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Africa pursues free trade amid global fragmentation

by with One Comment Free tradeGlobal Trade

Defying the trend toward deglobalization and economic fragmentation, African nations are uniting to form a free trade area. The project promises to offer the rest of the world a renewed message of hope on the benefits of removing – not erecting – barriers to free flows of goods, services, investment, and ideas across borders.

The African Continental Free Trade Area (AfCFTA) will be the biggest in the world by area and population, uniting 1.46 billion people in 55 countries. Africa’s combined GDP of US$3 trillion is comparable to India’s – and growing fast.

The potential benefits are tremendous. World Bank research shows that the AfCFTA could lift 50 million people out of extreme poverty by 2035 and expand incomes by US$571 billion. Many of the gains would result from unleashing trade within the continent ; currently, African countries trade more with the rest of the world than with each other.

Turning the aspiration into reality will require sustained effort and strong collaboration among African governments, the private sector, civil society, and the international community. That was the consensus among leaders representing those stakeholder groups during  a forum in Washington in April alongside the Spring Meetings of the World Bank and the International Monetary Fund.

“The agreement is riding on a wave of unprecedented political support and will,” AfCFTA Secretary General Wamkele Mene told the forum. “But delivering on its promise needs the effective and aggressive implementation of its protocols.”

No doubt, Africa faces myriad challenges. Some countries are plagued by persistent conflict. Difficulties in transacting among 42 currencies impose an estimated $5 billion a year in extra costs on traders. Border procedures can be cumbersome and time consuming. Small-scale cross border trade is flourishing but comes rife with risks, especially for women, who often face harassment and violence.

What is more, it won’t be easy to knit together a disparate group of economies with per capita GDP ranging from $221 in Burundi to $9,100 in Mauritius. But Africa has made a start: Its eight Regional Economic Communities can serve as building blocks. It will be incumbent on wealthier African nations, who are likely to be the first to benefit from freer trade, to catalyze opportunities for economically weaker states, Amany al-Wassal, executive director of Egypt’s Export Development Fund, told the forum.

“We have to lift the small countries and emphasize to them the importance of implementing the agreement,” she said.

Consider auto production. Africa’s three automakers are Egypt, Morocco, and South Africa. These countries will benefit when the auto market opens up in Africa. That, in turn, will create demand for components and raw materials from other African countries such as Zambia, a major copper producer, or the Democratic Republic of Congo, where cobalt for lithium batteries could be mined and processed.

Creating a single market holds huge promise, especially for young Africans, who by 2030 are expected to make up 42 percent of the world’s youth. Opportunities abound in relatively untapped areas such as trade in services – the fastest-growing sector globally and the biggest source of new jobs – and e-commerce. The AfCFTA is expected to draw billions of dollars of foreign direct investment, helping African firms join regional and global value chains. 

Value chains will play a big role in helping many African nations overcome their dependence on exports of commodities and develop comparative advantages in areas like agriculture, pharmaceuticals, and clean energy. Value chains allow economies to build their industrial capacity by contributing parts and components rather than manufacturing finished products.

“The pact offers states the opportunity to expedite industrialization and use the existing market for Africa, rather than importing from abroad,” said Elias Magosi, executive secretary of the Southern African Development Community.

Some barriers are already falling. Ghanaian exporters of ceramic tiles to Cameroon have seen tariffs drop by 20 percent as a result of the guided trade initiative. Across Africa, tariffs on 90 percent goods are slated to be phased out entirely by 2034. Even greater gains would come from lowering trade costs and improving hard and soft infrastructure at the borders and beyond them —so-called trade facilitation measures.

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Global trade tensions fueled by rising government subsidies risk undermining efforts to fight poverty

by with No Comment Global TradeUncategorized

We are witnessing important setbacks in the open, international trade system that has driven prosperity around the world and lifted billions of people out of poverty in developing countries. Geopolitical tensions, on the heels of earlier trade wars—and accentuated by shocks such as the pandemic, disruptions in supply chains, and climate events—are heightening the risk of economic fragmentation.

These setbacks could become a source of unwarranted economic inefficiency and a potential drag for the global economy. In particular, in a renewed drive toward self-reliance and interest in industrial policies to promote “strategic” sectors, the world’s major economies are increasingly turning to subsidies. And while subsidized exports of industrial goods from China were often blamed for hurting domestic industries in the West, these practices are increasingly being replicated elsewhere.

Developing countries are most vulnerable to the trade-distorting effects of subsidies. They rely on trade to drive economic growth, reduce poverty, diversify their economies, and respond to climate change. To attract investment, they need the certainty provided by a credible and coherent system of global trade rules. They also need to be able to compete on fair terms, a capacity that trade-distortive subsidies and protectionist policies will hurt.

Most subsidies are not directly related to trade but could have important effects on trade. Many have legitimate economic and social goals, such as promoting research and development or the production of environmentally friendly goods and technologies. Yet, even when deployed in pursuit of legitimate goals, subsidies can distort trade, fueling tensions and provoking countermeasures. And because the international trading system is ill-equipped to discipline their use, governments increasingly are responding with countervailing tariffs or subsidies of their own. 
 

Breaking this escalating cycle of subsidies and countermeasures calls for a multilateral solution.  But to reach such a solution, trade negotiators will need far more information than is currently available on subsidies and their economic impact. A recent World Bank study, “Unfair Advantage: Distortive Subsidies and Their Effects on Global Trade,” takes a step toward filling this knowledge gap and lays a foundation for further research. It builds and analyzes a database that categorizes over 2,000 subsidy programs in major trading partners (accounting for over 70 percent of global trade).

The report highlights that the use of subsidies is not limited to a single country or region. At the same time, they tend to be concentrated in big economies with the potential to influence global markets. China, the EU, and the United States account for about 75 percent of the documented measures.