Evaluating the effects of mega-regionals on Africa

18 April 2016

This article serves to explore and evaluate the economic effects of planned mega-regional free trade agreements on Africa, as well as to give specific policy advice to their members in order to make future trade more inclusive towards African economies.
 

The world of global trade is changing in a way we have never seen before. Multilateral negotiations have cleared the way for mega-regional trade agreements, with the big players of the global economy forming up into few powerful trading blocs. While a significant part of the world is concentrating on agreements with names like the TTIP (Transatlantic Trade and Investment Partnership) and TPP (Trans-Pacific Partnership) in the west or the FTAAP (Free Trade Area of the Asia Pacific), however, the African continent continues to be somewhat deliberately ignored. Though African economies have undertaken to form their own mega trade zone in the form of the Continental Free Trade Area (CFTA), trade relations with outside economies remain on unequal footing.

Yet Africa certainly has great trading potential. Many African countries are rich in natural resources such as diamonds, gold, copper, iron ore, oil, and rare earth elements. However, managing properly this wealth of raw materials can prove difficult and constitute a real challenge. Too often the promise of quick profits leads to excessive capital investment in mines and processing facilities, while other industries are neglected as a result. Such one-track economies are seldom sustainable and countries land in a developmental dead end, especially because the profits from raw material wealth are generally distributed extremely unequally among the population. Meanwhile, other developing nations – in Asia, for example – have invested more in infrastructure and diversified their economies to a greater extent, making them relatively more appealing for potential trade partners and investors. As a result, Africa’s share in world trade was still only three percent in 2013, a disproportionately small number.

Accordingly, Africa’s role as a raw material supplier for the rest of the world has changed very little since the days of colonisation. Raw materials comprise the vast majority of Africa’s exports today; other main exports are textiles and agricultural products. But how will such commodities trade be affected by future mega-regionals?

How do mega-regionals affect Africa?

Even though Africa itself is not directly involved in any of the upcoming global mega-regionals, we can assume that due to their sheer size, agreements like the TTIP, TPP, or the ambitious FTAAP will have significant effects on African economies.

Let’s take the TTIP as an example. Generally, an agreement like the TTIP can impact African countries in different ways. There will be a direct effect on prices as well as on income, but these direct effects would impact the welfare of third countries in opposite ways. The price effect, also called the trade diversion effect, arises when imports from African countries suddenly become relatively more expensive for Europeans or Americans compared to the imports from their TTIP partner countries. This loss of price competitiveness can result in a lower trade volume and therefore reduce the revenues of African exporters.

At the same time, however, a trade agreement like the TTIP is expected to lead to higher income and therefore to increased buying power in the TTIP member states[1]. Greater purchasing power stimulates increased demand – also for imports from third party countries. This enables those countries to increase their export volume at higher prices. Whether the TTIP has a direct positive or negative impact on the welfare of an African nation thus depends on which of the two effects has a greater influence on its balance of trade.

Indirectly, African countries could also be affected through so-called spill-over effects, which primarily rely on the harmonisation of regulations that go with big free trade agreements. This harmonisation could incentivise other economies to adjust their own regulations accordingly, making future trade in both directions between the original FTA countries and the outsider countries cheaper.

In a recent model simulation, the German Ifo institute on behalf of the Bertelsmann Stiftung has calculated such expected direct and indirect welfare effects of mega-regionals for a total of 25 African countries[2]. Focusing on the TTIP and the TPP, the data shows that for most African countries, the positive income effect of planned mega-regionals exceeds the negative trade diversion effects. For both the TTIP and the TPP, only Mozambique, Zambia and the Ivory Coast have to expect negative welfare effects according to the model. Mozambique is hit hardest under both agreements, with an annual negative effect of 0.2 percent on its income after ten years. While such an effect is relatively small compared to Mozambique’s current growth rate of up to 7 percent, Mozambique still is one of the poorest countries in the world, and it is not known how exactly the effects will be distributed among the population, leaving a big chance that the poorest will be affected the most.

On the other side of the spectrum, the data shows that mega-regionals such as the TTIP and the TPP can also have a significant positive welfare effect on African countries. An agreement like the TTIP is expected to generate additional income of 0.8 percent through direct effects for the most positively affected countries, such as Benin and Togo. If indirect spill-over effects are taken into account, these effects could increase up to around three percent annually after ten years. Similar positive effects can be expected from the TPP.
 

Eastern promises?

