Do EU trade policies help or hurt developing countries - Essay Example

? Running head: EU Trade Policies Do EU Trade Policies Help or Hurt Developing Countries? Insert Insert Grade Insert 15 May 2012 Introduction The European Commission (EC) is a regional political and economic bloc integrating about 27 countries in Europe. Its creation was after World War II with the original aim to foster economic cooperation, promote independence among trading partners and minimize instances of political and social conflict through the harmony established by engaging in trade activities. The EU has evolved from an economic union to now a large single market. Its organization covers wide policy areas such as those on economic and political development and the environment. EU has been part of many trade arrangements or Preferential Trade Areas (PTAs) across the world. By 2002, EC was already in more than 50 out of about 172 such arrangements around the globe thus maintain economic and trade relations with a myriad of economies in the developed, developing and even less developed economies. The EU has been keen as a positive force to generate economic prosperity for its member states. To the developing economies, EC has maintained preferential trade arrangements under the Generalized System of Preferences (GSP) while to most less developed countries, trade arrangements have largely been guided by the Cotonou Agreement, which succeeded the Lome’ Convention (Bhagwati, Greenaway, & Panagariya, 1998, p.1128-1148). EU’s trade arrangement within the Euro zone encompasses a common currency, common external tariff, common agricultural and competition policies as well as common rules on freedom of goods and services, capital and people. EU has entered into other trade agreements with countries and regions in other continents of the world. Among these is the European Economic Area (EEA) that extends the EU market to three countries, which are members of the EFTA1. Another arrangement is the Customs Unions with countries such as Malta, Cyprus and Turkey. EU has also got several Free Trade Area (FTA) arrangements with a number of countries and regions around the world, but these are at different implementation levels. These include countries such as Tunisia, Egypt, Israel, and Morocco under the Euro-Mediterranean Association, while Denmark, Switzerland, Iceland, Mexico and Chile are under the FTA arrangement among others. There is also the Mediterranean partnership where EU relates with several associates in the southern and Eastern Mediterranean. This particular trade arrangement aims to achieve FTA in line with provisions of the WTO through entering into various bilateral agreements starting with a series of association agreements. It also aimed at the expansion of the EU financial assistance to USD 4.7 billion over a period of 5 years from 1995 within EU-Mediterranean partnership. The ACP (Africa, Caribbean and Pacific) preference is another set of trade arrangements by the EU where it provides one way trade preferences for more than seventy countries in Africa, Caribbean and Pacific. These preferences are, however, not available to all developed countries in these regions and do not also apply to only least developed economies, for example. Thus, contravene the provision of the WTO regarding discriminatory practices, equity and fairness (Devisscher, 2011, p. 60). As per the United Nations rankings, 39 of the ACP economies are under the least developed category. Finally, GSP preferences by EU to a number of least developed countries exist as stipulated under the GSP provisions of the WTO. The EU’s GSP arrangement contains the ‘Everything but Arms’ (EBA) initiative for the least developed economies as well as general arrangements that are available to all developing countries and apply to non-sensitive products that come duty free. There are also the special arrangements under the Environmental and Social clauses, which apply to sensitive products only. Special incentives under the environmental clause apply to developing countries that have complied with the international standards on forest management, in particular the Tropical Timber Convention with products from tropical forests classified as sensitive products in the general arrangements (Hoekman & Kostecki, 2001, p.391). The EC has legal the mandate to negotiate trade arrangements with go-betweens on behalf of its affiliates in the European Union (EU) in accordance with Articles 133 and 300 of the EC Treaty. The EU has continuously revised the institutional balance between the EC and member states because of the consistent and aggressive extension of the international trade agenda. However, it has been challenging to maintain one position engaging in multilateral trade negotiations whilst taking due regard of the interests of the member states and the obligations (or accountabilities) of the commission. Member states participate in trade negotiations through a process that involves extensive consultations with the commission. Although developing countries have over the years relied on the EU as both consumer and supplier, there have been notable shifts in the share of EU market by the developing economies with exports by the latter, for example, continuing stagnate or reduce for a number of years now. Though not falling under developing