EU-ACP Economic Partnership Agreements: Implication for Trade and Development in West Africa Adeola F. Adenikinju and Olumuyiwa B. Alaba Trade Policy Research and Training Programme (TPRTP) Department of Economics University of Ibadan Ibadan, Nigeria Olumuyiwa_alaba@yahoo.co.uk Being Draft Paper for Presentation at the Silver Jubilee Meeting of WIDER-UNU, Helsinki, Finland, June 2005.
2 I Introduction The ongoing negotiations between the European Union (EU) and the African, Carribean and Pacific (ACP) countries under the aegis of Cotonou Partnership Agreement (CPA) is one of the Free Trade Agreements (FTAs) being negotiated between EU on the one hand and several regional groupings within the African, Caribbean and Pacific (ACP) region. The negotiations among other things to establish a Free Trade Zone between EU and ECOWAS for a period of 12 years starting from January 2008. There are four of such FTAs in sub Saharan Africa (SSA). These are ECOWAS in West Africa, CEMAC 1, in Central Africa, ESA 2 and SADC 3 in Eastern and Southern Africa respectively. South Africa already has a separate FTA with the EU. The CPA is a successor to the successive Lome Conventions (Lome I IV), which is fraught with some peculiar limitations including non-conformity with WTO and nonreciprocity. The CPA is different from its Lome Convention predecessors in three respects. First, it involves a reciprocal relationship between the EU and ACP countries, unlike the Lome Conventions that involved a non-reciprocal and preferential access of ACP exports into the EU. Second, the CPA is to be institutionalized in a series of economic partnership agreements (EPAs) each of which will be structured as a free trade agreement (FTA) between the EU and a group of ACP countries. Finally, the EPA will be negotiated separately between the EU on the one hand, and a number of ACP regions on the other hand (Oyejide, 2004). The priority on the content of the CPA is the development and poverty reduction of the developing-country partners. In addition, attention will also focus on the realization of other objectives. These include deepening of the integration process in West Africa, cooperation between EU and ECOWAS in trade related matters, enhancement of competition of enterprises located in the ACP, capacity building and upgrading, and to improve access to the EU markets for West African exports. In the case of West Africa, which is the focus of this assessment, ECOWAS provides the negotiating front for the fifteen countries that made up the group plus Mauritania which 1 Membership of CEMAC are Cameroon, Central African Republic, Chad, Republic of Congo, Gabon and Equatorial Guinea. 2 The Eastern and Southern Africa (ESA) regional EPA group consists of Burundi, Comoros, Democratic Republic of Congo, Djibouti, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Uganda, Zambia and Zimbabwe. 3 SADC is made up of seven countries, Angola, Botswana, Lesotho, Mozambique, Namibia, Swaziland and Tanzania
3 used to be part of the community. The countries include the 7 UEMOA countries of Benin, Burkina-Faso, Chad, Cote d Ivoire, Mali, Niger, and Senegal. Other non-uemoa member countries are Cape-Verde, Gambia, Ghana, Guinea, Guinea-Bisau, Liberia, Nigeria, and Sierra Leone. There is no doubt that the CPA will have significant implications on the economies of ECOWAS countries. In particular, the reciprocity condition implicit in the agreement, implied that at some time before 2020, the ECOWAS countries must have to open up their economies to imports from the EU countries. Fears have been expressed that this will generate considerable impact on these economies. Apart from reciprocal quota and duty-free access to both markets, the CPA may lead to trade diversion, trade creation, loss of trade revenues and deindustrialization, among others. Therefore, there are a number of critical challenges facing the West African countries as they go to negotiations. Coping with various challenges relating to EPA negotiation and its implementation require that specific attention must be given to the issue of industrialization and export response capacity of the sub-region if it is to achieve its development objective. This is because of a number of reasons. Industrialization provides a means for those countries to diversify the productive and export bases of their economies. Second, there is a close correlation between industrialization and development. Third, industrialization provides the means to process and increase the value added of the agricultural output as well as increase the productivity of the sector. Finally, the relatively high income and price elasticities of manufactured goods will ensure higher income and enhanced poverty reduction. It is in this context that this study examines the CPA. II Economic Structure of West Africa The economic structure of the West African sub-region is largely dominated by Agriculture and services. According to the 2000 edition of ECOWAS national accounts, agriculture contributed about 35.4%, to sub-regional GDP, up from 34% in 1998, next to it is the services sector which contributed about 25.5% of the groups GDP, down from about 43% in 1998. Mining, industry and manufacturing put together contributed about 16.5%, while energy and construction contributed 1.5% and 4.5% respectively to ECOWAS GDP. Levels of gross domestic product (GDP) of the group in 2000 ranged from lows in countries such as
