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UNDERSTANDING INTERNATIONAL TRADE
A publication of the OECS Trade Policy Project aimed at students,
businesspersons and th...
ACP African, Caribbean and Pacific Group
BFA Banana Framework Agreement
BPOA Barbados Programme of Action
(adopted in 1994...
PREFACE
Professor Vaughan A. Lewis1
This is an opportune time to publish this guide to the trade issues which shape the
cu...
Consequently the long period of successfully negotiated successive Lomé Conventions
with their arrangements for STABEX com...
Reform
The European Union, in a prelude to elaboration of new proposals for what has become
the formula of the Economic Pa...
It is a prerequisite for adapting to both the new environments of the EU and the emerging free
trade area agreements in ou...
FOREWORD
In an environment governed by global trade rules with a capacity for determining the
economic and social progress...
8
Table of Contents
Glossary ................................................................................................
9
Chapter 6 TOURISM AND OTHER SERVICES - THE ISSUES IN MULTILATERAL NEGOTIATION.........50
6.1.1 What are the OECS’ intere...
10
Adjustment Assistance: The financial and technical support
provided for States, firms, workers and communities to help
...
11
Export subsidies: Payments by government to domestic exporters
of goods and services. Such payments enable foreign sale...
12
Supply-side Constraints: New trading opportunities cannot
always be taken up by a country because it is unable to incre...
13
Introduction
The world of international trade can appear abstract and far removed from everyday
life. The very terms us...
14
require to maintain the lifestyles that they are accustomed to. (The islands therefore cannot
be self-sufficient). If t...
15
hapter 1
Economic Integration in the Caribbean
1.1 The OECS
Working together in the Eastern Caribbean is quite understa...
16
Evidence can be found of aspirations for Caribbean integration early in the last century.
This desire was based on a wi...
1.2.1 Creating the CSME
The CSME was built on an institutional base already created by CARICOM. To appreciate
the scope an...
The revised Treaty though, would not itself create the Single Market and Economy. The
Governments’ mere agreement to grant...
19
The realisation of benefits in these areas will depend on a number of factors, including the
appropriateness of the act...
20
7
Including “Council for Finance and Planning” (COFAP), Council for Foreign Community Relations” (COFCOR), and “Council...
21
hapter 2
Bilateral / Bi-regional Trading ArrangementsCEconomic integration of the OECS and CARICOM has been against a b...
22
2.1 Economic Partnership with Europe
When the UK joined the European Economic Community (EEC) in 1973, it had to give u...
The current system, the Cotonou Agreement, under which OECS countries can export
to the EU without having to pay customs d...
the innovation in the proposed trading relationship would essentially be that EU products
would now also enter the ACP on ...
25
In May 2004 Botswana’s President, Festus Mogae said, “We fear that our economies will
not be able to withstand the pres...
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INTERNATIONAL TRADE. BASIC PRINCIPLES

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  1. 1. URDERTIN IRa I'NTrRNnTIQNnlTRADr the "~Iiriri ,'i 'i':' ,' ~-~ - - -- - -- ---- , @1~u;tl:Jlmi,~rQID! lh:1_.'('0);[«11 ~- 1t~,ll!J,;i.."" '''r:'~!.i.:4 iiL' I'"~ ""dA,, 'iA .,;tn'Q~t. &p,WljR !a~iP'@"l!lm! 'iJ,Ji! g i#!:;'-r.."o;r.,r;, s~ i~ ,.:i,1" n.'i,li~', ~ 'E;:Q,£"JlI;e Ui~i 1r arB'e,J.""o,J,(1.::!Y'
  2. 2. UNDERSTANDING INTERNATIONAL TRADE A publication of the OECS Trade Policy Project aimed at students, businesspersons and the public that explains the operation of the trading system from the perspective of the Eastern Caribbean Written for the OECS Trade Policy Project by Edwin Laurent. Editor: Paula Hippolyte. Published by: The OECS Trade Policy Project June 2006. Design layout and artwork: Media Publishing International, Edwin Laurent and EPO Belgium, Paula Hippolyte and T Lindsey-Bethune. Cover design by John Steele - InnaEye Art Studio - legend@hotmail.com Printed by: Enschedé-Van Muysewinkel June 2006. Valuable contributions, assistance and support received from: Hon Charles Cadet, Dr. Paul Goodison, Dr. Mark Griffith and Mrs Thérèse Louérat. For making this work possible: The OECS Trade Policy Project, the Canadian International Development Agency (CIDA) and the OECS Secretariat. Copyright, 2006 OECS Secretariat P.O. Box 179, Morne Fortune, Castries, Saint Lucia Disclaimer: The ideas expressed in this publication are those of the writer and do not necessarily reflect the positions or views of CIDA, the OECS or any of its organs. 1
  3. 3. ACP African, Caribbean and Pacific Group BFA Banana Framework Agreement BPOA Barbados Programme of Action (adopted in 1994 by the 1st UN conference on the sustainable development of SIDS). CAP Common Agricultural Policy CARICOM Caribbean Common Market CARIBCAN Caribbean-Canada Agreement CARIFTA Caribbean Free Trade Area CBI Caribbean Basin Initiative CET Common External Tariff COM or CMO Common Organisation of the Market (in the EU) COTED Council for Trade and Economic Development CSME Caribbean Single Market and Economy DDA Doha Development Agenda. DFID Department for International Development (UK) DSB Dispute Settlement Body DSU Dispute Settlement Understanding DTI Department for Trade and Industry (UK) EBA Everything But Arms Initiative EC European Community ECCM East Caribbean Common Market EDF European Development Fund EEC European Economic Community EIB European Investment Bank EPA Economic Partnership Agreement ESM European Single Market EU European Union FAO Food and Agriculture Organisation FLEX Fluctuation in Export Earnings FOB Free on Board FTA Free Trade Area FTAA Free Trade Area of the Americas GATS General Agreement on Trade in Services GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product GSP Generalised System of Preferences HTCI Harmful Tax Competition Initiative ICT Information Communication Technology ITC International Trade Centre LDC Least Developed Countries (UN) LDC Less Developed Countries (CARICOM) MDGs Millennium Development Goals MFN Most Favoured Nation MTN Multilateral Trade Negotiations NAMA Non Agricultural Market Access NGO Non-Governmental Organisation NIP National Indicative Programme NTB Non-Tariff Barriers OECD Organisation for Economic Cooperation and Development OECS Organisation of Eastern Caribbean States QR Quantitative Restrictions RTA Regional Trading Arrangement SFA Special Framework of Assistance SIDS Small Island Developing States SSA Special System of Assistance (for bananas by the EU) STABEX Stabilisation in Export Earnings SVE Small Vulnerable Economy TBT Technical Barriers to Trade TRQ Tariff Rate Quota UNCTAD United Nations Conference on Trade and Development USTR United States Trade Representative WIBDECO Windward Islands Banana Development Export Company WINFA Windward Islands Farmers’ Association WIRSPA West Indies Rum and Spirits Producers Association WISA West Indies Associated States (Council of Ministers) WTO World Trade Organisation ACRONYMS 2 So all these letters really mean something then
  4. 4. PREFACE Professor Vaughan A. Lewis1 This is an opportune time to publish this guide to the trade issues which shape the current situation of the OECS countries and the international economic environment. The fate of the banana and sugar industries, as the conditions for entering an increasingly integrated and expanded European market change, in the face of global trade rules change, has awakened many citizens of the islands to the dramatic, negative effects on their livelihoods that have already occurred and are still likely to occur. And this has certainly been forcing a discussion on the manner in which these countries should adapt to such changes, and on the extent to which such adaptation can be successfully achieved. It is now some twenty years since the European Community indicated to the participating states in the African, Caribbean and Pacific (ACP) grouping that its pursuit of a European Single Market and Economy would require full liberalization of trade within the Community, and that its intention with to achieve this by 1993. At first, it appeared to the OECS governments that, following the successful diplomatic effort which, in concert with others, had resulted in the 1975 Lomé Convention, a similar effort of negotiation with the Community could be undertaken. The essential objective of this would be to preserve the benefits accruing from the Convention, including the preferential arrangements by which their key products were facilitated entry into the markets in Europe. Early on, however, it became apparent that two processes had been taking place, which would affect the nature of the negotiations and their potential results: • First the expanding membership of the Community was effecting a change of Community sentiment away from its previous understanding of and response to particular concerns of developing states, to one of reduced sympathy for them. The developing view was that there should be no substantial discriminatory difference among Member States with regard to the conditions under which third party products could enter into Community markets. • Secondly, at the time of the European decision on its Single Market and Economy, the member-states of the Community were already deeply engaged in negotiations within the Uruguay Round for further liberalization of international trade, the extension of the principles of liberalization to the sphere of production, and the further extension of those principles to the spheres of agriculture and services. This orientation was being pushed with a certain anxiety and persistence by the United States of America. As the writer indicates, as they began their negotiations, the OECS and CARICOM exporters of bananas were caught somewhat by surprise at the extent to which their traditional diplomatic relationship with the United Kingdom was not enough to achieve a smooth consensus with the other member states of the EC. This certainly revealed the diminished capacity of the United Kingdom to act as a diplomatic broker on behalf of the ACP, and therefore Caribbean states, and to achieve, relatively intact, broader agreement in Europe on proposals reached between the UK and the Caribbean. Britain, of course, had itself been engaged in a policy revolution focused on the liberalization and deregulation of her own domestic economy under Prime Ministers Thatcher and then Major, and thus could not legitimately resist the extension of that process to the international economy as a whole. It is useful to recall at this point that the realization on the part of the OECS and CARICOM states that changing international conditions would require substantial “structural adjustment” and “diversification” of their own economies was not something of sudden origin. In fact in the mid-1960’s, the Governments of the time, shocked into recognizing the implications of Britain’s decision to apply for membership of the European Communities, had appealed to that country to seek to ensure that in the process some form of preferences for their agricultural exports would be maintained, and “compensation” or “support” for progressive “adjustment” of the economies of their states towards “economic diversification”. 1 Dr Vaughan Lewis is Professor of International Relations of the Caribbean at the University of the West Indies, St Augustine Campus, Trinidad. He was the first Director General of the OECS Secretariat and is a former Prime Minister of Saint Lucia. 3
