ECONOMIC PARTNERSHIP AGREEMENTS IN AFRICA:

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ECONOMIC PARTNERSHIP AGREEMENTS IN AFRICA: A BENEFIT-COST ANALYSIS SYNOPSIS This study provides a simple cost-benefit analysis of the Economic Partnership Agreements (EPAs) between African countries and
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ECONOMIC PARTNERSHIP AGREEMENTS IN AFRICA: A BENEFIT-COST ANALYSIS SYNOPSIS This study provides a simple cost-benefit analysis of the Economic Partnership Agreements (EPAs) between African countries and the European Union. It compares the costs of signing an EPA - measured as revenue losses, versus the gains of signing an EPA - measured as African countries would avoid paying if they were to export to the EU market the EU s Generalised System of Preferences () scheme. The major question therefore is whether the revenue losses resulting from the EPA outweigh the that countries would have to pay in a non-epa scenario? Do the losses of EPAs outweigh the gains? The paper shows that even with this simple cost-benefit analysis (looking only at one dimension of the costs), for most African countries, the revenue losses are higher than the at the EU border if there is no EPA. The costs of an EPA are therefore greater than the gains! These countries include all African LDCs, and non-ldcs: Congo, Cote d'ivoire, Cameroon, Gabon, Ghana, Kenya and Nigeria. It should be noted that from a market access perspective, LDCs only incur losses an EPA. The EU s Everything But Arms (EBA) already provides for duty-free and quota-free market access for virtually all products. On the other hand if they sign the EPAs, there are significant revenue losses for them. Geneva, Switzerland This Analytical Note is produced by the Trade for Development Programme (TDP) of the South Centre to contribute to empower the countries of the South with knowledge and tools that would allow them to engage as equals with the North on trade relations and negotiations. Readers are encouraged to quote or reproduce the contents of this Analytical Note for their own use, but are requested to grant due acknowledgement to the South Centre and to send a copy of the publication in which such quote or reproduction appears to the South Centre. Electronic copies of this and other South Centre publications may be downloaded without charge from: TABLE OF CONTENTS I. INTRODUCTION... 2 II. THE BENEFITS OF SIGNING EPAS: NOT PAYING DUTIES AT EU BORDER... 3 III. THE COSTS OF SIGNING EPAS: TARIFF REVENUE LOSS... 4 IV. COMPARING BENEFITS AND COSTS: AN ANALYSIS OF AFRICAN NON-LDCS EXCEPT SOUTH AFRICA... 5 V. CONCLUSION ANNEX I PRODUCTS THAT WILL HAVE DUTIES UNDER EXISTING EU FOR NON-LDC AFRICAN COUNTRIES ANNEX II TARIFF REVENUE LOSSES FOR AFRICA BASED ON IMPORTS (BY COUNTRY) ANNEX III TOP 30 EXPORTS OF AFRICAN NON-LDCS AND APPLICABLE AND RATES IN THE EU I. INTRODUCTION 1. Negotiations on the Economic Partnership Agreements (EPAs) between Africa and the European Union (EU) have been dragging on for years. Most African countries have not been enamored by the implications of widespread elimination and other conditionalities that would be imposed on them. However, negotiations are still continuing in some form or other because many want to avoid the prospect of having a less preferential trading regime with the European Union as compared with what they had the Cotonou Agreement. 2. In this Note we compare the benefits of signing an EPA with the costs of signing an EPA for African countries. The paper focuses on comparing the main benefit versus one of the main losses countries would experience from implementing an EPA. Even this simple analysis already provides revealing results. 3. The benefit of an EPA is additional market access compared with the trading arrangement that could be applied in the absence of an EPA. This could be measured by calculating the that might be paid each year EU s Everything But Arms scheme (for LDCs) or EU s (for non-ldcs) in the absence of an EPA. (LDCs will face no additional without an EPA, hence they lose by signing EPAs). 4. The cost of an EPA is measured as the yearly revenue loss as a result of an EPA. There will be other costs involved in signing an EPA such as industries that could go bust when competing with the EU; new institutions that would have to be put in place to implement the EPA; infrastructure and other costs that would have to be incurred for countries to survive in a much more competitive market place. Nevertheless, revenue losses are measurable and immediate. These costs are therefore estimates of the real costs of an EPA. Table 1: Benefit-cost analysis Benefit of EPA Cost of EPA Avoidance of for African exports to the EU compared with the trading arrangement without an EPA (EU or EBA) Tariff revenue loss as a result of EPA 2 5. It should be noted that the benefit of the EPA (as defined in this paper) of that will not be charged for African exports will accrue to the African exporters. However, the costs of the EPA revenue loss will be costs borne by African government, and the people affected by cuts in government incomes. II. THE BENEFITS OF SIGNING EPAS: NOT PAYING DUTIES AT EU BORDER 6. From a market access perspective, the benefit of signing EPAs is the additional market access to the EU compared with trading arrangement the (for non-ldcs) or the EBA (for LDCs). The benefit of signing EPAs differs per country or country group: 7. Least Developed Countries (LDCs). For LDCs the additional benefit of an EPA is nil with respect to market access in goods. LDCs can already avail of Duty Free Quota Free (DFQF) market access the EU s Everything But Arms (EBA) scheme. 