Europe and Developing Countries: Time for a New “New Trade Relationship”

Europe’s trade relationships with the developing world are up for review, but policymakers are failing to seize the opportunity. In February 2020, the Cotonou Agreement—an aid, trade, and political partnership between the EU and African, Caribbean and Pacific (ACP) countries—will expire, paving the way for a new regional cooperation model. Around the same time, the Brexit transition period is due to end, at which point the UK will be able to implement its own bilateral agreements.

Yet, neither side of the Channel has demonstrated much appetite for reform. Both have promised to maintain the EU’s signature trade-for-development policy since 2000: Economic Partnership Agreements (EPAs). EPAs are free trade agreements between the EU and regional groupings of ACP countries. The UK has committed to “rolling over” bilateral versions of the deals post-Brexit. This is a missed opportunity. EPAs are poor policy, lacking in buy-in, evidence and ambition. To promote trade and investment in ACP countries, European policymakers must take a more comprehensive approach to regional cooperation.

New beginnings, old policies

Last month, the European Parliament’s Commonwealth Forum hosted a roundtable discussion on the future of EU and UK trade relations with ACP. Against a backdrop of headlines dominated by trade wars and tit-for-tat protectionism, the event sought to reassure developing countries that Brexit would not disrupt their current trading arrangements with Europe. Its key message was one of continuity.

Participants were provided with a briefing paper that reaffirmed the EU’s support for EPAs and the “new trade relationship” they afforded. The UK was quick to echo the sentiment. “As the UK prepares to leave the EU, we are working with ACP partners to ensure continuity in our trading arrangements during transition and beyond,” said one senior DFID official. “EPAs will provide the UK with the strongest possible platform to deepen our trade and investment relationships with ACP countries at the appropriate time.”

Don’t expect “the appropriate time” to be anytime soon. As the UK decides which trade deals to prioritise post- Brexit, those with small developing economies are unlikely to be first in line. Rolled-over EPAs between the UK and ACP countries that are temporary in theory could endure for decades in practice.

Criticisms against EPAs: well-known and well-worn

The announcement was met with little enthusiasm by ACP representatives. Since their inception, EPAs have generated considerable opposition among developing countries. Of the seven regional deals originally envisaged, only two—one with the Caribbean region and the other with the Southern African Development Community—are finalised and under provisional application. The others have been delayed by ACP parties’ refusal to sign despite more than 16 years of negotiations. In the East African Community, Burundi, Tanzania, and Uganda are withholding their signatures from the finalised EPA, while in West Africa, Nigeria is strongly opposed. In the three remaining regions, the EU is applying “interim” agreements with a minority of countries in the hope that others will join later.

The opposition to EPAs stems from their principle of reciprocity. Previously, the EU offered ACP states unilateral tariff reductions under its Generalised Scheme of Preferences. Under EPAs, developing countries must undertake reciprocal liberalisation on European products in order to access EU markets duty-free. The EU has justified the new approach on legal and economic grounds: (1) EPAs bring EU-ACP trade relations in line with WTO rules, and (2) EPAs promote economic diversification and investment by lowering the cost of imported intermediate goods for ACP producers and by offering foreign investors legal certainty.

However, critics argue that liberalising trade between regions with such disparate levels of development is detrimental for the poorer partner. Reducing tariffs on EU imports deprives ACP governments of an important source of revenue, displaces intra-regional trade and exposes nascent industry to competitive pressures prematurely. The latter point has been made forcefully by Nigeria and Tanzania, who have rejected EPAs on the grounds that the deals would undermine their efforts to industrialise and diversify production away from raw materials.

What does the evidence say?

While EPAs have provoked considerable controversy, the limited evidence available suggests that their economic impact may be negligible. An EU-funded assessment of the EPA with the Caribbean region (“Cariforum”) finds that the agreement did result in public revenue losses following its implementation in 2008. However, reciprocal tariff liberalisation had no discernible impact, positive or negative, on the volume or composition of EU-Cariforum trade, which remained dominated by commodities. The assessment concludes that the key challenge facing Cariforum countries is converting market access into meaningful market presence. This requires addressing supply-side constraints, including a lack of foreign and domestic investment in non-energy sectors, poor trade logistics and challenges related to standards compliance.

A similar finding was made by an evaluation of US tariff preferences. Since 2000, the US has unilaterally liberalised tariffs on 99 percent of imports from African countries under a scheme called the African Growth and Opportunity Act (AGOA). Yet, research by the Brookings Institution (here and here) finds that though AGOA increased the volume of non-oil exports from African countries to the US, they remained a consistently low share of total exports (approximately 10 percent). Moreover, the large majority of non-oil trade originated from a handful of countries, namely South Africa (60 percent), Kenya (13 percent), Lesotho (9 percent), and Mauritius (7 percent).

The research concludes:

The extremely low [preference] utilization level of most African countries suggests the real problems are low productivity and the high costs of doing business.

Trade policy beyond tariffs

This evidence highlights the key problem with EPAs and the debate that surrounds them. The narrow focus on tariffs fails to address the binding constraints to developing country trade. If the UK and the EU are serious in their ambition to “integrate ACP states into the world economy,” they must design a trade-for-development policy that tackles behind-the-border barriers. For example, China’s $8 trillion Belt-and-Road Initiative (BRI) aims to build international trade corridors by investing substantially in developing countries’ infrastructure, productive capacity, and trade facilitation using a mixture of public and private funds. The World Bank predicts that by addressing key supply-side constraints, the BRI could increase cross-border trade, crowd-in investment and improve growth in participating countries, many of which have been excluded from global markets until now.

Both the UK and the EU need to rethink EPAs. A dated policy with doubtful benefits for development, EPAs never really got off the ground. In devising alternatives, policymakers should consider a more comprehensive partnership model with ACP which combines tariff reform with substantial, targeted investment in infrastructure, industry, and border procedures.

Thanks to Mikaela Gavas and Ian Mitchell for their advice and comments.