Reciprocity In Future ACP/EU Trade Relations With
Particular Reference To The Caribbean

Dr. Anthony Gonzales

Senior Lecturer,
Institute of International Relations
UWI, St. Augustine,
Trinidad & Tobago

Paper to be Presented at the Colloquium Entitled "Diplomacy After 2000: Small States and Negotiating Space in the New International Trading Environment." and Organized by the Institute of International Relations , UWI for the 8th and 9th of October

Table of Contents

A. Introduction
B. FTA, The Region And The Case For Additional Market Access
Trade In Goods: Trade Creation And Trade Diversion
Investment
Trade In Services
Some Targeted Areas For Enlarged Market Access
C. Concepts Of Transition And Reciprocity
Transition
Issue of Differentiation In The Region
Issue of Graduation
D. Trade Options, Asymmetrical Reciprocity And EU FTA Experience
Trade Options And Reciprocity Expectations And EU FTA Experience With Developing Countries
E. The ACP Group, FTA And WTO Acceptability
Conclusion
References

A. Introduction

From the standpoint of the EU, reciprocity (meaning FTAs or MFNs is required with middle-income ACP states (MAS) because after the year 2000 it will be difficult to obtain a WTO waiver for MAS as a result of complaints from other developing countries of discrimination. Under Art. XXV:5 a waiver was granted to members of the Lomé Convention until the 29th February 2000¹. After the latter date, a waiver would have to be sought every two years putting the security of the concessions at risks.

As far as the ACP is concerned, it is felt by many that the high dependence of its exports to the EU on trade preferences should preempt any discussion of reciprocity with the EU. The latter view is also shared by many in the Caribbean whose dependence on preferences is higher than that of other ACP regions as a result of the special commodity preferential arrangements (in particular sugar, bananas, and rice)².

The case for reciprocity from the ACP must however be viewed differently and specifically from the interests of the ACP. The habit of non-reciprocity has. become so ingrained in ACP states that the NAS do not even ask themselves whether moving to some form of reciprocity with the EU could enhance their trading status and allow them to be more competitive in the EU market in the years ahead. The present status-quo is perceived as so beneficial in spite of the decline of ACP market share, the paucity of investment and the EU continuous erosion of the ACP preferential market access due to the reduction and elimination of preferences and the granting of greater market access conditions to some non-ACP competitors.

The fundamental rationale for seeking a new relationship with the EU after the end of Lomé IV stems from the inadequacy of the present non-reciprocal arrangements to ensure trade and investment expansion in the coming decades for MAS. The current and future movement to free trade areas and trade blocks will continue to generate trade and investment diversion away from the ACP in so far as these arrangements are designed with more attractive preferential concessions for their members.

In addition, preference erosion under universal trade liberalization has led to a substantial reduction in tariff margins. From the last Uruguay Round preferential margins have been reduced by almost 3 percentage points due to MFN reduction. The average EU tariff is now between 5-6% on industrial products which means that Lomb can no longer provide much of an advantage for ACP industrial exports.

Given the state of trade and investment links between EU and the ACP, FTA (Free Trade Area) would appear in the long-term to be a superior instrument to MFN, GSP and Lomé. It would expand market size by providing access to better FTA preferences as well as offer greater security of market access, transparency and stable rules. It could better focus the attention on the dynamic gains by examining other trade barriers, protective rules of origin and restrictive investment provisions that impede a better flow of efficiency-seeking investment to areas where the ACP exhibits competitiveness. On the whole, reciprocity on the part of the ACP MRS, if gradual, could improve competitiveness, reduce import prices and encourage investment. If viewed in this way the real debate becomes one of timing, timeframe, scope of product coverage, the range of trade policies included and adjustment costs.

As middle income countries that have already crossed the threshold in terms of the foundations for building competitiveness, these countries can rapidly take advantage of FTA concessions by putting in place certain structures and undertaking some key reforms. In addition, some of the external elements needed to attain competitiveness such as technology, capital flow, etc are only attainable in many of' these small developing ACP MAS economies through an enhanced trading status such as FTA. The situation cannot therefore be one of remaining in restrictive non-reciprocal arrangements expecting to build competitiveness as a pre-condition for entry into FTAs.

Recognition of the above and specifically the extent and speed of trade and investment diversion as a result of the formation of trading blocks have led some ACP countries to commit themselves to reciprocity with developed countries. Caribbean ACP states have expressed interest in an FTA (NAFTA/FTAA) integration process by the year 2005. Furthermore, at least two CARICOM ACP countries have shown support for joining NAFTA if invited. The granting of reciprocity to other more advanced developing countries in the Western Hemisphere is already established as a principle for the four CARICOM MDCs. Papua New Guinea has recently given reciprocity as well³ and SACU countries have legally accepted under ANNEX 36 Of Lomé IV to give reciprocity to the EU that is now given to South Africa even though the EU has not enforced this legal commitment.

By extension, this above logic must apply to the relationship with the EU. As the EU has extended FTAs to Central and Eastern Europe as well as the Mediterranean,( EU already has FTAs with Israel, Tunisia and Morocco and intends to expand this to the other countries in the Mediterranean) and proposes to do similar arrangements with other parts of the developing world (MERCOSUR, MEXICO, APEC, etc), Lomé will not remain a competitive trade instrument in the years ahead.

