IV. MARKET PROSPECTS

A. Trends in consumer demand

Prospects for the foreseeable future underline the need for strengthening production and related services in preference-receiving developing countries if agriculture and food industries are to foster development. Projections by FAO point to only a moderate growth of aggregate demand of developed countries for food and agricultural products up to 2005, since aggregate demand elasticity for food is low.^[43]

Section II indicated that demand in the EU and the United States for numerous developing country products was dynamic during 1996-2000 in spite of the slowdown of total agricultural imports in the EU. The dynamism may well continue as growth in these countries resumes and trade liberalization and tariff reductions are further pursued. Prospects nonetheless differ from one commodity to another.

Vegetables, fruit, beef, some fishery products and finished consumer goods are well placed since they enjoy above-average income elasticities of demand. Per capita consumption is still relatively low for several food and food industry products in some current and prospective EU Member States.

Exports of fresh fruit and vegetables can be further developed to extend beyond seasonal trade and diversified into new products with more countries entering into production and export. The high season for these products is very short: for example, in the major EU countries it lasts a mere two months. In the remaining ten months of the year consumption is only about half the seasonal peak, and there is a vast potential for African and other developing countries to fill supply gaps and to provide a variety of fresh products to consumers. Several ACP countries and other LDCs are well placed in this respect in view of their free access and preferential price advantages. Some have started to export citrus fruit and other Mediterranean fruit and vegetables, but such exports are still at an incipient stage. Strategies pursued by large supermarket chains for increasing variety to attract consumers offer bright prospects for exports of a wider assortment of tropical fruit. At present, international trade in tropical fruit accounts for only 3 percent of production in major exporting countries,^[44] and consumption in Europe is very low.^[45] Demand prospects are also favourable for certain vegetable oils, fishery products, organic products, and prepared food products ready for consumption.^[46]

For some major basic foodstuffs, as well as for major tropical crops such as coffee, cocoa, tea and rice, demand in Europe is stagnating, not only in value, but also in volume terms. The EU is self-sufficient or in oversupply for sugar and milk products, where high market access barriers are applied. The beef and other meat markets have their specific problems, because recurrent animal diseases in the EU resulted in a loss of consumer confidence and a reduced import demand from all sources. Imports on MFN terms are virtually prohibitive for most temperate-zone CAP products, with the exception of a few carefully circumscribed, low-duty tariff quotas for specific exporters who accepted substantial reciprocal concessions in turn.^[47] High domestic subsidies encourage domestic producers and distort access to markets in major food and fishery sectors. High residual access barriers also prevent the expansion of exports by more developed GSP and ACP suppliers, and discourage investments in these countries. Restrictive health standards and rapid change of standards contribute to the modest use of an otherwise existing potential of growing consumption and new market openings. With respect to processed food, imports remain subject to high protection for all non-LDC exporters, including ACP countries.^[48]

The United States market offers dynamic opportunities for a wider range of food products on more liberal terms of access, which are also extended to some temperate zone products. Section II showed that numerous food products enjoy a rapid growth of consumption and import demand. However, African ACP suppliers are hardly present on this market. The few dynamic exports of importance from Caribbean ACP countries include mainly rum and cigars. There were hardly any dynamic exports from African countries exceeding $10 million in 1999. On the other hand, ACP exports to the United States were over-represented in products where the domestic market suffered a substantial decline. The new facilities created under the AGOA may facilitate access by African countries to the United States for food products (see section III below).

Consumer concerns and government policies in developed countries emphasize the importance of nutrition for health, which holds good prospects for future market growth of fruit and vegetables. Studies in EU on health and nutrition indicate that there is much scope for raising consumption of these products. France, for example, has adopted a National Nutrition and Health Programme, with the prime objectives of increasing consumption, inter alia, by doubling the number of consumers eating fruit and vegetables at least twice a day.^[49] Such programmes imply a substantial rise in supplies, especially off season, and a widening of the assortment available on French and other European markets. The United States also has programmes to promote fruit consumption. Promotional measures that may be implemented under such programmes should guarantee future export growth for developing country and other off-season suppliers.

