KARIN GREGOW
THE RAW MATERIALS RACE HOW THE EU USES TRADE AGREEMENTS TO GRAB RESOURCES IN AFRICA
AFRICA GROUPS OF SWEDEN
FORUM SYD
FRIENDS OF THE EARTH SWEDEN
THE RAW MATERIALS RACE – HOW THE EU USES TRADE AGREEMENTS TO GRAB RESOURCES IN AFRICA
Author: Karin Gregow Copyright: Forum Syd and the author Editor Global Studies: Karin Gregow Language and stylistic review: Stefan Pessirilo Layout: Martin Johansson Published by Forum Syd förlag, Box 15407, 104 65 Stockholm Phone: +46 8 506 370 00, e-mail:
[email protected] Website: www.forumsyd.org ISSN 1404-7845 ISBN 978-91-89542-58-7
KARIN GREGOW
THE RAW MATERIALS RACE HOW THE EU USES TRADE AGREEMENTS TO GRAB RESOURCES IN AFRICA
This report is no 36 in the series GLOBAL STUDIES. The Global Studies reports are intended to be a basis for advocacy work by civil society organisations and are produced in cooperation between the participating organisations. This report has been published in collaboration between the following organisations:
Reports in the series Global Studies can be ordered from Forum Syd, www.forumsyd.org. This study has been published with the financial support from Sida. Sida, however, has not participated in the production of this study, and does not take any responsibility for the contents of the report or the opinions expressed hereunder.
TABLE OF CONTENTS
Introduction....................................................................................................... 07 Resource wealth – blessing or curse?.................................................................. 10 China in Africa................................................................................................... 18 The EU Raw Materials Initiative........................................................................ 24 Export taxes – development tools or trade distortions? ..................................... 33 EPAs – in whose interests? ................................................................................ 41 Export taxes and EPAs....................................................................................... 47 Investment agreements and the right to regulate.............................................. 54 The case of South Africa, by Claude Kabemba.................................................... 59 Natural resources for development or resource nationalism? ............................. 64 Recommendations............................................................................................. 66 Abbreviations..................................................................................................... 67 References.......................................................................................................... 68
INTRODUCTION ”The next phase of globalisation will be defined by pressure for access to basic resources. We are in a race.” Peter Mandelson, Former EU Trade Commissioner 1
The struggle for the world’s raw materials is becoming tougher. For China, with its booming economy, their own natural resources are not enough anymore. Other emerging economies, such as India and Brazil, are also becoming important players on the scene. Africa, which is home to an abundance of natural resources, is an important arena in this struggle. Within this context, the EU is confronted with the fact that it is losing its grip and ‘monopoly’ over natural resources in its former colonies in Africa. High on the EU’s political agenda is therefore how to secure reliable access to raw materials for European industries, in order to secure growth and jobs. It is in this context that the EU in November 2008 launched a new strategy on raw materials entitled “The Raw Materials Initiative – meeting our critical needs for growth and jobs in Europe”. The strategy is driven by European businesses concerned about access to cheap raw materials. The EU is highly dependent on imports of strategically important mineral raw materials. Many of these are found in Africa. Such minerals are part of everyday consumer products such as computers and mobile phones, as well as more advanced and high-tech products. Some of these minerals play a crucial role in the development of innovative environmental technologies. The EU is very concerned that access to raw materials might be threatened by different policy measures imposed by exporting countries – measures that in the views of the EU are distorting trade. Such measures include export taxes and other kinds of export restrictions, as well as conditions and regulations on investment. In strong and aggressive language, the EU is elaborating in its Raw Materials Initiative how they will work towards elimination of such ‘trade distorting’ measures. It is through trade agreements, both at the World Trade Organisation (WTO) as well as bilateral and regional agreements, that the EU intends to eliminate such ‘protectionist’ measures. The EU has challenged Chinese export restrictions at the WTO Dispute Settlement Body on a number of key raw materials, which the EU considers to be in breach of international trade rules. The EU has
07
tried to introduce disciplines on export taxes in the WTO, but without success. While the EU proposals at the WTO have been opposed by other members, the EU has turned its focus to its bilateral trade negotiations. In the negotiations with African countries on trade agreements, the so-called Economic Partnership Agreements (EPAs), the EU has, despite strong opposition by African states, demanded the ban of export taxes. Export taxes can be important policy tools for African countries to promote local value-addition and develop local industries. The EU’s policy could lock in African countries as exporters of cheap raw materials and undermine industrialisation and diversification of their economies. Many African countries are trapped in commodity dependence, relying heavily on a few primary commodities for most of their export earnings. In order to achieve a sustainable development, it is critical for these countries to break away from this commodity dependence and to diversify their economies. Resource-rich African countries apply export taxes on some of their minerals, with the objective to encourage local value-addition and promote manufacturing and processing industries. Export taxes and other restrictions are common on forest products. The use of export taxes as a tool for industrial support and development is increasingly being discussed in the trade policy debate in African countries. There is also a rush from foreign companies to invest in extraction of natural resources. The EU is pushing for an investment agreement in the EPAs, despite staunch opposition by African countries. An investment agreement in EPAs would severely limit African countries’ policy space to regulate foreign investment to ensure that the investments actually benefit the local economy and promote development. African countries’ abilities to use regulations such as joint venture requirements, restrictions on foreign ownership or restrictions on land ownership would be under threat. Foreign investment in extractive sectors has a very poor record. African governments have missed out on considerable amounts of tax revenue from mining because of tax incentives and concessions agreed in secret tax deals with mining companies as well as tax avoidance and evasion by companies. The extraction has often caused destruction of environment and displacement of local communities. It is critical that African countries escape the resource curse, where African countries with an abundant mineral wealth remain among the poorest in the world, and be able to benefit from their own resources. Several African countries are renegotiating mining contracts and amending mining legislation. New mining laws aim to ensure that locally owned companies are benefited, for example in Zambia. Several countries, among them Ghana, Botswana and Zambia, reserve small-scale mining for their citizens. Botswana is an example of a country that has managed to turn its mineral wealth into development. Effective regulation of the foreign investments was key to Botswana’s success.
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The EU feels threatened by an increasing awareness among resource-rich African countries of the development potential of their resource wealth, as well as recent moves by African governments to claim their right over their own natural resources. This could threaten the EU’s own attempts to try and secure access to raw materials from the continent. The EU accuses African governments of ‘resource nationalism’. The EU’s strategies to secure access to raw materials in Africa threaten to undermine sustainable development on the continent. The resource wealth of African countries could provide a bedrock for development. But the EU’s raw material policies could hinder African countries from using appropriate policy tools to achieve this.
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RESOURCE WEALTH – BLESSING OR CURSE? Africa is endowed with an abundance of natural resourcesi. The continent is rich in forests and biodiversity, particularly in West and Central Africa. Almost 40 per cent of many of the basic mineral resources required to fuel global industry are found in Africa2. The continent is the world’s top producer of several of the most sought after strategic minerals and has among the world’s largest reserves of many more. The continent is also well endowed with crude oil and gas. Africa’s share of global crude oil reserves is 9.6 per cent, ranking it the fourth region globally3. In the last few years, an increasing number of countries in Sub-Saharan Africa have been developing new oil and mining projects. Africa is one of the regions with the largest unexploited mineral resources in the world. No one knows exactly how much minerals there are underneath the African surface. The importance of natural resources for Africa is reflected in its share of the continent’s total exports. Natural resources accounted for 73 per cent of Africa’s total merchandise export in 2008. This can be compared to 14 per cent for Europe and 20 per cent for North America.4 Global demand for natural resources is increasing. The WTO stressed in the World Trade Report 2010 that tension between rising demand for natural resources on one hand and their scarcity and exhaustibility on the other was likely to increase. The report stated that “fears of inadequate access to supplies in resource-scarce countries and of inappropriate exploitation in resource-rich regions could lead to trade conflict or worse”5. The largest share of Africa’s exports of natural resources is to Europe (38.9 per cent). North America is the second largest destination (27.5 per cent), while Asia (23.5 per cent) is gaining share. Among the Asian countries, China is the main importer of Africa’s natural resources.
TRAPPED IN COMMODITY DEPENDENCE A major problem for many African countries is that they are trapped in commodity dependence, relying heavily on a few primary commodities for most of their export earnings. This makes them highly vulnerable to the volatility of world commodity prices and market vagaries. In fact, African economies are more susceptible to fluctuations in commodity prices than the direct effects of fluctuations in global financial markets6. It is hence crucial to address the commodity dependence in order to achieve a sustainable development in African countries. i
In this report, we use the most common definition for natural resources, which refers to fuels, forestry, mining and fisheries. These are goods that are found naturally, can be used with minimal processing, and that are traded. Agricultural products are excluded since they are cultivated, not extracted.
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NATURAL RESOURCES EXPORTS BY REGION, 2008
Region
Value (billion US$)
Share in total merchandise exports (percentage)
World
3855.4
25
Middle East
758.7
74
Africa
406.0
73
Commonwealth of Independent States (CIS)
489.7
70
Latin America
281.3
47
North America
397.8
20
Asia
630.4
14
Europe
891.5
14
Source: WTO, World Trade Report 2010
NATURAL RESOURCES EXPORTS OF REGIONS BY DESTINATION, 2008
% 100
5.8
90 80
27.5
5.4
7.2
8.7
12.4
6.8 22.1
12.0
North America
70 60 50
61.6
67.9 78.0
40
14.5 23.5
11.8
5.3
Africa
15.3
11.0
Asia
CIS
Europe
Middle East
Europe CIS
18.2
10 0
38.2
70.5
30 20
Middle East
82.1
38.9
South and Central America
North America
Asia Africa
21.5
South and Central America
Source: WTO, World Trade Report 2010
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For a long time commodity prices were declining, severely eroding the export earnings of many African countries. But between 2002 and 2008, there was a commodity boom and metal prices tripled, due to a strong and unforeseen increase in global demand7. The main reason for this surge in demand was the strong growth in emerging economies. China accounted for more than half of the growth in world consumption of industrial metals between 2002 and 20058. The commodity boom triggered a substantial rise in the sales revenues from the extractive sector and considerable foreign investment in sub-Saharan African countries9. It is expected that the continued growth of emerging economies will maintain a high global demand on raw materials. The effects of the global financial crisis by the end of 2008 led to a sudden fall in commodity prices, which hit some African countries quite seriously, but two years later prices were more or less back to what they were before the crisis. Global supply is expected to lag behind the demand.
MINERAL WEALTH After agriculture, the extractive sector is the most important economic sector in many African countries. Exports of mineral products and fuels account for up to 38 per cent of total exports in sub-Saharan Africa10. Africa is the world’s largest producer of diamonds, producing as much as 50 per cent of global production. The continent produces up to a third of total gold production. Africa is home to several of the minerals and metals that are currently much sought after by developed countries and emerging economies to fuel their electronics and high-tech industries.ii Notably, Africa accounts for around 80 per cent of the world’s production of platinum. The continent also provides around 50 per cent of the global production of cobalt11. South Africa is the main producer in the world, or at least among the top producers, of several strategic minerals, for example rhodium, platinum, vanadium, chromium, palladium and titanium. As for rhodium and platinum, over 70 per cent of the world production occurs in South Africa. The Democratic Republic of Congo is extremely resource-rich, with cobalt, coltan and copper among other important minerals. Zambia is a big producer of copper. Ghana produces gold, diamonds, bauxite and manganese. In Guinea, iron ore and bauxite are found. Gabon is the world’s second largest producer of high-grade manganese ore. Most of Africa’s minerals are exported as ores, concentrates or metals, without significant value-addition. There has been a shift in which metals are the most important on the global market. In the mid 1980s, gold accounted for more than half of the value of the metals mined in Africa, which decreased to 25 per cent in 2006. The platinum group metals have become the most important metals from Africa, accounting for almost a third of the total value, while copper has kept its share more or less constant.12
ii
In this report, in terms of raw materials we have chosen to focus on minerals and metals, since the EU’s Raw Materials Initiative focuses on non-energy minerals, although we make some references to forestry products and fuels as well. Much of the analysis and the discussions around policy measures in the report apply to other raw materials as well, particularly forestry produce.
