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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.