II. PREFERENCES IN A CHANGING ECONOMIC ENVIRONMENT

A. Changes in the international trading environment

Since the early 1990s, the international trading environment for agricultural products has changed substantially. The Uruguay Round resulted in major systemic changes in the nature of trade protection measures and preference schemes for agricultural products in their raw and processed forms. These negotiations were closely linked with a reform of the Common Agricultural Policy of the European Union (EU). The conclusion of the Round also led to important changes in agricultural policies, trade policy instruments and the application of subsidies in other developed countries. Subsequently, the trade provisions of the ACP-EU Agreement of Lomé were improved and the EU undertook a major reform of its GSP scheme. Developed countries in general adjusted their GSP schemes in the light of the Uruguay Round results and expanded their product coverage in agriculture. Most of them enlarged product coverage and preference margins for the least developed countries (LDCs). The Table below provides a schematic comparison of selected preferential trading arrangements between developed and developing countries. These are discussed in greater detail in Chapter IV.

The results of the Uruguay Round for agricultural products went beyond partial tariff reductions for a large number of raw and processed products, and included:

(i) full tariff liberalization for a number of raw tropical commodities by major developed countries;

(ii) removal of quantitative import restrictions, levies, voluntary export restraints, minimum entry price systems and equivalent import-restrictive measures;

(iii) tariffication of these measures which in most cases have been replaced by extremely high tariff rates for temperate and Mediterranean zone products, and products of the food industry;

(iv) the establishment of tariff quotas at lower than MFN rates;

(v) subjecting domestic agricultural subsidies to international surveillance, although not necessarily reducing their level;

(vi) a reduction of export subsidies;

(vii) a new agreement establishing, a specific discipline for the application of sanitary and phytosanitary (SPS) measures for the first time; and

(viii) changes in major rules of the multilateral trading system, including stricter disciplines on preferential arrangements, waivers and the implementation of World Trade Organization (WTO) decisions.

Subsequent to these changes in the multilateral rules for agricultural protection, the EU made important changes in the scope and significance of agricultural preferences for GSP beneficiaries and ACP countries:

• Tariff liberalization for major tropical products brought about a gradual phasing out of remaining preferences until mid-2000 for raw coffee and cocoa, papayas, mangoes and some other tropical fruit, roundwood, and other products. Preferences for rum were to be removed in 2003. For a number of other agricultural products subject to tariff reductions, preferences were also eroded.

• Tariffication of the various forms of quantitative import restrictions, levies, minimum prices and similar measures resulted in high MFN duties for many agricultural and processed products. This provided, in principle, new scope for applying trade-effective tariff preferences. The opening of new tariff quotas offered additional trading opportunities for suppliers under special preferential arrangements, especially where in-quota tariffs still constituted considerable barriers to MFN exporters. Tariff erosion in the EU was expected to be partly compensated by similar liberalization measures offering new trading opportunities in other major developed and developing country markets.

Table 2.1 Comparison of selected preferential trade schemes’ coverage of agricultural products

Reforms of the GSP schemes

In its GSP reform, the European Union replaced its regime of tariff quotas for sensitive products by modulating preference margins ranging from 15 percent to 100 percent of the MFN duty according to import sensitivity. This frequently resulted in a significant rise of preferential duty rates. While the product coverage was expanded to a certain extent, most agricultural products were allocated to the highly sensitive and sensitive categories, with a 15 percent or 30 percent preference margin respectively. This provision was further changed for the period 2002-2004:

(i) sensitive products (including all other partial preference products) now obtain a preference margin of at least 3.5 percentage points (or 30 percent of specific duties; the margin remains 3.5 percentage points for composite tariffs, i.e. specific duties remain payable; no reduction applies to in-tariff quota rates);

(ii) for other products, existing GSP rates continue to be applied if they are lower than the rate resulting from a 3.5 percent reduction.