A sustained trend of strong and steady growth of consumer demand for organic and “bio- products” in developed countries has provided exports of these products with a viable and sometimes high value added market niche. Changes in dietary habits among many segments of the population, increased health awareness and the increasing demand for a wider variety of products are contributing to this growth. Demand is expanding particularly rapidly for organic horticultural products in the United States, the EU and Japan. However, consumers of organic food are highly demanding regarding the safety, production, processing methods, and the ecological and social aspects of production. They demand full transparency, traceability and control of the products and zero default. For the time being, the market share of organic products in total food sales is still small, ranging from 1 percent to 3 percent.^[50] A few developing countries have small market shares for organic fruit. For example, producer cooperatives in the Dominican Republic and Ghana export organic bananas to the EU at prices higher than those obtained for traditionally grown bananas. On the other hand, the cost for “organic” certifications are high.

Food industries largely remain a domain of the developed countries and their TNCs. The major countries are themselves leading exporters of many processed food products. Their companies predominate in many food, fruit, cereal, beverage and tobacco industries, including those in which developing countries have a strong export and production base. The United States and the EU are the leading world exporters of roasted coffee, and the EU of coffee extracts (far ahead of Brazil and Colombia). The European Union is the top exporter of cocoa butter and cocoa powder, ahead of Malaysia, Indonesia and Côte d’Ivoire. The United States remains among the top exporters of fruit juices, whereas Brazil now leads in frozen orange juice. Canned and prepared pineapples are the major products where developing countries dominate world markets: Thailand, the Philippines, and Indonesia, followed by Kenya. The continued predominance of these suppliers on world markets is due to the financial and marketing strength of their companies. Their major assets include their brand names, their capacity to ensure consistently high quality, product innovation and publicity campaigns, as well as closeness to consumers combined with low transport costs.

Governmental policy also plays a role. High regional preferences within integration groupings, high import protection through tariffs, tariff escalation and anti-dumping measures, regional, research and other subsidies for developing agricultural processing, export subsidies and special export credit schemes contribute to maintaining or expanding production in industrialized countries. This makes it difficult for new exporters of processed food from developing countries to enter major markets. Some of their companies have nonetheless proven that it is possible to succeed as medium-sized exporters or TNCs in developing countries, or by means of subcontracting for retail chains.

Contrary to frequently taken positions, the markets for agricultural, fishery and food industry exports are not saturated; the challenge to farmers and business is to exploit new opportunities in the face of intensified competition. Governments can influence the future size of markets through multilateral negotiations, the negotiation of Regional Economic Partnership Agreements (REPAs) between ACP countries and the EU, regional integration and bilateral free trade agreements with other countries.

B. Prospects likely to derive from the Doha Round

Over the medium term, major changes may be expected to result from the multilateral trade negotiations under the Doha Round. In view of the negotiating objectives set for agriculture, above all one may expect further tariff reductions. A substantial reduction of peak tariffs to commercially viable levels would remove the prohibitive nature of many extremely high duty rates. A substantial increase of MFN tariff quotas can make a further important contribution to future growth of agricultural trade, if countries are committed to apply zero tariffs, set them at commercially meaningful levels and enlarge them rapidly.

The removal of the sizeable export subsidies and subsidized export credits granted mainly by major developed countries will enable developing countries to increase domestic production, regional trade and third country exports of cereals, rice, sugar, a number of fruits and vegetables, bovine meat, poultry, cheese and other dairy products, canned fruit and fruit juices, cereal products, sugar products, soy bean and sunflower oils, and milk-based products.

Subsidies granted to producers loom large in major developed countries. The Uruguay Round achieved little actual reduction in regard to subsidies. Whether proportional to production or de-linked as income support to producers, subsidies severely limit the markets for efficient third country producers, reduce the level and growth of consumption and enable producers in these countries to be artificially competitive on domestic and export markets.

An autonomous reduction of the extremely high producer subsidies is presently under consideration, for example, for cereals and sugar by the EU and for milk products by Switzerland. This reduction should enhance market prospects for developing countries in such products. On the other hand, the EU’s enlargement to a number of Central European countries will expand the coverage of the CAP, its protection and producer subsidies to the new Member States. The introduction of new producer subsidies in countries such as Poland, Hungary, and later on in Romania, is likely to stimulate production and absorb much of potential market opportunities that would otherwise arise on the EU market from future steps of market liberalization and growth of consumption.

