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Economic Partnership Agreements, Common External Tariff and Prospects for …

  1. 1. 130 Int. J. Liability and Scientific Enquiry, Vol. 3, Nos. 1/2, 2010Economic partnership agreements, common externaltariff and prospects for staple food itemsin Nigeria Chukwuma Agu* Investment and Trade Policy Centre Department of Economics University of Pretoria South Africa E-mail: *Corresponding author Anthonia Ifeyinwa Achike Department of Agricultural Economics University of Nigeria Nsukka, Nigeria E-mail: Moses O. Oduh Department of Economics University of Nigeria Nsukka, Nigeria E-mail: Abstract: This paper looks into the potential impacts of the proposed Economic Partnership Agreement (EPA) between African, Caribbean and Pacific countries and the European Union (EU) on agriculture and food production in Nigeria. Using a partial equilibrium analysis, it assesses possible changes in production arising from the implementation of a Common External Tariff (CET) and/or EPA on three crops considered critical for livelihoods and food security: rice, cassava and sorghum. Results indicate that aggregate imports will increase, leading to possible crowding out of domestic agricultural output given their low processing quality. The production of rice and sorghum will suffer major falls. The fall in cassava, presently not much imported, will be less but not altogether negligible. The work recommends closer attention to the provisions of the Economic Community of West African States (ECOWAS) Common Agricultural Policy (ECOWAP) as a possible stop-gap measure to ameliorate the negative consequences of the EPA if it must be adopted in Nigeria. Keywords: economic partnership agreement; EPA; Economic Community of West African States Common Agricultural Policy; ECOWAP; Nigeria.Copyright © 2010 Inderscience Enterprises Ltd.
  2. 2. Economic partnership agreements, common external tariff and prospects 131 Reference to this paper should be made as follows: Agu, C., Achike, A.I. and Oduh, M.O. (2010) ‘Economic partnership agreements, common external tariff and prospects for staple food items in Nigeria’, Int. J. Liability and Scientific Enquiry, Vol. 3, Nos. 1/2, pp.130–143. Biographical notes: Chukwuma Agu holds a PhD from the University of Nigeria, Nsukka, Nigeria and works with the African Institute for Applied Economics, Enugu, Nigeria. He is an alumnus of the Economic Modelling School, Brussels, Belgium and the Cambridge Advanced Programme on Rethinking Development Economics, and was a Visiting Scholar at the University of Oxford, UK in 2006. Anthonia Ifeyinwa Achike holds a PhD in Agricultural Economics, specialising in Finance and Project Analysis. She is a Senior Lecturer in the Department of Agricultural Economics, University of Nigeria, Nsukka, Nigeria which she headed from 2005 to 2007. She is also a visiting Lecturer/faculty member of the Trade Policy Training Centre in Africa (TRAPCA) and an Associate Fellow of the African Institute for Applied Economics. She is affiliated to the African Economic Research Consortium, the Council for the Development of Social Science Research in Africa and the Social Science Academy of Nigeria, among many other notable local and international institutions. Moses Onyema Oduh holds a PhD from the University of Nigeria, Nsukka, Nigeria and is a Lecturer with the Department of Economics at the same University. He is an Associate Fellow of the African Institute for Applied Economics, Enugu, Nigeria.1 IntroductionRegional Integration Arrangements (RIAs) and Economic Partnership Agreements(EPAs) are fast becoming accepted as the major instruments for enhanced growth. TheEuropean Union (EU) success story, more than anything else, seems to buttress theacceptability (and indeed necessity) of such arrangements for development. Thus, inSub-Saharan Africa (SSA), several RIAs are simultaneously ongoing. In West Africa,under Article 37 of its revised treaty, Economic Community of West African States(ECOWAS) member countries agreed to a Common External Tariff (CET). Giventhe World Trade Organization (WTO) rule of adopting the lowest average tariff,the Union Économique et Monétaire Ouest Africaine (UEMOA) tariff bands of 0%, 5%,10% and 20% were adopted. All countries of the subregion are therefore expected toalign duties imposed on imported goods with the UEMOA tariff rates. In addition,governments in the subregion are in the process of evolving a reciprocal EPA with theEU in what has been termed the African Caribbean Pacific–European Union EconomicPartnership Agreement (ACP–EU EPA). The ACP–EU EPA is expected to becircumscribed by the WTO and lead to the lowering of tariffs on goods originating oneither side by the parties involved. At the regional level, the ECOWAS common marketand the ACP–EU concessional arrangements have been in place for a long while. But there are challenges: the transformation of the ACP–EU relationship into areciprocal arrangement seems to pose some problems for the ACP party. For example, itis not clear what impact a change in tariff structure under both the CET and EPA will
