Epa Report

THE LONG TERM IMPACT OF EPA ON THE JAMAICAN ECONOMY

The Long-term
Impact of EPA on the
Jamaican Economy
A Simulation Exercise

18 May 2009

Caribbean Policy Research Institute

Guango Tree House

29 Munroe Road
Kingston 7, Jamaica

www.capricaribbean.or

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CaPRI is a Caribbean think tank that promotes evidence-based policymaking in the
region. Today we counter one of the main missteps of our past, by addressing the
widening deficit between researchers and policymakers across the region. In order
to bridge this gap whilst consistently introducing fresh-thinking into the
policymaking process, we apply a unique methodology – one that is built on the
values of multi-disciplinary work, team work and the utilization of the Diaspora in
our search for evidence. This has always been our mission, as epitomized in our
production of Jamaica‟s first comprehensive post-independence economic review,
under the Institute‟s former “Taking Responsibility” title.

This report has received funding from the Department for International Development, although the views expressed within do
not necessarily reflect official policy

For information and feedback, please contact:

CARIBBEAN POLICY RESEARCH INSTITUTE

GUANGO TREE HOUSE,
29 MUNROE ROAD,
KINGSTON 6
JAMAICA, W.I.

TEL: 1-876-970-3447, 1-876-970-2910
FAX: 1-876-970-4544

Email: takingresponsibility@gmail.com
WEBSITE: www.takingresponsibility.org


Contents
Introduction ........................................................................................................5
Background to EPA ..........................................................................................6
CARICOM‟s Trade Commitments .......................................................................7
The Economic Partnership Agreement ..................................................................7
Historical Antecedents ......................................................................................8
The Motivation for EPA .....................................................................................9
The Key Provisions .........................................................................................10
Caribbean Integration in the Context of the EPA ..............................................14
Impact Assessment Methodology ........................................................................16
Basic Idea and Rationale ................................................................................16
The Model ......................................................................................................18
Baseline and Simulations ...............................................................................19
Jamaica ............................................................................................................20
Characteristics of Jamaica‟s Trade ..................................................................20
Simulation Results .........................................................................................25
Conclusion.....................................................................................................27
Bibliography......................................................................................................28

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INTRODUCTION
The signing of the Economic Partnership Agreement (EPA) between a group of
Caribbean countries and the European Union was accompanied by a swathe of
public commentary which included a not insignificant portion of criticism.
Synthesising the critiques of the anti-EPA lobby reveals two principal hypotheses
(see CaPRI, “The Political Economy of Trade in the Caribbean”): first, that the EPA
will lead to a surge in imports into the Caribbean which would have a damaging
effect on weak, uncompetitive Caribbean industries; and second, that the EPA‟s
tariff reductions will cause significant revenue loss for Caribbean governments,
significantly worsening their fiscal balances (a serious concern in a region in which
fiscal deficits are a chronic problem: six of the world‟s ten most indebted countries
are in the Caribbean).
The arguments of many of the critics were, however, necessarily based on
speculation in the absence of a rigorous quantitative exercise. Defenders of the
EPA, most notably those who negotiated the accord on behalf of the Caribbean,
maintained that the focus on the import effects overlooked the fact that the EPA
secured market access for Caribbean exporters and so could serve as the
foundation for improved growth in the region.
Given the paucity of data on the topic, we judged it would be useful to estimate
both the fiscal and trade effects using a modelling methodology, applied to four
test-cases: Jamaica, St. Lucia, Trinidad and Tobago, and Guyana. In each of these
cases, we set out to test the two hypotheses in order to ascertain how, and how
profoundly, the EPA was going to affect both Caribbean economies and Caribbean
governments. In so doing, we hope to better prepare the governments in the region
to deal with any adverse consequences of adjustments that may occur in their
economies.
The central objective of EU-ACP cooperation is the reduction of poverty based on
the guidelines of sustainable development and through the integration of ACP
(African Caribbean and Pacific Group of States) countries into the Global economy.
Therein lies the nub of the debate over THE EPA. It is not only the specific terms of
the agreement that underlie the controversy. Rather, the underlying objective of
global integration and its effect on the Caribbean remains an object of contestation.
With this central issue in mind, we focus our analysis below on Caribbean-EU
integration through trade.
The CARIFORUM Grouping comprises countries that are at varying levels of
development and classifications. The Grouping is made up of both low and middle
income economies of various sizes with differing amounts and types of natural
resources. It is important, therefore, to examine individual countries, taking into
consideration their uniqueness, to determine the impact that a free-trade area with
the EU will have on the Caribbean region. It is for this reason that the present

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exercise is being conducted for four different countries in the region. The analysis
seeks to anticipate the extent to which trade patterns and production will shift to
accommodate the new trading arrangement. Further, the analysis will seek to
measure any economic costs both sectorally and at the macro level. Finally, we
estimate long term effects on economic growth for the country.

BACKGROUND TO THE EPA
International trade necessarily plays a significant role in small economies such as
those in the Caribbean. The region‟s exposure to trade winds has been partially
mitigated by the share of its trade that was governed by preferential market access,
primarily to the OECD countries through a succession of trade agreements. This
vulnerability has become exposed by the current global economic crisis and shifts
in the patterns of world trade, and will now be increased by the obligation to shun
traditional preferential trade arrangement with the European Union; these have
been deemed to be incompatible with the rules that govern world trade under the
auspices of the WTO (World Trade Organisation).
The overarching objective of signing a Free Trade Agreement between the European
Union (EU) and CARIFORUM countries is to maintain the longstanding preferential
market access arrangement that existed under the Lomé Agreement. The WTO
panel on the European Union‟s banana import regime determined that the
arrangement that existed under the Lomé Convention was incompatible with WTO
rules because it violated its most fundamental principles, those of non-
discrimination and reciprocity.
The Cotonou Agreement,1 signed in 2000, addressed these by requesting that the
Parties conclude WTO compatible trading agreements, involving the progressive
removal of barriers to trade between them and enhancing cooperation in all areas
relevant to trade. For administrative purposes, the EU negotiated these WTO
compatible arrangements by breaking up the ACP group into six regional groupings
or free-trade areas of which CARICOM2 plus the Dominican Republic was one such
group (“CARIFORUM”).
The critical demand of a new agreement was that the non-reciprocal element of the
traditional preferential agreements had to be jettisoned in the new agreement to
achieve WTO compliance. Whatever benefits that were enjoyed by CARIFORUM
countries in the EU market must now be enjoyed by EU members in CARIFORUM.
The Economic Partnership Agreement was signed between most CARIFORUM
countries and the European Union (EU) on October 15th, 2008. The EPA is a
comprehensive cooperative framework which encompasses a holistic approach to

1
The Cotonou Agreement was signed in Benin in July 2000.
2
This acronym refers to the Caribbean Community which consists of Antigua and Barbuda, the Bahamas,
Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent
and the Grenadines, Trinidad and Tobago and Suriname.

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development by focusing on the objectives and principles set out in the Cotonou
Agreement.

