The EU is aiming for deeper economic integration with African countries by negotiating Economic Partnership Agreements (EPAs), which are multilateral free trade agreements between African, Caribbean and Pacific (ACP) countries and the EU. While opening international markets for African products and thus helping Africa to become more competitive seems to be a noble and economically reasonable approach by the EU, there are several objections on the African side that are also uttered by many NGOs.Their argument is that opening the African markets will destroy many domestic industries and will lead to exploitation of African resources even more than it is already happening. Critics therefore accuse the EU’s EPA approach of neo-colonialism. Who is right, who is wrong and whether there is a particularly promising strategy to improve Africa’s situation by using free trade agreements will be the topic of this comment.
David Ricardo’s theory of the benefits from trade liberalization is a milestone in international economic theory. Cutting tariffs and allowing goods and services to move freely across borders is assumed to increase welfare of a trade agreement’s member states. However, this theory only applies in the absence of market distortions, which unfortunately exist in both Africa and Europe. Hence, a global welfare maximum will hardly be achieved with the sole implementation of trade agreements. At the same time, closing a country’s borders for foreign trade is neither an option as economic growth depends strongly on competition and (international) labor division. But given the political and economic asymmetries between Africa and Europe, an EPA may strongly distribute any gains from trade liberalization in favor of the EU member states. That is, the question is open to debate how EPAs could be used to generate economic gains benefitting both continents.
EPAs can have a positive effect on development when implemented carefully and when objections, especially those voiced by African countries, are taken seriously. In fact, economic collaboration should be built on two pillars: First, the often institutionally weak African countries need to get rid of supply-side constraints ranging from infrastructural bottlenecks to insecure property rights and political reluctance to implement domestic market reforms and regional integration through trade liberalization with neighbor countries. Second, the countries should seriously consider opening their markets to the EU by banning tariffs and quotas, as to reach reciprocal benefits in the long run. Hence, the pillars suggest a useful distinction between South-South cooperation (among African countries) and North-South cooperation (between Africa and the EU) which both may contribute to raising wealth within the African continent. The EPAs should prioritize the first pillar before dealing with the second pillar for mainly two reasons: (i) intra-African trade will foster the benefits from competition and labor division, but (ii) without the political and economic asymmetries which would arise under an EU-African agreement.
Ever since the establishment of the European Community (EC) in 1957 there has been a special emphasis on development aid for the ACP countries, many of them being former European colonies. In 1975, the Lomé Treaty first opened the European market to these countries, granting them duty-free and quota-free access to the EC market while allowing them to keep their protectionist measures against imports from Europe at the same time. However, this was not in line with the rules of the General Agreement on Tariffs and Trade (GATT), since the treaty violated the GATT principle of non-discrimination by putting non-ACP countries in a disadvantage. In order to meet the GATT rules, there had to be either a Free Trade Area (FTA) or the bilateral agreements also had to be granted all other GATT members. While there exist exemptions from GATT’s rules, including preferential treatments and applying for most African countries, today the EU aims at implementing reciprocal trade regimes in the first place.
The actual rules applying include the EU having a temporary asymmetrical approach, meaning that African countries can slowly reduce tariffs over at least 20 years while still being allowed to keep protectionist measures on sensitive industries. At the same time, EU markets remain open for African countries (over 90%). So far, only one EPA has been agreed upon under these premises. The CARIFORUM countries (mostly Caribbean islands) were granted a timeframe of 25 years to reduce tariffs, while being allowed to exclude from these cuts around 17% of goods and services which they consider sensitive. The EU argues that with this approach, ACP economies will have enough time to adjust gradually to the competitive situation within a completely liberalized trade regime.