The United States has reversed the direction of its farm policy reform and significantly raised actual expenditure on farm subsidies since 1998. The new Farm Bill of 2002 expanded the range of agricultural subsidies and put the former ad hoc increases on a regular basis (see section V.D).

It is, therefore, particularly important that the Doha Round succeed in effectively reducing the level and scope of all subsidies to agricultural producers without distinguishing among them. There is an urgent need to counterbalance the effects of expansion of new types of schemes, their country and product coverage, and hence their effect of petrifying past patterns of production in countries, which can only remain competitive at rising expenses for farm subsidies. Markets could be significantly expanded by measures promoting structural adjustment. Production subsidies should be reduced in favour of support to farmers who achieve only low productivity to diversify into activities providing them collateral and alternative incomes (such as tourism, rural support services or agricultural processing). All countries should phase out export subsidies to allow a gradual shift of production in the direction of more efficient patterns, without a risk of temporary supply shortages. The next agreement on agriculture should set a target date for the end of the special transition period for the agricultural sector so as to finally integrate agriculture into the general WTO agreements.

The Doha Round could make a particularly important contribution to poverty alleviation by removing the subsidies in the fishery sector. The high subsidies granted in major fishery countries for the construction and modernization of fishing vessels are inconsistent with resource management objectives, since several fishery resources have become scarce in most seas. Removing subsidies could contribute to re-establishing the lost balance, conserving and replenishing the resources in the North Atlantic, and reducing pressures on developing countries for opening their fishing grounds to foreign fishing fleets. Reduced subsidies would further enlarge markets for fishery products from developing countries. GSP preferences should be extended to all fishery products of developing countries, beyond the LDCs, to assist them in facing fierce international competition from large-scale industrial fishery. Maintenance of high tariffs in their regard, reaching beyond 20 percent, is no longer rational when retail trade and processing industries confront increasing sourcing problems. In turn, poverty could be substantially alleviated in developing countries, as fishery products are now the single major export product of a large number of developing countries, including most LDCs, and more generally, the poor populations in many others.

The next Round will not risk rendering the preferential approach insignificant. As seen above, even under optimistic assumptions, tariff rates for many agricultural and processed products will remain high after the conclusion of the Doha Round. In some cases, such as sugar, dairy products, meat, wheat, rice and other cereals, as well as their processed products, MFN tariffs of some countries are even likely to remain at peak levels (e.g. in a range from 20 percent to 30 percent and above). This will assure the continued effectiveness of preferences under the various special preferential arrangements of major developed countries, including for products covered by the GSP for LDCs and other developing countries.

C. Prospects likely to derive from Regional Economic Partnership Agreements and the “Everything But Arms” scheme of the European Union

European consumption of food can be boosted by the progressive liberalization of the EU market for basic foodstuffs and food industry products by multilateral and preferential measures. There is room in several member countries for a significant further rise in consumption levels of several raw and processed products. New initiatives for reforms of the Common Agricultural Policy should provide further scope for enlarging product coverage and depth of preferences in that sector.

Regional Economic Partnership Agreements (REPAs)

The REPAs to be negotiated between ACP groupings or countries and the EU should substantially improve the market prospects of these countries for raw and processed agricultural products. Since ACP countries will have to grant free access to all industrial and agricultural exports from the EU, they can in turn expect full liberalization of their agricultural market access by the EU, as required by the WTO rules. Any small exceptions during the transition period ought to be reserved for safeguarding ACP production and should not be pre-empted by protecting agricultural production in the EU. All import duties, including the specific duties and duty components that are still levied on imports from ACP, ought thus to be removed. In particular, the liberalization of access for rice, maize and other cereals, sugar, bananas, beef and other meat products should open major new market prospects and investment opportunities for all ACP countries. Even where those countries now enjoy special price advantages or zero tariffs within tariff quotas, full liberalization will result in significant improvements, because these tariff quotas have not been enlarged for decades. Furthermore, the proposed changes in the CAP for beef, sugar and cereals will imply the reduction of prevailing EU prices, and hence of the price presently obtained or guaranteed for ACP exports.

In the past, there has therefore been little incentive to invest in products without prospects for expanding exports. Preferential liberalization would open substantial opportunities for ACP producers to access a sector, which in fact comprises the bulk of the consumption of food and food industry products in the EU. Full liberalization could give ACP suppliers a competitive edge as early starters over other suppliers and stimulate agricultural investments. REPAs should also boost prospects for establishing processing industries in ACP countries, as the specific duty components for high-priced raw materials will be removed, and further instruments for investment cooperation should be in place.