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RESOURCE-RICH COUNTRIES IN SUB-SAHARAN AFRICA (2000-2005)
Over the last 3 years a growing number of countries, particularly in Sub-Saharan Africa, are developing new oil and mining projects. Hydrocarbon-rich Potentially large medium to long-term hydrocarbon revenue and mineral-rich Mineral-rich
Source: European Commission, Commission Staff Working Document accompanying the Raw Materials initiative, Brussels, 2008
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TOP THREE PRODUCERS IN THE WORLD FOR SOME SELECTED MINERALS (2008/2009)
Metal
First
Rhodium
South Africa
79%
Russia
11%
USA
6%
Platinum
South Africa
77%
Russia
11%
Canada
4%
Palladium
Russia
45%
South Africa
39%
USA
7%
Vanadium
South Africa
36%
China
36%
Russia
26%
Titanium
Australia
25%
Canada
19%
South Africa
17%
Chromium
South Africa
41%
India
17%
Kazakhstan
15%
Cobalt
D.R. Congo
41%
Canada
11%
Zambia
9%
Manganese
China
21%
Gabon
20%
Australia
16%
Tantalum
Australia
48%
Brazil
16%
Rwanda
9%
Gold
South Africa
12%
China
11%
Australia
11%
Second
Third
Source: European Commission, Critical raw materials for the EU, 2010
The world’s second greatest tropical forest after the Amazon (the Congo Basin) is found in Central Africa. The forest has some of the world’s most abundant biodiversity. In West Africa, the Guinean Forests are found, with unusual but endangered biodiversity, since these forests are already fragmented and vulnerable. More than a quarter of Africa’s mammals are found in these forests.13
AFRICAN COUNTRIES WITH SIGNIFICANT AREAS OF TROPICAL FOREST AND BIODIVERSITY BY RANKING
Country
World ranking in area of tropical forest
World ranking in biodiversity by number of species
Total area of forest (1000 ha)
DR Congo
2
18
133,610
Angola
8
43
59,104
Zambia
11
55
42,452
Tanzania
12
21
35,257
Central African Republic
15
-
22,755
Congo Brazzaville
16
40
22,471
Gabon
17
38
21,775
Cameroon
18
27
21,245
Source: Hall, R, Undercutting Africa – Economic Partnership Agreements, forests and the European Union’s quest for Africa’s raw materials, Friends of the Earth, 2008
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THE RESOURCE CURSE The resource wealth of many African countries has the potential to transform their economies. But historically their resources have often been a curse rather than a blessing. This phenomenon is often refered to as “the resource curse”. The discovery of natural resources has been followed by conflicts, environmental destruction and economic instability in many African countries. Local communities and the environment have often suffered badly from extraction of oil and minerals. More than half of the major mineral reserves in the world are located in countries with a per capita Gross National Income (GNI) of US$ 10 per day or less14. Countless studies document the correlation between an abundance of mineral resources and negative economic and political outcomes among developing countries. A World Bank study states that countries with substantial income from mining performed worse than countries with lower incomes from mining15. Many resource-rich African countries remain among the poorest in the world. Several of the African countries that are rich in mineral resources are found at the bottom of the rankings of the Human Development Index by the UNDP. For example, The Democratic Republic of Congo ranks 176 out of 182 countries. Guinea and Liberia are ranked 170 and 169, respectively, while Zambia is placed at 164.16 There are several reasons behind the seeming paradox that African countries with an abundant mineral wealth have remained poor. Mining in African countries is often carried out by foreign companies. In countries such as Botswana, Gabon, Ghana, Guinea, Namibia and Zambia, foreign companies are responsible for virtually all production17. African governments have missed out on considerable amounts of tax revenue from mining because of tax incentives and concessions given to mining companies as well as tax avoidance and evasion by companies. Most African mining tax regimes have lowered taxes considerably in order to attract foreign investment and they often also allow ministers to negotiate tax deals with individual companies at their discretion. During the 1990s, the World Bank played a key role in the formulation of new mining tax laws in several African countries eager to attract foreign investors, including Tanzania, Ghana, Zambia, Sierra Leone and DR Congo18. The World Bank encouraged lower tax rates and other concessions for foreign companies, arguing that the countries’ existing mining tax laws were not conducive to foreign investment. For Ghana and South Africa, for example, estimated losses of lower royalty rates are up to US$ 68 million and US$ 359 million respectively. Tax exemptions in a single mining contract in DR Congo have meant losses for the treasury of US$ 360,000 a year19. Mining companies have different ways to avoid taxes, such as secret mining contracts, corporate mergers and acquisitions, as well as various ‘creative’ accounting mechanisms. Negotiating tax breaks in secret mining contracts have often been used by companies to avoid paying mining taxes stipulated in the national law. Another common way to avoid paying tax in developing countries is through so-called transfer mis-pricing. Companies either under-declare or overstate the prices of their imports, when trading among associates or between the parent company and associates. In this way the company is able to reduce the profits it declares in the country where it is registered as a tax-payer, and transfer the profit to, for instance, a tax haven. In Tanzania, in another case of illegally evading taxes, an auditor commissioned by the government has claimed that the country’s four largest gold mining companies have over-declared their losses by millions of US dollars20.
15
In some African countries, the revenue earned from natural resources has been squandered through corruption and lack of government accountability to its people. Other reasons why the resources have not led to development include the fact that countries that are heavily dependent on resource exports are more vulnerable to economic shocks due to their lack of diversification and the volatility of commodity prices. The international prices for primary commodities, including minerals, have been more volatile than the prices for manufactured goods. This price volatility has increased since the 1970s21. Extractive industries have often not done well in terms of equity of income distribution.
NIGERIA – RICH IN OIL BUT AMONG THE POOREST COUNTRIES IN THE WORLD
Nigeria has been a significant oil producer for decades, but the country has not been able to transform its oil resources into economic growth. In fact, its GDP growth has been lower than that of its non-oil producing neighbouring countries. Nigeria is the world’s seventh largest oil producer. Still, Nigeria’s per capita GDP has shrunk from US$ 1,113 in 1970 to US$ 1,084 in 2000. The country’s own corruption agency estimates that between US$ 300 billion to 400 billion of oil revenue has been stolen or wasted through corruption over the last 50 years. More than half of Nigerians live below the poverty line. Nigeria ranks 158 among 182 countries in the Human Development Index. Shell has long been involved in the extraction and production of Nigeria’s oil. The oil extraction has been marked by conflicts with local communities and devastating environmental effects. There have been more than 6,800 recorded oil spills in Nigeria’s delta region. Sources: UNCTAD, World Investment Report 2007; Klare, M, Resource Wars; Weinthal, E & Luong, P, Combating the Resource Curse
An independent group of international experts in economically sustainable resource extraction, including renowned economist and author Paul Collier, has developed a Natural Resource Charter, with the purpose to help governments and societies effectively harness the opportunities created by natural resources. The Charter contains 12 precepts, which offer guidance on the extraction of resources as well as on using revenues generated by the resources.22
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CONFLICT MINERALS In several African countries, minerals have contributed to enriching rebel groups and fuelling civil wars and other armed conflicts. These ‘conflict minerals’ have funded brutal conflicts in Africa that have resulted in the death and displacement of millions of people. In the Democratic Republic of Congo, for example, the struggle over control of the country’s vast natural resources and minerals has fuelled war and violent conflicts. One of the minerals from Congo, coltan, is commonly used in mobile phones, computers and DVD-players. Conflict diamonds, also known as “blood diamonds”, have had devastating effects for several countries. Angola, the Democratic Republic of Congo, Liberia and Sierra Leone are still recovering from widespread devastation resulting from wars fuelled by diamonds. Diamonds continue to be used for money laundering, tax evasion and organized crime. Only a few African economies have actually benefited from diamonds. One such example is Botswana, which has managed to turn its diamond wealth into development. (See more in the chapter on investment agreements.) Conflict minerals from DR Congo, in particular, have received international attention, because of the brutality of the conflicts fuelled by minerals. The country is trying to recover from the bloody war between 1998 and 2003. Despite a peace deal, people in the eastern parts are often threatened and attacked by rebel groups and the army. Tens of thousands of women, possibly hundreds of thousands, have been raped since the start of the war23. It is clear that income from the extraction of minerals (mainly tin, coltan, wolframite and gold) contributes to sustain the deadly conflict. Both politicians and civil society organisations are demanding that international companies introduce strict processes to show that they are not buying minerals from conflict areas in Eastern Congo. In July 2010, the US passed a law designed to stop the import of conflict minerals into the US. The UN Special Representative on Sexual Violence in Conflict, Margot Wallström, has urged the EU to legislate against conflict minerals24.
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CHINA IN AFRICA
China’s involvement in Africa has expanded dramatically since the beginning of the century, and the country has become one of Africa’s most important economic partners. Access to Africa’s abundant natural resources is still the predominant interest for China’s engagement with the continent, even if other forms of commercial activity also provide an incentive to trade with Africa. This is likely to continue for the foreseeable future, even if the desire to tap into Africa’s markets, which are already being inundated by cheap Chinese products, is strong as well.25 Along with securing access to natural resources and export markets, investment opportunities are also important drivers for China’s engagement in Africa. Since many of the basic mineral resources required to fuel global industry are found in Africa, the continent is of strategic interest to China. China itself is home to many strategic minerals, but this is not enough today to meet the demands of its booming economy. The amount of natural resources available per capita in China is far below the international average in most cases26. Therefore China needs to look to other countries and continents to meet the growing demands of its expanding economy and its population. China also needs to secure sources of energy for its economy. Currently over 30% of China’s oil requirements are sourced from Africa and this will expand following the purchase of important stakes in Nigeria’s delta region27.
DRAMATIC INCREASE IN TRADE China has been increasing its foothold in Africa since the mid 1990s - and fully visible since beginning of the new century. The trade between China and Africa grew ten times in only eight years, from US$ 10 billion in 2000 to 114 billion in 200828. For the latter year, Africa had a trade deficit of USD 10 billion. This year, African exports to China amounted to US$ 52 billion, while the imports from China came to 62 billion. The trade with China now represents close to ten per cent of Africa’s exports and imports. Africa’s trade with China is highly concentrated on only a few countries in the continent. Around 70 per cent of Africa’s export to China originates from only four African countries: Angola (34 per cent), South Africa (20 per cent), Sudan (11 per cent) and the Democratic Republic of Congo (8 per cent)29. The African imports from China are slightly less concentrated, but still six countries receive more than half of the imports.
18
HIGH CONCENTRATION OF AFRICAN EXPORTS TO CHINA (2007)
Angola 34 %
Others 19 %
Libya 4% Equatorial Guinea 4% DR Congo 8%
South Africa 20 %
Sudan 11 %
Source: African Development Bank, Chinese Trade and Investment Activities in Africa, 2010
The trade between Africa and China is also highly concentrated by sector. Around 70 per cent of registered African exports to China consist of crude oil and 15 per cent of other raw materials30. African imports from China, on the other hand, are relatively more diversified, even though three major types of products still dominate, i.e. machinery and transport equipment, manufactured goods and handicrafts. The imports of manufactured goods have allowed Africans to increase their range of consumer products, since the prices are often relatively low. Machinery and transport equipment imports are linked to the strong prevalence of Chinese companies in the infrastructure sector.
CHINESE INVESTMENT The volume of Chinese investments in Africa has increased substantially during the last 10 years. The investments have increased by an average of 46 per cent annually over the last decade31. Resource-rich African countries receive by far the largest share of Chinese investment. The main destinations of Chinese investments during 2003-2007 were Nigeria (20.2%), South Africa (19.8%), Sudan (12.3%), Algeria (12%) and Zambia32. The Chinese companies that are investing in oil, mining or infrastructure are mostly state-owned and/or subsidized with Chinese grants or by state-owned banks. Linked to its investments in natural resources are investments in physical infrastructure, for example roads, railways and port facilities.
19
China has invested in infrastructure projects in more than 35 African countries. Resource-backed loans, often issued by China’s export credit agency, have been used in several African countries. Chinese companies have for example built roads, railways, hospitals, schools and water systems in Angola with three oil-backed loans from Beijing. A hydropower project is underway in Ghana, to be repaid in cocoa beans, and the Democratic Republic of Congo will receive a US$ 3 billion copper-backed loan that will finance railways, roads, hospitals and universities33. Some argue that Chinese companies have been able to get a strong foothold in Africa partly because of liberal African investment policies imposed by the World Bank, International Monetary Fund (IMF) and Western donors in the last few decades. In a report for the Danish Institute for International Studies, Peter Kragelund writes that “without the very liberal investment climate in Africa, to a large extent imposed by the International Financial Institutions, Chinese companies could not have pursued its grand policies of vertical integration to control full value chains”34.
CHANGING PATTERNS It is obvious that the pattern among Africa’s economic and trading partners is changing. The EU is still Africa’s main trade partner, but the share of African exports to European countries is on the decline. China’s rise as a major trading partner to Africa is likely to continue. This is challenging traditional Western pre-eminence in African economies.
AFRICAN EXPORTS TO THE MAJOR BLOCS (1994-2007)
60% 50%
EU
40%
China
30%
Asia excluding China and Japan
20%
United States
10% 0
Japan 1995
2000
2005
Source: African Development Bank, Chinese Trade and Investment Activities in Africa, 2010
20
AFRICAN IMPORTS FROM THE MAJOR BLOCS (1994-2007)
60%
EU
50%
United States
40%
China
30%
Asia excluding China and Japan
20%
Japan
10% 0
Middle East 1995
2000
2005
West hemisphere
Source: African Development Bank, Chinese Trade and Investment Activities in Africa, 2010
China is also keen to increase its strategic geopolitical profile and to broaden its circle of allies. For example, China puts a lot of effort into gaining the support of African states for Chinese positions in a number of international fora, particularly the UN. African countries have often given support in the UN when Chinese conduct has been criticised.
IMPACT ON AFRICA In terms of the impact of the Chinese engagement, the benefits and disadvantages for Africa can be debated. Some argue that China’s expansion can help to promote development on the continent. A report from the OECD states that the increased demand for primary commodities has contributed to the rise of raw material prices and improved terms of trade for Africa35. However, since Chinese imports from Africa still mainly consist of raw materials, it may derail the attempts by African commodity producers to diversify away from traditional exports. Moreover, concerns have been raised that the cheaper imports of Chinese manufactured products threaten local production, which is unable to compete. An obvious example of this is textiles. African countries need to tackle the challenges if they are to take advantage of the increasing Chinese involvement in the continent. There are signs that African governments are increasingly able to negotiate better bargains with the Chinese. Angola, for example, demanded that Chinese companies subcontract 30 per cent of the work to local firms and the Democratic Republic of Congo required that maximum 20 per cent of the construction workers should be Chinese36.
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THE EU LOSING MONOPOLY China’s involvement in Africa has caused great alarm in Western countries. The economic and political consequences of this have been the subject of much debate in the West. The speed at which China has become a major investor and strategic player in Africa has stunned the rest of the world. In the Western debate on China’s role in Africa, China is often viewed as a threat and as a competitor for access to Africa’s natural resources. China is often portrayed as the resource hungry dragon with an endless appetite to feed its ever expanding economy37. The EU often criticizes the Chinese foreign policy of non-interference - ‘no political strings’ – which the EU considers to be a hindrance to political reform and development in Africa. It is evident that the EU fears that they will lose leverage in Africa. The EU begins to realize that they do not hold a monopoly over Africa’s resources. The European Commission and the member states were slow to recognise the significance of the growing Chinese presence on the African continent. For a long time Europe seems to have been relying on an assumption that their aid relationship and historical ties with African countries will always give them an advantage over the more recent actors. China has become an alternative to Western countries for African leaders – an alternative which has given them increased bargaining power on the economic and political scene.
