1. EPAs, Trade and Development
Paul Brenton
Trade Department
World Bank

2. 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

3. The global context
Developing countries share of world trade will rise as global integration intensifies…
Exports from developing and developed countries,
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.

4. …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.

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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.

11. ... 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

12. 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

13. 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

14. 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…

15. 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

16. 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

17. 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

18. 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

19. 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)

20. 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

21. 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

22. 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 “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.