EMBA 618, INTERNATIONAL TRADE AND

INVESTMENT

Group Assignment

QUESTION:

DIFFERENCES AND SIMILARITIES BETWEEN EPA AND AGOA

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Trade Agreement is an international agreement on conditions of trade in
goods and services. Stated differently is an agreement resulting from
collective bargaining. A major objective of the Lome IV Convention and its
predecessors was to improve the trade performance of the African,
Caribbean and Pacific (ACP group of countries, with the ultimate aim of
promoting their economic growth and development. For that purpose, the
European community (EC offered non-reciprocal trade preferences to
products originating I ACP countries. The Cotonou Agreement which was
concluded in June 2000, offers a shift from the non-reciprocal trade
preference s to Economic Partnership Agreements (EPAs) by the end of 2007.
The ACP countries would be expected to open-up their domestic markets for
almost all products from the EU - a free-trade area (FTA) within a twelve-year
period (2008 to 2020). The main objectives of the EPA include an enhanced
market access for ACP countries to the EU, negotiations on trade in services,
deepening of the regional integration process between ACP countries, and
increase cooperation in trade-related areas like competition and investment.

75 African Caribbean and Pacific (ACP) countries, including Ghana, are

engaged in negotiations with the EU over possible Economic Partnership
Agreements (EPAs). The new arrangements, which will succeed the trade
provisions of the Cotonou Agreement, was expected to enter into force on 1
January 2008. EPAs are essentially free trade agreements (FTA), which will
overhaul the entire way in which Ghana’s trade relations are structured.
Unlike previous EU-ACP agreements that provided unilateral preferential
access to the EU market for Ghanaian exporters, EPAs require that Ghana
reciprocate by liberalizing tariffs on EU goods entering its market, as well as
agreeing to additional binding rules in new areas such as investment,
competition, government procurement and services. This move to reciprocal

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liberalization will entail fundamental changes to all African economies and
will have important implications for Africa’s development.

The stated aim of EU-ACP trade relations is to ‘foster the smooth and gradual
integration of the ACP states into the world economy…promoting their
sustainable development and contributing to poverty eradication’.1
However, the structure and content of the EPA negotiations have raised
concerns about the impact these agreements will have on Ghana and its
efforts towards poverty eradication, regional integration and economic
growth. It is therefore crucial that greater attention is paid to their
development implications.

The precise structure of EPAs is still under negotiation between ACP and EU
states. However, as
envisaged by the EU, EPAs would include: The establishment of free trade
areas with ACP regions.
And liberalization of 90% of the total value of trade between the EU and the
ACP, whereby the
EU liberalizes 100% of its trade and the ACP liberalizes 80% of its trade. This
would leave ACP countries, including Ghana, able to protect only 20% of the
total value of their trade with the EU through the use of an exclusion list.
As established under the Cotonou Agreement, EPA negotiations began in
2002 and are to be negotiated during a five-year preparatory period,
concluding on the 31 December 2007. In the negotiations, ACP countries are
split into six regional groups: West Africa; Eastern and Southern Africa (ESA);
Southern African Development Community (SADC); Central Africa; the
Caribbean (CARIFORUM); and the Pacific. Each of these groups is negotiating
a separate EPA with the EU. Ghana is negotiating as part of the West African
Group of countries, which includes Benin, Burkina Faso, Cape Verde, Côte
d’Ivoire, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania,
Niger, Nigeria, Sierra Leone, Senegal and Togo.2 In total, these 16 West
African countries are inhabited by 242 million people and form a diverse and
acutely poor regional economic grouping. West Africa’s gross domestic
product (GDP) per capita amounted to little over US$326 in 2004.3 Apart
from Ghana, Nigeria and Cote d’Ivoire, all of the countries in the group are
categorized as ‘least developed’ (LDC).

