The EPAs and Africa’s regional integration
How can African countries capitalise on the transition period as envisaged in their Economic Partnership Agreements with the EU to deepen regional integration so as to enhance further the agreements benefits?
After over 12 years of controversial discussions, countries belonging to three African negotiating groups, namely West Africa, East African Community, and South African Development Community, concluded the negotiations for the Economic Partnership Agreements (EPAs) with the European Union (EU) last year. This acceleration partly reflects the 1 October 2014 deadline unilaterally set by the EU for the withdrawal of a market access regulation "MAR 1528/2007", and the ensuing threat for non-LDC African countries to see part or all their preferential access to the EU market discontinued unless EPA negotiations were concluded. At this stage, negotiations are still on-going in the two remaining blocks of Central Africa, and Eastern and Southern Africa (ESA); yet, a number of countries in these two groups have already signed interim EPAs.
The move from preferential arrangements to a WTO-compatible reciprocal – albeit asymmetric – agreement, such as the EPAs, has traditionally raised numerous concerns, notably on the potential impact on Africa’s regional integration and development prospects. These questions are all the more relevant at the current juncture, characterised by the growing momentum towards the establishment of an African Continental Free Trade Area (CFTA) by the indicative date of 2017.
EPAs: what is at stake?
As with other trade agreements, the impact of EPAs is essentially driven by the interplay of two main elements: the changes in tariffs agreed by the two parties, and the structural features of trade relationships between African countries and the EU. Concerning the former element, the reform in the EU Generalized System of Preferences - GSP (EU regulation 978/2012) hinges on the following regimes:
- Everything But Arms (EBA): offering duty-free quota-free market access to all products originating from LDC Countries, except arms and ammunitions;
- Generalised System of Preferences (GSP): available to 41 low income and lower-middle income countries, and granting tariff reductions on roughly 66 percent of tariff lines;
- GSP +: available to “vulnerable countries” implementing core conventions on human and labour rights, sustainable development, and good governance, which offers deeper tariff reductions, on the same tariff lines considered for GSP treatment; or
- Most Favoured Nation treatment or Preferential Trade Agreement for all other countries.
Against this background, the EPA package offers complete liberalisation of EU imports from negotiating countries (whether or not LDCs), in exchange for a gradual liberalisation of the latter’s imports of EU goods, covering “substantially all trade”. For African LDCs, whose goods are anyway covered by the EBA, this basically implies no further improvement in their access to the EU market; whilst for other African countries – which are mostly eligible for GSP treatment – improvements may be significant, but are basically circumscribed to a rather small number of tariff lines, mainly on EU import-sensitive agricultural products. Conversely, over the transition period, African countries need to cut significantly the relatively high level of tariffs they currently impose on EU exports, with tariff reductions covering roughly 80 percent of their imports from the EU. This would imply a sizeable improvement in EU’s access to African markets across a broad array of products, ranging from cereals and livestocks to metals and transport equipment.
The economic relationships between EU and African countries, on the other hand, are patently characterised by deep-seated structural asymmetries, not only in terms of economic size and level of development, but more fundamentally in terms of bilateral trade and relative negotiating power. For instance, whilst the EU nowadays accounts for roughly 20 percent (40 percent) of total merchandise exports from ESA region (Western Africa), the latter purchases a mere 0.1 percent (0.6 percent) of total European exports (UNCTADSTAT). Moreover, notwithstanding many years of preferential market access, African exports to the EU remain mainly concentrated in a narrow range of mostly primary products. Conversely, the EU exports to Africa cover a much wider spectrum of products, including mainly manufactures and capital goods, but also refined fuels and food items.
Given the above, it is not surprising that the move to a reciprocal but asymmetric trade agreement, as implied by full implementation of EPAs, would likely translate into uneven trade gains (ECA, 2014). Consistent with the fact that EU would ultimately benefit from the bulk of tariff cuts, its export gains can be expected to exceed those of its counterparts. Again, cheaper access to imported production inputs from the EU may lead to some efficiency gains for the ESA and Western Africa regions, but the expansion of their exports would be mainly captured by non-LDC. The main reason for this is that they are the ones that would see their access to the EU market somewhat improved. Such a boost, moreover, would be mainly circumscribed to a few agricultural products (diaries, rice, sugar, and meat), which are those currently protected by the EU. Conversely, with the full implementation of EPAs, ESA and Western Africa would witness a sharp increase of EU-originating imports, covering a broader array of products including numerous manufactured goods. In this respect, simulations also suggest that the EPAs may lead to some trade diversion for Africa, with adverse effects on intra-African trade and, to a lower extent, for countries outside EPAs. Finally, the impact of EPAs on African countries’ real income could be expected to be slightly negative, as a result of a decline in tariff revenues, an increase in imports following liberalization, and a smaller increase in exports, mainly captured by African non-LDCs.