  3. 3. 132 C. Agu, A.I. Achike and M.O. Oduhhave on the real sector – particularly agriculture – with all the implications for povertyreduction and sustainable livelihood in member countries. It might also help to askwhether a regional market is possible in ECOWAS. This question can be asked in twoparts: First, is such a union feasible? Second, is it desirable? There is no doubt that theACP–EU EPA provides inviting opportunities for the comparatively poor ACP countriesto increase their share of world trade through the EU window. But again, the process,method, speed and timing of the negotiations have raised more questions than answers.For instance, how will Nigeria’s current inconsistent protectionist trade policy designbe reconciled with the EPA’s time-bound demand for a regime of trade liberalisationand further pressure of reciprocity? Obviously, the speed and force of an EPA-drivenliberalisation far exceeds the pace of trade policy refinement in Nigeria and may breakthe ‘trade shield’ that somewhat covers the local industries and business actors in thecountry. Also of importance is the fact that the framework of the EPA is regional, and itinvolves the EU, which has mastered the act of trade negotiation over a long period in thehistory of world trade. Besides, there are really no assurances that the supply response inACP countries will rise to match the increased market. Consequently, analysts worryabout the sort of relationship that the current arrangement holds for the developingcountries involved – a symbiosis or parasitism – and what the prospects for povertyreduction and sustainable livelihood, especially through its impact on the agriculturalsector, would be. Unfortunately, little empirical work has so far been devoted toanalysing the impact of the EPA and CET on agriculture in Nigeria and other WestAfrican countries; hence, this study. The rest of the work is organised as follows:Section 2 reviews agricultural production and trade policy in Nigeria. Section 3 providesa model and some estimates of the impact of tariff reduction on selected agriculturalproducts using elasticities of import and output response to changes in tariff, whileSection 4 concludes the work with policy recommendations.2 Agriculture in the Nigerian economyAgriculture takes up a very significant proportion of both employment and output inthe non-oil sector of the Nigerian economy. Before the advent of the oil industry andat earlier stages of development, agriculture contributed over 60% to total output andemployment in the economy. Since the 1980s and particularly in the 1990s, theagricultural share of total Gross Domestic Product (GDP) has stood at about 40%. Whencombined with mining and quarrying, the total share of the primary sector is over 50%.Though the share of agriculture in total output dwindled with the discovery of oil andemergence of several shades of services, it is still the dominant economic activity of therural population and is also the largest single employer of labour, providing livelihood to66% of the total labour force. However, growth in agriculture relative to other sectors in the overall macroeconomy has been epileptic and volatile and consistently missed target numbers,particularly in recent years. Table 1 shows target and actual growth rates of agriculturefrom 1986 to 2007. When compared to targets, agricultural growth has been much lowerexcept for the 2004–2007 period. For example, while the target growth rate averaged6.65%, actual growth rate in the sector was no more than 3.62%, about half the targetrates. The major factors accounting for the poor performance of agriculture rangefrom low producer prices, marketing restrictions and climatic factors (drought, flood,
  4. 4. Economic partnership agreements, common external tariff and prospects 133desert encroachment, etc.) to poor technology, an ageing workforce and inconsistenciesin policy. Most of the man-made factors like technology and policy have hardlychanged since the country’s independence. Years of good performance as witnessed for2004–2007 often are no more than the result of improved weather conditions.Table 1 Annual average growth in agricultural production Percentage (%) Target growth in Actual growth in agriculturalRolling plan period agricultural production production (annual average)1986–1992 8.5 3.81993–1995 7.2 3.51995–1997 7.2 3.71996–1998 6.1 3.81998–2000 5.1 3.22000–2003 5.8 3.72004–2007 6.0 6.5 Sources: Eboh (2004); United Nations (1995); data adapted from CBN (2007)As a result of the nature of agriculture in Nigeria, the country does not really havefood security. This paradox has been attributed to a number of factors including thefact that small-scale farmers account for 81% of the total land area and 95% of thetotal agricultural output. This class of producers has a low capital base, antiquatedtechnology, poor market access and a host of other socioeconomic disadvantagescaused by poverty and poor management of agricultural cropland. In fact, it has beenestimated that rangeland degradation, forest losses and other forms of degradation arisingfrom poor farm technology in Nigeria cost the country between N590 billion andN725 billion (US$4.4 billion and US$5.5 billion) per year (Eboh et al., 2005). Theseare just direct costs and do not include the economic multiplier effects and dynamiclosses from forfeited gains of increased rural incomes that would have been the casein the absence of the degradation. The situation is further compounded by the completeabsence of appropriate agricultural production and trade policies directed at thesesmall-holder farmers. It is therefore not surprising that agricultural growth in Nigeria in the past twodecades has been characterised by a tripling of area harvested (FAO, 2004), while yieldsof many major crops have fallen. Land under crop cultivation is now near its maximumcapacity in many states. According to satellite data Land Use and Vegetation (LUV),already by 1995 cropland occupied nearly 70% or more of the total land area in 40% ofthe states. It also appears from available data that cropland expansion is increasinglytaking place on marginal land with lower yields, low or complete lack of productivitygains and lack of off-farm and urban income opportunities for an ever increasingpopulation. A time series analysis of yields in relation to hectares harvested and otherfactors affecting yields over the period 1961–2004 seems to confirm that expansion inlarge part is on marginal land, especially for cereals, as shown in Table 2.
  5. 5. 134 C. Agu, A.I. Achike and M.O. OduhTable 2 Regression analysis of cereal production, 1961–2004Variable Regression coefficientArea harvested 0.7 (elasticity)Fertiliser application 0.05 (elasticity)Technology improvement 0.02 (annual productivity)Land productivity –0.15 (percent change) Source: Eboh et al. (2005)Overall, the agricultural sector in Nigeria presents a number of paradoxes. Itsdistinguishing features are its high employment, input and potential but very lowproductivity and market share and high contribution to poverty. Relating these tothe protocols of the proposed EPA between Nigeria (and perhaps other Africancountries) and the EU raises a number of challenges. We summarise these in thefollowing paragraphs. Agriculture in Nigeria is dominated by small-scale farmers who account for 81%of the total land area and 95% of the total agricultural output. This implies that short-termprospects in agricultural production, trade and impact of EPAs on agriculture dependon these small-scale farmers and their socioeconomic features, and that evolving a newgeneration of farmers can only be a long-term strategy. The average size of farm holdingsis less than two hectares. This implies that the sector is dominated by uneconomic andnoncompetitive farm holdings, which inherently lack the capacity for modernisation andglobal competitiveness, and so only scale-neutral technologies make sense. Hence, tradeopenness and liberalisation (particularly with an agriculture-subsidising and exportingEU) may not be beneficial in the short run. Even in the long run, concerted efforts have tobe made to increase the scale of operation in the sector to make it competitive beforeopening up. The rural share of the total population is 60%, and 90% of these rural folk derive theirlivelihood from agriculture. This signifies that agricultural development is tied closelywith rural development, and this must be factored into trade negotiations, policyformulations and EPAs. The agricultural share of the total population living below thepoverty line is 65%, implying that growth and development in the agricultural sector is akey route to poverty alleviation. So far, not much has been seen in EPA negotiationson this issue. The agribusiness share of the total number of enterprises is about 70%,indicating that agriculture is a sector with the highest numerical strength of businesses,though with much room for improvement. Majority of these businesses barely breakeven. Trade negotiation might have to first target the revitalisation of these businesses.The agricultural share of total employment is about 60%; hence, it is the largest singleemployer of labour. Targeting a rechanneling of some of this labour through retrainingwhile improving the productivity of the rest will definitely be helpful. However, it is notclear that these are strongly being put on the table of EPA and CET negotiations andother trade policy programmes. The sector has clearly not been helped by the structure of trade policy in Nigeria,which is characterised by a high degree of arbitrariness, inconsistency, poor focus andfrequent changes. Trade policy statements are often vague and difficult to measure. It is
