Economic partnership agreements and the export competitiveness of Africa

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WPS4627 Policy ReseaRch WoRking PaPeR 4627 Economic Partnership Agreements and the Export Competitiveness of Africa Paul Brenton Mombert Hoppe Richard Newfarmer The World Bank Poverty Reduction and Economic Management Network International Trade Department May 2008 Policy ReseaRch WoRking PaPeR 4627 Abstract Trade can be a key driver of growth for African to regional integration, including both tariff and non- countries, as it has been for those countries, particularly tariff barriers; improve trade facilitation; and define in East Asia, that have experienced high and sustained appropriate most favored nation services liberalization. rates of growth. Economic partnership agreements At the same time, African countries will need to reduce with the European Union could be instrumental in a external tariff peak barriers on a most favored nation basis competitiveness framework, but to do so they would to ensure that when preferences for the European Union have to be designed carefully in a way that supports are implemented after transitional periods, they do not integration into the global economy and is consistent lead to substantial losses from trade diversion. This with national development strategies. Interim agreements entails an ambitious agenda of policy reform that must be have focused on reciprocal tariff removal and less backed up by development assistance in the form of aid restrictive rules of origin. To be fully effective, economic for trade. partnership agreements will have to address constraints This paper--a product of the InternationalTrade Department, Poverty Reduction and Economic Management Network-- is part of a larger effort in the department to contribute to the discussion of trade policy, competitiveness and export growth. Policy Research Working Papers are also posted on the Web at The author may be contacted at The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Produced by the Research Support Team Economic Partnership Agreements and the Export Competitiveness of Africa1 Paul Brenton, Mombert Hoppe and Richard Newfarmer International Trade Department The World Bank MSN MC2-201 1818 H Street St. NW Washington DC 20433 Tel: (202) 473-4255, Fax: (202) 522-7551,, 1The views expressed in this paper are those of the authors only and should not in any way be attributed to the World Bank. We are very grateful for the comments of Shuby Andriamananjara, Gerrit Faber, Larry Hinkle, Elke Kreuzweiser and Jan Orbie. 1 1. Introduction Trade has been a key driver of growth in countries that have been successful in achieving high rates of growth over the past three decades, such as those in East Asia. If they are to accelerate their growth, trade will have to perform the same role for African countries. Designing policies that promote trade and trade competitiveness must therefore be at the heart of growth strategies for African countries. Economic partnership agreements (EPAs) with the EU could be instrumental in a competitiveness framework, but to do so they have to be designed carefully. Any successful EPA will need to take into account critical features of the new global economy: · intense new competition emanating from large developing countries such as China, India and Brazil; · simultaneous rapid growth of these economies opening up new dynamic market opportunities; · explosive growth of services trade, creating new opportunities in the global market and offering new avenues for diversification away from primary commodities; · the increasing importance of domestic institutions, policies and infrastructure in affecting productivity and the ability of a country's firms to compete in international market. In this new global context, the EPAs create an opportunity to undertake domestic reforms that support global competitiveness. A broad template for such reforms would include (i) reforms that improve the incentive framework especially by reducing tariff and non-tariff barriers to remove bias against exporting, (ii) increase access to and lower the costs of backbone services, such as telecoms, transport, energy and finance and (iii) address non- tariff barriers and weak trade supporting institutions, including standards, customs, and trade promotion agencies and design effective mechanisms to assist the restructuring of domestic firms with the potential to be globally competitive. The EU can contribute by helping to design and support African countries in effectively implementing the provisions of a pro-development EPA. In this context Aid for trade associated with EPAs (and the multilateral discussions) can help build infrastructure and the institutional capacity that is necessary to remove NTBs, facilitate trade, regulate services and support trade promotion and firm restructuring. The first order of business is to reduce barriers to regional integration and allow African firms the opportunity to exploit nearby markets as a springboard to the global market. Typically these barriers also directly limit access to the global market. EPAs can play an important role in leveraging coherent regional reforms and in putting in place mechanisms that allow for coordinated development support from EU countries. The priority of delivering effective regional integration was recognized in the initial objectives of the EPA negotiations and was strongly identified as such by the EU Trade Commissioner in several speeches. In a context of wanting to have in place WTO consistent agreements when the Cotonou Agreement expired, the EU pushed hard in 2007 to define interim agreements that focus 2 primarily on reciprocal tariff reductions to satisfy GATT Article XXIV requirements.2 The interim agreements also include an important relaxation of the rules of origin for certain products, but especially clothing, which had previously restricted preferential access to the EU market for African exporters. A number of African countries signed these interim agreements either collectively (as with the EAC) or individually. Other countries are expected to sign shortly, while other countries such as Senegal and Nigeria have been strongly critical of the interim agreements and have expressed reluctance to signing. If EPAs are to realize their development potential, it is important that these interim agreements do not become de facto EPAs -- otherwise the opportunity for such agreements to address constraints to competitiveness and integration into global markets and to be a key mechanism in supporting development in Africa will be lost. Bilateral reductions of tariffs is unlikely to be effective in driving rapid growth to the extent they leverage only minimally the domestic and regional reforms that are necessary to overcome the barriers that limit integration into the global economy. Many African countries have seen a very weak supply response to preferences in the past and this is unlikely to change unless these supply constraints are ameliorated. Worse, there is a real risk that removal of tariffs against