1 Issue 6 | Volume 9 | July / August 2010 Volume 9. July ... · 1 Issue 6 | Volume 9 | July / August 2010 Regulars ... Weekly Trade News Digest, Volume 14, ... according to the UN

Issue 6 | Volume 9 | July / August 20101

Regulars

1 Editorial A home grown approach to development: A special issue on the fiscal implications of EPAs and domestic resource mobilisation

2 News and publications In brief

15 WTO Roundup

17 EPA Update

20 Calendar and resources Features 3 Taxation for development in Africa: A shared responsibility Henri-Bernard Solignac Lecomte 5 Why enhance domestic resource mobilisation in Africa? Roy Culpeper and Aniket Bhushan

8 Economic Partnership Agreements – How severe (and how urgent) is the fiscal challenge? Jean-Jacques Hallaert

10 Addressing the fiscal challenges of an EPA: Some preliminary considerations ECDPM

12 Fiscal impact of the Economic Partnership Agreement (EPA) in West Africa David Laborde

14 Mapping donors’ involvement in the area of taxation and development: The case for better coordination and division of labour International Tax Compact Secretariat

Trade Negotiations Insights

ICTSDInternational Centre for Tradeand Sustainable Development

Issue 6

Volume 9. July/August 2010 Available online

www.ictsd.net/news/tni www.acp-eu-trade.org/tni

A home grown approach to development: A special issue on the fiscal implications of EPAs and domestic resource mobilisation

In the recent international economic context, marked by global crises and instability, budgetary and fiscal matters have gained greater prominence on the economic recovery and growth agenda. In the developing world, greater attention has been given to domestic resilience to external shocks, types of integration to the global economy and the pursuit of sound macroeconomic and sustainable budgetary policies conducive to equitable growth and development.

An important dimension is the need for governments to focus on generating revenue at home more effectively. For one, the contract it forms between taxpayer and state can make governments more accountable to its citizens, thus contributing to improved economic and political domestic governance. It can also free governments from the strings attached to donor aid, or the self-interest of foreign investors.

It is not surprising then, that domestic resource mobilisation has been receiving increased attention. In recent months, for instance, the African Development Bank, together with the OECD, launched their African Economic Outlook 2010, with a focus on “Public resource mobilization and aid in Africa”. Even more recently the EU Council adopted a communication on “Tax and Development - Cooperating with Developing Countries on Promoting Good Governance in Tax Matters”.

In this special issue of Trade Negotiations Insights, we focus on two highly topical questions: what degree of fiscal revenue loss do the African, Caribbean and Pacific (ACP) countries face due to the Economic Partnership Agreements (EPAs) with the European Union; and second, how can ACP governments compensate such losses through adjustment measures, engage

in fiscal reforms and ensure a better mobilisation of their domestic resources?

Neither question is straightforward. Estimating revenue loss from trade liberalisation is an inexact science, given the multiple variables and the poor data in many ACP countries. Yet the estimates are getting closer to the mark. This is partly because the methodologies are improving. It is also because a number of countries have now signed up to tariff cuts in the EPAs (or interim agreements), and so economic modellers can base their estimates on actual agreements rather than assumptions.

So how drastic is the revenue loss faced by the ACP? In fact, it appears that while for some countries the fiscal consequences of an EPA are not very significant, for some others they can be a major cause for concerns, either because of their economic impact or because of the political sensitivity of the issue or the capacity and institutional constraints. More fundamentally, the capacity and willingness of countries to engage in fiscal reforms, as well as the accompanying support they receive to do so, can play a much more critical role in ensuring fiscal stability.

Against this backdrop, we have asked experts to highlight strategies for African governments to improve domestic resource mobilisation, as well as the role the international community should play in this regard, and to assess the possible fiscal implications of EPAs.

It is our intention that this special issue launches an ongoing discussion in the pages of TNI on both of these important issues.1

Notes 1 ECDPM has been working on these issues and will continue to stimulate an informal dialogue on these themes. Comments and suggestions are most welcome, and should be sent to San Bilal at [email protected]


News and publications In brief

EC launches public consultation on future trade policy Following the ‘Europe 2020’ paper adopted by the European Commission in March this year, the Commission has now launched a broad public consultation on the future direction of EU trade policy. The consultation is intended to gather views from relevant stakeholders within the EU and in third countries regarding the rationale, scope and strategic objectives for a future EU trade policy. An ‘issues paper’ is intended to set the scene for this consultation exercise. The Commission expects to set out its policy in autumn 2010, explaining how trade policy can help achieve the objectives of the ‘Europe 2020’ Strategy. The consultation will run from 2 June 2010 to 28 July. For more information, see: trade.ec.europa.eu/doclib/html/146220.htm

pledge from last fall’s summit in Pittsburgh. For more information, see “G-20 Compromise on Deficit Reduction, But Spectre of Mercantilism Looms”, Bridges Weekly Trade News Digest, Volume 14, Number 24: http://ictsd.org/i/news/bridgesweekly/79230/

ACP assesses the potential impact of the Lisbon Treaty on EU-ACP relationsThe ACP Secretariat, together with ECDPM, organised a workshop on 27 May to discuss the impacts of the Lisbon Treaty on EU development and trade policies, including the Economic Partnership Agreements. The ACP Secretary General and Chairman of the Committee of Ambassadors stated the groups’ concerns over the impact of the Treaty on the long-term development partnership with the EU and the group’s desire for the Treaty to strengthen the key pillars of the ACP-EU partnership. They also emphasised the importance of remaining open-minded about the changing landscape of global politics and whether the purpose of the ACP grouping is still relevant to its long-term perspectives. For more information, see the ECDPM’s website at: http://www.ecdpm.org/

Food prices continue to riseGrowth in global agricultural output is expected to slow down in the coming decade, while production in Brazil, China, India, Russia and the Ukraine will likely increase, according to the UN Food and Agriculture Organization (FAO) and the Organisation for Economic Cooperation and Development (OECD). High food prices and market volatility, however, remain a concern for food security, according to the OECD-FAO “Agricultural Outlook 2010-2019”. OECD Secretary-General Angel Gurría described this year’s report as “cautiously more positive,” in comparison with recent years. However, he warned that, given the likelihood of future shocks to the market, governments would need to implement policies to help farmers be prepared for these situations. Barring any market shocks, however, the expected slowdown in the rate of growth of agricultural yields is unlikely to steer the world off track from reaching a 70% increase in agricultural production. That figure is what experts have said will be necessary to sustain the world population in 2050. For more information, see: http://www.agri-outlook.org/pages/0,2987,en_36774715_36775671_1_1_1_1_1,00.html

EU report forecasts shortages of 14 critical mineral raw materialsRaw materials are an essential part of both high-tech products and every-day consumer products such as mobile phones. But their availability is increasingly under pressure according to a report by an expert group chaired by the European Commission. In the first ever overview on the state of access to raw materials in the EU, the experts identify 14 raw materials as “critical” out of 41 minerals and metals analysed. The growing demand for raw materials is driven by the growth of developing economies and new emerging technologies. The list was established in the framework of the 2008 EU Raw Materials Initiative in close cooperation with Member States and stakeholders. The results of the report will be used for the drafting of a communication on strategies to ensure access to raw materials, which the Commission will publish in the autumn. For more information, see: http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/10/263&format=HTML&aged=0&language=EN&guiLanguage=en

The Commission has now launched a broad public consultation on the future direction of EU trade policy.

G-20 agree to tackle deficitsLeaders from the world’s biggest economies agreed to a timeline for reducing their budget deficits and debt levels, as well as to plans for new regulations aimed at enabling banks to withstand severe financial crises. At a summit in Toronto over the 26-27 June weekend, the Group of 20 leading industrialised and developing countries said that solidifying the still-fragile economic recovery required governments to strike an appropriate balance between fiscal stimulus and restoring health to battered public finances. The G-20 also pledged to avoid specific protectionist policies. “We renew for a further three years, until the end of 2013, our commitment to refrain from raising barriers or imposing new barriers to investment or trade in goods and services, imposing new export restrictions or implementing World Trade Organization (WTO)-inconsistent measures to stimulate exports, and commit to rectify such measures as they arise,” said the statement, echoing a

In the first ever overview on the state of access to raw materials in the EU, the experts identify 14 raw materials as “critical” out of 41 minerals and metals analysed.

Issue 6 | Volume 9 | July / August 2010 3

Taxation for development in Africa: A shared responsibilityHenri-Bernard Solignac Lecomte

Africa needs more effective, efficient and fairer taxation systems. As several African nations celebrate 50 years of independence in 2010, it is time for a continent that still relies too much on often volatile and unpredictable external flows to take a new look at taxes – a potential untapped source of billions of dollars. While the primary responsibility lies with African governments, the international community must also play its part. And this time, it’s hardly about aid.

The global economic crisis has shown, yet again, how vulnerable Africa remains to falling commodity prices and export revenues, uncertain future aid flows and declines of foreign direct investment (FDI), which resulted in a general shortfall of external finance. At the same time, the continent continues to suffer from an acute hemorrhage of capital. Indeed, Kar et Cartright-Smith (2008) estimate that Africa lost US$854bn, at least, in illicit financial outflows from 1970 through 2008. In other words, while Africa is overly-reliant on external financing, it is a net creditor to the world. The case is clear: African economies need to mobilise their domestic resources better. This is in large part the job of governments, who mobilise public resources through taxation (and debt) to fund investment in roads, power plants, schools, health facilities, etc. Over the long term, effective taxation can not only reduce a country’s dependence upon aid and largely unpredictable external finance flows, but it will also increase its ownership of the development agenda, and lay the foundation of a social contract between state, citizens and firms.

The good news is that the 2010 African Economic Outlook finds that the average African tax revenue as a share of GDP has been increasing since the early 1990s, from US$113bn in 1996 to 479bn in 2008. The bad news is that this has been mostly induced by taxes on the extraction of natural resources: oil-related taxes alone for the top ten exporting countries totalled US$275bn in 2008. Focusing on natural resource rents distracts governments from more politically demanding forms of taxation, in particular direct forms of taxation, such as corporate income taxes on other industries, personal income taxes, as well as Value Added Taxes (VAT) and excise taxes. Indeed, income taxes

(mainly personal and non-resource corporate) have stagnated over the same period, and trade liberalisation and regional integration in Africa have reduced revenue from trade taxes. Further trade liberalisation may leave a critical gap in public resources if it is not purposively sequenced with domestic tax reform. What can African governments do? In the short-run, strategies towards more effective, efficient, and fair taxation in Africa must complement efforts to deepen the current tax base. This does not mean trying hard to bring small, informal activities into the tax net: chasing the myriad of self-employed or micro-shops would cost more than it it would generate in tax revenues. Besides, many informal entrepreneurs already contribute, as they pay VAT on the input they purchase from retailers. Neither are small and medium enterprises (SMEs) in the formal sector the target of choice to extract more tax revenues: too visible to escape taxation and not big enough to obtain exemptions, African SMEs—the ‘missing middle’ in most economies—are not only subject to some of the highest nominal corporate tax rates in the world, they too often are the victims of

abusive practices by the tax administration. By contrast, focussing on the large economic actors that pay less tax than they should could generate high revenues at a small cost. This strengthens the classic case for reviewing and removing tax preferences and exemptions, which multinational companies benefit from, and in particular for taxing extractive industries more fairly and more transparently. In addition, governments need to crack down on fraud and corruption, and remove exemptions—sometimes as political favours—to powerful patrons with large, informal trading activities. The objective should be to levy taxes at low and relatively flat rates on bases that have been broadened through the elimination of exemptions and other loopholes. Lower, simpler taxes are not only easier to collect and administer but are a more effective policy to stimulate the development of the private sector. As for the reform of trade taxes, this should be built into the medium-term overall fiscal reform agenda, instead of coming as an afterthought once tariff cuts have been decided, as is too often the case.