AFRICA-CHINA-EU COOPERATION The EU, and the Commission in particular, has initiated a trilateral dialogue for Africa-China-EU cooperation. The EU Commission released a communication in October 2008, entitled ‘The EU, Africa and China: Towards Trilateral Dialogue and Cooperation’. The EU envisaged that the three parties should work together in a “flexible and pragmatic way”, linking their cooperation wherever possible with existing commitments in multilateral forums. It also proposed sectoral cooperation, focusing on several main areas: peace and security; support for African infrastructure; sustainable management of the environment and natural resources; and agriculture and food security. A trilateral dialogue faces the challenge of addressing the concerns of all participants while maintaining an overarching commitment to Africa’s development. China has been much more cautious and not shown the same level of enthusiasm for the trilateral dialogue as the EU. China fears that aspects of the process may conflict with Chinese interests on the African continent. The views are also characterized by a belief that the origin of the EU initiative is less about interest in African development but rather stems from the EU’s self-interest38. Within Africa, the trilateral dialogue has been met with profound scepticism. The process is widely seen as an effort by external powers to exercise a determining influence over the African continent. Comparisons are being made to the Berlin conference of 1884-1885, where the colonial powers divided the continent between themselves. The Africans fear what they see as a China-EU “donor cartel”. The question of ownership is probably the most important and contentious issue for the trilateral cooperation. If the initiative is not ultimately driven by Africa, it risks being seen as China-EU collusion to pursue their interests in Africa39.
22
OTHER EMERGING ECONOMIES IN AFRICA While China is by far the largest actor when it comes to engaging with Africa, other emerging economies are also increasingly turning their eyes to Africa, in their search of raw materials as well as other commercial activities. India has greatly increased its engagement with Africa in the last decade. Access to natural resources and oil is of critical importance to India. Oil constitutes 70 per cent of Africa’s export to India. 12 per cent of India’s oil comes from Africa. However, according to the OECD, African exports to India are more diversified and labour-intensive than those to China40. Africa is also becoming an important market for Indian exports, with an increasing diversification into highervalue goods and services. India now occupies the fifth place among Africa’s trading partners, and trade has grown at 23 per cent a year since 2000.41 Brazil’s engagement with Africa has received less attention than that of China or India. Energy is a major interest for Brazil and oil constitutes a large part of its trade with African countries. Angola, Libya, Nigeria and South Africa are the main trading partners.
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THE EU RAW MATERIALS INITIATIVE
Raw materials are crucial for the functioning of many sectors in today’s economies. Sectors such as construction, chemicals, automotive, aerospace, machinery, equipment and electronics are all dependent on access to raw materials. Mineral raw materials are an essential part of both more advanced and high-tech products as well as everyday consumer products such as mobile phones, computers and batteries. The electronics industry is highly dependent on certain strategic minerals and metals. So-called high-tech metals are increasingly essential to the development of technologically sophisticated products, even if they are often only needed in small quantities. High-tech metals play an essential role in the development of innovative “environmental technologies” for boosting energy efficiency and reducing greenhouse gas emissions. Lithium batteries, for example, are used for hybrid and electric cars and platinum-based catalysts are needed in hydrogenfuel based cars. Cobalt can be used in fuel cells to help future energy supply, while rare earths are critical to the development of hybrid and electric vehicles. The European Commission claims that the EU will not manage the shift towards sustainable production and environmental friendly products without such metals42. Some minerals are particularly critical. For many of these strategic metals and minerals the concentration is very high and they are found in only a few countries. Frequently, the top three producing countries account for over half of the total production in the world. For some strategic minerals, the three main producing countries account for almost the entire global production43. The strategic minerals are defined by factors such as: their significant economic importance for key sectors high supply risks due to the high import dependency and a high level of concentration in producing countries lack of substitutes
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ESSENTIAL METALS AND THEIR USES
Platinum, palladium and rhodium are, along with a few other metals, part of the so-called platinum group metals. The unique properties of the platinum group metals account for their widespread use. They are highly resistant to corrosion. Platinum and palladium are used in many electronics including computers, mobile phones and televisions. A common use of both metals is also as catalytic converters, which convert harmful gases from auto exhaust. Rhodium is extremely reflective. It is used as a finish for jewelry, mirrors, and search lights. It is also used in electric connections and is alloyed with platinum for aircraft turbine engines as well as in automotive catalyst applications, where it is used together with platinum and palladium to control exhaust emissions. Titanium, sometimes called the ‘space age metal’, can be alloyed with, for example, iron and aluminium to produce strong lightweight alloys for aerospace (jet engines, missiles and spacecraft). Titanium is used in many military and industrial processes (e.g.chemicals, pulp, and paper) as well as automotive, agri-food and medical among other industries. Lithium and its compounds are used in several industrial applications, including heat resistant glass and ceramics. Lithium is also used in batteries, particularly rechargeable batteries. Cobalt is an important metal for the electronics industry. It is used in rechargeable batteries for example in laptops and mobile phones. Vanadium is mainly used in metal alloys and is important in the production of aerospace titanium alloys. Rare earth metals - a group of 17 elements - are equally essential to the development of hybrid and electric vehicles as to the super-alloys and wind turbines deployed in aviation. China accounts for 97 per cent of the global production of rare earth metals. China produces 60 per cent of the world’s indium, which is widely used in thin-films to form lubricated layers. It is estimated that three times more indium will be needed for use in flat screens by 2030 than was produced in 200644. Source: The European Commission
HIGH IMPORT DEPENDENCE The EU is the world’s largest importer of natural resources, accounting for 23 per cent of the global imports of natural resources45. The raw materials that are fuelling the European manufacturing industries are sourced from all over the world. Between 70-80 per cent of the primary resources are imported. In 2007, about 70 per cent of all imports to the EU were not finished consumer products but intermediate goods headed for transformation industries in Europe46. The EU is highly dependent on imports of metallic minerals and especially of high-tech metals such as cobalt, platinum, rare earths and titanium. The EU’s import dependency rate for minerals ranges
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from 46 per cent for chromium, 54 per cent for copper ore, 95 per cent for bauxite to 100 per cent for materials such as cobalt, platinum, titanium and vanadium47. The current import sources to the EU vary according to the different minerals. Certain minerals are imported from China and Russia, but African countries are also important import sources, mainly South Africa and the Democratic Republic of Congo.
MAIN IMPORT SOURCES TO THE EU FOR SOME SELECTED MINERALS
Mineral
EU import dependence
Main EU import source
Share of EU imports
Bauxite
95%
Guinea Australia Brazil
55% 19% 10%
Chromium
46%
South Africa Turkey Albania
79% 16% 2%
Cobalt
100%
DR Congo Russia Tanzania
71% 19% 5%
Copper
54%
Chile Indonesia Peru
33% 19% 17%
Fluorspa
69%
China South Africa Mexico
27% 25% 24%
Manganese
91%
Brazil South Africa Gabon
39% 33% 26%
Platinum Group Metals
100%
South Africa Russia Norway
60% 32% 4%
Rare Earth Elements
100%
China Russia Kazakhstan
90% 9% 1%
Tantalum
100%
China Japan Kazakhstan
46% 40% 14%
Titanium
100%
Canada Norway Australia
28% 26% 22%
Tungsten
73%
Russia Rwanda Bolivia
76% 13% 7%
Vanadium
100%
South Korea Japan Venezuela
90% 7% 3%
Source: European Commission, Critical Raw Materials for the EU, 2010
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FUTURE ACCESS AT RISK? The EU fears that access to some minerals may become more difficult in the future. The main problem for the EU is not that the extraction industry is not able to keep pace with demand. Rather, in a situation where the producers of some of the key strategic minerals are in a dominant position, they hold control over the supply. China, for example, has 97 per cent of the world’s production of rare earth elements, which are essential in many everyday technological products, such as mobile phones as well as in products of green technologies, for example, hybrid cars, solar panels and wind mills. China appears to be tightening their control over rare earth production, which is raising tensions in the EU and the US. China capped production levels for 2010, and imposed a moratorium on new mining licenses until next summer48. There have been rumours in Chinese media that China is planning to reduce the export of rare earths by 30 per cent in 2011 in order to prevent overexploitation49. China is the dominant producer of several of the minerals that the EU has defined as particularly strategic. China could create major problems for modern industries around the world, if they would suddenly decide to cut exports of rare earths and other strategic minerals. The EU fears a situation where producers in a dominant position in different ways restrict exports of strategic minerals. China and rare earths are one example. Another strategic mineral is niobium, which is used in superconducting magnets, where 90 per cent of the world’s production is in Brazil. The EU is also concerned about the fact that some of the minerals come from countries with a high degree of political instability. The Democratic Republic of Congo, for instance, is the main producer of cobalt, which is essential in mobile phones.
THE RAW MATERIALS INITIATIVE In November 2008, the EU launched a new strategy on raw materials, entitled “The Raw Materials Initiative – meeting our critical needs for growth and jobs in Europe”50, with the aim to improve and secure access to raw materials for European industry. The Initiative proposes an integrated strategy as a response to the different challenges that the EU envisages regarding access to non-energy raw materials. The Raw Materials Initiative focuses on non-energy minerals, but the EU stresses that the analysis and the proposed measures, especially with regard to ‘trade distortions’ in other countries, apply also to other raw materials, e.g. wood. The Raw Materials Initiative is born out of the Global Europe strategy51, which was launched in 2006. In this strategy, the EU sets out a new trade policy agenda designed to reflect the EU’s strategic priorities in terms of reducing barriers to trade globally and opening markets abroad. The trade agenda is driven by the EU’s aspiration to maintain competitiveness towards China, India, Brazil and other emerging economies. Access to raw materials and energy supplies is a key area in Global Europe: “More than ever, Europe needs to import to export. Tackling restrictions on access to resources such as energy, metals and scrap, primary raw materials including certain agricultural materials, hides and skins must be a high priority. Measures taken by some of our biggest trading partners to restrict access to their supplies of
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these inputs are causing some EU industries major problems. Unless justified for security or environmental reasons, restrictions on access to resources should be removed.” 52 According to Global Europe, the Free Trade Agreements that the EU is negotiating with other countries should be “comprehensive and ambitious in coverage, aiming at the highest possible degree of trade liberalisation including far-reaching liberalisation of services and investment. All forms of duties, taxes, charges and restrictions on exports should be eliminated.” 53
AGGRESSIVE RAW MATERIALS STRATEGY The Raw Materials Initiative is based on three pillars: (1) Access to raw materials on world markets at undistorted conditions; (2) Foster sustainable supply of raw materials from European sources; (3) Reduce the EU’s consumption of primary raw materials. The first pillar and the trade dimension comprise the controversial part of the Initiative, and has raised concern and stirred debate among various actors. The EU is increasingly concerned about the fact that many resource-rich countries are pursuing industrial strategies aimed at protecting their natural resources and applying ‘protectionist measures’ in order to promote their own downstream processing industries54. The European Commission argues that there is a proliferation of government measures that distort international trade in raw materials. Such ‘trade distorting’ measures include export taxes and quotas, subsidies, price-fixing, dual pricing as well as restrictive investment rules. The Commission has identified over 450 export restrictions on more than 400 different raw materials, including metals, wood, chemicals, hides and skins 55. According to the Commission, China, Russia, Ukraine, Argentina, South Africa and India are among the key countries involved in applying such measures. The Commission argues that since some of these countries also benefit from reduced or duty-free access to the EU market for related finished products, this puts many EU industrial sectors at a competitive disadvantage. The content as well as the language of the EU’s Raw Materials Initiative suggest that the EU would have an automatic right of access to other countries’ raw materials. With strong and aggressive language, the EU discloses how it aims at forcing other countries to abolish such ‘trade distorting measures’: “The EU should work towards the elimination of trade distorting measures taken by third countries in all areas relevant to access to raw materials. The EU will take vigorous action to challenge measures which violate WTO or bilateral rules, using all mechanisms and instruments available, including enforcement through the use of dispute settlement. More generally, the EU will act against the protectionist use of export restrictions by third countries. In determining its actions, the EU will take as priority those export restrictions that pose the greatest problems for EU user industries or give their domestic downstream industries an unfair competitive advantage on international markets.” 56
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The European Commission argues that the global financial and economic crisis has reinforced the risk that protectionist measures will increasingly be taken by exporting countries to protect their own resource base. According to the Commission, there are indications that the number of trade restrictions regarding raw materials has further increased since the launch of the Raw Materials Initiative, which has reinforced the need for further action.57 By the end of 2010, the Commission is expected to publish a communication on the implementation of the Raw Materials Initiative and the way forward. In 2010, the European Commission launched a new strategy, Europe 2020 – A European strategy for smart, sustainable and inclusive growth58, with concrete targets for how the EU will meet the challenges ahead and recover from the global economic crisis. The strategy identifies access to raw materials as one of the strategic issues for the coming years. According to the Commission, the Raw Materials Initiative has gained extra momentum with the Europe 2020 strategy, since access to raw materials will be an essential part of a framework to be set up for a modern industrial policy, as well as a trade strategy59. European mining and extractive industry has had considerable influence over the Raw Materials Initiative. In 2006, the main business federation in Europe, Business Europe, presented a position paper, calling for an EU strategy to secure access to industrial raw materials. In the paper, the business federation outlined what it saw as the main threats to a secure access to industrial raw materials: “The competitiveness of EU industries will suffer if government policies that thwart the free market for access to industrial raw materials are not abolished. A well thought through European strategy has an important role to play in removing trade distorting practices. ... An increasing number of countries restrict the export of raw materials by means of export taxes or other measures60.” Business Europe has kept encouraging the EU Commission to remain tough and to use all means available to abolish distortions in raw materials trade. In February 2010, it stated the following as one of the priorities to enhance the competitiveness of the European economy: “The EU will need to enhance its raw materials strategy and pursue a tough line to address government distortions of raw materials markets making use of all possible policy instruments. All available policy avenues must also be used to enhance the security of the EU’s energy supply61.”