African Growth and Opportunities Act (AGOA) on the other hand, started
when former U.S President Bill Clinton signed the AGOA into law on May
2000 as Title 1 of The Trade and Development Act of 2000. The Act provides
tangible incentives for African countries to continue their efforts to open up

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their economies and build free markets. AGOA provides reforming African
countries with the most liberal access to the United States market available
to any country or region with which the United States does not have a Free
Trade Agreement. AGOA supports United States business by encouraging
reform of Africa's economic and commercial regimes, which will build
stronger markets and more effective partners for US firms. AGOA can change
the course of trade relations between Africa and the United States for the
long-term, while helping millions of African families find opportunities to build
prosperity by: Reinforcing African reform efforts; Providing improved access
to US expertise, credit, and markets; Establishing a high-level dialogue on
trade and investment.

The largest possible number of Sub-Saharan African countries is able to take

advantage of AGOA. The proclamation issued by President Clinton on
October 2000 designated 35 countries (including Namibia) in Sub-Saharan
Africa as eligible for the trade benefits under AGOA. The Act authorizes the
USA president to designate countries as eligible to receive the benefits of
AGOA if they are determined to have established, or making continual
progress towards establishing the following: Market based economies; The
rule of law; Elimination of barriers to USA trade and investment; Protection of
intellectual property; Effort to combat corruption; Policies to reduce poverty;
Increasing availability of health care and educational opportunities;
Protection of human rights and worker rights; Elimination of child labour
practices.

The Act provides for duty free and quota access to the USA market without
limits for apparel made in eligible Sub-Saharan countries from USA fabric,
yarn and thread. It also makes provision for substantial growth of duty free
and quota free apparel imports made from fabric produced in beneficiary
countries in Sub-Saharan Africa. The preferential treatment for apparel took
effect on October 2000, but the beneficiary countries must first establish
effective visa systems to prevent illegal transshipment and use of counterfeit
documentation, and that they have instituted required enforcement and
verification procedures. Specific visa requirements of the visa systems and
verification procedures were promulgated to African governments via USA
embassies on September 2000.

After the passage of the African Growth and Opportunity Act (AGOA) in 2000,
Ghana was one of the first to receive U.S. approval of its textile visa system,
and accordingly benefit from the unprecedented U.S. - Africa trade
relationship. The Ghanaian government recognized the necessity of fulfilling

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certain economic and development criteria in order to reap the rewards of
AGOA. Such criteria included improvements in capital equipment,
infrastructure and the workforce. Today, the Ghanaian government supports
the proposed amendments to the AGOA legislation.

Industries currently benefiting from increased trade between Ghana and the
United States include the textile and garments sector and traditional and
non-traditional exports, including Ghanaian handicrafts. The Committee for
the Implementation of Textile Agreements (CITA) targets specific industries
for export promotion and markets these sectors. CITA has identified the
following products for promotion: hand loomed fabrics, hand loomed articles
(including rugs, scarves, placemats and tablecloths), and handmade articles
made from hand loomed fabrics.

The foreign revenue AGOA statistics demonstrate a positive progression of

economic benefits for Ghana. Last year, traditional and non-traditional
exports to the United States are expected to reach US$62.5m. This figure
exceeds the US$50.4m generated in 2002 and US$42m in 2001. Investments
in all sectors are highly encouraged by the government as it seeks to build
on the premise of “Ghana as the Gateway to West Africa.”

One of the most important tools for development is trade. Africa needs to
increase its share of international trade in order to earn more resources to be
able to finance its own development. In addition to unfair subsidies, access
to rich country markets is limited for Africans. Quotas limit the quantity of
products that may enter a certain market while tariffs often make products
too expensive to compete. Sometimes tariffs are unevenly applied making it
twice as expensive for African farmers to export processed goods (from
which they could derive greater profits) than their unprocessed crops.

The Africa Growth and Opportunity Act (AGOA) is one way in which the U.S.
has worked to open its markets to African producers. AGOA was enacted in
2000 as the first piece of trade legislation focused on increasing and
enhancing trade between the United States and countries of sub-Saharan
Africa by permitting the duty-free export to the U.S. of most African goods. In
order to qualify for AGOA, countries must be working to improve the rule of
law, human rights, and respect for core labor standards. Currently, 37 of 48
sub-Saharan African countries qualify.

