OTN Special Update (Capitalizing on Advantage – EU-Central American Agreement with the CF-EU Economic Partnership Agreement )

OTN UPDATE is the flagship electronic trade newsletter of the Office of Trade Negotiations (OTN), formerly the Caribbean Regional Negotiating Machinery (CRNM). Published in English, it is a rich source of probing research on and detailed analyses of international trade policy issues and developments germane to the Caribbean. Prepared by the Information Unit of the OTN, the newsletter focuses on the OTN, trade negotiation issues within its mandate and related activities. Its intention is to provide impetus for feedback by and awareness amongst a variety of stakeholders, as regards trade policy developments of currency and importance to the Caribbean.

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On March 22, 2011, just shy of one year after to its completion, the European Union (EU)-Central America Association Agreement (AA) was initialled by the EU and participating Central American countries, namely Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama. The Agreement gives legal expression to a new framework that will guide the context of economic, social and political dialogue and cooperation between the EU and Central America.1 In this regard, the Agreement is arranged in three primary sections addressing specific components of the EU-Central America relationship, namely Political Dialogue, Cooperation and Trade. With respect to the Trade pillar of the AA, the provisions are aimed at establishing an advanced FTA that facilitates reciprocal albeit gradual liberalisation of trade in goods and services, investment, public procurement, the protection of intellectual property rights, cooperation regarding competition and trade defence instruments, trade facilitation and a dispute settlement mechanism. At the same time, the provisions take into account the asymmetry in development between the two regions and therefore include EU support measures to promote changes in the productive sectors and the

competitiveness of the Central American economies through trade. For the participating Central American countries, the Agreement makes available improved market access to a wider range of products than what is available at the multilateral level or under the EU’s Generalized System of Preferences (GSP). This improved access has been extended to agricultural products of particular significance to their economies such as bananas, the market access of which several Central American countries have gone to considerable lengths to expand at the multilateral level. 2

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SPECIAL

OTN Update May 26, 2011

The negotiations for an European Union (EU)-Central American

Association Agreement (AA) was concluded on May 18, 2010.


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As far as the architecture and objectives are concerned, with emphases on asymmetry, support mechanisms and built in flexibilities, the AA is not that different from the CARIFORUM-EU Economic Partnership Agreement (EPA) in general terms. To improve their market access and competitiveness within the EU markets and wider international market, these agreements can be of strategic utility to the respective developing regions, which share characteristics and circumstances that constrain their growth and development. Both regions still struggle to varying degrees with low standards of living, comprising low incomes, high inequality, poor health and inadequate education; low levels of productivity; high and rising levels of unemployment and underemployment; and significant dependence on agricultural production and primary product exports. However, the contexts within which the two regions deal with such development challenges are very different and affect their interface within the global economy. Central America’s relatively larger size presents complexities to it as a region but, at the same time, offers the benefits of relatively large markets, a wide range of resources, and the potential for self-sufficiency and economic diversity. In contrast, for the developing island states of CARIFORUM, the inverse applies. While smallness can present certain advantages, it also advances specific and arguably unique vulnerabilities associated with relatively limited markets, shortages of skills, scarce physical resources, weaker bargaining power and influence within the global stage, and limited prospects for economic diversification. The full architecture of the EPA, supported by the background of the region’s historical relationship with the EU, especially within the context of the Cotonou Agreement, is designed to take account of and help to ameliorate the region’s unique complement of trade-related development challenges. With its marked emphasis on (i) the infusion of development cooperation, the scope of which is far reaching and addresses supply side constraints as well as capacity constraints which impede the region’s trade competitiveness and potential for economic growth through trade; along with (ii) its liberal market access in services as well as in goods to the EU market; and (iii) the inclusion of asymmetrical reciprocal liberalization CARIFORUM obligations, the EPA, relative to the trade chapter of the AA, goes much further.

