“It's worldwide first. At the end of the day, we will have 100% access, withno exclusions, except of course for arms. We have delivered on our fine words. This sends a signal to the rest of the world that we are serious about getting the most disadvantaged to share in the fruits of trade liberalization.”
European Commissioner for Trade (2001)
“Unfortunately, the EU proposal was swiftly attacked by powerful vested interests that succeeded in removing commodities such as sugar, rice and bananas from the liberalization commitments. This has led some critics to change the name of this initiative from ‘Everything But Arms' to ‘Everything But Farms'.”
Executive Secretary of the United Nations Economic Commission for Africa (2001)
Trade is generally recognized to be one of the most powerful levers to bring economic and social development to developing nations. Empowering poorer countries to participate in international trade rather than giving them aid, gives those countries an active role in their own progress. Market access is one of the conditions that needs to be fulfilled for trade to work to the benefit of development. Recognizing this, the European Union has implemented several preferential trade agreements with developing countries over the past decades. One of the most recent programmes which has been praised by EU policymakers as ‘a first of its kind' is the ‘Everything But Arms' (EBA) initiative. Deployed in 2001, the EBA schedule provides for duty-free and quota-free access to the EU market for all products coming from the world's least developed countries (LDCs), with the exception of armaments.
This short paper provides a basic analysis of the Everything But Arms initiative. The first section discusses the aims and beneficiaries of the programme, as well as its history and its place within the EU's development policy framework. The second section sets out a number of common critiques on the EBA programme. Finally, the conclusion will try to give an answer to the question whether Everything But Arms indeed represents a significant step forward for the world's least developed countries, and set out a number of recommendations for the future of the initiative.
Description of the ‘Everything But Arms' initiative
Trade, economic development and poverty reduction are intimately linked. Trade is widely recognized as one of the most effective levers to encourage economic and social development in developing countries. Empowering poor states to participate in international trade gives the inhabitants of such countries an active role in their own progress.
One of the conditions that needs to be fulfilled for trade to work as an instrument for development for developing countries is market access. Market access is traditionally achieved through reduced import tariffs or expanded import quotas, leading to lower relative prices of goods originating from countries benefiting from the trade preferences. These lower relative prices represent an incentive for traders to import products from beneficiary countries rather than from other nations, raising demand of such products.
As such, market access enables producers in developing countries to expand their production, benefit from economies of scale and exploit any comparative advantages they might have compared to producers from other regions in the world (e.g. in agriculture, exploitation of natural resources and labour-intensive manufacturing). This process is expected to gradually improve the competitiveness of developing countries, diversify their economies and generate additional export revenues. Under the right circumstances, this increase in wealth from trade may lead to poverty reduction (Faber and Orbie, 2007; European Commission - Trade, 2010a).
Although the EBA scheme has only been in existence for 9 years now, its roots can be found almost 40 years in the past.
In 1968, the first United Nations Conference on Trade and Development (UNCTAD) proposed the creation of a ‘Generalised System of Tariff Preferences' under which developed countries would grant trade preferences to developing countries. Article 1 of the GATT (the General Agreement on Trade and Tariffs), laying down the principle of non-discrimination, in principle forbade such preferential treatments, as it required that (WTO, 2010):
“… any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.”
In order to overcome this legal obstacle, a waiver from this Article 1 was granted in 1971. This temporary waiver was made permanent at the end of the GATT Tokyo Round with the agreement on the so-called ‘Enabling Clause' in 1979. As such, developed countries were authorized to implement national generalized schemes of tariff preferences (Cernat et al., 2003; Faber and Orbie, 2007). The European Community was the first economic power to implement a GSP scheme in 1971. Other developed countries followed the Community's example, implementing their own GSPs, often featuring differing product coverage and rules of origin (European Commission - Trade, 2010a). It should be noted however that these GSPs did not yet recognize the special needs of least developed countries.
