A Positive Agenda for Trade Facilitation Negotiations in Africa

This paper I wrote is a little dated but the concision is still useful given the conclusion of the WTO Trade Facilitation negotiations. The paper can be assessed here.

Trade facilitation is definitely a potential source of growth promotion in Africa and African countries need to continue focus on an integrated and coherent approach. Progress achieved in such a broad approach does not, however, necessarily mean multilateral binding. It is important to provide adequate policy flexibility in the rules to enable countries commit according to own priorities and capabilities. Members should be allowed to pre-commit, with the option of linking pre-commitments to effectiveness of capacity building efforts. A multilaterally agreed monitoring framework will be necessary. Such a review needs to monitor and evaluate the commitments made, the implementation capacity and the availability of technical and financial assistance. Experience with ongoing trade facilitation programme suggests that the cost of ambitious multilateral agreement on trade facilitation will be high and certainly beyond the capability of African countries. 

There is, therefore, a need for trade facilitation fund to cater for necessary adjustment costs arising from the expected new commitments in the final WTO trade facilitation agreements. The next steps for adequate participation of Africa in these negotiations would be to document the situation in a selected group of countries that have made relatively good progress in these areas and that could provide “best practice” examples. These case could be used to design a comprehensive programme that a typical African country would have to undertake in order to comply to a multilateral agreement on trade facilitation with elements in proposals being tabled are to become binding. Additionally, submissions to the negotiating group on trade facilitation can be made specifically to address concerns of African countries and present possible positions following the needs assessment exercise.

See other comments I have made on trade facilitation here.

WTO Trade Facilitation Agreement and Facility

The WTO Trade Facilitation Agreement (TFA) adopted In December 2013 in Bali is the first multilateral trade agreement to be concluded since the WTO was established 20 years ago. WTO members also adopted on 27 November 2014 a Protocol of Amendment to insert the new Agreement into Annex 1A of the WTO Agreement. According to the WTO Agreement, a Member formally accepts the Protocol by depositing an “ instrument of acceptance” for the Protocol with the WTO. The Trade Facilitation Agreement enters into force once two-thirds of members of the 162 have completed their domestic ratification process, that is 108 members. As of writing, 70 countries have completed the ratification process and deposited their instrument of acceptance with the WTO.

The agreement aims to clarify and improve relevant aspects of Articles V, VIII and X of the GATT 1994 with a view to further expediting the movement, release and clearance of goods, including goods in transit. It also sets out measures for effective cooperation between customs and other appropriate authorities on trade facilitation and customs compliance issues. Among the issues addressed in the Agreement are:

• norms for the publication of laws, regulations and procedures, including Internet publication
• provision for advance rulings
• disciplines on fees and charges and on penalties
• pre-arrival processing of goods
• use of electronic payment
• guarantees to allow rapid release of goods
• use of "authorized operators" schemes
• procedures for expedite shipments
• faster release of perishable goods
• reduced documents and formalities with common customs standards
• promotion of the use of a single window
• uniformity in border procedures
• temporary admission of goods
• simplified transit procedures
• provisions for customs cooperation and coordination.

The agreement is groundbreaking in that for the first time in WTO history, the commitments of developing and LDC's are linked to their capacity to implement the TFA. In addition the agreement states that capacity building support should be provided to these countries to help them implement the TFA provisions.

To benefit from Special and differential Treatment (SDT), a member must categorize each provision of the Agreement, as defined below, and notify other WTO members of these categorizations in accordance with specific timelines outlined in the Agreement.

• Category A: provisions that the member will implement by the time the Agreement enters into force (or in the case of a least-developed country member within one year after entry into force) 
• Category B: provisions that the member will implement after a transitional period following the entry into force of the Agreement 
• Category C: provisions that the member will implement on a date after a transitional period following the entry into force of the Agreement and requiring the acquisition of assistance and support for capacity building.

In order to assist developing and LDCs secure assistance and support to implement the provisions of the TFA, the WTO has established the Trade Facilitation Agreement Facility through which the WTO and other partners will expand its traditional technical assistance programmes to assist with matchmaking of donors and recipients.

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. 

Linking Trade Policy to Supply Chain Constraints

Since the birth of the GATT in 1947, multilateral negotiations have focused primarily on reducing barriers to trade for specific products and sectors: tariffs, subsidies, and different types of nontariff barriers. A recent report by the World Economic Forum, in collaboration with Bain & Company and the World Bank (WEF 2013), Enabling Trade: Valuing Growth Opportunities (World Economic Forum, Bain & Co. and World Bank 2013) concludes that improving border management and transport and communications infrastructure services could increase global GDP by up to six times more than removing all import tariffs.

