New trade deals: Africa to lose out as EU gains

East African, Nairobi

New trade deals: Africa to lose out as EU gains

By Gichinga Ndirangu

23 July 2007

As Africa’s leaders met in Accra, Ghana, last week to consider ways of consolidating continental unity through increased trade, pertinent questions were being raised over the impact that a new trade arrangement between the European Union and the 75-member ACP trading bloc will have on regional integration.

At least four regional trading blocs in Africa - Comesa, Ecowas, EAC and SADC - are working towards establishing Customs Unions to reduce their dependence on the EU market and take advantage of regional economies of scale.

But as the clock ticks towards the end of 2007, the deadline for concluding negotiations between the ACP and EU, uncertainty looms on what will happen if the deadline is not met and the impact that a deal will have on the trade fortunes of individual countries within the regional blocs.

A deal between the ACP and EU will usher in a new trade framework based on reciprocity that will require agreement on uniform tariffs on at least 80 per cent of goods traded. This will effectively end years of preferential access enjoyed by the ACP countries, under which their goods entered the EU market duty-free even as EU exports to ACP markets attracted tariffs.

The current negotiations have been necessitated by the imminent expiry of the waiver granted by the WTO, which allowed the EU-ACP preferential trade arrangement to continue until the end of 2007. This has been viewed as discriminating against non-ACP members and in violation of WTO trade rules; it is also implicit that the EU wants a share of the pie by increasing exports to the ACP markets on more favourable terms.

But the entry of EU goods on more favourable terms has raised concerns that more efficient EU firms and subsidised agricultural goods will out-compete local enterprises involved in value-added production and farmers, thus limiting the benefits of regional integration to individual countries.

The EU believes that the economic partnership agreement (EPA) negotiations will strengthen regional integration through more predictable trade policies, but the limited time left to conclude negotiations and the serious capacity constraints facing many ACP countries have raised concern that they actually risk slowing down regional integration.

A major concern is the isolation of members of the same regional trading blocs forced to negotiate under different EPA configurations, which now creates the risk of members of one regional bloc committing to different tariffs and trade liberalisation measures from those agreed upon under regional blocs.

For instance, Tanzania, though a member of the East African Community, is negotiating under the Southern African Development Community (SADC) while Kenya and Uganda negotiate under the Eastern and Southern Africa (ESA) configuration.

Yet, even as EPA negotiations raise mounting concern over their potential impact on the African trade blocs, the reality is that integration efforts in most regions have been slow due to cumbersome border controls, inefficient Customs administrations and poor transport infrastructure, which have limited intra-regional trade to an average 10 per cent for individual countries.

But despite these difficulties, regional trade for some countries, like Kenya, has grown. A total of 49 per cent of Kenya’s exports are now destined for other African countries, dominated by the Comesa region, while the EU takes up 25 per cent of the country’s exports.

However, the EU still remains an important market destination for many ACP countries as a result of limited intra-regional trade. For instance, whereas the EU absorbs 49 per cent of Ghana’s exports, the country exports an insignificant 2.6 per cent to neighbouring Benin - a situation replicated in many other African countries.

Even as the EU market remains a prime destination, it is ridden by uncertainties over constantly changing criteria of eligibility, especially from EU consumers and the private sector. Strict sanitary and phyto-sanitary measures, pesticide traceability criteria and other health certification standards are among the most challenging non-tariff barriers to trade facing exports into the EU.

Under EPAs, the different regional configurations will be expected to liberalise at least 80 per cent of their trade over an average 12-year period, even though many African countries favour a time frame pegged on the achievement of specified development indicators rather than arbitrary timelines. This approach is intended to allow local enterprises prepare adequately for competition from EU firms.

The Economic Commission for Africa (ECA) has warned that the EU stands to benefit the most from a reciprocal trade arrangement with the ACP countries. In particular, the EU would benefit from improved access to regional markets, while African countries are likely to lose out on intra-regional trade.

For instance, intra-regional trade in the Comesa region is expected to decline by 5.8 per cent, which translates into a loss of $242 million. On its part, the EU stands to increase exports to Comesa to the tune of $1,152 million under a new trade arrangement based on reciprocity.

The situation is replicated in West Africa, where the ECA estimates that Ecowas countries could lose trade worth $365 million to EU competitors, who are expected to increase their exports by an estimated $1.87 billion into this regional market.

These trends emphasise the relative efficiency of EU firms over local enterprises, which will result in increased presence of EU products in their markets, hence eating into the share of individual country exports within these markets.

Indeed, with an anticipated elimination of existing tariffs on at least 80 per cent of the ACP’s trade with the EU, it is estimated that regional trade in ACP countries will decline by about 22 per cent, which will translate into a loss of jobs and investment in different regions.

Rwanda is, for instance, expected to increase its imports from the EU from the current 27.4 per cent to 32.2 per cent, even though a large number of these imports could be sourced locally and hence help augment trade in industrial goods. The ECA warns that, “This threatens to weaken regional integration efforts as Comesa countries could significantly lose out to the benefit of the EU countries, especially Belgium, France, Germany and Netherlands.”

Kenya’s development strategy, which is increasingly shifting emphasis to regional markets, is also expected to experience the effects of the EU’s foray into key regional markets like Comesa, which accounted for an estimated 67 per cent of the country’s manufactured exports (excluding agro-processed products) in 2003 compared with 9 per cent to the EU market.

Currently, Kenya’s trade with Comesa stands at nearly Ksh80 billion ($1.2 billion), an increase of Ksh19.3 billion ($288 million) over the 2005 earnings totalling Ksh60.7 billion ($906 million). This has made the region Kenya’s most significant trading partner.

However, as the main destination for Kenya’s agricultural exports, the EU remains a significant market, accounting for 25 per cent of total exports, while Africa takes up 49 per cent. A full 37 per cent of Kenya’s total exports to Africa go to the Comesa region.

The Kenya Institute of Public Policy Research and Analysis (Kippra) estimates that Kenya stands to lose 15 per cent of its regional trade under an EPA. It adds that Kenya will lose out to the EU, especially in exports of manufactured products to the EAC and Comesa.

“This will undermine the country’s trade in value-added goods and increase dependence on primary exports, narrow the range of products that Kenya currently trades in as well as the diversity of its trading partners,” observes Kippra.

Given the fears that a broad liberalisation of trade with the EU could adversely impact on intra-regional trade, negotiators must try for a less ambitious liberalisation, excluding higher-value products traded among individual African countries, even as the EU seeks a more ambitious regime encompassing broad tariff reduction.

Gichinga Ndirangu is a lawyer and trade policy analyst based in Nairobi