The purpose of this InBrief series is to provide a synthesis of the main elements and issues at stake for the 6 African, Caribbean, and Pacific (ACP) groupings negotiating an Economic Partnership Agreement (EPA) with the European Union (EU). Each InBrief offers an overview of the economic and regional integration dynamics influencing the structure, pace, and outcome of the EPA negotiation process for each region. It also focuses on the main issues and challenges to be tackled by each region in order to make the new trade arrangement a development oriented instrument. Each regional InBrief is complemented by an update on the ongoing EPA negotiation process. Every 6 months until the conclusion of the EPAs, a new update will be produced.

Introduction

The Pacific ACP (PACP) region¹ is composed of small island states spread across a large portion of the southern Pacific Ocean. The development challenges facing the region are largely a function of the peculiar characteristics of its island states. They are diminutive in size, geographically dispersed, isolated, vulnerable to natural forces (including climate change and sea-level rise) and have scarce energy resources. Their geographical features, diversity of cultures and languages and the breadth of the ocean contribute to the beauty of the Pacific Islands, but also constitute a serious obstacle to their economic development, and especially to the expansion of markets (both domestic and regional)² and foreign trade. Indeed, the region suffers from significant competitive disadvantages and stagnant economic growth, particularly due to high transport costs (affecting both imports and exports) and low and declining investment flows (both domestic and foreign). As might be expected from their geographical position, the main trading partners of PACP countries are Australia and New Zealand (as well as the United States for some). The PACP countries have little trade with the European Union, except for Fiji, Papua New Guinea and Vanuatu.

At the regional level, the PACP countries are currently pursuing their own economic integration process. At the same time, they are involved in a series of external trade negotiations at the multilateral level in the context of the World Trade Organization (WTO) as well as bilateral negotiations with regional partners. In particular, PACP states are negotiating an Economic Partnership Agreement (EPA) with the European Union which is to replace, by 1 January 2008, the more than thirty-year-old Lomé non-reciprocal preferential trade regime.





The Pacific ACP Regional Integration Process

Regional integration among PACP countries has been slow. This is not surprising considering the small, scattered and isolated character of the islands, which are located thousands of kilometres away from one another and from their closest regional trade partners. Economic conditions within the region are also highly diverse,³ as are the ethnic, cultural and historical features, which identify three distinct groupings of countries (Melanesia, Micronesia and Polynesia). Nonetheless, the Pacific Islands are involved in several overlapping regional and international agreements encompassing trade and political and economic cooperation.

In 1971 the independent Pacific Island states, together with Australia and New Zealand, established the Pacific Islands Forum, an institution embracing all regional cooperation initiatives in the southern Pacific, today comprising the fourteen PACP states, plus Australia and New Zealand. This institutional configuration reflects one of the most distinguishing features of regional dynamics of the PACP group: well before initiating their own integration, PACP countries bound themselves into a broader regional integration process with Australia and New Zealand, the two most proximate developed economies, which are also their major donors and trade partners. The two regional integration processes – that among the PACP countries and that encompassing the PACP plus Australia and New Zealand – are intimately linked. Even the institution supporting and coordinating the two integration efforts is the same, the Pacific Islands Forum Secretariat.

The Pacific Island Countries Trade Agreement (PICTA), signed in 2001, is the free trade agreement of the developing nations of the Pacific Islands Forum. Although it has been in force since April 2003, tariff reductions have yet to commence, due to signatories´ delays in submitting the required documentation and notifications.⁴ While initially based on trade in goods, the possible extension of the PICTA to include trade in services is currently under discussion. The current geographical configuration of the PACP countries for the EPA negotiations with the European Union coincides with the fourteen Forum countries that are also party to the PICTA.

An important component of the ongoing integration processes in the PACP is the Melanesian Spearhead Group Trade Agreement (MSG), comprising Fiji, Papua New Guinea, the Solomon Islands and Vanuatu. The MSG entered into force in July 1993 and has since shown considerable progress. This sub-regional agreement, aimed at liberalising trade among the Melanesian countries, involves four of the larger economies in the region, which are also by far the largest EU trading partners among the PACP states.

International Trade Negotiations

The PACP countries are currently engaged in a series of negotiations that should foster their integration into the world economy. In addition to their own regional integration process, PACP states are involved in economic cooperation initiatives within the Pacific Islands Forum, in the WTO Doha Development Round and in the EPA negotiations with the European Union.

