percent (0.4 percent of GDP<sup>17</sup> ), which includes a second round effect of the EPA, compared with 2.5 percent (1.2 percent of GDP) in Busse et al.’s study (2004), which is based on the normal assumptions of partial equilibrium analysis.

Our analysis focuses on the following four countries of ECOWAS: Nigeria, the single largest economy in the sub-region as well as the largest trading partner with the EU; Ghana, with the lowest tariff collection rate and a projected impact on government revenue exceeding 10 percent according to previous studies; Senegal, with the highest tariff collection rate and a similarly significant impact on government revenue; and Cape Verde, with the highest impact as a share of government revenue.

As outlined above, the implementation of the EPA could lead to a decline in tariff revenue through two channels. First, the (direct) revenue loss as a zero tariff rate will be applied to imports from countries in the free trade area (EU); second, the (indirect) revenue loss arising from displacement of third country (non–EU) imports by countries in the free trade area (EU), following a tariff-induced reduction of prices.

We assume complete trade liberalization at the initial stage of the EPA, as in previous studies, which is consistent with the short term perspective of a partial equilibrium model. Therefore, our results are likely to be upper limits of the estimates of the possible static and budget effects. We examine the impact of EPA implementation on trade and fiscal revenue under different assumptions regarding import demand and trade substitution elasticities, to test the results for sensitivity to underlying assumptions following Busse, Borrmann and Grossmann (2004).

The base year for all estimations is 2004. Aggregate fiscal customs revenue data have been obtained from various IMF staff reports or directly from IMF desk officers.

Finally, we assume that the EPA will be implemented under the current non- uniform external tariff in each ECOWAS member country. However, ECOWAS could well apply a common external tariff (CET) to imports before the implementation of EPA, if Nigeria carries out the implentation of its tariff reform in line with the ECOWAS CET and Ivory Coast recovers rapidly from the ongoing conflict. Under the assumption of a custom union<sup>18</sup> in ECOWAS, the EPA trade and tariff revenue effects of the EPA could be re-assessed, using an expanded partial equilibrium model (Appendix I).

17 Our calculations, to ensure comparability with other studies’ results.

18 USAID (through ECOtrade Project) supported national impact studies of the ECOWAS CET in six countries. Studies were completed in 2004 for four countries: Gambia, Guinea, Nigeria and Sierra Leone, in collaboration with the ECOWAS Executive Secretariat, World Bank and other donors. It should be noted that many obstacles still impede effective implementation of free trade: absence of clear directives from national authorities in most member States; rules of origins; and other non-tariffs barriers, reflecting limited political commitment, a non-operational dispute settlement mechanism (community court of justice is not functional), inadequate compensation mechanism and limited capacity of regional institution to monitor and evaluate progress on the ground in each Member State (World Bank, 2004).

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