The GATT Tokyo Round also established the ‘Sub-committee on Trade of LDCs' within the GATT system. Its activities are referred to in the GATT ministerial declaration of 1982, which proposed a number of measures for LDCs, such as the improvement of market access for LDCs with the objective of duty-free access to the fullest extent possible, the reduction or elimination of non-tariff barriers (NTBs) for LDCs, a more flexible application of rules of origin, technical assistance, trade promotion activities and the facilitation of LDC participation in international negotiations. The GATT's Sub-committee on Trade of LDCs however did not consider market access as its biggest priority. More generally, the focus of the international community with regard to LDCs continued to be on financial support and development strategies, not trade (Faber and Orbie, 2007).
This changed with the initiative of WTO Director General Renato Ruggiero in the mid-90s. During the Singapore ministerial conference of the WTO in December 1996, members countries made a pledge in the ‘Action Plan for the LDCs' to improve access to their markets for goods coming from least developed countries (Faber and Orbie, 2007). On 2 June 1997, the Council of the EU reacted to this pledge (following a communication of the European Commission of 16 April 1997) by granting LDCs not party to the Lomé Convention trade preferences equivalent to those enjoyed by signatories, and by promising duty-free access for almost all products originating from LDCs in the medium term (Cernat et al., 2003; Council of the European Union, 2001a). Faber and Orbie (2007) have referred to this offer of the Council as ‘Everything But Arms avant la lettre'. This ‘EBA avant la lettre' was implemented by Council Regulation (EC) No 602/98 of 9 March 1998 (Council of the European Union, 1998b). In the meantime, LDCs became more and more active during WTO negotiations, and duty-free and quota-free market access is now on the top of their Doha Round agenda (Faber and Orbie, 2007).
Within the United Nations, the needs of the least developed countries (LDCs) have been also increasingly visible. In 1981, the first United Nations Conference on the Least Developed Countries was held in Paris, in order to draw international attention and generate action to address the deterioration of the socio-economic conditions faced by LDCs. This summit was followed by a second and a third United Nations Conference on the LDCs, in Paris in 1990 and in Brussels in 2001 respectively. The third conference adopted the ‘Brussels Declaration and the Programme of Action for the Least Developed Countries for the decade 2001-2010', known as the Brussels Programme of Action (BPOA) (UN-OHRLLS, 2010). With regard to market access, the BPOA called for (United Nations, 2001):
“Improving preferential market access for LDCs by working towards the objective of duty-free and quota -free market access for all LDCs' products. This will apply in the markets of developed countries. Improvements in market access for LDCs should be granted on a secure and predictable basis. They should be combined with simplified rules of origin that provide transparency and predictability so as to help ensure that LDCs benefit from the market access granted, and multi-donor programmes, such as the Integrated Framework for Trade -related Technical Assistance (IF), to upgrade LDCs' production and export capacities and capabilities. Consideration should also be given to proposals for developing countries to contribute to improved market access for LDCs' exports.”
Within the EU meanwhile, the commitments made in EBA avant la lettre in 1998, were further formalized in Article 6 of Council Regulation (EC) No 2820/98 implementing the EU's GSP for the period from 1 July 1999 to 31 December 2001. This article provided for special support arrangements for the least developed countries (Council of the European Union, 1998a).
In October 2000, the European Commission published a specific proposal with regard to these special support arrangements for the LDCs. The proposal was rather ambitious, granting immediate duty-free and quota-free access to all products from LDCs (except armaments) and foreseeing only a 3-year transition period for sensitive agricultural products such as rice, bananas and sugar. Fears over the potential adverse consequences of the Commission's initial EBA proposal eventually led to a weakened final EBA regulation (Council Regulation (EC) 416/2001) which was adopted in February 2001 (Faber and Orbie, 2007).
The ‘Everything But Arms' (EBA) initiative provides duty-free and quota-free access to the EU market for all products coming from the world's least developed countries (LDCs), except for armaments. Currently, 49 LDCs benefit from the EBA preferential trade arrangement (European Commission - Trade, 2010a).
