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 West Africa-EU EPA establishes a long-term and stable trade relationship between both parties, in compliance with international trade rules.

West Africa is the EU’s main economic partner among ACP regions, with strong political and social links to the EU. In the period 2008-2013, West Africa experienced strong economic growth (4.8% annually). West Africa’s trade with the world (exports plus imports) increased by 67% between 2007 and 2013, and West Africa’s trade with the EU by 70%. The EU is West Africa’s main trade partner (34.5% of West Africa’s exports and 22.1% of their imports); In 2014 West Africa exported €37 billion worth of goods and imported goods to a value of €31 billion from the EU (around 2% of EU trade with the world), percentages which are comparable to those of India or Canada.

The present report is part of the Economic analyses of negotiated outcome undertaken by DG TRADE at the end of negotiations. Contrary to earlier reports, it does not rely on possible scenarios but on the actual outcome of the negotiation between the parties, with a view to provide information to all stakeholders involved in the adoption process of the agreement, as well as to the wider public.

The rationale and content of the West Africa-EU 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. EPAs build a new bilateral 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 (as a factor favouring trade and investment, and as a condition for its compatibility with WTO principles), it weighs in favour of West Africa through specific provisions:

• Asymmetric market access in favour of West Africa: The EU has committed itself to open its market to all West African products as soon as the agreement enters into force. In exchange, the EU has accepted a partial and gradual opening of the West African market. The agreement fully takes into account the differences in the level of development between the two regions.

• Safeguards: Under the terms of the agreement, West Africa continues to be able to protect its 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 to West Africa.

• Flexible rules of origin: West African companies also have more flexibility to use foreign components while still benefitting from free access to the EU market. Cumulation of origin is allowed with a large number of developing countries (including ACP countries engaged in EPAs), so as to foster West Africa’s integration into regional and global value chains.

• Development: The EU complements the market opening effort of the West African partners with a substantial development assistance package. On 17 March 2014, the EU Foreign Affairs Council confirmed EU support of at least €6.5 billion for West Africa during the first period 2015-2020. The Economic Partnership Agreement Development Programme (EPADP) plays a crucial role in ensuring that the EPA promotes trade and attracts investment to West African countries. This will contribute to development, sustainable growth and reducing poverty.

The institutional provisions of the EPA set up a specific forum for West Africa and the EU to discuss and resolve trade issues: in that manner, the EPA creates a genuine bi-regional “partnership”, which is also extended to parliamentary representations and the civil society.

The conclusion of the EPA negotiations should also be seen in the context of West Africa’s efforts to improve regional integration, which materialised, for instance, in the adoption and entry into force of the Economic Community of West African States (ECOWAS) Common External Tariff (CET) in January 2015. Current intraregional trade is low, but the EPA would contribute to foster it especially through the flexible rules of origin provisions that are part of the agreement and the development assistance channelled in the EPA context for instance to support regulatory convergence and trade facilitation within the region.

The estimated effects of the tariff reductions set out in the West Africa-EU EPA

The economic impact of the EPA between the EU and West Africa was assessed using a dynamic general equilibrium model, tailor-made for trade policy analysis and adjusted to the specific characteristics which apply to the West 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, the EPA Development Programme, etc.) were left out from the model since they are difficult to quantify without making strong assumptions; still they weigh in favour of West African countries. The results presented in the study should thus rather be seen as a lower approximation which is expected to be exceeded in the long-term thanks to the non-tariff provisions of the agreement.

Based on the simulation results, West African countries’ GDP will be positively affected by the agreement, albeit to a small extent, up to 0.5% (all results refer to the situation in 2035 compared to a baseline without the EPA). Welfare is also expected to slightly increase, from 0.1 to 0.7% depending on the country but regardless of the country’s status as Least Developed Country (LDC) or not.

Total exports from West Africa to the world are positively affected by the EPA and so are total imports, though to a smaller extent. West African exports are expected to increase on average by 1.5% and imports by 1.2%. Despite the fact that most West African countries already enjoy duty-free quota-free (DFQF) access in the EU market, West Africa’s exports to the EU are expected to increase by 4.1%. The agreement does not affect the Rest of Africa’s trade with the world (0.0%) and has a small positive impact on the EU’s trade with the world (0.1% for both imports and exports).

