In continuation of last week’s series on the Economic Partnership Agreement between the European Union and West Africa (EU-West Africa EPA), I would like, in this final series, to analyse the agreement in terms of the opportunities and challenges it presents for West Africa. The EPA negotiations were concluded in February 2014 after ten years of talks. However, the fate of the agreement now hangs in the balance, with its ratification uncertain, because of Nigeria’s opposition to the deal. But, as I said last week, there should be an informed debate about the EPA, based on a factual analysis of what it actually says and not on some selective assessment of its content. This intervention is a contribution to that debate.
Now, the starting point is to recognise that all reciprocal trade agreements – and the EPA is a reciprocal trade deal – involve the exchange of concessions. As Emily Jones puts it in her book, Negotiating Against the Odds, “market access concessions are the currency of trade negotiations”. Every trade negotiation involves value-creating as well as value-claiming: everyone puts things on the table in order to take things from it! If a country approaches trade negotiations with the mindset of only claiming and not creating value, that country is not serious about building trade relations with other nations, which would be strange in a globalised world economy! But trade negotiations are also about balance of concessions. No trade agreement should be so skewed or unbalanced that it leaves the other party with an insignificant share of the pie. It is also conventional that, in trade negotiations between developed and developing countries, the latter should be accorded a special and differential treatment in recognition of differences in the level of development. So, against this background, what does the trade deal between the EU and West Africa look like?
Without a doubt, the EU-ECOWAS EPA is, like all trade agreements, dense and written in highly specialised and technocratic language. In addition to the preamble, the agreement is divided into seven substantive parts, consisting of 114 detailed articles. Part 1 describes the overarching objectives of the EPA, Part 2, the main trade element, sets out the tariff and non-tariff obligations of both parties, Part 3 is the development component and explains in detail the development programme that accompanies the EPA, and Part 4 deals with the dispute settlement process. The other Parts, 5, 6 and 7, address, respectively, general exceptions to the obligations, the institutional arrangements and the final provisions relating to, for instance, ratification and entry into force of the agreement. The EPA also comprises 6 annexes, covering rules of origin, customs duties, standards, customs matters and the development programme.
The Preamble and Part 1 (the objectives) are the prism through which the agreement, in its totality, must be seen. Under the Vienna Convention on the Law of Treaties, which governs the interpretation of the EPA, treaties are interpreted by reference to their ‘object and purpose’, i.e., what they are aimed to achieve. Thus, the Preamble and Part 1 of the EPA are critical to understanding the agreement. So, what does the EPA stand for? Well, the agreement states in its Preamble that it “must” be a “development tool” for “increasing the production capacity and exports of West African states and supporting the structural transformation of the West African economies and their diversification and competitiveness”. Part 1 goes on to say that the parties “undertake” to encourage improvement in the “supply capacity and competitiveness of the production sectors of the West African region”. These objectives are repeated throughout the agreement. This indicates the primacy of the objectives and the need to see the parties’ respective commitments within this strategic context.
What, then, are the parties’ respective commitments? Let’s start with the tariff dismantling obligations. The agreement sets out different tariff liberalisation regimes for the EU and West Africa. Article 10(1) and Annex B of the EPA state that products “originating in” West Africa “shall be imported into the EU free of customs duties”. The duty free commitment covers all West African products except arms. The everything-but-arms (EBA) policy has, of course, always been central to the EU’s preferential trade arrangements with the African Caribbean and Pacific (ACP) countries. But with the EPA, the EBA market-access concession would become a legally binding treaty obligation and not a best endeavours commitment that could be withdrawn at any time, as is usually the case with non-reciprocal trade arrangements, such as the US’s AGOA and even the Cotonou Agreement.
But what market access concession does the EU get from West Africa in return? Well, this is where the EPA becomes problematic, at least for Nigeria. Article 10(2) and Annex C of the agreement set out the tariff dismantling obligations of ECOWAS member states. These cover three categories of goods. Group A applies to social goods, capital goods and specific inputs. Group B covers inputs and intermediate goods. And Group C applies to final consumption goods. Under the EPA, ECOWAS member states must remove all customs duties on such goods originating in the EU by 2035. In other words, they must fully implement the tariff dismantling obligation within 20 years after the EPA enters into force, which should be this year!
