The Do’s and Don’ts of the Economic Partnership Agreement

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By Femi Badejo (PhD)
CEO/Chief Economist Global Trade Policy Initiatives

Being a position paper on the Economic Partnership Agreement (EPA) submitted to the High-level roundtable on the EU-West Africa Economic Partnership Agreement EPA on the 24th October, 2017, Lagos

SYNOPSIS
There is no doubting the fact the EPA and related issues has generated wide range of controversy and interest amongst varied key actors including the diplomatic community on the desirability or otherwise of the reciprocal trade regime meant to open up Import –Export trading links indeed for Nigeria and West Africa in general for an initial period of 20years. The controversy has led to the emergence of camps in support and against while the debate on it still ranges on.

Studies had confirmed the implications of the reciprocal regime on Trade, Revenue, and the welfare of the citizens and the multivariate benefits accruable from the EPA when finally signed. To mitigate against the Possible losses, The EU is to set up the EPADP to provide about E6.5billion amongst several other palliatives and It is hope that the signing countries should enjoy relative economies of scale and comparative advantage benefits if optimally used. The failure of Nigeria to sign the agreement in spite of 13 other countries in the sub region having done so is an issue in the front burner of discourse amongst Policy makers, diplomats and the academia in the recent times.

It is hoped that, once the fears of the manufacturers and other interested parties can be allayed ,that the coast shall be cleared for the signing of the EPA by Nigeria anytime soon and knowing fully that the ERGP readily align with the provisions of the EPA and in tandem with the WTO non trade discriminatory policy. The paper is segmented from 1:1 to 2:2 for ease of reference and for further academic discourse. The Paper relied exclusively on the review of related literature as the source of it empirical findings which has not been subject to further test by the author. Views expressed are absolutely that of the author and accepts full responsibility for it.

1:1 Objectives of the Paper?
• Provide insight and provoke further thought on the subject matter
• Provide the positive and normative interpretation of the subject matter • Assist and help to streamline thought towards arriving at a valid value judgment on same
1:2 Position Paper Posers
• Should the Infant industry argument be made to sustain Protectionism while shunning attractive Trade expansion offers?
• How far we are in reality to the fact that Liberalism and globalization are in tune with trade expansion concept of ‘Laizzez Faire” and “Reciprocalism” as is the case with the CET etc.
• How valid are Conventional wisdom arguments for sustainable trade liberalization and the relative EPA arguments on Trade Diversion and Trade Creation Effects?
• Politicking and emotions considerations as against reality of EPA?

1:3 CAVEAT/Limitations
The paper shall rely exclusively on empirical findings based on review of related literature and do not commission a new study on same due to the constraint of time for data gathering and others. Further interrogation of same is imperative.

1:4 Thrust of EPA
• The EPA is a Free Trade Area (FTA) reciprocal Trade regime
• Under the deal, EU would immediately offer the 15-member Economic Community of West African States (ECOWAS) and non-member state, Mauritania, full access to its market of 500 million people. In return, Nigeria and other ECOWAS members would gradually open up 75 per cent of their markets – with their 300 million consumers – to Europe over a 20-year period.

• The Economic Partnership Agreement (EPA) is expected to eliminate barriers to free movement of goods, services and investment between the European Union (EU) and ECOWAS and Nigeria in Particular.
• The EPA is expected to boost EU trade and expand its investment in the country
• The reciprocal deal readily supports the Diversification strategy of the Nigeria Government and in tandem with the Industrial and Manufacturing boosting policy of the ERGP.

• Conversely to the Lome convention and the LDC and Non LDC classifications, the EPA shall provide unrestricted trade access on a reciprocal basis.
• Conforms with the Non-discriminatory posture of the WTO 1:5 Why the Antagonism against the EPA? The opposite strand to the EPA, who might not be sufficiently informed on the ideals of it, based their objections to the EPA on the unlisted considerations:
• Unfinished and primary production arguments and which may not allow for fierce competition with the EU Manufactures and its attendant Market access difficulty. • Nigeria’s weak manufacturing base, caused by infrastructural deficit and other logistical problems which lead to stunt growth

• That the West African states, including Nigeria, are not on the same economic page with any European country in terms of development to warrant the conclusion of a reciprocal trade relationship as espoused in the trade agreement with EU.
• That the agreement would lead to de-industrialization in West Africa, with economic and employment consequences for Nigeria which controls 60 per cent share of the regional market and Gross Domestic Product (GDP).

