Adverse Effects on Industry, Agriculture and Government Revenue

The EPAs will hamper Africa’s industrialisation and development prospects. The EU is requesting that African countries bring 80% of their tariffs to zero, and insisting on having rules on goods trade in the EPAs, such as heavily restricting the use of export taxes and disallowing increases in present applied tariff rates.

The EU also wants the EPAs to open up Africa's services sectors to European firms, as well as have chapters with complex rules in the areas of intellectual property rights, investment and financial flows, government procurement, competition law and policy. 

These rules will severely remove or restrict policy space, preventing African governments from using policy measures to boost local firms and the domestic economy.    

Implications: African countries will no longer have the trade policy flexibilities that can support, in a dynamic way, the objective of increasing production capacities both in the industrial and agricultural sectors. 

According to economists,all countries which have industrialized used infant-industry protection to do so. These infant industries change as countries move up the value chain. For this upgrading of industries, countries need the policy space to have different tariffs at different stages. The EPA’s requirement to eliminate tariffs on 80% of products will drastically reduce this policy space.

The EU is also demanding restrictions on the ability to impose new export taxes or to increase existing export taxes. Export taxes have been historically proven as an effective instrument for industrialisation and diversification. They enable countries to retain raw materials domestically and to process them or make manufacturing products out of them, and thus add value to the raw materials. Restricting export taxes will limit a crucial policy measure for promoting industrial development.

These EPA disciplines will make it significantly harder for African countries to move up the industrial value chain. They are thus likely to remain mainly exporters of primary commodities. 

African countries have also been losing their capacity to produce their own food – largely because structural adjustment policies have forced them to have low agricultural tariffs. Cheap subsidised imports have been displacing local farmers' products. These IMF/World Bank policies can be changed, or African countries can move out of these policies when they no longer depend on their loans. However, the EPAs require the import liberalisation of some of the agriculture sector, with some agricultural products having zero tariffs and this could make the old structural adjustment policies permanent.

Food import surges in Africa are already a major problem in products such as sugar, dairy, poultry, rice, and vegetable oils. These are likely to worsen after the EPAs take effect. There will thus be adverse effects on farmers' incomes and livelihoods and on national food security. This is particularly so because the EU continues to give huge domestic subsidies that reduce the cost of its exports (milk, poultry, pork, beef, cereals etc), allowing them to unfairly out-compete local products.

These subsidies are not being removed either at WTO or in the EPA negotiations. The playing field is therefore tilted against African countries. With the EPA imposing liberalisation to the extent of zero tariffs, African countries will have little or no defence against the subsidised products.

Government revenue will also be affected by the EPAs. Since most tariffs on goods from Europe will eventually be reduced to zero, African governments will experience a reduction in the collection of customs duties. As these duties are a significant source of overall revenue, governments will have less revenue to fund their budgets. This is a major problem especially during the present period of global economic slowdown and lower growth in Africa.   Estimates by the South Centre show that collectively, the 47 African countries negotiating EPAs will lose USD 4-5 billion a year in tariff revenue. It remains doubtful if the EU will provide sufficient, new, legally enforceable and permanent funding over and above existing sources to make up for this critical shortfall.

Major Effect on Regional Trade and Integration

Even though the EPAs are supposed to foster African regional integration, this desired outcome will not happen with the type of EPA that the EU is proposing. In fact, the EPAs will damage the trade integration process within Africa and undermine Africa's present and future regional integration efforts in a number of ways, a few of which are listed below.

Firstly, the regional configurations are already being changed by the way that different EPA regions have been chosen. 

Secondly, the current (and proposed) common external tariffs in African regions are being disturbed by some countries within a region initialing an EPA and others not wanting to join EPAs.

Thirdly, the EPAs may divert goods, services and government procurement from other African countries to trade with the EU.

Fourthly, the EU’s insistence on the abolition of the community levies which fund some of the secretariats responsible for African regional integration may mean a severe reduction of funding for these regional secretariats.

Africa is actually the biggest market for Sub-Saharan Africa's manufactured exports. Excluding South Africa, the exports of manufactures of SSA to Europe in 2008 are only USD 4.8 billion, while manufactured exports of SSA to Africa in that same year are USD 10 billion, i.e. more than double.

With the EPAs resulting in SSA’s tariff elimination on most industrial products, Africa’s imports of EU manufactured goods will increase and this will hinder the fairly vibrant intra-African trade of manufactured products that is taking place today.

Sub-Saharan African countries already have a ‘hubs and spokes’ trade relation with Europe: 90% of exports from SSA (excluding South Africa) to Europe are fuels and other primary products. Only 10% of exports to Europe are in the form of manufactured products. With the EPAs, this imbalance will be accentuated and African countries will continue to be raw materials exporters, whilst also increasing their imports of industrial products from the EU.

The best opportunity for Africa to industrialise is through the use of the regional African market. However, to continue and improve on this trend, tariffs must be kept, and they must be adjusted dynamically in accordance with the processes and stages of industrialisation. This is not possible with the EPAs, where African producers will have to compete with EU exports in their own national and regional markets.

