Agritrade ACP-EU Trade Issues in the Agricultural and Fisheries Sectors Cover photo credits : Anne Sophie Robast (Terre Nourricière) 2009 COMPENDIUM Contributions Editorial team: Dr. Colin Stoneman (ACPATAL Ltd) Vincent Fautrel (CTA) Solène Sureau (CTA) Authors: Dr. Arlène Alpha (GRET) Roger Blein (Bureau Issala) Dr. Paul Goodison Béatrice Gorez (CFFA) Bénédicte Hermelin (GRET) John Madeley Brian O’Riordan (CFFA) Dr. Stefano Ponte (DIIS) Dr. Chris Stevens (ODI) Dr. Paul Sutton (University of Hull) Translation: BDD Translations Editing: Clare Smedley The opinions expressed in the comments and analysis are those of the authors, and do not necessarily reflect the views of CTA. © CTA, 2009 ISBN N°: 978 92 9081 414 6 Published by: Technical Centre for Agricultural and Rural Co-operation ACP-EU (CTA) Designed and compiled by: Kristell Trochu (Terre Nourricière), France Stéphanie Hernandez (Terre Nourricière), France Printed by: Imp’act Imprimerie, Saint Gély-du-Fesc, France Technical Centre for Agricultural and Rural Co-operation ACP-EU (CTA) Agro Business Park 2 NL 6708 PW Wageningen The Netherlands Tel : +31 (0)317 467100 Fax: +31 (0)317 460067 Email: cta@cta.int Website: http://www.cta.int Bruxelles Office Rue Montoyer 39 1040 Bruxelles Belgium Tel: +32 (0) 2 5137436 Fax: +32 (0) 2 5113868 Table of contents Foreword ........................................................................................................................3 Acronyms ....................................................................................................................... 4 ACP-EU trade issues in the agricultural sector.............................................................7 EPA Negotiations: Central Africa................................................................................................. 9 EPA Negotiations: Eastern and Southern Africa (ESA).............................................................. 29 EPA Negotiations: Southern Africa (SADC) .............................................................................. 39 EPA Negotiations: West Africa .................................................................................................. 49 EPA Negotiations: Caribbean..................................................................................................... 75 EPA Negotiations: Pacific ......................................................................................................... 81 WTO agreement on Agriculture ................................................................................................. 93 CAP reform ............................................................................................................................. 113 Market access: tariff and non tariff aspects ............................................................................... 137 Food safety .............................................................................................................................. 153 ACP-EU trade issues in the Fisheries sector..............................................................171 Market access: tariff and non tariff aspects ............................................................................... 173 EU Common fisheries policy ................................................................................................... 187 ACP-EU fisheries relations; FPAs ............................................................................................ 197 WTO aspects in ACP-EU fisheries relations............................................................................. 211 Commodities in the ACP-EU trade relations............................................................ 225 Banana sector in the ACP-EU trade relations ........................................................................... 227 Beef sector in the ACP-EU trade relations ............................................................................... 247 Sugar sector in the ACP-EU trade relations.............................................................................. 265 Cotton sector in the ACP-EU trade relations............................................................................ 287 Coffee sector in the ACP-EU trade relations ............................................................................ 303 Cocoa sector in the ACP-EU trade relations............................................................................. 317 Tea sector in the ACP-EU trade relations................................................................................. 329 Fruit and vegetable sector in the ACP-EU trade relations......................................................... 339 Cereals sector in the ACP-EU trade relations ........................................................................... 357 Rice sector in the ACP-EU trade relations................................................................................ 381 Oilseeds sector in the ACP-EU trade relations ......................................................................... 393 Special reports............................................................................................................ 409 Prospects for EU agricultural markets 2008-2014 ..................................................................... 411 African food and agricultural sectors and interim EPAs ........................................................... 421 Policy responses to food crisis.................................................................................................. 443 1 Contentious issues in IEPA negotiations: implications and questions in the agricultural sector ....................................................................................................................................... 449 The EC Green Paper on agricultural product quality: what is it about and what questions are being raised......................................................................................................................... 457 Glossary of terms relating to agricultural trade......................................................... 463 CD Rom ..................................................................................................................... 471 The CD contains all the documents in PDF version, in English and in French, as well as the bibliography of each document. 2 Acronyms ACP AGOA AMS AoA ASCM AU BLNS CAP CARICOM CARIFORUM CET CFP CEMAC CMO COLEACP COMESA COREPER COTED CRNM DC EAFRD EBA EC ECDPM ECOWAS EDF EESC EEZ EPA ESA EU FPA FIFG FTA FVO GAIN GATS GATT GIs GSP GSP+ HACCP ICO ICTSD JPA LDCs LDWF MAI MCS MEA MFN MRLs NAFTA African, Caribbean and Pacific countries African Growth and Opportunity Act (USA) Aggregate Measurement Support Agreement on Agriculture Agreement on subsidies and countervailing measures (WTO agreement) African Union Botswana, Lesotho, Namibia and Swaziland Common Agricultural Policy (EU) Caribbean Community Caribbean Forum of ACP States Common External Tariff Common Fisheries Policy (EU) Central African Economic and Monetary Community Common Organisation of the Market (for commodities in the EU) Europe Africa Caribbean Pacific Liaison Committee (Comité de Liaison Europe-Afrique- Caraïbes-Pacifique) Common Market for Eastern and Southern Africa Permanent Representatives Committee (CE) Council for Trade and Economic Development (CARICOM) Caribbean Regional Negotiating Machinery Developing countries European Agricultural Fund for Rural Development ‘Everything but Arms’ initiative European Community European Centre for Development Policy Management Economic Community of West African States (CEDEAO) European Development Fund European Economic and Social Committee Exclusive Economic Zone Economic Partnership Agreement Eastern and Southern African European Union Fisheries Partnership Agreement Financial Instrument for Fisheries Guidance Free-Trade Area Food and Veterinary Office Global Agriculture Information Network General Agreement on Trade in Services General Agreement on Tariffs and Trade Geographical Indications Generalised System of (tariff) Preferences Generalised System of (tariff) Preferences + Hazard and Analysis Critical Control Points International Coffee Organisation International Centre for Trade and Sustainable Development Joint Parliamentary Assembly of European and ACP parliamentarians Least-Developed Countries Long-Distance Water Fleets Multilateral Agreement on Investment Monitoring, Control and Surveillance Multilateral Environmental Agreements Most Favoured Nation treatment Maximum Residues Levels (for pesticides) North American Free Trade Area 4 NFIDC NIP NTBs OCTs OECS PACER PACP PSE RFMO RIPs RISDP SACU SADC SEATINI SIA SID SMEs SPS SPS SPS TBTs TDCA TRIMs TRIPs TRQs TSN UEMOA URAA USDA VMS WAEMU WIPO WTO Net Food-Importing Developing Countries National Indicative Programmes (EDF context) Non-Tariff Barriers Overseas Territories of the European Community Organisation of Eastern Caribbean States Pacific Agreement on Closer Economic Relations Pacific ACP countries Producer Support Estimate Regional Fisheries Management Organization Regional Indicative Programmes (EDF) Regional indicative strategic development plan of SADC Southern African Customs Union Southern African Development Community Southern and Eastern African Trade Information and Negotiations Institute Sustainable impact assessment Small-Island Developing States Small- and Medium-sized Enterprises Single Payment Scheme Special Preferential Sugar Arrangement Sanitary and Phytosanitary Technical Barriers to Trade Trade, Development and Cooperation Agreement Trade-Related Investment Measures Trade-Related Intellectual Property Rights Tariff-Rate Quota Traditional Supply Needs Union Economique et Monétaire Ouest-africaine (WAEMU) Uruguay Round Agreements Act United States Department of Agriculture Vessel Monitoring System (satellite-based) West African Economic and Monetary Union (UEMOA) World Intellectual Property Organization World Trade Organisation 5 Executive brief Executive brief January 2009 Month/year Executive brief Central Africa-EU EPA negotiations Central Africa-EU EPA negotiations Table of contents 1. The central African regional configuration__________________________________________11 1.1 General characteristics _______________________________________________________ 11 1.2 The CEMAC ______________________________________________________________ 12 1.3 The CEEAC _______________________________________________________________ 12 1.4 Regional integration in central Africa ____________________________________________ 12 2. The negotiations_______________________________________________________________14 2.1 Structure __________________________________________________________________ 14 January 2009 2.2 Indicative schedule of negotiations ______________________________________________ 15 2.3 The negotiating terms of reference ______________________________________________ 15 2.4 The state of play in the negotiations in January 2009: only Cameroon has signed ___________ 15 The Cameroon-EC IEPA _____________________________________________________________ 16 2.5 Progress of negotiations in 2009: towards a regional EPA? ____________________________ 17 3. EU-central Africa trade relations _________________________________________________19 3.1 Agricultural products exported from central Africa to the EU__________________________ 19 3.1.1 The main agricultural products exported ______________________________________________ 19 3.1.2 Main changes these last years (1999-2007) _____________________________________________ 20 3.2 Agricultural products imported into central Africa from the EU ________________________ 21 3.2.1 Structure of Central Africa agricultural imports _________________________________________ 22 3.2.2 Main changes over the 1999-2007 period______________________________________________ 22 4. The main EPA issues for agriculture in central Africa _______________________________ 24 4.1 From the point of view of regional integration _____________________________________ 24 4.2 Better access to the European market? ___________________________________________ 24 4.3 In terms of imports__________________________________________________________ 26 4.3.1 Loss of tax receipts ______________________________________________________________ 26 4.3.2 Competition between local products and imported products _______________________________ 26 4.4 Removing supply constraints __________________________________________________ 27 9 Summary January 2009 Executive brief Central Africa-EU EPA negotiations In the specific context of the EPA negotiations, the Central African group is currently composed of the eight CEMAC countries, plus the Democratic Republic of Congo and Sao Tome and Principe. Despite the existence of a customs union, a common external tariff and a common market, regional integration is still weak. Central African countries trade mainly with countries outside the region and above all with the EU, which is the region’s main supplier, as well as its leading export market (except for the countries whose exports are chiefly oil products). At the regional level, Cameroon is the main intra-community trading partner and is by far the leading supplier of the countries in the region. In terms of EPA agricultural issues, the situation of the countries differs according to their status. The five LDCs of the sub-region, Chad, the Central African Republic, the Democratic Republic of the Congo, Sao Tome and Principe and Equatorial Guinea, which represent only 10% of regional agricultural exports to the EU all benefit, like all LDCs, from free access to the European market, under the ‘Everything But Arms’ (EBA) initiative. These five countries therefore had no incentive to conclude a temporary EPA at the end of 2007. The situation is different for the three non-LDC countries, Cameroon, Gabon and the Congo and the nonsigning of an EPA makes them subject to the European GSP, including for bananas. However, the GSP is less favourable than the EPA for a certain number of products. As regards imports, liberalisation would result in particularly high fiscal losses for the following products: wheat flour, powdered milk and poultry meat. Furthermore, there is a risk that certain products would be in direct competition with imports from the EU, namely: wheat flour, poultry meat, soya bean oil, powdered milk and sugar, hence the importance of identifying sensitive products and the treatment accorded to them. As of December 31st 2007 only Cameroon had initialled an interim agreement with the EU; this was confirmed on January 15th 2009 when both parties signed. Gabon and the Congo are therefore subject to the GSP. The sub-region’s other countries continue to benefit from the EBA initiative. The regional EPA negotiations are continuing but are coming up against differences of opinion between the two parties concerning chiefly the issues of coverage and the liberalisation timetable, as well as the provisions concerning the financing of support measures and how they should be inserted into the agreement. Furthermore, certain issues regarding regional integration have not yet been resolved: the DRC and Sao Tome and Principe are part of the Central African EPA negotiating group, but are not members of the CEMAC. The DRC is negotiating within the CEMAC and the COMESA, while Sao Tome and Principe has close economic ties with the CEMAC countries but does not belong to any of the regional organisations which are negotiating the EPAs with the EU. 10 1. The central African regional configuration January 2009 Executive brief Central Africa-EU EPA negotiations 1.1 General characteristics The Central African configuration for the EPA negotiations is composed of eight countries whose characteristics are set out in the table below. Whereas for the signature of the EPA, the region must form a customs union, integration at institutional level has not been completed. Although the eight countries are part of the ECCAS (Economic Community of Central African States), only six of them have reached an agreement on the establishment of a CET within the framework of the CEMAC (Central African Economic and Monetary Community); the two remaining countries, Sao Tome and Principe (STP) and the DRC still apply their own tariffs. Moreover, the Democratic Republic of the Congo (DRC) is participating in two other regional integration processes, the SADC (Southern African Development Community) and the COMESA (Common Market of Eastern and Southern Africa). In this framework, on October 22nd 2008, following a meeting between heads of state of the EAC, the COMESA and SADC, an agreement was signed with a view to the eventual creation of a free-trade area between these three regions, bringing together 26 states, including the DRC. However no precise timetable has been fixed. 2005 socio-economic indicators HDI GDP per capita (PPP US$) GDP per capita (US$) - value added agriculture** - value added industry** - value added tertiary** Population (millions)* - of which rural *** Landlocked LDC WTO Oil producer Cameroon 0.53 2,299 1,034 20.3% 33.5% 46.2% 17.8 44% × × CAR 0.38 1,224 339 53.9% 21.4% 24.8% 4.2 62% × × × Congo Gabon 0.55 1,262 1,273 4.2% 73.5% 22.3% 3.6 39% 0.68 6,954 5,821 4.9% 61.2% 33.9% 1.3 15% × × × × Eq. Guinea 0.64 7,874 6,416 2.7% 94.3% 3.0% 0.5 52% DRC 0.41 714 123 45.7% 27.7% 26.6% 58.7 67% × × × × × × STP 0.65 2,178 451 17.0% 20.8% 62.3% 0.2 40% × underway × Chad 0.39 1,427 561 20.5% 54.8% 24.7% 10.1 74% × × × × Source : 2007/2008 HDR- PNUD. *2004 ** 2006, World Bank, World Development Indicators database, April 2007 *** World Bank, Country at a glance 2007 The Central African countries vary considerably in size: Sao Tomé and Principe (STP) is a small island State while, at the other end of the scale, the population of the DRC on its own is twice that of all the other countries taken together. Except for the Central African Republic (CAR), all the countries in the region have oil, which explains the important share of the industrial sector in the GDP (except for Cameroon which still has an important agricultural sector and the DRC where oil production is very low) of the oil producing countries. It is to be noted that oil production has only recently started in Chad and has not yet started in Sao Tomé. In general, except for Cameroon, the economies of the region have little diversification and rely very much on oil production and trade in wood products. However, agriculture is still an important sector in the region, hence the high percentage of rural populations, between 39% and 74% according to country (excluding Gabon where the percentage is only 15%) 11 1.2 The CEMAC January 2009 Executive brief Central Africa-EU EPA negotiations The creation of the CEMAC in 1994 was an additional stage in a long process of economic and customs cooperation between Central African countries. After independence, the four members of the former FEA (French Equatorial Africa, composed of Chad, Congo, Gabon and the Central African Republic) formed in 1959 the Equatorial Customs Union (UDE), which Cameroon joined in 1962. In 1964, the UDE was reorganised, resulting in the creation of the Customs and Economic Union of Central Africa (UDEAC). Equatorial Guinea joined the UDEAC in 1984. The treaty setting up the CEMAC, signed in March 1994 in N’Djamena (Chad), entrusted the CEMAC with the task of deepening the integration process, initiated by the UDEAC, and extending the monetary union process carried out by the Bank of Central African countries (BEAC). The CEMAC launched in 1994 a series of reforms, the most important of which were the fiscal-customs reform and the first steps towards a common agricultural strategy. In the CEMAC zone, economic and monetary union takes the form of a free trade area (free movement of products within the zone), customs union (a common tariff for trade with nonCEMAC trade partners) and the harmonisation of economic policies. The CET entered into force in 1994, and the common market in 1999. The CEMAC CET Type of goods Essential products Raw materials and capital goods Intermediate goods Finished consumer goods Customs duties 5% 10% 20% 30% 1.3 The CEEAC The CEEAC, which was created in 1983 by the UDEAC member states and those of the Economic Community of the Great Lakes Countries, was intended to manage the cooperation and regional integration process in Central Africa. The CEEAC has 11 members: the members of the CEMAC, the DRC, STP, and Angola, Burundi, and Rwanda. For the EPA negotiations, Angola is part of the SADC group, and Burundi and Rwanda are part of the Eastern and Southern African region. During the 1990s, seven countries in the region suffered periods of conflicts, which rendered the regional institutions ineffectual. The CEEAC was re-launched in 1999 and its role was enlarged to include promoting peace and stability in the region. The intra-CEEAC free trade area decided in 2003 should be applied fully from 1st January 2007. 1.4 Regional integration in central Africa Overall, regional integration remains fairly ineffectual in Central Africa, including within the CEMAC. The CET is not effectively applied: certain member states apply higher or lower rates on certain products, depending on their national interests. There are still numerous obstacles to the free movement of people and goods. A visa is required to enter certain countries, including for passport holders of the region. Given its important losses in terms of customs duties, the Central African Republic has been authorised to put in place customs duties for CEMAC products entering its territory. Finally, there are still numerous informal controls, and the roads are not very safe in certain parts of the region. Cameroon accounts for the lion’s share of trade between CEMAC member states and is the leading supplier of the other countries in the region. 12 Chart 1: The relative shares of trade between CEMAC member states (%) 80 70 60 50 Fournisseur 40 Client 30 January 2009 Executive brief Central Africa-EU EPA negotiations 20 10 0 Cameroun Centrafrique Congo Gabon Guinée Eq. Tchad Source: CEMAC, 2003 However, intra-regional trade remains very modest compared with trade with other regions of the world. Intra-CEMAC trade is estimated to represent between 2 and 5% of the total trade of the member states. Central African countries trade above all with countries outside the region, as can be seen from the table below, and primarily with the EU, which is the region’s leading supplier and leading customer country, except for the countries which export primarily oil products. The main trading partners of the region’s countries (in 2004) Country Cameroon Central African Republic Congo Customers EU (25%). USA (6%). China (2.5%). Gabon (1.5%). Taiwan (1.2%). unknown (17%) EU (91%). Cameroon (4%). Switzerland (1%). Turkey (0.8%). Hong Kong (0.6%) EU (44%). USA (29%). Taiwan (24%). Morocco (0.8%). DR Congo (0.6%) Gabon USA (49%). EU (14%). China (6%). Iceland (4%) Equatorial Guinea USA (35%). EU (27%). China (27%). Canada (8%) EU (75%). USA (11%). China (8%) EU (94%). USA (3%). Angola (1.6%). South Africa (0.9%). Gabon (0.2%) USA (68%). China (21%). EU (7%) DR Congo Sao Tomé and Principe Chad Suppliers EU (46%). Nigeria (12%). USA (5%). Japan (5%). China (5%). unknown (2.4%) EU (52%). Cameroon (10%). Japan (3%). China (2.5%). USA (1.3%). unknown (21%) EU (46%). USA (8%). Japan (2%). Senegal (1.3%). Mauritania (1.1%). unknown (34.3%) EU (68%). USA (5%). Cameroon (3%). Japan (3%). Thailand (3%) EU (41%). USA (27%). Côte d’Ivoire (21%) EU (44%). South Africa (18%). USA (6%). Kenya (6%) EU (78%). Angola (10%). Japan (6%). Gabon (2.1%). Cameroon (0.9%) EU (53%). Cameroon (16%). USA (11%) Source: WTO for Cameroon, Central African Republic, Congo, Gabon and STP –European Commission – DG Trade for Equatorial Guinea, DR Congo and Chad 13 2. The negotiations 2.1 Structure The negotiations are organised at three levels. January 2009 Executive brief Central Africa-EU EPA negotiations The joint ministerial trade committee This is composed of the trade ministers of the Central African region countries. The EU delegation is led by the EC Trade Commissioner. This ministerial committee oversees the negotiations at political level. It meets at the beginning and end of each phase of the negotiations. The negotiating committee The negotiations are led by the regional negotiating committee, chaired by the executive secretary of the CEMAC. The vice-chairman is the deputy secretary-general of the CEEAC. The European side is represented by the director with responsibility for trade relations with the region. The negotiating committee is responsible for the technical aspects of the negotiations. It meets at least twice a year. The groups of experts They provide technical assistance to the negotiating committee. They are co-chaired by the trade directors of the CEMAC and the CEEAC for Central Africa. The experts are provided by the member states, the secretariats of the regional institutions and specialised institutions. The experts provided by the EU are representatives of the Directorate-Generals for Trade, Development or others, depending on the issues involved. In addition to the bodies which are conducting the negotiations, two other groups have been created, a contact group and a Task Force for Regional Preparation (TFRP). The contact group This is composed of representatives of the executive secretariats of the CEMAC and the CEEAC, and of the EC. This group acts as the secretariat for the negotiations and is responsible for following up impact studies, as well as exchanges of data and regulations on the subjects being negotiated. The regional preparatory task force This is composed of a representative of the EDF regional authorising officer, a representative of each national authorising officer and a representative of each of the EC’s Directorate-Generals that are involved in the negotiations. The task force’s role is to facilitate the implementation of the financial cooperation instruments. In addition, joint technical negotiating groups have bee set up, covering:     The regional market: free trade area, common external tariff, trade facilitation; Technical and health standards; Services and investments; Other trade related issues: intellectual property rights, competition policy, environment, public procurement contracts, capacity building. Civil-society involvement The roadmap for the negotiations specifies that non-state stakeholders must be involved in the negotiating process. Although civil society received little information and had only a limited involvement in the negotiating process, for a long time, that situation is gradually changing: the PROPAC (Platform of central African peasant organisations) co-organised with the CEMAC an information seminar on the impact of the EPA on agriculture in April 2006. Civil society and the private sector are now officially part of the Central African group of negotiators. 14 2.2 Indicative schedule of negotiations January 2009 Executive brief Central Africa-EU EPA negotiations Negotiations were provisionally scheduled as follows:   September 2002: launch of the 1st phase of negotiations for all ACP countries.  July 2004: adoption of the joint EU-CEMAC + STP roadmap (terms of reference, objectives of the negotiations, deepening regional integration, improving the region’s competitiveness, negotiating procedures).  September 2004 - July 2005: defining the priorities for regional integration (preparation of a framework document); drawing up and implementing a programme to improve competitiveness and upgrade the Central African region.  September 2005 - July 2006: defining the general architecture of the EPA and a draft agreement in areas relating to trade, agriculture, development issues and fisheries.  September 2006 - December 2007: negotiations on trade liberalisation and conclusion of the EPA.   End 2007: signature of the agreement. 4 October 2003: 2nd regional phase: launch of negotiations between the EU and the CEMAC + STP. January 2008: entry into force. As of December 31st 2007 only Cameroon had initialled an interim agreement with the EU; this was confirmed on January 15th 2009 when both parties signed. 2.3 The negotiating terms of reference The joint roadmap adopted in July 2004 specifies that the negotiations are to be based on five objectives.  The progressive creation of a free-trade area between the CEMAC-STP and the EU over a 12-year period, with effect from January 1st 2008;     Priority to be given to development; Deepening the integration process in Central Africa; Cooperation on trade-related issues; Improving competitiveness: capacity building and upgrading. 2.4 The state of play in the negotiations in January 2009: only Cameroon has signed Despite several technical meetings organised in central Africa and joint central Africa-EU technical negotiation meetings, organised in December 2007, central Africa failed to conclude an EPA with the EU before the deadline of December 31st 2007. Only Cameroon initialled an intermediate agreement on December 17th 2007, and signed this agreement on January 15th 2009. Congo (Brazzaville) and Gabon are now subject to the GSP, although negotiations are still ongoing with the latter country. The other countries in the region benefit from the EBA system thanks to their LDC status. 15 Central Africa does not seem ready to initial an agreement since, on October 29th 2007, all the governments had requested, in the framework of the ministerial declaration, an additional twoyear extension to the derogation covering the Cotonou preferences. It should be borne in mind that west Africa had made a similar request, which was rejected by the EC. January 2009 Executive brief Central Africa-EU EPA negotiations The Cameroon-EC IEPA The government of Cameroon is the only central African government to have signed an IEPA. As a major exporter of bananas, it was in Cameroon’s interest to sign an agreement in order to avoid its exports being subjected to customs duties when entering the European market (GSP system). Negotiations on the signature of the EPA by Cameroon continued in 2008 and an agreement was only signed at the beginning of January 2009. According to the ECDPM, this delay was apparently linked to the EU’s negotiations with Latin American countries on a freetrade agreement which would further erode the preference margins of ACP countries, in the banana sector in particular. Tariff liberalisation ‘will not commence until 2010’, providing two years for the government to bring its tariffs into line with the proposed CEMAC common external tariff. Overall tariff liberalisation under the Cameroon EPA is ‘moderately back loaded’, yet ‘Cameroon will experience some very early effects’ with the first tranche of liberalisation from 2010-2013 including ‘some high-tariff items’, while ‘almost half of Cameroon’s imports from the EU in 2005-06 will be fully liberalised within 10 years’. Some food and agricultural products will be subject to tariff elimination in the first phase, including certain potatoes and tubers, although the value of these imports is not significant. The first phase of liberalisation also includes agricultural and horticultural appliances which should serve to reduce capital-investment costs in the agricultural sector. Cameroon: first-phase agricultural commitments NTL code Ave. imports 2004-06 $ 000 010110 5 010611 0 010612 010619 - 010620 - 051110 071410 4 - 071420 - 071490 2 Description Tariff pure-bred breeding horses and asses live primates live whales, dolphins and porpoises 'mammals of the order cetacea' and ... live mammals (excl. primates, whales, dolphins and porpoises ‘mammals of the ... live reptiles 'e.g. snakes, turtles, alligators, caymans, iguanas, gavials and ... bovine semen fresh, chilled, frozen or dried roots and tubers of manioc ‘cassava’, whether or ... sweet potatoes, fresh, chilled, frozen or dried, whether or not sliced or in the ... roots and tubers of arrowroot, salep, jerusalem artichokes and similar roots and ... 30% 30% 30% 30% 30% 30% 30% 30% 30% Products excluded from tariff-liberalisation commitments ‘accounted for 21% of imports from the EU in 2005-06’, although ‘less than one-third are agricultural products’, covering some 354 tariff lines. The main food and agricultural products excluded are meat products, vegetables, cereal-based food products, coffee, cocoa, sugar and sugar confectionery. 16 Cameroon: agricultural exclusions and the share of excluded trade HS2 52 03 02 07 20 15 January 2009 Executive brief Central Africa-EU EPA negotiations 11 16 04 22 09 19 18 17 24 08 12 13 10 05 06 Description Cotton fish and crustaceans, molluscs and other aquatic invertebrates meat and edible meat offal edible vegetables and certain roots and tubers preparations of vegetables, fruit, nuts or other parts of plants Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animal or vegetable waxes Products of the milling industry; malt; starches; inulin; wheat gluten preparations of meat, of fish or of crustaceans, molluscs or other aquatic invertebrates dairy produce; birds' eggs; natural honey; edible products of animal origin, not elsewhere specified beverages, spirits and vinegar Coffee, tea, maté and spices preparations of cereals, flour, starch or milk; pastrycooks' products Cocoa and cocoa preparations Sugars and sugar confectionery Tobacco and manufactured tobacco substitutes edible fruit and nuts; peel of citrus fruits or melons oil seeds and oleaginous fruits; miscellaneous grains, seeds and fruit; industrial or medicinal plants; straw and fodder lac; gums, resins and other vegetable saps and extracts Cereals Products of animal origin, not elsewhere specified or included live trees and other plants; bulbs, roots and the like; cut flowers and ornamental foliage Share of total 10.4% 5.2% 4.1% 3.8% 3.2% 2.8% 2.2% 1.9% 1.7% 1.7% 1.6% 1.3% 0.8% 0.7% 0.7% 0.6% 0.6% 0.4% 0.2% 0.1% 0.1% 2.5 Progress of negotiations in 2009: towards a regional EPA? Since the end of 2007, negotiations on the signature of a regional EPA have continued, but after a year, they have still not reached a conclusion. Although Cameroon has signed an agreement, the central African representatives have insisted that this should not be used as the basis for the regional EPA and that negotiations should continue on the basis of those concluded in 2007 between the EU and the central African region as a whole. According to the ECDPM, the negotiations initially scheduled for the end of October and mid-December have been postponed until January 2009. However, some progress was made during 2008. In July, central Africa put forward a tariff liberalisation proposal, whereby 71% of imports from the EU would be liberalised over the next 20 years. Under the proposal some 1,205 products would have been excluded, representing 24.5% of tariff lines. Moreover, a preparatory period of five years was proposed in order to prepare the LDCs (the majority of countries) to confront the challenges resulting from the opening of the market, namely the impact on local production and government revenues. However, the EU rejected the proposal on the grounds that it was incompatible with the notion of ‘substantially all’ trade specified in article XXIV of the GATT. Thus, according to the ICTSD, during the meeting in July ‘the EU repeated that 80% of products should be liberalised over 15 years’. It is important to note that given the predominance of EU imports from the CEMAC in CEMAC-EU trade, if the CEMAC were to liberalise only 71% of current imports from the EU, while the EU would grant duty-free, quota-free access, in that case, on average, 88% of current trade would be subject to liberalisation under the agreement. That seems to comply with the WTO requirement for ‘substantially all trade’. In terms of the timetable proposed by the central African negotiators, there is no substantial difference from the timetable agreed with the countries of the East African Community. Therefore it is not clear why the central African proposal was rejected by the EC, at least from the point of view of compatibility with WTO rules. In November 2008, the central African negotiators maintained this offer despite the EC rejection. 17 EU-CEMAC trade (thousand euros) January 2009 Executive brief Central Africa-EU EPA negotiations EU imports EU exports Total trade % of total trade covered by a 100% EU & 71% CEMAC tariff offer 2004 3,581,340 2,669,776 6,251,116 87.7% 2005 4,653,169 2,904,178 7,557,347 88.9% 2006 5,548,184 3,083,996 8,632,080 89.6% 2007 5,953,239 3,755,942 9,709,181 88.8% The issues of coverage and the liberalisation timetable are still the main subject of negotiations, and in October 2008, questions concerning the settlement of differences and the development dimension of the EPAs had not yet been debated, while additional negotiations are still necessary on export taxes, the MFN clause (to which central Africa is opposed), protective provisions and anti-dumping measures. Finally, there are still important differences of opinion on the way to implement the development-aid commitments contained in the joint orientation document (JOD), which defines the priorities for production capacity building and improving economic competitiveness. The EC remains optimistic regarding the signature of a regional EPA and expects the negotiations to be concluded by mid-2009. Report of the European Parliament’s rapporteur on the negotiations In December 2008 the rapporteur for the European Parliament’s committee on international trade tabled a draft report on the central Africa–EU EPA negotiations. The rapporteur set out three criteria for assessing the agreement, namely it should offer ACP countries support for sustainable development, promote their participation in world trade and strengthen the regionalisation process. To achieve these objectives the rapporteur advocates a two-pronged approach involving:   protecting the ACP countries from the adverse effects of opening up their economies to EU exports;     a goods-only EPA;    more permissive safeguard provisions to allow their easier application;  the sequencing of the implementation of liberalisation commitments with the successful implementation of such programmes;  avoiding a simple extension of the Cameroonian agreement to the central African region, given the different economic capacities in the region;  the EC to give serious consideration to central Africa’s current tariff-elimination offer (to liberalise 71% of its trade over a 20-year period, with a 5-year preparatory phase);  the EC to avoid pressuring central African governments for commitments to include agreements on trade in services and other trade-related areas. supporting the ACP countries in order to ensure that they can derive real benefits from trade preferences, and support their economic and social development. The rapporteur argues for: a less stringent interpretation of the WTO requirement of ‘substantially all’ trade; greater protection of sensitive agricultural sectors; greater support for enhancing the competitiveness of the Cameroon banana sector in the light of the impending further erosion of the margins of preference; a simplification of the rules of origin; increased financing to address supply-side constraints and enhance the competitiveness of central African producers; The rapporteur concluded that ‘EPAs must serve as an instrument of development and must, therefore, respond to the needs expressed by the ACP countries. EPAs must, accordingly, include more forceful sections on development with a view to achieving the millennium development goals and on promoting and strengthening fundamental social and human rights’. European Parliament, working document PE416.653v01-00, December 10th 2008 http://www.acp-eu-trade.org/library/files/Arif_EN_101208_EP_Working-document.pdf 18 3. EU-central Africa trade relations Over the 2005-2007 period, central Africa ran a largely positive trade balance with the EU, amounting to €2,254 million, as can be seen from the table below. This surplus was chiefly due to oil exports from Cameroon and Equatorial Guinea and has varied between €1 billion and €2.5 billion since 1999. On the other hand, as regards the food and agriculture sector, the region has a trade deficit of €63 million; this deficit deteriorated during the 2005-2007 period, although this sector represents only 11.7 % of trade with the EU. Executive brief Central Africa-EU EPA negotiations EU-Central Africa trade, 2005-2007, in € millions Trade with the EU Exports Imports Total trade Trade balance Agro-food products Total 556 6,130 619 3,876 1,174 10,006 -63 2,254 Source : COMEXT Total export to the EU Total imports from the EU Trade Balance 8 7 Agricultural exports to the EU Agricultural imports from the EU Agricultural trade balance 800 700 600 6 January 2009 400 Millions Billions 500 5 4 300 200 3 100 2 0 1 0 1999 1999 -100 2000 2001 2002 2003 2004 2005 2006 2007 2000 2001 2002 2003 2004 2005 2006 2007 -200 The increase in the deficit is mainly due to an increase in imports from the EU, since exports have been more or les constant since 2005. 3.1 Agricultural products exported from central Africa to the EU Because most of the Central African countries export oil or wood products, the share of agricultural products in exports is smaller than in other sub-regions of the ACP zone. Agricultural exports to the EU account for only 9% of exports. This average value for the subregion conceals very strong disparities between countries: this agricultural share does not exceed 9% for five of the eight countries, whereas it is as high as 19% in the case of Cameroon, 36.5% in Chad and 53% for Sao Tomé. Central African agricultural exports to the EU are above all provided by Cameroon, which contributes 82% of the region’s exports. 3.1.1 The main agricultural products exported Central Africa’s agricultural exports are strongly concentrated on a few products. Two alone represent just under three-quarters of the total of agricultural exports: cocoa and its by-products represent 37% (most cocoa is exported in the form of beans - 90%) and fruits (mainly bananas) which represent 32%. Two other products together represent almost a fifth of exports, namely cotton (6%) and coffee (11%). 19 The main agricultural export products - 2005-2007 HS3 3% HS13 3% HS52 6% Others 8% HS18 37% Executive brief Central Africa-EU EPA negotiations HS9 11% HS8 32% HS3: Fisheries products; HS8: Fruits and nuts; HS9: Coffee, tea, spices; HS13: Gums, resins; HS18: Cocoa and its by-products; HS52: Cotton Source: COMEXT 3.1.2 Main changes these last years (1999-2007) Changes in the main agricultural export products (source: Comext) 350 300 Thousands of tonnes January 2009 The main changes as regards Central African agricultural exports over these last years from 1999 to 2007 vary considerably from one product to another. Bananas Cotton Coffee Cocoa 250 200 150 100 50 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 Exports of cocoa and cocoa by-products Cocoa exports from Central Africa to the EU increased slightly in volume over the period in question, from a three-year annual average of 126,000 tonnes for the period 1999-2001 to 157,000 tonnes for the period 2005-07, i.e. an increase of 25%. However, because total European imports increased far more strongly at the same time, Central Africa’s EU market share fell from 7.4% in 1999-2001 to 6.15% in 2005-07. The overall changes vary considerably between countries: for example, Cameroon’s cocoa exports have increased significantly (by 30%) while cocoa exports have fallen in all the other countries. Banana exports Banana exports have been regulated until now by the common market organisation of the EU. They were limited up to 1998 by the quota of 162,000 tonnes allocated to Cameroon and have considerably increases since that quantitative limit was increased and reached 293,000 tonnes in 2003 before falling to less than 220,000 tonnes in 2007. 2006 was marked by the transition to the tariff-only system with the establishment of a duty-free tariff quota of 775,000 tonnes for ACP banana-exporting countries and a single tariff of €176 per tonne for other exporters, in particular Latin American producers, the main competitors of African banana exporters on the European market. 20 Executive brief Central Africa-EU EPA negotiations While this change of system has enabled the latter to increase their market shares since the beginning of 2006, this does not seem to have had an impact on Cameroon whose market share has remained more or less the same (between 4% and 7% over the period). Moreover, the condemnation by the WTO of the EU’s banana regime following a complaint filed by Latin American countries in April 2008 does not augur well for Cameroon’s banana exports, since the EU could be required to reduce its MFN rate of duty of €176 per tonne to the detriment of ACP producers. The WTO’s appeals body rejectedthe EU’s appeal against the WTO’s decision of April 2008 condemning the EU regime, on November 26th 2008,. If the mini-ministerial of July 2008 had not collapsed, it would undoubtedly have ratified a reduction in the MFN import duty rate from €176 per tonne to €114 per tonne by 2016. Cotton exports As regards cotton, Central Africa has stabilised its EU market share over these last years, despite a decline in the volumes exported to the EU and in the volumes imported from the EU (from any country). It is to be noted however that the fact that the CFA franc is tied to the euro creates considerable difficulties for African cotton exporters in terms of price competitiveness given the euro’s strong appreciation against the US dollar of these last months. The dollar’s recent appreciation should benefit cotton producers in central Africa. Annual cotton exports, in thousands of tonnes January 2009 Chad Average 1999-2001 Average 2005-2007 Cameroon 43,9 19,1 CAR 27,8 10,1 Central Africa 4,6 1 Total imports Central from the EU African share 8,4 % 76,2 905,7 7,8 % 30,3 385,6 Source: Eurostat Coffee exports Central African coffee exports fell sharply over the same period, resulting in a fall in EU market share. Annual coffee exports, in thousands of tonnes Cameroon Congo CAR Average 1999-2001 Average 2005-2007 65,2 38,5 4,6 5 DRC 7,3 1,1 Central Africa Total imports Central from the EU African share 4,9 93 2531,8 3,68 % 1,3 50,9 2655,4 1,92 % Source: Eurostat 3.2 Agricultural products imported into central Africa from the EU On average, 15% of central Africa’s imports from the EU are agricultural and food products; the percentage varies between 11% and 31% depending on country. 21 3.2.1 Structure of Central Africa agricultural imports Structure of agricultural imports from the EU, 2005-2007 HS20 6% HS19 8% Others 17% HS21 8% HS2 10% HS11 13% HS4 12% HS10 11% Source: COMEXT, HS2: Meats and offal; HS4: Dairy products; HS10: Cereals; HS11: Wheat flour; HS19: Cereal by-products; HS20: Vegetable by-products; HS21: Other food preparations; HS22: Drinks. On average during the 2005-2007 period:  Cereals and by-products (mainly wheat) topped the list of CEMAC’s agricultural imports, representing almost a third of them;   Drinks represent 15% of imports. Poultry meat and milk powder come next in the list of most imported products, with a a share of around 10% for each; 3.2.2 Main changes over the 1999-2007 period Changes in wheat and wheat-flour imports from the EU (000’ t., source: Comext) Wheat 600 Wheat flour Malt 500 Thousands of tonnes January 2009 Executive brief Central Africa-EU EPA negotiations HS22 15% 400 300 200 100 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 Wheat imports increased by 52% over the period, rising from 275 thousand tonnes over the 1999-2001 period to 418 thousand tonnes; however, these imports vary considerably as can be seen from the above chart. They concern mainly four countries, namely Cameroon, Gabon, Congo and the DRC which transform this wheat into flour. On the other hand, imports of wheat flour fell by 43% over the period. However this decline varies between countries: on the one hand, the countries with a milling capacity, which are the four aforementioned countries, have reduced their flour imports from the EU (in the case of Cameroon and Gabon, they have fallen by almost 100% over eight years). On the other hand, the imports of the other countries have increased or stabilised. 22 Malt imports of the central African countries from the EU increased regularly during the period under review, rising by 54% between 1999 and 2007 and reaching 137 thousand tonnes in 2007. Malt is a raw material used for the production of beer. Changes in imports of some food products from the EU (000’ t., source: Comext) Poultry Sugar Prepared tomatoes Powder milk 80 70 Thousands of tonnes 50 40 30 20 10 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 The sub-region’s imports of poultry meat from the EU are composed mainly of cuts of frozen chicken. At regional level, they have remained above 50 thousand tonnes, but the level varies according to year and country: they have increased strongly in the DRC and STP since 1999, whereas in Cameroon and the Congo, after a sharp increase up to 2004-2005, they have been in free fall since then (because of the embargo on frozen chicken in Cameroon). After a strong increase in imports of milk powder from the EU up to 2002, imports have fallen to a level close to that of 1999, i.e. 21,295 tonnes. Once again, this trend varies from one country to the next: they have increased strongly in Chad and the DRC while the trend is the opposite in Cameroon, the Central African Republic and the Congo. Following the same trend, imports of prepared tomatoes grew strongly up to 2003. Since then the volume of imports has stabilised, reaching 20,984 tonnes in 2007. These imports concern mainly tomato purée, exported from the EU15 (mainly from Italy). While central African sugar imports from the EU grew strongly up to 1999, the trend has now been reversed: after having stabilised at around 35 thousand tonnes, they fell in 2006 to reach 5,800 tonnes in 2007. Most imports of agricultural products have therefore fallen since 2003, except for drinks (chapter SH22) for which imports from the EU have increased strongly in recent years, reaching 112 thousand tonnes in 2007 and accounting for 17% of agricultural imports from the EU. 65% of the volume of these imports is made up of beer and wine. The increasing beer imports could be a threat for breweries if a regional level EPA is signed. Changes in drink imports from the EU (000’ t., source: Comext) 120 HS22 100 Thousands tonnes January 2009 Executive brief Central Africa-EU EPA negotiations 60 80 60 40 20 0 1999 2000 2001 2002 2003 23 2004 2005 2006 2007 4. The main EPA issues for agriculture in central Africa The issues raised by the EPA are three-fold: regional integration, exports to the EU and imports from the EU. January 2009 Executive brief Central Africa-EU EPA negotiations 4.1 From the point of view of regional integration As was noted, little real progress has been made as regards regional integration is Central Africa. The common market within the framework of the CEMAC is not yet effective. In addition, two new countries need to be integrated, in particular the DR Congo, which is very important in demographic terms. This will involve in particular negotiating the application of a common external tariff for the whole region. The CET of the CEMAC is structured in four parts (see above), with a maximum rate of 30%. The tariff structure of Sao Tomé is simpler, based on three levels: 5%, 10% and 20%, respectively for essentials, intermediate products and finished products. Finally, the DRC has consolidated its customs duties for agricultural products with a ceiling of 55%, except for powdered milk, certain cereals (excluding wheat and rice) and roasted malt (20%), whole-wheat flour and non-roasted malt (15%). Discussions on the CET had not started in June 2006. Today, the development of economic integration in Central Africa depends chiefly on the political will of the States, and primarily those of the CEMAC. As the EPA negotiations have not for the time being resulted in a regional agreement, discussions on the CET are de facto in abeyance. 4.2 Better access to the European market? Although the EPA provides for better access to the European market for certain products exported by Central Africa, under the Cotonou regime the vast majority of the agricultural products currently exported to the EU by countries in the region entered the European market duty-free and without any quota restrictions, without distinction as to their origin. Therefore, in relation to the Cotonou regime, the EPA improves access to the European market only for sugar and bananas, and subject to certain conditions. For the countries that had not signed an EPA by December 31st 2007, there are two scenarios, one for LDCs and the other for non-LDCs. The 5 LDCs of the sub-region which represent only 10% of agricultural exports to the EU would benefit like all LDCs from free access to the European market, via the ‘Everything But Arms’ (EBA) initiative. If an EPA is not signed, they would fall within the scope of the European GSP, including for bananas (sugar being a slightly more complex case). However, the GSP is obviously less favourable than the EPA regime for a certain number of products (see the table below, drawn up on the assumption that Central Africa obtains the most favourable situation for access to the European market). This is the case, in particular, for bananas and what seems to have encouraged Cameroon to sign an EPA with the EU at the end of December 2007 in order to avoid the threat to its banana exports to the European market. Customs duties applicable to products exported to the EU with and without an EPA, for the non-LDCs, with effect since January 1st 2008 With EPA Without EPA (non LDCs) Cocoa beans Cocoa butter Cocoa paste Cocoa powder Bananas Cotton Coffee Gum Arabic Sugar Pineapples Canned green beans 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% (with safeguard clause) 24 0% 4.2% 9.6% 2.8% €176 per tonne 0% 0% 0% Depends on the current reform currently €339 per tonne 5.8% 19.2% January 2009 Executive brief Central Africa-EU EPA negotiations As regards sugar, the end of the protocol related to the non-signing of an EPA should result purely and simply in the ending of the Congo’s exports (the only Central African country to have signed the sugar protocol) to the EU, with the European market being replaced by local and regional markets. On the other hand, the signing of an EPA in the near future should enable the Congo to maintain its presence on the European market, provided that in the period 2009-2015 it can compete with the other non-LDC ACP countries that export sugar and have signed an EPA. It is to be noted that free access for ACP sugar in the framework of the EPAs is for the period 2009-2015 and for non-LDC ACP countries subject to limits of 1.38 million tonnes for 2009/10, 1.45 million tonnes for 2010/11 and 1.6 million tonnes for the following four seasons respectively. Commodity EU market access Products covered by a protocol: sugar and bananas The conditions of access for these products are currently in the process of being modified. To date, sugar from the Congo and bananas from Cameroon have benefited from preferential access to the EU market via tariff quotas. The current reform of the CMO for sugar, with the price of sugar being reduced by more than a third over four years, will result in a loss of income for the Congo (the only Central African country to have signed the Sugar Protocol and which has a quota of 11,071.8 tonnes) estimated at almost €3.5 million for the period 2006-2010 and annual loses after 2010 of approximately €2 million. Moreover, the end of the sugar protocol scheduled for October 2009 will result, for the countries that have not signed an EPA (which is the case to date for the Congo) in the elimination of the preferences granted hitherto in terms of access to the European market. As regards bananas, as described above (see paragraph 1.2) the signing of an EPA by Cameroon should enable that country to increase the volumes exported, as access is totally free since January 1st 2008. It is to be noted however that the questions of access to the market concerns in this precise case more the elimination of the system of licences and the maritime freight conditions than the preferential margin per se (free access in one case versus €176 per tonne in the other). Other products Apart from products covered by a protocol access to the European market is linked solely to customs duties. For all these products, Central Africa benefited under Cotonou Agreement generally from a small preferential margin compared with those from Latin America or South-East Asia. The latter have to pay customs duties under the GSP (Generalised System of Preferences) from which exports from Central Africa were currently exempt. These preferences are shown in the table below, with the names of the main countries exporting products in competition with Central African products on the European market. Trade preferences for agricultural exports from Central Africa Products Cocoa beans Cocoa paste Cocoa butter Central Africa (Cotonou Agreement) 0% 0% 0% Non-GSP GSP 0% 0% 9,6% 7.7% (Brazil, Singapore, Thailand) 8% (Brazil) 0 0% 0% 0% 0% 0% 0% 5.8% Canned green beans 0% 19.2% 15.7% (Chine) Ethanol 0% €19.2 per hl (Pakistan, Brazil) 0% Cocoa powder Cotton Gum arabic Coffee Pineapples 0% 4.2% (Indonesia, Malaysia) 2.8% (Indonesia) 0% 0% 0% 2.3% 25 GSP + Bilateral trade agreement 0% 0% (Ecuador) 0% (Peru) 0% 0% 0% 0% (Costa Rica, Ecuador, Honduras) 2.3% (South Africa) Tariff quota of 0%. Non-quota duty of 15.3% (Morocco) 0% (Guatemala) 4.3 In terms of imports 4.3.1 Loss of tax receipts January 2009 Executive brief Central Africa-EU EPA negotiations Trade liberalisation with the EU, the main supplier of Central Africa will result in a loss of tax receipts. Because of their oil revenues, Central African countries should theoretically cope easier than other ACP countries with this effect of the EPA. Among the main agricultural products imported from the EU, liberalisation will result in particularly high tax losses in respect of the following products: whole wheat flour, powdered milk and poultry, because they are imported in large quantities and because the customs duties on those products are currently the highest. According to an INRA study, the liberalisation of 71% of central Africa’s imports from the EU would result in a tax loss of 33.5%, which would be felt the most by the region’s three nonLDCs. 4.3.2 Competition between local products and imported products The impact varies between products which can be classified in four categories.  Non-processed agricultural products competing directly with local products: poultry. Competition is direct and imported poultry can be substituted immediately for local poultry.  Imported raw materials not competing with local products: that is the case of wheat and malt, processed locally but not produced locally.  Imported raw materials competing with locally produced products: imported powdered milk is used as a raw material in local dairy industries (reconstituted milk, yoghurts, etc.). Since, at the current time, there is very little dairy farming in the region, imports of powdered milk are not in competition with local production. However, as the development of dairy farming is one of the objectives of several countries in the region, imports are an obstacle to any such development.  Imported processed products competing with locally processed products: this concerns whole wheat flour, soya oil, sugar and to a lesser extent canned tomatoes. In addition, there is intra regional trade in some of these products, in particular vegetable oils and sugar (see table below). Main agricultural products traded between CEMAC countries, in 2003, in millions of CFA francs Product Value of trade Refined palm oil Food preparations Refined sugar Tobacco Beer 7 588 5 986 4 939 4 332 2 940 As a percentage of total trade 18% 14% 11% 10% 7% Aromatised raw sugar 1 676 4% Gabon Sweetened cocoa powder 1 409 3% Cameroon Source: CEMAC, directory of intra-regional trade 26 Exporting country Cameroon Cameroon Congo Gabon Cameroon Importing country Gabon All countries Cameroon Chad Equatorial Guinea Central African Republic Congo January 2009 Executive brief Central Africa-EU EPA negotiations Certain products will therefore be more sensitive than others to the consequences of the EPA, in terms of competition with local products, as an obstacle to regional trade and tax receipt losses. These products are whole wheat flour, poultry, soya oil, powdered milk, and sugar. As regards sugar, and given the needs in connection with the regional market, a possible strategy for Central Africa would be to develop its production capacity in sugar-based products. This strategy, which would consist in favouring sales to domestic and regional markets to the detriment of the European market depends however on the difference in price from the European market which itself is directly linked to changes in the exchange rate between the euro and the US dollar, and world sugar prices. If such a strategy were to be adopted, any risk of competition with European sugar-based products should be avoided by excluding it from the list of products covered by the EPA The growth of EU exports in processed products to Central Africa is already a reality and is likely to increase further with the reform of the CAP which reduces the cost of primary products and should, all things being equal, make EU exports even more competitive in terms of price. Finally, the opening of the region’s agricultural markets to European products will affect the earnings of local producers. Although urban consumers are likely to benefit from a reduction in the price of imported food products (provided that importers pass on the lower prices), the majority of the region’s population lives in rural areas. In all likelihood, therefore, their earnings from agriculture will fall. In addition, there is a risk that these imports will weaken the existing food industry, in particular in Cameroon. 4.4 Removing supply constraints Whether in order to develop exports in new products or meet the challenge of competition from European products, supply constraints are the main obstacle. Political instability and the upheavals that have affected numerous countries in the region have had negative consequences on the level of agricultural production. However Central Africa has important potentialities which simply need to be developed. Apart from North Cameroon and Chad, which sometimes have periods of drought, the regions natural conditions are very favourable for agriculture. However, only 15% of arable land has been developed for agricultural production, which leaves considerable scope for progress. Finally, better regional integration of markets in agricultural products will create important potentialities in terms of gains. The liberalisation of trade in food products, the improved competitiveness of local products since the devaluation of the CFA franc for CEMAC countries, the trade agreements on primary products and the progress of the CEMAC in the area of economic integration offer new prospects for the emergence of real regional markets in food products and agricultural inputs, which should facilitate such regional integration. However, the numerous remaining obstacles to regional trade, in particular the inadequacy of transport infrastructures and administrative constraints prevent the emergence of such markets. In 2003, the CEMAC adopted a regional agricultural strategy to develop the sub-region’s agriculture. To that end, five major challenges were identified:  Improving the living conditions of producers by increasing their earnings and measures such as capacity building of poor rural populations, supporting the diversification of economic activities, informal financial networks and access to technology.     Increasing agricultural productivity to meet the challenge of urbanisation. Developing infrastructures to facilitate access to markets. Successfully concluding the WTO negotiations on agriculture and the EPA negotiations. Increasing national budgets allocated to the agricultural sector. This regional agricultural strategy still needs to be implemented effectively in order to revitalise in concrete terms the region’s agriculture. 27 3fr3 Executive brief October 2008 Executive brief ESA-EU EPA negotiations EPA negotiations: ESA configuration Table of contents 1. The situation on January 1st 2008 __________________________________________ 30 2. Developments in 2008: the process ________________________________________ 30 2.1 Assessing the implications of diverse commitments ______________________________ 30 2.2 Wider COMESA concerns and the policy response ______________________________ 31 2.3 Divergent approaches ______________________________________________________ 32 2.4 Greater clarity on support for development _____________________________________ 32 2.5 Additional complications____________________________________________________ 33 2.6 Zambia comes on board ____________________________________________________ 33 October 2008 3. Developments in 2008: agriculture-related issues _____________________________ 33 3.1 The standstill clause________________________________________________________ 33 3.2 Export taxes ______________________________________________________________ 34 3.3 Defining ‘substantially all trade’ ______________________________________________ 35 3.4 Other possible areas of concern ______________________________________________ 37 4. The situation in October 2008 ____________________________________________ 38 29 October 2008 Executive brief ESA-EU EPA negotiations 1. The situation on January 1st 2008 At the start of 2008 ESA member countries were trading with the EU under three distinct trade frameworks. Five EAC countries had initialled an interim EPA with the EU (Kenya, Uganda, Tanzania, Burundi and Rwanda), another five ESA members had initialled a series of IEPAs with separate tariff-elimination commitments under the title of the ESA EPA (Mauritius, Seychelles, Comoros, Madagascar and Zimbabwe), while another seven countries, all LDCs, had declined to initial an IEPA (Djibouti, Somalia, Eritrea, Ethiopia, Sudan, Malawi and Zambia) and were trading with the EU under the EBA initiative. Under the IEPAs all residual tariff barriers had been removed, although in the case of sugar, transitional quotas have come into force, allowing a limited increase in market access. The granting of full duty-free, quota-free access was legally secured through EU Council regulation 1528/2007. Countries whose governments have initialled either IEPAs or a full EPA are included in annex I of this regulation which enables them to benefit from the duty-free, quota-free access. Article 2.3. of this regulation states: ‘Such region or state will remain on the list in Annex I unless the Council, acting by qualified majority upon a proposal from the Commission, amends Annex I to remove a region or state from that Annex, in particular where:  the region or state indicates that it intends not to ratify an agreement which has permitted it to be included in Annex I;  ratification of an agreement which has permitted a region or state to be included in Annex I has not taken place within a reasonable period of time such that the entry into force of the agreement is unduly delayed; or  the agreement is terminated, or the region or state concerned terminates its rights and obligations under the agreement but the agreement otherwise remains in force.’ This constituted the situation as negotiations around the IEPA between the ESA countries and EU resumed in 2008. Outcome of the ESA configuration EPA negotiations, January 1st 2008 EAC interim EPA ESA interim EPA No EPA agreement signed or initialled Non-LDCs Kenya Mauritius; Seychelles; Zimbabwe LDCs Tanzania; Uganda; Burundi; Rwanda Comoros; Madagascar Djibouti; Somalia; Eritrea; Ethiopia; Sudan; Malawi; Zambia 2. Developments in 2008: the process 2.1 Assessing the implications of diverse commitments Given the multiplicity of agreements concluded by ESA countries and the diverse trade arrangements with the EU resulting (see table above), a special meeting of the ESA regional negotiating forum was convened from January 16th to 17th 2008 to assess the outcome of the IEPA process and the implications for the ESA region. A major area of concern was the multiplicity of schedules for separate and distinct tariff-reduction commitments submitted by ESA countries. While the EAC countries submitted a single tariff-reduction schedule, which covered all EAC countries and was consistent with the common external tariff of the East African Community, the governments of the ESA IEPA countries each established different commitments for tariff-reduction schedules. This created a situation where six different sets of tariff-elimination commitments have been made by ESA members, while seven continued to maintain standard MFN duties on imports from the EU at the national level. These different tariff-elimination commitments are potentially highly problematical given the commitments to establishing a regional free-trade-area and subsequently a customs union. 30 October 2008 Executive brief ESA-EU EPA negotiations The EAC IEPA has tariff-reduction commitments which involve the largest degree of ‘back loading’ of any of the interim agreements concluded. According to an ECDPM/ODI study, the EAC countries will only start ‘removing positive tariffs on a significant proportion of imports during the second phase’ (2015-23). The process of tariff removal for the EAC will only be completed over the period from 2020 to 2033. In contrast, in the case of Mauritius the ‘first tranche of liberalisation is to be completed in 2008’, involving ‘one quarter of imports from the EU in 2004-06. ... the great bulk of imports from the EU (71% in total) will be liberalised between 2013 and 2022’. This is in line with the commitment of Mauritius to be a ‘duty-free island’. This is merely illustrative of the divergence of tariff-reduction commitments which similarly occur across other national IEPA commitments as well. In addition there is considerable discrepancy over the types of sensitive products excluded from the tariff-elimination process. Indeed, according to the ECDPM/ODI analysis there is only one category of agricultural products excluded that is common to all five countries signing EPAs in the ESA framework ‘coffee, tea, maté and spices’. In all the other areas subject to exclusions at least one ESA government has initialled an IEPA which has subjected these ‘excluded’ products to some level of tariff elimination. Finally while in the COMESA context there is agreement on the structure of the common external tariff (raw materials and capital goods – CET zero; intermediate goods – CET 10%; final products – CET 25%). According to the ECDPM/ODI study no agreement has been reached on ‘a formal definition that allocated each item in the nomenclature to one or other group’. Each category appears to be defined differently in each country’s tariff schedules. Indeed, ‘there are, in fact, over a thousand items being liberalised by one or more of the ESA countries where there is some degree of discrepancy in the CET classification’, with in some instances the classification of the same product being different in all the tariff schedules. However, in September 2008 it was reported that COMESA was expected to resolve all outstanding problems with regard to its common external tariff by the end of 2008. Nevertheless, the situation of diverse tariff-elimination commitments potentially creates considerable problems in terms of moving towards a common comprehensive ESA-EU EPA. This provides the background to the concerns which have been expressed in the region over the consistency of the EPA process with the regional-integration process in eastern and southern Africa. 2.2 Wider COMESA concerns and the policy response According to press reports the COMESA Secretariat expressed concerns about the implications of sub-groups of COMESA countries signing different interim EPAs at a very early stage in 2008, and demanded ‘an urgent review of the interim pacts to forestall a possible fall out among member states’. According to press reports the COMESA secretary-general Erastus Mwencha argued that while interim deals had helped countries like Kenya ‘they had failed to address the critical aspects of development and instead driven wedges among African states’. This gave rise to an initiative to consider ways of preserving regional-integration objectives by ensuring coordination and harmonisation of negotiations between the ESA, SADC and EAC groupings. This in turn gave rise to a call for a revision of certain provisions in the various IEPAs which are ‘deemed to work against regional-integration efforts in Africa’. It should be noted that provisions exists in a number of ESA IEPAs for the revision of tariff-elimination commitments in the context of regional-integration initiatives, provided the WTO-compatibility of the agreement is maintained. 31 October 2008 Executive brief ESA-EU EPA negotiations 2.3 Divergent approaches As in other regions, Trade Commissioner Mandelson sought to make the case for the early signing and implementation of the initialled IEPAs. Addressing ESA ministers at a joint meeting in Lusaka he acknowledged ‘the process leading to the interim EPA has not been easy for anyone … it has required courage and leadership from those countries to have tabled marketaccess offers compatible with multilateral trade rules.’ However he went on to argue ‘we designed and agreed the EPA together. We now need to move quickly to sign and implement and defend this agreement together’. However there remained issues which the ESA countries wished to see revisited before the initialled IEPAs were signed. According to the April ‘EPA update’ from Trade Negotiations Insights, issues which ESA countries wished to see revisited included:       the ‘standstill clause’ (preventing any increase in applied tariffs once an agreement is signed); the issue of export taxes; the definition of ‘substantially all trade’; the ‘MFN clause’; the development dimension of the EPA; pan-IEPA-configuration rules of origin. Once again given the divergent views on the sequencing of the signing of the IEPAs with the resolution of outstanding issues, there has been little progress to date on these issues. This is despite repeated discussions at the technical level, including most recently discussions in Bujumbura from September 15th to 17th. These discussions focused on issues of market access (customs and trade facilitation; sanitary and phytosanitary measures; technical barriers to trade; standstill; MFN; duties and taxes on exports; anti-dumping and countervailing measures and safeguards for infant industry) and questions of economic and development cooperation. Narrower cumulation and specific rules-of-origin provisions have generated trade disruptions in certain sectors, notably the fisheries sector, and this issue needs to be addressed urgently. 2.4 Greater clarity on support for development A partial exception in this lack of progress is the greater clarity provided by the EC on the level of regional funding to be made available to support the process of economic integration. The annex to the July 2008 joint communiqué of the high-level meeting on ‘accelerating regional integration in eastern and southern Africa and the Indian Ocean’ clearly set out the regional indicative programme for eastern and southern African and Indian Ocean states (10 ESA members) under the 10th EDF. The indicative allocation amounts to €645 million, 85% of which is to be utilised in support of regional economic-integration initiatives, 10% of which is to go to regional political integration and 5% to non-focal areas. The focal area of regional economic integration includes interventions in the following areas:      trade-related assistance and capacity building;   improving economic benefits derived from sustainable management of marine resources; alleviation of the impact of economic and fiscal adjustments in public expenditures; support to private-sector development; removal of supply-side constraints; improvement of land- and water-resources management to develop agricultural and food production; conservation of nature resources and management of the environment. 32 October 2008 Executive brief ESA-EU EPA negotiations At €645 million the initial allocation to regional cooperation activities in eastern and southern Africa is almost twice the combined size of the initial allocation to east Africa (€223 million) and southern Africa (€101 million) for regional cooperation under the 9th EDF. However, despite this increase in funding, a range of critical issues related to the use of these funds will need to be addressed if this EC aid is to assist ESA countries in dealing with the production and trade adjustment challenges which will be thrown up by the implementation of the various IEPAs signed. These include:  overcoming the delays in moving from allocation and programming to programme implementation;  ensuring that activities supported address concrete problems on the ground arising as a consequence of the implementation of IEPAs. The experience elsewhere has highlighted the importance of addressing production and trade adjustment challenges at the national level, rather than focusing on regional policy formulation and institutional capacity building, which has been the tendency of the EC to date. In the coming period increased attention will need to be paid to effectively operationalising the national-regional policy-making interface in getting to grips with EPA-related challenges. 2.5 Additional complications It was against this background that in February 2008 COMESA trade ministers proposed the formation of a larger trading bloc, creating a free-trade area which embraced both COMESA and SADC. Following on from the call by ESA ministers for an exploration of the possibility of establishing a wider eastern and southern Africa free-trade area, in October 2008 an initial agreement was signed to create a free-trade area between the SADC, EAC and COMESA, embracing 26 countries with a combined GDP of US$624 billion. It is far from clear what implications this agreement will carry for the implementation of the ESA IEPA given the multiplicity of divergent tariff-elimination commitments. 2.6 Zambia comes on board According to an EC press statement in October 2008 the government of Zambia by tabling its market-access offer to the EU has de facto joined the EU-ESA IEPA process. Zambia will now be added to the list of beneficiaries of the December 2007 EU regulation granting duty-free, quota-free access to countries which have initialled an interim EPA. However, it is far from clear what this development signals. At one level an additional ESA country has now joined the IEPA process. Yet, given that the Zambian tariff-elimination offer differs from those initialled with other ESA members, this could further serve to complicate the establishment of a definitive set of tariff-reduction commitments within a comprehensive all-embracing ESA-EU EPA. 3. Developments in 2008: agriculture-related issues 3.1 The standstill clause In a number of ESA EPAs the standstill provision stipulates that there shall be no increase in the applied customs duties. Although an exception is made where regional-integration processes require a harmonisation of tariff-reduction commitments, this does not necessarily deal with immediate problems arising as a consequence of the global food-price crises. While the aim of the standstill provision is a reasonable one – to establish the baseline from which tariffreduction commitments should be implemented, in the context of recent policy responses to high global food prices – this provision could have some unforeseen consequences. 33 October 2008 Executive brief ESA-EU EPA negotiations In response to very high food prices a number of governments reduced import duties, and in some instances even set them at zero. At this juncture, therefore, the strict application of this provision fixing applied duties at the levels obtaining upon entry into force of the agreement, could result in freezing in place exceptional low import duties. Against this background there would appear to be a need to review these standstill commitments, either to allow for their flexible implementation or to establish, line by line in an annex, the tariffs from which reduction commitments should be implemented. In this context it should be noted that on October 17th 2008 the EC ‘announced that customs duties on cereals imports will be reintroduced as a reaction to the price decrease on the cereals market’. This followed an earlier decision in 2007 to set import duties at zero in the light of high global food prices and the need to secure cereal supplies for the EU market. 3.2 Export taxes The ESA IEPAs provisions on export taxes seek to limit the use of export taxes to current taxes at current levels, with only in exceptional circumstances temporary export taxes being allowed subject to prior consultations with the EU. In the case of the EAC agreement these exceptions relate to the maintenance of currency stability and measures ‘to foster the development of domestic industry’. However the use of such tools is constrained not only by a requirement to subject the adoption of exceptional export taxes to prior consultation with the EC but also by a requirement to secure prior authorisation from the joint EPA Council. Given that the GATT does not prohibit export taxes and that in practice export taxes are commonly used as a tool for the promotion of value-added processing in key value chains in developing countries, these provisions are seen as contentious in certain ESA countries, since they subordinate what was previously a national decision-making responsibility to prior approval by the EU. In addition there are increased concerns over the scope of the prohibition on export taxes which the EC is proposing following presentations at the September 29th Trade and Raw Materials Conference. A presentation at this conference suggested the extension of the definition of an export tax to include certain VAT rebates, while the EC in discussions in the ESA region has sought to include harbour transhipment fees within the scope of the definition of export taxes to which the prohibition included in IEPAs would apply. There is thus a growing concern that a policy tool, which if correctly used can play a valuable role in promoting investment in greater value-added processing within agricultural value chains, will need to be abandoned as a result of the IEPA provisions. The use of export taxes in African countries needs to be seen in a context where governments lack the financial tools, increasingly used in the EU, to promote production and trade adjustments in the food and agricultural sector, by promoting movement up the value chain. In the EU the vast majority of the over €53 billion of public funding being deployed in support of axis 1 rural-development measures between 2007 and 2013 is being targeted on encouraging movement up the value chain within the EU agri-food sector. Lacking the financial means to deploy such generous public support to encouraging movement up the value chain, African governments have to resort to simpler and blunter instruments such as export taxes. Nevertheless, such export taxes, if properly used in conjuncture with other policy tools, can serve to promote value addition, employment creation and structural economic change in the specific national and regional economic circumstances prevailing. 34 Concerns about the definition of ‘substantially all trade’, hinge on the issue of product exclusions in any common ESA-wide agreement. Given the considerable discrepancy between the types of sensitive products excluded from the tariff-elimination process across the different IEPAs that ESA members have initialled, a question arises about how to establish a common exclusion list at the regional level. If all products excluded in any one agreement are excluded from any region-wide EPA, then the volume of trade excluded will be substantial indeed, creating problems of WTO-compatibility. In contrast if liberalisation takes place in all areas where at least one ESA government has agreed to dismantle tariffs under any EU-ESA wide agreement, then the only category of agricultural products which will be excluded from tariffelimination commitments would be ‘coffee, tea, maté and spices’, since in all the other areas at least one ESA government has initialled an IEPA which has subjected these ‘excluded’ products to some level of tariff elimination. Clearly some middle ground needs to be found, which allows those IEPA provisions which permit modification of tariff-elimination commitments in the context of regional-integration initiatives, to provide real scope for accommodating diverse national concerns within a common regional agreement. The issue of the definition of what constitutes ‘substantially all trade’ is critical in this regard. Its significance for the agricultural sector lies in concentration of the excluded products in the food and agricultural product sector across the various IEPAs. October 2008 Executive brief ESA-EU EPA negotiations 3.3 Defining ‘substantially all trade’ 35 Agricultural exclusions by ESA IEPA HS2 Description 52 20 Cotton Preparations of vegetables, fruit, nuts or other parts of plants Edible vegetables and certain roots and tubers Coffee, tea, maté and spices Dairy produce; birds’ eggs; natural honey; edible products of animal origin not elsewhere specified Edible fruit and nuts; peel of citrus fruits or melons Meat and edible meat offal Beverages, spirits and vinegar Preparations of meat, of fish or of crustaceans, molluscs or other aquatic invertebrates Preparations of cereals, flour, starch or milk; pastrycooks’ products Miscellaneous edible preparations Sugars and sugar confectionery Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animal or vegetable waxes Products of the milling industry; malt; starches; inulin; wheat gluten Fish and crustaceans, molluscs and other aquatic invertebrates Tobacco and manufactured tobacco substitutes Cereals Cocoa and cocoa preparations Residues and waste from the food industries; prepared animal fodder Live animals Live trees and other plants; bulbs, roots and the like; cut flowers and ornamental foliage Vegetable plaiting materials; vegetable products n.e.s. Products of animal origin, not elsewhere specified or included Oilseeds and oleaginous fruits; miscellaneous grains, seeds and fruit; industrial or medicinal plants; straw and fodder Lac; gums, resins and other vegetable saps and extracts 07 October 2008 Executive brief ESA-EU EPA negotiations 09 04 08 02 22 16 19 21 17 15 11 03 24 10 18 23 01 06 14 05 12 13 EAC Com -oros Yes Yes Yes Madagascar Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Mauritius Zimb abwe Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Seychelles Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Source: IEPA texts (see list of sources at end or article). 36 Yes 3.4 Other possible areas of concern October 2008 Executive brief ESA-EU EPA negotiations In the IEPA negotiations involving other non-ESA-configuration governments from southern and eastern Africa, concerns have also been expressed about a number of other IEPA provisions which potentially impact on agriculture-sector development. These include provisions dealing with:    import-licensing arrangements and the prohibition on quantitative restrictions; infant-industry protection in the food-processing sector; special agricultural safeguards. With regard to the provisions dealing with the ‘prohibition of quantitative restrictions’, in the SADC IEPA context there are concerns that this could profoundly affect the pursuit of objectives for agricultural development and food security in certain member states, given the use of seasonal import-licensing arrangements designed to enable local producers to be able to market production during the immediate post-harvest period. In addition in a SADC IEPA context import licensing is also used to stimulate local traders and retailers to buy locally produced horticultural products which meet price and quality requirements. In the EAC IEPA similar provisions prohibiting quantitative restrictions exist, although exceptions with regard to the use of quantitative restrictions are allowed where food-security concerns arise. Other ESA IEPAs also allow for exception to this prohibition on quantitative restriction, with these being stipulated in annexes to the various agreements. It is not therefore clear to what extent the introduction of a prohibition on quantitative restrictions (including the use of import licences) would impact on the use of existing policy tools for agricultural development in ESA member states and hence to what extent this is an issue of concern in the ESA region. With regard to infant-industry protection there is concern under the SADC IEPA that the provisions are inadequate and potentially undermine existing regional arrangements for infantindustry protection. Once again it is not clear to what extent this is a problem in the ESA region. Finally in the SADC IEPA configuration there is concern that that the current safeguard measures applicable to food and agricultural products do not take into account the structural distortions in trade with the EU generated by the evolving system of EU agricultural support. There are therefore calls being made to establish separate agricultural safeguard provisions, distinct from the current bilateral safeguard provisions, to allow the establishment of arrangements which more effectively address the concerns of certain SADC IEPA governments over the structural distortions arising from new EU instruments of support for agriculture and rural development. While similar shortcomings in the agricultural safeguard provisions can be identified in the various ESA IEPAs, this issue has to date not been given as much prominence in the ESA region as within the internal deliberations within the SADC IEPA configuration. 37 4. The situation in October 2008 October 2008 Executive brief ESA-EU EPA negotiations The current situation in the ESA IEPA is one in which:  a multiplicity of different tariff-elimination commitments has been tabled and initialled, the inconsistencies within which constitute a significant barrier towards the establishment of a single common and comprehensive EPA embracing all eastern and southern African states which negotiated as part of the ESA configuration;  efforts continue to finalise IEPA tariff-elimination commitments by other ESAconfiguration members which have not yet initialled an IEPA, with Zambia being the latest country to join the fold;  discussions continue around a range of contentious issues, but progress remains painfully slow, with a continued divergence of views on the sequencing for resolving these contentious issues and signing the IEPAs;  wider regional-integration discussions continue, with a new and extended commitment having been made to the establishment of a free-trade area and eventually a customs union embracing SADC, EAC and COMESA member states in a single framework; this would appear to further complicate efforts towards establishing a single, common and comprehensive EPA. Critical to the evolution of the ESA-EU relationship will be the flexibility shown in accommodating within initialled IEPAs the inconsistencies in tariff-elimination commitments and the new regional-integration initiatives which have taken place since the initialling of the ESA IEPAs. 38 Executive brief October 2008 Executive brief EU-SADC EPA negotiations EU-SADC EPA negotiations Table of contents 1. The situation on January 1st 2008 __________________________________________ 40 2. Developments in 2008: the process ________________________________________ 40 2.1 Early optimism ____________________________________________________________ 40 2.2 Fundamental differences in approach _________________________________________ 41 2.3 Emergence of the ANSA group ______________________________________________ 41 2.4 Concerns over the dominance of wider EU policy objectives ______________________ 41 2.5 The perceived failure to address local realities __________________________________ 42 3. Developments in 2008: agriculture-related issues _____________________________ 43 October 2008 3.1 Concerns over IEPA provisions on the use of import licensing _____________________ 43 3.2 Concerns over IEPA provisions on the use of export taxes ________________________ 44 3.3 Concerns over IEPA provisions on infant-industry protection______________________ 45 3.4 Concerns over the ‘standstill’ provisions of the IEPA _____________________________ 46 3.5 Concerns over special agricultural safeguards___________________________________ 46 3.6 Concerns over IEPA provisions on regional-integration processes __________________ 47 4. The situation in October 2008 ____________________________________________ 48 39 October 2008 Executive brief EU-SADC EPA negotiations 1. The situation on January 1st 2008 Five countries, the BLNS and Mozambique, had signed an interim EPA with the EU, although Namibia did not initial the agreement until nearly three weeks after the four other countries and then only having formally expressed reservations with regard to a number of provisions which were seen as contentious. Indeed the Namibian government indicated that if these issues were not satisfactorily resolved it might be prevented from ratifying the agreement. South Africa did not sign and continued to trade under the TDCA, while Angola was considering signing. Tanzania, the eighth member of the original SADC configuration, signed an interim agreement in the ESA configuration instead. Through EU Council regulation 1528/2007 residual tariff barriers were removed through the granting on a transitional basis of full duty-free, quota-free access to the EU market, with the exception of sugar, bananas and rice, for which special transitional arrangements were established. Countries whose governments initialled either IEPAs or a full EPA are included in annex I of this regulation which enables them to benefit from the duty-free, quota-free access. Article 2.3 of this regulation states: ‘Such region or state will remain on the list in Annex I unless the Council, acting by qualified majority upon a proposal from the Commission, amends Annex I to remove a region or state from that Annex, in particular where:  the region or state indicates that it intends not to ratify an agreement which has permitted it to be included in Annex I;  ratification of an agreement which has permitted a region or state to be included in Annex I has not taken place within a reasonable period of time such that the entry into force of the agreement is unduly delayed; or  the agreement is terminated, or the region or state concerned terminates its rights and obligations under the agreement but the agreement otherwise remains in force.’ This constituted the situation as negotiations around the IEPA between the SADC and EU resumed in 2008. 2. Developments in 2008: the process 2.1 Early optimism With the resumption of discussions in February 2008 there was optimism on both sides that contentious issues could be resolved. In the case of those governments of SADC configuration countries which had previously expressed grave concerns, considerable importance was attached to the perceived commitment by Commission President Barroso to giving a personal lead in resolving contentious issues. Following ministerial level consultations Trade Commissioner Mandelson argued that the meeting reaffirmed the status quo, and that ‘SADC members are happy to let the existing interim agreement stand’ although both Namibia and South Africa wanted their concerns to be addressed. He went further, stating that ‘South Africa has said it would not stand in the way of other SADC members which had initialled an interim EPA’. At this stage Mr Mandelson hinted that market access for South African exports could be improved if it was open to the conclusion of an ambitious comprehensive EPA. However South Africa’s chief negotiator Xavier Carim responded that ‘improved market access is not the point’. A host of recently tabled issues had ‘complicated matters’. These issues included the ‘elimination of export taxes, proscriptions on procurement’, limitations on local-content rules, institutional requirements far removed from regional realities’ and the MFN clause. 40 2.2 Fundamental differences in approach It soon emerged that there was a fundamental difference in approach to the resolution of contentious issues. From the EC’s perspective the signing of the initialled IEPA was seen as a prerequisite for addressing contentious issues of concern to SADC members. October 2008 Executive brief EU-SADC EPA negotiations From the perspective of SADC members with reservations over substantive provisions in the IEPA there was seen to be little point in signing and ratifying an agreement with which they had fundamental disagreements. Rather it was felt that the substantive issues should be addressed first, and only then should the agreement be signed and ratified. 2.3 Emergence of the ANSA group Given early EC insistence that issue of concern to certain SADC governments would only be addressed if other SADC members shared them, there has emerged a sub-group within the SADC configuration, Angola, Namibia and South Africa (ANSA) which has been actively elaborating the substantive issues of concern in ways designed to ensure that all SADC members realise what is at stake in resolving these issues. According to press reports, this development has led some EC trade negotiators to accuse ANSA of being a ‘pressure group’, ‘aimed at coercing the EU in a bid to give more concessions’. While the ‘mood music’ for the negotiations has varied, with the EC on occasion suggesting that the signing of the SADC EPA was imminent, there has been little substantive progress on the issues of concern given the fundamental disagreement on the approach to be adopted. Indeed, press reports in late 2008 suggested a hardening of the ANSA position, with a focus on elaborating the specific modifications required to the substantive provisions of the IEPA dealing with contentious issues. If these modifications are accepted then prospects for concluding the IEPA process and moving on to the elaboration of a comprehensive EPA would be greatly enhanced. 2.4 Concerns over the dominance of wider EU policy objectives What emerged clearly in 2008 was a growing perception in southern Africa that EU positions in the SADC EPA negotiations were driven not by development concerns but by the wider trajectory of EU trade policy. Writing in May South Africa’s deputy trade minister Rob Davies argued that the EC was pursuing its ‘strategic ambitions’ in ways which created a serious impediment to fundamental policy approaches in South Africa. He pointed out that these issues did not relate to trade in goods and tariff-reduction commitments per se, but were instead related to matters of trade rules, areas in which agreements were not actually required in order to secure a WTO-compatible trade arrangement. These ‘matters of trade rules’ relate to the ‘so-called Singapore issues’, such as investment, competition policy, and transparency in government procurement. The first problem confronted by the SADC in this area according to deputy-minister Davies is the absence of ‘common rules or common procedures on any of these matters’ within the SADC configuration. The second problem is held to relate to the implications of these provisions for existing domestic policies across a large number of areas, given the EC desire to make the interpretation of the scope of these provisions subject to independent arbitration. It is feared that these provisions could then be used ‘against preferences for domestic producers’ and ‘against so-called domestic monopolies’. According to him, South African negotiators ‘encountered a series of demands, which in our view would have allowed the EU to exert significant influence on our economic governance in a highly partisan and non-developmental manner’. 41 October 2008 Executive brief EU-SADC EPA negotiations These concerns have been greatly reinforced by the recent articulation of the EC position on securing access for EU companies to raw materials. In one of his last speeches as Trade Commissioner, Peter Mandelson condemned the use of export restrictions, including the use of export taxes, by a number of advanced developing countries and Russia and committed the EC to ‘writing commitments on free trade in raw materials into all our bilateral trade agreements where they are clear and enforceable’. This EC position is seen to have a direct bearing on contentious issues in the SADC IEPA, with SADC countries being affected by wider EU policy deliberations in ways which bear little relationship to local realities. 2.5 The perceived failure to address local realities The perceived failure of the EC approach in accommodate regional economic realities is of particular concern to the Namibian authorities. These concerns were articulated by the Namibian ambassador to Brussels in April 2008, with reference to the IEPA provisions on export taxes, import licensing and the MFN clause. According to an article published in the April edition of Trade Negotiations Insights it was felt that in Namibia these provisions could seriously compromise the use of domestic policy tools to promote both greater value addition for national, regional and international markets (e.g. the beef sector) and even threaten entire sectors (e.g. the milling industry). It highlighted the need to accommodate the specific realities of the SADC configuration, notably the situation where one country completely dominates economically and, in the context of a customs union, four much smaller economies struggle to carve out a niche in the regional and global trading system capable of sustaining rural incomes and creating employment. It is felt that regional arrangements which accommodate these local realities by making special exceptions and dispensations to the principles of free trade should be fully respected under the IEPA. In this context it has been pointed out that while in the EU financial transfers are used to balance regional inequalities, this is not an option in regions encompassing both developing countries and LDCs, and thus in such circumstances other policy tools have to be used. Against this background the Namibian authorities have sought to make the case for a revision of specific provisions of the IEPAs which were introduced ‘at the eleventh hour’, in order to ensure their consistency with wider development objectives as pursued in the specific regional context prevailing in southern Africa. The regional realities which the ANSA group wishes to see accommodated in the SADC IEPA have been further complicated by the formal establishment in August 2008 of the SADC free trade area. This has created a trading bloc of 247 million people where tariffs have been eliminated on 85% of all intra-regional trade. The establishment of free trade in 100% of products is scheduled for 2012, while ambitious plans are in place for a customs union by 2010, a common market by 2015, monetary union by 2016 and a single currency by 2018. However, concerns have been expressed at the highest level over the possible conflict between these objectives and the EPA process. Speaking at the launch of the SADC FTA the then South African president, Thabo Mbeki argued that EPAs ‘will have a profound – and even limiting – impact on the process of deepening integration at the regional level’. In the light of the substantive nature of ANSA concerns and the consequences which a number of these issues could have for the development of the food-and-agriculture sector, considerable work has been undertaken in the course of 2008 to elaborate the particular areas of concern and possible ways out of the current impasse. This work is reflected in the following sections. 42 3. Developments in 2008: agriculture-related issues October 2008 Executive brief EU-SADC EPA negotiations 3.1 Concerns over IEPA provisions on the use of import licensing In terms of the use of import-licensing arrangements to manage trade in sensitive food and agricultural products, the particular article of concern in the SADC IEPA is article 35, which deals with ‘prohibition of quantitative restrictions’. This requires SADC IEPA governments to immediately eliminate upon entry into force of the agreement all restrictions on imports, including import- and export-licensing arrangements. The implications of this provision can be illustrated by looking at the situation in Namibia. The current text of article 35 would profoundly affect the pursuit of agricultural development and food-security objectives in Namibia. The abolition of the current measures to regulate seasonal imports of wheat and maize, designed to provide a local market for irrigated Namibian production, would result in an immediate economic loss of N$113.7 million and N$96.5 million respectively to wheat and maize producers. What is more, depending on market developments, it could fundamentally undermine the future of irrigated wheat and maize production. In addition an immediate elimination of import- and export-licensing arrangements would also severely set back currently successful efforts to promote horticultural production in Namibia. Currently import licences represent a crucial element in an integrated market-information system, designed to link local horticultural producers with traders and retailers. A computerised database allows traders and retailers to identify when and where local production is available and facilitates producers’ identification of market opportunities. However, critical to this scheme is the licensing of imports of products where local production is being developed, with these licences only being issued by an independent body (which coordinates industry-wide consultations under the relevant legislation) when local products are not available at a competitive price. This scheme has seen a rapid expansion of local production for local markets in the last four years, such that 35% of national demand in the products covered by the scheme is now met from domestic production, at minimal cost in terms of regional trade distortion. It should be noted that under article 29 of the SACU agreement provision is made for the imposition of marketing regulations for agricultural products between SACU member states with specific reference to emergent agriculture and related agro-industries, or ‘any other purposes as agreed upon between member states’. This provision implicitly recognises that other objectives in the context of the vast inequalities in levels of development which exist within the SACU may need to be pursued in ways which appear to compromise the basic principle of free movement of agricultural goods. This is nevertheless allowed in the context of these wider public policy objectives. Similar provisions exist under the SADC trade protocol, under article 9. What is more this protocol requires the objectives of enhancing economic development, diversification and industrialisation to be taken into account in reviewing the removal of non-tariff barriers to trade. From a Namibian perspective ensuring that the SADC IEPA fully respects these special exceptions would appear to be a minimum requirement before it can be signed by Namibia. This would appear to be particularly important in the current global food-price context, where ‘Namibia’s national food-security situation would increasingly rely on volatile regional and international supply of staple food commodities and the end consumers’ vulnerability to regional and world market demand and supply factors and consequent commodity-price fluctuations would significantly increase’. 43 October 2008 Executive brief EU-SADC EPA negotiations 3.2 Concerns over IEPA provisions on the use of export taxes In terms of the use of export taxes as a tool for promoting greater local value-added processing and local employment creation the article of concern is article 24. This seeks to limit the use of export taxes to current taxes at current levels, with only in exceptional circumstances, temporary export taxes being allowed subject to prior consultations with the EU. The exceptional circumstances allowed relate to revenue needs, or concerns over infant-industry protection or environmental protection. This fundamentally fails to understand the policy use of export taxes in the SADC region, where increasingly the aim is to use such tools to promote the structural transformation of national economies (a critical objective of the EPA negotiations from an ACP perspective), by promoting movement up the value chain, so as to enhance growth and employment creation. Once again this issue can best be illustrated with reference to the Namibian agricultural sector. In Namibia export taxes have been used in a variety of ways to respond to the particular challenges facing a small economy in a regional context dominated by a much larger and economically more powerful neighbour, South Africa. The primary purpose of export taxes in the agricultural sector in Namibia is to encourage value-added processing. A concrete example in this regard is in the beef sector. Prior to independence Namibian cattle were largely exported ‘on the hoof’ to South Africa, with the value-addition and structural development of the meat-processing industry taking place in neighbouring South Africa. Since independence however, government policies (including securing preferential access to the EU market and the use of export taxes) has encouraged the development of a slaughtering and meat-processing industry, as well as a tanning and leather-working industry. This has extended the beef-sector value chain in Namibia and created thousands of new jobs. The Namibian government is trying to pursue a similar policy in regard to the small-stock sector, with a flexible export tax being applied, with export licences being linked to the level of livestock processed locally and possible use of export taxes under certain circumstances. In agricultural value chains, the use of export taxes can prove particularly valuable in maintaining supplies to processing industries in a context of periodic droughts, which can disrupt the flow of raw materials to processing industries. It can provide greater certainty over raw-material supplies and can thereby encourage investment in value-added processing. In is in this context that ANSA governments wish to avoid an unwarranted restriction on the use of this policy tool, given the central policy concern with stimulating movement up the value chain in ways which expand income-earning opportunities in rural areas. While the initial EC position was that Namibia remains ‘totally free to maintain all existing ones and even to increase them or add new ones, when required for reasons of public revenues, protection of the environment or of infant industry (protection)’, with the only requirement being that they be subject to consultation, there has subsequently been a hardening of the EC position. This was most clearly stated on September 29th 2008 by Commissioner Mandelson when he committed the EC to ‘writing commitments on free trade in raw materials into all our bilateral trade agreements where they are clear and enforceable’. There is now profound concern that an important policy tool for promoting investment in greater value-added processing will need to be abandoned. Once again this needs to be seen a context in which developing countries lack the financial tools increasingly used inside the EU itself to promote production and trade adjustments in the food-and-agriculture sector, by promoting movement up the value chain In the EU the vast majority of the over €53 billion of public funding being deployed in support of ‘axis 1’ rural-development measures between 2007 and 2013 is being targeted on encouraging movement up the value chain within the EU agrifood sector. 44 October 2008 Executive brief EU-SADC EPA negotiations Countries such as Namibia however lack the financial means to deploy such generous public support to encouraging movement up the value chain, and have to resort to simpler and blunter instruments such as export taxes. Such export taxes can, if properly used in conjunction with other policy tools, serve to promote value addition, employment creation and structural economic change in the specific national and regional economic circumstances prevailing within the SACU region. It is in this context that the ANSA group is seeking to modify the provisions of article 24. This issue also has significant implications outside of the agriculture sector, particularly in regard to mineral-beneficiation strategies being pursued in the southern African region. 3.3 Concerns over IEPA provisions on infant-industry protection The use of infant-industry protection in the SACU context is seen as critically important given the dominant role of South Africa within the region. It has commonly been used to protect infant industries in the food-processing sector. The article of concern in the IEPA is article 34 on bilateral safeguards which amongst other things deals with infant-industry protection. The first perceived problem is thus the merging of bilateral safeguards with provisions for infantindustry protection. Amongst ANSA countries the nature of the protection required for bilateral safeguards against import surges and infant-industry protection is felt to be quite different. It is therefore argued that these issues should be dealt with separately through the establishment of distinct provisions for infant-industry protection within the SADC IEPA. In addition the provisions of article 34.6 which deals with infant-industry protection are seen in ANSA countries as having a number of specific shortcomings, namely they:  implicitly limit infant-industry protection to products where duty reduction is under way (i.e. is not applicable to products excluded from the duty-reduction provisions under the agreement);  limit the application of infant-industry protection measures to eight years ‘from the date of entry into force of this agreement’ (although this can be extended following review by the Joint Council);  limit the scope of the protection measures which can be adopted to those applicable under bilateral safeguards;  subject the application of infant-industry protection measures to cumbersome procedures. More fundamentally however there is the concern that the current SADC IEPA infant-industry provisions serve to fundamentally undermine those of the SACU, which stipulate that the infant-industry provisions only apply where ‘such duties are levied equally on … like products imported from outside that area’. Thus were the IEPA provisions to be applied, involving separate measures and arrangements for their invocation, then the infant-industry protection made available under the SACU agreement would be brought into question – and would de facto become inoperative. In the ANSA group it is felt that, given the EU’s commitment to supporting regional integration, such damaging inconsistencies with existing regional arrangements that have been developed to accommodate the diverse and unequal sizes and levels of development of regional partners, should not be allowed to arise. It is argued that the provisions in the IEPA for infantindustry protection should be revised to ensure their consistency with SACU measures for infant-industry protection. These are the product of a negotiated compromise amongst regional partners, designed to accommodate the specific economic realities which prevail within the SACU and wider SADC region. 45 There is a fear that without such modification the smaller SACU economies could be locked into their current economic structures, and the elaboration of locally designed regional industrial-development strategies of the kind which were a feature of the early regional cooperation experience of the European Communities (i.e. the European coal-and-steel community) could be seriously constrained. Currently, the Namibian pasta and UHT milk industries enjoy infant-industry protection. October 2008 Executive brief EU-SADC EPA negotiations 3.4 Concerns over the ‘standstill’ provisions of the IEPA Article 23 of the SADC IEPA is the ‘standstill clause’. This article stipulates that ‘no new customs duties shall be introduced on trade with the EU, nor those already applied be increased, as from the entry into force of the agreement, for all products subject to liberalisation’. While the aim of this provision is a reasonable one: to establish the baseline from which tariffreduction commitments should be implemented, in the context of recent policy responses to high global food prices, this provision could have some unforeseen consequences. In response to very high food prices a number of governments reduced import duties, and in some instances even set them at zero. At this juncture, therefore, the strict application of this provision fixing applied duties at the levels obtaining upon entry into force of the agreement, could result in freezing in place exceptional low import duties. Against this background there would appear to be a need to review these standstill commitments, either to allow for their flexible implementation or to establish, line by line in an annex, the tariffs from which reduction commitments should be implemented. In this context it should be noted that on October 17th 2008 the EC ‘announced that customs duties on cereals imports will be reintroduced as a reaction to the price decrease on the cereals market’. This followed an earlier decision to set import duties at zero in the light of high global food prices and the need to secure cereal supplies for the EU market. 3.5 Concerns over special agricultural safeguards There are concerns in some SADC IEPA members that the current safeguard measures applicable to food and agricultural products do not take into account the structural distortions in trade with the EU generated by the evolving system of EU agricultural support. It is argued that new systems of EU agricultural support, ranging from the direct aid payment schemes (which lower input costs at the top of the production chain) to investment support deployed through rural-development policy instruments (which subsidise the production of value-added food products for domestic markets and export) create structural distortions in the trade relationship which require the inclusion of special agricultural safeguard measures in the text of the IEPA. Currently agricultural safeguards are dealt with under standard bilateral safeguard provisions (article 34). This is felt to be inadequate since the issues faced in the food-andagriculture sector arising from the structural distortions generated by EU agricultural and ruraldevelopment policy instruments are quite different from the issues arising from sudden import surges, which is what the bilateral safeguard provisions included in article 34 are primarily intended to address. It is in this context that calls are emerging for a revision of the existing safeguard provisions for food and agricultural products included in the SADC IEPA. Such revised provisions would aim:  to prevent disruption of markets for food and agricultural products in the context of a rapid expansion of the value of such EU exports to the ACP and a substantial growth in exports to the SACU market in particular since 1995;  to support the development of food and agricultural production to enhance income-earning opportunities and household food security;  to promote food security in the new context of increased volatility on international foodcommodity markets. 46 3.6 Concerns over IEPA provisions on regional-integration processes October 2008 Executive brief EU-SADC EPA negotiations Looking beyond issues of direct relevance to the agriculture sector, there are a number of issues with indirect consequences, notably with regard to the future existence of an integrated SACU market, which constitutes an important destination for SADC IEPA members’ food and agricultural products. There are concerns that article 26 of the IEPA and its associated annexes could serve to undermine the integrity of the common external tariff of the SACU, by requiring the BLNS countries to introduce tariff reductions which South Africa is not committed to undertaking. According to an ECDPM/ODI report ‘there does exist some earlier-than-TDCA liberalisation’. Indeed, ‘all the items in the tranche to be liberalised between 2008 and 2010 faced positive tariffs (of between 7.5% and 22.5%) in 2006’. This report went on to point out that this will mean that South Africa either has to:   ‘establish differential transition tariffs for imports’; ‘bring forward its own liberalisation’ commitments. Or that alternatively the EU would need to accept that ‘some items scheduled for full liberalisation by 2012 under the TDCA will not be liberalised by BLNS until 2018’. From an ANSA perspective this discrepancy needs to be removed by simply harmonising the South African commitments under the TDCA and the BLNS commitments under the SADC IEPA. This is particularly felt to be the case since the BLNS are already implementing tariffreduction commitments faster than any other grouping of ACP countries. For the BLNS the full liberalisation processes will be completed before most ACP countries have even started dismantling tariffs on imports from the EU. This represents only the most obvious area of infringement of the integrity of the SACU not only as a customs union but also as a regional-development initiative. The MFN provision, which could require BLNS countries to unilaterally reduce tariffs regardless of what South Africa does, would appear to further undermine the integrity of the SACU common external tariff. Concerns also exist over the implications of the IEPA for collective decision-making within the SACU, and the special dispensations made to try to accommodate the vastly different sizes and levels of development of the partners. From an ANSA perspective there is seen to be a need for a thoroughgoing ‘cleaning up’ of the SADC IEPA text to ensure consistency with existing regional trade arrangements and the integrity of these regional trade arrangements. If not there is felt to be a danger that a crisis in the institutions of the SACU could be provoked; this could have implications for the free movement of goods, including food and agricultural products within the SACU, a market of critical importance to the agricultural trade of SADC IEPA signatories. 47 4. The situation in October 2008  within the SADC grouping two distinct positions now exist, with ongoing efforts to ensure that, despite differing perspectives, a common approach which ensures the continued integrity of existing regional-integration arrangements and plans is maintained;  the implications of contentious provisions of the SADC-EU IEPA for the food-andagriculture sector are increasingly clearly articulated;  efforts are under way to draft alternative legal texts to address contentious issues in the current IEPA, to accommodate ANSA concerns and thereby allow the grouping to progress towards the elaboration of a more comprehensive EPA on a united basis;  a fundamental divergence of views exist between the EC and the SADC IEPA countries on the sequencing of concrete actions to resolve contentious issues and the signing and ratifying of the IEPA: the EC takes the view that signing and ratifying should come first, while the ANSA group is strongly of the view that contentious issues should first be resolved. October 2008 Executive brief EU-SADC EPA negotiations The current situation in the SADC IEPA is one in which: 48 Executive brief March 2009 Executive brief EPA negotiations: EU- West Africa EU-West Africa EPA negotiations Table of contents 1. Members of the regional configuration _____________________________________ 51 2. Structure, phasing and negotiating mandate ________________________________ 51 2.1 Structure of the negotiations _________________________________________________ 51 2.2 Civil-society implications ___________________________________________________ 52 2.3 The negotiating mandate ___________________________________________________ 53 3. The state of play in the negotiations _______________________________________ 54 3.1 Developments since 2007____________________________________________________ 54 3.2 Signing of interim EPAs by Côte d’Ivoire and Ghana_____________________________ 55 3.2.1 The Côte d’Ivoire-EU interim EPA__________________________________________________ 55 3.2.2 The Ghana-EU interim EPA_______________________________________________________ 56 3.2.3 Compatibility between the two EPAs and with a future regional EPA ________________________ 57 3.3 Work in progress on sensitive products and support measures for the agricultural sector in the EPA_____________________________________________________________________ 57 March 2009 3.3.1 Establishing sensitive products and preparing the market-access offer________________________ 58 3.3.2 Establishing support measures: the EPA development programme (PAPED) __________________ 58 3.4 Prior harmonisation of trade policy: implementation of the ECOWAS CET __________ 58 4. Main issues ___________________________________________________________ 60 4.1 The EU’s place in west Africa’s foreign trade ___________________________________ 60 4.2 Geographical concentration of trade __________________________________________ 62 4.3 Exports concentrated on a small group of products ______________________________ 64 4.4 Diversified imports, often in competition with west African sectors _________________ 64 5. The main issues in the agricultural negotiations _____________________________ 66 5.1 General issues _____________________________________________________________ 66 5.2 Access to the European market ______________________________________________ 67 5.3 Access to the west African market ____________________________________________ 67 5.4 The development component ________________________________________________ 70 49 March 2009 Executive brief EPA negotiations: EU- West Africa Summary West Africa is the main ACP region in terms of its importance in exports to and imports from the European Union (some 40% of EU-ACP trade). In this context, the proposed changes to the trade regime between west Africa and the EU are of key strategic importance for the future of west African economies. The region for the purposes of these negotiations includes the 15 ECOWAS member countries and Mauritania. Its key features are the coexistence of two economic integration areas (UEMOA and ECOWAS – the latter encompassing the UEMOA member countries) and a common external tariff (the UEMOA CET, recently extended to the ECOWAS). Finally, the west African region is characterised by having a majority of LDC countries (12 out of 16), the non-LDC countries being among the major exporters to the EU (more than 80% of exports). The latter therefore have a greater interest in signing an EPA in order to maintain the widest possible access to the European market, in contrast to the LDCs who in principle have total access via the EBA (‘Everything But Arms’) initiative. The two negotiating parties did not manage to reach an agreement before the original deadline of 31st December 2007. There were two reasons for this: on the one hand, delays built up in the region while the west African countries were preparing their negotiating positions, and on the other hand, there were major disagreements with the EC on multiple aspects of the agreement. Faced with west Africa’s refusal to commit to signing an interim regional APE, the EC negotiated and initialled bilateral agreements with two of the non-LDC countries, Côte d’Ivoire and Ghana, while Nigeria refused to take part in such a procedure. This episode has highlighted the fragility of the political process of regional integration, the difficulty of proposing compromises against a background of diverging interests among countries, and has exacerbated the different approaches taken by ECOWAS and UEMOA. While the EPA process is thought to strengthen the process of integration, in this case the EC’s management of the negotiations and its strategy have contributed rather to a weakening of the process. In parallel with the signing in 2008 of these two initialled agreements, negotiations continued between the two negotiating parties. Three main areas of negotiation form the basis for the work:    access to markets; the development programme (support); the text of the agreement. 50 1. Members of the regional configuration Executive brief EPA negotiations: EU- West Africa The configuration of the west African region in the framework of the EPA negotiations comprises all the 15 ECOWAS member countries, plus Mauritania, i.e. a total of 16 countries. Twelve countries are classified as LDCs, three countries – Côte d’Ivoire, Ghana and Nigeria – are non-LDC developing countries and one country, Cape Verde, is in a transitional phase. It is no longer an LDC, as a result of its higher development indicators, however its economy remains very vulnerable due to the fact that it is an archipelago. Benin Burkina Faso Cape Verde Côte d’Ivoire Gambia Ghana Guinea Guinea-Bissau Liberia Mali Mauritania (non member of ECOWAS) Niger Nigeria Senegal Sierra Leone Togo The inclusion of Mauritania poses an important problem from the point of view of putting in place a customs union prior to the signing of the EPA (see below). The political instability being experienced in Mauritania, and the suspension of formal relations with ECOWAS and the EU, make it difficult to address any problems resulting from its inclusion in the EPA. Finally, recent political events in Guinea and Guinea-Bissau are also likely to complicate the process.1 2. Structure, phasing and negotiating mandate 2.1 Structure of the negotiations March 2009 The structure of the negotiations decided by the region and the EC is based on the following organs:  the ECOWAS council of ministers, the political organ determining the terms of reference for negotiation, and framing and assessing the state of progress of negotiations;  the ministerial monitoring committee, composed of the ministers for trade, as well as the ministers of economy and finance. The negotiations between west Africa and the EU are organised under the aegis of the regional negotiating committee (RNC) and are organised at three levels:  the level of chief negotiators: delegation led by the presidents of the ECOWAS and UEMOA commissions, with the EU delegation led by the Trade Commissioner;  the level of senior civil servants: delegation led by the ECOWAS and UEMOA Commissioners with responsibility for trade and customs. The EU is represented by the Commission’s director-general for trade;  the level of experts: delegation led by the directors of trade within the ECOWAS and UEMOA Commissions. The EC delegation is made up of representatives of the directorategenerals for trade, development and other directorates-general depending on the subject of the negotiations. In the event of an agreement, the question arises of how to ratify it while countries that are party to the agreement are suspended from ECOWAS and/or from the Cotonou Agreement. 1 51 March 2009 Executive brief EPA negotiations: EU- West Africa A task force for regional preparations (TFRP) was set up to ensure consistency between the ‘development cooperation’ (EDF programme) part and the EPA. It brings together the EC, interested EU member states and the west African region. The latter is represented by the ECOWAS Commission, the UEMOA Commission and the competent national authorising officers of the European Development Fund (EDF). The TFRP is charged with three important tasks: (i) the creation of the special regional EPA fund (FORAPE); (ii) determining the net fiscal impact of the EPA; (iii) determining support and upgrading programmes. The TFRP does not run smoothly, and in effect provides a space that facilitates EU member-state involvement and exchange of information on the progress of the negotiations, rather than a real opportunity to make coherent the development support provided from across the EU as a whole to west Africa. At the heart of the debate is the issue of aid for trade. Five so-called ‘thematic technical groups’ worked in 2005 and 2006 and produced texts that were the subject of negotiations with the European negotiators before being adopted formally by the chief negotiators2:   free-trade area, customs union and trade facilitation;    other trade-related areas; standardisation, quality control and related services, SPS measures and technical barriers to trade; investments and services; issues relating to productive sectors (including agriculture, craft industries, industry, fisheries and forestry). Since February 2007, preparatory work has in principle been the responsibility of three groups: group 1 focuses on the drafting of the agreement; group 2 is charged with continuing the work of the previous group 5 devoted to productive sectors. Its remit includes assessing the fiscal impact, the creation of the special regional EPA fund (FORAPE) and the creation of a monitoring centre on competitiveness. Group 3 deals with market access. The boundaries between the two latter groups are fairly fluid. Whereas these groups were intended to promote participation by representatives from the professions and civil society, they mainly bring together the experts from the ECOWAS and the UEMOA commissions. 2.2 Civil-society implications ECOWAS is attempting to involve civil-society and private-sector stakeholders from the region in the EPA preparation process. Formally, the platform for civil-society organisations in west Africa is the interlocutor of the negotiators. The members of the platform participate as much at national level with their governments as at regional and international level, in coordination with other regional platforms. Coordination is carried out by ENDA Dakar. The platform is formally represented within the regional negotiating committee and plays an important role in monitoring developments and ensuring media coverage. The ECOWAS Commission also consults specialised organisations on more precise subjects, but on a non-institutionalised basis (there is no formal obligation to involve them). This is in particular the case as regards agricultural policy and the content of the EPA on agricultural products, where it consults the peasant organisations (ROPPA)3, the chambers of agriculture (RECAO)4, etc. 2 Formal reports of these five working groups adopted by both parties are available. Network of peasant organisations and producers in west Africa 4 Network of west African chambers of agriculture 3 52 2.3 The negotiating mandate March 2009 Executive brief EPA negotiations: EU- West Africa Phase II of the negotiations was launched for west Africa on October 6th 2003 on the basis of the negotiating terms-of-reference mandate set by the heads of state. The terms of reference are structured around six objectives:  the progressive creation, in accordance with WTO rules, of a free-trade area between ECOWAS and the EU during a 12-year period with effect from January 1st 2008;      the need to prioritise development and poverty reduction; cooperation on trade-related issues; strengthening the integration process in west Africa; improving competitiveness: capacity building and upgrading; improving market access for west African exports. The ‘road map’ adopted on August 4th 2004 reasserts the commitment of the two parties in the Cotonou Accord, and reiterates in particular that ‘the main aim of the EPA is to contribute to reinforcing regional integration and the sustainable economic development of west Africa’. In terms of reinforcing regional integration, the heads of state have adopted the principle of creating a customs union at the borders of the ECOWAS area (therefore not including Mauritania at this stage) on the basis of an extension of the common external tariff (CET) in force at the borders of the UEMOA area. This change in the tariff policy applied at the borders of the trade area is accompanied by a trade-facilitation system. In this regard the ‘road map’ provides in particular for various actions, the most important of which are as follows:  the harmonisation of customs clearance and other customs formalities in the ECOWAS area (definition of a new customs code harmonising existing codes, not finalised);     the introduction of a single customs declaration; the interconnection of customs computer systems (rationalisation of procedures); the harmonisation of regulations concerning load per axle; drawing up a regional road-controls plan; etc. The ‘road map’ sets out several other complementary measures: these involve in particular promoting a regional approach to product standardisation and quality control (systematisation of national structures, development of a policy on quality, employee training, a certification system, etc), as well as implementing an intellectual property rights system, as well as a common policy for free competition and investment. An important part of the ‘road map’ moreover is devoted to improving the competitiveness of west African economies. Its aim is to ‘maximise the dynamic benefits generated by the EPA and to help countries to adjust their economies to the liberalisation process in order to ensure the development dimension of the EPA process’. 53 3. The state of play in the negotiations 3.1 Developments since 2007 March 2009 Executive brief EPA negotiations: EU- West Africa When the chief negotiators met in February 2007, three prerequisites were specified for the parties to be able to conclude the EPA:    joint determination of the EPA support programmes and their financing by the EC; the drawing up of timetables for access to the markets of both the negotiating parties; the drafting of the text of the agreement. As these three conditions had still not been met by the beginning of the last quarter of 2007, west Africa decided not to commit itself to signing an EPA by the planned deadline. The European proposal of a ‘stepping stone’ agreement limited to liberalisation of trade in goods was rejected by the region. The EC’s attempt to conclude an agreement with the UEMOA countries was also unsuccessful. The EC, moreover, rejected the proposal from the region to ask the WTO for an extension of the waiver, which was then coming to an end. There were problems of compatibility with WTO rules for the three non-LDCs: Côte d’Ivoire, Ghana and Nigeria. For these three countries, the end of the waiver would have meant a change to their trading rules, with the application of the standard GSP regime. The risks inherent in this change of tariff arrangement led Côte d’Ivoire and Ghana to commit themselves to interim EPAs concluded on a national basis. These agreements were initialled before December 31st 2007. Nigeria, considerably less dependent than the other two countries on exports to the EU, rejected this option and asked the EC to apply its GSP+ regime. The Commission turned down this request, as it considered that Nigeria did not meet the necessary conditions as regards the ratification and application of international conventions. Although civil society applauded the region’s refusal to sign, these developments, on top of the divergences in interests and strategy among the countries, had a considerable effect on the region’s cohesion in the negotiations. The developments also affected the overall proceedings of the negotiations and introduced a number of doubts into the push towards regional integration. In its April 2007 market-access offer, the EC proposed duty-free, quota-free access, with the exception of rice and sugar, for which it proposed a transition period. West Africa has been very slow in preparing its offer, due to problems in interpretation of Article XXIV of the GATT, product coverage, and the timetable for tariff dismantling. This delay is due to the region’s process for preparing the offer, in particular for the identification of sensitive products. However, a general framework for its market-access offer was submitted to the EC at the end of 2008. The EC has also tabled a draft text. The west African region made a commitment to propose its own wording and is now refusing to work on the basis of the EC proposal. As it considers that the work on identifying sensitive products (prior to the market-access offer), determining upgrading programmes and defining support measures, as well as an agreement on rules of origin, are a prerequisite to the drafting of the agreement (see section below on agricultural issues), it has committed itself to preparing a proposal in parallel with this work. 54 March 2009 Executive brief EPA negotiations: EU- West Africa 3.2 Signing of interim EPAs by Côte d’Ivoire and Ghana In view of the risks of being subject to the GSP regime, the two countries first initialled bilateral agreements in November 2007, and then signed them in 2008. These agreements include a timetable for liberalisation of different groups of products classified according to sensitivity. They include the provisions of a full EPA, but give no commitment on the part of the EC towards the EPA section on development or support. The two agreements have not been harmonised as regards the liberalisation schedule (the list of products included in each group), but both provide for the liberalisation of 80% of products imported from the EU in 2004-2006. Both agreements carry the so-called most-favoured-nation (MFN) clause. Inclusion of this clause in the interim EPAs requires ACP countries to automatically accede the same trading preferences to the EU that they would accede to third countries in the context of another bilateral agreement, if the exports from the third country constitute more than 1% of goods exported at international level (this would affect trade with many emerging nations in particular). This issue is of concern particularly in some ACP regions because of policy initiatives aimed at diversifying trade and reducing overdependence on the EU market. South Africa’s deputy trade minister, Rob Davies, has said, for example, that he is concerned by the fact that ‘This would lock us into a primary relationship with the EU for ever more. … It would be an unacceptable limit on our sovereignty.’ Even if west Africa at present has no negotiations under way for an FTA with an emerging country, the inclusion of this clause could prove problematic if the region decided to start negotiations with China, for example. 3.2.1 The Côte d’Ivoire-EU interim EPA Tariff liberalisation commitments will commence immediately and will be completed in 2022. Goods due to be liberalised during the first phase up to 2012 ‘represented almost 60% of Côte d’Ivoire’s imports from the EU in 2004 to 2006’ (see Table 1). Although some of these goods were already zero-rated, others had duties of up to 20%. Five agricultural products with imports of over $1 million are included in the first tranche of liberalisation commitments (with a further six fishery products included). According to an ODI/ECDPM study, ‘several of the agricultural products would appear to be items that might compete with domestic producers’. Table 1: Côte d’Ivoire: first-phase agricultural commitments NTL code 1602500000 2005400000 2106901000 0303420000 0303430000 0303490000 0303500000 0303740000 0303790000 1108120000 Ave. imports Description 2004-06 $ ’000 1,254 Prepared or preserved meat or offal of bovine animals (excl. sausages and ... 1,038 Peas ‘Pisum Sativum’, prepared or preserved otherwise than by vinegar or ... 13,493 Food preparations, n.e.s.: No description at level 8 24,922 Frozen yellowfin tunas ‘Thunnus albacares’ 8,268 Frozen skipjack or stripe-bellied bonito ‘Euthynnus Katsuwonus-pelamis’ 1,396 Frozen tunas of the genus ‘Thunnus’ (excl. Thunnus alalunga, Thunnus ... 1,123 Frozen herrings ‘Clupea harengus, Clupea pallasii’ 1,328 Frozen mackerel ‘Scomber scombrus, Scomber australasicus, Scomber’ 11,463 Frozen freshwater and saltwater fish (excl. salmonidae, flat fish, tunas ... 1,396 Maize starch Tariff % 20 20 20 10 10 10 10 10 10 10 Exclusions from tariff-liberalisation commitments accounted for 20% of the country’s imports from the EU in 2004-06, with just over one-third of these being food and agricultural products (some 226 tariff lines; see Table 2 for summary details). 55 Table 2: Côte d’Ivoire: agricultural exclusions and the share of excluded trade HS2 Description March 2009 Executive brief EPA negotiations: EU- West Africa 52 15 09 02 18 20 22 04 01 24 07 17 10 03 11 Share of total % Cotton 21.2 Animal or vegetable fats and oils and their cleavage products; prepared edible 6.5 fats; animal or vegetable waxes Coffee, tea, maté and spices 5.6 Meat and edible meat offal 4.0 Cocoa and cocoa preparations 3.1 Preparations of vegetables, fruit, nuts or other parts of plants 3.0 Beverages, spirits and vinegar 2.8 Dairy produce; birds’ eggs; natural honey; edible products of animal origin, 1.7 not elsewhere specified Live animals 1.4 Tobacco and manufactured tobacco substitutes 1.2 Edible vegetables and certain roots and tubers 1.1 Sugars and sugar confectionery 1.1 Cereals 0.8 Fish and crustaceans, molluscs and other aquatic invertebrates 0.5 Products of the milling industry; malt; starches; inulin; wheat gluten 0.5 3.2.2 The Ghana-EU interim EPA The government of Ghana is the second west African government to have initialled an IEPA. Tariff-liberalisation commitments will start in 2009 and will be completed by 2022. ‘The liberalisation schedule is front loaded’. According to the ODI/ECDPM report, products being liberalised in the first six years accounted for over a quarter of imports from the EU in 2004-06 (see Table 3). The items with the highest tariffs applied fall into this first-phase liberalisation schedule. Over 70% of imports from the EU will be liberalised within 10 years. Four agricultural items are included in first-phase liberalisation, including cuts of turkey meat, wheat flour and oats. Table 3: Ghana: first-phase agricultural commitments NTL code Ave. imports 2004-06 $ ’000 020727 1,297 110100 1,245 110412 1,536 330210 8,996 Description Tariff % Frozen cuts and edible offal of turkeys Wheat or meslin flour Rolled or flaked grains of oats Mixtures of odoriferous substances and mixtures incl. alcohol 20 20 20 10 Some 20% of current imports from the EU are to be excluded from liberalisation, with 28% of these items being agricultural and 62% of these items falling in the highest tariff band (see Table 4 below). 56 Table 4: Ghana: agricultural exclusions and the share of excluded trade HS2 Description March 2009 Executive brief EPA negotiations: EU- West Africa 52 03 02 07 15 08 09 20 16 22 10 13 11 18 04 17 24 01 21 19 Share of total % Cotton 5.7 Fish and crustaceans, molluscs and other aquatic invertebrates 4.6 Meat and edible meat offal 3.3 Edible vegetables and certain roots and tubers 3.6 Animal or vegetable fats and oils and their cleavage products; prepared 2.8 edible fats; animal or vegetable waxes Edible fruit and nuts; peel of citrus fruits or melons 2.5 Coffee, tea, maté and spices 2.2 Preparations of vegetables, fruit, nuts or other parts of plants 2.2 Preparations of meat, of fish or of crustaceans, molluscs or other aquatic 1.8 invertebrates Beverages, spirits and vinegar 1.8 Cereals 1.0 Lac; gums, resins and other vegetable saps and extracts 0.9 Products of the milling industry; malt; starches; inulin; wheat gluten 0.8 Cocoa and cocoa preparations 0.8 Dairy produce; birds’ eggs; natural honey; edible products of animal 1.7 origin, not elsewhere specified Sugars and sugar confectionery 1.1 Tobacco and manufactured tobacco substitutes 1.2 Live animals 0.4 Misc. edible preparations 0.2 Preparations of cereals, flour, starch or milk, pastrycook products 0.1 3.2.3 Compatibility between the two EPAs and with a future regional EPA As can be seen above, Ghana has a larger number of product exclusions than Côte d’Ivoire, excluding certain edible fruit and nuts; peel of citrus fruits or melons (HS 8), preparations of meat (HS 16), lac; gums, resins and other vegetable saps and extracts (HS 13), misc. edible preparations (HS 21) and preparations of cereals, flour, starch or milk, pastrycook products (HS 19), which Côte d’Ivoire does not exclude. Equally there is no overlap between the first-phase tariff-elimination commitments of Ghana and Côte d’Ivoire in the agricultural sector. There is thus an incompatibility between both the first-stage tariff-elimination commitments and the exclusion lists in the agricultural component of the tariff-reduction schedules of Ghana and Côte d’Ivoire. The two agreements are based on the current agreement being replaced by a region-wide EPA agreed at regional level with the EC, with the replacement effective from the entry into force of the regional EPA. In this case, the parties will need to ensure that the comprehensive EPA at regional level maintains the fundamental rights (of the respective country) under the current agreement. The main problems will be around the liberalisation timescale, considerably longer than the 15 years in both of these agreements, and the scope of coverage of liberalised trade. 3.3 Work in progress on sensitive products and support measures for the agricultural sector in the EPA Given the importance of the agricultural sector, the opportunities and risks inherent in the EPA, the region attaches particular importance to two aspects: determining sensitive products and defining support programmes. It is important for the ECOWAS to ensure that it is consistent with the ECOWAP, as regards both the content and the process. On the latter point, this means above all ensuring that the member states and socio-professional stakeholders are closely involved in the preparatory process, formulating the choices and the negotiation of compromises. 57 March 2009 Executive brief EPA negotiations: EU- West Africa 3.3.1 Establishing sensitive products and preparing the market-access offer The market-access offer to be made depends on identifying how sensitive products are to trade liberalisation. The methodology used is a variant of the ICTSD method for identifying WTO special products, in order to ensure maximum coherence between the various negotiations in which the countries are involved (EPAs, WTO, CET). The approach began with agricultural products, but has been broadened to include all products. The process relies on work carried out at national level and then consolidated and arbitrated at regional level. Each country has produced a market-access offer based on a comparable methodology (involving sensitivity criteria, indicators, marks and weighting) but differentiated according to the nature of the agricultural products on the one hand and the industrial and craft products on the other hand. The regional consolidation is then based on tried and tested statistical methods, and consolidation and arbitration methods that bring together the member states and the stakeholders. The definitive list of products has not yet been validated and there are still 10% of tariff lines where there remain divergences between the countries. 3.3.2 Establishing support measures: the EPA development programme (PAPED) The region has committed itself to preparing ‘an EPA programme for development (PAPED)’ which will be a reformulation of the approach of accompanying measures and upgrading that will make the EPA ‘a tool for development’. The programme has five strategic headings, namely:      diversification and growth of production capacity; developing intra-regional trade and facilitating access to international markets; improvement and strengthening of trade-related instructure; carrying out necessary adjustments and consideration of other trade-related needs; implementation and monitoring and assessment of the EPA. The approach is based on the work carried out in each of the 16 countries, and then at regional level. At this level, three priority value chains have been identified: food and agriculture, cotton and textiles, and tourism. Finally, as regards assessment of support needs relating to trade liberalisation, the region and the EC have agreed to develop an impact study based on a computable general equilibrium (CGE) model, with jointly defined indicators. This approach is particularly useful for assessing the effects of the liberalisation plan proposed by west Africa on economic growth, employment, income from various economic operators, trade flows and receipts from customs duties. The results of this study should form the basis for the negotiations over compensation for loss of fiscal receipts. 3.4 Prior harmonisation of trade policy: implementation of the ECOWAS CET Since the signing of the Cotonou Agreement, the formal regional integration process has been strongly accelerated. The aim is to take advantage of the Cotonou agenda with the revision of the trade regime to speed up internal reforms, and in particular to develop a customs union with a liberalised single market and the application of a common external tariff (CET). This stage is already complete, with the formal adoption of the ECOWAS CET under Decision A/DEC.17/01/06. Complete application of the CET was originally planned for 1st January 2008, when the new trade regime with the UE was due to enter into force after a transition period of two years (see section 5 below for more detail), but its application was postponed as result of persistent differences over the creation of a fifth category and the reclassification of some products. 58 Composition of the common external tariff (CET) The CET is composed of: March 2009 Executive brief EPA negotiations: EU- West Africa    customs duties (CD), the statistical tax (ST5) and the ECOWAS community tax (PC/ECOWAS); the regressive protection tax (TDP); import activity tax (TCI). Products are classified according to the tariff and statistical groups and divided into four categories to which a different customs duty rate will apply:     Category 0: essential products of a social nature; Category 1: essential products, basic raw materials, capital goods and specific input; Category 2 : input and intermediate products; Category 3: finished consumer goods. The customs duty rates decided for each of the four categories are as follows: category 0: 0%; category 1: 5%; category 2: 10%; category 3: 20%. the ECOWAS Commission has evoked the possibility of a supplementary mechanism intended to neutralise the impact of export subsidies of OECD member countries to the ECOWAS area; this mechanism known as the ‘ECOWAS countervailing duties’ (PCC) is still being negotiated between the countries. Source: Decision A/DEC.17/01/06 on the adoption of the ECOWAS common external tariff. For the time being, the TDP, which is intended temporarily to protect sectors which would be subject to over-rapid and risky liberalisation resulting from application of the CET, as well as the TCI (the ECOWAS special safeguard mechanism) intended to react to significant increases in imports and/or a perceptible fall in import prices, have not yet been set. The ECOWAS commission is proposing a complementary mechanism intended to neutralise the impact of export subsidies of OECD member countries to the ECOWAS area. This mechanism, known as ‘ECOWAS countervailing duty’ is also still under negotiation. The implementation of the ECOWAS CET has highlighted the divergences within the trade policies of the 15 member states. The creation of a fifth category has been agreed in principle by the heads of state, but the rate of duty it will incur (35% or 50%) and the products it will cover are yet to be finalised. The new CET structure and final definitions of supplementary trade protection instruments are due to be adopted by June 2009. As regards reclassification of items within the four existing categories, the divergences reflect the countries’ contradictory interests, in particular between those countries wishing to protect production and those wishing to facilitate consumer access to products (see section 5 below). As things stand at the beginning of 2009, no definitive CET has yet been adopted and it has proved difficult to get any update on the state of play regarding the application of a provisional CET. 5 The statistical tax is set at 1%. 59 4. Main issues March 2009 Executive brief EPA negotiations: EU- West Africa West Africa is the most important ACP region in terms of exports and imports to and from the EU. Since the signing of the Cotonou Accord, significant efforts have been made to deepen regional integration, prior to the implementation of an EPA. The integration process has to be seen in the region’s very special context:  Two integration areas coexist in the region: on the one hand, the UEMOA, comprising the CFA franc-zone countries which have a fixed exchange rate with the euro and whose currency is still supported by the French treasury and, on the other hand, ECOWAS. The eight UEMOA member countries are integrated into the ECOWAS area. The countries which are not UEMOA members, mainly the English-speaking countries, each have their own currency. These countries are preparing a second monetary zone6 which it is intended will be merged eventually with the CFA franc zone, within a common west African monetary zone. This has been put back several times, and the heads of state are now seeking to give a new impetus to the initiative. Several means of advancing the initiative are under consideration and should be debated in the coming months.  The geographical area in the EPA negotiations includes Mauritania, which is not party to the negotiations on the creation of the customs union.  The coexistence of countries classified as LDCs – 12 out of the 16 countries in the region – and non-LDC countries: Nigeria, Côte d’Ivoire, Ghana and Cape Verde, which has recently been reclassified as a non-LDC. The non-LDC countries are also those which are among the main exporters to the EU: they account for 82% of exports (81% for agricultural products and food) and 62% of imports (48% for agricultural and food products). Consequently, they have a greater interest in participating in an EPA in order to maintain the broadest possible access to the European market. On the other hand, the majority of LDC countries do not need to conclude an EPA to maintain such access, in particular because they are eligible for the EBA initiative.  The importance of Nigeria and its role in the regional process. Nigeria alone represents more than half of the gross regional product (56%), half of the region’s population of 290 million inhabitants, almost half of the region’s trade with the rest of the world (41.5% of imports and 49% of exports for all products). It is responsible for 60% of the region’s exports to the EU (but only 14% of agricultural and food products) and takes 45% of the region’s imports from the EU (27% of agricultural and food products).  Intra-regional trade is very small: about €3 billion, estimated at only 10% to 15% of the trade of west African countries. However, these data are somewhat underestimated because of the existence of informal trade, in particular cross-border trade, which is extremely dynamic but is not recorded by customs and statistical services. 4.1 The EU’s place in west Africa’s foreign trade The EU is west Africa’s main trading partner, accounting for 32% of the region’s trade. Within the ACP, the west Africa regional grouping is the main EU partner and represents 40% of EUACP trade. 6 WAMZ: West African Monetary Zone. 60 Export destinations: ECOWAS and Mauritania Brazil 5% Intra-regional 8% United States 27% Graph 1: ECOWAS trade with its main international partners 2002-06 (billions of USD) 25,00 20,00 15,00 10,00 5,00 AS IE ne C hi E U ER IQ AM t l'O ue s de Af riq ue U SA Importation Exportation eu ro pé en on ni U March 2009 EU 32% India 8% ne Executive brief EPA negotiations: EU- West Africa Other 20% Source: ECOWAS. The region’s overall trade balance, after a sharp drop in the early years of the century, has regained its balance and shows west Africa with a slight deficit of the order of €140,000 out of an overall trade volume of €31.5 billion (imports plus exports). The trade balance has been favoured especially by the rise in petroleum-product prices for Nigeria and more recently by the recovery in agricultural raw-material prices. Trade in non-agricultural products shows a major deficit of €1.4 billion for the west African region, while trade in agricultural products is in surplus for the region, with a positive balance of €1.25 billion for the period 2005-07. Trade in agricultural products has deteriorated since 1996-98, in that food and agricultural imports grew by 51.6%, while exports grew by only 14%. Agricultural products have dropped as a proportion of exports in recent years, and now average 22% of exports for the period 2005-07, compared to 32.5% of exports in 1996-98. This was because between these two periods, exports of nonagricultural products rose by 93%, while agricultural exports almost stood still. The structure of exports remains highly reliant on raw materials, particularly agricultural raw materials. This is affected by the sheer scale of Nigerian oil exports, and the dependence of the other countries on agricultural and food exports to the EU is thus far greater. Strong fluctuations in oil prices bring about rapid changes in the structure of exports and the weight of the countries of the region within its foreign trade. 61 Table 5: Evolution of the trade balance of the region with the EU Trade balance of the region with the EU (€ ’000s) All products Agro-food products Non agricultural products 1988-1990 1996-1998 2005-2007 1,511,962 1,093,956 418,006 249,411 1,588,841 -1,339,430 -138,675 1,256,790 -1,395,465 March 2009 Executive brief EPA negotiations: EU- West Africa Source: COMEXT-Eurostat Table 6: Importance of agricultural products in total ECOWAS-EU trade and evolution over 18 years (euros) EU-ECOWAS+Mauritania (€ ’000s) Products Imports from EU Total Agro-food products Agro-food products as a % Exports to EU Total Agro-food products Agro-food products as a % 1988-1990 6,818,286 1,164,825 17.1% 8,330,247 2,258,781 27.1% 1996-1998 9,146,542 1,460,796 16.0% 9,395,953 3,049,637 32.5% 2005-2007 15,843,815 2,214,706 14.0% 15,705,140 3,471,496 22.1% Source: COMEXT-Eurostat 4.2 Geographical concentration of trade The economic and demographic disparities within west Africa have a direct influence on the importance of the countries in trade with Europe. In terms of overall trade, Nigeria alone accounts for 60% of exports. Together with Côte d’Ivoire and Ghana, it supplies 82% of exports. However as regards agricultural exports, the dominant country is Côte d’Ivoire, with more than 43% of the total for the region, although this share has been reduced in recent years as a result of the political crisis in the country. Côte d’Ivoire, Ghana, Nigeria and Senegal account for 91% of food and agricultural exports. This has led to a strong concentration on these issues in the EPA negotiations. Exportations CEDEAO-RIM commerce total (2005-07) Guinée Sénégal Mauritanie 3% 3% 3% Autres 4% Libéria 5% Ghana 7% Nigéria 60% Côte d'Ivoire 15% 62 Exportations CEDEAO-RIM produits agroalimentaires (2005-07) Mauritanie 3% Autres 5% Executive brief EPA negotiations: EU- West Africa Togo 3% Sénégal 8% Nigéria 14% Ghana 24% Source COMEXT / Eurostat As regards the ECOWAS area’s imports, there is a better spread across the countries of the region. Nigeria remains the biggest importer of the region with 45% of total imports, but ‘only’ 28% of the agro-food imports. However the taking four biggest importers together, Nigeria, Côte d’Ivoire, Senegal and Ghana account for almost 72% of total imports and 61% of food imports. Total imports: ECOWAS-Mauritania (2005-07) Guinée 3% Mali 3% Mauritanie 3% Bénin 3% March 2009 Côte d'Ivoire 43% Autres 8% Libéria 3% Nigéria 45% Togo 5% Côte d'Ivoire 8% Sénégal 10% Ghana 9% ECOWAS-Mauritania agro-food imports (2005-07) Cap-Vert 4% Togo 5% Mauritanie 6% Guinée 3% Burkina Faso 3% Autres 7% Nigéria 27% Mali 5% Sénégal 13% Bénin 6% Ghana 9% Source: COMEXT / Eurostat 63 Côte d'Ivoire 12% 4.3 Exports concentrated on a small group of products Executive brief EPA negotiations: EU- West Africa Exports from the region are very concentrated on a small number of products, chiefly basic products that have not been processed or only processed to a limited extent. From an agricultural point of view, cocoa beans and their derivative products alone represent 60% of exports to the EU, followed a long way behind by fishery products (11%) and tropical fruit (pineapples and bananas for the most part) with a share of 9%. Oils are no longer a strategic export sector. Exportations CEDEAO-RIM produits agro-alimentaires (2005-07) Autres 11% Peaux & cuirs 4% Préparations viandes & poissons 5% Fruits 9% Cacao & préparations 60% Poissons 11% March 2009 Source: COMEXT/ Eurostat The table in annex 1 illustrates the countries’ dependence on a limited group of products and sets out each country’s percentage share of the main products exported. The table in annex 2 showing the preferential margins from which ACP exports benefit on the European market highlights that the issues in terms of access to the market are limited to a very small number of products and concern only a few countries – but the biggest exporters – of the region. In addition, these margins have been considerably reduced as a result of multilateral liberalisation and the negotiation of free-trade agreements between the EU and other regional zones, outside the ACP. 4.4 Diversified imports, often in competition with west African sectors Imports of agricultural and food products represent 14 % of the region’s total imports from the EU. The agricultural and food products imported are relatively diversified. However, cereals and cereal-based products, dairy products, meat and fish together represent 69.4% of the total. Other competing products, oils and fats, sugar, cotton and tobacco represent an additional 18%. 64 Share of the different food products in imports of the ECOWAS region Importations CEDEAO-RIM produits agro-alimentaires (2005-07) March 2009 Executive brief EPA negotiations: EU- West Africa Graisses & huiles Légumes, racines, animales & végétales tubercules Autres 3% 3% 4% Sucres et sucreries 4% Viandes & abats 4% Lait, laiterie, œufs, miel 17% Préparations céréales 10% Minoterie 5% Coton 5% Céréales 9% Boissons 8% Tabacs 6% Préparations fruits & légumes 6% Poissons 8% Préparations alimentaires diverses 8% Source: COMEXT/ Eurostat Table 7: Evolution of agro-food imports and share of the different products in the ECOWAS region ECOWAS-Rim imports from the EU (€ ’000s) Products Total trade Agro-food Of which: Cereals and derivatives Milk, dairy products, eggs, honey Drinks and liquids Various food preparations Fish Fruits and vegetable preparations Tobacco Cotton Meat Sugar and sweets Vegetables, root vegetables and tubers Fats and animal and vegetable oils Other 1988-1990 1996-1998 2005-2007 2005-2007 Of total trade: 6,818,286 1,164,825 9,146,542 1,460,796 15,843,815 2,214,706 174,233 189,259 274,996 224,899 542,269 363,853 24.5% 16.4% 72,130 90,636 95,416 42,106 86,176 92,934 174,984 78,281 172,124 171,433 170,623 131,740 7.8% 7.7% 7.7% 5.9% 41,898 119,048 45,581 178,646 20,337 70,690 78,328 42,329 149,766 24,307 128,311 121,010 99,648 85,610 73,555 5.8% 5.5% 4.5% 3.9% 3.3% 42,164 101,313 57,458 2.6% 53,371 61,794 97,072 4.4% Source: COMEXT-Eurostat 65 14.0% Of agro-food trade: 5. The main issues in the agricultural negotiations 5.1 General issues The central issues for agriculture can be set out under five main points: March 2009 Executive brief EPA negotiations: EU- West Africa  Supplying west African consumers and ensuring the capacity of regional agriculture to produce sufficient to meet the growing demand (the current population of 290 million is likely to grow to over 400 million by 2020). Central to this are: o the risks of increased competition from EU imports for national productive sectors; o the risks of increased competition from EU imports for regional productive sectors (weakening integration and synergies within west Africa). It is important to take into consideration the importance of public subsidies in the external competitiveness of European production in order to assess these risks adequately.  