EUROPEAN COMMISSION 9. THE IMPACT OF EU AGRICULTURAL PREFERENCES FROM INDIVIDUAL ACP COUNTRY PERSPECTIVES

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1 9. THE IMPACT OF EU AGRICULTURAL PREFERENCES FROM INDIVIDUAL ACP COUNTRY PERSPECTIVES In this section the methodology for the selection of the country-product case studies is outlined, and extended summaries of the case study reports are then provided. These summaries integrate and expand on the more specific case study material included in the answers to Evaluation Questions 2 to 4 in earlier chapters, in order to put the specific EQ-related material in a more general economic perspective Methodology for the selection of the country case studies The selection of the country case studies was based on specific criteria which aimed at ensuring the representation of important (in the context of this evaluation) countries, products, and trade regimes, and of all EPA regions (except the Pacific), and facilitating comparability between case study findings. These criteria were as follows: Change in tariff implemented during the period covered by the evaluation (1990 to 2011 or 2012), Significance of trade in the product proposed, Evolution of trade in the product proposed (e.g. preferential access has created new trade opportunities or generated growth of trade), Presence of private standards, Sanitary issues, Access to sea versus landlocked countries, Level of economic development, Strength of institutions. The procedure followed to identify country-product combinations involved the following steps: Step 1: based on the composition of agricultural exports to the EU by each ACP country in the most recent year for which (COMEXT) data is available, an initial selection was made of two or three products (at the 6 digit HS level) which are the most important for each country in terms of the share of their agricultural exports in value. [Significance of trade in the product proposed for the country in question criterion] Step 2: for the candidate country-product pairs identified in step 1, based on the evolution over the years (or 2012) of the specific country exports to the EU of the specific commodity (and to other destinations, if possible), identification was made of: (a) country-product pairs with strong growth; (b) pairs for which performance is not so good; (c) pairs with a product for which new export channels developed; and, where possible, (d) pairs for which exports to the EU as a share of the total exports of the country in the specific product are lower than the average for all other developing exporters to the EU. [evolution of trade in the product proposed criterion] Step 3: based on the presence/absence of changes in the trade policy regime (first in the country involved, but also among other relevant exporters of the specific commodity, including non ACP ones, taking into account erosion of existing preferences), identification was made of country-product pairs among those selected in step 2 which present (a) different evolutions of trade regimes and (b) no evolution (the applied tariff did not change). Finally by examination of the preferential and nonpreferential tariff data for the country-product pairs identified in steps 1 and 2, identification of country-product cases was made where significant changes in the trade regime and/or preference erosion occurred. [different trade regimes criterion] Step 4: based on country characteristics - such as level of development, strength of institutions (based on indices from sources such as the World Bank development indicators), degree of trade integration, being land-locked a selection of country-product pairs was made from those identified in previous steps to reflect different country profiles. [this includes the level of development, access to sea, and strength of institutions criteria] Step 5: Finally, from the several country-product pairs identified in the previous steps (at least 25) a final selection was made based on the need to include at least one country from each of the six regions of the EPAs, excluding the Pacific, and the importance of private standards, and SPS issues. In addition, products were chosen that were covered by commodity protocols, that had undergone significant policy changes under the CAP, which had relevant trade implications, and for which EU -148-

2 PTAs could have had a significant trade impact. This final selection was also influenced by the views of the European Commission regarding the importance of countries and products concerned. The above procedure resulted in the country-product pair selection indicated in Table along with some statistics for the countries and products. In the remainder of this chapter summaries of the country-product case studies are presented with the purpose of identifying the parts of the case studies that have most bearing in answering the evaluation questions posed earlier

3 Table 9.1.1: Selected country-product pairs for the case studies Country LDC Landlocked WB ease of doing business ranking HS code and product description Share of product in country's agri. exports to the EU; (%) Growth of product exports to EU in early period ( ) and late period ( ) 113 Share of country's total EU agri. exports in country's total world agri. exports; (%) Early Late Cameroon N N Bananas, incl. plantains, fresh or dried 18.4% % Ethiopia Y Y Fresh cut roses and buds, of a kind suitable for bouquets or for ornamental purposes 22.6% (+ from zero) % Ghana N N Cocoa butter, fat and oil 7.1% + + N/A Guyana N N Rice 29.3% % Kenya N N 129 Mozambique Y N 139 Namibia N N 98 Source: Computed by authors Leguminous vegetables, shelled or unshelled, fresh or chilled Raw cane sugar (excl. added flavouring or colouring) Fresh or chilled bovine meat, boneless 12.6% % 22.6% % 42.8% % 113 A positive sign denotes positive growth while a negative sign denotes negative growth

4 9.2. Cameroon Bananas Introduction With a per capita Gross Domestic Product (GDP) of USD 1,167 in 2012, Cameroon fares relatively well with respect to the per capita income in other Sub-Saharan African countries. Food security is still an extremely serious issue in Cameroon (in % of its population was undernourished), although it has improved over the years (the proportion of the population which was undernourished was 38.7% in 1991 and 26.8% in 2001 (World Bank, World Development Indicators)). Agriculture still plays a central role in Cameroon s economy. In 2010 it accounted for 53% of total employment; in 2007 agriculture value added was 19.7% of the national GDP. Cameroon s economy is increasingly integrated in world trade. Merchandise imports plus exports as a percentage of the country s GDP expanded from 24.2% in 1991, to 37.4% in 2001 and to 46.4% in Food exports were one fifth of total merchandise exports in 1990, 16.8% in 2001 but reached 46.4% in Between 2006 and 2011 agricultural exports increased at an annual rate which was 3.5 times that for total merchandise exports. The interim Economic Partnership Agreement (EPA) between Cameroon and the European Union has been agreed in December 2007 and signed in January 2009; it has been approved by the European Parliament in June 2013 and ratified by Cameroon in July This agreement is a regional agreement open to the other countries in the Central African group. Cameroon has been entitled since the 1st of January 2008 to duty-free and quota-free exports to the EU, with a transitional period for rice (until 2010) and sugar (2015). On its part, Cameroon will progressively remove existing market protection on 80% of its imports from the EU. Bananas are an important commodity in the context of the EPAs. In fact, it has been often indicated as one of the three agricultural commodities, with sugar and rice, for which most of the potential export benefits of the EPAs for ACP countries are to be gained. Bananas are an important source of export revenue for Cameroon, being the fourth most important agricultural export in value in 2011, after cocoa beans, cotton lint and rubber. Main characteristics of the banana sector The banana sector is a very dynamic industry. Bananas traded internationally doubled since Banana exports are highly concentrated; in 2012 the top five exporters alone Ecuador (33.7% of the world market), the Philippines (17.2%), Guatemala (13.1%), Costa Rica (12.1%) and Colombia (11.7) - accounted for 88% of net world exports. Cameroon is the seventh largest net exporter of bananas with 1.5% of the world market. Market concentration for imports is even higher than for exports. The two largest importing countries, the EU and the US, account for almost 60% of world net imports of bananas. Banana trade flows show a clear pattern of regionalisation. At least in part, this is induced by past and current EU import regimes. Virtually all ACP exports are directed towards the EU, while Latin American countries export bananas under MFN conditions to Europe, Russia, and North and South America. Virtually all US and Canada imports of bananas come from Central and South America and over 90% of the bananas imported by the Russian Federation come from Ecuador alone. The Asian market is largely characterized as a regional market separated from the rest of the world. Banana trade is still concentrated in a very small number of multinational companies; over 40% of world banana trade in 2013 was handled by three companies only. These firms are highly vertically integrated; not only they handle exports and imports, but also produce bananas in their own plantations and have their own fleets of vessels to transport bananas around the globe and ripening facilities in importing countries. Developments in the retail sector in the importing countries, with the rapidly increasing concentration of the industry, increasing volumes of bananas being shipped in refrigerated containers (rather than in the traditional reefers), and the disappearance of the EU import regime based on quota licenses, all have contributed to the progressive reduction in recent years of the capacity of multinational companies to exercise market power. Production of bananas suitable for exports is delicate and costly because of the relative fragility of the plant. Diseases such as Black Sigatoka, or other forms of black leaf streak diseases, are spreading globally and are a main concern also in Cameroon. Sales of organic, FairTrade and dual certified - organic and FairTrade - bananas have been consistently increasing over time. FairTrade and organic banana production constitutes the most important single factor explaining the rapid increase in recent years of the volume exported and the market share of some of the relatively smaller banana exporters, such as the Dominican Republic and Peru

5 Evolution of exports (in particular to the EU) in association to trade and other policy developments The dessert banana sector in Cameroon is extremely concentrated as four firms produce virtually all bananas exported from the country (98% of the total between 2003 and 2012). Production by smallholder producers is insignificant. The largest operator produces 51% of total Cameroon banana exports in 2013, while the next largest one, a public firm owned by the Government of Cameroon, accounts for around 40%. The third largest firm is a new comer on the Cameroon banana industry scene which started operations in 2008 and started exporting bananas in 2012; currently produces bananas on 300 ha, but has an option to expand production over 1,000 ha. Finally, a fourth firm has been an important actor in the Cameroon banana industry, with almost 16% of the country exports in 2007, but since then the group has been facing severe financial problems which significantly affected its activities and forced it to stop production and export activities altogether in January The Government of Cameroon is actively seeking a solution to the financial problems of this firm to allow banana production to resume and workers not to lose their jobs and incomes; the preferred option is to have private investors take over the company, but other possibilities are also explored. Productivity has always been considered an issue in banana production in Cameroon. Relatively low yields may be caused by several factors, including poor soil quality, a limited capacity to control Black Sigatoka, insufficient watering, suboptimal production practices, inefficient banana replacement and crop rotation practices. Recent developments in the industry strongly strengthened both the horizontal and vertical integration of the banana sector in Cameroon, with a strategic role played by the largest firm, which is owned by a relatively large multinational. In fact, this firm is currently providing technical assistance to both other firms in operation, is handling the shipment by sea of all banana exports from the country and is selling a significant portion of the bananas exported by the second largest exporting firm and the entire production of the third one. While this assures an easier and more efficient vertical coordination from production practices to the supermarket shelf which is in everybody s interest, because of the market power this firms holds, it also poses evident questions from the point of view of the distribution of the value of the bananas among the actors involved along the chain (e.g. being the sole provider of transportation services to the EU, how is the cost of this service charged to the other firms determined?). The evolution of Cameroon banana exports since 1990 clearly shows two sub-periods characterized by different dynamics, the first one from 1990 to 2003, the other from 2003 onwards. Exports in volume increased rapidly and consistently in the first period, and then they show a declining trend (Figure 9.2.1). However, Cameroon exports in value in USD (banana trade worldwide is expressed in USD per standard box containing kg of bananas) show, overall, a positive trend extending over the entire period This is the result of the developments observed over the same years for the price paid for Cameroonian bananas. The annual Average Unit Value (AUV) at the Cameroon border shows a negative trend when exports were increasing rapidly, and a positive one in the more recent years which compensated for the decline in the volume exported. This is largely due to the evolution of the USD/EUR exchange rate; in fact the AUV of Cameroon bananas expressed in Euro remained practically unchanged between 2000 and 2009, despite the fluctuations of the AUV (also in EUR) calculated at the EU border. The fact that the value of Cameroon bananas at the country s border did not change while the price at the EU border did has to do with the structure of the value chain and the distribution of the market power among the actors at the different links