EPAs and Africa’s regional integration
Two main facets of the EPAs have a critical bearing on Africa’s integration agenda: the negotiating configuration, and the very impact of the agreements. The former element is essentially a self-inflicted institutional complication that stems from African countries’ decision to negotiate the EPAs in five different blocks, of which only two replicate existing African Regional Economic Communities (EAC and ECOWAS). Accordingly, unless EPA provisions will be closely coordinated across the various blocks, they risk complicating the adoption of Common External Tariffs (CET), which in turn is a critical step towards the consolidation of Regional Economic Communities (RECs) into Custom Unions, as predicated by the Abuja Treaty. The complication in the adoption of CETs stems from the fact that if countries belonging to the same Regional Economic Community negotiate EPAs under different configurations, the list of sensitive products vis-à-vis the EU may well differ. This situation risks further accentuating the long-standing difficulties in dealing with countries with overlapping memberships to various RECs. This is evident, for instance, in the context of COMESA, a REC that aspires to set up a common market, whose member countries span over three different EPA negotiating blocks (plus the Euro-Mediterranean Partnership).
With respect to the impact of the EPA agreements, it is worth observing that, at the end of the transition period, African countries may end up granting a more favourable treatment to a number of EU-originating imports compared to similar African products. As a simple example, West Africa’s agreed liberalisation schedule implies that the tariff applied on, say, cereal imports from Europe would be significantly lower than the corresponding CET, which is applied to imports from African and other non-African countries outside ECOWAS. As a consequence, unless the various African countries successfully reduce tariffs across their RECs – that is in the context of the CFTA – European products may end up displacing intra-African exports, notably in the manufacturing, oil, and food sectors.
In view of the fact that intra-African exports are significantly more diversified and industrialised than Africa’s exports to the rest of the world, EPA’s potentially adverse effects on intra-African trade risk hindering the continent’s structural transformation agenda. At this stage, if one could argue that unilateral preferences have failed to spur economic diversification in Africa, it is hard to see how the EPAs would do, per se, any better at achieving the same objective.
However, combining the conclusion of the EPAs with the establishment of the CFTA could offset the adverse effects of the former in terms of diversion of intra-African trade, while still contributing significantly to net trade creation for both EU and African countries. Moreover, simulations on the impact of the CFTA suggest that the manufacturing sector would receive a strong boost from the elimination of tariff barriers at continental level. A growing body of literature also points to Africa’s disproportionately high trade costs as one of the key constraints to export performance both within the region and elsewhere. In line with this, ECA 2014 findings suggest that trade gains would nearly double, if the EPA were implemented not only in the context of the CFTA but also complemented by trade facilitation measures capable of halving the time goods spend at ports and for inland transport as well as making custom procedures twice as efficient as today. Tackling Africa’s disproportionately high trade costs would indeed allow effectively integrating the regional market and connecting it more closely to global partners, with sizeable positive effects on industrialization and intra-African trade. Accordingly, in such a scenario, trade gains would accrue to the whole spectrum of African countries, whether LDCs or not. Therefore, the room offered by the transitional period to African countries under the EPAs should be strategically utilised to rapidly deepen regional integration in the African continent.
The above discussion on the impact of EPAs points to the fact that the sequencing of trade liberalisation will continue to be key in supporting Africa’s integration and transformation agenda. Reducing trade barriers across the whole region, before opening domestic markets to the pressure of more developed competitors, is critical for African producers to harness those economies of scale and learning by doing, which will make them able to better compete internationally.
Against this background, and in light of the recent developments in the EPAs negotiations, five main policy implications emerge. First, EPA transitional period should be utilised to appropriately sequence liberalisation with EU and within the continent, notably in the context of the CFTA. This would imply fast-tracking the implementation of the CFTA to prevent the diversion of intra-African trade. Secondly, it is imperative that African countries coordinate the finalisation of EPAs negotiations across the five blocks (and possibly also with Northern African countries under the Euro-Mediterranean partnership), with a view to harmonise to the extent possible the various provisions, and minimise the obstacles to the regional integration agenda. Third, African countries should act in a concerted effort with the African Union Commission, to make sure that the most favourable provisions granted by the EU to any block would be extended to the others, in line with various African Ministerial Declarations. Fourth, African countries should preserve (and leverage) hard-fought policy space, considering very carefully whether or not to commit to WTO+ provisions, on issues such as investment, intellectual property rights, competition and government procurement, among others. Finally, in light of Africa’s disproportionately high trade-related costs, government should implement trade facilitation measures aimed at effectively integrating the regional market, consistently with the African Union Commission AUC Action Plan for Boosting intra-African Trade.
The opinions expressed here are only those of the authors and do not necessarily reflect the views of UNECA.
Authors: Simon Mevel - Economic Affairs Officer in the Regional Integration and Trade Division at the United Nations Economic Commission for Africa (UNECA); Giovanni Valensisi - Economic Affairs Officer in the Regional Integration and Trade Division at the UNECA; Stephen Karingi – Director of the Regional Integration and Trade Division at the UNECA