TThhee EEPPAA vvss.. TThhee AAAA Illustratively, in the case of goods trade liberalization, rather than providing immediate duty-free-quota-free market access for all goods as is the case for CARIFORUM goods under the EPA, the AA liberalizes 91% of EU tariff lines, equivalent to 87% of Central American exports to the EU. Provision has however been made for a gradual reduction of the remaining tariffs. For Central America’s part, at the point of implementation, there will be a requirement for the immediate full liberalization of 48% of tariff lines for products from the EU, equivalent to 67% of total trade. Within 10 years, 92% of tariff lines will be removed, equal to 95% of trade.3 In contrast, the EPA has more flexible CARIFORUM phasing requirements for the liberalization of goods. Furthermore, quite a number of tariff lines have been excluded from liberalization. In this regard, the asymmetry between CARIFORUM and the EU is more deeply accommodated than under the AA. While the EPA required a 52.8% reduction of tariffs on goods imported from the EU from January 1, 2009, the removal of these tariffs had negligible impact on revenue as most of the related products faced applied rates of 0% or close to 0% prior to the conclusion of the EPA. However, in 10 years tariffs will be removed from only 61.1% of goods imported from Europe. CARIFORUM also has been given up to 25 years to eliminate tariffs that will take the total level of liberalization to 86.9%. Both the AA and the EPA also feature provisions on Cooperation. Under the AA, the provisions on cooperation between the Parties address a range of development issues within the scope of the agreement, including human rights and democracy, social cohesion, and the preservation of justice and freedom. The EPA centres development cooperation on trade related development issues alone because the EPA is but the trade component of the Cotonou, which addresses the full ambit of cooperation under the ACP-EU bilateral relationship. The agreements’ provisions on development cooperation with respect to trade are albeit similar. However, there are important differences. These differences can be seen, by way of example, in the way that cultural cooperation has been addressed under the two agreements.

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way of example, in addressing the Parties’ commitments to collaborate in order to improve the conditions governing their exchanges of cultural activities, goods, services and address imbalances which exist, the EPA, in contrast to the AA, applies a stricter requirement. That requirement obligates the Parties to collaborate rather than to endeavour to collaborate. In that regard, the distinction is a subtle albeit important conveying of the emphasis and depth of the ambition of the Parties. With respect to the level of ambition regarding sectoral cooperation, there is also an important difference between the Protocols. Regarding audiovisual sectoral cooperation, the EPA Protocol speaks to the facilitation of co-produced audiovisual works. CARIFORUM secured provision for co-produced audiovisual works to access the EU market through the EU’s preferential scheme concerning the provision of audiovisual media services within the single EU market as outlined under the Audiovisual Media Services Directive (Directive 89/552/EEC).6 When similar preferential schemes are established within CARIFORUM, it is expected that CARIFORUM will also extend the associated preferential market benefits to co-produced audiovisual works. While the Protocol on Cultural Cooperation of the AA commits the Parties to facilitating access of co-productions, it does not explicitly afford such access through EU or Central American preferential schemes. CARIFORUM states have a distinct advantage relative to the Central American countries regarding the way market access of co-production audiovisual works will be treated within the EU. It should be noted that this type of treatment under the EPA cultural Protocol has been subsequently criticized by the French Government as facilitating a de facto reintroduction of audiovisual services into trade negotiations.7 Appreciating that the audiovisual sector is regarded as sensitive by the EU and, for this reason, has been excluded from liberalization, the significance of this gain for CARIFORUM under the EPA therefore looms large. Another area of difference relates to the way in which problems associated with the Protocol regarding for example, its interpretation or implementation will be resolved. As reflected in Article 250 of the EPA, all the components of the EPA, including the Annexes and Protocols are to be regarded holistically. The dispute settlement provisions which address the EPA are therefore

