EPA, REGIONAL INTEGRATION AND EXPORTS FROM AFRICA

Master Thesis in Economics Author:

Collins Enoh NYAMBI

Supervisors: Assistant Professor Martin ANDERSSON Ph.D. Candidate Jenny GREK Jönköping:

May 2010

Master’s Thesis in economics Title:

EPA, Regional Integration And Export From Africa

Author:

Collins Enoh NYAMBI

Tutor:

Assistant Professor Martin ANDERSSON Ph.D. Candidate Jenny GREK

Date:

2010-05-03

Keywords:

EPA, regional integration, export.

Certification This is to certify that this work represent an original countribution to research. The author has duly referenced and acknowledged all sources cited in the work.

Dedication This work is dedicated to the NYAMBI´s family, and to all my friends in and out of Sweden.

Acknowledgement I remain indebted to many people in the completion of this work. First and foremost, I am thankful to my supervisors, Dr. Martin Andersson and Ms. Jenny Grek for the great attention and support they provided in the course of this study. Their deep insight and gracious approach created a very conducive environment for my research. My family remains an enduring pillar of hope, love and emotional support. In this regard, I remain eternally grateful to my mother Gladys E. Nyambi for her ceaseless prayers, phone calls and affection. My brothers and sisters spread across the globe came together in their support, and cushioned the stress of those lonely and tiring days in which this work was conducted with their solidarity and love. I am truly thankful to them for this unity. And to all those friends in Sweden and elsewhere who stood with me physically and emotionally throughout the duration of my study in Sweden, I remain eternally grateful for your friendship, brotherhood and support. May God bless you all. As always, I am liable to all mistakes made in this work, and gracefully appreciate all corrections made.

Abstract Introduction: The trade relationship between the European Union (EU) and African countries based on regional groupings, under the framework of Economic Partnership Agreement(EPAs) came to play in most countries in January 2008. It replaces the preferential trade treatment granted by the EU under the Lomé convention and Cotonou agreement which allowed African, Carribean and Pacific countries(ACP) greater access to EU markets as a means of leveraging African exports, and encouraging the competitiveness of African economies in the global economy. Method: This work explores basically secondary data sources on EU trade with regional blocs in Africa over the course of the last 27 years. Special attention is given to thematic concerns in the area of intra-regional trade, balance of trade as well as market share. Graphically presentations are utilized in certain instances across the work to serve illustrative purposes and to highlight trends established. Conclusion: The study uncovers compelling evidence suggestive of imbalances in trade between the EU and her trading partners in Africa. It is anticipated that these imbalances could shrink export benefits for the African countries concerned. There is reason to believe that problems associated with implementation of EPA‟s, deriving from the distinct development context of the various countries concerned will hamper their development prospects. As it is at the moment, it is quite obvious that these countries will have to live with the consequences of these agreements and strive to cope with new economic realities that seem clearly difficult to reverse.

Table of Contents 1. Introduction ................................................................................ 3 1.1

Brief Trade History Between Europe And Africa ................................... 4

2. Theoretical Framework ............................................................... 6 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8

Ricardo´s comparative advantage ........................................................ 6 Heckscher-Ohlin Model .................................................................... 8 Terms of Trade .............................................................................. 10 Immiserized Growth ....................................................................... 12 Trade Policy .................................................................................. 14 Trade Restriction ............................................................................ 15 Theory of Economic Integration ....................................................... 17 Theoritical Prediction on Likely Effect ............................................... 21

3. Methodology ............................................................................. 22 4. Analysis ..................................................................................... 23 4.1 4.2 4.3 4.4

Market Share.................................................................................. 23 Intra-Regional Trade ....................................................................... 26 Balance of Trade ............................................................................ 29 Terms of Trade .............................................................................. 32

5. Conclusions............................................................................... 34 References.................................................................................... 36

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Abbreviations ACP

African Caribbean Pacific

AU

African Union

CEMAC

Economic and Monetary Community of Central Africa

COMESA

Common Market for Eastern and Southern Africa

DFQF

Duty-Free Quota-Free

EAC

East African Community

EC

European Community

ECCAS

Economic Community of Central African States

ECOWAS

Economic Community Of West African States

EPA

Economic Partnership Agreement

ESA

Eastern and Southern Africa

EU

European Union

FTA

Free Trade Agreement

GDP

Gross Domestic Product

GTAP

Global Trade Analysis Project

H-O

Heckscher-Ohlin

IOC

Indian Ocean Commission

PTA

Preferential Trade Agreement

QR

Quantitative Restriction

RTA

Regional Trade Agreement

SADC

Southern African Development Community

SSA

Sub-Saharah Africa

TCR

Regional Cooperation Tax

UMA

Arab Maghreb Union

UNCTAD

United Nations Conference on Trade and Development

UNECA

United Nations Economic Commission For Africa

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1. Introduction As the East Asian economic miracle has clearly shown over the last few decades, trade remains a major driving force behind sustainable economic growth. Consequently, African countries currently attempting to accelerate their economic growth rates have been struggling to devise effective trade policies that address the demands of regional integration even as they promote their export earnings. This is particularly important as the share of African world export over the years has dropped by almost 60 percent from 3.5 percent in 1970 to 1.5 percent in 1999. Within this period, Africa has shockingly lost $70 billion annually (World Bank, 2003). Longo and Sekkat (2004) have identified inadequate infrastructure, mismanagement of economic policies and internal political tensions as major obstacles to trade in Africa. Conflicts, democratic deficit, and political instability in particular, have adversely affected Africa‟s exports and its over all terms of trade, drastically bringing down GDPs in countries like Liberia, Sierra Leone, and The Democratic Republic of Congo that have been plagued by decade long conflicts (Fosu 2003, Colllier, 2007). To further compound this negative trend, the industrial and productive capacities of affected countries are often decimated in the course of such conflicts. Generally, since independence, few African countries have really developed sound and viable enterprises that can face western competition. Clarke (2005) for instance, reports that African manufacturing enterprises are less likely to export in countries with restrictive trade, poor customs administration and customs regulation. In this regard, Krugman (1991) explains the need for small and least developed countries to form an Regional Trade Agreements(RTA) in order for them to exert collective market power as a group thereby benefiting from higher external tariffs. Besides, it is clearly established in neoliberal economics that when countries trade as blocs instead of individually, they wield more market power, and therefore obtain greater leverage to levy higher tariffs and influence terms of trade balances positively. However, Economic Partnership Agreement (EPA) objective goes beyond just trade relation between European Union (EU) and Africa. They are also geared towards building intra-regional trade among African countries with the aim of integrating them into the world economy. Africa is a region full of potential but one key reason why African countries have not had great success in enhancing trade between member states is owed to the overlap-

