Tripartite FTA and East and Southern African States Participating in EPAs

The Tripartite FTA (see text of the agreement) between COMESA, EAC and SADC which was finally signed and s expected to facilitate the largest Free Trade Area in Africa by creating a more liberal regime between the Members of the three RECs COMESA< SADC and EAC. However some Members of the three RECs have various other trade agreements (e.g. Mauritius-Pakistan) and notably the Economic Partnership Agreements with the EC (ie EAC-EPA, SADC-EPA, ESA- EPA, TDCA and EC-Egypt FTA). The Grand FTA will require the free circulation of goods among the three RECs however its not clear how this will be feasible in the short to medium term in light of the 11 different schedules of liberalisation with the EC.

It is not practical to erect a barrier between cross border States that join and those that do not join an EPA. In practical terms therefore, little is achieved by staying outside of an interim EPA (which applies only to goods) when one is in FTA with neighbouring States that have signed, however one could assert that the cost of implementation and reciprocity is not borne since the principal reason to remain outside a goods EPA is to avoid reciprocity. However this goal would be undermined by cross-border trade if the outsider also participated in an effective FTA or customs union with countries that were also EPA members. Therefore the question arises whether countries that are currently not in trading regime with the EC, namely Angola, DRC, Djibouti, Ethiopia, Eritrea, Sudan and Malawi, would join a grand FTA with countries that are in an EPA. The problems of incompatible trade policy arise for countries that are not liberalizing on any product and those that are- hence a potential barrier to regionalism has been created between signatories of EPAs and other agreements that are different from those of their regional partners.

In any case the Tripartite agreement is now signed and the MFN clause applies. Article 7 says:

Nothing in this Agreement shall prevent a Tripartite Member/Partner State from maintaining or entering into new preferential trade agreements with third countries provided that any advantage, concession, privilege or favour granted to a third country under such agreements are offered to the other Tripartite Member/Partner States on a reciprocal basis.

Joint Ventures Key in China’s Export Growth

Foreign investors have played a key role in the evolution of China’s exports of consumer electronics. Over the past few decades, foreign investors in China were found to be the most productive of the producers, they were the source of technology, and they dominated exports. China’s openness to foreign investment and its willingness to create Special Economic Zones (SEZs) where foreign producers could operate with good infrastructure and with minimum hassles must therefore receive considerable credit. But if China has welcomed foreign companies, it has always done so with the objective of fostering domestic capabilities. To that end, China used a number of policies to ensure that technology transfer would take place and strong domestic players would emerge. Early on, reliance was placed predominantly on state-owned national champions. Later, the government used a variety of carrots and sticks. Foreign investors were required to enter into joint ventures using the Law of the People;s Republic of China on Joint Ventures Using Chinese and Foreign Investment with domestic firms (for instance in mobile phones and in computers).

There was also a role for tariffs. Domestic markets were protected to attract market-seeking investors, in addition to those that looked for cost savings. Weak enforcement of intellectual protection laws enabled domestic producers to reverse engineer and imitate foreign technologies. And localities were given substantial freedoms to fashion their own policies of stimulation and support, which led to the creation of industrial clusters in particular areas of the country.

On acquiring technology transfer and building local supply linkages, China’s strategy was clear: It allowed foreign firms access to the domestic market in exchange for technology transfer through joint production or joint ventures. In fact, 100% foreign owned firms were a rarity among the leading players in the industry. Most of the significant firms tended to be joint ventures between foreign firms and domestic (mostly state-owned) entities. A strong domestic producer base has however also been important in diffusing imported technologies and in creating domestic supply chains. Facilitating technology transfer requires a strong focus on Research and Development by the State. Without state support and publicly funded R&D, a company like Lenovo (previously known as Legend) which became large and profitable enough to purchase IBM’s PC business would never have come into being.

