60116 Regional trade agreements in sub-Saharan Africa: Africa Trade Policy Notes supporting export Note #15 diversification Paul Brenton, Nora Dihel, Ian Gillson and Mombert Hoppe1 March, 2011 Introduction in regional and global markets. The note The last decade was one of relative export discusses recent progress in a number of success for sub-Saharan Africa (SSA) as a regional trade agreements (RTAs) in SSA, whole, punctuated by the global crisis of especially with regard to reducing tariffs on 2009. However, much of this growth has regional trade, but argues that considerable been driven by rising global demand for potential for intra-regional trade in both primary commodities. The key development goods and services remains unexploited due challenge for SSA, therefore, remains export to the persistence of policy-related barriers. diversification to provide for a broader base Two key areas require attention: disciplining for sustained export growth, less and removing non-tariff barriers (NTBs) and vulnerability to volatile world prices and to achieving more integrated services markets. spread the benefits of trade more widely. In both cases the policy agenda revolves This note briefly discusses the recent export around regulations, their impact on trade and performance in SSA and the impact of the appropriate rules for integrated markets. global crisis on trade. It proceeds to argue Support for governments that wish to reform that regional integration in SSA can play a regulations can be provided through the critical role in allowing countries to exploit establishment of knowledge platforms. opportunities for export diversification both These would make available information on barriers to trade and their economic costs; 1 The authors work in the Poverty Reduction and regulatory reform options and experiences Economic Management department of the Africa elsewhere in implementing reform so as to Region of the World Bank. This work is funded by ensure that regulations and their the Multi-Donor Trust Fund for Trade and implementation are carefully tailored to the Development supported by the governments of the Finland, Norway, Sweden and the United Kingdom. demand and supply conditions in SSA; and, The views expressed are solely those of the authors implications for different stakeholders to and not necessarily the views of the funders, the enable policy makers to address political World Bank Group or its Executive Directors. economy constraints that may undermine During the crisis, SSA countries these reform efforts. experienced sharp export declines, but have since recovered on the back of Until the onset of the financial crisis, the increased exports to China region was growing and transforming SSA exports to the OECD markets fell in Between 2000 and 2008, SSA countries 2009 as a result of the financial crisis as did grew rapidly and often at much higher rates their exports to China, except for EAC than the world average, infusing the region which grew in that year. Since then SSA with a new commercial vibrancy. Growth exports to OECD markets have only shown was fueled, in part, by the commodity boom slow growth from their 2009 trough, with especially for exports of minerals to new the exception of ECOWAS countries that fast-growing markets such as India and have now recovered beyond their pre-crisis China (see Figure 1). But it also came from level (see Figure 2). other sources. Telecommunications, banking and retail flourished. Construction thrived Exports from the rest of the world to OECD and FDI surged. markets have recovered faster than SSA countries, except for EAC and ECOWAS. The fastest rates of merchandise export But SSA exports to China have grown much growth were experienced by Southern more rapidly, especially for EAC. For African countries, especially SACU ones example, EAC exports to the OECD (most notably South Africa) as well as non- countries were over twenty times the value COMESA SADC countries. Goods exports of those to China in the first half of 2008 from EAC countries grew more strongly (US$1.9 billion versus US$88 million) but towards the end of the period to keep pace two years later were only six times higher with world export growth and those from (US$1.7 billion versus US$259 million). ECOWAS largely stagnated. However, most of this new trade with China Figure 1: Some SSA exports of goods is in primary commodities, particularly have grown much faster than the world precious metals, which are low value-added average--Index of non-fuel export growth and/or capital intensive. Initial evidence (1998-2009) Source: UN Comtrade; data based on SITC Rev 2 mirror data (index 1998=100). suggests that exports to South Africa from competitiveness and employment for all SACU countries and COMESA and SADC, countries in the post-crisis period if Zimbabwe is excluded, have also rebounded strongly. While exports have grown strongly over the last decade, and the regions trade has started to recover from the global crisis, the Figure 2: Most SSA exports experienced impact on unemployment and poverty has sharp declines as a result of the financial been disappointing in many countries. crisis and the recovery is now largely Unemployment remains around 24 percent based on increased trade with China in South Africa. In Tanzania, extreme income-poverty appears to have remained broadly constant at around 35 percent of the Index of export growth (Q1-2 2008 through population. In Burkina Faso, income poverty Q1-2 2010) has been stagnant since 1997. Exports to OECD countries Exports to China Source: ITC TradeMap. In line with worldwide trends, SSAs This reflects export growth that has been services exports have proved more resilient typically fuelled by a small number of to the crisis than its exports of goods. mineral and primary products with limited Interestingly, while world services exports impacts on the wider economy and formal fell by approximately 12% from 2008 to sectors which remain small in many 2009, SSA saw its cross-border services countries. Hence, key objectives in SSA exports decrease by half the world average, remain to diversify the export base away at 6.2%. Within SSA, the most resilient from dependence on primary commodities group was ECOWAS, where services and find policies and processes that will exports fell by just 0.5%. By contrast, with a