Trade & Trade Agreements

In the 1990s the mainstream consensus was that trade causes growth. Subsequent research shed doubt on the consensus view, as evidence suggested that the identification of the effect of trade on growth was problematic in the existing literature. This paper contributes to this debate by focusing on growth in Sub-Saharan Africa. It estimates the effect of openness to international trade on economic growth with panel data. Employing instrumental variables techniques that correct for endogeneity bias, the empirical evidence suggests that within-country variations in trade openness cause economic growth: a 1 percentage point increase in the ratio of trade over gross domestic product is associated with a short-run increase in growth of approximately 0.5 percent per year; the long-run effect is larger, reaching about 0.8 percent after ten years. These results are robust to controlling for country and time fixed effects as well as political institutions.

African countries can prepare for the impact of the euro-zone crisis that threatens to derail economic growth on the continent by improving trade between their countries and fighting inflation, a top World Bank economist said on Sunday.

World Bank's Vice President for Africa, Obiageli Ezekwesili said the traditional partners of Africa in Europe were likely to be affected by the fallout of the European debt crisis, which would squeeze remittances, curb trade and tourism.

Ezekwesili said Africa's economic growth forecast for this year stood at 5.3 percent and 5.6 for 2013, but a recession would likely lead to a 1.7 percent contraction in 2012.

"When you talk about Greece, Portugal, Ireland and the other countries, you then look at African countries particularly linked to them. We keep our eyes on countries like Cape Verde, Guinea, Nigeria, Sierra Leone," Ezekwesili told Reuters on the sidelines of an African Union summit in Addis Ababa.

She said the Ethiopia summit would discuss boosting intra-regional trade in Africa to ease the impact of the recession.

"In Cape Verde, remittances constitute a very important part of its balance of payment, its current account. Its linkage with Portugal has a huge implication for remittances," she said.

"Tourists receipts (from Europe) can have a serious impact, as will the FDI (foreign direct investment). The export of merchandise to Europe will be affected."

Remittances -- money sent home by workers abroad -- are a key source of foreign exchange in Africa after revenue from traditional sources such as tourism, agricultural products and minerals.

Ezekwesili forecast a downturn of at least some 30 percent in some African countries, which she did not specify, by virtue of trade links with their key European trading partners.

She said some of the countries in Africa sent 60 percent of their exports to a particular country in Europe, and were likely to face a downturn in earnings due to the crisis.

Ezekwesili said public expenditure efficiencies were key, and urged diversification of economies and higher farm output.

Europe's sovereign debt crisis has killed off the economic revival that followed the 2008/2009 global financial crunch, and many euro zone economies likely began shrinking in late 2011 and may enter recession this year.

The International Monetary Fund is pessimistic, forecasting a 0.5 percent contraction in 2012 that it says could drag the world into recession.

Ezekwesili said African economies also have to strike a balance between pursuing growth, and keeping a lid on inflation.

She said African countries did well during the last financial crisis because policy-makers maintained macro-economic reforms, but they need to be even more vigilant now. Inflation is in double digits in key economies such as Nigeria and Kenya.

"We still see rising inflationary trends in some of the key countries which will need to be managed," she said. - Reuters

The main objective of this Synthesis Paper is to provide a synopsis of the contents of three related papers, namely: the Issues Paper, the Action Plan and the Framework Document, Road Map, Architecture for fast tracking the Continental Free Trade Area (CFTA), simultaneously developed to respond to the tasks of boosting intra-African trade and elaborating modalities for fast tracking the Continental Free Trade Area.

Background: Features of intra-African trade in brief

Trade is widely accepted as an important engine of economic growth and development. There are many regions and countries of the world that have been able to lift their peoples from poverty to prosperity through trade. Although the African economy is characterized by a relatively high degree of openness, with the ratio of exports and imports to GDP amounting to 55.7% in 2009, trade has not served as a potent instrument for the achievement of rapid and sustainable economic growth and development for many of the countries. As a consequence, Africa remains the most aid-dependent continent of the world, unable to eliminate poverty through trade.

A key feature of Africa’s trade, which has had some adverse implications for its impact on economic growth and development, is its high external orientation and relatively low level of intra-regional trade. Intra-African trade stands at around 10 per cent compared to 60 per cent, 40 per cent, 30 per cent intra-regional trade that has been achieved by Europe, North America and ASEAN respectively. Even if allowance is made for Africa’s unrecorded informal cross-border trade, the total level of intra-African trade is not likely to be more than 20 per cent, which is still lower than that of other major regions of the world.