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ping membership in multiple trade agreements and the ineffective nature of many intraAfrican economic agreements. Moreover, given the relatively high cost of trading at the borders, low resource complementarities between countries, small market size and poor transportation systems, intra and inter-regional trade in Africa is further limited (Yang and Gupta, 2007; Foroutan and Pritchett, 1993; Njinkeu and Powo Fosso, 2006). Corroborating this, for instance, Esterly and Levine (1994) have shown that trade restrictions (measured by the black market premium for foreign exchange) are the single most powerful policy-induced causes of slower growth in Africa, in comparison with that of the East Asian region between the period of 1965 -90. Against this backdrop of structural shortcomings the Economics Partnership Agreement (EPA) between the European Union and African states could be seen as stimulus package for mother continent to uplift the downward exporting path of African countries, putting them on more competitive platforms with respect to world exports. This master thesis focuses on the likely effects of the EPA in stimulating regional integration and enhancing competitive export base for African countries. It has been argued that the measures put in place by this agreement provides for a win-win scenario for all partners. However, because EPAs are only beginning to take effect, it is almost impossible to sufficiently measure the impact which the new trade regimes have begun having for African countries that have signed up. Structurally, this study unfolds as follows: Section 2 gives a general description of the EUAfrica relationship, with special focus on trade treaties that ended with the implementation of the EPA. Section 3 then provides the economic theories of international trade. These theories explain the rational of EPA progress in the African continent and paint a picture of ways in which these theories would be applicable in regional integration of the continent. Section 4 oultines the methodical considerations underpinning the study, and Section 5 provides a graphical analysis of the pre-EPA data. This takes into consideration special economic aspects for judgment like market share and the extent to which this factor enhances the continent‟s trade potentials. Finally, section 6 concludes the work, identifying dimensions for the way forward with respect to EPAs and Africa.

1.1

Brief Trade History Between Europe And Africa

What is today the EU and its colonies mostly ACP (African, Caribbean and Pacific) countries, have had longstanding trade and development ties. The European community(EC)

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with just six member States entered a treaty in 1957 at Rome with provisions to extend trade, aid and investment with 18 African countries which still had colonial ties with EC member states. However, with the independence of these states, terms of trade and other provisions had to be renegotiated and thus the Yaoundé convention was signed in 1964 and 1969. The Lome convention signed in 1975 consisted of a number of substantial changes which included unilateral EC trade preferences to Africa, whereas before 1975 the accent had been on reciprocal free trade. The basic provision were not altered significantly throughout the various Lome Conventions: Lome II (1980-85), Lome III (1985 -90) and Lome IV (1990-2000) but the number of signatories were increasing. The Cotonou Agreement in 2000 signaled a number of important changes in European Union-Africa trade relation which was built on the preceding Lome conventions. On the trade domain, it was agreed that EU would negotiate Economic Partnership Agreements (EPA) with regional groupings to be concluded by the end of 2007, seeing the birth of a new approach fostering regional integration into world economy to go operational in January 2008.

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2. Theoretical Framework The founding fathers of free trade are Adam Smith and David Ricardo. These economists believed that economies could gain a lot by trading with each other. The advocates of free trade and export argued that all trade regulating aspects such as tariffs, quotas etc ought to be abolished like the case of Jagdish Bhagwati, who remains with the traditional process but has actually condemned the prospective U.S.-Mexico trade. The theories of international trade have

been modified over time from the days of Ricardo by Heckscher and Ohlin, whose explanation of the theories added more light on trade situation for developing countries. Also included in the theoretical framework is the theory of integration which the EPA package encourages for African countries. This section starts with the presentation of the Ricardo´s comparative advantage theory followed by the Heckscher-Ohlin model,terms of trade, trade policy, trade restriction and finally theory of economic integration persuade by the partnership agreement.

2.1

Ricardo´s comparative advantage

The theory of comparative advantage was developed by David Ricardo stated by Bowen, Hollander and Viaene (1998). He pointed out that the basis of international trade is at the level of differences among countries in comparative costs for producing commodities. When this condition is met, it is the place of each country to specialize in producing the good whose cost is far less than the cost of the same good in another country compared with other goods, implying that greater comparative advantage compared with the other countries. Ricardo‟s theory of comparative advantage had certain assumptions, which can be stated as follows: •

There are no transport costs.

•

Costs are constant and there are no economies of scale.

•

There are only two economies producing two goods.

•

The theory assumes that traded goods are homogeneous.

•

Factors of production are assumed to be perfectly mobile.

•

There are no tariffs or other trade barriers.

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•

There is perfect knowledge, so that all buyers and sellers know where the cheapest

goods can be found internationally. Africa and the European Union under the umbrella of EPA has almost all it takes when looking from Ricardian theoretical perspective , taking into consideration the natural resource endowment posse by Africa and Europe‟s capital and technological know-how. This combination might go a long way to better the consumers‟ of both continents. Trade between continents when suddenly liberalized and made free, the initial differences in relative prices of the goods between parties in autarky will stimulate trade between Africa and EU. Since the differences in prices arise directly out of differences in technology among regions, it is the differences in technology that cause trade in the model. Profit-seekers in each continent with comparative advantage sector would recognize that the price of their good is higher in the other country. Since transportation costs are zero, more profit can be made through export than with domestic sales. Africa or EU may have absolute advantage in producing both goods as assumed by Ricardo, then the purchasing power of wages (real wages) of workers in the region would be higher in both sectors compared to wages in the other region. Better still workers in technologically advanced region would enjoy a higher standard living compared to the other region. The reason attached to this high standard of living is based on the wage level which is directly related to the productivity of the workers in that region. Considering the above assumptions, each region would export the good in which they have a comparative advantage. Trade flows would increase until there is price equalisation across Africa and Europe, thus the price of each region‟s export good will rise (comparative advantage) and the price of the import good will fall (comparative disadvantage). The comparative advantageous region receive higher price thus leading her to specialise in that good. In accomplishing this, labour would have to move from a comparative disadvantageous sector or industry into comparative advantageous sector. This goes a long way to explain that one industry would go out of production or activity. Considering that the model assumes full employment and zero cost for labour mobility, hence all workers are employed in the industry with comparative advantage. Arndt and Kierzkowski (2001) strengthen the scope of Ricardian comparative and absolute advantage by using international fragmentation of production in which various stages of production are sited where costs are lowest. When the production stage has a different fac-

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tor intensity then, by having the most labor intensive phase located in a labor abundant countries would provide more benefit for both trading partner thus encouraging specialization in comparative factor abundance as stated by Ricardo in 1817. However, challenging domestic industries in Africa to specialize in primary products. Taken into consideration the EPA‟s objective to foster Africa export, the comparative advantage would likely play a winning role for Africa. This would be with the cost of labor being low in Africa as compared to the EU; there would be an intrinsic advantage for goods using human production hours (cost per hour of labor being much cheaper in Africa than EU). However, neo-classical theories are especially divergent in that the greater the difference in autarky prices, the greater the incentive to trade. With this in mind, Africa´s low labor rate would be viewed as a benefit to both EU and Africa. Given the fact that what is imported from Africa will have a greater gain than the same good produced in the EU. Consequently, the EU would be inclined to import more goods from Africa thus having a positive effect on the EU. Well as, the export from Africa to EU being increased thus benefit to Africa.

2.2

Heckscher-Ohlin Model

The Heckscher-Ohlin model (H-O) is considered as the cornerstone of international and interregional trade theory. The recognition of H-O reflects the useful insight into trade patterns as well as the income distribution consequences of trade that it provides. Ricardo considered in his model two goods and one factor of production but Heckscher–Ohlin (HO) model had one addition factor of production which is capital, making the model a two country, two goods and two factors of production (2x2x2). In this model, the relationship between the quantity of capital to the quantity of labour used in production process as capital-labour ratio has given the name as factor proportions model.European countires are well endowed with physical capital relative to their labour force compared to African countries which has a very little physical capital but are well-endowed with a large labour force. The ratio of the aggregate endowment of capital to the aggregate endowment of labour to define relative factor abundance between EU and Africa.The technological differences in production for each party are not a source of comparative advantage with the H-O model as in Ricardian model. With these assumptions, the sole driving force for trade would be the supplies of capital and labor.