CRITICAL MINERALS IDENTIFIED As part of the framework of the EU’s Raw Materials Initiative, an expert group chaired by the European Commission was given the task to identify the most critical raw materials for the EU. In June 2010, the expert group presented its list of 14 critical raw materials identified out of 41 minerals and metals analysed. The minerals are considered particularly critical in terms of their combined high relative economic importance and high relative supply risk. The supply risk is considered high, since many of these minerals are concentrated in one producer country and several of the producer countries are
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considered politically and/or economically unstable. The risk is further increased by the difficulty in substituting the minerals as well as low recycling rates. China is the main producer of the largest share of the 14 critical minerals. Some are mainly found in Russia and Brazil. South Africa is the main producer of the platinum group metals and the Democratic Republic of Congo is a main producer of cobalt and tantalum. (See the map at right)
LIST OF CRITICAL RAW MATERIALS AT EU LEVEL (IN ALPHABETICAL ORDER)
Antimony
Beryllium
Cobalt
Fluorspar
Gallium
Germanium
Graphite
Indium
Magnesium
Niobium
Platinum Group Metals*
Rare Earths
Tantalum
Tungsten
Source: European Commission, Report of the Ad-hoc Working Group Defining Critical Raw Materials, June 2010
* The Platinum Group Metals include Platinum, Palladium, Iridium, Rhodium, Ruthenium and Osmium.
IMPLEMENTATION OF THE RAW MATERIALS INITIATIVE Multilateral trade negotiations as well as bilateral and regional trade agreements are the main tools that the EU is using to try to secure access to raw materials. The EU aims at “increasing the importance of non-energy raw materials in the multilateral and bilateral agendas of the trade policy instruments”62. We have seen examples of this during the last few years. In the WTO, the EU has attempted to introduce disciplines to ban or limit the use of export taxes, but so far without success. The EU has also challenged China’s export restrictions at the WTO Dispute Settlement Body (see the chapter on export taxes). In the EPA negotiations, the EU pushed the issue of export taxes onto the agenda - trying to ban the use of such taxes - despite strong opposition from the African countries (see the chapter on export taxes and EPAs). In its process to produce new policies on trade, as part of the Europe 2020 strategy, as well as on investment, the European Commission stresses the need to achieve a secured access to raw materials. In its blueprint for the new trade policy, presented in early November, the Commission states that: “The sustainable and undistorted supply of raw materials and energy is of strategic importance for the competitiveness of the EU economy. We will use current trade rules to the maximum, pursue the establishment of a monitoring mechanism of export restrictions, negotiate rules in ongoing bilateral negotiations and further explore multi- and plurilateral disciplines, e.g. an OECD agreement based
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PRODUCTION CONCENTRATION OF CRITICAL RAW MINERAL MATERIALS
Russia - Platinum Group Metals
Canada - Cobalt
USA - Beryllium
Mexico - Flourspar
Brazil - Niobium - Tantalum
India - Graphite
Japan - Indium China - Antimony - Beryllium - Fluorspar - Gallium - Graphite - Germanium - Indium - Magnesium - Rare earths - Tungsten
Rwanda - Tantalum Democratic Republic of Congo - Cobalt - Tantalum South Africa - Platinum Group Metals
Source: European Commission, Memo on 14 critical raw materials, 2010
on ‘best practices’.63” In relation to the new investment policy, the Commission has stated that the EU must “consider shaping a new EU-wide policy on foreign investment agreements in such a manner as to better protect EU investments in raw materials abroad, and ensure a level playing-field with other foreign investors who benefit from the backing of State funds”64. The EU aims at integrating the Raw Materials Initiative into the EU development policy as well. According to the Commission there is a lot of room for progress in this respect65. The EU will in its next communication examine if there is scope for a better and more efficient interface between raw materials policy and development policy. One area could be the recent adoption of an “Africa Mining Vision” by the African Union. The EU does not foresee the creation of new instruments, but instead emphasizes the importance of raw materials in the existing development cooperation policy instruments. The EU could for example examine possibilities to increase its involvement with the Extractive Industries Transparency Initiative (EITI). The EITI, which is a coalition of governments, companies, civil society groups, investors and international organisations, aims to strengthen governance by improving transparency and accountability in the extractives sector.
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The European Commission has stated that they do not see any negative impacts resulting from the Raw Materials Initiative. Furthermore, the Commission states that “actions affecting third countries will be fully in line with existing internationally agreed rules and agreements, aiming at a level playing field and sustainable growth”.66 The Commission is stressing that the EU aims at removing unjustifiable barriers to trade in raw materials. The type of barriers that the Raw Materials Initiative focuses on are those that distort a level playing field in an unfair manner, according to the Commission67. The Commission also argues that restrictions placed on the supply of raw materials often cause serious damage to other developing countries, and therefore the EU, in line with development objectives, must address this 68.
POSITION OF THE SWEDISH GOVERNMENT ON THE RAW MATERIALS INITIATIVE
A memorandum from the Ministry of Industry states that the Swedish government is positive to the Raw Materials Initiative and aims to participate actively in the continued work to elaborate an integrated European raw materials strategy. The government considers that it is important that the proposed trade policy instruments are carefully evaluated based on the interests of the user industry. The memorandum states that “the European industry’s access to raw materials is an important long term question of sustainability”.69 Source: Swedish Government, Communication on a European Raw Materials Initiative for More Jobs and Enhanced Growth, Ministry of Industry, Memorandum, 9 January 2009
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EXPORT TAXES — DEVELOPMENT TOOLS OR TRADE DISTORTIONS?
“We have been exporting our raw materials to Europe since the colonial times when the Europeans came to Africa. They still come here for our resources but we have remained the poorest continent. Many of our raw materials go and return as finished products for us to buy, and that keeps us in poverty. Why can’t we develop our own resources by adding value from here?” Elizabeth Tankeu, The African Union Trade and Industry Commissioner, July 2010
Export restrictions can take many different forms, such as export taxes, quotas, subsidies, mandatory minimum export prices and dual-pricing. Reduction of VAT rebates and stringent export licensing requirements can also be considered as export restrictions if they affect export volumes. Export taxes are one of the most frequently used forms. Export taxes are a common policy instrument in many developing countries. 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. The processing industry will benefit from lower prices of inputs and will be able to grow and gain competitiveness.70
EXPORT TAXES ON NATURAL RESOURCES Export taxes are more often applied to natural resources compared to other sectors in the world trade. According to the WTO, export taxes on natural resources appear twice as often as in other sectors. In fact, natural resource sectors account for one-third of all export taxes, although they represent less than a quarter of total tradable sectors. Export taxes are applied to 11 per cent of the global trade in natural resources, while more generally, export taxes are imposed on only 5 per cent of total world trade71. Among the natural resource sectors, export duties are more common on
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forest products compared to products from mining, fuels and fish. Within the mining sector, the use of export taxes varies significantly between different products. Iron, copper, natural or cultured pearls and stones are among the products where the use of export taxes is most common. According to the WTO, around a third of the WTO members are using export taxes and the majority of these are developing and least-developed countries72. Export duties are also increasingly used by resource-rich emerging economies, such as China and Russia. China applies export taxes ranging between 20-40 per cent on a number of minerals, for example aluminium, copper, manganese, rare earths, tungsten, yellow phosphorus and zinc. A common objective for the use of export taxes is environmental protection. Export duties can, for example, contribute to prevent deforestation. A number of developing countries, including Indonesia, Malaysia, the Philippines, the Dominican Republic, Mexico and Nicaragua levy export taxes for environmental and resource conservation purposes73. “Although sometimes criticized, such [export] restrictions can contribute to industrial development and prevent the destruction of forests, albeit at a substantial cost. They can also enhance people’s well-being, provided that the restrictions are adapted to local situations and used in combination with other policy instruments aimed at rural or industrial development.” FAO, State of the World’s Forests 2005 Export taxes are allowed under WTO rules, as opposed to other quantitative export restrictions, such as quotas or prohibitions, which are permitted only under certain circumstances. (Article XI(1) of GATT 1994). Even if the WTO does not prohibit export taxes, some countries that recently have acceded the WTO, such as China, Saudi Arabia, Ukraine and Vietnam, committed themselves to eliminating some or all of their export taxes in their Accession Protocols. China committed to eliminating all export taxes except for taxes applied on 84 specified tariff lines. On these tariff lines, China committed to not increasing the existing tax rates74.
EU ATTEMPTS TO BAN EXPORT TAXES IN THE WTO The EU is of the view that export taxes distort trade. During several years, the EU has tried to ban the use of export taxes in the WTO. The EU has protested against the weaker WTO rules on export taxes compared to those on import restrictions or different forms of non-tariff barriers. The EU finds that the increased use of export taxes is in contradiction to the developments on import barriers, where the WTO negotiations focus on reducing tariffs, eliminating tariff escalation and minimising non-tariff barriers. In 2006, the EU submitted a proposal to the WTO on disciplines for a new WTO agreement on export taxes as a non-tariff barriers issue in the negotiations on market access for non-agricultural products (NAMA)75. The EU proposed that all WTO members should commit to eliminating export taxes, with the possible exception for developing and least-developed countries to maintain certain export taxes. Members should however be able to use export taxes only for a limited
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THE WTO PERMITS EXPORT TAXES
Article XI of GATT 1994 – General elimination of quantitative restrictions 1. No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party. 2. The provisions of paragraph 1 of this Article shall not extend to the following: (a) Export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party;
Article XX: General Exceptions Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures: (g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption; Source: The WTO
number of products under specific circumstances. A WTO agreement on export taxes should aim to address distortions to international trade caused by 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: “Export taxes are legitimate tools of economic development, expressly permitted under Article XI:1 of the GATT. There is no legal basis to negotiate this issue in this Round. The Doha Ministerial Declaration and the Hong Kong Ministerial Declaration do not provide any mandate to initiate discussions about new disciplines on export taxes and duties. The insistence of a very limited group of developed countries to include this issue in the NAMA modalities disguised in the Non-Tariff Barriers discussion, regardless of the lack of mandate and the continuous opposition of developing countries, is particularly unhelpful for the conclusion of this Round. Therefore, Namibia with its other strategic alliances should resist all attempts to include in the modalities text or its annexes any reference to export taxes and duties.” 76
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In 2008, the EU submitted a revised proposal on export taxes to the WTO. The EU had now abandoned the idea of elimination of export taxes. Instead the EU proposed that WTO members should schedule and bind their export taxes. In this way, predictability would be ensured. The least developed countries would undertake to schedule export taxes but would not have to bind them.77 This proposal was also turned down by other WTO members and there has been no further movement on the issue.
THE EU TAKES CHINA TO WTO COURT At the end of 2009, the EU challenged Chinese export restrictions on a number of key raw materials, such as bauxite, magnesium, manganese, yellow phosphorus and zinc, at the WTO Dispute Settlement Body. Prior to that, the EU had raised the issue with China in formal WTO consultations. The EU considers that these restrictions are in violation of general WTO rules as well as of the specific commitments in their Accession Protocol. According to the EU, restrictions on raw materials give Chinese companies an unfair advantage, since downstream industries in China have access to cheaper materials than their competitors outside China. The main sectors concerned are chemical, steel and non-ferrous metal industries. The US and Mexico joined the EU in this action.78 In September 2010 the case was still ongoing at the WTO Dispute Settlement Body. A panel had been established and the parties had handed in their first written submissions79.
LEGITIMATE EXPORT TAXES? The views on what kind of export taxes can be deemed legitimate and under what circumstances export taxes can be justified differs widely between the EU and developing countries. The EU argues that export taxes artificially transfer gains from trade between WTO members to the countries applying them and create unfair advantages to domestic industries involved in international trade at the expense of other WTO members’ producers. Moreover, the EU is of the view that many countries also set export taxes at too high levels (15 per cent or more). According to the EU, legitimate situations where export taxes can be used include financial crises, infant industry protection, environment protection and preservation of natural resources as well as local short supply80. The EU does not consider purposes of diversification and industrial development as legitimate reasons. Developing countries, on the other hand, consider export taxes to be legitimate economic and industrial development tools. They want to retain the policy space to be able to use export taxes as a policy instrument in different situations, where they consider them appropriate. In 2008, the trade ministers of the least developed countries rejected the EU’s attempts to ban export taxes at the WTO. In the declaration from their meeting, 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”81.