That African countries do not trade much with each other means that they have been unable to fully harness the synergies and complementarities of their economies and take full advantage of the economies of scale and other benefits (such as income and employment generation) that greater market integration would have provided. There are cases where products and services could have been sourced competitively from other African countries but were procured from outside the continent.

Due to the fact that Africa does the bulk of its trade with the outside world and the exports are heavily concentrated on primary  commodities, the continent has been particularly vulnerable to external macroeconomic shocks and protectionist trade policies. This is evident from the recent global economic and financial crisis which, although not of the making of African countries, has had adverse impact on the continent’s economic performance. In today’s increasingly interdependent global economy, Africa cannot delink itself from trading with the outside world. However, the continent can reduce its vulnerability to external shocks and improve its trade and economic performance if its market integration is deepened and the countries do more of their external trade with each other. Thus, a major lesson to be drawn from the systemic shocks in the global economy is the need for Africa to promote intraregional trade.

Boosting intra-African trade and deepening regional market integration constitute a necessary response to the challenges facing Africa in the multilateral trading system and the global economy. By fostering competition among African countries, they will also assist in enhancing the latter’s’ capacity and prepare them to compete more effectively on the global market.

Basis for a new vision, momentum and action: Setting the agenda

For long, regional integration has been accorded high priority in the development agenda of African countries. The continent’s landscape contains a relatively large number of integration schemes. Inspite of this, market integration in Africa is weak and the level of intra-African trade remains relatively low as indicated earlier. It is in light of this situation that the 6th Ordinary Session of the AU Conference of Ministers of Trade decided to fast track the creation of a Continental Free Trade Area (CFTA). This was subsequently followed by the decision of the AU Assembly of Heads of State and Government to focus its January 2012 Ordinary Session on the theme of “Boosting Intra-African Trade”’ Boosting Intra-African Trade and Fast Tracking the CFTA: New modalities for action.

In order therefore to respond to these tasks, the African Union Commission and its collaborating partners, the UNECA, AfDB, RECs and other partners set to work to develop proposals aimed at addressing the challenges of boosting intra-African Trade as well as fast tracking a Continental Free Trade Area. The results are the production of an  Issues paper, an Action Plan and Framework document for launching the fast track process to accomplishing (achieving) the CFTA . All three documents together form the basis for the agenda setting on boosting intra-African Trade and fast-tracking the CFTA.

Readers can access the ten page synthesis paper here.  The 18th Summit  web page can be accessed here.  It will be updated throughout the summit.

TradeMark Southern Africa

African women want to bring real added value to the development of intra-African trade by implementing their sense of innovation and their dynamism, a spokesman of African women, Algerian Fatima Karadja, declared on Tuesday in Addis Ababa, Ethiopia.

Speaking in an interview with PANA, Mrs. Karadja, vice-president of the economic, social and cultural council of the African Union, said Africa must integrate women into commercial activities by granting them access to bank credits.

'African women have a sense of creativeness and an energy which they can transform into actions in the service of the development of intra-African trade. This is all about carrying out specific activities in favour of these women to start compensating for the imbalance they experience as compared to men,' she explained.

Mrs. Karadja said gender equality must serve the development of intra-African trade.

'In this perspective, which can only benefit Africa's development, women must be further integrated. They have an extraordinary capacity to cope with complex structures . They can therefore through their involvement, bring real added value to Intra-African trade,' she said.

The development of intra-African trade will be the central theme of the 18th summit of the African Union scheduled to take place from 23 to 30 January in Addis Ababa.

According to the different estimates, trade exchanges between the different African countries only represent 12% to 13% of transactions carried out between the Continent and the rest of the world. - Afrique en ligne

The 18th AU Summit, themed Boosting Intra-Africa Trade, commenced on Monday in Addis Ababa.  The Summit is expected to agree on fast-tracking the establishment of a Continental Free Trade Area (C-FTA) by 2017.  This is a recommendation by the African Union Ministers of Trade meeting held in December 2011.

The work on this recommendation started earlier.  The AU Ministers of Trade at their 2010 meeting, tasked the AU Commission, with assistance from the UN Economic Commission for Africa and the African Development Bank, to undertake preparatory work that would support their proposal of a Continental FTA.

