Part I The Design and Negotiation of Economic Partnership Agreements (EPAs)

Economic Partnership Agreements between Africa and the European Union: What to do Now? Full Report on Implementing Interim EPAs Part I The Design and Negotiation of Economic Partnership Agreements (EPAs) March 26, 2009 Poverty Reduction and Economic Management (PREM) Africa Region, World Bank

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Full Report on Implementing Interim EPAs Part I. The Design and Negotiation of Economic Partnership Agreements (EPAs) Table of Contents 1. Introduction: A Development Perspective on EPAs 5 2. The Economies and Trade of the African EPA-Countries 7 Page A. The Economic Structure and Performance of the African EPA-Countries 7 B. Africa s Recent Growth Performance 10 C. The EPA-Countries Export Performance 14 D. The EPA-Countries Imports: Structure and Trends 28 3. The Design and Negotiation of Economic Partnership Agreements, 2002-2006 39 A. The Lomé-Cotonou Trade Regime and the Genesis of EPAs 39 B. Main Design Features of EPAs 41 C. EPA Negotiations from 2002 to 2006 50 4. The Redesign of EPAs in 2007 and the Outcome of EPA Negotiations Thus Far 59 A. Phase III of the EPA Negotiations 59 B. The Revised EPA Design 63 C. The Outcome of EPA Negotiations to Date 66 5. Interactions between the EPA-Process and WTO s Doha Development Round 75 A. WTO Rules Governing Tariff Preferences and Free Trade Agreements 75 B. Preferential Treatment of Exports from LDCs 79 C. The Relationship between EPA and WTO Tariff Reductions 81 D. Agricultural Market Access, Export Subsidies, and Domestic Production Support 83 E. Aid for Trade 86 F. Conclusion 88 3

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1. Introduction: A Development Perspective on EPAs Expanding trade is essential for sustaining and accelerating growth in sub-saharan Africa. 1 The European Union is Africa s largest trading partner providing a market for 49% of Africa s non-oil merchandise exports and supplying 34% of its merchandise imports in 2007. The trade relationship between Africa and the EU is thus important for the continent s development. However, despite the trade preferences accorded to African countries by the European Union under a series of Lomé Conventions and continued under the Cotonou Agreement in June 2000, the performance of African exports to the EU has been dismal. The African EPA-countries exports have increased little in real terms; and their share in the EU s non-oil imports has fallen steadily from 1.7% in 1985 to 0.6% in 2007. 2 This prolonged decline is largely a reflection of competitiveness problems and supply constraints in the African EPAcountries, although the limits on market access under the Lomé-Cotonou trade regime have also been a restraining factor. The performance of the EPA-countries non-oil exports in most other major markets has been similarly weak, and these countries exports currently account for less than a 1% share of non-oil imports in all of their major trading partners markets. 3 Economic Partnership Agreements EPAs are intended to reformulate the trade preferences accorded to the African, Caribbean, and Pacific (ACP) countries under the Lomé-Cotonou agreements to make them compatible with World Trade Organization (WTO) rules as well as more effective in promoting ACP-EU trade and more supportive of African regional integration and broader development goals. In November-December 2007, after five years of negotiations, the EU and 18 African countries initialed interim EPAs providing for WTO-compliant reciprocal liberalization of merchandise trade, just prior to the Cotonou Agreement s January 1, 2008, deadline for putting these in place. A nineteenth African country, Zambia, initialed an interim EPA in October 2008; A number of important decisions were taken during the final stages of the EPA negotiations that could have important implications for the trade and trade-related policies of African countries and regional economic communities for the next fifteen years. In addition, in 2008, further negotiations were launched for full EPAs intended to have more comprehensive regional and policy coverage. These could provide an opportunity for addressing additional issues concerning regional trade integration, liberalization of trade in services, foreign direct investment, and the trade-related regulatory framework. 1 In this study, the terms Africa and sub-saharan Africa are used interchangeably. When the context requires greater precision, the term sub-saharan Africa is used. 2 See Chapter 2 for a further discussion of the performance and structure of the EPA-countries trade. 3 See Graph 2.2 in Chapter 2. 5

Objective and Coverage of this Report This report addresses the question raised in its title: now that 19 interim EPAs have been initialed or signed, what should the African signatory-countries and participating regional EPAgroups do about implementing them? The report is in three parts. Part I provides an overview of the economic structure and trade performance of the African EPA-countries and reviews the design of EPAs and the outcome of the EPA negotiations thus far. Part II discusses the access of African exports to the EU market and issues limiting this access. And Part III analyzes the interim EPAs implications for the trade and related policies of participating African countries and the reforms required for successful implementation of interim EPAs. A planned companion report will examine the potential role of full EPAs in advancing regional trade integration, open trade policies, and the liberalization of trade in services and foreign direct investment in Africa. The intended audience for these reports is primarily policy makers and their advisors in the African countries, but they may also be of interest to those in the broader development community concerned with Africa. A Development Perspective. Both the European Union and the ACP countries have repeatedly emphasized their desire to use the EPAs as instruments of development. This study thus analyzes the EPAs from a development perspective. The terms development friendly and pro-development as used here in assessing EPAs refer to policies that will accelerate global and regional trade integration in Africa and sustained long-term growth of real GDP per capita. The term trade integration is used to refer to increases in the ratio of total trade (that is, imports plus exports of goods and non-factor services) to GDP. 6