Why aren’t African governments taxing better?A key challenge of African tax administrations is to overcome the large capacity constraints that make it difficult to assess and collect taxes. Other constraints include:

Weak fiscal legitimacy. A general lack of trust on the part of citizens in the quality of •public spending. Shallow tax base. Governments are unable to widen the tax base and bring informal •actors—large and small—into the tax net. In addition, the existing tax base is eroded by excessive tax preferences and inefficient taxation of extractive activities. There are potentially large untapped tax sources, such as urban real estate and property taxation.Unbalanced tax mix. Many countries rely excessively on a narrow set of taxes to •generate revenues for their state and some stakeholders are disproportionally represented in the tax base.

Source: African Economic Outlook 2010, AfDB/OECD/UNECA.


AuthorHenri-Bernard Solignac Lecomte is Head of Unit, Africa, Europe & Middle East, OECD Development Centre. [email protected]

Figure 1. Public sector financial management as a share of technical cooperation to Africa in 2008

In the longer-term, the capacity constraints of African tax administrations must be alleviated to open up policy space and allow for the generation of tax revenues through a more balanced tax mix. A wide tax base is more stable because it relies on a diversified set of tax revenues. It is also more efficient by helping to keep the tax burden mild on each type of taxpayer and each type of economic activity. Additionally, it engages a wide range of stakeholders in the national political process. Urban property taxes, for example, are progressive and can scale up with Africa’s explosive pace of urbanisation and the corresponding need for urban infrastructure. Morocco is a good example of a comprehensive fiscal reform, successful in improving the balance in its tax mix and broadening the tax base, lowering the average tax share gradually over several years. As a result, new sectors were incorporated into the fiscal net, such as construction, banking and telecom services. The government modernised tax administration, enabling it to implement the planned reform. This resulted in a 10% increase in the share of direct taxation, while VAT realised its full potential after a wide range of exemptions were eliminated.

What can the international community do? The international community can do more to support sustainable forms of development financing through enhanced mobilisation of domestic resources in African countries. Aid used to stimulate public resource mobilisation can have a ten-fold multiplier effect on a country’s resources. Yet, donors have in some cases neglected the support to tax policy and administration: a mere 2% of DAC-funded technical cooperation is spent on public

sector financial management, of which

Tax revenues should not be seen as an alternative to foreign aid, but as a component of government revenues that grows as the country develops. Greater ownership of the development process, one of the development dividends of effective tax systems, helps governments shape an environment that is more conducive to foreign and domestic private investment, sustainable use of debt and effective foreign aid. The challenge is therefore for African countries and their partners to reverse the vicious circle of aid dependence, which shifts government accountability away from citizens towards donors, and trigger a virtuous circle of aid becoming redundant by supporting public resource mobilisation.

One Africa-led initiative that receives strong donor support is the African Tax Administration Forum (ATAF), a platform for articulating African tax priorities and building the institutional capacity of the continent’s fiscal administrations through peer learning. The importance of such dialogue cannot be understated on a continent where countries often compete for tax revenues and investment from multinationals.

Yet the responsibility of Africa’s partners extends far beyond aid. More efficient and fairer mobilisation of domestic resources by African countries critically depends on enhanced international cooperation in tax matters. The fight against tax evasion and avoidance through tax havens, or against the abuse of transfer pricing (whereby multinational firms declare profits in low-tax

2%

98%

Technical cooperation to “Public Sector Financial Management” In Africa

Total technical cooperation to other sectors in Africa

Source: OECD Development Assistance Committee (DAC) Aid Statistics (2010).

jurdisdictions, and losses in countries where operations actually take place1), the rationalisation of fiscal incentives and tax exemptions that are eroding African tax bases can only be tackled internationally. The interests of Africa and of richer developed or emerging economies can therefore converge on the international tax agenda, a priority of the G20. While significant progress has been made in combating bank secrecy, tax evasion and tax havens in recent years, the challenges ahead remain considerable. The European Commission’s Communication on Tax and Development issued last April therefore provides welcome political impetus to the debate, in particular by supporting “the adoption and implementation of the OECD transfer pricing guidelines in developing countries”, as well as “ongoing research on a country-by-country reporting requirement as part of a reporting standard for multinational corporations, notably in the extractive industry”.

Notes 1 Although models for assessing the loss of tax revenues to improper transfer pricing are still being developed, Hollingshead (2010) estimates a yearly average of USD 3.8 billion would have been lost in Africa between 2002 and 2006.

Related reading 1 African Economic Outlook 2010, by the African Development Bank, the OECD Development Centre and the United Nations Economic Commission for Africa.http://www.africaneconomicoutlook.org/en/ in-depth/ 2 European Commission (2010) Tax and Development - Cooperating with Developing Countries on Promoting Good Governance in Tax Matters, Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee, COM(2010)163 final, Brussels, 21.4.http://ec.europa.eu/development/ icenter/repository/COMM_COM_2010_0163_TAX_ DEVELOPMENT_EN.PDF 3 Kar et Cartright-Smith, (2008) “Illicit Financial Flows from Developing Countries, 2002-2006”, Center for International Policy, Washington DC.http://www.gfip. org/index.php?option=com_content&task=view&id=3 00&Itemid=75 4 Hollingshead, A. (2010), The implied Tax Revenue Loss from Trade Mispricing, Center for International Policy, Washington DC.http://www.gfip.org/storage/gfip/ documents/reports/implied%20tax%20revenue%20 loss%20report_final.pdf

taxation systems are only a subset (Figure 1).


Why enhance domestic resource mobilisation in Africa?Roy Culpeper and Aniket Bhushan1

Foreign aid comes with conditionality or policy strings attached, not to mention procurement restrictions that accompany “tied aid”. Aid also tends to be pro-cyclical and volatile.2 Foreign direct investment typically flows into sectors and projects dictated by the commercial interests of the foreign investors – for example, natural resource extraction. Moreover, governments that are heavily dependent on foreign aid, or on sharing the profits of foreign investors, have less incentive to raise taxes and less reason to pay attention to the demands of taxpaying citizens.

It is in Sub-Saharan Africa (SSA) that some of the steepest challenges to DRM are encountered: savings rates are low, dependence on foreign aid is chronically high, and institutional capacity to mobilise domestic resources is weak. In light of these challenges, the North-South Institute recently examined possibilities for enhanced DRM in Sub-Saharan Africa through the lens of five countries: Burundi, Cameroon, Ethiopia, Tanzania and Uganda.3 These five countries represent a breadth of circumstances in SSA: Burundi is a post-conflict country; Cameroon is experiencing declining oil revenues; Ethiopia is transitioning from a planned to market-based economy; and, Tanzania and Uganda both have longer records of reform and resources revenues (mineral and oil) that are expected to play an increasingly important role.

Developing countries that have achieved and sustained high rates of growth have typically done so largely through the mobilisation of their domestic resources. Domestic resource mobilisation (DRM) at a significant level is essential to solidify ownership over development strategy and to strengthen the bonds of accountability between governments and their citizens. In effect, DRM provides “policy space” to developing countries which is often constrained under the terms and conditions of external resource providers.

Pathways to enhanced revenue mobilisationMost low-income countries (LIC) are heavily dependent on trade taxes as a source of revenue, in large part because they are the easiest taxes to collect. About a third of non-resource tax revenue in SSA comes from trade taxes; however, this figure is in decline (from over 6% of regional GDP in the early 1980s to 4% by early 2000s). In keeping with global trends, the average tariff rate in the Sub-Saharan region has declined from over 20% in the 1980s to 13% by 2005.

The share of trade taxes in total tax revenue across our five case study countries has been declining (see Figure 1). While the overall tax to GDP ratio has increased (see Figure 2), it remains far below the Sub- Saharan average at around 18%. The ratio in resource-rich countries is substantially higher at around 25%. Resource-related taxes are responsible for most of the increase in revenue mobilisation in the region (1980-2005). Tax legislation in most African countries is complex and the tax rules incomprehensible, even to well-educated taxpayers. In many tax codes, a large number of exemptions and derogations exist, representing a staggering opportunity cost in terms of forgone revenue. Exemptions complicate tax systems and open the door to political capture. Too often they are viewed as costless because opportunity costs are not analysed and they are offered on an ad-hoc basis. Once in place, exemptions have a ratcheting effect and are difficult to remove. Despite little evidence that exemptions drive investment decisions, the number of Sub-Saharan countries

offering tax holidays, reduced corporate rates, and ‘free zones’ has increased substantially between 1980 and 2005.

The prevalence of exemptions significantly undermines duty revenues. In 2006/7 in Tanzania, import tax exemptions amounted to 32% of total duty revenue. In 2006 in Burundi, 60% of imports were exempted either in part or in full from paying tax or duties resulting in a loss equivalent to 65.5% of duty revenues. In Ethiopia in 2007, customs exemptions amounted to 4.5% of GDP.

Because trade-related taxes are such significant contributors to tax revenues in most African countries, trade liberalisation and tariff reduction measures to encourage greater economic openness should be gradual, paced and sequenced with other reforms aimed at revenue replacement. Aid donors should play a role to this end by pressing their trade negotiators to take a more holistic view of trade liberalisation in low-income countries. As it stands now, that is not happening frequently enough. For example, Cameroon’s Economic Partnership Agreement with the European Union will reduce tariff revenues by 70% or US$149 million (equivalent to 0.8% of 2006 GDP). In order not to undermine the revenue base, tariff reduction should be sequenced with the mobilisation of offsetting revenues (VAT or income taxes).

In general, tax systems in Sub-Saharan countries need to be broadened from their narrow base and compliance must be


increased. Typically taxes are levied at very high rates on a limited number of wealthy taxpayers, inciting widespread tax evasion and fraud. Lower income tax rates on the wealthy, along with the gradual introduction of income taxes for those less wealthy, are more likely to increase revenue generation and inculcate a more healthy taxpaying culture in the longer run.

Value-added or sales taxes are relatively new to many developing countries, and are likely to be broadened in their coverage and generate more revenue over time. However, there is scope to contemplate the introduction of yet other taxes which are conspicuous by their absence in developing countries. As countries become increasingly urbanized, for example, there is the opportunity to levy taxes on urban properties that are owned and/or which generate rental income. If property taxes were levied and collected, they could support urban and municipal authorities in providing or maintaining infrastructure and other services, including transportation. Research in Tanzania and other countries has repeatedly shown that citizens, including the poor, are willing to pay taxes when they see their taxes work. Property taxes at the municipal level can help engender the virtuous link between enhanced mobilisation and more accountable expenditure, vital to developing taxpayer culture.

