6:50 AM Oct 6, 1993

GATT WORKING PARTY ON LOME DIVIDED

Geneva 5 Oct (Chakravarthi Raghavan) -- The European Community's preferential trade arrangements with the African, Caribbean and Pacific (ACP) countries under the Lome agreement came for criticism at the GATT Tuesday at a working party which is going into the Lome-IV accord.

The main thrust of the criticism was that arrangements under the accord were contrary to the GATT obligations of the European Community and its member-States, and the EC should seek and get a GATT waiver for the preferences it was giving to the ACP countries.

The Lome-IV agreement was signed in December 1989 and is to run for ten years from 1990. But it was brought up before GATT only in 1993. As is the practice with such agreements, early this year a GATT working party was set up under the chairmanship of Joseph Wong from Hong Kong, but met only now.

The ACP accord covers some 69 developing countries of whom 45 are GATT contracting parties. The trade preferences to them are given by the 12 EC states and it is their GATT obligations visavis the Lome-IV that is now under question.

The European Community as well as the ACP countries, members of the GATT, have argued that the agreement should be viewed in terms of Art XXIV of the General Agreement (for customs unions and free trade areas) in conjunction with Part IV of the General Agreement, which provides for special preferences to developing countries.

The European Community from the beginning has proceeded, both in respect of its own founding Rome treaty, as well as the web of some of its preferential (and hierarchial) trading agreements with the ACP countries, Mediterranean and others, as Art XXIV agreements.

The GATT working parties that have gone into these agreements, and working under the consensus rule, have never come to conclusions but merely presented the various views.

Neither the Rome treaty (and arrangements under it such as the Common Agricultural Policy) nor the various Lome agreements or other trade arrangements of the EC have been formally approved by the GATT CPs. They have not been formally disapproved either. The EC has proceeded on the basis that what is not disapproved in the GATT is approved.

But in recent times, this EC stance has been coming under challenge.

A GATT panel that earlier this year went into the EC's banana regime (that ended on 30 June) and preferences to ACP countries had held that the EC's Lome Agreement could not be considered a free trade agreement in terms of Art XXIV of the General Agreement. The panel also held that GATT's Part IV and the 1979 Enabling Clause that permit tariff preferences to developing countries without their having to be extended to the developed countries did not enable discrimination as among the developing countries or for the EC to provide greater preferences to non-GATT countries not available to GATT members.

The panel said that the EC must seek and get a GATT waiver for extending the preferences to ACP countries, without giving similar treatment to other developing countries.

While the adoption of the panel's report has been blocked at the GATT Council by the EC as well as the ACP countries, the same issue is also before a new GATT panel that is going into the EC's new banana regime under the Single Market.

The EC officials had said privately when the panel ruling came that they did not want to see the 'waiver route' since, under their own proposal for the post-Uruguay Round MTO, waivers have to be time-bound.

Another factor that has weighed with the EC has been that while the needed twothirds majority for waiver for Lome-IV might be obtained, once this path is chosen waivers for other EC agreements (such as for east Europe, Mediterranean etc) might become problematic.

The review of Lome-IV in the working party has come in this context.

Several of the questions addressed to the EC by other contracting parties in regard to Lome-IV have in fact focused on the impact of the preferences on other developing countries and the banana issue too.

In written questions addressed to the EC in the working party, some of the cps have raised the issues of whether Lome accords, described as cooperation agreement between the ACP and EC, were different from a free trade area agreement envisaged under Art XXIV, and whether Part IV could at all be cited to justify discrimination as between two groups of developing countries.

In its response, the EC has contended that there is no formal provision in Art XXIV requiring an agreement to be expressly called a free-trade area and that since Lome-IV also contained other provisions it was called a cooperation agreement. The Part IV was cited, not to justify discrimination among developing countries, but to justify the non-reciprocal nature of preferences granted to ACP countries under a free-trade accord.

Flowing from this stand, the EC has argued in another reply, that it saw no reason to request a derogation from GATT obligations under Art XXIV as the US had done for its Caribbean Basin Initiative.