2. The Economies and Trade of the African EPA-Countries This chapter establishes the analytical framework used in subsequent chapters. It gives an overview of the structure and performance of the economies of the African EPA-countries and their trade with the European Union and the world under the Lomé-Cotonou trade regime, in order to gauge the likely trade impact of the EPAs and identify issues that these need to address. The first section reviews the size, characteristics, and performance of the EPA-economies. The following two sections then look in more detail at the structure of and trends in the EPAcountries exports and imports. The term African EPA-countries is used here to refer to the 46 sub-saharan African countries that signed the Cotonou Agreement and are eligible to participate in EPAs. The other two sub-saharan African countries are Somalia, which did not sign the Cotonou Agreement and is not eligible for an EPA, and South Africa, which did not sign the Cotonou Agreement but which the EU has offered to include in the EPA process if South Africa wishes to participate. The term EPA-signatories is used to refer to the 19 African countries that have initialed interim EPAs. The map on page xxi and the table on page xxiii in the front section show the EPA-signatories and non-signatories in Africa. Because South Africa s economy is so much larger and more advanced than those of the other African EPA-countries, data reported in this study for the African EPA-countries does not include South Africa unless specifically noted. Oil accounted for $142 billion (73%) of the EPA-countries total merchandise exports of $196 billion in 2007. Eight of the EPA-countries are classified as oil-exporters by the World Bank, and oil represents an average of 80% of these eight countries total merchandise exports. A. The Economic Structure and Performance of the African EPA-Countries Trade is essential for most of the countries in sub-saharan Africa. Exports of goods and non-factor services accounted for 37% of GDP in the median EPA-country in 2007 while imports of goods and non-factor services amounted to 40% of GDP. 4 Although significant areas of pure subsistence production persist, most dynamic economic activities in African countries are related to trade in goods and services or investment with the rest of the world or other African countries. Global trade integration, of which trade with the European Union is a substantial part, is an important determinant of rate of economic growth and, through it, poverty reduction in Africa. 4 See Tables 2.1, 2.3, and 2.6 below. 7

Size and Income Levels By global standards, all of the EPA-economies, other than South Africa, are tiny. In 2007 the population of the median EPA-country in the five regional EPA-groups ranged from 4 million in the Central African EPA-group to 31 million in the EAC EPA-group. The median country s economy ranged from a GDP of $4.4 billion in the ECOWAS group to a median GDP of $11.2 billion in the EAC EPA-group. Even the total GDP of all 46 African EPA-countries was only $566 billion in 2007, a total $90 billion smaller than Turkey s GDP. 5 Median gross national income per capita in the EPA-countries is also low, $635 in 2007, but varies significantly among the regional EPA-groups, ranging from a high of $2,580 in SADC (without South Africa) to a low of $340 in the EAC EPA-group. In contrast, sub-saharan Africa s two largest economies, Nigeria and South Africa, although small by global standards, appear as relative economic giants with populations of 148 million and 48 million and GDPs of $166 billion and $278 billion respectively in 2007. Together Nigeria and South Africa dominated both Africa s oil and its non-oil trade, accounting for 54% of the sub-continent s total merchandise exports in 2007. Nigeria supplied 44% of sub- Saharan Africa s oil exports and 24% of its total merchandise exports in 2007, and South Africa provided 59% of sub-saharan Africa s non-oil exports and 30% of its total merchandise exports. 6 The EPA-countries, other than South Africa and Nigeria, are thus too small individually to produce many tradable goods and services competitively. As the median per capita income in the EPA-countries is still low, most of the tradable goods that can be produced on an economic scale for domestic markets are simple products for low income consumers or inputs used widely in many domestic industries, including exports. Such small economic units also have difficulty in economically providing the government services and regulatory framework needed to support growth. Types of Economies The five regional EPA-groups consist of a diverse range of countries, which differ in terms of per capita growth rates and of classification as LDC vs. non-ldc, land locked vs. coastal, and oil-exporters vs. non-oil exporters. Each of the African regional EPA-groups is made up of a somewhat different combination of these types of economies (Table 2.2), and this diversity contributes to variations in their growth rates and trade with the world and the European Union. 5 Adding South Africa to the EPA-group raises its total GDP in 2007 to $843 billion, a regional GDP somewhat smaller than that of Mexico ($893 billion) (WDI data base, February 2009). 6 South Africa also has an existing, separate free trade agreement with the EU that predates the EPA-process: and its participation in EPA, if any, is to likely be on special terms. Because South Africa s economy is so much larger than those of the other EPA-countries and its unique trade arrangements, figures for the EPA-countries are given in this study both with and without South Africa. The terms SADC EPA-group and SADC EPA-group without South Africa are both used to refer to the SADC group excluding South Africa. When South Africa is included, the term SADC EPA-group with South Africa is used. 8

Table 2.1: Summary Economic Statistics for the African EPA-countries, Medians Group/Country Population (m, 2007) Population growth rate (2007) GNI per capita (US$, 2007) GDP (US$m, 2007) Average annual growth rate, real GDP (98-07) Exports of GNFS a (US$m, 2007) Exports of GNFS, % of GDP (2007) Average annual growth rate, GNFS real exports (98-07) Total trade, b % of GDP (2007) Change in trade to GDP ratio (97-06 c ) Gross domestic fixed investment, private sector, % of GDP (2007) Median EPA-Country 9.4 2.3 635 6,754 4.1 1,513 36.7 5.7 74.8 2.3 14.5 Median non-oil EPA-Country 9.2 2.5 430 4,564 4.0 1,244 28.2 5.7 72.4 2.4 14.5 Nigeria 148.0 2.3 930 165,690 5.2.. 39.0........ South Africa 47.6 0.4 5,760 277,581 3.6 48,087 30.3 4.1 61.7 0.5 15.7 Oil countries 13.9 2.3 1,295 15,649 6.0 3,086 55.2 19.4 82.9 7.7 14.3 Moderate-to-good growth countries 9.4 2.5 465 6,754 5.8 2,065 25.6 7.1 69.9 1.7 14.5 Slow-growing countries 8.9 2.4 400 2,942 2.1 966 33.8 5.5 78.2 4.3 14.6 Non-oil landlocked countries 12.1 2.5 380 4,170 3.9 1,115 21.1 8.1 61.1 4.3 14.3 Non-oil coastal countries 5.8 2.3 590 4,564 4.0 1,459 33.2 5.2 82.4 1.7 15.7 LDCs 9.4 2.6 400 4,170 4.6 1,097 25.6 8.2 63.2 2.5 13.6 Non-LDCs 8.6 1.4 2,580 11,781 3.7 3,086 49.4 4.6 102.3 0.6 15.8 EAC EPA-Group 30.9 2.9 340 11,214 5.8 1,097 13.3 7.4 52.3 2.1 15.2 ESA EPA-Group 11.9 2.0 740 4,957 2.9 1,244 20.6 3.9 65.6 1.6 15.5 SADC EPA-Group 2.1 1.3 2,580 7,752 4.3 2,218 50.0 6.5 89.4 3.5 9.5 ECOWAS EPA-Group 9.2 2.6 465 4,367 4.7 1,103 36.2 6.3 94.7 2.4 12.3 Central Africa EPA-Group 4.1 2.0 960 8,301 3.5 1,914 49.1 6.9 80.6 4.0 15.1 Notes: South Africa and countries with missing observations are not included in group totals. ".." indicates non-availability of data. (a) GNFS = Goods and Non-Factor Services. Exports GNFS are measured in constant 2000 prices. (b) Total trade is measured as exports of GNFS plus imports of GNFS in constant 2000 prices. (c) 3-year averages in constant 2000 prices, centered around 1997 and 2006. Source: Authors calculations from WDI data (accessed November 2008). 9