4 Guinea Bissau (GDPUS$.2 billion), Gambia (GDP US$.4 billion), Cape Verde (GDP US$.5 billion) and Sierra Leone (GDP US$.6 billion) to highs in Senegal (GDP US$4.4 billion), Ghana (GDP US$5.1billion) and Ivory Coast (GDP US$9.3 billion). But by far the largest economy in the region is Nigeria with a GDP in 2000 of US$41 billion. In 2000, per capita GDP was lowest in Sierra Leone (US$126), Niger (US$169), and Guinea Bissau (US$180) and highest in Guinea (US$406), Senegal (US$459) Ivory Coast (US$585) and Cape Verde (US$1,266). Per capita GDP in Nigeria was US$324 in 2000 (Page and Bilal 2001). Table 1: Structure of West African Economies 1998 (in percentages of GDP) Country Agriculture Industry Services Of which manufacturing Benin 38.6 15.3 8.2 47.9 Burkina Faso 32.0 27.8 21.4 40.3 Cape Verde 12.2 19.1 10.3 68.7 Cote d Ivoire 27.6 20.7 17.4 51.7 Gambia 27.4 13.7 5.8 58.9 Ghana 37.6 24.8 8.2 37.6 Guinea 22.3 35.3 4.1 42.4 Guinea Bissau 62.4 12.7 9.3 24.9 Mali 44.9 20.7 6.5 34.4 Mauritania 24.8 29.5 9.1 45.7 Niger 41.4 17.0 6.2 41.6 Nigeria 31.7 41.0 5.8 27.3 Senegal 17.4 23.3 15.3 59.3 Sierra Leone 45.1 24.3 N/A 30.6 Togo 42.1 21.1 9.1 36.8 West Afr. average 33.6 23.1 9.8 43.2 Source: Jones (2002) The structure of the West African economies is important in reaching mutually beneficial trade agreements between ECOWAS and EU. In the sub-region clear distinction exists between Sahel and non-sahel economies, and between the countries in the region and Nigeria, which is the major economic driving force in the region. The Sahel countries (Burkina Faso, Cape Verde, Gambia, Guinea Bissau, Niger, Mali, and Senegal and Mauritania) are all LDCs, with their economies relying predominantly on agriculture and to some extent commerce. Only four of Sahel countries have direct access to the sea (Mauritania, Senegal, Gambia and Cape Verde). The others are landlocked countries with poor and costly transport
5 infrastructure (road and rail). Even though Mali and Niger have important mineral potential, with the exception of very high-value products (gold and precious stones), their exploitation is not economically viable at present. The non-sahelian countries are the more developed countries in the region. They enjoy a diverse range of agricultural possibilities, a manufacturing sector and export possibilities with direct access to the sea. Three of them are not classified as LDCs (Ghana, Cote d Ivoire and Nigeria). In addition, Guinea has considerable undeveloped potential in sectors such as agriculture, mining and industry. III. Trade Structure of West Africa For nearly all the countries the leading import items are heavy equipments, chemical and chemical products and textiles, rubber and metal products. For all the countries, with the exception of Nigeria and Gabon, petroleum products also constitute an important component of imports. For instance, for Cote d ivoire, nearly 40% of her imports belonged to petroleum products category. Thirty percent and 24% of imports to Guinea and Ghana respectively also fall into petroleum products group. Furniture, fittings and decorative materials also constitute important import group for Cape Verde, Guinea and the Gambia (Tables 2). The export structure for non-agricultural products is also presented in table 3. Cotton & Clothing, non-metallic products are quite important exports for most of the countries in the sub-region. Over 60% of non-agricultural exports from Niger, Burkina Faso, Gambia, Benin and Guinea are Cotton & Clothing and non-metallic products. Petroleum products exports are particularly important in Nigeria and Cote d Ivoire. Textile, Rubber & Metal Products are particularly important in Gambia, Guinea and Senegal. Chemical and chemical products are also significant export group in Togo, Ghana, Guinea and Cote d Ivoire. Furniture, fittings and decorative materials are also quite important in the export structure of Cape Verde.
6 Table 2: Import Structure of Selected ECOWAS Countries in 2001 in (US$million and %) Senegal Nigeria Niger Cote d'ivoire Cape Verde B.Faso Benin Guinea Ghana Gabon Gambia Togo Total 1552 5805 383 2482 236 723 547 612 2933 955 188 323 Non-Agric 1262 4709 296 2104 183 657 440 502 2613 811 132 277 Food, Beverages, & Tobacco 2.1 0.7 9.4 1.8 7.8 2.6 1.7 5.2 1.5 3.1 3.1 3.3 Cotton & Clothing, non-metallic products 3.3 2.0 6.7 2.1 2.9 1.1 7.7 1.9 5.4 1.0 1.1 2.9 Petroleum Prod. & Other Energy 27.7 2.1 27.7 39.8 7.9 27.8 23.8 30.4 24.1 4.8 17.0 22.0 Animals & Vegetable Oil/Fat 3.6 0.5 6.8 0.5 3.2 1.3 1.1 2.3 0.6 0.8 4.0 1.5 Textile, Rubber & Metal Product 13.1 24.9 12.6 16.9 8.4 9.3 12.8 10.6 11.0 10.1 7.8 12.4 Chemicals & Chemical Products 17.0 23.2 14.6 15.1 22.9 13.0 27.8 16.0 16.5 14.9 22.3 30.0 Heavy equipments 28.0 41.4 16.8 19.4 36.9 40.8 18.7 23.2 34.1 56.5 31.2 21.7 Furniture, fitting & Decorative materials 5.2 5.1 5.4 3.9 10.2 4.2 6.3 10.0 5.8 8.8 12.0 6.3 Other manufactures 0.0 0.0 0.0 0.5 0.0 0.0 0.0 0.3 1.1 0.0 1.3 0.0 Source: ITC (2004) Table 3: Export Structure of ECOWAS Countries, 2001 in (US$ million and %) Togo Cote d'ivoire Niger B.Faso Ghana Cape Verde Gambia Benin Senegal Guinea Gabon Nigeria Total 219 3627 153 187 1715 9.5 15.6 181 784 573 2598 27053 Non-Agric 188 1883 91 164 1261 9.2 10.2 153 497 564 2584 27046 Food, Beverages, & Tobacco 1.1 0.5 0.1 2.1 2.1 0.0 0.0 2.1 0.6 0.2 0.3 0.0 Cotton & Clothing, non-metallic products 38.9 27.2 96.5 68.8 14.7 0.0 75.0 84.4 10.7 55.1 13.6 0.1 Petroleum Prod. & Other Energy 0.5 39.2 0.0 3.4 9.7 0.0 0.0 0.0 28.2 0.8 83.9 99.7 Animals & Vegetable Oil/Fat 1.7 2.5 0.0 3.1 0.8 0.0 1.7 0.4 14.4 0.1 0.0 0.0 Textile, Rubber & Metal Product 3.0 8.0 0.1 1.5 1.4 0.0 14.7 0.9 28.1 17.5 0.0 0.0 Chemicals & Chemical Products 49.4 12.7 1.1 11.9 17.6 0.0 0.8 4.1 6.9 17.9 1.5 0.1 Heavy equipments 2.6 2.0 1.4 6.8 0.9 2.3 6.7 1.0 6.9 2.1 0.4 0.1 Furniture, fitting & Decorative materials 2.8 5.0 0.7 1.8 4.0 97.6 0.0 0.4 4.2 2.7 0.3 0.0 Other manufactures 0.0 3.0 0.0 0.8 48.8 0.0 1.1 6.7 0.0 21.2 0.0 0.0
