Trade Negotiations Insights • Volume 8 • Number 5 • June 2009

Africa and the Economic Crisis: the case for greater flexibility in EPAs

by Emily Jones

Discuss this articleShare your views with other visitors, and read what they have to say

Sub-Saharan Africa has been hit hard by the economic crisis. After a few years of sustained strong growth and high levels of optimism, growth rates are expected to fall to 1.5 percent in 2009.[1] Exports, which have driven much of Africa’s recent expansion, are expected to fall by 40 percent.[2] As it sweeps away firms, mines, jobs, revenues, and livelihoods, African finance ministers have called it ‘a full blown development crisis’. The World Bank has declared it ‘nothing less than an emergency for development‘.

As the crisis reverberates across the continent, African countries continue to negotiate Economic Partnership Agreements (EPAs) with the European Union. A cursory glance at the negotiations points to a deep disquiet on the part of most African countries. One and a half years after the end-2007 negotiating deadline, not one African region has reached agreement on a full EPA, and whilst 19 of the 47 individual countries initialled interim agreements, only two have gone on to sign. At the heart of these delays are a series of ‘contentious clauses’ that African Ministers have identified for renegotiation.[3]

Just as the crisis has highlighted the vulnerability of African economies, so it provides an opportunity to reflect on the EPAs and ensure that they will support African countries’ efforts to recover from the different facets of the crisis and develop economic resilience.

The food crisis

The financial crisis has amplified food insecurity. Even though farming dominates African economies, one in three people is chronically hungry. In 2007, 27 of 47 food emergencies occurred in Africa.[4] The recent collapse in exports has left foreign reserves dangerously low, and net food importing countries are struggling to import basic foods. At time of writing, the Democratic Republic of Congo only has a few weeks supply of foreign exchange reserves.

Trade with Europe is highly relevant. For many countries, Europe is a primary and growing source of agricultural imports. In West Africa in 2007, 30 percent of agricultural imports came from Europe, an increase of 13 percent on 2006.[5] Whilst subsidised European products have reduced prices for consumers, their adverse impacts on African farming and hence long-term food insecurity have been widely documented.

In the EPAs, African negotiators have excluded the majority of their vulnerable agricultural sectors from trade liberalisation. More than half of the products on Madagascar’s exclusion list are agricultural.[6] However, there is still cause for concern.

The standstill clause in EPAs requires countries to bind their tariffs at applied rates. In some texts the clause applies to all imports from Europe, including products on exclusion lists. This severely restricts the ability of governments to respond to agricultural import surges. For instance, at the WTO Ghana has bound its agricultural tariffs at 97 percent. The comprehensive standstill clause in the interim text prevents Ghana from raising agricultural tariffs above 20 percent on imports from Europe, even on items that it has excluded from liberalisation under the EPAs.[7]

In lieu of flexible tariffs, safeguards play a vital role. Unfortunately, many African countries are not party to the relevant WTO safeguards provided for in EPAs, and the bilateral safeguards require a level of institutional capacity that most African countries simply do not have. Although some of the agreements include a food security safeguard, this faces the same problems as in most cases it merely expands the scope of the existing bilateral safeguard.

Given Europe’s recent decision to re-introduce export subsidies to support its farmers through the economic crisis, African countries are more likely to need effective responses to import surges. Revising the standstill clause and strengthening safeguards so they are automatically triggered and simpler to use would significantly reduce any risk that EPAs pose to food security.

The export crisis

The global economic crisis has been most acutely felt in the export sector. Demand in major markets has collapsed, and prices for leading commodities have fallen dramatically. The price of copper, which accounts for 80 percent of Zambia’s export earnings, fell by 60 percent in 2008, and thousands of workers have been laid off.[8]

The story is similar across the continent. The crisis has highlighted the importance to African countries of diversifying their production and export baskets by adding value, strengthening production for regional markets, and increasing exports to emerging markets, which are still growing significantly despite the crisis.

In terms of fostering value-addition, there are challenges in the balance and sequencing of commitments in EPAs. The texts focus on the liberalisation of trade in goods and services without making such policy changes conditional on addressing supply-side constraints and regulatory weaknesses. This poses the risk that liberalisation will merely displace local producers rather than make them more competitive. Moreover, as liberalisation is only undertaken vis-à-vis the EU, in sectors where markets are uncompetitive and European exporters already have a dominant position, tariff cuts are likely to transfer income from African governments to European producers.

In addition, the use of many trade policy tools is heavily circumscribed. Exclusion lists include relatively few manufacturing products as countries have understandably prioritised agriculture. However as economies develop new sectors, they may need temporary tariff protection. At present, many EPA texts have no provision for the modification of tariff commitments. Infant industry safeguards could compensate by introducing flexibility but although texts make reference to infant industry safeguards, in most cases they can only be used for existing industries, not the fostering of new industries.

Regional integration has been a high priority for both sides but negotiations have tended to exacerbate an already complex web of overlapping integration efforts. Europe can contribute significantly to regional integration, as with recent initiative to create a trade corridor in Eastern and Southern Africa.[9] However such support is not a binding part of the EPA. Instead, African countries commit to a series of potentially high cost, albeit useful, reforms such as streamlining and upgrading customs procedures to meet international standards, without any guarantees of support from Europe.

