EPAs have some disadvantages for less developed and developing countries.
Economic Partnership Agreements (EPA) are trade agreements between countries. EPAs are more common now as they are used to replace expiring trade agreements. While EPAs are considered more compatible with the World Trade Organization’s (WTO) rules regarding tariffs, barriers to trade and nondiscriminatory practices in trade, these types of agreements are still new enough that some people are skeptical of the benefits of EPAs.
Exclusions
Regional firms that benefit from the specialization of goods from their countries not found anywhere else, receive no benefit from an EPA. EPAs provide exceptions to the continuance of tariffs on imports that are already globally competitive. Producers in less developed and developing countries that rely on the unusual goods they can produce because of indigenous material or goods, will continue to face tariffs.
Strong Arm
Since EPAs are now the common agreement among countries, without an EPA the less developed and developing countries face higher tariffs and are unable to import or export as many goods and resources as they could under an EPA or previous trade agreement. For countries that trade with European Union countries this is the Generalized System of Preferences, which provides less access to EU markets. When trade agreements expire, less developed and developing countries either accept the EPA or face high tariffs and trade restrictions.
Reduction in Revenues
EPAs reduce or eliminate some tariffs, which is revenue that some countries rely upon. The European Union recommends that countries facing a reduction in revenues as a result of a decrease in tariffs, shift their dependence of tariff revenues to fiscal revenues such as sales taxes or excise duties because these are more sustainable sources of revenues. This may be easier said than done for some less developed and developing countries.
Trade Diversion
Economists are concerned that an EPA may result in trade diversion, or the increased access to less expensive goods. Trade diversion is considered to be welfare reducing because less expensive imports produced by more efficient producers replace imports or goods produced within a countries borders. This causes some producers to go out of business or lose profits due to the decrease in demand. The overall effect of trade diversion depends on the country.
Skimming
Reduction in tariffs does not always result in the reduction of prices. In some circumstances, an importer or seller may continue charging consumers the same price for goods and pocket the money that would have gone to paying the tariff.