6 350 (exports, 000 t) Figure 9.2.1: Cameroon. Bananas exports in volume (000 t) Source: FAOSTAT As a result of the strong preferential tariff margin enjoyed in the EU market, virtually all Cameroon exports are shipped to the EU. Since 2000 this market alone has absorbed a share of Cameroon banana exports which remained between 97.4% and 100%. Answer to EQ1: Where and to what extent has the market access under the different EU preferential trade regimes impacted on agricultural trade? Cameroon banana exports show a clearly increasing trend between 1990 and the mid-2000s, i.e. increased competitiveness on the EU market, also as a result of the significant investment support the EU provided to the sector through the Special Programme of Assistance (SPA) to traditional ACP banana producers and the ATF (Assistance Technique et Financière) program. In assessing the impact on Cameroon exports of the evolution in more recent years of the EU import regime for bananas five changes need to be considered: (i) the EBA initiative, which was fully implemented for bananas in January 2006; (ii) the introduction of the tariff only import regime for MFN countries in January 2006; (iii) the implementation of the interim EPA in January 2008; (iv) the December 2009 WTO agreement to progressively reduce the import tariff imposed on banana imports under MFN conditions; and (v) the trade agreements reached between the EU and eight Central America and Andean countries in 2010 and with Ecuador earlier this year, which will progressively reduce the import tariff imposed on their banana exports to the EU. The replacement in 2006 of the import regime for MFN countries based on a quota system with the tariff only regime significantly changed the competitiveness of Cameroon bananas on the EU market vis à vis MFN exporters as well as other ACP countries. This brought a significant increase in EU27 imports from MFN countries. Until 1 January 2006 ACP country exports outside the existing duty-free quota were subject to a preferential tariff of EUR 360 per ton, while with the introduction of the tariff only regime the tariff imposed on out-of-quota ACP exports became the now much lower MFN tariff, i.e. 176 EUR/t. As a result, under the new regime ACP country exports also expanded. In 2006 and 2007 around 15% of ACP banana exports to the EU occurred subject to the MFN tariff, which implies that some of the ACP countries had developed a capacity to produce and market bananas competitively with MFN countries. However, Cameroon was not among the ACP countries taking advantage of the new EU import regime, as this made it possible for more competitive ACP banana producers (e.g. Dominican Republic and Ghana) to exploit their competitive margins vis à vis relatively less efficient ACP banana producing countries, including Cameroon; as a result, Cameroon exports declined, rather than increased, in 2006 and The EPAs, granting ACP country banana exports unlimited duty-free access to the EU market, greatly increased the trade preferential margin of their bananas on the EU market. As a result, ACP banana exports to the EU increased significantly. ACP share of the EU market increased at the expense of that of MFN countries from 17.7% in 2007 to 21.9% in

7 The net effect for ACP countries as a whole of the two subsequent changes in the EU import regime the introduction of the tariff only import regime for MFN countries and the interim EPAs appear to be positive, i.e. the increased preference granted to ACP countries through the elimination of the quota appears to have been able to more than compensate the preference erosion which occurred with the implementation of the tariff only regime for MFN banana exports. In fact ACP banana exports to the EU in (with both changes in the EU import regime for bananas in place) were 32% higher than those in (before the changes). Analogously, considering longer periods to make the comparisons, ACP average yearly exports increased from 765 thousand tons in to 868 in and to 989 in Thanks to the trade creation effect of both policy changes, MFN exports also increased between and , although by a smaller percentage (+13%) with respect to ACP exports. However, MFN share of EU banana imports remained always above 80% between 1999 and 2008 but was below this threshold after then (Table 9.2.1). Cameroon exports did not follow the trend observed for total ACP banana exports. In fact, the reduction of the out-of-quota tariff in 2006, the elimination, in the same year, of the quota licenses for ACP countries based on historical imports and the introduction of a first come first served system to administer the quota, and the elimination of the quota limiting ACP duty-free exports to the EU in 2008 favoured relatively new, more competitive, banana exporters among the ACP group of countries. The elimination of the licenses changed market conditions and the competitive environment within the country as well, allowing firms which were not integrated with multinationals and did not own licenses, to export bananas to the EU without having to pay stiff prices to license holders. Cameroon annual exports did not change after the introduction of the tariff only system, and increased at a rate much smaller than those observed for other ACP countries after the implementation of the EPA. While the Cameroon banana sector has been clearly benefitting from the EPA regime, it has not been able so far to take full advantage of the more favourable EU import regimes due to the increasing relative competitiveness of other ACP exporters. The main relevant factors which could potentially explain the change in the relative competitiveness of Cameroon vis à vis emerging ACP banana exporters seem to be (i) higher production and domestic transaction and handling costs and (ii) the limited capacity to differentiate its bananas with respect to those of competitors (the success by Dominic Republic is largely based on the consumer perception of its bananas, due to the fact that a large share of this country s exports are organic, and a significant share are both organic and FairTrade certified). Exporters were all vehement in saying (a) that maintaining EPA market access provisions currently in place is a necessary condition for the survival of the banana industry in Cameroon and (b) that the progressive preference erosion due to the WTO agreement and trade agreements by the EU was a challenge for the competitiveness of Cameroon bananas. Nevertheless, all firms are currently investing to expand their plantations and increase their banana production, revealing their positive assessment of the profitability of the industry in Cameroon in the years to come, notwithstanding the expected reduction of the preferential margin on the EU market. Exporters agreed that regional exports could expand, but pointed also to the fact that Nigeria is, by large, the single largest and most profitable market in the region (and exports are currently strongly limited by the severe social instability). Nigeria is not part of the Central Africa group of countries

8 Table 9.2.1: EU-27 banana imports in volume by source; absolute values (t) and percentage composition ( ) Imports (t) Cameroon 162, , , , , , , , , , , , , , ,239 Total ACP 690, , , , , , , , , , ,708 1,025, , ,335 1,059,085 Total non-acp 3,320,035 3,224,698 3,129,459 3,205,629 3,323,030 3,284,939 3,219,972 3,559,303 3,921,062 4,041,201 3,663,915 3,567,174 3,729,832 3,558,221 3,767,328 Total EU-27 imports 4,010,088 3,997,841 3,879,547 3,946,548 4,127,675 4,070,285 3,985,061 4,450,458 4,765,965 4,962,357 4,624,623 4,593,159 4,714,088 4,540,556 4,826,413 EU imports from Cameroon (% of imports from ACP countries) Cameroon Composition EU imports (%) Cameroon Total ACP Total non-acp Total EU imports Source: Computed by authors from Comext data -155-

9 Answer to EQ2: Which were the drivers that contributed to the impact/absence of impact on agricultural trade under consideration of the market access under the different preferential trade regimes? Changes which occurred in the structure of the world banana market affected the sector in Cameroon only marginally. On the global market, the progressive reduction of the market power held by the large multinationals and the emergence of a relatively large number of smaller operators, with a growing volume of bananas being directly traded by the retail sector in the importing country and producers and producer organizations in the exporting one, did not extend to the Cameroonian industry. Exports continued to be exported through some of the largest multinationals, with no new actors appearing on the scene. The progressive strengthening in recent years of the horizontal and vertical integration of the Cameroonian banana industry is reinforcing also its capacity to expand exports. However, it is also increasing the dependence of the industry from the strategies of a single international firm; in the short run the goals of other exporters are not incompatible with those of the company controlled by the multinational, but in the medium run the two might diverge (for example, with respect to strategies related to product differentiation based on firm-owned brands, or to the use of refrigerated containers provided by large international shipping operators, rather than transportation services by reefer provided by the multinational). Supply side rigidities exist which reduce the capacity of the sector to take advantage of the preferential trade regime, but these do not seem to constitute a binding constraint. An expansion in yields and product quality, for example through more effective agricultural practices and resource management, appears feasible and would yield increased exports. The quality of infrastructure (mainly access roads to the Douala port and rural roads to access the plantations, the absence of refrigerated storage facilities at the Douala port and the lack of an effective supply of the electrical energy needed by some of the plantations) is an important negative factor currently affecting the competitiveness of the industry. However, concrete actions indicated by the stakeholders have been undertaken by the Government to address all these problems and improve the competitiveness of Cameroon banana exports. Stakeholders were confident these limiting factors will be removed within the near future. Compliance with rules of origin in the case of banana exports from Cameroon is not an issue. In fact, it is economically unprofitable to re-export to the EU bananas imported from third countries which are not eligible for the same preference Cameroon is entitled to. As bananas are exported unprocessed, the issue of complying with cumulation of origins rules is not an issue either. Based on the consistent assessments provided by the stakeholders, the relatively low quality of public sector services in Cameroon does not appear to be a factor limiting banana exports, or negatively affecting the capacity of the industry to take advantage of the preferential trade concessions. This should not come as a surprise because of the social relevance of the industry and the very limited number of large firms which produce and export bananas, which puts them in a relatively good position when negotiating with the Government and, in general, in dealing with the public sector. Differently from other ACP countries, such as the Dominican Republic, which exploited the increased preferences granted by the EU and the removal of the quota system by significantly expanding their banana exports to the EU, Cameroon was not able to respond to changed consumer sensibilities by having a large share of its bananas certified as being organic and FairTrade. The need to diversify bananas from Cameroon on the market with respect to undifferentiated bananas is well perceived by all operators. However, the possibility of having a significant share of production certified as being organic is prevented by adverse environmental conditions and the need to control for Black Sigatoka. On the contrary, part of the production by the largest producer is already certified as being FairTrade, and this company is planning to realize the investments needed in order to have more of its bananas complying with FairTrade standards. In addition, its bananas are certified ISO (an internationally-set standard related to the adoption by the firm of an effective environmental impact management system) and also meet the quality standards of one of the major UK retailers, a private standard which is more restrictive than GlobalGAP in terms of the chemicals which can be used. The second largest producer also is going along the same path. Finally, the entire production by the third firm currently producing banana in the country is certified ISO Efforts by one of the firms to promote its own private brand of high quality bananas and the programme to develop and promote a high quality banana label for African bananas from Cameroon, Ivory Coast and Ghana are both strategies aiming at differentiating in the eyes of consumers bananas from Cameroon from other bananas. These are difficult and costly strategies to implement, but are certainly in the right direction and, if successful, would enhance the capacity of the industry to take advantage of the potential benefits deriving from the EU preferential import regime

