# EUR-Lex - 52015DC0131 - EN

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# 52015DC0131

**REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Annual Report on the Implementation of Part IV of the EU-Central America Association Agreement /* COM/2015/0131 final */**

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REPORT FROM THE COMMISSION TO THE
EUROPEAN PARLIAMENT AND THE COUNCIL

Annual Report on the Implementation of
Part IV of the EU-Central America Association Agreement

1. 
Introduction

The
EU signed the Association Agreement (hereafter the Agreement) with Central
America on 29 June 2012. Part IV of the Agreement, covering Trade, has been
provisionally applied as from 1 August 2013 with Nicaragua, Honduras and
Panama, 1 October 2013 with El Salvador and Costa Rica and finally as from 1
December 2013 with Guatemala[1].

The
Commission regularly informs and updates the Parliament and the Council as
regards the implementation of the Agreement. As a complement, in accordance
with Regulation (EU) No 20/2013 of the European Parliament and of the Council
of 15 January 2013 implementing the bilateral safeguard clause and the
stabilisation mechanism for bananas of the Agreement[2] (the
Regulation hereinafter) the Commission shall present an annual report to the
European Parliament and the Council. This report responds to this requirement.

In
line with Article 13 of the Regulation, the report contains three sections:

A summary of the statistics and an
  overall assessment of trade flows (part 2);
 Information on the activities of
  various bodies responsible for monitoring the implementation of the
  Agreement (part 3), including on fulfilment of obligations under the Title
  on Trade and Sustainable Development (part 4);
 Information on the monitoring
  activities referred to in the Regulation (part 5).

2. 
OVERALL ASSESSMENT: EVOLUTION OF TRADE

2.1.        Methodology

The
limited availability of data that could be used for this first annual report
prevents drawing firm conclusions on the impact of the Agreement. Changes in
trade flows cannot be attributed solely to the implementation of the Agreement
and many other factors also influence these figures, such as fluctuations in
demand or global prices. It should also be recalled that, as the asymmetry in
the level of development of the economies is reflected in their respective
tariff schedules, the tariff dismantling period is longer for Central America
than for the EU. As a result, during the first year of application, the tariff
reduction is higher for EU imports from Central America than Central American
imports from the EU.

It
should be noted that before the implementation of the Agreement, Central
American countries benefited from a preferential access to the EU market, the
General System of Preferences (GSP hereinafter) granting tariff concessions to
developing countries. In application of this scheme, some key Central American
products (such as coffee and fruits) already benefitted from duty-free
treatment. However, the tariff concessions granted under the Agreement cover a
broader range of products than under the GSP and make these concessions permanent.
The Agreement is expected to help increasing the diversification of Central
American exports but it will take time to take effect.

The
following analysis of bilateral trade flows is based on a comparison of data
for a 12 months period (October 2013 - September 2014) which is then compared
to the same period of the previous year (October 2012 - September 2013).
Hereinafter, the first year of implementation will refer to the 12-month period
between 1 October 2013 and 30 September 2014. Except otherwise indicated, this
report is based on EUROSTAT data.

It
should be noted that EUROSTAT and Central American statistics show significant
divergences as regards Panama (+255%) and Costa Rica (+46%). These divergences
have been discussed in the Market Access subcommittee and it has been agreed to
carry out a joint analysis in order to seek the reasons for this.

2.2.        Evolution of overall trade
flows with Central America (goods)

New
data from the United Nations’ Economic Commission for Latin America and the
Caribbean show that Foreign Direct Investment in Central America remained
relatively stable during the first semester of 2014 compared to 2013.
Nonetheless, trade[3]
between Central American countries as well as between this region and the rest
of the world contracted by 1%-2%. Similarly, global EU trade flows decreased by
3%.

Despite
this overall decline in trade flows and while it is premature to draw final
conclusions, there has been an upward trend in trade flows for certain
countries and specific goods. EU trade flows with the region remained stable or
even increased, except with Panama where trade suffered a significant
contraction in comparison with 2012 (-11.9 %). This may, however, be linked to
the overall reduction of EU exports to South America in which the Panama Free
Trade Zone plays a key role as regional hub.