  6. 6. Economic partnership agreements, common external tariff and prospects 135safe to say that agricultural production and trade have not received much facilitation fromtrade policy in the country. Table 3 summarises the major trade policy regimes (includingthe average tariff in those regimes) and performance of key agricultural products.Table 3 Implicit tariff and growth in output of selected agricultural commodities Percentage Percentage change in Average tariff change in rice cassava Percentage change inYear (implicit) production production sorghum production2001 37.07 8.22 0.80 0.692002 17.84 29.52 1.94 6.712003 23.10 5.71 1.62 6.492004 22.58 15.21 9.58 –2.832005 9.94 4.72 11.24 11.212006 8.97 2.50 0.39 1.972007 8.09 2.02 3.76 0.972008* 4.84 NA NA NANote: * third quarter (2008). Source: Authors’ calculations based on data from CBN and FAOSTAT3 Impact assessment of EPA and CET on agriculture3.1 Selected productsThree agricultural products form the bedrock of this analysis: rice, cassava and sorghum.Two considerations underpin the selection of the products: their contributions tosustainable livelihood and poverty reduction and their export potentials. These wereextracted mainly from the literature and interaction with stakeholders. All three items arealso part of the ongoing presidential initiative on selected agricultural products.1 Rice is presently a very important staple food in the country. It also has a high exportpotential. However, a major problem of domestic rice is the low quality of its packaging.The technology for destoning is still rudimentary to the effect that domestically producedand packaged rice does not compete effectively with its foreign counterparts. Currently,rice imports constitute up to 30% of the total agricultural imports in the country. Thisshows the strategic nature of the item for sustainable livelihoods. Enhancing domesticproduction can go a long way in creating jobs and increasing food security, and thussecuring the economic independence of the country. Nigeria is estimated to be the second largest producer of cassava globally. However,over time, production has been based on low technology and largely limited to domesticdemands. However, the presidential initiative on the product seems poised to change thestructure of the industry. Interactions with stakeholders reveal that cassava stems are nowa premium commodity, as investment in the production of cassava increased considerablyin the last five years. The appeal of most of the current investment in the sector is exportpotential. With a lot of derivative products from cassava, the export potential is quite highand production is now struggling to meet the growing export demand.
  7. 7. 136 C. Agu, A.I. Achike and M.O. Oduh Sorghum is one of the most cultivated crops in the country, and Nigeria is the thirdlargest producer of the crop in the world. It is produced mainly in the middle belt. Theaverage annual output of sorghum in Nigeria is put at 7 096 000 metric tonnes between1990 and 1998. Given the versatility in its use as well as its potential for export, sorghumholds the promise of helping reduce poverty if only a little more policy attention could begiven to it. Currently, much of the sorghum in Nigeria is produced by subsistence farmersbut there is potential for export especially with a little help in pest control.3.2 The modelWe start by considering a change in the world price, tariff or exchange rate facing asingle crop. The price of a good that is traded internationally will be largely if not entirelydetermined by the world price. The literature on growth linkages (e.g., Laird et al., 2004;Morrissey et al., 2003; Bhalla, 2002; Tarr and Gurgel, 2003) argues that agriculturalliberalisation and productivity growth are very effective at poverty alleviation becausetheir demand spillover is heavily concentrated on relatively employment-intensive andlocalised activities in which the poor have a large stake. The model, therefore, followsa normal production function specified as a log-linear model where the determinants ofdomestic production in an open economy are domestic prices, i.e., the tariff and the realexchange rate. Theoretically, demand and supply are both functions of price and income. Equally,the problem of identification in the conventional identity (Q = Q (P, Y)) could be tricky.However, at the macroeconomic level, this problem is reduced because, empirically, thepoint of focus is the elasticity coefficient, especially in circumstances where the macroaggregates of total imports and production have already been individually identified. Assuch, the analysis that follows assumes that both demand and output supply interactwithin the same economy and are basically defined by the same set of macro aggregates,but in varying degrees and directions. Economy-wide aggregate output is defined by theGDP (in real terms). Textbook relationships in terms of direction of impact hold here. Economy-wide relative price is defined by the real exchange rate. Conceptually,the real exchange rate is defined as the sum of major macroeconomic fundamentals ofproduction and consumption in a country relative to its trading partners. But practically,it is obtained as the product of the nominal exchange rate and relative trade weightsof tradables in each trading partner’s baskets and the value of trading partner currenciesvis-à-vis the domestic economy as follows: RER = NERdj*(Σi – j P*ij . TWij) / Pdjwhere: RER = the domestic real exchange rate NER = the nominal exchange rate of the domestic currency vis-à-vis the currencies of the country’s trading partners P* = the price level in the countries concerned Pd = the domestic price level TW = the trade weight of the i-th country at period j with the domestic economy.