Issues regarding access to the European market: the debate concerns chiefly the dismantling of tariff escalation relating to the extent of processing of raw materials (cocoa, coffee, fruit in particular), the dismantling of residual duties and sanitary and phytosanitary standards, as well as all technical barriers to trade;  Issues inherent in the funding of public policies, with the decline in customs duties which are one of the main sources of funding for the state budget (impact of the transfer from taxation at the port of entry to internal taxation in economies with a very high proportion of ‘informal enterprises’;  Challenges inherent in improving the competitiveness of companies and in particular their capacity to modernise and adapt to the new trade environment (transformation, storage, preservation, etc.). At this level, the liberalisation of inputs and capital goods, when they are imported, can help to reduce charges and improve the positioning of African companies, if there is genuine competition between importers;  Challenges at the level of potential alliances in international negotiations, in particular within the WTO. In this regard, the debate is focused on three subjects: (i) determining the special products that developing countries can exclude either partially or completely from their liberalisation commitments on the grounds of ‘food security, guaranteeing means of subsistence and rural-development needs’; (ii) defining special safeguard mechanisms (SSM) relative to agricultural products, in the event of a sharp increase in imports or price fluctuations; (iii) the flexibility of Article XXIV of the GATT on free-trade areas, in particular on the question of the asymmetry of liberalisation. These three themes illustrate the very strong interdependency of the EPA and WTO negotiations and the importance of alliances in order to produce a consistent trade environment for the ACP countries. The food-price crisis has significantly changed the situation, and has raised questions about the risks brought about by trade liberalisation and the increased dependence of regional food economies on world markets. It has also opened up the debate on market regulation and instruments for the reduction of price volatility. However the trade-administration agencies within the EC as much as in west Africa have not at this stage brought these issues fully into the negotiations. 66 5.2 Access to the European market March 2009 Executive brief EPA negotiations: EU- West Africa The market-access offer formulated by the European negotiating party proposes complete liberalisation except for rice and sugar, as a result of tariff barriers to trade in these commodities. Given the already very wide access to the European market for ACP countries, this marketaccess offer means little improvement on the current situation. For non-LDCs, it does not integrate the GSP regime, which is less favourable than the existing regime, and for LDCs, it brings no improvement at all over EBA conditions. The issue of standardisation, in particular SPS measures, has not been included, even though it is one of the main obstacles to the entry of products, such as fish. As regards rules of origin, the debate over improving the Cotonou provisions remains open and has not yet been been the subject of a compromise offer. 5.3 Access to the west African market At the time of the last meetings between the two negotiating parties, the west African region submitted the broad lines of its market-access offer. Its liberalisation plan was based on four different product groups:   Group D: sensitive products excluded from liberalisation;  Group B: products where liberalisation would be set in motion in 2013 and spread over 15 years;  Group A: products for immediate liberalisation, i.e. from January 1st 2011, so as to enable the customs services to put the new regulations in place and check that liberalisation clauses are being fulfilled. Group C: products where liberalisation would be delayed, before being set in motion in 2018 and spread over 15 years; The timetable for dismantling the previous regime has been designed to take account of three criteria:   the starting level of duty (20%, 10% or 5%);  simplicity: the principle adopted favours the reduction of customs tariffs in large tranches but with these taking effect over an extended period: five percentage points reduction in customs duty per five-year period, to maximise transparency and clarity for operators and facilitate adjustment to the capacity of the customs systems. the ‘development need’, i.e. the phasing of the period between liberalisation and adaptation to the competition by the productive sectors; The proposed liberalisation schedule sets in motion the dismantling of tariff barriers for the least sensitive products in January 2011 (Group A products). Most of the tariff dismantling is set out over a period of 23 years from 2009. All the products subject to liberalisation, i.e. 65% of imports from the EU, will be liberalised by January 1st 2032, but the majority of the tariff dismantling will take place between January 1st 2011 and January 1st 2028, i.e. a 17-year period. 67 The timetable for the dismantling of tariff barriers is designed to be indicative. Its implementation is dependent on a set of conditions. The region will need to carry out in-depth work to define the necessary criteria and indicators that will determine when the successive phases of liberalisation are put in place. At this stage, only the principles have been proposed, and these all relate to the aim set by the statutory bodies: an EPA aimed at development, promoting regional integration, poverty reduction, integration in international trade and prioritising the development of the sectors of production. March 2009 Executive brief EPA negotiations: EU- West Africa The criteria on which the phases of trade liberalisation are dependent will therefore be linked to:   recorded achievements in the development of regional trade;  the findings of regular assessments of the impact of the EU-west Africa trade agreement on the economic mood, poverty reduction, employment, management of natural resources and the environment, economic diversification and increasing added value;   de facto trade-policy reform implemented by the EU to reduce distorting effects on trade; documented progress in the area of productivity and competition in the sectors and networks of production; de facto responsibility for the net fiscal impact and for support during fiscal transition. The liberalisation plan will be confirmed, adjusted or give rise to negotiation of further types of support (this is the region’s position), depending on the outcomes of the above assessments, which are integral to an appropriate monitoring and evaluation mechanism, to which the monitoring centre for competitiveness should also make an active contribution. The following schedule is given as an illustration of the process favoured by the region, and corresponds to liberalisation of the order of 65% of imports from the EU. The majority of competing agricultural and food products produced in the region are excluded from liberalisation. The table in annex 3 sets out the number of sensitive tariff lines by sector of activity. The table in annex 4 assesses the customs duties collected for each of the four product categories, and thus gives a general idea of the losses in customs receipts likely to result from this liberalisation schedule. 68 (35 % of products) Customs duty % Category 1 0 Category 2 5 1 Jan 2011 to 31 Dec 2012 1 Jan 2013 to 31 Dec 2017 1 Jan 2018 to 31 Dec 2022 1 Jan 2023 to 31 Dec 2027 1 Jan 2028 to 31 Dec 2032 From 1st Jan 2032 EXCLUDED 10 Category 4 20 Category 5 To be decided Category 1 0 0 0 0 0 0 0 Category 2 5 5 5 0 0 0 0 Category 3 10 10 10 5 0 0 0 Category 4 20 20 20 15 10 5 0 Category 1 0 0 0 0 0 0 0 Category 2 5 5 0 0 0 0 0 Category 3 10 10 5 0 0 0 0 Category 4 20 20 15 10 5 0 0 Category 1 0 0 0 0 0 0 0 Category 2 5 0 0 0 0 0 0 Category 3 10 0 0 0 0 0 0 Category 4 20 0 0 0 0 0 0 (x % of products) Category 3 (x % of products) CET categories (x % of products) Group D Group C Group B Group A March 2009 Executive brief EPA negotiations: EU- West Africa Table 8: Liberalisation schedule proposed by the west African region Note: the dates in the above table were proposed in workshops with ECOWAS member states, and trade unions and professional organisations. The region’s negotiators have reviewed the dates and agreed upon the following periods:     Group A: immediate liberalisation over the period January 1st to December 31st 2010; Group B: liberalisation over the period January 1st 2015 to December 31st 2024; Group C: liberalisation from January 1st 2034; Group D: products excluded from liberalisation. The region’s proposal comprises a timetable and level of liberalisation rather different from the interim agreements signed by Côte d’Ivoire and Ghana (which make provision for a higher level of liberalisation, involving 80% of traded goods over a 15-year period). Both of these agreements are considered to become void as soon as a regional agreement is signed. 69 Executive brief EPA negotiations: EU- West Africa When the negotiating session took place at expert level from February 16th to 19th 2009, the EC indicated that it had noted the west African negotiating party’s information relating to the working methodology. The EC welcomed the work that had been done and said that it would be examining in detail the proposal submitted by the region in order to assess the potential for economic development. The Commission stressed ‘the necessity of reaching a level of liberalisation consistent with GATT Article XXIV requirements’. West Africa considers that its market-access offer meets these requirements. On this point, both the regions are still in disagreement over the interpretation that should be placed on the article relating to the extent of coverage and timing of trade liberalisation in a regional free-trade agreement. In addition, the two regions have divergences over which duties and tariffs should be liberalised. The EC wishes to include the community solidarity levies and the statistical tax. The solidarity levies are the main source of the budgets of the ECOWAS and UEMOA commissions. At the current time, the region is opposed to the inclusion of these duties in the liberalisation process. Finally the bilateral safeguard clauses remain the subject of exploratory work, in relation to the customs duties (CET) supplementary trade-defence instruments. 5.4 The development component The programme has been designed with a view to ‘a people’s ECOWAS’ en route to its adoption by the member states. The programme has been structured around the five strategic headings (see above). The programme has been designed as an open-ended, evolving programme, commensurate with the data from the monitoring and evaluation objective. Its aim is ‘to support the countries of the region to participate fully in the opportunities offered by the EPA and to minimise negative effects of the EPA’. In its current form, the programme sets out a number of points under each of the strategic headings. The member states have met to discuss the programme, but have not yet formally adopted it. March 2009 There are a number of major obstacles to this:  linking the programme with the scheduling processes already committed to at sectoral policy level (e.g. ECOWAP members’ national and regional programmes for agricultural investment);  defining actions in line with the objectives of the EPA that should be financed under this framework, when the strategic headings involve trade as a whole, and not just trade with the EU;  working out a schedule for PAPED that can run alongside the community regionaldevelopment programme before this has finished (the process is only just beginning);  finding an approach that does not include all ‘aid for trade’, given existing donor commitments, but is limited to European funds;  the subsidiarity issue: is the regional programme focused on policy at a regional level, or does it include national and regional policy overall? Do the regional institutions have the capacity to ensure such a programme’s coherence and complementarity with the multiple national programmes? Do they have the capacity to implement such a far-reaching regional programme? The PAPED programme is due to be submitted to the ministerial monitoring committee at the end of March 2009. 70 Annex 1: Importance of trade with the EU for countries in the region Burkina Faso 332,562 Côte d'Ivoire 1,248,212 52,621 2,601,474 Mali Niger Senegal Togo 374,172 203,778 1,168,148 422,269 65,751 82,994 405,664 68,043 243,819 119,258 1,008,463 431,335 40,256 1,362,291 5,121,626 302,818 390,804 24,057 23,903 1,114,537 476,064 7,523 872,779 5,001,203 85,180 372,174 Cape Verde Gambia Ghana Guinea Guinea-Bissau Liberia Nigeria Sierra Leone Mauritania cotton 48%, skins 21% cocoa 53%, wood 10%, preparations of fish 6%, bananas 5% cotton 62%, skins 11% natural uranium composites 74%, petroleum gas 13% fish 56%, groundnut oil and residues 19% cocoa 18%, fish 18%, phosphates 8%, cotton 6%, coffee 5% fuel 23%, shoes 17%, clothes 18% groundnut oil and residues 63%, fish 15% cocoa 37%, aluminium 14%, gold 13%, wood 12% aluminium ore 53%, diamonds 20%, gold 8% fish 47%, cotton 36%,wood 9% cargo ships 88%, wood 7%, rubber 2.5% fuel 88%, cocoa 6% diamonds 53%, cocoa 5% iron ore 65%, fish 32% Source: EC - drawn from the framework of agricultural policy of west Africa; 2004; ECOWAS March 2009 Executive brief EPA negotiations: EU- West Africa EU Exports EU Imports Most imported EU products 11,312,032 ECOWAS + Mauritania 13,313,469 fuel 39%, cocoa 19%, fish 5%, aluminium 4%, wood 4%, skins 2% 4,292,800 3,334,612 UEMOA cocoa 41%, wood 8%, fish 7%, bananas 4%, cotton 3% 543,659 58,065 of which Benin skins 33%, cotton 22% 71 Annex 2: Preferential margins for selected products and the main west African countries Executive brief EPA negotiations: EU- West Africa Products Cut flowers Avocados Prepared or tinned pineapples Fresh fish or refrigerated whole fish - whole tuna, mackerels, herrings - sardines Filleted fresh, refrigerated or frozen fish - tuna filets; swordfish, mackerels, sea bream, bass 18 Prepared and tinned fish: - tuna 24 (12 on a quota basis) - mackerel filets 25 - sardines 12.5 Shellfish 12.5 (6 on a quota basis) Fresh or refrigerated vegetables – beans 10.4 Cocoa paste 14.5 20.5 17.5 9 4.3 6.9 9.6 6.1 7.7 8 (a) 33.6 (b) 176 euros/T 16 4.2 2.8 to 4.5 depending on the products (a) 30.1 (b) 12.5 0 8.3 7.5 9 0 4.8 2.6 3.1 Cocoa butter Chocolate and other containing cocoa March 2009 ACP origin preference in relation Main west African (as a %) exporters To third countries To developing countries/GSP 8.5 5 Senegal 4 0 5.8 2.3 Côte d’Ivoire Senegal, 0 0 Mauritania, Togo, 15 - 23 11.5 - 19.5 Guinea-Bissau preparations Fruit juices Bananas Plantains Coffee - non roasted and non decaffeinated - non roasted and decaffeinated. - roasted and non decaffeinated. - roasted and decaffeinated. Senegal, Mauritania Senegal, Ghana Ghana, Senegal, Burkina Faso Côte d’Ivoire, Ghana, Nigeria, Togo Côte d’Ivoire, Ghana, Nigeria, Togo Côte d’Ivoire Côte d’Ivoire, Togo Source: based on 2006 data: EC/Export Helpdesk for developing countries Notes: (a): all origins including ACP origin are subject in addition to a duty of €25.2 to €41.9/100kg depending on the degree of product processing. (b): all origins including ACP origin are subject in addition to a fixed duty of €20.6/100 kg. 72 March 2009 Executive brief EPA negotiations: EU- West Africa Annex 1 : Number of sensitive tariff lines (by sector) for lists I and II (see note below) HS6 code 010 020 030 040 050 060 070 080 090 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250 260 270 280 Sector Agricultural food products Agricultural products destined for industry and export Products obtained from stock breeding or hunting Products obtained from forestry, logging and related services Fisheries products Products derived from extraction Products obtained from slaughtering, processing and preserving meat and fish Fats Products from milling grains, starch products, animal feed Cereal-based food products Cocoa- and coffee-products, confectionery and sugar Other food products n.e.c. Drinks Tobacco-based products Textiles and clothing Worked leather, travel articles, footwear Products of worked wood or basketwork Paper and board, edited and printed products Products from refining, coking and nucluear industries Chemical products Products made of rubber and plastic Glass, pottery, and construction materials Metallurgy and foundry products and ironwork Various machinery and equipment Radio, tv and communications equipment and appliances, medical instruments Transport equipment Furniture, recyclable products n.e.c. Electricity, gas and water List I 60 29 33 19 13 9 46 45 54 82 57 66 54 57 72 64 32 42 8 8 22 12 9 1 0 6 5 0 List II 63 37 38 38 23 19 57 55 63 82 63 71 8 57 78 71 48 48 21 14 30 30 14 2 0 1 8 0 Note about Lists I and II: two lists were drawn up during the preparatory work. They are based on the fact that products enjoy a high level of protection for reasons related to the customs receipts generated, although they are not competing with local production. Liberalising these products would enable the rate of liberalisation to be improved without presenting problems for productive sectors. List II proposes liberalisation of these products by replacing customs duties with excise duties (payable equally on national production as on imported products) at an equivalent level in order to maintain fiscal receipts. Annex 2 : Customs duties by product group Total taxes collected Share of taxes as a proportion of total Imports from the on EU imports (in tax collected on imports from the EU European Union US$) (in %) LIST I D C B A TOTAL LIST II 927,038,426 584,612,834 232,196,853 227,702,171 11,521,114,962 D C B A TOTAL 1,971,569,838 989,586,634 367,994,292 217,731,776 396,237,582 11,521,114,962 1,971,569,838 73 47 30 12 12 100 50 19 11 20 100 Executive brief October 2008 Table of contents 1. The situation on January 1st 2008 __________________________________________ 76 2. Developments in 2008: the process ________________________________________ 76 2.1 Ongoing concerns in Guyana __________________________________________________ 76 2.2 Exploration of other options___________________________________________________ 77 2.2 Guyana comes aboard________________________________________________________ 77 3. Developments in 2008: agriculture-related issues_____________________________ 77 3.1 Benefits of the EPA _________________________________________________________ 77 3.2 Caribbean private-sector views on the EPA _______________________________________ 79 4. The situation in October 2008 ____________________________________________ 80 October 2008 Executive brief Caribbean-EU EPA negotiations Caribbean-EU EPA negotiations 75 October 2008 Executive brief Caribbean-EU EPA negotiations 1. The situation on January 1st 2008 A full EPA had been initialled by governments of the Caribbean configuration and the EU. It included trade in goods and services and agreements on trade-related areas and development cooperation. In terms of trade in goods it granted duty-free, quota-free access for all goods except sugar, where a transitional quota and a ‘dual trigger’ safeguard mechanism applied. As with other ACP countries which had initialled IEPAs on a transitional basis the duty-free, quota-free access provisions were applied through EU Council regulation 1528/2007. Countries whose governments initialled either IEPAs or a full EPA are included in annex I of this regulation which enables them to benefit from the duty-free, quota-free access. Article 2.3. of this regulation states: ‘Such region or state will remain on the list in Annex I unless the Council, acting by qualified majority upon a proposal from the Commission, amends Annex I to remove a region or state from that Annex, in particular where: (a) the region or state indicates that it intends not to ratify an agreement which has permitted it to be included in Annex I; (b) ratification of an agreement which has permitted a region or state to be included in Annex I has not taken place within a reasonable period of time such that the entry into force of the agreement is unduly delayed; or (c) the agreement is terminated, or the region or state concerned terminates its rights and obligations under the agreement but the agreement otherwise remains in force.’ This constituted the situation as the Caribbean region and the EU initiated discussions on the signing of the full EPA agreement in the course of 2008. It was acknowledged at the initialling that some areas still required clarification, including: safeguard measures, export-subsidy commitments, the application of rules of origin, the response to preference erosion, food-safety and SPS issues, and supply-side constraints. Concerns also existed in certain Caribbean countries over the possible consequences of the EU’s MFN clause. In addition the assumption was made in the Caribbean that the subsuming of trade in bananas within the EPA would prevent further challenges from Latin American growers to the preferences enjoyed by Caribbean banana suppliers. 2. Developments in 2008: the process 2.1 Ongoing concerns in Guyana Initially it had been expected that the comprehensive EPA would be signed in the early months of 2008. However it became apparent in the course of 2008 that reservations which had been expressed by Guyana’s president Jagdeo in early December 2007 over certain aspects of the Caribbean EPA remained matters of concern. The concerns articulated in early December focused on the cumulation provisions of the rules-of-origin issues (a matter of particular concern given Guyana’s vulnerability to floods and proximity to the sugar-producing areas of north-eastern Brazil); limitations placed on exports to overseas territories of the EU; the implications of EPA provisions for the regional-integration process in the Caribbean and the non-binding nature of the provisions for development assistance in the EPA. In the course of 2008, despite the initialling of a comprehensive EPA, debate around these issues intensified in the Caribbean, particularly in Guyana. This, alongside difficulties with translation and the finalisation of the legal text in all EU languages, led to a number of delays in the signing of the Caribbean-EU EPA. 76 2.2 Exploration of other options October 2008 Executive brief Caribbean-EU EPA negotiations The public debate in Guyana raised such concerns that the government of Guyana raised the issue of concluding a ‘goods-only EPA’, to ensure WTO-compatibility, while continuing negotiations on other non-trade-in-goods issues. This option was rejected by the EC, which insisted on the signing of a comprehensive EPA. In September 2008, press reports in the Caribbean cited EC representatives as warning Caribbean governments that if they failed to sign the EPA by October 31st 2008 they risked losing preferential access to the EU market. Indeed, in September the Caribbean regional negotiating machinery (CRNM) issued a briefing looking at alternatives to signing the Caribbean EPA. This briefing set out the consequences for the Caribbean of any failure to sign the initialled EPA, highlighting how potentially 26 of 56 products accounting for over US$1 billion in Caribbean exports to the EU would be adversely affected by the imposition of GSP duties totally nearly US$300 million annually. Fully twothirds of these additional duties would have fallen on the region’s sugar exports. Rice and fisheries exports would also have faced additional duties. This would have severely impacted on Caribbean food and agricultural exports to the EU. 2.2 Guyana comes aboard In the face of steps being taken within the EU to remove Guyana from the ‘annex I’ list of beneficiaries of the December 2007 regulation (1528/2007), on the eve of the signing of the Caribbean-EU EPA in mid-October Guyana announced its willingness to sign. This followed the signing of a joint statement designed to address two of the principal concerns raised by Guyana, namely:  what should happen if a conflict emerged between the provisions of the EPA and the provisions of the revised Treaty of Chaguaramas;  reiterating a commitment by the parties to a comprehensive review of the EPA every five years ‘to determine the impact of the agreement, including the costs and consequences of implementation’ with a view to amending its provisions and adjusting its application if necessary. In statements accompanying the announcement of its decision to sign, the government of Guyana has continued to highlight its reservations with regard to the non-trade-in-goods provisions and has emphasised the role that the ‘imminent threat of GSP sanctions’ played in its final decision to sign the EPA. 3. Developments in 2008: agriculture-related issues 3.1 Benefits of the EPA The CRNM has highlighted the following benefits for the agricultural sector stemming from the EPA:   the preservation of traditional market-access preferences;  continued protection of sensitive products, with most exclusions from tariff-liberalisation commitments being agricultural products (covering 75% of food and agricultural imports from the EU in the 2002-04 period);   a heavy back loading of the tariff-elimination commitments made for agricultural products; improvements in market access for a range of agricultural products, including rice, sugar and fruit-and-vegetable products; a general safeguard provision which recognises the special conditions under which agricultural products are traded; 77 Executive brief Caribbean-EU EPA negotiations October 2008  provision for development assistance to improve competitiveness, develop export-marketing capabilities, support compliance with SPS standards and promote private investment;  a commitment by the EU to the elimination of export subsidies on products subject to tariff elimination by the Caribbean;  improvements in the rules of origin for certain processed agricultural products, although there are limitations on regional cumulation for sugar-containing products and for rice until October 2015;  an agreement to ‘prior consultations’ on policy developments impacting on traditional Caribbean agricultural exports to the EU;  a joint declaration on bananas which recognises the importance of maintaining preferences for Caribbean suppliers and commits the EU to providing further assistance to adjustment and diversification processes. The CRNM highlighted in particular the 60,000 tonnes of additional access for sugar exports for the 2008/09 season, with a commitment to reallocating any unutilised sugar-protocol quotas within the Caribbean region. This has seen the Dominican Republic initiate sugar exports to the EU market, with two consignments of 12,000 tonnes and 20,000 tonnes being dispatched for arrival after October 2008. In addition a commitment has been negotiated to reviewing the cumulation provisions in sugar value-added products after 2015 (a bone of contention in Guyana’s relations with the EU). It also highlighted the additional access granted for regional rice exports (an increase of 29% and 72% respectively for 2008 and 2009) and the agreement to remove the approximately €65 per tonne duty currently paid. Since the new agreement allows both the export of broken and whole-grain rice, this should enable Caribbean exporters to target higher-price markets in the EU, once supplies become available. The new agreement further commits the EU to removing those import-licensing arrangements which have in the past reduced the benefits obtained by Caribbean rice exporters. The CRNM also emphasised the claim that the complete duty-free, quota-free access granted to CARIFORUM banana exporters makes the WTO dispute-settlement panel ruling on bananas ‘null and void’. However it is far from clear whether this is in fact the case, with the abortive deal thrashed out on the fringes of the WTO negotiations involving a substantial reduction in the MFN duty applied to dollar banana suppliers, thereby potentially bringing about a substantial erosion of the value of traditional Caribbean banana-sector preferences. This deal which the EC provisionally accepted on July 16th would have seen the €176 per tonne tariff reduced by an initial tariff cut of €26 per tonne in the first year (January 1st 2009), a further €9 cut per tonne in the second year (January 1st 2010) and then a €5 cut in each remaining year to 2015’ (to reach €116 per tonne by January 1st 2015). These developments in July, which were subsequently overtaken by the collapse of the WTO negotiations, raise questions as to the ultimate benefits derived from the EPA in the banana sector. This is despite the joint commitments enshrined in the EPA both to maintaining ‘significant preferences’ for Caribbean bananas for as long as possible and consulting the Caribbean before any decisions are taken which affect traditional agricultural preferences. Other questions which have been raised with regard to the impact of the EPA on agricultural trade relations in the evolving context of Caribbean-EU trade include:  what will be the specific impact of the EPA in the light of the recent WTO banana ruling with regard to the margins of preference enjoyed over Latin American suppliers?  what contribution will the EPA make to the development of branded high-value products and how will this be achieved? 78 Executive brief Caribbean-EU EPA negotiations October 2008  how precisely do the provisions of the EPA support product innovation in food-andagriculture value chains?  how precisely do the provisions of the EPA serve to support the enhancement of competitiveness in the food-and-agriculture value chain?  how precisely does the EPA facilitate the effective delivery of assistance to adjustment processes in food-and-agricultural product value chains in the banana, sugar and rice sectors? 3.2 Caribbean private-sector views on the EPA The Sugar Association of the Caribbean and the Caribbean Council for Europe have both publicly set out their views on the Caribbean-EU EPA. The Sugar Association of the Caribbean welcomed the conclusion of the EPA, arguing that ‘the EPA holds many provisions which are regarded as the starting point for the repositioning of the regional sugar industry. These provisions can be activated by the region’s sugar industry for business development internally or jointly with EU partners’. The SAC however expressed concern ‘over the slow pace of disbursement of funds by the EU that were intended to alleviate the impact of price cuts resulting from the reform of the EU sugar regime’. In this latter regard similar concerns have been expressed by the Caribbean Council for Europe, which described past EC financial support as ‘virtually inaccessible’ to the private sector. It expressed serious concerns that ‘even modest levels of support could not be delivered by the European system on the time scale in which change has to occur, not least because it was always accompanied by rules that were at odds with individual corporate success’. This, it argued was generating ‘a deep cynicism about the real meaning of the EPA’. It also called for a ‘paradigm shift’ on the part of public-sector officials in terms of the engagement with the private sector, which is felt to be essential in meeting the challenges which will be faced in the coming period. This issue of the difficulties faced in deploying EC support to private-sector-led adjustment processes for the attainment of wider public-policy objectives is an issue which will take on growing significance as the Caribbean region moves towards the implementation of EPAs. Yet it is an issue where, in the agriculture sector, the EC has considerable experience under its internal rural-development programmes. The EC even has experience of supporting privatesector-based production and trade adjustments in the agricultural sector in the Caribbean. In Guadeloupe, Martinique and French Guyana major rural-development programmes have been launched, with the main focus on measures aimed at enhancing the competitiveness of enterprises in the food, agriculture and forestry sectors. In the case of Guadeloupe some €180 million is to be deployed in support of measures to enhance the competitiveness of such enterprises, with fully 39% of these expenditures being devoted to adjustment-related investments in production based in the private sector, and nearly 34% to physical infrastructure programmes, including irrigation improvements. The first component of this funding is allocated to individual farmers and firms within the framework of multi-annual strategies designed to adjust agricultural production to new market and trade realities. At the level of the 4,500 farmers to be targeted, investments eligible for support include: studies for the implementation of the investment (up to a limit of 10% of the project amount); agricultural materials; computing materials and tools; bee-keeping materials; installation, equipment and placement; support to improvement of transformation processes, conditioning, sterilisation and cold-storage shops; buildings; and seedling acquisition. At the level of the 50 agricultural and food-processing companies identified for support, investments eligible for support include: material or immaterial productive investments for marketing and transformation firms (i.e. machinery and specific equipment; computer programmes and software); costs associated with risk prevention and for the protection of persons and environment; costs associated with devising new products, processes and technologies which are environmentally friendly. 79 October 2008 Executive brief Caribbean-EU EPA negotiations This is the kind of support to production and trade adjustment which the Caribbean food-andagriculture sector will need if it is to respond to the challenges being thrown up not only by the EPA, but by the wider process of change under way in both the EU’s internal agricultural policy and the EU’s external agricultural-trade relations. Indeed it would appear that important lessons could be drawn from this experience in the French overseas territories in designing market-led, private-sector-based EPA-related support measures for production and trade adjustment in the Caribbean. 4. The situation in October 2008 On October 15th 2008 (October 21st in the case of Guyana) the Caribbean-EU EPA was signed. According to an EC memorandum accompanying the signing, the EPA will:  ‘put the Caribbean on the map as an expanding market where traders and investors can find opportunities for growth and security for their investments’;    ‘ensure cheaper goods for consumers and investors’;   support fuller regional-market integration;  provide a €165 million regional programme of support under the EDF and open up access to ‘aid for trade’ support for the implementation of the EPA. provide full duty-free, quota-free access with improved rules of origin; open up new opportunities for ‘Caribbean companies and professional to offer services in the EU and for young Caribbean professional to gain EU work experience’; allow continued protection of sensitive sectors, particularly ‘agricultural and processed agricultural products’; 80 Executive brief February 2009 February 2009 Executive brief EU-Pacific EPA negotiations EU-Pacific EPA negotiations Table of contents 1. The context ___________________________________________________________ 82 1.1. The Pacific configuration _____________________________________________________ 82 1.2 EU-Pacific trade ____________________________________________________________ 82 1.3 Sequencing of the negotiations _________________________________________________ 83 2. Developments since November 2007 _______________________________________ 84 3. Implications for the PACP _______________________________________________ 86 3.1 Main provisions of the IEPAs__________________________________________________ 86 3.2 Market access ______________________________________________________________ 86 3.2.1 Improved market access? _________________________________________________________ 86 3.2.2 New exports ___________________________________________________________________ 88 3.2.3 Improved rules of origin: opportunity for adding value to fish? _____________________________ 89 3.3 Consequences of reciprocity ___________________________________________________ 89 3.3.1 Overview of Fiji’s tariff liberalisation towards the EU ____________________________________ 89 3.3.2 Overview of PNG’s tariff liberalisation towards the EU __________________________________ 90 3.3.3 Removal of other taxes ___________________________________________________________ 91 81 February 2009 Executive brief EU-Pacific EPA negotiations Summary A particular problem in the region’s negotiations arise from the close trade relations of most of the countries with Australia and New Zealand (and for a few with the USA also). This means that free-trade negotiations are liable to trigger similar negotiations with these other partners. At the same time, two countries (Fiji and Papua New Guinea) would have been adversely affected by the lapse of Cotonou trade preferences in 2007 had an equivalent successor regime not been put in place. Perhaps unsurprisingly, therefore, only these two countries initialled an interim economic partnership agreement (IEPA) in November 2007. This requires them to liberalise their trade regime for imports of goods from the EU. Since then negotiations have continued with all countries on the outstanding issues not covered by the IEPA although there is as yet no indication that any other Pacific states are willing to liberalise their goods import regimes. 1. The context 1.1. The Pacific configuration Known collectively as the Pacific ACP (PACP), the regional configuration for the purpose of the EPA negotiations with the EU consists of the following 14 countries: Cook Islands Marshall Islands Nauru Papua New Guinea Tonga Fiji Federated States of Micronesia Niue Samoa (LDC) Tuvalu (LDC) Kiribati (LDC) Palau Solomon Islands (LDC) Vanuatu (LDC) Of the 7.8 million total population of these countries, 5.5 million are in Papua New Guinea 0.9 million in Fiji, and 0.5 million in the Solomon Islands, with the remaining countries totalling barely 0.8 million between them. 1.2 EU-Pacific trade The Pacific-EU EPA negotiations are less relevant than for the other ACP regions: indeed neither region is a main trade partner for the other. The table below showing the main trade partners of Pacific countries indicates the low importance of the EU both in imports and in exports. The exception is Tonga, for which EU exports represents 12% of its imports value and Fiji and PNG where exports to the EU are 14% and 7% respectively of their total exports (mainly sugar and palm oil). Main trade partners of Pacific countries in 2007 Main trade partners for imports Main trade partners for exports Fiji Singapore (29%); Australia (23%); New Zealand (17%) US (17%); Australia (14%), EU (14%) PNG Samoa Australia (53%); Singapore (13%); China (6%) New Zealand (23%); Fiji (15%); Singapore (13%) Australia (30%); Japan (8%); EU (7%) Australia (49%); American Samoa (34%) Solomon Islands Australia (26%); Singapore (24%), Japan (8%) China (47%); South Korea (10%); Japan (6%); EU (6%) Tonga Fiji (31%); New Zealand (28%); EU (12%); US; Australia (8%) US (39%); Japan (28%); New Zealand; South Korea (8%) Source: IMF 2006 data in Comext in (data not available for other PACP countries) http://ec.europa.eu/trade/issues/bilateral/regions/acp/stats.htm 82 Vanuatu Australia (21%); Japan (20%); Singapore (12%) Thailand (60%); India (17%); Japan (11%) About a half of the Pacific ACP countries’ exports to the EU are of agricultural products, as the following table shows; the balance is mainly ships and boats (31.2%), copper ores (10.0%), yachts and other pleasure vessels (3.0%) and petroleum oils (1.3%). The main agricultural export is palm oil, followed by sugar, vegetable oils, coffee, fish and cocoa. Agricultural exports to the EU, 2007 February 2009 Executive brief EU-Pacific EPA negotiations Country Cook Is. Fiji Kiribati Papua New Guinea Product Juices Sugar Coffee Palm oil Other oils Coffee Fish Cocoa Rubber etc Samoa Veg. Oils Solomon Is. Fish Palm oil Copra Tonga Vegetables Fish Plants etc Vanilla Vanuatu Veg. Oils Cocoa Copra Fish Total Pacific Palm oil ACP Sugar Other Oils Coffee Fish Cocoa Value (€000) 69 86,335 420 185,927 46,260 39,766 35,824 15,898 9,178 9 9,164 8,078 601 343 79 58 46 1,408 637 341 115 195,484 86,335 49,994 40,186 45,054 16,535 % of total Total Chs1- % of exports 24 (€000) exports 4.5 192 87.0 94,634 84.9 448 41.0 332,853 10.2 8.8 7.9 3.5 2.0 2.3 9 49.2 18,262 43.3 3.2 39.2 586 8.9 6.6 5.3 38.4 2,567 17.4 9.3 3.1 21.5 454,061 9.5 5.5 4.4 5.0 1.8 total 12.6 95.4 90.7 73.4 2.3 98.0 67.0 70.0 50.0 Source: Europa via http://europa.eu.int/comm/trade/issues/bilateral/regions/acp/stats.htm 1.3 Sequencing of the negotiations The proposed structure for the negotiations was agreed in the joint ‘road map’ published on September 15th 2004 which identified a regional negotiating team (RNT) with primary responsibility for the conduct of the negotiations. But negotiations on the trade provisions were postponed until the end of 2006. This was partly because this chapter had much wider implications than simply the conduct of trade with Europe. Australia and New Zealand have long had preferential trade agreements with the Pacific islands, so when the latter agreed to negotiate with the EU under the Cotonou Agreement, they had also to agree to enter into the PACER agreement. This foresees free-trade area negotiations by 2011 but it also provides that the commencement of free-trade negotiations with any other party will advance this date so that parallel negotiations should take place. The shortage of capacity in the region was judged to make this impossible in 2004, so the trade aspect, with the EC’s agreement was ‘back-loaded’, meaning that the focus of the EPA negotiations in the Pacific, unlike in any other ACP region was on the liberalisation of trade in services, investment, competition, data collection, procurement, intellectual property protection etc. 83 February 2009 Executive brief EU-Pacific EPA negotiations If there were a parallel free trade area with Australia and New Zealand the implications of any EPA would be ‘scaled up’: whereas the 27 EU states account for only about 9% of Pacific trade Australia alone accounts for 23%. Furthermore, three of the Pacific states, Palau, the Marshall Islands and the Federated States of Micronesia, are in a similar situation with regard to the USA. Thus when trade negotiations began in 2007, there was the prospect of three sets of such negotiations simultaneously. This has had important practical implications because the trade negotiations have been the most ‘time constrained’. The EU has had preferential trade-and-aid agreements with the PACP since 1975. The latest, the Cotonou Partnership Agreement (CPA) of 2000, specifically provided that the trade regime would be recast and a successor implemented by 2008 (although the rest of the accord remains in force until 2020). The principal reason for this is that the trade provisions of Cotonou’s predecessor (the Lomé Convention) were the subject of adverse rulings during the 1990s, first in the General Agreement on Tariffs and Trade (GATT) and then in the World Trade Organisation (WTO). This is because they involve the EU discriminating in favour of some developing countries (the ACP) and against others in ways that cannot be justified under WTO rules. After two years of negotiations, and in the context of the Doha Ministerial summit, the EU obtained support from WTO members for a waiver that would allow this discrimination to continue – but only to the end of 2007. The EPA negotiations have covered a much broader canvas than simply trade in goods, including also trade in services, investment, competition, intellectual property rights and government procurement. Under the original timetable all were to be completed before 2008, but by early 2007 it was clear that negotiations had barely begun on the details and that insufficient time remained to complete them in the way that is normal in trade negotiations. In deference to the rapidly approaching deadline the EC agreed in November 2007 to split the negotiations into two stages. But this ‘compromise’ failed to allow the details of the goods offer to be agreed at a slower pace, since only the non-goods issues could be deferred until 2008. The ‘interim EPAs’ (IEPAs) to be initialled before the end of 2007 had to include complete provisions on goods. Following this the EU passed enabling legislation that would offer dutyfree quota-free (DFQF) access to imports from January 1st 2008 (deferred for rice and sugar) to all countries that had initialled IEPAs by the end of the year. 2. Developments since November 2007 In considering developments since November 2007 the reader must bear in mind that apparently precise dates are not always exactly as they seem. The Cotonou trade regime was terminated on December 31st 2007 and since then the ACP states have exported most goods to the EU under one of several successor regimes (see below). But the EU import regime for sugar, of obvious importance for Fiji, did not change abruptly on January 1st 2008. Most (but not all) of Fiji’s sugar exports are made under the ACP-EU sugar protocol which, although denounced by the EU, will continue in force until October 2009. This means that Fiji did not perhaps face the same urgency as did other preference-reliant states in agreeing a successor regime by the end of 2007. At the same time, however, none of the commitments it made in the (I)EPA have yet been implemented, even though some were scheduled to come into force in 2008. This is because the negotiations on details are continuing and Fiji (together with all other countries initialling (I)EPAs) will need to act on its commitments, at the earliest, only after it has signed the treaty. In other words, both sides of the equation (risk of loss of preference and new trade obligations) are happening later than the headline dates would suggest. 84 February 2009 Executive brief EU-Pacific EPA negotiations Precise dates aside, the PACP states fall into three groups in terms of the impact upon them of losing Cotonou trade preferences – and this goes a long way to explain what has happened since November 2007. Fiji and Papua New Guinea export significant volumes to Europe of goods that would have faced a serious market-access barrier had the Cotonou preferences not been superseded by an equivalent regime in January 2008. But they are the only Pacific countries in this position. Kiribati, Samoa, Solomon Islands, Tuvalu and Vanuatu, as least developed countries (LDCs) benefit from the EU’s ‘Everything but Arms’ (EBA) regime which offers similar preferences to Cotonou (apart from the provisions for sharing production processes among them – known in the jargon as ‘cumulation’). The end of the Cotonou regime, therefore, held few practical implications for them. By contrast Cook Islands, Tonga, Marshall Islands, Micronesia, Niue, Palau and Nauru have been transferred to a less favourable trade regime by the EU – but because they export few if any goods to Europe that face significant tariffs they have not so far faced any significant commercial difficulties. A further piece in the jigsaw is that the EU has negotiated bilateral fisheries partnership agreements (FPAs) with Kiribati, the Solomon Islands, and the Federated States of Micronesia, which meet some of the requirements for developing an industry. These countries did not need an EPA to safeguard their fish exports and may indeed have been reluctant to surrender their advantages to the wider region through a comprehensive EPA regime. Although only Fiji and Papua New Guinea stood to lose tangible commercial advantages from the termination of the Cotonou regime a number of other states have an interest in securing an improvement on Cotonou. The DFQF regime takes one step forward by improving the rules of origin for fisheries products (see below) but negotiations on further improvements have been deferred as have those on services, which could be important for some states. It is against this background that Fiji and Papua New Guinea initialled IEPAs in November 2007 but the others did not. The term ‘IEPAs’ is given in the plural since the accords differ partly from each other. Negotiations between the EU and the full group have continued in 2008 on a ‘full EPA’ which may cover development-cooperation provisions, a fisheries chapter, social and environmental issues and competition. The EU view is that it should also extend the provisions in the IEPA to other PACP states but as of January 2009 there was no indication that any further Pacific countries would offer to liberalise their import regime for goods as Fiji and Papua New Guinea have done. Following a round of technical negotiations in September 2008 the situation is that the PACP are proposing a limited provision on services. This would take the form of a ‘rendezvous clause’ (listing the areas in which services negotiations would continue in the future) plus a nondiscrimination (MFN) provision and a confirmation by PACP WTO members of their multilateral commitments. The EU is in favour of a more flexible approach where PACP countries ready and willing to take services commitments could do so already at this stage. The question of including trade-related areas like intellectual property rights and government procurement in the full EPA remains open and will be discussed further. 85 3. Implications for the PACP February 2009 Executive brief EU-Pacific EPA negotiations 3.1 Main provisions of the IEPAs Both Fiji and Papua New Guinea have initialled the same main text; it is in the details of what they will liberalise and when that the two countries’ commitments differ. Under Article 13 of the main text either state can modify its tariff-liberalisation commitments in case of serious difficulties if the Joint Trade Committee (representing all IEPA parties) agrees. But modifications must not result in the agreement failing to comply with GATT Article XXIV (which requires the liberalisation of ‘substantially all’ trade within a period of time that must be ‘reasonable’). The IEPA also allows countries to halt liberalisation in case of serious balance of payments difficulties or the threat thereof. It is the only one of the (I)EPAs that contains this provision. Another unique feature is its provision on the consequences of natural disasters which might result in serious revenue decline (Article 45). Most of the (I)EPAs have a blanket ban on export duties but Article 10 allows the Pacific states to impose them if necessary: to ensure fiscal solvency; to protect the environment; or (subject to mutual agreement ‘in exceptional circumstances’ with the EC and for a ‘limited number of products’) in case of infant-industry development. As in all the (I)EPAs there is an ‘MFN clause’ (Article 16) under which the Pacific states will consult and ‘jointly decide’ with the EC how to extend the preferences given to another ‘major trading economy’ in cases where they are granted ‘more favourable treatment in goods, including rules of origin’. This is a more flexible phraseology than is found in the African IEPAs. Such ‘more favourable treatment’ explicitly includes the rules-of-origin regime. Permissible infant-industry support is only reactive (i.e. countries can impose safeguards if a threat arises to an infant industry) rather than proactive but they can be applied for up to ten years (and longer for any LDCs that accede) within the first 20 years of the IEPA – a lengthier timescale than in the other (I)EPAs. But quantitative restrictions can be employed for safeguards on a maximum of 3% of tariff lines or 15% of total import value (Article 21). 3.2 Market access Since January 1st 2008, all those ACP states that have initialled an interim or full EPA have been granted DFQF access to the EU market (phased in over some years for sugar and also for rice for which DFQF will start in 2010) under an autonomous decision by the European Council in December pending finalisation of the negotiations. The immediate effect of DFQF is the removal of any residual tariffs or quotas, but it is possible that in the medium-term beneficiaries could develop new exports of products that can be produced competitively but which faced high tariffs under Cotonou. There are two aspects of the export regime that need to be assessed. One is to identify how great would have been the loss to Fiji and Papua New Guinea had they not initialled EPAs at the end of 2007. The other is to determine whether or not DFQF offers new export opportunities that were not available under the Cotonou trade regime. 3.2.1 Improved market access? PNG For Papua New Guinea, 33 of the country’s 201 products exported to the EU in 2007 would have faced a positive tariff had DFQF not taken over when Cotonou lapsed. The total duty payable (on 2007 export volumes) would have been € 9.6 million, most of it for tuna. The total duty payable on the two most important exported varieties would have been equivalent to about one-fifth of the value of the exports. As with Fiji the loss of tuna preference would probably have provoked a search for new markets. 86 Since it must be assumed that sales at present are to the EU because it is a more profitable market than the alternatives, the result would have been to make the trade less profitable than it is at present. But by how much could be determined only through market analysis. Given the fact that PNG will be liberalising only a very few items that face significant tariffs and which the EU can supply competitively, the IEPA may represent a ‘very modest cost to avoid a less modest cost’ option. February 2009 Executive brief EU-Pacific EPA negotiations Fiji Because of sugar, the proportional impact on Fiji of losing Cotonou preferences would have been significant (from October 2009 corresponding to the effective end of the sugar protocol). 70 out of the 180 products it exported to the EU in 2007 would have faced positive tariffs with a total duty payable on 2007 export volumes of almost €60 million. The great majority of this is accounted for by sugar, followed by tuna. The duty on sugar would have been equivalent in 2007 to over two-thirds of the value of the exports, whilst for tuna the duty would have been equivalent to somewhat over one-eighth. It seems improbable that Fiji could have continued to export sugar to the EU were it to have faced tariffs of these levels. At best, the impact would be to reduce significantly the profitability of exports (since prices would have to be cut in order to compete with other suppliers) which might lead to a significant fall in the volume of exports. More likely, however, is that alternative markets, which are currently not as profitable as the EU, would turn out to be more profitable once account was taken of the European tariff. The result, therefore, would be a redirection of at least some exports and the ‘cost’ of the EU’s withdrawal of preferences would be the difference in the return (net of transport and compliance cost) derived from these new markets compared to the old European one. The regime for sugar is particularly important for Fiji which has been the only significant Pacific beneficiary of the ACP-EU sugar protocol. Under the old regime it held 12.75% of the EU’s quota under the sugar protocol (165,000 tonnes) and also had 9.3% of the special preferential sugar (SPS) scheme total (just over 30,000 tonnes). The DFQF transition for sugar will involve three-phases for non-LDCs but some of the details still have to be agreed:  January 2008–September 2009: continuation of the sugar protocol, with ‘additional market access’ for beneficiaries.  October 2009–September 2015: DFQF for non-LDC ACP countries subject to an ‘automatic volume safeguard clause’ and, for processed agricultural products with high sugar content, an ‘enhanced surveillance mechanism in order to prevent circumvention of the sugar import regime.’  October 2015 onwards: DFQF for non-LDC sugar exports, subject to a ‘special safeguard clause’. DFQF for sugar has been accompanied by the removal of the price guarantee that, under the sugar protocol, related the price received by ACP exporters to that received by EU producers (see table below). The sugar protocol, which was of ‘indefinite duration’ but not of ‘unlimited duration’, has been denounced by the EU. Since it did not provide any guarantee of what the price would be (only that it would be related to the European farmer price – which has been falling) the impact of the policy change will depend very much on what happens to competition. The stated intention of the EC is to maintain a regulated sugar market – but whether or not this will be possible after DFQF is fully phased in for all LDCs and for EPA states remains to be seen. It is possible that there could be price competition between LDC and EPA suppliers, and in this context considerations of quality and reliability of supply would become more important so as to ensure that prices above this floor price are maintained. 87 EU sugar price evolution Year EU price 2005/6 2006/7 2007/8 2008/9 2009/10 523.7 496.8 €496.8 €448.8 Not less than 90% of €335.0 2010/11 Not less than 90% of €335.0 2011/12 Not less than 90% of €335.0 2012/13 Marketrelated prices February 2009 Executive brief EU-Pacific EPA negotiations 3.2.2 New exports What of the prospects for new exports? In absolute terms the immediate gains from DFQF over Cotonou will be relatively small, but this is because the status quo ante was already liberal. In theory DFQF will have four types of actual or potential effect:  First, but of little relevance to Fiji or PNG (see below), is the redistribution of the import tax that the EU formerly levied on imports. This will be transferred from the EU to elements in the PACP export supply chain (retailers, importers, shippers, exporters, producers). To the extent that any accrues to PACP producers or exporters it will make exports more profitable.  Second, if the revenue transfer induces importers to shift purchases away from lesspreferred sources towards the PACP, there could also be an increase in the volume of PACP exports. It may also enable them to increase their supply of competitive products without substantial new investment.  Third, by removing some very high tariff barriers DFQF might make it commercially feasible, for the first time, for PACP countries to export to the EU products that they already supply competitively to other markets.  The fourth effect could be the most substantial, but is also the most difficult to predict. If DFQF induces increased supply from PACP states (e.g. as a result of new investment or shifts between products) there could be wide-ranging effects both in terms of foreign exchange earned and in knock-on effects for the rest of the economy. Neither Fiji nor Papua New Guinea paid tariffs on their major exports to the EU under Cotonou, so there will be no positive revenue transfer (the first effect) as a result of DFQF. On the contrary, since the government of Fiji imposes a 3% levy on sugar sales to the EU, its revenue will fall as the EU price is reduced as a result of reform to the common agricultural policy for sugar. The new regime for sugar may well result in a shift in the pattern of EU imports (from higher to lower-cost preferential suppliers – the second effect) but how this will affect Fiji is not yet clear. Its sugar industry has been undergoing major restructuring in order to improve efficiency and add value in the face of falling prices, but so have other former beneficiaries of the sugar protocol. An analysis of the current exports of Fiji and Papua New Guinea to the world does not indicate any obvious products that might be subject to the third effect (export diversion). It also provides no foundations for a preliminary guess at the fourth effect – new supply. All in all, therefore, the main effect of the IEPA on the exports of Fiji and Papua New Guinea appears to be one of avoiding a disruption following the lapse of Cotonou preferences rather than of creating new opportunities. 88 February 2009 Executive brief EU-Pacific EPA negotiations 3.2.3 Improved rules of origin: opportunity for adding value to fish? The possible exception concerns fish. The Pacific IEPA includes special provisions (not found in the other (I)EPAs) on fish processing. Fish origin rules were one of the bones of contention for some ACP states under Cotonou. By defining the originating status of fish according to the ownership and crew nationality of the vessel catching them, it disadvantaged states with a productive exclusive economic zone but no maritime tradition. It also caused difficulties ensuring year-round capacity utilisation of fish-processing factories in cases of migratory fish movements, since only fish caught at certain times of the year were ‘originating’. Article 5 and most of Article 6 of the Pacific IEPA origin rules basically restate the position that applied under Cotonou in respect of originating status and processing. But Article 6.6 introduces some flexibility. It provides that: …when circumstances are such that wholly obtained products as defined in Article 5, paragraphs 1(f) and (g) cannot be sufficiently utilised to satisfy the on-land demand, and after prior notification to the European Commission by a Pacific state, processed fishery products of headings 1604 and 1605 manufactured in on-land premises in that state from non-originating materials of Chapter 03 that have been landed in a port of that state shall be considered as sufficiently worked or processed for the purposes of Article 2… Although the provision appears to be contingent on informing the EU (and making a report within three years) it does not appear that the EU can refuse to accept a legitimate notification. It appears to be an important advance for the parties to the Pacific IEPA – but of course the economic impact of the change will depend critically on whether or not the flexibility that has been provided offers a commercial advantage. Only case studies will determine this since a commercial advantage will be obtained only where there is a processing plant that is (a) commercially viable for the foreseeable future (at least with this provision) and (b) cannot (costeffectively) acquire raw materials during a part of the year from originating sources. 3.3 Consequences of reciprocity 3.3.1 Overview of Fiji’s tariff liberalisation towards the EU Fiji will be liberalising just over 84% of its imports from the EU over a period ending in 2023. This will be done in four tranches to be completed by the end of 2008, 2013, 2018 and 2023 (so that the reduced tariffs are in place by the next day, January 1st). Unlike most other states, the liberalisation in each tranche will not occur through a series of incremental cuts. Instead, the IEPA contains no obligation to lower any tariff up to the day before it is scheduled to be set at zero. At first sight, this liberalisation schedule appears fairly front-loaded. Over one-fifth of imports must be duty free on entry into force of the IEPA, but 171 of the 498 items involved already face zero duties according to the tariff rates given in the IEPA schedule. Other tariffs may have been removed since the schedule was compiled, but even if they have not the adjustment impact of the first tranche appears unlikely to be substantial. Most of the items (326) face 5% tariffs. Their removal may affect government revenue but is unlikely to require significant adjustment. Only one item (data-processing machines) faces a substantial tariff (of 15%) and imports are unlikely to compete with domestic production. About 40% of the 1,173 products groups that Fiji is not liberalising are agricultural. Animal products followed by other agricultural products plus processed-food items account for just under one-half of all the exclusions. Many of the most sensitive products, facing the highest tariffs at present, have been excluded – but by no means all. Over half of the exclusions currently have tariffs of 10% or more, but only 6% are in the highest tariff band (which is 27%). 89 February 2009 Executive brief EU-Pacific EPA negotiations Summary of Fiji exclusions Description Total Covered by WTO Agreement Agriculture In highest applicable tariff band Specific duty only Tariff 10% or more Tariff less than 10% Duty free # lines 1,173 at HS6 and national tariff line level 469 on 75 (= 27% or varying specific duties, whichever is greater) 58 667 373 — Source: Commonwealth Secretariat, 2008, Table 3 Broad composition of Fiji exclusions HS Section Description Share of total excluded lines I Live animals; animal products 13.0% II Vegetable products 13.7% III Animal or vegetable fats/oils 1.1% IV Prepared foodstuffs; beverages; tobacco 19.2% V Mineral products 2.0% VI Chemical products 5.3% VII Plastics/rubber & articles 4.3% IX Wood & articles 5.7% X Woodpulp/paper & articles 3.2% XI Textiles & clothing 11.3% XII Footwear/headgear/umbrellas etc. 1.2% XIV Precious/semi-precious stones/metals & 0.4% articles XV Base metals & articles 9.5% XVI Machinery & mechanical appliances 2.1% XVII Vehicles/aircraft/vessels & associated 7.3% equip. XIX Arms & ammunition; parts/accessories 0.5% thereof Note: There are no exclusions in HS Sections: VIII (hides/skins, leather, furskins and articles); XIII (articles of stone, plaster, ceramics, glass, etc.); XVIII (photographic/precision/medical/surgical etc. instruments); XX (misc. manufactured articles); XIX (works of art, collectors' pieces & antiques). Source: Commonwealth Secretariat, 2008, Table 4 3.3.2 Overview of PNG’s tariff liberalisation towards the EU Papua New Guinea, uniquely among the ACP, is liberalising everything that is to be liberalised (some 88% of its imports) on day one: entry into force of the IEPA. But this may not create the ‘shock’ that might be imagined since most of the goods involved are either already duty-free or are not imported. Of the 4,796 products to be liberalised, 4,491 are already duty-free. Of the 305 products that face positive tariffs many are not imported from the EU – in total imports of these goods accounted for just 0.07% of the total value of imports. The goods being excluded from liberalisation include a high proportion (just under 40%) of agricultural items, notably animal products, followed by other agricultural products plus processed food items. A full 89% of the excluded items currently have tariffs of 15% or more, although only five are in the highest (70%) tariff band. 90 February 2009 Executive brief EU-Pacific EPA negotiations Summary of PNG exclusions Description # lines Total 1,048 at national tariff line level Covered by WTO Agreement on 399 Agriculture In highest applicable tariff band 5 (= 70%) Specific duty only 61 Tariff 15% or more 982 Tariff less than 15% — Duty free Source: Commonwealth Secretariat, 2008, Table 7 Broad composition of PNG exclusions HS Section Description Share of total excluded lines I Live animals; animal products 9.3% II Vegetable products 14.1% III Animal or vegetable fats/oils 3.1% IV Prepared foodstuffs; beverages; tobacco 17.2% V Mineral products 0.4% VI Chemical products 3.1% VII Plastics/rubber & articles 3.1% VIII Hides/skins, leather, furskins and articles 0.8% IX Wood & articles 6.8% X Woodpulp/paper & articles 4.9% XI Textiles & clothing 21.9% XII Footwear, headgear, umbrellas, walking sticks, etc. 2.2% XIII Articles of stone, plaster, ceramics, glass, etc. 1.3% XIV Precious/semi-precious stones/metals & articles 1.3% XV Base metals & articles 5.6% XVI Machinery & mechanical appliances 1.0% XVII Vehicles/aircraft/vessels and associated transport equip. 0.5% XX Misc. manufactured articles 3.5% Note: There are no exclusions in HS Sections XVIII (photographic/precision/medical/ surgical etc. instruments), XIX (arms and ammunition), and XXI (works of art, collectors’ pieces and antiques). Source: Commonwealth Secretariat, 2008, Table 6 3.3.3 Removal of other taxes The EPA may require the removal of taxes other than tariffs; it all depends on whether or not they have a differential effect on imports. Article 7 of the Pacific IEPA defines as ‘customs duties and charges’ any charge ‘of any kind imposed on or in connection with the importation of goods, including any form of surtax or surcharge…’. They must be removed immediately. It exempts only anti-dumping, countervailing or safeguard measures and charges limited to the approximate cost of services rendered that do not ‘represent indirect protection for domestic products or a taxation of imports for fiscal purposes.’ Such fees and charges may ‘not be applied on an ad valorem basis.’ Judging whether or not a tax bears more heavily on imports than on domestic production is the responsibility, in the first instance, of the country that applies the tax. But if the EU considers that some Pacific taxes are wholly or partly trade-related and they are not removed, it can take the matter to dispute settlement. In judging the potential impact of the EPA, therefore, it is wise to assume that all taxes that have a differential impact on imports may be subject to whatever rules have been agreed. 91 Executive brief January 2009 January 2009 Executive brief WTO agreement on agriculture WTO agreement on agriculture Table of contents 1. The EU's approach to the WTO __________________________________________ 95 2. ACP concerns__________________________________________________________ 96 3. State of play in the negotiations ___________________________________________ 98 3.1 Domestic support ___________________________________________________________ 98 3.1.1 The EU approach _______________________________________________________________ 98 3.1.2 Current debates_________________________________________________________________ 98 3.1.3 Recent proposals ________________________________________________________________ 99 3.1.4 Perspectives for ACP countries ____________________________________________________ 100 3.2 Export competition_________________________________________________________ 101 3.2.1 Earlier discussions______________________________________________________________ 101 3.2.2 Wider considerations concerning export competition ___________________________________ 102 3.2.3 Perspectives for the ACP_________________________________________________________ 103 3.3 Market access _____________________________________________________________ 103 3.3.1 EU interests __________________________________________________________________ 103 3.3.2 Areas of convergence: the model for tariff reductions ___________________________________ 104 3.3.3 Areas of convergence: ‘special products’ _____________________________________________ 104 3.3.4 Areas of convergence: ‘sensitive products’____________________________________________ 105 3.3.5 Areas of convergence: ‘special safeguards’ ____________________________________________ 105 3.3.6 Areas of convergence: extending DFQF access for LDCs ________________________________ 105 3.3.7 Areas of divergence: tropical products and preference erosion_____________________________ 105 3.3.8 Areas of divergence: the SSM and beyond ____________________________________________ 106 3.3.9 Perspectives for the ACP_________________________________________________________ 107 3.4 Other issues ______________________________________________________________ 109 3.4.1 The cotton initiative ____________________________________________________________ 109 3.4.2 Geographical indications _________________________________________________________ 110 3.4.3 Net-food-importing developing countries and the food price crisis _________________________ 110 93 January 2009 Executive brief WTO agreement on agriculture Summary The EU's approach to the WTO agricultural negotiations is based on the process of CAP reform, (essentially involving a shift from price support to direct aid payments). This allows export refunds to be eliminated and import tariffs to be reduced, without undermining agricultural markets in the EU, and means that EU cotton subsidies are to be reduced in line with ACP concerns. To this is linked a growing emphasis on non-trade concerns, notably the protection of geographical indications (GIs). However this embraces issues of concern to developing countries, such as the right to use measures to promote food security and the alleviation of poverty, free of WTO restraints. For the EU it is seen as vital that the WTO continues to tolerate the ‘blue box’ and ‘green box’ concepts which embrace the new forms of EU support. Measures accepted as trade-distorting, such as export refunds, will be phased out and EC support will increasingly focus on WTOcompatible measures under the single-payment scheme and rural-development programmes. Levelling the playing field for export competition will not, however, take full account of the impact of new forms of EU support on EU production levels, trade outcomes and price competitiveness, which impact on the production and trade prospects of ACP countries in a number of sectors. Access to the EU market will be improved, largely on a reciprocal basis, but there is little substantive attention being paid to the question of preference erosion. It is recognised that as CAP reform will allow some world prices to rise, measures to help net-foodimporting countries will be required. ACP governments have expressed concerns in six main areas:  preserving the right to make use of certain trade-policy tools (e.g. import licences and export taxes);    the effect of developed countries’ domestic support on production and trade outcomes;   the cotton issue; the disciplining of export-support instruments; the impact of market-access commitments, both in terms of ACP tariff-reduction obligations and the impact of EU tariff-reduction commitments on the margins of ACP trade preferences; rising food prices. Few of these concerns have as yet been substantively addressed through the process of negotiations. The WTO negotiations broke down in July 2006 but were subsequently resumed. Despite optimism and some technical progress, the July 2008 mini-ministerial which lasted fully ten days broke down on the issue of the special safeguard mechanism (SSM). However a number of issues of importance to ACP countries had not been addressed or even discussed, including: the cotton issue; the definition and treatment of tropical products, notably sugar and bananas; preference erosion in general; the production and trade effects of new forms of agricultural support (an underlying concern in the debate around the SSM). While efforts were made in the second half of 2008 to re-launch negotiations insufficient progress was made to warrant a meeting of ministers before the end of 2008. ACP governments have made it clear that key sectoral issues of concern - cotton, sugar and bananas – must be satisfactorily addressed if they are to sign on to a final Doha deal. In the interim the EU and USA have placed renewed emphasis on bilateral trade negotiations. 94 1. The EU's approach to the WTO January 2009 Executive brief WTO agreement on agriculture The EU's basic approach to the WTO agricultural negotiations was established at the end of 2000. It supported the progressive and ongoing reform process, designed to achieve further reductions in support and protection, whilst accommodating non-trade concerns. The EU Council clearly stated that further reductions in farm support may only occur ‘provided that the concept of blue and green boxes continues’, since this remains essential to the shift from price support to direct aid payments, which is now substantially completed in the EU. The EU Agriculture Council was reassured that the Commission's approach was based firmly on the ‘Agenda 2000’ reform package. Ensuring WTO acceptance of the new forms of EU agricultural support has formed the basis of the EU's approach to WTO agricultural negotiations. This objective was secured through the July 31st 2004 agreement. Defending this basic position and promoting the EU’s ‘offensive’ interests has subsequently informed the EC’s engagement in the negotiation process. While the EU argues that further liberalisation of agricultural trade through the WTO will contribute to sustained growth, and that developing countries should be well placed to participate more fully in increased agricultural trade, it needs to be borne in mind that the current trajectory for CAP reform will:  significantly reduce the benefits that ACP developing countries will gain from the preferential access extended in a bilateral framework under the (I)EPAs to EU agricultural markets; and  significantly increase the competitive challenge posed by EU exports of agricultural and agriculture-based value-added products (both food and non-food). The EU's entire approach to the WTO agriculture negotiations is thus firmly based on the ongoing process of CAP reform, within which increasing prominence is being given to EU nontrade concerns (environmental protection, food safety, protection of rural livelihoods, and promotion of rural development). The end goal of the CAP-reform process, namely closing the gap between EU and worldmarket prices, is being greatly facilitated by the prospect of higher average world market prices in the coming years. The price surges in 2007-2008 even allowed EU import tariffs and export refunds to be set at zero in some sectors. However price declines associated with the financial crisis and subsequent economic down-turn have led to the reintroduction of export refunds and an increase in applied tariffs. These recent developments, reflecting the prospects for increased price instability in the coming years, have made it more difficult for the EC to argue convincingly for substantial real tariff reductions by developing economies, without the maintenance of simple and effective special safeguard measures As Agriculture Commissioner Mariann Fischer Boel pointed out in an address to the Carnegie Institute, the EU has built certain assumptions about the Doha Round into the current CAP reforms and the EU cannot be expected to go beyond these assumptions, thereby compromising a long-established process of hard-fought reform. Against this background the EC’s main objective in the Doha round remains as stated in the June 2006 EC memorandum on CAP reform and international trade negotiations, namely to: ‘get the basics of the European agricultural policy agreed upon in the multilateral trading system’. The objective in this regard is to insulate the EU reform process from any WTO challenge. Achieving this, with or without a renewal of the ‘peace clause’, remains an underlying EU objective. 95 Executive brief WTO agreement on agriculture January 2009 Addressing the European parliament on September 2008 the then EC Trade Commissioner, Peter Mandelson, noted that for the EU the agreement on the table in July 2008 respected all the EU’s ‘red lines in agriculture’. This was particularly the case for the key EU concern over the ‘green box’ and the treatment of sensitive products. It was felt that what was on the table in July 2008 would ensure that any concession made by the EU would ‘remain within boundaries where … transformation and change can be managed gradually’. The Trade Commissioner argued that the agreement on the table in July 2008 would serve to secure ‘permanent legal protection for our reformed CAP’. Securing an agreement was also seen as important for promoting EU offensive interests in the area of geographical indications. It is far from clear what this would mean in terms of ACP concerns over the effects on production, trade and competitiveness of changing patterns of EU agricultural support. 2. ACP concerns ACP agricultural concerns can be divided into six areas: preserving the right to make continued use of certain trade policy tools; domestic support; export competition; market access (including preference erosion); the cotton initiative; higher and fluctuating food prices. In terms of preserving the right to continue to use trade policy tools, the ACP, as a group, have expressed concern over the need for the retention of appropriate policy space to allow ACP countries to use certain trade-policy tools (e.g. import licensing and export taxes) in pursuit of agricultural policies that are supportive of their development goals, poverty-reduction strategies, food security and livelihood concerns. The retention of domestic policy space complements ACP aspirations to secure improved market access for the agricultural products of ACP countries both in primary and processed forms. This primarily relates to non-EU market access, given the granting of duty-free, quota-free access to ACP countries initialling or signing (I)EPAs and the prospects for finalising the EPA process and thereby consolidating this access. On domestic support the ACP group have called for:  a real and substantial reduction in trade-distorting domestic support, specifically for developed countries to ‘engage in the review and clarification of the ‘green box’ criteria in a manner that will ensure that the ‘green-box’ measures have no or at most minimal tradedistorting effects or effects on production’;  developed countries to end all de minimis support (support enjoying exemption from notification for state aid below a certain threshold);    the adoption of disciplines on ‘blue box’ support at a product specific level; ACP countries to be excluded from any commitments on reducing de minimis support; ACP states to be excluded from any obligations to reduce domestic support. On export competition issues the ACP have called for:   a ‘credible end-date for elimination of export subsidies’;  arrangements on state-trading enterprises which exclude ACP state-trading enterprises from such disciplines given ‘the critical role played by STEs in sustaining livelihoods, food security and poverty reduction in such countries’. arrangements on food aid which take into account the needs of net-food-importing developing countries and food-aid recipients; 96 January 2009 Executive brief WTO agreement on agriculture On market-access issues the ACP as a group have called for:  the elaboration within a WTO context of ‘specific and concrete mechanisms and solutions to the problems of preference erosion ... in accordance with part 44 of the framework agreement’, specifically through the USA and EU being allowed to phase-in tariff cuts on textiles and clothing and other sensitive products over 15 years and the implementation of already promised trade-related assistance;  special arrangements for market-access commitments for sugar and bananas to slow down the process of preference erosion on the EU market, specifically through excluding bananas and sugar from the category of tropical products and treating these as ‘sensitive products’;  the extension of full duty-free access to LDC exports by all OECD countries and advanced developing countries, with this being made commercially meaningful by limiting the range of exclusions and the introduction of more relaxed rules of origin;  full access to special safeguard mechanisms through procedures which allow for effective protection against import surges;  no obligatory market-access commitments to be imposed on LDCs. On the cotton issue the ACP have consistently supported the group of four African countries (Senegal, Mali, Benin, and Chad) which have called for:     the immediate elimination of export subsidies; the phased reduction of production support in the cotton sector, with 80% of production support being eliminated by January 1st 2007, a further 10% eliminated by January 1st 2008 and its total suppression by January 1st 2009 (an area in which there has been no progress); complete duty-free access for LDC cotton and cotton products to all OECD markets; the establishment of development-assistance programmes for the cotton sector to compensate for losses incurred by the trade-distorting policies pursued by OECD countries in the cotton sector. On the issue of higher and fluctuating global food prices, ACP spokespersons have called for specific measures to address instability in commodity prices. In its analysis of the food-price crisis and the WTO, the ICTSD has argued that the disciplines on domestic support in the WTO package ‘leave much to be desired’, since they would allow OECD producers ‘to continue to overproduce’ a factor which would ‘serve as a disincentive for developing-country production of key crops’. In this context the ICTSD article argued that ‘high food prices create opportunities for subsidy reform’ and that this opportunity should be seized. Other analyses however suggest that across the OECD as a whole the prospects of subsidy reform remain a forlorn hope. Certainly with depressed prices arising from the global economic slowdown there appears to be far less room to seize such opportunities, with the EU reintroducing export refunds and raising tariffs within bound limits in response to depressed commodity prices. Against this background some analysts have suggested targeted programmes of assistance to increase the participation of LDCs and ACP countries in the value chain as one means of getting to grips with volatile commodity prices, with this being accompanied by general programmes of development assistance support for addressing specific supply-side constraints. The EU’s €1 billion ‘food facility’ (arising from under-spending on major CAP budget lines as a result of earlier high global prices) can be seen as a response in this regard, assuming that such funding finally materialises despite the economic downturn. 97 3. State of play in the negotiations 3.1 Domestic support January 2009 Executive brief WTO agreement on agriculture 3.1.1 The EU approach The EU is committed to continuing reductions in trade-distorting domestic support for agriculture, while preserving its right to use less trade-distorting ‘blue box’ measures (programmes aimed at limiting agricultural production, perhaps within defined limits), and securing the complete exemption of non-trade-distorting ‘green box’ measures from any reduction commitments (indeed it seeks an extension of ‘green box’ measures). Both of these types of support are seen by the EU as vital to addressing a range of non-trade concerns. Significantly, the EU defines the new instruments that it is deploying under a reformed CAP as ‘less trade-distorting’ or in some cases ‘non-trade-distorting’, while categorising the types of domestic-support measures that the USA is using as significantly trade-distorting. The EU has been seeking to achieve through the WTO an acceptance of its definitions as to which domestic-support measures are to be seen as trade-distorting, and which as less trade-distorting and non-trade-distorting, an aim largely achieved in the July 31st 2004 WTO agreement. It has subsequently successfully defended its bottom lines, with the aim of securing ‘permanent international protection for our reformed CAP’. This will allow the CAP to be implemented within the existing agreed parameters. Having insulated from challenge ‘non-trade-distorting forms of support’ the EU is willing to engage actively in discussions on the level of reductions to be introduced in trade-distorting forms of support. As a consequence of the process of reform launched in 1992 (and subsequently substantially extended) the EU is less and less reliant on these trade-distorting forms of agricultural support (although it continues to use them where the market situation requires it). The EU's approach to domestic support recognises the importance of measures that promote rural development and poverty alleviation in order to secure food security in developing countries and wants this to be allowed under WTO rules. It also wants improved market access for developing countries and stability in the preferences granted, so as to stimulate agri-food processing. It is willing to support proposals that these should be considered as an integral part of the rights which developing countries should enjoy under the ‘special and differential treatment’ provisions of the WTO. The EU would also like to see a continuation of the ‘peace clause’ provision within the Agreement on Agriculture, which ensures that any measures agreed within the framework of the agreement cannot be challenged by any of the contracting parties. It is this ‘peace clause’ which allowed both the EU and the USA to greatly expand agriculture-sector support whilst remaining within WTO rules. The lapsing of the peace clause initially coincided with a growing number of successful challenges to both EU and US agricultural-support instruments. However with the surge in global food prices and projections of higher average price levels over the next ten years, the lapsing of the peace clause became of less concern to the EU than it was previously. 3.1.2 Current debates The impact of WTO rules on domestic support remains problematical, not only in the EU but also in the USA. Advanced developing countries in particular want substantial reforms, warning that if the EU and USA ‘do little more than pretend to reform … farm subsidies by reducing spending limits to well above current or planned expenditures’ then advanced developing countries will do little more than pretend to cut industrial tariffs. As the ICTSD has pointed out, for a large majority of the WTO’s 151 members ‘major reductions to trade-distorting farm support in rich countries [remains] central to delivering on the development dimension of the round’. 98 January 2009 Executive brief WTO agreement on agriculture Indeed, papers presented at the April 2007 ICTSD workshop on agricultural subsidies and the ‘green box’ concluded that ‘there is increasing evidence to suggest that payments made under many of these programmes do in fact affect farmers’ production decisions, and therefore potentially affect world trade’. As a consequence as pressure mounts on developed countries to reduce trade-distorting support there may be a tendency to simply switch subsidies between ‘boxes’. Papers submitted at this workshop called for a balancing of the benefits of ‘green box’ measures in supporting legitimate social and environmental objectives and the negative trade effects of such measures. The academic analysis presented at the April 2007 ICTSD workshop appears to be backed up by the findings of the OECD which concluded that while specific ‘green box’ policy measures can be ranked by their trade-distorting effects and while different measures have different degrees of trade-distorting effects ‘all agriculture-specific support measures investigated have some effect on production’. It found that no decoupled measures were in fact completely production neutral, but rather had ‘statistically significant’ effects on land allocation, and production or investment decisions. However, the OECD analysis did argue that policies have less impact on production where the farmer is given more freedom of choice over what to produce, and that, furthermore, payments based on area-payments distort production and trade less than price support. However it also pointed out that the extent of the difference between these two effects is still relatively poorly understood. Thus the single-payment scheme has ‘quickly become the dominant form of farm support in the EU’. WTO considerations are felt to be a significant factor in this evolution of patterns of EC support. However, citing the precedent of the Brazil-USA cotton case, academics have argued that since the EU single-payment scheme has some of the features of the US cotton scheme, it could also be subject to challenge, particularly if large volumes of agricultural support were ‘parked’ within its provisions. This sets the context for the ongoing negotiations on domestic support in the WTO. Some WTO members want to negotiate additional curbs on ‘green box’ support, such that new bound levels are established which bring about an effective reduction in domestic support actually disbursed in support of agriculture in developed economies. Other WTO members, such as the EU, meanwhile want to maintain current ‘green box’ provisions, subject to the overall agreement on de minimis limits and reductions in the aggregate measure of support, limitations which are still to be agreed. At the heart of the current negotiations is the anomaly of a WTO process which leaves ‘green box’ domestic subsidies largely unaffected. This anomaly underpins much of the continuing debate around the special safeguard mechanism (SSM). 3.1.3 Recent proposals Against this background no fundamental changes in WTO disciplines on domestic support are likely. The only progress in 2008 was the removal of the ‘square brackets’ which provided a range of possible levels of reduction and their replacement by specific figures for reduction commitments. These involve much gentler cuts in domestic support for developing countries compared to developed economies, with progressively higher levels of reduction of support the higher the level of domestic support currently extended. 99 Proposals for reducing all distortionary internal subsidies and ‘amber box’ subsidies for developed countries Subsidy level January 2009 Executive brief WTO agreement on agriculture Developed countries Reduction DCs (1) NFIDCs/ LDCs Over US$60 billion (3) 80% Exempt from US$10-US$60 billion (4) 70% -36,6% reduction Under US$ 10 billion 55% Over US$40 billion 70% Exempt from US$15-US$40 billion 60% reduction Under 15 billion US$ 45% 30% Notes: (1). Domestic support of developing countries is not comparable to subsidies in developed countries which is why it is in the lowest category; (2). Overall trade-distorting support; (3). For the EU; (4). For the USA; (5). Aggregate measurement of support. All domestic support with distorting effects on trade (OTDS (2) ) ‘Amber box’ (AMS (5)) Source: CTA-GRET discussion forum ‘Progress in WTO agricultural negotiations since the failure in July 2008 - 6 December 2008’. http://www.dgroups.org/groups/cta/wtohong-kong/index.cfm On ‘amber box’ support the EU should cut the aggregate measure of support by 70%, the USA and Japan by 60% and the rest by 40%. Per-product ‘amber box’ support is to be capped at the average of notified support in 1995-2000 with some variation for the USA. With regard to the de minimis limit, developed countries are to make cuts to 2.5% or 5% of the value of production, with developing countries making cuts two-thirds of this, except with regard to support measures for subsistence and resource-poor farmers. ‘Blue box’ support is to be limited to 2.5% of the value of production in developed countries and 5% in developing countries, with caps per product being included. The provisions dealing with the ‘green box’ are to be revised and subjected to tighter monitoring and surveillance. It remains to be seen whether these proposed formulae will deliver an effective reduction in all forms of domestic support that impact on production decisions and thereby influence trade outcomes; current indications are that it will not. 3.1.4 Perspectives for ACP countries The challenge for ACP trade negotiators has been to shift the terms of the debate on domestic support in the agriculture negotiations so that all genuinely trade-distorting public-aid measures that have an impact on trade flows between the EU (and other OECD suppliers) and the ACP are brought within effective WTO disciplines. In this context it is worth noting that the World Bank’s Global Economic Prospects Report 2004 referred to direct aid payments as ‘effective export subsidies’. However, this ACP objective needs to be accomplished whilst at the same time preserving the right of developing countries to use various domestic-support tools to promote the objectives of food security and the alleviation of poverty. It should be noted that commitments made to date do not address the central issue of bringing about an effective reduction in domestic support actually disbursed in support of agriculture in developed countries. Nevertheless the WTO director-general Pascal Lamy appears to have acknowledged developingcountry concerns regarding ‘green box’ domestic subsidies, stating in July 2007 that a ‘number of the current substantive rules of the WTO do perpetuate some bias against developing countries … for example with rules on subsidies in agriculture that allow for trade-distorting subsidies which tends to favour developed countries’. He argued in this context that ‘a fundamental aspect of the Doha Development Agenda is therefore to redress the remaining imbalances in the multilateral trading system’. It is far from clear whether the December 6th 2008 text gets to grips with this fundamental issue in the area of domestic support. 100 Indeed, it can be argued that developing countries are increasingly seeking to retain the right to take the measures they see fit in response to this un-resolved issue of the external trade effects of changing patterns of domestic support in OECD economies. This has manifested itself in the intense and controversial discussion around the ‘special safeguard mechanism’ which resulted in the collapse of the July 2008 WTO ‘mini-ministerial’ negotiations. January 2009 Executive brief WTO agreement on agriculture 3.2 Export competition 3.2.1 Earlier discussions A stated aim of the EU is to ‘level the playing field’ for export competition by extending current rules on export refunds to other areas, such as export credits and state-marketing bodies. In addition it proposes to strengthen the rules on food aid by ensuring that all food aid is in grant form, and by establishing a code of conduct for food-aid operations. The price reductions that the process of CAP reform brought about was intended to reduce the EU's need for export refunds by closing the gap between EU and world-market prices. This process is most advanced in the cereals sector where the need for export refunds fell from €3,282 million in 1992 to a mere €260 million in 2001. This 92% decline occurred against the background of an 8% increase in exports of cereals between 1991/1992 and 2000/2001. In the course of 2007 the evolution of world-market prices was such that the EC was able to set at zero export refunds for cereals and dairy products (setting export refunds at zero is different from abolishing export refunds, since it allows refunds to be reintroduced if the market situation so requires). Subsequently falling global food prices (exacerbated by the financial crisis) saw export refunds reintroduced. Despite these variable trends as EU exports have become more price-competitive and less dependent on export refunds, the EU has increased its support for a tightening of WTO disciplines on all forms of export support. This constitutes the background against which the EU wishes to see a strengthening of WTO disciplines on export competition (in particular the use of export credits and the abuse of food aid for the purposes of export promotion). In this regard the July 31st 2004 WTO agreement, the discussions held in Hong Kong in December 2005 and the July 2008 proposals are largely consistent with EU objectives. The agreement in this area involves a commitment to abolish export subsidies by 2013, with a proposal for the reduction of total budgetary commitments of 50% by the end of 2010, ‘with the remaining budgetary outlay commitments being eliminated in equal annual instalments so that all forms of export subsidies are eliminated by the end of 2013’. However these moves on export subsidies are complementary to parallel moves on the regulation of the activities of statetrading companies, disciplines on export credits, export-credit guarantees and insurance programmes as well as international food aid. A critical issue with regard to state-trading enterprises is ‘whether monopoly power would be outlawed or just disciplined’. The final conclusion and implementation of these related measures will be in parallel and be subject to close monitoring and surveillance. Nevertheless, until such time as the WTO requires their final abolition, the EU will continue to make use of export refunds to address specific market situations which undermine EU agricultural exports. A case in point in this regard was the EC announcement on November 26th 2007 of the introduction of ‘export refunds for pigmeat carcasses, cuts and bellies’ for ‘exports to all destinations’ in response to ‘the difficult market situation’ arising from high feed costs and the sharp drop in the value of the US dollar against the euro which had reduced the competitiveness of EU exports. A further case in point is the January 2009 announcement of the reintroduction of export refunds for butter, cheese and whole skimmed-milk powder in the face of a sharp reduction in prices of dairy products on world markets which was creating a situation where EU exporters were unable to compete without the benefit of export-refund payments. 101 Executive brief WTO agreement on agriculture January 2009 Significantly, from an EU perspective, the July 31st 2004 agreement included provisions stipulating that the phasing-in of these commitments would ‘take into account the need for some coherence with internal reform steps of members’. This effectively subordinated the implementation of commitments on export refunds to the successful attainment of domesticreform programmes which largely do away with the need for such export support. This demonstrates the primacy that domestic-reform measures in major OECD countries take over international obligations. In the case of the EU this was highlighted by Agriculture Commissioner Mariann Fischer Boel’s recent statements in the context of the CAP ‘health check’ to the effect that the EC should do away with export refunds regardless of the outcome of the Doha Round. However at the same time she argued that this should be done ‘in the right way, taking into account the needs of various sectors’, reassuring farmers that export refunds ‘will be part of our safety net that we are going to establish for the period 2009-2013’. Thus the EU position on the elimination of export refunds, while welcome, needs to be placed in the context of successive waves of CAP reform since 1992 that have progressively reduced the need for export refunds. 3.2.2 Wider considerations concerning export competition While the EU wants to see a ‘levelling of the playing field’ in export competition, within the EU's approach this levelling effectively only applies to trade between the big OECD competitors. The EU approach does not address the problems generated on the domestic markets of agriculture-dependent developing countries by the publicly financed direct-aid agricultural-support programmes of the EU and other OECD suppliers. These programmes enable OECD producers to export much higher volumes of agricultural commodities at much lower prices than would be the case without such support. For the EU, such direct-aid programmes in the cereals sector have reduced the need for export refunds by allowing prices to fall without undermining farm incomes (and even production levels for some crops). This serves to shift the supply curve to the right, enabling EU producers to supply higher volumes of products at much lower prices. While the trade benefits of these reforms were not immediately forthcoming because of the weakness of the US dollar against the euro, the 2007-2008 strengthening of world-market prices virtually removed the commercial need for export refunds. Subsequent price declines however have complicated this situation, requiring the reintroduction of export refunds in the dairy sector (although the strengthening of the US dollar against the euro - but not necessarily other EU currencies - has partly eased this situation). In addition the EU position on export competition does not take into consideration the negative effects which various forms of state support to domestic agriculture sectors have on the development of value-added processing in developing countries. By making EU agricultural raw materials much cheaper (for example the price of wheat used in pasta production), CAP reform is enabling EU food-product manufacturers to exploit the economies of scale they enjoy more effectively. This is particularly the case for products like pasta where the raw-material content constitutes an important part of the final cost, and where agriculture-based ACP countries could quite easily begin to develop their own production. Thus CAP reform is likely to close off a range of opportunities for the development of value-added processing of agricultural raw materials in ACP countries. This needs to be seen against the backdrop of a growing volume of evidence that suggests that many so-called ‘non-trade-distorting’ instruments still affect farmers’ production decisions, and potentially therefore world-trade outcomes. 102 3.2.3 Perspectives for the ACP January 2009 Executive brief WTO agreement on agriculture Regarding exports refunds, the commitment made by WTO members to remove ‘all forms of export subsidies and disciplines on all export measures with equivalent effect’ by 2013 in a ‘progressive and parallel manner ... so that a substantial part is realised by the end of the first half of the implementation period’ has often been commented on as the most concrete achievement to date. However in an EU context it should be noted that this is entirely consistent with the current trajectory for CAP reform. From an ACP perspective the deferment of the elimination of export subsidies until 2013 is seen as something of a set-back, since they had wanted a more rapid phasing-out of export subsidies. However, much will depend on how this phasing-out is introduced. In this context ACP countries should focus on those export subsidies which currently generate the most significant adverse trade effects and seek restraint informally in those areas of concern where the EU is adamant on the ‘back loading’ of elimination commitments. Given ACP aspirations to move up the agricultural- and food-product value chains, attention should focus on the EU’s use of export refunds for so called, ‘non-annex I’ products, that is value-added food products that use CAP-covered agricultural raw materials on which export refunds are paid on the basic raw material. This is particularly important given trends in EU exports of value-added food products to ACP countries. According to a presentation made at the June 25th 2007 symposium on EU agri-food export interests by a representative of the Confederation Of Food And Drink Industries of the EU (CIAA), in 2005 ACP countries took some €3,753 million of EU food-and-drink exports, with a modest upward trend since 2000 (mostly concentrated in milk (HS 0402), fish (HS 0303) and spirits (HS 2208)). However of these exports, ‘non-annex I’ products totalled €1,028 million, an increase in the value of these exports of ‘33% since 2000’. 3.3 Market access 3.3.1 EU interests Because the EU is one of the world's largest agricultural exporters, improving market access for food and agricultural products is very much a two-way process, and the EU wants to see further reductions in agricultural tariffs by all WTO members so as to bring this about. Improved access for developing-country exports to the EU, and improved access for EU agricultural-and food-product exports to developing and other third-country markets, are thus two sides of the same coin in the EU's approach to market-access questions within the WTO negotiations. The EU believes that tariff-rate quotas established under the Uruguay Round have contributed positively to increased market access and it would like to see the rules that are applied to tariffrate quotas clarified and disciplined. It also believes that the ‘special safeguard clause’ is a very useful instrument for addressing import surges or sharp reductions in import prices, and so it would like to ensure that this instrument continues to be available within WTO rules. As the shift from price support to direct aid results in declining EU prices, the EU progressively finds itself needing much lower tariff levels in order to ensure effective protection (a process that has already gone a long way for most commodities, with sugar and bananas being notable exceptions). Within the July 31st 2004 WTO agreement the EU needed to make a number of concessions to secure developing-country support for an overall agreement. The most significant of these was acceptance of the EU-supported proposal that G90 countries should, in terms of tariffreduction commitments, get the ‘round for free’ – that is they should not be required to make further tariff-reduction commitments in the context of the WTO agreement. 103 Executive brief WTO agreement on agriculture January 2009 However, EU concessions in this regard did not constitute any great deviation from the EU’s underlying policy agenda, for in the context of the EPA negotiations with ACP countries the EU was at the end of 2007 able to secure tariff preferences on trade with nine LDCs and remains committed to securing similar preferential access to the markets of the remaining ACP LDCs, through the conclusion of comprehensive EPAs. This is an apparently contradictory position for the EC, as on the one hand it is supporting a ‘round for free’ for LDCs in the WTO, requiring LDCs to make no tariff-reduction commitments while on the other hand seeking tariff elimination on substantially all trade between the EU and these countries through the EPA negotiations. While multilateral tariffs remain, this is generating a situation in which the margins of preference enjoyed by EU exporters to these LDCs will be maximised, as tariffs on imports from the EU will be reduced and then eliminated under the EPAs, while being maintained on imports from third countries. More broadly, with regard to market access, the July 2004 agreement saw an acceptance of an approach to tariff reductions involving a tiered formula. Countries with higher bound tariffs are required to make larger reductions in the bound tariffs. Alongside this tiered formula for developed economies, developing countries are required to make smaller cuts then developed economies, with developing countries further benefiting from special and differential treatment (S&DT) for LDCs and small, vulnerable economies. 3.3.2 Areas of convergence: the model for tariff reductions In the course of 2008 WTO members drew close to an agreement on the specific modalities for tariff reductions in the agriculture sector. The agreement reach during the July 2008 ‘miniministerial’ in the area of tariff-reduction commitments, was formalised in the December 6th 2008 draft modalities text. The reduction commitments now involve specific figures and not ranges of reductions. The details are set out in the table below. Proposed developed-country tariff-reduction commitments (tiered formula) Developed Countries Bound Tariffs Tariff Reduction Developing Countries Bound Tariff Tariff Reductions LDCs SVEs Other DCs 0 - 20% 50% 0 - 30% Exempt 23.2% 33.3% 21 - 50% 57% 31 – 80% Exempt 28% 38% 51 – 75% 64% 81 – 130% Exempt 32.4% 42.7% Over 75% 70% Over 130% Exempt 36.7% 46.7% Minimum Average cut of 54% (‘sensitive Maximum average cut of 36% (‘sensitive products’ are products’; cuts applied to tropical taken into account in the calculation of the average). products; and tariff escalation are included in the calculation of the average) . 3.3.3 Areas of convergence: ‘special products’ Linked to this basic modalities framework are proposals for the treatment of ‘special products’, in which for reasons of food security, livelihood security or rural development, developing countries will be allowed to undertake smaller tariff reductions. Once again the basic agreement in this area was reached in July 2008, with this being formalised into a proposal in the December 2008 text. It is proposed that developing countries will be able to designate 12% of their tariff lines as ‘special products’. Up to 5% of these lines could be exempted from reduction, but the average tariff reduction of all the special products should be 11%. However there remains no consensus as to whether there should be a category of ‘special products’ on which no tariff cuts are required. 104 January 2009 Executive brief WTO agreement on agriculture 3.3.4 Areas of convergence: ‘sensitive products’ The basic modalities also include the possible designation of ‘sensitive products’ by developed countries. This allows developed countries to designate up to 4% of tariff lines as ‘sensitive products’, subject to lower tariff-reduction obligations. Developed countries with over 30% of the tariff lines in the upper tier of tariff-reduction commitments will be allowed to declare an extra 2% of their tariff lines as ‘sensitive products’. However any designation of tariff lines as ‘sensitive products’ requires an increase in tariff-rate quotas for the product concerned For developed countries, this increase is of the order of 4% of domestic consumption in the case of a two-thirds deviation from the tiered formula, 3.5% of the domestic consumption if only half the cut is made and 3% for a one-third deviation. For developing countries, quota increases are two-thirds of those required of the developed countries. If after applying tariff-reduction commitments customs duties on certain tariff lines are still 100% more (150% for developing countries), then the tariff quota will be increased by 0.5% more than planned. This requirement to increase tariff-rate quota access is potentially problematical for the ACP in the sugar sector, where within the EU the increase in quota required under this provision has not been built into the EC’s calculations for ensuring a market balance and maintaining prices, in an era without price guarantees. This could have severe price implications for ACP sugar exporters once guaranteed prices for ACP raw sugar are discontinued. There are considerable differences between developed economies with regard to this proposal. In December 2008 the Agriculture Chair, Crawford Falconer, sought to bridge this difference by applying strict limits to the creation of new quotas, which could not exceed 1% of tariff lines. 3.3.5 Areas of convergence: ‘special safeguards’ The market-access commitments tabled in December 2008 reiterated the agreements already reached on the limitations to be placed on the use of special safeguards, which is to be limited to 1% of tariff lines and is to be eliminated within seven years of the entry into force of the Doha Round agreement. The application of the special safeguard clause is limited to 2.5% of the tariff lines for developing countries (compared to 3% in the previous text) and it is also specified that small vulnerable economies (SVE) can apply it up to 5% of their tariff lines. 3.3.6 Areas of convergence: extending DFQF access for LDCs The final part of the market-access modalities proposal is that LDCs ‘would not have to reduce tariffs’ and would enjoy duty-free, quota-free access to developed country markets on a lasting basis for not less than 97% of products, including cotton products. 3.3.7 Areas of divergence: tropical products and preference erosion On tropical products it is proposed that the tariff reductions should be higher than for other products. These proposals have not changed between July and December 2008. Two options remain to be negotiated on the size of the reduction to apply:  if the tariff is below 25%, it will be reduced to 0% and if it is higher, the reduction applicable will be 85% instead of the reduction provided for by the tiered formula; tropical products could not be declared as sensitive;  if the tariff is below 10%, it will be reduced to 0%, and if it is higher, a 72% reduction will be applied. With regard to tropical products, commitments in this area need to be balanced against commitments with regard to long-standing preferences. While some want to ‘accelerate liberalisation of tropical products’, others, namely the ACP, want a ten-year moratorium on any tariff reductions in areas of long-standing trade preferences. 105 There thus continues to be disagreement on what should be classified as a tropical product – particularly with regard to sugar and bananas. January 2009 Executive brief WTO agreement on agriculture 3.3.8 Areas of divergence: the SSM and beyond The special safeguard mechanism allows for a temporary rise in customs duties to deal with a sudden increase in imports or a drop in prices. Currently the divergent views revolve around whether the SSM would allow tariffs to be raised above the pre-Doha Round bound rates. Most developing countries believe that limiting increases to pre-Doha bound rates would not provide sufficient protection and want duties to be allowed to exceed pre-Doha round bound rates, while the USA and other food-exporting countries want the allowed customs-duty increases not to exceed the pre-Doha Round bound rates. This debate is directly linked to concerns over the production and trade consequences of new forms of agricultural support being developed in OECD countries (notably the EU), which it is felt could generate structural distortions, against which developing countries should be allowed to protect themselves. It is on this issue that the July 2008 ‘mini ministerial’ meeting nominally broke down. However as a result of the breakdown of the negotiations over the SSM issue the cotton issue was not addressed. Some negotiators suspected that the reason the negotiations broke down over the SSM was a US reluctance to move on to discussion of cotton issues in an election year. African governments expressed disappointment that cotton issues had not been addressed. SSM, corrective measures below the pre-Doha bound rates (July draft of modalities) Trigger thresholds (% of the average volume Corrective measure (additional duties) of imports over the last three years) Over 110% and under 115% 25% of the bound tariffs or 25 ad valorem percentage points (whichever is higher) Over 115% and under 135% 40% of the bound tariffs or 40 ad valorem percentage points (whichever is higher) Over 135% 50% of the bound tariffs or 50 ad valorem percentage points (whichever is higher) The December 6th 2008 text however makes proposals for pre-Doha bound rates to be exceeded but within strictly defined limits:   no more than 2.5% of tariff lines over a 12-month period;  the SSM can only be applied for a period of 4 to 8 months (to be negotiated) after which it can no longer be applied for an equivalent period;  reduced corrective measures, particularly for countries with low bound rates. cross-checking: there must be a drop in the domestic price as well as an increase in quantities imported to be able to apply this SSM; SSM, corrective measures below the pre-Doha bound rates (December 6th 2008 proposal) Trigger thresholds (% of the average volume Corrective measure (additional duties) of imports over the last three years) Over 120% and under 140% One-third of the bound tariffs or 8 ad valorem percentage points (whichever is higher) Over 140% One-half of the bound tariffs or 12 ad valorem percentage points (whichever is higher) Efforts to restart negotiations in September 2008 proved ineffective because of the irreconcilable position of the participants. Informal talks in October allowed some progress to be made but not sufficient to warrant a reconvening of ministerial level consultations. 106 The December 6th 2008 text consolidated the progress made in July 2008 (largely removing the range of possible reduction commitments and replacing it with specific figures) but did not move on to get to grips with ongoing areas of conflict. 3.3.9 Perspectives for the ACP January 2009 Executive brief WTO agreement on agriculture Safeguard concerns Given the underlying ACP objective of promoting the structural transformation of their economies through the progressive expansion of value-added processing in order to create jobs and promote growth, the ACP would require an extension of the scope of product coverage of special safeguard measures. This calls for a widening of the coverage of the special safeguard provisions to include their associated value-added product chains. This would appear to be necessary given trends in EU food exports to ACP countries and the cost-reducing effects of the process of CAP reform. It remains to be seen whether there will be sufficient flexibility within the provisions on the table to meet ACP concerns. Wider preference-erosion concerns In terms of improved market access in the OECD countries, the area of greatest concern where there has been little substantive progress relates to the issue of preference erosion. This is increasingly being seen as an ‘aid for trade’ issue, where the main policy response will be support for diversification. With regard to long-standing preferences the ACP favours the option of a 10-year moratorium on tariff reductions, and has called for more support for technical assistance to address supply-side constraints and promote diversification in areas where preference erosion was a concern. In this context it should be noted that in May 2007 the Agriculture Chair Crawford Falconer argued that banana-sector issues, the major area of preference erosion, remained an issue essentially outside of the negotiating context. This position was reiterated in July 2008 when a side agreement on bananas was concluded, but was subsequently shelved with the breakdown of the overall negotiations. Yet preference erosion from an ACP perspective is not just restricted to bananas and affects a wide range of products, some of which ACP countries have diversified into to escape commodity dependency in other areas. However for the ACP the erosion of the value of preferences, resulting from the process of CAP reform, is of greater significance than the erosion of the margins of preference, which tends to be the focus at the WTO level. Given their past experience of EC assistance to banana, rice-, rum- and sugar-sector adjustments, ACP countries retain a deep scepticism as to the value of a purely aid-based response, in the absence of a thorough re-thinking of the purpose and modes of delivery of such external assistance. The then Trade Commissioner Peter Mandelson argued that the importance of the EU agricultural markets to African exporters requires a slower approach to tariff reductions in certain areas. However, given the EC tendency to focus on the erosion of the margins of ACP preferences rather than the erosion of their value, it is an open question as to whether this will help to address ACP concerns or simply allow the EU more time to implement its own internal reforms in the sugar and banana sectors. Banana-sector concerns The agreement negotiated on the fringes of the July 2008 ‘mini-ministerial’ designed to finally lay to rest the WTO banana dispute called for:   a tariff of €116 per tonne, a big cut from the existing tariff of €176 per tonne’;  an initial tariff cut of €26 per tonne in the first year (from January 1st 2009), a further cut of €9 per tonne in the second year (from January 1st 2010) and then a €5 cut in each remaining year to 2015 (to reach €116 per tonne by January 1st 2015). delay in implementation of MFN tariff reductions over the period until 2015 in order to allow ACP banana producers to adapt; 107 January 2009 Executive brief WTO agreement on agriculture It was proposed that if this formula were accepted then ‘bananas will not be subject to additional cuts in the Doha Round’ and both sides would agree a ‘peace clause which will commit them to not reopening the issue’. The Trade Commissioner however stressed that resolving the banana dispute ‘must be part of a final Doha deal’. Indeed, according to press reports he went so far as to argue that directorgeneral Lamy’s proposal was made ‘on a take-it-or-leave-it basis’ and that ‘if it was not accepted there would be no accord on trade in tropical agricultural products and so no wider WTO accord’, thus ‘if others wanted to reject it, then they had to take responsibility for the failure of the whole Doha Round’. In response to this development, ACP representatives described the Lamy offer as ‘an unacceptable threat to its producers’, since it would give ‘undue advantage to the Latin American producers’ and ‘deal a lethal blow to the ACP banana industry’. In contrast Latin American diplomats said ‘we are positive we can agree something. We are very close but not yet there’. Press reports suggested that some Latin American banana suppliers were looking for a deeper initial cut (down to €141 per tonne) and falling to €109 per tonne by 2014. ACP representatives for their part suggested a slower phase-down (a two- to three-year grace period) and increased financial compensation would probably be needed to reach an agreement. These discussions however became academic following the collapse of the ‘mini-ministerial’ at the end of July 2008, and the EC’s withdrawal of the offer which it had previously endorsed. However following the WTO appellate body’s ruling on bananas this package would appear to be back on the table, albeit within the context of a wider WTO deal. In response to this situation the ACP group has argued that the EU should not go beyond what was placed on the table in July 2008. Indeed the ACP advocate maintaining the initial reduction for a period of years and back-loading subsequent tariff reductions, reaching a level of €116 per tonne only in 2019 (rather than 2015). The ACP have also called for binding new commitments on financial assistance for banana-sector restructuring through the extension of the ‘Special Framework of Assistance’ programme for a further five years (2009-2013), with the ‘establishment of simple disbursement mechanisms that facilitate the rapid release of EC funding on January 1st of each programme year’. The elements of a possible long-term agreement to the banana dispute are now thus all on the table awaiting an appropriate moment for their consolidation as part of a wider package of agreements linked to the outcome of the Doha Round. Sugar-sector concerns In the sugar sector the ACP have called for the EU to designate sugar as a ‘sensitive product’ in the WTO negotiations. However addressing sugar-industry representatives in May 2008 Agriculture Commissioner Mariann Fischer Boel noted that treating sugar as a sensitive product, while allowing lower tariff reductions, would require the EU to establish a tariff-rate quota for sugar imports of between 485,000 tonnes and 675,000 tonnes. She noted that such a tariff-rate quota was not taken into account in the reform of the EU sugar regime and so the EC ‘would have to take further steps to keep our market in balance’. It was not indicated what these steps might be but she warned industry representatives to ‘assume that you will be affected and make your voice heard’ in the run up to the 2013 round of CAP reform. What is clear is that the outcome of the WTO negotiations with regard to ‘sensitive products’ and ‘special safeguard measures’ will determine the EU’s approach to the sugar sector as part of the 2013 round of CAP reform. This is undoubtedly an issue of concern to those ACP sugar exporters which could potentially maintain raw-sugar exports to the EU after the current round of EU sugar-sector reforms, but would struggle to maintain such exports were the EU sugar price to fall still further. 108 3.4 Other issues January 2009 Executive brief WTO agreement on agriculture 3.4.1 The cotton initiative Subsidisation of cotton production in some OECD countries, leading to a destruction of livelihoods in many developing countries, provides a stark example of an issue where the WTO (and also the World Bank, the IMF and the OECD) are potentially in conflict with the policies of the USA and the EU. Whereas the ACP has some of the lowest-cost cotton producers in the world (especially Benin, Mali, Burkina Faso, Uganda and Tanzania), the world’s highest-cost cotton producers are probably in the EU (Greece and Spain, where costs are three times the world price), along with the USA, Syria and Israel. The USA accounted for 63% of world cotton subsidies and 40% of world cotton exports in 2002/03. The EU, although accounting for 18.5% of world cotton subsidies, plays a much smaller role in world cotton production and trade. Overproduction of cotton has caused cotton prices to halve since 1996/97, and real prices in the USA are probably one-fifth what they were in the 1950s. Although the rise of synthetic-fibre production has been partly responsible, it is widely recognised that market intervention by developed countries has also been a major factor in this decline. The EU Council agreed in 2004 to reform of the cotton sector involving a decoupling of 65% of payments from production. The 2008 CAP ‘health check’ gave a further stimulus to this process of decoupling of agricultural aid payments from production. The 2004 reforms also saw a restriction on the area eligible for financial support. However it is unlikely that this will be enough to transform the long-term situation for ACP producers. Policy reform in the USA and the question of compensation for African cotton producers adversely affected by OECD subsidy policies remain to be resolved. The July 31st 2004 framework agreement included a section on cotton, committing the WTO to appropriate prioritisation of reform of the cotton market, and promising a sub-committee on cotton, which was duly established on November 19th 2004. In the run up to the Hong Kong Ministerial, the Africa group submitted a revised proposal for addressing cotton issues. However, the discussions in Hong Kong between the C4 (Chad, Senegal, Benin and Burkina Faso) and the US delegation did not go very far. The final declaration merely reiterated the earlier commitments of the July framework, with no substantial progress on domestic support, which in the case of the US cotton sector is by far the most trade-distorting element. A special high-level session on cotton was held in March 2007, where it was agreed that a breakthrough was needed, particularly in removing blockages on development assistance. In a meeting with the ministers responsible for trade from Mali and Burkina Faso on February 6th 2008 the Trade Commissioner reiterated the EU’s support for African positions in the cotton dispute, describing cotton as a development priority in the Doha Round. In an accompanying memorandum the EC noted that the ‘subsidisation of cotton exports by developed countries has a disastrous effect on prices’ for African cotton producers and called for ‘the elimination of all forms of export refunds’ on cotton. The memorandum notes that under EC aid programmes since 2004 ‘more than €260 million has been allocated to cotton programmes and projects’. However, African governments claimed that aid for cotton-sector adjustments was not available, while donors claimed that the aid was there but suitable requests were not forthcoming. According to the WTO director-general ‘there’s something wrong and there’s something we have to discover’. Cotton issues were never discussed at the July 2008 WTO ‘mini-ministerial’ as the negotiations broke down over the preceding agenda item on the special safeguard mechanism. It was acknowledged by the Agriculture Chair Crawford Falconer following the breakdown that cotton was one of the ‘questions that could have prevented agreement’. 109 While currently in the December 6th 2008 text the proposals made by the C4 remain the basis for the text on cotton, it is clear that these proposals are unacceptable to the USA as they stand, since they would mean a very marked reduction in cotton subsidies to US producers. The WTO director-general Pascal Lamy has however reiterated his view that ‘cotton is the decisive test for commitments to development made in the Doha Round’. Despite this, analysts believe that the level of divergence on cotton issues is such that any attempt to reach agreement is likely to fail. January 2009 Executive brief WTO agreement on agriculture 3.4.2 Geographical indications An important non-trade concern of the EU is to secure WTO acceptance of designations of geographical origin (or geographical indications – GIs). This involves securing international recognition of the right to protect the use of common names and other designations linked to geographical origin beyond that already extended to wines and spirits. EU policy in this area aims to:  guarantee effective protection against usurpation of names in the food-and-drinks sector through the establishment of a multilateral register of GIs;  protect the right to use geographical denominations or appellations of origin, involving in some cases a clawback of certain names now used generically;  guarantee consumer protection and fair competition through regulation of labelling. This forms an integral part of the EU’s efforts to shift the focus of agricultural production from bulk commodities to value-added products. Indeed the EC has expressed the belief that ‘commercial opportunities arising from restricting the use of names associated with particular places could help compensate their agricultural producers for subsidy and tariff cuts’. This acknowledgement of the link between greater recognition of EU GIs and the wider EU position has underpinning it an implicit recognition of the central thrust of EU agricultural policy, namely shifting EU agricultural production, towards serving the ‘luxury purchase’ component of the EU market (and globally), where consumer purchase decisions are taken on the basis of quality considerations not simply price considerations. It is this trajectory for EU agricultural production, alongside the emphasis in the EU’s rural-development policy on creating nonfarming-based income opportunities in rural areas, which will over time create space in the EU market for increased volumes of agricultural imports. These will not, however, enjoy the higher price margins which were a feature of EU agricultural markets under the old CAP. The experience of South Africa, in the wines-and-spirits sector, suggests that the EU's emphasis on appellations of geographical origin could result in serious problems for developing-country producers in certain food-and-drink products whose common names are widely used and recognised, although originally linked to geographical areas of the EU. Conversely certain ACP countries could have an interest in securing international recognition of certain GIs, for example Jamaican ‘Blue Mountain’ coffee or Guyanese ‘Demerara sugar’. Although it is by no means certain that small developing countries would have a strong enough commercial interest to legally pursue and protect such exclusive rights. With a number of countries opposed to EU proposals in this area, including the USA, Canada, Australia and New Zealand, this EU position remains a contested area. 3.4.3 Net-food-importing developing countries and the food price crisis Reform of agricultural support in developed countries should, if it is meaningful, allow worldmarket prices of some commodities to rise towards a level closer to the cost of production; this should benefit efficient producers, including those in developing countries. However, LDCs, and especially net food-importing developing countries (NFIDCs) may suffer. 110 In the ‘Decision’ on NFIDCs as part of the WTO agreement, the ministers agreed: January 2009 Executive brief WTO agreement on agriculture ‘[…] to establish appropriate mechanisms to ensure that the implementation of the results of the Uruguay Round on trade in agriculture does not adversely affect the availability of food aid at a level which is sufficient to continue to provide assistance in meeting the food needs of developing countries, especially least-developed and net food-importing developing countries. To this end ministers agree:  to review the level of food aid established periodically by the Committee on Food Aid under the Food Aid Convention 1986 and to initiate negotiations in the appropriate forum to establish a level of food-aid commitments sufficient to meet the legitimate needs of developing countries during the reform programme;  to adopt guidelines to ensure that an increasing proportion of basic foodstuffs is provided to [LDCs and NFIDCs] in fully grant form and/or on appropriate concessional terms in line with Article IV of the Food Aid Convention 1986;  to give full consideration in the context of their aid programmes to requests for the provision of technical and financial assistance to [LDCs and NFIDCs] to improve their agricultural productivity and infrastructure. Ministers further agree to ensure that any agreement relating to agricultural export credits makes appropriate provision for differential treatment in favour of [LDCs and NFIDCs] […]’. The July 31st 2004 framework agreement reiterated the importance of ensuring that the needs of NFIDCs are met, and in a context of rapidly rising global food prices their concerns can be expected to be given greater prominence. Analysis commissioned by the ICTSD has suggested that ‘elements of the Doha Round could have a lasting positive impact on aligning domestic agricultural production with international markets’, but notes that ‘the exceptions, flexibilities and diminishing ambition are threatening the potential benefits of the Round while allowing some trade-distorting practices in global agriculture to continue unchecked’. It points out that while the Lamy package in domestic support reductions would have established ceilings ‘nearly twice the level of projected (and current) outlays’, it ‘would have provided a significant guarantee against future increases in domestic farm payments’. The analysis acknowledges that ‘the disciplines on subsidies leave much to be desired’ and that the concerns over disciplines on domestic agricultural subsidies are compounded by the ‘lack of clarity on the treatment of biofuels’. The ICTSD analysis argued that by making direct aid payments WTO compatible, the proposed agreement would have allowed OECD producers ‘to continue to overproduce’, a development which would ‘serve as a disincentive for developing-country production of key crops’. Yet conversely this measure by promoting ‘overproduction’ would serve to contain the price pressures, which raised such concerns in ACP NFIDCs. The issue is however complicated, with the dismantling of EU public-intervention mechanisms creating space for financial speculation in basic agricultural food commodities, given the absence of the moderating influence of publicly held stocks on price-related speculation. 111 Executive brief June 2008 Executive brief CAP reform CAP reform Table of contents 1. The scope of the common agricultural policy _________________________________ 115 2. The CAP reform process __________________________________________________ 116 2.1 The CAP ‘health check’_______________________________________________________ 117 2.2 Situating reform: implications for the WTO ______________________________________ 118 2.3 From quantity to quality ______________________________________________________ 120 2.4 The growing role of rural development __________________________________________ 122 June 2008 2.5 The overall aim of CAP reform _________________________________________________ 124 3. The CAP and ACP-EU agricultural trade_____________________________________ 125 3.1 The CAP and traditional ACP preferences _______________________________________ 125 3.2 An overview of the effects of CAP reform ________________________________________ 126 3.3 ACP exports ________________________________________________________________ 126 3.4 ACP imports________________________________________________________________ 130 3.5 A policy response to increased EU export-price competitiveness _____________________ 135 113 Summary June 2008 Executive brief CAP reform This executive brief reviews the scope of the CAP: its basic structure, product coverage, objectives and evolution since 1992. The review of the CAP reform process highlights:  the shift in policy emphasis from the quantity of EU agricultural production to the quality of EU agricultural and food products and the different aspects of the ‘quality’ dimension;  the growing role of rural-development policy and instruments within the CAP and its interface with wider processes of CAP reform;  the link between the CAP-reform process and EU positions in agricultural negotiations in the WTO, particularly the relationship to the ultimate aim of bringing EU agricultural prices down towards world-market price levels. The section on the impact of CAP reform on ACP-EU agricultural trade focuses on:   the impact of CAP reform on the value of traditional ACP trade preferences;  the importance for ACP authorities and private-sector operators of getting to grips with the food-safety challenge and the increasing costs of accessing the EU market;   the trends in EU exports of agricultural and simple value-added food products to ACP markets; the need for ACP exporters to respond proactively to changes within EU markets for food and agricultural products; the importance of developing an effective policy response to the competitive challenges this poses and the necessity for this to encompass a value-chain analysis if it is to support the development of local value-added agricultural and food-product production in ACP countries. 114 1. The scope of the common agricultural policy June 2008 Executive brief CAP reform Ensuring adequate supplies of food for EU countries in the context of the immediate post-war experience of food shortages and the ongoing cold-war confrontation with the Soviet Union had a strong bearing on the early evolution of the common agricultural policy (CAP). In the early years the focus was very much on ensuring European food supplies, with high prices stimulating production. This led to the establishment of a regime consisting of:  price-support systems, such as intervention prices, minimum grower prices, etc, to stimulate production;  tariff protection to protect domestic markets and sustain internal prices;  market-support mechanisms, such as storage and withdrawals to deal with surpluses which emerged as production was over-stimulated;  export refunds to assist in clearing markets of surplus production. Trade relations were thus an integral part of the CAP regime. Under the old CAP the basic objective was to increase the ‘productivity of agriculture’, ‘promote a fairer standard of living for farmers and achieve market stabilisation. In many respects this policy proved remarkably successful, particularly with regard to productivity increases and market stabilisation. The CAP did not cover all agricultural products, but only those which, by mutual agreement of the EU member states, are subject to the common organisation of the EU market. Currently the following product groups are subject to common organisation of the market (CMO): Products falling under the CAP Arable: Meat and dairy: cereals sweet lupins peas field beans beef and veal animal feed stuff cotton hops sugar milk and milk products fibre flax and hemp olive oil rice dried fodder pig meat flowers and live plants tobacco seed honey poultry meat and eggs fruit and vegetables seed flax cotton oilseed silkworms potatoes wine sheep meat and goat meat In addition to the products formally falling under each CMO there were ‘many agricultural products and goods which do not benefit from these mechanisms, but may benefit from customs protection’ and specific production assistance. Furthermore there were so-called ‘non-annex I’ products, which are composite products formed from basic agricultural raw materials falling under the CAP, which were subject to ‘specific import and export arrangements’. Finally, there were some products such as potatoes, which although not subject to a CMO, were subject to marketing standards. This can have a bearing on patterns of exports of these products to African markets. Under this system high prices suppressed domestic demand and stimulated ‘surplus production’, so this began to put heavy financial burdens on the public purse. With the benefit of export refunds it also gave rise to the ‘dumping’ of surplus basic agricultural commodities on third-country markets, a policy which led to substantial international protests and concern over its longer-term development consequences. 115 June 2008 Executive brief CAP reform Evolution of CAP expenditures: increased spending and a declining role for export refunds and storage costs Total Export refunds Storage costs € million € million % € million % 1989 24,084 9,708 40.3 2,804 11.6 1990 24,936 7,722 31.0 4,097 16.4 1991 30,551 10,080 33.0 5,602 18.3 1992 30,350 9,487 31.3 5,267 17.4 1993 33,659 9,999 29.7 5,358 15.9 1994 32,205 8,075 25.1 1,070 3.3 1995 34,492 7,802 22.6 339 1.0 1996 39,108 5,700 14.6 1,392 3.6 1997 40,423 5,884 14.6 1,597 4.0 1998 38,748 4,826 12.5 2,008 5.2 1999 39,541 5,573 14.1 1,568 3.9 2000 40,467 5,646 14.0 951 2.4 2001 42,083 3,400 8.1 1,060 2.5 2002 43,214 3,432 7.9 1,162 2.7 2003 44,461 3,730 8.4 928 2.1 2004 44,761 3,384 7.6 322 0.7 2005 48,928 3,052 6.2 *852 1.7 2006 49,865 2,494 5.0 757 1.5 * Reflects difficulties in getting grain to market in new member states Source: extracted from ‘Agricultural situation in the European Union’, Annual reports, Table 3.4.4. 2. The CAP reform process While elements of this old system remain in place, fundamental reform has been under way since 1992, accelerating in 2000 and 2003 and subject to a ‘health check’ in 2008 (with other reforms being introduced in between these major rounds of reform on an almost continuous basis). Traditionally under the old CAP little attention was paid to the sustainability of the resulting patterns of agricultural production, food-safety issues, or the external effects of EU surpluses. It was only following the changes in the global context that issues of wider concern began to find their way onto the EU’s agricultural policy agenda, with these issues taking on increasing significance over time. The roots of the fundamental reform can be traced back to 1991, when the escalating cost of the CAP created a financial incentive for reform. However, the importance of this factor should not be overstated, since the process of reform has required a substantial expansion of CAP expenditures, as the cost of supporting EU farming has been shifted from consumers (via high prices) to the public purse (through direct aid payments). A more critical factor in the reform process was the end of the cold-war confrontation in Europe, which removed the imperative for food selfsufficiency. Alongside this the impending conclusion of the Uruguay Round of multilateral trade negotiations was seen as creating opportunities for a new more market-oriented EU agricultural policy (albeit based on higher levels of public funding via direct aid to farmers). These considerations encouraged EU policy-makers to ‘bite the bullet’ of reform in 1992, with the ‘McSharry reforms’. As a consequence of this reorientation of EU agricultural policy since 1992 a fundamental shift in the nature of the CAP has been under way. This can be divided into three overlapping phases: Phase I a shift from price support to direct aid to farmers; Phase II a partial shift from direct aid to farmers linked to production, to area payments, and subsequently to historical payment obligations, progressively ‘decoupled’ from production; a complete shift to non-production-related farm assistance (full ‘decoupling’) across all CAP-covered products. Phase III 116 This has involved a shift to ‘higher direct aid payments to farmers [to] offset lower guaranteed prices’. An explicit aim of the move to higher direct aid payments is to allow prices to fall towards world market price levels. This was achieved by introducing direct aid payments to farmers to ‘compensate’ for the impact of reductions in the intervention price (which supported market prices) on farm incomes. This process has been progressively extended to more and more crops, where it has served to:  boost consumption; June 2008 Executive brief CAP reform  reduce the gap between EU and world market prices;  reduce ‘surpluses’ (by boosting domestic consumption and export possibilities). Since the 1992 reforms the system of direct aid payments has been further reformed to progressively remove the link between EU direct aid payments and levels of production. This process, which has intensified since 2003, is referred to as ‘decoupling’. The principal vehicle for this is a shift to a single-payment scheme (SPS). In the course of 2007 all sectors subject to the CAP were brought under the ambit of the SPS, although in certain sectors coupled payments were partially maintained. This has largely completed the process of replacing 21 separate regimes for agricultural products with a single CMO. At the time of the launching of this proposal in December 2006 it was argued that ‘the creation of a single CMO will slim down legislation in the farming sector, improve its transparency and make the policy more easily accessible’. The aim of this reform is to have a CAP covered by just four main Council acts: ‘those on the single CMO, the direct aid regime, rural development and the financing of the CAP’. This process of moving over to a single-payment scheme is in the process of being consolidated by the tabling of a range of proposals under the CAP ‘health check’. 2.1 The CAP ‘health check’ On May 20th 2008 formal proposals were tabled to the EU Agricultural Council containing ten major measures to ‘further modernise, simplify and streamline’ the CAP, with the aim of removing ‘remaining restrictions on farmers to help them respond to growing demand for food’. The measures proposed include:  the abolition of set-aside, which currently requires arable farmers to leave 10% of their land fallow;  the phasing-out of milk quotas through five annual increases of 1% between 2009/10 and 2013/14;  the full decoupling of farm support so all remaining production linked payments (except suckler cow, goat and sheep premia) are integrated into the single-payment scheme;  giving member states the possibility of moving away from historical payments towards a flatter system, so as to remove historical anomalies in the level of farm payments by region;  an extension of the single area payment scheme in ten of the twelve new member states beyond 2010 to 2013;  simplification of cross-compliance standards, whereby farmers receive aid in exchange for meeting environmental, animal welfare and food quality standards;  the introduction of greater flexibility in providing ‘assistance to sectors with special problems’, within the 10% national budget ceiling allowed to member states;  progressively increasing the level of ‘modulation’ from 5% to 13% by 2012, thereby reducing direct aid payments to larger farmers, so as to free money for rural-development measures ‘in the field of climate change, renewable energy, water management and biodiversity’; 117  the abolition of intervention buying for durum wheat, rice and pig meat, the establishment of intervention at zero for feed grains (but retaining the system in case of need) and the introduction of tendering arrangements for bread wheat, butter and skimmed milk, so as to increase farmers’ responsiveness to market signals; June 2008 Executive brief CAP reform  the establishment of ‘a minimum payment per farm of €250, or for a minimum size of 1 hectare or both’; Presenting the proposals to the EU Agricultural Council, the Agriculture Commissioner Mariann Fischer Boel sought to place the ‘health check’ in context. She argued that there was no need to micro-manage European farming, since ‘even the best administrators can’t second guess the world’s needs for farm products – or allocate resources efficiently to meet those needs’. However she equally rejected the idea that it was time to simply abolish the CAP. ‘The market has a very important role to play, but left to itself, it will not care for our landscapes or respond to other public demands’, she argued. She concluded ‘if we strip farming of all defences against occasional crises, we gamble with our food supply’. The CAP ‘health check’ ‘must clear away obstacles which are hindering farmers’ responses to market signals … must make our support systems more effective, efficient and simple – and more consistent with competitiveness … must help farms and other country businesses to meet various developing challenges, such as climate change’. The overall package ‘will move us further along the road of competitive and sustainable farming – that can respond to demand and be part of the solution to the broader challenges that the world faces’. 2.2 Situating reform: implications for the WTO This process of shifting from price support to direct aid, by narrowing the gap between EU and world market prices has also had implications for agricultural trade policy: it has reduced the need for the EU to use protective tariffs and deploy export refunds and thus allows the EU to contemplate substantial tariff reductions and accept the eventual abolition of exports refunds (by 2013). The process of reform however also ‘marks the limits’ of the EU’s negotiating position in the WTO. As the Agriculture Commissioner has unequivocally stated ‘we will not allow the Doha Round to be the main driver of our domestic policy for farms and rural areas in the years ahead’. While the EC has a degree of flexibility in the WTO negotiations it is limited, but the extent to which the process of CAP reform is doing away with the need for such policy tools as export refunds has been acknowledged by the EC. Commissioner Fischer Boel has argued that regardless of the outcome of the Doha Round, the EU should do away with export refunds. This is held to be the case since the export-refund policy tool is no longer relevant in an era of a single agricultural regime supported by a single-payment scheme, since such an arrangement leaves farmers free to adjust their production to what the market requires, rather than the prerequisites of production-tied agricultural-support systems. The 2003 CAP reforms and the 2008 CAP ‘health check’ represent a firm shift to decoupled payments and are designed to allow full decoupling in the 2013 round of CAP reform. In the majority of agricultural commodities this has now eliminated the link between payments to farmers and the area sown or the volume of production of any particular crop. The implementation of phase II and the transition towards phase III are designed to:  allow further reductions in tariffs in certain sectors;  further reduce the need for export refunds;  reduce the EU’s dependence on WTO-constrained forms of domestic agricultural support, by moving a proportion of EU agricultural support from the ‘blue box’ to the ‘green box’. The aim is to allow the EU to ‘park’ the bulk of EU farm support securely in the ‘green box’ where it will be free from any WTO disciplines. 118 June 2008 Executive brief CAP reform The changing basis of direct aid payments The basis of the direct aid payments made to EU farmers under the various phases of reform has evolved considerably. Initially, compensation payments were based on the volume of production. This was subsequently shifted to area-based payments, with regional-specific multipliers being used to take account of variations in yields. The final stage of this process is the shifting over to a single farm-payment scheme, which covers a large number of products and which is nominally ‘decoupled’ from production – that is it is no longer linked to the production of specific products or the area sown. However it needs to be borne in mind that to date these decoupled payments are based on historical eligibility for support payments (with a reference period of 2000-02), which were based on area, and before that on the level of production. The CAP ‘health check’ however now proposes allowing EU member states to move away from historical payments towards a flatter system. This, alongside the introduction of full decoupling (except for suckler cows, and the goat and sheep premia) is designed to remove any specific productionrelated basis for the single-payment scheme, thereby ensuring its compatibility with WTO rules on nontrade-distorting forms of support. Herein lies the significance of the basic CAP-reform process: it will allow the EU to maintain systems of farm support to achieve wider policy objectives without falling foul of WTO rules. EU Agriculture Commissioners have repeatedly defended the EU’s ‘sovereign right’ to pursue these broader policy objectives provided it does so in ways which do not distort trade. The progressive implementation of this three-phased process of CAP reform does not mean that the EU has been able to dispense entirely with the traditional forms of agricultural support, such as export refunds. The EU continues to use this policy tool where the market circumstances so require. Indeed, the strengthening of the euro against the US dollar since the turn of the century has created some difficulties in terms of attaining the EU’s underlying objective of attaining parity between EU and world market prices. This has on occasion required an expansion of the budgetary allocation to export refunds, despite sustained efforts to remove the need for the deployment of such policy tools, given their clearly trade-distorting nature. Subsequent increases in world market prices however have allowed refunds to be set at zero across a range of sectors and for publicly owned intervention stores to be largely emptied. These high prices have even allowed the setting of import duties on a range of cereals at zero. It should be noted that setting export refunds and tariffs at zero is quite different from dismantling the system of export refunds and tariff protection. Setting them at zero, while retaining the policy tools in place, allows the level of support or protection to be increased in future should market circumstances so require, in order to maintain stability on EU markets. This policy nuance would appear to be an important one for ACP governments to note when negotiating tariff removal in sensitive agricultural sectors. This shift in how EU agricultural support is organised needs to be seen against the backdrop of two wider policy trends, namely:  changes in market demand within the EU and globally and the associated growing emphasis on the quality rather than quantity of agricultural production;  the strengthening and extension of the rural-development pillar of the CAP, with rural development no longer being seen as synonymous with the development of agricultural production. 119 The single-payment scheme Under the SPS the single payment will be made once a year and will replace most existing productspecific direct aid payments. The national allocation to the single farm-payment scheme consists of the aggregation of the maximum that each state could spend on direct aid payments during the agreed historic reference period. June 2008 Executive brief CAP reform Payments will be made to any farmer actively farming at the date each member state introduces the scheme. Farmer entitlements will be defined by the entitlements that the farmer enjoyed during the reference period (normally 2000-02, although there are variations). ‘Each entitlement is calculated by dividing the reference amount by the number of hectares which gave rise to this amount in the reference years’. Eligible hectares include all types of agricultural land except land used for permanent crops and forestry. ‘Farms may produce all crops with the exception of permanent crops, fruit and vegetables and potatoes’. This payment is linked to cross-compliance with various conditions, linked to land management, good agricultural practices and environmental considerations. Member states have various options as to how they calculate and make payments. This can be based on individual farmers’ receipts during the reference period or averages for the region or the state. During the transition period coupled payments may under certain conditions be maintained (so-called ‘partial decoupling’). All payments made were reduced by 3% in 2005, 4% in 2006 and 5% in 2007, under the principle of ‘modulation’, which is designed to free funding for wider rural-development activities (the CAP ‘health check’ proposes to extend ‘modulation’ to 13% of direct aid payments by 2012). According to the EC the SPS ‘provides stable support allowing farmers to produce to market demand and to plan for the future’. 2.3 From quantity to quality There are now two distinct components to the EU market: ‘necessity purchases’ and ‘luxury purchases.’ ‘Necessity purchases’ are those products where purchase decisions are made exclusively on the basis of price considerations. For ‘luxury purchases,’ in contrast, purchase decisions are not primarily based on price, but on some perceived ‘quality’ attributes of the product. According to an EC-funded study, the EU’s underlying demographic means that there will be no expansion of overall demand for food and agricultural products in the coming period. Rather, as EU citizens become more affluent, patterns of food consumption will change, with consumers increasingly favouring high-quality products and convenience foods (‘luxury purchase’ products). These luxury purchase products are less prone to price declines and tend to face stable or buoyant price trends. In contrast, in the face of a progressive liberalisation of imports of basic agricultural products, it is expected that prices of undifferentiated agricultural commodities in Europe (‘necessity purchase’ products) will fall in real terms in the coming years. It is against this background that an increasingly important component of the CAP is the effort to shift European food and agricultural production from quantity to quality, from serving ‘necessity purchase’ markets to serving ‘luxury purchase’ markets. For the EC, progressively shifting European production from bulk commodities to differentiated higher-quality products, for local, national, European and international markets, is now a fundamental aspect of the new CAP. Agriculture Commissioner Mariann Fischer Boel elaborated on this point in October 2005 when she pointed out that the emergence of strong new players on world markets was setting entirely new standards for productivity and generating fierce competition. In this context she argued that ‘competing on product quality is not an optional extra ... [but] … essential to our strategy in the future’. This point was repeated by Trade Commissioner Mandelson in the UK on February 27th 2006, when he told UK farmers that shifting to the production of ‘high-quality, value-added goods’ was essential since ‘Europe simply cannot compete in the long run with third-country producers in Brazil, Argentina or elsewhere’. 120 This is why quality considerations are now being placed at the centre of the CAP with ruraldevelopment policy instruments being designed to assist this shift to quality production. Indeed a strengthened and extended rural-development policy can be seen as the critical second plank of the new CAP, alongside the single-payment scheme. However, using rural-development spending to support this objective is by no means a simple process, with a 2006 Court of Auditors report on the effectiveness of rural-development investment measures finding that insufficient attention was being paid to ‘what was financed and what was achieved’. June 2008 Executive brief CAP reform 2.3.1 Geographical indications Other aspects of EU policy are also supportive of this transition, however, for example the EU policy on geographical indications and geographical designations of origin. This is why so much importance is attached to securing through the WTO an international regulatory framework which recognises geographical designations of origin and geographical indications. This broadens the commercial value of these exclusive product designations beyond the EU to global markets. Internal EU financial support to meeting quality standards Addressing EU agriculture ministers in May 2003 on the importance of quality standards within a reformed CAP, then Agriculture Commissioner Franz Fischler noted that ‘these quality marks often entail higher costs or lower yields’ and that these ‘have not always been adequately compensated by the market’. Therefore he argued that ‘producers who are willing to sign up to such quality rules should continue to benefit from public funding’. On this basis, support for quality products forms an integral part of the CAP, with four forms of assistance being envisaged:   a scheme to help farmers introduce the new and exacting standards;   a five-year scheme to support farmers’ participation in certification programmes; a scheme to promote animal welfare, with those who farm better than the normal good-husbandry standard receiving permanent aid to compensate for the costs and income foregone; a scheme for the advertising of quality-labelled products by producer groups. The Commissioner argued that efforts to improve quality would no doubt affect production costs and WTO members should recognise this and allow support to be extended in order to compensate for these higher costs or lower revenues. Above and beyond these specific instruments, an element of the costs arising on-farm from meeting higher EU standards is built into the various direct aid schemes the EU has introduced. In addition, at the level of the food-processing enterprise, provision is made under rural-development programmes for support to investment in enhancing ‘competitiveness’, including through meeting higher EU food-safety standards. It is against this background that a case can be made for the EU to assist ACP producers in meeting EU food-safety standards, since otherwise the associated costs could greatly reduce the attractiveness of supplying the EU market, particularly in a context where the prices of basic commodities are falling. Source: speech by then Agriculture Commissioner Franz Fischler (SPEECH/03/238-13/05/2003) http://europa.eu.int/rapid/start/cgi/guesten.ksh?p_action.gettxt=gt&doc=SPEECH/03/238|0|RAPID&lg= EN&display= 2.3.2 Food safety A final, separate yet closely related, aspect of the shift away from quantity to quality production is the growing emphasis placed on food safety. Since 2000 the EC has been working on a comprehensive new policy designed to guarantee food safety ‘from farm to fork’. This involves the adoption of an integrated approach covering all sections of the food chain, including feed production, primary production (on the farm), food processing, storage, transport and retail sale. While in many of its specific measures this policy is a response to a series of high-profile food-safety scares (BSE/CJD and the dioxin crisis in Belgium) it is also part of wider EC efforts to shift the focus of EU agricultural production away from quantity to quality. 