EPAs will bring more costs than benefits

Economic Partnership Agreements are undertakings to create a Free Trade Area (FTA) between the European Commission of the European Union and the African, Caribbean and Pacific (ACP) countries. Benjamin William Mkapa explores whether it is worthwhile for the EAC.

In June 2010, the EAC decided, wisely, to hold off the signing of the Economic Partnership Agreement (EPA) with the European Union. Our negotiators chose to continue the negotiations, as the package on the table remained highly problematic. Signing it would have compromised the future development of the EAC region, as well as jeopardised the potential of regional trade and integration.

Although the negotiations have not moved much since last June, the EPA remains on the table and member states seem to be preparing themselves to re-engage.

In this context, a very basic question must be posed. Does the EAC need the EPA? If an EPA is signed, what are the costs and the benefits, and would the benefits outweigh the costs?

Trade trends in the EAC

It seems to be conventional wisdom that the EU is the EAC’s main trading partner. This, however, is a misperception. Up-to-date trade statistics show that in fact, the trend for quite a long time has been that EAC exports to the EU (as a percentage of overall trade) is declining. At the same time, EAC export to Africa is on the rise. In fact, by 2008, EAC exports to Africa ($4 billion) surpassed EAC exports to the EU ($2.9 billion).

However, the quantity of export in and of itself is not a satisfactory indicator of development. For the EAC countries to develop, our countries should not be exporting raw materials, but transforming these and exporting a more diversified range of products, particularly manufactured products. The markets that we have for value-added manufactured products are therefore more important to us.

Here again, trade statistics tell us that EAC exports its manufactured products predominantly to Africa. In contrast, its exports to the EU are largely by way of primary commodities. 

The Costs of the EPA

The problem with the EPA is that it is largely a reciprocal trade agreement between EAC countries and a giant economic power house, the EU. Under the EPA, ECA countries would have to bring to zero, tariffs on EU products for 80% of our imports from the EU. The consequences of this are deep and myriad.

Losing the opportunity to industrialise?

Opening the bulk of our fragile manufacturing and agricultural sectors to EU imports will mean that EU products will easily out-compete many of our local firms and farms. The EU will be able to monopolise our local markets in certain products, both within the EAC, and also in other African markets (if they also sign EPAs). The current rise in production and exports we are witnessing in East Africa, will inevitably take a hard beating.

Not only will regional employment be affected as imports from Europe increase and displace domestic farms, the opportunity we have to transform, develop and industrialise our economies will be put jeopardy.

It should be noted that in addition to the elimination of tariffs, EU also wants the EAC to halt any introduction of new export taxes. Export taxes have been used by developed and emerging economies alike to keep primary commodities in the country in order to process them or use them for manufactures. These taxes encourage diversification, rather than the exportation of raw materials

If we sign the EPA, our main utility to Europe will be to sell primary commodities to them, and to reimport these goods once Europe has added value to them. It would be difficult. It would be difficult, if not impossible under these conditions of competing with Europe, for EAC to develop, the EAC to develop and economically diversify.

EAC countries would do well to look back into our recent past. With the onset of structural adjustment policies in the 1980s and 1990s, our countries, under pressure from the international financial institutions, reduced tariffs drastically. Some of our industries and farms went under as they could not compete with other overseas suppliers that gained access to our markets. Our trade policies are therefore critical instruments that can make or break our industrialization and diversification strategies.

The Food Crisis: EPA will be the wrong approach

Our region is also now facing difficulties due to high global food prices. According to recent UN statistics, the current price for basic foods globally is 37% higher than a year ago. In the EAC region, the increase in food costs is already affecting people. Some experts are predicting that these high prices might remain for a significant time to come.

In this context, it is important that the EAC region increases its own food production as the strategy for coping with high food prices. However, to do this, farmers will have to be supported for instance by having the security that they will have a local market to sell their produce to. If we liberalise vis-à-vis the EU, our own small farmers will have less and less access to this domestic/regional market.

It should be borne in mind that the EU provides subsidies to its farmers to the tune of about 85€ billion yearly. Europe has refused to eliminate or reduce these subsidies in the EPA negotiations, and they have also not done so in the World Trade Organisation (WTO) negotiations. Under these circumstances, the agricultural trade with EU will always be lopsided and unfair. Hence, the importance of EAC tariffs, so that local EAC farmers are protected from this unfair trade.

In the face of high food prices, and in times when food supplies are low, EAC countries can unilaterally lower their applied tariffs to import food at a lower cost. However, we should not agree in an EPA binding ourselves at 0% tariff rates if we are serious about increasing our own domestic food production into the long term, and assuring our producers of an internal market.

