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. 

India, China now Kenya's Top Import Trading Partners

The East African

India has overtaken the United Arab Emirates (UAE) to become Kenya’s top source of imported goods, newly released data show.

The world’s second most populous nation grew its exports to Kenya by 27.1 per cent to Sh174.6 billion in the first 11 months of last year or 15 per cent of Kenya’s total imports.

That growth allowed New Delhi to topple UAE from the top trading partner position it has occupied for the past two decades — helped by exports of petroleum products.

Official statistics show that the UAE’s share of Kenya’s total imports dropped to 11.9 per cent saddled by a 22 per cent drop in the value of its merchandise to Sh138.2 billion.

India’s stride to the top spot came on the back of big-ticket contracts in healthcare and energy sectors that were concluded in the past 12 months.

The Indian High Commission in Nairobi said Indian investors had intensified their search for business opportunities in Kenya and that the effort was bearing fruit.

“Kenya has become an important market for Indian firms and most have intensified their search for business opportunities with very positive results,” said Tanmaya Lal, the deputy High Commissioner at the Indian embassy.

Mr Lal said that geographical proximity has made it easier for Indian companies to export to Kenya while keeping prices close to what they charge at home.

The world’s most populous nation and the world's second largest economy China also grew its exports to Kenya by 16.4 per cent to Sh154.7 billion beating the UAE to the third position.

Chinese goods now account for 13.3 per cent of Kenya’s total imports, affirming the rise of Asia as an important trading partner for East Africa’s largest economy.

UAE has consistently featured as the top source of imports in Kenya in the past 10 years save for 2010 when China sold Sh120.6 billion worth of goods more than UAE’s Sh116 billion.

The relegation of UAE to the third trading spot has been linked to a decline in Kenya’s intake of petroleum products that form the bulk of Abu Dhabi’s exports.

Kenya’s imports of fuel and lubricants fell 5.3 per cent to Sh305.7 billion in the 11 months to November compared to Sh323 billion a year earlier.

The decline in the petroleum shipments – that accounts for a quarter of Kenya’s imports — also pulled down the value of total imports by 3.3 per cent to Sh1.19 trillion in the same period.

India and Kenya have tightened their economic ties in the past three years, paving the way for Delhi to sign major supply deals with Nairobi and deepen its export position.

China and EAC Sign Trade and Investment Framework Agreement

The Framework Agreement between EAC and China focuses on the promotion of commodity trade, exchange of visits by business people from EAC and China, co-operation in investment, infrastructure development, human resource development and training. The two sides also created a Joint Committee on Economy, Trade, Investment and Technical Cooperation (JCET) as the implementation framework for the Agreement. 

This is a different type agreement from the EPAs. It focuses on market enabling assistance in areas such as infrastructure development, skills development and private sector engagement. In fact, China has indicated she will provide funding for feasibility studies on roads and infrastructure. The focus on commodity trade also signals willingness to expand agricultural production and processing of agricultural commodities and thereby enhancement of the value chain.

Manufacturing share of African GDP falling

Interesting piece.  In fact, Africa's agricultural and manufacturing GDP is falling. These realities should also be considered in light of the long standing WTO negotiations on agriculture and  non agricultural products. 
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Africa is uncompetitive, insufficiently export-driven, and situated too far from the world's main markets, argues economist Tony Hawkins.

"Africa has not been industrializing; it has de-industrialised. Since the 1990s, the GDP share of the continent's manufacturing sector has declined and now accounts for about 10% of the continent's GDP," said Tony Hawkins, economist and professor at the graduate school of management at the University of Zimbabwe.

"Over 60% of the industrial output from the whole of sub-Saharan Africa is generated in one country - SA."

"Asia's manufacturing industry, on the other hand, is growing fast. One of the reasons is that the industry in this part of the world is export-driven. In Asia, manufacturing accounts for 70% of the continent's total annual exports. In Africa, this is 20%," he said.

One of the reasons why Africa would not able to compete with China lay in the market it produced for. "Africa is manufacturing goods for their own, local markets," he added.

Africa is a small and poor market, with a low demand for high-tech products and a high demand for cheap goods. The problem is that the market for cheap goods is growing much slower than the high-tech markets the Asian manufacturing industries are producing for.