8. South Africa trades a reciprocal free trade agreement with the EU - the Trade, Development and Cooperation Agreement (TDCA). The TDCA provides for the liberalisation of 95% of the EU's imports from South Africa. 1 For South Africa, the EPA potentially provides only an incremental benefit in terms of market access, whilst there are other costs in terms of more conditionalities in the EPA as compared to the TDCA. 9. We exclude South-Africa from the cost-benefit analysis. Like in the case of LDCs, the country has little to gain from signing an EPA as the additional market access an EPA is minimal. On the other hand, South Africa already incurred revenue losses the TDCA. Up to now, the country has opted out of signing the EPA because of costs other than revenue losses e.g. clause, the EU s insistence to include services and the reluctance of the EU to align the SADC EPA with the TDCA (which would mean delaying South Africa s liberalization commitments for some products). 10. Non-LDCs other than South Africa. At present, ten African non-ldcs enjoy Cotonou Agreement-equivalent preferences the EU s non-reciprocal Market Access Regulation 1528/ They are: Botswana, Cameroon, Cote d Ivoire, Ghana, Kenya, Lesotho, Mauritius, Namibia, Seychelles, Swaziland and Zimbabwe. The EU has proposed that this regulation expires by January Moving these countries to an EPA arrangement will mean that the status quo in duty free access to the EU market will 1 2 Council Regulation (EC) No 1528/2007 of 20 December 2007, 3 continue for these countries. (I.e. there will be no withdrawal of their preferential treatment). Without EPA, these non-ldcs with the exception of South-Africa would fall back to EU s (like Congo and Gabon) and start paying at the EU border. 11. Cape Verde, Republic of the Congo, Gabon, Nigeria, are not listed as beneficiaries of the EU s Market Access Regulation. Cape Verde has been removed from the list of the LDCs in 2008 but benefits from a transitional period that allows it to still be granted EBA preferences until the end of After that, it would fall back to EU s. The other three countries have already been trading since III. THE COSTS OF SIGNING EPAs: TARIFF REVENUE LOSS 12. The most measurable and immediate cost of implementing the EPA is the massive loss of fiscal revenues governments will face. Tariffs have always been a major source of government revenue for countries in the process of development. For instance, in the United States, s were the largest source of federal revenue from the 1790s to the eve of World War I, until it was surpassed by income taxes This is not different for many African countries today. Earlier we reported that import as a share of total tax revenue can be quite high in some developing countries. 4 For instance, Cameroon s dependency on s is 31.6%, Uganda s share is 50.3% and Swaziland reaches 54.7% There are several studies that estimate revenue losses of African countries if they sign an EPA. However, they focused mostly on individual countries or countries within a particular region and did not look at all individual African countries negotiating EPAs. 15. The most comprehensive study is a 2005 UN Economic Commission for Africa (UNECA) report which examined the economic and social impacts of the trade liberalization aspects of the EPAs. It provides a quantitative assessment of the likely implications of the EPAs, including revenue implications. To date this is the only study that has 3 4 South Centre Analytical Note SC/TADP/AN/MA/1, Revenue implications of WTO NAMA reduction. 5 For Swaziland, see also the Swazi Observer, 6 June 2011, 50% govt revenue from international trade s, 4 revenue loss figures for all African countries using the same method (with the exception of Cape Verde) As already noted above, besides revenue loss, there are other costs incurred when EPAs are signed. First, they are reciprocal free trade agreements obliging African countries to lower applied s. They limit the flexibility to raise s in the future when needed. This will have wide-ranging implications on African countries domestic industries and agricultural sectors. Second, the EPAs include the Most Favoured Nation () clause which would constrain Africa s ability to conclude agreements with countries like Brazil, Russia, China and India. Such costs are not factored into our analysis. IV. COMPARING BENEFITS AND COSTS: AN ANALYSIS OF AFRICAN NON-LDCS EXCEPT SOUTH-AFRICA 17. This Note compares the additional that a country would not have to pay trading an EPA (benefit of EPA) with revenue losses as a result of an EPA (cost of EPA). 