121 Encouraging this shift has required the elaboration of a range of new EU agricultural-policy instruments. These range from specific target programmes to support producer organisations and quality schemes (particularly in the fruit-and-vegetable sector), through the introduction of crosscompliance conditionalities linked to direct aid payments, to the deployment of rural-development funding in support of measures to modernise agricultural processing and enhance competitiveness. June 2008 Executive brief CAP reform The implications of this shift from quantity to quality will need to be carefully assessed by ACP governments and agriculture-based private-sector enterprises in developing future agricultural trade relations with the EU. 2.4 The growing role of rural development Since 1995 there has been a strengthening of the rural-development pillar of the CAP. However a qualitative change occurred in 2000 when a dedicated financial allocation was included in the budget. The twin aims of the EU’s rural-development policy are to enhance the competitiveness of the EU food-and-agricultural sector and to encourage the development of non-agricultural activities in rural areas. This policy emphasis on rural development was further strengthened by the 2003 round of CAP reforms, which introduced the concept of ‘modulation’ and the inclusion of new areas within the rural-development concept. Under the modulation concept, funds paid to large farms were to be capped, with payments being progressively recouped for redeployment in support of broader ruraldevelopment objectives. In terms of the extension of the scope of rural-development policy new chapters were introduced in the regulation dealing with food-quality assurance-and-certification schemes, and support to producer groups for the promotion of products produced under these schemes (including geographically designated and organic products) – thereby strengthening the policy emphasis on quality over quantity. Since 2003 the rural-development policy has been subject to a comprehensive review, including the consolidation of all rural-development funding under a single instrument – the European Agricultural Fund for Rural Development (EAFRD). Under the new policy approved by the EU Council in September 2005 rural-development activities are organised around four axes (see box below). While a minimum of 10% of rural-development funding is nominally targeted to improving the competitiveness of the EU food and agricultural sector, in reality an average of some 37% of total rural-development funding made available from the public purse for the period from 2007 to 2013 has been allocated to measures explicitly designed to enhance the competitiveness of enterprises in the EU food and agricultural sector. This percentage of funding allocated to competitivenessenhancing measures rises to as much as 74% in the French overseas territories of the Caribbean, the areas of the EU with economic structures most closely resembling those of ACP economies. Rural-development spending 2007-13 (total and axis 1) May 2007 to April 2008 (€ millions) April 2008 Total Axis 1 (enhancing Axis 1 (% total) programme competitiveness) 142,152.5 52,709.7 37.08 Under the CAP ‘health check’ the EC has proposed a progressive expansion of ‘modulation’ in order to increase the money available for rural-development spending ‘in the field of climate change, renewable energy, water management and biodiversity’. The significance of EU ruraldevelopment policy in promoting structural change within the EU food and agricultural sector thus continues to grow. 122 The EU’s new rural-development policy and instruments Executive brief CAP reform The main features of the EU’s new rural-development policy are:  the creation of one funding instrument, the European Agricultural Fund for Rural Development (EAFRD);    the creation of a genuine strategy for rural development with focused priorities; strengthened controls and reporting; reinforcement of the ‘bottom-up’ approach to programme design and implementation. The new policy has four main axes:     improving the competitiveness of farming and forestry enterprises; improving environmental and land management; improving the quality of life and diversification of economic activities in rural areas; the extension of the existing LEADER programmes. June 2008 Under the first objective this may include support for: improving and developing infrastructure for the development and adaptation of agriculture and forestry; support to farmers’ participation in food-quality schemes; setting up young farmers; support to semi-subsistence farming in new member states. Under the second objective this may include support for: provision of natural handicap payments to farmers in mountain areas; agri-environmental measures; animal-welfare payments; support to NATURA 2000 programme activities. Under the third objective this may include support for: diversification into non-agricultural activities; the creation of micro-enterprises; the encouragement of tourism; village renewal. Throughout, emphasis is placed on local design and implementation of activities within the framework of locally developed strategies. Support to farmers and food-sector enterprises in meeting food-safety standards and promoting animal welfare also forms an important component of these rural-development programmes The new EAFRD will bring together all expenditures dealing with rural development. ‘Rural development is the key tool for the restructuring of the agricultural sector and to encourage diversification and innovation in rural areas’. The EC argues that ‘getting the restructuring process right is essential for macroeconomic growth’, with policy being designed to steer the process of reform towards ‘a higher value-added more flexible economy’. Rural-development policy is seen as playing a major role in all member states in promoting ‘competitiveness in the agricultural and food-processing sectors’. The significance of this should not be underestimated. The EU food and agriculture sector (including drinks) accounts for 19 million jobs in the EU27, equivalent to 9% of total employment. It is thus in value-added food-processing activities that the greatest scope for income and employment growth is to be found in the EU, rather than in the agricultural sector per se. It can thus be seen that the EU’s rural-development policy is not just about employment creation in the food-processing sector, it is also about supporting rural diversification. Indeed it was argued in the Scenar 2020 study that since 1997 agriculture is less and less the driving force of the rural economy in many regions and that in future ‘rural and agricultural policies need to be distinct’. Increasingly therefore agriculture is no longer seen as synonymous with rural development, but merely as one of the constituent elements (albeit an important one), within a much broader concept of the future of rural areas within the EU. The implications of this were rather bluntly stated by the Agriculture Commissioner in her speech to the informal EU Agricultural Council meeting in Mainz on May 22nd 2007 when she argued that there will be ‘increased diversity of the farming sector in the next ten years … the most competitive holdings will continue to specialise in very specific sectors, like for example high-quality food and renewable energies, while other holdings will concentrate on services’. 123 She maintained that ‘multifunctionality is already a feature of a large number of farms in Europe and this trend will probably deepen’. It was in this context that she stressed that in the deployment of public funding, EU policy should favour the provision of investment support instead of simple subsidies. It is this approach which lies behind the CAP ‘health check’ proposal to increase the scale of ‘modulation’, whereby direct aid payments are freed for redeployment to investment programmes in rural areas, under the rural-development instrument. June 2008 Executive brief CAP reform 2.5 The overall aim of CAP reform Under the European model of agriculture that this process of reform is promoting, prices will be progressively reduced towards world market price levels, as price support is replaced by programmes of direct aid to farmers that are increasingly decoupled from production. The deployment of this support will be linked to cross-compliance requirements and other measures designed to shift European food-and-agricultural production away from bulk commodities towards increasingly specialised and differentiated higher-value quality food products. In addition once this transition from price support to direct aid is under way in all sectors the EC will seek to extend the concept of ‘dynamic modulation’, so as to progressively reduce the real value of direct aid payments, and encourage more efficient cropping patterns in the various regions of the EU (shifting from subsidies to investment support). Over time this could lead to the concentration of individual crops in those areas most favourable to their production, with a consequent increase in average productivity and competitiveness. This would particularly occur as more marginal farming areas within the EU gradually go out of production. The ultimate aim of this reform process is to create a situation in which all internal EU prices are brought into line with international prices, with EU agricultural production feeding a globally oriented food-and-drink industry, increasingly specialising in high-value, quality food-and-drink products. This will take place within the context of increasingly diversified rural economies, with expanding employment opportunities outside of both agriculture and food processing (i.e. in a diversified service sector). If this transition can be brought about, this will result in a fundamental shift in the orientation of European agriculture. Agricultural policy will no longer be aimed at ensuring food security within the EU, with incidental surpluses being exported with the help of publicly financed export refunds. Instead it will be geared towards both the production of high-quality food products for ‘luxury purchase’ markets in the EU and globally, and towards providing the EU food-and-drink industry with access to world-market-priced raw materials, used in globally oriented, price-competitive value-added food-and-drink industries. This process is already substantially under way, with food and drink constituting the single largest manufacturing value-added subsector within the EU. However, it should be noted that this more competitive EU food-and-drink industry will remain dependent upon the continued provision of large, but more efficiently deployed, volumes of public aid to the basic system of agricultural production and in support of investment in upgrading products and following market trends. 124 Executive brief CAP reform The changing pattern of EU agricultural trade According to the EC analysis of the ‘Situation and prospects for EU agriculture and rural areas’, the EU’s ‘agri-food trade has significantly changed in recent years’. It continued: ‘Despite the decline of the EU export shares in many commodity markets (e.g. sugar, butter, SMP, cereals), the competitiveness of the EU has gradually and regularly improved in many agri-food sectors over the most recent years. In 2003, the EU overtook the USA as the world’s leading agricultural exporter. EU exports have further increased and in 2006 reached an unprecedented level of €72.5 billion. As a result the EU became a net exporter of agri-food products in 2006. For the first time since the introduction of the CAP, the EU agricultural balance was indeed positive, coming close to €4.5 billion. This reversal in the EU agricultural trade balance is all the more striking as it comes despite the strengthening of the euro and despite enlargement, which resulted in (mechanically) increased net agricultural imports. Since 2004 EU exports have grown faster than imports, hence the improvement in the trade balance.’ In particular final products (goods which are ready for final consumption) ‘dominate EU agri-food trade’ accounting for two-thirds of export sales. When the final-product trade is considered on its own ‘the balance is positive and has significantly improved in 2006. In other words the dynamism in final products is one key factor explaining the reversal in the EU agricultural trade balance’. This is entirely consistent with the objectives of a reformed CAP. June 2008 Source: ‘Situation and prospects for EU agriculture and rural areas’, AGRI G.2/BT/LB/PB/TV /WM/D(2007) http://ec.europa.eu/agriculture/analysis/markets/prospects12_2007_en.pdf 3. The CAP and ACP-EU agricultural trade 3.1 The CAP and traditional ACP preferences The EU’s traditional high-price policy required a highly regulated agricultural-trade regime to prevent cheaper world-market-priced products being sucked into the EU, so undermining domestic markets. The coverage of this external trade regime has always been more extensive than the CAP regime, since it extends to any products which potentially compete with EU CAP products, and value-added products produced on the basis of CAP-covered agricultural raw materials (e.g. litchi juice, which could compete with orange juice which falls under the processed fruit-and-vegetable regime). ACP countries benefited from this arrangement since under preferential trade arrangements they were allowed controlled access to these high priced EU markets. While not enjoying full duty-free, quota-free access for agricultural products (the basic principle of the ACP-EU trade arrangement) various systems of quota-restricted duty-free or reduced-duty access were established. The most prominent trade arrangements were the commodity protocols (the sugar protocol, the beef protocol and the banana protocol) and the provisions of Declaration XXII (the joint declaration concerning agricultural products referred to in Article 1(2)(a) of Annex V). This preferential access to high-priced EU markets generated high levels of ‘income transfers’ to those ACP agricultural producers benefiting from these trade preferences. (A calculation of the ‘income transfer’ can be made using a simple comparison between earnings derived from exports to the EU market under preferential arrangements and what could be earned if the same product were sold on the world market.) The most important of these was the sugar protocol, since this is where the greatest difference between EU and world market prices emerged. Thus while traditionally the CAP restricted the scope of the duty-free access granted to ACP countries for agricultural exports, it also enabled those benefiting from specific trade preferences to secure considerable extra income as a result of the high domestic prices maintained under the CAP. In this context for many years the ACP sat at the apex of a pyramid of EU agricultural trade preferences. With the initiation of CAP reform in 1992, the acceleration of multilateral trade liberalisation and the initiation of the EU’s free-trade-area policy from 1994 onwards, this began to change. 125 June 2008 Executive brief CAP reform Speaking in Japan in July 2002, the then Agriculture Commissioner, Franz Fischler, made it clear that the EU’s ultimate objective was to establish an EU agricultural system which ‘could be preserved without trade barriers’, by shifting from support for production to support for producers. This has profound implications for the agricultural trade preferences enjoyed by ACP countries and is resulting in the progressive erosion of the value of traditional ACP trade preferences. This is the background against which the EU’s decision to grant full duty-free, quotafree access to ACP exports (including food and agricultural products, except for rice and sugar for which special transitional arrangements have been established) under economic partnership agreements needs to be seen. 3.2 An overview of the effects of CAP reform Against this background from an ACP perspective, the multifaceted process of CAP reform is having a number of significant effects. It is:  making the EU market less attractive for basic agricultural exports, by substantially reducing EU market prices, thereby undermining the value of traditional trade preferences;  creating a more differentiated market, requiring ACP suppliers to make the shift from trading bulk commodities into the EU, to the marketing of differentiated products into specific parts of the EU market;  increasing the cost of placing goods on the EU market through the strengthening of EU foodsafety standards and control procedures;  enhancing the price competitiveness of EU exports, particularly simple value-added foods products. 3.3 ACP exports 3.3.1 ACP exports to the EU: the value of preferences As the EU moves from price support (which ensured high EU prices for basic agricultural products) to direct aid to farmers, so EU market prices of basic agricultural products have been allowed to decline. In a number of sectors this has had and is having a direct impact on the value of traditional ACP trade preferences. The process of CAP reform has seen beef prices paid to ACP exporters fall substantially, initially by 30%, as a result of the combined effects of CAP reform and the BSE crisis, and in the long term by 20% following a recovery in consumer confidence in beef, with consumption bouncing back to above pre-BSE levels. In the rice sector, the most recent round of reforms (2003) saw EU prices fall between 16% and 37% depending on the rice variety planted, although the surge in commodity prices saw a price recovery in 2006 and 2007 (albeit to levels below the pre-reform peaks). This saw prices offered for rice imports from Guyana and Suriname in 2004 some 24% below 2001 levels. Price range: EU market prices of rice (€ per tonne) 2001 Jan-May 2002 Jan-May 2003 Jan-May 2004 Jan-May 2005 Jan-May 2006 Jan-May 2007 Jan-May Italian roundgrain 300 - 333 296 - 300 280 - 283 224 - 239 185 - 189 224 - 262 245 - 288 Italian longgrain 301 - 316 303 - 308 281 - 286 270 - 277 165 - 190 221 - 235 240 - 250 126 Spanish mediumgrain 315 - 339 270 - 281 284 - 326 269 - 281 224 - 239 205 - 210 219 - 235 Spanish ‘indica’ rice 285 - 298 281 - 284 285 - 293 262 - 287 178 178 218 - 242 While the average price obtained for rice imported into the EU subsequently improved slightly, by 2007 prices were still around 17.5% below the average price per tonne obtained in 2001. What is more, the prices received on the EU market for ACP rice exports since 2000 have been significantly below the prices received at the beginning of the 1990s. At its peak Guyana received €431 per tonne for its direct husked and brown rice exports to the EU, with the lowest price received in 1996 of €340 per tonne still substantially exceeding the highest price per tonne received since 2000. June 2008 Executive brief CAP reform Average price received by Guyana and Suriname per tonne of rice Guyana Tonnage 2001 2002 2003 2004 2005 2006 2007 % change 2001-07 99,246 93,083 101,123 131,133 96,613 90,888 133,402 Unit value (€/tonne) 318.6 298.0 258.9 241.4 263.3 270.1 263.3 Suriname Tonnage Unit value (€/tonne) 27,152 341.2 40,789 302.8 21,194 265.5 17,366 257.0 25,648 264.3 14,759 298.9 15,735 284.8 - 17.4% - 17.5% In the sugar sector the agreed reforms are set to see the price offered for ACP sugar fall by 36% by October 2009, while the market-access arrangement established under the various EPAs (replacing the sugar protocol which will expire in October 2009) will see a further five percentage-point reduction in the price offered for ACP sugar, if import volumes increase in line with EC expectations. Indeed the elimination of any price guarantees for ACP sugar from October 2012 could see little difference between EU and world market prices for sugar (depending of course on the exchange rate between the US dollar and the euro, and the world market price of sugar from October 2012). In the longer term all ACP countries which export products falling under the scope of the CAP will be affected by the shift to the decoupled single-payment scheme. Outside of the sugar and banana sectors, these price effects have already occurred, and have thus already affected the value of agricultural trade preferences extended to ACP countries. The worst effects of these price declines have however been mitigated in part in some ACP countries by the strength of the euro against the US dollar. Nevertheless the impact of these EU price declines can be seen in the stagnation in the value of ACP agricultural and food-product export earnings between 1999 and 2006. This trend has only been partially mitigated by the high agricultural prices experienced in 2007. Total ACP-EU agricultural and food-product trade 1999 and 2006 1999 (€ million ) 2006 (€ million) % change 1999-2006 ACP exports to the EU 8,981 8,892 -1 EU exports to the ACP 3,643 5,060 + 38.9 ACP surplus + 5,337 + 3,832 - 28.2 Sources: EU exports http://ec.europa.eu/agriculture/agrista/tradestats/2006/eur25ch/page_071.htm EU imports http://ec.europa.eu/agriculture/agrista/tradestats/2006/eur25ch/page_072.htm These developments need to be taken into account in the final stages of the negotiations for comprehensive EPAs, particularly with regard to the policy tools required to address the process of preference erosion, the processes of change under way on EU food and agricultural markets and the processes of change under way in ACP-EU agricultural trade relations. The question arises: how is this issue of preference erosion to be effectively addressed? What trade tools and instruments for development assistance will need to be set in place to ensure that ACP countries continue to gain from their food and agricultural product trade with the EU? 127 Possible policy responses to preference erosion In formulating a response to the process of preference erosion which is under way in ACP-EU trade, six concrete areas for action can be identified. Three of these are primarily trade measures or trade-related measures, while three of them are targeted ‘aid for trade’ measures in support of trade adjustments that are required as a result of preference erosion. Executive brief CAP reform Specifically on the trade and trade-related side the kinds of measures required include:  the early removal of all remaining tariff and quota restrictions on ACP food-and-agricultural exports to the EU, so that full advantage can be taken of what margins of preference remain for as long as they remain;  cooperation on administrative arrangements to reduce transaction costs on exports to Europe, particularly for small ACP suppliers and countries undertaking diversification;  the establishment of clear time-bound procedures for the resolution of SPS disputes, including the establishment of arbitration arrangements in case of non-resolution of the SPS dispute within the agreed time-frame. Only one of these measures, the removal of all remaining tariff and quota restrictions on ACP food and agricultural exports, has so far been achieved within the EPA negotiations process. The transitional arrangement established for sugar however reduces the value of these arrangements in the immediate short term, when prices in the EU market are still high. June 2008 In the area of development assistance and ‘aid for trade’ the specific kinds of measures required include:  the establishment of effective, targeted ‘aid for trade’ packages to assist in production adjustments to enhance efficiency and reduce costs, to meet ‘quality’ standards and facilitate movement up the value chain, and targeted support to improve marketing;  the establishment of aid instruments to support diversification out of the affected sectors (involving the provision of both technical and financial support) both within agriculture and beyond;  the provision of support to social adjustments in affected sectors and communities in order to reduce the transition costs and support the maintenance of an investment-friendly environment. In each of these areas detailed measures and appropriate modalities for their implementation, on a sector-, country- and region-specific basis, will need to be worked out. 3.3.2 ACP exports to the EU: responding to a changing EU market The growing differentiation within the EU market suggests a need to increasingly develop a capacity to market products into particular components of the EU market, rather than simply trading bulk commodities into undifferentiated markets. Indeed, this will be essential if ACP exporters are not to get caught out by a decline in EU prices for basic agricultural commodities (relative to pre-reform prices). Developing this increased marketing capacity is human-resource intensive, but despite the human-resource constraints faced throughout the ACP, producers in some countries are making the transition (e.g. in the Kenyan horticultural sector and the Namibian beef sector). However, more generally there would appear to be a need to establish programmes to assist ACP producers in making this transition. Future cereal price trends ‘Favourable conditions on world markets as well as the increasing domestic demand should favour higher cereal prices in nominal terms than in the past decade. However, despite the hikes in 1983, 1989, 1995, 2003 and 2006 cereal prices should continue their trend of real decline over the medium term, which is pointing to the fact that production is increasing faster than demand, despite frequent price hikes due to adverse weather conditions’. Source: ‘Prospects for agricultural markets and income in the European Union 2007-2014’ (March 2008) http://ec.europa.eu/agriculture/publi/caprep/prospects2007b/fullrep.pdf 128 Commitments to expanding ‘aid for trade’ financing made by EC and EU member states in October 2006 would appear to offer considerable financial scope for getting to grips with the challenges faced. What is more the EC has considerable experience under its internal ruraldevelopment programmes of supporting farmers’ organisations and sectoral associations in the EU in undertaking production and trade adjustments in response to changing market conditions. Such instruments and programmes may well need to be established for ACP producers’ organisations also. June 2008 Executive brief CAP reform 3.3.3 ACP exports to the EU: the cost of accessing the EU market The income losses that ACP exporters will face in areas where preferential access to formerly highpriced EU market has hitherto been enjoyed are likely to be compounded by the extra costs that ACP producers are facing in meeting the increasingly harmonised and strict EU hygiene standards. In addition to the investment and recurrent costs associated with meeting higher EU food-safety standards there is also the issue of the cost of verifying compliance with EU standards. This can be particularly burdensome for small-scale producers and is an area where dialogue can be effective in designing schemes to verify compliance whilst minimising the costs of administration of such schemes. There is furthermore the issue of the central role being given to state bodies in monitoring and controlling compliance with EU standards. Increasingly responsibility for verifying compliance is being vested in national food-safety authorities in ACP countries, whose institutional development, in many instances, is still at an early stage. Under the EU’s 2004 food-and-feed control regulation the emphasis is not mainly on the standards of individual production establishments but rather on ‘evaluating the performance of the relevant competent authority in the overall operation of national control systems, especially its ability to transpose, implement and enforce EU legislative standards effectively’. Under this new approach, public authorities in ACP countries will have major obligations to certify and verify compliance with EU food-safety standards. If they fail to do so, then this risks the closure of the EU market to relevant exports from the ACP country concerned, regardless of the standards attained in the individual enterprises. Given the constraints on human and institutional capacity faced by ACP food-safety authorities this raises significant new challenges for public institutions in ACP countries. As a result of these developments there is likely to be an increased incidence of SPS disputes in the coming years, particularly beyond 2008 when the currently over-stretched EU Food and Veterinary Office will have completed its priority programme of internal EU food-safety controls. Development assistance will need to be mobilised to assist in meeting both the technical standards and national food-safety control functions. In a number of sectors the EU has already initiated such support programmes (a €29 million pesticide programme and €45 million fisheries-sector programme). However, the scope for funding such initiatives will need to be expanded substantially in the coming years as an integral part of newly-announced EC and member state ‘aid for trade’ initiatives. In addition procedures will need to be established within the context of the EPA negotiations for consultation and arbitration in the case of SPS disputes, with clear procedures and time-frames for the resolution of disputes. This will be essential if ACP producers are to have the opportunity to serve EU agricultural and food-product markets under the circumstances created by a reformed CAP. 129 3.4 ACP imports June 2008 Executive brief CAP reform 3.4.1 EU exports to ACP markets: the underlying trend The EU argues that direct aid payments are less trade-distorting than price support and export subsidies. However, from the perspective of agriculture-based ACP economies any beneficial consequences from the supposed less-trade-distorting nature may be hard to find. If direct aid payments improve the price competitiveness of EU suppliers (the stated objective of the CAPreform process) and so enable EU suppliers to win contracts and supply markets which ACP producers and processors previously served, then the fact that at the macro-economic level direct aid payments may be less trade-distorting than other forms of public aid, will provide little consolation. ACP producers, even if they are economically more efficient than their European counterparts, will still find themselves losing markets to EU suppliers and find their profitability undermined. This could have serious consequences for those ACP countries seeking to expand their markets and add value to basic agricultural raw materials, as a means of promoting more sustainable patterns of poverty-focused economic growth. Despite EC claims to the contrary, at this basic level the process of CAP reform will not fully eliminate the trade-distorting nature of EU agricultural-support programmes. Even under the CAP ‘health check’ it will remain at the discretion of EU member states as to the extent to which they move away from historical payments (based on entitlements that individual farmers enjoyed over the period 2000 to 2002) towards a ‘flatter’ scheme. Unless member states extensively avail themselves of this opportunity, the danger is that past distortions will remain largely frozen in place until this issue is revisited on a compulsory basis in 2013. 130 Prospects for EU agricultural markets The latest EC ‘Prospects for EU agricultural markets’ report projects a 3.84% increase in total EU cereals production between 2008 and 2014, and a 4.43% increase in EU cereals exports. June 2008 Executive brief CAP reform In the beef sector it projects a 4.51% decline in production, largely as a consequence of shrinkage in the dairy herd in the context of continued quota restrictions and increasing milk yields. A 41.56% decline in beef exports between 2008 and 2014 is also projected. In the poultry sector a 5.35% increase in usable production is projected, but with a 6.11% increase in consumption, exports are projected to fall by 8.16%. However given EU consumers’ preference for poultry breast and the consequent need to export poultry parts, the growth in consumption is the key indicator from an ACP perspective, since it is to ACP markets that poultry parts are exported. Increased consumption of chicken breast in the EU could thus generate an increase in exports of chicken parts to ACP markets, within an overall decline in total EU poultry-meat exports. Specific trends in this regard will be heavily influenced by the domestic trade policies adopted by ACP countries in the poultry sector. In the pig-meat sector the EC projects a 2.7% increase in production between 2008 and 2014. However, with a 3.19% increase in consumption, EU pig-meat exports are projected to fall by 5.6% between 2008 and 2014. However with exports still exceeding 1.17 million tonnes, this decline is marginal. Overall on global meat markets the EC is projecting growing import demand, as consumption grows faster than production. The main beneficiaries of this trend are expected to be low-cost Latin American suppliers. This global trend however could serve to ease some of the current reported pressures on certain African meat markets. However, it should be noted that in the face of intensifying competition from low-cost developing country suppliers on its traditional markets, EU exporters have tended to fall back on African markets as ‘markets of last resort’ in times of difficulties. This tendency needs to be constantly borne in mind. In the dairy sector EU milk production is projected to grow with the likely increase in milk quotas, as part of the phasing out of the quota system. EU27 cheese production is expected to increase 10% over the medium term compared to 2005 levels (+ 6.47% between 2008 and 2014), in the face of high domestic demand (+ 7.91% between 2008 and 2014). Exports are expected to decline 12.5% compared to 2008 levels. EU butter production is projected to decline 6.65% between 2008 and 2014, with exports shrinking a massive 40%. EU skimmed-milk powder production is also expected to decline by some 9.63% between 2008 and 2014 (after a decline of 7.17% between 2005 and2008). Despite a decline in consumption of around 2%, exports are projected to decline a massive 67.5% Globally strong consumer demand is expected to be matched by growing domestic production. This creates circumstances favourable to the development of ACP dairy production, provided input costs can be kept under control. If any export threat to a resurgence of ACP dairy production were to emerge it would largely be from Australia and New Zealand who are ‘projected to expand their combined share in butter and whole-milk powder exports, while the USA and India are expected to substantially increase skimmed-milk powder exports’. This highlights some of the concerns that ACP countries have with regard to the impact of CAPreform measures on production levels and trade outcomes. It also illustrates that EU price competitiveness in future will no longer be dependent on the deployment of WTO-constrained export refunds. Rather it will be derived from the supply-side effects of the system of direct aid payments, which allows prices to be reduced without necessarily affecting the overall levels of production, but which also allows markets to be cleared at world market price levels. These somewhat perverse effects of CAP reform are in part a product of the commitment to avoiding any land abandonment, which was a central component of the final political agreement on the June 2003 reform package. This commitment has a direct impact on the level of direct aid payments established, which in turn affects the area sown. With EU farmers consistently attaining increased yields in all major arable crops, this has the effect of increasing overall levels of EU production. A notable exception to this trend will be the sugar sector, where WTO rulings on the exportpromotion impacts of the functioning of the sugar regime (i.e. the cross subsidisation of ‘C’ sugar exports from the ‘A’ and ‘B’ quota price) has resulted in the end of ‘C’ sugar exports. 131 3.4.2 EU exports to ACP markets: the cereals sector The complexities of the direct impact of the process of CAP reform on agricultural markets can be illustrated with reference to the cereals sector. Here the shift to a system of direct-aid programmes allowed EU cereal prices to fall dramatically, on average by between 45% and 50% since 1992. This boosted domestic consumption of cereals in Europe and laid the basis for an expansion of unsubsidised exports of EU cereals. June 2008 Executive brief CAP reform The EU’s ambition in the cereals sector ‘Aligning Community prices with those on the world market should therefore make it possible to export without subsidies, and therefore without quantitative ceilings. Community products will therefore be able to benefit from opportunities in a world market where the volume of trade is expected to increase significantly in the medium term’. Source: DG Agriculture, September 26th 2007 http://europa.eu.int/comm/agriculture/markets/crops/index_en.htm However the scope this created for the elimination of export refunds in the cereals sector did not immediately materialise, for with a weakening of the US dollar against the euro and the emergence of non-traditional low-cost cereals exporters from the Black Sea area, the gap between EU and world market prices for cereals increased, necessitating an expansion of export refunds in the cereals sector after a decade of continuous declines. Thus the expected expansion of unsubsidised cereals exports did not fully materialise. After an expansion in the value of exports following the full implementation of the 1992 reforms, from 2000 onwards the value of EU cereal exports fell back and fluctuated. There was a slight overall increase in EU cereals exports in 2005 and 2006 with this being strongly concentrated on ACP countries. Indeed, in 2006 the ACP was taking 20% of EU cereal exports, the highest level since 1998. In a context of increasing competition on traditional EU markets, to a certain extent the ACP has emerged as a ‘market of last resort’ for EU cereals traders. EU exports of cereals (CN 10) (million euros) Year Exports to ACP Exports to world % share of ACP 1995 290 1,913 15.159 1996 334 2,212 15.099 1997 330 2,079 15.873 1998 328 1,674 19.594 1999 268 2,308 11.612 2000 330 3,039 10,859 2001 345 2,277 15.152 2002 326 2,114 15.421 2003 385 2,360 16.314 2004 188 1,493 12.592 2005 270 1,963 13.754 2006 449 2,193 20.474 Sources: For EU exports to the ACP 1995-2004 http://europa.eu.int/comm/agriculture/agrista/tradestats/eur15ch/Page_075.htm For EU exports to the world 1995-2004 http://europa.eu.int/comm/agriculture/agrista/tradestats/eur15ch/Page_001.htm For EU exports to the ACP 2005-06 http://ec.europa.eu/agriculture/agrista/2007/table_en/3712.pdf For EU exports to the world 2005 06 http://ec.europa.eu/agriculture/agrista/2007/table_en/372.pdf This trend is even more pronounced in cereal-based processed-food products, where the importance of the ACP market has grown considerably. In the area of ‘preparations of cereals’ (CN 19), the ACP now takes about 10% of EU exports, compared to about 5% in 1995, while for ‘products of the milling industry’ it takes about a quarter of EU exports compared to an eighth in 1996. 132 June 2008 Executive brief CAP reform EU exports of preparations of cereals (CN 19) (million euros) Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 % change 1996-2006 Exports to ACP Exports to world % share of ACP 127 2,387 5.32 152 2,712 5.61 202 3,022 6.68 228 2,948 7.73 233 2,830 8.23 285 3,242 8.79 373 3,700 10.08 356 3,659 9.73 347 3,568 6.92 359 3,374 10.64 385 3,689 10.44 420 4,055 10.35 + 230.7% + 69.9% Source: Tables 3.72 and 3.7.12 in ‘Agricultural situation in the EU’, Annual reports While the value of total EU exports of ‘preparations of cereals’ grew 70% between 1995 and 2006, EU exports to the ACP grew 231%, while for ‘products of the milling industry’ EU exports to the ACP doubled while overall EU exports contracted marginally. This highlights the growing importance of ACP markets to EU cereals sector exporters. This growing importance was highlighted in the June 2007 DG Agriculture seminar on agri-food exports, which sought to identify EU ‘offensive interests’ in free-trade-area negotiations. Representatives of the EU cereals sector industry noted the EU’s structural overcapacity in flour milling and the increased competition faced on third-country markets from low-cost advanced developing-country suppliers. It was noted that the ACP was now taking ‘over half of all exports’ of flour and called for the EC to pay particular attention to removing tariff and non-tariff barriers to flour exports, the combined effect of which in certain ACP markets could be the equivalent of a 50% import duty. The presentation stressed that in the EPA negotiations ‘interests of EU producers and exporters cannot be left aside’, arguing for the establishment of an ‘acceptable import duty’ of not more than 5%. In at least one ACP region provisions which could de facto deliver on this European cereals exporter’s demand have become a source of contention in the provisions of an interim EPA. Thus we find that while at the aggregate level ACP markets play a minor role in the overall expansion of EU value-added food-product exports (with the former Soviet Union, eastern Europe and advanced developing countries such as China and India being seen as much more important), in certain sectors where major competitive challenges are faced their significance is considerable. What is more, viewed from an ACP perspective, given the relative size of the EU and individual ACP economies even relatively small increases in exports to ACP countries from the EU can potentially have profound implications for local ACP value-added food-product industries. EU exports products of the milling industry (CN 11) (million euros) Products of the Products of the milling EU exports to ACP countries milling industry ACP industry World as % of total exports 1996 201 1,597 12.6 1997 333 1,978 16.8 1998 361 1,639 22.0 1999 302 1,398 21.6 2000 343 1,598 21.5 2001 336 1,749 19.2 2002 368 1,787 20.6 2003 340 1,696 20.0 2004 363 1,764 20.6 2005 368 1,536 24.0 2006 404 1,592 25.4 % change 96-06 +101% - 0.31% Source: Tables 3.72 and 3.7.12 in ‘Agricultural situation in the European Union’, Annual reports 133 June 2008 Executive brief CAP reform In this context it should be recalled that it has long been the EU’s contention that ACP countries should be encouraged to ‘move up the value chain’, by adding value to raw materials for local, regional and international markets. If ACP countries can be supported in doing this, then more solid foundations will be laid for the promotion of sustainable poverty-focused growth. However, the current trajectory for CAP reform, which will greatly enhance the price competitiveness of simple value-added EU food-and-drink exports, is likely to close off market opportunities for the development of such value-added processing in ACP countries. This is particularly problematical at the present time while the EU food and agricultural sector is in transition between an industry focused on producing bulk undifferentiated commodities primarily for the domestic market, towards an industry focused on the production of higher-quality, highervalue products for an increasingly liberalised global market. During this transition ACP markets, particularly those in west and central Africa, could see themselves increasingly being used as a ‘market of last resort’, when individual EU agricultural sectors face acute competitive pressures on traditional markets or where significant market changes occur – for example, the introduction of the meat- and bone-meal ban in animal feed. It is in this latter context that the cross-sector effects of cereals-sector reforms on poultry-meat exports need to be seen. The average 45% to 50% decline in the EU intervention price of cereals over the decade of the 1990s saw a fall in the price of EU-produced animal feedstuffs. In industries where animal feed constitutes a major cost component this decline in EU cereals prices has greatly improved the competitiveness of EU producers. Thus in the poultry sector, where animal-feed costs have traditionally accounted for up to 70% of production costs, declining cereal prices have led to significant savings. This in turn has contributed to the expansion of both EU poultry-meat production and exports (up from 400,000 tonnes to a peak of one million tonnes, falling back to 800,000 tonnes in 2007). Indeed the cost savings have been such that despite the expansion in EU poultry-meat exports the level of export-refund payments in the poultry-meat sector have declined dramatically over the 1990s. ACP markets in west Africa were a particular focus for EU poultry-meat exports in the early part of this period, with changes in consumer preferences in Europe (away from red meat to white meat and towards poultry breast) and the introduction of a ban on the use of meat-and-bone meal as animal feed, fuelling an expansion of exports of chicken parts. Between 1996 and 2002 EU exports of chicken parts to west Africa increased from 3,884 tonnes to 42,443 tonnes, with west Africa’s share of total EU exports of chicken parts increasing from 1.34% to 7.94%. For the ACP as a whole their share of total EU exports of chicken parts rose from 5% to 15% over the same period. With growing EU consumption of poultry meat, produced both domestically and imported, this export trade in chicken parts is likely to continue to increase, be these from domestically produced chickens or imported chickens. EU exports of chicken parts (tonnes) to west African configuration countries Country Cape Verde Gambia Ghana Mauritania Nigeria Senegal Total W. A. W.A. share % ACP total ACP share % Total EU 1996 25 8 3,399 257 11 184 3,884 1.34 14,570 5.0 290,665 1997 46 58 6,523 1,321 13 415 8,376 2.42 27,846 8.1 345,071 1998 120 15 9,260 1,899 39 712 12,045 3.17 39,848 10.5 378,934 1999 362 291 14,395 1,100 1,245 730 18,123 4.71 47,759 12.3 385,109 2000 1,670 1,059 8,255 2,561 3,081 1,449 18,075 4.27 57,952 13.7 423,283 2001 1,662 446 5,826 2,990 8,983 2,500 22,407 5.37 52,701 12.6 417,100 Source: USDA Foreign Agricultural Service ‘European Union’s Broiler Situation’ 2003. 134 2002 2,162 314 11,850 5,098 14,705 7,314 42,443 7.94 79,752 14.9 534,408 In this context it is apparent that the effects of the deployment of CAP instruments in some sectors is becoming far more complicated and less direct, as the benefits of direct aid payments in one sector are passed on to other sectors through ‘normal’ market mechanisms. These indirect effects of the CAP on the competitive situation facing producers in ACP countries will increasingly need to be taken into account as the process of CAP reform intensifies. This is particularly relevant as the EU moves over to the single-payment scheme, under which it will be virtually impossible to distinguish support payments to particular products. June 2008 Executive brief CAP reform 3.5 A policy response to increased EU export-price competitiveness Given the increased availability of EU products at lower prices, ACP countries producing competing products either need to greatly enhance the price competitiveness of their production or will need to find ways of insulating their markets from the increased price competition generated by the process of CAP reform and the changing nature of EU agricultural support. This suggests a need for ACP governments either to prioritise programmes of targeted support to enhancing the efficiency of agricultural production, trading and domestic processing or to look towards the establishment of swift, simple and effective safeguard measures which can be deployed in a preemptive way to avoid any market disruption, arising from the new trade flows generated by the implementation of CAP reforms. In terms of trade defence instruments such measures could be based on the existing Cotonou safeguard measures which are available to the EU. These provisions allow action to be taken where imports:  cause or threaten to cause serious injury;  threaten serious disturbances in any sector;  threaten to create difficulties which could lead to an economic deterioration in a region. These provisions place emphasis on preventing disruption of markets through ‘statistical surveillance’ and ‘prior consultations’ in ‘sensitive’ sectors. In ‘sensitive’ sectors it also allows action to be taken without the need to document the damage being caused, since the emphasis is on preventing ‘injury’, ‘disturbances’ or ‘difficulties’. These types of safeguard provisions could very usefully be applied against EU agricultural and value-added food-product exports to ACP countries in a context where CAP reform is enhancing EU price competitiveness. Establishing ‘monitoring and surveillance’ arrangements in sensitive sectors under safeguard provisions mirroring those used by the EU could prevent severe market disruptions arising under future trade arrangements with the EU. There are moves in this direction under various EPAs, with the value of such measures being determined by how they will be applied in practice. In this context the implications of a number of trade-related provisions being proposed for inclusion in EPAs will need to be carefully evaluated. A case in point is the provisions in the SADC-EU interim EPA dealing with the free movement of goods within the territory of the SADC EPA region (including the SACU). This provision could potentially force the dismantling of current import licensing arrangements used to regulate trade within the SACU in sensitive agricultural products, which has been specially designated for more restrictive treatment in the interests of national agricultural development and food security. The dismantling of this system in line with the proposed provisions of the SADC-EU interim EPA would lead to the almost immediate collapse of the Namibian irrigated cereals-farming sector. In addition ACP governments will have to pay close attention to the tariff offers they put forward under the EPA negotiations, with regard to food and agricultural products. They will need to construct their tariff offers around ‘product chains’, if the development of value-added processing based on domestic agricultural production is to be nurtured. 135 Executive brief January 2008 Market access Executive brief Market access Table of contents 1. Introduction _________________________________________________________________139 2. Market access for ACP countries under interim EPAs _______________________________140 2.1 The basic EU market-access offer under interim EPAs______________________________ 140 2.2 Transitional arrangements for rice and sugar ______________________________________ 141 2.3 The central question of rules of origin___________________________________________ 142 3. Market access for ACP LDCs under the EBA initiative ______________________________144 January 2008 3.1 Evolution of the EBA_______________________________________________________ 144 3.2 Changes in market access: impact of the EBA_____________________________________ 144 3.3 Major issues under the EBA __________________________________________________ 147 4. Market access for ACP countries under the GSP____________________________________147 4.1 Application of the standard GSP scheme ________________________________________ 147 4.2 The debate around GSP+ ____________________________________________________ 147 5. Changing agricultural markets __________________________________________________147 5.1 The impact of CAP reform on the value of ACP preferential market access ______________ 147 5.2 The impact of the EU’s new trade policy on the value of ACP preferential access__________ 149 6. Review of cross-cutting issues___________________________________________________150 6.1 SPS, food safety and consumer concerns ________________________________________ 150 6.2 Supply-side constraints ______________________________________________________ 152 6.3 Supporting movement up the value chain ________________________________________ 152 137 January 2008 Executive brief Market access Summary Market access for ACP agricultural exports to the EU can take place under one of three regimes: the trade provisions of the various interim or comprehensive EPAs; the EBA initiative for LDCs; and the standard GSP system applicable to all developing countries. The duty-free, quota-free access provisions of the various interim EPAs and the comprehensive EPA concluded with the Caribbean are qualified in three respects: with regard to rules of origin; the application of the various safeguard clauses; and in regard to the transitional arrangements for sugar and rice. The benefits of the EBA for least developed ACP countries are also reduced by the rules of origin, potentially by the application of the transitional arrangements applied to sugar up to October 2009 and the dual safeguard trigger to be applied up to 2015. The standard GSP provisions have to date been little used by ACP countries, but since January 1st 2008 are now the sole market-access option for the 10 non-LDC ACP countries which have not initialled interim EPAs (Gabon, Republic of Congo, Nigeria, Cook Islands, Tonga, Palau, Nauru, Niue, Micronesia, Marshall Islands). In terms of the value of ACP agricultural market-access arrangements, the erosion of the value of preferences is primarily driven by the process of CAP reform and not currently by multilateral tariff-reduction negotiations at the WTO, nor as yet as a result of bilateral agreements between the EU and third countries. Not only are earnings falling on products previously covered by the commodity protocols, but also across a number of other CAPcovered commodities. This is affecting the value of ACP trade preferences under all marketaccess arrangements. Beyond this, non-tariff barriers are growing in importance, in large part consequent on rising food-safety standards and the shift in the EU’s emphasis from bulk to quality production of agricultural commodities. The briefing concludes by reviewing the issues faced in agricultural trade under the various trade regimes. 138 1. Introduction January 2008 Executive brief Market access As from January 1st 2008 market access for ACP agricultural exports to the EU is taking place under one of three regimes:  the trade provisions of the interim ‘goods only’ EPAs (or in the case of the Caribbean a comprehensive EPA);   the ‘Everything but Arms’ (EBA) initiative for LDCs; the standard Generalised System of Preferences (GSP) applied to all developing countries. There has been considerable debate since June 2006 on the possibility of extending the GSP+ scheme, either in its current or an enhanced form, to non-LDC ACP countries. This has been in an effort to establish a non-punitive alternative to EPAs for those countries whose governments feel they are not in a position to conclude an EPA, but to date the EC has not taken any administrative steps to extend the application of the GSP+ scheme to exports from eligible non-LDC ACP countries. This debate and the implications for ACP agricultural exporters are briefly reviewed in the context of the EC’s interim EPA approach. Market-access arrangements by ACP country1 Comprehensive EPA Interim EPA EBA Standard GSP Antigua & Barbuda Dominican Republic St Kitts & Nevis St Vincent & Grenadines Trinidad & Tobago Bahamas Barbados Belize Grenada Guyana Jamaica Suriname Dominica St Lucia Haiti Cameroon Mauritius Seychelles Comoros Madagascar Zimbabwe Kenya Tanzania Uganda Burundi Rwanda Namibia Botswana Lesotho Swaziland Mozambique Ghana Côte d’Ivoire Fiji Papua New Guinea Central African Republic Equatorial Guinea Democratic Republic of the Congo São Tomé Chad Djibouti Somalia Eritrea Ethiopia Sudan Malawi Zambia Angola Cape Verde Gambia Guinea Liberia Sierra Leone Benin Burkina Faso Mali Guinea-Bissau Niger Senegal Togo Mauritania Samoa Solomon Islands East Timor Kiribati Vanuatu Tuvalu Gabon Republic of Congo Nigeria Cook Islands Tonga Palau Nauru Niue Micronesia Marshall Islands A further development since June 2006 that is of relevance to the value of the market access granted ACP countries is the implications for ACP agricultural exporters of the launch of the EU’s ‘new trade strategy’. Under this strategy the prospect exists of the EU concluding a range of ‘ambitious’ free-trade-area agreements with advanced developing countries, which could have an impact on the margins of preference which ACP agricultural exporters have traditionally enjoyed. The implications of this development are explored below. 1 All LDCs remain eligible for EBA preferences regardless of whether or not they have concluded an EPA. It is unclear however whether LDC non-signatories to an interim EPA will be eligible for additional market access in the sugar sector during the 2008/09 transitional season, prior to the full introduction of duty-free, quota-free access for LDC sugar exports. 139 2. Market access for ACP countries under interim EPAs January 2008 Executive brief Market access 2.1 The basic EU market-access offer under interim EPAs The market-access provisions of the interim EPAs, which represent the first phase in the conclusion of comprehensive EPAs, are based on the EC’s April 4th 2007 market-access offer. Under this offer the EC proposed to remove all remaining quota- and tariff-limitations on access to the EU market for ACP exports immediately following the entry into force of EPA agreements (with the exception of sugar and rice, for which special transitional arrangements are to be set in place). Outside of the sugar and rice sectors (and associated value chains) all residual market-access tariffs on ACP food-and-agricultural exports will de facto be removed. In the case of bananas, however, this market access will be subject to monitoring so as to avert any disruption of the EU banana sector. After the transition period, free access will be granted for sugar and rice. The duty-free, quota-free access granted to ACP exporters is however qualified by the rules of origin and various safeguard provisions that are to be applied under the various interim EPAs. Temporary rules of origin are to be applied based on an elaboration of those under the existing Cotonou Agreement rules of origin. Subsequently new rules of origin will be developed, but there is as yet no consensus between the EC and the various ACP regions on the nature of these new simplified, less-restrictive rules of origin. In the agricultural and food-product sectors the EU’s market-access offer includes provision for the elimination of special duties and levies which would otherwise be applied to certain agricultural and processed agricultural products on the basis of their CAP-covered raw-material content. This will bring the treatment accorded to non-LDC ACP exporters into line with the treatment accorded to LDC exporters under the EBA initiative. The exception in this regard is the sugar component of these products, which during the transition period looks likely to continue to attract special duties. With regard to safeguards, in addition to the general safeguard provisions there will be special safeguards for sugar imports from ACP countries. The full implications of the special safeguard arrangements for sugar at the national and regional level are far from clear. They will apply to all ACP countries and involve a ‘dual’ volume trigger (one for the ACP as a whole and one for non-LDC ACP sugar exporters – see next section for details). While the full implications of this ‘dual trigger’ safeguard at the national level are uncertain, since its effects will be determined by the evolution of sugar exports from various ACP countries (particularly the LDCs), what is clear is that uncertainty over market-access arrangements for sugar engendered by these sugar safeguard provisions is adversely affecting private-sector investment flows in non-LDC ACP sugar exporters and is increasing the cost of borrowing for sugar-sector restructuring. The market-access arrangements for ACP exports under the interim EPAs and subsequent comprehensive EPAs will bring to an end the commodity protocols, which formerly provided the framework for ACP exports of sugar, beef and bananas. It will also supersede the provisions of Declaration XXII, the ‘Joint declaration concerning agricultural products referred to in article 1(2) (a) of Annex V’, which formerly governed trade in other sensitive agricultural products. The EC’s April 2007 market-access offer does not apply to South Africa, to which existing TDCA market-access arrangement will apply, until such time as South Africa accedes to the SADC-EU EPA. Upon accession the expanded market-access provisions applicable to South African exports arising from the process of negotiations will apply. 140 2.2 Transitional arrangements for rice and sugar The transitional arrangements for rice are fairly straightforward. A two year transition is envisaged, with a substantial increase (50%) in duty-free quota access during the transition. For sugar the transitional arrangements are much more complicated. Here a three-phase transitional arrangement is envisaged as shown in the following table: January 2008 Executive brief Market access First phase: (January 1st 2008-September 30th 2009)   Continuation of the sugar protocol until September 30th 2009 with guaranteed prices.   Initial market access for ACP non-LDCs not parties to the Sugar Protocol. Substantial improvement of LDC market access for marketing year 2008/09 through quantities additional to the quota foreseen under the ‘Everything But Arms’ initiative. Additional market access for ACP non-LDCs parties to the Sugar Protocol. Second phase (October 1st 2009-September 30th 2015)   Free access for ACP sugar subject to an automatic volume-safeguard clause.  Until September 2012, importers of ACP sugar would be required to pay not less than a certain price level. After 2012, a price information system based upon the current system would provide for transparency of the market.  A limited number of processed agricultural products with high sugar content would be subject to an enhanced surveillance mechanism in order to prevent circumvention of the sugar import regime. This safeguard would only be applied to ACP non-LDCs, allowing for a substantial increase of export levels. Final phase (from October 1st 2015)  ACP sugar would be duty-free, quota-free subject to a special safeguard clause for sugar. This safeguard clause could be based on the regular EPA safeguard, adjusted to take account of the sensitivity of sugar. The specific additional quotas applicable to individual non-LDC and LDC sugar exporters are set out under the various interim EPAs and the comprehensive Caribbean-EU EPA. During the transition period from October 2009 to October 2015 a ‘dual trigger’ safeguard will be applied to total ACP sugar exports, and, within this, exports of sugar from non-LDCs. The ‘dual trigger’ establishes a ceiling of 3.5 million tonnes of sugar imports from the ACP as a whole and the following ceilings for non LDCs: 1.38 million tonnes in 2009/10; 1.45 million tonnes in 2010/11; 1.6 million tonnes from 2011/2012 season for the following four seasons. Once this ceiling has been reached safeguard measures involving a ban on further imports can be applied. The hope of individual ACP sugar exporters is that the additional quotas allocated for the 2008/09 period, combined with past sugar protocol quotas, will constitute a minimum level of guaranteed access for non-LDC ACP sugar exporters, which remains immune from the application of safeguards. While this is the hope of ACP sugar exporters there is no clear indication as to whether this is in fact a shared understanding between the EC and the ACP governments concerned. Of course many competitive non-LDC ACP sugar exporters hope to be able to expand their sugar exports to the EU after October 2009, should the overall ACP supply situation allow. The special safeguard applied to sugar will also have an impact on ACP exports of sugarcontaining food products to the EU, to which, up to October 2009, it appears special duties on the sugar content will still be applied under the various interim EPAs. 141 January 2008 Executive brief Market access 2.3 The central question of rules of origin While temporary improvements in the rules of origin applied to ACP exports are to be introduced as part of the various interim EPAs, there remains a fundamental difference of approach over the basis of the rules of origin to be applied in the long term under the comprehensive EPAs. The ACP have long argued that the current rules of origin are far too restrictive and simply inappropriate to increasingly globalised networks for the competitive sourcing of inputs. The ACP favour the use of a simple ‘change of tariff sub-heading’ (CTSH) approach to rules of origin. This is seen as being administratively simple to apply and as imposing minimal administrative costs on ACP exporters. This latter aspect is an important consideration, as EU tariff reductions at the multilateral level are eroding the margin of preferences which ACP exporters enjoy. The EC for its part favours a value-addition approach, which is easier to negotiate and allows the establishment of a more transparent system across different trade agreements. This is a fundamental difference of approach on an issue which is central to the real value of the trade preferences being extended to ACP countries in the context of the EPAs. Regardless of the approach adopted, some ACP regions, notably those with a limited agricultural base, favour special arrangements for rules of origin on value-added food products, so as to promote the development of export-oriented food-processing industries under the duty-free, quota-free provisions of the proposed comprehensive EPAs. This is a critical issue for ACP exporters for whom permissive rules of origin supportive of a process of transition towards the production and export of more sophisticated value-added food and agricultural products would be highly valuable. Establishing permissive rules of origin should therefore be seen as an integral part of the EU policy response to the erosion of traditional ACP trade preferences. Despite the consistency of such an approach with the emerging global division of labour, it is far from clear whether this will be adopted in negotiating the comprehensive EPAs. However, it is reported that under the Pacific-EU interim EPA improved rules of origin have been introduced for fisheries, agricultural and textile products. According to a joint statement, ‘it is expected that the improved rules of origin could lead to investment and employment opportunities in both Papua New Guinea and Fiji’. The lack of clarity on the rules of origin to be applied under the comprehensive EPAs makes it very difficult to assess the full value of the EU’s market-access offer under the various EPAs with reference to the central ACP objective of promoting a structural transformation of the basis of their integration into the world economy, so as to enhance livelihood and employment opportunities in their countries. 142 ODI findings on rules of origin January 2008 Executive brief Market access A substantial ODI study on rules of origin found that EU rules of origin set a value threshold which is often above the norm for value addition under normal commercial transactions. It found that in some sectors EU member states have lower levels of value addition under their normal commercial production cycles than would be required from ACP producers under Cotonou Agreement rules of origin. This raises the questions as to whether EU rules of origin are ‘forcing poor countries into an old-fashioned industrial structure that will be untenable if the preferences are eroded or removed’. Given the variation in the ‘normal’ levels of value addition across sectors the study found that it would be ‘infeasible’ to create ‘a new system that is both simple and development friendly’. It concluded that ‘it can be “simple” only if thresholds are set far too high for many or unnecessarily low for others. The former would make the new rules more development unfriendly than the current ones’. The study demonstrates that across many sectors ‘extra processing is required in a country beyond the level normal for a single firm’. Put simply ‘the value-added thresholds used in the current (EU) rules are much higher than the levels normally achieved by firms. In one-third of ISIC sectors the Cotonou/GSP figures are at least twice the level found of the lowest mean value added’. It found ‘there is not a single case in which the Cotonou/GSP threshold does not exceed the highest of the three means’ which are the norm for low-income countries, low- to middle-income countries and all countries. It concludes that current EU rules of origin ‘[imply] a heavy bias against firms in small economies that do not process domestic raw materials’. It notes that ‘fortunately, value added is used as the sole test of originating status in Cotonou and the GSP for only one-tenth of the goods that poor countries actually export to the EU …. In most cases value-added targets in the current rules are an alternative (or a supplement) to a tariff jump (the most frequently used criterion) or process rule’. However this means that ‘using only a value-added test will represent a major – and disproportionately large – change for countries exporting under Cotonou’. With the EU increasingly favouring a value-addition approach across all trade agreements , such a change to the rules of origin applied to ACP products would ‘represent the greatest proportional change’, with some existing exports no longer meeting EU rules of origin (although new opportunities could arise in other areas). The study highlights the major challenge facing the EC in the field of rules of origin as being to ‘avoid either enormous complexity or thresholds that are too high for some but too low for others’. It suggests that if the EC adopted the value addition approach then ‘value-added thresholds of around 25% or less in many sectors’ would be necessary to make EPAs more development friendly. If the value-addition criteria are 35% or more, it would make EPAs more ‘unfriendly’. Source: ‘Creating development friendly rules of origin in the EU’, ODI Briefing Paper, No. 12, November 2006. http://www.odi.org.uk/publications/briefing/bp_ROO_nov06_refs.pdf This lack of clarity is particularly the case in the food and agricultural sector, where the real value of preferential access to the EU market exists. According to an analysis posted on the World Bank website, while in an African context the EU charges no duties on 75.4% of African LDC exports and 74.6% of non-LDC exports regardless of the trade regime under which they enter the EU market, where trade preferences are enjoyed these are largely for agricultural and food products. Indeed according to this analysis these products account for 60.8% of SSA LDC exports to the EU covered by preferential arrangements and 63.9% of SSA non-LDC exports to the EU. Furthermore some 60.9% of African LDC dutiable items receiving preferences would face MFN duties above 6% (45.4% above 9%), while some 73.6% of African non-LDC exports face duties above 6% (61% above 9%). This highlights the ‘particular importance of trade preferences for LDCs and sub-Saharan African countries’ in the agricultural sector. 143 3. Market access for ACP LDCs under the EBA initiative January 2008 Executive brief Market access 3.1 Evolution of the EBA The EU first announced its intention of granting duty-free access for all originating products from LDCs as early as the 1995 Singapore WTO ministerial meeting. This intention was announced in the expectation that other developed economies (the USA, Canada and Japan) would follow the EU example and open up their markets to all exports from developing countries. This intention was reiterated in the text of the Cotonou Agreement, with a commitment being made to begin in 2000 ‘a process which by the end of multilateral trade negotiations and at the latest 2005 will allow duty-free access for essentially all products from all LDCs’. Progress in this direction began with duty-free access for industrial goods originating in LDCs. On September 20th 2000, the EC announced the adoption of a plan to introduce duty-free access to the EU market for all exports ‘originating’ in LDCs, with the exception of arms. While the initial EC proposal covered all food and agricultural-product exports, the final scheme agreed by the EU Council excluded a range of tariff lines covering sugar, bananas and rice products from the scheme. For these products during a transitional period (until 2007 for bananas and 2009 for rice and sugar) quota-restricted duty-free access was to be introduced. In the sugar sector this has had certain unexpected consequences for value-added food products primarily derived from production in other sectors, but which include sugar as a central component or as a preservative. Despite these exclusions, this represented an improvement in the market-access arrangements for ACP LDCs over the market access established for agricultural exports under the Cotonou Agreement, primarily via the waiving of the special duties and levies which are applied to certain agricultural and processed agricultural products in addition to the basic duties. Full duty-free access was thus in large part extended to LDC agricultural product exports in March 2001. The conclusion of the interim EPAs effectively removes the margin of preference which the EBA initiative gave LDCs over other ACP countries. This could impact on patterns of investment flows in certain regions (notably east Africa), all other factors being equal. EBA tariff quotas for sugar and rice Year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Tariff quota (tonnes) Sugar Rice 74,185 2,517 85,313 2,895 98,110 3,329 112,827 3,829 129,751 4,403 149,213 5,063 171,595 5,823 *197,335 6,696 * For ACP LDCs which have initialled a comprehensive or interim EPA, an additional quota of 150,000 tonnes for marketing season 2008/09 has been introduced. 3.2 Changes in market access: impact of the EBA Early studies of the impact of the EBA reached differing conclusions. The June 2003 WIDER paper found ‘moderate welfare gains from the EBA initiative’. These gains largely arose in the sugar sector. Significantly it noted that the effects on the EU itself are minimal, since the increased access for LDC sugar is at the expense of ‘other preference-receiving countries’. 144 The August 2003 USDA study emphasised that since the introduction of the EBA, the trade deficit of LDCs with the EU had actually grown, suggesting that there was no evidence that the EBA had increased LDC exports to the EU. It identified a number of reasons for this limited impact, notably: January 2008 Executive brief Market access    rules of origin which are far stricter than those in the Cotonou Agreement; restrictive requirements for meeting the ‘sufficient processing’ criteria; the costs and difficulties of providing the necessary paperwork. Additional reasons put forward in the paper for the relative failure of the EBA include:  the possible withdrawal of these preferences, since they are unilaterally established and are not bound at the WTO;  rapidly changing EU standards. Both these studies were conducted within two years of the implementation of the EBA initiative. Five years on, we can ask how LDC exports to the EU have evolved. While between 2000 and 2005 the value of ACP LDC exports to the EU increased from €8.2 billion to €10.2 billion, an increase of 31.8%, this was largely attributable to the increase in the value of ACP LDC mineral-product exports, which increased in euro value by 105.9% between 2000 and 2005. Excluding mineral products, ACP LDC exports increased by only 4.3% over the period, with the value of food-and-agricultural-product exports (the products affected by the EBA initiative) increasing by 5.2% over the period in euro terms. In absolute terms ACP LDC foodand-agricultural-product exports increased by €108 million, with half being attributable to the expanded duty-free access granted to their sugar exports under the EBA initiative. It should be noted that the trend in the euro value of ACP LDC exports over the six years from 2000 to 2005 was highly variable. There was a sharp decline in value from 2002 to 2003 and then a continued, if somewhat reduced, decline in 2003 to 2004, attributable to currency movements between the US dollar (in which all major commodities are traded) and the euro. For ACP LDC food-and-agricultural-product exports there was a small marginal increase in value between 2000 and 2001, before a decline of 8.1% to 2004, then a strong recovery from 2004 to 2005, with an increase in value of 16.2%. This suggests that if the EBA had any positive impact on aggregate ACP LDC food-andagricultural-product exports to the EU it appears to have occurred only at the end of the period, from 2004-2005. During this year the expansion in exports at 16.2% was over twice that of nonmineral ACP LDC exports to the EU, which rose by 7.9%. This being said, it is possible that the positive gains from the implementation of the EBA scheme have been lost at the aggregate level, since these gains have been more than wiped out by losses in other food-and-agriculturalproduct areas, where prices on the EU market or world markets over the period had been declining. A notable point is the increasing share of prepared foodstuffs, beverages and tobacco in total ACP LDC food-and-agricultural-product exports to the EU (up from 17.8% to 26.7%, under a constant trend). This movement up the value chain into products less vulnerable to declining prices than basic agricultural commodities, if it is in fact occurring on a sustained basis, could be attributable to the impact of the EBA initiative on investment decisions in ACP LDCs. 145 January 2008 Executive brief Market Access Value of ACP LDC exports to the EU 2000-2005 TDC I TDC II TDC III TDC IV Total TDC I-IV 2000 691,035 917,366 90,401 368,974 2,067,776 2001 780,001 706,266 92,467 405,678 1,984,412 2002 811,796 694,920 86,179 444,487 2,037,382 2003 726,713 698,311 57,062 509,647 1,991,733 2004 660,057 685,864 45,761 479,920 1,871,602 2005 716,055 833,916 45,281 580,400 2,175,652 Total LDC exports to EU TDC V Total excluding TDC V 8,203,790 2,216,608 5,987,182 9,470,748 2,830,141 6,640,607 9,724,771 3,081,035 6,643,736 8,312,363 2,208,110 6,104,253 8,199,672 10,808,040 2,411,185 4,563,036 5,788,487 6,245,004 Year on year percentage change in the value of ACP LDC exports to the EU TDC I TDC II TDC III TDC IV TDC I-IV Total LDC exports to EU TDC V Excluding TDC V 2000/01 +13 -25 -6 +11 -4 2001/02 +4 -2 -7 +10 +2.7 2002/03 -12 -6 -34 +10 -2.2 2003/04 -9 -2 -20 -6 -8 2004/05 +8 +22 -1 +21 +16.2 2000-05 +3.6 -9.1 -50.0 +57.0 +5.2 +12 +27 +10.9 +3 +9 +0.05 -21 -28 -8.1 -1 +9 -5.2 +32 +32 +7.9 +31.8 +105.9 +4.3 Key: TDC I: Live animals, animal products; TDC II: Vegetable products; TDC III: Animal or vegetable fats, oils and waxes; TDC IV: Prepared foodstuffs, beverages and tobacco; TDC V: Mineral products. This would appear to bear out the initial conclusion of an IDS study that the impact of the EBA on LDCs will be positive but modest, given the limited supply capacities of LDCs. Looking beyond these studies and statistics there is evidence that the existence of EBA preferences has had a major effect on investment decisions in the sugar sector and a significant effect in the cut-flower and fruit-and-vegetable sectors. The impact has been particularly significant in the sugar sector, with major investments in an expansion of production in Mozambique, Malawi, Zambia, Mali, Ethiopia, Sudan and even to an extent Tanzania, since the launching of the EBA initiative. This is likely to see a major expansion of ACP LDC sugar production and exports in the coming years, as quota restrictions are lifted. This expansion could create difficulties for non-LDC ACP sugar suppliers given the way the EC has structured the special safeguard arrangements in the sugar sector. However, for ACP LDCs perhaps the most significant impact of the EBA is that it provides a non-punitive alternative market-access arrangement for goods to a reciprocal EPA that is secure enough to attract investment in those areas where margins of tariff preferences for agricultural products are most significant. This underlying reality is reflected in the table setting out which ACP countries have signed interim EPAs and which ACP countries have chosen to trade under a GSP-based system from January 1st 2008 (either EBA or for three African countries and seven Pacific countries standard GSP). 146 January 2008 Executive brief Market Access 3.3 Major issues under the EBA For LDCs which are trading under the EBA rules of origin remain a major issue. Agricultural exports per se are little affected by rules of origin issues, with most being wholly originating products. However issues are likely to arise as LDCs seek to move into the production of more sophisticated food products or floriculture products, which require the use of non-originating materials. While to date there is little production of this nature in ACP LDCs, the process of preference erosion which is under way requires LDCs to shift away from exporting basic agricultural commodities to bulk commodity markets towards exporting value-added products to more differentiated product markets. It is thus important that the rules of origin under the EBA should be permissive and supportive of this development. 4. Market access for ACP countries under the GSP 4.1 Application of the standard GSP scheme Those non-LDC ACP countries that did not conclude an interim EPA with the EC by December 31st 2007, face the prospect of exporting to the EU market under the standard GSP scheme. This applies to ten ACP countries which have neither initialled an interim nor a comprehensive EPA. For the African countries concerned, total exports will be little affected. For example, only 1% of Nigeria’s exports will be affected. However it should be noted that with Cape Verde graduating from LDC status, standard GSP treatment could affect its exports. In regard to the Pacific islands, IDS analysis suggests that Nauru and Tonga will face tariff jumps on goods accounting for over 50% of total exports. 4.2 The debate around GSP+ While there has been considerable debate over the possibility of extending GSP+ treatment to eligible ACP non-LDCs this option was never seen as a viable policy by the EC. ACP ministers however continue to call on the EU to ‘honour its commitments made in the Cotonou Agreement to ensure that the ACP states not in a position to sign an EPA, be provided with a framework for trade which is at least equivalent to their existing situations’. 5. Changing agricultural markets 5.1 The impact of CAP reform on the value of ACP preferential market access The attractiveness of the EU market for ACP exports of products falling under the CAP was based on the high prices obtained as a result of the system of price support which underpinned the CAP. However, since 1993 a process of reform of the CAP has been under way which has involved a shift in policy away from price support to systems of direct aid to farmers. While the pace of reform varies considerably, all CAP products are now subject to this process, the overall thrust of which is to bring down prices towards the levels of the world market, reducing the income earned on ACP exports of these products to the EU market, and thus the overall attractiveness of the EU market for ACP exports of these (and competing) products. Furthermore, as the process of CAP reform closes the gap between EU and world market prices the need for high protective tariffs is reduced, and the EU is likely to progressively reduce tariffs, thus eroding any margins of preference that ACP exporters enjoy under the EBA or interim EPA arrangements. Although significant margins of preference will still be enjoyed in the short term, in the long term (beyond 2015) the significance of the market-access preferences granted to ACP suppliers will decline markedly. 147 January 2008 Executive brief Market Access The extent of the erosion of the value of preferences is most vividly illustrated by the current experience in the sugar sector, where the agreed reforms will reduce prices received by 36% from October 2009. Given the experience in other arable sectors subject to reform, prices could be further reduced from 2013 to reach a level 50% below the pre-reform price. Depending on the evolution of the exchange rate between the euro and the US dollar, and world market prices for sugar, this could well mean that by 2015 there is little or no additional value to be had on the EU market from raw sugar sales, compared to world market prices2. Similar processes of preference erosion have already taken place in the beef sector since 1999, where earnings from exports to the UK market have fallen between 28% and 30% in sterling terms. Similarly ACP rice exporters have faced a dramatic decline in their earnings on exports to the EU market in the face of the reform measures agreed in June 2003 which involved a 50% reduction in the EU intervention price for rice. This has only begun to be reversed with the high world market prices of basic commodities in 2007 beginning to transmit themselves into EU market prices. While EU prices may now be rising, however, this reflects world market price trends and thus there is no significant difference between EU and world market prices where this price rise is occurring. Overall the value of the preferential market access in the agricultural sector granted to ACP countries under both the Cotonou Agreement and the EBA initiative is being greatly reduced by the implementation of CAP reform. This is significant since food-and-agricultural-product exports are the main areas in which significant margins of preference currently exist, and these exports account for fully 28.3% (2005) of total ACP exports to the EU (with a much greater importance in certain regions, see table below) and 45% of non-energy-related exports to the EU. Importance of food and agricultural products in ACP exports to the EU (€ million) Region ACP Caribbean Pacific Africa EAC SADC CEDEAO & Mauritania CEMAC & STP & DRC UEMOA COMESA (excl. Egypt) ACP LDC African LDCs Franc zone 28,347 3,110 558 24,648 1,805 8,109 10,534 2004 Food and agricultural product exports* 8,462 937 402 7,125 1,231 1,628 3,288 29.9 30.2 68.3 28.7 68.1 20.1 31.2 4,318 448 2,828 6,174 8,200 8,152 6,423 Total exports 36,034 3,787 1,245 31,001 1,570 10,047 13,761 2005 Food and agricultural product exports 8,583 916 428 7,239 1,382 1,687 3,118 23.9 24.1 34.5 23.2 87.9 16.7 16.2 10.4 5,392 526 9.8 2,026 2,756 71.6 44.6 2,837 7,863 1,805 2,915 63.6 37.0 1,872 1,843 2,460 22.9 22.6 38.3 10,808 10,749. 7,502 2,175 2,147 2,308 20.1 20.0 30.8 % Total exports % * Based on TDC classification I – IV for agricultural products. Source COMEXT rs4, TradeC-2 (BS). 2 This assumes a euro/US dollar exchange rate of 1 to 1.15 and a world market price of around 11 to 12 cents per lb cif. 148 January 2008 Executive brief Market Access In addition to issues related to the erosion of the value of ACP preferential market access there are important non-tariff barriers to trade with the EU, including those consequent on the particular trajectory that CAP reform is following with regard to quality production and food safety. The commercial barrier to trade which sanitary and phytosanitary (SPS) regulations constitute is an increasing area of concern to ACP exporters. It has been noted that EU standards are particularly burdensome, since they increasingly go beyond the CODEX system. LDCs and small non-LDC economies are seen as facing particular problems with SPS measures, since they face difficulties not only in meeting EU standards cost effectively but also in verifying compliance with these standards where they are met. This is largely an issue of the unit costs of such measures. According to a World Bank study by John Wilson ‘a 10% increase in EU food standards decreased African exports to the EU by 11%’. 5.2 The impact of the EU’s new trade policy on the value of ACP preferential access In September 2006 the EC launched its new trade strategy, focussed on ‘defending Europe’s openness to imports while taking a more ‘activist’ approach to opening markets’. Presenting the new strategy in Berlin in September 2006 Trade Commissioner Mandelson called for the EC to ‘go beyond the EU’s existing bilateral free trade agreements, by setting out the case for new free trade agreements designed to deliver more open market and fairer trading conditions in new areas of growth, particularly in Asia’. According to the Commissioner the openness abroad which the EC seeks is ‘no longer simply a question of tariffs. Increasingly the most serious obstacles to European trade are behind borders. Poor protection of intellectual property right and patents. Closed markets for services and investment. Unfair state intervention which distorts prices and fair competition. Public procurement markets that remain closed to fair competition’. For Commissioner Mandelson it is in these areas that the EU’s competitive strength lies, yet issues central to trade in these areas are not adequately addressed by WTO rules or standards at the moment. In this context the new FTAs would seek to build on WTO multilateral liberalisation by going ‘beyond what can be achieved at the global level’, but paving the way for ‘the next generation of global trade liberalisation, ensuring that the new FTAs are a stepping stone for progressive liberalisation within the WTO system, not a stumbling block to it’. These new FTAs would also ‘set out new initiatives on the better protection of intellectual property rights’, with the whole of the policy forming a part of the EU’s wider economic strategy focused on the promotion of growth and job creation. Questions of the value of traditional ACP preferential market access thus need to be seen against the background of this new ‘ambitious’ free-trade agreement policy, where the EC is seeking extensive commitments in trade-related areas, trade in services and investment regulations from advanced developing countries which have declined to negotiate these issues in a WTO context. This raises the question: what will the EC offer these advanced developing countries in exchange for agreements in areas which their governments have declined to negotiate in a multilateral context? The answer appears to lie in enhanced market access for food and agricultural products, since this is the only area where significant tariff concessions can still be granted to advanced developing countries. According to press reports this issue has already been raised in a central American context (see box). Extending sugar and banana preference in central America ‘The European Union is willing to accept an increase in sugar and banana export from central American countries if the countries of the isthmus show more openness to their goods and services in return. The General Director of Foreign Affairs of the EC, Eneko Landaburu, made the announcement during a meeting with Central American journalists, in Brussels, before the inaugural session of the negotiations for a commercial association agreement between the EU and isthmus nations … “It is a global negotiation hypothesis where all parties involved must win” added Landaburu.’ Sopisco News, Week 41/07. 149 January 2008 Executive brief Market Access This process would further intensify the problem of preference erosion confronting ACP countries. One example in the beef sector will suffice to illustrate this point. Brazil already exports a substantial tonnage of beef duty paid to the EU market. Were tariff concessions to be agreed on these exports as part of an EU free-trade agreement with Brazil, this would reduce the costs of imported Brazilian beef, and exert a significant downward pressure on import prices for undifferentiated beef imports, adversely affecting the prices received for Namibian and Botswanan beef exports to the EU and potentially driving these less competitive exporters out of the EU market. 6. Review of cross-cutting issues There are a number of issues of concern to ACP countries with regard to future access to the EU market that cut across the various frameworks for market access. 6.1 SPS, food safety and consumer concerns The main cross-cutting issue is how to get to grips with the challenges arising from the EU’s increased preoccupation with SPS and food-safety issues. A strong case exists for establishing a structured ACP-EU dialogue for addressing the challenges posed by stricter EU SPS standards. This will need to address four areas:     the setting of standards; the costs of technical compliance; the costs of verification; transitional arrangements. The economic costs associated with meeting high hygiene standards when a country has only a limited volume of production is particularly important for LDCs (and other small countries) where limited production runs can greatly increase the unit costs of processing to a standard that will allow access to the EU market. This could come to constitute an important barrier to trade. In this context derogation provisions will need to be developed which allow greater use to be made of non-originating raw materials, where this allows the unit costs of SPS-compliance in the countries concerned to be reduced to an economically viable level. If this does not occur, and emphasis is instead placed on developing administrative arrangements to ensure minimal impact on European markets, then not only will the immediate short-term benefits of ACP market access be limited but the scope for promoting longer-term benefits will also be undermined. Risk-based inspections Inspections of imports of food-and-agricultural products into the EU are increasingly based on risk assessments. Where a track record of exporting the product concerned exists, and the risk associated with the imports is known, inspections can be based on this knowledge. Thus for Kenyan cut-flower exports, where a long-established history of inspections exists and where the risk is known, only 5% of consignments are inspected, with the inspectors looking for known problems. For a new exporter such as Rwanda, however, since there is no track record and the risk threat cannot be assessed, imported cut flowers would be subjected to much more rigorous inspections and the whole consignment would be inspected. This can result in inspection fees being charged on new exporters at a level 400 times larger than those on an established exporter with a known risk profile. This can act as a serious commercial impediment to the development of non-traditional exports and appropriate arrangements need to be set in place to defray the high costs which new exporters face while establishing a track record for risk assessment. 150 A further concern is the growing burden of compliance with the increasingly strict standards being applied by private-sector-based bodies in the EU. These standards often go beyond the formal legal requirement, since the legal obligation to ensure the safety of food imported into the EU market is placed on the importer. If importers are not able to prove that they took all possible precautions to prevent unsafe food entering the EU market they can be fined around €40,000 per consignment and could face imprisonment for up to two years. January 2008 Executive brief Market Access This is leading to increased pressure on ACP suppliers from EU importers to ensure that all foodstuffs exported to the EU market are safe and subject to traceability requirements. This includes insistence on the adoption of ‘good practices’ from field to embarkation, with this being certified by independent organisations. Substantial new administrative burdens are thus being imposed on ACP exporters (along with the associated costs), burdens which fall particularly onerously on small-scale producers. It is also leading to EU importers refusing to deal with suppliers who cannot guarantee both the traceability and food safety of the consignments supplied. This area of development is viewed with such concern that AU trade ministers in April 2006 called for the EU to introduce appropriate control over standard setting undertaken by marketbased NGOs. This issue was taken up in an EC conference in February 2007 on the link between food-quality certification and value addition. The conclusions of this conference noted that while ‘private standards for imports from developing countries can improve farming efficiency, promote good agricultural practices and stabilise business relations … only the best farmers are able to be certified; the weakest may be excluded … schemes may be perceived as barriers to market access’. Against this background it called for ‘stakeholders in developing countries (to) play a role in the development of schemes and for technical assistance for capacity building’. It further recommended that ‘farmers and first-stage processors should participate in the development and operation – if not the ownership – of certification schemes’, presumably including those in ACP countries. Debate around these issues of private standards has also taken place in the WTO SPS Committee with some members suggesting that ‘governments should take responsibility for the WTO-compatibility of voluntary standards set by companies within their borders’. This was felt to be particularly relevant since ‘the remit of private-sector standards was expanding, now touching on issues such as production methods, environmental concerns … and labour and fair-trade issues’. The issue of harmonisation between public-sector and private-sector standards so as to reduce costs of administration is becoming a critical issue in ACP trade with the EU and one where an EU initiative would appear to be essential. In this context it should be noted that the EC supported calls for greater coordination of private labelling initiatives to reduce the administrative costs of compliance falling on developingcountry exporters. However, while broadly sympathetic to developing-country concerns the EC is profoundly reluctant to take any formal role in this area. It is likely to favour the adoption of a facilitating or coordinating role rather than a more interventionist approach. A last issue relates more to consumer preferences, notably the ‘food miles’ debate. In 2007 debate intensified over the environmental impact of air-freighting horticultural and floricultural exports from ACP countries to the EU market. While there are genuine environmental concerns over this practice, there are also commercial considerations linked to differentiating EU products from imported products, in order to attract premium prices. In terms of the environmental concerns it was only in October 2007 that the UK Soil Association agreed to continue to certify air-freighted fresh produce as organic, regardless of the carbon footprint of this trade. This decision was taken on the basis of the development benefits of this trade for poor people in some very vulnerable countries. 151 However the Soil Association Chair, Anna Bradley, argued that ‘it is neither sustainable nor responsible to encourage poorer farmers to be reliant on air freight’. She nevertheless recognised that ‘building alternative markets that offer the same social and economic benefits as organic exports takes time’. This suggests that this issue of ‘food miles’ is not going to go away. ACP producers’ associations in the affected sectors may therefore need to consider shifting the debate from ‘food miles’ to the overall carbon footprint of production and trade, with energy utilisation per employee being lower in ACP countries than in the EU. January 2008 Executive brief Market Access 6.2 Supply-side constraints Another cross-cutting issue which needs to be addressed relates to the supply-side constraints faced in ACP countries. Duty-free, quota-free market access in and of itself is not sufficient to attract the new investment to ACP countries which will be central to any process of structural economic transformation which lies at the heart of the ACP’s approach to trade negotiations and market-access issues. Comprehensive programmes of assistance, designed to address the specific supply-side constraints faced in developing production for particular EU markets in specific ACP countries and regions, will need to be designed and implemented before new investment flows are likely to occur. This constitutes an important agenda for action under the various aid-for-trade commitments which the EC and EU member states have made. 6.3 Supporting movement up the value chain The final cross-cutting issue that needs to be addressed relates to how to effectively support ACP countries in making the transition from serving bulk commodity markets, where in future EU prices will be little different from world market prices (so called ‘necessity purchase’ markets) towards increasingly serving quality-sensitive and value-added food and agriculturalproduct markets where price trends are likely to be stable or rising (so called ‘luxury purchase’ products). This represents one of the substantive agendas to be addressed under the much heralded ‘aid for trade’ initiative. However, it will also require permissive rules of origin and increased administrative collaboration to prevent food safety and SPS issues becoming barriers to movement up the value chain. 152 Executive brief January 2008 Food safety January 2008 Executive brief Food safety Table of contents 1. Elaborating EU food-safety policy ________________________________________ 155 1.1 The background and the approach _____________________________________________ 155 1.2 Harmonisation of maximum residue levels and the pesticide review ____________________ 155 1.3 The general food law________________________________________________________ 156 1.4 The hygiene package ________________________________________________________ 157 1.5 The food-and-feed control regulation ___________________________________________ 157 1.6 Private-sector standards _____________________________________________________ 158 2. Impact of EU food-safety policy on the ACP _______________________________ 159 2.1 Disaggregating the food-safety challenge_________________________________________ 159 2.2 Standard setting ___________________________________________________________ 160 2.3 Technical compliance _______________________________________________________ 161 2.4 The costs of technical compliance______________________________________________ 161 2.5 The costs of verification and control____________________________________________ 162 2.6 Transitional arrangements ____________________________________________________ 163 3. Trends and implications for ACP countries ________________________________ 164 3.1 Importance of agriculture to the ACP ___________________________________________ 164 3.2 The commercial impact of stricter food-safety standards_____________________________ 165 3.3 Existing EC programmes of support____________________________________________ 167 3.4 Responding to the food-safety challenge _________________________________________ 168 3.4.1 Establishing a dialogue on the application of standards __________________________________ 168 3.4.2 Assisting with the costs of upgrading to EU standards __________________________________ 168 3.4.3 Meeting information and technical assistance needs_____________________________________ 168 3.5 Establishing a special food-safety control facility___________________________________ 169 3.5.1 Addressing the problem of recurrent costs ___________________________________________ 169 3.5.2 Greater use of ‘temporary derogations’ ______________________________________________ 169 153 Summary January 2008 Executive brief Food safety Although food safety has been an important consideration in the EU for several decades, some recent developments are affecting exporters more radically. These include: harmonisation of regulations across all the countries of the Community; traceability and the precautionary principle under the 2002 general food law; the hygiene package; and the food-and-feed control regulation. The latter may have the greatest impact, as it places new responsibilities on governments of exporting countries. In addition some private-sector institutions are instituting higher standards even than those legislated for. There are five areas in which action needs to be taken to minimise adverse impacts on ACP exporters: standard setting; technical compliance; the costs of technical compliance; the costs of verification and control; and transitional arrangements. Temporary derogations may be needed as a result of the banning of 430 previously used pesticides. Longer-term trends and implications for ACP countries are analysed in relation to the relative importance of agriculture in different ACP regions and countries and the commodity areas most affected. These include the consequences of SPS standards, the impact on value-added activities, and the impact on state finances; EC support programmes are analysed in relation to these trends. The responses that will be needed to meet the challenges are then discussed, treating in turn: establishing a dialogue on the application of standards; assisting with the costs of upgrading to EU standards; and meeting information and technical-assistance needs. Finally the modalities of establishing a special food-safety control facility are discussed, and the costs of a basic programme of measures in each country/region are elaborated. 154 1. Elaborating EU food-safety policy January 2008 Executive brief Food safety 1.1 The background and the approach EU controls on food safety have been a fact of life for nearly 40 years, and have certainly been a factor in ACP-EU trade since the signing of the first Lomé Convention. Traditionally, these standards were applied at the sector level (e.g. in the beef sector) and had to be complied with in order to place products for sale on the EU market. The 1990s however saw an intensification of EU food-safety controls in response to a series of food-safety scares, largely arising from an over-intensification of EU agricultural production. These ranged from the BSE crisis in the UK to the scandal of dioxin contamination in Belgium. As a consequence of these shocks to the EU’s agriculture and food industry, the EC began work in 2000 on the establishment of a comprehensive food-safety policy designed to guarantee food safety on a systematic basis, ‘from farm to fork’. This policy was based on targeting measures to ensure food safety at critical points in the overall supply chain, where the risk was highest. It sees food safety as a risk-management exercise, requiring the integration of standards and controls at all levels of the food-supply chain ‘from farm to fork’. This also requires the establishment and effective operation of systems of national food-safety control and verification to ensure that the required standards are being met and the necessary controls effectively implemented. The requirement to establish effective national food-safety control and verification regimes is targeted mainly at EU member states, but it applies equally to all food-and-feed products placed on the EU market. It therefore de facto applies to third countries seeking to export food-and-feed products to the EU, including ACP countries. Four broad sets of regulatory measures can be identified as accounting for the vast majority of food-safety-related problems which ACP countries will face in their trade with the EU, these being:     harmonisation of maximum residue levels (Directive 91/414) and the pesticide review; the general food law (178/2002); the revision of hygiene regulations (852/2004, 853/2004); the food-and-feed control regulation (882/2004). There are concerns that in the elaboration of sanitary and phytosanitary (SPS) and food-safety measures, the EC goes beyond internationally established norms. While this is allowed within WTO rules, there are concerns that it could lead to the EU applying SPS standards in ways which de facto come to constitute barriers to trade. In this context, a number of ACP regions have sought in the EPA negotiations to establish an institutional basis for dialogue on the implementation of SPS and food-safety standards, so as to ensure that while EU human-, animal- and plant-health concerns are fully addressed, this is achieved in ways which minimise the additional costs placed on commercial exporters in ACP countries. In addition, a growing area of concern to ACP exporters is the proliferation of private standards for imports into the EU and the cost implications of these standards. 1.2 Harmonisation of maximum residue levels and the pesticide review The harmonisation process seeks to consolidate and simplify existing legislation, so that all regulations apply equally in all countries of the EU, from Sweden to Greece and from Poland to Portugal. This has thrown up some problems for traditional ACP exports. 155 January 2008 Executive brief Food safety For example, for citrus exports from Swaziland to the UK, there is now ‘zero tolerance’ on the presence of the fungal infection known as ‘citrus black spot’. If this is detected on any fruit the whole consignment is destroyed. This occurs despite the fact that ‘citrus black spot’ poses no threat to agriculture in the UK, (where there is no citrus production). The measure is felt to be necessary, however, since there is free circulation of goods within the EU and hence a possibility that an infected orange could find its way to Spain and, under particular environmental circumstances, infect citrus groves there. Since the destruction of even a single consignment would represent a serious economic loss to the Swazi citrus industry (given its small size), this measure is threatening to undermine the existing trade. The problems thrown up by the process of harmonisation are being compounded by the side effects of the pesticide review which, in this case, are increasing the costs of treating against disease. The pesticide review entails an expensive process of verifying the safety of pesticides to be registered. This has resulted in agrochemical companies declining to seek approval for products of lower commercial interest. Often these products are those used in tropical rather than temperate farming systems. As a consequence the review is leading to discontinuation of approval for pesticides which have long been used on products exported to the EU. This is occurring not on a scientific basis related to food-safety concerns but as a by-product of commercial considerations undertaken by agrochemical companies. In certain sectors this is posing expensive new challenges (since newer products tend to be more expensive than olderestablished pesticides) to ACP producers exporting to the EU market. Under the COLEACP programme efforts have been initiated to support the registration of some of the pesticides of greatest interest to ACP exporters, despite the reluctance of the companies concerned. An additional problem relates to the very process of establishing minimum residue levels, with often the minimum level allowed being driven by improvements in the technologies available for measuring residues (minimum level of detection), rather than an underlying threat to human health. This means that testing equipment installed in ACP countries can rapidly become out of date, incurring substantial recurrent investment costs in the technologies required for measuring and controlling compliance with EU standards. In some countries this problem has been addressed by sending all samples to the EU for testing. However, this is economically possible only where substantial volumes are involved and can be prohibitively expensive for small-scale or emergent exporters. 1.3 The general food law The general food law which was approved in 2002 came into effect in 2005 and covers all types of food and feed in the EU. It applies to all enterprises involved in the food chain (producers, processors, traders, importers) and establishes common responsibilities for all member states. Its principles also apply to imported food and feed. Two important principles can be identified under the general food law: traceability and the precautionary principle. Traceability seeks to trace the handling of food ‘from farm to fork’. With the exception of those products where specific rules are laid down, the legal requirement for traceability is limited to ‘one step forward, one step back’, that is the ability at each stage to trace where the food came from previously and to whom it is going subsequently. The aim is to facilitate the withdrawal from the market of foods from particular sources, should a threat to health be identified. The obligations this places on importers has served to increase their power in the supply chain, often to the detriment of small-scale ACP producers. The precautionary principle allows measures to be taken where there is a possibility of harmful effects. It does not require full scientific verification of the threat before action is taken. Significantly it allows the EC to act on its own initiative to avert threats to public health. 156 1.4 The hygiene package January 2008 Executive brief Food safety The hygiene package of measures involves the harmonisation of existing hygiene measures across member states with the overall aim of establishing a single hygiene regime covering all food-and-feed operators. It places primary responsibility for food safety with the enterprises involved in the industry at all levels and requires them to implement a ‘hazard analysis and critical control points’ (HACCP) system. Significantly, imports of all products covered by these hygiene regulations have to meet these EU standards. While HACCP compliance in third countries is not a formal legal requirement, imports have to meet the standards which HACCP systems are intended to ensure. As a consequence the retail chains tend to insist on the ‘voluntary’ application of the HACCP system. The hygiene package Hygiene 1, 852/04 – general requirements, primary requirements, production, technical requirements, HACCP, registration/approval of food businesses, national guides to good practice. Entered into force January 1st 2006. Hygiene 2, 853/04 – specific hygiene rules for food of animal origin (approval of establishments, health and identification marking, imports, food-chain information). Entered into force January 1st 2006. Hygiene 3, 854/04 – detailed rules for the organisation of official controls on products of animal origin (methods to verify compliance with Hygiene 1 & 2 and animal by-products regulation (1774/2002). Entered into force January 1st 2006. Hygiene 4, 2002/99/EC – laying down health rules governing the production, processing, distribution and importation of products of animal origin. Entered into force January 1st 2006. Hygiene 5, 2004/41/EC – repealing 12 existing directives. Entered into force on January 1st 2006. 1.5 The food-and-feed control regulation Potentially by far the most important measure impacting on ACP food-and-agricultural product exports to the EU is the food-and-feed control regulation, which entered into force on January 1st 2006. This regulation de facto places an entirely new level of responsibility on ACP government departments to ensure the safety of food traded into the EU market. According to the EC the new system should help third countries to meet EU standards by clarifying what is required. However, from an ACP perspective this regulation now places public authorities in ACP countries at the heart of the trade in food and agricultural products into the EU market. Serious concerns have been raised by private-sector operators in ACP countries as to the ability of existing government institutions to meet the challenge of verification of compliance with detailed food-safety rules, given the limited financial resources available and the existing institutional arrangements relating to food-safety compliance in ACP countries. This creates a situation in which, even if private-sector operators have fully met all EU standards, if the government ‘competent authority’ has not been able to verify compliance to the EC’s satisfaction, then the EU market could be closed to exports from the ACP country concerned. The EC has recognised the challenges this will give rise to in developing countries and has committed itself in the formal regulation to extending support to developing countries in meeting its provisions (see later section on EU programmes of support). While the EC has made it quite clear that it has no intention of taking precipitate action under this regulation in ways which might disrupt existing trade, in February 2007 it was made clear that monitoring of the implementation of EU standards by third countries would intensify in 2007 and 2008, with more frequent inspections, follow-up inspections and on-the-ground verification. In November 2007 the implications of this became apparent when, following a visit by the EU Food and Veterinary Office (FVO), the recommendation was made that South Africa be removed from the list of exporters of ostrich meat, poultry, milk, honey, pork and beef. 157 January 2008 Executive brief Food safety According to press reports ‘EU spokesperson Philip Tod has confirmed the delisting recommendation, adding that the move came after an EU delegation of health inspectors had declared the country’s residue-control systems ineffective and dysfunctional’. This move threatens the future of the Rand 1.2 billion ostrich-meat export business, since the EU takes 90% of South Africa’s ostrich-meat exports. The recommendation of the EU health- and consumer-protection service that South Africa be delisted is an indication of the tightening up of import controls which is under way following the completion of the priority programme of internal checks and inspections. In this context ACP countries are likely to find themselves subject to rigorous inspections of their food-safety enforcement capacity in the coming years, and if these systems are not up to EU standards, de facto prohibitions on imports from the affected countries could be introduced. If South Africa, despite its wealth and human-resource base has a ‘lack of local staff to monitor the control system’, the question arises: how well placed will other southern and eastern African countries be in ensuring sufficient local staff to monitor the control system? The EU Food and Veterinary Office (FVO) Under the auspices of the EC Director-General for Health and Consumer Protection a special EU Food and Veterinary Office (FVO) has been established to ensure that effective food-safety control systems are in place in the EU and to inspect the national food-safety control capacity of national authorities in third countries seeking to place food and agricultural products on the EU market. The FVO seeks to:   promote effective food-safety control systems;  contribute to the development of EU food-safety policy. check on compliance with the requirements of EU food-safety legislation, within the EU and third countries exporting to the EU; It undertakes this role primarily through a programme of inspection visits both within the EU and to third countries. Inspection priorities are identified on an annual basis and the programme of inspections is available on the FVO website. On the basis of its inspections the FVO makes recommendations for improving food-safety control and compliance, with the ‘competent authority’ in the country concerned being requested to provide an action plan on how it intends to address any shortcomings. The action plan is evaluated and its implementation monitored. On the basis of its work the FVO may recommend amendments to EU regulations or suggests ways in which current practices should be modified. The FVO has a complement of 163 staff, 81 of whom are inspectors. 1.6 Private-sector standards A further level of food-safety challenge above and beyond those posed by these four broad sets of measures exists for ACP food- and agricultural-product exporters, namely those arising from the increasingly strict standards being applied by private-sector-based bodies in the EU. These standards often go beyond the formal legal requirement, since the legal obligation to ensure the safety of food imported into the EU market is placed on the importer. If importers are not able to prove that they took all possible precautions to prevent unsafe food entering the EU market they can be fined around €40,000 per consignment and could face imprisonment for up to two years. This is leading to increased pressure on ACP suppliers from EU importers, to ensure that all foodstuffs exported to the EU market are safe and subject to traceability requirements. This includes insistence on the adoption of ‘good practices’ from field to embarkation, with this being certified by independent organisations. Substantial new administrative burdens are thus being imposed on ACP exporters (along with the associated costs), burdens which fall particularly onerously on small-scale producers. It is also leading to EU importers refusing to deal with suppliers who cannot guarantee both the traceability and food safety of the consignments supplied. 158 January 2008 Executive brief Food safety This area of development is viewed with such concern that AU trade ministers in April 2006 called for the EU to introduce appropriate control over standard setting undertaken by marketbased NGOs. This issue was taken up in an EC conference in February 2007 on the link between food-quality certification and value addition. The conclusions of this conference noted that while ‘private standards for imports from developing countries can improve farming efficiency, promote good agricultural practices and stabilise business relations … only the best farmers are able to be certified; the weakest may be excluded … schemes may be perceived as barriers to market access’. Against this background it called for ‘stakeholders in developing countries (to) play a role in the development of schemes and for technical assistance for capacity building’. It further recommended that ‘farmers and first-stage processors should participate in the development and operation – if not the ownership – of certification schemes’, presumably including those in ACP countries. Debate around these issues of private standards has also taken place in the WTO SPS Committee with some members suggesting that ‘governments should take responsibility for the WTO-compatibility of voluntary standards set by companies within their borders’. This was felt to be particularly relevant since ‘the remit of private-sector standards was expanding, now touching on issues such as production methods, environmental concerns … and labour and fair-trade issues’. The issue of harmonisation between public-sector and private-sector standards so as to reduce costs of administration is becoming a critical issue in ACP trade with the EU and one where an EU initiative would appear to be essential. In this context it should be noted that the EC supported calls for greater coordination of private labelling initiatives to reduce the administrative costs of compliance falling on developing-country exporters. However, while broadly sympathetic to developing-country concerns the EC seems reluctant to take any formal role in this area, and is likely to favour the adoption of a facilitating or coordinating role rather than a more interventionist approach. New issues Beyond these issues two new areas of concern emerged in 2007 which could potentially impact on certain ACP food- and agricultural-product exports. The first of these relates to the application within the EU of new rules on animal transport which establish higher standards for vehicles and equipment and stricter enforcement standards for treatment of animals in transport. The significance of this development lies in EU efforts to ‘internationalise’ these animal-welfare standards. Any such internationalisation could be very costly for ACP beef exporters, whose production systems are based on extensive grazing and are often spread across thousands of square kilometres. In a context where in some countries compliance with foodsafety standards already accounts for between 8% and 10% of the total revenue earned on export sales to the EU, any additional costs arising from animal-welfare regulations could further undermine the attractiveness of exporting to the EU market. It should be stressed, however, that there are currently no EC plans to extend the provisions on animal transport to the handling of cattle from which beef is produced for export to the EU. 2. Impact of EU food-safety policy on the ACP 2.1 Disaggregating the food-safety challenge Given the importance of the agriculture sector in most ACP countries and the major role food and agricultural products play in ACP exports to the EU the implications of the EU’s new stricter food-safety policy are potentially profound. There is an urgent need for ACP policy makers and private operators in the food-and-agricultural sector to understand the different trade-policy issues arising from the EU’s new food-safety policy and to develop appropriate policy response to address these issues. 159 January 2008 Executive brief Food safety The issues arising for ACP countries from the EU’s new food-safety policy can be divided into five areas:      standard setting; technical compliance; the costs of technical compliance; the costs of verification and control; transitional arrangements. 2.2 Standard setting The EU has made it clear that it has a sovereign right to establish its own food-safety standards and that it will do so within the framework of the principles mutually agreed within the WTO. It has made it clear that there can be no negotiations with third countries on the food-safety standards applied in the EU. This is the EU’s sovereign right, and provided food-safety standards are applied in ways which do not discriminate between EU and third-country suppliers, then the EU is not in contravention of any of its international obligations. This reality needs to be recognised and respected. A key issue, however, is precisely how the EU intends to implement the various new food-safety regulations in the varied circumstances characterising the production and supply of agricultural products from ACP countries. Here there would appear to be a need for dialogue if the costs of food-safety compliance are to be contained within reasonable limits which do not come to constitute a barrier to continued trade. This can perhaps best be illustrated through a specific case, that of beef imports from ACP countries. In the beef sector a number of questions arise: Will respect for the objectives of EU regulations need to be attained in the same way in all countries, or will the EU be able to tailor requirements to country circumstances (with countries at high risk of disease facing stricter controls than those with no history of such diseases)? Will all provisions of the applicable EU regulations be equally applicable to production in third countries, or will certain aspects be waived, provided that the safety of meat destined for the EU market is not compromised (for example with regard to disposal of animal by-products)? Will the exemptions to small-scale trade in animal feed between farmers within the EU be extended to small-scale feed trading in third countries (on the basis that for feed-contamination to be of concern it must affect a minimum level of total feed intake)? There are many uncertainties over precisely how EU food-safety regulations relating to the beef sector will be applied. These uncertainties need to be cleared up immediately before expensive, perhaps inappropriate, programmes to foster compliance are set in place. Currently these issues are being dealt with at the technical level through the preparation by the EC of guidance notes and informal consultations. However, this basis provides ACP countries with no guarantees or security, should EU personnel or policy change, with regard to how the various regulations should be implemented. In this context there would appear to be a need to establish formal structures for dialogue around the issue of how various EU food-safety regulations are to be applied in practice under the different circumstances prevailing in ACP countries. Such dialogue has already taken place over the application of private standards, with the recent recognition of the equivalency of the KENYAGAP code to those of EUREPGAP (now GLOBALGAP), with the KENYAGAP code having been modified to take into account local realities in ways which, while less costly to implement, ensured that the underlying food-safety objectives were achieved. If such effective dialogues can take place at the private-sector level, it should be possible at the public-authority level. 160 January 2008 Executive brief Food safety 2.3 Technical compliance In terms of compliance with food-safety standards, most ACP enterprises involved in exporting to the EU market have no problem in ensuring technical compliance with standards applied by the EU. The technical and scientific capabilities can be secured to ensure respect for EU foodsafety standards. The key issue however is one of cost. This is a particular problem in a context in which many of the public utilities that are taken for granted in EU countries may not be operating to European standards, so that the private-sector operators involved in exporting will themselves have to carry part of the costs which would normally be carried by public-sector bodies in Europe. 2.4 The costs of technical compliance The financial implications in ACP countries of meeting EU food-safety standards should not be underestimated. Often the fixed investment costs involved are high. This means that a large volume of throughput is required to reduce the unit cost of food-safety compliance. This places many ACP countries at a distinct disadvantage, since being small economies, the volume of production destined for the EU market is also relatively small. The cost of ensuring food-safety compliance could then price ACP production out of the EU market. This was particularly the case during the period when EU food-safety regulations were still evolving, and led to the abandonment of the export trade with the EU in some sectors in some ACP countries (e.g. game-meat exports from Namibia). In some cases the costs of technical compliance with SPS measures at the level of the enterprise represents between 7% and 8% of industry costs (e.g. the Namibian beef sector). Overall studies suggest that ‘SPS measures can represent between 2% and 10% of a company’s export turnover’. In July 2007 this issue was raised in the WTO in the SPS Committee by Argentina which criticised the standards for pesticide residues being established by developed countries which are stricter than those agreed in the CODEX Alimentarius. The Argentinean paper highlighted how ‘additional costs related to complying with the pesticides standards falls on countries which do not subsidise their agricultural sector – something the importing countries setting the standards often do’. This, it was argued, constrained market entry. Against this background Argentina called for a bigger role for the CODEX Alimentarius (a jointly managed FAO/WHO body) in standards setting. Menu of enterprise-level needs         Supporting the application of HACCP principles Supporting adoption of new patterns of cost-effective pesticide usage Need for certification and accreditation through local or regional bodies to reduce costs Need for more technical personnel Need for more management personnel Access to training materials and facilities Access to information Access to equipment Studies have identified the availability of low-cost financing as a principal constraint on SPScompliance at the level of individual enterprises. However, other appropriate instruments and initiatives may well need to be established in order to address other particular needs (e.g. access to information and access to skilled personnel). 161 In addition, a further way that the EC could perhaps help ACP producers to address the costs of SPS and food-safety compliance is through support to ACP suppliers in securing the full commercial benefits to be gained from higher quality production. This is after all a critical challenge which the EC is facing internally and one which was a central focus of the February 2007 conference. Extending support in this area would prevent quality certification becoming what the director of COLEACP’s PIP programme described as little more than an ‘expensive admission ticket’ to the EU market. January 2008 Executive brief Food safety 2.5 The costs of verification and control The costs of setting up national food-safety control authorities in ACP countries to verify and ensure compliance with EU food-safety regulations should not be underestimated. In many ACP countries there is no national food-safety authority, with functions currently being split across different departments. While this did not pose a problem when EU controls were sectorbased, now that they apply to the integrity of the national food-safety control system as a whole, this is posing more of a challenge. Work undertaken for the CTA by CERREX-Ltd UK has identified seven levels at which this issue of institutional development of national food-safety control capacity needs to be addressed. These include:        access to information on the standards themselves; securing the skilled labour required; the costs of skilled labour; the costs of capital equipment for testing and verification (equipping laboratories); inadequate legislative and regulatory frameworks; the need for national food-safety control strategies; institutional consolidation of food-safety responsibilities. These all represent initial costs. Menu of initial food-safety control-related costs Indicative cost in US$ (2002) Enhancing institutional capacity through establishment of reference and training centre (regional level) 6,245,000 Sub-total regional 6,245,000 Strengthening institutional framework of national food-safety controls 86,000 Updating the legal and regulatory framework 76,000 Strengthening and rationalising the food-inspection service Upgrading scientific and technical capabilities of food-safety control laboratories Training food-industry quality-control managers, including in HACCP Sub-total national 604,000 1,505,000 120,000 2,391,000 Recurrent costs of maintaining and running facilities not available Source: Martin Doherty, ‘Study of the consequences of the application of SPS measures in ACP countries’, CTA, May 2003 The major costs are incurred however through the maintenance and running of the facilities once established. This is likely to prove the most difficult area, since ‘the commercial environment within which testing bodies exist often prove insufficient to produce sufficient fee162 January 2008 Executive brief Food safety income to pay for continuing updates’. This means that in part these extra costs will need to be covered by the government budget on an ongoing basis, if the conditions for exporting to the EU are not to be undermined. One option for addressing this issue, put forward in the beef sector in 2003 by Namibian beefsector interests, was the immediate elimination of residual tariff barriers and the introduction of an industry levy equivalent to the removal of the tariff to provide funds on an ongoing basis for the financing of the recurrent costs of food-safety compliance (at £0.15 per kg on 10,000 tonnes of beef exports this would generate £1.5 million per annum to cover recurrent costs). Implicit in this proposal was the need to ‘self generate’ revenues for the financing of food-safety compliance verification. In this context consideration may need to be given to using grantfinanced loans to generate own-resource revenues (see later section for details). Looking beyond this institutional level there is a need to consider how EU food-safety objectives can be guaranteed in ways that are consistent with local realities in ACP countries. An important aspect of this relates to the ‘software’ of food-safety compliance, the people involved in the process. The elaboration of the application of EU food-safety regulations can result in demands for trained personnel to operate the system that are quite impractical in the circumstances prevailing in the ACP countries concerned. However, alternative methods of managing and deploying scarce skilled labour could be designed which ensure the same objective – the placing of safe food, and only safe food, on the EU market. For example, in Namibia the EC appears to be insisting that food-safety requirements require all animal-health inspectors to be college-trained. This poses a problem at two levels. First, what do you do with the experienced animal-health inspectors who are not college trained? Second, how do you finance the increased wages that will be required to attract and retain college-trained animalhealth inspectors? In a context of declining life expectancy as a result of the HIV/AIDS pandemic (with geographically mobile and sexually active animal-health inspectors being a vulnerable group) how can adequate levels of animal-health inspection be ensured at a sustainable cost given the human-resource constraints faced in Namibia? Clearly a dialogue is required on this issue to ensure that, while respecting animal-inspection standards, an excessively high level of formal education qualifications imposing significant additional costs, is not made a requirement of the operation of the system. 2.6 Transitional arrangements In addition to these more general problems, particular transitional problems are also arising. This has been the case especially in the fruit-and-vegetable sector as a result of the introduction of ‘zero tolerance’ and associated strict minimum residue levels, and the pesticides review. The pesticides review has seen over 430 pesticides that were previously approved for use withdrawn from the market.1 Horticulture and floriculture producers in the ACP thus face the withdrawal of authorisation to use certain products, even where these may be safer than alternatives or even where alternatives simply do not exist. This is potentially a significant problem. ‘Temporary derogations’ may well be required in order to address this problem in the short term while cost-effective alternatives are found. This would extend the approach applied within the EU for certain products which are seen as having ‘essential uses’. This relates to products which have not been defended by the manufacturer, but for which there is no readily available alternative for the crops in question, and for which no food-safety concerns arise. For more details see the EC press release IP/03/957-08/07/2003, which can be found at: http://europa.eu.int/rapid/start/cgi/guesten.ksh?p_action.gettxt=gt&doc=IP/03/957|0|RAPID&lg= EN&display= 1 163 3. Trends and implications for ACP countries January 2008 Executive brief Food safety 3.1 Importance of agriculture to the ACP In 52 ACP countries agriculture accounts for over 60% of employment. As a consequence it is central to efforts to alleviate poverty, particularly in Africa. Agricultural-product exports accounted in 2005 for 28.3% of total ACP exports to the EU and 45% of non-energy-related EU imports from the ACP. In some regions the importance of the agricultural sector to the ACP-EU trade relationship is even more important than these figures imply. For the ESA region, some 57.8% of exports to the EU are of food and agricultural products, ranging from a high of 92.6% for Burundi to a low of 10.2% for Djibouti. All of these exports will potentially be impacted on by various dimensions of the EU’s new food-safety policy. Importance of food and agricultural products in ACP exports to the EU (€ million) Region % Total exports 28,347 3,110 558 24,648 1,805 8,109 10,534 2004 Food and agricultural product exports* 8,462 937 402 7,125 1,231 1,628 3,288 29.9 30.2 68.3 28.7 68.1 20.1 31.2 4,318 448 2,828 6,174 8,200 8,152 6,423 Total exports ACP Caribbean Pacific Africa EAC SADC CEDEAO & Mauritania CEMAC & STP & DRC UEMOA COMESA (excl. Egypt) ACP LDCs African LDCs Franc zone 36,034 3,787 1,245 31,001 1,570 10,047 13,761 2005 Food and agricultural product exports 8,583 916 428 7,239 1,382 1,687 3,118 23.9 24.1 34.5 23.2 87.9 16.7 16.2 10.4 5,392 526 9.8 2,026 2,756 71.6 44.6 2,837 7,863 1,805 2,915 63.6 37.0 1,872 1,843 2,460 22.9 22.6 38.3 10,808 10,749 7,502 2,175 2,147 2,308 20.1 20.0 30.8 % * Based on TDC classification I – IV for agricultural products. Source: COMEXT rs4, TradeC-2 (BS). Major product categories likely to be affected by stricter SPS and food-safety standards include:             meat products; fisheries products; cut flowers; edible vegetables; edible fruit and nuts; coffee; tea; spices; cereals/flour; animal and vegetable oils; sugar and sugar confectionery; cocoa and cocoa confectionery. These product areas cover the vast majority of ACP agricultural exports to the EU. Cases of market closure as a result of perceived infringements of EU food-safety standards are a growing 164 Executive brief Food safety feature of the ACP-EU trade relationship. With the application of the new EU food-and-feed control regulation to imports from third countries, such disruptions of trade could be increasingly common and affect a growing volume of trade, as the basic integrity of national systems of food-safety control are brought into question. This is why in March 2003 the then EU Health and Consumer Protection Commissioner, David Byrne, highlighted for the executive directors of the World Bank the importance of getting to grips with the food-safety challenge. He acknowledged that high EU food-safety standards were ‘difficult to meet, in particular for developing countries’ and argued that ‘more should be done to assist developing countries to meet our standards’. Rather ominously, however, he continued that ‘unless there is a serious effort to also strengthen the capacity of developing countries to meet the food-safety standards of the developed world, the opportunities presented by trade liberalisation in the food area may prove illusory’. In view of the seriousness of the challenges faced it was somewhat disappointing that in discussing the assistance required Commissioner Byrne focused almost exclusively on promoting LDC participation in international fora dealing with SPS regulations and certification, rather than on concrete programmes of assistance to national producers and institutions to respectively comply with and verify compliance with SPS standards. January 2008 3.2 The commercial impact of stricter food-safety standards Analysis conducted for the CTA suggests that the increasing complexity and cost of meeting EU SPS standards is having serious commercial implications. One area identified relates to the concentration of power within the supply chain on importers. The 2003 CTA study noted that stricter SPS measures were ‘forcing formerly independent producers to become dependent on single supplier contracts with major EU importers, who in turn assist them to meet SPS measures’. In the long term however, this is weakening the commercial negotiating capacity of ACP suppliers, with the importers dictating key aspects of the commercial relationship. In this context the recommendation from the conclusions of the February 2007 conference on the link between food-quality certification and value addition calling for greater collaboration between member states and the EC to ‘prevent collusion or abuse of dominant positions’ would appear to be relevant. A further area identified in the CTA study related to the impact on the development of valueadded processing activities in ACP countries. Stricter SPS standards were ‘deterring small growers and producers of semi-processed foodstuffs from taking the next step of development into processing where the main potential for added-value profit exists’. It suggested that the structural development of ACP countries within agricultural value chains was thus being ‘frozen’ as a consequence of stricter EU food-safety regulations. This is a matter of considerable concern, since one of the main policy responses to the erosion of preferences on basic agricultural products which ACP countries are facing, is to support a process of moving up the value chain, to reduce vulnerability to the declines in basic agricultural commodity prices. It would appear that the stricter food-safety policy is making this transition harder for producers in ACP countries to achieve. A third area of impact relates to the deterrent impact on ACP firms who may wish to expand out of the national and regional base to international trade with the EU. Many of these firms ‘are capable of exporting internationally but do not see commercial advantage in meeting the ongoing costs of SPS standards that their products must carry on their price on foreign markets’. While this is a worrying development, since it significantly reduces the ability of regional integration to provide a platform for the growth of international exports, its consequences go much further. In certain ACP regions, the more advanced and economically more significant economies are actively trying to develop food-safety standards which will allow them to attain recognition of ‘equivalency’ with EU standards. 165 Should this occur then stricter EU food-safety standards will not only have consequences for the ability of ACP firms to expand out of regional markets into international markets, but could even drive some ACP producers out of their own regional markets, as EU food-safety standards become the norm. In the context of the debate around mutual recognition, the implications for regional trade of stricter EU food-safety standards are an issue which will require careful attention. Potential impact: the case of the ACP horticultural sector January 2008 Executive brief Food safety ‘In the ACP countries, some 45 million people were dependent on horticultural exports to the EU for their livelihood, and legislative changes are likely to have effects as follows:     a fall in export production and increased production costs; higher risk of crop wastage and crop failure; exclusion of small growers from the supply chain; exclusion of smaller countries from the export chain. Smallholders were most affected because:     importers will exclude exporters relying on small outgrowers; exporters will not source from smallholders where alternative sources exist; production costs will increase (more expensive chemicals and controls); smallholders may turn to local markets/subsistence as an alternative. Workers would suffer through:     loss of jobs, especially in SMEs; increased seasonality of work and reduced job security; reduced income; social disruption. Developments in this area were one of the primary drivers behind the establishment of the COLEACP pesticides initiative programme (PIP) to help exporters to comply with the new regulations’. ‘COLEACP suggests that the ACP horticultural sector has €850 million of exports at risk from the EU pesticides regulations, which could reduce exports by €60 million annually. Similarly estimates of the impact of lower aflotoxin MRLs in foodstuffs suggest that African exports could potentially decrease by around US$670 million (approx. 64% of the total).’ Source: Martin Doherty, ‘Study of the consequences of the application of SPS measures in ACP countries’, CTA, May 2003 Implications for government finances New EU food-safety standards, particularly the food-and-feed control regulation, will place new responsibilities on ACP governments that will carry important financial implications, both relating to initial capital costs but more significantly the recurrent costs incurred in maintaining and running national food-safety control authorities. For smaller ACP countries in particular (bearing in mind that over half of ACP countries have populations below two million) it is highly unlikely that a volume of export production can be generated that will provide a selfsustaining basis for the financing of food-safety institutions. Ongoing support to government institutions will thus be required if these smaller ACP economies are not to be driven out of exporting food and agricultural products to the EU. This is particularly the case for LDCs, where special assistance programmes will be needed. 166 3.3 Existing EC programmes of support January 2008 Executive brief Food safety The EC is currently supporting two major sector-based programmes to support food-safety compliance in ACP countries, namely:  the €29 million pesticide-initiative programme designed to improve the competitiveness of the horticulture sector, implemented through COLEACP;  the €42.7 million programme of assistance to fish exporters to help them to meet international health standards. In addition to these sector-based programmes the EC has established the €50 million trade.com programme. This has three main components, one of which relates to the funding of pilot projects to address institutional and supply-side constraints with a special emphasis on enabling ACP countries to meet technical standards and SPS requirements. Unfortunately this represents a relatively minor component of the programme, with more emphasis being given to immediate needs related to trade-policy formulation and trade negotiations. The EC has however also launched a €30 million pan-ACP food-safety compliance initiative, for which an initial call for proposals was launched in October 2007 (the deadline for submissions was November 23rd 20072). Putting EU SPS support to ACP countries in context With moves towards the implementation of the EU’s ‘farm to fork’ food-safety policy, EU member-state governments expressed concerns that the costs associated with the implementation of the new standards could result in a loss of price competitiveness for EU producers. Against this background in May 2003 the EC announced the creation of four schemes to support EU farmers in meeting the higher costs associated with these regulations since, as Commissioner Fischler noted, these higher costs ‘have not always been adequately compensated by the market’3. These four schemes include:   a scheme to help farmers introduce the new and exacting standards;   a five-year scheme to support farmers’ participation in certification programmes; a scheme to promote animal welfare, with those who farm better than the normal good-husbandry standard receiving permanent aid to compensate for the costs and income foregone; a scheme for the advertising of quality labelled products by producer groups. In the 2004 EU agricultural budget some €248 million was allocated to food safety and animal-, plantand human-health protection programmes. In addition, in a context where it was recognised that the market does not always adequately reward higher quality, EU farmers are also being assisted in meeting these higher quality standards in part through the direct aid payments being made from the EU budget while processing companies are being supported through the broader rural-development envelope. In the run-up to enlargement the Special Programme of Assistance to Agriculture and Rural Development provided over €550 million per annum in assistance to prepare agricultural sectors and rural areas for full incorporation into the EU market. Between 2000 and 2004 some €1.33 billion was made available to pre-accession countries. Within these programmes the promotion of competitive structures and enterprises in the food-processing sector was accorded a high priority, with often as much as two-thirds of expenditures being allocated for this purpose. An important component of this support directly related to food-safety compliance. The programme title is ‘Strengthening food safety systems through SPS measures in ACP countries’ financed under programme EuropeAid/125959/C/ACT/Multi. 3 See speech by Commissioner Fischler to EU agriculture ministers at: http://europa.eu.int/rapid/start/cgi/guesten.ksh?p_action.gettxt=gt&doc=SPEECH/03/238|0|RAPI D&lg=EN&display= 2 167 January 2008 Executive brief Food safety In addition to this programme the EC is supporting a multiplicity of initiatives at the national level. For example in Burundi it finances a dedicated SPS programme from former STABEX funds, while in Namibia it used 9th EDF NIP funds to finance an emergency programme of measures to ensure food-safety compliance in the beef sector, where the findings of the EU FVO report threatened the closure of this trade unless urgent remedial measures were adopted. Significantly this programme was funded from the existing NIP allocation to a major ruraldevelopment programme which was still in preparation. This raises important issues related to internal resource-allocation in ACP countries. With food-safety responsibilities often being spread across government departments, there is, in most ACP countries, no strong institutional basis for the mobilisation of financial resources to address food-safety priorities. This means that the concerned departments are often poorly placed in mobilising funds from global national allocation (e.g. the NIP), where stronger spending departments (transport, education, health, agriculture) with an established track record of accessing EC assistance often take priority in resource-allocation decisions. This results in food-safety departments and authorities in ACP countries often being deprived of the resources required to address this critical issue. Thus in extending support to ACP countries to address food-safety challenges it may be necessary to establish dedicated facilities and financial allocations, if institutional structures for ensuring food safety in ACP countries are to be effectively assisted in meeting the challenges that lie ahead. While the pan-ACP €30 million facility represents a first step in this direction, the resources available are only likely to be sufficient to meet initial diagnostic needs and are unlikely to be sufficient to finance the subsequent investment needs. 3.4 Responding to the food-safety challenge 3.4.1 Establishing a dialogue on the application of standards With regard to food-safety standards there would appear to be a need for formal structures for dialogue around the issue of how various EU food-safety regulations are to be applied in practice under the different circumstances prevailing in ACP countries. This would appear to be vital if expensive, perhaps inappropriate, programmes to foster compliance are not to be set in place which are subsequently challenged by the EU. Similar frameworks for dialogue would appear to be necessary with regard to private-sector standards, building on the experience to date in Kenya. 3.4.2 Assisting with the costs of upgrading to EU standards Given the financial implications in ACP countries of meeting EU food-safety standards there would appear to be a need for a low-cost loan facility to assist ACP enterprises in making the necessary investments to meet EU standards. A facility should be established locally (so as to eliminate exchange-rate risk) using grants for on-lending at highly concessional rates of interest, and it should operate as a revolving fund, so as to provide an ongoing source of support for food-safety improvements. 3.4.3 Meeting information and technical assistance needs In addition there would appear to be a need for a number of other initiatives designed to provide timely access to information on the evolution of food-safety requirements and to provide targeted technical assistance to ACP enterprises in finding cost-effective means of meeting EU food-safety standards in the particular circumstances faced in individual countries. 168 3.5 Establishing a special food-safety control facility January 2008 Executive brief Food safety A major area where grant-financed support would appear to be needed is in establishing effective national food-safety control capacity in ACP countries. What is required in the initial phase in this regard at the national level is known: the costs involved are approximately €2 million per ACP country. However, this would need to be supplemented by certain regional facilities which would cost around €5 million each. This gives a total funding requirement of approximately €180 million for these initial measures to enhance food-safety control capacity in ACP countries. Given the scale of funding required overall, this implies a need for an expansion of the programme ‘Strengthening food-safety systems through SPS measures in ACP countries’, perhaps via the establishment of dedicated regional food-safety trust funds in the various interim EPAs now being concluded. Certainly funds would need to be more easily accessible and available both for a rolling programme of structural measures and emergency measures, should these prove necessary in order to maintain existing market access. Regionally based trust funds, under the management of accountable private-sector-led boards of trustees would appear to offer a better model for aid deployment in this area than the horizontal programmes that the EC has established to date. This would appear to be essential because existing food-safety bodies in ACP countries may lack the institutional muscle to secure the necessary finances from their NIP allocations, where large spending ministries tend to dominate the NIP-programming process. 3.5.1 Addressing the problem of recurrent costs An additional area where considerable creative thought will be required relates to the financing of the recurrent costs of national food-safety control authorities, since in many ACP countries the commercial environment within which such bodies operate cannot sustain the level of user fees which would be required to make such facilities self financing. Solutions will need to be found to this challenge if the future basis for exporting to the EU is not to be undermined. One option in this regard relates to the use of the interest-rate ‘spread’ on grant-financed loans made available under the EDF4. Grant-financed loans could be made available through the trust-fund approach for on-lending to commercial enterprises for investment in meeting safety standards. The bulk of the interest-rate ‘spread’ between the price at which Cotonou Agreement funds are made available and the interest rate charged to the commercial enterprises (which would be market-related) could then be used to finance the infrastructure for the verification of foodsafety compliance. 3.5.2 Greater use of ‘temporary derogations’ A final area where action is needed links to transitional problems associated with the pesticide review. Consideration needs to be given to the more generalised use of ‘temporary derogations’ for products not submitted for approval under the new procedures, but where no food-safety concerns arise and there are no readily available alternatives. The difference between the interest rate paid to the EIB for the loan and the interest rate charged to the final borrower. 4 169 Executive brief October 2008 Executive brief Fisheries market access October 2008 Fisheries market access: tariff and non tariff aspects Table of contents 1. The international context of EU-ACP trade in fishery products ________________ 175 1.1. General context and emerging issues ___________________________________________ 175 1.2 International legal framework _________________________________________________ 176 2. The significance of the EU market for ACP exporters of fish and fishery products 176 3. The significance of ACP fish and fishery products for the EU market ___________ 177 4. The basis for ACP fisheries exports to the EU market________________________ 178 4.1. Tariff regimes_____________________________________________________________ 178 4.2. Rules-of-origin issues _______________________________________________________ 179 4.3. Investments ______________________________________________________________ 180 4.4. Erosion of preferences______________________________________________________ 181 5. Non-tariff barriers _____________________________________________________ 181 5. 1. Food safety issues _________________________________________________________ 182 5.1.1. Standard setting _______________________________________________________________ 182 5.1.2 Country-eligibility criteria ________________________________________________________ 182 5.1.3 The costs of technical compliance __________________________________________________ 183 5.1.4. HACCP and its implications______________________________________________________ 183 5.1.5. The costs of verification _________________________________________________________ 184 5.1.6. Technical assistance ____________________________________________________________ 184 5.2 EU legislation on residue levels and heavy metals in fishery products ___________________ 184 5.2.1 Residues of veterinary medicines ___________________________________________________ 184 5.2.2 Heavy metals in fish ____________________________________________________________ 184 5.3 Labelling as a technical barrier to trade __________________________________________ 185 5.4 The IUU catch-certification scheme ____________________________________________ 186 173 Summary October 2008 Executive brief Fisheries market access Almost 40% of total world fisheries production, from both aquaculture and capture fisheries, enters international trade. The contribution of aquaculture to fisheries production and to the international trade in fishery products has grown rapidly in recent years. In a context of declining catches in wild fisheries, increasing attention, including in ACP countries, is being given to the potential of aquaculture to meet the gap in fish supplies for both local consumption and export markets. The international legal and policy frameworks governing how fisheries may be exploited and traded are provided by the UN organisations and the WTO. As regards market access for fisheries products, the FAO Code of conduct for responsible fisheries and the FAO/WHO Codex Alimentarius are of particular importance. The EU as a bloc is the world’s largest market for fish and provides ACP countries with their most lucrative market for fish. ACP fish exports to the EU benefit from special, non-reciprocal, tariff-free arrangements under the Cotonou Agreement. These non-reciprocal trade-aid arrangements should be progressively replaced by fully reciprocal, WTO-compatible economic partnership agreements (EPAs). In the current context, ACP exporters face four main challenges in maintaining access for their fishery products to the EU market:  the erosion of preferences and the loss of the ACP’s competitive advantages due to market liberalisation under the WTO (NAMA);  compliance with the rules of origin will continue to represent a barrier for ACP fishexporting countries;  compliance with an increasingly complex and stringent set of EU standards (both public and private), including SPS measures and legislation on traceability, labelling, and on residue levels and heavy metals in fishery products;  the quid pro quo that the EU may demand in the new reciprocal arrangements. 174 1. The international context of EU-ACP trade in fishery products October 2008 Executive brief Fisheries market access 1.1. General context and emerging issues FAO figures for 2008 show that international trade in fish products grew by 7% in 2007: about 40% of total fisheries and aquaculture production are exported, confirming fish as one of the most highly traded food and feed commodities. FAO figures show that the EU is, in terms of value, both the world’s largest fish exporter with 26% of total exports and also the largest importer with 43.5% of total imports. It imported US$20.75 billion worth of fish and fisheries products from non-EU suppliers in 2007, an increase of 11% over the previous year. Six EU countries are amongst the world top ten fish importers: Spain, with imports from non-EU suppliers worth US$4.37 billion in 2007, followed by the UK (US$2.2billion), Denmark (US$2 billion), Germany (US$1.9 billion), Italy (US$1.8 billion), and France (US$1.77 billion). A 2007 study by the European Fish Processors’ Association shows the EU’s declining selfsufficiency from catches in its own waters, estimated to be just over 30% in 2007. Overall EU fish supplies depend on imports to a level of 69%, but for some categories the dependency on imports is as high as 90%, as for white fish in 2007. This situation, together with the enlargement of the EU from 15 to 25 and 27 member states in 2005 and 2007, provides ACP exporters with significant opportunities, so long as they can comply with the rules of origin and the non-tariff barriers represented by the EU’s hygiene and other relevant standards. Developing countries now account for half of the total value of fish-product exports, with China playing a leading role. China’s increased imports result partly from out-sourcing, as Chinese processors bring in raw fish material from other regions, including the EU, for reprocessing and export. Stagnation and decline in fish catches, and concern over the status of stocks has focused attention on the potential of aquaculture to meet the growing needs of international trade and domestic food security. A 2008 Globefish report shows that aquaculture now accounts for 45% of the world’s food fish and this proportion is expected to reach 50% in 2015. China is responsible for about 70% of aquaculture production. Some regions lag behind and in ACP countries in particular, aquaculture currently represents less than 2% of total fisheries production. Various schemes are under way, particularly in African countries following the NEPAD ‘Fish for all’ initiative, to boost aquaculture production. For ACP countries, currently two of the most important species groups for export trade are tilapia and shrimp/prawn, although some are advocating the development of other types of aquaculture (molluscs) which require less care, have higher survival rates and where the farms are less expensive to run. In 2006, FAO published technical guidelines on aquaculture development to promote good practice in aquaculture as part of its programme of implementing the code of conduct for responsible fishing. This identifies the main challenges for aquaculture development in developing countries as ‘operating fish farms in a more socially and environmentally responsible manner and making a tangible contribution to rural development and poverty alleviation in coastal areas’. The distribution of profit along the value chain is becoming a crucial issue for ensuring that ACP fisheries sectors benefit from international fish trade. Inputs for ACP fish producers are becoming more expensive, fuel and freight costs in particular. ACP fish producers, fishermen and fish farmers, are ‘price takers’ rather than ‘price makers’ – they cannot pass higher costs to the fish buyers, particularly when these are large European retailers. To get a better price for fish products is critical if sustainable development, based on the paradigm ‘fish/farm less, earn more’, is to occur. Recently several ACP countries have emphasised that developing the processing side can help to realise greater benefits from fish resources. 175 This is true only if all conditions are met to produce high-quality products, complying with, in particular, SPS regulations. October 2008 Executive brief Fisheries market access 1.2 International legal framework The UN and the WTO are responsible for the international legal and policy frameworks that define how fisheries may be exploited and fishery products may be traded. While the WTO provides the institutional structure and legal basis for international trade liberalisation, the UN provides the legal basis for the sustainable development and management of fisheries resources, and responsible fisheries production. The UN Convention on the Law of the Sea (UNCLOS) that entered into force in 1994 requires that coastal states manage their fisheries in a sustainable fashion: requirements that are also addressed in the 2002 plan of implementation (POI) of the world summit on sustainable development (WSSD). The 1995 FAO code of conduct for responsible fisheries, in addition to promoting responsible fishing policies and practices, deals with such issues as the health, safety and quality requirements in processing and marketing fishery products. Although non-binding, it is considered to be of central importance in establishing the world’s fisheries on a sustainable footing. The FAO/WHO Codex Alimentarius Commission provides the international standards for food hygiene, contaminants, food technology, food import and export, microbiology and fishery products. These standards are recognised by the WTO in the SPS Agreement. As a yardstick for evaluating the hygiene and other standards of importing countries, they are indispensable tools for helping developing countries to overcome non-tariff barriers (NTBs) to international trade. The issue of sustainable trade is one of the main pillars of the WTO. This is addressed in the Marrakech Agreement establishing the WTO (1994), and the subsequent Doha Ministerial Declaration (2001). The latter emphasises the role of trade in the economic development of developing countries (paragraphs 2 and 3). It commits the WTO to the objective of sustainable development (paragraph 6), recognises the particular concerns of the LDCs (paragraphs 42 and 43), and the need for special and differential treatment (paragraph 44). However, progress with negotiations on how to eliminate tariffs and how to address the requirements of developing countries has been slow in the WTO and, in July 2008, the WTO Doha Development Round negotiations collapsed. For some observers, this shows that the WTO is losing its place as the central rule-maker and dispute-settler in global trade, due to the growing number of bilateral trade agreements around the world, such as the EPAs negotiated between the EU and ACP countries. 