There are a lot of advantages that go with AGOA. Eligible countries are
supposed to abide by conditions such as good governance, anti corruption,
poverty reduction, all these will improvement in social and economic well
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being of the people. Eligible countries will have access to the US market, for
the export of apparel/textile products; this will lead to export earnings. AGOA
comes with other benefits, such as private sector assistance in fighting
HIV/AIDS, efforts to combat desertification, and provision of air traffic control
equipment.

The demerits of AGOA There are conditionalities attached under AOA, such
as mandatory establishment of market based economy, support to US
foreign policy interest. These tend to impede formulation of domestic
economic and other policies.The agreement under AGOA provides for tariff
free and quota free trade in textiles. The lack of capacity on the part of local
forms to favorably compete with US firms has the danger of killing the textile
industry, with attendant problems like job lost and others.
The agreement under AGOA is meant for only the US market, it therefore
limits our ability to explore as many foreign markets as possible

The EPA agreement, also tends to enforce good governance, and requires
policies to fight corruption. This will enforce the combat of corruption in
Ghana. EPA agreement will lead to more inflow of cheaper products. This will
help in curbing demand pull inflation, and also enhance the living standards
of the people. The EPA agreement, will lead to an inflow of foreign direct
investment. Countries will relocate to Ghana to take advantage of Ghana`s
comparative cost advantage in some industries, so as to produce for the
export market. Since the EPA will be negotiated by African countries as a
group, rather than as individual countries, better trade terms are likely to be
achieved.

Demerits of EPA are stated below. The EPA has some conditionalities
attached, such as the need to submit to of EU policy prescriptions. The effect
of this is to limit the space of economic and other developmental policies.
Even with retractions, there is dumping from EU countries. Therefore an EPA
agreement will worsen such a situation, since there will be unrestricted
inflow of all manner of foreign goods. Since the EU is Ghana`s largest trading
partner, the removal of certain tariffs, required by EPA agreement will
significantly lead to loss of revenue from import tariffs. An EPA agreement
will have the risk of total destabilization of critical sectors of the economy,
especially the Agric sector. The influx of cheap imported food items, will
reduce the market for domestic Agricultural products. This will seriously
affect Employment and GDP, since about 60% of the population is employed
in Agric. And Agric accounts for 35% of our GDP.

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The impact of AGOA cannot be overemphasis. Statistics indicate that imports
from AGOA-eligible countries have increased each year since enactment of
the law, most recently rising by 16 percent in 2006 over 2005, although the
majority of AGOA exports to the U.S. are oil and petroleum products. AGOA
works best for countries producing oil and engaged in other extractive
industries and petroleum exports continue to make up the bulk of export
income. Five countries – Nigeria, Chad, South Africa, Angola and Gabon—
have accrued the lion’s share of these benefits. However, other industries
such as agriculture commodities, textile and apparel, and automobiles are
benefiting as well. More than $500 million in new investments and
approximately 250,000 jobs have been in Africa as a result of AGOA. Apparel
has been particularly successful due to a special provision of AGOA that
allows 24 of the 37 AGOA countries to use inexpensive fabric from anywhere
in the world to make clothing, that can be exported to the U.S. duty-free.

AGOA however has the following Limitations. Though efforts have been made
to extend AGOA and make it easier for African countries to take advantage of
the benefits, AGOA as a tool is limited in its ability to truly alter African trade
with the U.S. The scope and diversity of products could be expanded to
create more opportunities for African countries—for example full access to
sensitive products such as sugar, beef, and footwear are not included under
AGOA but could have great potential for African producers if they were
added.

Moreover, AGOA itself only addresses market access; its impact will be
limited because it does not reflect a comprehensive approach to trade policy.
AGOA does not and is not intended to address subsidies in any way;
therefore the competitive advantage of subsidized U.S. goods continues to
impact Africans’ ability to compete. What AGOA even more vividly reveals is
the need for greater trade capacity assistance and the need to address
“supply side” issues in Africa so that once the barriers to trade are removed,
Africa can better take advantage in a variety of industries. The lack of
infrastructure (transportation, telecommunication, energy and water);
finance and currency problems; and the need for legal and banking reforms
work against Africa. Only by addressing capacity/infrastructure gaps,
encouraging diversification of exports and transforming the international
trade system to level the playing field will ensure that more trade benefits
accrue to sub-Saharan Africa.

