Connecting to the world through regional value chains

12 February 2016

Integrating into the global economy will require Africa to first look inwards: by creating successful regional value chains, African economic actors might become competitive enough to enter global value chains.

 

The widespread claim that globalisation largely benefits developed nations should not prevent us from grasping this core truth: globalisation has fundamentally altered the nature of international trade and the political economy. As a result of technological advancements, the world has become a smaller and more efficient place. Firms – multinational corporations or companies (MNCs) in particular – adapted to this environment by moving away from local production, towards coordinating various stages of the production process across different countries and suppliers. This revolution of the traditional supply chains has given birth to what trade economists call “global value chains” or GVCs.

In a bid to lower costs, multinational corporations have created GVCs by offshoring or outsourcing their business activities where they can be most efficiently performed. These activities range from design and research, assembly of parts, to marketing or other related services. This shift in the geographical location of production processes has provided developing countries and transition economies with the opportunity to integrate themselves into the global economy. The undoubted leader in this endeavour has been China and its mighty labour force and manufacturing sector. Trailing behind in this regard are African, Caribbean, and Pacific countries (ACP). This article sheds light on Africa in particular.

In light of how increasingly critical GVCs are in international trade and investment, it is imperative that Africa participate more effectively in these value chains in order to foster sustainable economic development. Successful participation in these GVCs will depend on African firms’ capacities on three levels: the capacity to enter GVCs, to remain in existing GVCs and to upgrade to a more productive stage of these value chains. The systemic challenges faced by African countries have caused the first capacity level – becoming competitive enough to join GVCs – to require the most attention from government and policy advisors. These challenges include the fragmentation of the African continent, the low level of income of African economies, as well as general infrastructure deficiencies.

These major obstacles must be addressed in order to develop the competitive edge needed for entering GVCs. However, as some authors argue, this development first needs to be achieved at the regional level.[1] Offering firms the chance to operate through regional value chains (RVCs) across various African countries would promote the regional integration of markets, which in turn could trigger upgrading processes. As a result, these RVCs could reach international standards of productivity and quality, allowing African economic actors to become competitive enough to attract investment from multinational companies and finally enter GVCs.

Regional value chains as building blocks to global value chains

The creation of RVCs in Africa will depend on a host of factors. One such factor lies in the ability of African firms to capitalise on existing opportunities. For example, the fact that Africa is home to 65 percent of the world’s arable land warrants serious attention. Developing more agricultural value chains across countries could be the key in unlocking this potential.

Another factor which would influence the creation of successful regional value chains will be the extent to which regional cooperation measures and instruments are available to African economic actors. Although the existence of many regional economic communities (RECs) in Africa suggests that regional integration has been sufficiently achieved, this is not the reality. The establishment of regional integration arrangements, while demonstrating African governments’ support, has done little to break barriers between African markets and increase African intra-regional trade. As argued by Trudi Hartzenberg, Executive Director of the Trade Law Centre for Southern Africa (TRALAC), RECs are crucial if Africa wishes to escape this pervading characterisation: a continent of “small countries, small economies and small markets.”

The Tripartite Free Trade Area and its role in creating competitive value chains

The year 2015 marked a tremendous milestone in terms of African regional integration. In the space of about a week in June, the continent saw the signing of the Tripartite Free Trade Area (TFTA) agreement, as well as the launch of the negotiations for the establishment of the Continental Free Trade Area (CFTA). Spanning three existing RECs, the TFTA will be the largest free trade area in Africa once the requisite number of member states ratifies the agreement. The three RECs involved are the Common Market for East and Southern Africa (COMESA), the East African Community (EAC), and the Southern African Development Community (SADC). The CFTA is markedly more ambitious than the TFTA – it envisions a free trade area across all nations in the African Union.

Both the TFTA and the CFTA show the inclination of African governments to rival mega-regional agreements such as the recently signed Trans-Pacific Partnership (TPP), or the Transatlantic Trade and Investment Partnership (TTIP). Those two initiatives could prove instrumental in spurring the establishment of successful regional value chains in Africa, which in turn would help African economic actors to improve their competitiveness and join global value chains. The CTFA being unlikely to enter into force soon due to its sheer scope, the TFTA ought to be the agreement to garner the most attention right now. In fact, it has been argued that the implementation and success of the TFTA will significantly influence the probability of the CFTA coming into fruition.[2]

An analysis of the TFTA agreement yields differing perspectives. On the one hand, it is commendable that there is an appreciation that, in the African context, tariff liberalisation cannot be the only or most crucial feature of a free trade area. In addition to tariff liberalisation commitments, the TFTA addresses, among others, rules of origin (RoO), non-tariff barriers (NTBs), and trade facilitation. However, room for improvement exists for these provisions and member states need to consider these more as they move forward towards ratification of the TFTA Agreement.

