University of Ghana http://ugspace.ug.edu.gh UNIVERSITY OF GHANA THE EFFECTS OF AGOA AND EU-ACP TRADE PREFERENCES ON GHANA’S BILATERAL EXPORTS: A COMPARATIVE STUDY BY PRINCE BAAH (10277227) A THESIS SUBMITTED TO THE UNIVERSITY OF GHANA, LEGON IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF MASTER OF PHILOSOPHY (M.PHIL) DEGREE IN ECONOMICS JULY, 2015 University of Ghana http://ugspace.ug.edu.gh DECLARATION I, PRINCE BAAH, hereby declare that this thesis is the original research undertaken by me under the guidance of my supervisors. Neither the whole nor a part of this thesis has been presented for another degree elsewhere. ………………………………………… PRINCE BAAH (10277227) ……………………………………… DATE ……………………………….. …………………………………… DR. FESTUS EBO TURKSON DR. FRITZ AUGUSTINE GOCKEL (SUPERVISOR) (SUPERVISOR) ………………………………. ………………………………….. DATE DATE ii University of Ghana http://ugspace.ug.edu.gh ABSTRACT Ghana has been a recipient of several trade preferences fashioned to increase its export earnings and diversify its exports. Among these trade preferences are the notable EU- ACP and AGOA adopted by the EU and US respectively. The study draws motivation from the relative sparcity of literature that seeks to investigate the effect of these preferences on individual developing countries and the inconclusiveness of existing studies. The main objective of the study is to find out if the EU-ACP and AGOA trade preferences have had any effects on the total bilateral exports of Ghana. Estimating a gravity model augmented with measures of trade preference agreements and a multilateral resistance term, the study uses bilateral export flows and key gravity covariates from the CEP II, UN-COMTRADE and WDI on Ghana’s export destinations over the period 1960-2013. After taking into account the unobserved individual heterogeneity, controlling for the potential endogeneity of the trade preference dummies, and correcting for serial correlation and heteroskedasticiy, the study finds that EU-ACP and AGOA trade preferences have a negative and insignificant impact on Ghana’s total bilateral exports. The results therefore indicate the need for Ghana to focus on expanding its export base in order to significantly benefit from the two PTAs. It is also recommended that the EU and US expand the product coverage of their respective preference schemes to cover commodities in which Ghana has a comparative advantage. iii University of Ghana http://ugspace.ug.edu.gh DEDICATION To the Baah and Issahaka families in consolidation of our family ties. iv University of Ghana http://ugspace.ug.edu.gh ACKNOWLEDGEMENT I thank the Almighty God for his mercies and abounding gift of knowledge that has seen me through the completion of this thesis. My profound gratitude goes to Dr. Festus Ebo Turkson and Dr. Fritz Gockel for their good supervision. My primary debt is to Mr and Mrs Oduro for their motivation and encouragement throughout this programme. For their affection, constructive suggestions, as well as moral support, I express my heartfelt appreciation to my mum and siblings (Mavis Baah, Louis Asare and Priscilla Martey). I am also indebted to many friends and colleagues from the economics department for their support. I acknowledge the valuable contribution made by Rebecca Addo, Deborah Amartey, Maxwell Adika, Abdallah Issahaka Wumpini, Vera Acheampong, George Acheampong, Iddrisu Rashid, Manan Moro, Salim Mumuni Bawumiah and Ibrahim Issahaka Dokurugu in helping to improve the study. I will never forget the meritorious contribution of my father, Mr. Mohammed Issahaka Salifu. v University of Ghana http://ugspace.ug.edu.gh TABLE OF CONTENTS DECLARATION .......................................................................................................... ii ABSTRACT ................................................................................................................. iii DEDICATION ............................................................................................................. iv ACKNOWLEDGEMENT .............................................................................................v TABLE OF CONTENTS ............................................................................................ vi LIST OF FIGURES ..................................................................................................... ix LIST OF TABLES .........................................................................................................x LIST OF ABBREVIATIONS ...................................................................................... xi CHAPTER ONE INTRODUCTION 1 1.1 Introduction to International Trade ....................................................................1 1.2 Background of the Study ...................................................................................4 1.2.1 Ghana’s trade in Retrospect ........................................................................9 1.3 Problem Statement .......................................................................................... 12 1.4 Objectives of Study ......................................................................................... 14 1.5 Rationale of the Study ..................................................................................... 14 1.6 Organization of Study ...................................................................................... 16 CHAPTER TWO OVERVIEW OF EU AND US TRADE PREFERENCES 17 2.1 Introduction to Trade Preferences .................................................................... 17 2.1.1 Unilateral and Non-Reciprocal Trade Preferences..................................... 18 2.1.2 Trade Creation, Facilitation and Erosion ................................................... 20 2.2 The Scope and Depth of AGOA ...................................................................... 21 2.2.1 Membership ............................................................................................. 23 2.2.2 Product coverage ...................................................................................... 25 2.2.3 Rules of Origin ......................................................................................... 