Other new features of the EU scheme are similar to those introduced by other preference-giving countries:

(i) various newly industrializing developing countries (NICs) and high-income developing countries were excluded from the EU and other GSP schemes;

(ii) progressive graduation of broad sectors was introduced by EU (instead of specific products as previously) where a preference-receiving country achieved a high export performance or an important share in the respective market;

(iii) greater conditionality or exclusion from the scheme can be applied by the EU, the United States and others to a country for non-economic reasons;

(iv) most preference-giving countries greatly extended preferences for LDCs, and zero preferential duties have been granted to them for important products;

(v) the drug incentive schemes of the EU and the United States in favour of Member Countries of the Andean Group and the Central American Common Market have been substantially expanded; the EU introduced a new special incentive regime for countries applying the core International Labour Organization (ILO) labour standards and a high level of environmental standards (although it has not been applied thus far, i.e. by mid-2002, except for Moldova).

Other preference-giving countries, in particular the United States, also made increasing use of graduation and policy conditionalities in their GSP schemes. However, they increased in parallel GSP advantages for selected LDCs and other relatively less advanced countries. Such conditionalities, for example, the non-observation of core labour standards or of democratic principles, or non-membership of WTO, were advanced for the exclusion of various developing countries, including LDCs, from preferences or MFN treatment (for example Myanmar, Afghanistan, Lao People’s Democratic Republic, and various African LDCs).

In spite of various extensions of product coverage, generally accessible GSP benefits are granted only for a limited range of raw and processed agricultural products and vary from one preference-giving country to another. The preferences continue to be determined unilaterally by each preference-giving country; they have often been subject to frequent changes and short-term and ex-post renewals, as in the United States. In spite of the introduction of pluriannual schemes now, there is no guarantee of the continuation of their benefits for a specific exporter. This feature significantly detracts from the value of the GSP as a basis for major investment decisions for creating new plantations or factories, or for diversifying into new product lines.

Modification of special preferential arrangements

After the conclusion of the Uruguay Round, the various special preferential arrangements applied by EU, the United States, Canada and other developed countries underwent major changes. The ACP-EU Convention, the preference schemes of the United States under the Caribbean Basin Initiative, and the Andean trade preferences were adjusted to the new multilateral trading regime, with improvements in scope and depth of preferences.

Further important changes have since been made or are scheduled for the near future. The EU and the ACP countries have agreed to convert their traditional preferential arrangement into reciprocal free trade areas, which are to be fully consistent with WTO rules. The Cotonou Agreement set out a broad framework for political, development and trade cooperation, and set in motion a process for negotiating regional economic partnership agreements between sub-regional integration groupings and the EU. The ACP countries may choose between bilateral free trade arrangements with EU and general GSP status, in the latter case enjoying the more extensive preferences accorded to LDCs described below. During a transitional period until 2008 present ACP preferences will continue. While the Cotonou Agreement further expanded product coverage and increased preferential margins, it did not provide free market access for a large number of food and processed food products.

In May 2000, the EU introduced its new Everything But Arms (EBA) initiative. Under this scheme EU grants, in principle, duty-free and quota-free entry for all products in favour of all LDCs. The suspension of duties took immediate effect for most raw and processed agricultural products. For sugar and rice, duty-free global quotas have been established that will rise by 15 percent each year; MFN duties will be reduced over three years to zero starting in 2006. As regards bananas, tariffs will progressively be reduced to zero for LDCs over the period 2002-2006.

The United States has significantly improved its special preference scheme for Caribbean and Central American countries under the Caribbean Basin Trade Partnership Act (CBTPA), in particular in favour of clothing products. It has also expanded product coverage under its GSP scheme offering duty-free access to LDCs. In particular, their exports of agricultural products within tariff quotas are no longer subject to duty.