CARICOM‟S TRADE COMMITMENTS
CARICOM has signed bilateral preferential trade agreements with developing and
developed countries. The CARICOM-Venezuela Agreement is a trade and
investment agreements based on one-way preferential market access and
investment flows. Tariffs were eliminated on 22% of products and reduced on 67%.
The result is that Venezuela‟s applied MFN tariff on CARICOM‟s exports is, on
average, a third less than Venezuela‟s MFN tariff. The CARICOM-Colombia
agreement made provisions for trade liberalisation and facilitation (which included
the exchange of preferences). Initially, it offered one-way tariff reductions on
selected CARICOM product entering Colombia, which was revised in 1999 to make
the reductions reciprocal. The CARICOM-Dominican Republic agreement made
provisions for the asymmetrical application of reciprocity, with mutual granting of
concessions by the MDC‟s of CARICOM and the Dominican Republic. The LDC‟s
were required to undertake such commitments until 2005. The Cuba-CARICOM
agreement deals with tariff reductions, taxation, trade promotion and facilitation,
among other elements. The Costa Rica-CARICOM agreement is a free trade
agreement which offers non-reciprocal preferences to CARICOM LDC‟s and
reciprocal preferences to CARICOM MDC‟s.
Preferential trade agreements granting non-reciprocal market access to the major
developed country markets take the form of broad arrangements: the CARIBCAN
agreement signed with Canada, the Caribbean Basin Initiative (CBI) signed with
the USA, the Revised Cotonou Agreement signed between the ACP and the EU. The
General System of Preferences (GSP) schemes also grants preferential market
access to the markets of Australia, Japan, New Zealand and Switzerland, with the
range of exports depending on the individual country‟s scheme.

THE ECONOMIC PARTNERSHIP AGREEMENT
The CARIFORUM-EU Economic Partnership Agreement is a Regional Trade
Agreement signed by the EU and CARIFORUM countries which establishes,
amongst other areas of cooperation, a free trade area for goods and services. The
most distinctive feature of the EPA that sets it apart from previous trade
agreements is that it is WTO-compatible, satisfying the requirements of GATT
Article XXIV3 on Free Trade Areas that eliminates non-reciprocal market access
between trading Partners .

3
Article XXIV, provides exceptions to MFN treatment for customs unions (CUs) and free-trade areas. In
particular it requires that, in free trade areas and customs unions, trade preferences are permitted only when

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To fully comply with GATT article XXIV, there was the requirement that duties and
other restrictive regulations of commerce be eliminated on „substantially all trade‟ 4
between the parties in products originating in such territories. In the EU
Commission Guidelines5 for Preferential Trading Arrangements (PTA), it was
decided that WTO compatibility required 90% liberalisation of trade between the
partners through the elimination of tariff barriers.
The EPA in its application and scope is more comprehensive than previous
agreements. It expands the former market access commitments from trade in
goods only to cover a range of additional subject areas such as government
procurement, investment, trade facilitation, competition policy, and intellectual
property rights. Importantly, the agreement also includes a services agreement
which is compatible with GATS (General Agreement on Trade in Services) article V.
Goods falling under chapter 93 of the Harmonised System (HS) have been excluded
from the liberalization process. Except for rice, sugar and bananas, as of January
1, 2008 all products from CARIORUM States will l enjoy Duty Free Quota Free
Access (DFQF) to the EU market.

HISTORICAL ANTECEDENTS
The modern history of cooperation between the Caribbean and the EU started in
1975 in the framework of the ACP-EU relationship. This relationship came to be
codified in a series of “Lomé” conventions (there were eventually four of them)
named after the Togo capital where the first was signed. The Lomé conventions
were built on the stated principle but practical violation of equal partnership
between the parties through economic and commercial cooperation and
development assistance.
A system of one-way trade preferences was used to implement the economic
cooperation aspect of conventions. These preferences allowed all manufactured
goods and some agricultural products to enter the EU with the protection of
customs duties or quantitative restrictions.6 One of the most important benefits of
that relationship was non-reciprocal market access, the only requirement being
that ACP countries applied the MFN (Most Favoured Nation) clause within the EU
and not discriminate amongst the countries of the Union. To ensure that products
such as agricultural goods were not in direct competition the EU‟s common

duties and other restrictive regulations are eliminated on “substantially all the trade” between the constituent
territories. Thus preferences in an FTA have to be reciprocal.
4
The quantitative requirement would be that a high coverage must be achieved by the free trade area of around
90 per cent of current trade and of 90 per cent of the tariff lines; the qualitative test would be that no major
sector of trade should be excluded.
5
This document was presented to the Council of the European Parliament in October 1997.
6 Tropical products which do not compete with European products enter the EU market duty free. Temperate

products face an exemption or reduction of customs duties, while fruits and vegetables are subject to seasonal
restrictions. Other agricultural products face quantitative restrictions or are excluded from preferential
treatment.

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agricultural policy, a number of protocols were signed covering rum, bananas,
sugar, beef and veal.7
The establishment of the WTO in 1995 and the changes in the global economy in
general, required the EU to re-appraise the framework of its economic and
development cooperation with ACP countries. The legal framework of the WTO did
not make allowances for non-reciprocal discriminatory preferential arrangements
as such agreements violated GATT Article XXIV. When Lomé IV expired in 2000, it
was replaced by the Cotonou Agreement – a pact broader in its objectives and
scope as it included poverty reduction, sustainable development and the
integration of ACP countries into the global economy. These objectives were to be
achieved through the negotiation and enactment of new trade relations that
incorporated a WTO-compatible, reciprocal agreement.

THE MOTIVATION FOR THE EPA
The Most Favoured Nation (MFN) principle has been the bedrock of multi-lateral
trade negotiations since the initial GATT in 1947. The principle stipulates that any
concessions granted by a member country to any other member must be
unconditionally granted to all WTO members. This provision rules out preferential
trading arrangements. Article XXIV of GATT, however, provides for a legitimate
exception to the MFN principle in its territorial application by allowing
discrimination through the formation of Free Trade Areas. That provision creates
the opportunity for the EU to continue a preferential arrangement with the
Caribbean (and other ACP groups in turn), but obligates the arrangement to be
structured as a free trade area (FTA) encompassing the European Union and the
CARIFORUM countries. The EPA is therefore designed to occupy the intersection
of the objectives of the Cotonou Agreement and the obligations under the WTO.
In the absence of a trade and development treaty with the EU, all Caribbean trade
with the EU would otherwise be governed by the General System of Preferences
(GSP), a non-reciprocal, non-discriminatory preference scheme available to all
developing countries, while the smaller economies in the region would further
qualify for the special provisions of the GSP‟s “Everything But Arms” (EBA)
initiative. Under the EBA initiative, Caribbean exports may enter the EU without
reciprocity in terms. No such privilege would be available to the larger economies,
however. Further, there would be no institutional framework for development and
technical assistance as provided for in the EPA. Finally, some Caribbean exports
would continue to attract tariffs upon entering the EU, including commodities such
as alumina, rice, cane sugar, rum, methanol, textiles, banana and crustaceans.