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The H-O model states that, under free trade between two countries which vary in terms of their abundant factors of production, each country will specialize in and export goods whose production involves intensive use of its abundant factor and import goods which involve intensive use of its scarce factor. Merle Holden ( 1983) carried an empirical test to predict the Heckscher-Ohlin model for South Africa and envisage that those industries with relatively high labor-capital ratios 0.329 will tend to be exporters and those with relatively low labor-capital ratios 0.277 will tend to be importers which goes a long way to confirm the H-O model. EPAs trade goal under the H-O theory gives the two regions a propensity for producing good which they have relative abundant. Since in autarky, the price of capital-intensive good in the capital abundant region (Europe) would be bid down due to its extra supply relative to price of the good in Africa and vice versa for labour-abundant region. When trade is allowed, profit-seeking companies would move their products to the markets that temporarily have the higher price. Thus the capital-abundant European countries would export the capital-intensive good since the price would be temporarily higher in African countries. Likewise the labour-abundant African countries would export the labourintensive good. Trade flows for these continents would rise until the prices of both goods are equalized in the two markets. This model would suggest that the EU, the more capital abundant of the two continents, would specialize in and export capital intensive goods and that Africa, the more labor abundant, would specialize in and export labor intensive goods. With the extent of specialization in each of the continent, Africa would stand a more competitive exporter of the goods which she has specialized in. Capital and labor are the only factors of production considered in the model and must be immobile that is, they cannot be transferred across borders. These factors are not equally available in all countries. Taken the country's comparative advantage relative to its partner would not change over time. Africa would always remain labor-abundant relative to the European Union and as such would always specialize in labor-intensive goods. It is worth highlighting here a fundamental distinction between the H-O model and the Ricardian model. The Ricardian model assumes that production technologies differ between regions, the H-O model assumes that production technologies are the same. The reason for

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the identical technology assumption in the H-O model is perhaps not so much because it is believed that technologies are really the same; although a case can be made for that. Instead the assumption is useful in that it enables us to see precisely how differences in resource endowments is sufficient to cause trade and it shows what impacts will arise entirely due to these differences.

2.3

Terms of Trade

The terms of trade within the EPA could be considered as a relationship between the prices at which African countries sells her exports and the prices paid for its imports. These sub-Sahara countries would enjoy favorable terms of trade if export prices exceed import but what we have to note is that this terms of trade depend on the world supply and demand of goods involved thus indicating how the gains from international trade would be distributed. Cadot et al (2007) suggest that for developing countries including Africa, exports are highly products and sectors concentrated. This concentration might have a negative impact on growth performance by Lederman and Maloney( 2003) and Herzer and Nowak-Lehmann (2006). The strong comparative advantage which Africa posses give her high incentive to specialized in natural resources and related sectors. Sachs and Warner (1999) concluded that the high dependency on export of natural resources maybe costly in terms of economic growth. Gylfason (2001) criticized that high reliance on exports of primary goods tends to be associated with high terms of trade volatility, which has negative consequence on exports and investment and thereof on economic growth. In addition, this natural sector are generally self- contained i.e. the interactions with other sectors of the economy are weak. As a consequence, different sectors might grow or decline apart resulting in duality of economic structure and policies. Fostering growth through exports, African countries should be able to exploit their comparative advantage by means of diversifying within and away from present static comparative advantages. Following the above criticism and negative view about specialisation in primary products. The EPA package should encourage export diversification through the promotion of manufactures export, which is generally seen as an important factor for sustainable economic growth. With reasons been that:

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

The income elasticity of demand is higher for manufactured goods compared to primary products. This means that growth prospects for these African countries exports along with growth in foreign income could be estimated to improve by specialising in manufacturing.



The price elasticity of both demand and supply are assumed to be higher for manufactured goods than for primary commodities. As a result, expected variability in the price of manufactured goods following changes in demand is comparatively lower than for primary products, thus giving African states a stabilising effect on the terms of trade and, also a more stable growth of export earnings over time for these countries.



Gains from dynamic productivity in the manufacturing sector can go a long way to stimulate growth, which could arise from learning effects, economies of scale and externalities between firms and industries. However, manufacturing for export provides a unique opportunity to realise on dynamic gains for example, the African economies which lack a domestic market of sufficiently large size in terms of purchasing power.

In the 1980s most developing countries that had expanded their manufacturing export sector made a valuable contribution in providing foreign exchange to service external debt. It was greatly welcome since the primary communities at this period suffer depression in world market hence causing problems to many countries that rely on primary products. However, Prebisch-Singer thesis argued that the effect of specialization on export in primary products are disadvantageous to growth in that the price of these products is on a long-run downward trend with respect to price of manufactured goods. Considering the volatility of primary product prices, exporters of these products experience greater instability of export revenue. Grilli and Yang (1988) and Bleaney and Greenaway (1993) showed that this downward trend in relative price of primary products are sufficiently slow that it can possibly be explain by quality improvements in manufactures which are not captured in the price indices. More so, Brock (1991) and Maizels (1992) concluded that evidence for greater export revenue instability amongst exporters of primary products is mixed. This result can be seen in Africa with recent oil boom in some countries like Equatorial Guinea and Angola. Sachs and Warner (1997) reported that 1970 share of primary exports in GDP had a significant

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negative coefficient on a growth regression for 83 countries over the period 1965–1990, and Sala-i-Martin (1997) also found that the 1970 share of primary products in total exports to be strongly and negatively correlated with growth over many alternative regression specifications. Considering that African countries are endowed with natural resources, recent studies have shown that policies in these countries are engaged toward specialization in this sector to increase productivity. EU economies are technologically endowed, which determines both transformation costs that have direct impact on production and transaction costs, and also property rights which are determining factor for productive opportunities in an economy. As a result, property rights determine how the markets operate and how productive opportunities are realized thus giving the increasing evidence that specialization in primary products production may be harmful to economic growth.

2.4

Immiserized Growth

Bhagwati‟s classic theory of immiserizing growth based on the relationship between economic growth and intensified poverty occurs when a producer with an influential position in the international market for some good facing inelastic world demand expands output of that product, leading to a price reduction that decreases export revenues and national welfare like the case of African cocoa. The modern twist to the immiserized growth hypothesis is that increased prices and output are linked with lower producer welfare. Balassa (1990) standard view in neoclassical theory is that increased prices induce profit maximizing farmers to increase production, yielding increased producer thus with EPA encouraging African countries to take advantage of her natural resources there is likely to be an increase in the number of small household families engaged in this sector for daily break. Johnson (1967) produced another example of immiserizing growth according to which a small open economy like that of most African countires facing an exogenously imposed tariff could become worse off as a result of economic expansion. Krueger et al. (1988) finding concluded that most low-income agrarian economics such as Africa, taxed agricultural producers and subsidized consumers rather than vice versa. With the Krueger et al result, the small famers is faced with the decision on consumption and production simultaneously considering the volatility of prices and all the risk associated with this sector. Dehejia and Weichenrieder (2001) demonstrated that the presence of a

