EU ECONOMIC PARTNERSHIP AGREEMENT – WHAT IT MEANS FOR THE BAHAMAS

First Published: 2008-10-10

If the proposed Economic Partnership Agreement with the European Union covering trade both in goods and services is signed in its present form by the Bahamas, the effects on the country’s economy and way of life will be far-reaching.

The Government should be commended for its efforts to consult stakeholders, as well as members of the public through town meetings, and for its publication last month of a detailed explanatory document about the EPA.

However, it appears that, for the most part, the Government has not entered into a genuine consultation about the fundamental issue of whether it is in the general interest of the Bahamas to sign an EPA at all; and many Bahamians remain uninformed about its likely impact on their lives and welfare.

There has been no formalized national consultation involving political parties, the trades unions, the churches and the private sector as a whole. Instead, the Government has taken a policy position, in line with other CARIFORUM countries, to go along with the EPA. It  has sought to explain and justify its decision rather than to debate the overall merits and demerits of the EPA as far as the nation is concerned.

With the Government now set to sign later this month a “goods-only” EPA dealing with market access issues, while deferring its services offer for at most 6 months, it is timely for the Nassau Institute to set out briefly the main issues in a readily comprehensible form and to draw attention to a number of questions which should be examined further.

What is the EPA?

The Lome Convention of 1975 and its successor, the Cotonou Agreement of 2000, provided preferential tariff access into the EU for exports from the African, Caribbean and Pacific (ACP) states. This, of course, included the Bahamas.

The original intention of the EU was laudable. Its stated purpose was to help eradicate poverty in the context of sustainable development in developing countries with a view also to strengthening democracy and good governance.

Even though cynics suggested that the EU’s real purpose was to secure a steady supply of raw materials or primary products, the fact was that the ACP countries benefited from these trade preferences.

The Cotonou Agreement envisaged that such preferences would eventually be replaced by Free Trade Agreements (FTA). This was necessary in order that the EU could meet its non-discriminatory obligations required by the World Trade Organization (WTO). But the EU itself has now gone further.

Notwithstanding its own protectionist policies, the EU is looking (for its own purposes) to other countries to open their markets to European goods – former EU Trade Commissioner, Peter Mandelson, has publicly stated that the EU, as the largest economy in the world and a major trading bloc, is likely to benefit from more accessible world markets.

So, over and above its commitment to make arrangements for trade in goods that are compatible with WTO rules, the EU has proposed an EPA as a Free Trade Agreement which, on a basis of reciprocity, not only provides for the removal of all tariffs on the export of goods but also covers trade-related matters such as services, investment, e-commerce and capital movements as well as issues like competition, intellectual property and public procurement.                                                               

How would the Bahamas benefit from free trade with the EU under the EPA?
 
The USA and Canada together constitute the largest trading partner of the Bahamas, 83% of whose exports of goods go to them compared to only 13% to the EU.

Professor Norman Girvan of the University of the West Indies states that, since some 72% of the Bahamas’ foreign currency earnings derive from tourism and financial services, and with the preponderance of trade of goods with the USA, just 4% of total  export earnings come from Europe.

The Government is keen to preserve the duty-free access for its exports to the EU worth some $90million and thereby to maintain its existing trade surplus. Loss of this access would result, for example, in imposition by the EU of an 8% tariff on crawfish exports.

In return, the EPA requires the Bahamas to give up tariff rates on 85% of EU imports, phased out over a 25-year period. The estimated loss of revenue is $6million. Since the main purpose of import duties is to generate government revenue rather than act as a barrier to trade, this loss will have to be offset by other taxes.

‘Trade-related’ matters

Under this section, a range of services areas will be opened up to EU competition enabling European companies and professionals to set up business here and Bahamians  likewise to enter the EU marketplace.

However, Zhivargo Laing, minister of state for finance, has made it clear that the services offer to be presented to the EU “mirrors our current National Investment Policy” which presently reserves 13 areas of the economy for Bahamians.

To some observers, the benefit to the Bahamas of opening up the EU’s services sector is illusory since there are few Bahamian companies or individuals currently equipped or
ready to compete in an EU market of 27 countries with over 400 million people and in the face of prohibitive costs, non-tariff barriers, subsidies and other hurdles.
                                                                   
It is not yet clear what the additional cost will be of complying with the EPA obligations; for example, the creation of new institutions, regulatory bodies and laws.

Effect of the EPA on trade with third countries

According to Stephen Lande, president of Washington-based consultants Manchester Trade, the major concern with the EPA is the impact of its Most Favoured Nation (MFN) provision on future relations with the USA.

