|The Bahamas Investor Magazine
June 23, 2009
June 23, 2009
Global economic integration is a challenge facing all growing economies. The key is to balance national policies to promote long-term economic growth and development while remaining competitive in an international trade environment.
The Bahamas recently took a further step towards global integration by signing an Economic Partnership Agreement (EPA) with the European Union (EU) in October 2008 in Barbados.
After nearly four years of intense negotiations, studies, assessments, drafting and redrafting the EPA was ratified, providing for a system of preferential trade agreements between the 27 countries of the EU and the 15 countries of the Caribbean Forum (CARIFORUM).
The process of reducing the duty or tariff on imported goods is known as “tariff liberalization” with goods being placed in one of seven baskets:
• the excluded basket (goods not subject to tariff reductions)
• the zero basket (zero duty)
• the five-year basket (tariff on goods will be reduced progressively over five years from their current tariff to zero duty)
• the 10-year basket
• the 15-year basket
• the 20-year basket
• and the 25-year basket.
Over the next 25 years, gradual liberalization under the EPA is expected to affect 46 per cent of goods coming from the EU.
This has garnered some mixed reactions. Most observers acknowledge that multilateral, regional and bi-lateral trade agreements are the way of the future but some are concerned about the cost to the local economy of such globalizing policies.
According to James Smith, chairman of Circle Vision Financial Planning (CFAL), an investment and financial analyst company, the globalization process could not work unless there were a set of “clear, transparent and detailed” rules and regulations regarding the conduct of trade among the nations of the world, including an overarching legal body for settling disputes related to trade.
Smith, a former senator who once held the position of Minister of State in the Ministry of Finance, noted that while the EPA might not make any immediate inroads into trading with Europe, it’s arguable that without an agreement, certain exports to Europe such as crawfish, could have been adversely affected by punitive tariffs applied to The Bahamas.
When talks of the EPA surfaced, it was the exporters of fisheries products, rum, chemical and other manufacturers that were among the first to sound the alarm in the private sector.
“It would certainly have put us at a disadvantage [if the EPA had not been signed] because our product would have cost more money going into Europe,” says Anthony McKinney, president of Paradise Fisheries—a crawfish tail export business.
And the crawfish industry is big business for The Bahamas. The latest figures available from the Department of Marine Resources indicate that 4.9 million pounds of crawfish tails, valued at $86.7 million, were exported in 2007. From 2003-2007, crawfish tail exports have varied between $106.3 million and $86.7 million.
Facing fluctuating oil prices and stiff competition from countries such as Belize, Brazil and Nicaragua, McKinney knew that his business—of which exports to the EU account for 60 per cent—would have suffered had The Bahamas not embraced the EPA.
“Our product would have been far more expensive and hence we would have had less product to ship into the European market which is a more buoyant market than the United States,” says McKinney. “Perhaps one or two companies might have folded.”
Some non-governmental organizations and dissenters within the Caribbean have argued that the EPA will ultimately hurt Caribbean producers by exposing them to unfair competition with their more developed European counterparts.
“We cannot prefer our agricultural sector [for example] over and above any of the signatories as we have agreed to lower and remove customs duties on such products coming to The Bahamas,” says Paul Moss, chairman of Bahamians Agitating for a Referendum on Free Trade (BARF).
“This is clearly shortsighted as we should be in position to nurture this section, especially in a volatile world where we have seen the [scarcity] of food recently.”
A downside to the EPA, according to Smith, is that it contains an unusual most favoured nation clause which states that the EU must receive the same benefits as CARICOM (Caribbean Community—comprising CARIFORUM member countries minus the Dominican Republic) in any future trade agreements with any other third-party state.
“In short, [our] largest trading partner, the US, is now at a competitive disadvantage since its exports to the Caribbean are subject to customs duty,” explains Smith, who for five years served as the country’s ambassador for Trade in the Office of the Prime Minister and also served as a Central Bank governor. “It is expected that the US will negotiate a trade agreement with CARICOM, which could result in the elimination of the preferential access of CARICOM goods. In my view, an EPA should have been negotiated with the US before the Europeans.”
Trade economist and Bahamas Chamber of Commerce consultant Hank Ferguson believes that The Bahamas, perhaps, gave away too much in the EPA.
“We started with the Europeans, treated them as neighbours and close friends even though our trade is not that significant with them. Now we are doing [negotiations with] the Canadians. Then we are doing the WTO [World Trade Organization] and by that time President [Barack] Obama would have his new Secretary of Trade negotiating a replacement to the Caribbean Basin Initiative,” says Ferguson. “We gave a lot more than anybody else gave primarily because our economy was open. You already could come here as a European and build a hotel if you wanted. The only thing we protected was our National Investment Policy.”
All areas open and reserved in the National Investment Policy remain the same under the EPA. Areas such as wholesale and retail trade, inter-island transport, real estate agencies, construction (except specialized construction) and import/export businesses are closed to foreign participation. Passenger transportation services such as taxis, tour operators and jitneys are also reserved for Bahamians.
The EPA concerns three key areas of trade: goods; services, investment and e-commerce; and trade-related issues.
The 155 sectors included in the EPA services schedule fall into very broad categories. For each service sector, countries determine how a foreign supplier will be allowed to supply service to their domestic market.
There are some sectors such as national and international air transport services, aircraft repair and maintenance, ground handling services and so on, that have been exempted from the EPA by all countries.
There are also some sectors that countries may choose to exclude from the Services Schedule. The Bahamas exempted telecommunications and real estate.
On the financial services front, the EPA states that countries “may adopt or maintain measures for prudential reasons that include protection of investors, depositors or policy holders or measures that will ensure the integrity and stability of their financial systems.”