In 1980 Pacific Islands Forum member states concluded the South Pacific Regional Trade and Economic Agreement (SPARTECA), a preferential trade agreement whereby Australia and New Zealand granted duty-free access to exports from the developing island countries of the Forum. A further step was the concurrent signing in 2001 of PICTA and the Pacific Agreement on Closer Economic Relations (PACER). PACER entered into force in October 2002 as the regional trade and economic cooperation agreement between all Forum members, including Australia and New Zealand, with a focus on trade facilitation. It includes a “triggering mechanism”, the obligation on the part of the fourteen Forum island countries to start negotiating free trade arrangements with Australia and New Zealand should they commence formal negotiations for such arrangements with one or more developed non-Forum country (including the European Union).⁵ Consideration is also being given to expanding both PICTA and PACER to include the Pacific Territories of France⁶ and the United States.⁷ Due to slow progress in the existing regional integration processes and considering the increasingly serious challenges of globalisation, all members of the Forum launched in April 2004 the Pacific Plan, an ambitious programme of cooperation and integration for the Pacific. The plan envisages the pooling of scarce regional governance resources, reform of regional integration organisations and the aligning of policies to strengthen national capacities. The objective is to achieve deeper political and economic integration in a time span of ten years.

With respect to multilateral trade negotiations, only three of the fourteen PACP states are WTO members (Fiji, Papua New Guinea and the Solomon Islands) and three others (Samoa, Tonga and Vanuatu) are negotiating accession. Nonetheless, all PACP countries have a direct interest in the outcomes of the Doha Round. This is first because the WTO rules have a direct impact on international trade and second because all EPAs must be WTO compatible.⁸ Especially important for the PACP-EU EPA negotiations will be the WTO outcomes regarding the Small Economies Work Programme and the specific language on special and differential treatment.⁹

Economic Partnership Agreement Negotiations

In previous ACP-EU cooperation agreements, all ACP countries enjoyed non-reciprocal tariff preferences for their exports to the EU market. Under the Cotonou Agreement, this will change from 2008 onward, when reciprocal free trade arrangements negotiated at the regional level between the European Commission (EC) and the six ACP regions will replace the previous preferential trade regime. These new agreements must be compatible with the rules of the WTO, development-oriented and build upon ACP regional integration initiatives. The new trade regime must also incorporate and improve upon the Lomé/Cotonou instruments regarding access to the EU market for the ACP countries.

Pacific ACP-EU EPA Negotiation Principles

The PACP-EU EPA is to be based on a number of principles detailed in a joint road map agreed upon at the official launching of the negotiations on 10 September 2004.

First of all, the EPA must be an instrument for development, with the development dimension reflected in all aspects of the negotiations. Specifically, the PACP-EU EPA should promote the development objectives of the countries of the region in a way that is consistent with their own development strategies. It should include provisions to enhance their production, supply and trading capacity, as well as their capacity to attract investment. Negotiations are to take into account the special economic, social, natural and geographical constraints of the PACP as island states, as well as their capacity to adapt their economies to the EPA process. In particular, meeting EPA-related adjustment costs, such as upgrading productive structures, diversifying exports, developing human resources and institutional capacity, and maintaining adequate fiscal revenues, will constitute a substantial challenge. In that regard, the negotiating parties have agreed to seek financial assistance for projects and programmes to accompany the negotiation and implementation of the EPA, through Cotonou Agreement instruments and complementary resources.

A second fundamental negotiation principle is that the EPA should take account of the different needs and levels of development of the individual PACP countries. Special and differential treatment should be provided to all PACP states, which differ greatly in size, development, income level, resource base and expected adjustment costs. Particular consideration should be given to the constraints facing the least developed countries and the smaller island states. The EPA is moreover to encompass a variety of forms of special and differential treatment, not only longer transitional periods and technical assistance, but also measures that effectively address the PACP states’ critical constraints of size, dispersed land masses and populations, and isolation from major markets and sources of investment. Flexibility and asymmetry are to be incorporated into the broadly agreed EPA framework to allow individual countries to adjust the pattern and schedules of implementation to their own national circumstances.

