Vietnam and Malaysia predicted to be winners of TPP agreement

The Trans-Pacific Partnership involves 12pacific rim countries but some look set to benefit more than others from the agreement, with Vietnam and Malaysia singled out as two likely winners. The Trans-Pacific Partnership (TPP) is a trade agreement concerning a variety of matters of economic policy, which was reached on 5 October 2015 after 7 years of negotiations. 

Each of the 12 countries that signed up to the landmark Trans-Pacific Partnership (TPP) agreement expects to benefit greatly from a deal that will open up a vast new market of 800 million people for their products and spans a large portion of the globe. However, none has higher expectations than Vietnam, which experts say has emerged as the big winner of the TPP agreement, with Malaysia as the runner-up, in the struggle to boost exports and attract FDI. 

The agreement’s 30 chapters cover various trade and trade-related issues, including reducing tariff and non-tariff barriers in sectors as diverse as agriculture, industrial goods, pharmaceuticals, service industries, financial services and telecommunications. 

The agreement also deals with investment, intellectual property, labour, the environment, good governance and methods for dispute settlement. Novel features of the agreement include addressing the roles of state-sponsored enterprises and e-commerce, and its commitment to assisting small and medium-sized enterprises so that they benefit from the new trade openings. It will also work towards facilitating the development of production and supply chains and seamless trade.

FDI boost

That so many countries – Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam – at such different levels of development were able to reach agreement on so many complex and domestically sensitive issues is remarkable. 

The TPP, though primarily about trade, is also expected to generate a significant increase in FDI. Indeed, its chapter on investment specifically emphasises that each country’s markets and services sector will be fully open to foreign investors – unless the country has put a specific sector on a 'negative list' that is not open to foreign investment.

“The big winners on trade are likely to be the big winners on investment, especially over a 10-year period,” says Dr Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington, DC.

In percentage terms, Mr Hufbauer expects Vietnam to be a big winner in both categories because it is coming from far behind the rest of the field. In addition, its tariffs on many imports – among the highest in the TPP trade area – will be lowered or eliminated. To get the maximum benefit from the TPP, Mr Hufbauer says Vietnam will need better technology and financial services, both of which will require FDI. “If Vietnam carries through on the reforms in the TPP, it will get a ton of investment,” he says.

Vietnam’s burgeoning textile and apparel sector, which currently exports about $17.5bn-worth of goods a year, is expected to benefit most under the TPP. Its other major exports are telephones, consumer electronics, footwear and seafood.

The Nafta effect

Mr Hufbauer expects that under the TPP, Vietnam could enjoy the benefits of “the Nafta effect”, which enabled Mexico to increase the FDI it received from $3bn to $4bn a year to $15bn to $20bn annually after Mexico, the US and Canada signed the North American Free Trade Agreement. To get the full benefit of the TPP, however, both Vietnam and Malaysia will need to improve their infrastructure and tackle corruption, he says.

Dr Deborah Elms, executive director of the Asian Trade Centre in Singapore, is also bullish on Vietnam. “The consequences of the TPP for the [Vietnamese] economy are huge. A lot of the reforms they have to make are hard and challenging. By using TPP as the mechanism to get reforms done, we are more likely to see them,” she says. 

Inward FDI has already begun, she adds, with large-scale investors from China, South Korea and Indonesia already moving to Vietnam to take advantage of the TPP. Ms Elms points out that the trade benefits of the TPP are based on where the product is made, not on the country in which the corporate headquarters are located. Therefore companies with operations in other countries are likely to move those operations to locations within the TPP to benefit from zero or lowered tariff barriers on their products. 

Malaysia too has high hopes for the TPP. It sees a competitive advantage for its key exports of electrical and electronics goods, as well as chemical, palm oil, rubber, wood, textiles and automotive products. In a statement, the Malaysian government reported that a number of foreign companies in non-TPP countries were exploring Malaysia as a base for their operations to take advantage of the agreement.

Sector winners

The TPP also opens up vast new opportunities for the services sector in member countries – an arena in which the US is extremely competitive, says Ms Elms. The agreement states that member countries’ markets must be fully open to services, except those on the 'negative list'. 'Services' include professional services such as legal and accounting, as well as retail and restaurants, travel and tourism, and telecommunications. At the same time, Ms Elms expects openings to be created for domestic companies to become competitive.

Another industry she expects to benefit from the TPP is the food and agricultural sector, where markets are traditionally very protected and closed to foreign products. Tariffs will be eliminated or reduced over time, food will not have to be repeatedly tested as it crosses borders, and special rules will expedite the processing of perishable goods through customs. Ms Elms expects these advantages to attract FDI, especially in food processing. 

