Africa’s preferential trade agreement and the WTO: Yin and Yang

18 April 2012

The article focuses on the benefits of pursuing a “multilateralizing regionalism” approach that could allow the region to tap the potential arising from global value chain shifts in the medium run.

The existence of a healthy multilateral trade regime is crucial to resolving an array of future trade concerns. The reduction and elimination of subsidies for agriculture, fisheries, and fossil-fuel energy - often referred to as top sustainable development priorities - are among those at the apex of those in need of such a mechanism. Yet the success of the multilateral trade regime raises new challenges that require adapted rules. Some of these new rules may initially be provided by preferential trade agreements (PTAs). This dilemma underscores the "coherence debate" concerning how PTAs relate to the WTO, and particularly how the former can be made more compatible with the latter. The proposed PTA amongst three African regional economic communities (RECs), namely SADC, COMESA, and the EAC, provides one angle on the coherence debate.

A major obstacle to the establishment of an African Economic Community by 2025 is the continent's fragmentation into fourteen RECs. One of the Tripartite-PTA's (T-PTA) stated objectives is to ameliorate the problem of overlapping memberships amongst the three constituent RECs. If successful, the T-PTA would result in a PTA covering nearly half the continent in terms of nation states. That could be a significant achievement for the continent as well as a major contribution to the global challenge of building greater coherence between PTAs and the WTO.

Issues

The WTO's Annual Trade Report notes that the ground has shifted in many ways, notably the declining relevance of import tariffs as barriers to international commerce. Underlying this shift is the growth of global value chains, which require minimisation of transactions costs across borders. Consequently PTAs have increasingly shifted into regulatory "behind the border" measures spanning market access and harmonisation, or convergence. This means the impact of PTAs on non-parties, and by extension their relationships with WTO disciplines, are more difficult to measure than the standard trade creation (new trade resulting from the new PTA) / trade diversion (loss of non-parties' exports resulting from the PTA) toolkit allows for.

Therefore, as the WTO report notes, improving coherence between PTAs and the WTO is challenging. It identifies four arenas in which this agenda could be explored:  lowering MFN tariffs; filling gaps in the WTO's legal framework; adopting a "soft law" approach with a view to establishing "hard law" disciplines; and multilateralising regionalism.

The report notes that the impasse in the Doha round has effectively stymied the MFN and legal framework issues. With respect to the soft law/hard law issue, members agreed to establish a transparency review mechanism, which could lead over time to the development of a code of good practices then negotiations aimed at improving hard law mechanisms. However, this is hindered by members' inability to clarify existing rules under the Doha mandate. On the issue of multilateralisation, the report notes that the WTO could play a role as a forum for coordination, standardisation and harmonisation of preferential rules of origin, or identifying "best practices" in PTAs.

The T-PTA potentially fits into the "multilateralising regionalism" component. Its core philosophy is to remove barriers to trade within the combined geographic space of its constituent states beginning with tariffs then proceeding to regulatory barriers, including harmonisation. This vision fits with the broad thrust of PTA evolution in terms of the substance of PTA negotiations, but goes where relatively few have gone in terms of the "widening" ambition relating to parties to the agreement.

Clearly the political economy of the T-PTA will determine whether the vision is likely to be achieved or not, and therefore what significance it holds for the coherence debate. Currently political economy forces seem to be converging on a more limited interpretation of the PTA mandate. While the three REC Secretariats favour a bold and comprehensive approach - tackling tariff and regulatory liberalisation, and regulatory harmonisation together - the member states would like to see the tariff negotiations concluded before moving forward. Since the tariff negotiations are likely to take considerable time to conclude - if indeed they do reach a successful conclusion - the prospects for deeper integration currently appear quite slim. This is compounded by renewed efforts to promote continental integration, which may detract from the T-PTA effort.

Responses

If the T-PTA is to serve as a model in the coherence debate, then the benefits of pursuing the "multilateralising regionalism" approach need to become self-evident to the negotiating parties. Since those benefits are intrinsically linked to global value chains and production networks, a phenomenon that until now has almost entirely bypassed sub-Saharan Africa, this is a tough sell.

Nonetheless, in the medium-term (say 5-10 years) the underlying cost structures driving value chain location could change dramatically. For example, energy and associated transportation costs are likely to continue rising as fossil fuels prices increase and policy measures targeted at carbon emissions intensify. Similarly, as new players from emerging markets secure access to various resources, competition will increase and prices of those resources are likely to rise. Export restrictions, if not properly regulated, are also likely to intensify placing further upward pressure on prices. Also, as China continues to shift its growth model away from reliance on exports towards domestic consumption, wage costs are likely to rise sharply and the currency should continue its appreciation. Hence the ‘China cost' is likely to continue rising. Information technology costs should also be considered as they are likely to be driven lower through intense technological competition.

The geography of value chain location is, thus, likely to shift and the rules governing value chain operation should likewise be updated to allow the new emerging context to evolve optimally. Certain countries or sub-regions in sub-Saharan Africa could benefit from such global value chain shifts, provided that policy reforms aimed at creating appropriate investment environments are rapidly undertaken. In this light, T-PTA member states have a relatively narrow window of opportunity to position their broad region in the emerging opportunity context.

This scenario requires focusing negotiations on issues where transactions costs are highest, since these are of major concern to the multinational companies that drive global value chains. The ensuing schemes should eschew institution-intensive forms of integration as far as possible, and focus on trade facilitation in its broadest sense. Linking this to the "multilateralising regionalism" agenda suggests that T-PTA members should prioritise the following issues: reducing the most blatant costs imposed by constituent PTAs; prioritising the design and implementation of "mutual recognition" (e.g., technical barriers to trade); experimenting with "mutual evaluation" of their respective regulations, a key issue in services; improving the overall design of the T-PTA by defining WTO-compatible best-practices; and including accession provisions for candidate countries with the same commitments as those adhered to by the founding PTA members.

This limited agenda will prove challenging to implement. However, if pursued in tandem with successful infrastructure and tariff liberalisation thrusts, the move could position the region and its member states favourably in the unfolding race to attract global value chain investments.

Because African states are rule-takers in the global trading system, not rule-shapers, successful implementation of the agenda would likely have only marginal implications for the coherence debate. Hence the primary objective behind the strategy should be to position the T-PTA region in the global value chain space. Fortunately the two objectives are congruent; in other words, pursuing a "multilateralising regionalism" agenda would serve the region's interests at the same time as contributing, albeit marginally, to the coherence agenda.

Author: Peter Draper is Senior Research Fellow at the South African Institute of International Affairs

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