ISSN X. Farm & - - Gfl. Vol. 6, No.1, October The Journal of the. Agro-Economic Society

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1 ISSN X Farm & - - c Gfl Vol. 6, No.1, October 2003 The Journal of the Agro-Economic Society

2 EDITOR-IN-CHIEF: RANJIT H. SINGH, Senior Lecturer, Department of Agricultural Economics and Extension The University of the West Indies, St. Augustine The Republic of Trinidad and Tobago EDITORIAL AD VISOR Y BOARD: Compton Bourne, UWI, St. Augustine, The Republic of Trinidad and Tobago Carlton G. Davis, University of Florida, Gainesville, Florida, USA L. Harlan Davis, University of Georgia, Athens, Georgia, USA Vernon Eidman, University of Minnesota, St Paul, USA Calixte George, Ministry of Communications & Works, St Lucia Bishnodath Persaud, UWICED, UWI, Mona, Jamaica William Phillips, University of Alberta, Edmonton, Canada Reginald Pierre, IICA, Washington, DC, USA Dunstan Spencer, Dunstan Spencer & Associates Ltd., Sierra Leone Karl Wellington, ALCAN, Mandeville, Jamaica George Wilson, Kingston, Jamaica Lawrence Wilson, UWI, St Augustine, The Republic of Trinidad and Tobago EDITORIAL STAFF: Editor-in-Chief. Associate Editors: Technical Editor: Technical Assistant: Ranjit H. Singh Vidya Forrester Sarojini Ragbir Hyacinth Mohammed Albert Mahabir Cover Design: Karen Yorke

3 Regional Economic Partnership Agreements and Its Implications 165 It* fr* Roger Hosein (Lecturer, Economics Department, The University of the West Indies, St. Augustine, Trinidad, Wl) and Bhoendradatt Tiwarie (Principal, The University of the West Indies, St. Augustine Campus) The world economy has undergone a remarkable element of transformation to date. In this era of rapid globalization, Caricom economies have witnessed the systematic decay of many of its margins of preference. In 1994, the North American Free Trade Area (NAFTA) was formalized and Mexico gained ascension into the North American market on terms equivalent to and in some cases exceeding the Caribbean Canadian (Caribcan) and Caribbean Basin Initiative (CBI) arrangement. The pending Free Trade Area of the Americas (FTAA) will pose some degree of threat to the Common External Tariff (GET) of the established Caricom Community (Caricom). In recent times, there have also been challenges to the European Union - African Caribbean Pacific (EU-ACP) relations. The Lome arrangements between the EU-ACP, which were initiated in 1975, have now been replaced with the Cotonou provision, which in turn may be superceded by a Regional Economic Partnership Agreement (REPA). This paper focuses on the margin of preference 1 traditionally enjoyed with Europe and seeks to assess what the pending REPA together with the recently established Everything But Arms (EBA) Agreement imply for Caricom sugar exporting countries. Cooperation between European countries and African, Caribbean and Pacific countries started in 1957 with the signing of the European Treaty of Rome which led to the formal establishment of the European Economic Community (EEC), otherwise known as the Common Market. A customs union was formed where it was agreed that all tariffs would be dismantled in a 12-year period. However, due to economic success, this process was hastened, ending in 1968 instead. Additionally, imports from third countries were forced to endure a common Note: The authors would like to acknowledge the research assistance of Gerard Boodram and Rhoda Patiram. 1 A margin of preference may be defined as any intervention on the free market that provides a firm with operating conditions superior to that which the free market would normally provide.

4 Regional Economic Partnership Agreements and Its Implications 166 tariff, enforced by all the members. The Treaty of Rome allowed for the free movement of goods, the banning of monopolies and the institution of common transport policies. Member states were also allowed to grant its colonies commercial privileges (historiasiglo20.org). At this signing, the EEC countries were Belgium, France, West Germany, Italy, Luxembourg and the Netherlands. In 1973, three (3) other European countries joined the group; these were the United Kingdom, Denmark and Ireland. In Yaounde, Cameroon, in 1963, the first formal arrangement between the EEC and ACP countries was signed. 2 This Convention secured preferential access to the EEC for 18 francophone countries. Another Convention (Yaounde II) was signed in 1969 and expired in January 1975, but by February of the same year, the first Lome Convention was signed in Lome, the capital of Togo. 3 Preferential trading arrangements were offered to countries in the African, Caribbean and Pacific group of countries through the Lome Conventions. These conventions (the fourth convention was signed in 1990 and the fifth in 2000 (Cotonou)) offered Caricom countries a wide range of benefits, but in particular, it provided specific protocols for sugar, bananas, beef and veal (the table 2 These countries were Benin, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Congo (Brazzaville), Congo (Kinshasa), Cote d'lvoire, Gabon, Mali, Mauritania, Niger, Rwanda, Senegal, Somalia and Togo. 3 When the UK became part of the EU it brought on-stream for preferential treatment its former dependencies from the Pacific and Caribbean region. below provides basic information on the various conventions). The Lome arrangement was therefore a long term one between the ACP and EU countries. As with most long term trading arrangements, however, signs of fragmentation emerged as the process of globalization intensified. Some of the specific areas of discontent were: (i) A dissipation of areas of common interest between the EU and ACP. (ii) The politicization of the relationship between the EU and other extra-acp countries, (iii) The greater element of trade liberalization that the WTO requested of the EU-ACP relations, (iv) The overall poor performance of ACP exporters, (v) The general complexity of the preferential trading arrangements between the two blocs of countries (de la Rocha, 2003). (vi) Divergent approaches to the challenges of liberalization and global competitiveness. In 1995, the WTO was formed and this intensified calls for the EU to liberalize its trading mechanism. A partial consequence was a long process of negotiations that culminated in the signing of the Cotonou Agreement. The Cotonou Agreement represents a developmental agreement as well as a number of other formal arrangements, which provide some element of detail concerning the areas of political cooperation and preferential trade agreement, between the EU and the ACP membership. The Cotonou Agreement is earmarked to extend for a 20-year period