However, the tariff dismantling requirement does not apply to all West African products. It only covers 75 percent of West Africa’s tariff lines, i.e., product classes as defined for the purpose of customs duties. The remaining 25 percent, under Group D, are excluded from the obligation. The Group D goods are described as “sensitive products” for West Africa. As I examined the long list, it struck me how much trade protection is built into the EPA in favour of West Africa. This will be clear from looking at the ECOWAS tariff structure.
ECOWAS has five tariff bands, the fifth added, by the way, at the behest of Nigeria. Only three of these tariff bands, where tariffs are already relatively low or even non-existent, are covered by the EPA tariff dismantling obligation. The three tariff bands and their current ECOWAS common external tariffs (CET) are: essential social goods (0 percent), basic goods, basic materials, equipment, specific inputs (5 percent) and intermediate goods (10 percent). The remaining two tariff bands, where the CETs are currently very high, are excluded from liberalisation under the EPA. Specifically, products currently facing a 35 percent CET, namely, finished products manufactured locally, such as processed meat, chocolate and printed fabrics are excluded from liberalisation. Similarly, products currently attracting 20 percent CET, i.e. consumer goods, such as cements, paints, perfumes and cosmetics, stationery, textiles and apparel and “fully built cars” are excluded. Given the scope of the excluded products, it’s clear that ECOWAS played an active role in the EPA negotiations. Evidently, detailed haggling over market access took place, and ECOWAS secured significant protections for its industries.
Of course, some would argue that removing customs duties completely on 75 per cent of tariff lines, albeit over a period of 20 years, is still a big deal. And particularly for Nigeria, it’s also a big deal that the agreement prohibits, under Article 34, quantitative restrictions, including import bans, which are key tools in Nigeria’s trade policy arsenal. In practice, though, any trade agreement that imposes a tariff dismantling obligation should include responsive provisions that allow any of the parties to suspend or modify the commitments in response to, say, external shocks, fiscal losses or damage to local industries. So, what flexibilities are contained in the EU-West Africa EPA? Well, unsurprisingly, the standard provisions!
Specifically, Article 12 provides for a change in the ECOWAS tariff commitments for “special development needs, in particular the need to support its common sectoral policies”. Chapter 2 makes provision for the use of trade defence instruments, namely, anti-dumping and subsidy countervailing measures (Article 20), multilateral safeguard measures (Article 21) and bilateral safeguard measures (Article 22). These measures, which include suspension of tariff reduction or increase in customs duties, may be introduced by ECOWAS if, for instance, EU products are coming into West Africa in such large quantities as to “cause or threaten to cause serious injuries” to domestic industries. Furthermore, the EPA includes a “fledgling” (or infant) industries clause (Article 23), which allows for temporary tariff protections if a flood of EU imports poses a threat to the establishment of an infant industry or to an existing infant industry. Then, there is Article 89, which allows ECOWAS to take or maintain trade restrictions if its members are facing serious balance of payments and external financial difficulties.
The devil, of course, is in the details. But, assuming ECOWAS can use these flexibilities in a way consistent with the EPA, they are no doubt significant tools for mitigating any future adverse effects of the agreement. Surely, if their use is driven by protectionist intent, that would violate the international law principles pacta sunt servanda and good faith fulfilment of treaty obligations, and cause friction with the EU. But, let’s be clear, mitigation is not what could make or break the agreement. Far more fundamental is the differences in beliefs about the gains that will accrue to ECOWAS member states from the EPA. Often, the main obstacle to a trade agreement between developed and developing countries is differing beliefs about the real benefits that will accrue to each party from such a deal. This, I believe, is at the heart of the controversy around the EU-ECOWAS EPA in Nigeria. Will the agreement benefit Nigeria or not? That’s the question!
I will come to that in a moment, but let me say at this point that, for me, the excessive focus in Nigeria on the tariff dismantling element of the EPA is misplaced. Leaving aside the fact that there are many benefits of tariff liberalisation, it is difficult to see, given the breadth of the excluded products in Group D and the responsive clauses, why any rational criticism of the EPA should focus on the progressive elimination of customs duties on 75 per cent of tariff lines over 20 years! What is more important, in my view, is whether the EPA can achieve the objectives set out in its Preamble and Part 1, and repeated throughout the agreement, about engendering structural transformation, economic diversification, production capacity, and competitiveness in West Africa, but particularly in Nigeria.
