4. Impact of the Lomé Convention


• 4.1 Aid
• 4.2 Trade preference and the perpetuation of the colonial economies
  • a) The Sugar Protocol: Exporting the CAP
  • b) Trade in tree crop products: GATT and Lomé
  • c) Tuna products

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4. Impact of the Lomé Convention

The impact of the Lomé Convention on the region has been substantial. As an instrument of development, it has affected almost every aspect of economic life from how national budgets are allocated to what is produced and exported and where it is exported. This paper will touch on these aspects only in the most general terms. In virtually every one of the areas that are considered to be constraints, the EU has offered significant economic assistance to the region. Without the EU there is no doubt that the problems of isolation and distance would be far more serious than they presently are. In telecommunications, transport infrastructure, shipping and the provision of harbour and airport facilities, the Lomé Convention has been one of the keys to the region being able to maintain a standard of living even approaching the current low level.

4.1 Aid

The Pacific ACP region is one of the greatest per capita aid recipients in the world. [See C. Brown and D.A. Scott, Economic Development in Seven Pacific Island Countries .] In large part this stems from the fact that the purpose of per capita aid is really not to target people (i.e. aid/capita) but nation states (i.e. aid). In this regard the Lomé national indicative programmes (NIPs) are no different. The obvious target is aid, not aid per capita, with a great deal of political interest in allocations. [See G. Nicole and R. Grynberg, ‘Allocations of National Aid under the Lomé Convention’.] The EU has made the point quite clearly that it is the region’s second largest aid donor, with allocations at the end of 1990 standing at ECU 930 million, calculated from the beginning of the Lomé I Convention. [See R. Brenner, ‘La Communauté européenne et al. Pacifique Sud’, pp. 54-55: La Communauté européenne occupe la deuxième place des donateurs dans la région, derrière l’Australie. Etant donné que 80% de l’Aide australienne va à la Papouasie-Nouvelle Guinée, la CE devient de facto, le principal donateur pour les autre sept Etats ACP indépendants de la région.]
Not only has the aid level been large but the allocations to the Pacific region have been disproportionately large, as is seen in table 1 below.

However, the NIPs do not give a proper indication of the total level of assistance that is offered under the Convention because they do not include the very large volume of non-programmed assistance that is available under Sysmin, Stabex, Articles 136-8 and other facilities of the Convention. The level of programmed plus non-programmed aid was four times higher than the ACP average (total PACP per capita aid 80.3 mecu, as against ACP average per capita aid 22.5 mecu).

These data create an unfortunate impression of the Pacific ACP region, since ACP averages have a special status with benefits far outweighing those of other signatories to the Convention. While superficially this may well be true, one must consider the very obvious fact that much of the aid coming to the Pacific are indirect subsidies to the nationals and consulting firms of donor states. In its most recent report on the region, the World Bank makes it quite clear that 45% of the region’s aid is in the form of technical assistance. [The 45% figure does not include the very large amounts used for consulting services in the other sectors that the OECD/DAC defines as more directly productive, i.e. infrastructure, etc. It is doubtful if even half the aid received by Pacific ACP states is in a tangible form of direct benefit to the region. Australian aid in this regard is no different from EU aid.]
Much of this assistance is not priced competitively because of the absence of competitive bidding practices. Access to tendering is restricted to nationals of the donor states. The World Bank states (1995, p. 8):

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Table 1
The per capita value of national indicative programmes under Lomé IV/1

Source: Author’s Estimates

A dominant characteristic of aid in the PMCs (Pacific Member Countries) is the high proportion of technical assistance; 45% of all grant aid has been in the form of technical assistance. It is not clear what this relationship might have to growth performance. On the one hand, it is thought that the bulk of the funds provided as technical assistance replaces current public expenditure such as schools, hospitals and some ministries and that it accrues as income to expatriates rather than tangible investments to the aid receiving country … Thus technical assistance does provide expertise, equipment and training of local professionals or help meet shortages in specific areas, a role that could theoretically improve productivity, if priced competitively (emphasis added).