Due
to the uncertainties concerning the date of provisional application in 2013,
operators could have experienced difficulties to integrate the benefits under
the Agreement into their decisions. Despite this, there are indicators that
suggest that businesses in specific sectors are increasingly making use of the
Agreement.

The
value of EU imports of goods from Central America increased by 3.4% (EUR 6,629
million) whereas EU exports to Central America decreased by 6.3% (EUR 5,106
million). In 2014, the EU's trade balance therefore reached a deficit of EUR
1,528 million (the year before the deficit was EUR 962 million).

Export || Import || Total trade flows

Costa Rica || 812 || 1.5% || 4,096 || -0.7% || 4,908 || -0.4%

El Salvador || 574 || 13.9% || 191 || -6.0% || 766 || 8.1%

Guatemala || 829 || 7.7% || 619 || 4.0% || 1,448 || 6.1%

Honduras || 421 || 15.3% || 791 || 3.1% || 1,213 || 7.0%

Nicaragua || 165 || 0.0% || 305 || 28.7% || 470 || 16.9%

Panama || 2,305 || -19.0% || 627 || 29.7% || 2,932 || -11.9%

Total || 5,106 || -6.3% || 6,629 || 3.4% || 11,736 || -1.1%

Trade flow between EU and Central
America and its yearly evolution

(in
m Euros – period 1/10/2013 to 30/9/2014)

The
main destination of EU exports to Central America was Panama (46%)
followed by Guatemala and Costa Rica (16% each). The main exports according to
CTCI categories were machinery and transport equipment (32.7%) followed by
chemicals (17.5%). EU exports are quite diversified and the 15 products which
are exported the most (in value) cover 28% of total exports. In total, 5 817
different products have been exported to Central America during the first year
of implementation (+0.5% compared to the year before).

EU
exports to Central America decreased by 6.3%. This reduction, which mainly
concerned Panama (-19%) could be related to the overall negative trend with the
South American region. EU exports to Central America show a significant
variability (both positive and negative) for products such as heavy machinery,
railway, planes and vessels which represents a large share of total exports and
for which trade flows are linked to industrial or capital investment.

Penetrating
a new market may take time and does not depend solely on the existence of an
FTA but it should be noted that among the EU exports to Central America which
increased the most in relative terms, 9 out of the 15 benefit from a
preferential tariff treatment in application of the Agreement, such as:

Aircraft
  parts increased from EUR 2.5 million to
  39.5 million during the first year of implementation (+ 1431%),
 Pictures
  and print increased from EUR 0.4
  million to 3.4 million (+644%),
 Drinking
  glasses increased from EUR 0.3 m to
  1.6 m (+432%).

The
main EU imports from Central America were equipment and machinery (42%)
followed by food and live animals (39.4%). The main sources of EU imports from Central
America are Costa Rica (62%) followed by Honduras and Panama (11% each).
Equipment and machinery imports from Central America mainly originate from
Costa Rica (86% of total machinery and equipment imported from Central
America).

In
total, 2 281 different products have been imported from Central America during
the first year of implementation (+3% compared to the year before). Despite
this positive evolution, the diversification of products imported from Central
America remains limited: the 4 most imported products cover around 60% of total
EU imports from Central America (electronic assemblies of data processing
machine (IT motherboard) 32%, coffee 10%, banana 10% and pineapples 7%).

Overall,
EU imports from Central America increased by 3.4% during the first year of
implementation despite the fact that imports of the two most traded products
decreased (assemblies for data processing machine and coffee were down by 7.2%
and 17% respectively). These decreases are probably related to external
factors: The data processing machine import reduction might be an early sign of
ongoing reorganization of this industry as a consequence of the recent
announcement of the major producer in Central America to relocate its facility
from Costa Rica to South East Asia. The decrease in coffee imports is related
to the severe drought and the coffee rust epidemic (so-called “roya” in
Spanish).

Notable
positive variations in newly liberalised Central American exports have been
recorded in products such as:

Cane
  molasses rose by 394% (from EUR 8
  million to 41 million)
 Frozen
  shrimp imports rose by 63% (from EUR
  0.1 million to EUR 0.16 million),
 Rum
  in bottle imports rose by 205% (from
  EUR 5.6 million to 17 million)
 Manioc
  imports rose by 39% (from EUR 10
  million to 14 million),

2.5.        Use of tariff rate quotas
(TRQs)

The
Agreement provides for several TRQs which consist of granting to the other
party a preferential tariff treatment up to the quota’s quantitative threshold.
Above this threshold, the MFN tariff applies.