LDC vs. Non-LDC. The classifications of countries as LDC vs. non-ldc, land locked vs. coastal, and oil-exporters vs. non-oil exporters all matter in different ways for the EPAs LDC or non-ldc status is important both because the classification as an LDC reflects a country s more limited institutional capacity and less advanced economic structure and because WTO rules permit developed countries, such as the EU s members, to grant, if they so decide, more favorable trade preferences to LDCs than to developing countries generally. Median per capita income in the 33 African LDCs ($400) was only 16% that in the continent s 13 non-ldcs ($2,580) in 2007, although real GDP grew somewhat faster over the last decade in the median LDC than in the median non-ldcs (4.6% vs. 3.7%). Slightly over one-third of LDCs (12 out of 33) are landlocked, and twelve of Africa s fifteen landlocked countries are LDCs. Four of the eight oil-exporting EPA-countries are also LDCs. Oil-Exporters vs. Non-Oil Exporters. The distinction between the eight oil-exporters and the 38 non-oil exporters matters because market access is not a constraint for oil exports in the current world trading environment. 7 Hence, countries whose exports are now, and are likely continue to be, dominated by oil, have relatively little to gain in the medium term from improvements in market access under EPAs. In addition, those oil exporters that are capitalsurplus economies (such as Equatorial Guinea) may need development assistance and aid for trade for technical and capacity building but not for increased financial inflows in themselves. For most oil exporters, the primary rationale for EPAs is thus likely to be as instruments of reform for discouraging the growth of inefficient import-substituting sectors and for promoting efficient production of services and other non-tradables. Landlocked vs. Coastal. In contrast, for the 15 landlocked countries, market-access constraints are aggravated by the need for most of their bulkier exports and imports to transit through their coastal neighbors. In addition, the coastal countries are often important export and labor markets for the landlocked countries in their hinterlands. Open, cooperative trade relations with their coastal neighbors are often vitally important for landlocked countries. Hence, it is the landlocked countries that potentially have the most to gain from well designed outward-oriented regional integration under EPAs. 8 7 The eight African EPA-countries classified as oil exporters are Angola, Cameroon, Chad, Congo (Rep.), Equatorial Guinea, Gabon, Nigeria, and Sudan. 8 The 15 landlocked African countries are: Botswana, Burkina Faso, Burundi, Central African Republic, Chad, Ethiopia, Lesotho, Malawi, Mali, Niger, Rwanda, Swaziland, Uganda, Zambia, and Zimbabwe. See Collier (2006) for a recent discussion of African geography and growth. 10

Table 2.2: African EPA-Countries: Ten Year Average Annual Growth Rates of Real GDP, 1998-2007 (in percent) Slow growing countries (21) 36% of SSA population Moderate to good growth countries (18) 34% of SSA population Oil countries (8) 30% of SSA population EAC EPA-Group EAC EPA-Group ESA EPA-Group Kenya 3.8 Rwanda (LDC, LL) 6.8 Sudan (LDC) 6.7 Burundi (LDC, LL) 2.3 Tanzania (LDC) 5.9 Uganda (LDC, LL) 5.8 SADC EPA-Group ESA EPA-Group Angola (LDC) 10.8 Zambia (LDC, LL) 4.0 ESA EPA-Group Madagascar (LDC) 3.8 Ethiopia (LDC, LL) 6.3 ECOWAS EPA-Group Malawi (LDC, LL) 2.9 Mauritius 4.5 Nigeria 5.2 Djibouti (LDC) a 2.6 Comoros (LDC) 1.9 SADC EPA-Group Central Africa EPA-Group Seychelles 1.8 Mozambique (LDC) 7.8 Equatorial Guinea (LDC) 21.9 Eritrea (LDC) 0.7 Botswana (LL) 6.1 Chad (LDC, LL) 8.3 Zimbabwe (LL) b -4.4 Namibia 4.3 Cameroon d 3.9 Congo 3.5 SADC EPA-Group ECOWAS EPA-Group Gabon 0.8 South Africa 3.6 Liberia (LDC) c 7.9 Lesotho (LDC, LL) 2.5 Sierra Leone (LDC) c 7.8 Swaziland (LL) 1.8 Cape Verde (LDC) 6.1 Burkina Faso (LDC, LL) 5.6 ECOWAS EPA-Group Mali (LDC, LL) 5.6 Mauritania (LDC) 4.5 Ghana 5.1 Niger (LDC, LL) 3.8 Gambia The (LDC) 4.9 Guinea (LDC) 3.1 Senegal (LDC) 4.6 Togo (LDC) 1.7 Benin (LDC) 4.3 Cote d'ivoire 0.4 Guinea-Bissau (LDC) -1.0 CEMAC EPA-Group Sao Tome and Principe (LDC) 7.0 Central Africa EPA-Group Congo. Democratic Republic (LDC) 1.9 Central African Republic (LDC, LL) 1.4 Notes: This table includes South Africa. It does not include Somalia and Mayotte since they are not EPA-countries. LDC = Least Developed Country. LL = Land Locked country. (a) The World Bank treats Djibouti administratively as part of its Middle East and North Africa region, and the country is consequently not included in the growth categories in the Bank s African Development Indicators. The authors have included Djibouti in this table since it is an EPA-country. (b) Zimbabwe's annual average GDP growth rate is from 1998 to 2005 because 2006 and 2007 data are not available. (c) Liberia's and Sierra Leone s annual average GDP growth rates are misleading because the countries are recovering from conflict. Liberia s annual average GDP growth since 1979 (the last GDP peak before its civil war) is -0.1%. Sierra Leone s growth since 1990 (the last GDP peak before its civil war) is 0.2%. (d) Cameroon's classification in the ADI has fluctuated between an oil country and a moderate to good growing country, depending on the year. Sources: Growth categories are based on African Development Indicators 2007. GDP growth rates from most countries are calculated from the World Development Indicators database (accessed November 2008). GDP growth rates for Sao Tome and Principe are calculated from the African Development Indicators 2008/09. 11