A third crucial principle for the negotiations is that the EPA must build on the regional integration processes under way among the PACP states, to complement and support integration initiatives, the harmonisation of regional trade-related rules and the consolidation of regional markets. Consequently the pace of trade liberalisation between the PACP and the European Union should be a function of the degree of regional economic integration achieved. The EPA is also likely to have important implications for the PACP states’ existing legal commitments with other regional trading partners. The triggering of PACER with Australia and New Zealand, for instance, may have significant impact on the region’s overall development efforts. Such implications need to be reflected in all areas of the negotiations, so that the EPA constitutes a significant net contributor to the island states’ development.

PACP Negotiating Structure

Negotiations between the PACP and the European Union will take place at two levels: the ministerial level and that of the senior negotiators. The PACP states chose the trade ministers from the Cook Islands, Fiji, Papua New Guinea, the Republic of the Marshall Islands, Palau, Samoa, Tonga and Tuvalu to form the Regional Negotiating Team (RNT) with primary responsibility for the conduct of the EPA negotiations. Within the RNT, ministers from Fiji, Papua New Guinea, Samoa, Tonga and Tuvalu are to be spokespersons and the Hon. Kaliopate Tavola, Minister of Foreign Affairs and External Trade of Fiji, the lead spokesperson for the Pacific region as a whole. At the senior negotiators’ level, the RNT has established negotiating groups on specific issues. Each negotiating group is led by a senior Pacific trade official and include Pacific ACP ambassadors and/or other senior officials and experts from PACP states.

Key issues and challenges

A number of challenges arise from the EPA negotiations.

Tariff reduction and other links with the overall regional integration process
The direct economic impact of a PACP-EU EPA might be minimal because trade with the European Union accounts for only a small proportion of aggregate PACP imports. However, an EPA could have significant indirect effects on the region’s trade relations with third parties, particularly the PACP states’ main trading partners, Australia and New Zealand, through the triggering of PACER. Although PACER does not legally require that a PACP EPA with the European Union be matched by an equivalent arrangement with Australia and New Zealand, it could be argued that due to their much greater importance for the PACP states and the political realities of these relationships, the outcome would be a free trade agreement with Australia and New Zealand providing a degree of reciprocity similar to that in the EPA. This could constitute an opportunity, for instance, if liberalisation of the movement of natural persons (Mode 4 of the General Agreement on Trade in Services) from the PACP countries was granted by the European Union and subsequently by Australia and New Zealand. But it also presents risks. In particular, since Australia and New Zealand are the dominant suppliers of imports to all countries in the region, the same market access concessions to the European Union and Australia and New Zealand under a free trade agreement would result in a serious loss of government revenue in the many PACP states that rely on import duties. Hence, it is vital for the region to use all of the flexibility and asymmetry allowed in WTO agreements when defining both the product coverage and sequencing of the liberalisation process under the EPA.

Development issues and investment
A key priority for the PACP countries is the EPA’s development component. Effective measures to enhance production and trading capacity, to diversify exports and to develop human resources will be necessary if the PACP economies are to overcome the special economic, social, natural and geographical constraints of small islands and thus concretely benefit from improved market access in Europe. Provisions to improve the region’s ability to attract investment, in particular, will be crucial for raising long-term growth performance and for successful development of key export industries. Emphasis should also be put on raising the PACP’s capacity to comply with EU technical, quality and food safety requirements.

Key sectors: Fisheries, services
Fisheries is vital for most PACP states and is seen as the sector with the greatest potential to contribute both to the region’s integration into the global economy and to its long-term sustainable development.¹⁰ Statements from PACP negotiators indicate that enhancement of the Lomé preferences for fish exports as well as modification of the rules of origin applying to PACP fisheries will have to form a core element of any new trade arrangement.

The services sector is also of great importance to the PACP states. For the smaller states that lack significant manufacturing and agricultural sectors, services (tourism in particular) comprise by far the largest part of their economies. An EPA should therefore emphasise liberalisation of EU market access in service sectors and modes of supply of export interest to the PACP states (mainly tourism-related services and Mode 4), while commitments by the PACP states should come in sectors where liberalisation would enhance efficiency and competitiveness.