5 Regional Economic Partnership Agreements and Its Implications 167 Table 1: Summary Information on Previous EU-ACP Relations. Year Convention 1963 Yaounde I: Agreement between the EEC and 18 former francophone African colonies, providing the colonies with commercial advantages and financial aid Yaounde II: Renewal of Yaounde I, including Kenya, Tanzania and Uganda, introducing preferential trade arrangements for developing countries and access to raw materials for the EEC Lome I: Convention included preferential trade agreements on most ACP products, each individual state having the right to decide on its policies, a cooperation system ensuring the security of relations, impartiality, respect for sovereignty, common interests and interdependence existing and the STABEX system for stabilization on agricultural export earnings as well as direct development aid Lome II: SYSMIN system providing stabilization aid to mining industries in ACP countries 1984 Lome HI: Attention shifts from industrial development towards food security and selfreliance Lome IV: Focus on structural adjustment and crosscutting themes such as the encouragement of democracy, good governance, human rights; fortifying women's role; environment safety; intensified regional cooperation and a greater role of the private sector, as a response to debt crises and famines Lome IV: Revised: Underlining the importance of human rights, democracy and good governance, as well as regional cooperation. Eighth Economic Development Finance (EOF) is not increased in real terms. Decentralized cooperation via participatory partnerships was also fostered, with the inclusion of an assortment of civil society actors Cotonou: Removal of most tariffs on imports from ACP group with sugar and beef and veal to be covered by proposed REP As, and a new tariff only banana regime to be phased in. Shift towards participatory development paradigm EBA: Immediate removal of all tariffs on all imports from LDCs except arms, with 3- stage removal of tariff and quotas on sugar, rice and bananas. Source: Bjomskov et. al. (2001). with a review of the process on a five-year basis and with the addendum that each review would be associated with a financial protocol. Some aspects of the Cotonou Agreement have been earmarked for review on an annual basis, particularly the procedures attached to procuring financial support and policies for particular sectors. The specific objective of the Cotonou Agreement was listed in Article 1 as: "to reduce and eventually eradicate poverty, consistent with the objectives of sustainable development and the gradual integration of the ACP countries into the world economy." Article 9 of the Cotonou Agreement documents that the Agreement is premised

6 Regional Economic Partnership Agreements and Its Implications 168 on the principles of human rights, democracy and the rule of law. Article 9 also emphasizes good governance in the participating member states. Article (74-78) of the Agreement emphasizes the need for the building up of an economic climate, which minimizes the risk to investment and thus, can prompt economic growth. The Cotonou Agreement highlights that the objectives of economic growth, poverty reduction and sustainable development in the ACP bloc of countries can be attained through a variety of methods. Specifically, this Agreement emphasizes that regional cooperation, integration and important matters such as human rights, democracy, women's rights, environmental protection and economic diversification all have pivotal roles to play in the development of the ACP membership (Bjornskov and Krivonos, 2001). REGIONAL ECONOMIC PARTNERSHIP AGREEMENTS The ACP's non-reciprocal tariff preferences currently on offer to its members will mature on 31 st December These may be succeeded by Regional Economic Partnership Agreements (REPAs) with each of the ACP bloc of countries. These REPAs are proposed to be WTO-compatible and are planned to be implemented within 4 years, (see Table 2) 4. REPAs, as proposed are really Free Trade Agreements (FTAs) characterized by trade reciprocity and tariff dismantlement. Specifically, the EPAs will be 4 See articles and of the Cotonou Agreement. aimed at "fostering the smooth and gradual integration of the ACP states into the world economy, thereby promoting their sustainable development and contributing to poverty eradication in the ACP countries" (Article 34.1 of the Cotonou Agreement) 5. With the REPAs the ACP membership will have to open up their markets to the flow of goods and services from the EU and this no doubt will involve significant economic restructuring and therefore, will carry an associated set of costs. 6 Attached to the proposed REPAs are incentive sums of financial assistance. In particular, ACP member states attached to REPAs would have access to a pool of investment resources amounting to euro 2.2 billion. The proposed REPAs will be founded on three basic principles: reciprocity, regionalism and special treatment for the poor. Reciprocity will require ACP countries to open their economies to a flow of imports from the European bloc of countries. The regionalism principle is intended to reflect the EUs intent to negotiate with blocs of countries as compared to individual member 5 The EU Commission standpoint highlights that regional integration can act as a catalyst, enabling these economies to become engaged in more meaningful trade liberalization exercises and as a consequence, prepare them for participation in global trade liberalization. The EPAs represent a stepping stone approach to allow ACP economies to benefit from economies of scale and dynamic learning by doing. 6 There is another option for ACP non-lldcs that don't enter into a national or regional EPA which is that they can be transferred after 2008 to either a non-reciprocal GSP or another arrangement still to be defined.