  5. 5. Consequently the long period of successfully negotiated successive Lomé Conventions with their arrangements for STABEX compensation for exports periodically affected negatively by market or production conditions, along with satisfactorily negotiated preferential arrangements, appears to have lulled Governments into a false sense of the security of those arrangements as props for their post-colonial mode of economic production and marketing. The rude awakening of Caribbean governments to the persistent push for liberalization of the European internal market, spurred on by commitments now made to the World Trade Organization (WTO), indeed revived the language, in Caribbean diplomacy of the 1990’s of compensation, adjustment, special treatment and gradual erosion of preferences, that had been prevalent since the 1960’s and 1970’s. And this has been persistently so, particularly as the WTO in general has shown no sympathy for ACP countries presumed status as requiring, in this case at least, “special and differential treatment”. Regional and International Relations The decision, of the CARICOM states to establish a Single Market and Economy, initially made in 1989 and formalized in 1992 was an indication of the compulsions moving the region towards principles of liberalization increasingly being implemented as a requirement of their receipt of assistance from the World Bank and the International Monetary Fund at a time of recession among, in particular, the More Developed Countries of the Region. This commitment, including reductions in the levels of the CARICOM Common External Tariff, intensified discussions in the region as a whole, on the necessity for domestic structural adjustment and liberalization, which Governments had been forced to undertake at the international level (at the level of EU-ACP relations). The requirements for compensation arrangements (including a Regional Integration Fund) and special treatment, which where being pleased for at that international level, were now re-echoed by Lesser Developed Countries (largely OECS States) within a regional context. Again here, the discourse led by OECS Governments has been strangely reminiscent of the “demands” made by Antigua and Barbuda and Montserrat at the time of the transformation of CARIFTA into CARICOM in 1973. These resulted in the “compensatory” arrangements for the establishment of the Caribbean Investment Corporation and a renewed commitment to focus the Caribbean Development Bank’s efforts on the Lesser Developed Countries efforts. The banana producing countries which have had to contend since the 1990’s with the fallout from changes in the banana marketing arrangements, and which have been taking this message to European capitals since then, in search of a viable solution to the decline in banana preferences, have now been followed in their diplomatic forays by Governments of the sugar producing states of the Region. In the early 1990’s, the view was taken that the Sugar Protocol, having been separately agreed, and agreed prior to the Lomé Convention, would be exempt from the pressures for change emanating form the liberalization process of the European Single Market and Economy. But ten to fifteen years later, Caribbean Governments have been shocked into recognition that the process of internationalization of decision-making on trade arrangements, (the WTO process) which ruthlessly negated agreements which the Banana producing countries continually negotiated and deemed as settled, has come to affect the status of their sugar exports. The European Union has had to bend to the mandates of the WTO, and our traditional “interlocutor valuable” or diplomatic broker, the United Kingdom, has not been able to roll back the waves of liberalization and deregulation in spite of her professed sympathy for our case. What all this raises, surely, is the extent to which, over the years of change in our conditions of international trade and production, the Caribbean countries are being forced to adjust to new trading conditions, either through the reorganization of their traditional economic (and in particular agricultural) activities, or the creation of new activities capable of penetrating existing international markets under the new conditions. 4
  6. 6. Reform The European Union, in a prelude to elaboration of new proposals for what has become the formula of the Economic Partnership Agreement (EPA), had given a signal in its Green Paper (discussed in this Guide) that it had not been satisfied that the provisions of the Lomé Conventions, providing access to the non-agricultural sector of the EU economy, had been appropriately made use of. The EU observed that the extensive aid provided to ACP countries over the years had not resulted in sustained structural adjustment of their economies. The EU, now reaching into South and Central America in search of new markets and new locations for investment (through the establishment of free trade areas), is conscious that in doing so, it is required to conform to the disciplines attached to such trading arrangements, particularly those relating to the principles of reciprocity. It was therefore but a matter of time before the EU was to insist that reciprocity – mutual opening of markets - should underlie any new trading arrangement between itself and the ACP countries, irrespective of size of economy. And in turn Caribbean countries have felt compelled to raise the battle cry of the need for deliberate differentiation based on size and level of economy through mechanisms of special and differential treatment. As the writer indicates this is a discussion now in progress, and we are left to see what the translation of reciprocity into rules and regulations means for these self-categorized small-island developing countries (SIDS) in addition to the larger mainland producers of sugar (Guyana and Belize) and of bananas (Belize). In a sense, in this process the ball is now squarely in the court of the ACP countries – specifically the Caribbean states. For it is recognized that our negotiations for an EPA will not be diplomatically “mediated” by the United Kingdom in any substantial sense as were our negotiations towards the 1975 Lomé Convention. And that, further, our states cannot have the attention of the “traditional” European member states of the EU as they struggle with their new venture of simultaneous deepening and widening of their own internal market involving states with even less empathy for our objectives than the block of “liberalizing-inclined” EC states in the 1990’s. This raises an issue which goes beyond the reach of this Guide: the need to search for new diplomatic allies in the difficult situation where differences of orientation among developing countries themselves are tending to become evident – witness the stand of Guyana’s neighbour Brazil on the sugar issue. A further issue raised is that of the translation of the demand for assistance within the structure of a new EPA into efforts conducive to encouraging structural adjustment and sustainable development. The writer stresses the need for the detailed programming of EU funded projects to coincide with European expectations of visible progress in the structures of our economies. These issues are being negotiated at the Caricom regional level, and should presume an effective single economic space to meet the need for diversification on the basis of scale adequate to meet the demands of the competitive environment, and to permit diversification of economic activities and therefore exports. Charting a new course The OECS countries have recognized the need to systematically travel the road to some form of economic union and creation of a single economic space. The urgent question now is what form is the larger system to take in terms of creation of a Caricom single economic space, and the extent to which this is necessary to give the OECS countries a stronger base for economic diversification, or will affect their own process of economic union. This internal discussion needs to take place with some deliberation within our sub-Region at this time. As the author emphasizes, it requires extensive technical and financial resources. 5
  7. 7. It is a prerequisite for adapting to both the new environments of the EU and the emerging free trade area agreements in our Hemisphere. The European Union is presently carrying out an experiment related to the adjustment of its new members of Eastern Europe, which in a sense speaks to the issue of the arrangements between lesser and more developed countries. As we approach them in our negotiations they will see us in constant comparison with their own circumstances, and match our progress against those circumstances. The insistence in the EU Green Paper on the need for more appropriate utilization of aid funds will undoubtedly remain a significant part of European diplomacy, and a condition of the success of our own diplomacy.And our success in this sphere will undoubtedly influence the nature of the relations that we work out in this Hemisphere as the United States pushes relentlessly on towards the creation of a free trade area, or a multiplicity of free trade areas here. 6
  8. 8. FOREWORD In an environment governed by global trade rules with a capacity for determining the economic and social progress of small states vulnerable to change, trade matters have within the OECS States become the business of everyone. This is particularly true for students about to enter a world of business which demands knowledge of such issues. Under an assistance Programme designed to Strengthen the capacity of the OECS sub-region to better participate within the regional integration and wider multilateral trade agreement processes, the OECS Trade Policy Project, funded by the Canadian International Development Agency, included in its activities an awareness component intended to create a general climate of understanding of the trade issues which will need to be addressed in this context. It is against this background that an allocation of resources from the awareness component of the CIDA/OECS Trade Policy Project was directed by the OECS Secretariat towards the preparation of this trade policy guide which, while specifically targeted at tertiary school students, is hoped will be found usefully informative by a wider public. Dr. Len Ishmael Director General OECS Secretariat 7
  9. 9. 8 Table of Contents Glossary .................................................................................................................................................................................... 10 Introduction .................................................................................................................................................................................... 13 Section 1 TRADING SYSTEMS........................................................................................................................................... 15 Chapter 1 ECONOMIC INTEGRATION IN THE CARIBBEAN.................................................................................15 1.1 THE OECS................................................................................................................................................................15 1.2 THE CARICOM AND THE CSME.....................................................................................................................15 1.2.1 Creating the CSME................................................................................................................................................16 1.3 HOW DO THE SINGLE MARKET AND THE SINGLE ECONOMY WORK ?...................................18 1.3.1 What is in the CSME for the OECS ?........................................................................................................... 18 Chapter 2 BILATERAL / BI-REGIONAL TRADING ARRANGEMENTS...............................................................21 2.1 ECONOMIC PARTNERSHIP WITH EUROPE...............................................................................................22 2.1.1 The EPA negotiations and their policy context...................................................................................... 22 2.1.2 Background to EPAs.............................................................................................................................................23 2.1.3 What is the EPA?....................................................................................................................................................24 2.1.4 Criticism of EPAs...................................................................................................................................................24 2.1.5 Issues in the EPA negotiations.........................................................................................................................25 2.1.6 Matching up the two sides.............................................................................................................................. 27 2.1.7 Stop EPAs ?..............................................................................................................................................................28 2.2 FREE TRADE AREA OF THE AMERICAS.......................................................................................................28 2.2.1 Prospects and challenges..................................................................................................................................28 2.3 BILATERAL TRADE AGREEMENTS................................................................................................................. 29 Chapter 3 A MULTILATERAL ALTERNATIVE - THE WTO........................................................................................30 3.1 ORIGINS AND EVOLUTION............................................................................................................................ 30 3.2 MULTILATERAL PRINCIPLES.............................................................................................................................30 3.2.1 The system.............................................................................................................................................................. 31 3.3 THE URUGUAY ROUND AND THE BIRTH OF THE WTO.................................................................... 32 3.4 THE WTO’S DISPUTE SETTLEMENT MECHANISM................................................................................. 32 3.4.1 The process............................................................................................................................................................. 33 3.4.2 OECS Participation in Panel Disputes.......................................................................................................... 