In some countries a property tax already exists, in principle, but it is not collected in reality. For example, the annual property assessment in Cameroon’s urban areas is 0.1% of the value of the property, but there is little concerted effort from tax officials to collect this tax or tax on rents. Similarly, property taxes could be strengthened in Tanzania and should be introduced in Uganda.

Reforming tax systems and administrationsAs mentioned, in many African countries tax legislation and rules are overly complex. Not only do they encourage evasion, but they also provide too much latitude for discretion and hence corruption on the part of tax collectors and taxpayers. In Uganda, for example, 43% of firms pay bribes to tax officers. For this reason alone tax systems should be simplified and made more transparent.

Looking beyond simplifying and rationalizing tax systems, tax administration capacity and integrity are key to enhanced revenue mobilization. This means elevating the competency of revenue authorities and their officials and rooting out corruption. This is already recognized in the countries we studied. For example, in Ethiopia enhancing the capacity of the revenue authority is a central part of the public sector reform programme. In Cameroon, administrative reforms were introduced in 2004 and the

2007 Fiscal Reform Commission made similar recommendations.

However, there is a sense of déjà vu – such reforms have been introduced in the past and have yet to tackle some of the fundamental underlying problems. For example, in Uganda there has been a series of reforms from 1991-2007, but tax officials still have wide discretionary powers, sometimes abused, and there is widespread tax evasion. Similarly the Government of Tanzania has implemented reforms to strengthen tax administration but there are still extensive loopholes and rampant corruption.

Africans taking ownership over DRM and the role of donorsThe global financial and economic crisis of 2008-9 prompted African leaders across the continent to re-examine their economic strategies and vulnerability to external shocks. The crisis has eroded donors’ aid budgets as well as remittances from overseas migrants and export earnings due to the recession in Europe and North America. It is already evident that the OECD donors have fallen short of their aid commitments made at the Gleneagles G-8 Summit in 2005. Only U$11bn of the US$25bn in the additional aid promised for Africa by 2010 will materialize.

African countries have been here before – in periods of prosperity, aid donors make promises they cannot subsequently keep, and rosy forecasts of expanding trade and foreign investment inflows are drastically revised downwards by recession. The current financial crisis has again underlined the vulnerability of SSA to external shocks. However, this time the critical importance and timeliness of enhancing DRM was clearly acknowledged by African finance ministers and central bank governors when they met in January 2009 in Pretoria.

Subsequently, in November 2009 the African Tax Administration Forum was formally launched, bringing together 25 African revenue authorities with a shared conviction that “efficient and effective tax administration is key to building capable states.” 4 The Forum will provide peer support toward increasing the capacity and integrity of African revenue authorities.

Source: New Revenue Database for Sub-Saharan Africa (Keen and Mansour, 2009)

80.00%

70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

Trade Taxes (% total tax revenue)

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Burundi Cameroon Ethiopia Tanzania Uganda

Figure 1


Author Roy Culpeper is President, and Aniket Bhushan Researcher, at The North-South Institute in Ottawa, Canada. This article is based on a research project on Domestic Resources Mobilization in Sub-Saharan Africa. More information about this research is available at: http://www.nsi-ins.ca/english/research/progress/58.asp

Notes 1 The authors would like to acknowledge the contributions of the DRM project team through the five country case studies: Tsegabirhan Giorgis Abay (Ethiopia); Astere Girukwigomba (Burundi); Sunday Khan (Cameroon); John Matovu (Uganda); and Nehemiah Osoro (Tanzania). The authors thank Yiagadeesen Samy for helpful comments. 2 Aid is found to be four times as volatile as domestic resources, and aid volatility is greater in more aid dependent countries. 3 The authors would like to acknowledge the support of project funders and partners: the African Development Bank, African Economic Research Consortium, Canadian International Development Agency, Department for International Development (UK) and International Development Research Centre (Canada). 4 For more details on the ATAF launch and communiqués see: http://www.oecd.org/document/55 /0,3343,en_2649_33749_44109943_1_1_1_37427,0 0.html

Select Bibliography 1 Bulír, Aleš, A. Javier Hamann. Volatility of Development Aid: From the Frying Pan into the Fire? World Development, 36 (10), October 2008. 2 Culpeper, Roy, and Aniket Bhushan. “Reorienting Development Finance through Enhanced Domestic Resource Mobilization in Developing Countries.” Canadian Development Report, 2009. 3 Culpeper, Roy, and Aniket Bhushan. “ Domestic Resource Mobilization – A Neglected Factor in Development Strategy.” Project Backgrounder, April 2008. (Online at: http://www.nsi-ins.ca/english/pdf/ NSI%20Background%20paper%20DRM%20SSA%20 project%20%5B2008%20%5D.pdf ). 4 Eifert, B. and A. Gelb, A. “Coping with Aid Volatility.” Finance and Development, 42 (3), 2005. 5 Keen, Michael, and Mario Mansour. “Revenue Mobilization in Sub-Saharan Africa: Challenges from Globalization.” International Monetary Fund Working Paper WP/09/157, July 2009. 6 Le, Tuan Minh, Blanca Moreno-Dodson, and Jeep Rojchaichaninthorn. “Expanding Taxable Capacity and Reaching Revenue Potential: Cross-Country Analysis - Policy Research Working Paper 4559.” The World Bank, March 2008. 7 Moore, Mick. “How Does Taxation Affect the Quality of Governance?” IDS Working Paper 280, Institute of Development Studies, April 2007.

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Tax Revenue (% GCP)

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Burundi Cameroon Ethiopia Tanzania Uganda

Figure 2

Source: New Revenue Database for Sub-Saharan Africa (Keen and Mansour, 2009)

While it is appropriate for Africans to play a leadership role, donors can also help. To begin with, they can adopt more coherent policies toward developing countries. In particular their non-aid policies can be made more consistent with their aid policies. Reference was made to the need to slow down and sequence trade liberalisation and tariff reduction in African countries, commensurate with their ability to replace lost revenues in a sustainable manner. Equally, African countries need to review tax incentives offered to foreign investors in their attempts to create a more business-friendly climate. Such incentives often lead to huge and unnecessary tax losses. Better coordination of investment incentives, especially in the context of ongoing regional trade integration such as in the East African Community (EAC), is essential to ensure countries are not undermining one another. If donor countries had a coherent and supportive approach to development, their aid, trade and investment policies would be working together to help build capacity and the self-reliance of their developing-country partners.

Donors can also support African revenue authorities in their attempts to build their capacity. To date technical cooperation to

‘public sector financial management’ in the Sub-Saharan region is only about 2% of total technical cooperation. In our research, we found no significant relationship (positive or negative) between aid levels and tax mobilisation. This suggests there is much room for improvement in support for tax-related capacity building. Donors can provide support in the form of both hardware (information-technology systems) and software (organisational support, skills training and technical assistance, and legal support to make legislation and tax codes more user-friendly and reinforce revenue mobilisation). More importantly, they can help enhance the capacity of domestic policy communities working on taxation. Improving taxpayer education is vital in creating informed bargaining and negotiation around tax issues and central to democratic governance.

While they can make significant contributions to development, external aid or trade and investment opportunities alone will not be sufficient for Sub-Saharan Africa to achieve sustainable, equitable growth and poverty reduction. Development success depends primarily on the efforts of developing countries themselves – which ultimately means enhancing their ability to mobilise their own human and financial resources.


Economic Partnership Agreements – How severe (and how urgent) is the fiscal challenge?

Jean-Jacques Hallaert

Many studies have tried to measure the potential fiscal revenue losses stemming from the EPAs. As they were conducted before the EPA negotiations were concluded, their authors had to make assumptions on key parameters of the agreement such as the list of products that would not be subject to tariff cuts. Moreover they overlooked the transition period and thus could not give any indication of the time profile of the fiscal revenue losses—a crucial element for the design of the policy response. Against this background, it is not surprising that the estimated potential fiscal revenue losses for a given ACP country can vary substantially from one study to another. Therefore, there is a great interest at estimating the potential fiscal revenue losses using the tariff cuts actually agreed. This analysis is limited to six sub-Saharan African countries: Burundi, Côte d’Ivoire, Ghana, Madagascar, Rwanda, and Tanzania.

Direct fiscal revenue losses varies substantially across countries The fiscal impact of the EPAs varies across countries. The revenues from customs duties could be lower, at the end of the

transition period, by about 8% in Rwanda and Tanzania, 16% in Burundi, 21% in Madagascar and up to 28% in Ghana. The severity of the fiscal shock from these losses depends on the importance that customs duties have for government revenue. The fiscal challenge of the EPA is likely to be large for Madagascar where taxes on international trade account for half the government’s revenue. It is likely to be more limited for Tanzania where taxes on international trade account for only 10% of the government’s revenue.

Estimating the potential fiscal loss on the basis of the customs duties revenue is common in the literature. However, this method tends to underestimate the actual fiscal shock as it ignores the spillover of the customs tariff cuts on revenues from other taxes. Customs duties are usually part of the tax base for excise and value-added tax (VAT) levied on imported goods. Therefore, a tariff cut also reduces these revenues. Another shortfall of this method is that it ignores the fact that the ACP countries provide tariff preferences to partners in preferential trade agreements, to foreign investors, and to enterprises located in

Special Economic Zones. Thus, a more accurate estimate of the fiscal revenue losses should consider taxable imports rather than total imports. This requires detailed trade data that were only available for Madagascar. Using taxable imports, the potential loss in customs duties revenues is revised from 21% to 30%. Taking into account the spillover of tariff cuts to other taxes suggests that the total revenues of the Malagasy government could drop by 5% at the end of the transition period. This loss could have substantial repercussions because Madagascar suffers from one of the lowest revenue performance in the world (the tax to GDP ratio is only 10%).3

Trade diversion as an indirect source of revenue lossAlthough more accurate, this revised estimate of the impact of the EPA on Madagascar fiscal revenue still understates the magnitude of the fiscal shock because it ignores the fiscal loss from trade diversion. Eliminating customs duties on EU goods rather than on all imports will encourage consumers (households as well as firms

The relations between the African, Caribbean, Pacific (ACP) countries and the European Union (EU) are evolving dramatically with the phasing in of the Economic Partnership Agreements (EPAs).1 The EPAs are meant to cover a long list of topics but their cornerstone is trade relations. They replace the three decade-long non-reciprocal preferential treatment granted by the EU with WTO-compatible reciprocal preferential agreements. As a result, the ACP countries that concluded an (interim or comprehensive) EPA by the end of 2007 deadline will eliminate their customs tariff on at least 80% of their imports from the EU.2 Such a dramatic change triggered many fears, most notably related to the fiscal shock.


Author Jean-Jacques Hallaert is associated with the Groupe d’Économie Mondiale de Sciences-Po (GEM). The article summarises the main findings of the research project “Economic Partnership Agreements: Tariff Cuts, Revenue Losses and Trade diversion in sub-Saharan Africa” published in the “Journal of World Trade” in February 2010 (vol. 44, no. 1, pp. 223-250). The full article is available at:http://www.kluwerlawonline.com/toc.php?area=Journals&mode=bypub&level=6&values=Journals%7E%7EJournal+of+World+Trade%7EVolume+44+%282010%29%7EIssue+1.

that use imports as an input) to shift their purchase from non-EU imports to EU imports. Indeed, because of the tariff preference, some of the tariff-free EU goods will appear of better value than the tariff-inclusive goods imported from the rest of the world. In other words, the EPA will give EU goods a price advantage over non-EU goods and as a result duty-free EU goods will replace other taxed imports, leading to an additional revenue loss for the ACP governments.