“If a company can figure out how to take advantage of this agreement, the upside is great. But it takes a fair amount of effort to figure out what is in it and how to harness it,” she says.

It will also take a fair amount of effort for each of the 12 governments that signed the deal to get their parliaments to go along with it. In each country there are powerful groups that see their own special interests as being damaged, whether in the agricultural, biopharmaceutical or automotive sectors. Labour groups also worry that production will be outsourced to workers in low-wage countries. US presidential candidate Hillary Clinton has announced her opposition to TPP, even though it was negotiated by a fellow member of the Democratic Party.

Expect a fierce fight on all fronts before the dust settles.

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WTO Ministerial Conference in Nairobi

The just concluded 10th WTO Ministerial Conference (MC10)  was held on 15th-19th December 2015 in Nairobi Kenya.  Four issues of interest to Africa — more favorable preferential rules of origin for LDCs,TRIPS agreement, the operationalization of the services waiver for LDCs, and elimination of export subsidies — were resolved during the 10th Ministerial Conference. The meeting also concluded the Information Technology Agreement in which tariffs on over 201 technology products will be eliminated for the benefit of participating importers all for the expansion of trade in information technology products.

The 10th Ministerial Conference has come more than 20 years after the conclusion of the Marrakesh Agreement in Morocco which led to the creation of the WTO in January 1995. The Ministerial Conference is the top-most decision-making body of the WTO. It usually meets every two years, and brings together all members of the WTO.  This is first time the meeting has been held on African soil.

For related documents see here.

Made in Africa

November 20th marked yet another “Africa Industrialization Day” by the United Nations. There have now been 25 such events, and they seem to have come and gone with relatively little notice. This year may be different: Africa’s failure to industrialize has come to the attention of a growing number of observers, noting with some alarm at the fact that many African countries are de-industrializing while they are still poor, raising the worrying prospect that they will miss out on the chance to grow rich by shifting workers from farms to higher-paying factory jobs.

By any measure Africa’s failure to industrialize is striking. In 2013 the average share of manufacturing in GDP in sub-Saharan Africa was about 10 percent, half of what would be expected from the region’s level of development. Moreover, it has not changed since the 1970s. Africa’s share of global manufacturing has fallen from about 3 percent in 1970 to less than 2 percent in 2013. Manufacturing output per person is about a third of the average for all developing countries and manufactured exports per person, a key measure of success in global markets, are about 10 percent of the global average for low income countries.

This lack of industrial dynamism is a growing matter of concern to Africa’s political leaders, as well. Historically, industry is the sector into which resources have first moved in the course of economic development. Industry is the pre-eminent destination sector at early stages of development because it is a high productivity sector capable of absorbing large numbers of moderately skilled workers. Between 1950 and 2006, about half of the catch-up by developing countries to advanced economy levels of output per worker was explained by rising productivity within industry combined with labor moving out of agriculture into manufacturing. 

The objective is clear—Africa needs more industry—but the path forward, remains 'more a marathon than a sprint'. One of the major constraints to Africa’s industrial development is a lack of the “basics”—infrastructure, skills and institutions. While industrialization cannot succeed without these, they are not enough. Three closely related drivers of firm-level productivity—exports, agglomeration and firm capabilities—have been largely responsible for East Asia’s industrial success, and their absence goes a long way toward explaining Africa’s lack of industrial dynamism. For example, in Tanzania, special economic zones (SEZs), which are export-oriented industrial clusters, contain about 40 firms, employing around 10,000 people. Vietnam on the other hand has 3,500 firms in its export processing and industrial zones, employing 1.2 million workers. Putting policies in place that promote manufactured exports, encourage the development of industrial clusters and attract more capable foreign direct investors outside of the natural resources sector are essential first steps in reversing Africa’s industrial decline.

Tripartite FTA COMESA-EAC-SADC Launched

The Tripartite FTA has been launched and encompasses 26 Member/Partner States from the Common Market for Eastern and Southern Africa (COMESA), East African Community (EAC) and the Southern African Development Community (SADC), with a combined population of 625 million people and a Gross Domestic Product (GDP) of USD 1.2 trillion, will account for half of the membership of the African Union and 58% of the continent’s GDP.

The Tripartite FTA popularly known as the Grand Free Trade Area, is the largest economic bloc on the continent and the launching pad for the establishment of the Continental Free Trade Area (CFTA) according to the Abuja Treaty by 2017. This might be accomplished possibly by the Tripartite FTA negotiating with ECOWAS. 

