Regional Approach to the Integration of Logistics Services in the EAC

Article I wrote for EABC in 2013 republished here.

The five East African Community (EAC) countries vary in their degree of integration into world markets, global supply chains and application of global best practices in trade logistics. The 2012 publication Trade in the Global Economy, compares the Logistics PerformanceIndex (LPI) of 155 countries and is measurement of the logistics efficiency of an economy. The performance of the EAC Partner States is poor overall, and not surprisingly it varies widely between the landlocked and transit countries. Tanzania for instance scores the highest LPI in the EAC region with a rank of 88 out of 155 countries, followed by Kenya at 122, Rwanda at 139 and Burundi at 155. Landlocked economies are geographically disadvantaged and restricted with regard to transit and logistical transport conditions outside their borders and hence faced with longer transit times and higher transit and transport costs. Recent studies show that importing into a landlocked country typically takes a week longer than its coastal neighbors while freight costs alone can be up to 40 per cent of export values for landlocked developing countries. The higher costs are caused by inadequate transit transport inter-modal connections, poor regulation and service and to address these concerns, the EAC region could benefit from a regional approach to streamline the logistics services sector and consolidate the broad range of logistics institutions, private sector, and relevant stakeholders into a single cross-border transport, logistics system and platform.

African economies generally have the highest trade logistics costs in the world and the EAC is not an exception to this trend. In a recent study, a set of estimates for Kenya, Tanzania and Uganda places the average cost of trade logistics services at the equivalent of a tax of between 25 and 40 percent on value added, which is rather alarming. For this reason, overall performance of the logistics sector in the EAC can impact negatively on the regions trade competitiveness, trade expansion, export diversification, ability to attract foreign direct investments, and invigorate economic growth. While infrastructure is an important and costly constraint, institutions, the regulatory environment and regional cooperation are equally vital for efficient logistics services and the consolidation of the EAC customs union and common market. 

Logistics services encompass streamlined door-to-door multimodal transport services from a logistics chain perspective and they determine the cost of getting goods from point of supplier to point of buyer. These services include services auxiliary to all modes of transport such as maritime, road, air, rail and pipeline services, freight and include other relevant services such as courier, cargo and freight services, customs broker services, testing services, warehousing, distribution, information and communication management and some aspects of financial services. Logistics services have become an increasingly large obstacle to Africa’s trade performance because of a profound change in the nature of international trade that has taken place in the last quarter century: the explosion of “trade in tasks.” In some manufacturing activities, a production process can be decomposed into a series of steps or tasks and since transport and coordination costs have fallen in many parts of the world, it has become efficient to produce different steps in the process in different countries. Even though African enterprises could compete with Chinese and Indian firms in factory floor costs in some product lines such as garments and other simple manufactured goods, overall African producers might be unable to compete given that the cost and efficiency of logistics services in the continent is a major supply side constraint 

Reforms are underway in the EAC region, to consolidate the customs union through various separate interventions, including harmonization of policies and regulations, modernization of transport and border management institutions, the NTB monitoring mechanism, standards and testing and investment in infrastructure. The 2012 World Bank Doing Business Report indicates that all 5 EAC economies implemented 11 combined regulatory reforms in trade facilitation, in areas such as the electronic submission of documents, risk management systems for inspections and joint border cooperation. While this is commendable, rather than individually address interlinked trade logistics issues, the EAC Partner States could jointly consider a comprehensive program on trade logistics services to address the weakest links in the macro-supply chain and thereby stimulate cooperation between public and private players. A legal instrument similar to the Logistics Protocol found in the ASEAN region, could provide a cross-sectoral platform for regulatory cooperation and dialogue among government, business, and civil society. An EAC logistics sectoral protocol would also consolidate the cross-cutting objectives of the Common Market as enshrined in Part B of the Protocol on the Establishment of the Common Market Protocol. A useful place to start would be a road-map for the integration of the logistics services sector through a framework for private public consultative dialogue, progressive liberalization and trade facilitation, in order to support the enhancement of EAC competitiveness and creation of an integrated trade logistics environment. 

EPA Rules of Origin and Value Added Methodology

My article on Tralac website republished here. (original dated March 2007)

In a March 2005 communication, the European Commission (EC) proposed a radical change to its origin rules and suggested that the reform would simplify processes and make the rules more development friendly. The EC envisages sweeping away the present multiplicity of rules of origin and replacing them with a single rule, based on value addition in the beneficiary country. Under this methodology, a product resulting from the working or processing of imported non-originating materials would be considered as originating if the value added in the country (or in a region where cumulation is permitted) amounted at least to a certain threshold (a minimum "local of regional value content") expressed as a percentage of the net production cost of the final product. 

Value addition is one of the three major criteria to determine last substantial transformation for non-originating inputs in the ACP-EU Cotonou Partnership Agreement. The other two criteria are the Change in Tariff Heading (CTH) test which requires that the tariff-heading of the final product should be different from the tariff-headings of its inputs at the four HS digit code and the Specific Process (SP) test, which requires a product to undergo certain stipulated processes before originating status can be conferred. 

As agreed by ACP Ministers in Port Moresby, Papua New Guinea in June 2006, the negotiating mechanism for the rules of origin in the EPA negotiations will be at the level of the ACP-EU. In this regard, while the harmonisation of the methodology for determining substantial transformation in the EU rules of origin regime is understandable, given that the EU has about forty preferential arrangements with third countries or groups of third countries in total, a proposed move to a single value addition methodology in the ACP-EU EPA negotiations would undermine the ACP negotiating position given its less frequent usage as a sole criteria and comparatively infant stages of regional integration in the ACP.