Regrettably, EU aid is no exception in this regard, with a large portion of it returning as technical assistance payments to European firms and expatriates. [Under Lomé III, for example, the total amount of expenditure on technical assistance was ECU 429 million or approximately 7% of EDF allocation. However, the definition does not include technical assistance that is provided under Lomé under various sectoral allocations, so it cannot be taken as an accurate representation of European com mitments to this type of expenditure. See ‘From Lomé III to Lomé IV: Review of Aid from the Lomé Conventions at the end of 1990’, Commission of the European Communities, Brussels, April 1992.]

4.2 Trade preference and the perpetuation of the colonial economies

The trade preference given to the Pacific ACP states has been crucial, especially in Fiji, to the stability of the economy. While stability is vital, it has also meant that in certain key export sectors, the region has not moved to more profitable products as rapidly as would otherwise have been the case. This has meant that the economy of Fiji, the single largest beneficiary of trade preference, remains ‘stuck’ with largely the same structure of exports as in the colonial era. [The only major development has been the rapid growth of the Fiji garment export industry, which developed after 1987 and now has exports (in 1995) of US$ 130 million, making it the country’s second largest export sector after sugar.]
In large part, the trade preference has been taken up by Fiji with the huge benefits it receives from the Sugar Protocol; as well, the benefits from tropical tree crop products go to PNG and Solomon Islands (see table 2). The other impor-

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tant area has been the development of the South Pacific tuna export industry, which has developed largely as a result of the very high margins of trade preference available for ACP exports to the EU. As we shall see, though, the EU has successfully used its rule of origin to restrict trade, causing the development of an industry that is almost permanently unprofitable.

Table 2
Estimated benefits of preferential trade agreements to Pacific ACP states (USD 000’s)

Source: Author’s Estimates

a) The Sugar Protocol: Exporting the CAP

Since 1975 Fiji has had a quota of 163,000 tonnes of sugar into the EU market under the terms of the Lomé Convention. [Actual exports have been significantly larger than the Lomé quota.] This sugar has been sold at the EU’s intervention price, which in most years is two to three times the world price of sugar. In 1995 this was supplemented by a further quota of some 40,000 tonnes. [The extra 40,00 tonne quota stems from commitments under Lomé IV to allocate extra quota to sugar producting ACT states as European countries with cane refining capacity join the EU. See Joint Declaration on Sugar in the Portuguese Market , Article XXXVIII, Lomé IV.]
The result has been that Fiji in 1991 received a net transfer from the EU of $ 90 million, or 4% of GDP. For the average Fiji sugar farmer this translates into a net operating profit of about $20/tonne of cane.

It is expected that the price of sugar will decline by approximately 12% by the year 2000 as a result of the Uruguay Round agreements. [Pers. comm., London Sugar Group, 1994. The precise effect upon EU prices of the Uruguay Round commitments remains an internal EU policy decision, because the discretion permitted under the Blair House Agreement means that the precise decrease in prices is uncertain. The recent World Bank report on Fiji suggests (p. 29) that the precise magnitude could be as low as 5-10%.]
This will mean a once and for all decrease of GDP of approximately 1%. The effects on the producer price of Fijian cane farmers in Fiji if the Sugar Protocol were ever to be removed is shown in Chart 1 below. The average Fiji sugar farmer would move from being profitable [The average cane farmer made an operating profit of F$20 per tonne in 1992.] to being marginal.

One of the few immediately beneficial effects of the Uruguay Round has been that the EU has included the Sugar Protocol in its offer to the GATT. This means that it will be even more difficult for the EU to remove the Sugar Protocol, because the minimum access provisions of GATT would prohibit the EU from decreasing access from current levels. [See Article 4, Part III, Agreement on Agriculture , GATT 1994.]
This, of course, does not

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preclude the EU from decreasing intervention prices that are paid for Fiji and other ACP imports. [The inclusion of the Sugar Protocol terms in the EU’s offer does not legally preclude a subsequent GATT challenge to the Sugar Protocol.]