In 2000, under the African Growth and Opportunity Act (AGOA), the United States established a new scheme for trade and investment cooperation. The new scheme offers duty-free preferential access to selected African countries for additional manufactures, petroleum products, metals, some agricultural products (within the tariff quotas, where applicable), and, in particular, certain clothing assembly products and textiles.^[1] It further provides for measures intended to encourage development and investments by US enterprises in African countries. AGOA preferences are, however, subject to a wide range of policy conditions; an annual review evaluates to what an extent each eligible sub-Saharan African country respects these conditions or is making progress in their implementation (see section V).

From July 2000, when the Uruguay Round results were fully implemented by the EU, half of the agricultural exports of ACP countries have no longer enjoyed EU preferences, while the other half still have a preference margin averaging some 10 percent.^[2] As a result of the improved preferences extended to them by the United States, Caribbean and Central American countries now enjoy very liberal preferential market access conditions both in the United States and in the EU market.(Some Caribbean countries also enjoy special preferential access to the Canadian market, which is more favourable than the GSP.)

Regional integration

In parallel to multilateral liberalization, regional integration has deepened and expanded throughout the 1990s, significantly affecting the potential impact of GSP and ACP preferences. The establishment of the Single European Market by the EU in 1992 had already removed customs controls on goods and was followed by the removal of border controls on the movement of persons. The European Economic Space and bilateral agreements facilitated preferential exports of food industry products and specific agricultural and fishery products from Norway, Switzerland and Iceland to EU. In the course of their accession to the EU, Sweden, Finland and Austria adopted its Common Agricultural Policy and its GSP scheme, and adhered to the ACP-EU Convention and the other trading and preferential arrangements of the EU. Furthermore, a number of new bilateral Free Trade Area agreements were concluded by developed and developing countries. Thus, by 1996 the preferences and the trading environment in which they operated had significantly changed.

As Central and Eastern European countries become full members of the EU, competition in the European market for agricultural products will further intensify. On the other hand, the financial implications of their agricultural integration into the EU may exert some downward pressure on the amount of the EU’s agricultural subsidies. Furthermore, certain association agreements between the EU and major Mediterranean countries have been changed from preferential arrangements to mutual free trade areas or customs unions. Duty-free access for many products of export interest to other developing countries is consequently being progressively widened, although several major agricultural exports are still subject to MFN duties or are limited by ceilings and seasonal restrictions during the transition periods. New free trade area arrangements have entered into effect between the EU and South Africa, Mexico and Chile, and a new arrangement is envisaged with MERCOSUR. These arrangements could significantly alter market access conditions to Europe, because they involve leading world market producers of meat, fruits, vegetables, flowers, vegetable oils, cereals, sugar, fishery, and plywood, among others, and highly competitive exporters in the food processing industry.

In the light of the above, it is likely that by 2005 to 2008, existing special preferential arrangements will be replaced by WTO-conformed free trade areas, leading to fully reciprocal liberalization of essentially all mutual trade. The Cotonou Agreement, the Caribbean Basin Initiative (CBI) and AGOA are moving into that direction. The Cotonou Agreement (and future bilateral free trade area agreements with African countries) will lead to the establishment of free trade and investment between an enlarged European Union and virtually all ACP developing countries. The Free Trade Area of the Americas (FTAA) is expected to expand free trade and investment on a reciprocal basis throughout the Western hemisphere. The United States intends to conclude free trade area agreements with certain AGOA beneficiaries and their groupings. The members of the Asian and Pacific Economic Cooperation grouping (APEC) are pursuing similar objectives for free trade and investment at both the multilateral and the regional level. Meanwhile, sub-regional and regional integration groupings among developing countries are accelerating efforts to liberalize their mutual trade in preparation for the liberalization of trade with major world trading nations.

The future of preferential arrangements

The common implication of all these regional arrangements is that they will significantly intensify competition in the major world markets. For all products taken as a whole, the main economic value of trade preferences will shift from price advantages to obtaining free access in order to avoid being discriminated against, and to other policy goals, such as increased investments. This does not preclude the continued value of trade preferences for products where protection is still high, as in the case of agricultural goods.

