DETERMINANTS OF INTRA-INDUSTRY TRADE BETWEEN ECOWAS AND EUROPEAN UNION

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DETERMINANTS OF INTRA-INDUSTRY TRADE BETWEEN ECOWAS AND EUROPEAN UNION

BY

DAMILOLA FELIX ARAWOMO Matric No. 141640

B.sc (Econs) AAUA, M.Sc (Econs) Ibadan

A Thesis in the Department of Economics, Submitted to the Faculty of the Social Sciences in partial fulfilment of the requirements for the Degree of

DOCTOR OF PHILOSOPHY

of the

UNIVERSITY OF IBADAN, NIGERIA.

NOVEMBER, 2014

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ABSTRACT

Economic Community of West African States‘ (ECOWAS) total trade has reflected deficit in the last two decades. It was $1.42 billion in 1990, increased to $3.32 billion in 2000 and

$6.24 billion in 2009. This trade imbalance in the ECOWAS region can be traced to the dominance of primary over manufactured products in the region‘s exports. However, the imbalance can be reversed with trade in similar products that is Intra-Industry Trade (IIT) between the region and her highest trade partner, (European Union (EU)). Empirical studies have examined IIT among developed countries (horizontal-IIT), while adequate attention has not been paid to it between developing and developed countries (vertical-IIT).

This study, therefore, examined the extent and determinants of IIT in both final and intermediate products between ECOWAS and EU.

The Augmented Gravity Model, based on Flam-Helpman‘s North-South trade framework, was estimated to determine the factors affecting vertical-IIT between ECOWAS and EU.

The model considered income distribution in partner countries, factor endowment, product differentiation, Foreign Direct Investment (FDI), relative country size, weighted distance, capital-labour ratio, exchange rate and tariff as determinants of vertical-IIT. The Grubel- Lloyd index, bounded by 0 and 1, was used to compute the dependent variable (extent of vertical-IIT). A closer to one Grubel-Lloyd index implied higher level of IIT. Data were collected from the World Integrated Trade Solution and World Development Indicators from 2001 to 2011. Fractional Logit Regression technique that took note of the nature of the dependent variable was estimated while controlling for heteroscedasticity. The estimations were done for both final and intermediate products. Hausman-test and LM-test were used to confirm the robustness of the model and statistical significance at P≤0.05.

Vertical-IIT in both final and intermediate products between ECOWAS and EU were low.

Average vertical-IIT in final products between the two regions increased from 0.1 in 2001 to 0.3 in 2011, while that of vertical-IIT in intermediate products increased from 0.1 in 2001 to 0.2 in 2011. Income distribution, factor endowment, products differentiation and FDI improved vertical-IIT in final products. Specifically, if these factors were increased by

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1.0%, vertical-IIT in final products would improve by 10.0% 4.0%, 4.0% and 11.1%, respectively. However, the coefficients of the weighted distance (-0.02) and tariff (-0.006) were indicative of inverse change in vertical-IIT in final products by 2.0% and 0.06% in response to 1.0% change in the two factors respectively. For the vertical-IIT in intermediate products, 1.0% change in factor endowment, product differentiation, income distribution and relative country size improved vertical-IIT by 5.9%, 2.2%, 4.1%, and 3.7%, respectively. The coefficients of FDI (0.19) implied that vertical-IIT in intermediate products increased by 19.0% in response to 1.0% change in FDI.

Product differentiation and foreign direct investment have positive and significant impact on intra-industry trade in final and intermediate products between Economic Community of West African States and European Union. It is important, therefore, to attract more multinational firms into the region. Efforts should also be made to improve on the level of products differentiation in the region.

Keywords: Intra-industry trade, Fractional logit model, Intermediate products, products differentiation.

Word count: 495

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DEDICATION

To the Almighty God, for;

“even when I must walk through the darkest valley … you are with me; your rod and your staff reassure me” (Psalm 23:4; NET).

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ACKNOWLEDGEMENT

All glory be to the Almighty God, Alpha and Omega, Beginning and The Ending, who has proven the meanings of His names in my life.

I would like to express my special appreciation to my supervisor Dr. Adeolu O.

Adewuyi, you have been a tremendous mentor for me. Sir, accept my special appreciations for encouraging me to pursue this programme and also for allowing me grow under you as a researcher. Your advice on both research as well as on my career have been priceless. Also, I would like to thank the rest of member my thesis committee:

Professor Olawale E. Ogunkola and Dr, Abiodun S. Bankole for the learning opportunities and critiques of my research work. I appreciate all academic and non- academic staff of the department of Economics University of Ibadan. Regards to my colleague in M.Sc and Ph.D programmes, from you all I have received wonderful inspirations, suggestions, and encouragement throughout the period of this programme.

Words cannot express how grateful I am to my parents Mr Anthony Oladele Arawomo and Mrs Alice Olayemi Arawomo for all of the sacrifices that you have made on me and my siblings. Your prayers and love sustained us thus far. My siblings (Mrs Oluwaseyi Alli, Olawale Arawomo, Barrister Tosin Arawomo, Oluwagbemi Arawomo) deserve much appreciation for their understanding. To my caring, loving, and supportive wife, Mrs Bisola Silva Arawomo, accept my deepest gratitude. Your encouragement when the goings became rough is much appreciated. It was a great comfort and relief to know that you were willing to endure the financial inadequacies occasioned by the commitment to the programme. My loving son Oluwadarasimi Emmanuel Arawomo is remembered, you came as a soothing balm in the cause of the programme.

I also appreciate fathers in the lord, church members, friends, relatives and neighbours, but time, space, and modesty does not permit me mention all names.

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CERTIFICATION

I certify that this work was carried out by Damilola Felix ARAWOMO in the Department of Economics, University of Ibadan.

………..

Adeolu O. Adewuyi

Dip. Coop. Studies, B.Sc., M.Sc., PhD. (Ibadan) Supervisor and chairman, thesis committee Senior lecturer, Department of Economics,