Rules of origin

Rules of origin (RoO) dictate how countries determine the economic nationality of imported goods, and thus which duties should be imposed. The WTO sets out disciplines with regards to RoO in the Agreement on Rules of Origin. The advent of globalisation and GVCs has rendered RoO particularly relevant, because the origin of a product can now be easily and often justifiably contested. As discussed earlier, the outsourcing or offshoring of products and services may lead to several nationalities or origins of these inputs. The creation of regional value chains in Africa thus necessitates a mindful consideration of RoO. Furthermore, the TFTA needs to take into account how the preferential RoO applied among member states could result in “hidden protectionism.” Put simply, strict preferential RoO which disqualify outside exporters from the TFTA-conferred preferential treatment would effectively limit market access for these exporters.[3] By preventing regional economic actors from sourcing cheaper inputs from outside the free trade area, this could constrain their ability to become competitive enough to join global value chains.

Trade facilitation and non-tariff barriers

One of the most cited impediments to intra-regional trade in Africa is the inordinate amount of time and money lost as a result of inefficient movement of goods between countries. To illustrate, there is a directly proportional relationship between the time products spend in transit and transport costs, which deters businesses from accessing other markets. Maximising efficiency for cross-border trade is thus crucial for the creation of efficient regional value chains in Africa. Trade and transport facilitation offer preventive and corrective measures for this distinctly African plight.

The TFTA agreement contains provisions outlining programmes and strategies which member states should commit to in respect of transport and trade facilitation.[4] Even before the TFTA was signed, however, these three RECs (SADC, COMESA & EAC) were engaged in harmonising programmes to mitigate the challenges of doing business within and between these regions. These programmes include, for example, a mechanism to monitor, report and remove non-tariff barriers (NTBs), as well as the implementation of more streamlined border and customs procedures in the form of one-stop border posts.[5] A brief discussion of these measures is provided below, with recommendations for their reform.

The NTB Mechanism

The NTB Mechanism is an interactive process whereby NTBs are monitored and reported with a view to have them resolved expeditiously. The main NTBs reported through this mechanism have been cumbersome or ineffective customs and administrative procedures, non-harmonised transport regulations or prohibitive transit charges, and overt corruption at road blocks. Despite significant successes since its inception, the NTB Mechanism would benefit from regularly reviewing its processes and observing how other regions or countries have implemented similar mechanisms. The recent Trade Obstacles Alert (TOA) platform implemented by Ivory Coast (with the assistance of the International Trade Centre and the EU) is one such programme from which the NTB Mechanism could learn. The TOA is a web-based platform which uses an alert system based on email notifications to address the need for transparency and accountability between exporters and importers.

One-stop border posts

One-stop border posts (OSBPs) aim to ensure that vehicles stop only once at the border, thus exiting and entering through countries simultaneously. It is thus envisioned that border officials combine their resources and competencies to be more efficient and combat systemic fraud. Arguably, the most well-known OSBP is the Chirundu OSBP between Zimbabwe and Zambia. The economic gains from such a programme have been borne, in particular, by the fact that waiting times for commercial traffic have dropped from a tedious 3-5 days to same-day clearances. Considering such success, it is therefore surprising that governments in the COMESA-SADC-EAC region have remained sluggish in making one-stop border posts ubiquitous. Member states of the TFTA need to place the implementation of more OSBPs higher on the agenda, not only for the short-term goal of easing traffic and increasing efficiency, but also for the larger goal of creating a more favourable environment for regional value chains.

Conclusion

Despite Africa’s growing GDP, the continent is beset by unrelenting poverty levels, rising unemployment, and a volatile political climate. While by no means a panacea to these systemic crises, international trade and investment provide a path for African countries to reach their full economic potential. Making inroads into the global economy will, however, first require tapping into possible regional value chains across the continent. As described above, regional trade agreements provide the best mechanisms in order to achieve African regional integration. But as with similar agreements over the world, political will remains a stubborn stumbling block. African leaders thus hold the ultimate power in making ambitious free trade areas such as the Continental Free Trade Area and the Tripartite Free Trade Area a reality.

 
Author: Kelvin Kajuna, bachelor student in Law at the University of the Witwatersrand, Johannesburg, South Africa.

This article was selected as part of the TDS Bridges Writing Competition. For more information please see the following link:  http://tds.ictsd.org/tds-bridges-writing-competition.

[1] Draper, Peter et al. “The Potential of ACP Countries to Participate in Global and Regional Value Chains: A Mapping of Issues and Challenges.” SAIIA Research Report 19 – Economic Diplomacy Programme. (2015): 10-13.

[2] Hartzenberg, Trudi et al. The Tripartite Free Trade Area: Towards a New African Integration Paradigm? Stellenbosch: Trade Law Centre for Southern Africa & Swedish International Development Cooperation Agency, 2012. 4-5.

[3] Abreu, Maria Donner. “Preferential Rules of Origin in Regional Trade Agreements.” Staff Working Paper: World Trade Organization Economic Research and Statistics Division. (2013): 5-6.

[4] Article 14 and Annex 3 of the Tripartite Free Trade Area Agreement.

[5] Pearson, Mark. “Trade facilitation in the COMESA-EAC-SADC Tripartite Free Trade Area” The Tripartite Free Trade Area: Towards a New African Integration Paradigm? Ed. Trudi Hartzenberg. Stellenbosch: Trade Law Centre for Southern Africa & Swedish International Development Cooperation Agency, 2012. 142-156.

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