The EAC-EU EPA and Brexit: Legal and Economic Implications for EAC LDCs

This report presents a legal and economic analysis of the Economic Partnership Agreement (EPA) between the European Union (EU) and the East African Community (EAC), the EPA's relation to the rules of the WTO, and the implications of the UK’s departure from the EU on EAC LDCs-EU trade. It considers the obligations of EAC parties under public international law, the WTO, the EAC treaties and under the EPA itself. The report also assesses whether EAC members are currently under any obligation to ratify or implement the EPA, and, in its final chapter, presents an analysis of the UK’s continuing obligations to EAC Partner States after Brexit. The authors also offer a series of recommendations of how EAC LDCs may best approach the UK to secure their developmental and economic interests.

Clinic: Georgetown University Law, with TRAPCA, Spring 2017

Executive Summary

The full report can be accessed and downloaded here.

INTRODUCTION

After over a decade of negotiations, in 2014 the European Union (EU) and the East African Community (EAC) finalised the text of an Economic Partnership Agreement (EPA) to provide each other with preferential market access. From the EU’s perspective, the EPAs’ overarching objective is to provide a means for continued duty-free quota-free (DFQF) market access into the EU to the African, Caribbean and Pacific (ACP) groups of countries, consistent with the parties’ obligations under the rules of the World Trade Organization (WTO). Although least developed countries (LDCs) currently obtain DFQF access consistent with WTO rules, the EU contends that the only way to continue to provide such access to developing countries, like Kenya (which are not “least developed”), is to enter into the reciprocal EPAs, where both parties undertake to liberalise and reduce their import tariffs under GATT Article XXIV.

The EAC-EU EPA was initially set to be signed in October 2016. Yet, several EAC LDCs (ELDCs) have been reluctant to do so, citing concerns over Brexit – the UK’s recent decision to leave the EU – and the adverse economic and developmental impact the EPA might entail. ELDCs are particularly concerned about undertaking greater tariff liberalisation than ever before, especially given the EU’s highly competitive and advanced industries. In addition, ELDCs have expressed concern over the EU’s agricultural subsidies, the EPA prohibition on export taxes, and how the standstill and most favoured nation (MFN) clauses might constrain their policy space and ability to protect infant industry.

This report presents a legal and economic analysis of the EPA, its relation to the rules of the WTO, and the implications of the UK’s departure from the EU on ELDC-EU trade. It considers the obligations of EAC parties under public international law, the WTO, the EAC treaties and under the EPA itself. It suggests that three options are open to the EAC Partner States in relation to the on-going EPA negotiations: withdrawing from the negotiations and the EPA, renegotiate the EPA, or advocate for a change in the WTO rules. The second option, to renegotiate, is recommended as the most fruitful. The third option can be pursued together with either of the other two, but is likely to be difficult.

In addition, the report considers whether EAC members are currently under any obligation to ratify or implement the EPA, and, in its final chapter, presents an analysis of the UK’s continuing obligations to EAC Partner States after Brexit. The report offers a series of recommendations of how ELDCs may best approach the UK to secure their developmental and economic interests.

Who are the Parties to the EU-EAC?

It is important to first ascertain who the parties to the EPA are, especially in light of Brexit. The Preamble of the EPA lists the EAC members (excluding South Sudan), the 28 EU member states individually, and the EU itself as signatories to the EPA agreement. Article 132 of the EPA defines the contracting parties of the EPA to be the contracting parties to the Treaty establishing the East African Community (EAC Treaty), on one side, and the EU, or its member states, or the EU and its Member states, on the other side.

Findings:

- South Sudan was not an EAC member during the EPA negotiations. However, by virtue of its accession to the Treaty establishing the EAC in April 2016, it too would become a party to the EU-EAC EPA if the agreement is concluded.

- The territorial application clause of the EPA clarifies that the EPA agreement shall apply only to the territories of the EAC Partner States and territories where the Treaty on the European Union (TEU) and Treaty on the Functioning of European Union (TFEU) apply.

- Therefore, when the UK ceases to be a member of the EU, the TEU and TFEU will no longer apply to the UK, and, consequently, the EUEAC EPA will no longer be applicable to the territory of the UK.

