by Philani Mthembu
Despite the recent signing of the Tripartite Free Trade Area between the Southern African Development Community (SADC), the East African Community (EAC), and the Common Market for Eastern and Southern Africa (COMESA), Africa remains the most fragmented continent in the world, with 54 countries and very low levels of intra-regional trade, which stood at 16.2 percent in 2013, according to the World Trade Organization. This compares unfavourably with Europe (68.6 percent), Asia (53.3 percent), North America (49.2 percent), and South and Central America (26.6 percent). To compound this, Africa’s share of world trade was a mere 3.3 percent in 2013. This combination of factors ensures that African countries remain vulnerable to external trade patterns and regulations.
While African countries have grown their trade relations with the BRICS countries, trade with the EU and the US continues to be significant, heightening the relevance of the ongoing Transatlantic Trade and Investment Partnership (TTIP) negotiations. The biggest threat to African countries lies in the potential for the TTIP to have trade diversion effects, making it more difficult for African goods and services to access the transatlantic market. According to a report in Deutsche Welle, the transatlantic partnership may at first glance not seem to affect African countries due to many of them exporting unprocessed goods. However, stringent rules of origin would make it difficult for many African countries not content with being producers of primary goods to grow their processing industries and realise their national goals for the beneficiation of their natural products. Gabriel Felbermayr, professor at the Munich-based Ifo Institute, confirms the possibility of such an outcome for African countries, basing his analysis on a study he conducted on the possible impacts of the TTIP on developing countries.
In order to minimise these negative effects, I argue here that the transatlantic partners must ensure that the benefits are not exclusive to the TTIP signatories, but also extend to third countries. This could be achieved through a policy of mutual recognition of standards extended to third countries with flexible rules of origin. Adopting such a policy would not be charity on the part of the transatlantic partners, but would be consistent with the reality of many of their production bases being located outside of their territories. This action would help reduce trade diversion concerns in Africa and the developing world while sending a signal that the transatlantic partners are still committed to an open global trading system.
Since the direction of the TTIP largely depends on the political and economic intentions of the transatlantic partners, it is arguable that African countries cannot afford to idly wait for the final agreement and should, in the meantime, remain committed to increasing intra-Africa trade and supporting regional integration while continuing to expand their trade with emerging powers. A combination of these actions reduces Africa’s vulnerability by ensuring that fears of trade diversion through TTIP are minimised. Furthermore, African economies must make better use of existing trade preferences with the EU and the US. These include the EU’s Everything But Arms (EBA) scheme for Least Developed Countries (LDCs) and the Africa Growth and Opportunity Act (AGOA) extended by the US to qualifying Sub-Saharan African countries. Martina Huzell and Annie Dewill of the Department of Economics at Lund University in Sweden argue that although these preference schemes should extend market access, their benefits are underutilised due to restrictive rules of origin, limited production capacity, and poor infrastructure in beneficiary countries. When LDCs struggle to locally source intermediate inputs required for their exports, certain hypothesised gains are nullified. It is these factors that must be addressed in order to allow countries qualifying under AGOA and EBA to better utilise their existing trade preferences.
Trade diversion versus trade creation in the TTIP
One of the main concerns in any preferential agreement is the discrimination against third countries. Stormy-Annika Mildner from the Stiftung Wissenschaft und Politik (SWP) and Claudia Schmucke from the Deutsche Gesellschaft für Auswärtige Politik (DGAP), both renowned think tanks in Germany, refer to the work of the late Canadian economist Jacob Viner, who demonstrated that “trade diversion occurs when the dismantling of trade barriers gives goods and services from the partner country a competitive advantage and consequently trade with third countries is diverted to the partner country even if the third country can produce the relevant goods and services more efficiently”. A proliferation of free trade agreements (FTAs) also leads to a growing number of different rules of origin. This increases the obstacles to trade for non-signatories, especially for smaller businesses not able to comply with different regulatory frameworks.
Basing its assessment on a study by the Centre for Economic Policy Research (CEPR), the European Commission predicts that the TTIP would have a positive impact for the rest of the world, even to the amount of €99 billion. These gains are mostly distributed within the OECD countries (€39 billion). Thus, even under this optimistic study, the gains would be shared disproportionally, with Africa likely getting the least. However, a separate study conducted by the Ifo Institute, using a different methodology, provides a more vivid illustration of the gains and losses, demonstrating that exports from African countries would be negatively affected, while the impact on welfare also shows a decline. Both the CEPR and Ifo Institute examine two scenarios: the first with an elimination of tariffs in trade and a second consisting of a comprehensive liberalisation scenario, which also includes the reduction of non-tariff trade barriers.