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domestic capital tax may eliminate the welfare loss but how this could be applied in the context of Africa was a question. J. Gilbert and E. Tower worked on the level of tariffs governments imposed on poor farmers stating that sufficiently high tariff will result in immiserizing growth. From the above justification, there are two key features to how producers might suffer welfare losses from increases primary commodity prices. The households are net buyers suffer real income losses from increased expected prices and those who are price risk averse will suffer from more variable prices. The farmers who are risk-averse thus stands to lose from market-oriented reforms that increase natural resource price distribution. Governments generally introduce policy measures that would have effect to protect the market share of domestic producers in natural resource sector mostly in Africa, taken into consideration the role it plays in the state budget. Winters( 1984), Ito et al. (1988) and Alston et al.(1989) concluded that shares of individual exporters may not be homothetic, and the preferences of importers for products originating from different suppliers may be a critical factor for determining market shares. Considering the quality of the product exported; if inferior then the product‟s market share may decrease regardless of its low price, as buyers allocate more to the budget for a better class of products. It is also likely that the market share of the low-quality product may increase due to its low price, when buyers need to purchase the same amount of the good with a reduced budget. Baldwin (1956) and North (1959) pointed out that extreme concentration of wealth in the hands of the very rich will manifest itself in demand for goods of very high quality and imported luxuries rather than for domestic products, even when farm or export income grows thus giving the EPA emphasis on minimum standard of products to be exported. Deaton (1989) and Deaton (1997) showed how to use budget shares to measure these consumption effects when there are barriers to international trade. Considering the income side, lower trade barriers cause changes in factor demands that lead to changes in wages, agro-input prices, and household income. The net effect would depends on how much is spent on agro-consumption goods and by how much, the household participates in the formal labor markets and in the agricultural sector.

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2.5

Trade Policy

Tariffs are tax levied on imports which could take an ad valorem or specific rate form. It has the power to change the consumption, production and trade patterns of the domestic country with respect to world trade. The optimal tariff theory states that the optima tariff for a country that is acting unilaterally to improve its terms of trade is higher and thus the lower the elasticity of world demand for her exports. However, the creation of tariff would distort the domestic and world price and also change national and world welfare. Putting all this economic principles into account, the partnership between the EU and Africa has to maintain the existing tariffs at the level which the parties enteredin the EPA. The EPA guarantees ACP and particularly African countries a permanent duty-free quotafree (DFQF) access to the EU market for its exports, with the exceptions of sugar and rice, which include a short transition periods before DFQF kicks in. African states would be expected to remove tariffs on „substantially all‟ imports from the EU during an implementation period. Countries in the Southern Africa Development Community (SADC) EPA, for instance, are to eliminate tariffs on 86% of imports from EU within 8 years, that is, by 2016; the Comoros(98%), Madagascar (89.3%), Mauritius (96.6%), Seychelles (97.7%) and Zimbabwe 87% in the East South Africa (ESA) group are to eliminate their duties within 14 years, that is, by 2022; while the East Africa Community (EAC) countries are to eliminate duties on 80% of the value of imports within this period and 64% within the first two years of EPA. It has been elucidated that the duties on these items, being 38% of the tariff lines, is already zero per cent. Ghana is to eliminate duties on 80.5% of the tariff lines within this period and Cote d‟Ivoire on 88.7% within the period. With these in mind, by the time the African common market would be established, in accordance with the set time frame, most African countries would already have obligations of indefinite duration to eliminate customs duties on imports from EU. Tariffs support domestic import competing producer relative to foreign producer in the domestic market while export subsidies give the domestic exporter an advantage over foreign producer in foreign market. Since a subsidy is a negative tax, it decreases the welfare of the subsidizing country and also deteriorates the country´s terms of trade and trade volume effect. The consequent of these effects are that, it measures the increase in domestically financed subsidy payments implying an increase in exports which adds to welfare loss.

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With the present EPA partnership and the enfant nature of most African industries, governments turn to subsidise industries as a means to keep its industries competitive in the free trade world. The agreement states that no party should introduce new export subsidies or increase any existing subsidy of this nature particularly on agricultural products destined for the territory of the other party:since the increase would cause a variation in the world prices of the products in question. The reduction in tariff protection resulting from economic partnership agreements might technically result into a loss of fiscal revenues. This should also be an important concern for many African countries undertaking EPAs with the EU. They will experience a loss of tariff revenues, firstly on tariff imposed on imports from other members of their Regional Economic Community which have become free border passage, secondly on tariffs imposed on imports from the EU. This may cause significant problems for those African countries where tariff revenue constitute a large part of the government budget, and for which a lot of imports originates either in the European Union or in neighboring countries. Beyond the one-off effect of lowering tariffs, an EPA will also affect an ACP country‟s development by binding tariff liberalization. An EPA is likely to freeze the tariff reduction commitments made by African countries, meaning that countries will not easily be able to increase their tariffs once they have made commitments to lower them. Hence, it is crucial to remember that EPAs will have an impact both on a country‟s present and future prospects. Binding tariff levels impacts on a government‟s ability to use tariff policy as a means of encouraging production, sheltering industries and nurturing them to move up the „valuechain‟ into areas where there is more value-added in the goods that are produced.( Mayur Patel, 2007).

2.6

Trade Restriction

Tariffs and other forms of prices are measures used to determine the quantity or volumes of goods to be traded or by use for policies. Quantitative restrictions (QRs) can be explained in terms of export and import quotas or when it takes the form of a domestic content requirement. The price and volume effect of a quantitative restriction can be duplicated with suitable tariff and also keeping in mind the welfare effects. Lerner symmetry theorem between export and import taxes implies a similar symmetry between export and im-

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port quotas to be precise; there exists an export quota that has the same price and volume effects as an import quota. Tariffs will generally generate revenue for the home government and quantitative restriction generate pure economic profit (rent) for importers or exporters of the restricted good. In a case where the holders of “quota right” are not domestic agents, this is a transfer of domestic income to foreigners that goes to add the cost efficiencies of the country experiencing the trade restriction. Traditional international trade theory predicts that African countries are not likely to suffer from opening up their domestic markets. Actually, it would rather be in their own interest to refrain from imposing trade restrictions, as in this way they could increase their own prosperity. When the EPA comes to play, trade is liberalised, consumers in Africa would face lower prices of both imported and domestically produced goods. The beneficiaries of free trade may be not only households, whose real incomes rise as a result of falling prices, but also firms, whose international competitiveness is increased by the purchase of cheap investment and intermediate goods or whose domestic sales rise owing to the positive realincome effects. Tariff elimination to estimate trade and budget effects would occur within this agreement if European exporters lower their export prices thus leaving market prices unchanged and increasing their profits if tariffs are eliminated that is, the importing region would lose import duties without gaining the advantage of lower import prices. However, from the importing region‟s point of view, economic welfare would definely decrease. This outcome is more likely to occur in less competitive markets, where the degree of competition suppliers is less severe. Even though cannot predict how firms would behaviour in the African market. The Economic partnership agreement between the EU and African states had to ensure that manufactured and agricultural products enter the EU market without being subjected to quantitative restrictions but specific clauses were applied on particular products such as sugar, beef and bananas. Following the sugar protocol, most African countries have to deliver a fixed quantity of these products to the EU market at a guaranteed EU price. With the beef and veal protocol, some African state like Namibia, Zimbabwe, Madagascar, Swaziland and Kenya have to export fixed quotas of beef and veal to the EU market and with these fixed quotas, no

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ad valorem duty is levied. However, customs duties excluding ad valorem are stepped down by 92% on this product. Meanwhile in the banana protocol, it is stated that 775,000 tons of this product will enter the EU market at a zero duty from ACP.