Let's not forget that Asia also produces cheap products for the export market and these are much more inexpensive compared with the goods made in Africa. They are often of a better quality. This hampers Africa's competitiveness.

Another major disadvantage was Africa's geographical location, Hawkins noted. Many African countries, especially in sub-Saharan Africa, are situated far away from the world's major markets such as Europe, Asia and Latin America. Exporting goods to these parts of the world requires high transport costs.

"Asia in this respect has taught us that having a competitive advantage globally no longer depends on natural resources and cheap labour," Hawkins continued. "It is about knowledge, strategic locations, and skills - among other things."

The situation in Africa could change for the better, he noted: "But only if African governments invest in their manufacturing industries and make them more competitive while upgrading the continent's export structures to overseas markets."

TBT Issues in Bilateral and Regional Trade Agreements: An African Perspective

Study from the OECD on  TBT issues in Africa.

TBT measures in African RTAs are apparently (with few exceptions) only vaguely addressed.  Interestingly, this paper also observes that there is an import-export bias in the sense that generally Africa seems to favour low technical requirements in respect of their imports (i.e. by virtue of their TBT border protection levels) whereas they face high TBT requirements for their exports to more developed regions. Products are often re-tested in export markets, leading to large cost penalties for exporters, whereas products of sub-standard quality often find their way into the markets of the region, because the TBT infrastructure is underdeveloped.

This June 2010 paper  also examines whether and how eight major regional integration agreements within the African region address TBT issues and implement the  WTO  TBT Agreement whose objective is to ensure that technical regulations and other TBT measures do not unnecessarily constitute barriers to trade. However the agreement also recognizes countries’ rights to adopt the standards they consider appropriate and it is acknowledged that domestic regulations and region-wide standards, are essential for protecting economies and common markets, from business practices that may bring harm to humans, plant, animal life, the environment, industry, and to national security.  

While only one of the 8 agreements surveyed by the authors refer explicitly to the WTO TBT Agreement, most of the RTAs refer to the elimination of TBT-related barriers or harmonisation of legitimate measures, but they use broad and non mandatory language. Few of the eight RTAs require or encourage parties to accept as equivalent the other parties’ regulations and conformance procedures. Mutual recognition is envisaged by some, but mostly as a goal and only in broad terms. None of the agreements reviewed require that parties explain the reasons for non-recognition.

Finally, there are no clauses prescribing transparency and no procedures for dealing with disputes over TBT matters.  Existing provisions for eliminating TBT-related barriers or harmonising legitimate technical regulations are formulated mostly in broad and nonprescriptive terms.

The paper provides concrete steps that parties to these RTAs have taken in order to reduce technical barriers. However, while TBT policy reform could be advanced through WTO negotiations, the authors recommend the following measures in order to facilitate TBT policy alignment among countries of the region:

• African RTAs should be revisited, reviewed and amended to include more stringent TBT provisions.
• A targeted review of TBTs should be undertaken in light of the development needs in meeting the basic requirements of standards systems and implementation of current obligations to support expanded trade opportunities with developed economies.
• It should be investigated whether African countries benefit from Mutual Recognition Agreements for national product testing and certification.
• Performance of enquiry points should be assessed throughout the region on an ongoing basis.
• A programme of assistance in infrastructure modernisation should be considered, comprising inter alia a long-term plan for infrastructure modernisation and enhanced access of African countries to the development of voluntary standards activities. 
• More attention should be paid to trade with India and China, with which the RECs in Africa and specifically the tripartite SADC/EAC/COMESA alliance have no trade agreement or TBT arrangements.Because of the sheer size of these economies, trade in unregulated low-priced products may be harmful to consumers and economies of the sub-Saharan region. (a controversial point might I add given the reports of dumping from the west as well).

The publication is useful but I should also mention a few additional facts. African enterprises need to link with global supply chains to market their products internationally however such linkages (beyond the supplies of raw materials) are few and far between. In addition, African exporters are largely small scale- even SMEs, when compared to their  international counterparts. SMEs have inherent difficulties with access to capital, productive capacity, technology and servicing because of resource limitations. Therefore my additional recommendations would be for increased investment in capacity building, testing and technology at the the enterprise level.

This publication can be accessed here.

