Presented By : Dr Tunji Babatunde

University of Ibadan

For Barr. Sunday OghayeiEmail: Oghayei@yahoo.com

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POTENTIAL IMPACT OF EPA

PRESENTATION TO MANUFACTURER’S

ASSOCIATION OF NIGERIA (MAN),OGUN STATE BRANCH

COUNCIL

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OUTLINE

• Introduction

• Nigerian Economy in Brief

•Place of Ogun State in the Industrial Framework

•EPA implications from Empirical findings

•EPA implications from Text

•Way forward

•Conclusion

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Introduction

•EPA is mainly a Trade and Development Cooperation Framework between ECOWAS countries and the EU

•For West Africa, negotiations began on 6/10/2003 ( enforcement date was initially 1/1 2008 but now 1/1/ 2015)

•Passed ECOWAS decision making process of the Council of Ministers on the 25th to 26th March, 2014 and further to the Summit of the Heads of State and Government on the 28th to 29th March, 2014.

•ECOWAS Heads of State and Government finally “decisively approved” on 10/7/2014.

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Introduction cont’d

•Early impact analysis gave rise to grave concerns about the detrimental effects of the EPA on business and employment in West Africa.

•Past Concerns•Trade diversion from cheaper sources to EU sources could raise costs to West Africa

•Reciprocity•Binding Supply constraints in West Africa•EU Farm subsidy and domestic support to agriculture

•Loss of government revenue•Singapore issues

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Nigeria’s Economy in briefWithin Trade & Industry context:

•Agricultural sector was the backbone of the economy from independence up till the late 1960s for revenue generation, national output (GDP), trade and employment (about 60 to 70%)

• However, the oil price boom in the early 1970s, led to a shift in the contributions of this sector to revenue generation and trade

•Agriculture still contributes between 35-40% to national output and largest employer of labour

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Nigeria’s Economy in brief cont’d

•Growth performance fluctuated between 2000 & 2012, rising from 5.4% to 7.0% in 2000 & 2009 but fell to 6.5% in 2012.

•In recent time, the average growth rate is 7%. Per capita income grew higher in the late 2000s compared to the early 2000s.

•This reveals the dynamic structure of Nigerian economy and the performance of the economy.

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Nigeria’s Economy in brief cont’d

•On trade performance, export rose from N1,945.7 billion to N14,736.1 billion in 2002-2012.

• Imports rose from N985.0 billion to N10,235.2 trillion during the period.

•Structure of trade shows that Nigeria’s export was dominated by oil products.

•Visa Africa Integration Index 2013, describes Nigeria as one of the least regionally integrated economies on the continent.

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Nigeria’s economy in brief cont’d•Nigeria’s global integration score of 40.6% shows its average links with the rest of the world, while the regional score of 35.7% shows its relatively low links with Africa.

•The “depth” of Nigeria’s regional integration is scored at an even smaller 19.2%, meaning that even where trade relations exist, their commercial output is low.

•By comparison, South Africa, scores 63.3%, indicating greater economic links on both the regional and global level. This status must change for Nigeria to lead Africa’s economic resurgence.

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Nigeria’s economy in brief cont’d•Nigeria’s growth may be hindered by the concentration of its partnerships in Europe, Asia and America, and its absence in Africa.

•This is due to inability to diversify from oil to non oil exports, which has led to the neglect of other pillars of commerce.

•The fact remains that Nigeria needs to pursue a deliberate policy to diversify her economy, increase industry output and attract PPP arrangement.

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Where is Ogun State?•Paucity of data that can reveal the magnitude of the state level economy activities and the contribution of each state to national output

•However, the number of industrial establishment could be used to make some inferences.

•Ogun state is one of the major industrial centres in Nigeria.

•About 40.0% of the total establishments involved in industrial activities, while the rest render services.

•This necessitates the need for the awareness of the implications of EPA for industrial activities in the state so as to adequately prepare for its effective domestication in the state.