With regard to the usage of the value added methodology, the recent study by ODI Creating Development Friendly Rules of Origin in the EU found that the value added test has been aplied as the originating test for only about one tenth of the products that poor countries such as ACP countries actually export to the EU. Furthermore the study indicates that the value added test is the second most frequently applied sole substantial transformation criterion after specific processes, with a utilisation of 23.5% across all EU agreements. Taking this into account, a move to this single approach within the ACP could erode the benefits accruing in the EPA negotiations, unless the methodology can accommodate the CTH rules and SP and production methods already triggering trade within the Cotonou Agreement.

Given that the future ACP-EU rules of origin are expected to be an outcome of the EPA negotiations, a single value added approach by the EC would still need to accommodate ACP interests as part of the outcome of the negotiations. The ACP-EU negotiations would therefore need to take into account sound regional economic analysis that meets the objectives of the EPAs, which is development. Any benchmarks under consideration would need to enhance and stimulate trade for this methodology to be feasible across the sectors of interest to the ACP.

In addition, the ACP countries may also consider the following in their negotiations:

The value addition criteria, where it is utilized would rather be costs based rather than the ex-works price. The ex works price currently applied in the Cotonou Agreement may compromise the value of the EPA preferences particularly for landlocked and LDC countries.

Methodology for the valuation of non-originating materials will need to consider that some ACP States to date, still do not have the capacity to implement and apply the WTO or WCO customs valuation agreements.

The methodology should provide reduced local value added thresholds for LDCs and small, vulnerable, island and landlocked States given their unique challenges.

Value added thresholds where they are agreed upon should be as low as necessary to accommodate the diverse objectives of the different EPA regions and sectors of interest given that high or low wages and rents can conceal the true value added levels.

Thresholds will need to be achievable by firms and enterprises across the board and be based on EPA regional economic analysis and specific sectors of interest given that percentages for minimum value addition thresholds can vary significantly between products and sectors. This may arise due to the prevailing labour costs, capital and technology, cost of inputs and the import dependence of the region in terms of intermediates.

Reciprocity in rules of origin will need to be considered given that thresholds will need to accommodate the variance between developed, developing and least developed countries. This may need to be sector specific, such as clothing, textiles and fisheries, given that the ODI study on rules of origin has indicated that value added is not always lowest in low-income countries with some EU countries meeting lower value added thresholds than ACP States in certain sectors in light of technological advances for instance.

ACP defensive rules of origin will need to complement the objectives of ACP sensitive sectors vis a vis the EU and hence the value added methodology may need to consider EU sectoral processes and production advantages as well.

Detailed regional analysis will need to supplement the ACP-EU level negotiations both on the substance and objectives of EPAs. The negotiations should therefore take into account the highly unequal levels of the Parties with regard to regional integration. The concerns around overlapping membership in regional trade agreements and thereby overlapping rules of origin are relevant, if EPAs are to promote regional integration and enhance competitiveness.

The task ahead is indeed momentous. Rules of origin have frequently been identified as the root cause of underutilization of the long standing ACP-EU preference regime. Fortunately, the ACP States now have a historic opportunity to improve upon these rules in order to expand trade and development in their economies. However given the complexity of this issue, divergence in the negotiating strength of the two Parties and ACP regional variances, one wonders if ACP countries will be adequately prepared this year to negotiate reciprocal rules of origin using the value added methodology as the cornerstone of the negotiations.

Impact of Transport on Landlocked Countries

At present, about one out of five countries in the world are landlocked and only three high-income economies out of 35 are landlocked. Of the 31 Land Locked Developing Countries (LLDC) in the world, 15 are in Africa. Being land locked significantly affects the GDP per capita of these countries. For instance, over the period 2003-05, GDP per capita of LLDCs was approximately 50% of the GDP per capita of transit developing countries and only about one quarter of GDP per capita of developing countries in general.

The main problem with regard to being landlocked is the geographical remoteness from the sea and transit dependence complicates the export and import processes.  As a result LLDCs trade less, grow more slowly than neighbouring coastal countries and for example countries like Burundi, Central African Republic and Mali spend an average of 15% of export earnings on transport and for some the cost can be as high as 50%.

According to World Bank Study, Improving Trade and Transport for Landlocked Developing Countries the cost of transporting a container from an LLDC to a port in a developed country is 20% higher than transporting from a coastal country.  The main causes of the higher costs are inadequate transit transport inter-modal connections, regulation and poor service.

The cost of importing from a LLDC is also rising and the Study also suggests that improving road infrastructure alone is not sufficient to eradicate inefficiency and high transport costs.  As indicated in previous posts in this Blog, the other main problems are associated with port infrastructure and the quality of port services which affect the cost and process of dispatching goods in and out of transit countries.

In addition,  it is estimated that manufacturers shipping from SSA pay nearly three times more in container handling charges at African ports than manufacturers shipping from Europe.   As shown in the above chart, in some SSA countries the cost of importing a standard-sized container is reportedly more than twice the world average. Added to these charges are the indirect costs associated with time delays at the port of entry and costs of transporting  goods to inland destinations and  in particular onward delivery to landlocked countries.