US and India on Partnering with Africa

Recent discussion by the Carnegie Endowment for International Peace on how India and the US could partner with Africa to foster its development. This is relevant because foreign investors interested in Africa are facing similar risks and opportunities to those they faced when investing in India. African countries could therefore learn from India’s successful economic reforms in service and industrial sectors which helped it achieve an impressive growth rate for several years. 

Some useful ideas from this discussion include:

India can contribute to Africa’s development by sharing its experiences in mobilizing human capital and social policy innovation, such as the ongoing large-scale rural employment program launched in India in 2006. In fiscal year 2009/10 alone, it provided employment to 52.5 million rural households. India can help Africa produce high tech yet low cost goods that are within the purchasing power of the African people.

India’s Green Revolution transformed the country from a food deficit nation into a food self-sufficient country. The introduction of high-yielding varieties of seeds, increased use of fertilizers, and improved irrigation helped to increase agricultural productivity in India, leading to self-sufficiency in food grains. It also helped India to effectively address famines. This revolution is similar to what happened in China.

Foreign investors need to diversify from energy investment in Africa and investment needs be increased in non-energy sectors as well.

The US government and the private sector could consider public-private partnerships in order to reduce investment risks while making investments in Africa. This could also be done by developing tax incentives and credits for US investors in Africa (see previous post on this here).

On financing, U.S. banks are risk-averse and less willing to finance businesses in Africa, which creates a financing problem for U.S. businesses interested in doing business in Africa. However, European banks have been more forthcoming in financing investment in Africa. A possible proposed solution in this regard could be increased support from the Overseas Private Investment  Corporation (OPIC) in the US.

China Reduces Tariffs on Imports from Kenya and Other States

According to the Africa Report, Kenya has now been included in the list of 41 countries enjoying reduced tariffs into China.  Other recipients are largely LDCs as agreed in the 4th Ministerial Conference of the Forum on China-Africa Cooperation- Sharm El Sheikh Action Plan (2010-2012).

BEIJING (Reuters) - China is adding 33 states to the list of developing countries whose goods are largely exempt from import tariffs, the Ministry of Finance said on Wednesday. It said that from July 1 it would scrap tariffs on about 60 percent of imports from countries on the list, which include Ethiopia, Kenya, Liberia, Mali, Madagascar, the Comoros and the Democratic Republic of Congo. Burundi, Malawi, Mozambique, Benin, Togo, Uganda, Zambia, Central African Republic are also on the list. In Asia-Pacific, beneficiaries include Afghanistan, Bangladesh, Nepal, Samoa and Vanuatu. Since 2001, China has had 41 countries on the zero-tariff list.

This is especially interesting especially because Kenya is not an LDC.

Further reports show that China would grant zero tariffs status to 4,762 categories of commodities.  China imports scrap metal, fruits, nuts sisal fibre, row hides and skins, fish, black tea, coffee, and leather wares from Kenya and scrapping tariffs on these produce means their cost will fall in China by between three to 30 per cent — the current range of the Asian country’s external tariffs.

According to other sources, the balance of trade between Kenya and China has worsened over the last five years in favour of the Asian countries. Official statistics indicate that while Kenya’s exports to China only grew at a snail pace from Sh1.2 billion in 2005 to Sh2.5 billion in 2009, imports have risen phenomenally to Sh74.5 billion from Sh19.4 billion in 2005.

Genesis of the EC's MFN Clause in the EPAs

There has been much discontent regarding the Most Favoured Nation (MFN) Clause found in the Africa-EU Economic Partnership Agreements (EPAs), and the effect the clause would have on south-south trade and the standing of the Enabling Clause.

The genesis of the MFN clause can be understood in the context of OECD's recent 2010 publication: Shifting Wealth, which finds that between 1990 and 2008, world trade expanded almost four-fold, but South-South trade multiplied more than ten times. Hence developing countries now account for around 37% of global trade, with South-South flows making up about half of that total. This trade could be one of the main engines of growth over the coming decade, especially if the right policies are pursued.

It would seem that the EU would like a slice of this rapidly expanding south south pie.  In fact as shown above, the contribution to world GDP and PPP growth by developing countries has risen sharply since the nineties and has outpaced the contribution of advanced economies, and has doubled it.  Hence, the MFN clause could be intended to accelerate the EC’s ability to benefit from south south market-opening especially with fast growing economic giants that the EU has not concluded an FTA with.  These include the BRIC countries (Brazil, Russia, India and China).  