10 Answer to EQ3: Which was the role of non-tariff measures on composition, volume and value of agricultural trade between the EU and the ACP? As already mentioned above, public standards, including those pertaining to sanitary and phytosanitary ones, both domestic and in place in the EU, do not constitute a problem, being significantly less stringent than the private ones imposed by retailers on their suppliers and, as a result, required by the importers. However, complying with private standards is not seen as a problem either, but for the additional costs to be incurred. They are not to be seen as a factor expanding exports, because competitors are also able to comply and, as a result, the capacity to satisfy them does not constitute a factor positively affecting the competitiveness of the industry. No other relevant potential non-tariff barriers which could limit Cameroon banana exports to the EU have been identified by the stakeholders. Answer to EQ4: To what extent is the implementation of the preferential agricultural trade regimes efficient, relevant and coherent with regard to their objectives? The preferential trade regimes have been a driving force in the development of the banana industry in Cameroon. From a macro-economic viewpoint it has been found that banana exports have a statistically significant positive effect on Cameroon s economic growth (this was found to be also the case for coffee exports, but not for Cameroon s exports of cocoa). (Gilbert et al., 2013) The EU preferential regime for bananas, having been successful in the development and consolidation of the industry, had a positive effect on the country s economic growth. Bananas are not a commodity relevant for Cameroon s food security. Banana production practices do not have relevant potential spill-over effects on those of the main staple foods in the country, i.e. cassava, maize, sorghum, beans and plantains. This means that the diffusion of economically effective, scarce resource- and environment-friendly production practices in banana plantations do not generate positive spill-over effects in the small plots farmed by plantation workers. Hence the development and consolidation of the industry determines very small benefits in terms of improved production practices for staple food relevant for food security. The direct impact of the banana sector on poverty alleviation and, hence, on food security, is through (a) the large number of workers employed, (b) the fact that they are paid salaries which are above the minimum wages dictated by the law, and (c) the health and educational services the two largest companies provide to their workers and their families. These positive effects of the EU preferential import regime on poverty alleviation and food security depend on the capacity of the Government to put in place an enabling environment and of the industry to take full advantage of the competitive advantage it creates. In addition, the growing interest of firms for having their bananas certified FairTrade resulting from perceived economic benefit as well as the pressure exerted by the Government and by the EU to have working conditions improved also generates significant benefits for those employed in the sector. The banana industry in Cameroon benefitted since the mid-1990s from relevant financial assistance from the EU, meant to support the investments needed to increase competitiveness and make the sector able to face, first the negative effects from the creation of the EU single market, then those from the progressive reduction in the preferential margins. The 1994 Special System of Assistance to traditional ACP suppliers of bananas (SSA) was followed in 1999 by the Special Framework of Assistance for traditional ACP suppliers of bananas (SFA), and, finally, by the Banana Accompanying Measures (BAM) scheme, introduced in 2009 and recently implemented. The SFA disbursed in Cameroon EUR 46.3 million over the years ; the Banana Accompanying Measures (BAM) will distribute EUR million between 2013 and These schemes are policy instruments which are coherent with the EU granting over the years bananas from Cameroon preferential market access. Cameroon has been indicated as a country where the implementation of the SFA and SSA schemes has been successful in terms of their effectiveness in generating the expected results. All the stakeholders interviewed independently stated that the EU financial support to the sector has been extremely important for the strengthening of the industry by relaxing factors limiting banana supply, generating the adoption of better production technologies (with higher productivity and a more cost-effective use of scarce inputs), and increasing product quality and exports. The preferential trade regime, having been effective in the development and strengthening of the industry in Cameroon, significantly contributed to the objective of fostering the integration of Cameroon into the world economy. On the contrary, because of the much larger profitability of exports to the EU market with respect to exports to regional markets in terms of prices paid, EU interventions have been less successful in fostering regional trade integration. Banana exports to other countries in the Central African group are insignificant, while limited exports occur to Nigeria (potentially the largest and more profitable regional import market) and, to a smaller extent, Chad

11 Overall evaluation The trade preference EU has been granting Cameroon bananas, provides them with a significant competitive margin vis à vis banana exports from MFN countries. The evolution of this preferential treatment over the years appears to have been able to over-compensate the preference erosion deriving for ACP countries from changes which occurred in the MFN import regime for bananas. The industry in Cameroon benefitted also from the significant financial support the EU provided over the years to promote private investments. These investments helped improve the quality of bananas produced, increase productivity, reduce production costs, reduce the environmental impact of banana production and post-harvest practices, and improve working conditions in the plantations. Cameroon has not been able to exploit the expanded potential access to the EU market as much as other ACP countries. Cameroon is able to produce bananas complying with the high standards dictated by the importers in the EU, but at a relatively high cost, and its capacity to differentiate its bananas from those of the competitors is currently limited. The trade preference granted by the EU is likely to constitute a necessary condition for the competiveness of a large part of Cameroon banana exports. Based on the conclusions reached, from a strictly sectoral perspective the only one which can be considered in this report, there is little doubt that the positive conclusion of the negotiations with the EU for the EPA, with the indefinite extension of duty-free and quota-free access to the EU market for Cameroon bananas, will bring the Cameroonian banana sector significant benefits. On the contrary, the implementation in the years to come of the trade agreements the EU concluded with the largest banana exporting countries will progressively reduce these benefits Ethiopia Cut flowers Introduction Ethiopia is a landlocked state in east-central Africa, with a land area of 1,120,000 kilometres² and a population of about 92 million, of which more than 80% is rural. 114 It is also one of the world s poorest countries, with a per capita GDP of USD 455 in The economy has experienced strong growth over the past decade. In % of Ethiopians lived in extreme poverty, while in 2011 this had been reduced to 29.6% 115. The Ethiopian economy is dominated by the agriculture and services sectors with each accounting for about 45% of GDP. 116 Primary commodities account for as much as 86% of the total foreign exchange earnings (coffee accounts for approximately 30%), while the agricultural sector accounts for 85% of employment and supplies 70% of the raw material requirements of local industries. The country s trade deficit in 2011 and 2012 stood at 17.5% and 18.4% of GDP respectively. 117 Within agriculture, 60% of the output is from crops, with livestock and forestry producing 30% and 7% respectively. Crop production by area is predominantly dedicated to cereals, maize, sorghum, wheat and barley. Cut flowers represent just 0.01% of agricultural production in terms of harvested area but approximately 2% in terms of value. 118 Ethiopia has benefited from GSP special arrangements for LDCs ( ), and since 2001 from EBA. Ethiopia belongs to the ESA region and is currently negotiating an EPA with the EU. 114 Source: United Nations, Source: as measured by the national poverty line, of less than USD 0.6 per day 116 Source: Annual report 2012, National Bank of Ethiopia 117 Source: Annual report 2012, National Bank of Ethiopia 118 Source: FAOSTAT -158-

12 Main characteristics of the cut flowers sector The main cut flower producing countries in Europe are the Netherlands, Germany, Italy and France. The production value in the Netherlands amounted to around EUR 4.1 billion in 2010, compared with EUR 1.7 billion in Germany. 119 Total import value of freshly cut flowers by EU countries from non-eu countries amounted to around EUR 1.1 billion in The Netherlands is by far the most important trade hub for cut flowers in Europe with approximately 60% of all EU imports entering there. A large proportion of these flowers are re-exported to other European countries. In 2012 in Ethiopia 1,442 ha of land were under cultivation with cut flowers, by 84 producers of which 50 were foreign investors, 10 were joint ventures between foreign and local investors and 24 were local. In Ethiopia producers of cut flowers are also exporters as the law does not allow for exports by trading companies (i.e. companies which do not own a flower farm). The Ethiopian floriculture value chain from farm to market can be divided into farming (pre-harvest) and post-harvest transport and marketing activities. Pre-harvesting includes activities such as selecting the appropriate variety, propagating, planting, irrigation and applying inputs necessary for quality and disease control. Planting the right variety is essential and thus breeders are crucial actors in the chain as it is they who have unique rights on a variety (and allow farmers to grow their varieties in return for a royalty payment). After harvesting the flowers, each farm undertakes post-harvest activities such as sorting, cutting to the required length, bunching and packing in standardised cardboard boxes. The flowers are then transported to the airport, palletised and stored in the cold storage facility until loading. Transportation (airfreight and road transport) is by far the largest cost item in the value chain accounting for approximately 46% of the total production cost. Approximately 90% of the flowers are transported by Ethiopian Airlines cargo planes, the country s sole cargo carrier, to Liege in Belgium. They are then taken to a selling agent, who is an important intermediary between domestic firms and the market. Agents main activities are to unpack and refresh the flowers, and make them presentable for the market. Dutch companies trade flowers directly through the company head office or a related subsidiary, via auctions, or direct sales. Evolution of exports (in particular to the EU) in association to trade and other policy developments In Ethiopia, approximately 97% of the cut flowers produced (which meet export quality standards) are exported. Production and export of cut flowers increased substantially between 2003 and 2006 the number of stems exported grew by more than 1,000%, from 16 million to 186 million. Correspondingly, the share of the flower industry in the country s total exports grew from 0.01% to 1.4%. The five primary exporters of cut flowers to the EU are Kenya (43%), Ethiopia (17%), Ecuador (11%), Colombia (10%) and Israel (5%). Among major exporters to the EU, the only ones not benefiting from a zero tariff/zero quota regime at present are Israel, Thailand and India. Overall, the MFN tariff and thus the preferential margin of countries trading under a zero tariff zero quota regime, has decreased significantly during the period under investigation. However, this erosion of preferences does not seem to have affected exports by preferred countries to a significant extent. The growth rate of EU imports of cut flowers from Ethiopia has averaged more than 60% per annum since A major driver of growth, which played a pivotal role in the development of trade of cut flowers in Ethiopia under EBA, has been material support by the government, including the provision of suitable land, a five-year income tax holiday, the soft loan scheme from the Development Bank of Ethiopia with generous terms, as well as competitive freight charges to floriculture by Ethiopian Airlines in the early years of the industry. In addition, international investors report that ease of access to government decision makers as well as political instability and corruption in competing and neighbouring exporters such as Kenya have been important factors in attracting them to Ethiopia. On the other hand, from 2010 onwards there has been a relative decrease in the Ethiopian cut flower export growth rate, as compared with the total EU cut flower import growth rate, which can be explained primarily by the saturation of access to land appropriate for the cultivation of cut flowers in Ethiopia. Other major obstacles identified were bureaucratic working practices and tight regulation of the business environment with no chemical trading or transportation operations allowed to be run by non-ethiopians and no intellectual property protection for seed breeders. 119 Source: CBI Market Information Database -159-

