MADAGASCAR'S ECONOMIC PARTNERSHIP WITH EU UNDER THREAT

UNCLAS ANTANANARIVO 000607

DEPARTMENT FOR AF/E - MBEYZEROV
DOC FOR BERKUL
TREASURY FOR FBOYE

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ETRD EINV ECON PREL MA
SUBJECT: MADAGASCAR'S ECONOMIC PARTNERSHIP WITH EU UNDER THREAT

REF: A) 09 ANTANANARIVO 573, B) 09 ANTANANARIVO 604


1. (SBU) SUMMARY: Since 2002 the European Union (EU) and the
African, Caribbean and Pacific Group of States (ACP) have been
working to put in place new trade agreements: the Economic
Partnership Agreements (EPAs),designed to enhance cooperation in
all areas related to trade. Madagascar signed an interim EPA on
December 11, 2007 and continues to enjoy trade preferences regarding
its exports to the EU. However, due to the ongoing political crisis
in Madagascar, the de facto GOM will not be allowed to continue
negotiation of EPAs, nor to sign the interim EPAs on August 28. A
temporary waiver has been granted until the next EU/Malagasy
political dialogue in October. If the EU continues its suspension
of cooperation at that time, Madagascar's export costs to the EU
will rise, adding another threat to the country's future economic
development. END SUMMARY.

EPAS COMPATIBLE WITH WTO RULES, AND GOOD FOR BUSINESS
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2. (U) Since 1976, the Lome agreement outlined the trading and
political relationship between the EU and Africa, the Caribbean and
Pacific group (ACP),which includes 77 developing countries. This
agreement gave unilateral preferences for ACP products into the EU,
which was eventually challenged in the WTO by non-ACP developing
countries. WTO rules on regional trade agreements authorize
developed countries to give unilateral preferences to only two
groups of developing countries: either Least Developed Countries, or
all developing countries. Hence, since 2002 the EU and ACP have
been working to put in place new trade agreements: the Economic
Partnership Agreements (EPAs) which are also designed to enhance
cooperation in services, investment and intellectual property. The
goal is to ensure a stable business environment and rule of law that
will attract foreign investment and help ACP countries integrate
further into the global economy.


3. (U) The EPAs should have replaced the former trade arrangements
between the ACP and EU starting from January 2008, given that the
waiver granted by the WTO expired at the end of 2007. However, EPA
negotiations did not conclude on time, so the EU and ACP countries
decided to sign interim agreements. Madagascar initialed an interim
EPA on December 11, 2007 and continues to enjoy trade preferences
(governed by EU regulation CE 1528/2007).

POLITICAL CRISIS JEOPARDIZING EPAS
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4. (U) Following the March 17 coup, the EU launched a process of
consultations in accordance with the Article 96 of the Cotonou
Agreement, and has suspended its development work indefinitely (with
the exception of humanitarian aid and support that directly benefits
the population). After the political dialogue held in Brussels on
July 6, the EU resolved to maintain the current suspension.
Furthermore, Madagascar is not allowed to continue the negotiation
of EPAs, nor to sign the interim EPAs expected to be completed on
August 28.


5. (U) The process of consultations launched by the EU lasts 120
days. Another political dialogue will take place in October and the
EU will decide at that time on the continuation of its cooperation
with Madagascar. In the meantime, regulation CE 1528/2007 continues
to govern trade between Madagascar and the EU.

EXPORTS WILL SUFFER IF COOPERATION REMAINS SUSPENDED
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6. (SBU) The outcome of the political dialogue depends on the
evolution of the political situation in Madagascar. If cooperation
remains formally suspended, Madagascar would not benefit from an
EPA, nor from the Everything but Arms initiative (the Generalized
System of Preferences granted to least developed countries). As a
result, Madagascar's exports will be subject to custom duties and
become more expensive relative to products benefiting from trade
preferences. In 2008, Madagascar's exports to the EU amounted to
USD 726.6 million, representing 60 percent of total exports.
Agricultural goods (coffee, vanilla, spices, cocoa, clove, and
sugar) and fisheries and textile products represent the bulk of
these exports. Hence, rural farmers and low-skilled workers who are
the poorest in the country will be hit severely by a suspension of
EU cooperation with Madagascar.

MADAGASCAR'S FUTURE ECONOMIC DEVELOPMENT AT STAKE
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7. (SBU) Apart from the trade aspect, the EPAs affect development
cooperation. For Madagascar, this includes promotion of the fishing
sector (capacity building, investment in infrastructure and
equipment),private sector development (investment promotion,
competitiveness enhancement, financial sector development, promotion
of the mining sector, promotion of the tourism sector),and
infrastructure in the energy, transportation and ICT sectors. The
European Development Fund finances this development cooperation in
the context of the Cotonou Agreement.


8. (SBU) COMMENT: The stakes are thus very high for the EU's October
political dialogue, with far-reaching impact on both EU/Malagasy
trade and economic development. With the United States' AGOA
preferences also currently endangered by Madagascar's political
crisis (reftel A),much depends on the outcome of current talks
among the feuding political movements (reftel B). If a political
solution cannot be reached, and Madagascar cannot thereby quickly
restore the rule of law, the loss or expected loss of US and EU
preferential trade agreements is certain to further undermine the
already weakened economy in November/December 2009.