Regional Trade Arrangements in Africa; International Monetary Fund; September 20, 2005

International

Monetary

Fund

Regional Trade Arrangements in Africa

Regional Trade

Arrangements in Africa

Yongzheng Yang

Sanjeev Gupta

Regional Trade Arrangements in Africa

IMF

Regional Trade Arrangements

in Africa

Yongzheng Yang and Sanjeev Gupta

International Monetary Fund

Washington, DC

Production: IMF Multimedia Services Division

Typesetting: Alicia Etchebarne-Bourdin

Cover Design: Martine Rossignol-Winner

Photo Credit: Andrew Burke/Lonely Planet Images

Cataloging-in-Publication Data

Yang, Yongzheng.

Regional trade arrangements in Africa / Yongzheng Yang and Sanjeev Gupta—[Washington, D.C.]:

International Monetary Fund, 2005.

p. cm.

Includes bibliographical references.

ISBN 1-58906-439-9

1. International trade—Africa. 2. International Monetary Fund. I. Gupta, Sanjeev.

HF3874.Y35 2005

Disclaimer: The views expressed in this work are those of the authors and do not

necessarily represent those of the IMF or IMF policy. The IMF has not edited this

publication. Some documents cited in this work may not be available publicly.

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iii

Contents

Abbreviations v

Preface vii

Chapter 1. Introduction 1

Chapter 2. Regional Trade Arrangements in Africa 3

A. Global Background 3

B. Challenges of Regionalism for Africa 4

C. The Web of Africa’s Trade Arrangements 7

Chapter 3. Effects of African Trade Arrangements 14

A. Have RTAs Helped Increase Intraregional Trade? 14

B. Have RTAs Helped Improve Regional Competitiveness? 19

C. Have RTAs Benefited Africa? 22

D. Have RTAs Achieved Their Noneconomic Objectives? 23

Chapter 4. Policy Implications 25

Chapter 5. Role of the IMF 33

A. Establishing Sound Macroeconomic Frameworks 33

B. Managing Revenue Losses from Trade Reform 34

C. Addressing the Impact of Preference Erosion 36

D. Strengthening Surveillance and Trade-Related Technical Assistance 36

E. Creating an Enabling Global Environment 38

Chapter 6. Conclusions 39

References 41

Boxes

1. Regional Trade Integration With and Without RTAs: The EU and East Asia 27

2. Trade Liberalization and Revenue Losses 35

3. Preference Erosion from Multilateral Liberalization 37

REGIONAL TRADE ARRANGEMENTS IN AFRICA

Tables

1. Official Checkpoints on Selected Routes of Western African Highways,

December 2000 10

2. Simple Average of Applied MFN Tariffs, 1997 and 2004 12

3. Intra-Arrangement Trade in Africa 16

4. Decomposition of African Non-Oil Export Growth, 1970–2000 20

Figures

1. The African Galaxy 9

2. Intra-African Trade in Total African Trade, 1970–2003 15

3. Intraregional Trade Intensity in Africa, 1970–2003 17

4. Africa’s Share in World Trade, 1970–2003 18

5. Foreign Direct Investment: Net Inflows in Africa, 1970–2001 21

Abbreviations

ACP Africa, Caribbean, and Pacific

AEC African Economic Community

AfDB African Development Bank

AGOA African Growth and Opportunity Act

ASEAN Association of Southeast Asian Nations

ATC Agreement on Textiles and Clothing

CEAO West Africa Economic Community

CEMAC Central African Economic and Monetary Community

(formerly UDEAC)

CET Common external tariff

CMS Constant market share

COMESA Common Market for Eastern and Southern Africa

CU Customs union

EAC East African Community/Cooperation

EBA Everything but Arms (EU)

ECA Economic Commission for Africa (UN)

ECCAS Economic Community for Central African States

ECOWAS Economic Community of Western African States

EEC European Economic Community

EFTA European Free Trade Association

EPA Economic Partnership Agreement (EU)

EU European Union

FDI Foreign direct investment

FTA Free trade agreement/area

GATT General Agreement on Tariffs and Trade

GSP Generalized system of preferences

Mercosur Common Market of the South

MFN Most favored nation

NAFTA North American Free Trade Agreement

NEPAD New Partnership for Africa’s Development

NTBs Nontariff barriers

OAU Organization of African Unity

PRGF Poverty Reduction and Growth Facility

Quad Canada, the EU, Japan, and the United States

ROO Rule of origin

RTA Regional trade arrangement

SACU Southern African Customs Union

SADC Southern African Development Community

TIM Trade Integration Mechanism

UDEAC Central African Customs and Economic Union

REGIONAL TRADE ARRANGEMENTS IN AFRICA

VAT Value-added tax

WAEMU West African Economic and Monetary Union

WTO World Trade Organization

vii

Preface

Trade policy is a critical component of an effective strategy for reducing poverty

and boosting growth in Africa. In recent years, however, African policymakers

have increasingly resorted to regional trade arrangements (RTAs) as a substitute

for broad-based trade liberalization. This trend has long-term implications for

the effectiveness of trade policy as a tool for poverty reduction and growth.