7
Under the sugar protocol, several ACP countries have the right to deliver fixed quantities of sugar to the EU
market at the guaranteed EU price. The banana protocol of the Cotonou Agreement includes no specific
commitments on preferential market access for ACP banana exports, because the EU banana import regime had
to be changed following a long-standing dispute in the WTO.

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Thus the EPA appears to confer some advantages on participating Caribbean
economies, but only in the presence of the reciprocity demanded by an FTA.
Under the GSP, the pressure of increasing global competitiveness would continue
to challenge Caribbean economies. Not only would the Caribbean have to cope
with the loss of preferential access with the expiration of the Lomé conventions,
but global trends would continue to erode traditional trading relationships. The
era of trade liberalisation has led to lower tariffs and the removal of non-tariff
barriers worldwide, resulting in increased competition in the global marketplace
and thereby enabling rich-country consumers to access a wider array of sources
for imported product. This process is ongoing. So Caribbean economies would
face mounting pressure to adjust their economies away from traditional patterns of
trade. This is the context in which the EPA arrives and provides a framework for
CARIFORUM countries to continue to have some preferential access to the
European Union market, along with development assistance to facilitate structural
change.
The recognition that the on-going evolution of the global economy will continue to
pose the challenge of structural change in the Caribbean underlies the equal focus
in the EPA on capacity-building. The negotiating parties believed that the benefits
available to the weaker Caribbean states under the EPA would not be sufficient to
assist them in capacity-building to the levels required for global competition. The
EBA initiative makes provision for increased market access opportunities for LDCs
to export to the EU but does not provide development assistance that can resolve
some of the supply-side constraints faced under the previous trade arrangements
with the EU. The comprehensive integrated framework of the EPA makes provisions
for development aid and assistance which have the potential to produce significant
gains for LDCs.

THE KEY PROVISIONS
Trade Measures
Market access is the main area of focus under the EPA. Unlike its predecessors,
this new arrangement goes beyond the scope of goods to include services and other
aspects of trade-related areas such as intellectual property, innovation, public
procurement, competition, protection of personal data, the environment and social
issues. Wider market access is expected to expand investment into non-traditional
sectors, through diversification of exports and the development of an industrial
base, resulting in higher added-value exports for the region.
To qualify as a free trade area requires, according to Article 24, that member states
within the area “substantially all trade” among themselves, with the conventional
benchmark being 90 percent. Under the EPA, the EU has liberalised, duty-free
and quota-free, or DFQF, 98 percent of trade in goods and 94 percent of trade in
services immediately, as at January 1, 2008. The offer provides Duty Free Quota
Free (DFQF) access for agricultural products that had previously attracted tariffs

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such as beef, dairy, cereals, fruits and vegetables. Custom duties have been
removed from sugar and rice, while the quota aspect will be eliminated on a phased
basis, ending in 2009 and 2010. Bananas will also enjoy immediate DFQF access
to the EU market in a manner which negates some of the objections in the WTO
Dispute Settlement Panel on the Banana Protocol.
The EU liberalisation of 98% of trade in goods under the EPA is not a significant
departure from the status quo ante. Under the predecessor Cotonou Agreement,
approximately 95 percent of CARICOM product entering the EU did so DFQF. The
difference of 3 percent covers the afore-mentioned sugar, rice and bananas that
had faced quota restrictions.
CARIFORUM countries, meanwhile, will liberalize 92 percent of trade in goods over
a 25 year period and for trade in services, 75 percent and 65 percent respectively
for the more developed and less developed CARIFORUM countries.
Rules of Origin specify the criteria for a product to be considered as locally-
produced and hence qualify for preferential treatment. The new guidelines on rules
of origin that have been included in the EPA create new opportunities for
CARIFORUM countries to extract more value added through further processing
within the region before the final product is exported to the EU. At a basic level,
the rules specify that only goods produced in a country, using only materials from
that country, or products that have been handled under special conditions by
regulation in that country, can be deemed to qualify as originating products.
Given the fact that these are all small states with limited endowments and
productive capacity, it is likely that a large share of the inputs required for the
production process would originate beyond their boundaries. As a result, the EPA
offers improved Rules of Origin benefits over those that existed under previous
agreements. These changes would have impacted on the value-added conditions,
the discontinuance of the certification of origin and the verification procedures.
A number of aspects of rules of origin have been changed under the EPA. One
aspect allows for changes in the treatment of some sectors affected by particular
conditions governing production and manufacture; this will mainly affect textiles,
clothing, fish and some agricultural products. The changes also allow for some
„permanent derogation‟ from the primary rules through an exception called
„cumulation‟, which allows for the broadening of the concept of originating status of
materials and sufficient working or processing. Under the EPA, materials
originating in some of CARIFORUM‟s neighbouring developing countries will be
considered as originating in a CARIFORUM state. Finally, the concept of wholly-
owned was broadened beyond products extracted or grown locally to include sea
fishing or other products taken from the sea by local vessels and local fishermen.
The service provisions are of particular importance as the Caribbean is the only
member region of the ACP grouping that is a net supplier of services. The benefits
negotiated under the EPA include agreements which cover investment, trade in
services and electronic commerce. The commitments under the EPA cover a range
of sectors in which CARIFORUM firms have shown distinct comparative advantage

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such as tourism, investment and entertainment services. The commitments in
services are different from trade, in that the services agreement makes provision for
different modes of supply to access or deliver these services.
The market access commitments allow for a generous asymmetry in the level of
service liberalisation. The EU has undertaken to liberalise 94 percent of the W120
list of service sectors while CARIFORUM Countries will liberalize only some 65 to
75 percent or their services.8 The service sectors will include business, financial,
and recreational services and tourism. Further, a number of specific issues have
been addressed, such as barriers for CARIFORUM investment in the EU, the cross
border supply of goods and services, limitations on number of suppliers and
volume of transactions, and access for Caribbean professionals.
To ensure a higher level of transparency and equity in the treatment of EU
suppliers, the EU ensures that there is a substantial procurement chapter in all
bilateral agreements negotiated. The commitments negotiated on public
procurement in the EPA place emphasis on encouraging transparency and the
creation and strengthening of regional procurement markets. One of the benefits
to the Caribbean of the negotiated procurement rules is that it will provide member
governments with a tool to reduce corruption and ensure the proper utilisation of
resources through proper verification and administrative controls. This will involve
the exchange of information and experience about best practices and regulatory
frameworks, the establishment of the appropriate systems and mechanisms to
facilitate compliance with the agreement, the creation of an online facility at the
regional level for information-gathering and sharing about tendering opportunities.
ACP countries have found it difficult in the past to take advantage of preferential
market access opportunities in the EU because of technical requirements and
sanitary and phyto-sanitary standards. Generally, the EU has strict rules on
health and safety standards that have gone beyond the requirements within the
WTO. The EPA provides CARIFORUM countries with the cooperation and
assistance necessary to meet the standards set by the EU import regime.
Finally, there are provisions in the EPA for customs and trade facilitation. The EPA
mandates cooperation to ensure that relevant legislation and procedures, and the
administrative capacities of the relevant administrations, are used for the effective
facilitation of trade. Easy access to information and transparency of procedures
creates an enabling environment to do business, guaranteeing unhindered
movement of goods across borders. Businesses suffer significant losses due to
delays at borders, complicated and unnecessary documentation requirements, and
inadequate use of technology to carry out government procedures. These costs can
sometimes be greater that the total of all tariffs combined.