countries, China, USA and Japan have accounted for the largest imports by the EU. Earlier EU’s trade policy was such that countries could access based on certain preferential considerations leading to different levels of treatment with most favoured nations (MFN) at the forefront, which disregarded the world’s developing economies opportunities for growth and development through access to the international markets. Examples here are the European Economic Area (EEA) and the Euro-Mediterranean Association (EMA) agreements. The relations between the EU trade policies with the developing countries has changed over time and became more complex, but European Commission’s (EC’s) development cooperation has given emphasis to trade and development as one of the precedence areas. The World Trade Organization (WTO) has on its part continued to strengthen multilateral rules setting the stage for bilateral trade agreements and support, as well as encourage negotiations. These WTO requirements have led multiple reviews of trade initiatives including but not limited to GSP2, which includes the EBA3 amendment and trade related aspects of CPA4. These developments in the world trade agreements and regulations circles have had implications on the implementation manner of the EU policies. It could be said that WTO’s aim would be to foster equitable economic globalization through expansion of foreign trade and investment among all nations whether first world, developing or least developed countries. Fair and equitable trade policies and practices are to be upheld in order to achieve economic globalization without depressing the potential of the small economies in terms of resource creation, sustainability and growth as well as avoiding limiting their production capacity to enhance industrialization and self reliance through international trade. A few studies have, on the impact of the EC’s trade policies to the developing economies, alluded to the fact that other than rent transfers as a result of these arrangements, there has not been any definite impact that could be attributed squarely on EU’s participation in trade with these countries particularly because of the multi-layered arrangements that have existed. This paper will explore the good and the bad with regards EC’s preferential trade arrangements with developing countries. It will ascertain if there has been any positive impact on these economies as a result of EC’s trade policies (Nelson, 2004, p.33). Benefits of EU Trade Policy to Developing Countries Some issues have come up in terms of relationship of EU trade policies in relation to the achievement of economic and trade aims by the developing countries. Considering adherence to WTO requirements, EU’s trade regime (replaced with EPAs) targeted at offering not fully reciprocal and allowed asymmetric treatment otherwise referred to as special treatment of small developing countries without calling for disciplinary action by the WTO (Whalley, 1990, p.1325). A superb example here is the GSP arrangement. EPAs have for many years not provided clear differentiation among members based on regions of ACP countries. This has resulted in some LDCs and other economies receiving access to duty-free and quota-free products across all of EU. The EU’s extension programme of regional arrangements through multilateral negotiations has helped to bring in more LDCs and other countries on board in terms of access to EU’s trade arrangements, thus competitively opening up those economies to international markets. This, however, has crushed with WTO’s regionalization agenda that has not supported multilateral process because it encourages preferential access. This hurts negotiating power for resources available in the LDCs and other economies. Under the GSP established in 1971, developed counties initially received only unilateral, non-reciprocal tariff preferences but with time EU has increased the range of beneficiaries guided by a graduation system based on the income levels of the developing countries (Mattoo, Roy & Subramanian, 2002, p.23). It is pertinent to note that greater benefits in terms of limits of quotas and tariff ceilings, as a way of regulating imports of sensitive goods and services, got considerations for the least developed economies. For the LDCs5 in 2001, almost all products except arms and ammunition and agricultural imports such as rice, sugar and bananas were liberalized by the EU through complete removal of restrictions of duty and quotas. For the three agricultural products, there was going to be phased liberalization beginning 2002. In fact, the group of ACP developing countries ranked above the GSP beneficiaries under the EU’s preference order receiving even more favourable tariff preferences on a bigger product range and subjected to minimal restrictive rules of origin (Devisscher, 2011, p.85). This could be said to be one of the encouraging moments where EU trade policy supported the development of small economies around the world. This is because it was a definite positive move for the LDCs countries. Reduced trade protocols to allow access to the highly protected European market was an opening for the LDCs to venture and increase participation in the international trade, boost domestic production of key resource and output products that qualified for exportation to the euro zone as