2.7

Theory of Economic Integration

Countries enter regional groupings to enjoy freer international economic relations among themselves which include movement of goods and services, capital and labor within the integrated region. In Myrdal‟s (1956) opinion, integration could be considered as a social and economic process aimed at diminishing barriers between partners both at national and international levels. The various forms of economic integration represent varying degrees of integration. In free trade area, tariffs are abolished between member countries but each country maintains its own tariffs with non-member countries as in the CEMAC region. In the case of a custom union, besides the suppression of discrimination in the field of commodity movement within the union, there is also the creation of a common tariffs wall against non-member. Kemp and Wan (1976) proposed that, the formation of a custom union does not harm outsiders (non-members) but makes the members of the union better off. The fact that these regional groupings avoid to harm non-members while improving their own welfare does not mean they do not harm outsiders. Considering the fact that, African countries have a comparative advantage in the production of mostly natural resource goods; the regional integration agreement might restrict external trade in order to exploit its new-found monopoly power in world trade thus given mother continent a better position in trading with non-members. A higher structural type of economic integration is attained in a common market, where not only trade restriction but also factor movements are abolished. In economic union as distinct from a common market, combine the removal of restrictions on commodity and factor movement with a degree of harmonization of economies, monetary fiscal and social policies. Finally, total economic integration presupposes the unification of economic, fiscal etc policies and requires the setting up of a supranational authority whose decisions are binding for the member- countries. The EU sees regional integration schemes and processes as “key instrument” for African countries‟ integration into the world economy, which shall be “encouraged and supported.”

17

(European Commission 2000, Art. 35). South-South integration will help small countries in Africa to strengthen their competitiveness, save resources and increase their bargaining power visà-vis the EU. The World Bank also estimated that between 40% and 60% of world trade occurs within regional trading blocs. But Africa's appetite for integration exceeds that of any other continent, according to a study by the Harvard Institute for International Development. There is a lot of overlap in membership of regional groupings among the African countries. ECOWAS, UEMOA and CEMAC have together a membership of 22 countries. Eight of these countries are member of two economic trading communities. Within southern Africa countries made up of SACU, SADC, COMESA, EAC, IOC, ECCAS. These regions have a number of regional integration agreements and bilateral agreements taking place within the context of the worldwide multi-lateral trading system. These include:

Source: Adopted from the World Bank Which has a combination of 25 country membership. Of these, 8 countries have dual membership, four have a triple membership and three are member of four regional groupings. Matambalya (1999) stated that overlapping membership lowers the credibility of the

18

grouping. Via being member of more than one community, the countries concerned show that they want to keep open alternative options. Which enable them to trade-off opportunities for regional arrangements as they seem fit. Nonetheless, regional integration is a reciprocal process by nature; which could only be successful if there is a firm commitment of the participating countries. Costs and benefits of regional integration are likely to be unevenly distributed over time. When a country has difficult time as a result of restructuring of economic activities, there is a high degree of political commitment is required to protect the economic community nationally. Solidarity from the other member countries would be helpful. Governments can easily put their stakes in a different community, then credibility of a particular economic community to be undermined. Thus making the process for defining countries to a particular region difficult. In Africa, some regions have a high level of integration with fixed objectives when it comes to trade policies but overlapping membership maybe problematic in implementing these objectives. Since overlapping member do not have commitment when it comes to hardship when there is an optional policy in the other region. The theory of economic integration from the EPA‟s point of view would have many economic effects mostly within the domain of preferential trade. Its trade effects are basically of two types, one in which partner countries expands with respect to international comparative advantage and the other is on preferential treatment given to its partners than rest of the world. Vincer referred to the former effect as “trade creation”, in which domestic products are substituted by lower-cost imported goods produced by partner countries and the latter “trade diversion” which is a shift from least-cost exporter import to expensive product from her partners. This would apply to the EPA package with some African products to European market and via versa. With recent research on the phenomenon (trade creation/ diversion) Sandrey et al (2006) showed that trade diversion and customs revenues will lead to significant welfare losses to many African countries. Venables (2000) analyses the distribution of the gains from regional integration for different groups of countries, mainly poor countries and industrialized countries. He uses Ricardian and Heckscher-Ohlin-Armington models to extend economic community theory to which countries that are characterized by their factor endowment. He assumed that two poor - countries integrate that have unskilled labor abundant compared to the global average. One of the two is more extreme unskilled labor abundant than the other. After integration and free trade has been introduced, the extremely endowed member state will suf-

19

fer trade diversion as its partner will have a comparative advantage in goods that use skilled labor in production. The non-extremely endowed country will gain from trade creation, as is substitutes its production of unskilled labor intensive goods for imports from its partner. The result is a divergence of real income levels. This tendency has been observed in the East African Community (EAC) and in the Economic Community of West Africa (ECOWAS). Integration among industrialized countries, by contrast, is likely to give rise to convergence. In that case, the extremely endowed country is most skilled labor abundant and thus the richest of the two. Regional free trade will bring trade diversion to the country with the high endowment of skilled labor, which is the richest. Gains from trade creation will mainly flow to the poorer, less extremely endowed partner. The summary of this analysis is that, regional integration among poor countries tends to lead to income divergence, which encroaches upon the viability of trade and economic integration. The prospect for North/South trading partnership like the EPA between Africa and EU is much better thus concentrating trade creation in Africa and trade diversion in the EU member countries. Busse et al. (2004) quantified the possible trade effects of the EPAs and clearly brings out the trade diversion elements of an EPA between EU and ECOWAS countries. Generally, the study found that trade creation effects in ECOWAS outweigh trade diversion at a more highly disaggregated level. Ghana was found having an opposite result due to petroleum oils. The study also recognized that a few product categories, such as apparels and clothing, footwear, light manufacturing in general, and sugar and cereals are sensitive in almost all ECOWAS countries with respect to trade flows. Szepesi and Bilal (2003) considered that potentially trade creation does outweigh diversion but there is a considerable diversion effect and that revenue losses are crucial in some countries. The World Bank also finds that EPA offer significant potential benefits to African countries but they also pose a number of policy, administrative and institutional challenges which comprise of replacing forgone tariff revenues, avoiding serious trade diversion, appropriately regulating liberalized industries and liberalizing internal trade. The above are just some of the effect of integration processes; the others include economies of scale as a result of improved economic market, tariff revenues lost due to preferential tariff exclusion, trade dynamic effects resulting from changes in relative export and import prices such as gains in increased competition, transfer of external technology and capital inflows. Basse et al. (2004) studied the ECOWAS zone using partial equilibrium

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model which estimated that losses in customs revenues for Cape Verde and Gambia was 20% of the total government revenue while the other countries in the zone faced a 5 to 10% decline in the overall government revenues. These outcomes are only likely to occur in a less competitive market.