Reducing supply-chain barriers to attain 50% of the global best practice level – as observed in Singapore – could increase global GDP by some 4.7% and global trade by 14.5%. By contrast, the global GDP and trade gains available from complete worldwide tariff elimination amount to some 0.7% and 10.1%, respectively. The gains from reducing supply-chain barriers would also be more evenly distributed across countries than those associated with tariff elimination. A less ambitious set of reforms that moves countries halfway to regional best practice (e.g. Chile in Latin America) could increase global GDP by 2.6% and world trade by 9.4%.

A pilot project implemented by eBay shows that helping small and medium-sized enterprises navigate the regulatory regimes of importing countries could expand their volume of international sales by 60 to 80%. Given that small and medium-sized enterprises account for a large share of total economic activity, this type of targeted trade facilitation could have significant positive spillover effects on employment.

Such large increases in GDP would be associated with positive effects on unemployment, potentially adding millions of jobs to the global workforce.

What could be done to realise the large potential welfare gains from an approach to policy focussed on supply chain barriers? The World Economic Forum report makes five specific recommendations:

1. Create a national mechanism to set policy priorities for improving supply-chain efficiency based on objective performance data and feedback loops between government and firms;

Governments must work with businesses and analysts to determine the policies and procedures that will help reach key tipping points. A central component of this effort should be the creation of mechanisms to collect data on factors affecting supply-chain operations. These data can then be used to identify ‘clusters’ of policies that jointly determine key supply chain barriers, identify priorities for action, and assess progress.

2. Create a focal point within government with a mandate to coordinate and oversee all regulation that directly affects supply chain efficiency;

Given the importance of tipping points, governments need to design policy with an economy-wide vision and recognition that industry-specific supply chains are affected by different clusters of policies. Improving supply-chain performance requires coherence and coordination across many government agencies and collaboration with industry.

3. Ensure that small and medium-sized enterprises’ interests are represented in the policy prioritisation process and that solutions are designed to address specific constraints that impact disproportionately on these businesses;

Because small and medium-sized enterprises’ ability to overcome supply-chain barriers is proportionally more difficult, governments should pay special attention to the needs of smaller businesses. For example, one relatively straightforward policy identified in the report is to raise levels for customs-duty collection that are too trivial to merit serious consideration in order to facilitate small-business engagement in international markets; another is to ensure that initiatives to reduce regulatory compliance costs such as ‘trusted trader’ programmes are complemented by programs that are accessible to small and medium-sized enterprises.

4. Pursue a ‘whole of the supply chain’ approach in international trade negotiations;

Greater coherence of domestic policies is important, but a key insight derived from the case studies is that coordination across countries matters as well. Joint action will increase the overall gains from lower supply-chain barriers. International trade negotiations usually take a silo approach, addressing policy areas in isolation. Lowering supply-chain barriers requires a more comprehensive and integrated approach that spans key sectors that impact on trade logistics, including services such as transport and distribution, as well as policy areas that jointly determine supply-chain performance – in particular those related to border protection and management, product health and safety, foreign investment, and the movement of business people and service providers.

Such a ‘whole of the supply chain’ approach can be pursued both at the multilateral (i.e. WTO) level and in regional trade agreements. Doing so would greatly enhance the relevance of international trade cooperation for businesses and help generate the engagement that is needed for trade agreements to obtain the political support needed to be adopted by national legislatures and to be implemented by governments. As has been argued by many observers, one lesson of the failure to conclude the Doha Round is that what is on the table is not seen to make enough of a difference from an operational business perspective. A supply-chain approach has great potential to address this failure and in the process provide a low-cost economic stimulus for the world economy in the medium term.

5. Launch a global effort to pursue conversion of manual and paper-based documentation to electronic systems, using globally agreed data formats.

Many of the inefficiencies in the operation of supply chains reflect a lack of reliability due to delays and uncertainty stemming from manual paper-based documentation, redundancy in data requirements and the absence of pre-arrival clearance and risk management-based implementation of policy. A global effort to adopt common documentary and electronic data/information standards would reduce administrative costs, errors, and time associated with moving goods across borders.

To address some these challenges, it is hoped that the WTO negotiations on trade facilitation will be succesfully concluded in Bali at the end of this year, 2013.

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.

Shipping Connectivity in Africa

According to the International Maritime Organization (see list of IMO conventions), 90% of the world's trade is transported by sea and shipping is truly the lynchpin of the global economy. Without shipping, intercontinental trade, the bulk transport of raw materials and the import/export of affordable food and manufactured goods would simply not be possible.  Efficiency of shipping is also closely interlinked with ports and land transport services.  The world's major ports are located close to the main international shipping routes that transverse the east-west global axis and Africa's intra-regional liner shipping connections are largely determined by the shipping liner routes, connecting African countries with Europe, Asia and to a lesser extent the Americas. 