7 The European Union remains the main recipient of ECOWAS countries exports and the main source of imports to ECOWAS. Export from ECOWAS countries to the EU as a percentage of total exports from ECOWAS countries is substantial and more than 40% of total exports in some of the years on table 4. Import trend from the EU followed the same pattern falling between from 46% and 52% between 1996 and 2001. However, both export and import intensities increased over the period 1990 and 2000. Export and import intensities increased by more than 100% between 1990 and 1999. This is an outcome of the trade reform programmes embarked upon by the countries in the sub-region. Table 4: ECOWAS Trade Structure 1996-2001 (as a % Total Exports Value) Countries/Years 1996 1997 1998 1999 2000 2001 Intra-ECOWAS 10.86 12.66 14.59 10.08 8.40 9.25 Other African Countries 14.69 16.20 18.53 13.59 9.59 8.70 European Union 41.80 38.47 42.51 31.54 28.81 31.44 Northern America 23.06 25.81 19.47 26.11 36.69 31.00 Asia 8.79 11.16 7.52 19.02 17.12 14.68 Source: Extracted from ECOWAS Handbook of International Trade 2003 Table 5: ECOWAS Trade Structure 1996-2001 (as a % Total Imports Value) Countries/Years 1996 1997 1998 1999 2000 2001 Intra-ECOWAS 11.25 10.93 10.54 12.44 16.79 13.61 Other African Countries 13.94 13.02 13.01 15.29 19.60 Na European Union 47.73 46.30 50.09 51.68 48.31 45.50 Northern America 12.46 11.77 10.98 11.26 8.73 9.59 Asia 16.23 19.15 17.88 19.19 21.89 20.89 Source: Extracted from ECOWAS Handbook of International Trade2003 There is an obvious asymmetry in the trade structure between the two regions. The figure below shows that raw materials and food, live animals, beverages and tobacco constitute 56.4% and 31.3% of ECOWAS exports to the EU in 2002. Manufactures only constitute about 12.3%. On the other hand, manufactures account for about 76% of the EU s export to ECOWAS, while raw materials only account for 7% of EU s exports to the sub-region. IV. Regional Integration Agreements in West Africa and Europe The history of regional integration is more recent in West Africa compared to Europe. In West Africa, Francophone West Africa group (now UEMOA) was the first set of countries to conceive an independent regional group in 1962. UEMOA led by Cote d Ivoire transformed from CEAO in 1994. UEMOA had a target of free internal trade and a common external tariff, and in the longer term full movement of services, capital and people and harmonization and normal recognition of technical
8 standards. ECOWAS, which was launched in 1975, is a more encompassing regional integration agreement and was set up to achieve the same idea as contain under the UEMOA but under a broader arrangement. However, at present, the ECOWAS is still struggling to achieve the level of integration already made in the UEMOA. The EU has a longer history of integration dating back to 1951 and has achieved a deeper and broader level of integration than ECOWAS. It already has achieved a monetary union with a common currency euro, though without three EU countries, Britain, Sweden and Denmark. The EU has maintained preferential economic relationships with ECOWAS under the broader ACP-EU preferential agreement. Since the 1970s, under the Lome Conventions (I through IV), the EU had provided unilateral preferences access to its market to the ACP countries. The Lome Convention because it did no entail reciprocal relationship and because they were not part of the EU s general system of preferences (GSP) did not conform to WTO rules. The Cotonou Agreements under which the current trade negotiation is being conducted is designed to bring trade relations between the two groups in line with their WTO commitments. V. Phases of the EPA Negotiations ECOWAS-EU EPA negotiations being part of a larger ACP-EU process were launched in Brussels on 27 September, 2002. The opening Ministerial Conference agreed on the modalities of the conduct of the negotiations in two phases, the outcome of which is schedule to be effective no later than 1 January 2008. The first phase of the negotiations was conducted at all-acp level and covered horizontal issues of interest to all parties. On the 2 nd of October 2003, the ACP Council of Ministers and the EC Commissioners for Trade and Development declared the results of the first phase to be satisfactory in view of high degree of convergence achieved. The parties adopted the joint reports, ACP/00/118/03 Rev.1-ACP-EC/NG/NP/43, that came out of the meeting. The report serves a point of reference and guide for the conduct of negotiations between West Africa and European Community. The second phase of the negotiations, as far as West African sub-region is concerned was launched in Cotonou on October 6, 2003. The two parties reaffirmed the commitments made under the Cotonou Agreement and restated the inbuilt development objective of EPAs, which centres on promoting the deepening of the regional integration process and sustainable economic development in the West African region. The primary concern according to the roadmap for negotiation and establishment of the EPA developed by the representatives of ECOWAS and EU is to give priorities to West African region s integration, seek to strengthen competitiveness and develop macroeconomics and sector wide policies aimed at ensuring a