University of Ibadan, Nigeria

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TABLE OF CONTENTS

TITLE PAGE

Title Page i

Abstract ii

Acknowledgement iii

Dedication iv

Certification v

Table of Content vi

List of Tables vii

List of Figures xi

List of Abbreviations xvi

CHAPTER ONE: INTRODUCTION 1

1.1 Preamble and Statement of the Problem 1

1.2 Objectives of the Study 4

1.3 Justification for the Study 4

1.4 Scope of the Study 7

1.5 Organisation of the Study 7

CHAPTER TWO: ECOWAS AND EU: ECONOMIC PERFORMANCE, TRADE

FLOWS AND TRADE AGREEMENTS 9

2.1 Introduction 9

2.2 Comparative Analysis of Macroeconomic Performance 9 2.1.1 Real Gross Domestic Product (RGDP) of the ECOWAS and EU 10

2.1.2 Growth Rate of GDP in ECOWAS and EU 12

2.1.3 Per Capita GDP in ECOWAS and EU 14

2.1.4 Foreign Direct Investment in ECOWAS and EU 16

2.1.5 The Exchange Rate of ECOWAS countries and EU 19

2.1.6 Trade Tariff in ECOWAS-EU Trade 21

2.1.7 Structure of Output and Comparative Advantage between

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ECOWAS and EU 25

2.3 Trade Policies and Trade Agreements between ECOWAS and EU 28

i. The Lome Convention 28

ii. The Cotonou Agreement 30

iii. Economic Partnership Agreement (EPA) 30

2.4 Performance of ECOWAS Trade with EU 31

2.4.1 Imports of ECOWAS Countries to the World (Billions of U.S Dollars) 35

2.4.2 Performance of ECOWAS Trade with EU 43

2.4.3 Specific Products/Industries in which ECOWAS has IIT with EU. 43

CHAPTER THREE: LITERATURE REVIEW 48

3.0 Introduction 49

3.1 Theoretical Review 48

3.1.1 The Theories of IIT in Final Products 48

3.1.1.1 Models of Vertical IIT in Final Products. 49

i. Neo-Heckscher-Ohlin Model 49

ii. Natural Oligopoly and Vertical Differentiation 52 iii. Model of North-South and Vertical Product Differentiation 54 3.1.1.2 Models of Horizontal IIT in Final Products 54

i. Neo-Chamberlinian models 55

ii. Neo-Hotelling models 56

iii. Reciprocal Dumping Model 56

3.1.1.3 Concluding Remarks on Review of Theories of IIT in Final Products 57 3.2 Review of Methodologies Used in Previous Studies 58 3.2.1 Review of the Methods of Separating Trade Flows into Intermediate and Final

Products 58

3.2.2 Measurement of IIT 60

3.2.3 Review of the Methods of Disentangling IIT into Differentiated Products 62 3.2.4 Measurement of some the Explanatory Variables 64

3.2.4.1 Product Differentiation 64

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3.2.4.2 Geographic distance (DIST) 65

3.2.5 Review of Methods of Analysis 66

3.3 Empirical Review 67

3.3.1 Existence and magnitude of IIT 70

3.3.2 Studies on Determinants of IIT Conducted among Developing Countries 72 3.3.3 Determinants of IIT Conducted on Single Industry. 73 3.3.4 Determinants of IIT Conducted between Developing and Developed

Countries. 75

3.3.5 Determinants of IIT in Intermediate Products 78

CHAPTER FOUR: THEORETICAL FRAMEWORK AND METHODOLOGY 82

4.0 Introduction 82

4.1 Theoretical Framework 84

4.2. Methodology 86

4.2.1 Measures IIT 87

4.2.2 Model Specification 87

4.2.2.1 The Gravity Model for IIT 87

4.2.3 Estimation Technique 91

4.2.3.1 Panel Data and Fractional Logit Regression Analyses 91

4.2.4 Methods of Analysis 92

4.2.5 Definition and Sources of Key Variables. 92

CHAPTER FIVE: EMPIRICAL ANALYSIS 94

5.0 Introduction 94

5.1 Preliminary Results 94

5.1.1 Measurement of the Extent of IIT between ECOWAS and EU 94 5.1.2 Separating Trade Flows into Vertical and Horizontal Trade 94 5.1.3 Categorising the Trade Flows into Final and Intermediate Products 96

5.1.4 Bivariate Relationship among Variables 97

5.2 Presentation of the Results 101

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5.2.1 Extent of IIT between ECOWAS and EU 101

5.2.1.1 Final Products 101

i. Ghana’s IIT in Final Products 101

ii. Cote d’Ivoire’s IIT in Final Products 104

iii. Nigeria’s IIT in Final Products 106

5.2.1.2 Intermediate Products 108

i. Cote d’Ivoire’s IIT in Intermediate Products 108

ii. Ghana’s IIT in Intermediate Products 111

iii. Nigeria’s IIT in Intermediate Products 114 5.2.1.3 Comparing IIT across Selected ECOWAS Countries. 117

5.2.2 Presentation of Empirical Results 121

5.2.2.1 Determinants of IIT in Final Products between ECOWAS and EU 121 5.2.2.2 Determinants of IIT in Final Products between Nigeria and EU 123 5.2.2.3 Determinants of IIT in Final Products between Ghana and EU 125 5.2.2.4 Determinants of IIT in Final Products between Cote d‘Ivoire and EU 127 5.2.2.5 Determinants of IIT in Intermediate Products between ECOWAS and EU 128 5.2.2.6 Determinants of IIT in Intermediate Products between Nigeria and EU 131 5.2.2.7 Determinants of IIT in Intermediate Products between Ghana and EU 133 5.2.2.8 Determinants of IIT in Intermediate Products between

Cote d‘Ivoire and EU 135

5.3 Discussion of the Results 137

5.3.1 Extent of IIT in Final Products between Selected ECOWAS Countries and EU

(First Objective) 137

i. Analysis of IIT in Final Products between Cote d’Ivoire and EU 137 ii. Analysis of IIT in Final Products between Ghana and EU 141 iii. Analysis of IIT in Final Products between Nigeria and EU 145 5.3.2 Extent of IIT (IIT) between ECOWAS and EU Intermediate Products (First

Objective) 150

i. Analysis of IIT in Intermediate Products between Cote d’Ivoire and EU 150 ii. Analysis of IIT in Intermediate Products between Ghana and EU 150

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iii. Analysis of IIT in Intermediate Products between Nigeria and EU 154 5.4 Determinants of IIT in final products between selected ECOWAS countries and EU

(Objective Two) 162

i. Relative Market Size and IIT in Final Products 162 ii. Factor Endowment and IIT in Final Products 163 iii. Income Distribution and IIT in Final Products 164 iv. Real Effective Exchange Rate and IIT in Final Products 164 v. Weighted Distance and IIT in Final Products 165 vi. Product Differentiation and IIT in Final Products 165 vii. Trade Tariff and IIT in Final Products 166 viii. FDI and IIT in Final Products 168 5.5 Determinants of IIT in intermediate products between selected ECOWAS countries

and EU, (Third Objective) 168

i. Relative Market Size and IIT in Intermediate Products 168 ii Factor Endowment and IIT in Intermediate Products 169 iii. Income Distribution and IIT in Intermediate Products 169 iv. Real Effective Exchange Rate and IIT in Intermediate Products 169 v. Weighted Distance and IIT in Intermediate Products 170 vi. Product Differentiation and IIT in Intermediate Products 170 vii. Trade Tariff and IIT in Intermediate Products 171 viii. Capital-Labour Ratio and IIT in Intermediate Products 171 ix. Inward FDI and IIT in Intermediate Products 172 CHAPTER SIX: SUMMARY, CONCLUSION AND RECOMMENDATION 174

