Report on the Implementation of the derogation to the standard rules of origin granted to the Pacific ACP States in the framework of the Interim Economic Partnership Agreement (EPA)

FWC COM 2011 - LOT 1
EuropeAid/129783/C/SER/MULTI

Report on the Implementation of the derogation to the standard
rules of origin granted to the Pacific ACP States in the framework
of the Interim Economic Partnership Agreement

FWC COM 2011 RFS 2011/266449

Amanda Hamilton
Antony Lewis
Liam Campling

December 2011

A project financed by the A project implemented by LINPICO
European Union

Final Report RoO Derogation under the PACP-IEPA

DISCLAIMER

This report was commissioned and financed by the European Commission. The views expressed
herein are those of the Contractor, and do not represent the official view of the Commission.

ACKNOWLEDGEMENTS

The consultants gratefully acknowledge and extend their sincere thanks to all persons who kindly
assisted in carrying out this review by making the time available to meet with members of the
consultancy team during in-country visits and/or providing valuable insights and data.

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TABLE OF CONTENTS

1 INTRODUCTION .................................................................................................................... 8
1.1 Background ........................................................................................................................... 8
1.2 Methodology ......................................................................................................................... 9
1.3 Stakeholder consultation .................................................................................................... 10
2 RULES OF ORIGIN DEFINED ................................................................................................. 13
2.1 What are preferential rules of origin? ................................................................................ 13
2.2 The ‘global sourcing’ rule of origin under the PACP-EU Interim EPA ................................. 14
3 PNG CANNED TUNA INDUSTRY ........................................................................................... 18
3.1 PNG Tuna Fishing Fleet ....................................................................................................... 18
3.2 PNG Processing Sector ........................................................................................................ 25
3.2.1 Existing Operations ................................................................................................ 25
3.2.2 New planned investments ..................................................................................... 31
3.2.3 Potential future investments ................................................................................. 36
3.2.4 Competitiveness of PNG processors ...................................................................... 38
3.3 PNG Tuna Trade .................................................................................................................. 41
3.3.1 Exports ................................................................................................................... 41
3.3.2 Domestic Market .................................................................................................... 45
3.4 Projected Production - 2012-2016 ...................................................................................... 46
3.4.1 Implications of global sourcing on PNG processing sector expansion ...................47
4 DEVELOPMENT EFFECTS ON THE PNG ECONOMY ............................................................... 48
4.1 Definition of ‘Development Effects’.................................................................................... 48
4.2 Income Generation ............................................................................................................ 49
4.3 Employment Generation..................................................................................................... 50
4.4 Labour/Working Conditions ................................................................................................ 52
4.4.1 Cannery Labour Profiles ......................................................................................... 52
4.4.2 Cannery Labour Conditions .................................................................................... 54
4.5 Other Social Issues .............................................................................................................. 66
4.5.1 Corporate social responsibilities of tuna processing companies ........................... 66
4.5.2 Spin-off businesses ................................................................................................. 68
4.5.3 PMIZ development ................................................................................................. 70
4.5.4 Other concerns ....................................................................................................... 71
4.6 Environmental Issues .......................................................................................................... 72
4.6.1 Management of environmental risks ..................................................................... 72
4.6.2 Existing environmental risks .................................................................................. 74
4.6.3 Potential environmental impacts ........................................................................... 77
4.7 Impact of RoO derogation on PNG development ............................................................... 79

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5 MANAGEMENT OF TUNA RESOURCES IN THE WCPO .......................................................... 80
5.1 Tuna Stock Status ................................................................................................................ 80
5.2 Catch and effort trends ....................................................................................................... 82
5.3 Profile of WCPO purse seine fishing fleets ......................................................................... 84
5.4 Fisheries Management Frameworks and Institutions ........................................................ 89
5.4.1 Regional level institutions ...................................................................................... 89
5.4.2 Sub-regional level institutions................................................................................ 94
5.4.3 National level (Papua New Guinea) ....................................................................... 99
5.4.4 Current effectiveness of management institutions ............................................. 101
5.5 IUU Fishing ........................................................................................................................ 104
5.5.1 Incidence of IUU fishing in WCPO ........................................................................ 104
5.5.2 Evaluation of monitoring, control and surveillance (MCS) capabilities for
combating IUU fishing .......................................................................................... 105
5.5.3 Implementation of the EU- IUU Regulation 1005/2008 ......................................110
5.6 SPS Regulations ................................................................................................................. 113
5.6.1 Background .......................................................................................................... 113
5.6.2 PNG Competent Authority ................................................................................... 114
5.7 Impact of RoO Derogation on Tuna Resource Management............................................ 120
5.7.1 Stock sustainability............................................................................................... 120
5.7.2 IUU fishing ............................................................................................................ 120
5.7.3 SPS compliance .................................................................................................... 121
6 IMPACTS ON THE EU MARKET AND EU-CENTRED INDUSTRY ............................................. 122
6.1 EU Retail Market for Canned Tuna ................................................................................... 122
6.2 EU Market for Pre-cooked Frozen Tuna Loins .................................................................. 125
6.3 Major Suppliers of the EU Canned Tuna Market .............................................................. 129
6.4 Intra-EU ............................................................................................................................. 129
6.4.1 Extra-EU................................................................................................................ 132
6.5 EU Distant Water Fleet (EU DWF) ..................................................................................... 134
6.6 EU-based Processors ......................................................................................................... 142
6.7 Third Country Processors .................................................................................................. 146
6.8 Impacts of the Derogation on the EU and Third Countries .............................................. 148
6.8.1 Projecting PNG exports: data and assumptions................................................... 150
6.8.2 Impacts on the EU Distant Water Fleet................................................................ 151
6.8.3 Impacts on EU-based Processors and their Canned Tuna Markets .....................153
6.8.4 Impacts on Third Countries and their EU Canned Tuna Markets ........................158
7 OTHER CONSIDERATIONS ................................................................................................. 169
7.1 Fiji ...................................................................................................................................... 169
7.2 Direct and Indirect Preference Erosion............................................................................. 169

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7.3 GSP+ Reforms.................................................................................................................... 170
7.4 PACP-EPA Negotiations ..................................................................................................... 171
8 CONCLUDING COMMENTS ............................................................................................... 171
9 REFERENCES ..................................................................................................................... 173
APPENDIX 1 TERMS OF REFERENCE (ANNOTATED) ................................................................. 182
APPENDIX 2 LIST OF PERSONS CONSULTED ............................................................................. 187
APPENDIX 3 DETAILED DATA FOR PNG PRODUCTION AND EXPORT PROJECTIONS ................190
APPENDIX 4 PROFILE OF EU CANNED TUNA PROCESSORS, 2011 ............................................ 193

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LIST OF TABLES

Table 1.1 List of stakeholder organisations consulted .................................................................... 12
Table 3.1 Vessels licensed to fish in PNG by flag and permitted operating area - 2008, 2011 ....... 18
Table 3.2 Catch in PNG watersa by vessel access category (mt), 2006-2010 .................................. 19
Table 3.3 PNG fleet catch in PNG waters and beyond (mt), 2006-2010 ......................................... 19
Table 3.4 Catch in PNG archipelagic waters (mt), 2006-2010 ......................................................... 20
Table 3.5 Market/processing destination of fish caught by vessels in PNG waters, 2011 .............. 22
Table 3.6 Profile of PNG’s Existing Tuna Processing Operations, 2011 ........................................... 26
Table 3.7 Production Capacity of PNG’s Tuna Processing Plants (2006-2011) ............................... 30
Table 3.8 Status of New PNG Tuna Processing Investments, October 2011. .................................. 35
Table 3.9 Total PNG Tuna Exports (mt), 2006-2010 ........................................................................ 42
Table 3.10 PNG Exports of Canned Tuna and Cooked Loins (HS 1604) to EU, 2000-2010 ................ 43
Table 3.11 PNG Exports of Canned Tuna and Cooked Loins (HS 1604) to US, 2000-2010 ................ 44
Table 3.12 PNG Exports of Canned Tuna to other markets (non-EU, US) (mt), 2000-2010 .............. 44
Table 3.13 PNG Domestic Market for Canned Tuna (Estimate) – 2006-2010 (mt) ........................... 45
Table 3.14 Medium-term projection of the production capacity of PNG’s tuna processing plants,
2011-2016 ........................................................................................................................ 47
Table 4.1 Income Generation by Existing Tuna Processing Plants to PNG Economy, 2007-2010
......................................................................................................................................... 50
Table 4.2 Projected Income Generation by Tuna Processing Plants to PNG Economy, 2011-2016
......................................................................................................................................... 50
Table 4.3 Estimated Employment Generation in PNG from Tuna Processing, 2006-2010 ............. 51
Table 4.4 Projected Employment Generation in PNG from Tuna Processing, 2011-2016 .............. 52
Table 4.5 Labour profile of existing tuna processing operations - 2011 ......................................... 54
Table 4.6 PNG ratification of eight ‘fundamental’ ILO conventions................................................ 55
Table 4.7 Issues with PNG implementation of ‘fundamental’ ILO conventions.............................. 56
Table 4.8 Overview of Working Conditions in PNG Tuna Processing Facilities – September, 2011 ...
......................................................................................................................................... 58
Table 4.9 Socio-Economic Benefits Generated by PNG Tuna Processors, 2011 ............................. 69
Table 4.10 Potential environmental risks associated with fish processing plants ............................ 74
Table 4.11 Reported environmental issues associated with tuna processing plants in PNG............ 75
Table 4.12 Status of environmental approvals for planned PNG processing facilities, 2011 ........... 77
Table 5.1 Current stock status of skipjack, yellowfin and bigeye in WCPO, 2011 .......................... 81
Table 5.2 No. of vessels and catch for major fleets operating in the WCPO, 2010-2011 ............... 85
Table 5.3 Changes in vessel numbers in the WCPO industrial purse seine fleet between 2007 and
2011 (October)................................................................................................................. 87

