Economic Partnership Agreements: Negotiating Issues and Strategies

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Economic Partnership AgreementsNegotiating
Issues and Strategies
Richard Newfarmer World Bank
May, 2006
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Key Messages

• A poorly structured EPA agreement could undermine
  African development, so negotiators should enter
  discussions with eyes wide open.
• Nonetheless, Economic Partnership Agreements
  (EPAs) also provide an opportunity to promote
  open regional integration and trade growth
• But to succeed, negotiators have to develop clear
  objectives and well thought-out negotiating
  strategies.

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Positive EPA results are not automatic consider
risks of a bad EPA

• Agreements could end up providing little new
  access to EU and governments may not use
  opportunity to adopt reforms
• because EU negotiators focus excessively on
  their own market access demands and defensive
  interests rather than development
• because SSA negotiators sign agreements without
  coming to consensus on their internal reforms
• Aid could be insufficient to provide to elicit
  supply response.
• Result
• hub and spoke trade relations, with negligible
  stimulus to regional integration
• possible income losses stemming from revenue
  losses without compensating internal and external
  trade gains
• if services not MFN, entrenchment of monopolistic
  service providers, either from the EU or state
  owned companies

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So why engage in negotiations on EPAs? Possible
reasons
1. Learning to play the global game North-south
FTAs agreements are fast undermining any SSA
privileged access to northern markets
Percent of World Trade Covered
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So why engage in negotiations on EPAs?
2. Better than the alternative?

• No deal at all End to Cotonou access but not
  end of the world
• LDCs revert to EBA
• with some loss of preferential market access
  unless better rules of origin could be negotiated
• Non-LDCs revert to GSP
• with some loss of preferential access (but not
  much for most)
• Uncertain impact on EU aid flows

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How valuable are Cotonou preferences?
ACP Africa Non-LDCs Value of Pref's Requested of Total Export when GSP rate only applied (a) Value of Pref's Requested of Total Export when ACP GSP rate applied (b) Change (a)-(b)
SWAZILAND 0.6 39.7 -39.0
MAURITIUS 1.2 21.3 -20.2
SEYCHELLES 0.6 16.6 -16.0
NAMIBIA 1.3 6.9 -5.6
ZIMBABWE 1.8 7.1 -5.3
COTE DIVOIRE 0.8 5.5 -4.8
CAMEROON 0.4 4.3 -4.0
KENYA 1.5 5.1 -3.6
GHANA 1.0 3.0 -2.1
BOTSWANA 0.3 2.1 -1.8
CONGO 0.1 1.4 -1.3
GABON 0.7 1.0 -0.3
NIGERIA 0.2 0.2 -0.1
But GSP potentially inferior to EPAs depending on
rules of origin, exclusions, and speed of
diversification of SSA Nonetheless, SSA is in
strong bargaining position because alternative to
EPA is not so bad.
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3. The most important reason To harness EPA
negotiations for more rapid internal and external
reforms to promote trade and growth
So why engage in negotiations on EPAs?
Annual GDP growth, 1991/3 2001/3 Non-oil
African Countries
Note SSA excluding Angola, Congo (Brazzaville),
Equatorial Guinea, and Nigeria
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Exports to the world spur regional trade
Regional trade as share of GDP
The most integrated regions also have the lowest
MFN tariffs and lowest costs of trading
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To achieve trade goals, SSA negotiators have to
develop a clear negotiating objectives and
strategy
First, consider objectives

• To leverage national and regional reforms
• Tariffs, transportation, and border barriers
• Tax structures
• Services
• Investment climate
• To leverage changes in EU policies
• Rules of origin
• Other market access
• Offensive interests in rules agenda