In the face of this challenge, multilateral trade liberalization is bound to progress in order to avoid segmentation of and discrimination between the two largest preference systems, those of EU and the United States. This is most relevant for developing countries that do not enjoy “least developed” status, or that have not yet obtained special preferential access to both markets. The success of the Doha Round of multilateral trade negotiations is critical for developing countries, which have already been graduated, in part or wholly, out of GSP or face the risk of graduation in the near future.

The Doha Round aims at “substantial improvements in market access; reductions of, with a view to phasing out, all forms of export subsidies; and substantial reductions in trade-distorting domestic support to agriculture.”^[3] It should bring about further global liberalization of agricultural trade, a reduction of tariff peaks, and an enlargement of duty-free or low-duty tariff quotas, as well as easier access to domestic markets, in as much as producer subsidies in agriculture and fishery are to be reduced. Meanwhile, the EU made some further progress in agricultural policy reform under its Agenda 2000. The reform of its beef sector policy is expected to reduce beef prices significantly.^[4] Proposals for reforms of the sugar and fisheries sectors are under consideration. Further needs for agricultural policy reforms are likely to arise as a consequence of the new Round and the accession of new Member States. This trend should, to some extent, open up the entrenched market closures for major food products. ACP countries will also acquire new opportunities for market access in other dynamic markets, which should stimulate preparations for diversifying their export destinations.

In spite of the new Round, the GSP is likely to remain important in the trading relations between developed and developing countries, in particular the LDCs and other countries with limited market size. It will also have a role to play in inter-regional relationships outside the new free trade area arrangements, which tend to maintain the traditional North-South orientation in spite of inter-regional extensions, such as AGOA and EU free trade areas with Latin American countries. Even within the Cotonou Agreement, certain ACP countries that are not members of sub-regional integration groupings with deep mutual trade liberalization may evaluate the pros and cons of opting for a continued GSP status instead of entering into a free trade agreement with the EU. Certain ACP LDCs in the Pacific and the Sahel may also choose to continue to benefit from the EU scheme for LDCs. It should be noted that the EU envisages a further extension of its GSP scheme for the period 2005-2014.

In agriculture, substantial scope remains for maintaining the value of the GSP beyond the next Round. Even if a 30 percent reduction of agricultural duties could be achieved, or if a common ceiling rate could be agreed upon (for example, that no tariffied rate shall exceed, for instance, 30 percent), the resulting MFN rates will still remain at double-digit levels for many tariffied and food industry products. Many rates would still be prohibitive for many developing country exporters other than Free Trade Area (FTA) countries or LDCs with respect to: cereals, rice and their products; sugar, sugar-based food and chocolate products; several prepared and canned fruit and vegetables and fruit juices; meat products; canned and prepared fish and shrimps, coffee and cocoa products, as well as a number of other prepared or processed food products in rapidly growing demand by consumers. Even the new FTA arrangements are likely to phase tariff reductions for many of these products over lengthy transition periods.

These compounded changes in the international trading framework will lead to profound alterations of the competitive positions of individual producer and exporting countries in the world, regional and domestic markets for agricultural and processed products. The scope of these changes requires governments to focus their policies on strengthening supply capacities and increasing competitiveness in both domestic and export markets. Enterprises in developing countries are continuously challenged to augment productivity and technological capacities, and to improve their capacity to meet international quality, sanitary and safety standards. Existing trade preferences can buffer the adjustment process. Combined with investment cooperation, preferences can also provide an incentive to domestic and foreign investors to expand production. Favourable operating conditions and the availability of free or preferential market access to major developed countries and regional markets can play an important role in investment decisions.

B. The domestic environment in developing countries: Production and export performance of agriculture and food industries

The domestic environment for an effective use of trading opportunities and preferences was characterized during the whole 1990s by continued structural adjustment and reforms. Growth during the first half of the period was, however, followed by a series of major crises, inflation and currency devaluations in several countries, including the earlier most successful exporters. The period as a whole was characterized by widening disparities in growth and economic performance among developing countries.

