Africa and the WTO after Doha

18 April 2012

Other than welcoming Russia, Montenegro, Samoa and Vanuatu to the club and besides a few inconsequential decisions, the 8th WTO Ministerial Conference in Geneva last December ended in the same despair that has now become characteristic of the Doha Round. This paper examines the implications of a failed Doha Round for African economies and argues that it is time to move beyond Doha and start thinking of a new round, learning from the failures of the current one.

A key message is that African countries should judiciously use the current impasse to intensify efforts to integrate into the global economy through unilateral trade liberalization, while tackling policy and structural constraints to regional integration and intra-Africa trade. Aid for Trade has delivered results on the continent; it should be enhanced and scaled up to continue to benefit African LDCs and landlocked countries.

What's in it for Africa?

If the Doha Round is development-focused, Africa, with 31 of its 54 countries classified as LDCs, must be a critical player in the negotiations given that a majority of African countries suffer from a serious development deficit. After all, the very point of featuring development so prominently in a trade round was to pay special attention to countries with a serious development deficit, the majority of which are African.

Yet, there is no evidence that Africa would gain from a successful conclusion of the Doha Round. While estimates of Doha Round gains and losses differ in magnitude, they tend to converge on one point: sub-Saharan Africa (excluding South Africa) invariably loses in most Doha Round scenarios.  These welfare losses range from USD 197 billion in the Carnegie model to USD 400 billion in the World Bank model. Gains for sub-Saharan Africa are positive only in the IFPRI model, which simulates the welfare impacts of alternative DFQF market access scenarios. Even so, the gains occur only under 100 percent DFQF - a very unlikely scenario. Only South Africa shows robust gains under most Doha Round scenarios across a number of empirical studies.

Sector-wise, exports of agricultural products, such as sugar, cotton, tea, coffee, and cocoa, are likely to increase following agricultural trade liberalization under the Doha Round. Conversely, the manufacturing sector - including textiles and clothing, leather, footwear and metal products - will be hit hard by proposed industrial tariff cuts. Thus, a successful Doha Round will exacerbate the already high export concentration in primary products by undermining sub-Saharan Africa's timid efforts at industrial diversification while further boosting agricultural exports.

These results are not surprising since Africa is a heterogeneous bloc of countries - as demonstrated by the diverse coalitions representing African countries at WTO negotiations. In agriculture, for example, Africa's main point of contention is the trade-distorting subsidies that the US government provides to local cotton producers. The effect of these subsidies is both to squeeze out African cotton exporters from the US market as well as to depress the world price of cotton. Africa would benefit from a reduction in cotton subsidies, as promised by the US government, but the gains will be limited to the four main producers of cotton, namely Benin, Burkina Faso, Chad, and Mali. However, if this comes as part of a package of agricultural trade reforms by developed countries, Africa as a whole might lose as lower subsidies will raise the prices of agricultural imports and adversely impact Africa's numerous net-food-importing countries, including the cotton exporters.

Industrial tariff cuts under current NAMA proposals will effectively amount to an erosion of the existing margin of preference for African countries under various schemes, including the EU's Everything But Arms Agreement, the EU-ACP economic partnership agreements and AGOA. Without such preferences, most African countries will not be competitive exporters of manufactured products.

Service liberalization is difficult to quantify and it is hard to know what is on the table since negotiations in this area are governed by a process of requests and offers, and shrouded in a veil of opacity. African countries will clearly gain from Mode 4 (movement of natural persons) liberalization. They might also benefit from opening up their own service sectors, especially banking, telecommunications, and retail trade, and from encouraging commercial presence of foreign firms in sectors in critical need of upgrading through technology transfers, such as specialized health and higher education. However, governments worldwide are reluctant to liberalize these services, and African governments are no exception.

While multilateral trade liberalization in both agriculture and manufacturing might generate increased demand for imports, it is unlikely that African countries will benefit from trade creation due to their poor supply response capacity. However, it is doubtful that  tariff cuts in these sectors will translate into actual liberalization since the cuts apply to bound tariffs, which are generally well above applied tariffs. In the case of DFQF access, the proposal as it stands - that is, zero tariffs on 97 percent of industrial country tariff lines - is unlikely to make much of an impact since a number of products will likely fall under the three  percent of tariff lines exempted from the proposed tariff cuts.

