Africa - Economic partnership agreements between Africa and the European Union : what to do now? Summary report

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This report addresses the question raised in its title - now that 18 interim Economic Partnership Agreements (EPAs) have been initialed and negotiations of full EPAs have been launched, what should African countries and regional EPA-groups do? Part two of the report analyzes the outcome of the EPA negotiations thus far, the interim EPAs' implications for the trade and related policies of participating African countries, and the reforms required for successful implementation of interim EPAs. Part three examines the potential role of full EPAs, in advancing regional trade integration, open trade policies, and the liberalization of trade in services and foreign direct investment in Africa. The intended audience for this report is primarily policy makers and their advisors in the African EPA-countries, but it may also be of interest to those in the broader development community concerned with Africa.
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Report No. 45945-AFR AFRICA Economic Partnership Agreements between Africa and the European Union: What to do Now? Summary Report October 2008 Poverty Reduction and Economic Management (PREM) Africa Region Document of the World Bank Currency Equivalents (October 1, 2008) US$1.00 = 0.710 1.00 = US$1.408 Abbreviations and Acronyms ACP African, Caribbean, and Pacific countries AGOA Africa Growth and Opportunity Act CARIFORUM Caribbean Forum of the African, Caribbean and Pacific Group of States CEMAC Communaut Economique et Montaire de l'Afrique Centrale (Central African Economic and Monetary Community) CET Common External Tariff COMESA Common Market for Eastern and Southern Africa EAC East African Community EBA Everything-But-Arms EC European Commission ECOWAS Economic Community of West African States EDP European Development Fund EPA Economic Partnership Agreement ESA Eastern and Southern Africa EU European Union FDI Foreign Direct Investment FTA Free Trade Area GDP Gross Domestic Product GSP Generalized System of Preferences HS Harmonized System IPR International Property Right LDC Least Developed Country MFN Most Favored Nation NTB Non-tariff barrier REC Regional Economic Community RoO Rules of Origin RTA Regional Trade Agreement (or Area) SACU Southern African Customs Union SADC Southern African Development Community SSA Sub-Saharan Africa UEMOA Union Economique et Montaire Ouest-africaine (West African Economic and Monetary Union) UNCTAD United Nations Conference on Trade and Development US United States WTO World Trade Organization Vice President : Obiageli K. Ezekwesili (AFRVP) Sector Director : Sudhir Shetty (AFTPM) Task Team Leader : Linda Van Gelder (AFTPM) ii Table of Contents ACKNOWLEDGEMENTS.......................................................................................................V EXECUTIVE SUMMARY......................................................................................................VI MAP..................................................................................................................................XXI 1. INTRODUCTION: A DEVELOPMENT PERSPECTIVE ON EPAS ..................................... 1 2. INTERIM EPAS: IMPLEMENTATION AND COMPLEMENTARY REFORMS ................... 3 A. The Outcome of EPA Negotiations to Date................................................................. 3 WTO Compatibility: The Driver of the EPA Process .................................................... 3 Revised Approach: A Flexible, Variable-Geometry Design .......................................... 4 Overview of Interim EPAs Initialed to Date.................................................................... 5 B. Access of African Exports to the EU Market ............................................................. 7 Tariff Preferences ............................................................................................................ 8 The EPAs' Rules of Origin.............................................................................................. 8 C. Liberalization of African Trade and Accompanying Reforms ............................... 13 EPA-Countries' Imports from the EU and Tariff Structures......................................... 14 Commitments to Liberalize Import................................................................................ 15 Potential Negative Effects ............................................................................................. 17 Parallel Reduction in Tariffs on All Imports ................................................................. 19 Potential Revenue Losses and Stronger Domestic Tax Systems................................... 21 D. Complementary Reforms to Generate A Strong Supply Response....................... 23 Supply-side Constraints and Competitiveness Problems............................................... 23 Types of Reforms Required to Spark a Strong Supply-Response ................................. 25 E. Supportive Development Assistance.......................................................................... 26 The EU's and its Member States' Aid Programs........................................................... 26 F. Risks and Mitigating Measures.................................................................................. 28 G. Conclusion: An Opportunity to Accelerate Trade-Related Reforms................... 30 3. FULL EPAS: REGIONAL INTEGRATION AND LIBERALIZING GOODS & SERVICES TRADE......................................................................................................................... 32 A. Regional Trade Integration and Open Trade Policies............................................. 32 Regional Participation in Interim and Framework EPAs .............................................. 32 Constraints to Expanding Intra-African Trade .............................................................. 34 Importance of Open Trade Policies ............................................................................... 36 A New Strategy for Regional Trade Integration............................................................ 