As an example, Africa's south-south trade with non African countries, has increased from a low of 8% of Africa's total trade to almost 30% and this increase is largely trade with Asia. Trade between Africa and China was estimated at US$6.5billion in 1999 but in 2008 was valued at US$107 billion, making China, Africa's second largest single country trading partner following the United States (see previous posts on Asia China Trade). Meanwhile, in the last 30 years, Africa's trade with the EU has continued to decline, from a high of 55% in the mid eighties to about 35% share of total Africa trade in 2008.

In light of the above, it is necessary for African countries to take caution with regard to forward-looking concessions between Africa and fast growing economies and concessions between Africa and shrinking economies.  In addition, it should be noted that the EU is undertaking numerous FTA negotiations with developing and BRIC economies. Therefore, the future standing of the MFN clause in the EPAs should also be considered in light of the EU's rapidly expanding list of future FTAs. 

Other legal and systemic concerns regarding the EPAs can be found here. 

Shifting Wealth: Recommendations for the Future

According to the 2010 Perspectives on Global Development: Shifting Wealth, by the OECD Development Centre, the economic and financial crisis is accelerating a longer-term structural transformation in the global economy. In fact, longer-term forecasts in the Report suggest that today’s developing and emerging countries are likely to account for nearly 60% of world GDP by 2030.  

These findings should indeed transform the way we configure ourselves in Africa especially with the key economic engines of the world; China and India. 
To this end, the Report makes useful recommendations below with regard to development strategies in developing countries, which need to be adapted to harness the opportunities of shifting wealth. 

National development policies should:

● promote South-South foreign direct investment and learning the lessons from successful examples of clusters and Export Processing Zones. They should harness investment links to achieve technological upgrading through national innovation systems;

● ensure appropriate revenue management policies in resource-rich economies and consider using sovereign wealth funds to smooth consumption and channel resources to promote growth and investment in the domestic economy;

● respond to the growing demand for agricultural exports and increasing pressure on arable land by strategies to improve agricultural productivity, through greater support to R&D and extension services, and through South-South technological transfer;

● implement pro-poor growth policies, focusing on providing more and better jobs and improving social protection through further development and replication of institutional innovations such as conditional cash transfers;

● expand South-South peer learning to help design policy based on successful experiences in the South.

A shift from predominantly North-South cooperation to predominantly South South (African and non African) cooperation especially with india and china may require a shift in foreign policy for some African countries. However, that shift is not only necessary but crucial. 

Africa's Top 20 Global Merchandise Trade Economies

Source: Customised from EC Trade 2008 data. Click to enlarge

SA is the top African importer and exporter and globally has a 0.6% share of world trade. However SA has a negative trade balance with imports valued at about 70billion Euros and exports at 55.8 billion Euros . 

Nigeria comes in second on total trade (both imports and exports) and the country has a positive trade balance with a higher share of global exports (52.2 billion Euros) than imports (37.1 billion Euros). 

In Sub Saharan Africa, the big players on total trade (over 10 billion Euros) are SA ranked globally at no. 36, Nigeria (44), Angola (55), Sudan (82), Ivory Coast (89), Kenya (90) and Ghana (95). 

Naturally oil exporters are at the top. Angola and Sudan are 2 LDCs in the top 10 on total trade. The North African countries have a higher combined total trade than most Sub Saharan African countries.

Top global trade economies:

EU combined trade is highest in all three categories. However on a per country basis:

• Importers (and total trade and in the same order): USA, Fr Germany, China, Japan, France.
• Exporters: China, Fr Germany, USA, Japan, Netherlands.

Interestingly, China is the world's largest exporter and leading source of imports for Africa. See Africa- China engagement here.

Meanwhile, the US is the largest importer globally and the single largest importer of African goods at a country level.  See US-Africa trade profile here.

See previous post on trade between Africa and trading partners here.

Trade Between Africa and Trading Partners 1980-2008

Interesting illustration from the Africa Progress Report regarding percent (%) share of trade between Africa and her trading partners from the period 1980-2008.

In the almost 30 years illustrated in the chart; Africa's trade with the EU has continued to decline, from a high of 55% in the mid eighties to about 35% share of total Africa trade in 2008.

