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The changing global trade architecture: Implications for sub-Saharan Africa’s development

The changing global trade architecture: Implications for sub-Saharan Africa’s development
Photo credit: Commonwealth Trade

05 Aug 2016

The narrative of a ‘rising’ Africa is now widely recognised. It has replaced the discourse of ‘the hopeless continent’, which adorned the front cover of The Economist just over a decade ago. Africa’s economic fortunes have become more hopeful as the global trade architecture has changed dramatically in the new millennium.

What are the main changes in the global trading architecture over the past 15 years? How have these changes impacted on Africa’s economic development and the nature of trading relations between Africa and its traditional developed country partners, the European Union, the UK and the USA, and its main developing country partner, China? What are the implications of ‘Brexit’ – the UK’s departure from the European Union – for Africa’s trade? And how has the changing narrative of trade and trade integration impacted on Africa’s own strategy to integrate its market? This issue of Commonwealth Trade Hot Topics explores these questions and offers some policy recommendations for African policy-makers and trade negotiators.


The changing architecture of world trade

China’s accession to the World Trade Organization (WTO) at the launch of the Doha Development Round in November 2001 helped to catapult China into the pinnacle of global trade within a decade, and transform the existing patterns of North-South trade that emerged after the Second World War. China’s high growth rates – of over 10 per cent per annum – created the demand for Africa’s commodities, leading to improved growth prospects for many Sub-Saharan African countries following at least two lost decades of development. In the first decade of the new millennium African economies grew at an unprecedented average rate of over 5 per cent per annum, although this growth was not always inclusive and sustainable, or lead to Africa’s structural economic transformation. China’s ‘rise’, and that of other emerging developing countries that became known as the BRICS (Brazil, Russia, India, China, and South Africa), has changed the nature and direction of world trade through greater South-South trade and investment in the first decade of the new millennium.

These changes in the world trading system in just over a decade have been dramatic. The following selected trade statistics illustrate these changes. China overtook Japan as the leading Asian exporter in 2004. China was to then overtake the USA in 2007 and Germany in 2009 to become the world’s largest exporter. According to the WTO, the share of developing country exports in world trade grew, from 26 per cent in 1995 to 44 per cent in 2014, while the share of developed economies’ exports in world trade declined, from 70 per cent to 52 per cent, during the same period. The United Nations Economic Commission for Africa (UNECA) furthermore notes that Africa’s share of world exports had also grown, albeit very modestly, from 3 per cent in 1990 to 3.3 per cent in 2010 but fell back to 3 per cent in 2014. While Africa’s economies have been growing at unprecedented rates, this has been from a concentrated export structure and significant de-industrialisation for some countries, while poverty, inequality and unemployment, especially for the youth, are still key challenges today. While the African growth story is still positive and hopeful, it should be treated with some caution and considerable degree of nuance.

Developing countries, led by China, have made significant progress in world trade during the past 15 years of the new millennium. These changes were to impact significantly on the WTO Doha Round of trade negotiations. These changes are now discussed below together with the role of African countries in the multilateral trading system.

Africa’s Economic Partnership Agreements (EPAs)

The dramatic changes in the European Union, since the fall of the Berlin Wall and the end of the Cold War, increased the membership of the EU, from EU-15 to EU-28. Most of the EU-13 countries do not share the burden of responsibility for the colonial relations between Europe and Africa, and thus have not had the same enthusiasm for the EU-Africa or EU-ACP relationship that was defined by trade preferences and development assistance since the Lomé Convention in 1975. The Lomé Convention was transformed into the Cotonou Agreement in 2000. These changes in the composition of the EU began a debate for the radical transformation of the traditional trade and aid relationship between the EU and Africa from one of unilateral preferences towards one of reciprocity. The fact that the Cotonou Agreement required a waiver in the WTO to extend the Cotonou preferential trade arrangement with the ACP was arguably of much less importance than that of the change in the composition and attitude of the new members to the ACP. The EU thus began a process of ‘negotiating’ African countries out of the Cotonou Agreement towards reciprocal Economic Partnership Agreements (EPAs) on 27 November 2002.