2.8

Theoritical Prediction on Likely Effect

Ricardo theory gave a framework for the advantages of international trade and taking into consideration the assumption he made about transport and barriers. EPA has all its takes to success from Racardo‟s view, following her objectives of encouraging regional integration and production by specialization in the domain which countries have comparative advantages to have a competitive position in the European market thus with the standard implimentation of the EPA in Africa, there are all indication that Africa stand to gain and increases her export to the European market. Heckscher-Ohlin model (H-O) viewed on international trade had an addition factor, capital. For African countries to really face the other continent as competitors in the European market, Africa under the EPA should embagged on encourage the flow of capital to the continent. What are the steps put in place by EPA package for these needed capital to come in? If this is well taken care of then African countries would likely stand the test of time in the European market with other continents. The theoretical view of terms of trade put Africa and other continents that depend on nature or primary products for trade on a questionable position. To resolve this question, the EPA encourages countries to diversify production and also enter into manufacturing sectors. These facts does not only give African countries a better position to face the changing times but to also stand as a better player in the world market. Given her a stable and competitive attitude thus encouraging production, export and regional integration that might lead to a better socio-economic environment of the countries. The EPA from a theoretical framework has almost all it takes for African countries to success in the European market but considering the willingness of the different states to commit to this partnership agreement might change the expected result. Implying that a total commitment is what is needed for all countries within the agreement to forster regional integration and export.

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3. Methodology The purpose of this thesis is to investigate the likely effects of EPAs on Africa‟s export on the encouragement of regional integration within the continent. Seconday data is elicited through the review of textbooks, journal articles, statistical sources such as the United Nations Conference on Trade and Development (UNCTAD) Handbook of Statistics 2008. UNCTAD is the main source of data for this work. It gives the tade pattern between the African continent and European Union on merchandise over 27 years starting from 1980 to 2007. The base year for calculating the various trade rational is 1980. UNCTAD objective is to provide the statistical data essential for the analysis of the world trade, investment, international financial flows and development. The quantities use are measured in US Dollars at current prices and current exchange rates in millions. However, with long experience in data collection, this source has all the credibility and available information needed for this work. Over these periods, a graphical interpretation would be given based on economic theory. These also provide useful clues on pre-existing export scenario, prior to the implementation of EPAs. African countries are clustered based on their regional affiliations and membership in respective Regional Economic Communities (RECs) such as CEMAC, ECOWAS, SADC, ESA, and UMA, as well as their trade pattern with the EU over the past years. These RECs are already existing communities with common goal for economics harmonization and free trade among its members. The way forward is then contemplated based on the findings of the analysis undertaken. Recommendations are then generated in order to strengthen perceived the win-win outcome of the agreements.

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4. Analysis The analysis of this work is on past trade data with a graphical interpretation on how the various regions were doing before the EPA and how these past results can be use to predict the likely effect of EPA on the African continent. The trade rational used for these analysis are market share, intra-regional trade and balance of trade.

4.1

Market Share

In the recent years, the market share of export for regions in Africa have seen a shift improvement, this could be associated with better products from Africa market to the EU such as banana from CEMAC(Cameroon) and cocoa from ECOWAS (Cote d´Ivoire) making the products competitive with that from South America. With the introduction of EPA package which encourages African countries to be more competitive in the sectors of her comparative advantage, the effect of a positive result is relatively high. Figure 1 below represents the market shares of export of the four trading blocs of Africa and Europe. Africa‟s market segment in the world market is far below Europe‟s market share. EU has an average of about 95% while over the years Africa has suffered a fluctuation in its market share, with the best of every result registered by CEMAC. One can attribute the success of this economic community to its harmonize economy policy, common currency and a relative stable political environment. From when CEMAC came to existence, this zone has been enjoying an average market share of about 60% over the years with the best result recorded in 2006 of 102% for her shares of merchandise exports. The SADC also enjoyed an encouraging market share position in Africa reasons associated with this result could be the common language used in the communities, for CEMAC is French and SADC is mostly English thus lowering the expensive on advertising and thus the cost of reaching potential buyers reduces which in turn increase the profitability of the enterprises doing business in the regions. This process has a chain effect in that, with the attractive nature of these regions, investors are likely to come in with new capital. The ECOWAS and UMA regions have a fairly low market share compare to the other two. These regions do all it takes to have better market share but the cost incurred in the process of publicity could be a cause for a low market share in that a double cost is incurred in the communication process from one language to other ( French to English and via versa).

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Figure 1: Market Share of Export 120 100 80 CEMAC 60

ECOWAS SADC

40

UMA EU

20 0

Source: UNCTAD data (2008) readapted diagrammatically by author. Taking all the above reasons for market shares, African exporters before now enjoyed quasi-duty-free access to the European markets. Whereas European exporters are likely to considerably increase their sales in the African markets, the key issue is whether African exporters will be able to do the same in the European markets. Market access issues are not main obstacles for African producers on the European markets, but these producers would be faced with high transaction costs and supply side rigidities. Furthermore, if the gains of the EPA for African exporters are limited, the costs of the agreement could be high. Local and regional producers may lose significant market shares to the benefit of their European counterparts, which may result in a decline in output, shrinking intra-African trade. The EU with her advanced technologies supply goods at lower prices to the African continent than what the African exporters do in the European market. This means that the EPAs would lead to welfare improvement as prices go down due to tariff dismantlement and assuming elastic import demand for the EU goods, which leads to trade creation at the same time. EPAs in theory may perhaps lead to replacement of regional suppliers once tariffs on EU imports are dismantled. These result may possiblely be of two-fold. To begin with, intra-African trade, which is anticipated to create dynamics for deeper integration, will be compromised. AU (2007) projected that under EPAs with reciprocal trade; there would

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be a reduction of up to 16% of intra-Africa trade and finally, African might find herself in a situation where there is an increased dependence on EU imports, thus greatly increasing EU market share in the African continent. Milner et al. (2002) studied the possible effect of an EPA between the EU and the East African Community (EAC) their reached a conclusion where trade diversion within the EAC would reverse not only the integration efforts that has been put in place but would at the same time accelerate de-industrialization. This result was carried out using an extension of the model in Panagariya (1995) indicating that Kenya was going to lose significantly its market share in the two economies of Uganda and Tanzania. However, Grilli (1993) argued that, the traditional concern of Europe with Africa has not been deeply rooted in European self-interest and P. Collier and J. W. Gunning (1994) added that Africa is not a major market for Europe taking into consideration her disproportionate share in Africa‟s imports which are due to her very poor economic performance and consequently costly for European exporters. Poverty Reduction and Economic Management (PREM) report for Africa Region by the World Bank (March 26, 2009) stated that despite the trade preferences accorded to African countries by the European Union under Lomé and Cotonou agreements, over the last decade the African EPA-countries‟ non-oil exports to the EU have grown at only 3.0% annually in nominal terms, less than one-half of the 6.3% growth rate of their non-oil exports to the rest of the world. The share of the EPA-countries‟ non-oil exports going to the European Union has thus fallen steadily from 65% in 1985 to 49% in 2007. In addition, very little progress has been made in the diversification of Africa‟s exports to the EU market and these remain heavily concentrated in primary products. Sales of the EPA-countries‟ most significant labour-intensive manufactured export, clothing, grew very much faster to the rest of the world (19% annually) than to the EU (2% annually). This weak performance of non-oil exports is a reflection of competitiveness problems and supply constraints in African countries as well as of the limits on access to the EU market under the Lomé trade regime. Thus given all the reasons for export challenges from EPA in ways to better Africa‟s‟ export image and market share in the world and Europe in particular. However, the central challenge of the EPA which is to accelerate export growth and diversification in Africa beyond the Lomé-Cotonou Agreement.

