policy Project, funded by the Canadian International DevelopmentAgency, included in its activities an awareness component intended to create a generalclimate of understanding of the trade issues which will need to be addressed in this context.

It is against this background that an allocation of resources from the awareness componentof the CIDA/OECS Trade Policy Project was directed by the OECS Secretariat towards thepreparation of this trade policy guide which, while specifically targeted at tertiary schoolstudents, is hoped will be found usefully informative by a wider public.

Dr. Len Ishmael

Director GeneralOECS Secretariat

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Chapter 6 TOURISM AND OTHER SERVICES - THE ISSUES IN MULTILATERAL NEGOTIATION.........506.1.1 What are the OECS interests ?.......................................................................................................................50

6.1.2 Tourism.......................................................................................................................................................................526.1.3 Financial services...................................................................................................................................................536.1.4 Information and communication technology (ICT)................................................................................536.1.5 Mode 4...................................................................................................................................................................... 546.1.6 Other negotiating aims.......................................................................................................................................54

Section 3 THE WAY FORWARD......................................................................................................................................... 55Chapter 7 ADOPTING NEW APPROACHES................................................................................................................... 55

7.1 DIVERSIFICATION AND DEVELOPMENT......................................................................................................557.1.1 A role for the private sector............................................................................................................................ 557.1.2 The experience of external support............................................................................................................ 577.1.3 Was the support effective ?.............................................................................................................................577.2 TRADE AND ENVIRONMENT...........................................................................................................................587.3 NEGOTIATION- USING TRADE DIPLOMACY TO ADVANCE NATIONAL/REGIONAL GOALS....60

Further reading .....................................................................................................................................................................................63

List of tables

Table 1 Supplies of Bananas to the EU 15, 1990-2002 (thousand tonnes)....................................................36Table 2 Banana Export Values (fob) (US$ million).................................................................................................. 40Table 3 Contribution of sugar to employment and foreign exchange.......................................................... 44Table 4 Projected loss of earnings..................................................................................................................................46

List of boxes

Box 1 The building blocks of the CSME....................................................................................................................20Box 2 Department for International Development and Department of Trade and Industry Report.. 25Box 3 UK Parliamentary Report...................................................................................................................................27Box 4 Trade policy reviews.............................................................................................................................................31Box 5 UNCTAD.................................................................................................................................................................... 34Box 6 The problem of different production costs between the ACP and Latin America.................. 37Box 7 CommonFund for Commodities.....................................................................................................................47Box 8 Rum............................................................................................................................................................................. 48Box 9 Making Trade Policy..............................................................................................................................................49Box 10 The International Trade Centre.......................................................................................................................58Box 11 Millenium Development Goals (MDGs)..................................................................................................... 59

List of figures and charts

Figure 1. Merchandise trade in the OECS, 2004.........................................................................................................14Figure 2. The position of the OECS within the global trading system.............................................................21Figure 3. Average free on board (fob) prices, 1999....................................................................................................37Figure 4. Number of active banana growers in the Windward Islands, 1993-2001, thousands.............. 39Figure 5. Export values for bananas fob, 1991-2002, $US million....................................................................... 40Figure 6. Services Trade of the OECS, 2003.................................................................................................................51Figure 7. Tourist arrivals in the OECS, 2004 (thousands)........................................................................................52Figure 8. Estim. value of expenditure, EC$ m, 2004.................................................................................................53Figure 9. Estim. % total tourist expenditure, 2004................................................................................................... 53


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Adjustment Assistance: The financial and technical supportprovided for States, firms, workers and communities to helpthem adapt to and function satisfactorily in conditions ofincreased competition for their products in overseas and/ordomestic markets. This assistance can include help toGovernments to devise alternative revenue collectionmechanisms to replace duties lost as a result of their reductionor elimination of tariffs on imported goods.

Appellate Body: The WTO group that hears appeals against theconclusions of Dispute Settlement Panels.

Asymmetry in the Trade Agreement: The treatment of the sidesin a trading arrangement where the rate of tariff reductionundertaken by the Parties is different, or asymmetrical. One

Party could be given a longer time compared to the other forcompleting the process. Alternately, a lesser percentage of itstotal imports could be subjected to tariff reduction and elimination,and also, different obligations on the rate or extent of removalof other barriers to trade could apply.

Barriers to trade - (tariff and non-tariff): Restrictions placed bygovernments on imports that take the form of customs duties,charges, limitations on the volume and other measures, whichare not borne by domestic products. These barriers can have theeffect of making imports more expensive and/or reducing theirvolume.

Beggar-thy-Neighbour Policy (Protectionism): A countryseeking to strengthen the competitive position of its domesticproduction vis--vis imports through discouraging imports withhigh tariffs and other measures that restrict imports. The imagery stemsfrom a side effect of the policy that exporters could lose themarket and might well be impoverished.

Bilateral: Negotiations, agreements or understandings betweentwo countries.

Binding: When countries agree in the WTO not to increase therate of duty on a particular item imported from other Members,the rate is bound. The country cannot then charge duties at

rates higher than the bound level; it would be violating the rulesand action could be taken against it. There are, however, provisionsfor it to subsequently negotiate for increases in its tariff rate.A country is free to charge (apply) a lower rate of duty.

Bretton Woods Institutions: The collective name for theInternational Monetary Fund and the World Bank. Named afterthe town in New Hampshire in the US where they were createdin 1944.

Caribbean Single Market and Economy: The single economicspace among members of CARICOM in which there are norestrictions on the free movement of goods, services, labour andcapital.

Commodities: Widely traded bulk goods, often unprocessed andhomogeneous.

Commodity Protocols: The ACP-EU Agreements contain specialarrangements regarding ACP trade in specific commodities likesugar and bananas. The aim is to provide additional provisions tothe ACP that will support development and remunerative tradeof these commodities.

Common Agriculture Policy (CAP): The unified system operatedby EU countries for conducting their agricultural programmesand policies that are based principally on price supports or subsidiesand production quotas.

Common External Tariff (CET): The schedule or list of importduties applied by all Members of a common market on importsfrom non-member countries.

Comparative Advantage: The international trading system isbased on this principle first elaborated in 1817 by the economistDavid Ricardo that a country should produce and export thosegoods and services in which it is most competitive internationallyand import to satisfy its needs for those that it does not produce.

Concessions: In negotiations, countries offer to reduce tariffs orother trade barriers, in exchange for, or to induce similar actionfrom their trading partners.

