Assessing Prospective Trade Policy : Methods Applied to EU-ACP Economic Partnership Agreements [1 ed.] 9780203842959, 9780415554039

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Assessing Prospective Trade Policy

The European Union (EU) has provided trade preferences to the African, Caribbean and Pacific (ACP) countries since 1975. To maintain these preferences, a series of economic partnership agreements (EPAs) between the EU and regional groupings of ACP countries are being agreed, (negotiations started around 2003 and many framework agreements have been signed). As multilateral negotiations within the World Trade Organisation have stalled, EPAs are currently the single most important policy issue for ACP trade. This volume assesses EPAs and the potential impact on ACP countries, provides guidance for ACP negotiators in future negotiations and introduces methods to analyse the impact of future trade reforms. The essential features are that ACP countries commit to remove tariffs on substantially all imports from the EU and the EU offers improved market access to ACP exporters. For ACP countries the major impacts will be increased imports from the EU, hence a loss of tariff revenue and increased competition from imports in domestic and regional markets, implying significant adjustment costs, which may be offset by some increases in exports to the EU. This collection excellently outlines a variety of analytical methods that can be used to assess the potential economic effects of trade policy reforms, shows how these can be applied to EPAs and derives implications for the issues that should be addressed in negotiating the details of agreements. This valuable contribution offers a balanced assessment of the issues and should be essential reading for postgraduates and researchers focussing on Development Economics. Furthermore, the book is written in an accessible style and should be an excellent resource for trade negotiators and government officials concerned with trade relations, as well as officials in the European Commission, individual countries (ACP, Commonwealth, EU) and in multilateral organizations (WTO, UNECA, World Bank, UNCTAD). Oliver Morrissey is Professor in Development Economics and Director of CREDIT, School of Economics, University of Nottingham, UK.

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Assessing Prospective Trade Policy

Methods applied to EU–ACP economic partnership agreements Edited by Oliver Morrissey

First published 2011 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Avenue, New York, NY 10016 Routledge is an imprint of the Taylor & Francis Group, an informa business This edition published in the Taylor & Francis e-Library, 2010. To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk. © 2011 Selection and editorial matter; Oliver Morrissey, individual chapters; the contributors All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Assessing prospective trade policy: methods applied to EU-­ACP economic partnership agreements/edited by Oliver Morrissey. p. cm. Includes bibliographical references and index. 1. European Union countries–Commercial policy. 2. Africa–Commercial policy. 3. Pacific Area–Commercial policy. 4. European Union countries– Commerce–Africa. 5. European Union countries–Commerce–Pacific Area. 6. European Union countries–Commerce–Caribbean Area. I. Morrissey, Oliver. HF1531.A85 2010 382′.3094–dc22 ISBN 0-203-84295-2 Master e-book ISBN

ISBN: 978-0-415-55403-9 (hbk) ISBN: 978-0-203-84295-9 (ebk)

2010011385

Contents



Notes on contributors Acknowledgements List of acronyms

1

Introduction: EPAs and prospective trade policy analysis

xiii xiv xv 1

O liver M orrissey

2

Overview and comparative analysis of EPAs

14

M areike M eyn

3

The impact of EPAs on ACP imports and welfare

60

O liver M orrissey and E vious Z govu

4

Adjusting to an EPA: evidence for Mauritius

83

C hris M ilner , O liver M orrissey and E vious Z govu

5

Trade and poverty impacts for Uganda

105

O le B oysen and A lan M atthews

6

Trade and growth impacts for Kenya

132

J ane K iringai

7

Import response to tariff reductions in Africa

158

C hris J ones

8

Export performance of ACP countries in perspective

186

A ndrew M old and A nnalisa P rizzon

9

Economic Partnership Aagreements and food security A lan M atthews

203

xii   Contents 10 Conclusions: EPAs to promote ACP development

223

O liver M orrissey



Index

235

Contributors

Dr Ole Boysen, Institute for International Integration Studies and Department of Economics, Trinity College, Dublin, Ireland. Dr Chris Jones, Research Fellow, Economics and Strategy Group, Aston Business School, Aston University, UK. Dr Jane Kiringai, Economist, World Bank Office, Nairobi. Professor Alan Matthews, Institute for International Integration Studies and Department of Economics, Trinity College, Dublin, Ireland. Dr Mareike Meyn, Maghreb and Middle East Department, GFA Consulting Group GmbH, Hamburg, Germany. Professor Chris Milner, School of Economics, University of Nottingham, UK. Dr Andrew Mold, Senior Economist, Finance for Development Unit, OECD Development Centre, France. Professor Oliver Morrissey, School of Economics, University of Nottingham, UK. Dr Annalisa Prizzon, Finance for Development Unit, OECD Development Centre, France. Dr Evious Zgovu, Visiting Research Fellow in CREDIT, School of Economics, University of Nottingham, UK.

Acknowledgements

The Nottingham contingent in this volume (Chris Milner, Oliver Morrissey and Evious Zgovu) is grateful to the European Commission (EC) who, directly or indirectly, supported most of their original research on EPAs (on which Chapters 3, 4 and 10 are based). Milner and Morrissey were first commissioned by DG Trade to work on EU–ACP trade relations in the late 1990s, when economic partnership ideas were being developed and this stimulated their continued interest. The research for Chapter 3 was funded by the EC through a research project in the TRADEAG research programme in FP6 (www.tradeag.eu). Although the initial research on which Chapter 4 is based was conducted for the Government of Mauritius, it was financed by the EC. The discussion in Chapter 10 draws in part on a study for DG Trade on ‘The link between EU–ACP EPAs and institutional reforms’. Over a period of some ten years we have benefited from discussions with many officials in the EC, especially in DG Trade, on various aspects of EPAs. We have also benefited, it should be said, from discussions with trade officials in many ACP countries, especially in the Caribbean and Africa. The views expressed in these chapters are, however, those of the authors alone and should not be attributed to the EC or any of its staff, nor to any ACP countries.

Acronyms

ACP AFT AGOA AoA BLNS CAP CARICOM CARIFORUM CE CEMAC CET CGE COMESA DFQF DiD EAC EBA EC ECDPM ECOWAS EDF EPA EPZ ESA EU FDI FTA GATT GDP GNI GSP GSP+

Africa, Caribbean and Pacific Aid for Trade African Growth and Opportunity Act WTO Agreement on Agriculture Botswana, Lesotho, Namibia and Swaziland EU Common Agricultural Policy Caribbean Common Market Caribbean Forum consumption effects Communauté Économique des États d’Afrique Centrale common external tariff computable general equilibrium Common Market for Eastern and Southern Africa Duty Free Quota Free difference-­in-difference estimation East African Community Everything but Arms European Commission European Centre for Development Policy and Management Economic Community of West African States European Development Fund Economic Partnership Agreement Export Processing Zone Eastern and Southern Africa European Union foreign direct investment free trade agreement General Agreement on Tariffs and Trade Gross Domestic Product Gross National Income Generalised System of Preferences the special incentive arrangement for sustainable development and good governance (under the EU’s GSP)

xvi   Acronyms HS IEPA IMF KIPPRA Kshs LDC MFN NBER NTBs ODI OECD OLS PACP PICTA PNG QRs REER RIAs RoO ROW Rps SADC SAM SDT SP SPS SSA TBT TC TC&CE TD TD&CE TDCA UGS UN UNCTAD UNECA UNIDO UNHS WDI WTO

Harmonised System Interim Economic Partnership Agreement International Monetary Fund Kenya Institute for Public Policy Kenyan shillings Least Developed Country Most Favoured Nation National Bureau of Economic Research Non-­Tariff Barriers Overseas Development Institute Organization for Economic Cooperation and Development Ordinary Least Squares Pacific ACP Pacific Islands Countries Trade Agreement Papua New Guinea Quantitative Restrictions real effective exchange rate regional integration arrangements Rules of Origin rest of the world Rupees (Mauritius) Southern African Development Community social accounting matrix Special and Differential Treatment sensitive products Sanitary and Phytosanitary Standards Sub-­Saharan Africa Technical Barriers to Trade trade creation trade creation with consumption effects trade diversion trade diversion with consumption effects [EU–South Africa] Trade, Development and Cooperation Agreement Ugandan shillings United Nations UN Commission on Trade and Development UN Economic Commission for Africa UN Industrial Development Organization Uganda National Household Survey World Development Indicators World Trade Organization

1 Introduction EPAs and prospective trade policy analysis Oliver Morrissey

Trade is important to all economies. Increasing trade volumes and increased openness to trade has been an integral part of the globalization phenomenon over the past few decades, and most countries have a stated commitment to trade liberalization, if only in the terms of their commitments in the World Trade Organization (WTO). There may be disagreement about how much emphasis governments should place on liberalizing trade policies, and all countries have concerns about the impact of increased imports (at least for certain products). Nevertheless, exports, and export promotion policies, make a significant contribution to economic growth. Export growth is easier and more likely if other countries provide greater access to their markets, i.e. countries have to liberalize imports to facilitate global growth in exports. Trade relations are an integral part of international relations between countries. This volume is about one set of trade relations, between the European Union (EU) and the African, Caribbean and Pacific (ACP) countries. Specifically, the focus is on how the relationship is changing and what trade policy analysis can contribute to improving the design and features of the future trade relations. The EU has had preferential trade agreements with the ACP since the 1970s but these were not consistent with WTO rules, so, since 2002, the parties have been negotiating WTO-­compatible Economic Partnership Agreements (EPAs). These negotiations have been protracted and the final details have yet to be agreed. As the negotiations are continuing, concern in the analysis is with the effects of future reforms. Essentially this volume is concerned with prospective trade policy analysis, i.e. assessing the effects of what is going to happen rather than evaluating the impact of what has happened. When changes to trade policy are proposed, within a country or for relations between countries, how can analysis be helpful? The direct relevance is for policy-­makers as agreements have to be negotiated, so those with more analysis underpinning their position will have more influence. To paraphrase Piermartini and Teh (2005), those with better analysis (and hence the best numbers) will rule in the negotiations. The inherent difficulty in ana­ lysing proposed policy reforms is that one does not know what the actual effects are. Indeed, one may not even know with any certainty what the precise reforms will be (and the information provided by analysis informs the negotiations that determine the detail of final agreements). In practice, the analyst engages in

2   O. Morrissey informed guesswork: given the available information, begin by establishing a plausible or probable reform scenario, then simulate or estimate likely types of effects. There are various ways to conduct such an exercise, and the contributions to this volume cover a number of such approaches. The aim is to provide a flavour of the methods for prospective trade policy analysis so as to inform discussions and negotiations for the EU–ACP. There is no claim or intention to be comprehensive in the types of methods covered. For example, the ‘impact assessment’ approach is not covered (see George and Kirkpatrick, 2004, 2006; Lee and Kirkpatrick, 2006) nor are the details of trade models addressed (see, for example, Hertel, 1997). Furthermore, we do not consider potential effects on the EU (in large part because the European Commission has analytical capacity to address this). Rather, the aim is to provide analysis that relates to policy and negotiating concerns of ACP countries. In June 2000 the EU signed the Cotonou Agreement with 77 ACP countries to replace the Lomé conventions (at that time Lomé IV). The agreement established that from 2002 the EU would negotiate with regional ACP groups a set of EPAs originally intended to be effective in January 2008. The Cotonou framework of cooperation had three components (trade, development aid and a political dimension). The trade component is a preferential trade arrangement between the EU and the ACP states, giving WTO-­compatible preferential access to respective markets. Reciprocity in EPAs will be a clear shift from the previous non-­reciprocal arrangements under Lomé. The contributions here are largely limited to the trade component (other issues are mentioned in Chapter 10). At the time of the Cotonou Agreement ACP countries were aware that EPAs offer limited benefits, although the situation differed between least-­developed countries (LDCs) and non-­LDCs. The LDCs are entitled to essentially tariff-­free access to the EU without committing to reciprocity. The non-­LDCs, however, could lose their Lomé-type preferences and would be granted only Generalised Scheme of Preferences (GSP, although possibly enhanced) access if EPAs were not in place. This loss of preferences could undermine export competitiveness and damage major sectors dependent on exports to the EU, such as beef in Namibia and horticulture in Kenya (Stevens, 2007). Thus, non-­LDCs had a strong incentive to sign EPAs to maintain preferential access for their exports to the EU. EPAs represent an important case to study the dynamics of trade negotiations within ACP countries and regions and between the EU and ACP. These issues are elaborated in Chapter 2. The volume is innovative in providing broad coverage and assessment of EPAs across the full range of ACP countries, including estimates of trade and economic effects (comparing partial and general equilibrium methods), content and implementation of the agreements and discussion of specific issues (such as adjustment effects and food security). A specific feature of the volume is the intention to use EPAs to illustrate the application of methods for assessing the impact of trade policy reforms, i.e. a guiding theme is how to develop and apply impact assessment techniques to inform trade policy negotiations. Economic analysts do not know the details of agreements when trying to estimate possible

Introduction   3 impacts, yet negotiators and policy-­makers need guidance on potential effects to inform their negotiating position. This problem is faced by analysts of and parties to any (trade) policy negotiations, such as in the WTO, so there are broad lessons with general implications. EPAs provide a useful case to study because, in contrast to WTO negotiations for example, the broad parameters have been established relatively early in the process and future negotiations relate to details. Assessment is rendered somewhat easier if the core features of reforms are established so analysts can identify probable reform scenarios. A major concern of negotiators is to identify which products should be treated as sensitive (and hence excluded); by identifying products and sectors where effects are likely to be large, analysis can inform this part of negotiations. This brief introduction comprises three parts. Section 1.1 provides an overview of EU–ACP relations, especially trade preferences, and evidence on ACP experience with trade liberalization. Section 1.2 introduces the changes embodied in EPAs and how these relate to prospective trade policy analysis. Section 1.3 outlines the contribution of each chapter. There is no conclusion to this chapter; Chapter 10 provides an overall conclusion to the volume, combining the insights of each chapter and relating them to other concerns in EPAs.

1.1  EU–ACP trade relations and ACP trade performance The EU has had a preferential economic and political relationship with ACP since 1975 under successive Lomé conventions. The special relationship has been an important feature in economic policy and performance for the ACP (e.g. Guillaumont and Guillaumont, 1994), especially preferential access to the EU market and significant EU aid. However, the ‘political balance’ always favoured the EU: ACP was never granted the level of support and policy concessions requested so aid and trade agreements never fully reflected the needs of ACP countries (Brown, 2002). As the EU saw ACP countries as important suppliers of raw materials, and recognized the relevance of a colonial history, they were granted preferences not available to other developing countries. Although ACP would have liked greater preferences, what they received has been significant. Although much emphasis has been placed on the preferential access to the EU market, these trade preferences have been of limited value (Langhammer, 1992). This is not surprising as trade preferences in general have not provided significant benefits to developing countries (Hoekman et al., 2009; Milner et al., 2009), especially in Africa (Brenton and Ikezuki, 2005). One reason for the limited effect is the conditions under which preferences were granted (Ozden and Reinhardt, 2003), either restricting the products eligible for full preferences (often excluding products of particular benefit to developing countries) or, especially in the context of EU preferences for the ACP, imposing very restrictive Rules of Origin (RoO) requirements (thus limiting opportunities for diversification). This is related to the broader argument that the preferences reflected EU interests more than ACP needs (Brown, 2002). Another reason relates to policy-­induced distortions in the ACP countries, so that actual incentives for production

4   O. Morrissey diversification are weak, exacerbating the problem of a narrow production structure and primary commodity resource base (Milner et al., 2009). This is especially true for Africa (but applies more generally to ACP). In general, targeted preference schemes have been more effective in increasing developing country (and LDC) exports; there is evidence of positive trade effects from Lomé, the US African Growth and Opportunity Act (AGOA; Frazer and van Biesebroeck, 2007) and EU–Mediterranean agreements. As in the case of AGOA, the benefits of EU trade preferences (in particular to ACP countries) have been concentrated on a few beneficiaries (Milner et al., 2009). In the EU case the major benefits have been for Sugar Protocol countries (see discussion of Mauritius in Chapter 4) and banana producers (mostly Caribbean non-­LDCs). In the case of AGOA, the trade stimulus has been concentrated on countries such as South Africa, Lesotho, Madagascar, Mauritius and Kenya and products like coffee, tea, maté and spices, and knitted apparel. As EPAs provide targeted preferences there are potential benefits. The benefits of preferences are susceptible to changes in the terms on which they are offered, in particular RoO and product standard requirements. These requirements limit utilization and if made stricter could eliminate the benefits of preferences (this is especially true for apparel exports under AGOA). Complex (ill-­defined and/or costly to comply with) RoO are one reason that preferences have not been fully utilized. This is especially true for the EU, where restrictive RoO have limited the growth of ACP exports to the EU, especially for garments. By contrast AGOA has generated benefits for African exporters to the US, in part because of relatively lax RoO (although these have also been tightened for apparel). Developing countries, including ACP, recognize a need to expand exports, with emphasis on expanding manufacturing, and recently services, exports. Sustained growth in Africa requires implementing policies to expand exports, and to diversify exports away from dependence on a narrow range of (unprocessed) primary commodities (Commission for Africa, 2005). Trade preferences can play a role, as the experience with AGOA suggests. This implies that appropriately designed EPAs could support increased ACP exports, a theme addressed in this volume. For many of the small, and often relatively remote, ACP island economies the scope for diversification of agricultural and manufacturing goods production is limited. These countries have considered diversification into services production where traditional preferences are irrelevant. Indeed one of the motives of some ACP countries for negotiating EPAs may well have been to gain improved and preferential access for labour and other services to the EU market, as well as retaining preferential access on better terms for traditional exports. This emphasis on diversifying exports can divert attention away from what is required to enhance the competitiveness of existing producers, whether import-­ competing or traditional exports. In an ACP context, this means addressing the primary sector, especially agriculture, and more generally considering the import side of any trade policy (Morrissey, 2005). This is especially relevant to EPAs as

Introduction   5 they will require ACP countries to eliminate tariffs on most imports from the EU, the impact of which will depend primarily on the structure of a country’s imports. There are benefits for products where there are few or no competing domestic producers – consumption gains from increased cheaper imports and potential welfare gains in sourcing imports from more efficient EU producers. There are potential welfare losses, or adjustment costs, where cheap imports from the EU undermine domestic production or displace more efficient producers in the rest of the world. Assessing the balance of these costs and benefits is the focus of many of the chapters here. Effects of trade liberalization The central feature of EPAs is reciprocal trade liberalization (essentially a step towards an EU–ACP free trade area). There are no studies specifically on ACP trade liberalization, but relevant issues are covered in studies for developing countries, particularly in Africa. There is a literature suggesting that African countries would benefit from trade liberalization. Typically, the context is of multilateral liberalization, such as under the WTO. For example, Anderson et al. (2006) argue that significant multilateral trade liberalization would increase incomes in sub-­Saharan Africa (SSA) by proportionally more than in other regions, developing or high-­income. Under partial liberalization, the more likely actual scenario, the gains for SSA are significantly reduced (and other studies estimate they could even be eliminated). Developed country tariffs should not be considered the primary concern: Hertel and Martin (2000) show that developing countries face even higher tariffs on exports to other developing countries than on exports to developed countries. However, SSA countries are often the least well positioned to benefit from multilateral tariff reductions. Hoekman et al. (2004) estimate the effect on world prices of a 50 per cent reduction in tariffs for a sample of 267 commodities. The estimated world price effects are then used to estimate the impact on imports and welfare for 144 countries. The authors find that LDCs (mostly SSA) actually experience a welfare loss if all WTO members reduce tariffs. On balance, the literature suggests that LDCs/SSA are the countries least able to benefit from trade liberalization. While this does not mean they cannot benefit, it implies a need for careful analysis of how liberalization is implemented. The experience of SSA countries is a good indicator of what ACP countries, at least the LDCs, can anticipate. African countries have liberalized trade policy significantly since the 1980s; although the pace and pattern of reforms varies from country to country, in general tariffs have been reduced by about half (Ackah and Morrissey, 2005). One would expect this to encourage an increase in imports. Santos-­Paulino (2002a) finds that imports increase following liberalization: for developing countries overall, trade liberalization increases the rate of growth of imports by almost three-­quarters, with a much greater estimated impact for SSA (given the low base). Santos-­Paulino and Thirlwall (2004) consider the effect of import duties (tax revenue on imports as a share of import

6   O. Morrissey value) and find only a modest effect, especially for African countries. Thus, significant reductions in tariffs do not necessarily result in large increases in imports (this issue is addressed in Chapter 7). However, imports are likely to be more responsive than exports (especially as export supply response is limited in most ACP countries, see Chapter 8 and Morrissey, 2005). Thus, imports may increase faster than exports and the resulting trade deficit will create macroeconomic imbalances that retard growth (Thirlwall, 2003, pp. 16–20). This is important in the context of EPAs as if imports are to increase they must be financed, i.e. foreign exchange is required to pay for imports. Increasing foreign exchange requires either increasing exports (which may happen under an EPA) or aid (which is a negotiating issue). The evidence that exports increase following liberalization is weaker than for imports: export growth tends to be slower than import growth (Santos-­Paulino, 2002b; Santos-­ Paulino and Thirlwall, 2004). Wu and Zheng (2008) use measures of trade liberalization dates to identify the impact of trade liberalization on imports, exports and overall trade balance for a large sample of developing countries. They find strong and consistent evidence that trade liberalization leads to higher imports and exports but do not find robust evidence for a negative impact on the overall trade balance. Africa, in particular SSA, has generally avoided this adverse effect, especially to the extent that aid finances the trade deficit (in effect, imports are required to accommodate the relatively large aid inflows; Morrissey, 2005): imports have risen fairly slowly and export growth has tended to match this (on average) so that trade deficits have changed little during the 1990s (Ackah and Morrissey, 2005). This is in the context of a period in which increases in aid and reductions in tariffs occurred together. Thus it may be that it was the aid (financing) that generated any increase in imports rather than the tariff reductions, which has implications for EPAs.

1.2  The EPA process A specific feature of preferences under Lomé conventions is that they were granted to selected countries that were not required to grant reciprocal concessions to the EU; this was challenged and found to be ‘illegal’ under WTO rules. To continue preferences, the EU agreed a waiver in the WTO in 2001 to remain in effect until 2008, when a new WTO-­compliant regime was to be in place. The Cotonou Agreement proposed introducing reciprocity through the establishment of a series of EPAs, under which the EU and regional groupings of ACP countries offer reciprocal trade preferences to each other. Negotiations between the EU and ACP regional groups began in 2003 and agreements, whether framework or initialled, were in place for most ACP countries by the end of 2009 (see Chapter 2). However, many important details remain to be negotiated over the next few years. In principle, EPAs offer potential benefits to ACP countries beyond what was available under Lomé conventions. The preferential access to the EU is less restrictive: all ACP countries should have tariff-­free access to the EU for almost

Introduction   7 all products; this should be available once the agreements are in place, and restrictions, such as RoO requirements, should be fewer than previously.1 The ACP member countries should derive some benefit from enhanced regional integration as a precursor to EPAs: even if the actual trade benefits are limited, there are benefits from regional economic cooperation. A range of trade-­related policy reform commitments are included in the EU proposals, covering trade facilitation and investment, and perhaps also competition policy and government procurement. If implemented properly these could enhance the business environment in ACP countries, attracting investment and promoting exports. There is an expectation that some increased aid will be made available by the EU to support implementation and adjustment. There are potential costs to ACP countries through reciprocity as they are required to grant tariff-­free access to imports from the EU. Although there is concern in ACP countries that such opening up to import competition from the EU will displace domestic production, it is not obviously the case that there will be adverse effects. The welfare impact of import liberalization depends on the production and trade structure of the country in question, and as such is an empirical question. Of greater practical concern is the potential loss of revenue from tariffs on imports from the EU. On the basis of existing signed EPAs, ACP countries have up to 25 years to phase in tariff elimination, although some will have eliminated tariffs on most imports by as early as 2015. More importantly, ACP countries can exclude a range of designated ‘sensitive products’ accounting for up to roughly 20 per cent of imports from the EU (identifying these is a sticking point in negotiations). Thus, countries do have time to plan both their adjustment to the economic effects of increased imports and the revenue effect of eliminating tariffs. To design such plans they need information on the likely effects of tariff elimination on trade, revenue and welfare; Chapters 3–6 provide such information based on alternative approaches. For ACP countries, the first step was to form themselves into regional groups, some of which are actually more advanced in regional integration than others, and six emerged: Caribbean, Pacific, Central Africa, West Africa, Southern African Development Community (SADC) and East and Southern Africa (ESA, from which the East African Community formed a separate group). Some African countries have yet to decide which group they are in and some are members of more than one group, e.g., Zambia in ESA and SADC; Tanzania was at one point in both of these and the East Africa Community (EAC).2 Furthermore, for Africa at least, existing regional integration arrangements (RIAs) are at best weak, have proved politically difficult to sustain and have generated few clear economic benefits (Lyakurwa et al., 1997). While integration can contribute to growth and development, notably by increasing the size of the market and attracting foreign direct investment (FDI), most of the evidence for beneficial effects of RIAs relate to developed or middle-­income countries (Schiff and Winters, 2003). The general problem has been that most of the benefits accrue to the largest and richest member while few economic benefits accrue to the poorest members so deep integration has been difficult to achieve or sustain. This is an

8   O. Morrissey underlying problem in EPAs, especially in Africa, where the regional groups include at least one ‘large’ non-­LDC member with (economically) small LDC members. The former stands to gain from securing trade preferences for the EU market whereas the latter have no preferences to gain (beyond what they should be entitled to even without EPAs). It is therefore relevant to assess the impact of reciprocity (offering tariff-­free access to imports from the EU) and whether this may differ between LDCs and non-­LDCs (see Chapter 3). While it is important for ACP countries to assess the effects of reciprocity on trade, welfare and revenue, there are few assessments in the literature on the impact of EPAs. As the ACP countries are negotiating EPAs in regional groups, most studies of the impact of EPAs have been at a regional level, e.g. McKay et al. (2005) and Milner et al. (2008) on East Africa; Busse and Grossman (2007) on West Africa; Greenaway and Milner (2006) and Busse and Luehje (2007) on the Caribbean. Some studies have covered large samples of countries, e.g. Karingi et al. (2005) on Africa, Morrissey and Zgovu (2007) for agriculture. The studies in this volume are intended to complement and extend the existing literature. Busse and Grossman (2007) apply a differentiated product partial equilibrium model to analyse the trade and revenue effects of the EU–ECOWAS EPA. They find that the (static) trade effects are quite high (imports from the EU increase by over 20 per cent for some products in some countries) although trade creation dominates trade diversion, so the welfare effect is positive for all countries. However, while revenue losses under 10 per cent are the norm, some countries face much higher losses (among the non-­LDCs, Ghana faces the highest revenue loss). Karingi et al. (2005) use a combination of general and partial equilibrium techniques and conclude that the likely revenue and adjustment effects will be costly for African countries. McKay et al. (2005) apply partial equilibrium ana­ lysis to East Africa and conclude that although the welfare effects (excluding revenue losses) are small, whether positive or negative, there are short-­run adjustment costs and potentially large revenue losses. They find a negative short­run welfare effect on Tanzania (because the trade diversion effect from the rest of the world dominates) but a small positive short-­run effect for Uganda (because the consumption gain dominates and the increase in imports from the EU displaces relatively inefficient imports from Kenya). Kenya is likely to experience a welfare loss, as it loses regional market share and faces increased competition from EU imports, but this must be set against the gains of preferential access to the EU (especially important for the now large horticulture sector). The EPAs can be WTO-­compliant as long as, among other conditions, ‘substantially all the trade’ between partners is liberalized (i.e. subject to zero tariffs). Although there is agreement that this probably means about 80 per cent of trade, it is not at all clear how this should be measured. Is it 80 per cent of tariff lines or of the value of trade, before or after liberalization? Consequently, it is not clear what proportion of ACP imports from the EU can be excluded, i.e. what proportion can be deemed sensitive products? As exports to the EU typically account for over 60 per cent of total bilateral trade, ACP countries could exclude

Introduction   9 almost half of their imports from the EU. In practice it has been assumed that ACP countries can exclude up to 20 per cent of imports from the EU and that whole sectors, such as apparel, cannot be omitted. The chapters in this volume pay particular attention to how excluded products should be selected, as this is an important determinant of the impact on ACP countries.

1.3  Structure of the volume The essential features of EPAs are that ACP countries commit to remove tariffs on substantially all imports from the EU (within some 15 years) and the EU offers improved market access to ACP exporters. Such reforms will have impacts on trade, tariff revenue and economic performance in ACP countries. This volume outlines a variety of analytical methods that can be used to assess the potential economic effects of trade policy reforms, shows how these can be applied to EPAs and derives implications for the issues that should be addressed in negotiating the details of agreements over the next few years. In addition to overviews of the content and process of EPAs, estimates of impacts on a range of ACP countries and detailed analysis for a few countries, chapters cover specific negotiating concerns such as adjustment costs, impacts on poverty and food security. An inherent difficulty in assessing the likely effects of any prospective trade reform is identifying the likely reforms that will be implemented and the period over which this will be achieved. This is especially difficult for EPAs as the potential scope of reforms is broad and the commitments and implementation schedules differ across negotiating regions and countries. To set the scene for the rest of the volume, Mareike Meyn (Chapter 2) provides an overview of the liberalization commitments (time frame, coverage, type of exclusions) based on comprehensive analyses of the 36 EPAs that existed at the start of 2010. The core message is of diversity. Only two of the seven EPA regions had been able to agree on one regional schedule while sub-­regional or country-­specific liberalization commitments exist for the other regions. The absence of (within-­region) consistency in EPA commitments is likely to complicate deeper economic integration, especially in southern and western Africa. The fear of losing their current preference level and the ability to continue exporting to the EU market with preferences was for most ACP countries the decisive factor for entering into an EPA. Facing the alternative of being downgraded to the EU’s ‘next best alternative’ (the GSP), most developing ACP countries initialled an EPA – many of them in the last minute. The analysis in Chapter 2 shows that the ‘80/15’ formula (liberalization of 80 per cent of imports within 15 years) has not been applied equally among the ACP regions; country-­ specific schedules and differences within regions are the norm. Oliver Morrissey and Evious Zgovu (Chapter 3) outline a partial equilibrium method (that is relatively easy to apply with available data) to analyse the likely impact of EPAs on imports for a sample of 34 ACP countries, considering trade, consumer welfare and revenue effects. In terms of consumer welfare, the ACP overall and the average ACP country gain. However, the potential tariff revenue

10   O. Morrissey losses are often too high to easily be compensated through tax substitution. The analysis pays attention to identifying the sensitive products (SP) to be excluded from tariff reduction. The choice of SP can be important in determining the overall effect of EPAs, especially in promoting intra-­regional trade. The likelihood that consumer welfare effects will be positive or negligible for most ACP countries does not imply low adjustment costs. Indeed, as it is the increase in imports from the EU that generates the consumer gain, larger gains will be associated with greater adjustment costs, in terms of revenue losses and increased competition from imports. Chris Milner, Oliver Morrissey and Evious Zgovu (Chapter 4) illustrate this in estimating the impact and adjustment costs for Mauritius, considering trade, revenue, welfare, production and employment effects. They also set this against the potential benefit of preserving preferential access to the EU market. Preferences under an EPA are unlikely to support any growth in the major export sectors (sugar and garments), so absorbing the adjustment costs will be difficult. As Mauritius is a relatively developed country this suggests adjustment costs may be significant for all ACP countries. The next two chapters apply computable general equilibrium (CGE) models for country studies. Ole Boysen and Alan Matthews (Chapter 5) analyse the poverty impacts for Uganda. There are fears that further opening to EU imports could threaten the incomes of poor people through lower prices for agricultural commodities, the crowding out of vulnerable industries and loss of government revenue. The poverty effects are small, and whether or not they are positive depends on the selection of sensitive products, although under all scenarios the very poorest appear to lose. Jane Kiringai (Chapter 6) uses a CGE model to analyse the trade and growth effects on Kenya. Although the overall effects are small and not very sensitive to which products are treated as sensitive, she identifies certain sectors that are likely to experience significant losses (mostly agriculture-­related) and manufacturing sectors that could gain. The overall impact on Kenya is likely to depend on how intra-­regional trade is affected, as it is the major exporter in the region (the EAC). Prospective analysis requires assumptions about how imports will respond to lower tariffs and how exports respond to increased preferences. What does the evidence tell us about these assumptions? Chris Jones (Chapter 7) examines the effects of tariff reductions on the change in imports for a small sample of African countries. Unlike previous studies he includes data at a sector level, and also distinguishes agriculture from manufactures; while on aggregate imports may be determined by availability of foreign exchange rather than the level of tariffs, at a sector level one should be able to discern any effect of tariff reductions. There is little evidence (except for Ethiopia) that imports increased significantly in response to tariff reductions, cautioning against assuming large import responses to EPAs. Andrew Mold and Annalisa Prizzon (Chapter 8) look at the export experience of ACP countries over the past few decades – what explains an evident trend decline in exports (if not in value at least relative to global trade)? The ACP has not clearly sustained a benefit from trade preferences (though some countries did benefit from the commodity boom in the 2000s): supply-­side

Introduction   11 capacity is determined by demand from developed countries, by maintaining a competitive exchange rate and by measures designed to enhance overall competiveness. Any EPA agreement will need to address the underlying lack of (internationally competitive) productive capacity. Agriculture is the major sector in most ACP countries and food production is a major concern. Given a historic perception of the effect of EU export subsidies for food on producers in importing countries, ACP countries are inclined to exempt food imports from EPAs. Alan Matthews (Chapter 9) addresses the various concerns raised in relation to food security: limited ability of domestic producers to compete with EU agri-­food imports; restrictions on ACP scope to react to food import surges; and restrictions on ACP to use tariff and other policies to promote increased domestic supply of staple foods. Addressing these concerns has implications for the detail of EPA agreements. In Chapter 10, Oliver Morrissey provides an overall summary and extends the discussion to other issues, notably trade facilitation, measures and reforms to support investment, and competition policy. There is considerable evidence that reforms in these areas offer potential economic benefits. If implemented properly these could enhance the business environment in ACP countries, attracting investment and promoting exports. However, it does not follow that it is necessarily desirable to include provisions or commitments relating to each area in international agreements such as EPAs; in many cases, the potential gains can be realized through domestic reforms alone (perhaps with external advice, technical and financial support). A government may be willing to implement reforms in any of these areas yet be unwilling to include specific commitments in an EPA. Nevertheless, any trade-­related elements of EPAs will be instrumental in determining the dynamic and development impacts.

Notes 1 The EU proposal for EPAs is a ‘30 per cent local value added’ threshold, compared to the current Cotonou RoO which are equivalent to a 60 per cent threshold. The details have not been agreed, and some ACP countries favour a ‘change of tariff heading’ test, i.e. if the activity in the ACP countries changes the tariff classification the exported product is deemed to have origin in that country (Pearson, 2007). 2 SADC is a good example of the complexity in Africa. South Africa, the dominant member, only has ACP ‘observer status’ and had a free trade agreement with the EU. In December 2006 the EU and South Africa agreed to abandon their Trade and Development Cooperation Agreement (TDCA) to allow South Africa to become part of SADC in EPA negotiations. Botswana, Lesotho, Namibia and Swaziland were in a customs union with South Africa (SACU), whereas Angola, Mozambique and Tanzania (also then in ESA and EAC) were not. It is far from clear how any EPA could treat all members of SADC equally.

References Ackah, C. and O. Morrissey (2005), ‘Trade Policy and Performance in Africa since the 1980s’, Economic Research Working Paper No. 78, Tunis: African Development Bank.

12   O. Morrissey Anderson, K., W. Martin and D. van der Mensbrugghe (2006), ‘Would Multilateral Trade Reform Benefit Sub-­Saharan Africa’, Journal of African Economies, 15 (4), 626–70. Brenton, P. and T. Ikezuki (2005), ‘The Value of Trade Preferences for Africa’, Trade Note 21, World Bank, May 16. Online: www.worldbank.org/trade. Brown, W. (2002), The European Union and Africa: The Restructuring of North–South Relations, London: I.B. Taurus. Busse, M. and H. Grossman (2007), ‘The Trade and Fiscal Impact of EU/ACP Economic Partnership Agreements on West African Countries’, Journal of Development Studies, 43 (5), 787–811. Busse, M. and S. Luehje (2007), ‘Should the Caribbean Countries Sign an Economic Partnership Agreement with the EU? Challenges and Strategic Options’, Journal of Economic Integration, 22 (3), 598–618. Commission for Africa (2005), Our Common Interest: Report of the Commission for Africa, London: Commission for Africa. Frazer, G. and J. van Biesebroeck (2007), ‘Trade Growth under the African Growth and Opportunity Act’, NBER Working Paper No. W13222. George, C. and C. Kirkpatrick (2004), ‘Trade and Development: Assessing the Impact of Trade Liberalisation on Sustainable Development’, Journal of World Trade, 38 (3), 441–69. George, C. and C. Kirkpatrick (eds) (2006), Impact Assessment and Sustainable Development: European Practice and Experience, Cheltenham: Edward Elgar. Greenaway, D. and C. Milner (2006), ‘EU Preferential Trading Agreements with the Caribbean: A Grim REPA?’, Journal of Economic Integration, 21 (4), 657–80. Guillaumont, P. and S. Guillaumont (1994), Adjustment and Development: The Experience of the ACP Countries, Paris: Economica, in collaboration with the European Commission. Hertel, T. (ed.) (1997), Global Trade Analysis: Modelling Implications, Cambridge: Cambridge University Press. Hertel, T. and W. Martin (2000), ‘Liberalising Agriculture and Manufactures in a Millennium Round: Implications for Developing Countries’, World Economy, 23 (4), 455–69. Hoekman, B., W. Martin and C. Primo-­Braga (2009), Trade Preference Erosion: Measurement and Policy Response, Washington, DC: The World Bank and Palgrave Macmillan. Hoekman, B., F. Ng and M. Olarreaga (2004), ‘Agricultural Tariffs or Subsidies: Which Are More important for Developing Economies?’, World Bank Economic Review, 18 (2), 175–204. Karingi, S., R. Lang, N. Oulmane, R. Perez, M. Sadni and H. Ben Hammouda (2005), Economic and Welfare Impacts of the EU–Africa Economic Partnership Agreements, Addis Ababa: UNECA. Online: www.uneca.org/trid. Langhammer, R. (1992), ‘The Developing Countries and Regionalism’, Journal of Common Market Studies, 30 (2), 211–31. Lee, N. and C. Kirkpatrick (2006), ‘Evidence-­based Policy-­making in Europe: An Evaluation of European Commission Integrated Impact Assessments’, Impact Assessment and Project Appraisal, 24 (1), 23–33. Lyakurwa, W., A. McKay, N. Ng’eno and W. Kennes (1997), ‘Regional Integration in Sub-­Saharan Africa: A Review of Experiences and Issues’, in A. Oyejide, I. Elbadawi and P. Collier (eds), Regional Integration and Trade Liberalisation in Sub-­Saharan Africa (vol. 1), London: Macmillan, pp. 159–209. McKay, A., C. Milner and O. Morrissey (2005), ‘Some Simple Analytics of the Welfare Effects of EU–ACP Economic Partnership Agreements’, Journal of African Economies, 14 (3), 327–58.

Introduction   13 Milner, C., O. Morrissey and E. Zgovu (2008), ‘Welfare and Adjustment Implications of EU–ACP EPAs: Some Evidence for Africa’, in H. Asche and U. Engel (eds), Economic Partnership Agreements: Devilish Undertakings or Just the Devil in the Details, Leipzig: University of Leipzig Press, pp. 41–60. Milner, C., O. Morrissey and E. Zgovu (2009), Policy Responses to Trade Preference Erosion: Options for Developing Countries, London: Commonwealth Secretariat. Morrissey, O. (2005), ‘Imports and Implementation: Neglected Aspects of Trade in the Report of the Commission for Africa’, Journal of Development Studies, 41 (4), 1133–53. Morrissey, O. and E. Zgovu (2007), ‘The Impact of Economic Partnership Agreements on ACP Agriculture Imports and Welfare’, CREDIT Research Paper 07/09, Nottingham: University of Nottingham, School of Economics. Ozden, C. and E. Reinhardt (2003), ‘The Perversity of Preferences: GSP and Developing Country Trade Policies 1976–2000’, Policy Research Working Paper No. 2955 (January), Washington, DC: The World Bank. Pearson, M. (2007), ‘Agreeing EPA Rules of Origin: A Strategy Unfolds’, Trade Negotiations Insights, 6 (4) (July–August), 6–8. Online: www.ictsd.org/tni. Piermartini, R. and R. Teh (2005), ‘Demystifying Modelling Methods for Trade Policy’, WTO Discussion Paper No. 10, Geneva: World Trade Organization. Santos-­Paulino, A. (2002a), ‘The Effect of Trade Liberalisation on Imports in Selected Developing Countries’, World Development, 30 (6), 959–74. Santos-­Paulino, A. (2002b), ‘Trade Liberalisation and Export Performance in Selected Developing Countries’, Journal of Development Studies, 39 (1), 140–64. Santos-­Paulino, A. and A. Thirlwall (2004), ‘The Impact of Trade Liberalisation on Exports, Imports and the Balance of Payments of Developing Countries’, Economic Journal (Features), 114 (493), F50–F72. Schiff, M. and L.A. Winters (2003), Regional Integration and Development, Washington, DC: World Bank. Stevens, C. (2007), ‘EPAs: Entering the Danger Zone’, Trade Negotiations Insights, 6 (4) (July–August), 1–5. Online: www.ictsd.org/tni. Thirlwall, A.P. (2003), Trade, the Balance of Payments and Exchange Rate Policy in Developing Countries, Cheltenham: Edward Elgar. Wu, Y. and L. Zheng (2008), ‘The Impact of Trade Liberalization on the Trade Balance in Developing Countries’, IMF Working Paper No. 08/14, Washington, DC: International Monetary Fund.

2 Overview and comparative analysis of EPAs Mareike Meyn

An inherent difficulty in assessing the likely effects of any prospective trade reform is identifying the likely elements of reforms that will be implemented and the time period over which this will be achieved. This is especially difficult for Economic Partnership Agreements (EPAs) as the potential scope of reforms is broad and the commitments and implementation schedules differ across negotiating regions and countries. To set the scene for the rest of the volume, this chapter provides an overview of the liberalisation commitments and legal obligations based on comprehensive analyses of the 36 African, Caribbean and Pacific (ACP) EPAs with the European Commission (EC) that existed at the start of 2010.1 By that time, 19 of the African states, including most non-­least developed and some least developed countries (LDCs), have initialled interim EPAs, as have two Pacific non-­LDCs – Fiji and Papua New Guinea (PNG). The 14 Caribbean Forum countries (CARIFORUM) have gone further and signed a full EPA including services, investment, public procurement and intellectual property rights provisions (Haiti only initialled the CARIFORUM EPA). The EU grants all these countries immediate duty and quota free (DFQF ) market access while they liberalise ‘substantially all trade’ in return. The EPA countries have committed to liberalise between 75 per cent (Ghana) and 97.5 per cent (Seychelles) of EU imports within between one year (PNG) and 25 years (East African Community (EAC), CARIFORUM). The EC insisted on limiting the ACP exclusion basket to about 20 per cent of import value from the European Union (EU), regarded as a prerequisite to guarantee World Trade Organization (WTO) compatibility. When selecting their exclusion basket ACP countries sought to find a balance between reducing revenue losses and protecting domestic producers. The chapter is structured as follows. Section 2.1 discusses the ‘push and pull’ factors for entering into an EPA by quantifying the immediate costs for non-­ signatories and immediate benefits of receiving DFQF for signatory states. The extent to which ACP countries have committed to open up their markets for EU imports and differences and similarities in the single EPA regions’ and countries’ exclusion baskets and liberalisation commitments are discussed in Section 2.2. Considering that it is a primary objective of the EPAs to promote regional integration among ACP, Section 2.3 assesses alignment of the different sched-

Overview and comparative analysis of EPAs   15 ules in a regionally harmonised approach (this issue is also addressed in Chapter 3 of this volume). Section 2.4 summarises the findings and discusses the implications for future negotiations on the details of EPAs.

2.1  Immediate effects of the EPA The fact that the immediate threat of tariff increases if they did not sign an EPA was disproportionately higher than the immediate benefit of improved market access has worked against ACP countries. Most non-­LDC ACP lacked the ultimate source of bargaining power of the weaker party, namely the ability to walk away from EPA negotiations. Some of the ACP signed hastily drawn liberalisation schedules that neither consider sufficiently domestic sensitivities nor are harmonised on a regional level. This section considers the likely costs and benefits in turn. The immediate costs of not signing an EPA For the ACP overall, EU trade preferences are most important for agriculture commodities; for some countries (mostly non-­LDC islands), manufactures are important, especially textiles and garments. Preference margins for agriculture exports to the EU have been reduced, in general because of DFQF access granted to all LDCs under Everything but Arms (EBA) and specifically for sugar and bananas as these regimes have been challenged in the WTO, but remain important. The loss of EU preferences would have immediate negative effects for ACP agricultural production (Stevens and Kennan, 2007): • •

Some 267 products would face tariff jumps of over 10 per cent ad valorem. Among the products most affected would be beef, processed fruit, sugar, rice, bananas, citrus and horticulture. Nearly two-­thirds of non-­LDC ACP countries would see tariff jumps of over 25 per cent of their EU export values. For example, taking 2006 quantities, the taxes imposed on Namibia’s and Botswana’s agricultural exports to the EU would have been equivalent to more than four times their annual EU aid receipts. EU taxation of Botswana’s beef exports would have equalled 80 per cent of its 2006 export revenue – higher than that paid by some of the most competitive beef suppliers in the world (Meyn, 2007a, 2007b).

Facing the risk of collapsing EU exports if preferences were eliminated, 35 of 75 ACP countries initialled a draft EPA by December 2007 (Zambia joined the Eastern and Southern Africa (ESA) EPA in 2008). The remaining ACP countries fall into three groups: 29 LDCs that can continue benefiting from unilateral preferences under the EBA initiative; South Africa, which already has a free trade agreement with the EU – the Trade, Development and Cooperation Agreement (TDCA); seven Pacific and three African states that are classified as developing

16   M. Meyn ACP countries and are downgraded to the EU Generalised System of Preferences (GSP). As the first two groups can maintain their preferential market access without an EPA, the following investigates the costs for countries in the final group (for details, see Stevens and Kennan, 2007). African non-­signatories As can be seen from Table 2.1, the immediate monetary costs of not joining an EPA are limited for the three African non-­EPA signatories – Nigeria, Republic of Congo and Gabon. Only 1.7 per cent of Nigeria’s exports (of products that account for 1 per cent or more of its total exports) would experience a tariff increase. For the Republic of Congo 3.3 per cent of total exports are affected and for Gabon 4.1 per cent. Compared to other African developing countries this is marginal. For Ghana and Kenya, for instance, more than 60 per cent of EU export items would have experienced tariff increases if downgraded to the GSP. Due to the dominance of crude oil as major export item for all three countries it is rather unlikely that the loss of Cotonou preferences would have a significant detrimental impact on these economies. This does not necessarily mean that the sector impact of the loss of preferences may not be significant. The Congolese sugar industry, which supplied an average of 11,769 tons of white sugar equivalent to the EU market in 2004–6, stopped exporting to the EU in the face of Most Favoured Nation (MFN) tariffs in January 2008. Other industries might have been negatively affected, but not as obviously as sugar. Depending on the elasticity of EU demand for Congolese tobacco, Gabonese fish or Nigerian cocoa, small and medium tariff increases might have equally resulted in the cessation of exports to the EU (for the case of Nigerian cocoa exports, see ECDPM, 2008). Pacific non-­signatories Cook Islands, Micronesia, Marshall Islands, Nauru, Niue, Palau and Tonga are the developing Pacific countries that have not signed an EPA. Most only joined the group of ACP countries in 2000 and have very little trade with the EU. Taking the items that account for 1 per cent or more of total EU exports affected by tariff increases as an indicator is not meaningful in case of the Pacific. As Table 2.2 reveals, more than half of Nauru’s exports face tariff increases but this refers to only one item (cherries). In fact, the very limited number of export items affected (and the moderate tariff increases they face, with a maximum tariff of 17.3 per cent for honey from Cook Islands) is decisive for the fact that most Pacific countries did not join the EPA. The two exceptions are Fiji and PNG – both beneficiaries of the EU Sugar Protocol. However, although defensive interests dominated when signing an EPA, the ACP also pursued offensive interests in EPA negotiations, such as improving their effective access to the EU market by eliminating residual tariff barriers and benefiting from more generous Rules of Origin (RoO).

596 5,513 14

Nigeria Republic of Congo Gabon

32  5  5

10 < 20% 24  4  1

Specific duty 57  9  6

Total 1.7 3.3 4.1

Share total exports with a change in █access (%)

Notes Number of goods experiencing an increase in tariffs is at the HS-6 digit level; percentage share with a change in access based on products accounting for 1% or more of total exports.

1 – –

20%+

Number of goods with tariff increase of:

Source: Eurostat COMEXT; UNCTAD TRAINS; UK Tariff (2007).

Value of exports 2006 (€000)

Country

Table 2.1  Monetary costs for non-EPA signatory non-LDCs in Africa

2 – N/A 1 N/A N/A 1

10 < 20%

– – N/A – N/A N/A –

20%+

Number of items with change of:

1 1 N/A – N/A N/A –

Specific duty 3 1 N/A 1 N/A N/A 1

Total

92.6 28.1

28 0.01 29.5 52.2 8.1 36 52.7

Items accounting for 1% or more of the total which █would experience a change in access (%)

Notes Number of goods experiencing an increase in tariffs is at the HS-6 digit level; percentage share with a change in access based on products accounting for 1% or more of total exports.

Source: Eurostat COMEXT; UNCTAD TRAINS; UK Tariff (2007).

Potential monetary costs for Pacific EPA signatories of being downgraded to GSP Fiji 8 2 2 12 PNG 2 3 –  5

Cook Islands Marshall Islands Micronesia Nauru Niue Palau Tonga

Country

Table 2.2  Monetary costs for non-EPA signatory non-LDCs in the Pacific

Overview and comparative analysis of EPAs   19 The immediate benefits of signing an EPA Under an autonomous decision taken by the Council in December 2007 the EU removed from January 2008 all tariffs and quotas on imports from countries that initialled EPAs, except for sugar and rice for which DFQF is being phased in (European Council, 2007). In the case of rice, DFQF for the varieties exported by the ACP will begin in 2010. The transition for sugar will involve three phases for non-­LDCs but some of the details still have to be agreed.2 In absolute terms the immediate gains will be relatively small, but this is because the status quo ante was already liberal. For some countries the principal export benefit of EPAs is retention of previous levels of access rather than the new opportunities offered by DFQF (see Stevens et al., 2008). Gaining DFQF will have four types of actual or potential effect. First, and most immediate, is the redistribution of the import tax that the EU formerly levied on imports. This will be transferred from the EU (a revenue loss) and shared between elements in the ACP export supply chain (retailers, importers, shippers, exporters, producers). Although some of the gain will accrue to importers and retailers (the EU price may not fall by the full amount of the tax reduction), to the extent that any accrues to ACP producers or exporters it will make exports more profitable. Second, if the revenue transfer induces importers to shift purchases away from less preferred sources towards the ACP, there could also be an increase in the volume of ACP exports. Third, by removing some very high tariff barriers, DFQF might make it commercially feasible, for the first time, for ACP countries to export to the EU products that they already supply competitively to other markets; in some cases it may even create new export opportunities. The fourth effect could be the most substantial, but is also the most difficult to predict: if DFQF induces increased supply from ACP states (e.g. as a result of new investment, new exports or reallocation of resources between products) there could be wide-­ranging effects both in terms of foreign exchange earned and dynamic gains (in production and efficiency) throughout the economy. As of January 2008, 35 ACP states have been accorded DFQF treatment for most of their exports. The greatest change has been for the 26 states that are not LDCs, as LDCs already have DFQF under the EU’s EBA initiative of 2001, which will be fully phased in by 2009. The only way in which the export situation of LDCs may change is if the RoO regime under EPAs is more favourable than that under EBA (see Box 2.1). Some €1.4 billion of EU imports was affected immediately by DFQF (Table 2.3). Although this is equivalent to just 2 per cent of total EU imports from all non-­LDC ACP states in 2006, the immediate gains for some items may be large, and for some countries could be relatively important, especially in the longer term, if they are able to increase supply of the affected goods, and once DFQF is fully implemented.

20   M. Meyn

Box 2.1  Key changes of rules of origin under the EPAs The expressed desire of the EU and ACP was that the rules of origin in EPAs should be a substantial improvement on the status quo of Cotonou. The parties were not able to reach agreement on how this improvement should look but agreed on interim measures, which show three important improvements to Cotonou and one potential problem for the interim period until the EPAs enter into force within the ACP. Clothing: The EU has adopted (at last) a rule similar to that applying in the African Growth and Opportunity Act (AGOA) under the derogation for lesser developed countries. This is that both knitted and woven clothing can be produced from non-­originating fabric without losing originating status under the EPA. Fish: There is a major change to the rules for processed fish for the Pacific EPA signatories. Article 4:3 makes provision that fisheries products from signatory Pacific states can be processed from non-­originating materials on the land of that state without losing originating status. Also, relaxed crew requirements will apply for all ACP. Specific derogations: The EPA includes an appendix on derogations from the list of working or processing (limiting non-­originating inputs to 15 per cent of product value) for several agricultural product groups. However, derogations do not apply to all products within each Chapter and most products qualifying for derogation need to comply with a value added threshold of 60 per cent (Naumann, 2008: 8ñ9). Cumulation provisions: In at least one respect the provisions are more restrictive than either Cotonou or the proposed EPAs. This area of restrictiveness in the ‘temporary’ RoO that apply between the end of the Cotonou trade regime and the implementation of the (interim) EPAs concerns cumulation. Under the December 2007 Council regulation, full ACP cumulation is not permitted. Annex 2, Article 2 defines the ‘ACP States’ with which cumulation is permitted as only those countries that have initialled EPAs (and are listed in Annex 1). Thus, full cumulation among all ACP countries will only be possible once the EPAs come into effect (which means either once they are signed or once they are ratified, depending on the respective countries). There are also areas of improved cumulation provisions, for instance in the case of South Africa. This provision is of major relevance for Botswana, Lesotho, Namibia and Swaziland, which are, together with South Africa, in a customs union but export under two different trade regimes to the EU. An ACP product using South African inputs will acquire originating status if the ACP value added exceeds the value of imports from South Africa. This is a potential improvement to the Cotonou Agreement which allowed cumulation provisions only for a limited list of products (according to Annex XI to Protocol 1). Moreover, the EPAs allow some cumulation with more developed ‘neighbouring’ countries such as Latin American states in case of CARIFORUM and North African states in the case of the ESA.

Overview and comparative analysis of EPAs   21 The largest export gains are likely to arise from the removal of tariffs that are very high but not so high as to prevent ACP exports altogether or keep them at very low levels. The goods for which the removal of EU import taxes will be greatest are rice, grapes and beef, followed by citrus fruit and vegetables. Moreover, a number of processed foods that are currently exported at only modest levels could become more important but this will depend largely on how far the current rules of origin (RoO) are amended during the continuing EPA negotiations. Critics have long alleged, and the EC has accepted, that some rules are unduly onerous and prevent the ACP utilising the tariff preferences that exist on paper. Previously a concern primarily in relation to manufactures, DFQF extends these concerns into processed foods. In many cases the current rules do not allow an ACP state to process raw materials that are imported (Box 2.1). Recent history indicates that new trade preferences granted to the ACP have been quite quickly extended by the EU to other suppliers. The competitive advantage of DFQF is likely to be eroded in the same way. DFQF has opened up a window of opportunity, but it is time-­bound. To benefit fully from the opportunities, both ACP and EU countries will need to take further action. The former Table 2.3  Countries affected by DFQF Non-LDC ACP exporter

No. different goods*

Mauritius Cameroon Côte d’Ivoire Dominican Republic Guyana Fiji Jamaica Swaziland Belize Namibia Zimbabwe St Lucia Botswana Suriname Trinidad and Tobago Barbados Ghana St Vincent/Grenadines Kenya Dominica Congo Total

20 10 16 21 6 1 17 15 4 5 16 2 3 13 9 6 24 1 28 6 2

Value of exports 2006 (€000) 270,382 175,975 146,382 111,436 111,196 105,792 85,052 81,065 67,854 54,870 39,742 24,006 23,712 21,332 18,288 16,575 13,940 11,249 10,685 8,624 5,513 1,405,255

Source: Eurostat COMEXT database. Notes Number of goods (*) is at the HS-6 digit level; Congo (in italics) has not yet initialled an EPA and so will only benefit from DFQF if they do so in the future.

22   M. Meyn must engage without delay in necessary reforms and adjustments of their economies, but there is now an onus on the EU and its member states to provide positive assistance to help countries make the most of it. The fact that the immediate threat of tariff increases was much higher than the immediate benefit of improved market access increased the imbalance in the power relation between the EC and the ACP. The ultimate source of bargaining power of the weaker party, namely to walk away from the EPA negotiations, would have implied very high costs and was not an option for many ACP countries.

2.2  Regional EPA liberalisation schedules and exclusion baskets This section compares ACP countries exclusion baskets, summarises the EPA liberalisation commitments of single countries and regions and discusses the implications of EPA schedules for regional integration. The focus is on comparing commitments between regions and among the countries of one region. More detailed information on countries’ exclusion baskets and liberalisation schedules can be found in Bilal and Stevens (2009) for the African EPAs and Stevens et al. (2009) for the CARIFORUM and Pacific EPAs. Three questions are addressed: which and how many sensitive products are excluded from liberalisation commitments; what are the hypothetical revenue losses;3 and what are the potential implications for the ACP agricultural sector? Comparing ACP exclusion baskets ACP countries’ exclusion baskets range from 2.5 per cent of EU imports (Seychelles) to 29 per cent (Suriname). As can be seen from Table 2.4, 11 countries exclude under 15 per cent of imports while another nine countries have an exclusion basket of more than 20 per cent. When comparing baskets with the number of exclusions covered by the WTO Agreement on Agriculture and high-­tariff items excluded significant disparities become obvious. For most countries agricultural products constitute more than one-­third of their exclusions. However, for Botswana, Lesotho, Namibia and Swaziland (BLNS) and Mozambique, the agricultural exclusion basket is considerably lower. The number of excluded products that fall in the highest applicable tariff band ranges from less than ten (Zimbabwe, EAC, BLNS, Seychelles and PNG) to 800 or more (Cameroon and Ghana). In Cameroon, Côte d’Ivoire, Ghana, Mauritius and Zambia, two-­thirds or more of exclusions face the highest tariff. At the same time one has to consider that countries’ protection levels differ substantially. While Côte d’Ivoire, Ghana, Madagascar and Mozambique have a maximum tariff level of only 20 per cent, the highest applicable tariff band is 100 per cent or more in EAC, Zimbabwe, Seychelles, Bahamas, Barbados, Dominica, Grenada, Guyana, Jamaica and Suriname. The types of excluded products are rather similar among the countries. The main agricultural product groups excluded are meat and meat products; dairy

Overview and comparative analysis of EPAs   23 products; vegetables, fruit and nuts; sugar and confectionery; cereal preparations; fruit and vegetable preparations; and beverages. In addition to agricultural products and high-­tariff revenue products (such as vehicles), countries also excluded products that might compete with domestic industries, such as textiles, apparel or electronic products. Many countries also excluded some items which are not exported by the EU (such as live animals or plants) or for which the EU would not appear to have an obvious supply capacity (see Stevens and Bilal, 2009). As discussed below, CARIFORUM countries have not agreed on one regional liberalisation schedule but rather on country-­specific liberalisation schedules with a certain level of regional overlap. However, countries’ exclusion baskets are similar: agriculture products account for almost one-­third of total exclusions; chemical products and textiles/clothing, followed by base metals/articles and miscellaneous manufactured articles are the other substantial areas of exclusion. Liberalisation schedules The Communauté Économique des États d’Afrique Centrale (CEMAC) EPA Cameroon is the only signatory CEMAC EPA state and has established its liberalisation schedule by reference to a Common External Tariff (CET, assumed to be that of CEMAC). Liberalisation will not commence until 2010, giving Cameroon two years to make any necessary amendments to its current tariff schedule to bring it into conformity with the CEMAC CET. Liberalisation is moderately back-­loaded (Table 2.5). At the same time, Cameroon will experience some very early effects. Even the first tranche includes liberalisation of some high-­tariff items. Moreover, products accounting for almost half of Cameroon’s imports from the EU in 2005–6 will be fully liberalised within ten years. The total hypothetical loss (in 2005–6 values) over the full implementation period is US$99 million. Cameroon will lose 21 per cent of its hypothetical tariff revenue on imports from the EU during the first six years of implementation (and this will be additional, of course, to any loss that occurs by virtue of Cameroon adopting the CEMAC CET). The Economic Community of Western African States (ECOWAS) EPA Côte d’Ivoire and Ghana are the only West African states that have initialled separate EPA texts and submitted individual liberalisation schedules. Hence, they will be treated separately. The Côte d’Ivoire liberalisation schedule was amended during 2008 to move the start date back by 18 months to 1 July 2009. The liberalisation schedule is heavily front-­loaded (with some 60 per cent of EU imports to be liberalised by the end of 2012). The liberalisation process will be completed by 2022 (Table 2.6).

575 185 131 414*** 716

1,012 3,239***

SADC EPA BLNS Mozambique

93

Madagascar Mauritius Seychelles Zambia Zimbabwe

ESA EPA Comoros

1,390

640** 1,039

ECOWAS EPA Côte d’Ivoire Ghana

EAC EPA Burundi Kenya Rwanda Tanzania Uganda

1,217

Total items (at HS-6 sub-head level)

CEMAC EPA Cameroon

Excluded items

10 18

59 50 37 36 68

68

25

35 33

29

Covered by WTO AoA (%)

Table 2.4  Comparison of exclusion baskets among EPA regions

   6 (=specific duty) 1,319 (=20%)

No MFN tariffs available for Comoros, and no CET tariffs shown in the market access schedule for excluded items   500 (=20%)   108 (=30% or specific duty)    5 (=225% or specific duty)   288 (=25%)    2 (=100%)

   5 (=100%)

  390 (=20%)   884 (=20%)

  798 (=30%)

In highest applicable tariff band

5.5 18.5

19.3 4.4 2.5 20.4 20.1

19.3

20.5 17.9 22.5 18.6 16.1

20 25

21

Average share of imports* (%)

38

75 (=27% or specific duties)

   5 (=70%)

 

   1 (100%)   167 (40%)

   1 (=50%)    1 (210%)    1 (216%)    2 (50%)    6 (165%)   17 (40%)    2 (184%)   27 (100%)    1 (57.8%)    9 (100%)   95 (40%)   27 (45%)   144 (40%)

11.9

15.8

29.0 9.5

5.9 4.3 19.2 20.8 20.0 6.2 19.3 21.2 15.6 10.6 15.0 8.0 3.9

Notes Acronyms are: Communauté Économique des États d’Afrique Centrale (CEMAC), Economic Community of Western African States (ECOWAS), East Africa Community (EAC), Eastern and Southern Africa (ESA), Southern African Development Community (SADC), Botswana, Lesotho, Namibia and Swaziland (BLNS), Caribbean Forum (CARIFORUM), Pacific ACP (PACP). * Last three available years. ** No import values are included in the market access schedule. UN’s Comtrade database data has been used. ***At eight-digit national tariff-line level.

Source: Derived from analysis of individual exclusion schedules.

1,048

PNG

40

53 53

481 464

5,781

11 49 54 53 53 54 53 54 70 53 54 52 54

489 431 446 485 486 338 490 474 318 456 487 450 488

PACP Fiji

CARIFORUM EPA Antigua and Barbuda Bahamas Barbados Belize Dominica Dominican Republic Grenada Guyana Haiti Jamaica St Kitts and Nevis St Lucia St Vincent and the Grenadines Suriname Trinidad and Tobago

26   M. Meyn Table 2.5  Cameroon market access schedule Import value (average, 2005–6) Share of total (%) Total trade in HS 1–97 2013 2017 2023 Excluded goods

100 24.5 24.3 30.2 21

Base tariff █

Max.

Trade-weighted average

30 30 30 30

  8.1 11.1 16.4 22

Notes As no import data are provided with market access schedule, import value is based on imports from EU25, as reported by Cameroon to the United Nations (UN) Commodity Trade Statistics (Comtrade) database; these are available for only two recent years (2005 and 2006), so the average figures are for these two years only. The maximum tariff (Max.) is the ‘Tariffs maximum appliqués au 31/12/2007 CEMAC’, as shown in the market access schedule.

The trade-­weighted average tariff of the items that had to be liberalised by July 2009 is 20 per cent – significantly higher than in the following six tranches. However, many of the products being liberalised in the first tranche are not consumed in Côte d’Ivoire, except for tanks and armoured vehicles (these face a 20 per cent tariff, and imports from the EU in the base period totalled US$384.9 million). Agricultural liberalisation is also front-­loaded and many products to be liberalised appear to stand in direct competition with domestic production: agricultural items to be liberalised by 1 January 2013 include meat and meat products, poultry, eggs, tomatoes, mushrooms, potatoes, several (prepared) vegetables, flour, food preparation, jams, cheese, cereals and pasta. Many of these appear to be produced domestically. By the end of the implementation period Côte d’Ivoire could face hypothetical revenue losses of US$196 million (41 per cent higher than in the original schedule), almost three-­quarters of this would be lost by 1 January 2013 and 39 per cent by 1 July 2009. Ghana revised its liberalisation schedule during 2008. Although the end date for the first tranche of liberalisation is unchanged (1 January 2013), none of the tariffs that must be removed by then exceeds 5 per cent, whereas under the original schedule there were several 20 per cent tariffs to be liberalised. The proportion of imports excluded from liberalisation has increased from 20 per cent to 25 per cent and liberalisation of all of the highest (20 per cent) tariff items is deferred until the two final years (Table 2.7). The liberalisation schedule was significantly revised. While the original one foresaw for the first tranche that ten agricultural products primarily sourced from the EU with a tariff of 20 per cent would have been liberalised (most of which were likely to stand in direct competition with domestic production), the new schedule only liberalises low (5 per cent) tariff products until 2015 and moderate (10 per cent) tariff items in the period 2016–21.

Overview and comparative analysis of EPAs   27 Table 2.6  Côte d’Ivoire’s market access schedule Import value (2005–6) Share of total (%) Total trade in HS 1–97 of which, 16 codes not listed in schedule

Base tariff █

Max.

Trade-weighted avg.

 0 20 20 20 20 20 20 20 20  5 10 20 20

0 20.0 6.0 8.7 6.3 7.4 5.1 10.5 19.9 5.0 10.0 20.0 13.6

100 0.2

Goods to be liberalised: Already duty free 1 July 2009 1 January 2010 1 January 2011 1 January 2012 1 January 2013 1 January 2016 1 January 2017 1 January 2018 1 January 2021 1 January 2022 1 January 2023 Excluded goods

5.7 16.7 1.8 10.9 14.3 10.4 1.9 3 5.3 3.1 5.1 1.6 20

Total

99.8

Notes Import value as for Cameroon (Table 2.5). Trade-weighted average based on multiplying import value by applicable tariff for each product, summing and dividing this total by total import value. In addition to the 16 HS-2 codes which appear in the trade statistics but not in the schedule, there are 17 codes which appear in the schedule but not in the trade statistics (because they were not valid in the period 2004–6).

Table 2.7  Ghana market access schedule Import value (2005–6) Share of total (%) Total trade in HS 1–97 Goods to be liberalised: already duty free from 1 January 2013 from 1 January 2015 from 1 January 2017 (starts 1 January 2016) from 1 January 2021 (starts 1 January 2019) from 1 January 2022 (starts 1 January 2019) Excluded goods Total

Base tariff █

Max.

Trade-weighted avg.

 0  5  5 10 10 20 20

0 5 5 10 10 20 16.9

100 13.9 8.7 7.9 36.2 2.8 5.5 25 100

Notes Import value as for Cameroon (Table 2.5). Trade weighted average as given in the market access schedule.

28   M. Meyn The East Africa Community (EAC) EPA The EAC is the only region in which all signatories have identical schedules, which were revised in the course of 2008. The schedules are all based on reductions from what is described as ‘the MFN rate’, which is assumed to be the agreed CET to which all EAC states have committed. Although the first ‘liberalisation’ tranche, covering two-­thirds of imports, must be completed by 2010, all of the items in it face a zero MFN tariff and so, as in the original schedule, none of the countries is required to start removing any positive tariffs until 2015 (Table 2.8). Any liberalisation before that date required to achieve the ‘MFN rate’ set out in the schedule needs to be judged, therefore, as a ‘customs union effect’ rather than an ‘EPA effect’. The countries have 24 years from the date they attain their agreed CET rates (and 26 years from 2008) to complete the interim EPA liberalisation process. Even though the majority of items that are to be liberalised will have their tariff removed over the next 15 years (the bulk in the period 2015–23), this makes the EAC EPA the one with the longest transition period. Although the EAC liberalisation schedules are the same, their impact is determined by the level and distribution of imports from the EU: countries that import from the EU more of the items that will be liberalised earlier (the second tranche) will face a more rapid adjustment shock than those that do not. A flavour of the potential non-­revenue adjustment effects (for domestic producers and consumers) in each of the countries is provided in Table 2.9, which provides for each of the EAC countries information on the value of the goods to be liberalised in each of the tranches (and to be excluded from liberalisation). In all cases countries have to start removing positive tariffs on a significant proportion of imports during the second phase (from 2015), but this represents a notably greater share for Burundi. The proportion of imports being excluded from liberalisation for the region as a whole is 17–18 per cent4 but this varies between countries (because they import different things) from a low for Uganda (of 16.1 per cent) to a high for Rwanda (of 22.5 per cent). Table 2.8  EAC liberalisation schedule Goods to be liberalised in:

Import value (average 2004–6) Share of total (%) Burundi

Kenya

Rwanda

Tanzania

Uganda

2010 2015–23 2020–33 Excluded goods

41.5 33.9 4.0 20.5

50.3 25.9 6.0 17.9

45.3 24.2 8.0 22.5

50.2 26.0 5.2 18.6

52.3 26.2 5.3 16.1

Total

99.9

99.98

99.99

99.99

99.98

Notes Import values based on EU25 export data given absence of alternative consistent sources for each country.

Overview and comparative analysis of EPAs   29 Table 2.9  Hypothetical revenue loss in EAC countries Country

Burundi Kenya Rwanda Tanzania Uganda

Hypothetical revenue (US$000) on: all items being liberalised

2nd tranche items

3,767 49,572 4,835 24,876 12,639

2,915 31,467 2,652 16,607 8,394

2nd tranche █share (%) 77.4 63.5 54.9 66.8 66.4

As none of the countries will liberalise any positive-­duty tariff during the first tranche, Table 2.9 indicates the proportion of hypothetical revenue that will be lost by the end of the second tranche (by 2023), giving countries a relatively long time to adjust. By that time all countries will have had to put in place alternative revenue sources since they will have lost a significant share of tariff revenue on imports from the EU. The estimates refer to changes from the CET so they are wholly an ‘EPA effect’ and are additional to any ‘customs union effect’. The Eastern and Southern Africa (ESA) EPA Five ESA states initialled an EPA with the same text at the end of 2007: Comoros, Madagascar, Mauritius, Seychelles and Zimbabwe. Although all of them also established their liberalisation schedules in relation to the Common Market for Eastern and Southern Africa (COMESA) CET, the details of their liberalisation and of their exclusion baskets are different: though the COMESA members agreed on a three-­band CET (0 per cent for raw materials and capital goods, 10 per cent for intermediate goods and 25 per cent for final goods), they never agreed a formal definition that allocated each item in the nomenclature to one of the three groups. The EPAs have made this specific link – but it is far from clear that ‘raw and capital’ or ‘intermediate’ or ‘final’ are defined in the same way in each country’s schedules. During 2008 Zambia also initialled the common ESA EPA text. However, Zambia’s liberalisation schedule is completely different, with no reference to a CET and different start and end dates. Overall, there are over 1,000 items being liberalised by one or more of the ESA countries for which there is some degree of discrepancy in the CET classification. This may make eventual agreement on a common customs union-­wide set of tariffs more difficult. There are differences between the hypothetical revenue losses of all the countries (Table 2.10). Potentially, all the countries will experience substantial revenue losses in the first tranche – but in the case of Mauritius and Seychelles this impression is probably misleading as sales tax will replace tariffs as a revenue source. Taking this into account, Madagascar faces the highest absolute revenue loss, with Zambia and Zimbabwe affected to broadly the same degree. In all five cases liberalisation occurs in three tranches which relate broadly speaking to the COMESA CET categories. Tariffs are not reduced by equal

30   M. Meyn Table 2.10  Hypothetical revenue loss in ESA countries Country

Comoros Madagascar Mauritius Seychelles Zambia Zimbabwe

Hypothetical revenue (US$000) on: all items being liberalised

1st tranche items

3,508 32,643 18,074 142,874 12,710 14,531

N/A 13,631 3,858 141,748 4,706 6,906

1st tranche █share (%) N/A 42 21 99 37 48

Notes The absence of tariff data makes it impossible to calculate hypothetical revenue loss for Comoros.

annual instalments (as is the case in some other EPAs) but in four or five specified years. EPA-­induced liberalisation will take place over ten years, starting in 2013. However, in the first five years (2008–12) countries must accommodate their current tariffs to the COMESA CET level. Given country-­specific differences, each country is considered separately. The UNCTAD TRAINS database does not list MFN tariffs for Comoros so it is unclear how far current tariffs will have to be reduced in order to reach the agreed CET. All of the items in the first tranche of liberalisation (2013) have CETs of zero (Table 2.11). It has until 2014, the first year for the other two tranches, to begin ‘EPA-­induced’ liberalisation. Although Madagascar has in each of the liberalisation tranches some items for which recent MFN duties have been zero, they also all contain other items that have faced tariffs of up to 20 per cent (Table 2.12). The items that will be liberalised in 2013 accounted for 37 per cent of the country’s imports from the EU in 2004–6, implying a sharp front-­loading given the similarity of trade-­weighted tariffs. Table 2.11  Comoros market access schedule Average import value 2004–6 Share of total (%)

CET █

Max. Trade-weighted average

Total trade in HS 1–97 2013 2014–22 (reductions in 2014, 2017, 2020, 2022) 2014–22 (reductions in 2014, 2016, 2018, 2020, 2022) Excluded goods

100 21.5 25

 0 10

 0 10

34.1

25

25

19.3

Not given in schedule

Total

100

Notes Import value and trade-weighted average as given in the market access schedule.

100 37 26.1 17.6 19.3

Share of total (%)

Average import value 2004–6 █

20 20 20 20

10.4 11.5 13.3 17.7

Max. Trade-weighted average

MFN 2006 █

 0 10 25 Not shown in schedule

CET

Notes Import value (for all but 108 of the lines) and CET (except for the 575 excluded lines) as given in the market access schedule. MFN tariffs from the 2006 Madagascar tariff schedule omit 263 lines in the market access schedule (accounting for 0.03% of the average value of imports).

Total trade in HS 1–97 2013 2014–22 (reductions in 2014, 2017, 2020, 2022) 2014–22 (reductions in 2014, 2016, 2018, 2020, 2022) Excluded goods

Table 2.12  Madagascar market access schedule

100 24.5 29.1 42.0   4.4

Share of total (%)

Average import value 2004–6 █

30 or spec. 30 or spec. 30 or spec. 30

Max.

MFN 2006

  1.8   1.2   3.1 23.4

Trade-weighted average

█

 0 10 25 Not shown in schedule

CET

Notes Import value (for all but nine lines) and CET (except for the 185 excluded lines) as given in the market access schedule. MFN tariffs from the 2006 Mauritius tariff schedule omit 279 lines in the market access schedule (accounting for 0.6% of the average value of imports). ‘Spec.’ refers to specific duty. The first tranche of liberalisation for Mauritius had to be completed in 2008 (rather than 2013 as specified in the other ESA EPAs). Not all of these goods had been liberalised in 2006, the latest year for which tariff data are available (Table 2.13). This group of products accounted for one-quarter of imports from the EU in 2004–6. Since only 4.4 per cent of imports are being excluded altogether, the bulk of imports (71 per cent in total) will be liberalised between 2013 and 2022. Since the country has announced its intention to be ‘a duty-free island’ (using sales taxes instead of tariffs to collect revenue), this will presumably not pose any ‘additional’ EPAinduced problems.

Total trade in HS 1–97 2008 2013–17 (reductions in 2013, 2014, 2015, 2017) 2013–22 (reductions in 2013, 2015, 2018, 2020, 2022) Excluded goods

Table 2.13  Mauritius market access schedule

Overview and comparative analysis of EPAs   33 Seychelles, like Comoros and Madagascar, has its first EPA commitments in 2013 but in some cases it will need to reduce very high tariffs (in 2006) to meet the CET target. Table 2.14 shows that this customs union effect far outweighs the EPA one. The trade-­weighted average tariff for goods that will be liberalised by 2013, to reach the CET of zero per cent, was 104 per cent in 2006. The Zambian schedule was completed in 2008 and differs substantially from the other ESA states. The schedule starts from Zambia’s 2008 MFN tariffs (with no mention of a CET) and the liberalisation tranches are not the same as for the other ESA countries which, despite small variations, start liberalisation in 2013 and complete it in 2022. The Zambia schedule specifies the tariff payable in every year from 2009 to 2023 inclusive for all the goods that are to be liberalised. The first tariff cuts do not need to be made until 2014, when the tariffs on 858 items (all with an MFN of 5 per cent) must be removed. A second phase of liberalisation starts in 2017 with a reduction to 10 per cent, followed by further reductions in 2020 and 2023. The final phase of liberalisation starts in 2019 with 5 per cent reductions annually to 2023 (Table 2.15). Like ESA countries apart from Mauritius (Table 2.13) and Zambia, Zim­ babwe’s first tranche of liberalisation is in 2013 (Table 2.16). The other two tranches begin a year later than the norm (in 2015) and, unusually, the liberalisation of final goods is completed one year earlier than that for intermediate goods. The COMESA CET for the products to be liberalised in 2013 is zero but the latest available Zimbabwean tariffs on some goods have been much higher. The trade-­weighted average MFN tariff in 2003 for the goods to be liberalised in 2013 was 12 per cent. Since 45 per cent of the country’s imports from the EU in 2004–6 fall into this category the impact could be significant. The Southern African Development Community (SADC) EPA The countries of SADC are now split into four groups: signatories to the SADC minus EPA; signatories to the ESA EPA; one signatory to the EAC EPA; and non-­signatories. This section covers only the four EPA members of the South African Customs Union (SACU) – BLNS – and Mozambique. Namibia has not signed the EPA in June 2009, unlike other SADC EPA members. At the time of writing it remained unclear whether the country would join the EPA at a later stage. B otswana , L esotho, Namibia and S waziland (BLN S)

Table 2.17 provides information for BLNS comparable to that provided above. The tariff status quo for Namibia is different to Botswana, Lesotho and Swaziland (BLS). Goods originating in the EU are treated in one of two ways according to the country through which they first enter SACU. Those goods that enter SACU via Botswana, Lesotho, South Africa or Swaziland have been subject to the tariffs specified in the TDCA between South Africa and the EU. Those goods that enter via Namibia have been charged the MFN tariff set out in the SACU CET.

  2.5

Excluded goods

█

200 200 200 or spec. 225 or spec.

Max.

79.3

104.1 0.7 2.4

Trade-weighted average

MFN 2006 █

Not shown in schedule

 0 10 25

CET

Notes Import value (for all but 17 lines) and CET (except for the 131 excluded lines and 26 others) as given in the market access schedule. MFN tariffs from the 2006 Seychelles tariff schedule omit 926 lines in the market access schedule (accounting for 5.8% of the average value of imports). ‘Spec.’ refers to specific duty.

100 62.1 15.1 20.4

Share of total (%)

Average import value 2004–6

Total trade in HS 1–97 2013 2013–17 (reductions in each year) 2013–22 (reductions in each year)

Table 2.14  Seychelles market access schedule

100 48.9 20.8   6.9   2.9 20.4

Share of total (%)

Average import value 2004–6 █

 0  5 15 25 25

Max. 0 5 15 25 21.5

Trade-weighted average

MFN 2006 █

 0 10 25 Not shown in schedule

CET

Notes Import value (for all but one line) and Maximum tariff as given in the market access schedule. Trade-weighted average based on multiplying import value by applicable tariff for each product, summing and dividing this total by total import value. CET derived from other ESA schedules.

Total trade in HS 1–97 already duty free in 2014 2017–23 (reductions in 2017, 2020 and 2023) 2019–23 (in equal annual instalments) Excluded goods

Table 2.15  Zambia market access schedule

100 44.9 14.7 20.3 20.1

Share of total (%)

Average import value 2004–6 █

  60   80 100 100

Max. 13.0 12.4 28.4 23.7

Trade-weighted average

MFN 2006 █

 0 10 25 Not shown in schedule

CET

Notes Import value and CET (except for the 716 excluded lines and one other) as given in the market access schedule. MFN tariffs from the 2003 Zimbabwe tariff schedule omit 363 lines in the market access schedule (accounting for 1% of the average value of imports).

Total trade in HS 1–97 2013 2015–23 (reductions in 2015, 2018, 2021, 2023) 2015–22 (reductions every year) Excluded goods

Table 2.16  Zimbabwe market access schedule

100

31 17.01 96 20

4.6 0.1 5.8 0.5

Max.

30 60.48 60.48 25 25 20 15.75

█

or spec or spec or spec

or spec or spec

or spec

or spec

16.0 0 6.1 9.4

0.03 8.7 8.9 0 0 10.6 15.8

5,027

739 2 123 56

3,127 16 908 2 13 38 3

Trade-weighted avg.d,e & # lines on which calculated

TDCA tariff  b (Botswana, Lesotho, Swaziland)

74.2 0.1 13.1 0 0 1.5 0

100

Share of total (%)

Import value 2007a █

43 27 96 40

55 96 96 25 25 40 25

Max.

or spec. or spec. or spec.

Or spec. or spec.

Or spec. Or spec. Or spec.

21.9 27.0 6.8 5.8

1.2 20.9 16.3 0 25.0 8.2 25.0

5,016

739 2 123 56

3,115 16 909 2 13 38 3

Trade-weighted avg.d,e & # lines on which calculated

MFN tariff  c (Namibia)

Notes a No import data are included in the market access schedule. Because the schedule is in the 2007 version of the HS, and because only Namibia has reported 2007 trade to the UN’s Comtrade database, EU data on EU27 exports to BLNS in 2007 from Eurostat’s COMEXT database have been used to mirror imports. b 2007 ‘Preferential tariff for European Union countries’ from South Africa’s schedule in UNCTAD’s TRAINS database. c 2007 ‘MFN duties (applied)’ from South Africa’s schedule in UNCTAD’s TRAINS database. d Ad valorem tariffs only. Where a range of tariffs applies to different items within an HS-6 sub-head, the highest has been used in these calculations. e Calculated by multiplying the import value by the max. AV tariff for each item (specific duties are not taken account of), then totalling the results for all items, and dividing this total by total import value for all items. Only items for which both an AV tariff and the import value are known are included in the calculation. f i.e. goods categorised as Industry List 5, on which tariffs will be reduced but not removed. g i.e. goods categorised as List 5, regime 1. h i.e. goods categorised as Agriculture List 4 or Industry List 6.

Total

Total trade in HS 1–97 Goods to be liberalised in: 2008 2008–10 2008–12 2008–14 2008–17 2011–15 2011–18 Goods not being fully liberalised: Partial liberalisationf Frozen at 2007 TDCA rateg Excluded goodsh Goods for which the treatment is not clear from the schedule

Tariff range

Table 2.17  BLNS market access schedule

38   M. Meyn Most BLNS imports (by value) will either be liberalised by 2012 or are, as with the TDCA, industrial products subject to partial liberalisation. Almost three-­quarters of imports had to be liberalised in the first tranche (2008) and by 2012 the liberalisation process will have been completed (as far as it goes) on 87 per cent of the country’s imports; only 5.8 per cent of goods are excluded from liberalisation altogether. By 2012, therefore, the import policy of BLNS with respect to the EU is likely to be very similar to that of South Africa under the TDCA (although because of product classification problems it is not possible to be absolutely certain that everything that BLNS will liberalise by 2012 is identical to what South Africa will liberalise under the TDCA). Unlike BLNS, Mozambique’s commitments are not linked to the TDCA and can be analysed in the same way as for all the other EPA signatories. The Mozambican liberalisation schedule was subject to continuing negotiations during 2008. As a result, there are several changes from the version included in the EPA that was initialled at the end of 2007. The first tranche of liberalisation has been put back from 2008 to 2009 and substantially increased. Some 2,109 lines (85 of them – accounting for almost 16 per cent of total import value – already duty free) are to be liberalised on entry into force before 1 January 2009 (Table 2.18). They account for 70.5 per cent of imports which compares to a requirement in the original schedule to liberalise only 50.8 per cent of imports in the first tranche. The second tranche of liberalisation has also been increased compared to the original schedules (from 2.6 per cent of Table 2.18  Mozambique market access schedule Average import value 2004–6a Share of total (%) Total trade in HS 1–97b Goods to be liberalised: 2009 2023 Excluded goodsd

100

Total

100

70.5 11 18.5

MFN 2006b █

Max. Trade-weighted averagec

60 20 20 20

13 12.4 28.4 23.7

CET █

0 5.2 6.2 N/A

Notes a As given in the market access schedule, augmented by data from TRAINS – see note (d). b As given in the market access schedule – but see note (d). c Calculated by multiplying the import value by the tariff for each item, then totalling the results for all items, and dividing this total by total import value for all items. This was not possible for excluded items – see note (d). d The market access schedule lists only the 2,138 items to be liberalised. The number of items being excluded, and their codes, was identified by comparing the market access schedule with Mozambique’s 2007 tariff schedule: any code in the latter which is not included in the former has been assumed to be being excluded. A total import value for these excluded items was derived by subtracting the value of imports of the goods listed in the schedule from the total value of imports also shown in the schedule. Because this gives only a total figure for all exclusions (with no detail on imports in the individual items), it is not possible to calculate a trade-weighted average tariff.

Overview and comparative analysis of EPAs   39 imports to 11 per cent) but deferred from 2018 to 2023, bringing it into line with several other African EPAs. The increase in both tranches of tariff removal has been accommodated by reducing the share of imports that are excluded from liberalisation. According to the data in the schedule it represents a large fall in the proportion of trade that is excluded: down from 37.8 per cent to 18.5 per cent. Since no source for import values is given in the schedule it is not possible to check why such a small fall in the number of exclusions should result in such a large decrease in the proportion of trade that is excluded. As a result of its EPA liberalisation, Mozambique will lose hypothetical revenue of US$11.6 million. Unsurprisingly, given the front-­ loading of the liberalisation, 85 per cent of this loss will take place in 2009. The Caribbean Forum (CARIFORUM) EPA The CARIFORUM EPA comprises the 14 members of the Caribbean Community (CARICOM)5 and the Dominican Republic which is associated to the regional bloc by a free trade agreement (FTA). All CARICOM countries except Bahamas and Haiti are members of the Caribbean Single Market Economy (CSME) that entered into force in 2006 aiming to establish a common market. In 1993 member countries adopted a CET for all goods except agricultural products that was supposed to be implemented in four phases by 1998. However, this deadline was missed and the CARICOM CET is still not fully implemented today. CARICOM’s CET is also not really common because it offers broad scope for tariff suspensions and reductions as well as for national derogations from the CET. Tariff harmonisation and reduction is particularly difficult for the Eastern Caribbean countries6 which rely heavily on customs revenue as income source (WTO, 2007). Though the EPA appears to include a single regional liberalisation schedule for CARIFORUM (with some national exceptions) the reality is that the schedule comprises 15 country-­specific schedules with a certain level of overlap. For  each product the schedule shows the treatment to be accorded within CARIFORUM unless a country has registered an exception. These ‘exceptions’ vary from about 400 tariff lines in Dominica up to more than 3,600 in the Bahamas.7 Even after the end of the 25-year implementation period, the CARIFORUM countries will not have a common external tariff on all their EU-­ sourced imports.8 Given this huge disparity in the CARIFORUM countries’ liberalisation schedules it is not feasible to present in the main text in a digestible, coherent fashion a full comparison of what each country will do in each tranche. Analysing the timetable for major liberalisation, the different implications of countries’ liberalisation commitments become apparent. While Jamaica will liberalise, for instance, only about 11 per cent of products that currently face a tariff of 20 per cent or more this figure is more than 93 per cent for Bahamas (see Table 2.19). The revenue implications of the EPA will therefore be quite different among the CARIFORUM countries.

–

0

2011–13

2011–18

0.1

0.2

–

0.4

–

–

14.1

2013–28

2011–33

2013–33

2015–33

Total (%)

25.2

1.6

–

2.9

0.4

35.3

–

–

1.1

–

1.2

15.4

18.0

–

–

0.3

–

0.2

–

35.5

–

0

3.3

–

2.0

0.2

29.5

–

–

1.0

–

0.5

–

–

28.1

0

–

–

10.9

–

0.7

–

0.5

–

9.5

0

–

0.2

0.0

–

–

–

–

–

–

–

–

0

–

–

–

10.9

–

0.9

–

0.7

–

9.4

0

–

0

34.6

–

–

0.7

–

0.8

0.5

–

32.7

0

–

–

73.8

–

0.5

–

0.2

0

0.1

73.0

0

–

0

64.7

–

–

0.1

–

0.3

–

–

64.3

0

–

–

17.2

–

–

1.9

–

1.8

–

–

12.4

0.1

0

1.0

11.8

–

0.8

–

0.2

0

–

10.8

0

0

–

–

Key a shaded cell denotes that the country in question has no liberalisation scheduled for the tranche in question. ‘–’ denotes that there were no imports of items with tariffs of 20% or more (or a specific duty) in the tranche in question. ‘0’ denotes that imports of items with tariffs of 20% or more (or a specific duty) amounted to less than 0.05% of total imports.

93.6

0.4

–

0.3

5.0

–

0.1

–

2011–28

–

2018–23

–

7.7

–

–

3.6

7.5

4.3

13.4

17.5

0

–

–

2013–23

17.6

0

–

–

2011–23

20.2

0.1

–

–

6.8

11.0

7.3

69.4

2015–22

2013–18

–

2009

Liberalisationa Antigua/ Bahamas Barbados Belize Dominica Dominican Grenada Guyana Haiti Jamaica St Kitts/ St Lucia St Vincent/ Suriname Trinidad/ Barbuda Republic Nevis Grenadines Tobago

Table 2.19  Proportion of import value accounted for by items with tariff of 20% or more (or specific duty)

Overview and comparative analysis of EPAs   41 Table 2.20  Hypothetical revenue loss in CARIFORUM Country

Antigua/Barbuda Bahamas Barbados Belize Dominica Dominican Republic Grenada Guyana Haiti Jamaica St Kitts/Nevis St Lucia St Vincent/Grenadines Suriname Trinidad/Tobago

Annual revenue loss (€000) 2011–13

by 2033

7,625 133,379 54 383 30 12,753 162 22 0.02 251 44 13 2,511 1,239 152

19,241 186,303 22,016 5,856 3,117 90,833 4,219 5,168 4,113 26,845 3,861 32,680 40,068 16,741 41,295

2011–13 share of █total (%) 40 72 0.2 7 1 14 4 0.4 0 1 1 0 6 7 0.4

Notes Estimated revenue loss based on average value of imports in 2004–6 using 2009 tariff rates for items liberalised by 2013 (2011–13) and all liberalised items (by 2033); specific duties are not considered.

Though the EPA text states that the first tranche of liberalisation starts ‘by 2011’ (which would give countries a three-­year moratorium), it also lists for each item in its liberalisation schedule how it will be treated by the start of 2009. Comparing the 2009 tariffs with countries’ latest available MFN tariffs (2006) it shows that these are higher for all countries except Haiti which suggests that, unless they have already completed the process, countries still had to do some ‘pre-­EPA liberalisation’ before January 2009 (see Stevens et al., 2009). In absolute terms the highest revenue loss over the full implementation period will be experienced by Bahamas (which makes its very sharp front-­loading even more likely to create a shock unless alternative revenue generation mechanisms are in place – see Table 2.20). Next (with hypothetical losses at less than half of the Bahamas level – in absolute, not relative, terms) is Dominican Republic, despite its much larger size. Significant absolute losses are also likely to be experienced by Trinidad/Tobago, St Vincent/Grenadines, St Lucia, Jamaica, Barbados and Antigua/Barbuda. In all of these cases the hypothetical losses are over €20 million per year (or slightly less in the case of Antigua/Barbuda). The Pacific ACP (PACP) EPA Although most Pacific countries are not WTO members they are highly open to trade with an (imports plus exports) to GDP ratio of 114 per cent in 2004 compared to 49 per cent for Africa and 80 per cent for the Caribbean (UNCTAD, 2004). This high level of trade openness is not surprising given the smallness

42   M. Meyn Table 2.21  Fiji market access schedule Import value 2007 Share of total (%) Total trade in HS 1–97 Liberalisation on: 1 January 2008 1 January 2013 1 January 2018 1 January 2023 Excluded

Base tariff (% unless stated otherwise) █

Max.

Trade-weighted average

15 15 or spec. 27 or spec. 27 or spec. 27 or spec.

  1.7   6.3   7.3 21.8 19.7

100   22.8   2.3   55.2   3.9   15.8

Notes Import values based on EU25 export data (Eurostat COMEXT) given absence of import data in schedule. Base tariff as given in market access schedule; ‘Spec.’ refers to specific duty. Tradeweighted average based on ad valorem tariffs (or equivalent where it can be calculated) only.

and remoteness of Pacific islands. The EU is not a major trade partner for most of the small islands, and only Fiji and PNG signed an EPA. Fiji will be liberalising just over 84 per cent of its imports from the EU over a period ending in 2023 (Table 2.21). Over one-­fifth of imports must be duty free on entry into force, but 171 of the 498 items involved already face zero duties according to the tariff rates given in the schedule. Most of the items face 5 per cent tariffs so the adjustment impact of the first tranche has been minor. The Papua New Guinea (PNG) liberalisation schedule is unique: it will be liberalising everything that is to be liberalised (just over 88 per cent of its imports from the EU) on entry into force; there will be no transition period (Table 2.22). One reason for the decision not to agree a multi-­year implementation period may be that almost all of the tariffs that will be ‘liberalised’ are already set at zero; Table 2.22 shows that although the current tariff on the items to be liberalised is as high as 40 per cent, the trade-­weighted average is a mere 0.01 per cent; only 305 products faced positive tariffs. Imports of all 305 items together accounted for just 0.07 per cent of the total value of EU imports, implying an immediate hypothetical loss of about €4,200.

2.3  Comparison of ACP liberalisation commitments Caribbean and Pacific countries have a political leverage that does not apply to most African countries; as both import considerably less from the EU (in value terms and as a share of imports) than African countries, they were largely able to exclude or back-­load domestically sensitive products. However, although African countries are on average more heavily affected by the adjustment and revenue impacts of the EPA, there are considerable differences. Côte d’Ivoire’s liberalisation is heavily front-­loaded (with more than half of EU agricultural imports facing a tariff of 20 per cent being liberalised in the first five years). Cameroon moderately back-­loaded its liberalisation but will still experience early liberalisation of

Overview and comparative analysis of EPAs   43 Table 2.22  PNG market access schedule Import value Share of total (%) Total trade in HS 1–97 Liberalisation on 1 January 2008 Excluded

100   88.1   11.9

Tariff (% unless stated otherwise) █

Max.

Trade-weighted average

40 70 or spec.

  0.01 15.8

Notes Import values based on national data in schedule. Tariff as given in market access schedule; ‘Spec.’ refers to specific duty. Trade-weighted average based on ad valorem tariffs (or equivalent where it can be calculated) only.

some high-­tariff items. Ghana succeeded in revising its original liberalisation schedule significantly in the course of 2008. While the original schedule foresaw the liberalisation of agricultural items subject to 20 per cent tariffs in 2009 (several of which appeared to compete with domestic production), the revised schedule removes no tariff exceeding 5 per cent until 2015. Moreover, Ghana succeeded in reducing the revenue impact of EPA liberalisation in the revised schedule (lowering the share of revenue loss in the first tranche from 29 per cent to 7.5 per cent). This allows the country much more time to put alternative revenue collection systems in place to compensate for tariff losses. For EAC, the ‘EPA effect’ will not start until 2015 and will be completed over a further 18 years, giving the region a good period within which to adjust. EAC included few items that exceed the scheduled tariff of 10 per cent and that are significantly sourced from the EU. However, given the disparity between the current protection level for some products and the three-­band EAC CET with the highest protection level of 25 per cent, EAC countries are likely to face adjustment costs for some products. Similar adjustment costs will occur for most Caribbean countries (where immediate change appears to be required by most countries to bring applied MFN tariffs in line with the 2009 tariffs stated in the liberalisation schedule), Cameroon (CEMAC) and Zimbabwe (COMESA) when implementing their CET. Though these adjustment costs can be considered a ‘customs effect’ rather than an EPA effect, they may be perceived as harsh challenges by domestic producers. The countries of the ESA will be very differently affected by the EPA. For the islands in the group (especially Mauritius and Seychelles) it would be feasible to replace tariffs with sales tax as all imports must enter via sea or airport. This policy latitude is more limited for the large mainland countries (although most taxed imports come through a few major points of entry). Different challenges of implementing the EPA (and the COMESA CET) arise from countries’ varied protection levels and differences in the importance of imports from the EU. While Madagascar would need to raise its maximum tariff of 20 per cent to reach the third band of the COMESA CET, Zimbabwe will face severe adjustment costs when bringing its applied MFN tariffs down to the CET levels.

High Bahamas BLNS Côte d’Ivoire Mozambique Zimbabwe Seychelles

Impact of early tranche(s)

Adjustment

Dominican Republic Ghana Madagascar Mauritius Zambia

Medium

2–5 years Cameroon All CARIFORUM* Ghana Madagascar Seychelles Zimbabwe

Fiji Zambia Zimbabwe

BLNS Cameroon Comoros Côte d’Ivoire Ghana Madagascar Mauritius Mozambique PNG Seychelles Under 2 years BLNS CARIFORUM (except Haiti)* Côte d’Ivoire Fiji Mauritius Mozambique PNG

15–20 years

Under 15 years

Liberalisation starts for positive-tariff goods

Duration

Table 2.23  Comparison of ACP liberalisation schedules

All EAC Antigua and Barbuda Barbados Belize Cameroon Comoros Dominica Fiji Grenada Guyana

Low

6+ years All EAC Comoros Zambia

All EAC All CARIFORUM

20+ years

Revenue

30%+ Antigua and Barbuda Bahamas Côte d’Ivoire Madagascar Mozambique PNG Seychelles Zambia Zimbabwe

10–30% Cameroon Dominican Republic Ghana Lesotho Mauritius Namibia

continued

Under 10% All EAC Barbados Belize Botswana Comoros Dominica Fiji Grenada Guyana Haiti Jamaica St Kitts/Nevis St Lucia St Vincent/Grenadines Suriname Swaziland Trinidad/Tobago

Haiti Jamaica PNG St Kitts/Nevis St Lucia St Vincent/Grenadines Suriname Trinidad/Tobago

15–20 years Barbados Côte d’Ivoire Comoros Fiji Grenada Haiti Kenya Madagascar Namibia St Kitts and Nevis Tanzania Uganda

Under 15 years Antigua and Barbuda Bahamas Botswana Dominican Republic Jamaica Lesotho Mauritius PNG Seychelles St Lucia St Vincent/Grenadines Swaziland Trinidad/Tobago

Belize Burundi Cameroon Dominica Ghana Guyana Mozambique Rwanda Suriname Zambia Zimbabwe

20+ years

Note * According to the EPA text the countries have a three-year moratorium for liberalisation. However, according to the latest available MFN tariff (2006) all CARIORUM countries but Haiti have higher tariffs than those listed in the liberalisation schedule for 2009.

Exclusions

Table 2.23  continued

Overview and comparative analysis of EPAs   47 As in ESA, the SADC liberalisation schedules show considerable incoherence. There is a strong similarity between the BLNS commitments and those of South Africa under the TDCA, but very little between these and the Mozambique regime (just one-­fifth of the items are being excluded by both parties). Since BLNS have de facto implemented the TDCA since 2000, the additional adjustment costs as a result of the EPA are marginal. For Mozambique, however, the EPA implies immediate revenue losses that are significant. The implications for regional integration As structured to date, EPAs will do little to promote regional integration within ACP countries. Even where countries are in a regional agreement they have not negotiated an entirely common EPA (exclusion lists differ widely), and often few members have signed an EPA. Cameroon is the only CEMAC country that initialled an EPA, while Côte d’Ivoire and Ghana are the only ECOWAS states that initialled (different) EPAs. Cameroon had an incentive to act alone as the other CEMAC members are either LDCs with the EBA initiative as a fall-­back position or export very few items to the EU that might be subject to increased tariffs under GSP (see Section 2.2). All countries have  been invited to join the CEMAC EPA and negotiations towards a full  EPA with all CEMAC members are ongoing. However, in addition to political uncertainty about joining an EPA, technical caveats complicate the negotiations. Cameroon will start liberalising its tariffs from the CEMAC CET level in 2010. Given that this CET is not yet fully implemented, a delay in the conclusion of a regional agreement would require some additional effort to realign tariffs within the region during the implementation of a full EPA. Should the conclusion of a regional agreement be delayed beyond that date, this would mean that Cameroon would already have cut tariffs below the CEMAC CET level applied by other countries in the region. Accordingly, in order to implement a regional EPA, either Cameroon would have to increase tariffs again to the regional level, or other countries would have to accept rapid cuts in tariffs to reach the level of Cameroon, or the regional EPA would have to specify a transition period during which Cameroon would apply different tariff levels than other countries in the region, until these gradually reach the same level of liberalisation as Cameroon. As only Côte d’Ivoire and Ghana initialled EPAs, over four-­fifths of the ECOWAS states have not joined an interim EPA. It is understood that either country’s schedule would be superseded in the case of a broader ECOWAS EPA but it remains open how this could be realised. While Ghana is only liberalising zero tariff items until 2012, Côte d’Ivoire will have liberalised some 60 per cent of EU imports by the end of 2012. Though both EPA texts foresee the option to revise countries’ liberalisation schedules in the light of a regional tariff (another novelty to the original EPA) it restricts at the same time the options for such a regional amendment. Thus, the ‘general incidence’ resulting from any tariff

48   M. Meyn changes should not be higher than the liberalisation commitments of Ghana and Côte d’Ivoire vis-­à-vis the EC. In the light of countries’ very divergent schedules it is difficult to see how this could be realised. It also remains open which ECOWAS countries will join the EPA. In spite of the optimistic rhetoric in the region on the prospect of concluding a full regional EPA, the road ahead remains unclear (as does the ECOWAS economic integration process). The EAC is the only region where countries have agreed on an immediate joint regional liberalisation schedule based on their CET. If countries’ commitments under the EPA are implemented fully and in a timely way, economic integration will have been reinforced (although they do not have a common agreed exclusion list; as argued in Chapter 3 such a common list would help promote intra-­regional trade). A different picture emerges with respect to COMESA/ESA integration. With the exception of Tanzania, all EAC countries are members of COMESA and committed to become members of the COMESA customs union. Officially, the EAC EPA should merge with the ESA EPA and the SADC EPA in a ‘tripartite process’. This will be, however, extremely challenging as the discussions around the ESA and the SADC EPA shows. Sixteen of the 19 COMESA countries negotiated as ESA with the EU.9 By the final negotiation process ESA had splintered: five countries initialled the ESA agreement in 2007, one in 2008 and four initialled in 2007 under the EAC. The remaining six COMESA countries are LDCs (Djibouti, DRC, Eritrea, Ethiopia, Malawi and Sudan) which can export to the EU under the EBA initiative. At this stage, the regional character of the ESA EPA grouping is difficult to see, and the initialling of a separate agreement by EAC partner states has created some tensions within the grouping. Though all the parties involved in the ESA EPA negotiations have made the political commitment to pursue negotiations towards a full and comprehensive EPA this has been extremely difficult: no product is excluded by all countries and 70 per cent of all products excluded were chosen by one country only – a clear indication of the countries’ very divergent protection interests. In addition to the technical difficulties in aligning the six different ESA schedules with the separate EAC liberalisation offer, the region also needs to convince the remaining six countries of the benefits of signing an EPA with the EU. In the absence of an established CET for COMESA, it is less clear what interest the LDCs would have in tabling a market access offer. Like ESA, SADC is split, which implies significant challenges for its customs union, to be launched in 2010. Half of the SADC member states are also members of COMESA which (re)announced the creation of its customs union by the end of 2009. The EPA process has unfolded the inconsistency of southern African countries’ regional integration commitments and forced a decision, with the result that now both COMESA and SADC are split. Whether South Africa and Angola will join the SADC EPA remains to be seen. The other SADC members have either joined the EAC EPA (Tanzania), the ESA EPA (Madagascar, Mauritius, Zambia and Zimbabwe) or fallen back on the EU’s EBA initi-

Overview and comparative analysis of EPAs   49 ative (DRC and Malawi). However, the EPA has not only split SADC and COMESA, two regions that had shown inconsistencies in their membership and integration plans, but also SACU, the only fully implemented customs union in Africa. One of the most contentious unresolved issues is the relationship between the SADC EPA and the TDCA. As BLS signed the interim EPA in early June 2009, while South Africa and Namibia stay outside there are two SACU tariff regimes for imports from the EU. This is expected to give rise to political, legal and technical challenges.10 While the CARIFORUM EPA has been portrayed as a region–region document, the reality is that it provides an umbrella for separate and partially different national trade policies on trade in goods. Even after the 25 years implementation period the region will not have a CET vis-­à-vis the EU for all trade in goods. Thus, it is difficult to see how the EPA liberalisation schedule promoted regional integration in the CARIFORUM region. As the discussion above shows, the trade rules of the EPA also have significant implications for the region’s integration process. The nature of the Pacific islands, some of which are thousands of kilometres apart, makes it extremely difficult to establish economic integration processes. The Pacific Regional Economic Integration Programme created the Pacific Islands Countries Trade Agreement (PICTA), which aims to establish an FTA among Pacific states. While PICTA originally envisaged liberalising intra-­Pacific trade by 2010 for developing countries and by 2012 for LDCs, the schedule was changed to early 2007 because of EPAs. The PACP EPA may pose challenges for implementing the PICTA; if PACP comes into force countries are expected to be able to implement the RoO, thus hindering EU-­originated goods from being traded among Pacific islands. In most regions the liberalisation commitments under the EPA are not in line with countries’ regional liberalisation commitments. However, it will be technically and politically difficult to revise countries’ liberalisation commitments on a regional level. Some countries (BLS, Côte d’Ivoire, Mauritius, Mozambique, Fiji, PNG) are in the process to start with the implementation of their liberalisation commitments and would have to reimpose tariffs on EU imports in order to accommodate a revised liberalisation schedule covering all countries in the region. This, however, might not be possible since the EPA signatories are committed to ‘freeze’ the currently applied tariff level for items that are not subject to liberalisation.

2.4  Conclusions and policy implications The Economic Partnership Agreements initialled between the EU and 36 ACP countries in late 2007 remain hotly contested. While proponents argue that EPAs are ‘development tools’ that promote economic development, strengthen regional integration and facilitate the incorporation of ACP countries into the global economy, opponents fear that revenue losses and the increased exposure of ACP economies to EU imports will be detrimental to development.

50   M. Meyn Starting with an analysis of ACP countries’ motivation to enter into an EPA it was found that the fear of losing their current preference level (and in many cases the ability to continue exporting to the EU market) was the decisive factor for initialling an EPA. ACP exporters of beef (Botswana and Namibia), sugar (beneficiaries of the EU Sugar Protocol), bananas (Cameroon, Côte d’Ivoire and several Caribbean countries), rice (Guyana and Suriname), horticulture (Kenya) and citrus (Zimbabwe, Swaziland) were the most likely to be heavily affected by the loss of Cotonou preferences. Facing the alternative of being downgraded to the EU’s ‘next best alternative’, the GSP (and MFN in the case of beef and sugar), most developing ACP countries initialled an EPA – many of them very late in the process. Only ten developing ACP countries did not join an EPA and have faced GSP tariffs for their EU exports since January 2008.11 As these countries export little to the EU market or export only a few products affected by increased tariffs, the overall negative effects are very limited. The additional gains of receiving DFQF market access are comparably small because the ACP already enjoyed largely free access to the EU under the Cotonou Agreement. Any immediate gains where existing EU tariffs are eliminated must be reinforced to bring longer-­term benefits by enabling an increase in ACP supply. This will often require significant investment in both physical and human resources. It also needs to be recognised that the EPA signatories will face very different adjustment costs and revenue losses, as the importance of the EU as a source of imports varies considerably. Côte d’Ivoire, for example, will have removed completely tariffs on 60 per cent of its imports from the EU three years before Kenya even begins to start reducing its tariffs as part of the EPA liberalisation process. There are not only large differences between the liberalisation commitments of the different regions but also within the countries of each region, so there is little coherence between the EPA agenda and regional integration processes, particularly for the African regions (except for EAC). The revision of EPA schedules on a regionally coherent basis will be technically and politically extremely challenging. Countries in SADC, West Africa, ESA and PACP have already started the implementation of their liberalisation commitments, so establishing regional coherence would require reimposing tariffs on some EU imports which would be in contradiction to their commitment to ‘freeze’ the currently applied tariff level for items that are not subject to liberalisation. The most problematic issue for regional EPAs will be establishing a consistent region-­level exclusion list. Low levels of trade integration and divergent economic interests (reflected in the non-­convergence of tariff levels) continue to complicate the formulation of a common negotiation position. Future ACP–EU trade will not only be influenced by tariff liberalisation commitments but also by the EPA texts (Bilal and Stevens, 2009; Stevens et al., 2008). The EPA signatories have largely lost the ability to apply quantitative restrictions, local content requirements or any other non-­tariff barriers, not only for trade with the EU but also for intra-­regional trade. Such restrictions

Overview and comparative analysis of EPAs   51 are often used in South–South integration agreements to protect the least developed countries from the intermediate developed countries. The abolition of quantitative restrictions might therefore constrain regional ACP policies aimed to promote social cohesion by applying special and differential treatment. While EPA measures relating to quantitative restrictions, safeguards and infant industry protection are enforceable (i.e. they are subject to dispute settlement), the provisions on development cooperation are largely non-­ actionable. Thus, all the EPA texts lack binding financial commitments that go beyond what had been agreed under the tenth European Development Framework (EDF ). The negotiations towards comprehensive EPAs offer both parties the chance to address areas that are feared to constrain ACP development and regional integration.12 When EPAs are implemented it will be imperative to have agreements that mirror the development interests of both sides. While sufficient funds from the EDF are available in theory to cover first-­round needs (such as immediate revenue losses), it is not guaranteed that the funds will actually be provided or, if so, can be adequately used. What is needed is to tighten up the framework for aid to ensure that it is given in adequate amounts, in an appropriate and timely way and to deal with the actual, new costs that will be created by the EPA. It is necessary to commit the EC and EU Member States to supply immediately available resources according to countries’ high-­priority needs, to specify medium-­term needs as soon as possible and to monitor the delivery and effectiveness of aid.

Most restrictive in the EPA

CEMAC (unilateral stop of liberalisation possible for max. 1 year)

ESA (no new/higher export CARIFORUM (no new duties, Zambia: export duties listed in existing duties to be abolished Annex III can be applied without duties) within 3 years) time restrictions. PACP, EAC, SADC, CEMAC, Ghana, Côte d’Ivoire (temporary (re-)introduction allowed; subject to mutual agreement

Export duties

CARIFORUM, PACP (in case of serious difficulties; to be mutually agreed)

EAC, ESA, SADC, Ghana, Côte d’Ivoire (no indication)

SADC (10 years) PNG (immediately)

Review of tariff concessions in case of ‘serious difficulties’

CEMAC, Ghana, Côte d’Ivoire, ESA, Fiji (15 years)

CARIFORUM, EAC (25 years)

Time frame

CARIFORUM (individual EAC (joint approach, no SDT) schedules will merge; SDT possible; CF will do its best to levy customs duties only once); SADC (joint approach for BLNS; individual for Moz.; schedules shall be merged)

Moderately restrictive in the EPA

PACP, CEMAC (Cameroon), Ghana, Côte d’Ivoire (regional integration envisaged but no binding provisions yet)

Least restrictive in the EPA

Regional liberalisation

1. Customs duties

Provision

Appendix A2.1  Comparative analysis of the EPA texts

Appendix Least restrictive in other EU FTA

CARIFORUM, PACP: (parties will consult how to apply MFN clause; Joint Council/Commission takes final decision)

PACP, SADC (limited to products that will be liberalised)

Summary (number of appearances in each (I)EPA restrictiveness column): CARIFORUM 2 2 CEMAC 3 1 Côte d’Ivoire 2 1 EAC 2 – ESA 0 (+ Zambia 1) 2 Ghana 2 1 PACP 2 2 (+ Fiji 1) SADC 1 2

Sanctions in case of failure to provide administrative cooperation

MFN clause

Standstill provision

3 3 4 5 4 4 1 (+ PNG 1) 3

All regions/countries (temporary suspension of 6 months)

EAC, ESA, CEMAC, SADC, Ghana, Côte d’Ivoire (no exception from MFN clause)

CARIFORUM, EAC, ESA, CEMAC, Ghana, Côte d’Ivoire (for all trade)

continued

TDCA and Mexico: no provisions

TDCA and Mexico: no provisions

Least restrictive in the EPA

ESA, EAC, PACP, CEMAC, Ghana, Côte d’Ivoire (suspension of tariff reduction, increase of customs duties to applied MFN rate and tariff quotas)

No time limit: not exceed what is necessary to remedy or prevent serious injury

Safeguard instruments

Maximum safeguard protection

Pre-emptive safeguards

All regions/countries (5 years with the option of extension)

ACP exclusion from GATT/AoA safeguards

2. Trade protection/NTBs

Provision

Appendix A2.1  continued Moderately restrictive in the EPA

All regions: max. 200 days

SADC, CARIFORUM (suspension of tariff reduction, increase of customs duties to applied MFN rate or tariff quotas)

Most restrictive in the EPA

TDCA and Mexico: no time restrictions

TDCA: periodic review by Joint Council; max. period 3 years Mexico: up to 3 years in exceptional cases

TDCA: no specification; measures need to be communicated to Joint Council Mexico: no specification (‘appropriate measure’)

TDCA and Mexico: no provisions

Least restrictive in other EU FTA

CEMAC, ESA, SADC: 8 CARIFORUM, EAC, Ghana, years in the first 10–15 Côte d’Ivoire: 8 years in the first years (10 years for ESA, 12 10 years (extendable for G+CI) years for SADC, 15 years for CEMAC and all LDCs)

TDCA: Protected goods shall not increase 10% of import value TDCA and Mexico: only safeguards

PACP (protected goods shall not increase 3% of tariff lines or 15% of import value) CARIFORUM, CEMAC (only safeguards)

All regions except PACP: no

Ghana, Côte d’Ivoire, PACP, ESA (temporary increase of customs/excise duties possible subject to mutual agreement) EAC, SADC (temporary introduction of export taxes is possible subject to mutual agreement)

QRs for infant industry protection

Further provisions for infant industry protection

continued

TDCA and Mexico: for 3 years

TDCA: 4 years in the first 12 years

No new safeguards All regions: for 1 year for a product that has been previously subject to safeguards

PACP (10 years/15 years for LDCs and small island states) in the first 20 years

Maximum period to apply safeguards for infant industry protection

EAC, ESA, SADC (no provisions TDCA: linked to preyet) emptive safeguards Mexico: linked to preemptive safeguard and the introduction of export duties

PACP (not linked to preemptive safeguards)

Safeguards related to CARIFORUM, CEMAC, Ghana, food security Côte d’Ivoire (linked to preemptive safeguards)

EAC (restrictions in case of food insecurity and for commodity marketing possible) Seychelles: Exempted from NT provision for 10 years Ghana: Annex III lists products for which application of discriminatory charges is allowed for 10 years

Abolition of NTBs and quantitative measures

Subsidies

QRs for infant industry protection

All texts except PACP: nonexistent

Maximum period for PACP (first 20 years) which infant industry protection is applicable

Least restrictive in the EPA

Provision

Appendix A2.1  continued Most restrictive in the EPA

All regions/countries: national subsidies allowed

CEMAC (first 15 years) SADC (first 12 years/15 years for LDCs); with option of extension) ESA (first 10 years/15 years for LDCs) Ghana, Côte d’Ivoire (first 10 years with option of extension)

PACP (safeguards may not increase on more than 3% of tariff lines or 15% of import value)

EAC, CARIFORUM (first 10 years for all countries)

Côte d’Ivoire, ESA, SADC, CARIFORUM (only antiPACP (exemptions in case dumping/countervailing measures of infant industry are exempted) protection possible; subject to mutual agreement)

Moderately restrictive in the EPA

Mexico: national subsidies allowed; TDCA: no provisions

Least restrictive in other EU FTA

PACP (no provisions)

Note a Chapters not yet drafted for EAC and ESA.

CARIFORUM, PACP (review of progress after 3 and 5 years respectively)

6 2 2 4 2 2 3 3

1 1 1

3 1 1

CARIFORUM, Ghana, Côte d’Ivoire, SADC (Special Committee on Customs)

Ghana, Côte d’Ivoire, CARIFORUM, CEMAC (regional SADC (promotion of customs legislation, joint harmonised customs procedures and documentation) legislation and procedures)

Summary (number of appearances in each (I)EPA restrictiveness column): CARIFORUM – – CEMAC 2 – Côte d’Ivoire 1 1 EAC ESA Ghana 1 1 PACP 2 – SADC 1 1

Common institutions PACP, CEMAC (no provisions)

Development of common regional standards

Single administrative CEMAC, Ghana, Côte d’Ivoire, document SADC (no provisions)

3. Customs and Trade Facilitationa

Summary (number of appearances in each (I)EPA restrictiveness column): CARIFORUM 6 1 CEMAC 7 3 Côte d’Ivoire 8 3 EAC 8 1 ESA 7 (+1 Seychelles) 4 Ghana 9 2 PACP 7 2 SADC 6 4

58   M. Meyn

Notes   1 The chapter draws extensively from the ODI section of the study ‘The Interim Economic Partnership Agreements between the EU and African States: Contents, challenges and prospects’ (Bilal and Stevens, 2009) and the ODI study ‘Analysis of Contents of the CARIFORUM and Pacific ACP Economic Partnership Agreements and Challenges for 2008’ (Stevens et al., 2009).   2 (1) January 2008–September 2009: continuation of the Sugar Protocol, with ‘additional market access’ (180,000 tons) for beneficiaries. (2) October 2009–September 2015: DFQF for non-­LDC ACP subject to an ‘automatic volume safeguard clause’ (3.5 tons for all ACP countries) and, for processed agricultural products with high sugar content, an ‘enhanced surveillance mechanism in order to prevent circumvention of the sugar import regime’. (3) October 2015 onwards: DFQF for non-­LDC sugar exports, subject to a ‘special safeguard clause’ (which will be applied when the EC market price falls below 80 per cent).   3 The ‘hypothetical revenue loss’ is obtained by applying the tariff to the value of imports in the reference year(s). This assumes that collection is 100 per cent efficient and that there are no rebates, which is unrealistic. It also assumes that all tariffs are known, which is not always the case. These two ‘errors’ will work in opposite directions. One will produce a figure for hypothetical revenue loss that is the maximum possible figure and is almost certainly overstated. The other will overlook some revenue that is currently being collected (assuming that the ‘missing tariffs’ are positive. Unless there are sharp differences in the collection rate between products (e.g. because of a duty exemption on some goods), the figures for the relative speed of tax loss should not be inaccurate. It is more important, therefore, to take account of whether the fiscal shock will come sooner or later rather than its absolute ‘hypothetical’ level since the creation of alternative revenue systems will take time.   4 The EPA schedule states that 17.4 per cent of imports are excluded and the ODI calculations based on mirror data on average imports in 2004–6 put the figure at 18.2 per cent (Stevens et al., 2009).   5 Additionally, the UK territory Montserrat is a member of CARICOM.   6 The members of the Organization of Eastern Caribbean States (OECS) are Antigua and Barbuda, Dominica, Grenada, St Kitts and Nevis, St Lucia and St Vincent and the Grenadines.   7 On a HS-­6 digit level.   8 Taking 2007 volumes on the HS-­6 digit subhead 6.5 per cent of import CARIFORUM sources from the EU will face different tariffs in 2033.   9 Of the other three, Egypt and Libya are not classified as ACP countries and Swaziland negotiated in the SADC EPA group. 10 According to SACU (Art. 31) the consent of South Africa is a legal requirement for the EPA. However, South Africa has so far refused to give its consent and claims that the BLS decision to sign the EPA puts the existence of SACU in question. 11 Namibia might join this group in the near future since it did not sign the SADC IEPA in June 2009 and now faces the risk of being downgraded to the GSP, which would imply considerable costs for the country (Meyn, 2007a; Stevens and Kennan, 2007). 12 The European Council Regulation from 27 May 2008 makes explicit reference to ACP’s option to draw on provisions agreed in other EPA texts (European Council, 2008, Point 3).

References Bilal, S. and C. Stevens (eds) (2009), ‘The Interim Economic Partnership Agreements between the EU and African states: Contents, challenges and prospects’, ODI (London)

Overview and comparative analysis of EPAs   59 and ECDPM (Maastricht): Study prepared for the Foreign Ministry of The Netherlands, March 2009. ECDPM (2008), ‘Nigerian cocoa processors to lose millions’, Trade Negotiations Insight, 7, 2 (March): 4–5. European Council (2007), ‘Council Regulation (EC) No. 1528/2007 of 20 December 2007 applying the arrangements for products originating in certain states which are part of the African, Caribbean and Pacific (ACP) Group of States provided for in agreements establishing, or leading to the establishment of, Economic Partnership Agreements’, Official Journal L 348, 31 December. Online: http://eur-­lex.europa.eu/ LexUriServ/LexUriServ.do?uri=OJ:L:2007:348:0001:0154:EN:PDF. European Council (2008), ‘Conclusions of the Council and the Representatives of the Governments of the Member States meeting within the Council on Economic Partnership Agreements (EPAs)’, Doc. 9629/08, Brussels, 27 May 2008. Eurostat Comext (various dates), COMEXT database, Luxembourg: Eurostat. Online: http://epp.eurostat.ec.europa.eu/newxtweb/mainxtnet.do. Meyn, M. (2007a), ‘The end of current EU preferences for Namibia: Economic and social impacts’, ODI Project Briefing, May 2007. Online: www.odi.org.uk/iedg/Publications/ Namibia_Preferences_Project_Briefing.pdf. Meyn, M. (2007b), ‘The end of Botswana beef exports to the EU?’, ODI Project Briefing, August 2007. Online: www.odi.org.uk/iedg/Publications/Botswana_MMeyn_briefing. pdf. Naumann, E. (2008), ‘Rule of Origin and EPAs: What Has Been Agreed? What Does It Mean? What Next?’. Online: www.bilaterals.org/IMG/pdf/Naumann_Rules_of_ Origin_and_EPAs.pdf. Stevens, C. and J. Kennan (2007), ‘The costs to the ACP of exporting to the EU under the GSP’, ODI (London): Study prepared for the Foreign Ministry of The Netherlands, March 2007. Online: www.odi.org.uk/iedg/Research_areas/Trade_trade_policy.html. Stevens, C., J. Kennan and M. Meyn (2008), ‘EU duty- and quota-­free market access: What is it worth for ACP countries in 2008 beyond?’, ODI (London): Study prepared for the Department for International Development, February 2008. Online: www.odi. org.uk/iedg/publications/0708009_report_final.pdf. Stevens, C., J. Kennan and M. Meyn (2009), ‘CARIFORUM and Pacific ACP Economic Partnership Agreements: Challenges ahead?, Economic Paper Series No. 87, London: Commonwealth Secretariat. UK Tariffs (2007), Integrated Tariff of the United Kingdom, London: TSO. UNCTAD (United Nations Conference on Trade and Development) (2004), Trade Performance and Commodity Dependence, Geneva and New York: United Nations. UNCTAD (various dates), Trade Analysis and Information System (TRAINS) database, operated by the World Bank’s World Integrated Trade Solution (WITS). Online: http:// wits.worldbank.org/witsweb. WTO (2007), Trade Policy Review: Organization of Eastern Caribbean States (OECS), Geneva: World Trade Organization.

3 The impact of EPAs on ACP imports and welfare Oliver Morrissey and Evious Zgovu

Economic Partnership Agreements (EPAs) require ACP countries to eliminate tariffs on most imports from the European Union (EU), the impact of which will depend primarily on the structure of a country’s imports (EPAs include many other provisions and effects, as discussed in other chapters, but the focus here is on ACP imports). The impact of eliminating tariffs on most imports from the EU will depend on how important the EU is as a source of imports, in general and for particular products, and the extent to which these compete with domestic producers or, in an ACP region context, regional ACP producers. There are benefits for products where there are few or no competing domestic (or regional) producers – consumption gains from increased cheaper imports and potential welfare gains in sourcing imports from more efficient EU producers. There are potential welfare losses where cheaper imports from the EU displace more efficient producers in the rest of the world, and adjustment costs where cheaper imports from the EU undermine domestic production or intra-­regional trade. Negotiated agreements, whether framework or initialled, were in place for most ACP countries by the end of 2008 (Meyn, Chapter 2 of this volume) but many important details remain to be negotiated over the next few years. As EPAs are a case of prospective policy reform, existing studies try to estimate what the effect of likely future scenarios may be. Most ex ante studies of the impact of EU–ACP EPA agreements have concentrated on the welfare and revenue effects, in particular those arising from the requirement of the ACP countries to eliminate (within a maximum of about 23 years) tariffs on substantially all imports from the EU (conventionally interpreted as 80 per cent). This focus is in part because these were important negotiation issues, but partly also because effects could be estimated with limited information on tariffs and patterns of regional trade. There are potential costs to ACP countries through reciprocity as they are required to grant tariff-­free access to imports from the EU. Although there is concern in ACP countries that such opening up to import competition from the EU will displace domestic production, it is not obviously the case that there will be adverse effects. The welfare impact of import liberalisation depends on the production and trade structure of the country in question, and as such is an empirical question. Of greater practical concern is the potential loss of revenue from tariffs on imports from the EU. On the basis of existing

Impact of EPAs on ACP imports and welfare   61 signed EPAs, ACP countries have up to 25 years to phase in tariff elimination, although some will have eliminated tariffs on most imports by as early as 2010 (Chapter 2). More importantly, ACP countries can exclude a range of designated ‘sensitive products’ accounting for up to roughly 20 per cent of imports from the EU from tariff liberalisation (identifying these is a sticking point in negotiations). Thus, countries do have time to plan both their adjustment to the economic effects of increased imports and the revenue effect of eliminating tariffs. To design such plans they need information on the likely effects of tariff elimination on trade, revenue and welfare. This chapter provides such information at an aggregate level for 34 ACP countries. As originally conceived by the European Commission, EPAs were expected to promote regional integration within groups of ACP countries; in principle, a group of ACP countries first negotiate a regional integration agreement (RIA) and then the RIA negotiates a reciprocal EPA with the EU. However, the introduction of reciprocity under an EPA will tend to threaten intra-­regional trade in ACP groupings for a number of reasons. There is a direct displacement threat to existing regional suppliers from the elimination of the external tariff protection vis-­à-vis European exporters. There is also an indirect threat associated with the displacement of domestic production by European exporters in domestic markets, which may thereby reduce regional production capacity and future prospects for intra-­regional exporting. These threats to regional trade development can be offset in a number of ways. Most obviously, as negotiations allow for the exclusion of sensitive products and for phased introduction of the tariff reductions, ACP regions may benefit by treating products traded within the region as sensitive for EPAs, hence avoiding or postponing any reductions on tariffs on such imports from the EU. Less directly, to the extent that the EU provides ‘aid for regional trade’ and support for measures that enhance the productivity and competitiveness of domestic producers, export capacity (both intra- and extra-­regional) can be improved. If EPAs promote increased ACP exports to the EU there is potential to benefit from spillovers (an issue returned to in the concluding chapter). The results reported and discussed in this chapter are based on a number of ex ante studies of the trade effects of EPAs on various ACP groupings or countries that all adopt a similar partial equilibrium analytical framework. McKay et al. (2005) analysed the welfare impacts on East African countries; Greenaway and Milner (2006) covered CARICOM and Milner et al. (2008) considered aspects of impact and adjustment costs for the East African Community (EAC) and Mauritius. Morrissey and Zgovu (2007) focus on agriculture for a large sample of ACP countries to compare the welfare effects of a full liberalization with a scenario that excluded products traded intra-­regionally. This chapter addresses the impact on total imports for the same ACP sample. There are other studies adopting other approaches. Busse and Grossman (2007) apply a differentiated product partial equilibrium model to analyse the trade and revenue effects of the EU–ECOWAS EPA. They find that the (static) trade effects are quite high (imports from the EU increase by over 20 per cent for some products in some

62   O. Morrissey and E. Zgovu countries) although trade creation dominates trade diversion, so the welfare effect is positive for all countries. While revenue losses of less than 10 per cent are the norm, some countries face much higher losses (among the non-­LDCs, Ghana faces the highest revenue loss). Busse and Lüehje (2007) apply the same type of model to Caribbean countries and argue that while there are likely to be welfare gains, revenue losses and adjustment costs could be high. Chapter 1 notes studies that use a combination of general and partial equilibrium modelling techniques and conclude that the likely revenue and adjustment effects will be costly for African countries. The remainder of the chapter is organised as follows. Section 3.1 presents the partial equilibrium method used to estimate the trade, revenue and welfare effects of introducing an EPA for EU imports to ACP countries. Section 3.2 provides a set of estimates, covering the majority of ACP countries except those in the Pacific, for the impact of ‘full liberalization’ to give a benchmark or maximum effect on trade, revenue and welfare, and for how these impacts are affected by identifying sensitive products as those traded within the ACP region. Finally, Section 3.3 sets out the implications of the analysis for future negotiations on the details of implementing EPAs. The analysis here does not incorporate adjustment costs, but these are considered for particular countries in subsequent chapters.

3.1  Modelling framework With a focus on economic welfare, two effects are of particular importance in any analysis of the welfare effect of a regional integration agreement (RIA), which in our case is between an ACP region and the EU considered from the perspective of ACP imports. We assume that the EU benefits, although we make no attempt to estimate this, and focus on the effects on (consumers in) ACP countries. Beneficial trade creation arises where inefficient production by domestic firms in the ACP country is displaced by tariff-­free imports from more efficient producers in the EU. This increases welfare in total through a more efficient allocation of production within the RIA. Trade diversion imposes a welfare loss where trade from more efficient extra-­regional suppliers (ACP imports from the rest of the world, ROW) is diverted to less efficient EU suppliers. For the RIA as a whole, welfare increases if trade creation is greater than trade diversion. A third effect is important for EPAs as the EU may displace trade within ACP regions, in principle benefiting the importing country to the cost of the intra-­regional exporter. The partial equilibrium analytical framework applied incorporates these three effects. As used by McKay et al. (2005), it extends an established theoretical framework for analysing the economic (welfare) effect of regional integration (Balassa, 1974; Lyakurwa et al., 1997; Schiff and Winters, 2003) as applied by Panagariya (1998) to consider when small countries (in this case ACP) integrate with large countries (the EU in this case). Although partial equilibrium methods are limited and restrictive, they offer a number of advantages over alternative computable general equilibrium (CGE)

Impact of EPAs on ACP imports and welfare   63 approaches which make them attractive for analysis covering a range of countries (as presented here). First, and most important for prospective impact studies, the data requirements are relatively simple: all that is needed are data on imports for a representative year disaggregated by source (ACP, EU and ROW) and product. In contrast, CGE analysis requires a model of the structure of the economy (Chapters 6 and 7 provide country CGE applications). The minimal data requirements and simple model structure makes it relatively easy to estimate order of magnitude effects of alternative liberalization scenarios. Second, the estimates are quite easy to interpret as proportional effects relative to initial trade volumes and revenues; consequently, the results are quite useful for policy-­ makers and negotiators. Third, the analysis can be conducted at a high level of product disaggregation for any country, which is especially useful in assessing the impact of alternative criteria to identify sensitive products (CGE analysis typically requires sector aggregation). The results reported here are at an aggregate country level as the aim is to cover many ACP countries. There are limitations, although no approach is without weakness. A number of restrictive assumptions are required, such as on supply and import demand elasticities, although arguably the assumptions are no more restrictive than for alternative methods (and results are quite robust to sensitivity checks). More importantly, the analysis is limited to static trade effects; it does not allow for effects on or responses by domestic producers, or for any effects through factor markets and sector adjustment, although with suitable data it is relatively straightforward to incorporate such issues (Chapter 4 considers the extension to consider adjustment implications). Furthermore, the analysis does not account for changes in partner countries (e.g. if they also reduce tariffs) or the global market (e.g. world prices), or for possible changes in demand for exports, for example if trade preferences change (as under an EPA); addressing these issues would require a global model. The partial equilibrium approach does estimate likely first-­order effects on imports and in principle these could form a basis for more detailed CGE country studies where feasible (see Chapters 6 and 7 for CGE applications). The estimates are indicative of the potential impact of EPAs on imports in ACP countries. Results for three effects from the perspective of consumers are estimated and reported (Chapter 4 illustrates how to incorporate effects on producers). Consumption effects arise from increased imports at reduced prices; if the EU is initially the dominant supplier, the EPA results in pure consumption effects only, and this is clearly beneficial. Trade creation (TC) arises in this context when imports from the EU displace imports from other ACP countries; assuming the EU is the more efficient producer, this increases welfare in the importing country (although producers in the exporting ACP country lose).1 Trade diversion refers to a situation where the elimination of tariffs allows EU suppliers to displace more efficient producers in the ROW; this is likely to arise if pre-­EPA the ROW is the dominant supplier. Figure 3.1 illustrates the welfare effects of an EPA from the perspective of a small home country member (denoted H) of the RIA among ACP countries that

64   O. Morrissey and E. Zgovu is negotiating with the EU. The larger ACP partner country (R) in the RIA is assumed to have an upward sloping supply curve (being relatively small, this is not unreasonable). There are initially two extra-­regional suppliers, the EU and the ROW, both with infinitely elastic supply curves. For a given product: DH represents the home country’s demand for imports, SR the partner’s (upward sloping) supply of exports (to H), and SEU and SW are the respective extra-­regional export supply functions at constant cost (prices PEU and PW respectively). Assume for convenience that initially PEU > PW (this would not apply in our case where the EU is initially the dominant supplier), but once tariffs are eliminated the EU can meet all demand at PEU (i.e., SEU is below SR). There is a non-­discriminatory (ad valorem) tariff (t) on extra-­regional imports, where P Wt   = PW (1 + t) and initially H imports OM2 in total, with OM1 t coming from R and M1M2 from ROW (P EU is not shown as the EU is assumed to be the higher-­cost supplier prior to the EPA). Assuming no domestic production capability welfare (W ) and change in welfare (denoted ΔW ) is defined by the consumer surplus: W for H is initially given by the consumer surplus triangle (the area below DH and above S Wt ) plus the tariff revenue on extra-­regional imports (area a + b). Under the EPA, t applies to ROW but not the EU. The relevant supply price is now PEU with the total quantity of imports expanding from OM2 to OM3 (the consumption effect). Figure 3.1 illustrates a case where all imports post-­EPA come from the EU. The trade diversion effect is illustrated as M1M2, and the trade creation effect as OM1. Different scenarios could be illustrated in separate figures, but it is more useful to consider other possibilities in describing how welfare effects are estimated. P DH SR

P

SWt

PWt

d

PEU

c

a

e b

SW

PW

O

M1

Figure 3.1 Effect of an EU–ACP EPA.

M2

M3

Q

Impact of EPAs on ACP imports and welfare   65 Estimating trade and welfare effects In estimating effects we begin with the trade data and allocate imports by product into one of three cases. If initially the EU is the dominant supplier (accounting for at least 40 per cent of imports), we assume that all effects are consumption gains (consumption effects only). If the ACP is initially a significant supplier (accounting for at least 5 per cent of imports for the product) and the EU is a source of these imports, we allow for the TC of the EU displacing ACP imports of that product. If initially the ROW is the dominant supplier (accounting for at least 40 per cent of imports), we assume that at zero tariffs the EU can displace all imports from the ROW to estimate the maximum trade diversion (TD) potential (this is therefore unlikely to be the actual impact, but is a useful baseline). Consumption effects only (CE) If the EU is initially the dominant supplier we can interpret this as P Wt   =  PEU  t in Figure 3.1; imports increase by M2M3 and we measure the welfare gain as area e. The consumption effect alone (∆C M) is estimated relative to existing EU import volumes as (where elasticities are the modulus, although of course a reduction in tariffs implies an increase in import demand):  t  d EU ∆C M =   .η M .M 0 1 + t 



(3.1)

where t is current tariff imposed on imports from the EU, ηdM is the price elasticity of demand for imports, M0EU is the existing value of imports from the EU. As an EPA entails elimination of tariffs on imports from the EU, the tariff revenue loss on imports (M0EU = OM2) and welfare effects can be estimated as follows: ∆R C = −t.M 0EU

(3.2)

∆W C = ( 1 2 )t.∆C M

(3.3)

‘Trade creation’ with consumption effects (TC&CE) For the case where an ACP partner supplies a relatively significant share of imports one can estimate the effects of trade creation with consumption effects by considering the case where the ACP price lies over the relevant range t between P ROW and PEU. In this case all ACP imports (OM1) will be replaced by imports from the EU. The maximum value of trade creation with consumption C effects (∆TC M  ) obtains where the price of ACP imports is as high as the tariff-­ inclusive price of imports from the EU. Thus:  t  A ACP ∆TCMC = ( 1 2 )   .η M . M 0 1 + t 



where M0ACP is the current value of imports from ACP.

(3.4)

66   O. Morrissey and E. Zgovu Welfare effects of trade creation with consumption effects can be estimated as the combination of the maximum value of trade created by the displacement of ACP exports to partner country j and consumption effects of trade creation defined in equation (3.4) as follows: ∆WTCM = ( M 0ACP ) .t + ( 1 2 ) ( t.∆TCMC )

(3.5)

‘Trade diversion’ with consumption effects (TD&CE) Relevant cases of trade diversion occur where more efficiently produced imports from the ROW (M1M2) are displaced by relatively less efficiently produced commodities from the EU due to an EPA. Commodities for which the ROW is a dominant supplier pre-­EPA can be taken to indicate that the ROW is more effit cient than the EU. Where an EPA leads to PEU  chi2 LM test Prob > chi2 Heteroscedasticity test F-test Prob > F

1,257 58 0.8553 21.79 0.0001 1,094.78 0.0000 14.507 0.0003

Notes *, **, *** denote significance level at 10%, 5% and 1% respectively. The estimation is based on an unbalanced panel from 1980 to 2006. Estimation in column (1) includes Angola, Barbados, Belize, Benin, Botswana, Burkina Faso, Burundi, Cameroon, Cape Verde, Central African Republic, Chad, Comoros, Congo Rep., Congo DRC, Côte d’Ivoire, Cuba, Dominican Republic, Equatorial Guinea, Ethiopia, Fiji, Gabon, Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Haiti, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius, Mozambique, Namibia, Niger, Nigeria, Rwanda, Samoa, Sao Tome and Principe, Senegal, Seychelles, Sierra Leone, Somalia, St. Kitts and Nevis, St. Lucia, St. Vincent, Sudan, Suriname, Swaziland, Togo, Trinidad and Tobago, Uganda, Tanzania, Zambia and Zimbabwe. Estimations in column (2) and (3) cover Angola, Belize, Benin, Botswana, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Congo Rep., Congo DRC, Dominican Republic, Equatorial Guinea, Ethiopia, Fiji, Gabon, Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Kenya, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Niger, Nigeria, Rwanda, Samoa, Senegal, Seychelles, St. Kitts and Nevis, St. Lucia, Sudan, Suriname, Togo, Trinidad and Tobago, Uganda, Tanzania and Zambia. The Wald Statistics is used to test the joint significance of the coefficients for each set of estimates. The null hypothesis of all non-significant coefficients is rejected. The Prais–Winsten test for panel-corrected standard errors is used because errors are not independent and identically distributed (Beck and Katz, 2005). First, we reject in all estimations the null hypothesis of independently distributed errors as specified by the LM test. Second, we also reject the null hypothesis of identically distributed errors as indicated in the F-test of heteroscedasticity.

Export performance in perspective   199 competitiveness. There is nothing surprising in these results, but it does confirm the importance of investing in measures which enhance productivity and competitive export diversification in ACP economies, as well as their sensitivity to demand conditions in their trading partners. If EPAs are to successfully counter the long-­term trend of gradual ACP marginalisation from world trade they would need to address these broader problems underlying limited productive capacity. In that sense, the agreements do indeed need to fulfil the promise of being ‘more than simply a free-­trade area’. In particular, they would need to readdress the relative neglect of the productive sectors by external donors (the EU among them) that has been a characteristic of development cooperation in recent decades (Ndulu, 2007: 189). From the perspective of export performance, the other ‘road to salvation’ for the ACP countries is that we enter into a prolonged ‘supercycle’ in terms of prices for their commodities. There have been a number of interesting studies suggesting that this is indeed the case (e.g. Cuddington and Jerrett, 2008). The danger here is that it creates a strong bifurcation between ACP countries which export ‘hard’ commodities (where the most notable price rises have so far occurred’) vis-­à-vis those dependent on ‘soft’ commodities – price rises have so far been concentrated disproportionately on certain products. They mean little for countries whose major export items have been little affected by these trends (for example, tea in Kenya) or have experienced price movements for its own reasons, quite independently of any other markets, such as vanilla in Madagascar (Lines, 2008: 62). Moreover, one must also be careful to distinguish temporary price movements from underlying trends (often only possible with hindsight): short-­term commodity price volatility can be driven as much by speculation as real market conditions, especially during periods of global instability (such as the current financial crisis). At the time of writing (late 2009), for instance, sugar prices are very high – a product of much importance to several ACP countries. Yet this may not imply any real benefit for sugar producers: the prices reflect trades, especially in futures, on commodity markets, not what is actually received by exporters (who may already be locked into forward contracts). Finally, our analysis drives home the important point that it is not enough to export greater volumes – what matters is the ability to capture rents, in the Schumpeterian sense.13 Even if the income terms of trade are positive, if technical progress is low in primary production, then growing export quantities may have a high opportunity cost in resource terms. This means that the resources devoted to the production and export of these commodities could be used more effectively in other sectors (Kaplinsky, 2005: 58). Ultimately, there may be little alternative for the ACP countries but to diversify into manufacturing if export growth (and, by extension, development) is to be sustainable.14 This is not to belittle important new sources of trade growth in the services sector – a number of ACP countries have had considerable success in generating income from  tourism, for instance.15 Nevertheless, the stylised facts strongly suggest that  manufacturing still plays a major role in achieving a dynamic growth performance.

200   A. Mold and A. Prizzon The recent UNIDO (2009) report classifies low-­income countries into fastand slow-­growing groups, noting that the rate of manufacturing value added growth per worker was about twice as fast in the fast growers (and it was more than three times as fast in per capita terms). The challenge is a longstanding one, but unless EPAs help to address this issue, our analysis suggests that the simple removal of tariffs will not in itself suffice in laying the groundwork for a vigorous export sector. This conclusion holds even ignoring any possible adverse impact of cheaper imports from the EU competing with domestic producers.

Notes   1 The analysis expressly focuses on the export volume (goods) performance of ACP countries. Although trade in services constitutes one of the integral parts of EPAs agreements, it would require a different treatment. For some insightful observations on this dimension of the EPAs, see ODI (2006).   2 However, the ACP countries are a heterogeneous group and overall performance largely depends on a limited number of countries (see Section 8.2).   3 The increase in the terms of trade in favour of African countries between 2003 and 2008 was large, at 7.8 per cent. This is almost entirely accounted for by gains of oil-­ exporting countries, a 16.9 per cent gain; the gains for non-­oil exporters were very low, at just 1.1 per cent (IMF, 2008), although within this group mineral commodity exporters are likely to have fared much better than soft commodity exporters.   4 Unlike previous Lomé/Cotonou agreements, EPAs do not expressly contain any specific scheme for commodity price stabilisation, such as Stabex or Flex. Article 68 in the ACP–EU Partnership Agreement only mentions the provision of ‘a system of additional support in order to mitigate the adverse effects of any instability in export earnings, including in the agricultural and mining sectors, within the financial envelope for support to long-­term development’ (www.acpsec.org/en/conventions/ cotonou/accord1.htm).   5 Formal trade figures may understate the degree of intra-­ACP trade for some groups of ACP countries – much intra-­ACP trade in regions like West Africa is informal and goes unrecorded.   6 European Commission, Economic Partnership Agreements: Means and Objectives. Online: http://trade.ec.europa.eu/doclib/docs/2003/december/tradoc_115007.pdf.   7 In fact, the scale of the decline in the share of EU imports accounted for by the ACP countries is probably considerably larger than these figures suggest, as the EU has grown from 12 countries in the 1970s to the 27 current members.   8 There is much controversy over this issue. One bone of contention in the negotiations over the EPAs is the exact amount of trade which should be liberalised so as to be compatible with GATT Article XXIV (which provides the framework so that regional trade agreements are compatible with the multilateral system). Unfortunately, Article XXIV does not specify exactly how much trade should be liberalised – the phrase used is ‘substantially all’, which is open to interpretation. The European Commission understands this to imply coverage of around 90 per cent (including both the volume of trade and the number of tariff lines) of trade (Curran et al., 2008); as the EU proposes to liberalise 100 per cent on its side, ACP countries would have to remove tariffs on about 80 per cent of imports from the EU. On the question of the ‘reason­ able length of time’ for implementation of the liberalisation, WTO members agreed in 1994 that it should exceed ten years only in ‘exceptional cases’. In the EU’s TDCA with South Africa, the transitional period was set at 12 years. The schedules discussed in Chapter 2 imply that almost all EPAs are exceptional.

Export performance in perspective   201   9 The share in world GDP of ACP countries achieved its peak in 1980 at 3.6 per cent. Since 1980 it has been progressively declining to 1.8 per cent in 2005 (UNCTAD, 2008). 10 It is unclear from the reported results if one can interpret Cline’s estimated elasticity directly so one should not attach weight to the size of this number. 11 The composition of the samples is listed under Table 8.2. 12 Among other possible export determinants, average tariffs on imports and taxation on exports would have been ideal candidates. Unfortunately, both these variables are affected by limited data availability. Some idea of their possible impact can be gleaned from other studies using different methodologies. Based on a general equilibrium model, for instance, Perez (2006) estimates the impact of EPAs if the EU eliminates tariffs on 100 per cent of its imports from ACP countries while these countries apply duty-­free access on only 80 per cent of EU exports. Under such a scenario, ACP exporters will not be able to increase their sales to European markets significantly, due to supply-­side rigidities, while European exporters experience a substantial increase their shares in ACP markets. The assumptions behind the scenario and findings are, however, disputed by Curran (2007). 13 See Kaplinsky (2005, chapter 3) for a discussion of this issue. 14 Such diversification does not necessarily entail ambitious plans of structural reform; it can be achieved, for example, by diversification through adding value to the commodities produced (processing) – a strategy that in some cases may be more appropriate than trying to identify ‘new’ manufacturing activities. 15 For example, tourism receipts as a share of total exports in2006 exceed 19 per cent in Kenya, 21 per cent in Uganda, 29 per cent in Ethiopia and Tanzania, 34 per cent in Gambia; in the case of small island economies this share can easily exceed 50 per cent of total exports (World Bank, World Development Indicators).

References Ackah, C. and O. Morrissey (2005), ‘Trade Policy and Performance in Sub-­Saharan Africa since the 1980s’, Economic Research Working Paper No. 78, Tunis: African Development Bank. Beck, N. and J.N. Katz (1995), ‘What to Do (and Not To Do) with Time-­series Cross-­ section Data’, American Political Science Review, 89, 634–7. Boratav, K. (2001), ‘Movement of Relative Agricultural Prices in Sub-­Saharan Africa’, Cambridge Journal of Economics, 25, 395–416. Cline, W.R. (2004), ‘Trade Policy and Global Poverty’, mimeo, Washington, DC: Center for Global Development and Institute for International Economics. Cuddington, J.T. and D. Jerrett (2008), ‘Super Cycles in Real Metals Prices?’, IMF Staff Papers, 55, 4, 541–65. Curran, L. (2007), ‘Response to the Article “Are the Economic Partnership Agreements a First-­best Optimum for the ACP Countries?” Perez, R. (2006) 40(6)’, Journal of World Trade, 41, 1, 243–4. Curran, L., L. Nilsson and D. Brew (2008), ‘The Economic Partnership Agreements: Rationale, Misperceptions and Non-­trade Aspects’, Development Policy Review, 26, 5, 529–53. Davenport, M. A. Hewitt and A. Koning (1995), Europe’s Preferred Partners? The Lomé Countries in World Trade, London: Overseas Development Institute. European Commission (2009), Eurostat. Downloadable data available online: http://epp. eurostat.ec.europa.eu/portal/page/portal/eurostat/home. Hummels, D. and P.J. Klenow (2002), ‘The Variety and Quality of a Nation’s Trade’, NBER Working Papers 8712, Cambridge, MA: National Bureau of Economic Research.

202   A. Mold and A. Prizzon IMF (various years), International Finance Statistics, Washington, DC: International Monetary Fund. IMF (2008), World Economic Outlook, Washington, DC: International Monetary Fund, April. Kaplinsky, R. (2005), Globalization, Poverty and Inequality: Between a Rock and a Hard Place, Cambridge: Polity Press. Lines, T. (2008), Making Poverty History, London and New York: Zed Books. McKay, A., O. Morrissey and C. Vaillant (1997), ‘Trade Liberalisation and Agricultural Supply Response: Issues and Some Lessons’, European Journal of Development Research, 9, 2, 129–47. Mamingi, N. (1997), ‘The Impact of Prices and Macroeconomic Policies on Agricultural Supply: A Synthesis of Available Results’, Agricultural Economics, 16, 17–34. Mbabazi, J., C. Milner and O. Morrissey (2003), ‘The Fragility Of Empirical Links Between Inequality, Trade Liberalisation, Growth And Poverty’, in R. van der Hoeven and A. Shorrocks (eds), Perspectives on Growth and Poverty, Tokyo and New York: United Nations University Press, pp. 113–43. Mold, A. (2007), ‘Pulling Back from the Brink? Evaluations, Options, and Alternatives to the EPA’, Real Instituto Elcano Working Paper, No. 33, July, Madrid: Real Instituto Elcano. Morrissey, O. (2005), ‘Imports and Implementation: Neglected Aspects of Trade in the Report of the Commission for Africa’, Journal of Development Studies, 41, 4, 1133–53. Ndulu, B. (with L. Chakraborti, L. Lijane, V. Ramachandran and J. Wolgin) (2007), Challenges of African Growth: Opportunities, Constraints, and Strategic Directions, Washington, DC: World Bank. Noorbakhsh, F. and A. Paloni (1998), ‘Structural Adjustment Programmes and Export Supply Response’, Journal of International Development, 10, 4, 555–73. ODI (2006), ‘The Potential Effects of Economic Partnership Agreements: What Quantitative Models Say’, Policy Brief No. 5, June, London: Overseas Development Institute. Onafowora, O. and O. Owoye (1998), ‘Can Trade Liberalization Stimulate Economic Growth in Africa’, World Development, 26, 3, 497–506. Perez, R. (2006), ‘Are the Economic Partnership Agreements a First-­best Optimum for the African Caribbean Pacific Countries?’, Journal of World Trade, 40, 6, 999–1019. Rodrik, D. (1999), The New Global Economy And Developing Countries: Making Openness Work, Washington, DC: Overseas Development Council. Santos-­Paulino, A. (2002a), ‘The Effect of Trade Liberalisation on Imports in Selected Developing Countries’, World Development, 30, 6, 959–74. Santos-­Paulino, A. (2002b), ‘Trade Liberalisation and Export Performance in Selected Developing Countries’, Journal of Development Studies, 39, 1, 140–64. Söderbom, M. and F. Teal (2003), ‘Are Manufacturing Exports the Key to Economic Success in Africa?’, Journal of African Economies, 12, 1, 1–29. ul Haque, I. (2004), ‘Commodities under Neoliberalism: The Case of Cocoa’, G-­24 Discussion Paper series, No. 25, January, Geneva: UNCTAD. UNCTAD (1999), African Development in a Comparative Perspective, Oxford: African World Press/James Currey. UNCTAD (2008), Handbook of Statistics. Online: www.unctad.org/Templates/Page. asp?intItemID=1890&lang=1. UNIDO (2009), Industrial Development Report: Breaking In and Moving Up – New Industrial Challenges for the Bottom Billion and the Middle-­Income Countries, Vienna: UNIDO.

9 Economic Partnership Agreements and food security Alan Matthews

This chapter addresses the potential impact on food security of the Economic Partnership Agreements (EPAs) signed between the European Union (EU) and the African, Caribbean and Pacific (ACP) states. Food security is just one development dimension where EPAs can have an impact, but the importance for the ACP merits this separate discussion. A characteristic of the majority of ACP states is their poor scores on the Global Hunger Index and their lagging performance in reaching the first Millennium Development Goal to halve the number of people suffering from hunger by 2015. There is thus an urgent need to improve food security in ACP countries, particularly in Africa. Article 3.3 of the EU directive for the negotiation of EPAs with ACP countries and regions required that agreements include provisions to foster food security in accordance with WTO rules (Pannhausen, 2006). EPAs have the potential to significantly influence food security both through their impact on food availability as well as food access. The ability of a country to improve its food security is a function of its development effort and performance generally, and EPAs will influence this through a variety of channels. In this chapter, we focus on the way EPAs might affect agricultural trade and the ability of ACP governments to influence agricultural trade flows. Agricultural production is intimately linked to food security in low-­income developing countries through the role it plays in income and employment creation, the supply of foodstuffs and export revenue generation. Agricultural trade between the EU and ACP states already faces many challenges, including the erosion of traditional trade preferences, increasingly stringent and varied food safety and technical standards, as well as critical supply-­side constraints. However, the EU has opened its market to duty-­free and quota-­free access to all ACP countries (with some delay for sugar) as part of EPAs, which is a potentially positive element particularly for those non-­ least developed ACP countries which do not benefit from Everything but Arms (EBA). Nonetheless, many criticisms were made during the negotiation of EPAs that they would undermine food security in ACP states. This chapter investigates just one piece of this jigsaw by focusing on the commitments which ACP countries have been asked to make when acceding to an EPA. The fears expressed in relation to food security related to the inability of domestic production in ACP states to compete with EU agri-­food imports, the

204   A. Matthews potential restrictions on ACP governments to address import surges that could undermine local food production and the limitations on the freedom of ACP countries to use tariff policy and market regulation more generally to promote the domestic supply of staple foods (ACP–EU Joint Parliamentary Assembly, 2008; Aprodev, 2009; Bertow and Schultheis, 2007; Kasteng, 2006; Terra Nuova, 2006). Other observers criticized EPAs because they did not go further in helping ACP countries to improve their supply of staple foods (Brewster, 2008). These specific worries about the potential impact of EPAs were nurtured by case studies of the damage caused to local production by existing EU imports, often assisted by export subsidies in the past. The potential negative impacts of greater trade liberalization on smallholder farmers in the ACP countries, especially given unfair competition with highly subsidized EU production, was raised on a number of occasions by the former UN Special Rapporteur on the right to food, Jean Ziegler. He also queried whether eliminating tariffs on EU imports might jeopardize government funding for social programmes and thereby threaten governments’ ability to meet their obligations in terms of economic, social and cultural rights, including the right to food (UN Human Rights Council, 2008). The literature in this area is relatively sparse, although notable exceptions include Bilal and Stevens (2009), CTA (2008) and three studies published by the German Development Institute: Pannhausen (2006), Seimat (2006) and Weinhardt (2006). Impact assessments seemed to support the fears that EPAs could have negative consequences for food security in some countries, especially if the majority of people are rural net food producers (PricewaterhouseCoopers, 2007). Pannhausen (2006) produced detailed estimates for the West African region of the trade impacts of zero tariffs on EU imports for four important staple foods (milk, poultry, wheat and wheat flour and processed tomatoes) but recognized that the producer losses (and government revenue losses) would be balanced by benefits to consumers in the form of lower prices, leaving the overall welfare effect indeterminate. The relationship between trade policy and food security is a controversial one (FAO, 2003; Ford and Rawlins, 2007). Views are conventionally divided between those who advocate food self-­reliance and those who advocate food self-­sufficiency (or food sovereignty) as the more effective strategy to guarantee food security. Behind the differing views on the most appropriate food security strategy are not just different readings of the empirical evidence on what has worked most successfully in the past and under what conditions, but also evident differences in interests of the winners and losers under either strategy. Lower tariffs will result in food becoming more readily available and accessible to consumers, but will also encourage greater imports, leading to adjustment pressures for food producers who might lose their livelihoods without being able to adjust to alternative income-­earning opportunities. Thus EPAs are likely to have ­different impacts for different socioeconomic groups. Farm organizations naturally seek higher protection. Thus a joint press release from African and European farm organizations (quoted in Pannhausen, 2006) recommended that West

EPAs and food security   205 African countries should protect their food sovereignty and interests of family farms by maintaining significant tariff protection and refusing European dumping, particularly on products which represent an economic and food interest for West Africa. On the other hand, the food price spike in 2007–8 brought home the difficulties which higher food prices create for food security. The increase in food prices may have pushed a further 75 million below the minimum nutrition standard (FAO, 2008), and many governments responded by imposing export bans or lowering import tariffs. Forming a judgement on whether the (market access provisions of ) EPAs are, on balance, positive, negative or neutral for food security in ACP countries requires us to take a position on the relationship between trade and food security. The perspective underlying this chapter is that the two positions are too stylized to be effective guides to policy. It is possible to argue both that countries should be slow to move away from engaging in international trade while also acknowledging that, particularly among ACP countries, there is an absolute necessity for improved agricultural performance which would, as a consequence, lead to lower imports and greater food self-­sufficiency. ACP governments have a variety of policy instruments available to promote domestic food production in addition to market regulation through border measures, including investing in supply-­side capacity such as improved physical infrastructure and technology, investing in more effective market institutions, and the use of targeted domestic subsidies. Trade policy is just one of many measures open to developing countries to promote the growth of smallholder agriculture. We examine later the extent to which the EPA provisions encourage or limit the availability of these policy instruments to ACP governments. We address these issues in this chapter in two ways. We first investigate the practical effect of the tariff liberalization offered by those ACP countries which have signed interim/full EPAs (Section 9.1). Tariff reductions are scheduled to take place over a relatively lengthy transition period, with some tariff lines (usually accounting for around 20 per cent of the value of total ACP imports) excluded from any liberalization commitment (see Meyn in Chapter 2). The first step is to identify the treatment of agri-­food commodities in these tariff liberalization schedules. Because of the large number of tariff lines covered, we focus on a limited number of ‘staple food commodities’ which are chosen because of their importance in either the diets or agricultural production of ACP countries as well as in imports. Through an analysis of the published liberalization schedules, we identify the existing level of protection provided to domestic production and how this is likely to change over the course of the EPA transition period and beyond. However, the EPA provisions go beyond a simple schedule of tariff reductions. They also encompass a commitment to tariff standstill and disciplines on the use of other border measures including quantitative trade restrictions, export taxes and subsidies and safeguard measures. In a second step, we analyse the text of the agreements to evaluate the significance of these disciplines for the policy autonomy of EPA states (Section 9.2). Our normative standpoint is that the purpose of EPAs is to create a WTO-­compatible

206   A. Matthews system of trade preferences between the EU and the ACP countries. We therefore pay particular attention to whether EPAs go beyond WTO compatibility in their provisions governing border measures. Finally, the important question for the ACP states themselves is how best they can advance their food security goals in the context of EPAs, and we briefly focus on this policy issue in our conclusions (Section 9.3). Throughout the chapter the existing agreements are referred to as EPAs for convenience although most are interim agreements so provisions and schedules of tariff liberalization are likely to be amended during continuing negotiations. We use the term EPA states to refer specifically to those ACP countries which have signed either interim or full EPAs to date.

9.1  ACP market access commitments and food security We start the discussion of how EPAs might impact on food security in the ACP countries by describing trade flows in agri-­food products between the EU and ACP countries (for a more comprehensive if now somewhat dated account, see Kasteng, 2006).1 Agri-­food exports have fallen as a share of total ACP exports to the EU, from 27 per cent of the total basket to 16 per cent between 1996/7 and 2006/7. There has been a gradual diversification of ACP export destinations away from the EU, with the EU’s share falling from 55 per cent to 46 per cent over this period. Partly because of this, the ACP share in total EU imports fell from 15 per cent to 13 per cent during this period. On the import side, the EU now accounts for just 26 per cent of ACP agri-­food imports, down from 32 per cent in 1996/7. These make up around 10 per cent of all ACP imports from the EU, and account for 8 per cent of total EU agri-­food exports (Table 9.1). Total trade flows are dominated by the two ‘big’ regions, West Africa and the Southern African Development Community (SADC) (including South Africa) (Table 9.2). But while there is only limited variation in the importance of the EU as an export market (despite the fact that the Central African share is twice that of the Caribbean Forum (CARIFORUM)), the differences are more marked on the import side. While Central Africa sources 46 per cent of its agri-­food imports from the EU, the Pacific share is only 3 per cent. Other regions with low shares include the East African Community (12 per cent) and CARIFORUM (15 per cent), while the ESA share is just 20 per cent. The relatively limited share of EU food imports in these regions means that any food security repercussions of EPAs are also likely to be limited. However, a more refined analysis, taking into account the role of EU trade particularly in food security staples, is necessary before drawing final conclusions. We gain further insight into this issue by examining the commodity composition of imports and exports in each ACP region.2 We can first note the extent of specialization on the export side, even if different regions specialize in different commodities. In the Caribbean, for example, fruit and horticulture (mainly bananas), sugar and drinks make up 82 per cent of total exports; in Central Africa, tropical commodities and fruit and horticulture (again, bananas) make up 96 per cent of total exports; while in the ESA region, tropical commodities, fruit

Imports from world Imports from EU-27

12.8 15.1 30.5

Year

1996/7 2001/2 2006/7

Note Includes South Africa.

Source: Own tabulations based on BACI.

  4.1   4.5   8.0

10.2   8.5 12.7

18.4 17.2 27.5

1996/7 2001/2 2006/7

Exports to EU-27 (US$bn)

Exports to world (US$bn)

Year

32.0 29.8 26.2

Share of imports from EU-27

55.4 49.4 46.2

Share of exports to EU-27 (%)

Table 9.1  Agri-food trade of EPA countries with the EU-27

11.4 11.7 10.0

Share in total imports from the EU

27.3 19.8 15.7

Share in total exports to the EU (%)

15.2 15.0 13.1

59.3 55.1 96.3

  6.9   8.1   8.4

Extra EU-27 Exports Share in EU-27 exports

66.8 56.6 97.0

Extra EU-27 imports Share in EU-27 (US$bn) imports (%)

2.83

1.03

7.93

6.35

4.66

3.74

0.98

CARIFORUM

Central Africa

West Africa

SADC

ESA

EAC

Pacific

Source: Own tabulation based on BACI.

27.52

To world

0.47

1.71

1.91

2.86

4.05

0.71

1.03

12.74

To EU-27

Exports (US$/bn)

Total ACP

Region

47.6

45.8

41.0

45.1

51.1

68.6

36.3

46.2

EU-27 share (%)

36.2

69.7

37.0

8.2

17.2

9.0

18.0

15.7

Share in total █exports to the EU (%)

Table 9.2  Agri-food trade by EPA regions with the EU-27 (average 2006–7)

0.74

2.24

3.93

6.41

10.43

1.91

4.89

30.55

From world

0.02

0.28

0.79

1.79

3.56

0.89

0.71

8.04

3.1

12.3

20.2

27.9

34.1

46.6

14.6

26.2

From EU-27 EU-27 share (%)

Imports (US$/bn)

2.9

7.1

9.9

6.0

13.7

16.5

11.6

10.0

Share in total █imports from the EU (%)

EPAs and food security   209 and horticulture (mainly vegetables and cut flowers) and sugar account for 95 per cent of total exports. The main imported commodities are very different. Grains and feeds figure prominently in all regions, as do fruit and horticultural imports; dairy products are particularly important in the CARIFORUM and West African regions, while meat imports are significant in Central Africa, West Africa and SADC. Of interest is the importance of drink imports in most regions, where this category comes top in SADC and ranks second in importance in the Caribbean. This commodity breakdown also is important regarding the food security implications of EPAs. Many, but not all, EPAs, contain formal commitments on food security.3 These either acknowledge that food security is a critical element in the eradication of poverty and recognize the need to avoid major disruption in agricultural and food markets (CARIFORUM) or acknowledge that the removal of barriers to trade between the parties may pose significant challenges to producers in the agricultural and food sectors of the ACP state, and commit the parties to consult with each other on these issues (e.g. Central Africa, Côte d’Ivoire, Ghana, Pacific states). In the latter case, there is an explicit recognition that, where compliance with the EPA provisions leads to problems with the availability of, or access to, foodstuffs or other products essential to ensure food security and where this gives rise or is likely to give rise to major difficulties for an EPA party, that party may introduce agricultural safeguards.4 However, as we discuss later, this provision has no substantive value because agricultural safeguards are anyway permitted in all EPAs under the general bilateral safeguard provisions. To make a fuller assessment of the impact of EPAs on food security, it is first necessary to go beyond the Agreement wording and to look at the schedules of tariff-­reduction commitments (we also discuss some other disciplines on the use of border measures which have caused concern). We start with an abstract scenario. In most EPAs, it is theoretically possible to exclude all agricultural and processing food products from liberalization. On average, agri-­food imports only account for 10 per cent of the value of imports from the EU, and the highest share for any region is 17 per cent for Central Africa.5 However, WTO rules on regional trade agreements require that no major sector should be wholly excluded from liberalization. Also, a more disaggregated approach allows EPA states to exclude sensitive products from the point of view of food security while still allowing room for exclusions based on other criteria, e.g. maintaining tariff revenue. In fact, the proportion of agricultural products in the exclusion lists is around one-­third, varying from 10 per cent in one ESA signatory (Zimbabwe) to two-­thirds in other ESA signatories (Comoros, Madagascar) (see Chapter 2 above; Bilal and Stevens, 2009). From the food security point of view, what is important is whether staple food products are excluded as sensitive products or whether the tariff reductions on these products are back-­loaded so that liberalization occurs towards the end of the period. To assess this, we examine the situation for a group of 15 staple foods. To identify these staple foods, we drew on the literature identifying Special Products in the context of the WTO Doha Round negotiations as well as the importance of particular products in import statistics.6

210   A. Matthews Tariff reductions are calculated from the applied tariffs in place, not from the level of bound tariffs in the WTO (for those countries which are WTO members).7 Meyn (Chapter 2) points out that the schedules of tariff reductions agreed in each of the signed EPAs to date are very different, with respect to the length of the transition period and the timing of the reductions. We observe the same with respect to agri-­food imports. In some cases, countries which are signatories to the same EPA may have different initial tariffs as well as different tariff-­reduction schedules. Nonetheless, the evidence is that ACP countries have made use of the flexibilities in the EPA negotiating process to exclude from liberalization products of importance from the point of view of food security. As a rough indicator, if we create a matrix showing the tariff treatment of the 15 food security products for each of the 15 Agreements, of the 225 cells in the matrix, 132 or 59 per cent have been excluded from liberalization. In the cases where tariffs are scheduled to go to zero, for the 15 products concerned, this will happen within five years for 36 per cent, within 6–10 years for 15 per cent, within 11–15 years for 47 per cent and after 15 years for 2 per cent. Thus there is evidence that, where tariff elimination has been scheduled on imports from the EU, this elimination has been delayed for more than a decade on half of these cases. There is also some evidence that, where tariffs are scheduled to go to zero, the initial tariff rate is relatively low. For example, tariffs on wheat and milk powder are scheduled to go to zero by 2011 in Côte d’Ivoire and by 2013 in Ghana, but the initial applied tariffs in both countries are only 5 per cent. Even in those cases where initial tariff levels are higher, it is not correct to jump to the conclusion that domestic market prices are likely to fall by this amount. In some cases, the EU may be a relatively minor source of imports, such that the domestic market price will continue to be set by the price of imports (including the most favoured nation (MFN) tariff ) from the major supplier. In this case, the importers of the EU product will earn rents while the domestic market price would be unaffected.8 Even in those cases where the EU is a more important supplier and the tariff reduction is passed through in lower prices of the imported goods, the domestic price need not fall by the full amount of the tariff if there is imperfect substitutability because of consumer preferences for the local product. The tariff-­reduction schedules do not capture the full impact of the Agreements on tariff policy. All EPAs include a standstill provision which stipulates that no new customs duties shall be introduced on trade with the EU, nor those already applied be increased, as from the entry into force of the agreement.9 Because the maximum rates are anyway set out in the schedules for products subject to liberalization, the main effect of the standstill provision is to add a discipline to prevent EPA states from raising tariffs on those products not scheduled for liberalization. In some agreements (CARIFORUM, SADC and Pacific) this discipline does not apply because the standstill clause only applies to products subject to liberalization. For agri-­food products exempted from liberalization in these three agreements, ACP signatories continue to have the ability to raise their applied tariffs provided these higher rates are applied on an MFN

EPAs and food security   211 basis. However, for signatories of the remaining EPAs (Central Africa, EAC, ESA, West Africa), the standstill clause applies to all tariff lines. A standstill clause adds to the predictability of the trade regime introduced by an EPA and this predictability will benefit business. But it is hard to understand the reason for the asymmetric treatment. WTO compatibility does not require the inclusion of a standstill clause in the EPA (Bartels, 2008). It seems that the EU has, more recently, offered more flexibility in this area which may help to restore some greater tariff autonomy to ACP signatories of these latter EPAs (Bilal and Stevens, 2009). In this analysis, we have only examined whether or not EPA states took advantage of the flexibility inherent in negotiating EPAs to exempt or delay tariff reductions on food security products. We have not discussed the appropriateness of this policy stance. Defensive and protectionist measures are unlikely to increase the efficiency of farmers; incomes may be more secure but productivity is not enhanced and high protection often increases inefficiency so one should be careful in identifying sensitive products (Pannhausen, 2006). It is also important to reiterate that maintaining high prices in order to promote food security may serve the interests of producers but may undermine the food security of consumers. Examination of the existing tariff schedules indicates that ACP governments are aware of this trade-­off. In Cameroon, for example, tariffs on imported foodstuffs generally range from 20 to 30 per cent, but are specifically lowered to 5 per cent for milk powder and broken rice imports which suggests that the government had particular policy objectives in mind when setting these tariffs. The same pattern is evident in Ghana where most tariffs on food imports range from 10 to 20 per cent but are specifically lowered to 5 per cent for milk powder and wheat meal. These tariff liberalization schedules may yet be changed either in a bilateral context or as other ACP states in a region become parties to an EPA or where an interim EPA is replaced by a full EPA. Bilal and Stevens (2009) have highlighted that the list of exclusion products selected by individual ACP countries is often very different, even where these countries are formally committed to a regional integration process and the establishment of a common external tariff. For example, they note that of the goods being excluded by ESA not a single item is in the basket of all six countries and 70 per cent are being excluded by just one. In the SADC region, comparing Mozambique’s schedules with those jointly agreed by Botswana, Lesotho, Namibia and Swaziland, just one-­fifth of the items are being excluded by both parties. The implication is that changes will be required in these schedules if the regional integration processes proceed. It will thus be important to keep any changes to these tariff schedules under review from the point of view of their consequences for food security products.

9.2  Disciplines on border measures There is little evidence from the tariff-­reduction schedules that EPAs will have any immediate adverse effects on food security in ACP states. For those

212   A. Matthews agri-­food products scheduled for liberalization, it will be important that each ACP state makes an individual assessment of the adjustment pressures that may arise and use the transition period to put in place measures to strengthen the affected sectors’ ability to compete. However, EPAs also contain provisions on border measures which some fear may restrict the ability of ACP countries in the future to ensure food security. Critics point to the way disciplines limiting the use of quantitative restrictions, export taxes and safeguards may reduce the policy space available to ACP governments. We examine these fears in this section. One of the difficulties in generalizing about these provisions is that there are subtle, but potentially important, differences in the commitments undertaken by countries in each region. One such difference is that some Agreements contain a specific Article on food security while others do not. However, on closer examination, this has limited substantive significance as the food security Article in those Agreements where it appears (Central Africa, West Africa, CARIFORUM, Pacific) only allows the ACP party access to the bilateral safeguard mechanism in cases where the implementation of the Agreement leads to problems with the availability of, or access to, the foodstuffs necessary to ensure food security. As bilateral safeguards are anyway permitted in all Agreements in the face of disruption of domestic agricultural markets, it is not clear that adding food security concerns as a justification for bilateral safeguards makes any substantive difference to the policy armoury available to EPA states (indeed, the Pacific Agreement explicitly equates the two situations). This clause might have provided a justification for export taxes in cases where a steep increase in world market prices might threaten domestic food security, although as we discuss below this does not appear to be the case. All EPAs contain provisions dealing with the ‘prohibition of quantitative restrictions’, which require both parties to immediately eliminate upon entry into force of the agreement all restrictions on imports and exports, including import and export licensing arrangements, except for customs duties and fees. Some commentators fear that this would prevent some ACP countries from pursuing currently successful agricultural development and food security policies (CTA, 2008). CTA quotes the example of a Namibian scheme of market regulation for specifically defined ‘controlled products’, which involves a reference price mechanism backed up by import controls through import licensing administered by the Namibian Agronomic Board. Whole-­grain (white) maize, wheat, pearl millet (mahangu) and their milled products are controlled crops in Namibia and subject to seasonal import restrictions under which no import licences are issued until all domestic production has been sold. For example, in 2006 no imports of white maize were permitted between 1 May and 16 October. Normally, the import of wheat flour into Namibia is prohibited although imports may be permitted depending on market conditions. The restriction is aimed at promoting the domestic processing industry (WTO, 2009) and is mainly intended to restrict imports from South Africa which the latter country tolerates, if reluctantly. Namibia joined the WTO in 1995 and, at face value, these licensing restrictions appear to be inconsistent with Namibia’s obligations under the WTO

EPAs and food security   213 Agreement on Agriculture (which prohibits discretionary import licensing). However, the WTO Agreements make provision for exemptions from the general prohibition on quantitative restrictions in a limited number of specific cases. Under Article XI of GATT 1994, export restrictions can be temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party.10 Import restrictions are permitted where these are necessary to complement similar domestic supply restrictions or to remove a temporary domestic surplus by making it available more cheaply to domestic consumers. These exemptions, particularly in the case of import restrictions, are quite limited and have been further tightened in WTO jurisprudence which has emphasized the importance of a necessity test. Indeed, the possibility to adopt import restrictions to complement similar domestic restrictions was introduced specifically to cover US farm programmes designed to raise farm incomes which at the time operated on the basis of supply controls. It is obviously an inappropriate measure for ACP countries where the overriding priority is to try to increase their agricultural production. Under Article XII, exemptions from the prohibition on quantitative restrictions are permitted on balance-­of-payments grounds, while Article XVIII permits exemptions for infant industry protection while also reiterating and expanding on the balance-­of-payments justification. Article XX, dealing with general exemptions, exempts, inter alia, restrictions on exports of domestic materials necessary to ensure essential quantities of such materials to a domestic processing industry during periods when the domestic price of such materials is held below the world price as part of a governmental stabilization plan. It also exempts measures essential to the acquisition or distribution of products in general or local short supply. These Article XX exemptions are subject to the general proviso that they should not be applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, nor are a disguised restriction on international trade. What is striking is that five of the regional EPAs (Pacific, ESA, CARIFORUM, West Africa and Central Africa) do not allow for even these limited exemptions. The EAC Agreement permits the use of temporary export restrictions to address a critical shortage of foodstuffs or other essential products, while only the SADC Agreement incorporates the full range of GATT Article XI exemptions by specifically including a reference to this Article. Signatories of the other Agreements no longer have the right to impose temporary export restrictions on exports to the EU as part of a measure to help keep the domestic price of foodstuffs below the world price level during a price spike such as occurred in 2007–8. The practical importance would depend on how significant exports to the EU of such foodstuffs might be. Because most ACP countries are net importers of basic foodstuffs, it might be argued that the non-­inclusion of a clause allowing temporary export restrictions to control the domestic price of food is not of great importance. However, the fact remains that, in this regard, EPAs go beyond what ACP WTO members committed to when they signed the WTO accords.

214   A. Matthews All EPAs also prohibit the introduction of new or increased export taxes on trade with the EU. The EU argument is that the elimination of export taxes and restrictions is necessary to comply with the GATT XXIV requirement to eliminate barriers on ‘substantially all trade’, which covers both imports and exports.11 The ACP concern is that this provision may make it more difficult to use this policy tool to stimulate value added processing in ways which expand income earning opportunities in rural areas, or to protect domestic food supplies in periods of high world food prices (see Bilal and Stevens, 2009). Some Agreements (Pacific, SADC, West Africa) list exceptional circumstances where the EPA states may introduce, after consultation with the EU, temporary export taxes or charges having equivalent effect on a limited number of additional products where justified by specific revenue needs, protection of infant industries or protection of the environment. The EAC Agreement permits temporary export taxes to foster the development of domestic industry or to maintain currency value stability. While this may give an opening to tax the export of raw materials to promote value added processing, the ESA and CARIFORUM Agreements do not have this opt-­out clause, while the Central Africa Agreement does not include infant industry protection as a justification for its use. Some Agreements specify that the use of export taxes requires consultation with the EU, while others specify that the authorization of the joint council is required. In all cases the use of export taxes is seen as a temporary and exceptional measure. The SADC Agreement has a rendez-­vous clause providing for the review of the provisions on temporary export taxes taking into account their impact on development and diversification of the SADC EPA states’ economies. As the use of export taxes is not formally disciplined under WTO agreements, ACP countries have also gone beyond their WTO obligations by accepting a provision which prevents them from introducing new or increasing existing export taxes on their exports to the EU. Nor is food security one of the justifications that can be invoked even in those Agreements which foresee some circumstances in which ACP states might resort to the use of export taxes. Arguably, the introduction or increase of export taxes might be justified under the food security clause contained in some (but not all, see above) EPAs which permits the ACP country to take appropriate safeguard measures if the implementation of the Agreement (in this case, the inability to raise export taxes on exports to the EU) leads to difficulties regarding the availability of, or access to, foodstuffs necessary to ensure food security. The curious wording of this Article has already been noted (see note 4) in that the safeguards expressly allowed refer to import rather than export restrictions, although the context clearly envisages a situation where elements of the population have difficulty in accessing foodstuffs. What is clear is that the provisions on export restrictions and taxes in the Agreements go beyond what ACP countries are asked to accept in terms of WTO disciplines, and for no obvious benefit to the EU. The most that the EU could reasonably have sought in these Agreements was a non-­discrimination clause, so that any measures taken on exports to the EU would also apply to other export partners (outside the ACP region).

EPAs and food security   215 EPAs allow the parties to take bilateral safeguard measures in the event of a product from one party being imported into the other party in such increased quantities and under such conditions as to cause, or threaten to cause, disturbances in agricultural markets or mechanisms regulating those markets.12 Importantly, the use of safeguards is not confined to products where tariffs have been liberalized under the EPA. Safeguard remedies can include the postponement of a scheduled tariff reduction foreseen under the Agreement, a reversal of reductions in tariffs which have previously taken place under the Agreement up to the level of applied duties on imports from other WTO members (CARIFORUM, ESA, EAC texts) or a level which does not exceed the WTO bound rate (SADC text), or the introduction of tariff quotas. While safeguard measures should not be maintained beyond the period for which they are necessary, they can be maintained by ACP countries for a period of up to four years, renewable in exceptional circumstances for a further period of four years. A 12-month period would then have to elapse before the safeguard clause could be invoked again.13 Critics of the safeguard clause have sought greater latitude in the remedies which can be applied, for example, allowing remedies to be indefinite in duration, allowing safeguard tariffs higher than initial applied or bound tariffs, allowing automatic (i.e. unilateral) invocation of safeguards and allowing safeguards in response to price declines as well as import surges (Kwa, 2008; French National Assembly, 2009). Some of these solutions do not seem appropriate in a bilateral trade agreement. For example, a collapse in import prices would presumably not be confined to EU imports and therefore bilateral restrictions on EU imports alone are unlikely to protect domestic farmers. Maintaining safeguards indefinitely is effectively another way of exempting a product from liberalization. The bilateral safeguard is there primarily in case of a surge in imports from the EU in response to the bilateral reduction in ACP tariffs under the Agreement. It might seem reasonable that the remedy allowed is that tariffs can be raised to the level they were at before the Agreement took effect. In the absence of the EPA, an EPA state would be able to protect its market from a surge in EU imports by resorting to an increase in its multilateral MFN applied tariff. What is noteworthy is that the EU conceded to SADC states the right to impose bilateral safeguard duties up to the MFN bound rate. This could potentially lead to a situation where duties on some EU agricultural imports are higher than on imports from other countries, if SADC MFN applied tariffs are lower than their MFN bound rates.14 The EU seems prepared to accept this situation as it has waived its right to resort to WTO dispute-­settlement procedures in the case of bilateral safeguard measures taken under EPAs. The EU has not insisted that higher bilateral safeguard duties than those applied at the outset of the EPA can only be introduced where there is a corresponding adjustment to the SADC MFN applied tariff. While it could raise objections in the Trade and Development Committee governing the EPA, the SADC party has the right to prevail. Indeed, as bilateral safeguards can be applied also to products which are exempt from liberalization, this seems to be one instance where an EPA provides some additional policy flexibility to an EPA state which it would not otherwise

216   A. Matthews have. It is an interesting question whether EPA states could use this precedent to press for the use of quantitative restrictions as part of a safeguard measure which could be a more effective short-­term response to a surge in EU imports than a tariff increase. The emphasis on the importance of a flexible safeguard clause arises, in part, from the perception that EU exports are subsidized and thus create unfair competition for ACP producers. In the past, when the EU made more use of market price support as its preferred policy instrument to support farm incomes, EU exports had to be supported with export subsidies (refunds) to bridge the gap between the high domestic EU price and the lower world price in order to make them competitive. As the EU has moved more to direct payments to support farm incomes, the importance of export subsidies as measured by EU budget expenditure has diminished, although they have not disappeared. Export subsidies were reintroduced for dairy products and pigmeat, among others, in 2008. The food security Article in the Cotonou Partnership Agreement (CPA) (Article 54) dealt entirely with export subsidies, but principally from the perspective that reliable food imports at competitive prices were an important guarantee of ACP countries’ food security. Thus, the CPA provided for the advance fixing of export refunds in respect of a range of products drawn up in the light of the food requirements expressed by those states. It proposed that specific agreements could be concluded with those ACP states which so requested in the context of their food security policies, while acknowledging that such agreements should not place in jeopardy production and trade flows in ACP regions. Despite the apparent benefits of subsidized exports to food-­importing states and consumers, hostility to export subsidies has grown. Indeed, it was French President Jacques Chirac who, at the end of a Franco-­African summit in Paris in 2003, surprisingly called for a moratorium on farm export subsidies to African countries until the conclusion of the Doha Round.15 This ambiguity about the role of export subsidies may help to explain the silence on their treatment in the EPAs. Only the CARIFORUM EPA commits the EU to the elimination of export subsidies on exports to that region, and then only on those agricultural products for which CARIFORUM has agreed to eliminate tariffs. Whether the omission of any explicit reference to EU export subsidies in the other agreements is because the EU wanted to avoid an explicit commitment or whether the ACP countries did not push the issue because of perceived short-­run benefits is not clear. Given that the tariff lines exempt from liberalization are more likely to involve staple foods, it is intolerable that the EU retains the right to subsidize its exports to its EPA partners. This provision should be altered to reflect the spirit of the CPA provision, namely, that export subsidies are prohibited unless an EPA state specifically requests to be included in the relevant EU regulation. While such a change would be desirable, the practical significance of the change should not be over-­emphasized, given the limitations on the likely EU use of export subsidies now and in the future. Even if an explicit EU commitment to refrain from the use of export subsidies were included in the agreements, which it should be, critics point out that the

EPAs and food security   217 large volume of direct payments which EU farmers receive constitute a support to production and, indirectly, to exports. The EU points out that these payments are increasingly decoupled from production; farmers no longer must produce to gain eligibility for support. Others point out that the support to production can be subtle and indirect but nonetheless important (ICTSD, 2009). While the academic literature remains undecided on the size of the production response to direct payments, the perception that EU agriculture is unfairly subsidized can be used to justify the exclusion of food security products from tariff liberalization under EPAs. As we have seen, ACP countries will continue to maintain tariffs against many EU agri-­food exports in the future, except in those cases where the countries themselves have decided that their balance of interests favours the import of cheaper foodstuffs.

9.3  Conclusions Food security is a central challenge for ACP countries particularly in Africa, and because of their comprehensive nature, EPAs have the potential to influence, for good or ill, the ability of ACP countries to address their food security challenge. This chapter addresses just one piece of this puzzle, namely, whether the commitments undertaken by ACP governments when they sign EPAs are likely to curtail their ability to improve the food security of their populations. The focus is on the trade policy provisions of EPAs, though even here the analysis remains partial because we have not addressed the value of the EU market access offer to remove all duties and quotas on ACP exports to the EU (with a transitional period for sugar) which is the other part of the EPA trade provisions. This will generate some positive effects for food security, though mainly for the non-­LDC ACP countries which do not currently benefit from the EBA, in the short run from the revenue that went to the EU as import tax and, in the long run, to the extent that ACP countries can improve their supply capacity to take advantage of the duty-­free quota-­free access (Stevens et al., 2008). Much of the criticism of EPAs for their potential adverse food security effects has been based on the commitments undertaken by ACP governments to remove tariffs on the bulk of imports from the EU and to refrain from the use of other trade policy measures on their trade with the EU. Critics have raised the spectre of competition from subsidised EU exports undermining domestic food production in ACP states, and argue that the limits placed on the use of trade policy instruments, particularly in the face of import surges or very high world market prices, will undermine the ability of ACP governments to promote food security. We investigated the validity of these criticisms in this chapter. The context is given by the size and structure of existing trade flows between the EU and ACP states in agri-­food products. One important point to emerge is that the EU is not the major supplier of ACP agri-­food imports, accounting for just one-­quarter of the total in 2006–7. Only in West Africa is the share still near to 50 per cent, but in a number of other ACP regions it is below 20 per cent. Nor are all these imports basic foodstuffs, as drink imports figure prominently in total

218   A. Matthews value in a number of ACP regions. The low importance of EU imports in the total means that the significance for food security of trade policy liberalization relative to the EU alone will be correspondingly diminished. Our analysis of tariff liberalization schedules suggests that, at least as far as major food staples are concerned, ACP states have made use of their flexibility to exempt many of these tariff lines from liberalization. Where staple food tariff lines are included in the liberalization schedule, very often either liberalization has been postponed until towards the end of the transition period, initial tariff rates were low anyway or the EU is not a major supplier of the food staple in question. It seems that the tariff liberalization schedules, as such, will not open the floodgates to cheaper EU imports which will undermine local production. The EPA provisions on other border measures are more problematic. A reasonable EU position would be that EU trade should be treated no less favourably than trade with other countries (excepting regional integration partners) while not requiring ACP states to make commitments that went beyond the WTO disciplines which those countries which are also WTO members had already accepted. We observed that in many Agreements this is far from being the case, and the EPAs commit the ACP partners to disciplines which go well beyond what the WTO requires and which, potentially, could damage their food security. The puzzling feature is that, in each of the individual Agreements, there are clauses to which the EU has agreed and which are more favourable from the ACP point of view, but these are not replicated in the other Agreements. Among the examples we cited are the standstill provision, which in some Agreements extends to tariff lines exempt from liberalization but not in others; the absolute prohibition on the use of export restrictions, where some Agreements permit their use to avoid a critical shortage of foodstuffs; the absolute prohibition of export taxes, where some Agreements permit their use for revenue reasons, or on infant industry or environmental grounds; differences in the extent of bilateral safeguard remedies, where the SADC Agreement allows tariffs to be raised to WTO bound rates while the others restrict safeguard remedies to the maximum of the previous applied rate; and the general absence of a prohibition on the use of export subsidies by the EU, although in the CARIFORUM Agreement at least they are eliminated on products where the CARIFORUM countries have liberalized. There is a substantial economic literature which is sceptical of the efficacy of some of the measures now barred to ACP governments to improve food security. But until ACP governments themselves are convinced by the merits of these arguments, it simply sows the seeds of distrust for the EU to insist that it knows best. The objective of EPAs is to allow trade preferences that are compatible with the WTO Agreements. Those limits to policy measures taken to improve food security which go beyond WTO-­compatible provisions should be removed either through renegotiating these Agreements or when establishing full EPAs. We also noted that some Agreements include a food security Article but not others, although where the Article exists it confers no new substantive rights or responsibilities. A revised food security Article could justify the use of addi-

EPAs and food security   219 tional border measures where food security was threatened. For example, this might extend to ensuring price stability in agricultural markets, particularly in least-­developed countries where producers have particular difficulties in managing risk. This would have to come with the caveat that, for WTO members, it would not diminish the rights and obligations that each party has assumed or granted to the other in that context, it could grant non-­WTO members among ACP states some additional flexibility if they wished to use it. However, it would be even more important to take the opportunity to commit the parties to giving greater emphasis to food, agricultural and nutrition policies.16 ACP countries continue to face a massive challenge to reduce the extent of under-­nutrition and hunger, and to reverse their growing dependence on food imports. While some observers blame trade liberalization for these problems (Kwa, 2008), the fundamental difficulty has been the lack of investment to address productivity improvement and supply-­side constraints. The considerable heat generated on the EPA issue detracts from the more important question of what domestic initiatives ACP countries need to take to ensure that agriculture can play its role as an engine of growth and poverty reduction. Small-­scale farmers need access to modern inputs, resources and technologies – such as high-­quality seeds, fertilizers, feed and farming tools and equipment – that will allow them to boost productivity and production. This requires investment in agriculture, rather than trade restrictions. Requiring consumers to pay high prices simply to maintain an unproductive agriculture is not a sustainable strategy to improve food security. The potential of EPAs to improve food security can only be realized by a focus on greater agricultural investment and improved institutions. Resources can be made available from the EU budget, the EU’s European Development Fund and bilateral donors, but the prerequisite is that these requirements are prioritized by the ACP countries themselves.

Acknowledgement The generous financial support of the Advisory Board for Irish Aid under its Framework Project on Policy Coherence for the research reported in this chapter is gratefully acknowledged. Support was also received from the ‘New Issues in Agricultural, Food and Bio-­energy Trade (AGFOODTRADE)’ Small and Medium-­scale Focused Research Project (Grant Agreement no. 212036), funded by the European Commission. I am grateful to Patrick Wustmann for excellent research assistance.

Notes   1 The trade statistics in this chapter are taken from the BACI database (Gaulier and Zignano, 2009). BACI starts with UN COMTRADE data, but makes use of the double reporting of trade flows (reporter-­partner) to estimate non-­reported values. Because developing countries are often not good reporters, there are many missing values in the COMTRADE database for developing country trade. The harmonization procedure extends considerably the number of countries for which trade data are available,

220   A. Matthews as compared to the original dataset. BACI provides bilateral values and quantities of exports at the HS six-­digit product disaggregation, for more than 200 countries over the period 1995–2007.   2 Agricultural trade flows are defined to include all products belonging to the HS chapters 01, 02, 04 to 24 plus selected agricultural products belonging to chapters 29, 33, 35, 38, 41, 43, 50, 51, 52, 53 of the Harmonized System.   3 There is no mention of food security in the SADC, EAC or ESA EPAs. However, the rendez-­vous clause in the EAC and ESA Agreements commits the parties to continue negotiations in a range of areas with a view to concluding a full and comprehensive EPA which specifically includes agriculture. Thus, one assumes that there will be much greater attention to agriculture in the full EPAs with these groups.   4 The wording in this food security Article with this group of countries is curious as the emphasis is put on problems of availability of and access to foodstuffs causing major difficulties, to which agricultural safeguards are hardly an appropriate solution.   5 This was also the conclusion reached by Stevens and Kennan (2007) in a more sophisticated analysis of ACP tariff policy space in EPAs. They concluded that only Central African Republic and Congo, among ACP countries, would need to liberalize agricultural goods facing high tariffs.   6 Fifteen products identified at the HS6 tariff line level were identified for analysis: 020230 Bovine cuts boneless, frozen; 021011 Hams and shoulders, swine, salted, dried or smoked; 021019 Swine meat, salted/dried/smoked not ham/shoulder/bell; 040221 Milk and cream powder unsweetened