“Everything But Arms” arrangement for LDCs

The “Everything But Arms” (EBA) arrangement, which entered into effect in March 2001, provides for the removal of all duties on all imports of the EU from LDCs, except arms. This new scheme immediately changed the market access for LDC countries for most raw and processed agricultural products. (Imports of manufactures and industrial raw materials from these countries were already duty-free before.)

The Asian LDCs - namely Afghanistan, Bangladesh, Bhutan, Cambodia, Laos, the Maldives, Nepal and Yemen - are the major beneficiaries, as they obtained full liberalization for a widely enlarged range of agricultural and processed agricultural products, compared to their former LDC treatment.^[51] Duty-free access and major preferences have been made newly available for their important export products, including beef, sheep, goat and chicken meat and their processed products, several fresh and processed vegetables, fresh nuts, oranges, other major citrus fruit, apricots and other fresh fruits, several spices, cereals and flours. Furthermore, the removal of high specific duties or specific duty components for numerous primary and processed products resulted in substantial price advantages vis-à-vis major suppliers exporting at MFN conditions. This amounted to more than 80 percent for maize, 75 percent for manioc (above tariff quotas), 12 percent to 18 percent for several fresh fruits and vegetables (increasing with low export prices) and groundnut products, 25 percent to 60 percent for canned pineapples as well as juice from oranges, pineapples, apples and other fruit; well and 50 percent to 75 percent for cigarettes and smoking tobacco. LDC exports are subject to the general provisions and rules applicable under the GSP scheme of the EU, including its limited duration, conditionalities and origin requirements. In other words, all major raw materials such as fruit, vegetables, tobacco or sugar must originate in the exporting country. Nonetheless, exporters in Asian LDCs can make use of partial cumulation of origin for inputs from their respective sub-regional groupings, namely the Association of South East Asian countries (ASEAN) and the South Asian Association for Regional Cooperation (SAARC).

LDC countries belonging to ACP also immediately enjoyed substantial new advantages for a range of agricultural, and in particular processed, products. The EBA scheme offers significant improvements over ACP treatment, because it eliminates all specific duties still maintained under the Cotonou Agreement. For example, it removes duties for cereals, beef and other meat, their processed products, sugar-containing processed products, such as fruit preserves and juices, as well as for sweetened cocoa powder. Several ACP LDCs are important exporters or have a potential for exporting these products to the EU. Exporters opting for the LDC preferences rather than for ACP treatment are subject to the general GSP conditions and origin requirements for these products. They lose the advantage of regional cumulation within ACP (which may be important in cases such as mixed products, tobacco products, fruit preparations and juices or cocoa powder containing sugar).

For three highly import-sensitive products, import liberalization will be phased in during a transition period, and at the latest completed in 2009. Import duties for fresh bananas from LDCs are being reduced by 20 percent annually until 1 January 2006. This measure is important for several ACP- LDCs, as the duty-free tariff quota for imports from ACP countries is fully absorbed by the traditional ACP exporters.^[52]

For sugar and rice, two major export products of LDCs in all regions, tariff reductions will start only in September 2006 and reach zero in September 2009. In the meantime, the EU opened duty-free tariff quotas for the following products: rice (and rice products under HS number 1006) will grow from 2 500 tonnes in 2001/2002 to 6 700 tonnes in 2008/2009; and the tariff quota for sugar will grow from 74 000 tonnes in 2001/2002 to close to 200 000 tonnes in 2008/2009, before being fully liberalized by the EU. In terms of actual LDC exports, major trade effects of the EBA scheme will be felt, by and large, as of the marketing year 2007/2008, when duties will have been halved and the size of duty-free tariff quotas more than doubled. The Commission, in cooperation with Member States, monitors imports of rice, sugar and bananas from LDCs. The preferences may be suspended in cases such as fraud, failure to comply with origin rules, or huge increases in imports into the Community beyond the usual output or export capacity of the LDCs concerned.