2. The significance of the EU market for ACP exporters of fish and fishery products For ACP countries, the EU represents the most lucrative market for fish. However, ACP and other developing countries may face difficulties in maximising these benefits. A 2007 study shows that, while the nominal value and the overall volume of developing-country fish exports have increased in recent years, their relative value has declined: in 1984 a tonne of developingcountry fish exports was worth 28.4% more than the value of developed-country exports; in 2004, they were worth 10.4% less per tonne. This highlights the fact that ACP and other developing countries may be able to significantly increase their export earnings form fish and fishery products. 176 October 2008 Executive brief Fisheries market access But there is also a need for caution. The rapid growth in international trade to meet market demands is putting pressure on fishery resources. This can cause over-fishing where fishery management is weak, and where the use of fish-catching technologies that damage the environment is permitted. There are also concerns that international trade in fishery products may have negative consequences for local food security. Negative impacts may include reduced physical and economic access to fish, by channelling fish away from local markets to international markets, and by increasing the price of fish locally. The importance of the EU markets for ACP fish exports ACP regions ACP fish exports to the EU27 (ave. value 2004-2006, in US$ ’000s) Africa Caribbean Pacific 1,241,172 100,783 42,654 Total ACP fish exports (ave. value 2004-2006, in US$ ’000s) Relative importance of EU market % 2,178,036 57 204,526 49 188,425 23 Source: FAO statistics, fish trade flows by region, 2008 For all ACP regions, the EU is the most important export market for their fisheries products. Other main markets for ACP fish products include the US, south-east Asia and regional markets. 3. The significance of ACP fish and fishery products for the EU market As a group, the ACP is an important fish-trading partner for the EU. EU trade statistics Eurostat (Comext statistics, via EU export Helpdesk http://exporthelp.europa.eu/) show that in 2006, the value of EU imports of fish from ACP countries was around €1.4 billion, i.e. about 12% of the total value of extra-EU fish imports (€13.3 billion). The following table shows the top ten ACP fish exporters to the EU (by value), the value and quantities of fish exported, the type of products exported, and the average value per tonne for 2007. Country Namibia Value of fish Volume of Main fish products exported exports fish exports (by order of importance) (€ ’000s) (’000 kg) 231,336 68,279 White fish fillets/ frozen white fish South Africa 221,357 Senegal 170,027 Tanzania Uganda Madagascar Mauritania 126,164 96,500 97,870 110,500 Mozambique Nigeria Seychelles 61,692 39,444 19,040 54,566 Fresh white fish/frozen white fish/white fish fillets 41,326 Fresh white fish/white fish filets/frozen white fish 34,276 White fish fillets (frozen) 24,634 White fish fillets (fresh) 12,167 Crustaceans (shrimps and prawns) 26,925 Molluscs (octopus)/fresh fish/frozen fish 8,559 Crustaceans (shrimps and prawns) 5,521 Crustaceans (shrimps and prawns) 11,711 Canned tuna Source: EU Export helpdesk, statistics 2007. 177 Average value per tonne (€ ’000) 3.4 4.0 4.1 3.6 3.9 8.0 4.1 7.2 7.1 1.6 October 2008 Executive brief Fisheries market access Although other factors, such as the fish species concerned or the level of integration between EU and ACP operators, may play a role, this table seems to indicate that export earnings may be increased if certain products, like high-quality fresh fish, are given priority. Contrary to the common belief that processing always adds value to fish, this table shows that for some processing, like the canning of tuna, the value of fishery products may be reduced. In a context where many ACP fish stocks are either fully exploited or over-exploited (which means that it will be difficult to increase benefits by increasing production), the way in which resources are exploited and processed has a bearing on the extent to which ACP countries can maximise the benefits from them. 4. The basis for ACP fisheries exports to the EU market 4.1. Tariff regimes Since 1975 ACP exports to the EU have benefited from special, non-reciprocal, tariff-free arrangements; first under the successive Lomé Conventions (Lomé I - IV), and since 2000, under the Cotonou Agreement. They allow ACP countries to export their fish products to the EU without having to pay the import tariffs applied to fishery products from other countries, provided they comply with rules of origin. This has given, and continues to give ACP countries a considerable competitive advantage. Since 2001, ACP and EU countries are negotiating new bilateral trade arrangements (Economic Partnership Agreements) that will replace in 2008/2009 the current non-reciprocal trade ones. While these agreements will lead to the progressive opening of ACP markets to EU imports, the access of ACP products to the EU market will be maintained and for some products even improved. Regarding the fisheries products, the access to the EU market will continue to be fully duty free and quota free provided that the rules of origin and the food safety requirements are respected (see sections below). For those ACP countries which have not signed or initialled an EPA before 31 December 2007, they benefit from the General System of Preferences (GSP)that offers preferential access to imports into the EU market from developing countries. Following the approval of the Council Regulation on July 22nd 2008, a new scheme of generalised tariff preferences will apply for the period from January 1st 2009 to December 31st 2011. In response to the desire expressed by users of GSP to ensure continued stability, predictability and transparency, the scheme remains broadly unchanged, and comprises three different arrangements:   the general arrangements (GSP);  the special incentive arrangement for sustainable development and good governance (also known as GSP+). the special arrangements for LDCs, the so-called ‘Everything but arms’ arrangement (EBA) which since 2001 provides duty free access for almost all products from LDCs; In terms of market access, the EBA regime and the EPAs are both providing duty-free, quotafree access for fisheries products and therefore are more advantageous than the GSP. This explains why some non-LDC ACP countries decided to ‘break ranks’ with their regional group and initial an EPA in December 2007 in order to maintain their preferential access to the EU market (Papua New Guinea, Ghana, Côte d’Ivoire, Seychelles, etc). 178 Trade regime after January 1st 2008 by ACP country Regional configuration Central Africa ACP having signed or initialled a full EPA or having an interim EPA (9 LDCs, 26 non-LDCs) Antigua & Barbuda, Bahamas, Barbados, Belize, Dominica, Dom. Republic, Grenada, Guyana, Haiti, Jamaica, St Kitts & Nevis, St Lucia, St Vincent & Grenadines, Suriname, Trinidad & Tobago Cameroon Eastern and Southern Africa (ESA) Eastern African Community (EAC) Pacific Comoros, Madagascar, Mauritius, Seychelles, Zimbabwe Burundi, Kenya, Rwanda, Tanzania, Uganda Papua New Guinea, Fiji West Africa Côte d’Ivoire, Ghana SADC Botswana, Lesotho, Namibia, Mozambique, Swaziland October 2008 Executive brief Fisheries market access CARIFORUM EBA (32 LDCs) GSP (10 non-LDCs) Central African Republic, DR Congo, Chad, Equatorial Guinea, São Tomé Djibouti, Eritrea, Ethiopia, Malawi, Somalia, Sudan, Zambia Gabon, Republic of Congo (Brazzaville) Kiribati, Samoa, Solomon islands, Tuvalu, Vanuatu Cook Islands, Tonga, Marshall Islands, Niue, Micronesia, Palau, Nauru Nigeria Benin, Burkina Faso, Cape Verde, Gambia, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Senegal, Sierra Leone, Togo Angola 4.2. Rules-of-origin issues Since January 2008, the preferential origin for ACP exports is established by Annex II to Council Regulation 1528/2007 (Market Access Regulation – MAR – applicable to 35 ACP states that have initialled WTO-compatible agreements with the EC) and by Articles 66-97 of Commission Regulation 2454/1993 (GSP/EBA scheme applicable to the 43 remaining ACP countries). The MAR has been introduced as a transition measure and will be replaced by the origin protocols annexed to the EPA agreements as soon as they provisionally start to apply. The restrictions imposed by the rules of origin have for long been a source of contention in EU-ACP fisheries relations, in particular with respect to the valuable tuna fishery. The way ‘originating fish’ is defined effectively forces ACP processors to purchase from high-priced EU suppliers (as they do not have their own tuna fleets, and fish from third-country vessels is not ‘originating’), in order to produce originating-tuna products. By thus restricting their possible sources of raw material, this limits the development of ACP processing activities. It also creates an incentive for ACP countries to grant EU vessels preferential access to their EEZs so as to ensure that their tuna canneries are supplied with ‘originating tuna’. 179 October 2008 Executive brief Fisheries market access A 2007 EC-commissioned study states that the RoO provide the EU tuna fleets with a captive market able and willing to pay the premium required by the EU fleets to operate viably. That the higher exploitation costs of EU fleets are passed on to ACP tuna buyers raises questions about their capacity to compete in such a highly competitive global market as that for canned tuna. According to some observers, the preferential margin offered to the ACP countries for originating canned tuna could therefore be considered as a form of upstream subsidy to EU vessels via fishery-access agreements rather than as a trade concession to ACP countries. Currently, the rules of origin applicable under the protocols deriving from the MAR include a series of changes from the situation under the Cotonou Agreement:    deletion of the crew, masters and official requirements from the ‘vessels rules’; simplification and redrafting of the ownership requirement; change of the main rule for several products of Chapters 3 and 16. Instead of the wholly obtained requirement with regard to materials of Chapter 3, now 15% of non-originating input is allowed. There is a specific derogation for Pacific ACP countries (namely Papua New Guinea and Fiji) in the context of the EPA initialled with them. This offers these countries ‘the possibility of sourcing their fish raw material for processing globally’. This global sourcing can be applied only under certain conditions, such as the notification by the Pacific country providing concrete information about the species concerned, products to be manufactured and quantities involved under the relaxed rule. For Pacific ACP states, this relaxation of the rules of origin may represent the only way for canneries to remain economically viable. It may already be showing its effects, in terms of job generation and poverty reduction. Although the EU insisted on the fact that this concession was due to the specificities (geographical, etc) of the PACP, it shows how relaxing rules of origin could benefit other ACP groups, provided that other EU conditions (hygiene standards, etc) can be met. 4.3. Investments In August 2005, African governments meeting around the ‘Fish for all’ initiative organised by NEPAD (see site http://www.fishforall.org/ffa-summit/africasummit.asp) stated that: ‘Strategic investments are needed urgently to safeguard the future contribution of Africa’s fish sector to poverty alleviation and regional economic development. Broadly, investment is needed to (i) improve the management of natural fish stocks; (ii) develop aquaculture production; and (iii) enhance fish trade in domestic, regional and global markets’. IEPAs and EPAs include provisions on investment that could help meet these objectives, whilst improving ACP competitiveness, which is crucial in countering the consequences of preference erosion. ACP countries should use this opportunity to secure EU investment and development support to improve their fish-landing, transport, and processing infrastructures, and improve the capacity of their fish-processing-and-export sector to comply with international traceability and sanitary standards. At the same time there is a need for caution: improving competitiveness through the promotion of EU investments should not be at the expense of local enterprise, labour standards, quality of life, and the local environment. As investment is also a key component of the fisheries partnership agreements (see the executive brief on FPAs), a coherent approach should be developed by the ACP and the EU to ensure that there is synergy between investments promoted through FPAs and EPAs, and that they are in line with ACP sustainable fisheries development. 180 4.4. Erosion of preferences October 2008 Executive brief Fisheries market access The main benefits enjoyed by ACP fish exporters under the EBA initiative and/or the interim EPAs are the margins of preference provided over their competitors. These are gradually but inexorably being eroded due to three main factors:  The first is international trade liberalisation under the WTO, where tariff and non-tariff barriers to trade are to be lifted. Already the advantages enjoyed by ACP countries in the EU have been successfully challenged by two ASEAN countries in the case of canned tuna.  The significance of the new GSP is that it further erodes ACP margins of preference. Under the special GSP provisions for LDCs and the special incentive arrangement for sustainable development and good governance a number of Latin American and Asian fish-exporting countries benefit from tariff reductions on fish and fishery products. 5. Non-tariff barriers While ACP fish exporters enjoy duty-free, quota-free access to the EU market for their fisheries products, they however are facing increasing quality-related standards. Issues of food safety (SPS standards), product identification (species, origin, etc), traceability (from catch to consumption), and eco-labels (for sustainability of fish stocks and organic aquaculture) are becoming increasingly important issues facing ACP fish exporters in accessing the EU market. Sanitary and phytosanitary (SPS) standards in fish-processing plants and throughout the chain of custody (from vessel through to consumer) must be complied with. It is also important to note the growing power of international retailers who have been able, sometimes more efficiently than governments, to impose increasingly stringent safety and quality standards for fish imports, but also requirements related to eco-labels on producers. Whilst some of these, like the SPS standards may be important measures to protect European consumers, they also act as non-tariff barriers (NTBs) to trade, providing considerable constraints on market access for ACP fish producers and exporters, particularly the small- and medium-scale enterprises. Realising the full potential from EU export earnings in ACP countries is therefore severely constrained by NTBs, which, for ACP fishery products include:     EU standards for SPS measures; EU legislation on residue levels and heavy metals in fishery products; EU legislation on labelling; EU future regulation on the fight against IUU fishing, in particular the catch-certification scheme. Compliance with this complex set of EU regulations presents a considerable challenge to fishexporting ACP countries. Above all there are cost implications, in terms of investment in new technology, infrastructure and institutions. ACP countries also face the risk of export embargoes on their products when shipments are found not to comply with EU regulations and associated standards, with the risk of significant economic losses. 181 5.1 Food safety issues October 2008 Executive brief Fisheries market access 5.1.1. Standard setting The EU’s standards for food safety, product quality and labelling have already been set and are under implementation. The details of the IUU catch-certification scheme are still being developed, as the regulation will only enter into force at the start of 2010. A communication and a series of seminars are planned by DG Mare for beginning 2009 to inform developing countries about what this will mean for their trade relations with the EU. The basic framework for the application of EU SPS standards to ACP fishery products is provided by the EU directive dealing with the ‘Production and placing on the market of fishery products for human consumption’. 5.1.2 Country-eligibility criteria For all fishery products, countries of origin must be on a positive list of eligible countries for the relevant product. The eligibility criteria are:  Exporting countries must have a competent authority which is responsible for official controls throughout the production chain. The authorities must be empowered, structured and resourced to implement effective inspection and guarantee credible certification of the relevant hygiene conditions.  Live fish and live bivalve molluscs must fulfil the relevant animal-health standards. This requires that the veterinary services must ensure effective enforcement of all necessary health controls and monitoring programmes.  The national authorities must also guarantee that the relevant hygiene and public-health requirements are met. The hygiene legislation contains specific requirements on the structure of vessels, landing sites, processing establishments and on operational processes, freezing and storage.  Specific conditions apply for imports of live or processed bivalve molluscs (e.g. mussels and clams). These imports are only permitted if they come from approved and listed production areas. The national authorities of exporting countries are required to give guarantees on the classification of these products and the close monitoring of the production zones to exclude contamination with certain marine bio-toxins causing shellfish poisoning.  In the case of aquaculture products, a control plan on heavy metals, contaminants, residues of pesticides and veterinary drugs must be in place to verify compliance with EU requirements.  A suitable control plan must be designed by the competent authority and submitted to the EC for initial approval and yearly renewal.  Imports are only authorised from approved vessels and establishments (e.g. processing plants, freezer or factory vessels, cold stores), which have been inspected by the competent authority of the exporting country and found to meet EU requirements. The authority provides the necessary guarantees and is obliged to carry out regular inspections and take corrective action, if necessary. A list of such approved establishments is maintained by the EC and is published on its website. See: http://forum.europa.eu.int/irc/sanco/vets/info/data/listes/table0.html  Inspections by the EC’s food and veterinary office are necessary to confirm compliance with the above requirements. Such an inspection mission is the basis of establishing confidence between the EC and the competent authority of the exporting country. 182 October 2008 Executive brief Fisheries market access The EU regulation on the ‘Production and placing on the market of fishery products for human consumption’ is supplemented by the following directives:  Directive 97/98. This provides for mandatory veterinary checks on all products entering the EU from third countries. Checks must be carried out at border inspection posts designated by the custom authorities, which must be located close to the point of entry into the EU territory. Fishing vessels must land their products only in ports designated by the EU member state. Special safeguard provisions, such as limiting imports from a given country, may be taken to prevent a serious threat to public, human or animal health.  Directive 89/107. This ‘framework directive’ lays down the general requirements and criteria for the assessment of additives. Three subsequent directives cover sweeteners (Directive 94/35); colours (94/36) and other additives (Directive 95/2). However, the WTO SPS agreement acknowledges that although governments have the right to take SPS measures necessary for the protection of human health, they are required to apply those measures only to the extent required. It does not permit member governments to discriminate by applying different requirements to different countries where the same or similar conditions prevail, unless there is sufficient scientific justification for doing so. 5.1.3 The costs of technical compliance There are often high costs associated with ensuring compliance with EU food-safety standards and SPS regulations. However, the market does not always adequately reward producers of higher quality or safer products. While EU fishing enterprises may be assisted in meeting these quality standards, ACP suppliers will have to carry all these costs on their own account and will receive no such assistance. This is likely to greatly reduce the possibilities for ACP fish exporters to access EU markets. The fixed costs associated with technical compliance with EU standards are often very high indeed, and in order to be economic, these fixed costs need to be carried across a large volume of production or/and exports. This can create problems for small-and medium-scale ACP enterprises, who can find the costs of compliance quite uneconomic. In addition by leading to the concentration of export potential in a limited number of enterprises it can weaken the market position of local fisher folk catching fish for export. 5.1.4. HACCP and its implications Hazard Analysis and Critical Control Point (HACCP) requires producers to identify food-safety hazards that may arise, and establish adequate process controls to prevent or minimise their occurrence. It is primarily a fixed-cost system, i.e. the costs of the control programme do not vary significantly with the amount of product produced. Costs do vary from plant to plant, based in part on the risk inherent in the product and the complexity of the plant. The fixed nature of HACCP will cause a relatively larger burden on small plants, with particular implications for small-scale producers and exporters in ACP countries. In this context particularly favourable low-cost loans could be made available to small-scale fish producers in order to ensure that higher EU food-safety standards and other health measures are not implemented in ways which undermine poverty-eradication efforts by systematically placing a disproportionate burden on small-scale producers. Such loans, for example, could be provided through the offices of the joint EU-ACP programme to strengthen fishery-product health conditions. These problems are often compounded by shortcomings in institutional capacity of publicly financed bodies to verify compliance with EU standards. There may also be a general lack of knowledge, as well as a lack of technical capacity to meet EU standards. 183 5.1.5. The costs of verification October 2008 Executive brief Fisheries market access ACP fish exporters may face difficulties in accessing the EU market, not necessarily because their products are unsafe, but often because they lack access to the necessary monitoring, testing and certification infrastructure that would enable them to demonstrate compliance with import requirements. Particular problems arise for small-scale fish producers who are simply unable to afford the costs of compliance and subsequent verification (since these processes tend to have high fixed costs which need to be spread across large volumes of production). 5.1.6. Technical assistance SFP (Strengthening fishery products health conditions in ACP/OCT countries) is a programme financed by the EDF on behalf of the ACP countries and the OCT (Overseas Territories of the Community) and is aimed at third countries’ competent authorities, test laboratories, the fish industry and small-scale fisheries. The objective of the programme is to improve the sanitary conditions for fishery products as food for human consumption so as to increase the income of those countries by developing trade and optimal use of available resources (see SFP website http://www.sfp-acp.eu/EN/index.htm). 5.2 EU legislation on residue levels and heavy metals in fishery products. In addition to the general health controls for all fishery products, other additional requirements are imposed for the control of various residues in fishery products. These include the residue limits set for ‘veterinary medicinal products in foodstuffs of animal origin’, and for heavy metals. 5.2.1 Residues of veterinary medicines The rules laid down for controlling the residue levels of veterinary medicines in fish products are contained in:  Directive (96/23/EC) on: ‘Measures to monitor certain substances and residues thereof in live animals and animal products’;  Regulation (EEC) No 2377/90 laying down a Community procedure for the establishment of maximum residue limits of veterinary medicinal products in foodstuffs of animal origin. Of particular importance are the residues of certain antibiotics used in aquaculture, notably those where no safe levels can be determined. The latter are contained in Annex IV of Regulation 2377/90/EEC, which lists nine substances. Of particular importance are the two antibiotics nitrofuran and chloramphenicol. Traces of these have been found in aquacultureproduced shrimp from Asia, and as a result lengthy and costly embargoes on the export of fishery products from those countries (notably India, China, Thailand, and the Philippines) were instituted. It is also significant that the EU is reported to be demanding destruction of goods when such chemicals are detected. It is therefore highly important that ACP countries with fledgling aquaculture sectors establish national standards and control mechanisms for regulating the use of antibiotics and other chemicals. 5.2.2 Heavy metals in fish Heavy metals (notably mercury and cadmium) occur naturally in several fish species. EU Regulation (EC) No 466/2001 sets the maximum limits for heavy metals in a number of listed species of fish and shellfish. However, there are several species of importance, such as swordfish and some tuna species that are not listed. This has meant that maximum levels for fish not listed, such as swordfish, have been set at twice the maximum levels for other species listed in the regulation in a seemingly arbitrary fashion. 184 Heavy metals have recently attracted a great deal of international attention, leading to raised public awareness of the risks of consuming certain products. This is likely to prejudice the position of such products as tuna and swordfish exported from ACP countries. There is therefore an urgent need for the harmonisation and standardisation of the food-safety regulations that apply to heavy metals in fish. October 2008 Executive brief Fisheries market access 5.3 Labelling as a technical barrier to trade Commission Regulation (EC) No 2065/2001 of October 22nd 2001 lays down detailed rules for the application of Council Regulation (EC) No 104/2000 as regards informing consumers about fishery and aquaculture products. Directive 79/112 and its amendments provide the framework for harmonising EU member states’ laws on labelling, presentation and advertising on foodstuffs. Increasing consumer concerns about food quality, health and environmental sustainability are having an important influence on the development of EU standards for labelling. The EU is therefore revising the standards it applies to labelling, and has recently (2001) introduced mandatory requirements for consumers. At the level of the individual member states there is also a need to provide information in the national language. Some minimum binding requirements have been established for fishery and aquaculture products offered for ‘retail sale to the final consumer’. In this regard, the following information must now be indicated on the label:  the trade name of the species, bearing in mind that rules on names must be adopted at national level;   production methods (capture or aquaculture); origin (EU or third country – to be specified). The recent case brought by Peru against the EU shows how labelling requirements may be used as a barrier to trade. Prior to the WTO ruling, the EU regulation for preserved sardines had specified that ‘preserved sardines’ must be prepared exclusively from fish of the species Sardina pilchardus walbaum. Peru had challenged the EU over the reservation of the trade name ‘sardine’ for this one species. When Peru’s challenge was upheld, the EU revised its regulations. The new regulation differentiates between ‘preserved sardines’ and ‘preserved sardine-type’ products. The former only includes the species Sardina pilchardus. The latter includes 18 different species, including five species of sardinella. These may be marketed in the EU under a trade description consisting of the word ‘sardines’ joined together with the scientific name of the species. The use of eco-labels for both capture fisheries and aquaculture is receiving increasing attention. In marine capture fisheries, the goal of eco-labelling programmes is to create market-based incentives for better management of fisheries by creating consumer demand for seafood products from well-managed stocks. Eco-labels are seals of approval given to products that are deemed to have fewer impacts on the environment than functionally or competitively similar products. Eco-labels are also being developed for aquaculture products that use certified organic-farming methods and sustainability criteria. A 2008 FAO study showed that eco-labels for seafood products are most visible in countries with the highest level of competition between retailers, the highest level of competition between processors, and the smallest number of different species sold on the market. In future, expected changes in EU market structures (concentration/competition/stimulation) may favour ecolabelled products. This seems to confirm that fish-product eco-labelling in the EU market is a marketing tool, strategically used by large retail chains to compete for increased market share, and did not arise from EU consumer demands. 185 For ACP producers and exporters to the EU markets, who may increasingly be pushed to enter eco-labelling schemes, technical assistance and capacity-building programmes will be necessary, along with appropriate investments to help them access such schemes. October 2008 Executive brief Fisheries market access In 2009, the EC will propose to establish a legal framework that would determine how voluntary certification and eco-labelling schemes could be developed. Such a framework would aim at ensuring that the schemes receive sufficient legal protection and that they can be properly monitored. 5.4 The IUU catch-certification scheme In July 2008, EU fisheries ministers found political agreement on a new regulation to fight IUU fishing. It includes a catch-certification scheme for certifying the legal origin of the product. This scheme, which is likely to be based on the model used for ensuring compliance with SPS standards, raises several issues. The system proposed will not work if it is not supported by or based on at-sea observations. In the case that certification of catches is not supported by efficient and appropriate monitoring, control and surveillance (MCS) systems in countries where catches are made, there is a high risk that such certificates will be tampered with, negating any impact on the fight against IUU fishing. On the other hand, the catch-certification scheme by placing an additional burden on ACP authorities, producers and exporters, may become an obstacle to legal ACP fish imports. Automatic ‘derogations’ (or exception to the rules) for canned tuna are non-existent in the GSP. 186 Executive brief June 2008 Executive brief The EU common fisheries policy The EU Common Fisheries Policy Table of contents 1. The structure of the CFP _________________________________________________ 189 2. The reformed CFP ______________________________________________________ 189 2.1 Aspects of particular interest to ACP countries – the degree of over-exploitation of EU fish stocks ____________________________________________________________________________ 190 2.2 Aspects of particular interest to ACP countries – the impact of EU demand for fish ________ 191 3. The new CFP __________________________________________________________ 192 3.1 The regulations adopted ______________________________________________________ 192 3.2 Action plans, strategies, communications and proposed regulations _____________________ 193 4. The significance of fisheries partnership agreements _________________________ 194 5. Improving collection, management and use of fisheries data ___________________ 195 6. The European Fisheries Fund ____________________________________________ 195 June 2008 6.1 Introduction _______________________________________________________________ 195 6.2. Measuring fishing capacity and effort ____________________________________________ 196 6.3 The fuel crisis ______________________________________________________________ 196 187 For about 30 years, the common fisheries policy (CFP) has dealt with the EU’s policies on fisheries, both within its own waters and externally (international and third-country waters), including ACP waters. The internal problems of EU fisheries and policies arising, such as overexploitation of fish resources and the EU fish market’s increasing reliance on fish coming from outside, have important consequences for the development of ACP fisheries. This is particularly so in the areas of resource management, food security, and the development of value-added activities. In 2002, the EU completed a wide-ranging review of the CFP, and new sets of regulations and action plans were adopted to enable conservation and sustainable exploitation of fisheries resources. Some of these are of particular relevance to ACP countries, in particular the Council conclusions on an integrated framework for partnership agreements with third countries. The rising price of fuel – which represents the most important running cost for many EU fleets – has resulted in some parts of the EU industry ceasing to be profitable, and pressures from the industry to increase subsidies are growing. To address economic and environmental aspects in EU fisheries policies more consistently, the EU, supported by the European Fisheries Fund, has adopted communications and proposals on issues such as the collection, use and management of fisheries data; the measuring of fishing capacity and effort, the reduction of discards, the adoption of an ecosystem approach, etc. These various proposals will have impacts on EU fisheries activities conducted in ACP countries. Finally, stepping up the fight against ‘illegal, unreported and unregulated’ (IUU) fishing has also become a top priority, and a package of measures to address the issue has been adopted in June 2008, including measures on imports from third countries such as the ACP. June 2008 Executive brief The EU common fisheries policy Summary 188 1. The structure of the CFP June 2008 Executive brief The EU common fisheries policy The EU is a major world fishing power. For about 30 years, the national fisheries of EU member states within community waters have been governed by the CFP, as have many aspects of their distant-water activities. The appropriate level for analysing distant-water fishing by the EU is therefore at the Community level, rather than at the individual member-state level. The CFP thus deals with the EU’s policies on fisheries both within its own waters (Community waters) and externally (international and third-country waters), including in ACP waters. Its main objectives include:     conservation of fish stocks and protection of the marine environment; ensuring the economic viability of the European fleets; improvement of living standards in fishing communities; securing good quality supplies to both industry and consumers at reasonable prices. The CFP is composed of measures agreed by EU member states, and is constructed on four main policy pillars:  Conservation policy – to protect fish resources by regulating the amount of fish taken from the sea, by allowing young fish to grow and reproduce, and by ensuring that conservation measures are respected;  Structural policy – to help the fishing and aquaculture industries adapt their equipment and organisations to the constraints imposed by scarce resources and the market;  Market policy – to maintain a common organisation of the market in fish products and to match supply and demand for the benefit of both producers and consumers;  International policy – to set up fisheries agreements and to negotiate at the international level within regional and international fisheries organisations for common conservation measures in high-seas fisheries. Many EU member states have long traditions as distant-water fishing nations, most notably Spain, Portugal, UK, France, Poland, the Baltic states of the former Soviet Union, and more recently the Netherlands. Currently, EU fishing fleets are active throughout all of the FAO regions of the Atlantic Ocean as well as the western and southern parts of the Indian Ocean, and increasingly in the Pacific region. The policy and programmes that the EU adopts with respect to its fishing fleet is thus of importance, not only for the domestic industry, but also for fisheries in many other areas of the world, including the ACP. 2. The reformed CFP In 2002 the EC acknowledged in a ‘green paper’ that the CFP had ‘not delivered sustainable exploitation of fisheries resources’. A number of general comments were made by the Commission including:  ‘available fishing capacity of the Community fleets far exceeds that required to harvest fish in a sustainable manner’;  ‘the overcapacity in EU fleets has resulted in over-exploitation of target stocks and excessive pressure on non-target species’;   ‘fishing effort is increasing every year due to technological progress’;  the fishing industry is economically fragile as a result of ‘over-investment, rapidly rising costs and a shrinking resource base’; with an increasing demand for fish, the EU is relying more and more on fish coming from outside EU waters. 189 June 2008 Executive brief The EU common fisheries policy 2.1 Aspects of particular interest to ACP countries – the degree of overexploitation of EU fish stocks An issue of particular relevance to ACP countries, at the root of ‘the failure of the CFP’, is the over-exploitation of EU fish stocks. In June 2008, the EC highlighted that 88% of fish stocks in EU waters are over-fished, compared with 25% on average globally. This situation of overexploitation has come about for technical as well as political reasons. The control mechanisms employed by the CFP to regulate fishing effort are based almost exclusively on controlling the output from fisheries (by establishing ‘total allowable catches’ (TACs) and using a quotaallocation system). These measures have proved largely unsuccessful, mainly due to a lack of political will, as is illustrated by the repeated fixing by the EU Council of Ministers of TACs at levels higher than indicated in the scientific advice. Little has been done to reduce fishing effort through controlling the ‘input’ side of fishing. A days-at-sea scheme was introduced for some fisheries, but, as was highlighted by the EC in June 2008, the large number of complex derogations introduced by member states have effectively neutralised the impact of the scheme. Promoting more-selective fishing techniques, including for fleets fishing outside EU waters, has not been implemented yet. The different application of regulations in the use of selective fishing gear within and outside Community waters is of particular significance. EU fleet regulations are much less detailed for operators in ACP waters than for operators in EU waters, particularly concerning gear selectivity. For example, for demersal trawlers fishing in EU waters there are many criteria that must be complied with (mesh type, netting material, twine diameter, extension length, etc). In ACP-EU fisheries agreements, the only criterion mentioned for demersal trawlers is the mesh size. This has implications for the sustainable exploitation of ACP fish stocks, particularly in places like the Gulf of Guinea, where by-catch contains a high level of juveniles. There are also implications for the value of the catches being made by the EU in ACP waters, since some of the by-catch species are in fact high-value commercial species sold in the market. The CFP has also encouraged overcapacity. The current EU fleet is much too large for the resources available in community waters. The assumption that the problem is caused by ‘too many boats chasing too few fish’ has led to the elimination of many old, inefficient and small boats. These have been replaced by fewer but larger, more powerful and efficient vessels. Thanks to technological progress, the efficiency of these fishing vessels continues to increase every year. Technological advances in vessel and gear design, in fish finding and navigational equipment, and in telecommunications all contribute to increasing capacity. This means that new vessels exert much more fishing pressure than old vessels of equivalent tonnage and power. It also means that the overcapacity problem is inherent in the industrial model of fishing developed by the EU and other fishing nations. This is of particular relevance for ACP coastal countries where EU boats are operating under fisheries agreements. Over the years, whilst the declared EU capacity may have remained constant (e.g. as in the declared gross registered tonnage for trawlers), in reality fishing effort has actually increased due to technological factors. More resources are being fished than planned (sometimes leading to or aggravating over-fishing), and the financial compensation does not reflect the real value of the fish being caught. This has serious implications for the management of the resources in ACP countries, by causing overfishing and increasing competition with the local fleets. By using inappropriate measurements of capacity, ACP negotiators may be systematically underestimating the catch and impact of the EU fleets in the agreements that are signed. 190 June 2008 Executive brief The EU common fisheries policy 2.2 Aspects of particular interest to ACP countries – the impact of EU demand for fish Another issue of relevance to ACP countries that is also at the root of ‘the failure of the CFP’ is the increasing fish-supply deficit on the EU market. Given increasing demands on the EU market – consumption across the EU has risen to an estimated 26.5 kg/caput/year in 2007 – and decreasing supplies from its own waters, EU reliance on imports for all fishery products was estimated to be about 70% for 2007 (for some species like white fish, it has reached 90%). It is also important for the ACP to note that fish caught in EU waters are mainly destined for the fresh fish market, whilst imports mainly comprise fish as raw material for the processing industry. This has a bearing on marketing value-added processed fish in the EU. In order to be competitive, the EU processing industry needs to import fish at competitive prices, where the granting of tariff reductions plays an important role. The EU has concluded a number of agreements with, or granted tariff preferences to, several third countries. These agreements include the Cotonou Agreement and subsequent interim EPAs with ACP countries, the special General System of (Tariff) Preferences (GSP) granted to promote sustainable development, and various free-trade agreements (such as the Trade, Development and Cooperation Agreement (TDCA) with South Africa, the ‘Med’ agreements, and the association agreement with Chile). The trend, for the short to medium term, will be for the present system of tariffs to be reduced or eliminated altogether, this being a central objective of the WTO. In parallel, all the other requirements applicable to imports, e.g. concerning the rules of origin, health-and-hygiene standards, and traceability requirements are becoming increasingly difficult to comply with. The growing demand for fish as raw material for the EU fish-processing industry is an important factor in the evolution of ACP-EU fisheries cooperation. With regard to the impact on food security, it is important to note that in the past industrial fleets in ACP waters have focused on exports, whilst the artisanal fleet has supplied the local market, providing the main contribution of fisheries to food security. However, in some cases, like Senegal, the artisanal fishery sector is now becoming the main supplier of raw fish for the EU market. Therefore, increasingly, ACP fleets, in both the industrial and artisanal sectors, operate to supply the needs of the European fish-processing industry and not African consumer demand. This could come to have important consequences for local food security (reducing both the availability of fish on national markets and increasing its price. A report by the UK Department for International Development shows that, while the net supply of fish in African countries may have been stable over the last decade, it is increasingly composed of small pelagic species like sardinella. These are highly dependent on cyclic climatic and environmental conditions (particularly on up-wellings and coastal water temperatures). According to the projections made in the report, the net supply of demersal fish in West Africa will be reduced to zero before 2015. Consequently, future fish supplies will only be guaranteed when environmental and climatic factors coincide to produce favourable conditions. The DFID study argues that, given the need of the EU fish-processing industry for raw materials, it is likely that development actions will increasingly focus on:  developing raw-material production and exports to the detriment of the development of local processing capacities and the creation of value-added ACP fish products;   improving product quality to meet European health-and-hygiene standards; shortening the production-processing-marketing chain in order to reduce the time between production and exports (infrastructures of landing and transport). 191 June 2008 Executive brief The EU common fisheries policy In conclusion, the internal problems of EU fisheries and arising policies have important consequences for the development of ACP fisheries. This is particularly so in the areas of resource management, food security, and the development of value-added activities. There is therefore a need for a careful analysis of the evolution of the EU’s fisheries sector in order to evaluate the kinds of fisheries relationships on offer (be they through fisheries agreements, partnership agreements, or market-access conditions). An assessment then needs to be made as to whether or not these are likely to provide the benefits that the ACP countries seek with regard to the development of their fisheries sectors and the maximisation of the contribution of fisheries to the objectives of national food security, job creation and government revenuegeneration. 3. The new CFP As noted above, the EC has completed a wide-ranging review of its CFP. A raft of new policy proposals, action plans, and strategies followed, and some new regulations have been put in place. 3.1 The regulations adopted The Council of Fisheries Ministers agreed on the first package of reform measures in December 2002. Three new Council Regulations were agreed on:    Conservation and sustainable exploitation of fisheries resources; Emergency Community measures for scrapping fishing vessels; Community structural assistance in the fisheries sector. A number of aspects of these new regulations are of relevance to ACP countries. The regulation on conservation and sustainable exploitation of fisheries resources (Regulation 15780/02) is particularly significant given the importance of applying selectivity for the EU fleets fishing in ACP waters. It is important that the incentives offered to promote selectivity are also offered to EU vessels fishing outside EU waters, particularly under the fishery partnership agreements (FPAs). This raises the important question of how the use of these gears/practices can be controlled so as to ensure that they comply with the standards of selectivity established. This in turn has implications for the enforcement costs to be borne by ACP countries. These cost increases need to be taken into account when negotiating the level of the financial compensation granted in the future fisheries relations (through FPAs and EPAs). One of the objectives of the new regulation on Community structural assistance in the fisheries sector is intended to achieve ‘a stable and enduring balance between the capacity of fishing fleets and the fishing opportunities available to them both inside and outside Community waters. In this regard, as from December 2004, the subsidised transfer of EU vessels to third countries has been stopped. However, transfer of vessels is still part of the EU-ACP fisheries relations and figures in the EC’s communication on FPAs. In May 2006, the EU Council adopted a regulation establishing Community financial measures for the implementation of the CFP and in the area of the Law of the Sea, which includes the financing of such FPAs for the period 2007-13. The total annual budget is some €375 million. 192 3.2 Action plans, strategies, communications and proposed regulations Executive brief The EU common fisheries policy The various proposals, action plans, strategies, communications and proposals for regulations focus on the following issues:    the integration of environmental protection requirements into the CFP;  the setting up of partnership agreements with third countries. This looks at ways of improving fisheries agreements, in particular those concluded with developing coastal states by promoting international cooperation and strengthening measures to ensure sustainable fisheries in the waters of the partner concerned;  the improvement of scientific and technical advice for fisheries managers. The EC identifies two main ways to achieve this: by reorganising the provision of scientific advice and by devoting more resources to obtaining this advice. the eradication of illegal fishing in order to ensure sustainable fisheries beyond EU waters; the reduction of discards of fish by tackling the causes of discarding. The measures proposed aim to prevent catches of unwanted fish, particularly immature fish and to remove incentives for discarding. EU measures to reduce discards will apply to its fleets active in ACP waters. Some of these are of particular relevance to ACP countries, in particular the EU action plan against illegal fishing, and the communication on an integrated framework for partnership agreements with third countries. June 2008 In addition to fisheries agreements and joint ventures, vessels owned by EU member-state companies may also get access to third-country fisheries through registering under a foreign flag (a third-country coastal state or flag of convenience or an ‘IUU’ state). In this way they are able to escape any EU control and regulatory measures. The new EU regulation to combat ‘illegal, unreported and unregulated’ (IUU) fishing was adopted at the end of June 2008. The system will apply to both EU and non-EU fishing vessels. All fisheries products will be covered, with the exception of freshwater aquaculture products (obtained from fry or larvae). Of particular importance for ACP countries is the catchcertification scheme, which will guarantee the legal origin of the fish. Strong emphasis is put on check, inspection and verification activities to be carried out according to common criteria governed by risk management and assessment, allowing better targeting of the trade flows to be controlled. Concerning processed products imported from third countries, including ACP countries, and obtained from imported raw materials, the system has changed: EU importers will have to submit a statement issued by the processing company providing information establishing the link between the processed products and the fish used as raw material. This statement shall be accompanied by the certificates related to the fish used and will have to be endorsed by the authorities of the third country in charge of monitoring export-oriented processing activities relying on imported raw materials. The number of the health certificates and the approval number of the processing plant will be mentioned on the statement to ensure a link with the implementation of the health legislation. An issue arising for ACP producers and exporters is the complexity of the documentation system required, which could, in some cases, become an obstacle to the trade of legally caught products. It is important to note that the EU proposes to provide assistance for developing countries to control unlawful fishing, so as to help them to comply in full with the undertakings they will make under the FAO international plan of action (IPOA) to prevent IUU fishing. For the ACP, these undertakings may be implemented with the means provided by the FPAs, or through specific projects to establish monitoring, control and surveillance (MCS) programmes. 193 June 2008 Executive brief The EU common fisheries policy 4. The significance of fisheries partnership agreements Some 500 EU fishing vessels (20% of the EU fleet) fish under the various bilateral fisheries agreements (currently there are 15 in place) with ACP countries. The cost to the EU taxpayers is some €145 million per annum, paid to ACP countries as compensation payments in exchange for negotiated fisheries access. European operators pay an additional €30 million in access fees. The activities of the EU fleet operating under these agreements produce a turnover of about €1 billion per annum, representing about 20% of the total turnover of EU fishing activities. A costbenefit analysis undertaken for the EC in 1999 showed that, on average, for each euro invested by EU tax-payers in a fisheries agreement, there was a return of three euros for the EU operators. This arises from several factors, including:  most of the fish caught under ACP-EU fisheries agreements is not processed in ACP countries but comes as raw material to the EU, with the benefits of adding value therefore accruing to EU operators;  the value (and quantities) of the fish caught in ACP waters has often been underestimated by ACP countries because of the difficulties in controlling catch levels, the inaccurate measurement of the EU fishing effort deployed, and the quantities of valuable fish taken as by-catch. Given the changing global context that may outlaw certain kinds of fishing subsidies challenged, the EU has adopted an alternative approach and now concludes FPAs that supposedly contribute to responsible fishing in the mutual interest of the parties concerned. These are the subject of the CTA executive brief on EU-ACP fisheries relations; FPAs. FPAs are to include the following new elements:  a preliminary requirement for a joint (EU-ACP) assessment of the national fishing policy, as defined by the coastal state, to be made;  the inclusion of the requirements for the sustainable development of the local fishing sector as expressed by the partner country;  determining whether surplus resources exist, and if so agreeing on the share to be allocated to the EU distant-water fleet;  implementing an environmental-impact analysis prior to the agreement, and where necessary adopting appropriate remedial action;  inclusion of civil-society concerns. There is also to be an enhanced contribution from the public authorities to encourage both direct investment and technical, scientific, economic and social transfers in the fishing industry. In negotiating FPAs, ACP countries should insist that the requisite conditions for ensuring the sustainable development of their sectors be included. These would include:  the implementation of protective measures for small-scale and subsistence fishing (in particular by strict observance of a protection zone), and increasing the contribution of fisheries to food security;   upgrading the ACP processing sector in order to ensure that value is added in ACP countries;  the flexibility to adjust the levels of fishing according to resource assessments, taking into account the best available scientific information in the light of the needs of the local fishing industry. creating favourable conditions for ACP fishery products to access EU markets, particularly as regards processed products, including increased support for dealing with non-tariff barriers, such as compliance with hygiene and food-safety standards; 194 In this latter regard, where such adjustments are taken for conservation purposes, the level of EU investment in ‘sustainable fisheries’ should be maintained, as the more fragile and over-exploited a fishery is, the greater is the need for investment in measures such as research and control in order to aid stock recovery. Executive brief The EU common fisheries policy 5. Improving collection, management and use of fisheries data The EU adopted a regulation in 2008 establishing a framework for the collection, management and use of data in the fisheries sector and support for scientific advice regarding the CFP. The new framework introduces provisions to meet the move towards fisheries- or fleet-based management as opposed to managing fish stocks and the shift towards an ecosystem-based approach. The new data-collection system covers the entire process, from the collection of data in ports or at sea, to its use by the end-users (the scientific community and advisory bodies). There are new rules for access and use of the data collected, as well as rules to protect the interests of data providers. The new framework also places more emphasis on social and economic data so as to provide a basis for impact assessment of new legislation and to allow monitoring of the performance of the European fleet. This new regulation also applies to EU vessels fishing outside EU waters, including in ACP exclusive economic zones. This could help to reduce the vast under-reporting of catches, particularly for tuna, observed for some segments of the EU tuna fleet fishing in the east Atlantic and Indian oceans. The emphasis put on developing rules to protect the interests of data providers is also important for the ACP to take on board: if these data, commercial and strategic, (showing for example the fishing ‘hot spots’) were to be unscrupulously traded, then it would de facto mean that fishing operators would stop providing them or tamper with them. June 2008 In particular ACP countries need to keep a close watch on:   how the action plan will support the development of capacity within ACP research bodies;  how the EU interprets the data derived from stock evaluation, particularly as regards the availability (if any) of surplus resources and the levels of access demanded. how the research will be carried out, the extent to which ACP research bodies will be involved, and the degree to which the EU will use ACP data; 6. The European Fisheries Fund 6.1 Introduction In June 2006, the EU Council adopted the European Fisheries Fund (EFF), to provide the necessary financial assistance to implement the proposed CFP reforms and to support the development and restructuring of the EU fisheries sector. In view of developments in the sector, including the fuel crisis and the recent enlargement of the EU, the EFF provides for five priorities:   to adjust the EU’s fishing fleet to the available resources;    collective action; to promote the acquisition and use of gear and methods that reduce the impact of fishing on the environment; sustainable development of coastal fishing areas; technical assistance. 195 June 2008 Executive brief The EU common fisheries policy The regulation contains a number of measures and amendments introduced during the process of adoption by Council, including aid for engine replacement on grounds of safety and fuel efficiency, on the condition that the engine power of the vessels concerned is either the same or smaller, depending on the size and type of vessels. The introduction of this last item is in response to the fuel crisis affecting the EU catching sector. High fuel costs have a significant bearing on the economic viability of the European fleet, and its ability to operate in distant waters. At the same time, differences in fuel costs and the availability of subsidies to install more fuel-efficient engines in the EU may increase the competitive advantages already enjoyed by the EU fleet in ACP waters. Spain is the main beneficiary from the fund, with €1.005 million for the period 2007-2013 from the EFF, 26% of the total of €3.849 million. Two other aspects of this new regulation may have a significant impact in ACP waters where EU fleets are operating. These are considered in the next two subsections. 6.2. Measuring fishing capacity and effort The EC tabled a report at the end of 2007 using the most recent fleet reports from member states, together with data from the EU fishing-fleet register. It shows a continued decline in fishing capacity in 2006, at the slow but steady annual rate of between 2% and 3%. However, this is too low, given the requirements for large reductions in fishing effort in line with the sustainable management of several key commercial fish stocks. Moreover, much of this reduction is more than compensated for by the technological improvements that increase the fish catch per unit of effort. The impact of fishing-effort limitations on capacity reduction appears to have been low, and more work is needed to ensure that appropriate incentives are provided at national level, in order to ease the transition towards a more sustainable EU fishing industry. It needs to be borne in mind that many vessels in the EU long-distance fleet operate in ACP waters where there is overcapacity, where resources are over-exploited, and where MCS means are inadequate. Therefore, this initiative to review how capacity and fishing effort are measured may have some important impact on determining the level of access of EU fleets to ACP resources. 6.3 The fuel crisis Over the period 2004 to 2008, the price of fuel used in fisheries has more than tripled. Fuel represents one of the most important running costs for fishing operations, and already receives significant price support in Europe. High fuel costs are likely to continue, and further increases seem inevitable in the short to medium term. They have a significant bearing on the economic viability of some European fleets and their ability to operate in distant waters, like the trawlers fleets active in west Africa. At the same time, differences in fuel costs and the availability of subsidies to cushion the impact of the fuel prices and install more fuel-efficient engines in the EU could increase the competitive advantages already enjoyed by EU fleets in ACP waters. 196 Executive brief September 2008 September 2008 Executive brief ACP-EU fisheries relations and FPAs ACP-EU fisheries relations and FPAs Table of contents 1. The various types of ACP-EU fisheries relations ____________________________ 199 1.1 Fisheries-sector cooperation within the framework of the Cotonou Agreement ___________ 199 1.2 Bilateral fisheries agreements__________________________________________________ 199 2. The EU’s interests in signing fisheries agreements __________________________ 200 3. From ‘cash for access’ agreements to partnerships __________________________ 201 4. Issues arising from ACP-EU fisheries partnership agreements ________________ 202 4.1 Regionalisation/harmonisation of FPAs _________________________________________ 202 4.2 Conditions of access to ACP resources __________________________________________ 202 4.2.1 Setting up of the level of access ____________________________________________________ 202 4.2.2 Estimation of the fishing effort ____________________________________________________ 202 4.2.3 Catch reporting ________________________________________________________________ 203 4.3 Definition of the financial contribution__________________________________________ 203 4.4. Development of the local fisheries industry ______________________________________ 204 5. Issues arising from EU investments in ACP fisheries ________________________ 204 5.1. The mixed experience of ACP-EU joint enterprises ________________________________ 204 5.2. The strategic importance of joint enterprises for the EU ____________________________ 205 5.3. The strategic importance of joint enterprises for the ACP countries____________________ 205 6. Priority areas and demands to be discussed in negotiations for FPAs ___________ 207 7. Monitoring, control and surveillance: a priority in ACP-EU fisheries relations____ 208 8. Constraints to be addressed in the FPAs ___________________________________ 208 9. Coherence between FPAs and EPAs ______________________________________ 209 197 Summary September 2008 Executive brief ACP-EU fisheries relations and FPAs The main formal fisheries relations between the EU and ACP countries fall either within the framework of the Cotonou agreement or within the framework for bilateral fisheries partnership agreements (FPAs) between a single ACP country and the EU. The former are mostly funded through the European Development Fund. The bilateral fisheries agreements form part of the Common Fisheries Policy (CFP) and provide the EU with security of fish supply, through EU access to ACP resources. Through the financial contribution, they may support ACP countries’ efforts to implement sustainable exploitation of resources (particularly in terms of research and control). These ‘cash for access’ fisheries agreements raised a lot of criticisms, concerning the sustainability of EU access to ACP resources, particularly in cases where resources are fully exploited or even over-exploited, and where EU fishing activities lead to competition with the local ACP sector for access to resources or markets. To answer these criticisms, the EU has shifted towards FPAs, in which issues of sustainability are prominent. Related issues include the WTO-compatibility of subsidies (which should be development-oriented in the partner country, rather than to the EU industry), EU investments, particularly joint enterprises and vessel transfers, and the importance of acting at a regional level. Different considerations take priority in mixed fisheries and tuna fisheries. Priority areas to be resolved in FPAs include access rights of EU fleets, data collection, transparency, and monitoring, control and surveillance (MCS) in the fight against illegal, unregulated and unreported (IUU) fishing. Constraints relate to commercial interests on the EU side, and where there may be a lack of capacity on the ACP side to exploit their own resources in a sustainable manner. There are also conflicts arising between the desire for bilateral cooperation and regional cooperation. Finally it is important to ensure that FPAs are coherent with the EPAs currently being negotiated, as studies show that EU access to ACP resources impacts on the ACP capacity to trade fish. 198 1. The various types of ACP-EU fisheries relations September 2008 Executive brief ACP-EU fisheries relations and FPAs Fisheries relations between the EU and ACP countries are complex. However, they can be divided into three main categories:  fisheries sector cooperation within the framework of the Cotonou Agreement, including mainly national or regional projects;   bilateral FPAs; these are part of the international component of the CFP; bilateral trade relations, currently governed by the provisions of the Cotonou Agreement, scheduled to be replaced by economic partnership agreements (EPAs). This executive brief is mainly concerned with the first two categories; trade relations are dealt with in detail in the executive brief on market access. 1.1 Fisheries-sector cooperation within the framework of the Cotonou Agreement Through DG Development the EU is financing fisheries initiatives in ACP countries, mostly under the European Development Fund, with a total financial envelope of around €140 million. The most important initiatives concern programmes and projects financed under regional programmes or through so-called ‘all-ACP funds’ (sector-wide programme funds, not allocated at national or regional level). These include:  Strengthening Fisheries Products Sanitary conditions (SFP), a €45 million programme up to 2010 whose objective is to facilitate access for local fishery products to the global market;  ACP FISH II, a five-year programme (starting in 2009) which will promote the sustainable exploitation of ACP aquatic resources and the equitable distribution of benefits. Besides these rather large projects, there are several projects at national or regional ACP level. Of particular importance, given the emphasis that the EU and ACP are putting on the fight against illegal fishing, is an initiative funded under the regional indicative programme for west Africa in support of fisheries management in the area covered by the subregional fisheries commission (CSRP). The objective of the latter is to reinforce institutional capacities, to contribute to the harmonisation of the fisheries policies of the member states of CSRP and to foster subregional cooperation in areas such as research and MCS (to combat IUU fishing). Fisheries-sector cooperation activities can also be financed from other European sources, including the European Investment Bank, the Centre for the Development of Enterprise and Proinvest. 1.2 Bilateral fisheries agreements Anticipating the UN Convention on the Law of the Sea, in the mid-1970s an increasing number of coastal states established exclusive economic zones (EEZs) by extending their jurisdiction out to sea from 3-12 to 200 nautical miles. This brought almost 90% of the world’s exploitable fish resources under the control of coastal states. The fleets of the EU member states, which had traditionally fished in the waters of other countries, suddenly found themselves barred from them. To ensure continuity of access for their fleets, fisheries agreements were concluded between the EU and the third countries concerned. When Spain and Portugal joined the EU in 1986, their national bilateral agreements were phased out and replaced by ‘Community Agreements’. In cases where there is no ‘Community fisheries agreement’ (e.g. South Africa) national bilateral agreements continue in force. 199 Fisheries agreements between the EU and third countries, including ACP countries, are an integral part of EU distant-water fisheries policy. They include a component of access for EU fleets to ACP resources, and a financial contribution which compensates for that access. September 2008 Executive brief ACP-EU fisheries relations and FPAs The EU distant-water fisheries policy, of which the main objective is to defend EU fishing interests, has been until now the main force driving ACP-EU fisheries relationships. In July 2008 there were 14 of these Community fisheries agreements with ACP countries, involving the payment of a financial contribution. In return, EU fleets are provided with access to resources that, in theory, are not exploited by the coastal state, often referred to as ‘surplus resources’. Apart from the agreement with Guinea (Conakry), all of the ‘cash for access’ type fisheriesaccess agreements, have been replaced by FPAs, based on a sustainable development approach. Some agreements with ACP countries have no protocol in force, as with Angola, Mauritius, Senegal, etc. 2. The EU’s interests in signing fisheries agreements The main interests of the EU in signing fisheries agreements include:  Supplying fish as raw material to the EU processing industry. A 2008 EC study on the EU external fleet (i.e. the fleet active outside EU waters) estimated the total catch for this fleet to be around 1.2 million tonnes, representing more than 20% of the EU total catch for human consumption. The external fleet’s catch of tuna species represents 92%; shrimps 35%; cephalopods 28%; and small pelagics 18% of EU total catches for these species. The majority of the external fleet’s catch arrives on the EU markets, either directly (in frozen form), or indirectly after processing in a third country (canned tuna).  Maintaining fishing capacity outside EU waters. Currently more than 700 EU vessels operate outside community waters, mainly from Spain (59%), France (12%) and Portugal (10%). Although the external fleet represents less than 1% of the 88,600 units of the EU fishing fleet, it constitutes 24% of the capacity in terms of gross tonnage. The main fleets active in ACP waters are:  Tropical tuna purse-seiners, which represents the largest segment of the external fleet (25% of EU external fleet capacity);  154 trawlers operating in west African waters (19% of EU external fleet capacity), engaged in bottom trawling (for shrimp, cephalopods, etc) and 12 pelagic trawlers fishing for small pelagics;  Surface long-liners (15% of EU external fleet capacity), fishing for swordfish and oceanic sharks.  Maintaining EU employment. The ACP-EU fisheries agreements provide 35,000 jobs, mainly in the EU-based processing sector. It is estimated that ACP-EU agreements have generated a value added of around €700 million in the member states through processing and marketing of the fish caught. Most of the benefits from the ACP-EU agreements accrue to Spanish operators, who obtain over 80% of the added value and jobs. France and Portugal benefit from approximately 7% each. In 2007, the overall expenditure for bilateral FPAs was around €120 million, representing 74.44% of the available budget. For some of the most important ACP-EU fishing agreements, expenditures in 2007 were as follows:    €86 million for the EU-Mauritania agreement €4.125 million for the EU-Seychelles agreement €4.8 million for the EU-Guinea agreement. 200 3. From ‘cash for access’ agreements to partnerships September 2008 Executive brief ACP-EU fisheries relations and FPAs As part of the process of the reform of the CFP, the EU adopted Council conclusions in 2004 which proposed that EU fisheries bilateral relations move from access agreements to ‘partnership agreements’ that contribute to responsible fishing. Anticipating new WTO rules on fishing subsidies, the communication also proposed that ‘the financial contribution ... cannot be considered as a subsidy to the European fishermen. For the future, the Community financial contribution will have to be regarded as investments for the improvement of responsible and rational fishing and therefore based on new considerations.’ The main elements in the FA and FPA texts negotiated are summarised in the following table. It is to be noted that some changes were not introduced in the first FPAs negotiated but only in later ones, showing the evolving pattern of the FPA approach. From ACP-EU fisheries agreements (FAs) to fisheries partnerships (FPAs): main changes Main elements EU fleet operations FA FPA For the determination of the level of fishing opportunities, no reference was made to international scientific recommendations. No exclusivity clause (stipulating that all EUflagged boats fishing in the zone should operate under the FA). General principle of EU fleets accessing only surplus stocks that cannot be caught by local fleets (so de facto discrimination between local and EU fleets). Financial contribution Determination of the level of the financial compensation based on fishing opportunities, and including specified amounts of the financial compensation to be devoted to particular initiatives (‘targeted actions’), often unconnected from the fisheries policy of the ACP country concerned. The ACP country concerned sent an annual report about how money had been spent to implement targeted actions. A reduction or an increase in the fishing opportunities granted to EU vessels leads to a reduction or increase in the financial compensation. Scientific cooperation Seafarers’ employment Provisions for investments Not formally included. Ex-ante evaluations Only after 2003 (not public). For the determination of the level of fishing opportunities, reference is made in tuna agreements to RFMOs’ scientific recommendations. Existence of an exclusivity clause. Principle of non-discrimination between different fleets fishing in the fishing zones concerned, although the principle of access to surplus was reiterated in the Council’s conclusions. Determination of the level of the financial compensation based on fishing opportunities, and including EU financial support for the definition and implementation of a sectoral fisheries policy in the ACP country concerned. The EU and the ACP country concerned undertake prior consultations, in particular as regards implementation of the ACP sectoral fisheries policy. The EC monitors the results against the objectives, using performance indicators, rather than looking at the spending of the monies. A reduction or an increase in the fishing opportunities granted to EU vessels leads to a reduction or increase in the financial compensation. Provisions for a joint scientific committee. Employment of local or ACP crew; a social clause is included. Yes, particularly through the setting up of fishing joint ventures, transfer of technology, vessels, etc. Ex-post impact evaluations to be carried out (not public). Employment of local crew; no social clause included. No 201 4. Issues arising from ACP-EU fisheries partnership agreements The new ACP-EU FPAs raise some issues of key concern for ACP countries: September 2008 Executive brief ACP-EU fisheries relations and FPAs 4.1 Regionalisation/harmonisation of FPAs A report on the EC’s 2006-2008 action plan for simplifying and improving the CFP, adopted by the European Parliament at the end of 2006 ‘emphasises the need to finalise a standard agreement for the negotiation of FPAs’. This demand to adopt a standardised approach to negotiations of agreements in consultation with all parties involved, including ACP stakeholders, would certainly help ACP countries to discuss, on a regional basis, issues arising from bilateral FPAs with the EU and harmonise their approaches to FPA negotiations. Already, technical conditions governing tuna partnerships have been revised to take into account the specific regional aspects of these highly migratory species: presence of regional observers, taking into account of recommendations of regional fisheries organisations, etc. 4.2 Conditions of access to ACP resources The prevention of over-fishing is a key concern of the Fisheries Council conclusions, ‘in particular for stocks of importance to local people’. This echoes the resolution on FPAs from the European Parliament which insisted that FPAs should contain measures ‘to protect smallscale indigenous fisheries, to promote the landing of fish locally and require access to be dependent on the use of selective fishing methods’. The Parliament also stressed that ‘no agreement should be sought in relation to access to stocks that are already fully exploited or in danger of over-exploitation’. These commitments raise a number of issues concerning the way that access to fisheries resources is defined in the FPAs. 4.2.1 Setting up of the level of access Some FPAs, particularly west African mixed agreements still provide access to resources that are already fully exploited or even over-exploited (demersal coastal species in Mauritania is the best example), contrary to the European Parliament demand. Although there is a will to increasingly allocate FPA monies for ‘the promotion of sustainable fisheries’ in the ACP country concerned, a linkage still exists between the level of access and the level of financial compensation. In the past, this has meant that necessary measures for stock recovery, and the diminution of EU access to resources, have often been delayed due to the inherent conflict between receiving foreign-exchange payments for access rights on the one hand, and resource conservation on the other. It needs also to be noted that a reduction of the level of access (fishing possibilities) does not de facto mean a reduction in catches. This raises the question as to whether fishing possibilities are the right tool for measuring EU access to ACP fish resources. This has important implications, both in terms of ACP resource-management, as well as financial repercussions, in as much as the financial contribution is based on the fishing possibilities, rather than on real catches made. 4.2.2 Estimation of the fishing effort Another issue is the way the fishing effort is estimated. In FPAs, fishing rights for EU fleets are given either in GT (gross tonnage) for demersal fisheries, or, in the case of tuna fishing and small pelagics fishing, in the number of boats. ACP negotiators may therefore be systematically underestimating the catch and impact of the EU fleets in the agreements that are signed due to the imprecise nature of these units of measure (GT and vessel numbers). 202 The use of unselective fishing gears, like trawls, is also a problem, which has implications for the sustainable exploitation of ACP fish stocks. This is particularly so in places like the Gulf of Guinea, where by-catches contain high levels of juveniles. There are also implications for the value of the catches being made by the EU in ACP waters, since some of the by-catch species are in fact high-value commercial species. Furthermore, a study showed that the value of discards incurred by the EU fleet in Senegalese waters (based on their value as fish for reduction to fish meal) was equal to approximately 18% of the financial compensation received. September 2008 Executive brief ACP-EU fisheries relations and FPAs 4.2.3 Catch reporting Many ACP countries with EU fisheries agreements have sizeable EEZs to police and control, and often lack the capacity to do so in an efficient way. It is therefore very difficult for an ACP country to assess the quantities and value of the fish caught by distant-water fishing nations like the EU, particularly in the case of tuna fishing. The use of VMS (satellite-based vessel-monitoring systems), now systematically introduced in the agreements, partly addresses the issue of reporting by locating where fishing boats are and whether they are fishing or not. The effectiveness of the system is highly dependent on the capacity of the coastal state to back up such systems with patrol vessels and the ability to monitor catches directly, and in the latest agreements, considerable efforts have been made to improve ACP countries’ capacities in terms of MCS. The problem of (under-) reporting of EU fleets fishing outside EU waters has been highlighted in the Court of Auditors report on the CFP MCS system, released in December 2007. Another problem arises from ACP misreporting of local catches. A 2009 study estimates that the statistics provided in the last 50 years, including by ACP countries, to the FAO have failed to show relatively large volumes of fish being caught by small-scale fisheries. The study provides examples of ACP countries having used statistics that underestimated local catches to justify selling permits to European boats to fish for high-value species – further depleting stocks for the local community. 4.3 Definition of the financial contribution The Council of Fisheries Ministers is ‘anxious to ensure that the Community financial contribution under the CFP effectively and adequately supports the establishment of responsible and sustainable fishing in the interests of the parties.’ Given the important ACP needs in terms of ‘scientific and technical evaluation of the fisheries, monitoring and supervision of fishing activities, hygiene requirements, etc’, required levels of EU investments to address those needs implies that costs will rise. The other side of the coin, is that if the EU only asks for access to stocks that are not fully or over-exploited, overall fishing possibilities may decrease in the short term. Higher compensation payments for lower access levels would certainly de-link access from payment, but given the growing number of EU voices demanding that these agreements represent ‘value for money’, this constitutes a major political challenge. In this context, it is worth noting that in the latest Mauritania-EU FPA, signed in 2008, an explicit linkage is made for the first time between funds disbursed under the FPA and EDF funding. A footnote specifies that, in addition to the FPA financial compensation agreed, in the event of a positive overall performance at the time of the mid-term review of the 10th EDF in 2010, including the sectoral fisheries policy, an increase in the programmable allocation under the 10th EDF may be considered. This means that, if conditions are fulfilled (accountability, good governance, and performance of the sectoral fisheries policy), the global budgetary support provided to Mauritania through the EDF will be reviewed and increased after the mid-term review of the NIP, in order to ‘compensate’ the losses due to the diminution of the FPA financial compensation. 203 On the one side, this kind of linkage can be seen as a way to put pressure on an ACP country, Mauritania in this case, to sign an agreement providing access to its resources, and to tailor its fisheries policy to suit EU needs. However, involving more EDF funds in the overall EU-ACP fisheries relations may also contribute to decreasing the influence of the access component of the agreement and giving more emphasis to development needs. 4.4. Development of the local fisheries industry September 2008 Executive brief ACP-EU fisheries relations and FPAs Benefits generated by EU fishing operations still mainly accrue to EU operators. But there are a number of constraints for maximising the benefits from fishery agreements in ACP countries, including:  Lack of onshore infrastructure: onshore infrastructure is often insufficient to deal with the landings (cold chain, warehouses, etc), which makes it difficult to organise value-adding activities. The EU provides the main export market for fishery products for most of the ACP countries that have fisheries agreements with the EU. But access to the EU market is increasingly conditional on meeting hygiene standards that ACP countries are often not able to comply with. This is a major constraint on the development of export-oriented valueadded operations, particularly so where the local artisanal sector is a significant supplier of the processing industry and has access to export markets.  Compulsory landing provisions: although most of the agreements have provisions for compulsory landings, very seldom are these landings obligatory (with notable exceptions as in the case of Senegal). As noted above, most agreements contain provisions that allow boat owners to default on their obligations to land fish if they make a compensation payment. The role played by the various sets of norms put in place by the EU, such as the rules of origin, the sanitary and phyto-sanitary standards, or, in the near future, the norms to prove the legal origin of fish, needs also to be kept in mind. One of the incentives for ACP countries, particularly those with a fish-processing industry, to sign an FPA with the EU is to secure supplies of ‘originating’ raw material for local processing industries, often with the objective of exporting these processed products duty-free to the EU market. Obviously, this can only work if the ACP country has the sanitary approval to do so. There is therefore an evident linkage between the signing of an FPA (on tuna particularly), the maintenance of tariff preferences, and the granting of sanitary approval by the EU. It is important for ACP countries to analyse how best to approach and to deal with these linked issues. 5. Issues arising from EU investments in ACP fisheries The FPAs contain provisions for supporting EU investments in ACP fisheries, particularly through joint ventures. It needs to be emphasised that, too often, this type of European investment in ACP fisheries sector has been made on the basis of a very limited knowledge of the state of fish stocks, ecosystems, and with a poor understanding of the dynamics of fishery sectors and coastal communities. 5.1. The mixed experience of ACP-EU joint enterprises The main experience of EU investments in ACP fisheries, to date, has been through the setting up of joint enterprises based on vessel transfer. According to a COFREPECHE study that analysed EU joint enterprises in fisheries, four main objectives had been set by the EU for subsidising joint enterprises:   to eliminate the overcapacity from EU waters; to guarantee the supply of the EU market; 204   to maintain, even partially, EU employment; to follow up the evolution of the existing fisheries agreements. September 2008 Executive brief ACP-EU fisheries relations and FPAs The study questioned whether any of these objectives had been met, noting that:  86% of the vessels under joint enterprises were previously fishing outside EU waters, so the reduction of overcapacity has been minimal;  vis-à-vis employment, the study notes that ‘the trend is to gradually decrease the EU staff, on the one hand due to pressure from local authorities and on the other hand due to few young Europeans entering the job market to renew the crew’. Working conditions are also worsening as the vessels become subject to the third country’s (and not the EU’s) labour regulations, and this acts as a disincentive for EU fishermen. 5.2. The strategic importance of joint enterprises for the EU Joint ventures involving EU capital are operating in ACP countries such as Namibia, Mozambique, Angola, Mauritania, Senegal, Gambia, Guinea-Bissau, Guinea-Conakry, Gabon, etc. The ‘Cluster of EU joint enterprises’ set out how their activities were beneficial for the EU. From their point of view, joint enterprises ensure:  the strategic supply of high-quality marine products to the EU market (10% of the imports and 5% of the total consumption);   the creation of 7,000 jobs (over 86% of which were in third countries);  the reduction of illegal immigration thanks to the jobs created in third countries, with EUlevel salaries. an important contribution to the EU fleet’s efforts at capacity reduction and sustainability of the activities in the fishing zones where the joint ventures operate; As would be expected, EU operators are often reluctant to lose control of the operations, for a variety of reasons, including the lack of security for investments in third countries. This is the reason why, according to an EC representative, two factors are needed for the promotion of fishing investment in third countries:  greater liberalisation of the investment regime, greater fairness and the legislative stability to ensure better investor protection;  a full guarantee that there will be no sudden changes or discriminatory treatment for European operators and that there will be financial support in accordance with the investment’s wealth-creating potential. 5.3. The strategic importance of joint enterprises for the ACP countries The starting point for European investment in ACP fisheries should be based on the needs of ACP countries. The ACP small- and medium-size fishing enterprises (SMEs), particularly smallscale fisheries, processing and exporting businesses, are effectively addressing many of these explicit needs, and a priority for EU investments should be the SME sector. At the end of 2006, at a conference looking at fishing joint enterprises as a tool for sustainable development, an ACP fisheries minister declared that what was needed was ‘a greater understanding by European ship-owners of the problems countries face to manage fishing on a sustainable basis ... the main battle … is none other than the fight against absolute poverty…. In this context, the main objective is an integrated development of artisanal fishing, with improvements in turnover and the living conditions of the artisanal fishermen.’ 205 On the future role of joint ventures he said: ‘we are looking for fresh challenges. For instance, we still supply the raw material for fish processing in the industry abroad. Joint-venture owners should look for ways of making their catches into end products, to be sent directly to the national or regional (ACP) consumer.’ September 2008 Executive brief ACP-EU fisheries relations and FPAs This summarises some of the most important issues ACP countries need to resolve to ensure that joint ventures contribute to sustainable development. New challenges like those posed by regional markets, or by the setting up of joint ventures for the purpose of adding value, must also be addressed. However, a major hurdle to promoting European investment in those SMEs is that, often only EU industrial ship-owners are considered as ‘potential partners’ for investment. Small- and medium-scale European fishing, processing and marketing enterprises, whose size and nature are probably better adapted to partner those in ACP states, are largely excluded from the mechanisms that facilitate investments in the ACP fisheries sector. Lately, some ACP countries, particularly Pacific-island countries, have proposed to link shorebased investment to access to fishing grounds. This presupposes that public infrastructure, available markets, etc, can ensure the economic profitability of the operation. Above all the main objective should be to conserve fish resources, as they are the basis for long-term investment. Given the state of stocks, and the general move towards restriction of access, how will these ACP countries ensure that foreign investors will respect access restrictions, so that there is a balance between the fishing effort and tuna resources available? Before joint enterprises are eligible for EU support through fisheries partnerships, consideration needs to be given to establishing minimum standards which private companies should be expected to meet. These guidelines should be based on the principles of good governance, and on the objectives of EU development cooperation policy. Thus, with regard to:  poverty alleviation – an assessment should be made of the net effect of the private-sector activities receiving assistance on job creation, average income levels, and working conditions;  sustainable development – private-sector companies seeking EU assistance should be expected to make a clear commitment to comply fully with responsible fishing practices, as laid down in national legislation and international codes of conduct;  supporting the integration of ACP countries into the world economy – emphasis should be placed on the contribution of the private-sector company’s activities to locally owned valueadded processing activities;  promoting good governance – private-sector companies should be expected to make a clear commitment to full transparency of the fishing activities undertaken, full transmission of catch data and full cooperation with scientific research into fish stocks;  establishing responsible fishing policies – joint ventures need to be based on local requirements rather than on EU demands. 206 6. Priority areas and demands to be discussed in negotiations for FPAs September 2008 Executive brief ACP-EU fisheries relations and FPAs Given these global challenges, the need for compliance with WTO rules, and past experience of ACP-EU bilateral fisheries agreements, it is possible to draw up a list of priority areas and demands that need to be discussed as part of future FPA negotiations. This was the subject of two meetings organised jointly by the ACP secretariat, the CTA and the Commonwealth Secretariat in 2003 and 2004. Representatives from both the EU and ACP attended these meetings. So far they have represented the only organised broad consultation with ACP countries on FPAs, and the participants made a number of recommendations on various aspects of the future partnerships. These included:  The objectives of the Cotonou Agreement should form the basis for the establishment of FPAs. These should therefore be the result of a political dialogue. The approach proposed at EU level in the Council Resolution on Fisheries and Poverty Reduction (EU, 2001) could be used as a reference for future FPAs.  In order to conserve ACP natural capital for both current and future generations, it is important that access of EU boats to ACP waters be made conditional on:  the flexible adjustment of fishing possibilities on the basis of annual resource assessments, taking into account the best available scientific information (in particular the results of international or regional scientific committee meetings) and in accordance with the needs of the local fishing sectors;  the promotion of good governance, with a clear distinction being made between the financial compensation allocated for fishing access and the monies allocated for investing in sustainable fisheries development. Under no circumstances should the reduction of fishing access lead to a reduction in monies allocated for investment in sustainable fisheries development;  the promotion of a regional approach to partnerships in ways that strengthen systems and capacities for collecting, processing and sharing data on catches, fish stocks, ecosystems, fishing effort, and the economic and social importance of the fishery sector. In particular, FPAs should support and build on existing regional research initiatives involving both national research centres and international bodies like the FAO;   the promotion of transparency;  full transparency, information and well-prepared participation of the local ACP fisheries sector in the negotiating process can only reinforce the ACP countries’ position in favour of a sustainable, ‘poverty reducing’ development of ACP fisheries sectors. data collected should be publicised, in their aggregated form, to promote transparency, public debate and public control over the process; 207 7. Monitoring, control and surveillance: a priority in ACP-EU fisheries relations September 2008 Executive brief ACP-EU fisheries relations and FPAs In order to be able to better assess the value of their natural capital, ACP coastal states have pushed for an improvement of their MCS capacities. In particular, they have asked for the following conditions to be included in access provisions for EU fleets:  the use of VMS (vessel-monitoring system) should be systematically introduced with the data collected made directly available in real time to both the EU and the third state. Current arrangements, particularly those involving private companies, that make only partial data available post facto, are highly unsatisfactory;  on-board observer programmes should be compulsory (without a default clause); observers should be paid through public funds and not by the boat owners; observers should be qualified to the same internationally recognised standard, ensuring harmonisation of standards in the observer programmes between all FPAs;  by-catch management should make the avoidance of discards a priority, through the promotion of selective fishing methods; by-catch reporting should be compulsory;  local landings: obligatory landings would facilitate and enhance the quality of the control. This ACP demand coincides with the EU proposed regulation to fight IUU fishing, for which a political agreement was found in June 2008. The regulation will enter into application as from January 1st 2010. Adopted measures include:  introduction of an EU ‘blacklist’ of non-complying vessels, with detailed rules on the drawing up of such a list, the consequences of being included thereon and, in certain cases, the consequences for third countries harbouring such vessels;  establishment of a certification scheme designed to cover all imports of fishery products with the exception of products derived from inland fisheries and aquaculture;  approximation within the Community of the levels of sanctions for serious infringements: a maximum fine of at least five times the value of the fishery products obtained by committing the serious infringement. From an EU point of view, fighting illegal fishing will also contribute to eliminating unfair competition by IUU fleets, and help to protect and ensure long-term access to third countries’ resources for EU fleets. 8. Constraints to be addressed in the FPAs The raison d’être of FPAs is to maintain the presence of the European long distant water fleets (LDWF) in the EEZs of third countries, to protect EU interests and to maintain the employment and other social and economic benefits linked to its activity. Thus, the driving force behind the conclusion of FPAs will continue to be the commercial and related interests of the EU fishing sector. On the other hand, the EU can hardly promote responsible and sustainable fisheries through FPAs if the ACP partner has no capacity to manage its fisheries in a sustainable way. Similarly, it is not possible to incorporate an FPA into the development strategies of a coastal state – one of the elements stated in the EC communication on FPAs – if this state does not have a clear fisheries policy outlining a development strategy for the sector. 208 Given the conditions for the disbursement of the FPA financial contribution (through the CFP) and the pressing requirements for ACP countries to develop sustainable fisheries in their waters, it is clear that FPAs on their own will not lead to sustainable fisheries development. It is also clear that FPAs cannot (and should not) replace development cooperation in fisheries matters. September 2008 Executive brief ACP-EU fisheries relations and FPAs 9. Coherence between FPAs and EPAs There is a fine line in ACP-EU fisheries relations that divides the interest of the EU in resource access on the one hand, and the ACP’s interests in tariff-free access to EU markets on the other. ACP negotiators need to be aware that the EU may push for ACP access to EU markets to be made conditional on EU fleet access to ACP waters. An issue of even greater concern is that post-Cotonou, and within the framework of EPAs, ACP market access may be made conditional on direct foreign investment for EU enterprises in the ACP fishing sector. The ‘association agreement’ between the EU and Chile, signed in 2002, provides some clues as to how future ACP-EU FPAs may be linked to trade and economic arrangements through EPAs. The EU-Chile agreement provides a framework for free trade, investment, cooperation and political dialogue in a number of sectors, of which the fisheries sector is but one. It is the first time that fisheries access for the EU on the one hand (through direct investment), and import-tariff concessions for a third country on the other, have been included as part of a package deal. This may be the blueprint for future bilateral EPAs with ACP countries. It is important for ACP negotiators to understand the implications for the EPA negotiations of the EU-Chile agreement. In this there are two main components dealing with fisheries:  a protocol on fishing enterprises establishes the possibility for European investors to purchase 100% ownership rights in Chilean fishery enterprises, on a reciprocal basis;  conditions for rules of origin and the removal of tariff barriers are established. Mention is also made in other parts of the agreement of:    bilateral and/or multilateral agreements covering fisheries on the high seas; developing regional cooperation in fisheries matters; the rights and obligations of both parties under the United Nations Convention on the Law of the Sea. In 2007, an EC representative declared that ‘EPAs negotiated with ACP countries will be the main tool of economic, financial and political cooperation’, as they concern the entire fishing sector, service, marketing, processing and market access, as well as the programming of part of EDF resources. The issue of combating illegal fishing and the importance of regional action, within the framework of these EPAs, will also be discussed as well as coordinated action at the level of regional-fishing organisations. It is true that EPAs could help achieve such ends provided that fisheries are treated as a priority in the negotiations. However, the absence of any reference to resource-access issues, or to FPAs, is noticeable in the discourse of the EC representative. This is markedly different from the approach proposed by several ACP groupings, such as the Pacific ACP, where access to resources forms an integral part of the EPA discussions. 209 Executive brief August 2008 Executive brief WTO aspects of ACPEU fisheries relations WTO aspects of ACP-EU fisheries relations Table of contents 1. How fisheries are dealt with in the WTO __________________________________ 213 2. Market access for non-agricultural products________________________________ 213 2.1 Tariff barriers and the NAMA negotiations_______________________________________ 213 2.2 Non-tariff barriers (NTBs) ___________________________________________________ 215 2.2.1 The WTO agreement on the application of SPS measures ________________________________ 215 2.2.2 The WTO agreement on technical barriers to trade _____________________________________ 216 2.2.3 Eco-labels ____________________________________________________________________ 217 August 2008 3. The WTO agreement on subsidies and countervailing measures (ASCM) _______ 217 3.1 The Doha declaration and fisheries subsidies _____________________________________ 217 3.2 WTO rules on subsidies _____________________________________________________ 218 3.3 ACP fishery policy: implications of improved WTO disciplines on fisheries subsidies_______ 219 3.4 EU-ACP fishery relations: implications of improved WTO disciplines on fisheries subsidies _ 219 3.5 Fishery-subsidy negotiations and their implications for EU-ACP fisheries relations ________ 220 3.6 Current status of fisheries subsidies and WTO rules negotiations ______________________ 221 4. Trade and the environment _____________________________________________ 221 5. Dispute-settlement procedures __________________________________________ 222 6. WTO anti-dumping agreement __________________________________________ 223 7. The WTO agreement on safeguards ______________________________________ 223 8. The WTO general agreement on trade in services (GATS) ____________________ 223 211 Summary August 2008 Executive brief WTO aspects of ACPEU fisheries relations Fisheries and fishery products are not part of the agricultural negotiations in the WTO but are dealt with as industrial products. As such they are included in the non-agricultural market-access (NAMA) negotiations. Under the Doha Mandate, fisheries subsidies are subject to rulesnegotiations on disciplines. Fisheries are also dealt with under trade and environment negotiations, and dispute-settlement procedures have been invoked in several cases. Also important are anti-dumping measures and the agreement on safeguards. Issues arising from NTBs, including SPS questions and technical barriers to trade, are highly relevant. A related aspect includes the increasing attention afforded to the use of ‘eco-labelling’. Subsidies negotiations have highlighted the need to differentiate between harmful and beneficial subsidies to the fisheries sector, and the need to allow exceptions for developing countries through special and differential treatment (S&DT), particularly artisanal fisheries. Fisheries agreements between the EU and ACP countries were a particular source of concern as many payments nominally for access rights or to aid the development of local fisheries have been construed as subsidies to the EU fleet. The EU has adapted its fishery agreements to be WTO-compatible. So far it has adopted a middle position regarding subsidies between the hard-line anti-subsidy ‘Friends of fish’ group and the ‘Friends of fishing’ group, but tending towards the latter. ACP participation in the subsidy negotiations has been fairly low key, with some notable exceptions (linked to the small vulnerable coastal states, and in their own right), one of their main concern being that fisheries-access fees should be exempted from any new disciplines on fisheries subsidies. The draft text, released by the Chair of the negotiating group on rules on November 30th 2007, explicitly states that access fees shall not be deemed to be subsidies within the meaning of this agreement, subject to certain conditions. The vulnerable situation of ACP canned tuna on the EU market has also been highlighted, given the boost that the anticipated tariff reductions could give to non-ACP imports. The dispute-settlement procedures of the WTO have been invoked, notably by Asian competitors of ACP canned tuna, focusing on the preferences given to ACP tuna-canners in the EU market. Since the breakdown of the Doha Round negotiations in July 2006, it has been questioned whether there is the necessary political will to see the Doha Mandate through. In parallel the EU and other major players are signing up to bilateral trade agreements that go beyond WTO commitments, indicating that they favour a bilateral approach to trade liberalisation over a multilateral approach (through the WTO). 212 1. How fisheries are dealt with in the WTO During the Uruguay Round of negotiations of the General Agreement on Tariffs and Trade (GATT), mainly as a result of the position taken by a number of WTO members, fisheries (and fishery products) were left out of the Agreement on Agriculture. Fisheries and fishery products are therefore treated as an industrial sector and industrial products respectively by the WTO. August 2008 Executive brief WTO aspects of ACPEU fisheries relations As an industrial sector with industrial products, fisheries are currently dealt with by the WTO at four different levels:  market access for non-agricultural products (reduction and elimination of tariffs and nontariff barriers, particularly on products of interest to developing countries) (NAMA);   the agreement on subsidies and countervailing measures (ASCM);  dispute-settlement procedures. trade and the environment, particularly as regards multilateral environmental agreements (MEAs); The international trade in fishery products has also been affected by two other areas of WTO jurisdiction, under:  the anti-dumping agreement (the agreement on the implementation of Article IV of the GATT);  the agreement on safeguards. Lastly, under the General Agreement on Trade in Services (GATS) services incidental to fisheries may be liberalised. 2. Market access for non-agricultural products Improving market access for fish and fishery products largely depends on reducing tariff and non-tariff barriers. Fish and fishery products are not covered by the Agreement on Agriculture, and improving market-access conditions for fishery products depends on WTO negotiations on market access for non-agricultural products (the so-called NAMA negotiations). The Doha Mandate highlights the particular importance to be given to products of export interest to developing countries and specifies that the modalities must include capacity-building measures to assist LDCs in participating effectively in the negotiations. Exports of fish and fishery products from developing countries are making an increasingly important contribution to their export earnings. The international trade in fishery products grew by 7% in 2007, according to the FAO, and developing countries (including China) are accounting for 50% of all fish exports. Fish and fishery products feature significantly in the export earnings of some ACP countries, where fish has replaced more traditional commodities as the most valuable export product. 2.1 Tariff barriers and the NAMA negotiations Under Cotonou Agreement trade provisions and subsequent EPA and interim EPA agreements, ACP fish exporters enjoy significant margins of preference in the EU, their most important market. However, this competitive advantage is gradually being eroded, first by the GATT Uruguay Round, and now by the WTO NAMA negotiations. 213 August 2008 Executive brief WTO aspects of ACPEU fisheries relations The Uruguay Round reduced average weighted import tariffs on fish products in developed countries to around 4.5%. However this hides a number of tariff peaks and cases of tariff escalation for processed or value-added fish products in the most important import markets. Thus for non-ACP exporters, EU import tariffs for products of importance to the ACP range from 10%-22%. Tariffs on canned tuna are currently 22%; on fresh fish fillets 18%; on fresh fish 15% (some species); and on fresh and frozen shrimp and prawn 12%. If the WTO negotiations are taken to their logical conclusion, this competitive advantage will be lost entirely. The NAMA negotiations have so far adopted two distinct approaches:  the ‘critical mass approach’, which would require that a critical mass of major fishproducing, importing and exporting countries establish a sector-specific agreement (i.e. to make fisheries a special case) to liberalise fish trade, i.e. to take fisheries out of the NAMA negotiations;  the ‘formula approach’, which would require agreement on a formula to be applied to current tariff regimes, so as to reduce them to zero over time. The EU is advocating a formula approach, so it is the approach most likely to be adopted. Being responsible for 30% of global fish trade, the EU’s backing is necessary if the critical mass is to be reached. The Hong Kong ministerial declaration of December 2005 proposed that:    a ‘Swiss formula’ be adopted for reducing or eliminating tariffs as appropriate; coefficients should be set at levels that address the export interests of developing countries; their special needs and interests should be taken fully into account. It notes that flexibility would need to be built into the formula to take account of the special concerns of small, vulnerable economies, and to address these without creating a sub-category of WTO members. Given the slow rate of progress in the NAMA negotiations since Doha, it is likely that current tariff regimes will remain in place until after the EPAs currently under negotiation enter into force. The phased elimination of all tariff protection on fishery products, set as a target by the WTO, may have to wait for several more years. This slow progress is highlighted in the report on draft NAMA modalities by the Chair of the negotiating group on market access. The report, dated July 17th 2007, was written as the WTO prepared to break for two months, and noted that members would have to change their positions if agreement were to be reached. It also highlighted the difficulties in reaching a compromise between members on the issue of the different coefficients to be applied in the (‘Swiss’) formula for developed and developing countries (and between developing countries) for tariff reductions, and stated that resolving the issue of reciprocity was highly complex given that ‘the positions of members are very polarised and that there has never been an agreed definition of reciprocity’. The report provides some concrete proposals for negotiating the way forward, including the adoption of a simple ‘Swiss formula’ with two coefficients (one for developed members, and another for developing members), and for product coverage, mark-up for unbound tariffs, the implementation period, and ad valorem equivalents to be included in the formula. Proposals are also given on flexibilities for developing-country members, including the LDCs and small, vulnerable economies. 214 Elsewhere, it has been argued that lower tariffs could impact on the sustainability of fisheries by creating greater demand for stocks that are already over-exploited, and poorly managed. Also, reducing tariffs in developing countries could encourage dumping of large quantities of lowgrade fish from developed countries. Both outcomes would have negative consequences for ACP and other developing countries with large artisanal fishing sectors. This has led to calls for fish and fishery products to be taken out of the WTO negotiations. August 2008 Executive brief WTO aspects of ACPEU fisheries relations 2.2 Non-tariff barriers (NTBs) Non-tariff trade measures may restrict trade inadvertently or incidentally to their primary purpose. In general terms, for fisheries trade, these non-tariff barriers have fallen under the categories of:     packaging and labelling regulations; health and sanitary regulations; animal-health and safety and production-process standards; customs-clearance procedures. Trade is restricted only when the standards in the importing country are stricter than those of the exporter. Such standards may be designed intentionally to discourage imports of products that compete with local producers. Examples include inspection procedures in France in the 1990s, where would-be importers protested that this was an intentional trade barrier, disguised as quality inspection. This procedure was subsequently changed. Also the scientific basis of the EU ban on imports of fresh fish from Kenya, Mozambique, Tanzania and Uganda for health reasons (a cholera risk) was challenged by Tanzania. They complained that 40% of its fisheries workforce had been laid off, and the country had lost $US46.9 million as a result of the ban. Fish-exporting ACP countries may lack the scientific and technical capacity to mount a challenge to such embargos. Even if called off after being challenged, the affected countries and fishing sectors may incur significant non-retrievable losses from such embargos. Two WTO agreements deal with NTBs:  the agreement on the application of sanitary and phytosanitary measures (the SPS agreement);  the agreement on technical barriers to trade (the TBT agreement). The WTO recognises the international standards set by the FAO/WHO Codex Alimentarius Commission as appropriate to international standards for food safety. These apply to food hygiene, contaminants, food technology, product labelling, food-import and -export regulations, and microbiology. They provide an important yardstick for evaluating the hygiene and other standards of importing countries, and are potentially indispensable tools for helping developing countries to overcome NTBs to international trade that may be used by the main importing countries. For example, it was thanks to the Codex Alimentarius standards on food labelling that Peru was able to make a successful challenge to the EU’s labelling regulation as applied to sardines through the WTO’s dispute-settlement panel. 2.2.1 The WTO agreement on the application of SPS measures The ‘SPS agreement’ aims at ensuring that food-safety and animal-and-plant-health standards do not create unnecessary barriers to international trade. It requires that standards and measures are applied only to the extent needed to protect human health. 215 August 2008 Executive brief WTO aspects of ACPEU fisheries relations The relevant provisions of the SPS agreement for trade in fish and fishery products include:  the requirement to use harmonisation principles, i.e. to establish national SPS rules on standards agreed in the relevant international institutions (such as by the Codex Alimentarius);  the requirement, when international standards do not exist or harmonisation is not appropriate, to use the alternative ‘equivalence principle’ whereby the importing country accepts that SPS measures in the exporting country achieve an appropriate level of health protection, even though they differ from the measures used in the importing country;  the requirement for either scientific evidence or appropriate risk assessment if a country intends not to rely on harmony or equivalence but rather on its own domestic standards. New regulations adopted by major importing countries with regard to quality control and assurance have become significant barriers for the export trade in fishery products from ACP and other developing countries. These regulations make the entrepreneurs (processors, traders, etc) fully responsible for the quality of their products, and are based on the ‘hazard analysis critical control point’ (HACCP) principle. To access the EU market, all imported fish products (including from the ACP countries) must come from plants with an HACCP plan. The investments needed to bring a fish-processing plant up to the standards of a HACCP plan are substantial, and many companies, especially in developing countries, feel that the implementation of the new regulations on fishery products is de facto a non-tariff barrier discriminating against value-added products originating from developing countries. If a nation feels unfairly discriminated against by HACCP or other SPS measures, it can seek redress through the WTO system. HACCP is a governmental policy, and it is governments that have signed on to the WTO and Uruguay Round agreement of the GATT. However, ACP countries may lack the scientific and technical capacity to challenge the HACCP programmes foisted on them by the EU. 2.2.2 The WTO agreement on technical barriers to trade Technical regulations and standards (other than SPS standards) are extensively used for fish trade and may constitute distortions or obstacles to trade. The TBT agreement aims at ensuring that regulations, standards (including packaging, marking and labelling requirements), and analytical procedures for assessing conformity with technical regulations and standards, testing and certification procedures, do not create unnecessary barriers to international trade. It recognises the rights of member states to use the standards they deem appropriate to protect human, animal or plant health, and to protect the environment or promote consumer interests. States may also take the necessary measures to ensure that their standards are met. However, to avoid excessive diversity, the agreement encourages countries to use, where appropriate, international standards, guidelines and regulations. The TBT agreement deals with two categories of measures. It treats technical regulations as legally binding laws that are issued by governments; and standards as non-legally binding measures issued by governmental and non-governmental standard makers. Different legal provisions are applied to the two different categories, and it is important to understand how the TBT agreement tries to link the two kinds of measures, given the considerable overlap between them. For instance, international standards may become incorporated into regulations at national level. In some circumstances access to certain markets may be conditional on compliance with certain international standards (for example, organically reared fish from aquaculture). As a result of these types of overlaps, the TBT agreement divides standards into two categories: those for which compliance is required to access a market, and those for which compliance remains fully voluntary or based solely on market factors. Each of these categories is regulated differently. 216 August 2008 Executive brief WTO aspects of ACPEU fisheries relations In addressing all of these areas, the main concern of the TBT agreement is to ensure that standards and technical regulations are not adopted and applied so as to create protectionist barriers to trade in support of domestic producers. Mandatory technical regulations (e.g. the use of a particular fishing technique) and voluntary standards (e.g. government-endorsed eco-labelling schemes) are likely to comply with the TBT agreement if based on internationally agreed norms and standards (such as those contained in multilateral environmental agreements (MEAs). Where trade measures are disputed, individual member states may, in line with WTO procedures, invoke the dispute settlement panel. The importance of the TBT agreement was illustrated by the complaint recently brought by Peru against the EU regarding its labelling regulations for sardines. Peru claimed that the EU labelling regulation for canned sardines constituted an unjustified barrier to trade, contrary to articles 2 and 12 of the TBT agreement. This was upheld by the WTO dispute-settlement panel. 2.2.3 Eco-labels ‘Eco-labelling’ is receiving increasing attention as a potential barrier to trade. An eco-labelling scheme informs consumers that a labelled product is environmentally superior (or more ecofriendly) to other products in the same category. In this regard eco-labels carry both positive and negative implications: as well as having the potential to influence consumer behaviour and to provide new market opportunities, they may also serve to restrict market access and raise barriers to trade. Eco-labels are being promoted in marine-capture fisheries as a way to promote sustainability through consumer choice, and in aquaculture to promote organic fish farming and responsible aquaculture practices. Such labels may discriminate unfairly against small-scale fisheries in developing countries, given such difficulties as guaranteeing traceability (through the ‘chain of custody’), and the lack of catch, effort and resource data. Eco-labels cover what are defined as ‘non-product-related process and production methods’ (PPM). As such they provide rather a complex case for the WTO to rule on. But to date, the decisions of the WTO appellate body have made it clear that PPM-related standards are not inconsistent with WTO rules. It is probable, although not entirely clear, that the TBT agreement covers labelling standards concerning such non-product-related criteria. 3. The WTO agreement on subsidies and countervailing measures (ASCM) 3.1 The Doha declaration and fisheries subsidies The fourth WTO ministerial conference in Doha in 2001 agreed that the global fishing sector should be subject to WTO rules concerning subsidies and countervailing measures (under the ASCM). The Doha Declaration commits WTO members to undertake negotiations: ‘to clarify and improve WTO disciplines on fisheries subsidies, taking into account the importance of this sector to developing countries’ (paragraph 28). Reference is also made to fisheries subsidies with the objective of enhancing the mutual supportiveness of trade and environmental considerations (paragraph 31). This linkage implies that both the trade-distorting nature of subsidies and their environmental impact are to be the subject of WTO disciplines. In dealing with how the WTO negotiations on subsidies in fisheries may affect EU-ACP fishery relations, the following questions must first be answered:  what constitutes a subsidy, and what are the subsidies that currently affect EU-ACP fishery relations? 217 August 2008 Executive brief WTO aspects of ACPEU fisheries relations  how far will the subsidy negotiations go?: will they address only trade-distorting practices within the context of the agreement on subsidies and countervailing measures? Will the environmental and developmental aspects of subsidies and fisheries be fully addressed? These include their negative impacts on the environment and on small-scale fisheries in developing countries, as well as the distinctive production distortions that subsidies can cause in the fisheries sector. The Doha Round of WTO negotiations broke down on July 24th 2006 after a meeting of ministers from six key trading nations collapsed over divisions on how to cut farm subsidies and tariffs. This has raised questions about the political will of member states to see the Doha Round through; instead greater emphasis may be placed on liberalisation through bilateral trade agreements than on a multilateral approach through the WTO. 3.2 WTO rules on subsidies The ASCM places subsidies in two broad categories:   prohibited subsidies (so-called ‘red light/red box’ subsidies); and actionable subsidies (so-called ‘amber light/amber box’ subsidies). Prohibited subsidies are categorised as ‘export subsidies’ and ‘local-content subsidies’. According to the ASCM, ‘these two categories of subsidies are prohibited because they are designed to directly affect trade and thus are most likely to have adverse effects on the interests of other members’. The definition of prohibited subsidies contains the proviso that certain subsidies are prohibited ‘except as provided in the Agreement on Agriculture’. Actionable subsidies ‘are subject to challenge, either through multilateral dispute settlement or through countervailing action, in the event that they cause adverse effects to the interests of another member’. Prohibited and actionable subsidies cover various state supports to the fishing sector. According to the WTO ASCM, a subsidy has three basic elements:    a financial contribution; by a government or any public body within the territory of a member; which confers a benefit. All three of these elements must be satisfied in order for a subsidy to exist. The ASCM also highlights the importance of ‘special and differential treatment of developingcountry members’, and of particular note is Article 27.1, which states that: ‘Members recognise that subsidies may play an important role in economic-development programmes of developingcountry members’. This implies that the provision of special support to fishing communities to meet a variety of social and economic requirements needs to be exempted from consideration as a subsidy. At least three kinds of prohibited subsidies may be in operation in the fish-catching sector:   direct payments from government budgets (i.e. financed by taxpayers) to fishing enterprises;  general services (costs of financing fisheries research, vessel monitoring, control and enforcement, etc). cost-reducing transfers, such as those that reduce the costs of fixed capital and variable inputs; and 218 3.3 ACP fishery policy: implications of improved WTO disciplines on fisheries subsidies August 2008 Executive brief WTO aspects of ACPEU fisheries relations The fisheries sectors of ACP countries may benefit from subsidies provided directly by the national governments, and indirectly through bilateral and multilateral aid programmes. In particular, subsidies are often provided for:  Fuel. Fuel represents one of the major fixed costs of fishing, particularly in the motorised sector. As such, several ACP countries provide tax-free fuel to the fishing sector. This represents a significant subsidy, often worth several million dollars. Under current WTO ASCM rules such subsidies would be prohibited, with serious implications for highly fueldependent artisanal fisheries in ACP countries.  Artisanal fishing. The importance of artisanal fishing in ACP countries is widely recognised. Many ACP countries therefore implement fishery-development programmes that provide direct support to the artisanal sector (for fleet modernisation, infrastructure development, etc). Whilst the parties negotiating the WTO rules to be applied on fisheries subsidies have recognised that artisanal fisheries in the developing countries require special attention, concerns have been raised about the lack of clarity in how artisanal fisheries are defined. It is therefore crucial that ACP countries define artisanal fisheries in the context of their national level policies, and demand that they receive special treatment under WTO rules.  Special and differential treatment (S&DT) for developing countries. The importance of the fisheries sector to the developing countries must be taken into account in the fisherysubsidy negotiations. ACP countries should therefore take a strong stance to ensure that S&DT for developing countries is addressed in these negotiations.  Access fees for fishing rights. Several ACP countries earn important revenues from the compensation payments and licence fees that come from access and private licence agreements. In the case of some small-island states these revenues make a significant contribution to overall GDP (as in the case of the Pacific island nations of Tuvalu and Kiribati). In disciplining WTO fisheries subsidies, such access and licence-fee payments may be subject to new WTO rules. It is therefore important that ACP countries clarify the role of such arrangements in the development of their economies, and justify such arrangements within the framework of the UN Convention on the Law of the Sea (UNCLOS). On November 30 2007, the Chair of the negotiating group on rules produced a draft text on rules for disciplining fisheries subsidies. This explicitly excludes access fees and proposes that subsidies be permitted for vessels not greater than 10 metres in length. But to date there is no broad agreement on the text. 3.4 EU-ACP fishery relations: implications of improved WTO disciplines on fisheries subsidies Until recently subsidies pervaded almost every aspect of EU fisheries: grants for vessel construction; grants for training; tax breaks (e.g. on fuel); infrastructure development; subsidised loans; market support; third-country fishing-access fees, etc. Such subsidies gave EU enterprises unfair competitive advantages over other fishing sectors. The recently adopted ‘European fisheries fund’ (EFF) addresses many of the concerns raised in the Doha fishery-subsidy negotiations. The EFF has now replaced the ‘Financial instrument for fisheries guidance’ (FIFG) as the instrument to provide structural assistance to the fisheries sector for the period 2007-2013. 219 August 2008 Executive brief WTO aspects of ACPEU fisheries relations Its five main priorities are: helping the fleet to adapt fishing capacity and effort to available fish resources; providing support to various industry branches (aquaculture, processing, marketing); provision of aid for operations to support the collective interest of the sector; promoting the sustainable development of fisheries-dependent areas, and providing technical assistance to member states to facilitate the delivery of aid. Furthermore WTO-compatible FPAs have replaced EU-ACP fisheries agreements. The FPA proposal is couched in language that explicitly recognises the need to differentiate between the payment of access fees on the one hand, and on the other to support developing-country fisheries to establish sustainable fisheries policies. The Commission argues that the EU’s financial contribution will be based on the mutual interest to invest in sustainable fisheries policies, rather than the need to pay for access rights. This, it is maintained, would be WTO compatible and hence would not be a prohibited subsidy. However, given the divisions among EU member states on the issue of FPAs and subsidised fishery agreements, and given the slow pace of fisheries-subsidy negotiations, there would seem to be no strong political will at European level to resolve the issue in the short term. The framework for the EPAs being put forward by the EU very closely resembles the framework of the association agreement signed between the EU and Chile in May 2002 and similar EU association agreements, based on reciprocity. There are some important lessons that ACP countries need to learn from such agreements. In particular, market access (reduction and elimination of tariffs and NTBs) for third-country fishery products may become conditional on the liberalisation of investment opportunities for EU companies in ACP countries. Or, as in the case of the ‘Trade, development and cooperation agreement’ (TDCA) negotiated with South Africa, trade liberalisation for fishery products may become conditional on signing a fisheries agreement. A third area of subsidies where ACP countries need to keep a close watch concerns development assistance and other aid provided for modernisation and infrastructure development. Modernisation of the artisanal fishing sector has enabled it to develop as an important economic and employment sector, which contributes significantly to the export earnings of many ACP countries. WTO subsidy disciplines should therefore recognise the importance of this sector, and include provisions for S&DT for small-scale fisheries in ACP countries. 3.5 Fishery-subsidy negotiations and their implications for EU-ACP fisheries relations There are three main areas where the outcome of the fishery-subsidy negotiations may affect EU-ACP fishery relations:  through the existing provisions of the ASCM, support for fishery-access agreements may be challenged on the basis of their ‘trade-distorting’ nature;  the subsidies negotiations may later be extended to address the wider environmental aspects of fisheries (Article 31 of the Doha Ministerial Declaration). A sufficient case needs to be made for special and differential provisions that exempt developing countries. If not, national and international support programmes for fisheries-sector development may be put at risk if it can be shown that they enhance fishing capacity;  how ‘the needs of developing and least-developed participants’, and ‘the importance of this [fisheries] sector to developing countries’ will be taken into account is not yet clear. 220 3.6 Current status of fisheries subsidies and WTO rules negotiations August 2008 Executive brief WTO aspects of ACPEU fisheries relations Members remain divided into two broad camps on how to structure rules aimed at curbing fisheries subsidies. Japan, Korea, Taiwan and the EU want a ‘bottom-up’ approach that would ban specific types of subsidy payments, such as those that directly contribute to increased fishing capacity. They contend that this would make for clear, workable, and effective fisheries regulations. In contrast, several countries, the so-called ‘Friends of fish’ – Australia, Chile, Ecuador, Iceland, New Zealand, Peru, Philippines and the USA, advocate a ‘top-down’ approach. This would ban all fishing subsidies save for some negotiated exceptions. Supporters of this approach argue that a comprehensive prohibition represents the best option for halting over-fishing. Meanwhile, the debate on S&DT for developing countries has progressed to the level where the following issues are receiving serious attention:   the possible exemption of the access fees paid to developing countries;  the possible exemption of development cooperation programmes. the possible exemption of small-scale and artisanal fisheries, where this would require arriving at acceptable definitions of these sectors; Aquaculture and inland fisheries have also been addressed in the negotiations on fisheries subsidies, but are not included in the Chair’s November 2007 draft text. 4. Trade and the environment Under the Doha Mandate the relationship between existing WTO rules and specific trade obligations set out in multilateral environmental agreements (MEAs) is to be clarified. This is relevant both for international fish trade and fisheries management as several important fish species are subject to trade measures applied through MEAs and through regional fishery organisations (RFOs). MEAs of direct relevance to fisheries include the UN Convention on the Law of the Sea (UNCLOS), the UN fish stocks agreement, and the FAO’s code of conduct for responsible fisheries. In addition a number of MEAs contain important fisheries provisions. These include the convention on international trade in endangered species of wild fauna and flora (CITES), and the convention on biological diversity. The European common fisheries policy could also be categorised as an MEA. This issue is important mainly for coastal (particularly island) ACP countries, especially for those that export tuna products. It is also important for landlocked ACP countries with fish-export industries. These countries may find their products subject to trade restrictions where they do not comply with the appropriate MEA or with the regulations of the RFO. Trade measures are used in MEAs to promote sustainability, and to implement and enforce international environmental agreements. Such measures seek to promote fishery products that comply with conservation and management objectives, and to discriminate against those that do not. An example is the use of trade measures in the fight against illegal, unregulated and unreported (IUU) fishing. Here measures include discriminating against certain national vessel registers (‘flags of convenience’), against certain catching methods, and against like products caught by non-complying states (e.g. through eco-labelling schemes). 221 August 2008 Executive brief WTO aspects of ACPEU fisheries relations There are potential conflicts with the provisions of GATT, under Articles I, III and XI, although Article XX provides for some general exceptions to these rules. Exceptions include trade measures aimed at protecting human, animal or plant life or health or measures ‘relating to the conservation of exhaustible natural resources’. The relationship between WTO rules and MEAs hinges on how Article XX is applied. RFOs have been established to promote fisheries management and cooperation at the regional level. The importance of RFOs for sustainable and responsible fisheries is recognised in several MEAs. Under the provisions of UN fish-stocks agreement RFOs have a critical role to play in the conservation and management of fish stocks on the high seas, and those that migrate between the high seas and waters under national jurisdiction. Tuna resources make a major contribution to the export earnings of several coastal ACP countries, and many of the world’s tuna resources come under the management responsibility of several RFOs. The main RFOs for tuna of significance to ACP countries include the International Commission for the Conservation of Atlantic Tunas (ICCAT) and the Indian Ocean Tuna Commission (IOTC). In the Pacific a new RFO was established on June 19th 2004 with the convention on the conservation and management of highly migratory fish stocks in the western and central Pacific Ocean (WCPTC). The new convention covers a region that is estimated to have 60% of the world’s tuna resources. The Nauru Agreement concerning cooperation in the management of fisheries of common interests that applies to the tuna purse-seine fishery in the western and central Pacific Ocean (WCPO) is also important, as is the Palau Arrangement for the management of the western Pacific purse-seine fishery. Parties to the Nauru Agreement (PNA countries) include several ACP countries, and the PNA is a ‘subregional’ body within the WCPO region. The restriction of market access of non-complying or otherwise non-conforming fishing enterprises is a tool being promoted by RFOs. This is significant for ACP coastal states with tuna resources, especially where they depend on joint ventures, vessel chartering and access arrangements with foreign companies for shore-based tuna processing. Unless their various arrangements for exploiting fisheries in their EEZs and in international waters comply with the tuna-catching provisions of RFOs, they may well find themselves discriminated against in the market place. 5. Dispute-settlement procedures Dispute-settlement procedures (DSP) for trade in fish and fisheries products have been invoked on several occasions both under the old GATT and under the WTO. Currently, if WTO members (meeting as the dispute settlement body) do not reject by consensus a panel report after 60 days, it is automatically accepted (‘adopted’). The institutional components of the DSP include the dispute settlement body (DSB); the panel appointed by the DSB on a case-by-case basis; and the appellate body (AB) appointed by the DSB every four years. The DSB process thus involves three stages: consultations (after a complaint is received), panel and appeal. Under the WTO DSP, there have been three fisheries cases of interest to ACP countries: the case brought by four non-ACP coastal states against the USA for its requirements for turtleexcluder devices to be used in shrimp-trawl fisheries where there is a significant likelihood of encountering sea turtles; the case brought by two tuna-exporting ASEAN countries against the EU over the tariff preferences accorded to ACP countries under the Cotonou Agreement; and the case brought by Peru against the EU over its labelling regulation for sardines. 222 August 2008 Executive brief WTO aspects of ACPEU fisheries relations 6. WTO anti-dumping agreement The 1994 agreement on the implementation of Article VI of the GATT (or WTO anti-dumping agreement) allows countries to act in a way that would normally break GATT rules on bound tariffs and non-discriminatory action. However, this requires a number of requirements to be met, not the least of which is the requirement to show that the domestic industry is being hurt. ‘Dumping’ involves exporting a product at a price lower than is normally charged on the home market. The WTO anti-dumping agreement regulates how importing countries can react to dumping. In proven cases of dumping, the agreement allows importing countries to apply special duties to compensate for dumping. Dumping is said to take place when a margin of more than 2% is applied by an exporting country, and where the country in question has more than 3% of imports. As yet anti-dumping measures have not been widely applied in the international trade in fish and fishery products, with the notable exception of the USA and shrimp imports from Latin America and south Asia. However, with the development of aquaculture in several ACP countries, anti-dumping may become an issue for future EU-ACP fisheries relations. 7. The WTO agreement on safeguards The WTO agreement on safeguards provides a mechanism for importing countries to take measures to protect domestic producers against the detrimental effects of surges in the imports of specific products. Safeguard measures are not permanent. They are usually introduced for two to three years, and normally consist of a quota of imports beyond which an extra duty is levied. The EU is so far the only major importer of fishery products to impose safeguard measures. In this case, the EU adopted a regulation (Commission Regulation No. 1447/2004 of August 13th 2004) that applied a system of tariff quotas for the period August 15th 2004 to February 6th 2005. This was in relation to imports into the Community of farmed (other than wild) salmon, whether or not filleted, fresh, chilled or frozen. Whilst this regulation does not apply to ACP countries, it may set a precedent in a context where value-added fishery products from the EU and ACP countries may come into increasing competition in the same markets (in the EU). 8. The WTO general agreement on trade in services (GATS) ‘Services incidental to fishing’ are included in the current WTO negotiations on the general agreement on the trade in services (GATS). Fishing services ‘can mean many things’, and may include traded services for ‘arrangements where fishing vessels from country A catch country B’s fish’. The coverage of ‘support services to fishing’ is still under debate, but could cover: foreign vessels using local harbour services; the composition of fishing crews; and joint ventures between local and transnational firms. Foreign fishing agreements – including fishing rights, quota allocations or individual transferable quotas – could also be affected by GATS. 223 Executive brief January 2009 Executive brief Bananas Bananas Table of contents 1. The EU regime and its reform__________________________________________________ 229 1.1 The basic EU regime................................................................................................................. 229 1.2 The reform of the EU banana regime ....................................................................................... 230 1.3 What banana reforms mean for EU producers.......................................................................... 231 2. The importance of bananas to ACP countries ______________________________________231 January 2009 3. The EU regime reform and its effects on ACP producers____________________________ 233 3.1 The trade-regime effects of the WTO dispute ........................................................................... 233 3.2 The July 2008 WTO banana deal’s demise and resurrection ...................................................... 235 3.3 The effects of trade-regime changes on ACP market shares ...................................................... 236 3.4 Impact of the evolution of the EU banana-import regime since 2001........................................ 237 3.5 The socio-economic consequences of banana-sector changes ................................................... 238 4. Recent developments _________________________________________________________ 239 4.1 Market developments under the tariff-only regime .................................................................... 239 4.2 EPAs and duty-free, quota-free access for ACP bananas........................................................... 241 4.3 EU assistance for restructuring in the ACP ............................................................................... 242 227 January 2009 Executive brief Bananas Summary This executive brief summarises the EU banana regime and its scope in the light of the September 2006 EU banana-sector reforms which saw the incorporation of the sector into the single farm-payment scheme and the still unresolved WTO banana dispute. It then reviews the implications of the reforms and WTO-induced import-regime changes for EU and ACP producers, including the impact on the relative shares of ACP and non-ACP suppliers. It reviews the treatment of bananas under economic partnership agreements and the implications of these agreements in the context of the ongoing WTO banana dispute. In passing, it reviews the emerging basis for a final banana agreement in the context of recent WTO rulings. It then looks at the scope for market-led adjustments in the banana sector and the possible role of EU restructuring support. The briefing closes by reviewing the experience under the EU’s programme of support for banana-sector restructuring. In undertaking this review it highlights:  the differential impact of reforms and changes in import regime on EU and ACP banana producers in the light of the different levels of support extended;  the lessons which need to be learned from the experiences of different restructuring programmes;  the factors other than changes in the EU import regime which impact on the market share of ACP and non-ACP banana suppliers;  the importance of developing production to serve increasingly differentiated markets, so as to maximise financial returns to the sector (notably with regard to ‘fair trade’ and ‘organic’ bananas). 228 1. The EU regime and its reform 1.1 The basic EU regime January 2009 Executive brief Bananas The EU banana regime covers fresh and dried bananas (excluding plantains), frozen, provisionally preserved and prepared bananas, banana juice, banana flour, meal and powder. Within the EU, the banana-producing regions are the Canary Islands, Guadeloupe, Martinique, Madeira, Crete, Algarve (Portugal) and Lakonia (Greece). EU banana producers receive income support, subject to quality requirements, for production of up to 854,000 tonnes. Cyprus was also granted a guaranteed quantity of 13,500 tonnes following accession on May 1st 2004. The compensation paid to EU banana farmers reflects the difference in price between EU-produced bananas and those that are imported. Under the EU banana regime the establishment of producer organisations and associations is encouraged (there are currently 21), and assistance programmes are implemented by member states in collaboration with such organisations and associations within commonly agreed rules. Until the implementation of banana-sector reforms in 2007, EU producers were eligible for a compensatory aid scheme amounting currently to €64.03 per 100 kg of production, up to a maximum quantity of 867,500 tonnes. This maximum quantity was broken down by producer region as follows:       Canary Islands 420,000 tonnes Guadeloupe 150,000 tonnes Martinique 219,000 tonnes Madeira, Azores and Algarve 50,000 tonnes Crete and Lakonia 15,000 tonnes Cyprus 13,500 tonnes Internal expenditures in the banana sector between 1999 and 2003 averaged €249 million annually. In addition supplementary aid was available to EU banana producers when ‘average production income was at least 10% below the average Community income’. In a context of price declines on the EU banana market this provision provides an important safety net to EU producers. Finally EU banana producers were entitled to structural support in the framework of rural-development measures. These programmes were designed to promote any two of the following objectives:    improvement in the preparation and marketing of products; greater competitiveness; environmentally sensitive use of resources. The stated aim of the EU banana regime was to organise the market in such a way that it would allow the Community market to ‘receive satisfactory supplies of quality bananas at fair prices for producers and consumers and ensure a balance between the various sources of supply’. This commitment to maintaining a balance between the various sources of supply has underpinned EC moves towards the tariff-only regime, which formed part of the agreement to resolve the long-running banana dispute. 229 In 1999 total consumption of bananas in the EU15 was 3,927,000 tonnes. Between 1999 and 2003 EU15 consumption rose by about 5% to around 4,678,000 tonnes. On the eve of EU enlargement in 2003 the ten new member states consumed 564,802 tonnes of bananas, of which only 2% came from the ACP, with Caribbean bananas being virtually unknown in the new EU member states. This added up to a total consumption in the EU25 in 2003 of around 5,242,800 tonnes. EU banana consumption and supplies (tonnes) January 2009 Executive brief Bananas EU15 consumption ACP supplies to EU 1999 2003 2006 3,927,000 4,678,000 ‘Dollar-banana’ supplies 720,000 2,500,000 906,303 3,278,697 In 1999 ACP countries provided the EU with some 720,000 tonnes of bananas; about 750,000 tonnes were produced within the EU; and 2.5 million tonnes were supplied by ‘dollar banana’ countries at the applicable MFN duty. By 2006 approximately 4,185,000 tonnes of bananas were being imported into the EU, with some 906,303 tonnes (21.7%) coming from the ACP, a small percentage decline since 1999 (22.4%). In 2007 imports from the ACP declined by 6.75%, while imports of bananas (excluding plantains) from Colombia increased by 21.4%, from Costa Rica by 16.5% and from Panama by 13.1%. Imports from the dominant Latin American supplier, Ecuador, however declined marginally (by 1.2%) according to the Fruitrop statistical year book. Overall supplies from these Latin American suppliers increased by 11.1% between 2006 and 2007. 1.2 The reform of the EU banana regime On September 20th 2006 the EC put forward proposals for a new EU banana regime designed to ‘bring the system into line with reforms in the other agricultural sectors’. The EC proposed ‘abolishing the current compensatory aid scheme for banana growers’ and replacing it with a system which supports agricultural production more generally. The bulk of banana-sector payments are being incorporated into the POSEI programme for the outermost regions of the EU (the allocation was increased by €278.8 million), while in other banana-producing areas they are being transferred to the single-payment scheme (SPS) (an allocation increase of €4.6 million). These reforms will de facto incorporate the EU banana regime into the single farm-payment scheme. The reform will also abolish ‘Community rules on producer organisations and groupings’, which will now be left as a member-state responsibility. The new rules came into effect in the 2007 marketing year. When announcing the reforms Commissioner Fischer Boel noted that ‘the current aid scheme for banana producers is a relic from the past and has to change … producers are artificially isolated from the market by payments which automatically compensate them for price changes. This is inconsistent with our modernising Common Agricultural Policy which aims to encourage producers to follow market signals’. She also noted that the old system was difficult to defend in the WTO. In other sectors this pattern of reform has seen a dramatic fall in EU market prices. This also appears to be likely to occur in the banana sector given the large discrepancy between EU and world market prices. This seems to have been anticipated by the EC, for at the November 2006 EU Council meeting several member states were critical of the overall budget allocation to the banana sector, which it was felt was too high (€280 million). The EC explained that the ‘purpose of the safety margin was to take account of the variations in banana prices which may result from changes in the import regime’. 230 January 2009 Executive brief Bananas 1.3 What banana reforms mean for EU producers According to the USDA GAIN briefing the new EU banana regime will increase EU support from €280 million to €338.9 million per annum. The total budget for the POSEI programme, under which this aid will be extended, will increase from €289.3 million in 2006 to €331.8 million in 2007, €617.6 million in 2008, €624.5 million in 2009 and €628.2 million in succeeding years as a result of the incorporation of the banana-sector payments. Proportional increases in allocations for producers in other banana-growing regions of the EU will also be made available under the single-payment scheme. Member states will be responsible for allocating funds on a non-discriminatory basis based on the quantity of bananas formerly marketed over the 20002005 period, the area under banana production, and ‘the amount of compensation for loss of income paid during that period’. According to these figures EC banana-sector reform will increase the level of support to banana producers from 18 cents per kg to 33 cents per kg an increase of slightly over 83%. This suggests that the EC is anticipating that the reforms will provide a basis for a decline in EU banana prices, with the extra level of payments deployed through the POSEI programme and the SPS being designed to insulate EU banana producers from the envisaged price reductions. 2. The importance of bananas to ACP countries Under the early Lomé Convention there were twelve ACP suppliers of bananas: Belize, Dominica, Grenada, Jamaica, St Lucia, St Vincent, Surinam, Cameroon, Côte d’Ivoire, Somalia, Madagascar and Cape Verde. In recent years Madagascar, Cape Verde, Somalia and finally Grenada have stopped exporting bananas to the EU, while two new ACP countries have begun exports, namely the Dominican Republic (with a very strong and rapid growth in exports, making it the second largest ACP supplier in 2007) and Ghana (which is rapidly expanding its exports, becoming the sixth largest ACP supplier in 2007). A substantially larger number of ACP countries (mainly in Africa) are involved in banana production but this is primarily for national markets. Currently there are also discussions in Ethiopia on the development of banana exports, but it is unclear whether this would be for the EU market. 231 Banana exports to the EU25, 2001-2007 (thousand euros) Belize January 2009 Executive brief Bananas Bananas Total exports % bananas Cameroon Bananas Total exports 2001 29,970 82,468 36.3 % 2002 22,823 68,227 33.5% 2003 37,010 89,338 41.4% 2004 35,164 79,111 44.4% 2005 47,574 113,939 41.8% 2006 35,423 88,169 40.2% 2007 32,464 98,536 32.9% 146,111 1,736,830 139,459 1,563,41 0 8.9% 187,501 1,723,235 172,219 1,642,731 182,664 1,959,682 181,495 2,741,959 151,376 2,492,798 10.9% 10.5% 9.3% 6.6% 6.1% 117,150 2,601,47 4 4.5% 138,094 2,522,300 147,588 2,189,452 131,308 1,967,397 149,670 2,477,044 128,347 2,729,206 5.5% 6.7% 6.7% 6.0% 4.7% 12,558 27,645 45.4% 6,865 18,269 37.6% 8,135 17,213 47.3% 8,158 21,177 38.5% 8,728 18,220 47.9% 4,889 11,129 43.9% 61,082 349,040 17.5% 58,296 330,747 17.6% 57,441 444,653 12.9% 84,343 472,028 17.9% 110,177 664,196 16.6% 124,581 803,784 15.5% 395 14,196 2.8% 289 13,464 2.1% 269 8,353 3.2% 29,770 507,489 5.9% 21,788 525,927 4.1% 11,301 623,101 1.8% 4,608 751,461 0.6% 13,194 525,099 2.5% 7,470 510,025 1.5% 35,031 38,515 91.0% 20,980 23,587 88.9% 27,909 31,487 88.6% 18,371 57,993 31.7% 24,004 202,331 11.9% 19,200 47,523 40.4% 23,114 176,248 13.1% 13,481 149,519 9.0% 15,737 250,252 6.3% 10,354 262,820 3.9% 11,249 125,091 9.0% 9,023 95,841 9.4% 3,985 112,307 3.5% . . . 6,001 169,356 3.5% 12,608 192,469 6.6% 16,637 222,097 7.5% 18,312 244,719 7.5% 14,777 1,107,411 1.3% 20,544 1,142,265 1.8% % bananas 8.4% Côte d’Ivoire Bananas 130,798 Total exports 2,046,640 % bananas 6.4% Dominica Bananas 12,354 Total exports 25,627 % bananas 48.2% Dominican Republic Bananas 50,595 Total exports 317,800 % bananas 15.9% Grenada Bananas 417 Total exports 27,668 % bananas 1.5% Jamaica Bananas 33,303 Total exports 560,263 % bananas 5.9% St Lucia Bananas 24,136 Total exports 48,229 % bananas 50.0% St Vincent Bananas 21,438 Total exports 153,328 % bananas 14.0% Surinam Bananas 19,520 Total exports 147,293 % bananas 13.3% Ghana Bananas Total exports % bananas 232 … … … … … … … … …. Executive brief Bananas January 2009 Traditionally a major ACP source of supply for the EU market were the Windward Islands and Jamaica, where, in a number of countries, the banana sector constituted the heart of the economy and exports to the EU were central. Even with the changes that have occurred in ACP-EU banana relations since 1992, the banana sector remains vital to the economies of the Windward Islands (except Grenada and St Vincent), although production is at greatly reduced levels. It is also important in Belize’s trade relationship with the EU, and constitutes a major agricultural sector in the Dominican Republic. In Surinam the sector declined dramatically, with a nadir in 2003 when exports were halted, but restructuring has led to a strong resurgence of the industry, with exports to the EU almost tripling between 2004 and 2007. This restored Surinam’s position as the fifth largest ACP supplier of bananas to the EU market. In Jamaica the banana sector’s export performance to the EU market has declined almost as dramatically as that of the Windward Islands, with its contribution to the national economy suffering a corresponding decline. While the banana trade with the EU has grown in importance for Cameroon and Côte d’Ivoire, the more diversified nature of their economies means that the banana sector, while an important agricultural sector, is less significant overall than for the Windward Islands (except Grenada and St Vincent) and the Dominican Republic, although more important than for Surinam and Jamaica. 3. The EU regime reform and its effects on ACP producers 3.1 The trade-regime effects of the WTO dispute Initially in response to the creation of the single internal market in the EU in 1993 and subsequently under the impact of the trade dispute in the GATT/WTO, the EU import regime for ACP bananas has undergone profound changes. It shifted from a system of national-based quotas and limited intra-EU trade, to a single EU quota-based import regime, with complex import-licensing arrangements and high MFN tariffs applied outside of quotas on Latin American bananas, through various modifications, culminating in a tariff-only regime which was introduced from January 1st 2006 (see earlier archived executive brief for details). The tariff-only import regime which entered into force on January 1st 2006 establishes a flat-rate tariff of €176 per tonne for bananas imported from ‘most favoured nation’ suppliers and an annual import quota of 775,000 tonnes subject to a zero-duty rate for ACP bananas. The explicit objective of this tariff remained the maintenance of the existing market position of various suppliers. 233 January 2009 Executive brief Bananas Evolution of the banana-tariff proposal Chronology June 2004 Opening of negotiations with Latin American suppliers on level of flat tariff to be applied under a tariff-only system. October 2004 Informal discussions held with Latin Americans. October 27th 2004 €230 per tonne tariff is announced. January 31st 2005 €230/t. tariff officially notified to the WTO March 30th 2005 Latin Americans launch an official challenge in the WTO and go to arbitration. August 1st 2005 WTO arbitration rules in favour of Latin American banana suppliers. September 12th 2005 New EC proposal for a tariff of €187 per tonne put forward Consultations with Latin American banana suppliers. September 26th 2005 EU requests second WTO arbitration October 27th 2005 WTO arbitrator rejects EU proposal for a tariff of €187 per tonne. December 2005 EC announces a tariff of €176 per tonne. January 1st 2006 New flat-rate tariff of €176 per tonne enters into force July 2008 WTO ‘deal’ Phased reduction of the MFN tariff from €176 per tonne to €116 per tonne (January 1st 2009 €150; January 1st 2010 €141; January 1st 2011 €136; January 1st 2012 €131; January 1st 2013 €126; January 1st 2014 €121; January 1st 2015 €116) November 26th 2008 The WTO appellate body rejected the EU’s appeal and upheld the earlier decision What was said at the time The EC’s objective is to ‘maintain the same level of protection and preference for African Caribbean and Pacific countries as the existing regime provides’. Press release IP/04/707-02/06/2004 According to Commissioner Lamy this tariff ‘would keep market shares steady and maintain market access to the EU’ ICTSD (Vol. 8, No. 37, 3 November 2004) ‘The EC will maintain a preference for African, Caribbean and Pacific countries in a manner respecting entirely the EU’s obligations and commitments towards all interested parties’ Press release IP/05/118-31/01/2006 ‘The EU banana regime is changing but the level of protection is not increasing … I believe this figure and methodology has allowed us to square the circle and safeguard the sometimes conflicting interests of our consumers, producers and trading partners’ Mariann Fischer Boel, press release IP/05/377-31/03/2005 ‘The tariff proposed by the EU was designed to be a neutral and fair conversion that would maintain current market access for all banana suppliers to the EC’ Peter Mandelson, press release IP/05/1030-02/08/2005 ‘The Commission’s new proposal confirms Europe’s commitment to ending this longstanding dispute. We have been careful to ensure that preferential access for our ACP partners is maintained’ Peter Mandelson, press release IP/05/1127-12/09/2005 ‘We are surprised and disappointed that the arbitrators did not back our proposal. We believe that the system we proposed would have maintained access to our markets in a fair manner’ Mariann Fischer Boel, press release IP05/1359-27/10/2005 ‘This is a fair and balanced result for everyone, which will fully maintain access for Latin American producers while continuing to take into account EU and ACP producers’ Mariann Fischer Boel, press release IP/05/1493- November 29th 2005 ‘We are now working on the basis of a solution that would see the tariff charged to Latin American exporters cut, but over a period of time long enough to allow ACP banana producers time to adapt – assisted as they are already with EU development assistance … It is hard to see any other solution that will satisfy both sides, but there is heated debate over the precise detail … I am convinced that we must find an agreement to the dispute that can be folded into any Geneva agreement’ Peter Mandelson, Doha WTO Ministerial, Daily Update, July 27th 2008 ‘The EC banana-import regime, in particular, its duty-free tariff quota reserved for ACP countries was inconsistent with Article XIII:1 and Article XIII:2 of the GATT 1994 ... the tariff applied by the European Communities to MFN imports of bananas, set at €176/mt, without consideration of the tariff quota of 2.2 million mt bound at an in-quota tariff rate of 75€/mt, is an ordinary customs duty in excess of that provided for in the European Communities Schedules of Concessions, and thus inconsistent with Article II:1 of the GATT 1994’ WTO appellate body, full report, WT/DS27/AB/RW2/ECU, November 26th 2008 234 A critical feature under the new regime for ACP banana exports is the operation of the importlicensing arrangement, with the introduction in 2008 of a ‘first-come, first-served’ system for the allocation of import licences. Operation of the ‘first-come, first-served’ system January 2009 Executive brief Bananas Upon arrival the operator requests treatment under first-come, first-served, and uses an existing licence or requests MFN treatment. The request is sent to the EC for processing two working days after receipt. Bananas are discharged upon arrival but as the operators will only know the treatment accorded two days later, a bank guarantee has to be lodged. If the first-come, first-served quota is about to be reached, a pro rata reduction will be applied to all requests from member states’ customs authorities. If duty-free treatment cannot be accorded as the bimonthly first-come, first-served quota has been filled, the operator submits a new declaration requesting another customs treatment. The status of the quota can be followed on the website: http://europa.eu.int/comm/taxation_customs/dds/en/qothome.htm However, while ACP suppliers objected to the tariff applied under the new regime as too low, Latin American suppliers remained convinced that it was too high. Consequently, despite the introduction of the tariff-only regime from January 1st 2006 the banana dispute has rumbled on. On March 20th 2007 Ecuador tabled a request for a WTO panel to examine the EU’s bananaimport policies and a possible violation of multilateral trade rules. On March 21st Colombia joined the action, requesting consultations with the EU over its banana regime. On June 29th this dispute took on a more serious twist when the US trade representative announced that the USA would join the Ecuadorian challenge to the EU banana regime. On December 10th 2007 the WTO dispute panel issued an interim ruling in favour of Ecuador and against the revised EU tariff-only banana regime, finding that the EU had failed to bring its import regime into compliance with the former WTO ruling. Ecuador declared the decision as ‘highly satisfactory’, while the EC claimed that the panel had adopted a formalistic approach which overlooked data showing that Latin American exports were increasing. When this interim ruling was subsequently confirmed the EC appealed against it. On November 26th 2008 the WTO appellate body rejected this appeal and upheld the earlier decision. It recommended that the dispute-settlement body ‘request the European Communities to bring its measures … into conformity with its obligations under that Agreement’. Following this ruling the US trade representative Susan Schwab argued that ‘it is time for the EU to do the right thing and implement a tariff-only regime for bananas that meets the interests of all parties involved’. In the face of the ruling the EC suggested that the best means of resolving the dispute was in the context of the WTO’s overall Doha Round, with the EC spokesperson Peter Power stating that the EC was ‘ready to take up the negotiations on a deal on bananas with all suppliers where they left off in July’. This strongly suggests that the July 2008 WTO banana deal will be back on the table when ministers are invited back to the negotiating table in Geneva. 