- A close reading of the preamble suggests that the EAC itself in its institutional capacity is not a signatory to the EPA. Instead each individual EAC Partner State is a signatory.

OPTION A: WITHDRAWING FROM THE EPA NEGOTIATIONS

A straightforward means to deal with the economic and developmental concerns flowing from the EPA is to withdraw from the negotiations. However, as this report highlights, abandoning negotiations poses risks to future EAC integration as well as the potential benefits the EPA may bring.

Ability to withdraw from negotiations under principles of public international law

If they wish to do so, the EAC members are able to withdraw from the EPA negotiations consistent with international law. Since the EPA has not yet entered into force, even Kenya, which has both signed and ratified the EPA, can withdraw without consequence.

Economic and legal reasons provided by Brexit in favour of withdrawal

Looking at the UK market in 2016, approximately €0.4 billion of EAC exports (17% of total EAC-EU exports) were destined for the UK, out of which €0.37 billion (93%) originated from Kenya alone.1 This means that Brexit will shrink the EU export market for EAC countries by 17% as per last year’s figures, while under the EPA, the UK continues to enjoy full access to EAC markets. The UK’s departure thus significantly impairs the expected benefits of the EPA and upsets the negotiated balance of concessions. Furthermore, Brexit raises questions regarding the development funds promised to the EAC. The UK is the third largest contributor to the EDF after Germany and France, contributing up to 14% to both the 10th and 11th EDF. 2 Brexit therefore creates uncertainty about continued aid disbursement to the EAC Partner States, and the continuity of EU funded projects such as the EAC Road Transport Sector Policy.

Additionally, it can be argued that Brexit and the consequent imbalance in the negotiated concessions constitutes a “fundamental change in circumstance” under Article 62 of the Vienna Convention on the Law of Treaties (VCLT). This provides an additional legal basis under which the EAC Partner States would be justified to withdraw from the negotiations in good faith.

Possibility of the EPA proceeding without all EAC members

Under Article 12 of the East African Customs Union Protocol (CU Protocol), EAC members are obliged to maintain a Common External Tariff (CET). If some EAC members implement the EPA, and others do not, EAC members will no longer maintain the same external tariffs and thus violate the CET. Any modification of the CET will have to be by unanimous decision, either through “review”, contained in Article 37 of the CU Protocol, or through a treaty amendment. However, even if a common position is arrived at, deviating from the CET could severely undermine future integration and cooperation efforts.

Recommendations:

- If they wish to, a single member can likely block other EAC members from implementing the EPA. Yet this would severely harm the EAC and may result in members threatening to leave EAC, as it would prompt a choice between EAC membership and EPA market access.

- EAC members can also agree to review or amend the CET to allow some members to implement the EPA while others withdraw from negotiations. However, given the benefits of regional integration, and the threat posed to long-term integration efforts if only some EAC members implement the EPA and thereby undermine the CET, withdrawal from the EPA negotiations by any of the EAC partners is not recommended. In our opinion, the most beneficial outcome would be to renegotiate the EPA under Option B below.

OPTION B: RENEGOTIATING THE EPA

Legal justifications for renegotiating the EPA

The same grounds as invoked under Option A are equally valid in the context of renegotiation. In addition, the EPA contains provisions allowing for a review of its terms when another country joins either trading bloc (Articles 144-5). South Sudan’s accession to the EAC therefore triggers such a review. By analogy, the departure of a member should also trigger a review, as is the case with the UK. Both of these events thus provide a reason to review the negotiated EPA.

Mandatory WTO requirements for free trade agreements (FTAs)

Under the WTO, developing countries can provide specialized market access between themselves under the Enabling Clause. The EAC is notified under the Enabling Clause. However, trade arrangements which include a developed country, such as the EU, must be notified under Article XXIV of the General Agreement on Tariffs and Trade (GATT). In contrast to the Enabling Clause, Article XXIV requires all FTA parties to liberalise “substantially all the trade” between them. The EU interprets this requirement to mean that 90% of average total trade volumes of all FTA parties must be liberalised. Under the EPA, the EU will therefore liberalise 100% of its trade, and all EAC Partner States 82.6%.

How can the EPA be renegotiated?