The main or busiest shipping route in Africa transits the Red Sea into the Suez Canal through the Mediterranean and out through the Strait of Gibraltar. Vessels along this route deliver goods mainly to and from Europe and Asia although in recent year intra-regional African trade in this region has been increasing. Generally however the connections within the continent are few and for example North Africa is not connected to East or Southern Africa and there are no shipping lines for instance between Kenya and Cote d' Ivoire.

By the same token, according to a Study by USITC titled Sub-Saharan Africa: Effects ofInfrastructure Conditions on ExportCompetitiveness, Third Annual Report about 12 shipping companies provide services between Mombasa and Dar-es-Salaam but neither has services to the Northern seabed of Africa.  Thus maritime trade between African countries on opposite coasts of the continent depends on transshipment services via Europe or South Africa.

Normally a transshipment operation to a third country means higher costs compared to direct port to services between two trading economies hence increasing the cost of intra-regional trade. Nonetheless, transshipment centers such as Djibouti, Senegal, Morocco promote south-south trade especially on routes where trade volumes are currently not large enough to justify direct port to port shipping service. 

Reforming Port Services in Africa

There are approximately 90 maritime ports in Africa which include coastal ports and those located on inland lakes and rivers. The top 10 ports in Sub Saharan Africa account for nearly three-quarters of the cargo transported to and from the region. Among the region’s largest and/or most active ports are Abidjan, Côte d’Ivoire, and Tema, Ghana, in West Africa; Dar es Salaam, Tanzania, and Mombasa, Kenya, in East Africa; and Durban, South Africa, and Maputo, Mozambique, in southern Africa.  Together, these six ports account for almost one-half of containerized cargo transiting SSA.  Among the region’s coastal ports, the South African Port of Durban is the largest in terms of annual throughput, and the next largest port is Mombasa, Kenya.

Nonetheless, the capacity of even the largest SSA ports to handle a rising volume of containerized cargo remains insufficient.   Firstly, by international standards, most SSA ports are small, even when compared with other ports in the developing world.  Secondly,  the physical infrastructure of most SSA ports is inadequate in part due to historical factors since many SSA ports were developed to accommodate the transport of specific types of raw materials.

Despite the relatively small size of the SSA maritime market, several ports have undergone recent reforms and are attracting new investment. Reforms are aimed primarily at improving the operational efficiency of ports, which historically have been hampered by inadequate infrastructure, poor management, and a lack of financial resources. Reform has largely been achieved through public-private partnerships, in which a private-sector entity is granted a concession to operate a port while the port remains under state ownership. In many cases, the private-sector entity also invests in port infrastructure and equipment. By 2000, 70 percent of SSA ports had some form of private-sector participation.  

Private Sector Management of Ports in SSA

Although most SSA ports are state owned, the majority of shipping firms serving the region’s ports are private-sector entities. While private-sector management of SSA ports, as well as investment in physical infrastructure, has led to modest improvements in port productivity, problems remain. In particular, the region’s maritime operations continue to be adversely affected by burdensome customs procedures, inadequate access to land transport networks and governance. 

However the primary constraints facing SSA ports—inefficient operations and lack of sufficient capacity—have yet to be fully resolved. As a result, freight rates to and from SSA remain substantially higher than in other parts of the world, reducing the region’s export competitiveness. As an example, a small container ship may potentially incur an operating cost of $43,000 for each day that it is delayed from docking at a port and to mitigate such costs, some shipping firms impose ‘vessel delay surcharges which in turn are passed on to importers.

However certain ports in the region have been successful in addressing capacity issues for containerized traffic by attracting outside investment in infrastructure and improving port management. For example, at the port of Mombasa, the Kenya Ports Authority has established dedicated berths for one of the area’s largest shipping firms and now permits cargo to be processed on a 24-hour basis. Ultimately, Mombasa and other SSA ports are increasingly serving as regional hubs or transshipment ports and are investing in infrastructure and managerial expertise to handle the growing containerized trade in the continent.  Trade in services WTO negotiations in maritime services to liberalize the sector include  three main areas: access to and use of port facilities; auxiliary services; and ocean transport. Under the WTO/W120 list of services sectors, maritime services negotiations include the following sub-sectors: 

a. Passenger transportation
b. Freight transportation
c. Rental of vessels with crew
d. Maintenance and repair of vessels
e. Pushing and towing services 

f. Supporting services for maritime transport

Maritime Transport in Africa and European Shipping Lines

Over 90 percent of international trade between Sub Saharan Africa and foreign countries is conducted via maritime transport and most shipping companies operating in the region are European.   The region accounts for 2–3 percent of global  merchandise trade by value, and slightly more than 2 percent of worldwide maritime cargo originates in or is destined for an SSA port.  