The three institutions developed three key papers on boosting intra-African trade: “Issue paper on Boosting Intra-Africa Trade”, “Action Plan for

Boosting Intra African Trade” and “Draft Framework, Roadmap and Architecture for Fast Tracking the C-FTA”. The AU Trade Ministers officially endorsed these papers at their December 2011 Meeting. The papers set out a plan to boost trade by at least 25-30% in the next 10 years and to establish the C-FTA by 2017.

The C-FTA will eliminate tariffs on substantially all originating trade between C-FTA member states. Along with measures to further reduce the cost of cross-border trade, it will not only help to increase intra-African trade, but also to improve Africa’s competitiveness in the global marketplace. Ministers have agreed to a number of provisions set out in the Draft Framework, Roadmap and Architecture for Fast Tracking the C-FTA.

Importantly, it was agreed that the C-FTA would build on the Free Trade Areas of the COMESA-EAC-SADC Tripartite and of ECOWAS. Practically, this means that members of these two FTA’s would offer each other the same preference previously accorded only to members of their own FTA. It is envisaged that member states currently outside of these two agreements would join in, and that these FTAs should be active by 2014. Other individual AU Member States would then join the C-FTA process by 2015, while the Tripartite and ECOWAS FTAs would be consolidated into the C-FTA by 2017.

In order to ensure that only goods originating from FTA members are traded free of duties, FTA members will define the Rules of Origin (RoO) to which goods must conform for preferential market access. It was agreed that Rules of Origin should be simple and transparent - promoting trade while ensuring that trade deflection does not take place.

Members of the C-FTA will also need to agree upon an appropriate dispute settlement mechanism to cater for trade disputes that may arise between C-FTA member states. Other components of the C-FTA that will be negotiated include a comprehensive trade facilitation programme, standards-related issues and the removal of Non-Tariff Barriers to Trade. Member states could also agree to a protocol on the free movement of persons within the FTA, as well as to provisions on trade in services, competition policy, public procurement and trade-related intellectual property rights (TRIPS).

The proposed institutions for overseeing the negotiations and subsequent implementation of the C-FTA are the AU Summit, Joint Conference of Trade and Finance Ministers, a C-FTA Negotiation Forum and the AU Commission. A number of support structures have also been proposed. - TradeMark Southern Africa

Since the beginning of the new millennium we are increasingly noticing the influence on the structure of the world economy not only of some major emerging markets, namely Brazil, India and China, from a developing country perspective, but also of the rise of Russia (since the collapse of the Soviet Union). Their role in the global arena, from an economic and political perspective, has raised concern in the developed world about the manner in which their influence is shaping or shifting the balance of power. Concerns about the impact on the environment and governance issues have also been raised. However, in Africa, the role of some of these countries under the auspices of the so-called South–South alliances can be viewed as an opportunity to enhance cooperation with other developing countries, playing a significant role in the economic and social development of the region.

Poverty, poor infrastructure, lack of productive capacity and transfer of technology, the emerging threats associated with climate change as well as the food, energy, financial and economic crises, have been identified as areas where Africa can enhance its capacity by cooperating with other developing countries. Furthermore, the increased bargaining power of developing countries in multilateral negotiations, as reflected in the current Doha negotiations of the World Trade Organisation (WTO), has been cited as another reason for cooperation. It is against this background that since 2000, African countries have entered into new partnerships and arrangements with the South, increasingly driven by economic rather than political. The new partnerships are often based on formal frameworks with dialogue forums and action plans.

Download:  Trade at a glance: the BRICS and Japan’s engagement with Africa

tralac

Since the beginning of the new millennium there has been a lot of interest in the influence on the world economy, not only of some major emerging markets, namely Brazil, India and China, but also of the rise of Russia (since the collapse of the Soviet Union). In the global arena, the influence of these emerging markets in shaping the global political economy is being considered carefully by particularly the leading Western economies. Concerns about the impact on the environment and governance issues have also been raised. However, in Africa, the role of some of these countries under the auspices of the so-called South–South alliances can be viewed as an opportunity to enhance cooperation with other developing countries, playing a significant role in the economic and social development of the region.

