A New Deal with Europe


Economic News

22 Jul 2010
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The Bahamas, along with 12 other Caribbean countries, has approved an Economic Partnership Agreement (EPA) with the EU, even as it is still debating whether to remove trade barriers in the services sector.

The agreement grants all Bahamas exports, excluding sugar and rice, duty-free and quota-free access to the EU. In return, EU exporters will have unhindered access to 61.1% of goods in the Caribbean market for 10 years, rising to 82.7% after 15 years and finally to 89.9% by 2033.

The EPA was initiated in December 2007 as a replacement of the former Lomé Convention, and its successor, the Cotonou agreement, a non-reciprocal trade pact between the EU and member states of the African, Pacific and Caribbean region.

In mid-September, Zhivargo Laing, minister of state for finance, endorsed the EPA as a continuation of the trading relationship between the two countries that goes back to 1975.

"We have enjoyed a trade relationship with Europe going on now for some 25 years. Europe is a very important global market. We want to continue to have a good relationship with Europe and signing on enables us to do just that," he told the local media.

At the ceremony held in Barbados on October 15, the Bahamas was alone in delaying the services agreement, though both Haiti and Guyana did not sign at all. Under the terms of the negotiations with the EU, the Bahamas is, however, expected to finalise arrangements for opening up its services market to EU businesses within six months.

Some sceptics have questioned the benefits to the Bahamas in regards to the services side of the EPA. Opponents complain that the yet-to-be-finalised services agreement may result in job losses, stemming from labour migration, particularly in the financial services sector. While many companies based in the EU may want to expand into the local market, currency controls limit the ability for Bahamians to invest abroad, though this may change as the economy expands and the government aims at removing such controls by the end of its term.

A report issued on October 14 by the Nassau Institute, an independent economic think tank, echoed these concerns, stating that imports could be greatly affected as the flow of goods coming from Europe may see a sharp rise, possibly at the expense of local industries. However, the country already imports most of its manufactured goods and such an EPA could have the opposite effect of attracting investment to the Bahamas to help develop its small manufacturing and industrial base.

Laing sought to allay those fears on September 2, saying the arrangement would be in line with the country's existing National Investment Policy, which protects 13 economic sectors. Reserved areas include wholesale and retail trade, ground transportation, inter-island transportation and construction.

More importantly, the report calculated that the Bahamas will lose about $6m annually in import duties when tariffs are lifted on 85% of European imports. This suggests that the government will have to look for other sources of revenue, with excise taxes expected to play a more significant role in the country's budget revenue.

The Nassau Institute also raised concern over the uncertain cost of meeting the requirements of the EPA, including setting up new agencies and regulatory bodies and enacting new legislation to cover such issues as intellectual property rights. The report also points out to the costs for the private sector, with exporters obliged to ensure that their products meet EU standards.

To put things into context, around 83% of the Bahamas' exports go to the US and Canada, compared to 13% to the EU, according to the institute. This figure, combined with the fact that some 72% of the Bahamas' foreign currency earnings derive from tourism and financial services, means that the actual amount of foreign export earnings from the EU totals only 4%. This would in turn suggest that the impact of the EPA will be limited in terms of increased export earnings.

Criticisms of the agreement have been dismissed by Fred Mitchell, the opposition Progressive Liberal Party's spokesman on foreign affairs and trade, who described the signing of the EPA as a "red letter day" in the country's history. Mitchell, a former foreign minister whose party had backed the agreement while in office, stated that the Bahamas economy was already significantly internationalised and open.

"We were living a fiction in many ways that we could wrap ourselves in a cocoon, and promote economic policies that would on the surface appear to be helping Bahamians but in the end, many of them did more damage," he said in a speech on October 15.

Proponents say the benefits of the agreement will outweigh any costs. According to them, the agreement will help the Bahamas to develop new exports and help attract the investment that capitalises on the Bahamas tax-free status and proximity to the US and the Caribbean market.

In addition, Laing underlined the need to preserve the level of foreign reserve earnings. "Not signing onto the agreement has the possibility of impacting the $90m annually we receive from the EU in foreign reserve earnings, as a result of the companies that now have competitive access to Europe's market. And so when one considers the possibility of losing that level of reserve earnings, one sees that there is this net gain in terms of preserving that, versus having to bear the cost of the revenue reduction," Laing explained.

Similarly, the European Commission has said the countries will be better off under the EPA deaal, since failure to sign it would have resulted in the region having to accept the EU's alternative system of 'generalised preferences', under which their exports to the EU would have been subject to tariffs.

Critics have predicted that the EPA will spell gloom for the Bahamas' economy while its proponents have touted a boom, but the truth may lie somewhere in the middle. Though the deal will bring additional expenses, a fall in Customs revenue and greater competition, it will also guarantee exporters access to European markets, provide the opportunity for increased international cooperation and - given time - diversify the local economy.

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