33 3.5 THE WTO DOHA DEVELOPMENT AGENDA (DDA)................................................................................33 3.5.1 Small Vulnerable Economies............................................................................................................................34 Section 2 THE OECS EXPERIENCE ....................................................................................................................................36 Chapter 4 BANANAS –THE FIGHT FOR THE EU MARKET.....................................................................................36 4.1.1 The Banana Dispute.............................................................................................................................................37 4.1.2 The role of diplomacy........................................................................................................................................38 4.1.3 Resolution of the dispute and subsequent reforms..............................................................................39 4.1.4 Consequences for the Windwards................................................................................................................39 4.1.5 2004 – EU Enlargement.....................................................................................................................................40 4.1.6 More recent threats: Arbitration and the abolition of quotas.........................................................41 4.1.7 The CARICOM-OECS position........................................................................................................................41 4.1.8 Beyond Cotonou.................................................................................................................................................. 42 4.1.9 Charting a course for the future....................................................................................................................42 Chapter 5 SUGAR......................................................................................................................................................................44 5.1.1 The Sugar Protocol.............................................................................................................................................. 44 5.1.2 Threats to the Protocol..................................................................................................................................... 44 5.1.3 Reforming the EU Common Market Organisation for Sugar............................................................. 45 5.1.4 Consequences for the Sugar Protocol Members....................................................................................46 5.1.5 Securing and using financial support...........................................................................................................46 5.1.6 What future for sugar ?......................................................................................................................................47
  10. 10. 9 Chapter 6 TOURISM AND OTHER SERVICES - THE ISSUES IN MULTILATERAL NEGOTIATION.........50 6.1.1 What are the OECS’ interests ?.......................................................................................................................50 6.1.2 Tourism.......................................................................................................................................................................52 6.1.3 Financial services...................................................................................................................................................53 6.1.4 Information and communication technology (ICT)................................................................................53 6.1.5 Mode 4...................................................................................................................................................................... 54 6.1.6 Other negotiating aims.......................................................................................................................................54 Section 3 THE WAY FORWARD......................................................................................................................................... 55 Chapter 7 ADOPTING NEW APPROACHES................................................................................................................... 55 7.1 DIVERSIFICATION AND DEVELOPMENT......................................................................................................55 7.1.1 A role for the private sector............................................................................................................................ 55 7.1.2 The experience of external support............................................................................................................ 57 7.1.3 Was the support effective ?.............................................................................................................................57 7.2 TRADE AND ENVIRONMENT...........................................................................................................................58 7.3 NEGOTIATION- USING TRADE DIPLOMACY TO ADVANCE NATIONAL/REGIONAL GOALS....60 Further reading .....................................................................................................................................................................................63 List of tables Table 1 Supplies of Bananas to the EU 15, 1990-2002 (thousand tonnes)....................................................36 Table 2 Banana Export Values (fob) (US$ million).................................................................................................. 40 Table 3 Contribution of sugar to employment and foreign exchange.......................................................... 44 Table 4 Projected loss of earnings..................................................................................................................................46 List of boxes Box 1 The building blocks of the CSME....................................................................................................................20 Box 2 Department for International Development and Department of Trade and Industry Report..25 Box 3 UK Parliamentary Report...................................................................................................................................27 Box 4 Trade policy reviews.............................................................................................................................................31 Box 5 UNCTAD.................................................................................................................................................................... 34 Box 6 The problem of different production costs between the ACP and Latin America..................37 Box 7 CommonFund for Commodities.....................................................................................................................47 Box 8 Rum.............................................................................................................................................................................48 Box 9 Making Trade Policy..............................................................................................................................................49 Box 10 The International Trade Centre.......................................................................................................................58 Box 11 Millenium Development Goals (MDGs)..................................................................................................... 59 List of figures and charts Figure 1. Merchandise trade in the OECS, 2004.........................................................................................................14 Figure 2. The position of the OECS within the global trading system.............................................................21 Figure 3. Average free on board (fob) prices, 1999....................................................................................................37 Figure 4. Number of active banana growers in the Windward Islands, 1993-2001, thousands.............. 39 Figure 5. Export values for bananas fob, 1991-2002, $US million....................................................................... 40 Figure 6. Services Trade of the OECS, 2003.................................................................................................................51 Figure 7. Tourist arrivals in the OECS, 2004 (thousands)........................................................................................52 Figure 8. Estim. value of expenditure, EC$ m, 2004.................................................................................................53 Figure 9. Estim. % total tourist expenditure, 2004................................................................................................... 53
  11. 11. 10 Adjustment Assistance: The financial and technical support provided for States, firms, workers and communities to help them adapt to and function satisfactorily in conditions of increased competition for their products in overseas and/or domestic markets. This assistance can include help to Governments to devise alternative revenue collection mechanisms to replace duties lost as a result of their reduction or elimination of tariffs on imported goods. Appellate Body: The WTO group that hears appeals against the conclusions of Dispute Settlement Panels. Asymmetry in the Trade Agreement: The treatment of the sides in a trading arrangement where the rate of tariff reduction undertaken by the Parties is different, or asymmetrical. One Party could be given a longer time compared to the other for completing the process. Alternately, a lesser percentage of its total imports could be subjected to tariff reduction and elimination, and also, different obligations on the rate or extent of removal of other barriers to trade could apply. Barriers to trade - (tariff and non-tariff): Restrictions placed by governments on imports that take the form of customs duties, charges, limitations on the volume and other measures, which are not borne by domestic products. These barriers can have the effect of making imports more expensive and/or reducing their volume. Beggar-thy-Neighbour Policy (Protectionism): A country seeking to strengthen the competitive position of its domestic production vis-à-vis imports through discouraging imports with high tariffs and other measures that restrict imports. The imagery stems from a side effect of the policy that exporters could lose the market and might well be impoverished. Bilateral: Negotiations, agreements or understandings between two countries. Binding: When countries agree in the WTO not to increase the rate of duty on a particular item imported from other Members, the rate is “bound”. The country cannot then charge duties at rates higher than the bound level; it would be violating the rules and action could be taken against it. There are, however, provisions for it to subsequently negotiate for increases in its tariff rate. A country is free to charge (apply) a lower rate of duty. Bretton Woods Institutions: The collective name for the International Monetary Fund and the World Bank. Named after the town in New Hampshire in the US where they were created in 1944. Caribbean Single Market and Economy: The single economic space among members of CARICOM in which there are no restrictions on the free movement of goods, services, labour and capital. Commodities: Widely traded bulk goods, often unprocessed and homogeneous. Commodity Protocols: The ACP-EU Agreements contain special arrangements regarding ACP trade in specific commodities like sugar and bananas. The aim is to provide additional provisions to the ACP that will support development and remunerative trade of these commodities. Common Agriculture Policy (CAP): The unified system operated by EU countries for conducting their agricultural programmes and policies that are based principally on price supports or subsidies and production quotas. Common External Tariff (CET): The schedule or list of import duties applied by all Members of a common market on imports from non-member countries. Comparative Advantage: The international trading system is based on this principle first elaborated in 1817 by the economist David Ricardo that a country should produce and export those goods and services in which it is most competitive internationally and import to satisfy its needs for those that it does not produce. Concessions: In negotiations, countries offer to reduce tariffs or other trade barriers, in exchange for, or to induce similar action from their trading partners. Consensus (decision making): Agreement is reached when there is no continuing objection by any participating member of the decision making group. This is in contrast with unanimity where agreement of all participants is actually ascertained. Contracting Party: A country that signed the GATT and accepted its obligations and benefits. Discrimination: Providing more favourable tariff or other treatment for goods and services imported from particular countries as opposed to others. Dispute Settlement Body: The grouping of representatives of all WTO Members that administers WTO rules, establishes Panels to adjudicate disputes and authorises punitive measures for countries that violate the rules. Diversification: Expanding the foundations of the economy to a wider range of production beyond reliance on a single or a narrow range of goods and services. This improves the prospects for economic growth and development. Erosion of Preferences: As importing countries reduce tariffs because of liberalisation, the advantages enjoyed by their sup- pliers with duty-free or reduced duty privileges are cut back. Everything but Arms Initiative: The package first offered to LDCs in 2001 in which Developed Countries and now Developing Countries in a position to offer it, are encouraged to grant pro- ducts from LDCs unrestricted entry to their own markets by removing duties and quotas on all imports except for arms and ammunition. GLOSSARY