EPAs will Restrict Policy Space to Use Development Measures

The EPAs include issues that go beyond trade in goods. They include services trade, intellectual property rights, as well as the “Singapore issues” (investment, competition policy and government procurement). The WTO rules on regional trade agreements do not require that a bilateral or regional trade agreement must contain services or any of these non-trade issues.

The inclusion of these issues would expand the EPAs into very large areas, some of which are bigger than trade. They would lead to liberalisation of services, investment and government procurement that would enable the entry of large European firms, which would eclipse the small local firms. Moreover, these rules would make it hard for African governments to support or give preference to local enterprises. For example, it would be difficult for governments to buy local products or provide contracts to local firms – they would be subjected to competitive bidding procedures with EU companies.

The EPAs would also make it more difficult for African governments to take measures to counter the global economic slowdown or to avoid the effects of financial instability.

(1) EPAs will Affect Local Services

The EU is advocating that the EPAs include a chapter on Services and Investment. This is not necessary because the WTO rules do not require bilateral or regional trade agreements to include services. However, the WTO rules (in the services agreement) indicate that if market access in services is to be included, then they should cover a substantial amount of service sectors.

Thus, the EU model of EPAs would result in African countries liberalising a significant number of their service sectors (that may include finance, distribution, wholesale and retail trade, telecommunications, utilities, etc). Since most African services firms are still small, it is premature to subject them to such a significant opening up to competition from large European firms. In recognition of this, the WTO allows developing countries to open up their services only at their own chosen pace, and it is agreed in the Doha Round that LDCs do not have to make any offers to liberalise their services.

However, since the EU is aggressively pushing for EPAs to contain provisions for significant opening up of services to European firms, the result could well be that African service enterprises would be overwhelmed, and many service sectors would end up being dominated by European firms.

Another EU proposal is to have rules that require “competition elements” under many of the service sectors. These elements restrict the ability of governments to provide a boost or an advantage to local enterprises.  

The services and investment provisions may also:

·    Reduce African countries’ ability to regulate foreign investments and to require foreign investors to transfer technology, form joint ventures with local firms (and thus share equity and profits), etc.

·    Reduce African countries' ability to ensure affordable universal access to essential services such as telecommunications and postal services.

·    Restrict their ability to do value addition through shipping on domestic or regional ships.

(2) EPAs contain “Singapore Issues” that Reduce Policy Space

The EU wants EPA negotiations to include the non-trade issues known as “Singapore Issues”, i.e. investment, competition policy and government procurement. If agreements are concluded on these issues, they will significantly reduce the ability to African governments to regulate the rights of European firms and investors to enter and participate in the domestic economy, while also curbing the ability of African governments to give preferences and assistance to local companies.

 The provisions on Investment would:

· Prohibit or severely limit African countries' ability to restrict and control the inflow and outflow of foreign capital and thus would adversely affect Africa’s ability to regulate the volatile flow of short-term capital, thus subjecting the countries to financial instability.

· Reduce African countries’ ability to regulate foreign investments and to require foreign investors to transfer technology, form joint ventures with local firms (and thus share equity and profits), etc.

· Expand the rights and status of foreign firms which are likely to gain dominance in various sectors, while crowding out domestic firms.

The provisions on Government Procurement would:

·    Curb the ability of African governments to give preferential treatment to local companies in the procurement of goods and services, or in the award of contracts for government projects. This is because European firms (or local firms acting for European companies) would have to be given national treatment or be treated in the same manner as local firms.

·    Affect the present practice of many African countries, in which government procurement policies are used as developmental tools to boost the growth of the domestic private sector and as social tools to promote the share in the economy of disadvantaged groups and communities.

·    Limit the use of government spending as an instrument for combatting recession, as there will be increased “leakage” via imports and foreign profits. 

On Competition Policy, it should be noted that:

·    In the competition chapter as well as in the Services chapter, the EPAs would introduce elements and definitions of “competition” that may be premature or inappropriate to conditions in African countries. This is because competition as conceptualised in the EPAs is designed to give effective equality of opportunities and market access to European products and firms. This will limit the ability of African governments to provide preferences and support to local enterprises, and to have partnerships between the public sector and the domestic private sector.

·    It is important that African countries and Africa as a region define and develop competition policy and law in their own way, to suit their national objectives and development needs, rather than have an inappropriate definition of competition policy and law imposed through a particular model in the EPAs.

(3) IPR Rules That Go Beyond WTO Obligations

The EU also wants intellectual property disciplines introduced into the full and comprehensive EPAs. These EPA rules go beyond the obligations of the WTO's TRIPS Agreement, and have several adverse effects.   

If the IPR rules are similar to those in the CARIFORUM-EU EPA, they will require the patenting of more technology (that is needed for manufacturing, research and development and to deal with climate change) and therefore make them more expensive.