well as attract foreign direct investments to grow their economies substantially. Shift from the non-reciprocal tariff preferences in the Lome’ Convention to the reciprocal trade arrangements in the Cotonou Agreement of 2000 opened the door for the liberalization of trade. Nevertheless, it phased removal of trade barriers through the creation of EPAs between EU and ACP countries. EPAs aimed at meeting compliance with international rules by the WTO in terms of liberalizing trade arrangements within the expected timelines not only covering processed and agricultural products, but also extending to other areas such as services, investments, competition, intellectual and property rights among others by removing technical barriers, as well (Matthews, 2008, p.385). These were very encouraging measures for the developing world to take advantage and develop the industrial, agricultural and technical resource potential at their disposal through business engagements with the much developed euro zone. The EBA initiative under the GSP has provided extensive incentives to member LDCs where they can export duty free to the EU market all products except ammunition and arms and three other products namely bananas, rice and sugar. This is an encouraging initiative of the EU trade policy to promote trade and stimulate domestic production for export in the LDCs. Another special arrangement under the GSP is the environmental and social clauses which encourage countries to uphold core labour standards and protect as well as preserve forests and vegetation to stand a good position to receive certain incentives and preference arrangements from the EU (Gibb, 2004, p. 573). These provisions are appropriate for third world countries because they have and will continue to enjoy two fold benefits that come with environmental conservation, on the one hand, and also from trade with the EU to expand their economies, on the other hand. On a large scale at the multilateral level, there has been more favourable effect of EU’s trade liberalization policies to the developing countries compared to an assessment from a bilateral perspective where individual countries or regions enter into negotiated agreements with the EU. Perceived Demerits of EU’s Trade Policy in Developing Countries EU’s distinctive trading arrangements with different developing economies either through preferential access, or regional blocks has helped some and injured others in different ways. This has resulted in a case of winners and losers among the LDCs and other countries involved in these arrangements; thus promoting the development agenda for some and at the same time hurting the interest to develop for others. Reconciliation and harmonization of differential trading arrangements by the EU is a strategic route to bringing coherence between trade policy of the EU and development goals of the developing economies. This minimizes the instances where countries opt to protect domestic production and prevent reforms thus locking themselves from opportunities as well as advantages of accessing the international markets (Nelson, 2004, p. 15). The CAP6 is a classic example of the bad side of EU’s trade policies to the developing countries. The GSP of 1995-2004 was an improvement of the earlier agreement. Based on the level of industrial advancement (not only generally but also in terms of sector specialization in the economy), the exclusion criteria for imports this time largely segregated against the small and developing economies. This GSP arrangement even aggravated the situation further by stating that a developing country that exceeds the set limit of 25 per cent in import level per designated product would lose the preferential status awarded on that particular product. This had the potential to kill the trade abilities of the developing economies, which could supply much more of a given product forming part of the key resources in their respective countries, and it actually led to the total exclusion of certain products from countries such as china, India, and Brazil (Bhagwati, Greenaway, & Panagariya, 1998, p.1132). The GSP requirements and even higher duties resulted in developing country exports becoming less competitive. A case in point here is Botswana that risked forgoing its preferential access for beef exports into the European market, which would have adversely hurt the country’s agriculture sector, killed the beef production and cattle-rearing business in the country and adversely reduced incomes for the rural poor who sustain the beef market. In the context of EPA, filtration of access to the EU market for all products, but with the exception of arms and ammunitions as well as certain agricultural products, has brought in a disincentive in terms of the flexibility by the developed ACP countries to open up their market for the EU products (Matthews, 2008, p.385). Also, the differentiated treatment of the ACP economies by the EU based on development levels and regional arrangements has not been very encouraging, and there has been concerns that this may separate the regions further into smaller trading blocs than integrate them as envisaged. The preferential tariff rates particularly for sensitive products may be interpreted as low but are quite high for some of the developing countries. Still, exclusion of agricultural products