13 Frequent delays in the arrival of cargo planes at Liege, and the lack of flexibility to re-schedule when necessary due to market price fluctuations and the inability of smaller Ethiopian cut flower producers to jointly market in the EU (the cost of marketing individually is prohibitive) were also obstacles. Answer to EQ1: Where and to what extent has the market access under the different EU preferential trade regimes impacted on agricultural trade? PTAs have encouraged exports of cut flowers from Ethiopia and made them more competitive on the world market, by forcing producers to adopt higher SPS, packaging, labelling and other standards. The PTAs have relaxed supply side cost limitations for exports, through a financial benefit which is equal to the average profitability level in the industry (13.5%, as derived from an analysis of the latest financial accounts of over 80% of cut flower producers). If a 5-8.5% level of duties for exporting Ethiopian cut flowers to Europe existed, as would be the case for Kenya if it had not agreed to the relevant EPA in October 2014, then the Ethiopian cut flowers industry would be only barely profitable. Answer to EQ2: Which were the drivers that contributed to the impact/absence of impact on Ethiopian cut flowers trade of the market access under the different preferential trade regimes? Ethiopia, along with other major flower exporters to the EU, has enjoyed a zero tariff/zero quota regime for many years. This has been conducive to growth of exports, but has not been a critical driver behind the establishment and growth of the industry. This is shown by the fact that although the MFN tariff, and thus the preferential margin of countries trading under a zero tariff/zero quota regime, has been reduced significantly in recent years, exports by preferred countries have not decreased to a significant extent. Failure to ratify the bilateral EPA between the EU and the EAC could lead to the demise of many Kenyan horticultural companies and transfer to Ethiopia. Some of the flower producers in Ethiopia, mostly those owned by international investors, comply with major global standards. This has affected their volume of exports, price received (more direct sales), turnover and profitability. Other flower producers, mostly Ethiopians with limited previous experience in the industry, comply only with the absolute minimum standards to export, and can only sell at the Flora Holland auction in Amsterdam where they receive a lower price than from direct buyers. In general, compliance with global standards is not a problem and does not impose significant costs. In addition, a critical issue is the inability of Ethiopian cut flower producers to jointly foresee price fluctuations and effectively market in the EU, as the cost for each to undertake these individually is prohibitive. This is an obstacle to their integration into global value chains and their ability to compete in global markets. Imports to the EU do not seem to have been significantly affected by RoOs or other NTBs such as preshipment inspections, customs formalities, quotas, quantity control measures, etc. Nor do there seem to have been any important influences from other ACP-EU agreements not related to trade. The main supply side constraint is land availability near the Addis Ababa airport exporting point. New production corridors have recently been identified close to other available domestic airports whose infrastructure is being upgraded. Another constraint is the lack of flexibility of Ethiopian Airlines who rarely re-schedule cargo flights when necessary due to market price fluctuations. The main institutional factors affecting the volume and price of exports are the heavily regulated business environment and the lengthy and bureaucratic processes for all operations (business set up, importing, exporting, bank controls). Frequent regulatory changes are another factor inhibiting exports. Answer to EQ3: Which was the role of non-tariff measures on the composition, volume and value of trade between the EU and Ethiopia for the cut flowers industry? NTMs with the greatest impact on exports are technical qualifications, quality requirements and labelling. Packaging and labelling of cut flowers to the requirements of final buyers is a source of difficulty. SPS measures were an issue a few years ago, during the first years of development of the industry, but this is no longer the case. It is indicative that EU authorities have inspected only 5% of cut flower consignments from Ethiopia (compared to 15% from Kenya). Technical qualifications, quality requirements and labelling significantly impact on the growth of exports as direct buyers are not satisfied with minimum quality standards and set their own higher standards. Packaging and labelling of cut flowers to final buyers specific requirements remains a difficulty for Ethiopian cut flower producers

14 Answer to EQ4: To what extent is the implementation of the preferential agricultural trade regimes efficient, relevant and coherent with regard to their objectives? In spite of the broader benefits that EPAs offer to LDCs, as compared to the DFQF regime of EBA, stakeholders believe that Ethiopia has little incentive to sign an EPA. The quality of cut flowers exported has significantly increased over time, as evidenced by the decrease in levels of non-compliance with SPS standards, as well as the annual increase in the average export unit value since PTAs have encouraged exports and made Ethiopian cut flowers more competitive by forcing producers to adopt higher standards, but the main driving factor has been the advancement in knowledge among Ethiopian flower producers based on experience gained during the first few years of development of the cut flowers industry. The Ethiopian Government s focus, as elaborated in its Growth and Transformation Plan , is on job creation, export promotion, tax revenues and foreign currency reserves. The most relevant EPA objectives to this are job creation and economic growth. The Government s particular focus for the agricultural sector is on the reduction of poverty through enhancement of export-market orientation, expansion of rural infrastructure and attraction of foreign investment. Relevant EPA objectives to this are reduction of poverty, strengthening of economic and trade relations with the EU, enhancement of supply capacity and support for increasing investment. PTAs have been a necessary condition for the development of the sector by facilitating attraction of FDI, and in turn, job creation and economic growth. In this respect, the PTA measures are clearly linked to its objectives. PTAs have also relaxed supply side cost limitations for exports, through the financial benefit amounting to the average profitability level in the industry. Overall evaluation The PTAs have encouraged exports and competitiveness by forcing producers to adopt higher standards. The quality of exports to Europe has significantly increased, as evidenced by the decrease in SPS infringements and increases in export unit value since The PTAs have benefited operators of different size. Nevertheless, operators need to be of a certain scale in order to be efficient, with a plot size of 15 hectares and substantial upfront capital to construct greenhouse facilities. Beneficiaries of PTAs were those with a significant amount of capital investment. On the other hand, cut flower production is labour intensive, thus the sector s growth has created many employment opportunities and has been an important source of income for a large part of the population, especially in rural areas. Estimated employment in the sector has increased substantially during , to reach nearly 30,000. The PTAs have provided a financial benefit equal to the average profitability level in the industry. However, following rapid growth and substantial investment in the early years, the sector s profitability has not led to an equivalent rate of investment more recently, particularly post If a 5-8.5% level of duties for exporting Ethiopian cut flowers to Europe existed, as would be the case for Kenya if it had not agreed to the relevant EPA in October 2014, then the Ethiopian cut flowers industry would be only barely profitable Ghana Cocoa Introduction Ghana has a population of roughly 25,7 million people and is well-endowed with natural resources. It is West Africa s second largest economy, with a GDP of USD 38.6 billion, which has experienced sustained growth of 5-8.5% per year over the past decade peaking at 14% in Ghana s agricultural sector is a key driver of the economy, contributing 22% of GDP in 2013 and accounting for just over 60% of employment. Gold and cocoa production and individual remittances are major sources of foreign exchange. Smallholder farmers dominate agriculture in Ghana. They use traditional methods with little or no inputs to produce about 80% of Ghana s total agricultural output. The structure and composition of Ghana s exports is still dominated by the primary products, which make up 85% of total merchandise exports. Cocoa beans and semi-finished cocoa products are Ghana s leading export, accounting for 42% of the total export base. Other important exports include timber, gold, fish, fruit and vegetables. Non-food industrial supplies dominate Ghana s imports, including plant machinery, vehicles, raw materials and petroleum products. Ghana faces significant macroeconomic challenges as its fiscal and current account deficits remain very high. Economic growth over the past year has been stagnant, while inflation is on the rise

15 Ghana-EU trade has been supported by a DFQF regime under the Lomé Convention from 1975 to 2000 and later under the Cotonou Agreement (CPA) from 2000 until December 2007 when Ghana agreed to initial an interim EPA with the EU which it has neither signed, nor ratified so far. From 2008 onwards, the MAR regime was instituted to maintain the DFQF framework after the trade provisions of the Cotonou Agreement expired at the end of 2007, and to provide additional time to negotiate a more comprehensive bilateral or regional EPA. In June 2014, Ghana initialled the full EU-ECOWAS EPA and was later on added to the GSP and MAR regimes, therefore sustaining the DFQF framework for trading with EU, until the full EPA is signed and ratified. If Ghana, as a member of the ECOWAS region, had not concluded negotiations with the EU on the EPA by October 2014, it would have faced positive tariffs for trading with the EU under the GSP regime, which would have constrained the export of newly emerging export commodities such as horticultural products as well as processed cocoa. Main characteristics of the cocoa sector Cocoa is Ghana s major export commodity, accounting for about 30% of Ghana s total export earnings. The cocoa sector accounts for more than 8% of the country s agricultural GDP. Ghana is known for a reliable supply of high quality cocoa, for which it gets a premium price on the world market. The PTAs played a role in this upgrading, as did international requirements. Ghana s Cocoa Board, the COCOBOD, has played a crucial role in helping Ghana to attain a strong position on the global market and ensuring the quality of its cocoa exports. Production, quality control, marketing and other important functions of the cocoa value chain in Ghana are overseen by COCOBOD, which was established in 1947 in an effort to encourage and facilitate the production, processing, marketing and export of good quality Ghanaian cocoa. Recent economic hardships have turned attention to strengthening and diversifying the export sector as the primary means of building a resilient economy. Evolution of exports (in particular to the EU) in association to trade and other policy developments Historically, cocoa has been exported almost exclusively in raw bean form from Ghana. The postharvest production chain is mainly placed outside Ghana and the long-term goal is to process 50% of cocoa beans locally. Significant but slow progress is being made in terms of adding value to Ghana s cocoa. Between 2007 and 2010, the percentage of processed cocoa increased from 16.09% to 37.66%. From 1995, certain processing companies started adding value to beans and from 2005, multinationals have started to launch bean processing operations in Ghana. Ghana s total export earnings from cocoa have been increasing since the mid-2000s. Apart from a dip between 2006 and 2007, there has been a steady increase from 2007 to 2010 when the country earned approximately USD billion from cocoa exports, which accounted for 28.9% of total foreign exchange earnings. 120 Ghana's cocoa exports are mainly directed towards Western Europe which accounts for about 67% of total cocoa exports. The main importing countries are the Netherlands (33.8%), the UK (12%), Belgium (8.9%) and Germany (3.6%). The cocoa sector is partially liberalised but the COCOBOD has a monopoly on marketing and export through its subsidiary, the Cocoa Marketing Company. COCOBOD controls much of the supply chain: they set the prices, control the quality, test and distribute inputs, do research and provide extension services and are involved in buying and processing. Answer to EQ1: Where and to what extent has the market access under the different EU preferential trade regimes impacted on agricultural trade? The DFQF regime under the Cotonou framework, as well the higher predictability offered by the interim EPA regime from 2008 onwards, played a significant role in attracting investments in the Ghanaian cocoa sector by large multinational companies. This gave a boost not only to local production but also to local processing of cocoa beans. Overall, however, the PTAs have favoured large multinational operators because of their human and financial resources and, most importantly, their capacity to meet standard requirements. 120 Scientific Research, Ghana Cocoa Industry - An Analysis from the Innovation System Perspective,