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Industrial Establishments in Nigeria

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Where is Ogun state cont’d

• Source: MAN 2014

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Where is Ogun State Cont’d

Source: MAN 2014

Manufacturing Production Value

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Where is Ogun state cont’d

Manufacturing Investment by Industrial Zone

Industrial Zones Manufacturing Investment (N) Edo/Delta 4,542,112,980.00 Imo/Abia 308,869,560.00 Oyo/Ondo/Osun/Ekiti 19,178,700,000.00 Kano/Sharada/Challawa 19,753,191,966.00 Kaduna 371,195,804.61 Ogun 376,574,359,552.62 Kano Bompai 9,385,433,043.00 Apapa (Lagos) 3,345,000,000.00 Ikeja (Lagos) 39,856,793,006.13 Anambra/Enugu 5,498,073,598.77 Bauchi/Benue/Plateau 4,124,311,759.47 Rivers 72,300,000.00 Total 483,010,341,270.60

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Analysis of EPA Impact• Need for country specific analysis to ensure that Nigeria’s position on the regional market access offer is evidence-based and that the agreement promotes economic development.

• This section provides an analysis of the possible impacts of the new market access offer of 75% liberalization and 25% exclusion list to inform policy makers, EPA negotiators and other stakeholders.

• Analysis was carried out with computable general equilibrium model (CGE)

• The CGE provides a laboratory for quantitative assessments of total effects (direct and indirect) of policy changes

• It capture the interdependencies among economic sectors, economic agents and economic markets

Simple Analytic Framework

Exports

Domestic demand

Q

Imports

XSF(K, L)

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Impact of EPA market access: Sectors

• AGV Subsistence farming • AGI Industrial agriculture • ELV Livestock farming • SYL Forestry • PEC Hunting and Fishing • MIN Extractive Industry (including crude oil)• ALIM Food, beverages and tobacco industries • TEXT Textile, leather, shoes and other garment

industries • INDU Other industries• ENE Electricity, gas, water and distribution of

other petroleum products • SERV Services (transport, storage and communication, financial services; real estate services and corporate support services; hotels, bars, restaurants and trading; other services

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Product Categorization Scenario A

• Category A Products (mostly those with 5% tariffs) are essential products that carry low tariffs and are liberalised first (on 1/1/2020) by 100%

• Category B Products mostly those with inputs of 10% tariffs (to be liberalised in 2025 by 50% and 2030 by 100%).

• Category C Products are those products that are deemed to compete with imports (these carry 20% tariffs) and will be liberalised at a later stage in the liberalization schedule (i.e. in 2025, 2030 and 2035 by 50%, 50% and 100% respectively).

• The exclusion list contains products in category D whose tariffs (20% and 35%) will not be liberalized throughout the agreement.

Scenario B• Some products were shifted across

categories after the Ministry’s meeting with the Manufacturers’ Association of Nigeria (MAN).

• These shifts did not radically change the structure of the categorisation but could have tampered with the 75%-25% liberalisation agreed with the EU.

• Hence :• 4% of its tariff lines of ALIM shifted

from category D to A and B • a marginal shift of products from

categories A and C to D occurred under energy products (ENE).

• Products of other industry (INDU) were shifted from A, B and C to D

• A little part of category C was moved to D under mineral (MIN) products

• About 1% of products moved from B to A under textile products (TEXT).

• The effects of these shifts are analysed under EPA scenario B.

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Impact of EPA on Nigerian Tariffs on Imports from the EU- Major Findings

•WA• Most of industrial agriculture, Food beverages and Tobacco and Textiles, Leather etc, tariffs are in the exclusion category

• Over 50% of subsistence farming products are in Category B

• Mineral, Energy are spread out between A and B.

• Most of Forestry and Fishing are categorized in A and B respectively

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Nigeria• Largest proportion of

Livestock and Fishing (PEC) tariffs are in category B,

• All the forestry products (SYL) are in category C.

• Substantial proportion of Mineral (MIN) are in category B and D

• Industrial agriculture (AGI), Food Beverages and Tobacco as well as textile and leather products are under category D.

• Most of the products of other industry (INDU) are categorised in category A and B.

