Trade Growth under Preferential Trade Agreements

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This entry is adapted from the peer-reviewed paper 10.3390/economies10120302

The EU is the world’s leading trade power and plays a leading role in international trade negotiations. Almost all trade negotiations between EU and developing countries aim at liberalizing all trade products (from agriculture to manufactured products) and services to increase the revenues of exporting countries, offer consumers in the importing countries a wider choice of goods and services at lower prices (because of increased competition), and then allow all countries to produce and export the goods and services with which they are best placed to compete. The Economic Partnership Agreement (EPA) is essentially a free trade area and is expected to stimulate more production, thereby increasing exports to the EU market. From theory, it is known that each country fully specializes in the production of the good in which it has a “comparative” cost advantage in production and, therefore, trades other goods with the other country, generating gains from trade. Thus, specialization and trade translate into an increase in total production and a reduction in costs.

EU–SADC EPA intensive margin of trade extensive margin of trade

1. Introduction

In the last years, the European Union (EU) has been particularly engaged in a web of preferential trade relations with African countries or regional groupings, which range from the regular Generalized System of Preferences (GSP), the Africa-Caribbean-Pacific agreement (i.e., the Lomé/Cotonou agreements), and the Bilateral Euro-Mediterranean Association Agreements. Since 2016, a new development-focused trade agreement has been signed between the EU and the six countries of the Southern African Development Community (SADC), namely Botswana, Lesotho, Mozambique, Namibia, South Africa, and Eswatini (formerly Swaziland). It is called the EU–SADC Economic Partnership Agreement (EPA)¹. The EU–SADC EPA considerably improved the extent of the preferential market access granted to Southern African countries, providing the most favorable regime available. The idea behind these preferences is that developing countries in the world must overcome a lot of difficulties to promote economic development as well as integration in the world economy. In this respect, preferential access to EU markets could help these economies to reach these goals.

The new EU preferential scheme grants 100% duty and quota-free access to all imports from Botswana, Lesotho, Mozambique, Namibia, and Eswatini. Access to the EU market is permanent, full, and free for all products, with the exception of arms and munitions. The EU abolishes customs duties on 98.7% of imports from South Africa, under specific quantitative quotas. The EPA foresees asymmetric access. The SADC EPA countries can protect sensitive products from full liberalization and apply safeguard measures when imports from the EU grow too fast.

2. The Impact of Preferential Trade Agreements on Trade Flows

The EU is the world’s leading trade power and plays a leading role in international trade negotiations (Woolcock 2019). Almost all trade negotiations between EU and developing countries aim at liberalizing all trade products (from agriculture to manufactured products) and services to increase the revenues of exporting countries, offer consumers in the importing countries a wider choice of goods and services at lower prices (because of increased competition), and then allow all countries to produce and export the goods and services with which they are best placed to compete. The EPA is essentially a free trade area and is expected to stimulate more production, thereby increasing exports to the EU market. From theory, it is known that each country fully specializes in the production of the good in which it has a “comparative” cost advantage in production and, therefore, trades other goods with the other country, generating gains from trade. Thus, specialization and trade translate into an increase in total production and a reduction in costs (Ricardo’s ([1817] 1951) theory of comparative advantage).

The role of free trade agreements (FTAs) on the country, sector, and firm performance has been largely investigated in the literature. The main theoretical and empirical predictions suggest a positive impact of FTAs, especially for low-income countries that can take advantage of easier access to the foreign market. FTAs can bring tangible economic benefits to producers, by increasing the availability of a wider variety of inputs which can be characterized by higher quality and technological content, and to consumers, who can benefit from greater competition, and, therefore, lower prices, and from the widest choice of products on the market. (De Loecker et al. 2016; Cernat et al. 2018; Amiti et al. 2020). The recent developments in the theory of international trade have also promoted formal models of determinants that explain export performances. In particular, trade openness affects exports through an improvement in product quality and variety (Feenstra 1994, 2010; Hummels and Klenow 2005; Feenstra and Kee 2008). Additionally, there are also some works highlighting some potential detrimental and negative effects, especially related to a decrease in innovation and investment incentives due to stronger competitive pressures and reduced market shares (Rodrik 1992).

Rodrik (2018) argues that economists need to be aware that FTAs create winners and losers. Trade agreements could result in mutually beneficial exchanges, through freer market access, and involve the global updating of regulations and standards, for labor, for example, or the environment. However, they could lead to a set of rent-seeking interests and politically well-connected firms (international banks, pharmaceutical companies, and multinational firms), and may serve to internationalize the influence of these powerful domestic interests.

The impact of the FTA is often reduced by the presence of complex rules relating to the origin, which might be an obstacle for exporters of processed goods (Portugal-Perez 2008; Sytsma 2021). The use of FTAs implies that the members need to comply with rules of origin (RoOs) to prove that goods are produced within their borders. When eligible goods are exported under Most-Favored Nation (MFN) rules, it is likely due to compliance costs and RoOs; therefore, if an exporter prefers not to use the preferential access, it is because the ad valorem equivalent of costs to prove that the goods are produced within their borders are higher than the multilateral tariff (Brenton and Manchin 2003; Bureau et al. 2007; Bombarda and Gamberoni 2013).

Despite this large literature, the evidence, especially at the sectoral level, for African countries is scant and rests on few contributions (Jonsson and Subramanian 2001, for South Africa; Augier et al. 2007, for Morocco; Bigsten and Gebreeyesus 2009; Bigsten and Söderbom 2010, for Ethiopia and African countries; Fontagne et al. 2011, for ACP countries; de Melo and Regolo 2014, for the members of the East African Community) that find increased competitiveness and enhanced efficiency for firms in the liberalized sectors.

In addition, the impact of the EU–SADC EPA is largely unknown. Some studies provided simulations of its potential effects when the negotiations between the EU and the SADC EPA countries were launched (see, for example, Decaluwe et al. 2008; Keck and Piermartini 2008; Osman 2014). These analyses have found positive gains, though small, from the tariff reductions set out in the EPA.

Using a gravity model of trade, Stender et al. (2021) estimate the trade effects of the EPAs between the EU and African countries and find heterogeneous effects across specific agreements and economic sectors. EPAs seem to have increased EU imports from the SADC EPA countries. On the sectoral level, in the area of manufacturing trade, authors find decreases in exports of the ESA and SADC EPA countries to the EU but increases in EU imports for the SADC EPA countries.

Paha et al. (2021) analyze the effects of EU sugar reforms on development in Africa and find different implications for members of the SADC EPA, especially for South Africa, which registered an increase in sugar exports to the EU from 2016 to 2019. Differently, Mozambican sugar exporters did not benefit from improved access to the EU market as a result of joining the SADC EP, also because they already had full duty-free and quota-free access to the EU Single Market under the “Everything But Arms” scheme.

Recently, Bouët et al. (2021) develop a new model to evaluate the economic, trade, and poverty impact of the EU–SADC EPA and find that the agreement is not a full FTA between the EU and these six members of the SADC since these six African countries were already involved in another two different free trade areas; furthermore, some products are exempted from liberalization on the African side. Secondly, many products are already exchanged under free trade. Consequently, since the shock in terms of reducing trade barriers produced by the agreement is small, the impact globally, even if positive, remains tiny for the SADC EPA countries.

Note

1 The EPA entered into force provisionally on 10 October 2016 and Mozambique has been applying it provisionally since 4 February 2018.

References

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1. Introduction

2. The Impact of Preferential Trade Agreements on Trade Flows

Note

References