DDiiffffeerreenncceess iinn AApppprrooaacchh ttoo CCuullttuurraall CCooooppeerraattiioonn Cultural and creative industries are of interest to developed and developing countries alike. Importantly, these are also productive areas in which many developing countries may have comparative and competitive advantage, the value of which is underscored within the context of the emerging knowledge economy cum creative economy. For this reason, securing effective market access and other related trade support to facilitate the development and advancement of cultural and related industries is an important component of the Caribbean region’s external trade policy. In the EPA, CARIFORUM pursued and secured market access, for example, for its contractual services suppliers (CSSs) under entertainment services other than audiovisual services, that was superior to the access afforded by the EU under its GATS commitments. Access for CSSs in Chef de Cuisine services and Fashion model services has also been secured.4 However, CARIFORUM has also been a demandeur of the inclusion of cooperation commitments as have been outlined within the Protocol on Cultural Cooperation under the EPA. Such commitments were considered important to buttress CARIFORUM’s market access commitments for services and goods related to the cultural and creative industries, and to strengthen sustainable creative industries and cultural development. Given the importance of culture and creative industries to the EU as well, the inclusion of provisions on cultural cooperation has been consistent with its approach to integrating culture in its external relations, including its bilateral trade relations. It is therefore not surprising that the EU has agreed to trade instruments such as the EPA and the AA, which feature provisions on cultural cooperation.5 The themes addressed under the provisions are similar and include provisions on cultural exchanges and dialogue, technical assistance, the facilitation of entry and temporary stay of cultural professionals and practitioners, and cooperation on specific cultural and creative sectors including audiovisual, performing arts and publications. However, important differences in the nuancing of the provisions distinguish the EPA Protocol from the AA Protocol specifically. Both Protocols in large measure utilize ‘best endeavour’ language to convey the extent of the ambition of the commitments of the Parties. To be sure, best endeavour language does not nullify the obligation of Parties to operate in good faith and to try to honour commitments. However, by

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extended to the Protocol on Cultural Cooperation. Both the EU and CARIFORUM can rely on and defer to a transparent and predictable mechanism to resolve disputes which may arise relating to the implementation and or interpretation of the Protocol. Furthermore, there is an institutional framework provided under the Agreement to address implementation matters, including those related to the Protocol. The AA, on the other hand, explicitly exempts its Protocol on culture from the scope of the dispute settlement provisions of that Agreement. Inferring from the preamble of the Protocol, with respect to the management of the Protocol’s implementation, it appears that reliance has been placed upon the functioning of the Agreement’s Institutional Framework. Under that framework, for the purposes of addressing the implementation of the Protocol, provision has been made for the establishment of a Co-operation Sub-committee that should comprise officials with competence in cultural matters and practices. However, regarding the resolution of disputes specifically, it is not clear what mechanism will be used or the extent to which such mechanism will be transparent or predictable. The EPA also does not attach any conditionalities to the application of its Cultural Protocol. The application of the Protocol is considered to be effected by the provisional application of the Agreement.8 However, the AA requires under its Protocol that the application of the Protocol between the EU and each Central American Party must be preceded by the ratification of the UNESCO Convention on the Protection and Promotion of the Diversity of Cultural Expressions by the Central America Party. Furthermore, if the deposit of instruments of ratification of the Convention is completed by all the Central American countries prior to the completion of requirements to facilitate the entry into force of the Agreement, the provisions of the Protocol will apply from the date of entry into force of the Agreement . At the time of the completion of the AA, the ratification of the UNESCO Convention was not complete amongst the Central American countries and the conditionality seems to have been directed at ameliorating this.9 Furthermore, it would appear that for the EU, facilitating the centrality of the UNESCO Convention is regarded as hallmark objective of the establishment of Protocols on cultural cooperation.10 However, only eight of the CARIFORUM countries have ratified the UNESCO Convention.11 At the same time, the preambular text of both Protocols refers specifically to the recognition of the Parties’ intent to implement the UNESCO

