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Trade Policy options for Nigeria: a GTAP simulation analysis by Ron Sandrey, Hans Grinsted Jensen and Olubukola Oyewumi tralac Working Paper No 10/2007 December 2007 Copyright © tralac, 2007. Readers are encouraged to quote and reproduce this material for educational, non-profit purposes, provided the source is acknowledged. All views and opinions expressed remain solely those of the authors and do not purport to reflect the views of tralac. This publication should be cited as: Sandrey, Ron, Jensen, Hans G. and Oyewumi, Olubukola. 2007. Trade Policy options for Nigeria: a GTAP simulation analysis tralac Working Paper No. 10. [Online]. Available: www.tralac.org. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 1 Section 1 – Summary and key points Nigeria is the most populous country in Africa, but a low income country by the World Bank definitions. Fuels and mining products completely dominate exports, and the US and the EU are the destination for 73% of these exports. Nigeria has effectively duty-free access into both of these destinations, but domestically its own tariffs are high by international standards. The oil sector also dominates production in the economy, and recent high oil prices have ensured a strong trade surplus. The stalling of the talks in the Doha Round of the WTO in Geneva is leading to questions about the value of such a round for Africa, and similarly there are many who question the value of the possible Economic Partnership Agreements (EPA) proposals for the African, Caribbean and Pacific (ACP) countries. To analyse this for Nigeria this paper uses the Global Trade Analysis Project (GTAP) computer model1 to simulate (a) a likely outcome for Nigeria from the Doha Round and (b) the impacts for Nigeria of going one step past the EPA negotiations and entering into a full free trade agreement (FTA) with the EU. To set the scene a preamble to the WTO is provided. This includes the major issues from the agricultural negotiations in the WTO and a review of some of the more recent analyses of a likely Doha Round outcome for Africa. The striking feature of the latter is that the estimated benefits to agriculture globally are reducing as (1) the limitations of a likely outcome from Doha are being realised and (2) more realistic trade modelling is being done by researchers. The likely Doha outcome An important part of the model assumptions is that there will be a degree of flexibility that enables countries to preserve their tariff protection on a few selected lines, and this protection is allocated by the model to the most heavily protected tariff lines (the so-called special and sensitive products). The overall global welfare gains from Doha are estimated to be some $48.2 billion, with a lesser $3.27 billion of this from agricultural reform and the greater $45 billion from the liberalisation of markets for non-agricultural goods. The agricultural results are reinforcing 1 For a full background to GTAP visit the website at https://www.gtap.agecon.purdue.edu. This truly global project has become the model and/or database of choice for most trade and trade related modellers. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 2 the ‘modern’ GTAP outcomes which show that use of these special and sensitive products neuters an agricultural outcome from the Doha Development Agenda (DDA). Nigeria gains some $198 million, with a loss of $59 million from agricultural reform and gains of $257 million from non-agricultural reforms. By sector, the gainers in Nigeria are heavily concentrated in the oil and gas industry. The Nigerian–EU trading relationship This paper then uses the GTAP computer model to assess what the likely benefits from a full FTA between Nigeria and the EU are likely to be. The results suggest that there will be gains to Nigeria of some $856 million at 2015. These gains come about exclusively through its own reduction in import tariffs to zero on EU27 imports, and this increased welfare stems mostly from an increased investment/capital stock as global manufacturing exports increase as the sector becomes more internationally competitive. This is a significant result for Nigeria. The EU gains a larger $1,119 million, with almost all of this from preferential access into Nigeria. Other trading partners lose in welfare terms, and we caution that the GTAP model has not increased any other domestic taxes neutralising the reduced income the Nigerian government faces due to tariff reductions. In the standard GTAP model the total labour supply is fixed exogenously, and the model assumes that there is full employment in all countries/regions of the world. This is a very simple assumption and is clearly not the case in Africa in general with high unemployment rates. Therefore we have extended the standard model so that the total unskilled labour supply is modelled using a labour supply curve which specifies the relation between labour supply (unemployment rate) and the real wage in each region. The results show that if Nigeria is serious about lowering unemployment, the policy option of holding wages in nominal terms and increasing the numbers in the workforce is a superior one. Section 2 – Introduction Nigeria, with its population of close to 150 million, is the 9th largest country in the world by population and certainly the largest in Africa. It is, however, a low income country according to the World Bank definition, with a 2005 Gross National Income (GNI) as measured in purchasing power parity (PPP) of just $560 per annum. The WTO2 reports that during 2005 it was ranked 29th as a global merchandise exporter and 42nd as a global importer when 2 World Trade Organisation, www.wto.org. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 3 intra-EU trade is ignored, and holds a place some ten positions lower in global services trade. Since merchandise exports are much higher than imports ($42,277 million versus $17,702 million during 2005) its trade balance is strongly positive. In 2006, its current account balance as a percentage of GDP was 12.2%, growth of real GDP 5.3%, inflation rate 8.3% while export to GDP ratio stood at 45.6%. Fuels and mining products dominate these exports (90.4%), and manufactures (75.6%) its imports. By destination the US (49.9%) and the EU (23.1%) dominated during 2006, while the main sources of imports were the EU (32.8%), China (10.7%) and the US (8.4%). Intra-African trade is low, with South Africa being its major import source in Africa (2.2% of its total imports) and Côte d’Ivoire being its major export destination in Africa (2.8% of its total exports). By WTO standards its applied tariffs are relatively high, with a reported Most Favoured Nation (MFN) applied average rate of 15.6% on agricultural imports and 11.4% on nonagricultural imports during 2006. Some 19.2% of Nigeria's total tariff lines are bound, generally at ceiling rates. All tariff lines on agricultural products are bound, in contrast with only 7% of non-agricultural lines (WTO definitions). Final bound tariffs range from a minimum of 40% to a maximum of 150%, with an average of 118.4%. Conversely, for its exports Nigeria is eligible for non-reciprocal trade preferences under the Generalised System of Preferences (GSP) schemes of several WTO Members, the Cotonou Agreement with the European Communities (EC), and the US African Growth and Opportunity Act (AGOA). Utilisation of these opportunities with non-oil exports remains low, as oil completely dominates exports from Nigeria. Indeed, during 2005 Nigerian exports were concentrated to the extent that 97.5% were in HS Chapter 27, oil and gas exports. In addition to these, Nigeria 3 uses import prohibition to protect its manufacturing and agricultural sectors. Its import prohibition list includes a wide range of manufactured (all of Chapters 50-63 for example) and a few agricultural products (including fresh fruits, pork and pork products, beef and beef products, mutton, lamb and goat meat, and frozen poultry). On its export prohibition list are maize, timber, raw hides and skin, scrap metals, unprocessed rubber latex and rubber lumps, artefacts and antiquities, and wildlife animals classified as endangered species and their products. Despite this protection, Nigeria’s export is still dominated by oil and gas products, while some of the prohibited import products get smuggled in through its porous borders with Benin Republic. 3 Nigeria Customs Service, www.nigeriacustome.gov.ng/Prohibitions%20List.htm. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 4 Politically, tralac 4 reports that the oil-rich Nigerian economy, long hobbled by political instability, corruption, and poor macroeconomic management, is undergoing substantial economic reform under the new civilian administration. Nigeria's former military rulers failed to diversify the economy away from over-dependence on the capital-intensive oil sector. The current civilian government through its medium-term economic strategy – the National Economic Empowerment and Development Strategy (NEEDS) – aims at stimulating economic growth via trade by laying a solid foundation to fully exploit Nigeria’s potentialities in international trade (Briggs, 2007). However, the WTO reports that the mining sector, specifically the petroleum subsector, dominates the Nigerian economy. It accounts for some 45% of GDP, 95% of export earnings, and over 70% of total government revenue, but employs only 5% of the labour force. The largely subsistence agricultural sector has failed to keep up with rapid population growth, and Nigeria, once a large net exporter of food, now must import food. Nigeria's trade policy has been found to be somewhat inconsistent from the period after independence (Adenikinju, 2005) but NEEDS seeks to drastically reduce the age-long unpredictability of the trade policy regime, establish a schedule to fully adopt the Economic Community of West African States (ECOWAS) common external tariff (CET) by 1 January 2008, and respect obligations under multilateral trading systems. Objectives of the study It is against this trading background and trade policy regime that the paper will examine the implications for Nigeria from firstly an outcome for the WTO DDA and secondly for extending the proposed Economic Partnership Agreements (EPA) for the continuation of the Cotonou Agreement past its scheduled WTO-mandated end at 2008 to a full goods-only free trade agreement between Nigeria and the EU. To undertake this analysis we will use the GTAP model. Before describing the model and subsequently undertaking the analysis the paper will provide a background to the WTO DDA and outline the possible parameters of an outcome as the situation stands at mid-2007. 4 Trade Law Centre for Southern Africa, www.tralac.org. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 5 Section 3 – a Doha Development Round Simulation The WTO The WTO deals with global rules of trade – it determines and oversees the multilateral trade rules among the 151 members. The main function is to ensure that international trade flows as smoothly, freely and predictably as possible and with no undesirable side-effects. It aims to raise standards of living and ensure full employment in member states by enabling the expansion of trade in goods and services in a sustainable manner. The current DDA aims to continue this momentum and further open global trade across a broad front, and theoretically the second ‘D’ in DDA for ‘Development’ is to ensure that developing and, more importantly, less developed countries, are given a boost up the global ladder. But within this (and on the road to this) potentially fairer and more market-oriented trading system there is no symmetry of negotiating power and opportunity between the parties, as over three-quarters of WTO Members are developing or least-developed countries with many of the latter situated in Africa. Developing countries are themselves not a homogeneous group, but agriculture plays an important role in most of their economies – whether through exporting, rural development and/or food security. Some are already food exporters, and others could develop export-oriented agricultural sectors, but first need better export opportunities. WTO Members have recognised that liberalisation in these developing countries’ own markets needs to be more gradual than for developed countries – the principle of ‘special and differential treatment’ (S&D), while least developed countries are required to make very few adjustments. The latter comment is, however, tempered by the extent to which these least developed countries are an integral part of a common external tariff (CET) arrangement involving other developing or even least-developed countries, as in these cases some will be unable to take full advantage of the S&D provisions. Such is the case within ECOWAS. Finally, it is important to always keep in mind that the WTO negotiates ‘bound’ tariffs, or tariff rates that members have pledged not to exceed, rather than ‘applied’ or what is actually levied at the border. In agriculture in particular, these bounds are often above and sometimes considerably above applied rates, thus a reduction in bounds may make little or even no difference in practice at the border. For Nigeria, a socalled Paragraph 6 country5, the latter situation is complicated in that many of the tariffs in non-agricultural products are not formally bound. 5 The Paragraph 6 countries’, defined in Paragraph 6 of the NAMA (Non-Agricultural Market Access) annex of the WTO's August 2004 Framework Agreement, are WTO members that have bound 35% or less of their NAMA tariff lines. This Framework exempts countries with a binding coverage of non- Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 6 The importance of agriculture Agricultural protection and domestic support in developed countries has led to three main effects. The first two effects are (a) lower global prices of some agricultural products as a result of these policies, which, in turn, (b) increased the competitiveness of developed countries’ agricultural products on international markets, thus reducing the export levels of some African countries exporting the same products (cotton and sugar). However, importers of other agricultural products such as cereals benefited from import prices that are often lower than the real costs. The third effect is (c) the high tariff (and non-tariff) protection that is applied in most developed countries as part of their agricultural policies, and these restricted agricultural products that could be exported by African countries6. These issues are all linked and complex. It is easy to point to examples where African nations benefit from global agricultural protection. The opportunity to gain from preferential access into some markets and the abilities to gain from depressed commodity prices to the extent that countries are net food importers are two such examples. But these are second-best arguments, and one must not lose sight of the first-best ‘big picture’ and provided that care is taken to ensure a carefully constructed negotiating strategy is followed, the net effects for Africa should be positive. Issues for the agricultural negotiations It is becoming apparent that there are many trade-offs for developing and least-developed countries in the increasingly complex web of global agricultural policies. Perhaps nowhere are these dynamics as embodied as they are in the complexities of Special Products (SP) and Special Safeguard Measures (SSM) for the developing and even least-developed members on the one hand and the potential use of Sensitive Products by the developed countries on the other. For the latter, there is the danger that developed countries may declare all products of access interest to the developing world as sensitive, thus neutering the DDA for them, while on the other, there is an urgent need for developing countries to seriously consider exactly what products they want to protect, justify these to at least their agricultural tariff lines of less than [35]% from making tariff reductions through the formula. They are expected to bind [70-100]% of non-agricultural tariff lines at an average level not exceeding the overall average of bound tariffs for all developing countries. There are 12 countries listed as Paragraph 6’ countries (with their percentage of tariffs that are bound shown in brackets): Cameroon (0.1%); Congo (3.2%); Côte d'Ivoire (22.9%); Cuba (20.4%); Ghana (1.2%); Kenya (1.6%); Macao (China) (15.6%); Mauritius (5.3%); Nigeria (6.9%); Sri Lanka (28.3%); Suriname (15.1%) and Zimbabwe (9%). 6 This has been the impact of EU export subsidies, although with current (October 2007) world agricultural prices these impacts have lessened. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 7 domestic constituencies, and examine how they are going to design and implement a regime to operate the SSM. The three main pillars for agricultural negotiations are market access, domestic supports and export subsidies. For market access the US has proposed a series of deeper cuts in tariffs based on four tiers for both developed and developing countries. There will be only one percent of tariff lines as ‘sensitive products’, and there must be compensatory Tariff-Rate Quota (TRQ)7 expansion for these products. The developing countries will operate under the same four tiers, but with tariff cuts to be negotiated. They will have longer periods and lesser cuts, and the SSM and SP to provide transitional protection from import surges, but they should make some meaningful commitments. The EU has also proposed a four-tier approach to tariff cuts that appear to be less steep than the US proposal. Importantly, the EU wants to preserve roughly eight percent of tariff lines as sensitive products that are protected by lower tariff cuts within an expanded TRQ access and with recourse to the special safeguard clauses. The G10 8 has reaffirmed the principle of S&D and continued their support for sensitive product concession in market access and for tariff cuts proposes a position similar to the US. The G209 proposal also adopts a similar band structure to the US proposal, but proposes linear cuts within these bands for both developed and developing countries, with the developed cuts at least 54% on average nearly twice the maximum cut of 36% on average mandated for developing countries. For domestic supports there is a major debate evolving around reductions here, with much of the debate focusing on the EU’s blue box and the need to ensure that ‘box shifting’ of supports does not take place. Reductions should increase global prices for many agricultural products, and although this is generally good for exporters, it may have implications for import prices and thereby for consumers. While in general export subsidies are of limited concern to developing and least developed countries, there are some complex inter-plays involved. These include the need to ensure that delivery of genuine food aid is not hampered in an emergency, that such food aid does 7 The TRQ is a two-levelled tariff where the tariff rate charged depends on the volume of imports. A lower (in-quota) tariff is charged on imports within the quota volume. A higher (over-quota) tariff is charged on imports in excess of the quota volume. 8 A WTO informal grouping comprising net food-importing, mainly developed countries that include Japan, Korea, Norway and Switzerland. 9 Another recently formed informal grouping of Argentina, Bolivia, Brazil, Chile, China, Cuba, Egypt, Guatemala, India, Indonesia, Mexico, Nigeria, Pakistan, Paraguay, Philippines, South Africa, Tanzania, Thailand, Uruguay, Venezuela and Zimbabwe. These are generally but not necessarily food exporters that have provided an alternative view to the larger and richer OECD economies within the WTO. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 8 not destroy domestic commercial supplies, and that the monetisation of food aid shall be phased out. The balance is between ensuring that food aid is delivered when and where it is needed, and possible circumvention of export subsidies by the developed countries using surplus food as food aid in a way that is prejudicial to the objectives of curtailing export subsidies. Other issues and the implications include the Special Products and even perhaps Sensitive Products. The latter are products that a member may declare and thus be obliged to make lesser market access commitments for that product. Special products extend this concept to developing members only for those products that are a staple or basic food of that country, and negotiations continue on how extensive this concession may be. Extending this still further is the special safeguards measure (SSM) that will allow both developing and leastdeveloped members to raise tariffs in the event of an import surge that threatens domestic producers: it constitutes a unique instrument to assist with food security, livelihood security and rural development. The literature review Who stole the gains from Trade Liberalisation to Africa? This section examines the literature on the gains from trade liberalisation to Africa from both (1) the DDA and (2) proposed agreements between African countries and the EU. Analysts are warning that the projected gains from the DDA are not what they were initially expected (hoped?) to be as an updated model database enables factors such as tariff revenue loss to be factored into recent research and the hopes of anything approaching a comprehensive DDA agreement are fading. With respect to the proposed EPA between the ACP countries the same tariff revenue loss and the related concept of trade creation/trade diversion is important, but more crucially the perceived potential damage to Africa’s industrial base, the reluctance of the EU to make meaningful reforms to their agricultural sector during the DDA negotiations and the limitations to take advantage of opportunities imposed by self-inflicted African infrastructural constraints are casting a shadow that suggests there may even be losses to at least some African countries from both the EPA and the DDA10. 10 We note that other authors have argued that developing countries in Africa in particular need to expand their South-South trade (trade between developing countries) in order to improve their own industrial bases, and that unilateral liberalisation will foster the competitiveness needed to enhance this trade. For example, Rodrik (2006) outlines how China achieved its spectacular growth rates over recent years by exporting a basket of goods that is significantly more sophisticated than what would normally have been expected from a country at a similar stage of development. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 9 Key policy points emerging Virtually all of the recent modelling work is pointing to reduced gains from the DDA, and even in some cases for developing countries, to losses. This from a combination of better models that have more recent information such as the final UR tariffs and the full implications of China’s accession to the WTO incorporated and an ability to model tariff revenue losses and the impacts of trade creation/diversion effects, the consequences of the erosion of tariff preferences, and a ‘scaling down’ of the DDA ambitions that are now being modelled as more realistic assumptions of any outcome. These same or similar factors are also contributing to the cautious results that are now coming from researchers who are looking at the EPA possibilities. These results are accentuated by the problems facing Africa in its major infrastructural and capacity constraints that will severely limit the abilities of most African countries to take advantage of the new opportunities. Africa itself must address most of these problems, and, in doing so, ensure that aid monies for these projects are well spent. However, it is not entirely clear as to where new trade opportunities may come from, as most African countries have good access into Europe under CONOTOU for most- or the EBA for the least-developed countries. The reviews A good place to review the so-called ‘disappearing gains from trade liberalisation’ is the paper by Ackerman (2005) that details how the gains are becoming both smaller and skewed towards the developed countries rather than poverty alleviation in the developing world. In other works widely cited at Hong Kong, the World Bank are revising their benefits downwards to a miserly $3.13 per head in the developing world (in contrast to the $79.04 per head in the developed world)11. Why are the gains shrinking? Part of this is that some of the assumptions are being revisited (employment, for example), while the newer version of the GTAP database enables analysts to use better trade and tariff data and incorporate both the EU expansion and 11 Anderson and Martin (2005) and Hertel and Winters (2005). Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 10 China’s WTO accession into their now-updated base work. Some of the more optimistic models employ dynamic and economies of scale assumptions that extend the scope and range of these gains, and these assumptions are rightly viewed with some scepticism. Added to this is the realisation that “free trade” is an overly optimistic and somewhat mercurial concept and therefore modellers may be better served by assuming a more realistic outcome to assist policy makers. This is realism versus idealism in essence. Other research that warns of the trade creation/diversion costs of the EPA and potential tariff revenues loss is the review by Szepesi and Bilal (2003). They consider that potentially trade creation does outweigh diversion, but there is a considerable diversion effect, and that revenue losses are likely to represent over 50% of import revenues in some countries (Francois et al, and Baunsgaard and Keen, 2004). The World Bank (Hinkle and Schiff, 2004) also finds that EPAs offer considerable potential benefits to Sub-Sahara African (SSA) countries, but they also pose a number of policy, administrative, and institutional challenges, including replacing forgone tariff revenues, avoiding serious trade diversion, appropriately regulating liberalised service industries, and liberalising internal trade. Polaski (2006) found that agricultural liberalisation benefits only a relatively small subset of developing countries. Global gains range from an insignificant $2.9 billion with a limited agricultural liberalisation at one extreme and $5.4 billion under the current DDA agricultureonly liberalisation through to a maximum of $168 billion for comprehensive liberalisation at the other extreme. Those benefiting from agricultural liberalisation include Brazil, Argentina, most of Latin America, South Africa, and some Association of Southeast Asian Nations (ASEAN) member countries, notably Thailand. Accounting for this is the ’Special Products’ (SP) scenario, where this was an ’outer bound’ of any agreement that might be reached in which least-developed countries are to shelter all their agricultural products from liberalisation as SPs. Kirkpatrick et al (2006) concur, and agree that the economic impact of the DDA is likely to be modest and smaller than earlier predicted. In particular they are worried that the gains are not shared, and in the poorer countries, with Sub-Saharan Africa as the example, poverty may worsen as these countries lose from trade liberalisation on the one hand and, on the other, face severe supply constraints that bedevil Africa. This is especially so when the dynamic or second and subsequent effects of the DDA are examined, as the developing countries have the best infrastructure to exploit these advantages. If the DDA is to be a ‘development round’, then additional measures such as ‘aid for trade’ (specific trade-related capacity-building measures) will need to be implemented. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 11 Perez and Karinga (2006) use the GTAP model to produce very gloomy results for Africa, with a welfare loss of some $0.6 billion and fiscal losses from tariff revenues from a comprehensive EPA. Even worse, the intra-African trade diversion is of the order of 18%, highlighting that the EU is destroying the very thing it wants to promote: African integration, although agriculture does gain slightly. Taking the analysis further, and mindful of the fact that all African candidates for the EPAs are aggregated together, the authors find that only a large asymmetry between what Africa and the EU give in the way of tariff elimination will result in a somewhat neutral outcome for Africa, but even here there are pitfalls for Africa in that the results are destabilising upon manufacturing and intra-African trade in particular. In short, they cannot see an up-side for Africa. This is supported by Fang et al. (2006), who use a CGE model to assess the impact of trade liberalisation on food security in SubSaharan Africa and South Asia. In a similar review Kwa (2006) comes to similar conclusions citing many of these same mainstream references above. It is against this somewhat sobering background that the paper will examine the implications for Nigeria of firstly an outcome in the DDA and secondly moving beyond an EPA agreement to a full goods-only FTA between Nigeria and the EU. Section 4 – The GTAP analysis Introduction Model, database and scenarios The objective of this section is to discuss the model and database used in this analysis and how these predict the overall welfare benefits to the respective parties12. The database is the most recent Version 6 GTAP database with the base year 2001 (Dimaranan et al., 2005), where the 2001 tariff data originating from the Market Access Maps (MacMap) database has been used with some verification and minor modifications. The main unskilled labour market closure of the model has been changed so that the supply of unskilled labour is endogenously determined by the labour supply elasticity. We believe this is more relevant to a labour-surplus economy. 12 The potential gains to FTAs between South Africa and its leading trade partners have also been assessed by tralac (Sandrey et al. 2007) using the same GTAP database and model as used in this paper. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 12 Like any applied economic model, this model is, of course, based on assumptions, both in terms of theoretical structure as well as the specific parameters and data used. Regional production is generated by a constant return to scale technology in a perfectly competitive environment, and the private demand system is represented by a non-homothetic demand system (a Constant Difference Elasticity function) 13 . The foreign trade structure is characterised by the Armington assumption implying imperfect substitutability between domestic and foreign goods. The macroeconomic closure is a neoclassical closure where investments are endogenous and adjust to accommodate any changes in savings. This approach is adopted at the global level, and investments are then allocated across regions so that all expected regional rates of return change by the same percentage. Although global investments and savings must be equal, this does not apply at the regional level, where the trade balance is endogenously determined as the difference between regional savings and regional investments. This is valid as the regional savings enter the regional utility function. The quantity of endowments (land, skilled labour and natural resources) in each region is fixed exogenously within the model, although, as discussed, alternative unskilled labour market assumptions are investigated. The capital closure adopted in the model is based on the theory where changes in investment levels in each country/region become on-line instantly, updating the capital stocks endogenously in the model simulation14. Finally, the numeraire used in the model is a price index of the global primary factor index. The global database combines detailed bilateral trade, transport and protection data characterising economic linkages among regions, together with individual country inputoutput databases which account for intersectoral linkages within regions. The database contains 96 regions and 57 sectors, and we have aggregated these to 10 regions and 41 sectors in order to keep the model within computational limits and focus on the individual member countries/regions of the FTA. These 10 regions are Nigeria and the EU27 and another eight-country/region grouping of the US, Japan, China, India, Brazil, South Africa, Rest of Africa and the Rest of the World. The applied ad valorem equivalents (AVEs) tariff data found in the standard GTAP Version 6 databases originate from the Market Access Maps (MacMap) database, which is compiled 13 Hence the present analysis abstracts from features such as imperfect competition and increasing return to scale, which may be important in certain sectors. We are therefore using what can be thought of as a base GTAP structure. 14 This capital closure adopted in the model is the so-called Baldwin closure as documented in GTAP technical paper no. 7. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 13 from UNCTAD TRAINS data, country notifications to the WTO, AMAD, and from national customs information. The MacMap database contains bound, Most Favoured Nation (MFN) and bilateral applied tariff rates (both specific and ad valorem) at the 6-digit Harmonised Systems (HS6) level. These are then aggregated to GTAP concordance using trade weights compiled from the COMTRADE database. Baseline projection 2001 – 2015 A meaningful evaluation of an anticipated policy change can be obtained by comparing the liberalisation scenario with a non-liberalisation (business as usual) base scenario. This base must contain projections of the macroeconomy and incorporate the effects of important policy changes other than specific policy changes to be analysed. Our business-as-usual baseline features a number of important policy initiatives by the EU and others that must be set in place first. These are (as shown in Box 1): • a stylised implementation of the Agenda 2000 and the Mid-Term Review Reform of the CAP; • the accession of China to the WTO; • the final implementation of the UR commitments for developing countries; • the enlargement of the EU with 12 new member countries; • the Everything But Arms (EBA) Agreement between LDCs and the EU; • the implementation (and continuation) of the AGOA on textiles and wearing apparel; • an update of India’s applied MFN tariff rates to the latest year available. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 14 Box 1. Assumptions shaping the baseline 2001 –2015 Projections Shocks to GDP, factor endowments and population Total factor productivity endogenously determined Trade Policy changes Abolishment of export quotas on textiles and apparel shipped to the EU and the US Final implementation of the UR commitments for developing countries Accession of China to the WTO Enlargement of the EU customs union and the extension of the EFTA to include the new member countries EBA agreement between LDCs and the EU AGOA on textiles and apparel EU Agenda 2000 and Mid-Term Review (MTR) Reform All direct payments deflated by 2 percent per year (maximum budgetary outlays fixed in nominal terms) Adjusted hectare and livestock premiums (direct payments) Decoupling of direct payments to a single farm payment Milk quotas unchanged Reductions in intervention prices modeled by reducing export subsidies and import tariff rates. US agricultural subsidies Agricultural expenditure fixed in nominal terms at its 2001 level As always, we apply shocks to GDP, population, labour force, and capital to project the world economy to the baseline year of 2015 – a year when the market access reforms are assumed to be completed. The projection of the world economy uses the exogenous assumptions listed in Table 1, and is important in shaping the baseline scenario. The general sources for these assumptions in Table 1 are given as a footnote to the table, and they represent the best estimates of the possible future path of the data. The GTAP model then determines changes in output through both an expansionary and a substitution effect in each country/region of the model. This expansionary effect represents the effects of growth in domestic and foreign demand shaped by income and population growth and the assumed income elasticities, while the substitution effect reflects the changes in competitiveness in each country/region shaped by changes in relative total factor productivity, cost of production, as well as any policy changes. Thus, the GTAP model uses this set of macroeconomic projections to generate the ‘best estimate’ of the global production and trade data as it will be Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 15 in 2015. Therefore, the relative growth rates between each country/region for GDP, population, labour, capital and total factor productivity play an import role in determining the relative growth in output of the commodities when projecting the world economy from 2001 to 2015, and we can now take the resulting data set from this baseline simulation as the new base for our FTA scenario. A simulation scenario measures the difference between our baseline model’s output at 2015 in the absence of the selected FTA against what it would be with the FTA introduced. Therefore the model results shown in this paper present the isolated effect of the FTA outcome. Table 1: Macroeconomic projections, annual growth rates, 2001 – 2015 Real GDP Labour Force Pop. Total Unskilled Skilled Capital TFP* Nigeria 3.1 1.9 2.9 2.8 3.5 3.1 0.4 South Africa 3.2 0.4 1.3 1.2 1.9 3.2 0.5 India 5.8 1.3 1.8 1.6 4.7 5.8 1.2 Brazil 3.3 1.1 0.9 0.6 3.5 3.3 0.5 Rest of Africa 4.0 2.0 2.6 2.5 3.6 4.0 0.4 China 7.2 0.6 0.9 0.8 3.9 7.2 1.3 Japan 1.8 -0.1 -0.2 0.2 -0.7 1.8 0.6 EU 2.2 0.0 0.2 0.2 0.2 2.2 0.5 US 3.2 0.8 1.2 1.4 1.0 3.2 0.7 Rest of World 3.7 1.2 1.8 1.6 3.7 3.7 0.4 Sources: World Bank forecasts, Walmsley (2006) and own assumptions. Note: *The annual growth rate in Total Factor Productivity is determined by the exogenous variables (GDP, unskilled, skilled labour force and capital), the model and the associated database. DDA assumptions The primary scenario considered in this paper entails the result from a possible Doha round, with the results as measured in the year 2015 in a world shaped by the baseline scenario. Differences between the so-called initial baseline scenario and this so-called primary Doha scenario are therefore the results of implementation of Doha. Note that we are not modelling reductions in either services or any non-tariff barriers. In the agricultural case, we use the tiered market access formula suggested by the G20 (Table 2 below) allowing developed countries take out two percent of their tariff lines as sensitive products while developing countries are allowed to exclude three percent of their Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 16 tariff lines. All agricultural export subsidies found in the GTAP database are eliminated, while there is no change to domestic support in our Doha scenario. We have omitted any reductions in domestic supports from the model as analysts are finding that this makes little difference to the results, and in practice they are very hard to model15. And we note that the introduction of the 2% and 3% allowed for Sensitive Products is likely to make a big difference, as the real targets are removed from the shooting gallery16. Table 2: G-20 proposal for market access Tariff rate (%) Tariff cut (%) Developed countries Tariff rate (%) Tariff cut (%) Developing countries Greater than 75 75 Greater than 130 40 Between 50.01 and 75 65 Between 80.01 and 130 35 Between 20.01 and 50 55 Between 30.01 and 80 30 From 0 to 20 45 From 0 to 30 25 Cap: 100% Cap: 150% With regard to the NAMA (Non Agricultural Market Access) reform we use the simple Swiss formula with coefficients 5 and 20 for respectively developed and developing countries, including newly acceded members. Developing countries and newly acceded countries are allowed to exclude up to 5% of their tariff lines if it does not exceed five percent of their value of imports. Non-bound tariff are bound by adding 20 percentage points (mark up) to the MFN rate. The so-called Paragraph 6 countries (Nigeria) and small vulnerable countries are not required to make any reductions in their applied tariffs but have to bind all their tariffs so that the simple average of all NAMA tariff lines do not exceed respectively 28.5 and 22 percent on average. LDCs are not required to do anything by way of reform themselves, but are likely to gain duty-free access into developed countries markets for both agricultural and nonagricultural products.17 15 We note that the EU has made domestic reforms under the MTR reforms of the CAP that may enable it to escape future restrictions imposed by a possible DDA outcome, and that current high agricultural prices on the global market are also lessening the global impacts of these domestic supports in the EU and US. 16 The latest revised draft modalities for agriculture (WTO August 2007) also propose the G20 tiered formula but with a range within which the tariff cut percent should lie for each band. Over chosen tariff cut percents lie for the most within this range. We note that we have not modelled the proposed exceptions for small vulnerable economies or the proposed maximum average reductions in bound duties for developing countries. Also our 2% and 3% allowance for Sensitive Products is well below the range suggested by the revised draft and we have not modelled any tariff quota expansion. 17 Most LDCs already effectively have this quota- and duty-free access into the EU under the Everything But Arms (EBA) agreement (except for rice and sugar), and most African countries have similar preferential access into the US under AGOA. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 17 The scenario is detailed below: • Least developed countries or LDCs: LDCs are exempt from making any commitments. • Paragraph 6 countries (including Nigeria): Countries with less than 35% binding coverage are exempt from making tariff reductions through the Swiss formula. They are, however, expected to bind 95% of non-agricultural tariff lines at an average level that does not exceed the overall average of bound tariffs for all developing countries after full implementation of current concessions. This level is calculated as 28.5%. • Small vulnerable economies: These countries are exempt from making tariff reductions through the Swiss formula, although they must bind 95% of non-agricultural tariff lines at an average level that does not exceed 22%. • Newly acceded members and developing countries: These implement the Swiss formula with a coefficient value of 20. They do, however, have the flexibility of retaining unbound tariffs or formula cut exemptions for up to 5% of all lines, as long as the lines do not exceed 5% of the member’s total import value. • Developed countries: These countries implement the Swiss formula with a coefficient of 5 and they must grant duty-free and quota-free market access for non-agricultural products originating from LDCs. The general instrument for specifying tariff reduction commitments is the so-called simple Swiss formula, defined as: t1 = (a or b) × t 0 (a or b) + t 0 where, t1 = Final bound tariff t0 = Base rate a= Coefficient for developed Members (= 5) b= Coefficient for developing Members subject to the formula (= 20) Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 18 The base rate is given as the current bound rate or, in the case of unbound tariff lines, the MFN rate plus a constant mark-up of 20 percentage points. The Swiss formula is constructed in such a way that the highest tariffs are reduced the most, thus eliminating tariff peaks. Also, the final bound tariffs will be no higher than the coefficient used in the formula, i.e. 20% for developing and 5% for developed countries18. Section 5 – The results: a plausible Doha Round outcome The big picture Table 3 shows the changes in welfare 19 from a possible Doha outcome, with the data expressed in US$ million as one-off increases in annual welfare at the assessed end point of 2015. The welfare results are given as a total value, and then this total is split between contributions from agriculture (which is itself split between agricultural export subsidy abolition and market access changes) and NAMA reforms. The overall gains of $48 billion are dominated by NAMA gains of $45 billion, thus reinforcing the ‘modern’ GTAP results which show that use of the special and sensitive products neuters an agricultural outcome from the DDA. Note that (a) global welfare changes from the abolition of export subsidies are almost zero (a gain of $7m), and (b) that we have not modelled any changes to domestic supports. Table 3: Welfare (EV) results from Doha outcome, US$m Total EV US$m Agr Export Agr market Subsidies access NAMA NGA 198 -61 2 257 ZAF 223 17 20 186 RAF 983 -295 341 937 18 In the latest ‘Chairman’s Introduction to the Draft NAMA Modalities’ (WTO July 2007) the formula proposed by the chairman to reduce bound tariffs is the Swiss formula where he suggests a coefficient for developed countries in the range of [8-9] and developing [19-23] with a mark-up of 20 percentage points to the MFN applied rate for unbound tariffs. We note that our modelled NAMA tariff reduction is not far of the mark from the chairman’s negotiation proposal. 19 The interpretation of results from a model is not straightforward. In the standard type of computer general equilibrium (CGE) such as the GTAP model these results are expressed as welfare measures that show how much better off a country/region and the world are as a result of the particular change. There is no indication of the time-path of the welfare gains in a static model, so a welfare gain of $10 million to Nigeria means that Nigeria is $10 million better off at the final year than it otherwise would have been in the absence of that change. There is also little said about the distributional aspects of these gains as there is only one ‘representative household’ in GTAP. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 19 Total EV US$m Agr Export Agr market Subsidies access NAMA 5,907 1,040 591 4,275 USA -1,189 387 548 -2,124 IND 1,534 -3 68 1,469 CHN 8,968 -67 -9 9,044 BRA 2,611 89 617 1,905 JAP 5,404 -13 224 5,193 ROW 23,532 -1,086 787 23,831 Total 48,180 7 3,265 44,907 EU Source: GTAP results Nigeria’s gains are $198 million: a loss of $61million from abolition of export subsidies 20 , $2 million from better market access for agricultural goods, and the bulk ($257 million) from the NAMA outcome. The biggest loser in dollar terms is the US, with all other countries/regions gaining. China and the rest of the world (ROW) are the biggest gainers, with all of these gains coming from NAMA. Table 4 shows the composition of these welfare gains. Globally they are spread between gains in allocative efficiency and an expansion of the capital stock that in turn is increasing production. For Nigeria there are some gains in these two components of the overall gains but the majority comes from terms of trade gains as the relative prices of Nigeria’s exports increase by more than those of imports. Not shown is that under the employment closure that we are using Nigeria’s employment rate increases by 0.036% and wages for those in employment increase by a greater 0.107%. While not massive, these gains are incrementally important. Table 4: Composition of the welfare gains from Doha, US$million Total EV Nigeria Global total Allocative Unskilled Capital Terms of efficiency Labour stock trade 198 18 2 36 143 48,180 20,430 225 27,539 -14 Source: GTAP results 20 This occurs because global agricultural export prices increase as a result, and as Nigeria is an agricultural importer this has a negative impact. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 20 The individual components of the contributions to factor income are shown in Table 5, where the contribution from natural resources (right-hand column) is clearly shown. Overall real GDP increases by 0.09% in Nigeria as a result of the Doha outcome. Table 5: Factor income contributions – relative % changes Total TOT Nigeria Real Factor GDP Income 0.46 0.09 Contributions from Land 0.45 Unskilled Skilled labour labour 0.01 0.02 Natural Capital 0.01 resources 0.07 0.34 Source: GTAP result Extending Table 5 to show the agricultural factor income (Table 6) highlights that this agricultural contribution is relatively minor as the contribution here is less than one-quarter of the total. Table 6: Agricultural factor income Primary Agricultural Contributions from Factor Income Nigeria Land 0.12 Unskilled Skilled labour labour 0.05 0.07 Capital 0.00 0.00 Source: GTAP result The changes by GTAP sector Table 7 shows the relative changes in the key Nigerian GTAP sectors as a result of this Doha outcome. These changes are driven almost exclusively by the natural resources sector of oil, coal and gas. Here output increases by 0.08% (driven by global price increases of 0.62%). Leather goods are the only other productive sector to show any significant changes, and here output declines by 7.33% as exports decline. Output in the service sector increases by 0.17% even though we are not modelling changes specifically in this sector. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 21 Table 7: Changes in Nigerian production and trade (%) from base post-Doha Change Contributions from Output % Ex Sub Change in Quant % Agr access NAMA exports imports Resources Coal/oil/gas 0.08 0.00 0.00 0.08 0.08 0.04 -7.33 -0.05 -0.47 -6.81 -11.05 -0.05 0.17 -0.05 -0.02 0.25 0.49 0.49 Manufacturing Leather Services Source: GTAP results The changes made to Nigeria’s import tariffs on products originating from the markets of the Rest of Africa, EU, US and Rest of the World are shown in Annex Table A1, while the comparable changes made to tariffs faced by Nigerian exporters are shown in Annex table A2. Note that tariff changes for oil exports are minor, suggesting that the price increases are coming through enhanced global economic activity. While there are several tariff reductions in many products in Nigerian markets these have little or no impacts on production and trade as exports are very minor in these sectors. Also note that (a) similarly there are some changes in Nigerian import tariffs in agriculture but that these are off large base tariffs, and (b) there are no changes in Nigerian import tariffs in either natural resources or manufacturing as Nigeria is exempt from making any reductions in non-agricultural goods. Tables 8 and 9 take the next step and expand upon the changes to relative tariffs and prices to show the specific details of the changes to firstly export destinations (in Table 8) and then import sources (in Table 9). In resources are some major changes in the exports (Table 8) of coal, oil and gas, with a big increases to both the EU and US – but some of this is trade diversion away from the rest of Africa. In manufacturing trade, changes are limited to a relatively minor $17.7 million decline. Table 8: Changes in Nigerian exports, $ million Other crops Rest of Africa 0.2 EU -1.8 US -0.1 Brazil 0.0 Rest of World -1.9 Total -3.3 Coal oil gas -69.2 53.5 103.2 24.2 11.9 179.7 -0.3 -12.0 -0.9 -0.5 -0.1 -13.7 -0.4 -4.6 -1.2 0.0 -0.4 -6.4 0.2 -3.6 -0.1 0.0 -1.2 -4.0 Leather goods Subtotals Services Agriculture Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 22 Natural resources Manufacturing Total Rest of Africa -69.2 EU 53.5 US 103.2 Brazil 24.2 Rest of World 11.9 Total 178.9 -4.5 -15.1 -1.1 -0.3 1.2 -17.7 -74.0 30.2 100.8 24.0 11.5 150.7 Source: GTAP results. Changes in imports as shown in Table 9 highlight that these are very minor, with only the dairy products (with a import substitution away from the EU towards the rest of the world), petroleum products as the sector readjusts marginally to enhanced crude oil exports, and the catch-all ‘other manufacturing’ products show noteworthy changes. Table 9: Changes in Nigerian imports, $ million Rest of Africa EU US Other crops 0.0 0.3 -0.3 India 0.0 Coal oil gas 0.0 0.0 0.0 0.0 Milk products 1.7 -53.0 -0.1 Other food 0.7 0.5 Textiles 0.4 Leather goods China 0.0 Rest of World 0.0 Total 0.0 0.0 0.0 0.0 0.0 0.0 61.2 10.6 0.7 0.1 0.1 3.1 5.7 4.2 0.4 -0.5 -4.9 2.3 2.4 0.2 1.7 0.2 0.0 -2.3 0.3 0.0 Petroleum products 0.0 5.4 0.9 0.0 2.0 0.4 11.6 Other transport 0.0 1.3 0.8 2.6 -4.2 3.4 3.9 Electrical machinery 0.0 3.7 1.4 2.7 -3.5 1.2 5.7 Other manufacturing 0.6 9.0 3.2 15.5 -15.1 -0.1 11.3 Services 1.5 15.2 6.6 0.3 -1.9 -1.3 20.1 Agriculture 3.6 -61.1 5.6 1.9 0.1 67.9 24.7 Natural resources 0.0 0.1 0.0 0.0 0.0 0.0 0.1 Manufacturing 3.6 37.0 9.0 26.6 -38.3 6.4 44.3 Total 8.8 -8.8 21.2 28.9 -40.1 73.0 89.2 Subtotals Source: GTAP results. Overall, increased oil exports are clearly driving the changes for Nigeria. These exports appear to be ‘fuelled’ by increased global economic activity rather than any tariff or market access changes as such. In agriculture, Doha has a limited impact, while there are marginal changes in the manufacturing sectors that are driven by resources reallocations with Nigeria rather than enhanced trade opportunities. Overall, Doha does little for Nigeria except to increase the value of its considerable oil exports marginally. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 23 Section 6 – extending the Cotonou/EPA to an FTA between Nigeria and the EU The African, Caribbean and Pacific (ACP) countries face a complete shift in their trade relations with the European Union (EU). Under the Lomé Conventions these countries enjoyed unilateral trade preferences into the EU market for almost three decades. The Fourth Lomé Convention was replaced by the Cotonou Agreement in 2000, which extends these unilateral trade preferences up to the end of 2007. Thereafter, negotiated WTO compatible reciprocal trade agreements, called Economic Partnership Agreements (EPAs) will replace the current non-reciprocal preferential trade regime. These EPAs have to be concluded by no later than the beginning of 2008. EPA negotiations started in September 2002, as at September 2007 they were looking in danger of missing the deadline for replacing Lomé. While the reciprocal nature of the trade preferences has been controversial, in general the emphasis has been much more on ACP access into the EU rather than the converse of EU preferential access into the ACP countries. However, given that the EPAs are being negotiated, it will be instructive to examine the welfare implications for reciprocal free trade access between the EU and Nigeria, or, in effect, a goods-only free trade agreement (FTA) between the two partners. This will be undertaken using the same GTAP model, with all other factors held constant. To set the scene, Tables 10 and 11 display the trade between Nigeria and the EU as reported in MacMaps for the 2001-year for Nigerian exports (as reported by the EU as imports from Nigeria) and EU exports to Nigeria (as reported by Nigeria as imports from the EU). Table 10 demonstrates the overwhelming importance of oil and gas exports from Nigeria, as they contribute over 88% of the total trade by value. These imports are effectively duty-free for all products. This suggests that under the Cotonou preferences there is little left for Nigeria to gain other than ensuring that these preferences become permanent and safe from a WTO challenge. Trade is somewhat in balance from the EU perspective, with EU imports from Nigeria totally $4,387 million and EU exports to Nigeria totally a lesser $4,117 million. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 24 Table 10: EU imports from Nigeria, 2001 $million and duty % trade duty % cumulative Grand Total 4,387.33 0.00% total oil gas 3,867.66 0.00% 88.16% other crops 162.82 0.00% 91.87% leather products 105.58 0.00% 94.27% other food products 70.06 0.01% 95.87% petroleum products 51.55 0.00% 97.04% forestry products 24.34 0.02% 97.60% machinery, etc. 22.32 0.01% 98.11% textiles 17.44 0.03% 98.51% chemicals rubber plastics 14.19 0.00% 98.83% metal products 10.17 0.00% 99.06% other 41.20 0.08% 100.00% Source: MacMaps database Table 11 now shows the Nigerian imports from the EU for the same period. Here several features are apparent. The first is that the average duty is assessed at 22.3%, while the second is that Nigerian imports are much more diverse than the oil-dominated northwards trade flow. Thus, EU exports can be expected to increase considerably more than EU imports under an FTA with Nigeria. Table 11: Nigerian imports from EU (EU exports), 2001, $ million and duty% GTAP Sectors trade $m duty % cumulative % Grand 4,117.07 22.3% 100.0% other machinery 1,070.96 14.9% 26.0% chemicals rubber plastic 676.18 21.1% 42.4% vehicles 449.14 20.5% 53.3% other foods 306.69 30.4% 60.8% electrical goods 295.84 11.5% 68.0% iron steel 186.59 24.0% 72.5% petroleum products 155.76 28.2% 76.3% paper products 149.19 11.6% 79.9% dairy products 128.17 11.0% 83.0% metal products 99.58 29.8% 85.5% textiles 90.95 40.6% 87.7% beverage tobacco 88.19 116.3% 89.8% other transport 88.16 10.5% 91.9% Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 25 GTAP Sectors trade $m duty % cumulative % other mineral products 87.73 27.4% 94.1% sugar products 46.63 15.0% 95.2% non-ferrous metal products 39.30 11.4% 96.2% forestry products 27.71 53.0% 96.8% wheat 25.07 5.0% 97.4% other manufacturing 23.68 40.4% 98.0% leather products 22.71 47.4% 98.6% other meats 15.12 59.0% 98.9% apparel 10.74 50.3% 99.2% all others 32.92 40.6% 100.0% Source: MacMaps database The GTAP results for an FTA The previous section examined the impacts of the DDA for Nigeria. This section will take another step and examine the welfare and trade implications of moving to comprehensive tariff- (and quota-) free merchandise trade between Nigeria and the EU (note that this bypasses the EPA process and goes straight to a comprehensive goods-only FTA). The primary scenario considered in this section now entails the result from the removal of merchandise trade tariff and barriers between Nigeria and the EU as set out in a possible FTA, with the results as measured in the year 2015. Results: the implications of the FTA The big picture Table 12 shows the changes in welfare from the FTA, with the data expressed in US$ million as one-off increases in annual welfare at the assessed end point of 2015. Nigeria’s gains are a very solid $856 million, a similar outcome to the EU’s gains of $1,119 million. All other countries are losers in dollar terms, and especially the US. The Rest of Africa loses some $118 million, while South Africa’s losses are a lesser $43 million. Overall, global welfare is worse off by $1.2 billion. The gains to Nigeria are concentrated in the contributing factors of capital stock ($784m) and terms of trade (ToT) from better relative prices between exports and imports. Allocative efficiency worsens by $216 million. The EU’s gains are spread across all of the four categories. In further examining the GTAP results we are able to decompose the results to confirm that all of Nigeria’s gains (and all other outcomes) result Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 26 from the abolition of duties in Nigeria against EU imports, as the EU itself has effectively no tariffs against Nigerian imports to reduce. Table 12: Change in welfare (EV of income) due to EU/Nigeria FTA, $ million at 2015 Allocative Efficiency Total Nigeria Term of Labour Trade Capital 856 -216 -21 784 309 1,119 343 69 81 626 South Africa -43 -9 -5 -13 -16 Rest of Africa -118 -19 -6 -35 -58 China -307 -47 -5 -124 -132 US -730 -126 -9 -542 -54 India -312 -66 -8 -181 -57 Brazil -83 -26 -3 -41 -14 Japan -255 -77 -3 -158 -17 Rest of World -1,344 -214 -9 -540 -581 Total -1,214 -456 3 -769 8 EU Source: GTAP results Nigeria’s gains come about exclusively through its own reduction in import tariffs to zero on EU27 imports, and this increased welfare stems mostly from an increased investment/capital stock in the country. The reduction in tariffs reduces the price of producing capital goods used to expand the countries capital stock, and this reduction in turn increases the return to investments in Nigeria relative to Rest of the World and thereby attracting increased investments in the country. This increased investment increases the capital stock in the country and moves the production frontier outwards in Nigeria, thus increasing the amount of goods that can be produced domestically. Over time this increases welfare by $784 million as shown under the ‘capital’ heading in Table 12 above. We note that since the GTAP database and model do not have any international transfer of receipts between countries, the welfare gains of capital accumulation can be slightly over/understated in each region/country if part of the capital stock originates from foreign investments in a given country. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 27 Changes in trade flows Table 13 introduces the aggregate overall changes to trade flows for the partner countries in 2015, expressed as percentage changes for both exports and imports and then in US$ million for the trade balance. Nigeria has increased exports globally once all markets are accounted for, but imports increase by more as a percent and the country registers a significant negative trade balance of some $406 million. The trade differences for the EU are positive. Table 13: Percentage change in the quantity of total imp\exp & trade balance, 2015 Nigeria EU Exports % 3.1 0.0 Imports % 5.4 0.1 -406 99 Trade balance $m Source: GTAP results The specific sector results This section will discuss the trade changes in the GTAP sectors, with details shown in Tables 14 and 15 for exports and imports respectively. These tables split the GTAP sectors into primary and secondary agriculture, natural resource and manufacturing before displaying (a) the AVE or the initial pre-FTA average ad valorem tariff facing either Nigerian exports in the EU market for exports or EU tariffs into Nigeria for imports, and (b) the change in either Nigerian exports or imports into or from the EU in response to reducing these border tariffs to zero, and (c) the changes with the Rest of the World – defined as all others here, and finally (d) the final overall outcome once trade creation and trade diversion have been accounted for. These trade flow changes are given in both US dollar values and percentage changes from the base to put them in perspective. For exports in Table 14, only those sectors where the changes in total exports are greater than $5.0 million are shown (thus totals may not reconcile. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 28 Table 14: Changes to Nigerian exports following the EU FTA, EU tariffs, $ million and quantity percent% EU27 AVE tariff Rest of World Total change % change change %change change % change in value million $ quantity value million $ quantity value million $ quantity of exports exports of exports Primary other crops 0.0 6 5 7 subtotal (incl other) 3 4 11 4.7 9 18 Secondary other foods 0.0 7 27 4 7 sub total (inc other) 24 7 11 25.6 14 Natural resources coal oil gas 0.0 98 2 98 sub total (inc other) 219 1 224 1.4 317 322 Manufacturing textiles 0.0 4 48 2 48 6 48.1 leather 0.0 56 60 7 60 63 60.1 lumber 0.0 14 52 3 51 17 52.1 petroleum products 0.0 1 8 11 8 11 7.5 plastic 0.0 5 44 8 49 12 46.9 other manufacturing 0.0 10 57 8 56 17 56.2 chemical rubber subtotal (inc other) 97 services 90 Grand Total 299 48 22 125 145 22 415 214 21.3 713 3.1 Source: GTAP results Given that there is no tariff protection in the EU faced by Nigerian exports we would need to look elsewhere for the reason as to why these exports increased. That reason is the results of the second round effects of increased competition on the Nigerian market place reducing domestic output prices, making Nigerian exports more competitive in the global market place. We noted above in the general literature review section that many analysts feared that preferential access of EU imports into Africa would destroy the African production base. Our results suggest just the opposite in that the increased competition has made Nigeria more competitive internationally. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 29 For imports into Nigeria from the EU, as shown in Table 15 (where again only those sectors where the changes are at least $5 million are shown), there are increases in most sectors in response to some very large tariff levels. Overall, imports from the EU increase by just on five billion dollars, but as some $3.8 billion of this is trade diversion away from the Rest of the World the net result is a much lesser increase of only $1,120 million in new trade or trade creation. More importantly, this trade diversion suggests a large potential tariff revenue loss to Nigeria, and indeed a ‘rule of thumb’ calculation from the GTAP results indicates that this loss is in the vicinity of $900 million. By sector, there is an increase in agricultural imports from the EU of $446 million, with $262 of this diversion from other sources for a net increase of $184million. As there are no changes in natural resources the remaining increases are in the manufacturing sector. Here there are several large changes shown, but again much of this is trade diversion from other sources. Table 15: Changes to Nigerian imports following the EU FTA, Nigerian tariffs, $ m and quantity % EU27 Rest of World Total change % change change %change change %change AVE in value quantity value quantity value quantity tariff million $ of imports million $ imports million $ imports Primary Vegetables, fruits 94.9 16 684 -6 43 subtotal (incl other) -33 -27 10 55.7 16 Secondary other meats 60.0 60 115 -21 -97 40 53.3 vegetable oils 66.6 60 1,043 -41 -61 19 26.5 dairy products 10.8 78 37 -62 -34 15 3.8 other foods 24.3 112 25 -66 -48 46 7.7 bev tobacco 120.8 80 81 -29 -71 52 36.8 403 sub total (inc other) -235 168 Manufacturing textiles 40.0 512 476 -337 -54 175 23.8 apparel 51.4 145 875 -84 -55 61 35.5 leather 47.3 118 285 -77 -83 40 29.8 lumber 53.2 90 202 -22 -83 68 94.7 petroleum product 27.9 621 82 -323 -35 298 17.9 chem rub plastic 20.7 682 104 -509 -41 172 9.1 Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 30 EU27 Rest of World Total change % change change %change change %change AVE in value quantity value quantity value quantity tariff million $ of imports million $ imports million $ imports other mineral prod 27.0 241 101 -189 -50 52 8.4 iron/steel 23.6 211 130 -167 -34 43 6.6 non ferrous metal 11.2 19 75 -15 -28 5 5.9 metal products 29.9 160 327 -128 -40 32 8.7 vehicles 20.8 236 50 -179 -48 57 6.7 other transport 10.9 59 120 -67 -9 -9 -1.1 electrical goods 12.4 285 91 -250 -31 35 3.1 other machinery 14.8 1,047 90 -876 -38 171 4.9 38.9 144 230 -93 -72 51 26.7 other manufacturing 4,613 subtotal (inc other) 0.0 services -3,360 -137 -6 4,926 Grand Total 1,253 -182 -6. -3,806 -319 -6.2 1,120 5.4 Source: GTAP results Changes in output Table 16 follows through from the trade results to show the changes in the quantity of output, exports and imports, and the change in the real price of these outputs. In order to keep the table manageable only the GTAP sectors where the change in production is at least $10 million in either direction are shown. The output changes are spread across a number of sectors, with petroleum products being the main changes in value terms. Note that there is a price reduction in all of the sectors shown as a result of the FTA with the EU. Table 16: Change in quantity of output, exports, imports and real prices (%) Change in real price of production % change endowments value $ million -28 in production -0.4 and output prices -1.8 vegetables, fruits -164 -0.2 -2.1 Subtotal (with others) -189 -68.5 -5.4 other grains other meats -35 Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 31 Change in real price of production other foods beverage, tobacco Subtotal (with others) % change endowments value $ million -32 in production -4.6 and output prices -6.0 -47 -21.2 -4.6 -117 fish -83 -0.1 -6.6 coal oil gas 166 0.8 -0.2 Subtotal (with others) 87 textiles -54 -10.1 -5.4 apparel -46 -7.5 -5.7 leather 33 26.4 -5.9 lumber -64 -15.3 -6.6 -273 -6.5 -1.9 chemical rubber plastic -88 -0.4 -6.3 iron & steel -31 2.9 -6.8 metal products -27 4.4 -7.4 vehicles -17 -6.5 -7.0 12 26.4 -5.5 3.8 -5.0 petroleum products Machinery, etc. Subtotal (with others) -563 services -443 -1,225 Grand Total Source: GTAP simulations Section 7 – Labour markets and the Unskilled Labour closure In the standard GTAP model, the total labour supply is fixed exogenously. In other words, the model assumes that there is full employment in all countries/regions of the world. This is a very simple assumption which is of course not always correct, and especially so in the case of Nigeria with its large unemployment rate of around 25%. Therefore we have extended the standard model so that the total unskilled labour supply is modelled using a labour supply curve which specifies the relation between labour supply and the real wage in each region. Importantly, note that we have the same labour market closure for all countries in the simulation. We believe that this particular section of the analysis potentially makes an important contribution to the nexus between trade policy and welfare redistribution in developing Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 32 countries. The results of the FTA simulation as given in this paper are driven from the labour market assumption as displayed in rows (B) in Table 17 below21, where the welfare gains for Nigeria are some $856 million and the increased real GDP is 1.0%. Not shown earlier is that the EU FTA, all other things held constant, reduces Nigeria’s CPI or inflation rate by 4.6% under the assumption used. The key employment issue is the one shown in Table 17 in the centre of the table (second bloc B) under the heading ‘Nigeria’, where the Nigerian story on unskilled labour is told (recall that the supply of skilled labour is held fixed). Under this closure, whereby the unskilled labour supply is a function of the unemployment rate, the employment of unskilled labour decreases by 0.37 percent and the real wage rate by 1.1%. To the right of this we see limited change in the EU. Section (A) in Table 19 shows what may be thought of as a general trade union position seeking to protect those already in employment. In this extreme position, the level of employment is fixed and all adjustments must take place within the wage rate. This is good for those employed, but their wage rate decreases by 1.7% in order for them to keep these jobs. It is however marginally better for the economy, as the welfare gains increase to $912 million and GDP increases by 1.1%. At the other extreme we have section (D), where the real wage is fixed and all adjustments must come through the number of unskilled persons employed. Here the results show that employment is down by 1.0% in order to maintain this wage rate, and that has a cost to the economy as the welfare gains are lower ($763 million). This is again in turn contrasted by alternative (C), where the real wage rate is pegged to the inflation rate (recognising of course that this inflation rate is itself a function of the labour market closure). Here, the welfare gains are some $1,269 million or 1.6% of real GDP with the real wage change set at the inflation rate of minus 5.5%. The employment change is now an increase of 2.4% (this is because the inflation rate is negative and wages are falling in real but not nominal terms). This is a dramatic result which highlights that if a developing country like Nigeria is serious about increasing both welfare and employment in the economy, then policies moving towards creating jobs rather than rewarding those actually in employment are a superior option for policy makers. 