under GSP limits access by competitive suppliers from the developing economies majorly dependent on their versatile agricultural sector. The strictness of the rules of origin under the different product categories has hampered the full utilization as well as benefiting from the tariff preference privileges by the developing countries (Gibb, 2004, p. 582). A good example of this is the case of high quality of processing required for some products, which countries may not meet because of their low production capacities. Under GSP arrangement, commodity coverage and range as well as level of preference given to developing countries in ACP are much narrower compared to least developed countries resulting in lower gains from GSP by developing countries in ACP. Bilateral or regional agreements, as opposed to multilateral ones, are not as efficient because they seem to strain the limited negotiating resources that least developed countries have in place. This is more as a result of trade diversion for member countries or regions, but the situation becomes even worse for non-members who suffer from the results of trade diversion because of their exclusion from the benefits of trade creation. Creation of regional agreements by the EU clearly has undermined multilateral process and development of global trade because of the established margins of preferences for members, which are not available to non-members. This has consequences of creating imbalances in terms of what the members of such bilateral agreements may consider as opportunity costs associated with the existence of a multilateral process that would deny them preferential treatment (Nelson, 2004, p.25). It has also been argued that developing countries could benefit more from non-discriminatory trade arrangements with the EU. This is because a provision of trade preferences to certain countries may have killed or reduced their internal policy initiatives and capabilities to liberalize trade from within, which could have promoted faster growth and expansion (Panagariya, 2000, p. 288). EU’s integration with first world economies has been getting stronger over time at the expense of developing countries, which suffer the loss of market access even though there are preferences laid down for them to take advantage of. The imbalances in preferential treatment among different developing and least developing countries by the EU has also contributed to trade disparities; thus failing to provide a level playing field for growing economies to access the international market and develop their markets (Sapir and Lundberg, 1984 p. 95). Even though the EU created a regional partnership with a number of countries in the Mediterranean, these countries have not done much in terms of fostering free trade areas amongst themselves, a situation that could be explained partly to mean that these countries found themselves in a comfort zone with the establishment of preferential trade with the Euro market. It could be argued that these countries would have thought of creating their own regional trade blocs to foster economic and political integration for development if the EU formation was not in place (Ozden & Reinhardt, 2002, p. 1992). The fact that EU grants duty free access on non-sensitive7 products, as well as partial tariff preferences on sensitive products, automatically rules out duty free access in products with high tariff duties. Products such as textiles, clothing and footwear that developing nations have the facility to produce hence have a comparative advantage and, therefore, attract high tariff duty thus introducing a negative correlation between the margin of preferences and the capacity of developing nations to sell abroad to the euro zone. This particular EU trade policy may be interpreted as a hindrance to full utilization of the full potential by developing countries because it does not wholly encourage exports of these products by charging lower tariffs (Matthews, 2008 P. 390). Free trade area arrangements suffer criticism for slowing down unilateral and non-discriminatory liberalization. It also undermines free trade from a multilateral angle as opposed to a bilateral perspective compromising the whole idea of efficiencies of free trade environment. There have been questions from different observers on whether preferential trade areas act as building blocks or as stumbling blocks to the promotion of free trade across the globe. The proponents of multilateral trade arrangements and liberalization argue that trade diversion8 is harmful to global trade efficiency. It leads to adverse welfare effects to economies that are not members of the PTA in terms of potential to divert competitive and more efficient imports from non-member economies in favour of imports from member states with low quality products. Trade diversion will then occur when member countries overprotect their domestic industries against non-member countries resulting in inefficient domestic firms due to tariff preference (Panagariya, 2000, p. 302). Trade creation, on the other hand, would occur when the preference makes the partner’s goods more attractive relative to the previously protected, less efficient domestic goods. Increasing trade barriers between members of the PTA and non-members would result in higher tariffs without observance of WTO provisions but