Consensus (decision making): Agreement is reached when thereis no continuing objection by any participating member of thedecision making group. This is in contrast with unanimity whereagreement of all participants is actually ascertained.

Contracting Party: A country that signed the GATT andaccepted its obligations and benefits.

Discrimination: Providing more favourable tariff or othertreatment for goods and services imported from particularcountries as opposed to others.

Dispute Settlement Body: The grouping of representatives of allWTO Members that administers WTO rules, establishes Panels toadjudicate disputes and authorises punitive measures for countriesthat violate the rules.

Diversification: Expanding the foundations of the economy to awider range of production beyond reliance on a single or a narrowrange of goods and services. This improves the prospects foreconomic growth and development.

Erosion of Preferences: As importing countries reduce tariffsbecause of liberalisation, the advantages enjoyed by their sup-pliers with duty-free or reduced duty privileges are cut back.

Everything but Arms Initiative: The package first offered toLDCs in 2001 in which Developed Countries and now DevelopingCountries in a position to offer it, are encouraged to grant pro-

ducts from LDCs unrestricted entry to their own markets byremoving duties and quotas on all imports except for arms andammunition.

GLOSSARY


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Export subsidies: Payments by government to domestic exportersof goods and services. Such payments enable foreign sales to beat lower prices; hence they are more competitive than theywould otherwise have been. The WTO therefore considers thatsuch subsidies change trade patterns and distort trade.

Factors of Production: According to economic thinking: land,labour and capital.

Fairtrade: The production and marketing of goods according tostipulated criteria regarding working conditions, welfare ofworkers, acceptable environmental standards and the provisionof fair returns to producers.

Free Trade: The ultimate theoretical goal where there are nogovernmental barriers to international trade in the form of tariffsand other barriers to goods and services entering the country.

Free Trade Area (FTA): A cooperative arrangement among agroup of countries to remove tariffs and trade restrictionsamong themselves, but they keep their individual tariffs onimports from outside the area. CARIFTA was a Free Trade Area.

Generalised System of Preferences (GSP): A system underwhich tariffs applied by developed countries on certain importsfrom developing countries are reduced or eliminated on thebasis of agreed conditions.

Gross Domestic Product (GDP): The total value of new goodsand services produced in a country during a given year.

Import quota : The maximum quantity or value of a particularproduct allowed to enter a country during a specified time period.

Least Developed Countries (LDCs): These are countries classifiedby the UN on the basis of a range of criteria, principally their percapita income below $900 per annum. According to that criterion,none of the OECS countries are LDCs. The only LDC in theAmericas is Haiti. LDCs are eligible for special trading privilegesincluding the Everything but Arms initiative (EBA).

Less Developed Countries (LDCs): CARICOM designates theOECS and Belize as LDCs in view of their small size, narrowresource base and low level of development. This designationmakes them eligible for special support measures within CARICOM.

Liberalisation: An underlying principle of the WTO and the earlierGATT that seeks the reduction and eventual elimination of tariffsand other measures that impede trade.

Licensing: When Governments limit the volume of imports of acertain product they might grant permits or licenses to importersthat provide them with approval, whether or not in a physicaldocument, that grants them rights to import. Often specificconditions are stipulated. Licensing can also be operated forexports.

Market Access: The availability of a national market to exportingcountries.

Mercantilism: The now discredited policy of the pursuit of tradesurplus and the accumulation of monetary assets by promotingexportation and discouraging importation.

Mode 4: The temporary relocation of workers to another countrywhere they are employed to provide a service. The farm workerprogrammes with the US and with Canada are examples.

Most Favoured Nation (treatment): A cardinal principle of theMultilateral Trading System is that a country will automaticallyapply to all WTO Members the lowest tariffs or reductions itapplies on imports from any source, whether another WTOmember or not. Exceptions to this rule are possible, e.g. in FTAs.

Multilateral: Negotiations, agreements or understandingsamong several countries or groupings.

Multilateral Trade Negotiations: These negotiations among allWTO Members (previously GATT Contracting Parties) have beenheld at intervals to advance the attainment of the objectives ofthe WTO and are referred to as rounds. The current round iscalled the Doha Development Agenda (DDA) or Doha Round.

National Treatment: The commitment to treat foreign products,

sellers, businesses and those who provide services the same asdomestic counterparts.

Non- Tariff Barriers (NTBs): These are measures, other thanimport duties, taken by a government, that impose limitations onor impede imports. They can range from outright importprohibitions to onerous quality standards and labellingrequirements.

Preferences: Advantages extended to imports from selectedtrading partners in the form of lower or zero tariffs or exemptionfrom certain NTBs.

Quantitative Restrictions (QRs): The limitation of the importvolume of specific products from the rest of the world or fromspecific countries.

Quota Rent: When the importation of a particular product islimited by a quota, the restriction can sometimes lead to ascarcity that increases prices in the import market. The quotarent is the difference between the domestic price (net of theimport tariff) and the world price. This value may be obtained bythe exporters, importers or distributors or shared among them.

Reciprocity: This is the principle that generally guides tradenegotiations; where a country awards trade concessions, they arematched by the provision of equivalent advantages in exchange.

Rule/s of Origin: The criterion that determines whether aparticular item was produced in a country e.g. the productionprocess or the amount of value added locally.

Sanitary and Phytosanitary Import Measures: Controls andrestrictions placed on imports, to protect human, animal andplant health.

Single Undertaking: The requirement in a trade negotiation toaccept the entire package rather than just particular elements ofthe agreement.

Special and Differential Treatment: The principle that theaward of benefits to developing countries and the demandsmade of them should be in keeping with their trade, financialand development needs and capacity.


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Supply-side Constraints: New trading opportunities cannotalways be taken up by a country because it is unable to increaseits competitive production due to a number of reasons(constraints) such as insufficiency of investment, lack of therequired skilled labour, inappropriate public policy framework,limited land space, etc.

Tariff: A tax on imports. This might be charged as a percentageof the value of the product (ad valorem) or a fixed charge perunit (specific).

Tariff-Rate-Quota (TRQ): The application of a different tariff onimports of the same item with the higher rate levied on importsabove a certain volume. This can have the same practical effectas a QR where the upper rate is so high that the imports onwhich it is charged would be made too expensive and thereforeunsaleable with the result that imports do not actually takeplace. (The TRQ device became quite widespread in themid-1990s when WTO Members were required to end QRs onagricultural products and resorted to it in order to effectivelyretain their prohibition on imports beyond set levels, whilstostensibly complying with the rules).

