Challenges in international and regional trade and new opportunities for SIDS in market access: the case of CARICOM

1. Challenges in international and regional trade and new opportunities for SIDS in market access: the case of CARICOM Nigel Durrant Head, Agricultural Trade Unit Office of Trade Negotiations, Caribbean Community (CARICOM) Secretariat Presentation for panel discussion - Building resilience in small island economies: from vulnerabilities to opportunities Hotel Victoria, Pointe aux Piments, Mauritius, 23-24 April 2012

2. CARICOM The Caribbean Community (CARICOM), with a total population of under 16 million, comprises 15 member states with populations ranging from 5,000 (Montserrat) to 7.5 million (Haiti). It is based on the Treaty of Chaguaramas, first signed in 1973 and revised in 2001. It is the longest surviving integration movement among developing countries, its predecessor being the (CARIFTA) (1965 to 1973) The aim is to create a single market and economy (SME) characterized by the free movement of goods, persons, services and capital. While significant headway has been made in creating the single market for goods, other aspects of the regime lag behind.

3. CARICOM (cont’d) The Organization of Eastern Caribbean States (OECS) is an independent organization, which comprises nine members, eight of which are members of CARICOM. It has achieved a deeper level of integration than CARICOM as a whole, having a single currency and central bank as well as other shared institutions. Most CARICOM members are former British colonies, the exceptions being the most recent members – Suriname and Haiti. Not all members of CARICOM participate in the single market – the Bahamas having opted not to participate and Haiti having been given a time-limited dispensation from its obligations We will return to some of the challenges of regionalism later in the presentation

4. Economic Landscape The Caribbean has historically been dependent on the export of agricultural products to Europe – sugar, cocoa, coffee, spices, others and later, bananas. Currently, the economies are mostly dependent on services – tourism, financial services (mainly offshore banking), cultural industries (mainly music). Services account on average for 50% of GDP and 60% of exports but with wide variations across countries. The OECS is even more dependent on services. Some elements of traditional export agriculture still remain and there is a wide variation in the level of importance of that sector across the region. Guyana, Suriname, Belize (the three coastal states) Dominica, and to a lesser extent, Jamaica, are the countries most dependent on agriculture. Agriculture’s contribution to GDP in 2005 was about 35% for Guyana, 18% in Dominica, 15% in Belize and 8% in Grenada and St. Vincent and the Grenadines. For other countries, the contribution ranged from about 3% to 6%. While agriculture has diminished in importance over many decades, it still retains its importance in terms of employment, food security and export earnings.

5. Economic Landscape (cont’d) Manufacturing plays a minor role – much of the light manufacturing that was once significant in some of the countries has declined or disappeared, e.g. the garment sector. Haiti maintains a significant garment export sector. Petroleum looms large in the economy of Trinidad & Tobago. Other mineral products – bauxite/alumina, gold – are important in Jamaica, Guyana, and Suriname. Exports are fairly concentrated in a few products – mainly food/agricultural products, mineral ores, some manufactures and petroleum products and there is a seeming inability to diversify towards technology-intensive exports. The US market is the most important for both exports (50%) and imports. The EU market, at 10% of total exports, nevertheless, continues to be important for agricultural exports – sugar, bananas and rice. The CARICOM market accounts for at most 12% of imports and 20% of exports and has been static.

6. Economic Landscape (cont’d) Foreign direct investment (FDI) flows into CARICOM have been buoyant but narrowly focused on the extractive industries and tourism. There is little evidence that FDI has helped to move the economies towards higher value added production in either goods or services. Growth rates (per capita GDP) have been disappointing and have not kept pace with some of the fastest growing African countries The current economic downturn that started in 2007 has had severe effects on the fiscal balances of many CARICOM countries and has also impacted on tourism earnings. Those countries less affected are those with significant petroleum exports (Trinidad & Tobago) and gold High cost of transportation for both intra-regional and external markets is an on-going issue in policy debates. Available data suggest that overall transport costs and insurance in the Caribbean are 30 per cent higher than the world average. It is often cheaper to ship via port Miami than directly between CARICOM countries. High energy costs – Energy utility costs are among the highest in the world with the only real exception being Trinidad & Tobago, which has a petroleum industry. ICT capacity and affordability – while the region is fairly well “wired”, the main issue of affordability both for businesses and consumers, including low income groups.