  12. 12. 11 Export subsidies: Payments by government to domestic exporters of goods and services. Such payments enable foreign sales to be at lower prices; hence they are more competitive than they would otherwise have been. The WTO therefore considers that such subsidies change trade patterns and distort trade. Factors of Production: According to economic thinking: land, labour and capital. Fairtrade: The production and marketing of goods according to stipulated criteria regarding working conditions, welfare of workers, acceptable environmental standards and the provision of fair returns to producers. Free Trade: The ultimate theoretical goal where there are no governmental barriers to international trade in the form of tariffs and other barriers to goods and services entering the country. Free Trade Area (FTA): A cooperative arrangement among a group of countries to remove tariffs and trade restrictions among themselves, but they keep their individual tariffs on imports from outside the area. CARIFTA was a Free Trade Area. Generalised System of Preferences (GSP): A system under which tariffs applied by developed countries on certain imports from developing countries are reduced or eliminated on the basis of agreed conditions. Gross Domestic Product (GDP): The total value of new goods and services produced in a country during a given year. Import quota : The maximum quantity or value of a particular product allowed to enter a country during a specified time period. Least Developed Countries (LDCs): These are countries classified by the UN on the basis of a range of criteria, principally their per capita income below $900 per annum. According to that criterion, none of the OECS countries are LDCs. The only LDC in the Americas is Haiti. LDCs are eligible for special trading privileges including the Everything but Arms initiative (EBA). Less Developed Countries (LDCs): CARICOM designates the OECS and Belize as LDCs in view of their small size, narrow resource base and low level of development. This designation makes them eligible for special support measures within CARICOM. Liberalisation: An underlying principle of the WTO and the earlier GATT that seeks the reduction and eventual elimination of tariffs and other measures that impede trade. Licensing: When Governments limit the volume of imports of a certain product they might grant permits or licenses to importers that provide them with approval, whether or not in a physical document, that grants them rights to import. Often specific conditions are stipulated. Licensing can also be operated for exports. Market Access: The availability of a national market to exporting countries. Mercantilism: The now discredited policy of the pursuit of trade surplus and the accumulation of monetary assets by promoting exportation and discouraging importation. Mode 4: The temporary relocation of workers to another country where they are employed to provide a service. The farm worker programmes with the US and with Canada are examples. Most Favoured Nation (treatment): A cardinal principle of the Multilateral Trading System is that a country will automatically apply to all WTO Members the lowest tariffs or reductions it applies on imports from any source, whether another WTO member or not. Exceptions to this rule are possible, e.g. in FTAs. Multilateral: Negotiations, agreements or understandings among several countries or groupings. Multilateral Trade Negotiations: These negotiations among all WTO Members (previously GATT Contracting Parties) have been held at intervals to advance the attainment of the objectives of the WTO and are referred to as “rounds”. The current round is called the Doha Development Agenda (DDA) or Doha Round. National Treatment: The commitment to treat foreign products, sellers, businesses and those who provide services the same as domestic counterparts. Non- Tariff Barriers (NTBs): These are measures, other than import duties, taken by a government, that impose limitations on or impede imports. They can range from outright import prohibitions to onerous quality standards and labelling requirements. Preferences: Advantages extended to imports from selected trading partners in the form of lower or zero tariffs or exemption from certain NTBs. Quantitative Restrictions (QRs): The limitation of the import volume of specific products from the rest of the world or from specific countries. Quota Rent: When the importation of a particular product is limited by a quota, the restriction can sometimes lead to a scarcity that increases prices in the import market. The quota rent is the difference between the domestic price (net of the import tariff) and the world price. This value may be obtained by the exporters, importers or distributors or shared among them. Reciprocity: This is the principle that generally guides trade negotiations; where a country awards trade concessions, they are matched by the provision of equivalent advantages in exchange. Rule/s of Origin: The criterion that determines whether a particular item was produced in a country e.g. the production process or the amount of value added locally. Sanitary and Phytosanitary Import Measures: Controls and restrictions placed on imports, to protect human, animal and plant health. Single Undertaking: The requirement in a trade negotiation to accept the entire package rather than just particular elements of the agreement. Special and Differential Treatment: The principle that the award of benefits to developing countries and the demands made of them should be in keeping with their trade, financial and development needs and capacity.
  13. 13. 12 Supply-side Constraints: New trading opportunities cannot always be taken up by a country because it is unable to increase its competitive production due to a number of reasons (constraints) such as insufficiency of investment, lack of the required skilled labour, inappropriate public policy framework, limited land space, etc. Tariff: A tax on imports. This might be charged as a percentage of the value of the product (ad valorem) or a fixed charge per unit (specific). Tariff-Rate-Quota (TRQ): The application of a different tariff on imports of the same item with the higher rate levied on imports above a certain volume. This can have the same practical effect as a QR where the upper rate is so high that the imports on which it is charged would be made too expensive and therefore unsaleable with the result that imports do not actually take place. (The TRQ device became quite widespread in the mid-1990’s when WTO Members were required to end QRs on agricultural products and resorted to it in order to effectively retain their prohibition on imports beyond set levels, whilst ostensibly complying with the rules). The Singapore Issues: Investment, competition policy, transparency in government procurement and trade facilitation were four subjects that Trade Ministers meeting in Singapore in 1996 decided should be studied by the WTO. Trade Diversion: The redirection of trade flows as a result of providing preferences to less efficient trading partners. Goods might be sourced from them because the trade preference could make them competitive with the more efficient exporters. Trade Facilitation: Reducing red tape and inefficient administrative procedures so as to enable goods to be imported and exported more easily, quickly and possibly cheaply. Vulnerability: The frequency and intensity with which a country is exposed to negative environmental events and other disasters and the extent of damage caused. A country can also be vulnerable to adverse economic developments from abroad such as a loss of export markets, decline in prices etc. The narrower the production and export base the more vulnerable the country. Waiver: The authorisation granted by the WTO to a Member permitting it to deviate from legally binding agreements or obligations. WTO-Compatible: An agreement, policy or practice that is in keeping with the rules of the WTO. Trade arrangements, agreements and policies of WTO Members are supposed to conform with its rules. Now I know what all these big words mean
  14. 14. 13 Introduction The world of international trade can appear abstract and far removed from everyday life. The very terms used, the WTO, the FTAA, the CSME, might seem designed to mystify rather than enlighten. Many people are therefore content to ignore trade negotiations, disputes and agreements, viewing those matters as concerning only Governments and big businesses. Increasingly, however, these processes are defining not only commercial and trading relations among countries, but economic activities within countries themselves. Quite ominously, they constrain Governments’ flexibility on an increasing range of economic policy issues. In the 21st century no country can expect to be an “island unto itself”, shut off from and indifferent to the outside world. This is nowhere more true than in the OECS countries2 , whose economies have, from the earliest colonial times, been open to and reliant on international trade. The quality of life of their people, their security and standard of living have therefore always depended upon the international situation and developments. Rather than producing for themselves the things that they need, these islands have earned their livelihood through producing goods for sale abroad; initially a variety of commodities, ranging from cane sugar, rum and bananas, to light manufactured goods, and now, increasingly, to the provision of services for foreigners, principally tourism. Their exports of goods have been principally to Europe, the Caribbean and the USA. Their imports are more varied, coming from the USA, Japan, Europe, Latin America, China and several other sources. Services are sold principally to North America and Europe. The income from the sale or export of the narrow range of goods and services that they produce is used to purchase from abroad (to import) the diversity of goods and services they consume. Therefore, what happens internationally affects the lives of everyone locally and is thus of real concern. At the most basic level it determines what can be sold abroad and sets the prices that can be received and those to be paid for purchases from abroad. This publication seeks to demystify the functioning of the trading system and explores how international regulations impact on the trade and economic life of OECS countries. It also assesses whether very small countries can have any significant influence on the international processes that influence their future and whether they can be more than passive observers while their fate is being determined. Is the international system just a jungle in which only the fittest can survive and prosper? In the context within which they operate, economic and political power is important. However, the system is based on rules and democratic principles, so even the smallest Members can use their voices to safeguard and advance their interests. The experiences of the Islands over the last decade are used to examine these issues and questions, and the conclusion that emerges is that under certain conditions they can actually influence, to their benefit, the course of events. The first section of this publication assesses the trading position of the OECS, and reviews the origins of regional economic cooperation and the issues at stake for the OECS within the Caribbean Single Market and Economy (CSME), the Economic Partnership Agreement (EPA) with Europe, the Free Trade Area of the Americas (FTAA) and the World Trade Organisation (WTO). The second section studies the experiences of OECS countries’ principal foreign exchange earners. It also explores public and private sector roles in diversification and assesses the environmental considerations in the formulation of trade policy. Finally, drawing on experience in international negotiations and trade diplomacy, it makes recommendations regarding approaches to ensuring fuller benefit from the system. Why participate in the multilateral trading system? The members of the OECS have no option but to rely on and be open to the outside world for their survival and prosperity. They do not have the means to produce even a significant portion of the range of capital and consumer goods that their populations 2 The Membership of the Organization of Eastern Caribbean States (OECS) comprises of Antigua and Barbuda, Commonwealth of Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines with Anguilla and the British Virgin Islands as associate Members.