Other sectors, like agriculture, forestry and mining, have significant development potential for Papua New Guinea, Fiji and the Solomon Islands and might also be addressed during the PACP-EU negotiations. The reform of the ACP Sugar Protocol will be a key issue determining Fiji’s final position on the EPA, since Fiji faces the prospect of losing its preferential access to the EU market for sugar.¹¹

The membership and structure of a PACP-EU EPA
The Pacific presents several unique elements in the context of the ACP-EU EPA negotiations. First, the trade flows between the parties are relatively insignificant. Second, the major impact of the EPA is likely to derive from its triggering of new trade arrangements with third parties (i.e. Australia and New Zealand). Third, the PACP countries display a marked heterogeneity in terms of size, development, income levels, economic interests, state of preparedness for entry into reciprocal free trade agreements and available bargaining chips.

This, coupled with the fact that the EPAs are not the only option open to the ACP countries¹² and that alternatives are still available,¹³ leads to considerable uncertainties on both the final membership and structure of a PACP-EU EPA. Countries with limited expectations of concrete benefits from improved trade arrangements with the European Union, with very little investment or trade expansion opportunities to offer during negotiations, or with serious concerns regarding government revenue losses and unbearable competition in the event of a free trade agreement with Australia and New Zealand, may consider it a better option to avail of the EU generalised system of preferences scheme and the Everything-But-Arms initiative for the least developed countries. Some PACP states may not yet be ready to enter into an agreement with the European Union for reciprocal free trade in goods. Yet these states may nevertheless be willing to join an agreement on fisheries with both market access and development provisions. Other PACP states might be willing to undertake free trade in goods but may not be ready to conclude an agreement with the European Union on trade in services.

For these reasons, the PACP states have proposed a flexible structure for the EPA. The whole PACP group would sign a master agreement establishing the principles governing the EPA relationship, and individual countries would be allowed to join only those specific “subsidiary agreements” to which they were prepared to commit. This structure would enable all PACP states to participate in the EPA, while accommodating the significant diversity among them and providing the flexibility required by the potential effect of triggering new trade arrangements with larger third economic partners. The negotiations in the coming months will clarify these fundamental uncertainties about membership and structure of a PACP-EU EPA and whether such a flexible approach to the new partnership is indeed viable.



List of acronyms

ACP African, Caribbean and Pacific
APTIAD Asia-Pacific Trade and Investment Agreements Database (APTIAD)
CAP Common Agricultural Policy
EC European Commission
EPA Economic Partnership Agreement
EU European Union
GATT General Agreement on Tariffs and Trade
GDP Gross Domestic Product
IMF International Monetary Fund
MSG Melanesian Spearhead Group Trade Agreement
PACER Pacific Agreement on Closer Economic Relations
PACP Pacific African, Caribbean and Pacific Countries
PICTA Pacific Island Countries Trade Agreement
RNT Regional Negotiating Team
SPARTECA South Pacific Regional Trade and Economic Agreement
SPS Sanitary and Phytosanitary measures
UNDP United Nations Development Program
UNESCAP United Nations Economic and Social Commission for Asia and the Pacific
US United States
WTO World Trade Organization

Overview of regional EPA negotiations InBrief series for 2006-2008 The purpose of this InBrief series is to allow a wide range of ACP and EU stakeholders to have a clear overview on the structure, phasing, key challenges and main developments in the negotiations of economic partnership agreement (EPA) by each of the six ACP negotiating regions: the Caribbean, West Africa, Central Africa, East and Southern Africa, Southern Africa and the Pacific. For each ACP EPA regional grouping, reference is made to other international trade negotiations and their regional economic integration processes. In addition, each InBrief will be complemented by a regular Update that summarises the current state of negotiations. The Overview of Regional EPA Negotiations InBrief series is part of the effort by ECDPM to provide regular information and analysis related to the EPA negotiations. Other contributions include the Negotiating EPA InBrief series which provides non-techincal overviews and syntheses of specific issues that are to be addressed in the EPA negotiations (www.ecdpm.org/epainbriefs), and the Comparing EU FTA InBriefs series which provides a detailed overview of the trade and trade-related provisions of free trade agreements (FTAs) recently concluded by the EU with developing countries (www.ecdpm.org/ftainbriefs). The ECDPM acknowledges the generous support of the Swiss Agency for Development Cooperation, the Ministry of Foreign Affairs in Sweden and the Netherlands for the production of this series. The InBriefs are available online at www.acp-eu-trade.org and www.ecdpm.org/regionalepainbriefs This Overview of Regional EPA Negotiations InBrief series is an initiative by the European Centre for Development Policy Management with contributions of FSanoussi Bilal, Camille Donnat, Nicolas Gerard, Francesco Rampa and Kathleen Van Hove (ECDPM) under the editorial supervision of Sanoussi Bilal (sb@ecdpm.org) and Kathleen Van Hove (kvh@ecdpm.org).

'InBrief' provides summarised background information on the main policy debates and activities in ACP-EC cooperation. These complementary summaries are drawn from consultative processes in which the European Centre for Development Policy Management (ECDPM) engages with numerous state and non-state actors in the ACP and EU countries. The Centre is a non-partisan organisation that seeks to facilitate international cooperation between the ACP and the EC. Information may be reproduced as long as the source is quoted. The ECDPM acknowledges the support it receives for the InBrief from the Ministries of Foreign Affairs in Finland, Luxemburg, the Netherlands and Sweden, the Directorate-General for Development Cooperation in Belgium, Irish Aid, the Swiss Agency for Development and Cooperation, the Instituto Português de Apoio ao Desenvolvimento in Portugal, and the Department for International Development in the United Kingdom.

European Centre for Development Policy Management Onze Lieve Vrouweplein 21 NL-6211 HE Maastricht The Netherlands Tel +31 (0)43 350 29 00 Fax +31 (0)43 350 29 02 info@ecdpm.org www.ecdpm.org ISSN 1571-7437

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Notes

1 The PACP group comprises the Cook Islands, the Federated States of Micronesia, Fiji, Kiribati, Nauru, Niue, Palau, Papua New Guinea, Republic of the Marshall Islands, Samoa, Solomon Islands, Tonga, Tuvalu and Vanuatu.
2 Eight of the fourteen PACP states have populations of less than 100,000. Papua New Guinea is the only country with more than one million citizens (about 5.5 million), for a total population in the region of seven million.
3 Five PACP states (Kiribati, Samoa, Solomon Islands, Tuvalu and Vanuatu) are classified as least developed countries.
4 PICTA entered into force after it was ratified by six countries. It has now been ratified by the Cook Islands, Fiji, Kiribati, Nauru, Niue, Papua New Guinea, the Republic of the Marshall Islands, Samoa, Solomon Islands and Tonga, while Tuvalu and Vanuatu not yet done so. The Federated States of Micronesia and Palau have been given a grace period to join, given their special relationship with the United States through the Compacts of Free Association.
5 This is also referred to as a most-favoured-nation clause. Note that PACER requires free trade arrangements with Australia and New Zealand to commence eight years after the PICTA comes into force.
6 French Polynesia, New Caledonia and Wallis and Futuna.
7 American Samoa, Commonwealth of the Northern Mariana Islands and Guam.
8 Given the European Union’s developed country status, WTO compatibility means that any new agreement between the PACP states and Europe must comply with the provisions of Article XXIV of the General Agreement on Tariffs and Trade (GATT), dealing with free trade agreements, or any modification of that Article that might be agreed upon prior to the conclusion of the EPA.
9 At Doha, it was agreed that the Small Economies Work Programme should “frame responses to the trade-related issues identified for the fuller integration of small, vulnerable economies into the multilateral trading system” and that all special and differential treatment provisions in WTO agreements would be reviewed “with a view to strengthening them and making them more precise, effective and operational” (paragraphs 35 and 44 of the Doha Round Agreement). The small vulnerable economies of the PACP would greatly benefit from strengthened special and differential treatment.
10 The PACP region is endowed with the world’s largest tuna fishery, which attracts the interest of all major players in the international fishing industry.
11 Fiji derives from sugar over 80% of its EU export earnings and a quarter of its total export earnings, which is a higher figure than any other ACP Sugar Protocol member.
12 Under the terms of the Cotonou Partnership Agreement, the European Union is required to examine, in 2004, ‘all alternative possibilities’ for those ACP countries that decide they are not in a position to conclude EPAs.
13 Alternatives include the EU Everything-But-Arms initiative in favour of the least developed countries and its generalised system of preferences granting favourable market access to all developing countries. In the Pacific, the Everything-But-Arms programme, granting duty- and quota-free market access to the least developed countries, is of possible benefit only to Kiribati, Samoa, the Solomon Islands, Tuvalu and Vanuatu.