16 From 2008 onwards, the MAR regime was instituted to maintain the DFQF framework after the trade provisions of the Cotonou Agreement expired at the end of 2007, and to provide additional time to negotiate a more comprehensive bilateral or regional EPA. In June 2014, Ghana initialled the full EU-ECOWAS EPA and was later on added to the GSP and MAR regimes, therefore sustaining the DFQF framework for trading with EU, until the full EPA is signed and ratified. Answer to EQ2: Which were the drivers that contributed to the impact/absence of impact on agricultural trade under consideration of the market access under the different preferential trade regimes? PTAs do not relax supply side constraints for exports. In the case of cocoa, most of the supply side constraints are structural and infrastructural. To increase production, there is a need to increase productivity, which is low compared to other major cocoa producing countries and constrained by the lack of inputs (fertilizers, fungicides, pesticides, access to credit, etc.). To transport cocoa is a challenge as the road and port infrastructure hinders export. Cocoa producers are also facing problems of high costs for technical tools such as sieves and lack of subsidization, and lack of know-how about the overall comprehension of the value chain and the impact on their revenue. The vast majority of farmers are at subsistence level and have limited working capital for the purchase of needed inputs and to cover intra-seasonal household needs. Assetpoor and isolated, very few can get a loan, and those who do face exorbitant interest rates from financial institutions that view farmers as high risk. Processors, exporters, and traders can also have difficulty getting access to needed working capital loans, which decreases their turnover and income potential. According to a recent study by Association of Ghana Industries, poor availability and the high costs of credit constitute the single largest constraint to growth in Ghana. Despite some progress achieved in the last years, the cocoa sector is suffering from governance weaknesses such as insufficient integration of all relevant policies and instruments, limited institutional coordination, insufficient dialogue among stakeholders, lack of a common vision for development of the sector, limited coordination among sustainable initiatives and the lack of an inclusive forum to bridge information gaps. NTMs with the greatest impact on exports of cocoa products to the EU are EU standards which impose huge certification costs on processors. Stringent EU measures have made it difficult for local processors to export cocoa products to the EU. Overall, NTMs have mainly affected processed cocoa products rather than beans. SPS measures are not considered a barrier to trade. On another level, these rules and regulations can help improve the local industry via an improvement on their standards by enhancing their competiveness on the international market. The COCOBOD has maintained standards that meet EU SPS measures and earn a premium on international markets. However, the local companies have struggled to meet such standards. Answer to EQ3: Which was the role of non-tariff measures on composition, volume and value of agricultural trade between the EU and the ACP? RoOs have not been restrictive as processed cocoa exports have not contained significant amounts of inputs which did not originate in the country. Sanitary and phytosanitary measures are not considered as a barrier to trade for cocoa in Ghana. The Ghana cocoa industry led by the COCOBOD and other agencies such as the Ghana Standards Authority (GSA) are responsible for ensuring that safety and quality standards are met. The high quality of Ghana cocoa beans has been maintained over the years, through effective quality control practices and monitoring at the time of purchase by the Quality Control Division. The Quality Control Division fumigates and disinfects beans to ensure that only insect free cocoa beans are exported. Controls are carried out in all cocoa storage premises to prevent damage of the beans in storage, while inspection, grading and sealing is performed on cocoa for the international and local markets. Ghana's cocoa is subject to a minimum of three stages of quality inspection prior to shipment. For processed cocoa, the GSA looks at the whole process that the product undergoes (good hygiene and good manufacturing practice, etc.), from checks on harvesting practices to storing and labelling end products. Multinational companies in Ghana exporting intermediate processed cocoa (butter, paste and powder) have always insisted on abiding by pre-specified international standards in order to access the EU market. On the other hand, local processing companies find it extremely difficult to meet these stringent measures as they lack the resources (finance, scientific and technical knowledge), and hence are less competitive. Overall, NTMs have particularly affected intermediate processed cocoa (especially by local processors) but have not impacted significantly on EU imports of cocoa beans

17 Answer to EQ4: To what extent is the implementation of the preferential agricultural trade regimes efficient, relevant and coherent with regard to their objectives? Although the PTA objectives are rather general, interviewees reported that they are relevant to the needs and priorities of the sector in Ghana, in particular to the promotion of good governance (which in the case of the cocoa sector, corresponds to the development of sectoral institutions), the increase of investment, the enhancement of supply capacity and the improvement of competitiveness as illustrated hereafter. In general, measures are coherent with PTA objectives. Some examples illustrate this coherence regarding the objectives listed above. Significant investments were made by the government via the Ghana Strategy Support Programme (GSSP) initiated in 2005 to boost production and competitiveness by introducing a high-tech package consisting of hybrid seeds, fertilizers, pesticides and fungicides, mass spraying, bonus for cocoa farmers and increased purchasing prices. In order to improve market measures, the GSSP has also put in place a policy to develop a comprehensive value chain for cocoa. One aim of the strategy is to increase the percentage of locally processed cocoa to 50%, as was stated in the 2007 budget statement. Regarding efficiency, the analysis indicates the existence of significantly positive impacts of the PTA on trade expansion, though there seem to be reservations on the distribution of such benefits, which seem to mostly accrue to large processors. In combination with other international standards, the PTA has also played a positive role in the upgrading of quality in the cocoa industry. Overall evaluation Ghana is known for a reliable supply of high quality cocoa. PTAs played a role in the sector's quality upgrading as did international requirements. Also, the COCOBOD has played a crucial role in securing Ghana's position in the global marketplace and ensuring the quality of its cocoa exports. PTAs favour large operators due to their financial muscle. The main cocoa processors in Ghana are multi-nationals with the human resources and financial capacity to meet global requirements. PTAs do not relax supply side constraints. For cocoa, most of these are structural and infrastructural. To increase production, there is a need to increase productivity which is low compared to other major cocoa producers and suffers from lack of inputs. Also, transport is a challenge due to the state of road and port infrastructure. It might be beneficial to link PTAs to EU-ACP country development programmes such as the Civil Society Support Programme, a research and capacity building programme which has helped farmers to improve quality and community management. The zero tariffs under PTAs attract multinationals to the country, which has also boosted local production and processing, although local companies struggle to meet EU standards and need to improve quality which comes at a cost. The EPA is expected to boost productivity and increase exports, leading to expansion of production capacity. This will transform the sector, increase Government revenues, and strengthen regional integration, employment and the overall value chain Guyana Rice Introduction Guyana is a lower middle-income country, rich in natural resources, biodiversity, and forests. Around 90% of its population lives in the narrow coastal plain, largely below sea level. It is currently one of the countries with the highest economic growth rates in South America. With a GDP per capita of USD 3,584 in 2012 it is ranked 115th out of 190 countries in the world, while its ranking in terms of GDP per capita in purchasing power parity is 101st (USD 8,250). According to the UNDP Human Development Index, Guyana is ranked 118th out of 186 countries, while in 2007, the Gini index was There has been significant progress in terms of hunger alleviation, as 5% of the population was undernourished in 2012, compared to 10% in Main characteristics of the rice sector The rice sector in Guyana is one of the most important economic activities, representing around 40% of agricultural GDP, 15% of export earnings and providing a livelihood to 10,000 farm households. It currently covers 90,000 ha of farmland in the coastal belt. There are currently 65 rice mills, several of which are engaged in exports. If knock-on effects are taken into account, more than 150,000 people are estimated to be affected by the rice sector in Guyana

18 Evolution of exports (in particular to the EU) in association to trade and other policy developments Guyana produces less than 1% of world paddy production, but its exports currently account for some 80% of its rice output. It is a traditional exporter of rice, which has benefited from preferential access to the EU (through the Cotonou Agreement and the CARIFORUM EPA) and Caribbean Community markets for over 30 years. In the 1990s, economic liberalisation and access to European export markets brought about the current high level of organisation in the Guyanese rice sector. Several institutions were established and a national strategy was designed for the development of the sector. State efforts in research, extension and development led to the improvement of cultivation methods and infrastructure. Gradually, new varieties were introduced, acreage increased and yields improved. Production and exports (mainly to the EU) almost doubled between 1991 and However, exports to the EU were mostly for brown rice, as Guyana specialised in the lower value-added segment of the rice market. In the context of the CARIFORUM Agreement, Guyana obtained DFQF access for rice to the EU market plus development assistance associated with issues such as trade facilitation, cooperation on agri-food sector modernisation and regional integration. The strong trend in rice production was halted, but has peaked again in recent years, with a record crop being recorded in This development is attributed to the penetration of export markets in the Caribbean and especially, the Petro Caribe Agreement with Venezuela. Currently Venezuela accounts for 60% of Guyana s rice exports bought at a price which is around 30% higher than the world market price. In parallel, Guyana rice exports to the EU went down from around 115,000 tons in 2004 to an average of 60,000 tons in With regard to NTBs, the inadequacy of the Guyanese industry associated with MRL certification constitutes a barrier for rice exports. This problem constrains exports of higher value-added rice both to the EU and other important (for Guyana) markets and effectively traps Guyana rice exports to a lower segment of the global rice market. Quality standards (both public and private) do not seem to constitute a problem, even in cases where they are quite high (e.g. Venezuela market). Rules of origin are not an issue for the Guyana rice industry. In fact, the CARIFORUM provisions are quite favourable for Guyana exports. Regarding non-trade effects, conditions associated with the Georgetown port increase transportation costs. Customs delays and bureaucracy have not been reported, while there were no complaints on the functioning of the internal market. Access to credit difficulties exist for both farmers and millers and constrain investment. As FDI is non-existent in the industry, credit constraints can potentially affect production and exports of Guyana rice. However, the favourable trade arrangement with Venezuela has in recent years rather shielded the sector from such effects. No significant supply-side constraints exist, but there are issues such as the lack of drying facilities, credit availability, and shortage of farm workers. However, the most important supply-side constraint is the condition of the drainage network. Answer to EQ1: Where and to what extent has the market access under the different EU preferential trade regimes impacted on agricultural trade? CMS analysis has shown than Guyana experienced significant losses in market share during and in terms of its agricultural exports to the EU. However, the contrary is observed for and These losses and gains are heavily linked to losses and gains in competitiveness. Also, gravity analysis has shown that PTAs have generated significant agricultural trade expansion for ACP countries during the period, including for the cereals group (in which rice is included). In the case of rice, as already noted, exports to the EU increased by five times between 1992 and 2002, then declined in the mid-2000s, and peaked again in the period. Subsequently, exports to the EU declined substantially, mainly due to the attractiveness of the Venezuela market. It is evident that ACP agreements (Lomé, Cotonou) are associated with higher export flows to the EU, compared to CARIFORUM; however, this is not attributed to any negative provisions of CARIFORUM (which in contrast, has provided DFQF status to Guyana rice exports), but is mostly attributed to the Venezuela market and changes in the MFN regime. Answer to EQ2: Which were the drivers that contributed to the impact/absence of impact on agricultural trade under consideration of the market access under the different preferential trade regimes? As already noted, the switch to the Venezuela market due to proximity and the Petro Caribe Agreement has negatively affected Guyana rice exports to the EU. Changes in the global value chain affecting exports of Guyana rice under EPA are rather specific to a change in consumption patterns in the EU market and gains of market share by aromatic eastern rice -165-