• That the elimination of customs duties will lead to a significant decline in government revenue and lead to an increase in unemployment, provoking heightened economic insecurity and political instability.
• That the EPA will have severe consequences on the Revenue Flow and its attendant budgetary and fiscal implications, Trade and the welfare of its citizenry.

• That the displacement of the domestic Production and a further disincentive to investments is a bigger challenge with the EPA
• That the EPA infringes on the Economic sovereignty of the Nation and is viewed as another neo-colonial expansion framework.
• That the Competitive rather than been complementary nature of the Economies in the region is a concern to the manufacturers and related actors

1:6 EPA Status In West Africa
• The EPA negotiations between EU and ECOWAS took off in August 2004, but the most important milestone was the adoption by ECOWAS of a Common External Tariff (CET) on October 25, 2013. After only one round of post-CET discussions, negotiations were concluded in February 2014 in Ghana.

• All 28 EU member states and 13 of the 16 ECOWAS member states signed the EPA in December 2014. The Gambia, Mauritania and Nigeria have not yet signed. All countries must sign before ratification can begin. EPA can only come into force only after ratification (not signature). The question here why has Nigeria not signed the EPA agreement in spite of the varied overtures to the Government on same?

1:7 EU-Nigeria Trade Relationship-Facts and Figures
• The size of EU’s Foreign Direct Investment (FDI) in the country grew from 25 billion Euros in 2011 to 30 billion Euros in 2013, underscoring the robust economic relations between Nigeria – arguably Africa’s largest economy – and the 28-member EU.
• In 2014, the trade volume between Nigeria and the European Union (EU) stood at 40 billion Euros.
• And by 2016, Nigeria and European Union (EU) member states stood at 19.9 billion Euros (N8.6 Trillion) A more escalated submission on same shall be provided shortly.

1:8 Empirical Justifications
Conceptual arguments are required in our quest to interrogating and justifying valid arguments on it. A review of related literature on the subject matter becomes imperative with a view to aggregating empirical submissions as backup for the justification of the EPA signatures or otherwise. We are quick to observe here that few studies exist on same and could not interrogate further due to time constraint. No doubt that varied strands had emerged on the 6 discourse and most importantly on the implications of the EPA-reciprocity (FTA) on Trade, Welfare and Revenue on the participating counties in general and Nigeria in particular while also recognizing the non-discrimination Trade posture of the WTO.

Balassa (1974) summed it all when he opined that “while it is clear that some Countries will experience increasing growth from reciprocal trade, there is the possibility that others may probably lose some.”
Busse and Grossman (2007) applied a differentiated product partial equilibrium model to analyse the trade and revenue effects of the EU-ECOWAS EPA. They concluded that the (static) trade effects are quite high (imports from the EU increase by over 20 per cent for some products in some countries) although trade creation dominates trade diversion, so the welfare effect is positive for all countries. However, while revenue losses of 4 to 9 per cent are the norm, some countries face much higher losses.

Karingi et al(2005) adopted a combination of general and partial equilibrium modeling techniques and concluded that the likely revenue and adjustment will be costly for African countries. However, their estimate of welfare effects is based on consumption effects only, so they found welfare gains for all countries.

In a more likely manner, Epiphanes A (2006) analyses the effects of implementation of EPAs on income distribution and poverty in Benin using a micro-simulated computable general equilibrium model. He opined that, the impact of complete abolition of duties and taxes on imports varied starkly according to the mode of adjustment used to compensate for the losses in revenues. While the institution of a compensatory tax was beneficial for the households outside the city of Cotonou, the reduction in public spending was beneficial for those living within it. He pointed out that the abolition measure, irrespective of the adjustment mode, had little effect on income, because the effect on well-being and the poverty situation were rather due to price fluctuations.

