EMBA 618, INTERNATIONAL TRADE AND INVESTMENT

Group Assignment

QUESTION:

DIFFERENCES AND SIMILARITIES BETWEEN EPA AND AGOA

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Trade Agreement is an international agreement on conditions of trade in goods and services. Stated differently is an agreement resulting from collective bargaining. A major objective of the Lome IV Convention and its predecessors was to improve the trade performance of the African, Caribbean and Pacific (ACP group of countries, with the ultimate aim of promoting their economic growth and development. For that purpose, the European community (EC offered non-reciprocal trade preferences to products originating I ACP countries. The Cotonou Agreement which was concluded in June 2000, offers a shift from the non-reciprocal trade preference s to Economic Partnership Agreements (EPAs) by the end of 2007. The ACP countries would be expected to open-up their domestic markets for almost all products from the EU - a free-trade area (FTA) within a twelve-year period (2008 to 2020). The main objectives of the EPA include an enhanced market access for ACP countries to the EU, negotiations on trade in services, deepening of the regional integration process between ACP countries, and increase cooperation in trade-related areas like competition and investment.

75 African Caribbean and Pacific (ACP) countries, including Ghana, are engaged in negotiations with the EU over possible Economic Partnership Agreements (EPAs). The new arrangements, which will succeed the trade provisions of the Cotonou Agreement, was expected to enter into force on 1 January 2008. EPAs are essentially free trade agreements (FTA), which will overhaul the entire way in which Ghana’s trade relations are structured. Unlike previous EU-ACP agreements that provided unilateral preferential access to the EU market for Ghanaian exporters, EPAs require that Ghana reciprocate by liberalizing tariffs on EU goods entering its market, as well as agreeing to additional binding rules in new areas such as investment, competition, government procurement and services. This move to reciprocal
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liberalization will entail fundamental changes to all African economies and will have important implications for Africa’s development. The stated aim of EU-ACP trade relations is to ‘foster the smooth and gradual integration of the ACP states into the world economy…promoting their sustainable development and contributing to poverty eradication’.1 However, the structure and content of the EPA negotiations have raised concerns about the impact these agreements will have on Ghana and its efforts towards poverty eradication, regional integration and economic growth. It is therefore crucial that greater attention is paid to their development implications. The precise structure of EPAs is still under negotiation between ACP and EU states. However, as envisaged by the EU, EPAs would include: The establishment of free trade areas with ACP regions. And liberalization of 90% of the total value of trade between the EU and the ACP, whereby the EU liberalizes 100% of its trade and the ACP liberalizes 80% of its trade. This would leave ACP countries, including Ghana, able to protect only 20% of the total value of their trade with the EU through the use of an exclusion list. As established under the Cotonou Agreement, EPA negotiations began in 2002 and are to be negotiated during a five-year preparatory period, concluding on the 31 December 2007. In the negotiations, ACP countries are split into six regional groups: West Africa; Eastern and Southern Africa (ESA); Southern African Development Community (SADC); Central Africa; the Caribbean (CARIFORUM); and the Pacific. Each of these groups is negotiating a separate EPA with the EU. Ghana is negotiating as part of the West African Group of countries, which includes Benin, Burkina Faso, Cape Verde, Côte d’Ivoire, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Sierra Leone, Senegal and Togo.2 In total, these 16 West African countries are inhabited by 242 million people and form a diverse and acutely poor regional economic grouping. West Africa’s gross domestic product (GDP) per capita amounted to little over US$326 in 2004.3 Apart from Ghana, Nigeria and Cote d’Ivoire, all of the countries in the group are categorized as ‘least developed’ (LDC). African Growth and Opportunities Act (AGOA) on the other hand, started when former U.S President Bill Clinton signed the AGOA into law on May 2000 as Title 1 of The Trade and Development Act of 2000. The Act provides tangible incentives for African countries to continue their efforts to open up
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their economies and build free markets. AGOA provides reforming African countries with the most liberal access to the United States market available to any country or region with which the United States does not have a Free Trade Agreement. AGOA supports United States business by encouraging reform of Africa's economic and commercial regimes, which will build stronger markets and more effective partners for US firms. AGOA can change the course of trade relations between Africa and the United States for the long-term, while helping millions of African families find opportunities to build prosperity by: Reinforcing African reform efforts; Providing improved access to US expertise, credit, and markets; Establishing a high-level dialogue on trade and investment. The largest possible number of Sub-Saharan African countries is able to take advantage of AGOA. The proclamation issued by President Clinton on October 2000 designated 35 countries (including Namibia) in Sub-Saharan Africa as eligible for the trade benefits under AGOA. The Act authorizes the USA president to designate countries as eligible to receive the benefits of AGOA if they are determined to have established, or making continual progress towards establishing the following: Market based economies; The rule of law; Elimination of barriers to USA trade and investment; Protection of intellectual property; Effort to combat corruption; Policies to reduce poverty; Increasing availability of health care and educational opportunities; Protection of human rights and worker rights; Elimination of child labour practices. The Act provides for duty free and quota access to the USA market without limits for apparel made in eligible Sub-Saharan countries from USA fabric, yarn and thread. It also makes provision for substantial growth of duty free and quota free apparel imports made from fabric produced in beneficiary countries in Sub-Saharan Africa. The preferential treatment for apparel took effect on October 2000, but the beneficiary countries must first establish effective visa systems to prevent illegal transshipment and use of counterfeit documentation, and that they have instituted required enforcement and verification procedures. Specific visa requirements of the visa systems and verification procedures were promulgated to African governments via USA embassies on September 2000. After the passage of the African Growth and Opportunity Act (AGOA) in 2000, Ghana was one of the first to receive U.S. approval of its textile visa system, and accordingly benefit from the unprecedented U.S. - Africa trade relationship. The Ghanaian government recognized the necessity of fulfilling
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certain economic and development criteria in order to reap the rewards of AGOA. Such criteria included improvements in capital equipment, infrastructure and the workforce. Today, the Ghanaian government supports the proposed amendments to the AGOA legislation. Industries currently benefiting from increased trade between Ghana and the United States include the textile and garments sector and traditional and non-traditional exports, including Ghanaian handicrafts. The Committee for the Implementation of Textile Agreements (CITA) targets specific industries for export promotion and markets these sectors. CITA has identified the following products for promotion: hand loomed fabrics, hand loomed articles (including rugs, scarves, placemats and tablecloths), and handmade articles made from hand loomed fabrics. The foreign revenue AGOA statistics demonstrate a positive progression of economic benefits for Ghana. Last year, traditional and non-traditional exports to the United States are expected to reach US$62.5m. This figure exceeds the US$50.4m generated in 2002 and US$42m in 2001. Investments in all sectors are highly encouraged by the government as it seeks to build on the premise of “Ghana as the Gateway to West Africa.” One of the most important tools for development is trade. Africa needs to increase its share of international trade in order to earn more resources to be able to finance its own development. In addition to unfair subsidies, access to rich country markets is limited for Africans. Quotas limit the quantity of products that may enter a certain market while tariffs often make products too expensive to compete. Sometimes tariffs are unevenly applied making it twice as expensive for African farmers to export processed goods (from which they could derive greater profits) than their unprocessed crops. The Africa Growth and Opportunity Act (AGOA) is one way in which the U.S. has worked to open its markets to African producers. AGOA was enacted in 2000 as the first piece of trade legislation focused on increasing and enhancing trade between the United States and countries of sub-Saharan Africa by permitting the duty-free export to the U.S. of most African goods. In order to qualify for AGOA, countries must be working to improve the rule of law, human rights, and respect for core labor standards. Currently, 37 of 48 sub-Saharan African countries qualify. There are a lot of advantages that go with AGOA. Eligible countries are supposed to abide by conditions such as good governance, anti corruption, poverty reduction, all these will improvement in social and economic well
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being of the people. Eligible countries will have access to the US market, for the export of apparel/textile products; this will lead to export earnings. AGOA comes with other benefits, such as private sector assistance in fighting HIV/AIDS, efforts to combat desertification, and provision of air traffic control equipment. The demerits of AGOA There are conditionalities attached under AOA, such as mandatory establishment of market based economy, support to US foreign policy interest. These tend to impede formulation of domestic economic and other policies.The agreement under AGOA provides for tariff free and quota free trade in textiles. The lack of capacity on the part of local forms to favorably compete with US firms has the danger of killing the textile industry, with attendant problems like job lost and others. The agreement under AGOA is meant for only the US market, it therefore limits our ability to explore as many foreign markets as possible The EPA agreement, also tends to enforce good governance, and requires policies to fight corruption. This will enforce the combat of corruption in Ghana. EPA agreement will lead to more inflow of cheaper products. This will help in curbing demand pull inflation, and also enhance the living standards of the people. The EPA agreement, will lead to an inflow of foreign direct investment. Countries will relocate to Ghana to take advantage of Ghana`s comparative cost advantage in some industries, so as to produce for the export market. Since the EPA will be negotiated by African countries as a group, rather than as individual countries, better trade terms are likely to be achieved.

Demerits of EPA are stated below. The EPA has some conditionalities attached, such as the need to submit to of EU policy prescriptions. The effect of this is to limit the space of economic and other developmental policies. Even with retractions, there is dumping from EU countries. Therefore an EPA agreement will worsen such a situation, since there will be unrestricted inflow of all manner of foreign goods. Since the EU is Ghana`s largest trading partner, the removal of certain tariffs, required by EPA agreement will significantly lead to loss of revenue from import tariffs. An EPA agreement will have the risk of total destabilization of critical sectors of the economy, especially the Agric sector. The influx of cheap imported food items, will reduce the market for domestic Agricultural products. This will seriously affect Employment and GDP, since about 60% of the population is employed in Agric. And Agric accounts for 35% of our GDP.
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The impact of AGOA cannot be overemphasis. Statistics indicate that imports from AGOA-eligible countries have increased each year since enactment of the law, most recently rising by 16 percent in 2006 over 2005, although the majority of AGOA exports to the U.S. are oil and petroleum products. AGOA works best for countries producing oil and engaged in other extractive industries and petroleum exports continue to make up the bulk of export income. Five countries – Nigeria, Chad, South Africa, Angola and Gabon— have accrued the lion’s share of these benefits. However, other industries such as agriculture commodities, textile and apparel, and automobiles are benefiting as well. More than $500 million in new investments and approximately 250,000 jobs have been in Africa as a result of AGOA. Apparel has been particularly successful due to a special provision of AGOA that allows 24 of the 37 AGOA countries to use inexpensive fabric from anywhere in the world to make clothing, that can be exported to the U.S. duty-free. AGOA however has the following Limitations. Though efforts have been made to extend AGOA and make it easier for African countries to take advantage of the benefits, AGOA as a tool is limited in its ability to truly alter African trade with the U.S. The scope and diversity of products could be expanded to create more opportunities for African countries—for example full access to sensitive products such as sugar, beef, and footwear are not included under AGOA but could have great potential for African producers if they were added. Moreover, AGOA itself only addresses market access; its impact will be limited because it does not reflect a comprehensive approach to trade policy. AGOA does not and is not intended to address subsidies in any way; therefore the competitive advantage of subsidized U.S. goods continues to impact Africans’ ability to compete. What AGOA even more vividly reveals is the need for greater trade capacity assistance and the need to address “supply side” issues in Africa so that once the barriers to trade are removed, Africa can better take advantage in a variety of industries. The lack of infrastructure (transportation, telecommunication, energy and water); finance and currency problems; and the need for legal and banking reforms work against Africa. Only by addressing capacity/infrastructure gaps, encouraging diversification of exports and transforming the international trade system to level the playing field will ensure that more trade benefits accrue to sub-Saharan Africa.

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We recommend that the EPA may lead to or promote technological spillovers between the EU and ECOWAS countries, either as a consequence of increased trade volumes or because of policies designed to encourage scientific interchange. But integration, may also lead to pro-competitive effects, which relate to more incentives to innovative and the reduction of duplication in research and, thus, a more efficient allocation of resources in research and development activities in Ghana. There is the need therefore for the ECOWAS countries to have a specific agreement on technological transfer in areas of comparative advantage. Traditional international trade theory predicts that ECOWAS countries are not likely to suffer from opening up their domestic markets. When trade is liberalized, consumers in ECIWAS countries face lower prices of both imported and domestically produced goods. The beneficiaries of free trade may be not only households, whose real incomes rise as prices fall, but also firms, whose international competitiveness is increased by the purchase of cheap investment and intermediate goods. It can not be denied that domestic producers might face increased competition from EU suppliers. However, if domestic producers have a comparative advantage, resources could be reallocated into those sectors to increase productivity. This structural adjustment is likely to increase production and employment and raise overall welfare. The estimated trade and budget effects will occur if European exporters lower their export prices in line with tariff elimination. Yet not, Ghana would lose import duties without gaining the advantage of lower import prices which will definitely reduce economic welfare. In general, this outcome is more likely to occur in less competitive markets, where the degree of competition among suppliers is less severe as in the case of Ghana. Even though we cannot predict the market behaviour of international companies in Africa, this outcome has to be taken into account for the interpretation of the results. EPAs are also meant to stimulate related new efforts. Regional integration processes between developing countries have been unsatisfactorily ineffective so far. EPA negotiations could become an external driving force that will push regional organizations to rationalize and harmonise their regional trade arragements, thus strengthening the regional integration and assisting sub-saharan Africa in becoming a more effective partner in the global economy.
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Instead of impeding progress in multilateral liberalization, ECOWAS countries could take part actively. They could join and support initiatives of other developing countries aiming at liberalization of market access in key areas of interest. In particular pressure on the EU and other developed countries to reduce or eliminate agricultural export subsidies and domestic support for agricultural production. The ECOWAS countries need to design a suitable timing and sequencing of tariff reductions for the progressive removal of trade barriers that helps the economy to adjust to increased competition from the EU with a minimum of economic and social upheavals. In sectors where the EU competition could have destructive effects, gradual implementation of trade liberalization would be necessary in order to preserve domestic production and enable it to build competitiveness. Complementary measures are also urgently required to ensure that moving from a restrictive to an open-trade regime does not lead to fiscal shock and macroeconomic instability. Therefore, unavoidable short and medium term losses in government revenue need to be cushioned. In conclusion, we would advice that between the two partnership agreements, Ghana signs for the EPA because of the following reasons among others. An EPA agreement would serve as a booster to trade. This is because under such agreement, trade barriers would be removed, thereby leading to increase in export revenue. The EU takes the largest portion of Africa`s exports. This would serve as a booster to Agric and industry, leading to increase in GDP, jobs EPA would also help attract foreign direct investments. Companies would get established in Ghana to take advantage of Ghana’s comparative advantage in some sectors, to produce for the liberalized EU market. This would create more investments, income and jobs. Under EPA agreement, Ghana would have 100% free access to the EU market. Also there are measures to compensate Ghana for its lack of capacity to optimize export potential. This will enhance the competitiveness of Ghana in the export Market EPA agreement requires among other things that government should pursue anti corruption policies, promote human rights and others. This will serve as a check on the Ghanaian government thereby promoting good governance

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