Rice and sugar are major well-established exports to the EU of many LDCs among the ACP countries and in South Asia. Duty-free access will enable LDC suppliers to compete on equal footing with the high-cost suppliers of beet sugar in the EU and new future Member States. Sugar and rice preferences amount to, on average, more than 70 percent over other suppliers subject to MFN rates. The special LDC arrangements should, therefore, provide powerful incentives to boost production of sugar and rice for exports and have a high potential for alleviating poverty in these countries.

The EBA initiative can also encourage production and exports of food industries in LDCs. It remains highly important that regional cumulation of origin be maintained for inputs sourced from any ACP country, in order to enable LDCs to benefit from indirect exports of raw materials used by the food industry in neighbouring countries for the manufacture of products exported to the EU. It should therefore be considered to add the sub-regional groupings among ACP countries - or, preferably, the ACP-Group of countries - to the list of groupings for which cumulative origin can be applied under the GSP scheme of the EU.

A recent joint study by the Commonwealth Secretariat and UNCTAD estimated the expected ex ante benefits of the EBA scheme for selected LDCs. The study concludes that the LDCs surveyed will unambiguously gain from the EBA initiative, although the export increase will be small. The three main beneficiaries will be Malawi, the United Republic of Tanzania and Zambia: their exports being expected to increase by 2 percent to 6 percent, once EBA will have been implemented in full.^[53] The estimated impact on the European Union from granting the preference is negligible in every respect, the only sensitive sector being sugar.^[54] For this product, the effects are subject to the outcome of the proposed revision of the EU sugar policy.

The benefits to LDCs will be much greater if the United States, Canada, Japan follow the lead of the European Union and offer full duty- and quota-free access for all products from LDCs. In this case, LDC exports will increase by approximately 3 percent, the United Republic of Tanzania, Malawi and Bangladesh being the main beneficiaries with export increases ranging from 8 percent to 10 percent. Exports of Zambia, Uganda and the average for sub- Saharan African LDCs would increase by about 2 percent.^[55]

D. Prospects deriving from the African Growth and Opportunity Act, and other recent improvements in preferential arrangements of the United States

Prospects for least developed, African, Caribbean and Andean countries

The United States’ market offers substantial prospects for further expansion, since market access conditions have been progressively improved after the Uruguay Round for a range of agricultural products, especially in favour of eligible least developed Caribbean, Central American and Andean countries. As the combined result of already prevailing zero or low MFN duties and recent improvements of special preferences, these countries now enjoy a substantial potential for export growth. In screening the list of eligible duty-fee products, one finds several export products of these countries, notably, chilled and frozen fish, shrimps and other crustaceans; lamb and goat meat; most flowers and plants; most fresh and frozen fruit (including bananas, pineapples and other tropical fruit, stone fruit and berries), nuts and vegetables, manioc and arrowroot; raw and roasted coffee, tea, cocoa, cocoa butter and paste; spices; cereals and flours, including raw and milled rice, grain sorghum, millet, maize and wheat; soybeans, palm nuts and most other oilseeds; as well as a range of other raw vegetable products and materials, such as lac, gums, and dyeing and tanning products. Duty-free and low-duty products offer a large potential for horizontal diversification because they include several products with expanding demand in the United States. There are few other governmental measures constraining markets, such as subsidies, for many of the products listed, but they remain important for cereals, soybeans and groundnuts.

Eligible countries also enjoy favourable prospects for promoting processing and vertical integration in such duty-free (or low-duty) sectors such as vegetable oils and fats, meat preparations and canned meat, prepared and canned shrimps, octopus and other crustaceans, pasta, cornflakes, bakery and tapioca products, vegetable and fruit preparations and preserves, instant coffee and other coffee extracts, beer, wine, rum and tafia and other alcoholic beverages.

High preference margins are enjoyed by eligible least developed, Caribbean and other countries vis-à-vis other suppliers for some of their readily exportable agricultural and processed agricultural products. They range, for example, from 11percent to 22 percent for many fresh, frozen and prepared vegetables (including frozen potatoes, prepared and canned tomatoes and pimentos, etc.), sweet corn, arrowroot and similar tubers, watermelons, frozen papayas and berries, and certain other preserved and prepared fruit and nuts, soybean and groundnut oil, as well as canned sardines. Special preference margins are very high for orange, grapefruit and other fruit juices, and cigars, cigarettes and other tobacco products, and reach up to 30 percent, for example, for dates, melons and preserved apricots and 35 percent for canned tuna.

