Sitting on the sidelines: How will mega-regionals affect African LDCs?

1 December 2014

Although the final substance and eventual ratification of Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP) negotiations remain uncertain, the ability of African nations to diversify market opportunities, integrate their economies in global value chains and attract sustainable investment could be affected. The long-term balance of benefits against risks will depend on the design of these agreements, supportive international policies and the strategic response of African policy-makers and firms. Four issues are relevant: new compliance measures, geopolitical dynamics, preference schemes and international production networks.

Transparency and monitoring will be an important basis on which sub-Saharan African nations can frame a proactive response.

New compliance measures

The TTIP and TPP differ in their motivating factors and negotiating dynamics. However, beyond their geographical spread and respective weights in world economic output and trade, they hold in common the objective of reaching binding commitments on “21st century”, or “WTO-Plus”, trade-related issues.

The TPP’s main focus is to reach agreement on disciplines configured to support the formation of transnational production networks, including intellectual property, investment, competition policy, services, customs procedures and investor-state dispute settlement. The TTIP builds on this with its core ambition of eroding non-tariff barriers to trade by agreeing to common standards and working towards regulatory convergence (through harmonisation or mutual recognition). Both sets of negotiations further include chapters on labour and environmental norms, financial services, public procurement practices and market access.

Should new regulatory standards and disciplines emerge from the TPP and TTIP negotiations, they will, in all probability, apply to trade and investment relations with the rest of the world, including sub-Saharan Africa. The ability of African nations to attract investment and gain reliable access to mega-regional markets, most importantly the EU and the US, will progressively depend on compliance with non-tariff measures – both technical and non-technical – that go beyond the realm of traditional trade policies.

In the case of standards, meeting higher thresholds will entail regulatory changes without which African producers could be shut out of the markets concerned. This raises the problem of resource constraints and the ability to strengthen regulatory capacities. In regard to compliance with disciplines covering investment or intellectual property rules, domestic policy changes will be expected. This raises the issue of the appropriateness of adopting “gold standard” policies in weak institutional settings.

The depth of these behind-the-border requirements will not be without controversy. Yet, they could be exploited by African nations as an impetus for reform in areas of domestic priority. Depending on the nature of institutional and supply-side constraints, as well as the capacity to conform to new standards and disciplines, targeted assistance under the aegis of the Aid for Trade programme and broader capacity building efforts will be required.

Geopolitical dynamics

The geopolitical foundations and possible implications of the mega-regionals on the international trading system should not be lost in the discussion on their potential impact on sub-Saharan Africa.

There is disagreement among analysts whether the mega-regionals represent “building blocks” towards multilateral convergence or “stumbling blocks” towards fragmentation. Systemic scenarios will hinge, to a great extent, on how China responds and whether one of the unstated objectives of the US-led mega-regional drive, that of not necessarily excluding China but rather compelling the world’s second largest economic power towards accepting new norms and rules on pre-established terms, leads to gradual consent or contest – particularly in the context of a powerful Asia-Pacific coalition like the TPP where China is by design an outsider to negotiations.

This geopolitical dimension is of relevance to sub-Saharan Africa at a time when the continent’s trade and investment patterns are undergoing a profound and seemingly secular shift from traditional economic partners to intensified relations with fast-developing centres of world commerce.

The EU as a bloc remains sub-Saharan Africa’s largest trading partner, yet its share of total African trade halved between 1989 and 2011 from 50 percent to 25 percent. In 2011, the US accounted for 12 percent while China had become sub-Saharan Africa’s biggest bilateral trading partner with 15 percent of the region’s total trade. The speed and scale of China’s engagement with the continent has been a game-changer.

The backdrop to the mega-regional effort is one in which sub-Saharan African nations are concurrently engaged in discussions with major partners over institutional arrangements of long-term developmental and strategic importance. The African Growth and Opportunity Act (AGOA) – the centrepiece of US economic relations with the region since 2000 – is up for renewal in 2015 with a fair degree of uncertainty regarding the terms of any new agreement. AGOA has been characterised by its unilateral and non-reciprocal nature, features that are up for discussion, specifically with regards to sub-Saharan Africa’s biggest economies and most dynamic markets. An important factor behind this reasoning is that the EU is hoping to finalise arduous negotiations on regional Economic Partnership Agreements – the foundation since 2008 of Europe’s economic integration with sub-Saharan Africa, which (with the exception of least developed countries) is built on reciprocity, hence preferential access to African markets for European firms.

Since 2000, the Forum on China-Africa Cooperation has served as the main stage for Sino-African bilateral relations. Recently, there have been moves to formalise trade and investment arrangements with African regional groupings through initial Framework Agreements with the East African Community (EAC) and the Economic Community of West African States (ECOWAS). China, too, may start to demand reciprocity with certain partners.

A question that arises is how sub-Saharan African nations and regions will react should mega-regional agreements fail to reach coherence and lead to fragmented governance structures within the international trading system. The immediate tendency may be to gravitate towards European and US partners – especially if existing preference schemes are strengthened and the EU makes African economic development a strategic priority. However, the emerging centres of growth, trade and investment are largely to the east. While the future velocity of this shift in world economic gravity can be debated, the expectation is that Asia will continue to experience significant economic convergence and that South-South trade and investment dynamics with Africa will amplify. A discussion on the region’s double-edged economic relationship with China, including the possibility of future regulatory demands, would seem to be a priority.

Preference schemes

The TTIP could provide an opportunity for the EU and the US to jointly revisit trade preference schemes to support the development objectives of sub-Saharan African low-income countries. The transatlantic partners apply distinct non-reciprocal arrangements that offer special access to African nations and least developed countries – the most comprehensive of which are AGOA and the Everything but Arms (EBA) regime of the EU.