Approximately 87 percent of the total volume of cargo exported from SSA ports is crude petroleum, with the remaining 13 percent divided evenly between minerals and metals (primarily bauxite and iron ore) and general cargo (including agricultural goods and textiles and apparel). By contrast, 90 percent of maritime cargo destined for SSA ports consists of general cargo. Crude petroleum is transported by tankers, minerals and metals are transported by break bulk carriers, and general cargo is transported by both break bulk carriers and container ships.

Large international shipping firms such as Danish-based Maersk and French-based CMACGM account for the bulk of maritime transport service between SSA and non-SSA markets.    In particular, these two firms transport the majority of containerized cargo between SSA and Europe, the largest market for SSA exports.  Other foreign-based shipping firms that have a substantial presence in the region include the German firm Hapag-Lloyd, the Italian firm Grimaldi Lines, and the Swiss firm Mediterranean Shipping Co.

In recent years, the maritime transport market in SSA has become more concentrated, as many large shipping firms have been absorbed through corporate consolidations. For example, in 2005, Maersk purchased the liner shipping business of British-based P&O Nedlloyd, and Hapag-Lloyd merged its operations with the Canadian firm CP Ships. Earlier, in 1999, Maersk also purchased the South African shipping firm Safmarine, one of the largest regional shipping lines providing service between SSA and foreign countries.

For a recent review of maritime transport see here.

Inter-modal Linkages in Africa's Transport Sector

Intermodal transitions (in which freight is transferred from trucks to trains, trains to ships, or other modal combinations) is particularly time consuming and inefficient throughout Sub Saharan Africa (SSA).  In many cases, intermodal links are the main bottleneck for freight movement and for many SSA countries, the freight forwarding industry is entirely reliant on manual loading and unloading for intermodal transitions. This is in stark contrast to more developed economies.   

For example, improving intermodal links was a major factor in the export-driven development of Southeast Asian countries. Starting in the 1980s, these countries restructured their transport sectors into multimodal supply chain management sectors that took advantage of containerization and the internationalization of production.   Improvements in intermodal links in Southeast Asia were correlated with increased trade flows (especially of intermediate goods), increased integration into global production networks, and growth in domestic manufacturing sectors.

Intermodal connections can facilitate the vertical integration of commodity chains since logistics sectors typically evolve from a three-stage system of transporting commodities (from rural hinterlands to marketplaces, from marketplaces to ports, and then from ports to overseas markets) to integrated door-to-door supply chains;  a highly efficient system.  

Logistics and intermodal transitions are clearly areas where African countries need to enhance their transport sector efficiencies further.

Impact of Infrastructure Services on Sub Saharan Africa's Export Competitiveness

According to a World Bank Study poor infrastructure conditions increase production costs, economic distance (the time and cost of transporting goods) business uncertainty, and undermine Sub Saharan Africa’s (SSA) export competitiveness. Generally, roads in SSA are poorly maintained, some unpaved and truck fleets generally consist of aging, fuel-inefficient vehicles that are often overloaded and contribute to further road degradation. Poor roads and truck breakdowns result in the slow movement of goods, considerable damage to goods in transit (particularly to perishable goods), and high shipping costs relative to other areas of the world.

Rail networks in SSA are also limited and generally even less reliable than trucks, increasing the dependence on roads to transport goods. “Soft” infrastructure constraints, such as excessive check points, burdensome administrative procedures, and inefficient processing at border crossings, often cause longer delays than poor road conditions. These delays increase economic distance and often reduce product quality, particularly for perishable goods, leading to higher rejection rates, higher production costs, and lower income for producers.  

For instance,  a USITC Study titled Sub-Saharan Africa: Effects of Infrastructure Conditions on Export Competitiveness, Third Annual Report found that some SSA coffee exporters take almost 42 days to export (excluding maritime travel) due to poor roads, long distances to the ports, roadblocks and customs delays while Latin American exporters take only 14 days to export- excluding maritime travel.  This difference in competitiveness means that the SSA coffee farmers are facing a significant tariff equivalent barrier to exports when compared to Latin Americans.

Given the importance of these issues, I will be focusing on the impact of infrastructure services on Africa’s export competitiveness for the next few posts.