3.2 The July 2008 WTO banana deal’s demise and resurrection On July 16th 2008 the EC announced its willingness to accept proposals put forward by the WTO director-general Pascal Lamy which proposed:   a tariff of €116 per tonne, a big cut from the existing tariff of €176 per tonne’;  an initial tariff cut of €26 per tonne in the first year (from January 1st 2009), a further cut of €9 per tonne in the second year (from January 1st 2010) and then a €5 cut in each remaining year to 2015 (to reach €116 per tonne by January 1st 2015). delay in implementation of MFN tariff reductions over the period until 2015 in order to allow ACP banana producers to adapt; 235 January 2009 Executive brief Bananas It was proposed that if this formula were accepted then ‘bananas will not be subject to additional cuts in the Doha Round’ and both sides would agree a ‘peace clause which will commit them to not reopening the issue’. The then Trade Commissioner Peter Mandelson however stressed that resolving the banana dispute ‘must be part of a final Doha deal’. Indeed, according to press reports he went so far as to argue that director-general Lamy’s proposal was made ‘on a take-it-or-leave-it basis’ and that ‘if it was not accepted there would be no accord on trade in tropical agricultural products and so no wider WTO accord’, thus ‘if others wanted to reject it, then they had to take responsibility for the failure of the whole Doha Round’. In response to this development ACP representatives described the Lamy offer as ‘an unacceptable threat to its producers’, since it would give ‘undue advantage to the Latin American producers’ and ‘deal a lethal blow to the ACP banana industry’. In contrast Latin American diplomats said ‘... we are positive we can agree something. We are very close but not yet there’. These discussions however became academic following the collapse of the WTO negotiations at the end of July 2008, and the EC’s withdrawal of the offer which it had previously endorsed. The elements of a possible long-term agreement to the banana dispute are now thus all on the table awaiting an appropriate moment for their consolidation as part of a wider package of agreements linked to the outcome of the Doha Round. 3.3 The effects of trade-regime changes on ACP market shares Since 1992 the geographical origin of ACP banana exports to the EU has changed substantially. Three major trends can be identified:  a decline in the share of traditional Caribbean suppliers (including Surinam but excluding Belize, a low-cost producer), falling from 52.3% of total ACP banana exports in 1992 to 12.5% in 2007, with Surinam supplying over half of these bananas;  an increase in African banana exports from 37.4% of the ACP total in 1992 to 60.5% of total ACP banana exports in 2004 (falling back to 48.8% in 2007);  an increase in exports of bananas from the Dominican Republic and Belize from 9.8% of total ACP banana exports in 1992 to 32.5% in 2007. ACP banana exports to the EU25 (tonnes), 1992-2007 Total ACP 800,000 St Lucia Dominica Jamaica 120,000 750,000 100,000 St Vincent Grenada 700,000 80,000 650,000 60,000 600,000 550,000 40,000 500,000 20,000 450,000 400,000 0 1992 1993 1994 1995 1996 2001 2002 2003 2004 2005 2006 2007 236 1992 1993 1994 1995 1996 2001 2002 2003 2004 2005 2006 2007 Dom. Rep. Belize Surinam Côte d’Ivoire 140,000 300,000 120,000 250,000 100,000 Cameroon Somalia 200,000 80,000 150,000 60,000 100,000 40,000 50,000 20,000 January 2009 Executive brief Bananas 0 0 1992 1993 1994 1995 1996 2001 2002 2003 2004 2005 2006 2007 1992 1993 1994 1995 1996 2001 2002 2003 2004 2005 2006 2007 Source: For 1992-1996, ‘External Trade of the European Union with the ACP Countries and OCTs 1992-1996’. For 2001-2005 see http://europa.eu.int/comm/trade/issues/bilateral/regions/acp/stats.htm Between 1992-2005 the traditional Windward Island producers, Grenada, Dominica, St Vincent and St Lucia, have seen their exports of bananas to the EU terminated or decline by 85.5%, 80.7% and 75% respectively. This has been compounded by volatile prices with a strong downward trend into 2007, after which supply problems in Ecuador saw EU banana prices increase by 8% up to April 2008. In contrast, the rise of African banana exporters has been quite dramatic, with Cameroon’s exports increasing by 137% between 1992 and 2004 and those from Côte d’Ivoire increasing by 62% (before falling back by 15.2% and 10% respectively by 2007). This has increased the importance of the banana sector in Cameroon from the fifth most important sector, accounting for 6.2% of earnings from exports to the EU in 1992, to the fourth most important in 2007. The costs of production in Côte d’Ivoire and Cameroon are low, comparable to the ‘dollar banana’ producers in Latin America. Even more dramatic has been the rise of the Dominican Republic as a banana suppler, with Belize also proportionally enjoying higher growth in banana exports than traditional African suppliers. Since 2006 Ghana has also emerged as a supplier of bananas to the EU market, rapidly establishing itself as the sixth most important ACP supplier. 3.4 Impact of the evolution of the EU banana-import regime since 2001 The creation of a single EU import regime in 1993 saw a strong downward pressure on prices in the main market for traditional Caribbean suppliers, the UK market; by 1995 UK banana prices were 33% below their 1991 peak. As a result the Windward Island share of the EU market fell sharply. The ending of country-specific quotas from 1999, and the implementation of the agreement intended to resolve the WTO banana dispute from July 2001, caused a further decline. By 2007 the volume of Windward Island banana exports to the EU was down by nearly 80% on the volume in 1992. Windward Island banana exports 2001-2007 (tonnes) St Lucia St Vincent Dominica Grenada WI total 2001 2002 2003 2004 2005 2006 2007 34,727 49,313 32,520 42,874 28,243 36,733 30,497 30,829 32,522 20,919 23,969 15,895 17,239 13,792 18,062 17,802 10,823 12,401 13,182 13,591 7,458 591 557 448 406 84,209 100,194 64,710 79,650 57,320 67,563 51,747 The new regime transformed the basis for commercial contract negotiations. A 2004 report by National Economic Research Associates on Caribbean banana exports to the EU since 1992 noted that the movement away from country-specific quotas had led to ‘substantial increases in production and exports from some of the lower-cost ACP countries’. 237 January 2009 Executive brief Bananas While Caribbean exports had fallen by 52% (except for Belize and the non-traditional supplier the Dominican Republic) exports from Côte d’Ivoire and Cameroon had risen by 122% and 194% respectively. Overall the report concluded with regard to the post-1992 quota-managed regime that ‘prima facie, the evidence suggests that the regime has offered progressively less protection to the most vulnerable producers, with the result that they have suffered the consequences of falling prices for their production and loss of market share to lower-cost producers … for many individual Caribbean countries that have traditionally exported to the UK the extent of the decline, whether measured in terms of the prices available to their growers or in terms of their production, has been severe. For these countries, the regime has clearly not been successful in ensuring the continuing viability of their banana exports’. In contrast to this Windward Island experience, overall ACP banana exports to the EU market rose by 29.6% between 1992 and 2006, before falling back by some 9% in 2007. The strongest winners since 1992 have been the Dominican Republic (+435%), Belize (+115%), Cameroon (+ 101%), Côte d’Ivoire (+ 32%) and in recent years, Surinam. The decline in Jamaican banana exports to the EU has been almost as dramatic as that of the Windward Island producers (75%). Other ACP banana exports to the EU 2001-2007 (tonnes) Cameroon Dominican Republic Côte d’Ivoire Belize Surinam Jamaica Sub-total 2001 2002 2003 2004 2005 2006 2007 215,930 229,722 292,706 262,067 253,362 259,476 222,318 86,064 97,227 109,440 101,355 144,744 176,752 206,212 217,886 210,727 205,485 210,866 183,495 227,885 190,069 51,609 38,174 73,806 80,292 74,189 73,207 61,175 28,731 6,557 -----19,277 35,261 45,153 54,353 42,985 40,600 41,784 28,660 11,654 31,866 18,372 642,205 623,007 703,201 702,517 702,665 814,329 752,499 The reality was that competitive ACP banana suppliers were left largely unaffected by the first two phases of preference erosion. Indeed their position on the EU market strengthened (in part with the benefit of EU banana-sector adjustment support – particularly in Cameroon) allowing an expansion of production and employment in the sector. The fact that the more competitive ACP banana suppliers (with the exception of Côte d’Ivoire) have been able to raise their exports to both the UK and the wider EU market in the face of the outcome of the WTO dispute which involved significant administrative reforms, highlights the centrality of the tariff-only issue. Preference erosion has only become significant for lower-cost ACP banana suppliers in Africa and the Caribbean since the introduction in 2006 of a tariff-only regime. This being said, the introduction of the tariff-only regime has been closely followed by the adoption of proposals for the reform of the EU domestic banana regime, which is likely to make it very difficult to disentangle the price effects of these two measures. In addition 2007 and 2008 saw very difficult market conditions, with rising prices and rapidly escalating input and shipping costs making profitable exports difficult for some ACP suppliers. 3.5 The socio-economic consequences of banana-sector changes From an economic and social perspective the most severely affected countries have been the Windward Islands. Their earnings from banana exports peaked in 1992 at US$146.1 million, and have shown a declining yet fluctuating trend since. Recently the exchange rate between the euro and the US dollar has taken on particular significance for Caribbean exporters, since most of their costs are in US dollars and many currencies are consequently pegged to that currency. Since 2001 the weakening of the US dollar against the euro has served to ease the consequences of some of the market changes taking place in Europe, with every euro worth of bananas sold in 2007 earning 61% more in US dollar terms than in 2001. 238 Windward Islands value of exports (thousand euros, 2001-2007 January 2009 Executive brief Bananas St Lucia St Vincent Dominica Grenada Total US$:€1 US $ ‘000s 2001 24,136 21,438 12,354 417 58,345 0.8496 49,570 2002 35,031 23,114 12,558 395 71,098 0.9455 67,223 2003 20,980 13,481 6,865 289 41,615 1.1317 47,096 2004 27,909 15,737 8,135 269 52,050 1.2402 64,552 2005 18,371 10,354 8,158 2006 24,004 11,249 8,728 2007 19,200 9,023 4,889 36,883 1.2447 45,908 43,981 1.2560 55,240 33,112 1.3709 45,393 However the strengthening of the US dollar against the euro in the last quarter of 2008 is threatening to reverse the exchange-rate effect. Indeed, in the immediate future, local currency earnings in the Caribbean on exports to the EU are likely to decline by around one-sixth as a result of movements in the exchange rate. (In the course of the six months to November 2008 the US dollar rose from $1.5: €1 to $1.25: €1. EC projections for the future of EU agricultural markets assume that the US dollar will continue to rise to a value of US$1.15: €1 in the coming years.) Since 1992 the decline in exports to the EU and associated earnings losses has seen the number of registered banana farmers in the Windward Islands (nearly all small-scale producers) fall from just over 24,000 in 1993 to barely 5,300 in 2003. Yet in Dominica, St Vincent and St Lucia the banana sector in 2000 still accounted for 68.2%, 45.5% and 23.4% respectively of rural employment and 26.6%, 29.5% and 18.8% respectively of total employment in these countries. This demonstrates the limited progress made to date in developing alternative employment and income-earning opportunities in these environmentally vulnerable and geographically remote banana-dependent economies, where 36,000 people continue to depend on the banana sector. What is more it should be noted that the much smaller numbers now engaged in production, along with lower volumes and higher production costs than elsewhere in the ACP, leave Caribbean banana exporters vulnerable to US$/euro exchange rate movements, oil-price shifts and overall demand for reefer vessels (which can profoundly affect shipping costs). Taken together these longer-term trends (once the recession induced by the 2008 financial crisis comes to an end) are likely to seriously threaten the future viability of the banana industry in the Windward Islands. The only promising development on the horizon has been the dramatic expansion of the ‘fair trade’ banana market (see next section). If fully developed and sustained this may serve to avert the IMF's dire prediction that ‘recent developments in the international banana market have brought into question the viability of the industry’. 4. Recent developments 4.1 Market developments under the tariff-only regime In 2006 the first year of the EU’s tariff-only regime for bananas, EU imports increased by 12.2% from 3,729,000 to 4,185,000 tonnes. Imports from ACP countries rose by 18.6%, with particularly strong increases from Jamaica and Ghana. Cameroon and Côte d’Ivoire retained their position as the main ACP banana suppliers to the EU, accounting for around 53.8% of ACP exports. The EU is virtually the sole outlet for bananas from these two ACP countries. However, exports from both Cameroon and Côte d’Ivoire fell back by some 15.4% in 2007, with the Dominican Republic displacing Côte d’Ivoire as the second largest ACP supplier of bananas to the EU market. EU banana imports (thousand tonnes) 1996 3,877 1997 3,157 1998 3,042 1999 3,198 2000 3,299 2001 3,203 2002 3,288 Source: Agricultural situation in the EU, table 3.7.8 (various years) 239 2003 3,365 2004 3,864, 2005 3,729 2006 4,185 January 2009 Executive brief Bananas Exports of ‘dollar bananas’ grew by 10.7% in 2006. Ecuador remained the single largest supplier to the EU market but with exports declining by 3.6%. In contrast, Guatemala’s exports grew by a massive 811%, while Peru, Brazil, Venezuela, Panama, Colombia and Costa Rica increased exports by 95%, 50%, 16%, 10.2%, 6.7% and 37% respectively. Latin American suppliers now account for 70% of EU banana supplies. The EU is now the single largest market for Costa Rican bananas. While this increase reflects in part a recovery from flood damage ‘the increase in export levels has gone beyond making up lost ground’, and exports were fully 10% higher than the average for 2002-2004. By 2007 Costa Rica’s exports of bananas had risen by a further 15.6%. This growth is driven by government investments and technological innovation, which means that Costa Rica now has the highest yields per hectare in the world. Meanwhile there are fears in Ecuador that preferences for African bananas are distorting investment flows and thereby threatening an end to Ecuador’s banana exports according to Ecuadorian producers’ representatives. In 2006 EU banana output was down by 1% to 641,754 tonnes, just 13% of overall EU supplies. Although in February 2007 Canary Island banana exports increased by 22% compared to the corresponding month in 2006, at the beginning of March it was announced that Canary Island banana producers were withholding up to 20% of their normal supplies so as to ‘prevent a further market saturation on the Iberian peninsula’. Clearly there have been diverse trends in EU banana imports under the tariff-only regime, only partly attributable to the implementation of the regime itself. Other important factors include:   a bounce back from weather-related fluctuations;    logistical difficulties (notably in Ecuador); comprehensive investments in industry development and technological improvements in some countries (notably in Costa Rica); the strengthening of the ‘fair trade’ market; difficulties in securing transportation in the face of shortages of reefer capacity in the light of China’s thirst for commodities. This latter factor may well account for reports on major importers’ websites of a 20% decline in ACP banana exports in 2007 compared to the equivalent period in 2006 (but only a 6.7% decrease on a year-on-year basis between 2006 and 2007 according to official EU statistics). There would appear to be mounting logistical problems faced in sustaining certain parts of the ACP-EU banana trade. More recently, Latin American suppliers have continued to expand their market share in the EU, with a reported 20% expansion since January 2006. Press reports indicate that between January 1st 2006 and November 2007 Latin American exports of bananas grew by 635,000 tonnes, while ACP exports of bananas grew by a mere 74,000 tonnes. This provides the basis for Caribbean concerns that any further reduction in the duty would ‘severely hamper the ability of Caribbean producers to compete in the EU market (figures from the Fruitrop statistical yearbook indicate an 11.1% increase in imports for the four main Latin American banana suppliers between 2006 and 2007). It is far from clear what the EC’s October 2008 €60.3 million fine imposed on Dole and Wiechert for running a cartel setting banana prices (alongside Chiquita, which provided the information for the action) will mean for competition in the EU banana market, although it can be expected that closer monitoring of anti-competitive behaviour within food-supply chains will, through stimulating competition, exert a certain downward pressure on prices to consumers. 240 On the African continent, where most bananas (90%) are produced for the domestic market, analysts are increasingly arguing for greater liberalisation of intra-regional trade in bananas, so as to serve the growing urban demand. Calls have also been made for greater investment in developing consumer demand and in the organisation of growers into associations capable of establishing and promoting product standards and product development, as well as getting to grips with challenges in initial preservation, distribution and marketing. January 2009 Executive brief Bananas 4.2 EPAs and duty-free, quota-free access for ACP bananas In the context of the EPA negotiations on April 4th 2007 the EC proposed to remove all remaining quota and tariff limitations on access to the EU market for ACP exports immediately following the entry into force of EPA agreements, with the exception of rice and sugar. This offer was formalised in the comprehensive EPA initialled by the Caribbean ACP countries (except Haiti) in December 2007 and in the various interim EPAs initialled with certain regions and individual countries towards the end of 2007. This primarily benefited non-LDC banana producers, since LDC producers already enjoyed duty-free, quota-free access under the EBA initiative following the end of the quota-restricted transition period. It should be noted that all non-LDC banana-exporting ACP countries initialled either a comprehensive EPA (the Caribbean) or bilateral interim EPAs (African countries). This enabled all non-LDC ACP banana exporters to benefit from the duty-free, quota-free access granted under EU Council regulation No. 1528 of December 20th 2007. This will provide the basis for banana exports to the EU from non-LDC ACP countries until such time as the EPAs have been signed and enter into force. The only exception to this will be if an individual ACP government indicates its intention not to sign the currently initialled IEPA. Under such circumstances the EC can remove the country from the list of beneficiaries of Council regulation No. 1528, with a resulting loss of the duty-free, quota-free access extended through this regulation. It is by no means clear what the implications of this measure will be for ACP exporters, since the value of the duty-free, quota-free access will be strongly influenced by:  the market-price effects of EU banana-sector reforms (where the EC appears to be making financial provision in the banana-sector budget for significant price reductions);  the outcome of the WTO banana dispute, in terms of the market-access arrangements established for dollar-banana suppliers;  the outcome of the EU FTA negotiations being launched with various regions which include dollar-banana suppliers. Caribbean banana producers in particular are concerned that the EC duty-free, quota-free offer for bananas could further marginalise the position of traditional Caribbean banana suppliers on the EU market as competition from African banana suppliers intensifies. Given past trends in EU banana exports, these fears appear to be well-founded. Towards the end of 2007 the EC appeared to believe that, through the full incorporation of the banana-trade arrangements with ACP countries into EPAs, the basis for a WTO challenge would be removed (since a basic objective of EPAs is to establish a WTO-compatible basis for ACP trade preferences). The view that EPAs would shield Caribbean banana preferences from further WTO challenge was one eagerly taken up by Caribbean governments. However, it is far from clear to what extent this is the case. The WTO continues to find against the EU’s bananaimport regime and pressure is increasing for the EC to reinstate the July 2008 WTO deal on bananas, which will greatly reduce the MFN duty charged on Latin American exports of bananas to the EU market, thereby increasing the price-competition faced by ACP suppliers (who do not enjoy the income support extended to EU banana producers). 241 Given current uncertainties, an as-yet-unexplored issue is how corporate players in the banana sector will respond to the evolving context and how these corporate decisions will impact on patterns of ACP banana production and trade. January 2009 Executive brief Bananas 4.3 EU assistance for restructuring in the ACP The EU acknowledged that on completion of the single internal market in Europe some difficulties would be created for traditional banana suppliers, particularly those in the Caribbean. In 1994 therefore, the EU passed a regulation (2686/94) providing for a ‘special system of assistance’ (SSA) to help ACP banana suppliers to restructure to meet the challenge of improved access for non-ACP suppliers. The assumption underlying the regulation was that all ACP countries producing bananas could become competitive exporters. However the February 2000 report ‘Evaluation of EU assistance to ACP banana producers’ reached the conclusion that this assumption was never realistic since only Côte d’Ivoire and Cameroon ‘among ACP countries have any realistic possibility of competing on costs with Costa Rica or Ecuador’. In all, some €75 million was committed under the SSA. 4.3.1 The special framework of assistance In 1999 the SSA was replaced by a ‘special framework of assistance’ (SFA) (856/1999) which was to last ten years. This promised greater levels of funding (€45 million per annum) and a wider remit to include the promotion of diversification as well as support for competitiveness. There has been criticism that the SFA was still tending to support programmes in the banana sector in countries which have only limited potential to be competitive and that insufficient attention was being paid to diversification. As a consequence in 2002 some 64% of funds allocated were directed toward diversification compared to 12% in 1999. This reflected the conclusions of the February 2000 evaluation, which emphasised the need for support for diversification rather than restructuring given the competitiveness challenges facing traditional Caribbean banana suppliers. However, most of these projects have been small-scale pilot projects which highlight the difficulties faced in promoting diversification in the particularly difficult environmental (periodic hurricanes) and geographic circumstances faced in the Windward Islands. Annual commitments under the special framework of assistance (€ millions) Belize Dominica Grenada Jamaica St Lucia St Vincent Surinam Sub-total Cameroon Côte d’Ivoire Somalia Madagascar Cape Verde Grand total 1999 3.10 6.50 1.00 5.30 8.50 6.10 3.10 32.70 2000 3.10 6.50 0.50 5.30 8.88 6.45 2.70 33.43 2001 3.45 6.70 0.50 5.00 9.20 6.40 2.70 33.95 2002 3.50 6.40 0.50 4.70 8.80 6.10 2.50 32.50 2003 3.20 5.90 0.50 4.40 8.00 5.60 2.20 29.8 2004 2.93 5.30 0.50 4.84 7.26 5.33 2.31 28.47 2005 2.49 4.51 0.50 4.10 4.51 4.53 1.96 22.60 6.20 4.70 5.70 4.35 5.60 2.85 5.10 2.60 4.50 2.10 4.38 1.38 3.72 3.75 3.21 4.12 38.41 25.85 0.00 0.00 0.50 44.10 0.00 0.00 0.00 43.48 0.60 0.00 0.00 43.00 2.80 0.50 0.50 44.00 2.60 0.50 0.50 40.00 2.07 0.50 0.50 37.3 1.76 0.50 0.50 32.83 1.50 0.50 0.50 30.70 11.33 2.50 3.00 315.31 Source: EC Biennial report (Brussels, 15.12.2006 COM (2006) 806 final http://eur-lex.europa.eu/LexUriServ/site/en/com/2006/com2006_0806en01.pdf 242 2006 TOTAL 2.11 23.88 3.83 45.64 0.50 4.50 3.50 37.14 5.41 60.56 3.85 44.36 1.67 19.14 20.87 234.22 Executive brief Bananas January 2009 The 2006 biennial report on EU support under the SFA for traditional ACP suppliers of banana notes that in 2005, 48% of funds went to programmes to improve banana-sector competitiveness and 52% went to diversification programmes, while in 2006 39% of funds went to competitiveness programmes and 61% to diversification programmes. In August 2005 new procedures for aid management were finalised, which it was hoped would overcome commitment and disbursement problems which had been faced. The report notes that the five countries focussing on competitiveness programmes ‘have been able to maintain or increase the quantities of bananas exported to the EU during the period 2003 to 2006. For those countries focusing on diversification, exports stopped or declined between 1990 and 2000, a trend which continued up to 2006’. Programmes in these countries have been focussed on assisting those leaving the banana sector and are typically programmes of four to five years’ duration. Areas of assistance have included support to:      vocational and adult-education programmes; agricultural diversification towards horticulture production targeting local markets; development of local markets for banana and plantain production; tourism development; rural-development initiatives. The report notes that ‘overall the implementation of the programmes remains delayed. Only 48% of all funds allocated have been committed to works, supplies and service or grant contracts and only 35% have been disbursed. For programmes decided between 1999 and 2005, therefore, some €150 million remain to be contracted and some €186 million remain to be disbursed’. The delays in the deployment of restructuring support in the banana sector have been a constant source of friction. It should be noted however, that these programmes greatly increased the volume of aid being deployed through public authorities to deal with problems which were essentially facing private producers. This issue, of how best to provide public aid in support of what essentially need to be private-sector-led processes of production and trade adjustment, is likely to become an increasingly problematical area in the ACP-EU relationship, as broader processes of EPArelated adjustment need to be addressed. Payment rates on the €287 million in SFA support 1999-2005 Country Dominica St Lucia St Vincent Grenada Belize Jamaica Surinam Cameroon Côte d’Ivoire Somalia Cape Verde Madagascar Payment rate 23.7% 25.8% 17.6% 44.5% 40.1% 49.2% 42.7% 46.6% 39.2% 37.4% 5.2% 20.0% 243 Executive brief Bananas January 2009 Overall, programmes of support to enhance competitiveness have performed better than programmes to support diversification. The 2006 report held that in those countries where competitiveness is supported ‘the SFA has had an impact in strengthening productivity and efficiency and reducing costs’. In Cameroon ‘the average yield rate grew by 13.9% when comparing the period 1994-98 with 2002-04; exports increased by 20% between 1998 and 2003; the number of workers employed per 1000 tonnes decreased from 50.78 in 1998 to 40.77 in 2003’. In Côte d’Ivoire exports rose from ‘118,400 tonnes produced on a surface area of 12,000 hectares in 1991 to 217,500 tonnes produced on a surface area of 5,493 hectares in 1999. Further improvements were seen in the period 1999-2004; with exports reaching 229,000 tonnes produced on a surface area of 5,120 hectares in 2004 … the yield rate was 9.9 tonnes per hectare in 1991, 39.6 tonnes per hectare in 1999 and 41.7 tonnes per hectare in 2004’. According to the report ‘the SFA has played a fundamental role in the revival of the sector ‘in Belize and Surinam. In Belize production has increased from ‘472 boxes per acre in 2001 up to 760 boxes per acre in 2004’. In Surinam the production yield increased ‘from 15.7 tonnes per hectare in 2001 … to 34.8 tonnes per hectare in 2005’. Positive employment trends are evident in Cameroon, Surinam and Belize. In Jamaica support has focussed on ‘a well-designed technical-assistance strategy focusing on the commercial quality of the products’. In Jamaica, Belize and Cameroon the SFA has supported obtaining EUREPGAP certification which has had ‘a positive impact in improving both the environmental aspects and socio-economic working conditions in the plantations, in addition to strengthening the sector’s position in the marketing chain’. However it should be noted that Caribbean banana exporters have also been greatly helped by the relative strength of the euro against the US dollar, which has boosted local currency earnings. If the more recent strengthening of the US dollar against the euro continues, difficult financial times could lie ahead for Caribbean banana sectors. This would be particularly the case if further reductions in the MFN tariff were to occur with a resultant decline in the EU market prices for bananas. The ACP have called for an extension of the SFA for a further five-year period (2009-2013), with an emphasis on accelerating disbursements. This could lead to a shift to provision of assistance in the form of budget support, raising the important issue of how to effectively deploy budget-support financing in support of what needs to be essentially private-sector-based processes of production and trade adjustment. Getting to grips with this policy issue is likely to pose a major challenge to governments of banana-exporting economies and meeting this challenge may well require innovative thinking on how to effectively support production and trade adjustments. Such innovation however, if successfully tested in the banana sector, could prove invaluable in getting to grips with wider problems of production and trade adjustment in the food-and-agriculture sector that will arise in the course of trade liberalisation under EPAs and beyond. 4.3.2 The ‘fair trade’ market The 2006 biennial report of the SFA notes that in the Windward Islands, despite the growing importance of the ‘fair trade’ market, no project has so far been put forward under the SFA to directly support ‘fair trade’ production and marketing. However it is important to draw lessons from other non-EC-financed programmes in the Windward Islands which have been relatively successful in supporting conversion to the production of ‘fair trade’ bananas, since serving this market offers ‘an opportunity for smaller-scale enterprises to survive in global market competition’. 244 January 2009 Executive brief Bananas As the report pointed out, the development of ‘fair trade’ production and marketing has not been a target of SFA support, but it suggested that in future such schemes should be supported, and indeed it is now being deployed in Jamaica, where the aim is to convert 100% to ‘fair trade’ banana exports in the coming years. However, this support may well have come too late, given the decision of the Jamaica Producers Group to leave the export industry and focus on the development of local consumption of bananas and banana products. This decision highlights the importance of timely support to market-led adjustments. Delays in extending support to encourage ‘pro-active adjustment can see opportunities fall by the wayside. However, the experience in seeking to extend timely support to proactive market-led adjustment processes (both positive and negative) would appear to have relevance both beyond the banana sector and beyond simply ‘fair trade’ products. The experience of the ‘Plantation Reserve’ sugar brand in Barbados suggests that there is considerable scope for improving the marketing of ACP products so as to maximise the commercial returns. Given that the rural-development division of the Agricultural Directorate of the EC has considerable experience in supporting marketing and production-adjustment schemes designed to shift patterns of production towards serving ‘luxury purchase’ markets, this is perhaps an area where broader ACP-EU cooperation could be initiated. The decision by a number of UK supermarket chains to move over to 100% ‘fair trade’ bananas would appear to be offering some relief to hard-pressed traditional island suppliers in the Caribbean. The development of the trade in ‘fair trade’ bananas was described by the prime minister of the Commonwealth of Dominica, Roosevelt Skerrit, before a House of Commons Select Committee as ‘critical to Dominica’s development’, ensuring that ‘the social stability of our country is maintained, that poor people particularly in rural communities can enjoy a better standard of living’. He argued that ‘fair trade’ bananas had ‘reversed a nearly catastrophic recession in his country’. Similarly, in response to the challenge of preference erosion in the banana sector Jamaica banana suppliers are seeking to move over to 100% fair-trade certification. In January 2008, it was announced that funds from the EC banana-assistance programme in Jamaica would in part be devoted to this purpose under a newly agreed €6 million programme. According to press reports the targeting of ‘fair trade’ markets can ‘boost revenues by 11% to 12%’. This move over to serving ‘luxury purchase’ components of the EU market (where purchase decisions are not taken on the basis solely of price but rather quality, or in this case, ethical considerations) represents a critically important part of the policy response to preference erosion and constitutes an area into which far more targeted assistance should be deployed both for ‘fair trade’ certification but more importantly market-development initiatives. However, the current economic slow-down following the financial crisis is stalling the growth of these ‘luxury purchase’ markets and is even resulting in the contraction of certain market components. The current economic context is therefore not the most favourable for the launching of such strategies. Nevertheless a long-term view (10 to 15 years) needs to be taken in looking at marketing adjustments. 245 Executive brief June 2008 Executive brief Beef Beef Table of contents 1. The basic regime and beyond ____________________________________________ 249 2. The EU import regime _________________________________________________ 250 2.1 The basic framework________________________________________________________ 250 2.2 ACP and other trade preferences ______________________________________________ 251 2.3 The growing importance of food safety__________________________________________ 252 June 2008 2.4 The impact of reform on the EU beef market_____________________________________ 254 3. The EU export regime: the WTO and EU beef exports_______________________ 257 4. Trends in EU trade ____________________________________________________ 257 4.1 Recent trends in EU imports and exports ________________________________________ 257 4.2 Future trends _____________________________________________________________ 259 5. Implications for ACP countries __________________________________________ 261 5.1 The removal of residual restrictions ____________________________________________ 261 5.2. Addressing the financial burden of food-safety measures ____________________________ 261 5.3. Serving differentiated markets ________________________________________________ 262 5.4 Defending national and regional markets ________________________________________ 262 247 Executive brief Beef Summary The structure of the basic EU regime for beef is described, including the link to management arrangements in the dairy sector and the full incorporation of the beef sector into the single payment scheme. The import regime and recent trends in EU imports, notably the growing volume of duty-paid imports from Brazil and Argentina, are then examined. The long-term implications of this trend for prices received by ACP suppliers are explored in the context of ongoing trade negotiations at the multilateral and bilateral levels. The growing importance of food-safety compliance is explored as well as ACP ‘aid for trade’ needs in the livestock sector and the need for closer institutional collaboration. The impact to date of beef-sector reforms on EU prices is analysed, particularly the erosion of the value to ACP countries of trade preferences in the beef sector. The EU export regime is reviewed, noting the continued and rapidly accelerating decline in EU beef exports. Major trends in the EU-ACP beef trade are summarised. In the final section the implications for the ACP of various developments are noted, including:  the significance of having removed residual tariff barriers;  the importance of addressing the financial burden of food-safety compliance; June 2008  the need to respond to growing differentiation within the EU market through developing increasingly sophisticated market strategies to maximise returns secured;  the need to defend certain regional markets through the inclusion of safeguard provisions in EPAs. 248 1. The basic regime and beyond June 2008 Executive brief Beef The basic regulations establishing the common organisation of the market in beef within the EU date back to 1968. The system consisted of four major elements:     price support through a system of intervention buying; high levels of tariff protection around the EU market for beef; export-refund support to promote beef exports; direct payments. With the implementation of CAP reform in the beef sector, a number of major changes have taken place, consistent with the shift from price support to direct support payments. This has involved a substantial expansion of direct support payments in parallel with price reductions and the dismantling of intervention buying. However beyond this shift in instruments there has emerged a shift in focus, away from an emphasis on the quantity of production to an emphasis on the quality of production. In the beef sector in particular, this has involved two distinct elements: food safety, which is foremost the responsibility of government authorities; and food quality, which is essentially an issue for the private sector (although in the case of the EU, substantial levels of public assistance are being extended in support of the development of quality-assurance schemes and quality labels). Food-safety issues and food-quality differentiation of beef products will be critical factors in the coming years in determining the nature of ACP-EU trade in beef products. A factor strongly influencing EU beef production is the progress of reform of the EU dairy regime, since two-thirds of EU beef production comes from the dairy herd. The maintenance of milk quotas in a context of increasing milk yields has led to a substantial decline in EU beef production (with a fall of 11.9% in the total dairy herd translating into a 3.4% fall in total beef production). However, there is now a proposal as part of the CAP ‘health check’ to facilitate the termination of a quota-based management system by progressively expanding milk production quotas through five annual increases of 1% between 2009/10 and 2013/14. This would be followed by the ending of the quota system. With average milk yields per cow increasing at around 1.1% per annum, this could be expected to slow down the decline in the EU dairy herd but not reverse it (without the quota increase the EU27 dairy herd was ‘projected to decline from around 24 million head in 2007 to approximately 22 million animals by 2014’ – a fall of 8.3%). The EU’s traditional high-price policy, which maintained EU beef prices at levels substantially above the world market price, was at the heart of the attractiveness of the EU market to ACP beef exporters. The process of EU beef-sector reform is transforming the market situation in the EU faced by ACP exporters and is having significant effects on trade relations. The EU beef sector has now been incorporated into the single-payment scheme, with a consequent decoupling of aid. This, combined with increased feed costs, is expected to act as a disincentive to intensive beef production in the EU, thereby contributing to the continued decline of EU27 beef production. This is despite the expectation of firmer EU beef prices in the coming period as a result of the tight domestic supply situation. The March 2008 ‘Prospects for EU agricultural markets and incomes’ projects a 4.51% fall in EU beef production between 2008 and 2014, from 7,959,000 tonnes to 7,600,000 tonnes. 249 The single-payment scheme The single-payment scheme will be paid once a year and will replace most existing product-specific direct aid payments. The national allocation to the single-payment scheme consists of the aggregation of the maximum each state could spend on direct aid payments during the agreed historic reference period. Executive brief Beef Payments will be made to any farmer actively farming at the date each member state introduces the scheme. Farmer entitlements will be defined by the entitlements the farmer enjoyed during the reference period (normally 2000-02, although there are variations). ‘Each entitlement is calculated by dividing the reference amount by the number of hectares which gave rise to this amount in the reference years.’ Eligible hectares include all types of agricultural land except land used for permanent crops and forestry. ‘Farms may produce all crops with the exception of permanent crops, fruit and vegetables and potatoes.’ This payment is linked to cross-compliance with various conditions, linked to land management, good agricultural practices and environmental considerations. Member states have various options as to how they calculate and make payments. This can be based on individual farmers’ receipts during the reference period or averages for the region or the state. During the transitional period coupled payments may under certain conditions be maintained (so called ‘partial decoupling’). All payments made are to be reduced by 3% in 2005, 4% in 2006 and 5% in 2007, under the principle of ‘modulation’, which is designed to free up funding for wider rural-development activities. According to the EC the single-payment scheme ‘provides stable support allowing farmers to produce to market demand and to plan for the future’. June 2008 2. The EU import regime 2.1 The basic framework The high EU prices have traditionally required the EU to maintain high levels of import tariffs in the beef sector. Currently the EU’s import regime for beef consists of a combination of an ad valorem duty and a specific amount per tonne (see table below). As can be seen, the Uruguay Round agreement resulted in a 36% reduction in these duties over six years. By far the most important duty is the specific duty, which for beef now stands at €1,768 per tonne. It is this duty which is likely to be subject to the most substantial progressive dismantling, particularly as part of moves towards establishing ad valorem equivalent values, prior to tariff reductions under the Doha Round. In addition to these two duties a safeguard clause allows customs duties to be increased in the case of import surges or a drop in the import prices below a certain trigger threshold. However, with the process of price reductions under way and a shift over to direct support payments, the need for tariff protection is receding. This will in the coming years be reflected in modifications to the EU import regime, either as a result of multilateral trade negotiations or the conclusion of bilateral trade agreements, particularly an EU-Mercosur free-trade-area agreement. Under various Doha Round proposals EU beef tariffs could be lowered by between 60% and 70%. According to the USDA under such a scenario Brazilian duty-paid imports would directly impact on EU domestic prices. The price declines that this could induce could seriously compromise the profitability of ACP beef exports. Thus whether as a result of multilateral trade liberalisation or tariff concessions under the EU’s new ambitious free-trade-area agreements, ACP beef exporters are likely to face a significant erosion of their margins of preference in the coming years. If a profitable trade in beef is to be maintained by ACP beef exporters in this context, then they will increasingly need to serve the ‘luxury purchase’ component of the EU beef market. This process is already under way, with the Namibian beef industry seeking to target ‘luxury purchase’ markets in both the EU and South Africa. This is resulting in significant improvements in industry revenues from the sale of beef from the ‘Farm Assurance Namibia’ (FAN) scheme. However, it should be noted that this requires both the establishment of a domestic quality-assurance scheme and the adoption of a clearly targeted marketing initiative. In addition, given the likely changes on the EU market, improving marketing and diversifying 250 markets (both geographically and in terms of the product range) is seen as an ongoing challenge of critical significance to the industry. In Namibia and elsewhere in the ACP, given the small size of ACP beef sectors, the establishment of targeted ‘aid for trade’ support to improve national, regional and international marketing (including targeting the quality conscious ‘luxury purchase’ components of the market) will be essential . The EU beef import regime Executive brief Beef Live animals Beef meat Base rate for reductions 1995 2000 reduction ad valorem 16.0% 15.0% 10.2% 36% specific €/t 1,454 1,367 931 36% ad valorem 20.0% 18.8% 12.8% 36% specific €/t 2,763 2,597 1,768 36% 26.0% 24.4% 16.6% 36% Preserved meat ad valorem Source: Situation and outlook: beef sector, CAP 2000 working document, DG Agriculture, April 1997, p.13. June 2008 2.2 ACP and other trade preferences The following table shows the preferential quotas for chilled and frozen de-boned beef/veal formerly extended to ACP countries under the Cotonou Agreement, and the average quota utilisation over the period. These preferential quotas totalled 52,100 tonnes and constituted around 14% of total EU imports throughout the 1990s. However, Kenya has only supplied beef in one year, 1992, and Madagascar has not supplied any beef to the EU since 1998, while, initially as a result of foot-and-mouth disease, Zimbabwe has also not supplied the EU market since 2002. ACP beef exports to the EU 1977-2004 Botswana Namibia Zimbabwe Swaziland Madagascar Kenya Quota (tonnes) Ave. supply (tonnes) 18,916 11,403 13,000 9,415 9,100 6,266 3,363 914 7,579 954 142 1 % quota fill (ave.) 60.3 72.4 68.9 27.2 12.6 0.7 Source: Commonwealth Secretariat, ‘The future of ACP beef and veal sector preferences’, August 2006 As with rare annual exceptions quota utilisation averaged only 55.6% of the allocated quota, this suggests that tariff barriers were not a significant barrier to trade. Indeed, meeting increasingly strict food-safety standards at commercially viable costs, in a context of falling EU market prices has come to constitute the major challenge. The significance of the ACP as a supplier of beef moreover has fallen dramatically as EU beef imports have increased, and in 2008 will account for less than 5% of EU beef imports. Looking beyond the ACP, in order to comply with its WTO market-access commitments the EU also operates a tariff-rate quota, which provides reductions on the standard MFN duty (set out below). Before enlargement the EU in addition granted tariff-rate quotas to pre-accession countries, amounting in total (live animals and meat) to around 142,000 tonnes. Market access in the beef-and-veal sector MFN Tariff EBA EPA Beef meat 12,8% +141 4-303, 4*/100kg DFQF DFQF Source: EC Export Helpdesk, http://exporthelp.europa.eu/index.html * According to the tariff lines the specific duties range from €141.4 per 100 kg to €303.4 per 100 kg. 251 2.3 The growing importance of food safety June 2008 Executive brief Beef In terms of exporting to the EU, following directly on from the BSE experience, there has been a growing policy emphasis on food safety and in parallel a growing emphasis on food quality. Food-safety standards have to be met in order for beef products to be allowed entry to the EU market. Food quality is important from a commercial perspective since it allows beef products to attract the premium prices which make it attractive to export to an EU market in a context where prices have generally been falling, while costs of supplying the market have been increasing. In order to be granted access to the EU market, verification of food-safety compliance needs to be addressed at three levels:    recognition by the EU of the country as eligible to export; the listing by the EU of establishments eligible for export to the EU; the certification by the local competent authority that the consignment meets EU standards. This last stage of certification by the local competent authority must comply with a range of basic principles. Meeting these standards fully and consistently places a considerable and growing financial burden on ACP national administrations. Yet getting the paperwork right and establishing a credible system of control by the competent authority is now vital to trading meat products into the EU. If any of the paperwork is not in order, or the integrity of the competent authority is brought into question, imports of these meat products into the EU will cease. The case of Brazil On December 19th 2007 the EU standing committee on the food chain and animal health took the decision to increase surveillance of imports of Brazilian beef, after a repeated failure of the Brazilian authorities to comply with EU requirements for food-safety and animal-disease surveillance. This was described as ‘overdue’ by EU farmers’ leaders, who called on the EC to take all appropriate measures, including banning imports, if Brazil continued to fail to comply with EU animal-disease control and food-safety requirements. According to the USDA, DG SANCO has effectively suspended new certification of imports of Brazilian beef. While beef which has already been certified will be allowed to be landed in the EU no new certification for exports will take place until a favourable opinion has been received from the latest EC FVO audit. If a favourable opinion is forthcoming trade disruptions could last only a matter of a couple of weeks, but if not this could ‘trigger a full EU import ban for Brazil beef’. The action has been taken on the basis of EU concerns over the quality of domestic audits of the safety of Brazilian beef exports. Speaking to Irish farmers at the end of January 2008 the Agriculture Commissioner said that the EC was ‘keeping a very wary eye [on] beef exports from Brazil’ and that if Brazil wants to export beef to the EU then ‘that beef must meet the agreed standards’. She estimated that ‘out of the 10,000 holdings which are currently eligible to export to us, only 3%, which means about 300 holdings, will initially make the grade under the new rules’. However she did not rule out the possibility of a total ban if the situation warranted it since ‘our animal-health and food-safety standards are non-negotiable’. On January 31st 2008, the EC imposed a ban on beef from all holdings until inspections had been carried out. The EC took action after failing to reach agreement with Brazil over a list of farms licensed for export to the EU. The Brazilian Beef Information Service (BBIS) said the EC’s decision was not a ban but a “temporary interruption” in supplies. The EU partially lifted this ban on February 27th by agreeing to allow meat exports from 106 farms deemed to fulfil EU safety requirements. This places in context the importance attached by the EU to ensuring full respect for food-safety standards. http://www.dailypost.co.uk/farming-north-wales/farming-news/2008/01/31/farmers-embracebrazilian-beef-ban-55578-20421716/, http://business.maktoob.com/NewsDetails-20070423142498EU_partially_lifts_ban_on_Brazilian_beef_official.htm 252 June 2008 Executive brief Beef This placing of responsibility for ensuring the integrity of food-safety controls throughout the food chain (from the production of animal feed through the handling and disposal of animal byproducts, to the despatch of the beef from the port) in the hands of a local competent authority, places the performance of public bodies in ACP countries at the centre of the beef trade with the EU. Any failure by ACP governments in performing these functions, if the infringements are considered serious enough, will lead to the closure of the EU market, regardless of the quality of operations of the beef producers and processors involved in the trade. This suggests a need to establish targeted programmes of ‘aid for trade’ to support the establishment and effective operation of public food-safety control systems. As if this challenge were not enough, there is considerable uncertainty and confusion as to how the EU wishes to see the various animal-product-related food-safety regulations applied in ACP countries. For example:  will respect for the objectives of EU regulations need to be attained in the same way in all countries?  or will the EU be able to tailor requirements to country circumstances (with countries at high risk of disease facing stricter controls than those with no history of such diseases)?  will all provisions of the applicable EU regulations be equally applied to production in third countries or will certain aspects be waived, providing the safety of meat destined for the EU market is not compromised (for example with regard to disposal of animal by-products)?  will the exemptions to small-scale trade in animal feed between farmers within the EU be extended to small-scale feed-trading in third countries (on the basis that for feed contamination to be of concern it must affect a minimum level of total feed intake)? These uncertainties will need to be cleared up in the coming period as the EU Food and Veterinary Office (FVO) begins a more intensive programme of controls on imported products. This suggests a need for a closer institutional dialogue over these issues. A further area of potential concern in the field of food safety is the EC’s efforts to ‘internationalise’ its own animal-welfare regulations. The EC supported the February 2004 OIE global conference on animal welfare and is pushing for the establishment of international standards. These EC initiatives cannot be divorced from EU member states’ concerns over the potential competitive disadvantages to EU producers arising from higher animal-welfare standards. Harmonisation of international standards for animal welfare would remove any competitive disadvantage that EU producers might face. However this would increase the costs of supplying the EU market. These cost burdens would be likely to fall particularly heavily on ACP beef exporters who use extensive-farming systems of cattle production, and this could over time come to constitute an effective trade barrier. ACP beef exporters will need to pay close attention to EU efforts to promote binding international standards for animal welfare, particularly in the area of transportation. Just how serious the EU is about animal-welfare standards can be seen from the March 21st 2007 EC decision to refer the Greek authorities to the European Court of Justice for consistent and repeated infringements of the enforcement obligations under animal-welfare regulations. In contrast, Commissioner Fischer Boel has been highlighting the importance of EU beef farmers ‘valorising’ their respect for animal-welfare standards in the market place, with this being seen as a new commercial opportunity to differentiate EU products from imported products, and not as simply another cost. This approach reflects wider EC efforts to support and promote a shift in the pattern of production in the EU away from bulk products, where price competition is increasingly intense (the ‘necessity purchase’ component of the market), to ‘quality’ differentiated products, for the growing quality or ethically conscious EU consumer (the ‘luxury purchase’ component of the EU market). 253 June 2008 Executive brief Beef Surveys of beef consumption show that EU consumers are increasingly favouring meat products which respect animal welfare, and are willing to change their shopping habits and spend more in this respect. It is this trend that the EC argues should be exploited by EU producers to give them a competitive edge over imported products. It has offered support to ‘private initiatives on labelling and certification’ and proposed eventual moves towards an ‘EU logo label which will assure the citizen that food produced is based on the very high quality standards provided by EU legislation’. This includes support to such marketing schemes as ‘Label Rouge’ in France, ‘Freedom Foods’ in the UK, and ‘Neuland’ in Germany. Against this background an area to which ACP beef-exporting governments will need to pay increasing attention in the coming period, is operationalising the EC’s public commitments on the provision of assistance to ACP countries in meeting EU food-safety standards and to extending this to targeted programmes of support for improving marketing of beef products. This will be essential if ACP countries are to be helped to maximise their trade potential in the area of beef and other agricultural exports. The EC has committed itself to ensuring that food-safety standards do not become new nontariff barriers to trade with the developing world. However this ignores one very important dimension, namely the economic cost of compliance. This cost has been recognised inside the EU, and various public-assistance programmes to support food-safety compliance have been set up. These range from a dedicated budget line (€248 million in the 2004 budget) for food-safety measures, to the inclusion of components for food-safety compliance in direct aid payments to farmers and rural-development programmes in favour of food processors. Yet in many ACP countries, even though the high fixed costs of SPS compliance and verification relate to relatively small production runs, no assistance programmes commensurate with the challenge faced have been set up to date. This means that the beef industry in ACP countries is itself carrying the costs of compliance with EU food-safety standards. This is becoming an increasing burden as prices received on the EU market decline. This inferior access to public support for food-safety compliance and verification places ACP beef suppliers at a competitive disadvantage in supplying the EU market compared to EU producers. This is an issue which will need to be addressed if they are to continue to supply the EU market. This suggests a need to establish targeted programmes of ‘aid for trade’ support to defray in part private-sector costs associated with investing in meeting the increasingly strict EU standards. 2.4 The impact of reform on the EU beef market From an ACP perspective there are two major effects of reform on exports to the EU market. The first is the impact on prices received for beef sold in the EU of the shift from price support to direct aid payments to farmers. ACP beef producers saw the value of their earnings from exports to the EU decline progressively under the impact of CAP reform in the beef sector, as EU beef prices have been allowed to fall towards more ‘normal’ levels. The former EU Agriculture Commissioner, Franz Fischler, estimated that two-thirds of the price declines which occurred in the EU beef market between 1999 and 2002 were the result of CAP reform and only one-third were the consequence of the BSE crisis. While EU farmers have been compensated for these reform-induced price declines by increased levels of direct aid payments, ACP suppliers have simply faced the income losses. 254 The process of EU beef-sector reform June 2008 Executive brief Beef From the end of 1992 a process of reform has been under way in the EU beef sector, involving a movement away from price support to increased levels of direct aid payments to farmers. This has featured increasing headage premia and progressive reductions in the intervention price for beef. The ‘Agenda 2000’ extension of reform in the beef sector involved a 20% reduction in the intervention price for beef in three stages. From January 1st 2000 the intervention price fell to €3,475 per tonne for the first six months, to €3,242 per tonne for the season from July 2000 to June 2001, and to €3,013 per tonne for the season 2001/2002. On July 1st 2002 the intervention price was replaced by a ‘basic price’ for storage of €2,224 per tonne. Under this new system if the EU market price falls below 103% of the ‘basic price’ then the EU will finance private storage of beef in order to support the market (roughly equivalent to an intervention price of €2,669 per tonne under the old intervention price system). In addition beef producers will also benefit from a ‘safety net’ intervention system for bulls and steers, involving the organisation of ‘buying in tenders’ in particular member states, if the market price for bulls and steers in the member state concerned falls below €1,540 per tonne for two consecutive weeks. To compensate for these reductions in the intervention price, direct aid to EU beef farmers was increased. Initially these payments consisted of different premia paid per head; however as of June 2003 further reform measures were adopted, involving the progressive decoupling of existing farm-aid payments from production through the establishment of a single-payment scheme, which embraced a range of commodities. As with other sectors, the single-payment scheme will be linked to ‘cross compliance’ with environmental, food-safety, and animal-welfare standards, as well as the requirement to keep all farmland in good agricultural and environmental condition. During a transitional period up to December 2006, EU member states had a degree of discretion over the pace at which they implemented the decoupling of farm payments. By 2008 the single-payment scheme will be extended to the dairy sector (although quotas will remain in place until the 2014/15 season). This is important since trends in the dairy sector have a direct bearing on overall EU beef production. In the case of southern African beef exporters the sterling value of beef exports declined by between 28% and 30% from 1999 to 2001. In the case of Namibia this resulted in an income loss of €6 million in 2001 compared to the prices received when Namibia first began exporting to the EU. In the case of Swaziland the declining EU beef price led first to a discontinuation of exports of lower-quality beef cuts, and subsequently a discontinuation of all exports in the face of lower local currency earnings on the back of a strengthening rand. Under the impact of the 2000 round of CAP reform these price declines continued until 2003. For Namibia, earnings for fresh and chilled beef exports fell from €6.143 per kg in 2001 to €5.589 per kg in 2003 (a 9.8% decline), while for Botswana the decline was from €5.572 per kg in 2001 to €5.075 per kg in 2003 (a 9% decline). The price declines for frozen beef cuts were even more pronounced, with prices for frozen Namibian beef cuts falling from €2.876 per kg to €2.069 per kg (a decline of 28.1%) and those from Botswana falling from €2.508 per kg to €2.120 per kg (a decline of 15.5%). There was however some ‘bounce back’ in prices in 2004 and 2005 reflecting the emergence of a deficit in beef supplies to the EU market. For Botswana, this bounce back continued into 2006, before prices declined to below 2005 levels, while for Namibia the recorded prices obtained in euro per kg continued to fall in 2006 and 2007, reaching levels 26.6% below the levels received in 2001 for fresh and chilled beef and 32.3% below in the case of prices received for frozen beef. In the case of Botswana prices for fresh and chilled beef fell by 6.2%, but those for frozen beef rose by 2.3%. (Given the concentration of Botswanan and Namibian exports, these fluctuations in part reflect currency movements between the euro and the pound sterling.) 255 Beef exports from Namibia and Botswana Frozen beef exports (€/kg) Botswana Namibia Botswana Namibia 2007 5.224 4.509 2.566 1.947 2006 5.338 5.199 - 2005 5.227 5.624 - 2.558 2004 5.233 5.589 - 2.210 2003 5.075 5.544 2.120 2.069 2002 5.662 6.135 2.428 2.157 2001 5.572 6.143 2.508 2.876 Source: http://trade.ec.europa.eu/doclib/docs/2008/april/tradoc_138666.pdf for 2007; http://trade.ec.europa.eu/doclib/docs/2008/april/tradoc_138649.pdf for 2006; http://trade.ec.europa.eu/doclib/docs/2006/april/tradoc_128152.pdf for 2005; http://trade.ec.europa.eu/doclib/docs/2005/april/tradoc_122515.pdf for 2004; http://trade.ec.europa.eu/doclib/docs/2004/april/tradoc_116843.pdf for 2003; http://trade.ec.europa.eu/doclib/docs/2003/june/tradoc_113164.pdf for 2002; http://trade.ec.europa.eu/doclib/docs/2003/april/tradoc_111595.pdf for 2001; June 2008 Executive brief Beef Fresh and chilled beef exports (€/kg) Fresh and chilled from Botswana Fresh and chilled from Namibia Frozen from Botswana Frozen from Namibia 7 6 Euros/Kg 5 4 3 2 1 0 2001 2002 2003 2004 2005 2006 2007 It was in this context that at the end of 2007 Namibia sought to redefine its marketing strategy so as to target ‘luxury purchase’ markets in the EU more clearly, including diversifying markets within the EU away from the UK. This move reflects the emergence of a far more differentiated beef market within the EU, with divergent price trends in different components of the market. This is a reality which certain ACP beef suppliers are beginning to adjust to, with exports of clearly labelled and differentiated beef products being targeted at premium-priced markets, where price trends are stronger and exports can remain profitable despite the escalating costs of food-safety compliance, which have to be carried by private-sector operators in ACP countries. This is requiring the development of carefully designed labelling and marketing strategies. While in the case of Namibia this is currently being financed from private-sector resources, in some ACP suppliers this will require external technical and financial assistance to ‘pump prime’ the trade- and market-adjustment process. This is particularly the case since the volume of exports from ACP countries involved is relatively small, when considering the costs of such labelling and marketing initiatives. In the face of the price competitiveness of Latin American supplies, this would appear to be the only basis on which ACP beef suppliers can continue to supply the EU market profitably in the longer term. 256 This is particularly the case since tariffs on imports from Brazil and Argentina are likely to fall in the coming years with the conclusion of a Mercosur-EU free-trade-area agreement and the expansion of tariff-rate quotas for sensitive products as part of the final deal under the Doha Development Round. This would serve to further enhance the price competitiveness of Brazilian and Argentinean beef on the EU market. The question arises: will ACP beef producers, processors and public authorities be up to the challenge of ensuring a consistent supply of clearly labelled and differentiated quality beef products to the EU market? June 2008 Executive brief Beef 3. The EU export regime: the WTO and EU beef exports In the 1990s the EU was the world’s leading beef exporter, with over 25% of the world beef trade and a peak level of exports of 1.2 million tonnes. This was a classic outcome of the old CAP regime, which through price support encouraged production, required huge levels of export refunds (over 1.2 billion ecus) and generated substantial intervention stocks. In the 1990s export refunds drove this trade, with export-refund payments being equivalent to around 40% of the market price. In ACP countries where lower-quality and hence lower-priced beef cuts were sold, the importance of export refunds was even greater in fuelling this trade. EU export commitments under the Uruguay Round Base 1995 2000 Reduction Value (€ million) 1,959 1,923 1,254 36% Volume (thousand tonnes) 1,040 1,137 822 21% Source: Situation and outlook: beef sector, CAP 2000 working document, DG Agriculture, April 1997, p.15. However, the Uruguay Round agreement placed ceilings on the level of subsidised EU beef exports, and along with the BSE crisis, continued improvements in milk yields in a context of restrictive production quotas, and the implementation of the reform of the beef sector, exports began to fall sharply. By 2004 EU beef exports were only around one-third of what they had been throughout most of the 1990s, with export-refund allocations then being substantially below the allowed WTO ceiling (just over a quarter) and export volumes well below half the allowed level on which export refunds could be paid. This trend has continued, with exports in 2007 being under 12% of what they were in the early 1990s, when EU beef exports were at their peak. In the context of falling EU production, and the transformation of the EU into a net beef importer after 2003, WTO export-refund ceilings currently have no impact on the level of EU beef exports. 4. Trends in EU trade 4.1 Recent trends in EU imports and exports In the 1990s EU imports of beef remained fairly constant at around 370,000 tonnes per annum. However since 2002, EU imports of beef have risen substantially to an average of around 432,000 tonnes in 2002-2003, before rising to 620,000 tonnes in 2006. Some 70% of these imports came from Brazil and 20% from Argentina, with, in both instances, the full duty being paid. This arises from the highly price-competitive nature of Brazilian and Argentinean beef production (not unconnected of course with dramatic currency movements). For example, Brazilian rib-eye cuts (€7 per kilo) are almost half the price of Irish rib-eye cuts (€13 per kilo) and 30% cheaper than Dutch Limousin rib-eye (€10 per kilo). Argentina, while more expensive than Brazilian production (at €9 per kilo), is still highly competitively priced for most European markets. In the 1990s the EU was largely a net beef exporter, with a balance of over 500,000 tonnes in 1997. However, since this date EU exports have continuously decreased, by some 580,000 tonnes by 2003 (and over 850,000 tonnes by 2007). 257 Wholesale prices – August 2005 Brazilian rib-eye about €7/kg Argentinean rib-eye about €9/kg Dutch Limousin rib-eye about €10/kg Irish rib-eye about €13/kg Source: USDA (GAIN Report No. E35178-09/08/2005) http://www.fas.usda.gov/gainfiles/200509/146130828.pdf EU beef imports and exports 1997-2007 Exports (tonnes) 971,000 695,000 872,000 577,000 498,000 522,000, 390,000 315,000 213,000 185,000 114,000 Source: Eurostat EU Imports EU Exports 1,000 900 Thousands tonnes June 2008 Executive brief Beef 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Imports (tonnes) 387,000 347,000 385,000 378,000 350,000 424,000 440,000 548,000 614,000 620,000 588,000 800 700 600 500 400 300 200 100 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Since 2002 EU imports of beef have exceeded EU beef exports, a consequence of a strong recovery in EU beef consumption after the BSE crisis, and a contraction in EU beef production linked to the decline in the size of the dairy herd and a loss of competitiveness on third-country markets relative to advanced developing-country beef exporters. The enlargement of the EU to include Bulgaria and Romania saw imports into the EU fall by 5.2% in 2007 and consumption increase slightly. This however only marginally affected the underlying trend. These trends are projected to continue with exports falling from a projected 77,000 tonnes from the EU27 in 2008 to 45,000 tonnes in 2014 and with imports increasing from a projected 592,000 tonnes in 2008 to 743,000 tonnes in 2013. A growing trend in the EU beef market is towards increased product differentiation, with a clear distinction emerging between high-quality beef and low-quality beef, labelled differentiated beef and non-labelled generic beef. The EU27 currently has a shortage of high-quality beef and a surplus of low-quality beef. This arises in large part from the disjuncture between patterns of beef production in new member states (low quality) and aspirational consumption patterns (towards high-quality beef). This explains why, despite a growing deficit between EU production and consumption since 2003, the EU remains a beef exporter, albeit on a much reduced scale. 258 Executive brief Beef June 2008 This has important implications for the trade relationship with ACP beef-producing countries. On the one hand, with a growing gap between EU beef consumption and EU beef production, there exist opportunities for ACP beef producers to supply high-quality beef, at prices which allows them to profitably export to an increasingly fragmented EU beef market. However with a surplus of low-quality beef, and given the scale of EU production relative to the size of ACP markets, even exporting as little as 58,000 tonnes per annum over the next seven years, the danger exists that EU beef exports could easily swamp ACP markets. This danger is exacerbated by the fact that highly price-competitive Latin American suppliers are increasingly pushing EU traders out of their traditional beef markets. In this context, as in other sectors where the EU has faced intensified competition in bulk commodities in higher-priced markets, EU traders may find themselves increasingly looking to supply African markets, as markets of last resort. This is a matter of some concern, because EU beef exports to ACP countries consist almost entirely of low-quality beef destined for the low-priced end of the market. This tends to compete directly with the production of small-scale farmers and emergent commercial farmers (whose commercial position already tends to be weak), further harming the development of this sector of ACP beef production. This is a particular concern in southern Africa where two of the potential regional markets, Angola and the Democratic Republic of the Congo, are among the ten top destinations for EU beef exports, with the value of exports to Angola having risen by 83% between 1995 and 2005. Against this background a number of factors can be seen to influence EU beef exports to ACP countries, notably:   the openness and demand for beef on non-ACP markets;  the development of domestic consumption of beef within the EU (towards higher-quality beef);  the variations in the level of export refunds offered for different types of beef cuts for different destinations;  the trade arrangements established by ACP countries to regulate beef imports (tariffs and safeguard arrangements);  the WTO ceilings on the volume of exports. the cyclical ups and downs of European beef production, as well as the pace of change in the composition of production (from lower quality to higher quality); Local supply-and-demand considerations on ACP markets are likely to have only a marginal impact on the actual pattern of EU beef exports to ACP countries. 4.2 Future trends The long-term decline in EU cattle numbers will only be slowed down by the proposal to expand milk production quotas in the run-up to their abolition. The impact of the termination of dairy-production quotas in 2015 on cattle numbers is by no means clear, since this will be determined by the state of global dairy markets and the stimulus this gives to European dairy production in the context of the final ending of the system of export-refund payments. However, falling EU beef consumption (a projected fall of 2.1% or 176,000 tonnes) alongside a shift in patterns of consumption towards higher-quality beef products, could, with the ending of quota restrictions in the dairy sector, see an expansion of EU exports of low-quality beef products. The existing EU projections dealing with prospects for the EU beef market do not take into account the projected expansion of EU dairy quotas in the run-up their abolition in 2015 and the current projections need to be read in this context. 259 March 2008 projections for the EU beef market Executive brief Beef EU beef production is projected to decline in the medium term to 7.6 million tonnes by 2014 from 7,959,000 tonnes in 2008, a decline of 4.51%. EU consumption of beef however is also projected to decline, although at a slower rate of 2.08% between 2008 and 2014. Despite the production deficit in the EU exports will continue to take place, though be it at greatly reduced levels (partly in response to higher domestic demand). Indeed, despite EU enlargement total EU exports by 2014 will be only 21.13% of the level attained in 2005. EU imports of beef are projected to increase 25.34% between 2008 and 2014, from 592,000 tonnes to 743,000 tonnes. Beef production, consumption, exports and imports EU25 2005* 2008 2011 2014 % change 2008-14 Usable Production 8,044,000 7,959,000 7,740,000 7,600,000 - 4.51 Consumption 8,445,000 8,474,000 8,340,000 8,298,000 - 2.08 Surplus/Deficit - 401,000 - 515,000 - 600,000 - 698,000 Deficit + 74 Exports 213,000 77,000 52,000 45,000 - 41.56 Imports 614,000 592,000 653,000 743,000 + 25.34 Exports Imports Surplus/Deficit 800 600 Thousands June 2008 400 200 0 2005* -200 2008 2011 2014 -400 -600 -800 Source: Table A.9 ‘Prospects for EU agricultural markets and Incomes 2007-2014’, EC Directorate General for Agriculture, March 2008 As has been noted, the continuation of exports will largely be a consequence of the imbalance between production and demand for low- and high-quality beef cuts. In terms of ACP beef exports to the EU, while EU imports of beef are projected to increase by over 25% between 2008 and 2014, ACP suppliers are poorly placed to take advantage of these opportunities as they face serious supply constraints and major difficulties in meeting EU foodsafety standards cost effectively. In addition, they face a fundamental lack of price competitiveness vis-à-vis the major exporters of beef to the EU, namely Brazil (54% of EU imports) and Argentina (26% of EU imports). Indeed the prospects of tariff reductions on Brazilian, Argentinean and Uruguayan (6% of EU imports) beef exports either as a result of the conclusion of a bilateral FTA agreement or the conclusion of the Doha Development Round is likely to intensify price competition on the EU market. A December 2005 EC assessment of the impact of its market-access offer at the Hong Kong WTO Ministerial suggested that the EU’s trading position in the beef sector could shift from net imports of 400,000 tonnes, following full implementation of agreed CAP reforms, to net imports of 1.2 million tonnes of beef as a result of the implementation of the EU’s tariff-reduction offer. This would be likely to have profound price effects on undifferentiated EU beef markets compared to the situation prevailing without a WTO agreement. In this context a key feature of trade trends in the beef sector is the growing importance of quality considerations in the prices received for beef exported to the EU market. If quality standards can be attained and assured and ACP countries make the transition to marketing their beef production more effectively into increasingly differentiated EU beef markets, then growing trading opportunities can be exploited. In this context, the removal of quantitative restrictions on ACP beef exports under the interim EPAs could begin to yield benefits. 260 5. Implications for ACP countries June 2008 Executive brief Beef 5.1 The removal of residual restrictions Under interim EPAs duty–free, quota-free access has been granted to ACP beef exports, although in the case of Namibia a failure to resolve the issue of a number of contentious clauses potentially threatens this arrangement. Nevertheless the removal of the 8% residual special duty paid on beef exports under the beef protocol will bring immediate financial benefits equivalent to an estimated £150 per tonne. With exports in 2007 of 10,452 tonnes and 8,051 tonnes respectively for Botswana and Namibia, an equivalent tonnage of exports in 2008 would yield extra revenues of €1.96 million for Botswana and €1.51 million for Namibia1. Given the traditional underutilisation of ACP beef quotas, this measure on its own is unlikely to have an immediate impact on export volumes from ACP countries. What could have an effect, however, would be a dramatic increase in import prices if Brazilian beef supplies are interrupted, although even here the ACP supply response, to what is likely to be a short-term interruption of supply, should not be overstated. Improvements in the rules of origin to allow greater intra-regional trade in weaner cattle is one area where changes could be introduced that would have a relatively immediate effect on supplies of beef for export. However, even these measures could fall foul of food-safety and animal-disease-control measures. In the longer term, should the EU market prove attractive, the current low rates of off-take in ACP beef-protocol countries (i.e. those countries whose beef sector is already certified to allow exports of beef to the EU market) could be raised, leading to a considerable expansion of production. However this would require the identification of remunerative markets, the improvement of quality standards, and the modification of some cultural practices linked to cattle ownership. 5.2. Addressing the financial burden of food-safety measures The issue of the financial implications of technical compliance with EU food-safety standards is an issue of critical importance to ACP beef exporters, particularly since with declining EU prices this is creating a ‘squeeze’ on the profitability of beef exports to the EU. Unless grant financing is made available by the EU through a dedicated funding mechanism to meet EU food-safety standards in the beef sector (similar to the support extended in the fisheries sector) then ACP beef exporters could find themselves excluded from the EU market, either as a result of failure to comply with EU food-safety standards or because the financial costs of compliance has made exports to the EU commercially non-viable. A dedicated financial instrument to support institutional capacity development in the area of food-safety compliance has recently been launched with an initial financial allocation of €30 million. However, a CTA study in this area has suggested initial costs for the ACP as a whole of €187 million to establish the necessary regulatory, legislative and institutional capacity for ensuring food-safety compliance. This estimate excludes operating costs and costs of periodically upgrading testing facilities. 1 Assuming an exchange rate of €1.25 to £1. 261 June 2008 Executive brief Beef What the EC has said on assisting developing countries to meet EU food-safety standards Addressing a conference on EU exports and SPS measures in Brussels on May 27th 2005 Trade Commissioner Mandelson said that SPS measures were ‘a crucial dimension of trade policy … future challenges in trade policy will not be in the field of traditional tariffs, but in the so-called non-tariff barriers to trade, to which the question of standards is crucial’. He continued, ‘if not managed with care, these measures can be impediments to trade which are difficult to justify. Managed successfully, they can be a stimulus to trade: enhancing the opportunity to exploit comparative advantage to the mutual benefit of all’. Commissioner Mandelson argued ‘we should not shy away from taking a fresh look at how we can best work more closely with developing countries to meet their needs. First and foremost how do we enable them, through effective capacity building, to meet our own and international standards?’ He went on, ‘we need to help developing countries to improve their capacity to abide by SPS rules and requirements and help them provide the infrastructure to do so’. Commissioner Mandelson called for ‘specific provision for trade-related technical assistance in the field of SPS [to be] included in our aid programmes’. Source: Speech by Commissioner Mandelson (SPEECH/05/307-27 May 2005) http://europa.eu.int/rapid/pressReleasesAction.do?reference=SPEECH/05/307&format=HTML &aged=0&language=EN&guiLanguage=en The importance of ACP countries meeting the food-safety challenge should not be underestimated. The economic consequences of the termination of beef exports to the EU market would not be restricted to the lost income on sales to the EU market, but would be compounded by price declines on local and regional markets into which this beef would need to be diverted. This is particularly the case for high-quality beef cuts, for which there is actually a surplus in southern African markets as a result of the structure of beef consumption and production in South Africa, the major beef consumer and producer in the region. Nevertheless, recent efforts by Namibian exporters to target ‘luxury purchase’ markets in South Africa could reduce the financial costs of any loss of access to the EU market. These efforts to diversify markets are currently being intensified and constitute an important area for ‘aid for trade’ support. 5.3. Serving differentiated markets The issue of the commercial sustainability of EU food-safety controls will be vitally affected by the ability of ACP beef producers and processors to make the shift from ‘trading’ beef into an undifferentiated market to ‘marketing’ beef cuts into an increasingly differentiated EU market. While this process has been launched with some success in Namibia, activities in this area will need to be ongoing. In addition in other ACP beef-producing countries, given the humanresource-intensive nature of these types of marketing activity and the human-resource constraints faced in the principal beef-exporting regions of the ACP (linked in large part to the reversals in human development arising from the HIV/AIDS pandemic), external financial and technical assistance will almost certainly be needed to ‘pump prime’ marketing adjustment processes. With the EU already having in place extensive programmes of assistance to its own farmers in developing marketing strategies, the EC would appear to be an ideal source of support for such financial and technical assistance. Furthermore given EU member states’ commitments to expanding ‘aid for trade’ financing in the coming period, there would appear to be ample financial scope for extending support to such programmes. 5.4 Defending national and regional markets While the scale of EU beef exports is greatly reduced and EU beef intervention stocks are empty, this does not mean that ACP countries face no threats of market disruption. The EU is facing increased competition on its traditional beef-export markets and is increasingly wanting to dispose of lower-quality beef cuts, which find no markets in the EU. As in other sectors (e.g. cereal-based value-added food products), the EU could easily fall back on supplying ACP (mainly African) markets. While the volume of EU beef exports is rapidly declining, the absolute volumes will still be high compared to the size of individual ACP markets. 262 EU25 exports of meat and bovine meat to the ACP and the world (thousand tonnes) Beef to ACP 167 58 101 188 115 35 29 25 Beef to ACP world share % 4,368 3.82 4,231 1.36 3,916 2.58 2,809 6.69 2,246 5.10 1,482 2.34 1,289 2.28 873 2.89 Meat to ACP 2,566 2,476 3,148 3,632 3,272 2,885 3,230 3,239 Meat to world 27,827 25,336 28,102 27,375 29,587 28,747 29,860 30,177 ACP share % 9.22 9.77 11.20 13.27 11.06 10.03 10.82 10.73 Source: Eurostat M eat to the ACP (left axis) 4,000 Beef to the ACP (right axis) 200 180 3,500 140 2,500 120 2,000 100 80 June 2008 1,500 60 1,000 40 500 0 2000 Thousands 160 3,000 Thousands Executive brief Beef Period 2000 2001 2002 2003 2004 2005 2006 2007 20 2001 2002 2003 2004 2005 2006 0 2007 There is also some evidence to suggest that for a period between 2000 and 2003 the ACP became a more important market for EU meat exports generally, with a 41.5% expansion in their volume of meat exports to ACP countries in this period, in the context of a contraction in the volume of overall EU meat exports. While the importance of ACP markets subsequently declined in both absolute and relative terms, governments of ACP beef-producing countries will need to look closely at policy options open to them for managing any potential problems that could arise given the changing patterns of ACP-EU trade in beef products. This suggests a need for:  the establishment of mechanisms for monitoring EU beef exports to both ACP markets and non-ACP markets;  the establishment of swift and effective safeguard measures in the beef sector to allow immediate action to prevent market disruptions, should EU exports to ACP markets look likely to increase in the light of changes in wider EU patterns of trade (Russia accounted for 56% of EU beef exports in 2004);  the establishment of surveillance mechanisms, with the support of the EU, to monitor applications for export refunds on beef destined for markets of importance to ACP beef producers (in 2007 60% of EU beef exports remained dependent on export refunds);  the establishment of a framework for consultations under interim EPAs and the EBA initiative on beef-sector issues of concern to existing ACP beef suppliers and potential ACP beef exporters. 263 Executive brief January 2009 January 2009 Executive brief Sugar Sugar Table of contents 1. The reform of the EU sugar regime _______________________________________ 267 1.1 The direction and principal impacts of reform ____________________________________ 267 1.2 Secondary impacts: the restructuring of the EU sugar industry ________________________ 269 2. Beyond the sugar protocol ______________________________________________ 270 2.1 The denunciation of the sugar protocol__________________________________________ 270 2.2 Transitional arrangements under EPAs __________________________________________ 271 2.3 Regional specificities ________________________________________________________ 273 3. The implications for the ACP ____________________________________________ 275 3.1 The nature of the fundamental change __________________________________________ 275 3.2 Opening-up of EU import-licensing arrangements _________________________________ 276 3.3 Future prices and the value of preferences _______________________________________ 277 3.4 The sugar sector and the 2013 round of CAP reforms ______________________________ 278 3.5 The evolving situation in the LDCs_____________________________________________ 279 3.6 Regional knock-on effects of the EU sugar-sector reforms ___________________________ 280 3.7 The question of reciprocity for sugar-containing food products _______________________ 281 4 Preparing for further EU sugar-sector reforms ______________________________ 281 4.1 Breaking down the problem __________________________________________________ 281 4.2 Reducing costs ____________________________________________________________ 282 4.3 Opening up new revenue streams ______________________________________________ 282 4.4 Adapting to changing market conditions _________________________________________ 283 4.5 Reviewing the role of EU restructuring support ___________________________________ 284 265 January 2009 Executive brief Sugar Summary This executive brief first outlines the nature of the reform of the EU sugar regime, focusing on its principal impact – a reduction in prices – that will affect not only ACP producers but also EU beet farmers and sugar millers, for whom restructuring support is available. Secondary impacts include the globalisation of EU sugar companies, which are embarked on a process of acquisition of overseas sugar producers, particularly in southern Africa. A consequence of reform has been the EU’s recent denunciation of the long-standing Lomé sugar protocol, despite ACP opposition, and the incorporation of market-access arrangements for ACP sugar exports into (I)EPAs. This involves a three-phase transition to duty-free, quota-free access, within the framework of a global safeguard against ACP sugar exports, involving a ‘dual trigger’ mechanism and the phasing out of price guarantees. Because of the co-existence of ceilings on ACP exports and nominal unlimited access under the EBA for LDC producers, some nonLDCs fear reduced market access. In addition a further round of price cuts is clearly signalled for 2013. The reform will fundamentally change the economics of ACP sugar trade with the EU: as the value of sugar-sector preferences fall, few of the present protocol beneficiaries will be able to benefit from exporting to the EU after 2013. In the shorter run the EBA is stimulating massive investment in sugar-producing LDCs whose exports to the EU are likely to rise significantly. The opening up of EU import-licensing arrangements may also produce some structural benefits. The EU sugar-sector reforms are likely to result in a series of knock-on effects in regional markets for sugar and sugar products, as the relative attractiveness of neighbouring markets to regional producers and sugar-based industries increases. At the same time the costs of EU industries based on sugar (soft drinks, biscuits, confectionery etc) will fall with the lower EU price, so raising their competitiveness in overseas markets, including in ACP countries. Finally the brief looks at how ACP sugar exporters can respond to the changed market situation following on from the implementation of EU sugar-sector reforms, via programmes to reduce costs, open up new revenue streams, improve the marketing of sugar and investing in moving up the sugar value chain. It closes by reflecting on the role of EU sugar-sector restructuring support in assisting ACP sugar sectors in making the necessary trade and production adjustments. 266 1. The reform of the EU sugar regime Executive brief Sugar 1.1 The direction and principal impacts of reform After considerable delay (proposals for reform were first developed in 1993), the first stage of reform of the EU sugar sector will be substantially completed in 2009. This reform essentially involves a move away from very high price-support for sugar (i.e. via administratively setting the price of sugar beet and associated sugar prices) to a mixed system involving the inclusion of sugar production in the single-payment scheme (SPS) for farmers and the maintenance of administratively determined prices (a move to high prices rather than very high prices). This process of administratively reducing prices has taken place over four years and will be completed in October 2009. The reference price for white sugar was reduced to €631.9 per tonne from October 2006. It was further reduced to €541.5 per tonne from October 2008 and will be reduced to €405.4 per tonne in October 2009. The raw-sugar reference price has been similarly reduced, to €496.8 from October 2006, to €448.8 per tonne in October 2008 and will be reduced to €335.2 per tonne in October 2009. This process of price reductions is one of the main effects of the sugar-sector reform process on ACP sugar exporters. January 2009 Changes in prices for ACP raw sugar Year Pre-reform regime 2006/07 2007/08 2008/09 2009/10 Price per tonne €523.7 €496.8 €496.8 €448.8 €335.2 % change (cumulative) 0 - 5.1% - 5.1% -16.7% -36.0% Internally within the EU, this process of price reductions will be supported by the inclusion of sugar production in the single farm-payment scheme and the mobilisation of some €8 billion in restructuring support, which will be used to finance the ‘voluntary’ relinquishing of 6 million tonnes of sugar-production quotas by EU millers. While initially difficulties were faced in securing the relinquishing of sufficient production quotas on a voluntary basis (with only 2.2 million tonnes being relinquished by mid-2007), the introduction of a temporary compulsory quota cut of 2 million tonnes to stabilise the EU market and the ‘threat’ of compulsory uncompensated cuts if ‘voluntary’ reductions were not forthcoming, ensured that by November 2008 it was being reported that 95% of the required 6 million tonne quota cut had been achieved (5.7 million tonnes). This process of securing the necessary quota cuts was supported by the introduction in May 2007 of a programme of supplementary support designed to encourage more millers to ‘voluntarily’ give up sugar-production quotas. This programme included:  fixing the restructuring payments that farmers and contractors could receive at 10% of the amount (€62.5 out of €625 per tonne);  supplementing the payment to farmers with an additional payment of €237.5 per tonne (bringing the total to €300 per tonne and to be retroactively applied);   allowing growers to apply directly for restructuring support and to directly renounce quotas; providing additional incentives to processors to give up quotas by waiving obligations to pay certain restructuring levies. According to the November 2008 USDA analysis of the EU sugar sector, EU sugar exports are expected to increase to 1.7 million tonnes, (with some 900,000 tonnes likely to be exported in the form of processed food products), while EU sugar imports are expected to increase to 4 million tonnes. Press reports suggest that this could rise as high as 4.25 million tonnes, with the EU replacing Russia as the world’s largest buyer of raw sugar. 267 This is consistent with the EC projections made in the February 2007 publication of ‘Prospects for EU agricultural markets and incomes’. Some press reports have gone so far as to suggest that pending the granting of full duty-free, quota-free access to LDC sugar exports in October 2009, a shortage of sugar could actually emerge on the EU market. However, this forecast does not appear to take into account the impact of the global recession on growth in consumer demand. The EU reform measures January 2009 Executive brief Sugar In November 2005 the following specific sugar-sector reform measures were introduced:  a reduction in the guaranteed price for white sugar of 36% over four years, beginning in the 2006/07 season;  the introduction of compensation to sugar-beet farmers ‘at an average of 64.2% of the price cut’, through a ‘decoupled’ payment linked to ‘cross compliance’ which will form part of the ‘single farmpayment scheme’;  the payment of an additional ‘coupled payment’ equivalent to 30% of the price cut for a transitional period of five years plus the possible payment of ‘limited national aid’, but only for ‘countries which give up more than half of their production quota’;  the establishment of a ‘voluntary restructuring scheme lasting four years for EU sugar factories and isoglucose and inulin producers, consisting of a payment to encourage factory closure and the denunciation of quotas, with the aim of encouraging ‘less competitive producers to leave the industry’ (with payments being made of €730 per tonne in the first two years, falling to €625 in year three and €520 in year four) and the financing of social and environmental adjustment costs in the most affected regions to support diversification;  the funding of restructuring measures through a special levy placed on remaining quota holders over three years of the transition;  the introduction of scope to use restructuring funds to compensate beet producers affected by factory closures (reportedly up to 10% of the amount). This part of the reform package was revised in the light of the low take-up of restructuring support. Payments to farmers are now financed out of the general CAP budget with the restructuring funds available to finance the voluntary relinquishing of quotas thereby being expanded;  the establishment of a ‘diversification fund for member states where the quota taken up is reduced by a minimum amount, with diversification funds increasing the more quota is renounced’;   the merging of the ‘A’ and ‘B’ quotas;  the maintenance of the intervention agency during the four-year transition period followed by ‘the introduction of a private storage system as a safety net in case the market price falls below the reference price’;  the allocation of an additional quota of 1.1 million tonnes to ‘C’ sugar-producing countries against ‘a one-off payment corresponding to the amount of restructuring aid per tonne in the first year’;  an increase in the isoglucose quota of 300,000 tonnes for existing companies, phased-in over three years;  the possible purchase by Italy (60,000 tonnes), Sweden (35,000 tonnes) and Lithuania (8,000 tonnes) of extra isoglucose quota at the restructuring-aid price. a provision for the use of non-quota sugar in the domestic ‘chemical and pharmaceutical industries and for the production of bio-ethanol’; The new sugar regime came into force on July 1st 2006, with the first year of application running for 15 months, after which the sugar-marketing year ran from October to September. 268 January 2009 Executive brief Sugar It should be noted that this reduction in official in-quota sugar production has been achieved alongside out-of-quota production of 2.7 million tonnes. Thus we find that in Germany sugar production has exceeded its EU quota by 800,000 tonnes or almost 23%, with the surplus needing to be used for purposes other than sugar production. A similar production over-run of 100,000 tonnes occurred in Denmark. According to press reports in September 2008 ‘ethanol producers are expected to take up much of the surplus’. Here again, however, it is far from clear what the impact of rapidly declining oil prices and the revision of national targets for biofuel consumption will be on the economics of ethanol production in the EU. Should plans for ethanol production be scaled back, increased volumes of this out-of-quota sugar would need to be sold on the world market without export subsidies. Despite the out-of-quota production over-runs a significant reduction of EU sugar production is under way. Sugar production has ended in Bulgaria, Ireland, Latvia, Portugal and Slovenia and been reduced by 70% in Italy, 33% in Portugal, 10% in Holland and 20% in Belgium. There has also been a significant reduction in the area under sugar as follows:      Germany - 19.0%; France - 7.0 %; UK - 4.3%; Poland - 5.6%; Austria + 7.3%. These production adjustments are generating new patterns of trade in sugar and sugar products within the EU. Trade aspects of the reformed EU sugar regime The EU will retain both MFN import duties and export refunds. In order to monitor the trade in sugar a system of import and export licenses will be retained. This will include a system for regulating and, where necessary, prohibiting inward-processing arrangements. The EC also retains the right to adopt safeguard measures should a threat of market disruption arise. During the transition period import licenses for ACP sugar are to be retained for the exclusive use of full-time refiners. This situation will last until after the first three months of the 2009/10 marketing year. This implies that afterwards import licenses will be open to other operators. This is understood to be the EC’s intention, and will open up new ‘routes to market’ for ACP sugar suppliers. 1.2 Secondary impacts: the restructuring of the EU sugar industry An important secondary impact of the EU sugar-sector reform process is the restructuring response of European sugar companies, both within the EU and globally. Internally a process of cross-border industry consolidation is underway. Thus beyond the expansion of EU15 corporate players into new EU member states which had been taking place prior to reform, in the past three years major consolidations have taken place within the EU15 sugar sector. Thus Germany’s Nordzucker has purchased the sugar division of DANISCO, while Associated British Foods (ABF), the owners of British Sugar has agreed to buy the sugar operations of Ebro Puleva, Azucarera Ebro, which is currently ‘the leading supplier in the Iberian region with a 50% share of the market’. An additional dimension of the increased concentration of ownership that needs to be borne in mind is the tendency towards oligopolistic control, and the opportunities for abuse of a dominant market position that this could open up once prices in the sugar sector are marketdetermined (from October 2012). In this context the EC communication on food prices in Europe of November 10th 2008 would appear to have a certain relevance. 269 January 2009 Executive brief Sugar Amongst other things, this communication included specific proposals to:  promote competitiveness in the food-supply chain so as to increase resilience to price shocks;    ensure a vigorous and coherent enforcement of competition rules at national and EU levels; review potentially restrictive regulations at national and EU levels; establish a permanent European system for monitoring prices. Unless these proposals take appropriate form in the sugar sector once ACP price guarantees are removed, oligopolistic control of the EU sugar sector could lead to an abuse of a dominant market position by EU sugar businesses. The new patterns of trade in sugar within the EU, however, potentially open up new opportunities for ACP sugar exporters. These range from the possibility of supplying Zimbabwean sugar to Hungarian refineries to the supply of Illovo sugar via ABF to the newlybuilt Ebro Puleva refinery in Cadiz. These new trading patterns provide an interface between internal corporate restructuring and the global restructuring of EU corporate production and trading patterns in the sugar sector. The most notable international development affecting ACP producers has been the acquisition by ABF of a 51% share in the South African-based regional sugar-giant Illovo. This gives ABF a controlling share in 95% of the Zambian sugar sector, 100% of the Malawian sugar sector, and control of 45% of sugar production in Tanzania, 22% in Mozambique and 36% in Swaziland (as well as 33% in South Africa). Through Illovo, investments are also being made in sugar production elsewhere in Africa, most notably in Mali. ABF owns not only British Sugar (the major sugar supplier to the UK market and a major player in the Polish sugar sector) but also Billington, the leading supplier of unrefined cane sugar (including ‘organic’ cane sugar and ‘fair trade’ sugar) to the UK market, as well as the soon-to-be-acquired Azucarera Ebro in Spain. The benefits derived from these new trans-continental corporate relationships are a two-way street, with real advantages accruing to the Southern corporate partner in terms of increased ‘local’ knowledge of rapidly evolving and increasingly differentiated EU markets. Thus Illovo is not the only regional sugar company in southern Africa linking up with a European partner, as Tongaat-Hulett is reportedly seeking similar partnerships in order to facilitate its access to an evolving EU market. Other European sugar companies are also taking share holdings in ACP sugar sectors (including the French company Tereos in Mozambique, although its major overseas focus is in Brazil). These developments have potentially profound implications for the nature of the ACP-EU sugar trade, and specifically for how ACP countries market their sugar in the EU. This is particularly the case given the opening up of import-licensing arrangements that will take place in 2010 and the increased competition that is emerging, as corporate players seek to reposition themselves in a transformed EU sugar sector. 2. Beyond the sugar protocol 2.1 The denunciation of the sugar protocol On September 29th 2007 the EU Council of Ministers took the decision to unilaterally denounce the sugar protocol: The EC noted that ‘in the context of a reformed Community sugar market, the Community will cease to guarantee prices to European sugar producers as the former mechanism of intervention is being phased out’. It pointed out that ‘in the context of a transition towards liberalisation of ACP-EU trade, unlimited quantities cannot co-exist with the price and volume guarantees of the sugar protocol’. 270 January 2009 Executive brief Sugar In explaining the decision Commissioners Mandelson, Michel and Fischer Boel argued that the sugar protocol was not compatible with the proposed EPAs and ‘for the new arrangement to come into legal effect, our current arrangement for sugar must change’. The Commissioners further argued that the sugar protocol is ‘not compatible with the reform of the EU’s sugar regime, which is bringing an end to guaranteed prices for the EU’s own producers’. They argued that the EU ‘cannot justify paying guaranteed prices’ for ACP producers when ‘we are no longer guaranteeing prices for our own producers’. The Commissioners insisted that ‘the decision to end the sugar protocol cannot be presented as reneging on the development goals set out in the Cotonou Agreement’, since EPAs will ‘support ACP countries in building regional markets and, improving the competitiveness of their business development’, as well providing substantial assistance. They maintained that ‘safeguarding the benefits of the sugar protocol … does not necessarily mean preserving the protocol itself’, arguing that EPAs ‘will preserve the most important part of the protocol – namely ensuring preferential treatment in the EU market’. The September 2007 EU Council decision did not result in the immediate termination of the sugar protocol, but gave notice of its termination from October 1st 2009. The sugar protocol The sugar protocol entered into force with the adoption of the Lomé Convention in 1975, allowing 18 ACP sugar producers (Barbados, Belize, Congo, Côte d’Ivoire, Fiji, Guyana, Jamaica, Kenya, Madagascar, Malawi, Mauritius, Mozambique, St Kitts and Nevis, Swaziland, Tanzania, Trinidad and Tobago, Zambia and Zimbabwe) to export duty-free to the EU defined quotas of raw and white sugar at a guaranteed price. This price was negotiated every year and remained very close to the EU price, which has generally been substantially above the world price. ACP sugar exports to the EU contribute to a significant part of exports earnings, national income and employment for these sugar-dependent countries. Moreover they provide a large proportion of the population with a secure income and, through the sugar industry, various services (including health, education, housing, drainage, irrigation etc). Source: www.acpsugar.org 2.2 Transitional arrangements under EPAs Given the sensitivity of the sugar sector in the EU the principle of full duty-free, quota-free access, which underpinned the EU’s EPA market-access offers was qualified. This saw the establishment of a global ceiling for imports of sugar from ACP suppliers during a transitional period (to be enforced through safeguard measures if necessary) and the establishment of regional market-access arrangements within this framework. This has created a three-phase transition to duty-free, quota-free access for ACP sugar exports to the EU from October 2015.  Phase 1: (January 1st 2008-September 30th 2009): o continuation of the sugar protocol until September 30th 2009 with guaranteed prices equivalent to those obtained under the sugar protocol; o substantial improvement of LDC market access for marketing year 2008/09 through quantities additional to the quota foreseen under the ‘Everything but Arms’ initiative; o additional market access for ACP non-LDCs that are party to the sugar protocol; o initial market access for ACP non-LDCs that are not party to the sugar protocol.  Phase 2: (October 1st 2009-September 30th 2015) o free access for ACP sugar subject to an automatic volume-safeguard which would only be applied to ACP non-LDCs (however this would allow for a substantial increase of export levels); 271 o the automatic safeguard involves a ‘dual trigger’ and establishes a ceiling of 3.5 million tonnes of sugar imports from the ACP as a whole and the following ceilings for non-LDCs: 1.38 million tonnes in 2009/10; 1.45 million tonnes in 2010/11; 1.6 million tonnes from 2011/2012 season for the following four seasons. Once this ceiling has been reached safeguard measures involving a ban on further imports can be applied; January 2009 Executive brief Sugar o until September 2012, importers of ACP sugar would be required to pay not less than 90% of the reference price for the relevant marketing year. After 2012, a price information system based upon the current system would provide for transparency of the market; o for a limited number of processed agricultural products with high sugar content, an enhanced surveillance mechanism will be applied in order to prevent circumvention of the basic sugar-import regime.  Phase 3: from October 1st 2015: o ACP sugar would be duty-free, quota-free subject to a special safeguard clause. This could be based on the regular EPA safeguard, adjusted to take account of the sensitivity of sugar. This ACP-wide arrangement, which was designed to minimise market disruptions in the EU during the transitional period in the sugar sector, provided the framework for the region-specific sugar arrangements which have been established. Within this framework additional market access for ACP sugar in 2008/09 of 230,000 tonnes w.s.e. was set out in the December 2007 EPA-implementing regulation. The ‘additional’ quotas set out in the December 2007 regulation de facto replace the SPS/CQ access which was formally available to ACP countries. Only countries listed in the annex to the implementing regulation (Implementing Regulation (EC) No. 1528/2007, December 20th 2007), namely those countries which have initialled interim or comprehensive EPAs, are allowed to benefit from this additional quota allocation, which is split, with 150,000 tonnes allocated to non-LDCs and 80,000 tonnes allocated to LDCs. Across all EPA configurations between October 2009 and September 30th 2012 the price offered for ACP sugar will not be less than 90% of the EU reference price for the equivalent marketing year. All ACP sugar exports from October 2009 will be subjected to the application of the ‘dual trigger’ safeguard applicable to all ACP sugar exports. Summary of ‘additional’ regional quotas in the 2008/09 season (tonnes w.s.e.) Caribbean 60,000 SADC 50,000 EAC 15,000 ESA 75,000 Pacific 30,000 Total 230,000 While ACP LDC sugar suppliers will enjoy full duty-free, quota-free access to the EU sugar market under the EBA from October 2009 (subject to the overall safeguard ceilings established), many ACP non-LDC sugar exporters hope that the new EPA sugar arrangements will allow them to expand sugar exports substantially above current levels. Increased supplies from LDCs and certain non-LDC ACP suppliers could increase competition in supplying EU sugar refiners, with not all EU refiners able to afford to pay above the floor price, given their geographical locations and cost structures. There is thus likely to be an intensification of competition between ACP suppliers as price guarantees ‘soften’ from October 2009. However, this competition may not always be on the basis of price and could well be based on considerations of quality and reliability of supply. It needs to be recognised however that this could generate tensions in the management of the orderly marketing arrangements which have been established between ACP/LDC suppliers and European refiners. If these tensions are not managed, and orderly marketing arrangements are not maintained, then from October 2009 this could exert a further downward pressure on the prices offered by EU refiners for ACP raw sugar. 272 These pressures would only intensify from October 2012 when price guarantees will fall away and prices offered for ACP sugar become market related. 2.3 Regional specificities January 2009 Executive brief Sugar Under the comprehensive Caribbean-EU EPA during the first phase of the transition period in addition to the duty-free quotas enjoyed under the sugar protocol an ‘additional’ sugar quota of 60,000 tonnes is to be made available. This will be divided equally between traditional Caribbean sugar suppliers and the Dominican Republic. This represents an additional level of access slightly above the level enjoyed under the former special preferential sugar (SPS) arrangement (see the following table). ‘Traditional’ Caribbean duty-free access to the EU sugar market (tonnes w.s.e.) Country Barbados Belize Guyana Jamaica St Kitts & Nevis Trinidad & Tobago Sub-total Dominican Republic Total Sugar-protocol quotas 54,687.4 43,857.4 173,271.8 129,017.4 16,946.6 47,555.4 465,336.0 465,336.0 Traditional SPS access 2,841.2 4,985.2 19,181.8 15,931.7 1,831.3 5,592.2 50,363.4 50,363.4 ‘Additional’ quota (breakdown to be determined in the region) 30,000 30,000 60,000 Since half of this ‘additional’ allocation is to be allocated to a non-traditional supplier (Dominican Republic), this can be seen as a de facto reduction of access for traditional Caribbean sugar suppliers based on historical levels of preferential access granted (not necessarily recent levels of supply). This being stated, the move to ‘regionalisation’ of quotas means suppliers from within individual regions will have first call on meeting any regional shortfalls in supply. Thus any national shortfalls in supply in the Caribbean will be met from other Caribbean suppliers. This is significant given the decision taken in both Trinidad & Tobago and St Kitts & Nevis to discontinue sugar production for export to the EU and the reduction in national sugar production in Barbados. The ‘regionalisation’ of quotas will thus potentially allow a substantial expansion of sugar exports from the more competitive Caribbean raw-sugar suppliers (notably Guyana, Belize and the Dominican Republic). The Dominican Republic is probably the best placed to expand exports, with October 2008 press reports indicating two shipments of 12,000 tonnes and 20,000 tonnes having taken place. Sugar-industry sources in the Dominican Republic indicate that the Caribbean EPA arrangement is expected to ‘eventually triple the country’s sugar exports’. Transitional issues: the underlying competitive concern In the short term (up to October 2009) all ACP countries have an interest in maximising their sugar exports to the EU market. The reality is that for every 10,000 tonnes of sugar exported in the 2008/09 season rather than the 2009/10 season the extra revenue generated would be nearly €1.14 million. In short, with the value of preferential access to the EU market declining, all ACP exporters have an interest in maximising their short-term exports to the EU market (i.e. up to September 30th 2009). Under the SADC-EC interim EPA during the first phase of the transition period in addition to the duty-free quotas enjoyed under the sugar protocol an additional sugar quota of 20,000 tonnes is to be granted to Mozambique and an additional quota of 30,000 tonnes is to be allocated to Swaziland for the 2008/09 season. From October 2009 Mozambique as an LDC will enjoy full duty-free, quota-free access to the EU market under the EBA initiative. 273 Country Swaziland Sugar-protocol quota (tonnes) 117,844.5 Traditional SPS access (tonnes) 30,000.0 ‘Additional’ quota 30,000.0 January 2009 Executive brief Sugar For both Mozambique and Swaziland sugar exported under the additional quota in 2008/09 will benefit from the price paid for sugar-protocol sugars. The additional quota offered to Swaziland is equivalent to the former ‘quota’ enjoyed under the earlier SPS arrangement, but is substantially below the volume of sugar exported in recent years by Swaziland under the ‘complementary quantities’ arrangement (a combined quota for the 2008/09 period of a total of 158,092 tonnes compared to exports of over 180,000 tonnes in the 2006/07 season). In the context of the dual-trigger safeguard provision to be applied, and the commitment to redistributing any unutilised quotas in the Caribbean to neighbouring Caribbean suppliers, the danger exists for Swaziland that the application of the EC’s duty-free, quota-free arrangement in the sugar sector could result in a reduction in the level of duty-free access enjoyed in recent years. This will depend on the total level of EU sugar imports from ACP countries (both LDC and non-LDC) from October 2009 onwards and how the EC applies the safeguard provisions in practice. However it should be noted that in a Swazi context uncertainties in this regard could affect patterns of private-sector investment in sugar production and could furthermore affect the investment-location decisions with regard to value addition in the sugar value chain of major multinational sugar companies. Nevertheless the dynamism within the Swazi sugar sector and the awareness of emerging opportunities on EU markets could well see continued growth in the sector, particularly on the back of the ongoing investments in the Lower Usuthu Irrigation Project (LUSIP) scheme, to which the EC has devoted the majority of its programmed aid to Swaziland under the 8th and 9th EDFs. Under the East African Community (EAC)-EU interim EPA during the first phase of the transition period, in addition to the duty-free quotas enjoyed under the sugar protocol an ‘additional’ sugar quota of 15,000 tonnes is to be opened for marketing year 2008/09, with a guarantee of prices equivalent to those paid under the sugar protocol. Since Kenya is the only non-LDC member of the EAC configuration this provision would primarily benefit it, although the volume of additional access granted falls short of Kenyan aspirations. Country Kenya Tanzania Total Sugar-protocol Traditional SPS access ‘Additional’ quota (breakdown to be quota (tonnes) (tonnes) determined in the region) 0 11,023.4 10,186.1 2,485.9 10,186.1 13,509.3 15,000 Under the Eastern and Southern African (ESA)-EU interim EPA during the first phase of the transition period, in addition to the duty-free quotas enjoyed under the sugar protocol, an ‘additional’ sugar quota of 75,000 tonnes is to be opened for marketing year 2008/09, with a guarantee of prices equivalent to those paid under the sugar protocol. Given that Zambia subsequently initialled an interim EPA, it will be eligible for part of the additional quota allocated for 2008/09. However given a rainfall-affected harvest it is far from clear what impact this ‘new’ market access will have. What is clear is that Malawi will remain ineligible to access the additional quota allocated to ESA countries for 2008/09, so long as the government of Malawi does not initial an interim EPA. However, given that most Malawian exports can take place under the EBA or the old sugar-protocol arrangement (until October 2009), it is far from clear whether this will have any impact on actual exports, particularly given the short-term production difficulties that have been experienced (a 7.9% decline) in Malawi. 274 Country January 2009 Executive brief Sugar Madagascar Malawi Mauritius Zambia Zimbabwe Total Sugar-protocol quotas (tonnes) 10,760.0 20,824.4 491,030.0 0.0 30,224.8 552,839.2 Traditional SPS access (tonnes) 2,550.0 10,000.0 41,980.1 12,731.5 25,000.0 92,261.6 ‘Additional’ quota (breakdown to be determined in the region) 75,000 Under the Pacific-EC interim EPA during the first phase of the transition period in addition to the duty-free quotas enjoyed under the sugar protocol an ‘additional’ sugar quota of 30,000 tonnes is to be opened for marketing year 2008/09, with a guarantee of prices equivalent to those paid under the sugar protocol. Once again, given the production difficulties faced (sugar production has fallen from 301,000 tonnes in 2005 to 237,418 tonnes in 2007 and 207,768 tonnes in 2008), it is by no means clear that Fiji will be able to supply these increased volumes. However press reports indicate that plans are afoot to import 45,000 tonnes of sugar to meet domestic (32,000 tonnes) and regional market (13,000 tonnes) needs, in order to free up sugar for export to the EU. Despite these recent trends in production it was announced in May 2008 that the Fiji Sugar Corporation has concluded a deal with Tate & Lyle to supply 300,000 tonnes of sugar a year to the EU market up to 2015. Country Fiji Sugar-protocol quotas (tonnes) 165,348.3 Traditional SPS access (tonnes) 19,181.8 ‘Additional’ quota 30,000 3. The implications for the ACP 3.1 The nature of the fundamental change The reform of the EU sugar regime, the EU corporate response to these changes, the EU’s denunciation of the sugar protocol and the new EPA sugar-trade arrangements all have implications for the ACP. The process of EU sugar-sector reform and the denunciation of the sugar protocol in particular will fundamentally transform the market situation facing ACP sugar suppliers. Formerly ACP sugar suppliers benefited from:    country-specific quotas and immunity from safeguard measures; a high guaranteed price for the raw sugar supplied to a pre-determined set of processors; recourse to a buyer of last resort (EU intervention agencies), if no commercial buyer for their sugar could be found in the EU at the guaranteed price. Under the post-reform, post-sugar-protocol arrangement the following situation will prevail:  no country quotas will be allocated, but rather duty-free, quota-free access will be allowed (within safeguard ceilings) within a framework which envisages imports from ACP/LDCs of up to 3.5 million tonnes, in a context of a finite level of dedicated cane-sugar refining capacity and declining prices;  the high guaranteed price will be reduced by at least 36%, with the possibility of further price cuts between 2012 and 2015 being introduced;   the role of the EU intervention agencies as ‘buyers of last resort’ will be abolished; new avenues to the EU market for ACP-produced sugar will be opened up, through EU import-licensing arrangements from January 2010. 275 January 2009 Executive brief Sugar This will create a situation of increased competition between suppliers of raw cane sugar on the EU market in a context of:   a substantial decline in EU sugar prices;   finite dedicated cane-sugar refining capacity; rapidly escalating freight costs (freight charges tripled from 2002 to2006, although the global economic downturn has dramatically affected this trend); uncertain location and possible supplementary freight charges on supplies to former beet refiners. This will fundamentally change the economics of the ACP raw sugar trade with the EU. 3.2 Opening-up of EU import-licensing arrangements The decision to open up the EU import-licensing system to a wider range of importers will come into effect from January 2010. This will allow new routes to markets in the EU for ACP sugar suppliers, the full implications of which have not yet been assessed. One implication however will be that it will be possible to import increased volumes of direct-consumption raw sugar and increased volumes of speciality sugars. This opens up scope for the production of sugars in ACP countries to serve ‘luxury purchase’ components of the EU market (e.g. ‘organic’ sugars, ‘fair trade’ sugars and quality branded sugar products - e.g. ‘Plantation Reserve’ sugar from Barbados). However, export trends in these areas will depend on the rate at which these markets can be developed. The extent to which expansion of these ‘luxury purchase’ exports will be possible, the investment required and the potential sources of such investment, will all need to be carefully explored in the coming years by ACP governments and industry associations. Serving these markets, if significant market growth can be stimulated, will probably be easier for those ACP countries where EU firms play a dominant role in the sugar sector. The basis for this opening up of EU import-licensing arrangements is an issue which ACP governments should consider taking up in the framework of the comprehensive and interim EPAs, in order to ensure that licensing arrangements do not systematically discriminate against ACP operators with no corporate linkages directly into the EU market. Developments with regard to licensing arrangements need to be seen against the backdrop of EC projections of increased imports of sugar to the EU market. In February 2007 the EC included sugar in the annual survey of ‘Prospects for agricultural markets and income’ for the first time. This document sought to project the likely evolution of the EU’s production and trade situation in the sugar sector following on from the implementation of the agreed sugarsector reforms. It projected imports of sugar to rise from 3.0 million tonnes in 2005 to 3.8 million tonnes in 2007, to 4.2 million tonnes by 2009 and 4.4 million tonnes from 2010 onwards. (These projections were broadly reiterated in the EC’s July 2007 update of ‘Prospects for agricultural markets and incomes’, except for a reduction in projected imports of 100,000 tonnes in both 2008 and 2009.) Within these imports the EC is envisaging that a total 3.5 million tonnes of sugar will originate in the ACP group. Given the finite dedicated cane-sugar refining capacity in the EU and the emergence of new importers (and non-ACP exporters, notably Cambodia), the questions arise:   what will be the market impact of increased supplies and the emergence of new importers? will this strengthen the market position of ACP suppliers from 2010 onwards or will it weaken the market position of ACP suppliers? 276 This is a critical issue that needs more detailed investigation in the context of the implications of the denunciation of the sugar protocol and the associated abandonment of traditional commitments on price and ‘purchase into intervention’ which this entails. EU sugar-market projections 2003-2013 (EU27) (million tonnes) January 2009 Executive brief Sugar Year Net production 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 19.6 20.3 17.4 16.1 16.4 16.6 16.8 16.7 15.2 15.7 15.6 Net consumption of total biofuels 16.1 17.0 17.4 18.6 19.2 19.4 19.8 20.1 20.5 20.8 20.9 Imports Exports 3.2 3.0 3.0 3.4 4.1 4.2 4.4 4.4 4.4 4.4 4.4 4.9 6.7 1.3 1.3 1.3 1.3 1.3 1.3 0.9 0.7 0.3 Source: Extracted from table A.8, ‘Prospects for agricultural markets and income in the EU, 2007-2014’, EC Directorate-general for Agriculture and Rural Development, July 2007. http://ec.europa.eu/agriculture/publi/caprep/prospects2007a/fullrep.pdf 3.3 Future prices and the value of preferences The EC places considerable emphasis on the maintenance of preferential treatment on the EU market under EPAs, a feature which it argues was the most important part of the sugar protocol. However, from an ACP perspective the most important part of the sugar protocol relates not to the preferential access per se, but to the value of the preferential access granted. This value is being profoundly undermined by the process of sugar-sector reform, in line with the mainstream of CAP reform. This will reduce income on sugar exports to the EU by 36% over the four-year period up to the 2009/10 season. In addition EPA sugar arrangements have resulted in a substantial weakening of the price guarantees formerly granted to ACP suppliers. After October 2009 the only price guarantee is that 90% of the reference price will be paid. If supplies of sugar to the EU market increase, or internal surpluses emerge, a floor price of €301.5 per tonne could emerge, resulting in a further reduction in the price paid for ACP sugar. Thus under the new EPA arrangements prices offered for ACP raw sugar could fall by a further 10%, bringing the total price decline between 2006 and October 2009 to over 42%. From October 2012 even this price guarantee will disappear, with prices paid for ACP sugar becoming market-determined. Evolution of price guarantees for ACP sugar Raw sugar price €/tonne 2005/06 2006/07 2007/08 2008/09 €523.7 €496.8 €496.8 €448.8 2009/10 2010/11 2011/12 Not less than 90% of €335.0 Not less than 90% of €335.0 Not less than 90% of €335.0 From 2012/13 Marketrelated prices This level of price reduction will fundamentally affect the ability of certain ACP sugar suppliers to export sugar to the EU market profitably, particularly during periods of escalating input costs. Already some ACP countries find it unprofitable to produce for export to the EU and have discontinued sugar-cane production for export. Still other ACP countries will find it increasingly difficult to export profitably to the EU as sugar prices fall to 36% and even 42% below the prereform price level. 277 January 2009 Executive brief Sugar 3.4 The sugar sector and the 2013 round of CAP reforms The current reforms may not be the end of the sugar-sector reform process. In May 2008 Commissioner Fischer Boel warned sugar-industry representatives that ‘it is very unlikely that the sugar sector will be able to sit out’ the 2013 round of CAP reform. She indicated however that the nature of the treatment to be accorded the sugar sector under the 2013 round of CAP reform would be strongly influenced by the treatment of sugar in the WTO. This underlying reality is reinforced by the fact that the EU sugar sector is increasingly being integrated into the mainstream of the reformed CAP. In this context it should be noted that successive rounds of reform in other arable sectors have resulted in prices being reduced by fully 50% from the administratively determined levels by the time the reform process was completed. Factors driving a possible further round of EU sugar-price reductions There are five major factors suggesting that there will be a further round of EU sugar-price reductions in 2013:  The experience in other arable sectors where post-reform prices have typically been at about a half the pre-reform levels.  The implications of the commitment to the abolition of export refunds: with the EU sugar price at twice the world market price, this would place food products using sugar as a major input at a significant disadvantage on export markets.   The administrative difficulties of operating a two-tier pricing system.  The logic of CAP reform which is to shift assistance from price support to direct aid payments so as to allow EU prices to fall to around world market price levels. The structure of the April 4th 2007 EC market-access offer: the three-phase offer tabled by the EC grants full duty-free, quota-free access by 2015; this strongly implies that another round of sugarprice cuts will be introduced in 2013 and phased in up to 2015. A further factor influencing the treatment accorded to the sugar sector in 2013 will be the evolution of the euro/US dollar exchange rate. A weak US dollar would increase pressure for a further round of price reductions so as to close the gap between EU and world market sugar prices. A significant strengthening of the US dollar against the euro, while reducing pressure for a further round of EU sugar-price reductions, would also reduce US dollar-denominated earnings on sugar exported to the EU. Thus whichever way the euro/US dollar exchange rate goes ACP exporters can expect a reduction in their US dollar-denominated earnings on raw-sugar exports to the EU, given the need to close the gap between EU and world market prices. On the basis of currently projected cost structures only a small number of ACP sugar-protocol countries will be able to export to the EU market profitably should a further round of price reductions be introduced in 2013 (reaching 50% of the pre-reform price level). This includes Mozambique, Malawi, Zimbabwe, Swaziland and Zambia and would probably extend to the new LDC suppliers Sudan, Ethiopia, Mali and the new Caribbean supplier Dominican Republic (although the Sudan may prefer to supply newly established Gulf-state sugar refineries). Clearly both Belize and Guyana will need to make major cost savings if raw-sugar exports to the EU are to be maintained under such a scenario. This appears to be possible, as industry players are aware of the challenges faced, but securing investment funds and bringing about logistical and management improvements throughout the supply chain will be essential if long-term supplies to the EU market are to be maintained. 278 Sugar-protocol beneficiaries: costs of production and transport after restructuring to lower costs by 2009 - (€/t) January 2009 Executive brief Sugar Country Production Transport Total Pre-reform EU price Possible cost costs cost EU price 2010 2015 price Mozambique 141 68 209 523.7 335.00 261.85 Malawi 141 92 233 523.7 335.00 261.85 Zimbabwe 158 84 242 523.7 335.00 261.85 Swaziland 176 76 252 523.7 335.00 261.85 Zambia 141 116 257 523.7 335.00 261.85 Guyana 211 76 287 523.7 335.00 261.85 Mauritius 229 64 293 523.7 335.00 261.85 Belize 211 92 303 523.7 335.00 261.85 Fiji 229 80 309 523.7 335.00 261.85 Jamaica 264 56 320 523.7 335.00 261.85 Tanzania 211 120 331 523.7 335.00 261.85 Congo 229 104 333 523.7 335.00 261.85 Cote d’Ivoire 264 112 376 523.7 335.00 261.85 Kenya 264 120 384 523.7 335.00 261.85 Madagascar 317 80 397 523.7 335.00 261.85 Barbados 352 60 412 523.7 335.00 261.85 St Kitts 440 80 520 523.7 335.00 261.85 Trinidad 440 80 520 523.7 335.00 261.85 Source: Extrapolated from Table 8 of the Draft Report ‘Safeguarding the benefits of the ACP-EU Sugar Protocol in the context of the EPA negotiations’ (20/02/07). Countries in bold remain cost competitive suppliers even at a sugar price 50% of the pre- reform level. 3.5 The evolving situation in the LDCs Although the price reductions that are under way will limit the benefits gained by LDCs after the final introduction of full duty-free, quota-free access from October 2009, substantial investments have already been made in the sugar sector in a number of LDCs in preparation for this unlimited access. Two of the three major South African sugar companies, Illovo and Tongaat-Hulett, are playing a major role in this regard, not only in southern and eastern African LDCs (Mozambique, Malawi, Zambia and Tanzania), but also in west African LDCs such as Mali. (See also section 1.2.) This investment took place on the basis of the calculation by the investors of a guaranteed EU price which would yield around US cents 22 per lb up until 2012 (this was calculated at an exchange rate of around US$1.48: €1; however, a strengthening of the US dollar has seen the euro fall to US$ 1.25: €1, so that the yield would be only some US cents 18.7 per lb). However, this investment has not only stimulated an increase in production, but has also served to improve physical infrastructure and management capacity and reduce considerably unit costs. In this context it has served to off-set the financial impact of EU price reductions, particularly given the limitations which were formerly placed on LDC sugar exports to the EU. This investment has served to off-set the financial impact of EU price reductions, particularly given the limitations that were formerly placed on LDC sugar exports to the EU. Indeed, it could serve to effectively prepare these LDC suppliers to compete on the EU market beyond 2012, particularly given the ‘inside track’ to changing EU sugar markets that the new patterns of corporate ownership provide for sugar produced in Mozambique, Malawi, Zambia and Tanzania. 279 January 2009 Executive brief Sugar Beyond the activities of the major corporate players in investing in LDC sugar production, an expansion of sugar production is also under way in Uganda, Ethiopia and the Sudan. In the case of Sudan much of the investment is coming from the Gulf states, where major sugar-refining capacity has been or is being installed and where major sugar-using value-added food-product industries have been established (e.g. the UEA chocolates and sweets industry). The level of investment from the Gulf in the Sudan sugar sector is leading to talk of Sudan becoming the ‘new Brazil’ in terms of sugar production. Looking beyond the African LDCs, Tate & Lyle is developing strategic supply links with another non ACP LDC, Cambodia, (as well as redefining its relationship with Belize and Fiji). Beyond the LDCs, a multiplicity of non-traditional sugar suppliers are looking to the possibility of exploiting expanded MFN quota access to the EU market for the export of refined sugars. A dramatic period of change lies ahead for ACP sugar exporters that will require the adoption and effective implementation of pro-active, market-led, enterprise-based restructuring programmes. While in some LDCs this restructuring is private-sector-led, in others it is stateled. In the changing trading context with the EU it is clear that those LDC producers with corporate links into the EU market will find themselves better placed to profitably exploit the increasingly differentiated and complex EU markets than producers in LDCs that do not. 3.6 Regional knock-on effects of the EU sugar-sector reforms A further indirect impact of the agreed EU sugar-sector reforms relates to its impact on the functioning of regional sugar markets in the ACP, particularly in a major sugar-surplus region such as eastern and southern Africa. With EU sugar prices set to fall by 36% by October 2009 and possibly up to 42% in the subsequent months and years, and with freight charges on shipments to the EU having risen substantially until the onset of the global recession, it seems likely that in the coming years the EU market could well be less attractively priced than neighbouring regional sugar markets. In this context the questions arise:  what will be the knock-on effects, in terms of regional sugar prices, of the fall in the EU sugar price, as regional producers look for regional markets?  what would be the knock-on effects on regional sugar prices of a further EU sugar-price reduction beyond October 2012, when prices paid for ACP sugar are to be market-related?  what implications does this carry for intra-regional trade arrangements in sugar and sugarcontaining food products (including with regard to rules of origin) in ACP regions? In some ACP regions the very real danger exists that sugar which currently goes to the highpriced EU market will be re-directed to regional markets (particularly if shipping freight charges resume their previous upward trend). If this occurs on a large scale this could undermine national sugar prices. This could even lead to serious trade disputes, as some regional partners seek to make extensive use of protectionist safeguard measures. Thus a key challenge facing ACP sugar industries in the coming period will be how to raise regional demand for regionally produced sugar and sugar-containing products, while maintaining the value of regional sugar markets, in the face of the changed price conditions for exports to the EU market and the enhanced EU export-price competitiveness of sugarcontaining value-added products. Careful consideration will need to be given to this question in terms of the policies set in place nationally, regionally and inter-regionally. 280 January 2009 Executive brief Sugar 3.7 The question of reciprocity for sugar-containing food products Linked to the foregoing issue is the question of the trade treatment to be accorded to sugar and sugar-containing food products under EPAs. With EU sugar prices set to decline by 36% by 2009/10, and possibly more subsequently, the raw-material costs of EU sugar-containing foodand-drink products will fall sharply. As the USDA has pointed out in the case of Poland, ‘less expensive sugar will permit Polish food-processing companies to better compete locally and in export markets’, since in sectors such as soft drinks and sweets, sugar accounts for 30 to 50% of production costs. The impact of EU sugar-sector reforms on the price competitiveness of EU exports of sugar-containing products both directly and via the increased volume of exports which can be financed within WTO financial ceilings on the use of export refunds (€415 million per annum) will require careful evaluation in low-cost ACP sugar-producing countries, seeking to develop sugar-based value-added processing for national and regional markets. It is vital that regional industrial demand for regionally produced sugar be raised given the profound changes taking place on the EU market and the prospect of a further round of sugarsector reform in 2013. The competitive challenge from EU exports of high-sugar-content value-added food products also needs to be seen against the back-drop of the little noted EU reform provisions dealing with the use of non-quota sugar in the chemical and pharmaceutical industries. These provisions will serve to free up funds within the ‘non-annex 1’ budget, currently deployed in support of chemical and pharmaceutical exports, for deployment in support of exports of sugar-containing value-added food products. This competitive challenge also needs to be seen against the back-drop of the ‘offensive’ interests in free-trade-area negotiations identified by EU exporters during the June 25th 2007 symposium on ‘EU agri-food export interests’. During this symposium the EU Association of Biscuit and Confectionery Industries (CAOBISCO) called for efforts to secure a reduction in applied tariffs on CAOBISCO products in non-EU markets, either via the WTO or bilateral agreements, and for a sustained effort to remove non-tariff barriers and simplify rules of origin under bilateral agreements. In its presentation, the Confederation of Food and Drinks Industries (CIAA) specifically spoke of its offensive interests towards South Africa, identifying specific interests in: beverages; chocolate; biscuits; and food preparations. These are all areas where strong growth in EU exports has already been occurring (beverages + 72.1% from 1996 to 2005; chocolates + 38.0%; biscuits + 38.6%; food preparations + 106.5%) and all areas where sugar can constitute a significant input into the production process. Thus, in at least the southern African region, EU exporters would appear to have real and clearly articulated export interests. Given the nature of the southern African regional trading system the implications of this EU corporate interest could extend far into the ESAEPA configuration. 4 Preparing for further EU sugar-sector reforms 4.1 Breaking down the problem With the prospect of further EU reductions in the price paid for ACP raw sugar from October 2012, with or without a further round of sugar-sector reform in 2013, ACP sugar exporters need to start preparing for the market-price effects of such a policy development. Overall, on the basis of the various experiences to date, there appear to be four levels of response to the challenges posed by EU sugar-sector reforms and the radical transformation of the basis for ACP-EU sugar-sector trade relations.  Abandoning sugar sales to the EU market or ceasing sugar production altogether (no consideration is given to this option here); 281   the introduction of cost-reduction measures, including the off-loading of social costs;  adaptation to changes in sugar-market conditions. the opening up of new revenue streams from sugar-cane production (including movement up the value chain); January 2009 Executive brief Sugar 4.2 Reducing costs Even prior to the announcement of EU sugar-sector reforms some ACP sugar sectors with government support had begun initiating comprehensive reform programmes (notably Mauritius). In other ACP countries as early as 2002 private-sector companies began initiating restructuring programmes to reduce costs and off-load social expenditures. Successes in this regard have included innovations in electricity co-generation which have succeeded in eliminating coal purchases for electricity generation as a cost item. While reducing costs is essentially an issue for ACP farmers and sugar-sector companies, there is both scope and need for public-sector support to promote and ‘pump prime’ this process of cost reduction. This public-sector support can be deployed at three levels:  general infrastructure and public-amenity provision to reduce operational costs of production and transportation;  the provision from the public purse of social, health and education infrastructure previously funded from sugar-industry revenues;  ‘pump priming’ support for improvements in agricultural productivity and yields (particularly in smallholder-based farming systems) and for the promotion of the adoption of innovation at the processing level (possibly through the mobilisation of low-cost loans). The extent to which public authorities in ACP countries can take up more responsibilities in these areas varies. Various forms of public-private partnerships are likely to be required. This poses problems in some countries for the extension of EC support to these processes. Greater clarity is needed on how EC-provided public assistance can be extended to operational activities implemented through private-sector bodies, in those instances where this provides a more efficient and effective mechanism for the delivery of support than the use of public-sector bodies. 4.3 Opening up new revenue streams The opening up of new revenue streams from sugar-cane production has been recognised as potentially playing a critical role in reducing the dependence of ACP exporters on the price obtained from raw-sugar exports to the EU market, and many ACP sugar companies and a multiplicity of private-sector initiatives have been launched. Some companies have begun alcohol production, with some of them generating up to one-third of their total profits thereby. Other companies are looking to the co-generation of electricity for sale to the national grid or to develop bio-ethanol production for local markets and even exports to the EU. It is often assumed that supporting such innovations will automatically benefit both millers and sugar-cane growers, but this is by no means a certainty, so a case can be made for the deployment of public funding in support of the development and adoption of innovations which open up new revenue streams, with the specific intent of ensuring that sugar-cane growers also share in the resulting revenue. In terms of moving up the value chain this needs to involve the targeting of national and regional markets as well as EU markets. This is of course closely linked to the market effects and consequences of EU policy changes. 282 January 2009 Executive brief Sugar What is clear is that while the reference price for raw sugar is set to decline dramatically, prices of white sugar and other speciality sugar products are likely to be less severely affected. This will require assistance to be extended to ACP sugar producers in developing production to serve these high-value markets. While investments are occurring in making this transition in some ACP countries, on the basis of either government-supported restructuring programmes or changing corporate investment patterns, it is proving difficult in other countries to mobilise such financing, given the uncertainties created by the process of EU sugar reform. These uncertainties are leading private financial institutions to increase the cost of financing for sugar-related investments in the ESA region, as the perception of the risks associated with sugar-sector investments change. There thus appears to be a need for targeted investment-support instruments (notably low-cost loan facilities) to provide financing to assist ACP sugar sectors in moving up the sugar value chain. 4.4 Adapting to changing market conditions In terms of adapting to changing market conditions once again some ACP companies have proved highly innovative. The EU market for sugars is becoming increasingly differentiated, with this differentiation taking on greater and greater commercial significance. In response in the Caribbean, some producers are adopting new innovative ways of marketing high-quality sugar into the ‘luxury purchase’ component of the EU market. The retail price of these new speciality sugars can reach the equivalent of €9,000 per tonne. In this particular case care has been taken to structure this trade in ways which enable the exporter to gain part of the margins at the wholesale level. However, these private-sector-led innovations in ACP countries are the exception rather than the rule. Particular efforts will therefore need to be made in assisting ACP producers in developing and serving ‘luxury purchase’ components of the EU market. Two notable components in this regard are the ‘fair trade’ market and the ‘organic’ market. The economic significance of such markets should not be underestimated in a context of declining EU raw-sugar prices. This can be illustrated by consideration of the ‘fair trade’ sugar market. The ‘fair trade’ premium, which is paid directly to certified ‘fair trade’ sugar producers associations, is US$60 per tonne, an amount equivalent in some southern and eastern African countries to around 30% of the sucrose price paid to smallholder sugar farmers. The significance of this premium will increase over time as EU raw-sugar prices decline. A major development in the expansion of the ‘fair trade’ market in the UK came with the announcement by Tate & Lyle on February 23rd 2008 of its decision to convert its granulated white cane-sugar brand to ‘fair trade’ sugar by the end of 2009. Plans are afoot to convert a further 22 products to the ‘fair trade’ label, until 100% of Tate & Lyle’s retail cane-sugar range is ‘fair trade’. Not surprisingly, given Tate & Lyle’s position on the UK sugar market, this move has been described as ‘the biggest ever “fair trade” switch by a UK company’. There are even discussions on Tate & Lyle converting part of its industrial sugar to the ‘fair trade’ label. The immediate ACP beneficiary of this move is Belize, where the plan is to buy between 50,000 and 100,000 tonnes in the first year, paying a premium of US$60 per tonne, benefiting some 6,000 smallholder farmers. However the full acquisition of the benefits of this Tate & Lyle conversion to ‘fair trade’ assumes that:    existing producer associations can secure certification as ‘fair trade’ producers; the efficiency of the supply chain from field to mill can be enhanced; necessary investment in mill modernisation to reduce milling costs can be mobilised. 283 January 2009 Executive brief Sugar None of these pre-requisites are assured by the simple act of converting to ‘fair trade’ supply. Complementary actions and investments are required if the new market opportunities are to be exploited in the context of the broader evolution of the EU sugar market. Part of that broader evolution is the increased competition between EU sugar companies and the strategic re-positioning of each company in both its national market and with regard to other EU markets, which is consequently taking place. The entry of EU sugar companies into the field of ‘fair trade’ is thus far from a philanthropic exercise. It will still require hard commercial negotiations by ACP suppliers to ensure that the new arrangements bring the intended benefits and do not simply ‘cushion’ the production consequences of price reductions stemming from the process of sugar-sector reform. Assistance may well be needed to strengthen ACP commercial negotiating capacities in this regard in the era beyond price guarantees for ACP suppliers which is rapidly approaching. There is clearly a role for public aid in ‘pump priming’ market-adjustment processes. However, there is a need to define this role carefully and to establish operationally effective instruments for its realisation. 4.5 Reviewing the role of EU restructuring support While it is not within the scope of this executive brief to provide an overall assessment of the EU’s sugar-protocol accompanying measures (SPAM) programme, the potential importance of this programme warrants some brief comments and observations. Under the SPAM programme the EC is scheduled to deploy some €1.244 billion in assistance over the period from 2006 to 2013 to the benefit of former sugar-protocol beneficiary countries. These funds are programmed at the national level through multi-annual indicative programmes and operationalised through annual action plans. Mobilising these funds to support market-led enterprise-based production and trade adjustments in former sugar-protocol beneficiary countries would appear to be an urgent priority. To date however the programme has been criticised by ACP sugar sectors for the slowness of disbursements, the complexity of its procedures and lack of focus on core marketrelated sugar-sector issues. In this context ensuring swift and effective deployment of EU assistance in support of market-led, time-sensitive adjustment processes remains a major unresolved issue in ACP-EU sugar-sector relations. Of the multiplicity of difficulties faced under this programme a number can be highlighted in terms of the production- and trade-adjustment needs of ACP sugar sectors. The first relates to the time-sensitive nature of the adjustment processes under way in ACP former sugar-protocol countries. With the process of EU price reductions approaching completion the delivery of assistance on the ground in support of cost-reducing measures and revenue enhancement and diversification is extremely ‘time sensitive’. The contrast in the experience of restructuring support internally within the EU and externally in the ACP is striking. Whereas on July 3rd 2008 it was announced that €52 million in restructuring support to Irish sugar farmers and milling companies had now been fully disbursed, on July 16th 2008 it was announced that a €6.5m, sixyear programme of support for the restructuring of the Tanzanian sugar sector, intended to enhance its competitiveness in preparation for the effects of EU price reductions, had only just been approved. Speeding up the delivery of assistance on the ground can thus be seen as a critically important issue. 284 The frame of reference for the resolution of this policy issue should increasingly be the EU’s own internal practice with regard to the extension of public support to agricultural restructuring to meet the competitiveness challenges faced in a context of global trade liberalisation, rather than the EU’s traditional development-cooperation approach. In this context it remains to be seen whether, despite the best efforts of all concerned, the EC’s current sugar-protocol-accompanying-measures programme will be able to provide the support required in time. January 2009 Executive brief Sugar Closely linked to this is the need to identify more clearly the precise measures and programmes of assistance for production and trade adjustment to be supported and precisely what kind of assistance can be extended to private-sector-based and market-led adjustment processes. This is a fundamental issue which needs to be addressed, namely under what terms and conditions can EC aid be used to support production and trade-adjustment measures implemented through private-sector bodies. It is vitally important that this issue be addressed up-front if extensive delays in programming and aid deployment are to be avoided and if interventions are to be relevant to the production- and trade-adjustment challenges faced. 285 Executive brief December 2008 Executive brief Cotton Cotton Table of contents 1. The international cotton market __________________________________________ 289 1.1 Production _______________________________________________________________ 289 2.2 Consumption _____________________________________________________________ 291 2.3 Trade flows_______________________________________________________________ 292 December 2008 2.4 Price and quality trends ______________________________________________________ 293 2. The EU’s cotton policy _________________________________________________ 294 2.1 Production support_________________________________________________________ 294 2.2 The EU trade regime _______________________________________________________ 295 3. African cotton production in the face of the support programmes of developed countries _______________________________________________________________ 295 4. Cotton and the WTO ___________________________________________________ 296 4.1 The Brazilian complaint _____________________________________________________ 296 4.2 The cotton initiative ________________________________________________________ 297 4.3 Recent developments _______________________________________________________ 298 4.4 Opposing positions, preventing any global agreement_______________________________ 298 5. The cotton action plan _________________________________________________ 299 6. Cotton and the EPA negotiations ________________________________________ 300 7. Fair trade, a system for the future?________________________________________ 301 7.1 The general principles of fair trade _____________________________________________ 301 7.2 ‘Fair trade’ cotton __________________________________________________________ 301 7.3 The limits of fair trade cotton _________________________________________________ 302 287 Summary December 2008 Executive brief Cotton European cotton production is concentrated in four member states (Greece, Spain, Bulgaria and Portugal) and supported by direct aids. The reform of European cotton policy, initially applied in 2004, was cancelled by the European Court of Justice and is currently being revised. As a result of further reform introduced in 2008 the majority of subsidies have been decoupled and crop areas limited. Access to the EU market is free for cotton fibre, irrespective of the country of origin. Although 27 ACP countries produce cotton, they represent only 4.2% of world production. Only west African countries can be considered as substantial producers; they accounted for approximately 3% of world production and 7.5% of cotton exported in 2008. The ACP countries are very dependent on the world market since they export almost all their cotton-fibre production. After China and India, the USA is the third largest cotton producer in the world, but a very long way behind the leading exporters. Its cotton production is strongly supported, which tends to push world prices downwards and this issue has been at the centre of numerous discussions within the WTO. US cotton policy was ruled definitively contrary to the WTO rules in 2008 following a complaint from Brazil. Although the USA has suspended its export supports since mid-2006, the current reform of its agricultural policy is unlikely to reduce support to the cotton sector. Nevertheless, as a result of higher prices for most agricultural foodstuffs, competition has increased on land previously used for cotton growing, resulting in a foreseeable reduction in both the areas farmed and production in 2008. The price began to increase and analysts are predicting that it will continue to increase in 2009. However, price movements at the end of 2008 seem to suggest that the price will fall. In 2004, the EU adopted an action plan comprising a series of measures for cotton in favour of producers in African countries. In the same year, an initiative for the development of fair cotton was launched. However, the cotton sector in African countries has been seriously damaged by several years of very low prices and by the disruption of production in certain countries following the privatisation of national companies with responsibility for the cotton sector. 288 1. The international cotton market The fruit of the cotton plant is a seed covered with long strands. It is known as cotton-seed. Ginning in mills enables the cotton-fibre to be separated from the cotton-seed (from which oil is extracted). International trade is based on uncarded and uncombed cotton fibre. The different processing stages produce carded and combed cotton, yarn, weaves and then textiles. December 2008 Executive brief Cotton 1.1 Production In 2007/2008, world production of cotton fibre amounted to approximately 24.4 million tonnes, down from 26.2 million tonnes during the previous year (USDA). It is dominated by China, which represents more than a quarter of world production, and India (20% of production), followed by the US (12%), Pakistan (8%), Uzbekistan and Brazil (5% each) and the African countries of the franc zone, which together account for 3% of world production. The EU represents only 1% of production. World cotton production more than doubled between 1960 and 2008, growing from just under 10 million tonnes to almost 25 million tonnes. Countries producing more than 100,000 tonnes of cotton represent, depending on the year, around 90% of world production. Since 1960, certain countries have been constantly in this category, such as China, the USA, India and Pakistan, which together now produce almost 70% of world cotton production. On the other hand, other major cotton-producing counties, such as Mexico and Peru, have gradually ceased production. Finally, new market entrants have emerged, such as the EU and sub-Saharan countries (Côte d’Ivoire, Mali, Burkina Faso, Zimbabwe). The fall in production noted during the 2007/2008 season was due above all to competition from other crops on land dedicated to cotton, in particular in the USA where a substantial part of the land was sowed with maize, because maize prices were high in 2007 as a result of the subsidies paid for its transformation into biofuels. The other explanation for the fall in production lies in the ongoing decline in cotton prices since 2000, which has encouraged farmers to diversify their production and even to turn to other types of speculation. This phenomenon is sensitive in sub-Saharan Africa where production has declined since 2005. In total, the deficit between production and consumption is around 3 million tonnes, which has resulted in a decline in world stocks. 