Estimating the magnitude of this second-round revenue loss is difficult as it depends on many factors such as the willingness of ACP consumers to shift their source of imports, the capacity of EU firms to supply the additional demand, the reaction of the traditional suppliers (they may choose to cut their prices to remain competitive), and the strategic behaviour of EU exporters (some may pass the tariff cut to their customers while others may choose to keep their retail price unchanged and increase their profits).

One thing is sure though: the bigger the gap between the most-favored-nation (MFN) tariff and the final tariff levied on EU goods, the larger the trade diversion and thus the fiscal revenue loss. In many ACP countries this gap will be large because, despite recent trade liberalisation, MFN tariffs remain high in ACP countries. In all the Sub-Saharan Africa countries considered in this article they are above 12% on average.

Rather than estimating the fiscal impact of trade diversion—an exercise that would be driven by the assumptions regarding the various actors’ behaviour—it is better to assess the potential scope for trade diversion. Again the choice of excluded products largely determines the impact. In the case of Madagascar, 13% of the tariff lines are excluded from tariff cuts. These lines account for 38% of total taxable imports. Thus trade diversion could potentially affect 62% of the countries taxable imports. However, the actual trade diversion is more limited as for many lines the EU and other countries benefit (because of preferential trade agreements) from a duty-free access accounts for all imports. Taking this fact into account, trade diversion could affect 49% of Madagascar’s taxable

imports. This is substantial, although it is impossible to predict ex ante the size of the trade diversion on these imports.

The fiscal impact is in most cases substantially delayedThe estimates presented so far focused on the total losses, i.e. when all tariff cuts are implemented. However, the shock will be progressive: tariff cuts will be phased in over a long transition period ranging from 10 years for most Southern African ACPs to 26 years for the members of the Eastern African Community (EAC) and of the Caribbean. Moreover there will be no fiscal shock in the short run for two reasons:

First, for most ACP countries, there •will be no tariff cuts before several years. Tariff cuts will only start in 2013 for Ghana and Madagascar and 2015 for the EAC counties. However, Côte d’Ivoire agreed starting eliminating some of its tariff as early as 2009 (though it has not done so yet).

Second, the African ACP countries •considered in this article have chosen to start eliminating the tariff starting with the lowest tariff rates (Côte d’Ivoire is again an exception).

This liberalization pattern limits the risk of trade distortion in the short run and smoothes the adjustment shock (including the fiscal adjustment cost).

Conclusion: How to cope with the fiscal challengeThe estimates presented in this article show that the fiscal impact of the EPAs differs significantly across countries but can be substantial especially when the potential impact of trade diversion is taken into account. However, long transition periods mean that in most cases the fiscal shock will be delayed and progressive.

There is therefore ample time to implement policies and reforms that will help address the fiscal shock of the EPAs. ACP countries should take the opportunity of the transition period to cut their MFN tariffs. This would reduce the welfare cost of trade diversion and simplify the often complex customs regime. The additional revenue losses

could be offset by a rebalancing of the tax regime from taxes on international trade to domestic taxes. Past experience shows that such reform is unlikely to allow governments to fully recoup the revenue losses from tariff cuts under the EPAs but has value on its own as domestic taxes are less distortive than taxes on international trade. Moreover, this reform appears to be important to secure some EU budget support. Indeed, in its 2007 Aid for Trade Strategy, the EU has committed itself to “contribute to the absorption of net fiscal impact resulting from tariff liberalization in the context of EPAs in full complementarity with fiscal reforms.”4

Notes 1 Thirty five of the seventy five ACPs have initialled an interim agreement that include a schedule of the tariff cuts that these countries will implement. Only the Caribbean countries have reached an agreement on the full list of topics of the EPAs. As of mid-2009, the Dominican Republic was the only country to have ratified its EPA. 2 This share can go as high as 97.5% in the case of Seychelles 3 However, the domestic tax reform implemented in 2008, following an IMF technical assistance, may help alleviate the fiscal shock of the EPAs by reducing the reliance on taxes on international trade. 4 The “EU Strategy on Aid for Trade: enhancing EU support for trade related needs in developing countries” is available at: http://register.consilium. europa.eu/pdf/en/07/st14/st14470.en07.pdf


The debate around the impact of EPA tariff liberalisation on government revenues in ACP countries has been particularly controversial throughout the negotiations. A great deal of the opposition to EPAs has focused on the argument that the agreements are likely to have serious effects on government revenues, and therefore on social expenditures geared towards the achievement of broader development objectives, such as the Millennium Development Goals. The financial and economic crisis, combined with recurrent food and energy crises, has only heightened these concerns. Attempting to quantify the fiscal impacts of EPAs has therefore been an important, yet sometimes difficult, exercise.

In terms of reaching a comprehensive assessment of the fiscal impacts of EPAs, the picture remains relatively unclear despite a growing number of regional and country-level studies on the subject. Differences in methodology, data and assumptions have contributed to a mixed picture, although it is also important to acknowledge that comparison and debate between various studies is healthy, and no forecast is likely to be definitively accurate in light of the uncertainties involved in making them. One overall conclusion, however, is that there has been a general tendency to overestimate the direct fiscal losses resulting from an EPA, at least in some of the earlier studies as compared to more recent analysis. Nonetheless, the implementation of an EPA can have significant, and in some countries very serious, consequences for government revenues.

Beyond efforts of researchers to quantify the tariff revenue losses that might result from EPAs, surprisingly little discussion has taken place thus far on the more practical and policy-related questions of how to address the fiscal impact of the agreements. While giving estimates of the impact that liberalisation will have on revenues, most studies do not delve deeper into implications of this work, and ask how trade taxes might be replaced as implementation proceeds. For some countries, replacing remaining trade taxes might become a pressing concern in the next few years, especially given the substantial liberalisation that has already taken place over the last few decades.

Addressing the fiscal challenges of an EPA: Some preliminary considerations

ECDPM1

In terms of the policy responses that will be needed, these are likely to be fairly context specific, depending naturally on the scale of expected losses but also on a range of other factors, such as the existing tax mix, the strength of the economy and breadth of the tax base, tax-raising capacity (in terms of the ease of implementing new taxes or strengthening the collection of others), or even whether there is scope for current spending levels to be reduced as government services are delivered more efficiently. The debate should thus shift away both from theory and rhetoric, towards more concrete actions to address the potential revenue shortfalls, with a role for all stakeholders, including governments, the private sector, researchers and donors. What strategies can ACP countries and their partners adopt to mitigate the negative consequences of liberalisation and take advantage of opportunities for wider reform or consolidation in the area of taxation? Below are some preliminary considerations, with illustrations from Tanzania and Mozambique that highlight the differences and similarities at the country level between

different ACP countries on the revenue consequences of EPAs.

The reform context: varying expectations and perceptions Given that the various models of EPA revenue losses lack perfect foresight and can offer only tentative indications on what to expect, it is perhaps unsurprising that opinions amongst officials on the issue also tend to differ amongst and within ACP countries. In some parts, the views of officials and stakeholders at the country level often continue to reflect long-held positions on the consequences of EPAs more generally, with ‘EPA sceptics’ highlighting the potential negative effects of EPAs on revenues and competitiveness. In contrast, ‘EPA supporters’ put greater emphasis on the dynamic opportunities and gradual transition process. Underpinning such views, however, is the fact that the context of reform is very different in ACP countries, depending on factors like the initial baseline position, ongoing dynamics of regional integration, and the available options for reform.

The case of TanzaniaWith regard to fiscal losses as a result of implementing EPAs, Tanzanian officials familiar with the negotiations emphasise the significant proportion of revenue that continues to be derived from taxes of all kinds (i.e. not just customs duties) on imported goods: currently some 43% of total revenues originate from imported goods. Not all of this revenue is under threat however, since much of the tax collected comes from taxes other than import duties, such as VAT and excise taxes also levied on imported goods, which are not affected by EPA liberalisation requirements, at least directly. Furthermore, flexibility in the EPA liberalisation schedule means that some goods are excluded from liberalisation – in Tanzania’s case, these amount to around 17% of imports, including some ‘big ticket’ revenue-generating products on which import duty will continue to be applied.

Conversely, it is important to understand that the elimination of duties will not just lead to lower customs revenue itself, but also reduce the basis for calculations of other ad valorem taxes, most notably VAT, which are generally levied after duties have already been applied. In addition, the issue of VAT has in recent years been a sensitive item on the reform agenda in Tanzania, with a reduction in the rate from 20% to 18% to bring it closer into line with regional EAC partners, further reducing fiscal revenues.

More generally, many Tanzanians fear the potentially adverse effects that trade liberalisation may have on the economy and tax base as a whole. They are worried that increased competition with EU suppliers may result in the collapse of some domestic industries, including some major tax-paying firms, leading to declining levels of corporate income tax collections, as well as lower collection of personal income taxes as a result of reduced levels of employment.


From a political point of view, the difficulty for hesitant governments facing the prospect of trade liberalisation is that the potential for revenue losses are immediately apparent, while the benefits will only be seen over time. While the dynamic effects of an EPA are unpredictable, opponents to an EPA can easily highlight the potential revenue losses through simple calculations of forgone import duties. Combined with parallel trade liberalisation processes at the regional level and global crises (economic, food, energy, etc.), some political leaders might be reluctant to engage in a far reaching agreement with the EU whose benefits are uncertain.

One potential first step in such cases would be to conduct more in-depth assessments of the impacts of EPAs – at the country level, perhaps jointly commissioned – with a focus not on specific estimates, but rather on the robustness or fragility of countries’ revenue base, or the overall economic costs and benefits.

Strategies to address fiscal losses related to EPA implementation Solutions that have so far been identified for dealing with the revenue consequences of EPAs include those that have been proposed in the context of negotiations – seeking to establish close links between liberalisation commitments and some compensatory financial assistance combined with support to fiscal reforms, as part of Aid for Trade. Beyond this, an emphasis should also be put on more general reform measures aimed at increasing the tax-raising capacity of ACP countries, which are further removed from the specific issue of EPAs and form part of a broader fiscal reform and domestic resource mobilisation agenda. Measures here can range from building the administrative capacity of tax administrations to target specific groups of taxpayers, to tackling international tax issues – such as tax evasion by multinational actors and (illegal) capital flight – at a bilateral or global level. Different approaches are often complementary, and include:

Financing mechanisms for ‘direct •compensation’ of EPA net fiscal losses: here it is interesting to note some precedents where the EC has undertaken to provide direct support to provide partial compensation for fiscal losses due to trade liberalisation, either in the context of EPAs – as in West Africa2, or in the context of regional trade liberalisation – as in East Africa through the Regional Integration Support Mechanism (RISM) programme.

EPA ‘accompanying measures’ leading •to higher tax collection through economic growth: Aid for trade for EPA implementations and adjustments will be key to allow ACP economies to reap the potential benefits of an EPA, which in turn would lead to higher economic growth and associated tax collections.

