Falling out of favour

Should Europe's trade policies continue to afford privileges to its former colonies?

“TRADE follows the flag” was one of the slogans of the British empire: the gunboats and the redcoats opened the way for the merchants and the manufacturers (although, on occasion, the sequence was reversed). But long after the flag came down on Europe's empires, the continent's trade policies still offer more than a salute to its colonial legacy.

Through a succession of trade deals - signed first in Yaounde, Cameroon, in 1963; then in Lome, Togo, in 1975; and finally in Cotonou, Benin, in 2000 - the European Union (EU) and its predecessor have kept their markets open to former colonies in Africa, the Caribbean and the Pacific islands (ACP). The EU's patronage is now enjoyed by 77 countries - Francophone, Anglophone and Lusophone - from which the EU bought €28.3 billion-worth ($35.1 billion) of goods last year.

The Lome conventions gave the ACP countries privileged access to the EU market (plus a dollop of aid) without asking much in return. But these arrangements eventually fell foul of the World Trade Organisation (WTO), because they discriminate against countries, some of them poor, that did not happen to be colonised by a European power. Thus the Cotonou agreement envisages more give and take in the EU's relations with the ACP countries. If they are to keep their privileges beyond 2007, these countries will have to reciprocate, cutting their tariffs on “substantially all” EU imports (which might in practice mean only two-thirds for some countries) over a “reasonable” period (which might be 12 years or more).

This modest push for “reciprocity” is deeply controversial. The EU stands accused of forcing open the markets of some of the poorest countries in the world in order to further its commercial interests. Not quite gunboat diplomacy, the critics say, but an economic powerplay nonetheless.

To allay these suspicions, the British government in March felt compelled to renounce all “mercantilist” ambitions in its dealings with the ACP group. Likewise, it urged the EU not to “pursue any offensive interests” in these countries, leaving them to make their “own decisions on the timing, pace, sequencing and product coverage of market opening.” But not all Europeans are so forbearing. In a memo leaked to Britain's Guardian newspaper earlier this month, Mogens Peter Carl, a senior trade official at the European Commission, described Britain's declaration as an “unwelcome shift”, attributable to strong lobbying by non-governmental organisations and celebrities in the run-up to the British general election.

Are the charities and celebrities right to oppose “reciprocity”? A simulation by a group of economists at the United Nations Economic Commission for Africa gives warning that sub-Saharan Africa's low- and medium-technology industries could shed half their unskilled labour if the protection they enjoy were cut to the EU level. But there is another side to the ledger. African businesses and consumers would benefit from the cheaper goods the EU would sell. According to a simple before-and-after calculation, the abolition of tariffs on EU imports would yield gains to consumers worth $57.6m in Mauritius, $113.3m in Nigeria and $71.5m in Ghana, the UN economists reckon.

Even as it benefits consumers, cutting tariffs will deprive governments of revenue. According to Christopher Stevens and Jane Kennan, of the Institute for Development Studies at Sussex University, three-quarters of the ACP countries could lose 40% or more of the tariff revenue they collect from EU imports. Other taxes could be introduced to plug the gap, but few are as easy to collect as tariffs. Grenada, for example, brought in a value-added tax in 1986. But after failing to make it work, it eventually fell back on taxing goods coming in to port.

Still infants

The EU's critics argue that the ACP countries need to retain some shelter behind which they can rear their infant industries, as the East Asian tigers did before them. But the 1975 Lome convention afforded them precisely that: generous access to EU markets and no obligation to open up at home. Thirty years later, the infant industries have yet to grow up. Indeed, the ACP countries' share of the EU market has dropped, from 8% in 1975 to less than 3% by the time of the Cotonou agreement.

The British government does not deny that poor countries can benefit from trade liberalisation. But it does not want to force the pace. There is some wisdom to that view. Like most reforms, cutting tariffs is unlikely to bear fruit unless national governments are committed to it.

But some worry that Britain's permissive stance might itself weaken this commitment. A liberalising government typically relies on its export lobby to stiffen its spine. Exporters know that foreign governments will not open up to them unless their government opens up at home. But since the rich world has already given ACP exporters much of what they want, they have less interest in lobbying for free trade at home. Caglar Ozden and Eric Reinhardt, of the World Bank, show that countries are more likely to open up after they are ejected from one-way preference schemes. When Chile was kicked out of America's system of preferences in 1988, for example, it cut its average tariffs from 20% to 15% in a bid to lower the cost of inputs.

However, the arguments over reciprocity miss the point. A liberal trading order rests on the principle that countries do not play favourites, even if the favouritism is reciprocated. As the founding articles of the WTO put it, “any advantage, favour, privilege or immunity” granted to one member should be extended to all. This “most-favoured nation” clause is the world trading system's most cherished principle. It is a liberal legacy far more worthy of preservation than the colonial inheritance handed down from Yaounde to Lome and Cotonou.

Should Europe's trade policies continue to afford privileges to its former colonies?