AFRICAN TRADE POLICY IN THE CONTEXT OF NATIONAL DEVELOPMENT STRATEGIES*

By T. Ademola Oyejide

1.             Introduction

            Since the mid-1980s, many developing countries have implemented wide-ranging trade policy reforms. In spite of the accumulated experience from these “experiments”, debate continues to rage in the literature with respect to various questions associated with the design, implementation and impact of trade policy reforms. In the context of this debate, trade liberalization has generally been treated as any or a combination of the following three: import liberalization, a move towards neutrality in the structure of relative prices, and the substitution of less distorting for more distorting forms of intervention. For instance, Krueger and Rajapatirana (1999) characterize as trade liberalization any trade policy reform for a particular country which “reduces the bias of its trade regime against exports, substitutes price measures (such as tariffs) for quantitative restrictions, and otherwise reduces the degree of government control over transactions between domestic residents and foreigners”. Furthermore, as shown in Bhagwati (1978) trade policy reform aimed at achieving neutrality of the trade regime is feasible without a reduction in import barriers provided that appropriate export incentives are sued to neutralize high import tariffs.

            These perspectives suggest two important points. First trade liberalization is not necessarily the same thing as import liberalization. Second, import liberalization may not be sustainable unless it is preceded or closely accompanied by other policy measures aimed at boosting exports (or similar external resource inflows). Hence, an analysis of trade liberalization and its economic impact should begin with a review of its composition and the context within which the trade policy reform was implemented. In what follows, therefore, section II focuses on the issue of mainstreaming trade liberalization in national development strategies; while section III explores questions relating to the components, modality and extent of trade liberalization in Africa as well as its impact. In section IV, some concluding comments are offered with respect to future trade liberalization efforts.

II.                Mainstreaming Trade Policy in National Development Strategy

There are, at least, two elements of a concerted effort aimed at enhancing the positive nexus between trade and development. One consists of mainstreaming trade policies into a country’s development strategy. The other involves mainstreaming development dimensions such as infrastructure needs and poverty reduction into the articulation of trade policies and into trade negotiations which influence policy reforms. Prior to the major shift in development strategy which heralded policy reforms in may African countries from around the mind-1980s, trade policy did not occupy a significant position in the articulation of national development goals and objectives. In fact, export was generally discouraged through taxes and overvalued exchange rates; import was generally discouraged through taxes and overvalued exchange rates; import was controlled through tariff and non-tariff barriers, including import licensing and foreign exchange rationing.

Eventually, a broad consensus emerged around the development objectives of rapid and sustainable economic growth with poverty alleviation as well as the achievement of these objectives through an outward-oriented development strategy. This moved trade policy to centre-stage as a reflection of the perspective that trade policy reform, undertaken within a comprehensive development strategy, promotes deeper integration with the global economy which, in turn, is associated with improved economic growth performance and poverty reduction. Integral to this comprehensive development strategy should, however, be appropriate complementary, compensatory and mitigating measures designed to address the largely inevitable transitional and adjustment costs associated with trade policy reforms. In general, complementary measure help to reduce the adjustment costs of trade policy reform by enhancing the effectiveness of market institutions and relaxing export supply response capacity constraints. Similarly, compensatory and mitigating measures help to protect those who suffer losses as a result of trade policy reform through the provision of “safety nets”.

National trade policies are also shaped by bilateral, regional and multilateral trade arrangements, Hence, the feasible set of a country’s trade policy tends to emerge from the interaction of domestic and external factors, with the latter determining the external market access opportunities and challenges faced by the country. The implication of this is that harmonization of trade policy reforms implemented through several different and sometimes overlapping modalities may become an important policy issue. In particular, a significant coordination problem my arise with integrating the unilateral, bilateral, regional and multilateral dimensions of trade policy into the reform agenda and the national development strategy in terms of balancing the sometimes conflicting demands of the different modalities with respect to focus, coverage and speed of reform, and the competition among these modalities for limited human, institutional and resource capacity.

In many African countries, the effort to establish a coordinated and integrated approach to the articulation of trade policies in the context of a national development strategy remains in its infancy. This may be a reflection of the recent history of the commitment of particular countries to overall economic reform, or inadequate domestic ownership of such reform. In any case, there is generally insufficient coordination at both the policy and institutional levels to permit an adequate mainstreaming of trade policy priorities into the national development strategy.

III.             Trade Liberalization in Africa

Trade liberalization has two closely inter-related component pats, i.e., import liberalization and export promotion. The former has taken the lead in the reforms associated with the shift to an outward-oriented development strategy in many African countries. In this context, trade policy reform has involved movement away from complete control over imports and foreign exchange towards a modes and mostly tariff-based protection. This movement has occurred in several stages. i.e., rationalization of the tariff structure, reduction of tariff dispersion, and finally reduction of tariff rates.

Through a combination of unilateral and regional modalities, import liberalization has progressed quite rapidly in many African countries, particularly during the 1990s. In West Africa, for instance, UEMOA implemented its common external tariff (CET) as it transformed itself from a free trade area (FTA) into a customs union between 1994 and 1998. As a result, its member-countries (Benin, Burkina Faso, Cote d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo) currently have simple average import tariffs of 12% within the range of 0-20%.  Other members of ECOWAS have decided to adopt the same CET as UEMOA, although this decision is yet to be fully implemented.  However, countries such as Ghana and Guinea have continued to implement their unilateral import liberalization programmes so that  by 2002, their simple average tariffs were 14.6% and 6.5% respectively, although Ghana’s maximum rate remained as high as 279%.  Thus, Nigeria remained the only West African country with an average tariff rate as high as 30% and a maximum rate of 150% in 2002.  In Central Africa, a similar regional effort has produced the same kind of result.  The adoption by CEMAC of a CET implemented from 1998 reduced the average import tariff rate of its member-countries (Cameroon, Central African Republic, Chad, Congo, Equatorial Guinea, and Gabon) to 18% within the range of 0-30%.

