Africa’s trade with the developed world: Reflecting on trade preference schemes (Part I)

By Rafiq Raji

SSA Exports to EU and US

Views on the developed world’s trade preference schemes with African countries are mixed. The European Union (EU) Economic Partnership Agreements (EPAs) have “failed to boost local economies and stimulate growth in African, Caribbean and Pacific (ACP) countries.”[1] Between 1978-2002, ACP exports to the EU actually declined from 7% to 3%.[2] Re-negotiated EPAs, which technically come into effect on October 1, 2014, are supposedly aimed at changing this. Reservations that they would achieve their stated goals of trade development, sustainable growth and poverty reduction remain. Also, the United States’ trade preference scheme with African countries, the African Growth and Opportunity Act (AGOA IV), which expires in September 2015 (if it is not renewed by the US Congress), enters its final year on October 1, 2014 as well. The consensus view is that AGOA has been relatively successful. This is principally because of its more flexible Rules of Origin (ROO).

Duty-free access for Africa’s exports supposedly should make its goods cost competitive relative to say, Asian ones. Tariffs and duties that would have been paid by African exporters had there been no trade preferences also add to capital for incremental investment. With predictable demand for its exports consequently, these schemes are expected to help generate employment and contribute to growth. That has largely not been the case because some of the quality specifications in these agreements are beyond the technological reach of most African countries. Flexible ROO mitigate this by allowing subject countries to import intermediate inputs and yet still enjoy preferential market access. The re-negotiated EPAs address this hitherto rigid ROO requirement that has been argued to be responsible for the failure of the Yaounde and Lome Conventions (1975-2000) to engender increased ACP exports to the EU. For instance, the EU-West Africa EPA will allow subject countries “produce goods for exports to Europe using materials sourced from other countries without losing the benefit of the free access to the EU market.”[3] The devil would be in the fine details of these agreements.

My continuing skepticism about these agreements being in the long-term industrial development interests of African countries pushed me to ask for the views of Dr. Adam Elhiraika of the United Nations Economic Commission for Africa (UNECA) at the launch of UNECA’s 2014 Economic Report on Africa (“Dynamic Industrial Policy in Africa”) on 24 September 2014 at Chatham House in London. It was important to me to hear the views of a respected economist who was also African. He believes the EPAs should be re-negotiated for the same reason. A survey of the literature also points to strong views about the cost-benefit trade-offs of these agreements for Africa’s industrial development. Whether these new ones would finally help the continent grow its industrial base remains to be seen.

Trade preferences spur growth under the following conditions: (1) Easy import of complementary inputs (2) Availability of skills and infrastructure that meet global standards.[4] Africa falls short on both conditions for internal and external reasons. Logistical bottlenecks at its ports and foreign exchange policy constraints constitute major hindrances. Corruption and cronyism are also problems. Imports of complementary inputs need to be tariff- exempt for the final goods to remain cost-competitive. Tariff concessions have instead been used as tools of political patronage by most African countries. So, there is a governance problem that is wholly and entirely African. In regard of a skilled workforce, the continent remains bereft. The continent also continues to run a very large infrastructure deficit. There are other supply-side constraints as well. Some of them are: still relatively lower labour productivity, little or no scale economies, and shallow capital markets. The expected relocation of the more value-adding, employment-generating and growth-driving labour-intensive manufacturing from Asia to Africa has not been forthcoming precisely because of these constraints. This is in spite of a widening wage gap between the two continents. The economic argument is that gains that would be given up when an Asian manufacturer relocates to Africa still remain relatively higher. The reverse has to be the case to induce relocation.

[1] http://www.ec.europa.eu/trade/policy/countries-and-regions/development/economic-partnerships/

[2] http://www.ec.europa.eu/trade/policy/countries-and-regions/development/economic-partnerships/

[3] http://trade.ec.europa.eu/doclib/docs/2014/july/tradoc_152694.pdf

[4] Venables, T. Collier, P. 2007. “Rethinking Trade Preferences: How African can diversify its Exports” The World Economy 30 (2007): 1326-45

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