Trade and Trade Policy

Transcription

1 Trade and Trade Policy A Guide for Commonwealth Parliamentarians in Sub Saharan Africa July 2010 Overseas Development Institute 111 Westminster Bridge Road London SE1 7JD, United Kingdom Tel.: +44 (0) Fax: +44 (0)

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3 A Guide for Commonwealth Parliamentarians in Sub Saharan Africa Table of contents List of tables List of figures List of boxes List of acronyms Executive summary Aims of the Guide Scope of the Guide Key points The broad picture for parliamentarians Why and what to trade Influencing trade domestically Influencing trade multilaterally Influencing trade regionally v v v vii ix ix x xi xi xi xii xii xii Chapter 1. Introduction Who, what, why and how The topics covered Why trade? What policies foster development friendly trade? The current multilateral and regional negotiating agendas Where do parliamentarians fit in? 3 Points to remember 4 Chapter 2. The basics: why countries trade and what they have gained Why and what to trade Accounting for the differences Implications for policymakers Trade performance The global picture The regional picture Lessons from the Global Financial Crisis 12 Points to remember 14 Chapter 3. How can governments influence trade and how does this affect development? How governments can influence the impact of trade Levels of influence The domestic sphere The different perspective of producers and consumers 18 iii

4 Trade and Trade Policy The differing impacts of domestic and international trade The international sphere National trade and foreign exchange policy Trade policies that must be negotiated Putting it all together 22 Points to remember 23 Chapter 4. Multilateral trade negotiations Why join the WTO? The Doha Round Special and Differential Treatment Modulation of commitments Trade preferences Market access Ancillary support Negotiating services 33 Points to remember 34 Chapter 5. Regional trading arrangements The objectives and potential effects of RTAs Recent RTAs and current negotiations 38 Points to remember 41 Chapter 6. The role of parliament Applying broad principles to specific tasks Trade policy is political Linking trade to development Creating a bridge to stakeholders Financing trade policy change Shifting taxes Aid for Trade 46 Points to remember 48 References and further reading 49 Glossary 54 Appendix 1. Groups in the WTO 57 Appendix 2. Supplementary regional tables 61 iv

5 A Guide for Commonwealth Parliamentarians in Sub Saharan Africa List of tables Table 1. Share of world merchandise trade by region and selected economy, various years (%) 9 Table 2. SSA countries membership of WTO/regional groups 29 Table 3. Estimated adjustment costs by region (millions of Euros) 48 List of figures Figure 1. GDP per head (constant 2000 US$) 6 Figure 2. Trade in goods and services as a share of GDP 6 Figure 3. Composition of merchandise exports in developing regions, averages 9 Figure 4. Terms of trade indices of selected developing country groups (2000=100) 10 Figure 5. Agricultural exports by value 10 Figure 6. Number of products accounting for more than 75% of exports 11 Figure 7. Top African export destinations 12 Figure 8. Potential GDP effects of the GFC as a result of trade shocks (% of GDP) 13 Figure 9. Trade policy and poverty: causal connections 17 Figure 10. Intra regional exports as a proportion of total exports, Figure 11. Africa s overlapping RTA memberships/epa initialling states 40 List of boxes Box 1. What is trade policy? 1 Box 2. The Asian NICs as many questions as answers 6 Box 3. Some insights from theory 7 Box 4. A loss of the old certainties 8 Box 5. The concept of rent 8 Box 6. The effect of the GFC on migrants 13 Box 7. Disentangling the impact of trade 16 Box 8. The Commonwealth and small states 19 Box 9. Tariffs: types and challenges 20 Box 10. Are small developing country policies WTO compliant? 22 Box 11. How poor countries are affected by rich countries actions and policies 22 Box 12. Countries which are not WTO members 24 Box 13. The WTO: a free trade organisation? 25 Box 14. Policy space current usage and origins 25 Box 15. The Trade Policy Review Mechanism 25 Box 16. The Hub and Spokes project 26 v