39 Potential Role of Full EPAs in Advancing Regional Trade Integration........................ 41 B. Liberalizing Trade in Services and Foreign Direct Investment.............................. 44 Africa's Exports of Services to the EU Market ............................................................. 44 Liberalization of Imports of Services and Regulatory Reform...................................... 45 The Caribbean EPA: Provisions Relevant to Africa..................................................... 47 Enhancements and Complementary Competitiveness Reforms .................................... 49 iii Using EPAs to Improve Regulatory Environment for Services and Investments ......... 51 ANNEX A: THE CARIBBEAN EPA'S APPROACH TO THE LIBERALIZATION OF TRADE IN SERVICES ................................................................................................................... 53 REFERENCES..................................................................................................................... 56 Graphs Graph 1: Non-oil Imports from the African EPA-Countries as a Share of their Major Trading Partners'non-Oil Merchandise Imports, 1985-2006 ........................................................ 2 Graph 2: Destinations of the African EPA-Countries' non-Oil Merchandise Exports, 1985-2006 7 Graph 3: Graph 3: EU and US Imports of Clothing from African LDCs, 1995-2007 ................ 10 Graph 4: Sources of the African EPA-Countries' Merchandise Imports, 1985-2006.................. 14 Graph 5: EU Non-oil Imports from African LDCs, 1995-2007................................................... 23 Tables Table 1: Estimated Shares of Imports from the EU to be Liberalized.......................................... 16 Table 2: Estimated Revenue Losses from EPAs for Four COMESA Countries.......................... 21 Table 3: Comparative Investment Rates and Total Factor Productivity....................................... 24 Table 4: Comparison of Average Rankings of Major Developing Regions................................. 24 Table 5: Classification of EPA-Groups by Common External Tariffs......................................... 41 iv Acknowledgements T his study of Economic Partnership Agreements and related trade and regional integration issues was supported by grants from the Trade Window of the Bank- Netherlands Partnership Program trust fund and the Multi-donor Trust Fund for trade. The study was carried out by a team of consultants led by Larry Hinkle and composed of Sheela Ahluwalia, Luis de Azcarate, Elke Kreuzwieser, Jonathan Munemo, Zhen Kun Wang, and Fahrettin Yagci. The study team would like to thank Richard Newfarmer for his contributions to previous phases of the World Bank's analytical work on EPAs, Paul Brenton and Mombert Hoppe for their inputs on the EU's preference schemes and rules of origin, and Olivier Cattaneo for inputs on several legal issues. Soamiely Andriamananjara, Bernard Hoekman, and Richard Newfarmer were the peer reviewers for the study. Jean-Pierre Chauffour, Sumana Dhar, Philip English, Ian Gillson, Bernard Hoekman, Guggi Laryea, Richard Newfarmer, Salomon Samen, and Volker Treichel provided helpful written comments on drafts. Guggi Laryea's reporting on EPAs from Brussels has been valuable for keeping up with events while the reports were under preparation. v Executive Summary 1. In November-December 2007, the European Union and 18 African countries initialed interim Economic Partnership Agreements (EPAs) providing for reciprocal liberalization of merchandise trade with each other. In the first half of 2008, further negotiations were launched for full EPAs to address additional issues concerning regional trade integration, liberalization of trade in services, foreign direct investment, and trade- related regulations. This report analyzes from a development perspective the steps required for successful implementation of interim EPAs and the potential role of full EPAs in advancing regional trade integration in Africa and in addressing the liberalization of trade in services and related issues.1 Implementation of Interim EPAs and Complementary Reforms 2. After adoption of a flexible, variable-geometry approach to EPAs in the quarter of 2007, eighteen of the 46 African countries eligible for EPAs quickly reached agreement with the EU on interim EPAs. These established bilateral free trade arrangements for merchandise trade to replace the Cotonou trade-preferences when they expired in January 2008. The interim EPAs contain non-binding rendezvous clauses stating the parties' intentions to continue negotiations towards full EPAs in a period of 12-18 months. Despite their name, interim EPAs are in fact permanent in that they will govern trade between the eighteen African signatories and the EU unless and until replaced by another trade agreement. 3. Uneven Participation in Interim EPAs. There were sharp differences in participation in interim EPAs between LDCs and non-LDCs and between the eastern- southern and the western-central African regions. These variations reflect both the different market-access alternatives faced by LDCs and non-LDCs after the expiry of the Cotonou trade preferences and the diversity of regional and country trade policies and interests. Ten of Africa's 14 non-LDCs, which otherwise would have reverted to the EU's less favorable tariff preferences under its General System of Preferences (GSP) after expiration of the Cotonou trade-preferences, initialed interim EPAs. In contrast, only eight of Africa's 33 LDCs, which would continue to have tariff-free, quota-free access to the EU market under its EBA program, initialed interim EPAs. There were similar differences in participation rates between regions: fifteen of the 23 countries in eastern and southern Africa initialed interim EPAs, but only three of the 24 countries in the western and central Africa did so. 1The terms development friendly and pro-development as used here in assessing EPAs refer to policies that will accelerate global and regional trade integration in Africa and sustained long-term growth of real GDP per capita. The term trade integration is used to refer to increases in the ratio of total trade (that is, imports plus exports of goods and non-factor services) to GDP. vi 4. Establishment of a WTO-compliant Trade Regime. Interim EPAs bring the trade relations between the EU and the signatory countries into line with WTO rules and thus achieve one of the key objectives set out in the Cotonou Agreement. They establish reciprocal, asymmetric arrangements for preferential merchandise trade between the EU and the EPA-signatories. Under the interim EPAs, the EU has granted immediate tariff- free and quota-free access to its market for 100% of its imports from the EPA-signatories, with short transition periods only for rice and sugar and more liberal rules of origin for clothing exports. The EPA-signatories are required to reciprocate by gradually granting tariff free access to their own markets for at least 80% of their imports from the EU within a 15 year transition period. 