Wider tax reform to broaden the •tax base and increase compliance: EPAs need also to act as a catalyst for or build on wider reforms in ACP countries, including on fiscal reforms, in particular as part of a strong emerging agenda on domestic resource mobilisation in ACP countries.3

Going forward, one key challenge will be the need for political leadership and commitment to address EPA-related fiscal adjustments and broader fiscal reforms, as an integral part of a domestic resources mobilisation agenda, with appropriate development and technical support.

The reform context in Mozambique In contrast to their counterparts from Tanzania, officials from Mozambique who have followed EPAs tend to view the revenue consequences of the agreements for their country as being relatively limited, for a number of reasons that illustrate the diversity of countries’ experiences. In the first instance, Mozambique’s officials point to their lower reliance on tariff revenue over recent years – and the fact that regardless of the controversies surrounding an EPA more generally, the agreement fits well within the pursuit of economic reforms, including trade and tariff liberalisation and tax reform, resulting in a lower reliance on customs duties and a more open and liberalised economy, which is a key element of the government’s development policy.

Secondly, officials point out that regional integration, principally in the SADC context, will have an important influence on customs duty revenues in coming years, in many ways regardless of EPA liberalisation. SADC (and mainly South Africa) is now Mozambique’s foremost trading partner, with around 40% of imports coming from the region – by contrast imports from the EU represented 12% of total imports in 2007, falling from 15% in 2005.

Finally, Mozambique officials point out that many of the goods actually being liberalised under the EPAs – such as capital goods or intermediate inputs – typically enter Mozambique under special duty exemptions given to large investment or aid projects. One consequence of this is that while some theoretical models might point to Mozambique losing fairly significant amounts of revenue based on assumptions about how much customs duty is collected, and on data that does not reflect recent shifts in the structure of trade – in reality the losses could likely to be less severe. Even where liberalisation of such goods does result in revenue losses, officials point out that at the same time the reductions in prices are more likely to encourage development rather than create negative competition, in line again with Mozambique’s general development strategy.

Notes 1 This article draws on some initial analysis conducted by ECDPM for a project funded by IrishAid on the fiscal adjustments resulting from EPAs. The final study, written by San Bilal, Dan Lui and Melissa Dalleau, will be published in the coming weeks. Comments and suggestions are welcome; contact: San Bilal: sb@ ecdpm.org 2 See the article by David Laborde in this issue. 3 See the article by Henri-Bernard Solignac-Lecomte in this issue.


Fiscal impact of the Economic Partnership Agreement (EPA) in West Africa

David Laborde

Qualitatively and quantitatively defining the “net fiscal impact” of an EPA: a complex undertakingIn West Africa - one of the most important regions in demographic and economic terms among the ACP - European and African negotiators decided to inform their discussions with a regional Computable General Equilibrium model led by a joint committee. Indeed, answering the above questions required a common tool to quantify certain key issues in the negotiations, especially the notion of net fiscal impact. The loss of customs revenues has been a major concern for West Africa’s governments, which face tense budgetary situations and economies with an extensive informal sector, presenting a challenge for replacing border taxes with a domestic tax system. The EU committed itself to accompany and support the ACP partners during the liberalisation phase in order to protect against the negative effects resulting from trade reform, which is why it is necessary to assess and determine the forms of this support. Nonetheless, three important points must be borne in mind. First, this is an unprecedented commitment. While the EU has negotiated numerous free trade agreements, until the EPAs it has not committed to pay the adjustment costs of its partners.1 Second, the very concept of “net fiscal impact” is new, and must be defined before any quantification can be undertaken. Finally, one should note the originality of the approach, which revolves around the notion of partnership between the EU and ECOWAS, as the parameters and hypotheses of the model have been determined jointly by the two parties, in order to avoid politicising the exercise.

Trade liberalisation and its fiscal effectsThe fiscal effects of trade liberalisation are numerous. First, the abolition of customs duties leads to a loss of the custom revenues derived from European imports. Moreover, the replacement of imports coming from non-EU countries (e.g. the United States) subject to multilateral customs duty by non-taxed European products will lead to additional revenue losses. At the analytical level, it is important to make a distinction between theoretical revenues (nominal rate multiplied by the value of imports) and the level of tax actually collected. The latter is sometimes significantly lower (less than 60% for some countries), because of tax avoidance, corruption or legal tax exemptions (i.e., sector-based initiatives, tariff suspension, imports by government or international agencies). Moreover, customs duties are not the only type of tax levied at the border: excise duties or value-added tax (VAT), for example, are also applied on imports. If those taxes are not directly affected by liberalisation, their tax base is. For instance, the volume of (and therefore revenue from) imports will increase, but the value of imports, including the value of custom tariffs, which is the basis of calculation for the VAT, can be reduced. In the case of a perfect substitution of taxed local products by imported products, the net impact will be negative. However, if the imports replace the production of the informal sector, which previously evaded the tax system, the impact will be positive. The combination of the different mechanisms will therefore depend on the consumers’ sensitivity to prices and on the efficiency of the initial tax collection.2 By changing the growth path at the macroeconomic level, liberalisation will also have an impact on income derived from VAT.

Indirect taxation is not the only channel to be considered. Income tax – both corporate and individual – will also be modified by changes in the levels of profit, wages and employment. Moreover, changes in profitability will also affect public – or quasi-public – companies and have consequences on the consolidated budget of public authorities.

Adoption of a Computable General Equilibrium ModelTo be able to take all these effects into account, particularly within the scope of commercial liberalisation spread over 15 to 20 years, requires a model as comprehensive as possible. In this respect the regional Computable General Equilibrium model seems to be the best choice: it can determine the “net” impact on the government’s total tax income, considering all the effects previously discussed.

This definition of the “net” fiscal impact can seem incomplete, however, because it does not address the level of public spending that will also react to trade liberalisation. Nevertheless, the spending aspect entails difficult questions. For example, how will spending on social services and public investments be affected? For this reason, we have decided to focus on the “revenue” side of the equation. Definition of the analytical framework Once the net fiscal impact has been defined, an important question remains: what should be the point of comparison? At the beginning of the EPA negotiations, the African negotiators insisted that the old Cotonou preferences should to be used as the reference point (i.e., the cost or benefit of the EPA should be compared

Will trade liberalisation bear an adjustment cost for ACP countries? If so, how much and who will pay for it? What are the strategies for reducing or even eliminating these costs? These are all sensitive questions facing ACP and European negotiators in the context of the negotiations of the Economic Partnership Agreements (EPAs).


Author David Laborde is an economist at the International Food Policy Reseach Institute (IFPRI – Washington DC) and has collaborated with the ECOWAS-EC Regional Preparatory Task Force in the context of ECOWAS EPA negotiations since 2007.

to the “current” situation). On the other hand, European negotiators insisted on the fact that the reference point should be the Generalized System of Preferences (GSP), since after 2007 the unilateral preferences could not exist anymore and this alternative was thus irrelevant.

The second option obviously leads to a more optimistic assessment of the EPA. Since 2008, the European position is de facto the most relevant, even if some observers think that it does not follow the initial commitment’s spirit. Yet this does not necessarily mean that the debate on this question is closed. In fact, we now need to know if the actual base for the negotiation of a regional EPA should be the GSP applied to exports to the EU, while also maintaining the actual pricing structures of Western African countries, or if the temporary agreements signed, and the associated concessions, must be used as a reference for Ghana and the Ivory Coast. In the latter case, the regional EPA usually results in a reduction of the liberalisation granted at a bilateral level and thus in a fiscal gain. Finally, the question of ECOWAS’ common external tariff arises: fixed at an intermediate level between the UEMOA (West African Economic and Monetary Union) level and the Nigerian level, for example, it would increase the tax loss of French-speaking countries and reduce that of Nigeria. We also have to keep in mind that the tax impacts will depend on the degree and the sequencing of the liberalisation. Greater market opening will result in higher losses from foregone custom duties. The very composition of the list of sensitive products plays an important part, and also presents a difficult choice for the African negotiators: should they protect the products that generate tax revenue or products considered critical to the rural or industrial development?

Preliminary results: a mixed picture Since the negotiation process is not over yet, it would be a premature to present specific numbers on the fiscal impact of the EU-West Africa EPA. However, basing our judgment on the existing outlines of the agreement, we can give a couple of rough estimates. Overall, customs revenues should be reduced by 30% at the most3 for the whole

ECOWAS, and between 20% and 40% for the different countries, which represents 10% of total indirect tax revenue. Therefore, the impacts are not the disaster claimed by some, but at the same time cannot be ignored. The distribution of these losses is an important issue and Nigeria itself would represent a third of this amount. Tackling the challenge: possible strategiesThe evaluation of the net fiscal impact is just one step of the negotiation process. It is also advisable to consider solutions to the problem. First, one could consider the option of “fiscal neutralisation” through a transfer from the EU under the form of budget support. In this respect, it is important to note that the amounts to be invested are less important than the net fiscal impact previously assessed. In fact, if the transfer programme is implemented at the same time as liberalisation is undertaken, public spending will not have to decrease and economic growth will not slow down (which generated additional losses). Secondly, national fiscal policy can be reformed and adapted. For example, some customs duties can be replaced by excise duties, the VAT can be increased or direct taxes modified to get back a part of the lost customs taxes. Indeed, the suppression of customs duty results in a decrease in domestic prices of imported goods, which benefits consumers and firms but triggers a loss for the state. In response, governments can maintain tax pressure and in doing so, retrieve the amounts earned by other economic agents. If this strategy is the most logical in the long term, it is also difficult to implement in countries that have set up numerous tax reforms and are confronted by a large informal sector that escapes official taxation. Any increase of the tax rate would then only encourage a switch to the informal sector, worsening the situation even more. Thirdly, the development policy associated with the EPAs, the PAPED (EPA Development Program4), could sufficiently reinforce economic growth and generate additional tax income that will cover the direct losses due to trade liberalisation. This scenario is more optimistic, but its success will depend on the exact characteristics of the PAPED.

ConclusionWestern Africa offers a very relevant example of the use of economic models in free trade negotiations. Even when incomplete, these tools can help quantify some of the questions that are of critical interest to political decision-makers and help clarify the consequences of various options. Well used, they offer a coherent framework for the negotiating parties, which force participants to explain their offers and expectations. In the context of estimating the fiscal impact of the EPAs, the selected approach allows the parties to tackle the problem head-on and to immediately define a tailored and negotiated strategy, instead of denying the reality or allowing utopian fantasies obscure the debate.

