TCD0012 - Evidence on Trade and the Commonwealth: developing countries

Written evidence submitted by Fairtrade Foundation (TCD0012)

Summary

We welcome the government’s decision to replicate the EU’s ‘Everything But Arms’ (EBA) arrangement for LDCs;
We would like to see a UK preference scheme which builds upon the EU’s GSP, by extending DFQF access to a wider set of economically vulnerable countries, including those countries that are in Customs Unions with LDCs (as proposed by Traidcraft). There should also be consideration, subject to impact assessments, of more generous product coverage within a UK scheme;
EPAs continue to be problematic from a development perspective and in some countries remain heavily contested. UK trade policy should support regional integration rather than fragmentation in the South, and existing market access could be guaranteed through the extension of unilateral preferences, rather than a ‘rolling over’ of EPAs;
The Commonwealth could be a space for piloting new initiatives and supporting outcomes from multilateral processes. The Fairtrade Foundation is calling for a focus on Fair Trade for Development at CHOGM 2018;
The UK could support development through trade in a number of ways: by taking a ‘value-chain’ approach and develop holistic plans for investment and policy change across a number of sectors; by excluding ISDS from future trade deals; by refocusing ‘aid for trade’ programmes for maximum impact on producers and workers, and by championing development issues in global trade negotiations;
In order to maximise its support for development there needs to be cross-Whitehall coordination involving DIT, DFID, DEFRA, BEIS and DexEU. The Fairtrade Foundation would like to see a commitment to policy coherence for development and achievement of the SDGs set out in trade legislation.
As noted in previous submissions, we would like to reiterate the need for legislative change, through the current Trade Bill or otherwise, in order to establish a transparent and inclusive process for the agreement of trade deals.

Introduction

The Fairtrade Foundation is the independent non-profit organisation that licenses use of the FAIRTRADE mark on products in the UK as the UK member of Fairtrade International. We work with over 400 businesses in the UK which sell Fairtrade certified produce, from major retailers and international brands to small and medium-sized enterprises (SMEs) specialising in ethically traded produce. The Fairtrade retail market in the UK alone was worth £1.6 billion in 2016.

Fairtrade works directly with businesses, consumers and campaigners to make trade work for farmers and workers in least developed countries (LDCs) and other developing countries. There are 1.6 million small scale farmers and workers in the Fairtrade system, across 75 countries. 60% of all farmers and workers in the Fairtrade system are in Africa and one third are in Commonwealth countries.

The Fairtrade Foundation very much welcomes this inquiry into Trade & the Commonwealth: Developing Countries. Brexit presents some opportunities but some very real threats, and it is our hope that the UK will thoroughly considers the development impact of any trade policy decisions, in line with the Sustainable Development Goals. The Commonwealth Heads of Government Meeting also offers an opportunity to discuss trade in a different context, outside of formal negotiations and we very are calling for this to be a discussion about Fair Trade for Development.

Should the UK seek to replicate or modify the unilateral trade preferences it currently grants Least Developed Countries after Brexit?

Least Developed Countries (LDCs) are granted unilateral duty-free, quota-free access on all good (except arms and ammunitions) to the EU market (and currently the UK market) through the EU’s ‘Everything But Arms’ (EBA) arrangement which constitutes one tier of the EU’s preference scheme and currently covers 49 countries. The Fairtrade Foundation welcomes the government’s stated commitment to replicate this arrangement after Brexit and the inclusion of this preferential arrangement in the Customs Bill which is currently making its way through parliament. Achieving DFQF market access for LDCs is a World Trade Organisation (WTO) outcome, agreed in Hong Kong in 2005 and built upon in Bali in 2013 [1], and is also included as a target within the Sustainable Development Goals (SDGs) – 17.12 [2].

It is important to note that the value of such a preference scheme is relative and is determined to a large extent by other deals with non-LDCs which could lead to preference erosion. Unilaterally reducing tariffs, which is being promoted in some quarters as a post-Brexit option, would by definition undermine any preferential access granted to developing countries. Therefore it is essential that timely and independent impact assessments are carried out before negotiations formally commence on any new trade deals or significant changes to tariffs.