The Singapore Issues: Investment, competition policy,transparency in government procurement and trade facilitationwere four subjects that Trade Ministers meeting in Singapore in1996 decided should be studied by the WTO.

Trade Diversion: The redirection of trade flows as a result ofproviding preferences to less efficient trading partners. Goodsmight be sourced from them because the trade preference couldmake them competitive with the more efficient exporters.

Trade Facilitation: Reducing red tape and inefficient

administrative procedures so as to enable goods to be importedand exported more easily, quickly and possibly cheaply.

Vulnerability: The frequency and intensity with which a countryis exposed to negative environmental events and other disastersand the extent of damage caused. A country can also bevulnerable to adverse economic developments from abroad suchas a loss of export markets, decline in prices etc. The narrower theproduction and export base the more vulnerable the country.

Waiver: The authorisation granted by the WTO to a Memberpermitting it to deviate from legally binding agreements orobligations.

WTO-Compatible: An agreement, policy or practice that is inkeeping with the rules of the WTO. Trade arrangements,agreements and policies of WTO Members are supposed toconform with its rules.

Now I know what allthese big words mean


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IntroductionThe world of international trade can appear abstract and far removed from everyday

life. The very terms used, the WTO, the FTAA, the CSME, might seem designed to mystifyrather than enlighten. Many people are therefore content to ignore trade negotiations,

disputes and agreements, viewing those matters as concerning only Governments and bigbusinesses. Increasingly, however, these processes are defining not only commercial and tradingrelations among countries, but economic activities within countries themselves. Quiteominously, they constrain Governments flexibility on an increasing range of economic policyissues.

In the 21st century no country can expect to be an island unto itself, shut off from andindifferent to the outside world. This is nowhere more true than in the OECS countries 2,whose economies have, from the earliest colonial times, been open to and reliant oninternational trade. The quality of life of their people, their security and standard of livinghave therefore always depended upon the international situation and developments. Ratherthan producing for themselves the things that they need, these islands have earned their

livelihood through producing goods for sale abroad; initially a variety of commodities,ranging from cane sugar, rum and bananas, to light manufactured goods, and now, increasingly,to the provision of services for foreigners, principally tourism. Their exports of goods havebeen principally to Europe, the Caribbean and the USA. Their imports are more varied,coming from the USA, Japan, Europe, Latin America, China and several other sources. Servicesare sold principally to North America and Europe. The income from the sale or export of thenarrow range of goods and services that they produce is used to purchase from abroad(to import) the diversity of goods and services they consume. Therefore, what happensinternationally affects the lives of everyone locally and is thus of real concern. At the mostbasic level it determines what can be sold abroad and sets the prices that can be received andthose to be paid for purchases from abroad.

This publication seeks to demystify the functioning of the trading system and exploreshow international regulations impact on the trade and economic life of OECS countries.It also assesses whether very small countries can have any significant influence on theinternational processes that influence their future and whether they can be more than passiveobservers while their fate is being determined. Is the international system just a jungle inwhich only the fittest can survive and prosper? In the context within which they operate,economic and political power is important. However, the system is based on rules anddemocratic principles, so even the smallest Members can use their voices to safeguard andadvance their interests. The experiences of the Islands over the last decade are used toexamine these issues and questions, and the conclusion that emerges is that under certainconditions they can actually influence, to their benefit, the course of events.

The first section of this publication assesses the trading position of the OECS, andreviews the origins of regional economic cooperation and the issues at stake for the OECSwithin the Caribbean Single Market and Economy (CSME), the Economic PartnershipAgreement (EPA) with Europe, the Free Trade Area of the Americas (FTAA) and the World TradeOrganisation (WTO). The second section studies the experiences of OECS countries principalforeign exchange earners. It also explores public and private sector roles in diversification andassesses the environmental considerations in the formulation of trade policy. Finally, drawingon experience in international negotiations and trade diplomacy, it makes recommendationsregarding approaches to ensuring fuller benefit from the system.

Why participate in the multilateral trading system?

The members of the OECS have no option but to rely on and be open tothe outside world for their survival and prosperity. They do not have the means to produceeven a significant portion of the range of capital and consumer goods that their populations

2 The Membership of the Organization of Eastern Caribbean States (OECS) comprises of Antigua and Barbuda,Commonwealth of Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines withAnguilla and the British Virgin Islands as associate Members.


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require to maintain the lifestyles that they are accustomed to. (The islands therefore cannotbe self-sufficient). If the goods that they consume are to be obtained from abroad, thenforeign exchange to pay for them must be earned through the countries own export of goodsand services. OECS countries therefore have no choice but to trade: they have always beentraders. The trend for OECS countries to import more than they export is illustrated in the

following chart that highlights

their trade imbalance.

They face numerousconstraints that make themparticularly vulnerable to shocksfrom abroad and limit theirdevelopment prospects. The mostdecisive factors are their smallsize, insularity and shortage ofnatural resources.3 These structuralconstraints cannot be overcomeand they combine to make it moredifficult for the Islands to achieveeconomies of scale in severalareas of production at the sametime. As a result, they have relied

on mono-crop (or single industry) production. Economists however warn that a diversifiedproduction base is essential for sustainable development.

It is within their constraints that the islands endeavour to grow and develop. Butdomestic policy measures alone will not be sufficient. The international environment, whichis increasingly being shaped by regulations, must be favourable. The questions that they faceare: what should they do, and can their efforts really have any impact?

Consequently, as countries seek to ensure that the conditions in the outside world are

favourable to their economic well being, they work specifically for supportive trade rules andother regulations. This is the underlying reason why OECS Member States participate innegotiations, lobbying and economic diplomacy. These activities can be viewed as an essentialcomplement to, as well as an extension of, domestic and OECS policy aimed at fosteringeconomic security, growth and development and the improved welfare of their citizens.

The review of the trading system is presented in this guide, in three sections. The firstaddresses the regional versus the global approach. In the first chapter it considers theexperiences of cooperation within the OECS and CARICOM and in chapter two, with the EU.Chapter three examines the evolution and functioning of the World Trade Organisation(WTO). Section two reviews the actual international engagement of OECS countries from theperspective of the income generating activities on which their participation in the tradingsystem is based. The experience of the banana dispute and the reform of the EU market,

reviewed in chapter four offer valuable lessons for small developing countries. The impact oncane sugar exportation is considered in chapter five. Tourism and services in internationalnegotiations are analysed in chapter six in an attempt to identify more precisely the interestsand issues at stake. The final section is forward looking, beginning with the case fordiversification in chapter seven, as well as the key role to be played by the private sector. Thenecessity for OECS countries to incorporate their environmental interests and concerns intothe formulation of their national economic policies is also considered in the final chapter. Itends by drawing on OECS experiences and those of the writer to suggest how small countriescan use trade negotiation and diplomacy to secure and advance their trading interests.