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Table 5.4 Summary of current management activity at regional, sub-regional and national levels,
according to criteria established for RFMOs, 2011 ....................................................... 103
Table 5.5 Summary of MSC activity at regional, sub-regional and national (PNG) level in the
WCPO ........................................................................................................................... 110
Table 5.6 Number of RASSF alerts for fish and fish products from selected EU exporting countries,
2006 – September 2011................................................................................................. 116
Table 5.7 Comparison between numbers of active purse seine vessels and the number of those
vessels on the SANCO lists, 2010-2011.......................................................................... 119
Table 6.1 Corporate concentration and private label penetration in principal EU canned tuna
markets .......................................................................................................................... 124
Table 6.2 Extra-EU27 tuna ‘loin’ imports by major supplier and selected GSP+ and ACP countries
(all in tonnes unless otherwise specified)...................................................................... 128
Table 6.3 EU market volume – domestic production vs. extra-EU imports (in tonnes unless
otherwise specified) ...................................................................................................... 129
Table 6.4 Intra-EU export of canned tuna in value and volume, bi-annual 2002-2010 ................ 131
Table 6.5 Extra-EU export of canned tuna by top-3 destination market, bi-annual 2002-2010 (in
million Euro unless otherwise stated) ........................................................................... 131
Table 6.6 Extra-EU27 canned tuna imports by major supplier and selected GSP+ and ACP
countries (all in tonnes unless otherwise specified), 2001-10 ...................................... 133
Table 6.7 The EU distant water tuna purse seine fleet in 2011 .................................................... 141
Table 6.8 Estimated EU-based Tuna Processors, Capacity and Production in 2008 ..................... 142
Table 6.9 Major EU canned tuna processing firms ........................................................................ 144
Table 6.10 Canned Tuna and Loin Production in Selected Countries by EU Preference Regime in
2008/10.......................................................................................................................... 148
Table 6.11 Projected PNG exports to EU in 2016 ............................................................................ 151
Table 6.12 Average value per tonne of EU imported canned tuna by supplying country, 2006-10 (all
in Euro)........................................................................................................................... 155
Table 6.13 Identifying market interaction and potential trade diversion – Top 5 markets for EU-
based processors plus PNG (in million Euro), annual average for 2006-10 .................. 156
Table 6.14 Share of EU Import Market by Selected Third Country Suppliers of Canned Tuna, 2001-
10 (all in %) .................................................................................................................... 159
Table 6.15 Share of EU Import Market by Selected Third Country Suppliers of Tuna Loins, 2001-10
(all in %) ......................................................................................................................... 160
Table 6.16 Identifying potential raw material trade diversion for Third Countries – WCPO purse
seine catch by fleet or flag and estimated processing country receipts in 2010 for major
processing countries (all figures to nearest ‘000mt) ..................................................... 164
Table 6.17 Identifying market interaction and potential trade diversion for Third Countries –
Volume of Supplier's Canned Tuna Exports to EU27 Markets, annual average for 2006-
10 (all in % unless otherwise specified) ......................................................................... 168

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LIST OF FIGURES

Figure 3.1 Comparative Direct Raw Material Processing Costs – Thailand and PNG, 2011
(US$/mt) ....................................................................................................................... 39
Figure 5.1 WCPO catch by gear in the WCP Convention Area, 1960-2010 ................................... 83
Figure 5.2 Number of purse seine vessels by flag on the FFA Regional Vessel Register, October
2011. ............................................................................................................................. 84
Figure 5.3 WCPO purse seine catch by fleet (mt), 2010 ............................................................... 85
Figure 6.1 Schematic value chain in canned tuna ....................................................................... 125
Figure 6.2 EU import of pre-cooked tuna loins in value and volume, 2001-2010 ...................... 126
Figure 6.3 EU import of pre-cooked tuna loins by major destination market, 2001-10 (in tonnes).
.................................................................................................................................... 126
Figure 6.4 EU27 production of prepared or preserved tuna, 1976-2008 ................................... 130
Figure 6.5 EU27 vs. World skipjack and yellowfin tuna catch. All regions, gears, all fishing areas
(in tonnes), 1950-2009 ............................................................................................... 134
Figure 6.6 EU Canning-grade Tropical Tuna Catch: all regions, gears, all fishing areas (in tonnes),
1950-2009................................................................................................................... 135
Figure 6.7 France (a) vs. Spain (b) total catch by fishing area (skipjack and yellowfin combined),
1950-2009................................................................................................................... 138
Figure 6.8 Network of EU marine territories and Fisheries Partnership Agreements in 2011 ... 139

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ACRONYMS
3IA Third Implementing Arrangement of the Nauru Agreement
ACP African, Caribbean and Pacific Group of States
ACU NFA – Audit and Certification Unit
Asociación Nacional de Buques Atuneros Congeladores y la Organización
ANABAC
de Productores de Túnidos Congelados
ANFACO Asociación Nacional de Fabricants de Conservas de Pescados y Mariscos
ASEAN Association of Southeast Asian Nations
AW archipelagic waters
BE Bigeye
BFAR Bureau of Fisheries and Aquatic Resources (Philippines)
BOD Biochemical Oxygen Demand
BSCI Business Social Compliance Initiative
CA competent authority
CC catch certificate
CCMs WCPFC members, cooperating non-members and participating territories
CCS catch certification scheme
CCSBT Commission for the Conservation of Southern Bluefin Tuna
CDS catch documentation scheme
ILO Committee of Experts on the Application of Conventions and
CEACR
Recommendations
CEPESCA Confederación Española de Pesca
CER country evaluation report
CFTO Compagnie Francaise du Thon Oceanique
CH China
CMM conservation and management measure
CMS Compliance Monitoring System
CoC Chain of Custody
CRO Community Relations Officer
China Shenyang International Economic and Technical Cooperation
CSYIC
Corporation
CTC Change in Tariff Classification method
DCI Department of Commerce & Industry
DEC Department of Environment & Conservation
DG MARE EC - Directorate General for Maritime Affairs and Fisheries
DG SANCO EC - Director General for Health & Consumers
DG Trade EC - Directorate General for Trade
DLIR Department of Labour & Industrial Relations
DWFN distant water fishing nation
EC Environment Council
EC European Commission
EEAS European External Action Service

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EEZ Exclusive Economic Zone
EIA environmental impact assessment
EMP Environmental Management Plan
eNGO environmental non-government organisation
ENSO El Niño/La Niña-Southern Oscillation
EP Environmental Permit
EPA Economic Partnership Agreement
EPO Eastern Pacific Ocean
EU European Union
Eurothon European Tropical Tuna Trade and Industry Committee
FAC WCPFC Finance and Administration Committee
FAD fish aggregation device
FCF Fong Cherng Fishery Company Ltd.
FFA Pacific Islands Forum Fisheries Agency
FPA Fisheries Partnership Agreement
FSM Federated States of Micronesia
FSMA Federated States of Micronesia Arrangement
FTA Free Trade Agreement
FVFODF Freezer Vessel Fish Origin Declaration Form
FVO EU Food and Veterinary Office
GDP gross domestic product
GoPNG Government of Papua New Guinea
GRT gross registered tonnage
GSP Generalized System of Preferences
GSP+ EU Generalised System of Preferences Plus
GT gross tonnage
HACCP Hazard Analysis and Critical Control Point Analysis
HCR harvest control rule
HR Human Resources
HSP high seas pocket
IA Implementing Arrangement
IATTC Inter-American Tropical Tuna Commission
ICCAT International Commission for the Conservation of Atlantic Tunas
IEPA Interim Economic Partnership Agreement
IFC International Fisheries Corporation
ILG Incorporated Landowner Group
ILO International Labour Organisation
IOTC Indian Ocean Tuna Commission
IPA Investment Promotion Authority
ITUC International Trade Union Confederation
IUU Illegal, unreported, unregulated fishing

