12/6/01The external policy of the EU is generally considered to consist largely of trade negotiations on various bilateral and multilateral stages. There is much debate over the effectiveness of policy with respect to the developing world; in the context of this discussion I have used the term ‘developing world’ in its widest sense, although I will most commonly focus on the Mediterranean counties, ACP, and Latin America. It should also be made clear that for these purposes I will not be drawing too much on historical background, rather examining the issue over the last fifteen to twenty years, and how the changes in political climate within Europe may be affecting the developing world in the future.
It is interesting to note that this essay comes at a time when increasing pressure from the USA and other member of the WTO to liberalise trade are in direct opposition to the talks currently being held on the successor to the Fourth Lome Convention.
This in turn comes into some conflict with the Union’s own goals of increasing its scope as a Single Market, and makes for an apparently unyielding division of loyaltyThis essay falls naturally into two main sections; I shall concentrate first on External and then Internal policy of the EU. In the first section I shall devote some time to exploring the economic arguments surrounding the individual trading preferences granted to many developing countries, before looking more closely at the wider implications of such systems and how some countries stand to gain more than others from the system.
The second section covers the far-reaching effects of internal EU policy on the developing world, touching briefly on the implications of the Common Agricultural Policy before analysing the effects (both realised and potential) of widening and deepening the Union in terms of the developing countries.
I hope to demonstrate that, despite being a complex and multi-faceted issue, the overall conclusion must be drawn that the EU policy over the recent past has been lacking in any real worth in aiding development in the Third World.
One of the problems of trading relations as exemplified by the Lome Convention of 1975 is that, despite ostensible being a co-operative arrangement, it is patently clear who the dominant partner is. Inclusion of the safeguard clause, and the EU’s perceived willingness to make use of it means there is uncertainty in developing markets, which hinders investment and therefore growth. Furthermore, the EU has placed significant limitations on which goods are to be traded freely and which incur tariffs. Those industries which threaten weaker European industries face barriers to trade, however the process of deindustrialisation in the West has meant that these tend to be older primary and secondary industries which are precisely those on which developing countries are likely to concentrate. Tsoukalis rightly points out that free access for industrial exports means very little if there is “little to export” . This could seem to make the gesture of trading preferences seem rather more hollow; nevertheless, the EU remains the most important source of foreign capital for many third world countries .
Most studies on trade effects of EU policy yield a positive result for developing countries, however the broad consensus is that the benefits are at best marginal and short term in nature; that is to say, the growth of exports in a particular nation has been shown to be determined by that country’s export supply conditions (degree of outward orientation in business strategy, bureaucratic constraints, activity of investors etc.). However it has also been shown that in those countries where export conditions were indeed favourable, the existence of beneficial trading agreements contributed to the degree of growth success achieved .
The complex network of preferences and agreements which has built up over time in the EU, coupled with the reliance of the EU on trade agreements as foreign policy tools has meant that an increasing number of preferential trade agreements have been formed. These agreements are self-replicating as each new accord creates further disadvantaged partners or erodes existing advantage. The general proliferation has devalued them for each individual, making EU policy less effective on a country-to-country basis.
Pomfret shows that there is welfare gain to the developing country from a preferential trade agreement; It is shown that even without the increased exports, welfare gain to the developing country is achieved through a General System of Preferences on the part of the EU. This is also a satisfactory policy as it can be implemented without any change in economic or business structure in the domestic economy, and is also available to the government as ‘no-strings’ aid if they choose to implement an export tax equivalent to the preference level .
There is no firm conclusion over whether trade creation as a result of EU preference policy is outweighed by trade diversion; the EC’s own figures suggest that the one will cancel the other. However it is accepted that diversion will occur in markets for low-value, non-differentiated, price-elastic goods which indicates that the average developing economy will lose out on trade in manufactures to EU counties . However in the case of primary commodity exports the elasticities of price are smaller, so the trade creation effect will be greater. The effect of this is likely to be that existing trade patterns are strengthened, and diversification of the developing economy is constrained . This will make it more difficult for the developing nation to move away from a heavy reliance on one or two primary products with a risky market base. Finally, from a purely economic point of view, it should be remembered that any trade diversion represents a global loss of efficiency and mis-allocation of resources .
Hallett’s rather serious concern is that the emergence of an ever-closer union in Europe will have negative effects the developing nations, not through net effects on output and trade, but through the obstruction of diversification, and diversion of investment to the EU .
One of the problems in inherent in the system is that of asymmetrical benefit amongst developing nations; for example the Caribbean has been less successful than Africa in exploiting the Lome Convention , and the two tier import regime agreed upon by the EU in the wake of the banana disputes is still favouring ACP countries above ALM (Asian and Latin American). Whilst this is clearly good for ACP, the policy cannot necessarily be said to be helping all developing countries to develop. The EU has fostered preferential trade agreements with all Mediterranean countries except Albania and Libya; examples of asymmetrical benefit are plentiful. The EU was accused in the 1970s of creating a ‘Pyramid of Privilege’ in its network of trade relations whereby the ACP are the preferred nations with the Euro-Med. countries second and the rest of the developing world being considered last. In recent years ACP importance has declined relative to others (although only slightly) and South Asians have lost out to Latin Americans (mostly as a result of the accession of Spain and Portugal into the Community in 1986) . Although the pattern may be less marked now than in the conceptual ‘Pyramid’, the question remains; should we be examining who benefits from EU policy rather than whether anyone indeed does?The final concern about EU external policy toward developing nations is the increasing conditionality which prevails. In later versions of the Lome Convention the emphasis has been taken away from the (admittedly false) assumption of an equal co-operation agreement, and the principle of economic self-reliance. Instead there are several clauses in Lome III and IV which refer to Human Rights Conditions and reference to democracy and structural support programmes. Emphasis on civil society and even an attempt to include a clause for “good governance” (resisted angrily by the ACP but favoured by the EU in the wake of corruption revelations) may be feted as ‘ambitious’ and ‘sophisticated’ or viewed distrustfully as neo-colonialist in nature. Trading agreements are beginning to look more like ‘tied’ aid which should be approached with due care and attention paid to the relevant moral and ethical issues.