A critical problem for ACP at present is attracting investment. Investment brings competitive advantage and trade. Future arrangements with the EU must focus more on how to attract investment in the context of globalized networks.

Another reason for arguing that non-reciprocal arrangements as Lomé, GSA, CARIBCAN and CBI have reached their outer limits and cannot compete with FTAs has largely to do with the fact that these instruments cannot be extended without reciprocity in terms on product coverage, rules of origin, services, investment, etc given the changing realities of development cooperation policy.

In recognition of these changing realities, many ACP countries have embarked on a process of liberalization to prepare themselves for a world of liberalized trade and globalization. They have adopted a series of reforms since 1980. These reforms now have to be institutionalized within FTAS to make them more permanent and credible.

In the context of NAFTA/FTAA, the transition to FTA FOR THE Caribbean is conceived as one of NAFTA "Parity" and various measures to assist small countries to benefit from PTA. in relation to the EU, there is no similar clear option that has been decided by the region. This has largely to do with the fact that the EU has not taken the initiative to concretely propose a new form of relationship. It has only spoken of the possible end of non-reciprocity.

In a fundamental sense the move to FTA in the Western Hemisphere has reduced the trade options of the Caribbean region to MFN or FTA with the EU. In assessing these options, this author has advanced the concept of simultaneous FTA movement to NAFTA/FTAA and the EU based on phased or relative reciprocity along with requisite development assistance to facilitate competitiveness and transformation. This position is based first on the imperative of FTAs with the EU and North America for attracting investment and boosting exports as well as the importance of making Caribbean membership in NAFTA/FTAA compatible with its trade relationship with the EU in so far on a non-discriminatory basis the same treatment (as required by the Lomé Convention) given to the developed countries of NAFTA must be given to the EU. Furthermore, if MFN becomes the basis for trading with the EU, it would severely downgrade the trading status of the region as the EEC pyramid of trade privilege is restructured.

Under a diversification and competitiveness-building strategy discussed above, it is possible to conceive of the Caribbean moving to reciprocity with the EU under a transitional arrangement after Lomé IV. such an FTA with variable speeds of entry and degrees of reciprocity based on appropriate concepts of FTA readiness, differentiation and graduation could be viable especially if it is region-specific in so far as it does not exclude the key products and services of export interest to the region and grant concessions not in broad terms but in sectors where the region can compete.

B. FTA, THE REGION AND THE CASE FOR ADDITIONAL MARKET ACCESS

In a region-specific framework, middle-income countries in each ACP region would have to ask whether they can benefit from extended market access in certain areas and is this attainable only through reciprocity. The Caribbean would have to make this kind of assessment which is attempted below.

Trade In Goods: Trade Creation And Trade Diversion

It is often assumed that the more concentrated a country's exports on one of the trading blocks (EU, NAFTA or Asian Pacific), the more likely it will gain in an overall sense from better access to that trading block. The loss that would result from standing still and not obtaining similar access to other trading blocks would be less than the gains made from joining the block where the majority of its exports are channeled. The net result will therefore be positive. The opposite negative net effect can be expected if it remains outside its main trading block. This appears to be the rationale behind the trade block choice of Canada and Mexico. It is a model often applied to the Caribbean by suggesting that with the exception of a few traditional commodities (especially sugar and. bananas) the bulk of Caribbean exports go to the US and as a result, NAFTA/FTAA should be the natural trade block choice of this region.

The above type of theorizing is however flawed in so far as it neglects the high product concentration of exports of these countries which are also geographically concentrated and consequently dangerously over-exposed in particular markets. It should therefore be subjected to some caution as regards interpreting the behaviour of exports of small countries where at times just the specific behaviour of a few exports could be determining. In addition, in so far as it does not take account of potential exports and the most likely outlets for these exports as well as the fact that the country may focus on services whose trade affiliation requirements could be different, is also another reason to proceed with care in interpreting this "mercantilist theory".⁴

The Uruguay Round has not brought the reduction in trade barriers that were expected. One can therefore expect trade barriers to remain relatively high if not grow and conflicts between blocks to be a regular feature of the trading system. It is thus not only countries with a diversified pattern of exports which would be particularly affected due to the fact that the access they gain from joining one block would be disproportionately offset by the loss that would be incurred from their competitors gaining better access to the other trading block(s). Countries with a narrow export base and experiencing special difficulties in diversifying would also experience a major loss if they cannot gain the security and breath of market access from more than one trading block. In the absence of more effective multilateral liberalization and/or a global free trade area, trade block choice should be broader in scope for these states.

The above discussion on the advantages of export concentration in a world of' "mercantilist" trading blocks also tends to abstract from the national position and lumps countries into one region. The Caribbean for example is quite diversified.

In this region the countries with a high trade dependence on the US (and generally North America) are Belize, Jamaica, St Kitts and Nevis, The Bahamas and Trinidad and Tobago. Such trade dependence is not however as high as that of Canada and Mexico. Countries which are more dependent on the EU market are Barbados, Grenada, Guyana, St Lucia, and St Vincent and The Grenadines.