However, even LDCs (as well as the other beneficiaries of special preferential arrangements)continue to face numerous constraints on the United States market:

Major products, which LDCs can effectively export, remain subject to extremely high tariffs, although their exports of peak tariff products are generally duty-free within the limits of tariff quotas. This is notably the case for beef, subject to above-quota rates of 26 percent and for raw cane sugar that is subject to a prohibitive rate of about 240 percent. All major sugar-based processed products are similarly subject to high peak duties associated with tariff quotas. The above-quota rate for groundnuts amounts to 164 percent associated with a tariff quota of only 9 000 tonnes, which is also applicable to all other countries but Argentina. The MFN duty amounts to 132 percent for groundnut butter, and roasted, salted and preserved groundnuts. Another product of high export importance to LDCs, tobacco for the manufacture of cigarettes, is generally subject to an above-quota rate of 350 percent, with tariff quotas at the preferential zero duty of 10 000 to 12 000 tonnes for Malawi, Zimbabwe and Guatemala. The tariff quota amounts to only 3 000 tonnes for all other countries not having negotiated their own tariff quota with the United States (and applies, for example, among the LDCs, to Zambia). Most milk products, cheese and other dairy products are also subject to high peak tariffs and tariff quotas.

LDCs do not yet benefit from zero tariffs for some other exportable agricultural products, such as fresh roses, tomatoes, cucumbers and some other vegetables (in season), fresh sweet corn (the MFN rate exceeds 21 percent), dried onions and garlic (MFN rates reach 30 percent), fresh oranges, mandarins and grapefruit, mixtures of cereals, cocoa powder containing sugar, juices from oranges, grapefruit and pineapples, and preparations based on coffee extracts.

The GSP and LDC provisions are not applied to all LDCs defined by the United Nations. Coverage under the LDC scheme extended to 38 LDCs only. Some LDCs are not covered by GSP; Afghanistan and Laos did not enjoy MFN treatment until 2001

Furthermore, the United States maintains high duties for imports of clothing, textiles, shoes, leather goods and certain other manufactures from LDCs that are not eligible for preferences under AGOA or the Caribbean Basin Trade Partnership Act (CBTPA) as well as for imports that are not eligible under their special apparel provisions (see below).

Prospects under the African Growth and Opportunity Act (AGOA)

In the agricultural sector, AGOA has opened up a substantial new potential for the expansion of raw and processed products from those sub-Saharan African countries that are not LDCs. By 2002, 35 countries were designated as AGOA beneficiaries, including 24 LDCs, as defined by the United Nations. Virtually all others (including Cameroon, Côte d’Ivoire, Kenya, Mauritius, Nigeria and South Africa, but excluding, for the time being, Zimbabwe and Congo Democratic Republic) have been beneficiaries of this scheme since 2002. They newly obtained access to the duty-free preferential treatment granted hitherto to LDCs under the GSP, and now enjoy essentially equal treatment for agricultural products with LDCs, Caribbean, Central American and Andean countries.

AGOA extended duty-free treatment to a few additional agricultural products only. A comparison between the products covered by AGOA and the products previously covered by the GSP for LDCs shows that AGOA countries may newly export tomatoes throughout the year at zero tariffs, as well as celery, sweet corn, dried onions and garlic, oranges, mandarins, grapefruit and juices produced from these fruits.

African LDCs have thus received only little additional benefits for raw and processed agricultural products under AGOA. However, much more important additional benefits are likely to accrue to them in the industrial sector for exports of certain clothing products, textiles, metals and, eventually, for petroleum products. Only about half of all LDCs, as defined by the United Nations, have access to AGOA or CBTPA preferences, and one-third of the African LDCs were not eligible for AGOA benefits in 2002.

