From 1948 to the present, the world has witnessed the evolution of multilateral trade regimes. From the creation of the General Agreement on Trade and Tariffs (GATT) to the World Trade Organisation (WTO) where regulations and agreements on trade in goods, services, intellectual property and investment have been enacted and agreed upon to reduce trade barriers and create fair competition among all countries.
However, with over 160 countries being signatories to the WTO multilateral agreement, we have still seen the rise of Regional Trade Agreements (RTA) and Bilateral Trade Agreements in force, growing from 62 to 461 between 1995 and 2017. Because of this, academic scholars and researchers have begun a debate on why the increase of RTAs and Bilateral Trade Agreements (BTAs) among WTO members, trying to find out the opportunities that they seek to explore that they can’t get from the multilateral agreements and the challenges that are likely to face.
This article will use the Ghana – European Union (EU) interim Economic Partnership Agreement (iEPA) as a case study and argue that even though Ghana may be benefiting from unlimited access to the EU’s market, which can lead to industry upgrading, the elimination of import tariffs from EU’s imports, the existence of non-tariff barriers to trade with other West African countries within the iEPA and Ghana as a signatory to the Cotonou agreement (ended February 2020), brings on board a lot more challenges that will offset the benefits/opportunities that iEPA offers Ghana.
Review of the Ghana-EU Interim Economic Partnership Agreement (iEPA)
EU is already Ghana’s biggest market for its agricultural products totally over €5.5bn in 2017. The iEPA was initialled in 2007 and approved in the EU parliament in December 2016 as an initial framework towards a fully-fledged Economic partnership agreement (EPA). Both parties developed and signed it as a steppingstone to safeguard their economic interest to avoid the risk of the WTO getting a compatible agreement to replace the Cotonou agreement when it expires.
The objectives of the iEPA were:
- to allow Ghana to gain enhanced market access to the EU without disruption after the expiration of the Cotonou agreement
- to use it as the starting point to negotiate a full EPA.
- Help Ghana integrate into the world economy harmoniously without compromising on Ghana’s political and developmental choices and priorities; and
- create an agreement that is compatible with the article XXIV of GATT 1994.
In terms of product coverage within the Harmonised System Codes (HS), products listed in chapter 1 to 93 plus products with tariff heading 1006 and 1701 will enjoy import duty-free from Ghana to the EU. However, if within a marketing year the import of product with heading 1701 are imported in excess of 3.5m tons to disrupt the EU markets, a Most Favoured Nations (MFN) duty will be imposed on it. Products on Chapter 93 of the HS code will be charged the MFN duties (MFN principle implies that each country treats the over 140 WTO members equally with no preferential treatment). “But the idea of the iEPA & EPA was to give Ghana a preferential access to Eu markets”. In exchange, the EU will have a liberalisation schedule in Ghana where products can be imported to Ghana duty-free, except products that were categorised as sensitive towards, livelihoods, food security, rural development in Ghana. Such goods included agricultural and Agro-processing, luxury, and high-revenue goods. Ghana will, in summary, liberalise 80% of its imports from the EU including industrial machines, certain types of vehicles, chemicals not produced in Ghana.
Challenges
Why does this bilateral trade agreement pose a net challenge than net opportunities?
- Gifting EU Free Monies we could have kept for development
The first challenge is Ghana’s loss of revenue from import duties. It is also very interesting to note that, before Ghana signed the iEPA, it was already enjoying preferential market access to the EU on a tariff and quota-free arrangement under the Cotonou agreement whiles EU goods that were coming to Ghana were charged import tariffs. Ghana is heavily dependent on Tax for an averagely of 79% of its revenue and the EU generate an averagely of 12.1% of its total revenue from taxes. This makes import tariff removal a big issue for Ghana in terms of revenue generation. So, one will question why Ghana signed the agreement in the first place to give out freely, monies they could have saved in the forms of import tariffs from the EU under the Cotonou agreement? According to Acheampong, et al., (2014), Ghana under the iEPA is estimated to lose revenue in terms of the removal of the import tariffs to the tune of $1.3bn between 2008 to 2022, representing 2.35% of its 2013 GDP. The fear to lose revenue was one of the strong elements that led the ECOWAS trading bloc to object to the signing of the iEPA. Another supporting argument raised by Ekeke (2017) was that there is the potential for developing countries who have signed the iEPA to start imposing heavy taxes on their local actors to compensate for the import tax losses. When this happens, they lose their competitiveness in the global market especially in the EU market, because Ghana is not the only developing country with preferential market access to the EU market. The consequences of this lost-competitive-edge would be, low revenue generation by such local firms and can lead to the collapse of these local export firms, hence increasing unemployment. The government also will lose the tax it could have gained from these collapsed firms and this will end up going against the core aim of the agreement, which was to help in reducing poverty.
- Limiting Ghana’s policy space to protect its industries
The next Challenge is that the iEPA limits Ghana’s policy space to use import taxes as a protectionist tool to nurture and protect its heavy industrial manufacturing sector, which generates much higher revenue and employment than the light manufacturing sector (Agro-processing). Part of the liberalised imports from the EU are heavy industrial goods like industrial machines, tractors, heavy chemicals, etc. These are high-value items. According to Haffman, the net industrialisation growth of a country should be measured by the net value of the output of consumer goods and that of industrial goods produced, with a higher value of the output of industrial good being more preferred than consumer goods. The EU in 2016 exported machinery and transport equipment worth €746bn representing 42.7%; food, drinks and tobacco 6.6% and raw materials 2.4% of total export. In Ghana the total export sector earnings were est. $16bn with traditional exports commodities like Gold, Cocoa beans and Crude Oil which are raw materials being responsible for 57%, 13% and 7.2% of the total value of Ghana’s export (MIT, 2018). So, you would realise that Ghana’s industrialisation agenda which seem to be supported by the iEPA in terms of upgrading its agriculture sector, implicitly upgrade Ghana to the production of consumer goods i.e., Agro-processing, whose value as compared to the production of heavy industrial goods is extremely low and wouldn’t generate as high revenue as the EU is generating.