8
The W120 list was used as the basis for negotiations under the GATS in the WTO. These range from business
services, communications, construction, distribution, environmental, ﬁnancial, transport, tourism and recreation
services.

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Scale Constraints
The EPA seeks to improve market access opportunities for CARIFORUM members
for trade in both goods and services separately. It was recognised that
CARIFORUM countries have not been able to take advantage of the market access
opportunities in the European market under the previous trade agreements, even
in the absence of prohibitive tariffs, because there were obstacles within the
Caribbean which seem to have prevented the economies in the region from
expanding more aggressively into non-traditional exports. To address these
concerns, the trade-in-goods component of the EPA focuses on capacity building.
Since the Caribbean has had some success in nurturing successful services
businesses, the agreement recognizes that provided a platform from which
CARIFORUM firms may expand into the EU market.
Many of the obstacles to regional trade simultaneously inhibit exports further
afield, so a strong regional framework is a necessary platform for more expansive
export ambitions that would encompass Europe. Deeper regional integration was
therefore seen as a necessary condition and appropriate platform for development
assistance and a critical element for the success of the EPA.
Size is an obvious challenge to the exploitation of trade opportunities. The local
firms in the small Caribbean territories suffer from diseconomies of scale due to
the limited market sizes. In addition, the cost of implementing trade agreements
has been significant relative to their government budgets, resulting in the region
being unable to take advantage of opportunities under various trade arrangements.
The EPA will provide resources that will assist CARIFORUM countries to overcome
these challenges. Within the context of a fully functioning Single Market and
Economy, these resources will be channelled to areas such as trade facilitation,
standards setting, customs facilitation, infrastructure building and the
development of technological and regulatory capabilities. The planned outcome
will be the establishment of certification agencies, testing laboratories, physical
infrastructure (roads, ports, telecommunication, electricity and water) and
institutions (customs, market research, trade finance, tax reform) along with the
capacity for TBT (packaging and labelling) and SPS (processing methods) that has
prevented CARIFORUM goods from entering the EU market.

Services
While there are opportunities to be exploited from trade in goods, the region has
experienced greater success from trade in services. The EPA now provides an
opportunity for the region to leverage its experience in services in the more
lucrative economic arena of the European Union. The services sectors in most
CARIFORUM countries account for more than 50 percent of GDP and for the OECS
sub-regional grouping, many are more than 60 percent.
Under the EPA, the EU has liberalized the importation of 94 percent of its services
sectors, including from business services, financial services, tourism and

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recreational services. These commitments made by the EU go beyond the
commitments made at the level of the GATS Agreement. They are broad enough to
included the removal of identified investment barriers such as limits on foreign
share holding. There are no limitations on the number of service suppliers or the
volume of transactions. The agreement allows for the temporary movement of
service suppliers -- such as contract professionals if they are in possession of a
contract -- in as many as 29 sectors. In the cases where they are independent
contractors and self employed persons, they have been granted access in 11
sectors.
The CARIFORUM countries, for their part, have been allowed to undertake different
levels of liberalisation in trade in services based on the sizes of the economies. The
more developed countries (MDC‟s) will liberalize 75% of sectors; while the less
developed countries (LDC‟s) will liberalize 65% of sectors. There were no
commitments to liberalize public services. The services sectors that have been
liberalized by CARIFORUM countries are in sectors where Foreign Direct
Investment (FDI) has always been encouraged in the past: tourism, business
services, environmental services and maritime services. It is generally accepted
that these sectors holds the greatest potential for increasing investment and
economic growth in the region.
With different programmes, then, for both goods and services, the craftsmen of the
agreement hope to promote Caribbean development. In the goods sector, by
facilitating the strengthening regional integration and the institutional capacity in
areas and services critical to small business development, the agreement hopes to
promote the development and expansion of firms whose products can find a
marketplace in Europe. In the service sector, where enterprises and markets in the
Caribbean are well established, increases access is deemed to be sufficient to
promote Caribbean success in the EU.

CARIBBEAN INTEGRATION IN THE CONTEXT OF THE EPA
Given the importance of the regional integration efforts already undertaken by the
region, the negotiators of the EPA sought to build and enhance the provisions
related to the CSME. This position was reinforced in Article 1 Para. (d) which
speaks of “promoting regional integration, economic cooperation and good
governance thus establishing and implementing an effective, predictable and
transparent regulatory framework for trade and investment between the Parties
and in the CARIFORUM region” and Article 4, Para(4) which states that: “without
prejudice to the commitments undertaken in this Agreement, the pace and content
of regional integration is a matter to be determined exclusively by the CARIFORUM
States in the exercise of their sovereignty and given their current and future
political ambitions”.
The promotion of regional policies within the EPA framework as a means to
facilitate the implementation of the EPA clearly implies that the CSME is integral to
the EPA process. Operating within a free trade area means policies will be

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implemented at the regional level, therefore, it is through the CSME process that
the necessary framework and institutions will be put in place for both parties to
effect the new agreement. The EPA presents an opportunity for a deeper and
smoother integration through the CSME than what has been accomplished so far
through CARICOM. While it has been mooted that being locked into an EPA
development path diminishes the scope for regional integration with detrimental
effects on the region,9 the EPA is constructed with a view to the mutual facilitation
of both the EPA and CSME.
Problems have bedevilled the exploitation of CARICOM‟s attempts at integration
from its inception in 1965 right up to CSME (Caribbean Single Market and
Economy) in 2005. The obstacles that have obstructed deeper regional integration
will therefore very likely be visited upon the free trade area that includes the EU.
As a result, the successful implementation of the EPA demands attention to the
removal of these obstructions.
One of the issues that has obstructed the full exploitation of the letter and spirit of
Caribbean regional integration is continued restriction on the full and free
movement of goods. This is due to the insistence of countries on applying forms of
restriction on intra-regional trade by means of unauthorized import duties, export
duties, discriminatory internal taxes, fiscal charges, import licences, and
quantitative restrictions. Other issues in regional integration include the right of
establishment, the free movement of capital, services, and labour, inconsistency in
the application of the Common External Tariff, and the absence of policy
coordination and convergence.
The EPA is attempting to address these issues by providing funding for the creation
of an institutional framework for regional integration, technical assistance,
capacity building (including support for trade facilitation), and investment in trade
related infrastructure. The EPA makes provisions for technical assistance and
development cooperation which should ensure that when trade measures are
implemented, they are done within the right framework so that they can lead to
sustainable growth.
A part of such a framework for sustainable development is technical and
administrative capacity. Thus, the EPA provides for capacity building. Technical
assistance will benefit CARIFORUM governments in the areas of policy
harmonization, legislative reform, and tax reform while the private sector will
benefit in the areas of competitiveness and research and development.