289 Countries producing more than 100,000 tonnes of cotton a year (000’ tonnes) 1960 Country 1980 Production Argentina 124 % of world production 2000 Production % of world production 1.3 December 2008 Executive brief Cotton Australia Brazil 425 4.3 594 4.3 2008 Production % of world production 1,067 10.9 Colombia Côte d’Ivoire Egypt 2 700 19.6 116 0.8 % of world production 165 0.9 185 0.8 806 4.2 261 1.1 939 4.9 1,393 5.7 125 0.5 Benin Burkina Faso China Production 114 0.6 207 0.8 4 420 22.8 7,729 31.6 125 0.6 1 125 0.5 478 4.9 529 3.8 200 US 3,100 31.6 2,422 17.5 3,742 19.3 3,015 12.3 India 1,022 10.4 1,322 9.6 2,380 12.3 5,534 22.7 160 0.8 101 0.4 100 0.4 148 0.6 5 1,110 4.5 1,785 9.2 1,960 8.0 365 1.9 218 0.9 106 0.5 114 0.5 125 0.5 Iran Kazakhstan Mali Mexico 105 457 4.7 347 0.5 2.5 Uzbekistan 958 Pakistan 304 3.1 714 5.2 Peru 121 1.2 109 0.8 Sudan 114 1.2 Syria 111 1.1 118 0.9 Tajikistan Tanzania Turkey Turkmenistan EU Russia 169 1.7 140 1,481 15.1 500 3.6 175 1.3 2,700 19.6 Zimbabwe Rest of the world Total world 784 4.1 501 2.1 180 0.9 283 1.2 525 2.7 271 1.1 120 0.6 125 0.5 699 8.6 1,514 11 1,449 7.5 792 3.2 9,812 100 13,800 100 19,345 100 24,422 100 Source: USDA Although 27 ACP countries produce cotton (all African, except for Haiti and the Dominican Republic, whose production is very small), 12 of them represent 90% of ACP production. The WCA countries as a whole account for more than 70% of ACP production and Tanzania, Zimbabwe and Zambia 25%. In ACP countries as a whole cotton production developed strongly from the mid-1980s. 290 December 2008 Executive brief Cotton Production of ACP countries (thousand tonnes) Country Burkina Faso Benin Tanzania Zimbabwe Mali Nigeria Cameroon 1960 1965 3 34 57 11 Côte d’Ivoire Zambia Chad Sudan Togo Total 35 114 405 3 67 9 8 44 21 4 31 163 3 527 1970 1975 8 18 14 76 32 20 39 14 12 4 34 25 2 735 8 42 58 37 61 17 26 1 63 111 4 578 1980 1985 23 46 4 53 70 43 27 32 56 8 31 97 9 548 32 31 89 67 10 46 82 12 39 142 27 726 1990 77 1995 64 2000 114 2005 299 2007 288 2008 207 59 145 48 82 73 104 115 169 36 100 44 79 116 96 25 16 60 62 83 107 41 44 884 1,206 139 41 120 105 87 94 125 29 65 74 49 1,176 131 120 76 250 91 125 12 76 76 81 50 1,654 109 125 103 125 123 125 201 100 87 98 87 65 82 54 54 41 71 38 71 35 22 27 1,449 1,040 Source: USDA 2.2 Consumption The main cotton consumers are the main textile producers of the developing countries. China is by far the leading cotton-consuming country with consumption more than doubling between 2000 and 2008 because since the end of the Multifibre Arrangement it can export without restriction to the US and the EU. It is followed by India, Pakistan, and Turkey; the USA remains in fifth place, but with constantly declining consumption levels since 2000. Main cotton-consuming countries (thousand tonnes) China India Pakistan Turkey Brazil USA Bangladesh Indonesia Thailand Mexico EU Russia Total world 1990 4,355 1,951 1,251 547 723 1,823 98 336 328 197 1,221 1,191 18,658 1995 4,126 2,558 1,573 950 818 2,324 121 476 310 246 1,150 250 18,588 2000 4,997 2,949 1,769 1,125 876 1,824 218 544 367 463 983 348 19,824 2005 9,036 3,701 2,564 1,535 849 1,306 393 512 479 441 550 327 24,768 2007 11,376 3,984 2,700 1,350 1,002 1,002 599 484 419 435 380 283 26,959 Source: USDA Within the ACP countries as a whole, cotton-producing and -consuming countries are not the same. In all, ACP countries consume less than a quarter of their production. The seven main cotton-consuming countries are, in descending order of consumption, Nigeria, Zimbabwe, Zambia, Mauritius, Ethiopia, Kenya and Côte d’Ivoire. Together they represent three-quarters of the cotton-fibre consumption of the ACP countries. Only two of them, Nigeria and Côte d’Ivoire, appear among the leading ACP cotton producers. 291 2.3 Trade flows December 2008 Executive brief Cotton Not surprisingly, the main cotton-importing countries are developing countries that have an important textile industry. In 2005, China, Indonesia, Pakistan and Turkey accounted for more than half of world imports. Chinese imports can vary considerably from one year to the next, depending on the country’s needs and production. However, the boom in the Chinese textile industry, driven by the dismantling of the Multifibre Arrangement, on January 1st 2005, resulted in an increase in Chinese demand. Main cotton-importing countries (thousand tonnes) 1990 1995 2000 2005 2007 2008 China 480 633 50 3,592 2,510 2,830 Turkey 46 113 383 751 697 718 27 980 370 827 697 80 105 218 381 610 654 Indonesia 324 466 577 501 501 501 Thailand 354 336 342 468 420 425 1,086 1,039 847 455 324 344 46 115 406 305 333 294 1,152 240 359 327 278 261 Taiwan 322 300 226 267 229 218 Vietnam 44 351 87 152 207 218 443 362 309 267 212 212 19 341 174 98 174 Pakistan Bangladesh EU Mexico Russia Korea India Japan 642 330 248 158 126 120 Egypt 53 20 28 125 120 109 6,658 5,878 5,707 9,143 8,352 8,854 Total world Source: USDA The USA is by a very long way the world’s main exporter (more than one-third of world exports in 2005), followed by India and Uzbekistan. Western and central African countries together are the world’s third largest exporter. Main world exporters (thousand tonnes) USA India Uzbekistan West and central Africa Brazil Australia EU Total world 1990 1,697 154 1,174 339 156 299 154 6,436 Source: USDA 292 1995 1,671 123 985 496 22 319 372 5,957 2000 1,467 20 751 586 69 850 399 5,747 2005 3,571 392 969 887 435 642 428 9,022 2007 2,973 1,568 969 894 486 265 290 8,443 2.4 Price and quality trends As with the prices of numerous other agricultural raw products, world cotton prices have been unstable and trending downwards up to 2007, before rising in 2008. From the second half of 2007, prices started rising, in particular as a result of the pressure of other crops (whose prices were increasing) on land dedicated to cotton. December 2008 Executive brief Cotton Price of the fibre in USD and FCFA (100=January 2001) Source: Berti 2007, from Bellocq et Sylve 2007. Cotton prices are measured by the Cotlook A and B indexes. The Cotlook A index takes account of the average of the cheapest five quotations from a selection of the main upland cottons traded internationally (19 origins). The prices are cif cash against documents on arrival of a vessel at a far-east port (Thailand, Indonesia, China, etc). For west African producers in the CFA franc zone, it is necessary to emphasise that the impact of higher international prices between the second half of 2007 and the first half of 2008 were limited, for two reasons: first, the increase was relatively weak compared with those noted for other crops (for example cereals) and, secondly, the dollar’s weakness against the euro (and therefore against the CFA franc) more or less cancelled out the increase in cotton prices on the world market (see chart above). This depreciation of the dollar even resulted in a fall in the price paid to producers (in Burkina Faso, from €0.32 in 2004/2005 to € 0.22 for 2007/2008, i.e. a decrease of more than 30%), whereas the price of inputs increased alongside oil prices. As a result, producers and cotton companies find themselves in a difficult position, with an uncertain outcome. Even those with the highest sales, such as Sofitex in Burkina Faso, are unable to cope with the fall in prices and the 2007-2008 growing season is likely to be very difficult. The high price levels of inputs during the 2008 season (linked to oil prices) considerably limited the procurement levels of national companies, as in Mali, thereby encouraging producers to turn to other crops that are less demanding in terms of fertiliser requirement. As a result, between the 2006/2007 and 2007/2008 seasons, production in Mali fell by half, according to the FAPRI figures. The most recent price changes show a strong fall in prices in autumn 2008. According to the USDA, international prices quoted in US dollars fell by more than 20% between September and November 2008, as a result of a strong decline in Chinese imports. The quality criteria for cotton fibres are generally based on the criteria used in the USA, namely the colour (from white to yellowish), purity (absence of visible waste, such as leaves) and length of the fibre (length, uniformity and resistance). African cotton tends to be considered as good quality, regular cotton, in particular thanks to the length of the cotton fibre. However, it has been criticised in recent years for colour defects. 293 2. The EU’s cotton policy 2.1 Production support From 1981 to 2003 December 2008 Executive brief Cotton The EU cotton regime was put in place in 1981 when Greece joined the European Economic Community. The accession of Spain and Portugal in 1986, and of Bulgaria in 2007 enlarged the number of countries covered by the WTO agreement on cotton. Aid was paid to cotton ginners on condition that cotton producers benefited from a minimum price per tonne of cotton seeds. This system made it possible to protect producers from variations in world prices while enabling companies to sell cotton fibre at the international price. The aid per tonne of cotton seeds was equal to the difference between the guide price (fixed every year) and the world market price. The payment of aid was limited to a maximum guaranteed quantity (MGQ) set annually. If the MGQ was exceeded, the guide price fell (by 1% per tranche of 15,000 tonnes of MGQ overrun). The Community MGQ was increased at the time of the accession of Spain and Portugal to 752,000 tonnes (compared with 567,000 tonnes previously). The MGQ was systematically exceeded between 1986 and 1991 (up to 1,200,000 tonnes produced in the EU). From 1987, a guide price cut-off system was introduced to protect growers from the risk of very big falls in the minimum price. The original cut-off was 15% but this was increased over time to 25%. However, all in all MGQ overruns led to reductions in the price paid to growers of up to 25%. In 1992, the EU cotton regime was modified: the annual fixing of the MGQ was abandoned, the method used for calculating the guide-price reduction was modified, which did not prevent regular MGQ overruns. From 1995, the EU MGQ was increased to 1,031,000 tonnes and the guide and minimum prices were reduced. The guide price was set at €1,063 per tonne for cotton seeds and the minimum price at €1,009.90 per tonne. In addition, the MGQ was divided between cotton-producing countries to make each member state aware of its responsibilities. As production continued to increase, while the world price was falling, budget expenditure exceeded the ceiling. With effect from 2001, the mechanisms for reducing prices paid to growers were made more stringent. In addition, member states were given the possibility to introduce agri-environmental criteria to limit the areas eligible for cotton aid. However, such systems did not achieve the desired effect of controlling cotton production. The abortive 2004 reform The EU cotton policy was reformed in 2004, on the basis of the general reform of the common agricultural policy adopted in June 2003. On April 22nd 2004, CAP reform was extended to the cotton sector, so as to combine aids that did not distort trade (‘green box’) with those with minimally trade-distorting effects (‘blue box’). The reform came into force on January 1st 2005. This 2004 reform was challenged by the Spanish government and cancelled by the Court of Justice of the European Communities in September 2006. The Court did not call into question the approach followed by the reform (modification of the aid regime), but considered that the Commission should have carried out an impact study including labour costs in the calculation of production costs and assessed the effects of the reform on local ginners. It therefore called for a new regulation to be prepared and adopted within a reasonable period of time. The EC launched a public consultation on the EU’s cotton policy which resulted in a reform of the sector in 2008. This reform provides for the decoupling of 65% of aids to producers, the remainder continuing to be linked to production, and fixes a ceiling per country for areas eligible for aids (370,000 ha for Greece, 48,000 ha for Spain). In addition, it includes a €10 million restructuring plan for the cotton sector to finance investments and the dismantling of ginning installations, as well as quality measures. 294 2.2 The EU trade regime December 2008 Executive brief Cotton Cotton fibre (HS 5201, 5202 and 5203 codes) enters the EU free of duty, irrespective of the country of origin. Neither the ACP nor LDC countries benefit from preferential conditions from the EU. In order to protect its textile industries, the EU uses tariff escalation. Whereas raw materials entering Europe are exempt from customs duties, the greater the degree of transformation the higher the customs duties. Thus, textiles are taxed at an average rate of 6.5% when entering the territory and clothes are taxed at 11.5% (WTO, World Tariff Profiles, 2008). The tariff escalation applied by the EU helps to maintain the situation whereby countries of the South are exporters of raw materials and prevents the development of transformation activities in the place of production. 3. African cotton production in the face of the support programmes of developed countries Cotton plays an essential role in certain African economies, in particular in west Africa for Benin, Burkina Faso and Mali. Share of cotton in exports from African countries (as a % of the value of total exports) 1990-1991 % 2000-2001 % 2005-2006 % Benin Burkina Faso Mali Tanzania 52.4 59.7 61.9 18.41 66.7 56.6 38.1 6.89 61 61 16.5% 6.52 Togo Cameroon Zimbabwe Zambia Côte d’Ivoire Chad* 21.3 3.3 5.01 0.28 5.3 85.9 15.6 4.6 8.25 0.66 4.1 75.6 5 4.5 3.41 3.38 2 1.6 Central African Republic 10.3 12.3 <1 * Between 2001 and 2005, Chad’s total exports by value increased 16-fold, linked with the start of oil drilling in 2003, while the value of cotton exports was more or less unchanged. Source: FAOSTAT, 2008 As the vast majority of their production is exported (percentage of exports reaching for some countries more than 60% of national exports), these economies are particularly vulnerable to variations in international prices. However, in the cotton sector, direct income aids and price-support systems represent approximately 1% of the support provided to agriculture in the OECD countries. It is difficult to measure the impact of this production support on international prices. Certainly world cotton product would be located differently without such support. Production costs are around US$0.35 in Benin, US$0.45 in Pakistan, US$0.50 in Brazil, US$0.80 in the USA and more than US$1.00 in the EU (Source: ICAC). As the EU is only a minor player as regards world production of cotton fibre, the effect of its production support, the largest per tonne of cotton produced, remains fairly negligible. 295 December 2008 Executive brief Cotton Numerous studies have been carried out to measure the effect on the international price of the elimination of all support for cotton producers. It is fairly difficult to compare the results, given the different methodologies used, and the results vary considerably. An FAO document (2004) listing these studies shows that the projected price increase varies from 2.3% to 29.7% depending on the authors. Would this increase in prices benefit all producing countries? According to an ODI study (2004) that is far from being the case. The world cotton market is in fact segmented, since the quality of the fibres depends on the cotton’s origin. Buyers would therefore be more likely, at least in the short term, to remain loyal to their suppliers. In addition, in the event of an increase in the world price and the probable fall in production levels in the countries which support their cotton production, it is not certain that the other countries are capable of increasing their production to meet demand. Although a higher price could encourage cotton growers to increase their production, other limiting factors should not be underestimated: available land, falls in yield following soil exhaustion, access to inputs, access to water for the countries that irrigate cotton, the functioning of cotton sectors in a liberalisation context. The ODI considers that western and central African countries have a fairly good capacity to respond to an increase in prices and cotton-related income could grow in those countries by between 14% and 37%. Other studies stress that an increase in the world cotton price would not necessarily benefit African growers (Fok, 2005). Even if the quality of African cotton is recognised, it does not benefit from the price level that it could expect, in particular because this quality is not widely promoted. 4. Cotton and the WTO Cotton fibre (raw cotton, cotton trash, carded and combed cotton) is considered as an agricultural product and therefore covered by the WTO agreement on agriculture. All other cotton-based products, such as yarn, weaves and other textile products were subject until January 2005 to the Multifibre Arrangement. That agreement which came into force in 1974 was intended to protect the textile industries of developed countries from the growing exports of developing countries by way of a system of quotas. The liberalisation of the textile sector has not benefited all developing countries: if China is the big winner, the ACP textile-exporting countries (as Mauritius), which had special access to the EU market, have lost their trade preferences. 4.1 The Brazilian complaint Cotton became part of the agricultural discussions at the WTO in September 2002, when Brazil, with the support of C4 (a group bringing together cotton producers from four west African countries – Mali, Burkina Faso, Chad and Benin) filed a complaint with the WTO disputesettlement body against the support given by the USA to its cotton producers. Brazil considered that the USA had not respected the WTO agreement on agriculture and as a result had helped to depress world prices and damage the interests of Brazilian cotton growers. In June 2004, the dispute-settlement body upheld the Brazilian complaint, and the ruling was confirmed on appeal in March 2005. It took the view that the US support should be reclassified, either as export subsidies, or from the ‘green box’ to the ‘amber box’ (the most distorting aids, which are capped) for domestic support. 296 December 2008 Executive brief Cotton The cotton panel’s decisions US programmes called into Expenditure in question 2002/2003 (billions of US$) Export credits (cotton and 1.6 other products) Step 2 (cotton) 0.4 Marketing loans support 0.9 (cotton) Counter-cyclical support 1.3 (cotton) Direct aids to growers (cotton) 0.6 Source: Oxfam, 2004 Classification Dispute settlement body’s notified by the decision on classification USA to the WTO not notified export subsidies amber box amber box export subsides amber box amber box amber box green box amber box These data have not changed significantly since 2004 (except for Step 2 subsidies) despite complaints to the DSB, as the USA has dragged out proceedings by filing several appeals. The amount of the subsidy changes according to the level of international prices (counter-cyclical payments). Thus, the amounts paid are substantial when prices are low and, conversely, subsidies are reduced when prices are high. Although counter-cyclical subsidies are not linked to the quantity produced, the DSB acknowledges that they lead to serious trade distortions since they disconnect producers from market signals. On average, the volume of subsidies is around the same level as the value of production (US$4.7 and US$3.9 billion respectively in 2005-2006). On August 1st 2006, the USA announced that it was eliminating Step 2 type subsidies; however, the other subsidies are still in place. The new Farm Bill adopted in 2008 does not change the amount of subsidies granted to the cotton sector for the next five years. On June 2nd 2008, on appeal, the WTO ruled against American cotton subsidies after a six-year legal saga. The appeals panel confirmed the ruling against American subsidies to cotton producers delivered in December 2007, finally putting an end to the dispute between Brazil and the USA which had lasted since 2003. Once again it was noted that the USA acts ‘in a way incompatible’ with the WTO rules and ‘has not complied’ with the previous recommendations and decisions of the DSB. According to the report of the WTO judges, the subsidies paid to American farmers by way of marketing loans and the counter-cyclical payments ‘have the effect of preventing a notable increase in prices’, ‘causing a serious prejudice to Brazil’s interests’. As the USA has exhausted all possibilities of appeal, the way is now open for a possible request for trade sanctions by Brazil via the application of retaliatory measures, which could reach a level of US$1 billion (IDEAS, briefing note No. 80, 2008). 4.2 The cotton initiative In May 2003, Benin, Burkina Faso, Mali and Chad submitted to the WTO Secretariat a ‘Sectoral initiative on cotton’ (WTO, 2003). In response to the losses suffered by their farmers following the fall in world prices, they called for the elimination of support granted by developed countries to their cotton production. Their demands also included, pending such a decision, the payment of financial compensation. They called for separate negotiations to be conducted for the cotton sector, outside the agricultural negotiations. LDCs, the African group and the ACP countries have given their support to this initiative. The lack of any response to these demands was one of the causes of the failure of the WTO Ministerial in Cancun in September 2003. The framework agreement of July 2004 decided on the creation of a cotton sub-committee and specified that cotton would be treated in an ‘ambitious, rapid and specific way’ in the framework of the negotiations on agriculture. Cotton was one of the items at the heart of the agriculture discussions at the Hong King Ministerial, but the results were negligible. 297 December 2008 Executive brief Cotton The only concrete progress achieved in Hong Kong was agreement on the elimination of American cotton-export subsidies by the end of 2006. The WTO members committed themselves to ensuring that the reduction in domestic-support programmes should be more rapid and important for cotton than for other products. The resolution of the cotton issue has however now become completely linked to progress achieved in other agricultural products, which will no doubt undermine the planned ‘ambitious and rapid’ treatment of cotton. Better access to the markets of rich countries has been negotiated for African cotton. However, it is very unlikely that such a commitment by the USA will have any significant impact for African cotton-exporting countries. To date, cotton imports by the USA have remained well below the tariff quota of 5% of domestic consumption that it grants (lowly-taxed quota, from 0 to 4.4 cents/kg within the quota compared with 31.4 cents/kg outside the quota). Thus, from 2000 to 2004, American cotton imports were only 8,367 tonnes on average, for a current tariff quota of 68,670 tonnes. Faced with the competition of the Chinese textile sector, the USA has relocated its textile industries, in particular to Mexico and Honduras. Domestic cotton consumption by textile industries in the USA therefore fell from 2,485 million tonnes in 1997/98 to less than one million tonnes in 2008. The USA therefore needs rather to find an outlet on export markets for its own cotton production than to import cotton. 4.3 Recent developments On July 17th 2007, the Chair of the agriculture negotiations, Crawford Falconer, drafted some operational modalities from the Doha Ministerial Declaration in Hong Kong containing significant advances on cotton. The key development concerned the reduction in domestic support granted by the EU to its cotton producers. The draft ‘modalities’ paper suggests a formula for reduction in ‘amber box’ support for cotton. Moreover, it specifies that the expenses cap granted to cotton in ‘blue box’ support will be stricter than for other products (at one-third of the cap for ‘normal’ products). The implementation of the reduction in domestic support will occur more quickly than for other products, in one-third of the time. In addition, it is expected that duty-free, quota-free access to the markets of developed countries and of those developing countries which feel able to cope with it, will be granted to cotton coming from LDCs, and full elimination of export subsidies will be implemented at once. Since 2007, the question of cotton seems to have declined in importance in the Doha negotiations at the WTO. For example, the discussions that resulted in the July 2008 text at no time addressed directly the question of cotton, which is treated as peripheral. The fact that the sub-committee on cotton has not met since July 2007 illustrates this lack of interest. 4.4 Opposing positions, preventing any global agreement The ministerial negotiations of July 2008 enabled the member states to reconcile their positions on strategic issues (tariff reductions, cuts in subsidies). During the week of negotiations between G7 ministers (a group formed to accelerate the negotiations at the ministerial meeting at the end of July and composed of the main trading powers: Australia, Brazil, China, the USA, India, Japan and the EU), the talks collapsed as a result of differences between India and the USA on the question of the special safeguard mechanism (SSM). However, certain observers consider that the reason why the talks broke down was the determination of the USA not to address cotton on the list of subjects for discussion (the question of cotton was placed last on a list of 20 items to be discussed during the ministerial negotiations). 298 According to observers, the USA, which had accepted a 70% general reduction in its tradedistorting subsidies, apparently was unable to make an extra effort on its subsidies to the cotton sector, as required by the mandate on this product (the WTO mandate on cotton requires states that subsidise their cotton producers to implement a more substantial and quicker reduction in subsidies than for other sectors). In fact, the Farm Bill adopted in 2008 provides for subsidies to cotton producers to be maintained if not increased (Martin Khor, SUNS, August 4th 2008). December 2008 Executive brief Cotton 5. The cotton action plan In February 2004 the EU adopted an action plan to help developing countries dependent on basic products. Three main areas of action for cotton were identified immediately:    obtaining fairer trade conditions on international cotton markets; helping African countries to consolidate the competitiveness of their cotton sectors; measures to mitigate the impact of price fluctuations. This plan was discussed and adopted on July 5th-6th 2004 at the EU-Africa Forum on cotton, at the end of which a steering and monitoring committee (COS cotton) was set up. The financial support received by the committee for operating purposes from August 2007 was ended in September 2008. This will be replaced for the next two years by funding under the AAACP (All ACP agricultural commodities programme) of €400,000. The plan, which is part of the ‘EUAfrica cotton partnership’, is structured around the following themes. International trade This involves supporting the African cotton initiative (see above, cotton and the WTO) at the level of negotiations and by enhancing the capacities of cotton producers and negotiators so that they are better able to defend their interests. National and regional strategies Cotton-producing countries are drawing up national cotton strategies, which will be the framework for financial support for the cotton sector. At regional level, this involves coordinating national strategies and linking them with the EPAs. Politics and institutions This involves improving the legal and regulatory environment in order to protect the interests of growers and cotton merchants, strengthening and improving institutions in the cotton sector (growers and merchants). Technological innovation This involves improving soil fertility, supplies of seeds and farming practices in general. It also involves capacity strengthening to facilitate decisions concerning genetically modified cotton, and finally putting in place in African countries an automatic cotton-classification system. Risk management and finance To mitigate the effects of price fluctuations, the action plan provides for the increased use of market-based price-risk-management mechanisms, improving self-insurance systems, integrating cotton-risk management into national strategies, and studying the feasibility of a regional cotton stock exchange. Integration of the cotton chain In order to raise added value, the aim is to improve and develop the textile sector (from spinning to the clothing industry), including craft industries, develop the processing of the coproducts, develop the organic cotton and fair-traded cotton sectors, and stabilise markets by combating fraud. 299 Recent and current activities under the action plan December 2008 Executive brief Cotton The following activities have recently being implemented at international, regional and national levels in the framework of the action plan:  the organisation of regional workshops (west Africa, central Africa and south and east Africa) between May and June 2008 in order to promote exchanges between stakeholders and determine support priorities for the sector;  the organisation of an international conference in Montpellier in May 2008 on changes in cotton policies;  the organisation of an international conference in Ouagadougou in September 2008 on the challenges of genetically modified cotton in Africa;  the mid-term evaluation of the EU-Africa cotton partnership, which is due to be completed at the beginning of 2009;  a ‘Cotton made in Africa’ public-private partnership programme to promote the sustainable production of African cotton in three African countries (Burkina Faso, Benin and Zambia);  a project to support the development of the production of ‘fair trade’ and ‘organic fair trade’ cotton in west and central Africa via subsidies to l’AProCA (association of African cotton producers);  several national programmes to support the sector or producers have been put in place in various countries: Burkina Faso, Benin, Côte d’Ivoire, Mali, Senegal, Mozambique, Chad and Togo. As at March 31st 2008, the amount of financial assistance provided to African states (EU-Africa cotton partnership) was €315 million, composed of €147 million committed by the EU in the form of subsidies and €168 million by European states in the form of loans and subsidies. The cotton action plan represents approximately 5% of this budget, i.e. €15 million. The work of the steering and monitoring committee (COS) on updating the action plan establishes not only the progress of programmes put in place but also the difficulty in achieving concrete results rapidly in the various areas covered by the plan. The emphasis is on regional integration and the implementation of joint strategies. 6. Cotton and the EPA negotiations As access to the EU market is free for cotton fibre, irrespective of its origin, cotton is not a trade issue in the EPA negotiations. However, for transformed cotton-based products, the signing of an EPA could help to improve access to the EU market, for textile-producing countries, such as Mauritius. Concerning the opening of the ACP markets, the issues of competition from European imports are also very small, if not zero, since the EU does not export cotton fibre to the ACP countries. However, it is to be noted that the list of sensitive products defined in the west Africa region includes all cotton-sector products, including cotton fibre. On the other hand, the development aspect of the EPA could allow specific support for this sector, in particular for the processing sector. The main obstacles to the development of a textile industry in African are investment and access to energy. The west Africa region initiated in 2008 an EPA-development programme (PAPED) with the aim of making the EPA a development tool. National studies are currently being carried out in order, in particular, to identify relevant priority programmes and projects with regard to the main lines established for the PAPED. In Mali, for example, improving the performance of cotton exports would appear to be one of the key challenges to be met, and one which could benefit from support measures in the framework of the EPA. 300 7. Fair trade, a system for the future? December 2008 Executive brief Cotton The African cotton sector has certain advantages when it comes to satisfying ‘fair trade’ criteria. It is based on small, essentially family farms, practising mixed farming/stock farming, with production methods based on limited use of inputs and economical levels of water and energy consumption (therefore consuming less carbon than American or Chinese producers). In addition, the organisation of the sector around state or semi-state bodies makes it easier to monitor farmers and their compliance with standards. The development of ‘fair trade’ could make it easier to capitalise on these advantages among groups sensitive to ‘fair trade’ principles. In 2004, the ‘fair trade’ association, Max Havelaar France, launched a ‘fair-traded cotton’ initiative, in partnership with the Géocoton group (former Dagris), which participates in numerous cotton networks in western and central Africa. 7.1 The general principles of fair trade Four essential points distinguish fair trade from traditional trade:  the purchase of products from poor farmers in developing countries: small farmers and their cooperatives, plantation workers, micro-enterprises, workshops;   the payment of a fair price, allowing a fair remuneration for producers and their employees;  the sale of products to consumers in industrialised countries, with actions to raise awareness regarding international trade issues. a stable long-term trade relationship, with actions to support and assist farmers (technical support, support to obtain input supplies, export assistance, etc); Producer groupings are certified by an international certification body. In west Africa, Max Havelaar is the main certification body; certification is organised at the level of producer organisations. 7.2 ‘Fair trade’ cotton ‘Fair trade’ cotton was first marketed in Europe, in France and Switzerland in 2005, based on exports from four African countries (Senegal, Mali, Burkina Faso and Cameroon). In 2006, the UK, via DFID, launched a ‘fair trade’ cotton sector in India. Thanks to the projects implemented by the French and Swiss cooperation services some 30,000 producers were certified for the 2007/2008 season in Mali, Burkina Faso, Senegal, Cameroon and Benin, representing the equivalent of 1% of the volumes produced in the region. As for all ‘fair trade’ products, the price paid to the producer is determined in advance, and is sufficient to cover the production costs and remunerate the producer’s work. For the 2007/2008 season, the price paid to producers in west Africa (234 FCFA per kg of seed cotton) was particularly attractive in a context of contractually low cotton prices (160 FCFA per kg in Mali and 145 FCFA per kg in Burkina Faso) (AFD-FARM, 2008). In addition to this price, a community-development premium is paid, with the aim of financing collective investment in the framework of producer groupings (34 FCFA per kg of seed cotton for the 2007/2008 season). An additional premium encourages producers to develop ‘organic fair trade’ products. In west Africa, ‘organic fair trade’ represents 10% of volumes of ‘fair trade’ cotton. 301 The question of ‘organic’ cotton in its own right, separately from ‘fair trade cotton’, is also relevant. This sector has existed for several years and the production volumes reached are considerably higher than those of ‘fair trade’ cotton. While world demand for ‘organic’ cotton is to a large extent unsatisfied because of inappropriate farming practices in exporting countries (USA, India), African production systems would appear to be more rapidly convertible to ‘organic’ farming methods (AFD-FARM, 2008). December 2008 Executive brief Cotton 7.3 The limits of fair trade cotton Fair trade cotton is a fairly recent initiative, but a certain number of limits are already apparent. First of all, the number of farmers concerned is very small in relation to the number of African cotton farmers. Cotton is a product which, unlike other fair trade products such as coffee, is subject to numerous processing operations involving several operators between the producer and the end consumer. However, although for the time being the fair trade certification applies to cotton production, it does not apply to the following stages: ginning, transport to factories, spinning, the clothing industry, etc. In principle there are checks to ensure that the companies concerned apply strictly international agreements on the rights of workers (according to the ILO convention). However, will the employees of these companies working in developing countries also benefit from better wages and better working conditions thanks to fairly traded cotton? There are no guarantees on this point. The same applies for ‘organic’ cotton which guarantees only farming practices. The high certification costs (carried out at the level of producer organisations) may eventually, when the sector’s development is no longer supported by development aid, weigh on the remuneration of producers or on the competitiveness of ‘organic’ cotton. The certification body and textile operators do not guarantee purchases of ‘organic’ cotton from one season to the next, unlike traditional national cotton companies. Demand may fluctuate considerably depending on the habits of consumers in the North (fair trade ‘going out of fashion’). 302 Executive brief September 2008 September 2008 Executive brief Coffee Coffee Table of contents 1. Production, trade and consumption: the role of ACP countries and the EU ______ 305 1.1 Production breakdown ______________________________________________________ 305 1.2 Geography of production and long-term trends ___________________________________ 305 1.3 The EU trade regime _______________________________________________________ 305 1.4 The role of ACP countries in the global coffee market ______________________________ 306 1.5 The structure of coffee production in ACP countries _______________________________ 307 1.6 The importance of EU consumption globally _____________________________________ 307 1.7 The importance of the EU market to ACP countries _______________________________ 307 2.The global value chain for coffee: regulation, prices and corporate strategies _____ 307 2.1 Stocks and prices __________________________________________________________ 309 2.2 Corporate strategies ________________________________________________________ 310 3.Sustainable coffee: the new mainstream? ___________________________________ 311 3.1 A profile and new trends_____________________________________________________ 311 3.2 Costs and benefits__________________________________________________________ 312 4.Options for ACP-EU cooperation on coffee _________________________________ 313 4.1 The role of regulation _______________________________________________________ 313 4.2 Market-based approaches ____________________________________________________ 313 4.3 Improving sustainability certifications ___________________________________________ 314 4.4 Capturing extra value in ACP countries: the role of geographical indications______________ 315 303 Summary September 2008 Executive brief Coffee The share of ACP countries in world coffee exports has almost halved over the last 20 years, and in 2007 made up only 13.5% of world trade; this was partly because of the rise of production in Indonesia and Vietnam. All major ACP producers are in Africa with the exception of Papua New Guinea. The EU25 account for 57% of total consumption of coffee globally, and remain the dominant market for ACP producers. The International Coffee Organisation operated a quota-regulation system until 1989. Since then, production has risen dramatically and has remained over 100 million (60 kilogram) bags every year, including in 2007. Prices fell sharply to the lowest level for a century in the period from 2000 to 2004, but recovered thereafter. Along with a more general commodity price boom, in 2007 the average ICO composite indicator price passed the $1/lb mark for the first time since 1998. In the first six months of 2008, this average was over $1.3/lb. Still, farmers’ gains resulting from higher coffee prices have been significantly eroded by high oil prices (via increasing costs of farmers’ inputs) and the continued weakness of the US dollar. Along with increasing prices, the coffee industry is currently witnessing a rapid growth of certified ‘sustainable’ coffees – such as ‘organic’, ‘fair trade’, ‘Rainforest Alliance Certified’, ‘Utz Certified’, and other designations. According to recent estimates, the sustainable market accounts for approximately 5.5% of exports, up from 1% in 2003. Increasing and sustaining coffee farmers’ income (and especially smallholders’) in ACP countries is an important policy goal. The possibility of achieving this by reasserting some control over the market, as operated by the ICO before 1989, or through other price-support or compensation schemes such as STABEX and now FLEX, does not offer much hope of success. Better prospects are offered by the promotion of speciality and sustainable coffees and the capturing of value-added through systems of indication of geographic origin. 304 1. Production, trade and consumption: the role of ACP countries and the EU 1.1 Production breakdown September 2008 Executive brief Coffee Arabica coffee accounts for over 70% of world production, with the balance being robusta. Arabica is generally of better quality, fetching higher prices; it grows at altitudes of between 1,000 and 2,000 metres, whereas robustas are grown between sea level and 700 metres. Both arabica and robusta are produced by ACP countries. Arabica coffee is subdivided into three categories – Colombian milds (grown by Kenya and Tanzania), Brazilian naturals (grown by Ethiopia) and ‘other milds’, grown by many ACP arabica producers. Robustas have the advantage that they have higher yields per hectare than arabicas – typically 2,300-4,000 kg/hectare, against 1,500-3,000 kg/hectare, but the disadvantage is that they fetch little more than half the price. 1.2 Geography of production and long-term trends At the beginning of the 19th century, coffee was exclusively cultivated on islands. Réunion, Martinique, Santo Domingo, Cuba, Jamaica, Puerto Rico, Java and Sri Lanka were the main coffee-producing territories. During the following decades, coffee cultivation spread to the Americas. Soon after, Brazil became the main exporter, producing 25% of the world harvest around 1830, 50% around 1860 and 75% at the end of the century. Effectively all production at this time was of arabica coffee. It was not until the 1920s that the expansion of coffee production restarted in the rest of Latin America, with Colombia emerging as the main competitor to Brazil. It is also during this period that Africa gradually emerged as a new coffeeexporting continent. During the 1980s and 1990s, coffee cultivation increased dramatically in Asia as well, first in Indonesia and later, at an even faster pace, in Vietnam. In 1994, Vietnam produced 230,000 (60 kilogram) bags of coffee, while Colombia produced over 11 million bags. By 1999, Vietnam had replaced Colombia as the world second largest producer with over 11 million bags. In 2007/08, it exported nearly 16 million bags. In parallel to labour-intensive expansion in Vietnam, Brazil has been promoting the ‘rebirth’ of coffee cultivation, with new expansion based on a mechanised and input-intensive model of cultivation and harvesting. The result of these changes has been the steady decline of ACP production (see below). Overall, changes in export patterns in the last two decades have followed a similar path, since only Brazil and Ethiopia have significant domestic consumption. As for robusta, production and export started with the entry of African colonies into the coffee market, mostly Uganda, Angola, Madagascar, Côte d’Ivoire and Cameroon. The share of robusta in the world harvest increased from almost zero in 1920 to 27% at the end of the 1960s. Then, in the 1970s, with civil unrest in Angola and later in Uganda, and the ageing of coffee trees in other African countries, this share decreased. The 1980s and 1990s, on the contrary, witnessed a large increase in robusta cultivation. Four countries played a decisive role: Indonesia and India during the 1980s, and Vietnam and Brazil more recently and more spectacularly. During the early 2000s, robusta accounted for approximately 40% of world coffee production. 1.3 The EU trade regime ACP coffee exporters enjoy preferential rates in EU markets. Exports of both green and roasted coffee from ACP countries to the EU are zero-rated. For non-ACP countries that are not benefiting from the EU’s Generalised System of Preferences (GSP), the EU applies a rate of duty of 0% for green (not decaffeinated) beans, and of 8.3% for decaffeinated green beans. For roasted coffee, duties of 7.5% and 9% respectively are applied. For coffee substitutes, the duty is 11.5%. There are no quantitative restrictions on ACP-EU coffee trade. 305 1.4 The role of ACP countries in the global coffee market September 2008 Executive brief Coffee The biggest ACP coffee exporters in 2007 were Uganda, Ethiopia and Côte d’Ivoire with export volumes of around 2.6-2.7 million bags, followed by Papua New Guinea (909,000), Kenya (817,000), Tanzania (751,000), and Cameroon (717,000). Collectively, ACP countries accounted for 13.5% of world coffee exports in 2007 (more or less the same if the 2005-07 average is used), for a total of almost 13 million bags (12.3 million for the period 2005-07) (see Table 1). The 2007 export figure is lower than the individual exports of Brazil (28 million) and Vietnam (17.9 million) and only slightly higher than Colombia (11.3 million). Only 20 years earlier, ACP coffee exports amounted to 16 million bags (average 1985-87), or 23% of global exports. Cameroon, DR Congo, Côte d’Ivoire, Kenya, Madagascar and Rwanda together account for 6.3 million bags of this export decline, much of it due to civil unrest, but also to domestic marketing issues (in Kenya and Cameroon). The only marked increase in exports between 1985-87 and 2005-07 took place in Ethiopia (almost +1.5 million bags). Table 1: ACP coffee exports (60 kg bags) 2007 Angola Benin Burundi Cameroon Central African Rep Congo, D.R. of Congo, Rep. Côte d’Ivoire Cuba Dominican Republic Equatorial Guinea Ethiopia Gabon Ghana Guinea Haiti Jamaica Kenya Liberia Madagascar Malawi Nigeria Papua New Guinea Rwanda Sierra Leone Tanzania Togo Trinidad & Tobago Uganda Zambia Zimbabwe ACP total World total ACP as % of world total Source: ICO 3,916 0 322,805 717,176 71,566 197,428 0 2,582,005 15,640 77,830 0 2,604,008 403 33,038 435,370 20,416 24,182 817,182 0 96,850 18,875 9,107 908,737 222,167 51,090 751,441 154,908 24 2,693,187 50,258 32,366 12,911,975 95,967,095 13.5 Average 2005-2007 4,664 0 325,058 720,468 47,160 164,351 0 2,267,769 18,419 81,423 0 2,658,212 498 21,751 411,236 23,101 21,344 695,818 0 123,862 19,054 15,085 985,728 254,361 40,819 702,709 145,600 530 2,411,589 78,002 52,531 12,291,143 91,735,225 13.4 306 Average 1985-1987 203,330 24,092 551,465 1,603,807 224,276 1,770,452 22,088 3,894,245 212,341 513,563 15,758 1,202,998 28,970 8,614 49,982 260,943 14,838 1,781,418 115,680 796,372 67,653 6,337 878,406 700,011 125,207 781,279 228,003 17,841 2,455,764 8,357 197,587 16,037,169 69,274,378 23.2 Difference (2005/7 - 1985/7) -198,666 -24,092 -226,407 -883,339 -177,116 -1,606,101 -22,088 -1,626,475 -193,922 -432,140 -15,758 1,455,215 -28,472 13,137 361,254 -237,842 6,506 -1,085,600 -115,680 -672,510 -48,599 8,748 107,322 -445,650 -84,388 -78,570 -82,403 -17,311 -44,174 69,645 -145,056 -3,746,026 -10 September 2008 Executive brief Coffee 1.5 The structure of coffee production in ACP countries In ACP countries, coffee is overwhelmingly grown by small-scale farmers. With the demise of coffee marketing boards and caisses de stabilisation in producing countries, almost all ACP countries are characterised by free coffee trade domestically and at the export level, with varying degrees of regulation. Export quality controls have been maintained in most countries, and mandatory export auctions are still operating in Ethiopia, Kenya and Tanzania. Uganda has probably the most liberalised domestic coffee market of all ACP countries. Farmers generally sell to traders at the farm-gate or in the local market. Buyers then sell the coffee on to other traders. Coffee beans can change hands many times before they reach the point of export. This has implications for the quality of coffee. Due to lack of incentives at the farm-level to deliver better quality and the many transactions between production and export, coffee quality has decreased in several ACP countries following liberalisation. 1.6 The importance of EU consumption globally Coffee is consumed mainly in the developed countries of the northern hemisphere. The only producing countries with sizeable domestic consumption are Brazil and Ethiopia. Until the 1960s, coffee consumption was concentrated in Europe and North America. Since then it has increased remarkably in Asia, especially Japan and Korea. The EU25 accounted for 57% of world consumption in 2007 with 40.7 million bags. Germany is the largest consumer, with 8.6 million bags, followed by Italy (5.8 million bags), France (5.6 million bags), Spain (3.2 million bags) and the UK (2.8 million bags). 1.7 The importance of the EU market to ACP countries For historical reasons, the EU market is the most important coffee outlet for ACP coffeeproducing countries. EU27 imports accounted for over 53% of total ACP coffee exports in 2007 by volume (source: COMTRADE). Speciality coffee markets (intended as high quality) are growing fast, but it is not clear whether the extra premium paid on quality justifies the extra investment needed at the farm level. Furthermore, with the demise of cooperatives in many ACP countries, it is more difficult to deliver high-quality coffee homogeneously, in sufficient quantity, and year by year when purchasing from smallholders. In addition, matching ‘sustainable’ coffee certifications such as ‘fair trade’, organics, Rainforest Alliance-certified and Utz-certified is increasingly important for market access into the EU (see below). Demand for coffees bearing geographical indications (GIs) is also growing. Given the EU’s interest in pushing the GI agenda within the WTO (due to its wine-and-spirits interest), this is an area of possible collaboration between ACP countries and the EU, especially following the milestone agreement that was reached between Starbucks and Ethiopia in 2007 on the use of geographic origin names such as Yrgacheffe and Sidamo (see below). 2. The global value chain for coffee: regulation, prices and corporate strategies Coffee is one of the few commodities where international agreements aiming to support international prices were in place for several decades in the 20th century. From the beginning of the century to 1989, producing countries played a substantial role in the global value chain for coffee. They took control of world stocks, held real market power, and influenced international prices. Under the International Coffee Agreement system (which lasted from 1962 to 1989), a target price (or a price band) for coffee was set, and export quotas were allocated to each producer. When the indicator price calculated by the International Coffee Organisation (ICO) rose above the set price, quotas were relaxed; when it fell below the set price, quotas were tightened. If an extremely steep rise in coffee prices took place, quotas were abandoned until prices fell within the band. Although there were problems with this system, many analysts have shown that it was successful in raising and stabilising coffee prices. 307 Coffee prices have increased substantially since 2005 even though total production in 2005-07 averaged 118 million bags, against an average 114 million bags of the previous three years (200204). For exportable production, however, the increase between the two periods has been less than 1 million bags. At the same time, consumption in importing countries on average increased healthily – by almost 2 million bags (ICO data). This factor is likely to have provided some upward pressure on prices. Still, price levels in 2005-08 have been on average below the levels of the late 1970s and the 1980s. Also, farmers’ gains resulting from higher prices have been ‘significantly eroded by factors exogenous to the coffee market. The ascent of oil prices to record levels has had a direct impact on the costs of farmers’ inputs. In addition, the continued weakness of the US dollar, which is used as a reference in the international coffee trade, has meant that prices of coffee in many local currencies did not fully reflect the improvement’ in dollar terms (ICO 2008c: 5). Figure 1: ICO Composite Indicator Price (Jan 1976-Jun2008) 350 300 250 200 150 100 50 0 2007 2005 2002 2000 1997 1995 1992 1990 1988 1985 1983 1980 1978 US cents/lb 1976 Executive brief Coffee September 2008 In the months following the suspension of quota regulation, a large part of producer stocks moved from harbours in producing countries to harbours in consuming countries. A dramatic drop in international prices resulted from this movement. To put things in perspective, the international price for green coffee in the early 2000s was at its lowest level in real terms for more than a century, a level even lower than the one attained in the previously worst conjuncture, between the two World Wars. Chronic oversupply, due to technical innovations and new planting, contributed to the generally lower level of international coffee prices experienced between 1989 and 2004 (with the exception of two peaks in 1994-95 and 1997; see Figure 1). Global production between 1998/99 and 2007/08 exceeded 100 million (60 kg) bags every year. Between 1990/91 and 1997/98, production had surpassed the 100 million bag mark only three times. Source: ICO data The 1999-2004 coffee crisis can not be considered a classical ‘overproduction crisis’ similar to the one in the 1930s, when Brazil was burning coffee to run locomotives. Neither was it similar to the one in the 1960s, when world production increased dramatically with the expansion of coffee cultivation in Brazil. In the same way, the current price upswing is likely to be not only the result of a tighter supply/demand situation but also of speculative activity in the commodity markets more generally. In order to understand these changes beyond the dynamics of supply and demand volumes, one must examine: (1) the evolution of coffee stocks and its ownership; and (2) changing corporate strategies. 308 2.1 Stocks and prices The reason is that the impact of world stocks on prices depends on the identity of the operator owning or controlling them. Historically, one of the main objectives of producing-country coffee policies, and particularly of Brazilian coffee policy, was precisely to take excess stocks out of the market. Thus, when stocks are owned by producing-country governments, they are absent from the market, or at least there is considerable uncertainty about their availability. In a different way, but with a similar impact on prices, stocks owned by roasters are stocks ‘taken out’ of the market. They are not available anymore. Only stocks owned by traders or producers represent a permanent availability and impact wholly on prices. Figure 2: Stocks and US coffee import value (1880-2005) STOCKS AND US COFFEE IMPORT VALUE 25,00 SMI 120,00 100,00 Brazilian Monopoly 80,00 15,00 60,00 10,00 40,00 5,00 20,00 US Import Value (Cents by pound, 1967 dollar) International Agreements Imperial fragmentation 20,00 Stocks (Months of world imports) September 2008 Executive brief Coffee Figure 2 shows that world coffee stocks and prices are inversely related, and that the magnitude of this relation has changed over time. The huge stocks of the 1960s did not cause a fall in price proportionate to their scale, especially when compared to the beginning of the 20th century or to the 1930s. On the contrary, the dramatic price fall of the post-1989 period appears totally disproportionate compared with the evolution of stocks. 0,00 0,00 1880 1890 1900 1910 1920 1930 Stocks 1940 1950 1960 1970 1980 1990 2000 US Unit import Value Source: Daviron and Ponte (2005) After World War II, by means of the interventions of state coffee agencies, producing countries were able to master the main part of world stocks. Because of the international coffee agreements, they could maintain world prices at quite high levels. With the breakdown of the international coffee agreement (ICA) in 1989, the relation between stocks and price changed once again, working in a way quite similar to that at the beginning of the 20th century. In the current period, producing countries no longer control stocks. Due to liberalisation policies in producing countries, stocks are now held by producers and above all by traders. Finally, since 1998, the relation between stocks and prices seems to have changed yet again. The impact of stocks on prices appears stronger than before. This is due to the implementation of ‘suppliermanaged inventory’ (SMI) strategies by roasters. SMI means that international traders are holding and managing an increased proportion of stock on behalf of roasters. For the market, this means an increase in the volume of stocks that are immediately available. As a result, the same volume of stock generates an international price much lower than in the previous decade. According to this interpretation, one can postulate that the current tightening supply situation, combined with speculative activity in commodity markets (including coffee), would have generated a much higher price in previous periods. 309 September 2008 Executive brief Coffee 2.2 Corporate strategies International traders have gone through considerable restructuring in the last two decades. Midsized traders found themselves too small to compete with larger ones. As a result, they either went bankrupt, merged with others, or were taken over by larger traders. The coffee trade is becoming more concentrated. In 1998, the two largest coffee traders (Neumann and Volcafé) controlled 29% of the total market, and the top six companies controlled 50%. In the early 2000s, with the mergers of Volcafé and ED&F Man on the one hand, and Esteve and Cargill into ECOM on the other, the three top groups probably accounted for 45% of the market. At the same time, prospects seem to be good for smaller and specialised companies that trade in the speciality coffee market (high quality and specific origins). With some exceptions, there has been little vertical integration between roasters and international traders. The level of concentration in the roaster market has reached a level even higher than for international traders. The top two groups combined (Nestlé and Philip Morris/Altria) controlled 57% of the world market share for roasted and instant coffees in 2002. The top five groups controlled 87% of the market. Nestlé dominates the soluble market with a market share of over 50%. Roasters are still able to maintain a relative position of power over retailers due to the special nature of coffee in the retail business and the fact that in many retail markets coffee is offered to consumers at a low margin, or even at a loss. This applies to mainstream coffee. Speciality coffees exhibit higher margins at the retail level. Yet, supermarkets’ own brands have not been able to enter the speciality segment in meaningful ways. One is more likely to find ‘high quality’ brands such as Starbucks or Illy dominating the high-end market in retail chains. More meaningful changes in the balance of power in the coffee value chain have actually occurred in the roaster-international trader node. In this case, roasters have actually increased their influence on international traders as a result of oversupply, increased flexibility in blending, and especially through the implementation of ‘supplier-managed inventory’ (SMI), which allows roasters to minimise costs by transferring the working-capital costs of inventory holding to trading houses. As a result of the adoption of SMI, and in combination with market liberalisation in ACP countries, international traders had to strengthen their supply network. This has taken place through coordination (mostly financing) or vertical integration with exporters in ACP countries. In some countries, international traders have moved upstream all the way to domestic trade and in some cases to estate production. Another trend that is emerging in the industry is one towards the creation of a system of first-line and second-line suppliers, subject to price premia and discounts. Major roasters tend not to accept coffee for their blends from countries that cannot guarantee a reliable minimum amount of supply. As a result, on the one hand, minor producers (as many ACP countries are) may become increasingly marginalised in the future. On the other hand, this has pushed some international traders to be (directly or indirectly) involved in domestic trade in major ACP producing countries (such as Côte d’Ivoire and Uganda) even though these operations may not be profitable, as long as they can satisfy their major clients. To summarise, the last 25 years have witnessed at least four major transformations in the global coffee value chain:   the ICA regime collapsed;  ACP countries, via domestic market liberalisation, lost their ability to control export flows and stocks;  a larger proportion of coffee stocks has become more readily available, leading to a situation (between 2000 and 2004) of low levels of stocks and low international prices; this has been followed by coffee price increases in more recent years, due to a tightening supply situation and speculative activity. roasters and international traders went through a period of consolidation that has led to a situation of oligopoly; 310 3. Sustainable coffee: the new mainstream? September 2008 Executive brief Coffee 3.1 A profile and new trends ‘Sustainability’ has become a key element for marketing coffee. Until a few years ago, it concerned only niche markets. Now, it has moved into the mainstream as well. Some ‘sustainable’ coffees are sold as certified coffee, such as ‘organic’, ‘fair trade’, ‘bird-friendly’, ‘Rainforest Alliance-certified’, and ‘Utz-certifed.’ Others are sold under sustainability initiatives that are designed by private companies, with or without third-party monitoring and verification. The largest private initiative with third-party monitoring is Starbucks’ C.A.F.E. practices. Certified sustainable coffees (including Starbucks’ C.A.F.E.) in 2006 represented 4% of global coffee exports by volume and nearly 8% of North American imports (Giovannucci et al. 2008). By 2007, sustainable coffees reached 5.5% of total exports by volume (see Table 2). In 2003, they represented only 1% of the total. Organic coffee is produced with methods that aim at promoting a viable and sustainable agroecosystem. ‘Fair trade’ coffee is based on a trading relationship between stakeholders that has both market-based and ethical elements and aims to be economically sustainable in the long term. Shade-grown coffee is grown under forest cover, thus preserving biodiversity and providing an appropriate habitat for migratory birds. Rainforest Alliance-certified and Utzcertified coffees attempt to combine some elements of the other three. Gross total purchases of certified ‘sustainable coffee’ for 2006 (as opposed to total volume certified, which is a higher figure than actual volume of purchases) was estimated at approximately 4.2 million bags (see Table 2), surging to almost 6 million bags in 2007. In addition to the strong growth of fair trade and organic coffees, three relatively new sustainability initiatives – Utz-certified, Rainforest Alliance-certified, and the Starbucks C.A.F.E. programme – also grew dramatically. 883,000 bags of Utz-certified coffee were purchased in 2007, against 600,000 in 2006 and 480,000 in 2005 (Utz 2008). Rainforest Alliance-certified coffee purchases were slated to reach 760,000 bags in 2007 (Rainforest Alliance 2008), up from 453,000 bags in 2006. Starbucks alone certified over 1.7 million bags of coffee through its C.A.F.E. programme in 2007 (up from 1.2 million in 2006) (Starbucks 2008). Assuming that 65% of fair trade purchases are also organic-certified, the net volume of purchases of sustainable coffee was in the range of 3.7 million bags in 2006 (or 4% of total coffee exports), growing to over 5.3 million in 2007 (or 5.5% of total coffee exports). Thus, the sustainable coffee market is still a niche, but a strongly growing one – in 2003, it represented only 1% of total volume of exports. It is attracting increased interest in the mainstream industry as well. In addition to Starbucks’ own programme, almost all large coffee roasters are buying one or more kinds of certified sustainable coffee. Table 2: Estimated volume of third-party certified ‘sustainable coffee’ sold in 2006 and 2007 (60 kg bags) 2007 Type of coffee 2006 ‘Fair trade’ 833,000 1,036,093 Organic 1,152,000 1,570,662 760,000 Rainforest Alliance-certified 453,000 Starbucks C.A.F.E. 1,174,400 1,727,272 883,000 Utz-certified 600,000 Gross total 4,212,400 5,977,027 Net total* 3,670,950 5,303,567 Net sustainable coffee exports over total coffee exports (%) 5.5 4.0 Sources: for 2006, Giovannucci (2007); for 2007, Utz (2008), Rainforest Alliance (2008), Starbucks (2008), ICO (2008b); http://www.fairtrade.net/coffee.html?&L= * Assuming that 65% of fair trade coffee is also certified organic. 311 Executive brief Coffee September 2008 Another important initiative in the realm of sustainability in the mainstream coffee market is the public/private collaboration between the German Coffee Association and the German Ministry of Cooperation and Development (GTZ). This initiative led to the writing of a code of conduct, the ‘Common Code for the Coffee Community’ (or 4C) ‘for growing, processing and marketing of mainstream coffee that is feasible for implementation and suitable for binding agreements’. The parties to the elaboration process included large roasters (Nestlé, Tchibo, Sara Lee and Kraft), international traders (Neumann and Volcafé), producing-country representatives (from Brazil, Vietnam, Kenya, Colombia, Indonesia and several central American countries), NGOs (Oxfam International and Greenpeace), and federations of trade unions (including representatives from coffee-industry workers). The 4C basically embeds guidelines that seek to avoid the worst forms of labour exploitation and environmental destruction. These guidelines draw on existing UN conventions and other domestic regulations that are already in force in many producing countries. In this respect, the 4C substitutes (failing) implementation of existing regulations by the state with voluntary compliance verified through auditing. 4C became fully operational in September 2007 with the establishment of a Secretariat and the appearance in the market of the first 4C compliant coffee. It now counts 80 members representing three branches (producers, trade and industry, and civil society) – including all the major international trading houses and coffee roasters, and key NGOs such as Oxfam and Rainforest Alliance. 4C aims at 50% of the total coffee market to be compliant with its code by 2015 (4C 2008). Finally, in December 2003 UNCTAD, together with IISD’s ‘sustainable coffee initiative’, began a process towards the establishment of a global multi-stakeholder ‘sustainable coffee partnership’ (SCP). By bringing together producers, industry, civil society and public policy-makers, the partnership aims to develop a global and integrated approach to sustainability for the coffee sector through research, policy development and cooperation. The SCP addresses issues such as financing for sustainability in coffee, sustainability contracts, and sustainability standards. 3.2 Costs and benefits Most actors engaged in the global coffee value chain earn higher margins on sustainable coffees than on regular coffees. The price premiums paid to farmers vary considerably, with ‘fair trade’ paying the highest premium during the last coffee crisis (much reduced at current market prices), followed by organics. Some initiatives provide no guarantee of a price premium to farmers, although a premium is often paid. Some of the most significant benefits of sustainability certifications are indirect – such as the improvement of community-cooperative governance structures. The overall income impact of sustainability standards on producers depends on the balance between the extra costs of matching these standards (including labour costs and the cost of certification) and the extra income earned from the premium – plus or minus the impact of changing farming practices on yields and quality. The process leading to achieving certification can also serve to stimulate farm incomes outside of the coffee economy. By eliciting from producers requirements such as traceability and process-management standards, farmers prepare to meet the demands of modern agricultural export trade. Certification processes may also have spill-over effects on adjacent communities. With the right dynamics, the efforts needed to meet sustainability standards can create a virtuous circle of empowerment and organisational strengthening. In other cases, farmer organisations find it difficult to maintain cohesion if the expected benefits do not materialise in the short term. For many, the hidden costs of marketing, coordination (e.g. time spent in meetings, transport), uncertainty, and the limitations of collective action may significantly decrease the overall net benefits of certification efforts and threaten the existing governance structures in cooperatives or associations. If a standard becomes the de facto purchasing criterion, then most farmers will have to comply and will incur the same difficulties mentioned. Furthermore, as these criteria become a widely accepted standard, there may be growing unwillingness amongst buyers to pay extra for such achievements – leaving farmers with higher costs of production and no direct financial incentive. 312 4. Options for ACP-EU cooperation on coffee September 2008 Executive brief Coffee 4.1 The role of regulation In the last decade, there has been renewed interest in promoting supply management in tropical commodity markets even though the last attempts by the now-defunct Association of Coffee Producing Countries (ACPC) were not successful because of excess supply, the absence of state agencies able to control exports and organise storage, and high levels of market concentration at the level of international trade and roasting. A re-establishment of a quota-based ICA with the cooperation of consuming countries seems far off the screen of political possibilities. The closest the ICO has come to reasserting its regulatory power has been through the coffee quality-improvement programme (CQP) during the coffee crisis. The overall goal of the programme was to reduce the supply of exportable coffee in the short term, thereby increasing prices. In the longer term, the programme aimed at raising the overall quality of coffee exports. It faced strong reluctance from the USA, which was negotiating its re-entry into the ICO, having left the organisation in 1989. Reflecting these difficulties, and following a review of the impact of the first phase of the project, the ICO made the CQP voluntary rather than mandatory in May 2004 (there is no sign of the CQP provisions in the 2007 International Coffee Agreement). The programme continues to operate on a voluntary basis. In 2007, 68% of coffee exports were compliant with the CQP minimum criteria, up from 64% in 2006 (ICO 2008a). Historically, another approach for addressing the impact of low coffee prices on livelihoods in ACP countries has been compensation for the macroeconomic impacts of price and terms-oftrade shocks. Under STABEX, the EU supported ACP countries with balance-of-payments problems related to falls in commodity prices. In the early 1990s falling commodity prices and the end of commodity agreements led to major resource disbursements and increased eligibility for assistance. STABEX ran into serious problems and in 1990-91 was able to pay out only 42% of eligible claims. Repayment rates also collapsed. In 2000, with the signing of the Cotonou Agreement, the EU replaced STABEX with FLEX, for which the criteria for eligibility are much more stringent, and levels of compensation are lower. After sharp criticism from ACP countries the rules were relaxed in 2004. Yet, even under the new rules compensatory levels are unlikely to reach the ones achieved under STABEX. Nevertheless, regulation can still be an effective tool for shifting power relations in favour of ACP farmers and their organisations. Public forms of coordination (or the facilitation of private forms) could be re-established – especially in relation to quality control and quality-related pricing, provision of inputs and credit, and delivery of extension and research services. Efforts could also be directed towards developing new regulatory tools. Rules on transparency in product information and labelling (e.g. blend composition, proportion of arabica and robusta employed, countries of origin of coffee used in blends, perhaps the proportion of the final price paid to producers) and international anti-trust law are two promising approaches. Regulation would also be central in supporting the establishment of systems of geographical indications (GIs) in producing countries, and in defending these systems internationally through a legallybinding WTO register of geographic indications that goes beyond wine and spirits to cover tropical commodities as well. 4.2 Market-based approaches Increasing coffee farmers’ income (and especially smallholders’) in ACP countries is an important policy goal. In addition to the tool of regulation, market-based solutions have also been suggested to achieve this, such as:   promoting consumption in producing countries and in emerging markets; diversifying production; 313   promoting speciality coffee; promoting price-risk management. September 2008 Executive brief Coffee The problem with promoting consumption in producing countries is that growth of consumption in Brazil in the last few decades is used as a successful example; yet, only Brazil and Ethiopia have a truly domestic coffee culture to build upon, and no ACP country has the resources that Brazil can muster. Emerging markets, with the exception of eastern Europe and Russia, are traditionally tea-drinking. Diversification out of coffee cultivation is extremely difficult in some locations: alternative crops may no longer be attractive in terms of price and returns to labour; they may not be agroecologically compatible; market structures and traders handling these crops may not be present. Finally, diversification is hard to engineer: if alternative crops (or economic activities) were present, feasible, and culturally acceptable, producers would have already adopted them (and, to some extent, they have – coca leaf cultivation in Colombia, khat in Ethiopia, vanilla in Uganda). Supporting speciality coffee is broadly reasonable – given the changes in consumption patterns that have taken place in the last decade or so. The main cautionary note here is that speciality coffee (intended as high quality) does not necessarily entail higher prices for better quality coffee at the farm-gate (especially among smallholders) nor does it by itself lead to the strengthening of producer organisations. Finally, instruments of price-risk management may not be so popular among producers and their organisations for a variety of reasons: they cover for price and not volume risk; they cover a time period of only two years in theory, and often shorter than that in practice; they do not hedge premium variation, only overall price; their cost is high; and they require a high level of liquidity. As for the behaviour of ‘real’ commodity markets themselves, these instruments are broadly neutral. Their role is to reduce the effects of price volatility for individual actors, rather than to reduce volatility in the aggregate. 4.3 Improving sustainability certifications Given that sustainability certifications may have the unintended consequence of marginalising smallholder farmers and farmers in ACP countries more generally, the ACP and the EU should take cooperative steps to ensure that certifications and other initiatives on ‘sustainable’ coffee are appealing to consumers while simultaneously leading to substantive improvements in farmers’ livelihoods. In particular, ACP countries should pressure the EU to fund activities to:   provide farmer credit (for improvements needed to matching sustainability standards);   facilitate direct marketing between these organisations and buyers in consuming countries;  provide resources for monitoring claims (especially the actual payment of a premium at the farm-level);   simplify smallholder compliance with standards; train and provide organisational assistance for cooperatives and other kinds of producer associations; re-establish coordination mechanisms in producing countries, especially in relation to quality control and quality incentives; facilitate producer participation in the setting of standards; 314 Executive brief Coffee September 2008  promote mechanisms of cost minimisation in certification, through multiple certifications, group auditing, and accreditation of local certification agencies;    provide for extra resources to farmers to comply with standards; involve the supposed beneficiaries at all steps of formulation; encourage practices that are practical and flexible enough to allow for widespread adoption. 4.4 Capturing extra value in ACP countries: the role of geographical indications Recent studies show that most of the value added in the coffee value chains is generated in consuming countries, and in relation to ‘symbolic’ and ‘in-person service’ attributes of ‘quality’ rather than ‘material’ attributes. Improving the material quality attributes of coffee and getting paid for it is a necessary, but not sufficient strategy for producers. The value added that can be captured at the farm-gate in improving material quality is limited. ACP producers need to sell the symbolic quality attributes of coffee as well – territory, a story, ideas, and the exotic. They need consumer information so that they can provide individualised material and/or symbolic offering. Albeit more limited, some in-person service provision is also possible through agrotourist networks, safari-and-coffee farm tours, and the establishment of café chains controlled by producer organisations (Fedecafé of Colombia has opened a series of ‘Juan Valdez’ cafés in the USA). For this process to be producer-led and -controlled, it can be done through systems of indications of geographic origin (GIs) and related producer associations. The EU has a long history and experience in having GIs recognised and defended in national and international regulation. At the WTO-level, discussions related to the establishment of a register of indications for wine and spirits could be broadened to include coffee and other tropical products. ACP countries could use a strategic alliance with the EU in this realm. The 2007 agreement between Starbucks and Ethiopia may open the way for a broader application of GI-based strategies in coffee. In 2004, the intellectual property rights (IPR) office of Ethiopia, with NGO support, started to explore ways in which Ethiopia could benefit from the rights for high-quality coffees originating from the regions of Harrar, Sidamo and Yrgacheffe. A decision was made to apply for the registration of these coffee names as trademarks in various countries. Registering a name as trademark means that coffee retailers, in order to use a trademarked name would have to obtain a licensing agreement and pay a licensing fee to the Ethiopian IPR office. If managed properly, these funds could have been either channeled to the producers of these coffees or used for community or coffee-related projects. Applications were successful in the EU, Canada and (partly) in Japan. However, in the USA things became more complicated because Starbucks had already registered two of the Ethiopian coffee names for itself and was using them on retail packages. In 2005, the Ethiopian embassy in the USA contacted Starbucks offering an amicable solution to this potential conflict. It received no response from Starbucks. Oxfam was then brought in to mediate between the two parties. In February 2006, Ethiopia asked Starbucks to forego their trademark rights, and offered in exchange a free licensing agreement – this meant that Starbucks would not have to pay any royalties to the Ethiopians. But Starbucks refused to sign the agreement and the National Coffee Association of the USA filed a letter of complaint to the US trademark office. The letter claimed that Sidamo and Harrar are ‘generic’ names for coffee rather than distinctive and valued trademarks. The Ethiopian application was refused (Yrgacheffe went through because it had not yet been trademarked by Starbucks). 315 September 2008 Executive brief Coffee In September 2006, Ethiopia went back to Starbucks, again with mediation from Oxfam, to start a new round of negotiation – but nothing came of it at that time. But Starbucks’ brand equity is partly based on its ethical sourcing guidelines and an image of a sophisticated, wellmeaning business catering to educated consumers. Following press coverage of the conflict with Ethiopia (and combined with other factors), Starbucks’ stock value fell from a high of almost $40 in mid-November 2006 to barely over $25 in mid-June 2007. In late June 2007, Ethiopia and Starbucks finally reached an agreement: Ethiopia was granted trademark rights over the names of its speciality coffees, and Starbucks a royalty-free licence to use these names on its retail products. Although coffees such as ‘Kona’ and ‘100% Colombian’ were already registered as trademarks in the USA, the Starbucks-Ethiopia agreement is extremely important because it has brought to wider attention the role that systems of geographic indication and/or trademarks can play in ‘valorising’ coffee at the site of production. GI systems can strengthen producer organisations because it provides them with a focus and a clear business plan – instead of a more generic push ‘to get themselves together’. Thus, local producers could not only benefit from higher prices for their product, but also from wider developmental impacts. GI-related organisations could also spearhead broader ‘territorial strategies’ (e.g. related to tourism, crafts, other agro-food products, music, gastronomy, etc) drafted in collaboration with regional governments, commercial associations, donor agencies/NGOs, northern marketers, and local producer groups. With this approach, it would not only be locations producing ‘high quality’ coffees that could benefit from an GI-led initiative, but also locations where the material attributes of coffee may not be so attractive, but other symbolic offerings and in-person services may be. 316 Executive brief May 2008 Executive brief Cocoa Cocoa Table of contents 1. The international cocoa market __________________________________________ 319 1.1 Production breakdown ______________________________________________________ 320 1.2 The International Cocoa Agreement ____________________________________________ 320 1.3 Oligopolistic control ________________________________________________________ 321 2. The ACP cocoa sector __________________________________________________ 321 May 2008 2.1 EU-ACP cocoa-sector relations _______________________________________________ 324 2.1.1 The EU trade regime____________________________________________________________ 324 2.1.2 Past STABEX support __________________________________________________________ 324 2.1.3 The FLEX arrangement _________________________________________________________ 324 2.1.4 The EC commodities action plan __________________________________________________ 325 2.1.5 The EU position on geographical designations ________________________________________ 325 2.2 Policy responses to declining prices_____________________________________________ 326 2.3 The scope for EU action_____________________________________________________ 327 317 May 2008 Executive brief Cocoa Summary World cocoa output is currently close to a record high of 3.5 million tonnes annually, but the price in 2007, at about US$0.70 per lb, was about a fifth of the 1980 price in real terms; in early 2008 it had risen to around US$1.20 per lb. Marketing boards were largely replaced by private arrangements based on supply and demand after 1980. The International Cocoa Organisation established in 1973 to administer international cocoa agreements operated price-support measures in its first decade but now seeks to maintain a ‘sustainable cocoa economy’. Cocoa and chocolate manufacture and distribution is oligopolistic, with two or three companies accounting for over 58% of production in each of three different areas. Some 36 ACP countries between them have millions of small-scale farmers involved in cocoa growing, and in three countries cocoa accounts for about a third of export revenues. World production and exports are dominated by Côte d’Ivoire, Ghana, Nigeria and Cameroon, with the first two alone producing and exporting over half the world total. Indonesia and Brazil are also large producers, but Indonesia is the only significant non-ACP exporter, with about 10% of world exports. Cocoa beans and non-sugar-containing cocoa products from ACP countries enter the EU dutyfree, enjoying significant, though declining, margins of preference. The declines in cocoa prices in the 1990s made cocoa producers, along with coffee and groundnut growers, the main beneficiaries of STABEX, but payments via its successor, FLEX, have been small. There are hopes that the recent reform of FLEX and the EC’s 2004 commodities action plan may produce more positive results. Fair-trade and organic cocoa production, and more use of geographical designations, offer hope for higher earnings in the teeth of declining basic prices. The EU could play a role in supporting these possibilities, as well as price-risk management mechanisms and helping producers move up the value chain. 318 1. The international cocoa market World exports of cocoa beans in 2004 amounted to 2.725 million tonnes, up from 2.409 million tonnes in 2003, but worth US$4.176 billion, down from US$4.392 billion in 2003, following a decline in the unit value of 16%. In addition there were exports of cocoa paste, cocoa butter and cocoa husks and shells. A further marginal decline in unit value (less than 1%) followed in 2005 down to an average price of US$0.6977 per lb. Africa dominates exports of cocoa as well as production; some large producers such as Brazil consume most of their own output. Net exports of cocoa and cocoa products (thousand tonnes)* Côte d’Ivoire Ghana Nigeria Cameroon Total Africa Indonesia World total May 2008 Executive brief Cocoa Total production of cocoa beans in crop year 2005/06 was an all-time record of 3.675 million tonnes, although output was forecast to fall back to 3.472 million tonnes in 2006/07. The forecast output for 2007/08 in January 2008 was 3.713 million tonnes. The largest producers in 2006/07 were Côte d’Ivoire and Ghana, which grew 37.4% and 20.7% of the world total respectively, followed by Indonesia, Cameroon, Nigeria and Brazil, with 12.7%, 5%, 4.6% and 4.5% respectively. Together, ACP countries thus account for over two-thirds of world production. 2000/01 1,179.8 370.5 160.5 132.6 1,872 373.0 2,485 2004/05 1,299.6 612.2 200.7 187.2 2,397 454.0 3,123 *Net exports of cocoa beans plus net exports of cocoa products converted to beans equivalent using the following conversion factors: cocoa butter 1.33; cocoa paste/liquor 1.25; cocoa powder and cake 1.18. Source: ICCO World grindings of cocoa beans (a proxy for consumption) reached an all-time high of 3.641 million tonnes in 2006/07, with Europe the main user, although its share fell from 45% in 1999/2000 to 42.8%. The Americas’ share also fell over this period from 29% to 26%; meanwhile Asia and Oceania rose from 13% to 17% and Africa from 12% to 14% (mostly due to increased processing in Côte d’Ivoire rather than consumption). Consumption is forecast to rise to over 4 million tonnes by 2010. The world price of cocoa is quoted on international exchanges, the principal of which are London and New York, and is determined by supply and demand. The world price of cocoa rose sevenfold in the 1970s to over US$3,500 per tonne, stimulating the entry of Malaysia and Indonesia into production. Since then production has doubled and prices have halved; in real terms the price in 2002 was only 19% of the 1980 price (Robbins, p. 9) and although prices have risen since, no significant further improvement is forecast. Both London and New York operate cocoa futures and options on cocoa futures. International cocoa prices US$/tonne 2005/06 US$/tonne 1980/81 2,098 4,733 1990/91 1,193 1,770 2000/01 990 1,127 2005/06 1,557 1,557 2010/11 (projection) 1,867 1,713 Source: ICCO Market committee, September 12th 2007; projection calculated assuming SDR1:US$1.46. 319 Marketing boards have been a feature of production in anglophone producing countries in Africa (though Nigeria abandoned the system in 1986) and the similar caisses de stabilisation operated in francophone countries. More recently liberalisation has resulted in the privatisation of internal and external marketing structures in Nigeria, Cameroon and Côte d’Ivoire. May 2008 Executive brief Cocoa 1.1 Production breakdown There are two main types of cocoa beans: bulk (or basic), which makes up over 90% of output, comes mainly from Africa and Brazil and is mostly of the Forastero variety. Fine and flavour cocoas, which have distinctive flavour characteristics, constitute only 5% of production. Ghana cocoa sets the standard for grading, which is determined by the count of defective beans, with Grade I having less than 3% of mouldy beans, less than 3% of slaty beans and less than 3% of insect-damaged, germinated or flat beans. Grade II beans must satisfy counts of 4%, 8% and 6% respectively in these categories. After shelling and roasting, the resulting ‘nib’ is ground into cocoa paste (or liquor) and then refined to produce cocoa butter and cocoa cake (which may then be ground to powder). Chocolate is made by mixing cocoa butter, cocoa liquor and sugar. Because of tariff escalation in importing countries most cocoa (about 57%) is exported as beans, worth about US$1,500 per tonne in 2004. Cocoa paste, powder and cake, worth about US$2,400 per tonne in 2004 accounted for about 23% of exports by volume, while cocoa butter, worth about US$3,376 per tonne, accounted for about 14% of exports by volume. However according to the EC, ACP countries face no tariff escalation on their trade with the EU. According to its press release of August 9th 2006 in the case of cocoa and chocolate ‘the tariffs for these raw and processed goods are the same for countries like Ghana and Rwanda. As members of the African, Caribbean and Pacific countries group, they export these goods and almost all others they can produce to the European Union tariff free’. However, see section 2.1.1 below. 1.2 The International Cocoa Agreement The London-based International Cocoa Organisation (ICCO), an intergovernmental organisation, was established under the auspices of the United Nations in 1973 to administer the first International Cocoa Agreement, which includes both exporting and importing countries. The first agreement began in 1972 and successor agreements were negotiated in 1975, 1980, 1986, 1993 and 2001 (entering into force in October 2003). The earlier agreements included provisions for an export-quota scheme, buffer stocks and a withholding scheme designed to reduce volatility and maintain price levels, but under later agreements such economic interventions were abandoned. Instead, the main emphasis is on a sustainable cocoa economy. ‘Through the creation of a private-sector board, the Agreement seeks the active involvement of the private sector in the achievement of its goals. It will also promote transparency in the world cocoa market through the collection, analysis and dissemination of relevant statistics and the undertaking of appropriate studies.’ The ICCO supports the World Cocoa Foundation, formed in 2000 by cocoa-using industries ‘to promote and coordinate sustainable cocoa community development’. In 2001 the ICCO had about 40 members from 13 cocoa-exporting countries (9 of which are ACP members) as well as 27 consuming countries (although not the USA) plus the EU. 320 1.3 Oligopolistic control May 2008 Executive brief Cocoa Cocoa and chocolate manufacture and distribution is oligopolistic, with two or three companies accounting for over 58% of production in each of three different areas. Barry Callebaut Archer Daniels Midland (ADM) Nestlé Cadbury Hershey Fevrier Avril Others Producers of industrial and speciality chocolate in 2003 (%) 51 11 Producers of consumer chocolate in 2003 (%) 7 - Producers of industrial and consumer chocolate in 2003 (%) 24 4 4 34 27 15 13 17 21 21 12 10 13 16 Source: UNCTAD based on data from Barry Callebaut One consequence of oligopoly is the rising share of processors and manufacturers in the sale price of chocolate, and the declining share of the growers. A study in France for MAAPAR has shown that whereas in 1960 growers received about 18% of the final price of a bar of chocolate sold in France, and still around 16% until the end of the 1980s, their share then fell rapidly to around 5% in 2002; the share of manufacturers has moved from 56% to 70% over the same period, and that of retailers from 12% to 17%. Prospects for offsetting this oligopolistic control lie chiefly in the alternative cocoa and chocolate sector, especially the fair-trade movement. 2. The ACP cocoa sector In ACP countries cocoa is overwhelmingly grown by millions of small-scale farmers, often as their main cash crop. With the demise of most cocoa marketing boards in producing countries, farmers now sell to traders at the farm gate or in a local market. The buyers then sell on the cocoa to other traders. Lack of knowledge about prices means that farmers, especially poorer ones, can be exploited by traders. Cocoa earns export revenues for 36 ACP countries. For Ghana, Côte d’Ivoire and São Tomé & Principe it normally earns over 30% of export revenues from beans alone, with the exact percentage depending on prevailing price levels. The ratio rises to over 40% in most years in Ghana and Côte d’Ivoire when exports of cocoa butter, paste and powder/cake are included. Cameroon, Grenada, Sierra Leone and the Solomon Islands earn around 7%, and a number of other countries between 1% and 4%, including the Dominican Republic, Guinea, Liberia, Nigeria, Papua New Guinea, Togo, Uganda and Vanuatu. Output has had to contend with civil war and unrest in some producer countries including Côte d’Ivoire, the DR Congo, Uganda, Sierra Leone and Liberia, although the impact has been less severe than might have been expected. Output in Liberia halved between 2000 and 2004; but in the DRC output fell by only about 14% and in Côte d’Ivoire by only 5% in the same period, and production seems to have been little affected in Sierra Leone and Uganda. However, this is to be seen in the wider context of increases in output in the same period of two-thirds in Ghana and over a third in Cameroon; outside the ACP, Indonesia increased output by 45%, Ecuador by 37%, and Colombia by 24%. 321 May 2008 Executive brief Cocoa Cocoa bean production in ACP and other countries (thousands of tonnes) ACP countries/year Côte d’Ivoire Ghana Nigeria Cameroon Togo Papua New Guinea Dominican Republic Guinea Sierra Leone DRC Uganda Haiti Madagascar Tanzania Solomon Islands São Tomé & Principe Equatorial Guinea Other major producers Indonesia Brazil Ecuador Colombia World total production 1999 1,306.2 434.2 225.0 116.0 7.0 35.6 25.9 5.1 10.9 6.6 3.5 4.5 4.3 3.7 2.4 4.2 5.5 2000 2001 1,396.0 1,264.7 436.6 389.6 338.0 340.0 122.6 122.1 6.6 6.5 46.8 38.8 37.1 44.9 3.3 1.8 10.9 10.9 6.6 6.2 4.0 4.0 4.5 4.3 4.4 4.4 2.1 2.3 2.3 2.0 3.4 3.2 4.9 4.0 367.5 421.1 428.3 205.0 196.8 185.7 94.7 99.9 76.0 51.5 44.5 43.7 3,122.3 3,378.4 3,168.5 2002 1,264.7 340.6 362.0 125.0 6.0 42.4 45.5 2.5 11.0 5.8 3.5 4.4 4.4 4.0 2.9 3.2 2.0 2003 1,351.5 497.0 385.0 155.0 7.9 42.5 47.4 10.0 12.0 5.7 3.8 4.8 4.4 4.5 4.6 3.5 2.4 2004 2005 1,407.2 1,360.0 737.0 740.0 412.0 441.0 166.8 178.5 21.7 59.0 42.5 42.5 48.0 31.4 9.8 17.0 9.7 8.7 5.7 5.6 4.5 5.0 4.7 4.7 4.4 4.6 3.5 5.0 5.0 3.8 3.5 3.5 3.0 3.0 2006 1,400.0 734.0 485.0 164.6 73.0 0.0 31.4 19.0 13.9 5.6 6.0 4.7 4.6 4.5 3.8 3.5 0.0 571.2 572.6 601.3 610.0 580.0 174.8 170.0 196.0 208.6 199.4 88.0 88.3 89.7 93.7 93.7 48.2 41.7 36.4 37.1 37.1 3,286.2 3,582.3 3,973.8 4,012.9 4,058.6 Source: FAOSTAT Other ACP countries producing less than 2,000 tonnes a year include: Angola, Belize, Benin, Central African Republic, Comoros Islands, Republic of Congo, Costa Rica, Dominica, Fiji Islands, Gabon, Grenada, Guyana, Jamaica, Micronesia, St Lucia, St Vincent, Suriname, Trinidad & Tobago and Vanuatu. With ACP countries growing over two-thirds of the world’s cocoa beans, they naturally dominate world trade. In fact as two other big growers, Brazil and Malaysia, consume or process most of their own production, the ACP share is even more important. This applies to a lesser extent in the case of cocoa paste, cake, powder and butter, which in the ACP are only produced to a significant extent by Côte d’Ivoire and Ghana (and Cameroon in the case of cocoa paste). 322 May 2008 Executive brief Cocoa Exports of cocoa and its products in 2005 (percentage of world total) Countries/Products Côte d’Ivoire Ghana Indonesia Nigeria Cameroon Netherlands Belgium Ecuador Papua New Guinea Togo Dominican Republic USA Germany Malaysia France Brazil World total (tonnes) Cocoa beans % 33.5 18.2 12.4 9.1 5.5 5.4 4.8 2.6 2.1 1.0 0.9 0.7 0.4 0.3 0.1 0.0 2,969.9 Cocoa butter % 9.3 1.5 5.8 1.0 0.0 33.1 0.5 1.3 0.0 0.4 3.1 1.4 12.3 10.3 5.6 Cocoa paste % 35.2 5.2 0.2 0.3 4.1 25.2 1.0 0.2 3.3 3.8 2.8 4.5 2.7 701.4 Cocoa powder/cake % 9.6 1.8 5.9 0.4 0.0 33.0 0.4 1.0 0.0 0.3 2.6 5.2 10.6 5.8 4.8 414.9 804.7 Source: FAOSTAT Whereas most Latin American producers export almost their entire output of cocoa as cocoa products, the proportion in the early 2000s was only 23% for Côte d’Ivoire, 14% for Cameroon and 8% for Ghana. The import and consumption figures, coupled with historical preferences in favour of ACP countries mean that the EU remains overwhelmingly the main market for ACP cocoa producers. It is also the main target for expanded sales of value-added, organic and fair-trade products. However the EU is a stagnating market, with sales growth slowing down. According to Confectionery News, ‘This is very much a consequence of the maturity of the western markets. Major manufacturers have experienced declining value sales. Indeed, falling European sales in 2003 drove Cadbury Schweppes to start a cost-cutting programme that led to jobs being lost to help shore up profits. Western European sales have also been affected by a rising sense of health consciousness, having a particular impact on the chocolate segment.’ However, there has been growth in certain components of the EU market, for example sales of certified fair-trade cocoa and chocolate have increased. China and India will soon be big markets for a wide range of commodities, including cocoa, according to a report by UNCTAD. The two countries have a combined population of 2.3 billion people, about 37% of the world’s population. A $100 increase in the per capita income (representing a 10% rise in China and 20% in India) would translate into about $230 billion in additional demand for commodities. The study notes that African countries experienced a 10% annual increase in agricultural exports to China from 1995 to 2002. It concludes that the ‘coming years may see an unprecedented opportunity for developing countries to increase exports of commodities, particularly to other developing countries, as a result of favourable market conditions over the medium term, both for raw materials and for food commodities.’ 323 2.1 EU-ACP cocoa-sector relations May 2008 Executive brief Cocoa 2.1.1 The EU trade regime Cocoa beans from all producers now enter the EU duty-free. ACP exporters of cocoa-based products however enjoy preferential rates in EU markets. In 2002 the MFN rate for cocoa and cocoa products was 34.3%, the GSP rate was 28.5% and ACP countries paid only 13.0%. The latter rates have since been reduced, and all cocoa products from ACP countries that contain less than 5% sugar now enter duty free. Because of a flat tax on sugar content, the margin of preference falls for products containing more sugar, but after signing an EPA this sugar-content tariff rate falls to zero. On the other hand, as a result of its failure to sign an EPA, Nigeria now faces the GSP rate. Tariff rates as of May 2008 1801 Cocoa beans 1803 Cocoa paste 1804 Cocoa butter 1805 Cocoa powder 1806102 Cocoa powder containing 5%-65% sugar 1806103 Cocoa powder containing 65%-80% sugar 1806109 Cocoa powder containing more than 80% sugar 1806201 Chocolate in slab MFN rate % 0 9.6 7.7 8.0 43% or 8% + €25.2/100kg 43% or 8% + €31.4/100kg 43% or 8% + €41.9/100kg 43% or 8.3 % + EA MAX 18.7 +ADSZ GSP rate % 0 6.1 4.2 2.8 2.8% + €25.2/100kg 4.5% + €31.4/100kg 4.5% + €41.9/100kg 4.8 % + EA MAX 18.7 +ADSZ ACP rate % 0 0 0 0 0% + €25.2/100kg* 0% + €31.4/100kg* 0% + €41.9/100kg* 0% * Zero in an EPA. 2.1.2 Past STABEX support Under the EU-ACP system for the stabilisation of export earnings (STABEX, instituted as part of the Lomé Agreement), ACP countries were compensated in part for shortfalls in export earnings. Under Lomé I, II and III, three products, namely coffee, groundnuts and groundnut products and cocoa received 60% of all STABEX transfers. Côte d’Ivoire received 18.8%, Senegal 10.4% and Cameroon 9.2% of all STABEX funds. This bias was exacerbated by maintaining the dependency threshold. The pattern with cocoa and coffee, which swallowed most STABEX funds (90% in 1990), changed slightly when large STABEX transfers were made for bananas to Caribbean states during the first five years of Lomé IV. São Tomé & Principe, Grenada and Papua New Guinea have also benefited from STABEX support for cocoa. STABEX resources often constituted a very substantial supplement if compared to the total amount of export earnings of the beneficiary states. STABEX payments for cocoa to São Tomé & Principe made up 48% of the total export earnings of that country in 1991. STABEX ended with the signing of the Cotonou Agreement in June 2000, when the system was replaced by FLEX. 2.1.3 The FLEX arrangement FLEX is a mechanism intended to compensate for shortfalls in total export earnings of ACP countries. Unlike STABEX, it does not compensate for shortfalls in export earnings of any particular commodity. It provides additional budgetary support to countries that have registered:   a 10% loss in exports earnings (2% in the case of LDCs); and a 10% worsening of the programmed public deficit. 324 Experience has already shown that these eligibility criteria have been too stringent: from 2000-2 in only 6 out of 51 cases have ACP countries been able to meet both criteria. Support from FLEX in the six cases has totalled €35.65 million. May 2008 Executive brief Cocoa 2.1.4 The EC commodities action plan In 2004 the EC put forward a proposal for an EU action plan on agricultural commoditiesdependence and poverty. The aim of the plan was to help developing countries enhance their export performance and reduce their vulnerability to price fluctuations in major international agricultural commodities such as cocoa. The key objective was to improve the income of producers and reduce income-vulnerability to price fluctuations. The Commission proposed to simplify the FLEX criteria. The plan identified six major areas of intervention: Putting the commodity problem on the agenda including: supporting commodity-dependent developing countries (CDDCs) in elaborating comprehensive commodity strategies covering critical parts of the commodity chain and fully integrating these in their overall povertyalleviation policies; supporting the reform of the international commodity bodies, making them more receptive to development concerns. Responding to price decline: supporting the implementation of commodities strategies which in the context of the ongoing negotiations for EPAs between the EU and ACP regions would support regional initiatives for developing regional networks of farmers’ organisations, qualityenhancing services, investment promotion or commodity branch organisations. A total of €600 million has already been allocated for trade-related assistance within the EPA negotiations. Managing risks and increasing access to finance: support for new financial instruments and commodity-risk insurance schemes, to fight against inadequate access to finance, and cushion against price fluctuations. Support for the development of insurance tools at macroeconomic level to counter fluctuations in commodity prices which reduce predictability of government revenues and limit developing countries’ ability to implement the reforms in favour of sustainable development and poverty alleviation. Support for diversification: the EU should assist CDDCs in making informed choices on promoting diversification and support the implementation of these choices. Provision of direct aid to local producer diversification is also proposed. Successful integration of CDDCs into the international trading system. Simplifying FLEX: it was proposed to extend to landlocked countries and island states the special clause on a 2% loss in export earnings applied to LDCs, and eliminate the 10% benchmark on the worsening in the programmed public deficit. Had these proposed criteria been applied to the 51 cases from 2000-2002, ACP countries would have received €255 million through the FLEX system, over seven times as much as they actually did under the existing FLEX instrument. In addition the EC proposed to engage international commodity companies in the promotion of corporate social responsibility, sustainable codes of conduct, promotion of public-private partnerships and promotion of international competition. To date the commodities action plan has had little impact in the cocoa sector. 2.1.5 The EU position on geographical designations The EC would like to see an international register of food-and-drink products that are made from a special recipe, or are from a specific region, that are not allowed to be copied. Such GIs would follow the pattern already established for wines and spirits. The March 2005 WTO ruling on geographical designations of origin should help ACP countries that want to develop regionally specific cocoas, particularly fine and flavour cocoas. 325 May 2008 Executive brief Cocoa The ICCO has sponsored a project on the ‘Study of the chemical, physical and organoleptic parameters to establish the difference between fine and bulk cocoa’ in order to achieve sustainability of the highest quality cocoas in the world. This project was developed in Ecuador and involves Ecuador, Papua New Guinea, Trinidad & Tobago and Venezuela. The objective of the project is to develop the capacity for all involved in the production and trade of cocoa to differentiate adequately between fine and bulk cocoa, thus improving the marketing position of fine or flavour cocoa. The project has also created awareness among farmers of the need to maintain good postharvesting practices in order to protect the reputation of fine or flavour cocoa originating from their countries. There is also a need for investment to help countries to add value and export a higher proportion of their cocoa as paste, cake and powder, butter and indeed chocolate and other forms of confectionery. 2.2 Policy responses to declining prices Remunerative prices for cocoa farmers are at the core of ‘economic sustainability’ in the world cocoa economy. With wide fluctuations in cocoa prices, there are times when prices are no longer sufficiently attractive to farmers to plant new cocoa trees and to properly maintain their cocoa farms. Whenever that occurs, cocoa production is no longer economically sustainable until prices have increased. Initiatives aimed at promoting an effective policy response to declining prices have largely been implemented through the ICCO. These have focused on: improving productivity; enhancing the quality of production encouraging movement up the value chain in developing countries and support for risk-management schemes. Quality-related programmes have often included elements of traceability to ensure that quality standards can be ensured. The experience of developing risk-management schemes in Africa has not been as successful as initially hoped. A major area where scope for product differentiation exists and where premium prices can be obtained for cocoa and cocoa products is the ‘fair trade’ market, which is growing rapidly. For example the retail sales value of fair-trade cocoa and chocolate in the UK was about £1 million in 1998, since when sales have risen rapidly to reach £16.5 million in 2004 and £34 million in 2007 (still, however, representing less than 2% of the market). The UK has overtaken Germany, Switzerland and the Netherlands in consumption of ‘fair trade’ cocoa products, increasing 100fold from 22 tonnes in 1996 to 2,238 tonnes in 2005, three times as much as the nearest rivals, Germany and France. Fair-trade cocoa and chocolate are labelled with the ‘Fairtrade’ mark, a consumer label operated by the UK-based Fairtrade Foundation. The mark guarantees a better deal for producers in developing countries. There are fair-trade labelling initiatives in 18 countries, mostly in Europe, but also in North America and Japan. An umbrella body, the Germany-based Fairtrade Labelling Organisations International (FLO) coordinates the international monitoring and certification of producers and traders. It permits more than 800,000 producers, workers and their dependents in 50 countries to benefit from being labelled ‘Fairtrade’. An additional differentiated market which could be served by ACP suppliers seeking price premiums is the organic market. This is very much a new area for the cocoa industry. At least ten ACP cocoa producers however already have a foot in this market. A notable feature of the policy response to declining prices in the cocoa sector is the relatively minor role being played by the EC, despite the commitments made in the 2004 commodities action plan. 326 2.3 The scope for EU action Given the importance of the EU market to the ACP cocoa sector and the policy commitment to helping commodity-dependent developing countries in developing comprehensive strategies covering critical parts of the commodity chain, the EU could potentially play an important role in addressing a number of key challenges faced. May 2008 Executive brief Cocoa These include:  supporting the establishment of quality standards and assured compliance (via full traceability);  supporting targeted programmes of assistance to ACP producers in serving the ‘fair trade’ and ‘organic’ niche markets;   supporting the elaboration of effective price-risk management mechanisms; supporting ACP cocoa sectors in moving up the value chain. The EC has a long experience both in establishing quality standards and assisting producers (through support to producer organisations) in meeting these standards. This rich experience could be drawn on to ensure that ACP cocoa producers are increasingly well placed to serve differentiated markets with clearly differentiated products, which attract premium prices. Extending support to ACP producers in serving the ‘fair trade’ and ‘organic’ niche markets can be seen as a sub-set of quality-related initiatives, but with particular problems related to the costs of certification. EU initiatives are needed not only to support the attainment of ‘fair trade’ and ‘organic’ standards of production, but also to bring down the costs of certification. This should form an integral part of commodity strategies which are fully integrated with poverty-alleviation strategies. Ever since the debate on the abolition of the STABEX scheme in 1997 the EC has been arguing in favour of developing market-based risk-management instruments. However, to date there is no record that the EC has been able to support the establishment of such scheme in the cocoa sector in any ACP country. There would appear to be a need for renewed and sustained EC effort in this area, particularly in the light of the importance of cocoa to smallholders, and in order to enhance poverty-eradication efforts in cocoa-producing ACP countries. In terms of extending support to ACP producers in moving up the value chain, the first area which needed to be addressed was the elimination of any residual tariffs or special duties arising from the application of special duty provisions on value-added food products linked to sensitive agricultural products (e.g. sugar); this has been achieved under the EPAs. The second area which needs to be addressed relates to sector-specific inspection requirements. Some EU regulations (e.g. in the dairy sector) require separate inspections by dairy inspectors where dairy products are used in combination with other agricultural products to produce valueadded products destined for the EU market. This can raise the costs of inspections unnecessarily. These regulatory anomalies should be removed, with inspection requirements being consolidated to reduce costs. Thirdly the EC needs to look at what types of financial instruments are required to support investment in moving up the cocoa value chain in ACP countries. This may require reviewing the terms and conditions of grant-financed EIB administered loans, to reduce the costs of loans targeted at encouraging investment in movement up the cocoa value chain. Alternatively it may require the creation of new financial instruments. Overall what is required is a comprehensive approach to assisting ACP cocoa producers in moving up the value chain so that their dependence on the low basic cocoa price is reduced. 327 Executive brief May 2008 Executive brief Tea Tea Table of contents 1. The international tea market ____________________________________________ 331 1.1 Market breakdown _________________________________________________________ 331 1.2 Global production and consumption ___________________________________________ 331 1.3 How the tea market works ___________________________________________________ 332 1.4 International producers and traders_____________________________________________ 332 1.5 Major trends in the market ___________________________________________________ 333 May 2008 2. The production structure of the ACP tea sector _____________________________ 334 2.1 The competitiveness of ACP tea _______________________________________________ 335 2.2 The economic significance of tea to ACP countries ________________________________ 335 3. The EU regime _______________________________________________________ 336 4. The importance of the EU market globally_________________________________ 336 5. Challenges and opportunities for the ACP tea sector_________________________ 336 5.1 The need for investment to improve quality and add value ___________________________ 336 5.2 Exploiting the ‘fair trade’ market_______________________________________________ 337 5.3 Other trends ______________________________________________________________ 338 6. Conclusion ___________________________________________________________ 338 329 Summary There are a number of areas in which the EU could help ACP producers, for example by acting with them to reduce the abuse of dominant market positions by large companies. It could also help to promote the use of Geographical Indications and could expand its ‘aid for trade’ financing. The fair-trade market is of growing significance, and other ‘luxury purchase’ developments could yield higher earnings for responsive producers in the future. May 2008 Executive brief Tea Of the 36 world tea producers, 19 are ACP countries, including the third largest producer, Kenya, which is also the world’s largest exporter. Tea is grown both on plantations and by small growers, and is mainly sold by auction, but the industry is dominated by a few vertically integrated companies, and there have been charges of collusion. Although price trends have been downwards, and in real terms producers now receive less than half what they did 30 years ago, output continues to rise. The EU is an important market for ACP countries and applies no tariffs (with a minor exception). 330 1. The international tea market 1.1 Market breakdown May 2008 Executive brief Tea There are two major types of tea, black and green. Black tea accounts for around 75% of global production and over 90% of the market in western countries. Black tea results from leaves that are fully oxidised, while green tea leaves are steamed, rolled and dried without any oxidation. Most green tea is grown in China and is gaining popularity in the west, partly for health reasons. FAO projections for the ten years to 2017 indicate that world black tea production will grow at 1.9% annually from about 2.5 million tonnes in 2006 to reach 3.1 million tonnes while world green tea production is expected to grow at a considerably faster rate of 4.5% annually to reach 1.57 million tonnes. The FAO believes that in these years the expansion of tea production could substantially exceed growth in consumption, with the current situation of market balance being transformed into one of growing surplus production. This could serve both to depress prices and reduce ‘returns to producers in developing countries’. In this context increasing attention is being paid to ‘expanding consumption in producing countries’ and getting to grips with the challenge of establishing quality standards. According to the FAO ‘better quality should increase demand while preventing low-quality tea from being traded should curtail the over-supply situation in the world tea market’. 1.2 Global production and consumption Tea is grown in 36 tropical and semi-tropical countries, 19 of them ACP countries. The six largest producing countries – India, China, Kenya, Sri Lanka, Turkey and Indonesia (in that order) – account for 80% of world output. Less than half of production is exported, as India and China, in particular, are major consumers as well as producers. Global tea production has grown by around 2% a year since 1993-95, but consumption in western countries has grown by barely 1%. In a number of developing countries, however, consumption has kept pace with, or exceeded production. Global production grew by over 3% to 3.65 million tonnes in 2006. World tea consumption grew by 1% in 2006, reaching 3.64 million tonnes. China’s total consumption overtook that in India, following an increase of 13.6%. For India, the annual tea consumption growth at 2.51% was considerably higher than the annual trend of 1.6% on average over the previous decade. In 2006 China accounted for 28.8% of world output, followed by India with 24.5% and Kenya and Sri Lanka with 8.5% each. Tea production Main world producers and leading ACP producers China India Sri Lanka Kenya Turkey Indonesia Malawi Uganda Tanzania Zimbabwe Rwanda World total Source: FAO 331 Production in 2006 (tonnes) 1,049,500 892,730 310,800 310,580 204,600 171,410 38,387 34,334 30,300 22,000 16,000 3,649,491 As China, India and Sri Lanka are also major consumers of tea they fall behind Kenya as the major exporter. In 2005 ACP countries account for only about 13% of production, but 29% of exports. Beyond Kenya, other ACP exporters represent only 8% of total exports, Uganda, Malawi and Tanzania exporting more than 20,000 tonnes each in 2005. 1.3 How the tea market works May 2008 Executive brief Tea Tea is unusual among major agricultural commodities in that it is sold through auctions or in private deals, increasingly online. Unlike coffee or cocoa, there is no futures market for tea. There are two auction centres in ACP countries, both in Africa. The major centre in Mombasa, Kenya, offers between 60,000 and 90,000 packages of tea every week, with teas mainly from Kenya, but also from Uganda, Rwanda, Tanzania and DR Congo. The other auction centre, in Limbe, Malawi, sells teas from Malawi and occasionally from Mozambique, Zimbabwe and Zambia. Due to the seasonal nature of Malawi’s tea production, the auction operates weekly for the six months of the season – between December and May – and fortnightly thereafter. Online tea auctions have recently been set up alongside traditional auctions. These speed up access to information and facilitate participation. Bids can be submitted at any time and the sale process is not geographically confined. Transaction cycle times and the stages in handling are reduced. Also, teas need not be transported to warehouses as inspections can be done using samples couriered to buyers from the plantations. Although the auction system would seem to approximate a ‘fair market’ in which prices are determined solely by the interplay of supply and demand, the system does not always work well for small-scale producers. Auction prices vary considerably with both the quality and quantity of tea on offer, and the demand for tea at any given time. There is evidence of collusion among brokers to influence prices. A number of investigations have revealed ‘a high degree of collusion that prevails in buying and ... wide scope for collusion between brokers and buyers’. Such collusion, if it occurred, would tend to reduce the price at which producers could sell tea at the auctions, and would also affect prices of direct sales. Indeed, in 2005 the situation was deemed so bad the Kenyan National Chamber of Commerce called for the elimination of tea auctions. The extent of this alleged collusion by buyers raises important issues of competition policy, of the kind the EU has routinely taken action against in the sugar sector within the EU. 1.4 International producers and traders A small number of companies dominate the tea industry. They have a presence at almost all stages of the journey of tea from tea bush to tea bag or packet. The companies buy their tea at an early stage of production, and usually carry out the high-value-added blending and packaging (which account for 80% of the retail price), at facilities in the EU and other western countries. Blending means that many tea qualities have become exchangeable and are bought wherever they are cheapest. The major companies are not reliant on any one particular source and can easily freeze out a particular producing country if it does not cooperate with the needs of the company. The UK/Dutch company Unilever is the world’s largest supplier of black tea. With tea estates in India and eastern Africa it has an estimated 15% share of global black tea sales. Its subsidiary Brooke Bond Kenya is the country’s largest plantation company with an 11% share of output. In July 2004 the company changed its name to Unilever Kenya Tea. Unilever’s major brands (including Lipton, PG Tips and Red Label) have an annual turnover in excess of €2.35 billion and are available in more than 100 countries. Unilever’s Lipton Yellow Label is the world’s most popular tea brand. 332 James Finlay Ltd produces around 55,000 tonnes of tea each year on its plantations in Kenya, Uganda, Bangladesh and Sri Lanka. Tata Ltd (India) has 18 subsidiaries worldwide and a significant presence in 35 countries. It owns more than 70 estates in India and Sri Lanka, produces over 60,000 tonnes of black tea and in 2003 acquired Tetley, the second-largest tea-bag brand worldwide. This level of industry concentration also raises competition policy issues. There is no single world price for tea, but rather differing prices at different auctions. The price trend until recently has been downward. World Bank figures suggest that between 1970 and 2000, tea prices fell by 44% in real terms. However, the FAO composite price index, a world indicator price for tea, shows that tea prices are slowly increasing since 2002. After two years’ decrease between 2000 and 2002, the price for tea increased by 31.7% in 5 years; in recent years it rose by 6.5% to $1.95 per kg in 2007 after an 11.6% rise in 2006, in a sign that global oversupply of tea was improving. According to FAO simulations, ‘tea prices are expected to maintain their upward trend in 2008 as a result of a tight supply on the world market exacerbated by a projected 10% decrease in Kenyan production due to the current civil unrest in this country […] [and] given current demand elasticities of the major players in the tea market, it will take 3 years for the market to adjust to this price shock.” May 2008 Executive brief Tea 1.5 Major trends in the market FAO composite prices (US$/kg) 1.8 1.56 1.48 1.52 1.66 1.64 1.83 1.95 Year 2000 2001 2002 2003 2004 2005 2006 2007 Annual growth rate % -13.3 -5.1 2.7 9.2 -1.2 11.6 6.6 Source: Committee on commodity problems intergovernmental group on tea: Current situation and medium-term outlook, May 2008 ftp://ftp.fao.org/docrep/fao/meeting/013/k2054E.pdf FAO tea Composite prices (US$/kg) 2.5 2 1.5 1 0.5 0 2000 2001 2002 2003 2004 2005 2006 2007 However a longer-term analysis indicates that after taking inflation into account, the real price of tea has dropped substantially. In real terms, producers now receive less than half what they did 30 years ago. While technological innovation and the development of new teas has led to some expansion of the market, they have increased world output of tea and reduced prices without affecting global demand significantly. In the absence of supply-management strategies, production has outstripped demand. 333 Tea prices have nonetheless fluctuated less dramatically than coffee prices, giving small-scale tea growers a little more certainty than coffee farmers. Executive brief Tea Auction centres could become redundant with technological advances. At present almost all tea fields are located in regions where land-phone lines intermittently fail or do not exist. With the development of the internet through mobile phones, however, and given that many plantations are financed by large companies, tea estates will in the future be able to post real-time data daily onto the internet, enabling a viable futures market. The global process for bringing buyers and sellers more directly together is already taking place with catalogue sales of premium tea. ACP producers need assistance to access information to enable them to exploit online auctions. 2. The production structure of the ACP tea sector The 19 ACP tea producers are Burundi, Cameroon, DR Congo, Ethiopia, Kenya, Lesotho, Mali, Malawi, Mauritius, Mozambique, Nigeria, Papua New Guinea, Rwanda, Seychelles, South Africa, Swaziland, Tanzania, Uganda and Zimbabwe. All but Lesotho, Mali, Nigeria and Seychelles export tea. May 2008 Kenya accounts for over half of the tea output in ACP countries. Malawi, Uganda and Tanzania are the next largest producers (in that order), with Malawi’s production about 15% of Kenya’s. Globally, most tea is grown on plantations. In the ACP countries, small-scale growers are also prominent; in Kenya, they account for about 60% of the country’s tea production. Smallholders often grow tea bushes alongside staple crops for their own consumption, with the tea providing a cash income. Outsourcing is practised in some countries – in Zimbabwe and Malawi, for example – with growers using their own plots to grow tea on contract for plantations. Only the smallest producers farm their land entirely with family labour, and many smallholders employ workers, often on a casual basis. On plantations, the use of child labour seems common in many of the poorer tea-producing regions, due to the economic conditions of the household and lack of schools. A recent survey by the Malawi Congress of Trade Unions found, for example, that child labour is a very serious problem in many tea (and also tobacco) plantations. Low prices for tea tend to be passed on to the poorest segments of a country in the form of low wages on plantations. Given that it is easier to cut costs (by reducing labour costs) than raise prices (it is impossible for a producer country to attempt this unilaterally), producing countries have to remain competitive by lowering wages – which partially accounts for the rut in which plantation wages are caught. Labour costs account for over half of the cost of production, and approximately 75% of that arises in plucking. There is downward pressure on farmers’ incomes and labourers’ wages and working conditions, even though the proportion of wages in the consumer price of tea is low. ACP countries thus account for around 13% of world production and 43% of the EU’s imports. 334 Tea production and exports of ACP countries and other major exporters to the EU in 2006 (tonnes) Sources: FAO; EC Helpdesk May 2008 Executive brief Tea Production ACP Burundi Cameroon DR Congo Ethiopia Kenya Madagascar Malawi Mali Mauritius Mozambique Nigeria Papua New Guinea Rwanda Seychelles Tanzania Uganda Zambia Zimbabwe Total ACP Other exporters India China Sri Lanka Indonesia World total Exports to EU 7,500 4,000 1,400 3,900 310,580 550 38,387 150 1,567 10,500 n/a 9,000 16,000 189 30,300 34,334 750 22,000 >491,107 88.5 11.6 81.5 85,137.5 10,863.3 35.7 496.9 9.8 1,523.4 451.4 4,786.3 176.7 22.3 4,545.3 >107,830.2 892,730 1,049,500 310,800 171,410 3,649,491 41,661.8 32,850.1 22,657.6 29,624.3 274,836.7 2.1 The competitiveness of ACP tea Yields of tea and the cost of producing it vary enormously from smallholder to estate, estate to estate, and country to country. In Kenya the estate sector is the most efficient with yields of about 2,670 kg/ha compared to 1,167 kg/ha in Sri Lanka. This is reversed in the smallholder sector; in Kenya, yields from smallholders average only 1,651 kg/ha as against 2,217 kg/ha in Sri Lanka. The low level among Kenya smallholders is attributed to low levels of fertiliser usage, poor husbandry practices and inferior management. Paradoxically, tea smallholders in Kenya generally earn more than tea workers, many of whom would prefer to be smallholders. The Kenya Tea Development Authority pays a minimum of Ksh 7.50 (US cents 9.5) per kg to smallholders and outgrowers. Growers in Uganda receive US cents 10.4-15, those in Rwanda US cents 9.5, and those in Malawi US cents 7.5. 2.2 The economic significance of tea to ACP countries Tea output is increasing in the ACP group as in other tea-producing areas. Kenya’s production increased from 236,286 tonnes in 2000 to over 328,500 tonnes in 2005, while its exports increased even faster, from 217,290 tonnes in 2000 to 313,200 tonnes in 2005. Tea accounts for around 20% of Burundi’s total exports, 18% of Kenya’s, 12% of Rwanda’s and 7% of Malawi’s. Uganda and South Africa are vigorously developing their tea sectors, the latter partly through red tea (rooibos), worldwide export sales of which increased by 400% between 1998 and 2003. Studies carried out in South Africa have shown that rooibos is rich in antioxidants and may help protect against damage that can lead to types of cancer and heart problems (note: strictly rooibos is not a tea). There is a danger that expansion could have a negative effect on world tea prices, especially given the near-stagnant demand for tea in many western countries. 335 3. The EU regime Executive brief Tea The EU has no restrictions on the import of tea, nor does it have quality standards. The EC describes tea as ‘a totally liberalised market’. The most favoured nation (MFN) tariff is zero, and there is no tariff escalation if tea is processed. However, on small packages only, a rate of 3.2% ad valorem tax applies on imports into the EU of ‘green tea (not fermented) in immediate packings of a content not exceeding 3 kg’; on black tea the rate is 0%. There were therefore no significant issues related to tea during the EPA negotiations, and countries failing to sign interim EPAs did not face tariff rises as in the case of some other commodities. According to the EC, the main issue concerning the tea sector is the way its producers are unprotected from ‘copycats’. Around 10,000 tonnes of ‘Darjeeling’ tea, for example, is produced from the estate in Darjeeling, India, but 30,000 tonnes is sold under this designation around the world. The EC would like to see an international register of food-and-drink products that are made from a special recipe, or are from a specific region, that are not allowed to be copied. The March 2005 WTO ruling on Geographical Designations of Origin should help ACP countries that want to develop regionally specific teas. The EU believes that the ruling upholds its system of granting protection to products with specific geographic origin (GIs). May 2008 4. The importance of the EU market globally Global tea imports in 2005 totalled 1.39 million tonnes, of which the EU imported 323,930 tonnes, 23.7% of the total. In 2007 the UK imported 151,271 tonnes, 56.3% of EU imports. Germany was the EU’s second largest importer with 16%. The EU share of global imports rose with the entry of Poland, a major tea-consuming country, which imported 23,212 tonnes in 2007 (8.6% of EU imports). The EU’s historical relationship with ACP countries lays the basis for cooperation, given that EU countries do not grow tea. The entry of Turkey, the world’s sixth largest tea producer, into the EU could change this and cause considerable, but as yet unknown, repercussions for ACP countries. The EU gives financial support to tea projects in ACP countries. Development Programme in Uganda, for example, was assisted with European Development Fund. The objective of the project was smallholder tea subsector and make it profitable, and to increase employment opportunities and foreign-exchange earnings. The Smallholder Tea €20 million from the to develop Uganda’s farmers’ real income, ACP countries could gain, believes the EU, if the WTO were to extend the extra protection for GIs, currently limited to wines and spirits, to other products including commodities – Kenya tea, for example. ‘There is ample evidence that geographical indications are instrumental in fostering market differentiation leading to premium prices. The resulting consumer recognition and product reputation should therefore be safeguarded against unfair competition and imitations via WTO-wide rules’, according to an EC report. 5. Challenges and opportunities for the ACP tea sector 5.1 The need for investment to improve quality and add value Investment is needed to raise the general quality of ACP teas which tend to be low. This is reflected in the comparative prices at the Mombasa auction on the one hand and the Indian and Sri Lankan auctions on the other. For instance in January/February 2005, tea fetched an average of US cents 154.4/kg in Mombasa compared with US cents 194.2/kg at the Colombo auction. 336 Executive brief Tea More investment is also needed to produce speciality teas. Teas in this category from Kenya and Rwanda and other ACP tea-producing countries are in demand and have attracted good prices. Speciality teas from India have earned a reputation for high quality and fetch very good prices. A batch of genuine Darjeeling tea, for example, fetched a record, if exceptional, price in 2003 of £223/kg, compared with less than £1/kg for ordinary teas. Tea-producing countries would profit from expanding into upstream activities, adding value in their own country, and generating additional employment, income and revenue. Efforts by producers to enter activities such as blending have been hampered by poor market information and inadequate marketing strategies, aggravated by a lack of funding. The Kenya Tea Development Agency (KTDA), which processes and markets tea on behalf of its 370,000 smallholder owners, wants to reverse this. In March 2003 it announced plans to blend KTDA tea with cheaper African teas and sell them in branded packs to foreign markets. In early 2004 the KTDA announced that three new tea brands are being produced in Kenya for export: green, orthodox and flavoured tea. The development of the products was inspired by a need ‘to meet new customer demands’. New strategies aimed at adding value and reducing production and marketing costs are also needed, especially to meet changing tastes May 2008 5.2 Exploiting the ‘fair trade’ market An increasing number of tea growers and plantation workers are benefiting from selling their tea in the fair-trade system, with a ‘Fairtrade’ label. Products are certified by the UK-based Fairtrade Foundation. Fairtrade-certified tea is sourced from tea estates and democratic small-farmer organisations under terms of trade which include:    fair wages and working conditions for employees; payment of a negotiated fair price to producers (estates and smallholder organisations); an additional premium for investing in social, economic or environmental programmes. The ‘fair trade’ tea industry is growing rapidly, from 1,964 tonnes in 2004 to 5,413 tonnes in 2007, representing a 175% increase in three years. But this still represents only 0.5%, 2% and 5% of the market shares in the UK, Germany and Switzerland respectively in 2005. Cafédirect, a UK-based fair-trade company, sources tea from east Africa and Sri Lanka for sale under its Teadirect label. With a 34% year-on-year growth by value, Teadirect is the fastest growing tea brand in the UK retail market. Farmers who grow tea for Teadirect receive a guaranteed minimum price of US$1.95/kg, some 40 cents a kg higher than the Mombasa auction price in early 2005. In addition, a premium of €0.50/kg or €1.00/kg, depending on the type of tea, is paid for the improvement of the socio-economic situation of the workers, their families and communities. A growing percentage of fair-trade tea, almost 40%, comes from small-scale growers. Another major UK-based company Traidcraft, buys chiefly from Uganda and Tanzania. More than 70 fair-trade teas are now marketed, both tea bags and loose tea, and including ‘organic’ and green tea. The Fairtrade label is monitored by the German-based Fair-trade Labelling Organisation International (FLO), which sets standards under which tea can be sold, and is working with 79 tea-producing organisations from six ACP countries, including fifteen in Kenya, five in Tanzania and in South Africa, three in Uganda, two in Malawi and one in Burkina Faso. 337 An FAO ‘Tea Mark’ was launched in December 2002. This is intended to be an international mark to promote tea’s health benefits. The tea boards of India, Kenya and Sri Lanka have been involved. Executive brief Tea The Kayonza tea-processing factory in Uganda is an example of involvement in the fair-trade system. The factory is collectively owned by about 3,100 smallholders, who together cultivate 1,300 hectares of tea, but most work very small plots of land (usually less than 0.2 hectares under tea). They took over the factory after it was privatised. 5.3 Other trends There are some other favourable trends: a Teadirect report refers to some ‘amazing advances in tea drinking’. It predicts that our cup of tea, what’s in it and the way we drink it will have changed beyond recognition by 2010: ‘Tea looks set for a massive revival over the coming years, helped along by new inventions and lifestyle trends’. Tea will also be put to new uses: ‘Trendy tea – tea will come to reflect our life-style choices and values. Hip bars in France, the UK and the USA are already serving champagne teas and Earl Grey martinis’. May 2008 In an effort to make tea more convenient to prepare, the tea industry has introduced a ‘tea tablet’. Invented in Japan, this could help to widen the market. Scientists at the world’s largest tea-research facility, in Assam, India, are also reported to have developed a tea tablet. However, instant tea was a commercial failure when introduced into the UK about two decades ago. 6. Conclusion While there are no tariff issues in EU-ACP trade relations in the tea sector, this does not mean that there are no issues that need to be addressed. Internally, the EC has routinely used provisions of its competition policy against ‘abuse of a dominant market position’ to prosecute and fine EU sugar companies for collusion in setting sugar prices. The question therefore arises: will the EC agree to joint ACP-EU action against international companies which collude in setting prices of major commodities such as tea, thereby abusing a dominant market position? There also appear to be a number of key ‘aid for trade’ issues in ACP-EU trade relations in the tea sector. We might ask whether the EU will be willing to use:  ‘aid for trade’ instruments in a structured and systematic way to assist in developing tea production in ACP countries which serves the ‘quality’ end of the EU tea market, thereby improving the prices received for teas?  ‘aid for trade’ support to assist ACP countries in developing production for the ‘fair trade’ market and in further promoting this market within the EU?  ‘aid for trade’ support to assist ACP countries in procuring the technical expertise to be able to move up the tea value chain through developing blending operations to serve EU markets directly? Initiatives in these areas could greatly help ACP countries increase the value obtained from tea production. The importance of growing demand for tea and regulating the quality of tea traded internationally would appear to be the kind of programme which the ‘All-ACP’ agricultural commodities programme funded by the EC should support. 338 Executive brief January 2008 January 2008 Executive brief Fruits and vegetables Fruits and vegetables Table of contents 1. Fruit-and-vegetable production and consumption in the EU __________________ 341 2. The common market organisation for fruit and vegetables ____________________ 341 2.1 The basic regime ___________________________________________________________ 341 2.2 Reform of the sector________________________________________________________ 343 2.3 The growing importance of support to producer organisations ________________________ 343 2.4 The role of standards in the EU _______________________________________________ 347 3. Trade arrangements in the EU fruit-and-vegetable sector ____________________ 347 4. Trends in the ACP fruit-and-vegetable sector _______________________________ 348 4.1 Exports of ACP countries____________________________________________________ 348 4.2 Imports of ACP countries from the EU _________________________________________ 350 5. Issues arising for ACP countries _________________________________________ 351 5.1 Issues faced on the EU market ________________________________________________ 351 5.1.1 Impact of the reform____________________________________________________________ 351 5.1.2 The food safety challenge ________________________________________________________ 351 5.1.4 Proliferation of private voluntary standards ___________________________________________ 354 5.2 Issues faced under reciprocity _________________________________________________ 355 6. Possible policy responses _______________________________________________ 356 339 January 2008 Executive brief Fruits and vegetables Summary Fruits and vegetables account for about one-sixth of the value of EU agricultural production, making the EU the second largest producer in the world and the second largest exporter; despite this it is also the largest importer. The common market organisation for fruit and vegetables (F&V) was established in 1962, instituting a minimum grower price amongst several other interventions. Reform of the regime began in 1996 and in 2001 the minimum price was abandoned; nevertheless total support in 2004 for the EU15 was hardly changed from that in 1996 at about €1.6 billion, although most by then was in the category of ‘other interventions’; the total rose to €1.8 billion in 2005 as a result of enlargement of the community to 25 members. In 2007 further reforms to the F&V regime were agreed, involving the incorporation of the F&V sector into the single-farm-payment scheme. 37 ACP countries export fruit and vegetables to the EU, enjoying a range of preferences under the Cotonou Agreement, but they may now account for less than 10% of imports, while Mediterranean countries provide nearly a quarter. Some ACP countries are responding to preference erosion and declining prices by moving up-market in terms of products, whilst adding value by various forms of packaging and processing. Greater competition for ACP exporters is foreseen as China and Brazil enter the market at an intensified level. Other challenges arise from the EU’s increasing emphasis on food safety, which is likely to affect all suppliers in various ways, including falling maximum residue levels, the new food-andfeed control regulation and the introduction of traceability. The latter may eventually impose heavy burdens on states which will need to demonstrate their capacity to monitor food safety at every stage of production and marketing. Smaller countries and suppliers may also find the unit costs of complying with risk-assessment criteria are much higher than for established exporters, preventing them breaking into the market. The cost implications of a proliferation of private standards for imports into major components of the EU market are also now of growing concern for ACP exporters. A final problem that may be foreseen relates to the consequences of reciprocity in the event of countries’ entry into a free-trade area with the EU. Local production could be threatened by imports of cheap tomatoes, potatoes and onions and various forms of processed tomatoes from the EU, that benefit from various forms of direct aid support and investment support under a number of rural-development programmes. A wide range of policy responses in the context of the EPA negotiations, including the mobilisation of ‘aid for trade’ packages, are discussed. 340 1. Fruit-and-vegetable production and consumption in the EU January 2008 Executive brief Fruits and vegetables According to the EC the F&V sector accounts for over 17% of the value of EU15 agricultural production, with all regions of the EU involved to varying degrees; in several EU member states the share is around a quarter. The leading vegetable-producing members states are Italy, Spain and France (with 27.3%, 21.8% and 14.5% respectively). The leading fruit-producing member states are similarly Italy, Spain and France (with 31.6%, 26.3% and 20% respectively). The F&V trade is also of considerable economic significance in Holland and Belgium, given the central role of Rotterdam and Antwerp in both the import and export trades. New EU member states have added 9 million tonnes of vegetables to EU15 production of 55 million tonnes and 6 million tonnes of fruit to EU15 production of 57 million tonnes. Poland is by far the largest producer amongst the new member states, accounting for around a half of both vegetable and fruit production in the new member states. EU consumption of fresh fruit is 43 million tonnes and of vegetables 46 million tonnes. The EU is the second largest F&V producer in the world, with 9% of global commercial production in 2001-02. It is also the second largest exporter and the biggest importer of fruit and vegetables. Even excluding bananas, the F&V sector is becoming an increasingly important area of trade for the ACP with the EU. EC public information brochures describe the EU as ‘an active operator on the world markets’. 2. The common market organisation for fruit and vegetables 2.1 The basic regime The CMO for fruit and vegetables was set up in 1962, and a regime for processed F&V was added in 1968. Basic elements of the regime included:       the establishment of a minimum grower price; the establishment of marketing standards1; support for withdrawal of products from the market; the granting of processing aids; the provision of export refunds; the establishment of high import tariffs and seasonal special duties to protect the basic regime by preventing import surges onto the high-priced EU market. Given the diversity of products covered, the EU F&V regime, and particularly its trade dimension, is highly complex. Indeed, the USDA has described the regime as:  a mosaic of tariffs, quotas and other import restrictions that vary considerably among products and among preferred partners which makes analysis impossibly complex. It notes that such arrangements are an ‘integral part of the management of EU imports’ under the F&V regime of the CAP. The products set out in Box 1 fall under the fresh F&V regime, while the products falling under the processed F&V regime are set out in Box 2. 1 This has important implications for the export of sub-standard fruit to ACP markets. 341 Box 1: Fresh fruit-and-vegetable regime: product coverage January 2008 Executive brief Fruits and vegetables 07020000 0703 0704 0705 0706 070700 0708 Ex 0709 Ex 0802 08030011 08042010 08043000 080440 08045000 0805 08061010 0807 0808 0809 0810 08135031 08135039 12121010 Tomatoes, fresh or chilled Onion, shallots, garlic, leeks, etc, fresh or chilled Cabbages, cauliflowers, kohlrabi, kale, etc, fresh or chilled Lettuce, fresh or chilled Carrots, turnips, salad beetroot, salsify, celeriac, radishes, etc, fresh or chilled Cucumbers and gherkins, fresh or chilled Leguminous vegetables, fresh and chilled Other vegetables, fresh or chilled, excluding 07096091, 07096095, 07096099, 07099031, 07099039, 07099060 Other nuts, fresh and dried, whether or not shelled or peeled, excluding areca and cola nuts falling under 08029020 Fresh plantain Figs, fresh Pineapples Avocadoes Guavas, mangoes and mangosteens Citrus fruit, fresh and dried Fresh table grapes Melons and paw paws, fresh Apples, pears, quinces, fresh Apricots, cherries, peaches, plums and sloes, fresh Other fruit, fresh Mixtures exclusively of dried nuts of CN nos. 0801 and 0802 Carobs Box 2: Processed fruit-and-vegetable regime: product coverage ex 0710 ex 0711 ex 0712 08040290 080620 Ex 0811 Ex 0812 Ex 0813 08140000 09042010 Ex 0811 Ex 130220 Ex 2001 2002 2003 Ex 2004 Ex 2005 Ex 200600 Ex 2007 Ex 2008 Ex 2009 Vegetables frozen, excluding sweetcorn of sub-heading 07104000, olives of sub-heading 07108010, fruits under subheading 07108059 Provisionally preserved vegetables unsuitable for immediate consumption in their present state, excluding sub-headings 071120 and 07119010 and 07119030 Dried fruit whole or cut but not further prepared, excluding potatoes falling under 07129005, products falling under 07129011, 07129019, 07129090 Dried figs Dried grapes Fruit and nuts, not containing added sugar (excluding frozen bananas under 08119095) Fruit and nuts provisionally preserved but unsuitable for direct consumption in existing state (excluding banana falling under 08129095) Fruit dried, other than in headings 0801 to 0806, mixtures of nuts and dried fruit (excluding headings 08135031 and 08135039) Peel of citrus fruits and melons Dried sweet peppers Fruit and nuts containing added sugar Pectic substances and pectinates Prepared vegetables, fruits and nuts (excluding 200019020, 20019030,20019040, 20019060, 20019065, 20019096 Tomatoes, prepared or preserved Mushrooms, truffles, prepared or preserved Other prepared or preserved vegetables (excluding 20049010,20049030,20041091 and products in 2006) Other prepared and preserved vegetables (excluding 200570, 20058000, 20059010, 20052010 Fruit nuts, fruit peel preserved by adding sugar (excluding bananas falling under 20060038 and 20060099 Jams, fruits and jellies (excluding 200710, 20079939, 20079958, 20079998) Fruits and nuts preserved and prepared (excluding 20081110, 20089100, 20089100, 20089985, 20089991, 20089999, 20089295, 20089278, 20089293, 20089298) Fruit juices, vegetable juices not containing sugar and unfermented (excluding 200961, 2009,69, 200980) 342 Some major products such as potatoes do not formally fall under the F&V regime but are subject to marketing standards. 2.2 Reform of the sector January 2008 Executive brief Fruits and vegetables The F&V regime was first reformed in 1996, subjected to a certain simplification and modification in 2001, and to further clarification and modification in 2003. On January 24th 2007 the EC tabled regulations for a further round of reforms, aimed at:      improving the competitiveness and market orientation of EU F&V production; reducing income fluctuations in the F&V sector; promoting increased consumption of fruit and vegetables; enhancing environmental protection in F&V growing areas; simplifying the rules governing the administration of the F&V regime. Speaking at the time of the tabling of the reform proposals the Commissioner argued that ‘some of the aid schemes in the current scheme don’t belong in the CAP, hence the need for reform. On June 12th 2007 EU agriculture ministers reached unanimous political agreement on the reform of the F&V sector. Measures announced included:       inclusion of the sector in the single-farm-payment scheme;   a programme of free distribution of F&V to schools, hospitals and charities; abolition of export refunds; decoupling of existing support for processing; an expansion of support to producer organisations; the establishment of special transitional measures for tomatoes over a four-year period; compulsory spending of 10% of funds by producer organisations on environmental measures; special transitional payments for soft-fruit producers. The importance of strengthening producer organisations under the reform process was highlighted. This was felt to be particularly important given the high levels of concentration of purchasing power in the retail sector, resulting in a ‘stranglehold’ on the sector. Speaking in Lithuania on September 14th 2007 the Agriculture Commissioner Mariann Fischer Boel emphasised that ‘producers must be able to stand together if they want to bargain effectively with the retail giants’ and that cooperation via producers’ organisations ‘also opens the door to valuable initiatives to raise competitiveness’. 2.3 The growing importance of support to producer organisations An increasingly important aspect of the EU’s horticultural sector policy is encouraging F&V ‘producers to group together in order to strengthen their position on the market and deal with increasingly more concentrated demand in the retail and processing-industry elements of the food chain’. Since the 2001 abolition of the minimum-grower-price system, support to producer organisations has become an increasingly important element of the EU F&V regime. This is now complemented by the extension of the single-farm-payment scheme to the F&V sector. 343 The EU provides ‘financial assistance to recognised producer organisations to set up operational funds, encouraging them to become a major means to market fruit and vegetables. Nearly 1,400 producer organisations channel about 40% of all F&V to the market’. In some countries such as the Netherlands and Belgium ‘more than 70% of all F&V production is marketed through producer organisations’. In Italy it is as low as 30%, while in Spain and Portugal it is 50% and 55% respectively. Executive brief Fruits and vegetables The producer organisations use ‘operational funds’ to:  ensure that production is planned and adjusted to demand, particularly in terms of quality, traceability and quantity;  encourage concentration of supply and the placing on the market of the products produced by members;   improve technical and economic crop-management and stabilise producer prices; promote the use of cultivation practices, production techniques and environmentally sound waste-management practices, in particular to protect the quality of water, soil and landscape, and preserve and/or encourage biodiversity. Generally members are obliged to market their produce through the producer organisations. January 2008 The objectives of operational funds may include:        improving product quality; boosting of a product’s commercial value; consumer promotion campaigns; creation of organic-product lines; the promotion of integrated production methods or other production innovations; the reduction of market withdrawals; promotion of compliance with plant-health standards and respects for MRLs. Operational funds can also be used to:    finance market withdrawals for products not benefiting from EU compensation; top up EU compensation; finance operational programmes approved by the member states. Withdrawals from the market can cover ‘whatever quantity and for whatever period they consider appropriate’. However, they have to finance such withdrawal themselves. This is the case except for 16 products which can ‘benefit from a limited EU withdrawal compensation up to a ceiling of 10% of the quantity marketed by the producer organisation (5% for citrus fruit and 8.5% for apples and pears)’. Products benefiting from partial EU withdrawal support Cauliflowers Nectarines Mandarins Tomatoes Apples Table grapes Peaches Satsumas Clementines Lemons Watermelons Pears Apricots Melons Aubergines Oranges Withdrawn products can be made available to: charitable organisations for free distribution; animal feed; processing into industrial alcohol; but ‘any withdrawn product which cannot be so utilised is destroyed’. 344 January 2008 Executive brief Fruits and vegetables Following the 1996 reforms the system of withdrawals from the market was greatly reduced (halved over the 1996-2001 period), as a result of the introduction of ceilings on the financing of withdrawals from the market (both overall and the EU contribution), and the imposition of a requirement for producer organisations to contribute. The table below shows the evolution of overall EU F&V expenditures since 1996 and the rapid expansion since 2000 of the category ‘other interventions’, which includes support to producer organisations, expenditure on guidance premiums, processing and marketing aids and since 2003, withdrawals. Total F&V sector expenditures fell from a peak of €1,581 million in 1996 to a low of €1,454.1 million in 1999 (-8.1%), before increasing and then stabilising from 2000 to 2003. In 2004 F&V sector expenditures were only 0.6% below their 1996 peak. However in 2005 appropriations rose by 15% (€1,814 million) with the enlargement of the EU to 25 members. Budgetary allocation for the EU fruit-and-vegetable sector 1996-2005 (€ millions) Allocation 1996 1997 1998 1999 2000* 2001 2002 2003 2004 2005 2006** 2007** 1,581.10 1,569.00 1,509.50 1,454.10 1,551.30 1,551.90 1,551.40 1,532.20 1,572.90 1,742.70 Export refunds Storage 98.4 84 58.3 40.4 46.1 50.8 46.4 29.3 25.8 25.3 30 30 0 0.3 0 0.5 0 0 0.5 1.6 0.1 0.4 Guidance premiums Withdrawals 188.1 0 67.3 29.7 - 0 283.8 138.3 90.6 169.2 117.2 61.4 - Processing/ marketing aids Direct aid 878.2 769.9 539.7 627.7 - 313.9 311.7 393.7 356.4 439.6 316.8 351.4 344 374.6 Other incl. funds for POs 192.9 9.3 394.1 271.5 979.6 950.3 1,130.90 1,149.90 1,203.00 1,342.40 * Budget classifications were altered in table 3.4.4. for the year 2000, with the classification ‘other interventions’ consolidating the categories of guidance premiums, processing and marketing aids and category other. From 2003, the category of withdrawals was consolidated into the item ‘other interventions’, under table 3.4.4. ** 2007 Preliminary draft budget heading, Table 3.4.3.1., Agricultural and rural development policy area expenditure Source: Table 3.4.4., ‘Agricultural situation in the European Union’, annual reports of the EC. From 1997 expenditures on market interventions (withdrawals and export refunds) have fallen dramatically from over €367.8 million to under €117.8 million in 2002 and a mere €25.3 in 2005. While financial support to export refunds, storage aid and withdrawals fell by 93% between 1997 and 2005, total expenditures on the F&V regime increased by 11%. Operational funds deployed via producer organisations rose from zero in 1996 to over €450 million by 2003 and €497 million by 20052. It should be borne in mind that the operational funds are financed on a 50/50 basis by producers and the EU; thus the level of actual expenditure on these programmes is double the EU allocation. 2 See Official Journal of the European Union, March 8th 2005, II/298. 345 558 716 644 January 2008 Executive brief Fruits and vegetables Overall the EU contribution to such operational funds is limited to ‘a maximum of 4.1% of the value of production marketed by the producer organisation’. In 2003 however EU payments to operational funds stood at just 1.1% of the value of total EU F&V production and 2.7% of the value of production marketed through producer organisations. There is thus considerable scope for expansion in EU support within the current system. A September 2004 USDA briefing highlighted that the deployment of ‘operational funds’ was to finance technical measures linked to production and marketing which strengthen the competitiveness of the EU F&V sector. Under the regime, assistance is also provided to ‘inter-branch organisations’, which are involved in ‘the production, trade or processing of fruit and vegetables’. The aim is to provide more general support to marketing and processing than is possible simply through producer organisations. In many respects the shift to support programmes managed by producer organisations is in line with the broad trajectory for CAP reform, which is bringing about a shift from market support for products to direct aid to producers. The assistance extended through producer organisations in the F&V sector in part mirrors the support being deployed through intermediate stakeholdermanaged organisations under the EU’s rural-development instruments. Within the general policy framework there are a number of specific support programmes for processed F&V products. These include aid to processed tomato products, compensation to encourage processing of citrus fruit, production aids for fruit-based products, and production aid for dried grapes and processed figs. Of these processing aids the most important from an ACP perspective are the processing aid for tomatoes and citrus fruit, the former because it directly impacts on trade into ACP countries and the latter since it can limit ACP opportunities in third-country markets. Previously these programmes provided companies with processing aids to bridge the gap between EU and world-market prices arising from the compulsory application of minimum grower prices which had to be paid by processing companies to EU growers. Currently, the aid is ‘granted on the fresh produce delivered during a prescribed period’. This aid is paid to ‘recognised producer organisations, which pay out to the growers’. According to the EC ‘delivery to approved processors is based on contracts specifying the quantities they cover, the price and the schedule of supply. These contracts require the processor to process the products delivered. Minimum characteristics of the raw material supplied for processing and minimum quality requirements for finished products are defined’. EU budget 2005: support to processed fruit and vegetables Processing aid: tomatoes Processing aid: citrus fruits Production aid: fruit-based products Production aid: dried grapes and figs Total F&V budget Expenditure 2003 (€ millions) and % 268.7 17.4% Appropriation 2004 (€ millions) and % 290.0 17.9% Appropriation 2005 (€ millions) and % 298.0 16.4% 257.1 16.7% 257.0 15.9% 261.0 14.4% 74.9 4.9% 93.0 5.8% 93.0 5.1% 103.2 6.7% 115.0 7.1% 115 6.3% 1,538.5 100% 1,617.0 100% 1,814.0 100% The EU establishes thresholds for individual products above which such processing aid cannot be paid. Penalties are charged for overrunning these thresholds. The introduction of these ceilings is shifting the character of processing towards higher-value products. 346 2.4 The role of standards in the EU Another important feature of the current regime is ‘marketing standards’. These are ‘designed to encourage trade by ensuring the free movement of produce internally within the EU and outside’. Between May 2005 and August 2007 some €330 million in EU funding was provided in support of market promotion across targeted agricultural sectors. These standards are designed to facilitate trade in F&V and are quite distinct from food-safety standards. The high EU foodsafety standards are commonly highlighted as part of the EU’s international promotional campaigns for fruit and vegetables, both inside the EU and outside. This constitutes another important area of EU support, with 50% of the costs of such approved programmes being met from EU funds and 50% by the professional or inter-branch organisation that proposed the promotional measure. January 2008 3. Trade arrangements in the EU fruit-and-vegetable sector The USDA has noted that the EU F&V regime requires ‘very high MFN tariffs’. To regulate access to the EU market and prevent imports undermining the basic regime, import licences are used. This is especially the case for managing the over 70% of EU F&V imports which occur under some form of preferential arrangement. The various preferences extended under the trade component of the F&V regime are qualified by various types of quotas (including seasonal quotas), or partial duty rebates on the standard duty. Import duties are based on a minimum import-price system, with the rate being set with reference to each consignment. The EC has highlighted the fact that ‘different systems may be selected by the importers to establish the entry price of the imported consignment’. Among these is the use of the standard import value which varies by origin and is fixed daily by the Commission on the basis of representative prices of the products imported from third countries sold on EU import markets’. Should imports subject to the entry-price system exceed agreed trigger levels, an additional import duty may be charged. For processed F&V, additional duties are charged based on the sugar content of the product, and this can come to constitute a significant tariff barrier for processed and preserved F&V products. With EU sugar-sector reform these additional duties should fall in line with reductions in the special duties applied in the sugar sector. Formerly for ACP countries the trade in F&V exports was regulated by the provisions of Declaration XXII of the Cotonou Agreement. However for those ACP countries which are signatories of either a comprehensive EPA or interim EPA, these provisions have been superseded by the duty-free, quota-free access introduced on January 1st 2008, which (with the exception of rice) provides unrestricted duty-free access to the EU market. LDCs which are not signatories to EPAs will continue to enjoy full duty-free, quota-free access under the EBA initiative. Non-LDCs which are not signatories to an EPA will revert back to standard GSP treatment. However, no major ACP F&V exporter falls into this group of non-LDCs which have not signed some form of EPA agreement, but it is worth noting that Republic of Congo, which is currently trading under the GSP, has seen its F&V exports increasing in recent years. The significance of this measure introduced under the EPAs is that it removes all the seasonal and special-duty restrictions which were a feature of the trade arrangements for F&V products under Declaration XXII of the Cotonou Agreement. For non-LDC ACP F&V suppliers which now find themselves trading under the same conditions as LDC suppliers, this could impact positively on investment flows, all other factors being equal. This needs to be seen in a context where in recent years the more favourable treatment accorded to LDCs under the EBA has stimulated investment in a number of LDC F&V exporters in both east and west Africa. 