In my new book Africa and Preferential Trade (for a discount code see the end of this blog) I provide analysis on how African countries have – or have not – benefited from non-reciprocal trade arrangements with the European Union, the US, and China. I show how, with the right domestic policies, African countries can benefit from these programs. But I also caution countries against overdependence on these arrangements, which are controlled by the preference-giving countries.
According to a famous proverb, “give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.” Non-reciprocal preferential trade arrangements neither “give a man a fish” nor “teach a man how to fish.” Rather, they offer the promise of a market in which to sell one’s fish. That is, these arrangements encourage preference-receiving countries to “teach themselves how to fish” and to “go fishing on their own,” with the non-binding promise that they will have a market for the fish they are able to catch and sell. Non-reciprocal preferential trade arrangements are, thus, a form of foreign aid – aid through trade.
It is often taken for granted that preferential trade arrangements are important stimuli for African development. They are seen as a positive form of “aid”—not a handout, but rather aid that takes advantage of the strengths of the preference-receiving countries. Yet it is not always clear: (a) how preferential these arrangements actually are; (b) to what extent African countries are able to take advantage of them; and (c) whether these arrangements in fact help African countries or instead lead them to perpetual dependence on specific markets and products. Moreover, preferential trade agreements are often unpredictable, since the duration and magnitude of preferences are at the discretion of the preference-giving countries. As one reviewer wrote, “Mshomba’s cogent, accessible, and nuanced book offers persuasive answers to these questions.”
In Chapter 1, traditional trade models are used to explain the potential link between trade and development. In Chapter 2, I draw on trade theory, history, and political economy to present and analyze the evolution of trade relations between European countries and the ACP countries, from the 1960s to the early 2000s, when the establishment of Economic Partnership Agreements (EPAs) was formally initiated. Chapter 3 presents a systematic analysis of EPA negotiations for each negotiating group in Africa by examining the specific features of countries in each group. The chapter provides an in-depth discussion on why some countries have been quick to embrace EPAs while others have been ambivalent or outright against them. Chapter 4 analyzes the key features of the Generalized System of Preferences programs and other nonreciprocal trade programs, including the EU Everything But Arms (EBA) program and the U.S. African Growth and Opportunity Act (AGOA). Chapter 5 examines the extent to which preferences are actually used by African countries.
Special and preferential trade arrangements provide opportunities for developing countries to expand their export sector and, potentially, grow their economies. But they are only opportunities. Therefore, I caution that there is nothing inherent about preferential trade arrangements that guarantees substantial positive outcomes for the beneficiary countries. Moreover, these arrangements are only temporary opportunities. The utilization of these arrangements and the benefits derived from them depend on many factors, both external and internal. The magnitude of the margins of preference, the reliability of the preferences, and the rule-of-origin provisions are among the key external determinants. Internally, the domestic capacity to expand the production of exports depends on political stability, investment policies, access to credit, the quality and reliability of infrastructure, and opportunities for backward and forward linkages in production.
Paradoxically, some rules of origin have provisions that are too accommodating. Some attractive provisions can inadvertently limit production linkages in benefit-receiving countries. For example, while AGOA’s provision to allow the use of U.S. and third-country fabrics is critical to African LDC competitiveness in the U.S. market, it has caused many African countries to rely heavily on imported fabric. For example, Kenya imports 93 percent of the fabric used to produce apparel for export. Given that most producers of apparel in African countries are subsidiaries of corporations in Asia, reliance on imported fabric is a “no brainer.” It is exactly how the corporations would want it to be, to preserve their vertical integration within the corporation. As such, it is important that investment incentives are deliberate in their application to maximize foreign direct investment spillovers which can occur through, for example, growth in production of domestic inputs and an increase in demand for those inputs.
Incentives must be carefully spelled out to reduce ambiguity and avoid being taken advantage of. For example, it is not sufficient to require a minimum number of local managers, without specifying what roles constitute a managerial position. Without such specifications, every employee could be labeled a manager. Likewise, if there is a tax holiday for ten years, for example, safeguards need to be in place to prevent nomadic firms from simply coming to operate during those ten years and then moving to a different country. A safeguard could be that a foreign direct investor cannot bring in used machines from another plant, that is, machines that can easily be abandoned or discarded at no major loss after the grace period is over.
Warning against overreliance on preferential trade arrangements, I explain that these arrangements must be seen as a ‘borrowed” tool whose life span is not certain. Between 2015 and 2023, 18 African counties had been suspended from AGOA for different periods of time. As such, long-term development cannot be made based on it without discounting its future. Of course, when available, these preferential trade arrangements can be used in conjunction with other development tools to expand and diversify the export sector and, in turn, be a source of economic development. I conclude by providing recommendations for different entities—international organizations, preference-giving countries, producers in preference-receiving countries, preference-receiving countries, regional economic blocs, and the African Union.
Richard Mshomba is Professor Emeritus of Economics, La Salle University in Philadelphia, U.S.A. He is the author of Africa in the Global Economy (Lynne Rienner Publishers, 2000), Africa and the World Trade Organization (Cambridge University Press, 2009), and Economic Integration in Africa: The East African Community in Comparative Perspective (Cambridge University Press, 2017).
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SEPTEMBER 2024
$65.00 hardcover, 266 pages
Receive 20% off at
www.sup.org with code
MSHOMBA20
