4. Basis for a New Approach

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4. Basis for a New Approach

The fundamental rationale for the Caribbean seeking a new relationship with the EU after the end of Lomé IV stems from the inadequacy of the present non-reciprocal arrangements to ensure trade and investment expansion in the region in the coming decades. The current and future trend toward free trade areas and trade blocks will continue to generate trade and investment diversion away from the region in so far as these arrangements are designed with more attractive preferential concessions for their members.

In addition, preference erosion under universal trade liberalization has led to a substantial reduction in tariff margins. Since the last Uruguay Round, preferential margins have been reduced by almost 3 percentage points due to substantial MFN reduction, which is substantial. The average EU tariffs are now below 5-6% on industrial products, which means that Lomé can no longer provide much of an advantage for ACP industrial exports.

Given the state of trade and investment links between the EU and the Caribbean, a FTA (Free Trade Area) would appear in the long-term to be a superior instrument to MFN, GSP and Lomé. It would expand market size by providing access to better FTA preferences. It would offer greater security of market access, transparency and stable rules. It could better focus the attention of the region on dynamic gains by examining other trade barriers, protective rules of origin and restrictive investment provisions that impede a better flow of efficiency-seeking investment to areas where the region exhibits competitiveness.

As middle income countries that have already crossed the baseline threshold in terms of the foundations for building competitiveness, these countries can rapidly take advantage of FTA concessions by putting in place certain structures and undertaking some key reforms. In addition, some of the external elements needed to attain competitiveness, such as technology and capital flow, are only attainable in small economies through an enhanced trading status such as a FTA. Small countries will not be able to remain in restrictive, non-reciprocal arrangements if they expect to build competitiveness as a precondition for entry into FTAs.

Recognition of both the above and, specifically, the extent and speed of trade and investment diversion as a result of NAFTA has led Caribbean countries to commit themselves to an FTA (NAFTA/FTAA) integration process by the year 2005. Furthermore, at least two CARICOM Countries have expressed interest in joining NAFTA if invited. The granting of reciprocity to other countries in the developing hemisphere is already established as a principle for the four CARICOM MDCs.

By the same token, this logic must apply to the relationship with the EU. Since the EU has extended FTAs to Eastern Europe, and proposes similar arrangements with other parts of the developing world, Lomé will not long remain a competitive trade instrument for the Caribbean.

The critical problem for the region, at present, is attracting investment. Investment brings competitive advantage and trade. Future arrangements with the EU must focus more on how to attract investment in the context of globalized networks.

Another reason for arguing that non-reciprocal arrangements like Lomé and CBI have reached their outer limits and cannot compete with FTAs is that these instruments cannot be extended without reciprocity in terms of product coverage, rules of origin, services, investment. The changing realities of development cooperation policy have made this the case.

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In recognition of these changing realities, Caribbean countries have embarked on a process of liberalization to prepare themselves for a world of liberalized trade and globalization. They have adopted a series of reforms since 1980. These reforms now have to be institutionalized within FTAs to make them more permanent and credible.

In the context of NAFTA/FTAA, the transition to FTA is conceived as one of NAFTA parity and various measures to assist small countries to benefit from FTA. In relation to the EU, there is no similar clear option that has been decided by the region. This has largely to do with the EU not having taken the initiative to concretely propose a new form of relationship. It has only spoken of the possible end of non-reciprocity.

In a fundamental sense, the move to FTA in the Western Hemisphere has reduced the trade options of the region to MFN or FTA with the EU. In assessing these options, this author has advanced the concept of simultaneous FTA movement with NAFTA/FTAA and the EU based on phased or relative reciprocity along with requisite development assistance to facilitate competitiveness and transformation. This position is based, first, on the imperative of FTAs with the EU and North America for attracting investment and boosting exports. Secondly, it stems from the importance of making Caribbean membership in NAFTA/FTAA compatible with its trade relationship with the EU. This must be done on a non-discriminatory basis, so that the same treatment (as required by the Lomé Convention) is given to the developed countries of NAFTA to the EU. Furthermore, if MFN becomes the basis for trading with the EU, it would severely downgrade the trading status of the region, as the EC pyramid of trade privilege is restructured.

Another advantage of FTA with the EU is that it would provide the basis for greater integration and cooperation with the DOMs (overseas departments) and OCTs (overseas countries and territories), some of which have been seeking free trade status with the independent Caribbean states and with which common regional security goals are shared.

While some notion of a transition to FTA is evolving in the Caribbean in relationship to NAFTA/FTAA, there is a reluctance to even contemplate such a position with respect to Lomé and to desperately fight to hold on to the Lomé acquis. The main reason for this is that for some Caribbean countries, dependence on commodity protection is so great that it inhibits a vision of survival in a globalized and liberalized world. Transition in these circumstances must therefore mean some guarantee of economic security for these small states facing high costs and tremendous difficulties in diversifying. It cannot just mean the provision of financial and technical resources for restructuring of the industry. It should, as was done under the CBI, encourage diversification through offering specific trade, service and investment concessions that will directly pull investment into new or existing areas and allow new industries to grow up as the sunset ones are phased out. The case of garments, in relation to the reduction of the US sugar quota, under the CBI is a good example.

The EU has advocated tourism-led diversification for the Windward Islands and more local non-traditional agricultural and other inputs as an alternative to the banana industry. Yet, there are no specific measures in the Convention that would directly promote tourism such as tax credits for conventions or more duty-free products for returning EU tourists.

Under the diversification and competitiveness-building strategy discussed above, it is possible to conceive of the Caribbean moving to reciprocity with the EU under a transitional arrangement after Lomé IV. Such FTA with variable speeds of entry and degrees of reciprocity based on appropriate concepts of FTA readiness, differentiation and graduation could be viable. This would be the case especially if it were region specific, so that it would not exclude the key products and services of export interest to the region and would grant concessions in sectors where the Caribbean can compete.