The Trade Beat (Johannesburg)

19 August 2014

East Africa: How the EAC Locked Horns With the EU Over the EPA Negotiations

analysis

In a new series of guest articles on the negotiations underway to agree a set of Economic Partnership Agreements (EPAs), Godfrey Ssali from the Uganda Manufacturers Association explains what is behind the current deadlock between the East African Community (EAC) and the European Union (EU).

The EAC partner states also belong to the African, Caribbean and Pacific Group of States (ACP), which entertains a special relationship with the European Union (EU). This relationship began way back in 1957 when the EU signed an agreement in Yaoundé, Cameroon.

The current relationship between the ACP and the EU is guided by the ACP-EU Agreement (better known as the Cotonou Partnership Agreement), signed in the Benin capital of Cotonou in 2000.

The Agreement is based on five interdependent pillars, namely: comprehensive political dimension; participatory approaches; strengthened focus on poverty reduction; new framework for economic and trade co-operation; and the reform of financial co-operation.

The trading component of the ACP-EU relationship has continued to be based on the EU granting preferential access for products from the ACP group members to the European market.

However, during the intervening period (between 2002 and the end of 2007), the EU entered into negotiations with ACP groupings towards reciprocal market access under the terms and conditions of the Cotonou Agreement. This meant that the EU would also be granted duty-free access to the ACP markets. One of the groupings formed for the negotiations was the EAC EPA group.

Read two other articles in the EPA series, The endgame of the EU-SADC EPA negotiations and Why should the SADC EPA allow export taxes?

Fast forward, and as the negotiations have progressed both in the EAC capitals and in Brussels, the EAC and the EU have yet again failed to agree on the long-awaited EAC EPA, this time threatening to put into jeopardy the principal market for Kenyan fresh produce exports including cut flowers.

The collapse of the talks recently held in the Rwandan capital of Kigali, if not amicably resolved, could see exports currently accorded duty-free access to the EU being taxed at between 8% and 12% when the current interim arrangement ends on 1 October 2014.

This would render them uncompetitive in the face of strong competition from other ACP or developing country states that have signed free trade agreements with the EU.

What's clear is that Kenya will suffer on its cut flower sales to the EU. From 1 October, exports of cut flowers from Kenya will fall under the Generalised System of Preferences regime and duties will be levied on these exports to the EU. Kenya currently exports flowers to the EU worth US$537 million and vegetables worth more than US$307 million annually, with the EU accounting for about 40% of Kenya's fresh produce exports.

So what are the bones of contention for the two trade blocs?

The first is disagreement on provisions for agricultural subsidies that farmers in the EU continue to benefit from. The second is duties and taxes on EAC exports that EAC wishes to retain, and then there are non-trade issues such as transparency and good governance.

The two parties continue to blame each other for the deadlock, with some officials from the EU delegation accusing the EAC member state representatives of abruptly coming up with new demands in the negotiation meetings. Trade negotiators from the two trade blocs failed to reach a consensus on the EPA negotiations during their January meeting in Brussels as well. The EU has not been able to convince EAC negotiators to give in, despite heavy pressure.

As regards the duties and taxes on exports, the EAC partner states are unanimously maintaining that the EAC should have the authority to determine when to impose the duties without seeking authorisation from the EPA Council as demanded by the EU.

In their defence, the EAC member states maintain that taxes on exports of raw materials are very critical and important in developing the region's agriculture-based industries as well as maintaining currency stability, particularly when global commodity prices surge.

With the call by EAC leaders to add value to raw materials and industrialise, taxes on exported raw materials becomes the safety net to deter over exploitation of raw materials. The leaders fear a failure to industrialise locally due to the urgent need for raw materials by large industries in the EU, leaving little for local industrialists.

The EU, however, insists that such taxes should be imposed with the authorisation of the Economic Partnership Agreement Council and that if duties are affected under special circumstances with regard to revenue, food security and environmental protection, the EAC should only do so after notifying the EU. The EAC wants to have the express authority to impose the export taxes, while the EU insists on its position, which is viewed as a way of helping it predict the availability of raw materials once the agreement comes into force.

On the contentious issue of farmer subsidies in the EU, the EAC fears that allowing in subsidised agricultural produce from the EU would fatally destabilise the local market and block the growth of agriculture-based industries, which are the source of livelihood for millions of its citizens, since local agriculture is not at the same level of development and the EAC does not have the same level of support to offer to local farmers.

The EAC maintains that there must be a provision in the EPA that restricts such products' access to the EAC market or excludes the EAC as a destination for agricultural exports benefiting from subsidies.

The head of the EU delegation to Rwanda, Michael Ryan, disagrees strongly, saying the EU made an offer to the EAC to guarantee that no export refunds would be applied to EU exports to the EAC.

EU negotiators still insist that the EU does not provide domestic agricultural support for exports, and that that was the EU of 20 years ago. However, a means of verification that farmer subsidies in the EU are no longer in place hasn't been discussed or well-planned.

Equally unresolved by both parties is whether to include or exclude non-trade issues, mainly transparency and good governance, in the agreement. The EAC team accuses the EU of pushing for the retention of non-trade sections of the Cotonou Agreement in the final document, terming the latter's insistence suspicious.

The EAC is particularly uncomfortable with including sections of the Cotonou Agreement that touch on countering proliferation of weapons of mass destruction, protecting and promoting human rights and fighting corruption, bearing in mind that the EPA is a legally-binding document.

It is now clear that the deadlock can only be resolved at an EU-EAC ministerial level, as the disagreements need a political solution. This could be organised in September to iron out the issues before the 1 October 2014 deadline for concluding the EPA. Both sides are expressing hope that the pending issues will be resolved.

Only time will tell if the political leaders will agree. What is clear is that the skills, expertise and commitment shown by the EAC technical negotiators was a shock to the EU who had seen this as a done deal just like in other EPA economic blocks - such as ECOWAS and the Caribbean - where the EPAs have been concluded.

Godfrey Ssali is a Policy Analyst & Advocacy Officer at the Uganda Manufacturers Association.

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