EFFECTS OF ECONOMIC PARTNERSHIP AGREEMENTS ON AGRICULTURAL TRADE BETWEEN SMALL AND LARGE ECOWAS ECONOMIES AND THE EU
Smart Simulation Partial Equilibrium Methodology was employed in this study to determine Effects of Economic Partnership Agreements on Agricultural trade between small and large ECOWAS economies and the EU. Specifically, the study looked at the patterns of imports of sample of two ECOWAS countries the Gambia and Nigeria; the potential trade effects on the selected countries embarking on free trade under economic partnership agreement scenario; the potential revenue effects on the selected countries under the same platform; the potential welfare effects on the selected countries under the same platform; the sensitive products based on source and volume of import criteria. WITS provided access to international trade and protection related data and offered built-in-analytical tools for the study. Results of the analysis on patterns of import of the selected ECOWAS countries showed that the Gambia’s highest ($62158.328 million) proportion of imports came from ROW, followed by imports from the EU ($ 13071.561 million) and least ($1372.053 million) imports from ECOWAS region. However, it was observed that the highest ($28493.34 million) product group imported by the Gambia was product group 10 (cereals) at 45.840% from ROW. The results on patterns of agricultural imports of Nigeria showed that Nigeria’s highest ($1817981.912 million) imports on agricultural products came from ROW; followed by imports from EU ($982718.781 million) and least ($45635.089 million) imports from ECOWAS region. It was further observed that product group 10(cereals) was the highest ($699,878.321million) product group Nigeria imports which came from ROW at 38.50%. Result on Potential Trade Effect of EPAs between economies of ECOWAS countries studied and the EU, showed that the EU beneficiary countries (ECOWAS) were seen to gain $35926.855 million in “Trade Creation” and $15081.5191 million in “Trade Diversion”, while Total Trade Effect amounts to $20845.0309 million in Product groups studied as obtained from SMART Simulation Partial Equilibrium 2014. Result on Potential Revenue Effect of the two sample ECOWAS countries going into EPAs, showed total likely revenue losses (-$17223.665 million) for the two sampled countries on the product groups studied, with Nigeria recording higher ( -$16666.638 million) loss and Gambia recording least ( -$557.027). Result on Potential welfare effect of EPAs between the economies of ECOWAS countries studied and EU showed likely welfare gain ($2326.905 million) for the consumers in all the agricultural products studied. With Nigeria recording higher welfare gain ($2238.793million) than the Gambia ($88.112 million) in all the product groups studied. Result on sensitive products based on source and volume import criteria, showed that product group 3, 4 and 15 were identified to contain the potential sensitive products for the ECOWAS countries studied and should be exempted from EPAs as identified by the study. Base on the findings of this study, the following recommendations were made: The trade effect showed that ECOWAS countries are likely to record greater trade creation effect than trade diversion effect in favour ECOWAS countries. The on-going Economic partnership Agreements (EPAs) negotiations between ECOWAS and the EU need to be concluded and implemented based on this ground but measures should be taken to guide the infant industries to protect them from fazing off from production due to cheaper goods flooding ECOWAS markets from EU market.There is need for fiscal reforms to replace EPAs induced tariff revenue losses. The fiscal reforms should entail shifting revenue from trade to non-trade tax sources and improving the efficiency of fiscal revenue collecting policies. Examples of non-tariff instruments that may assume greater importance in revenue generation include value-added tax (VAT) and excise taxes charged on imports from the EU. If ECOWAS countries can adapt this measure, EPAs should be signed since the lost revenue can be reclaimed via these means. Agricultural product groups 3, 4 and 15 should be the likely sensitive products for the ECOWAS countries and should be exempted from EPAs as identified in this study.
