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AN IMPACT STUDY OF THE EU-ACP ECONOMIC PARTNERSHIP AGREEMENTS (EPAS) IN THE SIX ACP REGIONS Final Report January 2008 This report has been prepared by Lionel FONTAGNE (CEPII UNIVERSITE DE PARIS I), Cristina
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AN IMPACT STUDY OF THE EU-ACP ECONOMIC PARTNERSHIP AGREEMENTS (EPAS) IN THE SIX ACP REGIONS Final Report January 2008 This report has been prepared by Lionel FONTAGNE (CEPII UNIVERSITE DE PARIS I), Cristina MITARITONNA (CEPII UNIVERSITE BOCCONI), David LABORDE (CIREM UNIVERSITE DE PAU) N Trade SPECIFIC CONTRACT N SI Implementing Framework Contract No TRADE/05/H3/01/1c Commission of the European Union - Directorate General for Trade This report has been prepared at the request of the Chief Economist Unit of DG Trade. The views and opinions presented in this document do not necessarily reflect those of DG Trade or the European Commission. CEPII-CIREM 9 rue Georges Pitard PARIS Cedex 15 France Phone: Fax: Web: Executive summary Executive summary The EU s trading relations with the 77 members of the African, Caribbean and Pacific (ACP) countries have historically been framed by a series of conventions, most recently Lomé, which granted unilateral preferences to the ACP countries on the EU market. Although the ACP countries are amongst the most vulnerable countries in the global trading system, the conventions nevertheless violated WTO rules as they established unfair discrimination between developing countries. A change was therefore required. The Cotonou Agreement in 2000 paved the way for a new trading regime based on reciprocal preferences. On this basis, in 2001 the WTO agreed to give a waiver to the EU to continue providing unilateral preferences until January Under the Cotonou Agreement, Economic Partnership Agreements (EPAs) will be established between the EU and the ACP countries. EPAs define a new stage in the policy of the EU towards the ACP developing countries, establishing a framework which is fully compatible with the WTO trading rules, in the sense of GATT Article XXIV. However, the EPAs, which should replace the Cotonou agreement by the beginning of next year, will pose important challenges for many ACP countries. The negotiations with the EU to establish EPAs began in September For the purposes of negotiations, the 77 ACP countries have been grouped into six negotiation regions (West Africa, Central Africa, Eastern and Southern Africa, the Southern African Development Community, the Caribbean and the Pacific) based on existing regional integration institutions. The EPAs raise several concerns amongst ACP countries. Firstly, ACP countries fear that giving preferential access to EU products, under a reciprocal arrangement, would put their producers in numerous sectors at risk of increased competition. Secondly, they also fear that cutting tariffs for EU products would result in a sizeable loss of tariff revenue that would hurt their public budgets. Thirdly, they claim that the timetable for the negotiations and their implementation is extremely tight given the numerous modalities still to be precisely determined. For example, what will be the scope and pace of liberalisation? Which products will be considered to be sensitive for ACP regions and thus excluded from liberalisation? How will integration inside each region be linked with ACP-EU liberalisation? In order to better address these concerns, our study intends to present a very detailed analysis of the trade-related aspects of EPAs negotiations. We use a dynamic partial equilibrium model at the HS6 level (covering 5,113 HS6 products). The main source of trade data are Comext and BACI, while advalorem tariffs and Tariffs-Rate-Quotas are provided by MacMapHS6v2. The use of these data sources means that we can accurately deal with the crucial aspect of sensitive products. Two alternative lists of sensitive products are constructed, one giving priority to the agricultural sectors (H1 option), the other focusing on tariff revenue preservation (H2 option). The dynamic aspect of the model allows us to measure the impact of the agreement over different CEPII September An impact study of the EU-ACP Economic Partnership Agreements (EPA) in the six ACP regions time periods. It is important to remember the strong asymmetry existing between the two trading partners. ACP countries are highly dependent on the EU market, largely due to their historical links. For the EU, on the other hand, despite this longstanding partnership, the ACP region remains of more modest economic importance, accounting for very little in terms of trade. The ECOWAS group alone accounts for half of total EU imports from the whole region. On the export side, ACP countries tend to be highly specialised in a few key products. This strong concentration mainly derives either from the abundance of minerals and natural resources in many African countries (petroleum, gold, diamonds and uranium and radioactive elements) or a heavy reliance on a few unprocessed agricultural