Notes 1 It is necessary to note, however, that in the past, the EU did help West African countries to deal with the revenue loss related to their own regional intégration. 2 It is important to keep in mind that in certain cases, the efficiency of this collection can be endogenous to the deregulation process, if the latter comes with a tax reform or investments in customs administration, etc. 3 We take the upper bound of the opening rate, with an 80% threshold. 4 See on this subject our issue of Trade Negotiations Insights dedicated to the PAPED/EPAD : Trade Negotiations Insights, Vol9, No5, June 2010. See also : ECDPM. 2010. The EU Commitment to Deliver Aid for Trade in West Africa and Support the EPA Development Programme (PAPED). (ECDPM Discussion Paper 96). Maastricht: ECDPM


Mapping donors’ involvement in the area of taxation and development: The case for better coordination and division of labour

International Tax Compact Secretariat

Strengthening tax systems and supporting developing countries’ efforts to increase domestic revenue is receiving growing attention within development cooperation. The declarations of Monterrey (2002) and Doha (2008) have emphasised the importance of domestic resource mobilisation for sustainable development. Numerous international and national initiatives and platforms have also emerged in recent years, underlying the importance of the topic (e.g. EITI, Tax Justice Network, International Tax Dialogue, S4TP, International Tax Compact, Task Force of OECD/DAC on Taxation and Development, etc.). The African Development Bank has dedicated its African Economic Outlook 2010 to the topic of “Public resource mobilization and aid in Africa ”.1 And most recently the EU Council adopted a communication on “Tax and Development - Cooperating with Developing Countries on Promoting Good Governance in Tax Matters”, which was elaborated by the European Commission under the Spanish Presidency.2

Thus, the importance of efficient systems of taxation and domestic revenue mobilisation in developing countries is increasingly recognised. To ensure that efforts aimed at improving cooperation, collaboration and alignment in the area of taxation are well targeted, it is first and foremost critical to survey what is being done, where and how. A mapping of world-wide activities in the area of taxation and development reveals that quite a number of actors are already working on these issues. Although each of these actors has different priorities and modalities of work, geographic and thematic overlaps are frequent.

Much engagement in taxation, but also regional overlapIndeed, a country-specific mapping exercise conducted within the framework of the International Tax Compact (ITC), and as part of a broader mapping survey, indicates generally good worldwide coverage of tax-related assistance projects by donors. However, these activities are at times very intense, with many donors working on tax issues in the same country, while other

countries are not supported at all. Asia and Central and South America seem to be quite well covered by donor engagement, for example, while coverage of the African continent seems to be slightly less extensive. This is alarming as the tax revenue to GDP ratio is especially low in Africa, indicating weak revenue raising capacities and, consequently, the necessity for intensive and long-lasting assistance. The initial impression that the regional coverage of support in Africa is not yet sufficient is confirmed when only long-term projects, lasting for at least several months, are taken into account and mission-based cooperation of IMF Regional Technical Assistance Centers (RTACs) is left aside. While there is intensive donor activity in many parts of Africa, 17 out of 53 African countries - a third of the entire continent - still do not receive long-lasting tax-related assistance.

and organisation reform, tax laws, etc) and country groups (developing countries, emerging market economies, transition countries). Yet activities are often carried out by all organisations with only slight concentration on specific issues. Thus, the division of labor between the different actors is here again rather weak.

Enhancing international cooperation As a result, the findings of both the region-specific and the topical mapping indicate a high potential of duplication of work, including projects of multiple donors in a specific country, as well as identical working areas with regards to the content of the programmes undertaken. Although it is not clear whether duplications actually occur, it is obvious that organisations need to increase the level of information sharing to guarantee that assistance is indeed complementary and aligned. Moreover, an improved division of labour would encourage in-depth expertise - both with respect to the regional or country-specific background as well as in terms of technical knowledge. Also, a more focused approach and division of labour would unleash forces in areas and regions not well covered so far.

Author International Tax Compact Secretariat. This article is based on the Maping Survey on Taxation and Development by Daniel Köhnen, Thorben, Kundt and Christiane Schuppert, realized by ITC and super-vised by the Deutsche Gesellschaft fur Technische Zusammenarbeit (GTZ) on behalf of the Federal Min-istry for Economic Cooperation and Development (BMZ). Further information on the ITC can be obtained at: www.taxcompact.net

Notes 1 See Henri-Bernard Solignac Lecompte, “Taxation for Development in Africa: A Shared Responsibility”, pages 3-4 of this issue. 2 This Communication is available at; http://ec.europa. eu/development/icenter/repository/COMM_ COM_2010_0163_TAX_DEVELOPMENT_EN.PDF

Issues broadly treated but weak division of laborOn the other hand, the topical-mapping conducted as part of the same survey and covering thematic characteristics of the organisation’s work related to taxation show that tax-related activities cover a broad range of issues, including domestic and international taxation, areas of expertise (tax systems reforms, tax administration

The International Tax Compact (ITC) As an informal platform of donor and partner countries and in close communication with NGOs and the private sector, the ITC brings together the relevant actors in the area of taxation and development in order to strengthen revenue raising capacities. Launched by the German Federal Ministry for Eco-nomic Cooperation and Development (BMZ), the ITC aims to promote tax systems that allow partner countries to be more effective in fighting tax evasion and inappropriate tax practices with the intention to achieve national and international development goals. BMZ has commissioned GTZ and KfW to support the initiative’s implementation. The secretariat is based in Bonn.

15Issue 6 | Volume 9 | July / August 2010

WTO Roundup

Brazil, US strike framework deal in cotton disputeTrade officials from Brazil and the United States reached a place-holder accord in June that delays until 2012 the imposition of trade sanctions in a protracted dispute over Washington’s cotton subsidies.

The ‘framework’ deal that was announced on Friday outlines a new set of negotiations and consultations that will take place over the next two years as US lawmakers revise the Farm Bill, the omnibus legislation that governs the form and value of subsidies for US farmers, which will expire on 30 September 2012.

The framework agreement obligates the US to fork over US$147.3 million per year in the form of a “technical assistance fund” to help Brazilian farmers. Washington officials have also agreed to work toward benchmarks for specific changes to its controversial GSM-102 programme and to establish “a limit on trade-distorting cotton subsidies,” according to a statement from the Office of the US Trade Representative. Officials from both sides will meet four times a year as the next Farm Bill takes shape.“This is not a final solution, but it lays out elements that will allow for consultations and reforms to the Farm Bill that will take place by the end of 2012,” said Roberto Azevedo, Brazil’s ambassador to the WTO, according to a report in The Financial Times. “Brazil doesn’t rule out taking countermeasures at any moment.”

The United States’ cotton subsidies have long been a sticking point in the Doha Round of world trade talks at the WTO. A number of developing countries, including Brazil, have urged the US to reform the support it offers its cotton farmers, but US officials have so far failed to indicate what changes they might be willing to adopt.

Washington’s failure to overhaul its cotton programme has had important implications for cotton farmers in Brazil and other developing countries, according to a recent study conducted by Mario Jales, a graduate resident fellow at Cornell University.1

The analysis found that world cotton prices would have jumped by 6% if the US had agreed to make cuts outlined in proposals that African nations have put forward in the Doha talks. Such an increase could have brought significant gains to cotton farmers in the developing world.

by negotiating group chairs, preliminary contacts between trade ministers, and Lamy’s own consultations with delegations. Lamy reiterated that these three ingredients must be combined to produce an effective result.

Lamy added, however, that the timing still was not right to do a “horizontal give and take” on the Doha issues that are still open, given that “we need all these issues to be at the same level of technical maturity, and this is not the case yet.” He insisted that any horizontal discussions would have to include all topics that were still outstanding.Given the principle of “single undertaking,” nearly every item of on the Doha Development Agenda needs to be treated as part of the whole. As Lamy has frequently reminded delegates, “Nothing is agreed until everything is agreed.”

Zambia, however, speaking on behalf of the group of Least Developed Countries, or LDCs, asked that members consider an “early harvest” for the following four areas: quota-free, duty-free market access for LDC exports; preferential trade in services for LDCs; an ambitious package on cotton; and simplification of rules-of-origin.

At the TNC meeting, Lamy described “extra quantum” - a term he used in a meeting in Paris recently - as a “combination of ambition and balance for all participants,” calling upon countries to give the talks added momentum so that the Doha process can move forward.

Some delegations took the TNC meeting as an opportunity to challenge Lamy’s use of this language. India, for instance, stated that they did not believe phrases like “added quantum” were helpful for the Doha Round. Raising the bar in these negotiations would be counterproductive and should be avoided, the Indian delegate said. Some of the other countries present also reiterated this concern.

Delegations at the TNC meeting also spoke at length about whether the current Doha package was balanced, and about how big of a role the agriculture and industrial goods talks should play in the Round.

A number of developing countries, including Brazil, have urged the US to reform the support it offers its cotton farmers, but US officials have so far failed indicate what changes they might be willing to adopt.

WTO officials frustrated over lack of momentum on Doha WTO Director-General Pascal Lamy attempted to inject a positive tone into a meeting of the Trade Negotiations Committee on 11 June, which saw delegations express their frustration at the Doha Round’s slow progress. While members all reaffirmed their commitment to the prompt conclusion of the Round, many were concerned about political tensions among delegations that seem to be holding the talks back.

Lamy reminded the delegations of the Round’s potential benefits, referring to it as a “stimulus package that has a sustainable and lasting impact” and calling trade “an engine to generate growth and contribute towards the recovery.”

Along with calling up members to avoid falling into complacency, Lamy also spoke about the need to pursue a “cocktail” approach to negotiations, an approach that he first referred to in his report to the General Council in May of this year.

The cocktail approach, according to Lamy’s earlier report, includes the following three ingredients: meetings organised

16 Issue 6 | Volume 9 | July / August 2010

Brazil, speaking on behalf of the G20 group of developing country farm exporters (not to be confused with the G20 group of major economic powers), stated that the December 2008 draft modalities text set the appropriate level of ambition and balance, and that there was no need to make additional concessions regarding these issues. The US, however, claimed that there was never the balance that other members say exists. Members lament lack of progress on cottonWTO Director-General Pascal Lamy told trade delegates in a fax on 12 May that cotton has become a “litmus test” for the “development dimension” of the Doha Round. However, at a recent review of the issue’s standing in WTO talks, some countries, such as Tanzania, alleged that no progress has been made since 2005.

Leonce Kone, the trade minister from Burkina Faso - a cotton-exporting Least Developed Country (LDC) - joined Geneva-based trade delegates in consulting with WTO Deputy Director-General Harsha Singh on 7 June. These consultations are part of the work of a Sub-Committee on Cotton, which was mandated in the General Council’s July 2004 framework agreement to conclude the Doha Round. The committee’s remit is to review “all trade-distorting policies affecting the sector in all three pillars of market access, domestic support, and export competition.”

The consultations are intended to feed into a broader process that allows WTO members and donors to gauge progress on cotton - specifically with regards to trade, development, and the need for domestic reforms. Many developing country members used the 7 June meeting to express concern over the lack of attention that the issue has received in recent years.

Brazil, which is engaged in negotiations to settle a WTO dispute with the US on cotton, called developed country subsidies an unfair source of competition for developing country farmers, while suggesting that consultations in the negotiations have backtracked.

The United States, the world’s largest subsidiser of cotton, repeated on Monday its position that WTO agriculture talks in all other major areas should be resolved before negotiators turn to cotton.

Tanzania insisted that development assistance without cuts in domestic support would lead nowhere, a common refrain among other developing country members.

Director-General Lamy, in a letter to WTO ambassadors, reminded them of the growing amount of development assistance that is being offered on cotton, even during the global economic and financial crisis. According to the WTO, the disbursement of funds for cotton-related assistance has increased by 24% to US$266 million from the last such report.

Tanzania insisted that development assistance without cuts in domestic support would lead nowhere, a common refrain among other developing country members.

