The ACP Experience of Preference Erosion in the Banana and Sugar Sectors
Possible Policy Responses to Assist in Adjusting to Trade Changes
by Paul Goodison
Agricultural Trade and Sustainable Development Series • Issue Paper 7
Countries from the Africa, Caribbean and the Pacific Group of States (ACP) have traditionally benefited from high margins of preference on European Union (EU) markets, particularly for sugar and bananas. Preferences are designed to be an instrument to promote trade and export diversification. By encouraging trade in sectors where there are rents, preferences also imply a financial transfer and, therefore, an improvement in beneficiaries’ terms of trade. Preferences are a significant source of income, since the beneficiary countries can sell their products in the EU at a much higher price than in the global market. Also, agricultural commodity exports, such sugar and bananas, are important sources of foreign exchange earnings for ACP countries.
As tariff protection is progressively dismantled (for whatever reason), this automatically leads to an erosion of the margin of tariff-preferences from which ACP countries benefit. Currently, the ACP agricultural trade preferences are being eroded by five distinct processes: the EU’s Common Agricultural Policy (CAP) reform, the ‘Everything but Arms’ (EBA) scheme for Least Developed Countries (LDCs) and revisions of the Generalised System of Preferences (GSP), EU bilateral trade agreements, multilateral agreements on tariff reductions, and World Trade Organization dispute settlement rulings.
Research suggests that erosion of all preferences would have a substantial impact on some countries, especially those with a high concentration of exports in heavily protected commodities. Relatively bigger impacts are concentrated in small island economies and a number of LDCs dependent on sugar, bananas and, to a lesser extent, garment exports. Reducing preferences for ACP exports will lead to losses for most of these suppliers, as higher production costs mean that these countries and regions can only sell profitably to a protected market. Caribbean ACP banana countries and main ACP sugar exporters (mainly Belize, Fiji, Guyana and Mauritius) worry that, as a result of preference erosion, they will loose their competitiveness against the largest Latin American banana producers (including Colombia, Costa Rica, Ecuador and Guatemala) and sugar exporters (Brazil).
WTO Members recognised the need to help developing countries take advantage of trade liberalisation and for complementary measures to address adjustment costs. The WTO Framework Agreement, adopted in the context of the Doha negotiations in July 2004, recognises the importance of long standing preferences and mandates that the issue of preference erosion be addressed. The Hong Kong Ministerial Declaration also states that «[WTO Members] reaffirm that nothing [they] have agreed here compromises the agreement already reflected in the Framework on other issues including…longstanding preferences and preference erosion.»
Assistance for preference erosion to help developing countries benefit from trade liberalization and improve their ability to use trade for development includes possible trade-related and non-traderelated measures. Trade-related measures that have been suggested in the WTO Agriculture negotiations consist of measures such as a longer implementation period for the tariff reductions, a deferral of the start of the implementation period, lower tariff reductions for affected products, and expanded market access for products, which are of vital export importance to preference-receiving Members. However, these measures might conflict with the current WTO mandate on the fullest liberalisation of trade in tropical agricultural products (such as sugar and bananas) that is also mandated in the market access negotiations.
Non-trade-based measures include targeted technical assistance programmes to assist long-standing preference-receiving countries to diversify their export base, and additional financial assistance and capacity building to address supply constraints, promote diversification and assist in adjustment and restructuring. These measures are targeted «Aid for Trade» (A4T) measures in support of the trade adjustments that will be required as a result of preference erosion.
The present Issue Paper (No. 7) on “The ACP experience of preference erosion in the banana and sugar sectors and possible policy responses to assist in adjusting to trade changes», by Paul Goodison, is intended as a contribution to the discussion on trade-related adjustment under A4T. The purpose of this paper is to situate the process of preference erosion in ACP-EU trade relations in the context of internal EU policy adjustments designed to prepare the EU agricultural and food products sector for trade liberalisation at the multilateral and bilateral levels.
The paper seeks to analyse the sources and impacts of preference erosion on ACP banana and sugar sectors and reviews the experience of the EU policy response to the impact of preference erosion in ACP economies and societies. It also seeks to draw lessons from the various experiences of the policy response to preference erosion in the different circumstances faced in ACP countries, with a view to identifying the elements which could form part of a more comprehensive A4T approach to assisting ACP economies and societies in meeting the challenges thrown up by the ongoing process of both trade liberalisation and preparations for trade liberalisation within the EU and the consequent process of preference erosion.