EPA Review Annex Documents - DFID

Caribbean and Pacific
The impact of the EPAs on the Caribbean and the Pacific regions is likely to be of smaller
magnitude than that in the SSA region given the small share of trade that occupies bilateral
trade between the EU and these regions. Furthermore, most studies (Gasiorek et al (2006),
Gasiorek and Winters (2004), Greenaway and Milner (2003) and Scollay (2002)) concur that
trade diversion is likely to dominate over trade creation. In the Caribbean, Fontagne et al
(2008) estimate the cost of losing Cotonou at 9% of exports to the EU, whilst they see the
reciprocation of a signed EPA to add 25% to exports and 27% to imports to/from the EU.
These values are to be interpreted from the perspective that the EU represents very little
both as an overall destination and origin market. However, it is likely that there will be a large
displacement of trade from more efficient sources to the EU. This carries not only the
negative trade diversion effect, but also an important tariff revenue loss as customs duties
on diverted dutiable sources are lost. Fontagne et al (2008) estimate the loss of tariff
revenue falling between 16 and 13% whilst Gasiorek et al (2006) calculate a similar effect
with import revenue falling 22%. In contrast, the PE model in Greenaway and Milner (2003)
sees a reduction in customs taking of 73% in a scenario of full reciprocity. 88 Perez (2005)
estimates this effect to reduce GDP by 0.2% under partial reciprocity (80%) and 0.5% under
full reciprocity. In the case of the Pacific, very little empirical work has been carried out given
the lack of data both for general equilibrium and partial equilibrium analysis however, Scollay
(2002) argues that impact is likely to be small in magnitude and trade diverting at best. Perez
(2005) estimates an overall reduction in GDP of 0.17% as a result of the EPAs whilst
Fontagne et al (2008) claim an increase in exports from the region of 37% with no change in
imports. In terms of tariff revenue loss, the study estimates a fall in tariff revenue of 8%
whilst Perez’s (2005) results show a possible loss of 2.1% of GDP under a full liberalisation
scenario and a fall of 1.6% of GDP if only 80% of tariff lines are liberalised. Milner Reflects
this in his calculation of compensation accruing to the region where he calculates that the
overall disbursement of aid to the region should be €0.6 billion to the Pacific and €0.9 billion
to the Caribbean.
In addition to the above table, it is also interesting to provide a graphical representation of
the likely effects of the EPAs on ACP countries. In Figure 1 we do so by mapping, in the
horizontal axis, the loss in tariff revenue as a percent of total tariff revenue and in the vertical
axis we present the percentage change in trade balance according to the results in Fontagne
et al (2008). Here we can easily identify the countries that are likely to suffer most in terms of
revenue loss and also look at the change in trade balance as a result of the EPAs. Even
though the position in the vertical axis is not a measure of welfare, it remains an interesting
one as we can see how reciprocity also has its implications for exports of ACP countries. 89
From the figure, we see how the GSP countries tend to be located in the upper part of the
vertical axis whilst the EBA countries concentrate in the lower part of the axis. This follows
the simple logic that GSP countries will receive, as a result of the EPAs, a greater
preference margin given that the GSP regime has a lower coverage than the EBA regime.
For countries falling into the EBA regime, there is little gain in terms of tariff preferences into
the EU market as a result of the EPAs hence the effects of liberalisation will be concentrated
on the import side. In terms of tariff revenue loss, we see from the figure that many EBA
countries are located further out in the horizontal axis (Benin, Mali, Burundi, Burkina Faso).
This suggests that many EBA countries will not only not gain much in terms of market
access to the EU, but will also have to forego a sizeable chunk of their tariff revenue as a
result of the EPA.
88
Greenaway and Milner (2003) use data for 1997 and at the 2-digit level. Given that there has been
substantial liberalisation in the region since then, the results should be interpreted with caution.
89
The impact on exports of losing Cotonou preferences is often ignored in the literature, but not in
Fontagne et al (2008).
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