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JP Japan
K PNG kina
kg Kilogram
KR Korea
LNG liquid natural gas
LRP limit reference point
MCS Monitoring, control and surveillance
MFN Most-Favoured Nation
MOU Memorandum of Understanding
MSC Marine Stewardship Council Certification
MSY maximum sustainable yield
mt metric tone
NAMA Non-Agricultural Market Access
NC WCPFC Northern Committee
NEC National Economic Council
NFA National Fisheries Authority
NGO Non-Government organisation
NMSA PNG National Maritime Safety Authority
NPOA National Plan of Action
NTAD non-target, associated and dependent species
NTMP National Tuna Management Plan
NZ New Zealand
OFP SPC – Oceanic Fisheries Programme
OPAGAC Organización de ProductoresAsociados de GrandesAtunerosCongeladores
ORTHONGEL Organisation des Producteurs de Thon Congelé
PACER Pacific Agreement on Closer Economic Relations
PACPs Pacific ACP States
PAE party allowable effort
PAFCO Pacific Fishing Company
PH Philippines
PICs Pacific Island countries
PMIZ Pacific Marine Industrial Zone
PMSA FAO Port State Measures Agreement
PMV passenger motor vehicle
PNA Parties to the Nauru Agreement
PNG Papua New Guinea
PNGDF PNG Defence Force
PNGFIA PNG Fishing Industry Association
PNGSFFP PNG Standards for Fisheries Products
PS purse seine
RASSF Rapid Alert System for Food and Feed

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RDTC RD Tuna Canners
RFMO Regional Fisheries Management Organisation
RFV Register of Fishing Vessels
RoO Rules of Origin
ROP Regional Observer Program
RPOA Regional Plan of Action
RTMADS FFA Regional Tuna Management and Development Strategy
RVR FFA Regional Vessel Register
SA 8000 Social Accountability International
SAAS Social Accountability Accreditation Service
SC WCPFC Scientific Committee
SEZ Special Economic Zone
SKJ skipjack
SPARTECA South Pacific Regional Trade and Economic Cooperation Agreement
SPC Secretariat of the Pacific Community
SPS sanitary and phytosanitary standards
SSTC South Seas Tuna Corporation
STDs Sexually transmitted diseases
TAC total allowable catch
TAE total allowable effort
TOG Thunnus Overseas Group
TOR terms of reference
TPJ Trans Pacific Journey Fishing Corporation
TRP target reference point
TSP TSP Marine Industries
TTC WCPFC Technical Compliance Committee
TW Taiwan
UK United Kingdom
UN United Nations
UNCLOS United Nations Convention on the Law of the Sea
UNCTAD United Nations Conference on Trade and Development
US United States of America
USMLT US Multilateral Tuna Treaty
UVI Universal Vessel Indicator
VDS Vessel Day Scheme
VMS vessel monitoring system
VTAF vessel tracking agreement form
VU Vanuatu
WCPFC Western and Central Pacific Fisheries Commission
WCPO Western and Central Pacific Ocean
WMA wildlife management area

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WMP Waste Management Plan
WQM water quality monitoring
WTO World Trade Organisation
WWF World Wildlife Fund
YF yellowfin

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EXECUTIVE SUMMARY

Background

After several years of negotiations to establish a WTO-compliant reciprocal Economic Partnership
Agreement (EPA) between the European Union (EU) and the Pacific-ACP states (PACPs), the EU and
PACPs agreed to the terms of an Interim EPA, which was initialled in November 2007 by Papua New
Guinea and Fiji, and later signed in July and September 2009, respectively.

As part of this agreement, a special derogation to the standard Rules of Origin (RoO) for processed
fish was negotiated. This derogation, often referred to as ‘global sourcing’, permits PACPs to source
raw material from any vessel regardless of flag or where it was caught, provided it has been
‘substantially transformed’ by a PACP-based processing facility into canned tuna or frozen cooked
loins. This was a one-off and specific exception offered exclusively to PACPs because of their
historical lack of RoO compliant fish under the prior RoO due to limited fishing capacity of PACP
fishing fleets, reduced processing capability due to physical and economic factors, geographical
isolation and distance from the EU market, as well as a low identified risk of destabilising the EU
market.

On 13 March 2008, PNG submitted a notification to the EU for use of the derogation for processed
fishery products. In meeting the review requirements specified in the PACP IEPA text (Protocol II,
Art. 6), this report on the implementation of the RoO derogation was commissioned for completion
no later than three years after PNG’s notification had been lodged to consider the following:
 Development effects on PNG economy – long-term income and employment generation;
 Effective conservation and sustainable management of fishing resources (including
compliance with sanitary and phytosanitary (SPS) regulations and support for combating
illegal, unregulated and unreported (IUU) fishing in the Western and Central Pacific Ocean
(WCPO)).

In addition, the review also considers the impacts of the RoO derogation on the EU canned tuna
market and EU fishing and canned tuna processing industries.

Impact of RoO derogation on PNG development

The impact of PNG’s global sourcing RoO derogation on development effects on the PNG economy
has been negligible since 2008, given that existing canners have made very little use of the
derogation to date.

In the medium term future (2011-2016), with the potential development of an additional five
processing plants, the derogation is expected to have a partial impact on development effects on the
PNG economy, given global sourcing is only one contributing factor of several in attracting new
onshore investment to PNG.

Onshore tuna processing facilities

Currently, PNG has three tuna processing facilities handling canned tuna and cooked loin production,
with a combined maximum processing capacity of 520 mt/day (130,000 mt annual raw material
throughput). In September 2011, actual production was around 280 mt/day (70,000 mt/year). From
2008-2011, global sourcing has had little influence on growth of PNG’s existing tuna processing

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facilities, given production levels have generally remained constant and well below capacity. To
date, existing plants have generally been able to meet raw material needs with EU-compliant
catches from their own fleets, or if sourcing from non-company vessels, are yet to branch out and
utilise the RoO derogation to its full capacity to source fish from vessels who have not traditionally
supplied them in the past.

There are currently five new planned tuna processing investments for PNG, each at different stages
of development; four at Malahang Industrial Estate, Lae and one at the Pacific Marine Industrial
Zone at Vidar, Madang. By 2016, estimated total daily production could potentially reach around
730 mt/day (~182,500 mt raw material), should all five new and proposed operations proceed. At
present, there are few other confirmed additional projects in the pipeline for tuna processing in
PNG, and the publicity given to the possibility of rapid large scale expansion seems not be based on
the reality of existing development plans.

Expansion is currently driven largely by PNG’s National Fisheries Authority (NFA) policy of linking
fisheries access to onshore processing, rather than duty free access to the EU market and global
sourcing per se. However, while not the primary driver for attracting onshore investment, the
derogation will play a critical role in industry expansion in the future and its survival. One of the
primary intentions of negotiating global sourcing was to reduce the impediment to industry
expansion of inadequate supplies of wholly originating fish for export to the EU market. Global
sourcing, amongst other factors, will assist in efforts to achieve greater economies of scale, such that
PNG tuna processing facilities can improve their competitiveness in the short-medium term. In
doing so, if and when PNG’s margin of preference (24%) to the EU gradually erodes in light of more
favourable trade preferences garnered by PNG’s major competitors (e.g. Thailand, Philippines),
global sourcing will be a contributing factor in sustaining PNG’s processing sector in the future.

Income generation

For 2007-2010, total direct income generated to the PNG economy by the existing three tuna
processing facilities was in the order of around K 35 million – K 48 million annually (US $16 - 22
million). The most significant contributions to the economy were employee earnings (average K 25
million/year; 45% of net income) and net purchases in local businesses (average K 13.5 million/year;
32% of net income).

Since 2007, the total net direct income generated from canned tuna and tuna loin processing has
generally increased, however, this cannot be directly linked with global sourcing. This trend relates
largely to increased contributions from one of the three existing canneries, whose production has
expanded annually since establishment in 2006. Also, employee earnings have increased
consistently in line with increases in the minimum wage rate.