6.1 Summary 174

6.2 Conclusion 177

6.3 Recommendations 178

6.4 Agenda for future research 179

REFERENCES 180

APPENDICES 211

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List of Tables

Table 2.1. Real Gross Domestic Product of the ECOWAS Countries. (Billion Dollars) 11 Table 2.2. ECOWAS States Average Annual Rate of Gross Domestic Product (%) 13 Table 2.3. ECOWAS States Average Annual Gross Domestic Product per Capita

($ Dollars) 15

Table 4: Foreign direct investment, net inflows (Million US$) 17 Table 2.5: European Union Companies that have Affiliates in Selected ECOWAS

Countries. 18

Table 2.6: ECOWAS Counties Real Exchange Rates to United States Dollars

(Local Currencies) 20

Table 2.7. Ghana Trade Tariff on Products Imported from EU 22 Table 2.8. Cote d‘Ivoire‘s Trade Tariff on Products Imported from EU 23 Table 2.9. Cote d‘Ivoire‘s Trade Tariff on Products Imported from EU 24 Table 2.10 Structure of Output in ECOWAS (Per centages) 27 Table 2.11 Exports of ECOWAS Countries to the World (Billions of U.S Dollars) 33 Table 2.12 Imports of ECOWAS Countries to the World (Billions of U.S Dollars) 34 Table 2.13 ECOWAS Exports of Goods to European Union (Million $) 36 Table 2.14 ECOWAS Imports of Goods from European Union ($ Million) 38 Table 2.15. Sectoral Composition of Trade between ECOWAS and European

Union (%) 40 Table 2.17. Products in which Nigeria has Intra-industry Trade with EU ($ 000) 45 Table 2.17. Products in which Ghana has Intra-industry Trade with EU ($ 000) 46 Table 2.18. Products in which Côte d'Ivoire has Intra-industry Trade with EU ($ 000) 47 Table 3.1 Broad Economic Categories Classification Scheme (BEC, 1986) 59 Table 3.2. Topology of Products Based Studies on Existence of Intra-industry Trade 69 Table 3.3. Topology of Country Based Studies on Existence of Intra-industry Trade 70 Table 3.4 Topology of Studies on the Existence of Intra-industry Trade in

Intermediate Products 71

Table 4.1. A prior Expectation of the Variables 90

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Table 5.1. Summary of the Trade Flows between the Selected Countries and

EU (2011) 95

Table 5.2 Results of correlation among variables (final intra-industry model) 98

Table 5.3. Results of correlation among variables (intermediate intra-industry trade model) 99

Table 5.4 Ghana‘s Intra Industry Trade in Final Products 103

Table 5.5. Cote d‘Ivoire‘s Intra Industry Trade in Final Products 105

Table 5.6. Nigeria‘s Intra Industry Trade in Final Products 107

Table 5.7 Cote d‘Ivoire‘s Intra Industry Trade in Intermediate Products 110

Trade 5.8. Ghana‘s Intra Industry Trade in Intermediate Products 113

Trade 5.9. Nigeria‘s Intra Industry Trade in Intermediate Products 116

Table 5.10. Descriptive Comparison of Intra-industry Trade in Final Products among the Selected ECOWAS Countries 118

Table 5.11. Descriptive Comparison of Intra-industry Trade in Intermediate Products among the Selected ECOWAS Countries 120

Table 5.12: Regression Results of the Determinants of Intra-industry Trade in Final Products in ECOWAS 122

Table 5.13. Regression Results of the Determinants of Intra-industry Trade in Final Products in Nigeria 124

Table 5.14: Regression Results of the Determinants of Intra-industry Trade in Final Products in Ghana 126

Table 5.15: Regression Results of the Determinants of Intra-industry Trade in Final Products in Cote d‘Ivoire 128

Table 5.16: Regression Results of the Determinants of Intra-industry Trade in Intermediate Products in ECOWAS 130

Table 5.17: Regression Results of the Determinants of Intra-industry Trade in Intermediate Products in Nigeria 132

Table 5.18: Regression Results of the Determinants of Intra-industry Trade in Intermediate Products in Ghana 134 Table 5.19. Regression Results of the Determinants of Intra-industry Trade in Intermediate

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Products in Cote d‘Ivoire 136

Table 5.20: Selected Econometric Study of Determinants of Intra-industry Trade in Final Products between Developed and Developing Countries 167 Table 5.21: Stylized Summary: Selected Econometric Study of Determinants of Intra-

industry Trade in Intermediate Products. 173 Table A-1: Average Intra-Industry Trade Computed with Adjusted Grubel Lloyds Index for

Final Products in Cote d‘Ivoire 194

Table A-2: Average Intra-Industry Trade Computed with Adjusted Grubel Lloyds Index for Intermediate Products in Cote d‘Ivoire 195 Table A-3: Average Intra-Industry Trade Computed with Adjusted Grubel Lloyds Index for

Final Products in Ghana 196

Table A-4: Average Intra-Industry Trade Computed with Adjusted Grubel Lloyds Index for

Intermediate Products in Ghana 197

Table A-5: Average Intra-Industry Trade Computed with Adjusted Grubel Lloyds Index for

Final Products in Nigeria 198

Table A-6: Average Intra-Industry Trade Computed with Adjusted Grubel Lloyds

Index for Intermediate Products in Nigeria 199 Table A-7: Trade Patterns: Theory And Empirical Perspective. 200 Table A-8: Summary of the Review of Previous Empirical Studies 201 Table A-9: Stylized Summary of Empirical Studies on Determinants of Intra-industry Trade

(North South Trade) 209

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List of Figures

Figure 2.1. Structure of Output between ECOWAS and EU 26 Figure 2.2. Share in ECOWAS Trade with the European Union (Exports and Imports) 37 Figure 2.3: SITC Categorisation of ECOWAS Exports to European Union (%, 2011) 41 Figure 2.4: SITC Categorisation of Imports of ECOWAS from 42

Figure 5.1: Trends of Cote d‘Ivoire Intra-industry Trade with EU in Final Products (2001 to2011)

Figure 5.2 Industrial Composition of Cote d‘Ivoire Intra-industry Trade with EU in Final Products 2001 139

Figure 5.3 Industrial Composition of Cote d‘Ivoire Intra-industry Trade with EU in Final Products 2011 140 Figure 5.4: Trends of Ghana‘s Intra-industry Trade with EU in Final Products (2001

to 2011) 140 Figure 5.5 Industrial Composition of Ghana‘s Intra-industry Trade with EU in Final

Products 2001 142 Figure 5.6 Industrial Composition of Ghana Intra-industry Trade with EU in

Final Products 2011 143 Figure 5.7: Trends of Nigeria‘s Intra-industry Trade with EU in Final Products