the EU without broader tariff reform and in the presence of substantial NTBs to regional trade will lead to economic losses for African countries. Further, there are real concerns that the current patchwork of agreements will undermine regional integration. With the exception of the EAC, countries in the same regional bloc have signed agreements with the EU that have different product exclusion lists which will necessitate strict controls on the movement of EU products within regional groupings to ensure that a product exclusion in one country is not undermined by preferences for the same product in a partner country.3 The EU Commission has asserted that these WTO-consistent market access agreements will be a stepping stone to deeper agreements in the future. However, whether the second stage of such a process will actually materialize remains to be seen as African countries may well lose the bargaining power domestically to obtain progress on competitiveness issues that came from market access concessions.4 This paper elaborates on ways EPAs could be designed to drive growth through effective regional integration and integration into the global market. A first section highlights the trade challenge that African countries face and makes the point that preferences have not been effective in preventing the substantial decline in world market share of African countries. A second section describes opportunities that the new wave of globalization is opening up to African countries. A third section briefly discusses what this means in terms of a strategy to attain global competitiveness and suggests design features of an EPA that would complement and support competitiveness reform programs. 2These require that the parties to a free trade agreement remove tariffs on substantially all (interpreted by the EU to mean 80% of mutual trade) trade under a defined and reasonable timetable. 3See, Stevens et al (2008) 4See, for example, Francesco Rampa, Love is blind ? A two-stage agreement risks being an `EPA tight' rather than an `EPA light', ECPDM, ICTSD_Love-is-blind-A-two-stage-agreem%E2%80%A6.pdf 3 2. The trade challenge facing African countries The trade preferences that have been granted to the ACP countries by the European Communities under the Yaoundé, Lomé, and Cotonou Agreements for the last 30 years will expire in 2008. Negotiations for a new WTO consistent trade agreement have been taking place for the last 5 years. To limit the demands of negotiating agreements with each ACP country the EU has pursued negotiations to establish six Free Trade Areas (FTAs). To date, negotiations have advanced only slowly and there is considerable debate as to how EPAs should be designed and what elements and commitments they should contain. Before proceeding to these issues it is important to reflect upon the impact of current and previous EU development agreements. We focus our description of past trends on Eastern and Southern Africa (the ESA-region in the EPA negotiations). The trade challenges that we highlight for ESA are probably broadly similar to those facing most of the other EPA regions. The average share of global merchandise exports of the ESA countries was small 25 years ago -- but has by now fallen to half its original level (Figure 1). Most of the decline occurred in the 1980s with a leveling off in the 1990s but little subsequent rebound. The performance of the average ESA country stands in stark comparison with the average of a group of 16 fast growing countries5. It is the trade and growth performance of these countries that African countries will have to replicate over the next 20 years if the targets that they have set for poverty reduction are to be achieved. On average, the fast-growing countries of the past two decades have seen their share of global exports rise rapidly (a 3- fold increase over the past 25 years), fuelling the sustained growth that these countries have enjoyed. The figure highlights the importance of trade for the fast growing countries and shows the lacklustre export performance of the average country in the ESA region. Given the small (economic) size of most countries in Sub-Saharan Africa, the role that trade can play for the achievement of robust and sustained economic growth is particularly important. The figure indicates the enormous potential for sustained growth of exports from the ESA region. 5This group contains non-oil exporting countries that have grown at an average annual rate of growth of 4.5 per cent of more over the past 25 years. The averages are unweighted so that country size does not influence the measure. The sixteen countries are Botswana, Sri Lanka, Chile, Indonesia, Pakistan, Mauritius, Uganda, Burkina Faso, India, Thailand, Malaysia, Taiwan, Cambodia, Singapore, Korea, Rep., and China. 4 Figure 1: In contrast to the fast growing countries of the past 20 years, Figu cont he grow count he ESA countries have lost share of the global market for merchandise count hav ost of he global or chandi Average share of world merchandise exports (% of US$ current) chandi ur Average HP 16 Averag Average ESA 0.04% 1.2% Average High Performing 16 er gh 16 0.04% 1.0% 0.03% 0.8% 0.03% 0.02% 0.6% 0.02% 0.4% 0.01% Average ESA 0.2% 0.01% 0.0% 0.00% 80 82 90 92 98 00 04 19 19 1984 1986 1988 19 19 1994 1996 19 20 2002 20 Source: Bank staff calculations, based on data from IMF W orld Economic Outlook, Ethiopia and Eritrea counted as one country Figure 2 shows a similar story for exports of services. The average ESA country has had a very low and declining share of the global market for services. This is in contrast to the fast growing countries, which have, on average, almost tripled their share of the world market over the past 25 years. Hence, the challenge for ESA and other ACP countries is to provide a trade policy climate in which to attain the sustained increases in exports of both goods and services and rising global market shares that have driven growth in the high performing countries. These figures also suggest a lack of effectiveness of current and previous agreements with the EU in supporting sustained growth of exports or in dealing with the constraints that have undermined the share of ESA countries in the world market. In other words, this weak performance occurred despite preferential access to the EU and other markets. Preferences alone have not helped to strongly integrate ESA into the global economy. With decreasing margins of preference due to continued multilateral liberalization, they are even less likely to help in achieving this objective in the future. 5 Figure 2: W hilst fast growers have used trade in services to drive Fi st gr ave vi growth, ESA countries have been less successful h, ve been ess succes ul Exports of service as share of world services trade por of service shar of or ces ade Average HP 16 Averag (% of US current dollars) of urrent do ars Average ESA er 0.9% 0.04% 0.8% Average for HP 16 er or 16 0.03% 0.7% 0.03% 0.6% 0.5% 0.02% 0.4% Average for ESA age 0.02% 0.3% 0.01% 0.2% 0.01% 0.1% 0.0% 0.00% 80 82
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