Convention and to cooperate within a framework that builds upon the principles of the Convention. Taking these factors under consideration, the rationale for the attachment of conditionality in the context of the AA but not within the EPA context therefore seems curious. The rationale may stem from the criticisms of the EU cultural cooperation model articulated by the French Government following the conclusion of the EPA as alluded to previously. The French Government recommended a list of guiding principles for the negotiation of Protocols on cultural cooperation. That list included a recommendation to secure commitments within such Protocols that would emphasize the centrality of the UNESCO convention. Such commitments included the attachment of conditionalities on the application of the Protocol.12 It is not surprising that the approach adopted with respect to the AA Protocol reflects the recommendation of the French government. Making the application of the Protocol contingent on the entry into force of the AA may have been linked to the preservation of other EU interests. The objective may have been to ensure that the facilitation of the application of the Protocol did not deter the Central American countries from fulfilling their obligations to effect entry into force of the rest of the AA. Entry into force of the AA would facilitate cooperation on other matters that would be of particular interest to the EU such as cooperation on the prevention of financing of terrorism and money laundering. The fundamental point is that the exclusion of conditionality regarding the application of the Cultural Protocol under the EPA has facilitated an unfettered opportunity for cultural practitioners within CARIFORUM to benefit from the provisions. In contrast, recognizing the time lag that may pass between the initialling of the Association Agreement, the ratification of the UNESCO Convention by each Central American country, and the entry into force of the Agreement, it is difficult to discern when cultural practitioners from the Central American states will be able to access the benefits of the Protocol.

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AApppprreecciiaattiinngg tthhee vvaalluuee ooff aaddvvaannttaaggee As seen in the above illustrations, with more favourable preferential treatment accorded to CARIFORUM under the EPA than Central America has been able to attain under the AA, CARIFORUM can have an advantage over its Central American competitors in dealing with the development of its trade competitiveness. As alluded to, the advantage was also facilitated by the early provisional application of the EPA which has allowed the CARIFORUM region to exploit the preferential access to the EU market prior to the entry into force of the EPA. In the case of EU-Central American Relationship under the AA, while the agreement has been initialled, it is not clear when it will be signed by the Parties or when it will enter into force. Furthermore, although the Agreement provides arrangements for provisional application of the section on Trade prior to entry into force of the AA, it is not clear when the legal procedures necessary for this purpose will be completed.13 CARIFORUM, relative to Central America, will therefore continue to have an advantage but only for a time. The value of the advantage will only be realized through capitalization. Furthermore, the overall value of its preferential regime with the EU will progressively change and diminish over time as the EU pursues and completes additional free trade agreements with other countries and regions from across the developing and developed world. Additionally, progressive liberalization at the multilateral level will also erode the value of bilateral preferences. However, the key to economic growth and development through external trade in part resides in entrepreneurial expansion and increased development in export interest and readiness amongst the private sector. Without these, it will be difficult to capitalize upon any advantages facilitated through preferential trade agreements. It should also be noted that Central American countries, such as Costa Rica have shown signs of exploiting available tools and initiatives which are not conditional to the establishment or implementation of a trade agreement, but that can be used to improve their competitiveness in export markets, including the EU market. For example, with respect to the banana industry, a sector of importance to CARICOM countries and some Central American countries, Costa Rica has secured Geographical

Indication (GI) protection for its bananas.14 While the resources, time and investment utilized to realize this may have been considerable for a developing country like Costa Rica, by effectively developing and exploiting the value of the GI, Costa Rica will improve its chances of more successfully quality differentiating, branding and marketing its bananas, thereby expanding its revenue and total market share within the EU market and beyond. This action by Costa Rica looms large for CARIFORUM countries as an example of appropriate adaptation and response to global competition. CARIFORUM should therefore not only exploit its preferential market advantages but should also continue to pursue, with alacrity, the exploration and use of a myriad of other adaptation tools to improve its own global competitiveness.

