The Daily Observer (Banjul) | Jan 7, 2005

EU-ACP PARTNERSHIP AGREEMENT
Can The Gambia benefit?

By Dr Basil Jones

In the 1970s, the EU unilateral preferential access to its market to sub-saharan Africa and other ACP countries under the Lome convention (I through IV) that did not entail reciprocal preferences. In order, among other things, to bring its trade relations with the ACP countries in line with GATT/WTO commitments, the EU entered into the Cotonou agreement with them in June 2000. This agreement provides for the negotiation of free trade arrangements under the economic partnership agreement to change the existing relationship of unilateral preferential access of ACP countries to EU markets to a new relationship of reciprocal preferential access.

One of the objectives of the EPA process is to promote outward oriented regional integration among the ACP countries and limit the “hub and spoke” effect that bilateral free trade between the EU and individual countries especially given the current EU enlargement. In SSA, the trade blocs chosen for negotiating EPAs are Ecowas, CEMAC, COMESA and SADC. The Gambia’s negotiations under the economic partnership agreement with the EU are being conducted within the Ecowas framework. In Africa, despite the strong political rhetoric supporting integration, regional trade agreements have failed to increase trade, attract foreign direct investment, enhance growth, or achieve convergence among member countries. In fact, Africa as a region has been marginalised in the global economy: it under-trades, and the degree to which it under trades has steadily increased since the 1980s leading to substantial fall in its share of world trade. Reversal of its marginalisation in world trade is essential to accelerate growth, expand employment, and reduce poverty in the region.

Phase 1 of the negotiations
On 27 September 2002, the European Union and the ACP countries officially opened negotiations of economic partnership agreement (EPAs) in brussels. These negotiations, which are to take place over five years, are aimed at redefining the trade regime between the two groups of countries, replacing the system applicable since Lome 1. Because the EPA negotiations are expected to involve reciprocal concessions by both sides, they will provide an opportunity for SSA to negotiate with the EU about trade issues that are important to Africa. Phase one of the negotiations ran from September 2002 through September 2003. In reality, there was little agreements on many key issues between the ACP and the EU and even disagreement within the ACP itself.

Of special importance is the issue of additional financial resources to support the trade liberalisation process in SSA. The ACP group has argued that the financial resources currently available from the European Development Fund are insufficient to support trade liberalisation and expansion, as well as the ACP countries other needs. In response, the EU has stated that the amount of development finance available from it the next 5 years has been set in the Cotonou agreement and is not open for renegotiation.

Phase II
In early October 2003, phase II negotiations were launched with two of the four SSA sub-regions, CEMAC and Ecowas. COMESA is also actively preparing to launch EPA negotiations with the EU. The fear within the ACP is that these two regional EPA negotiations may set precedents, which could adversely affect their own regional negotiations or parallel ACP-wide discussions and weaken the unity of the ACP group and its ability to address common issues.

Thus there is a substantial risk of unsatisfactory development outcomes from multiple negotiations with disparate regional organisations having limited technical capacity and inadequate time to prepare. These risks are aggravated by the simultaneous demands and uncertainties of the Doha WTO trade negotiations.

Why EPA
On 1 January 2008, the waiver obtained from the WTO at the Doha ministerial conference will end and will be replaced by a new framework that must be compatible with WTO rules. In trade terms, the EPAs will almost certainly take the form of free trade areas between the EU and the six ACP geographical regions, the aim being the progressive abolition of both tariff and non-tariff obstacles to trade. Special treatment will continue to be reserved for the poorest ACP least developed countries-LDCs like The Gambia. The Gambia already benefit from the EUs “everything but arms” initiative adopted in 2001, which extends the duty and quota free access to all products originating in LDCs, except arms and ammunition.

The EPAs are both based on and aimed at the process of integration and regional cooperation already embarked upon by the ACP countries, has promoting intra-ACP trade with a view to stimulating their integration into the world economy. Is it reasonable to expect that these objectives can be achieved? Will they be compatible with development needs in the ACP countries? Will the EPAs be sufficiently flexible in their design to enable ACP countries to adapt? Are countries themselves ready for such wide ranging negotiations.

Increased competitiveness
Unless the ACP countries like The Gambia become markedly more competitive, able to offer products which can face international competition, including in their own markets, and to surmount all kinds of non-tariff constrains, the EPAs may well turn out to be of little benefit to The Gambia. But competitiveness is itself dependent on the economic environment, the performance of the private sector, investments and production and marketing capacity aimed at high value-added products.

Although it is generally acknowledged that trade alone cannot solve all development problems, a favourable macro and micro economic framework leaves little doubt over the question of whether in principle economic integration and trade liberalisation in particular generates overall positive welfare effects. Once barrier to cross-border economic activity are lifted, this will usually result in a dynamic combination of efficiency gains increased competition, lower prices, knowledge transfers and ultimately highly economic growth. To yield the benefits of integration certain basic institutional requirement need to be fulfiled. Its success is very much dependent on the adoption of voluntarism, sound, transparent and responsible polices on the part of the governments, in close collaboration with their civil societies.

Scepticism
There are already all kinds of concerns not only in the ACP countries but also in Europe concerning these trade negotiations. Skepticisms have been expressed in several quarters. The end of trade asymmetry will bring about many serious consequences, for which the The Gambia is ill equipped (lowering of customs and budget revenue, competition with imported products, pressures on ACP competitivity). Adjustment costs will have to be measured accurately and be genuinely taken into account. Other observers accuse the EU of wanting to open up the ACP countries’ markets further to european companies and believe that in controlled liberalisation would be damaging to the ACP economies take off, historically made use of trade safeguarding measures to help their economies take off, and that these countries still use concealed protectionism mechanisms that distort the free competition system, as is the case in the agricultural sector. Other analysts believe that the EPAs will inevitably give rise to the risk of division between the ACP countries.

According to them, the unity of the group risks collapsing in the long term and economic disparities could arise even within the ACP regions, because of different trade regimes which would be set up. Moreover, this type of trade negotiation is still highly complex owing to the diversity and the technical nature of the topics under discussion, and requires negotiator of proven ability. According to certain experts, the ACP countries are quite simply not yet ready to meet this challenge, particularly since the timetable for the negotiation looks tight.

Welfare implications
Under the cotonou agreement, the ACP countries (expect the poorest) must grant the EU preferential access. This is likely to hurt the ACP countries overall. From their viewpoint, what matters mainly are transfers to tariff revenues, which may occur in the absence of any efficiency effects of trade creation or diversion. Opening up The Gambia’s and ACP markets to the EU is likely to result in transfers of tariff revenues from ACP countries to the EU and this will worsens their terms of trade and result in a welfare loss. It has been argued that EPAs will do very little to aid the ACP countries’ development and poverty alleviation. The short-term preferences are not worth very much, while the longer term reciprocal trade agreements offer very few benefits.

Fiscal losses for developing countries negotiating EPAs
Though the implications differ widely between ACP countries and regions, the fiscal dimension of EPAs is another issue that cannot be ignored. Trade liberalisation within ACP regions and with the EU implies that fiscal revenues currently obtained from tariffs and duties on imports will disappear over time. In particular, the fiscal revenues of the smaller countries like The Gambia, whose economies are more dependent on trade related taxation, will be seriously affected-up to 30 per cent revenue losses in some cases.

There is no doubt that without flanking measures, these large decreases in fiscal revenue will substantially harm The Gambia’s budgetary capacities to finance key expenditures in focal development areas, such as education, health and poverty alleviation. Alternative sources of revenue will therefore need to be created. A standard recipe is to replace the taxes levied on imports with an (increased) tax on consumption, labour or capital. Such fiscal reform could have several advantages. Finally, without EPAs, most ACP countries stand to lose a substantial share of fiscal revenue anyway through multilateral trade liberalisation under WTO or other regional arrangements. In that respect, EPAs could well form a useful incentive to start reforms as soon as possible.

Yet, however large the rationale for fiscal reform, the issue is likely to remain among the more controversial aspects of EPAs. Experience suggests that radically altering the fiscal system is a cumbersome exercise for developing countries. Firstly, this is because a large part of economic activity takes place outside the realm of the official economy, escaping any form of taxation. Secondly, many developing countries rely heavily on taxation of imports because it is relatively easier and less costly to administer. Indeed, where other government agencies are not strong enough to enforce modern types of taxation, customs authorities have so far constituted a practical alternative.

Hence, the implementation of EPAs has serious institutional implications for tax authorities in The Gambia. Government capacity needs to be built to design, implement and enforce fiscal reform. Additionally, special programs need to be established and skills of local administrators enhanced to stimulate the entrance of informal businesses into the formal (taxable) economy.

The writer is a senior programme specialist on Trade and Poverty, at International Development Research Centre (IDRC), Nairobi.