The EBA initiative was approved by the Council of the European Union on 28 February 2001, published as Council Regulation (EC) No 416/2001 in the Official Journal of the European Communities on 1 March 2001 and entered into force on 5 March 2001 (Council of the European Union, 2001a).
The initial EBA regulation (Council Regulation (EC) No 416/2001) contains the following important provisions (Cernat et al., 2003; Council of the European Union, 2001a):
With the subsequent renewals of the EU's Generalised System of Preferences (GSP) in the following years, the EBA provisions were integrated in the Council Regulations implementing the EU's GSP (see Table 1 ). Those Council Regulations made the following additions and/or changes to the EBA provisions (Council of the European Union, 2005; Council of the European Union, 2008; European Commission, 2008a; European Commission, 2009a; European Commission - Trade, 2010a):
The EBA programme is one out of three non-reciprocal preferential trade regimes belonging to the EU's Generalised System of Preferences (GSP). The EU's GSP is a comprehensive trade arrangement through which the EU offers preferential access to its market to 176 developing countries and territories, by applying reduced import tariffs when certain categories of goods originating from those countries and territories enter the EU market. Next to the EBA initiative giving quasi-complete market access to least developed countries, the EU's GSP contains the standard GSP, providing preferences to more than 170 developing countries and territories with regard to more than 6 000 tariff lines, and GSP+, a special incentive arrangement for good governance and sustainable development which offers additional tariff reductions to ‘vulnerable' developing countries if they ratify and implement 27 international conventions (e.g. relating to human rights, labour standards, sustainable development and good governance). The EBA programme is considered to be the most favorable trade regime implemented by the EU (European Commission - Trade, 2010a).
The EU's general strategy with regard to its GSP is determined following a 10-year cycle in order to regularly adjust the scheme to the changing environment of the multilateral trading system. The current cycle covers the period from 2006 until 2015, and its principles have been set out in a communication from the European Commission in 2004 (European Commission, 2004). The actual implementation period of the EU's GSP is 3 years: every 3 years, the Council of the EU endorses a new version of the EU's GSP. However, this periodical renewal of the GSP does not apply to the EBA initiative, which is to be maintained for an unlimited period of time (Cernat et al., 2003; European Commission - Trade, 2010a). An overview of Council Regulations implementing the EU's GSP, including references to the provisions made for least developed countries under the EBA scheme, can be found in Table 1 in the appendix.
The EU's GSP operates following a mechanism of graduation and degraduation. When an individual country benefiting from the EU's GSP with regard to particular tariff lines over a 3-year period exceeds or falls below a predetermined performance threshold, preferential treatment is either suspended or reestablished. This mechanism is necessary to ensure that the benefits of preferential treatment continue to be directed in particular to those countries most in need of preferential market access (European Commission, 2004; European Commission - Trade, 2010a). It should however be noted that the GSP's system of graduation and degraduation does not apply to the EBA scheme: the EBA initiative has its own mechanism of graduation and degraduation based on a formal classification of least developed countries (LDCs) by the United Nations.
Finally, the GSP regulations provide for another mechanism of (temporary) exclusion from the EU's trade preferences. Beneficiary countries which exhibit serious and systematic violations of international conventions relating to core human and labor rights may be withdrawn from the EU's GSP. This is currently the case for Belarus and Myanmar. Despite the fact that Myanmar is recognized by the United Nations as a least developed country, it cannot benefit from the EBA scheme on grounds of the above provision (Council of the European Union, 2008; Europea Commission, 2008; European Commission - Trade, 2010a).
The EU's Everything But Arms initiative is specifically targeted at the world's least developed countries (LDCs). In order to qualify as a ‘least developed country', a country must be recognized as such by the United Nations. This recognition depends on the fulfillment of three core criteria (UN-OHRLLS, 2010):
In addition, the population of a least developed country should not exceed 75 million.
Currently there are 49 LDCs, of which 33 are situated in Africa, 15 in Asia and one in Latin America and the Caribbean. With the exception of 9 Asian countries, all LDCs are signatories of the Cotonou Agreement with the European Union, the most recent agreement in the history of EU-ACP development cooperation (UN-OHRLLS, 2010; European Commission - Development, 2010).
