As the much anticipated uniform tariff for ECOWAS region will become reality from January 1, 2015, Olushola Bello looks at the benefits and implications of the Common External Tariff (CET)

Tariff For All

When a group of countries form a customs union they must introduce a common external tariff. The same customs duties, import quotas, preferences or other non-tariff barriers to trade apply to all goods entering the area, regardless of which country within the area they are entering. It is supposed to be designed to end re-exportation; but it may also inhibit imports from countries outside the customs union and thereby diminish consumer choice and support protectionism of industries based within the customs union.

The common external tariff is a mild form of economic union, but may lead to further types of economic integration. In addition to having the same customs duties, the countries may have other common trade policies, such as having the same quotas, preferences or other non-tariff trade regulations apply to all goods entering the area, regardless of which country within the area they are entering.

Important examples of Common External Tariff are those of the Mercosur countries (Brazil, Argentina, Venezuela, Paraguay and Uruguay) and the Common Customs Tariff of the Customs Union of Belarus, Kazakhstan and Russia. Similar to free trade areas, however, external countries have to pay tax on goods and services that are entering.

The South American as well as the eastern European examples of the CET and the customs union nations stated above, each have a country with the characteristics that Nigeria possesses in the West African region. At various social and economic levels, Brazil in South America and Russia in Eastern Europe are to their regions what Nigeria could be to the West African region.

History Of ECOWAS

In May 25, 1975, fifteen West African countries came together to form the Economic Community of West African States (ECOWAS), with the aim of making the region a strong economic powerhouse in Africa. The countries are Benin, Burkina Faso, Cape Verde, Côte d‘Ivoire, Gambia, Ghana, Guinea, Guinea Bissau, Liberia, Mali, Nigeria, Niger, Senegal, Sierra Leone and Togo. The lofty objectives of ECOWAS is to promote economic integration in all fields of endeavours, particularly industry, transport, telecommunications, energy, agriculture, natural resources, commerce, monetary and financial policies, social and cultural matters.

Rules Under The New CET

The Nigeria Custom Service came out with a new regime, five per cent duty is applicable for 2,146 tariff lines under the basic raw materials and capital goods category;10 per cent for the 1,373 tariff lines that qualify as intermediate products category; while 20 per cent duty is reserved for the 2,165 tariff lines under final consumer products. Some 5,899-tariff lines are covered under the new tariff regime with the rate ranging between zero and 35 per cent for the 130 tariff lines that fall into the category of specific goods that contribute to the promotion of the region’s economic development.

The CET is a precursor to a regional customs union, which is predicated on the harmonisation and convergence of national fiscal, monetary and trade policies of member states for the attainment of economic integration by the 15-nation economic community with a combined population of more than 300 million people.

With the view to enhancing the economic integration process in West Africa, the Authority of ECOWAS Heads of State and Government met in Extraordinary Session in Dakar, Republic of Senegal in October 2013 and agreed on the creation of a 1.5 per cent community integration levy, whose scope and operationalisation would be the subjects of further regional reflection, as part of the mechanisms to enable the regions cope with the challenges of implementation of the new tariff regime.

Example Of CET Benefits

Similar to these nations in terms of population, land mass, agro ecological endowments as well as skilled manpower availability, Nigeria potentially could be the biggest beneficiary of the West Africa customs union expected to kick-off in January 2015. Brazil and Russia effectively leveraged on size, capacity and resources as well as other more latent factors and have since become the leading powers not just in their sub regions but also in the entire world.

Before they kicked off the economic union with their neighbours, they took all the steps necessary to ensure that they took full advantage of all the nations’ God-given socio economic endowments which, within a relatively short time, helped them emerge as some of the world leading economies resulting in the now popular global economic acronym referred to as BRICS (Brazil, Russia, India, China and South Africa).

Benefits And Shortcomings Of CET

Stakeholders are of the view that the benefits of CET will increase turnover due to a larger domestic market; enlargement of member states industrial sector through higher economics of scale; higher production and productivity; higher capital accumulation (Economic growth) and strengthening of national institutions through peer learning among members.

Many empirical studies of the European Union have found that integration leads to higher economic growth; productivity growth; less macroeconomic fluctuations; increased intra-regional exports, and higher foreign direct investment. They attribute the shortcomings of the CET to loss of national trade policy, sovereignty to regional institutional arrangements; loss of lobbying ability by the producers and workers; low level of tariff which can lead to dumping and de-industrialisation; loss of government revenue coming from tariff.

Different Views

Analysts have said despite the benefits CET will have on the economy of the country, without proper dimensioning of the risks, rewards and how best Nigeria can put its natural and positional gifts to use to ensure that it takes full advantage of the opportunities, it might just bring to the country more harm than good.