9
See C.Y. Thomas (2008) Trinidad Express, June 11.

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IMPACT ASSESSMENT METHODOLOGY
BASIC IDEA AND RATIONALE
The present exercise traces the economic impact of the tariff reduction on
European Union imports into the Caribbean. Lower tariffs will initially shift
expenditure towards the now relatively cheaper EU imports for those goods for
which a significant tariff existed. Expenditure may be drawn away from domestic
production (trade creation) or from imports from other parts of the world (trade
diversion). Since there is a significant amount of intra-regional trade, such trade
diversion may very well be from Caribbean trading partners.
Trade diversion will have little additional impact on the local economy, but trade
creation necessitates structural adjustment. As expenditure shifts out of domestic
production for the affected commodities, incomes fall in those industries and
resources are released. In the long run, those resources shift into their next most
lucrative employment, expanding production in the other sectors of the economy.
At the same time, the income saved by buying now relatively cheaper European
Union imports will itself be redirected to other commodities, increasing demand in
the rest of the economy. The combination of relative supply and demand shifts
results in an economy with a changed structure of production.
There is a fiscal impact of the EPA, as well. As tariffs are eliminated, the
government‟s tariff revenues decline. But the decline is not commensurate. To the
extent that the shift of productive resources and expenditure to other sectors
increases alternative economic activities, additional tax obligations will be incurred
and the net effect on total revenue will be ameliorated. But there will be,
nonetheless, a net revenue loss.
In order to estimate the degree to which consumption expenditure and fiscal
budgets will shift to new activities following the reduction of tariffs on EU imports,
a computable general equilibrium (CGE) model of the economy is employed. CGE
models ensure all subsequent repercussions are reflected in the final solution. A
CGE model disaggregates the economy into “accounts” – each account representing
a productive sector (such as “bauxite mining”), a factor of production (such as
“semi-skilled, female labour”), or economic institution (such as “urban households”
or “central government”). The modelling framework maps all income flows amongst
accounts. That is, it captures all the income coming into an account by source
and allocates it amongst its uses by destination account. Thus, a productive
sector‟s income is derived from the sectors and households that provide the market
for its product and is allocated amongst the sectors from which it obtains
productive inputs, providers of labour and owners of capital, and the government
which collects taxes levied on the activity. Household accounts, for their part,
which collect income from employment, owning capital, and being the final
repository of enterprise profits, will allocate that income amongst the productive
sectors from which they purchase final consumption goods, the financial account
to which they deposit and from which they withdraw savings, and the government

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to whom they pay direct taxes. The matrix of flows is completed by accounts for
the government and the rest-of-the-world.
Transactions between the rest of the world and each of our modelled economies are
captured in various ways. For commodities, imports are combined with domestic
production to create a composite commodity for domestic consumption, the
proportions of which vary with the relative prices of the commodity from each
source. This specification reflects the reality that most aggregated commodity
groups are made up of a mix of domestic and imported commodities and that price
changes will only change the mix. It is through this relative price-change that the
effect of the EPA will have its initial impact in the model. As tariffs fall, the relative
prices of EU imports fall commensurately relative to both imports from the rest of
the world and to domestic production, simulating the partial switch of expenditure
from the now relatively more expensive sources to the cheaper one. In a
comparable manner, domestic production is divided between the domestic and
export markets according to the relative prices that can be obtained in each.
Remittances are accounted for as income transfers from the rest-of-the-world
account to households, from which they are spent in the same manner as any
other income would be. These flows will be large and important in Jamaica and
Guyana, less so in St. Lucia and Trinidad and Tobago. Foreign direct investment is
accommodated as a flow from the rest-of-the-world to the savings-investment
account, from which it will demand investment goods (such as construction) in the
same was any other source of investment.
In addition to enforcing the balancing of the budgets of all the accounts in the
model by ensuring that earnings equal outflows, the model ensures that all
commodity markets clear insofar as product-quantity supplied must be equal to
product-quantity demanded. This may be accomplished by automatically allowing
prices to respond appropriately where they are flexible, and sufficient time for
adjustment is allowed. Market equilibrium may also be achieved by forcing a
quantitative adjustment where it is determined that prices are sticky over the
relevant time-frame of the analysis.
The response of factor markets is critical in assessing the effects of any stimulus
such as the EPA tariff reductions. In general, factor markets respond in stages. In
the first, factor prices are sticky and production expands or contracts its use of
factors in response to changes in quantity demanded in the presence of unchanged
factor prices. Later, factor prices such as wages have time to adjust, a period that
may take up the three years, so that markets eventually clear. After that, in the
very long run, the structure of the economy shifts to reflect the competitive
opportunities opened up by the dynamic efficiency gains and the adoption of better
production technology that follows from the new trading opportunities.
In the present exercise, we are interested in both short term and long term impacts
– namely, the short- term change in employment as well as the long-term effect
after labour has had a chance to redeploy. For the short run, quantitative
adjustment will be used in labour markets which will be demand-determined with
the option for changes in unemployment in the presence of sticky wages. A

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reduction in demand for unskilled, male labour, for example, will result in open
unemployment in the short run. For the long run results, we presume that
markets, including the labour market, have had ample time to adjust and allow
wages to adjust to take up all but the structurally unemployed. The effect on
labour markets over that time-frame, then, will be manifest as lower wages.
Whereas labour is assumed to be mobile across sectors, capital is assumed to be
fixed and immobile once installed, and is always fully employed.
We use a “Leontief” production function amongst commodity inputs and between
commodity inputs and total value added in which the quantities of inputs are
determined by fixed coefficients. Within value added, the choice between skilled
and unskilled labour and capital is determined by a constant elasticity of
substitution production-function which can allow some substitutability as the
relative prices of each type of factor shifts.
Since the modelling framework is static, it does not have the capacity for
endogenous growth effects. Neither the labour force nor the capital stock can grow
over time. This does not prevent the simulations from having something to say
about the growth effects of the EPA, however. The models will be able to compare
the growth potential of the two states (EPA and no EPA) and estimate the likely
effect of the EPA on growth in the long run.

THE MODEL
Assumptions and Closures
With a 25-year time horizon for eliminating tariffs on EU imports into the region,
there will be ample time for labour to shift amongst affected industries in a gradual
way such that the consequences for unemployment during a short-term
adjustment period will be negligible. Therefore, we take the long- run view and
assume wages adjust to ensure the continuation of the existing levels of
employment. As is the case with most CGE models, we assume that once installed,
capital is immobile.
For simplicity, we collapse the liberalization schedule for each country and
implement the entire slate of expected tariff reductions all at once. This
simplification, if anything, should exaggerate the impact on the economy by
concentrating the effects all at once. The results presented below can therefore be
interpreted as a worst-case scenario in terms of economic adjustment.
The simulations ignore technological change and capital accumulation during the
period in which the EPA is implemented. Both of those considerations account for
the growth of an economy over time. The present exercise is not interested in
absolute levels of growth, however. Our interest is in the relative effect of the EPA
tariff reductions over and above (or under and below, as the case may be) what
would have occurred in the absence of the EPA. The positive effect of increased
trade on total factor productivity will be calculated using the Baldwin multiplier.