0

100

200

300

400

500

US$million

Source:WTO

3Conclusion of the World Bank in its Report No. 31725-LAC A Time to Choose - Caribbean Development in the21st century 26 April 2005.

Figure 1. Merchandise trade in the OECS, 2004

Tell me whyI should bother


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Evidence can be found of aspirations for Caribbean integration early in the last century.This desire was based on a widespread notion of a West Indian identity characterised byNorman Manley who said at the 1947 Caribbean Labour Conference: Wherever there is anassembly of West Indiansyou feel at home and as one. The sense of unity in the West Indiesis so powerful and so rapidly growing today that the minor historical differences are irrelevantin the face of innumerable common ties. Complementing this sense of identity was the

recognition that on their own, Caribbean entities are too small to set and effectively pursuetheir own agendas particularly with respect to economic development and improved welfareof their populations.

It was a desire to work together to improve prospects for economic success thatprompted the current phase of Caribbean integration. Its actual conception can be traced tothe meeting of West Indian leaders in Montego Bay in 1947 that formally explored the ideaof the closer association of the British West Indian colonies. This meeting of Caribbean leadersactually predated the 1951 Coal and Steel Community, which was the predecessor to theEuropean Common Market. The aspirations and ideas of unity eventually materialised in theform of the West Indian Federation. By 1962, however, the Federation collapsed after Jamaicaand then Trinidad and Tobago withdrew, proceeding to political independence on their own.

A last ditch attempt to persevere with a union of just the Leeward and Windward Islands andBarbados, the Little Eight, failed.

Five years later, a fundamentally different approach was embarked upon: the 1967Caribbean Free Trade Area (CARIFTA), which lifted duties on goods being traded within theRegion. It is from this initiative that the origins of the CSME can be traced, though its directinstitutional precursor was the 1973 Caribbean Community and Common Market (CARICOM).

CARICOM was a major advance from CARIFTA, taken to strengthen the coordinationand regulation of economic and trading relations among Members in order to advance theirbalanced development. The mandate of CARICOM institutions and the harmonisation ofnational regulations, however, stopped well short of the creation of a genuine single market.

This, though, was not for lack of ambition. Caribbean economic integration was an unpredictableprocess conducted without the benefit of similar models or earlier experiences among smalldeveloping countries. Forbes Burnham, the then Prime Minister of Guyana, summarisedthe realism of Caribbean leaders when he said at the 1967 Conference of the Heads ofGovernment of the Commonwealth Caribbean: we cannot start off with some ideal or perfectarrangement. Neither can we hope to be so prescient of the future as to be able to determineall the consequences and difficulties of integration This is the naked truth, either we integrate,or we perish, unwept, unhonoured.When CARIFTA was born and later gave way to CARICOM,there was no detailed or rigid road map and timetable but leaders had a very clear vision ofthe direction in which they would steer the region.

Such clarity among Caribbean Governments of the ultimate goal of regional integration

was the critical factor in its evolution and survival. Having an agreed destination but withflexibility as to the route and pace of travel might well have assisted the region in survivingits most difficult period from 1975-1982. With their economies reeling from the impact of theglobal petroleum crises and many saddled with unmanageable debt, balance of paymentproblems and the region embroiled in the ideological conflict spawned by the Cold War,progress in regional integration was left on hold, but never abandoned.

The stalemate came to an end at the Ocho Rios Summit in 1982 and the integrationmovement got back on track. By 1989, at their Summit in Grenada, CARICOM Heads decidedto establish the Caribbean Single Market and Economy (CSME) in order to deepen theintegration process and strengthen the Caribbean community in all its dimensions. They envisageda single market that would allow the free flow of goods, services, people and capital across

borders without tariff or other barriers or restrictions. They expected that it would permitthe coordination and harmonisation of national economic policies covering foreign exchangeand interest rates, taxation and currency policies among Caribbean countries.

We are all

on it though!

That was

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1.2.1 Creating the CSME

The CSME was built on an institutional base already created by CARICOM. To appreciatethe scope and nature of the change, it is necessary therefore to recognise what was alreadyin place. The 1973 Treaty establishing CARICOM committed its Members to the removal ofrestrictions on intra-regional trade in goods. Under Articles 15, 17, 18, 20 and 21, they agreed,with certain exceptions, to remove import duties and other restrictions on goods producedin other Member countries. They also decided to apply the same level of duty on the goodsthat they imported from non-CARICOM sources and to co-ordinate economic policy morefully and effectively.

The initial aims of the Treaty with respect to the free movement of capital and labourwere quite limited. In the case of capital, it was simply to examine the introduction of ascheme that regulated movement, whilst the Treaty explicitly excluded any requirement forpermitting the free movement of persons. Having just free movement of goods but not of

capital and labour meant that CARICOM could not be a full common market.

Work however continued on achieving the objective of creating a genuine commonmarket and the Treaty was revised on 5th July 2001. Countries for the first time committedthemselves to the goal of free movement of labour and agreed to the immediate removal ofrestrictions on the free movement of certain categories of workers. In a fundamental shiftfrom the original CARICOM Treaty, they now agreed in Article 46 paragraph 3 that the revisedTreaty should not inhibit Member States from permitting free entry of persons from therest of CARICOM5. This distinction was not of mere semantic significance but reflected afundamental shift in labour migration policy between 1973 and 2001.

Progress was also made with respect to the movement of capital. In a real commonmarket, funds must be able to flow freely for investment and for payment of goods and services.

CARICOM States agreed in 2001 not to impose any new restrictions on the movement ofcapital (Art. 39) and in Art. 40, they agreed to the removal of all restrictions on the movementof capital and current payments.

The other key area of liberalisation, which had been largely ignored in the originalTreaty, was that of services. Here, restrictions were to be lifted on the establishment ofbusinesses by nationals and firms from other CARICOM States. Persons travelling to otherMember States to provide paid services would not be restricted and steps would be takento develop common standards and recognition of qualifications.