(2001 to 2011) 144

Figure 5.8: Industrial Composition of Nigeria‘s Intra-industry Trade with EU in

Final Products 2001 146

Figure 5.9: Industrial Composition of Nigeria‘s Intra-industry Trade with EU in

Final-Products 147 Figure 5.10: Trends of Cote d‘Ivoire‘s Intra-industry Trade with EU in Intermediate Products (2001 to 2011) 151 Figure 5.11: Industrial Composition of Cote d‘Ivoire‘s Intra-industry Trade with EU in

Intermediate Products 152 Figure 5.12: Industrial Composition of Cote d‘Ivoire‘s Intra-industry Trade with EU in

Intermediate Products 2011 153 Figure 5.13: Trends of Ghana‘s Intra-industry Trade with EU in Intermediate Products

(2001 to 2011) 155

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List of Abbreviations

ACP African Caribbean and Pacific BEC Broad Economic Classification

CET Common External Tariff

CFA Colonies Francaise d‘Afrique (French Colonies of Africa)

EC European Community

ECOWAS Economic Community of West African States EPA Economic Partnership Agreement

EU European Union

FLRM Fractional Logit Regression Model

FTA Free Trade Area

HIIT Horizontal Intra-industry Trade

HS Harmonised Commodity Description Coding System IFS International Financial Statistics

IIT Intra-industry Trade

ISI Import Substitution Industrialisation ITER Inter-industry Trade

LDCs Less Developed Countries

LM Lagrange Multiplier

MDGs Millennium Development Goals

MNCs Multinational Corporations

NEPAD New Partnership for Africa‘s Development NICs Newly Industrialised Countries

OECD Organisation for Economic Cooperation and Development

OLS Ordinary Least Square

QMLE Quasi-Maximum Likelihood Estimation SICT Standard International Trade Classification

UEMUA Union e´conomique et mone´taire de l‘Afrique l‘Ouest (West African Economic and Monetary Union)

UN COMTRADE United Nation Commodity Trade Statistics UNSD ` United Nations Statistical Division

VIIT Vertical Intra-industry Trade

WAMZ West Africa Monetary Zone

WCO World Custom Organisation WDI World Development Indicators WITS World Integrated Trade Solution WTO World Trade Organisation

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CHAPTER ONE

INTRODUCTION

1.0 Preamble and Statement of the Problem

International trade plays important roles in economic development of countries. It broadens the consumption baskets of consumers and enhances their purchasing power. It also facilitates producers‘ access to critical inputs not available locally at affordable prices, thereby becoming catalyst to increased output and employment. Equally, governments are able to generate more revenue for financing developmental projects (Markusen, 1995).

International trade has been broadly categorised into two: inter-industry trade (ITER) and intra-industry¹ trade (IIT). While ITER refers to international exchange of widely dissimilar goods, such as the export of cocoa in return for import of automobile, IIT is the simultaneous importing and exporting of similar products, for instance rice for rice². In other words, ITER is trade between any two countries producing different goods (particularly between developed and developing countries). IIT could occur between countries at the same level of development such as those involving two developed nations (horizontal IIT) or between countries at different levels of development such as those occurring between developed and developing countries (vertical IIT).

1The definition of an ―industry‖ is probably the most contentious issue in applied IIT research. Grubel and Lloyd (1975) define IIT as ―trade in differentiated products which are close substitutes‖. Over time, it has become generally accepted that the relevant criterion is substitutability in production (rather than in consumption), since this is the aspect of industries that: (a) maps trade flows to production patterns; and (b) lies at the heart of the link between IIT and factor-market adjustment. Whilst statistical product classifications are inevitably imperfect in this respect, they are nevertheless largely guided by the correct criterion, an effort to group goods with similar input requirements.

2 IIT is defined as the simultaneous export and import of products, which are close substitutes in production and consumption. In empirical studies, researchers, on the other hand, define IIT as the simultaneous export and import of products, which belong to the same statistical product category.

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Most developing countries export primary products to developed nations and import manufactured products from them (ITER), hence, they are susceptible to cyclical deterioration of terms of trade. The Prebisch-Singer³ hypothesis posits that ITER widens the income gap between developed and developing nations (Prebisch, 1950; and Singer, 1950). Most ECOWAS countries exchange raw materials they produce with manufactured goods produced by developed nations. It is therefore not surprising to observe that ECOWAS countries (except the oil-rich economies among them that experience periodic oil-boom) witness low income level and instability. Alternatively expressed, the gains from ITER are distributed unequally between nations exporting mainly primary products and those exporting mainly manufactured products.

Undoubtedly, this gain has been in favour of manufactured products exporting countries.

The need to boost ECOWAS trade through IIT is very expedient because of its numerous advantages. One of the benefits is that it enables developing countries get out of the dislocations associated with ITER (Ruffin, 1999). Also, IIT produces extra gains from international trade, over and above those from ITER, because it allows countries benefit from larger markets than those permitted by engaging in ITER only. By engaging in IIT, a country can simultaneously reduce the number of products it produces and increase the variety of goods available to consumers (Krugman and Obstfeld, 2003). The pattern and intensity of IIT are likely to be connected to the structures of consumer preferences, than the pattern and intensity of ITER. By producing fewer varieties, a country can produce each on a large scale, with increased productivity and reduced costs. Also, the price elasticities of imports and exports from a given country are likely to be greater for IIT than for ITER. More specifically, IIT is more beneficial than ITER because it stimulates innovation and exploits economies of scale (Ruffin, 1999). Finally, IIT reduces the demands for protection because in any industry there are exports and imports, making it difficult to achieve unanimity among those demanding protection (Marvel and Ray 1987). However, tariff war and non-tariff barriers characterise ITER.

3 Prebisch (1950) and Singer (1950) allege the long-term deterioration in the (net barter) terms of trade of developing countries.

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In an attempt to use trade to facilitate economic growth, various governments in ECOWAS countries have entered into bilateral, regional and multilateral trade agreements with their trading partners. Among the regions that trade with ECOWAS, the European Union (EU) ranks the highest in terms of imports and exports. Since 1975, the (EU), under various Lome Conventions and Cotonou Agreements, has provided non- reciprocal trade preferences to products originating from their former colonies in Africa, the Caribbean and the Pacific Group of States (ACP) with the ultimate aim of promoting economic growth and development of these countries. The non-reciprocal trade preferences offered ACP countries granted them access to the EU⁴ markets. After over two decades of experience under the Lome Conventions and Cotonou Agreements, the results controversial. The continued ITER that existed between ECOWAS and EU has resulted in perpetual exporting of primary products by the former to the latter despite the non-reciprocal trade relation between them. This implies that irrespective of the trade relations between ECOWAS and EU, if the trade between two regions remains inter- industry, the expected benefit of trade between them may continue to elude ECOWAS.

Thus, the region may continue to witness terms of trade instability.

