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Insight from the Journal of Common Market Studies

The jury is still out on the Economic Partnership Agreements

The negotiations and implementation of the Economic Partnership Agreements (EPAs) between the European Union (EU) and the 79 countries forming the Organisation of the African, Caribbean and Pacific States (OACPS) – a group of developing countries largely sharing a colonial past with EU members – were conflict-ridden from the beginning. Transforming a decades-long system of unilateral tariff preferences into quasi-reciprocal trade agreements, at the heart of controversies are the potentially adverse effects of the EPAs inflicted on African, Caribbean and Pacific (ACP) countries. In our recently published article we explore this allegation by providing an early ex-post assessment of the EPAs’ effects on two-way trade flows between the European Union and the ACP countries. An empirical assessment is key to inform the heated discussions on EPAs and EU-ACP trade relations and to also shed new light on the debate on the European Union as a potentially normative trade power which uses its economic strength to advance non-trade objectives such as sustainable development.

The European Union and the ACP countries agreed to negotiate several EPAs in the context of reforming their trade relations under the 2000 Cotonou Partnership Agreement. Conserving the existing tariff-free access of ACP exports to the EU market, EPAs entail tariff concessions on around 80 percent of trade from ACP countries in order to make bilateral trading conditions compliant with the rules of the World Trade Organization. To date, seven EPAs are under provisional application between the European Union and 32 ACP partner countries.

Needs time, takes time

The EPAs differ not only by regional scope and year of entry, but also by the depth and speed of their liberalisation processes. The EU-CARIFORUM agreement, for instance, was concluded several years ahead of the other EPAs in 2008, and partial fulfilment of tariff commitments has been underway since 2010. By contrast, neither Ghana nor Côte d’Ivoire have started liberalising their import markets in the course of their respective interim EPAs. Despite these differences, a common feature across EPAs is that ACP countries are granted long implementation periods (up to 25 years) for their tariff reductions, to smooth the liberalisation process and allow for the development of domestic industries. As mechanisms to provide ACP countries with the policy space to support industrialisation processes, they are also allowed to temporarily exclude certain products from liberalisation, protect infant industries and use export subsidies.

The EPAs aim at promoting trade while also fostering sustainable development and regional integration, all of which are supported by accompanying Aid for Trade. Yet, the overall objective of the EPAs as “trade and development” agreements is under substantial discussion. In particular, the relationship between trade and development remains controversial. Not all ACP states concur with the European Commission’s perspective on EPAs as promising instruments to promote development. One recurring concern is that (premature) trade liberalisation endangers domestic industries and, more generally, industrialisation efforts through unregulated exposure to more advanced European competitors.

What is more, with the Lomé Conventions coming to an end, former ACP beneficiaries were given the choice to either conclude EPAs or to be integrated into the European Union’s Generalized System of Preferences or the Everything But Arms initiative, depending on their status of economic development. While both the Lomé Conventions and Everything But Arms preferences guarantee duty-free and quota-free access to EU markets, the Generalized System of Preferences stipulates the removal of duties on only two thirds of tariff lines.

Because EPA negotiations are divided by geographical rather than developmental aspects, discord prevails over concord in most African EPA regions. In West Africa, for instance, Nigeria has been blocking region-wide EPA negotiations because the country sees a reciprocal trade agreement with the European Union as being cross with its own industrialisation strategy. On the other hand, Ghana and Côte d’Ivoire, fearing a significant degradation in access to EU markets under the Generalized System of Preferences scheme, therefore urged to conclude individual (interim) EPAs. Fragmentation is present also in Central Africa where Cameroon rushed ahead with an individual EPA with the same motive, since the majority of fellow members are not keen on engaging in (near) reciprocity with the European Union as they qualify for unrestricted EU market access under the Everything But Arms scheme.

Early warning or too early to say?

The trade effects of EPAs have previously been estimated in a number of studies using ex-ante methods to simulate likely future patterns. Overall and as expected, these studies have in common that they predict larger increases of exports from the European Union to EPA partner countries than vice versa. Given their short lifetime to date, the scope for using ex-post empirical methods to analyse EPAs’ actual effects on trade has until now been very limited and constrained by a relatively short treatment period.

Our article provides early ex-post empirical evidence on the trade effects of the provisionally applied EPAs, thereby generating some important initial insights to the effect that some of the developmental concerns regarding EPAs may be justified. While we do not find any general EPA effect, our findings suggest that specific agreements do affect trade flows. While the EU-CARIFORUM agreement, if anything, decreased imports from the European Union, the agreements with African partners tended to raise respective imports. More specifically, our findings suggest an increase in overall EU exports to the members of the Southern African Development Community EPA. For the EU’s agricultural exports, we find statistically significant increases to the partner countries in the Southern African Development Community, and those in Eastern and Southern Africa and the Pacific region. In the area of manufactures trade, we find a reduction of exports from partner countries in Eastern and Southern Africa and the Southern African Development Community to the EU.

Trade and development – ‘win-win’ or not?

Our findings do not support claims about development-friendly EPAs in the sense of expanding ACP exports to the European Union and thereby generating ‘win-win’ options in former colonies.  At the same time, this does not necessarily imply that EPAs are detrimental to development in partner countries. More precisely, on the import side, increased quantities at cheaper prices may not only pose a threat to domestic industries but also generate welfare gains in ACP countries. This is true in particular with regard to agricultural imports when considering a temporary shortage in domestic (food) supply. Furthermore, increased imports of intermediary products may help export-oriented companies to increase their competitiveness in regional and global value chains. These potential upsides have, however, to be carefully evaluated against the disruptive effects on domestic markets and industrialisation prospects that our findings imply, especially in the agricultural sector in Africa.

Overall, our findings suggest that positive developmental impacts of the EPAs are unlikely to come with unleashing market forces, but instead require continuous EU support to prepare ACP markets for new export and import conditions. Similarly, our empirical findings suggest that the trade effects arising from a potential future bi-continental free trade area encompassing whole Africa and the European Union could, at least in the short-run, be unequally distributed.

Our early assessment of the EPA effects merits attention in light of the importance of monitoring future implications of these agreements. At the same time, it is still too early for any final verdict on the EPAs’ effects. Future research is needed to investigate the mid- and long-term consequences of these agreements.

 

This blog post draws on the JCMS article “The trade effects of the Economic Partnership Agreements between the European Union and the African, Caribbean and Pacific Group of States: Early empirical insights from panel data”.

 


Clara Brandi is Head of Research Programme at the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) in Bonn, Germany, and a lecturer at the University of Duisburg-Essen. She works on global economic governance and sustainable development, with a focus on international trade.

Twitter: @ClaraBrandi.

 

 

Axel Berger is a Senior Researcher at the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) in  Bonn, Germany. He works on the design, effects and diffusion patterns of international trade and investment agreements, with a focus on emerging markets and developing countries.

Twitter: @ax_berger.

 

 

Jakob Schwab is an associate researcher at the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) in  Bonn, Germany. He researches on various aspects of North-South globalization, among them foreign direct investment, trade and the environment, tax cooperation and distributional issues.

 

 

 

Frederik Stender is a post-doctoral researcher at the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) in Bonn, Germany. His research focusses on international trade policy, including trade agreements and non-tariff measures.



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