• This import structure and the attendant tariff liberalisation are run under EPA Scenario A.

SCENARIO A

A B C D Total (US$)

AGI 19.91 4.62 0.04 75.43 100 380,116,540.24

AGV 17.75 70.69 1.11 10.45 100 200,914,868.07

ALIM 25.81 4.67 3.81 65.71 100 237,931,110.76

ELV 20.57 79.43 0.00 0.00 100 370,736.45

ENE 43.35 49.89 5.90 0.86 100 1,528,464,487.68

INDU 41.56 26.99 13.94 17.51 100 1,698,196,658.19

MIN 28.13 39.80 0.43 31.64 100 149,973,001.19

PEC 0.14 99.86 0.00 0.00 100 232,217.90

SYL 0.00 0.00 100.00 0.00 100 222.00

TEXT 5.92 30.90 6.81 56.37 100 39,921,397.53

SCENARIO B: Post MAN MeetingA B C D Total (US$)

AGI 19.91 4.62 0.04 75.43 100 380,116,540.24

AGV 17.75 70.69 1.11 10.45 100 200,914,868.07

ALIM 26.49 8.48 3.81 61.23 100 237,931,110.76

ELV 20.57 79.43 0.00 0.00 100 370,736.45

ENE 43.29 49.89 5.84 0.98 100 1,528,464,487.68

INDU 40.26 25.94 9.05 24.75 100 1,698,196,658.19

MIN 28.13 39.07 0.18 32.63 100 149,973,001.19

PEC 0.14 99.86 0.00 0.00 100 232,217.90

SYL 0.00 0.00 100.00 0.00 100 222.00TEXT 6.91 29.91 6.81 56.37 100 39,921,397.53

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• For scenario A, no cuts on tariffs until 2020 (after the 5 years grace period).

• Tariffs of PEC, ENE, and Forestry (SYL) products approach zero in 2035.

• Food beverages and Tobacco (ALIM), Industrial agriculture` (AGI), and textile and leather products (TEXT) tariffs are far above zero in 2035 (these are explicitly excluded from tariff liberalisation as they are placed in sensitive products list)

Post-EPA Evolution of Tariffs 2015-2035

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• Scenario B retains the features of scenario A with slight differences • final tariffs of ALIM and TEXT in scenario B are lower than

in A• final tariffs of INDU and MIN are higher in B than in A• reflect the shifts that were done post MAN meeting

discussed above

Post-EPA Evolution of Tariffs 2015-2035

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• government will likely lose significant revenue from import duties under EPA Scenario A (gap between the BAU and APE1 curves)

• At the initial period of liberalisation, government revenue from import duties will likely fall by 10% with possible increases in the fall to above 35% as liberalisation deepens by 2035.

• Scenario B shows similar trend of the three curves but the gap widens more• The effect of the reduction of customs revenue on total government income is

depicted in the lower part• Total government income reduced by about 0.5% at the commencement of liberalisation and

this portrays a stepwise movement downward to about 5%.

Impact on Government Revenue from import Duties-major findings

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• government will likely lose significant revenue from import duties under EPA Scenario A (gap between the BAU and APE1 curves)

• At the initial stage of liberalisation, government revenue from import duties will likely reduce by 10% with possible increases to above 35% as liberalisation deepens by 2035 (average is 17-19%)

• Scenario B reveals similar trend of the three curves but the gap widens more

• Effect of the reduction of customs revenue on total government income is depicted in the lower part

• Total government income reduced by about 0.5% at the start of liberalisation and this portrays a stepwise movement downward to about 5%. (average is -1.8% to 1.9% throughout the period)

Impact on Government Revenue from import Duties- major findings

Scenario A Scenario B

Tax on Imports BAU ($mn) 37,591.65 37,591.65

APE1_Value ($mn) 30,539.14 31,052.07

APE1(% var) -18.76083652 -17.39636329

Var_Val ($mn) -7,052.51 -6,539.58

Government Income BAU ($mn) 603,728.84 603,728.84

APE1_Value ($mn) 592,103.41 592,347.85

APE1(% var) -1.925604548 -1.88511635

Var_Val ($mn) -11,625.42 -11,380.99

2015-2035

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Impact on Macroeconomic Variables – Employment (Major findings)