6 Trade and Trade Policy Box 17. The Commonwealth and the WTO 26 Box 18. The devil in the Doha detail 27 Box 19. Will Africa gain or lose under Doha? 31 Box 20. The shadow of intellectual property rules 31 Box 21. The GATS different forms of services trade 34 Box 22. The WTO and EPAs 36 Box 23. Trade negotiation or commercial diplomacy? 37 Box 24. The hierarchy of regional trade agreements 38 Box 25. Establishing priorities 43 Box 26. Operationalising needs 44 vi

7 A Guide for Commonwealth Parliamentarians in Sub Saharan Africa List of acronyms ACP AfT AGOA CAP CEMAC CEPII CET CFA CHOGM CIPR CMA COMESA CPA CU DDR DFQF EAC ECCAS EC EPA EU FTA GATS GATT GDP GFC GSP IEPA IFPRI IGAD IOC ITC LDC MFN NAFTA NAMA NFIDC NIC OECD RAM REC RTA RoO SACU SADC SDT SSA SVE TRIPS UEMOA African, Caribbean and Pacific Aid for Trade African Growth and Opportunity Act (the EU s) Common Agricultural Policy Economic Community of Central African States Centre d'etudes Prospectives et d'informations Internationales Common External Tariff Communauté Financière Africaine Commonwealth Heads of Government Meeting Commission on Intellectual Property Rights Common Monetary Area Common Market for Eastern and Southern Africa Cotonou Partnership Agreement Customs Union Doha Development Round Duty Free, Quota Free (market access) East African Community Economic Community of Central African States European Commission Economic Partnership Agreement European Union Free Trade Agreement General Agreement on Trade in Services General Agreement on Tariffs and Trade Gross Domestic Product Global Financial Crisis Generalised System of Preferences Interim Economic Partnership Agreement International Food Policy Research Institute Intergovernmental Authority on Development Indian Ocean Commission International Trade Centre Least Developed Country Most Favoured Nation North Atlantic Free Trade Area Non Agricultural Market Access Net Food Importing Developing Country Newly Industrialising Country Organisation for Economic Cooperation and Development Recently Acceding Member (of the WTO) Regional Economic Community Regional Trade Agreement Rules of Origin Southern Africa Customs Union Southern African Development Community Special and Differential Treatment Sub Saharan Africa Small and Vulnerable Economy Trade Related Aspects Of Intellectual Property Rights Union Economique et Monétaire Ouest Africaine vii

8 Trade and Trade Policy UMA UNCTAD US(A) WAMZ WTO Union du Maghreb Arabe United Nations Conference on Trade and Development United States (of America) West African Monetary Zone World Trade Organization viii

9 A Guide for Commonwealth Parliamentarians in Sub Saharan Africa Executive summary This Guide is aimed primarily at parliamentarians, but also at all those who are affected by trade policy and who attempt to influence it. It shows how trade affects an economy and how this impact can be influenced to some extent by a range of government policies, of which formal trade policy is only one. Trade needs to be mainstreamed in the full range of these policies to exert maximum impact. Aims of the Guide The Guide aims to help parliamentarians and others place in its broader context any particular feature of trade or negotiations with which they are confronted. This is an essential part of the any scrutiny, approval, or monitoring process that parliament must undertake since it helps to identify the right questions that legislators must ask of the executive, and the information that they can pass on to their constituents. The details of any particular event coming before them (the impact of the Global Financial Crisis (GFC), for example, or the relative merits of a new trade agreement) will usually be voluminous, and legislators will need briefing on the specifics. Understanding the economic, social and political implications of those details, however, requires a broader knowledge of the role that trade can play in development, the ways in which it affects socio economic groups differentially, and the requirements for a dynamic trade profile that can support long term growth. This Guide helps to supply this broader knowledge. It includes sufficient reference to current trade issues affecting sub Saharan African (SSA) to help readers apply the broad background to the practical concerns that face them. But, of course, it cannot be a detailed cookbook in relation to the items on the current agenda: not only would it become out of date very quickly, but in many cases the details are very country and issue specific. The impact of the Interim Economic Partnership Agreements (IEPAs) signed by some countries, for example, will be very country specific and their implications for other regional integration schemes will partly depend upon how signatories implement them in practice. To help bridge the gap between the underlying principles (covered in this Guide) and the details of any particular question facing a Commonwealth parliament, the final chapter suggests ways in which the former can be applied to the latter. A point emphasised throughout the Guide is that decisions on trade are essentially political ones and, hence, that parliaments should be at the centre of scrutiny, approval and monitoring. Trade and trade policy create winners and losers at least in a relative sense (some groups gain more/lose less than others); changes alter that pattern of relative gains and losses and so favour some groups over others. Legislators are central not only to decision making over who gains but also on any remedial measures required to assist those who lose. Trade forms an integral part of development strategy in developing countries and, hence, decisions on the one also affect the other. This linkage may not always be apparent in the technical details presented to parliament on a particular trade agreement or global event, but this Guide aims to help legislators tease out from the technical detail the development implications. It is the private sector that trades governments create the framework of rules, laws and taxes within which this takes place. For a change to the framework to have the desired impact in their behaviour, producers, traders and consumers must know what has changed. Often this is far from clear in the minutiae of technical details in a trade agreement. As the central link between the executive and the population, ix