B. Africa s Recent Growth Performance After two decades of stagnation, Africa s trade and growth performance started to improve in the mid-1990s. A group of 18 countries was able to maintain average annual growth rates of real GDP of 4% or more from 1997 to 2007. 9 For the median EPA-country, which had a population growth rate of 2.3%, a 4% growth rate in real GDP was equivalent to a growth rate of 1.7% in per capita terms, with variations in population growth rates causing the per capita equivalents to be slightly higher or lower in other African countries. In the median EPAcountry, exports of goods and non-factor services grew at a rate of 5.7%% per year in real terms over this period and real GDP grew by 4.1% per year. In comparison, total world exports of goods and services grew somewhat faster, by about 7% annually in real terms; and world GDP grew by 3% annually in real terms. However, economic prospects for the next two to three years appear more difficult. Much of Africa s growth in the last five years has been due, directly or indirectly, to rising prices for oil and other primary exports. With the collapse in oil and most other commodity prices in the second half of 2008, the onset of a global recession, and world trade currently projected to contract by 2% or so in 2009, the recent expansion in African trade and production is likely to be halted until growth rates in the world s larger economies start to recover. Variations in Growth Performance The group of 18 African countries that was able to sustain average annual real growth rates of 4% (equivalent to an average real per capita growth rate of 1.7% in the median EPAcountry) or more for the last decade included 34% of Sub-Saharan Africa s population (Table 2.2). The median country in this group of moderate and good-growth countries had an average growth rate of 5.8% per year in real GDP (3.3% per capita) for the ten year period 1998-2007. Aided by rising oil prices, the eight African oil-exporting countries, with another 30% of the subcontinent s population, grew slightly faster with an average annual growth rate of 6.0% in real terms (3.7% per capita) in the median oil-country. In contrast, for the other 36% of the Africa s population in the 21 slow growing countries, which included several affected by social conflicts, real GDP grew by only 2.1% annually in the median country and per capita GDP declined by 0.3% annually in per capita terms. Trends in Trade Integration Overall, trade integration of the African EPA-countries with the world economy has increased slightly as the ratio of their total trade (imports plus exports of GNFS) to GDP has risen by 2.3 percentage points from 72.5% in 1996-98 to 74.8% in 2005-07 (Table 2.1). The 9 These 18 moderate to good growth countries, as cited in the 2007 World Bank s African Development Indicators and listed in Table 2.2, are Benin, Botswana, Burkina Faso, Cape Verde, Ethiopia, the Gambia, Ghana, Liberia, Mali, Mauritius, Mozambique, Namibia, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Tanzania, and Uganda. 12

% % % % Graph 2.1a: The African EPA-Countries Total, non-oil, and Oil Merchandise Trade (Imports plus Exports), 1990-2007, as a % of GDP in Current Prices 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Total trade Non-oil trade Oil trade Notes: South Africa is not included in the totals for the EPA-countries in this graph. Time series data have been smoothed for countries with sporadic missing data. Sources: Authors calculations from UN COMTRADE (SITC 3 mirror data) and WDI (both accessed in December 2008) Graph 2.1b: Total Trade (Imports plus Exports) in Goods and non-factor Services as a % of GDP in Current Prices in the African EPA-countries, 1990-2006 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Median country Median non-oil country Median oil country Notes: South Africa and countries with missing data have not been included in determining group medians. Time series data have been smoothed for countries with sporadic missing data. Sources: Authors calculations from WDI (accessed in February 2009) 13