The current list of least developed countries, as recognized by the United Nations, can be found in Table 2 in the appendix. A map of LDC countries can be found in Figure 1 in the appendix.
The UN applies a system of graduation and degraduation to its list of LDCs. In order to be recognized as an LDC, a country must satisfy all three core criteria mentioned above. In order to graduate, a country must reach threshold levels for graduation with regard to at least two core criteria, or its GNI per capita must be at least twice the threshold level for graduation and must be sustainable at that level. The UN reviews its list of LDCs every three year. The last review took place in 2009.
When a country graduates from the UN's list of LDCs, it will eventually be withdrawn from the list of beneficiaries of the EU's EBA scheme, in order to ensure that EBA benefits continue to be directed towards those countries who need them the most. In its GSP regulations, the EU foresees the establishment of a transition period of at least 3 years (to be decided by the European Commission) for graduating LDCs, in order to alleviate any adverse effects which may be caused by the removal of the EBA tariff preferences (Council of the European Union, 2008). A recent example of a graduated LDC is Cape Verde, which has been excluded by the United Nations from the list of LDCs with effect from January 2008, but will benefit from EBA preferential treatment until the end of 2010 (European Commission, 2007).
Rules of origin determine the country of origin of a good for international trade purposes. With regard to the EU, they define the conditions that products must satisfy in order to be considered as coming from a country eligible for preferential access to the EU market (a least developed country in the case of the Everything But Arms trade regime) (Brenton and Manchin, 2003).
The EU's rules of origin attached to the EBA initiative aim to avoid trade deflection, ensuring that a significant part of the value of export goods coming from LDCs is effectively created in LDCs, and avoiding that goods originating from non-LDCs destined for the EU are redirected through LDCs in order to illegally benefit from EBA preferential treatment by the EU (Brenton and Manchin, 2003).
However, the EU's rules of origin have been criticized to be excessively restrictive and are therefore widely considered as the most important reasons for LDC's limited export performance under the EBA regime (Brenton and Manchin, 2003; Faber and Orbie, 2007). Restrictive rules of origin attached to EU preferential trade regimes usually imply that products eligible to enter the EU market under that regime eventually do not enter at the expected reduced duties. With regard to the EU's GSP for example, research has shown that only one third of EU imports from developing countries that were eligible for GSP preferences actually entered the EU market with reduced tariffs (Brenton and Manchin, 2003).
In the case of EBA, many LDCs are unable to meet the strict requirements of the highly technical rules of origin that the EU stipulates, as such lowering the value of the preferences the EU offers to LDCs. Furthermore, there is the additional issue relating to the costs of proving origin (i.e. obtaining certificates of origin). These costs might be very high especially in case of poorly developed customs organizations, which is true for many LDCs (Brenton and Manchin, 2003). The provisions in the EU's rules of origin concerning ‘cumulation of origin' (bilateral and regional cumulation) considerably restrict the freedom of producers in LDCs to source inputs for the production of their export goods from where they consider it best (European Commission, 2008b).
In its communication on the GSP for the 10-year period from 2006 to 2015, the European Commission recognizes the need for increased flexibility with regard to the EU's rules of origin, so LDCs can benefit more from the preferential treatment EBA offers them (European Commission, 2004).
The Everything But Arms initiative is not the only trade instrument the EU has in place to foster development. Other instruments include the standard GSP and GSP+, as well as Aid for Trade and the trade agreements the EU has with the group of African, Carribean and Pacific (ACP) countries under the Cotonou agreement.