  15. 15. 14 require to maintain the lifestyles that they are accustomed to. (The islands therefore cannot be self-sufficient). If the goods that they consume are to be obtained from abroad, then foreign exchange to pay for them must be earned through the countries’ own export of goods and services. OECS countries therefore have no choice but to trade: they have always been traders. The trend for OECS countries to import more than they export is illustrated in the following chart that highlights their trade imbalance. They face numerous constraints that make them particularly vulnerable to shocks from abroad and limit their development prospects. The most decisive factors are their small size, insularity and shortage of natural resources.3 These structural constraints cannot be overcome and they combine to make it more difficult for the Islands to achieve economies of scale in several areas of production at the same time. As a result, they have relied on mono-crop (or single industry) production. Economists however warn that a diversified production base is essential for sustainable development. It is within their constraints that the islands endeavour to grow and develop. But domestic policy measures alone will not be sufficient. The international environment, which is increasingly being shaped by regulations, must be favourable. The questions that they face are: what should they do, and can their efforts really have any impact? Consequently, as countries seek to ensure that the conditions in the outside world are favourable to their economic well being, they work specifically for supportive trade rules and other regulations. This is the underlying reason why OECS Member States participate in negotiations, lobbying and economic diplomacy. These activities can be viewed as an essential complement to, as well as an extension of, domestic and OECS policy aimed at fostering economic security, growth and development and the improved welfare of their citizens. The review of the trading system is presented in this guide, in three sections. The first addresses the regional versus the global approach. In the first chapter it considers the experiences of cooperation within the OECS and CARICOM and in chapter two, with the EU. Chapter three examines the evolution and functioning of the World Trade Organisation (WTO). Section two reviews the actual international engagement of OECS countries from the perspective of the income generating activities on which their participation in the trading system is based. The experience of the banana dispute and the reform of the EU market, reviewed in chapter four offer valuable lessons for small developing countries. The impact on cane sugar exportation is considered in chapter five. Tourism and services in international negotiations are analysed in chapter six in an attempt to identify more precisely the interests and issues at stake. The final section is forward looking, beginning with the case for diversification in chapter seven, as well as the key role to be played by the private sector. The necessity for OECS countries to incorporate their environmental interests and concerns into the formulation of their national economic policies is also considered in the final chapter. It ends by drawing on OECS experiences and those of the writer to suggest how small countries can use trade negotiation and diplomacy to secure and advance their trading interests. 0 100 200 300 400 500 US$millionSource:WTO 3 Conclusion of the World Bank in its Report No. 31725-LAC “A Time to Choose - Caribbean Development in the 21st century” 26 April 2005. Figure 1. Merchandise trade in the OECS, 2004 Tell me why I should bother
  16. 16. 15 hapter 1 Economic Integration in the Caribbean 1.1 The OECS Working together in the Eastern Caribbean is quite understandable; proximity and small size make a compelling case for economic and institutional integration. Collaborating amongst themselves can promote efficiency and optimize the benefits of scarce human, institutional and other resources. This no doubt is the reason why historically, these neighbouring islands have shared institutions4 . The 1932 Closer Union Commission appointed by the British Government, proposed a Federation of all the Leeward and Windward Islands. This did not materialize but in 1938, the Moyne Commission repeated this suggestion. Not surprisingly, no progress was made during the World War that began in the following year. The Leeward and Windward Islands have always had a strong desire for cooperation both within the wider Caribbean grouping and among themselves. They all joined the 1967 Caribbean Free Trade Area (CARIFTA) but even before that, had set out to pursue closer coordination and integration among themselves. In the previous year, 1966, they created the West Indies Associated States Council of Ministers (WISA) to administer various common services. It met at the level of Heads of Government and had a small secretariat. Then one year after WISA, the Heads decided on a more ambitious programme of economic integration, the East Caribbean Common Market (ECCM). This was to be a mechanism to further the islands’ harmonious economic growth and development, improved standard of living and their closer economic relations. Specifically, they committed themselves to eliminating import duties and restrictions on trade amongst themselves; introduction of free movement of persons, services and capital, the coordination of currency and financial policies (they already shared a common currency); harmonisation of tax and incentive legislation, cooperation in transport and communications and agricultural policy. With their Common External Tariff (CET), single currency, judiciary and civil aviation authority, the islands would successfully operate a parallel but more advanced and closer unit within the broader regional integration grouping. When most of the islands had attained political independence from the United Kingdom, they decided to replace WISA by a unified institution backed by a treaty. This was the Organisation of Eastern Caribbean States (OECS), inaugurated on 18th June 1981 with the signing of the Treaty of Basseterre. The mandate of WISA was subsumed within the OECS, which expanded its scope to broader political cooperation and security issues, collaboration in the purchase of pharmaceuticals and formalised its joint overseas diplomatic representation. The ECCM agreement was annexed to the OECS Treaty so that their Common Market continued even within the wider Caribbean Common Market. Integration among the Windward and Leeward Islands has always been a step ahead of that in the wider Caribbean region, but their full participation in the Caribbean “family of nations”, has also played a central role in the national policy of OECS countries. 1.2 CARICOM and the CSME The Leeward and Windward Islands had always pursued closer union among themselves in parallel with their ambitions for broader Caribbean unity. The following paragraphs trace the origins and changing nature of that wider relationship. Section Trading Systems •The bilateral/bi-regional vs. the multilateral approach •OECS/CARICOM/CSME •ACP/EU & FTAA •The WTO C 4 The Leeward Islands actually had a Federal Government from 1871-1956. 1 One for all and all for one!