7. The Multilateral Trading System – dispute settlement Most CARICOM countries joined after independence, from 1962 onwards – Trinidad & Tobago (1962), Jamaica (1963), Barbados (1967). The bulk of the remainder joined around the time of the Uruguay Round – early 1990s. The Bahamas remains the only Caribbean non-WTO member. For much of CARICOM, the “banana wars”, which started in the early 1970s, became emblematic of the GATT/WTO as an arbitrating institution, capable of imposing penalties and granting redress to its members. Caribbean banana producers, although their interests were clearly involved, in terms of their access to the EU market, found that they had no legal standing in these disputes and that the rulings made could more or less ignore the (negative) consequences for them. The fact that negotiating rounds further threatened to erode their preferences further compounded the hurt. The successful Brazilian challenge to aspects of the EU’s sugar regime (export subsidies) was also perceived to have had negative consequences for the Caribbean and other ACP producers. This interpretation may be disputed since the EU had internal pressures for reform and the ruling may simply have given impetus to this trend. The success of the WTO challenge by Antigua & Barbuda against the USA in the internet gaming case was soured by the USA’s refusal to comply with the rulings. This points to the difficulty faced by small countries in gaining redress through the dispute settlement system. Imposing trade restrictions against a large trading partner may not be a feasible option. These events have helped to colour public perception of the role of the WTO in trade and development

8. The Multilateral Trading System – rules and negotiations GATT/WTO rules are often seen as restrictive and unfair for developing and small economies. The facts, however, are somewhat different. The outcome of the Uruguay Round was such that CARICOM countries were not required to make any real concessions. The main discipline imposed was in terms of the commitment to bind tariffs. Most CARICOM countries bound their agricultural tariffs at 100% and their non-agricultural tariffs at 50%, thus providing themselves with considerable “policy space”. The exceptions were Haiti and Suriname (who were not CARICOM members at the time) and whose bindings were considerably lower, in many cases at the level of their applied rates. In terms of the ability to provide support to their agricultural sectors, the Agreement on Agriculture (AoA) provides considerable scope. The problem is 1) financial ability to provide such support and 2) priority placed on the agricultural sector. Indeed, the WTO is sometimes used as an excuse for inaction in providing support to agriculture. CARICOM’s services commitments during the Uruguay Round were minimal

9. Doha Round Negotiations Participation by CARICOM in the round has focused primarily on in goods (agriculture and NAMA) with services coming in at a poor second. There is some interest in the negotiations on rules, particularly those relating to regional trade agreements and fisheries subsidies In agriculture, CARICOM’s approach has been highly defensive – guarding against any disruption of markets since the sector is regarded as very fragile. Though there is room for some flexibility, the idea is that new commitments should not compromise CARICOM CET CARICOM is also a strong defender of special treatment for “long-standing preferences” – i.e. guarding against preference erosion particularly in the EU market. This has pitted the group against Central American and other countries who want to break into those markets and see CARICOM’s position as obstructionist As part of the small and vulnerable economies (SVE) group, which also includes Mauritius and Fiji, CARICOM has been successful in crafting draft modalities which would require it to reduce its bound agricultural tariffs by an average of 24% along with flexibilities for Suriname, which would be allowed to rebind upwards.

10. Doha Round Negotiations (cont’d) Regarding fisheries subsidies negotiations (which seek to reduce subsidies as a means of relieving pressure on the world’s resources), the position adopted is one that calls attention to the low impact that small economies, and particularly small-scale fishing, has on the overall resource and thus the need for a special carve-out for subsidies granted by small economies. In services, an area in which the CARICOM has concrete interests, the region has proceeded from a position of extreme caution Some factors that contribute to the position are 1) lack of information on services 2) low level of non-tourism services trade in global context Some key services interests in developed country markets – “Mode 4” access for lesser-skilled labour; elimination of economic needs tests (ENTs); mutual recognition of credentials for professional services