Against the general picture painted above, it is helpful to examine briefly trade-creating and trade-diverting effects of both NAFTA and the SINGLE EUROPEAN MARKET (SEM) on the Caribbean and draw out some implications (even though they may be provisional) for countries with a high level of dependence on trade in terns of the large share of exports in their GDP.

In the SEM, falling prices and increasing incomes should lead to a faster rise in EU GNP in the coming years. The terms of trade are also expected to improve⁵. These trade-creating developments could positively spill-over in terms of larger imports, especially if the. EU country has a high level of trade with third countries. The Caribbean is not too favoured in this regard in so far as it enjoys low shares in EU import markets.

The demand for Caribbean experts in the EU will significantly depend on their elasticities. With falling EU prices due to increased competition and more EU competitiveness, trade diversion will naturally occur. If Caribbean goods are very price-elastic on the one hand, then there will be a large fall in demand for these goods since more of them will now be produced in the EU at lower prices. on the other hand, it they are very responsive to income increases with a high income elasticity of demand, then the net trade effect could be positive. The balance between these two forces will therefore be largely determining.

On another level, EU import-competing firms in more competitive markets will become more efficient. They would probably not become so efficient so as to displace Caribbean exports in NAFTA and other non-EU markets. Their efficiency should increase but not to the point of making them highly competitive exporters. If it occurs at all, the extent of such trade diversion will most likely be small. In general, Caribbean current exports are not substitutes with such potential EU exports. In the future as Caricom exports diversify, the situation may however change.

SEM gains are expected to De more significant in imperfect markets, i.e. steel, textiles, agriculture, etc. Protectionism is likely to grow in garments, steel and light manufactures. This is largely due to the flood of such exports expected to come from the transitional economies in Eastern Europe⁶ and the rest of the world. Trade diversion is expected to be highest for low-valued, undifferentiated, price-elastic goods such as textiles, clothing, footwear, leather, consumer products, simple electronics, metals and chemicals. Such products have a high price elasticity and generally average income effects. These are the goods that countries in the region especially the Dominican Republic, Jamaica and Trinidad and Tobago are now expanding to the EU⁷.

Trade diversion should be lowest for non-competing primary goods and specialized high-valued goods. For commodity exports, income elasticities are smaller than for manufactures but price elasticity is even smaller. Trade creation should therefore dominate in this category.

The net effect of the SEM on Caribbean exports can be assessed using some general income and price elasticities. Estimates of income elasticities vary considerable but some indicative ones are as follows: non-fuel primary commodities (5-7), fuel (1.2), manufactures (2) and machinery and transport (2.4) .Estimates of price elasticities are: primary commodities(5), chemicals (5), machinery (5), transportation (5) and manufactures(2).

The bulk of CARICOM exports to the EU are in primary products where for the non-fuel ones, there could be a trade- creating effect over the trade-diverting one. These would be in the non- protected primary areas such as bauxite/alumina and some agricultural and horticultural products. Fuels should also benefit from trade-creating income expansion. In manufactures, the small quantities of garments, labour-intensive electronics and some other light consumer items will suffer the most from trade diversion. The net effect on chemicals is not clear. They should experience both a high trade-diverting price-elastic impact as well as strong trade -creating income effects.

The same price and income effects described above will occur with the formation of NAFTA. Trade-creating income effects in NAFTA could be positive for expanding Caribbean exports especially if better market access is obtained. 'The trade-diverting effects have been largely emphasized. They cone basically from increased Mexican competition as a result of better market access and lower production costs that will emerge iron greater competition in the larger market. Products that have been identified that would undergo such effects are apparel, electronics assembly, agricultural items (particularly sugar, fruits, vegetables and flowers) and rum.

Caribbean exports to the EU can be further affected if they lose access to the US market through trade diversion. Garments are a good case in point. Many garment factories in the region try to achieve economies of scale (at tines at least 90 % must be exported to achieve scale economies) by exporting as. much as possible to North America and Europe. This is particularly the case of the small local garment producers who try to attain critical mass by diversifying their export outlets as much as possible, quite unlike the large (mainly multinational) firms that operate with large guaranteed quotas in the US market and engage only in assembling (essentially sewing). some of the local firms try to add more value in CMT (cut, make, trim) garment work. As a result of the tendency to encourage Us CBI quotas based on US-made or US- imported fabric cut in the US, CMT producers have been encouraged to diversify. The EU market is a difficult one insofar as the rules of origin limit garment exports but there are still some areas where it is possible to take advantage of the unlimited duty-free access under Lomé and achieve scale⁸.

Caribbean garment exporters have been increasing their penetration of the.EU market. At the margin some noteworthy growth of exports is perceptible. on the whole Caribbean exports to the EU have been expanding very slowly and their share of the EU market has been declining similar to the general trade pattern of the ACP states. Manufactured exports in particular have not showed much dynamism. Apart from some chemicals (urea, methanol and ammonia), garments have been the main other non-traditional area. Manufactured exports to the us nave been exhibiting faster growth.