• In the model, urban skilled labor market (wage rigid); unskilled job market (wages flexible);

• A decrease in domestic investment and increase in EU imports demand will likely lead to a fall in import-competing sectors which creates a drop in urban skilled employment ;

• Unemployed skilled urban workers move to unskilled job market for a source of income;

• This movement exerts downward pressure on rural and urban unskilled wages;

• Labor market’s impacts on household income entail a drop in aggregate consumer demand

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Main Findings: Impact on Macroeconomic Variables - Employment• There will likely be a

gradual increase in urban and rural unemployment (this happens because farms are also facing competition from imports from the EU) as liberalisation deepens under EPA scenario A and B

• These increases will be quite small at first (less than 0.5% up to 2026) but will likely become sharper as liberalisation becomes more intense, rising to about 3.5% in 2035

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The increased imports from the EU will likely induce a decrease in prices of imports in all product categories

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• most sectors will increase their imports from the EU • This increased imports will likely displace imports from ECOWAS, other developing countries and other developed countries

• imports will likely increase by $2.5m, $385m, $4billion and $37.5billion for AGI, AGV, ALIM and INDU respectively.

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• EPA scenario A will likely divert imports by about 4%, 1% and 10% in the case of China, India and developing countries.

• Therefore, increased imports from the EU will likely displace imports from developing countries because imports from the EU will be more competitive consequent on signing the EPA.

20152016

20172018

20192020

20212022

20232024

20252026

20272028

20292030

20312032

20332034

2035

-12

-10

-8

-6

-4

-2

0

Imports from Developing Countries

China India Other developing

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Import from Other Developed Countries

• Possibility of Incidence of import diversion from other developed countries

• Possibility that import will reduce from other developed countries and the US also due to more competitive imports from EU will be

• Reduction will be like 2% for the US and over 12% for other Developed countries in 2035.

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

-14

-12

-10

-8

-6

-4

-2

0

Imports from Other De-veloped Countries

US Other Developed excluding US

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Summary of Empirical findings implications

• On tariff : Sectors whose tariff rate approaches zero will be worse off by 2035.

• On impact of Government Revenue from import Duties: Inability of government to support the industrial sector with adequate infrastructure services such as power supply, good roads among others given the fall in revenue.

• On impact on Balance of Payments: Changes in Current Account Balance: deterioration of the current account balance have negative implications for the industrial sector in Nigeria since imports of goods and services is greater that exports of goods and services.

• On impact on employment: with the adoption of EPA, a good percentage of the workers in the industrial sector will be laid off and will increase the unemployment situation of Nigeria. Also, the fall in prices of imports will negatively affects the industrial growth because the price in locally produced products are expensive and citizens will not purchase them which could lead to close down of industries.

• Impact on employment: possibility of a gradual increase in urban and rural unemployment (this happens because farms are also facing competition from imports from the EU) as liberalisation deepens under EPA.

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Summary of Empirical findings implications cont’d

• On impact of household consumption: The overwhelming loss of disposable income could affect the purchasing power of households which will enable them to consume at their optimal level despite the fall in prices. Industrial growth of domestic firms will therefore suffer given the low purchases of households.

• Sectoral imports from the EU: increase imports from the EU will have implications on the foreign exchange reserve of Nigeria. Also, the set of imports are products that should have been produced in Nigeria in the absence of EPA, hence the outflow of revenue does not augur well for the Nigerian industrial sector.

• Impact on Sectoral Outputs: decrease in the output of the sectors means that industrial growth will be stagnant during the period that EPA will be in operation. Hence, a confirmation of the negative impact of EPA on the Nigerian industrial sector.

• Impact on imports from Developing Countries: competition will be reduced with the signing of the EPA since exports of other developing countries such as China and India will be reduced. The lack of competition could prompt EU industrial firms to exports sub-standards products to Nigeria.