with checking these provisions, there is a high likelihood that anti-dumping may be a consequence. The EU has signed many bilateral agreements under the FTA arrangement, which has led to a myriad of tariffs determined by rules of origin and product classification. The situation gets even more complicated because of the multi-layered one way trade preferences under the various trade agreements discussed earlier. It has also been explained and evidenced through case research that the various preferences offered to member developing countries have continuously eroded incentives for these countries to engage in internal industry liberalization and attract their trading partners into their markets. The evidence to this is the fact that countries that opt to move on the preferential trade arrangements are in a position to rapidly and substantially open up their markets to the outside world. Conclusion The European Commission (EC) is a regional political and economic bloc that integrates about 27 countries in Europe and aimed to foster economic cooperation, promote independence among trading partners. EU has been part of many trade arrangements across the globe. EC has maintained preferential trade arrangements with most developing countries under the Generalized System of Preferences (GSP) and via the Cotonou Agreement, which succeeded the Lome’ Convention for the less developed countries. The EU’s GSP arrangement contains the ‘Everything but Arms’ initiative as well as general arrangements. These are available to all developing countries and apply to non-sensitive products that come duty free. Special arrangements contain the Environmental and Social clauses that apply to sensitive products only. Trade arrangements between the EU and developed economies have included the European Economic Area (EEA), Free Trade Areas (FTAs) and the Euro-Mediterranean partnership. The ACP is a trade arrangement between EU and countries in Africa, Caribbean and the Pacific. In simple terms, EU’s integration may be classified in three categories consisting of the core EU that carries with it a common external tariff as well as a single market, the free trade area arrangement containing reciprocal trade preferences. Thirdly, there are the one-way trade preferences exclusively for the developing countries. Basically, analysis of EU’s trade policy in relation to developing and least developed economies under the two main agreement arrangements stipulated above has shown that there are just a few non-tangible and definitive benefits to these countries resulting from trade cooperation with the EU. Rent transfers are one of the good outcomes of this cooperation. The other is the advantage that developing and least developed countries have had in gaining access to the EU’s large single market. However, the explanation to this is with a pinch of salt because of the level of the discriminatory preferences given to different countries of the same classification in terms of economic, social and political advancement, without due regard to the provisions of the WTO about equity and fairness in conduct of international business and trade. The EU has accommodated more LDCs through its extension program. Hence, competitively opening up those economies to the intercontinental marketplaces as a way to promote trade and stimulate domestic production for export by the LDCs. The GSP’s environmental and social clauses encourage countries to protect and preserve forests and vegetation and uphold core labour standards, a very valuable initiative for third world countries to continue to enjoy two fold benefits in terms of environmental conservation and trade with the EU to expand their economies. The EBA initiative under the GSP has provided extensive incentives to member LDCs where they can export to the EU market almost all products (except a few) on duty free basis. There exist a number of demerits of EU trade policy on the developing countries. The GSP requirements and even higher tariff duties have resulted in exports from the developing countries becoming less competitive. With EU’s integration with first world economies getting stronger and stronger, developing countries suffer the loss of market access even with the laying down of differentiated preference procedures and arrangements. The imbalances in preferential treatment among different developing and least developing countries by the EU have also contributed to trade disparities. Thus, failing to provide a level playing field for growing economies to access the international market and develop their own markets. The fact that EU charges duty free access on non-sensitive products as well as partial tariff preferences on sensitive products automatically disqualifies exportation of products attracting high tariff duties, such as textiles and footwear. These products are a specialty of the developing economies implying that this EU policy could be perceived as a block to trade expansion between itself and the developing countries. From the forgoing discussion, it is almost convincing that developing countries should, in addition to engagements with the EU or other regional trade blocs, focus on liberalizing their own economies to gain independency and achieve maximum benefits of access to international markets. 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