EPAs, Trade and Development Paul Brenton Trade Department World Bank

Key Issues The new global economy presents challenges and opportunities for ACP countries To realize the opportunities, ACP has to reverse past trends toward declining world market shares of goods and service ACP countries can use EPAs to leverage global competitiveness and sustained export growth … if they seize the opportunity to forge a pro-reform negotiating strategy

The global context Developing countries share of world trade will rise as global integration intensifies… Exports from developing and developed countries, 2005-2030 US$2001 trln. $27 trln High-income countries If our scenario materializes, the next wave will lead to an unprecidented increase in trade in goods and services. In earlier periods, the main drivers of globalization have been falling transport costs, falling communications costs, and falling barriers to trade. The next wave will be driven by China and India’s unreserved embrace of globalization as a development engine, growing trade in services (made possible because of recent advances in communication.), and accelerated diffusion of technology. In 1998, only 10% of the world’s 180 m users of the internet were in developing countries; today there are 900 m users and 300 m are in develeoping countries– and all have access to the latest technology and infomation. Developing countries 45% 32% 22% Source: World Bank simulations with Linkage model.

…and the share of developing countries in global output will rise… The global context …and the share of developing countries in global output will rise… GDP of high-income and developing countries (market exchange rates) US$2001 trln $72 trln High-income countries In terms of purchasing power, developing countries already account for 47%. By 2030, they could account for as much as 60 percent of the global economy. Developing countries 31% 23% 16% Source: World Bank simulations with Linkage model.

The global context China’s surge – and that of other developing countries – represents more opportunity than threat Exporting requires importing, and China’s imports are rising rapidly Imports in USD billions Source: WITS, Bank staff calculations

The global context But China’s surge – and that of other developing countries – represents more opportunity than threat Exporting requires importing Surging growth means rising wages Internationally comparable average wage rates, indexed, 1998=100

Growth will raise incomes and reduce absolute poverty The global context Growth will raise incomes and reduce absolute poverty Average incomes are likely to double …and sharp reductions in dire absolute poverty But if current trends persist, Africa will host most of the worlds poor Millions of people 28% Other 20% Sub-Saharan Africa 12% South Asia The scenario would be good news for the the world’s poor. Growth, if it transpires as we think it could, would reduces the ranks of the absolute poor by 450 m. despite population growth. 8% East Asia

Global market share has fallen for the last 25 years The Trade Problem for Africa: the example of ESA Global market share has fallen for the last 25 years Average ESA countries’ share of world merchandise exports (% of US current dollars) Average ESA Countries’ share in world merchandise exports Source: Bank staff calculations, based on data from IMF World Economic Outlook, Ethiopia and Eritrea counted as one country

In comparison, 16 fast growing economies gained market share… The Trade Problem for Africa: the example of ESA In comparison, 16 fast growing economies gained market share… Average share of world merchandise exports (% of US$ current) Average HP 16 ESA Average HP 16 Average ESA Source: Bank staff calculations, based on data from IMF World Economic Outlook, Ethiopia and Eritrea counted as one country

Performance in services trade has been equally disappointing The Trade Problem for Africa: the example of ESA Performance in services trade has been equally disappointing Average ESA countries’ share of world services exports (% of US current dollars) Average ESA Countries’ Share in world service exports Source: Bank staff calculations, based on data from World Economic Outlook, Ethiopia and Eritrea counted as one country.

... Whilst fast growers have used trade in services to drive growth The Trade Problem for Africa: the example of ESA ... Whilst fast growers have used trade in services to drive growth Exports of service as share of world services trade (% of US current dollars) Average for HP 16 Average for ESA Source: Banks staff calculations, based on data from World Economic Outlook, Ethiopia and Eritrea counted as one country

The EU will decline in importance as a destination for exports The Trade Problem for Africa: the example of ESA The EU will decline in importance as a destination for exports ESA SADC

Reform is necessary in ACP countries to attain global competitiveness Countries everywhere are adopting reforms to take advantage of new global opportunities Successful programs have had five key characteristics… Trade and tax reforms to encourage exports and allow access to key inputs at world prices Openness to FDI, especially in services Sound macroeconomic and supportive business climate Sustained investments in education and skill enhancement Support to firms and labour to move resources out of inefficient sectors into efficient ones