underlying trend has, however, been less strong: much of the increase in the overall trade ratio has been due to the rising nominal value of oil trade as a result of the run up in its price in 2002-2007 (Graphs 2.1a and 2.1b). In the period from 1995 until 2007, oil trade more than doubled relative to GDP, rising from 12% to 27% of GDP, although this large increase in the relative importance of oil trade will be partially reversed by the collapse in oil-prices in the second half of 2008. 10 In contrast, non-oil merchandise trade declined from 35% of GDP in 1994-96 to 30% of GDP in 2006-2007, and the ratio of total trade in GNFS to GDP in the median non-oil EPAcountry stagnated at a about 70% of GDP from 2001 to 2006 (Graph 2.1b). Trade openness varies somewhat between oil and non-oil exporters, LDCs and non- LDCs, and landlocked and coastal countries. As one would expect, trade openness, that is the ratio of exports plus imports of goods and non-factor services to GDP, is higher for the median oil exporting country (83%) than for the median non-oil exporter (72%), higher for the median non-oil coastal country (82%) than for the median non-oil landlocked countries (61%), and higher for non-ldcs (102%) than for LDCs (63%) (Table 2.1). Trade openness has increased the most rapidly in the oil countries, rising three times as much (7.7 percentage points) in the median oil-exporter as in the median non-oil EPA country (2.4 percentage points) in 1997-2007. However, as noted above, this increase in trade openness was largely due to rising oil prices and is likely to be partially reversed in 2008-2009 by the recent decline in oil prices. C. The EPA-Countries Export Performance In 2006, the African EPA-countries total exports of goods and non-factor services (GNFS) in current prices were about $200 billion (not including South Africa). Merchandise exports, accounted for $176 billion (88%) of this amount. 11 Exports of non-factor services were $13 billion. The following two sub-sections review Africa s historic marginalization from world trade and the recent improvements in its trade performance. The Marginalization of African EPA-Countries in World Export Markets For two decades from the mid-1970s to the mid-1990s, the already small 3% share of African EPA-countries in total world exports dropped steadily, reaching a level of about 1.5% in the mid-1990s, as other parts of the world expanded their exports more rapidly. This long-term decline affected all five regional EPA-groups, with only a few countries like Mauritius and Botswana managing to avoid it. The improvement in Africa s export performance since 1995, 10 The line showing oil trade as a percent of GDP in Graph 2.1a probably underestimates the role of oil in the EPAcountries trade as the surplus of their oil exports over oil imports helps to finance imports of other categories of goods, which are included in the figures for non-oil trade. The actual importance of oil-trade is, thus, probably somewhat greater and that of non-oil trade somewhat smaller than suggested by Graph 2.1a. 11 The figure cited in this paragraph for merchandise exports in current prices in 2006 ($176 billion) is from the World Development Indicators data base. It is measured f.o.b in the exporting country and excludes re-exports. The mirror data figure from COMTRADE for merchandise exports in current prices cited in subsequent paragraphs ($196 billion) is for 2007. It includes re-exports and is measured c.i.f. in the importing country. 14

% % although not yet strong enough to increase the continent s share of world exports, halted, at least temporarily, the deterioration in its share of total world exports. 12 However, Africa remained the only global region that over the last 20 years has failed to increase the ratio of non-oil exports to GDP (Broadman 2006). Exports from the African EPA-countries constitute a very small share of the imports of their largest trading partners because of the small size of their economies (the GDP of the median African EPA-country was only $6.8 billion in 2007). The EPA-countries exports currently account for less than a 1% share of non-oil imports in all of their major trading partners markets other than South Africa (Graph 2.2). Regional trade within Africa has also remained fairly low and has expanded only marginally. 13 Furthermore, because of competitiveness problems and supply constraints, the EPA-countries have lost market share in their three largest traditional export markets -- the European Union, the United States, and Japan. Since 2000, the EPAcountries export market shares, including oil, have increased only in South Africa and China (Graph 2.2). Graph 2.2: Non-oil Merchandise Imports from the African EPA-Countries, 1990-2007, as a % of their Major Trading Partners' Non-oil Merchandise Imports 3 3 2.5 2.5 2 2 1.5 1.5 1 1 0.5 0.5 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 EU US China Japan South Africa Notes: South Africa is included in this graph as an export market for the African EPA-countries but is not included in the totals for the EPA-countries. No trade data are available for South Africa prior to 1992 because of apartheidera trade restrictions. Source: Authors calculations from UN COMTRADE (SITC 3 partial mirror data, accessed December 2008) 12 See Annex A, Graph A.1: Total, Oil, and non-oil Exports from the African EPA-countries as a Share of Total World Merchandise Exports, 1990-2007. 13 See the forthcoming companion report on full EPAs for a discussion of regional trade integration. 15

% % The EPA-countries Recent Export Performance Exports of goods and non-factor services from the EPA-countries rose more rapidly than GDP over the last decade, increasing from 25% to 34% of GDP in 1997-2006 in the median country (Graph 2.3). Earnings from the EPA-countries merchandise exports grew quite quickly in nominal terms over the decade, rising at an average rate of 11% annually from 1997 to 2007 in the median country (Table 2.3). Exports (GNFS) in real terms followed similar growth trends, increasing at an average annual rate of 19.4% in the median oil exporter but at only 5.7% in the median non-oil country. The moderate-to-good growth non-oil countries registered faster average growth rates of exports (GNFS) in real terms (7.1% in the median country) than the slow-growth non-oil countries (5.5% in the median country). However, as noted above, much of the growth in nominal terms was due to the increase in petroleum prices. The merchandise export earnings of the eight oil-exporting EPA-countries increased by 22.7% per year in current prices from 1997 to 2007 in the median country, inflating their nominal GDPs in the process. In contrast, the merchandise exports of the 38 non-oil EPAcountries increased at a more moderate rate of 8.8% year in the median country. For the EPAcountries as a group, non-oil exports to the world grew at only 6.2% in nominal terms, slightly more than one-third of the 17.5% growth rate of their earnings from oil exports. As a result of rising oil prices, the value of the African EPA-countries merchandise exports, including oil, grew about 1 percentage point faster than the value of their total exports of goods and non-factor services (10.9% versus 9.6%) in the median EPA-country in the 1997-2008 period. Graph 2.3: The African EPA-Countries' Exports of Goods and non-factor Services as a Percent of their GDP in Current Prices, 1990-2006 60 60 50 50 40 40 30 30 20 20 10 10 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Median country Median oil country Median non-oil country Notes: South Africa and countries with significant missing data (CAR, Chad, Comoros, DRC, Liberia, Sao Tome and Principe, Zimbabwe, Mauritania, Equatorial Guinea, and Eritrea) have not been included in these calculations. Time series data have been smoothed for countries with sporadic missing data. Source: Authors calculations from WDI data (accessed December 2008) 16

