Making Trade Work for Africa

An African Trade Initiative

Sub-Saharan Africa is experiencing record economic growth, but its share of world trade is only 2%, down from 6% in the 1980s. In many African countries this recent growth is largely based on oil and mineral exports, with benefits held by political and economic elites. Without faster growth across agriculture and manufactured goods sectors, sub-Saharan Africa has little chance of reaping the benefits of globalisation and beating extreme poverty.

Promises to change trade rules and boost aid that helps African countries trade are not being met. The G8 in particular promised to “make trade work for Africa” in 2005 and again in 2007, but its most powerful members maintain subsidies and rules of origin that strangle African business. At the same time intra-African trade suffers from a lack of infrastructure and poor integration.

The 2001 Doha Development Agenda (DDA) declaration promised to make development the focus of multilateral trade negotiations. Since then, there have been many rhetorical statements about the importance of including Africa in a global trade deal, but little concrete progress. If Doha succeeds in its current form, it will deliver little for the poorest countries on the planet – most of them in Africa. Similarly, the EU’s current effort to negotiate Economic Partnership Agreements (EPAs) with African countries is rushing towards a finish line that could ultimately sign Africa up for an end result that could threaten its already delicate trade balance.

To ensure that Africa is able to grow through increased exports and regional trade, DATA is proposing an African Trade Initiative. The initiative emphasizes the urgent need for further opening of EU and US markets to African products, reform of subsidies that harm African producers and enhanced aid for trade commitments that address Africa’s supply-side challenges.

The concepts below could be implemented in three ways: i) as part of a reinvigorated Doha round, ii) through greatly improved and simplified Economic Partnership Agreements (EPAs) or iii) as bilateral undertakings. Of these three, DATA’s preference is for a successful Doha outcome with a robust African component, but with little sign of progress to date other options must be considered sooner rather than later. The approach below could be pursued by donor countries in partnership with African countries that have prioritised trade as a key part of poverty reduction and national development.

1. Market Access

Duty-free/quota-free access for 100% of products from all African countries: In order to significantly increase exports from Africa to developed country markets, access should be extended to all African products and all African countries, including non-LDCs. Agricultural products are particularly important as farming employs the majority of the African workforce. The programme could be implemented either through current negotiations (DDA or EPA) or existing preference programmes like the U.S. African Growth and Opportunity Act (AGOA) or the EU’s Everything But Arms (EBA) programme. It is essential that these benefits apply to goods for which Africa has good export potential such as textiles and apparel, footwear, sugar, rice, fruits and vegetables. In order to truly grow through trade, Africa must be able to add value to its own goods, and not remain a source of cheap primary products or basic commodities. It is also essential that trade privileges are extended to the larger economies which are not LDCs so that they become drivers for growth across the continent.

Rules of origin reform: “Rules of origin” are used to define whether a product qualifies for a trade preference programme. In order to qualify for duty-free treatment, the exported product must contain a specified percentage of African inputs. The complexity and strictness of the rules of origin requirements, especially in the EU, make these programmes extremely difficult to access and add an average of 10% to export costs. The amount of African content required by these programmes also varies, making it complicated for African producers to export to different markets. Both the Commission for Africa and the World Bank recommend a low value-added rule of origin of 10% which would allow African countries to import low-cost inputs, contribute value to the final product and still qualify for duty-free access1. These types of adjustments would cost developed economies very little and make African products much more competitive.

2. Subsidies

In 2005, the OECD estimated that farmers in developed countries received $279 billion in subsidies – an amount equivalent to more than 60% of the GDP of all sub-Saharan African countries combined2. When applied to an individual sector that impacts African producers, like tomatoes, the impact of agricultural subsidies can be significant. Oxfam research has shown that tomatoes used in tomato paste, canned tomatoes, and tomato sauce are subsidised at a rate of 65% in the EU3. These subsidies enable processors to purchase tomatoes cheaply and export the processed product to Africa at low prices, undercutting domestic producers and making it difficult for a value-added tomato industry to develop. Eliminating the EU tomato subsidy would increase the world price of tomato paste by approximately 5% and create greater opportunities for African tomato producers to compete in domestic, regional and global markets4.

If through Doha-Subsidy reduction or elimination:
A key component of the Doha development agenda is an agreement to reduce or eliminate developed country agricultural subsidies. Priority should be placed on those subsidies that have the greatest impact on Africa, including rice, sugar, poultry, cotton, and fruits and vegetables.

If through EPAs or bilateral initiatives-Addressing the Impact of Subsidies on African Producers: In the event that a multilateral agreement on subsidy elimination cannot be reached through the Doha round, a separate initiative should address the impact of trade-distorting subsidies on products that compete with or distort the market for African products. Politically, reform of subsidy programmes in developed countries may be impossible to undertake outside the WTO negotiations and also may not address specific sectors that impact African farmers. Therefore, developed countries that provide these subsidies should find ways to mitigate the impact of domestic subsidies on African products.

In the near term, before their own subsidies are abolished, donors should compensate for the impact of these subsidies on African producers by providing assistance equivalent to the revenue lost to Africa. For example, the EU could direct the amount equivalent to annual subsidies to their own tomato producers to the development of a value-added industry in tomato-producing African countries and improvements to the technology, capacity, and infrastructure of the agricultural processing industry.

3. Aid for Trade

‘Aid for trade’ addresses Africa’s supply-side problems: infrastructure and telecoms, financial services, payment of adjustment costs to compensate for losses incurred by the removal of internal trade barriers, strengthening of regional trade entities, education and marketing. The Commission for Africa provided some initial estimates of the assistance that Africa needs in terms of aid for trade — suggesting $10 billion annually to address Africa’s critical infrastructure needs and $250 million to assist all of sub-Saharan Africa in meeting sanitary standards in export markets. More recent analysis commissioned by DATA indicates that $12-13 billion annually is needed to address these challenges5. Donors should commission a full independent assessment of Africa’s needs, and make sure they are met. In order to promote regional growth, this assessment should not be limited to LDCs and should take into account African regional economic entities.

At the 2005 Hong Kong Ministerial and at the 2006 and 2007 G8 summits, donor countries made a series of commitments to scale up global aid for trade, though many of these were existing commitments and may or may not be tied to the completion of the Doha round. This assistance must be delivered and scaled up regardless of the outcome of the Doha round.

4. Policy Space and Regional Trade

In order to develop and implement trade policies that enhance individual countries’ poverty alleviation strategies, there must be an appropriate level of flexibility in multilateral, regional, and bilateral agreements for African countries. This will ensure that African countries have access to the same flexibilities that G8 countries benefited from as they pursued their own economic growth. Assistance in determining these priorities could be provided by in-country independent think tanks that are funded by donors and the private sector and are focused on the needs of specific countries or regions.

Trade Agreements: Policy space is an essential component of multilateral, regional, and bilateral agreements. Special provisions must be effectively sequenced and coordinated with trade policy and poverty alleviation strategies so as to have a real impact. EPAs between the EU and African countries in particular must not require high levels of rapid reciprocal market liberalization. African trade policies must be designed by African governments, not determined in Brussels or Washington.

African trade:
This flexibility is also essential as African countries develop and grow regional economic entities. Currently, African countries trade more with non-regional partners than with each other, with intra-African trade accounting for less than 10% of the region’s exports, while trade with Europe accounts for approximately 40% of exports6. Increasing trade and investment among African countries by reducing trade barriers could bring real benefits in employment and incomes and help African countries to specialize in particular sectors. African countries must have the ability to develop trade and poverty alleviation strategies that not only enhance trading relations with developed countries, but also encourage stronger and more complex regional trading relationships.

Issues:

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