commodities such as coffee or cotton. Looking at protection levels, ACP regions apply differing tariff rates on EU exports. CEMAC, COMESA and Pacific regions appear to be the most protective. Tariff structures present the usual shape. The highest level of protection is in agriculture, with high peaks in agro-food and vegetable production. In manufacturing, CEMAC and SADC still protect textiles while COMESA has high tariff rates in the metallurgic sector. On the other hand, EU trade policy is quite generous to ACP countries. The Cotonou agreement gives largely free access on all industrial products. The only protection remains in agriculture. However, given the high level of specialisation of many ACP countries on agricultural products, some of which are still protected, the average protection they face is often higher than that applied by the EU to the rest of the world. To be WTO compatible, the EPAs will have to satisfy GATT s Article XXIV, including the liberalisation of substantially all trade. However, this reciprocity is not the only objective of EPAs and, as the European Parliament has rightly pointed out there is the need to be vigilant that the issue of compatibility does not take precedence over the overall aim of sustainable development. In this sense, EPAs include several other elements, including support for deep integration and development assistance. Although both of these elements can be important catalysts for growth, due to difficulties in their integration into the model, they are not quantified in this study. However they should not be overlooked when it comes to the interpretation of the results. In other words our results need to be seen in the light of broader positive effects that can be expected from EPAs, but which are not modelled here. To define what substantially all trade means in terms of share of trade, we have followed the guidelines of the EU Commission. They consider that a Preferential Trading Agreement (PTA) is WTO compatible if 90% of bilateral trade is fully liberalised 1. We use this criterion to simulate EPAs for each negotiating regional block. We assume that the full implementation of EPAs will be achieved within 15 years. To reflect the asymmetry between partners, the EU is modelled as granting free access to all ACP exports in The selection of sensitive products for the ACP remains a key issue. Two approaches have been chosen, following the advice of DG Trade experts. Under the H1 scenario, priority is given to agricultural products, to reflect the political sensitivity of 1 This quantitative requirement (90 per cent of free trade) is achieved considering both 90 per cent of bilateral trade in volume and 90 per cent of tariff lines in the Harmonised System. 4 Fontagné L., Mitaritonna C., Laborde D. Executive summary the sector. Under the H2 Scenario, sensitive products are selected such that tariff revenue losses are minimised at the regional level. The framework for the analysis is a partial equilibrium model focusing on the demand side. Different simulations are performed in order to assess the impact of both potential outcomes from the EPA negotiations and alternative scenarios in the event that EPAs are not signed. In the latter context, firstly, we consider the end of Cotonou, no EPA and GSP tariffs applied to non-ldc ACP countries (Everything But Arms-EBA-will still provide market access for LDCs). Secondly, we model the end of Cotonou, no EPA and the GSP+ tariffs applied to non-ldc ACP countries (EBA for LDCs). Lastly, we consider the end of Cotonou following successful EPA negotiations, using the H1 and H2 scenarios. As a sensitivity analysis, we also examine the H1 case in circumstances where the Doha round of multilateral negotiations is also completed, in order to measure the magnitude of potential preference erosion. The consequences of EPAs are assessed through different indicators: changes in exports and imports, changes in tariff income and the countries current accounts. We avoid to put emphasis on the effects on domestic production, due to the fact that information at the product level is scarce and of low quality. However our analysis seems to indicate that in general there would be minor effect on ACP domestic production due to EPAs (see Table 13). This result is in line with the fact that EU products are not in direct competition with ACP production (in particular in H1 where agricultural commodities are excluded from the liberalization process). All the results have to be interpreted as deviations from the reference situation, which is not the status quo (which is no longer legally tenable) but rather the only current legal alternative, which is a combination of GSP for ACP-non LDCs and EBA for ACP LDCs. For instance, when considering the impact on trade, ACP exports to the EU are forecast to be 10% higher with the EPAs than under the GSP/EBA option. In percentage terms, the largest increases in exports will occur in the livestock sector, which is forecast to at least double in the EPA scenario. Exports of agricultural products (excluding meat and cotton) and textile products are forecast to increase by 40%. On the import side, a 7% average increase overall is forecast for ACP countries in 2015, against 17.7% in This low forecast in the short run is explained by the limited liberalization of ACP imports over this time horizon. On average ACP countries are forecast to lose 70% of tariff revenues on EU imports in the long run, under the central scenario (H1). The most affected region is ECOWAS. Yet imports from other regions of the world will continue to provide tariff revenues. Thus when tariff revenue losses are computed on total ACP imports, losses are limited to 26% on average in the long run under H1, and 19% under H2 (when the product lists are optimised). Furthermore, the final impact on the economy depends on the importance of tariffs in government revenue and on potential compensatory effects. Some positive impacts can be expected from EPAs, whenever an enlargement of the fiscal basis upon which other public incomes are based is achieved. However CEPII September An impact study of the EU-ACP Economic Partnership Agreements (EPA) in the six ACP regions this long term and less visible effect will mainly depend on the capacity of each ACP country to reorganise its fiscal base, shifting to other forms of taxation. Some improvements in the efficiency of the customs administration could be attained, as a consequence of diminished trade flows to tax and monitor. Considering a 50% increase in the collection rate, we find that tariff revenue losses could be significantly alleviated. 6 Fontagné L., Mitaritonna C., Laborde D. Table of Contents Table of contents PART I Introduction PART II Literature Review PART III Trade relations between ACP countries and the European Union III.1 Asymmetric trade relations between the ACP and the EU III.2 Current trade pattern of ACP countries III.2.1 Trade Balance III.2.2 Product specialisation PART IV Current and future trade policies between the EU and the ACP countries IV.1 Current protection pattern IV.1.1 ACP trade policies IV.1.2 EU trade policy towards ACP countries IV.2 The Economic Partnership Agreement negotiations and the alternative policy options.. 36 IV.2.1 From the Lomé Conventions to the Cotonou Partnership Agreement IV.2.2 Towards WTO-compatible arrangements: main alternatives IV.3 EPAs: designing a WTO compatible agreement PART V Assessing the impacts of EPAs V.1 Modelling choices and experiment design V.2 Choosing the right counterfactual V.2.1 Different options V.2.2 Reference scenario: impact on ACP exports to the EU V.3 The global impact of EPAS on ACP countries V.3.1 Main trade effects V.3.2 Impact of excluding products V.3.3 Impacts on tariff and government revenues V.4 From fiscal effects to net fiscal costs V.4.1 Tariff revenue losses and Fiscal constraints V.4.2 Customs duties efficiency and monitoring capacity V.4.3 Tax evasion Appendix I. List of countries included in the study Appendix II. Model Structure Appendix III. Trade appendix Appendix IV. EPA and the preference erosion driven by the DDA Appendix V. Time dimension of the EPA for ACP imports Appendix VI. Country level results Appendix VII. Products level results Appendix VIII. EPA vs full FTA assumption Appendix IX. Bibliography Appendix X. Terms of references CEPII September An impact study of the EU-ACP Economic Partnership Agreements (EPA) in the six ACP regions List of tables Table 1 - Share of ACP Exports and Imports, by region Table 2 - Share of ACP imports from the EU that could potentially be excluded from liberalization Table 3 - Tariff revenue losses and fiscal dependence (selected countries) Table 4 - Results from the baseline model (dependent variable in value) Table 5 - Results from the baseline model (dependent variable in quantity) Table 6 - Share of ACP Exports and ACP Imports by Markets. Countries listed by EPA region Table 7 - Cumulative frequency of ACP exports, hs6 level. Countries listed by negotiating groups Table 8 - ACP trade: exports shares of the first three hs4 codes, with the world and with the EU-25 as partner. Countries are listed by negotiating groups Table 9 - ACP trade: import shares of the first three hs4 codes, with the world and with the EU-25 as partner. Countries are listed by negotiating groups Table 10 - Change in exports to the EU (country level) Table 11 - Changes in imports from the EU (country level) Table 12 - Changes in total imports (country level) Table 13 - Changes in domestic sales on domestic market (all products) Table 14 - Tariff revenue losses (all origins, %) Table 15 Tariff revenue losses (all origins, millions of euros) Table 16 Tariff revenue losses (all origins, share of GDP, %) Table 17 Tariff revenue losses by ACP regions (with the EU, share of GDP, %) Table 18 Tariff revenue losses by ACP regions (all origins, share of GDP, %) Table 19 - Changes in trade balance (level expressed as % of 2007 total exports) Table 20 - Major Changes on ACP exports to the EU when moving to GSP (HS4 results, thousands of euros) Table 21 Major changes on ACP exports