US, EU ink deal to end banana dispute The United States and the European Union signed an agreement that should bring to a close their long-running dispute over trade in bananas on 8 June, on the heels of a related pact that was signed by the EU and a group of Latin American countries a week earlier.

Under the agreement, the European Union pledged to implement a non-discriminatory, tariff-only regime for its banana imports.

“I am pleased that we, together with the Latin American banana-producing countries, have taken one more significant step toward ensuring that the EU’s bananas import regime is consistent with its WTO obligations,” said US Trade Representative Ron Kirk.

The deal, which was initialled in Geneva in December of last year, serves as a complement to the Geneva Agreement on Trade in Bananas, the pact that was signed by the EU and a group of Latin American countries on 31 May.

The United States soon joined the Latin Americans in their suits against Brussels. The US is not a major banana exporter, but several large banana companies - Chiquita, Del Monte and Dole - operate in Latin America but are headquartered in the US.

This information has been summarised from ICTSD’s Bridges Weekly Trade News Digest.

Notes 1 How Would A Trade Deal On Cotton Affect Exporting And Importing Countries?, Mario Jales, International Centre for Trade and Sustainable Development, May 2010, http://ictsd.org/i/publications/77906/


African regions seek common positions on EPAsThe European and African Union (AU) Commissions held a meeting, attended for the first time by the African Regional Economic Communities, on 8 June where one of the issues discussed was the Economic Partnership Agreements (EPAs). The meeting followed an AU EPA negotiations coordination meeting on 20- 21 May, aimed at achieving synergy and coherence in the EPA negotiations. The AU also presented a paper to the EC highlighting contentious issues in the EPA negotiations. These were identified as:

The EC’s position that the World Trade •Organization (WTO) definition of substantially all trade coverage and transitional time frames requires that all African countries and customs territories under the EPA have to liberalise at least 80% of their value of trade within 15 years. African countries and regions have proposed to liberalise 60-70% of their trade during periods of over 20 years, arguing that this is necessary for Least Developed Countries (LDCs). The AU also notes that there is no clear definition at the WTO on this question.

African countries’ position that the EC’s •proposal to prohibit the use of export taxes and quantitative restrictions under EPAs is an unnecessary WTO-plus requirement that would limit the policy space to use these measures for value addition, diversification, infant-industry promotion, food security, revenue and environmental considerations.

The EC’s proposal to include a Most •Favoured Nation Clause (MFN) in the EPAs, which would require African countries to extend to the European Union any more favourable treatment that it would give to any other “major trading partner”. African countries feel this limits their scope to sign ambitious trade agreements with emerging economies.

EC hesitance to allow for future tariff •modifications, which African countries argue are necessary to take account of the evolution of regional integration programmes.

African countries’ proposals for •asymmetry in the rules of origin to take account of the differences in the level of development between African countries and the EU. African governments want unconditional cumulation with all ACP and neighbouring countries.

African countries’ proposal to allow •agricultural safeguards, on the grounds that products originating in the EU can cause serious injury in African markets.

The EC’s proposal that African •community levies should be phased down, which the Africans feel undermines financing for regional integration programs.

African countries’ proposals for legally •binding measures to ensure additional EU resources are provided and effectively implemented to support EPA implementation.

Central Africa EPA meetings delayed againA meeting of the Central Africa EPA contact group, which plans to establish a work programme for EPA negotiations, has yet to be held. The Central African EPA Regional Negotiating Committee is due to meet in mid-July in Kinshasa to flesh out negotiating positions.

EC officials were expected in the region from 16-23 June to meet with trade ministers from Congo Brazzaville (the current president of the Economic Community of Central African States), Gabon and the General Secretary of the Economic Community of Central African States (ECCAS). No further information has been provided, but expectations were that discussions would focus on the details of the conclusions of the February Central Africa ministerial meeting on EPAs.

Contentious issues remain following latest round of West Africa-EU EPA negotiationsAn EU-ECOWAS (Economic Community of West African States) ministerial-level meeting held on 15 June reiterated the commitment of both sides to resolve the outstanding areas of divergence and swiftly conclude a regional EPA covering trade in goods, EPA-related

cooperation and other trade-related issues by the end of 20101. Ministers also welcomed the conclusions of the EU Council regarding the West African EPA Development Programme (EPADP) adopted on 10 May. Both parties agreed on the need to ensure the availability of financing from the EU and other parties as soon as possible.

Joint technical-level EPA negotiations were held in Ouagadougou from 2-11 June.2 Based on the results of the ECOWAS Council of Ministers meeting on 31 May,3 West Africa maintained its market access offer of 70% coverage with a transition period of 25 years starting after a 5-year moratorium. The region also rejected the EC’s proposal for the inclusion of MFN and non-execution clauses in the EPA. Some progress was made on the formula for tariff dismantling and the corresponding calendar, although there is uncertainty over the Common External Tariff’s (CET) definition, classifications and completion (issues which were discussed at a CET regional meeting between the ECOWAS and the West African Economic and Monetary Union Commissions from 24-28 May and will be raised again in July). As a result, there is currently no clear starting point for tariff dismantling. West Africa also called for the maintenance of regional levies.

There was an initial discussion on West Africa’s proposal for a protocol on the modalities for implementing EPADP. The first substantial discussion on proposals from both parties on rendezvous clauses was also held. There was also a constructive exchange on rules of origin (ROI) based on a paper from the EU on asymmetries with respect to the rules applied to agriculture and fisheries products. Negotiations will continue in all areas.

East and Southern Africa continue preparations for July-August round of EPA negotiationsThere have been no EPA meetings over the past month, but the East and Southern African (ESA) region continues to prepare for the next round of technical and political-level negotiations to explore ways of resolving the contentious issues based on a reality check of what is feasible in a full and inclusive EPA that goes beyond trade in goods (i.e., covering services, investment, government

EPA Update

Melissa Julian

18 Issue 6 | Volume 9 | July / August 2010

procurement, competition etc). The ESA will write to the EC summarising the region’s position on the way forward.

Seychelles finalised their ratification process for the IEPA on 21 May.4

East African Community and EC agree to focus on signing comprehensive EPAAn East African Community (EAC)-EU ministerial meeting, preceded by a senior officials meeting, took place in Dar es Salaam on 9 June.5 Ahead of the meeting, there were indications that the Framework EPA (FEPA), initialled in November 2007, would be signed by EAC ministers, but in the week prior to the negotiations, a letter from the EAC’s WTO coordinator to EAC governments, Tanzanian Ambassador Dr. Matern Lumbanga, reported serious reservations about the content and timing of the FEPA, particularly its compatibility with the flexibilities already provided to EAC countries in the WTO. For this reason, Lumbanga urged governments not to sign the FEPA in its current form.

Progress was made in the negotiations in relation to sanitary and phytosanitary measures, technical barriers to trade, and customs and trade facilitation. Text was also agreed for the articles on dispute settlement. In other areas - export taxes, the MFN clause, and allowance for future tariff modifications to take account of the evolution of regional integration programmes - no consensus was reached.

The EAC also wanted to include a reference to the development matrix - which had been expected to be completed before the summer - in the EPA to make it a legally binding commitment. However, the EC wants to include this only in the comprehensive EPA.

The EAC maintained its position that its proposed changes rectify factual errors in the FEPA text and the initialled FEPA should be amended to reflect these before signing and moving on to negotiations on a comprehensive EPA. For its part, the EC argues that the proposed changes would alter the substance of the initialled agreement and that it has no mandate to amend the FEPA. Instead, the EC wants the EAC to sign the November 2007 FEPA and then move to include any changes in the eventual

comprehensive EPA. The EC also emphasised that the current situation is untenable since it provides duty-free, quota free access for the EAC to the EU market with no commitments from the EAC.

The parties, therefore, agreed to accelerate negotiations for a comprehensive EPA – which could include revised texts on contentious issues and also services, investment, intellectual property rights, government procurement and competition – with a view to reaching agreement so that a full EPA could be ready for signature by the end of November 2010, prior to the AU-EU summit. EU Trade Commissioner Karel De Gucht made it clear that he would do his upmost to maintain applied tariffs provided that both parties conduct negotiations in good faith.

SADC and EC hold first round of EPA negotiations in nearly a yearOn 3 June, the EU Council adopted its position to be taken within the EU-South Africa Cooperation Council on amendments to the EU-South Africa agreement on trade, development and cooperation, in order to align certain sensitive tariffs with those applied to EU products by Botswana, Lesotho and Swaziland. 6

On 25 and 26 May, technical and senior officials’ from the EC and Southern African Development Community (SADC) met in Brussels, for the first time in nearly a year, to discuss the way forward in the EPA negotiations.7 The EC stressed the need to proceed with signing, notification and implementation of the IEPA in order to provide legal security to the EU market access enjoyed by the SADC EPA states. In parallel, a comprehensive EPA should be negotiated, says the EC. For its part, the SADC underlined its commitment to move towards notification and provisional application of the IEPA and to negotiate a comprehensive EPA by the end of 2010, but considers it necessary to first address the outstanding issues in the IEPA.

SADC requested stronger guarantees and reassurances that the Swakopmund texts agreed in March 2009 would replace existing IEPA provisions. The EC reiterated that the agreement of Swakopmund would prevail and the new provisions would be integrated

in the comprehensive EPA once concluded. Following the meeting, Botswana’s chief negotiator, James Masisi, said that the EC confirmed this commitment in a letter. “Thus, there is legal assurance to say the EU has agreed to this,” said Masisi. 8

SADC insisted on the need to solve tariff alignment issues. The EC indicated that the SACU CET is not under risk until the interim EPA is applied, since the South African Trade and Development Cooperation Agreement (TDCA) is de facto applied by all SACU countries. The EC maintains that once the IEPA is implemented, tariff alignment is possible. The EC also indicated that another option is to move directly to the comprehensive EPA with the whole region, in which case any alignment on tariffs and rules of origin would be unnecessary.

The SADC requested modifications on the rules of origin provisions in the IEPA – including an alignment of the TDCA and IEPA provisions, cumulation, maritime issues, tuna derogation and administrative cooperation agreement.

South Africa repeated its interest to improve its access to the EU market beyond the current TDCA provisions. Given that other SACU states already enjoy duty and quota free access, the EU considered that there seems to be limited scope for further liberalisation, since an adequate level of reciprocity is required from South Africa. Both sides agreed that these tariff negotiations should not hinder the rapid conclusion of a comprehensive EPA.

Both sides indicated they are ready to resume negotiations on services and investment. The SADC suggested that the investment chapter should be limited to cooperation, while the EC is seeking liberalisation commitments. The SADC suggested elaborating joint modalities and concluding services negotiations within 5 years, while the EC would like a faster process. The EC suggested a ‘differentiated’ approach whereby each SADC member could negotiate provisions individually with the EU and potential incompatibilities for the region to develop a common set of provisions could be addressed. SADC will consider this proposal.