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Closure rules – the selection of the balancing variables – are assumed for each of
the model‟s macroeconomic balances – the savings-investment balance, the
external balance, and the fiscal account. Investment is determined by the level of
savings. The level of investment is assumed to be exogenous, with household
savings rates adjusted automatically to achieve the desired level of savings. The
level is therefore the difference between endogenously-determined income and the
level of savings required to fund the fixed level of investment.
To maintain external balance, the current account is held at whatever level of
surplus or deficit existed in the base year, with the real exchange-rate adjusting
automatically to maintain that level. This is consistent with the recognition that
our interest in the present exercise is in the adjustment of the economy over the
long run. Finally, alternative fiscal-balance closures are investigated and
presented in the results below.

Data
Data for these simulations are provided entirely by official sources and the exercise
uses mostly unpublished data. The basic database for a CGE model is the flow of
goods and services between industries. This data matrix has to be specially-
generated by the national accounts divisions of each country‟s public statistics
agency. That exercise also yields the size of payments to labour and capital owners
for each sector of the economy.
A household survey provides information on the accumulation of income by
households and on the distribution of the household‟s expenditure over the
commodity groups produced by the various productive sectors. Ministries of
Finance are the source of information on indirect tax payments by each sector,
both at the border and on domestic production.
Demands and supplies respond endogenously, with varying degrees of elasticity, to
the changes in relative prices amongst the commodities and between domestic and
foreign supply. The elasticities chosen reflect experience gained across a range of
developing economies with the use of similar models, as well as the specific
structural characteristics of the particular sector. In the short run, for example,
there is considerable inelasticity in the demand for bauxite, given that the decision
to exploit veins has to be made far in advance of the actual mining activity. In
contrast, tourists rarely plan tropical vacations more than six months ahead and
will respond to the relative cost of competing destinations. The elasticities chosen
reflect these structural characteristics.

BASELINE AND SIMULATIONS
The model and simulations are designed to estimate alternatives to the expected
baseline outcome. The model itself does not embody a forecast of what growth and
trade is likely to be over the next 25 years. Rather, it computes the expected

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deviation, due to the tariff reductions, of macroeconomic variables and sectoral
outcomes from whatever path is going to unfold.
Several alternative scenarios are investigated. Two scenarios stimulate the
economy with the tariff reductions programmed into the EPA liberalization
schedule, differing only in their treatment of the effect on the fiscal accounts. One
assumes that the government does not levy compensatory taxation and instead
allows the fiscal deficit to rise. The other assumes that the deficit is unaffected as
the government increases indirect tax rates to the level necessary to replace the
foregone tariff revenue.
For the purpose of comparison, two other results are simulated. The first is the
complete elimination of tariffs on EU imports, including the exempted, “sensitive”
commodities. The second alternative is a hypothetical scenario of a unilateral 50
percent cut in import tariffs for worldwide imports.

JAMAICA
Jamaica‟s trade outcomes have been determined less by a vision of the role of trade
in development and more as a by-product of domestic policy and, as everywhere,
by history and geography. The pattern of trade reflects somewhat the legacy of
historical economic ties to Great Britain – and through there to Europe. Largely,
however, the trade pattern is governed by the proximity and purchasing power of
the United States and Canada along with both the historical links and the
proximity to the rest of the Caribbean.

CHARACTERISTICS OF JAMAICA‟S TRADE
Trade Profile and Structure
Like all small economies, Jamaica is highly dependent on trade, which represents
half of domestic economic activity. Reflecting its increasing integration with the
world economy, the share of the country‟s imports consisting of consumer goods
has doubled to around one-third over the last 25 years. Intermediate goods are
about half of the total.
As is the case with many of the countries in the English-speaking Caribbean,
economic geography dictates that the United States is the largest trading partner
for Jamaica, providing 37 percent of imports and absorbing 27 percent of exports
in 2006. With tourism providing a large share of overseas earnings, that 27
percent does not fully reflect the importance of the United States on the earnings
side of the current account balance. CARICOM is a significant source of imports,
at 15 percent of the total, but a negligible destination for exports at 2 percent.
The European Union, too, is important on only one side of ledger. While the EU‟s
share of exports is significant at 16 percent, the EU provides only around 6 percent

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of imports. The export share shows marginal growth over the long term. In the
early 1980s, the EU import share averaged 13 percent, while over the last five
years, the average has been 19 percent. By contrast, the import share, which had
swollen a decade ago to twice what it is today, seems to be on a downward
trajectory.
The relatively high European Union export share is explained entirely by
bauxite/alumina, which constitutes almost 70 percent of the EU-bound traffic.
Bauxite, like many extractive industries, exists in only a handful of countries in the
world. European demand therefore, would account for a significant share of
Jamaican exports.
From the European Union, Jamaica imports mostly vehicles, machinery and
equipment, and pharmaceuticals, all of which account for half of the commodity
flow south. The significance of this list is that none of those commodities are
produced in Jamaica in significant quantities if at all. They are, however,
produced in almost every OECD economy, which suggests that relative prices may
be significant in determining the source of imports, but not whether they are
imported or not. Tariff reductions by Jamaica in respect of EU products under the
EPA are therefore likely to lead to diversion from some sources of imports to others
instead of replacing local production. For all other commodities, the EU share is
only marginal.
The scope for either export or import growth with respect to the European Union
seems therefore to be limited. Outside of bauxite, the export of which was not
constrained by tariffs before the advent of the EPA, there are few exports to the EU.
On the import side, the relatively low level of existing tariffs and the absence of
domestic production in the largest import categories suggest that not much
domestic production will be displaced by a cheaper import price.

Trade Commitments
Jamaica‟s institutionalized trading relationships are many and varied. On its own
and through its CARICOM membership, Jamaica has participated in a number of
multilateral trade fora such as the World Trade Organisation (WTO), the Free Trade
Areas of the Americas (FTAA), the Caribbean Single Market and Economy (CSME),
and the African Caribbean Pacific/European Union (ACP-EU), among others. At
the same time, Jamaica has signed a number of bilateral trade deals.
Jamaica is an original member of the WTO and has honoured its WTO obligations.
During the Uruguay Round in 1994 that founded the WTO, Jamaica bounded its
entire tariff structure for goods. Since then, it has dutifully applied Most Favoured
Nation (MFN) treatment to all its trading partners. Under the General Agreement
on Trade in Services (GATS), commitments were made in the areas of tourism,
business, educational services, health, recreational, transport, and financial
services. Though the country has not ratified the Fifth Protocol of the GATS on