In sum, China has benefited both from good fundamentals—low labor and materials costs, “outward orientation” in the form of SEZs, large market size—and from a determined government effort to acquire domestic capabilities and build a modern industry. The large size of the economy has allowed policy experimentation. It also has allowed the government to use the carrot of the internal market to force foreign investors into joint ventures with domestic producers. If China is producing an increasingly sophisticated set of consumer electronics for instance, it would appear that this is due as much to the policy environment as it is to the free play of market forces.

For more on Special Economic Zones see here. 

Need for tariff reform to boost Africa's exports to Asia

Africa's exports to China and India are growing at an average rate of 18% a year and growing faster than exports to any other region in the world. See previous post here. This is in sharp contrast to Africa's exports to the world which have declined sharply over the past few decades to about 2% of total world exports.

One reason why exports to Asia have grown rapidly is linked to the high growth rates in China and India and the high demand for raw materials and natural resources thus contributing to a relative increase in prices of certain commodities. In addition, there is a growing middle class in these two highly populated countries and hence a higher demand for certain consumer products.

While African exports to Asia are largely fuel and mineral based (a familiar trend in Africa's export profile), there are increasing exports of processed commodities, light manufactured goods, household consumer items and tourism.

However a key growth barrier to trade between the two regions is high tariffs in both China and India and in key exportable products from Africa. Therefore while both have reduced tariffs for a few products over recent years, tariff escalation and high tariffs are still prevalent in key product areas including coffee and cocoa products.

Some experts have called for a Pan-Asia-Pan Africa FTA however this approach could be cumbersome to say the least. In this regard there is no trade agreement between Africa and Asia however there are negotiations between India and SACU. A more structured approach could be envisaged through a possible outcome of the Doha Round. Failing that African countries could lobby China and India (2 countries whose population consists of one third of the world's population). Africa-China/India could craft a negotiated outcome under the auspices of the Enabling Clause at the WTO in order to address the mutual reduction of barriers which would facilitate South-South trade and investment without necessarily concluding an ambitious FTA.

Africa's exports to Asia are growing faster than Exports to any other region

According to the World Bank publication on Asia-Africa trade "Africa's Silk Road: China and India's New Economic Frontier" Asia receives about 27 percent of Africa’s exports, in contrast to only about 14 percent in 2000. This volume of trade is now almost on par with Africa’s exports to the United States and the European Union, Africa’s traditional trading partners. What is also surprising is that the EU’s share of African exports has halved over the period 2000–05.

According to the report, exports to China and India have grown 1.7 times more than exports to other regions and of the two countries, China is the more dynamic market for Africa's exports. Exports to China alone grew annually at about 48% between 1999 and 2004 compared to an annual growth of 14% for India. On the whole, exports to China from Africa total 10% of Africa's total exports to the rest of the world, which means that China has overtaken Japan as the leading Asian importer of African products.

According to Chinese customs data, trade between China and Africa reached a record US$106.84 billion in 2008, up 45.1 percent from a year earlier. Exports to Africa reached US$50.84 billion, up 36.3 percent while imports from Africa hit US$56 billion, up 54 percent. China had a trade deficit of US$5.16 billion with Africa in 2008, compared with a surplus of US$940 million in 2007. The number of African countries with which China had more than US$1 billion in trade increased to 20 in 2008 from 14 in 2007. Angola remained China's largest trading partner in Africa and South Africa came second.

However there could be mixed reactions across Africa and especially in relatively robust economies where there are clear winners and losers. For instance textile mills and other light manufacturing factories have suffered and even closed as cheap Chinese goods flood world markets, eliminating jobs in countries that sorely need them. Ultimately this could be an issue for market institutions and import regulatory authorities to monitor, including increased governance in relevant agencies.

Nonetheless, these developments are dramatic and may require new policy responses from African countries with regard to export development and promotion efforts. The increases in exports may lead to even more emphasis on south-south trade as provided for under the WTO Enabling Clause paragraph 2(c) which permits preferential arrangements among developing countries in goods trade. There is currently no regional trade agreement between African countries and China however there are ongoing negotiations between SACU and India.