Economic and Welfare Impacts of EPAs on African Countries

1
Economic and Welfare Impacts of EPAs on African
Countries

• Stephen Karingi, UNECA, Addis Ababa, Ethiopia
• Presentation at the Regional Meeting on EPAs,
  22-24 September, 2005, Mombasa, Kenya

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Presentation outline

• Brief background on the EPAs
• Research questions
• Methodology model assumptions and scenarios.
• Results
• Summary of key findings
• Conclusions
• Key recommendations

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Introduction EPAs Principles

• Reciprocity
• Need for WTO-compatibility
• MFN principle
• Enabling clause
• QUAD countries tend to use this
• Article 24 of GATT
• Deeper regional integration
• Differentiation
• Trade and aid coordination

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Potential challenges of EPAS

• Expected fiscal revenue loss
• Competition associated with reciprocity
• Net benefits from EPAs vis-à-vis EBA
• Negotiations capacity
• Consistency with DWP

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Why should LDCs bother with EPAs

• Unlike EBA, the EPAs are beyond trade in goods.
• EBA is a unilateral measure does not create
  certainty necessary for long-term investments
• EBA rules-of-origin quite restrictive
• A constraint attested by the utilisation rates.
• EPAs are likely to reach agreement on issues of
  interest to LDCs.
• But also some elements might negate EBA.

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Research questions

• Potential gains and losses at macro level?
• Sectors likely to gain or lose in SSA?
• Welfare effects?
• Trade creation and diversion?
• Fiscal implications?

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Methodology modelling framework

• Study exploits synergies of two methodologies
• Multiple-country multiple sectors framework.
• Methodology allows interactions but limited by
  few individual African countries in database
  used.
• Single-country simulations
• Methodology limited by lack of interactions but
  allows analysis at HS level.

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Methodology baseline data and assumptions

• GTAP database (version 6) base year 2001
• Database takes into account existing trade
  preferences even within RECs such as in COMESA
  FTA.
• Assumptions
• Enlargement of the EU
• Takes account of possible EPAs for the Caribbean
  and Pacific ACP states (Africa and these regions
  will be competing for the EU market possibly
  under similar terms).

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Methodology some of the scenarios

• EU-SSA Free Trade Area (full liberalisation).
• SSA reciprocates to the EU preferential treatment
  (sensitive products for EU remain).
• Whats an appropriate level of asymmetry?
• Focus on deepening intra-Africa integration.

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Economic output in SSA
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Welfare gains for SSA
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Trade impact of full reciprocity
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Bilateral trade balance is asymmetry dependent
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Primary commodity specialisation
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And de-industrialisation a reality!
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Adjustments in labour market with some costs
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EPAs and regional integration intra-SSA trade
diversion

• Regional integration is to be a pillar of EPAs.
• Intra-regional trade shrink significantly by as
  much as 18.
• Situation likely to be worsened by kind of
  specialisation to occur.

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What if regional integration is deepened first?

• Quantified potential benefits of regional
  integration on SSA.
• The benefits seem to be real.
• However, they do not fully offset the effects of
  EPAs.
• Hence, the need for proper sequencing

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EPAs will require major fiscal reforms
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Summary of key findings

• Overall, trade creation exceeds trade diversion.
• However, the trade diversion is substantial.
• Intra-regional trade significantly undermined.
• Substantial revenue shortfalls likely to result.
• Adjustment cost of tax policy and admin reforms
• Potential negative impacts on fiscal spending.
• Growth implications of reliance on income taxes.
• Equity questions if there is a shift to
  regressive consumption taxes.

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Summary of key findings

• Full reciprocity leads to a specialisation in
  primary commodities.
• Deepening regional integration mitigates opening
  up for the EU and gives space for
  diversification.
• Deeper regional integration taken alone has
  superior results compared to the FTA the 3
  reciprocity scenarios.
• Full reciprocity also will undermine the already
  low level of intra-Africa trade.

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Conclusions

• EPAs will portend significant adjustment costs
  de-industrialisation fiscal and BOP imbalances.
• Revenue shortfalls in particular will imply
  substantial adjustment costs in respect of tax
  policy and admin reforms.
• Consumers will benefit but such benefits
  outweighed by welfare losses associated to
  producers and the government.

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Conclusions

• Full reciprocity especially without addressing
  sensitive EU products will be costly for SSA.
• Full reciprocity also will undermine the already
  low level of intra-Africa trade.
• Reciprocity and deeper integration principles
  pull in different directions.

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Some key recommendations

• Sequencing of the EPAs implementation will be
  critical
• Early implementation should first focus on
  removing intra-Africa trade barriers.
• Then focus on unrestricted market access to the
  EU to utilise supply capacities and diversity
  from free intra-Africa trade.
• Phased dismantlement of SSA tariffs on EU.

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Some key recommendations

• Africa must hasten regional integration processes
  to build and consolidate supply capacity before
  opening up to EU.
• Coordinate EPAs with WTO negotiations (avoid WTO
  concessions).
• Closely follow WTO negotiations on regional trade
  agreements (Article 24 needs revisiting w.r.t.
  asymmetry question).

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• I Thank You for Your Attention.