7 Regional Economic Partnership Agreements and Its Implications 169 March September 2002 September Table 2: Calendar of ACP-EU Trade Negotiations within the Cotonou Framework Preparations for negotiations of new trading agreements 2005 (At the latest) 2006 December 3 1 st 2007 January /20 Commencement of negotiations on new trading arrangements Exploration of alternative arrangement for non-ldcs unable to conclude EPAs Non-reciprocal duty free access for essentially all products of LDCs Formal and comprehensive review of progress End of preparatory period Entry into force of economic partnership agreement Transitional period for implementation of economic partnership Agreements Establishment of WTO compatible free trade 2018/20 Source: Integrated Social Development Centre (1SODEC) states. The third principle requires that the 49 Least Less Developed Countries (LLDCs) of the world will benefit from an Everything But Arms Agreement (EBA). As mentioned previously, the ED was dissatisfied with its influence on the economic development process in the ACP membership and expressed its intention to that any new trading arrangement should have a greater element of selectivity in the manner in which ACP countries were engaged. Even more, aid offered by the EU would in the future be tied to ensure the governance and other performance indicators of the member state. Additionally, and in defending its switch away from the Lome preference scheme towards the Cotonou arrangement, the EU offered the suggestion that the Lome Conventions provided generous access to the EU market but these were not beneficial to a large number of ACP countries, so that some ACP member states remain marginalized in the world economy. The reason for this has been identified by the EU as being that most of the ACP membership lacked the required levels of production, technical and marketing skills which were necessary for them to benefit from preferential access to the EU market. The liberalization of ACP trade is proposed to start on January 1 st 2008 and to extend for a transitional period of 12 years. 7 THE EU SUGAR PROTOCOL The ten largest producers of sugar in the world are India (15%), South Africa (2%), Cuba (3%), Australia (3%), Mexico (4%), Thailand (5%), China (6%), United States (6%), Brazil (12%) and the European Union (13%). Total acreage cultivated in sugar has been estimated to be 31 million hectares in 7 The period until 2008 is to be used for capital building in both the public and private sectors, strengthening of regional ties and further negotiations on the EPAs.

8 Regional Economic Partnership Agreements and Its Implications 170 Table 3: Thirty Years of Change to the EU Sugar Policy 1968 Introduction of the EU Sugar Policy covering the six founding Member States of the Union The accession of the United Kingdom, Ireland and Denmark to the EU prompts a second revision of the EU Sugar Policy; the validity of the A&B 8 quotas is extended. 1979/80 Transitional arrangements are agreed for Commonwealth Sugar Agreement pending negotiation of the Sugar Protocol Agreement of the ACP/EU Sugar Protocol One year "rollover" agreed to extend the validity of A&B quotas. Greece accedes to theeu Third revision of the Sugar Policy. Isoglucose (High Fructose Corn Syrup (HFCS)) is incorporated into the policy and assigned quotas Accession of Spain and Portugal to the EU. Transitional arrangements for the supply of raw sugar to the Portuguese refiners are agreed (Article 303). The EU sugar policy is "rolled over" until 1990/91. A new production levy on A&B sugar is introduced (the "elimination levy") The "Special elimination levy" introduced to reinforce the self-financing system German reunification; A&B quotas are agreed for the territory of the former German Democratic Republic The EU Sugar Policy is "rolled over" until 1992/93 pending the outcome of the Uruguay Round GATT talks; the Portuguese Article 303 arrangements are similarly rolled over. The "additional levy" replaces the elimination levies and ensures the complete self-financing of the policy on an annual basis The EU Sugar Policy is "rolled over" again, this time for only one year until 1993/94, again pending the outcome of the Uruguay Round. Inulin (a high fructose syrup) is incorporated into the policy and quotas assigned The EU Sugar Policy is "rolled over" yet again, for one more year until 1994/95, yet again pending the outcome of the Uruguay Round (UR). The UR of negotiations is completed in December The 1995 review of the EU sugar policy noted the need to: (a) ensure compliance with the EU's WTO Uruguay Round (UR) commitments whilst retaining the principal instruments of the policy, namely the production quota and self-financing systems; and (b) implement a new raw sugar policy further to the conclusions of the Commission's report on the situation of the EU refining industry. Source: acpsugar.org. 8 A-sugar is known as white sugar whereas B-sugar is known as high grade raw sugar. C sugar is low grade raw sugar and this sugar is non quota sugar which is not sold in the EU but instead, is exported at world prices devoid of export funds ( and