Ways ACP countries could use EPAs to promote growth…… Reform is necessary in ACP countries to attain global competitiveness Ways ACP countries could use EPAs to promote growth…… To leverage national and regional reforms Tariffs, transportation, and border barriers Tax structures Services Investment climate To leverage changes in EU policies Rules of origin Other market access issues (eg standards) Offensive interests in “rules agenda” Let’s elaborate on the national and regional objectives…

Use EPAs to phase down high MFN tariffs, NTBs and transport barriers Because high border barriers: undermine competitiveness, risk trade diversion, and impede intra-African trade… NAFTA and the Asia Free Trade Area have low tariffs, and many analyses show that trade creation has far outweighed diversion and stimulated trade gains. Some of the EPA regions have high tariffs. But these mask consideration dispersion at the country level. At risk of over generalization, I would argue that the problem with Africa’s trade regime is the proliferation of high tariff peaks and the high tariffs is a handful of countries, for example Nigeria and Sierra Leone. Some country-groups are not so far above East Asia’s average of about 10% One of the most powerful tools to spur intra-African trade is to make it a regional priority to bringing down MFN tariffs toward the average of the lowest tariff countries as an early step in the liberalization process. This would also reduce the cost of preferences granted later to EU firms as part of any EPA. Average MFN weighted tariffs Note: EPA Tariffs are import-weighted at the country level, then weighted by GDP at EPA averages Source: UN TRAINS, accessed through WITS

Use EPAs to reduce trade costs Days through ports to warehouse Time is money. One extra day in customs or ports or in transport essentially adds almost 1% to the cost of landed goods, driving down the competitiveness of the economy (Hummels, 1999). Source: World Bank, Doing Business 2006

Use EPAs to leverage reforms in tax policy: Challenge: Fiscal revenues could fall 2-20% if all tariffs removed on EU imports Part of the broader development challenge is to move away from reliance on tariffs as a source of revenue – need to increase tax base, improve revenue collection

Use EPAs to improve regional investment climate and lower costs of backbone services Liberalize transport, telecoms, and other trade-related services Regional regulatory frameworks – e.g., power, air transport Regional infrastructure investments

From objectives … to a pro-development agreement An illustration… A Program of phased variable geometry for MFN tariffs consistent with regional development programs, e.g.: Phase 1 & 2: Eliminate all internal barriers in CU/FTA Phase 1-2: Bring down MFN peak tariffs to average to promote intra-African and other efficient trade Phase 2-3: Bring down average MFN average levels to East Asian levels Phase 3: Allow EU duty free access to EPA markets Less restrictive rules of origin (choice of satisfying either a 10% value-added requirement or change of tariff heading) A program of trade facilitation measures – to reduce costs of trading, with special attention to lowering transit costs of land-locked countries A program of technical and financial assistance for trade facilitation, SPS, and supply side measures (e.g., infrastructure)

From objectives … to a pro-development agreement An illustration… A program of gradual but purposeful reforms of tax administration and intra-regional tax policy to harmonise tax structures A program of services liberalization on MFN basis that supports regional development… Phase 1: Open services where markets discipline sellers (e.g, retailing, professional services) Phase 2 & 3: Open services where regulations are required (e.g, telecoms, finance, electricity, transport) Make no concessions on investment, competition and IPR beyond what is in EU- Mexico or EU-S. Africa arrangements. Disciplines can entail significant risks, but disciplines in existing EU-led free trade agreements have been mild. A program, however small, of temporary movement of persons

In conclusion… ACP countries are confronting the challenge of moving from preference dependence to being more dynamic exporters in a competitive global environment Need to create incentives to move private resources into internationally competitive activities – and release those now bottled up in low productivity sectors… …and up-grade essential service industries, including introducing new competition and efficient regulation … …together with safety nets to support workers (not jobs) and measures that provide training and education to all If EPAs can be designed to support such an agenda then they will be effective tools toward competitiveness, integration into the global economy, growth and development Definition of RTA Liberalizing effect modest from a global perspective, though important for some participants

Further Reading and References Global Economic Prospects, 2007 Managing the Next Wave of Globalization Paul Brenton “Preferences for Africa: How Much are They Worth?” in Trade, Doha, and Development: A Window into the Issues R. Newfarmer (ed.) World Bank: Washington Hinke, L.. M. Hoppe, and R. Newfarmer 2005 “Beyond Cotonou: Economic Partnership Agreements in Trade , Doha, and Development: A Window into the Issues R. Newfarmer (ed) Washington: World Bank. World Bank, Global Economic Prospects, 2005: Trade Regionalism and Development Wasington: World Bank, 2004.