The Tripartite FTA offers significant opportunities for business and investment within the Tripartite and will act as a magnet for attracting foreign direct investment into the Tripartite region. The business community, in particular, will benefit from an improved and harmonized trade regime which reduces the cost of doing business as a result of elimination of overlapping trade regimes due to multiple memberships. 

The launching of the Tripartite Free Trade Area is the first phase of implementing a developmental regional integration strategy that places high priority on infrastructure development, industrialization and free movement of business persons. Integration under the Tripartite is a developmental process with infrastructure development, industrial development and market integration as three critical, interdependent pillars. The second phase of negotiations, should address liberalization in services, movement of people, investment, as well as competition policy and intellectual property rights, and is yet to be undertaken.

For full copies of documents check here

South Africa Leads on Inward Foreign Investment

South Africa leads as the top destination in Africa for inward foreign direct investment (FDI) and shows clear economic potential, according to new research from fDi Markets.

Between 2010 and 2014, the country saw the highest number of inward FDI projects in Africa with 667 investments chiefly in the business services sector (19 percent). This is closely followed by software and IT services (17.86 percent) and financial services (12.62 percent). 

South Africa’s vast mining industry saw precious mineral reserves and prices dwindle in 2014. The country also relinquished its status as Africa’s biggest economy to Nigeria, following the latter’s recalculation of its GDP base. Unemployment continues to have a crippling effect on the nation - with youth unemployment hovering at 54 percent - and growth is set to average 2 percent. However, good corporate governance and transparency keeps South Africa’s Johannesburg Stock Exchange (JSE) - the continent’s oldest and largest equity market - a draw for overseas investors. Further, following an acute depreciation of the rand to its lowest in 15 years, the economy is showing signs of embarking on an export-led recovery.

Meanwhile a World bank report states that the continent of Africa has become the second most attractive investment destination in the world – ranking just behind North America.

Lesotho Making Billions Selling Water to South Africa

Even though Lesotho has high debt levels and high unemployment, it is raking in billions by selling water to South Africa. South Africa gets water from the landlocked mountainous kingdom through a series of tunnels and dams given that Lesotho receives 60 percent more rain than its neighbor. This transfer is accomplished through a series of rivers which include the Malibamatso, Matsoku, Senqunyane and Senqu, while in in South Africa it involves the Vaal River. This water transfer is said to be Africa's largest water trade scheme.

There is a signed Treaty between the two governments which sets out the structures required to implement the water transfer Project on behalf of the two governments, through an implementing management structure known as the Lesotho Highlands Water Project will also generate hydro-electric power.

For more details click here.

New Database on Trade in Services

A new services database has been developed and it may be an interesting tool for policy makers. I-TIP Services is a joint initiative of the World Trade Organization and the World Bank. It is a set of linked databases that provides information on Members' commitments under the WTO's General Agreement on Trade in Services (GATS), services commitments in Regional Trade Agreements (RTAs), applied measures in services, and services statistics.

In its four modules (GATS, RTA Commitments, Applied Regimes, and Statistics), the integrated database permits searches by Member, sector, agreement, or source of information.

To access the database click here.

Tanzania's Labour Laws and the EAC

According to sources, the Association of Tanzania Employers (ATE) has disagreed with President Jakaya Kikwete’s position on closing the labour market to other East African nationals. ATE executive director Aggrey Mlimuka said freely allowing skills to flow in will expand the economy, which in turn will create more jobs.

Delivering a speech to the National Assembly recently, President Kikwete said Tanzania’s stand against opening up its labour market in accordance to the East African Common Market Protocol is among the reasons why the country is being sidelined by other member states. The EAC Common Market Protocol was adopted and signed on November 20, 2009, by member Heads of State, and entered into force on July 1, 2010, officially allowing for free movement of labour. Recent World Bank findings show that East Africa would benefit greatly from free trans-border flows of labour, as they would allow for a more efficient allocation of skills that are relatively scarce in some partner states as well as provide employment to idle skill resources in others.

Mr Mlimuka said it was wrong for Tanzania to close the labour market wholesale. He suggested that Tanzania review its laws to allow foreigners to work in the country and complement the weak local labour force. He said Tanzania could stipulate that the foreign worker have a local person understudying them during the contractual period. That way, the local labour force would become competitive across the region. 

It is important to note that the cost of a work permit in Tanzania is $2,000, Zanzibar $150, Burundi charges 30 per cent of the salary; in Kenya, Rwanda and Uganda the permits are issued free of charge to East African nationals.

According to other sources, an ongoing crackdown on EAC immigrants in Tanzania is fueling fresh doubts about the country’s commitment to the East African Community as Tanzania and its partners within the bloc continue to pull in different directions on regional integration.