10 Trade and Trade Policy parliamentarians have a key role to play, which they can perform only if they themselves understand what has changed. Scope of the Guide The Guide follows a logical sequence from underlying questions to the role of parliamentarians in framing a trade policy that supports their country s development strategy. The chapters deal in turn with the questions: why, and what to trade; what lessons can be learned from the experience of the fastest growing states by those that have done less well over past decades; how can governments influence the impact of trade and put their country on a strategic track towards a more dynamic trade pattern (given that it is the private sector that does most trading and that many key forces affecting countries and especially small, poor ones are outside their direct control); how can these insights be brought to bear in actual trade policy negotiations, both multilateral and regional; what special role do parliamentarians have to play in this process? The core of the Guide has been written to apply to any developing country region because the fundamentals are not regionally specific. This is so that it can serve to inform a series of workshops planned by the Commonwealth Parliamentary Association. But each one also contains specific information relevant to one of the Commonwealth regions, and this one focuses particularly on SSA. Although governments have only a few instruments that act directly upon trade flows, they have a wide range of policies (mostly outside the portfolio of the trade ministry) that can influence the short and long term impact of trade on development. Many of these are domestic and so trade policy needs to be mainstreamed if the desirable effects are to be reinforced and negative ones minimised. In the international sphere, most of the main factors affecting the conditions under which poor and vulnerable countries trade are either outside governments control or require negotiation. This is why developing countries are negotiating trade in many arenas. The Guide focuses on the World Trade Organization (WTO), which is the most fundamental. It identifies the arguments for and against WTO membership and the concomitant requirement to engage in the Doha Development Round (DDR). This includes the trade off between a loss of policy space for one s own country against the gains of having it removed from powerful trade partners, and the relative forms of influence of developed and developing countries. The forms of Special and Differential Treatment (SDT) in the current WTO rule book are explained as are the reasons why they are an eroding asset, parts of which will disappear if the DDR is not completed on appropriate terms. Most developing countries also belong to one or more Regional Trade Agreement (RTA), and this is particularly marked in the case of SSA states. RTAs serve foreign policy as well as trade objectives, which can be in harmony provided that the latter are realistic. Sources of tension can arise, however, because as with all liberalisation there are winners and losers. Forms such as Free Trade Agreements (FTAs) require less prior agreement on a common tariff regime than do Customs Unions (CUs), but this can allow the underlying tensions to be overlooked, only to surface as implementation progresses. New tensions have been created in recent negotiations with the European Union (EU). In addition to adapting to the changing external trade environment and the erosion of preferences in traditional x