African countries thus have a challenging task to evaluate the implications of the EPAs for their regional integration processes. African countries will need to ensure that they do not open their markets to EU member states before they open their markets to their neighbours in Africa. The EPAs do not correspond to the same regional configurations that African countries have been moving towards. A range of challenges thus arise for African economies, including: the different pace of goods liberalisation, both in terms of products and phase down periods; the different rules of origin that may complicate regional integration; and the different rules that may create differences on policy issues, such as export taxes. Africa will have to evaluate how to unravel the complications that have been created by these EPAs and how to ensure that they do not allow these agreements to become stumbling blocks, but instead use the EPAs as building blocks to advance Africa’s regional integration agenda.

The prospect of Brexit will also have implications for the EPAs and the UK’s future trading arrangements with Africa. The Brexit shock will impact on Africa through various channels: trade, FDI, official development assistance (ODA), remittances and tourism. For example, Sub-Saharan African countries have almost doubled their merchandise exports to the UK over the past fifteen years, from US$8 billion in 2000 to about US$16 billion in 2014. In 2014, the UK’s ODA to developing countries amounted to about £12 billion, much of which went to Africa. It is important that Brexit does not disrupt current trade or aid to the world's poorest continent.

African Growth and Opportunity Act (AGOA)

The USA had been following the EU negotiations with the ACP countries with a great deal of interest as it began its own process of reviewing its trade arrangements with Africa, specifically the African Growth and Opportunity Act (AGOA-III) that was set to expire in September 2015. Originally enacted in 2000, AGOA grants qualifying Sub-Saharan African countries unilateral trade preferences for over 6,400 tariff lines. This programme has now been renewed three times with the latest renewal (AGOA-IV) signed by President Obama in June 2015.

Learning from the EU, the USA introduced a slew of provisions in the new AGOA Extension and Enhancement Act of 2015 that demand reciprocity from AGOA beneficiaries, including on specific trade and investment related policy issues required by its lobbies. In addition, the US administration is required to actively encourage African countries to engage in a dialogue with the US Trade Representative with a view to transforming the existing one-way preferential trade system enjoyed by AGOA beneficiaries into a two-way reciprocal free trade agreement.

It is also most likely that the template for the reciprocal free trade agreements will come from the recently concluded TPP negotiations where the USA has already agreed on a slew of trade issues including tariffs, trade rules and regulations, which go well beyond that covered or contemplated in the WTO Doha Round. In addition, the current debate in the US Congress over the TPP and TTIP, if successful, will lead to more than two-thirds of world trade being captured in these new trading blocs and the consequent erosion of preferential access into the US market for current major beneficiaries of AGOA, such as South Africa, and other Sub-Saharan African countries.

The implications of the new AGOA Extension and Enhancement Act of 2015, and the impact of the US led mega-regional (TPP) and mega-bilateral (TTIP) is that the 10-year extension of AGOA benefits may not be assured over this period, unless African countries acting together persuade the US Congress to maintain AGOA-IV until its current expiry date of 2025. Thus current export beneficiaries of AGOA should be cautious about making long-term investment plans. African countries will need to intensify their lobbying in the US Congress to make AGOA more development friendly and supportive of African regional integration.

Competing approaches on African economic integration

While Africa has made considerable progress in building an ambitious programme of action to integrate the continent in the past few years, there remain competing paradigms for African economic integration, which have diverted Africa’s attention from its development integration path. It is for this reason that it is important to revisit the debate and set out clearly the path that Africa will need to travel to succeed in its objective of development integration. Two main approaches to regional integration are discussed: linear integration and open-regionalism supported by the World Bank, and ‘development integration’ advocated by UNCTAD, the UNECA and other writers.

A recent World Bank (2015) study uses the global value chain (GVC) narrative as its analytical framework and argues that while Africa has made significant progress in increasing growth, the main strategy to advance poverty reduction should be to: increase its role in GVCs by focusing on the production of intermediate goods; liberalise its tariff regime, not only to its African neighbours but also to all other third countries; and focus on developing a Services Hub in Southern Africa. The report argues that African countries should not only be opening their markets to their neighbours in Africa, but also opening their markets to all other countries as well in a so-called ‘openregionalism’ approach.