19 (such as basmati, etc.). This change simply means that the Guyana rice industry must attempt to differentiate its output, as demand for traditional varieties produced in Guyana has been shrinking. With regard to NTBs, the inadequacy of the Guyanese industry associated with MRL certification constitutes a barrier for rice exports. Quality standards (both public and private) do not seem to constitute a problem, even in cases where they are quite high (e.g. Venezuela market). RoOs are not an issue and CARIFORUM provisions are quite favourable for Guyanese exports. Regarding non-trade effects, conditions at the Georgetown port increase transportation costs. Customs delays and bureaucracy have not been reported, while there were no complaints about the functioning of the internal market. Access to credit is difficult for both farmers and millers and constrains investment. As FDI is non-existent, credit constraints can potentially affect production and exports. However, the favourable trade arrangement with Venezuela has, in recent years, rather shielded the sector from such effects. No significant supply-side constraints exist, but there are issues, such as the lack of drying facilities and a shortage of farm workers. However, the most important supply-side constraint is the condition of the drainage network. Since the deregulation of the local rice industry, public and quasi-public institutions have positively affected its development and export performance. According to all respondents and published evidence, the rice sector is well-organised, with the exception of the shortcomings observed in residue testing certification. Cooperation between public and private institutions is smooth, the regulatory environment is clear and adequate and structures essential to the operation of the sector are in place. Also, local institutions play an active role in efforts to diversify and modernise production and expand export outlets. Answer to EQ3: Which was the role of non-tariff measures on composition, volume and value of agricultural trade between the EU and the ACP? As already mentioned, shortcomings in certification capacity are a threat to exports of Guyanese rice, as they restrict quality upgrading. Quality standards (both public and private) do not seem to constitute a problem. RoOs were an issue in the late 1990s (when OCT trade was in effect, restricted), but are no longer a problem. CARIFORUM provisions are quite favourable for intra-regional exports of unprocessed rice. No other relevant potential non-tariff barriers to Guyana's rice exports to the EU have been identified by either stakeholders or desk work analysis. Answer to EQ4: To what extent is the implementation of the preferential agricultural trade regimes efficient, relevant and coherent with regard to their objectives? Preferential access to the EU market, together with the industry s deregulation led to the development of the rice sector, its institutional modernization and its establishment as an important exporter in the world rice market., Within this context, it can be rather safely argued that sectoral development induced by preferential access to the EU facilitated the expansion of rice exports to other markets. The objectives of the preferential agricultural trade regimes are highly relevant to the needs and priorities of Guyana, including actors engaged in the rice sector. Trade facilitation was achieved through Lomé/Cotonou, while CARIFORUM fully liberalized rice exports to the EU. It should be noted that in the absence of CARIFORUM, Guyana would have no preferential access to the EU market for rice. The objectives of the CARIFORUM EPA were judged to be highly relevant to needs and priorities of both country and sector. Judgements of high relevance are specific to EPA Objectives such as the strengthening of economic and trade relations between Guyana and the EU, enhancement of supply capacity, poverty reduction, achievement of higher economic growth and promotion of the integration of Guyana to the regional and world markets. In other words, despite the recent declining importance of the EU market for Guyanese rice exports, local stakeholders believe that preferential access to the EU market as well as the relevant development assistance accompanying the EPA have both been highly relevant to those needs. On the other hand, the vast majority of stakeholders were unable to associate EPA objectives with specific measureable targets and goals. In terms of coherence, stakeholders argued that trade-related measures have linked well to the above-mentioned objectives, which were judged to be highly relevant. Preferential arrangements strengthened economic and trade relations between Guyana and the EU, enhanced supply capacity, contributed to higher economic growth and promoted the integration of Guyana to the regional and world markets. Most stakeholders agreed that EPA measures and projects link well to the CARIFORUM provisions and serve its objectives. As probably expected, it was much easier for these stakeholders to -166-

20 identify measures, which directly or indirectly affect the rice sector, such as Support to the Competitiveness of the Rice Sector in the Caribbean. Also, when provided with a list of EDF measures (especially those associated with trade and regional economic integration), stakeholders agreed that these measures link well to EPA objectives. On the other hand, several stakeholders expressed reservations about delays in both design and implementation of EDF measures, while some of them suggested that higher emphasis should be provided on measures aiming to assist Guyana rice to access new markets, upgrade research technology and solve the MRL certification problem. In terms of efficiency, stakeholders were rather critical. They argued that efficiency of strictly trade measures was high, especially in the case of Lomé/Cotonou, and trade measures contributed to meeting the most important and relevant (according to their judgement) preferential agricultural trade regime objectives. Also, stakeholders argued that efficiency of EDF action associated with CARIFORUM is rather marginal. Outcomes of intervention were judged to be very modest, funding was judged to be insufficient (when sectoral needs are taken into account) and implementation suffered from lack of coordination, while also delays are observed. Overall Evaluation The overall assessment of this case study is that preferential access to the EU market, together with the industry s deregulation led to the development of the Guyana rice sector, increased its human and institutional capacity, and established the Guyana rice sector as an exporter in the world market. Amongst ACP, Guyana is still an important exporter of rice to the EU market, while sectoral development induced by preferential access to the EU facilitated the expansion of rice exports to other (non-eu) markets. The development of the Guyana rice sector has been beneficial to the country s economy. Also the livelihoods of several thousands of people in Guyana are directly and indirectly affected by rice production. Benefits have accrued not only to larger operators (such as exporters and millers) but also to smallholders. The expansion of rice production has also contributed to food security. In terms of impacts on beneficiaries, it was argued that PTAs induced quality improvement in the rice sector, forced exporters to higher standards and thus, made expansion to other (non-eu) export markets possible. It was suggested that it is not possible to export to the EU without keeping up with high quality standards and expanding our exports to the EU was the main reason behind the development of the rice sector, which in turn facilitated our positive image in other markets. Stakeholders suggested that PTAs generated rents, which largely accrued to exporters and importers that are comparatively larger operators. However, they also argued that both smaller and larger farmers also benefited. It was also suggested that the PTA has relaxed supply-side constraints for rice exports, as it has induced significant improvements in yields and production, and vastly contributed to investment and (in a more general sense) to the development of the Guyana rice sector. Further, stakeholders were unanimous in the opinion that the PTA was the main reason behind the expansion of the rice sector and the improvement in the welfare of both producers and exporters. Finally, it is not easy to assess how the Guyana industry would have fared without the PTA and EPA. However, one must note that together with the 1990s deregulation, preferential access to the EU market was the main reason for the development of the rice sector and the expansion of exports. This particular policy environment established Guyana as a global rice exporter, induced significant improvements in the organization of the sector and hence made possible the presence of Guyana in the international market. Nowadays, the challenge faced by the sector is to explore new markets and develop appropriate marketing strategies, but also to improve productivity and quality. To sum up, without the PTA and EPA it is not very likely that the rice sector would have followed such a development trajectory Kenya Green Beans Important Note The talks of the EU with EAC countries for a comprehensive EPA brought the deal to conclusion on 16 October Since 1st of October and for as long as the talks were ongoing Kenya s exports to the EU moved from the DFQF status of the Market Access Regulation (MAR) to the GSP status. It is 121 Information retrieved at the export helpdesk, last accessed on 28 October 2014 at:

21 expected that by 1st January 2015 Kenya will be reinstated to the duty and quota free access of the Market Access Regulation (MAR). This development does not bring any changes to the presentation of the Kenya-Green Beans case study. Even the analysis on how the green beans sector could react to the GSP status and of whether the sector could afford a GSP tariff, despite being irrelevant now, has its own merit because valuable data related to the cost of production, the value added along the supply chain and estimations of farm incomes are presented. Introduction Kenya grew significantly after 2000, but this was interrupted by the 2008 financial crisis and the post 2007 election violence. After 2010, the Kenyan economy has re-gained its pre-2008 levels of development. Kenya still has many severe problems pertaining to poverty, undernourishment, bad governance and an unfavourable business environment. The country maintains an overall trade deficit that is widening. Agricultural commodities account for the overwhelming majority of the value of its exports. The EU is its major trade partner and the partner with which Kenya maintains, proportionally, the smallest trade deficit. The country s GDP is at around USD 42.5 billion (EUR 33 billion). Economic growth and political evolution seem to be closely related. As concerns growth, the Kenyan economy should be viewed in two very distinct phases. First is the post-independence phase with its main characteristic being the centralised system of government inherited from the British, with a single-party system. In 1986 we observe peak GDP growth of almost 7% that was followed by a period of stagnation that triggered a move towards multi-party democracy in The second phase starts in 2002 when a democratically elected government developed an economic blueprint that increased GDP by 6% a year on average between 2002 and 2007, reaching almost 7% in Post-election violence in 2007 and 2008, along with the global financial crisis and high fuel and food prices, interrupted these growth rates. Today, the World Bank reports that since a new government was elected in March 2013, Kenya has maintained a stable macroeconomic environment despite challenges of financing the new devolved system of governance. The economy is projected to have grown by 5% in 2013, and it is expected to grow by 5.1% in Medium term prospects are stronger, with the growth in GDP projected to improve to around 6%. Main characteristics of the vegetable sector Within the horticultural sector, vegetables are the most important in terms of area cultivated, quantity produced and value, and second to cut-flowers as concerns export value. This is due to the fact that vegetables are to a large extent consumed nationally and only a few are exported regionally or to the EU. There are no detailed data but it is estimated that fresh bean production involves around 50,000 small growers and sambanis (extremely small garden-like growers). More than 60% of growers are women, while men work mainly in seed producing plots in certain parts of the country. Thus, the relevance of the sector for the poor and marginalised is very high. Green bean production is concentrated in the Central, Eastern and Rift Valley regions where irrigation projects can support cultivation. The average bean growing plot was reported to be less than 1 acre in The four major stages in green bean cultivation are germination, flowering, fruiting and harvesting. Estimates of production costs vary enormously. USAID provides a margin analysis with a cost of 30,800 Ksh (EUR 270) per acre. A private firm estimates the cost at almost 90,000 Ksh (EUR 790) including labour, while other sources put it even higher at almost 126,000 Ksh (EUR 1,110). A margin analysis reveals that gross profits may run from 25,000 Ksh (EUR 220) (USAID, 2013) to 51,000 Ksh (EUR 450) (private firm) or even higher depending on the season (prices), the region (irrigation and soil fertility) and the size of the land (scale economies). These estimates are close to an average net income of 40,624 Ksh (EUR 360) from an average plot of 0.69 hectares which brings the average net income per acre to 23,900 Ksh (EUR 210). Smallholders are in need of considerable starting capital for the purchase of seed, fertiliser and pesticides at germination, fruiting and irrigation. This is difficult for farmers to finance. Supply contracts in the green beans market are known to be imperfectly enforced, which allows exporters and farmers to modify contract terms after signing. Evolution of exports (in particular to the EU) in association to trade and other policy developments Leguminous varieties (beans and peas) are the major vegetable exports to the EU. Exports of fresh leguminous products grew continuously from 1999 to when a prolonged drought and political instability led many farmers to switch cultivation. Since 2009, exports of leguminous vegetables have stabilised. Between 2012 and 2013 there has been a drop in exports of about 17%. This may be partly due to increased controls imposed on imports of peas and beans from Kenya. In 2001, Kenya was the top exporter of green beans to the EU with a share of 36% of the total value of USD 150 million (EUR 117 million) of green bean imports. Export unit values for beans and peas -168-