9 unified market, and establishment of surveillance mechanism to ensure functional free trade area and gradual establishment of customs union. However, a major worry has been that, given the weak and non-competitive industrial structure of West African economies, the need to open up their domestic market for almost all products from the EU within a 12-year period, requires that care must be taken so that the long term industrial development objectives of these countries are not compromised. They must be allowed to designate sensitive products that should be protected as well as receive technical and financial support to upgrade their industrial and infrastructural sectors. VI. Compatibility of EPA with WTO Doha Round. One of the objectives of the EU in the EPAs is to ensure its consistency and conformity with the WTO provisions. There are two areas where the Lome Conventions were not compatible with the WTO. These are it was not reciprocal and it was discriminatory. Free trade agreements between developed and developing countries are governed by Article XXIV of the WTO. The Article requires that countries forming an FTA should liberalize substantially all trade within a reasonable length of time. In addition, the WTO requires that unilateral preferential treatment from developed countries must go to only two groups of countries: to LDCs or to all developing countries. In other words, there must be no discrimination. These enabling clauses of the WTO have forced the EU to obtain waiver from the WTO, first, for the Lome Agreement in 1994 and then for the Cotonou Agreement at Doha in 2001. Possibility for extending the waiver for the Lome-Cotonou type preferences after 2007 would be very difficult and may carry costly trade concessions to other non-acp countries in order to do so. Even, if any waiver is obtained there are some aspects of the Cotonou Agreements that are vulnerable to disputes. In spite, of this, the overall objectives of the DDA and the EPA are consistent in that they both focus on development. The challenge is how to ensure that both are compatible. In particular, it has been suggested that the EPA negotiation should proceed after the conclusion of the DDA. This is because since the multilateral trade negotiation in the WTO s DDA covers many of the issues raised in the planned EPAs, the DDA when completed may render EPA a superfluous. EPA should therefore be delayed so that its provisions will build upon the gains made under the DDA (Oyejide, 2003). It has also being raised that since the EU s EBA have already provided for full quota-free and duty-free access to EU market for all LDCs exports irrespective of whether they join the EPA or not. Thus, except for three countries in West Africa, viz, Nigeria, Cote d Ivoire and Ghana, all the other thirteen countries will benefit from the EBA. Thus, for these thirteen countries, the EPA may not carry additional benefits over the EBA except for the technical and financial support that the former may
10 carry. In fact, it is felt that the EPA will simply allow the EU to have free access to the markets of these countries, especially Nigeria. There is therefore a need for the EU to compensate these countries for whatever loss the opening up of their economies to imports from EU may entail for their economies. Authors like Oyejide (2004) have argued that the EBA should be extended to all the ACP countries irrespective of their development classifications. Among other reasons, this will allow all these countries to negotiate the EPA with a common vision and interests. Another reason for delaying the EPA until the conclusion of the DDA is that since the DDA will eventually lead to reduction in MFN tariff rates, the EPAs should be an improvement upon the preferential access to the EU market under the existing CPA. Given this consideration, the non-ldc ACP countries face stronger negotiating incentives: they need the EPAs in order to maintain or improve upon the preferential access to the EU market that they currently have under the Cotonou Agreement but which will expire when that agreement ends in 2008. However, there is a risk that EPAs could create a bloc of countries that, because of short term concern about the erosion of their preferences in the EU market, could inhibit progress at the WTO in liberalizing world trade and achieving improved market access for other developing countries. Long-term competitiveness and sustainable development cannot be built solely upon special preferences allowing less developed countries to benefit from transient distortions in world trade policies, and adjustment to preference erosion is going to be necessary sooner or later in any case. The EPA may provide an opportunity to commence this adjustment in favorable circumstances given facilities open to ECOWAS countries under the financial cooperation component of EPAs. VII. Measuring of EPA on West African Economies Trade Effects of EPA One