  8. 8. Economic partnership agreements, common external tariff and prospects 137To get the relevant Pij, which represents the price level of the j-th trading partner,a weighted average of the trade shares and price levels of the individual partnersis employed. Tariff is also a price, but not an economy-wide pervasive price in the class of thereal exchange rate. It is taxed on individual products and covers only tradable items. Inthe import demand function, and with analysis focused on tariff changes, the elasticity ofeach commodity to the tariff will show the extent of its reaction in the event of a removalor reduction in the tax rate given the implementation or adoption of the EPA and CET.For imports, the tariff acts as the price and so is negatively related to imports. Forproduction, tariff serves as the instrument of protection. For simplicity, therefore, it willbe assumed that other factors affecting supply response are favourable such that apositive relationship can exist between the tariff and domestic output. The above relationships are specified as: Md = Md (Y, RER, Tariff) (1)and Yd = Yd (Y, RER, Tariff). (2)Generally, for the estimations, let: AOC = agricultural output RTF = real tariff, such that ⎡ RTFi ⎤ ⎢ ⎥ = real tariff rate for each crop ⎣ AOCi ⎦ RMT = real import ⎡ RMPi ⎤ ⎢ ⎥ = implicit import value for each crop ⎣ RTFi ⎦ REX = the real exchange rate RGDP = real GDP.The specific crop export, import or domestic output response function will be given by: ⎛ ⎡ RTFi ⎤ ⎡ RMTi ⎤ ⎞ AOC i = ⎜ ⎢ + + [REX i ] + [RGDPi ] ⎟ . (3) ⎜ AOC ⎥ ⎢ RTF ⎥ ⎟ ⎝⎣ i ⎦ ⎣ i ⎦ ⎠To formalise the response function, log-linearise Equation (3): ⎡ RTFi ⎤ ⎡ RMTi ⎤ LogAOCit = α 0 it + α1it Log ⎢ ⎥ + Logα 2it ⎢ ⎥ + Logα 3it [ REX i ] ⎣ AOCi ⎦ ⎣ RTFi ⎦ (4) + Logα 4 it [ RGDPi ] + Logα 5it + ν it .To provide scenario analysis and impact simulation of CET and EPA tariffs, we have: ⎡ RTFi ⎤ ⎡ RMTi ⎤ *LogAOC it = *α 0it + *α1i Log ⎢ ⎥ + *α 2i Log ⎢ ⎥ ⎣ AOC i ⎦ t ⎣ RTFi ⎦ t (5) + α 3i Log[REX i ]t + *α 4i Log[RGDPi ]t .
  9. 9. 138 C. Agu, A.I. Achike and M.O. OduhEquation (5) is the estimated version of Equation (6): ⎡ RTFi ⎤ ⎡ RMTi ⎤ *LogAOC it e = λ*α 0it + λ*α1i Log ⎢ ⎥ + λ*α 2i Log ⎢ ⎥ ⎣ AOC i ⎦ t ⎣ RTFi ⎦ t (6) + *λα 3i Log[REX i ]t + λ*α 4i Log[RGDPi ]twhere λ is a constant such that (0 ≤ λ ≤ 20) and *LogAOCit e is the expected simulatedimpact of CET on specific crop i using the CET (0, 5, 10, 20) tariff rate. Data for analyses were obtained from the Food and Agriculture Organization (FAO)Annual Abstract of Statistics and the Central Bank of Nigeria Annual Report andStatement of Accounts.4 Major findings4.1 Import responseTo evaluate the impact of the CET and EPA on tariff, two models were estimated. Thefirst is an aggregate imports equation incorporating the tariff, real exchange rate andincome as stated in earlier sections. The tables below summarise the elasticity of theimports: Table 4 for aggregate imports and Table 5 for agricultural imports (all equationsare log-linear and estimated in the first difference). In both equations, the impact of thetariff is unbiasedly negative.Table 4 Aggregate importsVariable ElasticityTariff –0.87Income 1.91Real exchange rate 0.41Table 5 Agricultural importsVariable ElasticityTariff –0.74Real exchange rate –0.34Income/Output 0.89The coefficient of elasticity indicated in both tables shows increases of between 0.74%(for agricultural imports) and 0.87% (for aggregate imports) for unit reductions in tariffrates. This signals the possibility of huge increases in aggregate and agricultural importsin the event of the implementation of the CET and EPA. For the CET, given that the ratesare graduated, the increase in imports arising from full-scale application would be smallerthan that arising on account of the implementation of the ACP–EU EPA.
