An analysis prepared by the European Commission’s Directorate-General for Trade

On 3 April 2014, Heads of State and Governments of Africa and of the European Union gathered at the Fourth EU Africa Summit declared: “Our economies remain closely linked, and we will work to ensure that the growth of the one will help the other. We are also convinced that trade and investment and closer economic integration on each of our continents will accelerate that growth.” While acknowledging the “valuable role” of development assistance, they called for “a fundamental shift from aid to trade and investment as agents of growth, jobs and poverty reduction.”

Economic Partnership Agreements (EPAs) between the EU and African, Caribbean and Pacific (ACP) countries are the main pillar of ACP-EU trade cooperation, and aim at creating the right conditions for trade and investment. In this context, the EPA between the EU and the SADC (Southern African Development Community) EPA Group[1] establishes a long-term and stable trade relationship between both Parties, in compliance with international trade rules.

The current population of the SADC EPA countries combined is 89 million people. The two largest countries are South Africa and Mozambique, accounting for respectively 61% and 30% of the region’s total population. The average GDP per capita is roughly 3,700 EUR. In purchasing power parities (PPP), this value is much higher, at about 8,400 EUR. Behind this average hides significant variation. Per capita GDP in the region’s richest country, Botswana is approximately 15,700 EUR, which is roughly 14 times as high as it is in the region’s poorest country, Mozambique. The regional average GDP per capita is about 25% that of the EU. Real GDP grew by an annualised 3% over the last decade, a period in which the corresponding figure for the EU was 1%. In total, the EU imported about 23.7 billion EUR worth of goods from the region whereas its goods exports were 27.2 billion EUR.

The rationale and content of the SADC EPA

The EU’s trade relations with the ACP countries were historically framed by a series of conventions, which granted unilateral preferences to the ACP countries on the EU market. By the end of the 1990s, it was found that these conventions did not promote trade competitiveness, diversification and growth as intended. They were also found to be in breach of the World Trade Organisation’s (WTO) principles, as they established unfair discrimination between developing countries. A change was therefore required. EPAs were the response defined jointly by the ACP countries and the EU in the Cotonou Agreement signed in 2000. EPAs build a new reciprocal partnership for trade and development, asymmetric in favour of ACP countries.

In keeping with the objectives set out in the Cotonou Agreement, sustainable development is a key objective of the EPA, which is explicitly based on the “essential and fundamental” elements set out in the Cotonou Agreement (human rights, democratic principles, the rule of law, and good governance). The joint EPA institutions are tasked with the function of monitoring and assessing the impact of the implementation of EPAs on the sustainable development of the Parties, also carving out a clear role for civil society and members of parliament.

In view of these objectives, the EPA differs from most Free Trade Agreements (FTAs) currently in place or negotiated by the EU with other trading partners: while it remains a reciprocal agreement, it weighs in favour of southern Africa through specific provisions:

• Asymmetric market access: The EU has committed to opening its market more than the SADC EPA countries have committed to do. The agreement fully takes into account the differences in the level of development between the two regions.

• Safeguards: Under the terms of the agreement, SADC EPA countries continue to be able to protect their sensitive products from European competition either by keeping tariffs in place or, if necessary, by imposing safeguard measures. To support local agricultural production, the EU has also agreed not to subsidise any of its agricultural exports.

• Flexible rules of origin: companies in the SADC EPA region also have more flexibility to use foreign components while still benefitting from free access to the EU market. In the SADC EPA, the rules defining the origin are formulated in a way to support development of new value chains in the region. The so-called “cumulation of origin” enables canned fruit exporters to source fruit from neighbour countries, or textile producers to use imported fabric. This type of flexible rules of origin will benefit companies in agri-food, fishery and industrial sectors.

• Development: The EU complements the market opening effort of its partners with substantial development assistance. This will contribute to development, sustainable growth and reducing poverty.