The way forward

Africa should use the breathing space afforded by the status quo to act on the following outstanding issues:

Liberalize trade - unilaterally

Tariffs in Africa remain high - the second highest, as a region, after South Asia - and peak tariffs in sensitive sectors prevail. For example, the simple mean tariff for primary products and manufactures amounted to 12.1 percent and 10.9 percent, respectively, in 2009-2010. Such high rates of protection tend to stifle export growth and diversification away from traditional sectors and account in large part for Africa's marginalization in world trade.

Forge regionalism with a view to continental integration

Fifteen African countries, representing about one-third of Africa's population, are landlocked; population densities are low and domestic markets small; and most African countries are far from the major markets of Europe and USA. The recent financial crisis has demonstrated yet another benefit of regional integration: the most integrated economies of Africa (Uganda, for example) were left unscathed by the crisis. This suggests that regional integration can strengthen economic resilience to external shocks, which is critical to sustaining national development efforts.

Nevertheless, intra-Africa trade has remained below 10% of total African trade, pointing to the huge untapped potential of regional markets. Despite the declared political will and a plethora of initiatives to forge regional cooperation - including the proposed tripartite EAC-COMESA-SADC FTA and the recent AU decision to fast-track establishment of a continental FTA - progress has been generally slow and plagued by a number of structural and institutional constraints. It is therefore crucial that African policymakers and pan-African institutions move beyond rhetoric to harness regional integration as a vehicle for growth and development in the future.

Negotiate bilaterally for more flexible rules of origin

Strict rules of origin have often been blamed for impeding the development of industry in Africa and for pushing much of the continent into the raw materials corner. Although tariff escalation may have a similar effect, it has mattered less for African countries' exports, the bulk of which is geared toward the European market, where they have typically benefited from duty-free access. In the case of clothing for example, the Lomé Convention and subsequently the Cotonou Agreement, required apparel to undergo a double transformation , that is, assembly plus at least one pre-assembly, inherently capital-intensive, operation, such as spinning or weaving/knitting. Conversely, apparel exports to the US under AGOA are subject to a simple value addition rule. This has encouraged the development of a clothing industry based on unskilled labor in countries like Lesotho and Madagascar.

However, clothing exports to the EU under the EPAs will only need to satisfy a ‘single transformation' rule, which would likely make it easier for African countries to export to the EU market. The EPAs also propose softer rules of origin for fish products, among others. Such flexibility is a good reason for Africa to move faster with the ratification of EPA agreements. Another potential avenue for reform relates to reluctant non-tariff barriers, such as technical barriers to trade, SPS standards, and potentially labor- and environment-related measures, which are emerging as a formidable constraint to Africa's exports of processed products.

Press for more Aid for Trade resources

A growing body of evidence, mostly anecdotal, suggests that Aid for Trade (AfT) has proved effective in building productive capacity and trade-related infrastructure in African LDCs. The North-South Corridor, which links the port cities of Dar Es Salaam and Durban across eight countries, is often cited as the perfect example of the achievement of Aid for Trade, spurring intra-regional trade and facilitating exports. But there are other - albeit less documented - successful experiences across Africa.(1) If AfT was doled out as compensation for a stalled Doha Round, then African countries should welcome AfT!

Scaled-up financial resources for technical assistance and for protecting governments' revenue bases as tariffs fall are critical to the trade liberalization agenda in Africa. AfT has also supported regional integration efforts in Africa both by financing trade facilitation projects and by helping build the institutional capacity for negotiating trade agreements. Going forward, the AfT initiative should play a more important role in helping African countries address non-tariff barriers.

Conclusion

A failed Doha Round has a silver lining for Africa -success in the trade talks would have translated into an erosion of preferences and net welfare losses for the continent as a whole. However, while Africa might take comfort in the status quo, this is no time for complacency. The continent should use the lifeline afforded by the stalled round to make greater efforts to integrate into the global economy, both through unilateral trade liberalization and regional integration. African countries should also move faster to ratify EPAs and to negotiate more flexible rules of origin and scaled up Aid for Trade resources to address the numerous supply-side constraints they face.

Author : Vinaye Dey ANCHARAZ, an international trade expert, is a senior lecturer on leave from the University of Mauritius.

The views and opinions expressed in this article are the author’s own and should in no way be associated with the African Development Bank, its Board or its Regional Member Countries.

(1) See, for example, the African case stories compiled by the WTO.

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