In 2013, sub-Saharan Africa accounted for 2 percent of world trade and less than 3 percent of global foreign direct investment (FDI) flows, with extractive industries drawing the lion’s share. Liberal access to developed markets, as envisioned by the policy thinking behind AGOA and EBA, could help stimulate investment and job creation in agricultural, manufacturing and service export sectors.

However, despite their successes, both schemes suffer from limitations that curtail their utilisation and effectiveness.

To cite some of the most commonly echoed weaknesses: AGOA excludes and applies tariff quotas to key products that the region can produce competitively, not least agricultural products;  EBA provides full duty-free, quota-free coverage but only to countries classified as LDCs, thereby driving an arbitrary wedge within the region; the administrative costs of compliance to complex local content requirements can be prohibitive to firms operating in LDCs; the rules of origin required for product eligibility are seen as ill-adapted to the development of value chains; and AGOA’s annual review mechanism added to the uncertainty of the scheme’s renewal post-2015 reduces security of access.

There is as yet no evidence that the harmonisation of preference schemes is on the agenda of the TTIP. However, short of integrating their preferential arrangements, the EU and the US could send a strong message to their African partners that the agreement is about coherence and inclusion by mutually recognising requirements covering rules of origin.

This not only would reduce information costs and ease compliance procedures for African exporting firms, it also, in principle, would allow imported products from African countries covered by preferences to be granted reciprocal access to EU and US markets.

International production networks

The fight for relevance in 21st century trade is increasingly being conducted via global value chains (GVCs). Despite the developmental potential that disaggregated production networks hold for low-income economies in Africa by allowing for the formation of capabilities and clusters in a narrow set of specialised tasks, the region has essentially been bypassed.

Most models predict that the mega-regionals will not lead to significant trade diversion and that any loss could be compensated by the efficiency gains to the global economy.

This prognosis will depend on how the agreements are designed (e.g. an approach based on open regionalism with accession clauses or “docking stations”) and the manner in which the EU and the US decide to integrate the many trade agreements they hold with third countries and regions (e.g. mechanisms covering the cumulation of rules of origin).

The TTIP, TPP and the Regional Comprehensive Economic Partnership (RCEP) incorporate all three GVC hubs: Europe, North America and East Asia. There is a risk that these agreements could have negative spillover effects on the incentive to invest and stimulate actual and potential production in sub-Saharan Africa.

As discussed, generous preference schemes in developed markets with rules adapted to the realities of modern trade could spur African export diversification. The operationalisation of the LDC Services Waiver and the implementation of the Trade Facilitation Agreement as agreed at the WTO Ministerial in Bali, may also form part of a supportive international policy environment, which will need to be complemented by national and regional policies.

Although many economies in sub-Saharan Africa have consistently grown faster than other regions of the world in recent years, primary commodities have driven a large share of this growth. Most African nations need to implement reforms that improve their business environment and attractiveness as investment destinations so they can develop their potential in manufacturing activity and agricultural productivity. Modernised infrastructure and backbone services (logistics, telecommunications and transportation) are further preconditions to competitiveness and the ability to tap into sophisticated production networks.

Securing greater depth and coherence to existing regional integration efforts will also be an important strand in sub-Saharan Africa’s effort at creating an environment conducive to the expansion of value chains. Official intra-regional trade between African nations stands at around 10 percent (compared to 30 percent for ASEAN nations). This weak integration is partly driven by the lack of complementarities between the region’s economies, but also by the prevalence of high barriers to trade: The cost and complexity of conducting business across borders severely restricts the ability to form regional value chains. Given the low level of intra-African trade, Africa will remain dependent on external forces for a long time, and these forces will require the greatest adjustments in the near term. However, initiatives at the regional level could be used as laboratories for reform and for building regional value chains with an eye on graduation into global production networks.

A recent initiative of note that underscores the awareness of the need to better integrate and harmonise regional economic communities is the Tripartite Free Trade Area spanning the EAC, the Southern African Development Community (SADC) and the Common Market for Eastern and Southern Africa (COMESA). The agreement is to be based on three pillars (market integration, infrastructure and industrial development) with an agenda in two phases that includes trade in goods (tariffs, non-tariff measures, rules of origin, customs cooperation, dispute resolution) followed by services, intellectual property, competition policy and investment – all of which were until recently rarely considered in African regional trade agreements and could better prepare Africa for the post mega-regional environment.

Conclusion

One of the consequences of mega-regional activity is that the influence of sub-Saharan Africa on the global trade and investment agenda will diminish – the region relies on the World Trade Organization to be heard and has very little bargaining power to push its interests forward outside of the organisation. Nevertheless, sub-Saharan African policy-makers can devise strategies aimed at building on the opportunities and curtailing the risks occasioned by the mega-regional agreements. This entails closely monitoring the negotiating chapters, working with partners to ensure that the potential for discrimination is minimised and creating a domestic and regional economic environment that invites confidence.

 

This article is an adaptation of a longer article which appeared in Mega-regional Trade Agreements: Game-Changers or Costly Distractions for the World Trading System?, World Economic Forum, July 2014.

Authors:
Peter Draper, Senior Research Fellow, Economic Diplomacy Programme, South African Institute of International Affairs, South Africa.

Salim Ismail, Group Chairman and Chief Executive Officer, Groupe Socota, Mauritius.

 

This article is published under
1 December 2014
During the first “wave” of Regional Trade Agreements (RTAs) bilateral agreements were the norm; most of the 300 plus agreements notified to the WTO are bilateral agreements although there are some...
Share: 
1 December 2014
“We’re talking about what could be the biggest bilateral trade deal in history, a deal that will have a greater impact than all the other trade deals on the table put together.” In June 2013, when...
Share: