APPROACHES AND ISSUES IN ASSESSING THE POTENTIAL WELFARE IMPACTS OF EUACP EPAs

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• APPROACHES AND ISSUES IN ASSESSING THE POTENTIAL
  WELFARE IMPACTS OF EU-ACP EPAs
• by
• Professor Oliver Morrissey
• CREDIT and School of Economics,
• University of Nottingham
• This version March 2007

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Outline

• What are Economic Partnership Agreements?
• A Partial Equilibrium (PE) approach
• Graphical representation
• Illustrative estimates East Africa
• Difficulties with Sensitive Products (SPs)

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Economic Partnership Agreements

• Lome Conventions (preferences to ACP exports to
  EU) deemed incompatible with WTO
• Cotonou agreement proposed EPAs (to come into
  effect in 2008)
• Groups of ACP countries form RTAs
• These RTAs pair with EU (EPAs)
• Reciprocal free trade (zero tariffs) covering
  substantially all trade
• EU gets tariff-free access to ACP
• ACP countries get tariff-free access to EU (LDCs
  can avail of such preferences anyway).

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PE approach

• Partial Equilibrium (PE) approach
• Relatively simple (disaggregated data on trade
  and tariffs)
• Easy to interpret estimates (trade, consumption
  and revenue effects)
• Assists identification of products where effects
  may be large (SPs)
• Useful for policy-makers and negotiators
• Assumptions no more limiting than other
  approaches (and can be extended)

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PE approach

• Decomposing welfare effects
• Consumption effects (CE) - increased imports at
  a lower price (gain) M2M3 e
• Trade Creation (TC) -EU displacing less
  efficient ACP producers (gain) OM1 c d
• Trade Diversion (TD) - EU displacing more
  efficient ROW producers (loss) M1M2 b (a
  e)
• Welfare (W) combined trade effect on
  (consumer) welfare
• Tariff Revenue (TR) effect loss (a b)

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Figure Impact of an EU-ACP EPA
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PE Approach

• Estimating welfare effects
• Consumption effects only (CE) where EU is
  initially the dominant supplier 0.5tDMEU)
• Trade Creation (TC) where regional ACP
  significant suppliers tMACP CETC
• Trade Diversion (TD) - where ROW dominant
  supplier 0.5 tMROW CETD
• Welfare DW CE TC TD
• Tariff Revenue (TR) - tMEU tMROW

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Illustrative estimates East Africa

• Welfare effects tend to be small
• Can be positive or negative as it depends on
  pattern of trade (whether CE/TC or TD dominate)
• Suggests products for which to assess domestic
  production capacity (SPs)
• Major regional suppliers stand to lose (domestic
  producers and adverse TC)
• Large Revenue implications

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Illustrative estimates East Africa
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Composition Trade Effects (Agriculture, GDP)
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Difficulties with Sensitive Products (SPs)

• What criteria to identify SPs?
• High tariff suggests a domestic sector to
  protect, but there may be few genuine examples
  (e.g. milk). Typically, tariffs are highest for
  luxury goods (not SPs)
• High imports (for a given tariff) imply high
  revenue loss, but again not a good criterion for
  an SP.
• Region (ACP) an important supplier this is the
  main criterion we apply as it suggests common SPs
  for regional ACP groups.

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Difficulties with Sensitive Products (SPs)

• Consumers vs producers
• Identify import competing producers (which may
  require support to achieve competitive potential)
  for SPs
• Net import sectors (no or low domestic
  production) will have a net benefit so not
  candidates for SPs.
• Luxury goods (e.g. wines, tobacco) tariffs
  can be replaced by Excise duties, so not SPs
• Country vs ACP sub-region (not the same products
  as SPs)
• Kenya supplies manufactures to Uganda and
  Tanzania, Uganda supplies food to Kenya.

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Conclusions

• Welfare likely to increase if
• EU major supplier of imports with no local
  competition.
• EU efficient with respect to ROW
• Competitive local products excluded
• Welfare likely to decrease if
• EU not most competitive supplier
• Significant local production potential

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Implications for EPAs

• Consumers benefit from cheaper imports so the
  core issues are products with local or regional
  producers (e.g. milk and dairy).
• 2. A strategy to address revenue losses is
  important, as tax substitution is difficult in
  practice.
• 3. ACP countries need to be supported in the
  negotiations, given that they may not have
  sufficient capacity to conduct their own analysis.

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Alternatives to EPAs

• 1. Copy the US bilateral FTAs (worst option for
  ACP)
• 2. Promote ACP-compatible WTO negotiate for
• All ACP LICs get LDC treatment
• Regional groups (not FTAs) A, C P
• Asymmetric concessions
• 3. Super EBA extend to all LICs