  10. 10. Economic partnership agreements, common external tariff and prospects 1394.2 Aggregate agricultural production, the CET and the EPAEstimating the impact of the tariff reductions on the domestic production of agriculturewas not as straightforward as that of aggregate imports. There are a number of offsettingconsiderations, one of which is the observed weak impact of tariff on agriculturalproduction relative to its imports and/or aggregate imports. This, in the view of theauthors, stems from some important features of both the model and the Nigerian economythat are worth considering.4.3 EPA and the production of selected agricultural commoditiesOur partial equilibrium models relate the production of the selected commodities – rice,sorghum and cassava – to changes in tariff rates. As explained under the methodology,implicit tariff values were used while projections were made to evaluate the impact ofreducing tariff on agricultural products to zero (the most likely option under the EPA).The estimations showed that tariff has a significant impact in determining the productionlevels of several agricultural products with the exception of cassava, where thecoefficient of tariff was not very significant. From the estimation results, both rice andsorghum react significantly to changes in tariff rates with elasticities of 19% and 24%,respectively. These were also statistically very significant in both cases. However, thereaction of cassava is much smaller with an elasticity of 6%,which was not verysignificant at the 5% level. As expected, the time lag of the impact of tariff was over a year for all three products.There were minor variations between the products but generally the time lag ranged fromtwo to four years.2 For rice, tariff changes take approximately two years to reflect onproduction, while for cassava and sorghum, it takes four years before necessary changesin supply arising from tariff changes are made. Table 6 shows simulated changes in the production of the selected agriculturalproducts. All simulations assume a tariff reduction of up to zero, the most likely scenariounder an EPA. Simulations using an average CET tariff rate of 11.67% yield lesssignificant changes than the ones in the EPA, but potentially, the impact of the EPAwould overshadow that of the CET as the former implies a tariff reduction to zero foraffected products.Table 6 Hypothetical production losses due to a reduction in tariff arising from the EPA and CET (values in millions of metric tonnes except for Columns 5 and 7)Column 1 Column 2 Column 3 Column 4 Column 5 Column 6 Column 7 Difference in Total EPA EPA Baseline Production at production difference/ difference difference/Crop production 0% tariff (0% less baseline) baseline (%) (Mt) baseline (%)Rice 1 614 985.5 1 573 458.5 –41 527.1 –3.21 –23 587.4 –1.83Cassava 18 072 193.0 17 786 810.0 –285 383.4 –1.33 –162 097.8 –0.76Sorghum 4 610 750.0 4 370 207.5 –240 542.6 –4.74 –136 628.2 –2.69
  11. 11. 140 C. Agu, A.I. Achike and M.O. OduhImports from the EU 15 constitute 32.8% of Nigeria’s total imports, and 17.7% of thetotal imports are agricultural. At the same time, 24% of the total imports into Nigeria areunaccounted for by the International Trade Statistics (ITS) data and generally representimports from other EU (besides the EU 15) and ECOWAS member countries. Thus, theshare of the total imports to be affected by the EPA and CET (taking away contributionsby other major trading partners) is 56.8%. Calculations on the loss in production from theimposition of the EPA and the removal of tariffs on major products from the EU andother ECOWAS countries will be obtained under the assumption that this ratio remainsconstant in the near future. Of course, this is a very implausible assumption to make.With the removal of tariffs, many supply-driven markets will be created for EU exportsinto West Africa. Market creation and diversion will ensure an increase in the share oftotal imports from the EU and other West African countries. But these are second-levelimpacts and cannot be captured by our partial equilibrium analyses. We present a hypothetical projection of losses in agricultural output given theelasticities from the model. Column 2 of the table shows projections based on theestimates from the models (termed ‘the baseline estimates’). This column shows whatproduction should be if our equation holds. These figures do not significantly differfrom the actual production for the base year (2004). In Column 3, the equations projectthe level of aggregate production with the reduction to zero of tariff rates on selectedagricultural products. All other variables are held constant and only tariff rates areallowed to vary here. Column 4 shows the difference between Column 2 and Column 3.In other words, it is the size of the difference that arises on account of tariff reduction tozero. The share of this difference