11 A Guide for Commonwealth Parliamentarians in Sub Saharan Africa markets such as the EU, a primary concern for SSA is to ensure that trade negotiations in the 21st century serve to reinforce rather than undermine regional integration processes. Parliament is central to trade policy because the decisions are inherently political and require close consultation with a wide cross section of the population if they are to be acted upon and implemented effectively. Since trade policy is an instrument for advancing a country s development it must reflect this strategy. Perhaps the most important single factor determining whether trade policy is pro developmental is if a country has clear, realistic and prioritised objectives for the role of trade in its development. At the same time consultation can be controversial, since the best sources of information (and those most interested in change) also have an interest in the outcome of any decisions. Key points The broad picture for parliamentarians Trade policy involves political decisions. Trade produces winners and losers in a country, so policies that influence the impact of trade alter this pattern. The Guide seeks to help parliamentarians take political decisions that are informed by a better understanding of the economic implications of the available options. Because politics and communication are at the heart of trade policy so too are parliamentarians. Their input comes at every stage. There is no shortcut for parliamentarians: since there are no universal certainties they must assess each episode that comes before them on a case by case basis. Why and what to trade Countries trade to obtain more goods and services than could be obtained without trade. Although exports are usually the centre of discussion (because exporting is hard), it is in fact imports that are the raison d être for trade. International trade is important for countries that are small (in the economic not the geographic sense), for land locked countries, and for the less developed countries of SSA, which can produce only a narrow range of goods and services within their borders. The impact of trade is changing fast (as the global economy changes) but it is hard to isolate this impact from other economic changes. Moreover, the impact of any policy will depend crucially on its details (which may be very numerous). Lessons can be drawn from the experience of the most successful countries, but they must be carefully applied to the specific circumstances of each country. What worked at one period of time for one country may not work (even if it is a practical proposition) for another at a different period. Many old arguments are too generalised to be of help (such as those for and against government intervention, or that manufactured exports are better than primary products). The task is to identify practical ways in which firms can maximise the potential gains from trade and how governments can help them. The revenue from increased exports to Asia must be ploughed back to develop new export lines if this helpful diversification of Africa s markets is also to support diversification of its exports. xi

12 Trade and Trade Policy Influencing trade domestically Trade policy should reflect national economic priorities but unless a goal can be achieved wholly through autonomous actions it has to be translated into a negotiable point. Mainstreaming trade policy is vital: an effective response requires civil servants and parliamentarians with portfolio responsibility for trade to understand the broader agenda and to work very closely with colleagues in agriculture, health, education, finance and elsewhere. States in SSA have not been immune to the effects of the GFC. High export concentration and dependence on a limited range of commodity exports means many states are vulnerable to sudden price fluctuations and therefore volatility in export earnings. Influencing trade multilaterally The caricature sometimes made of the WTO as a free trade organisation can be misleading; it is as much about agreeing, monitoring and adjudicating on the rules within which global trade takes place. WTO membership involves a loss of policy space but this is also a reason to join since the rule book applies to the rich and powerful as well as to the poor and weak. By the same token, agreeing new rules in the DDR may be attractive to a country if the constraints on its actions are an acceptable and appropriate price to pay for those applying to others. But checking out the potential DDR effects is difficult: as the illustrative example in Chapter 4 shows, in the early stages what has been agreed is insufficiently detailed, and in the later stages there is no time. SDT in the current WTO rule book is an eroding asset, so not agreeing a DDR may also involve costs; most existing SDT will disappear altogether in the coming years if there are no new rules with associated new SDT. Services trade negotiations are different: as illustrated in Chapter 4, the powers available to governments to influence the pattern of trade are not the same as those for goods. In some cases there is little about which to negotiate as governments cannot control trade and in others any concession can easily be circumvented by other controls that have not been liberalised. Influencing trade regionally Some countries have signed up to mutually incompatible regional commitments. This may be because trade negotiations are being used positively as an extension to a country s broader foreign policy. But commitments that far outstrip any realistic assessment of what a country will actually agree to do, or are mutually incompatible, may eventually undermine regional integration. The impact of RTA liberalisation depends on the relative scale of two, opposing effects. Trade creation occurs if the more efficient producers in the region expand production to the advantage of consumers and the detriment of less competitive producers. Trade diversion occurs if less competitive (but tariff free) regional goods replace more competitive goods from outside the region. The physical and institutional problems of trade must also be tackled through improved infrastructure to complement any easing of border controls that occurs as a result of RTAs. RTAs with more developed countries must be designed to reinforce regional integration by anchoring policy commitments but the effect of the IEPAs may be in the opposite direction. xii