In the medium term, as new onshore investments come on stream, additional income will be
generated in the economy - the largest direct contributions being employment earnings and
spending by canneries (and their employees) in local businesses.

Employment

New tuna processing facilities will generate a significant increase in employment opportunities for
PNG nationals, particularly young women (potentially in the order of 50,000 direct and indirect jobs
by 2016).



The derogation also has the potential to contribute, in part, to improvements in working conditions
for cannery employees. If profitability of the canneries increase due to lower production costs
realised through gains in economies of scale, then the capacity of companies to afford higher than
minimum wages and other benefits will increase. Existing processing companies have already
indicated that while there is believed to be a readily available source of local labour, competition for
attracting labour will arise between various plants. In trying to attract and retain labour, this may
result in canneries offering more favourable pay conditions, as well as additional benefits (e.g.
transport, housing). Already, with growing international attention on PNG’s tuna cannery sector,
including working conditions within processing facilities, companies are voluntarily taking steps to
demonstrate their compliance with international labour standards and continue to make
improvements in this respect through third-party accreditation under private social standards
systems.

Other development issues

With increased investments, the opportunity for expansion in spin-off businesses (and other
ancillary benefits) for local communities exist, if these businesses are adequately planned and
executed, with the necessary capacity building provided in all facets of small business operations, in
addition to any working capital provided.

If not properly managed, negative social and environmental impacts associated with tuna processing
activities could magnify. However, it should be noted that the management of broader social, as
well as environmental issues is not the sole responsibility of tuna processing companies. A
coordinated effort is required between canneries, national and provincial governments, local
community leaders, as well as concerned NGOs. In addition, it should be noted that social and
environmental issues associated with tuna processing developments in PNG have been in existence
prior to global sourcing.

Impact of RoO Derogation on Tuna Resource Management

Stock sustainability

The current status of tuna stocks in the WCPO is generally positive and remains essentially
unchanged since the advent of the RoO derogation. Two of the three main stocks harvested -
skipjack and yellowfin - which supply over 95% of purse seine-caught raw material for processing,
continue within sustainable limits, now and most likely into the future. This is despite primary
management measures failing to limit effort, associated with the growth of the purse seine fleet
during much of the previous decade. However, most of this growth occurred prior to the derogation
and the total WCPO catch has been relatively stable since 2007. The third stock, bigeye, was subject
to overfishing at the introduction of derogation and will continue to be, unless purse seine effort can
be reduced. However, bigeye is not yet deemed to be in an overfished state.

Current management measures in place will be strengthened under an enhanced Conservation and
Management Measure (CMM) through the Western and Central Pacific Fisheries Commission
(WCFPC), which will be extended to include skipjack (in addition to yellowfin and bigeye currently)
and revised on the basis of current scientific advice. An important recent development has been the
approval of the Marine Stewardship Council PNA skipjack certification in December 2011. As a result
of the certification, reference points and harvest control rules will be introduced as key management
measures in the near future, which will further strengthen management in the WCPO, including
PNG’s waters.



Provided compliance with existing and new management measures is good, and current effort levels
in both the purse seine and longline fisheries can be reduced, the impact of derogation on stock
sustainability in the future is likely to continue to be minimal.

IUU fishing

Monitoring, control and surveillance (MSC) capability at the regional, sub-regional and, in the case of
PNG, national level is well developed and continues to strengthen. There is little evidence of IUU
fishing in the WCPO purse seine fishery, with most issues relating to in-zone infractions.

As tighter MCS controls are introduced and enhanced management measures adopted, pressure to
infringe, particularly with respect to closed high seas areas, time period closures and fishing method
restrictions may increase. This additional pressure on MCS schemes will be exacerbated by increased
pressure on relatively static raw material supplies, given WCPO catch levels are expected to remain
stable. Provided MSC activities continue to be well resourced and well coordinated across the
region according to agreed strategies, both within EEZs and on the high seas, any impacts of
derogation on IUU fishing should be limited.

A recent review indicated that PNG has effectively implemented the EU-IUU Fishing Regulation. This
additional requirement for EU market access has not limited the supply of compliant raw material
for processing in PNG plants, other than in the case of Vanuatu-flagged vessels.

SPS compliance

To date, global sourcing has had little or no direct impact on PNG processors, with adequate supplies
of originating fish to meet prior and current needs. Catches within archipelagic waters have been
close to 100,000 mt in recent years, while PNG’s canneries have required around 60,000-70,000 mt.
Also, the requirement for compliance of this supply with the EU’s Sanitary and Phytosanitary (SPS)
Regulation has not been a constraint thus far, with an adequate number of SPS-compliant vessels to
meet the necessary raw material supply.

In the short to medium term, as additional processing plants come on stream, global sourcing will
need to be exercised to a much greater degree for new plants to acquire sufficient SPS-compliant
raw material for processing and export to the EU. However, the issue may not be that the number
of vessels with SPS certification is inadequate, given that in 2010, over 750,000 mt of WCPO fish was
likely caught by vessels with SPS certificates. Rather, the issue may be the availability of SPS
compliant fish to PNG processors. Global sourcing notwithstanding, there is currently little to no
incentive for fleets to offload to PNG plants (existing or potential plants) if those vessels/fleets have
no links to PNG onshore investments. Even where vessels do have links to onshore plants,
significant quantities of fish are often transhipped and exported, rather than offloaded to processing
facilities. PNG will need to consider arrangements to guarantee supply to proposed future plants
(e.g. compulsory offloading a portion of catch by licensed vessels, in combination with preference
given to licensing SPS-compliant vessels to fish in PNG waters). The present requirements for vessels
fishing under existing arrangements to supply fish to onshore plants may need to be tightened up or
enforced.

A second SPS-related issue for PNG relates to the status of its Competent Authority (CA). Issues with
the CA itself and the certification of vessels and plants were identified by DG SANCO’s Food and
Veterinary Office in 2007 and 2008, and the CA was further examined in 2009. While best efforts
have made to rectify the deficiencies identified, it is still not certain if full compliance has been



achieved. There has been a recent increase in rapid alerts for EU tuna imports from PNG, which will
raise renewed questions about the compliance of vessels/plants and the CA itself. PNG cannot
afford to be de-listed, with the EU the primary market for PNG canned tuna and increasingly, cooked
loin exports. In future, the work load and expectations of the CA associated with increasing number
of plants and unloading vessels can increase substantially. The CA has anticipated this to some
extent, with plans to double the number of auditors by next year. Furthermore, additional
equipment, enhanced training and capacity building, upgrading systems/processes etc. will all be
required.

Impacts on the EU Market and EU-Centred Fishing and Processing Industries

The EU is PNG’s most significant market overall in terms of total tuna exports, and is the largest
market for canned tuna. In 2010, total canned tuna exports to the EU were 15,867 mt and valued at
around € 37 million. The highest volume of canned tuna exports on record was 18,217 mt in 2005,
with annual export volumes fluctuating throughout the past ten years (2001-2010). The major EU
markets for canned tuna from PNG are presently Germany, UK, Denmark and the Netherlands.

PNG processors have also been exporting cooked loins to the EU since 2005 and volumes have
fluctuated during this time. In 2010, cooked loin exports were the highest volume to date, totalling
2,485 mt and valued at € 8.8 million. The major markets for PNG loins are Italy and Spain.

Impacts on the EU Distant Water Fleet

The purse seine fleet that is flagged by EU member states operates almost exclusively in the Eastern
Tropical Atlantic and the Western Indian Ocean. Today, and historically, there is very limited
interaction of the EU Distant Water (tuna purse seine) Fleet (EU DWF) with the WCPO. Currently
only four Spanish-flagged boats operate under Fisheries Partnership Agreements in the WCPO (with
FSM, Kiribati and Solomon Islands), and an additional 10 Spanish-owned, non-EU flagged boats are
registered to fish in the WCPO. Non EU-flagged Spanish-owned vessels in the Pacific operate
primarily in the Eastern Pacific Ocean, but also engage in operations in the WCPO. These purse
seiners primarily supply catches to parent tuna processing facilities in Latin America. As a result,
these vessels generally do not supply originating fish to PNG or other tuna processing facilities based
in the Pacific islands.

PNG-based processors have utilised only very minor quantities of tuna under the derogation in 2011,
so de facto no direct impacts on the EU DWF are discernable. The Spanish DWF active in the WCPO is
not currently supplying PNG, so processing investment in PNG is not directly influencing EU DWF
tuna sales through competition on the PNG market with non-EU purse seining firms.