Chart 1
Fiji sugar cane producer prices with and without the Sugar Protocol

Source: Fiji Sugar Corporation

The sugar quota was created largely to help Tate & Lyle in the UK, which needed a supply of cane sugar for its refineries in London and Liverpool. [The Sugar Protocol was negotiated when sugar prices were at their highest point in this century and there was substantial insecurity of supply.]
This dependence on cane sugar led to the EC’s original agreement to the Sugar Protocol in 1975. The Sugar Protocol costs the EU between 500 and 700 million ECU per annum (25% of the annual cost of the entire Lomé Convention [The actual 1993 cost of the Sugar Protocol to the EU is estimated to be 600 million ECU. See World Bank op. cit., p. 21. The funding for the Sugar Protocol and the other commodity protocols that are part of the Lomé Convention does not flow through the normal channel of the European Development Fund.]).
The EU is one of the world’s largest sugar exporters, so it is importing sugar from the ACP states only because of the interests of Tate & Lyle and the other smaller cane refiners in the EU. [On the basis of pure financial calculus, the EU could close the Thames and Liverpool refineries, pay compensation and, within the space of ten to fifteen years, all parties, with the exception of the ACP states, would be better off and UK sugar needs would be met from continental European imports.]
However, there exists an important legal imperative that will require the EU not to abrogate its obligations under the terms of the Sugar Protocol even if political reasons to do so should arise. The interpretation of this Article is crucial because it has been interpreted to mean that the EU cannot abrogate the agreement unilaterally but must seek the agreement of the sugar producing ACP States.^*

^* [Article 10, Protocol 8, Lomé IV, 1990. The relevant section states:
The provisions of this Protocol shall remain in force after the date specified in Article 91 (the expiry date of the Lomé IV Convention) of the Convention. After that date the Protocol may be denounced by the Community with respect to each ACP State and by each ACP State with respect to the Community, subject to two year’s notice. (Em phasis added).
The use of ‘and’ rather than ‘or’ in the final sentence of the paragraph is taken to mean that agreement by both parties is required.]

The EU will keep sugar intervention prices high for the foreseeable future because sugar remains one of the few highly profitable crops in Europe. By extension this will also benefit Fiji and other sugar producing ACP farmers. One other reason why the EU sugar prices will be maintained at high levels is that the Common Sugar Policy, which governs the production and pricing of

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sugar in the EU, puts no immediate pressure on the EU budget because it is self-financing. Price support regimes for other products under the CAP fall upon the consumer as well as the EU, but the full cost of the sugar policy is borne by the consumer and hence there is less political pressure for its reform.

b) Trade in tree crop products: GATT and Lomé

Despite what were, even prior to the closure of the Uruguay Round, small margins of trade preference, the benefits offered by the Lomé Convention in the tropical tree crop sector remain. The two countries that are most likely to be affected by any loss of trade preference are PNG and Solomon Islands, which have significant exports of tropical tree crop products to EU markets. The most important products to be affected by the EU offer to the GATT are palm oil, coffee, and cocoa. (Copra already enters the EU market duty-free, so there is no margin of preference and most PNG tea is sold to Australia.) The EU offer on commodities relevant to the Pacific is contained in table 3 below. What is relevant is that the existing margin of preference over non-ACP producers is declining. [The EU’s offer to GATT on tree crop products has a significant impact on Pacific ACP states. For example, the margin of preference on cocoa will be eliminated. In the case of unroasted coffee, the decrease is 40%, which is slightly greater than the 36% required under Blair House. However, the decrease in agricultural import duties under the terms of the accord must be for groups of commodities rather than for tariff lines. There is a minimum 15% reduction per tariff line. As a result, for some commodities where the EU faces competition (e.g. edible oils), the decrease in import duties will be the minimum decrease. It would appear that the EU has met some of its Uruguay Round commitments on agriculture by decreasing tariff preference margins for ACP states by more than 36% in some areas. Some of those decreases will directly impact upon the Pacific ACPs such as PNG, Solomon Islands and Vanuatu.]
In the case of certain commodities that are low value to weight (such as palm oil) and where Pacific ACP producers are already disadvantaged because of high transportation costs, the elimination or the substantial decrease in the margin or preference may endanger viability even further. [Cole has indicated that the value of the coconut oil preference was worth some US$ 41 per tonne to Lever Solomon Ltd, the main exporter from Solomon Islands. The cost of freight to Europe, however, was in the vicinity of US$58. Thus the differential would more than cover the cost of procuring Philippines coconut oil, which attracts the MFN rate. The margin of trade preference was the equivalent of 9% of producer price. See R. Cole, ‘Transnational Corporations in the International Trade of Selected Primary Commodities from the South Pacific’.]