TABLE OF CONTENTS
Title page i
Table of contents v
List of tables vii
List of figures viii
CHAPTER ONE: INTRODUCTION 1
1.1 Background of the Study 1
1.2 Problem Statement 5
1.3 Objectives of the Study 7
1.4 Study Hypotheses 7
1.5 Justification of the Study 7
1.6 Limitations of the Study 8
CHAPTER TWO: LITERATURE REVIEW 9
2.1 The Status of Economic Partnership Agreements (EPAs) Negotiations 9
2.2 Trade Effects (Creation or Diversion) 10
2.3 Revenue Effects 13
2.4 Welfare Effects 14
2.5 ECOWAS Regional Block and Trade Policies 16
2.6 Importance of International Agricultural Trade 18
2.7 Empirical Literature 19
2.8 Theoretical Framework 22
2.8.1 Heckscher–Ohlin theorem (HO) 23
2.9 Analytical Framework 24
2.9.1 Smart Model for Partial Equilibrium Simulation Analysis 27
CHAPTER THREE: RESEARCH METHODOLOGY 32
3.1 The Study Area 32
3.2 Sampling Procedure 33
3.3 Data Collection 33
3.4 Data Analysis 34
3.4.1 Model Specification for Objective 2 34
3.4.2 Model Specification for Objective 3 36
3.4.3 Model Specification for Objective 4 37
CHAPTER FOUR: RESULTS AND DISCUSSION 38
4.1 Patterns of Imports of Sample of small and large economies of ECOWAS Countries (the Gambia and Nigeria). 39
4.2: Potential trade effect of EPAs between ECOWAS (the Gambia and Nigeria) and EU on Agricultural products. 41
4.3: Potential Revenue Effect of EPAs between ECOWAS (The Gambia and Nigeria) and the EU 44
4.4: Potential Welfare Effect of EPAs between ECOWAS (The Gambia and Nigeria) and the EU 46
4.5 Agricultural Sensitive Products for the Selected Small and LargeECOWAS Economies (the Gambia and Nigeria). 48
CHAPTER FIVE: SUMMARY, CONCLUSIONS AND POLICY IMPLICATIONS 50
5.1 Summary 50
5.2 Conclusion 51
5.3 Recommendations 53
5.4 Contributions to Knowledge 53
5.5 Areas for Future Research 54
1.1 Background of the Study
The Economic Partnership Agreements (EPAs) between Economic Community of West African States (ECOWAS) and the European Union (EU) are aimed at promoting trade between the two groupings. The expectations are that through trade deepened integration, development in addition to sustainable growth and poverty reduction would evolve in ECOWAS sub region. The EPAs are set out to help West African countries integrate and as well into the world economy and share in the opportunities offered within and outside the sub-region by globalization. Also, it hopes to provide scope for wide-ranging trade co-operation on areas such that services, and standards acting as drivers of change to kick-start reform and help to strengthen rule of law in the economic field, thereby attracting foreign direct investment (FDI), to help create a "virtuous circle" of growth (ECOWAS Statistical Bulletin,2013).
However, with the exception of about 15 Caribbean states that signed a regional economic partnership agreement (EPA), negotiations with all the other countries have continued. To preserve their access to the EU market after 2007, about 20 countries concluded interim trade agreements. This light version of the original EPAs has not put an end to the negotiations as some of these countries would like to see the terms of the trade agreement revised, or their scope extended, and concluded at regional levels, to preserve their regional integration process (ECDPM, 2012). In this regards, one wonders how Ivory Coast and Ghana each could have a bilateral free trade agreement with the EU. This is because opening their domestic market to European products, while their West African partners, with whom they form a customs union, keep protecting their market from the EU would, very logical lead to EU goods flooding the whole regional markets via these two countries, rendering the West African customs union and further integration process totally ineffective. This scenario which seems to be unique to West Africa is the same in several other African regions (Stevens, 2006).
Recently, Europe threatened to withdraw the special trade preferences by 2014 to countries not showing commitment to proceed with their interim EPA. Europe's objective hopefully is to press for the conclusion of broader trade deals at regional level that would replace these awkward and controversial interim EPAs. In an apparently generous move, the European parliament's trade committee called on decision-makers to extend this deadline to 2016. The identification of regionally traded products in a bid to sustaining them through joint and diversified action plan by the region is very necessary in aiding the negotiations through listing of products where trade exist among ECOWAS for which the EU are suppliers. These should be exempted from tariff removal (McKay, Milner & Morrissey, 2005).
EPAs date back to the signing of Cotonou Agreements in 2000 and are "tailor-made" to suit specific regional circumstances. In 2002 when the EU opened free trade negotiation with 78 African, Caribbean and Pacific countries, it promised to go beyond conventional free-trade agreements, focusing on ECOWAS among other ACP countries' development and taking into account their socio-economic circumstances included co-operation and assistance to aid ECOWAS implement the Agreements. The opening up of the EU markets fully and immediately (unilaterally by the EU since 1st January 2008), and allowing ECOWAS 15 to 25 years to open up to EU imports while providing protection for the sensitive 20% of imports are also major aspects of EPAs ( Busse & Grossman ,2007).
However, Chris, Morrissey and Evious (2008) stated that the introduction of reciprocity under an EPA will tend to threaten intra-regional trade in ECOWAS region for a number of reasons. There is a direct displacement threat to the traded products existing among regional suppliers by the elimination of the external tariff protection vis-a-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 ECOWAS 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, ECOWAS regions in general may benefit by treating products traded within the region as sensitive for EPAs, hence avoiding or postponing any reductions on tariffs on imports from the EU. If EPAs promote increased ECOWAS exports to the EU there is potential to benefit from spill-over (Onogwu, & Arene, 2013).