Given zero direct interaction between the Spanish fleet and PNG, there is little likelihood of the
derogation impacting on the current operations of the EU DWF in the medium term. However, in the
case where European fishing firms wanted to expand their operations to the PNG EEZ, they may
encounter enhanced competition for fisheries access and the PNG market for tuna raw material may
already be sufficiently supplied by fishing firms that have onshore investments.

EU-based processors and their canned tuna markets

Since PNG processors have only sourced very minor volumes of raw material under the derogation in
2011, the derogation has not had a discernable impact on EU markets. In any case, PNG canned tuna
exports have not penetrated the most important markets of EU-based producers (i.e. Spain and



Italy), largely since the types of canned tuna products currently processed in PNG (i.e. basic skipjack
in vegetable oil or brine in 180 g packs) do not interact substantially with the types produced within
Italy and Spain for their major markets of Italy and Spain (i.e. high quality yellowfin in olive oil in
small packs). Given that Philippines-based processors are the principal source of investment in PNG,
and that these companies have not penetrated the Italian or Spanish markets in their three decades
of operations in the Philippines either, it is highly unlikely that this will change in the far more
challenging business environment of PNG.

It seems that the most important immediate strategic concern of EU-based processors is that global
sourcing will be treated as a precedent rather than as an exemption and be offered to other trading
partners, such as in free trade agreement negotiations with major canned tuna processors in ASEAN.

In the medium-term, without the purchase of a major brand, PNG’s lack of direct penetration of
Italian and Spanish markets is very unlikely to change. If there are plans for intra-EU growth by
Spanish non-branded exporters, they may deepen interactions with PNG exports, possibly in the
French market. However, Italy- and Spain-based processors may develop a symbiosis with PNG
through the increased import of loins.

Third countries and their EU canned tuna markets

Thailand, Philippines, Ecuador, Mauritius and Seychelles have consistently been leading third country
suppliers of canned tuna and cooked loins to the EU market throughout the last decade. To date,
PNG’s RoO derogation has not had any direct impact on third country exports to the extra-EU
market, given the derogation has barely been utilised. Similarly, the derogation cannot explain shifts
in PNG’s share of EU markets for canned tuna and tuna loins. Neither the data for relative PNG
share of the EU canned tuna market, nor that for the loin market show any discernable trends in the
‘post-derogation’ period (March 2008-2011).

For extra-EU imports of canned tuna, the top-5 third countries have dominated the market for the 7
year period running up to the derogation (2001-06) and afterwards. PNG has remained a relatively
insignificant player throughout. In fact, PNG’s largest recorded volume share of the extra-EU canned
tuna import market was before the derogation (i.e. 4.5%. in 2005). The market share of the leading
third country supplier in that year (Ecuador) was 3.4 times higher than PNG’s. For PNG volume share
of the extra-EU import market for tuna loins there was a minor increase in the post-derogation
period when it hit a new height of 2.4% in 2010, but there is no discernable trend in the data. This
share is, however, insignificant compared to that of the top-3 leading third country suppliers in 2010
(i.e. Ecuador with 35.6%, Mauritius with 12.0%, and Thailand with 11.6%).

Raw material diversion of tuna catch in the WCPO from third country processors relying on this
supply to PNG-based processors is one potential impact on third country suppliers identified for the
medium term. By 2016, PNG processors may require an additional 120,000 mt of raw material. The
main third countries that will likely be impacted will be processors in Thailand, Philippines, Vietnam
and China. There are no likely raw material diversion impacts on EU-based processors, or other IEPA
(i.e. Indian Ocean based processors) and GSP+ (i.e. Latin American) third countries.

Trade diversion of finished product, where increased PNG exports of duty free canned tuna and tuna
loins to the EU market will displace market share of existing exporters, has been identified as
another potential impact on third country tuna processors.

If the EU market remains relatively stagnant, by 2016 PNG could capture up to 14.0% share of the
extra-EU import market for canned tuna (from 4.3% in 2010), potentially exporting around 56,700



mt by 2016. Alternatively, if the extra-EU canned tuna import market returns to growth, PNG could
capture up to 12.6% share of a mildly expanding extra-EU import market for canned tuna. Under
both of these scenarios, potential PNG share of the extra-EU canned tuna import market is
significantly less than that of Thailand and Ecuador, the two largest third country suppliers in recent
years. The trade diversionary effect would be minor, and would not serve to destabilise the EU
market. Two sets of companies in third companies could be potentially impacted: i) non-branded
Asian-Pacific processors targeting similar markets as PNG (e.g. Germany, the UK and the
Netherlands) that are also reliant on the WCPO for raw material (i.e. Philippines, Vietnam, China and
smaller players in Thailand); and ii) Others: specialised non-branded processors in a weak tuna
supply position (e.g. poor location, without vertically-integrated fleets,) and without ownership by
EU firms (i.e. that are not tied-in to EU markets through EU firms who have an interest in the
commercial survival of their overseas cannery investments).

In the case of tuna loins, should the EU market experience continued growth, based upon projected
PNG exports to the EU in 2016 of 29,200mt, PNG could capture up to 15.4% share of the extra-EU
import market for tuna loins. Under this scenario, Ecuador’s 2010 market share is more than double
that of Papua New Guinea’s projected share in 2016. In short, expansion of PNG’s exports to the EU
(and the contributing role that the derogation plays in this) will not have a market destabilising
effect. Moreover, given that the EU market for loins could increase by an estimated 54,600 mt
between 2010 and 2016 (from 104,400 mt in 2010 to 159,000 mt in 2016) and that PNG’s projected
exports in 2016 are 29,200 mt, existing third country suppliers will also still have room to grow.



1 INTRODUCTION

1.1 Background

Since the mid 1970’s, former European Union (EU) colonies in the African, Caribbean and Pacific
regions (ACP) have enjoyed preferential market access for exports to the EU under the Lomé
Convention, and more recently, the Cotonou Agreement. The EU’s primary stated rationale for
offering preferential market access to ACP countries has been to boost ACP industry competitiveness
and promote development. Under the Lomé/Cotonou preference, Pacific Island Countries (PICs)
benefit from duty free access for processed tuna products (cans/loins), while competing exports are
subject to an EU 24% most-favoured nation (MFN) tariff.

To comply with WTO requirements, former non-reciprocal trade agreements between the EU and
ACP are being reformulated under a series of reciprocal Economic Partnership Agreements (EPAs).
Regional negotiations between the EC and the 14 Pacific ACP States (PACPs) commenced in 2004
and fisheries issues have been a critical component. From the outset, the principle fisheries-related
demands of PACPs in negotiations have been ongoing preferential market access for fisheries
products (particularly tuna), and relaxed rules of origin (RoO) that deems fish to be originating
regardless of where the fish is caught or vessel ownership, if substantially transformed (processed)
in a PACP-based processing facility prior to export.

In 2007, PACPs were successful in negotiating a special derogation to the standard RoO (referred to
as ‘global sourcing’) for processed fish (HS Chapters 1604 and 1605, covering canned tuna and
cooked loins) which permits PACPs to source fish from any vessel regardless of flag or where it was
caught, provided it has been ‘substantially transformed’ by a PACP-based processing facility. This
derogation means that PACPs are able to source qualifying fish from a much wider range of vessels
for onshore processing than under previous Cotonou Agreement rules of origin. The objective of the
RoO derogation for processed fishery products is to support the development of onshore processing
capacity for fish (notably tuna) products in the Pacific States, in order to create local employment (in
particular for women) and income. For the EC this was a one-off and specific exception offered
exclusively to PACPs because of their historical lack of ‘compliant’ fish under the prior RoO due to
limited fishing capacity of PACP fishing fleets, reduced processing capability due to physical and
economic factors, geographical isolation and distance from the EU market, as well as a low identified
risk of destabilising the EU market.

EC-PACP negotiations have been complex and drawn out, resulting in an inability to conclude a
comprehensive EPA by the end-2007 deadline. Papua New Guinea (PNG) and Fiji signed an interim
EPA in November 2007 to ensure uninterrupted preferential market access into the EU from 1
January 2008.

On 13 March 2008, PNG submitted a notification to the EU for use of the derogation for processed
fishery products. According to Protocol II (Article 6) of the PACP Interim Economic Partnership
Agreement text, a report on the implementation of the RoO derogation must be drawn up no later
than three years after notification has been lodged by a PACP to utilise the derogation.

In meeting the review requirements under Protocol II, this report on the ‘implementation of the
derogation to the standard rules of origin granted to the Pacific ACP States in the framework of the
Interim Economic Partnership Agreement’ was commissioned by the European Commission’s
Directorate-General for Trade (DG TRADE) for completion by December 2011.