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EPA Implications on Industry from Texta. Bilateral Safeguard: Without adequate safeguard, industries particularly infant industry may not survive influx of goods into Nigeria. The Bilateral safeguard particularly the provisions in sub Article 7, 8 & 9 need to be strengthened.

Given the potential impacts of the EPA on industrialization, employment and investment from empirical findings, it is important to establish safeguards mechanism to protect the infant firms in Nigeria.

If there is no strong safeguard mechanism, it will negatively impact infant industries and affect projected sales and loss of income to the firms as well as those that cannot adjust will close up.

The multiplier effect of it, is that, the internally generated revenue of states will reduce since companies will no longer be in a position to pay company profit tax etc.

b. Customs duties; Standstill Article 7, Article 9: The standstill clause freezes the currently applied tariff/customs duties in effect from the date of entry into force of this Agreement. It fails to recognize that the CET is evolving and cannot be said to be an “optimal tariff” yet.

For instance, Nigeria is still seeking re-classification of 180 tariff lines in the CET. Which implies that the deadline on the CET, may not be practical,

WA-EPA stipulates as follows: No new customs duties on imports shall be introduced on the products covered by liberalization between the Parties, nor shall those currently applied be increased from the date of entry into force of this Agreement. This article reduces the flexibility for any adjustment to policies to address trade and industrial concerns for development.

Nigeria and ECOWAS may revise the CET in response to change circumstances e.g. food crisis or as we move up the value chain. This buttresses Nigeria’s request for reclassification of the products in order to ensure that her Industrial Revolution Plan is not derailed. The flexibility that the government has to put in place tariff policies to promote trade, industrial development and protect private investment is hindered by this provision. 

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EPA Implications on Industry from Text cont’d

c. Fees and other charges – Article 8: The EPA puts under scrutiny ECOWAS application of levies on any tariff line. Under the WTO, ECOWAS has more flexibility to shield away additional charges of fees/levy under the category of “Other Duties and Charges (ODC)”.

The EPA text Article 8 limits the policy space for ECOWAS member States to manage their economies for growth and development, using instruments such as levies for infrastructure – e.g. Port development levy. There is need to tackle this issue, because it might undermine the competitiveness of local product .

d. Export duties and taxes (Article13): Article 13 prohibits new export taxes and current ones shall not exceed duties imposed on similar goods. Export duties and taxes are instruments government uses to discourage exports of raw materials and to encourage value addition. This encourages industrialisation and creates jobs.

The Article will limit Nigeria’s policy space to regulate her economies for industrial growth and development.

It will put the level of development to export of raw materials only particularly in mineral and commodities sector.

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EPA Implications on Industry from Text cont’de. Prohibition of Quantitative restriction (34): Article 34 prohibits quotas, import and export licenses. If Nigeria bans, applies quotas or licenses on any imports which was permitted under Art XI.2c (ii) of GATT, then this would not be permitted under Art 34 EPA as it does not include Art XI.2 GATT exceptions.

The Article directly affects the backward integration policy adopted in Nigeria Industrial Revolution Plan (NIRP) e.g. cement, sugar. For instance the article invalidates the policy in two ways, first, by invalidating the restriction on importation of certain products; and second, by invalidating the granting of quotas for manufacturers importation.

Nigeria’s industrial policy and other sectorial polices in this respect could be challenged under the EPA. Product reclassification is therefore critical before endorsement of the EPA.

f. MFN Clause (Article 16): Article 16 of the EPA in its current form, puts the trade relationship of Nigeria, other economic blocs and countries in jeopardy. It would serve as a disincentive to preferential agreements between WA and other countries outside ACP (including Brazil and China).

For instance, with AGOA, US may demand extension of MFN preference to them and vice versa. In effect, it reduces ECOWAS ability to have trade co-operations with other economic blocs and individual countries.