The results reported and discussed in many studies are based on a number of ex ante studies of the trade effects of EPAs on various ACP groupings or countries undertaken by the authors thus: - McKay, Milner and Morrissey (2005) analyzed the welfare impacts on the East African Community (EAC);Greenaway and Milner (2006) covered CARICOM and Milner, Morrissey and Zgovu (2008) considered aspects of impact and adjustment costs for the EAC and. Morrissey and Zgovu (2011) focused on agriculture and total respective imports for a large sample of ECOWAS countries to compare the welfare effects of a full liberalization with a scenario that excluded products traded intra-regionally. These studies measured the regional trade displacement effects of the liberalization of tariffs on imports from the EU given their areas of study.
By far, one of the studies closer to this research intention was the study by Busse, et al (2004). Though their study was on' agricultural products it was silent over trade classification and product details. Again, their study was silent at product sections levels hence on the listing of products traded among ECOWAS member nations within the region for which EU are suppliers (sensitive products) requiring sustenance. This can be used as a strong bargaining factor in EPAs between ECOWAS and the EU. Besides, other authors have not, however, explored in many details the associated trade, tariff revenue and welfare effects of EPAs on neither intra-ECOWAS trade, nor have they explicitly considered the source and volume of imports of traded products as a measure for sensitive products listing and criterion in designing a reduction of adverse intra-ECOWAS trade development effects. This proposal aims at filling these gaps.
The ECOWAS countries are involved in trade with countries within and outside the region. Intra-ECOWAS trade (as percent of total export and import value, 2007-2013) is represented in figure 1. While figure 2 shows the ECOWAS trade with outside the region and they include the EU, NAFTA, SADC ,APEC, and OECD .they account for an average of 12.8,18.1,6.3,21.4 and 35.8 per cent within the same period respectively, as the value of total exports; while for imports the SADC,NAFTA, EU, APEC and OECD account for 1.7,5.8,22.6,28.1 and 38.2 per cent, respectively
Figure 1.1: Intra-ECOWAS trade (as % of total exports and imports)
(Extracted from ITC (Trade map), 2014)
The weak supply capacity of ECOWAS on European markets has made the old preferential system something of an irrelevance. The recurrent issue of the competitive nature of the ECOWAS economies remains fundamental, whether in the case of a system based on privileged market access, or within a more elaborate and contractual framework of trade relations such as the one foreseen in the future EPAs. Unless the ECOWAS become markedly more competitive, able to offer products which can face international competition, including on their own markets, and to surmount all kinds of non-tariff constraints, the EPAs may well turn out to be of little benefit to the region. But competitiveness is itself largely dependent on the regional characteristics, economic environment, the performance of the private sector investments, production and marketing capacity aimed at high value-added products, and the size of captive markets, etc. The future regional agreements must be based on all these interactions, or at the same time supposed to stimulate them, according to the Cotonou Agreement. In combination with other trade performance vectors, the issue of competitiveness obviously raises the question of development, which will need to be integrated into these new trade agreements. Without this, the agreements may not deliver efficiently (Babatunde, 2006).
It has been argued that in the African interim EPAs, regional integration has in fact been undermined. In the case of Central and West Africa, by adoption of bilateral EPAs with individual countries; in the case of SADC by tariff liberalization schedules that do not respect the obligation of SADC countries to maintain a common external tariff and by the different treatment for South Africa; in the case of ESA, by the separate schedules each of the countries has attached to the agreement; and in the case of EAC by adopting tariff elimination schedules inconsistently with the Customs Union Protocol which requires the application of the three-band common external tariff to all imported products (ATPC, 2008).
1.2 Problem Statement
Despite nearly three decades of privileged access to the EU market, ECOWAS trade or economic development seems not to have benefitted from it as intended. In this regards, preferential access has failed to boost local economies and stimulate growth in ECOWAS and ACP countries in general. The ECOWAS countries still export just a few raw materials such as Oil, Coffee, Cocoa or Minerals, which are subject to frequent and severe price fluctuations. Besides, these products exported remain isolated from the rest of the economy since usually hardly do any processing take place and little value is added (Brenton &Ikezuki, 2007).
The objectives of economic and trade cooperation as defined in Article 34 A of the Cotonou Agreement are to foster "the smooth and gradual integration of the ECOWAS countries in general into the world economy thereby promoting their sustainable development and contributing to poverty eradication" (Longo & Sekkat, 2004).
Furthermore, Commission for Africa (2005) noted that ECOWAS share of the EU market has consistently fallen from 7% to 3% of EU imports, while other developing countries that used to be just as poor have increased their sales to the EU over the same period without such generous access to the EU market. On 1 January 2008, the waiver obtained from the WTO at the Doha Ministerial Conference ended and has been replaced by a new framework compatible with WTO rules. In trade terms, the EPAs will almost certainly take the form of free-trade areas between the EU, ECOWAS and the other six ACP geographical regions, the aim being, the progressive, abolition of both tariff and non-tariff obstacles to trade (ECOWAS statistical Bulletin, 2004 ).