Table 2.3: Summary Export Statistics for the African EPA-Countries, in Medians Group/Country Merchandise exports to EU (US$m, 2007) Average annual nominal growth rate of merchandise exports to EU (98-07) Total merchan dise exports (US$m, 2007) Average annual nominal growth rate of total merchandise exports (98-07) Average annual nominal growth rate of GNFS exports (97-06) Average annual real growth rate of GNFS exports (98-07) Average annual growth rate of exports as a capacity to import (98-07) Merchandise exports to EU, as % of total merchandise exports (2007) Non-oil exports to world (US$m, 2007) Non-oil exports to EU (US$m, 2007) Median EPA-Country 406 7.3 1,245 10.9 9.6 5.7 5.4 35.0 917 387 Median non-oil EPA-Country 344 6.8 904 8.8 9.1 5.7 5.0 42.2 900 343 Nigeria 12,850 14.9 67,617 18.2 18.0.... 19.0 1,668 1,033 South Africa 29,387 10.8 84,027 11.4 8.4 4.1 4.5 35.0 74,777 25,203 Oil countries 2,090 13.5 8,155 22.7 16.2 19.4 24.1 15.2 1,173 442 Moderate-to-good growth countries 429 6.4 968 8.3 9.8 7.1 6.0 43.1 950 429 Slow-growing countries 268 9.7 859 11.1 7.2 5.5 4.1 39.0 857 268 Non-oil landlocked countries 237 6.0 755 9.8 10.5 8.1 6.8 33.3 754 237 Non-oil coastal countries 480 7.2 1,245 9.0 7.0 5.2 4.3 48.0 1,057 480 LDCs 200 7.2 678 10.9 9.7 8.2 6.4 33.7 535 190 Non-LDCs 1,410 9.0 3,209 10.0 8.4 4.6 4.5 42.2 2,204 1,275 EAC EPA-Group 472 4.7 921 6.1 9.6 7.4 7.9 43.1 917 472 ESA EPA-Group 280 5.4 1,015 15.3 6.4 3.9 3.0 33.4 883 280 SADC EPA-Group 1,366 24.9 2,859 25.3 10.4 6.5 7.4 35.0 2,346 1,184 ECOWAS EPA-Group 270 6.3 541 8.9 8.4 6.3 3.0 35.2 477 265 Central Africa EPA-Group 690 7.6 3,614 8.3 6.0 6.9 14.9 40.9 942 346 Notes: South Africa and countries with missing observations are not included in group totals. GNFS = Goods and Non-Factor Services. The growth rates of exports GNFS in nominal and real terms are for slightly different ten year periods because, at the time when these data were obtained, the WDI data base was reporting nominal exports of GNFS up through 2006 and real exports of GNFS through 2007... indicates non-availability of data. Sources: Authors calculations from WDI and UN COMTRADE data (accessed November 2008). 17

Although the 2003-2007 commodity boom undoubtedly contributed significantly to their improved growth and trade results, the accelerated growth of trade and GDP in a number of African countries in the last decade still represents an improvement over the declines and stagnation of earlier decades. However, the recent growth rates of trade and GDP are still well below both the growth rates of world trade generally and the 7% or higher growth rates needed for rapid poverty reduction in Africa. Moreover, the global recession that started in the second half of 2008 will make economic progress much more difficult for the next two to three years. Africa s Oil Exports Importance of Oil Exports. Oil is by far the largest single export of the African EPAcountries, amounting to $142 billion in 2007(Table 2.4). The relative importance of oil exports has increased significantly since the mid-1990s as high oil prices on the international market inflated oil earnings. The share of oil in the EPA-countries total merchandise exports to the world has risen from 50% in 1996 to 60% in 2004 and 73% in 2007. Even with the retreat of international oil prices in the second half of 2008, the export share of oil is unlikely to drop back below the 60% level attained in 2004 in the medium term. Concentration of Oil Production in Eight African Countries. African petroleum production is concentrated in eight of the EPA-countries as noted above. 14 Together these countries account for 98% of the EPA-countries total oil exports of $142 billion in 2007. Oil represented on average 83% of these eight countries total export earnings in 2007. 15 Africa s two largest oil exporters Nigeria and Angola accounted for 74% of the EPA-countries total crude petroleum exports, and petroleum amounted to 87% and 95%, respectively, of these two countries total merchandise export earnings. Out of the EPA-countries $142 billion in oil exports in 2004, 98% was crude oil and only2% ($3.3 billion) was refined products. 16 Markets for Africa s Oil Exports. The US is the largest export market for most African oil exporters. In 2007, the share of petroleum exports going to the US was about 40%. Oil exports to China, however, have grown quite rapidly since 2000. China now absorbs 16% of the African EPA countries petroleum exports, the same share as the European Union (16%) which had been the second largest market for petroleum exports. The Chinese market is particularly important for Angola s, the Republic of Congo s, Equatorial Guinea s, and Sudan s exports of crude. 14 See Annex A, Table A.1: The African EPA-Countries Top Ten Exporters of Crude and Refined Petroleum 2007. 15 The eight African countries classified as oil exporters are Angola, Cameroon, Chad, Congo (Rep.), Equatorial Guinea, Gabon, Nigeria, and Sudan. In 2007, oil generated more than 75% of merchandise exports in all but two of these eight countries, Gabon and Cameroon, where it accounted, respectively, for 72% and 52% of exports. 16 The African EPA-countries total exports of refined petroleum are relatively small because most countries have very limited refining capacity. The US, with an 80% share, is the largest market for African exports of refined products. Although crude petroleum dominates the African oil-countries external trade, refined products are more important in intra-africa trade. South Africa, Mozambique, Côte d Ivoire, Kenya, and Senegal have refineries and are largest suppliers of refined products for intra-african trade. Nigeria is the main supplier of intra-epa exports of crude petroleum, although intra-african trade represents a very small share of its total exports of crude petroleum. See Annex A, Table A.1: The African EPA-Countries Top Ten Exporters of Crude and Refined Petroleum 2007. 18