Even so, it is mainly Jamaica and the Dominican Republic which have benefited from this export expansion-

In the light of the above, it would appear that Caribbean countries would find it more difficult to diversify into manufactures if trade diversion continues at its present rate in NAFTA and the EU. Diversification that would depend 1ess on the US market would be made more frustrating if the net effects of' the SEM along With the expected diversion of EU imports to countries geographically closer to Europe are not countered with a greater supply effort coupled with greater market access. The latter phenomenon is already occurring between the EU and its neighbouring countries. It is quite visible particularly in the change in sourcing of EU imports of food products from Latin America to the Mediterranean.

In conclusion, therefore, access that the Caribbean has lost from not being members of NAFTA is being further compounded by the erosion of' its position in the EU market. Entry into NAFTA would help offset the present and potential decline in access to the EU market. This solution is however sub-optimal. The first-best solution should be to equally improve access to both markets. In view of the trade diversionary' effects of the SEM noted above coupled with improved market access for Caribbean competitors under FTAs, the Caribbean countries on the whole and especially those whose trade is diversified between North America and Europe would be seriously disadvantaged.

Furthermore, the sensitivity of the products that would be subjected to contingent protection in the form of standards, (current examples are wood, rum, asphalt, chocolate, etc -to name a few), environmental and labour norms, technical barriers, countervailing and anti-dumping duties, and restrictive rules of origin (e.g., yarn-forward for garments, etc) must be taken into account. Theoretical duty-free access will not provide the guaranteed access in the years ahead. in the EU consumer protection is an important area of public policy. It weighs heavily in fool manufacturing, electrical goods and services. The adoption of norms and standards through mutual recognition would also facilitate investment.

Investment

NAFTA removes the restrictions on the flow of investment within the North American region. Along with the removal of duty and other restrictions, this allows firms to rationalize production within NAFTA and vertically integrate operations through specialization and the achievement of economies of scale. In addition, by strengthening Mexico's investment climate, more investment from non-NAFTA sources will be attracted to Mexico. The extent to which EU investment in the Caribbean will shift to Mexico remains an unknown. Some foreign firms, particularly in garments have already started to shift but generally these are non-EU firms. in any case EU firms are not involved in outward processing of garments in this region, not only due to the distance but also on account of the tight rules of origin which generally specify value added from locally-produced fabric⁹.

Data on EU investment is not readily available and up-to-date. The volume however is small and the annua1 inflow from 1982 seems on average to be in decline as compared with the average for 1979-82. Jamaica and Barbados attracted same better inflows for the year 1989. This performance is in line with the general decrease in investment flows to the region as a result of the onslaught of the debt crisis. Today, however, investment inflows have picked-up but there is no evidence that the Caribbean is benefiting from that resurgence of EU flows to Latin America.

The investment provisions in Lomé are not as facilitating as those in NAFTA. Apart from exhorting ACP States to create a better investment climate, basically they seek to encourage the signing of bilateral investment treaties with the EU member states and avoid discriminatory ACP treatment among the EU member states. In addition, there are the usual provisions regarding freedom of capital transfers.

NAFTA made a radical departure by emphasizing national treatment. The Lomé Convention requires that MFN investment treatment be given to the EU.

NAFTA could impact negatively on EU investments in the Caribbean countries since such capital may move to Mexico. Advantages such as more stable access to the large North American market of 360 million people, improvement in financial markets, an improved dispute settlement mechanism in regard to both trade and investment and Mexico's low wages constitute incentives for investment. As a result, investment in such areas as the manufacturing of rubber products, footwear, cosmetics, chemicals and food processing could be diverted away from the Caribbean countries.

Both the SEM and NAFTA will create more investment opportunities domestically with high rates of return. Thus investment diversion is most likely. There is already some evidence that with higher growth expectations and lower capital cost, more global investment is being diverted into NAFTA and EU. it is going largely where economies of scale and comparative advantage could be explored. since no additional domestic savings in NAFTA and the EU are expected from changes in financial conditions and savings do not increase at current interest rates, no investment creation is likely. The available stock will therefore be re-distributed more in favour of these blocks and to the detriment of the Caribbean region.

A key pull factor on investment therefore is Whether the trade opportunities will be positive or negative as a consequence of the type of links developed with these regional blocks. if the net trade effect is positive, an additional inflow of market-driven investment could be forthcoming which will help diversify investment away from its present concentration on natural resources.

Trade In Services

In Lomé IV, services were not tackled. It was basically agreed in Art.185(4) that "the Contracting Parties will negotiate amendments or further elaboration of this Convention to take account and to take advantage of the Multilateral Trade Negotiations in the GATT". The Uruguay Round. did not make much progress in trade in services. The General Agreement on Trade in Services(GATS ) established a multilateral framework for trade in services. It emphasized continuous negotiation in this sector and provided some rules governing transparency, security and predictability. The aim is to increase information flow by publishing and notifying member states of legislation and regulations affecting the services sector. There is also a general obligation to give MFN treatment with an exemption for a maximum of ten years. Some countries made otters to open certain service sectors to foreign competition but more sectors are to be identified in future negotiations.