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financial services, Jamaica has participated in the extended negotiations on basic
telecommunications and financial services.
Jamaica is one of the most active developing-country members of the WTO,
recognised for its high levels of participation in multilateral negotiations. In the
WTO, Jamaica has strongly advocated for special and differential treatment for
developing countries, which it sees as fundamental to its negotiating interest at the
multilateral level. The agricultural sector is the single largest employer and the
third largest earner of foreign exchange, so Jamaica has taken strong positions on
agricultural issues. In conjunction with its other CARICOM Partners, Jamaica has
made proposals relating to tariff reductions, such as exemptions from the
reduction of tariffs on a percentage of commodities from small developing countries
and also the maintenance and expansion of preferences.
Jamaica is active in a number of regional trade agreements10 allowed under Article
XXIV of the GATT. Jamaica is one of the founding and leading members of
CARICOM and a member of the Caribbean Single Market and Economy (CSME).
Much of Jamaica‟s trade policy is formulated and implemented within the context
of CARICOM, being that the country is one of its most active members. Within this
framework, preferential trade agreements have been concluded with a number of
states. Bilateral agreements have been signed with Venezuela, the Dominican
Republic, Colombia, Cuba, Costa Rica, Canada, the USA and the EU.
From the number of bilateral agreements and the size of the markets to which
Jamaica has preferential market access, it may be concluded that market access is
not a binding constraint on Jamaica‟s development. Jamaica has not been able to
take full advantage of the market opportunities that it already has. It is in this
context that the cooperation and technical assistance to identify and break supply
constraints that is a central part of the EPA may turn out to be even more
important than access to the EU market.

Tariff Levels and Trade Restrictions
The gradual reduction of tariffs on Jamaica‟s imports from the European Union
obligated by the EPA is to be understood as part of the trade liberalization process
that has been underway in Jamaica for some time. By 1990, Jamaica had already
completed the removal of almost all of its quantitative restrictions on imports and
had come to rely entirely on (relatively high) ad valorem tariffs for its industrial
policy. The process of trade liberalization gained impetus in the early 1990s when
the PNP (People‟s National Party) administration returned to power. In that first
phase, the tariff structure was simplified as well as lowered. Simplification was
effected by a reduction in the number and dispersion of rates. Between 1990 and

10
A regional trade area is broadly defined as a group of countries that adopt zero or significantly low tariffs
and no other restrictions on trade, among themselves, while not necessarily changing the barriers that each
member country has on trade with the countries outside the group.

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1993, both the average rate and the standard deviation in the tariff table fell by a
third.
The second phase, covering the remainder of the decade, was conducted under the
auspices of Jamaica‟s faithful and early implementation of CARICOM‟s Common
External Tariff (CET). With an already simplified tariff structure, this period was
characterized largely by further tariff reductions, the weighted average import tariff
falling from 20 percent in 1993 to 15.5 in 1999. At same time, there was complete
elimination of the tariff on certain raw materials and capital goods. An
examination of the top 30 commodities imported by Jamaica during that period
from its CARICOM partners, showed that the average CET rate had fallen from 15%
in 1993 to 11% in 1998.11 Since 2000, import and stamp duties have continued on
their downward trajectory, albeit at a much reduced rate. By 2007, the average
import tariff had fallen by another percentage point and a half to 14.
In order to increase confidence and predictability of its trade regime, Jamaica has
bound all of its tariff lines -- which is a commitment to not raise tariffs above the
levels that obtained at the completion of the Uruguay Round in 1994. Tariff rates
in Jamaica can and have varied in both directions below that bound rate.
Duties on agricultural products, which range up to 100 percent, tend to be higher
than those on non-agricultural commodities, which are rarely more than 40
percent. For some products, other duties and charges are generally bound at 15%;
in the case of agricultural products, they are bound at higher levels. Custom user-
fees and, in some cases, stamp duty are also applied to imports. An additional
stamp duty Is levied on the customs value plus tariffs in a compound manner. In
the case of vegetables, there is a 100% tariff plus an additional stamp duty of 80%;
at the end of the process, the aggregate import duty could be as high as 260%.
Almost all imports from CARICOM members enter Jamaica duty-free.
Jamaica makes limited use of import licensing in order to regulate the inflow of
products that will have an impact on the environment, health and safety. No
charges apply to exports and export prohibitions are applied to only a few products
such as spirits and wines. Jamaica uses a plethora of disguised export subsidies,
mostly in the form of tax relief on profits or gains, import duties, excise duties and
GCT for export and related industries. Explicit export subsidies are applied in only
four instances – the Foreign Sales Corporation (FSC), Export Free Zones(EFZ),
Export Industry Encouragement (EIE) and the Simulation Results
In the Jamaican case, we find that the hypothesis of considerable or even
noticeable damage to the economy is rejected, while the concern in relation to
revenue-loss is warranted, though the problem is manageable. The overall picture
which emerges is of an agreement whose trade element will not require significant
restructuring of the Jamaican economy, while the fiscal adjustment will, at worst,
be small.

11
Bank of Jamaica Pamphlet, 2003.

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Tariff Changes under the EPA
At a glance, the tariff reductions obligated by the EPA seem large. Tariffs on
imports into Jamaica from the European Union will be cut, on average by, two-
thirds. However, closer scrutiny reveals enough qualifications and obstacles to
considerably diminish the expected impact of those tariff reductions. A large
number of commodities from the European Union are already admissible into
Jamaica with a low or zero tariff, including grains, cereals, seeds, a variety of
chemicals, animal skins, paper, some fabric, pre-fabricated iron and steel, and
manufacturing machinery and equipment. Many of these no- or low-tariff items
already encompass the commodity groups that are likely to have significant trade
potential. Similarly, some of the commodities to which new tariff reductions apply,
such as fur-skins, have no significant trade potential (though Jamaican
bobsledders and dog-mushers may be grateful).
Another reason why EU-Jamaica trade liberalization will have limited impact is the
25-year length of the implementation timetable. Such a long period of
implementation distributes the impact over a sufficiently long time that each year‟s
adjustment is necessarily small. Moreover, the global trading environment is
changing with sufficient rapidity that one or two decades hence, many of the
commodities in the schedule will become irrelevant before they are liberalized.
A further contributing factor limiting the impact of the trade liberalization is the
small amount of EU imports into Jamaica. While some 23 percent of the island‟s
share of total imports originates in the European Union, if we omit services and
consider only goods, to which the tariff liberalization largely applies, the EU share
drops to only to six percent. And the small size of this activity is not largely due to
prohibitive tariffs. Rather, it reflects a combination of the many factors that
determine trade patterns, such as proximity, language, and historical ties. Few of
these other determinants can be influenced by the EPA.
Within this limited context, the more significant tariff reductions amongst the slate
of goods affected apply to a range of agricultural and manufactured products. In
agriculture, non-negligible tariff reductions apply to a variety of vegetables and
nuts, for which the average tariff has fallen from 19 percent to eight – an eleven
percentage point difference, which roughly approximates the proportional effect it
will have on the import price. Prepared and preserved food along with other food
items will experience a 7 percentage point reduction. The tariff on garments and
textiles, which currently averages 7.5 percent, will be eliminated altogether. And
the tariff reduction on a limited range of manufactured items including, jewellery,
handbags, lighting, and sporting equipment falls from an average of just over 10
percent to near zero. We examine the effects of these tariff reductions first on trade
flows and then on the rest of the economy and the fiscal accounts.