To ensure fairness in the marketplace, the EPA commits countries to the establishment of a competition commission, among other things.
The hard part:?implementation
Since signing the EPA, the Ministry of Finance along with the Office of the Attorney General and the Ministry of Foreign Affairs have been busy.
The agreement requires the enactment of legislation and the creation of a new institution by 2013 that will have the capacity to investigate anti-competitive practices such as the imposition of unfair prices, clauses that give exclusive rights to individuals or groups of companies, quantity restrictions or vertical integration.
“[The] competition policy is one of a few areas where there is no legislation in place,” says Minister of State in the Ministry of Finance Zhivargo Laing. “However, the Office of the Attorney General has draft legislation so we are now moving from a position of having nothing at all.”
To comply with EPA requirements some existing legislation will have to be amended as it relates to customs and trade facilitation, intellectual property, public procurement, and plant and animal protection. To this end, there have been meetings with the ministries and agencies to discuss the commitments outlined in the agreement.
Among other things, the EPA calls for the creation of a standards bureau. Laing says legislation pertaining to a weights and measures bureau has already been passed. He points out that there’s already several standard-setting bodies scattered among various government agencies within the Ministry of Health, the Ministry of Agriculture, the Department of Marine Resources and the Ministry of Works.
“This is one of the areas where major legislative change is not the main obstacle but the need for institutional reform,” Laing explains.
With one of the central tenets of the EPA being to improve transparency, government agencies are being asked to improve their web presence and the dissemination of public information.
Within the Bahamas Customs Department a consultant has been working to improve the information technology systems. Once completed, the upgrades are expected to provide, in the short term, three important outputs.
“Customs would be able to accept documents electronically from brokers,” Laing explains. “Government agencies would be able to communicate with the Customs Department in real time and there would be a single administrative document for imports and exports.”
The move is critical as the EPA includes measures to improve, increase and regulate trade between the EU and CARIFORUM countries.
For Ferguson, the trade economist, the move to streamline customs is a step in the right direction but the bigger issue, he says, is how will government replace customs revenue losses.
“The 800 pound gorilla in the room is where are we going to get or replace that revenue,” Ferguson queries. “That is the million-dollar question this government will have to answer in the short term within this administration.”
The road ahead
Since December 2007 the Trade Commission has been liaising between the government and the private sector on trade matters and advising the government from a private sector perspective on those aspects of the local economy on which the EPA will have an impact.
As to the way forward, Trade Commission chairman John Delaney has some suggestions.
“We need human and physical resources dedicated to the Trade Commission. All our members have demanding professional commitments. No member receives any money. This is entirely voluntary,” he says, adding that the Trade Commission does not have its own staff, rather it’s assisted by the staff at the Ministry of Finance.
Members of the Commission meet monthly at the office of Higgs &?Johnson, a full-service commercial law office of which Delaney is the managing partner.
“I imagine that the next state of evolution will be full-time staff, physical premises and for there to be a budgetary increase from the $50,000 per annum that’s allocated to the Trade Commission now,” he adds. “As to when those things might happen, I can’t speculate on where we are starting from today with fairly limited resources. Those are obvious areas of evolution that we might be able to anticipate.”
Funding for the EPA requirements should not be a problem however. An allocation of $1 million was set aside in the 2008-2009 budget to assist with EPA implementations, while some government agencies are expected to be allocating funds in the 2009-2010 budget in order to meet their EPA obligations.
Regionally, some $200 million has been set aside for CARIFORUM to assist in implementing the agreement.
In the meantime, an EPA Cabinet Implementation Committee continues to monitor the country’s progress.
Officials say once implemented, the agreement provides legal certainty to investors not only from Europe but from other CARIFORUM countries who seek to invest in The Bahamas.
Says Laing:?“It not only outlines the areas where they can invest in The Bahamas but also compares the investment regime here with the rest of the CARIFORUM region.”
How the EPA?came to be
There’s nothing new about The Bahamas trading relationship with Europe. It has been in existence for nearly 35 years, through this nation’s involvement in the Association of African, Caribbean and Pacific States (ACP) since 1975.
However, the Cotonou Agreement (which the Economic Partnership Agreement replaces)?was acutely one-sided.
Under the Cotonou Agreement, ACP countries were allowed preferential (duty-free)?access to Europe’s market, while EU countries received no such preferential treatment.
The US challenged the agreement claiming that it violated the most favoured nations (MFN) treatment rule of the World Trade Organization (WTO)—a body which oversees the rules of trade between nations at a global level.
Under the MFN principle there must be trade without discrimination; that is, all nations have to be treated equally. Special favours such as low, or no, customs duty for some is discriminatory.
It was a state of affairs that resulted in the EU and the ACP having to negotiate new rules of trade called the EPA. The key feature of the new agreement being “reciprocity”—the two-way flow of benefits.
With the EPA being provisionally applied since December 29, 2008,it means there’s now an international mandate in place that outlines the steps for lowering and the eventual elimination of duty on EU and CARIFORUM imports into The Bahamas.
Foreign worker influx?
One of the biggest fears originally associated with the EPA was the cross-border movement of people; that is, would the EPA allow EU and CARIFORUM workers open access to the Bahamian labour market?
The answer is no. The EPA does however facilitate the temporary entry of workers for business purposes in specifically defined categories.
Specific categories of foreign-born workers will be allowed to stay anywhere from three months to three years in The Bahamas.
These categories include?senior personnel involved in setting up a business, intra-corporate transfers, graduating trainees, business service sellers (a representative of a service supplier), contractual service suppliers and independent professionals (a specialist required to fulfil the terms of a contract).
Bahamians in these categories can also access similar jobs in CARIFORUM and EU countries.