Trade agreements fail to deliver for developing nations

Date: 08/05/02

Paul Brenton and Miriam Manchin argue the case for reforming the EU's preferential trade agreements.

FREE trade and preferential trade agreements are a major element in EU foreign policy and are currently at the forefront of policy towards developing countries and the Balkans.

The EU has recently trumpeted its 'Everything But Arms' (EBA) deal for the least-developed nations and is signing so-called stabilisation agreements with countries in the Balkans.

Such trade agreements are designed to increase economic integration through improved access to the EU market. This in turn is seen as vital in achieving other political, foreign policy and security objectives.

A key element of the EU's free trade and preferential trade agreements, therefore, is the extent to which they deliver improved market access.

However, the rules that the EU imposes in such agreements severely constrain their effectiveness.

Information on the implementation of the EU's existing preferential scheme of access for developing countries, the Generalised System of Preferences (GSP), shows that only one-third of EU imports from these countries which are eligible for preferences, actually enter the EU market with reduced duties.

This primarily reflects the treatment of textiles and clothing products, which account for over 70 of imports from countries covered by the GSP, but where the 'utilisation rate' (the ratio of imports receiving preferences to eligible imports) is only around 30.

Clothing is of particular importance to developing countries, providing a base for industrialisation and participation in the world economy, and is a major export from many Balkan countries.

For example, in 1998, almost 84 of Albanian exports to the EU were eligible for preferential treatment under the GSP yet only 2 were actually granted preferential access. So, existing trade agreements towards developing countries have only had a moderate impact at best in improving export access from these countries to the EU.

Understanding the reasons for the failure of EU partners to benefit from trade preferences and duty reductions on textiles and clothing products is important in assessing the extent to which the free trade provisions of the EBA agreement and the stabilisation agreements with the Balkans countries will actually deliver improved access to the EU market.

If factors which prevent the utilisation of benefits available under schemes such as the GSP remain under these new agreements then the direct effect upon exports from the 49 least-developed countries and the Balkans region is likely to be very muted. This in turn will compromise the foreign policy objectives of the EU towards these countries.

One of the key factors underlying the difficulties in obtaining preferential access is the specific rules, and particularly the rules of origin, which the EU attaches to all of its trade agreements. Rules of origin define the conditions that a product must satisfy to be deemed as originating in the country from which preferential access to the EU is being sought.

The main justification for rules of origin is to prevent trade deflection, whereby products from non-participating countries destined for the EU market are redirected through its free-trade partners to avoid EU customs duties. However, rules of origin can be very restrictive, particularly when they define technical procedures that must be satisfied.

For example, in the clothing sector the rules of origin stipulate a double-step processing requirement whereby clothing products must be made from domestically produced fabrics or fabric from EU countries. Clothing produced from fabric imported from third countries, such as China, will not satisfy the EU rules of origin and will not receive preferential treatment.

It is clear that the products exported by many preferential trade partners are unable to meet the very strict requirements of the highly technical rules of origin that the EU stipulates.

In the case of clothing, many developing countries do not have a domestic industry that can produce the necessary fabrics. Thus, to qualify for preferential access the country must import high-cost fabrics from the EU, or, in a limited number of cases, use fabrics from neighbouring countries covered by the scheme. However, if the country wishes to use fabrics from the most efficient producers, typically, China, India or Pakistan, it is denied preferential access to the EU.

The restrictiveness of satisfying rules of origin is also compounded by the costs of actually proving origin.

This involves satisfying a number of administrative procedures to provide the documentation that is required and the costs of maintaining systems that accurately account for imported inputs from different sources to prove consistency with the technical rules.

The ability to prove origin may well require the use of what are, for small companies in developing and transition economies, expensive accounting procedures. The costs of proving origin may be even higher, or prohibitive, in countries where customs mechanisms are poorly developed.

Thus, even if producers meet the technical requirements of the EU's rules of origin, they may not receive preferential access because the customs authorities do not accept their proof of origin or the costs of proving such are high relative to the duty reduction available.

So, at best, the nature of the rules that the EU imposes upon free-trade partners ensures that producers in these countries are locked in to using high-cost inputs from the EU if they wish to benefit from reduced tariff barriers on their exports. This clearly reduces the value of the concessions.

In this light we recommend:

• The EU should monitor the extent to which all of its trade agreements actually deliver improved market access to partner countries. This is crucial if economic integration is to play the role envisaged for it in the EU's foreign policy towards developing countries and regions such as the Balkans.
• The EU should make available information on the amount of tariff revenue collected on imports from preferential and free trade partners. Such funds should be added to the technical assistance budget for each country.
• There should be a complete reconsideration of the rules of origin in EU trade agreements.

The EU should consider at least the implementation of a simple one-step rule for clothing products together with a sensible safeguards policy which monitors any unusual increase in trade from trade partners and assesses whether this is due to trade from another non-preferred country being diverted through the trade partner.

If the EU continues to enforce the current draconian rules in its trade agreements and ignores the administrative costs for companies of complying with the rules, then the EBA agreement and stabilisation policies in the Balkans will have little success in integrating these countries into the international economy and will contribute little to the objectives of reducing global poverty and creating stable democracies in south-east Europe.

A simpler and less demanding system is crucial for small companies in developing and transition countries to actually gain the preferential access to the EU market that is supposedly being offered.

• Paul Brenton is senior research fellow at the Centre for European Policy Studies; Miriam Manchin is a research fellow for the same organisation. www.ceps.be

Major feature. Authors argue the case for reforming the EU's preferential trade agreements.