The Treaty Revision of 2001 achieved two critical objectives:- It extended the scope of CARICOM to include the free movement of capital and

of labour and to liberalise the trade in services; and

- It enshrined the principle of national treatment in all areas. Goods, services, capitaland labour were not merely to be given preferential treatment to those originating from outsideof the region but treatment that is not less favourable than that given to local counterparts.

17

5 The original Treaty (Art.38) had explicitly stated that countries would not be required to grant free movement.


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The revised Treaty though, would not itself create the Single Market and Economy. TheGovernments mere agreement to grant certain freedoms and promises to carry out measuresdo not make them happen; additional institutional and administrative measures would alsoneed to be taken. Most importantly, domestic laws and regulations might need to be passedfor certain of the arrangements to be implementable and enforceable within each country.

1.3 How do the Single Market and the Single Economy work ?The two components of the CSME are explained separately. Firstly the Single Market: it

allows goods, services, people and capital to move among the participating countrieswithout any restrictions at the border. The Single Economy on the other hand, seeks toharmonise economic, monetary and fiscal policies and measures in an attempt to haveregion-wide policies in those areas. It is expected that foreign exchange and interest rate policies,tax regimes and certain laws will be coordinated and harmonised6.

1.3.1 What is in the SME for the OECS ?

The idea from the outset of Caribbean economic integration was for the eventualcreation of a genuine Common Market, foreseen under the CARIFTA agreement as a viable

community of Caribbean Territories. In 1974 what the Leeward and Windward Islands joinedwas however only a partial Common Market but which they all expected would be completedeventually. In joining they would grow anddevelop as part of the viable communitywith their neighbours. The 2006 CSME isreally a stage (albeit a crucial one) inCaribbean regional integration rather thanthe completion of a process. The questionto be addressed is: having already largelyachieved free movement of goods is thereanything that is substantially new for OECScountries ?

First, what is the theoretical case? Theeconomic justification of the CSME isfounded on classical economic principles of

the gains from expansion of economic size, freedom of trade and competition. OECScountries expect to build on the benefits of economic integration in various ways includinghaving a larger market for their domestic goods and services. Instead of being limited to theirhome island, they have free access to the wider regional market. Hence, production thatwould otherwise not have been possible, can take place because of the expanded consumerbase.

Removal of restrictions on capital flows should contribute to more optimal decisionmaking on the location of investment as well as the pooling of regional resources with the

effect of increasing the impact of investment and promoting competition or the consolidationof regional firms. Similarly freedom of movement of workers should promote flexibility ofthe labour markets and make for more efficient use of the regions pool of skills.

But will this yield concrete benefit? Of course OECS countries do not have as extensivea range and volume of products available for export as the more developed countries (theMDCs) in the region, hence, the trade benefits of the CSME both intra-regionally and extra-regionally might be disproportionately shared out.

In a speech delivered in November 2005, the Barbados Prime Minister pointed out thatinequality among Members of the grouping could lead to fragmentation. It was agreedtherefore that a cohesion fund would be made available for the LDCs (OECS and Belize) thatwould provide them with financial and technical assistance to help them catch up.

The other means through which the CSME is intended to benefit the OECS is via enhancedfunctional co-operation among the countries and stronger positions in external negotiations.

6 Deepening Caribbean Integration: Barbados in the CSME.A production of the Ministry of Foreign Affairs & Foreign Tradeof Barbados.

CourtesyWINFA

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The realisation of benefits in these areas will depend on a number of factors, including theappropriateness of the actual joint regional policies and the adequacy of their incorporationas well as the reconciliation of the interests of all Members. The benefit for the OECScountries would therefore depend on the effectiveness of their participation in regionalpolicy formulation.

The ability of the grouping to articulate joint positions is expected to secure greater

external influence and benefits for CARICOM. However for joint negotiations to actually leadto better outcomes for the individual countries, the following features must characterise thedevelopment and articulation of regional positions:

- Adequacy of incorporation and reconciliation of the interests of all countries andfull national involvement, transparency in decision-making and effective monitoringand oversight.

- Certainty of full and consistent support by all Members for the regionally agreedpositions.

- Full accountability by spokespersons, whether or not they are representatives ofgovernments or institutions.

- Competent and effective articulation, negotiation and advancement of positions.

For a regional approach to negotiations to be of greater effectiveness than the individualcountry approach, the individual States would need to continue to be actively involved in theprocess so that they could contribute to the attainment of the negotiating aims throughtheir continued political backing and support.

January 2006 marked a crucial milestone in the integration of the Caribbean. It was notthe conclusion but rather work in progress on the construction project that was set in trainin 1973. It also represented the coming to fruition of a much earlier Caribbean dream of a singleeconomic space in the region. The case for the CSME ultimately rests on its ability to improveregional welfare through the removal of barriers to allow the free flow of goods, services,capital and labour within the region that is expected to lead to greater efficiency of production,thus enhancing international competitiveness. The CSME is therefore expected to provide aboost to economic development of the participating states.

On the 30th January 2006 only Barbados, Belize, Guyana, Jamaica, Surinam and Trinidadand Tobago signed the instruments and formal declaration launching the CSME, but itsMembership will eventually increase. The OECS group of countries has indicated that theywill join by 30th June 2006, when all their Members would be ready. Montserrat, as a Britishdependency, requires an instrument of entrustment from the UK in order to join.

There must be something

in it for all of us.


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7 Including Council for Finance and Planning (COFAP), Council for Foreign Community Relations (COFCOR), and Councilfor Trade and Economic Development (COTED).

Together we willtake on the world!

TT hh ee bb uu ii ll dd ii nn gg bb ll oo cc kk ss oo ff tt hh ee CC SS MM EE

The transition from a Common Market to a Single Market and Economy was made possibleby amendments to the CARICOM Treaty that centred on nine new elements or Protocols having legal forcewithin each CARICOM State that, in certain cases, require changes to domestic legislation. They are:

Management

New Community organs

7

and institutions have been gradually introduced in recent years, intended to makethe functioning of the community more efficient. New procedures were also agreed upon, a most notable onehas been the replacement of the unanimity rule by qualified majority voting, except for decisions by the Headsof Government where it has been retained.

Right of establishment, provision of services and movement of capitalThis Protocol creates a regime for trade and services that will facilitate investment by businesses and personsin other Member States as well as the free movement of services, capital and selected categories of labour.This will have the most dramatic impact on business since it will ensure that CARICOM citizens and businesses will,with few exceptions, be able to establish in any country and enjoy the same treatment as locals. The completeremoval of certain of the restrictions such as the free movement of all categories of labour, as well as commoneducation standards and mutual recognition of certificates/qualifications is to be achieved over time.

