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Edgar Ntasano
In 2000, the Cotonou Agreement between the European Union (EU) and the former
colonies that make up the African, Caribbean and Pacific (ACP) countries laid out
the framework for a new trade and development relationship called Economic
Partnership Agreements (EPAs). The EPAs are supposed to replace the Lomé system
of unilateral trade preferences with more comprehensive, modern, free trade
agreements that would be legal under Article XXIV of the General Agreement on
Tariffs and Trade (GATT). The trade component of the 1975 Lomé convention, which
offered the ACP countries preferential access to EU markets, discriminated against
other developing countries and thus was not WTO-compatible. Indeed, Lomé had
been sustained only because other WTO members granted a waiver on the
understanding that these preferences would be phased out. As such, Cotonou laid the
basis for new, reciprocal, and WTO-consistent trading agreements between the EU
and six groupings of ACP states that were to be introduced by 2008, the date of
expiration of the waiver (Hinkle, Hoppe & Newfarmer, 2005, 267).
The main element of the EPAs is the establishment of Free Trade Arrangements
(FTAs) between the EU and each of the seven regional EPAs negotiating blocs, all
the while encouraging them to pursue their own regional integration. To be consistent
with WTO Article XXIV, the preferential free trade agreements are based on the
principle of reciprocity in ‘substantially all trade’, which, although nowhere defined,
*
The author is an Assistant Lecturer in the Department of Political Sciences at the University of
Pretoria.
is widely understood to mean about 90 percent of the current bilateral EU-ACP trade
flows (Hinkle & Schiff, 2004, 1321-1322). The Cotonou Agreement thus maps out
ACP-EU relations up to 2020 (with a revision scheduled every five years). It provides
for a framework in the three main areas of political dialogue, development support,
and economic and trade co-operation (European Commission 2010). The Agreement
constitutes a comprehensive approach to development - including aid for trade -
covering trade in goods and services, investment, competition, trade facilitation (the
four Singapore issues), and some aspects of intellectual property rights. It allows for
some differentiation between LDCs and non-LDCs, primarily during the phasing-in
of reforms of external tariffs and other regulatory measures.
Although the EPAs concern all 77 countries of the ACP, this paper will exclusively
focus on their impact on the African continent. In effect, it will attempt to answer the
question whether the EPAs represent a boon or bane for Africa's development. That
said, such a question and its respective answer would consist of a simplistic view of
the effects the agreements might have on the continent. Indeed, such an assessment
would not only suppose that the EPAs would have the same effect on all African
countries alike, but also that the agreements' impact on the region's economic
development would be of a static nature whereby a distinction between long and
short-term effects would be neglected. Therefore, this paper will try to approach this
topic from a multi-dimensional angle instead, where, in assessing the impact of the
EPAs on Africa, it will take into consideration the fact that Africa is comprised of
numerous countries at different stages of economic development and that, while
EPAs might have an adverse effect on African economies in the short-term, they
might prove beneficial in the long run, especially in the context of integrating the
continent in the globalised world economy.
Global Integration through Trade Liberalisation: Long-Term Developmental Aims
and Goals of EPAs
The overall goals and objectives of the EPAs, as defined in Article 34 of the Cotonou
Agreement (ACP-EC, 2000), are to foster 'the smooth and gradual integration of the
ACP countries into the world economy […] thereby promoting their sustainable
development and contribution to poverty eradication'. This involves enabling the
ACP countries to manage the challenges of globalisation and to adapt progressively
to new conditions of international trade, thereby facilitating their transition to the
liberalised global economy. Therefore, for instance, as ACP countries need to ensure
their exports comply with changing EU standards (e.g. on food safety and animal
welfare), EPAs include technical support and training, and measures to promote
knowledge transfer and strengthen public services through initiatives such as the
EU pesticides programme for the horticulture sector or the EU fish health project
training in food safety and quality control (PIP programme) for over 200,000 family-
run fresh fruit and vegetable businesses (European Commission, 2010). As such, one
can equate the EPA's long-term benefits with those of trade liberalisation.
To be sure, trade liberalisation can be beneficial for the ACP in the sense that
EPAs will reduce the cost of doing business in the ACP and will increase
opportunities for business. More than 50 percent of ACP imports from the EU are
capital goods or intermediate inputs. Hence, reducing trade taxes on imports such
as high-technical inputs and consumer goods from the EU will reduce the costs of
production in the ACP directly, offering the chance to promote economic
diversification and leading to optimal factor allocation due to increased competition
(Curran, Nilson & Brew, 2007). Therefore, the reduction in the physical and
institutional barriers to trade seems to have enormous potential to increase both
trade volumes and the benefits which economies gain from them. In fact, a number
of studies indicate that trade facilitation is the major source of gains from
liberalisation, especially for developing countries. The estimates are rough, but
there is a broad consensus that trade facilitation could double the gains coming
from goods liberalisation (Hertel & Keeney, 2006).
In more general terms, trade liberalisation can also improve economic governance,
creating a more open and competitive playing field. In addition, market access to the
EU will be improved and secured. Indeed, the reciprocal approach will guarantee
secure WTO-compatible arrangements in a framework where preferences will not
depend on purely internal EU decisions or WTO politics anymore. As such, this
security will facilitate the transfer of technology through triggering long term
investment (European Commission, 2005, 5). To be sure, an FTA with the EU offers
the chance to 'lock-in' economic policies, as it would make it costly for ACP countries
to reverse their policies. Hence, a reciprocal trade agreement could act as an 'agency
of restraint' and signal willingness of ACP countries to economic reform, thus offering
the chance to attract foreign direct investment (FDI) for both domestic and the export
markets (Collier & Gunning, 1999).
However, the rather, optimistic abovementioned expectations of those who
pushed for the EPAs should be treated with care. These positive long-term
projections attributed to the advent of EPAs are based on the assumption that
adjustment technicalities and other conditionalities that are usually part of such a
project will be quickly and swiftly resolved. In actual fact, such a supposition is,
somewhat, misguided, in that it is really a big 'if' that should not be so easily
neglected. Indeed, as will be discussed below, the immediate economic
transformations that stem from the EPAs are not always better as some of these
constitute harmful consequences of trade liberalisation that occur under less-than-
ideal conditions. To be sure, a country first needs to overcome any short-term
eventualities when implementing EPAs in order to enjoy its longer-term benefits
that come from trade liberalisation. If it fails to do so, looking at the EPAs ‘visionary-
like’ longer-terms benefits almost constitutes a futile exercise, if not completely
irrelevant.
on merchandise imports from the EU. Revenues from tariffs still amount to 2 percent
of GDP in the median SSA countries, while some countries depend even more heavily
on tariff revenues, with these amounting to 4 percent to 6 percent of GDP (Hinkle &
Newfarmer, 2005, 26). This is understandable considering the EU is SSA's largest
single trading partner, buying on average 31percent of its merchandise exports and
providing 40 percent of its merchandise imports (Hinkle & Newfarmer, 2005, 3),
hence explaining why some countries are likely to lose significant tariff revenue
from reducing tariffs on imports from the EU. For example, an average country, in
which tariff revenues are 2 percent of GDP and 40 percent of imports come from the
EU, would lose tariff revenues equivalent to 0.8 percent of GDP (7 percent to 10
percent of government revenues) from eliminating tariffs on all imports from the
EU. The revenue losses would be significantly greater in countries that are highly
dependent on tariff revenues. Indeed, countries obtaining revenues of 4 percent or
more of GDP from tariffs could lose revenues of 1.5 percent or more of GDP (15
percent to 20 percent of government revenues) from eliminating tariffs on imports
from the EU (Hinkle & Newfarmer, 2005, 26).
Linked, is the issue of trade diversion that would occur because of tariff reduction
under the principle of reciprocity. Trade diversion occurs when imports from a regional
partner displace those that originated outside the regional arrangement, the
displacement occurring because the extra-regional imports are no longer price
competitive when the tariffs on trade within the region are removed (Ravenhill, 2005,
121). That said, while trade creation results from a shift in production from a high-
cost member to a low-cost member of a Preferential Trade Agreement (PTA), trade
diversion, on the other hand, results from a diversion of imports from a low-cost
non-member to a high-cost member of a PTA (Sally, 2008, 125). Indeed, this is what
would happen with EPAs between the EU and SSA, where lower-cost imports from
the rest of the world would be displaced by EU imports that now seem cheaper
because of lowered tariffs. This would have implications for fiscal revenues in SSA
as trade diversion from the rest of the world to EU suppliers would further increase
the loss of tariff revenues, as the share of EU imports is expected to rise by 9 percent
in the median West African country, for example (Busse, Borrmann & Grobmann,
2004). To be sure, trade diversion represents a transfer of revenue from the SSA to
the EU because the revenues SSA would have gotten from imports from the rest of
the world (who face higher tariffs) have now been transferred to the EU in the form
of extra revenue stemming from its greater SSA product market share at the expense
of the continent's loss of revenue in lower tariffs.
An Economically Diverse Continent: Differentiation between LDCs and DCs
It should be kept in mind, however, that the effects of EPAs, whatever they may be,
do not apply equally to all African countries. This, therefore, makes answering this
papers' title question even more complicated since you cannot generalise whether
EPAs represent a boon or bane for the continent as a whole. In fact, in addition to
that EPAs represent more of a bane for a country like Kenya than for a country like
Uganda or Tanzania, for which they could actually represent a boon in some instances.
To be sure, in almost any PTA amongst ACP countries there will be a 'Kenya type'
economy that will lose an import share in the region to EU competition.
Conclusion
The Need for Reforms for any Hope of Success
Taking all of the above into consideration, one can be forgiven for thinking that
EPAs, on the whole, represent a bane for SSA. Unfortunately, the fact of the matter
is, unless the short-term obstacles are dealt with comprehensively by SSA countries,
EPAs can actually make the situation worse for the continent in terms of economic
development. Indeed, unless EPAs are supplemented by precursor reforms, they
are unlikely to prove beneficial to SSA. These reforms would give African countries
the best chances possible for tackling the short-term costs of implementing EPAs
and help them reap its full benefits in the long-term. Incidentally, there are numerous
aspects of EPAs that need to be resolved, such as creating a SSA regional consensus
that exhibits one common schedule of tariff liberalisation to the EU, ultimately
dealing with the problem of regional overlap and the implications of a differentiation
between LDCs and Developing Country statuses (Stevens & Kennan, 2005, 2-3).
However, the most pressing, if not vital, batch of reforms that need to be implemented
before or alongside the EPAs seem to be those that bring about a restructuring of
indirect tax systems, MFN tariff reductions and greater regional integration.
Without a doubt, reinforcement of regional integration is a pre-requisite to the
African countries being able to benefit from the EPAs. That is so because significant
barriers to intra-regional trade still remain within 'free' trade areas and customs unions
on the continent (Africa Trade Policy Centre, 2006). To be sure, intra-Customs Union
and intra-FTA trade liberalisation in SSA should preferably be accompanied by a
reduction in MFN tariffs. The reason is that without the latter, the former is likely to
result in costly trade diversion from low cost non-EU to high cost EU suppliers, as
well as lead to substantial transfers of tariff revenues from SSA governments to EU
exporters (Hinkle & Newfarmer, 2005, 28).
Finally, to protect their fiscal positions and maintain macroeconomic stability,
the SSA countries will need to reform their indirect tax systems so that revenues
from the VAT and non-discriminatory excise taxes levied at equal rates on imports
and domestic products replace the tariff revenues. Improvements in tax administration
could also yield large revenue gains in some countries (Hinkle, Hoppe & Newfarmer
2005, 27).
Looking at the amount of reforms necessary for EPAs to be successful, though, it
seems as if the commitment and dedication required is much to ask from a continent
that has already proven slow to implement necessary changes for its own development
out of poverty. Hence, it is fair to say that the probabilities of EPAs representing a
boon for Africa appear to be quite a long shot; with the smart money being on them
more of a bane at the end of the day. Still, EPAs possess great potential in harnessing
a completely different and more prosperous outcome for Africa. Indeed, its overall
developmental vision and objective represent a more positive future for SSA,
especially if one considers the added benefits the abovementioned reforms would
bring in terms of much-needed, deep-seated and comprehensive institutional
restructuring.
Moreover, there are other aspects of EPAs that bring about additional benefits
such as the radical overhaul of the process by which aid is to be granted to the ACP
states, which takes the form of a 'rolling programming' for aid where aid allocations
are to be given on the basis of a record of implementation of 'Country Support
Strategies'. This change is further enhanced by the creation of a single aid budget
replacing the various separate instruments under Lomé IV, creating a single budget
heading for all aid resources which will generate greater ease for the Commission to
switch aid to ACP states that are deemed to be 'most effective' in using aid but also,
in theory, allows all aid resources in any one state to be used for adjustment support,
or good governance, or whatever is identified as the priority area (Brown, 2000,
377-378).
In conclusion, the importance of EPAs seems to rest on its restructuring factors
to help integrate SSA in the global economy. Indeed, tariff-free access to the EU
market on its own is not likely to have much impact in the medium term, while the
principle of reciprocity negatively affects SSA's balance of trade as well as it regional
integration process in the short-term. Partial preferential liberalisation of trade between
SSA and the EU under EPAs by itself would also be problematic, probably even
disadvantageous on balance, for many SSA countries because of the loss of tariff
revenues and the probability of significant costly trade diversion. Instead, the EPAs
can only be beneficial economically for SSA if they can be used to leverage the
abovementioned important policy reforms, locking them in a way that makes them
credible to prospective investors. But that is not given, and thus should not be taken
for granted.
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