African trade strategies in a world of preferential trade agreementsPosted on Wednesday, June 20th, 2012 in Hot Seat Comments
Should African countries be jumping on the PTA bandwagon?
Sean Woolfrey, a tralac Researcher, discusses African trade strategies in a world of preferential trade agreements.
One of the consequences of World Trade Organisation (WTO) members’ repeated failure to resuscitate the Doha Round of trade negotiations has been increased momentum for and acceptance of the global proliferation of preferential trade agreements (PTAs) that has taken place in recent years. With progress apparently stalled at the multilateral level, many major players in global trade are increasingly resorting to PTAs to further their commercial interests. The increasingly positive stance of major economies such as the US towards PTAs was clearly illustrated last year by the US Congress’ decision to finally approve long-delayed free trade agreements (FTAs) with Colombia and South Korea. The fact that even the US, historically a strong proponent the multilateral trading system, is focusing increasingly on discriminatory FTAs, suggests that, in the words of Jagdish Bhagwati, PTAs really have become “the only game in town”.
This new reality of global trade governance creates significant challenges for African countries. Whereas the institutional procedures and formal equality of Members enshrined in the WTO serve – at least in theory – to temper the ability of powerful economies such as the US and the European Union to simply get their way in multilateral trade negotiations and rule-setting and the adjudication of trade disputes between WTO Members, a shift towards a global trade governance regime based on a patchwork of PTAs could result in these powerful economies imposing their preferred rules on weaker partners. Global trade could also become increasingly governed by rules set in fora in which African countries have little or no say, while trade disputes brought under such fora are likely to be more reflective of power asymmetries, and less sensitive to the needs and circumstances of developing countries.
The recent global proliferation of preferential agreements has also been characterised by an increased focus on ‘deep integration’, with these agreements addressing many ‘behind-the-border’ issues such as competition and investment regulations, in addition to traditional trade issues such as border tariffs. The greater scope of these PTAs and FTAs not only places strain on the capacity of African countries to successfully negotiate such agreements, but also plays to sensitivities about sovereignty that exist in many African countries. Such sensitivities have certainly come to the fore in the Economic Partnership Agreement (EPA) negotiations between African countries and the EU.
Partly as a result of these challenges and sensitivities, African countries have largely remained on the sidelines of the ongoing proliferation of PTAs, and much of Africa’s trade continues to be conducted under long-standing, non-reciprocal arrangements with developed country partners. This situation poses challenges for African economies, however, as recent threats by the EU to withdraw market access preferences in the absence of significant progress on the EPAs, and delays in the extension of a vital provision of the United States’ African Growth and Opportunity Act (AGOA) clearly demonstrate. While most African countries recognize the need to look beyond domestic markets and precarious non-reciprocal preferences, they have generally been reluctant to enter into comprehensive reciprocal trade agreements with their traditional trading partners. Instead, African countries have turned with renewed energy to a regional economic integration agenda for the continent, as evidenced by plans to launch a tripartite FTA (T-FTA) between three of the continent’s existing regional economic communities.
Regionalism and regional integration undoubtedly offer the potential for leveraging developmental gains on the continent, especially through infrastructural development and cooperation to remove impediments to intra-African trade. Nevertheless, regional integration is not a ‘silver bullet’ for African economic development. Given low levels of manufacturing productivity and technological complexity across much of the continent, such gains are likely to be limited, especially if an inward-looking approach to regional integration – one which seeks to insulate African markets from global market forces – is adopted. African countries simply cannot ignore the need to forge and deepen economic links with partners outside the continent, especially dynamic, fast-growing and technologically advanced economies.
It is relevant to ask, therefore, whether African countries should be actively seeking trade agreements with non-African trading partners, either individually, or as part of existing regional blocs. Currently, only South Africa – which has an FTA with the EU – and the Southern African Customs Union (SACU) – which has an FTA with the European Free Trade Association and a more limited PTA with MERCOSUR – are party to FTAs with non-African partners, while a SACU-India PTA and the various EPAs between the EU and regional African blocs are at different stage of negotiation. This reflects the fact that, aside from an African integration agenda, the trade strategies of African countries have, at least until quite recently, focused mainly on maintaining the status quo in terms of existing access to markets in the US and Europe, rather than on diversifying into new markets.
This is unfortunate, as in recent years the epicentre of global production and trade has undoubtedly shifted eastwards, driven by, among other things, changing production patterns and the rise of ‘factory Asia’. Increasingly, global trade and production is being driven by trans-Pacific rather than trans-Atlantic relationships. The confluence of these two global trends – a resort to PTAs and the rise of the ‘East’ – can be seen in the increased attention being paid to the formalisation of economic relations with and between Asia-Pacific countries through agreements such as the ASEAN Free Trade Agreement and the Trans-Pacific Partnership.
Given the current malaise in African countries’ traditional export markets and the inherent limits to gains from an inward-focused regional integration agenda, it surely makes sense for African countries to seek more substantial economic engagement with countries in Asia and Latin America. However, whether this necessitates the conclusion of comprehensive trade agreements with these economies is less clear. If African countries do not seek to develop or participate in such arrangements, they risk being further marginalised by the global proliferation of PTAs, and especially by the increased use of such measures by dynamic economies in East and Southeast Asia. On the other hand, closer economic ties and greater bilateral trade and investment flows do not necessarily require formally institutionalised arrangements such as FTAs. Similarly, formal agreements do not necessarily result in substantially greater economic engagement. Indeed, much of the criticism of African economic integration has stemmed from the perceived failure of formal regional arrangements to stimulate greater trade and investment flows.
Where African countries have concluded formal agreements with non-traditional partners outside the African continent – for instance in the case of the SACU-MERCOSUR PTA – a lack of trade complementarity coupled with a reluctance to negotiate on behind-the-border issues or to liberalise trade in sensitive sectors has resulted in agreements that do not have much substance. This suggests that it may not be a simple task for African countries to conclude effective and comprehensive agreements with other developing countries.
FTAs are often advocated based on a desire to a) gain better access to foreign markets and b) lock in domestic reforms. With border tariffs becoming less important factors in influencing global trade flows and PTAs and FTAs increasingly becoming tools for domestic reform, the rationale for African countries to join in the current explosion of PTAs is less about maintaining a level playing field in terms of the tariffs their exports face, and more about using such instruments as a pretext for locking in the kinds of reforms that will create a domestic environment more conducive to foreign trade and investment. It should be noted, however, that many such reforms can be undertaken unilaterally, or even under the framework of regional integration processes such as the T-FTA.
In light of this, it would seem that the argument for African countries to seek comprehensive FTAs with non-African and non-traditional trading partners is perhaps not that strong. What is important, however, is that African countries recognize the need to engage more proactively with the new engines of the global economy, whatever the institutionalised form such engagement ultimately takes. In the new geography of global production and trade, relying on traditional trading relations and African integration is not likely to be sufficient to drive economic growth on the continent.
- Bhagwati, J. 2012. “The Broken Legs of Global Trade”. Available online at: http://www.project-syndicate.org/commentary/the-broken-legs-of-global-trade
- Chauffour, J. P. 2012. “Preferential Trade Agreements: Adjusting to New Trade Realities?” GREAT Insights, Volume 1, Issue 4. June 2012. Available online at: http://www.ecdpm.org/Web_ECDPM/Web/Content/Navigation.nsf/index2?readform&http://www.ecdpm.org/Web_ECDPM/Web/Content/Content.nsf/7732def81dddfa7ac1256c240034fe65/287379817a060406c1257a0f006b31c3?OpenDocument