13 A Guide for Commonwealth Parliamentarians in Sub Saharan Africa Tariff liberalisation always has distributional impacts that parliamentarians are best placed to consider. Either tax revenue will go down (with the possibility of spending cuts) or other sources of revenue (including other taxes) will need to increase and the incidence of this new tax regime will be different from that of the old. Parliamentarians need to push for Aid for Trade (AfT) commitments to be met: so far provision has been underwhelming. In relation to Economic Partnership Agreements (EPAs), monitoring AfT allocations for SSA by the European Commission (EC) as well as disbursement, is particularly important. xiii

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15 A Guide for Commonwealth Parliamentarians in Sub Saharan Africa Chapter 1. Introduction This chapter explains the purpose and format of the Guide, which is aimed primarily at parliamentarians but also at all those who are affected by trade policy and who attempt to influence it. The Guide shows how trade affects an economy and how this impact can be influenced to some extent by a range of government policies, of which formal trade policy is only one. Trade needs to be mainstreamed in the full range of these policies to exert maximum impact. 1.1 Who, what, why and how Who are the intended users of this Guide? What information does it offer? Why do the users need this information? How is the Guide set out? This sub section deals with these four questions in turn. The primary target audience for the Guide is legislators, but it will also be of interest to their support staff and to those who shape public opinion, civil society activists and the private sector actors with whom they interact. The Guide sets out in a rigorous but non technical fashion evidence about the role of trade in development, the (very different) trade experiences of countries and of groups within them over recent decades, the reasons for these different experiences, the types of trade policy (Box 1) that countries can use to influence the impact of trade on their development, and the reasons why such policies tend to produce both winners and losers. Box 1. What is trade policy? The answer to this question used to be simple: it comprised a relatively small group of laws and taxes primarily applying to goods as they crossed into a country over its international border (tariffs, quotas, bans on undesirable goods, etc.). Being limited and specific, these regulations were appropriately handled exclusively by a dedicated ministry. Nowadays this core trade policy forms a small part of a much wider range of trade related policies on which governments have to take decisions (and which parliaments must scrutinise). They extend into the portfolios of the finance, sectoral, transport and communications ministries and, increasingly, education and health as well. Calls to mainstream trade are a reflection of this. The causes of this trend include the world s success over the last half century in removing many of the most substantial core obstacles to exporters, the rapid expansion in the range and volume of trade in services (for which most regulation falls to ministries traditionally unconcerned with trade) and the trend to traceability of goods (particularly in relation to health, environment and social implications). As a result of this complexity myths abound. Legislators may find themselves asking questions about international trade rules such as Can we insist that imports be labelled in a language understood by consumers? (the answer is yes so long as the requirements are reasonable and apply equally to domestic producers); Can we insist that a foreign market accept goods that meet our own health standards? (the answer is no if the standards in the export market are based on science). For a trader the barriers presented by the traditional trade instruments of tariffs and quotas are often a minor factor in determining whether or not trade occurs. Goods must meet increasingly stringent government safety and health standards and, often, even more demanding standards imposed by the private sector on safety, presentation, quality and traceability; service providers must meet a whole range of domestic rules. These are barriers to trade in the sense that developing country exporters must overcome them but as long as they apply equally to domestic producers in the countries imposing them they are not necessarily discriminatory. In some cases, the WTO has ruled that restrictions notionally applying equally to domestic and imported goods are actually discriminatory, but even when they are not the competitiveness of poor country exports may be put at risk if the cost of compliance is beyond the reach of producers and public support is inadequate. At the least, it may mean exporting to lower priced segments of the market. Helping exporters meet these standards is a major task for government: to challenge those that are discriminatory and to help meet the costs of complying with those that are not. This last point underscores the importance of this information for parliamentarians. The choice of trade policy is a political decision. Economics and law have a role to play: economic analysis can show the likely effects of alternative policies, and new policy must be translated into legal texts for it to have an impact. But, in the final analysis, choosing between alternatives that affect some socioeconomic groups more favourably than others is a political decision that should be taken by the 1