Besides, during the structural adjustment program (SAP) era (1986-1993), policies of most ECOWAS member nations were directed at altering and re-aligning aggregate domestic expenditure, specialization, and production patterns to minimize over dependence on imports; enhance non-oil export base and ensure a steady and balanced economic growth. In spite of all these efforts, the possible trade, tariff revenue, and welfare implications of EPAs on intra-ECOWAS trade in major agricultural products traded are not known as to equip ECOWAS policy makers in their negotiation bid towards arriving at EPAs that will accommodate trade and developmental interests of the sub-region. These lingering negotiations seem to have created a lot of resentment and recrimination which have affected Africa's relations with Europe (Onogwu, Arene & Chidebelu, 2011).
It is against this background that this research work addressed the following questions: what are the patterns of imports of sample of the small and large ECOWAS-countries? ; What are the potential trade effects on the selected countries embarking on free trade under economic partnership agreement scenario? ; What are the potential revenue effects on the selected countries under the same platform? ; What are the potential welfare effects on the selected countries under the same platform? ; What are the sensitive products of ECOWAS trade bloc?
1.3 Objectives of the Study
The broad objective of the study was to investigate Effects of Economic Partnership Agreements on Agricultural Trade between Small and Large ECOWAS Economies and the EU. The specific objectives of the study were to:
(i) describe the patterns of imports of sample of the small and large ECOWAS-countries studied ;
(ii) estimate the potential trade effects on the selected countries embarking on free trade under economic partnership agreement scenario;
(iii) estimate the potential revenue effects on the selected countries under the same platform
(iv) estimate the potential welfare effects on the selected countries under the same platform
(v) identify the sensitive products based on the source and volume of import criteria.
1.4 Study Hypotheses
The following hypotheses were tested:
(i) The signing of EPAs by the selected ECOWAS countries will lead to a diversion of Agricultural trade in favour of the EU;
(ii) The effect of EPAs on Agricultural tariff revenue would be negative to the study countries ;
(iii) The welfare effects will be adverse to the study countries.
1.5 Justification of the Study
This proposed study is motivated for three reasons. Firstly, the purpose of international trade policy is to help a nation's international trade run more smoothly, by setting clear standards and goals which can be understood by potential trading partners. In many regions, groups of nations work together to create mutually beneficial trade policies (for an instance, tariff elimination) and accurate estimation of the impact of trade policy on trade flows are important for evaluating economic policy, as in deciding whether to join a free trade area or not. It is evident that one of the major reasons for economic integration is to enhance welfare of the participating countries. And the major channel for achieving welfare benefits is through trade integration as in free trade areas. However, it is not clear what the eventual welfare benefits are from this type of regionalism. Trade patterns might be altered in several ways that might result in trade creation and trade diversion. The former relates to increased trade between the FTA members, while the latter concerns trade between members and non-members. Trade creation will be welfare enhancing, but trade diversion could distort total welfare benefits and even make them negative (Viner, 1950). Hence, estimates on the EU EPAs with ECOWAS Agricultural sector are necessary for evaluating the merits of trade integration in ECOWAS region.
Secondly, establishing a free trade area on agriculture and analyzing its impact on trade is an interesting case study for evaluating international trade theory. Rose and Van Wincoop (2001) gave an extensive overview of trade costs, which entail transportation costs, tariff and non-tariff barriers, and information and transaction costs. Free trade areas obviously decrease tariff and non tariff barriers as well as transaction costs.
Thirdly, earlier studies on the trade impact of free trade areas have produced surprisingly wide range of estimates. Baier and Bergstrand (2007) and Glick and Rose (2002) reported large and positive trade creation effects indicating a doubling of trade or even more. However, using extreme bounds analysis, Faber (2005) conclude that the empirical evidence on the trade-creating effects of regional trade agreements is fragile. In addition, case studies on particular free trade areas show mixed results. In particular, ECOWAS estimation result on its agricultural sector is typically absent. Hence this work will fill the knowledge gap.
1.6 Limitations of the Study
This work faced serious challenges which included:
i challenge on protocols involved before having access to the data from world integrated trade solutions (wits) website. This was overcome by more devotion of time and finance into the analysis.
ii. Data in the website were conglomeration of all products from different sectors, which made it very difficult to extract data for Agricultural products only. This challenge was overcome by more resources input in terms of time and finance to extract and rearrange the data that concern agricultural products only.
iii Due to the volume of the work, resources required and time constraints involved. This work was limited to Agricultural product groups and not on individual agricultural products..