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SIMULATION RESULTS
Trade and Macro Outcomes
After the completion of the drawn-out schedule of tariff reductions, commodity
imports from the European Union rise by nearly half – a staggering increase. But
this, too, proves ultimately to have little effect on the Jamaican economy.
The overwhelming majority of the traffic from the EU to Jamaica is in services,
which accounted for more than 85 percent of the J$54b of imports in 2005. The
tariff reductions apply to only goods, however, so the impressive increase in
commodity imports mention above is operating on a base of only $8b of imports.
As a result, the overall increase in EU imports, services included, is only six
percent.
Further, with the EU accountable for less than a 25 percent share of Jamaica‟s
import bill, the potential increase in total imports would only be a quarter of that,
which is a mere 1.5 percent. But even that will contain a substantial portion
which represents not new trade that replaces domestic production (so called “trade
creation”), but rather import purchases shifted from other import sources against
which European imports are now more competitive (so called “trade diversion”). It
turns out that some two-thirds of the increase in imports from the EU is due to
trade diversion. So ultimately, the increase in total imports as a result of the EPA
is less than half of a percent. And that change, one must remember, is spread over
25 years.
A remaining, and potentially important, result is the extent to which that limited
impact is sufficiently concentrated to lead to a substantial adjustment for
particular local industries. That, however, turns out not to be the case.
Agriculture is the only sector to even have the potential to suffer in that way. The
10 percentage point tariff reduction on agricultural produce leads to a four-fold
increase in imports from the EU, almost all of which is trade-creation and therefore
potentially harmful to the domestic producers being replaced. However, the EU
share of total imports is only five percent and imports are a sufficiently small share
of total domestic supply that required contraction of domestic production ends up
being less than two percent.
Another candidate sector for a downward adjustment is manufactured metal
products, such as appliances, tools, and motors. In that industry, the simulation
suggests that the modest average tariff reduction of 4 percentage points yields a 40
percent increase in imports from the EU. But the vast majority of that is trade
diverted from other sources, given the small size of that sub-sector of
manufacturing in Jamaica. In the end, the impact on the sub-sector is a
contraction of only 2.4 percent.
The balance of trade changes little. Exports (not just those to the European Union)
are estimated to increase by one percent, or roughly J$2 billion. Total imports,
meanwhile, are expected to rise by 0.6%, or roughly J$1.4 billion, leaving a small,

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positive balance of around J$600 million. In the context of an trade deficit that is
200 times greater than that, however, this is a negligible change.
The likelihood, therefore that the EPA‟s tariff liberalization will have a strong trade
effect and require substantial adjustment to the structure of the Jamaican
economy is low. This is to be expected with the small actual and potential share of
EU trade with Jamaica and the small ratio of imports to domestic production in the
most-affected sectors. The protracted liberalization timetable makes the
adjustment required all the less important.

Fiscal Outcomes
Small economies, like those in the Caribbean, necessarily rely disproportionately
on taxes levied at the border versus those on domestic productive activity. Weak
administrative capacity in tax-collection only increases that reliance as border
taxes are easier to identify and collect. In Jamaica, border taxes have consistently
accounted for more than a quarter of total revenue. Governments are therefore
rightly sensitive to the fiscal ramifications of new trade agreements, which tend to
undermine an important revenue stream.
The only noticeable effect of the trade liberalization component of the EPA on
Jamaica is the loss of revenue. The net loss of indirect tax revenue from the
liberalization of trade with the European Union is J$2.9b in 2005 dollars, or almost
three percent of total indirect tax revenue. Such a loss potentially adds 0.4 percent
of GDP to the fiscal deficit. While not a massive fiscal burden, in the context of
Jamaica‟s long and ongoing struggle with fiscal deficits, this is not an insignificant
amount. In order to levy additional indirect taxation to compensate for this loss,
the rate on other indirect taxation would have to rise by a fifth of a percentage
point. If this compensation had to be raised entirely from the island‟s VAT (General
Consumption Tax), it would have to be bumped up by around a percentage point.
Note that the data presented represents not the direct loss of import tariffs from
the EPA liberalization schedule, but rather incorporates changes in the quantities
of imports across the spectrum and the changes in domestic activity and the level
of taxation derived from those changes. Thus, we report on how total indirect
revenue would change, and on the final impact upon the budget.

Growth Potential
The trade-in-services provisions of the EPA are likely to produce increases in total
factor productivity (TFP) – a rise in the productivity of all factors due to more
efficient resource and factor utilization. Historical experience with integration
treaties suggest that a five percent increase in TFP in the affected industries is not
unlikely. In the case of Jamaica, the sectors likely to be positively affected are
tourism, financial services, communications, and business services.

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Such an increase in productivity not only raises income directly, but more
importantly, raises savings to finance additional investment. From the ensuing
capacity expansion, further increases in income occur. In Jamaica‟s case, such a
productivity increase eventually raises the level of GDP by 2.7 percent. This is an
obviously positive outcome and will be a boon to the industries where the
productivity increase is concentrated. From a macroeconomic viewpoint, however,
it will not be transformative.

CONCLUSION
We are unsurprised to find that the impact of the EPA on the Jamaican economy is
small. Much of the challenge to the EPA in the public discourse was based on the
enormity of the EU economy compared to the relatively miniscule size of the
economies in the Caribbean. As it turns out, the space for EU trade in the
Jamaican economy is itself miniscule. Trade in services, not directly affected by
the tariff reduction on goods, accounts for the vast majority of the trade with
Jamaica. That, and the combination of trade diversion and non-price factors,
accounts for the limited existing and potential level of trade with Jamaica. With
such a small impact from the trade in goods, the ultimate effect on domestic
industries turned out to be tiny.
The fiscal impact at nearly half a percentage point of GDP is of greater consequence
in the context of Jamaica‟s already high fiscal deficit and high tax rates. The loss
of the EPA revenue will require a small, compensatory increase in indirect tax
rates.
In exchange for the revenue loss, the EPA will likely generate productivity increases
which will a promote a certain amount of economic growth. Ultimately, the
economy and the standard-of-living will rise by a few percentage points.

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BIBLIOGRAPHY
Caribbean Policy Research Institute (2007), The Political Economy of Trade in the
Caribbean.
Lofgren, Hans, Rebecca Lee Harris, Sherman Robinson (2002), A Standard
Computable General Equilibrium (CGE) Model in GAMS, International Food
Policy Research Institute, Washington, D.C.
Willenbockel, Dirk (2001) 'Recent Developments in the Predictive Assessment of
Dynamic Integration Effects: A Critical Appraisal', in The Asymmetric Global
Economy: Growth, Investment and Public Policy, ed. by C C Paraskevopoulos,
T. Georgakopoulos, L. Michelis. APF Press: Toronto.

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