The EU and ECOWAS have recently been negotiating on the platform of Economic Partnership Agreement (EPA). The EPA is expected to be based on reciprocal trade between the two regions against the non-reciprocal arrangement. The objectives of the negotiation are to establish, in line with WTO rules, a Free Trade Area (FTA) between ECOWAS and the European Community; accord priority to development and poverty reduction; cooperate on trade-related issues; deepen integration process in ECOWAS and enhance market access for ECOWAS exports. The ECOWAS negotiation team has been entertaining fears that they may not benefit from the FTA when it is created. This fear appears to be premised on the fact that the pattern of trade between ECOWAS and EU is ITER. However, a preliminary analysis of the trade flows between ECOWAS countries

4 The EU is a geopolitical entity covering a large portion of the European continent. It is founded on numerous treaties and has undergone expansions that have taken it from six member states in 1951 to 27 presently (2012), which comprise majority of states in Europe.

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and EU between 2001 and 2011 reveals some elements of IIT involving few ECOWAS countries especially Nigeria, Ghana and Cote d‘ivore. Meanwhile, the extent of such trade is yet to be established. Incidentally, these ECOWAS countries have capacity to expand their manufacturing base, which if exploited can enhance export. The manufacturing export potential of foreign companies that have affiliates in these countries can be fully exploited.

Bearing in mind that IIT is more beneficial to developing regions like ECOWAS, it is imperative to address some pertinent research questions as regards the form of trade.

These include; how can income instability of the ECOWAS countries be reversed? What is the extent of the IIT between selected ECOWAS countries and the highest trade partner - EU? What are the determinants of IIT between these ECOWAS countries and EU? Are these IIT determinants in any way similar to those of ITER? Can a deep understanding of these determinants assist to increase ECOWAS-EU trade?

1.2 Objectives of the Study

The broad objective of this study is to examine IIT in final and intermediate products between ECOWAS countries and EU. Specifically, this study seeks to:

(1) analyse the extent of IIT in both final and intermediate products between selected ECOWAS countries and EU.

(2) investigate the determinants of IIT in final products between selected ECOWAS countries and EU.

(3) examine the determinants of IIT in intermediate products between selected ECOWAS countries and EU.

1.3 Justification for the Study

The justifications for this study are derived from the gaps observed in the literature:

empirically, theoretically and methodologically. Previous studies have shown that most of the empirical studies on IIT have been conducted between developed

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countries/regions⁵ (horizontal IIT) due to the belief that IIT only takes place between countries with similar factor endowments. However, it has also been revealed by Havrylyshyn and Civan (1983), Lee (1989), Manrique (1987), Lundberg (1982), Balassa and Bauwens (1982), Tharakan and Kerstens (1995), Clark and Stanley (1999), as well as Sichei and Harmse (2004) that IIT between developed and developing countries (vertical IIT) is not negligible. These studies are very few, dated and exclude the ECOWAS⁶. They are dated because a lot of developments have occurred in the world including developing countries after the last study in 2004. Besides, they are predominantly concerned with IIT in final goods neglecting the intermediate products which dominated exports of developing countries. Thus, the common belief requires further examination and more empirical work is warranted. This is part of the gaps this study seeks to fill.

Theoretically, Flam and Helpman (1987) assert that the theory of north-south trade based on vertical product differentiation is the most suitable to examine IIT between developing and developed economies. So far, efforts have not been made to re-examine the empirical results obtained in the previous studies done for developing countries using this theory. The empirical studies on IIT between developed and developing economies have either used inappropriate theories or multiples of irreconcilable theories ((Manrique (1987), Lundberg (1982), Balassa and Bauwens (1988a), Tharakan and Kerstens (1995), Clark and Stanley (1999)). The reason was because most previous authors did not separate IIT into vertical and horizontal component. For instance, some authors⁷ adopted Neo-Chamberlinian model⁸ to examine (ITT) between developed and developing countries and did not categorise it. Thus this study adopts north-south model based on

5 This is known as horizontal IIT. Some of these studies include Balassa (1966), Becuwe and Mathieu (1992), Clark, Fullerton and Burdorf (2001), Crespo and Fontoura (2001), Faustino and Leitão (2007).

6 Intra-industry trade between unequal partners has been described as vertical intra-industry trade.

7 Nilsson (1999), Clark and Stanley (1999), Manrique (1987) and Tharakan and Kerstens (1995) Sichei and Harmse (2004)

8 Neo-Chamberlinian model of Helpman and Krugman (1985) is horizontal IIT that assumes same level of development for the trading partners.

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vertical product differentiation to examine the existence and determinants of IIT in final and intermediate products between EU and ECOWAS. The expected findings of this study are capable of reinforcing the need and importance of north-south IIT as well as alter the traditional views of trade between developing and developed countries.

Previous studies used over-aggregated trade flows data⁹ and estimated the models with inappropriate estimation technique. I filing this gap, I used more disaggregated north- south trade data at 6-HS digit level¹⁰. Falvey (1981) opined that spurious IIT may emerge as a result of inappropriate statistical aggregation. All the previous studies on vertical- IIT¹¹ between unequal partners used available data of between 2 to 4-digits SITC¹² product categories. In addition, this study used the most recent trade decomposition approach developed by Hine, Greenaway and Milner (1998) to separate IIT into vertical and horizontal, an area most of the previous studies neglected. Second, the Factional Logit Regression Model (FLRM) of Papke and Wooldridge (1996) designed to capture the characteristics of the dependent variables that are bounded between 0 and 1 was used in this study. Majority of past studies on determinants of IIT used either conventional OLS regression analysis, panel data analysis, probit, or logit. Since the dependent variable (index of IIT) ranges between 0 and 1, the coefficients from the conventional OLS regression will be biased and inconsistent. Also, probit and logit analysis will not be appropriate since IIT index will not take either 0 or 1 values. Moreover, inconsistent results were obtained in previous studies; this might be due to over aggregation of data or

9 The more products are grouped together into an ―industry‖, the higher the probability of overlap between exports and imports of that industry (sectoral aggregation bias).

10 The Harmonised Commodity Description and Coding System (HS) is an internationally standardised system of names and numbers for classifying traded products developed and maintained by the World Customs Organisation (WCO), an independent intergovernmental organisation with over 170 member countries based Brussels Belgium. The HS is organised into 21 sections and 96 chapters, accompanied with general rules of interpretation and explanatory notes. As of October 2012, there are 206 countries or territories applying the HS worldwide.

11 The definition of an ―industry‖ requires a choice not only about the level of statistical aggregation but also about the classification scheme to adopt.

12 The Standard International Trade Classification (SITC) is a classification of goods used to classify the exports and imports of a country to enable comparing different countries and years. The classification maintained by the United Nations is currently at revision four, which was promulgated in 2006.

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inappropriate estimation technique. The present study sought to ascertain the proper directions of the drivers of IIT.