  17. 17. 16 Evidence can be found of aspirations for Caribbean integration early in the last century. This desire was based on a widespread notion of a West Indian identity characterised by Norman Manley who said at the 1947 Caribbean Labour Conference: “Wherever there is an assembly of West Indians…you feel at home and as one…. The sense of unity in the West Indies… is so powerful and so rapidly growing today that the minor historical differences are irrelevant in the face of innumerable common ties.” Complementing this sense of identity was the recognition that on their own, Caribbean entities are too small to set and effectively pursue their own agendas particularly with respect to economic development and improved welfare of their populations. It was a desire to work together to improve prospects for economic success that prompted the current phase of Caribbean integration. Its actual conception can be traced to the meeting of West Indian leaders in Montego Bay in 1947 that formally explored the idea of “the closer association of the British West Indian colonies”. This meeting of Caribbean leaders actually predated the 1951 Coal and Steel Community, which was the predecessor to the European Common Market. The aspirations and ideas of unity eventually materialised in the form of the West Indian Federation. By 1962, however, the Federation collapsed after Jamaica and then Trinidad and Tobago withdrew, proceeding to political independence on their own. A last ditch attempt to persevere with a union of just the Leeward and Windward Islands and Barbados, the “Little Eight”, failed. Five years later, a fundamentally different approach was embarked upon: the 1967 Caribbean Free Trade Area (CARIFTA), which lifted duties on goods being traded within the Region. It is from this initiative that the origins of the CSME can be traced, though its direct institutional precursor was the 1973 Caribbean Community and Common Market (CARICOM). CARICOM was a major advance from CARIFTA, taken to strengthen the coordination and regulation of economic and trading relations among Members in order to advance their balanced development. The mandate of CARICOM institutions and the harmonisation of national regulations, however, stopped well short of the creation of a genuine single market. This, though, was not for lack of ambition. Caribbean economic integration was an unpredictable process conducted without the benefit of similar models or earlier experiences among small developing countries. Forbes Burnham, the then Prime Minister of Guyana, summarised the realism of Caribbean leaders when he said at the 1967 Conference of the Heads of Government of the Commonwealth Caribbean: “we cannot start off with some ideal or perfect arrangement. Neither can we hope to be so prescient of the future as to be able to determine all the consequences and difficulties of integration… This is the naked truth, either we integrate, or we perish, unwept, unhonoured.” When CARIFTA was born and later gave way to CARICOM, there was no detailed or rigid road map and timetable but leaders had a very clear vision of the direction in which they would steer the region. Such clarity among Caribbean Governments of the ultimate goal of regional integration was the critical factor in its evolution and survival. Having an agreed destination but with flexibility as to the “route and pace of travel” might well have assisted the region in surviving its most difficult period from 1975-1982. With their economies reeling from the impact of the global petroleum crises and many saddled with unmanageable debt, balance of payment problems and the region embroiled in the ideological conflict spawned by the Cold War, progress in regional integration was “left on hold”, but never abandoned. The stalemate came to an end at the Ocho Rios Summit in 1982 and the integration movement got back on track. By 1989, at their Summit in Grenada, CARICOM Heads decided to establish the Caribbean Single Market and Economy (CSME) in order “to deepen the integration process and strengthen the Caribbean community in all its dimensions”. They envisaged a single market that would allow the free flow of goods, services, people and capital across borders without tariff or other barriers or restrictions. They expected that it would permit the coordination and harmonisation of national economic policies covering foreign exchange and interest rates, taxation and currency policies among Caribbean countries. We are all on it though! That was one long road
  18. 18. 1.2.1 Creating the CSME The CSME was built on an institutional base already created by CARICOM. To appreciate the scope and nature of the change, it is necessary therefore to recognise what was already in place. The 1973 Treaty establishing CARICOM committed its Members to the removal of restrictions on intra-regional trade in goods. Under Articles 15, 17, 18, 20 and 21, they agreed, with certain exceptions, to remove import duties and other restrictions on goods produced in other Member countries. They also decided to apply the same level of duty on the goods that they imported from non-CARICOM sources and to co-ordinate economic policy more fully and effectively. The initial aims of the Treaty with respect to the free movement of capital and labour were quite limited. In the case of capital, it was simply “to examine” the introduction of a scheme that regulated movement, whilst the Treaty explicitly excluded any requirement for permitting the free movement of persons. Having just free movement of goods but not of capital and labour meant that CARICOM could not be a full common market. Work however continued on achieving the objective of creating a genuine common market and the Treaty was revised on 5th July 2001. Countries for the first time committed themselves to the goal of free movement of labour and agreed to the immediate removal of restrictions on the free movement of certain categories of workers. In a fundamental shift from the original CARICOM Treaty, they now agreed in Article 46 paragraph 3 that the revised Treaty should not inhibit Member States from permitting free entry of persons from the rest of CARICOM5 . This distinction was not of mere semantic significance but reflected a fundamental shift in labour migration policy between 1973 and 2001. Progress was also made with respect to the movement of capital. In a real common market, funds must be able to flow freely for investment and for payment of goods and services. CARICOM States agreed in 2001 not to impose any new restrictions on the movement of capital (Art. 39) and in Art. 40, they agreed to the removal of all restrictions on the movement of capital and current payments. The other key area of liberalisation, which had been largely ignored in the original Treaty, was that of services. Here, restrictions were to be lifted on the establishment of businesses by nationals and firms from other CARICOM States. Persons travelling to other Member States to provide paid services would not be restricted and steps would be taken to develop common standards and recognition of qualifications. The Treaty Revision of 2001 achieved two critical objectives: - It extended the scope of CARICOM to include the free movement of capital and of labour and to liberalise the trade in services; and - It enshrined the principle of “national treatment” in all areas. Goods, services, capital and labour were not merely to be given preferential treatment to those originating from outside of the region but treatment that is not less favourable than that given to local counterparts. 17 5 The original Treaty (Art.38) had explicitly stated that countries would not be required to grant free movement.
  19. 19. The revised Treaty though, would not itself create the Single Market and Economy. The Governments’ mere agreement to grant certain freedoms and promises to carry out measures do not make them happen; additional institutional and administrative measures would also need to be taken. Most importantly, domestic laws and regulations might need to be passed for certain of the arrangements to be implementable and enforceable within each country. 1.3 How do the Single Market and the Single Economy work ? The two components of the CSME are explained separately. Firstly the Single Market: it allows goods, services, people and capital to move among the participating countries without any restrictions at the border. The Single Economy on the other hand, seeks to harmonise economic, monetary and fiscal policies and measures in an attempt to have region-wide policies in those areas. It is expected that foreign exchange and interest rate policies, tax regimes and certain laws will be coordinated and harmonised6 . 1.3.1 What is in the SME for the OECS ? The idea from the outset of Caribbean economic integration was for the eventual creation of a genuine Common Market, foreseen under the CARIFTA agreement as “a viable community of Caribbean Territories”. In 1974 what the Leeward and Windward Islands joined was however only a partial Common Market but which they all expected would be completed eventually. In joining they would grow and develop as part of the “viable community” with their neighbours. The 2006 CSME is really a stage (albeit a crucial one) in Caribbean regional integration rather than the completion of a process. The question to be addressed is: having already largely achieved free movement of goods is there anything that is substantially new for OECS countries ? First, what is the theoretical case? The economic justification of the CSME is founded on classical economic principles of the gains from expansion of economic size, freedom of trade and competition. OECS countries expect to build on the benefits of economic integration in various ways including having a larger market for their domestic goods and services. Instead of being limited to their home island, they have free access to the wider regional market. Hence, production that would otherwise not have been possible, can take place because of the expanded consumer base. Removal of restrictions on capital flows should contribute to more optimal decision making on the location of investment as well as the pooling of regional resources with the effect of increasing the impact of investment and promoting competition or the consolidation of regional firms. Similarly freedom of movement of workers should promote flexibility of the labour markets and make for more efficient use of the region’s pool of skills. But will this yield concrete benefit? Of course OECS countries do not have as extensive a range and volume of products available for export as the more developed countries (the MDCs) in the region, hence, the trade benefits of the CSME both intra-regionally and extra- regionally might be disproportionately shared out. In a speech delivered in November 2005, the Barbados’ Prime Minister pointed out that inequality among Members of the grouping could lead to fragmentation. It was agreed therefore that a cohesion fund would be made available for the LDCs (OECS and Belize) that would provide them with financial and technical assistance to help them catch up. The other means through which the CSME is intended to benefit the OECS is via enhanced functional co-operation among the countries and stronger positions in external negotiations. 6 “Deepening Caribbean Integration: Barbados in the CSME.”A production of the Ministry of Foreign Affairs & Foreign Trade of Barbados. CourtesyWINFA 18
  20. 20. 19 The realisation of benefits in these areas will depend on a number of factors, including the appropriateness of the actual joint regional policies and the adequacy of their incorporation as well as the reconciliation of the interests of all Members. The benefit for the OECS countries would therefore depend on the effectiveness of their participation in regional policy formulation. The ability of the grouping to articulate joint positions is expected to secure greater external influence and benefits for CARICOM. However for joint negotiations to actually lead to better outcomes for the individual countries, the following features must characterise the development and articulation of regional positions: - Adequacy of incorporation and reconciliation of the interests of all countries and full national involvement, transparency in decision-making and effective monitoring and oversight. - Certainty of full and consistent support by all Members for the regionally agreed positions. - Full accountability by spokespersons, whether or not they are representatives of governments or institutions. - Competent and effective articulation, negotiation and advancement of positions. For a regional approach to negotiations to be of greater effectiveness than the individual country approach, the individual States would need to continue to be actively involved in the process so that they could contribute to the attainment of the negotiating aims through their continued political backing and support. January 2006 marked a crucial milestone in the integration of the Caribbean. It was not the conclusion but rather work in progress on the construction project that was set in train in 1973. It also represented the coming to fruition of a much earlier Caribbean dream of a single economic space in the region. The case for the CSME ultimately rests on its ability to improve regional welfare through the removal of barriers to allow the free flow of goods, services, capital and labour within the region that is expected to lead to greater efficiency of production, thus enhancing international competitiveness. The CSME is therefore expected to provide a boost to economic development of the participating states. On the 30th January 2006 only Barbados, Belize, Guyana, Jamaica, Surinam and Trinidad and Tobago signed the instruments and formal declaration launching the CSME, but its Membership will eventually increase. The OECS group of countries has indicated that they will join by 30th June 2006, when all their Members would be ready. Montserrat, as a British dependency, requires an “instrument of entrustment” from the UK in order to join. There must be something in it for all of us.