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EXPORT TAXES – DEVELOPMENT TOOL FOR AFRICAN COUNTRIES Export taxes can be important policy measures for developing countries for industrial development purposes, particularly if they have undertaken tariff liberalisation and tariffs are already quite low. 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 and the WTO negotiations. For African countries, in order to attain sustainable development, it is critical to break away from their commodity dependence. 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. A report to the World Bank argues that while primary commodities can provide a bedrock for development, it is the shift to higher value-added activities that will make such process sustainable82. Promoting manufacturing is critical if African countries will be able to escape the dependence on commodity exports. At a meeting in July 2010, the African Union’s Trade and Industry Commission proposed that the continent adopt policies to discourage the export of raw materials to the developed world83. Export taxes can play a key role in supporting downstream processing industries and the shift into higher value-added activities. Supporting processing industries can generate badly needed employment. An export tax is also fairly easy to administer and collect. However, export taxes might not always be the most efficient tool. The benefits of an export tax needs to be weighed against a potential decline in the production of the taxed good by domestic producers. The total effect of the export tax also depends on how the government spends the fiscal revenue from the tax. For an optimal use, export taxes need to be combined with other government policies as well. Resource-rich African countries charge export taxes on some of their minerals, for instance, Zambia (copper), Ghana (gold, bauxite, manganese), South Africa (unpolished diamonds), DR Congo (rough diamonds), Gabon (manganese) and Guinea (bauxite), with the purpose of encouraging local value-addition. Several African countries also apply export taxes on scrap metal, e.g. Zambia and Kenya. Tanzania even has an export ban on scrap metal. Scrap metal is an important input for manufacturing industries. Ensuring that there is scrap metal available for local manufacturing is of critical importance for newly-established and infant industries in African countries. Sierra Leone levies export taxes of 3 per cent on diamonds from artisanal mines, 5 per cent on the country’s only industrial miner and 3 per cent on diamond exports from licensed traders84. These export taxes are the most important source of mining revenue for the government, since no mining company has declared taxable income in Sierra Leone. South Africa, for example, currently only imposes export taxes on unpolished diamonds. However, the use of export taxes as a tool for industrial support and development is increasingly being discussed in the trade policy debate in the country. Export taxes are more and more seen as having
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potential to stimulate growth in higher value-added manufacturing and thus promote diversification of the economy. At the end of 2008, the Department of Trade and Industry was reported to consider levying an export tax on scrap metal in order to reduce input costs for downstream manufacturers that use scrap metal as an input. There have also been reports that they were considering to introduce export taxes on some agricultural primary products so as to encourage downstream agro-processing.85 Export taxes and other restrictions on forest products are common among African countries rich in forest. Several countries apply export taxes or even export prohibitions on logs. In Ghana, for example, exports of round or unprocessed logs as well as raw rattan and bamboo are prohibited in order to protect downstream processing. In Cameroon the entire log production must be processed on site in order to encourage value-added and ensure the supply of local wood for processing industries. For many species, log exports are prohibited. The DR Congo only allows processed wood in the finished or semi-finished state to be exported. In Gabon, an export quota will ensure that there is a minimum level of processing for logs, with the aim of promoting industrialisation of the wood sector.86
FERROCHROME PRODUCERS CALL FOR EXPORT TAX
In October 2009, ferrochrome producers in South Africa called on the government to impose an export tax and quantitative restrictions on exports of chromite ore in order to help the local industry to protect its position as the global leader in ferrochrome production. (Chromite ore is an important input in ferrochrome production.) The production of ferrochrome in China had increased and China had started to take market share from South Africa. But the Chinese production is heavily dependant on imports of chromite ore from South Africa. Thus the ferrochrome producers were hoping to prevent some of the export of chromite ore, and instead make locally-produced ferrochrome more internationally competitive. Making the domestic production of ferrochrome more profitable would create jobs and provide increased income for the South African economy.87 Source: Woolfrey, S (2009), Export taxes, TRALAC
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EXPORT RESTRICTIONS IN SOME AFRICAN COUNTRIES
Country
Product/material
Export restriction
Cameroon
Raw or semi-processed logs
Export tax
Log exports of some species
Export ban,
Year
Tax 17,5 %
export quotas DR Congo
Gabon Ghana
Rough diamonds
Export tax
2%
Rough timber
Export tax
15 %
Timber
Various taxes
Manganese
Export tax
Logs
Export tax
Gold, bauxite, manganese
Export tax
2001
6%
Certain processed timber
Export tax
2001
6%
Round or unprocessed logs,
Export ban 1999
$ 8-9 /
2001
3,5 % 17 %
raw rattan, cane and bamboo Guinea
Bauxite
Export tax
tonne Kenya
Hides and skins, scrap metal
Export tax
Round-wood
Export
2004
25 %*
prohibition Sierra Leone
Diamonds from artisanal mines
3%
Exports from the country’s
5%
only industrial miner Diamonds from licensed
3%
traders South Africa
Unpolished diamonds
Export tax
Tanzania
Scrap metal; e.g. copper, chro-
Export ban
1998
5%
2008
15%
mium, manganese, nickel Zambia
Copper concentrates
Export tax
Scrap metal
Export tax
Source: WTO Trade Policy Reviews
* Other sources indicate that the export tax on hides and skins has been raised to 40%.
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ZAMBIA – THE IMPORTANCE TO DIVERSIFY AND REDUCE COPPER DEPENDENCE
Zambia is known for its high-quality copper and cobalt reserves. The mining sector plays a critical role in Zambia’s economy, exercising a heavy influence over growth, job creation, poverty reduction, and the external accounts. The main export product, copper, now accounts for over 75 per cent of total exports, up from 65 per cent in 2002. In its Trade Policy Review, the WTO notes the problem of the Zambian economy’s increasing dependence on mining, and stresses the need for progress on structural reforms to diversify the economy and reduce dependence on natural resources. Diversifying out of copper has been an often-stated objective of Zambian governments for years, including under the current national development plan (2006-2010). The heavy dependence on one export commodity means that Zambia is extremely vulnerable to the volatility of commodity prices. When the copper price quintupled between 2002 and mid-2008, this meant that Zambia’s terms of trade and external balance greatly improved. When global economic activity was buoyant and commodity prices strong, Zambia’s economy soared, but as the global economic downturn began in the latter part of 2008, it dragged Zambia’s economy down with it. Copper is the world’s third most widely used metal, after iron and aluminium, and is utilised mainly in highly cyclical industries, including construction and industrial machinery manufacturing. The global economic crisis has slowed, and even halted, the construction of infrastructure and property development, and reduced the demand for consumer goods, including electronics. The mining sector in Zambia has been hit hard by the more than 60 per cent drop in copper prices since mid-2008, which has resulted in cutbacks in production and the scaling-back or suspension of expansion projects. The country’s continued dependence on copper earnings means economic growth will decline from the levels of the past six years, when Zambia benefited from the high international price of copper. The dependence on mining and the limited progress in other sectors like agriculture has also meant that large sections of the population have not been able to benefit from the commodity boom. As a consequence, roughly two thirds of the population live in poverty, despite the government’s strong commitment to poverty reduction, and even after several years of 5-6 per cent growth. The per capita annual income of US$ 934 is well below the level at independence, placing the country among the world’s poorest nations. Social indicators continue to decline, in particular, as regards life expectancy at birth mainly due to the prevalence of HIV/AIDS. This puts a heavy strain on the general health system, and child and infant mortality rates are rising. In the UN Human Development Index, Zambia currently ranks 165th out of 177 countries. In order to encourage local value-addition, in the 2008 budget the Zambian government introduced an export tax of 15 per cent on the export of copper concentrates, recognising that there is local capacity to process these products. An export tax also exists on scrap metal, which is considered an important input for manufacturing. Apart from this, export prohibitions apply to certain types of logs under international agreements, and occasionally for grains (during drought years).
Source: WTO Trade Policy Review 2009
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EPAs — IN WHOSE INTERESTS?
For several decades, countries in Africa, Caribbean and the Pacific (ACP) had preferential access into the EU market through the Lomé Conventions. The EU granted its former colonies almost duty-free access to its markets for most of their products, with the aim of supporting development in the ACP countries. This arrangement was, however, challenged by other WTO members as discriminating against other developing countries, and it required an exemption (a ‘waiver’) from the WTO membership. The EU then decided to replace these preferential arrangements with a reciprocal WTO-compatible trade regime. The negotiations between the EU and ACP towards new trade agreements, the so-called Economic Partnership Agreements (EPAs), started in 2002 and had an original deadline of end 2007. The trade preferences of the ACP countries would be protected by a WTO waiver until then. The start of the negotiations was marked by declaratory statements by the EU that the EPAs would support development and regional integration in the ACP, and that no ACP country would be worse off following the negotiations. But soon the EU’s real ambitions for the negotiations were revealed. It became obvious that the EU had clear mercantilist objectives with the negotiations, contrary to its assurances. For the first time, ACP countries were now expected to open up their markets to European goods in return for duty-free access to the EU market. The EU has also been demanding that the liberalisation of ACP markets should not be confined to trade in goods only (which would suffice to make the agreements WTO-compatible), but that the EPAs should be comprehensive agreements and also include liberalisation of trade in services, investment, government procurement, rules on competition as well as enforcement of intellectual property rights protection. The EPA negotiations have been marked by controversy and strong criticism from ACP countries. When the deadline was approaching in 2007, several ACP countries hastily agreed to initial interim agreements on trade in goods, since they feared that they would otherwise be faced with deteriorating access to the EU market, and to avoid trade disruption. Still, less than half of the ACP countries chose to initial the interim agreements. The others opted not to initial any interim EPA, because they did not agree to the terms of the agreement. The Caribbean countries were the only region which negotiated a comprehensive EPA-agreement from the beginning, signed in October 2008.
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LOCAL PRODUCTION UNDER THREAT There are grave concerns in African countries – from governments as well as from small businesses, farmer organisations, civil society, researchers and many other groups - about negative development effects of EPAs. The EU has been pushing for a fast and far-reaching liberalisation of African economies, which poses serious threats to local production. According to WTO rules, ACP countries need to open up ‘substantially all trade’, which the EU interprets as at least 80 per cent of the trade with Europe within 15 years. Notably, the East African countries will have to liberalise 82 per cent of their trade with the EU during 25 years, where 65 per cent has to be liberalised during the first two years. Botswana, Lesotho, Namibia and Swaziland have an even faster liberalisation commitment. Within four years, they will have to dismantle 86 per cent of their tariffs on imports of European goods.88 With this scenario, it will not be possible for African countries to protect all sensitive sectors of their economies. While seeking to defend their food production from European imports, they will have no scope left to support their infant industries and local manufacturing production, which will have to compete with much more advanced European manufacturing industries. The result could be de-industrialisation and loss of jobs. Even if most African countries have excluded agricultural products from liberalisation, standstill clauses, which freeze tariffs at current levels, as well as inadequate safeguards would still make it difficult for the countries to protect their local agricultural production from cheaper, often subsidised, European imports. The livelihood of small scale farmers and food security would be threatened. “The UN Special Rapporteur on the right to food would like to draw the urgent attention of all States… to the implications [EPAs] may have on the right to food of poor farmers in the developing world. He is particularly concerned about the potential negative impact of greater trade liberalisation on peasant farmers in the ACP countries, especially given unfair competition with highly subsidized EU production.” UN report Right to Food, 22 August 2007 In a survey undertaken by the UN Economic Commission for Africa and the African Union as part of a review of the EPA negotiations, most of the African countries expressed the wish that EPAs would offer them full market access to the EU (duty-free and quota-free), while they should be able to exclude a significant proportion of their imports from liberalisation. They also wanted to be allowed long transition periods.89
THE PUSH FOR COMPREHENSIVE EPAs In addition to liberalisation of trade in goods, the EU demands that the EPAs also include trade in services, rules on intellectual property as well as agreements on investment, government procurement and competition (the so-called Singapore Issues). The EU is demanding these issues in
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the EPAs, although this is not necessary in order to be compliant with the WTO rules on Free Trade Areas (FTAs). There are concerns that liberalisation of trade in services could hinder the ability of African governments to provide quality and affordable essential services. Strict rules on intellectual property could undermine access to medicines at affordable prices for poor people in African countries. Developing countries have long resisted the Singapore Issues in the WTO and they finally managed to remove them from the Doha agenda in 2004. 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 EU wants ‘national treatment’, i.e. its investors in Africa must be given the right to operate on the same terms as local companies. 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. (This is described in more detail in the chapter on investment agreements.) African trade ministers have repeatedly demanded that investment and the other Singapore issues should not be included in the EPAs. “We reaffirm the position of African countries that, except for trade facilitation, the other three Singapore issues of investment, competition policy and transparency in government procurement should remain outside the ambit of the WTO Doha Work Programme/EPA negotiations.” African Union’s Ministerial Declaration on EPA Negotiations, Cairo 5-9 June 200590
SIGNIFICANT REVENUE LOSSES Many African countries are concerned about losses of tariff revenue under EPAs and the impact this will have for already constrained economies. The effects of the global economic crisis combined with the food and energy crises, have reinforced these concerns. Import tariffs remain a substantial source of government revenue in many African states. The World Bank points out that since the EU is the largest source of imports for most African countries, some countries fear losing significant tariff revenues as a result of eliminating all tariffs on 80-85 per cent of their imports from the EU91. Based on the interim EPA agreements and the agreed schedules of tariff liberalisation, it is now possible to more accurately estimate the potential fiscal revenue losses. Recent estimations indicate that the tariff revenue could diminish by about 16 per cent in Burundi, 21 per cent in Madagascar, and up to 28 per cent in Ghana92. The severity of the fiscal shock from these losses depends on the importance that customs duties have for government revenue. The fiscal challenge of the EPA is likely to be large for Madagascar, for example, where taxes on international trade account for half of the government’s revenue. Low income developing countries are more dependent on trade taxes than other countries and it is often very difficult for them to replace revenues lost due to tariff reductions, because of the narrow existing domestic tax bases93.
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Although supporting regional integration is one of the aims with the EPAs - often repeated by the European Commission – several studies, for example by the UN Economic Commission for Africa, show that increased EU imports into Africa is likely to also compete with local products on the regional markets, and risk undermining regional trade. EU imports are likely to displace regional production and intra-regional trade, especially in higher value-added sectors. For African manufacturing producers the regional markets are important. Kenya, for example, sells 67 per cent of its manufactured export to the COMESA market, compared with 9 per cent to the EU94. Kenya faces a risk of losing 15 per cent of its regional trade under an EPA, which will undermine the country’s trade in value-added goods95. “We call on the EU Party to … display more sense of understanding and flexibility in the EPA negotiations so that EPAs can achieve the development objectives, including the maintenance of adequate policy space, the need to sustain and deepen regional integration and the non-acceptance of WTO-plus commitments.” African Union, Ministers of Trade, Kigali Declaration on EPAs, 2 November 2010 The EU has insisted on the inclusion of issues in the interim EPAs that were strongly opposed by the African counterparts. For example, the EU wanted to prohibit the use of export taxes. The EU has demanded the inclusion of a so-called Most Favoured Nation clause (MFN), which would require the African countries to extend to the EU the same treatment that they give to any other ‘major trading partner’. African countries fear that this would limit their scope to sign ambitious trade agreements with emerging economies and hamper south-south trade. “We recognise that there are contentious issues in the interim agreements (such as the definition of substantially all trade, transitional periods, export taxes, free circulation of goods, national treatment, bilateral safeguards, infant industry, non-execution clause, Most Favoured Nation clause) and call on them to review and re-negotiate these within the context of a comprehensive and full EPA to ensure an all inclusive comprehensive EPA that would safeguard development and regional integration efforts.” African Union, Addis Ababa Declaration on EPAs, 3 April 200896
PROCESS MARKED BY CONTROVERSY The actual process of the negotiations has been heavily criticised. The negotiation process has not taken into account the immense difference in negotiating strength and capacity between the EU and their ACP counterparts. ACP leaders and negotiators have at various opportunities stated that they have felt under strong pressure from the European Commission to conclude agreements that do not reflect their concerns and interests. “Ministers deplore the enormous pressure that has been brought to bear on the ACP States by the European Commission to initial the interim trade arrangements, contrary to the spirit of the ACP-EU partnership”. ACP Council of Ministers, Declaration at its 86th Session, 13 December 2007
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“[We are] concerned about undue pressure that is being put on some ACP countries to move forward to signing and ratification of interim or final EPAs before legitimate concerns have been adequately addressed in a way that creates conditions for all ACP countries to become part of agreements that genuinely contribute to growth, development and the advancement of regional integration”. ACP Heads of State, Annual Summit, Accra Declaration, 3 October 2008 “We express our deep concern about the pressure exerted by the European Commission on some countries and regions to sign the interim EPAs, thus prejudicing the progress made in the negotiation process.” African Union, Ministers of Trade, Kigali Declaration on EPAs, 2 November 2010 Several of the African countries that initialled interim EPAs by the end of 2007 have refused to sign the agreements, since there are still outstanding issues that were not resolved in the interim agreements. Such outstanding issues include a ban of the use of export taxes, Most Favoured Nation clause, infant industry protection and development finance. The European Commission has put strong pressure on those countries and regions that delayed their signing, for example Namibia and the countries in the East African Community (EAC). By the end of 2010, after eight years of negotiations, the EPA negotiations had come to a standstill. The EU trade and development commissioners turned to member states for advice on how to proceed with the negotiations. In a letter to European trade as well as development ministers, they recognised that it is unlikely that negotiations can rapidly be concluded in some regions, such as Central Africa and Eastern and Southern Africa (ESA). The commissioners wanted member states to discuss “cases where legitimate concerns in African countries on trade and development issues may lead the EU to decide either to discontinue negotiations or to accept agreements with a lower level of ambition”97. Moreover, the commissioners do not want to continue to grant duty and quota-free access to the EU market for those ACP countries that do not sign or implement the interim EPAs. By October 2010, only 19 out of 48 African countries had initialled an interim EPA. Of these, 10 had signed the agreement. In a joint action, around 40 organizations from civil society in Europe urged their governments to use this momentum to change direction in the trade negotiations and instead look at alternatives to EPAs98. The EU provides the world’s least developed countries with duty-free access to European markets through the so-called Everything But Arms initiative. The organisations argued that this initiative could be extended to all African countries.