The policy relevance of this study could be discussed in three main areas. First, the outcome could form the basis upon which tariff policies will be articulated in the selected ECOWAS members. IIT should be higher; the less the variance of countries' tariff rates (Lee and Han, 2008). Second, this study could equally be a basis for the formulation of policies around foreign direct investment (FDI) in the ECOWAS countries. The impact of FDI on IIT could indicate whether inward FDI complements or substitutes exports. Another policy implication of this study lies in its ability to furnish the ECOWAS countries information about products they exchanged with EU that could aid the on-going EPA negotiations.

1.4 Scope of the Study

Issues of bilateral trade are wide in scope, especially IIT. Notably, this study concentrates on the extent and determinants of IIT in final and intermediate products between ECOWAS countries and EU as a group¹³. Hence, this study does not cover horizontal and marginal IIT. The study covers 2001 to 2011 and industries ECOWAS countries have capacity to produce: beverages and tobacco, crude materials, mineral fuel lubricant, animals and vegetable, chemicals, and manufacture goods. The study equally concentrates on Nigeria, Ghana and Cote d‘Ivoire – the three most industrialised countries in ECOWAS that accounted for over 89 per cent of exports, 75 per cent of imports and 80 per cent of output of the region. (COMTRADE Database, 2012)

1.5 Organisation of the Study

After this introductory chapter, the rest of the study is organised into five chapters.

Chapter 2 presents the background to the study divided into three sections. The first dwells on the comparative analysis of macroeconomic performance of the selected ECOWAS countries, the second presents the trade policies and trade agreements

13 The EU is taken as a group because they usually negotiate with ECOWAS countries as a group and not individual countries.

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between ECOWAS and EU. The third discusses the trend of ECOWAS trade with the EU. The review of past literature is presented in chapter 3, along three broad categories of theories, methodologies and empirical evidence. Chapter 4 is on the theoretical framework and methodology. Chapter 5 is on the presentation and discussion of results based on the three objectives of the study. Lastly, chapter 6 provides the summary, conclusion, recommendations as well as limitation of the study. Areas of future research are also suggested.

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CHAPTER TWO

ECOWAS AND EU: ECONOMIC PERFORMANCE, TRADE FLOWS AND TRADE AGREEMENTS

2.1 Introduction

This chapter describes in a comparative manner the macroeconomic performance, structure of output and comparative advantage of ECOWAS and EU. It also provides a summary of trade policies and trade agreements between the two regions. Additionally, it discusses their performances. The discussions contain certain elements which are potential trade determinants, the various conventions and agreements between the two regions, ECOWAS trade with the EU, and the rest of the world, sectoral composition of trade between the two regions, and some specific products in which the ECOWAS countries have IIT with the EU.

2.2 Comparative Analysis of Macroeconomic Performance

Previous empirical studies have identified a number of macroeconomic factors that are capable of explaining IIT. Some of the factors include: average level of development of the trading partner (usually measured by per capita income, PIC), the differences in the trading partners‘ level of development (measured by absolute difference of per capita GDP), average market size of the trading partner (measured by average gross domestic product, GDP), differences in partners‘ market sizes (measured by absolute difference of the GDP), exchange rates, trade barriers such as transport costs. All the above mentioned macroeconomic trade determinants are country specific. Other determinants are: product differentiation (usually measured by number of tariff position), FDI, bilateral exchange rate, etc. These macroeconomic performance variables of ECOWAS and EU are discussed next.

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2.1.1 Real Gross Domestic Product (RGDP) of the ECOWAS and EU

The RGDP of the ECOWAS countries has been very small compared to high income countries as contained in Table 2.1 which shows the average RGDP of Nigeria, Ghana and Cote d‘Ivoire. Also, contained in the table is average RGDP of ECOWAS and EU.

The real GDP of the three countries put together is above 75 per cent of that of all ECOWAS countries between 2001 and 2011. Although the three countries consistently grew their RGDP during the period 2001 to 2011, the growth in Cote d‘ivoire is slower.

In terms of magnitude, Nigeria dominated the RGDP in ECOWAS, as her RGDP is several multiple of ECOWAS average. ECOWAS average RGDP of $21.0 billion in 2001 increased to $37.50 billion in 2011. Comparatively, the average RGDP in the EU is several multiples of that of ECOWAS between 2001 and 2011. The average real GDP of EU rose from $252 billion in 1990 to $314 billion in 2000 and $365.6 in 2011. This shows a very wide gap in the level of development between ECOWAS and EU. Table 2.1 equally shows the continuous widening of the level of development in the two regions.

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Table 2.1. RGDP of the ECOWAS Countries and the EU. (Billion dollars) Countries Cote d'Ivoire Ghana Nigeria ECOWAS

Average

EU Average

2001 10.4 5.2 47.4 21.0 321.1

2002 10.3 5.4 48.1 21.3 325.4

2003 10.1 5.7 53.1 23.0 330.0

2004 10.3 6.0 58.7 25.0 338.4

2005 10.4 6.4 61.9 26.2 344.9

2006 10.5 6.8 65.7 27.7 356.4

2007 10.7 7.2 70.0 29.3 367.7

2008 10.9 7.8 74.2 31.0 368.7

2009 11.3 8.1 79.4 32.9 352.4

2010 11.6 8.8 85.6 35.3 360.2

2011 11.1 10.0 91.3 37.5 365.6

Source: The World Bank (2012), World Development Indicators, Database

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2.1.2 Growth Rate of GDP in ECOWAS and EU

The average GDP growth in ECOWAS witnessed a high level of fluctuations from 2001 to 2011 with the region recording 1.52 per cent growth rate in 2011. As regards the growth of output in the selected countries, out of the three ECOWAS countries, only Cote d‘Ivore recorded economic decline in her domestic output between 2002 and 2003, while Ghana and Nigeria recorded appreciable growth in their output as shown in Table 2.2. From 2002 to 2006, output growth improved greatly ECOWAS, with the three countries recording substantial output growth. Although the growth of Cote d‘Ivore was slower than that of Nigeria and Ghana, Cote d‘Ivore was however sustained the growth till 2010. The growth of real GDP in Nigeria and Ghana remain substantial till 2011, this was however not the case in Cote d‘Ivore as it declined to -4.7.

A number of reforms were embarked upon in the region such as privatisation, liberalisation and regional integration. Probably as a result of the reforms, the countries, as seen in Table 2.2, display wide differences in terms of economic growth. This analysis shows that the average output growth performance has been less than the 7 per cent for ECOWAS required for poverty reduction as recommended by MDGs¹⁴ and NEPAD¹⁵. However, between 2003 and 2011, Ghana and Nigeria emerged as ECOWAS growth drivers.

The performance of Nigeria‘s output growth either positively or otherwise, could determine what happens to the region in general. The poor performance of GDP growth in ECOWAS is not unconnected with the different unfavourable structural and economic factors, the most important being the continuing deterioration terms of trade, and the political instability in the region, especially Nigeria. An appreciable increase in the EU output growth was again recorded between 2005 and 2007, but

14 The Millennium Development Goals (MDGs) there are eight international development goals officially established following the Millennium Summit of the United Nations in 2000 and the adoption of the United Nations Millennium Declaration. All 193 United Nations member states and at least 23 international organisations have agreed to achieve these goals by the year 2015.