Let’s face it, unless West Africa’s economies are transformed as envisaged by the EPA, the region would derive little gains from the agreement. The EU is West Africa’s biggest trading partner, ahead of China and the US, and accounts for 37.8 percent of West African exports. However, in terms of sectors, West Africa’s exports to the EU consist mainly of fuels (77.8 percent), with food products accounting for 14.1 percent. Nigeria’s situation is even worse: fuels account for 95 percent of its exports to the EU. Critically, therefore, only through radically improved production capacity, economic and export diversification and international competitiveness can West African states, particularly Nigeria, significantly increase their non-oil exports to the EU, despite the guaranteed market access opportunities under the EPA.
Of course, trade liberalisation can create the critical adjustments needed to drive economic diversification, which is why the tariff dismantling obligation in the EPA is very important. But, as the World Bank and other international economic institutions have pointed out, trade liberalisation alone, without the competitiveness of supply capacity, conformity with international standards and connectivity to markets, cannot lead to sustainable growth or structural transformation. It is for this reason that the competitiveness and development elements of the EPA are extremely important. These relate to standards and conformity assessments (chapter 3), trade facilitation and customs cooperation (chapter 5), agricultural productivity and competitiveness (chapter 6) and the development programme (Part III). The extent to which these sections of the EPA are fully implemented would make the difference to the success or failure of the agreement.
Yet if I am positive about the EPA, it is because its trade liberalisation element is well-balanced by the competitiveness and development components. The focus of the EPA development programme on, among others, “diversifying and increasing capacities” and “improving and reinforcing national and regional infrastructure linked to trade” clearly recognises the critical complementarity between trade and competitiveness. As everyone now knows, the key obstacles to Africa’s integration into world trade, or participation in the global value chains, in terms of value-added exports, are what UNIDO once described as the “three Cs”, namely, lack of enhanced competitiveness of supply capacity; lack of recognised conformity with international standards; and lack of efficient connectivity to markets. The EU-West Africa EPA promises to address these challenges, with EU and its Member States “undertaking” to “finance the development aspect of the EPA”.
So, now, to the critical question: should Nigeria sign and ratify the EPA? Well, I have already given away the answer. In my view, Nigeria has little to lose, but a lot to gain, from the EPA. Nigeria’s main concerns are about the potential impacts of the EPA on domestic industries and on tariff revenue. However, a number of studies have shown that the EPA would have minimal adverse effects on Nigeria in these areas. For instance, a World Bank study last year found that even after the EPA’s tariff dismantling obligation has been fully implement in 2035, fiscal losses in Nigeria could be expected in the magnitude of 0.8 percent of total fiscal revenue. Also, according to the study, once the EPA is fully implemented, overall tariff protection in Nigeria would reduce modestly from 11.3 to 9.2 percent. This is largely because of the number of sensitive tariff lines (25 percent) excluded from liberalisation under the EPA. Furthermore, the study shows that two-thirds of Nigerian manufacturing firms would experience a net increase in profitability due mainly to lower input prices. In a recent paper by Abiodun Bankole of the Economics department of the University of Ibadan, in which he looked at Nigeria’s application of the ECOWAS CET between 2008 and 2012, he argued that production output actually went up from 0.7 percent pre-CET to 3.7 percent after CET. As he put it, “Evidence shows a positive response of the manufacturing sector to import liberalisation in general and CET in particular”. Again, the main reason for this is lower input prices.
The truth is that Nigerian manufacturers are more resilient and able to adjust than we give them credit for. Most of them do not need tariff protection or import bans to survive. Yet, according to a recent World Bank study, “Nigeria is more protectionist than the average for Sub-Saharan Africa and the world”. But this only entrenches the strong anti-export bias in the economy since export-oriented firms cannot obtain critical inputs, including technology, cheaply and easily! Of course, it is also well known that the competitiveness of Nigeria’s industries is hindered by serious supply-side constraints, including the huge infrastructure gap, high policy and regulatory costs, poor standards and conformity assessment regime, and high trade transaction and logistics costs due to a “mediocre” customs and trade facilitation regime, according to the Logistics Performance Index. The EPA gives Nigeria the opportunity to embark on far-reaching policy and institutional reforms, including in its tax and customs regimes, and to lock in these reforms, while leveraging the technical and financial support and investment from the EU, and the wider developed world through the international “Aid for Trade” initiative.
ECOWAS countries will lose preferential access to the EU market next year if the EPA is not ratified. But neither Nigeria nor any other ECOWAS country should be influenced by the threat of losing their EU access. Rather they should sign and ratify the agreement only if it is in the region’s and their country’s interest to do so. And my view, as I have tried to argue in this intervention, is that, if faithfully implemented, the EPA is a good trade deal!
Olu Fasan
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