The acceptance of MFN clause by ECOWAS would expose the region to additional fiscal loss due to demand for a reciprocal preference from third party trading partners, such as the United States. This will further reduce government revenues, capital investment, as well as increase unemployment. On the side of third party countries, there will be trade diversion as cheaper EU goods crowd out other bloc’s imports.

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EPA Implications on Industry from Text cont’d h. National Treatment(NT) on domestic taxation and regulation (Article 35): provides that products and goods from the EU will be given no tax (NT) in terms of taxes, as well as with respect of laws, regulations and requirements affecting their sale, their offer for sale, purchase, transportation, distribution, or their use on the domestic market.

This effectively provides that there will be no distinction between “made in Nigeria/ECOWAS” goods and European goods.

It does however provide an exception for public procurement. This provision invalidates Nigeria’s oil & gas local content policy, which is an anchor policy of the Nigeria government e.g. an International Oil Company use this provision to assert that it is not bound to respect the local content requirement for locally fabricated equipment. Given the critical nature of the Nigerian Local Content policy (and related laws) to our economic development, we are unable to accommodate any provision that threaten this agenda.

h. Institutional framework (Article 91-98): provides the Institutional Framework for the EPA, the establishment of EPA Council comprising of European and ECOWAS Ministers, which will be used for consultations and which can make binding decisions on issues arising from implementation of agreement.

The establishment of this Council and its mandate reduces the current flexibility enjoyed by the ECOWAS governments in terms of their respective industrial and trade policies. Essentially, the council might have an effective veto power over key aspects of ECOWAS member States economic policy.

It is important for ECOWAS to examine the functions and mandate of the council and to be sure about the amount of authority it will cede to council. Well industrialized emerging market countries such as India, China, Brazil and Indonesia do not have similar restrictions on their trade and industrial policy. The EPA text should therefore be amended accordingly.

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Positive Impact of EPA on IndustryQuota Free and Duty Free exportsLow prices a. Production effect b. Consumer effect Safeguard measures a. In addition to the traditional trade defence instruments: anti-dumping, countervailing, and safeguard, the EPA text in chapter 2 covers both bilateral safeguard, and infant industry protection measures. The last two measures relate directly to the tariff dismantling process in the WA market access offer. Should the tariff dismantling induce massive importation from EU that causes or even threaten to cause injury to WA industry, the ECOWAS CET duty rate ex ante would apply. b. Furthermore, both multilateral and bilateral safeguard measures can be applied provisionally. c. The ECOWAS Supplementary protection tax which operates on the basis akin to the special agricultural safeguards involves both volume and price triggers to ensure that community industry is protected.• The application of the trade defense measures may

involve imposition of additional duty, restoration of ECOWAS CET duty, or quantitative restrictions.

Infant industry protection

Cooperation on TBT & SPS

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Way forward

• Nigeria at cross road!!!• Implication of Nigeria non-signing while others sign (-ECOWAS; Smuggling effect, stress on border management etc)

• Has Nigeria analyzed the political economic implication of not signing EPA in the context of her positions and role in ECOWAS?

• Before EU products enters at a reduced tariff rates, Nigeria should: prepare to institutionalize impact analyses; provide cushioning measures to sectors adversely affected; establish Trade defense mechanism to protect fledging and strategic industries; provide adequate infrastructure to enhance competitiveness

Way Forward cont’d•Prepare to develop its non-oil export sector in a targeted sense to the EU market

• Including to facilitate improved understanding of the rules and regulations controlling imports into EU

•Target the less developed members of EU

•Maximally seize the opportunity of Review using EPA Review Clause or wait until 5years after implementation

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Conclusion• Outcomes of the studies on the impacts on Nigeria revealed that the EPAs will affect some sectors negatively.

• Ogun State manufacturers must brace up to the challenges of the eventual implementation of the EPA as far as Nigeria is a member of ECOWAS

• Trade & Commerce is item 62 in the exclusive Legislative List of 99 Constitution as Amended.

• Item 17 of the Concurrent Legislative List gives State House the power to legislate on Industrial, Commercial & Agricultural Development.

• Ogun state have a voice on the issue through the State House of Assembly.

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Thank you for Listening