Table 2.4: Destinations of the Africa EPA-Countries Merchandise Exports, 1996 and 2007 Billions of US $ % of total 1996 2007 1996 2007 Non-oil exports EU 16.7 26.1 61.4 49.4 China 0.4 4.0 1.6 7.6 US 1.9 4.0 6.9 7.6 South Africa 0.6 2.0 2.3 3.7 India 0.5 1.6 1.8 3.0 Japan 1.3 1.1 4.7 2.0 Korea 0.1 1.0 0.3 1.9 Thailand 0.6 0.7 2.3 1.4 Other 5.1 12.3 18.8 23.2 Total 27.2 52.9 100.0 100.0 Oil exports EU 7.6 22.3 28.2 15.7 China 0.3 22.3 1.0 15.7 US 11.6 56.2 43.5 39.6 South Africa 0.1 3.7 0.3 2.6 India 1.5 8.8 5.5 6.2 Japan 0.2 4.3 0.8 3.0 Korea 0.7 1.9 2.7 1.3 Thailand 0.0 0.2 0.1 0.2 Other 4.8 22.4 17.9 15.8 Total 26.8 142.1 100.0 100.0 Total exports EU 24.3 48.4 44.9 24.8 China 0.7 26.3 1.3 13.5 US 13.5 60.3 25.1 30.8 South Africa 0.7 5.7 1.3 2.9 India 2.0 10.4 3.6 5.3 Japan 1.5 5.4 2.8 2.8 Korea 0.8 2.9 1.5 1.5 Thailand 0.6 1.0 1.2 0.5 Other 9.9 35.2 18.3 18.0 Total 54.0 195.6 100.0 100.0 Notes: The trading partners shown above each accounted for at least 1.5% of Africa's non-oil merchandise exports to the world in 2007. They are listed in descending order by amount of non-oil exports in 2007. South Africa is included as a trading partner but not in the totals for the African EPA-Countries. Source: Authors calculations from UN COMTRADE (SITC 3 mirror data, accessed December 2008) 19

Need to Distinguish between Oil and Non-oil Exports. Oil and non-oil exports are driven by quite different forces. Oil exports depend largely on a country s physical oil resources and the attractiveness and stability of the contractual arrangements or special incentive regime under which its oil resources can be exploited. Because of the strong world demand for oil and its relatively easy marketability, oil exports are in general not significantly affected by trade preferences. 17 In contrast, exports of non-oil products typically depend upon a host of factors that affect an economy s competitiveness and its access to international markets. For these reasons, oil and non-oil exports are considered separately in this chapter, and most of the discussion is about non-oil exports. 18 The Structure of the African EPA-Countries Non-oil Exports This subsection discusses the structure of the African EPA-countries non-oil exports. The following sections then review EPA-countries progress in export diversification, the continuing importance of the EU market for the EPA-countries non-oil exports, and their loss of market share in all of their major trading partners. Importance of Non-oil Exports for 38 EPA-countries. Non-oil merchandise exports of $53 billion in 2007 accounted for 27% of the total exports of the African EPA-countries. This percentage, however, understates the importance of non-oil exports to the countries and their populations. Of the 46 EPA-countries, the 38 non-oil countries, in which 70% of Africa s population lives, do not export large quantities of oil. For these 38 countries, non-oil exports are critical for accelerating growth and poverty reduction. Composition of Africa s Non-oil Exports. The African EPA-countries 13 largest nonfuel exports to the world market, exports of each of which exceeded $1 billion in 2007, consisted of 12 primary and semi-processed agricultural, forestry, fishing, and mining products and one labor-intensive manufacture, clothing (Graph 2.4 and Table 6.1). 19 Together these 13 products accounted for three-quarters (74%) of the EPA-countries global earnings from non-oil exports in 2004, with the average product accounting for 5% of non-oil exports. Cocoa, Africa s largest non-oil export level, and precious stones (including diamonds) and pearls, its second largest nonoil export at the SITC 3, accounted, respectively, for only 2.8% and 1.8% of Africa s total merchandise exports in contrast to the 73% share of oil in Africa s total merchandise exports. 17 Even when a country s MFN tariff on oil imports is not zero and oil imports are eligible under one of its preference schemes, the preference is sometimes captured by the importer as discussed in the chapter on the EU s tariff preferences in Part II. 18 Instead of using the oil/non-oil classification, some other authors distinguish between resource rich and resource poor African countries (see, for example, Collier 2006). The resource-rich classification combines in the same grouping countries whose exports are dominated by other mineral exports (such as Botswana with its diamonds) with oil exporting countries, with which they share many similar characteristics. Here, we have elected to use the oil/non-oil classification because oil is far more important than any other mineral export from the EPA-countries, accounting for 73% of their merchandise exports in contrast to the 4% share of the second largest mineral export (diamonds and precious stones). Oil is also subject to its own unique set of market forces, which merit analyzing separately. 19 Export product categories are measured in Graph 2.4 at the SITC 3 level but with related clothing and fish products being aggregated. 20