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We recommend that the EPA may lead to or promote technological spillovers
between the EU and ECOWAS countries, either as a consequence of
increased trade volumes or because of policies designed to encourage
scientific interchange. But integration, may also lead to pro-competitive
effects, which relate to more incentives to innovative and the reduction of
duplication in research and, thus, a more efficient allocation of resources in
research and development activities in Ghana. There is the need therefore
for the ECOWAS countries to have a specific agreement on technological
transfer in areas of comparative advantage.

Traditional international trade theory predicts that ECOWAS countries are not
likely to suffer from opening up their domestic markets. When trade is
liberalized, consumers in ECIWAS countries face lower prices of both
imported and domestically produced goods. The beneficiaries of free trade
may be not only households, whose real incomes rise as prices fall, but also
firms, whose international competitiveness is increased by the purchase of
cheap investment and intermediate goods.

It can not be denied that domestic producers might face increased

competition from EU suppliers. However, if domestic producers have a
comparative advantage, resources could be reallocated into those sectors to
increase productivity. This structural adjustment is likely to increase
production and employment and raise overall welfare.

The estimated trade and budget effects will occur if European exporters
lower their export prices in line with tariff elimination. Yet not, Ghana would
lose import duties without gaining the advantage of lower import prices
which will definitely reduce economic welfare. In general, this outcome is
more likely to occur in less competitive markets, where the degree of
competition among suppliers is less severe as in the case of Ghana. Even
though we cannot predict the market behaviour of international companies
in Africa, this outcome has to be taken into account for the interpretation of
the results.

EPAs are also meant to stimulate related new efforts. Regional integration
processes between developing countries have been unsatisfactorily
ineffective so far. EPA negotiations could become an external driving force
that will push regional organizations to rationalize and harmonise their
regional trade arragements, thus strengthening the regional integration and
assisting sub-saharan Africa in becoming a more effective partner in the
global economy.

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Instead of impeding progress in multilateral liberalization, ECOWAS countries
could take part actively. They could join and support initiatives of other
developing countries aiming at liberalization of market access in key areas of
interest. In particular pressure on the EU and other developed countries to
reduce or eliminate agricultural export subsidies and domestic support for
agricultural production.

The ECOWAS countries need to design a suitable timing and sequencing of

tariff reductions for the progressive removal of trade barriers that helps the
economy to adjust to increased competition from the EU with a minimum of
economic and social upheavals. In sectors where the EU competition could
have destructive effects, gradual implementation of trade liberalization
would be necessary in order to preserve domestic production and enable it
to build competitiveness.

Complementary measures are also urgently required to ensure that moving

from a restrictive to an open-trade regime does not lead to fiscal shock and
macroeconomic instability. Therefore, unavoidable short and medium term
losses in government revenue need to be cushioned.

In conclusion, we would advice that between the two partnership

agreements, Ghana signs for the EPA because of the following reasons
among others. An EPA agreement would serve as a booster to trade. This is
because under such agreement, trade barriers would be removed, thereby
leading to increase in export revenue. The EU takes the largest portion of
Africa`s exports. This would serve as a booster to Agric and industry, leading
to increase in GDP, jobs

EPA would also help attract foreign direct investments. Companies would get
established in Ghana to take advantage of Ghana’s comparative advantage
in some sectors, to produce for the liberalized EU market. This would create
more investments, income and jobs. Under EPA agreement, Ghana would
have 100% free access to the EU market. Also there are measures to
compensate Ghana for its lack of capacity to optimize export potential. This
will enhance the competitiveness of Ghana in the export Market
EPA agreement requires among other things that government should pursue
anti corruption policies, promote human rights and others. This will serve as
a check on the Ghanaian government thereby promoting good governance

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