25

Tekere et al. (2003) also gave evidence that African exporters will lose market share on the SADC markets to the benefit of the EU, and to the detriment of regional integration. The cost of adjustment to the EPAs would be even more unbearable given the inevitable loss of customs revenues currently being derived from European imports. Thus, the EPA might not fill into economic reforms, nor reinforce economic certainties and governmental credibility if they are associated with major negative economic and social effects.

4.2

Intra-Regional Trade

Intra-regional trade is limited in Africa. Only 15 percent of its merchandise is exported to other countries in the region, and only 10 percent of merchandise is imported with origin in the region. Even though regional agreements have proliferated, significant barriers to trade remain, mostly because of imperfect implementation of agreements, high border costs, restrictive rules of origin even within customs unions, and poor infrastructure. Figure 2 demonstrates Intra-Regional Trade within the major regional groupings. Intraregional trade in CEMAC is relatively low at less than 2 % of total trade and has remained stagnant over the past seven years and even inclined downwards fairly since 1999 , in spite of the 1994 initiative for creating customs union with some reasons been the high transit cost, poor road networking within CEMAC, high cost of procuring import and export licenses. Internal trade in this community is much lower when compared to other grouping with free intra-regional trade in Africa. As can be observed, the SADC has enjoyed a stable increase in intra- community trade over the years. The key driving force for this deeper intra-regional trade within SADC is based on sound macroeconomic policies, vibrant financial services, and increased investments within the region. To better the process, the SADC Trade Protocol was enforced in 2000 which was to stand as a keystone for more better intra community trade and market integration but unfortunately this region entered into an unstable political crises with major players like Democratic Republic of the Congo, Zimbabwe. The community had a significant increase in intra-regional trade in 1999 reaching a record 12% of total trade. This major increase in trade has been in the textiles, clothing and sugar sectors. The success story for the region can be placed on  Harmonization of customs documentation, rules and procedures  Simplifying transit procedures and regulations

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 Elimination of core non-tariff barriers like import and export licenses.  Synchronization of standards, quality and accreditation in SADC. Trade facilitation still has a long way to go in the area of sanitary and phytosanitary harmonization which are critical for trade. The ECOWAS region has enjoyed on average a relative high intra-community trade. With the formation of this organization, its members sought to develop customs union with an eventual establishment of a complete common market. With this goal in mind, the members called for a progressive liberalization of trade within the community by reducing tariffs on goods manufactured within ECOWAS and the instrument employed was Regional Cooperation Tax (TCR). Transport and transition cost within this community are very low owing from the fact that the region has a good transport network from rail to road. Trade within ECOWAS involves mostly commodities like grains and oils from forest area to Sahel countries and also in petroleum, with Nigeria supplying crude oil and refined petroleum to other members like Cote d´Ivoire Ghana and Senegal. The UMA intra-regional trade has remained low over the years despite the establishment of Free Trade Agreement (FTA) between the members. This sluggish performance can be attributed to factors as;  Lack of complementarities among UMA economies.  Non-compliance by countries to their obligations under trade agreements such as absence of credible dispute settlement mechanisms which are outcomes of numerous tariff and non-tariff trade barriers.  High transaction costs such as transport costs due to bureaucracy and infrastructure.  Often contradictory regulations and legislations on the rules of origin. Generally, the continent suffers from unrecorded data on intra-regional trade which may underestimate the magnitude of intra-community trade especially between neighboring countries. Nevertheless even with an adjustment for underreporting, this would not greatly change the magnitude of intra-regional trade within the continent.

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%

Figure 2 : Intra-Regional Trade and Trade Groupings Export 14

CEMAC (formerly UDEAC)

12 10

ECOWAS

8 6

SADC

4

2 UMA

0

Source: UNCTAD data (2008) readapted diagrammatically by author. Regional integration as one of the main objective of the EPA package, when better implemented, will reduce intra-regional barriers to trade in existing customs unions and FTAs. All regional trade arrangements in Africa, aside from SADC, have internal barriers to trade such as restrictive rules of origin and other controls that impede trade and protect existing industries. Although the interests behind these barriers will constitute formidable political voices against internal liberalization, achieving the regional integration objectives of the EPAs will require African countries to remove current barriers to intra-regional trade for a progressive and a win- win scenario for all the parties in the agreement. The interaction of the EPA process and the political support for regional integration in Sub-Saharan Africa provides a useful dynamic impetus for rationalizing the situation and an opportunity for removing intra-regional trade barriers. Hinkle and Newfarmer (2005) state that intra-regional trade within Africa is restricted, amounting to only about 12% of the average for African countries merchandise exports and 7% of its merchandise imports. Intra-regional trade in the continent is particularly important for landlocked and for a handful of coastal countries such as Nigeria, Cameroon, South Africa, Cote d‟Ivoire that have some manufacturing capacity. However , Limao and Venables (2001) worked on the infrastructural cost for both landlocked and coastal counties in Africa, reporting that poor infrastructure accounts for 40 percent of predicted transport costs for coastal countries and up to 60 percent for landlocked countries and also concluded that intra-SSA trade costs are considerably higher and trade volumes significant-

28

ly lower than those for non-SSA countries. Opening the borders for trade will create a common market and increase competiveness among African producers and also helping to better face western competitors.

4.3

Balance of Trade

Trade balance in Africa over the years has enjoyed on average a surplus but some regions have had a dominating role over this year‟s like the CEMAC and ECOWAS. The common factor that could be associated with this surplus of trade is the common currency with CEMAC and in most countries in ECOWAS with each having a central bank which control the monetary policy. In the early 1990s, countries in West and Central African (ECOWAS & CEMAC) franc zones faced a devaluation of 50% of its currency which was fixed to the French franc. The result of this devaluation stimulated the country‟s exports by putting it prices of goods and services lower in the European and world markets. However , the economic of devaluation worked in favour of these zones, its production cost in terms of land, labor, capital became cheaper attracting foreign investors and increasing the competitiveness of these regions. From figure 3, the trade balance surplus for CEMAC in 2005 reached a record 165%. Around the late 1980s, the whole continent suffered a trade balance deficit, this could be accounted for policies putted in placed by most government like the non-tariff barriers such as importing licensing procedures not clear, rules for the valuation of goods at customs pre-shipment agreement were not clear in most countries. SADC has on average a low balance of trade; this region‟s lacks a uniform monetary policy, trade in services remain behind due to lack of capacity but significant progress has been made in the trade of goods like Angola in petroleum and diamonds and Malawi for tobacco, tea and sugar. With all the multilateral, bilateral and unilateral taxes agreements which regions have entered, this gives a good base for EPA, which call for definitive regional integration and putting prices of home manufactured goods more attractive.

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Figure 3: Balance of Trade 200 CEMAC (formerly UDEAC)

150

ECOWAS 100 SADC

50 UMA

0

-50

Source: UNCTAD data (2008) readapted diagrammatically by author.

