Transcript Economic Partnership Agreements

Economic Partnership Agreements:
Managing Revenue Implications
Richard Newfarmer
Special Representative to the WTO and UN
World Bank
Geneva, Switzerland
July 12, 2007
This presentation was done with Paul Brenton and Erik Von Euxkull, World Bank
Many developing countries have found it difficult to
recover revenues lost from tariff reductions



High- income countries recover revenues lost from trade
liberalization from other sources
On average, middle income countries recover 45-60% of lost tariff
revenues
Least developed countries – on average -- recover less than 30% of
lost tariff revenues
 having a VAT does not guarantee revenue recovery
 LDCs have a small initial base for the “hard to collect” taxes
and poor collection efficiency
…this underscores the importance of integrating revenue
concerns into a trade strategy
Source: Baunsgaard and Keen (2005)
Key Messages

Strategic considerations: The way EPAs affect revenues will
depend on the depth and sequencing of tariff reforms. But the
path of tariff reforms should be guided by a strategy to
improve competitiveness, and only secondarily by revenue
considerations.

Methodological considerations: Measuring prospective losses
depends on assumptions -- and many studies over-estimate
losses.

Policy considerations: Policies to replace lost revenues
should be part of tax modernization and integrated into a
competitiveness strategy.
Regional trade agreements that have succeeded in
promoting growth and regional integration share several
characteristics…
•Design
Low
external tariff barriers
Nonrestrictive
Wide
rules of origin
product coverage with minimal exemptions
Regulated
liberalization of services
Facilitating
trade at borders
Appropriate
•Implementation:
rules
Avoiding paper agreements
….Open regionalism
Source: World Bank, 2004; Schiff-Winters, 2002
Effect on revenues depends on depth, sequencing and pace
of tariff reforms
An illustrative pro-development, phased tariff reform could have
three phases of 5 years each…

Phase 1 - 2: Eliminate all internal barriers in CU/FTA to promote integration.
 Advantages: promotes regional integration, reinforces trade facilitation and
reduction in border crossing delays, revenue losses minimal, provides
attractive, wider investment arena

Phase 1 - 2: Bring down MFN peak tariffs to average
 Advantages: promotes efficiency, intra-African trade, introduces more
competition, stimulates exports; moves toward EU common tariff on MFN basis

Phase 2 - 3: Bring down MFN average levels to East Asian levels
 Advantages: promotes exports by reducing anti-export bias

Phase 3: Phased elimination of duties on EU products
 Advantages: backloading minimal trade diversion, wider competition,
ACP can use EPAs to leverage domestic
reforms, beginning with tariff peaks
High tariffs undermine competitiveness, often protect monopolies,
risk trade diversion, and impede intra-African trade…
NAFTA
AFTA
1 Pacific
2 SADC
3 CARCOM
4 ESA
5 ECOWAS
6 CEMAC
0
5
10
15
20
Average MFN weighted tariffs
Note: EPA Tariffs are import-weighted at the country level, then weighted by GDP at EPA averages
Source: UN TRAINS, accessed through WITS
Exports to the world spur regional trade
Regional trade as share of GDP
18
East Asia
16
14
12
10
ECA
8
6
LAC
4
SSA
South
Asia
2
MNA
0
10
15
20
25
30
Exports as share of GDP
35
40
45
50
The most integrated regions also have the lowest MFN tariffs and
lowest costs of trading…
For fastest growing countries, revenues from tariffs declined in
importance with integration with global economy
Tariff revenue, applied tariff and export share in GDP, average for HP16*
60.0%
Exports / GDP
50.0%
40.0%
30.0%
Tariff Revenue / total
tax revenue
20.0%
applied tariff (tariff revenue / imports)
10.0%
Source: IMF
*) Exclude Cambodia and Taiwan due to missing data.
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
19
80
0.0%
Collection efficiency of VAT tends to rise with
development…and openness
Collection efficiency (% change) of VAT
Agriculture share of GDP
Durability of political
regime
Regulation of political
participation
Trade Openness
Real GDP per capita
Urbanisation
-6
-4
-2
0
2
4
6
8
10
12
effects of a one standard deviation change in explanantory variables
Source: Aizenman and Jinjarak (2005)
14
Methods to estimate revenue effect tend to overestimate losses