Almost by definition, EPAs are unlikely to promote export market diversification, as they are intended to deepen trade with Europe. However, there are widespread concerns that the ‘most-favoured nation’ clause unnecessarily obstructs future diversification initiatives with emerging markets, particularly Brazil, India and China. Under this clause, ACP countries would have to extend to Europe whatever additional terms they offer to other trading partners.

Where the EPAs clearly have the potential to assist is by expanding value-added exports to Europe. The move to duty-free quota-free access is laudable, as is the decision to change the rules of origin for textiles to require only a single transformation. However, new rules on cumulation erode some of these gains by frustrating the development of production chains across EPA regions. Moreover, to make use of market access African exporters need to be able to meet increasingly stringent standards. The EPA texts contain supportive language, but again, provide no binding commitments to provide help.

The government revenue crisis

As industrialised countries embark on a series of fiscal stimulus and social support measures, the crisis has exposed the fragility of African government finances. Whilst Mauritius has managed to provide increased fiscal support worth 3 percent of GDP to vulnerable industries, other countries are being forced to cut back government spending as revenues decline. Senegal, for instance, is forecast to cut spending by 4 percent of GDP.

EPAs raise the concern that losses from tariff liberalisation will weaken already fragile budgets. In practice, estimated losses vary substantially. Some countries have minimised the impact by placing high revenue items onto exclusion lists or into the last liberalisation tranche. In other cases, losses may be significant. For instance, Cote d’Ivoire could lose $83m by 2012.[10] To counteract such effects, the EPAs envisage supporting countries to switch to other forms of taxation. However the IMF estimates that in low income countries, for each $1 lost in trade taxes, as little as 30 cents are recovered through alternative taxes.[11] Furthermore, for many governments, raising consumption taxes is not politically feasible.

To minimise the impact on government finances, all ACP countries could be provided with a 25 year transition period, as opposed to the 15 year liberalisation period in some EPAs. Safeguards could be incorporated to enable countries to suspend commitments in case of deteriorating government revenue. Finally, the EPAs could take the approach of other regional trade agreements and provide for compensation.

The financial services crisis

Africa has been less exposed to the direct effects of the financial crisis than other regions, largely because it is less integrated into global financial markets. Many countries have prudential capital controls that reduced the risk of contagion and reduced capital outflows during the crisis. Nonetheless, middle income countries have seen substantial losses. In South Africa the financial sector experienced a collapse of asset prices, with losses of 46 percent on the stock market and 23 percent depreciation in currency value.

Financial services have yet to be negotiated by African countries in the context of the EPAs. Given the recent crisis, there are clear grounds for caution. To improve resilience in the face of future crises, the IMF advises addressing gaps in regulatory and supervisory frameworks, reinforcing the supporting financial infrastructure, and improving financial system surveillance. To date Europe’s approach has placed relatively little emphasis on strengthening regulatory capacity, focusing instead on liberalising the financial services sector, including ‘new financial services’ such as hedge funds, and opening the capital account. In light of the crisis, the EPA could be rebalanced to focus on regulatory reform with adequate European support, prior to any liberalisation.

Conclusion

Across the globe, faith in the ability of the market to ‘self-correct’ is being questioned. A rethink is underway of how international markets are governed. Consensus is widespread on the need for stronger and more effective regulation, particularly in the financial sector. In the words of Gordon Brown at the end of the G20 summit, ‘the old Washington consensus is over’.

The crisis has revealed just how vulnerable African economies are to external economic shocks. It also highlights aspects of the EPA texts that are in the mould of the ‘old Washington Consensus’. To help recovery, African ministers have called for increased flexibility and policy space, and initiatives to boost trade. In this regard, elements of the EPAs clearly need urgent revision.

Author

Emily Jones is a DPhil candidate at the University of Oxford’s Department for Politics and International Relations.

[1] IMF, April 2009, Regional Economic Outlook: Sub-Saharan Africa P16

[2] ‘Impact of the crisis on African economies: African Perspectives and Recommendations to the G20′ A report from the Committee of African Finance Ministers and Central Bank Governors (March 17, 2009) Note: unless stated otherwise, figures in this paper on the impact of the crisis are drawn from this report

[3] ‘Addis Ababa Declaration on EPA Negotiations’, AU Conference of Ministers of Trade and of Finance, 3 April 2008

[4] FAO (2008) The state of food security in the world: 2008

[5] Author’s calculations from trade flow data www.trademap.org

[6] ECDPM & ODI (2008) ‘The new EPAs: comparative analysis of their content and the challenges for 2008′

[7] Article 15 of Ghana IEPA text, July 2008

[8] IRIN 20th February 2009 ‘Zambia: Copper loses its shine and Copperbelt its jobs’

[9] ‘European Commission pledges €115 million for trade project in Eastern and Southern Africa’ European Commission Press Release 6/4/2009

[10] ECDPM & ODI (2008) ‘The new EPAs: comparative analysis of their content and the challenges for 2008′

[11] T Baunsgaard and M Keen, Tax Revenue and (or?) Trade Liberalization, IMF Working Paper, WT/05/112 (June 2005)

One response to “Africa and the Economic Crisis: the case for greater flexibility in EPAs”

Alehlign Tsige 12th August 2009 at 14:42
what are the impact of the current economic crisis on the import and export sector