The Important Role of the EU Market for Africa s Non-oil Exports. In contrast to its limited role as a market for Africa s oil exports, the European Union is, by a considerable margin, the single most important market for the African EPA-countries non-oil exports. In 2007, the EU bought 49% of the EPA-countries non-oil exports in comparison to the identical 8% shares of these sold to the US and China, which are tied for the role of second largest market. One half (50.5%) of the African EPA-countries largest non-oil exports are shipped to the European Union, and these products accounted for 48% of the EPA-countries total oil and nonoil exports to the EU in contrast to 16% of their total oil and non-oil exports to the rest of the world (Table 6.1). In addition, the EU is a major market for South Africa s exports, which are almost entirely non-oil, absorbing 41% of these. South Africa s non-oil exports to the EU ($29 billion) were 12% larger than the total non-oil exports of all of the 46 EPA-countries to the EU ($26 billion), in 2007. The important role of the EU as a market for Africa s non-oil exports is discussed in more detail later in this chapter. Graph 2.4: The African EPA-Countries' 15 Largest Non-oil Exports to the World in 2007 (as a % of the EPA-countries total merchandise exports to the world) Cocoa Pearls and precious stones Copper Total garments Aluminium Wood (in rough, squared) Base metal ore and concentrates, n.e.s. Fish (live, fresh, chilled, frozen) Fruits and nuts (fresh, dried) Coffee and coffee substitute Wood (simply worked) Tobacco (raw, wastes) Cotton Crude vegetable materials, n.e.s. Natural rubber and latex 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Notes: South Africa is not included in the totals for the EPA-countries in this graph. Products listed are the 15 which have the highest export values to the world. Source: Authors calculations from UN COMTRADE (SITC 3 mirror data, accessed December 2008) % 21

Export Concentration/Diversification in the EPA-Countries The current structure of the African EPA-countries exports to both the world and the European Union reflects their limited progress thus far towards export diversification. 20 Table 2.5 gives the detailed product composition of the three largest exports, measured at the SITC 3 level, in the African EPA-countries in 2006. 21 Exports remain heavily concentrated in traditional primary products. None of the 46 EPA-countries has a diversified export structure; and only two countries (Tanzania and Kenya) have partially diversified export structures. Highly Concentrated Exporters. Seventeen EPA-countries have highly concentrated export structures with the share of their three largest export products exceeding 75% of total merchandise exports. These seventeen countries are very vulnerable to external price shocks. Many of these countries recently benefited from windfall profits due to rising commodity prices but are likely to suffer significantly from the subsequent drop in commodity prices. Concentrated Exporters. Another 21 EPA-countries have concentrated export structures, with their three largest export products representing between 45% and 75% of exports (that is, an average share per major export-product of between 15% and 25% of exports). In this group of undiversified exporters, the top four to eight products typically account for 75% of total merchandise exports. Although these economies are less vulnerable to volatility than the 26 EPA-countries with the most heavily concentrated exports, they are still subject to significant shocks, especially the countries in the higher part of this category (that is, the 14 countries whose top 3 exports represent between 60% and 75% of total exports). Partially Diversified Exporters. In contrast, no African EPA-country has a diversified export structure with its three largest exports amounting to less than 15% of total exports (that is, an average export share of 5% or less for the three largest export-products). Only three EPAcountries Djibouti, Senegal, and Tanzania -- have partially diversified export structures with their top three exports representing 15-30% of merchandise exports. Five other EPA-countries -- Kenya, Eritrea, Madagascar, and Swaziland -- have somewhat undiversified export structures with their three largest exports accounting for between 30% and 45% of total exports (that is, on average between 10% and 15% for each of three largest products). 20 The terms export concentration and export diversification are defined here as opposites, that is: an increase in export diversification is a reduction in export concentration, and vice versa. 21 Following the standard concentration level used in assessing risk in financial portfolios, we have assumed that a country s merchandise exports are satisfactorily diversified if no single product accounts for more than 5% of its merchandise exports. In this case, the top 3 products would amount to no more than 15% of merchandise exports, the threshold which we have used for separating fully diversified export structures from the various levels of undiversified export structures. The threshold levels of 15%, 30%, 45%, and 75% of merchandise exports represented by a country s top 3 exports have been used here to denote, respectively, diversified, partially diversified, undiversified, concentrated, and highly concentrated export structures. In our partially diversified, undiversified, concentrated, and highly concentrated categories, a country s 3 largest exports represent, respectively, 15-30%, 30-45%, 45-75%, and 75% or more of its total merchandise exports; and each of a country s top 3 products represents on average 10% or less, 15% or less, 25% or less, or more than 25% of its merchandise exports. 22

Table 2.5: The African EPA-Countries Three Largest Exports as Shares of their Total Merchandise Exports, 2006 Country % share of top 3 exports 1st export product % 2nd export product % 3rd export product % # of products* Angola 96.0 crude petroleum 96.0 1 Nigeria 94.6 crude petroleum 89.6 natural gas, liquefied 5.0 1 Botswana 94.1 diamonds 82.7 nickel mattes 11.4 1 Eq. Guinea 91.7 crude petroleum 91.7 1 Chad 90.9 crude petroleum 90.9 1 Niger 89.8 natural uranium 58.9 refined petroleum 30.9 2 Sudan 89.3 crude petroleum 89.3 1 Congo 88.7 crude petroleum 88.7 1 Gabon 87.9 crude petroleum 72.3 manganese 8.0 logs 7.6 2 Guinea Bissau 86.9 cashew nuts 86.9 1 Mali 83.6 cotton 56.2 tankers 13.9 vessels 13.5 3 Burkina Faso 82.7 cotton 82.7 1 Rwanda 81.1 coffee 53.7 rare metals 18.2 black tea 9.2 3 Mauritania 79.4 crude petroleum 35.8 iron 34.0 octopus 9.6 3 Cen. Afr. Rep. 78.1 logs 37.1 diamonds 32.3 lumber 8.7 3 Zambia 76.7 copper cathodes 66.2 copper 5.8 copper wire 4.7 3 Mozambique 75.6 aluminium 65.9 aluminium 5.1 tobacco 4.6 3 Malawi 74.8 tobacco 59.1 sugar 8.2 black tea 7.5 4 Guinea 73.5 aluminium 51.6 crude petroleum 21.9 3 Seychelles 72.4 tuna 49.2 tuna 12.2 refined petroleum 11.0 4 Liberia 71.4 vessels 31.4 tankers 26.4 crude petroleum 13.6 4 Burundi 71.1 coffee beans 56.3 black tea 10.5 filters and purifiers 4.3 4 Cameroon 70.5 crude petroleum 57.0 lumber 7.4 bananas 6.1 5 23