15 The New Partnership for Africa‘s Development (NEPAD) is a programme of the Africa Union (AU) adopted in Lusaka, Zambia in 2001.

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Table 2.2. ECOWAS States Average Annual Growth Rate of Gross Domestic Product (%)

Countries Cote d'Ivoire Ghana Nigeria ECOWAS Average

European Union Average

2001 0.0 4.0 3.1 2.4 2.2

2002 -1.4 4.5 1.6 1.5 1.3

2003 -1.6 5.2 10.3 4.7 1.4

2004 1.8 5.6 10.6 6.0 2.5

2005 1.3 5.9 5.4 4.2 1.9

2006 0.7 6.4 6.2 4.4 3.3

2007 1.7 6.5 6.5 4.9 3.2

2008 2.3 8.4 6.0 5.6 0.3

2009 3.8 4.0 7.0 4.9 -4.4

2010 2.4 8.0 7.8 6.1 2.2

2011 -4.7 14.4 6.7 5.5 1.5

Source: The World Bank, World Development Indicators, (2012) Washington

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declined to 1.52 per cent in 2011. It is remarkable that the output growth rate in ECOWAS was higher than that of EU throughout 2001 to 2011.

2.1.3 Per Capita GDP in ECOWAS and EU.

The growth of GDP is not enough to analyse the performance of an economy in terms of development, the need to consider its impact on the masses is imperative. It is therefore important to examine the performance of GDP per capita in ECOWAS. The average GDP per capita of the ECOWAS increased from $418.1 in 2001 to $504.3 in 2011.

Cote‘d Ivoire has the highest GDP per capita between 2001 and 2010, though it declined to $548.7 in 2011 as presented in Table 2.3.

Also remarkable is the consistent increase in the GDP per capita of Ghana, it increased from $263.7 in 2001 to $402 in 2011. Ironically, despite the high real GDP in Nigeria, the country‘s per capita is very low. Although Nigeria‘s per capita increases in the last decade, it is still very low. Furthermore, the discouraging values of ECOWAS‘ GDP growth and GDP per capita could be explained by the region‘s frequent disruptions in electricity supply, with adverse effects on the operations of the industrial sector.

It must also be emphasised that several countries in the region have been victims of armed conflicts and political instability over the past few years, wreaking havoc on their economies. Even countries like Cote d‘Ivoire which had remained stable in the past, were affected. The reverse is the case of the EU; the region grew its GDP per capita from

$14,417 in 1990 to $19,599 in 2011

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Table 2.3. ECOWAS States Average Annual GDP per Capita ($ Dollars) Countries Cote d'Ivoire Ghana Nigeria Average ECOWAS Average EU

US $ US $ US $ US $ Average Growth

US $ Average growth 2001 616.5 263.7 374.2 418.1 -0.4 17890.0 2.0 2002 597.5 268.9 370.8 412.4 -1.4 18075.1 1.0 2003 579.0 276.1 399.1 418.0 1.4 18250.3 1.0 2004 580.2 284.5 430.6 431.8 3.3 18628.9 2.1 2005 578.0 294.1 442.7 438.3 1.5 18905.4 1.5 2006 572.3 305.4 458.6 445.5 1.6 19449.5 2.9 2007 572.1 317.4 476.2 455.2 2.2 19978.8 2.7 2008 574.9 336.0 492.3 467.8 2.8 19941.9 -0.2 2009 585.6 341.2 513.8 480.2 2.7 18997.4 -4.7 2010 587.9 359.9 540.2 496.0 3.3 19359.3 1.9 2011 548.7 402.3 561.9 504.3 1.7 19599.7 1.2 Source: The World Bank, World Development Indicators, (2013) Washington

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2.1.4 Foreign Direct Investment in ECOWAS and EU

Foreign Direct Investment is an important determinant of trade, especially IIT in intermediate and final products. Table2.4, shows the net inflows of FDI, (the balance of inward FDI and outward FDI) of the ECOWAS countries. Between 2001 and 2011 there has been tremendous increase in the inflow of FDI to the ECOWAS countries compared to the outflow. As shown in Table 2.4, Ghana and Nigeria have positive net flow of FDI between 2001 and 2011. Cote d‘Ivore also has positive FDI net inflow between 2001 and 2010. Expectedly, Nigeria attracted the highest net inflow of FDI in the period. The consistent increase in Nigeria‘s net inflow of FDI began in 2001 and continued till 2011.

According to UNCTAD database, Nigeria‘s FDI inflow reached $8 billion in 2011, making the country the 19th greatest recipient of FDI in the world. It is noteworthy that, although, there was consistent increase in net inflow to ECOWAS, the quantity is quite low as a region. Although Nigeria‘s highest inflow of FDI comes from America through various oil companies that have affiliates in Nigeria, over 30 per cent of Nigeria‘s FDI inflows come from the EU. FDI flow from EU to Nigeria is majorly in machinery and equipment, chemical and chemical products, food, beverages and tobacco industries. A good per centage of Ghana‘s FDI inflows are equally from EU and are in food, beverages and tobacco as well as chemical and chemical products industries.

The average net inflows of FDI to EU showed negative between 2001 and 2011. This signifies that the region has higher out flow of FDI in the period than inflow. Expectedly the greater proportion of the region‘s FDI outflows moved to the developing countries, ECOWAS inclusive.

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Table 2.4: Foreign direct investment, net inflows (Million US$) Countries Cote d'Ivoire Ghana Nigeria Average

ECOWAS

Average EU

2000 234.70 165.90 1140.14 513.58 -4255.09

2001 272.68 89.32 1190.63 517.54 -1667.91

2002 212.63 58.93 1874.04 715.20 1736.96

2003 165.35 136.75 2005.39 769.16 -1354.33

2004 282.98 139.27 1874.03 765.43 -5890.57

2005 311.92 144.97 4967.90 1808.26 -4163.34

2006 318.86 636.01 4534.79 1829.89 -4450.69

2007 426.78 1383.18 5167.44 2325.80 -13439.51

2008 446.15 2714.92 7145.02 3435.36 -16573.83

2009 380.87 1423.91 7029.70 2944.83 -2382.10

2010 446.15 2527.35 5133.47 2702.32 -4515.42

2011 446.15 2527.35 8025.11 3666.20 -4531.21

Source: The World Bank, World Development Indicators, (2012) Washington

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Table 2.5: European Union Companies that have Affiliates in Selected ECOWAS Countries.