South-south trade with non African countries, has increased from a low of 8% of Africa's total trade to almost 30%. This increase is largely trade with Asia. See previous posts on Africa Asia trade.

US Africa trade has declined compared to pre 1980 at 18% of total Africa trade. However since then, US Africa trade has been at a similar level at slightly over 10% since the mid 80's. See previous post on US Africa trade.

Intra Africa Trade has risen from a low 3% to slightly over 10% of Africa's trade, however this has been hovering at a similar level since in the mid nineties.

It will indeed be a historic moment when Africa's trade with other developing countries outperforms colonial trade flows.

The Africa-China Engagement

There has been considerable debate about the merits of China’s engagement in Africa, often with divergent views.  However the practical benefits for Africa are often welcome. 

For instance, according to the Africa Progress Report, recently presented by the Chair of the Africa Progress Panel, Mr Kofi Annan, China’s investment in Africa has doubled in the last decade (see chart) from about US$2billion in 2003 to over US$4billion in 2008. In addition Africa-China trade was estimated at US$6.5billion in 1999 but in 2008 was valued at US$107 billion, making China the second largest single country trading partner following the US. 
However China remains the regions largest source of imports and reportedly over 1600 Chinese companies are in operation in Africa, with the Chinese Government also investing in low cost industrial zones (e,g, Egypt) and in the agricultural sector (e.g. Ethiopia). 


Additionally, China also has targeted practical areas in which to focus its aid to Africa.  At 4th Ministerial Conference of the Forum on China-Africa Cooperation, Chinese Premier Wen Jiabao, announced eight (8) new measures to promote practical cooperation with Africa. The selected economic measures include:  Support to strengthen agricultural exchanges and cooperation in order to help Africa to increase food production capacity and increase the number of agricultural technology demonstration centers built by China in Africa to 20, and send 50 agricultural technology teams to Africa.

China has also pledged support to strengthen cooperation in education and human resources development; to build 50 China-Africa friendship schools; to train 20,000 personnel for Africa, including 1,500 school headmasters and teachers, 2,000 agricultural technology personnel, 3,000 doctors and nurses and to provide 1.5 million U.S. dollars in support of human resources training under New Partnership for Africa's Development (NEPAD).

Additionally, there will be support to strengthen cooperation in clean energy development and utilization, in clean drinking water technologies and to help Africa enhance capacity to adapt to climate change.

China will further advance the sound development of China-Africa trade by phasing in zero-tariff treatment for 95 percent of the products from the Least Developed African countries (LDCs) having diplomatic relations with China. This will starting with 60 percent of the products within 2010. China has also pledged to set up African commodities trade center in China and adopt preferential policies such as fees reduction for participating African enterprises to promote export of African commodities to China. China will also establish three to five logistic centers in Africa and improve business facilities in African countries.

To address the financial crisis, China will provide Africa with 10 billion U.S. dollars in concessional loans, mainly for infrastructure and social development projects.  The government will also support Chinese financial institutions in setting up a 1 billion U.S. dollar special loan to grow African small and medium enterprises.

China will also continue to support poverty reduction efforts and cancel due debts of interest-free government loans that matured by the end of 2009 owed by all heavily-indebted poor countries and the LDCs in Africa having diplomatic relations with China.

Finally, China has promised to further fulfill the pledges made at the Beijing Summit and to increase the size of China-Africa Development Fund to 3 billion U.S. dollars and support Chinese enterprises to expand investment in Africa.

My view is that there is a lot we can learn from China.  For instance on average, China's economy grew 10 percent per year between 1980 and 2008, compared with only three percent in sub-Saharan Africa during the same period. These divergences in economic growth in general, and in agricultural development in particular, have led to noticeably different patterns in poverty reduction in both regions.

According to a study by the International Food Policy Research Institute (IFPRI), between 1980 and 2005, the number of poor people decreased in China by more than four times, from 835 million to 208 million. The researchers found that China's strong initial emphasis on agricultural growth was essential in reducing poverty in that country. Growth in agriculture in China is estimated to have contributed to poverty reduction four times more than growth in manufacturing and services. Meanwhile according to World Bank figures, the role of agriculture in Sub-Saharan Africa has fallen from 19 percent of the gross domestic product (GDP) in 1980 to 14 percent in 2008.