Overall,
the preliminary analysis of quota utilisation suggests that operators have made
significant use of TRQs for products which were already traded before the
provisional application of the Agreement, whereas there was an insignificant
trade creation for those products not traded before the implementation of the
Agreement.

The
EU has agreed to provide eight TRQs in favour of Central America on
products that did not have any preferential access to the EU market before the
implementation of the Agreement. No use of these TRQs was made by Central
American economic operators in 2013 except for the TRQs for sugar which were
used at 95%.

In
2014, TRQs were only used for two categories (cane sugar and rum). Out of the
allotted 166,860 tonnes for cane sugar, 143,791 were used (86%). In terms of
value, EU imports of products covered by the TRQ for sugar increased from EUR
47.5 million to EUR 84.7 million (+78%).

Origin || Products || Unit || TRQ volume || EU Import || Utilisation rate

Central America || Garlic || ton || 550 || 0 || 0%

Rice || 21,000 || 0 || 0%

Manioc || 5,000 || 0 || 0%

Bovine meat || 10,450 || 0 || 0%

Mushroom || 275 || 0 || 0%

Sweetcorn || 1,560 || 0 || 0%

Central America except Panama || Sugar || 154,500 || 135,243 || 88%

Rum in container > 2 l || Litre Pure Alcohol || 1,022 || 153 || 21%

Panama || Rum in container > 2 l || 105 || 0 || 0%

Sugar || ton || 12,360 || 8,548 || 69%

Nicaragua || Bovine meat || 550 || 0 || 0%

TRQs
granted by the EU to Central America – Usage until 26 November 2014

In
addition to TRQs, the EU also granted to Central America derogation to the
rules of origin under specific quotas for 118 tariff lines. Essentially, these
derogations consist in granting some flexibility to Central America as regards
the origin of well identified products up to a quota’s quantitative threshold.
Beyond these thresholds, stricter rules of origin apply. These arrangements
mainly concern textile products. However the use of these derogations is almost
negligible and the amounts imported under these quotas remain very limited and
only concern a small fraction of the trade flow that could be eligible for the
preferential treatment. This latter finding confirms a general trend noted for
recently implemented agreements that it takes time for operators to adapt their
trading channels to the new environment.

Central
America granted TRQs to the EU on four specific products. All EU
exports covered by these TRQs increased as follows:

Cured
  ham: The EU exports rose from EUR 1.2
  million to EUR 1.5 million (+22%)
 Milk
  powder: EU export rose from EUR 2.9
  million to EUR 5.7 million (+96%)
 Cheese:
  EU export rose from EUR 7.1 million to EUR 9.3 million (+32%)
 Whey:
  EU export rose from EUR 0.5 million to EUR 0.6 million (+17%)
 Prepared
  pork meat: EU export rose from
  EUR 9.1 million to EUR 10.6 million (+16%)

Overall,
these TRQs served as a boost for products which were already traded before the
implementation of the Agreement, although there is still some margin of growth
since exports remain below the thresholds.

2.6.        Services

Services
trade data is produced with a considerable lag in time and is presented in
aggregated terms, making it unrealistic at this stage to make an analysis
comparable to the one for trade in goods. This aspect will thus be covered in
the annual implementation report once sufficient data is available.

3. 
ACTIVITIES OF THE IMPLEMENTATION BODIES

The
implementation bodies created by the Agreement are composed of an Association
Council, which meets regularly at ministerial level, an Association Committee
and six subcommittees which meet on an annual basis. The first meetings of
these bodies took place in Honduras in May/June 2014 except the Board on Trade
and Sustainable Development which met on 17-18 November in Nicaragua.

3.1.        Sub-Committee on Technical
Barriers to Trade

During
the meeting held on 13 May 2014, Central America and the EU reviewed:

The
  implementation of 4 technical regulations implemented by Central America
  (labelling of alcoholic drinks, cream (dairy), labelling of footwear), 
 Two
  Costa Rican technical regulations (tyres and electrical installations)
 The
  commitments taken by the Central American region to further their economic
  integration by adopting technical regional regulations.