Industrial PolicyThis Protocol harmonises industrial policy and seeks to promote industrial production through integration andthe establishment of enterprises with branches, subsidiaries or joint ventures in more than one Member State.

A key instrument of this Protocol that will stimulate intra-regional investment is the Regional Double TaxationAgreement. In order to improve the quality of goods and provide a basis for regional participation ininternational standard-setting negotiations, the CARICOM Regional Organisation for Standards and Quality(CROSQ) has been established.

Trade PolicyThis Protocol builds upon and consolidates existing provisions such as the CET, rules of origin and customscooperation that are aimed at enabling the free movement of goods by removing all tariff and non-tariff barriers.

AgricultureThe aim here is to strengthen and upgrade cooperation in diversification and transformation of the agriculturalsectors in keeping with Member State goals of greater efficiency in production and marketing, employment,poverty alleviation and Food Security.

Transport policyMember States commit themselves to cooperate in the development of enhanced air and maritime transport

systems and the uniform application of regulatory practices among themselves.Disadvantaged countries

A special regime is provided for disadvantaged countries, regions and sectors that need assistance inorder to become viable. The OECS countries along with Belize and Guyana have, in addition to Hati, beendesignated as disadvantaged . They are to benefit from a package of measures including financial assistanceto facilitate their economic adjustment to and full participation in the CSME as well as to provide specialtransitional arrangements and a programme to attract investment.

CompetitionThis Protocol seeks to harmonize legislation on competition policy and fair-trading across the region and topromote and preserve conditions for competition, as well as promoting and protecting consumer rights.

DisputesThrough this Protocol, a comprehensive system for the settlement of disputes that begins with referral togood offices, followed by mediation, consultations, conciliation and finally arbitration and adjudication has beenestablished. The Caribbean Court of Justice has been given compulsory and exclusive jurisdiction to hear anddetermine disputes relating to the interpretation of the Treaty.

Box 1


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2.1 Economic Partnership with Europe

When the UK joined the European Economic Community (EEC) in 1973, it had to give upthe system of trade preferences that existed throughout the Commonwealth. Under thesearrangements, the Commonwealth had operated as a sort of exclusive trading club whereMembers exempted each others imports from duties or charged them at rates lower than

those applied on imports from non-Commonwealth countries. At the time, most of the formerFrench African colonies were in a similar trading arrangement with the EEC, via the YaoundConvention. They were able to export duty-free to the EEC and waived duties on importsfrom it (i.e., this was a reciprocal arrangement). Rather than simply seeking to continue theYaound Convention and having it extended to the ex-British colonies, the two sets of formercolonies banded together to negotiate a radically new trading arrangement and calledthemselves the African Caribbean and Pacific Group (ACP).

At a time of great insecurity in global commodity markets and the height of the ColdWar, these countries were able to conclude an arrangement that was based on the principlesof special and differential treatment. The arrangement would provide them with financialand technical assistance and duty-free entry to the EEC for most of their exports. The ACPdid not have to offer the same facility to the EEC. It was non-reciprocal. This accord adopted

the name of the West African city of Lom where it was signed in 1975. It lasted for five yearsand was renegotiated at regular intervals until the fourth Convention, which entered intoforce in 1990 and had a ten-year life.

At the outset OECS countries were not yet independent and were not able to negotiatethe first Lom Convention that came into effect in 1975. However, because of their politicalassociation with the UK they were able to participate in the trading arrangements andenjoyed certain benefits. When the various islands achieved independence they were thenable to participate fully in the negotiations with Europe.

With OECS economies so very open to outside influences and their trade and economicrelations extending beyond the confines of the Caribbean region, they are obliged to securetheir economic interests by seeking agreements further afield. So far the relationship with

Europe has been central. Since their independence they have been full Members of the ACPgroup of countries and were party to the Lom trade and aid Conventions, which, in 2000,were succeeded by the Cotonou Partnership Agreement. That relationship has been afoundation of their participation in international trade. Over the years a major portion oftheir exports, principally of agricultural goods, have been exported to the European Union(EU)8 where they enjoy duty-free entry, whereas competitors often face high duties. In otherwords, they enjoyed trading preferences. Also, they have been receiving considerable financialand technical assistance for their development from the EU, via its various grant and loanfacilities; the National Indicative Programmes (NIP), Regional Indicative Programme (RIP) andthe Stabilisation of Export Earnings (STABEX) which was replaced in 2002 by the Fluctuationin Export Earnings (FLEX) facility. With other ad hoc programmes like the Special Frameworkof Assistance (SFA) for bananas or for rum and the 2.2 billion Investment Fund that isadministered by the European Investment Bank (EIB), the EU is overall the largest single aid

donor to OECS countries.

That link with Europe has been so extensive, enduring and deep-rooted that it sometimesappears as an integral and permanent fixture of the architecture of the international systemin which the islands operate. However, in reality, there is nothing certain or permanent aboutthat relationship. Indeed, negotiations are currently ongoing that will fundamentallyrefashion their trading dimension.

2.1.1 The EPA negotiations and their policy context

Ever since the signing of the 1st Lom Convention of 1975, OECS countries have beenable to export to the European Common Market virtually anything that they produce, whichmeets the rules of origin9. In certain cases, as with sugar and bananas, special arrangements

provided them with additional support that ensured that this trade was viable and couldactually take place even when the islands might have been producing at much higher costthan their competitors.

8 The EU replaced the EEC with the signing of Treaty of European Union, at Masstricht in the Netherlands on 7th February1992.9 See glossary.

My mother wasnteven born yet !

We really have beenwith these Europeans

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The current system, the Cotonou Agreement, under which OECS countries can exportto the EU without having to pay customs duty, expires at the end of 2007. A new trading systemtherefore has to be agreed upon to permit OECS countries to continue their duty-freeexports to the EU from 2008. Negotiations that are aimed at replacing the current arrangementswith a new structure for trade and economic relations between Caribbean countries andEurope are ongoing. It is essential to recognise that despite the negotiations for new

Economic Partnership Agreement (EPA), the current Cotonou Agreement itself has a life of 20years, expiring by 2020. Therefore the financial aid provided in five-year cycles under theFinancial Protocols is to continue independently of the outcome of these EPA talks. This issignificant since the decision on the EPA can be based on an objective assessment of its ownvalue rather than a false perception that concluding it is necessary for the safeguarding offunding from the EU.