improve the conditions of firms and decline in cross-border services exports of individuals in the informal sector, increasing 11%, COMESA was the least resilient opportunities to interact with formal sector regional group. The key issue in the region is how to transform its rich diversity into increased firms and providing a coherent route Implementing this vision is already part towards formality.2 of the regional trade policy agenda in SSA... Regional integration can play a critical role in making progress on these objectives. There have been considerable developments Deeper integration of regional markets can in RTAs in Eastern and Southern Africa lower trade and operating costs and relax the over the past 10 years. The EAC, the constraints faced by many firms in accessing smallest regional grouping, has seen the the essential services and skills that are most progress: it has successfully removed needed to boost productivity and diversify tariffs on intra-regional trade, enlarged to into higher value-added production and five members and established a customs trade. union with a common external tariff (CET). A common market commenced in July 2010 It has been commonly argued that regional which will ultimately allow all factors of integration can only play a limited role in production to move freely within the region. Africa because of the similarity of All five members have made commitments endowments between its countries. to open up and create regional markets in However, this does not reflect the enormous several services sectors and have accepted to opportunities for cross-border trade in remove restrictions on the free movement of agricultural products from food surplus to workers and on the right of establishment food deficit areas; the potential for regional and to pursue mutual recognition of production chains to emerge, as they have academic and professional qualifications. done in other regions such as East Asia; and, An ambitious objective has been set of the scope to develop cross-border trade in agreeing a protocol on monetary union in services. 2012 and a common currency in 2015. Existing figures on the extent of regional SADC has been trading on preferential trade vastly understate the amount of cross- terms since before 2000 and, based on the border trade that is taking place: at many implementation of tariff phase down borders between African countries there is commitments under the SADC Trade limited or no capacity for statistical Protocol, formally launched a free trade area recording of trade flows and a large amount in August 2008. As a result, 85% of intra- of trade takes places informally. Services SADC merchandise trade flows are now trade between African countries is also duty-free with most of the remaining 15% poorly measured but examples of the comprising sensitive products scheduled to opportunities that are available are be liberalized by 2012 (2015 for becoming increasingly apparent. For Mozambique). A SADC Regional Indicative example, Uganda has become a successful Strategic Development Plan (RISDP), exporter of education services to countries in finalized in 2003, recommended that SADC East Africa. A number of countries have deepen regional integration further by received investment from South Africa establishing a customs union by 2010, distribution companies. followed by a common market in 2015, monetary union by 2016 and finally a single currency by 2018. The creation of a 2 Informal sector actors have to be seen as providing customs union in 2010 was postponed at the an enormous opportunity for growth and poverty request of South Africa. reduction rather than simply as a source of revenue loss that must be removed. COMESA has had a free trade agreement Since 2000, UEMOA countries have been (FTA) since 2000, although not all applying a CET with four tariff bands (0%, COMESA members are party to the FTA. 5%, 10%, 20%) and intra-regional trade Trade between FTA members and non-FTA seems to be largely duty-free, although COMESA countries is conducted on unreliable customs data and mis-recorded reciprocal terms under the Preferential Trade transit trade flows make it difficult to Agreement. COMESA is also pursuing a determine the magnitude of these flows customs union. After five years of more precisely. By late 2006, ECOWAS negotiation, COMESA member states member states had largely agreed to adopt agreed to a CET in May 2007 with four the same UEMOA CET with some bands (with two bands at zero tariff) for raw adaptations as the ECOWAS CET but materials (0%), capital goods (0%), before final agreement was reached, Nigeria intermediate goods (10%) and final goods lobbied for the inclusion of a fifth tariff band (25%) although, for some products, at 35% (initially proposed at 50%) and discussions continue on which category they ECOWAS member states have agreed to will be classified under. The customs union that proposal. The process of modifying the was formally launched in June 2009, and all UEMOA CET and agreeing to an ECOWAS tariff lines carrying a rate above or below CET is therefore far from complete and it is these rates have been placed on sensitive unclear when there will be agreement on the product lists. Each member state has its own final classification of goods, including sensitive product list and timetable to adjust products to be included in the high-tariff to the CET, which should not exceed five band; those products to benefit from years. temporary deviations from the CET (type 'A' exemptions to be removed over a short In West Africa, progress on regional period of time); and, how to treat products integration continues to be slow and there where countries are arguing for adjusting the remains a lack of effective and consistent CET itself (type 'B' exemptions). While implementation of agreed provisions on UEMOA countries share the same currency, regional trade. The ECOWAS Trade the other 7 countries have been working Liberalisation Scheme, a preferential trading towards a second monetary zone. Its regime in place for close to 20 years, has establishment has been repeatedly delayed, had little impact on regional trade. To (initially scheduled for 2003) usually for benefit from free trade within the region, periods of two years, but was recently products need to meet relatively stringent postponed until 2015 since