26 vi University of Ghana http://ugspace.ug.edu.gh 2.2.4 Preference margin .................................................................................... 29 2.2.5 Assessment of the Export Performance of SSA under AGOA ................... 30 2.2.6 Ghana in AGOA ....................................................................................... 32 2.3 The Scope of the EU-ACP Trade Agreement ................................................... 34 2.3.1 Historical Overview of the EU-ACP Trade Relationship........................... 35 CHAPTER THREE LITERATURE REVIEW 42 3.1 Introduction ..................................................................................................... 42 3.2 Theoretical Review .......................................................................................... 42 3.2.1 Models of International trade .................................................................... 42 3.2.2 Theoretical Framework of Trade Preferences ............................................ 46 3.3 Empirical Review ............................................................................................ 48 3.4 Conclusion ...................................................................................................... 63 CHAPTER FOUR METHODOLOGY 65 4.1 Introduction ..................................................................................................... 65 4.2 Theoretical Foundations of the Gravity model ................................................. 65 4.3 Model Specification......................................................................................... 69 4.4 Data and Variables .......................................................................................... 76 4.4.1 Description of Variables ........................................................................... 76 4.5 Estimation Techniques .................................................................................... 79 4.6 Diagnostic tests ............................................................................................... 85 4.6.1 Serial Correlation and Heteroskedasticity ................................................. 85 4.7 Conclusion ...................................................................................................... 87 CHAPTER FIVE DATA ANALYSIS 88 5.1 Introduction ..................................................................................................... 88 5.2 Descriptive Analysis ........................................................................................ 88 vii University of Ghana http://ugspace.ug.edu.gh 5.3 Diagnostic Tests .............................................................................................. 90 5.3.1 Time Effects ............................................................................................. 90 5.3.2 Heterogeneity Bias ................................................................................... 90 5.3.3 Serial Correlation ..................................................................................... 91 5.3.4 Heteroskedasticity .................................................................................... 92 5.4 Empirical Results and Discussion .................................................................... 92 5.4.1 Economic Size .......................................................................................... 95 5.4.2 Distance ................................................................................................... 95 5.4.3 Control variables ...................................................................................... 96 5.4.4 EU-ACP ................................................................................................... 96 5.4.5 AGOA ...................................................................................................... 97 5.5 Conclusion ...................................................................................................... 98 CHAPTER SIX CONCLUSION AND RECOMMENDATIONS 99 6.1 Introduction ..................................................................................................... 99 6.2 Summary and Conclusion ................................................................................ 99 6.3 Recommendations ......................................................................................... 100 6.4 Delimitation of Study .................................................................................... 102 REFERENCES .......................................................................................................... 103 APPENDICES ........................................................................................................... 120 viii University of Ghana http://ugspace.ug.edu.gh LIST OF FIGURES Figure 1-1: Total goods, EU trade flows with Ghana (annual data 2004-2013) ............... 10 Figure 1-2: Ghana’s trade with the United States (2005 to 2012) ................................... 11 Figure 2-1: US imports from AGOA countries, 2000 - 2013 .......................................... 31 Figure 2-2: Ghana’s exports to the United States as a percentage of Ghana’s total exports (1996 to 2013) .....…………………………………………………33 Figure 2-3: EU Trade Preferences: The “Pyramid of Privilege” ..................................... 35 ix University of Ghana http://ugspace.ug.edu.gh LIST OF TABLES Table 2-1: Breakdown of RTAs in force ........................................................................ 17 Table 2-2: EU-ACP agreements and their respective membership .................................. 39 Table 5-1: Summary Statistics of Dependent and Independent Variables, 1990 - 2013 ... 89 Table 5-2: Breusch and Pagan LM test for random effects ............................................. 91 Table 5-3: Wooldridge test for Serial Correlation in Panel data ...................................... 91 Table 5-4: Breusch-Pagan test for Heteroskedasticity .................................................... 92 Table 5-5: Estimates of gravity model using FE, RE and HT, 1990-2013. ...................... 94 x