Abstract: The Transatlantic Free Trade Agreement (TAFTA) – currently known as Trade and Investment Partnership (TTIP) – may be negotiated in Brussels and Washington, but the ripples will be felt throughout the global political and economic landscape. Of particular concern to developing countries and Africa in particular is the potential for the TAFTA | TTIP to have trade diversion effects, thus making entry into the transatlantic market even more difficult. To minimise this potential for negative spillover effects, the EU and the US have the option of adopting a mutual recognition policy applicable to third countries with flexible rules of origin. While this decision lies with the EU and the US, African countries can also take steps towards minimising their vulnerability by expanding intra-Africa trade through further regional integration and expanding trade with emerging powers, who have strengthened their political and economic relations in recent years.
Introduction: Africa’s Changing Economic Landscape
In an address at the University of the Witwatersrand, Deputy Director General of the World Trade Organization (WTO) Valentine Rugwabiza (2012) noted that Africa remains the most fragmented continent in the world, with 54 countries and very low levels of intra-regional trade. She stated that intra-Africa trade stood at approximately 10%, comparing unfavourably with the EU (70%), Asia (52%), North America (50%), and South America (26%). To compound this, Africa’s share of world trade was a mere 3%. This combination of factors ensures that African countries remain vulnerable to external trade patterns and regulations.
Within this context, emerging powers have increasingly become of importance for African nation states, with recent economic growth across the continent partly attributed to these growing ties and demand for primary commodities and investment in mining, infrastructure, and other sectors (Carmody 2013). As a bloc, the BRICS have become Africa’s largest trading partners, with trade expected to reach more than US $500 billion by 2015, of which 60% will come from China. In 2012, trade with the BRICS had risen to $340 billion, which is 10 times higher than the value of trade in 2002 (Ncube 2013).
Despite these developments, trade with the EU and the US continues to be of great importance, heightening the relevance of the ongoing TAFTA | TTIP negotiations. The biggest threat to African countries lies in the potential for the TAFTA | TTIP to have trade diversion effects, making it more difficult for their goods and services to access the transatlantic market. This would essentially mean less trade with the transatlantic partners, further marginalising a continent that already plays a minimal role in global trade.
In order to minimise these negative effects, the following article argues that the transatlantic partners must ensure the benefits are not exclusive to TAFTA | TTIP signatories, but also extend to third countries. This could be achieved through a policy of mutual recognition of standards extended to third countries with flexible rules of origin. This action would help reduce trade diversion concerns in Africa and the developing world while sending a signal that the transatlantic partners are still committed to an open global trading system despite the ongoing deadlock at the Doha round of multilateral negotiations.
Since the direction of the TAFTA | TTIP largely depends on the political and economic intentions of the transatlantic partners, it is arguable that African countries cannot afford to idly wait for the final agreement and should, in the meantime, remain committed to increasing intra-Africa trade through regional integration – while continuing to expand their trade with emerging powers. A combination of these actions reduces Africa’s vulnerability, ensuring that fears of trade diversion in the TAFTA | TTIP are minimised.
Trade Diversion versus Trade Creation in the TAFTA | TTIP
One of the main concerns in any preferential agreement is the discrimination against third countries. Jacob Viner demonstrated that “trade diversion occurs when the dismantling of trade barriers gives goods and services from the partner country a competitive advantage and consequently trade with third countries is diverted to the partner country even if the third country can produce the relevant goods and services more efficiently” (Mildner & Schmucker 2013). A proliferation of FTA’s also leads to a growing number of different rules of origin, which determine the economic nationality of products (Kommerskollegium National Board of Trade 2012), thus preventing non-signatories from benefiting without making concessions. This increases the obstacles to trade for non-signatories to a preferential trade agreement, especially for smaller businesses not able to comply with different regulatory frameworks (Mildner & Schmucker 2013).
Basing its assessment on a study by the Centre for Economic Policy Research (CEPR), the European Commission (EC) predicts that a TAFTA | TTIP would have a positive impact for the rest of the world, even to the amount of €99 billion (European Commission 2013). However, a different study conducted by the ifo-Institute comes to different conclusions. Both examine two scenarios: the first with an elimination of tariffs in trade and a second consisting of a comprehensive liberalisation scenario, which also includes the reduction of non-tariff trade barriers (Felbermayr et al. 2013, 8).
While the CEPR estimates gains to non-signatories (€99 billion), these are mostly distributed within the OECD countries (€39 billion) (European Commission 2013). Thus, even under this optimistic study, the gains would be shared disproportionally, with Africa likely getting the least gains. Using a different methodology, the research conducted by the ifo-Institute is more explicit about the global distribution of gains and losses, making it vividly clear that exports from African countries would be negatively affected, while the impact on welfare also shows a decline.
According to the study, countries of the Maghreb, with which the EU has an FTA called the Euro-Mediterranean Agreement, would lose under both a limited (tariffs only) and a comprehensive scenario (reduction of tariffs and non-tariff barriers). European companies would become more competitive, while EU imports from the Maghreb would decrease as “traditional trade diversion effects predominate” (Felbermayr et al. 2013, 16). Given the political turmoil in the region and added need to bring about stability and improve their economic outlook, this scenario is worrying for the region. North and West Africa are especially affected, since they traditionally have extensive trade relations with Europe. The Ivory Coast and Guinea are the biggest losers as their exports into the EU are affected by the USA. While East Africa may fare a little better due to its closer proximity to larger markets such as China; Uganda and Tanzania record big loses (ibid., 28).