According to a study titled An Assessment of the Implementation of the EAC Common Market Protocol Commitments on the Free Movement of Workers commissioned by the East African Business Council (EABC) and the East African Employers’ Organisation, Tanzania’s work permit regulations emphasize immigration control measures instead of work related requirements. According to ATE, the cost of work permits and the complicated procedure for their approval are the biggest impediments to free movement of workers into Tanzania. The EABC study reveals that East Africa is facing a middle-level skills vacuum. In Tanzania, for example, middle-level professionals account for only 12 per cent of the total number of professionals in engineering and just six per cent in accounting. According to the Study, "the figures for accounting seem particularly low if compared with Kenya, where accounting technicians exceed the number of qualified accountants by a factor of four. In Tanzania, qualified accountants exceed accounting technicians by a factor of 16,” the research reveals. This means that in Tanzania, for every 16 qualified accountants there is only one accounting technician, the opposite of the normal pyramidal labour structure in a modern economy. In addition, according to the Study, there is a shortage of mid-level skills in most of the EAC.

Last month, the Tanzanian government said it would not waive work permit fees for East Africans seeking jobs in the country until some of the laws to do with immigration, capital flows and security have been assessed and revised.

Kenya's Sugar Sector and COMESA Safeguards

According to sources, Kenya’s sugar sector faces a gloomy future as the end of the COMESA safeguards beckons.

In March 2004, the government requested a four-year cover that was granted with conditions from the Common Market for Eastern and Southern Africa (COMESA) council of ministers. However, Kenya is yet to meet any of the conditions, and the government now indicates it will be seeking another extension when the current one ends March 2014.

Agriculture secretary Felix Koskei says the government is keen on an extension of the protection. “We will explain to COMESA why we need an extension; we understand that we have exhausted our limits, but we still have the reasons to be given one more extension,” says Mr Koskei.

Kenya has exhausted the required allowance for the extensions as put in place by the COMESA treaty, and it is not clear whether the window will be extended.  The cover came into effect in 2003 and Kenya was given a four-year waiver that would see the importation of duty-free sugar from the COMESA market regulated. Kenya got extensions in 2007 and in 2011. Initially, the treaty would provide for a maximum of eight years, however, the waiver in December 2007 was amended to avoid contravening COMESA Trade Remedy Regulation which provide for a maximum eight years for the application of safeguards under the bloc’s terms.  COMESA reviewed the regulations to be in tandem with the World Trade Organisation’s agreement on safeguards which provides for a total of 10 years for developing economies.

A former chairman with the Kenya Sugar Board (KSB) and currently a director at the agency says political will shall override the COMESA treaty on the protection.  “At the end of the day, political will shall prevail over the treaty; each member country has own interest of protecting their sugar sectors which provides a source of livelihood for more than a million people,” says Mr Saulo Busolo.  Kenya is considered a large-scale consumer of industrial sugar, used in making cakes, sweets and pharmaceutical products, which are later sold within COMESA.  Mr Busolo says Kenyan consumers are paying exorbitant prices for sugar as a result of shielding the local manufacturers from increased competition from neighboring African nations.  “Consumers are parting with high prices in buying sugar compared to other African countries such as Mauritius,” he said, adding that Kenyans were paying more than two times the world average. Mauritius exports all the locally produced sugar and imports cheap sugar from the COMESA market to sell it to its citizens cheaply, he said. 

A World Bank report on Kenya released last week says the protection measures have contributed to making Kenya a high-cost sugar producer, hurting the consumer.The high cost of producing sugar in Kenya is attributed to high cost of farm inputs. Kenya’s average production cost stands at $950 per metric tonne compared to regional countries like Malawi where the cost is as low as $350 per metric tonne.  When the safeguards were granted Kenya was asked to, among other conditions, come up with a formula for paying farmers and sell the State-owned millers. Some of the State millers are Miwani, Muhoroni, Awendo-based Sony, Nzoia, and Chemelil. Currently, the payment is based on a farmer’s supplies and the industry average. According to the COMESA safeguards, the payment would be quality-based judged by sucrose content, not the bulk. The KSB, the industry watchdog, says a pilot is running in Sony and Nzoia. The impending sale of the millers has been delayed for years, the Cabinet having given it a nod in 2010. But it could not take off, partly because there was no law and having the Privatization Commission in place also took a while.

Critics and reviewers, however, have voted overwhelmingly for the sale of the former giants to inject efficiency backed by new investment, talent, and limited political interference.  Before the window closed in the first four years of the first extension, all these millers had a combined debt of Sh50 billion, one of the factors that delayed their sale.  The minister has blamed the delay in privatization on the last Parliament, that, he says, did not give the government the go-ahead. “Parliament did not give the Treasury the privatization go-ahead that would have started early this year,” said Mr Koskei. 