of the implications of the reciprocity condition in the EPA is that the ECOWAS countries will have to open up their economies to imports from Europe. It is reasonable to say that the trade effect of the EPA on ECOWAS would be felt more on the import side than exports. This is because most of the countries already have unutilized trade preferences with the EU. Thus, the EPA will place European imports as a major competitor against domestic production as well as put EU imports at an advantage relative to non-eu trading partners. In other words, there are potential trade creation and trade diversion effects from the EPA. In a recent study, Busse and GroBmann (2004) examined the trade effects of EPA on ECOWAS countries using a partial equilibrium models. Three scenarios reflecting different assumptions about elasticity of trade substitutions were used to test the results for sensitivity to
11 underlying assumptions. In Table 6 we present their results for the mean scenario. The trade effects of EPA were decomposed into two, viz., trade creation and trade diversion. For all the countries, trade creation effect dominates trade diversion effect. Trade creation leads to an increase of EU imports into the sub-region by US$647.9 million or 9.62%. Trade diversion effects will displace non-eu imports in favour of EU imports by US$390.8 million or 5.77% of non-eu imports. Total trade effects were estimated at US$1,038.9 million or an increase in EU imports by 15.35%. However, the country effects vary. Trade creation effects vary from US$1.6 million in Guinea- Bissau to US$348.3 million in Nigeria. The mean increase for all the countries was US46.3 million. Apart from Nigeria, only three other ECOWAS countries have their imports rise above the mean. These are Senegal US$71.2 million, Cote d Ivoire, US$69.3 million and Ghana, US$45.8 million. However, in terms of percentage increases, Ghana imports from EU will increase by only 3.7%, while Nigeria will rise by as much as 12.5%. Table 6: Trade Effects of EPA on ECOWAS Countries, 2001 Country Trade Creation Trade Diversion Total Trade Effect Mill US$ % of Mill US$ % of nonpreferred Mill US$ % of preferred imports imports preferred imports Benin 20.4 7.6 10.7 3.2 31.1 11.6 Burkina Faso 14.1 5.7 9.8 3.2 23.9 9.7 Cape Verde 16.9 9.2 4.5 7.1 21.5 11.7 Cote d Ivoire 69.3 6.0 25.3 2.9 94.7 8.2 Gambia 8.2 5.8 5.8 6.6 14.0 9.9 Ghana 45.8 3.7 40.2 2.4 85.9 6.9 Guinea 14.3 4.9 10.0 3.3 24.3 8.3 Guinea-Bissau 1.6 4.5 0.3 1.1 1.9 5.2 Mali 13.3 3.6 8.3 1.3 21.6 5.9 Mauritania 9.8 7.2 5.4 2.8 15.2 8.6 Niger 4.6 4.9 3.5 2.3 8.1 8.6 Nigeria 348.3 12.5 229.1 7.6 577.4 20.8 Senegal 71.2 8.0 31.4 3.8 102.7 11.5 Togo 10.1 6.6 6.5 3.2 16.6 10.9 Average 46.3 9.62% 27.9 5.77% 74.21 15.65% Total (mill. US) 647.9 390.8 1038.9 Nigeria s share of 53.8 58.6 55.6 total (%) Source: extracted from Busse and GroBmann (2004) and own calculations
12 In the case of trade diversion there are also differences across countries. However, the pattern remains about the same. The highest impact is again recorded by Nigeria. The value for Nigeria is US$229.3 million compared to US$0.3 million for Guinea-Bissau and US$25.3 million and US$40.2 million for Cote d Ivoire and Ghana respectively. As the table shows, EPA will lead to a displacement of non-eu imports b 7.6% in Nigeria, 7.1% in Cape Verde and by only 1.1% in Guinea Bissau. What is very clear from this table is that the trade impact of the EPA will be most felt in Nigeria. The reasons for this are very clear. Nigeria constitutes the single largest economy in the sub-region as well as the largest trading partner with the EU, while the least impact will be recorded in Guinea- Bissau and Mali respectively. Using a CGE model for Nigeria 4, we find that a zero tariff rate on EU imports will have some impacts on the economy. Real GDP will decline by -0.06%, while aggregate imports and exports will increase by 0.43% and 0.31% respectively. Tables 7 and 8 show the summary of the aggregate and sectoral impacts of the zero tariff on EU imports on the Nigerian economy. The greatest macro impact is reflected on aggregate domestic investment which declined by -2.23%, followed by government revenue which showed a decrease of nearly 1%. Private consumption also rose, albeit marginally because the influx of cheaper imports from the EU lowers consumer prices and increases real income leading to higher consumption. Table 7: macroeconomic impact of the EU-ECOWAS EPA on the Nigerian Economy. (percentage change over the benchmark) Variable % change Real GDP -0.064 Imports 0.430 Exports 0.308 Consumption 0.079 Investment -2.231 Government Revenue -0.997 Source: Simulation results The reason for the relatively low trade impact of the EPA on Nigeria is because of a number of reasons. First, we used applied rather than nominal tariff rates and second, because the applied tariff rates are already very low in the country as a result of the unilateral tariff reduction that the country has embarked upon since 1988. Finally, the low substitution between imports and domestic production also mitigated the trade impact from the zero tariffs on EU imports. The sectoral impacts of the EPA on the Nigerian economy are shown in Table 8. Imports and exports rose in all the sectors. The manufacturing sector was divided into three consumer goods, 4 The structure of the CGE model is described in Olofin, Adenikinju and Iwayemi (2002).