In accordance with Protocol ll, Article 6.6 (c), (d), (e) of the PACP-Interim EPA and the project Terms
of Reference (Appendix 1), the report considers:
 Development effects on PNG economy – long-term income and employment generation;
 Effective conservation and sustainable management of fishing resources (including
compliance with sanitary and phytosanitary (SPS) regulations and support for combating
illegal, unregulated and unreported (IUU) fishing in the Western and Central Pacific Ocean
(WCPO)); and
 Impacts on the EU canned tuna market and EU fishing and canned tuna processing industry.

On the basis of this report, the EU and PNG will hold consultations in 2012 on the utilisation of the
derogation, taking into account in particular its development effects and the effective conservation
and sustainable management of the resources.

1.2 Methodology

This review has been undertaken in accordance with the methodology specified in the Terms of
Reference (TOR) and has involved a review of existing literature, desktop research, stakeholder
consultations and evidence-based analysis.

The review was conducted from July – December 2011 and consisted of three phases:
i) Phase l (18 – 29 July):
 Brussels - 1 week; client inception meeting; multi-stakeholder consultation, bilateral
consultations.
 Spain - 4 days; bilateral consultations - industry, government.

ii) Phase ll (8 Aug – 4 Nov):
 FSM consultation - 1 week; Western and Central Pacific Fisheries Commission (WCPFC).
 PNG consultation - 3 weeks; National Fisheries Authority (NFA), other government
departments, industry representatives, non-government organisations (NGOs), international
organisations.
 Evidence-based analysis and report preparation.
 PNG De-briefing - i) NFA/EC; ii) wider stakeholders.

iii) Phase lll (7 Nov – 31 Dec):
 De-briefing Brussels - EC (DG Trade, DG Mare, DG Sanco, European External Action Service
(EEAS)).
 Finalise draft report – submit to EC and NFA for review.
 Client review of draft report – 21 days.
 Report finalisation – 14 days; submission end December.

An extensive review of literature was conducted to complement the consultants’ existing knowledge
and establish a strong foundation for the study, since considerable information and data already
exists in the public domain. This enabled the consultants to maximize the time available in face-to-



face meetings with relevant stakeholders to focus on issues that are not sufficiently addressed in the
public domain, are not easily understood or are of a sensitive nature.

Desk top research included a review of reports/documents (e.g. public sector, private sector, grey
literature, academic literature), media releases, company profiles, data and official statistics (e.g.
vessel catch and effort data, vessel registries, trade statistics, market information), internet sites and
other sources in the public domain.

The study involved face-to-face consultation with key stakeholders in the EU (Belgium and Spain),
PNG and Federated States of Micronesia (FSM). Written submissions were also received from three
EU stakeholders (see Section 1.3).

Using relevant literature sources, data, information gathered from key stakeholders and the
consultants’ own knowledge and industry contacts, an evidence-based analysis was conducted.

In assessing the impacts of the RoO derogation, three timeframe scenarios were considered:
 Pre-derogation: 2006-2007
 Post-derogation (first three years following notification): March 2008-2011
 Post-derogation (future five-year projection): 2012-2016

In terms of future projections of potential development of PNG’s tuna processing industry, a
maximum period of five years was considered, as both the client and the consultants’ were of the
view that projections any further than five years out could not be made with any certainty.

While the objective of the review was to specifically analyse the impacts of the global sourcing
derogation, in each section of this report discussion goes well beyond this, where issues which were
either in existence prior to the derogation and/or have little relation to global sourcing have been
included for the purpose of providing context.

1.3 Stakeholder consultation

The study involved extensive consultation with key stakeholders in the EU (Belgium and Spain), PNG
and FSM. Table 1.1 presents a list of organisations that were consulted including relevant
government agencies, tuna fishing and processing operators, international and regional
organisations, non-government organisations and civil society representatives. Follow-up was
conducted via email/telephone with selected stakeholders (particularly industry representatives)
with additional information and data requests to support evidence-based analysis (see Appendix 2
for the list of persons consulted).

Discussions held with EU stakeholders centred largely around their respective positions on PNG’s
global sourcing derogation. The positions raised were general in nature (with little empirical
supporting information) and centred on issues including the potential impact of the derogation on
the EU market, and EU fishing and processing industries, as well as industries in other ACP and GSP+
countries; the impact on the WCPO tuna resource, including the potential for IUU fishing and SPS
infractions; and social issues relating to PNG’s processing facilities. Positions were presented during
the multi-stakeholder consultation and bilateral meetings held in Brussels and Spain (18-29 July), as
well as via written positions submitted to the consultants by three EU-based organisations.



In contrast, consultation held with PNG stakeholders (12-30 September) was for the specific purpose
of collecting detailed information and data to underpin evidence-based analysis of the impact of the
derogation in PNG, rather than more general positions concerning the strengths/risks of global
sourcing.


Table 1.1 List of stakeholder organisations consulted

Country Location Stakeholder Group/Company Details
Belgium Brussels EC / EEAS European Commission - Client
DG Trade European Commission - Client & Task Manager
EU Parliament - Committee on Fisheries
DG Mare European Commission
DG Sanco European Commission
EU fishing/canning industry OPAGAC, ANFACO, ANABAC, Eurothon, Pole Mer, Frucom
Diplomatic Missions PNG, Fiji, Thailand, Philippines
NGO's WWF, CFFA-CAPE, EBCD
Spain Vigo ANFACO Industry association - Spanish Canned Tuna Processors
Vigo Eurothon Industry association - European Tuna Fishers/Processors
Madrid OPAGAC + CEPESCA Producer organisation - Purse seine vessel owners
Madrid ANABAC Producer organisation - Purse seine vessel owners
Madrid Ministry of Fisheries Government Agency – Fisheries
Madrid Ministry of Industry, Tourism & Trade Government Agency – Trade
FSM Pohnpei Western and Central Pacific Fisheries Commission Regional Fisheries Management Organisation
Secretariat of the Pacific Community WCPFC Science Provider
PNG Port Moresby EC Delegation to PNG
National Fisheries Authority Government Fisheries Agency
Investment Promotion Authority Government Agency - Foreign Investment
Department of Commerce & Industry Government Agency - PMIZ Project Coordination
Department of Environment & Conservation Government Agency – Environment
Department of Labour & Industrial Relations Government Agency – Labour
World Bank/International Finance Corporation Support for PMIZ/Special Economic Zone development
Halisheng Corporation Tuna fishing/processing company - new development
Fairwell Investment Tuna fishing company - partner in Niugini Tuna development
World Wildlife Fund Environmental NGO
Lae Frabelle Fishing Corporation Tuna fishing and processing company - established (2006)
Majestic Seafood Corporation Tuna fishing/processing company - new development
International Fisheries Corporation Mackerel processors - existing, expanding into canned tuna
Madang RD Tuna Canners Tuna fishing and processing company - established (1997)
Niugini Tuna Tuna fishing/processing company - new development
PNG Fisheries Industry Association PNG tuna fishing/processing industry association
Bismarck Ramu Group NGO
Nancy Sullivan Social Anthropologist
Wewak South Seas Tuna Corporation Tuna fishing and processing company - established (2003)



2 RULES OF ORIGIN DEFINED

2.1 What are preferential rules of origin?

Rules of origin (RoO) are contained within all preferential and free trade arrangements and govern
whether or not a product is eligible for tariff preferences that are provided in a given trade
arrangement. RoO in preferential trade arrangements are designed to serve two purposes. The first is
to ensure that the economic activity associated with goods exported under the terms of the trade
preference is undertaken in the preference receiving country. By specifying the origin of inputs or the
amount of transformation required these rules reduce trade deflection (i.e. commercial interests in a
third country transhipping product through the preference receiving country). The result is that the
benefits of preferential trade are not conferred on non-signatories.