11. The Challenges of Regionalism – CARICOM Single Market & Economy CARICOM, while having shown remarkable resilience as an economic integration movement, has had to acknowledge that the pace of the deepening of the movement has been much slower than expected. The CARICOM Single Market & Economy (CSME) was originally scheduled to be in place by 2005. The regime for goods – the CET, the rules of origin etc. – receives the bulk of the attention from member states but there are reoccurring issues relating to its management which can only be addressed through a comprehensive reform of the system. Further, there is an outstanding mandate to institute a regime of free circulation of goods, which has hardly been addressed. The regime for services is considerably more recent and envisages a single market for trade in services via all four modes of supply. It is, in the estimation of a recent study done for the secretariat, only 37% complete. The major outstanding issue relates to the right of establishment and the need to harmonize national legislation so as to remove any elements that discriminate against CARICOM nationals. The aspect of the single market that has proceeded most slowly and which has probably drawn the most criticism is that relating to the movement of people and skills. The current regime provides for a limited list of skill categories to be recognized as having the right to move freely within the single market but there are continuing questions relating to the management of the regime. The slow pace of implementation has often been ascribed to a deficit in political will. It should also be taken into account that there may also be many economic actors who view integration negatively.

12. The Challenges of Regionalism – bilateral agreements CARICOM now has several trade agreements with neighbouring developing countries as well as with the European Union – the Economic Partnership Agreement. This is in addition to the non-reciprocal market access arrangements that it has with the US (CBI) and Canada (CARIBCAN). Agreements have been concluded with the Dominican Republic, Cuba and Costa Rica but all have operated at a low level. Three significant features of the above bilaterals are 1) CARICOM’s LDCs (the OECS and Belize) are not required to reciprocate , 2) the fairly restrictive regime for agricultural products, and 3) No provisions on services have yet been negotiated. Negotiations are currently being conducted with Canada and are expected to be concluded in 2012/2013. Unlikely that any other negotiations will commence prior to the conclusion of the agreement with Canada.

13. The Challenges of Regionalism – bilateral agreements (cont’d) The Economic partnership Agreement (EPA), concluded between the Caribbean (CARICOM plus the Dominican Republic) and the European Union in 2008, is the largest and most extensive trade agreement in which CARICOM participates. It is a WTO-compatible agreement, which replaces the unilateral preferences (for goods) granted by the EU under the Cotonou Agreement of 2000 EPA was crafted in accordance with the requirements of Article XXIV of the GATT and Article V of the GATS. The option of having the agreement notified under the Enabling Clause was not available given the involvement of a developed partner (the EU) in the agreement. It was also done against the background of the difficulties experienced in obtaining a WTO waiver for the Cotonou Agreement trade provisions in 2001 – difficulties that were tied up with the dispute with the EU over bananas. In the absence of the EPA, exports of several key agricultural products – sugar, bananas in particular – would have become unprofitable. The EU’s GSP scheme would not have sufficed. Although the Cotonou arrangements provided for free access for most goods, restrictions remained on most of the products covered by the EU Common Agricultural Policy. The EPA has eliminated all market access restrictions to the EU market The level of reciprocity required on the part of CARIFORUM has been modulated by a significant level of exclusions (mainly agricultural goods) and by extended liberalization timeframes for some goods that are important from a revenue or competition standpoint

14. The Challenges of Regionalism – bilateral agreements (cont’d) Regarding services and investment, the EPA provides for the opening up of most sectors on both sides along with provisions on non-discrimination for investors (national treatment), commitments to environmental safeguards, labour and occupational health and safety, and anti-corruption. The EU opens up 90% of its services sectors while CARIFORUM opens up 65%. There are also provisions on temporary presence of business persons and a protocol on cultural cooperation Development provisions are highlighted in the EPA both generally and with regard to specific sectors. Development financing will, however, continue to come from the European Development Fund (EDF) and other EU financing instruments. Some criticisms have been leveled at the EPA because of its comprehensiveness and the extent to which it apparently constrains policy flexibility on the part of CARICOM. Against that should be placed the confidence that such an agreement gives to economic actors as well as the significant asymmetries that CARICOM/CARIFORUM was able to build into the accord.