13 intermediate goods and capital goods sector. Import liberalization will have the greatest effect on consumer goods manufacturing, followed by capital goods manufacturing. Output of the two sectors would also likely contract as a result of the expansion in EU imports. Interestingly, exports in the two sectors are likely to increase. The EPA will also generate employment effects as shown in the last column of Table 8. Employment is likely to decline in consumer goods, capital goods and infrastructure sectors as a result of the EPA. Table 8: Sectoral Impacts of the EU-ECOWAS EPA on the Nigerian Economy. (percentage change over the benchmark Sector Output Imports Exports Employment Agriculture 0.005 0.321 0.310 0.165 Consumer Goods -0.087 0.714 2.386-1.930 Intermediate Goods 0.017 0.153 4.711 0.533 Capital Goods -0.001 0.528 0.782-0.019 Oil 0.001 4.015 0.239 0.850 Infrastructure -0.031 0.105 0.211-0.841 Services 0.003 0.002 0.281 0.051 Source: Simulation results Revenue Implication of the EPA One of the major fears about the EPA is that it will lead to significant revenue loss for most of the West African countries for which trade revenues constitute a significant proportion of total revenue. Tables 9 and 10 show the trends in import and export tariff revenues for the countries in the sub-region between 1996 and 2000. For the sub-region as a whole, import tariff revenue rose an annual mean of 2.4% from US$2.8 billion in 1996 to US$3.0 billion in 1999. However, a number of the countries recorded negative growth in import tariff revenue arising from a combination of factors including increasing import liberalization measures in those countries. Such countries include Burkina Faso, Cote d Ivoire, Senegal, Sierra Leone and Togo. Nigeria s import tariff revenue however rose from US$675 million in 1996 to US$952.4 million in 1999, translating to an annual increase of 14%.
14 Table 9: Trend in Import Tariffs Revenues - 1996-2000 (in million of US$) Countries/Years 1996 1997 1998 1999 2000 Grw rate 1996-99(%) Benin 125.61 124.12 133.99 150.05 6.25 Burkina Faso 128.04 124.70 118.48 120.84 76.55-1.87 Cote d Ivoire 747.70 700.55 705.82 664.12 451.42-3.82 Gambia 28.78 28.88 36.83 - - 13.94 Ghana 230.86 240.01 302.46 298.26 215.60 9.53 Guinea 135.73 164.63 163.56 149.33 145.91 3.98 Liberia 48.36 61.90 18.00 19.50 NA -11.53 Mali 184.67 192.88 207.48 222.19 NA 6.37 Niger 50.70 56.53 69.51 69.13 NA 11.30 Nigeria 675.02 771.60 686.70 952.40 998.27 14.00 Senegal 348.53 310.18 318.67 295.76 245.93-5.15 Sierra Leone 44.01 52.99 25.06 18.44 33.33-19.57 Togo 49.26 50.90 49.83 43.04 NA -4.13 Total 2797.27 2879.87 2836.39 3003.06 2167.01 2.44 Source: ECOWAS (2003) Statistical Bulletin Table 10: Trend in Export Tariffs- 1996-2000 (in million of US$) Countries/Years 1996 1997 1998 1999 2000 Grw 1996-1999 Benin 0.68 0.45 0.20 0.08 - -49.79 Burkina Faso 1.17 1.20 1.70 0.97 1.40 0.43 Cote d Ivoire 402.10 296.98 267.82 287.15 229.50-9.58 Gambia - - - - - Ghana 170.97 133.77 176.73 173.52 153.17 2.85 Guinea 0.13 0.13 0.13 0.13 0.65 0.00 Liberia - - - - - Mali - - - - - Niger 0.73 2.36 3.34 5.86-113.42 Nigeria - - - - - Senegal 24.04 27.59 27.12 25.99 93.12 2.97 Sierra Leone 0.37 0.63 11.84 5.87 8.78 599.74 Togo - - - - - Total 600.19 463.11 488.88 499.57 486.62-5.03 Source: ECOWAS (2003) Statistical Bulletin For most of the countries however, export tariffs have been eliminated or drastically rolled back. Nigeria has eliminated export tariffs on all her exports. Benin export tariff revenues declined by an annual mean of nearly 50% between 1996 and 1999 from US$0.68 million in 1996 to US$0.08 million in 1999. However, for a few of the countries, exports tariff continue to be a significant source of revenue. Countries falling into this category include Cote
15 d Ivoire, Senegal and Ghana. For the whole sub-region, export tariff revenue declined by a mean of -5% between 1996 and 1999. One possible outcome of the EPA is that it will provide duty free access for imports from EU to ECOWAS countries. For nearly all these countries, EU is the single largest trading block. Table 11 shows that share of EU in total imports for each country of the region varies from a minimum of about 29% for Niger to a maximum of 74% for Caper Verde. The average for the whole sub-region was 49.3% in 2001. Countries with above average share in 2001 include Cote d Ivoire 57.4%, Gambia 61.8%, Guinea Bissau 59.7%, and Senegal 51.8%. EU constitute nearly 48% of Nigeria s total imports in 2001. Liberalization of trade between West Africa and the EU based on EPA may in this respect affect the ability of governments in the region generate revenue and impede administration of fiscal functions. Table 11: Trade and Key Government Revenue Indicators, 2001 Country Imports from the Import duties in % EU in % of total imports of total government revenue Government deficit (-)/surplus(+) of GDP incl. grants Benin 44.4 18.1-1.5-4.2 Burkina Faso 44.6 12.0-4.0-11.3 Cape Verde 74.3 24.8-5.2-11.0 Cote d Ivoire 57.4 8.2 0.9 0.3 Gambia 61.8 33.7-6.3-9.8 Ghana 43.1 15.5-10.1-14.6 Guinea 49.0 9.4-4.4-7.8 Guinea-Bissau 59.7 8.5-11.7-26.2 Mali 36.3 10.7-5.1-9.5 Mauritania 47.5 12.8-1.8-5.7 Niger 28.9 12.3-2.4-7.1 Nigeria 47.9 4.7-1.5-1.5 Senegal 51.8 17.8-2.0-3.9 Togo 43.0 12.1-2.1-2.6 Average 49.3 14.7-4.6-8.9 Source: extracted from Busse and GroBmann (2004) Excl. grants
