EPAs and the European Raw Materials Initiative

The EU and its member states are increasingly worried about securing access to raw materials for European companies. The EU has to rely on the import of several critical raw materials from third countries. In fact the EU is the world’s largest importer of natural resources, accounting for 23% of the global imports of natural resources. The EU’s import dependency rate for minerals ranges from 46% for chromium, 54% for copper ore, 95% for bauxite to 100% for materials such as cobalt, platinum, titanium and vanadium.


The rise of China, and also of India and Brazil, set the alarm bells off. Therefore the Commission launched its Raw Materials Initiative in 2008. The main focus of the Initiative was to secure European access to raw materials in third countries. In February 2011 a new report was released, which confirmed the Commission's approach. In particular the Commission wants to improve the EU's security of supply through multilateral trade agreements at World Trade Organisation (WTO) level and bilateral trade agreements such as the Economic Partnership Agreements (EPAs). The objective is to use these trade agreements to remove obstacles - like export restrictions or limits on investments - which hinder Europe's access to raw materials in third countries.


Export restrictions


Export restrictions can take many different forms, such as export taxes, quotas, subsidies, or mandatory minimum export prices.


Export taxes are a common policy instrument in many developing countries. Export taxes are allowed under WTO rules. They are used to promote value-added domestic processing, to protect the environment and natural resources and/or as a source of government revenue. By levying a tax on the export of a certain raw material, it can provide an incentive for the development of domestic manufacturing or processing industries with higher value-added exports, as processing the raw material in loco becomes less expensive than exporting it for processing in Europe.


The EU is of the view that export taxes distort trade. For several years, the EU has tried to ban the use of export taxes in the WTO. In 2006, it submitted a proposal to the WTO on disciplines for a new WTO agreement on export taxes as a non-tariff barriers. The EU proposed that all WTO members should commit to eliminating export taxes. The proposal was rejected by other WTO members and criticised by developing countries. Namibia, for example, strongly resisted the EU’s attempts to ban export taxes. In 2008 the EU submitted a revised proposal which again failed to attract consensus and since then there has been no further movement on the issue in the WTO.


Developing countries, consider export taxes to be legitimate economic and industrial development tools. They want to continue to be able to use export taxes as a policy instrument in different situations, where they consider them appropriate. The trade ministers from the world’s poorest countries called upon the WTO members to agree “not to impose any discipline on export taxes, as these are legitimate tools for development”[1]


Since the EU had not succeeded in getting its way on export taxes in the WTO, it shifted its efforts to bilateral trade negotiations, such as the EPA negotiations with the ACP countries. In the original EPA negotiations, export taxes had not been on the agenda, but suddenly, when the 2007 deadline was approaching[2], the EU inserted them in the negotiation text.


The clause on export taxes that the EU managed to push into the interim EPAs prohibits the African countries from introducing any new export taxes, as well as from increasing those currently applied. In exceptional circumstances and only subject to agreement by the European Commission, export duties can be temporarily introduced.


African countries have repeatedly raised the issue of export taxes in the ongoing EPA negotiations. The East African Geneva-based ambassadors to the WTO have demanded that the clause on export taxes in the interim EPAs should be deleted. The African Union Commission presented a paper to the European Commission at a joint meeting in June 2010, stating the following on export taxes:

“The European Commission’s proposal to prohibit the use of export taxes and quantitative restrictions under EPA is an unnecessary WTO-plus requirement that would limit the policy space to use these measures for value-addition, diversification, infant industry promotion, food security, revenue and environmental considerations."[3]


For many developing countries, export taxes are one of the few remaining trade policy tools, since the domestic policy space to support industrial development has been significantly reduced by the liberalisation enforced by the Structural Adjustment Programs imposed by the International Monetary Fund (IMF) and the World Bank in the 1980s and 1990s and the WTO negotiations. When the EU tries to prevent African countries from introducing new export taxes, it denies them their policy space to decide on tools to promote local value-addition and pursue industrial development.


For African countries, in order to attain sustainable development, it is critical to break away from their commodity dependence and export tariffs are an incredibly valuable means to convince foreign investors to process raw materials locally, instead of exporting them. With the exception of some oil producers, no country relying on primary commodity exports is found among high-income economies. Only those countries that moved into skill-intensive and technology-based industries or incorporated value-adding processes into their primary sectors were able to achieve higher income levels. Promoting manufacturing is critical if African countries are to escape dependence on commodity exports.