Poverty, poor infrastructure, lack of productive capacity and transfer of technology, the emerging threats associated with climate change as well as the food, energy, financial and economic crises, have been identified as areas where Africa can enhance its capacity by cooperating with other developing countries. Furthermore, the increased bargaining power of developing countries in multilateral negotiations, as reflected in the current Doha negotiations of the World Trade Organisation (WTO), has been cited as another reason for cooperation. It is against this background that since 2000, African countries have entered into new partnerships and arrangements with the South, increasingly driven by economic rather than political. The new partnerships are often based on formal frameworks with dialogue forums and action plans.

The agenda behind the renewed and increased global economic interest in Africa, a continent that was once dubbed 'hopeless' should be considered. In historical representations Africa has been regarded as underdeveloped and poor, but of late Africa has been regarded as a continent brimming with potential and opportunities. The need of boom economies, like China and India, for raw materials is generating valuable new opportunities. Can this be regarded as a new scramble for Africa in a post-colonial era? Concern should be raised if this increased interest goes unchecked, as this could be no different from the way in which Africa was previously colonised for the sake of its resources.

This argument is certainly plausible if one looks at the majority of investments in Africa from the so-called emerging markets. These are concentrated in the traditional resource-rich primary sectors. The difference, however, is that this renewed economic interest in Africa is enabling African countries to add terms and conditions into the mix such as concessions attached to infrastructure development projects. For example, according to Holslag (2007), in Mozambique, Indian contractors were allowed to exploit the coal mines only after the Indian government had promised to invest in public infrastructure. Furthermore, this renewed interest in Africa has provided a front line for competition between the traditional investors – the United States of America (US) and the European Union (EU) on the one hand, and other emerging players, such as China, India, Brazil, Russia and South Africa on the other.

Africa's cooperation with especially the emerging markets such as Brazil, Russia, India, China and South Africa (the BRICS) offers new options that can be turned into opportunities. It is important to note that the opportunities are not automatic and African countries need to create an environment conducive for tapping into the benefits that accrue. In this regard, there is need for a proactive approach that allows for the development of cooperation strategies that are in line with national and regional development goals.

The Trade Law Centre for Southern Africa (tralac) has prepared an analysis of the BRICS and Japan's engagement with Africa. The paper provides a summary of the key factors in the involvement of the BRICS and Japan with Africa. Highlights of the analysis include:

Economic and trade policy overview: The BRICS nations represent 42% of the world's population and 18% of its Gross Domestic Product (GDP). Among the BRIC economies, Brazil ranked third, behind India, where growth reached 8.6%, and China, where GDP figures rose by 10.3%. Russia had the poorest result, with a 3.8% increase. For the new entrant, South Africa, real GDP recovered from -1.7% in 2009 to 2.8% in 2010 (Richardson, 2011).

In terms of trade policy, the BRICS have made significant policy reforms over the past five decades. From inward-looking protectionist policies to outward-looking market oriented policies in the BRICS; these emerging economies have risen above expectation to become the new major economies. Japan, on the other hand, has also maintained its outward-looking policies with the objective of ensuring its competitive edge in high-value manufactured products. The accession of Russia to the WTO will certainly have positive economic impacts on the Russian economy.

Africa as investment destination: Africa is now both a new frontier of economic and other opportunities and host to some of the fastest-growing economies in the world. The Real Gross Domestic Product of Africa increased by 5.2% annually in the past decade, compared with 2.3% in the 1990s (WEF, 2011).

Investments are diversified albeit still concentrated in infrastructure and commodities, but we currently see an increase in investment in services. Sectors receiving special investment attention include telecoms (towers, broadband services), financial services (commercial banks, insurance, ancillary services such as ATMs), agribusiness, infrastructure, oil and gas (marginal fields, oil field services, gas development), mining, and electric power (energy infrastructure, energy services).

The trading environment with Africa: Individually, the BRIC countries' trade growth with Africa has outpaced global trade and BRICS' trade with the rest of the world. India and China's trade with Africa as a proportion of GDP is 2.6% and 2.3% respectively, while Brazil's stands at 1.7% and Russia's at 0.5% (Freemantle and Stevens, 2010). South Africa has the highest trade with Africa with its proportion of GDP estimated just over 3% for 2010.

China – the largest trading partner with Africa – has increased trade with Africa from US$3.5 billion in 1990 to over US$120 billion in 2010, which equates to roughly two-thirds of Africa's total BRICS trade. Given Russia's significant natural resource reserves and South Africa's economic dominance in the region, the two are the only BRICS countries with an overall trade surplus with Africa.