15. The Challenges of Regionalism – bilateral agreements (cont’d) CARICOM’s positions in trade negotiations have been conditioned by perceptions of the uncompetitiveness of its economies – particularly the agricultural sector -- and the concomitant need to protect them from international competition. Positions taken in these negotiations – even with neighbouring developing countries of similar size – have been highly defensive and have sought to exclude significant percentages of goods from the agreements. Regional Trade Agreements (free trade areas, customs unions etc) have the advantage of providing legal certainty to the trade relations among the contracting parties. In this respect, the uncertainty surrounding the granting of the WTO waiver to the Cotonou Agreement in 2001 is salutary. Although CARICOM has had duty free access to its main markets (Canada, the EU and the USA) for many decades, these arrangements have involved autonomously-granted preferences, which can be altered by the preference-granting countries. In addition, all these arrangements include some restrictions on agricultural products and thus, there is a possibility of additional market access as a result of trade negotiated agreements

16. The Challenges of Regionalism – bilateral agreements (cont’d) Preferential access does not automatically translate into market penetration. National and inter-governmental organizations, along with the private sector, must provide accurate and timely information on market access conditions (charges, regulations etc.). Trade agreements cannot be seen as a panacea and there is a host of other complementary trade-related issues that must be addressed. Modern trade agreements dealnot only with goods but with services, investment and a host of other areas. The players in one sector cannot afford to focus narrowly on the negotiating issues that most directly affect them but must become familiar with the broader issues in trade negotiations (and trade policy) in order to properly articulate the interests of their sectors Private sector organizations must play a key role in providing information on market conditions, lobbying governments in both the home countries and abroad for beneficial policy changes, facilitating the provision of technical assistance to enterprises, and in coordinating positions for trade negotiations. Issues of technical capacity at the national level as well as some level of skepticism regarding the benefits of trade agreements continue to be topics that have to be addressed

17. Concluding Ideas The challenge of development is one that is not unique to SIDS. Although SIDS tend generally to experience higher costs, they may also have their unique advantages which can be exploited. Granted that these differences exist, the development imperatives are very much those that apply to all countries Although the term “Washington Consensus” has become a bad word in development circles, it is worth nothing that the person who coined the term (John Williamson, 1989), and the prescriptions that were laid down, were not of the extreme non-interventionist kind. In addition to recommendations on fiscal discipline and trade openness, the WC called, among other things, for a redirection of public spending from subsidies towards pro-growth and pro-poor services like education, primary health care and infrastructure investment.

18. Concluding Ideas It is through effecting improvements to the business environment (institutional) and infrastructure (hardware) that economies are able to prosper. Small economies have no choice to but to be basically open economies which are responsive to the international marketplace and for that reason must emphasize in their policy frameworks the building of absorptive capacity for international business. It is essential that SIDS participate fully in trade negotiations both at the multilateral and bilateral levels. It is equally important that these processes are seen as adjuncts to development policy and not as ends in themselves. ICT is one of the investments that SIDS should not take lightly since it helps to overcome or neutralize many of the disadvantages of size. The fact that small producers can be put in direct contact with small buyers (for both final goods and inputs) is a major benefit of ICT.

19. Concluding Ideas A concerted effort must be made to better link agriculture with the services-based economies. Tourism, while it can produce huge benefits to small economies, can also result in large outflows with food being one of the largest. This calls for a reengineering of the mostly small-scale agricultural sector to better enable it to meet the needs of the tourist sector in terms of the types of products demanded, consistency of supply and quality. The experience of CARICOM in this regard is a mixed one indeed but the main lessons to be learnt are 1) public investment – particularly in terms of research, infrastructure and information systems -- is necessary to support the reorientation of the sector and 2) strong partnerships must be developed among actors in both sectors. Providing supportive environment for innovation is a crucial factor in stimulating economic development. The evidence suggests that expenditure on research and development in CARICOM is not only low but has not been keeping up with inflation. This is probably also the case with other SIDS. This issue is also related to the priority placed on education, particularly technical and scientific education.

20. Nigel Durrant nigel.durrant@crnm.org