Should the UK seek to replicate or modify the unilateral trade preferences it currently grants other developing countries and after Brexit?

The Fairtrade Foundation has argued that current market access must be protected and our 2017 report [3] gives examples of different industries that could be affected should the UK fail to guarantee market access equivalent to that granted through the EU. This includes the export of cut flowers from Kenya and bananas from the Dominican Republic. Other Commonwealth countries that could be negatively impacted include Caribbean states such as Belize which is heavily dependent on the UK market for the export of cane sugar, and other African states which have signed an Economic Partnership Agreement (EPA) or an interim EPA (such as Ghana).

There are a number of countries which are covered by the EU’s GSP [4] which do not qualify for DFQF access as LDCs and which do not have an EPA or Free Trade Agreement (FTA). The EU’s standard GSP reduces EU import duties on around 66% of all product categories. There are 10 further countries which qualify for the EU’s GSP+ which provides duty-free access on two thirds of products subject to the application of 27 international conventions on human rights, labour rights and environmental protection. Just two Commonwealth members qualify for the GSP+, Pakistan and Sri Lanka.

Depending on the structure of a UK scheme there could be more generous country coverage, product coverage and simplified rules of origin. More generous country coverage could be achieved by extending duty-free, quota-free access to a wider group of countries, including those that currently have their access guaranteed through EPAs (more detail below). Another option would be to expand on the overall number of countries qualifying for unilateral preferences. The EU scheme uses World Bank income classifications to determine qualification, but other criteria or indices such as the Human Development Index (HDI) or economic vulnerability criteria could be considered.

More generous product coverage could be achieved by considering development impact and product sensitivity. On the latter, there may be products that were considered ‘sensitive’ by the EU in which there is no UK producer interest.

Offering simplified rules of origin and maximum regional cumulation should increase the utilisation of preferential rates and facilitate an increase in cross-border value chains, and developing country share of the export of processed goods.

Any changes should of course be made using objective criteria in order to be WTO compliant, and only after thorough consideration of potential impacts. To give an example – as a result of an EU decision to increase the tonnage of bananas that some Latin American countries can export duty-free to the EU, we have seen a decrease in exports from some neighbouring Caribbean countries [5].

The Committee should be aware that as currently drafted and being debated, the Customs Bill does not give any detail on the design of a new UK preference scheme and delegates power to the Secretary of State to make regulations on this. The Fairtrade Foundation would support an enhanced parliamentary process to allow for transparent debate and parliamentary input on this topic.

Are Economic Partnership Agreements (EPAs) effective from both a trade and development perspective?

The Committee will be aware of the differing status of Economic Partnership Agreements (EPAs) which the European Union has been negotiating with members of the ACP (Africa, Caribbean and the Pacific) since 2002. The original deadline of 2007 was missed and as a result, the EU initiated interim agreements with individual or small groups of ACP countries.

From a development perspective, the EPAs have been criticised for a number of reasons. Fundamentally, the EPAs are problematic in that they require signatories to liberalise and open up their markets to European imports. The expectation is that developing countries subject to EPAs will liberalise 80% of their markets, opening them up to more advantaged competitors, including in areas such as investment and services. There is risk that the EPA approach could undermine small producers and lead to dumping. Additionally, developing countries will also lose a significant amount of income, currently generated through tariffs, for investment in essential services and meeting the SDGs.

The least contentious agreement, signed in 2008, is the EU-CARIFORUM EPA (which includes the 14 CARICOM countries plus the Dominican Republic). Rolling over this agreement into a similar deal with the UK post-Brexit, appears to be proceeding well [6], although the UK government should reflect on the limited success of the EPA over the initial 5 year period, during which CARIFORUM states saw a revenue loss, albeit influenced by the global economic crisis.