Regional trade and integration foregone

The dream of regional integration is not an end in itself, but for all of us in EAC, it is primarily to support the development of each of our individual countries, particularly the transformation of our economies. The expanded regional market can be used to jumpstart regional industrialization processes. From the trade statistics cited above, this is clearly happening. Unfortunately, this process would be curtailed if the EU is now given preferential access to the regional market.

Tariff revenue losses

Negotiating an EPA will the EU will also mean that we forego a big chunk of government revenue resulting from trade with the EU. As our economies grow and trade increases, the revenue foregone would in fact be increasing.

According to World Bank figures, about 10% of Uganda and Kenya’s government budgets come from international trade taxes. They are 50 times more dependent on these more dependent on these taxes than members of the OECD. It is not so easy for our countries to recuperate these revenue losses through other means such as taxation, given the extent of the informal economy.

Services liberalization

The other area of interest to the EU is the liberalization of EAC services markets. This will have ramifications on employment, as well as our ability to regulate critical sectors, with far-reaching consequences. Services range from professional services to business, retail, telecommunications, environment, water, transport, energy, health services etc. Liberalisation means that our ability to regulate certain sectors will be curtailed.

For instance, if the financial sector is liberalized, it could mean that our economies are open to the kind of derivative and hedge fund activities that were responsible for the financial crisis. New conditions put on investors could be difficult to introduce later on e.g. having banks provide concessional loans to the agricultural sector. If retail services are liberalized and no limits are set on the number of supermarkets that can enter the EAC market, putting these in place later on would not be possible. Most importantly, would our services providers be able to compete with EU providers?

The benefits of the EPA

At present, the four Least Developed Countries (LDCs) in the EAC – Tanzania, Burundi, Uganda and Rwanda – already have duty-free and quota-free access to the EU market under EU’s Everything But Arms (EBA) preference programme. It is only Kenya as a non-LDC that does not have access to the EBA. Not surprisingly, there are some industries in Kenya that are pushing for the EAC EPA e.g. the Kenya flower industry. This industry has always enjoyed duty-free access to the EU market under the trade component of the Cotonou Agreement. The flower industry wants to continue these benefits; hence it is keen for the EAC to sign the EPA. Without the EPA, Kenyan flowers entering the EU could face duties of between 8.5 – 12%. With the EPA, Kenya will also enjoy duty-free access to the EU market for other products such as fish and tuna, and certain vegetables and fruit including beans and pineapples. 

Negative balance

The concerns of the Kenyan flower industry are valid. However, these benefits of the EPA must be weighed against. • The revenue losses the country will experience; • The costs of de-industrialization and the negative effects to the agricultural sector (many firms might face acute problems, even closure); • The costs of implementing the EPA; as well as • The costs of the EPA for the economies of the other EAC LDCs (revenue losses, losses to specific industries etc).

To sum up, the EAC would face tremendous challenges in industrializing our economies under EPA conditions. It will also be very difficult to build a robust agricultural sector, under the conditions of unfair competition with the EU for the agricultural products we would liberalize.

Calculations by the South Centre (Box 4) in fact show that the cost of an EPA is higher than the benefits. Using 2008 trade data, tariff revenue losses for Kenya are in the region of USD 288 million per year if an EPA is signed. In contrast, an estimate of the additional tariff costs their flower and other top 30 exports will face entering the EU market without the EPA is about USD 114 million. These figures do not take into account the broader effects of the EPA on other industries in Kenya and the other EAC countries.

Way forward

Rather than exerting energies on negotiating the EPA, the EAC region should concentrate its efforts on consolidating our new customs union, as well as putting our energies into elaborating on and implementing carefully thought through and robust industrialization, agricultural and services strategies.

The African market is already providing us with the best opportunities in trade – both in quantity and quality. We should optimize this opportunity. The emerging tripartite arrangement of the EAC-SADC-COMESA will further consolidate this opportunity of expanded regional integration. The emphasis must be an building production capacities in the region, in an manner that provides the maximum opportunities for employment. Further intra-regional trade will naturally follow.

As opposed to the developed country markets, Africa and the EAC and the EAC are the growth markets of tomorrow. Africa is also the world’s reserves for minerals. We should understand that Europe needs Africa for its future wealth creation.

If Europe is serious about supporting African integration, and preserving the integrity of our customs unions, it needs to offer Africa a uniform trade regime. The Everything But Arms (EBA) duty-free quota-free scheme for all countries in customs unions made up of predominantly LDCs would be the best solution. Through this, African this, African countries would enjoy Everything But Arms preferences.

Since even the African countries that do not have LDC status share similar characteristics with LDCs – they too have low incomes, with underdeveloped economies that need rapid upgrading – such a scheme for all of sub-Sahara Africa based on their common needs is justified.

That way, African regions can also retain their economic regional integrity and Europe would be showing the way to other developed countries to truly assist Africans with their uphill task of economic and social development.

June 26, 2011

Source: Daily Monitor, Uganda