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STATE OF PLAY — INITIALLED AND SIGNED EPAs, 2010
EPA configuration
Initialled interim EPA
Central Africa
East African Community, EAC Eastern and Southern Africa, ESA West Africa
Burundi, Kenya, Rwanda, Tanzania, Uganda Comoros, Zambia
SADC
Namibia
Ghana
Caribbean
Pacific
Signed interim EPA
Full EPA
No EPA*
Cameroon
Central African Rep, Chad, DR Congo, Equatorial Guinea, Gabon, Rep. Congo (Brazzaville), São Tome
Madagascar, Mauritius, Seychelles, Zimbabwe Ivory Coast
Djibouti, Eritrea, Ethiopia, Malawi, Somalia, Sudan Benin, Burkina Faso, Cape Verde, Gambia, Guinea, Guinea Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone, Togo Angola, South Africa
Botswana, Lesotho, Mozambique, Swaziland
Fiji, Papua New Guinea
Antigua & Barb, Bahamas, Barbados, Belize, Dominica, Dom. Republic, Grenada, Guyana, Haiti, Jamaica, St Kitts & Nevis, St Lucia, St Vincent & Gren, Surinam, Trinidad & Tobago
Cook Islands, East Timor, Kiribati, Marshall Islands, Micronesia, Nauru, Niue, Palau, Samoa, Solomon Island, Tonga, Tuvalu, Vanuatu
Source: European Commission, 2010
* The Least Developed Countries (LDCs) without an EPA are exporting to the EU under Everything But Arms (EBA), the non-LDCs are exporting under the Generalised System of Preferences (GSP). South Africa has a separate trade agreement with the EU.
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EXPORT TAXES AND EPAs
Since the EU so far had not succeeded in introducing disciplines on export taxes in the WTO, they shifted their efforts to bilateral trade negotiations. In the EPA negotiations, export taxes had not been on the agenda originally, but suddenly, when the 2007 deadline was approaching, the EU put the issue on the negotiation table. This was a controversial move and most African countries protested strongly against the Commission’s attempt to include a clause on a ban of export taxes in the interim EPA agreements (IEPAs). 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 subject to agreement by the European Commission, export duties can be temporarily introduced. (See the table on next page for formulation of the text in the different IEPAs.) When the EU is preventing African countries from introducing new export taxes, the EU is denying them their policy space to decide on tools to promote local value-addition and pursue industrial development. This also goes beyond the WTO rules on export taxes.
EXPORT TAXES – A CONTENTIOUS ISSUE Several African countries refused to initial the interim EPA agreements because of certain contentious issues, export taxes being one of them. Among those who did initial agreements, many delayed or refused entirely to sign these agreements, since the controversial issues were not yet resolved. The EU exerted intense pressure on these countries to sign the IEPAs (see the case of Namibia on page 49). Once the agreements are signed, they will have to be implemented and the EU can start to ensure that the countries live up to their obligations. African countries have repeatedly raised the issue of export taxes in the continued EPA negotiations. The African Union Commission presented a paper to the European Commission at a joint meeting in June 2010, highlighting contentious issues in the negotiations. They stated 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.” 99
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CLAUSE ON EXPORT TAXES IN THE INTERIM EPA AGREEMENTS
Country / region
Clause on export taxes in the EPA text
Cameroon
No new customs duties on export shall be introduced, nor those currently applied be increased. In case of serious public finance problem or need for greater environmental protection, export duties may be introduced on a limited number of additional goods, after consultation of EC. Provision will be evaluated regularly.
East African Community (EAC)
The parties shall not institute any new duties or taxes in connection with the exportation of goods to the other party. EAC can impose an export tax, with the authorisation of the EPA Council, to foster the development of domestic industry or to maintain currency value stability, on a limited number of products for a limited period of time. Reviewed by the EPA Council after 2 years.
Eastern and Southern Africa EPA group (ESA)
The parties shall not institute any new duties or taxes on or in connection with the exportation of goods to the other party.
Ghana
No new customs duties on export shall be introduced, nor those currently applied be increased. In exceptional circumstances, temporary export duties may be introduced to protect infant industry, environment or generate revenue, or existing duties could be increased, on a limited number of additional goods, after consultation of EC. Provision will be revisited after 3 years, fully taking into consideration their impact on the development and economic diversification of Ghana.
Ivory Coast
No new customs duties on export shall be introduced, nor those currently applied be increased. In exceptional circumstances, if the Ivorian Party can justify specific needs for income generation, protection for infant industry or environmental protection, it may, on a temporary basis and after consulting the EC party, introduce customs duties on exports on a limited number of traditional goods or increase the incidence of those which already exist. Provisions will be reviewed after 3 years, taking full account of their impact on the development and diversification of the Ivorian economy.
SADC EPA group
No new customs duties on export shall be introduced, nor those already applied be increased. In exceptional circumstances, where SADC EPA states can justify specific revenue needs, protection of infant industries or protection of environment, temporary export duties may be introduced on a limited number of additional products, after consultation with EC. Provision will be reviewed after 3 years, taking full account of their impact on the development and diversification of SADC states’ economies.
Source: European Commission, Texts of Interim Economic Partnership Agreements, http://ec.europa.eu/trade/creating-opportunities/bilateral-relations/regions/africa-caribbean-pacific/
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The East African Geneva-based ambassadors to the WTO have demanded that the clause on export taxes in the interim EPAs should be deleted: “Developing countries in the WTO (including African countries) have steadfastly rejected any suggestion that there be rules for the elimination of export taxes since these are regarded as a useful development tool which the developed world used to industrialise. It has been historically proven that such taxes incentivize local suppliers to move into processing and diversification. Article 15 of the EAC interim EPA disallows new export taxes or makes the introduction of any new export taxes difficult, and this policy limitation is incompatible with the flexibilities carefully retained at the WTO. Article 15 should be deleted.100” The countries in the East African Community (EAC) refused to sign the interim EPA because of the unresolved issues, including economic development, export taxes and the Most Favoured Nation clause. The European Commission has continued to put pressure on the East African countries. In February 2010, the Head of the EU delegation in Tanzania said in a statement that “the situation, as it stands now, is untenable. EAC countries, despite not signing the EPA, have been enjoying free access to EU markets in the same way with other ACP countries that took legally binding commitments by signing EPA. This is inconsistent and in fact the current situation is contrary to both EU law and WTO rules” 101. The East African Legislative Assembly (EALA) adopted a resolution in June 2010, urging the East African countries not to sign the interim EPA agreement until revisions are made to the agreement102. The East African Geneva-based ambassadors to the WTO also strongly advised the East African Community not to sign the interim EPA in its current form. “An acceptance of the interim EPA at this moment would undo many of the rights and principles that EAC delegations and ministers at the WTO, together with other African and developing countries, have managed to obtain”, the ambassadors wrote in a statement to the East African trade ministers103.
THE CASE OF NAMIBIAiii Mining plays a critical role in Namibia’s economy. In 2008, the mining sector generated US$ 1.4 billion of value-added and contributed 15.8 per cent towards the country’s GDP. Mining accounted for 61 per cent of the country’s merchandise export. The Ministry of Finance estimated that tax revenue from profits of the mining industry amounted to US$ 59 billion from diamond mining and US$ 87 from other mining.104 Namibia is one of the world’s largest diamond producers and is the fourth largest producer of uranium. Other mineral resources are copper, gold, lead and zinc.
iii
Based on a case study written by Wallie Roux, researcher from Namibia
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NAMIBIA, COMPOSITION OF MINERAL EXPORTS 2006
Zink 7%
Copper Other Gold 3 % 2% 3%
Uranium 15 %
Diamonds 70 %
Source: IMF Country report No, 08/82
“Namibia’s mining companies play an absolute vital role in the country’s economy, not only generating the lion’s share of our exports – and therefore allowing us to import the goods and services we all require – contributing handsomely to government’s coffers, helping to build the country’s physical infrastructure as well as creating employment, but also critically to skills, experience, exposure to world markets, technology transfer and a host of other intangibles as well as boosting general demand throughout the economy.” Robin Sherbourne, Namibian economist, Speech to the Mining Expo, Windhoek, 27 May 2010 In 2006, the Namibian government introduced a royalty tax on mining operations, which varies between 2-6 per cent. The royalty tax could also be used as an instrument to encourage greater value addition. The diamond royalty tax yielded US$ 54 million in 2008-2009 while other mineral royalties generated US$ 11 million105. The Namibian government had the ambition to add value to the country’s raw diamonds through a local diamond cutting and polishing industry. This eventually culminated in the formation of a joint venture between the government and De Beers (the world’s leading rough diamond company operating in more than 20 countries) in 2007. Local diamond cutting and polishing factories have been established, which has resulted in local value addition, job creation, the enhancement of skills and a boost in export earnings.
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The government of Namibia also wants foreign mining companies to start with local processing of minerals before exporting them, in order to create jobs and increase government revenue through export taxes. At the beginning of July 2010, the Namibian Prime Minister said at an official meeting that the government would at some point intervene to ensure that foreign mines would start with local value addition to minerals. “The government is not in favour of the export of Namibian minerals without adding value to them”, the Prime Minister said.106 The use of export taxes as a policy tool is high on the Namibian agenda, especially in terms of local value-addition and its subsequent spin-offs in terms of development. There are not many other policy tools available in order to add value to minerals. A common argument heard in the debate is also that European and other industrialised countries utilised similar measures to enhance their economies towards development and industrialisation – an option that the EU now wants to deny African countries.
RELUCTANT INITIALLING OF EPA Four SADC-countries – Botswana, Lesotho, Mozambique and Swaziland – initialled an interim EPA agreement in November 2007, succumbing to the threats of punitive tariffs by the European Commission. In this instance, Namibia, along with Angola and South Africa, decided not to initial an IEPA, since some of the critical issues were not yet resolved. The issue of export taxes was one of them.
“Namibia could not initial this Interim EPA (IEPA) on the 23rd November 2007 as the IEPA contains certain issues of critical concern to Namibia, and which could not be resolved during the final round of negotiations. These issues include: ... ii. The European Commission’s continued insistence on a clause for SADC EPA States to immediately freeze any new measures concerning the use of export taxes or levies. The EC only introduced this issue during the last round. Such a concession on our part would limit our national trade policy making space, with potentially far reaching implications on Namibia’s efforts to promote industrialisation and value-addition to our national raw materials.” Namibia’s Ministry of Trade and Industry, Press statement, 5 December 2007
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Under the threat of losing market access to the EU, Namibia eventually initialled the interim EPA agreement in December 2007, accompanied by a statement that would be appended to the agreement. The statement stresses that Namibia has initialled the IEPA with the understanding that concerns which Namibia had identified throughout the negotiations would be addressed in the continued negotiations towards a comprehensive EPA agreement107. Namibia initialled the IEPA only after assurances from the then President of the Commission, Manuel Barroso, at the EU-Africa Summit in Lisbon, that the unresolved issues would be re-opened for negotiations during 2008. The initialling was accompanied by a list of unresolved issues, including the freezing of export taxes. Since then, Angola and South Africa have added their concerns to the list. At a negotiating meeting in March 2009 in Swakopmund, the SADC EPA countries managed to get an additional formulation in the text on export taxes, stating that they in exceptional circumstances where they can justify industrial development needs, may introduce temporary export taxes on a limited number of products, provided the European Commission agrees108. For the SADC states this is at least an improvement compared to the original text in the interim EPA, and would give them some flexibility to introduce export taxes in order to promote industrial development. But the fact that Namibia would have to justify the industrial development needs and that they would need to obtain agreement from the European Commission might be an obstacle to fully utilise this provision.