            In Eastern and much of Southern Africa, most countries are still in the process of implementing the CET (0-30%) of COMESA.  But the following countries have achieved low simple average tariffs that are well within the COMESA CET range: Madagascar (5.7%), Malawi (13.4%), Rwanda (9.9%), Uganda (9.0%), and Zambia (14.0%).  Others include Ethiopia (18.8%), Kenya (17.1%), Mauritius (19.0%), and Zimbabwe (18.3%).  But, of course, there are also several countries with rates above 20%, including Djibouti (30.8%), and Seychelles (28.3%).  In the rest of Southern Africa, SACU is the dominant regional integration organization which also has a well established CET.  This ensures that countries such as Botswana, Lesotho, Mozambique, Namibia, South Africa, and Swaziland share the same simple average tariff rate of 11.4% within the range of 0-60% in 2002.  In the case of Tanzania, the simple average tariff rate in 2000 was 16.3% with a maximum rate of 25%.

            Active policy measures to promote export diversification and growth constitute a key element of an outward-oriented development strategy.  Until the beginning of trade policy reforms in many African countries, exports were penalized through at least five mechanisms, including high import duties (which amounted to indirect taxes on the export sector), export licensing, export taxes, below-market producer prices paid by monopoly marketing boards, and overvalued currencies.  Policy reforms have eliminated most of these mechanisms in the majority of African countries.

In addition to this, however, an appropriate export regime in the context of an outward-oriented development strategy should ensure that exporters have access to imported inputs at world market prices.  But if a country decides to retain some degree of domestic protection through import tariffs, either for fiscal revenue reasons or to prevent imports from displacing “infant” industries that could otherwise eventually become competitive, then mechanisms such as duty exemptions or drawbacks/rebates, bonded manufacturing warehouses, and free trade zones may be used as a means of granting free trade status to exporters.

            Many African countries, including Cote d’Ivoire, Kenya, Madagascar, Mauritius, Nigeria, Senegal and Zimbabwe have used duty exemptions/drawback schemes.  But these have not worked well in several countries due to poor management that caused delays and due to under-funding in some cases.  Similarly FTZs and bonded warehouses have been tried in many African countries including Cameroon, Kenya, Lesotho, Liberia, Madagascar, Nigeria, Togo, and Senegal.  The most successful African FTZs (such as in Mauritius) have been supported by adequate infrastructure and good quality labour force.

            In broad terms, the implementation of African trade policy reforms, if not their design, has been biased in favour of import liberalization with inadequate focus on export promotion, perhaps the former has been much easier to do than the latter which often requires additional resources as well as human and institutional capacity.  The combination of inappropriate sequencing and poor export supply response appears to have caused policy reversals in several African countries as import surges generated intense balance of payments pressures (Oyejide et al, 1999).

IV.              Concluding Comments

For fairly obvious reasons, the multilateral trade negotiations under WTO’s Doha Development Agenda are not expected to significant reductions in Africa’s applied tariff rates.  But negotiations of the Economic Partnership Agreements (EPA’s) between the European Union (EU) and groups of African countries are a different matter.  EPA’s are made WTO – compatible partly by making market access concessions between the EU and participating African regional groups reciprocal, even though the asymmetry involved suggests that African market access concessions should be phased-in gradually over the transitional period of 10-12 years, starting from the effectiveness of the EPAs in 2008.  In addition to opening to EU imports, the EPA objective of establishing fully integrated African regions suggests that African countries should also further open to both intra-regional and inter-regional imports.

The basic EU demand on African EPA countries is likely to be the reduction of African applied tariffs against EU imports to zero by 2020.  Given the current tariff structures in each of the four African EPA regions (West Africa – ECOWAS; Central Africa – CEMAC; Eastern and Southern Africa – ESA Group; and SADC Group), it would not be unreasonable to set a target for each to achieve a simple average tariff rate of 15% within the range of 0-30% by the time the EPAs become effective in 2008.  Beyond 2008, six step-wise reductions of 5 percentage points from the maximum rate every two years should accomplish the total elimination of tariffs against EU imports by 2020.

If each of the African EPA regions achieves a customs union status with a common CET by 2007, tariffs against intra – regional imports would automatically be eliminated by the 2008 effectiveness date of the EPAs.  In addition, the elimination of all tariffs on inter – regional African imports could occur within 4-5 years of coming into force of the EPAs, i.e., around 2012 or 2013.

The dramatic opening to EU imports envisaged in the EPA negotiations will obviously involve significant adjustment costs, particularly in terms of fiscal revenue losses and de-industrialization.  However, the EPAs constitute an “aid and trade” package.  Therefore, the negotiations should include the provision by the EU of appropriate adjustment assistance for both aspects of these costs.

References

Bhagwati, J.N. (1978), Foreign Trade Regimes and Economic Development:  Anatomy and Consequences of Exchange Control Regimes, Ballinger, Cambridge, Mass

Nerger, A.O. and S. Rajapatirana (1999), “The World Bank Policies Towards Trade and Trade Policy Reform”, The World Economy, 717-740

Oyejide, T.A. (2003), “The Mechanics of Trade Policy Reform in Developing Countries: A Literature Survey”, Paper Prepared for the Operations Evaluation Department, World Bank, Washington

Ojejide, A.B. Ndulu, and J.W. Gunning (eds) (1999), Regional Integration and Trade Liberalization in Sub-Saharan Africa:  Vol. 2. – Country Case Studies, Macmillian, London.