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Modeling framework
 CGE best because allows estimate of trade diversion, secondary effects, and
effects on income.
 But does not account for dynamic changes and is insufficiently detailed.
Tariff data and exemptions:
 Frequently data are out-dated.
 Using statutory rates to calculate tariff revenue losses will strongly overstate
the impact of liberalization because exemptions are common.
 Some African countries collect less than 50% of their statutory tariffs.
VAT and excise revenue:
 Most studies do not account for increases in VAT and excise taxes from trade
reform.
 Trade liberalization increases revenues from VAT and excise duties at the same
time as tariffs are lost.
Trade diversion:
 Replacing imports from MFN-tariff partners with tax free EU imports can reduce
tariff revenue more than the share of current revenue from EU imports.
Assumptions on elasticity of substitution will have a critical impact on revenue
estimates.
Choice of Reform Scenario:
 Liberalization towards the EU is likely to coincide with additional regional
integration, so analyzing the impact of free trade solely with the EU may
understate the revenue losses.
...and estimates of revenue losses from an EPA vary widely…
Trade Revenue Loss from EPAs in COMESA (% of total
revenue)
Khandelwal
(2004) 1)
Burundi
6.9
Comoros
6.3
Kenya
Karingi et al.
(2005) 2)
Munalula et al.
(2005) 3)
5.2
8.7
7.7
4.2
1.3
Madagascar
1.9
0.9
24.0
Malawi
3.3
6.0
11.8
Mauritius
11.8
Rwanda
10.2
Uganda
0.7
0.7
3.5
Zambia
4.0
2.0
1.6
(Tanzania)
1.1
1)
2)
3)
4)
Brenton et. al,
Forthcoming 4)
0.8
using COMTRADE data and assuming the elimination of all tariffs on all EU imports.
values are globally corrected for some current exemptions
using data of unreported origin with a SMART/WITS partial equilibrium model
based on COMTRADE data
preliminary data from ongoing research project at the World Bank’s International
Trade Department, based on data from national customs authorities and applied tariff,
excise and VAT rates (thus correcting for tariff exemptions)
…because they use different methods and data
Ways assumptions affect results -- a thought experiment
with Ethiopia
0.2%
0.1%
0.0%
-0.1%
literature
base scenario
-0.2%
base scenario +
exemptions
revenue change / GDP
-0.3%
-0.4%
tariffs,
VAT and
excise
-0.5%
-0.6%
base scenario +
exemptions with
high import
elasticity
base scenario +
exemptions with
high import
elasticity, all
exemptions
removed under
reform scenario
-0.7%
-0.8%
Karingi et al.,
Hammouda
tariffs
-0.9%
-1.0%
-1.1%
-1.2%
-1.3%
-1.4%
-1.5%
Munalula
et al.
Projections based on ongoing research at the International Trade Department of the World Bank
The real world case of tariff reform in Mauritius
Tariffs collected and exempted on imports (Bill Rupees)
duties exempted
12
duties collected
10
8
6
4
2
0
2000
2001
2002
2003
2004
2005
The real world case of tariff reform in Mauritius
Excise duties collected and exempted on imports (Bill Rupees)
12
duties exempted
10
duties collected
8
6
4
2
0
2000
2001
2002
2003
2004
2005
The real world case of tariff reform in Mauritius
VAT collected and exempted on imports (Bill Rupees)
duties exempted
12
duties collected
10
8
6
4
2
0
2000
2001
2002
2003
2004
2005
The real world case of tariff reform in Mauritius… total
revenues rose
Taxes collected and exempted on imports
12
tariff duties
excise duties
VAT
10
duties exempted
8
duties collected
6
4
2
0
2000 2001 2002 2003 2004 2005
2000 2001 2002 2003 2004 2005
2000 2001 2002 2003 2004 2005
Policy conclusions 1: Get the trade strategy right to
promote growth

Negotiate for a phased and sequenced trade reform that:
 promotes regional integration first,
 cuts distorting tariff peaks on an MFN basis to secure efficiency
gains,
 and only later phases-in preferential cuts to EU firms

Move competitiveness and export-led growth strategies to the
center of growth strategies.
 Get incentives right – in tariff, tax, and investment policies – to
promote exports
 Address high costs of services through regulated liberalization
 Adopt reforms to trade-related institutions that facilitate and
promote trade
Policy conclusions 2: Adopt reforms that modernize the
tax system integrated into the competitiveness strategy


Broaden the tax base for “difficult to collect taxes”
 Simplification: fewer rates, less exemptions
 increase size of formal relative to informal sector.
Improving revenue collection
 customs reform embedded in a trade facilitation strategy can
increase efficiency of collection and stimulate higher imports
and exports
 Invest in administrative reform of tax authority to improve
compliance
References and Further Readings
Brenton, Paul “Preferences for Africa: How Much are They Worth? World Bank Trade Note
(www.worldbank.org/trade/trade notes)
Brenton, Paul, Mombert Hoppe, and Richard Newfarmer “EPAs and Development in the New
GobalEconomy” Draft June 2007.
Karingi et al.(2005): Economic and Welfare Impacts of the EU-Africa Economic Partnership
Agreements
Busse and Grossmann (2004): Assessing the Impact of ACP/EU Economic Partnership Agreement
on West African Countries
Hammouda et al. (?): Assessing the consequences of the Economic Partnership Agreement on the
Ethiopian Economy
Nielsen and Zouhon-Bi (2007): ECOWAS - Fiscal Revenue Implications of the Prospective Economic
Partnership Agreement With the EU
Munalula et al. (2005): Revenue Impcats of the Economic Partnership Agreement Between the
European Union and Eastern and Southern African Countries
Khandelwal (2004): COMESA and SADC: Prospects and Challenges for Regional Trade Integration
Zgowu and Kweka (2006): Empirical Analysis of Sector-level Trade and Welfare Effects of
Reciprocity under an Economic Partnership Agreement with the EU: Evidence from Malawi and
Tanzania
Milner et al. (2005): Some Simple Analytics of the Trade and Welfare Effects of Economic
Partnership Agreements
World Bank, Global Economic Prospects 2005: Trade, Regionalism and Development World Bank,
2004.
Economic Partnership Agreements:
Managing Revenue Implications
Richard Newfarmer
Special Representative to the WTO and UN
World Bank
Geneva, Switzerland
July 12, 2007