McKay et al (2005) applied the partial equilibrium on the East Africa community and concluded that although the welfare effects (excluding revenue loses) are small, whether positive or negative, there are short-run adjustment costs and potentially large revenue losses. They find a negative short-run welfare effect on Tanzania (because the trade diversion effect from the rest of the world dominates) but a small positive shortrun effect for Uganda (because the consumption gain dominates and the increase in imports from the EU displaces relatively inefficient imports from Kenya)…….

Findings also revealed that, varied commissioned empirical studies on the EPA impact on the Nigeria economy in particular on the aforesaid variables were known and adequately explored prior to negotiations. 1:9 Empirical Findings Summary

1:9 Empirical Findings Summary
• It is affirmed by the forgoing empirical submissions, that there are potential costs to ACP countries through reciprocity as they are required to grant tariff-free access to imports from the EU. It is anticipated that such opening up to import 7 competition from the EU by the ACP will displace domestic production; it is not obviously the case that there will be adverse effects.

• That, the welfare impact of import liberalization 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 and how best to mitigate against it
• That an enhanced Trade creation effects should tickle down the economies of the region with its attendants multiplier effects to cushion the Trade diversion effects in the longrun and eliminating a foreseeable “Immisterising growth”.

• However, ACP countries have at least 10 years to phase in tariff elimination, and even then can continue to exclude a range of designated ‘sensitive products’ (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.
• A disaggregated Product level analysis suffices.

2:0 What EPA is supposed to bring to the Table?
• Advancement of the competitiveness of the sub-region’s economic segments
• Investors from EU countries see Nigeria as investors’ haven and thus need for FDI and related trade expansion.
• The removal of all its export subsidies to the West African market is meant to boost the regions competitiveness efforts

• Explore opportunities available in Nigeria to diversify exports, • The EPA is expected to Increase foreign exchange inflows via FDIs incursion based on the terms of the agreement.
• The EPA should strengthen EU-Nigeria business relations through identification of opportunities of partnership
• EPA will provide duty-free and quota-free access to a market for Nigeria’s exports; not just any market, but EU’s single market of 500 million people, which is the world’s highest.
• The EPA Development Program (EPADP) Fund of the EU shall provide €6.5 billion, about N1.4 trillion development funds for Nigeria and other West African countries to support infrastructure project towards Technical Progress

• Follow-up to the aforesaid, the fund will help companies here in Nigeria to meet international health, safety and environmental standards that are vital for access to world market while also enhancing its competitiveness.
• The agreement supports Customs authority’s modernization and procedures reforms to allow for ease of doing business across the board and reduce cross border bottlenecks.
• The EU-EPA should also provide for trade-related policy reform commitments covering trade facilitation, investment, and competition policy and government procurement. If implemented properly these could enhance the business environment in ACP countries, attracting investment and promoting massive industrial output and related advantages including comparative advantage boosting.

• The EPA should boost and enhance the regional economic cooperation and Integration which is a precursor and the attendant benefits therein.
• The preferential access to the EU is less restrictive: all ACP countries Should have tariff-free access to the EU for almost all products; this should be available once the agreements are in place, and restrictions, such as Rules of Origin requirements, should be less than previously adopted
• EPAs offer potential benefits to ACP countries beyond what was available under Lome conventions In principle.
• Provide for Economies of scale, price equalization in the Longrun, Technical Progress in tune with the New trade theories thinking.
• There are Provisions in the Agreement for the Capacity building in the private sector and civil society which should translate to more robust trade relations.

2:1 Way forward
• Enhanced export promotion strategy to increased export in other to maximally explore the EPA benefits
• Quality assurance certification and enhancement for increased product competitiveness
• Enhanced Competitiveness strategy on a continual and sustainable basis in addition to products enhancements test

• Realignment and harmonization of some tariff lines that may be in-conflict with the EPA for efficiency and mitigation of possible loss towards an optimum tariff regime. Some of the items include bottled water, agricultural products including palm oil, vehicles, oil derivatives and chemical products such as fertilizers, worked wood, paper products and light industrial products that are not optimally produced. Revisit sensitive tariff lines for enhanced production and competiveness

• Revisit the time line for the EPA life of 20years to alleviate the fears of possible second slavery and loss of economic sovereignty. It could be structured on a renewable 5years stretch subject to a period review. • Massive infrastructural development to enhance industrial output and optimal production regime and cost efficiency
• Liberal Government and institutional support policy to enhance production and boost competiveness

• Diversification strategy pursued with vigor and boost comparative advantage
• Maximally utilizing the support fund to create value and wealth in the production processes cut across critical sectors of the economy.,
• Enhanced and sustained advocacy on EPA in a simple language for the understanding of the SMEs and other key stakeholder s on the normative and the positive aspects of the subject matter.