18. When a non-ldc country does not sign the EPA, we assume in this simulation that it would fall back to the EU s trading arrangement and, as a consequence, its exports would be subject to. 7 All LDCs would continue to trade with the EU duty-free the EBA. Calculation of payable EU ( benefit of EPA ) 19. For non-ldcs, in the absence of an EPA, how are the payable EU s calculated? We look at the Top-30 exports of each African non-ldc in the period and retrieved the corresponding EU duty. 20. Top 30 African exports to EU. It is a well-known fact that most African countries export a relatively undiversified basket of products to the EU. In all non-ldcs, the thirty most important exports to the EU constitute more than 90% of total exports to the EU, with Botswana, Congo, Gabon, Nigeria, Seychelles and Swaziland reaching 98% or more. The 6 UNECA, African Trade Policy Centre, Work in Progress no. 10, March 2005, Economic and Welfare Impacts of the EU-Africa Economic Partnership Agreements, 7 Congo, Gabon and Nigeria are already. 5 only exception is Mauritius (79%), due to the fact that textile lines are extremely specific in the EU s schedule. Table 2: Coverage Top30 export products to EU in 2010 Country exports Goods registered Chapter 99 of the nomenclature exports Chapter 1 to 97 Top 30 exports Coverage (E/D) A B C D E F Botswana % Congo 1, , , % Cote d Ivoire 3, , , % Cameroon 2, , , % Cape Verde % Gabon % Ghana 1, , , % Kenya 1, , % Mauritius % Namibia 1, , , % Nigeria 14, , , % Seychelles % Swaziland % Zimbabwe % Note1: All trade data R million Note2: Goods registered Chapter 99 of the nomenclature generally are not charged. They include articles declared as supplies or services for ships and aircrafts and returned goods, among others. In the European Union, chapter 98 is only used for recording exports and arrivals or dispatches of (component parts) of complete industrial plants (Commission Regulations (EU) No 113/2010 οf 9 February 2010 and (EC) No 1982/2004 (2) of 18 November 2004). No trade seems to occur between EU and Africa in Chapter 98. Table 3: calculation of payable EU, sources Source Top 30 African exports to EU Eurostat trade data, EU imports from African non- LDCs, 8-digit, 3-year average Applicable EU duty rates from European Commission, Taxation Ad valorem equivalents (AVEs) of specific or mixed and Customs Union EU regulation , extended to 2012 ITC Market Access Map 6 21. Applicable EU duty. The current EU runs from 2009 to 2011 and has been extended to the end of 2013 in the face of EU reform. 8 The products included have been put in either of these two categories: Non-sensitive (NS) and Sensitive (S). Duties on products classified as non-sensitive products are suspended entirely, except for agricultural components. Ad valorem on products classified as sensitive products are reduced by 3.5 percentage points. For textiles and textile articles (HS Chapter 50 to 63) this reduction is 20 %. Specific on sensitive products are reduced by 30 %. In the case of mixed (ad valorem and specific duty) the specific are not reduced. 22. Duties are suspended totally if the duty after applying the above rules results in an ad valorem duty of 1% or less or in a specific duty of EUR 2 or less. The reason is that the cost of collecting such might be higher than the revenue gained. 23. The product coverage of the new EU proposed by the European Commission is almost the same as the current. 9 However, the number of eligible countries has been reduced. Countries having high or upper-middle income status during three consecutive years (as classified by the World Bank) would not be eligible for EU. In Africa, the countries that would no longer have access to the would be Botswana, Gabon, Mauritius, Namibia, Seychelles, and South Africa. 24. As of yet, the list of countries is indicative and the final list of countries will be established a year before the new EU becomes effective. In this Note, we assume that the current list of African beneficiaries remains stable. 25. EU by country. On average, African non-ldcs would experience an average of 2.2% on their exports. The table below provides this information by country. In total, Africa s exports without an EPA would be confronted with s amounting to EUR million, if exports stay at similar levels as those in Annex III provides country-by-country overviews of their respective Top 30 exports and applicable and rates in the EU. 8 Regulation (EU) No 512/2011 of the European Parliament and of the Council of 11 May European Commission document COM(2011)241 final, Proposal for a Regulation of the European Parliament and of the Council applying a scheme of generalised preferences, 10 May 2011, For the Memo on the proposal see 7 Table 4: Average on exports Country Top30 exports to EU (average ) in EUR million s on Top 30 exports (average ) R million Average on exports/ «Duty burden» Congo % Nigeria 13, % Gabon % Cameroon 2, % Cote d'ivoire 3, % Ghana 1, % Botswana % Namibia % Kenya 1, % Zimbabwe % Cape Verde % Mauritius % Seychelles % Swaziland % % Note 1: We consider an EU import from an African country equal to an export of an African country to the EU. Generally, import data has a higher data quality since most s are levied on imports. Also, EU s statistical office Eurostat has more recent trade data available. Note 2: We take a three year average of EU imports from African non-ldcs, over the last three years for which data is available (2008, 2009 and 2010). This has been done to correct for one-off exports appearing in the Top30 and to smooth-out price fluctuations. 