Given the tremendous importance to OECS economies of their trade and economicrelations with Europe, the new arrangement will be of major significance for future economicperformance, income and employment. Hence, the negotiations between the ACP and EU,launched on the 27th September 2002 that will define the new arrangements are ofoverwhelming political importance.

While the EPA negotiations have focussed on preparing new WTO-compatible trading10

arrangements aimed at progressively removing barriers to trade and enhancing cooperationin all areas relevant to trade, their agreed objectives are broader and rooted in the widerdevelopment objectives of the Cotonou Agreement. These are the reduction and eventualelimination of poverty in ACP countries, the promotion of sustainable development and, asa tool for achieving these objectives, the progressive integration of ACP countries into theworld economy.

A clear appreciation of the background and broader context of these negotiations onwhich the Caribbean and the other ACP regions have embarked with the EU is vital. Theprogress and their implications for OECS countries are reviewed below.

2.1.2 Background to EPAs

The conceptual origins of EPAs can be traced to the European Commissions 1997 GreenPaper on relations between the European Union and the ACP countries on the eve of the 21stcentury. It took a critical look at the ACP- EU relationship in the light of global developmentsfollowing the end of the Cold War and also the changing international economic environment,notably the greatly strengthened regulation of the multilateral trading system under theleadership of the WTO. New approaches to political and financial cooperation were explored,but the most radical thinking related to the options for trade. The Commission appreciatedthat the successful challenge to certain aspects of the European banana import regime byLatin American countries and the USA during the 1990s, had exposed the vulnerability of thepreferential trading arrangements to challenge within the WTO.

Currently ACP countries export their eligible products to the EU market without paying

duty; however, they charge duty on imports from the EU. In other words there is no reciprocitysince trade is not free on both sides.

The European Commission wanted change. The clear preference of the 1997 GreenPaper was for a reciprocal trading arrangement with the ACP countries. (In other words,exports both from the ACP and Europe would have duty free entry into each others markets).This was consistent with the orientations in the Commissions 1995 staff paper on Free TradeAreas, which proposed a twin-track approach to the promotion of EU trade and economicinterests through multilateral trade liberalisation at the WTO and through the conclusionof bilateral and regionally-based free trade area arrangements, which secured better treatmentfor European exports i.e., trade preferences for EU exporters.

By 1998, the European Commission received a mandate from the EU Council of

Ministers to negotiate the replacement of the non-reciprocal trading system with a newtrading arrangement that would be in conformity with WTO rules, particularly GATT ArticleXXIV11. Since the ACP already enjoyed duty-free access for most of their exports to the EU,

10 See Glossary: WTO Compatible11 The General Agreement on Tariffs and Trade (GATT 1947), Art XXIV Territorial Application Frontier Traffic Customs

Unions and Free-trade Areassets out inter alia the rules governing Regional Trading Arrangements (RTA). So they wantto change thingsBut the change mustbe good for us too.

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the innovation in the proposed trading relationship would essentially be that EU productswould now also enter the ACP on a duty-free basis. Some sceptics saw this as a one-sidedchange offering new benefit to the EU but not the ACP. The Commission, however, insistedthat the EPA was not about market opening per se, but rather, development. It argued thatthe EPA would achieve this by promoting ACP integration both regionally and into the globaltrading system, it would build trading capacity, be based on principles of asymmetry with

more favourable or special and differential treatment for the ACP and review the rules oforigin. Their contention was that ACP countries would gain overall from concluding EPAs withEurope.

2.1.3 What is the EPA?

This question continues at the heart of the negotiations, but fundamental differencesin perception persist between the ACP and EU sides. Commission negotiators tend often tooperate on the premise that an EPA is essentially a free trade area agreement, which, accordingto conventional WTO practice on free trade areas, must:

a) Involve the removal of import duties and taxes on substantially all trade between thecountries that sign the agreement. This is generally considered to cover as much as 90%

of current imports and exports;b) Be fully in place within a 10 to 12 year transition period;c) Exclude no economic sector from the coverage of the free trade area; andd) Include agreements on trade in services and trade related areas.

However, if EPAs are to support economic development and contribute to the eliminationof poverty in the OECS (and other ACP) countries, they cannot simply be classical free tradearea agreements in which all that happens is that OECS markets are opened up. They mustalso include measures to promote and support structural transformation and economicgrowth. Given the different levels of economic development of EU and OECS economies,particular care needs to be taken in devising the EPA. It evidently is important that the removalof duties and other restrictions on imports from Europe does not cause local industries tocollapse under the pressure from increased competition from imported EU goods; which

would undermine economic development prospects. The rest of the ACP have similarconcerns to the OECS and expect EPAs to be more than classical free trade area agreements,with a little bit of extra financial assistance provided.

2.1.4 Criticism of EPAs

The EPA negotiations have been criticized virtually from the outset. First there wereisolated complaints within the ACP group and then more widely among Non-Governmental

Organizations (NGOs) who have been conducting a vociferous stop EPA campaign. Theyargue that a disadvantageous deal12 for the ACP would detract from, rather than advance,economic development.

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12Christian Aid briefing 2004, Why EPAs Need a Rethink, www.epawatch.net


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In May 2004 Botswanas President, Festus Mogae said, We fear that our economies willnot be able to withstand the pressures associated with liberalisation as prescribed by theWorld Trade Organisation. This therefore challenges us all as partners to ensure that theoutcome of the ongoing EPA negotiations does not leave ACP countries more vulnerable to thevagaries of globalisation and liberalisation, thus further marginalizing their economies.

The debate over the likely impact on the ACP of EPAs, received renewed impetus fromtwo reports released in the UK. Firstly, in March 2005, the Department for InternationalDevelopment (DFID) and Department of Trade and Industry (DTI) released a joint reportentitled Economic Partnership Agreements: making EPAs deliver for development13. It questionedthe contribution of EPAS, as they are currently being negotiated, to the development of ACPcountries. Then, in the following month, the Cross Party International DevelopmentCommittee of the House of Commons (The Select Committee), released its own highly criticalreport of the EPA negotiating process.

13 www.dti.gov.uk/ewt/epas.pdf14 ACP-EU Agreement of Cotonou, Art.37 Para 6.