16 Trade and Trade Policy executive and legislative branches of government. The Guide seeks to help parliamentarians to take informed decisions. To achieve this, the approach of the Guide is to cut a path through three tangled thickets that trap the unwary. 1. The global economy is evolving very fast and so is trade theory in order to explain the new patterns; there is solid evidence to guide policymakers on many of the issues that come before them, but there are also areas where decision makers will need to exercise judgement, partly because different economies respond to trade in different ways. 2. In trade policy the devil is in the detail : an understanding of broad concepts and trends is very helpful in recognising the potential effects of any new policy, but the extent to which any treaty or item of legislation actually realises this potential will depend on its detailed provisions (which may run into hundreds of pages). 3. It is hard to isolate the impact of trade and trade policy from other economic factors: whilst trade permeates much of the economy, it does so in many, often indirect, ways that are hard to trace accurately when many other things are happening at the same time, each of which may also contribute to the net effect on the economy. The Guide sets out in the main text a broad brush review of the issues with which parliamentarians must grapple. A set of text boxes provide more detail and nuance on the topics covered in the main text. There is also a glossary of technical terms with a hypertext link (blue and underlined) from the first mention of the key word. This approach allows statements in the main text, which necessarily are sometimes presented in bald terms, to be checked out whenever needed. This is particularly necessary because every new trade policy question confronting parliamentarians is unique (in terms of the options available and their potential effects). Because of this, a Guide cannot be a cookbook, with a precise set of instructions guaranteeing success every time. Instead it is a guide to sensitise decision makers to the key features to look out for when dealing with any new question, the broad potential effects of the options available, the pitfalls that may stop positive effects being achieved, the defences that can mitigate or avoid negative effects and the details that will determine the final impact. The additional materials (in the text boxes, glossary and references) are the key to applying the broad lessons described in the main text to the specifics of a particular issue facing a given country at a precise point in time. 1.2 The topics covered Why trade? The Guide follows a logical sequence from underlying questions to the role of parliamentarians in framing a trade policy that supports their country s development strategy. The most fundamental question is: why do countries trade goods and services? More precisely, the question is: why do countries engage in international trade? This added precision is important because there is a great deal of domestic trade within countries. The reasons for international and domestic trade are similar the main differences relate to the scale of the impact and the governance of trade. Countries that produce a wide variety of goods and services within their borders may have relatively less international trade than those that do not, but both groups face the same questions of why and what to trade. Countries have had markedly different experiences of trade and growth, especially in recent decades. What lessons can be drawn from the most successful countries for the others? The answer 2

17 A Guide for Commonwealth Parliamentarians in Sub Saharan Africa is that whilst there are lessons to be learned, it is clear that they must be carefully applied to the specific circumstances of each country. What worked at one period of time for one country may not work (even if it is a practical proposition) for another at a different period. Unfortunately, there is no shortcut for parliamentarians seeking the best solution for their country: national and regional specificities are critical even though there are some common features in many small, poor or vulnerable states (as has been made clear, for example, by the GFC) What policies foster development friendly trade? The question why trade is fundamental since it informs the objective of trade policy. Clearly, the goal of trade policy should be to support a country s development when combined with all the other relevant policies but what does this mean in the specific circumstances of any given country? Parliamentarians need to take a view on the sorts of trade that will best promote their country s development before assessing the relative merits of alternative policies in fostering this type of trade. They then need guidelines on the potential effects of the main trade policy choices that face their government in order to spot those that appear most conducive to fostering the type of development that they seek. The seemingly simple term trade policy covers a bewildering and growing range of rules and regulations. Long gone are the days when tariffs and quotas were the most important policies affecting one country s imports and, hence, its partners exports. Known as border measures, since they are applied to imports at a country s international border (see Chapter 3), they are joined by a host of behind the border measures, such as rules on labelling, on product standards, on investment support and many more. The growing attention given to behind the border measures is evident from the desire of some countries to extend international trade rules from what can be labelled core trade policy into new areas. Often this takes negotiations into areas of policy that fall well outside the portfolio of a country s trade ministry or parliamentary committee. An effective response requires civil servants and parliamentarians with portfolio responsibility for trade to understand the broader agenda and to work very closely with colleagues in agriculture, health, education, finance and elsewhere The current multilateral and regional negotiating agendas The Guide identifies these core and newer trade related policies by describing the goals and current agendas of two sets of trade negotiations. The first are those of the multilateral negotiations being held under the auspices of the WTO and, especially, the DDR, which has absorbed much developing country negotiation capacity since it was launched in The second area of particular attention is on the South South and North South regional and bilateral trade agreements that are already agreed or being negotiated by many countries. A first step is to understand the potential effects of such agreements; a second is to focus on the detailed agendas in order to assess the extent to which these are likely to be achieved Where do parliamentarians fit in? Finally, the Guide deals with the bottom line question: what role can parliamentarians play in guiding trade related policies in the direction most likely to optimise the positive impact of trade on development? This brings us back to the initial point that trade policy reflects a political judgment about the favoured trajectory for a country and the balance to be struck between the interests of some socio economic groups over others. The information in this Guide does not (and should not) override these political decisions. But it can help to ensure that they are well informed political decisions: that the policies selected are those most likely to achieve parliamentarians goals rather than those that may sound good and appear to tick all the right boxes but which, the weight of evidence suggests, are more likely to lead in a completely different direction. 3