16 Table 11 similarly shows that nearly a 15% of government revenue of ECOWAS countries comes from import duties. This average figure however belies the variation in the degree of dependence of each country. For Gambia, more than one-third of total revenue comes from import duties. For Cape Verde, the figure is 25%. Import duties share in total government revenue are 18%, and 17.8% for Benin and Senegal respectively. Nigeria and Cote d Ivoire have the least shares of 4.7% and 8.2% respectively. Most of these countries are already operating huge fiscal deficit. Except, for Cote d Ivoire, all the countries in the sub-region had fiscal deficits in 2001. The average fiscal deficit for ECOWAS in 2001 was -8.9% of GDP, with Guinea-Bissau and Ghana leading the pack with -26.2% and -14.6% respectively. Most of the other countries have fiscal deficit GDP ratio of over 5%. What this therefore suggests is that the loss of fiscal revenue from import liberalization might further compound the precarious fiscal positions of these various countries. This issue deserves important consideration in the EPA negotiation. The European Commission had suggested that ECOWAS should diversify its revenue base from trade taxes to VAT and to also improve the efficiency of its tax administration. Busse and GroBmann (2004) have shown that import duty collection efficiency averaged only 67% in ECOWAS. Ghana has the lowest collection efficiency of 29% and Senegal the highest with 90%. Oyejide (2004) however argues that VAT and improvement in the efficiency of tax administration may be inadequate at least in the short-run to offset the potential revenue losses from import liberalization as envisaged under the EPA. VIII Non-Agricultural Production and Export Response Capacities in West Africa. One of the most important sectors when considering diversification of West African economies is the manufacturing sector. Transition from heavy dependence on agriculture and primary products to manufacturing and processed goods constitutes a major factor in explaining economic development of the European and the OECD countries. This section therefore considers the capacities of West African countries with respect to production of manufactured goods. Manufacturing activities tends to be stagnant in West African countries increasing marginally from total production value of US$11.2 billion in 1996 to US$12.2 billion in 1998, and declining thereafter to about US$10.7 billion in 1999. The distribution and export of Non-agricultural products is likely to have implication for the sub-region s content of negotiation with the EU. For instance over 40% of manufacturing production in West Africa is contributed by Nigeria, while Ghana, Senegal and Cote d Ivoire joint contribution is less than Nigeria s contribution.
17 Table 12: Value of Manufacturing Production in ECOWAS Countries (in million US$) 1996-2000. Countries/Years 1996 1997 1998 1999 2000 Ave. grw 1996-99 (%) Benin 198 195 200 207 198 1.52 Cote d Iviore 1806 1933 2435 2400-10.52 Gambia 3 3 3 3-0.00 Ghana 1377 1443 1559 1593-5.00 Guinea 402 298 305 287 - -9.81 Mali 398 373 380 368 - -2.52 Niger 356 338 361 384 348 2.71 Nigeria 4928 5551 5508 5383 5378 3.20 Senegal 1619 1236 1367 - - -6.53 Sierra Leone 76 75 75 63 20-5.77 Total 11163 11445 12193 10688 5944-1.09 Source: ECOWAS, 2003 Only two countries in the subregion, Cote d Ivoire and Ghana recorded more than 5% increase in manufacturing value added (MVA) between 1996 and 1999. However, some of the countries recorded a net decline in MVA over the period. Guinea led the pack with -9.8% decline in MVA. She was followed by Senegal -6.5%, Sierra Leone -5.8% and Mali -2.5% (Olofin et al. 2002). Eliminating import barriers for EU imports into ECOWAS will generate positive and negative impact on the manufacturing sectors in these countries. First, it will lower trade input costs and thus enhance the competitive advantage of domestic production. This will enhance domestic manufacturers access to essential imports and technologically embodied inputs and thus enhance domestic production. Furthermore, on the side of consumers, access to cheaper imports will increase scope for choice as well as increase real income and welfare of the consumers. Conversely, increased trade flows and import surge from EU consequent on import liberalization may stifle the already weak domestic manufacturing sector. The existence of the manufacturing sectors in most ECOWAS countries can be attributed mainly to government protection over the years. The weak industrial base can be attributed among other factors to the poor quality infrastructure and high transaction costs in these countries. According to Oyejide (2004), a more competitive EU imports will displace local production, lead to industrial plant closures and worsen the unemployment problems in these countries. Table 13 shows the competitiveness index of the manufacturing sectors in selected ECOWAS countries. The competitiveness index was measured relative to a group of East Asian countries. A value of less than 1 implies that the country is more competitive. Thus, from the table, except Niger, Senegal and Togo, the other four countries seem to be competitive. However, as Adenikinju, Olofin and Iwayemi (forthcoming) shows the relative