to the baseline production is taken in Column 5. Now,the EPA will not affect all products from all countries alike, but only products from theEU and ECOWAS member countries. Currently, the share of the EU, ECOWAS andother allied countries in the total imports into Nigeria is 56.8% as already mentioned.Thus, in Columns 6 and 7, the share of the total fall in production owing to theintroduction of the EPA is taken as the product of the share of trade with the EU and thetotal difference in output. The reduction in production arising from the implementationof the EPA is smaller than the reduction in total production arising from a blanketreduction of tariff on all products to zero, as not all imports are from the EU andECOWAS countries alone. As indicated in the table, there is a general fall in output for all the products onaccount of the reduction in tariff. This stems mainly from the reduced market sharethat domestic producers are likely to face in the event of a reduction in tariff. Themagnitude of loss again differs among products. The highest loss in output for anyproduct occurred for sorghum, where implementation of zero tariff leads to a 4.74%(almost 5%) reduction in total output. The application of the EPA yields a 2.7% loss inoutput on the average. Closely following is rice, for which absolute loss in productivitywas 3.21% of output in the absolute sense and 1.83% loss in output following theimplementation of the EPA. The fall in output was least for cassava, for which aggregateloss was less than 2% and 1% for zero tariff and the application of the EPA, respectively.This, however, may not be unconnected with the fact that, cassava is the least tradedamong the three commodities. Thus, it is less susceptible to the ups and downs inproduction arising from trade policy changes than other commodities. At this point, it would be helpful to stress that the above analysis assumes a numberof potentially relevant factors that affect the agricultural output constant. For example,the effects on output of increasing imports arising from positive import elasticities are
  12. 12. Economic partnership agreements, common external tariff and prospects 141not taken into account. Import elasticities would affect output in two ways: first by itsown changes (if it alters in absolute terms over the next years owing to changes in taste,income, etc.) and second by changes in aggregate imports arising from positive importelasticities. If changes in import elasticities are positive, this would mean greatertendencies to substitute local production with imports. In addition, even with constantimport elasticities, reduced tariff rates imply more imports, which puts the domesticproducer in greater jeopardy. Also, the analysis assumed the EU/ECOWAS trade share tobe constant for the time being. This is clearly not likely over time. The removal of tariffson EU imports would necessarily lead, through trade effects, to a higher share of totalNigerian trade with the EU.5 Conclusion: going forward with the EPA and CETThe structure of agricultural production in Nigeria is such that the bulk of producers aresmall scale. As seen from the analyses, the introduction of the EPA would likely lead tolosses in output as well as an influx of imports (mostly from less costly sources). This isconsistent with the findings of Busse et al. (2004), Soludo et al. (2003) and Karingi et al.(2005) in other sectors of the Nigerian economy as well as across other low-incomecountries participating in the EPA. While the aggregate trend in losses has been x-rayedin the section above, the impact of the introduction for micro agents involved inagricultural production will vary highly and could be absolute (i.e., many could be soaffected that the total income would be wiped out) in some instances. Given the structure of the Nigerian economy, agricultural production and trade arevery important, at least in the immediate scenario. However, policy attention toimprovements in these areas is still inadequate. Currently, trade policy does not seem toprovide the necessary levers for agricultural production and trade. There is so muchinconsistency and lack of focus on what trade policy should do to facilitate growth inagricultural production and trade as well as how it should be done. In the midst of thisconfusion, the government goes ahead with negotiations and the implementation ofregional trade agreements and EPAs with countries in the region and with the EU,thereby committing itself to further reducing protection to the sector. Findings from the analyses show that imports – whether aggregate or agricultural– are sensitive to tariff changes. In addition, our estimations and simulations indicatereductions in output for all three products in the study. With poor support for domesticproduction, lowering tariffs implies immediate substitution of domestic production withimports. Thus, without