While the effects of agreements like the TTIP and the TPP appear promising for most African countries, they pale in comparison to the potential of the Chinese-led FTAAP agreement. China is Africa’s largest trade partner in the world by far, even ahead of the US and the EU. If China has its way, this dominance will continue to grow in the future. According to Chinese Premier Li Keqiang, China’s current trade volume with the African continent of almost US$ 200 billion per year will double and reach US$ 400 billion by 2020. China primarily procures raw materials and natural resources from African exporters, such as various metals, rare earth elements and crude oil, which are further processed in China and then commonly exported to the global market in a different form. In return, China invests in African infrastructure and mining facilities in order to secure its role as the dominant buyer of African raw materials in the future, too.

In this regard, China-Africa trade is ideally set up for any demand-boosting effects of an eastern mega-regional. Since most of the raw materials that China imports from Africa are only traded on a small scale within the FTAAP, the trade diversion effects in these sectors are minimal. Meanwhile, increased Chinese trade has an enormously positive effect on demand for African raw materials, especially when we consider that the three largest customers for Chinese exports (US, Hong Kong, and Japan) are all FTAAP member states as well.

Calculating effects of a potential FTAAP, the Ifo model predicts positive welfare increases for all 25 African countries included in the simulation. Even the least affected country, Zambia, can still expect an income boost of 1.6  percent. Raw material rich countries like South Africa and Togo are looking at an annual increase of 7.9 percent and 8.6 percent respectively. A look at South Africa’s trade sectors shows how exactly Chinese demand for natural resources can cause such effects. While South Africa’s agricultural sector is expected to shrink slightly under a FTAAP due to trade diversion, its large mining sector is expected to grow by a whole 62 percent.
 

Ensuring inclusiveness

To ensure the most positive outcome for African developing countries, mega-regional trade partners should strive to create mega-deals in the most inclusive form as possible. For developed countries which are engaged in the TTIP and the TPP, an additional motivation would be to also secure future competitiveness towards China on the African markets. Potential trade diversion effects of mega-deals should be cushioned and the impact on demand from positive income effects should be maximized. At the same time, future options should be promoted in order to help African countries adapt their regulations, so as to achieve potential spillover effects.

Countries engaged in mega-regional trade initiatives such as the TTIP and the TPP should extend their recognition of mutual standards to non-member states, too. As long as either the EU or US standards are being upheld, it should have no influence on regulatory recognition whether the supplier of a good is exporting from France or from South Africa. Regulatory harmonisation in general is key when it comes to a united future in global trade. It is therefore essential that emerging markets outside TTIP or TPP be included in the future regulatory cooperation involved in those deals. The more African countries are integrated in such regulatory cooperation bodies, the weaker the trade diversion effects will turn out to be. Indirect spill-over effects could be boosted.

Finally, the role of the WTO as an international forum and advisor for current and future negotiations must be strengthened again. Only with a fair and impartial mediator like the WTO can the voices of poor third party countries like in Africa be heard sufficiently on an international level. If done right, agreements like the TTIP or TPP can be taken as stepping stones towards a globally united, multilateral free trading community.
 

Conclusion

In conclusion, modern simulations show that the effect of mega-regionals on Africa will mostly be a positive one. Only a few countries should expect negative welfare impacts under the future mega-deals. While those negative effects are generally low, they might hit some of Africa’s weakest economies, and since there is little data on the distribution of effects among the population, chances are that the poorest might have to carry this burden. On the brighter side, mega-regionals are expected to have positive effects on average for African countries, with a particularly strong impact under a Chinese-led FTAAP agreement. Developed countries engaged in mega-regional trade initiatives should strive to make their agreements as inclusive as possible. This would allow them to ensure the most positive outcome for African countries, while making certain that they are not left behind by Chinese trade in Africa.


Authors : Fritz Putzhammer, Part-time project manager for the Global Economic Dynamics (GED) project of the Bertelsmann Foundation. Ulrich Schoof, Head of the Global Economic Dynamics (GED) team within the Bertelsmann Foundation.


[1] Felbermayr et al. (2015), Potential impacts of the Transatlantic Trade and Investment Partnership (TTIP) on developing and emerging economies, Ifo institute, Munich. http://www.cesifo-group.de/ifoHome/research/Projects/Archive/Projects_AH/2014/proj_AH_ttip-entwicklungslaender.html.

[2] The results are already available in the form of downloadable fact sheets on the GED website : http://ged-project.de/factsheets/.

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