9 Regional Economic Partnership Agreements and Its Implications countries with 38 countries producing beet sugar, 65 countries producing cane sugar and 8 countries producing beet and cane. There are 80 exporting countries while there are 150 importing countries. Of the 2,440 sugar factories, 790 are beetprocessing plants and 1,650 are cane mills. 75% of world sugar exports are controlled by 10 exporters, of which the top four exporters account for in excess of 50% of the export market (Scollay 2002.). In the past, some sugar economies experienced economic buoyancy due to high prices and increased demand for sugar. But the high levels of profitability experienced were not sustainable due to rapid expansion in acreage in major producing countries as well as threats from substitutes such as corn sweeteners. The EU-ACP Sugar Protocol (SP) is a relationship established between the refiners from Europe and the producers of sugar from the ACP block of countries. The main interest of the Europeans was procuring a stable inflow of sugar whilst the ACP countries main interest lay with securing a guaranteed price for sugar and the commitment of a secure market given the intra-sectoral linkages of sugar. Particularly, the SP commits the EU to purchase specified amounts of cane sugar from ACP states (the specific tonnage offered to Caricom economies are discussed below). The commitments of the EU to the ACP states are delineated in Chapter 2 Annex V of the Cotonou Agreement, with the SP itself attached as Protocol 3 to Annex V. Chapter 2 of Annex V of the Annex of the Cotonou Agreement also indicates the EU's willingness to purchase the quantities of sugar specified in the SP at guaranteed prices for an indefinite period of time (Scnollay, 2002). In accordance with the SP, the sugar producing member states of the Caricom benefit from the following agreed upon quantities ranging from 40,348.8 tonnes for Belize to 159,410 tonnes for Guyana. Overall, the Caricom's share of the overall ACP sugar quota is 33.8%. 9 Table 4: ACP/EU Sugar Protocol Agreed Quantities(tonnes) (2001) Barbados 50, Trinidad & Tobago 43, Belize 40, Guyana 159, St Kitts Nevis 15, Jamaica 118, Caricom Total 438, Total 1,294, Share 33.8% Source: acpsugar.org. 9 The Special Preferential Sugar (SPS) arrangement allows the EU to import additional tonnage of sugar at prices below the guaranteed SP prices but above the world market price level.

10 Regional Economic Partnership Agreements and Its Implications 172 REPAs AND THEIR IMPLICATIONS FOR CARICOM SUGAR EXPORTING ECONOMIES Current Account Balance of Caricom Sugar Exporting Economies The importance of the EU sugar market to Caricom sugar exporting economies can be partly gleaned from the Table 5 above. In particular, Guyana, Jamaica, Belize, T&T and Barbados rank amongst the top 10 sugar exporting countries from the ACP sphere. Concerning shares of the EU sugar import market, these Caricom countries account for 31.2% of total EU sugar imports. According to Bjornskov (2001), these (5) countries export US$305.7m worth in sugar to the EU market or in volume terms 558,857 tonnes. Sugar from Guyana, Jamaica, Belize, T&T and Barbados account for 62.4%, 15.6%, 20.4%, 10.3% and 55% respectively of their total exports to the EU. The Caricom sugar industry, therefore, earns a vital amount of foreign exchange for the region and the industry is also a major employer. Further, in many Caricom countries, sugar is by far the largest contributor to agricultural Gross Domestic Product. For instance, in Guyana sugar accounts for as much as 20% of its total GDP and in excess of 50% of agricultural value added. The REPAs will involve a dismantling of import duties on commodities of EU origin. This reduction in tariffs, although encouraging a greater degree of consumer welfare, could result in an expansion in imports and hence, worsen the current account position of Caricom economies (see Table 6). Country Mauritius Fiji Guyana Swaziland Jamaica Zimbabwe Belize Trinidad & Tobago Barbados Malawi Total Table 5: Top Ten Sugar Exporting ACP countries, 1999 Sugar Exports Sugar Exports toeu toeu (US$m) (Tonnes) , , , , , , , ,092 Share of Total EU Sugar Imports Source: Bjornskov (2001) ,428 35,415 1,694,846 Share of Sugar in Total Exports to the EU (%)

11 Regional Economic Partnership Agreements and Its Implications 173 Table 6: Current Account Balances as a percentage of GDP in Caricom Countries, n.a. n.a Country Barbados Belize Guyana Jamaica St. Kitts/Nevis Suriname Trinidad &Tobago Source: World Bank data FISCAL BALANCES IN CARICOM SUGAR EXPORTING ECONOMIES The elimination of tariffs would also lead to a loss in tariff revenues. 10 Many of these Caricom sugar exporting economies are very dependent on import taxes for their overall fiscal revenues. Specifically, as the Table 7 below illustrates, St. Kitts obtained on average per annum as much as 44.8% of its fiscal revenues from import taxes in the decade of the 1990s, the corresponding ratio for Belize was 43.7%. With the exception of Barbados (9.2%) and T&T (7.4%), all the other Caricom sugar exporting economies also obtained in excess of ten percent (10%) of their fiscal revenues from import taxes. 10 A decrease in the amount of economic activity of a country usually has a negative impact on the amount of revenues that the government can collect and any reduction in fiscal revenues usually has a ripple effect on the rest of the economy, impacting adversely on socioeconomic conditions which in turn can negatively feedback into the overall level of macroeconomic productivity. Specifically, Guyana's annual average import taxes as a percentage of fiscal revenues per annum for the 1990s was 11.5% and Jamaica's 11.8%. Problems of fiscal revenue accumulation in the region is heightened by weaknesses in the overall tax administration process and narrow tax bases, in most of these economies. Bourne et. Al. (1999), using T&T as a reference example, noted some of the problems that the T&T economy experienced in trying to introduce a Value Added Tax (VAT). In general, for any economy, if the business sector is underdeveloped and many of the businesses are not formally registered, then these, among other things, can lead to a divergence between the amount of revenues that the government expects to collect and what it actually collects. Several researchers have tried to estimate the impact of REPAs on the fiscal revenues of Caricom economies. In 1998, the EU commissioned a series of studies to examine the impact of REPAs on ACP states. One of these studies focused on the