The extent to which the loss of margin of preference is a problem varies from crop to crop. In the case of palm oil, where Pacific ACP (as well as all ACP) exports are insignificant in comparison to exports from non-ACP countries (such as Malaysia and Indonesia), the small margin of preference currently being obtained by PNG and Solomon Islands is not sufficient to affect the market price of the commodity. In the case of other commodities, the margin of preference becomes part of the overall negotiated price and can be extracted by either the producer or the trader. Traders in palm oil indicate that the margin of preference is never passed on to the consumer.

For cocoa, commodity traders indicate that they themselves are not clear how the preference is divided between the various interested parties. The vast bulk of cocoa bean exports to the EU market are from ACP states, so the world market price would tend to reflect more closely the tariff status of the commodity. The European Coffee Contract, on the other hand, states that the import duty is the responsibility of the buyer. [The European Coffee Contract is a standard contract used for the purchase of coffee in the EU.]

This raises the question of whether the price is so adjusted as to reflect the margin of preference. There are two possibilities: Either the margin is passed on to the producer (in many cases the smallholders) or it becomes a part of the trading margin of the exporter or importer. In the former case, where the smallholder and producer get the actual margin, then the Uruguay Round will result in a diminution in the incentive to produce tropical tree crop products that are affected by the EC offer. Moreover, under most commodity supply contracts, the shipping cost is paid by the exporter. This simply increases the competitive disadvantage faced by Pacific ACP commodity exporters.

If a large part of the margin of preference is captured by the importer, as is certainly the case

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with complex commodities such as cocoa, it is possible that this will decrease the incentive to purchase from ACP countries in general and Pacific ACPs in particular. (Note, though, that in the case of PNG, some of the largest exporters were unaware of the existence of a margin of trade preference for their cocoa in the EU.)

The outcome for coffee will depend upon the bargaining power of those negotiating the contract. When a substantial portion of EU coffee comes from ACP countries, the price would reflect the margin of preference. However, the EU coffee price is not determined by ACP suppliers alone. In an attempt to assist Latin American countries trying to fight the drug trade (e.g. Columbia), the EU also grants them duty-free access to the EU market. The particular commodity and the particular market conditions determine who receives this margin of preference. However, the loss of this margin or its diminution can only serve to further diminish the incentive to produce the coffee or other tropical tree crops or to buy them from distant and relatively high cost Pacific ACPs.

In three Melanesian countries where export of tree crop products is significant, tropical tree crop dependence (expressed as these exports as a percentage of total exports) has declined, over the period 1980 to 1992, from 35% to 14% in PNG, 33% to 24% in Solomon Islands and 78% to 44% in Vanuatu. (Most of these exports are into the EU, Australia or New Zealand.)

The decrease in margins of trade preference for tree crop products also affects revenue from the EU’s commodity stabilisation program, Stabex. Payments to countries under the scheme depend upon the volume of commodity exports. Clearly the smaller the margin of preference into the EU market, the greater the incentive that exporters will have to find markets within the Pacific region, rather than in the EU. As a result, the decrease of margin of preference will have a secondary effect upon Stabex earnings.

c) Tuna products

Probably the area where the EU’s system of trade preference has had the greatest impact on the Pacific ACP states has been in the canned tuna sector. This industry exists in the Pacific ACP states largely because of the margins of trade preference that are available. If the Lomé Convention is the midwife of the Pacific ACP canned tuna industry, then the rule of origin must be seen as the instrument whose use has given rise to a badly handicapped infant whose parents now apparently wish to discard it.

