An evaluation of EEC agricultural trade policy with less developed countries : the extent of commodity trade diversion as a result of the Lome tariff preferences
The Lome Convention is the centrepiece of the European Economic Community's development co-operation policy. It provides tariff preferences in the EEC markets for the exports from certain less-developed countries (LDCs) in Africa, the Caribbean and the Pacific (the ACP countries), as well as the provision of economic aid. Preferential treatment for LDCs' exports over the exports of the industrialised nations has for long been accepted by most countries, and has been seen as necessary to promote the industrialisation of the Third World. However, the special preferences of Lomé over other LDCs raises the possibility of the diversion of trade away from other non-privileged LDCs. Furthermore, the replacement of several earlier preferential trading regimes by Lomé may have led to trade being diverted within the ACP group of countries. There have been no studies which have attempted to assess the extent of such trade diversion. This thesis helps to fill this gap. Agriculture contributes a major share of EEC imports from the Third World and thus trade diversion in agricultural commodities may have occurred as a result of the tariff preferences. Six commodities - coffee, cocoa beans, bananas, tobacco, oilseeds and hides and skins - were selected for the analysis of the extent of this diversion. In a three-country partial equilibrium model the effect of a tariff reduction by the EEC (the only importer) on imports from the ACP, is to lower the price paid by EEC consumers. This increases the level of imports - trade creation. The tariff reduction lowers the price received by non-ACP exporters (the ROW) leading to a fall in the level of their exports - trade diversion - and export earnings. The price received by ACP exporters rises along with their exports (trade creation and diversion) and export earnings. Although the level of world trade rises, the direction of change in world export earnings is indeterminate. The analysis is extended to allow for four ACP exporting groups: those associated solely with the EEC(6) before 1975, the AAS; those associated solely with the UK before 1975, the CSP; those associated with, both the EEC(6) and the UK before 1975, the ARUSHA; and those associated with neither before 1975, the OTHERS. The trade creation and diversion effects are again identified. In the EEC(6) market the AAS and the ARUSHA had to share previously exclusive preferential access with CSP and the OTHERS. The analysis demonstrates that this leads to a fall in the price received by the former two groups and a rise in the price received by the latter two. This generates trade substitution of import sources by the EEC. The AAS and the ARUSHA suffer trade substitution losses to the CSP and the OTHERS (in exports and export earnings). The direction of change in ACP and world export earnings is indeterminate. In the UK market the roles of the CSP and the AAS are reversed. However, in this market the exclusion of the Commonwealth Asian countries from Lomé led to the imposition of a tariff on their exports. This could have generated a rise in the price paid by EEC consumers so leading to a fall in the level of imports - trade erosion. The direction, of change in ACP and world export earnings is again indeterminate. Despite substantial margins of preference afforded to ACP exporters of tobacco and bananas in the EEC markets there is scant evidence for the diversionary effects of Lomé. This is probably to a large extent the result of oligopolistic market influences. Non-Lome LDC exporters of coffee appear to have suffered clear trade diversion losses as a result of the tariff preferences. However, it is also apparent that ACP countries have only been able to improve their position in the EEC markets at the expense of exports to other markets. There is far less evidence for trade substitution than trade diversion effects in the coffee market. The market for cocoa beans exhibits the reverse of the evidence found for coffee, i.e. greater support for the occurrence of trade substitution than trade diversion. This is probably a reflection of the high proportion of world trade accounted for by the ACP group in total, affording greater scope for intra-area diversion of trade than the inter-area effects of trade diversion.