  21. 21. 20 7 Including “Council for Finance and Planning” (COFAP), Council for Foreign Community Relations” (COFCOR), and “Council for Trade and Economic Development” (COTED). Together we will take on the world! TTTT hhhh eeee bbbb uuuu iiii llll dddd iiii nnnn gggg bbbb llll oooo cccc kkkk ssss oooo ffff tttt hhhh eeee CCCC SSSS MMMM EEEE The transition from a Common Market to a Single Market and Economy was made possible by amendments to the CARICOM Treaty that centred on nine new elements or Protocols having legal force within each CARICOM State that, in certain cases, require changes to domestic legislation. They are: Management New Community organs7 and institutions have been gradually introduced in recent years, intended to make the functioning of the community more efficient. New procedures were also agreed upon, a most notable one has been the replacement of the unanimity rule by qualified majority voting, except for decisions by the Heads of Government where it has been retained. Right of establishment, provision of services and movement of capital This Protocol creates a regime for trade and services that will facilitate investment by businesses and persons in other Member States as well as the free movement of services, capital and selected categories of labour. This will have the most dramatic impact on business since it will ensure that CARICOM citizens and businesses will, with few exceptions, be able to establish in any country and enjoy the same treatment as locals. The complete removal of certain of the restrictions such as the free movement of all categories of labour, as well as common education standards and mutual recognition of certificates/qualifications is to be achieved over time. Industrial Policy This Protocol harmonises industrial policy and seeks to promote industrial production through integration and the establishment of enterprises with branches, subsidiaries or joint ventures in more than one Member State. A key instrument of this Protocol that will stimulate intra-regional investment is the Regional Double Taxation Agreement. In order to improve the quality of goods and provide a basis for regional participation in international standard-setting negotiations, the CARICOM Regional Organisation for Standards and Quality (CROSQ) has been established. Trade Policy This Protocol builds upon and consolidates existing provisions such as the CET, rules of origin and customs cooperation that are aimed at enabling the free movement of goods by removing all tariff and non-tariff barriers. Agriculture The aim here is to strengthen and upgrade cooperation in diversification and transformation of the agricultural sectors in keeping with Member State goals of greater efficiency in production and marketing, employment, poverty alleviation and Food Security. Transport policy Member States commit themselves to cooperate in the development of enhanced air and maritime transport systems and the uniform application of regulatory practices among themselves. Disadvantaged countries A special regime is provided for disadvantaged countries, regions and sectors that need assistance in order to become viable. The OECS countries along with Belize and Guyana have, in addition to Haïti, been designated as “disadvantaged” . They are to benefit from a package of measures including financial assistance to facilitate their economic adjustment to and full participation in the CSME as well as to provide special transitional arrangements and a programme to attract investment. Competition This Protocol seeks to harmonize legislation on competition policy and fair-trading across the region and to promote and preserve conditions for competition, as well as promoting and protecting consumer rights. Disputes Through this Protocol, a comprehensive system for the settlement of disputes that begins with referral to good offices, followed by mediation, consultations, conciliation and finally arbitration and adjudication has been established. The Caribbean Court of Justice has been given compulsory and exclusive jurisdiction to hear and determine disputes relating to the interpretation of the Treaty. Box 1
  22. 22. 21 hapter 2 Bilateral / Bi-regional Trading ArrangementsCEconomic integration of the OECS and CARICOM has been against a backdrop of a deep-rooted sense of Caribbean identity and long-standing aspirations for closer unity, which was driven by the desire to reap the benefits of the pooling of resources and markets. The regional experience from WISA/ECCM to OECS, and from the West Indies Federation to CARICOM and now the CSME, can be understood in terms of these factors. Beyond the region, however, trade and economic relations are instead generally motivated by the desire to secure and advance national interests. In interacting with the rest of the world, the question facing OECS, CARICOM and many countries is what route to follow, should they deal selectively with other countries or groupings, and seek to develop trade and remove barriers exclusively among themselves, i.e., bilaterally? Or, should they pursue the multilateral route, as advocated by the WTO, and remove restrictions on imports from all sources? The two alternatives are examined in this section. Although OECS countries have not yet opened up their markets to other countries beyond CARICOM, they are in the process of negotiating to do so. This chapter reviews those negotiations and their implications. The multilateral alternative, too, is explored later on. The choice of which approach or combination of the two should be followed, will have to be based not on ideological considerations or political pressure, but rather on the sovereign decision taken by the countries themselves as to what is in their best interests. Current OECS policy is based more on the bilateral/regional rather than the multilateral approach. The chart below illustrates the position of the OECS within the global system. It shows the OECS within CARICOM and maintaining trading arrangements that are currently non-reciprocal with the EU (Cotonou), set to be replaced by an Economic Partnership Agreement (EPA) by 1st January 2008. It also indicates their relations with the USA through the Caribbean Basin Initiative (CBI), and with Canada, via Caribcan, and various bilateral arrangements with neighbouring countries that are to become reciprocal over time. With the exception of Cuba, all of these bilateral initiatives can be expected to be superseded by the Free Trade Area of the Americas (FTAA). The chart shows the OECS and CARICOM falling within that designated zone. All of the countries operate within the WTO; hence their relations are subject to its strictures. Then there is the rest of the world, with countries that do not belong to the WTO such as Russia, Seychelles, and many islands in the Pacific like Vanuatu and the Cook Islands. In the Caribbean only The Bahamas is not yet a Member of the WTO. Figure 2. The position of the OECS within the global trading system REST OF THE WORLD So that is how it works !
  23. 23. 22 2.1 Economic Partnership with Europe When the UK joined the European Economic Community (EEC) in 1973, it had to give up the system of trade preferences that existed throughout the Commonwealth. Under these arrangements, the Commonwealth had operated as a sort of exclusive trading club where Members exempted each other’s imports from duties or charged them at rates lower than those applied on imports from non-Commonwealth countries. At the time, most of the former French African colonies were in a similar trading arrangement with the EEC, via the Yaoundé Convention. They were able to export duty-free to the EEC and waived duties on imports from it (i.e., this was a reciprocal arrangement). Rather than simply seeking to continue the Yaoundé Convention and having it extended to the ex-British colonies, the two sets of former colonies banded together to negotiate a radically new trading arrangement and called themselves the African Caribbean and Pacific Group (ACP). At a time of great insecurity in global commodity markets and the height of the Cold War, these countries were able to conclude an arrangement that was based on the principles of special and differential treatment. The arrangement would provide them with financial and technical assistance and duty-free entry to the EEC for most of their exports. The ACP did not have to offer the same facility to the EEC. It was non-reciprocal. This accord adopted the name of the West African city of Lomé where it was signed in 1975. It lasted for five years and was renegotiated at regular intervals until the fourth Convention, which entered into force in 1990 and had a ten-year life. At the outset OECS countries were not yet independent and were not able to negotiate the first Lomé Convention that came into effect in 1975. However, because of their political association with the UK they were able to participate in the trading arrangements and enjoyed certain benefits. When the various islands achieved independence they were then able to participate fully in the negotiations with Europe. With OECS economies so very open to outside influences and their trade and economic relations extending beyond the confines of the Caribbean region, they are obliged to secure their economic interests by seeking agreements further afield. So far the relationship with Europe has been central. Since their independence they have been full Members of the ACP group of countries and were party to the Lomé trade and aid Conventions, which, in 2000, were succeeded by the “Cotonou Partnership Agreement”. That relationship has been a foundation of their participation in international trade. Over the years a major portion of their exports, principally of agricultural goods, have been exported to the European Union (EU)8 where they enjoy duty-free entry, whereas competitors often face high duties. In other words, they enjoyed trading preferences. Also, they have been receiving considerable financial and technical assistance for their development from the EU, via its various grant and loan facilities; the National Indicative Programmes (NIP), Regional Indicative Programme (RIP) and the Stabilisation of Export Earnings (STABEX) which was replaced in 2002 by the Fluctuation in Export Earnings (FLEX) facility. With other ad hoc programmes like the Special Framework of Assistance (SFA) for bananas or for rum and the €2.2 billion Investment Fund that is administered by the European Investment Bank (EIB), the EU is overall the largest single aid donor to OECS countries. That link with Europe has been so extensive, enduring and deep-rooted that it sometimes appears as an integral and permanent fixture of the architecture of the international system in which the islands operate. However, in reality, there is nothing certain or permanent about that relationship. Indeed, negotiations are currently ongoing that will fundamentally refashion their trading dimension. 2.1.1 The EPA negotiations and their policy context Ever since the signing of the 1st Lomé Convention of 1975, OECS countries have been able to export to the European Common Market virtually anything that they produce, which meets the rules of origin9 . In certain cases, as with sugar and bananas, special arrangements provided them with additional support that ensured that this trade was viable and could actually take place even when the islands might have been producing at much higher cost than their competitors. 8 The EU replaced the EEC with the signing of Treaty of European Union, at Masstricht in the Netherlands on 7th February 1992. 9 See glossary. My mother wasn’t even born yet ! We really have been with these Europeans for a long time.