providing support for increased productivity – preferably byfacilitating access to agricultural inputs and by providing a backstop for agriculturalprices so as to ensure steady income for producers – adopting the UEMOA CET orEPA, which implies reduced tariffs for all third parties and outright removal of tariffson imports from the West African subregion and the EU, would mean increasedunemployment for farmers and reduced income for those who remain in farming. Agricultural exports are currently too miniscule. But prospects for improvement arehigh especially with the presidential initiative on a number of agricultural products.However, it might not be helpful to exaggerate the possibilities from the initiative.Domestic demand for these products is also not small. But in the face of unhinderedadoption of both the CET and EPA, these potentials can be hindered. Currently,
  13. 13. 142 C. Agu, A.I. Achike and M.O. Oduhprotection for certain agricultural commodities is relatively high, but how consistent suchpolicies would be and what mechanisms are put in place to ‘wean’ domestic producersfrom such protection at the earliest possible dates are issues for careful consideration.Of the products under study here, for example, cassava is completely prohibitedfrom being imported. Rice importation attracts a tariff of about 150%, while sorghum hasnot been imported into the country since 2000. Momentarily, these are helpful measures,but policy consistency is important. More so, such policies have to be supported bya programme for farm support to ensure continuation of technological application toproduction and processing, which will enhance the competitiveness of such products inthe global market.ReferencesBhalla, S.S. (2002) ‘Trade, growth and poverty: re-examining the linkages’, Paper prepared for the Fourth Asia Development Forum, Seoul, Korea.Busse, M., Borrmann, A. and Grobmann, H. (2004) ‘The impact of ACP/EU economic partnership agreements on ECOWAS countries: an empirical analysis of the trade and budget effects’, Final report of paper prepared for the Friedrich-Ebert-Stiftung, HWWA, Hamburg Institute of International Economics, July.Eboh, E.C. (2004) ‘Competitiveness and performance of Nigerian agricultural sector 1992–2001’, Research Report Submitted to World Bank Nigeria Country Office, Abuja.Eboh, E.C., Achike, A.I., Oji, K.O., Amakom, U., Ujah, O.C., Nzeh, C.E., Oduh, M. and Larsen, B.J. (2005) ‘Unlocking the potentials of agriculture and forestry for growth and poverty reduction’, Policy Brief, African Institute for Applied Economics Enugu and the UK Department for International Development (DFID).Food and Agricultural Organization (FAO) (2004) ‘FAO statistics on agriculture’, http/, S., Lang, R., Oulmane, N., Perez, R., Jallab, M.S. and Hammouda, H.B. (2005) ‘Economic and welfare impacts of the EU-Africa Economic Partnership Agreements’, Work in Progress Paper No. 10, Africa Technology Policy Centre, Economic Commission for Africa.Laird, S., Peters, R. and Vanzetti, D. (2004) ‘Southern discomfort: agricultural policies, trade and poverty’, CREDIT research paper No. 04/02, Centre for Research in Economic Development and International Trade, University of Nottingham.Morrissey, O., Rudaheranwa, N. and Moller, L. (2003) ‘Trade policies, performance and poverty in Uganda’, Uganda Trade and Poverty Project (UTPP) ODI, EPRC and University of Nottingham.Soludo, C., Okey, C., Oji, G. and Agu, C. (2003) ‘Potential impacts of extension of UEMOA tariffs to all ECOWAS member states: a case study of impacts on revenue and trade balance in Nigeria’, Report to ECOWAS Ministerial Meeting on CET, Abuja, November.Tarr, D. and Gurgel, A. (2003) ‘Regional, multilateral, and unilateral trade policies of Mercosur for growth and poverty reduction in Brazil’, World Bank Policy Research Working Paper No. 3051.United Nations (1995) Africa Recovery, Vol. 13, No. 1.
  14. 14. Economic partnership agreements, common external tariff and prospects 143Notes1 The presidential initiative is an ongoing programme of intensification of research, funding and production on selected agricultural products. The idea is for a more coordinated approach and policy attention to the production of these items given their strategic place in food security, employment and sustainable livelihood in the country.2 The Cobweb theory of the impact of changes in a variable on the production of dependent variables was best illustrated with agricultural products. For many macroeconomic variables affecting the production of certain commodities, changes in the variable do not immediately reflect in changes in the production level of the commodity. For agricultural activities particularly, there is a gap between input decisions and output. Thus, input decisions incorporating changes in trade policy variables only show up during harvests, which may range from one year to many years.