If signatories enter into an FTA with a developed country which gives more favourable treatment than that provided to the EU under the EPA, they are obliged to consult the EU first. This could interfere with the Bahamas’ ability to enter into FTAs with other major trading countries as well as the USA.

A further consideration is that the USA, Canada and other non-EU trade partners are unlikely to accept that the EU can expect duty-free access to the Bahamas unless they can do so as well.

In the case of the USA, leading attorney Brian Moree argued at a Nassau Institute seminar on the EPA in June that, since MFN status meant no discrimination between countries, the Bahamas would have to offer – at the time it negotiated a replacement of the Caribbean Basin Initiative (CBI) – at least the same trade preferences and benefits it offered to the EU.

In practice, this would mean that, because the Bahamas’ level of trade with the USA was greater than with the EU, the starting point in negotiations would be – in his words – the ‘EU EPA plus’. Given that in 2007 the US exported to the Bahamas some $2.5 billion worth of goods, the loss to the latter would be substantial.

Mr. Moree further argued that, in order to meet the WTO’s demands for an end to one-way discriminatory preference regimes such as the Cotonou Agreement, a “goods-only” deal would have been sufficient so that it was not necessary to address trade-related issues such as services, investments, capital movements etc. Nor was it wise to address the so-called Singapore issues before it became necessary to do so (see ‘Further Issues’ below).

Way forward

Signature of a “goods-only” agreement as a first step now appears to be a fait accompli. It will secure tariff-free access to the huge EU market. The reciprocal removal of tariffs on imports from the EU will anyway become necessary as the Bahamas seeks to join the World Trade Organization. Membership of the WTO will require the phasing out of import duties across the board and development of an alternative means of generating government revenue.

Meanwhile, deferral of the Bahamas’ services offer is to be welcomed. This will allow time for debate.

Further issues

–    Services

An agreement covering services as well as goods seems, prima facie, to be heavily in favour of the EU. It is unnecessary because, if the conditions are suitable, EU investment is likely to continue without an EPA.

The Chamber of Commerce stressed recently the need to build capacity and competitiveness and to develop new ideas and entrepreneurship. But market access to the EU’s services sector does not necessarily lead to market presence.

Moreover, inclusion of the ‘Singapore issues’ – government procurement, intellectual property, trade facilitation, investment and competition policy – is premature since these issues have not yet been settled in  WTO global trade talks. Why should the Bahamas allow itself to be cajoled by the EU into jumping the gun and getting ahead of the WTO itself?

–    Regional integration

One of the stated objectives of the EPA is to promote Caribbean regional integration. It is an exaggeration to claim that the agreement constitutes a  commitment to CSME, but its implementation requires some regional cooperation which will result in a higher level of integration than now exists.

History shows that high levels of economic integration cannot be achieved without a significant degree of political integration resulting in the creation of  supranational powers vested in regional agencies.

This raises the question whether greater regional economic integration is in the interest of the Bahamas and thus whether it shares this objective with the promoters of the EPA. Has the matter been addressed as a general principle?

There will also be extra costs; for example, in implementing common procedures like customs management. How will regional agencies be funded and will contributions from CARIFORUM member states be based on GDP figures? If so, with the highest GDP in the region the Bahamas is likely to be called upon to pay disproportionately more. Assuming the Government has studied this, will it publish the figures?

–    Institutional and legal reform

Advocates of the EPA claim that, in order to fulfill its commitments under the agreement, the Bahamas will be forced to carry out much needed institutional reform; for example, the tax system, customs, competition, public services etc. Reform of customs administration is perhaps the most important. A host of new legislation, including harmonization of laws with CARIFORUM countries, will also be required.

Has the cost of all this been assessed? Mr. Laing has spoken of an ‘implementation framework’ which addresses these issues. Will he make this available in order to reassure the public that the Government has the capacity and commitment to fulfill its obligations in this respect and to pay for their implementation? Will he also provide information about plans for the ‘enabling legislation’ which will be required following signature of the “goods only” EPA this month?

Conclusion

A cautionary note. The EPA is entitled as being “between CARIFORUM states and the European Community and its member states”. But, although the Caribbean Regional Negotiating Machinery has led the way in negotiations, in practice Caribbean countries will sign it individually rather than collectively.

The result will be that, in the event of any dispute, each country will be at a serious disadvantage since it will be pitched individually against the massive resources of the EU. Have Caribbean negotiators considered the need to insist that the region should be able to speak as one in the settlement of disputes affecting individual countries?

The Government should not underestimate the repercussions of a “goods-only” EPA in negotiating trade arrangements with third countries, and it should now initiate a public debate about, in particular, its proposed services offer. It is important that those seeking to question the wisdom of government policy should not be characterized as being insular, unenlightened or opposed to change.

The Nassau Institute

Help support The Nassau Institute