18 Trade and Trade Policy Points to remember Trade policy involves political decisions. Trade produces winners and losers in a country, so policies that influence the impact of trade alter this pattern. The Guide seeks to help parliamentarians take political decisions that are informed by a better understanding of the economic implications of the available options. The impact of trade is changing fast (as the global economy changes) but it is hard to isolate this impact from other economic changes. Moreover, the impact of any policy will depend crucially on its details (which may be very numerous). International trade is important for countries that are small (in the economic not the geographic sense), for land locked countries, and for the less developed countries of SSA, which can produce only a narrow range of goods and services within their borders. Lessons can be drawn from the experience of the most successful countries but they must be carefully applied to the specific circumstances of each country. What worked at one period of time for one country may not work (even if it is a practical proposition) for another at a different period. Trade negotiations range well outside narrowly defined trade policy. An effective response requires civil servants and parliamentarians with portfolio responsibility for trade to understand the broader agenda and to work very closely with colleagues in agriculture, health, education, finance and elsewhere. 4

19 A Guide for Commonwealth Parliamentarians in Sub Saharan Africa Chapter 2. The basics: why countries trade and what they have gained This chapter provides background information to help inform the detailed decisions that governments must take to enhance their countries gains from trade. It explains why countries trade, describes the sharply differing experiences of countries and regions over recent decades and how this partly reflects what countries trade rather than how much, and how rather than whether they regulate the market. 2.1 Why and what to trade Why trade? The answer is the same for countries as for individuals: to obtain more goods and services than could be obtained without trade. Obviously, if a country needs goods and services that cannot be produced domestically (e.g. fuel in a non oil producing state) it must import it and obtain the required foreign exchange through exports. But even if it is technically possible for an item to be produced locally, it may still be sensible to import it if less local labour, capital and natural resources are required to generate the foreign exchange needed to pay for imports. Although this is self evident, it is often overlooked in discussion that emphasises the importance of exports when it is in fact imports that are the raison d être for trade. The focus of discussion is understandable since exporting, which is hard to do in a dynamic fashion that helps a country to move up the value chain, determines (together with investment, remittances and aid) how much a country can import and there are other reasons for exporting besides the immediate earning of foreign exchange. 1 But it is easy to come up with the wrong answers to trade policy questions if one forgets that the primary reason for trading is to acquire imports. Understanding the fundamentals is important. It is clear that there is no hard, direct link between trade and development. Look at Figures 1 and 2. The first presents an unhappily familiar picture: it shows the different experiences since 1960 of three countries, each of which can stand as a representative for several others. Comparisons between countries over lengthy time periods face major statistical problems, and so the data in Figure 1 provide only a very broad guide. None the less, the pattern is one that is clearly recognisable. In 1960 South Korea had a higher gross domestic product (GDP) per head than did Ghana, but only just over four times as high; Argentina had a significantly higher GDP per head than either of them. What a different picture by 2008! South Korea s GDP per head began to exceed Argentina s in the mid 1980s and has continued to soar, so that by 2008 it was 47 times as high as Ghana s. