By Kholofelo Kugler
The European Union (EU)-Sub-Saharan Africa (SSA) Economic Partnership Agreements (EPAs), which concluded in 2014, will have economic winners and losers, as does any trade agreement. While countries in West Africa could take full advantage of the EU-West Africa EPA to advance economic growth, this region, like each SSA EPA group, must also be aware of its sensitive economic sectors and mitigate losses effectively.
Sub-Saharan Africa (SSA) has entered a new era in its relationship with the European Union (EU), one that envisages an economic partnership model underpinned by sustainable development, to replace the traditional aid donor-recipient engagement that ensued following Africa’s independence from EU member states. SSA forms part of the African, Caribbean and Pacific (ACP) group of countries with which the EU has managed trade relationships under various Conventions from Yaoundé to Cotonou. These arrangements have largely failed to achieve any meaningful economic gains for SSA.(2) Indeed, ACP countries have seen their share of the EU market diminish from 8% in 1975 to 3% in 2012.(3)
The beginning of the Economic Partnership Agreements (EPAs) negotiations in 2002 coincided with growing economic development in SSA states — many of whose economic growth, albeit from a low base, continues to outstrip that of the EU. This growth period has also been characterised by SSA’s decreasing dependence on the EU as China emerges as a strong economic actor in Africa. Critics of the EPAs suggest that SSA’s industries will not survive the reciprocal trade concessions, while the EU will continue to have unfettered access to SSA’s natural resources. The year 2014 saw the termination of the beleaguered negotiation process for some SSA countries with the conclusion of the EU-West Africa, EU-SADC group and the EU-EAC EPAs. While countries in West Africa, including SSA economic giant Nigeria, could take full advantage of the EU-West Africa EPA to advance economic growth, this region, like each SSA EPA group, must also be aware of its sensitive economic sectors and mitigate losses effectively.
General assessment of the EU-SSA EPAs
The EPAs are premised on reciprocal trade relationships between the EU and SSA in order to create a free trade area (FTA) between the regions that will foster sustainable development in SSA. However, critical concerns expressed by SSA governments in light of the EPAs include the threat posed to intra-African regional integration and loss of fiscal revenue from, inter alia, custom duty elimination and the demise of Africa’s industrial capacity due to competition with cheaper and perhaps better quality products from the EU. As with any trade agreement, there are adjustment costs that will be borne by contracting parties, and SSA economies are no exception.(4) On balance, the EPAs indeed pose a threat to an already slow and delicate SSA regional integration project. For example, due to divergent trade interests and membership in multiple regional integration groups, Southern African Development Community (SADC) countries are negotiating with the EU in three different groups. The EPAs will require members of the negotiation groups to, inter alia, harmonise their collective external relations with the EU. This will lead to stronger relations within the negotiation group vis-à-vis other SSA regional economic communities (RECs). Some of the benefits that the EU stands to gain from its EPAs with SSA include duty free quota free (DFQF) SSA products and access to larger markets due to the regional nature of the agreements. Among the possible negative implications for SSA markets is the extermination of the region’s already weak and limited industrial sector, and for any country that has not established industrial manufacturing, such ambitions could be seriously hampered or rendered stillborn. Notwithstanding the possible economic losses, consumers in SSA countries will be the major beneficiaries of EPAs as importers will have to access cheaper products from the EU, which will subsequently translate into increased consumer welfare. However, possible factory closures due to competition and a concomitant loss of employment may dampen the welfare improvements.(5)
Although the EPAs are reciprocal, they still afford SSA countries asymmetrical access to the EU’s market. SSA countries will liberalise fewer products than the EU and have up to 20 years to fully liberalise all committed sectors — during which time states can develop the requisite competitiveness. SSA countries’ products will also gain DFQF access to one of the biggest markets in the world. Further, the EPAs allow SSA countries to use safeguards to shield sensitive products when EU imports grow too quickly.(6) With enough political will and cooperation, SSA states could leverage the EPAs to achieve deeper regional integration across the EPA groups and create regional value chains to serve global markets, including the EU.(7) The EPAs may also encourage SSA states to implement policy reforms such as restructuring fiscal systems to effect efficient tax collection and decreasing barriers to labour from the SSA region to attract much-needed skills in critical sectors to ensure successful trade with the EU, which will ultimately benefit trade relations with other partners.(8)
The EU-West Africa EPA
As of July 2014, parties to the EU-West Africa EPA, comprising the EU and Benin, Burkina Faso, Cape Verde, Ivory Coast, The Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone and Togo, have been engrossed in the signature and ratification process of the agreement. This region is the EU’s most important ACP trade partner, accounting for 40% of the total trade between the two regions. Although there are 16 economies represented, Ghana and Ivory Coast (the world’s largest cocoa producers) and Nigeria (Africa’s largest oil producer) account for 80% of the regions’ exports to the EU.(9) Like other RECs in SSA, the West African region is characterised by diverse economic interests and priorities, with countries at different stages of economic development. This region is home to Africa’s largest economy, Nigeria, while 10 of the 16 states are Least Developed Countries (LDCs). The LDCs already enjoy DFQF access to the EU market under the EU’s LDC preference scheme, Everything But Arms (EBA).(10)
What the EPA changes in respect of the LDCs is that these countries now have reciprocal obligations in terms of which EU products can enter their markets DFQF. This may threaten the already precarious production capacities of these economies and undo their industrialisation and diversification efforts. The remainder of the region’s exports to the EU are a limited number of primary goods such as crude oil, cocoa, bananas, processed fisheries products, cotton and groundnuts, which are susceptible to volatile commodity market prices. In contrast, the region imports more expensive industrial goods, machinery, vehicles and transport equipment from the EU.(11) The figure below shows EU-West Africa trade from the EU’s perspective between 2011-2013, demonstrating the recent growing trend of West Africa’s trade surplus vis-à-vis the EU.
In addition to oil, this region is also endowed with minerals such as gold, diamonds, uranium and rare earth metals. Due to China’s seemingly insatiable appetite for natural resources to fuel its economic development, it has been SSA’s single largest trading partner since 2009,(12) and according to the Wold Bank, trade and investment between China and West Africa in particular is expanding rapidly.(13) The region’s economic relationship with China has infused tension in its relations with the EU as the latter now faces competition in the exploitation of the region’s natural wealth from China.(14)
Under the EPA, the West African parties agreed on 75% market liberalisation over a transitional period of 20 years. Studies conducted before the conclusion of the EU-West Africa EPA estimated that, based on 80% market liberalisation, customs revenues would be reduced by 30% for the whole ECOWAS region and between 20-40% for individual countries, representing 10% of total indirect tax revenue.(15) Under full liberalisation, in absolute terms, tariff revenue loss in the region would range from less than US$ 10 million in Guinea-Bissau — which accounts for between 21% and 35% of the country’s total tax revenue — to more than US$ 682 million in Nigeria. However, these losses are relatively marginal to Nigeria given the importance of oil royalties and other resource-related revenue in the country’s budget. Total trade revenue losses will be notably large in Cape Verde: between US$ 24 million and US$ 34 million, or more than 60% of the country’s trade revenue. Mauritania, Senegal and The Gambia are also likely to be most adversely effected as a result of the implementation of the EPA. In fact, in comparison to all the other SSA regions, West Africa will be most negatively impacted by the loss of tax revenue from the EPA because West African states are generally more dependent on EU imports and protected by and dependent on trade-related taxes.(16)
However, the EU has undertaken to transfer € 6.5 billion (US$ 6.9 billion) to West Africa to build capacity, implement the EPA and support domestic reforms, i.e. cushion trade adjustment costs. This transfer could achieve a certain measure of fiscal neutralisation provided that the region has access to those funds upon trade liberalisation. Notwithstanding the funds, in order to mitigate the fiscal impact of the EPA, West African countries should reform their national fiscal policies by, for example, replacing some customs duties with excise duties and increasing VAT or direct taxes to claw back some of the custom tax losses. Tax reform, of course, will be ineffective in countries that have a weak fiscal structure and where a large portion of the economy is informal, thus escaping official taxation.(17)
Losses due to competition
While the EPA’s overall trade creation effect in ECOWAS will outweigh trade diversion, the main loser is likely to be the already weak labour intensive light manufacturing sector.(18) Economic activities that comprise light manufacturing include footwear, apparel, simple metals and furniture production, as well as agro-processing.(19) Success in these activities is often seen as the gateway to achieving manufacturing capabilities in more capital intensive products, ultimately precipitating meaningful economic development.(20) SSA accounts for 1% of global manufacturing and in Nigeria, manufacturing only accounts for 4% of GDP.(21) Manufacturing in West Africa is still in its infancy, with much of it still at the artisanal level. However, regional governments are trying to change this by, inter alia, the establishment of Export Processing Zones (EPZs) and Special Economic Zones (SEZs) to attract manufacturers and investors. Notable manufacturing activity includes the apparel cluster of Aba in Abia state, Nigeria and the relatively successful Free Zones of Ghana and Togo; enterprises in the latter employ more than half of Togo’s secondary sector and one EPZ employs 9,000 workers, 60% of which are women.(22)
West Africa failed to crack the EU’s “hands off” policy on its domestic support on agricultural products and as a result, faces import competition from agricultural products that received subsidies to the tune of € 98.8 billion (US$ 123.1 billion) in 2013.(23) Due to preference schemes and other agreements, West African unprocessed agricultural products largely already receive DFQF access to the EU market; however the region could take advantage of free access to the EU market to create an agro-processing hub as the FTA eliminates tariff escalation for processed agricultural products. The region already enjoys a significant comparative advantage in horticulture and the production of cotton, cocoa shea nuts and cassava and can expand upon projects such as Olam International’s cashew processing plant in Ivory Coast.(24) Left to their own devices, the onslaught of EU light manufactures could spell the end of much of manufacturing activity in West Africa. Therefore, regional governments are advised to adopt policy measures to protect and further develop this economic capacity in the region.
The proof of the pudding is in the eating
The EU-SSA EPAs, as with any trade agreement, will have economic winners and losers. Although not perfect, the EUEPAs are a first step for SSA to create meaningful reciprocal trade relations with significantly more powerful economies in order to leverage on the possible concomitant knowledge and technology spill-overs. However, each EPA Group, like West Africa, must be aware of the sensitive economic sectors and create policies that will mitigate losses effectively, while making full use of the advantages. There is, however, much left to be done by SSA countries and indeed, West Africa, in order to fully benefit from the new economic relationship with the EU. The true proof of the EPA pudding will be in the eating once the agreements are fully implemented.
(1) By Kholofelo Kugler. Contact Kholofelo through IOA’s South African office (firstname.lastname@example.org). This paper was developed with the assistance of Feri Gwata. Edited by Liezl Stretton. Web Publications Manager: Claire Furphy.
(2) Sindzingre, A., ‘The European Union Economic Partnership Agreements with Sub-Saharan Africa’, UNU-CRIS Working Paper W-2008/5, 2008,http://www.cris.unu.edu.
(3) ‘Trade, economic partnerships’, EU Commission, http://ec.europa.eu; Karingi, S., et al., ‘Economic and welfare impacts of the EU-Africa Economic Partnership Agreements’, Economic Commission for Africa, 2005, http://www.uneca.org.
(4) Karingi, S., et al., ‘Economic and welfare impacts of the EU-Africa Economic Partnership Agreements’, Economic Commission for Africa, 2005,http://www.uneca.org.
(7) Draper, P. and Lawrence, R., ‘How should Sub-Saharan African countries think about global value chains?’, ICTSD, 18 March 2013,http://www.ictsd.org.
(8) Karingi, S., et al., ‘Economic and welfare impacts of the EU-Africa Economic Partnership Agreements’, Economic Commission for Africa, 2005,http://www.uneca.org.
(9) EU Commission website, http://ec.europa.eu.
(10) ‘EPA: West Africa and the EU conclude a deal’, International Centre for Trade and Sustainable Development, 6 February 2014,http://www.ictsd.org.
(11) EU Commission website, http://ec.europa.eu.
(12) Patey, L. and Chun, Z., ‘China, trade, aid and Africa’, Financial Times, 11 March 2014, http://www.ft.com.
(13) Pigato, M. and Gourdon, J., ‘Africa trade practice working paper series number 4’, May 2014, http://www-wds.worldbank.org.
(14) Patey, L. and Chun, Z., ‘China, trade, aid and Africa’, Financial Times, 11 March 2014, http://www.ft.com.
(15) Laborde, D., ‘Fiscal impact of the Economic Partnership Agreement in West Africa’, ICTSD, 15 July 2010, http://www.ictsd.org.
(16) Bilal, S., Dalleau, M. and Lui, D., ‘Trade liberalisation and fiscal adjustments: The case of EPAs in Africa’, ECDPM Discussion Paper Np. 137, November 2012, http://ecdpm.org.
(17) Laborde, D., ‘Fiscal impact of the Economic Partnership Agreement in West Africa’, ICTSD, 15 July 2010, http://www.ictsd.org.
(18) Karingi, S., et al., ‘Economic and welfare impacts of the EU-Africa Economic Partnership Agreements’, Economic Commission for Africa, 2005,http://www.uneca.org.
(19) Dinh, H., et al., ‘Light manufacturing in Africa: Targeted policies to enhance private investment and create jobs’, World Bank, 2012,http://worldbank.org.
(21) ‘In search of a holy grail: The future of light manufacturing in West Africa’, The Rockefeller Foundation, 2012,http://www.rockefellerfoundation.org.
(23) ‘Agricultural policy monitoring and evaluation 2014, OECD Countries’, OECD, September 2014, http://www.keepeek.com.
(24) ‘In search of a holy grail: The future of light manufacturing in West Africa’, The Rockefeller Foundation, 2012,http://www.rockefellerfoundation.org.