12 Regional Economic Partnership Agreements and Its Implications 174 Country Barbados Belize Guyana Jamaica St. Kitts/ Nevis Trinidad & Tobago Table 7: Import Taxes as a Percenta ge of Fiscal Revenues, na Source: UNELAC (2002) na Av. 1990s Table 8a: Impacts of REPAs on Fiscal and Tariff Revenues, as Assessed in the 1998 Studies prepared for the European Commission % customs revenue loss Barbados 17 Belize 16 Guyana 12 Jamaica 11 St. Kitts and Nevis 10 Suriname 17 Trinidad and Tobago 16 Sources: CREDIT (1998) Average Average Average Table 8b: Impacts of REPAs on Fiscal Revenues of Caricom Members Estimated revenues under REPA (US$ '000) 95, , , , , , , , , , , , Source: Nichols et. al. (2001). As a % of tax revenue As % of current revenue Jamaica N.A. N.A Trinidad & Tobago N.A. N.A Table 8b: Organization of Eastern Caribbean States (OECS) N.A. N.A As % of GDP N.A N.A N.A. 7.2

13 Regional Economic Partnership Agreements and Its Implications 175 Table 9a: Fiscal Balance as a Percent of GDP in Caricom Member states, n.a. n.a n.a. n.a. n.a. n.a. Barbados Belize Dominica Guyana Jamaica St. Kitts Suriname Trinidad &Tobago Source: UNELAC (2002). Table 9b: External Debt of Caricom Member States, $USbn, Country Barbados Belize Guyana Jamaica St. Kitts & Nevis Suriname Trinidad & Tobago Source: IMF International Financial Statistics Yearbook (various years) n.a n.a. n.a Caricom (including the Dominican Republic). This study demonstrated that Caricom sugar exporting member states each stood to lose in excess of 10% of their customs revenues if a REPA was formed. In another study, Nicholls et. al. (1999) using an Almost Ideal Demand System (AIDS) to examine the impact of a REPA on the tariff revenues of Caricom economies found that a reduction in tariff rates will result in a decline in fiscal revenues. Specifically, this study found that for Jamaica and T&T, current revenues from trade taxes are projected to decrease by around 19.4% and 6.3% respectively. For the OECS, Nicholls et. al. found that in the event of a REPA this sub-regional block of countries could lose 28.5% of its current revenues. This loss of revenues would only heighten the pressure of fiscally managing these Caricom sugar exporting economies for as Table 9a below illustrates, with the exception of hydrocarbon rich T&T, every other Caricom sugar exporting member state have run fiscal deficits for the period Moreover, and as Table 9b below reflects, most Caricom countries have had to commit themselves to a greater degree of

14 Regional Economic Partnership Agreements and Its Implications 176 external debt during the interval in order to finance the running of their economies. MEETING THE ADJUSTMENT COSTS OFREPA The REPAs will also lead to adjustment costs in Caricom economies. Specifically, the government of Caricom economies will need to expend resources so as to minimize the cost of adjustment involved in the reallocation of resources from those Caricom producers displaced by lower cost EU producers. Resources will also have to be expended on securing alternative new sources of public revenues. It is well known that the level and growth of economic activity has a major impact on the magnitude of government revenues that an economy can collect as it implicates the size of individual and corporate sector incomes. The real growth performance of Caricom states must therefore be at a critical minimum rate to facilitate the growth of public revenues. During the 1960s, the average growth rate amongst these sugar exporting Caricom economies was 5%, motivated by a buoyant international economy, an expansion in foreign aid and the progression of the process of import substituting industrialization (see Table 10). With the increase in oil prices in the 1970s and the global recession of the 1980s, real growth rates in these sugar exporting economies faltered. In the 1980s, the level of real output in the more developed Caricom economies which export sugar also fell. For the 1980s, depressed international prices of key exports from these economies as well as fiscal and debt servicing problems alongside waning capital and consumer expenditure resulted in a loss of some of the gains made in previous decades. For example, in Jamaica, the level of real GDP in 1986 was only 80% of the 1973 level whilst in T&T real output decreased by 32% between 1983 and Overall in the 1980s, Caricom's lesser developed sugar exporting economies performed better than the other sugar exporting economies within the regional bloc. In the 1990s, however, real output in the more developed Caricom sugar exporting economies improved with the level of real output increasing by 40% in T&T between 1990 and The Jamaican economy, however, stagnated during the 1990s with the average level of real output growing by an average annual rate of 1% per annum. Overall, as compared to the 1960s and 70s, real growth rates per annum decreased in Barbados, Belize, Jamaica, St Kitts and Nevis and Trinidad and Tobago. It is also very important to recognize that some aspect of this growth performance is also partly as a consequence of artificially high prices for sugar (and other commodities offered by the EU Commodity Protocols). In particular, the Table 11 below shows world sugar prices in various markets. Clearly, in more recent times the price of sugar in the EEC market has been higher than that offered elsewhere. It is evident that the privileges of ACP countries in the EU market have a distortionary influence on the conditions prevailing in the global marketplace. Inflated prices encourage higher levels of production, which finds its way into the EU market as expanded levels of exports. The expansion on the volume of