The list of LDCs in Table 2 in the appendix shows that 40 out of 49 countries recognized as LDCs also belong to the group of ACP countries. The majority of countries eligible to benefit from the EBA initiative thus already enjoyed non-reciprocal access to the EU market before the EBA regime was introduced. This is the case for all 33 African LDCs, 6 Asian LDCs and Haiti. Only for 9 Asian non-ACP LDCs, EBA constituted a material improvement of preferential margins for a large number of products: Afghanistan, Bangladesh, Bhutan, Cambodia, Lao People's Democratic Republic, the Maldives, Myanmar (currently excluded), Nepal and Yemen (Stevens and Kennan, 2001; Faber and Orbie, 2007). Unsurprisingly, the top-5 countries benefiting the most from the EBA trade preferences are Bangladesh, Cambodia, Lao, Nepal and the Maldives (European Commission, 2009a; European Commission, 2009b). Due to this significant overlap, the aggregate incremental increase in access to the EU market for LDCs is rather small.
In order to simplify the EU's GSP, the European Commission has proposed to remove from the list of beneficiaries, those countries that already enjoy preferential market access to the EU market under the terms of another trade agreement with the EU, while avoiding that countries would lose trade benefits due to this operation (European Commission, 2004).
Political window dressing
The evolution of the value of imports under the EBA regime can be found in Figure 2 in the appendix. The import value increased from around 2,4 billion EUR in 2002 to approximately 5,8 billion EUR in 2008 (European Commission, 2009b).
However, these figures need to put into perspective. Figure 3 in the appendix shows that total imports into the EU coming from least developed countries equaled 24,4 billion EUR in 2008. Only 5,8 billion EUR worth of imports (24% of the total import value) entered the EU market under the Everything But Arms regime, whereas 15,5 billion EUR worth of imports (64% of the total import value) entered the EU duty-free under the EU's ordinary most-favored-nation (MFN) regime (European Commission, 2009a). It could therefore be concluded that Everything But Arms is not as important for least developed countries as is sometimes claimed.
The value of preferences (i.e. the nominal duty loss compared to the situation in which the same goods had been imported under the EU's standard most-favored-nation tariff) amounted to 657 million EUR in 2008 (European Commission, 2009a). EU funding from traditional own resources (i.e. agricultural duties, custom duties and sugar levies) amounted to more than 17 billion EUR in 2008 (European Commission, 2009c). The burden of the EBA initiative to the EU budget could therefore be considered very small. The reason is obvious: many least developed countries face severe supply-side restrictions and lack the necessary skills and resources to participate in global trade. Trade flows originating from LDCs therefore remain limited. For trade to become an effective development instrument, market access alone is not enough. Measures increasing market access should therefore be complemented by measures offering technical and financial assistance for developing countries specifically targeted at helping those countries develop their capacity to trade, especially in the presence of pervasive non-tariff barriers to trade such as quality standards (Stevens and Kennan, 2001; Faber and Orbie, 2007; European Commission - Trade, 2010b).
Arguments like the ones outlined above has led some critics to conclude that the EU's Everything But Arms initiative was not so much about offering better development prospects to LDCs, but rather about political window dressing, especially in view of the trade talks in the context of the WTO's Doha Development Round. Although the EU often uses its EBA initiative as proof of its goodwill towards LDCs, the extent of its offer is not as significant as it often claims. Nevertheless, it should be noted that the EU remains the single largest export market for least developed countries (Faber and Orbie, 2007).
Unlike the standard GSP programme, the EBA scheme does not make a distinction between so-called non-sensitive and sensitive products (the latter are subject to lower tariff reductions) (European Commission, 2009b). Nevertheless, the EBA initiative contains a number of provisions which has led critics to believe that the EU is only willing to give LDCs extended market access in case this doesn't harm its own economy (Stevens and Kennan, 2001).
First, there are the transition periods which were foreseen for rice, bananas and sugar, all considered sensitive agricultural products. The initial EBA proposal of the European Commission only foresaw transition periods of 3 years. Actual transition periods however turned out to be much longer: 5 years for bananas and 8 years for rice and sugar. It should be recognized however that now that the transition periods for rice, bananas and sugar have ended, EBA does represent a significant improvement in terms of market access for these products (Faber and Orbie, 2007).