MOUNTING PRESSURE ON NAMIBIA Namibia has refused to sign the interim EPA since there are still issues that are not resolved. The European Commission has repeatedly threatened Namibia that if they do not sign the interim EPA, they will lose the duty-free and quota-free access to the EU market that they currently enjoy. The Head of the EU delegation in Namibia warned that Namibia’s continued reluctance to sign the interim EPA could result in the country losing almost half of its export market109. The Delegation Head insisted that Namibia could lose out on a lucrative market in Europe for most of its priciest commodities, if timely consensus was not reached on signing the IEPA. For example, Namibia’s leading meat exporter Meatco could lose about 40 per cent of its annual total sales value. The spokesperson for the EU Trade Commissioner said in June 2009 that duty-free market access to the EU was “granted to the countries that have initialled the interim EPAs on a provisional basis and on the clear understanding that both sides would work towards signature of the agreements. It is obvious that these preferences cannot be maintained for an unlimited time.”110 Both the German and the Spanish Ambassadors to Namibia have urged the country to sign the interim EPA, since “it is in Namibia’s best interest” to sign the trade pact.111 112 The continued pressure from the EU provoked the Namibian Minister of Trade and Industry, Hon. Hage Geingob, to issue a strong official statement in May 2010, where he says:
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“We cannot sign an agreement just for the sake of giving in to the demands of the other side. Signing holds serious economic and policy consequences for Namibia. For example, if we sign, we would have to forfeit the policy option of using export taxes on raw materials as an important incentive for value addition to raw materials and as a potentially important new source of revenue. This we are expected to do at a time when it is a national priority to diversify our sources of revenue to mitigate the declining revenues from SACU and tariff liberalization in general. At the same time our constituents are demanding tougher measures against the exports of raw materials. … Remarkably, for almost all of these problems, we have already negotiated solutions with the EC, at Swakopmund as a matter of fact. The EC, for reasons known best to them, have steadfastly refused to properly safeguard these solutions, either by making amendments to the IEPA, issuing a strong joint declaration, or by guaranteeing their inclusion in the final EPA. … All too often we are forced to sign agreements that eventually hound us”.113 Around 30 European civil society organisations wrote a letter to the European Commissioner for Trade, Karel de Gucht, in June 2010, expressing their concern over the undue pressure on Namibia to sign the IEPA114. The organisations write that the signing of the interim EPA would have serious impacts on agricultural and industrial development in Namibia. They urge the Commission to engage positively with the SADC EPA countries and to show policy flexibility in addressing the outstanding issues in the negotiations. Thereby the Commission would assure that no country would be worse off by entering into an EPA-agreement or would be forced to sign an agreement that does not serve its best interest.
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INVESTMENT AGREEMENTS AND THE RIGHT TO REGULATE
The extraction of mineral resources is largely dominated by large-scale, capital-intensive investments. Most developing countries do not have – or cannot obtain – the financial resources needed for such investments and have resorted to attracting investments from foreign companies. Foreign investment can contribute to development. However, the investments in mining and oil sectors in Africa has generated few development benefits. On the contrary, foreign investment has been characterized by secret tax deals and concessions depriving African governments of important mining revenue, low levels of technology transfer and repatriation of profits out of the countries. 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. In terms of investment policy, the EU aims at “establishing a level playing field between companies and countries wanting to access raw materials”115. The EU has been pushing for comprehensive investment liberalisation in the EPAs, despite strong opposition by African countries. In the EPA for the Caribbean countries - the only region which so far has concluded a comprehensive EPA with the EU - investment liberalisation is included. In the Caribbean EPA, investment in forestry, fishing and mining sectors is explicitly included.
REGULATIONS FOR DEVELOPMENT PURPOSES An investment agreement in EPAs would severely limit African countries’ possibilities to regulate foreign investments and ensure that the investments actually benefit the local economy and promote development. Foreign investors would have to be given at least the same treatment and protection as domestic investors (national treatment). An investment agreement would also include limits on local content requirements. For example, the host country could not require that the foreign investor purchases part of the raw materials and other inputs locally or that the investor employs local staff. Other regulations that would be threatened by an investment agreement include requirements that foreign investors enter into join ventures with residents and/or the government, restrictions on land ownership and restrictions on non-residents establishing subsidiaries or branches in the country.
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Hence the investment liberalisation that the EU is pushing for would give increasing rights to investors while at the same time severely restricting African countries’ policy space to regulate investments to promote industrialisation and development. Liberalisation of investment in natural resources sectors could hand over more rights to foreign companies to exploit forests, minerals, oil and gas, which could lead to increasing deforestation rates and enhanced environmental destruction, as well as undermine the rights of local communities. Under the Lisbon Treaty, which came into force on December 1, 2009, all aspects of foreign direct investment have been brought under the exclusive competence of the EU. Investment policy has thereby been taken away from the member states, and will instead be led by the European Commission. Certain measures, such as investor-to-state dispute settlement, earlier lay with the EU member states and were included in Bilateral Investment Treaties (BITs). With this provision investors can sue governments before international arbitration panels. By mid 2010, the European Commission took the first steps towards a comprehensive European common investment policy, with a policy paper and a draft regulation. The regulation will recognise all member states’ existing BITs. The EU has also stated that it wants to include national treatment clauses in Free Trade Agreements116. There are fears that the EU’s investment policy will become more aggressive and far reaching. The EU has stated that it wants to achieve “legal certainty and maximum protection for EU investors”117. Many African countries have in place certain restrictions on foreign investment in natural resources sectors, 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.
BOTSWANA – TURNING DIAMONDS INTO DEVELOPMENT In particular, foreign investment in mining has often generated very little wealth for the host countries. Botswana, however, is an example of a country that has managed to turn its diamond wealth into development through effective regulation of foreign investments. For 30 years, it was the fastest-growing economy in the world and GDP per capita rose from US$ 76 at independence in 1966 to US$ 5,900 in 2007118. The country experienced a mineral-led economic growth, and even if HIV/Aids and poverty remain challenges, Botswana progressed from being one of the poorest countries in the world to becoming an upper-middle-income developing country. In fact, it is the first country to have graduated from a Least Developed Country status.
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Between 1975-2006, the mining industry directly contributed to 46 per cent of total GDP growth. Diamonds accounted for about four-fifths of Botswana’s total exports. Almost all the mining companies are either wholly owned by TNCs or are operated as joint ventures with the government. Effective regulation of the foreign investments was key to Botswana’s success. In the mid 1970s, the government renegotiated mining contracts with foreign companies. Botswana was criticized by international institutions for bargaining too hard and warned that this would discourage future investors. Through its joint venture with the main TNC involved in its diamond mining, De Beers, Botswana has exploited its key natural resource and gained a significant share of the profits. The government has an ownership stake of 15-50 per cent in major mining projects. In recent negotiations with De Beers, the government was able to secure commitments from the company to undertake value-added processing activities in Botswana.119
RESTRICTIVE INVESTMENT POLICIES IN SOME AFRICAN COUNTRIES
Ghana Ghana is often mentioned as one of the countries that has seen positive contributions to economic growth by TNC-led extractive industries. Ghana is a major producer of gold, diamonds, bauxite, and manganese, with exports of mineral products averaging 35 per cent of total merchandise export earnings120. In Ghana, mining is the most important target sector for foreign direct investment. Cumulative FDI inflows into the mining sector between 2000 and 2005 amounted to US$ 2,823 million. The share of mining in GDP increased from 1.5 per cent in the mid 1980s to 5.7 per cent in mid 1990s, despite generally low gold prices. GDP per capita started growing, reaching an average growth rate of 3 per cent in 2003-2004. There is compulsory state participation in the mineral subsector, whereby the Government acquires a 10 per cent equity in all companies at no cost. The Government also has the option of purchasing an additional 20 per cent equity at a “fair market price”, but this has never been exercised. The minimum investment for foreign companies is US$10 million. Any transfer of mining rights is subject to the approval of the government.
Zambia In Zambia the government amended their mining legislation in 2007, with the aim to ensure that the new law offers more benefits to the Zambian people. The new mining law, The Mines and Minerals Development Act 2008, contains a number of provisions to benefit companies owned by Zambian citizens, including provisions for a review of the operations of the principal operator of copper mines in Zambia, ZCCM, (where the Zambian government owns over 85 per cent of the company’s stock) to enable individual Zambians to own shares in large-scale mining companies. Continued on the next page
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Continued
Namibia Foreign investors generally receive full national treatment in Namibia, where almost all economic activities are open to foreign investors. However, the current Minerals Act is encouraging international mining companies to employ local staff and to procure from local sources as far as possible. The Act emphasises procurement from small and medium enterprises. The Namibian Chamber of Mines is currently developing a Mining Charter and they have proposed certain targets for local participation in mining. Local-participation requirements apply to fishing, where preference is given to whollyowned Namibian fishing companies and/or fishing companies with a majority of Namibian shareholding. Foreign ownership restrictions apply to agricultural land, and in recent years Namibia has expressed a desire to redress the inequitable distribution of fertile land. In this regard, Government has the first option to buy agricultural land that becomes available for sale. Source: WTO Trade Policy Reviews
SMALL-SCALE MINING RESERVED FOR CITIZENS
Artisanal and small-scale mining is quite important in Ghana, particularly in gold mining. Artisanal gold production was 6.9 tons out of a total production of 65 tons in 2005. It is estimated that some 500,000 people are engaged in small-scale mining. Small-scale mining licenses are only granted to Ghanaians. The Mines and Minerals Act 1999 in Botswana reserves small-scale mining for Botswana citizens or citizen-owned companies. Small-scale mining means the intentional mining of minerals other than diamonds in operations involving the mining and processing of less than 50,000 tonnes of raw ore per year, and in which the overall investment in fixed assets does not exceed US$ 150,000 (1 million Botswana Pula). In Zambia, the new mining law, The Mines and Minerals Development Act 2008, reserves small-scale mining for companies in which the majority interest is held by Zambians. Source: WTO Trade Policy Reviews & UNCTAD, World Investment Report 2010
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African countries have different types of legislations regulating the mining industry, which the EU might view as distortions of trade. Such legislations concern, for example, licensing for mining, prospecting and exploration as well as mining rights. 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 law empowers the government to give preference to applications from historically disadvantaged people.
GHANA – EMERGING NEW OIL PRODUCER
Africa is well endowed with abundant crude oil and natural gas. Africa’s share of global crude oil reserves is 9.6 per cent, making it the fourth region globally. The majority of Africa’s oil reserves are located in Libya, Nigeria, Algeria, Angola and Sudan. These countries together account for more than 90 per cent of the reserves on the continent. Ghana is one of the African countries with new oil discoveries. The estimated crude oil reserve in Ghana is 3.21 billion barrels. The offshore oil was discovered in 2007, and the Ghana Petroleum Regulatory Authority Bill was developed a year later. The bill contains local content provisions. For example, the Ghanaian government holds free shares. The bill requires that the state-owned oil company participate in oil production with foreign investors under joint operation agreements. The provision of goods and services to oil projects shall be reserved for local entrepreneurs. Ghana seems to be determined to avoid the resource curse syndrome, and instead try to ensure that the oil reserves will actually benefit the local economy. The local content provisions in the oil bill would be threatened, however, if the EU would succeed in pushing through an investment liberalisation agreement in the EPAs. Source: African Development Bank, Commodities Brief, Crude oil and natural gas production in Africa and the global market situation & Friends of the Earth, Ghana
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THE CASE OF SOUTH AFRICA By Claude Kabemba, Director of Southern Africa Resource Watch, South Africa.
Mining is crucial to the South African economy. It accounted for 5 per cent of the GDP in 2007 and employed around 500,000 workers. In the same year, it generated 9 per cent of total fixed investment, and contributed 30.2 per cent of South Africa’s total merchandise exports, despite a decline in production, mainly in gold and diamonds.121 South Africa has a fairly well developed infrastructure, human resources and transports as well as accountable systems, advanced research facilities and skills which facilitate extraction and evacuation. This is why South Africa remains the most important destination for mining and mineralprocessing investments amongst African producing countries. A study released by the Department of Minerals and Energy of South Africa showed increased interest by mining companies in committing financial resources to mining projects in South Africa. 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. The country is among the top producers of other strategic minerals, such as vanadium, palladium, titanium and chromium. There is a soaring demand for platinum group metals, and for platinum in particular, in high technology applications. Demand for platinum is expected to remain strong over a long period. Most South African minerals are beneficiated in developed countries, destroying the capacity of the mining sector to develop downstream and upstream industries. South Africa does beneficiate its platinum, but at an insignificant level for the world’s biggest producer of the mineral. South Africa’s minerals are consequently of high interest to developed countries. Equally, the aggressive penetration of China into the South African mining sector is an element that Western powers are concerned with. China is not only one of the most influential players on the world financial stage today, but it has also become an important importer of South African commodities, and therefore an integral part of the South African economy. The same could be said of India, although India’s pace is slower.