The Kenyan government for example raised the export tax payable on exports of raw hides and skins to 20% in 2006 and the following June doubled it to 40%, with the aim of encouraging the leather processing industry in the country. Research shows that these taxes have brought a number of major benefits to the local leather industry. They have drastically reduced the exports of raw hides and skins and boosted leather processing. According to the government, nearly 98% of skins produced in the country are now semi-processed or finished leather compared to 56% in 2004. In 2007, Kenya produced 20,000 metric tonnes of leather compared to around 5,000 in 2003. Total earnings from the leather industry, according to government figures, rose by 21% between 2005 and 2008. It is estimated that around 1,000 direct jobs and 6,000 indirect jobs have been created since the introduction of the export duty.


Also, Africa's tropical forests would come under threat, if EPAs were implemented and export restrictions removed as this would open up to unrestricted logging of Africa's forests. In particular the tropical forest in the Congo basin and the Guinean Forest in West Africa would be menaced. These ecosystems are not only vital for the local population, but are relevant globally as they are some of the world's most significant green lungs and important for climate regulation. 





In the Raw Materials Initiative, the EU lists ‘restrictive’ investment rules among government measures in developing countries and emerging economies that, in the view of the EU, distort international trade in raw materials.


Developing countries have long resisted an agreement on investments at WTO level and they finally managed to remove them from the Doha agenda in 2004. If the EU has its way a chapter on investments will be included in the final EPAs. The EPA with Caribbean countries, which is the only final EPA hitherto signed, contains a chapter on investments. An investment agreement with liberalisation commitments in the EPAs could severely restrict African governments’ policy space to regulate foreign investment so that the investment can benefit the local economy and stimulate development.


The chapter on investment that the EU wants to include foresees inter alia ‘National treatment’ and ‘Investor protection’. National treatment means that foreign investors have to be accorded the same rights as domestic investors thereby curbing developing countries’ ability to give preferential treatment to domestic investors, such as small or infant enterprises, or their ability to ban foreign investment in certain sectors or provide favourable treatment to regional investors to help foster regional integration. Moreover, giving ‘equal treatment’ to foreign investors often in practice means giving them greater influence and rights than domestic investors, given their larger size and power. Investor protection, which establishes minimum standards of treatment of investors and the free flow of capital movements between countries which secures the right of investors to repatriate profits, restrict the ability of developing countries to impose controls on capital movements.


Liberalisation of investment in natural resources sectors would hand over more rights to foreign companies to exploit forests, minerals, oil and gas. This would tie African governments’ hands and limit their ability to require foreign investors, for example, to re-invest part of the profit or to employ local staff. Other regulations that would be threatened by an investment agreement include requirements that foreign investors enter into joint ventures with residents and/or the government, restrictions on land ownership and restrictions on non-residents establishing subsidiaries or branches in the country.


Many African countries have certain restrictions on foreign investment in natural resources sectors in place, even if in many cases, in the hope of attracting more investment, they have been forced to introduce fairly liberal investment regimes. These regulations are often restrictions on foreign ownership, local participation or joint venture requirements, restrictions on land ownership or reserving small-scale mining for local citizens and citizen-owned companies. African countries’ abilities to use such regulations in the interest of development would be under threat if the EU succeeds in pushing through an investment agreement in the EPAs.


For instance, in South Africa the Mining Charter in the Mineral and Petroleum Resources Development Act sets out the rules governing the application for and issue or transfer of mining rights. It includes statutory provisions for Black Economic Empowerment and the increased participation of historically disadvantaged South Africans in the mining industry. The Charter calls for black South Africans to control 15% of mines within 5 years, and 26% within 10 years. The government set a target to transfer 26% of mining assets to black-owned companies, and to ensure that 51% of future mining projects are controlled by black-owned firms. The law empowers the government to give preference to applications from historically disadvantaged people.


South Africa is the world’s largest supplier of two of the raw materials which are considered by the EU as particularly critical - rhodium and platinum - and has already been identified by the EU as one of the countries which apply trade restrictions on raw materials. Were South Africa to sign an EPA which includes a chapter on investments, it would no longer be able to give preference to historically disadvantaged people. As the former World Bank Chief Economist and Nobel laureate Joseph Stiglitz said ‘If you’re from a developing country, try to make sure that your government doesn’t sign a bilateral investment treaty.’



Thomas Lazzeri

[1] WTO, Sixth LDC Trade Ministers Meeting, October 2009, Dar El Salaam Declaration

[2] EPA negotiations were originally set to end at the end of 2007.

[3] Julian, M (2010), EPA Update, Trade Negotiations Insight, July/August 2010

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