TNI is published by

The International Centre for Trade and Sustainable Development Chief Executive: Ricardo Meléndez-Ortiz Editor: Damon Vis-Dunbar Address: 7 Chemin de Balexert 1219 Geneva, Switzerland Tel: (41-22) 917-8947 Fax: (41-22) 917-8093 Email : [email protected] Web: www.ictsd.net

European Centre for Development Policy Management Editor: Sanoussi Bilal Address: Onze Lieve Vrouweplein 21 6211 HE Maastricht, The Netherlands Tel: (31-43) 3502 900 Fax: (31-43) 3502 902 Email: [email protected] Web: www.ecdpm.org Editorial team: Melissa Dalleau Isabelle Ramdoo

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This monthly publication is made possible through the financial contribution of the Government of the United Kingdom (DFID) and the Dutch Ministry of Foreign affairs (DGIS). The opinions expressed in the signed contributions to TNI are the authors’ and do not necessarily reflect the views of ICTSD or ECDPM. Manuscripts offered for publication are expected to respect good journalistic practice and be compatible with our mission. Guidelines for contributors are available on request. Material from TNI can be used in other publications with full academic citation. © Trade Negotiations Insights ISSN 1682-6744

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SACU and SADC senior officials and ministerial meetings were held from 16-18 June to discuss the outcome of the latest round of EPA negotiations and clarify the pros and cons of signing the IEPA. Ministers approved the strategy to conclude the EPA negotiations on outstanding issues, including on tariffs and rules of origin, and chapters on services and investment, so that the EPA can be signed and notified by the end of the year. Negotiations on services and investment liberalisation commitments should be completed in 2014.

Caribbean implementation still facing challengesEC officials indicate that internal arrangements between the CARICOM (Caribbean Community and Common Market) Member States and the Dominican Republic are still posing problems for effective EPA implementation, but could be solved with the necessary political will.9 No further information has been provided to TNI.

The CARICOM Council for Trade and Economic Development met from 17-18 June in Guyana, but no information on the outcome of the meeting in relation to EPAs was available as TNI went to press.

PacificPacific ACP trade officials and ministers were scheduled to meet in Nadi in June to discuss EPAs, but no information on the outcome of the meeting was available at press time. This marks the first EPA meeting for the Pacific since September 2009. Outstanding issues in the regional negotiations towards a comprehensive agreement include the rules of origin applied to fishery products and a fisheries chapter, the MFN clause, export taxes, provisions to protect infant industries and the non-execution clause. Services would be covered by a rendezvous clause. Sources indicate that given the slow progress, a comprehensive regional EPA is unlikely anytime soon. An alternative being considered is to have more countries sign the existing IEPA and gradually expand its scope.

Author Melissa Julian is Knowledge Management Officer with ECDPM.

Notes 1 EU-ECOWAS Political Dialogue at Ministerial Level. Communiqué. 15 June 2010. http://www.consilium.europa.eu/App/NewsRoom/ loadDocument.aspx?id=360&lang=EN&directory=en/ er/&fileName=115295.pdf2 EU and West African hold EPA talks in Ouagadougou. EC press release. 16 June 2010. http://www.acp-eu-trade.org/library/library_detail. php?doc_language=en&library_detail_id=53203 Results of ECOWAS Council of Ministers on status of implementation of regional integration programmes and Economic Partnership Agreements with the EU. 31 May 2010. http://news.ecowas.int/presseshow. php?nb=094&lang=en&annee=20104 EU welcomes ratification of interim EPA by Seychelles. EC Press Release. 21 May 2010. trade.ec.europa.eu/doclib/html/146180.htm5 EU Trade Commissioner meets East African Community Trade Ministers. EC. 9 June 2010. http://trade.ec.europa.eu/doclib/press/index. cfm?id=583 and EAC-EC Economic Partnership Agreement Negotiations Held. EAC. 9 June 2010. Joint declaration http://www.eac.int/component/ content/451.html?task=view and EU sets November deadline for new trade pact with EAC. tralac. 11 June 2010. http://www.tralac.org/ cgi-bin/giga.cgi?cmd=cause_dir_news_item&news_ id=88407&cause_id=1694 6 EU Council adopts decision on South Africa-SACU customs duties alignment. EU Council. 3 June 2010 http://www.consilium.europa.eu/App/NewsRoom/ loadDocument.aspx?id=352&lang=EN&directory=en/ jha/&fileName=114900.pdf See also: http://register. consilium.europa.eu/pdf/en/10/st09/st09393.en10.pdf7 EU and SADC EPA Group hold EPA negotiations in Brussels. EC press release. 25-26 May 2010. http://www.acp-eu-trade.org/library/library_detail. php?doc_language=en&library_detail_id=53118 Botswana in fragile balancing act at EPA talks. Mmegi. 20 June 2010. 9 European Parliament International Trade Committee to discuss EPAs. 1 June 2010. State of Play on Economic Partnership Agreements. Presentation by the European Commission.Watch a recording online at: http://www. europarl.europa.eu/eng-internet-publisher/eplive/ public/default.do?language=en


Trade Negotiations Insights

ACP-EU Events WTO Events

Resources All references are available at: www.acp-eu-trade.org/library

Printed on 100% recycled paper

Calendar and resources

Trade relevant provisions in the Treaty of Lisbon. Implications for Economic Partnership Agreements, Koeb, E. and M. Dalleau, Discussion Paper 98, Maastricht: ECDPM, June 2010,www.ecdpm.org U-ACP Economic Partnership Agreements: State of Play at June 2010, European Commission, State of Play at June 2010, 15 June 2010, trade.ec.europa.eu Commissioner De Gucht’s Speaking Points on the Future Trade Policy, European Commission on Trade, European Parliament, Committee on International Trade, 22 June 2010,trade.ec.europa.eu

European Parliament decision of 15 June 2010 on the setting up and numerical strength of the Delegation to the CARIFORUM-EU Parliamentary Committee, European Parliament decision, 15 June 2010, register.consilium.europa.eu

Official text - EU-US-Latin America banana agreements, EU Official Journal. 9 June 2010, eur-lex.europa.eu

Council conclusions on the Millennium Development Goals for the United Nations High-Level Plenary meeting in New York and beyond, Council Conclusions, Council of the European Union, 3023rd FOREIGN AFFAIRS Council meeting, Luxembourg, 14 June 2010, www.consilium.europa.eu

Proposal for a Council Decision on the signature of the regional Convention on pan-Euro-Mediterranean preferential rules of origin, Proposal for a Council Decision, Council of the European Union, 8 June 2010,register.consilium.europa.eu Proposal for a Regulation (EU) of the European Parliament and of the Council amending Council Regulation (EC) No 732/2008 applying a scheme of generalised tariff preferences for the period from 1 January 2009 to 31 December 2011, Proposal from the European Commission, 27 May 2010, register.consilium.europa.eu

Global Economic Prospects 2010- Summer 2010 ‘Fiscal Headwinds and Recovery’, World Bank Report, 10 June 2010, siteresources.worldbank.org

Assessing Regional Integration in Africa IV Enhancing Intra-African Trade, UNECA-AfDB-AU Report, May 2010, www.uneca.org Economic Development in Africa Report 2010, UNCTAD Report, 18 June 2010, www.unctad.org

Trade Regionalisation and Openness in Africa, Lelio Iapadre, Francesca Luchetti, European University Institute, Robert Schuman Centre for Advanced Studies, Working Paper, June 2010, erd.eui.eu

The Costs and Benefits of Duty-Free, Quota-Free Market Access for Poor Countries: Who and What Matters, Antoine Bouët, Kimberley Elliott, David Laborde Debucquet, Elisa Dienesch, Center for Global Development, Working Paper, March 2010, www.cgdev.org

Doing Business in the East African Community 2010, Report prepared as part of the EAC Investment Climate Program supported by the World Bank Group and DFID, 24 May 2010, www.doingbusiness.org

Are Simplified Customs Procedures for Imports Effectively Controlled? European Court of Auditors, Report, 7 June 2010, eca.europa.eu

Leveraging World Bank Resources for the Poorest: IDA Blended Financing Facility Proposal, Benjamin Leo, Center for Global Development, Working Paper, 08 June 2010, www.cgdev.org

Our Common Strategic Interests Africa’s Role in the Post-G8 World, Tom Cargill Chatham House Report, June 2010, www.chathamhouse.org.uk

LDCs Terms of Trade during Crisis and Recovery, International Trade Centre, ITC Trade Map Factsheet #3, June 2010, www.intracen.org

How imports improve productivity and competitiveness, OECD Report, May 2010, www.oecd.org

Trade and the economic recovery: why open markets matter, OECD Report, May 2010, www.oecd.org

Trade Policy and the Economic Crisis, OECD, Report, May 2010, www.oecd.org

Sixth Report on Potentially Trade Restrictive Measures, EC Trade Report, 28 May 2010, trade.ec.europa.eu

Africa Resists the Protectionist Temptation. The 5th GTA Report Simon Evenett, 5th Global Trade Alert Report, May 2010, www.globaltradealert.org

The Myth and Reality of Chinese Investors: A Case Study of Chinese Investment in Zambia’s Copper Industry, South African Institute of International Affairs, China in Africa Project, May 2010, www.saiia.org.za

July5-7 Trade Policy Review Body — Chinese Taipei 26-28 Trade Policy Review Body — The Gambia

29-30 WTO General Council

September15-17 WTO Public Forum 2010 19 WTO Open Day 2010

29 - 1/10 Trade Policy Review Body — United States

To subscribe electronically to TNI, please go to http://ictsd.org/news/tni/ or request a hard copy at: http://ictsd.org/subscribe/english/?publication=tni

July1 Belgium takes over the

Presidency of the European Union, Brussels, Belgium

4-7 Thirty-first Conference of the CARICOM Heads of Government, Jamaica

7-9 EESC regional seminar of ACP-EU Economic and Social Interest Groups. Addis Ababa, Ethiopia

12-16 (TBC) EU – WA technical

negotiations on Rules of Origins, (place TBC)

15-16 Workshop on civil society and the Africa-EU Strategy, Addis Ababa, Ethiopia

19-20/22(TBC) EU - SADC EPA technical

negotiations, Brussels, Belgium

19-27 Summit of the African Union (possibly preceded by civil society pre-summit), Kampala, Uganda

26-27 EPA-related seminar for Malawi, Malawi

TBC SACU Council of Ministers and Heads of Government Summit, South Africa

TBC ESA-EC EPA meeting and technical round (place TBC)

TBC Central African EPA Regional Negotiating Committee meeting, Kinshasa, RDC

August23-25 ESA-EC Senior Officials

EPA negotiations, Manzini, Swaziland (TBC)

25-27 28th meeting of COMESA Council of Ministers (place TBC)

27 ESA EPA Council, Manzini, Swaziland (TBC)

31-1 14th COMESA Heads of State and Government Summit, Swaziland

September13-14 EPA information seminar (South Africa), Capetown, SA

13-17 EU-West Africa technical and senior officials EPA meetings, Brussels, Belgium

24 SACU Council meeting, South Africa

20-23 SACU Commission meeting, South Africa

TBC SADC-EU senior officials EPA meeting (place TBC)

TBC EPA technical workshop, Nadi, Fiji Islands

TBC EU - SA Joint Cooperation Council, South Africa

TBC EU-EAC EPA Information Seminar, Kigali, Rwanda

TBC Joint ACP-EU Ministerial Trade Committee (place and event TBC)

1 Issue 6 | Volume 9 | July / August 2010 Volume 9. July ... · 1 Issue 6 | Volume 9 | July / August 2010 Regulars ... Weekly Trade News Digest, Volume 14, ... according to the UN

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