Likewise, the study by Felbermeyr conducted by the Ifo Institute concludes that the countries of the Maghreb, with which the EU has the Euro-Mediterranean Free Trade Agreement, would lose under both scenarios. European companies would become more competitive, while EU imports from the Maghreb would decrease by 5% from the comprehensive agreement as traditional trade diversion effects predominate. This in effect devalues existing preference agreements. Given the political turmoil in the region and the added need to bring about stability and improve the economic outlook, this scenario is worrying for North Africa. In general, North and West Africa are especially affected, since they traditionally have extensive trade relations with Europe. Côte d’Ivoire and Guinea are the biggest losers as their exports into the EU would be affected by the US. While East Africa may fare a little better on the aggregate level due to its closer proximity to and engagement with larger markets such as China, Uganda and Tanzania still record big losses. South Africa would also suffer the effects of the TTIP, especially when factoring in the rules of origin which may govern the agreement. With these results, the Ifo study is unequivocal: African countries stand to lose access to the transatlantic market. The following table outlines the hypothesised change in real per capita income under a tariff scenario and under a comprehensive scenario which includes non-tariff barriers, using data from the Ifo study by Felbermeyr:
Table 1: Change in real per capita income under a tariff and non tariff (comprehensive) barriers scenario among African countries
A lot is clearly at stake: An open TTIP, which incorporates mutual recognition and adopts flexible rules of origin might yet convince African countries that the EU and US are sensitive to the needs of developing countries, while a closed agreement will only cement the view that developed countries are not supportive of the developmental goals and needs of the global South. This is likely to nudge them politically and economically closer towards emerging economies. The manner in which non-tariff barriers are regulated will thus have a bearing on perceptions towards the transatlantic partners.
Countering the negative effects of the TTIP
In order to reduce the negative spillovers, the transatlantic partners have the option of adopting a policy of mutual recognition of standards with flexible rules of origin extended to third countries. Researching the impact of standards and the reduction of non-tariff barriers in regional agreements, Aaditya Mattoo of the Development Research Group in the World Bank and Maggie Xiaoyang Chen of the Department of Economics at George Washington University find that “harmonisation of standards may reduce the exports of excluded countries, especially in markets that have raised the stringency of standards. Mutual recognition agreements are more uniformly trade promoting unless they contain restrictive rules of origin, in which case intra-regional trade increases at the expense of imports from other countries.” Writing for Project Syndicate, Mattoo argues that “with mutual recognition, the EU and the US would accept each other’s standards or conformity-assessment procedures, allowing firms to adhere to the less stringent requirements in each area. If the policy were extended to third-country firms, it would have a powerful liberalising impact.” With this option ultimately relying on the transatlantic partners, it would be sensible for African countries to be proactive and take pre-emptive steps to minimise the potential negative effects.
This multi-faceted approach would mean remaining committed to increasing intra-Africa trade. This is important since Sub-Saharan African countries continue to have higher non-tariff barriers between themselves than on trade with third countries. Such a commitment must involve continued efforts to coordinate regional technical regulations and standards, sanitary and phytosanitary measures as well as rules of origin, which have all added significant costs to doing business in Africa.
More and more companies are increasingly breaking down regional barriers and expanding intra-Africa trade. Tony Elumelu of Nigeria’s Heirs Holdings Limited and Jonathan Oppenheimer of the De Beers Diamond mining dynasty provide examples such as Kenya’s retail and information and communications technology companies, and Nigerian banks and South African retailers and financial services. Despite these positives, intra-Africa trade still remains too low. Regional economic blocs will play a central role in further breaking down trade barriers, unlocking the full potential of African economies, and reducing the vulnerability to external changes.
Lastly, African countries must seize opportunities provided by the growing role of emerging economies The BRICS account for 40 percent of the world population, 20 percent of global output and nearly 20 percent of all trade and FDI flows, while their development cooperation across Africa is also growing rapidly. These trends are likely to continue in the coming years, putting African countries in a position to make strategic decisions that impact their economic landscape. While trade with the BRICS cannot replace trade with the transatlantic partners, a combination of intra-African trade with increased trade with the emerging powers would allow African countries to mitigate the impact of potential trade diversion effects through the TTIP, and would therefore no longer leave them at the pure mercy of negotiators in Brussels and Washington.
This article is an updated version, and first appeared in Cardoso, D. Mthembu, P. Venhaus, M. Verde Garrido, M., The Transatlantic Colossus: Global Contributions to Broaden the Debate on the EU-US Free Trade Agreement, Berlin Forum on Global Politics, Internet & Society Collaboratory, FutureChallenges, December 2013. [Available online] http://bfogp.org/publications/the-transatlantic-colossus/
Dr. Philani Mthembu is a Senior Researcher at the Institute for Global Dialogue (IGD) in Pretoria and co-founder of the Berlin Forum on Global Politics (BFoGP).