substantial work rules of origin, and need to be registered remains and most countries consistently through a complex two-stage (national and miss the convergence criteria. Regional regional) process. The implementation of the integration in Central Africa seems to have scheme is prone to uncertainty and error. In largely stalled and only limited progress has total, only about 1,100 companies and 3,200 been made. products are registered under the scheme. The West Africa Trade Hub recently ... but key challenges remain in published a report showing extensive non- integrating markets, particularly compliance by members with the provisions regarding NTBs and services. of the agreement, in terms of inadequate domestic laws and lack of implementation at While there is still much to be done to put in borders. place effective free trade agreements, especially in Western and Central Africa, attention is turning to two issues that policy well as ensuring that regulations are not makers are increasingly recognizing as more trade and investment restrictive than is being critical to successful regional and necessary to fulfill legitimate public policy global integration: competitive services objectives. Beyond this, countries must markets and removing NTBs. Both of these agree upon mechanisms that will enforce issues revolve around the nature and quality compliance with commitments to remove of regulation, its impact on trade and the trade-restricting barriers. Building on the need for improved regulatory practices in experiences of other countries will be integrated markets to ensure effective important but it is clear that regulations must regulation with minimal disruption to trade. be tailored to local demand and supply conditions in SSA: simply importing In East and Southern Africa while trade harmonized regulations from developed within the various RTAs is now largely countries will often not be appropriate. This duty-free, significant barriers to goods trade also means that countries will have to remain and intra-regional trade is typically address issues relating to the overall quality hampered by a large number of NTBs. infrastructure which often remains outdated These NTBs can be broadly grouped into and creates additional barriers to trade as five types and relate to: inefficiencies in many regulators do not accept conformity transport, border management and logistics; assessment certificates issued by foreign cumbersome fiscal arrangements; restrictive certification bodies, leading to duplicate rules of origin; poorly designed technical certification costs to firms. regulations and standards; and, other non- tariff barriers such as import bans, permits Policymakers in SSA, especially in Eastern and licensing. NTBs reported by firms in and Southern African countries, are these countries affect one-fifth of regional recognizing that weaknesses in their services trade. This ignores the impacts of barriers sectors also impede growth and that without that prohibit trade altogether, constraints that addressing services trade liberalization, go unreported as well as costs related to deeper regional integration cannot be inefficiencies in transport, logistics and achieved. All three of the regional groups in customs which affect all goods trade. NTBs Eastern and Southern Africa are committed undermine the predictability of the trade to the goal of creating an integrated regional regime and reduce investment in the region. market for services. The EAC Common Market Protocol has initiated the integration There has been progress in establishing process in services in Eastern Africa and its reporting mechanisms and monitoring five members have scheduled commitments committees for NTBs. Raising awareness in several services sectors, including and improving transparency are necessary adopting annexes on the removal of steps but it is becoming increasingly restrictions on the free movement of workers apparent that they are not sufficient due to and on the right of establishment, and an the lack of progress in removing these annex on mutual recognition of academic barriers. For example, most of the 25 and professional qualifications. Both barriers identified by the EAC for immediate COMESA and SADC are defining and removal in 2008 remain in place. Further seeking to implement services liberalization progress will require members making programs. However, relative to the process effective commitments to transparency and of regional integration in East Africa, non-discrimination in designing and regional integration in Southern Africa is implementing regulations that affect trade as less advanced. For example, SADC negotiations on services have been ongoing quantifying the economic impact of NTBs in for ten years centering on the framework Southern Africa; discussing options for agreement for the negotiations, i.e., removing NTBs in East Africa; and, "negotiating how to negotiate". In providing guidance on the coordination of ECOWAS, all member states have agreed to regulatory reform with services the national treatment of individuals and liberalization and facilitating more informed companies of other member states, including choices as countries contemplate reform a full right of establishment. Within UEMOA, through in-depth case studies.3 The specific directives allow the free circulation development of Mutual Recognition of providers since 2008 for a number of Agreements of Professional Qualifications professional services, including doctors, to facilitate the movement of professionals architects, and lawyers. How effectively supplying services in SSA features high on these provisions are legally implemented in the agenda of several regional groupings member states is less clear and cases of including COMESA and the EAC. discriminatory treatment of service providers within ECOWAS continue to be While the individual RECs have made reported. progress on enhancing integration, policy makers have also recognized that barriers to In parallel with reform to essential backbone trade, including tariffs, also persist between services such as telecommunications, the various RTAs; a situation that is banking and transport, SSA governments are complicated by the overlapping membership beginning to prioritize reform of business of some countries in more than one regional services, tourism, construction