The
EU recalled Central America's commitment to provide written replies to the EU's
written comments submitted in the framework of the TBT WTO notification
procedure. Central America took note of the request and committed to reply.

As
part of its commitments related to the implementation of technical regulations
in order to foster regional economic integration, Central America had agreed to
introduce a single regional registration for products. This regulation had
still not been implemented but Central America informed that this new
legislation was about to enter into force.

3.2.        Board on Trade and
Sustainable Development

The
EU and Central America launched the dialogue on Trade and Sustainable
Development and shared their experiences on domestic mechanisms to promote the
participation of civil society and groups committed to the implementation of
the Trade and Sustainable Development provisions of the Agreement (see part 4 below).

3.3.        Sub-Committee on
Intellectual Property

The
first meeting of the Intellectual Property Sub-Committee held on 22 - 23 May
2014 aimed at:

Agreeing
  with Central America the content of the Decision listing protected
  Geographical Indications;
 Exchanging
  the latest status on respective ongoing procedures for protection of EU
  and Central American Geographical Indications, in particular as regards
  on-going opposition procedures concerning some important EU Geographical
  Indications; and
 Initiating
  the dialogue on ways to simplify procedures for the registration of
  Geographical Indications in Central America.

The
outcome of this subcommittee was positive as the Parties agreed on a list of
protected Geographical Indications and agreed that there is room for
simplifying and easing the registration procedures in Central America, with a
view to fostering a harmonised approach at regional level.

3.4.        Sub-Committee on Sanitary
and Phytosanitary Matters

At
the first meeting of the sub-committee held on 17-18 June the topics discussed
included import
requirements, verifications, measures linked to animal and plant health,
equivalence, and technical assistance. The main
objectives were:

To
  further identify possible problems in the implementation of the Agreement,
  and to explore solutions;
 To
  address market access barriers and new import authorisation requests and
  find ways to facilitate or open trade;
 To
  get confirmation by all Central American countries on the interpretation
  and proper implementation of the articles on approval of listing of
  establishments and on verifications, that CA will bear the cost of
  inspections carried out in Europe by Central American competent
  authorities;
 To
  discuss the level of integration of Central America and on-going
  discussions in this regard within the region.

Overall,
the outcome of the subcommittee was positive, with Central America showing
commitment to reach the objectives of the Agreement.

3.5.        Sub-Committee on Customs
Procedures, Trade Facilitation, and Rules of Origin

During
the first meeting of this sub-committee held on 28-29 April, the Parties
discussed:

The
  fulfilment by Central America of its regional integration commitments;
 Two
  explanatory notes in the area of rules of origin and how to solve minor
  practical problems encountered by the operators during the first months of
  preferential trade under coverage of the Agreement.

The
EU also expressed its concerns as regards a tendency of Central American
countries to introduce scanning equipment on their borders and to charge ad
valorem fees which the EU considers could be contrary to the Agreement.

3.6.        Sub-Committee on Market
Access for Goods

The
points on the agenda of the first meeting of this sub-committee held on 19 June
were aimed at reviewing:

· 
The Costa Rican legislation which
introduced a minimum export price for bananas;

· 
The fee to be charged by Nicaragua for
scanning goods at each checkpoint borders;

· 
The administrative control introduced by
the EU for certain Central American products covered by TRQs.

Regarding
the legislation on a minimum export price for bananas, Costa Rica recognized
that there is no provision in this Agreement that would explicitly allow Costa
Rica to make use of this legislation. However, Costa Rica considered that,
given the current market price for banana, the minimum export price does not
constitute a barrier to trade. The EU noted that it would continue to follow
this issue.

As
regards the scanning fee applied by Nicaragua, the EU recalled that, as a
consequence of the Agreement, fees charged should not exceed the cost of the
services rendered. Nicaragua assured the EU that the legislation would respect
its international commitments.

The
Parties also exchanged information on possible future areas of work and agreed
to collaborate on collecting common reliable statistics.