An analysis of trade performance under AGOA thus far clearly indicates that for a wide range of beneficiaries its main potential is essentially in promoting clothing exports. In addition, a few African countries other than LDCs were able to raise substantial new exports of petroleum products; South Africa increased motor vehicle exports under this scheme. Total imports of the United States from AGOA beneficiaries were likely to fall from $19 billion in 2001 to about $13 billion in 2002, mainly due to the lower price for petroleum products, which account for the bulk of imports, as well as of preferential imports under AGOA (essentially from Nigeria and Gabon). By contrast, preferential trade in other products covered by the scheme has risen substantially: combined preferential imports under GSP and AGOA are estimated to rise from $6.6 billion in 2001 to about $8 billion in 2002.^[56]

Preferential imports of agricultural products from eligible countries are small. Total imports were likely to account for about $180 million in 2002, of which $80 million were imported duty-free under AGOA and GSP. This trade has not increased significantly since 1999/2000, except for South Africa, being the main country with a capacity for raising rapidly new agricultural exports due to AGOA. Ghana increased its agricultural exports under the GSP provisions, while in Madagascar, preferential exports of agricultural products shifted from GSP to AGOA without increasing significantly. AGOA plays only a small role for forest products; and United States imports from AGOA countries generally have stagnated since 1999.

Many eligible LDCs and other African countries have rapidly responded to the new export facilities created by the special provisions for clothing and textile exports to the United States. Two factors have particularly contributed:

• AGOA removed the quota constraints on textile and clothing imports from Kenya and Mauritius.

• Most sub-Saharan African countries can export to the United States clothing duty-free that is manufactured from fabric imported from anywhere in the world until 2004. This facility is available to beneficiaries whose per capita GDP does not exceed $300, as well as to Botswana and Namibia, and is subject to an overall ceiling for imports under special provisions from all AGOA beneficiaries.

Countries wanting to access the special regime for textiles and clothing must implement the special origin rules and establish an effective visa system as well as an enforcement mechanism to prevent illegal transhipment. By September 2002, 18 countries were eligible under the apparel provisions, of which 16, including 10 LDCs, were effectively accredited under the special origin rules for apparel. Preferential, duty-free clothing exports are likely to multiply from some $100 million in 2001 to about $700 million in 2002. Much of this new trade is due to AGOA preferences. These new exports are widely spread among African beneficiaries, including not only the traditional exporters, South Africa, Kenya and Mauritius, but also Lesotho, Madagascar, Malawi, Botswana and Ethiopia (in descending order of preferential exports). Such exports have a high-income impact, which spreads to the rural and urban poor. As clothing production involves a high proportion of women, these exports provide a second income to many poor families, thus increasing their capacity to buy food and other essentials and lifting them above the poverty line.

The records for the initial period of implementation also clearly indicate that the results achieved by AGOA were modest for most eligible countries in all other sectors, not only for agricultural products, but also for labour-intensive manufactures. These manufactures gained new duty-free market access to the United States, such as leather products and footwear, in spite of extremely high preference margins.

Possible improvements of the impact of preferences granted by the United States and other developed countries in favour of LDCs and other low-income countries.

The effectiveness of selective preference schemes, as applied by the United States and other developed countries such as Japan and Canada, should be further enhanced in depth, coverage and, especially, in their investment impact in favour of LDCs and other small, low-income countries. Country coverage of enhanced benefits should, in principle, be extended to all LDCs designated by the United Nations. Product coverage should be synchronized by extending additional benefits accorded under special preferential arrangements to all LDCs.

Over the medium-term, the United States, Japan, Canada, Norway, Switzerland, Australia and other preference-giving countries should, in line with declared policy objectives, progress further towards granting duty-free market access for all products imported from LDCs as defined by the United Nations. (This should eventually be extended to those smaller, low-income countries that already enjoy comparable preferential treatment in the Caribbean, Central American, Andean and Pacific regions, as well as to sub-Saharan African countries that are not LDCs.)

If the policy objective is to achieve a high impact on alleviating poverty, imports of raw and processed agricultural products should be rapidly liberalized across-the-board and without limiting them by tariff quotas. Trade data confirm that LDCs have only a limited trade importance and slow trade performance with regard to almost all products that may be highly import-sensitive for production in a country like the United States or other developed countries. Tariff quotas should rather be exceptional for products where LDCs have an important market share and are highly competitive exporters: initially, sub-quotas could be opened especially for LDCs, in addition to the WTO quotas, and rapidly increased in view of a firm deadline for their definite removal. However, for most products, a special safeguard clause, as usually applied in preferential schemes, should suffice and obviate the need for ex ante limitations with regard to imports from LDCs. Removing the tariff quota limitations on duty-free access of agricultural products by preference-giving countries concerned, could also encourage investment into export-oriented agriculture and food processing in LDCs.