21 The mathematical derivation of the equation used is shown in Annex B to ensure readers that it is both mathematically correct and economically sensible. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 33 Table 17: Unskilled labour market closure, % change employment/real wage Nigeria EV real CPI million US$ GDP % % 912 1.10 -4.70 A 1269 763 1.00 -4.60 1.60 -5.50 0.90 -4.30 B C D EU27 Fixed Employment 0.00 0.00 empl. Real wage -1.72 0.05 Employment -0.37 0.00 (1-U) Real wage -1.10 0.05 R. Wage Employment 2.40 0.04 CPI Real wage -5.48 0.03 Fixed Employment -1.03 0.12 R. Wage Real wage 0.00 0.00 U 856 Nigeria Source: GTAP results References Ackerman, F. 2005. The shrinking gains from Trade: A critical assessment of Doha Round projections. Global development and Environment Institute Working Paper No. 05-01, Tufts University, October 2005. Adenikinju, A.F. 2005. African imperatives in the new world order: country case study of the manufacturing sector in Nigeria. In Ogunkola, O.E. and Bankole, A. (eds.), Nigeria’s imperatives in the new world trade order. African Economic Research Consortium (Nairobi, Kenya) and the Trade Policy Research and Training Programme (Ibadan, Nigeria). Anderson, K. and Martin, W. (eds.). 2005. Agricultural Trade reform & the Doha Development Agenda. Washington DC: World Bank. Baunsgaard, T. and Keen, M. 2004. Tax Revenue and (or?) Trade Liberalization Working Paper. IMF, September 2004. [Online]. Available:http://www.imf.org/External/np/res/seminars/2004/tbmk.pdf. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 34 Bouet, A., Decrex, Y., Fontagne, L., Jean, S. and Laborde, D. 2005. A consistent, advalorem equivalent measure of applied protection across the world: The MAcMap-HS6 database. CEPII No 2004 – 22 December (updated September 2005). [Online]. Available: http://www.cepii.fr/anglaisgraph/workpap/pdf/2004/wp04-22.pdf. Briggs, I. N. 2007. Nigeria: mainstreaming trade policy into national development strategies. African Trade Policy Centre (ATPC) work in progress No 52. Addis Ababa, Ethiopia: United Nations Economic Commission for Africa.. Dimaranan, B.V. (ed.). 2005. Global trade, Assistance and production: the GTAP 6 Data Base. Center for Global trade Analysis, Purdue University. Fang, Cheng, Jian Zhang and BenBelhassen, B. 2006. The Impact of Multilateral Trade Liberalization on Food Security in Sub-Saharan Africa and South Asia. Paper presented at 9th Annual GTAP Conference, Addis Ababa, Ethiopia, June 2006. Francois, J., McQueen, M. and Wignaraja, G. 2005. European Union – Developing Country FTAs: Overview and Analysis. World Development Vol 33, No 10, pp. 1545 – 1565. Hertel, T. and Winters, A. (eds.). 2005. Putting Development Back into the Doha Agenda. Washington DC: World Bank. Kirkpatrick, C., George, C. and Scrieciu, S. 2006. Sustainability Impact Assessment of Proposed WTO Negotiations’, Institute for Development policy and Management. University of Manchester, May 2006. Kwa, A. 2006. Recent Assessments: Africa To Lose Out From WTO Negotiations, Even In Agriculture. Focus on Global South, June 2006. Downloaded from http://www.focusweb.org/recent-assessments-africa-to-lose-out-from-wto-negotiations-evenin-agricu.html. Perez, R. and Njuguna Karingi, S. 2006. Will the Economic Partnership Agreements foster the Sub-Saharan African Development?, United Nations Economic Commission for Africa, 2006. Polaski, S. 2006, Winners and Losers: Impact of the Doha Round. Washington D. C.: Carnegie Endowment for International Peace. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 35 Rodrik, D. 2006. What’s so special about China’s exports? Paper prepared for the project on ‘China and the Global Economy 2010’ of the China Economic Research and Advisory programme. Sandrey, R., Jensen, H.G., Vink, N. and Fundira, T. 2007. South Africa’s way ahead; trade policy options. Stellenbosch: US Printers (tralac). Szepesi, S. and Bilal, S. 2003. EPA Impact Studies: SADC and the regional coherence. European Centre for Development Policy Management. INBrief No 2B – September 2003. Walmsley, T.L. 2006. A Baseline Scenario for Dynamic GTAP Model. Revised March 2006 for the GTAP 6 Database. Center for Global Trade Analysis, Purdue University. WTO. 2007. Chairman’s Introduction to the Draft NAMA Modalities. Negotiating Group on Market Access. JOB(07)/126. July 2007. WTO. 2007. Revised Draft Modalities for Agriculture, Committee on Agriculture Special Session. TN/AG/W/4 and Corr.1 August 2007. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 36 Annex table A1: Changes in Nigerian import tariffs with Doha Initial tariffs (percent) Tariff changes (percentage points) Rest Rest Sector/source Wheat of Africa EU US of Rest World Africa Rest of EU US World 1.0 5.0 5.0 5.0 Other grains 37.2 52.0 33.3 30.9 0.71 0.28 0.00 0.01 Vegetables, fruits 99.9 95.0 100.0 77.1 6.11 9.50 10.00 4.64 Oil seeds 19.5 19.5 18.0 8.0 no changes Plant fibres 5.1 2.7 5.0 4.5 no changes Other crops 21.6 23.3 15.1 27.2 no changes Cattle 19.9 1.8 17.4 9.5 no changes Other agr products 21.5 24.4 45.4 28.0 0.00 2.22 0.00 Fish 11.2 1.3 15.1 6.2 no changes Forestry 11.2 11.2 15.0 5.9 no changes Coal oil gas 13.8 8.0 15.0 2.0 no changes Other minerals 16.7 17.2 10.7 9.9 no changes 2.4 10.2 5.2 9.3 no changes Poultry etc 51.3 60.0 31.8 27.2 0.16 0.79 0.27 0.66 Vegetable oils 60.4 66.6 31.5 65.8 0.16 2.12 0.53 0.30 Dairy 30.6 10.8 25.6 16.0 2.59 0.15 1.93 0.02 Rice products 73.3 68.3 75.0 75.0 no change Sugar 17.4 15.0 15.0 17.4 no change Other foods 45.2 24.3 16.1 19.9 0.07 0.24 0.40 0.35 tobacco 139.3 120.8 62.2 133.8 0.20 0.50 0.68 0.61 Textiles 37.8 40.0 54.7 45.0 no changes Clothing 48.3 51.4 50.6 53.9 no changes Leather products 41.7 47.3 49.2 46.2 no changes Forestry products 35.4 53.2 59.3 57.2 no changes Paper products 11.8 10.4 6.5 7.7 no changes Petroleum prod 28.2 27.9 29.6 24.4 no changes Chem plast rubber 54.3 20.7 19.7 20.4 no changes Mineral products 24.5 27.0 25.1 14.8 no changes Iron steel 18.0 23.6 29.0 24.9 no changes Non-ferrous metal 10.6 11.2 14.3 11.1 no changes Metal products 33.4 29.9 28.6 33.8 no changes Vehicles 35.0 20.8 19.1 19.0 no changes Other transport 12.9 10.9 10.5 12.6 no changes Beef no changes 0.00 Beverages, Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 37 Initial tariffs (percent) Tariff changes (percentage points) Rest Rest Sector/source of Africa EU US of Rest World Africa Electrical mach 15.9 12.4 12.4 21.9 no changes Machinery, etc. 17.5 14.8 16.4 23.2 no changes Oth manufactures 61.8 38.9 29.9 34.1 no changes Rest of EU US World Source: GTAP results. Note that here (and in the next Table) ROW refers to the ‘Rest of the World’ as used in the GTAP simulations and not all other countries except the Rest of Africa, EU and the US. This is because while there are some differences in the tariffs for say India and China the trade flows are not significant. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 38 Annex Table A2: Changes in export tariffs faced by Nigeria as a result of Doha. Sector/destination Wheat Other grains Vegetables, fruits Oil seeds Plant fibres Other crops Cattle Other agr products Fish Forestry Coal oil gas Oth minerals Beef Poultry, etc. Vegetable oils Dairy Rice products Sugar Other foods Beverages, tobacco Textiles Clothing Leather products Forestry products Paper products Petroleum products Chem plast rubber Mineral products Iron steel Non-ferrous metal Metal products Vehicles Other transport Electrical machinery Machinery, etc. Other manufactures Initial tariffs (percent) Rest of Africa EU US 5.0 0.0 0.0 5.0 0.0 2.3 20.0 1.6 0.6 15.4 0.0 0.0 5.0 0.0 2.0 20.7 0.0 0.1 11.9 0.0 0.0 12.4 0.0 0.0 10.0 0.0 0.0 10.8 0.0 0.0 2.3 0.0 0.0 11.3 0.0 0.1 0.0 81.6 0.0 10.0 0.0 0.0 16.7 0.2 0.2 5.3 26.8 11.1 9.9 0.0 0.0 21.9 0.0 0.0 19.2 0.0 0.2 20.6 0.9 7.7 18.9 0.0 0.0 20.8 0.0 0.0 17.8 0.0 0.1 14.8 0.0 0.4 12.7 0.0 0.1 11.4 0.0 1.2 14.5 0.0 1.1 18.7 0.1 1.5 14.0 0.0 0.0 11.6 0.0 0.2 17.7 0.0 0.9 11.4 0.0 0.0 12.7 0.0 0.0 9.0 0.0 0.6 8.3 0.0 0.9 28.4 0.0 0.3 Rest of World 0.9 26.2 17.3 11.2 1.0 3.3 1.7 1.1 4.2 4.1 2.6 1.7 12.5 2.2 7.2 15.9 1.7 2.5 6.6 20.9 9.3 12.8 5.1 5.4 3.0 4.8 6.2 11.4 7.6 3.6 6.6 6.5 0.8 0.7 5.9 0.9 Tariff changes (percentage points) Rest Rest of Africa EU World US 0 0 0 0 0 0 1.05 3.66 0 0.1 0.16 2.03 0.01 0 0 0 0 0 0 0.24 2.41 0 0.03 0.01 0 0 0 0 0.01 0 0 0.04 0 0 0 0.2 0.37 0 0.01 0.11 0.01 0 0 0.02 0 0 0.05 0.04 0 0 0 2.29 0.05 0.02 0 0.16 0 0.1 0.11 1.25 0 12.02 4.34 0.9 0 0 0 0.01 0 0 0 0.01 0 0.02 0.09 0.16 0.01 0.5 0.13 1.78 0.01 0 0 0.89 0 0 0 4.01 0.01 0 0.02 0.13 0.31 0 0.12 0.37 0 0 0 0.13 0.28 0 0 0.67 0.01 0 0.59 1.16 0.01 0.04 0.35 1.46 0 0 0 1.49 0 0 0.02 0 0.03 0 0 1.39 0 0 0 0.67 0 0 0 0.05 0 0 0 0.09 0.08 0 0.18 0.86 0.04 0 0.13 0.06 Source: GTAP results – see footnote for the previous table. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 39 Annex B: Derivation of the labour market assumptions In the standard GTAP model the total labour supply is fixed exogenously. In other words, the model assumes that there is full employment in all countries/regions of the world. This is a very simple assumption which is of course not always correct and especially so in the case of Nigeria with its large unemployment rate of around 25%. Therefore we have extended the standard model so that the total unskilled labour supply is modelled using a labour supply curve which specifies the relation between labour supply and the real wage in each region. This is shown in Figure A1. Figure A1. Labour supply curve determining employment level and the real wage A s y m p t o t e Real wage Labour force In each region/country we assume that the unskilled labour supply curve will have the shape above according to the following mathematical equation:22 l = a – b/real wage Where l is the amount of employed unskilled labour, a > 0 is an asymptote interpreted as the maximal potential amount of available unskilled labour force and b is a positive parameter determining the curve in Figure 1. The labour supply elasticity E in respect to the real wage is equal to: E = b/[(a x real wage) – b] But the labour supply elasticity can also be expressed as a function of the unemployment rate using the fact that 22 The assumed mathematical equation depicting the labour supply curve is taken from work done by van Meijl et al. (2006) in modelling land use in the GTAP model. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 40 Unemployment rate = 1 – l/a So that the labour supply elasticity E can be expressed as a function of the unemployment rate (u) E = u/(1 – u) which is directly observable in statistics from the International Labour Organisation (ILO) for many countries in the world. This is very convenient since the GTAP model/database is a global model and the labour supply curve has to be estimated for all regions/countries in the model. The ILO calculated elasticities for the 12 countries/regions specified in this paper, and these are shown in Table A1 below. Table A1: Unemployment rate and estimated unskilled labour supply elasticities. U Elasticity South Africa 0.27 0.362 Botswana 0.24 0.312 RSACU 0.34 0.511 Nigeria 0.25 0.333 Rest of Africa 0.25 0.333 EU27 0.09 0.100 US 0.05 0.054 India 0.04 0.045 China 0.04 0.044 Brazil 0.09 0.098 Japan 0.04 0.046 Rest of World 0.08 0.081 Source: ILO (International Labour Organisation) and own assumptions. Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 41 Working Papers 2002 US safeguard measures on steel imports: specific implications by Niel Joubert & Rian Geldenhuys. WP 1/2002, April A few reflections on Annex VI to the SADC Trade Protocol by Jan Bohanes WP 2/2002, August Competition policy in a regional context: a SADC perspective on trade investment & competition issues by Trudi Hartzenberg WP 3/2002, November Rules of Origin and Agriculture: some observations by Hilton Zunckel WP 4/2002, November 2003 A new anti-dumping regime for South Africa and SACU by Stuart Clark & Gerhard Erasmus WP 1/2003, May Why build capacity in international trade law? by Gerhard Erasmus WP 2/2003, May The regional integration facilitation forum: a simple answer to a complicated issue? by Henry Mutai WP 3/2003, July The WTO GMO dispute by Maxine Kennett WP 4/2003, July WTO accession by Maxine Kennett WP 5/2003, July On the road to Cancun: a development perspective on EU trade policies by Faizel Ismail WP 6/2003, August GATS: an update on the negotiations and developments of trade in services in SADC by Adeline Tibakweitira WP 7/2003, August An evaluation of the capitals control debate: is there a case for controlling capital flows in the SACU-US free trade agreement? by Calvin Manduna WP 8/2003, August Non-smokers hooked on tobacco by Calvin Manduna WP 9/2003, August Assessing the impact of trade liberalisation: the importance of policy complementarities and policy processes in a SADC context by Trudi Hartzenberg WP 10/2003, October Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 42 An examination of regional trade agreements: a case study of the EC and the East African community by Jeremy Everard John Streatfeild WP 11/2003, October Reforming the EU sugar regime: will Southern Africa still feature? by Daniel Malzbender WP 12/2003, October 2004 Complexities and inadequacies relating to certain provision of the General Agreement on Trade in Services by Leon Steenkamp WP 1/2004, March Challenges posed by electronic commerce to the operation and implementation of the General Agreement on Trade in Services by Leon Steenkamp WP 2/2004, March Trade liberalisation and regional integration in SADC: policy synergies assessed in an industrial organisation framework by Martine Visser and Trudi Hartzenberg WP 3/2004, March Tanzania and AGOA: opportunities missed? by Eckart Naumann and Linda Mtango WP 4/2004, March Rationale behind agricultural reform negotiations by Hilton Zunkel WP 5/2004, July The impact of US-SACU FTA negotiations on Public Health in Southern Africa by Tenu Avafia WP 6/2004, November Export Performance of the South African Automotive Industry by Mareika Meyn WP 7/2004 December 2005 Textiles and clothing: Reflections on the sector’s integration into the post-quota environment by Eckart Naumann WP 1/2005, March Assessing the Causes of Sub-Saharan Africa's Declining Exports and Addressing Supply-Side Constraints by Calvin Manduna WP 2/2005, May A Few Reflections on Annex VI to the SADC Trade Protocol by Jan Bohanes WP 3/2005, June Tariff liberisation impacts of the EAC Customs Union in perspective by Heinz - Michael Stahl WP4/2005, August Trade facilitation and the WTO: A critical analysis of proposals on trade facilitation and their implications for African countries by Gainmore Zanamwe WP5/2005, September An evaluation of the alternatives and possibilities for countries in sub-Saharan Africa to meet the sanitary standards for entry into the international trade in animals and animal products by Gideon K. Brückner WP 6/2005, October Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 43 Dispute Settlement under COMESA by Felix Maonera WP7/2005, October The Challenges Facing Least Developed Countries in the GATS Negotiations: A Case Study of Lesotho by Calvin Manduna WP8/2005. November Rules of Origin under EPAs: Key Issues and New Directions by Eckart Naumann WP9/2005, December Lesotho: Potential Export Diversification Study: July 2005 by Ron Sandrey, Adelaide Matlanyane, David Maleleka and Dirk Ernst van Seventer WP10/2005, December African Member States and the Negotiations on Dispute Settlement Reform in the World Trade Organization by Clement Ng’ong’ola WP11/2005, December The ability of select sub-Saharan African countries to utilise TRIPs Flexibilities and Competition Law to ensure a sustainable supply of essential medicines: A study of producing and importing countries by Tenu Avafia, Jonathan Berger and Trudi Hartzenberg WP12/2006, August Intellectual Property, Education and Access to Knowledge in Southern Africa by Andrew Rens, Achal Prabhala and Dick Kawooya WP13/2006, August The Genetic Use Restriction Technologies, Intellectual Property Rights and Sustainable Development in Eastern and Southern Africa by Patricia Kameri-Mbote and James Otieno-Odek WP14/2006, August 2006 Agriculture and the World Trade Organization – 10 Years On by Ron Sandrey WP1/2006, January Trade Liberalisation: What exactly does it mean for South Africa? by Ron Sandrey WP2/2006, March South African merchandise trade with China by Ron Sandrey WP3/2006, March The Multifibre Agreement – WTO Agreement on Textiles and Clothing by Eckart Naumann WP4/2006, April The WTO – ten years on: trade and development by Catherine Grant WP5/2006, May th A review of the results of the 6 WTO Hong Kong Ministerial Conference – Considerations for African, Caribbean and Pacific (ACP) Countries by Calvin Manduna WP6/2006, June Trade Liberalisation: What exactly does it mean for Lesotho? by Ron Sandrey , Adelaide Matlanyane and David Maleleka WP7/2006, June A possible SACU/China Free Trade Agreement (FTA): Implications for the South African manufacturing sector by Hans Grinsted Jensen and Ron Sandrey WP8/2006, July Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 44 Ecolabels and fish trade: Marine Stewardship Council certification and the South African hake industry by Stefano Ponte WP9/2006, August South African Merchandise Trade with India by Ron Sandrey WP10/2006, August Trade Creation and Trade Diversion Resulting from SACU trading Agreements by Ron Sandrey WP11/2006, August The ability of select sub-Saharan African countries to utilise TRIPs Flexibilities and Competition Law to ensure a sustainable supply of essential medicines: A study of producing and importing countries byTenu Avafia, Jonathan Berger and Trudi Hartzenberg WP12/2006, August Intellectual Property, Education and Access to Knowledge in Southern Africa by Andrew Rens, Achal Prabhala and Dick Kawooya WP13/2006, August The Genetic Use Restriction Technologies, Intellectual Property Rights and Sustainable Development in Eastern and Southern Africa by Patricia Kameri-Mbote and James Otieno-Odek WP14/2006, August Initiation of WTO Trade Disputes by the private sector – need for SADC/COMESA countries to develop national mechanisms. by Felix Maonera WP15/2006, October The Trade and Economic Implications of the South African Restrictions regime on imports of clothing from China by Ron Sandrey WP16/2006, October The Memorandum of Understanding and quotas on textile and clothing imports from China: Who wins? by Gustav Brink WP17/2006, October WTO and the Singapore Issues by Ron Sandrey WP 18/2006, November How can South Africa exploit new opportunities in agricultural export markets? Lessons from the New Zealand experience. by Ron Sandrey & Nick Vink WP 19/2006, November Promoting agricultural trade and investment synergies between South Africa and other SADC Member countries. by N. Vink, R. Sandrey, C.L. McCarthy & H.E. Zunckel WP 20/2006, November Proposed amendments to the anti-dumping regulations: are the amendments in order? by Gustav Brink WP 21/2006, November 2007 Examining the India, Brazil and South African (IBSA) Triangular Trading Relationship Ron Sandrey and Hans Jensen WP 1/2007, February Government-Business Interface in dispute settlement: Lessons for SACU Augustine Mandigora WP2/2007, February Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 45 South Africa and Japan: towards a new trading relationship? Ron Sandrey WP3/2007, March South African agriculture protection: how much policy space is there? Ron Sandrey, Olubukola Oyewumi, Bonani Nyhodo and Nick Vink WP4/2007, March South African agriculture: a possible WTO outcome and FTA policy space - a modelling approach. Ron Sandrey and Hans Jensen WP5/2007, March Revisiting the South African-China trading relationship Ron Sandrey WP6/2007, March Safeguards in South Africa: What Lessons from the First Investigation? Gustav Brink, G. 2007. WP7/2007, May South African Wine – An Industry in Ferment Stefano Ponte and Joachim Ewert WP8/2007, October Governance in the Value Chain for South African Wine Stefano Ponte WP9/2007, October Trade Policy options for Nigeria: GTAP simulation analysis Ron Sandrey, Hans Grinsted Jensen and Olubukola Oyewumi WP10/2007, December Trade Briefs 2002 Cost sharing in international dispute settlement: some reflections in the context of SADC by Jan Bohanes & Gerhard Erasmus. TB 1/2002, July Trade dispute between Zambia & Zimbabwe by Tapiwa C. Gandidze. TB 2/2002, August 2003 Non-tariff barriers: the reward of curtailed freedom by Hilton Zunckel TB 1/2003, February The effects of globalization on negotiating tactics by Gerhard Erasmus & Lee Padayachee TB 2/2003, May The US-SACU FTA : implications for wheat trade by Hilton Zunckel TB 3/2003, June Memberships in multiple regional trading arrangements : legal implications for the conduct of trade negotiations by Henry Mutai TB 4/2003, August Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 46 2004 Apparel Trade and Quotas: Developments since AGOA’s inception and challenges ahead by Eckart Naumann TB 1/2004, March Adequately boxing Africa in the debate on domestic support and export subsidies by Hilton E Zunckel TB 2/2004, July Recent changes to the AGOA legislation by Eckart Naumann TB 3/2004, August 2005 Trade after Preferences: a New Adjustment Partnership? by Ron Sandrey TB1/2005, June TRIPs and Public Health: The Unresolved Debate by Tenu Avafia TB2/2005, June Daring to Dispute: Are there shifting trends in African participation in WTO dispute settlement? by Calvin Manduna TB3/2005, June South Africa’s Countervailing Regulations by Gustav Brink TB4/2005, August Trade and competitiveness in African fish exports: Impacts of WTO and EU negotiations and regulation by Stefano Ponte, Jesper Raakjær Nielsen, & Liam Campling TB5/2005, September Geographical Indications: Implications for Africa by Catherine Grant TB6/November 2006 Southern Africa and the European Union: the TDCA and SADC EPA by Catherine Grant TB1/2006, May Safeguarding South Africa’s clothing, textile and footwear industries by Gustav Brink TB2/2006, May Agricultural Safeguards in South Africa by Gustav Brink TB3/2006, May The WTO Trade Policy Review Mechanism: application and benefit to SACU by Paul Kruger TB4/2006, June Amendment to TRIPs agreement: consensus or dissension? by Madalitso Mutuwazovu Mmeta TB5/2006, September Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007 47 2007 Southern Africa and the trading relationship with the European Union Ron Sandrey and Taku Fundira TB1/2007, January The development pillar of the EPA negotiation Catherine Grant TB2/2007, February The use and limitations of computer models in assessing trade policy Ron Sandrey TB3/2007, March Competition and infant industry protection within SACU: the case of UHT milk in Namibia Omu Kakujaha-Matundu TB4/2007, March Sunset Reviews in South Africa: New Direction given by the High Court Gustav Brink TB5/2007, July South African quotas on Chinese clothing and textiles: has there been sufficient economic justification? Johann van Eeden and Ron Sandrey TB6/2007, September Sunset reviews in South Africa: how long is five years? Gustav Brink TB7/2007, November The four pillars of South African agricultural trade policy Ron Sandrey TB8/2007, November Update: South African quotas on Chinese clothing and textiles: has there been sufficient economic justification? Taku Fundira TB09/2007, December Countervailing Reviews: Countering Subsidised Exports or Countering Subsidy Programmes? Gustav Brink TB10/2007, December Books 2007 Monitoring Regional Integration in Southern Africa: Volume 6 (2006) Editors: Anton Bösl, Willie Breytenbach, Trudi Hartzenberg, Colin McCarthy, Klaus Schade February 2007, ISBN 978-0-9584680-5-3 Economic Partnership Agreements: Handbook Authors: Talitha Bertelsman Scott and Catherine Grant April 2007 South Africa's way ahead: trade policy options Authors: Ron Sandrey, Hans Grinsted Jensen, Nick Vink, Taku Fundira September 2007, ISBN 978-0-9584680-7-7 Trade Policy options for Nigeria: a GTAP simulation analysis WP10/2007 tralac | December 2007