The Economic Impact of EPAs in SADC Countries

The Cotonou Agreement introduces new fundamental principles with respect to trade between the European Union (EU) and African, Carribean and Pacific (ACP) countries relative to the Lomé Convention: in particular, negotiations on the basis of different regional groupings and reciprocity are now important pillars of EU-ACP co-operation. Non-reciprocal preferential market access for ACP economies will only last until 1 January 2008. After that date, it will be replaced by a string of Economic Partnership Agreements (EPAs) meant to progressively liberalise trade in a reciprocal way. The progressive removal of barriers to trade is expected to result in the establishment of Free Trade Areas (FTAs) between the EU and ACP regional groups in accordance with the relevant WTO rules and help further existing regional integration efforts among the ACP. An applied general equilibrium model (15 regions, 9 sectors) is used to simulate the impact of EPAs for countries of the Southern African Development Community (SADC), some of which are part of the SADC negotiating group, while others are part of the Eastern and Southern African (ESA) group, which includes members of the Common Market for Eastern and Southern Africa (COMESA). The standard Global Trade Analysis Project (GTAP) model has been extended to include the elimination of textile quotas, EU enlargement to 25 members as well as tax revenue sharing and a common external tariff among Southern African Customs Union (SACU) countries. A number of comparisons between different scenarios are undertaken, in particular: (i) the EPA scenario is compared to the multilateral liberalization scenario; (ii) SADC liberalization with the EU only is compared to a scenario with simultaneous regional integration among African economies and to the case of the EU also signing an FTA with Mercosur; and (iii) a complete reduction of import barriers is contrasted with partial liberalization (i.e. only 50 per cent tariff reductions in agriculture) and with full trade liberalization that includes the elimination of subsidies. The issue of tariff revenue loss is also addressed and the required tax replacement is calculated. Selected experiments are re-run under an unemployment closure. Simulation results show that an EPA with the EU is welfare-enhancing for SADC, leading also to substantive increases in real GDP. Estimated gains for the region as a whole are of the order of 1.5 billion dollars (constant 2001 $), but there is some evidence of trade diversion from the rest of developing countries. For most countries further gains may arise from intra-SADC liberalization. The possibility of the EU entering an FTA with other countries, such as Mercosur, reduce estimated gains, but they still remain largely positive. Similarly, estimated gains need to be revised downwards if agriculture liberalization is not as far reaching as a reduction of import barriers for manufactures. At the sectoral level, the largest expansions in SADC economies take place in the animal agriculture and processed food sectors, while manufacturing becomes comparatively less attractive following EU-SADC liberalization. Interestingly, multilateral liberalization would instead foster some of the manufacturing sectors (textile and clothing and light manufacturing). Results also show the need for the SACU tariff pooling formula to be adjusted to reflect new import patterns as tariffs are removed.