This Special Issues paper examines the record of African RTAs in promoting

trade and investment and explores policy measures that may help improve the

RTAs’ performance. The paper concludes that African RTAs have been generally

ineffective in promoting trade and foreign direct investment. Relatively high

external trade barriers and low resource complementarity between member

countries limit both intra- and extraregional trade. Small market size, poor

transport facilities, and high trading costs make it difficult for African countries

to reap the potential benefits of RTAs. To increase regional trade and

investment, African countries need to undertake more broad-based liberalization

and streamline existing RTAs, supported by improvements in infrastructure and

trade facilitation. Early action to strengthen the domestic revenue base would

help address concerns over revenue losses from trade liberalization.

This paper was originally prepared, with input from Alexei Kireyev and Paolo

Dudine, for an IMF Seminar on Trade and Regional Integration in Africa, held in

Dakar, Senegal, December 6, 2004. The authors wish to thank the following for

their helpful comments: Luis de Azcarate, Bergljot Barkbu, Anupam Basu,

Ndiame Diop, Anne-Marie Gulde, Paul Heytens, Lawrence Hinkle, Chris

Hoveka, Michael Keen, Padamja Khandelwal, Hans Peter Lankes, Arnold

McIntyre, Jan Mikkelsen, Koffie Nassar, Michael Nowak, Arvind Panagariya,

Gonzalo Pastor, Catherine Pattillo, Delpin Rwegasira, Liliana Schumacher,

Arnim Schwidrowski, Chad Steinberg, and Stephen Tokarick. Vera Da Luz, Elisa

Diehl, and Suresh Gulati provided excellent research and editorial assistance.

Archana Kumar of the External Relations Department coordinated the

production of this publication.

CHAPTER

Introduction

Africa is home to some 30 regional trade arrangements (RTAs), many of which

are part of deeper regional integration schemes.

On average, each African

country belongs to four RTAs (World Bank, 2004). There has been a renewed

push in recent years for broader and deeper preferential trade arrangements in

Africa. Some of the previously defunct regional arrangements (e.g., the East

African Community) have been revived, while continental institutions—namely,

the African Economic Community (AEC), the African Union, and the New

Partnership for Africa’s Development (NEPAD)—have been launched under

the auspices of the Organization of African Unity (OAU). In addition, African

countries are preparing to negotiate FTAs with the European Union (EU) under

the Economic Partnership Agreements (EPAs). The Southern African Customs

Union (SACU) is negotiating an FTA with the United States. South Africa, the

largest African economy, has already signed an FTA with the EU.

The push for RTAs in Africa has occurred against the backdrop of increasing

regionalism worldwide and the ongoing Doha Round of multilateral trade

negotiations. The EU is poised to expand further (e.g., with Bulgaria and

Romania’s prospective accession) after admitting 10 new members from Central

and Eastern Europe in May 2004, while countries in the Americas have been

negotiating a hemisphere-wide FTA that would include all democracies in the

The RTAs discussed in this paper include both free trade agreements (FTAs) and customs unions (CUs). Many

regional integration schemes in Africa have monetary and economic union dimensions (i.e., monetary union,

common market, and economic union)—the so-called deep integration, which involves not only the removal of

traditional trade barriers (e.g., tariffs) but also the elimination of other barriers to the free movement of goods,

services, and factors and the harmonization of economic policies and regulatory regimes. This paper focuses

exclusively on the trade aspects of African regional integration schemes. The term “regionalism” is used to refer to

both multicountry and bilateral RTAs.

The South Africa–EU FTA applies de facto to all members of SACU by modifying SACU’s common external tariff

to establish preferential tariffs for imports from the EU. The modification enabled South Africa to sign the FTA

with the EU while being a member of SACU.

REGIONAL TRADE ARRANGEMENTS IN AFRICA

region. In Asia, regionalism has finally gathered momentum, with the major

countries in that region (e.g., Japan, China, India, and Korea) rigorously pursuing

preferential trade arrangements, which may eventually lead to an Asia-wide trade

bloc. On the multilateral front, the Doha Round has moved slowly. Despite the

framework agreement reached in August 2004, it will be difficult to conclude the

round by the end of 2005, as originally scheduled.

A key challenge facing Africa is to determine the priorities in its trade policy

among competing demands on the unilateral, regional, and multilateral fronts.

The preferred course of action will have to be based on both past experiences of

RTAs in Africa and elsewhere and an examination of the pros and cons of the

various options in moving forward. In this regard, this paper intends to

accomplish three tasks. First, it discusses the global trend toward regionalism, the

challenges it poses for African trade policy, and the salient features of African

RTAs (Chapter 2). The paper then goes on to analyze the effectiveness of the

arrangements in achieving their stated objectives (Chapter 3) and explore trade

policy priorities and strategies for trade promotion (Chapter 4). This is followed

by a discussion of the role of the IMF in helping African countries set these

priorities and accelerate trade growth (Chapter 5). The paper offers conclusions

in Chapter 6.