The rule of origin specifies, among other things, that the vessel upon which the fish was caught must be 51% ACP- or EU-owned. [See Article 2 (g) of Protocol 1 of the Convention. Definition of ‘their vessels’ and ‘the sea’ under this article remains a major issue for marine product exporting countries. The EC goes to great lengths to define ‘their fleets’ and it is in this definition that one finds the clearest example of the use of rules of origin as commercial instruments of protection.]
This instrument is totally outside the spirit of the harmonised rule of the Uruguay Round and no doubt explains why during the Uruguay Round the EU so strenuously opposed the extension of the agreed rule of origin provisions to preferential treaties. [ J. Croome, Reshaping the World Trading System: A History of the Uruguay Round , p. 100.]
While the 51% rule may make considerable sense for developed countries, its use in a country that does not have the capital may act to constrain the industry whose development is the purpose of the provision. However, assuming that we can take the EU’s rationalisation of this provision at face value (i.e. it exists to assure that other parties do not take advantage of it and that Pacific ACP states actually benefit), how does this stand up to the facts in the Pacific?

In Solomon Islands, the rule did not impede one of Japan’s largest food processing companies, Taiyo Gaigyo (now Maruha), from entering the country and using the provisions. The 51% rule was met by an effective transfer of ownership to the state over a number of years. The Solomon Islands government did not directly pay for its interest in Solomon Taiyo. Only on eight occasions since 1973 has Solomon Taiyo ever made a profit. This is not surprising. Because of the rule of origin, the effective rate of tax on every dollar of profit in the Solomon Islands fisheries

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Table 3
Present EU MFN rates of import duty and the GATT offer

Source: European Community

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is 79%. The last time the company paid any corporate taxes was in 1982. It has just recently renewed its agreement with the government of the Solomon Islands for a third joint venture agreement. [The evidence of transfer price manipulation to extract the margin of trade preference from the Lomé Convention has been commented upon in the recent World Bank report.]

However, STL was not the only fiscal disaster that resulted from the rules of origin. In order to meet the Taiyo cannery’s demand for fish, the Solomon Islands government established the National Fisheries Development Company (NFD) in the 1980s specifically to overcome the ownership provisions of the rule of origin. [See A.V. Hughes, ‘High Speed on an Unmade Road’. Hughes, who was Governor of the Central Bank of the Solomon Islands as well as Chairman of the Board of STL, said that that NFD was ‘… originally conceived as a way of accelerating local ownership of the fleet to facilitate duty-free access’.]
State ownership of NFD proved to be a massive financial liability and the company has now been sold to Canadian interests.

In Fiji, the 51% ownership provision has been overcome in a slightly less damaging manner by separating the fishing company from the cannery. The government established its own fisheries company, IKA, which ran a fleet of six to ten pole and line vessels to feed the PAFCO cannery that supplied the British tuna market. The public Annual Reports of the Fiji Department of Fisheries demonstrate that the state-owned fishing boats as a group catch as much as one or two vessels operated by the Japanese. One of the reasons that the cannery has given for its relatively poor performance has been its inability to acquire sufficient fish. It cannot buy fish from American Samoa and therefore must either catch the fish in local waters or buy them from Kiribati or Solomon Islands. In large part it has been the failure to obtain sufficiently high levels of input that has been responsible for the company’s lack of profitability.

In short, the rule of origin has not stopped foreign control of the fleets or the canneries. It has not assured benefits to the islands, but it has created an industry that is potentially viable if it is restructured and put onto proper footing. The EU has a clear moral obligation to help defray the cost of repairing the damage its margin of preference has inflicted on the industry. The Pacific ACP states are not blameless in this matter. They have refused on many occasions to deal with the problems confronting their industries. For example, it is widely known, though not documented, that the pay structure on Fiji fishing boats is such that officers receive a flat salary and hence have limited incentives to catch tuna. Fiji has known of this situation for many years but has done little to alleviate it.