15 Regional Economic Partnership Agreements and Its Implications 177 Table 10: Average Growth Rates of Real GDP of Caricom Sugar Exporting Economies, 1960s, 1970s, 1980s 1990s Countries Barbados Belize Guyana Jamaica St. Kitts and Nevis Suriname Trinidad & Tobago n.a. n.a " Source: http: //publications, worldbank. org/wdl/. a: represents average for 1978 and 1979 for St Kitts and Nevis YEAR Table 11: Sugar Prices in Various Markets, (US cents/pound), 1960, 1970, 1980, 1990, EEC Import ($) ^Caribbean (New York) US Import ($) Source: Commodity prices, World Financial Digest Various years. Brazil n.a. Australia n.a. Philippines n.a. n.a. n.a. sugar traded means that there is a downward push on global sugar prices for those countries which do not have access to the preferential markets in the EU. It is these high prices which allow the high cost sugar producers in the Caricom to return a profit when compared to efficient producers in the Pacific region or Brazil. In T&T, for example, the per unit cost of sugar production is almost eight (8) times the cost in Brazil (see Figure 1). In trying to assess the ability of Caricom sugar exporting economies to carry adjustment costs, it is also necessary to assess the structure of production. A nation's production structure is critical as it conditions its employment carrying capability as well as the extent to which foreign technology etc. can diffuse into the domestic economy. In particular, the understanding is that the larger the manufacturing sector in an economy, the greater the degree of backward and forward linkages with the rest of the economy, the greater the learning by doing and the higher the price and income elasticities of demand in the economy as

16 Regional Economic Partnership Agreements and Its Implications 178 fin F : ig 1: Cost of Production (US cents/lb Sugar) Eft fi ' 36 0 Trinidad Barbados Jamaica Guyana Belize African Pacific Brazil (*) countries countries Table 12: Structural Composition of GDP in Caricom Countries, various years Sectors Agriculture Mining & Quarrying Manufacturing Services Sectors Agriculture Mining & Quarrying Manufacturing Services Sectors Agriculture Mining & Quarrying Manufacturing Services Source: UNECLAC (various years) Jamaica Barbados Suriname St. Kitts & Nevis Trinidad & Tobago Guyana

17 Regional Economic Partnership Agreements and Its Implications 179 Table 13: Unemployment Rates (%) in Caricom Sugar Exporting Member States, Barbados Belize Guyana Jamaica St. Kitts/Nevis Suriname Trinidad &Tobago Source: Caricom Secretariat (2000) L Table 14: Comparing the Highest 15 Ranked Countries using Three Vulnerability Indices Rank UNCTAD/Briguglio Index Antigua and Barbuda Tonga Seychelles Vanuatu St Kitts and Nevis Swaziland St Lucia Chad Singapore St Vincent and the grenadines Grenada Bahamas Jamaica Kiribati Mauritius Belize Crowards Index Anguilla BVIs Cayman Islands St Kitts and Nevis Vanuatu Sierra Leone St Lucia Antigua and Barbuda Guyana Rwanda Seychelles Bahamas Maldives Haiti Jamaica compared to if the economy was predominantly agriculturally oriented. As Table 12 below Illustrates, the agricultural sectors in some of these Caricom economies account for a significant aspect of their overall economic output and except in T&T, the size of the manufacturing sector has contracted over the years indicated, for each member state. The overall weak performance and structure of GDP in some Caricom sugar exporting member states and other economic problems has meant that unemployment rates within Caricom countries have remained in double-digit figures (see Table 13). A number of researchers have shown that Caricom economies are economically vulnerable. Economic vulnerability is simply

18 Regional Economic Partnership Agreements and Its Implications ISO defined here as the risk associated with harmful shocks. Briguglio (1995) derived a composite index for a number of small island states to determine whether small economies were more economically vulnerable than other Caricom states. His argument was couched on three variables: economic exposure, a transport index and a disaster prone index. According to Briguglio's computations, the fifteen most economically vulnerable countries in the world are as shown in the table below. Another researcher, Croward (1999) also estimated the economic vulnerability status of small island states. Based on Croward's computations, the fifteen most vulnerable island states in the world have been extracted and are also listed as part of Table 14. Two Caricom sugar dependent economies, Jamaica and St Kitts and Nevis, appear in computations of both authors of the fifteen most vulnerable economies in theworld while Belize appears in Brigulglio's and Guyana in Croward's. SUPPLY CAPACITY CONSTRAINTS OF SUGAR EXPORTING ECONOMIES REPAs will need to pay adequate attention to the constraints in supply capacity of Caricom sugar exporting economies. These constraints are wide and range from limited availability of public utilities especially in water supply and electricity and general access and spread of proper infrastructure facilities. Some of these economies are also characterized by low levels of labor productivity and severe health problems. In some Caricom states, for example, there is a high incidence of HIV and poverty levels (see Fig 2 below). In this regard, future EU-ACP arrangements should comprehensively address these supply side deficiencies which restrict Caricom sugar exporting economies from producing other goods, at internationally competitive prices. TRADE DIVERSION AND CREATION FOR CARICOM IN THE CONTEXT OF REPAs REPAs, as with all free trade agreements can lead to both trade diversion and trade creation gains. In the EU-ACP context, trade diversion refers to gains that arise when more efficient non-eu producers are displaced by EU producers. Any trade creation gains which occur will hinge on the extent to which inefficient regional production can be substituted for imported goods. If we treat a ten percent (10%) share of export or import as representing a significant trading partner, then the EU was and remains an important trading partner for Caricom as a whole. Some authors, e.g. Bilal (2002) have observed that with REPAs, because the EU is such a significant trade partner, there is a high likelihood that trade diversion will result. The general lack of supply capability in ACP economies combined with net trade diversion in favor of the EU can sprout a greater degree of geographically concentrated trade. It is well known that a geographically concentrated (and commodity concentrated) basket of goods can be a major source of export and economic instability.