and group. In this context, the Tripartite process distribution services, including by creating was launched in 2008 to enhance integration more integrated regional markets. It is also among the members of the EAC, COMESA becoming apparent that building and SADC, including the establishment of a infrastructure, an essential element of pan-regional FTA, which might also include improved competitiveness and regional and provisions on services trade. global integration, must be complemented by policies that deliver competitive markets Finally, negotiations continue with the in the provision of services that use the European Union on Economic Partnership infrastructure. Opening up to trade is a key Agreements (EPAs). EPAs have been mechanism for attracting FDI and increasing sensitive insofar as they have conflicted with competition in services sectors. It is some of the provisions in existing RTAs for necessary, however, to ensure that opening example regarding common external tariffs, up to trade is coordinated with regulatory rules of origin, and the MFN clause reform so that appropriate regulations are in (especially in Southern Africa).The EPA place that address relevant market failures negotiations remain an opportunity to and encourage the competitive provision of support regional integration and trade services. reform in SSA, but one that is unlikely to be realized unless both sides adopt a more There is clear demand from countries and flexible and development oriented approach. Regional Economic Communities (RECs) in A comprehensive agreement with the EU SSA for support in implementing services would provide greater credibility to the reforms and addressing NTBs. The World Bank has been providing a range of 3 technical assistance on these issues: See Africa Trade Policy Notes 1,2, 5, 7, and 9 at http://go.worldbank.org/M8SXRN80G0. reforms that many countries are seeking to cooperation with neighboring partners who implement. A narrow trade agreement will have similar regulatory preferences can not address the critical issues of appropriate usefully complement unilateral regulations and regulatory capacity that are liberalization. essential to ensure that greater openness to trade delivers competitively provided goods To support the process of trade opening and and services to consumers and firms in SSA. regulatory reform, the World Bank has Hence the EPAs must become a flexible tool proposed the creation of regional knowledge that is part of a larger process of trade and platforms that will foster an inclusive and regulatory reform rather than specific end- substantive, evidence-based discussion of points in themselves. the impacts of regulatory policies on trade in both goods and services and the appropriate Conclusions and Recommendations design of sector-specific regulatory policies that will support countries in SSA to address Diversifying exports beyond a narrow range the challenge of coordinated trade and of primary products remains a key challenge regulatory reform. The platforms would in many African countries. Regional assist countries in addressing information integration can play an important role in this gaps on the impact of existing policies on by reducing transactions costs and providing trade and economic outcomes; the options a regulatory environment in which services for reform and experiences of other can flow freely and cross-border production countries that have implemented reform networks can begin to flourish. programs; and, approaches to identify and address the political economy constraints to The key issues facing policy makers in reform. implementing effective RTAs in large parts of SSA has moved beyond removing tariffs In many SSA countries the private sector to regulatory issues that prevent goods, and civil society have often been people and capital freely crossing borders. marginalized in the dialogue over regional This is a more complex agenda than integration and so the base of support for reducing tariffs and puts future trade reform integration has been very narrow. The efforts more firmly behind-the-border. It is process by which integration is defined and therefore important to put in place efficient implemented is as important as the outcome regulations that allow for integrated markets if there is to be widespread acceptance of in both goods and services while addressing reform. This is changing to some extent in the, sometimes entrenched, political Eastern and Southern Africa where business economy constraints that limit reform. In and export councils are coming to play many cases the first step towards removing increasingly important roles in driving the barriers to integration is to deal with them discussion about regional trade integration. domestically and to address resistance to reform from bureaucracies and interest Nevertheless, the size of the formal business groups at home before pursuing reforms sector in many SSA countries remains very with neighbours.4 Nevertheless, deeper small and often with limited interest in regional integration through regulatory reform. Considerable activity takes place in the informal sector, especially regarding 4 P Lamy (2010) ,,Regional Integration in Africa: cross-border trade, in major part as a result Ambitions and Vicissitudes, address to the of the barriers and constraints to trade and conference organized by ASPEN at Annecy on 28 investment that need to be addressed for August 2010. effective regional integration to be realized. Addressing regulatory and institutional barriers to trade at the border would be an important step in this process by increasing private sector activity and the migration of firms and traders into the formal economy, which in turn will increase the size of the constituency for further reform and integration in the region as a whole. About the authors Paul Brenton is Lead Trade Economist, Nora Dihel is a Trade Specialist, Ian Gillson is an Economist, and Mombert Hoppe is a Consultant in the Poverty Reduction and Economic Management unit. This work is funded by the Multi-Donor Trust Fund for Trade and Development supported by the governments of the United Kingdom, Finland, Sweden and Norway. The views expressed in this paper reflect solely those of the authors and not necessarily the views of the funders, the World Bank Group or its Executive Directors.