347 However despite these preferences ACP countries remain relatively minor suppliers of fruits to the EU (with the exception of pineapples, bananas being not part of the F&V regime), with South Africa and Latin American countries playing the major role. This reflects in part supplycapacity constraints in ACP countries. Executive brief Fruits and vegetables In the vegetable sector, ACP suppliers from Africa play a far more important role, particularly in the supply of peas and beans. Overall, according to analysis by the USDA in 2002, ACP countries together accounted for around 13% of EU F&V imports. The largest source of supply however is from GSP beneficiaries (38%), while the USA provides 10%, and Mediterranean countries and other European countries 9% each. Turkey supplies 3% of imports, exclusively in the form of processed products, while other MFN beneficiaries (excluding the USA) supply 9% of EU imports. Countries which traditionally supplied 8% of EU F&V imports have now joined the EU as of May 2004. However according to a 2005 COLEACP analysis, overall ACP supplies of F&V to the EU market have sharply declined and now only account for around 9% of EU15 fresh F&V imports, while Mediterranean countries have become the largest source of supply with 23% of EU imports. 4. Trends in the ACP fruit-and-vegetable sector January 2008 4.1 Exports of ACP countries In the period 2004-2006, the value of ACP exports was about €1.5 billion. The main products exported are fruits such as grapes, citrus fruits, tropical fruits, apples, provided mostly by the southern and west African and Caribbean countries. Exports of beans also account for an important part of the exports of the sector, with Kenya as the major actor. Trade in the flowergrowing sector is also a major income resource, and the sector ‘live trees and other plants’ accounts for almost €462,000 worth of exports, with Kenya exporting more than 65% of it. Fruit and vegetable exports from ACP countries to the EU, 2004-2006 Main exported products Grapes (SH806) Citrus fruits (SH805) Dates, figs, pineapples, guavas, avocados, mangoes (SH804) Apples, pears, quinces (SH808) Leguminous vegetables (SH708) Share of F&V exports % 20.39 19.48 Value in € millions 315.57 301.41 15.36 237.64 14.29 221.17 11.23 173.81 Main producer countries Namibia, South Africa Zimbabwe, South Africa, Swaziland, Belize, Cuba South Africa, Senegal, Mali, Kenya, Ghana, Dominican Republic, Cameroon, Côte d’Ivoire, Burkina Faso South Africa Kenya, Ethiopia, Senegal, Tanzania, Zambia, Zimbabwe Source: COMEXT Live trees and other plant exports from ACP countries to the EU, 2004-2006 (Comext) Main exporting countries Kenya South Africa Zimbabwe Uganda Zambia Tanzania Ethiopia Côte d’Ivoire Export value Share of ACP in € millions flower exports % 304.08 65.83 42.22 9.14 32.95 7.13 30.87 6.68 13.26 2.87 12.15 2.63 11.44 2.48 3.71 0.80 348 Executive brief Fruits and vegetables January 2008 While some ACP countries have a long tradition of supplying cut flowers and F&V products to the EU, the number of ACP countries involved in this trade has recently begun to fall back. There were 37 ACP countries involved in the F&V export trade to the EU with exports of more than €100,000 in 2005 compared to 40 countries in 2002. In eastern and southern Africa, the number of ACP exporting countries decreased from 12 in 1999 to 10 in 2005, despite Tanzania commencing exports. Sudan, Rwanda and Djibouti all stopped supplying the EU market. Similar trends are apparent in the Caribbean, with Grenada and Trinidad & Tobago disappearing from the list of exporters, while Barbados became a supplier in 2005. Only in western and central Africa are the number of suppliers increasing, up to 16 in 2005 from 12 in 1999 (the newcomers include Liberia, Mauritania, Niger and Republic of Congo). The question arises what underpins this trend? Is it purely climatic effects or are there structural problems militating against ACP countries remaining consistent suppliers to the EU market? The impact of new EU food-safety measures is a matter of growing concern in this regard. The USDA has noted that while new investments in meeting EU standards have been made (with EU assistance) ‘it remains to be seen whether sufficient investments will be forthcoming because of the added costs that the new rules imply for exporters.’ This gives particular importance to EU offers of assistance to developing countries in meeting EU food-safety requirements in the F&V sector. (For more detail please see chapter below.) Throughout the world, established horticultural suppliers are having to show considerable dynamic innovation, not only through changing the range of products exported in line with trends in competition but also in line with wider market developments through raising their quality standards, using more maritime transportation wherever feasible, investing in new technology, using ‘intelligent’ packaging while at the same time looking for economies of scale and rationalisation of costs in order to ensure competitive prices. In the face of declining prices and increasing production and marketing costs, a noticeable trend amongst established ACP horticulture and floriculture exporters is the movement up the value chain. Kenya for example, has moved into other produce where commercial opportunities are better (avocados, passion fruit, green beans, mange-tout peas, Asian vegetables and cut flowers), while no longer exporting boxes of raw beans, but instead prepared ready-to-cook packets of bean products, bar-coded for direct sale by the supermarkets. A similar trend is apparent in Kenyan cut-flower sales, with sales of bouquets directly to the supermarkets yielding far higher returns than sales of boxes of flowers through the Dutch auction houses. In other ACP countries where the export industry is much younger and has attracted less foreign direct investment than in Kenya, the capacity for change is much more limited, and targeted support will be needed if these countries are to meet the growing competitive challenges faced. The need for a dynamic response to market changes will increase in the coming years under the influence of:   EU price reductions induced by further reform of the F&V sector;   the emergence of China as a major supplier of vegetable products; multilateral trade liberalisation which will over time reduce the margins of preference enjoyed by ACP F&V exporters; bilateral trade liberalisation with Latin American countries through the EU’s growing range of free-trade-area agreements. 349 4.2 Imports of ACP countries from the EU The main imports in the sector are vegetables (potatoes, tomatoes, onions, beans), especially prepared vegetables; some fruits are imported but mostly as transformed fruits like fruits juices, jams, etc. The main importers of European products are the Caribbean, west and central African countries, and two countries from the SADC region, South Africa and Angola. January 2008 Executive brief Fruits and vegetables Fruit and vegetable (including processed) imports of ACP countries from the EU, 20042006 Main imported products Prepared tomatoes (SH2002) Value in € millions 149.56 % share of F&V exports 37.55 Prepared beans, peas, potatoes etc, not frozen (SH2005) Onions, shallots, garlic (SH703) Potatoes (SH701) 47.13 11.83 41.04 40.58 10.30 10.19 Fruit juices (SH2009) 28.77 7.22 Prepared vegetables, frozen (SH2004) Dried leguminous vegetables (SH713) Vegetables, frozen (SH710) Apples, pears, quinces (SH808) 18.23 4.58 9.67 2.43 7.14 6.64 1.79 1.67 Prepared fruits, nuts (SH2008) Jams (SH2007) 5.88 4.98 1.48 1.25 Main importer countries Angola, Benin, Congo, Côte d’Ivoire, Gambia, Nigeria, Togo Angola, Cuba, Nigeria, South Africa Côte d’Ivoire, Guinea, Mauritania, Senegal Trinidad & Tobago, Surinam, Mauritania, Cuba, Côte d’Ivoire Angola, Benin, Cameroon, Cape Verde, Ghana, Nigeria Dominican Republic, Jamaica, Trinidad & Tobago, South Africa Angola, Cape Verde, Kenya, Sudan Angola, Cuba, Eritrea, Jamaica, South Africa Benin, Côte d’Ivoire, Cape Verde, Liberia, Mauritania, Senegal Angola, Cuba, South Africa Angola, Benin, Senegal, South Africa Source: COMEXT As ACP imports represents a small part of the ACP-EU trade, this flow tends to increase since the last years. Indeed, between the periods 1995-1997 and 2004-2006 ACP imports of F&V from the EU increased by 160% in volume. Increase of main imported products- between 1995-1997 and 2004-2006 Products Prepared tomatoes Prepared vegetables Onions Potatoes Imports 1995-1997 (in millions tones) 818,3963 245,1967 649,7927 754,3367 Imports 2004-2006 (in millions tones) 1782,39 523,121 2367,626 1919,723 Variation 118% 113% 264% 154% The volume of prepared vegetables, including prepared tomatoes, imported increased about 115%. It seems that an important issue in the EU-ACP trade is value addition to ACP products, which remains weak. If ACP countries want to reduce the dependence with the EU and develop their internal market, an effort has to be made to transform the ACP raw products, to adapt the production to this new demand from the increasing urban population. The change of volume for onions and potatoes was much more important, respectively 154% and 264% increase in the last ten years. These are raw products, produced both in the EU and ACP regions. It remains to be seen whether these imports are in competition with regional production or if these imports come to fill a lack of supply in the ACP. In both cases, both the EPA negotiations for comprehensive regional EPAs and the agricultural WTO negotiations which will take place in 2008 have to consider these sensitive products, which remain an important income resource for small ACP producers. 350 5. Issues arising for ACP countries 5.1 Issues faced on the EU market January 2008 Executive brief Fruits and vegetables A number of issues will face ACP F&V exporters in the coming years. These include:  increased price pressures resulting both from the process of reform of the F&V sector and intensified competition from China and Brazil (particularly as ACP tariff preferences are reduced either as a result of bilateral trade agreements or multilateral trade negotiations);  increased food-safety challenges, which will increase the cost of supplying the EU market, and which if unaddressed will result in market closure;  increased proliferation of private voluntary standards (food quality, social and labour conditions of workers, agro-environmental practices) imposed all along the food-supply chain, which may exclude those producers who lack the capacity to secure economies of scale. 5.1.1 Impact of the reform The critical question from an ACP perspective is what will be the impact of F&V sector reform on the volume and value of ACP F&V exports in the main components of the EU market served by ACP suppliers? While the reform package does not directly affect prices, the incorporation of the F&V sector into the single-farm-payment scheme may well require some price realignment if surpluses are not to emerge in particular subsectors. It can be argued that the end of export subsidies and production aids will mean that F&V processors will be unwilling to pay such high prices as in the past. In addition the opening up of the sector to new farmers who receive the single-farm payment will be likely to increase production, unless prices are allowed to fall, but as yet it is far from clear what the price effects will be. If prices fall EU F&V farmers will be cushioned by the single direct aid payments to be introduced for F&V farmers as part of the reform process but ACP suppliers will simply have to carry the financial losses this would generate. However it should be noted that according to EC assessments the major subsectors where reforms will have an impact include tomatoes, citrus fruit, pears, nectarines, peaches, dried figs, prunes and dried grapes, in few of which ACP producers have a major export interest. Clearly the price effects of the latest round of EU F&V reforms will vary from sector to sector and product to product, depending on the changes in trade regime that will follow from the implementation of the reforms at a bilateral level in the context of the EC’s new ‘ambitious’ free-trade agreement policy. It is these subsequent policy changes which potentially offer the greater long-term challenge to ACP F&V suppliers. 5.1.2 The food safety challenge Harmonisation of maximum residue levels The process of harmonisation of MRLs seeks to consolidate and simplify existing legislation, so that all regulations apply equally in all countries of the EU. This means that the same regulations are applied from Sweden to Greece and from Poland to Portugal, thus allowing for free movement of goods throughout Europe. In the F&V sector the process of harmonisation has thrown up some problems for traditional ACP exports. 351 Executive brief Fruits and vegetables For example, for citrus exports from Swaziland to the UK, there is now ‘zero tolerance’ on the presence of the fungal infection known as ‘citrus black spot’. If ‘citrus black spot’ is detected on any fruit the whole consignment is destroyed. This will occur despite the fact that ‘citrus black spot’ poses no threat to agriculture in the UK, the main export market (where there is no citrus production). However the measure is felt to be necessary since there is free circulation of goods within the EU and hence there is a possibility that an infected orange could find its way to Spain and under particular environmental circumstances infect its citrus groves. Since the destruction of even a single consignment would represent a serious economic loss to the Swazi citrus industry, this measure is threatening to undermine the existing trade. Technological advances The challenges this poses for ACP suppliers are being compounded by improvements in the technology for measuring residue levels, which is leading to the introduction of ‘zero tolerance’. The improvement means that testing equipment installed in ACP countries can soon be out of date, requiring substantial recurrent investment costs in technologies needed for measuring and controlling compliance with EU standards. In some countries this problem has been addressed by sending all samples to the EU for testing. However, this is economically possible only where substantial volumes are involved and can be prohibitively expensive for small-scale or emergent F&V exporters. January 2008 The pesticides review The problems thrown up by the process of harmonisation is being further compounded by side effects of the pesticide review. This process entails an expensive process of verifying the safety of the pesticides to be registered. This has seen agrochemical companies declining to seek approval for products of reduced commercial interest, so leading to the ending of approval for some pesticides that have long been used on ACP products exported to the EU. This is occurring not on any scientific basis for food-safety concerns but as a by-product of commercial consideration undertaken by agrochemical companies. It is posing particular challenges in the F&V sector, many of which are currently being addressed under the EDF-financed pesticidesinitiative programme. Traceability The principle of traceability seeks to track the handling of food from ‘farm to fork’. With the exception of those products where specific rules are laid down, the legal requirement for traceability for third countries is limited to ‘one step forward, one step back’, that is the ability at each stage to trace where the food came from previously and to whom it is going subsequently. The aim is to facilitate the withdrawal of foods from particular sources from the market should a threat to health be identified. While the new traceability requirements apply on paper only to EU operators, these however have indirect consequences for ACP exporters since EU importers who now carry the legal responsibility for the safety of imported food products placed on the EU market (EC Reg. no. 178/2002) will try as much as possible to ensure that the same standards are met by their overseas suppliers (e.g. through EUREPGAP standards). This constitutes a significant administrative burden where smallholder producers are involved in supplying the export trade, and is beginning to contribute to a marginalisation of smallholder production within the export-oriented F&V sector. This challenge is also being addressed under the PIP (pesticides initiative programme) managed by COLEACP, which has developed solutions adapted to the situation of smallholders who constitute the major supply base for some delicate ACP export crops such as peas and beans. However, these types of programmes need to be extended and expanded to ensure ongoing support in meeting the evolving challenges. These EU regulations on food safety, food quality and hygiene are by far the most important measures impacting on ACP food-and-agricultural product exports to the EU. 352 January 2008 Executive brief Fruits and vegetables The food-and-feed control regulation In this context, the new food-and-feed control regulation, which entered into force on January 1st 2006, is de facto placing an entirely new level of responsibility on ACP government departments to ensure the safety of food of plant origin traded into the EU market while other food exports from ACP countries (animal, fish and fish products) were already subject to stringent safety and quality controls prior to export. This allocates a central role to ACP government administrations in the food-and-agricultural product export trade. Unfortunately, many ACP government administrations lack the necessary legal, institutional and humanresource capacity to carry out these food-safety functions. Currently, in the F&V sector, privatesector-based bodies generally take the bulk of responsibility for ensuring compliance with EU food-safety standards, since this is part of the commercial requirements of the EU importers with whom they have built up long-standing relationships. The EU legislation however appears to place limits on the extent to which private-sector-based bodies can support and supplement government efforts in the field of food-safety control and verification of compliance. While this is not currently a problem, since the EU has adopted a very pragmatic approach (it currently lacks the human-resource capacity to effectively enforce EU legislative requirements in third countries), by 2008-09, ACP food-safety control and compliance systems could come under increasing scrutiny. How in practice EU legislative requirements are then enforced will be a critical question. Risk assessment The final major area of concern relates to the financial implications of the EU’s ‘riskassessment-based inspection arrangements of non-conformity with marketing standards’ applicable to fresh F&V (EC Reg. no. 1148/2001). Inspections of F&V at the point of entry are increasingly based on a ‘risk assessment’. This appears perfectly reasonable, but it can have some perverse consequences: Kenya with an established track record of exporting has only 5% of its consignments inspected; in addition, the fees charged reflect the time taken to check consignments (in Kenya’s case this is limited since the areas of risk are known). A new nontraditional exporter from east Africa, however, would face inspection of 100% of consignments until a track record had been built up and a proper risk assessment could be made. In addition the new non-traditional exporter would be charged higher fees since until risks are known the amount of time spent on inspections is correspondingly higher. This can create a situation in which a non-traditional LDC exporter seeking to enter the floriculture or F&V trade can face inspection charges as much as 200 times higher than those levied on an established exporter such as Kenya. Clearly the cost implications of inspection charges need to be addressed if nontraditional LDC ACP countries are to be encouraged to diversify into F&V production for export. Such diversification is a real prospect, since commercial considerations, linked to guaranteeing reliability of supply to the retail chains, encourage European importers to maintain a diversified range of suppliers. Other concerns The particular challenges arising for ACP F&V suppliers as a result of the elaborated EU foodsafety policy has implicitly been recognised by the EU with the establishment of COLEACP and the €29 million EDF-funded pesticides-initiative programme (PIP), to which an additional €5 million has now been granted. In addition, in line with the general consensus among donor agencies that developing countries should be supported in meeting global SPS requirements the EC allocated a budget of €30 million to be available from 2007 to help ACP countries upgrade their national control systems. However, the food-safety challenges faced in the F&V sector are increasingly systemic and require substantially expanded programmes of support. 353 January 2008 Executive brief Fruits and vegetables 5.1.3 Proliferation of private voluntary standards A further level of food-safety challenge exists for ACP food- and agricultural-product exporters, namely those arising from the increasingly strict standards being applied by private-sector-based bodies in the EU. These standards often go beyond the formal legal requirement, since the legal obligation to ensure the safety of food imported into the EU market is placed on the importer. If importers are not able to prove that they took all possible precautions to prevent unsafe food entering the EU market they can be fined around €40,000 per consignment and could face imprisonment for up to two years.This is leading to increased pressure on ACP suppliers from EU importers, to ensure that all foodstuffs exported to the EU market are safe and subject to traceability requirements. This includes insistence on the adoption of ‘good practices’ from field to embarkation, with this being certified by independent organisations. Substantial new administrative burdens are thus being imposed on ACP exporters (along with the associated costs), burdens which fall particularly onerously on small-scale producers. It is also leading to EU importers refusing to deal with suppliers who cannot guarantee both the traceability and food safety of the consignments supplied. This area of development is viewed with such concern that AU trade ministers in April 2006 called for the EU to introduce appropriate control over standard setting undertaken by marketbased NGOs. This issue was taken up in an EC conference in February 2007 on the link between food-quality certification and value addition. The conclusions of this conference noted that while ‘private standards for imports from developing countries can improve farming efficiency, promote good agricultural practices and stabilise business relations … only the best farmers are able to be certified; the weakest may be excluded … schemes may be perceived as barriers to market access’. Against this background it called for ‘stakeholders in developing countries (to) play a role in the development of schemes and for technical assistance for capacity building’. It further recommended that ‘farmers and first-stage processors should participate in the development and operation – if not the ownership – of certification schemes’, presumably including those in ACP countries. Debate around these issues of private standards has also taken place in the WTO SPS Committee with some members suggesting that ‘governments should take responsibility for the WTO-compatibility of voluntary standards set by companies within their borders’. This was felt to be particularly relevant since ‘the remit of private-sector standards was expanding, now touching on issues such as production methods, environmental concerns … and labour and fair-trade issues’. The issue of harmonisation between public-sector and private-sector standards so as to reduce costs of administration is becoming a critical issue in ACP trade with the EU and one where an EU initiative would appear to be essential. In this context it should be noted that the EC supported calls for greater coordination of private labelling initiatives to reduce the administrative costs of compliance falling on developing-country exporters. However, while broadly sympathetic to developing-country concerns the EC is reluctant to take any formal role in this area, and is likely to favour the adoption of a facilitating or coordinating role rather than a more interventionist approach. The use of ‘aid for trade’ support in assisting smallholder farmers in meeting private standards represents an important area to be addressed under the EU’s aid-for-trade agenda in the coming period. An equally important area however is the establishment of effective mechanisms for dialogue on meeting official EU regulatory standards and private standards, in ways which while respecting EU concerns, are appropriate to local economic realities. 354 Dialogue has already taken place over the application of private standards, with the recent recognition of the equivalency of the KENYAGAP code to those of EUREPGAP (now GLOBALGAP), with the KENYAGAP code having been modified to take into account local realities in ways which, while less costly to implement, ensured that the underlying food-safety objectives were achieved. If such effective dialogues can take place at the private-sector level, it should be possible also at the public-authority level. January 2008 Executive brief Fruits and vegetables The costs of administering often duplicated standards represent another area which needs to be addressed, an issue that the EC has openly acknowledged A last issue relates more to consumer preferences, notably the ‘food miles’ debate. In 2007 debate intensified over the environmental impact of air-freighting horticultural and floricultural exports from ACP countries to the EU market. While there are genuine environmental concerns over this practice, there are also commercial considerations linked to differentiating EU products from imported products, in order to attract premium prices. In terms of the environmental concerns it was only in October 2007 that the UK Soil Association agreed to continue to certify air-freighted fresh produce as organic, regardless of the carbon footprint of this trade. This decision was taken on the basis of the development benefits of this trade for poor people in some very vulnerable countries. However the Soil Association Chair, Anna Bradley, argued that ‘it is neither sustainable nor responsible to encourage poorer farmers to be reliant on air freight’. She nevertheless recognised that ‘building alternative markets that offer the same social and economic benefits as organic exports takes time’. This suggests that this issue of ‘food miles’ is not going to go away. ACP producers’ associations in the affected sectors may therefore need to consider shifting the debate from ‘food miles’ to the overall carbon footprint of production and trade, with energy utilisation per employee being lower in ACP countries than in the EU. 5.2 Issues faced under reciprocity The problems arising in the F&V sector under moves towards reciprocity are concentrated in a limited number of products in particular ACP regions. The EC-financed sustainability-impact assessment of the agro-industrial sector in west Africa warned of ‘increasing competition between local production and imports from the EU’. At present ‘the countries of west Africa are ill-equipped in many sectors to meet the challenges imposed by such increased competition … there is a risk that local markets could be flooded with imports of processed tomatoes, potatoes and onions, which will threaten local production’. Since 1999 EU exports of potatoes to west Africa have increased by some 227% from 33,015 tonnes in 1999 to 108,201 tonnes in 2005, coming to account for some 20% of total EU exports (up from 11.6% in 1999). This increase in EU exports of potatoes (and onions) appears to have more to do with the disposal of production which does not meet EU marketing standards, than the deployment of financial assistance. EU main-crop potato exports to west Africa Senegal Mauritania Côte d’Ivoire Sub-total Total EU exports 1999 (tonnes) 15,244.5 7,697.2 10,073.6 33,015.3 284,872.3 2005 (tonnes) 58,629.4 28,021.9 21,550.1 108,201.4 530,134.6 % change + 284.6 + 265.3 + 113.9 + 227.7 + 86.1 For processed tomatoes, however, the trade is largely driven by the deployment of processing aids granted to the EU tomato sector. The EU tomato-processing sector is facing increased competition from Asian processors in a context of expanding global production and it appears that EU producers are once more falling back on west African markets as a ‘market of last resort’ (indeed, some of the EU exports of tomato puree could indeed be repackaged Chinese tomato puree). 355 The impact of EU processed-tomato exports is of particular concern given its knock-on effects on fresh-tomato markets. To the extent that EU exports of processed tomatoes result in the closure of local tomato-processing plants, this can increase price volatility on fresh-tomato markets, since there is then no outlet for surplus fresh tomatoes. This can result in a price collapse for fresh tomatoes as surplus production emerges, to the detriment of growers and the sector as a whole. January 2008 Executive brief Fruits and vegetables 6. Possible policy responses In terms of the policy responses required under any EPA agreement relating to market-access issues a number of specific areas for initiatives can be identified:  ensuring that any import-licensing arrangements introduced in the F&V sector do not restrict commercial marketing opportunities;  ensuring that inspection procedures for F&V imports into the EU do not result in delays in delivering the product to market and extra costs of inspection at the import stage, thereby undermining the commercial value and competitiveness of the marketed product;  ensuring that sector-specific internal EU regulations do not place excessive inspection burdens on products involving more than one raw material (e.g. microwave-ready garlic butter beans);  ensuring that the structure of inspection charges do not inhibit the development of valueaddition activities (e.g. the assembly of bar-coded and mixed-flower bouquets);   ensuring that ‘aid for trade’ packages provide support in meeting EU food-safety standards;  ensuring that ‘aid for trade’ packages are made available which assist in overcoming the human-resource constraint on the marketing (as opposed to trading) of ACP products into the EU market, in the light of the human-resource constraints faced;  ensuring the establishment of clear procedures, time-frames and arbitration arrangements for the resolution of SPS disputes;  ensuring that the investment-promotion provisions facilitate access to capital for productive investment in ways which overcome the inefficiencies and distortions in local capital markets in ACP countries;  ensuring that provisions in trade-related areas are established which lower the insurance and freight costs associated with delivering products in a timely manner to the EU market. ensuring that EU ‘aid for trade’ packages defray the costs of establishing and maintaining sustainable national food-safety control capacities in line with new EU regulations; In terms of the impact of reciprocity the main area where an initiative would appear to be needed relates to the use of pre-emptive safeguard measures designed to prevent disruption of markets for potatoes, onions and processed tomatoes. These product chains should be classified as ‘sensitive’, with trade flows with the EU being subjected to close monitoring and surveillance. Where a threat of market disruption arises special safeguard measures could then be introduced to avert any market disruption. This is an issue which could be addressed in west Africa in the context of efforts to resolve areas of controversy under interim EPAs and as part of efforts to move towards comprehensive regional EPAs. 356 Executive brief October 2008 Executive brief Cereals Cereals Table of contents 1. Evolution of the EU cereals regime _____________________________________________ 359 1.1. The scope of the cereals-sector regime __________________________________________ 359 1.2. The centrality of the cereals-sector experience to CAP reform ________________________ 359 1.3. The early cereals regime _____________________________________________________ 360 1.4. Reforming the cereals regime _________________________________________________ 360 October 2008 1.5. The 2003 CAP mid-term review_______________________________________________ 362 1.6. The CAP health check ______________________________________________________ 362 2. Impact of EU cereals sector reform _____________________________________________ 363 2.1. The impact of reform on production ___________________________________________ 363 2.2. The impact of reform on the EU import regime __________________________________ 366 2.3. The impact of reform on EU exports___________________________________________ 366 2.4. Future developments on the EU cereals market ___________________________________ 369 3. The impact of cereals-sector reform on the ACP___________________________________ 372 3.1. Disaggregating the impact of EU cereals-sector reform _____________________________ 372 3.2. Trends in EU cereal-based food products _______________________________________ 372 3.3. The downstream effects _____________________________________________________ 375 3.4. The cross-sectoral effects ____________________________________________________ 377 3.5. Issues faced in the IEPA negotiations __________________________________________ 378 357 October 2008 Executive brief Cereals Summary This briefing reviews the evolution of the EU’s cereals regime, highlighting the consolidation of different cereal, oilseed and protein crops into a single arable regime as the precursor to the single payment scheme. This single payment scheme embraces a growing number of products and is designed to provide direct aid to farmers in ways which are compatible with WTO rules. The process of reform under implementation since 1993 has allowed EU cereal prices to fall towards world market price levels. Until recently however the weakness of the US dollar against the euro prevented the EU attaining world market price parity. However, surging global food prices in 2007 finally allowed the EU to set at zero both export refunds and import duties for cereals (although import duties for cereals were reintroduced in October 2008). This process of internal EU cereals-sector reform has external effects through its consequences for the composition and level of production of cereals in the EU and the associated trade flows generated in cereals, cereal-based food products and other agricultural products which use cereals as an input. ACP countries are thus impacted in three main areas by reform of the EU cereals regime:    the direct effects on trade in cereals; the downstream effect on trade in cereal-based value-added products; the cross-sectoral effects of cereals-sector reform on those agricultural products using cereals as an input. The analysis shows the ACP is an increasingly important destination for EU cereal-based food products. As EU exporters face intensified competition on traditional export markets, so there has emerged a tendency to fall back on exporting to African markets of ‘last resort’. However, the scale of these exports is now making these markets significant in their own right for distressed sectors of the EU’s cereals product industry. This has led to industry calls for the systematic removal of tariff and non-tariff barriers to EU cereal-product exports through bilateral free-trade-area negotiations. The process of cereals-sector reform in the early days (1993 to 200) served to reduce the costs of EU poultry production, with a rapid expansion of poultry-part exports to the ACP. This trend was accelerated by the introduction of the BSE-related ban on the use of meat and bone meal in animal feed. EU cereals industry lobbying appears to be reflected in positions adopted by the European Commission in the IEPA negotiations on issues such as the use of import-licensing arrangements and other quantitative restrictions, which the Commission is seeking to see systematically dismantled. This is one of a number of issues which have arisen in the EPA negotiations which have a bearing on ACP-EU cereals-sector relations. Two other significant issues are:  the agricultural safeguard provisions, which are increasingly seen by ACP negotiators as inadequate in addressing the structural issues faced in agricultural sector trade with the EU;  the implications of the standstill provisions for applied tariffs following the policy response to high global food prices in 2007, in the context of subsequent price declines. 358 1. Evolution of the EU cereals regime 1.1. The scope of the cereals-sector regime The EU’s common organisation of the market in cereals covers the products listed in Table 1. October 2008 Executive brief Cereals Table 1: Product coverage of the cereals regime CN code 0709 9060 0712 9019 1001 9091 1001 9099 1002 0000 1003 00 1004 00 1005 1090 1005 9000 1007 0090 1008 10001 10 1101 0000 1102 1000 1103 11 1107 Certain nonannex I products Description sweetcorn, fresh or chilled dried sweetcorn, whole, cut, sliced, broken or in powder, but not further prepared common wheat and meslin seed spelt, common wheat and meslin other than for sowing rye barley oats maize (corn) seed other than hybrid maize other than seed grain sorghum, other than hybrids for sowing buckwheat, millet and canary seed; other cereals durum wheat wheat and meslin flour rye flour groats and meal or cheat malt, whether or not roasted various value-added cereal-based products The EU’s cereals regime applies to both internal trade in these products and the EU’s trade in these products with third countries. 1.2. The centrality of the cereals-sector experience to CAP reform The experience of reform of the EU cereals sector laid the basis in many respects for what is now the key component of a reformed CAP. The decision to consolidate the various EU cerealproduct regimes (except rice) and the regimes for oilseeds and protein crops into a single arablesector regime1 has provided valuable experience on which to base the new single direct aid farm-payment scheme (known as the single payment scheme – SPS). It should come as no surprise that CAP reform started in 1992 in the cereals sector. Not only is cereals production at the heart of EU agriculture in terms of the level of production (it accounts for 40% of the usable agricultural area, 21% of EU agricultural revenue and 11% of EU production) but it also has important linkages with other sectors. Some 62% of EU cereal production is now used in animal feeds consumed by the livestock sector in the EU (using fully 80% of maize currently consumed in the EU). EU cereal prices thus have important implications for the costs of production in the livestock sector, particularly for the pig-meat and poultry-meat sectors where in 1992 feed costs constituted 70% of total production costs. 1 As a result of this consolidation of product programmes into the arable regime, figures are given for the arable sector as a whole rather than its component parts: cereals, oilseeds and protein plants. However the analysis will focus primarily on the impact of changes in the cereals sector. Cereals account for around 75% of EU arable-sector expenditures. However, with the shift to hectare-based payments, the distinction between expenditures on different products in the arable sector diminished. 359 The cereals sector also provides major inputs into an expanding EU food-and-drink industry. This is of critical importance, for in some respects the process of CAP reform is less about supporting EU farmers than supporting the development of a globally oriented, competitively priced EU food-and-drink industry. October 2008 Executive brief Cereals 1.3. The early cereals regime The EU cereals regime was characteristic of the unreformed CAP, involving the maintenance of high producer prices, which in turn required the establishment of high levels of tariff protection to maintain the ‘integrity’ of the EU market. High prices however generated high and rising levels of production and served to suppress domestic demand for cereals, both for industrial uses and as an animal feed. This then required the deployment of large amounts of public funds for storing the surplus cereals and of even larger amounts to finance the disposal of these surpluses on third-country markets – so-called ‘export restitution payments’ (popularly known as export subsidies). It also gave rise to substantial food-aid programmes designed to dispose of surplus European products. This policy was, however, closely linked to the specific geo-political context of cold-war confrontation in Europe. With the ending of the cold war, opportunities were opened up for a fundamental reform of this policy. This was fuelled by mounting concerns over the size of EU surpluses and the costs of storing and disposing of them. However, budgetary considerations cannot be seen as the overriding concern, for the price of reform did not come cheap. 1.4. Reforming the cereals regime In 1991 the EU recognised that ‘fundamental reform was essential’2. The system of price support was both undermining the price competitiveness of European products on domestic and international markets3 and over-stimulating production. This was leading to stagnation and contraction of domestic demand for cereals and placing a growing financial burden on the EU budget. To address this situation the EC proposed to progressively reduce EU cereal prices, but with price reductions being compensated for by direct payments to farmers based on the area under production. In order to constrain production these payments were linked to the removal of a certain percentage of land from production – so-called ‘set-aside’. This constituted the first round of cereals-sector reform and involved a reduction in the intervention price of 29.4% for wheat and maize and 47.7% for durum wheat between July 1992 and July 1993. This initial cut harmonised the intervention price for common wheat, durum wheat and maize. This was followed by a further reduction of 7.7% from July 1993, and the intervention price thus established (apart from revisions to the agro-monetary rules) was to remain in effect until June 2000, when the second round of Agenda 2000 reforms was introduced. This led to a further 15% reduction in cereal prices (see Table 2 for details). ‘The agricultural situation in the Community’, 1991 Report, p.11. This was being felt particularly in the animal-feeds sector where imported cereal substitutes were gaining an increasing share of the market. 2 3 360 Executive brief Cereals Table 2: Evolution of the EU intervention price (ecu/tonne) Year Common wheat July 1992 163.49 July 1993 115.49 July 1994 106.60 July 1994 to June 2000 119.194 July 2000 110.25 July 2001 101.31 July 2002 to 2006 101.31 Source: Agritrade 2004 cereals sector executive brief. Durum wheat 220.87 115.49 106.60 119.19 110.25 101.31 101.31 Com m on w heat and Maize Maize 163.49 115.49 106.60 119.19 110.25 101.31 101.31 Durum w heat 250 200 150 October 2008 100 50 0 Jul-92 Jul-93 Jul-94 Jul-94 to Jun-2000 Jul-00 Jul-01 Jul-2002 to 2006 To compensate for these price reductions in the first phase of reforms, overall arable-sector5 expenditures rose from ecu 10,610.7 million in 1993 to ecu 12,643.7 million in 1994, and ecu 15,010.3 million in 1995. By 1996, direct aid payments in the arable sector totalled some ecu 15,838 million, about 97% of total arable-sector expenditures. Under the second round of reform-induced price reductions, compensation payments (or direct aid payments as they had by then become known) were increased from €54 per tonne to €63 per tonne. The second phase of reform called for further increases in overall arable-sector expenditures, which reached €18,590 million in 2002. Thus, under the impact of CAP reform, expenditures in the arable sector increased by 82% from 1992 to 2002, a not inconsiderable increase over a ten-year period. With the consolidation of a growing number of crops under the single payment scheme, it is no longer possible to distinguish direct aid payments specifically for the arable sector. By 2005 direct aid payments had reached €33.9 billion, increasing to €36.9 billion by 2007. Cerealsspecific expenditures (export refunds, storage, and intervention for starch), totalled only €624 million in 2005, €700 million in 2006 and €51 million in 2007. The fluctuation in these amounts highlights the volatility of expenditures on export refunds which rose by 73% between 2005 and 2006, before falling by 52% between 2006 and 2007, leaving the allocation for export refunds in 2007 17% below the 2005 level. Despite the continued weakness of the US dollar against the euro (a situation now reversing), the very high global cereal prices have seen little need for export refunds in the recent past. In 1995 changes were introduced in the agro-monetary rules and the intervention price was set at 119.19 ecu per tonne, an amount deemed to be equivalent to the proposed 100 ecu per tonne target price under the old rules. 5 Part of the reform sought to bring EU cereal, oilseed and protein-plant systems into alignment, with direct aid being made available over time to the arable sector rather than to specific products. 4 361 October 2008 Executive brief Cereals 1.5. The 2003 CAP mid-term review Following the third phase of CAP reform in June 2003, a range of products has been taken into the single payment scheme, including rice, beef and dairy products. The introduction of a single ‘decoupled’ farm payment deepened the process that had begun with the consolidation of the cereals, oilseeds and protein-crop regimes into a single arable-sector regime in 1993. This new ‘decoupled’ farm payment effectively freezes farm payments for most farmers at the levels established under the previous regime since they are based on the levels of assistance received under the previous system. The exception to this is for the highest recipients of EU farm support: these are now subject to ‘modulation’, which caps and recoups part of the eligible payments. The sums recouped are redeployed in support of wider rural development activities. Under the new arrangements payments are no longer formally linked to the production of specific products. The EC hopes that this will serve to make the EU’s whole agricultural-support scheme compatible with the WTO, insulating the main body of EU agricultural support from any multilaterally negotiated commitments to the reduction of agricultural support and any effective challenge. The full implementation of this component of reform will ultimately erode all distinctions between the EU cereals regime and other EU product regimes as they are merged into a single agricultural support regime. Temporary concessions to ‘decoupling’ introduced during the transitional period are being phased out and are likely to disappear entirely beyond 2013. The 2003 CAP mid-term review left the cereals-sector regime consisting of:  direct aid payments which have been increasingly delinked from production of specific products (98% of all expenditures in the arable sector in 2002);  a small and fluctuating level of allocation to export refund support, linked to currency movements and variations in world market prices;  a comparatively small and dwindling allocation to cover the costs of cereals storage, which is increasingly being moved into the private sector;  a revision of the import-tariff regime to establish a more realistic benchmark for world market prices in the light of the emergence of new highly competitive cereal exporters. EU enlargement has brought a need for further reform of the cereals-sector storage policy. On June 11th 2007 the decision to phase out intervention buying for maize over a three-year period was announced. This was in response to escalating levels of stocks, which were, according to the Commission, ‘rapidly becoming untenable’. The aim of this measure was to discourage production of maize specifically for intervention storage in new EU member states, and to promote more market-oriented production within the single payment scheme. The adoption of this reform was greatly facilitated by the high world market price situation, with political opposition simply evaporating in the face of the new market realities. 1.6. The CAP health check As part of the CAP ‘health check’, a series of measures was proposed which impacts on the cereals sector. The most significant of these was the proposal to abolish the system of set-aside, which at one time required arable farmers to leave 10% of their land fallow. The cereals sector, given the structure of production within the sector, is also likely to be affected by EC proposals to progressively increase the level of ‘modulation’ from 5% to 13% by 2012. This will serve to reduce direct aid payments to larger farmers, while freeing up money for rural development measures ‘in the field of climate change, renewable energy, water management and biodiversity’. The EC has also proposed the abolition of intervention buying for durum wheat and the establishment of intervention at zero for feed grains (but retaining the system in case of need). 362 In presenting these and the other CAP health check reform proposals, Agriculture Commissioner Fischer Boel highlighted the aim of removing ‘remaining restrictions on farmers to help them respond to growing demand for food’, while keeping measures in place which assist EU farmers in dealing with occasional crises. 2. Impact of EU cereals sector reform October 2008 Executive brief Cereals 2.1. The impact of reform on production The introduction of set-aside linked to increased direct aid payments to farmers saw the area devoted to cereals production fall from 38.1 million hectares to 34.7 million hectares in 19946. For a time this led to a reduction in EU cereals-sector production (see Table 3 below). However, domestic markets were regained as a result of the new price competitiveness of EUproduced cereals and this led to a rapid reversal of the reduction. This price competitiveness also stimulated a growth in domestic consumption of cereals, mainly for animal feed. As a result, although EU cereals production expanded beyond levels widely viewed as unsustainable in 1991, cereal stocks fell to levels which by the end of the century were only 20% of what they had been at their peak in 1992/93. Even taking into account EU enlargement, EU cereals production has continued to grow, except in years when bad weather has affected the harvest. 2004 saw the EU25 cereals harvest reach a total of 286.2 million tonnes, of which 62.8 million tonnes were produced in new member states and 223.4 million tonnes in EU15 countries. This represents a 20.5% increase in EU15 cereals production compared to the 2002/03 season (which was a poor harvest) and a 3.9% increase on the previous record cereals harvest for EU15 countries achieved in 1999/2000. It is perhaps somewhat ironic that a reform process which is popularly believed to have reduced EU production (this is the inference from the disappearance of the grain mountains) has actually served to promote record production levels, with EU production in the 2003/04 season being 22.8% higher than EU cereal production in the 1991/92 season, the last year before reform. Cereals production did however fall back in 2005 to a more normal level of around 253.1 million tonnes, and as low as 242.3 million tonnes in 2006, before rising slightly to 256 million tonnes in 2007. A full recovery is projected for 2008, with production in the EU27 reaching 300 million tonnes. Two successive years of poor harvests (2005 and 2006) led to a tightening of cereal supplies on the EU market, with stocks falling from 14 million tonnes to 1 million tonnes by mid-2007 and a mere 236,000 tonnes by April 2008. This saw the EU transformed from its traditional role as a net exporter into a very large net importer. The tight market situation saw the immediate adoption of two measures: the suspension of import duties on all cereal imports except oats, buckwheat and millet and the establishment of the set-aside obligation at zero. The latter measure has contributed to the projected 300 million tonne harvest in 2008. Subsequently, concerns over EU stock levels in the face of rising domestic consumption of cereals saw a relaxation of set-aside limits and an expansion of the area under cereals. 6 363 October 2008 Executive brief Cereals Up to 2014, EU use of cereals for biofuel production is expected to grow from its 2007 level of 1.9 million tonnes to 18.4 million tonnes. Overall EU consumption of cereals for food and industrial use, feed and bio-energy is expected to increase from 253.7 million tonnes in 2007 to 275.2 million tonnes. This 21.5 million tonne expansion consists of a 1.7 million tonne expansion of food and industrial usage, a 3.3 million tonne expansion in feed usage and a 16.5 million tonne expansion in biofuel usage7. Biofuel usage of cereals will increase from 0.75% of EU consumption to 6.7% of EU cereals consumption. However, the boost given to EU cereal production by biofuel developments is expected to be short-lived as a result of the development of new technologies which will increasingly allow undifferentiated biomass (household waste) to be used as the feedstock in biofuel production. However, this will be critically determined by the policy framework established by the EU with regard to imports of biofuel and blending targets, i.e. the level of biofuel to be blended with oil-based fuel products. Impact of biofuels policy on global cereals markets A recent OECD report on biofuel policies in OECD countries pointed out that public financing of biofuel production is expected to increase from US$11 billion in 2006 to US$25 billion in 2015. This is despite the recognition that such policies will have ‘a significant impact on world crop prices’ and significant trade impacts. Average wheat prices are projected to increase by 5% and maize prices by 7% over the next 10 years, according to the OECD. On the basis of current OECD policies, some 13% of world coarse grain production is expected to shift to biofuel production in the next 10 years, up from 8% in 2007. Various policy tools are currently being deployed in support of biofuel development. This includes tax concessions and direct financial support for biofuel producers, retailers and users. In addition OECD countries have set blending targets, both mandatory and voluntary, designed to create a market for biofuels, while regulating imports through the use of import tariffs, tariff-rate quotas (TRQs) and in the case of the EU, environment-based (‘sustainability criteria’) import licensing. Thus these wider public policy interventions can be seen as having an important bearing on the functioning of global cereal markets. Sources: Full report, OECD, July 16th 2008, http://www.oecd.org/dataoecd/19/62/41007840.pdf Press summary, OECD, July 16th 2008, http://www.oecd.org/dataoecd/19/62/41007840.pdf Despite expanding biofuel demand the EU is expected to return to being a net exporter in 2008, with production in 2014 exceeding consumption by 20.3 million tonnes. This however is nearly half the surplus of production over consumption attained in 2004/05 (production 285.1 million tonnes, consumption 244.6 million tonnes)8. There is a discrepancy between the consumption figures by usage and the sum of the consumption figures by sub-group of EU member states. In this section, for purposes of analysis, the consumption figures by usage are used. 8 For more detail on future projections see later section, ‘Future developments in the EU cereals markets’. 7 364 Year Production Consumption Exports Intervention 1988/1989 163,977,000 136,605,000 25,705,000 9,146,000 1989/1990 162,289,000 133,315,000 33,875,000 11,795,000 1990/1991 182,588,000 134,172,000 29,046,000 18,749,000 1991/1992 180,937,000 140,279,000 34,787,000 26,383,000 1992/1993 167,772,000 134,831,000 36,997,000 33,339,000 1993/1994 163,960,000 146,129,000 32,526,000 17,993,000 1994/1995 172,848,000 159,485,000 32,047,000 6,580,000 1995/1996 176,580,000 166,563,000 24,526,000 2,681,000 1996/1997 205,936,000 173,523,000 29,694,000 2,355,000 1997/1998 205,881,000 177,361,000 22,854,000 13,663,000 1998/1999 200,833,000 177,104,000 24,293,000 18,018,000 1999/2000 213,819,000 182,018,000 31,046,000 8,701,000 2000/2001 200,588,000 178,172,000 40,873,000 6,683,000 2001/2002 213,498,000 187,087,000 32,377,000 7,962,000 2002/2003 199,406,000 190,951,000 22,382,000 8,869,000 2003/20049 229,800,000 239,800,000 19,500,000 3,637,000 2004/2005 285,100,000 244,600,000 88,900,00010 15,517,000 2005/2006 253,786,000 247,093,000 22,564,000 13,963,000 2006/2007 263,911,000 269,560,000 21,782,000 2,438,000 Source: ‘Agricultural situation in the European Union’, Tables 4.1.4.4 & 4.1.6.3 (1991-2008). 300 Production Consum ption Millions 250 200 150 100 50 19 88 /1 98 9 19 90 /1 99 1 19 92 /1 99 3 19 94 /1 99 5 19 96 /1 99 7 19 98 /1 99 9 20 00 /2 00 1 20 02 /2 00 3 20 04 /2 00 5 20 06 /2 00 7 0 Exports Intervention Millions 100 90 80 70 60 50 40 30 20 10 0 19 88 /1 98 9 19 90 /1 99 1 19 92 /1 99 3 19 94 /1 99 5 19 96 /1 99 7 19 98 /1 99 9 20 00 /2 00 1 20 02 /2 00 3 20 04 /2 00 5 20 06 /2 00 7 October 2008 Executive brief Cereals Table 3: EU cereals, production, consumption, exports and intervention stocks 1988/89 to 2006/07 (tonnes) EU27. This is the figure given in the February 2008 report on the ‘Agricultural situation in the European Union’, table 4.1.4.4, although the author has profound reservations about the veracity of this figure. However, since these executive briefs seek to ensure a consistent use of source materials, this figure has been included despite the author’s reservations. 9 10 365 2.2. The impact of reform on the EU import regime October 2008 Executive brief Cereals As the EC freely acknowledges, the creation of a single EU market for cereals requires the maintenance of a regulated trading system at the external frontiers of the EU. The duties charged on imports are laid down in the customs tariffs and are within the commitments made by the EU in the cereals sector at the WTO. The actual duties charged consist of a basic duty and a supplementary duty. In addition the EC is empowered to take all necessary measures to prevent market disruptions should circumstances so require. In order to monitor the volume of trade the system operates on the basis of import and export licences. For durum wheat, common wheat, high quality wheat, rye, barley, maize and grain sorghum, the import duty shall be ‘equal to the intervention price valid for such products on importation and increased by 55%, minus the cif import price applicable to the consignment in question’. In order to make this calculation, ‘representative cif import prices shall be established’. In addition the EU has established various tariff-rate quotas for the import of medium- and low-quality wheat and barley. Until 2008 ACP countries enjoyed a tariff-rate quota regime under Declaration XXII of the Cotonou Agreement. This however has now been replaced for most non least-developed ACP countries by duty–free, quota-free access for cereal products (and all other products) under the interim Economic Partnership Agreements (IEPAs). However with the exception of rice, ACP countries are not major exporters of cereals. Since 1998 ACP exports of cereals to the EU have had an average annual value of around €50 million. This includes an irregular trade in animal feed. While this basic system remains in place, the EU in 2007, with world market prices soaring, suspended import duties on all cereals except oats, buckwheat and millet until the end of the 2007/08 season (a measure subsequently extended). This was in response to record high cereal prices globally and relative to the recent past within the EU itself. Agriculture Commissioner Fischer Boel said the decision was taken in the light of the high prices in the EU resulting from ‘two low European harvests in a row’ against the background of reduced stock levels (currently down to 500,000 t.). Indeed by the end of 2007, the EU was becoming a net importer of cereals (5.2 million t. of net imports by the end of November 2007). 2.3. The impact of reform on EU exports For many years the EU has been seeking to close the gap between EU and world market cereal prices by shifting from a policy of price support to direct aid payments, a policy which has allowed EU prices to fall dramatically. However EU efforts to attain world market price parity were for many years frustrated by the weakness of the US dollar (in which all major commodities are traded) against the euro. However, the increase in world market prices of cereals during 2007 made the attainment of this objective possible. The recent decline in world market prices of cereals has been offset by a strengthening of the US dollar against the euro, a development which promises to be sustained in the coming period. This is likely to enable the EU to make continued savings on export refund allocations prior to the much heralded abolishment of the export refund scheme in 2013. Indeed, with global food prices expected to remain higher than historical levels (although below recent peaks), the strengthening of the US dollar against the euro could well see an end to the use of cereal export refunds in the coming period. This being noted this policy tool will undoubtedly remain in place in case of need, given the projected increased price volatility expected on cereals markets in the coming period. This ending of the use of WTO export refunds will remove all WTO volume constraints on EU exports of cereals, which will increasingly be determined by EU production levels, EU demand trends and global market price trends. The expansion of EU biofuel production however will serve to limit the overall level of EU cereal exports reducing these by some 16 million tonnes (all other price and production factors being equal). 366 Total arable sector Export refunds Export refunds as % of expenditure total expenditure 1989 6,310.6 2,666.4 42 1990 7,869.4 2,501.0 32 1991 9,307.7 3,733.0 40 1992 10,211.2 3,281.8 32 1993 10,610.7 2,788.8 26 1994 12.643.7 1,513.2 12 1995 15.018.3 1,092.7 7 1996 16.372.2 312.8 2 1997 17.414.0 532.3 3 1998 17,945.2 429.4 2 1999 17.865.9 883.1 5 2000 16,663.1 823.6 5 2001 17,466.2 259.8 1.5 2002 18,590.1 99.3 0.5 2003 16,809.4 175.9 1.05 2004 17,296.6 72.4 0.42 2005* 17,367.3 228.0 1.31 * 2006 saw the introduction of the single farm payment, into which most of the arable sector payments have been transferred. In 2005 total direct aid payments amounted to €33.856 billion, rising to €36.879 billion in 2007. Source: ‘Agricultural situation in the European Union’, extracted from Table 3.4.3.1 (1991-2005), EAGF Guarantee by product. Total arable sector expenditure (left axis) Export refunds as % of total expenditure (right axis) 20000 45% 18000 40% 16000 35% 14000 30% 12000 25% 10000 20% 8000 15% 6000 4000 10% 2000 5% 0 0% 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 October 2008 Executive brief Cereals Table 4: The declining importance of export refunds in the cereals sector (€ million) The decline and virtual elimination of the use of export refunds in the cereals sector does not mean that overall financial support to the arable sector has declined. Between 1992 and 1997 total EU expenditures in the sector11 rose by 70.5% (from ecu 10,211.2 million to ecu 17,414.0 million)12, as direct aid programmes expanded to cushion the effect of price reductions on farm incomes. By 2002 the increase had reached 82% (from ecu 10,211.2 million to ecu 18,590.1 million). This represented the peak of dedicated EU arable-sector expenditure. Subsequently arable sector expenditures fell by 6%, before being replaced by the single payment scheme in 2005. The arable sector includes cereals, oilseeds and protein crops. Since the initiation of reform in 1993, expenditures have been reported for the arable sector as the shift over to direct aid has sought to establish progressively standardised treatment for cereals crops, oilseeds and protein crops. 12 Between 1989 and 1999 the rise was even sharper, with expenditures in the cereals sector almost tripling from €6.3 billion to €17.9 billion. 11 367 The single payment scheme now represents the principal means of EU support to the arable sector (including of course the cereals sector as its central component). While export refund deployment is no longer an issue in the cereals sector, the impact of EU direct aid payments on the production and trade outcomes in the cereals sector, and the resulting competitiveness of EU cereal-based products and livestock production, are of growing importance. October 2008 Executive brief Cereals Future prospects for global food commodity markets In June 2008 the OECD published a review of ‘Rising food prices: causes and consequences’. It highlights the combined effects of below-trend production (droughts in key producing regions), sustained consumer demand growth, the impact of oil price rises and continued devaluation of the US dollar, the demand surge provided by biofuel policies, depleted stocks and increased speculative investment in agricultural derivative markets. It argued that increased speculative investment has ‘contributed to the rise in short term futures prices’ and has been ‘an additional factor in the current spike in spot market prices’. It added however that this could constitute a permanent factor contributing to increased price volatility. It is felt that the depletion of stocks, which has been in part policy driven, and the increased vulnerability to weather-induced production shortfalls, will also contribute to increased price volatility. Against this background it argued that ‘tight markets may be a permanent factor in the period to 2017’, with cereals, rice and oilseed prices likely in the coming ten years to be ‘10% to 35% higher than in the past decade’ in real terms (35%-60% higher in nominal terms). Regardless of the specific level of prices increases, it was agreed that prices will be above historical levels, but in all probability below the recent peaks, on average. The OECD report further noted that those worst affected by rising prices are ‘poor consumers in developing countries, and food-importing developing countries’. In this context it highlighted the need for short-term humanitarian assistance. It further highlighted the need in the longer term to ‘foster growth and development in poor countries’. Source: OECD, 2008, http://www.oecd.org/dataoecd/54/42/40847088.pdf The 2005 LMC Consultants’ evaluation of the Common Market Organisation for cereals made a number of important observations about the impact of direct aid payments. These account for between 57% and 70% of the incomes of cereals farmers (large- and medium-sized farms respectively)13. Surveys undertaken as part of the evaluation revealed that:  were it not for the direct aid payments, most cereal farmers would ‘reduce their arable farming by at least 50%’;  ‘in almost half the regional studies analysed, … direct payments contributed the entire net income of cereal specialists’, while ‘in a similar proportion of studies, direct payments covered producers’ full cash costs’. The evaluation noted that the area under cereals had increased over the reform period and that the reforms had helped close the gap between EU and world market prices. This evaluation report strongly suggested that direct aid payments have resulted in some regions’ cereal-farming levels reaching double what they would have in the absence of such direct aid payments, at the price levels which were then the norm. This suggests that direct aid payments in the cereals sector have had profound production and trade effects. This would appear to have important implications both for the WTO negotiations and the ACP-EU Economic Partnership Agreement (EPA) negotiations, when dealing with products in the cereals-sector value chain. It should be noted that these figures pre-date the rise in global food prices. In the light of these increases the relative importance of direct aid payments to the total income of cereal farmers will have declined considerably. 13 368 2.4. Future developments on the EU cereals market October 2008 Executive brief Cereals The March 2008 ‘Prospects for agricultural markets and income 2007-2014’14, was drafted against the backdrop of record global prices in the cereals sector. These prices were attributed to ‘a steady rise in global food demand, the emergence of the biofuel market, the significant slowdown in cereal yield growth in the EU, … adverse climatic conditions and the restrictive export policy of some key world market suppliers’ and two successive lower than average EU harvests, which served to clear intervention stocks. It was anticipated that this tight market situation would continue until stocks in the EU were replenished. ‘Over the medium term, world and EU cereal prices are projected to remain sustained at higher levels than seen in the last decade, though at much lower levels than those recently observed’. It is envisaged that in future there will be greater price fluctuations, as EU prices increasingly mirror world market prices. A positive outlook for the EU cereals sector is foreseen, ‘thanks to the impact of the CAP reform, … the moderate prospects for yield growth, the emerging bioethanol market … and more favourable conditions on world markets’. This will serve to create a balanced cereals market in the EU in the medium term. In terms of overall production, an expansion of EU27 cereals production of 3.8% is projected between 2008 and 2014 (from 294.4 to 305.7 million tonnes) on the back of the 15% expansion in EU production which took place between 2007 and 2008, in response to price market price incentives and the establishment of set-aside obligations at zero. Table 5: Past and projected EU external trade in wheat (million tonnes) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Imports 7.4 6.7 5.0 7.2 7.7 6.4 5.8 5.8 6.1 7.2 7.8 Exports 13.7 15.1 13.1 10.0 16.8 18.7 18.9 18.0 16.0 15.2 15.0 Biofuel 0.5 1.4 1.0 1.1 2.5 2.4 2.9 4.1 6.1 9.1 10.7 Source: ‘Prospects for agricultural markets and income 2006-2014’, Table A.2, total wheat market projections for the European Union 2004-2014. With consumption growing by 5.5% in the EU27 (including nearly a fourfold increase in biofuel usage), after an initial expansion of total cereal export to 29.7 million tonnes in 2011 EU exports are expected to fall back to 28.9 million tonnes. This is some 14.5% below earlier projected levels of exports in 2013. Table 6: Past and projected EU external trade in coarse grains (million tonnes) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Imports 2.7 3.2 5.9 9.7 3.9 3.4 3.5 3.2 3.2 3.2 3.2 Exports 9.5 8.4 8.6 8.0 10.8 9.5 10.1 11.7 12.8 13.0 13.8 Biofuel 0.2 1.3 1.5 0.8 2.3 2.2 2.6 3.3 4.3 6.6 7.7 Source: ‘Prospects for agricultural markets and income 2006-2014’, Table A.3, total coarse grain projections for the European Union 2004-2014. Total EU27 wheat production is projected to grow by 2.5% between 2008 and 2014 (from 142 million tonnes to 145.6 million tonnes), on the back of a 16% increase in production between 2007 and 2008. With consumption projected to grow 10.97% between 2008 and 2014 (+0.8% for food and industrial use, + 9.8% for feed use and +428% for biofuel use), exports of wheat are projected to decline by 11%, with wheat export levels in 2013 now projected to be 30% below previous projections, largely as a result of the EU’s new biofuel policy. 14 This report is based on official data available as of December 2007. This means the latest trade data for the final quarter of 2007 will not have been available, hence the discrepancy between EC projections of the net trade balance and the reality reflected in EC policy statements at the end of 2007. 369 October 2008 Executive brief Cereals For coarse grains, total EU27 production is projected to rise by 5.2% (from 152.3 million tonnes in 2008 to 160.2 million tonnes in 2014), on the back of a 14% increase between 2007 and 2008. With consumption set to grow by 0.76%, exports are projected to rise by 27.8%, despite a 334% increase in biofuel consumption. For maize, total EU27 production is projected to rise by 8.9% (from 61.8 million tonnes in 2008 to 67.3 million tonnes in 2014), on the back of a 35% expansion between 2007 and 2008. Despite consumption growing by only 6.4% in the EU27, exports are expected to decline by 5.1% from 3.9 million tonnes in 2008 to 3.7 million tonnes in 2014. Imports are projected to decline dramatically from the unprecedented levels of 2007 (9 million tonnes) to around 2.5 million tonnes, the same level as in 2005. Table 7: Past and projected EU external trade in maize (million tonnes) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Imports 2.1 2.5 5.2 9.0 3.2 2.7 2.8 2.5 2.5 2.5 2.5 Exports 1.7 2.0 1.7 1.7 3.9 2.0 2.0 2.8 3.3 3.5 3.7 Biofuel 0.0 0.6 0.7 0.3 1.5 1.4 1.7 2.4 3.4 5.7 6.8 Source: ‘Prospects for agricultural markets and income 2006-2014’, Table A.6, total maize projections for the European Union 2004-2014. For barley, total EU27 production is projected to rise by 3.1% from 2008 to 2014 (from 57.8 million tonnes to 59.6 million tonnes). EU27 barley consumption is projected to decline 2.1% (from 51.4 to 50.3 million tonnes). Exports of barley as a consequence are projected to increase by 45.5% (from 6.6 million tonnes to 9.6 million tonnes). Table 8: Past and projected EU external trade in barley (million tonnes) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Imports 0.4 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 Exports 6.7 5.8 6.3 6.0 6.6 7.1 7.4 8.3 8.9 9.0 9.6 Biofuel 0.2 0.7 0.7 0.5 0.8 0.8 0.9 0.9 0.9 0.9 0.9 Source: ‘Prospects for agricultural markets and income 2006-2014’, Table A.5, total barley projections for the European Union 2004-2014. The overall area under cereals is projected to decrease slightly between 2008 and 2014 by some 2.3%, after a 20.4% expansion of the area under cereals between 2006 and 2008. With the area under cereals in 2014 projected to be some 58.9 million ha., this would be 17.6% larger than in 2006, the last full year before the establishment of set-aside obligations at zero in the autumn of 2007. The EU’s ambition in the cereals sector ‘Aligning Community prices with those on the world market should therefore make it possible to export without subsidies, and therefore without quantitative ceilings. Community products will therefore be able to benefit from opportunities in a world market where the volume of trade is expected to increase significantly in the medium term.’ Source: http://europa.eu.int/comm/agriculture/markets/crops/index_en.htm Year-on-year changes in export levels for wheat and maize are determined in large part by the rolling out of the EU’s biofuel programme, with this leading to a contraction of wheat exports towards the end of the period and containment of the level of expansion of EU maize exports. The overall impact of EU biofuel programmes on export however would appear to be contained by the significant expansion of the area under cereals (+12% by 2014 compared to the average for 2004-06). Higher world market prices and a strengthening of the US dollar against the euro are both likely to stimulate European cereals production and EU exports (which will no longer be constrained by WTO export refund ceilings), despite the introduction of biofuel blending targets. However, as previously indicated, export levels are likely to be lower than earlier projections for wheat and higher than earlier projections for maize. This in part reflects the price and demand effects of the US biofuel programmes. 370 Executive brief Cereals The EC view of the impact of EU biofuel targets The EC argues that its biofuel policy, notably the 10% target for biofuel utilisation across the EU27, is likely to have only a 3% to 6% impact on cereals prices compared to 2006 levels. It argues that by 2020, some 59 million tonnes of cereals or 18% of domestic use will be needed as a feedstock into both firstand second-generation biofuels, mostly soft wheat, maize and barley. It further notes that the expected 1% annual increase in yields would by 2020 produce some 38 million tonnes more cereals, while 14 million tonnes could be produced on formerly set-aside land. These two developments would largely meet expanded biofuel usage. EU biofuel policy will however reduce export levels and this is likely to have some price effects at the global level. Overall the EC contends ‘the 10% scenario does not overly stretch the land availability nor does it lead to a significant increase of intensities of production because of the limited pressure on markets’. Source: EC information note, March 2007, http://ec.europa.eu/agriculture/analysis/markets/biofuel/impact042007/text_en.pdf As can be seen from the table below, surplus cereal production is increasingly going to originate in new member states, in part because of more rapid consumption growth within the EU15 (+25.1 million tonnes in the EU15, compared to a small decline in consumption in EU10 countries). October 2008 Table 9: Projected EU cereals production, consumption and marketable surplus (million tonnes) 2005 Production EU15 EU10 EU2 EU27 Consumption EU15 EU10 EU2 EU27 - biofuel use Marketable surplus EU15 EU10 EU2 EU27 2006 2007 2008 2009 2010 2011 2012 2013 2014 195.0 58.1 192.4 50.0 193.0 52.1 10.9 256.0 210.3 59.1 25.0 294.4 204.8 58.4 25.0 288.2 207.5 60.3 25.8 293.6 210.2 60.7 26.7 297.6 211.5 62.6 26.6 300.7 212.4 64.6 26.9 303.9 214.1 64.5 27.2 205.7 198.0 48.9 199.3 48.2 200.1 48.3 17.2 265.6 1.9 199.6 48.7 22.3 270.6 4.8 201.0 48.6 22.1 271.1 4.5 202.3 48.5 22.2 272.9 5.5 205.2 48.2 22.2 275.5 7.5 208.5 47.9 22.2 278.7 10.3 213.0 47.5 22.3 282.9 15.7 215.9 47.3 22.3 285.5 18.4 -3.0 +9.2 -6.9 +1.8 -7.1 +3.8 -6.3 -9.6 +10.7 +10.4 +2.7 +23.2 +3.8 +9.8 +2.9 +16.5 +5.2 +11.8 +3.6 +20.6 +5.0 +12.5 +4.5 +22 +3.0 -0.6 -1.8 +14.7 +17.1 +17.2 +4.4 +4.6 +4.9 +22.1 +21.1 +20.3 Source: ‘Prospects for agricultural markets and income 2006-2014’, Table A.1, total cereals market projections for the European Union 2004-2014. Cereals production, consumption and marketable surplus for EU27 350 25 300 20 15 250 10 200 5 150 Production 0 Consum ption 100 Marketable surplus (right axis) 50 -10 0 2007 -5 -15 2008 2009 2010 371 2011 2012 2013 2014 3. The impact of cereals-sector reform on the ACP 3.1. Disaggregating the impact of EU cereals-sector reform October 2008 Executive brief Cereals There are three ways in which EU cereal sector reform and EU biofuel policies impact on ACP countries:   firstly via the direct effects on exports and price levels of cereals;  thirdly through the impact on animal feed prices and the price competitiveness of European meat exports to markets currently served by ACP producers.15 secondly through the effect on the competitiveness of EU cereal-based manufactured exports to markets currently served by ACP producers of cereal-based products; In the past, EU exports of cereals have been restricted by WTO ceilings on the value and volume of cereals which can be exported with the benefit of export refunds. Cereals sector reform and much higher world market cereal prices have served to remove this WTO constraint by promoting a convergence of EU and world market cereal prices. This objective would have been achieved much earlier as a result of the EU reform process, had not the US dollar devalued so dramatically against the euro. This period of weakness of the US dollar now appears to be reversing, suggesting the recent price convergence could be sustained without an additional round of cereals sector reforms. It is far from clear what the impact of these developments will be on ACP countries. On the one hand, with new EU biofuel targets reducing the volume of EU cereal exports there will potentially be more market opportunities for ACP wheat producers serving national and regional markets (e.g. in land-locked Zambia). However, the net impact of this will vary from ACP country to ACP country depending on the scope for developing national wheat production and the net cereals import position of the country. Despite increased EU biofuel demands, EU exports of coarse grains are projected to be sustained at higher levels than previously projected from 2010 onwards, with coarse grain exports increasing steadily by 36.6% between 2010 and 2014. This reflects in part higher production, stable food and industrial use, declining feed use and expanding biofuel usage. 3.2. Trends in EU cereal-based food products Currently the only ACP country among the top ten destinations for EU cereals and cerealproduct exports is Angola. The value of EU exports to Angola almost doubled from 1995 to 2004 (from €45 million to €85 million). By 2004 Angola was importing 3% of EU cereal exports, up from only 1% in 1995, a higher value of cereals from the EU than Switzerland. In 2005 Angola imported some 296,814 tonnes of wheat or meslin flour from the EU at a cost of €57.3 million, and a further 32,393 tonnes of pasta at a cost of €15.1 million. This volume of trade could have implications for the SADC-EU EPA negotiations and would suggest a need for ‘special arrangements’ for cereal imports under any SADC-EU EPA to which Angola is a party. This is an issue which is now becoming a bone of contention in the final stages of the SADC configuration IEPA negotiations. 15 With a fundamental shift occurring from export-refunded cereal exports limited by an agreed export-refund ceiling to the disposal of surplus European cereals priced at or below world market prices, there is currently little empirical evidence which is able to indicate the likely effects of these developments on ACP cereal markets. However, with regard to the impact of cheaper EU cereal prices on cereal-based processing industries and on animal-feed-intensive meat production and exports, a degree of empirical evidence is already available from which likely effects can be projected. 372 October 2008 Executive brief Cereals However, while individual ACP markets may not be that important to EU cereal product exporters, the ACP taken collectively is of growing significance. Between 1996 and 2006 the share of ‘preparations of cereals’ destined for ACP markets (mainly in west Africa) doubled from one in twenty tonnes exported to one in ten, with EU exports to the ACP increasing more than threefold. This compares to an increase in the value of EU global exports of only 67%. For the category ‘products of the milling industry’ (CN 11), EU exports to ACP countries doubled in value terms between 1996 and 2006, while EU global exports stagnated. This increased the importance of the ACP market to EU exporters from 12.6% to 25.4% in the case of ‘products of the milling industry’, and from 4.9% to 10.4% in the case of ‘preparations of cereals’. Table 10: EU cereal product exports to ACP countries 1996-2004, million ecu/euro Preparations of Preparations of cereals EU exports to ACP countries cereals ACP (CN 19) World (CN 19) as %age of total exports 1996 133 2,724 4.9 1997 176 3,021 5.8 1998 226 2,947 7.7 1999 230 2,829 8.1 2000 281 3,242 8.7 2001 368 3,700 9.9 2002 350 3,666 9.5 2003 339 3,569 9.5 2004 359 3,374 10.6 2005 385 3,689 10.4 2006 420 4,055 10.4 Source: ‘Agricultural situation in the European Union’ annual reports, Tables 3.7.2 and 3.7.12. EU Exports of preparations of cereals to ACP EU exports to ACP countries as %age of total exports 450 12% 400 10% 350 300 8% 250 6% 200 4% 150 100 2% 50 0 1996 1997 1998 1999 2000 2001 2002 2003 0% 2004 2005 2006 Table 11: EU cereal product exports to ACP countries 1996-2004, million ecu/euro Products of the milling Products of the milling EU exports to ACP countries as industry ACP (CN 11) industry World (CN 11) %age of total exports 1996 201 1,597 12.6 1997 333 1,978 16.8 1998 361 1,639 22.0 1999 302 1,398 21.6 2000 343 1,598 21.5 2001 336 1,749 19.2 2002 368 1,787 20.6 2003 340 1,696 20.0 2004 362 1,764 20.5 2005 368 1,536 24.0 2006 404 1,592 25.4 Source: Extracted from ‘Agricultural situation in the European Union’ annual reports, Tables 3.7.2 and 3.7.12. 373 EU exports of products of the m illing industry to ACP EU exports to ACP countries as %age of total exports 30% 450 400 25% 350 20% 300 250 15% 200 October 2008 Executive brief Cereals 150 10% 100 5% 50 0 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 These trends in the EU-ACP trade in cereal products need to be seen against the background of wider trends confronting the EU cereal products industry. The EU cereals product industry is facing intensified competition on traditional cereal product export markets (in north Africa and the Middle East) from non-traditional grain suppliers (e.g. Ukraine), advanced developing country suppliers (e.g. Brazil) and locally established processing plants. As a consequence the EU flour sector in particular is facing a structural overcapacity, with ACP markets taking on a growing significance. According to a presentation by a representative of EU wheat flour exporters at the DG Agriculture-organised symposium on EU agri-food export interests in free trade negotiations, held on June 25th 2007, the ACP is now taking ‘over half of all exports’. In this context the high tariffs applied on flour imports into ACP markets (sometimes up to 50% duties) were highlighted. Industry representatives went on to call for EU export interests to be fully taken into account in the ongoing EPA negotiations and for the EC to provide ‘active support for the position of the EU flour exporters’ in the EPA negotiations. Thus we find that with EU wheat flour exporters coming under pressure in other more lucrative markets, there has been a tendency to fall back on supplying markets in west Africa and there has been increased pressure on the EC to secure the removal of both tariff and non-tariff barriers to EU cereal product exports. However, the implementation of provisions under IEPAs dealing with both non-tariff and tariff barriers to EU cereal product exports could potentially close off opportunities for attracting investment in new milling capacity to serve emerging regional markets across the ACP (in particular from west Africa to southern Africa). There is anecdotal evidence to suggest this is becoming a point of contention in the final stages of the EPA negotiations, given the conflict between the commercial interests of EU companies in this area and the keen interest of ACP governments to promote an expansion of cereals production in the face of high global food prices. Overall the impact these trends will have on ACP cereals and cereal product markets will depend crucially on the policies adopted by ACP governments for the regulation of trade in these cereal products. In this context the provisions governing trade in cereals and cereal-based food products included in any EPA will take on particular significance (see final section). 374 Changing patterns of CAP assistance: additional areas of change October 2008 Executive brief Cereals The difficulties faced in identifying distortions generated by EU public aid programmes for individual products is compounded by the introduction of more general rural development programmes, which will directly serve to defray certain costs incurred by processing companies which expand market opportunities for agricultural producers in specified areas of the EU. The basic point to note is that before CAP reform the distortions generated by EU aid programmes were relatively clear cut. In the coming years the situation will be very different. This will not mean that distortions arising from the provision of EU public aid to the cereals sector will have been removed, but rather that the distortions will now be generated by general farmer-support payments, which, despite their alleged non-trade-distorting nature, impact on production decisions and trade outcomes.16 Thus while major changes have occurred in the use of traditional support instruments like export refunds, the objective of supporting EU production and exports of cereals and cereal-based products is now primarily achieved through the deployment of direct aid to EU cereal producers and direct aids of a horizontal nature (i.e. non-product-specific direct aid payments) rather than the deployment of export refunds. This raises important issues linked to the current WTO debates on the definition of what constitutes a non-trade-distorting form of agricultural support and the associated debate on the establishment of disciplines on all forms of agricultural support. These trends will have a greater impact on ACP countries in the coming years, should there be a strengthening of the US dollar against the euro, since this would greatly increase the price competitiveness of European wheat, barley and maize. This could enable EU suppliers to win contracts and supply markets which ACP country producers and processors previously served. In this context, the fact that the new EU system of direct aid payments is judged, at the macroeconomic level, to be less trade-distorting than other forms of public aid, will provide little consolation to ACP producers who find their markets undercut by ‘more competitive’ EU exports. 3.3. The downstream effects With the process of reform in the cereals sector having been under way since July 1993, it is not surprising that some of the effects of the reformed cereals regime on the competitiveness of EU value-added food-product exports are already apparent. Through the non-annex I budget the EU has been providing export refunds on the raw materials used in manufactured products destined for export, so that, de facto, EU exporters have been paying world market prices for the agricultural raw materials contained in exported products.17 Put simply, EU farmers would produce less if they were not in receipt of these decoupled direct aid payments. 17 For the sugar used in non-annex I products, the export refund is the difference between the EU and world market price, minus €30 per tonne. In addition during 2000, in the light of tighter WTO ceilings on the deployment of export refunds on non-annex I products, the EC introduced an across-the-board reduction of 10% in the export refunds paid on non-annex I products. 16 375 Table 12: EU ‘non-annex I’ budgetary allocations and WTO ceilings EU budgetary allocation Year WTO ceiling (ecu/euro millions) (ecu/euro millions) 1994 631.4 1995 598.4 1995/1996 717.4 1996 616.0 1996/1997 656.8 1997 519.818 1997/1998 596.4 1998 532.019 1998/1999 535.9 1999 576.4 1999/2000 475.4 2000 572.2 2000/2001 415.0 2001 435.6 2001/2002 415.0 2002 413.8 2002/2003 415.0 2003 433.3 2003/2004 415.0 2004 372.3 2004/2005 415.0 2005 335.4° 2005/2006 415.0 2006 274.1* 2006/2007 415.0 2007 299.0* 2007/2008 415.0 2008 150.0* 2008/2009 415.0 Source: ‘Agricultural situation in the European Union’ annual reports, Table 3.4.4 from 1994 to 2005 and Table 3.4.3.1 for 2006 to 2008. ° outturn * appropriation October 2008 Executive brief Cereals Year EU budgetary allocation WTO ceiling 800 700 600 500 400 300 200 100 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 0 Although WTO ceilings on the value of non-annex I export refunds have been in place since 1995, the effects of these constraints have been greatly reduced through the price reductions in the cereals sector and in recent years rapidly rising world commodity prices (with the notable exception of sugar). However the expansion of EU cereal-based product exports long pre-dated the dramatic increase in world market prices. With EU cereal prices down on average by 45% between July 1992 and July 1996, each euro of export refund for cereal-based products was able to finance a higher volume of non-annex I exports. This was one of the factors behind the 117% growth in the value of EU exports of processed food products between 1994 and 1998. It was also one of the factors behind the expansion of EU exports of ‘products of the milling industry’ and ‘preparations of cereals’ to ACP markets. This expansion is indicative of two trends. First, the growing difficulties faced by EU exporters in securing overseas markets in the face of increased competition from third-country suppliers and newly established local processors. 18 19 In this year an underspend of 29 million ecus occurred. In this year actual expenditures were 553 million ecus. 376 Secondly, the impact of CAP reform on the price competitiveness of EU exports of the simple cereal-based food products which find a ready market in the ACP. Substantially higher world food prices simply serve to extend these pre-existing trends, by compensating for the weakness of the US dollar against the euro. These trends have profound implications for agriculture-based ACP cereal-producing countries in the context of the current EPA negotiations with the EU (see final section). October 2008 Executive brief Cereals 3.4. The cross-sectoral effects Since 1992 increased direct aid payments in the cereals sector, by allowing EU cereal prices to fall (down on average 45% between 1992 and 1999 and 50%-55% by 2002) have had important effects on the livestock sectors for which EU-produced animal feed constitutes a major cost of production. For example, since 1992 the decline in the cost of EU animal feed has greatly assisted in the expansion of EU poultry production, which in turn has given rise to unprecedented levels of EU poultry-meat exports. Between 1992 and the end of the decade, EU poultry-meat exports expanded from 400,000 tonnes to 1,000,000 tonnes. Despite growing competition from advanced developing country suppliers, with enlargement to an EU of 25 in May 2005, total EU poultry-meat exports have remained between 800,000 and 900,000 tonnes. However in the coming period EU poultry-meat exports are expected to fall back to an average of around 760,000 tonnes, reaching a low of 720,000 tonnes in 2014 in the face of higher feed costs and intensifying competition. Despite these recent trends, EU programmes of direct aid to farmers in the cereals sector have undoubtedly had a major bearing on the competitiveness of EU production in the poultry sector (and to a lesser extent pig-meat and beef sectors). The contribution made by publicly financed agricultural-support programmes is not apparent from any consideration of EU expenditures in the poultry sector itself. Indeed, no direct aid payments are made to the poultry sector. The only CAP expenditures listed as being made in the poultry sector are on export refunds for poultry meat and eggs, and these have fallen dramatically since 1991 (from 273 million ecu in 1991 to €110.5 million in 199920 and to a low of €80.6 million for the combined poultry and pig-meat sector in 2006). Consideration of EU-ACP trade statistics are however revealing. Between 1996 and 2004 EU exports of meat products to ACP countries increased in value terms by 107%. This occurred despite the BSE and foot-and-mouth disease crisis which affected the EU beef sector, and the dioxin and avian flu crisis which affected the poultry sector. This saw the importance of the ACP market increase from 3.5% of total EU meat-product exports to 7.7% of total meat exports. Subsequently the relative importance of the ACP market has declined as EU exporters have partially recovered their position on major markets previously affected by food safety/animal disease control scares. However two other important factors have contributed to the expansion of EU poultry exports, namely the growing consumption of chicken breast and reduced consumer demand for chicken parts, and the ban on the feeding of meat and bone meal to ruminants. This effectively removed a substantial domestic market for chicken parts within the EU. This has seen the composition of EU poultry exports change significantly, with chicken parts now accounting for around 60% of total poultry meat exports. This expansion of chicken part exports has largely focussed on ACP markets. This decline in the total expenditures on poultry-sector export refunds occurred despite an expansion of total poultry-meat exports from 478,000 tonnes in 1991 to over 1 million tonnes in 1998. Between 1995 and 1998 alone, export refunds on poultry meat fell from 172 million ecus to 77.1 million ecus, despite the expansion in the overall volume of EU poultry-meat exports from 849,000 tonnes to over 1,027,000 tonnes during this period. By 2002 export refunds for poultry meat had stabilised at €104.4 million. 20 377 Executive brief Cereals Table 13: EU meat product exports to ACP countries 1996-2004, million ecu/euro Meat Meat EU exports to ACP countries ACP (CN 02) World (CN 02) as %age of total exports 1996 115 3,275 3.5 1997 150 3,644 4.1 1998 186 3,285 5.7 1999 188 3,743 5.0 2000 223 3,943 5.7 2001 240 3,830 6.3 2002 255 3,689 6.9 2003 247 3,156 7.8 2004 238 3,709 6.4 2005 210 3,823 5.5 2006 230 3,994 5.8 Source: Extracted from ‘Agricultural situation in the European Union’ annual reports, Tables 3.7.2 and 3.7.12. EU Exports to ACP October 2008 300 EU exports to ACP countries as %age of total exports 8% 250 7% 6% 200 5% 150 4% 3% 100 2% 50 0 1996 1997 9% 1% 1998 1999 2000 2001 2002 2003 2004 0% 2005 2006 This growth demonstrates how the network of CAP distortions is becoming more complicated and less direct, as the benefits of direct aid payments in one sector (in this case the cereals sector) are passed on to other sectors (livestock production, particularly the poultry sector) through ‘normal’ market mechanisms. These indirect effects of the CAP-reform process on the competitive situation facing producers in developing countries will increasingly need to be taken into account as the reform process intensifies. This is particularly the case since the move over to the single payment scheme will make it almost impossible to determine what level of agricultural expenditures are taking place in support of individual products. 3.5. Issues faced in the IEPA negotiations In the final stages of the EPA negotiations a number of issues of concern to ACP cereal producers have arisen. The first of these relates to the EPA provisions dealing with ‘prohibitions on quantitative restrictions’. These provisions place a requirement on ACP signatory governments, immediately upon entry into force of the agreement, to eliminate all restrictions on imports, including import and export licensing arrangements. While in some IEPAs there are exceptions to this prohibition on grounds of infant industry protection, public finance and food security concerns, this is not the case across all agreements. Furthermore in a number of countries it is far from clear whether the current wording of the agreements allows the continuation of currently successful agricultural development and food security policies, which hinge upon regulating seasonal access to the local cereals market through a system of import licensing. 378 October 2008 Executive brief Cereals The SADC IEPA and the situation of Namibia is a case in point. Namibia currently operates a controlled crop marketing system for sensitive food and agricultural products. So-called ‘controlled products’, which are clearly defined under national legislation, are subject to special marketing arrangements, including both a reference-price mechanism and certain import measures, including import licensing. For grains this system includes a prohibition on imports during the harvest period so that Namibian production can find a market locally. These restrictions even apply within the Southern African Customs Union and form part of the special arrangements in place under regional trading arrangements to support the development of the smaller, less developed members of the SACU. According to recent studies the abolition of current marketing measures to regulate seasonal imports of wheat and maize would result in an immediate economic loss of N$113.7 million and N$96.5 million respectively to Namibian wheat and maize producers, and a cessation of irrigated cereals production within a few years. In this context, if the aim of IEPAs is to support locally designed and led agricultural development and food security initiatives, an area to which increasing priority is being accorded by ACP governments in the light of the global food price crisis, then it would appear necessary to review these provisions of the IEPAs, to ‘grandfather’ in existing schemes, so as to allow continued use of those policy tools which have proved effective in stimulating local agricultural development and food security. Securing cereals-sector reform through the WTO agreement The July 31st 2004 WTO Agriculture Agreement contains a provision which stipulates that any criteria for disciplining ‘blue box’ support ‘will not have the perverse effect of undoing ongoing reforms’. For the EU this provision is critical, for it protects the current trajectory of CAP reform from any challenge in the WTO. This has always been a key objective of the EU, since the whole basis of CAP reform is to shift agricultural support into ‘blue box’ and ‘green box’ measures, which are then protected from challenge from within the WTO. In recognition of this, the EC press statement on the agricultural provisions of the July 31st WTO agreement stated ‘the framework locks in the recent reforms of the EU’s Common Agricultural Policy (CAP). They will not be called into question.’ More generally ACP governments when formulating policy will need to bear in mind the less transparent nature of EU support to cereal exports under a reformed CAP regime. The less transparent nature of aid can be seen in the nominal decline in direct aid payments in the arable sector which occurred from 2005 to 2006 (down from €17,393 million to €7,934 million) as a result of the shift to decoupled aid payments. Of course this did not actually see any decline in direct aid going to arable farmers. Rather it saw a reclassification of support as so-called ‘direct aids of a horizontal nature’, which increased from €1,388 million in 2005 to €16,375 million in 2006. Thus the direct aid payments going to arable farmers remained largely unchanged. However, the cross-sectoral nature of new EU agricultural support payments makes it increasingly difficult to identify specific trade impacts in individual sectors. This in turn makes it more difficult to argue for specific agricultural safeguards in the current IEPA negotiations. Yet in the cereal sector these would appear to be urgently needed. This represents a second major area of concern for cereal and cereal product producers in ACP countries in the context of the various IEPAs. Currently, across all IEPAs, agricultural safeguard measures are included within the general bilateral safeguard provisions. The operative clauses of the various IEPAs are of limited duration and are aimed at dealing with temporary import surges, whereas the distortions to trade in food and agricultural products (faced particularly in the cereals sector) can be seen as structural in nature. In this context there has emerged a certain concern about the existing IEPA agricultural safeguard provisions, with in some instances ACP governments seeking to review existing IEPA agricultural safeguard provisions to ascertain their adequacy in an era of higher, yet increasingly fluctuating international prices. 379 A number of governments, in response to very high food prices, reduced import duties and in some instances even set them at zero. At this juncture therefore the strict application of this provision, fixing applied duties at the levels in force upon entry into force of the agreement, could result in freezing in place exceptionally low import duties on basic food products. In some regions it is now felt that these standstill provisions should be revised, so as to avoid locking in unrealistically low duties, established as a result of the recent high price peaks. October 2008 Executive brief Cereals A final area of potential concern in the cereals sector linked to the current IEPA texts are the standstill provisions included in a number of the agreements. Under a number of IEPAs, but not all, a provision has been included which stipulates that no new customs duties shall be introduced on trade with the EU, nor shall those already applied be increased, as from the entry into force of the Agreement, for all products subject to liberalisation. The aim of this provision is a reasonable one: to establish the baseline from which tariff reduction commitments should be implemented. However in the context of recent policy responses to high global food prices, this provision could have some unforeseen consequences. 380 Executive brief June 2008 June 2008 Executive brief Rice Rice Table of contents 1. The EU regime _______________________________________________________ 383 1.1 Scope of the regime ________________________________________________________ 383 1.2 The traditional EU regime____________________________________________________ 383 1.3 The EU export regime ______________________________________________________ 386 1.4 The EU import regime ______________________________________________________ 387 1.4.1 Multilateral tariffs ______________________________________________________________ 387 1.4.2 Preferences for Asian suppliers ____________________________________________________ 387 1.4.3 LDC preferences_______________________________________________________________ 388 1.4.4 EPA-based preferences __________________________________________________________ 388 2. Implications for the ACP _______________________________________________ 389 2.1 The declining benefits of ACP rice-sector preferences ______________________________ 389 2.2 Supporting food-safety measures ______________________________________________ 391 2.3 ACP rice producers and EU rice exports_________________________________________ 391 381 Summary June 2008 Executive brief Rice This executive brief reviews the scope of the traditional EU rice regime, the associated import and export regimes and the process of reform launched in 2003. It seeks to identify the impact of EU rice sector reform on the ACP, notably the declining value of traditional ACP rice sector trade preferences, a trend only slightly ameliorated by the recent increase in rice prices. It also reviews the new trade arrangements for rice established under the Caribbean-EU EPA and the wider implications of EPA negotiations in the rice sector. 382 1. The EU regime 1.1 Scope of the regime June 2008 Executive brief Rice The EU rice regime covers:          rice in the husk (paddy); husked rice; semi-milled or wholly milled rice; broken rice; rice flour; groats and meal of rice; pellets of rice; flaked rice; rice starch. 1.2 The traditional EU regime The traditional common market organisation (CMO) for rice along with other traditional CMOs aimed to ‘stabilise prices and provide growers with a fair standard of living by laying down prices and detailed rules concerning trade with non-EU countries’. As with many other products falling under the common agricultural policy (CAP) the rice regime was traditionally based on a wholesale intervention price for standard-quality paddy rice (rice in the husk after threshing). The intervention price varied according to the quality of the rice. If market prices fell below the intervention price then rice was bought into intervention. The maintenance of a high intervention price (which served to support the market price) required high levels of fixed import duties and the provision of export refunds to allow the export of surplus rice onto lower-priced world markets and extensive expenditures on storage of rice until stocks could be cleared through export-refund-supported sales onto the world market. These export refunds were made available on both milled rice and on rice used in manufactured goods. The reform of the EU rice regime began in 1995 along similar lines to the reforms initiated in the cereals sector. This involved a 15% reduction in the intervention price over three years, and saw the intervention price for rice fall from €351 per tonne in 1997/98 to €298.35 per tonne in 1999/2000. To compensate fully for this reduction in the intervention price, direct aid payments were introduced in 1997/98, increasing in three steps to €52.65 per tonne by 2000/2001 (these payment were based on a hectorage calculation linked to average national yields - with an EU average of 6 tonnes per hectare). Consequently EU budgetary expenditures in the rice sector increased by 85% between 1997 and 1998 and 278% between 1997 and 2000. It is calculated that following the 1995 reforms the total level of EU assistance to rice farmers, via the intervention price and direct aid payments, amounted to €251/tonne. This provoked a tendency towards the production of rice for intervention stocks, with between 1996/97 and 2000 some 442,000 tonnes being bought into intervention, bringing total stocks to 700,000 tonnes (equivalent to 40% of annual EU rice consumption). Impact of the 1995 and 2003 reform measures on the intervention price and direct payments (euro per tonne) Intervention price (€/tonne) Direct payments (€/tonne) 1996/97 1997/1998 351.00 333.45 0 17.55 383 1998/99 315.90 35.1 1999/00+ … 298.35 52.65 2004/05 150.00 177.00 June 2008 Executive brief Rice This occurred despite the introduction of a maximum guaranteed area (MGA) for rice production in 1996/97, which was intended to discourage overproduction. However, with a ceiling of 433,123 hectares for the EU as a whole, the MGA still provided scope for an expansion of the area under rice. In reality, however, according to EC annual reviews, this production-area ceiling was never reached. However increased yields and better recovery of useable rice from paddy production were sufficient to sustain production levels despite a decline in the area under rice. This contributed to the accumulation of rice stocks equivalent to 40% of annual EU rice consumption. Area under rice (hectares) Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 EU15 425,000 422,000 408,000 394,000 398,000 398,000 396,000 407,000 426,000 409,000 407,000 EU25 EU27 400,000 398,000 410,000 428,000 411,000 409,000 405,000 403,000 415,000 435,000 420,000 419,000 Against this background of the accumulation of unsustainable levels of rice stocks in intervention, the EC proposed a further reform of the EU rice regime on June 7th 2000, designed to reduce production and the growth of rice stocks. However these proposals were rejected by EU member states. Lower production in the 2000/01 season and the use of intervention rice in animal feed in 2002 served to reduce the level of intervention stocks (down to 588,000 tonnes from 700,000 tonnes). However by the end of 2003 stocks were once more rising to previous levels, with the prospect of the situation deteriorating still further with the implementation of the provisions of the EBA initiative in the rice sector. It was against this background that in 2003 the EC was able to persuade EU member states to accept a further round of rice-sector reform. This involved:  a reduction of the rice intervention price by 50% (to bring it into line with world market prices by 2004/5);  direct aid compensation to be introduced equivalent to 88% of the price reduction, involving an increase in direct aid payments to €177 per tonne;   the incorporation of the rice sector into the single farm-payment scheme;  a modification of the EU’s import regime for cereals and rice. reform of the intervention system with a trigger price of €150 per tonne and a ceiling on purchases of 75,000 tonnes per annum; 384 Useable production, imports, exports, internal use, % self-sufficiency (tonnes) June 2008 Executive brief Rice Year 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 Useable production (wholly milled rice) 1,552,000 1,667,000 1,562,000 1,551,000 1,481,000 1,500,000 1,576,000 1,484,000 1,677,000 1,539,000 Imports 540,000 553,000 476,000 519,000 549,000 534,000 577,000 563,000 725,000 739,000 Exports 279,000 288,000 274,000 214,000 215,000 241,000 235,000 211,000 191,000 154,000 Internal use 1,706,000 1,739,000 1,756,000 1,736,000 1,761,000 1,789,000 1,801,000 1,914,000 2,374,000 2,320,000 % selfsufficiency 90.9 95.9 89.6 89.3 84.1 83.9 87.5 77.5 70.6 66.3 Studies undertaken as background to these reforms envisaged that these measures would result in a large reduction in EU market prices for rice (an average of 41.4% by 2009). This, it was believed, would result in a slowing down in the rate of increase of EU rice imports, which should stabilise imports near to current levels and eventually lead to a reduction in EU rice intervention stocks. Other studies however suggested that the reform measures could result in an increase in EU production over 2002 levels by as much as 20%. In reality, 2004 saw the area under rice reach levels in the EU15 not seen since 1996. When combined with rice production in new member states (on 11,000 hectares), EU useable rice production reached a record level of 1,677,000 tonnes in the 2004/05 season – the first season under the post-2003 reform regime. Droughts in Spain and Portugal subsequently saw production reduced (despite the expansion of the area under rice in Bulgaria and Romania), falling to 1,539,000 tonnes in 2005/06. Rice production in 2007 was reportedly up 1% on the previous season following a 2% increase in the area sown. This lower production expansion compared to the increase in the area under rice is in part a result of a shift towards increased production of japonica rice, which has lower yields but more favourable price trends. The relative profitability of rice Between 1997/99 the net value added per farm was higher on rice farms than on other farms in the area, in all major rice-producing countries except Greece. This would appear to be an important factor in the expansion of the area under rice which took place in the mid-1990s. Costs and margins for rice without direct aid subsidy €/tonne Greece Spain Total cost/tonne 256 208 Total margin/tonne 26 72 Italy 237 88 Costs and margins with direct aid subsidy (rice and maize) €/hectare Greece Spain Italy Total cost/hectare 2,041 1,309 1,369 Total margin/hectare 204 457 507 Total margin/hectare with subsidies: rice 400 maize 393 661 761 719 553 Portugal 259 54 Portugal 1,479 311 546 155 Prior to the 2003 reforms (which came into effect in the 2004/05 season) EU prices were generally below the high intervention price, causing an accumulation of rice in intervention stocks in the face of growing imports and declining exports. However with the implementation of the 2003 reform measures, which halved the intervention price, EU market prices have been above the new intervention price, ending the production of rice purely for intervention stocks. 385 June 2008 Executive brief Rice Price range: market prices of rice (euro per tonne) 2001 Jan-May 2002 Jan-May 2003 Jan-May 2004 Jan-May 2005 Jan-May 2006 Jan-May 2007 Jan-May Italian roundgrain 300 - 333 296 - 300 280 - 283 224 - 239 185 - 189 224 - 262 245 - 288 Italian longgrain 301 - 316 303 - 308 281 - 286 270 - 277 165 - 190 221 - 235 240 - 250 Spanish mediumgrain 315 - 339 270 - 281 284 - 326 269 - 281 224 - 239 205 - 210 219 - 235 Spanish ‘indica’ rice 285 - 298 281 - 284 285 - 293 262 - 287 178 178 218 - 242 In the pre-reform period in 2004, Italian round-grain rice cost between €224 and €239 per tonne. For the equivalent period in 2005 (January to May) market prices were between €185 and €189 per tonne. In 2006 prices rose consistently to reach €262 per tonne in May and €288 per tonne in December, before falling back in 2007 to €226 per tonne by July 2007. This represented a price level at the lower end of the pre-reform price range (from January 2001 to May 2003 prices fluctuated between €280 and €333 per tonne). Similar trends were followed for Italian long-grain rice, with 2007 prices being still 21% below the pre-2003 reform peak and 7.4% below the lowest pre-reform price level. While the post-reform price trends were slightly different for Spanish medium-grain and ‘indica’ rice, peak prices of Spanish medium-grain rice in 2007 were still 31% below peak pre-2003 reform levels and 13% below the lowest pre-reform level, while those for Spanish ‘indica’ rice in 2007 were still 19% below peak pre-2003 reform levels and 7.6% below the lowest pre-reform level. The process of reducing the intervention price, while initially impacting quite severely on market prices, had no corresponding effect on EU rice production, with changing varieties of rice planted and weather-related factors having a far greater bearing on the overall level of production. This reflects the financial significance of the single-payment scheme on overall production decisions in the rice sector. What is apparent however, is a process of greater price transmission between world market and EU prices in the rice sector in the post-reform period. 1.3 The EU export regime While the EU is not a major rice producer, ranking only 17th in the world, with only 0.5% of world rice production (1.8 million tonnes) in 2004, it is the tenth largest exporter of rice in volume terms with 1.4% of total rice exports. (The USA is a far more important player in the rice market, being the fourth largest exporter, with 11.3% of world exports despite only 1.5% of global production.) The Uruguay Round saw the imposition of quantitative limits on the level of subsidised exports which could take place (133,000 tonnes, with a total expenditure of no more than €36.8 million). However in addition the EU was allowed to export specified volumes of rice as food aid (rising to 133,000 tonnes in 1998/99 before declining to 69,000 tonnes in 2001/02). These low export ceilings saw intervention stocks rise dramatically from 1999 onwards. EU enlargement, by bringing part of international trade into the internal market, saw exports continue to fall, down to 154,000 tonnes in the 2005/06 season, 44.8% below 1996/97 levels. Given that EU rice exports tend to be of higher-value rice, ACP markets are not prime targets, with southern Mediterranean markets being the main EU focus. The EU plays a minor role in the rice trade with sub-Saharan Africa, with no ACP country being among the top ten destinations for EU rice exports. 386 Executive brief Rice African rice imports (tonnes) Country Nigeria Senegal Côte d’Ivoire Ghana Guinea South Africa Mozambique Madagascar Others Total 2006 1,600,000 750,000 850,000 400,000 300,000 800,000 350,000 100,000 1,990,000 7,140,000 2007 1,700,000 850,000 800,000 450,000 300,000 800,000 350,000 200,000 2,050,000 7,500,000 1.4 The EU import regime The EU is the world’s sixth largest importer of rice in volume terms, with 2.9% of imports in 2004, and is the fourth largest net importer in value terms, given the high quality of the rice it imports. June 2008 There are four distinct sets of trade arrangements for EU rice imports:     multilateral tariffs; the preferences for Asian suppliers; LDC preferences; EPA-based preferences 1.4.1 Multilateral tariffs The Uruguay Round agreement required the conversion of variable levies into fixed duties and a commitment to reduce duties by 35%. This agreement ensured that the tariff for husked indica rice could not raise the import price (tariff paid) above 180% of the paddy intervention price, and that the tariff for husked japonica rice could not raise the import price above 188% of the paddy intervention price. This meant that the ceiling price for milled indica rice was 263% of the intervention price and the ceiling price for milled japonica rice was 267% of the intervention price. In practice this has meant that during this period ‘imports of husked rice (were) normally competitive with EU rice, whereas for milled rice the price is prohibitive’. 1.4.2 Preferences for Asian suppliers The EU imports about two-thirds of its total rice imports under preferential conditions. Around 135,000 tonnes of basmati rice is imported annually, largely from India and Pakistan. Prior to the 2003 reforms these imports benefited from a €250 per tonne reduction in the duty applied, and such imports increased by 20% between 1998 and 2000. The EU also operated a tariff-rate quota (TRQ) of 76,800 tonnes milled-rice equivalent at zero duty, linked to the 1995 enlargement process. Duties on rice imports (€/tonne, 2005) - Source: http://export-help.cec.eu.int/ Products Origins Erga omnes Erga omnes (excl. Australia, Thailand, USA) ACP Third-country duty Tariff quota Preferential quota Paddy 211 - 69.51 Husked (brown) rice 42.5 88 10.54 145 - 175 - 38.36 Semi and whole milled 387 June 2008 Executive brief Rice These duties were subject to revision following the 2003 reform of the EU rice regime. This saw the introduction in September 2004 of a tariff of €65 per tonne for brown rice and €175 per tonne for milled rice, with India and Pakistan facing zero duty on basmati rice and other hybrid varieties of basmati. This was followed in February 2005 by an agreement with the USA which will see the introduction of variable duties depending on the level of rice imports into the EU (the applied duty under the new formula will be €65 per tonne, if there is a substantial increase in EU imports, but will fall to €42.5 per tonne if imports remain at historical levels and will fall still further to €30 per tonne if trade levels drop below historical levels). September 2005 saw an agreement reached with Thailand, allowing an adjustment of the tariff applied to semi-milled and milled rice every six months depending on actual imports and the reference import price, so that they fall within the range of €145- €175 per tonne. For broken rice a duty of €65 per tonne is applied and the reduced-duty quota has been increased to 100,000 tonnes. 1.4.3 LDC preferences In 2001 the EU also opened up quota-restricted, duty-free access for LDC rice exports under the EBA initiative, with the intention of phasing out these quotas at the end of the 2008/09 season and replacing them with complete duty-free access for LDC suppliers. The prospect of this unrestricted access for LDCs was later successfully used by the EC to press the case for a further round of rice-sector reform in 2003. EBA tariff quotas for rice imports from LDCs Year 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 Tariff quota (tonnes) 2,517 2,895 3,329 3,829 4,403 5,063 5,823 6,696 1.4.4 EPA-based preferences The provisions of the comprehensive Caribbean-EU EPA and the various interim EPAs have now replaced the Cotonou Agreement declaration XXII, which formerly covered rice imports from ACP countries. The two main ACP rice exporters are Guyana and Suriname. The provisions of the Caribbean-EU EPA are thus the most relevant in terms of the rice trade. Under this agreement, after a transitional period duty-free, quota-free access for rice exports will be introduced. During the transitional period Guyana and Suriname will see an expansion in their rice-export quotas from a 145,000-tonne quota before the conclusion of the comprehensive EPA to 187,000 tonnes in 2008 and to 250,000 tonnes in 2009, representing increases of 29% and 72% respectively (with these imports taking place on a duty-free basis). Moreover, the scope of the rice quota will be expanded to include both broken rice and wholegrain rice, ‘which means that exporters should be better able to target the higher-priced market for whole-grain rice’. The introduction of such administrative reforms has been a long standing demand of Caribbean rice exporters. The provisions of the Caribbean-EU EPA will thus progressively achieve the long-standing Caribbean objective of duty-free, quota-free access for rice exports. However, given soaring world market prices this will occur against the background of no significant price differences between EU and world market rice prices. 388 2. Implications for the ACP June 2008 Executive brief Rice 2.1 The declining benefits of ACP rice-sector preferences The significance of rice in Suriname’s exports to the EU has been in decline since 2002, both relative to other exports and in absolute terms, with rice exports in 2006 and 2007 accounting for 2% and 1.8% respectively of total exports to the EU. Guyana is the ACP country with the greatest dependence on rice exports, with 70% of production being exported. The rice sector is the single largest user of agricultural land and the second largest sector (after sugar), accounting for 20% of agricultural value added and 12% of export earnings. While it employs some 12,000 farmers, the employment created indirectly has been estimated at up to 150,000 jobs. Rice exports to the EU have accounted for between 14.4% and 17.8% of total Guyanese exports to the EU since 2001. The rice sector was an even more significant contributor to exports to the EU in the 1990s, with a rapid expansion of both rice production and exports occurring. This spectacular growth was fuelled by favourable indirect access to the EU market (via the OCTs) and high export prices. In 1997 Guyana rice exports to the EU both direct and indirect totalled over 285,051 tonnes, with 90% going via the OCTs, with the rice undergoing a certain degree of processing in the OCT prior to shipment duty-free to the EU market (in contrast to the 50% levy charged on direct exports). This boom period saw considerable investment in new production capacity in the rice sector in Guyana; however this investment (a necessary prerequisite for the development of trading capacity) ran into severe difficulties in the face of:   the introduction of safeguard measures by the EU against rice exported via the OCT route;  a consequent decline in rice prices in the major markets served. increased competition on regional markets from subsidised US rice exports (mainly in Jamaica); In terms of the EU market, with the introduction of the safeguard measures against rice exported via the OCTs, Guyana’s rice exports to the EU fell dramatically to below half their peak levels. Exports via the OCT fell from 90% to only 19% of total exports. This situation was compounded by the first round of rice-price reductions as part of the reform of the EU rice sector. Since 1995 EU rice prices have only intermittently been above the intervention price level. As a consequence, earnings from exports to the EU declined even more dramatically than the volume of rice exported, despite a reduction in the levy charged on direct exports to only one-third of that formally applied. The early years of this decade saw recorded earnings per tonne on Guyana’s and Suriname’s rice exports to the EU fall between 24% and 25%. Earnings per tonne increased slightly in 2005 and 2006, before falling back slightly in 2007. Overall between 2001 and 2007 recorded earnings per tonne on Guyana’s and Suriname’s rice exports to the EU fell 17.4% and 17.5% respectively. Average price received by Guyana and Suriname per tonne of rice 2001 2002 2003 2004 2005 2006 2007 % change 01-07 Guyana Tonnage 99,246 93,083 101,123 131,133 96,613 90,888 133,402 Unit value €/tonne 318.6 298.0 258.9 241.4 263.3 270.1 263.3 - 17.4% 389 Suriname Tonnage 27,152 40,789 21,194 17,366 25,648 14,759 15,735 Unit value €/tonne 341.2 302.8 265.5 257.0 264.3 298.9 284.8 - 17.5% June 2008 Executive brief Rice What is more, the prices received on the EU market for ACP rice exports since 2000 are significantly below the prices received at the beginning of the 1990s. At its peak Guyana received €431 per tonne for its direct husked and brown rice exports to the EU, with the lowest price received in 1996 of €340 per tonne still substantially exceeding the highest price per tonne received since 2000. This situation led at the time of the Lomé renegotiations in 1998 to calls from ACP rice exporters for the establishment of a direct-access quota for rice of 250,000 tonnes, with a 20% annual increase up to 2005, after which complete quota- and duty-free access should be allowed. This would not only have boosted ACP rice exports but would have enabled ACP processors to have gained the economic benefits previously obtained by OCT rice processors. However, with the deteriorating situation on the EU rice market (partly driven by expanding domestic production but also by increased imports from non-ACP suppliers) and the failure of EU member states to agree on Commission proposals put forward in 2000 for further reform of the rice sector, these demands were largely ignored by the EU. This places the recent granting of additional access for Caribbean rice exports under the EPA in perspective. This being said the global increase in the rice price is serving to stimulate rice production in Guyana, with farmers being encouraged to take land back into rice production after the disastrous experience of the late 1990s, which saw widespread bankruptcies of Guyanese rice farmers following the introduction of restrictions on trade with the EU via the OCTs. The provisions of the comprehensive Caribbean-EU EPA should provide more certainty with regard to market access and hence would appear to justify this new investment, providing that high world market prices for rice are sustained over the period during which returns on the new investments need to be made. The declines in EU rice prices brought about by the process of CAP reform have largely fed through into market prices, with the incorporation of the rice sector into the single farmpayment scheme and the establishment of intervention arrangements which only provide a safety net. EU rice prices now increasingly follow world market prices for rice. This has particularly been the case with the recent surge in world market prices. Table: Percentage change from previous year in the price of rice 2004 2005 2006 2007 2008* 24.9% 5.4% 8.9% 17.0% 46.2% Source: FAO: http://www.fao.org/docrep/010/ai465e/ai465e09.htm * January to March; press reports suggest 76% by the end of April but with a fall in the first half of May. This means that increasingly there will be little price differential between EU and world market prices for undifferentiated ACP rice products. In the coming period the decline in the value of both traditional and new ACP rice-sector preferences will increasingly be reflected in the absence of any price differential between EU and world market prices rather than any further decline in EU market prices for rice imports from ACP countries. Where EU prices decline this will reflect world market price trends. Linked to this trend the EU rice market is becoming increasingly differentiated, with there being significant divergences in price trends between bulk commodities and quality products. Thus a strong case exists for responding to the erosion of the value of traditional rice-sector trade preferences through expanding financial and technical assistance to the production and marketing of specialist rice products. From regional funds the EU has already supported a €24 million programme of support to the CARIFORUM rice industry, with some €9.5 million of these funds being spent in Suriname (aimed at enhancing the competitiveness of the industry) and some €11.7 million being spent in Guyana. However, it is unclear to what extent these programmes are focussed on producing and marketing into Europe higher-value rice varieties, which are not subject to the same reductions in market price that the lowering of the intervention price has generated for standard bulk rice. 390 June 2008 Executive brief Rice 2.2 Supporting food-safety measures Meeting food-safety measures will become an increasingly critical prerequisite for continued access to the EU market. In this context there may well be a need for targeted programmes of assistance both for ACP rice producers and ACP food-safety authorities to ensure that they have the financial and technical capacity to meet EU food-safety standards and hence the capacity to continue to access the EU market. Comprehensive programmes are already under implementation for ACP fruit-and-vegetable exporters (a €29 million pesticide programme) and ACP fish exporters (a €45 million programme); similar regional programmes for rice may well be required in the Caribbean. 2.3 ACP rice producers and EU rice exports Africa tends to import low-value rice, and as we have seen the EU exports mainly higher-value rice, so it plays a minor role in the rice trade with sub-Saharan Africa. While African rice production is increasing, consumption is growing even faster, with import demand surging ahead. In this context consumers in a number of African ACP countries have been hit hard by soaring global rice prices, which have hit a 20-year high. This has led to protests and food riots in a number of African ACP countries. A projected 2% increase in African rice production and easing of global rice price pressures with the arrival of new harvests on the market should ease this situation in the coming period. Despite this global market situation, given efforts to promote rice production in Africa a cautious approach to the treatment of rice under EPAs is probably warranted, particularly if these EPAs were to become a model for similar trade agreements with other major traders for whom rice exports are an important product. In this context consideration should probably be given to:   the establishment of mechanisms for monitoring EU rice exports to ACP markets;  the establishment of a framework for consultations on rice-sector issues for rice-producing ACP countries. the establishment of swift and effective safeguard measures in the rice sector to allow immediate action to prevent market disruptions; The inclusion of such provisions in EPAs with the EU would provide a precedent for similar provisions in free-trade-area agreements with other countries which play a major role in the international rice trade. This is an important consideration given the current MFN provisions included in interim EPAs. 391 Executive brief December 2008 Executive brief Oilseed Oilseed Table of contents 1. Introduction __________________________________________________________ 395 2. The international market in oil-producing plants____________________________ 396 2.1 Production _______________________________________________________________ 396 2.2 Consumption _____________________________________________________________ 396 December 2008 2.3 Trade ___________________________________________________________________ 397 2.4 Relations between markets in oil-producing plants and palm oil _______________________ 398 2.5 Trends __________________________________________________________________ 399 3. The EU regime and market _____________________________________________ 400 3.1 Changes in the basic EU regime _______________________________________________ 400 3.2 Trade, consumption and production in the EU ____________________________________ 401 3.3 Community imports ________________________________________________________ 402 3.4 The EU’s exports __________________________________________________________ 404 4. The reform of the CAP and its consequences _______________________________ 405 5. What influence will biofuels have on the market in oil-producing plants?________ 405 5.1 Biofuels: a political issue _____________________________________________________ 406 5.2 Towards a calling into question of biofuels? ______________________________________ 406 6. Issues of EPA negotiations in the oilseed sector ____________________________ 407 6.1 EU market access __________________________________________________________ 407 6.2 Issues concerning the opening of ACP markets ___________________________________ 407 393 December 2008 Executive brief Oilseed Summary The most important oilseeds are soybean, rapeseed and sunflower, from which oils and oilmeal for animal feed are derived, but edible oil for human consumption also derives from oil palms. The EU is nearly self-sufficient in rapeseed oil but needs to import large quantities of seeds of sunflower, soybean and palm oil for pressing, mostly from Latin America and south-east Asia. ACP countries are relatively unimportant in both the production at the global level and supply to the EU of oils, with the partial exception of Nigeria and Papua New Guinea for palm oil and Senegal for groundnut oil. However ACP countries do produce oils for local and regional markets. The EU is an important supplier of refined oils of various types to ACP countries. The EU imposes no tariffs on either oilseeds or oils no matter what their provenance, so there are no trade preferences for ACP countries. Since Brazil and Argentina have assumed greater importance for soybeans and Malaysia and Indonesia for palm oil, dependence on imports from the USA has declined. With CAP reform in 2003 oilseed production in the EU has now come under the single-farm-payment system. While some studies have predicted a decrease in European production under this new regime, production levels seem to be more a consequence of the recent price increase. The increasing use of oils as biofuels should also increase import demand, possibly opening some opportunities for ACP countries. But the production of oils in ACP countries for biofuels must be controlled in order to ensure that its development is not detrimental to food production or the environment. European oil exports to ACP markets are subsidised via the single-farm-payment system and in some countries they are in a position to compete with local oils. The liberalisation of local and regional markets should therefore be considered with caution; and the degree of flexibility allowed by the designation of ‘sensitive products’ in the framework of EPA negotiations and special products in the framework of WTO negotiations should be used when a risk to local production is identified. Another issue is the implementation of a common external tariff (CET) in the various ACP regions and the definition of the customs duties to be applied to oils from competing producers, such as Brazil, Argentina, Indonesia and Malaysia. 394 1. Introduction December 2008 Executive brief Oilseed Oil-producing plants are plants whose fruits or seeds contain a high proportion of oil. The seeds containing oil (such as soybean, rapeseed, sunflower, etc) are also rich in protein. Accordingly, they are widely used as animal feed in Europe. Animal-breeding techniques have become highly intensified in Europe since the 1960s, with in particular the introduction of oilmeals made from oilseeds. The European crushing industry therefore transforms oilseeds into oil, intended for human or industrial use, and into oilmeals for animal feed. As European production is unable to meet internal demand, the EU is heavily dependent on oilseed imports. The EU27 countries produce approximately a quarter of their consumption of protein-rich products, composed mainly of oilseeds (oil-producing plants constitute respectively 58% and 84% of European production and consumption of protein-rich products. This proportion has declined in recent years: it has fallen from 33% in 1999/2000 to 26% in 2004/2005, following the ban on the use of flours of animal origin in animal feed, implemented in 2000 (source: PROLEA, the French vegetable oils and proteins trade association). The entry of Romania and Bulgaria into the EU on January 1st 2007 had little impact on the sector. However, the EU self-sufficiency rate varies considerably depending on the species: it is 89% for rapeseed, 35% for sunflower and 1% for soybeans. However, 67% of European consumption of oilmeals is made up of soybeans which are to a large extent imported. The EU is thus obliged to import large quantities of oilseeds to satisfy its internal demand. These imports are made either in the form of seeds or in the form of oilmeals. As regards markets for oils, the EU is both an exporter of soybean oil, which is a by-product of crushing, and an importer of palm oil (the rapid development of biofuels in Europe has boosted soybean oil imports which now exceed exports, although the latter are still substantial). In this trade, two regions stand out: America (the USA, Brazil and Argentina) for soybeans and Asia (Malaysia and Indonesia) for palm oil. Economic forecasts show that world demand for oils should continue to increase, in particular as regards palm oil, which is very cheap at present. In the ACP countries, the main oil producers are in west Africa (Nigeria, Côte d’Ivoire for palm oil, Senegal for groundnut oil) and in Papua New Guinea. In west Africa, their degree of selfsufficiency has deteriorated in most cases as a result of the strong increase in imports from Asia (palm oil) and the EU (soybean oil). On the other hand, ACP exports to the EU are struggling to gain access to the European market in the face of competition from Asian oils and do not benefit from any trade preference. Only Papua New Guinea has succeeded in maintaining its place among the main suppliers of palm oil to the EU. In this context, what impact will recent price trends and the expected volatility have on the trade in oilseeds in the coming years? Similarly, what will be the consequences of the development of biofuels based on vegetable oil? Finally, how can these trends be taken into account in the custom union processes and in the negotiations for Economic Partnership Agreements (EPAs)? 395 2. The international market in oil-producing plants 2.1 Production December 2008 Executive brief Oilseed Main oil-plant producing countries, 2007-2008 (millions of tonnes) USA Brazil Argentina China Russia Ukraine EU Canada India Malaysia Indonesia Nigeria Thailand Source: USDA; FAOSTAT Soybeans Sunflowers Rapeseed Palm oil fruits 70.7 1.3 58.2 45.5 4.4 15.6 1.8 10.4 5.6 4.2 4.8 18.1 8.8 1.4 7.1 77.7 78 8.7 7.6 The four main soybean-producing countries are the USA (70 million tonnes), Brazil (58 million tonnes), Argentina (45 million tonnes) and China (15.6 million tonnes). In 2007/2008, these four countries together represented nearly 90% of global production. European production is negligible (0.4% of the world total). The 2007 soybean seeds campaign was marked by the decline in production levels in the USA. Although the USA maintained its place as the world’s leading producer, its share of world production declined from 39% (86 million tonnes) in 2006 to 32% (70 million tonnes) in 2007. In absolute terms, US production has fallen by 19% year on year, resulting in a decline of 6% at the world level and leading to record prices on markets (FAPRI, 2008, US and World Agricultural Outlook). This situation can be explained by a significant reduction in the areas devoted to soybeans in the USA in favour of maize (transformed into biofuels). The main producer of sunflower seeds are Russia (5.6 million tonnes), followed by the EU (4.8 million tonnes), Argentina (4.4 million tonnes), the Ukraine (4.2 million tonnes) and China (1.8 million tonnes). Production has stagnated or even fallen in most of these countries over the last ten or so years, except in Russia and the former Soviet republics. The main rapeseed producers are the EU (18.1 million tonnes, which represents 37% of world production), China (10.4 million tonnes for 2008), Canada (8.8 million tonnes for 2008) India (7.1 million tonnes) (source: FAOSTAT). The main palm oil producers are Indonesia (78 million tonnes), followed closely by Malaysia (77.7 million tonnes). These two countries represent approximately 80% of world production. Since 2007, Indonesia has replaced Malaysia as the world’s leading producer, which had held that place for several years. They are followed, a long way behind, by Nigeria (8.7 million tonnes), Thailand (7.6 million tonnes), Colombia (3.2 million tonnes), Ghana (2 million tonnes) and Côte d’Ivoire and Papua New Guinea (1.4 million tonnes), with world production totalling 192 million tonnes. The share of ACP countries and in particular of west African countries in world palm-oil production has declined significantly; the region was among the leading palm-oil producers some 50 years ago and indeed still has substantial development potential. 2.2 Consumption The main consumer countries of oil-producing plants are at the current time the EU, followed by the USA, China, and then Brazil (see the table for soybeans which reflects these trends). The USA and Brazil obtain supplies on their own markets, while the EU and China consume far more than they produce. 396 Trends December 2008 Executive brief Oilseed In the coming years, world consumption of the main oil-producing plants (soybeans, rapeseed and sunflowers) for human and animal consumptions is expected to rise. This increase relates chiefly to the increased demand for meat and the growing need for fodder in exporting countries; it also reflects the growth in developing countries of the demand for edible oils and biofuels. Soybeans are expected to remain the main oil-producing plant consumed, with almost 80% of the total. The trend regarding soybean consumption can also probably be applied generally to all oil-producing plants. FAPRI (2008, US and World Agricultural Outlook) estimates that between 2008 and 2018, China will account for 29% of the increase in world consumption of soybeans, ahead of the USA (17%), Brazil (9%) and the EU (7%). World soybean consumption in 2008 (millions of tonnes) Soybeans World Soyseed meal 282 Soyoil 158.9 38.2 EU25 17.7 34.6 3.6 USA 59 31.8 8.9 China 51.1 30 9.6 Brazil 49.5 11.2 3.8 Other countries 58.9 0.6 1.2 The majority of soybean consumption is in reality transformed into derived products (oilmeals and oil). The consumption of seeds is therefore not necessarily linked to an end use of the product on the territory in question since oilmeals and oil can be exported. Source: FAPRI 2.3 Trade Quantities of seeds, oilmeals and oil of the main oil-producing plants traded in the world in 2008 Soybean Rapeseed Sunflower Groundnut Palm Source: USDA Seeds (million tonnes) 71.2 7.2 0.7 1.5 - Oilmeals (million tonnes) 54.5 2.5 2.6 0.14 3.9 Oil (million tonnes) 9.8 1.5 2.9 0.16 28 2.3.1 Trade in seeds and oilmeals is dominated by soybeans Soybeans are by far the main oil-producing plant traded on world markets with 115 million tonnes. Trade in rapeseed, the second most widely traded oil-producing plant is barely 7% that in soybeans. There are three main countries exporting soybean seed, which represent 90% of world soybean exports. In 2008, Brazil became the leading soybean seed exporter with 29 million tonnes by overtaking the USA (26 million tonnes) and a long way ahead of Argentina (9 million tonnes). These three countries also dominated trade in soybean oilmeals in 2007, with Argentina in first place (29 million tonnes), ahead of Brazil (11 million tonnes) and the USA (7 million tonnes). China imported almost half of the soybean seeds traded in the world in 2008 with 33 million tonnes, while the EU imported 15 million tonnes. As regards oilmeals, the EU is the only major trading partner with 23 million tonnes imported in 2008. Seeds and oilmeals taken together, the EU remains the world’s leading importer because of the weakness of its domestic production. 397 2.3.2 Oils As regards oils, palm oil is the most traded on world markets, with 28 million tonnes in 2008, followed some way behind by soybean oil (9.8 million tonnes). Trade volumes in the other oils are far lower: sunflower (3 million tonnes), rapeseed (less than 2 million tonnes), then groundnut and cotton (less than 0.2 million tonnes each). December 2008 Executive brief Oilseed The principal importers of oil are China and India (which are also the main oil producers), and their demand is increasing, in particular for food purposes. 2.4 Relations between markets in oil-producing plants and palm oil Oil palms are grown for edible oils which are extracted from the pulp of its fruit (palm oil) and its kernel (palm-kernel oil). One hectare of oil palms produces between 2 and 7 tonnes of oil a year, compared with one tonne for rapeseed or sunflowers grown in a temperate climate. 80% of world production is produced by industrial plantations (2,500 to 10,000 hectares per unit); the rest is produced by very small industrial farms, located around oil mills. That is the case in particular in Indonesia and in part in Malaysia. A world total of six million hectares is devoted to oil palms, of which 80% is in south-east Asia. World production was 43.7 million tonnes in 2007 (mostly from the fruit), with less than three million tonnes coming from ACP, about half of it in Nigeria with 1.5 million tonnes (source: FAOSTAT). 80% of this oil production (palm and palm-kernel oils) is used for human consumption (margarines, basic vegetable fats, food oils). The rest is used to manufacture by-products for industrial use (fatty acids, soaps, resins, animal feed, etc) or in the production of biofuels. Waste from oil mills is used for fertilisers, electricity production or methane. 2.4.1 Increasing trade but with little ACP involvement World trade in palm oil has grown rapidly over the last ten years and the quantities of palm oil traded have tripled, increasing from 9.5 million tonnes in 1997 to 26.5 in 2007. The production of palm oil has also increased steadily, albeit to a lesser extent, increasing from 17 million tonnes in 1997 to 40 million tonnes in 2007. The ongoing dominance of Indonesia and Malaysia as the main producers and exporters is noteworthy and they have been responsible for 90% of production over the last ten years. Palm oil is among the cheapest fats. However, the increased demand for food and biofuels led in 2007 and at the beginning of 2008 to a rapid rise in palm oil prices, thereby reducing its competitiveness, although it remains the cheapest oil on the market. Record price increases … Annual averages US$/tonne Fats and oils Palm oil Jan-Dec 2003 443 Jan-Dec 2004 471 Jan-Dec 2005 422 Jan-Dec 2006 478 553 616 544 598 881 1,353 1,243 1,161 1,060 970 1,347 2,205 593 684 677 658 1,021 1,639 Soybean oil Groundnut oil Sunflower oil Source: FAOSTAT 398 Jan-Dec Jan-Oct 2007 2008 780 1,039 2300 Palm oil Soybean oil Groundnut oil 1800 Sunflow er oil 800 300 Jan-de c 2003 Jan-de c 2004 Jan-de c 2005 Jan-de c 2006 Jan-de c 2007 Jan-oct 2008 The changes in palm-oil prices over the 18 months to mid-2008 illustrate the surge in demand for commodities, followed by a sudden downturn of markets in the second half of 2008. The following chart shows that the price of palm oil doubled between January 2007 (US$600 per tonne) and March 2008 (US$1,250 per tonne). … and a downturn in the market in the second half of 2008: monthly trend in the palm oil price Evolution mensuelle du prix de l'huile de palme 1400 1200 P rix en U S $/t 1000 800 600 400 200 fé v- 07 vr -0 7 m ar s07 av r -0 7 m ai07 jui n07 j ui l -0 7 ao ût07 se pt -0 7 oc t- 0 7 no v-0 7 dé c -0 7 jan v08 fé vr -0 8 m ar s08 av r -0 8 m ai08 jui n08 j ui l -0 8 ao ût08 se pt -0 8 oc t- 0 8 0 jan December 2008 Executive brief Oilseed 1300 Source: FAOSTAT Oil-producing plants and cereals were the crops that were the most affected by the price rises in 2007 and 2008. The price of palm oil grew rapidly from the beginning of the first quarter of 2006 and increased on an almost continuous basis up to March 2008 (on a basis of 100 in 2006, its price was then 275) (source: CIRAD analysis of the causes of agricultural price increases). The weakness of stocks was to a large extent responsible for the overall increase in prices, but as regards oil-producing plants, the impact of the rapid development of biofuels in line with the increase in the price of crude oil (see below) also needs to be emphasised. 2.5 Trends In the coming years Chinese imports of oil-producing plants are expected to grow very strongly, and fluctuations in world soybean prices (soymeal and seeds) particularly are closely linked to Chinese demand. The EU is nevertheless likely to remain the world’s main net importer of oilproducing plants, as can be seen from the soybean import trends. 399 Net imports of soybeans (millions of tonnes equivalent soybeans) 2008 December 2008 Executive brief Oilseed Seeds World EU25 China Japan Other countries Source: FAPRI 71.5 15.4 33.7 4.1 18.3 Soymeal 54.5 22.8 1.7 30.0 2018 (forecast) Seeds Soymeal 91.7 72.2 14.7 27.7 52.0 3.4 3.5 21.6 41.0 Faced with this increased demand for oil-producing plants, soybean supplies are expected to be even more concentrated on Brazil and Argentina, whose exports of soybeans and soymeal are projected to grow by 72% and 52% respectively. To that end Brazil is expected to increase its production by about a half to 95.3 million tonnes, thereby becoming the largest soybean producer. Over the same period, US soybean exports are expected to fall slightly (-6%). Another trend has emerged in recent years in Latin American soybean-producing countries. Increasingly, they produce and export not only oils but also meat, mainly poultry at present, taking advantage of the availability and low cost of soybeans as animal feed. These exports of oil and meat cuts and processed meat represent for the countries concerned a more important source of added value than oilseed exports. There is therefore a risk that the production of meat and oils will be increasingly relocated to the most competitive countries in Latin America, which will meet the increasing demand for these products from other developing countries. The consequences are already being felt in stockfarming regions with the recent closure of poultryslaughtering plants in Brittany because their production costs could not compete with those of Brazil (Source: Ouest-France, November 22nd 2008). The palm-oil market is dominated by Malaysia and Indonesia. From 2001-2005, palm oil has represented 72% of world oil production (all origins taken together) and 46% of oils exported throughout the world. There is fierce competition between soybean oil and palm oil, with the latter product ahead despite the recent price rise. As the two main producers, Indonesia and Malaysia, are very much dependent on their exports on the world palm-oil market, they are unlikely to cut back their production. Because of its competitiveness, production and trade of palm oil could grow by 45% until 2018 (source: FAPRI, 2008), i.e. more rapidly than for vegetable oils as a whole. 3. The EU regime and market 3.1 Changes in the basic EU regime Policies for protein supply in Europe have been marked for 40 years by a dependency on American imports. In 1962, when the CAP was put in place, the then European Economic Community decided to favour cereal production to the detriment of that of oil-producing plants: it was the Kennedy round which authorised the importation of cereal-substitute products without customs duties. In 1967, this measure was enlarged to corn-gluten feed and soybeans. In the same year the Common Market Organisation for rape, rapeseed and sunflowers came into force. It was regulated by the basic regulation no. 136/66/EEC which covered all oils and fats including olive oil. Every year the Council fixed for each type of oilseed an indicative price and an intervention price. The seeds imported were in general cheaper than European seeds and entered without any customs duty. Crushers were encouraged to buy the more expensive European seeds via direct aid, calculated on the basis of the difference between the indicative price and the world price. The purchase by Europe of oil-producing plants was triggered when the internal price was less than 94% of the intervention price (Baudin, 1993). 400 December 2008 Executive brief Oilseed In 1973, bad weather conditions resulted in a drop in soybean production in the USA, thereby triggering an increase in its price. The US government, to protect the interests of the soybean industry, ordered an embargo on soybean exports. In response to that situation, the EU put in place in 1975 a proteins plan involving support for growing oil-producing and protein plants, and the development of new varieties for use as animal feed. The EU tried unsuccessfully on five occasions to introduce an import tax on oil-producing plants, but was forced to do an about-turn on each occasion in the face or pressure from animal-feed lobbies. Nevertheless, it succeeded in exceeding the threshold of 40% of self-sufficiency in vegetable proteins in the 1980s (Froidmont E., Leterme P., 2005). Before 1992 WTO rules on oil-producing plants were reformed only once, in the 1980s, when a stabilisation mechanism was put in place with a view to reducing the indicative price and the intervention price when a certain production level was reached. The CAP reform in 1992 replaced the CMO in oil-producing plants based on intervention prices by a system of direct aid to producers of rapeseed, groundnuts and soybeans, based on a premium per hectare (this premium per hectare is calculated by multiplying the basic amount per tonne by the historic average yield of the zone (calculated for the period 1986-90). In the same year, the Blair House Accord, negotiated between the EU and the USA in the framework of the Uruguay Round, introduced limits on the Community area devoted to oilproducing plants (the limit was fixed at 5,128,000 hectares for the EU12 and increased to 5,482,000 hectares for the EU15). The Agenda 2000 reform did not call into question the principle of the WTO rules for oilproducing plants based on direct aids to producers. On the other hand, the amount of such aid has been progressively brought into line with that of direct aids for cereals. Direct aids fell from €94.24 per tonne in 1999 to €81.74 per tonne in 2000/2001, €72.37 per tonne in 2001/2002 and then in 2002/2003 to the same amount as for cereals, i.e. €63 per tonne. Finally, the reform adopted in June 2003 integrated the premium per hectare into the single farm payment (see below for the impact of this reform). The CAP reform ‘health check’ adopted in November 2008 maintained the premium for protein-rich oil plants and decided to integrate it into the single payment scheme from 2010. This premium is intended, among other things, to favour crops intended to be transformed into biofuels. However, there is a risk that the health check will result in a decline in the European production of oil-producing plants by eliminating the compulsory set-aside (see below). 3.2 Trade, consumption and production in the EU Production, consumption and the trade balance of oil-producing products in the EU for 2007 (million tonnes) Production Soy Seeds Soymeal Oil Rapeseed Seeds Rapeseed-meal Consumption Trade balance (export-import) 0.84 16.4 -15.4 *11.8 2.7 18.2 34.6 3.4 18.6 -22.8 -0.7 -0.18 10.3 10.3 -0.02 Oil 7.4 7.7 Sunflower Seeds 4.5 4.9 Sunflower-meal 2.4 3.8 Oil 1.7 2.9 Palm Seeds 4.0 Palm meal 2.7 * Soymeal is produced from imported seeds. Source: compiled by the authors on the basis of COMEXT and USDA data. 401 -0.5 -2.1 -1.4 -1.0 -4.0 -2.7 The policies launched in 2005 at European level and by certain member countries to promote biofuels have boosted imports of oil intended for transformation purposes. The EU is now a net importer of rapeseed oil whereas it was an exporter up to 2004. 3.3 Community imports 3.3.1 The Community import regime December 2008 Executive brief Oilseed All oil products, raw or processed, enter the EU duty-free, whatever their origin; there are therefore no trade preferences on these products for ACP countries. 3.3.2 Oilseed and oilmeal imports The EU imports essentially soybeans (90% of oil-producing plant imports in 2007 (source: PROLEA). It is by far the world’s leading importer of soybeans (soybean seeds and soymeal taken together) with, in 2007, 38 million tonnes of soybeans (15 million tonnes of soybean seeds and 23 million tonnes of soymeal), i.e. nearly a third of world imports (Cyclope, 2008). Soybean imports come chiefly from Brazil (in 2006, 16 million tonnes out of 36 million tonnes, including 7.6 million tonnes of soymeal), Argentina (14.3 million tonnes, almost exclusively soymeal) and the USA (3.2 million tonnes, almost exclusively seeds). The fact that Argentina has supplied almost exclusively soymeal instead of seeds over the last four years can be explained by the fact that the varieties of Argentinean soybean are GMOs, which has led the EU to spurn this source of supplies (traceability requirements for soymeal used for animal feed are less stringent than for oils used for human food). As regards sunflower, the EU imports seeds and sunflower-meal. Since 2000, its imports of seeds have decreased sharply, falling from 1.5 million tonnes in 2000 to 200,000 tonnes in 2007. During the same period, imports of sunflower-meal have remained stable, varying between 1.4 and 1.8 million tonnes. A large part of these imports come from Argentina. The relatively strong domestic supply of rapeseed-meal explains the lower reliance on imports. In 2007, the EU imported 20,000 tonnes of rapeseed-meal. According to FAPRI’s estimates, the EU is likely to become an exporter of rapeseed-meal from 2010. Volumes of seed imports are far more variable, ranging from 45,000 to 658,000 tonnes. 3.3.3 Oil imports The rapeseed oil market is expanding rapidly with the development of biofuels. The quantities of rapeseed oil transformed into biodiesel exceeded the quantities intended for food in 2005. The EU is a net importer of sunflower oil, with imports rising eightfold between 2000 and 2007 from 157,000 tonnes to 1.2 million tonnes. During this period palm oil imports doubled from 2 to 4 million tonnes. Imports of palm oil and coconut oil remained fairly stable around 1.1 to 1.3 million tonnes, while imports of groundnut oil fell from 142,000 tonnes to 102,000 tonnes. The sources of imports are fairly concentrated: for palm oil in 2007 the four main suppliers (Indonesia, Malaysia, Colombia and Papua New Guinea) represented more than 97% of the total. 402 Main palm oil exporters to the EU (tonnes) Main exporters of palm oil to the EU (tonnes, COMEXT 2004) Others: 44,828; 1% Colombia: 124,795; 4% Executive brief Oilseed Papua New Guinea: 346,785; 10% Malaysia: 1,463 606; 44% Indonesia: 1,376 134; 41% Source: COMEXT (concerns only imports of fruit-pulp-based palm oil) December 2008 Palm-oil exports from Papua New Guinea to the EU in tonnes 400000 PAPUA NEW GUINEA 380000 360000 340000 320000 300000 280000 260000 240000 220000 2001 2002 2003 2004 2005 2006 2007 Source: COMEXT (SH 1511) Papua New Guinea’s palm oil exports have increased strongly since 2000 and in recent years have totalled approximately 370,000 tonnes. On the other hand, imports of groundnut oil, which was for a long time one of the main agricultural export products of Senegal (and of Gambia), are losing ground, falling from 150,000 tonnes in 2000 to less than 100,000 tonnes in 2007. However, Senegal continues to have a dominant place in this trade with almost 60% of the EU’s imports coming from that country (COMEXT data). Groundnut oil exports to the EU in tonnes 120000 GAMBIA SENEGAL 100000 80000 60000 40000 20000 0 2000 2001 2002 2003 Source: COMEXT (SH 1508) 403 2004 2005 2006 2007 December 2008 Executive brief Oilseed While the EU’s imports of fat products doubled between 2000 and 2007, increasing from 4.5 to 9.2 million tonnes, those from ACP countries remained stable at around 500,000 tonnes. Papua New Guinea is the leading ACP supplier of fat products to the EU; between 2000 and 2007, its share increased from 48% to 67% of the total, with its exports to the EU increasing from 240,000 to 337,000 tonnes. Senegal comes a long way behind with only 55,000 of oil (groundnut oil) exported in 2007, compared with over 100,000 tonnes in 2001. Several Pacific islands supply coconut oil and palm-kernel oil. The ACP countries do not supply sunflower oil (almost all the EU’s imports of sunflower oil come from two countries, namely Argentina and Ukraine). 3.4 The EU’s exports As a result of European internal market developments, the EU is now a net importer of most oils (soybean, rapeseed, sunflower and, of course, palm oil). This situation is new for rapeseed and sunflower oils. Nevertheless, despite this negative trade balance, the EU continues to export appreciable quantities of oils, in particular to the ACP countries, above all soybean oil derived from crushing seeds to obtain soymeal. This oil, considered as a soybean by-product, is re-exported, in particular to the African markets listed below. EU soybean oil exports to ACP countries in 2007 Countries Angola Fiji Senegal Cape Verde Ghana São Tomé & Principe Gabon Equatorial Guinea Source: EC COMEXT database, 2008 Volume (in tonnes) 32,023 4 461 4,066 2,925 2,709 1,922 1,487 1,168 These oils are very probably derived from GMO soybeans which represent more than 60% of world soybean crops and for which there are few outlets on European market (Transrural Initiatives, 2006). In numerous ACP countries, European exports of soybean oil are in competition with locally produced oils and fats. That is the case, for example of Ghana and Guinea which produce palm oil for the local market. Oils are partially interchangeable. However, as the chart below shows, these exports have remained stable and have even declined in the case of Senegal, in particular in recent years. Oils from Asian countries appear to represent a greater competitive threat for local ACP production. Soyoil imports from the EU (tonnes) 70000 ANGOLA CAPE VERDE EQUATORIAL GUINEA 60000 FIJI GHANA 50000 SENEGAL 40000 30000 20000 10000 0 2000 2001 2002 2003 Source: COMEXT (SH 1507) 404 2004 2005 2006 2007 4. The reform of the CAP and its consequences While the 2003 CAP reform decoupled direct aids and establishing the right to the single payment raised numerous questions as to the EU’s capacity to continue to produce and export, recent market developments have brushed aside these doubts with price levels encouraging European farmers to increase their production. December 2008 Executive brief Oilseed It is difficult therefore to distinguish between the impact of the reform of agricultural aids and the response of producers to market signals. However, several studies based on econometric models have attempted to identify the impact of the 2003 reform, in particular studies produced by the EC, the OECD, the Institut National de Recherche Agronomique (INRA) in France as well as the US Department of Agriculture. Over the medium term (the recent decade), compared with the situation which would have existed with the application of Agenda 2000, the vast majority of models agreed that the impact of the 2003 reform will be slightly negative in terms of European oil-producing plant areas and productions (Burny, 2003). By way of example, the OECD (2004) predicted, for 2005-2008, in the event of total decoupling, a fall of 2.8% in EU areas devoted to oil-producing plants and a fall of 0.7% in production levels. Current figures show on the contrary that the area used for growing oil-producing plants increased by 14% in the EU27 member states between 2000 and 2007. Over the same period, the production of oil-producing plants grew by 28%. This development is chiefly due to the expansion of rapeseed crops in Germany, Poland, France and the UK. From the mid-1990s to 2006 agricultural markets were characterised by constantly falling prices, which made it possible for politicians to influence production via direct aids. The strong volatility which has characterised agricultural markets for 18 months makes it tricky to anticipate any changes in volumes and production areas devoted to oil-producing plants. It is therefore difficult to predict what impact the measures proposed at the time of the CAP ‘health check’ will have, unless these are intended to stabilise prices paid to producers. The ‘health check’ put an end to the obligation for farmers to set aside 10% of their land. Hitherto, famers were authorised to grow non-food plants on this fallow land, in particular oilproducing plants intended to be transformed into biofuels. There is a risk that the ending of this compulsory set-aside may reduce the area dedicated to this type of farming, if prices are not sufficiently attractive to act as an incentive. 