5. Implementation Requirements. To realize the potential of interim EPAs for accelerating development, key actions will need to be taken on both the EU and the African sides during their implementation. From the EU, further liberalization of the EPA's current restrictive rules of origin will be the key step. From the African EPA- signatories, a series of tariff, tax, and other complementary reforms to improve competitiveness will be needed. These two sets of actions are discussed in order in the following sub-sections. Access to the EU Market and the EPA's Rules of Origin 6. The EU's Tariff Preferences. Although its relative importance has declined over the last two decades, the EU is still by far the largest single market for Africa's non-oil exports, absorbing 51% ($24 billion) of the total in 2006, a share that is six times the 8% share of Africa's second largest market (the US) for its non-oil exports. Now, the 18 EPA-signatories have tariff-free, quota-free access to the EU market under their interim EPAs; all African LDCs have similar tariff-free, quota-free market access under the EU's Everything-but-Arms (EBA) program; the three oil-exporting non-LDCs not participating in EPAs have tariff preferences under the EU's Generalized System of Preferences (GSP); and South Africa has its own separate free trade agreement with the EU. This combination of trade arrangements will maintain (or, in some cases improve) Africa's previous preferential access to the EU market under the Cotonou Agreement and has avoided significant disruption of current Africa-EU trade. 7. The EPAs' Restrictive Rules of Origin. By far the most important remaining market-access issue is the further liberalization of the EPAs' rules of origin, which seriously limit the benefits of the tariff-free, quota-free market access provided under interim EPAs. The improvements in market access under interim EPAs relative to the previous Cotonou tariff-preferences are limited, with the notable exception of the more liberal rules of origin for clothing exports. Hence, there is no compelling reason to expect that the export performance (other than of clothing) of the EPA-signatories will significantly improve under interim EPAs unless the EPA's rules of origin are further liberalized and supply constraints and competitiveness problems in the EPA-signatories are addressed. vii 8. Substantially liberalizing the EPA's current rules of origin will thus be important for the ultimate success of the interim EPAs in increasing and diversifying the signatories' exports to the EU. It is in the interest of Africa EPA-countries to aggressively pursue such liberalization in future negotiations. In particular, simpler, standardized rules of origin need to be established by replacing all of the current detailed product and process specific rules of origin with a uniform change of tariff heading at the HS 6-digit level or 10% value added rule. In addition, EPA-signatories will need to take steps to overcome supply constraints and address as discussed below. Liberalization of African Trade and Accompanying Reforms 9. Limited and Selective Market Opening under Interim EPAs. The opening of African economies under EPAs will be significantly smaller than many of the press reports might lead one to believe. The 18 interim EPAs initialed to date provide for the elimination of tariffs on 80-85% of imports from the European Union over a 10 to 15 year period as required for WTO-compatibility but will lead to only limited, selective market opening. The countries entering into interim EPAs appear to have all followed fairly similar approaches in choosing the 80-85% of imports from the EU on which to eliminate tariffs under EPAs. In most cases, the first tranche of the scheduled tariff reductions consists largely of binding current applied zero-rate MFN tariffs at a preferential zero-rate for imports from the EU. Tariffs eliminated on imports from the EU in subsequent tranches appear to have been chosen in most cases by starting with the products bearing the lowest non-zero MFN tariff rates and working upwards until 80% of imports from the EU are covered by zero-rate preferential tariffs. The timing of the import liberalization tranches under the interim EPAs has, in all cases, been set to eliminate tariffs on at least 80% of imports from the EU in 15 years or less. 10. Because of the simple structures of production in Africa's LDCs and its other small low income economies, the exclusion of 20% of imports from liberalization will leave high tariffs in place on most domestically produced products in most countries. In addition, because the existing structure of tariffs and trade with EU varied considerably from country to country, both the composition of the 20% of imports from the EU tariffs on which tariffs will remain and the tariffs on imports from non-EU sources will vary significantly from country to country despite the similarity of approaches in choosing the 80% of imports from the EU on which to eliminate tariffs. A problematic aspect of the import liberalization schedules under the interim EPAs is thus that they establish a minimalist norm of very slow and highly selective tariff reductions, leaving high levels of protection in place on virtually all import-competing domestic products. 11. Potential Negative Effects of Preferential Elimination of Tariffs on Imports only from the EU. Since many of th
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