If we are to look at India, they realised that attaining food self-sufficiency and exporting consumer goods wasn’t going to lead to economic growth, hence in the development of their 3rd Five-year Development Plan (FYP) post-independence, they promoted rapid industrialisation through the development of heavy industries that produce industrial goods like steel, iron, processed crude, heavy chemicals, heavy engineering and machinery, etc. India’s consumer goods production accounted for 60% of its total value-added manufacturing whiles industrial goods trailed at 30% in 1955. However, after implementing the rapid industrialisation plan, they were able to achieve a positive net industrialisation growth according to Hoffman’s formula by Rs14.02bn in absolute value.
India’s case is a clear demonstration of what Ghana stands to lose by agreeing to the iEPA and potential EPA liberalisation of import of heavy industrial products from the EU. This is so because if Ghana decides to venture into the production of heavy industrial goods, it will meet tougher competition from the EU suppliers who now have tariff-free access to Ghana’s Market, have a lot of industrial experience, economies of scale advantages, population advantages and sourcing advantages from EU members due to their economic integration. Ghana wouldn’t be able to protect its infant industry with the imposition of import taxes and tariffs, as the iEPA and the EPA (potentially) takes it off EU’s exports to Ghana. Nigerian and Senegal are examples of countries that rejected the iEPA with the EU with one of their reasons being to protect their manufacturing industries.
- Ripping ECOWAS apart with Non-Tariff Trade Barriers
Another challenge that the iEPA brings to Ghana is the complications and complexities in realising the benefits in the Cotonou agreement ((ended February 2020) and the ECOWAS trade agreement whiles the iEPA is still in force. Already in the Cotonou agreement (ended February 2020), there was a clause that talked about the need for a differentiation between Less developed countries (LDC) and Non-LDC to enable LDC to gain preferential access to EU markets whiles restricting EU access to its markets using import tariffs, to generate revenue to use in overcoming its serious economic and social challenges. But in the contrast, the iEPA and EPA allows Ghana to liberalise its markets for EU imports. The interesting thing is both agreements (IEPA and Cotonou trade agreements) are between the EU and developing countries. Now the question is which of these two agreements should Ghana apply and at what point in time, without losing or breaching any of them. Secondly, the iEPA has been signed individually by Ghana, Cameroun and Cote D’Ivoire while the remaining ECOWAS members haven’t.
Close attention needs to be paid to the non-tariff trade policy measures i.e., quality Standards, on the provisions on the Prohibition list that either ban or restrict some products coming from some of these West African countries into the EU, making it difficult for Ghana to source inputs from its ECOWAS members. For example, Poultry meat coming from Togo has been banned on Sanitary and Phytosanitary grounds since 2005. By implication, it means Ghana can’t buy any of these as an input into any of the products it intends to manufacture locally and export to the EU. The same can be said on Ghana’s inability to import any horticultural product, sugar nor poultry from Senegal due to an import ban imposed on them by the EU. So, the question is, how does this iEPA foster and reinforce the regional integration that it preaches and how does it allow Ghana to engage in intra-ECOWAS trade as an important member? This will cause Ghana to divert trade from these ECOWAS members to other countries that haven’t been sanctioned by the EU, hence affecting the essence of Ghana’s presence as a member of ECOWAS, thereby ripping ECOWAS apart with these non-tariff barriers to trade instead of encouraging it as promised in the iEPA. These are some of the complications that signing the iEPA brings to Ghana.
Conclusion
In Conclusion, the iEPA as an agreement creates increased market access to Ghana especially its agricultural product which can cause increased welfare gains by farmers and the government of Ghana. However, we realised that the iEPA only opens the door for Ghana to upgrade just its agricultural sector but limits Ghana’s policy space in igniting the heavy industrial manufacturing sector which generates high revenues from its high-economic valued products than the consumer goods manufacturing which generates low revenue. Ghana stands to lose lots of revenue in terms of import tariffs considering Ghana as highly dependent on taxes and tariffs for a bigger portion of its revenue and the fact that these items that have been liberalised for export to Ghana from the EU are high-value items. Last but not least is the complications the iEPA brings to Ghana in terms of trading within the ECOWAS bloc; and the difficulty of Ghana exploring the benefit of the Cotonou agreement ((ended February 2020) without breaching the iEPA in terms of imposing import taxes on imports from EU.
One of the recommendations towards remedying these complications would be for the EU-ECOWAS EPA to be ratified because the idea is that an agreement between two Trading Bloc will ensure that each trading bloc negotiates such that it doesn’t leave any member country out, hence helping in fostering the economic integration that the iEPA seeks to strongly promote, as opposed to each country negotiating its own EPA as Ghana and Ivory Coast has done. Again, it will better enhance the trading relationship within each trading bloc so that each other country can draw on the strength of member countries i.e., easily importing inputs it doesn’t have, without any restrictions or barriers, knowledge transfer advantages, etc. to increase its utilisation rate of the Economic Partnership Agreement.
Glossary:
- RTA – Regional Trade Agreement
- BTA – Bilateral Trade Agreement
- iEPA – Interim Economic Partnership Agreement
- EPA – Economic Partnership Agreement
- WTO – World Trade Organisation
- GATT – General Agreement on Trade and Tariffs
- EU – European Union
- MFN – Most Favoured Nations
- ECOWAS – Economic Communality of West African States