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INCREASING IMPORTANCE OF EXPORT RESTRICTIONS South Africa has been identified by the EU as one of the countries which apply trade restrictions on raw materials. The EU is concerned that ‘trade distortion and protectionism’ targeting raw materials will limit its access. It could be argued that in the case of South Africa, and other African countries, most of what could be seen as export restrictions should be considered as “positive restrictions” applied to support economic growth, job creation and industrialisation in a country where the majority of the population has never benefited from its resources. Currently, South Africa only applies export taxes on unpolished diamonds. But export taxes are increasingly being discussed in the trade policy debate as an important tool with potential to stimulate industrialisation and development. The government has a high royalty tax on certain commodities with the aim to raise government revenue, but the royalty tax can also act as a way to discourage export of the raw materials. The royalty tax ranges from 1 per cent for deep water oil and gas to 8 per cent for diamonds. South Africa is reforming its taxation regime continuously to increase the contribution of mining to the government budget. In the current policy debate, there is also a discussion about the benefits versus potential disadvantages of export restrictions. There is an understanding in South Africa, it seems, that raising trade barriers in one of its most important sectors might risk pushing the economy into contraction. South Africa is also aware that export restriction in one sector can induce responses from importing countries in an area where South Africa is vulnerable. Even if there are currently no export taxes or quantitative restrictions applied on exports of most minerals from South Africa, there are a number of legislative provisions that regulate the mining industry. Such legislative provisions might be viewed by the EU as restrictions on exports and thus trade distorting. One example is the Mining Charter, which stipulates the rules governing the application for and issue or transfer of mining rights in South Africa. 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 per cent of mines within 5 years, and 26 per cent within 10 years. It is estimated that three-quarters of the labour force is black, while less than 5 per cent of managerial positions are held by black people. The government set a target to transfer 26 per cent of mining assets to black-owned companies, and to ensure that 51 per cent of future mining projects are controlled by black-owned firms. The Precious Metals Act has a number of stipulations about the development, local beneficiation (e.g. smelting and refining) and sale of precious metals. The written approval of the relevant minister is required for the export of any unwrought or semi-fabricated precious metal.122
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BENEFIT FROM ITS OWN RESOURCES As the EU is strategising to secure its access to strategic minerals, South Africa is introducing changes to its mineral production prompted by observations that mineral economies are producing questionable welfare gains and development outcomes for the majority of South African citizens. South Africa is now aiming to use its abundant resources in a strategic way so that they contribute positively to the country’s economic growth and development. There is also a debate over whether the mining sector should be nationalised. One of the main objectives of nationalisation would be to transform the South African economy from overdependence and reliance on export of natural resources and import of finished goods and services. This means that South Africa would discourage export of raw materials, and instead encourage beneficiation to advance the industrialisation agenda by establishing downstream and upstream industries. In the natural resource sector, South Africa is increasingly focusing on beneficiation, i.e. local value-added processing of the raw materials, and less on protecting strategic commodities (as it did during the apartheid regime). This policy is in tune with the country’s need to industrialise. This policy of nurturing a cluster of industrial activities has been used by industrialized Western countries as well as the newly industrialised Asian economies. This nurturing has involved the identification and targeting of appropriate value-adding activities, the deployment of public and private resources to support innovation, entrepreneurship, and infrastructure development, as well as the judicious use of tariffs and other forms of protection. Many involved argue that restrictions which are intended to promote beneficiation cannot be characterised as unjust. The EU will need to distinguish between positive restrictions and negative ones. The EU must observe due diligence to make this distinction when trying to combat export restrictions, especially when Africa is concerned. The EU must reflect on why the supplier is introducing an export tax. In the case of South Africa, taxation is seen as a tool to support social transformation. South Africa’s tax regime is flexible and continuously changing. This is to ensure that it is at all times able to reduce or remove duties where evidence shows that such a move will be beneficial to the industries or sectors that need to be promoted, and likewise where evidence points to the need for tariffs to protect certain industries. South Africa’s policy on mineral export is driven by the need to increase opportunity for the sector to contribute sufficiently to the alleviation of poverty, to reduce inequalities, and to ensure a fair distribution of wealth.
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A CRITIQUE OF THE RAW MATERIALS INITIATIVE The Raw Materials Initiative will maintain the distortion of the international trade regime Despite rhetoric from the EU that it is for an equitable and fair trade, as well as for transparency and accountability, the Raw Materials Initiative will perpetuate a situation whereby Africa remains a provider of cheap raw materials. The Raw Materials Initiative is simply a new name, perpetuating the same unbalanced power relations between Europe and Africa. While the exploitative relationship between the EU and Africa has changed nature, it has remained the same in essence. The Raw Materials Initiative seeks to whitewash exploitation. It has no semblance of shared benefits. The Raw Materials Initiative might accelerate unsustainable use of natural resources The problem with foreign direct investment into the extractive industries on the continent has really not been what it can do, but rather what the state can and should do to draw maximum benefits from it. The state has an important role to play, not only in attracting foreign investment, but also in maximising the benefits and minimising the risks that accompany the extraction of minerals and oil. Not all states have the capacity to achieve this balance. In the absence of regulations governing natural resources extraction (or when they are weak or poorly enforced), increased openness to foreign investment can accelerate unsustainable resource use patterns. This situation exposes not only the dangerous side of the Raw Materials Initiative, but also the weaknesses of many African states. The Raw Materials Initiative will not resolve the problem of Foreign Direct Investment The Raw Materials Initiative will intensify the current situation whereby foreign investment to Africa goes into the mineral resources sector. African countries that have been able to attract foreign investment, are those that possess large amounts of natural resources, especially oil. The Raw Materials Initiative is in conflict with the achievement of the Millennium Development Goals in Africa Poverty can only be successfully reduced if African governments are able to secure substantial internal financial resources. Natural resources, such as minerals, oil, gas and timber, constitute a major source of foreign and fiscal revenue for many African economies. For most producer countries, these commodities could provide a basis for economic development. Mining could contribute to poverty reduction in a variety of ways, mostly through generating income and by creating opportunities for growth for downstream businesses. The International Council for Mining and Metals has confirmed the ability of the mining sector to jump start the process of economic development in developing countries, provided it is properly managed123. The Raw Materials Initiative might further weaken tax regimes There are concerns that the Raw Materials Initiative might weaken tax regimes on the continent, in order to secure favorable terms for EU companies. This will undermine African countries’ tax bases and thereby limit service delivery. Many African countries face significant challenges with
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respect to the effectiveness of their tax systems. Overall revenue yields and voluntary compliance are low, and the tax bases often remain narrow. The taxation of international transactions, in particular transfer pricing, has become increasingly difficult; the overall tax gap remains unquantified. South Africa earns its mining revenue from corporate income tax of 28 per cent. This is the lowest rate on the continent. The Raw Materials Initiative ignores new African agendas The Raw Materials Initiative does not consider emerging trends on the African continent as far as resource governance is concerned. While the EU is speaking of protecting its resource base to generate advantages from its upstream and downstream industries, there exists a multitude of initiatives on the continent at national, regional and continental levels in search of a new social contract for natural resources. At the national level, discussion about the governance of natural resources is not taboo any longer. African people are increasingly urging their governments to be more responsible in the manner resources are managed. This includes ensuring that contracts are signed in a way that benefits the people. In recent times, African governments have been renegotiating mining contracts, despite contrary pressure from the EU, which fears that the move will undermine foreign direct investment. Africa’s leaders are increasingly preoccupied with enhancing the contribution of the minerals sector to the economic and social development of the continent. In some countries debates are currently underway as to whether to nationalize or not. The need for control of resources is reminiscent of the post-independence period.
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NATURAL RESOURCES FOR DEVELOPMENT OR RESOURCE NATIONALISM?
In the last few years, African governments have begun to fully realize the potential of natural resources, and mining in particular, to spur industrialisation and development on the continent. They have started to analyse why the extractive sector has not been able to promote development and they are laying out strategies for this to happen. A number of initiatives have been launched, at the regional as well as at the continental level, to improve the mining development outcome. Such moves by African governments to claim their right over their own natural resources is perceived by the EU as a threat to its own attempts to try and secure access to raw materials from Africa. The EU accuses the African governments of ‘resource nationalism’. In 2008, the former EU Trade Commissioner Peter Mandelson said in a speech that “the case against resource nationalism is a strong one. Resource nationalism not only makes this system more politically unstable, it makes it less resource-efficient.”124 The EU’s Raw Materials Initiative is threatening the initiatives by African governments to take control over their own resources and ensure that mining contributes to development.
AFRICAN MINING VISION In October 2008, the African Union and the United Nation Economic Commission for Africa (UNECA) launched “The African Mining Vision 2050”, aimed at ensuring that Africa’s mineral resources contribute meaningfully to the continent’s development. The Mining Vision was adopted by African mining ministers in February 2009. The Vision identifies natural resources, and specifically mining, as a key sector to promote industrialisation and development of African economies. It tries to explain why Africa has not developed despite its enormous natural resource endowment and its long history of mining. More than half of the African countries are exporters of some of the most sought after minerals and metals, such as copper, nickel, gold, diamonds and platinum, as well as oil. At the same time, most of these countries are among the poorest countries in the world. The Mining Vision outlines what needs to be done to transform the natural resources into concrete development by 2050. The Mining Vision lists a number of reasons why African states have not been able to take advantage of their natural resource endowments to underpin diversification, growth and development. These reasons include the failure to impose tax regimes that ensure an equitable share of the revenue earned from natural resources, poor infrastructure, and a failure of downstream
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value-addition. The Vision largely attributes the failure of African countries to carry out downstream value-addition to the global corporate beneficiation strategies of transnational corporations, which often prefer to send crude resources to a central beneficiation facility in another country, or have a policy of keeping to their core competence of resource extraction.125
AFRICAN MINING PARTNERSHIP The African Mining Partnership was launched in 2004 with the objective to ensure that Africa’s mineral wealth contributes to economic development of the continent. The partnership coordinates mining and mineral-related initiatives around areas such as beneficiation and value addition, developing artisanal and small-scale mining, harmonising mining policies, as well as promoting foreign investment and indigenous participation in mining ventures. Ghana is the chairman of the African Mining Partnership with South Africa as the secretariat and organiser.
THE KIMBERLEY PROCESS The Kimberley Process started in 2000 in South Africa as interested governments, NGOs and industry groups sought to come up with a practical way to prevent illicit diamonds from entering the legitimate diamond trade. It is an attempt to try and stop the flow of so-called ‘blood diamonds’ (or conflict diamonds), which refers to diamonds mined in a war zone and sold to finance an insurgency, an invading army’s war efforts or a war lord’s activity. ‘Blood diamonds’ have contributed to fuelling devastating conflicts in a number of countries in Africa. The Kimberley process now includes 43 participants, comprising states and regional economic organizations, including the EU.
COMMON MINING POLICY IN WEST AFRICA AND SADC West African countries adopted a common mining policy and legislation in 2000, with the main objectives of diversification of mining outputs, transformation of minerals where they are produced, co-existence of industrial mines and small informal mining operations and preservation of the environment. In 2007, SADC Mining ministers adopted a framework for harmonising mining policies, standards and legislations in Southern Africa. The framework includes areas such as valueaddition, innovation and research, artisanal and small-scale mining as well as investment promotion.
AU-EU COOPERATION ON RAW MATERIALS In June 2010, the African Union Commission and the European Commission agreed to bilateral cooperation with regard to access to raw materials. In a joint declaration, both parties committed to developing bilateral cooperation in the field of raw materials and to working together on the elaboration of further initiatives, taking fully into account the Africa Mining Vision of February 2009 and the EU Raw Materials Initiative of November 2008. In particular, the cooperation will focus on issues such as governance, infrastructure and investment, as well as geological knowledge and skills126.
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RECOMMENDATIONS
Trade is important and can contribute to development in Africa. But trade agreements must be designed so that they promote development and poverty eradication. The EPA agreements between the EU and African countries must be driven by development needs in Africa, and support sustainable development on the continent. The EU must refrain from pushing their own interests and agenda in the trade negotiations. The EU must promote the equitable and sustainable use of the world’s natural resources. The EU has no automatic right of access to African countries’ raw materials. African countries must have the right to decide on the appropriate use of their natural resources. The EU should support African countries in their efforts to diversify their economies and break away from primary commodity dependence. It is crucial to address the commodity dependence in order to achieve sustainable development in African countries. African states must be allowed to use export taxes, if they find them an appropriate policy instrument to promote local value-addition, diversification and industrialisation in their countries. The EU should refrain from pushing for the ban of, or limitations on the use of, export taxes by African countries in the WTO negotiations as well as in the EPAs. In its new trade policy, the EU must recognize the right of developing countries to develop industrial policies based on development objectives. Global Europe must be revisited and contentious issues, such as the push for comprehensive and ambitious Free Trade Agreements, and the use of such agreements as a tool for the EU to access raw materials in developing countries, must be changed. Investment liberalisation should not be included in the EPAs. African countries must be allowed the policy space to regulate foreign investments, if they find it a useful tool to ensure that the investments benefit the local economy and foster development. In its new investment policy, the EU must ensure that governments have the right to regulate foreign investments and companies in public interest and to promote development objectives. Investment agreements must better balance investors’ rights with their obligations.
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ABBREVIATIONS
ACP Africa, Caribbean and Pacific AU African Union BITs Bilateral Investment Treaties COMESA Common Market for Eastern and Southern Africa EAC East African Community EALA East African Legislative Assembly EBA Everything But Arms EC European Commission EITI Extractive Industries Transparency Initiative EPA Economic Partnership Agreements ESA Eastern and Southern Africa EPA group FAO Food and Agriculture Organisation FDI Foreign Direct Investment FTA Free Trade Area GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product GNI Gross National Income GSP Generalised System of Preferences IEPA Interim Economic Partnership Agreement IMF International Monetary Fund LDC Least Developed Country MFN Most Favoured Nation NAMA Non-Agricultural Market Access NTB Non Tariff Barrier OECD Organisation for Economic Cooperation and Development RMI Raw Materials Initiative SADC Southern African Development Community TDCA Trade and Development Cooperation Agreement between the EU and South Africa TNC Trans-National Corporation UN United Nations UNECA United Nations Economic Commission for Africa UNDP United Nations Development Program VAT Value Added Tax WTO World Trade Organisation
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THE RAW MATERIALS RACE The struggle for the world’s raw materials is becoming tougher. Africa, with its abundance of natural resources, is a critical arena. China has become an important player, since their own raw materials are not enough for its booming economy. It is in this context that the EU has developed a strategy on how to ensure supply of raw materials to fuel its industries. The EU uses trade agreements to secure access to raw materials in Africa. The EU argues that different policy measures that developing countries use to promote industrialisation and diversification of their economies distort trade and threaten the EU’s access to raw materials. In the negotiations on trade agreements (EPAs) between the EU and African countries, the EU has been trying to ban or severely limit such measures, despite strong opposition from African countries. Many African countries are trapped in commodity dependence. Will the EU’s trade policies lock in African countries as exporters of cheap raw materials? Will the EU’s raw material strategies undermine industrialisation and development in Africa? Is the EU’s quest for raw materials in conflict with African countries’ right to their own natural resources? This report shows how the EU uses trade agreements as a tool to secure access to raw materials in Africa, and analyses the impact of the EU’s raw material policies on African countries. KARIN GREGOW is an economist, currently working at Forum Syd
in Sweden. She has an extensive experience of working with development issues, and worked during four years in Africa, based in Kenya, on trade policy issues.