19 Regional Economic Partnership Agreements and Its Implications 181 Fig 2: Headcount Poverty Indices for Sugar Exporting Caricom Economies Barbados Belize Guyana Jamaica St Kitts and Suriname Nevis T&T Source of Imports USA European Union Caricom LAIA Selected Asian Countries ,4 9.6 Rest of the World Source: A Quick Reference to Some Summary Data and Caricom Secretariat Table 15b: Distribution of Caricom Exports by Principal Destinations: (percentage) Destination of Exports USA European Union Caricom LAIA Selected Asian Countries Rest of the World Source: A Quick Reference to Some Summary Data and Caricom Secretariat.

20 Regional Economic Partnership Agreements and Its Implications 182 Figure 3: ACP Countries which Benefit from the EBA ACP countries Antigua and Barbuda, Bahamas, Barbados, Belize, Botswana, Cameroon, Congo, Cook Islands, Cote d^ivoire, Dominica, Dominican Republic, Fiji, Gabon, Ghana, Grenada, Guyana, Jamaica, Kenya, Marshall Island, Mauritius, Micronesia, Namibia, Nauru, Nigeria, Niua, Palau, Papua-New Guinea, Seychelles, South Africa, St Kitts & Nevis, St Lucia, St Vincent, and the Grenadines, Suriname, Swaziland, Tonga, Trinidad and Tobago, Zimbabwe ngola, Benin, Burkina Faso, Burundi, Cape Verde, Central African Republic, Chad, Comoros, Congo, DR Djibouti, Eritrea Ethiopia, Gambia, Guinea Equatorial, Guinea-Bissau, Haiti, Kiribati, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Niger, Rwanda, Samoa, Sao Tome e Principe, Sierra Leona, Solomon Island, Somalia, Senegal, Sudan, Tanzania, Togo, Tuvalu, 1 Vanuatu, Zambia. LLDC countries Afghanistan, Bangladesh, Bhutan, Cambodia, Laos, Maldives, Myanmar, Nepal, Yemen Table 16: The Overall Impact of the EBA in 2001 Exports of Products liberalized Exports of Products under the EBA with under the EBA in 2001 Liberalization (Bananas, Rice, Sugar) Exports to the EU of ACP countries ('000' Euros) Exports to the EU of Non ACP Countries ('000' Euros) Source: Brenton (2003). Delayed

21 Regional Economic Partnership Agreements and Its Implications 183 REPAs IN THE CONTEXT OF THE EBA The EBA was introduced by the ED in 2001 and offers to the 49 Least Less Developed Countries (LLDCs) preferential access to the EU market, some of which already belong to the ACP membership, (see Figure 3). The EU has argued that this EBA will substantially enhance the growth prospects of these 49 LLDCs. With the EBA, the liberalization on the imports of all commodities, excluding rice, sugar and bananas is proposed. Specifically, the duties on sugar will be reduced by 20% on the 1 st July 2006, 50% on 1 st July 2007, 80% on 1* July 2008 and fully eliminated by 1 st September According to Brenton (2003), the impact of the EBA is evidenced by a fall off in ACP exports of those products liberalized under the EBA in 2001, from 10.5m Euro to 3.3m Euros, a decrease of 68.2%. The exports of ACP countries of banana, rice and sugar to the EU decreased from 62.9m in 2000 to 60.5m in 2001 a decrease of 3.6%. In this same time period, however, the exports to the EU of non-acp countries of these products under the EBA which have delayed liberalization increased from Euro 59,000 to 74,000, an increase of 25% (see Table 16). It is possible that the excess of the EU price over the world price is so great that even net sugar importing LLDCs will have an incentive to export to the EU, making up the increased shortfall in their domestic market through increased imports at the much lower world market price. In addition, the availability of the higher priced EU market will encourage increased production in some LDCs to take advantage of the opportunity offered. The EBA, therefore, stands as a very real threat to the future economic development of ACP economies, to which group all of the sugar exporting Caricom economies belong. REPAs and WTO Compatibility EPAs, notes de la Rocha (2003) represents an important opportunity for ACP countries to negotiate important changes in their trading agreement with the EU. In particular, ACP economies can use the EPA as an opportunity to engage in a greater degree of regional integration whilst simultaneously becoming more interactive with the international community. Further, the REPAs represent an opportunity for Caricom economies to reduce their dependence on margins of preference. By engaging in more reciprocal trade with more competitive extra regional players, Caricom economies will need to become increasingly extra regionally competitive to maintain their viability. Indeed as one author notes: "... the rest of the world no longer sees the Caribbean as a special or unique case deserving of special treatment and assistance. Our search for empathy or goodwill, as we seek stays of execution in carrying out actions arising from our international commitments, which can have painful consequences for the survival of Caribbean societies, is now perceived as yet another set of rearguard actions..." (pg. 624, Arthur, 2001). As it stands, if REPAs are to be WTO compatible i.e. if liberalization were to be