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ENDNOTES

___________________________________________ 1 The Association Agreement replaces the 2003 EU-Central

America Political Dialogue and Cooperation Agreement

2 In 1996, the U.S. and a group of Latin American banana

producing countries, including the Central American republics of

Ecuador, Guatemala, and The Honduras, pursued legal action at

the WTO against the EU preferential regime for the importation

of bananas. The ensuing bananas trade war persisted for over a

decade and is thought to have been brought to an end through

the 2009 conclusion of a deal between the EU and these

countries, known as the Tropical Products proponents. This deal

known as the Geneva Agreement on Trade in Bananas

established a schedule for the reduction of EU multilateral tariffs

on its banana imports. The net effect of the deal has sealed the

decline of the preferential margin of the Caribbean region’s

bananas. Under the Association Agreement, bananas have been

accorded special treatment the details of which are outlined

under Appendix 3 of the Agreement.

3 See Newsletter on the relations between the EU and Central

America, No. 23 July 2010, APRODEV. Available at

http://www.aprodev.eu/files/EU_CA_News/hojadepica23july201

0eng.pdf

4 Most EU member states commitments under Entertainment

services other than audiovisual services are unbound. Under the

EPA, access to most EU countries has been bound, though

Economic Needs Test (ENT) and qualifications may be required.

Whereas under the WTO, Chef de cuisine and Fashion model

services are new sectors in which the EU has not made an offer

on CSS, under the EPA, the EU has bound commitments for Chef

de cuisine services and Fashion model services for the first time

within a trade agreement.

5 The inclusion of a Protocol on Cultural Cooperation also

features under the EU-Central America Association Agreement as

well as the EC-Korea Free Trade Agreement, which was signed in

October 2010

6 Under Article 5 para. 2 of the EPA Cultural Protocol, access to

the preferential treatment is predicated upon the following

conditionalities (i) the co-produced audiovisual works are

realized between undertakings which are owned and continue to

be owned, whether directly or by majority participation, by a

Member State of the European Union or a Signatory CARIFORUM

State and/or by nationals of a Member State of the European

Union or nationals of a Signatory CARIFORUM State; (ii) the

representative director(s) or manager(s) of the co-producing

undertakings have the nationality of a Member State of the

European Union and/or of a Signatory CARIFORUM State; (iii)

both (a) the total financial contributions of one or several

producers of the EC Party (taken together), and (b) the total

financial contributions of one or several producers of Signatory

CARIFORUM States (taken together) shall not be less than 20 per

cent and not more than 80 per cent of the total production cost.

7 See “For a new European Union external cultural strategy –

Communication by France”. The Document is available at:

http://www.coalitionfrancaise.org/eng/wpcontent/uploads/2009/1

2/comm_fr_strat_culturelle_ext_eng.pdf 8 Provisional Application of the EPA was effected on 29 December

2008. Provisional application would be relevant to the provisions of

the entire Agreement with the exception of those that may be

contingent on entry into force of the EPA.

9 However, since the completion of the AA, Costa Rica ratified the

UNESCO Convention on the Protection and Promotion of the

Diversity of Cultural Expressions on March 2011, joining The

Honduras, Guatemala, Nicaragua and Panama.

10 Communication by France, op cit. p. 4.

11 The eight countries that have ratified the UNESCO Convention on

the Protection and Promotion of Biodiversity of Cultural

Expressions adopted in Paris on 20 October 2005 and which came

into force on 18 March 2007 are as follows: Barbados (7/10/2008);

Dominican Republic (24/09/2009); Grenada (15/01/2009); Guyana

(8/2/2010);Haiti (8/2/2010); Jamaica (4/5/2007); St. Vincent and the

Grenadines (25/9/2009); and Trinidad and Tobago (25/7/2010)

12 Communication by France, op cit. , p. 8

13 Refer to Article 353 para. 4 of Part V (General and Final

Provisions) of the EU-Central America Association Agreement

14 Agritrade, “Latin American producers manoeuvre to secure

price advantages”, The Technical Centre for Agricultural and Rural

Cooperation (CTA) http://agritrade.cta.int/en/Commodities/Banana-

sector/News/Latin-American-producers-manoeuvre-to-secure-price-

advantages


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Documents

OTN Special Update (Capitalizing on Advantage – EU-Central American Agreement with the CF-EU Economic Partnership Agreement )