22 fluctuate between EUR 2.5 and EUR 3.2 per kg. The wholesale price of Kenyan extra fine and fine beans in the UK, Kenya s major importer in the EU, ranges from USD 4 to 6 per kg (EUR 3.1 to 4.6 per kg) depending on quality and season, while their retail price ranges from USD 6 to 14 per kg (EUR 4.6 to 10.8 per kg). Assuming that the average price for extra fine and fine green beans paid to the farmer is not higher than USD 1 per kg (EUR 0.77 per kg) even at peak periods, and that airfreight charges do not exceed USD 1.5 per kg (EUR 1.15 per kg), then packaging, exporting and importing may account for USD 1.5 to 3.5 per kg (EUR 1.15 to 2.7 per kg). Retailing adds a margin of over 50%. Thus, Kenyan exporters could have absorbed tariff increases from zero to 10.1% at maximum (the GSP tariff on green beans during high season, i.e. from 1st July to end of September) should the talks on the comprehensive EPA had not concluded. Taking into account the great seasonal variability in prices we can assume an average weighted entrance cost at EUR 3.1 per Kg. A GSP tariff at 10.1% (6.9% for imports from October to end of June) in effect since 1 October 2014 will increase the average entrance value by EUR 0.22 at EUR 3.32 as the tariff is estimated on the value of the consignment (at EUR 2.1 per Kg) and not on the airfreight at EUR 1 per Kg. Taking into account the power that the different actors have in the supply chain, an increase in the entrance cost may be absorbed by exporters and farmers. The airfreight cost is very inelastic while importers (wholesale and/or retail) are too powerful to accept to absorb even a slight part of this increase. If we assume an average price paid to farmers (between low and high season) at EUR 0.45 per Kg, and also assume that input prices will not change, farmers alone are not able to absorb a EUR 0.22 increase resulting from GSP access as this is almost 50% of the price they receive. In fact, any decrease in the already low prices paid to farmers will reduce the returns to labour and land and will lead many of the very small farmers out of the cultivation. Exporters may more easily absorb this increase as it accounts for less than 15% of the value they add to the farm product. In any case the increase due to a 10.1% tariff will risk only the viability of the less efficient, small and constrained farmer and the very small exporters. The tariff may not have important effects on the volume of trade (insofar as the entrance cost to the EU will not change) and production will shift to more efficient larger farmers with higher profit margins that allow them to absorb a moderate loss of profit margin. However, we expect this tariff to have serious distributional and welfare effects as it will squeeze out the very small, poor and inefficient farmers. Answer to EQ1: Where and to what extent has the market access under the different EU preferential trade regimes impacted on agricultural trade? Kenyan bean exports to the EU had a value of around EUR 100 million in 1999 and grew to EUR 189 million in By the end of 2013, they had fallen back to 2005 levels at EUR 153 million. However, this fall was not due to loss of competitiveness but due to a structural break in 2008 as a result of political instability (post-election violence) and adverse environmental conditions (extended drought). Despite the fact that exports had regained some ground by 2012, the 2013 EU decision to subject imports from Kenya to tighter inspections contributed to further losses in 2013, which have continued. At the same time, Kenyan beans maintained an important share of EU imports as compared with their main competitors such as Morocco. Kenya lost its position as the prime EU importer, with its share dropping from 36% of total bean imports in 2001 to 30% in But, if one takes account of the different modes of transport (air for Kenya versus sea for Morocco) and the different and more expensive type of beans (extra fine and fine) traded by Kenya in an era of financial crisis, Kenya s persistence in accessing the EU market is impressive. In extra fine and fine beans, Kenya has maintained a near monopoly in the EU as the quantities traded by Tanzania, Ethiopia and Senegal are negligible. At the same time, Kenyan beans maintained a high unit value despite the financial crisis and competition from less expensive varieties. The vegetable industry is dominated by smallholders, many medium-sized exporters and a few large ones. Over the same period, exports in the cut flower industry, which is dominated by large estates and exporters, grew from approx. EUR 144 million to approx. EUR 405 million, a growth of almost 180%. For vegetables, the growth was less spectacular but it was achieved by integrating thousands of smallholders and small and medium-sized exporters into the global value chain and is thus of greater significance for the development of rural areas and the Kenyan economy in general. Looking at the history of trade between Kenya and the EU, PTAs were the main enablers of trade and under PTAs, the Kenyan vegetable sector built up a comparative advantage. Since October 2014 the Kenyan bean industry has to assimilate a tariff increase of 10.1% resulting from the transition from the MAR to the GSP regime and before it is reinstated back to the DFQF status of the MAR on, probably, January The application of border controls on Kenyan beans and peas resulted immediately in an almost 20% drop in export values. In 2014 this may be translated into a drop of over 20% in areas taken up by bean and pea cultivation by smallholders and probably an increase (of less than 10%) in the corresponding areas cultivated by large farmers and integrated farming/exporting firms. The cost from increased tariffs will have no impact on prices paid by European consumers as Morocco and Egypt will continue to supply EU markets with bobby and fine -169-

23 beans and Senegal (or even Tanzania which will remain on an EBA regime up to the time the just concluded EPA is applicable) will supply extra fine quality beans. Also, no other markets can absorb even as much as 20% of the commodities exported to the EU, either because they lack the capacity (Saudi Arabia, United Arab Emirates, etc.) or the income (South Africa, India, China, etc.). In order to deal with the increased entrance costs (10.1% resulting from the GSP tariff regime), the industry will look to make economies of scale by squeezing out the small farmer and the non-integrated exporter and by reducing prices paid to smallholders. This will have a medium impact on trade and a severe impact on the poor. If, however, traded volumes are reduced to a level that will cause knock on effects and increase transportation costs or increase the cost of inputs, coupled by bad governance (e.g., unplanned increase in VAT for inputs, delays in returning VAT on exports resulting to a form of loan from the private sector to the government, etc.), the effects may be considerable on trade per se, let alone the poor and the smallholders. The impacts from a possible transition from the MAR to the GSP regime would have been negative but it is not easy to define exactly the severity of the impact as concerns volume and value of trade. However, it is evident that the impacts of not concluding the talks on the EPA would have been more severe for the small holder and the small and medium exporter with unforeseen consequences for the sector and the rural areas that depend on exported beans and peas. Answer to EQ2: Which were the drivers that contributed to the impact/absence of impact on agricultural trade under consideration of the market access under the different preferential trade regimes? None of the respondents or any findings in the literature review indicate that CAP developments have acted as an obstacle to Kenyan trade in green beans. With apparent consumption at EU level in 2011 standing at between million tons per year, imports will continue. In addition, all major importers to the EU (Morocco, Kenya, and Egypt) enjoy DFQF regimes. Furthermore, RoOs are not an issue in the vegetable sector. The most important development that had a positive impact on trade was the changing structure of global value and supply chains, but this also presents a threat to the sector. The first positive impact was the facilitation of exports through well organised and integrated chains that overcome the issue of distance for fresh and perishable products. Products are grown in rural areas of Kenya and distributed fresh to European consumers within two days of collection. The second positive impact was the successful integration of an extremely large number of smallholders (estimated at 50,000 for green bean cultivation alone) into global value chains through innovative certification schemes and contractual-entrepreneurial agriculture. However, stricter SPS and quality controls threaten smallholders, move production towards larger estates and lead to a more integrated production-export sector. Supply side constraints have frequently had a negative impact on the quantity and quality of trade. Resource constrained, small farmers, are usually financed by exporters in the form of input supply (seeds, fertilizer, plant protection materials). Despite the massive integration of smallholders into the global value supply chain, financing them remains tricky. Financing the small holder who cannot provide any loan guarantee is a very important issue in Kenyan agriculture in general. It is important if the policy opts for the empowerment of the small holders and their bargaining power in the supply chain, and is difficult to implement because these people cannot satisfy standard loan procedures and guarantees. Also, inaccessible rural roads and lack of irrigation negatively affect the quantity and quality of produce and cause post-harvest losses. Energy is also an issue for both farmers and exporters. Extension services and information dissemination especially as concerns the appropriate use of agro-chemicals is another gap which, if filled, can support better trade. Finally, improvements to institutions and good governance could also assist trade. The overall response to Evaluation Question 2 is that PTAs were the major trade enabling factor. They built the framework that triggered a number of positive developments in the sector and allowed it to reach very high competitive standards and to deal with a complex global economic and management environment. Answer to EQ3: Which was the role of non-tariff measures on composition, volume and value of agricultural trade between the EU and the ACP? NTMs are important factors affecting the volume and value of trade. In the case of Kenyan bean exports to the EU, they had a substantial effect on the volume of trade. The most important issue now threatening the viability of the sector is the Maximum Residue Limits (MRLs) of certain chemical substances used in plant protection. In particular residues of the substances Dimethoate (sum of dimethoate and omethoate expressed as dimethoate), Chlorpyrifos, Acephate, Methamidophos, Methomyl and Thiodicarb (sum of methomyl and thiodicarb expressed as methomyl), Diafenthiuron, Indoxacarb (as sum of the isomers S and R) have been set at the lower -170-

24 limit of analytical determination, practically at the level of no detection. During 2011 and 2012 the Rapid Alert System for Food and Feed (RASFF) issued three notifications for beans and peas imported to the EU from Kenya that were found above MRLs. Two of the notifications concerned Dimethoate concentrations. In December 2012, Regulation 1235/2012, added green beans and peas imported from Kenya to an increased level of official controls on imports with 10% of imported consignments being tested for residues, which was maintained by Regulation 1355/2013 in December Since 2013, the time Kenyan beans and peas were placed on an increased level of official control, exports have decreased by as much as 25% and several exporting licenses have been suspended by Kenyan authorities. Kenyans argue that MRLs for certain substances (especially dimethoate) develop to a Non-Tariff Barrier (NTB). This substantial drop in exports has triggered adverse developments across the supply chain especially for smallholders. It has also triggered an institutional response that has improved the internal control and audit processes as concerns the licensing, distribution, and sale of pesticides, the pre-shipment controls and the process of issuing export licenses. In the case of Kenyan vegetable exports, measures such as labelling and other measures protecting the environment, standards on technical specifications and quality requirements had an impact on the quantity and quality of exports and the structure of the supply chain. In the green beans sector, traceability requirements have squeezed out brokers and briefcase exporters and allowed for the spread of contractual farming. This had an impact on both the prices and the qualitative characteristics of exports. Prices were smoothed as brokers could not offer substantially higher prices to poach production while briefcase exporters had to have traceable contracts. On the other hand, very strict quality standards and especially those referring to the size and shape of beans result in significant production losses. Answer to EQ4: To what extent is the implementation of the preferential agricultural trade regimes efficient, relevant and coherent with regard to their objectives? The implementation of the preferential agricultural trade regimes was efficient, relevant and coherent with regard to their objectives. PTAs have made Kenyan bean exports more competitive on the world market by forcing exporters to meet higher SPS and quality standards. In so doing so, they integrated thousands of smallholders and poor farmers into global value chains and benefited urban workers. Thus PTAs had very beneficial distributional implications. Part of this success should be attributed to the aid channelled to Kenya from the EU and other international and national efforts. The programmes funded under EU Aid assisted the whole of the agricultural sector with specific reference to the nontradable part. As such, issues of food security and the development of arid and semi-arid agriculture were supported. Over the years, PTAs, directly or indirectly have helped to develop high scientific and organisational capacity, as at farm level. It is difficult to pinpoint the main impact of PTAs on relaxing supply side constraints but aid efforts have focused on some of these and provided a guide for further work. The increased demand for bean exports led to an increase in investments both for production (e.g., irrigation tanks) and compliance at farm level. It is important to note that these investments can be used for the production of a range of products (not only beans) and so they also increase the capacity of the country to overcome adverse conditions that may threaten food self-sufficiency. The increased trade under the PTAs and the MAR has positively addressed objectives such as poverty reduction and integration of small and marginalised growers to global value chains. It has also triggered an entrepreneurial spirit among smallholders, innovation among institutions (e.g. group certification) and assisted the whole vegetables sector. At the same time, there is room for improvement in other areas of relevance such as finance, insurance, extension services and capacity building. Overall evaluation The overall conclusion is that Kenyan agriculture, within the different PTAs from Lomé to Cotonou and the MAR, successfully developed a strong export sector that was beneficial to the poorer sectors of the population (smallholders) and contributed to food security (production of vegetables). Kenya s export achievements are considerable, especially if they are viewed against those of African countries that compete with Kenya on the same EU markets, or neighbouring EAC countries, and within a challenging political and economic environment. There is a big picture that should not be ignored. From the late 1980s to the present, all horticultural sectors (with the partial exemption of coffee) grew significantly under the PTAs. The increased demand for exports of vegetables, fruit, nuts and cut flowers has transformed rural Kenya. Irrigation projects that can contribute to food security were triggered by high value trade, and smallholders were successfully incorporated into global supply chains with considerable income effects and increases in living standards. Public infrastructure, including roads, rural electricity and research, is in place largely because of the country s achievements and trade potential. Institutional capacity building -171-