27. EU by product. In total, 127 products would not be duty free EU, on an eight-digit level. Some product would fetch a disproportionate amount of s. Raw cane sugar, bananas, preserved tunas and fresh bovine meat would make up 50% (EUR million) of total. Annex 1 lists all products that would have the EU s. 8 Table 5: Products that would have EU (Top 10) Nr CN8 code exports by non-ldcs, EUR mln EU, EUR mln Raw Cane Sugar Bananas Prepared Or Preserved Tunas And Skipjack Fresh Or Chilled Bovine Meat White Sugar Prepared Or Preserved Tunas And Skipjack Fresh Cut Roses And Buds Cocoa Paste (Excl. Defatted) Fillets Known As Loins Of Tunas Or Skipjack Cocoa Butter Costs of EPA 28. It should be emphasized that this analysis only examines revenue losses as a result of the EPA. In the case of the TDCA, not only South Africa was hit by declines in revenue but also the four other members of the Southern African Customs Union (SACU). (Once a good enters South-Africa and then circulates within SACU, no import can be levied again at the other SACU border posts.) This means that revenue losses for Botwana, Namibia and Swaziland as a result of an EPA will be lower than for other African non-ldcs. 29. Tariff revenue losses are derived from UNECA s 2005 study (par 13). In this study, 1997 was the base year. Obviously, imports from the EU have grown since Tariff revenue losses based on current imports in current dollars is much larger than revenue losses based on imports in We have corrected the revenue losses by calculated the increase in imports between 2003 and the average imports in During this period, imports have grown with 70% in nominal terms. 9 Table 6: Tariff Revenue Losses for Africa based on imports (by region) Region Tariff revenue loss (UNECA 2005) Import from EU, 2003 Import from EU, Correction factor (D / C) Revenue loss, based on imports (B x E) A B C D E F West Africa ,317 21, ,804.4 Central Africa ,479 4, EAC ,543 2, SADC EPA ,488 6, ESA EPA ,356 3, Sub Saharan 1, ,183 39, ,385.2 Africa See Annex II for a break-down of revenue losses by country. 31. For each of the countries in Africa, the table below sums up the cost-benefit of implementing the EPA. These figures estimate the costs, since it only draws on the immediate revenue losses. Even so, it is clear that most countries in Africa stand to lose by signing the EPA. Country Table 7: Benefit and Cost of Signing an EPA Duties (EUR mln) Gains of Signing EPA Duties (USD mln) Costs of Signing EPA Tariff revenue loss (USD mln Cost of EPA higher than benefit of EPA Non LDCs ,110.0 Yes Botswana No Congo Yes Cote d'ivoire Yes Cameroon Yes Gabon Yes Ghana Yes Kenya Yes Mauritius No Namibia No Nigeria Yes Seychelles No Swaziland No Zimbabwe No 10 LDCs 0 0 1,275.2 Yes All Sub Saharan Africa ,385.2 Yes Note 1: the daily average EUR/USD rate during was 1.4. Source: European Central Bank (ECB), V. CONCLUSION 32. The paper shows that even with this simple cost-benefit analysis (looking only at one dimension of the costs), for most African countries, the revenue losses with an EPA are higher than the at the EU border if there is no EPA. The costs of an EPA are therefore greater than the gains! These countries include all African LDCs, and non- LDCs: Congo, Cote d'ivoire, Cameroon, Gabon, Ghana, Kenya and Nigeria. 33. Besides revenue loss, there are other major risks to Africa s economic development from the EPAs. They have been highlighted in a common position paper on the Economic Partnership Agreements (EPAs) prepared by the African Union Commission and 5 regional economic communities (RECs) of Africa (ECOWAS, COMESA, EAC, SADC and ECCAS). The AU s Conference of African Trade Ministers in Kigali on 1-2 November 2010 welcomed the position paper and agreed to take into account the paper s options for Africa on the EPAs as a basis for political engagement with the EU Party at the highest political level. 34. The paper represents a remarkable expression of common concerns about the EPAs from the African region s most important political and economic regional agencies. The following major risks of the EPA to Africa s economic development, besides revenue loss were highlighted: 35. EPA s effect on Industrial Development: The EU s position on the elimination of s for 80% of trade; restrictions on the use of export taxes and quantitative restrictionsand the standstill clause; will mine Africa s effor
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