Based on a legal analysis of Article XXIV, this liberalisation as well other provisions of the EPA go beyond what is required for an FTA under the WTO. To respond to the developmental concerns that the EAC Partner States have raised regarding the economic impact of the EPA, they could seek better terms within the following areas:

- Liberalisation commitments: There is no agreement or accepted legal definition of the exact meaning of “substantially all trade”. Looking at caselaw, practice and statements by WTO members, ELDCs should only have to liberalise around 70%, rather than the current 82.6%. Notably, the EU itself has been supportive of differential treatment within Article XXIV, and liberalisation by Mexico under an existing EU-Mexico FTA from 2000 E only amounts to 54.1%. However, ELDCs should also consider to what extent a complete exclusion of certain markets, and complete liberalisation of others, locks them into an inflexible development model unable to respond to future market developments.

- Phase-in periods: There are no strict timing requirements for liberalisation under GATT Article XXIV. These could be extended from the current 25 years to 35 years or more, and/or more of the trade could be liberalised closer to the end of the liberalisation period. This would afford LDCs a longer time to adjust, lessening any adverse economic impact while maintaining any positive competitive advantage liberalisation may afford.

- Safeguards: Safeguards allow for the temporary restriction of imports where injury to the domestic industry can be proven. No strict requirements under Article XXIV exist, as long as measures are temporary. The safeguards currently in the EPA could be made easier to apply and less restrictive, and ELDCs should seek to improve the ability to apply safeguards to infant industry. The causation requirement could be removed, along with the current sunset clause removing infant industry as a ground after ten years. This would help ELDCs to shield their markets from sudden import surges and more competitive European producers more generally.

- Export taxes: Export taxes produce revenue and can be used to increase domestic supply by constraining exports, although this may also constrain economic growth and harm cash inflows. Export taxes are prohibited under the EPA, but can be imposed for up to 48 months under relatively flexible conditions in order to protect domestic industry, currency stability, food security etc. However, the WTO does not prohibit export taxes, and there is flexibility under Article XXIV to apply them to at least 20% of trade, especially if applied temporarily. There is thus scope for further flexibility than currently provided for under the EPA, and export taxes can be used as an affordable means to counteract the EU’s agricultural subsidies.

- MFN and standstill clauses: Most favoured nation (MFN) treatment requires that the EPA parties extend to each other treatment as favourable as that extended to other countries through subsequent trade agreements. The standstill clause means that the applied rates of duty, which may be lower than those which are bound (fixed) under the terms of the EPA, may not be raised. Neither clause is affected by WTO rules, but do constrain EAC states’ policy space. EAC parties could thus press for additional flexibility.

- Differential treatment for LDCs: We recommend that ELDCs emphasise that the five out of six EAC states are LDCs, and special considerations must apply. The EU may be open to more generous concessions if they only apply to LDC countries. Since Kenya as a developing country stands the most to gain from concluding the EPA, it may be willing to take on extra commitments.

Changes within these areas would serve to dampen the economic impact of the EPA on ELDC markets, and leave countries with more flexibility and policy space when formulating economic strategies in the future.

Recommendations:

- Based on our overall analysis, we conclude that a renegotiating of the EPA would be in the best interest of ELDCs.

- Ideally, on the basis of Brexit and the other legal and economic reasons outlined in this report, EAC members will be able to find a common position to push in concert for a renegotiation of the EPA in line with the above proposals. A common position would increase EAC bargaining power and avoid undermining future EAC integration and political tension.

- The EU is unlikely to give in readily on liberalisation commitments. However, reluctance to agree to decreased liberalisation commitments may help EAC members secure valuable concessions in other areas.

- ELDCs should emphasise their economic vulnerability and seek differential treatment where possible.

- The EPA can likely push the boundaries of WTO consistency, since unless the EPA commitments are grossly inadequate, a challenge under WTO dispute settlement procedures is unlikely. Five out of six EAC members are LDCs, and FTAs and customs unions have only been formally challenged once before. Even if a challenge was lodged, the EU and EAC would then have an opportunity to amend the EPA at that point.