5. What influence will biofuels have on the market in oil-producing plants? Biofuels are generally derived via two channels, the oil-based sector (oil, rapeseed, jatropha, and castor oil) and the alcohol-based sector (from sugar, wheat, corn, beet and sugar cane) which produces bio-ethanol. Only the first sector concerns us here. Alongside traditional uses of oils (feed and industrial purposes), its use as a source of energy is developing. Two products can be distinguished: pure vegetable oil and esterified oil. In the first case, the oil is used directly as fuel in vehicles having diesel engines, after certain technical modifications to take account of the technical characteristics of the oil (higher viscosity). Esterified oil, known generally as bio-diesel (diester in France – a registered trademark), can also be used directly, without however any modification to the vehicle. On the other hand, the production of bio-diesel requires heavy industrial equipment, whereas oil can be produced on a cottage-industry basis, with very little investment. The production of bio-diesel is chiefly concentrated in Europe (Germany, France and Italy). The world production capacity of bio-diesel was estimated in 2005 at 1.6 billion litres, including 1.5 billion in Europe, which is small compared with the 27.7 billion litres of ethanol produced in the world that year (according to the French Ministry for Economic Affairs, DIGITIP-DGTPE, May 2005), mainly in Brazil, the USA and Canada. 405 It is more difficult to assess the production of vegetable oil used as fuel. In fact, its production and use are above all based on small production units. Executive brief Oilseed Agriculture-based fuels are all produced from biomass. Also, their use helps to reduce greenhouse gas emissions. In a nutshell, the carbon dioxide discharged by the combustion of fuel was captured by the plants during their growth. From an environmental point of view, pure vegetable oil has the best results, ahead of diester which is itself more interesting than ethanol (Plassard, 2004). In order to combat the greenhouse effect, the EU has decided to increase quantities of ‘biofuels’ consumed in Europe. European Directive 2003/30/EC provides that the proportion of biofuels in European fuel consumption should increase from 2% at the end of 2005 to 10% in 2020. That will lead to increased demand for oilseeds, even if other technologies are available and can be used to produce oil, such as the pyrolysis of biomass. As the EU’s production capacity is limited, this will progressively have to be met by imports. Agriculture-based fuels all have higher production costs than fossil fuels. The ratio varies from 2 to 4 (International Energy Agency, 2004). December 2008 5.1 Biofuels: a political issue Since 2003, several European countries have initiated a programme for the industrial production of biofuels supported by public funding. Germany has decided to encourage the use of vegetable oils by totally exempting sales from taxation. In France, a ‘biofuels plan’ was adopted in 2003, and then supplemented in 2006, with tax exemption measures and support for research in the sector. European decision-makers saw the development of this sector as a means of resolving the problem of agricultural overproduction while participating in energy independence and the fight against climate change (by reducing greenhouse gases). At the European level, a directive was enacted in 2003 making it compulsory to incorporate 5.75% of biofuels in national consumption by 2010, while introducing a premium per hectare for energy crops. In France, the objective is more ambitious and the percentage to be incorporated by 2010 is 7%. In its strategy for the promotion of biofuels announced on February 8th 2006, the EU set out its policy of cooperation in this field. It intends in particular to develop a consistent biofuels aid programme which can be used in developing countries which have a biofuel potential. 5.2 Towards a calling into question of biofuels? The food crisis which marked the beginning of 2008 raised the problem of the substantial state support for the biofuels sector which has diverted part of agricultural production from food. The support strategies for the sector have also been criticised because they did not target real energy savings. In the face of pressure from civil-society organisations and multilateral institutions (see the OECD’s critical report: ‘Economic assessment of biofuel support policies’), the authorities have recently revised downwards their incorporation objectives. The European Parliament has decided to reduce the minimum incorporation threshold to 6% from 10% by 2020, while the French government has postponed its biofuel incorporation target of 10% initially scheduled for 2015. In addition, questions have been raised regarding the EU’s capacity to produce these incorporated biofuels. Several analysts have underscored the fact that the EU would be required to import the bulk of its biofuels, in particular from Brazil which is the main producer of such fuels, thereby participating in the industrialisation and intensification of farming processes which are often polluting and also contributing to deforestation. Despite proposals for putting in place specifications for imports making it compulsory to comply with certain environmental standards, it seems very unlikely that the European authorities will be able to control foreign production channels for such quantities. 406 December 2008 Executive brief Oilseed More recently, the economic cost-effectiveness of biofuels has been called into question, first of all as a result of the increase in prices of agricultural raw materials which make them more expensive; and more recently, following the fall in oil prices. With an oil price of less than US$50 a barrel in November 2008, numerous investments in bioethanol production structures are no longer profitable whereas they were several months earlier when the price of oil was above US$100 a barrel. It is therefore tricky to predict how international demand for crops transformed into biofuels will evolve. Several aspects which are difficult to predict enter into the equation: the prices of oil and agricultural raw materials (which condition the relative cost of biofuels in comparison to oilbased fuels) and political support for the sector (which can reduce substantially the production costs of biofuels via tax breaks). There is a strong risk that political decisions will shape the sector’s development, and therefore international demand for vegetable oils. New products are also conceivable such as jatropha and castor oil which have recorded spectacular growth. The strong energy potential of these tropical plants offers biofuel development opportunities for domestic markets in countries of the South. 6. Issues of EPA negotiations in the oilseed sector 6.1 EU market access The last CAP reform does not appear to provide any particular incentives to increase production of oil-producing plants. From this point of view, therefore, there is little likelihood of a reduction in the EU’s dependency. This is therefore some potential for the ACP countries, but as EU markets are already open to oil exports from the rest of the world including ACP countries, the latter will not gain in terms of access to the EU market. 6.2 Issues concerning the opening of ACP markets Europe continues to subsidise its production of oil-producing plants, using systems that are compatible with the WTO. In doing so, it subsidises indirectly its oil production. Exported oils compete directly with locally produced ACP oils and there is a risk that this competition will be exacerbated with the EPAs if local oils are not defined as sensitive, protected products. Imported oils tend to be substituted for local oils even if it does not involve the same species of oils. Moreover, because of the strong interchangeability between the various oils imported by the ACP countries, import taxes should be kept in place for all imported oils so as not to favour imports of an oil that has been liberalised. In the west African region, the process for designating sensitive products at regional level has thus resulted in all imported vegetable oils being classified as sensitive products, not to be liberalised in the framework of an EPA. Oil producers and the ACP countries have also had to contend for several years with competition from new market entrants, in particular Brazil. The latter is particularly rich in natural resources (land, water) and its production costs are particularly low. The common external tariff of the various regional zones which are negotiating EPAs with the EU must therefore be sufficiently high to protect the oil production of the ACP countries against cheap products from other developing countries. In west Africa, where the CET of ECOWAS is in the process of being finalised, discussions concern the creation of a fifth band that will make it possible to increase the current maximum CET level of 20% to the level of the UEMOA. In the UEMOA countries, imported oils are generally taxed at 10% or 20% depending on whether they are crude or refined oils. In the ECOWAS zone, a country such as Nigeria, a major producer of palm oil, prohibits imports of palm oil. Products subject to this fifth band should be those which it is considered important to protect in order, in particular, to stimulate local production. Imported vegetable oils could fall within this category in order to promote the development of local oils to satisfy consumer needs at national and regional levels. 407 Moreover export of biofuels from the ACP could promote development in response to EU demand. It is possible that this chain could be included in EPAs. However, it is to be hoped that if the ACP develops this production it will not be at the expense of food production nor smallscale agriculture. December 2008 Executive brief Oilseed Discussions on the protection of local oils in the framework of customs-union processes and the EPAs are linked to discussions at WTO level on special products. The aim here again is to protect products that are deemed to be strategic for reasons of food security, combating poverty and stimulating rural development. Local oils in the ACP countries generally satisfy these criteria and should logically be designated as special products by each of the ACP countries that are WTO members. 408 Special report June 2008 June 2008 Special report Prospects for EU agricultural markets Prospects for EU agricultural markets 2008-2014 The EU cereals sector The latest EC Prospects for EU agricultural markets covering the period up to 2014 (based on data available up to December 2007) notes record prices in the cereals sector in recent months attributed both to structural factors and conjunctural factors. The structural factors include ‘a steady rise in global food demand, the emergence of the biofuel market, the significant slowdown in cereal-yield growth in the EU’. The conjunctural factors include ‘adverse climatic conditions and the restrictive export policy of some key world market suppliers’. This has contributed to a very tight cereals market, which has led to a clearing out of EU intervention stocks (cereals stocks are now almost exclusively in private hands). It is anticipated that the tight market will continue, ‘maintaining cereal prices at high levels … until market stocks in the EU replenish’. Total cereals EU27 (tonnes) Usable production Consumption Surplus/deficit Ending stocks Exports Imports 2005* 253,100,000 2008 294,400,000 2011 297,600,000 2014 305,700,000 % change 2008-14 + 3.84 246,900,000 + 6,200,000 67,000,000 23,500,000 9,900,000 270,600,000 + 23,800,000 48,000,000 27,700,000 11,600,000 275,500,000 + 22,100,000 48,500,000 29,700,000 9,000,000 285,500,000 + 20,200,000 54,200,000 28,900,000 11,000,000 + 5.51 - 15.13 + 4.43 - 5.17 *EU25 25 310 70 60 260 20 50 210 15 160 40 30 110 10 20 60 5 10 -402005* 2008 Usable production 2011 Consumption 20140 Surplus/deficit 10 0 2005* 2008 Exports 2011 Imports 2014 Ending stocks ‘Over the medium term, world and EU cereal prices are projected to remain sustained at higher levels than seen in the last decade, though at much lower levels than those recently observed’. It is envisaged that in future there will be greater price fluctuations, as EU prices increasingly mirror world market prices. ‘The medium-term prospects depict a positive outlook for the EU cereal markets thanks to the impact of the CAP reform … the moderate prospects for yield growth, the emerging bio-ethanol market… and more favourable conditions on world markets’. However the report expresses the view that despite recent price hikes ‘cereal prices should continue their trend of real decline over the medium term’ (although increasing in nominal terms), since ‘production is increasing faster than demand’. 411 June 2008 Special report Prospects for EU agricultural markets This will serve to create a balanced cereals market in the EU in the medium term, with the structural impact of US biofuel policies leading to ‘a lasting change of relative prices in favour of coarse grains’. This more balanced market is a result of an ‘expansion of domestic consumption and cereal exports’ (assuming a strengthening of the US dollar to 1.26 to the euro by the end of the projection period). This will see a projected 4.43% increase in exports between 2008 and 2014, although by 2014 the surplus of usable production over consumption is estimated to be 15.13% less than in 2008. With a slower rate of growth in wheat production between 2008 and 2014 and a higher rate of consumption growth, surplus EU wheat production is projected to decline from a peak of 16.2 million tonnes in 2008 to a mere 6 million tonnes in 2014 (showing a steady decline through the period as consumption grows faster than production). After an initial increase wheat exports are projected to decline by 10.71% between 2008 and 2014, with a marginal increase in wheat imports (+1.3%). Total wheat (tonnes) Usable Production Consumption Surplus/deficit Ending stocks Exports Imports 2005* 123,300,000 2008 142,000,000 2011 142,000,000 2014 145,600,000 % change 2008-14 + 2.53 117,000,000 + 6,300,000 26,900,000 15,100,000 6,700,000 125,800,000 + 16,200,000 25,200,000 16,800,000 7,700,000 130,700,000 + 11,300,000 21.300,000 18,000,000 5,800,000 139,600,000 + 6,000,000 19,100,000 15,000,000 7,800,000 +10.97 -43.06 - 10.71 + 1.30 *EU25 160 18 140 16 120 14 12 100 30 25 20 10 80 8 60 6 40 4 20 2 0 2005* 2008 Usable Production 2011 Consumption 0 2014 Surplus/Deficit 15 10 5 0 2005* 2008 Exports 2011 Imports 2014 Ending Stocks Total coarse-grain production is projected to grow faster than the overall cereals average, increasing by 5.19% between 2008 and 2014, with consumption expanding by only 0.76%, the surplus of EU coarse-grain production over consumption is projected to expand by 32.41%. In this context EU coarse-grain exports are projected to rise 27.78% between 2008 and 2014, despite the need to rebuild EU coarse-grain stocks. EU imports of coarse grains are projected to decline by 17.95% between 2008 and 2014. In the light of EU biofuel targets, EU cereals demand for bio-ethanol production is projected to increase by 16.5 million tonnes between 2007 and 2014 (from 1.9 million tonnes to 18.4 million tonnes), some 33% of the expected expansion of overall cereals production over this period. The emergence of commercially viable second-generation technologies towards the end of the projection period should ‘lead to a slow-down in cereal and sugar-beet demand for bio-ethanol production’. 412 Total coarse-grains (tonnes) Special report Prospects for EU agricultural markets 2005* Usable Production Consumption Surplus/deficit Ending stocks Exports Imports 2011 2014 129,800,000 152,300,000 155,600,000 160,200,000 129,900,000 - 100,000 40,000,000 8,400,000 3,200,000 144,800,000 + 7,500,000 22,800,000 10,800,000 3,900,000 144,800,000 + 10,800,000 27,200,000 11,700,000 3,200,000 145,900,000 + 14,300,000 37,400,000 13,800,000 3,200,000 % change 2008-14 + 5.19 + 0.76 + 32.41 + 27.78 - 17.95 *EU25 180 16 45 160 14 40 140 12 35 120 10 30 8 25 100 80 6 60 4 40 2 20 0 0 2005* June 2008 2008 20 15 10 -2 2008 Usable Production 2011 Consumption 2014 5 0 2005* Surplus/Deficit 2008 Exports 2011 Imports 2014 Ending Stocks Implications for ACP countries The EU’s production response to any decline in world cereal prices will have significant medium- to long-term consequences for food security in developing countries such as those in the ACP. It is not yet clear whether EU production may contract proportionately to any downward price trend, or whether the direct aid-payment system will make EU cereals producers less responsive when global market prices fall, leaving other third-country suppliers carrying the burden of any price declines. On the other hand if world market prices for cereals rise, there will be a significant stimulus to production in ACP countries only if the rises are effectively transmitted down to agricultural producers. If consumer-price rises are absorbed by traders and middle men, then high prices will provide little economic incentive for ACP producers to expand basic cereal production, while rising input costs could well stimulate an exit from production of basic cereals. The EU beef sector EU beef production is projected to decline in the medium term to 7.6 million tonnes by 2014 from 7,959,000 tonnes in 2008, a fall of 4.51%. This is linked to the reduction of the dairy herd and the impact of the decoupling of EU aid payments. However, trends in the size of the dairy herd will be critically determined by the rate of milk-quota expansion agreed as part of the transition to the abolition of the quota-management system in 2015. The higher the increase in milk quotas the lower the rate of decline of the dairy herd and consequently the higher the level of domestic EU beef production. EU consumption of beef however is also projected to decline, although at a slower rate of 2.08% between 2008 and 2014. Despite the production deficit in the EU exports will continue to take place, albeit at greatly reduced levels (partly in response to higher domestic demand). Indeed, despite EU enlargement total EU exports by 2014 will be only 21.13% of the 2005 level. EU imports of beef are projected to increase by 25.34% between 2008 and 2014, from 592,000 tonnes to 743,000 tonnes. 413 Beef (tonnes) Usable Production Consumption Surplus/deficit Exports Imports 2005* 8,044,000 8,445,000 - 401,000 213,000 614,000 2008 7,959,000 8,474,000 - 515,000 77,000 592,000 2011 7,740,000 8,340,000 - 600,000 52,000 653,000 2014 7,600,000 8,298,000 - 698,000 45,000 743,000 % change 2008-14 - 4.51 - 2.08 Deficit + 74 - 41.56 + 25.34 June 2008 Special report Prospects for EU agricultural markets *EU25 8.6 0 0.8 8.4 -0.1 0.7 8.2 -0.2 0.6 8 -0.3 0.5 7.8 -0.4 0.4 7.6 -0.5 0.3 7.4 -0.6 0.2 7.2 -0.7 0.1 7 2005* -0.8 2008 2011 Usable Production Consumption 2014 Surplus/Deficit 0 2005* 2008 Exports 2011 2014 Imports The rise in EU imports is likely to increase the competition faced by ACP beef suppliers, although the price implications of this will be critically determined by the trade arrangements under which this beef enters the EU market. In anticipation of increased competition on undifferentiated EU beef markets, some ACP beef exporters are improving their marketing efforts to target ‘luxury purchase’ markets in the EU. This is already yielding significant financial benefits. However market diversification beyond the EU remains a critical priority, in preparation for the market consequences of the evolving EU trade regime in the beef sector. The EU poultry sector The market outlook for poultry meat is seen as favourable given strong consumer preferences for poultry meat and the competitive price of poultry meat vis-à-vis other meats. With the growth in EU poultry-meat production lagging behind the growth in consumption by 2008 the EU has become a net importer of poultry meat. With this trend continuing up to 2014, a growing production deficit will lead to increased EU imports of poultry meat (+8.04% between 2008 and 2014). Exports of poultry meat meanwhile are set to decline by 8.16%, ‘due to strong competition on the world markets by low-cost producers and unfavourable $/€ and Brazilian Real/€ exchange rates’. Despite the growing gap between EU production and consumption EU poultry-meat exports will still amount to 720,000 tonnes in 2014 (down from 881,000 tonnes in 2005), reflecting the EU preference for poultry breast and the need to export poultry parts. Given that ACP markets for poultry parts dominate EU poultry exports, the key indicator in terms of ACP-EU trade is the rate of growth in EU consumption of poultry meat, with increased consumption of breast generating a growing volume of EU exports of poultry parts within the overall poultry-meat export trade. Thus despite the decline in overall EU exports of poultry meat it is quite possible that EU exports of poultry parts to ACP markets could continue to grow. Trends in this regard will in part be determined by the domestic trade policies adopted by individual ACP countries and regions with regard to the trade in poultry products. In this context both the specific tariff-elimination commitments made on poultry parts by ACP governments and the wider provisions of EPAs dealing with trade flows within customs areas and regional groupings (which impinge on the ability of countries to use import-licensing arrangements to regulate intra-regional trade) could come to have a major bearing on trade flows in poultry meat between the EU and individual ACP countries and regions in the coming period. 414 Poultry meat (tonnes) Usable production Consumption Surplus/deficit Exports Imports 2005* 2008 2011 2014 11,564,000 11,435,000 11,776,000 12,047,000 11,439,000 11,473,000 11,835,000 12,174,000 + 135,000 - 38,000 - 59,000 - 127,000 881,000 756,000 747,000 784,000 766,000 826,000 720,000 847,000 % change 2008-14 + 5.35 + 6.11 from + 1.2 to - 1.0 consumption - 8.16 + 8.04 June 2008 Special report Prospects for EU agricultural markets *EU25 0.15 12.4 1 0.9 12.2 0.1 12 0.05 11.8 0.7 0.6 0.5 0 11.6 0.8 0.4 11.4 -0.05 0.3 11.2 -0.1 11 2005* -0.15 2008 Usable production 2011 Consumption 2014 0.2 0.1 0 2005* 2008 Exports Surplus/deficit 2011 2014 Imports The EU pig-meat sector Both pig-meat production and consumption are projected to increase in the medium term, although production growth is expected to be slower than in the 1990s. The rate of increase in consumption of pig meat is projected to be slightly higher than the growth of production. As a consequence while imports of pig meat are projected to be constant between 2008 and 2014, EU exports of pig meat are projected to decline 5.62%. This follows from a readjustment of extra-EU trade in pig meat following enlargement, which saw extra-EU imports fall dramatically (-71.5%) and a much more limited decline in extra-EU exports. This was purely a result of this trade being taken into the EU. The projected decline in EU exports of pig meat over the 200814 period is being exacerbated by increased competition for EU exporters from low-cost producers. In this context EU exports are anticipated to contract from 1,246,000 tonnes in 2008 to 1,176,000 tonnes in 2014. Pig meat (tonnes) Usable production Consumption Surplus/deficit Exports Imports 2005* 21,572,000 20,370,000 + 1,202,000 1,286,000 84,000 2008 22,081,000 20,873,000 + 1,208,000 1,246,000 38,000 2011 22,464,000 21,301,000 + 1,163,000 1,201,000 38,000 2014 % change 2008-14 22,677,000 + 2.70 21,539,000 + 3.19 + - 579 1,138,000 1,176,000 - 5.62 38,000 0 *EU25 1.22 1.4 23 22.5 1.2 22 1.18 21.5 1.2 1 0.8 21 1.16 20.5 1.14 0.6 20 0.4 19.5 1.12 0.2 19 2005* 1.1 2008 Usable production 2011 Consumption 2014 Surplus/deficit 415 0 2005* 2008 Exports 2011 Imports 2014 Special report Prospects for EU agricultural markets Recent press reports have highlighted increased sales of pig meat to western and central African markets, to the detriment of local pig-meat producers. This is leading to calls for ACP governments to take great care in the formulation of those EPA provisions which impinge on the utilisation of various trade-defence instruments in sensitive agricultural sectors. Overall on global meat markets the EC is projecting growing import demand, as consumption grows faster than production. The main beneficiaries of this trend are expected to be low-cost Latin American suppliers. This global trend however could serve to ease some of the current reported pressures on certain African meat markets. However, it should be noted that in the face of intensifying competition from low-cost developing country suppliers on its traditional markets, EU exporters have tended to fall back on African markets as ‘markets of last resort’ in times of difficulties. This tendency needs to be constantly borne in mind. The EU dairy sector Despite the recent substantial under-delivery of quota milk (with a structural under-delivery in the UK, Sweden, Finland and Hungary) milk deliveries are expected to increase slightly up to 2014, even without the likely expansion of quotas as part of the transition to their abolition in 2015. Subsistence production in new member states is expected to decline over the period as greater market orientation is engendered. June 2008 Delivery and production of milk (millions of tonnes) EU27 deliveries 133.5 132.7 132.9 133.6 134.4 134.7 135.0 135.3 135.5 135.6 Year EU27 production 2005 148.9 2006 147.5 2007 147.2 2008 147.3 2009 147.5 2010 147.5 2011 147.4 2012 147.4 2013 147.3 2014 147.3 EU15 production 120.7 119.7 119.6 119.8 120.2 120.2 120.2 120.2 120.2 120.2 EU10 production 21.9 21.7 21.7 21.7 21.7 21.6 21.6 21.6 21.6 21.6 EU2 production 6.3 6.0 5.9 5.8 5.7 5.7 5.6 5.6 5.6 5.6 160 140 120 100 80 60 40 20 0 2005 2006 2007 2008 2009 Deliveries EU27 EU15 production EU2 productiont 2010 2011 2012 2013 2014 EU27 production EU10 production Excluding the impact of any CAP ‘health check’ quota increase ‘the EU27 dairy herd is projected to decline from around 14 million heads in 2007 to approximately 22 million animals by 2014’. Average milk yields are expected to increase from 6.2 tonnes/dairy cow to 6.7 tonnes/dairy cow (+8.1%). 416 June 2008 Special report Prospects for EU agricultural markets Unprecedented increases in global dairy prices occurred in 2007, as a result of growing demand and limited supply. This has created ‘strong competition for raw milk among dairy products within the EU’. Butter production grew by 1.3%, cheese production increased but at a slower rate than in 2006, while skimmed-milk powder also increased ... exports of both skimmed-milk powder and cheese increased despite the elimination of export refunds on these products in June and July 2007 respectively. EU market prices for butter and skimmed-milk powder were at one point 117% and 70% respectively above intervention price levels. While cheese prices started to rise from the summer of 2007. This market situation allowed the elimination of butter intervention stocks. EU27 cheese production is expected to increase by 10% over the medium term compared to 2005 levels (+ 6.47% between 2008 and 2014), in the face of high domestic demand (+ 7.91% between 2008 and 2014). After an initial rise up to 2008, cheese exports are projected to decline to around current levels by 2014 (547,000 tonnes). Imports are projected to increase up to 2008 and beyond, rising by 11.88% between 2008 and 2014 in the face of surging domestic EU demand. Cheese (tonnes) Usable production Consumption Surplus/deficit Exports Imports 2005* 8,641,000 2008 9,117,000 2011 9,484,000 2014 9,707,000 % change 2008-14 + 6.47 8,184,000 + 457,000 551,000 94,000 8,593,000 + 524,000 625,000 101,000 8,998,000 + 486,000 593,000 107,000 9,273,000 + 434,000 547,000 113,000 + 7.91 - 5.03 -12.48 +11.88 *EU25 10 0.6 0.7 9.5 0.5 9 0.4 8.5 0.3 8 0.2 0.6 0.5 0.4 0.3 7.5 0.2 0.1 0.1 7 2005* 0 2008 Usable production 2011 Consumption 2014 0 2005* Surplus/deficit 2008 Exports 2011 2014 Imports Given exceptionally high world market prices EU production of bulk dairy commodities (butter and skimmed-milk powder) increased between 2006 and 2007, but this is expected to return to a declining trend as more milk is diverted to higher-value dairy products. In this context butter production is expected to decline by 6.65% between 2008 and 2014, while consumption is projected to contract by 4.97%. After large declines in exports of butter between 2005 and 2008 (-73.37%), exports are projected to decline by a further 40% between 2008 and 2014. Butter imports are expected to remain constant at 85,000 tonnes between 2008 and 2014. 417 Butter (tonnes) Usable production Consumption Surplus/deficit Special report Prospects for EU agricultural markets Exports Imports 2005* 2,195,000 2008 2,059,000 2011 1,973,000 2014 1,922,000 % change 2008-14 -6.65 1,968,000 + 227,000 2,054,000 + 5,000 1,989,000 - 16,000 1,952,000 - 30,000 338,000 80,000 90,000 85,000 69,000 85,000 54,000 85,000 - 4.97 from +11.5 to - 1.5 consumption - 40.00 0 *EU25 2.25 2.15 0.4 0.2 0.35 0.3 2.1 0.15 2.05 0.1 2 1.95 0.05 1.9 0.25 0.2 0.15 0.1 1.85 0 1.8 1.75 0.05 -0.05 2005* June 2008 0.25 2.2 2008 Usable production 2011 Consumption 2014 0 2005* Surplus/deficit 2008 Exports 2011 2014 Imports EU skimmed-milk powder production is expected to decline by 9.63% between 2008 and 2014 (after a decline of 7.17% between 2005 and 2008). Skimmed-milk powder consumption is also expected to decline between 2008 and 2014, but at the much lower rate of 1.89%. In this context skimmed-milk powder exports are projected to decline by 67.5% between 2008 and 2014 (after a decline of 36.84% between 2005 and 2008), with exports totalling 39,000 tonnes by 2014 compared to 190,000 tonnes in 2005. Skimmed milk (tonnes) Usable production Consumption Surplus/deficit Exports Imports 2005* 962,000 2008 893,000 2011 834,000 2014 807,000 % change 2008-14 - 9.63 847,000 + 115,000 190,000 10,000 793,000 + 100,000 120,000 20,000 792,000 + 42,000 52,000 10,000 778,000 + 29,000 39,000 10,000 -1.89 - 74.78 - 67.50 -50.00 *EU25 0.14 1 0.9 0.12 0.8 0.2 0.18 0.16 0.7 0.1 0.14 0.6 0.08 0.12 0.5 0.1 0.4 0.06 0.08 0.3 0.04 0.06 0.2 0.02 0.1 0 2005* 0 2008 Usable production 2011 Consumption 2014 Surplus/deficit 418 0.04 0.02 0 2005* 2008 Exports 2011 Imports 2014 This creates circumstances favourable to the development of ACP dairy production, provided input costs can be kept under control. If any export threat to a resurgence of ACP dairy production were to emerge it would largely be from Australia and New Zealand which are ‘projected to expand their combined share in butter and whole-milk powder exports, while the USA and India are expected to substantially increase skimmed-milk powder exports’. According to the latest ‘Prospects for EU agricultural markets’ review, EU agricultural incomes are expected to grow by 18.1% between 2006 and 2014 in real terms and per labour unit, although there are marked differences in different regions of the EU (EU15: 7.1% growth, EU10: 31.2%, EU2: 87.6% between 2006-14). While the overall outlook for EU agricultural markets and income over the next seven years appears globally favourable, it clearly remains subject to some important uncertainties, notably with regard to the outcome of the Doha Round, the exchange rate between the US dollar and the euro, future climatic conditions and associated policy developments. June 2008 Special report Prospects for EU agricultural markets It is anticipated that the prevailing high dairy prices will attract increased supplies which will lead to ‘a decline in dairy commodity prices over the short term’, although at a higher plateau that the pre-2007 period. Strong consumer demand is expected to be matched by growing domestic production. 419 Special report July 2008 Special report African food and agricultural sectors and interim EPAs African food and agricultural sectors and interim EPAs Table of contents Introduction ____________________________________________________________ 422 General observations _____________________________________________________ 422 EU duty-free, quota-free access commitments________________________________ 423 Main sectors affected by DFQF access _____________________________________________ 423 The complications in benefiting from DFQF access___________________________________ 424 The longer-term benefits of DFQF access __________________________________________ 425 Tariff treatment of non-IEPA signatories ___________________________________________ 426 ACP tariff-elimination commitments _______________________________________ 427 Central Africa: the Cameroon-EC IEPA____________________________________________ 427 West Africa: Côte d’Ivoire-EC IEPA ______________________________________________ 428 West Africa: Ghana-EC IEPA ___________________________________________________ 429 July 2008 West Africa: reflections_________________________________________________________ 430 Eastern and southern Africa: the East African Community-EU IEPA _____________________ 430 Eastern and southern Africa: the ESA-EU IEPA _____________________________________ 431 ESA: reflections ______________________________________________________________ 435 The SADC configuration: the SADC-EU IEPA ______________________________________ 436 Main trade-related-area provisions impacting on agriculture in ACP countries _____ 438 Trade-defence instruments: wide divergences and uncertain impacts ______________________ 438 Export controls: differing provisions ______________________________________________ 439 Removal of other import controls: limiting policy space ________________________________ 439 How important is policy space? __________________________________________________ 440 The MFN issue_______________________________________________________________ 440 Aid-for-trade issues in the agricultural sector _________________________________ 441 ODI/ECDPM observations_____________________________________________________ 441 The wider aid-for-trade agenda: learning from the EU experience ________________________ 441 421 Introduction This analysis is largely based on the joint ODI/ECDPM report ‘The New EPAs: comparative analysis of their content and the challenges for 2008’, supplemented by analysis and observations drawn from the Agritrade website. July 2008 Special report African food and agricultural sectors and interim EPAs General observations The various interim EPAs (IEPAs) signed are significantly different from each other, even where this concerns countries in the same region (although it should be noted ‘the interim agreement with Côte d’Ivoire specifically raises the possibility of renegotiating the liberalisation schedule as part of a wider ECOWAS EPA’). This makes any aggregate assessment for ACP food and agricultural sectors (FAS) very difficult. Indeed, it requires each of the individual ACP tariff-elimination schedules to be reviewed separately. In addition the treatment of goods not specifically mentioned in the tariff reduction/elimination commitment is far from clear. In some agreements, such as the EAC IEPA this covers a significant volume of current trade (some 38% of the value of Kenyan imports and an even higher share for Tanzania and Uganda). The provisions of the IEPAs impacting on FAS trade and production in African ACP countries include:  the EU commitment to the removal of all residual tariff barriers to ACP exports, which mainly affects food and agricultural products;  ACP tariff-elimination commitments;  various trade-related provisions which impinge on the use of agricultural and agriculturerelated trade policy tools (e.g. trade defence instruments, import-licensing arrangements, reference prices, use of export taxes, competition-policy provisions, public-procurement provisions). Looking towards the conclusion of comprehensive EPAs, a critical issue from an ACP perspective will be the ‘aid for trade’ tools established to support production and trade adjustments in the FAS in ACP countries, in response to the market changes brought about by the implementation of EPAs. These issues need to be borne in mind in reviewing the specific provisions of the different IEPAs and their impact on the FAS in those countries whose governments have initialled IEPAs. 422 EU duty-free, quota-free access commitments July 2008 Special report African food and agricultural sectors and interim EPAs Main sectors affected by DFQF access From January 2008 through the IEPAs, the EU removed all tariffs, quotas and special duties on all exports except sugar and rice (for which special transitional arrangements have been established) from all ACP countries whose governments had initialled such an agreement. The granting of DFQF access has primarily affected agricultural products, since the majority of residual tariff and quota restrictions were concentrated in the FAS. The principal beneficiaries of this move have been those non-LDC ACP countries whose governments have signed IEPAs, since they now enjoy the same access to the EU market as LDCs enjoy under the EBA initiative. According to the ODI/ECDPM report ‘some €1.4 billion of EU imports is affected immediately’ by the granting of DFQF access under the IEPAs, with this impacting primarily on ACP FAS exports (see Table 1). However, to put this in perspective this is ‘just 2% of total EU imports from all non-LDC ACP states in 2006’. The main products affected by this measure are set out below: Table 1: Products eligible for greatest static DFQF gains HS/CN ex 1006 08061010 ex 0201/2 ex 0805 ex 07 ex 19 2302310 18069070 ex 11 ex 0808/9 15091090 04022119 ex 2007/9 08119011 22042185 12129920 21069059 Total Non-LDC ACP exports 2006 (€ ’000) 29,651 28,075 50,507 17,869 6,124 1,733 493 1,174 917 815 248 87 194 60 97 186 124 138,354 Description Rice Fresh table grapes Beef Citrus fruit Some fresh vegetables (tomatoes, onions, leeks, cauliflower, broccoli, chicory, carrots, turnips, spinach, sweetcorn, etc. Preparations of cereals Wheat bran Preparations containing cocoa for making beverages Flour of cereals roots and tubers Apples, pears and plums Olive oil Milk and cream Fruit jams and juices Tropical fruits and nuts Wine Sugar cane Flavoured or coloured sugar syrup Duty paid in 2006 (€ ’000) 4,041.0 3,959.0 2,611.0 599.0 384.0 338.0 244.0 220.0 132.0 77.0 77.0 23.0 19.0 5.0 4.0 3.0 0.5 12,737.0 For rice during the transitional period Guyana and Suriname will see an expansion in their riceexport quotas from a 145,000-tonne quota before the conclusion of the comprehensive EPA to 187,000 tonnes in 2008 and to 250,000 tonnes in 2009, representing increases of 29% and 72% respectively (with these imports taking place on a duty-free basis). Moreover, the scope of the rice quota has been expanded to include both broken rice and whole-grain rice, which means that exporters should be better able to target the higher-priced market for whole-grain rice. The introduction of such administrative reforms has been a long-standing demand of Caribbean rice exporters. The provisions of the Caribbean-EU EPA will thus progressively achieve the longstanding Caribbean objective of duty-free, quota-free access for rice exports. However it should be noted that despite the rapidly rising global rice prices, this does not appear to have been fully reflected in prices paid on the EU market. Between 2001 and 2007 recorded earnings per tonne on Guyana’s and Suriname’s rice exports to the EU fell by 17.4% and 17.5% respectively. 423 July 2008 Special report African food and agricultural sectors and interim EPAs This suggests that global price rises have not been sufficient to compensate for price reductions in the rice sector induced by CAP reform. In the beef sector the IEPAs will also see the final removal of the 8% of the special duty still applied to ACP beef exports. Based on the volumes exported in 2007, for Botswana and Namibia this will yield extra revenues of £1.568 million and £1.21 million respectively. As can be seen from Table 1 the table-grape sector in Namibia will be one of the immediate beneficiaries of duty-free, quota-free access with an annual revenue gain of nearly €4 million. Beyond these areas (which account for 78% of the agricultural exports where the greatest shortterm gains arise) the ODI/ECDPM study concludes that ‘the immediate gains will be relatively small’. Indeed, this report argues that for some ACP countries ‘the principal export benefit of EPAs is less the new opportunity offered by DFQF than the retention of previous levels of access’. This holds particularly true for ACP food and agricultural exports. The complications in benefiting from DFQF access The situation is more complicated than Table 1 implies, with the case of sugar being a good example. In terms of immediate benefits the special transitional arrangements for sugar have nominally resulted in the allocation of additional export quotas of 230,000 tonnes for the 2008/09 export season (see Table 2 for the region-by-region breakdown). However, this appears to simply replace the complementary quantities which ACP exporters previously enjoyed. Table 2: Summary of additional quotas in the 2008/09 season (tonnes w.s.e.) Caribbean comprehensive EPA SADC interim EPA EAC interim EPA ESA interim EPA Pacific interim EPA Total 60,000 50,000 15,000 75,000 30,000 230,000 In addition the expanded access granted for the 2008/09 season needs to be set against the decline in the price paid for ACP sugar by EU importers to €448.8 from October 2008. The subsequent global quota-restricted access of 3.5 million tonnes for the ACP as a whole, involves a twin-safeguard trigger with the following ceilings for non-LDCs: 1.38 million tonnes in 2009/10; 1.45 million tonnes in 2010/11; 1.6 million tonnes from the 2011/2012 season and for the following four seasons. Once this non-LDC sugar import ceiling or the global ACP import ceiling has been reached, safeguard measures involving a ban on further imports can be applied. This quota-restricted access also needs to be set against the further decline in the price paid for ACP sugar by EU exporters of not less than 90% of €335.0 from October 2009 until October 2012. After this date the ACP will receive no price guarantees for their sugar, with the prices paid for ACP sugar by EU importers then being determined by the market (see Table 3). Table 3: ACP sugar-price guarantees under IEPAs Price (€/ tonne raw sugar) 2007/08 €496.8 2008/09 €448.8 2009/10 Not less than 90% of €335.0 2010/11 Not less than 90% of €335.0 2011/12 Not less than 90% of €335.0 2012/13 Marketrelated prices In this context a situation will emerge where the reduction in the value of the preferences granted will be likely to drive a number of ACP suppliers out of the EU market and could even in some instances result in the closure of their sugar industry. While other more competitive ACP suppliers will benefit from expanded exports, the fate of the less competitive ACP sugar suppliers highlights the intimate relationship which exists between the process of CAP reform and the subsequent process of trade liberalisation in sensitive agricultural sectors in the EU. 424 July 2008 Special report African food and agricultural sectors and interim EPAs Which ACP countries benefit and which lose out will be critically determined not only by the underlying competitiveness of production but also by patterns of new investment, both domestic and foreign, and the redefinition of the basis on which the trade in sugar and sugar products takes place in the context of rapidly evolving EU markets. This issue of investment in supply capacity in sectors where EU tariffs and quota restrictions were formerly applied will determine the benefits derived by individual ACP countries from the IEPAs. In the fruit-and-vegetable sector, where ACP exports have been growing in the last 15 years, securing the full benefits of duty-free, quota-free access is made difficult by the manner of application of stricter SPS, food-safety and private-sector standards. This is increasing the costs of serving the EU market and particularly disadvantaging small-scale producers. While policy initiatives can be undertaken to reduce these adverse effects, for example the establishment by mutual agreement of KENYAGAP standards, this approach is currently the exception rather than the rule in addressing this challenge across the ACP. The net effect is thus to narrow the scope for ACP exports rather than broaden the possibilities. The longer-term benefits of DFQF access In the longer term the ODI/ECDPM study identifies four potential benefits of the DFQF access granted under the IEPAs:  the redistribution of import taxes which the EU formerly levied (e.g. in the beef sector) to the benefit of ACP suppliers;  an incentive for EU importers to switch sources of supply to the ACP thereby increasing the volume of ACP exports;  the opening up of new export opportunities in products formally subject to high import duties (e.g. potentially important for processed food products, particularly sugar-containing food products);  the stimulation of investment in, and subsequent supply of, products from ACP countries (e.g. in the sugar sector where there is strong evidence that DFQF access is impacting on the investment and sourcing decisions of EU sugar companies), although to date the EBA initiative has had the greatest impact in this regard. Words of caution Overall the ODI/ECDPM study concludes that ‘it does not appear likely that there will be a sudden diversion of EU imports towards ACP suppliers’ as a result of the granting of DFQF access under the IEPAs. In the longer term, while processed food products potentially hold the greatest scope for expansion, this will be critically determined by the rules of origin applied to combination food products exported from ACP countries. A further complicating factor will be the food-safety rules and private quality standards applied to ACP food and agricultural exports, particularly the cost of verification of compliance with such public and private standards. This is an area where aid-for-trade support and the establishment of dialogue processes with regard to implementation arrangements (not the standards per se but how they are applied in specific national and regional contexts and under different production systems) could prove invaluable. Whether such support can be effectively mobilised could well prove to be a critical factor in whether any of the long-term benefits of duty free, quota-free access are realised in the particular circumstances faced by individual ACP countries. 425 The ODI/ECDPM study notes that ‘recent history suggests that new trade preferences granted to the ACP have been quite quickly extended by the EU to other suppliers’. This process is compounded by the shift from price support to direct aid payments under way in sectors in the EU of considerable importance to ACP agricultural exports. It thus seems likely that the ACP will have only a small window of opportunity to exploit these preferences. July 2008 Special report African food and agricultural sectors and interim EPAs The narrowness of this window, outside of those sectors where EU companies are restructuring at a global level (sugar and vegetable sectors) could well adversely affect investment flows into the development of new production in ACP countries. Implications for aid-for-trade needs This suggests a need for ‘pump priming’ support designed to encourage investment which follows market trends and is delivered in support of private-sector-led initiatives designed to adjust ACP production and trade structures in line with the new market realities. Such programmes could greatly assist ACP private sectors in exploiting the preferences while they exist. This would appear to pose a major challenge for expanding the ‘aid for trade’ programmes of the EU and its member states, which to date have not sought to address directly the issue of how to deliver ‘pump priming’ support to market-led, private-sector-based production and trade adjustments in ACP countries . However it should equally be noted that investment flows are also likely to be influenced by the wider market context both in ACP countries and regions and beyond and the domestic policies pursued by individual ACP governments. The impact of domestic policy on investment flows, once certain minimum conditions for investment have been met, is by no means clear. UNCTAD has suggested, on the basis of its own analysis, that there is no correlation between the conclusion of investment agreements and flows of foreign direct investment, suggesting that there are no simple solutions to the domestic policy challenges faced by ACP governments when it comes to encouraging investment in the structural economic transformation of their economies. Tariff treatment of non-IEPA signatories Before closing this review of EU DFQF treatment under IEPAs it should be noted that the majority of ACP governments have not initialled interim EPAs. For LDC ACP countries this has not posed any major challenges, since they have been able to export under the terms of the EBA initiative, which also grants DFQF access. However, non-LDC ACP countries, whose governments have not initialled IEPAs have faced the reimposition of standard GSP duties. According to the ODI/ECDPM study this has adversely affected ‘1.2% of Nigeria’s exports’ to the EU, ‘6% of Gabon’s exports and 3.5% of Congo’s’. While some of these newly imposed tariffs are low, some include specific duties which are commonly high, while some include high ad valorem duties. This is impacting negatively on the largely agricultural sectors where these duties have been re-imposed. Against this background Nigeria has recently applied for accession to the GSP+ scheme. 426 ACP tariff-elimination commitments July 2008 Special report African food and agricultural sectors and interim EPAs Central Africa: the Cameroon-EC IEPA The government of Cameroon is the only central African government to have initialled an IEPA. Tariff liberalisation ‘will not commence until 2010’, providing two years for the government to bring its tariffs into line with the proposed CEMAC common external tariff. Overall tariff liberalisation under the Cameroon EPA is ‘moderately back loaded’, yet ‘Cameroon will experience some very early effects’ with the first tranche of liberalisation from 2010-2013 including ‘some high-tariff items’, while ‘almost half of Cameroon’s imports from the EU in 2005-06 will be fully liberalised within 10 years’. Some food and agricultural products will be subject to tariff elimination in the first phase, including certain potatoes and tubers, although the value of these imports is not significant. The first phase of liberalisation also includes agricultural and horticultural appliances which should serve to reduce capital-investment costs in the agricultural sector (see Table 4). Table 4: Cameroon: first-phase agricultural commitments NTL code Ave. imports 2004-06 $ ’000 010110 5 010611 0 010612 010619 - 010620 - 051110 071410 4 - 071420 - 071490 2 Description Tariff % Pure-bred breeding horses and asses Live primates Live whales, dolphins and porpoises ‘mammals of the order cetacea’ and ... Live mammals (excl. primates, whales, dolphins and porpoises ‘mammals of the ...’ Live reptiles ‘e.g. snakes, turtles, alligators, caymans, iguanas, gavials and ...’ Bovine semen Fresh, chilled, frozen or dried roots and tubers of manioc ‘cassava’, whether or ... Sweet potatoes, fresh, chilled, frozen or dried, whether or not sliced or in the ... Roots and tubers of arrowroot, salep, jerusalem artichokes and similar roots and ... 30 30 30 30 30 30 30 30 30 Products excluded from tariff-liberalisation commitments ‘accounted for 21% of imports from the EU in 2005-06’, although ‘less than one-third are agricultural products’, covering some 354 tariff lines (see Table 5 for the agricultural product exclusions). The main food and agricultural products excluded are meat products, vegetables, cereal-based food products, coffee, cocoa, sugar and sugar confectionery. The EU does not produce some of these products so the reason for their exclusion is unclear, although it could be linked to the limited capacities in ACP countries to effectively enforce rules of origin for EU goods imported under the preferential provisions of the IEPAs. 427 Table 5: Cameroon: agricultural exclusions and the share of excluded trade Special report African food and agricultural sectors and interim EPAs HS2 52 03 02 07 20 15 11 16 04 22 09 19 18 17 24 08 12 13 10 05 06 Description Share of total (%) Cotton 10.4 Fish and crustaceans, molluscs and other aquatic invertebrates 5.2 Meat and edible meat offal 4.1 Edible vegetables and certain roots and tubers 3.8 Preparations of vegetables, fruit, nuts or other parts of plants 3.2 Animal or vegetable fats and oils and their cleavage products; prepared 2.8 edible fats; animal or vegetable waxes Products of the milling industry; malt; starches; inulin; wheat gluten 2.2 Preparations of meat, of fish or of crustaceans, molluscs or other 1.9 aquatic invertebrates Dairy produce; birds’ eggs; natural honey; edible products of animal 1.7 origin, not elsewhere specified Beverages, spirits and vinegar 1.7 Coffee, tea, maté and spices 1.6 Preparations of cereals, flour, starch or milk; pastrycooks’ products 1.3 Cocoa and cocoa preparations 0.8 Sugars and sugar confectionery 0.7 Tobacco and manufactured tobacco substitutes 0.7 Edible fruit and nuts; peel of citrus fruits or melons 0.6 Oilseeds and oleaginous fruits; miscellaneous grains, seeds and fruit; 0.6 industrial or medicinal plants; straw and fodder Lac; gums, resins and other vegetable saps and extracts 0.4 Cereals 0.2 Products of animal origin, not elsewhere specified or included 0.1 Live trees and other plants; bulbs, roots and the like; cut flowers and 0.1 ornamental foliage July 2008 West Africa: Côte d’Ivoire-EC IEPA The government of Côte d’Ivoire is one of only two west African governments to have initialled an IEPA. Tariff-liberalisation commitments will commence immediately and will be completed by 2022. Goods to be liberalised in the first phase up to 2012 ‘represented almost 60% of Côte d’Ivoire’s imports from the EU in 2004-06’ (see Table 6 for details). Although some of these goods were already zero-rated, others had duties of up to 20%. Five agricultural products with imports of over $1 million are included in the first tranche of liberalisation commitments (with a further six fisheries products included). According to the ODI/ECDPM study ‘several of the agricultural products would appear to be items that might compete with domestic producers’. Table 6: Côte d’Ivoire: first-phase agricultural commitments NTL code 1602500000 Ave. imports 2004-06 $ ’000 1,254 2005400000 1,038 2106901000 0303420000 0303430000 13,493 24,922 8,268 0303490000 1,396 0303500000 0303740000 1,123 1,328 0303790000 11,463 1108120000 1,396 Description Prepared or preserved meat or offal of bovine animals (excl. sausages and ... Peas ‘Pisum Sativum’, prepared or preserved otherwise than by vinegar or ... Food preparations, n.e.s.: No description at level 8 Frozen yellowfin tunas ‘Thunnus albacares’ Frozen skipjack or stripe-bellied bonito ‘Euthynnus Katsuwonus- pelamis’ Frozen tunas of the genus ‘Thunnus’ (excl. Thunnus alalunga, Thunnus ... Frozen herrings ‘Clupea harengus, Clupea pallasii’ Frozen mackerel ‘Scomber scombrus, Scomber australasicus, Scomber’ Frozen freshwater and saltwater fish (excl. salmonidae, flat fish, tunas ... Maize starch 428 Tariff % 20 20 20 10 10 10 10 10 10 10 Exclusions from tariff-liberalisation commitments accounted for 20% of the country’s imports from the EU in 2004-06’, with just over one-third of these being food and agricultural products (some 226 tariff lines; see Table 7 for summary details). Table 7: Côte d’Ivoire: agricultural exclusions and the share of excluded trade HS2 Description July 2008 Special report African food and agricultural sectors and interim EPAs 52 15 09 02 18 20 22 04 01 24 07 17 10 03 11 Share of total % Cotton 21.2 Animal or vegetable fats and oils and their cleavage products; prepared edible 6.5 fats; animal or vegetable waxes Coffee, tea, maté and spices 5.6 Meat and edible meat offal 4.0 Cocoa and cocoa preparations 3.1 Preparations of vegetables, fruit, nuts or other parts of plants 3.0 Beverages, spirits and vinegar 2.8 Dairy produce; birds’ eggs; natural honey; edible products of animal origin, 1.7 not elsewhere specified Live animals 1.4 Tobacco and manufactured tobacco substitutes 1.2 Edible vegetables and certain roots and tubers 1.1 Sugars and sugar confectionery 1.1 Cereals 0.8 Fish and crustaceans, molluscs and other aquatic invertebrates 0.5 Products of the milling industry; malt; starches; inulin; wheat gluten 0.5 West Africa: Ghana-EC IEPA The government of Ghana is the second west African government to have initialled an IEPA. Tariff-liberalisation commitments will start in 2009 and will be completed by 2022. ‘The liberalisation schedule is front loaded’. According to the ODI/ECDPM report, products being liberalised in the first six years accounted for over a quarter of imports from the EU in 2004-06 (see Table 8). The items with the highest tariffs applied fall into this first-phase liberalisation schedule. Over 70% of imports from the EU will be liberalised within 10 years. Four agricultural items are included in first phase liberalisation, including cuts of turkey meat; wheat flour and oats. Table 8: Ghana: first-phase agricultural commitments NTL code 020727 110100 110412 330210 Ave. imports 2004-06 $ ’000 1,297 1,245 1,536 8,996 Description Tariff % Frozen cuts and edible offal of turkeys 20 Wheat or meslin flour 20 Rolled or flaked grains of oats 20 Mixtures of odoriferous substances and mixtures incl. 10 alcohol Some 20% of current imports from the EU are to be excluded from liberalisation, with 28% of these items being agricultural and 62% of these items falling in the highest tariff band (see Table 9). 429 Table 9: Ghana: agricultural exclusions and the share of excluded trade HS2 Description July 2008 Special report African food and agricultural sectors and interim EPAs 52 03 02 07 15 08 09 20 16 22 10 13 11 18 04 17 24 01 21 19 Cotton Fish and crustaceans, molluscs and other aquatic invertebrates Meat and edible meat offal Edible vegetables and certain roots and tubers Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animal or vegetable waxes Edible fruit and nuts; peel of citrus fruits or melons Coffee, tea, maté and spices Preparations of vegetables, fruit, nuts or other parts of plants Preparations of meat, of fish or of crustaceans, molluscs or other aquatic invertebrates Beverages, spirits and vinegar Cereals Lac; gums, resins and other vegetable saps and extracts Products of the milling industry; malt; starches; inulin; wheat gluten Cocoa and cocoa preparations Dairy produce; birds’ eggs; natural honey; edible products of animal origin, not elsewhere specified Sugars and sugar confectionery Tobacco and manufactured tobacco substitutes Live animals Misc. edible preparations Preparations of cereals, flour, starch or milk, pastrycook products Share of total % 5.7 4.6 3.3 3.6 2.8 2.5 2.2 2.2 1.8 1.8 1.0 0.9 0.8 0.8 1.7 1.1 1.2 0.4 0.2 0.1 West Africa: reflections As can be seen above, Ghana has a larger number of product exclusions than Côte d’Ivoire, excluding certain edible fruit and nuts; peel of citrus fruits or melons (HS 8), preparations of meat (HS 16), lac; gums, resins and other vegetable saps and extracts (HS 13), misc. edible preparations (HS 21) and preparations of cereals, flour, starch or milk, pastrycook products (HS 19), which Côte d’Ivoire does not exclude. Equally there is no overlap between the first-phase tariff-elimination commitments of Ghana and Côte d’Ivoire in the agricultural sector. There is thus an incompatibility between both the first-stage tariff-elimination commitments and the exclusion lists in the agricultural component of the tariff-reduction schedules of Ghana and Côte d’Ivoire. Under any regional agreement this inconsistency would need to be reconciled. However, reconciling these inconsistencies between the Ghanaian and Ivorian offers would be greatly complicated by any moves towards a region-wide agreement, as more national tariff offers are placed on the table. Eastern and southern Africa: the East African Community-EU IEPA The EAC-EU IEPA includes one of a multiplicity of schedules for separate and distinct tariffreduction commitments submitted by ACP countries which negotiated in the context of the ESA configuration. In the case of the EAC however no tariff cuts will be made until 2015. According to the ODI/ECDPM study, ‘Liberalisation will occur in three tranches. The first is in 2010 and involves only products with a CET of zero percent. The second will be between 2015 and 2023 and the third between 2020 and 2033. In other words, countries have 24 years from the date of attainment of the CET rates (and 26 years from 2008) to complete the EPA liberalisation process. This makes the EAC EPA the one with the longest transition period.’ The EAC IEPA is thus the most back loaded of the interim agreements concluded, since EAC countries will only need to start ‘removing positive tariffs on a significant proportion of imports during the second phase’ (2015-23). 430 In terms of EAC exclusions from tariff-elimination commitments, around a third in terms of the volume of trade covered are agricultural products (see Table 10). Special report African food and agricultural sectors and interim EPAs Table 10: EAC: agricultural exclusions and the share of excluded trade HS2 52 20 07 09 04 08 02 22 16 19 21 17 15 11 03 24 10 18 23 01 06 July 2008 14 Description Share of total % Cotton 5.3 Preparations of vegetables, fruit, nuts or other parts of plants 3.9 Edible vegetables and certain roots and tubers 3.7 Coffee, tea, maté and spices 2.0 Dairy produce; birds’ eggs; natural honey; edible products of animal 1.8 origin, not elsewhere specified Edible fruit and nuts; peel of citrus fruits or melons 1.8 Meat and edible meat offal 1.7 Beverages, spirits and vinegar 1.7 Preparations of meat, of fish or of crustaceans, molluscs or other 1.5 aquatic invertebrates Preparations of cereals, flour, starch or milk; pastrycooks’ products 1.4 Miscellaneous edible preparations 1.2 Sugars and sugar confectionery 1.1 Animal or vegetable fats and oils and their cleavage products; prepared 1.0 edible fats; animal or vegetable waxes Products of the milling industry; malt; starches; inulin; wheat gluten 0.9 Fish and crustaceans, molluscs and other aquatic invertebrates 0.7 Tobacco and manufactured tobacco substitutes 0.7 Cereals 0.6 Cocoa and cocoa preparations 0.4 Residues and waste from the food industries; prepared animal fodder 0.2 Live animals 0.1 Live trees and other plants; bulbs, roots and the like; cut flowers and 0.1 ornamental foliage Vegetable plaiting materials; vegetable products n.e.s. 0.1 Eastern and southern Africa: the ESA-EU IEPA ESA IEPA signatories consist of four island states (Comoros, Madagascar, Mauritius and Seychelles) and Zimbabwe. Each government has established tariff-reduction schedules in relation to the COMESA common external tariff, however ‘the details of their liberalisation and of their exclusion baskets are different’. An additional problem in the COMESA context is that although the structure of the common external tariff has been agreed (raw materials and capital goods – CET zero; intermediate goods – CET 10%; final products – CET 25%), no agreement has been reached on ‘a formal definition that allocated each item in the nomenclature to one or other group’. Each category appears to be defined differently in each country’s tariff schedules. Indeed, ‘there are, in fact, over a thousand items being liberalised by one or more of the ESA countries where there is some degree of discrepancy in the CET classification’, with in some instances the classification of the same product being different in all the tariff schedules. While this will greatly complicate the conclusion of COMESA-wide tariff-elimination commitments, the FAS is little affected by this problem. Under the various ESA IEPA liberalisation commitments ‘raw materials and capital goods are liberalised first in a single year (although the actual year varies)’. Tariff reductions are not spread evenly across implementation periods but tend to be ‘bulky cuts’ implemented in specific years within the various phases (e.g. 2013, 2014, 2016, 2017, 2020, 2022). In the case of the Comoros, ‘all of the items being liberalised in the first tranche face a CET of zero’. In terms of product exclusions, for the Comoros 19.3% of imports from the EU in 200406 are excluded, with two-thirds of these items being agricultural products (see Table 11). 431 However ‘not all of the agricultural goods excluded are items that the EU can necessarily supply’. July 2008 Special report African food and agricultural sectors and interim EPAs Table 11: Comoros: agricultural exclusions and the share of excluded trade HS2 08 02 09 03 07 16 04 05 11 15 20 10 24 Description Edible fruit and nuts; peel of citrus fruits or melons Meat and edible meat offal Coffee, tea, maté and spices Fish and crustaceans, molluscs and other aquatic invertebrates Edible vegetables and certain roots and tubers Preparations of meat, of fish or of crustaceans, molluscs or other aquatic invertebrates Dairy produce; birds’ eggs; natural honey; edible products of animal origin, not elsewhere specified Products of animal origin, not elsewhere specified or included Products of the milling industry; malt; starches; inulin; wheat gluten Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animal or vegetable waxes Preparations of vegetables, fruits, nuts or other parts of plants Cereals Tobacco and manufactured tobacco substitutes Share of total (%) 17.2 9.7 9.7 8.6 5.4 5.4 3.2 3.2 2.2 2.2 2.2 1.1 1.1 For Madagascar there is no discernible back loading in the tariff-liberalisation commitments made. ‘On the contrary, the items that will be liberalised in 2013 accounted for 37% of the country’s imports from the EU in 2004-06, implying a sharp front loading’. However ‘none of the items being liberalised in 2013 are agricultural products’. In terms of product exclusions, for Madagascar 19.3% of imports from the EU in 2004-06 are excluded, with just over two-thirds of these items being agricultural products (see Table 12). Some of the products excluded from liberalisation commitments are already zero-rated. However, ‘the agricultural exclusions are, in the main, goods for which the EU is a plausible supplier of items that would compete directly or indirectly with local farmers’. Table 12: Madagascar: agricultural exclusions and the share of excluded trade HS2 02 07 20 03 52 04 22 08 16 19 15 11 17 21 18 24 09 10 12 13 Description Meat and edible meat offal Edible vegetables and certain roots and tubers Preparations of vegetables, fruits, nuts or other parts of plants Fish and crustaceans, molluscs and other aquatic invertebrates Cotton Dairy produce; birds’ eggs; natural honey; edible products of animal origin, not elsewhere specified Beverages, spirits and vinegar Edible fruit and nuts; peel of citrus fruits or melons Preparations of meat, of fish or of crustaceans, molluscs or other aquatic invertebrates Preparations of cereals, flour, starch or milk, pastrycooks’ products Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animal or vegetable waxes Products of the milling industry; malt; starches; inulin; wheat gluten Sugars and sugar confectionery Misc. edible preparations Cocoa and cocoa preparations Tobacco and manufactured tobacco substitutes Coffee, tea, mate and spices Cereals Oilseeds and oleaginous fruits; miscellaneous grains, seeds and fruit; industrial or medicinal plants; straw and fodder Lac; gums, resins and other vegetable saps and extracts 432 Share of total % 9.6 8.0 7.8 6.8 6.4 4.5 3.7 3.5 3.3 3.1 3.0 2.8 2.6 2.1 1.6 1.6 1.4 0.5 0.2 0.2 For Mauritius the ‘first tranche of liberalisation is to be completed in 2008’. According to the ODI/ECDPM report ‘This group of products accounted for one quarter of imports from the EU in 2004-06. Since only 4.4% of imports are being excluded altogether, the great bulk of imports (71% in total) will be liberalised between 2013 and 2022’ (see Table 13 for details). This is in line with the commitment of Mauritius to be a ‘duty-free island’. While some of these items have high tariffs, traded volumes have been very small. This group includes some 23 agricultural items, including a range of animal and meat products and tobacco products. July 2008 Special report African food and agricultural sectors and interim EPAs Table 13: Mauritius: first-phase agricultural commitments NTL code 010310 010391 010392 010599 020630 020641 020649 020725 020726 020727 020732 020733 020734 020735 020736 021011 021012 021019 240110 240120 240130 Ave. imports 2004-06 $ ’000 0 0 40 4 115 3 1 34 12 45 3 0 187 - Description Tariff % 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 Pure bred breeding swine Live pure bred swine below 50 kg Live pure bred swine above 50 kg Live poultry Fresh or chilled edible offal of swine Fresh edible livers of swine Edible offal of swine frozen Frozen turkeys not cut into pieces Fresh or chilled cuts of turkey Frozen cuts of turkey Fresh or chilled ducks, geese and guinea fowl Frozen ducks, geese and guinea fowl Fresh or chilled fatty livers of ducks, geese or guinea fowl Fresh or chilled edible offal of ducks, geese or guinea fowl Frozen edible offal of ducks, geese or guinea fowl Hams, shoulders and cuts Bellies and cuts of swine Meat of swine salted in brine Tobacco, unstemmed or unstripped Tobacco, partly or wholly stemmed or stripped Tobacco refuse Of the 185 items excluded half are agricultural products, while 58% face the highest tariffs. There is however a group of products which face zero tariffs which are being excluded from any liberalisation commitments. The main excluded items for Mauritius are ‘processed foods and light manufacturers, for all of which cheaper EU imports might compete with domestic production’ (see Table 14). Table 14: Mauritius: agricultural exclusions and the share of excluded trade HS2 20 02 17 16 15 19 22 04 21 01 06 09 11 Description Preparations of vegetables, fruits, nuts or other parts of plants Meat and edible meat offal Sugars and sugar confectionery Preparations of meat, of fish or of crustaceans, molluscs or other aquatic invertebrates Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animal or vegetable waxes Preparations of cereals, flour, starch or milk, pastrycooks’ products Beverages, spirits and vinegar Dairy produce; birds’ eggs; natural honey; edible products of animal origin not elsewhere specified Misc. edible preparations Live animals Live trees and other plants, bulbs, roots and the like, cut flowers and ornamental foliage Coffee, tea, maté and spices Products of the milling industry; malt; starches; inulin; wheat gluten 433 Share of total % 20.0 5.9 4.3 3.2 2.7 2.7 2.7 2.2 2.1 1.1 1.1 1.1 1.1 For the Seychelles the first-phase tariff reductions will begin in 2013. This covers an extensive range of food (including many fish products) and agricultural products (see Table 15). Overall for the Seychelles the effect of creating a COMESA customs union far outweighs the impact of implementing an EPA in terms of the tariff reductions required. Table 15: Seychelles: first-phase agricultural commitments July 2008 Special report African food and agricultural sectors and interim EPAs NTL code 040110 040120 040700 050100 050210 050290 050300 050400 050510 050590 050610 050690 050710 050790 060410 060491 060499 070511 070519 070930 080440 080450 080720 090111 090112 090300 091050 230910 Ave. imports 2004-06 $ ’000 1.00 0.20 516.00 3.00 25.00 0.30 1.00 3.00 3.00 0.03 1.00 59.00 0.10 - Description Milk and cream Milk and cream Birds’ eggs Human hair Pigs’, hogs’ or boars’ bristles Badger and other brush-making hair Horsehair or horsehair waste Guts, bladders and stomachs of animals Feathers Skins and other parts of birds Ossein and bones treated with acid Bones and horn cores Ivory inworked Tortoise shell Mosses and lichens Foliage Foliage Fresh or chilled cabbage Fresh or chilled lettuce Fresh or chilled aubergines Fresh or dried avocadoes Fresh or dried guava Fresh paw paw (papaya) Coffee (excluding roasted coffee) Decaffeinated coffee (excluding roasted) Maté Curry Dog or cat food, put up for retail sale Tariff % 50 50 200 25 25 25 25 25 25 25 25 25 200 200 100 100 100 25 25 25 50 50 50 50 50 50 100 50 ‘Only 2.5% of the value of the Seychelles imports from the EU in 2004-06 are excluded from any liberalisation’, but 37% of these products are agricultural products (see Table 16), although according to the ODI/ECDPM analysis, ‘exclusions appear primarily to be related to revenue generation rather than domestic production’. Table 16: Seychelles: agricultural exclusions and the share of excluded trade HS2 Description 03 22 24 02 09 16 07 08 Fish, crustaceans, molluscs Beverages, spirits and vinegar Tobacco and manufactured tobacco substitutes Meat and edible meat offal Coffee, tea, maté and spices Preparations of meat, of fish or of crustaceans, molluscs or other aquatic invertebrates Edible vegetables and certain roots and tubers Edible fruit and nuts; peel of citrus fruits or melons 434 Share of total % 15.3 14.5 6.9 For Zimbabwe the first tranche of liberalisation is in 2013, with further reductions in 2015, 2018, 2021 and 2023. Zimbabwe’s first-stage tariff reductions for agricultural products include: live animals, meat products, fish, dairy products, vegetables, fruit and nuts, coffee, tea, cereals and oilseeds and broken rice (see Table 17). According to the ODI/ECDPM study ‘in these areas it is entirely possible that EU imports would compete with domestic production’. However, this could well reflect the growing interest of Zimbabwean companies in trading with the region, be it in domestically produced goods or imported products. July 2008 Special report African food and agricultural sectors and interim EPAs Table 17: Zimbabwe: first-phase agricultural commitments HS 2 01 02 03 04 05 07 08 09 10 12 100640 Ave. imports 200406 $ ’000 46 0.4 0.01 0.1 4 2 1 0.1 4,853 2,087 Description Live animals Meat and edible meat offal Fish and crustaceans, molluscs Dairy produce Products of animal origin Edible vegetables, and certain roots and tubers Edible fruit and nuts; peel of citrus fruit or melons Coffee, tea, maté and spices Cereals Oilseeds, oleaginous fruits, misc. grains, seeds and fruits Broken rice Tariff % 30 40 40 40 40 40 40 40 25 40 15 Zimbabwe is seeking to exclude from liberalisation a basket of products which represents about one-fifth of its imports from the EU in the 2004-06 period. ‘Only a relatively small number of these are agricultural products’ (some 68 tariff lines – see Table 18). Table 18: Zimbabwe: agricultural exclusions and the share of excluded trade HS2 Description 52 22 04 Cotton Beverages, spirits and vinegar Dairy produce; birds’ eggs; natural honey; edible products of animal origin not elsewhere specified Cereals Products of the milling industry; malt; starches; inulin; wheat gluten Cocoa and cocoa preparations Misc. edible preparations Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animal or vegetable waxes Sugar and sugar confectionery Tobacco and manufactured tobacco substitutes Edible fruit and nuts; peel of citrus fruits or melons Coffee, tea, maté and spices 10 11 18 21 15 17 24 08 09 Share of total % 18.0 2.4 1.7 1.1 0.8 0.7 0.6 0.3 0.3 0.3 0.1 0.1 ESA: reflections Excluding for the moment the EAC EPA, of the two-digit agricultural classifications subject to some level of exclusions by governments which have initialled an IEPA, there is only one category ‘coffee, tea, maté and spices’ common to all five countries. In all the other areas subject to exclusions at least one ESA government has initialled an IEPA which has subjected these ‘excluded’ products to some level of tariff elimination. In addition in terms of first-phase liberalisation commitments there is considerable divergence in the agricultural and food products subject to ‘front-loaded’ tariff elimination. There is thus in the agricultural component of the tariff-reduction schedules an incompatibility between both the first-stage tariff-elimination commitments and the exclusions lists of Comoros, Madagascar, Mauritius, Seychelles and Zimbabwe. 435 Under any regional agreement this inconsistency would need to be reconciled. However, moving towards a comprehensive regional agreement which embraced all the countries which were formerly part of the ESA EPA negotiating configuration would see this problem of ensuring consistency across national tariff offers greatly compounded. July 2008 Special report African food and agricultural sectors and interim EPAs The SADC configuration: the SADC-EU IEPA Despite efforts to integrate South Africa into SADC EPA negotiations, in the light of the preexistence of the Southern African Customs Union (SACU) Agreement and the EU-South Africa Trade, Development and Cooperation Agreement (TDCA), only five of the SADCconfiguration governments (Botswana, Swaziland, Lesotho, Mozambique and Namibia – with reservations) have initialled the SADC-EU IEPA. South Africa, with by far the largest economy, has declined to initial the agreement, while Angola has not yet taken a decision to initial and Tanzania has initialled the East African Community-EU IEPA. The absence of South Africa from the SADC-EU IEPA throws up major legal problems in terms of the implementation of the agreement under SACU law. It also throws up very practical difficulties within the SACU. According to the ODI/ECDPM report ‘all the liberalisation that South Africa is required to make under the TDCA has either already happened or will not happen until 2012’. In this context any liberalisation commitments made by the BLNS which remove current duties before 2012 must involve ‘more rapid tariff removal than South Africa is required to make’ under the TDCA. This could even involve the removal of tariffs on which South Africa has made no commitments. ODI/ECDPM notes ‘there does exist some earlierthan-TDCA liberalisation’. Indeed, ‘all the items in the tranche to be liberalised between 2008 and 2010 faced positive tariffs (of between 7.5% and 22.5%) in 2006’. This will mean that South Africa either has to:   ‘establish differential transition tariffs for imports’; ‘bring forward its own liberalisation’ commitments. Alternatively the EU would need to accept that ‘some items scheduled for full liberalisation by 2012 under the TDCA will not be liberalised by BLNS until 2018’. In addition, Namibia needs to ‘catch up’ to the starting point which the other BLS countries have with regard to tariffs applied on imports from the EU, with this requiring the elimination of certain duties not currently charged under the TDCA. This creates a very complicated situation in the SACU and it is far from clear how it is to be resolved. According to the ODI/ECDPM study, for the BLNS ‘55% of imports are to be liberalised in 2008 and by 2012 the liberalisation process will have been completed … on 84% of the country’s imports.’ Thus by 2012 the BLNS import policy will be broadly similar to that of South Africa under the TDCA. ‘Just 67 items will be liberalised after 2012 (by 2018) and between them they account for only 0.8% of BLNS imports from the EU’. The main areas where the BLNS tariffs will be eliminated which are not covered by the TDCA are fisheries products. This is linked to the long-standing linkage which the EU has established between fisheries market-access issues and the conclusion of a fisheries-access agreement for EU vessels to South African fishing grounds, a linkage which now appears to have been allowed to fall by the wayside for Namibia, but not for South Africa. According to the ODI/ECDPM study, for the BLNS ‘just 2.8% of goods are to be excluded from liberalisation altogether’. The agricultural products excluded are shown in Table 19 and represent 22.1% of the total value of products excluded from tariff-liberalisation commitments. 436 Table 19: BLNS: agricultural exclusions and the share of excluded trade HS2 Description July 2008 Special report African food and agricultural sectors and interim EPAs 52 02 04 16 11 17 10 21 19 Cotton Meat and edible meat offal Dairy produce; birds’ eggs; natural honey; edible products of animal origin not elsewhere specified Preparations of meat, or fish or of crustaceans, molluscs Products of the milling industry; malt; starches; inulin; wheat gluten Sugar and sugar confectionery Cereals Misc. edible preparations Preparations of cereals, flour, starch or milk, pastrycooks’ products Share of total % 11.7 5.0 1.4 1.3 1.2 0.6 0.4 0.3 0.2 Mozambique has the shortest liberalisation period applicable to any ACP country (to be completed within 11 years) and has the most heavily ‘front-loaded’ liberalisation commitments. The agricultural products covered by the first-phase liberalisation commitments are set out in Table 20, (although it should be noted that average imports of these products totalled only $51,000): Table 20: Mozambique: first-phase commitments HS2 02 07 08 09 10 12 18 20 Ave. imports 2004-06 $ ’000 5 2 35 8 0.4 1 Description Meat and edible meat offal Edible vegetables, and certain roots and tubers Edible fruit and nuts; peel of citrus fruit or melons Coffee, tea, maté and spices Cereals Oilseeds, oleaginous fruits, misc. grains, seeds and fruits Cocoa and cocoa preparations Preparations of vegetables Tariff % 20 20 20 20 20 20 20 20 However according to the ODI/ECDPM analysis Mozambique has a ‘much higher proportion of imports … excluded from any liberalisation’, some 37.7% of imports from the EU. No explanation for this is offered, with the answer appearing to lie in the approach to liberalisation adopted in Mozambique, which is different to that applied elsewhere. According to the ODI/ECDPM report ‘the Mozambique agreement does not provide a positive list of exclusions’. Rather it lists the tariff lines already subject to duty-free treatment (85 tariff lines accounting for 9% of imports from the EU), the 1,966 tariff lines to be subject to immediate liberalisation in 2008 (50.8% of imports from the EU) and the 65 tariff lines (2.6% of imports) to be liberalised in 2018. This leaves 3,268 eight-digit items not listed in the agreement, with only items listed in the agreement subject to liberalisation commitments. Mozambique’s apparent exclusions include the products set out in Table 21 below: 437 Table 21: Mozambique: agricultural exclusions and the share of excluded trade HS2 Description Special report African food and agricultural sectors and interim EPAs 52 03 07 02 20 15 04 08 12 11 16 09 05 22 01 21 17 13 10 24 06 July 2008 18 Cotton Fish and crustaceans, molluscs and other aquatic invertebrates Edible vegetables and certain roots and tubers Meat and edible offal Preparations of vegetables, fruits, nuts or other parts of plants Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animal or vegetable waxes Dairy produce; birds’ eggs; natural honey; edible products of animal origin, not elsewhere specified Edible fruit and nuts; peel of citrus fruits or melons Oilseeds and oleaginous fruits; miscellaneous grains, seeds and fruit; industrial or medicinal plants; straw and fodder Products of the milling industry; malt; starches; inulin; wheat gluten Preparations of meat, of fish or of crustaceans, molluscs or other aquatic invertebrates Coffee, tea, maté and spices Products of animal origin Beverages, spirits and vinegar Live animals Misc. edible preparations Sugars and sugar confectionery Lac; gums, resins and other vegetable saps and extracts Cereals Tobacco and manufactured tobacco substitutes Live trees and other plants, bulbs, roots and the like, cut flowers and ornamental foliage Cocoa and cocoa preparations Share of total % 4.0 2.9 2.0 1.6 1.6 1.5 1.0 1.0 1.0 0.8 0.8 0.6 0.6 0.6 0.5 0.5 0.4 0.4 0.3 0.2 0.2 0.1 Main trade-related-area provisions impacting on agriculture in ACP countries Trade-defence instruments: wide divergences and uncertain impacts While one can be fairly definite on the tariff-elimination commitments made (although not necessarily in regard to what will happen in practice), it is far more difficult to be definite with regard to the nature and implications of commitments made in trade-related areas for the agricultural sector. The actual impact ‘will depend on the relationship between the precise wording (and how it is interpreted) with the exact circumstances in which they might be actioned’. There is far from any clarity on the interpretation of the commitments made and the extent to which divergent interpretations would give rise to actionable dispute settlement with legally binding outcomes. The texts of the various IEPAs vary considerably in terms of their treatment of trade-defence measures. A number of IEPAs including those with Cameroon, Ghana, Côte d’Ivoire (as well as the comprehensive EPA with the Caribbean) ‘allow countries to impose pre-emptive safeguards to limit imports in defence of food security’. The EAC ESA and SADC texts however, according to the ODI/ECDPM report ‘make no such provisions’. They ask, ‘do the foodsecurity safeguard clauses actually add freedom of manoeuvre to the more general pre-emptive safeguard provisions….or are they merely a public relations feature ...? The related question arises: how would such provisions fare under the dispute-settlement mechanisms included under IEPAs?’ 438 July 2008 Special report African food and agricultural sectors and interim EPAs Certainly these special food-security-related safeguard measures could take on increased significance in the coming period, since IEPAs ‘are removing MFN tariffs on some agricultural goods from a substantial exporter’. In this context such mechanisms could be increasingly required. According to the ODI/ECDPM report ‘all the African IEPAs except ESA allow for the temporary introduction/increase of export duties in “exceptional circumstances” following “joint agreement” with the EC … or consultations’. However, it is unclear under what exceptional circumstances consultations will give rise to a joint agreement to increase import duties. Certainly ACP governments will only be able to legally sustain unilateral action after such consultations have been held and joint agreement reached. Export controls: differing provisions Some of the EPAs provide ACP governments with more scope for pursuing agricultural policy and food-security objectives than others. For example under the EAC-EU IEPA Tanzania is allowed to ‘impose quantitative restrictions on the export of food in cases of domestic food shortages for the preservation of food security’. The Tanzanian government took advantage of this in February 2008 when it ‘imposed an export ban on agricultural commodities in the face of a domestic shortage of cereals’. Such an action however would be illegal under the provisions of any other IEPA since it would have been ‘a contravention of the terms of the agreement’ and would potentially ‘result in penalties being imposed under the dispute-settlement provisions’. However in other IEPAs, provisions have been included that are intended to limit the use of export taxes as a policy tool. In the case of the SADC-EU IEPA, both Namibia and South Africa have objected to restrictions on the use of export taxes as a policy tool to stimulate greater value-added processing in certain agricultural value chains. The Namibian government maintains this is an unnecessary restriction on policy space, in a context where ACP governments have little recourse to the kinds of financial incentives to stimulate value-added processing within agricultural chains which the EC itself routinely uses in the context of its rural-development programmes. The right to continue to use policy tools such as export taxes to stimulate investment in value-added processing is held to be of considerable importance by the Namibian government. Removal of other import controls: limiting policy space According to the ODI/ECDPM report ‘a general prohibition on import barriers other than customs duties and taxes … is subject to exemptions in all EPA texts (e.g. for infant-industry protection or in case of public finance difficulties)’. However this general prohibition in the case of the SADC-EC IEPA is being used to insert a commitment to the ‘free movement of goods’ within the territory of the SADC IEPA countries (specifically within the SACU). However this would require the dismantling of import licensing and reference price systems which are used to regulate trade in so called ‘controlled crops’. In the case of Namibia these policy tools have been successfully used to sustain an irrigated cereals sector without any major adverse effects on consumer prices or intra-regional trade. In addition in recent years this tool has been used to promote a rapid expansion of horticultural production for local markets, in those subsectors where such production is commercially viable. A recent study found that the de facto impact of the dismantling of the import licensing and reference price system which the proposed free movement of goods provisions would necessitate, would result in an income loss in the white maize sector of N$96.5 million per annum, and a further N$133.7 million in the wheat sector. In addition it would probably reverse the recent gains in horticultural production (+ 67% per annum between 2004 and 2006), jeopardising both a significant proportion of the 1,300 permanent jobs and 4,500 seasonal jobs dependent on current horticultural production for the domestic market in Namibia. 439 July 2008 Special report African food and agricultural sectors and interim EPAs How important is policy space? However the fundamental question arises: if EPAs close off ACP governments’ room for manoeuvre (policy space) is this a good thing or a bad thing? Some argue that IEPAs ‘limit the opportunity of governments to avoid or delay implementing the commitments they have made’. Others take the opposite view arguing that ‘the economic policies fostered by EPAs are developmentally undesirable’ and that it is desirable for ACP governments to pursue those policies which they feel are best suited to local economic conditions and wider societal policy objectives. Still others take the view that ‘EPAs are largely irrelevant to the economic challenges faced by the ACP and, if they are justified, it is by virtue of avoiding the problems being made worse by the ending of preferences’. This is essentially a political question which ACP leaders need to grapple with in their specific national and regional contexts. What is clear is that the cluster of issues related to policy space forms one of the core areas of contention under certain IEPAs, which need to be resolved before progress can be continued towards comprehensive EPAs. The MFN issue The inclusion of an MFN clause in IEPAs requiring ACP countries to extend automatically to the EU any additional trade preferences they make available to any third country accounting for more than 1% of world merchandise exports (this would affect trade with countries such as China, Turkey, India and Brazil), causes particular concern in southern Africa, given the policy initiatives under way to diversify trade away from an excessive dependence on the EU market. South Africa’s deputy trade minister Rob Davies has expressed concern that ‘this would lock us into a primary relationship with the EU for evermore’ and be ‘an unacceptable limit on our sovereignty’. There is also concern about the impact of this clause on the politics of trade negotiations with advanced developing countries. It has been argued that the MFN clause included in the SADCEU interim EPA provides a strong basis for Brazil to argue that the starting point of any SACUBrazil free-trade agreement should be the existing tariff-elimination offer made by the SACU to the EU, since any MFN clause should have universal applicability. This is a serious problem. It is one thing to eliminate tariffs on products containing sugar from the EU, where the sugar sector is undergoing a major down-sizing, it is quite another to offer the same to Brazil, where the sugar sector is rapidly expanding and dominating world markets. This is not a legal question but a matter of the politics of negotiations, with the current provisions being distinctly unhelpful in fostering South-South economic relationships. Ironically, it can be seen as equally unhelpful for European exporters if SADC were to offer the EU’s competitors the same tariff preferences which the EU has negotiated with them. There is thus concern in the ACP to see such MFN provisions removed from IEPAs, with the issue of the extension of further tariff concessions being taken up in the context of the routine reviews of the application of the IEPAs. 440 Aid-for-trade issues in the agricultural sector July 2008 Special report African food and agricultural sectors and interim EPAs ODI/ECDPM observations The ODI/ECDPM report notes that ‘all the EPAs except EAC have comprehensive but wholly non-binding provisions for development cooperation’. This is despite widespread recognition that secured financing represents an essential basis for the effective planning of aid-for-trade interventions in the FAS. This is after all why the EU itself established a multi-annual framework for its support for programmes to enhance the competitiveness of EU FAS enterprises. ‘The EAC, ESA and CEMAC texts explicitly foresee continued negotiations’, although to date EC financial commitments have been restricted to existing EDF commitments and half of the additional aid-for-trade financing to be made available by EU member states. According to ODI/ECDPM however these additional funds are not ‘formally secured nor is the strategy clear’. This being noted, discussions in the SADC context on the establishment of a mechanism for development financing and in the ESA context of a joint development committee, are ongoing. The wider aid-for-trade agenda: learning from the EU experience The EU attaches considerable importance to establishing tools to ‘support their farmers, their forestry sector and farm-processing industry in the necessary restructuring of these sectors.’ Indeed, the EU’s new rural-development policy is seen as being ‘the driving force in modernising our agriculture’. Against this background the explicit aim of ‘axis 1’ ruraldevelopment programmes is to improve the competitiveness of agricultural and forestry enterprises in the EU. Up to June 1st 2008 almost €53,094.7 million had been earmarked for deployment over the 2007-13 period in ‘pump priming’ FAS restructuring in the EU, designed to follow market trends and equip the EU FAS to prosper in an era of global agricultural trade liberalisation. In many respects ‘priming the pump’ through the use of public money is precisely what ACP countries are looking for when seeking EU support for production- and tradeadjustment support in the context of the implementation of the IEPAs. It is against this background that the question arises: what lessons can be drawn from this EU experience of relevance to the challenges which will face ACP FAS operators in the coming period? The first point to note is the sheer volume of public funding earmarked to the ‘pump priming’ process. This highlights the central role of public-sector support in ensuring a dynamic response to adjustment challenges in ways which contribute to the wider policy objectives for the growth of employment and incomes. The second striking point about EU programmes is their scope. The use of public funds is not limited to addressing infrastructure constraints, or supporting capacity building and retraining programmes or even studies and market assessments. Public funding is used for all of these purposes, but also, where appropriate and consistent with underlying policy objectives, it provides direct capital investment grants of up to 50% of the investment costs (split between EU and member-state contributions). This goes far beyond what is allowed under cost-sharing grant schemes in ACP countries, which tend to be limited to co-financing of the supply of business-support services. The third point to note about EU rural-development programmes is the growing efforts to decentralise programme prioritisation and design. The broad instruments of support are established at the pan-EU level, but prioritisation, programme design and implementation are decentralised and devolved to local or sector bodies. While in the EU this decentralisation largely takes place on a geographical basis, in the context of the trade- and productionadjustment challenges facing ACP countries, it may need to occur at the regional/sectoral level. 441 A fifth point to note about EU rural-development programmes is the central role given to strengthening the organisation of local stakeholders in rural areas, with 5.4% of total ruraldevelopment funding being earmarked for deployment within the LEADER approach, which seeks to build on local action groups to lead the restructuring process. In addition, in some sectors, such as the fruit-and-vegetable sector, strengthening producer organisations is a cornerstone of the reform process. How this is being achieved and what lessons can be learned from this process in extending support to strengthening farmers’ organisations in ACP countries, is an issue of considerable importance to developments in the coming period of increased trade liberalisation. July 2008 Special report African food and agricultural sectors and interim EPAs The fourth point to note about EU rural-development programmes is the extent to which they seek to engage with stakeholders, including private-sector companies, within a framework for the pursuit of wider rural-development policy objectives. Precisely how this is organised in ways which reconcile the deployment of public aid, through private-sector bodies in support of public policy objectives, is an issue which should be the subject of close examination, given the important lessons this could hold for the deployment of production- and trade-adjustment support to agricultural and food-processing sectors in ACP countries. 442 Special report June 2008 June 2008 Special report Policy responses to food crisis Policy responses to food crisis On May 20th the EC adopted a communication on its policy response to rising global food prices. The response is three-pronged:  short-term measures in the context of the CAP ‘health check’ and monitoring of the retail sector;  ‘initiative to enhance agricultural supply and ensure food security, including the promotion of sustainable future generations of biofuels’;  ‘initiatives to contribute to the global effort to tackle the effects of price rises on poor countries’. The communication has been accompanied by the release of a staff working paper on high food prices and an update on recent price developments in retail prices for EU agriculture products and food. The analysis points to ‘structural drivers of higher food prices, namely: increased demand for both staples and higher-value-added food in large emerging economies (e.g. China’s per capita meat consumption has increased from 20 kg in 1980 to 5 kg in 2007); increasing input costs linked to rising oil price; the emergence of new outlets for agricultural products, notably biofuels; and the slowing down in yield growth. It also notes temporary factors such as ‘poor harvests in a number of regions of the world, a historically low level of stocks, the depreciation of the US dollar, and export restrictions in a number of traditional suppliers to the world market’. It further acknowledges that ‘speculation has amplified the underlying price volatility’. However, the rapid price increases have followed ‘a three-decade-long trend of declining agricultural prices’ and a recent decline in commodity prices from the peak levels in early 2008. A detailed analysis of recent prices is provided by the IFAP-WABCG Commodity Market Monitor of May 16th 2008. This documents notes a recent slowing down or decline in most agricultural commodities, with the notable exception of rice, which showed a 53% increase in April and price increases of US$557 since November 2007 (from US$350 to US$907). It notes the continued rise in fertiliser prices and energy costs and expresses concerns that farmers could find themselves in ‘a very difficult position with input prices rising and output prices declining’. 443 June 2008 Special report Policy responses to food crisis The EC in its analysis notes that rising prices have affected net-food-importing countries in Africa most severely, with the impact on EU consumers being limited. In African countries high food prices have translated into ‘greater poverty, malnutrition and increased vulnerability to further external shocks for the world’s poorest’. However ‘in the medium to long term, rising prices potentially present new income-generating opportunities for farmers in the developing world and could enhance farming’s contribution to economic growth’. 1 Against this background the EC is pushing for a ‘more coordinated international response to the food crisis … continued open trade … (a) swift response to immediate short-term humanitarian needs ... targeting development aid to longer-term projects to revitalise developing-country agriculture’. The EC view on the importance of open trade was emphasised by the OECD secretary-general Angel Gurria at the launch of the joint FAO/OECD Agricultural Outlook 2008-2017 report. For his part the FAO director-general Diouf highlighted ‘the need to re-invest in agriculture’, which ‘needs to be put back onto the development agenda’. The joint FAO/OECD report highlighted that while prices should decline from their record peaks of recent months, they will remain above the average of the past decade. However over time ‘the underlying forces that drive agricultural-product supply … will eventually outweigh the forces that determine stronger demand’. At this point ‘prices will resume their decline in real terms, though possibly not by quite as much as in the past’. It expects ‘continued high-yield growth for crops to be more important than new areas brought into cultivation in determining crop supply’. The strength of the US dollar however will have an important bearing on ‘domestic price incentives to increase production’, which will affect the global distribution of expanded production. On the demand side it notes that biofuel demand ‘while smaller than the increase in animal feed use … is the largest source of new demand in decades and a strong factor underpinning the upward shift in agricultural commodity prices’. It is against this background that ‘commodity prices – in nominal terms – over the medium term will average substantially above the levels that prevailed in the past 10 years’. Comparing the 1998 -2007 period to the projected price levels for 2008-17 ‘beef and pork prices may be some 20% higher, raw and white sugar around 30%, wheat, maize and skimmed-milk powder 40% to 60%; butter and oilseeds more than 60% and vegetable oil over 80%’ . 1 Global prices, not EU prices. 444 June 2008 Special report Policy responses to food crisis Prices are expected to be more volatile in the coming period, in part as a result of speculation. Developing countries will, it is projected, play a growing role in agri-trade, both on the demand and supply sides. OECD countries will however ‘continue to dominate export trade for wheat, coarse grains, pork and all dairy products’. High prices, it is held, will benefit commercial producers but not necessarily the bulk of producers in developing countries where many farmers ‘are not linked to markets’. The urban poor in developing countries will suffer most, while LDCs will show increased vulnerability, particularly food-deficit LDCs. This, it is felt, underscores the importance of developing the supply capacity of LDCs. In the interim the FAO and the OECD call for ‘increased humanitarian aid … to reduce the negative impact of high prices on the very poor’. In the longer term it is argued that ‘agricultural supply is facing increased uncertainties and limitation to the amount of new land that can be taken into cultivation. Four additional reports have been produced and posted on rising food prices. One by the Carnegie Endowment for International Peace on ‘Rising food prices, poverty and the Doha Round’, reaches policy conclusions significantly at variance with the EC’s policy orientation. It highlights the need to allow ‘developing countries adequate policy flexibility so that they can build up their own agricultural sectors, increase food supply in the medium and long term, and shield the poor from market failures that can affect their very survival’. In this context the Carnegie report calls for a Doha agreement which:  sharply restricts ‘domestic and export subsidies provided to wealthy-country farmers’, since this ‘drives farmers in developing countries off the land or into poverty’;  allows ‘developing countries to shield at least 20% of tariff lines from reductions as “special products” to foster greater domestic production and shield poor households until they become more productive or find other livelihoods’;  creates ‘a robust “special safeguard mechanism” that would permit developing countries to address short-term volatility in global food markets by raising tariffs in response to import surges or agricultural price drops’. IFPRI produced two policy briefs in April and May 2008 on the policy response to be applied to high food prices. To date governments have responded by setting up price controls, introducing export bans and removing import taxes. The IFPRI analysis however argues that these measures are simply exacerbating the problem, since they introduce new market distortions, which send incorrect signals to domestic producers which hold back the normal production response to high prices. According to IFPRI ‘these national agricultural trade policies undermine the benefits of global integration, as the rich countries’ long-standing trade distortions with regard to developing countries are joined by developing countries’ interventions against each other.’ Against this background IFPRI recommends the following actions:  expanding social protection programmes (safety-net programmes) and food-related development aid;  the elimination of domestic subsidies and tariffs on biofuels by developed economies;  the elimination of agricultural trade barriers around developed-country markets (through a successful completion of the Doha Round);  increased investments in agricultural research extension, rural infrastructure, and measures to improve access for small farmers to markets;  the introduction of market-calming measures through the market-based regulation of speculation, shared public grain stocks, strengthened food-import financing, and reliable food aid. 445 June 2008 Special report Policy responses to food crisis Comment The EU market may well prove to be an exception to the projection that agricultural commodity prices in the coming period will on average be higher than over the past ten years, since past prices on EU markets were inflated by the price-support policies of the EU. While in response to the rise in global food prices, EU market prices have increased in the past two years, in the CAP-covered products which ACP countries export (sugar, beef, bananas, rice and certain vegetable products) the impact of these price rises has been greatly reduced by the broader process of CAP reform which has been reducing EU market prices down towards world market-price levels. This means that while in the coming period global agricultural prices are likely to be higher than over the past ten years, this will not necessarily be the case for prices received on CAP-covered commodities exported to the EU. These new ‘higher’ prices may still in general be below the price levels prevailing in the EU before the policy switch from price support to direct aid under the CAP. The tables below set out the declines in the intervention price/reference price system. However since the policy aim is to make EU prices more responsive to market signals in future it is expected that the intervention/reference price will be a floor price, with the market price being substantially above this level. Thus actual market price reductions will be less acute than in the graphs, with the exception of the sugar sector, where in this initial reform period, market prices for ACP sugar are expected to broadly follow the reduction in the reference price. In the case of the EU beef market prices in real terms have been falling since 1997. Cattle prices declined sharply from 2000 to 2001, before showing a steady recovery to reach and exceed pre-reform levels in nominal terms in 2005. EU cattle prices have subsequently continued to increase in nominal terms, reaching levels between 9% and 15% above pre-reform price levels. In the rice sector while market prices have risen from the low levels reached in the first half of 2005, these have never exceeded the heights reached by prices in the pre-reform period (prices in the first half of 2007 were 15.5% below the corresponding period in 2001 for Italian round-grain rice, 20.6% below for Italian long-grain rice, 40% below for Spanish medium-grain rice and 21.2% below for Spanish indica rice). Rice intervention price (€/tonne) 400 350 300 250 200 150 100 50 0 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 Beef intervention price (€/tonne) 4,000 600 3,500 Sugar intervention price (€/tonne) 500 3,000 2,500 400 2,000 300 1,500 200 1,000 100 500 0 1999/2000 2000/2001 2001/2002 2002/2003 446 0 2005/06 2006/07 2007/08 2008/09 2009/10 June 2008 Special report Policy responses to food crisis Overall this means that while ACP countries will face higher import costs for basic food stuffs, this is unlikely to be matched by similar increases in prices for agricultural products exported to the EU which formerly benefited from high margins of preference. These products accounted for around 41% of the value of ACP agricultural exports to the EU in 2006. The price trend is likely to be different for nonCAP-covered traditional ACP agricultural exports such as cocoa, coffee and tea, where prices have been rising, although overall not as dramatically as for staple foods. This suggests that the trend towards a shrinking ACP food-and-agricultural-trade surplus with the EU could well continue in the coming period. The fact that developing countries are projected to play a growing role in agri-trade, on both the demand and supply sides, is wholly consistent with the EC analysis which underpins the process of CAP reform. It is accepted that EU producers will not be able to compete with highly-competitive advanceddeveloping-country suppliers (none of which are ACP countries) in bulk-commodity markets, hence the efforts to shift European agricultural production towards producing quality products, serving ‘luxury purchase’ markets both within the EU and globally, and the emphasis on expanding EU value-added food-and-drink-product exports. In many respects therefore CAP reform has already anticipated these new trends, hence the limited domestic EU policy change in response to the global food crisis. The debate on policy flexibility for stimulating domestic agricultural production and value-added processing in ACP countries has an immediate bearing on the follow-up to the conclusion of interim EPAs, with contentious issues such as provisions in the SADC-EU interim EPA on free movement of goods and restrictions on export tax policy2, having profound policy implications for current instruments used to sustain and develop domestic agricultural production in countries such as Namibia. This issue is particularly important given the widespread recognition that in the coming period there will be far greater price instability in agricultural commodity markets. In this context the conclusions of the Carnegie report with reference to the Doha Round would appear to have an equal relevance in the context of the ACP-EU EPA negotiations. A key challenge in ACP countries is ensuring that agricultural producers benefit in full from high prices and are not squeezed between escalating input costs and the sluggish functioning of the market such that prices rises are not transmitted down to farmers. In many ACP countries this constitutes a significant challenge, particularly in a context where international policy prescriptions focus predominantly on unleashing market forces, with scant regard to the reality of market failure in many ACP countries, which block the transmission of price signals to small-holder farmers. 2 The issue of export taxes on basic agricultural commodities which are used to provide an incentive to domestic value-added processing and which can form part of national industrial-development policy, should not be confused with export bans, which represent a market intervention designed to ensure domestic supplies, but which can prevent the transmission of the correct price signals to domestic producers. 447 Composition of ACP agricultural exports to the EU 2001-2006 June 2008 Special report Policy responses to food crisis CN Product 2006 2005 2004 2003 % % % % share share share share 18 Cocoa & preparations of 25.13 25.40 25.62 29.77 08 Fruit & nuts (mainly bananas) 20.26 19.54 19.07 18.42 17 Sugars & sugar confectionery 9.96 10.02 10.52 9.05 09 Coffee, tea, maté, spices 9.53 9.25 7.72 8.09 22 Beverages, spirits 8.22 8.54 9.19 8.36 06 Floriculture 5.66 5.02 4.73 4.38 24 Tobacco 4.76 4.48 4.74 4.43 07 Edible veg. plants, tubers 3.65 3.23 3.17 2.91 20 Prep. veg., fruit, nuts 2.85 2.71 2.82 2.37 15 Animal & veg. fat 2.58 2.87 2.77 2.87 12 Oilseeds 1.41 1.53 1.77 1.59 02 Meat (almost exclusively beef) 0.84 1.01 1.12 1.18 13 Lac, gums, resin 0.80 1.43 0.83 0.53 10 Cereals 0.36 0.41 0.45 0.44 Ex-23 Waste and residues 0.23 0.19 0.25 0.39 01 Live animals 0.13 0.22 0.21 0.22 Ex-05 Other animal products 0.09 1.10 0.11 0.11 Ex-19 Preparations of cereals 0.07 0.08 0.08 0.08 04 Dairy products 0.06 0.08 0.21 0.05 14 Veg. plaiting materials 0.04 0.05 0.06 0.06 11 Products milling industry 0.03 0.02 0.02 0.01 Ex-16 Meat preparations 0.01 0.01 0.02 0.01 Sources: see Table 3.7.12., EU trade with ACP countries for: 2006, 2005, 2004 at: http://ec.europa.eu/agriculture/agrista/2007/table_en/3712.pdf 2001 at: http://ec.europa.eu/agriculture/agrista/2004/table_en/3712.pdf 2002 at: http://ec.europa.eu/agriculture/agrista/2005/table_en/3712.pdf 2003 at: http://ec.europa.eu/agriculture/agrista/2006/table_en/3712.pdf 448 2002 % share 24.69 17.99 9.90 8.69 8.87 4.39 5.52 3.16 2.51 2.88 1.75 1.36 0.60 0.49 0.57 0.22 0.12 0.07 0.10 0.08 0.01 0.03 2001 % share 19.5 19.11 10.26 11.16 8.48 4.27 6.17 2.96 2.33 2.65 1.72 2.08 0.66 0.53 0.73 0.24 0.12 0.06 0.01 0.09 0.01 0.03 Special Report October 2008 October 2008 Special report Contentious issues in IEPAs Contentious issues in IEPA negotiations: implications and questions in the agricultural sector Summary In some interim economic partnership agreements (IEPAs) a number of contentious issues have emerged, which in some countries will have profound and immediate implications for national agricultural development policies. The aim of this briefing is to set out the concerns around these issues with a view to assisting ACP governments in assessing whether they are relevant in their national situations. The issues reviewed are:  provisions prohibiting or limiting the use of import and export licences and other marketregulation measures;  provisions restricting the use of export taxes as a policy tool to stimulate movement up the agricultural value chain;  the tariff-standstill commitments made in the evolving context of high global food prices;  the provisions dealing with infant-industry protection and their consistency with existing national and regional arrangements for infant-industry protection;  the provisions dealing with agricultural safeguards and food-security issues. It should be noted that since there is no consistency in the treatment of these issues across the various IEPAs, the specific text and circumstances of individual agreements and individual countries need constantly to be borne in mind, with the key question being: how relevant are these concerns to the national agricultural development policies, policy tools and broader concerns and aspirations? 449 October 2008 Special report Contentious issues in IEPAs Prohibition of quantitative restrictions and the use of import and export licensing In all of the IEPAs there are provisions dealing with the ‘prohibition of quantitative restrictions’, which places a requirement on IEPA member-state governments to immediately eliminate upon entry into force of the agreement all restrictions on imports, including importand export-licensing arrangements. While in some IEPAs there are exceptions to this prohibition on grounds of infant-industry protection, public-finance and food-security concerns, this is not the case across all agreements. Furthermore in a number of countries it is far from clear whether the current wording allows the continuation of currently successful agriculturaldevelopment and food-security policies. However in a number of countries of more immediate relevance than the basic tariff-elimination commitments are a number of IEPA provisions which impinge on the operation of national and regional policy tools, designed to facilitate and promote balanced forms of regional development. The provisions of the SADC IEPA in relation to Namibia, is a case in point. Namibia currently operates a controlled crop-marketing system for sensitive food and agricultural products. Socalled ‘controlled products’, which are clearly defined under national legislation, are subject to special marketing arrangements, including both a reference-price mechanism and certain import measures, including import licensing. This covers both grain and certain horticultural products, where local production is viable. The aim of this policy is to sustain and promote cereals and horticultural production to enhance national food security and promote rural income-earning opportunities. For grains this system includes a Namibian production can find a Southern African Customs Union regional trading arrangements to members of SACU. prohibition on imports during the harvest period so that market locally. These restrictions even apply within the and form part of the special arrangements in place under support the development of the smaller less-developed According to recent studies the abolition of current marketing measures to regulate seasonal imports of wheat and maize, would result in an immediate economic loss of N$113.7 million and N$96.5 million respectively to wheat and maize producers and a cessation of irrigated cereals production within a few years. It would also have profound implications for the horticultural sector serving the local market. A recently established horticultural development scheme has seen a quadrupling of production for the local market (now meeting 35% of local demand), with a significant expansion in small-holder production being a feature of the scheme. While this scheme includes broad industry-wide consultations and dialogue, and the establishment of a computerised market-information system, which on a real-time basis provides information on both local production and local demand, central to its effectiveness is the control over the allocation of import licences by the managing authority. Retailers and traders have to work within an industry-wide framework to meet targets for the purchase and marketing of locally produced horticultural products, in order to be able to obtain import licences. The system is transparent and subject to appeal if local prices or quality are outside of the market norm. Given the market power of the retailers and traders, and the dominant role that South African producers play within the regional economy, this is a pragmatic solution to the local challenge of horticultural-sector development. An assessment of these market regulation measures found them to be minimally trade distorting, to have little impact on consumer prices and they have been found not to be tradedistorting in terms of the general usage of the WTO definition of trade distortion. 450 October 2008 Special report Contentious issues in IEPAs The situation in Namibia raises the following questions:  which ACP countries make use of similar market-regulation mechanisms for sensitive agricultural products involving the use of import- and export-licensing arrangements?   how important are these schemes within national agricultural production?  what would be the impact on the sectors concerned of the immediate dismantling of these market-regulation mechanisms?  are there any exceptions to this immediate prohibition on the use of quantitative restrictions within the IEPA which would allow you to continue with current agricultural policy measures? do the provisions of the IEPA to which your country is a signatory require their immediate abolition? If the aim of IEPAs is to support locally designed and led agricultural-development and foodsecurity initiatives, an area to which increasing priority is being accorded in the light of the global food-price crisis, then it would appear to be necessary to give ACP government more flexibility in the use of those policy tools currently in use which have proved effective in stimulating local agricultural development and food security. Prohibitions on the use of export taxes All IEPAs have provisions dealing with ‘duties, taxes or other fees and charges on exports’, which limit the ability of governments to use export taxes on basic raw materials to encourage the development of value-added processing. Only in exceptional circumstances, linked to revenue needs, infant-industry protection or environmental protection concerns, are temporary export taxes allowed subject to prior consultation with the EU. Given the importance to ACP countries of moving up the value chain to escape dependence on the export of basic commodities, in many countries this is seen as an unnecessary restriction on the use of an important tool for economic development. This use of export taxes as a policy tool to promote value-added processing and the structural transformation of ACP economies, particularly in the agricultural value chain, needs to be seen in the context of the limited possibilities such governments have to provide financial incentives for such investment. In countries such as Namibia, export taxes have been used as part of broader policy packages to promote movement up the agricultural value chain in ways which contribute to the structural change of the Namibian economy. A concrete example is the beef sector. Prior to independence Namibian cattle were largely exported ‘on the hoof’ to South Africa, with the value addition and structural development of the meat-processing industry taking place in neighbouring South Africa. Since independence however, government policies (including securing preferential access to the EU market and the use of export taxes) has encouraged the development of a slaughtering and meat-processing industry, as well as a tanning and leather-working industry. This has extended the beef-sector value chain in Namibia and created thousands of new jobs. The Namibian government is trying to pursue a similar policy in regard to the small-stock sector, with a flexible export tax being applied, export licences being linked to the level of livestock processed locally, and possible use of export taxes under certain circumstances. In addition, in drought-prone countries such as Namibia, the use of export taxes can prove particularly valuable in maintaining supplies to agricultural processing industries, an important factor in encouraging investment. 451 October 2008 Special report Contentious issues in IEPAs In future, export taxes may prove a useful tool in developing the value chains associated with products based on traditional knowledge. A concrete example in this regard in southern Africa is ‘hoodia’. ‘Hoodia’ is an appetite suppressant traditionally used by the ‘San’ people while hunting. Its modern use is as a slimming aid. The real commercial value of ‘hoodia’ of course lies not in the root itself, but in the value-added products derived from the root (a 100 gram pack of ‘hoodia’ and rooibos blended tea retails at €6 – equivalent to €60,000 per tonne). The policy issue is how to stimulate the production of value-added ‘hoodia’ products in southern Africa? One tool would be the use of export taxes on raw ‘hoodia’, with export licences only being issued on the basis of a progressively increasing percentage of local valueadded processing. There are concerns that the provisions of the SADC IEPA with regard to export taxes could prevent the use of such a policy tool. Indeed, there is a more general concern to avoid an unwarranted restriction on the use of this policy tool, given the central policy concern with stimulating movement up the value chain in ways which expand income earning opportunities in rural areas. Once again the use of export taxes in ACP countries needs to be seen against the background of the more limited range of policy tools open to developing countries in stimulating value-added processing. This experience raises the following questions for ACP governments elsewhere:  which ACP countries make use of export taxes to try to stimulate value-added processing in the agricultural sector?   how effective are these export tax schemes within national agricultural production?  what would be the impact on the sectors concerned of the limitations on the use of such measures included in the IEPA?  are there any exceptions to the use of export taxes which would allow you to continue with current policy measures? do the provisions of the IEPA to which your country is a signatory limit the use of such measures? Unforeseen implications of tariff-standstill commitments Under a number of IEPAs (but not all) a provision has been included which stipulates that no new customs duties shall be introduced on trade with the EU, nor shall those already applied be increased, as from the entry into force of the agreement, for all products subject to liberalisation. The aim of this provision is a reasonable one: to establish the baseline from which tariffreduction commitments should be implemented. However in the context of recent policy responses to high global food prices, this provision could have some unforeseen consequences. In response to very high food prices a number of governments reduced import duties and in some instances even set them at zero. At this juncture therefore the strict application of this provision fixing applied duties at the levels in force upon entry into force of the agreement, could result in freezing in place exceptionally low import duties on basic food products. 452 October 2008 Special report Contentious issues in IEPAs Against this background the following questions arise:  in response to high food prices, did your government reduced import duties on basic foodproduct imports?  if these currently applied duties were to be frozen in place under the provisions of the IEPA, would this have any impact on existing national food production if world market prices were to fall back to levels closer to historical levels?  is there a need to review the standstill clause in order to establish more appropriate base levels from which tariff-reduction commitments should be implemented for basic food commodities? If it was felt that the current standstill provisions should be revised then the approach favoured in the Caribbean EPA and the Israeli-EU preliminary agreement, could be adopted. This establishes on a line-by-line basis in dedicated annexes, the tariff level from which tariffreduction commitments should be made. In the case of the Israeli-EU agreement this establishes the baseline for tariff reductions somewhere between the applied and bound tariff levels. Infant-industry protection provisions Somewhat surprisingly given the quite different nature of the protection required for bilateral safeguards against import surges and infant-industry protection, under IEPAs the issue of infant-industry protection is dealt with as part of normal bilateral safeguards. There is in many respects a need for a separation of these issues, through the establishment of distinct provisions for infant-industry protection. Currently in a number of IEPAs the infant-industry protection provisions included in the bilateral safeguards:  limit infant-industry protection to products where duty reduction is under way (i.e. it is not applicable to products excluded from the duty-reduction provisions under the agreement);  define the period of time over which infant-industry protection can be accorded from the date of entry into force of the agreement;  limit the scope of the protection measures which can be adopted to those applicable under bilateral safeguards and subject the application of infant-industry protection measures to cumbersome procedures. In addition to these perceived shortcomings, the provisions of IEPAs on infant-industry protection can also give rise to problems for regional integration initiatives. This is the case in southern Africa. The infant-industry protection provisions under the Southern Africa Customs Union Agreement stipulate that provisions for infant-industry protection only apply where ‘such duties are levied equally on … like products imported from outside that area’. Thus were the IEPA provisions to be applied, involving separate measures and arrangements for their invocation, then the infant-industry protection made available under the SACU agreement would be brought into question –and would de facto become inoperative. This could then serve to undermine infant-industry protection accorded to newly established agri-food processing industries, to the detriment of the local structural development of the agrifood sector (e.g. current infant-industry protection accorded to pasta and UHT milk production in Namibia). This has given rise in the SADC IEPA context to calls for the revision of the IEPA infant-industry provisions to ensure consistency with SACU measures for infant-industry protection. 453 Special report Contentious issues in IEPAs This is particularly the case since the infant-industry provisions in the SACU agreement, unlike the provisions in the SADC IEPA, determine the length of the period of protection of the industry with reference to the establishment of the industry within a SACU member state. This is a far more sensible basis for infant-industry protection than the arbitrary eight-year timeframe established in the SADC IEPA, which effectively ends infant-industry protection from 2016. The danger of such time-restricted infant-industry protection is that it could lock less-developed ACP economies into their current economic structures and prevent the emergence of locally designed agriculture-based regional industrial-development strategies. Against this background the following questions arise:  to what extent are infant-industry protection instruments already in place at the national and/or regional level in your country?  to what extent are the provisions for infant-industry protection in the IEPA consistent with existing national and regional provisions for infant-industry protection?  would the abrogation of existing national and regional provisions for infant-industry protection have any direct impact on existing agri-food processing sectors?  would the abrogation of existing national and regional provisions for infant-industry protection be likely to have any impact on the development of potential agri-food processing sectors? October 2008 Agricultural safeguards and food security Agriculture is central to the economies of most African ACP countries. It is the principal source of employment and a major source of external trade and in addition is central to the social fabric. Given the difficulties in the WTO on the issue of special safeguard mechanisms for agriculture, the recent surge in global food prices and the global attention which has been focused on the consequent plight of the poor in many developing countries, renewed attention is being focused on the provisions of IEPAs with regard to agricultural safeguards and food security. In some IEPAs there are not even separate chapters on agriculture and food security, while across all IEPAs, agricultural safeguard measures are included within the general bilateral safeguard provisions. An emerging concern with regard to agricultural safeguards lies in the fact that the operative clauses of the IEPAs are of temporary duration and aimed at dealing with temporary import surges, whereas the distortions to trade in food and agricultural products are structural in nature (arising from the deployment of EU public aid to farmers, which encourages higher levels of production and trade than would be the case in the absence of such extensive levels of public support). This concern also needs to be seen against the background of the difficulties that EU exporters are facing on third-country markets arising from increased competition from non-traditional exporters (e.g. Ukraine and Russia) and advanced developing-country suppliers (e.g. Brazil). The concerns linked to food security relate to the prospects of significantly higher food prices in the coming period compared to the recent historical period (although lower than the peaks experienced in the past two years), and the likelihood of increased price volatility on international food commodity markets. It also needs to be seen against the background of recent trends in EU-ACP agricultural trade. Figures posted on the DG Agriculture website covering trade in food and agricultural products from 1999 to 2006, show EU exports of food and agricultural products to ACP markets growing by 38.9% in value terms between 1999 and 2006, while the value of ACP exports to the EU market has stagnated (in fact the value of ACP food and agricultural exports in 2006 was 1% lower than in 1999). 454 October 2008 Special report Contentious issues in IEPAs This has seen the ACP group’s agricultural trade surplus with the EU decline from €5.337 billion in 1999 to €3.832 billion in 2006, a fall of 28.2%. This reflects the divergent price trends between the agricultural products exported by ACP member states to the EU (where prices are largely stagnant or declining) and the prices of agricultural and food product which the ACP imports from the EU (which have been increasing and which are likely to stabilise at levels higher than historical levels). These trends raise new food-security concerns, the political significance of which has been heightened by the recent global surge in food prices. Total agricultural trade 1999 and 2006 ACP exports to EU EU exports to ACP ACP surplus 1999 (€ million ) 8,981 3,643 + 5,337 2006 (€ million) 8,892 5,060 + 3,832 % change 1999-2006 - 1.0 + 38.9 - 28.2 Source: EU exports http://ec.europa.eu/agriculture/agrista/tradestats/2006/eur25ch/page_071.htm; EU imports http://ec.europa.eu/agriculture/agrista/tradestats/2006/eur25ch/page_072.htm Future prospects for global agricultural markets would also suggest a need for a more nuanced approach to agricultural trade liberalisation, something which, given the EU’s own experience, one might have expected EC negotiators to be sensitive to. The June 2008 OECD review of the causes and consequences of rising food prices argued that ‘tight markets may be a permanent factor in the period to 2017’, with, in the coming ten years cereals, rice and oilseed prices likely to be ‘10 to 35% higher than in the past decade’ in real terms (35-60% higher in nominal terms). In this context it should come as no surprise that ACP governments are seeking to actively promote agricultural development and national and regional food security, particularly since, as the OECD points out, the worst affected by rising prices are ‘poor consumers in developing countries, and food-importing developing countries’. In such a context there has emerged a certain concern about the existing IEPA provisions for agricultural safeguards and food security. ACP governments thus need to carefully review existing national and regional trends in agricultural and food-product trade with the EU to see whether the existing IEPA agriculturalsafeguard provisions are adequate in the emerging context of high food prices (although prices are likely to fall back from recent peaks, they are nevertheless expected to remain significantly higher than the price levels of the past decade). 455 Special report November 2008 Special report EC green paper on quality The EC Green Paper on agricultural product quality: what is it about and what questions are being raised Introduction The EC has posted a ‘green paper’ consultation document on agricultural quality schemes in the context of intensifying competition from low-cost third-country suppliers on domestic and overseas markets, with the emphasis being on shifting EU production towards serving quality markets. Given the process of preference erosion under way in ACP-EU trade relations vis-à-vis competitive advanced developing-country suppliers, many of the issues raised in the paper have a direct bearing on the production- and trade-adjustment challenges which will be faced in ACP countries (particularly small and vulnerable ACP countries) in the coming period. Implicitly the consultation paper is aimed at addressing the issue of how to secure the full commercial advantage from quality production. November 2008 The EC consultation on agricultural product quality On October 15th 2008 the EC launched a consultation on ‘how to help European farmers make the most of the quality of the food and drinks they produce’. Launching the consultation the Agriculture Commissioner Mariann Fischer Boel highlighted how European farmers had three main advantages in facing up to competition from low-cost producers in third countries on both EU markets and abroad, namely ‘quality … quality … and quality’. The EC sees developing quality production as the means of meeting ‘head-on’ the intensifying challenge from low-cost producers in third countries in the era of trade liberalisation. Meeting this challenge requires EU farmers to deliver ‘exactly what consumers want, clearly distinguishing their products in the market place, and gaining premiums in return’. In the EC’s approach quality is defined as meeting consumer expectations, which are increasingly diverse and multiplying. It refers to a product’s characteristics and/or methods of production. The scope of the green paper The paper, which provides the basis of the consultation, covers three areas:  ‘baseline production requirements and marketing standards;  specific EU quality schemes such as geographical indications, traditional specialities and organic farming;  food-quality certification schemes’. It argues that baseline production requirements which exceed those used by exporters to the EU need to be better publicised and highlighted since ‘they could become a potential marketing advantage’. Currently, however the most commercially significant of these three areas relates to geographical indications (GIs), which fall under the category ‘specific EU quality schemes’. In the case of GIs, a growing number of consumers throughout the world are seeking out quality geographically designated products for which they are often willing to pay a significant price premium. As a consequence ‘for farmers and producers GIs can provide an important source of revenues and security’. 457 November 2008 Special report EC green paper on quality There are two components to GIs:  ‘protected designations of origin’, where ‘all steps of production must in principle take place in the geographical area and the product characteristics must be exclusively or essentially due to its geographical origin’;  ‘protected geographical indications’, where ‘at least one step of production has to take place in the area, and the link to the area concerned can be justified by reason of a specific quality, reputation or other characteristics linked to the geographical area’. In all around ‘3,000 geographical indications for wines, spirits and agricultural products and foodstuffs have been registered or are under examination’. Many of these products are ‘mainly sold on local or regional markets’. However ‘for many products the quality and reputation does not rest exclusively on factors linked to origin and/or the savoir faire of local producers. Sustainability criteria can also make an important contribution to the quality of the product’. Given the commercial significance of GIs, the EC is seeking to extend legal protection globally, both through efforts to establishing a registration system internationally through the WTO and ‘through negotiation of a large number of bilateral agreements for all agricultural products’. With regard to other ‘specific EU quality schemes’, the traditional speciality product designation is little used at the moment. With regard to organic products, there are concerns to ensure that the EU market could be made to work better and could be promoted and further developed. The green paper also raises the possibility of establishing other quality schemes including for ‘high nature value or mountain areas, welfare quality, an EU origin label and extension of the ecolabel scheme to processed agricultural products’. The paper further looks at the role of ‘private and national food-quality certification schemes’. These schemes are very varied and are mainly driven by large retailers. There are concerns about the transparency of such schemes, the credibility of claims made and their impact on ‘equitable commercial relations’. Overall the EC currently sees ‘no need in principle for further legislation to specifically address certification schemes’, but rather is considering establishing guidelines to ‘assist scheme owners in developing and improving schemes’ for quality certification. The paper notes that ‘for farmers in developing countries supplying the EU market, private certification schemes represent both a cost and an opportunity. Farmers may have difficulties meeting the requirements imposed. However, if they can be certified under a scheme used by an EU retailer, they may be a in a better position to sell into the EU’. In future it is held that EU policies ‘must support farmers’ efforts to win the quality challenge’. The key to gaining commercial advantage from quality production is seen as lying in:  offering ‘the consumer something over and above baseline requirements’ – whether in the form of special characteristics, such as taste, origin, etc, or in the method of production;  ‘giving consumers confidence in EU quality schemes and in the claims that producers make for their “premium products”’;  ‘helping consumers in choosing, and/or deciding whether to pay more for a particular product’;    protecting the use of GIs to ensure that quality standards are not undermined; supporting effective certification schemes; regulating the organic sector to protect the integrity of organic labels. 458 Special report EC green paper on quality As Commissioner Fischer Boel made clear in her introduction to the paper, in the coming period the main issue will be how to identify measures within various schemes for the promotion of quality products, which can be generalised to maximise the commercial value of quality production to EU farmers. This is seen as being essential for EU food and agricultural producers in the context of the competitive challenge posed by suppliers from low-cost advanced developing countries on national and international markets in an era of agricultural trade liberalisation. Given the process of preference erosion under way in ACP-EU trade relations vis-à-vis suppliers from competitive advanced developing countries, many of the issues raised in the green paper have a direct bearing on the production- and trade-adjustment challenges which will be faced in ACP countries (particularly small and vulnerable ACP countries) in the coming period. In all some 38 specific and detailed questions are raised for consideration in the green paper. Production requirements and marketing standards EU farming requirements How could the requirements and standards met by farmers that go beyond product hygiene and safety be made better known? November 2008 What would be the advantages and disadvantages of:  developing new EU schemes with one or several symbols or logos indicating compliance with EU farming requirements, other than those related to hygiene and safety?  Should a non-EU product which complies with EU production requirements be also eligible to use such an EU quality scheme?  having an obligatory indication of the place of production of primary products (EU/non EU)? Marketing standards  How does laying down product identities in marketing standards in EU legislation affect consumers, traders and producers?   What are the benefits and drawbacks?  Could compulsory quality and size classifications be made optional as ‘optional reserved terms’? Should the retail sale of products that do meet hygiene and safety requirements, but do not meet the marketing standard for aesthetic or similar reasons, be allowed? If so, should such products require specific information for the consumer? Reserved terms within marketing standards  To what extent is it necessary to lay down definitions of ‘optional reserved terms’ in marketing standards at EU level?  Should definitions for general reserved terms describing farming methods in particular sectors, such as ‘mountain product’, ‘farmhouse’ and ‘low carbon’, be laid down by the EU? 459 Simplifying marketing standards To what extent could the drafting, implementation and control of marketing standards (or parts of them) be left to self-regulation? November 2008 Special report EC green paper on quality If marketing standards (or parts of them) remain governed by EU law, what would be the advantages and disadvantages, including in respect of the administrative burden, of:    using co-regulation? referring to international standards? keeping the current legislative approach (while simplifying the substance as much as possible)? Specific EU quality schemes Geographical indications  Is there a need to clarify or adjust any aspects of the rules laying down the rights of GI users and other users (or potential users) of a name?   What criteria should be used to determine that a name is generic?  Should the use of alternative instruments, such as trademark protection, be more actively encouraged?   Should additional criteria be introduced to restrict applications for GIs?  Should specific sustainability and other criteria be included as part of the specification, whether or not they are intrinsically linked to origin?   What would be the benefits and drawbacks?   What should the EU do to protect GIs in the most effective way in third countries?  What are the advantages and disadvantages of identifying the origin of raw materials in cases where they come from somewhere else than the location of the GI?  Should the three EU systems for protection of GIs be simplified and harmonised and, if so, to what extent?  Alternatively, should they continue to develop as separate registration instruments? Are any changes needed in the GI scheme in respect of: o the extent of protection? o the enforcement of the protection? o the agricultural products and foodstuffs covered? Should the criteria for protected GIs, as distinct from protected designations of origin, be made stricter to emphasise the link between the product and the geographical area? What kind of difficulties do users of GIs face when trying to ensure protection in countries outside the EU? Have any difficulties arisen from the advertising of PGI/PDO ingredients used in processed products and prepared foods? Traditional specialities guaranteed Given the low take-up of the TSG scheme, is there a better way of identifying and promoting traditional speciality products? 460 Organic farming   What factors might inhibit the development of a single EU market in organic products? How can the single EU market in organic products be made to work better? November 2008 Special report EC green paper on quality Geographical indications for outermost regions  To what extent has use of the graphic symbols for the EU’s outermost regions increased awareness of products from the outermost regions?  How should these initiatives be developed in order to increase the volume of quality agricultural products originating from the outermost regions? General questions  Are there any pressing issues for which existing schemes and arrangements are inadequate and for which there is a strong case for an EU-level scheme?  Should the Commission consider mandatory schemes in certain cases, for example those with a complex legal and scientific background or those needed to secure high consumer acceptance?  If so, how can the administrative burdens on stakeholders and public authorities be kept as light as possible? Food-quality certification schemes  To what extent can certification schemes for quality products meet the main societal demands concerning product characteristics and farming methods?  To what extent is there a risk of consumers being misled by certification schemes assuring compliance with baseline requirements?  What are the costs and benefits for farmers and other producers of food (often small- and medium-sized enterprises) in adhering to certification schemes?   Should a more active involvement of producers’ organisations be promoted?   What criteria would need to be included in such a guide or guidelines?  How can private certification schemes be used to assist EU exports and promote European quality products in export markets?  How can the EU facilitate market access for producers in developing countries who need to comply with private certification schemes in order to supply particular retailers? Could EU guidelines be sufficient to contribute to a more coherent development of certification schemes? How can the administrative costs and burdens of belonging to one or more qualitycertification schemes be reduced? 461 Glossary of terms relating to agricultural trade 463 ‘A, B’, C’ sugar quotas In the framework of the former sugar CMO: acquis (communautaire) The body of principles, policies, legislation, practices, obligations and objectives that are included in the various EU treaties ad valorem equivalent (AVE) The rendering as a percentage, of an import tariff based on some other value, e.g. weight; for example if a tariff on an import is set at $n per product or unit of product, the AVE formula allows it to be expressed as a percentage of the value of the good Amber box All support measures that support prices or production of agricultural products, thereby distorting trade; examples include US counter-cyclical payments to farmers; to be reduced or eliminated under the AoA A: sugar produced for domestic needs, carrying a production levy of 2% B: sugar produced for export with subsidy, carrying a production levy of 37.5% C: sugar is sugar exported without a direct export subsidy http://www.wto.org/english/tratop_e/agric_e/agboxes_e.htm AMS Aggregate measurement of support is the indicator on which the domesticsupport discipline for the Uruguay Round Agreement on Agriculture is based. It is determined by calculating a market-price support estimate for each commodity receiving such support, plus non-exempt direct payments or any other subsidy not exempted from reduction commitments, less specific agricultural levies or fees paid by producers Article 133 Committee of the EU Committee that advises and makes proposals to the EC on the negotiation of international trade agreements Article XXIV The Article of GATT (1994, adopted by the WTO) relating to frontier traffic in free-trade areas and customs unions http://www.wto.org/english/docs_e/legal_e/10-24.pdf Blue box Subsidies or direct payments to agricultural producers that are part of programmes aimed at limiting agricultural production; these payments do not need to be reduced or eliminated http://www.wto.org/english/tratop_e/agric_e/agboxes_e.htm Cairns group A grouping of 17 countries that promotes liberalisation in trade in agricultural products; it includes: Argentina, Australia, Bolivia, Canada, Chile, Colombia, Costa Rica, Fiji, Guatemala, Indonesia, Malaysia, New Zealand, Paraguay, Philippines, South Africa, Thailand, and Uruguay http://www.cairnsgroup.org/ Cancun 5th WTO Ministerial conference in Cancun, September 2003 CARICOM Caribbean Community and Common Market http://www.caricom.org/ Codex Alimentarius Joint FAO/WHO food standards programme Commission http://www.codexalimentarius.net/web/index_en.jsp COLEACP The Europe-Africa-Caribbean-Pacific Liaison Committee is an interprofessional network promoting sustainable horticultural trade, gathering together ACP producers/exporters and EU importers of fruit and vegetables, flowers and ornamental plants, and other companies and partners operating in the ACP/EU horticultural industry http://www.coleacp.org/ 465 COMESA Common Market for Eastern and Southern Africa (Angola, Burundi, Comoros, DR Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia, Zimbabwe) http://www.comesa.int/index_html/view Committee on Agriculture The WTO committee that oversees the implementation of the AoA (c.f. supra) compensatory trade measures Policy response to the erosion of the value of trade preferences COREPER Committee of Permanent Representatives, the structure of consultations with national governments at the level of officials which prepares all ministerial decisions within the EU Counter-cyclical payment A form of agricultural subsidy used by the USA that compensates a farmer if the price of an agricultural commodity drops below a level deemed to be desirable CRNM Caribbean Regional Negotiating Machinery www.crnm.org Cross-compliance To make the single farm payments conditional on environmental, food safety, animal welfare, health and occupational safety standards decoupling Of farm support from production through direct payments deficiency payment payment paid by governments to producers of certain commodities and based on the difference between a target price and the domestic market price or loan rate, whichever is the less de minimis Rules permitting exemption from notification for state aid to farmers, fishermen, and processing and marketing companies, below a certain threshold (currently €3,000 over a three-year period); the total must make up no more than 5% of agricultural production for developed countries and 10% for developing countries derogation The act of withdrawing from or restricting the application of a rule; under the Cotonou Agreement the derogation provisions of the rules of origin allow exceptions to the general rules of origin. This allows non-originating products to be used to a greater degree than the normal rules of origin would allow, without losing the benefits of the trade preferences extended distortion When prices and production are higher or lower than levels that would usually exist in a competitive market EC European Commission http://europa.eu.int/comm/index_en.htm ECOWAS Economic Community of West African States (CEDEAO) (Benin, Burkina Faso, Cabo Verde, Côte d’Ivoire, Gambia, Ghana, Guinea, Guinea Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, Togo) http://www.ecowas.int/ equivalency agreements Equivalence of sanitary measures associated with food inspection and certification systems ESA configuration The grouping of eastern and southern African countries negotiating an EPA with the EU (Burundi, Comoros, DR Congo, Djibouti, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Uganda, Zambia, Zimbabwe) EU European Union http://europa.eu.int/ 466 EU15 the 15-member EU up to end-2003 EU25 the 25-member EU from 1 May 2004 EU27 the 27-member EU from 1 January 2007 export credits Financing arrangement allowing a foreign buyer of exported goods and/or services to defer payment over a period of time, often used also for an insurance or guarantee arrangement export subsidies government payments to induce exportation by domestic producers G20 Group of advanced developing countries, characterised by their common demand for greater agricultural market access from developed countries; members are Argentina, Bolivia, Brazil, Chile, China, Cuba, Egypt, Guatemala, India, Indonesia, Mexico, Nigeria, Pakistan, Paraguay, Philippines, South Africa, Tanzania, Thailand, Venezuela, Zimbabwe G90 Group of 90 developing countries including the LDCs, ACP and African Union member countries geographical indications Place names (or words associated with a place) used to identify products (for example, ‘Champagne’) which have a particular quality, reputation or other characteristic because they come from that place green box Agricultural subsidies that are government-funded and do not involve price support; they need not be reduced or eliminated. An example is payments under environmental programmes. http://www.wto.org/english/tratop_e/agric_e/agboxes_e.htm green room process Meetings of representatives of a limited number of WTO members specifically selected and invited by the host (often the WTO director-general) in order to work out an agreement among themselves, and then present such agreement to the broader WTO membership for general acceptance GSP Generalised System of (tariff) Preferences A scheme providing for free rates of duty for merchandise from beneficiary developing independent countries and territories to encourage their economic growth GSP + GSP+ is a special incentive arrangement which provides additional benefits than GSP for countries implementing international standards in sustainable development and good governance IPRs Intellectual property rights accrue to the creator of an intellectual property, including: copyrights, trademarks, geographical indications, industrial designs, patents, and undisclosed commercial information or data LDCs Least-developed countries http://www.unctad.org/templates/countries.asp?intItemID=1 676 MAI Multilateral Agreement on Investment http://www1.oecd.org/publications/pol_brief/1997/9702_pol.htm MEA Multilateral Environmental Agreements http://europa.eu.int/comm/environment/international_issues/agreements_en.ht m Mercosur Mercado Común del Sur (Southern Common Market - Argentina, Brazil, Paraguay and Uruguay) http://www.mercosur.int MFN Most favoured nation treatment; WTO members are normally required not to prefer or favour one or some WTO member over other WTO members 467 Ministerial Conference The highest policy- and decision-making body of the WTO, composed of the trade ministers of all WTO members modulation The instrument which provides a means to transfer CAP funds from direct aids to farmers and market measures (‘Pillar 1’ of the CAP) to rural-development measures (‘Pillar 2’); it applies to all farmers across the EU with the exception of the smallest; in order to finance the additional rural-development measures agreed in the reform, all direct payments (SPS and other direct aids) will be reduced, by 3% in 2005, 4% in 2006 and 5% from 2007 onwards until 2012. Multifunctionality The idea that agriculture has many functions in addition to producing food and fibre, e.g. environmental protection, landscape preservation, rural employment, etc National treatment The obligation to treat domestic and imported goods, services, service suppliers, investments, and IPRs equally or in the same way Non-annex 1 Value-added products produced on the basis of CAP agricultural raw materials but which were not included in the agricultural products listed in the annex to the treaty of Rome and subsequent EU Treaties NTBs Non-tariff barriers http://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm9_e.htm Originating product The concept of ‘originating’ product is the key to the rules of origin under the Cotonou Agreement: a product is considered ‘originating’ if it is ‘wholly’ obtained in an ACP country or if it has undergone one of the various stages of processing which grants the status of originating product on ‘non-wholly obtained products’. Pacific Forum The Pacific Island Forum represents 16 heads of government of all the independent and self-governing Pacific Island countries including Australia and New Zealand http://www.forumsec.org.fj/ Peace clause Provision in Article 13 of the WTO Agreement on Agriculture which says that agricultural subsidies committed under the agreement cannot be challenged under other WTO agreements, in particular the Subsidies Agreement and GATT; expired at the end of 2003 Pillar 1 and 2 measures ‘Pillar 1’ covers direct aids to farmers and market measures under the CAP; ‘Pillar 2’ covers rural-development measures POSEI Specific measures concerning agricultural products to assist the French Overseas Departments (POSEIDOM), the Azores, Madeira (POSEIMA), the Canary Islands (POSEICAN) Precautionary principle The precautionary principle covers cases where scientific evidence is insufficient, inconclusive or uncertain and preliminary scientific evaluation indicates that there are reasonable grounds for concern that the potentially dangerous effects on the environment, human, animal or plant health may be inconsistent with the level of protection chosen by a particular country Preference erosion A process in which trade negotiations, by entailing a general reduction in tariffs, erode the value of the preferences granted to developing countries Quad countries The USA, Japan, Canada and the EU Quint countries The USA, Japan, Canada, Australia and the EU QRs Quantitative restrictions, such as quotas on imports Rules of origin Laws, regulations and administrative procedures which determine a product’s country of origin and affects whether a shipment falls within a quota limitation, qualifies for a tariff preference or is affected by an anti-dumping duty 468 SDT (or S&DT) Special and differential treatment; it refers to the principle that allows developing countries with special terms regarding compliance with WTO obligations in view of their different or lower state of economic development. This includes receiving preferential access to developed country markets without having to provide a similar access to their own markets, and flexibility in the application of domestic support measures SACU Southern African Customs Union (South Africa and the BLNS countries) http://www.sacu.int/ SADC Southern African Development Community (Angola, Botswana, DR Congo, Lesotho, Malawi, Mauritius, Mozambique, Namibia, South Africa, Swaziland, Tanzania, Zambia, Zimbabwe) http://www.sadc.int/ SADC configuration The SADC countries negotiating an EPA with the EU: South Africa, the BLNS countries, Angola, Mozambique and Tanzania Sensitive products In the framework of multilateral negotiations: products nominated by WTO members as not subject to full disciplines by mutual agreement; the EU has explicitly stated that sensitive products will not be exempt from tariff cuts, although they will be at a reduced level; any allowance for sensitive products would be wider for developing countries In the framework of bilateral negotiations (including EPAs): products which are excluded from the agreement. Singapore issues The four issues identified in the Singapore Ministerial Conference in 1996 in which the WTO agreed to create four separate working groups to discuss the issues as part of the WTO’s work programme: (i) the relationship between trade and investment; (ii) the relationship between trade and competition policy; (iii) trade facilitation; and (iv) transparency in government procurement. Single-desk exporters Enterprises with responsibility for domestic and export sales (such as STEs) account for large shares of world trade in certain products: about 40% for wheat and 30% for dairy products Single farm payment From January 2005, this will replace most of the individual scheme payments under the current CAP regime. This single payment will not be linked to production. But it is conditional: farmers must keep the land in "good agricultural and environmental condition" (GAEC) and meet cross-compliance requirements Special products Products which concern food security, rural development or livelihood security designated as ‘special’ with the agreement of the WTO; they enjoy lower tariffreduction schedules, over a longer implementation period, and are exempt from minimum access-quota provisions ftp://ftp.fao.org/docrep/fao/005/y4852e/y4852e03.pdf Special safeguard clause Refers to article 5 of the URAA, which authorises WTO members, when their trade situation justifies such action, to apply additional duties in order to prevent sudden or unpredictable surges in imports or sharp reductions in import prices Single Payment Scheme (SPS) The SGS is the EU’s decoupled annual payment to farmers in the third phase of CAP reform Sanitary and phytosanitary (SPS) SPS measures to protect humans, animals, and plants from diseases, pests, or contaminants State trading enterprises STEs are defined by the WTO as ‘governmental and non-governmental enterprises, including marketing boards, which have been granted exclusive or special rights or privileges, including statutory or constitutional powers, in the exercise of which they influence through their purchases or sales the level or direction of imports and exports’; three trade-distorting practices of STEs, i.e. cross-subsidisation, price-discrimination and price pooling, can be identified as 469 ‘hidden’ export subsidies. http://www.wto.org/english/tratop_e/statra_e/statra_e.htm Tariff escalation Tariff escalation occurs when the tariff applied on a product category rises as the level of processing increases Tariffication The conversion of quotas or other non-tariff barriers to tariffs that would provide roughly the equivalent level of trade restrictions on imported products TBTs Technical barriers to trade http://www.wto.org/english/tratop_e/tbt_e/tbt_e.htm TDCA Trade, Development and Cooperation Agreement (FTA between the EU and South Africa) TRIMS (agreement) Trade-related investment measures (agreement): requiring national treatment in measures to encourage or regulate foreign investments, prohibiting quantitative restrictions and requiring transparency TRIPs (agreement) Trade-related intellectual property rights (agreement): makes the trade concepts of national treatment and most favoured nation treatment applicable to the protection, application, and use of intellectual property rights TRQs Tariff-rate quota; a defined quota of the import in question (usually a sensitive product) that enters at a certain rate, while imports above that level face a new higher tariff rate UEMOA Union Economique et Monétaire Ouest-africaine (see WAEMU) Uruguay Round The negotiations under the auspices of GATT that were launched at Punta del Este, Uruguay, in 1986 and concluded at Marrakesh, Morocco, in April 1994 Uruguay Round Agreement The package of trade agreements made at the conclusion of the Uruguay Round. The main agreement is the WTO Agreement, to which is annexed all the other trade agreements, decisions, and understandings agreed to during the Uruguay Round USDA FAS United States Department of Agriculture, Foreign Agricultural Service WAEMU/UEMOA West African Economic and Monetary Union. Member states: Benin, Burkina Faso, Côte d’Ivoire, Guinea Bissau, Mali, Niger, Senegal, Togo WTO World Trade Organisation www.wto.org WTO Agreement The main framework treaty creating the WTO and to which is annexed the various other Uruguay Round agreements. As of July 23rd 2008 153 countries had ratified or acceded to the WTO Agreement 470