Romain Perez (2006) predicted that the EPAs formulas could bring uneven gains among countries and that African export will increase at a slower rate on the EU market than the growth in the rate of European export to ACP markets, while taking into consideration the protection rates of African countries and the EU, and also the discrepancies in terms of performance between the African countries. The EPAs has it role to play on the balance of trade within the African economies and factors that should be considered by these countries are;  The cost of production (labor, land taxes, capital, incentives, etc.) within the exporting economies that is Africa with respect to those of the importing economy EU.  The movements of exchange rates.  The cost and accessibility to raw materials, intermediate goods and other inputs.  Tax policies on trade, be it multilateral, bilateral or unilateral.  The prices of home manufactured goods and her availability (supplies). In addition, balance of trade is expected to differ across sectors such as oil exploration and early industrial goods. African countries have different regional application with the above factors and once these are not taken into consideration within the EPA, there would be a likely effect that these economies would worse-off.

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However, macroeconomic instability created by a trade balance destabilization could be tackle at the balance of payment level. New investment flows from the EU can compensate the massive increase of imports from the EU. The orientation of these investment flows to the sectors that need to improve their capacity might render the EPA mutually profitable. The EU should assist African countries for a longer period of time in order to provide incentive to ensure that these countries benefit as much as possible from the EPAs. The EU support could also cover additional trade-related measures like the need to modernize customs administration, smooth border-crossing of goods and capacity building dedicated to allowing African exporters to be able to fulfill the conditions required to access European markets. While at the private sector level, the EPA should encourage competitions at different levels to increase productivity, quality and timely delivery which are good for business practice. Santos-Paulino (2007), urged that import liberalization should be combined with effective measures intended to improve competiveness and promote exports and also that if no appropriate combination of domestic policies and liberalization are put in place, both balance of trade and balance of payment difficulties might leave African countries worse-off. Busse et al. (2004) studied the possible effect of the EPAs on ECOWAS countries. Their study focused on trade and budget effects. Using the partial equilibrium methodology that follows the Viner model, Busse et al. examined implications of different tariff elimination scenarios and found that in absolute terms, decline in import duties would range from USD 2.2 million for Guinea-Bissauto USD 487.8 million for Nigeria. While Cape Verde and Gambia would be particularly affected, in that total government revenue could decrease by 20% and 22% respectively. Considering that no adjustments are made on the expenditure side, budget deficits in these countries will deteriorate by 4.1% and 3.5% of GDP respectively. The United Nations Economic Commission for Africa (UNECA, 2004), conducted a comprehensive evaluation of EPA‟s impact on African countries using the partial equilibrium model SMART and estimated that the complete elimination of the tariffs on European imports would induce public revenue losses in Africa amounting to USD 2.9 billion. UNECA‟s work is particularly shocking for the ECOWAS sub-region where the fiscal loss amounts to USD 980 million.

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Keck and Piermartini (2005) used the GTAP model to estimate the impact of the EPAs on the SADC sub-region after implementation of the EPAs and found that the welfare of the SADC sub-region would grow by US$ 1.5 billion, due partly to an improvement in the terms of exchange. These authors stated again that, these gains could be reduced by other liberalization processes, like multilateral liberalization. Moreover, their disclose that EPAs are likely to hamper industrialization of these countries, contrary to multilateral liberalization, which tends to foster their industries.

4.4

Terms of Trade

Export and import prices have taken on an increased importance in determining nations‟ real consumption possibilities, making information on the effects of changes in these prices an integral part of the story of macroeconomic development. In international trade, terms of trade is expressed as (Exports)/(Imports), or (Price Exports)/(Price Imports). In layman's terms it means how much is imported per export. Terms of trade are sometimes used as a proxy for the relative social welfare of a country, but this heuristic is technically questionable and should be used with extreme caution. An improvement in a nation's terms of trade is when there is an increase of the ratio and this is good for that country in the sense that it has to pay less for the products it imports. That is, it has to give up fewer exports for the imports it receives. Figure 4 below show the pattern taken by African countries over the past 8 years with the year 2000 used as base year for this calculation. Over these periods, Africa has enjoyed a favorable growth in her terms of trade, improvement may be due to domestic productivity shock that leads to an increase in domestic output and a decrease in its relative price in the world market. CEMAC, ECOWAS and AMU regions have a better result in the late 2000s when compared to SADC, reasons for these might be the persistent productivity shock that has been going through Africa in recent years, under the Lome Agreement with objectives to increase investment and shift capital to a more productive location. Considering that price of exports from African countries which is heavily influenced by currency value while keeping in mind that most countries had currency devaluation in the 90s, it turn to have influenced on interest rate in these countries. However, this improvement in terms of trade as we can see from the graph below might not necessarily imply an improved standard of living in these countries, consideration that different countries see the increase in price of export as a lower volume of exports.

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The EPA might encouraging African countries to keep this pattern of terms of trade and work on policies that could enhance the benefit into a welfare improvement and let the population feel the impact.

Figure 4: Terms of Trade Index 250 200 150

CEMAC ECOWAS

100

SADC AMU

50

0

Source: UNCTAD data (2008) readapted diagrammatically by author

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5. Conclusions This study used secondary data with respect to trade rational such as market share of Africa‟s export to world market, intra-regional trade within the continent and her balance of trade to predict the likely effect of EPAs on mother continent Africa. Given the structure of African economies, which is clearly in contrast with those of European Union member states, in terms of intra-regional trade and achievement of integration, the reciprocity condition implicit in the economic partnership agreements (EPAs) may have several consequences for Africa‟s export trade and general economic performance in the African region. However, African exports which already benefit from near duty-free access to the European markets and suffer from supply sides rigidities, will not significantly increase their sales on the European markets, while European exporters largely increase their shares on the African markets. As a result, African countries would likely undergo major trade imbalances, while the intra- regional trade might shrink to the benefit of African-European trade. The diversity of the regional groupings is problematic in the process to put forward internal reforms in order to promote their own competitiveness, regional integration, and growth, and to be willing to lock-in a program of implementation consistent with its own development priorities and pace of reform in various countries within the grouping. The EU through EPA, can provide support for African countries to embark on needed industrial transformation that follows the implementation of the EPA. The competitiveness of existing sectors needs to be improved, and establishment of new industries must be encouraged, principally in areas where regional groupings already have comparative advantage or where comparative advantage could be dynamically developed. Efforts must also be made to address the various supply side constraints that have limited the development of the industrial sector. The EPA is more than just a trade agreement. It carries with it the potential to commit the regions to a certain developmental path. That is, a path of unequal and asymmetrical integration of Africa with the wider world; of even greater loss of autonomy; and of sensitive fragmentation. The issue is that, the EPA may foreclose certain options to enhance export and integration. If that is the path the economic regions wish to follow; then they should do so with full understanding of the possible or likely consequences.In essence, EPAs must be as a result of the willful, voluntary consent of African countries, not the outcome of serious European strong-arming. There is a sense that in the end, decisions that have been

34

reached on the EPA in Africa have been reached out of a combination of expediency and fright considerations. This may be understandable; but the region will have to live with the consequences indefinitely, consequences that may prove difficult to reverse. Whichever way one looks at it, full disclosure, full explanation and full discussion of the agreement are vital for the way forward. Further research can be conducted on how committed African countries are in regional groupings thus reducing the problem of overlapping which could be considered are one of the setback of the EPA and also the policies put in place by regional government in favor of the partnership agreement.

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