DD ee pp aa rr tt mm ee nn tt ffoo rr II nn tt ee rr nn aa tt ii oo nn aa ll DD ee vv ee ll oo pp mm ee nn tt aa nn dd DD ee pp aa rr tt mm ee nn tt oo ff TT rr aa dd ee aa nn dd II nn dd uu ss tt rr yy RRee pp oo rr tt

This report advanced the view that developing countries can gain in the long run from trade

liberalisation only if they have in place the infrastructure and capacity to trade competitively. In this context iturged the EU to pursue a non-mercantilist approach to the negotiations and avoid resorting to traditionalmarket-opening tactics. It called for ACP regional groupings to be provided with maximum flexibility for theirown market opening for European goods and services and called for the EU to offer an unconditional transitionperiod of a minimum of twenty years. It made the case for additional financial assistance to develop the supply-sidecapacity of ACP economies and to support necessary trade reforms required to build competitiveness.

Finally the report called on the EU to work within the WTO for a review of GATT Article XXIV in orderto reduce the requirements for reciprocity and for the Commission to provide an acceptable and non-punitivealternative to EPAs. This would ensure that any ACP state choosing not to enter into an EPA would not be leftworse off14. (The provisions of the Cotonou Agreement require this alternative so that countries would have areal choice when deciding to accept the EPA or otherwise).

Box 2

2.1.5 Issues in the EPA negotiations

There are a number of issues of underlying concern in the EPA negotiations that willhave to be addressed and reconciled between the two sides. These include:

The adjustment costs of EPAs and Policy responses: A particular concern arises whenformerly protected industries are no longer able to compete with imports following theremoval of tariffs. This lack of competitiveness can lead to factory closures and job losses. Ifthe introduction of EPAs is not accompanied by new and competitive domestic productionfor the local, regional or international markets, then the negative effects on producers canoutweigh the benefits gained by consumers and importers from the introduction of freetrade with Europe.

A key issue in determining the extent of adjustment costs is the level of trade on which

tariffs are to be eliminated and the pace at which this is to be done. It is important that thisprovision for asymmetry in the EPA is fully utilised by the Caribbean, with both the timeframe for tariff reductions and elimination being as long as possible and the number ofproducts that they exclude from tariff reductions being maximised.

Development focus: The initial intention of both sides was that the EPA would have a cleardevelopment purpose, rather than being a classical free trade area with negotiations aimedsimply at market opening and trade expansion. The concept of development in the EPA wasintended to be more than a rhetorical device or merely the provision of additional financialresources. Rather it is a shared commitment of the EU and ACP sides to construct an agreementthat in its operations would actually promote sustainable development.

For the EPA to contribute to development, it would have to support the expansion on

a sustainable basis of domestic production and exports. The key impediments to achievingthis are the range of supply-side constraints facing the OECS and other ACP countries.Addressing these constraints on competitive production in a systematic and comprehensive

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way is the fundamental challenge of the negotiations and is essential if ACP countries areactually to benefit from EPAs. There is the need therefore, for the establishment of co-ordinatedand integrated country-specific programmes of assistance to address supply-side constraints,which reach beyond the current instruments and approaches.

The fiscal impact of an EPA: This is an area of concern to the OECS and many ACP countries

where revenue from import duties is a principal contributor to government income. Importsfrom the EU into all OECS countries are high and the elimination of duties would thereforeresult in a major reduction in overall customs revenues and have significant adverseeffects on total Government revenues. Consequently, alternative revenue sources need to bedeveloped before the fiscal losses actually occur.

An immediate challenge to the OECS in an EPA would be to establish cost-effectivealternative revenue collection mechanisms. These would have to generate enough additionalrevenue to compensate for losses resulting from the lifting of duties on imports from the EU.

If a budgetary crisis is to be avoided, such programmes of fiscal restructuring must beeffectively in place before the full implementation of any reciprocal free trade areaarrangements with the EU. Such restructuring, however, will be costly. Work undertaken bythe Commonwealth Secretariat suggests that approximately 3,300 million is required15 forthe ACP as a whole to finance programmes of restructuring and avoid the revenue lossesenvisaged under an EPA. It is important to stress that this is a transitional rather than a long-termnet-economic cost.

The erosion of the value of traditional protocol preferences: Of concern to the OECS hasbeen the severe deterioration of their trading position with the EU, even before an EPA. Thiswas due to erosion of the value of the traditional trade preferences granted through thecommodity protocols of successive Lom Conventions and the Cotonou Agreement. Forexample, the value of the Rum Protocol was lost by the decision of the EU following agreementwith the US in 199616 to phase out the import duties that had been protecting Caribbean rum.Also, the value of the banana preferences for the Windward Islands has been undermined bythe 1st January 2006 reform of the banana regime that replaced the quota system by a singletariff and begun the phasing out of the historical-based licensing system for ACP bananas.Finally, the commercial benefits provided by the sugar protocol to the Caribbean17 will bedrastically cut back by the impact of the November 2005 reforms of the EU sugar regime.

The future value of the commodity exports that have traditionally been the foundationof the OECS trade relationship with the EU is now quite bleak. For the OECS, the critical issueis to secure trading benefits from the EPA, but they must have competitively priced goodsand services to export. Of course, OECS countries can obtain net benefit from EPAs even iftheir exports to Europe decline. However, this would require the development of exports toother markets and possibly the replacement of some imports by domestic production.

WTO compatibility: Complying with WTO rules constrains the flexibility of the negotiationof EPAs. The Cotonou Agreement commits the EU and ACP to defending, within the WTO, thearrangements that they have reached between themselves. Compatibility is therefore to be

assessed in terms of anticipated, not current, WTO rules. The Cotonou Agreement uses thewords in conformity with WTO rules then [sic] prevailing.18

This clearly implies that the negotiations do not necessarily have initially to be in conformitywith the existing WTO rules. The understanding enshrined in the Agreement is that thenegotiations would not necessarily be strictly within the scope prescribed by current WTOrules, their flexibility or interpretation; rather negotiators could anticipate dynamism in therules, conclude an agreement and then seek acceptance at the WTO 19. It is the eventuallyconcluded EPA, not the negotiations, that needs to be in keeping with WTO rules. Thesestipulations of the Cotonou Agreement are not a matter of mere semantics, but vital to theACP for achieving their goal of negotiating EPAs that could be to their economic advantage.

A related concern is that the changes to WTO rules required by the ACP need to be

secured during, not after the Doha Round, since once it has been completed, the ACP willhave no immediate and realistic prospect of getting adjustments to the rules to rebalancethem in their favour.15This does not include transitional budgetary support, but solely the financing of programm

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