Eu-Caricom Free Trade: Opportunity or Mirage?

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Negotiations for the establishment of Economic Partnership Agreements (EPAs) between the European Union (EU) and former colonies in Africa, the Caribbean and the Pacific (ACP) began in September 2002 and are expected to be concluded by December 31, 2007. The EPAs are in effect free trade agreements that will replace the nonreciprocal trade preferences traditionally provided to ACP countries under the Lomé Conventions.

The reform of the EU-ACP trade regime is consistent with the global trend towards trade liberalization and the requirement to conform to WTO rules. The trade provisions of the Lomé Conventions violated the non discrimination principle of the GATT by discriminating against developing countries that are not members of the ACP group. The principle of nondiscrimination contained in the most favored nation (MFN) clause of article I of the General Agreement on Tariffs and Trade (GATT) is the foundation of WTO rules. The only exceptions to the non- discrimination rule allowed under the GATT are free trade agreements and the provision of preferences by a developed country to all developing countries. The Lomé conventions therefore failed to qualify for the foregoing exceptions. Given the incompatibility of the Lomé preferences with WTO rules a waiver is required. However, such waivers are subject to challenge from WTO members. The current international environment with its increasing pressures for trade liberalization increases the likelihood that WTO waivers will be challenged. It is therefore in the interest of the EU to replace the Lomé non-reciprocal preferences with a WTO compatible trade regime.

Another important factor underlying the reform of the Lomé trade regime is the EU's objective of integrating ACP states into the global economy. The EU's position is that integration into the world economy is necessary to prevent further marginalization of ACP countries in the context of increasing globalization of the world economy. The proposed trade regime is expected to assist this process by promoting compatibility with WTO rules, improving international competitiveness and attracting investment into ACP countries (European Commission 2001).

The poor trade performance of ACP states under the Lomé Conventions provided little economic justification for continuation of nonreciprocal trade preferences. The period between the signing of Lomé I and the termination of Lomé IV witnessed a significant decline in ACP countries share of the EU market from 6.7 percent in 1976 to 2.8 percent in 1998 (European Commission 2001:2). As in the case of other preferential trade arrangements for developing countries, the Lomé preferences were based on the assumption that such arrangements would allow the developing countries to expand and diversify their exports. The failure of ACP states to achieve these objectives suggests that preferences are not sufficient to promote exports and economic growth. Furthermore, trade preferences have become less valuable as the preferential margins enjoyed by ACP states have been eroded by the process of multilateral trade liberalization.

Finally, it can be argued that the establishment of free trade areas with ACP countries will allow the EU to gain increased access to markets. However, realization of this market potential is dependent on the achievement of economic growth and export expansion in the ACP countries. Therefore EU-ACP free trade can yield dividends for the EU to the extent that free trade promotes the export growth necessary to finance increased imports from the EU.

Under the terms of the EU-ACP Partnership Agreement (also referred to as the Cotonou Agreement) signed in June 2000, ACP countries have the option of negotiating EPAs either individually or as groups of countries. However, the EU preference is for regional EPAs. This paper is concerned with the potential costs and benefits of reciprocal free trade with the EU for the small economies of the Caribbean Community (CARICOM). …