22 Regional Economic Partnership Agreements and Its Implications 184 practiced in a wide way, then the Caricom products will have to compete on a more even playing field with an unequal trade partner. THE SUGAR PROTOCOL IN THE CONTEXT OF EPAs There are two possibilities concerning how a REPA can be configured in terms of the SP, i.e. SP can be either included or excluded. If EPAs are excluded, as has already been done with other EU relationship with Mexico and South Africa. Even if sugar in excluded from an EPA it would still have to meet the requirements of the WTO Article XXIV requirement of substantially all trade (SAT). If it is that the EPAs are excluded, then it may be possible to consider a scenario wherein the SP continues alongside some permutation of a REPA. In this context, one researcher notes: "The question would then be whether prospective members of such EPAs, including sugar producers, see sufficient benefit to themselves, from those particular feasible configurations, relative to other configurations that might otherwise be open to them, to make one or more of those feasible EPAs a viable proposition." (Scollay 2002, pg 44). It is, however, also permutation that the SP can be maintained within and effectively transformed into being part of a REPA. In this context, the quota benefits that ACP members enjoy can be featured into the RAPA as part of its arrangement. This arrangement would mature when the transitional period ends, at which point ACP producers can still engage the EU market but at terms similar to the LLDC. Scollay (2002) notes that the vulnerability of the SP preferences will be much lower as rulings by the appellate body reflect that exemption from Article XIII requirements can be made from Article XXIV especially in those case where it can be shown that quotas are integral for the formation of regional integration arrangement. Significant though, "Securing acceptance by the EU of an obligation to provide equivalent entitlements to sugar protocol entitlements with EPAs would be an essential prerequisite to any decision by sugar protocol members to abandon the sugar protocol in favor of the inclusion of sugar in EPAs. The legal basis for seeking acknowledgement of this obligation is provided by Article 36:4 of the Cotonou Agreement which specifically refers to the safeguarding of benefits derived from commodity protocols as one of the objectives of the forthcoming EPA negotiations. The provision also leaves it open for ACP producers to mount a case for compensation for any loss of benefits that they are required to accept in the course of the negotiations." (pg 45-46). POLICY REFLECTIONS The Caricom sugar market is currently plagued by a number of problems, these include the high cost of labor, limited availability of agrarian land, depressed world prices of sugar as subsidized prices are increasingly challenged and escalating costs

23 Regional Economic Partnership Agreements and Its Implications 185 of factors of production. In more recent times, the price of sugar has declined partly as a result of decreasing costs of production in several important sugar exporting countries, which in turn was triggered by significant efficiency gains and improved technology in the sugar industry of the relevant economies. The EU needs to pay sufficient attention to the potentially negative results that a REPA can have for all ACP states in general and for Caricom sugar exporting economies in particular. Any increase in the inflows of European goods may also displace regional production in favor of competing EU imports. This in turn will adversely affect unemployment rates in the Caricom sphere. Caricom (sugar) exporting economies also need to be cognizant of the fact that, in focusing on EU negotiations, it may divert the attention of their negotiators away from other equally or more significant negotiation agendas. Specifically, by placing too much emphasis on the EU agenda, other significant WTO negotiations may be sidelined. In the context of the proposed changes in the EU-ACP relations, Caricom sugar exporting economies will need to consider how to address lost export revenues, a reduction in trading preferences and the attendant fiscal consequences, amongst other problems. If the REPA erodes the margin of preference the EU-ACP provides, then for some Caricom sugar exporting economies, this will increase the burden of effective fiscal management of their economies. In the short run, the EU might consider providing some additional financial resources to help these sugar exporting economies improve their supply capacity in products other than sugar, where they may be more competitive. In preparation for the REPAs, Caricom economies would need to adjust their economies in a number of areas. Adjustment to freer trade in the context of a REPA will lead to a decline in employment opportunities in many Caricom member states and even further, would also trigger a loss of valuable human capital in those industries that are forced to close down. Recent advances in endogenous growth theory infer that human capital can encourage the growth of nations and as a consequence, a loss of human capital represents a compromise to the growth performance of any economy. 11 In negotiating REPAs therefore, Caricom negotiators may want to consider negotiating for compensatory assistance to retrain displaced workers. Changes in the margins of preference on offer to Caricom countries continue to be adverse and the clear indication is that globalization is insensitive to size and intolerant of economic backwardness. Into the future, Caricom countries may want to reconsider their position in the sugar industry and this may even involve closing down or reducing and rationalizing production operations in some producing economies. Caricom high cost sugar producing economies must realistically assess whether their energies will be most rationally deployed if they were to select production options on the upswing of the international product cycle, which do not require margins " See Romer (1993).