The government has also met with countries in the Southern Africa Customs Union (SACU) and has reported a positive response from governments to their transition plans [7]. However, an alternative perspective can be gleaned from research undertaken on behalf of the Africa APPG earlier in 2017 [8], where those interviewed were much more critical of the EPA process. That report recommends the introduction of interim non-reciprocal duty-free and quota-free preference schemes as an alternative.

The EPAs have been most problematic in West and East Africa, where they have led to regional fragmentation. A number of countries such as Nigeria and Tanzania have not signed the EPAs and given the ambition for regional Customs Unions’ and ultimately for a Continental Free Trade Area (CFTA) across Africa, the approach which has been taken by the EU which has been to make deals with individuals countries, thus putting pressure on others in the region, has not been helpful.

Ahead of EU-Africa Summit in Cote D’Ivoire (28-29th November), it was reported that the AU Trade Commissioner is seeking a “moratorium on all EPAs”. No official statement seems to have been made but we hope that the UK government is engaging with the AU and the Commissioner, to clarify and respond to the current position.

Moreover, EU-ACP relations will themselves be entering a new phase when the Cotonou agreement expires in 2020. Before Christmas, the European Commission presented a recommendation to the European Council, including a proposal for negotiating directives with a few to negotiations commencing no later than August 2018.

How should the UK approach its relationship with countries with whom it currently has an EPA after Brexit?

The UK should approach these relationships with an open-mind and on a case by case basis, assessing whether arrangements are working well from a development perspective, and whether development impact could be improved by offering an alternative. Whilst ‘rolling over’ the EPAs may seem like the easiest option, this would be a missed opportunity to ‘reset’ relationships and improve upon current EU deals. We do not believe that any LDCs should be pressured into signing EPAs, and across the African continent in particular, the UK government should hear the concerns of governments who are concerned that the EPAs will deny them the opportunity to nurture infant industries and protect the livelihoods of small-holders.

One alternative option could be to extend duty-free, quota-free access to those countries that are in customs unions comprising a majority of LDCs, an idea put forward by Traidcraft. Beyond that, the government could also look at guaranteeing existing market access through the extension of unilateral preferences – this need not be any more generous in effect than current arrangements, but would be another way of replicating existing market access.

Should the UK make particular arrangements for trade with developing countries that are members of the Commonwealth?

The Fairtrade Foundation sees potential in the Commonwealth for moving forward with Fair Trade for Development. The Commonwealth cannot be a ‘defined group’ for the purpose of trade policy and agreements, but it can be a ‘coalition of the willing’ that can pilot initiatives and support outcomes from other multilateral processes such as achievement of the SDGs.

Ahead of this year’s Commonwealth Summit, the Fairtrade Foundation is publishing a 5-point plan which calls for action to promote fair and ethical trade with a focus on improving the lives of producers and workers who can often find themselves exploited in supply chains. A third of Fairtrade-exporting countries are Commonwealth members and there are significant consumer markets in the UK, Canada, Australia and New Zealand. We think that this offers an opportunity to bring forward initiatives and a coordinated approach to policy and legislation (such as ‘modern slavery’) to improve standards through improved corporate reporting and accountability on human rights, action to address seemingly intractable problems such as the payment of poor wages, and the promotion of women’s economic empowerment. It is our hope that Commonwealth leaders will not just discuss trade for development, but Fair Trade for Development.

In what other ways might the UK seek to support development through trade?

Whilst this inquiry has asked about unilateral preferences and EPAs, it is important to remember that a number of developing countries either have existing Free Trade Agreements (FTAs) with the EU – as is the case with a lot of Latin American countries, or may have been identified by the UK as a potential partner for an FTA (e.g. India). The UK government could support development outcomes in future FTAs by categorically ruling out Investor-State Dispute Settlement (ISDS) mechanisms from future deals, which can undermine a country’s policy space.