Industry EU Companies that have Affiliates in Nigeria

EU Companies that have Affiliates in Ghana

EU Companies that have Affiliates in Cote d’Ivoire Chemical and

Chemical Products

PZ Cussons PLC, Astrazeneca PLC, Air Liquide Sa Etu Exploit Procedes Gc, Linde AG, Stichting

Administratiekantoor Unilever N.V., Sulzer AG, Novartis AG, Wishart Investments Inc. , Reckitt Benckiser PLC.

PZ Cussons PLC , Air Liquide Sa Etu Exploit Procedes Gc, L'oreal, Basf Se, Astrazeneca PLC,

Unilever Plc, Syngenta Ag, , Ub France Sa, Sigmakalon (Bc) Uk Ltd, Yara International Asa, Compagnie Merieux Alliance , Bayer Ag, And Royal Dutch Shell PLC

Food, Beverages and Tobacco

Nestlé S.A., L'Arche Holding SA,

Zuivelcoöperatie Friesland Foods U.A, Wishart Investments Inc, british American Tobacco (Investments) LTD , Lac B.V, Cadbury Schweppes P L C

Unilever PLC , Cadbury Schweppes PLC, Sabmiller PLC, Walther Schröter (GmbH & Co.), Aarhuskarlshamn AB (Publ), L'Arche Holding SA, british American Tobacco (South America) LTD , Diageo PLC.

Bolton Alimentari spa, Nestlé s.a., Jacobs Stiftung, Cemoi, Ste Financiere Alimentaire, Conserveries Des Cinq Oceans, Aarhuskarlshamn Ab (Publ) , Evialis.

Textiles, Clothing and Leather

Curtidos Codina Sa, Sulzer Ag, Wishart Investments Inc.

Go Acquisition B.V., CFAO

U.A.C. Holdings LTD, CFAO,

Rubber and Plastic Products

Crown Holdings, Inc, Michelin ET CIE, Sulzer AG, Invensys Plc

Crown Holdings, Inc, Cfao, Michelin Et Cie, Ce Carnaud Metalbox Group Services, Lammelin Textiles Et Industrie.

Metal and Metal Products

Astrazeneca Plc, Sulzer Ag, Crittall Holdings LTD, Wishart Investments Inc,

Crown Holdings, Inc, , Unilever Plc , Ce Carnaud Metalbox

Other

Manufacturing

Unilever Plc, John Holt Group Ltd, Sbm Marine Ltd, Schneider Electric Sa, Curtidos Codina SA, Sulzer AG, .

Ppr , Basf SE, Go Acquisition B.V.

Unilever PLC, Geodis, Royal Dutch Shell Plc , Getma International

Non-metallic Mineral Products

HeidelbergCement AG, Etergyp SA, Sulzer AG, SOCIETE LAFARGE

Ce carnaud Metalbox Group Services, Royal Dutch Shell PLC, Chanic Sa, Ce Carnaud Metalbox Group Services, Mining and

quarrying

Stanley Plumbing LTD, Adamus Resources Limited, Cluff Resources LTD

Source: International Trade Centre (ITC) Data Base: www.trademap.org

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2.1.5 The Exchange Rate of ECOWAS countries and EU

The exchange rate of ECOWAS countries against the US dollars is presented in Table 2.6. It is remarkable to note that the West African Economic and Monetary Union (WAEMU)¹⁶ countries use the West African CFA franc as their currency. The West African CFA¹⁷ franc consistently depreciated in 2000. Although, the West African CFA francs slightly appreciated against the US dollar in the last decade, the exchange rate of the currency remained high against the US dollar. The Ghana cedis consistently remained the weakest currency against US dollars in ECOWAS. 14186 cedis exchanged for 1US dollar in 2009. Nigerian currency Naira remained one of the strongest currencies in ECOWAS. The currency got depreciated against US Dollar to N 149 in 2009.

16Union Économique et Monétaire Ouest Africaine, UEMOA is the French name of the West African Economic and Monetary Union (WAEMU) (Union Économique et Monétaire Ouest Africaine, UEMOA.

The countries include: Benin, Burkina Faso, Cote d‘Ivore, Guinea, Guinea Bissau, Mali, Niger, Senegal and Togo.

17 West Africa and Central Africa regions use the CFA franc, the two currencies are guaranteed by the French treasury. Although the two CFA franc are theoretically separate, they are effectively inter changeable. Both CFA francs have a fixed exchange rate to the Euro: 100 CFA francs = 1.

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Table 2.6: ECOWAS Counties Real Exchange Rates to United States Dollars (Local Currencies)

COUNTRIES Cote d'Ivoire (CFA Franc)

Ghana (Cedis)

Nigeria (Naira)

2000 704 7047 109

2003 519 8852 136

2006 498 9235 128

2007 454 9704 117

2008 471 12141 132

2009 455 14186 149

2010 472 Na 150

2011 495 Na 154

Source: International Momentary Fund, Trade Direction (1994, 2004 and 2010)

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2.1.6 Trade Tariff in ECOWAS-EU Trade

The numerous advantages of international trade have been emphasised in terms of increasing the number of goods domestic consumers can choose from, decreasing the cost of those goods through increased competition, and allowing domestic industries to ship their products abroad. While all these advantages seem desirable, free trade is not widely accepted as completely beneficial to all parties. The tariff is a sort of cost on trade that raises the price of traded products. The trade tariff imposed by Ghana on goods imported from EU is presented in Table 2.7. In the late 1990s and the early 2000, Ghana imposed high tariff on mineral fuels and lubricants products imported from EU.

However, there was drastic reduction in tariff imposed by Ghana on EU imports from 34.33 per cent in 1999 to 11.31 per cent in 2011.

Conversely, while the tariffs Ghana imposed on food and live animals majorly increased from 14.3 per cent to 18.6 per cent, manufactured goods, crude materials and inedible, chemicals, as well as animals and vegetable all had marginal increase. Ghana‘s tariffs on beverages and tobacco imported from EU were not only low but also remained constant at 20 per cent. Comparatively, trade tariff imposed by Ghana on imports from EU in the various sectors are higher than that of Cote d‘Ivoire except in manufacturing goods. Of particular interest is the low tariff Ghana imposes on products of mineral fuels, crude materials, inedible and chemicals. It is equally remarkable that Ghana increased her trade tariff imposed on food and live animal products, beverages and tobacco, chemical products imports from EU in 2007. The tariff increase was however not sustained, as they substantially declined in subsequent years.

The tariffs imposed by Nigeria on products being imported from the EU were higher than what Ghana and Cote d‘Ivoire imposed in the same period. Nigeria‘s trade policy has been used as a tool to foster growth. Aside using trade tariff as a source of revenue, Nigeria has been using it to protect domestic industries, and discouraging the consumption of certain commodities. For instance, Nigeria has placed high tariff on beverages and tobacco since early 1990s, however there was a decline in tariff Nigeria imposed on EU imports from 81.6 per cent to 19.7 per cent. The sectors in which Nigeria has comparative advantages in terms of natural resources and products