The government negotiated for the COMESA lifeline to allow the importation of 200,000 tonnes to meet the country’s deficit, whose total annual consumption stands at 700,000 tonnes against the local production of 500,000 tonnes.This comes even as the regulator has warned that it will cancel the licences of the sugar factories that would not comply with the sugar policy that requires all the millers to have more than one income generating project. The policy, to be implemented in the next 24 months by the KSB is aimed at protecting the local sugar industry from collapsing in the weight of cheap sugar once the COMESA window closes. KSB chief executive officer Rosemary M’kok says that the 24-month window period is enough time for all the sugar factories to have complied with the requirement. “The factories that would not have complied with our policy will definitely have their licences cancelled as KSB will not renew them,” Ms M’kok said. It would be mandatory for all the millers to produce sugar, ethanol and electricity as a different source of generating income, instead of relying on sugar alone.

Promoting Intra-African Trade and Private Sector Dynamism

According to the Economic Development in Africa Report 2013 promoting entrepreneurship and building private sector supply capacity are vital to enhancing the capacity of African enterprises to produce and export goods to both regional and global markets. Efforts to promote entrepreneurship and intra-African trade must address the challenges presented by five distinctive features of Africa’s enterprise structure, namely (i) high and rising levels of informality, (ii) the relatively small size of African firms, (iii) weak inter-firm linkages, (iv) low levels of competitiveness and (v) the lack of innovation capability. 

There is therefore a need for policy actions to stem rising informality in Africa through facilitating the transition of firms from the informal to the formal economy. This requires simplifying procedures for obtaining permits for business registration, government provision of information to all citizens on how to start a business and on the rights and responsibilities of entrepreneurs, simplifying the tax system to reduce the cost and complications of complying with laws and regulations and strengthening the capacity of government agencies to administer laws and regulations.

African Governments should also facilitate the upward mobility of enterprises and the growth of firms by providing better access to finance and business services, particularly for SMEs. The establishment of credit bureaus and registries to reduce information asymmetry between lenders and borrowers is one feasible mechanism for enhancing access to finance for SMEs. Furthermore, developing the capacity of SMEs to meet the needs of large firms through training and the provision of business services and market information will promote inter-firm linkages and should be a priority for African Governments. 

Large firms (both domestic and foreign) can also contribute to the development of business linkages by providing SMEs with information on opportunities in their supply chain and also investing in education and training aimed at building the skills of the local community. 

African Governments should also address the constraints on intra-African trade imposed by the lack of transport, energy, communications and water infrastructure. The report argues that, given the scale and scope of African infrastructure needs, there is a need to strengthen domestic resource mobilization on the continent and also catalyze more private investment into infrastructure through public–private partnerships. It also recommends that regional development finance institutions should float infrastructure bonds to mobilize more funds for infrastructure development. Furthermore, it recommends that African Governments also address the issue of the lack of competitiveness of African enterprises, perhaps through granting subsidies to reduce the cost of factor inputs for exporting enterprises,

The establishment of a credible mechanism for effective relations between the State and business is also needed to unlock private sector potential, build productive capacity and enhance prospects for boosting intra-African trade. African Governments need to have regular consultations with the private sector for a better understanding of the constraints they face and how to address them. Purposeful and predictable leadership will also be needed to build trust between Governments and the private sector and create an environment that can enhance and sustain dialogue between both stakeholders. Checks and balances are also needed to ensure that close collaboration with the private sector does not exacerbate rent-seeking behavior. Transparency in dealings with the private sector and also the inclusion of civil society in dialogues between firms and Governments is a good way to reduce the scope for rent-seeking and corruption.

Rethinking the approach to regional integration

There is a need for a move towards a development-based approach, which pays as much attention to the building of productive capacity and private sector development as to the elimination of trade barriers. While the elimination of trade barriers is important, it will not lead to a significant expansion of intra-African trade if productive capacities are not developed. This requires deliberate government measures to strengthen the domestic private sector and promote industrial restructuring and economic transformation. It also requires a strategic approach to trade policy, coordination of investment into priority areas and strengthening of the institutions and capabilities of African Governments for implementing economic policies. The report identifies industrial policy, development corridors, special economic zones and regional value chains as important tools and vehicles for promoting intra-African trade within the context of developmental regionalism.

There is therefore a need for more direct intervention by the highest levels in government with regards to private sector concerns e.g. at the presidential level.