The Secretary of State has stated that post-Brexit he would like to an increase in value-added goods exported from developing countries. This is a very welcome statement and it would be helpful to explore how the UK might play a role in bringing this about. As noted above, whilst important to address tariff escalation, there are arguably even more important factors to address, especially given that tariff issues for a large proportion of countries are addressed through DFQF access or through EPAs and FTAs. In relation to coffee roasting for example, the major obstacles to value addition are investment in equipment and the lack of domestic and neighbouring markets given that coffee is higher quality if beans are roasted close to market. DFID and DIT could take a coordinated approach to a number of different value chains, and develop holistic plans for investment and policy change in those sectors.

DFID has already prioritised economic development and the recently agreed ED strategy earmarks around £1.8bn for its delivery, including increased capitalisation of CDC [9]. There are significant resources going into ‘Aid for Trade’ programmes such as Trademark East Africa which aims to improve trade infrastructure [10]. However, more work needs to be done to measure the development impact of these investments, particularly on women and the poorest communities - those who are ‘left behind’. There is also very little money going into the ‘social infrastructure’ that is required to empower producers and workers in the value chain – organisational strengthening for co-operatives, support for trade unions etc.

Through Fairtrade, there is evidence to demonstrate development impact through higher incomes and also through the Fairtrade Premium which is paid directly to farmers and workers for investments in productivity and other social projects. In Kenya, where there are more than 375,000 Fairtrade farmers and workers, €5m was generated in Premium in 2015. More than €5.7m was generated for investment in Ghana. Thus by buying Fairtrade, UK consumers are supporting development through trade.

The UK could also seek to support the development agenda in global negotiations, including at the WTO. There are outstanding issues from the Doha Development Round which remain unresolved and the UK could stand alongside developing countries in their calls for a conclusion to these agenda items which include a transformation of rules on agriculture to address (developed country) subsidies and promote food security.

In what ways might the UK coordinate its trade policy with other policies (e.g. development assistance) in order to support development?

There is already some positive coordination through the joint DIT/DFID ‘Trade for Development’ team, but it would be good to understand how this team is actively feeding into other DIT work-streams including the Working Groups which have been set up to lay the groundwork for future trade agreements with countries like the United States and Australia.

The Fairtrade Foundation has suggested that one way of embedding this co-ordination or policy coherence, would be to include a reference to sustainable development, or the Sustainable Development Goals (SDGs) within trade legislation. This would require the government to take account of development impact when considering changes to tariffs, other policy changes, and when agreeing a mandate for future trade negotiations.

There must also be a very close working relationship between DIT/DFID with DEFRA on the issue of subsidies, and at the level of individual commodities. The EFRA Committee has recently announced an inquiry into sugar which is very welcome – this is an example of a very complex issue, where decisions about subsidies and tariffs will directly impact on the livelihoods of producers in developing countries. It is our understanding that other important issues, such as quotas and sanitary and phytosanitary standards (SPS) will be led by DEFRA.

There is also further work that is required to ascertain how trade policy can contribute to wider government efforts to promote human rights and eliminate tackle modern slavery. The UK government must consider how to integrate human rights obligations, including labour rights, into trade agreements, and how it will approach doing trade with those countries with a poor record on human rights and a high risk of modern slavery.

Proactive coordination with BEIS is also needed in order to address unfair trading practices which can undermine the development impact of trade, and result in producers getting an unfair deal. The Fairtrade Foundation has been part of a wider coalition calling for the remit of the Groceries Code Adjudicator (GCA) to be extended so that producers further up the supply chain can bring cases.

It goes without saying that there must also be strong coordination with DExEU. A strong Fairtrade market in the UK and Europe, is currently enabled by frictionless trade at borders, which is especially important for the movement of fresh produce such as bananas and flowers.

Finally, we would like to take this opportunity to reiterate the points which we have made previously about the need for an enhanced scrutiny process for the agreement of UK trade deals. We would urge the government to come forward sooner rather than later with legislative proposals in response to the White Paper consultation on transparent and inclusive trade policy.

February 2018