Lets elaborate on the national and regional
objectives
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Use EPAs to phase down high MFN tariffs, NTBs and
transport barriers
Because high border barriers undermine
competitivenes, risk trade diversion, and impede
intra-African trade
Average MFN weighted tariffs
Note EPA Tariffs are import-weighted at the
country level, then weighted by GDP at EPA
averages Source UN TRAINS, accessed through WITS
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Use EPA to motivate convergence of external
tariff
Consider the case of ECOWAS
Average tariffs
Nigeria 30.0
Sierra Leone 14.9
Ghana 13.1
The Gambia 12.7
UEMOA(Benin, Burkina Faso, Cote d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal, Togo) 12.0
Guinea 6.5
Mauritania (non affiliated) 10.9
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Use EPAs to reduce trade costs in SSA for both
imports
Days through ports to warehouse
Source World Bank, Doing Business 2006
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Use EPAs to reduce trade costs in SSA for both
imports and exports
Signatures required to export
Source World Bank, Doing Business 2006
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Use EPAs to leverage reforms in tax policy
challenge and opportunity

• Challenge
• Fiscal revenues could fall 2-20 if all tariffs
  removed on EU imports

Revenue losses as percent of fiscal revenues
Sources Khandelwal (2004), Busse et al., own
calculations
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Use EPAs to leverage reforms in tax policy
challenge and opportunity

• Challenge
• Fiscal revenues could fall 2-20 if all tariffs
  removed on EU imports

• Opportunity
• Replace with more efficient taxes (VAT, etc.)
• Harmonize tax structures
• Improve collection efficiency - currently as low
  as 40 in some countries

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Use EPAs to improve regional investment climate

• Liberalize transport, telecoms, and other
  trade-related services
• Regional regulatory frameworks e.g., power,
  air transport
• Regional infrastructure investments

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From objectives to negotiating strategy
An illustration

• Propose program of phased variable geometry for
  MFN CET consistent with regional development
  programs, e.g.
• Phase 1 2 Eliminate all internal barriers in
  CU/FTA
• Phase 1-2 Bring down MFN peak tariffs to average
  to promote intra-African and other efficient
  trade
• Phase 2-3 Bring down average MFN average levels
  to East Asian levels
• Phase 3 Allow EU duty free access to EPA
  markets
• Propose less restrictive rules of origin (e.g.,
  SSA-wide)
• Integrate trade facilitation programs to reduce
  costs into agreement

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From objectives to negotiating strategy
An illustration

• Request program of technical and financial
  assistance for trade facilitation, SPSS, and
  supply side measures (e.g., infrastructure)
• Formulate and propose program of services
  liberalization in own regional interest on MFN
  basis
• Phase 1 Open services where markets discipline
  sellers (e.g, retailing, professional services)
• Phase 2 3 Open services where regulations are
  required (e.g, telecoms, finance)
• Offensive interests better access on temporary
  movement of persons (mode 4)
• Make no concessions on investment, competition
  and IPR beyond what is in EU- Mexico or EU-So.
  Africa arrangement develop offensive positions
  (e.g, information exchange)

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Conclusion

• EPAs represent both pitfalls and opportunities
• SSA negotiators are in a potentially strong
  bargaining position
• but to realize opportunities they have to have
  clear objectives and strategies especially
  about ways to use EPAs to further regional
  integration.

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References and further reading available at
www.worldbank.org/trade

• Paul Brenton Preferences for Africa How Much
  are They Worth? in Trade, Doha, and Development
  A Window into the Issues R. Newfarmer (ed.)
  World Bank Washington
• Hinkle, Lawrence and Richard S. Newfarmer Risks
  and Rewards of Regional Trading Arrangements in
  Africa Economic Partnership Agreements (EPAs)
  Between the EU and SSA World Bank Working Paper
  June, 2005
• Hinkle, Lawarence, Mombert Hoppe, and R.
  Newfarmer Beyond Cotonou Economic Partnership
  Agreements in Trade, Doha, and Development A
  Window into the Issues R. Newfarmer (ed.) World
  Bank Washington
• World Bank, Global Economic Prospects 2005
  Trade, Regionalism and Development World Bank,
  2004.

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Economic Partnership AgreementsNegotiating
Issues and Strategies
Richard Newfarmer World Bank
May, 2006
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Obtaining pro-development EPAs also requires the
EU to emphasize development

• EU could enhance development outcomes by
• Focusing less on its own access demands and
  instead encouraging MFN access
• Easing rules of origin requirements
• Ensuring MFN access in any services
  liberalization
• Providing sufficient development assistance to
  ensure supply response
• Facilitating variable geometry to support
  home-grown programs of regional integration