Second, the GSP's safeguard clause is extended to include rice, sugar and bananas. The European Commission will carefully monitor imports of rice, sugar and bananas together with the member states, and can temporarily suspend the preferences if it finds that the conditions for temporary suspension are met (Council of the European Union, 2001a).
Third, the GSP's temporary withdrawal clause is extended: in addition to the already recognized reasons justifying a temporary withdrawal of preferences, the European Commission may take action in case of massive increases of imports of products from LDCs in relation to their normal levels of production and export capacity (Council of the European Union, 2001a).
The EU's GSP, and hence Everything But Arms, provide preferential treatment to developing countries on a non-reciprocal basis, meaning that the latter are not required to return the favor by opening up their markets for products coming from the EU. Supporters of the EBA initiative have praised the scheme for this absence of conditionality.
Several studies however have pointed out that non-reciprocal preferential systems might be ineffective or even counterproductive. Non-reciprocity is thought to make beneficiary countries less likely to liberalize its own trade policy, as it weakens incentives for the domestic export sector to lobby for the liberalization for trade to improve its own competitiveness. As such, producers in countries benefiting from non-reciprocal trade regimes with developed nations will continue to be protected from international competition which would normally provide the necessary pressure to make domestic production more efficient. Additionally, there often is the threat of a safeguard by the donor of the preferences, if exports under the preferential regime rise to quickly. This in turn creates an incentive for developing countries to adopt a more protectionist stance themselves (Faber and Orbie, 2007).
The EU's Everything But Arms (EBA) initiative, granting duty-free and quota-free access to all goods (except armaments) originating from almost 50 least developed countries (LDCs), entered into force on 5 March 2001 as part of the EU's Generalised System of Preferences (GSP). With this initiative, the EU was one of the first economic blocs in the world addressing repeated calls from LDCs for extended market access in several international organizations such as the United Nations and the World Trade Organization. Now, 9 years after the entry into force of EBA, this short paper has tried to make a concise critical assessment of the declared merits of the EBA regime.
Although many stakeholders consider the EBA programme a definite step in the right direction, there is disagreement about the significance of this step forward. First of all, the EU GSP's rules of origin, which also apply to EBA imports, are considered to be too restrictive, limiting the value LDCs could extract from the EBA trade regime. Second, it was shown that many LDC eligible for EBA preferential treatment already enjoyed preferential access to the EU market through the EU's trade arrangements with ACP countries. Third, the economic benefits of EBA for LDCs have been modest: supply-side constraints are holding back significant improvements of their export performance. Without a clear commitment of the EU to assist LDCs in addressing these constraints, critics claim the EBA initiative is a political instrument rather than a development instrument. Fourth, EBA has been criticized for maintaining some protectionist elements, such as delayed and prolonged transition periods for rice, sugar and bananas, and extensions of the GSP's safeguard and temporary withdrawal clauses. Fifth, the non-reciprocal nature of the EBA initiative might be counterproductive as it prevents producers in LDCs from being exposed to international competition.
Despite this criticism, the EU does deserve some credit too. With its EBA initiative, it has proven its goodwill and commitments towards the world's least developed countries, and sets an example for other developed countries. The EU continues to be the largest importer of LDC products in the world. For almost 10 non-ACP countries in Asia, EBA constitutes a significant improvement in access to the EU market. And finally, in terms of products, EBA has considerably liberalized market access for sugar, rice and bananas, all considered to be very sensitive agricultural products.
With regard to the future of Everything But Arms, the EU should first and foremost consider relaxing its rules of origin so LDCs can better reap the trade benefits offered to them. Second, the EU should step up its aid for trade efforts to strengthen the supply side in LDCs, especially in the presence of pervasive product standards and requirements imposed by developed economies. Third, when these aid for trade measures start to pay off and a level playing field has been created for LDCs, the EU should consider requiring reciprocity from LDCs with regard to the EBA regime. Finally, the EU should simplify its development policy framework, i.e. decrease the number of different initiatives and reduce overlap in view of making its development instruments more coherent and effective.
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