Almost all sectors in West Africa are expected to benefit from the EPA through an increase in exports – with the highest increases in the following sectors: cereals (10.2%), other food (9.9%), red meat (8.4%) and wearing apparel (12.8%). Minor decreases in exports are expected in only three sectors: cattle (-1.4%), other crops (-0.6%) and other mineral (-2.2%). The increase in exports relates to agricultural sectors as well as industry and services sectors.

West African production is expected to follow the same pattern, with an increase in almost all the main sectors in each country. The sectors where production is estimated to increase mostly are vegetables/fruits, construction, metals, transportation and business services.

The report also highlight the case of several sectors such as cocoa and textiles, for which the EPA constitutes an opportunity for more transformation in West Africa and more value addition. For instance, the EPA provides access to the EU market not only for raw cocoa beans (as under the GSP) but also to cocoa powder, cocoa paste and chocolate. The textile sector will benefit from preferential rules of origin (only a single transformation required in order to keep the benefit of the preferential access to the EU market) that other competing countries do not have, thus incentivising investment location and production in West Africa, in line with West Africa’s industrialisation strategies.

EU’s exports to West Africa are expected to increase by 23.3%, reflecting the absence of preferential treatment for EU products currently. This increase would be in the sectors that West Africa decided to liberalise with a long timeframe and not on the sensitive sectors that have been excluded from liberalisation. That improvement in market access would only marginally affect other trade partners (mostly Asia and NAFTA) without however radically changing West Africa’s trade pattern.

The remuneration of production factors is generally positively affected by the EPA, albeit to a small extent. Remuneration of labour is expected to increase in all countries (up to 0.9% in Côte d’Ivoire), while other factors such as capital, land and natural resources would also gain in most countries, with limited exceptions. Tariff reduction is expected to slightly reduce the poverty headcount in the two countries observed (Ghana and Nigeria).

As a result of tariff reductions, collected import duties will on average be lower in 2035 (by 11.7%). Compared to GDP or government revenues, the reduction in import duties remains limited (respectively -0.3% and -2%). It should be noted that this is only the impact of the tariff reductions, without taking account the positive impact of fiscal reforms that West African countries might undertake, or the other elements of the EPA (e.g. the EPADP).

Conclusion

The simulation of the impact of tariff reductions set out in the EPA shows positive gains for West Africa, though small. However, the gains for West African countries should be considered as lower bounds since the modelling takes into account only those aspects of the EPA that are readily quantifiable (tariff reductions) and does not cover other aspects that are more difficult to quantify, but can affect positively West Africa’s economy.

For example, the relaxation of rules of origin should enable West Africa to take better advantage of the market access offered, to enhance cooperation among them as well as regional integration. Improvements in the quality of infrastructure and reduction in delays in trading through trade facilitation measures can reduce trade costs and further increase exports. By establishing a favourable and predictable regulatory environment and enhancing good governance, reducing corruption and increasing political stability, West African countries should be able to stimulate trade and investment further. All the aforementioned elements cannot be easily and accurately quantified and therefore they were not included in the analysis.

The EPA creates several joint institutions in charge of the implementation of the agreement (Joint Council, Joint Committee, Parliamentary Committee and Consultative Committee). It is the task of those institutions to ensure that the EPA is properly implemented, as well as to make proposals for reviewing priorities set out in the agreement. For that purpose, constant monitoring of implementation of the EPA is paramount. The setting-up of the Competitiveness Observatory would be important in this context too. It covers implementation of all aspects of the EPA from trade liberalisation, sustainable development to development cooperation actions. This will be achieved through a participatory and inclusive process, involving various actors and stakeholders.

In addition, the EPA foresees discussions on a wider negotiation agenda (“rendez-vous clauses”) covering other areas affecting trade and investment, for instance services, investment, or sustainable development, which could bring additional benefits to the countries concerned, when concluded.