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The European Union–West Africa economic partnership agreement

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IFPRI | 2 February 2016

The European Union–West Africa economic partnership agreement

by Antoine Bouët, David Laborde Debucquet, Fousseini Traoré

The objective of this research is to evaluate the economic, trade, and poverty impact of the EPA between the EU and the ECOWAS countries. This agreement consists of the implementation of a free trade area between the signatory countries, complemented by a DP. The evaluation is based on a dynamic multicountry, multisector general equilibrium model, MIRAGRODEP, and a microsimulation focused on Nigeria and Ghana using the final text of the agreement.

We conclude that globally, the EPA’s impact is either positive or negative for ECOWAS countries; while trade is increased overall, the impact on GDP and welfare in these countries is either positive or negative. If consumption prices are reduced due to the reform, the loss of custom duties requires the implementation of a new tax, which necessarily reduces welfare.

This study raises a number of issues concerning the trade agreement.

First, the effects of this agreement are small, if not tiny. This is not a surprise; due to both the characteristics of current trade policies and the characteristics of the agreement, the reduction in trade barriers is not large. Moreover, the magnitude of the DP is limited.

Second, there is a substantial difference in the economic mechanisms at play between ECOWAS LDCs and non-LDCs. For the latter group, increased exports come from a reduction in trade restrictions implemented by the EU, along with a simultaneous reduction of their own trade barriers on European products. For the former group, the immediate impact of the agreement is only a reduction of their protection on European products. More imports lead to a deterioration of LDCs’ trade balance, which brings real depreciation through a reduction of domestic prices. This internal devaluation helps restore these countries’ competitiveness and positively affects their exports. Thus, these are very different economic mechanisms that lead to the same result: increased exports leading to increased trade activity.

Third, the EPA agreement raises the issue of a fiscal adjustment. Custom tariffs represent an important part of public revenues in ECOWAS countries. However, the EPA entails a significant reduction of custom duties, since the EU is an important and significant trading partner in the region. To maintain public expenses and the provision of public goods constant, ECOWAS governments will have to find an alternative source of public revenues.

In this research, we adopt a central scenario in which a lump-sum tax is raised to compensate for this loss of public revenue. A sensitivity analysis is conducted in which a tax, either an additional consumption tax or an additional income tax, is raised to maintain the pubic expenses per capita constant. This illustrates that the EPA could affect households’ income and welfare by affecting the public revenues of these countries. The fiscal closure rule, in which no alternative tax is raised to offset the loss of custom duties and public expenses adjust to maintain the public sold constant in percentage of GDP, implies that the provision of public services is altered; as such the measurement of welfare is uncertain.

In conclusion, the benefits of the EPA between the EU and WA’s countries appear small, if not negative. West African countries should find a source of increased growth from other trade agreements, either multilateral or regional. For example, the implementation of a continental free trade area could create more economic expansion. This is an important policy perspective that requires further evaluation.

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 source: IFPRI