to the EU when moving to GSP (HS6 results, thousands of euros) Table 22 - Major changes in ACP net imports after EPA implementation (all origins, HS4 results, thousands of euros) Table 23 - Major changes in ACP net imports after EPA implementation (all origins, HS6 results, thousands of euros) Fontagné L., Mitaritonna C., Laborde D. Table of Contents List of Figures Figure 1 - Share of ACP in Total EU imports ( ), total and by Negotiating Group 26 Figure 2 - Trade Balance by ACP groups and Total 28 Figure 3 - Trade Balance by ACP groups in different sectors 29 Figure 4 - Exports by ACP groups, Millions of Euro 30 Figure 5 - Import by ACP groups, Millions of Euro 30 Figure 6 - Initial ACP tariffs on EU exports 34 Figure 7 - ACP Average tariffs. Regional level 35 Figure 8 - Initial EU sectoral tariffs faced by ACP regions (exporter) 36 Figure 9 - Average protection rates when moving from Cotonou to GSP and GSP+ 40 Figure 10 - Effective ACP liberalisation at the end of the EPA process 43 Figure 11 - The cost of not -signing an EPA. Regional results, with full implementation of EBA 50 Figure 12 - The cost of not -signing an EPA. Sectoral results, with full implementation of EBA 51 Figure 13 - ACP exports to the EU with the full implementation of EPAs. Regional results 52 Figure 14 - ACP exports to the EU with full implementation of EPAs. Sectoral results 53 Figure 15 - EPA consequences on EU exports to ACP countries. Sectoral results 54 Figure 16 - EPA consequences on EU exports to ACP countries. Regional results 55 Figure 17 - The role of the exclusion list on tariff revenue 56 Figure 18 - The impact of the exclusion list on sectoral trade flows 57 Figure 19 - The role of the exclusion list on regional imports 58 Figure 20 - Net imports and trade diversion (H1 scenario) 59 Figure 21 - Fiscal effects: annual losses (H1 scenario) 60 Figure 22 - Tariff revenue on EU products (% change, H1) 61 Figure 23 - Tariff revenue losses for ACP countries (all sources). 62 Figure 24 - Tariff revenue losses and Fiscal dependence (selected countries) 65 Figure 25 - Fiscal effects with increased efficiency in tariff collection 66 Figure 26 - Demand tree 77 Figure 27 - Trade Balance with the EU by Countries and Sectors, ECOWAS+ 81 Figure 28 - Trade Balance with the EU by Countries and Sectors, CEMAC 82 Figure 29 - Trade Balance with the EU by Countries and Sectors, COMESA 83 Figure 30 - Trade Balance with the EU by Countries and Sectors, SADC 84 Figure 31 - Trade Balance with the EU by Countries and Sectors, Caribbean 85 Figure 32 - Trade Balance with the EU by Countries and Sectors, Pacific 86 Figure 33 - ACP exports to the EU with full implementation of EPAs. Regional results 97 Figure 34 - ACP exports to the EU with full implementation of EPAs. Sectoral results 98 Figure 35 - EPA consequences on EU exports to ACP countries. Sectoral results 99 Figure 36 - EPA consequences on EU exports to ACP countries. Regional results 100 Figure 37 - Fiscal effects decomposition EPA vs. full FTA 127 List of Boxes Box 1 Possible way to aggregate the sensitive products list Box 2 Data sources CEPII September An impact study of the EU-ACP Economic Partnership Agreements (EPA) in the six ACP regions 10 Fontagné L., Mitaritonna C., Laborde D. Glossary Glossary ACP ACWL AD AFTA AGOA AMS AoA APEC ASEAN ATC ATPA CACM CAPE CARICOM CARIFORUM CBERA CBD CBI CBTPA CEPII CEMAC CNL COMESA CTD CU CVD DDA DSB DSU EBA EC ECDPM ECOWAS EDF EFTA EPA EU FAC FAO FTA African, Caribbean and Pacific Group (Lomé Convention) Advisory Centre on WTO Law Anti-dumping measures ASEAN Free Trade Area African Growth and Opportunity Act Aggregate measurement of support (agriculture) Agreement on Agriculture Asia-Pacific Economic Cooperation Association of Southeast Asian Nations Agreement on Textiles and Clothing Andean Trade Preference Act Central American Common Market Cellule d Analyse de Politique Economique Caribbean Community and Common Market Caribbean Forum of the ACP Countries Caribbean Basin Economic Recovery Act Convention on Biological Diversity Caribbean Basin Initiative Caribbean Basin Trade Partnership Act Centre d Etudes Prospectives et d Informations Internationales Communauté Économique et Monétaire de l'afrique Centrale Competitive Need Limitation Common Market for Eastern and Southern Africa Committee on Trade and Development Customs Union Countervailing duty (subsidies) Doha Development Agenda Dispute Settlement Body Dispute Settlement Understanding Everything But Arms European Communities European Centre for Development Policy Management Economic Community of West African States European Development Fund European Free Trade Association Economic Partnership Agreements European Union (officially European Communities in WTO) Food Aid Convention Food and Agriculture Organization Free Trade Area CEPII September An impact study of the EU-ACP Economic Partnership Agreements (EPA) in the six ACP regions GATS GATT GDP GNI GSP HS HDI ICTSD ID IF IFAD IFPRI ILO IMF ISIC ITC ITO LDBC LDC MERCOSUR MFA MF
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