At the working party, the US, Canada, Japan, and several Latin American countries including Costa Rica, Colombia, Argentina and Uruguay rejected the view that Lome-IV was covered by Art XXIV, and said the EC should follow the path of obtaining a GATT waiver (as had been done by the US for its Caribbean basin initiative and preferences) and not ask GATT to deal with it as if it is a free trade agreement. Some said they were not opposed to the trade preferences given, but to the route followed by the EC in giving them.

The main thrust of the EC response was that the Lome agreement with ACP countries was more than a mere trade preferences, and should be seen in a political way and even if there had been violations in terms of the letter of the GATT, it was necessary to look at the spirit.

The EC, supported by the ACP spokesman, also made the point that in fact the Lome accord had not stood in the way of the EC giving preferences to other developing countries and that in fact other developing countries had increased their market share.

Jamaica for the ACP countries stressed that this was the fourth such accord and a continuation of the first three Lome conventions, representing 30 years of special ties, and that Lome-IV had made no substantive changes to earlier conventions on trade cooperation.

The revised convention, Jamaica contended, did not also prejudice interests of other countries. Over the period 1980 to 1990, the non-Lome developing countries had in fact done better on the EC market -- their trade having risen from 96 billion ECU in 1980 to 113 billion in 1985 and 128 billion in 1992.

The Lome accord, Jamaica contended, was not an academic exercise, but a practical agreement providing a basis for investment and trading decisions and benefited 57 GATT cps (45 ACP countries and the 12 EC member-states and the GATT CPs should put the matter "beyond doubt once and for all" and conclude that Lome-IV is "a genuine Art XXIV and Part IV" Agreement and compatible with all the GATT provisions.

GATT sources said that with opinion sharply divided, there was no likelihood of a unanimous or consensus conclusions, and the working party would only be able to present the two differing views.

The consideration of the Lome Accord and its GATT compatibility comes at a time when the EC-ACP relations, and the conditionalities the EC is now trying to put on aid and benefits to the ACP countries, are themselves under review.

There is also a growing view within the ACP countries that the Lome pact has not really helped the ACP countries, either in increasing their exports and trade with the EC or attract investments and bring about diversification of their economies. Some development economists have held for some time now that the Lome accords only increase the dependency of the ACP countries.

A GATT working party document, containing EC replies to questions addressed to it on Lome-IV, in an annex shows that in 1990, about 64.8 percent of exports from ACP countries to the EC received duty free most-favoured-nation treatment, 6.86 percent of exports enjoyed duty free treatment under the GSP scheme, and only 33.07 percent (of which 22.58 percent were agricultural products and 10.49 industrial products) received ACP-Lome preferences.

In fact between 1980 and 1991, the share of ACP countries in EC imports fell from a 7.3 percent to 3.9 percent, whereas the share of some of these countries in other markets (where no Lome preferences are available) has been growing.

There are though some varying interpretations of this -- one view has been that it is an instance of enterprises doing more to maintain or gain market shares when they face competition as against their situation in the EC markets where because of the preferential margins, the exporters do not really make an effort to overcome their disadvantages and gain greater market share.

Some development economists have been contending that in fact the situation calls for a clear study and objective analysis as to why the ACP countries despite the preferences enjoyed have done poorly and whether this calls for changes in the Lome accord -- in terms of investments and incentives to bring about greater diversification and higher levels of processing.

The EC's rules of origin relating to these Lome imports are themselves held by some to be a negative factor.

In the reply to the working party, the EC has argued that its rules of origin do not indiscriminate between investments from any source and that they confer preferential originating status to products wholly obtained or sufficiently processed (when third country raw materials, parts or components are used) in the territory of the ACP States, irrespective of nationality of investors.

However, this is only a partial story.

Any foreign investor, often a TNC, starts production on the basis of its technology and imported inputs. A non-EC investor, whether from Japan or the US or any of the NICs, for example, would find in such a case the rules of origin operating against it, unless its output is totally based on the ACP country raw materials.

A foreign investment from a non-EC source in an ACP country, bringing in some inputs and reexports the finished products to the EC markets, for example, does not enjoy the same benefits as an EC investor bringing in inputs from the EC. This prevents the ACP countries from attracting FDI from other sources and setting up industries to manufacture goods and export to the EC to take advantage of the preferences.

This was the point reportedly made by Japan in the working party, though presented in a somewhat convoluted way, one of the participants said.