Africa – working towards an enabling environment:[1] African countries continue to liberalise their investment environments. In the past few decades, Africa has made significant strides toward democratic governance, transparent economic systems, and the elimination of some of the crippling bureaucratic barriers to trade and investment. Since 2005, of the 53 regulatory changes observed by the United Nations Conference on Trade and Development (UNCTAD) in Africa, four-fifths (42) were favourable to FDI, while 11 made the environment less favourable.

So what does this mean for Africa?[2]

Once considered a 'failed' continent, Africa's marginalised position in world trade is being reversed with sudden interest from the BRICS.

China has in many ways led the reinvigoration of commercial interest in Africa.

Winds of change mean it is now the BRICs and Africa, rather than the BRICs in Africa.

The story of the BRICS and Africa has only just begun and the future is exceedingly bright for the BRICS and Africa.

For the BRICS, engaging with Africa is not a unilateral act of goodwill; it makes perfect economic and strategic sense.

Africa must seize the moment to ensure it benefits proportionately from relations with the BRICS.

- Tralac

African leaders have long dreamt of creating an economic community spanning the vast continent. It would ideally be like the European Union, with open borders and the free movement of goods without customs barriers.

'A large common market from Cairo to Cape Town,' is how Tanzanian President Jakaya Kikwete recently described his vision for the future of a Continental Free Trade Zone (CFTA), even though today's reality looks very different.

Nevertheless, the intention is to bring this dream within grasp during the annual African Union (AU) summit, whose main session starts in Addis Ababa on Sunday (January 29).

A roadmap has set 2017 as the target date, but there are considerable obstacles.

Renewed talks have been launched, combining at least three of the eight overlapping African economic communities - EAC, SADC and Comesa - in the east and south of the continent.

But despite endless conferences, alliances and treaties, trade within Africa makes up just 12 per cent of the continent's total, according to figures for 2010 from the African Development Bank.

Africa has little commercial significance even for South Africa, the only state on the continent characterized as a 'Newly Industrialized Country'. More than 85 per cent of South African trade goes outside Africa.

An economic community could be a decisive step in the battle against poverty and towards sustained development, just as wider economic groupings are playing a dominant role in the economies of South East Asia, Europe and North America.

'The AU summit will, on the one hand, discuss a plan of action, by means of which internal African trade should be boosted, and on the other hand (be) the starting gun for the creation of the continental free trade zone,' said Stephen Karingi, director of the Department for Regional Integration, Infrastructure and Trade at the United Nations Economic Commission for Africa (UNECA).

A central aim is to export more finished goods, not just natural resources, to the rest of the world.

Africa's oft-cited economic boom in recent years has been nourished largely by a single source - raw materials - consisting by more than two thirds of the export of resources such as oil, uranium, titanium, copper and gold.

Demand within Africa has risen moderately, but serious problems stand in the way of a real economic boom that would improve the lot of the majority of Africans.

Firstly, there are too few locally manufactured products. Asian producers fill the shelves of African stores with laptops, mobile phones, clothing, pots, tools, television sets and even ready-made meals, quite apart from machine tools and other heavy industry products.

Industrial production declined as a proportion of output from 15 to 10 per cent over the past 20 years, according to UNECA. By comparison, in Asia it rose over the same period from 23.5 to 30 per cent.

Another barrier to trade is the poor state of African transport infrastructure. Trading structures and warehouses, trucks, railways and roads are all lacking - everything, in fact, needed to promote trade.

'Where there is a road network, traders often lose too much time at border stations,' Karingi says. All of this leads to a situation in which even countries with plenty of fertile soil, like Nigeria, Mozambique and Zimbabwe, continue to import food - or depend on international food aid.

Nevertheless, projects are underway to improve infrastructure, including the planned Trans-West African Coastal Highway from Mauritania to Nigeria, and the Northern Corridor intended to facilitate sea access for landlocked countries like Burundi, Rwanda and Uganda, through the Kenyan port of Mombasa.

Africa has everything needed to emulate the Asian tigers - cheap labour, plentiful natural resources, good soil, potential markets, and a plan for the future.

But the political structures are lacking, along with investment of the proceeds from natural resources into infrastructure and education.

'We can achieve all of this, if the political will is there,' said Kikwete, summarizing Africa's prospects. - M&G