With infrastructural conditions within Nigeria still a far cry from what is desirable and in most cases, worse than what is obtainable in smaller nations in the sub region; security challenges attaining unprecedented levels and fiscal as well as monetary policy indicators running amok, it is not difficult to conclude that Nigeria will very likely crash-land into the much anticipated customs union and lose the advantage of its mass market to its minuscule neighbours.

State Of Readiness

The director general of Lagos Chamber of Commerce and Industry (LCCI), Mr Muda Yusuf said the ECOWAS Council of Heads of States recently approved the new CET which shall come into effect on January 1, 2015. “We welcome the policy as it would advance the cause of economic integration of the West African sub-region. It is a move intended to improve the collective well-being of the citizens of the sub-region and promote the development of the various economies”, he said.

He pointed out that the move is also expected to consolidate the sub-region as a customs union and create a market of an estimated 500 million people as this offers great opportunities for investors through the advantage of economies of scale. Yusuf highlighted that the new policy regime includes scrapping of import prohibition list, scrapping of export prohibition list, abrogation of import duty waivers, abrogation of import levies and loss of sovereign authority on tariff policy.

Window Of Opportunity

The director general of the Nigerian Association of Chambers Of Commerce Industry Mines and Agriculture (NACCIMA), Dr John Isemede said that the effect of CET within ECOWAS region could discourage smuggling and promote regional trade. “The only key thing is that it should ordinarily reduce smuggling within the region.

“This is because what has promoted smuggling is disparity in tariff. If a product in Nigeria is attracting 70 per cent and the same product in Cotonou or Togo is attracting 10 per cent, it is likely that smugglers and other unpatriotic traders will follow the rules of the lowest tariff but if the same tariff obtains between Lagos and Mauritania then there is no advantage of smuggling by unscrupulous traders.”

He explained that implementing CET in the region will promote regional trade, “people will be able to plan better now because they know that the tariff will not change overnight, which has been a challenge for Nigeria in particular”. “If there is any need to change tariff, ECOWAS as a body must meet, the 15 countries as a group must agree to that tariff change. So that will make for better planning and companies will be able to plan long term, fully aware that their tariff will not change overnight and affect their investment output”.

Challenges Ahead

Isemede pointed out that West Africa is a sub-region and a custom union region due to different nations and currency, saying that countries like Nigeria, Ghana, Gambia are Anglophone nations while Togo, Benin, Burkina Faso, are Francophone. He explained that VAT is five per cent in Nigeria, 20 per cent in the francophone countries and then 15 per cent in Ghana, saying that if all these VAT are not harmonised, we can now talk about one external tariff. He added that cost of doing business in Nigeria is high when compared to other countries, that is why goods shipped into the country are cheaper than the ones made in the country. He called on ECOWAS to harmonise the different VAT in the countries for the smooth implementation of the policy. He, however, said that CET will not take Nigeria there except the VAT are harmonised as smuggling will still continue.

The president of Manufacturers Association of Nigeria (MAN), Kola Jamodu, said if the proposed CET is adopted by Nigeria as it is currently constituted, it would have huge implications for the Nigerian manufacturers. “We are of the view that if the CET is adopted as it is without giving consideration to MAN position, Nigeria will lose the right to use fiscal policy measures as instruments to attract foreign investments into the major sectors of the economy and would no longer be in a position to use fiscal policy as an effective instrument to protect its fledging manufacturing base, among others.”

Yusuf pointed out that the policy has a downside and the implications for the economy, particularly the manufacturing sector will be profound. “Currently, the Nigerian manufacturing sector suffers significant competitiveness issues which include the following: High energy costs, high costs of funds, high regulatory charges, high ports charges and other related charges, high cost of logistics amongst others”.

He stated that these are issues to worry about especially at a time when unemployment has become a major problem for the economy.  Therefore in order to avoid the collapse of what is left of the Nigerian manufacturing sector, some immediate policy responses are imperative.

Way forward

In order for Nigeria manufacturing companies not to be affected by the adverse effect of CET, Yusuf proposed the following policy options Import duty on raw materials, machineries and other vital input for manufacturing should be scrapped, VAT on raw materials and machineries should be scrapped and there should be generous tax allowances on infrastructure related expenditures. Also, there should be strong anti-dumping measures to protect local industries.

He said that all these are essential for the Nigerian manufacturers to be able to remain in the business under the proposed CET regime. The President of Nigeria, Goodluck Jonathan has promised that Nigeria has successfully negotiated a strong CET agreement with ECOWAS partners on the need to protect the country’s strategic industries from foreign domination.

While the minister of finance, Ngozi Okonjo-Iweala also assured manufacturers that efforts were on gear to establish a development finance institution in order to make credit accessibility easy and reduce high cost of funds, emphasising that efforts would be made to ensure that Nigerian manufacturers gained from the forthcoming Common External Tariff scheme.