  24. 24. The current system, the Cotonou Agreement, under which OECS countries can export to the EU without having to pay customs duty, expires at the end of 2007. A new trading system therefore has to be agreed upon to permit OECS countries to continue their duty-free exports to the EU from 2008. Negotiations that are aimed at replacing the current arrangements with a new structure for trade and economic relations between Caribbean countries and Europe are ongoing. It is essential to recognise that despite the negotiations for new Economic Partnership Agreement (EPA), the current Cotonou Agreement itself has a life of 20 years, expiring by 2020. Therefore the financial aid provided in five-year cycles under the Financial Protocols is to continue independently of the outcome of these EPA talks. This is significant since the decision on the EPA can be based on an objective assessment of its own value rather than a false perception that concluding it is necessary for the safeguarding of funding from the EU. Given the tremendous importance to OECS economies of their trade and economic relations with Europe, the new arrangement will be of major significance for future economic performance, income and employment. Hence, the negotiations between the ACP and EU, launched on the 27th September 2002 that will define the new arrangements are of overwhelming political importance. While the EPA negotiations have focussed on preparing new WTO-compatible trading10 arrangements aimed at progressively removing barriers to trade and enhancing cooperation in all areas relevant to trade, their agreed objectives are broader and rooted in the wider development objectives of the Cotonou Agreement. These are the reduction and eventual elimination of poverty in ACP countries, the promotion of sustainable development and, as a tool for achieving these objectives, the progressive integration of ACP countries into the world economy. A clear appreciation of the background and broader context of these negotiations on which the Caribbean and the other ACP regions have embarked with the EU is vital. The progress and their implications for OECS countries are reviewed below. 2.1.2 Background to EPAs The conceptual origins of EPAs can be traced to the European Commission’s 1997 “Green Paper on relations between the European Union and the ACP countries on the eve of the 21st century”. It took a critical look at the ACP- EU relationship in the light of global developments following the end of the ‘Cold War’ and also the changing international economic environment, notably the greatly strengthened regulation of the multilateral trading system under the leadership of the WTO. New approaches to political and financial cooperation were explored, but the most radical thinking related to the options for trade. The Commission appreciated that the successful challenge to certain aspects of the European banana import regime by Latin American countries and the USA during the 1990s, had exposed the vulnerability of the preferential trading arrangements to challenge within the WTO. Currently ACP countries export their eligible products to the EU market without paying duty; however, they charge duty on imports from the EU. In other words there is no reciprocity since trade is not free on both sides. The European Commission wanted change. The clear preference of the 1997 Green Paper was for a reciprocal trading arrangement with the ACP countries. (In other words, exports both from the ACP and Europe would have duty free entry into each other’s markets). This was consistent with the orientations in the Commission’s 1995 staff paper on Free Trade Areas, which proposed a twin-track approach to the promotion of EU trade and economic interests – through multilateral trade liberalisation at the WTO and through the conclusion of bilateral and regionally-based free trade area arrangements, which secured better treatment for European exports i.e., trade preferences for EU exporters. By 1998, the European Commission received a mandate from the EU Council of Ministers to negotiate the replacement of the non-reciprocal trading system with a new trading arrangement that would be in conformity with WTO rules, particularly GATT Article XXIV11 . Since the ACP already enjoyed duty-free access for most of their exports to the EU, 10 See Glossary: “WTO Compatible” 11 The General Agreement on Tariffs and Trade (GATT 1947), Art’ XXIV ‘Territorial Application – Frontier Traffic – Customs Unions and Free-trade Areas’ sets out inter alia the rules governing Regional Trading Arrangements (RTA). So they want to change things But the change must be good for us too. 23
  25. 25. the innovation in the proposed trading relationship would essentially be that EU products would now also enter the ACP on a duty-free basis. Some sceptics saw this as a one-sided change offering new benefit to the EU but not the ACP. The Commission, however, insisted that the EPA was not about market opening per se, but rather, development’. It argued that the EPA would achieve this by promoting ACP integration both regionally and into the global trading system, it would build trading capacity, be based on principles of asymmetry with more favourable or special and differential treatment for the ACP and review the rules of origin. Their contention was that ACP countries would gain overall from concluding EPAs with Europe. 2.1.3 What is the EPA? This question continues at the heart of the negotiations, but fundamental differences in perception persist between the ACP and EU sides. Commission negotiators tend often to operate on the premise that an EPA is essentially a free trade area agreement, which, according to conventional WTO practice on free trade areas, must: a) Involve the removal of import duties and taxes on “substantially all trade” between the countries that sign the agreement. This is generally considered to cover as much as 90% of current imports and exports; b) Be fully in place within a 10 to 12 year transition period; c) Exclude no economic sector from the coverage of the free trade area; and d) Include agreements on trade in services and trade related areas. However, if EPAs are to support economic development and contribute to the elimination of poverty in the OECS (and other ACP) countries, they cannot simply be classical free trade area agreements in which all that happens is that OECS markets are opened up. They must also include measures to promote and support structural transformation and economic growth. Given the different levels of economic development of EU and OECS economies, particular care needs to be taken in devising the EPA. It evidently is important that the removal of duties and other restrictions on imports from Europe does not cause local industries to collapse under the pressure from increased competition from imported EU goods; which would undermine economic development prospects. The rest of the ACP have similar concerns to the OECS and expect EPAs to be more than classical free trade area agreements, with a little bit of extra financial assistance provided. 2.1.4 Criticism of EPAs The EPA negotiations have been criticized virtually from the outset. First there were isolated complaints within the ACP group and then more widely among Non-Governmental Organizations (NGOs) who have been conducting a vociferous “stop EPA” campaign. They argue that a disadvantageous deal12 for the ACP would detract from, rather than advance, economic development. 24 12 Christian Aid briefing 2004, “Why EPAs Need a Rethink”, www.epawatch.net
  26. 26. 25 In May 2004 Botswana’s President, Festus Mogae said, “We fear that our economies will not be able to withstand the pressures associated with liberalisation as prescribed by the World Trade Organisation. This therefore challenges us all as partners to ensure that the outcome of the ongoing EPA negotiations does not leave ACP countries more vulnerable to the vagaries of globalisation and liberalisation, thus further marginalizing their economies”. The debate over the likely impact on the ACP of EPAs, received renewed impetus from two reports released in the UK. Firstly, in March 2005, the Department for International Development (DFID) and Department of Trade and Industry (DTI) released a joint report entitled ‘Economic Partnership Agreements: making EPAs deliver for development13 . It questioned the contribution of EPAS, as they are currently being negotiated, to the development of ACP countries. Then, in the following month, the Cross Party International Development Committee of the House of Commons (The Select Committee), released its own highly critical report of the EPA negotiating process. 13 www.dti.gov.uk/ewt/epas.pdf 14 ACP-EU Agreement of Cotonou, Art.37 Para’ 6. DDDD eeee pppp aaaa rrrr tttt mmmm eeee nnnn tttt ffff oooo rrrr IIII nnnn tttt eeee rrrr nnnn aaaa tttt iiii oooo nnnn aaaa llll DDDD eeee vvvv eeee llll oooo pppp mmmm eeee nnnn tttt aaaa nnnn dddd DDDD eeee pppp aaaa rrrr tttt mmmm eeee nnnn tttt oooo ffff TTTTrrrr aaaa dddd eeee aaaa nnnn dddd IIII nnnn dddd uuuu ssss tttt rrrr yyyy RRRR eeee pppp oooo rrrr tttt This report advanced the view that developing countries can gain in the long run from trade liberalisation only if they have in place the infrastructure and capacity to trade competitively. In this context it urged the EU to pursue a non-mercantilist approach to the negotiations and avoid resorting to traditional market-opening tactics. It called for ACP regional groupings to be provided with maximum flexibility for their own market opening for European goods and services and called for the EU to offer an unconditional transition period of a minimum of twenty years. It made the case for additional financial assistance to develop the supply-side capacity of ACP economies and to support necessary trade reforms required to build competitiveness. Finally the report called on the EU to work within the WTO for a review of GATT Article XXIV in order to reduce the requirements for reciprocity and for the Commission to provide an acceptable and non-punitive alternative to EPAs. This would ensure that any ACP state choosing not to enter into an EPA would not be left worse off14 . (The provisions of the Cotonou Agreement require this alternative so that countries would have a real choice when deciding to accept the EPA or otherwise). Box 2 2.1.5 Issues in the EPA negotiations There are a number of issues of underlying concern in the EPA negotiations that will have to be addressed and reconciled between the two sides. These include: The adjustment costs of EPAs and Policy responses: A particular concern arises when formerly protected industries are no longer able to compete with imports following the removal of tariffs. This lack of competitiveness can lead to factory closures and job losses. If the introduction of EPAs is not accompanied by new and competitive domestic production for the local, regional or international markets, then the negative effects on producers can outweigh the benefits gained by consumers and importers from the introduction of free trade with Europe. A key issue in determining the extent of adjustment costs is the level of trade on which tariffs are to be eliminated and the pace at which this is to be done. It is important that this provision for asymmetry in the EPA is fully utilised by the Caribbean, with both the time frame for tariff reductions and elimination being as long as possible and the number of products that they exclude from tariff reductions being maximised. Development focus: The initial intention of both sides was that the EPA would have a clear development purpose, rather than being a classical free trade area with negotiations aimed simply at market opening and trade expansion. The concept of “development” in the EPA was intended to be more than a rhetorical device or merely the provision of additional financial resources. Rather it is a shared commitment of the EU and ACP sides to construct an agreement that in its operations would actually promote sustainable development. For the EPA to contribute to development, it would have to support the expansion on a sustainable basis of domestic production and exports. The key impediments to achieving this are the range of supply-side constraints facing the OECS and other ACP countries. Addressing these constraints on competitive production in a systematic and comprehensive I better open my eyes wide - wide !

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