OPTION C: NEGOTIATING NORTH-SOUTH PROVISIONS AT THE WTO

ACP countries in 2002 sought to submit proposals to the WTO in order to introduce special and differential treatment for north-south agreements between developing and developed countries. Despite support from the EU, WTO members were not receptive. EAC members could seek to renew efforts to have the WTO recognize the developmental value of north-south agreements through more flexible WTO requirements.

Recommendations:

- Given previous failures to affect change in this area, seeking to influence the WTO rules would be a highly demanding and drawn out process. However, the stalling of negotiations within the current Doha Round (commenced in 2001), could represent an opportunity for G ELDCs and other ACP countries to promote the recognition of north-south FTAs as a pragmatic and achievable goal, which would help deliver on the Doha Round’s developmental aspirations.

- Furthermore, this option, although potentially costly, can be pursued together with either option A or B. If ELDCs decide to withdraw from the current EPA negotiations, this option could lay the ground for future negotiations; whereas if ELDCs choose to renegotiate the EPA, this option can be pursued alongside negotiations with the EU.

- Lastly, the arguments and previous stances taken by the EU in favour of greater flexibility for north-south agreements in the WTO, should be raised within the context of EPA renegotiations.

UK’S CONTINUING OBLIGATIONS POST-BREXIT

Much of EAC exports to the UK are enabled by two preferential arrangements, the EU standard Generalized System of Preferences (EUGSP) and the EU GSP-based Everything But Arms (EBA) initiative. There are three main variants of the EU-GSP Scheme:

- the “standard/general GSP arrangement”, which offers generous tariff reductions to developing countries. Practically, this means partial or entire removal of tariffs on two thirds of all product categories.

- the "GSP+" enhanced preferences mean full removal of tariffs on essentially the same product categories as those covered by the general arrangement. These are granted to countries which ratify and implement core international conventions relating to human and labour rights, environment and good governance;

- "EBA” arrangement for LDCs, which grants duty-free quota-free access to all products, except for arms and ammunitions.

The most significant trading partner of all the EAC Members in the EU bloc is the United Kingdom. Two EAC Member States – Kenya and Rwanda have a disproportionately high dependence on the UK Market. For Kenya, 27.8% of exports to the EU go to the UK, and for Rwanda 17% of exports are destined for the UK. The other three countries all have less than 6% of their total exports to the EU going to the UK.3 Upon formal exit from the EU, the UK will no longer be bound to extend the EU preferential trade arrangement schemes (EU-GSP and EBA) to the EAC. However, EAC exporters to the UK will have an interest in preserving preferential access to the lucrative UK market. To 3 Edwin Laurent, Lorand Bartels, Paul Goodison, Paula Hippolyte, Sindra Sharma, After Brexit : Securing ACP Economic Interests, The Ramphal Institute, London, 2017 H avoid any immediate adverse outcomes, EAC should advocate that the UK government consider offering a unilateral GSP scheme to the EAC states that would be comparable to market access provisions guaranteed under the EUGSP or EU-EBA scheme. Moreover, the UK is a signatory to the Cotonou Agreement in its own individual capacity and will still have to adhere to its obligations thereunder towards EAC members. This will ensure that Kenya continues to receive DFQF access to the UK market despite not being an LDC. The UK is one of the few high-income countries that fulfils the UN target of providing 0.7% of gross national income as overseas development assistance and is likely to continue its support to developing and developed countries. The UK is also highly likely to implement its trade reform post-Brexit in support of the Sustainable Development Goals, which call for a significant increase in the exports of developing countries and the realization of timely implementation of DFQF market access on a lasting basis for all LDCs.

Recommendations:

- Develop a common position and strategy to be pursued by the EAC collectively, aimed at securing and advancing EAC interests postBrexit.

- Continue proactive engagement with the UK government to continue unilateral preference for EAC exports and to continue development assistance.

- Establish and support a London/Brussels-based technical advisory group serviced by officials of supportive organizations and selected experts in EAC affairs to provide ongoing technical and strategic advice to the EAC and its campaign effort.

- Focus on active engagement with the media and supportive organizations to help ensure favourable public attitudes to safeguarding EAC interests after Brexit.

- Coordinate with other ACP partner countries in the Pacific and Caribbean, and with Commonwealth nations to shape post-Brexit relations with the UK.

The full report can be accessed and downloaded here.

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