In order to achieve a major impact on growth and diversification of agricultural production and investment, the security and reliability of free market access need to be improved for domestic and foreign investors. At present, under most preference schemes, apart from possibly EBA, investors cannot rely on a sufficient duration of duty-free market access for recuperating their capital. For example, the AGOA scheme attaches a multitude of political and social conditions to its benefits. Each country is surveyed annually with respect to:

• its progress towards: improving labour rights, reducing child labour; establishing democracy, the rule of law and human rights, and anti-poverty policies;

• its struggle to improve government, fight against terrorism and drugs;

• and a wide range of other criteria, some relating to governments.

These conditions are hardly met in their totality by any country. Further, it is difficult to evaluate progress objectively from year to year. The required annual confirmation creates a substantial degree of uncertainty for investors as to whether exports to United States will be effectively sustainable. After two rounds accomplished of comprehensive annual country reviews having been accomplished, it should now be possible to move to a more durable formula. Major reviews could be spaced over three or more years to provide for a minimal payback period for investments. Such investments are indeed required to spur diversification into new directions and products, which have some export prospects but require technology, capital and an intensive learning process by African producers.

The GSP scheme applied by EU is increasingly subject to economic and policy conditionality with regard to all beneficiaries, and the exact conditions of future market access for specific agricultural products to the EU from ACP countries are still to be negotiated by groupings or countries.

The original proposal had been to bind in WTO duty-free treatment for all products from all LDCs as defined by the United Nations. Although duty-free treatment for LDCs continues to be implemented as part of their GSP schemes, preference-giving countries should emphasize the investment aspects of LDC benefits, ensure multi-annual duration of LDC benefits, remove ceilings and tariff quotas and, to the maximum extent possible, refrain from applying policy conditionalities to these countries.

E. Supply-side policies

The major area for policy action lies on the supply side. Governments in many producer countries will have to focus on strengthening supply capacities and raising the competitiveness and attractiveness of export-oriented food and agricultural products. Developing countries have been able to build up a strong and competitive supply base for many of the agricultural and processed food products, which enjoy growing opportunities in major world markets. Certain competitive suppliers have rapidly expanded their exports of products, enjoying growing world demand. In some cases, developing countries have been able to raise their exports to stagnating or even shrinking markets in competition with developed country suppliers. The opening of low-duty tariff quotas and the expansion of preferential benefits to include agricultural and food industry products have contributed to this trend.

However, in many ACP and Caribbean Basin countries the supply base has remained very narrow. These countries have rarely participated in the trade growth for those food products for which world markets are growing fastest. African market shares decline with each further stage of processing, and some export success proved possible only on the European market. These trends point to major deficiencies in the supply base in ACP countries: insufficient flexibility of suppliers to adjust to changes in world demand, along with failure to rapidly grasp new opportunities arising from shifts in consumer demand, trade liberalization or new preferences.

Developing countries themselves need to do more to strengthen the capacity of agricultural exporters and processing enterprises. International support should focus more directly on production requirements for export markets. The narrow production base for exportable products calls for measures to raise private investments in poor countries with limited market size: investors generally prefer large markets with low risks, dynamic growth and high domestic purchasing power.

To counteract a frequently negative perception of high investment risk in many African countries and other LDCs, it would be essential to reduce the payback period of capital to the maximum extent possible. Most African countries and other LDCs have put very generous investment regimes and incentives into place. Developed countries should provide their complementary contribution. These countries should renounce on levying any income and corporate taxes from their investors during an initial period of at least five years for agricultural and agro-processing investments in poor countries with a limited market size. Alternatively, investment incentives granted by poor countries could be partly or fully taxed away even if tax credits are granted. Combined initial tax relief could considerably shorten the pay-back period and reduce the risk incurred by investors, especially in the volatile agricultural production. At a rate of return on capital of 15 percent per annum, the full amount of the investment capital could thus be amortized within 5 years.

Moreover, a bigger impact of existing trade preferences on investments could further be achieved by renouncing on the condition of a bilateral investment guarantee agreement in poor countries with limited market size (i.e. in LDCs and countries with similar treatment). AGOA seems to open up some flexibility in that respect; some other developed countries also have flexibility to offer investment guarantees in particular cases for specific investment projects.