25 was initiated and trade with Europe enhanced Kenyan agriculture's reputation because, as one interviewee put it, if you can trade with the most strict and demanding market of the world you can, practically, trade and deal with everybody. If we turn to the smaller picture of the vegetable sector, including beans, our analysis showed two major factors negatively affecting trade: supply side constraints and SPS measures. Among supply side constraints, the most difficult is to provide finance to smallholders and develop an entrepreneurial spirit because Kenyan smallholder agriculture is embedded in social norms and traditional values that affect the way finance or infrastructure is provided. Experience has shown that Kenya needs a Kenyan approach. The extension of infrastructure to less accessible areas will increase potential for international trade and ease the risk of famine and food insecurity. Supply can be increased by bringing in new production areas and by decreasing post-harvest losses. SPS measures may cause a problem for trade if the sector does not adapt. The same applies to private quality (marketing) standards. With such high sensitivity among European consumers about environmental, social and equity issues, quality marketing standards should not be blamed for the waste of food and resources, especially in a country where almost half of the population is under the poverty line and a significant proportion suffers from malnutrition Mozambique Sugar Introduction Mozambique has been independent since Two years after independence the country experienced intense civil unrest, followed by civil war from 1982 to It has a population of 25 million and is an LDC with estimated GDP of USD 10.5 billion in 2012 and a GDP per capita close to USD 400 per annum. Mozambique s industrial base is very weak and not yet capable of producing or exporting high value added products. Therefore, most products and exports are raw materials or lightly processed goods. Agriculture accounted for 29% of GDP in 2012, while commerce and services accounted for 71%. By contrast, 20% of total export value in 2009 came from agriculture, with tobacco making up 41% of total agricultural exports. Agriculture is the main employer, with over 80% of the active workforce working in the sector. Only 10% of arable land is cultivated and there is huge untapped potential. The major agricultural product in terms of value is cassava which accounted for almost 40% of agricultural value produced in At present Mozambique exports its sugar under EBA, where it enjoys DFQF access to the EU market. It agreed to the interim EPA along with Botswana, Lesotho and Swaziland in November 2007, and signed it in June 2009, but this has not altered the conditions under which it exports sugar to the EU. It should be noted that in July 2014 negotiations on a full EPA between the EU and the SADC EPA Group were successfully concluded in South Africa. The Agreement is currently being prepared for signature and ratification according to the domestic procedures of each partner. The main objectives of the interim EPA are similar to those set by most PTAs, namely reduction and eventual eradication of poverty, promotion of regional integration, economic cooperation and good governance, gradual integration of the SADC EPA states into the global economy and support for increased investment, competitiveness and growth. Main characteristics of the sugar sector In Mozambique, the sugar sector employs about 33,000 people and is the second largest employer after the public sector. Sugar represents around 20% of the country's total agricultural exports and is the second largest export commodity after tobacco. In recent years there has been huge growth in the sector. The area planted with sugar has increased from about 4,000 ha in 1992 to more than 40,000 in 2011 and total sugar cane harvested for milling increased from 151,000 tons in 1992 to 3.4 million in Production is estimated to have reached 4 million tons of cane by the end of 2013 following an increase in the planted area of 50,000 ha and increased processing efficiencies in Mozambique s four commercial sugar mills following new investment. The sector is highly concentrated and structured around the four mills and their production sites. Two of the four major mills are located in the province of Maputo, and the other two in the province of Sofala. There are plans for fifth sugar estate and mill in the Mopeia district of Zambezia province. There are practical reasons for the close relationship between mills and growers. Sugar cane must be produced close to the crushing site as it loses its sucrose yield quickly after cutting. This dictates where cane can be produced

26 All factories sell their product to the national sugar distributor - Distribuidora Nacional de Açúcar (DNA), a distribution and export organisation owned by the four main companies and subject to government oversight. It was created in 2002 to achieve economies of scale in the distribution chain. It has a network of 13 depots ensuring a continuous supply to domestic consumers. A common reference price for raw sugar is given to each producer, based on their share of overall production, both domestic and for export. Evolution of exports (in particular to the EU) in association to trade and other policy developments Mozambique exported 250,000 tons of sugar in 2012/13 to two main markets, the EU under EBA, and the United States under an annually reviewed Tariff Rate Quota. Figure 9.7.1: Sugar Exports Evolution (tons) Source: Kantor research, Distribuidora Nacional de Açúcar, Mozambique, 2014 As shown in Figure 9.7.1, the EU is by far the most important market for Mozambique. Relative exports to the EU compared to the US and the world markets has been on a upwards trend since the early 2000, with the EU becoming almost the only market to export Mozambican sugar since EBA has been instrumental in the development of the sector, as is recognised by all stakeholders. Under EBA, Mozambique almost always got a significantly higher reference price from the EU for its exports than it could get on the world market. When EBA came into force in 2001, a quota of 8,560 tons was allowed onto the EU market at zero duty and this increased each year until it was abolished in October Since 2007, Mozambique has sold almost its entire raw sugar exports to the EU. Answer to EQ1: Where and to what extent has the market access under the different EU preferential trade regimes impacted on agricultural trade? The sugar protocol formerly provided national quotas for export of sugar to the EU within an overall agreed ceiling. In addition, to meet the supply needs of traditional EU raw sugar cane refiners, additional access was granted, initially under the special preferential sugar (SPS) arrangement, and subsequently under the Everything But Arms (EBA) quota and the complementary quantities (CQ) arrangement. While Mozambique was able to join the list of sugar protocol beneficiaries, it did so with initially having no quota to export at all allocated, but could only pick up a share of any unutilized quotas. It was not until the entry into force of the EBA initiative that Mozambique enjoyed secure access to the EU sugar market. In the first year of operation of the EBA quota regime, 2001/02, Mozambique exported 8,331 tons of sugar to the EU. It should be mentioned that the sugar protocol was assorted with a number of accompanying measures. To qualify for the EU Accompanying Measures program, the Government of Mozambique approved the Adaptation Strategy for the Mozambican Sugar Sector -173-

27 in The National Adaptation Strategy (NAS) identified a number of strategic interventions to increase the competitiveness and long term viability of the sugar sector in Mozambique. The EU sugar protocol accompanying measures programme for Mozambique have been: expansion of sugar cane land under small/medium scale private grower schemes provision of training & skills development services to the Mozambican workforce and associations of Mozambican farmers provision of social service and facilities into the sugar production areas. On 1 October 2007, the EU formally denounced the Sugar Protocol, setting in its place, after a transitional period, provisions for the granting of duty-free, quota-free (DFQF) access for ACP/LDC sugar exports. There was a ceiling of 3.5 million tons for the whole ACP group. From this 3.5 million ceiling the non-ldc ACP countries could not exceed a secondary ceiling of 1.38 million tons in 2009/10; 1.45 million tons in 2010/11; 1.6 million tons from the 2011/2012. The transitional arrangements set in place came to an end on 1 October 2009, with least developed countries (LDCs) and ACP countries whose governments had signed an interim Economic Partnership Agreement (EPA), largely enjoying DFQF access to the EU market from this date, within the agreed transitional safeguard ceiling. Mozambique signed the interim Economic Partnership Agreement along with Botswana, Lesotho and Swaziland in June In July 2014 negotiations between the EU and the SADC EPA Group on a full EPA were successfully concluded in South Africa. The Agreement will replace the interim EPA signed in From 1 October 2012, price guarantees for ACP sugar were abolished and replaced with a negotiated market-related price. In 2010 the US had a shortfall and the price premium was higher than that for the EU so Mozambique filled its US quota. From the EU side, reform was driven by the need to cut costs and align the sugar market with the move towards a market-oriented CAP, which would enhance the competitiveness of EU sugar by eliminating unprofitable production capacity. The sugar industry in Mozambique is protected by a system of import duties. The Ministry of Commerce sets the domestic reference price for raw sugar which has remained 385 USD per ton since A fixed duty of 7.5% is charged on imported raw and white sugar, as well as a variable levy that is uncapped and can be increased if the world price drops so low that, even with the 7.5% duty, imported sugar becomes cheaper than domestic sugar. From independence until 2002, Mozambique only exported a small, annually revised, quota of raw sugar to the US. Since the introduction of EBA, there has been a significant increase in volumes of raw sugar exported to the EU (Figure 9.7.2). Along with the opening of the EU market, investment in the sector increased production capacity. Since the middle of the nineties slightly after the end of the civil war in the country (1992) there was interest by three large multinational companies to invest in the country s sugar sector which in the past (before the civil war and even before independence (1975)) was well developed. There was need for rehabilitation of all four mills. The four companies that own and operate the mills in the country claim that FDI would not have happened without the market opportunity provided by the preferential trade regime with the EU. Approximately 800 million USD has been invested in the sector from the late nineties to date. There is no specific break down of how this amount was invested or the distribution of funds invested by the different investors. However, one of the companies has invested more than 230 million USD in factory rehabilitation and cane area and another over 60 million USD. This went towards renovating the plants and modernising processes, and enhanced the capacity to supply raw sugar by scaling up production and improving yields. This is graphically shown and correlated with cane production trends in Figure below. In the course of onsite interviews with executives from the two largest companies, it was clearly stated that the fact that major competitors in the global sugar market like Brazil do not enjoy the same access privileges to the EU market has supported the development of the sector

28 Figure 9.7.2: Production and yield per hectare from 1970 to 2012 History/Investment Events Source: Kantor research and analysis Answer to EQ2: Which were the drivers that contributed to the impact/absence of impact on agricultural trade under consideration of the market access under the different preferential trade regimes? The changes to CAP that led to a volume reduction in the EU Member States, boosted Brazil and ACP countries in increasing their production. The changes to the trade regimes gave impetus to production and the secure market the EU offers to Mozambique is considered as the main catalyst for the sectoral development over the last 14 years. Infrastructure has been one of the main barriers to expansion, development and enhancement of competitiveness in the sector. The road system and the ports outside of Maputo are in a bad state. An indication of the size of the problem is that FOB costs in Maputo, which is modernised, are at 10 USD/t whereas in the port of Beira they are 38 USD/t. Additionally, huge areas of potentially arable land cannot be exploited due to lack of energy and irrigation systems. The regulatory framework concerning land ownership is not clear, thus making investment difficult. Many problems arise when it comes to compensation agreements between investors and land owners due to the lack of an official land registry and clear ownership rights. Reaching agreement for purchase of leasing of land can take years. Finally, a significant barrier to production and exports expansion is the lack of skilled farmers and workers. The majority of farmers farm for subsistence. This requires investors to allocate significant resources to training in order for the farmers to attain the skills to cultivate sugar cane to the required standard. Another factor limiting the expansion of the sector has been difficulty in accessing affordable credit finance for individual farmers, who are considered as particularly high risk by commercial banks, and can only access finance through the four major mills