Although the policy adopted by the EU with respect to its internal affairs may on the surface bear no relation to the developing countries, such a large trading area cannot possibly hope to fundamentally change its structure or organisation without the repercussions being felt abroad, particularly by those reliant upon it for trade. With this in mind I shall devote the rest of this essay to exploring the effect of various developments in EU integration and policy.
The Common Agricultural Policy is highly distortionary to the global market and has accelerated the trend away from traditional colonial relations by methods of trade creation and diversion. Its global welfare effect is strongly negative (for the participating countries as well as the developing world). The costs of its implementation are borne, surprisingly, by consumers in member states (food prices are far higher than world levels) and, unsurprisingly, by farmers outside the Union (despite having a comparative advantage in food production, they are prevented from exporting to the level considered efficient and, by some, just). On the implementation of the Single European Act of 1987, many countries raised fears of the EC (as was) becoming ‘Fortress Europe’, that is to say, a more protectionist Europe. The potential for erosion of existing trade benefits was the main concern. Trade creation could arise because of stronger growth within the EC, whilst trade diversion might occur as more efficient units of production were enabled in Europe through the Single Market. It was estimated that oil producers would fare best amongst developing countries which again demonstrates the asymmetrical effect of EU policy. It was also commonly observed that the effects on the developing countries would depend not on their response or their original domestic policies, but on the EC’s actions, again exposing the myth of being equal trading partners .
The European Directive EC-92 is predicted to dampen trade in manufactured goods in all developing countries, making diversification difficult and reinforcing dependence on one or two unstable goods, as well as trade and investment creation and diversion effects which will have worrying long-term implications for growth and trade .
The Treaty on the European Union (Maastricht) led the way toward the kind of conditionality on trade exemplified in Lome III and IV; again, the effects of this will differ depending on the area of the developing country. Africa will be focused on political and bureaucratic reform, Latin America and Asia on strengthening the private sector, Euro-Med on population and immigration issues. The treaty gives the impression that the EU will move toward a more unified and coherent strategy, which will most likely take much tougher line on trade issues than the previous more discretionary system. Whether this proves to be of benefit to the developing world remains to be seen.
The general trend towards structural realignment in the EU, particularly in the face of enlargement to the south-east will mean some considerable cost in realignment policy and structural adjustment in the form of fiscal transfers. Hallett points out that this surely must mean a reduction in aid to developing countries . The accession of Spain Greece and Portugal meant the export possibilities of Euro-Med countries were significantly reduced as the EU became increasingly self-sufficient in Mediterranean products (fruit, olive oil etc.).
The influence of internal policy on external relations was highlighted when market rationalisations were attempted in the early 1990s in an effort to move to common rules regarding banana imports. ACP exporters feared this represented ‘the beginning of the end’ for their traditional relationship with the EU, and the increasing pressure of the WTO suggests that liberalisation is going to become increasingly important in EU external relations, reducing the strength of existing preferences. The conclusions to be drawn from this examination are far from clear. Benefit or otherwise to a third party as a direct result of external policy are difficult to gauge empirically; the result is a wealth of conflicting information.
On the one hand, the many technical, economic criticisms of the system of preferences seem on the whole to indicate that the EU is doing the developing world no real favours in stifling their economy and creating a wealth of preferential agreements which serves only to undervalue the gesture. It is a fact that for every ECU (European Currency Unit) the EU spends on aid, it spends almost two on restrictive practices; surely we cannot consider this to be helping development?Yet on the other hand, despite constant criticism of the reach of the Lome Conventions, the ACP countries view it most favourably, as is borne out in the increasing number of participants and potential members. This must indicate some benefit to developing countries, even if it is not as extensive as one might hope?It is my personal conclusion that the EU policy has not been of any real constructive use to the developing world; it has given with one hand and taken away with another. The distortionary measures it employs and the consequent crippling of development in some countries as discussed above cannot be outweighed by the gains in evidence.
Nevertheless one of the most interesting points to draw from this analysis is that the transfer of powers within the union form a national to a community level is making the most mundane of decisions take on a new importance in the global marketplace, and it is perhaps here where we can seek to be more constructive in our development efforts in the future.
BIBLIOGRAPHYHallett, A. J. Hughes, ‘The Impact of EC-92 on Trade in Developing Countries’, The World Bank Research Observer, 9 (1), 1994Maud, Humphrey, ‘Seattle and After: Reflections on the European Union/ African, Caribbean and Pacific Negotiations’, The Round Table, 354, April 2000Pedersen, Jorgen Dige, ‘The EC and the Developing Countries: Still Partners?’, from Norgaard, Pedersen and Petersen (eds.), The European Community in World Politics, 1993Pomfret, Richard, The Economics of Regional Trading Arrangements, 1988Stevens, Christopher, ‘EU Policy for the Banana Market: The External impact of Internal Policies’, from Wallace and Wallace (eds.), Policy Making in the European Union, Third Edition, 1996Tsoukalis, Loukis, The New European Economy Revisited, 1997
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