As the largest economy in Africa, South Africa’s trade into the EU would also suffer the effects of trade diversion, as South African companies face increased competition with US companies in the EU. This would mean that South Africa’s current FTA with the EU, in the form of the Trade, Development, and Cooperation Agreement (TDCA) signed in 1999, would now have fewer benefits. With these results, the ifo study is unequivocal: African countries stand to lose access to the transatlantic market (ibid., 27).
The picture painted is particularly worrying at a time when the EU puts pressure on African regional economic blocs to sign comprehensive Economic Partnership Agreements (EPA’s), which cover areas such as intellectual property rights (IPR’s), sanitary and phytosanitary standards (SPS), public procurement, investment, and services. Fears in African countries partly stem from analyses that the losses in customs duty would surpass the gains of a free trade agreement with the EU (Patel 2007, 4).
The TAFTA | TTIP also comes at a time where Africa’s preferential trade regime with the US faces uncertainty due to the Africa Growth and Opportunity Act (AGOA) expiring in 2015. Initiated by the Clinton Administration in 2000, it grants preferential access to 39 African countries. Since it relies on Congress for extension, it remains essentially a one way preferential agreement. Of concern for African countries is the growing eagerness on the part of the US to exclude countries it feels have graduated from this scheme, thus following the logic of making it a stepping stone for a fully fledged FTA (Naumann 2013).
A lot is clearly at stake: an open TAFTA | TTIP might yet convince African countries that the EU and US are still sensitive to the needs of developing countries, while a closed agreement will only cement the view that developed countries are not supportive of the developmental goals and needs of the global South. This is likely to nudge them politically and economically closer towards emerging powers. The manner in which non-tariff barriers are regulated will thus have a bearing on perceptions towards the transatlantic partners. “Non-tariff barriers assume various forms, but one important way to liberalise them is to unify product standards or allow automatic domestic acceptance of products that are allowed for use abroad. That can also assist third countries: if a product satisfies the standards of one member country in a free trade zone, it may then be allowed for sale in all countries of the zone, even if it comes from a third country. With the adoption of standards, third countries can minimise the trade diversion effects that are harmful to them” (Felbermayr et al. 2013, 27)
Countering the Negative Effects of the TAFTA | TTIP
In order to reduce the negative spillovers, the transatlantic partners have the option of adopting a policy of mutual recognition of standards with flexible rules of origin extended to third countries. Researching the impact of standards and the reduction of non tariff barriers in regional agreements, Aaditya Mattoo and Maggie Xiaoyang Chen (2008, 838ff.) find that “such agreements increase the trade between participating countries but not necessarily with the rest of the world. Harmonization of standards may reduce the exports of excluded countries, especially in markets that have raised the stringency of standards. Mutual recognition agreements are more uniformly trade promoting unless they contain restrictive rules of origin, in which case intra-regional trade increases at the expense of imports from other countries.” This means if the TAFTA | TTIP adopts a policy of mutual recognition with flexible rules of origin, negative spillovers may be minimised.
Mattoo (2013) argues that “with mutual recognition, the EU and the US would accept each other’s standards or conformity-assessment procedures, allowing firms to adhere to the less stringent requirements in each area. If the policy were extended to third-country firms, it would have a powerful liberalising impact.[…] If however, the [TAFTA | ] TTIP excluded third-country firms from the mutual recognition policy, their competitiveness vis-à-vis European and American companies would diminish substantially.” With this option ultimately relying on the transatlantic partners, it would be sensible for African countries to be proactive and take pre-emptive steps to minimise the potential negative effects.
This would mean remaining committed to increasing intra-Africa trade. This is important since Sub-Saharan African countries continue to have higher non-tariff barriers between themselves than on trade with third countries. Such an effort must involve continued efforts to harmonise regional technical regulations and standards, sanitary and phytosanitary measures as well as rules of origin, which have all added significant costs to doing business in Africa (Rugwabiza 2012).
Tony Elumelu and Jonathan Oppenheimer (2012) argue that a new generation of African entrepreneurs and businesses is emerging, challenging traditional incumbents with new models and strategies. Examples include Kenya’s information and communications technologies companies, and Nigerian banks such as the United Bank of Africa. In telecommunications, South African companies such as MTN now operate in 21 countries, while Glo, a Nigerian mobile operator, has also increasingly expanded in its region. These companies are all increasingly breaking down regional barriers and expanding intra-Africa trade. In 2009, South Africa invested $1.6 billion (FDI outflows) into other African nation states. Despite these positives, intra-Africa trade still remains too low. Regional economic blocs will play a central role in further breaking down trade barriers, to unlock the full potential of African economies, and to reduce the vulnerability to external changes.
Lastly, African countries must seize opportunities provided by the growing role of emerging powers. This means using the added revenue to invest in trade related infrastructure while moving away from primarily shipping raw materials towards the beneficiation of goods and building local value-adding industries. This will take political will but ensure that African countries increasingly become less vulnerable to the constant changes of the global trading system (Elumelu, Oppenheimer 2012).
The BRICS account for 40% of the world population, one fifth of global output and nearly a fifth of all trade and FDI flows, while their development cooperation across Africa is also growing rapidly. These trends are likely to continue in the coming years (United Nations Economic Commission for Africa 2013), putting African countries at a position to make strategic decisions that impact their economic landscape. While trade with emerging powers cannot replace trade with the transatlantic partners, a combination of intra-Africa trade with increased trade with emerging powers allows African countries to be less vulnerable to trade diversion effects in the TAFTA | TTIP, while ensuring that they are not purely at the mercy of negotiators in Brussels and Washington.
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