It will also mean more medicines are patented. (The price difference due to patents can be seen in HIV/AIDS medicines: when they were patented, they were US$15,000 per patient per year. When they are not patented and so generic versions are available, they cost US$80 patient/year)

The EPAs may also contain stronger enforcement provisions and this would make it harder to import generic medicines. These provisions will also limit Africa’s ability to manufacture generic medicine, which provides medicine security. 

African countries will also be pressurised to join other intellectual property treaties in the World Intellectual Property Organization (WIPO) that are against their interests.

Effects on Africa’s Ability to Counter Economic Crisis

The global financial crisis has provided lessons on the need for African governments to avoid the kind of financial speculation and financial bubbles that caused the crisis. The associated global economic slowdown also requires government measures and the consideration of policy options for new development strategies. The EPAs impede these two processes for the following reasons.

·    A major lesson of the financial crisis is that there is need to regulate the volatile flows of “hot money” or short-term capital, which can enter developing countries, cause bubbles in the stock market and property market, and then leave suddenly, causing economic devastation. However the EPAs require the free and unregulated flow of capital, thus preventing African governments from using capital controls, which are now recognised even by the IMF and the World Bank as being important measures in preventing financial volatility.

·    The EPAs promote financial liberalisation, which may result in the introduction of new foreign financial institutions and new financial instruments such as various types of derivatives, which are difficult to understand let alone regulate, thus increasing the risk of financial crises.

·    The increased imports of goods arising from comprehensive liberalisation of trade and of government procurement will likely result in a deterioration in the trade balance and the balance of payments in some African countries, reducing their foreign reserves and worsening their external debt situation. 

·    The reduction in tariff revenue will put a strain on the government budgets at a time when governments need to boost domestic demand and maintain or create social safety nets because of the economic slowdown.

·  The opening up of the government procurement market to foreign products and firms means that the macro-economic measure of increasing government spending (fiscal stimulus) will have limited effect due to leakage to imports and foreign profits.

·  As the global export markets slow down, African countries need to consider expanding the African regional market as a strategy to make up for reduced growth in traditional Western markets. However the EPAs may divert trade by increasing imports from Europe, and by the disturbance caused by the EPAs to African regional integration efforts.       

EPA Commitments Would Go Far Beyond African Countries’ WTO Commitments

African countries have fought hard and successfully to make gains in the WTO and in the Doha Round in many areas. However, many of the provisions in the EPAs contradict the African positions in the WTO and would remove or reduce the gains that Africa has made.

·  African countries have to abolish tariffs on most tariff lines in the EPAs. At the WTO, the LDCs in the Doha Round of trade negotiations need not undertake any liberalization commitments. This is because the WTO recognizes their economic vulnerability. Most African non-LDCs have been recognized as ‘small and vulnerable economies’ and are only required to undertake lenient liberalization commitments. The EU demands that African countries have zero tariffs for most of their products under the EPAs contradicts what the African countries are allowed in the WTO and in the Doha Round.   

·  EPAs prevent African countries from introducing new export taxes, or make this very difficult. The WTO allows countries to continue with export taxes which enable them to process their commodities and diversify their economies. 

·  EPAs contain a Most Favoured Nation (MFN) clause that makes it obligatory for African countries to offer EU improved market access if they have offered this to another major economy (e.g. China, India or Brazil). This will discourage China, India, Brazil etc from negotiating South-South trade agreements with Africa. This is contrary to the WTO’s permission for preferential South-South trade.

· EU is asking African countries under the EPAs to liberalise in most services sectors (contradicting the fact that LDCs do not have to liberalise any services sector in the Doha Round and non-LDCs can liberalise at their own chosen pace); and introduce more stringent IP standards (even though LDCs are exempted from them in WTO).

· African countries successfully joined other developing countries to remove the Singapore issues (investment, competition and government procurement) from the Doha agenda in the WTO because of their adverse effects on development. However, the EU is insisting that the EPAs contain these same issues.

High costs, Little Benefits

The costs of EPAs to Africa are high and many of them are permanent. The costs include the loss of tariff revenue, the damage caused to domestic industry and agriculture due to displacement by imports, the premature opening up of service sectors, the loss of the policy space required for investment and government procurement, reduced ability to address the economic slowdown caused by global crisis, and disturbance caused to Africa's regional integration efforts.

Yet there are little benefits to be derived from the EPAs by African countries. There are no extra benefits for the 33 LDC countries. This is because they already have the EU’s Everything But Arms (EBA) scheme, providing all LDCs with 100% duty and quota-free market access.

For the 14 non-LDCs, the EPAs would enable them to retain their preferences (zero duty access to the EU market). However, this preferential access is quickly eroding as the EU has signed or is signing free trade agreements with many other countries. Moreover the Doha Round when it concludes will further erode the preference margins. Thus the retention of preferences through the EPAs would have decreasing benefits which are also temporary, compared to the permanent losses and costs.

Many African countries are hoping that the EPAs will bring extra aid. But so far there is little evidence that any significant new funds are forthcoming. The EU is simply re-categorising existing funding – what some have termed ‘reheating’ existing funds. Due to the present financial crisis in Europe, it is even more unlikely that there will be new funds through the EPAs.