CHAPTER ONE

INTRODUCTION

1.1        Background

Over the years, trade liberalization either as an experiment or an institutionalized policy, has been an evolving area with consistent debate about its growth implications (pro growth and trade vulnerability argument). However, a unified understanding exists - the importance of trade and the associated external shocks. That is, trade is desirable for growth, but it carries some other undesirable economic costs that are detrimental to people’s welfare; and it is this welfare implication and its management that has become the object of debate in trade policy analysis. According to Ron (2000:3) globalization has had and will continue to have tremendous benefits for all countries that participate. Nevertheless, it does create pressures leading to increased inequality in some countries and the need for structural adjustment in all. Moreover, globalization leaves some countries more vulnerable to external economic shocks (output volatility, income and expenditure volatility); and poses risk management challenges that have not yet been adequately addressed. In particular, there is need to understand better the risks faced by the poorer and less-skilled members of society and their difficulties in coping with economic change and shocks.

The foregoing suggests that while countries may not close their domestic economy to external trade, it should do so with caution by gradually tampering its degree of openness. But events over the last decade has shown that Nigeria in association with other developing countries of Africa, Caribbean and Pacific countries is over-stretching her domestic economy to external trade shocks by entering into various trade and economic partnership arrangements. One of such agreements is the economic partnership agreement EPA between the European Union, Africa, Caribbean and Pacific countries. The EPA1 is a preferential trade arrangement made to assess all goods entering the customs territory of any EU-ACP countries with the same rate of customs duty. It also, proposes to create market accessibility and concessions between the EU and participating African regional groups and the Pacific countries. This is expected to establish integrated African regions that will further open to both intra-regional and inter-regional imports. The basic EU demand on ACP countries is the

1  Economic partnership agreements shall be negotiated during the preparatory period which shall end by 31 December 2007 at the latest. Formal negotiations of the new trading arrangements shall start in September 2002 and the new trading arrangements shall enter into force by 1 January 2008, unless earlier dates are agreed between the Parties, (pg 55 article 37 paragraph 1 of the agreement).

11

reduction of applied tariffs against EU imports through a compendium of evolving requirements of cooperation that will eventually lead to zero tariffs by 2020 (12 years transition). If the African Commission’s recommendation is adopted, it could last to 2028 (20 years of transition).

Since the inception of the EU-ACP negotiation under the Lome conventions now Cotonou Agreement CA, there have been opinions as of what EU interest is and what ACP countries should seek. These two dimensions are: The trade and trade-related dimension and the development dimension. While the EU looks forward to an enlarged market in the ACP countries with increase in aids and trade related development policies in the ACP countries, the ACP countries with less competitive products ultimately will rely on the expected aid as a cushion against the expected unfavourable balance of trade and loss of revenue. Whatever the interest, different researches have been undertaken to show the expected implications of the agreement on the Nigeria’s domestic economy. These researches are in the areas of: trade creation and trade diversion implication, growth implication, debt stock implication, poverty implications and many other trade related implications. All these implications are mainly direct trade related implications ignoring the spillover effect such as: degree of inequality to be generated by the agreement, macroeconomic volatility, revenue structure and compositions implications (oil and non-oil revenue) and fiscal responsibility pressure as a result of the changing revenue structure and composition. These direct and indirect effects are necessary for assessing the impact of the EU-ACP partnership agreement on the Nigerian economy.

1.2        Statement of Problem

Nigeria’s potentials in international trade arrangement is bedevilled by so many constraints including the high cost of doing business in Nigeria; inadequate infrastructure; poorly implemented incentives (fiscal and tariff regimes); massive smuggling; lack of standardisation; and unfavourable international trade rules and practices. The government in 2003 and 2004, as a policy measure reintroduced import prohibitions on such products that have no certification of origin. Today, the fiscal policy measures in the 2005 Budget fully committed Nigeria to adopting the UEOMOA (Union Economique et Monetaire Ouest Africaine) tariff structure which is 35 percent less than Nigeria’s average tariff rate within the framework of the ECOWAS Common External Tariff (CET), which comprises four tariff bands. Common External Tariff CET is made to adopt a uniform tariff structure for goods

12

within the ECOWAS sub-region. Other increased market access agreements which Nigeria entered into include: the United State-African Growth and Opportunity Act (AGOA) established in 2000, to provide trade opportunities for Nigeria and other Sub-Saharan African countries through preferential market access and the on-going EU- ACP Partnership Agreement.

In spite of these arrangements, Nigeria’s non-oil, and in many cases total trade balances show persistent trade deficit with a high profile of fiscal deficit. Available statistics show that between 1999 and 2006 EU import (oil and non-oil) from Nigeria rose from 56.5% in 1999 (more than twice that from ACP countries) to a decline of about 37.6 % and 21% in 2004 and 2005 respectively. In the same period `export rose from 25% in 1999 to a decline of 12 percent in 2004 before picking up again 2005 by 14 percent. See figures 2 and 3 for details. A further break down revealed that Nigeria’s trade balance for non-oil export was consistently on deficit from Euro 3.1billion in 2000 to Euro 5.2 billion in 2006, a 42 percent increase. In the same period, total trade balance rose from 2.4 percent in 2002 to about 3.7 percent in 2006.

Summarising the trade relationship between EU and Nigeria shows that, there has been an average of Euro 5711.6 million value of trade between the EU 25 and Nigeria. Between 2000 and 2006 Nigeria made an average of Euro 743.1 million from non-oil import tariff; by implication a zero tariff would have amounted to the same revenue loss or 0.71 percent of the 2006 GDP. A study by Adenikinju and Olumuyiwa (2005) using West African Cross country case on the trade development implication of EU-ACP partnership revealed that most West African countries (Nigeria inclusive) will have revenue loss as a result of the agreement. Currently, Nigeria has lost approximately N50 billion to trade liberalization and trade waivers, (Ministry of finance and customs union, 2006). By implication, Nigeria has lost a total of N91.29 billion under two years, an annual average of 45.65 billion or 34.3% of 2006 GDP. By 2020 (14 years) Nigeria would have lost an average of 639 billion to trade waivers. UNECA (2005) and Neilsen (2005) also estimated Nigeria’s loss to EPAs to be 2.3 and 3.3 percent of GDP respectively, average of 2.8 percent of 2005 GDP.

The foregoing therefore, calls to question the likely implication of a more trade liberalization that will open up the Nigerian domestic economy to the EU with eventual zero tariff rate in the year 2020. Summary of the trade balances between Nigeria and EU 25 are in figure 1. Figure 2 also shows the fiscal burden of the public sector, 1996-2006.

13

Figure 1: Trade balance between Nigeria and EU 25

Though, according to Stevens and Kennan, (2005) the magnitude and effect of this depends on the extent to which imports increase and their prices in the domestic market fall. Reductions in tariff and high degree of openness are expected to complement the revenue loss and generate other welfare related problems like, macroeconomic volatility and the increase in revenue-expenditure volatility (attributable to oil price shock). This will further lead to an increase in the fiscal burden and responsibility by affecting the composition of public sector revenue. Winter, (2000:51) argue that one immediate reaction is that cutting tariffs will reduce government revenue. In the limit, this clearly will imply zero revenue, and more importantly, there is the danger that government may raise tax revenue as alternative in the event of revenue loss. A study by Glenn, Thomas and David (1996) on the economic implications for Turkey of a customs union with the European Union also shows that there was loss in tariff revenue of about 1.4 percent of their GDP. It further suggested that, reduction in fiscal deficit could only come if the government will reduce expendit