Returning to David Ricardo, however, the EU plans for EPAs along the lines outlined above do not meet his basic assumption of distortion-free market and, thus, are prone to suboptimal outcomes. African markets are characterized by weak public institutions, non-tariff barriers and red tape, while the EU suffers from a highly distorted agricultural sector due to heavy subsidization, which undermines the sector’s productivity. As a consequence, there is a desire to exclude this and other sectors from actual EPAs by introducing safeguard clauses on sensitive products (as in the CARIFORUM agreement). Clearly, these safeguards distort the very idea of a free trade agreement. The same problem applies, for instance, also for most manufacturing industries in Africa which are simply not able to compete with global industries. Again, safeguard clauses are demanded in order to protect these industries.
Nowadays, the biggest (and probably one of the most harmful) market distortion in the EU are the agricultural subsidies of various EU countries (including EU’s agricultural exports as well). In the context of EU-African trade negotiations, economists Razeen Sally and Fredrik Erixon call European politics a “Keynes at home, Smith abroad” strategy. That is, they argue that EU politics is intervening strongly in the home markets (Keynes), while promoting trade liberalization abroad (Smith) which is not an honest basis for granting development aid. So in order to truthfully liberalize trade and ensure efficient trade among (formally) equals, the EU has to liberalize their market at home as well.
Market distortions leading to distortive elements in free trade agreements (such as exceptions, safeguard clauses etc.) are the problem of trade negotiations in general and therefore apply for the specific EU-Africa context as well. Like a snowball system they accumulate during negotiations, leading to trade agreements consisting of thousands of pages and severely reducing welfare which could be gained under truly free trade. This is the main rationale why the distortions on both African and European markets need to be removed in the first place. Strengthening political and economic institutions and effectively liberalizing regional trade are important measures to achieve this goal. Only when institutions and market conditions (both in Africa and European markets) are sufficiently similar, the economies can really compete and the implemented trade regimes might work efficiently. Otherwise the asymmetries will lead to problems such as major current account deficits, unemployment and de-industrialization in Africa as a result of distorted trade liberalization.
Hence, it appears reasonable to postpone EPAs between Africa and the EU until a deeper regional integration of the much more equal economies in Africa has been introduced. In line with this suggestion, the EU has at least agreed to support regional integration through the European Development Fund (EDF). Being a stakeholder in this process allows the EU to push forward integration measures through sanctioning and rewarding. If successful, intra-African trade and continental efforts for trade facilitation would drastically improve the economic situation in Africa. Jobs would be created and incomes would rise. Africa would be less susceptible to external shocks and more competitive on the global markets. Above all, bargaining power of African countries within an integrated FTA would increase significantly when it comes – in a second step – to inter-continental trade negotiations such as the EU-African EPAs.
In the current interim agreements between African countries and the EU, the two above mentioned pillars (regional integration and international trade liberalization) have been acknowledged. This interim agreement’s mistake is, however, that the EU does not prioritize the aspect of regional integration. Regional integration based on inclusive and sound political and economic institutions that foster domestic free market reforms must be the first step to introduce a beneficial trade environment without endangering industries from a too quick integration into the global markets. Not until regional integration and a certain developmental level are achieved, reciprocity on an international level should be implemented. Only then competition will lead to diversification and specialization and to the creation of a competitive industrial sector. Only then David Ricardo’s idea of comparative advantages will apply.
If the European Union prioritizes the regional approach, the development strategy of the EU can be successful and both sides might benefit from EPAs as formally equal trading partners. Then the EPAs can be seen as an honest effort of the EU to help Africa become globally competitive and more developed. After liberalizing trade amongst African countries, most of the exceptions and safeguard clauses that are now negotiated and written down in interim agreements will no longer be necessary.
Dieser Beitrag ist im Rahmen eines Praktikums von Hendrik Jandel bei der Friedrich-Naumann-Stiftung für die Freiheit (FNF) im Regionalbüro Sub-Sahara Afrika in Johannesburg, Südafrika entstanden. Während des Praktikums beschäftigt er sich unter anderem mit regionalen, sowie interkontinentalen Handelsbeziehungen afrikanischer Länder.