18 competitiveness of these countries has been helped by the massive real currency depreciations that accompany adjustment programmes in these countries. However, the computed competitiveness did not translate into higher manufacturing growth and export performance, because the competitiveness simply reflect low labour productivity and low labour compensations. This is different from the Asian countries where high labour compensation reflects high labour productivity. Table 13: Competitiveness and Manufactured Exports Performance (1980-1993) COMPETITIVENESS INDEX Manufactured exports/exports Country 1980 1985 1990 1993 1980 1985 1990 1992 Burkina Faso 0.64 0.48 0.65 0.65 11.11 12.68 12.50 12.68 Cote D Ivoire 0.89 0.93 0.55 0.79 7.59 10.27 10.76 10.74 Gambia 0.72 0.90 0.94 0.94 0.51 0.53 0.53 0.53 Niger 1.21 0.97 1.16 1.31 2.24 1.61 1.37 1.48 Nigeria 0.65 0.53 0.55 0.48 0.87 1.01 1.11 1.11 Senegal 1.16 1.24 1.34 1.36 15.09 7.65 22.61 22.47 Togo 0.93 0.93 1.43 1.44 10.45 6.84 10.82 10.63 Sources: Extracted from Adenikinju, Olofin and Iwayemi (forthcoming) Past reform efforts in West Africa have focused on price competitiveness alone. However, the ability of the manufacturing sector in the sub-region to penetrate foreign markets or compete with imports is not just a function of price competitiveness, but also non-price competitiveness factors like timeliness, quality, marketing and distribution skills, reliability, after sales services, technological innovation and the institutional structural environment (Agenor, 1995). Table 8 shows that for Nigeria, complete liberalization of EU imports will lead to decline in the domestic output of some sectors. These include two manufacturing sectors of Consumer goods and Capital goods and then infrastructures. It will also lower employment in those sectors. Thus, the import surges expected from the EPA will displace domestic manufacturing production, especially in those countries with some levels of domestic capacities Nigeria, Cote d Ivoire, Ghana and Senegal. It is therefore important that some adjustment assistance be put in place by the EU to assist in building more competitive and export oriented industrial capacity in these countries. IX Conclusions Given the structure of West African economies, which is clearly in contrast with that of the European Union in terms of development and achievement of integration, the reciprocity condition implicit in the on-going partnership agreements (EPAs) may have several consequences for trade,
19 general economic performance and poverty in West Africa. In reaching mutually beneficial partnership agreements therefore, the structure and level of industrial development of West African nations should be an important factor in negotiating EPAs between ECOWAS and the EU. EPA s goal should be to complement the development programmes of ECOWAS countries by maintaining and improving the sub-region s current market access to the EU and by enhancing the supply response capacity of the countries in the sub-region so that they can take full advantage of the various domestic and external opportunities that will be created by the CPA. The development of the industrial sector of West African states should rank very highly in this scheme. The EU through the EPA should provide support for these countries to embark on needed industrial transformation that would follow the implementation of the EPA. The competitiveness of existing sectors need to be enhanced, and the establishment of new industries must be encouraged, especially in areas where these countries already have comparative advantage or where comparative advantage could be dynamically developed. Efforts must also be made to address the various supply side constraints that have limited the development of the industrial sector in West Africa. The empirical analyses carried out in this paper have shown very clearly that the implementation of the EPA has non-marginal implications for the ECOWAS countries. While, we show that the intensity of the impact of the partnership agreement will vary across the countries, nevertheless, most of the countries will suffer from loss of revenue, trade diversion and deindustrialization, especially in countries like Nigeria, Ghana, Senegal and Cote d Ivoire where some levels of industrial activities already exists. Simulation for Nigeria using a CGE clearly shows that some manufacturing subsectors will contract and employment will fall in those sectors. The paper therefore makes a clear case for the protection of these sectors. In particular, we identify sensitive products that must be protected at least during the initial period of the EPA. These products include apparel and clothing, other made textile articles, and footwear, gaiters and the like. Other products that will be affected by the EPA, though to a lesser extent, are sugar and sugar confectionery, soap and organic surface-active agents, cotton, carpets and textile coverage, and knitted or crocheted fabrics, among others. Survival of the sub-regional economy under the EPA requires purposeful adjustment in the main productive sectors of the economies. This suggests that there are varied degrees of cost to be borne by by the component economies of the sub-region. How these impacts could be minimized should clearly be an important goal of the EPA negotiations. ECOWAS countries should therefore request for financial and other economic support from the EU to aid the implementation of the EPA. They should similarly take full advantage of the inbuilt flexibility in the CPA such as differential and asymmetry treatment, flexibility in establishing the duration of transition periods, product coverage and the schedule for dismantling various market access barriers in the sub-region.
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