3.7.        Association Committee

The
Association Committee held on 25 June reviewed the work carried out in the
different sub-committees and also discussed other trade related issues.
Particular emphasis was given to the regional economic integration issues and
the need to avoid Central American measures running against the free
intra-regional flow of goods, as the main beneficiary from easier trade flows
would in fact be Central America.

The
Parties discussed Central America’s request for compensations for Croatia’s
accession to the EU, recognised the current existing differences of approach
and agreed to continue the dialogue on this point with a view to finding an
agreement as soon as possible. The EU also raised its concerns regarding
Panama's law on auxiliary maritime services which discriminates against foreign
operators. The EU and Panama discussed whether the law diminishes market access
and Panama informed that the new Government would reply to the EU.

3.8.        Association Council

The
Association Council held on 27 June considered the work done by the Association
Committee and endorsed the outcomes. The Association Council adopted five
decisions including the rules of procedure of the Association Council and its
various structures, the list of protected geographic indications and the rules
of procedure for the dispute settlement mechanism.

Central American participants also reiterated the
importance of the Agreement in terms of trade, regional integration and
enhanced relations which they expect will have a positive impact on the
economic and social development of Central America. Furthermore, Central
American participants expressed their wish for a rapid ratification of the
Agreement by the remaining 19 EU Member States to achieve the entry into force
also of the political and cooperation pillars. The EU presented the state of
play of the ratification process in Europe. Furthermore, the EU referred to the
entry into force of the Political Dialogue and Cooperation Agreement in 2014.

4.           FULFILLMENT OF
OBLIGATIONS ON TRADE AND SUSTAINABLE DEVELOPMENT

Activities in the first year of implementation of
the Agreement have focussed on establishing the institutional structures set
out in Title VIII on Trade and Sustainable Development.

4.1       Institutional
Aspects

The
first meeting of the Government to Government Board on Trade and Sustainable
Development was held in Managua, Nicaragua on 18 and 19 November 2014. A
meeting of the Civil Society Dialogue Forum was held in parallel and followed
by a joint session of the Board and Forum.

The
Board meeting was held with participation on the Central American side of
representatives from Ministries of Trade, Labour and Environment. The Civil
Society Dialogue Forum was organised by the Nicaraguan civil society advisory
group and a number of presentations were made on topics such as labour rights,
climate change, fair trade and corporate social responsibility. It was attended
by over 100 people.

The EU advisory group comprises representatives from
the European Economic and Social Committee and from EU civil society
organisations who expressed interest in participating in this group following a
call for expressions of interest launched through DG Trade's civil society
database. The Secretariat is provided by the EESC.

4.2       Implementation
of International Labour Organization (ILO) Conventions

During
the Board meeting the Parties reported on their implementation of ILO
conventions, in particular fundamental ILO conventions. As regards the later,
focus was put on measures to address child labour and to strengthen social
dialogue. The parties discussed the importance of social dialogue and of
effective and dissuasive sanctions against anti-union discrimination and
against violence, including violence against trade union leaders; and the
necessity for these sanctions to be effectively enforced.

As
regards child labour emphasis was placed on the importance of intensifying
efforts to tackle child labour especially in the informal economy, to
strengthen labour inspections, of efforts to increase the rate of school
attendance as well as to strengthen social protection with a focus on
protection of children.

The
EU drew attention to recently adopted ILO Conventions and Protocols and their
state of ratification by EU Member States in particular the Convention on
Maritime Labour (MLC), the Convention on Domestic Workers (C189) and the new
Protocol supplementing the Forced Labour Convention (C29).

In
relation to capacity-building on these issues the EU highlighted in particular
a programme that is being developed to support the decent work agenda in
Honduras.

4.3.        Implementation of
multilateral environmental agreements

During
the Board meeting the Parties reported on implementation of multilateral
environmental agreements, focussing in particular on climate change, endangered
species (CITES), hazardous chemical and waste shipments. The Central American
countries reported that they had all now ratified the Rotterdam Convention (on
trade in hazardous chemicals) as well as the Gaborone Amendment to CITES

The EU drew attention to recently concluded
environmental agreements, namely the Minamata Agreement on Mercury and the
Nagoya Protocol to the Convention on Biodiversity (CBD) and reported on
developments to implement these agreements within the EU. The Central American
countries emphasised the vulnerability of the region to climate change, which
directly affects export crops such as coffee, and the need to work on
adaptation. A number of them also outlined ambitious plans to increase the
share of renewable energy in their energy supply.