NAFTA went much further than GAT£S in that it clearly opened sectors as government procurement, banking, insurance and engineering services. NAFTA will not however have any impact on the services provisions in Lomé. The liberalization of trade in services in Lomé will proceed along the lines of what is achieved in the WTO and the specific nature of the ACP/EU relationship. Most ACP States are still in the developmental mode and now building the external economies necessary for their competition in the service sector. It is therefore expected that Lomé will go more the way of emphasizing resources for the development of the services sector than better access for ACP services. One-way non-reciprocal preferential access is seen by the majority of ACP states as important for developing competitiveness in the sector.

The Caribbean has not advanced in multilateral fora any innovative position as regards liberalization of the services sector. It has only made some minimal offers in GATS. In Lomé, it has pushed and obtained resources (possibly not additional) for the development of tourism. Given its present and future dependence on services, the region would wish to take the initiative to seek trade concessions in areas where it has an existing and potential comparative advantage.

Some Targeted Areas For Enlarged Market Access

In summary, the following are some indicative areas which could enlarge access to the EU under a programme of reciprocity:

- More flexible rules of origin targeted to the potential sector of diversification and geared to stimulate EU/Caribbean production-sharing investment¹⁰ . Garments would be an obvious candidate;

- Agreements on Standards and norms;

- Agreement on dispute settlement;

- Greater market access commitments trial deal With Changing regulations that act as barriers to trade in services. A good example is the limitations on the movement of natural persons and business services from the Caribbean. The EU can grant visas, work permits, accreditation, recognition of qualifications and licenses in a more flexible way and comparable to what is enjoyed by OECD countries in regional arrangements relating to the supply of services and service regulations;

- Returning EU tourists from the Caribbean can also be accorded larger duty-free allowances. Tax credits for particular Conventions held in the Caribbean (similar to what the US introduced) as well as for some other tourism activities would also act as an incentive;

- Traffic rights could be enlarged for airlines from the region on a preferential basis. Lower costs access to computer reservation systems, cargo handling facilities and check-in counters could also be considered;

- In the field of investment, while an PTA will provide more secure market access since it is based on reciprocity and this should be more attractive for DPI (Direct Foreign 1nvJestmencj, double taxation arrangements that provide tax relief for £U investments on the income saved from tax holidays and other incentives given in the Caribbean could act as an incentive. Maybe for some targeted sectors such as hotels where massive investment is required in the region to refurbish plant and equipment in order to stay competitive, this could be an incentive.

C. Concepts of Transition And Reciprocity

Transition

For some Caribbean countries dependence on EU commodity protection is so great that it inhibits a vision of survival in a globalized and liberalized world. Transition in these circumstances must therefore mean some guarantee or economic security for these small states facing high costs and tremendous difficulties in diversifying. It cannot just mean the provision of financial and technical resources for restructuring of the industry. It should, as was done under the CBI, encourage diversification through offering specific trade, service and investment concessions that will directly pull investment into new or existing areas and allow new industries to grow up as the existing sunset ones are phased down. The case of garments in relation to the reduction of the us sugar quotas under the CBI is a good example.

The EU has advocated tourism-led diversification for the Windward Islands based on more local non-traditional agricultural and other inputs as an alternative to the banana industry. Yet, there are no specific measures in the Convention that would directly promote tourism such as tax credits for conventions, more duty-free products for returning EU tourists, etc.

Under a diversification and competitiveness-building strategy discussed above, it is possible to conceive of the Caribbean (as well as other ACP regions) moving to reciprocity with the EU under a transitional arrangement after Lomé IV. Such an FTA with variable speeds of entry and degrees of reciprocity based on appropriate concepts of FTA readiness, differentiation and graduation could be viable especially if it is region-specific in so far as it does not exclude the key products and services of export interest to the region and grant concessions not in broad terms but in sectors where the Caribbean can compete. Transition to FTA should begin similar to the proposed transitional NAFTA Parity with the extension of' these preferences to the Caribbean in return for reciprocity on a phased or relative basis. With a target of FTA by the year 2005 and FTA parity extended to Caribbean countries from the end of the year 2000, Caribbean countries on the basis of' various established readiness and graduation criteria could begin to offer degrees of reciprocity in line with arrangements in the NAFTA/FTAA process. once differences in treatment are not too large to impact negatively on regional integration, this approach could be viable. CARICOM countries are already proposing reciprocity from the CARICOM MDCs ( More Developed Countries) and non-reciprocity from the LDCs (Less Developed Countries) in trade negotiations with developing countries in Latin America so that the principle of special and differential treatment is already accepted in CARICOM. It is thus possible to envisage a two-tier Caribbean similar to a two-tier ACP.

The concept of parity will not be the same as in NAFTA, that is, measured by what has been given to Mexico. Parity in this sense must be seen in terms of EU FTAs which offer more preferential rules of origin, norms and standards, dispute settlement and market access conditions for services. The EEA will obviously be the outer boundary but certainly the model could be somewhere between that and an FTA with South Africa. It would also have to be specific in terns of regional needs.