In practice, rules of origin (RoO) also serve an important second purpose. They protect and/or promote
economic interests based in the preference giving country by targeting the input composition of imports
or acting as a non-tariff barrier to trade. 1 According to a RoO specialist at UNCTAD, ‘today’s rules of
origin are used as, or simply are, instruments of commercial policy’. 2 This second purpose can have the
effect of limiting the potential developmental benefits of a commercially significant trade preference. 3

2.1 EU rules of origin for fish and fish products

EU rules of origin for fish are based upon ‘wholly obtained’ criteria. Under (Interim) EPAs and under the
EU’s current Generalized System of Preferences (GSP) regime, 4 the wholly obtained criteria for fish and
fish products are that:
 All fish is automatically wholly obtained and therefore considered as originating based upon the
location of catch for fisheries based inland and within territorial seas (12 miles from the coast). 5
This can also include fish caught in a country’s archipelagic waters where the proper
international legal procedures have been followed through the United Nations. 6
 Origination is determined by the ‘nationality’ of the boat for fish caught at any point outside the
territorial seas of signatories (i.e. in exclusive economic zones and the in high seas). The
nationality of the boat is determined by: a) the boat being flagged and registered by one of the

1
Falvey and Reed 2002; Gibbon 2008; Hoekman 1993; Krueger 1997.
2
Inama 1995: 109.
3
Alavi et al. 2007; Brenton 2003; Brenton and Manchin 2003; Brenton et al. 2008: 7-8; Mattoo et al. 2003.
4
The three pillars of the EU’s GSP regime are: a) the standard GSP (available to almost all developing countries); b)
the GSP+ (available to countries categorised as ‘vulnerable’ and having ratified and implemented 27 conventions
on the environment, good governance and human rights); and, c) ‘Everything But Arms’ (available only to least
developed countries, as recognised and categorised by the United Nations) (Council Regulation (EC) No 980/2005;
Council Regulation (EC) No 732/2008; Commission Regulation (EU) No 1063/2010).
5
Territorial seas as defined under UNCLOS (1982), Part II, Section II, Article 3.
6
For example, Papua New Guinea obtained a redefinition of its ‘territorial sea’ to incorporate the sea surrounding
its entire archipelago. To receive this status under UNCLOS (1982) Part IV, Articles 47-50, a country declares the
waters sovereign and submits the claim to the Division of Oceans and Law of the Sea at the UN (a collection house
for declarations). If there is no dispute, the declaration becomes law. Before PNG’s application, no other state had
made use of archipelagic waters in relation to EU RoO.



parties to the agreement; and, b) being at least 50% owned either by nationals of parties to the
agreement or by a company based in one of the parties to the agreement. 7

Due to the specific nature of fish, the 'wholly obtained' approach is the basis of all EU preferential rules
of origin for fishery products in international preferential trade arrangements, including in the Cotonou
Partnership Agreement (and the Lomé Conventions before it) .

The main change in defining ‘wholly obtained’ fish in the (Interim) EPAs and the current GSP compared
to Lomé/ Cotonou and prior GSP RoO is the full deletion of a requirement for a vessel’s crew to consist
of 50% nationals of the parties to the agreement (75% for the prior GSP RoO). 8 EU industry had pushed
for this deletion as it would give ‘the EU fleet greater flexibility without compromising any of the other
benefits of the current RoO’. 9

The EU tuna fishing industry maintains that the RoO contributes to off-setting its higher cost structure
compared to less heavily regulated competitors, especially in the realm of ‘social and environmental
conditions’. 10 From the perspective of preference-receiving trading partners, such as the ACP group, EU
fisheries rules of origin have long been perceived as a source of contention due to their restrictiveness. 11

2.2 The ‘global sourcing’ rule of origin under the PACP-EU Interim EPA

The ‘global sourcing’ rule of origin permits PACP signatories to the Interim EPA to source fish from any
vessel regardless of flag or where it was caught, provided it has been ‘substantially transformed’ by a
PACP-based processing facility. 12 This provision means that PACPs are able to source qualifying fish from
a much wider range of vessels for onshore processing than under previous Cotonou Agreement rules of
origin.

After several years of negotiations, the EU and the Pacific ACP agreed to the terms of an Interim EPA in
November 2007, which deals solely with the trade in goods. Only Papua New Guinea and Fiji initialled
the Agreement and both have since signed it (in July and December 2009 respectively). Fiji has not yet
applied the Interim EPA or notified its intention to utilise global sourcing. For PNG, the continuation of
uninterrupted preferential access to the EU market for palm oil and canned tuna were major
motivations behind its initialling of the IEPA.

From the perspective of the Pacific parties, achieving a relaxation of the rules of origin for fish was a
primary objective in the negotiations. The rationales for this objective were recorded in the text of the
PACP-EU IEPA (2010):

7
This is a simplification of complex legal text. More detailed comparative accounts of fisheries RoO under Cotonou
and under (Interim) EPAs can be found in Campling (2008) and Naumann (2010).
8
Compare (Interim) EPA RoO protocols with CPA, Annexes 5 and 17; and Commission Regulation (EEC) No 2454/93
with Commission Regulation (EU) No 1063/2010.
9
Oceanic Développement-Megapesca 2007: 52.
10
FITAG-Anfaco 2011: 2; Murias 2011a; Estudios Biologicos 2006.
11
Commission for Africa 2005: 55-56; Cosgrove Twitchett 1981: 111; Davenport et al. 1995: 33, 61; Ravenhill 1985:
167-171; Stevens and Weston 1984: 55.
12
See Box 1 for full reproduction of the relevant article in the PACP-EU IEPA.



The Parties recognise that since the Lomé Convention was signed in 1976, Pacific States
have not been able to develop an adequate national fleet respecting the vessel
conditions of Article 5.2 of the present Protocol II [i.e. on ‘wholly obtained’ fish]. The
Parties also recognise the special circumstances of the Pacific States encompassing the
insufficient wholly-obtained fish to meet on-land demand, the very limited fishing
capacity of the Pacific States’ fishing fleet, the reduced processing capability due to
physical and economic factors, the low risk of destabilising the EU market due to large
inflows of fishery products from the Pacific States, the geographical isolation of the
Pacific States as well as the distance to the EU market. The Parties also share the final
goal of promoting further development in the Pacific States while promoting
sustainable fisheries and good fisheries governance. (Protocol II, Article 6.6(a).)

In other words, the negotiated text of the PACP-EU IEPA explicitly recognised that prior EU RoO had
limited the developmental potential of commercially significant trade preferences for processed fish
products due to ‘insufficient wholly-obtained fish’.

For the EU this was a one-off exception offered exclusively to PACPs because of their historical lack of
originating fish under Cotonou RoO. Global sourcing is ‘a specific relaxation’ for the PACP and ‘cannot be
taken as a precedent in other negotiations’ (DG Trade 2007a: 3; see also DG Trade, 2007b: 15). A letter
by Trade Commissioner Peter Mandelson to Cook Islands Minister of Foreign Affairs Wilkie Rasmussen
reiterates this position. In the letter, Mandelson noted that, in offering global sourcing fisheries RoO,
‘we did so specifically and only for the Pacific, in response to what you [the PACP] said was a decisive
issue’ (Mandelson 2008; see also, EUROTHON 2011a: 2-3).

Popularly referred to as ‘global sourcing’ this negotiated outcome of the PACP-EU Interim EPA is more
technically understood as an application of the Change in Tariff Classification (CTC) method. That is,
goods are deemed to be originating if they are transformed in a signatory PACP country from one
heading of the Harmonised System (HS) of tariff classification (in this case fresh and frozen fish under
Chapter 3, especially tuna) to another heading (in this case processed fish products, especially canned
tuna and tuna ‘loins’ for reprocessing as canned tuna under Chapter 16). 13 The text establishing the
‘global sourcing’ derogation is reproduced in full as follows:
6. (b) The Parties recognise the enormous importance of fisheries to the people of the
Pacific States and that the fish, for example tuna in the Western and Central Pacific
Ocean is the most important shared natural resource for long-term income and
employment generation for the Pacific States. This shared fisheries resource in the
waters of the Pacific States is subject to various management regimes at regional, sub-
regional and national levels, including the Vessel Day Scheme aiming at regional
sustainable tuna purse seine fisheries. These activities are subject to monitoring within

13
It is important to specify the type of tuna ‘loins’ under consideration here. Pre-cooked, vacuum-packed frozen
skipjack and yellowfin tuna loins are filed under Chapter 16 of the World Customs Organisation Harmonised
System and transposed to the EU Combined Nomenclature (Commission Regulation (EU) No 861/2010). This type
of loin is used by canning operations, including by EU processors, for defrosting and inserting into the canned tuna
production process (HS codes 1604 1416 and 1604 1931). This product is distinct from fresh-chilled vacuum packed
tuna loins which are filed as ‘fillets’ under Chapter 3 (0304). This product type is imported to be cut into fillets or
steaks for sale on supermarket fish counters, retailed as pre-packed portions of fresh-chilled or frozen product, or
are used in restaurants.



the framework of the Western and Central Pacific Fisheries Commission, including the
Vessel Monitoring System and Observer Programmes. In this context, the Parties agree
that notwithstanding paragraph 1, when circumstances are such that wholly obtained
products as defined in Article 5 paragraphs 1(f) and 1(g) cannot be sufficiently utilised
to satisfy the on-land demand and following the prior notification to the European
Commission by a Pacific State, processed fishery products of headings 1604 and 1605
manufactured in on-land premises in that State from non-originating materials of
Chapter 03 that have been landed in a port of that State shall be considered as
sufficiently worked or processed for the purposes of Article 2. The notification to the
European Commission shall indicate the reasons why the application of this paragraph
will stimulate the development of the fisheries sector in that State, and shall include
the necessary information about the species concerned, the products to be
manufactured as well as an indication of the respective quantities to be involved.
(Protocol II, Article 6.6(b). Emphases added.)

Two points from this text are worth re-emphasising here. First, the rule was worded as a one-off
exemption applied to the Pacific islands (as already emphasised in the wording of the text of Article
6.6(a)). Second, this text and the ‘review clause’ (see below) details the principal objective of the
derogation – ‘long-term income and employment generation for Pacific States’ (see also, Commission
Staff Working Document 2007: 15).

The term ‘global sourcing’ can be misleading. While in terms of preferential origin the derogation is
global if compared to standard EU origin rules, this does not permit PACP signatories unmitigated
sourcing of tuna or other fish species on a global scale. The supply of fish is subject to strict EU sanitary
and phytosanitary (SPS) measures and the EU regulation on the import of IUU fish and fish products.
Both conditions are specified in Article 6.6(e) of Protocol II.

Another conditionality in the derogation is that ‘[a] report on the implementation of Article 6.6(b) shall
be drawn up no later than three years after the notification’ to the European Commission (Article 6.6(c)
and (f)). PNG sent a notification to the European Commission on 13 March 2008. This report was
commissioned to fulfil the requirement of Article 6.6(c). 14 In so doing, it provides the first step in the
process of the derogation’s ‘review clause’. The review clause specifies that:
On the basis of this report, the European Community and the requesting Pacific State
shall hold consultations on the utilisation of subparagraph (b), taking into account in
particular its development effects and the effective conservation and sustainable
management of the resources and, if appropriate, amend it. (Protocol II, Article 6.6(d).
Emphasis added)
The review clause thus specifies the two central elements to be considered in this report: the
derogation’s overarching objective of generating ‘development effects’ (defined as ‘long-term income
and employment generation’ as per Article 6.6(b) above) and the principal conditionality of ‘the
effective conservation and sustainable management of the resources’ (Article 6.6(d)). A third
component of this report takes seriously the en passant mention in Article 6.6(a) on ‘the low risk of
destabilising the EU market due to large inflows of fishery products from the Pacific States’ (see above).

14
See Appendix 1 for the full terms of reference for this study.



Box 1: Text of the PACP-EU Interim EPA on ‘global sourcing’, Protocol II, Article 6 (6)

6. (a) The Parties recognise that since the Lomé Convention was signed in 1976, Pacific States have
not been able to develop an adequate national fleet respecting the vessel conditions of Article 5.2
of the present Protocol II. The Parties also recognise the special circumstances of the Pacific States
encompassing the insufficient wholly-obtained fish to meet on-land demand, the very limited
fishing capacity of the Pacific States’ fishing fleet, the reduced processing capability due to
physical and economic factors, the low risk of destabilising the EU market due to large inflows of
fishery products from the Pacific States, the geographical isolation of the Pacific States as well as
the distance to the EU market. The Parties also share the final goal of promoting further
development in the Pacific States while promoting sustainable fisheries and good fisheries
governance.

6. (b) The Parties recognise the enormous importance of fisheries to the people of the Pacific
States and that the fish, for example tuna in the Western and Central Pacific Ocean is the most
important shared natural resource for long-term income and employment generation for the
Pacific States. This shared fisheries resource in the waters of the Pacific States is subject to various
management regimes at regional, sub-regional and national levels, including the Vessel Day
Scheme aiming at regional sustainable tuna purse seine fisheries. These activities are subject to
monitoring within the framework of the Western and Central Pacific Fisheries Commission,
including the Vessel Monitoring System and Observer Programmes. In this context, the Parties
agree that notwithstanding paragraph 1, when circumstances are such that wholly obtained
products as defined in Article 5 paragraphs 1(f) and 1(g) cannot be sufficiently utilised to satisfy
the on-land demand and following the prior notification to the European Commission by a Pacific
State, processed fishery products of headings 1604 and 1605 manufactured in on-land premises in
that State from non-originating materials of Chapter 03 that have been landed in a port of that
State shall be considered as sufficiently worked or processed for the purposes of Article 2. The
notification to the European Commission shall indicate the reasons why the application of this
paragraph will stimulate the development of the fisheries sector in that State, and shall include
the necessary information about the species concerned, the products to be manufactured as well
as an indication of the respective quantities to be involved.

(c) A report on the implementation of subparagraph (b) shall be drawn up no later than three
years after the notification.

(d) On the basis of this report, the European Community and the requesting Pacific State shall
hold consultations on the utilisation of subparagraph (b), taking into account in particular its
development effects and the effective conservation and sustainable management of the resources
and, if appropriate, amend it.

(e) Subparagraph (b) shall apply without prejudice to sanitary and phytosanitary measures in
force in the EU, effective conservation and sustainable management of fishing resources and
support to combat illegal, unreported and unregulated fishing activities in the region.

(f) The provisions of this paragraph shall be applicable to imports from a Pacific State from the
first day after the publication in the Official Journal of the European Union of a notice informing
that the State concerned has made a notification to the European Commission in accordance with
subparagraph (b).



3 PNG CANNED TUNA INDUSTRY

3.1 PNG Tuna Fishing Fleet

With a large exclusive economic zone (EEZ) 2,437,480 km2 in extent, and centrally located in the most
productive part of the western Pacific Ocean, PNG has become a tuna producer of global significance.
The annual catch in the PNG EEZ by the purse seine fleets which account for the majority of the tuna
catch (> 99%) 15 has been around 500,000 mt in most recent years, representing ~ 11% of the global
catch and 20% of the catch within the Western and Central Pacific Ocean (WCPO) in 2009. 16 PNG also
has extensive archipelagic waters (640,000 km2 – 26% of the total EEZ area) which it declared as
sovereign territory, along with territorial seas, under UNCLOS procedures, and has been law since 2004.
PNG was the first country to make use of this provision in relation to EU Rules of Origin (RoO). 17

The total purse seine fleet is a mix of PNG-flagged vessels, locally-based foreign (or chartered) vessels
which are linked to onshore development/processing through concessional access, and foreign fishing
vessels operating in PNG waters (but outside archipelagic waters) under bilateral access agreements. 18
The first two categories are considered to be under the competency of PNG, and hence, are generally
labelled the ‘PNG fleet’. Table 3.1 lists the number of vessels licensed in 2008 (pre-derogation) and
currently (2011). Certain foreign vessels have been permitted to fish within archipelagic waters on the
condition that fish is unloaded to onshore processing facilities (see later).

Table 3.1 Vessels licensed to fish in PNG by flag and permitted operating area - 2008, 2011
Vessel numbers
Category Flag Fishing area permitted as condition of licence
2008 2011
Domestica PNG 9 12 All waters outside 12nm of land, island, reef
(archipelagic and EEZ)
Locally- based Philippines (20), China (2), 33 39 Small-medium vessels <600 MT capacity -
foreign Taiwan (4), Vanuatu (13) archipelagic and EEZ waters but outside 12nm
(chartered)a Large vessels (>1,000 GT) 19 - EEZ waters only (i.e.
outside 12nm and archipelagic waters )
Foreign China, FSMA+, Japan, 128 (176)b EEZ waters (outside 12nm and outside
Korea, Philippines, Taiwan, archipelagic waters)
USMLT+, Vanuatu, other
a
Classified as ‘PNG fleet’
b
2010 figures - 2011 figures not available; other 2011 figures from NFA Licensing Database
+
FSMA = Federated States of Micronesia (FSM) Arrangement, USMLT = US Multilateral Tuna Treaty

15
There is a domestic longline catch of 2,000-4,000 mt in most years, plus small catches by handline vessels
(pumpboats); there has been no domestic pole-and-line fleet operating in PNG since 1985, and the Japanese
distant water pole and line fleet does not have access to PNG waters.
16
Usu 2011 (Table 2).
17
Campling 2008.
18
Exceptions to this are vessels fishing under the US Multilateral Treaty and the FSM Arrangement (FSMA)
amongst PNA members, which are licensed to fish both within PNG’s EEZ and beyond, in the EEZs of the seven
other PNA members (i.e. Solomon Islands, Nauru, Federated States of Micronesia, Marshall Islands, Kiribati,
Tuvalu, Palau).
19
Super seiners of two companies – size not defined but > 1,000 GT in most cases; small-medium vessels with well
capacity < 600 GT are permitted to tranship at sea, usually in archipelagic waters.


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