ABSTRACT

Economic Partnership Agreements (EPAs) require ACP countries to eliminate tariffs on most imports from the European Union (EU), the impact of which will depend primarily on the structure of a country’s imports (EPAs include many other provisions and effects, as discussed in other chapters, but the focus here is on ACP imports). The impact of eliminating tariffs on most imports from the EU will depend on how important the EU is as a source of imports, in general and for particular products, and the extent to which these compete with domestic producers or, in an ACP region context, regional ACP producers. There are benefits for products where there are few or no competing domestic (or regional) producers – consumption gains from increased cheaper imports and potential welfare gains in sourcing imports from more efficient EU producers. There are potential welfare losses where cheaper imports from the EU displace more efficient producers in the rest of the world, and adjustment costs where cheaper imports from the EU undermine domestic production or intra-regional trade. Negotiated agreements, whether framework or initialled, were in place for most ACP countries by the end of 2008 (Meyn, Chapter 2 of this volume) but many important details remain to be negotiated over the next few years. As EPAs are a case of prospective policy reform, existing studies try to estimate what the effect of likely future scenarios may be. Most ex ante studies of the impact of EU-ACP EPA agreements have concentrated on the welfare and revenue effects, in particular those arising from the requirement of the ACP countries to eliminate (within a maximum of about 23 years) tariffs on substantially all imports from the EU (conventionally interpreted as 80 per cent). This focus is in part because these were important negotiation issues, but partly also because effects could be estimated with limited information on tariffs and patterns of regional trade. There are potential costs to ACP countries through reciprocity as they are required to grant tariff-free access to imports from the EU. Although there is concern in ACP countries that such opening up to import competition from the EU will displace domestic production, it is not obviously the case that there will be adverse effects. The welfare impact of import liberalisation depends on the production and trade structure of the country in question, and as such is an empirical question. Of greater practical concern is the potential loss of revenue from tariffs on imports from the EU. On the basis of existing

(Chapter 2). More importantly, ACP countries can exclude a range of designated ‘sensitive products’ accounting for up to roughly 20 per cent of imports from the EU from tariff liberalisation (identifying these is a sticking point in negotiations). Thus, countries do have time to plan both their adjustment to the economic effects of increased imports and the revenue effect of eliminating tariffs. To design such plans they need information on the likely effects of tariff elimination on trade, revenue and welfare. This chapter provides such information at an aggregate level for 34 ACP countries. As originally conceived by the European Commission, EPAs were expected to promote regional integration within groups of ACP countries; in principle, a group of ACP countries first negotiate a regional integration agreement (RIA) and then the RIA negotiates a reciprocal EPA with the EU. However, the introduction of reciprocity under an EPA will tend to threaten intra-regional trade in ACP groupings for a number of reasons. There is a direct displacement threat to existing regional suppliers from the elimination of the external tariff protection vis-à-vis European exporters. There is also an indirect threat associated with the displacement of domestic production by European exporters in domestic markets, which may thereby reduce regional production capacity and future prospects for intra-regional exporting. These threats to regional trade development can be offset in a number of ways. Most obviously, as negotiations allow for the exclusion of sensitive products and for phased introduction of the tariff reductions, ACP regions may benefit by treating products traded within the region as sensitive for EPAs, hence avoiding or postponing any reductions on tariffs on such imports from the EU. Less directly, to the extent that the EU provides ‘aid for regional trade’ and support for measures that enhance the productivity and competitiveness of domestic producers, export capacity (both intra-and extra-regional) can be improved. If EPAs promote increased ACP exports to the EU there is potential to benefit from spillovers (an issue returned to in the concluding chapter). The results reported and discussed in this chapter are based on a number of ex ante studies of the trade effects of EPAs on various ACP groupings or countries that all adopt a similar partial equilibrium analytical framework. McKay et al. (2005) analysed the welfare impacts on East African countries; Greenaway and Milner (2006) covered CARICOM and Milner et al. (2008) considered aspects of impact and adjustment costs for the East African Community (EAC) and Mauritius. Morrissey and Zgovu (2007) focus on agriculture for a large sample of ACP countries to compare the welfare effects of a full liberalization with a scenario that excluded products traded intra-regionally. This chapter addresses the impact on total imports for the same ACP sample. There are other studies adopting other approaches. Busse and Grossman (2007) apply a differentiated product partial equilibrium model to analyse the trade and revenue effects of the EU-ECOWAS EPA. They find that the (static) trade effects are quite high (imports from the EU increase by over 20 per cent for some products in some

are the norm, some countries face much higher losses (among the non-LDCs, Ghana faces the highest revenue loss). Busse and Lüehje (2007) apply the same type of model to Caribbean countries and argue that while there are likely to be welfare gains, revenue losses and adjustment costs could be high. Chapter 1 notes studies that use a combination of general and partial equilibrium modelling techniques and conclude that the likely revenue and adjustment effects will be costly for African countries. The remainder of the chapter is organised as follows. Section 3.1 presents the partial equilibrium method used to estimate the trade, revenue and welfare effects of introducing an EPA for EU imports to ACP countries. Section 3.2 provides a set of estimates, covering the majority of ACP countries except those in the Pacific, for the impact of ‘full liberalization’ to give a benchmark or maximum effect on trade, revenue and welfare, and for how these impacts are affected by identifying sensitive products as those traded within the ACP region. Finally, Section 3.3 sets out the implications of the analysis for future negotiations on the details of implementing EPAs. The analysis here does not incorporate adjustment costs, but these are considered for particular countries in subsequent chapters.