During the 1990s, the GDP grew by an annual average of 3.3 percent and per capita GDP by 1.8 percent for developing countries as a group. Growth was uneven among developing countries and regions. It was very strong in Eastern and Southern Asia, at rates of 7.5 percent and 5.6 percent respectively, but remained below average in sub-Saharan Africa (2.2 percent) where per capita GDP stagnated at a very low level of hardly more than $1 per day. Per capita income regressed or stagnated in two-thirds of the ACP countries, except for Mauritius, the Dominican Republic, Lesotho, Uganda, Mozambique, Ethiopia and the Sudan, predominantly agriculture-based economies (in descending order of performance, see Table 3).

In several Asian developing countries, double-digit export growth made a major contribution to their rapid economic performance. Some Latin American countries, such as Argentina, Chile and most Central American countries, also achieved high export growth. In Africa, export performance varied widely: double-digit rates were achieved, for example, by Ghana, Benin, Uganda, Burkina Faso and Lesotho, all countries with a high dependence on agricultural production and exports.

Agriculture remains a major component of production and GDP, as well as the main source of employment for a large number of developing countries. This sector continues [to play a major role in stimulating overall development and provides [important resources for social development and investment. During the 1990s, agriculture grew in developing countries at a rate of 2.2 percent annually, and contributed importantly to overall income growth and employment. In East and South Asia, agricultural production grew at an average annual rate of 3.3 percent and in sub-Saharan Africa by 2.7 percent. In contrast to other regions, the growth of agriculture in Africa was faster than for manufacturing, which achieved a modest 1.6 percent. Agricultural growth was relatively high and outpaced GDP growth in Malawi, Sudan, Togo, Benin, Guinea, Tanzania, Zambia and Namibia (in descending order).

Central and South American countries achieved pronounced growth of agricultural exports. Such exports expanded or maintained their share in rapidly expanding world exports in Chile, Brazil, Uruguay, Ecuador, Peru, Bolivia, Venezuela, Nicaragua and Guatemala (in descending order). Strong agricultural exports also stimulated production growth in some Asian countries, such as Indonesia and the Lao People’s Democratic Republic, whereas in many others, export expansion occurred mainly in the industrial sector. Nevertheless, the global trend towards a reduced share of agricultural products in total exports continued (see Table 3).

In several developing countries, export growth made a significant contribution to the growth of agricultural value added, income and GDP. Certain ACP countries also combined fast export growth in agricultural products with significant growth of production: above-average growth of agricultural exports and production were achieved by Zimbabwe, Kenya, Ghana, Côte d’Ivoire, Togo, Benin, Burkina Faso, Mali, Uganda, Ethiopia, Mozambique and Lesotho (in descending order). On the other hand, most ACP countries achieved only a weak growth of production, exports and GDP, at rates insufficient for alleviating poverty.

Differing growth performance can be explained to some extent by the positive effects of currency devaluation, as in the West African Economic and Monetary Union (UEMOA). On the other hand, major agricultural policy reforms and market liberalization for cocoa, coffee, cotton and other agricultural products have provoked temporary disturbances of production. Poor performance of ACP and other commodity-dependent countries was mainly caused by the price collapse for major staple commodities on world markets. For some commodities, recent export prices were the lowest over the past two decades. This implied, for example, a farm-gate price of only $0.11 per kg of Robusta coffee in early 2002, which was about 60 percent below the normal range of producer prices. In the absence of income stabilization facilities after full liberalization, producers were neither prepared for, nor capable of, absorbing such price shocks. Commodity future exchanges, hedging, bank credits, and similar compensatory methods are still in the early stages of development in most African regions.

Overdependence of export supplies on a narrow range of traditional raw commodities facing slow demand growth and a low income elasticity continues to remain at the roots of poor export performance of many developing countries. Such a lack of diversification increases vulnerability to climatic and economic shocks. The poor or negative performances of several African countries were often caused by political disturbances and wars.