The estimated effects of the tariff reductions set out in the SADC EPA

The economic impact of the EPA was assessed using a dynamic general equilibrium model, tailor-made for trade policy analysis and adjusted to the specific characteristics which apply to the southern African countries. In a conservative manner, only the impact of the tariff reductions was assessed, i.e. what is easily quantifiable from the agreement. Essential provisions of the EPA (rules of origin, trade facilitation, cooperation on norms, and development assistance) were not considered in the model even though they weigh in favour of SADC EPA countries. The results presented in this study are therefore expected to be exceeded over time.

Based on the simulation results, SADC EPA countries’ GDP will be positively affected by the agreement, albeit to a small extent: Individual countries see their GDP grow by between 0.01% and 1.18%, whereas the weighted average GDP increase, which is strongly dominated by South Africa, is about 0.03% (Importantly, all results refer to the situation in 2035 compared to a situation without the EPA).

The variation between countries reflects the extent to which the EPA and the baseline differ: in countries such as Namibia, the EPA provides duty-free quota-free access while the country, in the absence of EPA, would not benefit from a preferential treatment (hence the higher impact). In Botswana, the main export items (e.g. diamonds) would still benefit from low duties without the EPA (hence the lower impact). For a least-developed country like Mozambique, which would still benefit from duty-free quota-free in the absence of EPA, the main benefits to be expected rather come from the flexible rules of origin, regional integration as well as cooperation on norms and standards to boost its exports (all factors which could not be quantified and therefore were not included in the model).

Total exports from the SADC EPA Group to the world are positively affected by the EPA as are total imports. SADC EPA exports are expected to increase on average by 0.13% and imports by 0.14%. In particular, SADC EPA exports to the EU are expected to increase by 0.91%. The agreement has no measureable impact on the EU’s overall trade with the world. Exports to the SADC EPA countries are anticipated to increase by 0.73% against a scenario where there would be no EPA.

The sectors with the highest expected increases in exports from SADC EPA countries are red meat (15.3%) and sugar (13.7%). Other sectors where an increase in exports is expected are beverage and tobacco, dairy products, fisheries, motor vehicles, “other food”, textile, utilities, vegetable oil, vegetables and fruit, and white meat. While several of the increases are sizeable, decreases are usually below 0.1%, with the exception of wearing apparel (-1.2%), cattle (-0.8%) and electronics (-0.4%). The increase and decrease reflect the comparative treatment of each sector under the EPA by comparison to the baseline: in many sectors, EU customs duties are already low in the baseline scenario (especially when it comes to inputs into the production or primary products), while EU customs duties on finished goods and agricultural goods are much higher in the baseline than in the EPA, hence the higher positive impact in those sectors.

The remuneration of the factors of production is generally positively affected by the EPA even if only to a small extent. Remuneration of labour and land is generally expected to increase, while other factors such as capital and natural resources offer a more mixed picture.

The SADC EPA is expected to modestly reduce the poverty headcount in the two countries observed (South Africa and Namibia).

As a result of tariff reduction, SADC EPA countries will collect less import duties, but the decrease is on average not higher than 0.59% of total import duty collection at the end of the liberalisation period. Revenue loss is therefore expected to be limited.

Conclusion

The EPA paves the way for a stable and long-term bi-regional trade relationship between southern Africa and the EU. The outcome of the negotiations is a WTO-compatible Agreement that offers asymmetry in market access. The duty-free access to the European market for the Botswana, Lesotho, Mozambique, Namibia and Swaziland (BLMNS) countries will no longer be at the discretion of the EU but will be anchored in a treaty between the Parties. South Africa has also negotiated better access than currently granted under the Trade, Development and Cooperation Agreement (TDCA) between South Africa and the EU

Outlook

The EPA, including through its development cooperation pillar, is expected to facilitate intra-regional trade as well as the region’s trade with the world. The SADC EPA will also re-establish the common external tariff of the Southern African Customs Union (SACU) and thereby renew the proper functioning of the oldest existing customs union in the world.

The EPA creates a joint Council and a joint Committee in charge of the implementation of the agreement. It will be the task of those institutions to ensure that the EPA is properly implemented, as well as to make proposals for the review of priorities set out in the agreement. For that purpose, constant monitoring of implementation is paramount.

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[1] Botswana, Lesotho, Mozambique, Namibia, South Africa and Swaziland.