This approach to development policy is similar to the structural adjustment policies (SAPs) advocated by the World Bank in the 1980s and the 1990s. The SAPs required countries to liberalise trade, deregulate their financial markets, privatise SOEs, and reduce social expenditure. More recently, the World Bank has admitted that the SAPs had gone too far, resulting in deindustrialisation in a number of African countries. This approach to regional integration has long been critiqued by several studies. As an alternative these writers have called for a ‘development integration’ approach that stressed the need for ‘macro and micro co-ordination in a multi-sectoral programme embracing production, infrastructure and trade’. In addition, Davies argued that, to ensure a more equitable balance of the benefits of regional integration, trade integration would need to be complemented by regional industrial development to compensate the least developed countries in a regional integration project. This approach to regional integration has gained increasing support. UNCTAD, in its 2013 report, argued that African countries should adopt an approach to regional integration referred to as ‘developmental regionalism’. More recently, the UNECA argued that ‘trade policy which exposes infant industries to competition can lead to de-industrialisation’. The UNECA report emphasises the need for trade to serve as an instrument of accelerated industrialisation and structural transformation in Africa, rather than an end in itself.

African countries have made considerable progress in increasing intra-regional trade, rising from a mere 10 per cent in 1995 to 18 per cent in 2014. This increase is still low compared to other regions. Intra-regional trade accounts for 70 per cent of the EU’s total trade. For North America, intra-regional trade accounted for 50 per cent of its exports, and in Asia 52 per cent of its exports was within Asia in 2014. African countries have been trying to integrate since the 1980 Lagos Plan of Action. While some regions in Africa have been making significant progress in developing their regional integration processes within the so-called Regional Economic Communities – namely, SADC, EAC, COMESA, ECCAS, ECOWAS, IGAD, UMA, and CEN-SAD – they have tended to follow political impulses rather than economic imperatives and created a complex set of overlapping regional configurations – resulting in a so-called spaghetti bowl of integration.

It is for this reason that African leaders decided to intervene to bring some consistency, integrity and seriousness of purpose to the African integration agenda. On 12 June 2011, the Heads of State and Government of SADC, COMESA and the EAC convened at a Tripartite Summit in Sandton, Johannesburg, to discuss the need for a ‘grand free trade area’ between the regional communities (Davies, 2011). An Action Plan on Boosting IntraAfrican Trade (BIAT) was adopted by the African Union Summit in January 2012. The plan is aimed at increasing intra-African trade and addressing a number of tariff and non-tariff issues, including: trade facilitation, trade policy, productive capacity, trade related infrastructure, trade finance, trade information and factor market integration.

The Tripartite Free Trade Area (T-FTA) was launched on 10 June 2015. The T-FTA will form the basis for an Africa-wide FTA initiative that has three pillars: market access, cross-border infrastructure and regional industrial development. In parallel with the process of the T-FTA negotiations, the African Union Assembly launched the Continental Free Trade Area (C-FTA) negotiations during the 25th Ordinary Summit of Heads of States and Governments on 15 June 2015 in Johannesburg. The benefits of the C-FTA include access to a larger market of more than one billion people and a combined GDP of over US$2 trillion.

In order to achieve the African Union’s vision of ‘an integrated, prosperous and peaceful Africa, driven by its own citizens and representing a dynamic force in the global arena’, the AU Summit in January 2015 adopted Agenda 2063. Agenda 2063 sets out the priority areas for Africa’s development over the next 50 years and calls specifically for a 50 per cent increase in intra-African trade by 2022. The post-2015 development agenda adopted by the United Nations aims at achieving, by 2030, a set of Sustainable Development Goals (SDGs) encompassing social, economic and environmental dimensions. Regional integration of the African continent is essential for both the implementation of the AU’s own goals captured in Agenda 2063 and the UN SDGs. African negotiators will need to ensure that their approach to regional integration draws on the development integration approach discussed above and is applied pragmatically to advance the economic development of the African continent. The EU model has informed African integration. It is important to draw lessons from Brexit, especially ensuring inclusive regional integration and balancing the costs and benefits of integration.

Building the capacity of African trade negotiators to advance the multiplicity of regional, bilateral and multilateral negotiations at the same time is essential. African countries will also need to anticipate the effects of TPP and TTIP.

Faizel Ismail is Adjunct Professor in the School of Economics, University of Cape Town. He previously served as South Africa’s Ambassador to the WTO (2010-2014). The views expressed in this article are those of the author and do not necessarily represent those of the Commonwealth Secretariat.

Author Faizel Ismail
Source The Commonwealth
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Date 05 Aug 2016
 
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