• The EU should design a further Compensatory modeling in the Short run to capture losses from Customs revenue and for fiscal sustainability in addition to related fiscal and Tax reforms.
• Realignment with country specific situation by the EU for specific provision in line with the WTO provisions and country comparative advantages and disadvantages.
• With enhanced production base and appropriate technological input, manufacturer will be able to compete and produce items that are competitive for export and ready to go for market competitions inconformity with the Gap theory framework and while addressing related and national interest matters.

• Government should conduct more assessment to identify sensitive HS codes tariffs for review were applicable in other to forge ahead with the EPA signatures
• It is imperative that the Medium to Long run should provide an ample opportunity for the maximization of the full potentials of the EPA while the immediate ST requires proper planning including on how best to mitigating exposures relating to same for the future and to possible avoid retaliatory actions from the other end.

• Stakeholder’s coordination and setting-up of contact groups across board to facilitate the realization of it is imperative.
• The Ministry of Trade and Industry should take full ownership of the EPA Processes ad lead discourse on it in other to reassure the Manufactures and others in-conjunction with the ECOWAS secretariat of commitment to same. The creation of the office of Trade Agreements by the MOTI is line in the right direction.
• Consistent Empirical Research on EPA is desired in other to keep all parties informed of the On-going Trend and Developments and for Policy advisory.
• Political Will and Political solution may be desired for a final push of the signature.

2:2 CONCLUSIONS

Should Nigeria refuses to sign the EPA , it then suggest that she might have to export to the EU under the Generalized Systems of Preference or the GSP+ or as the case may be which might not be as rewarding as the EPA while reverting to status quo. Nigeria does not qualify for further rebate as an Non- LDC status country. Nigeria will need to tap into the full potentials provided by the EPA for her to maximally enjoy the full blown benefits contained therein the FTA.

Coordinating the Major Stakeholders and key actors towards the realization of EPA signature is a task that must be pursued with vigor and expeditiously. 10 Finally, it is expected that signing the EU-EPA should be bring tremendous advantages to Nigeria cut across all sectors of the economy “All things being equal” while efforts should be made to mitigate loses that might arise from same at the immediate run and while also tapping maximally into the palliatives provided by the EU.

2:3 REFERENCES
Balassa, B. (1974), ‘Trade creation and trade diversion in the European Common Market: An appraisal of the evidence’, Manchester School, vol. 42, no. 1: 93-135. Journal of Development Studies, Vol.43, no. 5, pp. 787–811. Commission for Africa (2005). Busse, M. and H. Grossman (2007), ‘The Trade and Fiscal Impact of EU/ACP Economic Partnership Agreements on West African Countries’, Journal of Development Studies, Vol. 43, no. 5, pp. 787–811. McKay, A., C. Milner and O. Morrissey (2005), ‘Some Simple Analytics of the Welfare Effects of EU-ACP Economic Partnership Agreements’, Journal of African Economies, vol. 14, no. 3: 327-358. Pearson, M. (2007), ‘Agreeing EPA Rules of Origin: A Strategy Unfolds’, Trade Negotiations Insights, vol. 6, no. 4 (July-August): 6-8 Epiphanes A (2006) “Economic partnership agreement and poverty in Benin: An analysis using a CGE model based on the principle of micro-simulation”. Working Document, PEP, MPIA, Network Paper Session, AddisAbaba, Ethiopia. Femi Badejo ETAL- A Time series analysis of the pattern of Nigeria –EU Trade in Journal of Economic Studies,2001 Femi Badejo – Informal Trade review in ECOWAS-Inter-Trade Journal ,2006