Issue Of Differentiation In The Region

Relevant criteria are needed to assist in designing transitional arrangements that would best meet the needs of the region. The poorest would still be in need of special treatment. In this regard Haiti in terms on its level of development and the reforms presently being attempted would qualify for a special package.

Debt overhang should also be integrated in the assessment. Guyana is the only Caribbean country to be classified among the severely indebted low-income countries (SILICs) whose debt ratios (debt-to-exports, debt-to-GNP, net present value of debt-to-exports) are above 200% and considered unsustainable by international standards.¹¹ Guyana would be in need of a special package.

While the focus must be kept on the poorest and neediest, adequate attention must also be given to vulnerability to preference erosion. Caribbean countries are regarded as middle income countries but this tends to mask the dependence of their

income on preferences. In this regard, another important criterion should be the most vulnerable to the erosion of preferences (commodity and tariff protection) generally and specifically in relation to the EU. TABLE I attempts to give some indication of the dependence of GDP on preferences in the various countries.

Using the criterion of the portion of exports covered by preferential treatment, preference erosion vulnerability seems strongest in Suriname, Belize, Guyana, St. Lucia, St. Vincent, and Dominica. in a sense the Joint Declaration on Bananas in Lomé IV to the effect that Lomb aid programmes should take account of the special problems of ACE banana producers is a reflection of the need to pay more attention to this vulnerability criterion.

Next , capacity to participate in a world of liberalized trade could constitute another factor. it would imply the use of some structural competitiveness index using variables such as technology development, human resource development, etc and based on some notion of sustainable and diversified export capability. On the latter score, it is not helpful, given the size of these countries, to use broad concepts of industrial diversification such as the distribution of' GDP in agriculture, industry and services with emphasis being put on services as an indication of diversification away from manufacturing when in tact many of these countries are jumping the manufacturing stage completely or, because of the large role of a natural resource in the economy, a large non-competitive highly protected service sector has developed. It would appear more appropriate to focus on the extent to which exports are diversified and competitive in relation to the size of the country even though these exports could be just in one or two sectors but match the needs for specialization on the pare of these small countries.

TABLE I: Preference Erosion Vulnerability: % Exports Covered By Preferences

Issue Of Graduation

At present Lomé has no criteria for graduation similar to the GSP where country sector graduation is practiced on the basis of level of' development and sector specific specialization. The development index is based on per capita income and exports of manufactured products whereas specialization is based on competitiveness in the sector market as measured by the share in EU imports. It the beneficiary accounts for 25% of total GSP imports in a sector, it will be graduated. De mininis clauses exist at a low per capita income reflected in a low development index and for a country which accounts for a small share (less than 2% of GSP imports in the sector). No Caribbean country has been listed among the 37 GSP beneficiaries already identified for possible country- Sector graduation.

As yet Country graduation does not operate in the EU GSP. The EU is planning to introduce country graduation criteria at the beginning of 1998. In the debate, the size factor has already come into play. In addition to the size of exports of the sector, an economy of a certain level of GOP is considered structurally developed and capable of competing even if its per capita income falls below $2,500.

Caribbean countries have made a strong case for smallness to be considered in the FTA process. In this regard they have put on the negotiating table such criteria as the high costs of diversification in so far as small market size requires a large portion of output to be sold on the international market for a project to be viable, posing problems of production and marketing economies of scale; the high unit cost of infrastructure because of technical indivisibilities in small societies; special difficulties in macro-economic management due to extreme vulnerability to the vagaries of the external environment given the high export product and marl<et dependence and uncertainty in price and demand fluctuations; and high adjustment costs associated with the absence of specific factors of production needed for the development of alternative production.

Free trade readiness criteria in terns of success in policy reform and generally sound economic management have also been used to assess Caribbean countries preparation for NAFTA/FTAA. TABLE 2 shows for some countries their present ranking by one institution. Caution should be exercised in the use of these criteria in so far as they do not take account of' boundary conditions of size and degree of structural transformation as part of the readiness criteria.

TABLE 2

1996 Performance Scores on Readiness indicators ( 5 is the highest score)

Source ; Gary C. Hufbauer, Senior Fellow, The Institute for International Economists

D. Trade Options, Asymmetrical Reciprocity And EU FTA Experience Trade Options And Reciprocity

The trade options that present themselves can be summarized as follows:

1. Keep the Lomé acquis of non-reciprocity and continue to discriminate against other developing countries;

2. Extend Lomé either through inclusion in the Convention of some defined set of deserving LDCs with comparable economic structures or to this same set of states through a similar parallel arrangement (s);

3. Create a new GSP that would cover a selective group of developing countries based on criteria of graduation and differentiation. The other developing countries would be graduated to MFN of FTA;

4. Create a new GSP for all developing countries with different degrees of differentiation and sector graduation;

5. On the basis of differentiation and graduation, set up an a la carte menu of reciprocity and non-reciprocity based on groups in the ACP satisfying certain economic criteria;

6. Introduce region-specific arrangements based on variable geometry of reciprocity and non-reciprocity according to differentiation criteria.

Option 6 would appear to be the most realistic in terms of the diversity of the ACP Group and the current trends in trade policy. The Caribbean in terms of its pursuit of integration in this hemisphere should prefer an option that is region-specific and allows concessions extended to developed countries in this hemisphere to be also extended to the EU.

The concept of asymmetry would come into play to govern a new reciprocal relationship. Asymmetry means dismantling tariffs at different rates given levels of development. Asymmetry in practice would mean that the ACP must outline a phased programme of dismantling tariffs on EU imports while continuing to enjoy the present duty-free status in the EU and more. The process would be similar to that of former EU Associates which moved or are now moving from one-way free trade under GSP to reciprocity by the phased elimination of restrictions on imports from the £U. This is a relatively new type of arrangement between developed and developing countries as evidenced by the NAFTA experience with Mexico and the question has been raised as to whether the jurisprudence in the WTO takes full account of the needs of such a diverse set of developing countries. some observers have argued that longer periods should be required for ACE MAS which are less structurally diversified as compared to Mexico.

According to Art. 24, an FTA Should cover Substantially-all- trade in 10 years. Any Interim Agreement with more than ten years would require a derogation either under Art 24 para 10 where a two- thirds majority can approve such an interim arrangement provided finally it leads to an FTA or under Art. 25(5) where a two-thirds majority would be required to obtain a derogation from Art. 1.

There has been no consensus on what constitutes substantially- all-trade. The EU once proposed that 80t of total trade must be reached in the 10 years for an PTA to be achieved irrespective of whether a sector or sectors are excluded¹² the EU has had a history' of excluding agriculture from FTAs. It has not been possible to arrive at any agreement either on a qualitative or quantitative basis. As a result it is often argued that Art 24 in conjunction with Part 4 has the necessary flexibility. it would allow reciprocity that would have the necessary phase-ins, safeguards and respect for some criteria of differentiation and would seek to comply with the WTO full reciprocity in ten years.

Trade Options and Reciprocity Expectations And EU FTA Experience With Developing Countries

If reciprocity would bring greater coverage of products and services as well as trade policies such as standards, technical barriers, competition policies, unfair trade laws, etc, then such broader market access could be of interest to some ACP states. Many however have doubts as to the amount of additional market access that would be attainable. They point to the practice of the EU so far with FTAs and especially to the current negotiations with South Africa.

At present there are essentially two types of EU FTAs although there is significant variation in terms of coverage of products, trade policies and depth of liberalization. At the top of the EU pyramid of trade privilege and outside the EU itself, is the European Economic Area (EEA) countries. Here free trade covers industrial products and provision is made for mutual recognition of technical standards, technical barriers to trade, the harmonization of competition policies towards subsidies with the latter opening up the possibility for easier solution of ant-dumping and countervailing measures. Several features of the Single Market are also contained in this arrangement such as the free movement of labour and capital, services, the harmonization of legislation affecting enterprises, research and development, the environment, education, and public procurement.

The second layer is the EU Interim Agreements with Central and Eastern Europe leading to PTA in ten tears. These agreements cover industrial and processed agricultural products with sensitive products such as steel, textiles and unprocessed agricultural products in separate protocols. There are provisions for rules of origin, competition, government procurement, intellectual property, safeguards and dispute settlement. Trade in agricultural goods is restricted. The Mediterranean countries with Tunisia and Morocco leading the way are expected to join this category.

The EU negotiations with South Africa are at times heralded as the forerunner of future agreements with the ACP. However, there are major differences between South Africa and the ACP that should be noted. South Africa is regarded as a developed or advanced developing country. it never enjoyed GSP or Lomé-type treatment. Its negotiations would be quite different in the sense that it would not be entering into an arrangement with an acquis as the ACP countries. In addition, South Africa produces a fair amount of agricultural goods that compete with EU production under the CAP. This is far from the average ACP case. The experience of Tunisia and Morocco would be more appropriate since they are regarded as developing and moving from a similar Lomé-type arrangement to FTA.

E. The ACP Group, FTA And WTO Acceptability.

It has been suggested that Lomé and the ACP Group will cease to exist with individual or region-specific FTAs. The ACP regions as well that do not have FTAs among them will be affected if they enter into FTA with the EU. Some interpret Art 24 to suggest that only one FTA can be allowed with ACP as a Group similar to the Lomé Convention. Questions have also been raised about the benefits of collective negotiating strength in a context of region-specific agreements using an umbrella approach. The present trend with South Africa and SACU carving out that regional space in the ACP has further raised doubts about the effectiveness of ACP Group negotiations. in a fundamental sense, however, the South African negotiations have demonstrated the importance of the ACP remaining as a group and using its negotiating power. South Africa's interest in non-reciprocity or at least asymmetrical reciprocity has raised the basic question of the adequacy of multilateral FTA rules to deal with a group comprising the world's largest number of least developed and small developing countries. The multilateral rules do not presently cover adequately and clearly the scope of arrangements that may be necessary to deal with the phasing-in of reciprocity to take care of the needs of certain middle-income ACP states to sustain their reciprocal obligations under these arrangements.

The ACP as a group has an important role to play. Underpinning region-specific negotiations should be an ACP platform geared to seek a basic ACP/EU framework-type agreement on FTA that incorporates principles of asymmetry, relative reciprocity, length of phases for types of countries, minimum content of FTA in terms of standards, dispute settlement, etc. and based on some bottom- line acceptance of criteria for differentiation and graduation. The ACP Group and the EU may have to approach the WTO and seek some changes or interpretations of the multilateral rules.

F. Conclusion

In assessing the options, the concept of simultaneous FTA movement to NAFTA/FTAA and the EU based on phased or relative reciprocity along with requisite development assistance to facilitate competitiveness and parity over a transitional period, has been advanced. Ideally, the above strategy is perceived as providing additional market access on a more secure basis and ' enlarging' market size necessary to make the region more competitive for investment. The assumption, of course, is that in the light of universal trade liberalization, PTA is a more attractive basis for these countries on which to trade than Lomé, GSP or MFN. A region as the Caribbean has been shown to warrant a wider choice of trade blocks given its diversity and export product concentration.

Countries that have liberalized their economies and undertaken structural reforms should not have too much difficulty in this regard. Furthermore, if the Caribbean can keep its key Lomé commodity and financial arrangements for some transitional period, such an option Would be even further enhanced.

The transitional period to a post-Lomé adjustment has to be skillfully managed in order to ensure that adequate restructuring takes place. such an effort has already started with bananas and structural adjustment generally. It must however, get underway in several other areas. The Caribbean has to be perceived as making the necessary reforms as well as widening and deepening the integration process.

There is a wide consensus in the region about the importance of a new deal with Europe in the light of changing circumstances. Strategic analysis has not however thrown up a course of action that adequately links the past with the future by taking into account present and anticipated changes in circumstances. A strong rationale for a new relationship with the EU that promotes reciprocity and non-discrimination in trade but at the sane tine incorporates some existing and additional development provisions does exist. ideally as a first option FTA with the EU is to be preferred. Naturally, its feasibility can only be fully assessed as events unfold in the coming years.

END NOTES

1. Non-ACP developing countries have been arguing that the Lomé Convention, quite apart from violating ART. 1.1, is not in conformity with Art XXIL and with Part IV of the general Agreement in so far as it discriminates among developing countries. The EU however in obtaining a wavier from Art 1.1 does not accept that the Lomé Convention is incompatible with Art XXIV in the light of Part IV.

2. While the sugar Protocol has a life from the Lomé Convention, for all practical purposes it has to be considered as part of the overall Lomé concessionary package.

3.Time did not permit a full enquiry of the nature of this PNG initiative.

4. Time does not allow the pribing of these specific effects for the region.

5. There are many forecasts of higher income growth in the EU as a result of the SEM. Some more conservative estimates stress at least a 1.5% increase in the growth rate and a .5% improvement in the terms of trade.

6. One estimates puts such exports at US $250 billion.

7. For the expansion of Caribbean manufactures to OECD markets see World Bank, Coping with changes in the External Environment. Report No. 12821 LAC.

8. Under the Lomé Agreement, ACP States are exonerated from the MFN (Multifibre Agreement). Even though the MFN applies to Caricom States in their trade with the USA, CBI quotas are more advantageous since US origin rules allow for more offshore processing and the quotas have been large relative to pre-CBI values. EU outward processing is much more restricted and is not done in this region.

9. Some relaxation of the rules of origin in garments occurred in some areas in the mid-term review but this was not so far-reaching as to upset the argument being made.

10. Messerlin complains about the limit on inputs imported from non-EU sources (40 and 50%) in the EU Interim Agreements with the Eastern and Central European countries. This is considered high for such small economies needing to import raw materials. ( See Messerlin, P " The Association agreements Constitutional Failure?" ACTA OECONOMICA, VOL. 45 (1-2) pp.119-114 (1993)). The situation of the Caribbean is quite similar. It makes out sourcing both from EU and non-EU sources very difficult in a region where the industrial base is even smaller . The FTA an advantage over the Lomé rules of origin. Semi-finished inputs an partly -processed raw materials from countries outside the FTA are discouraged in so far as there is a high value-added requirement for goods originating within the FTA.

11. Guyana recently received some debt relief from the Paris Club to the extent of two/thirds of its Paris Club debt. This is quite recent and detailed information is still scarce. It has not been factored on the above.

12. The Report of the working party on the EU (BISD 6S/99) entails such a proposal.

REFERENCES

Frisch, Dieter, The Future of The Lomb Convention ECDPM working

Paper No. 11 1996

Gonzales, Anthony, "'The Caribbean and the EEC: Towards a post-Lomb strategy."" in The Dynamics of Trade and Political Economy in the Caribbean. Ed Anthony Bryan, NORTH-SOUTH CENTER. 1995.

Gonzales, Anthony, "Caribbean/EU Relations in a Post-Lomé World" Mimeo. June 1996

Gonzales, Anthony (ed.), "The European Community and The Caribbean in the 1990s." Economic Development Institute of the World Bank, EDI Working Papers No.93-25. 1993

Lingnau, Hiidegard, Perspectives on Lomé Cooperation, ECDPM Working Paper No 11. 1996