4.4.        Development of a positive
agenda for trade and sustainable development

During both the Board meeting and Civil Society
Dialogue Forum many examples were presented where production and trade had had
positive environmental and social impacts. Government policies to promote such
outcomes were described, as well as partnerships between businesses, labour
representatives, environmental NGOs and communities. Common themes included
corporate social responsibility, renewable energy, sustainable agricultural
production, cleaner production processes and sustainable tourism.

The
Board agreed that further discussions will take place to identify priorities
for the medium term. Articulation with ongoing and planned development
cooperation support to the region as well as engagement with civil society on
both sides of the Atlantic will be important in this process.

5.           IMPLEMENTATION OF
REGULATION (EU) NO 20/2013 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL IMPLEMENTING
THE BILATERAL SAFEGUARD CLAUSE AND THE STABILISATION MECHANISM FOR BANANAS

The
Regulation establishes the appropriate procedures to avoid serious harm to the
EU banana sector if, as a result of the reduction of customs duties, bananas
are imported in such increased quantities as to cause or threaten to cause
serious injury to the EU industry.

Hence,
in line with Articles 3 and 13 of the Regulation, the Commission has been
monitoring the evolution of imports of bananas from Central American countries
to assess if the conditions set out in the Regulation are met to initiate a
safeguard investigation or introduce prior surveillance measures.

5.1.        Evolution of Central
American banana imports

During
the first year of implementation of the Agreement, the Commission neither
initiated nor received any requests to initiate a safeguard investigation or to
introduce prior surveillance measures as the conditions set out in the
Regulation to initiate a safeguard investigation or introduce prior
surveillance measures were never reached.

2013 || 2014*

Import || Trigger || Utilisation Rate || Import || Trigger || Utilisation Rate

Costa Rica || 131,519 || 1,178,750 || 11% || 856,007 || 1,230,000 || 70%

Panama || 58,935 || 431,250 || 14% || 203,737 || 450,000 || 45%

Honduras || 1,749 || 57,500 || 3% || 3,622 || 60,000 || 6%

Guatemala || 21 || 57,500 || 0% || 22,861 || 60,000 || 38%

Nicaragua || 0 || 11,500 || 0% || 0 || 12,000 || 0%

El Salvador || 0 || 2,300 || 0% || 0 || 2,400 || 0%

(*)
till 10 December 2014

Import
of bananas under the stabilisation mechanism

6.         CONCLUSION

It
is too early to make any conclusive assessment of the impact of the trade part
of the Agreement.

Despite
the negative global environment including the overall decrease in global demand
in 2014, EU trade flows with Central America remained substantially stable and
saw significant increases in specific sectors. EU trade flows with most Central
American countries increased except with Panama. Moreover, the relatively low
utilisation rate of the available TRQs points to the possibility to further
increase bilateral trade flows between the two regions.

As
regards bananas, imports from Central American countries remained overall
stable and below the established trigger imports, so that it was unnecessary to
consider initiating any suspension of preferential customs duties.

It
has been agreed with Central America to carry out a technical review of the
statistical methods and data on trade flows which should allow a more detailed
analysis in the future.

The
overall conclusion of the Commission after the first year of implementation is
that it has brought about a rapid set-up and functioning of the institutional
framework of the Agreement and that the process of implementation is overall
positive. The formal process between the Parties for the implementation of the
Agreement will continue in the context of the meetings of the various
implementation bodies which are expected to take place by mid-2015.

The
focus of the second year of application remains the proper implementation of
the Agreement in order to allow economic operators from both regions to take
full advantage of its opportunities. The Commission is engaged in actions aimed
at increasing the awareness of the economic operators as regards the
opportunities presented by the Agreement. These actions take place both in the
EU and Central America including through cooperation projects in Central
America.

[1]               The
Agreement is provisionally applied in the EU until all Member States have
ratified it. The status of the ratification is posted on the Council's website:
http://www.consilium.europa.eu/policies/agreements/search-the-agreements-database?command=details&lang=en&aid=2012001&doclang=EN

[2]               See: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32013R0020

[3]               IMF data.