Why agreement on continental free trade will become a gamechanger

Wednesday November 7 2018

Andrew Mold

Andrew Mold, acting director for the UNECA Eastern Africa office. PHOTO | COURTESY 

By BERNA NAMATA
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Signing of the AfCFTA in March was an milestone towards a single African market. But domestication has been slow. The acting director for the UNECA Eastern Africa office Andrew Mold spoke to Berna Namata.

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What is the progress on the continental free trade area so far and why do you suppose East Africa will not be weakened by trade wars?

It depends on the extent to which global growth weakens. Trade tensions between the US and its partners do of course cause uncertainty.

But so too is the rather precarious situation in some of the emerging markets, the impact of Brexit on Europe, and also political tensions (with regard to Iran).

Generally, the first-round effects of global uncertainty are felt in our region through its impact on commodity prices; remittances and capital inflows to the region can also be impacted, weaker global commodity prices would have an impact on the region in reducing the income from exports of tea, coffee and minerals.

On the other hand, the region is a net importer of commodities. For instance, the rising price of crude oil will not help EAC countries with regard to their fuel import bills.

However, one thing we learnt from the global financial crisis of 2008-9 — to our surprise — is that East Africa is not as sensitive to global crises as we thought.

Indeed, East Africa rode out the storm. That was in part due to the fact that commodity prices stayed strong, principally due to sustained demand from China.

Moreover, the World Bank (in its Africa Pulse publication) has recently recognised that while there are signs of weakening growth across the continent, growth in East Africa is proving to be resilient in countries like Kenya, Rwanda and Tanzania.

Our economies are perhaps more robust than we think.

Non-reciprocity

There are many contributing factors. First, we have to accept that the preferential market access has not worked out the way it was intended.

Preferential market access was introduced in the 1970s to allow developing countries better access to the markets of the high-income economies by reducing tariffs on selected products. This was supposed to give a boost to the exports of our economies and help them diversify towards other more sophisticated products.

But in fact exports did not respond strongly, because there were restrictions to trade relating to phytosanitary and product standards, rules of origin, which have made it difficult to access those markets.

One example was Ugandan exports of Nile perch to Europe, which in the late 1990s, were substantial, but suffered a ban due to an alleged link between cholera and consumption of fish from Lake Victoria. The link proved spurious, but by the time the ban was lifted, the damage had been done.

This highlights another problem with preferential market access — its impermanence. Witness the recent problems that Rwanda has confronted with regard to a partial suspension from the Africa Growth and Opportunity Act, because of the government’s intention to restrict imports of second-hand textiles.

Anyone investing in a sector like textiles specifically to take advantage of the enhanced access to the US market will be disappointed if those advantages are suddenly withdrawn.

A fundamental problem with non-reciprocal market access is that what can be given with one hand, can be taken away with the other. The AfCFTA is truly different in this sense, because it provides guaranteed reciprocal access.

Also, preferential market access was supposed to provide an incentive to diversified exports in manufacturing. But in reality, because of a sharp decline in Most-Favoured Nation tariffs on industrial goods over the past 30-40 years, preferential market access actually provides a perverse incentive now for developing countries to continue specialising in agricultural exports.

This is because, while tariffs on industrial goods are now low (typically in the order of 2 or 3 per cent), the agricultural sector is still heavily protected, with very high tariff peaks in some products like dairy.

As a consequence, preferential market access often gives incentives for developing countries to continue specialising in agriculture. That was not the original intention of such market access.

Boldness and value addition

One underlying problem is that whereas markets like China, India and Europe are formally open to exports from East Africa, in practice access them has proved a lot more difficult.

Nonetheless, companies in our region supply goods and services that are attractive and competitive in global markets.

That is quite difficult in today’s highly competitive global market. But it is a question of capitalising on regional strengths, promoting an entrepreneurial culture and creating strong regional brands.

In processed foods, for instance, there are regional products that are really delicious. All that is required is upscaling the production, good packaging and bold marketing. Uganda and Rwanda have managed to do this internationally with coffee.

And so is RwandAir’s ambition to build a reputation for quality service in the airline industry. Of course, at this stage in the growth of the company, it still requires government support. But it is a good example of the boldness that is required.

Fortunately, EAC governments are aware of this challenge and have significantly increased expenditure on improving regional infrastructure, which is slowly reducing the cost of doing business.

But they also need to be more purposeful in the kind of strategic support that they give to industry through their industrial policies. There is a lot that they could learn from the Ethiopian strategy of rolling out industrial parks countrywide.

Through good planning, the Ethiopian authorities have tried to address all the potential problems that often discourage private investors, and have been rewarded by large-scale inflows of foreign direct investment, reaching $4 billion in 2016. These were marginally lower last year, due the considerable political upheaval that the country was going through.

It is still early. Between the signing in 1986 of the European Single Market Programme — which in some sense is comparable with the scope and ambition of the AfCFTA — and its implementation in January 1993, there was a period of seven years.

Much has been achieved in the past seven months since the AU Summit. Only six countries have not signing the AfCFTA. That is a remarkable degree of consensus on a continent of 55 nations.

We, however, need to raise awareness of the opportunities that the AfCFTA brings for East Africa. The UN Economic Commission on Africa will bring together policymakers and experts in Kigali on November 20-22 to discuss implementation of the AfCFTA.

There are a lot of issues and details to iron out. But we believe that the AfCFTA represents a unique opportunity to actually deliver on Africa’s longstanding desire for greater integration and co-operation. We are convinced that the continent is on the right path with the AfCFTA. It could be a game-changer.

Regional market capture

The big economies are by nature more diversified, hence they have more sectors that could potentially be negatively affected by liberalisation. However, they also tend to have stronger economies with higher levels of productivity, and stand to gain a lot too.

Our research work at ECA shows precisely that the envisaged increase in trade with the rest of Africa though the implementation of the AfCFTA means countries will enjoy better economies of scale, build regional value chains, and strengthen the profitability and competitiveness of East African firms.

The bottlenecks to a successful Common Market are well known. Three in particular stand out: High cost of and difficulty accessing credit, high cost of electricity; and lack of skilled workers.

In all three, effective government policy, together with the implementation of the AfCFTA, can make a marked difference.

Some economists recommend that firms need to enter into export markets to increase productivity.

Exporting firms tend to have far higher levels of productivity than those that cater exclusively for the domestic market. However, a staggered approach is better.

Success in global export markets is difficult — particularly at a time when so much of global manufacturing trade is dominated by China and other developing countries like Bangladesh and Vietnam, with low labour costs and relatively high productivity.

It makes more sense for East African firms to prime exports to regional markets while simultaneously making greater efforts to “recapture” the domestic market.

This strategy is more feasible over the short- to medium-term, and will help them build up capacity so that they can eventually compete on global markets too.

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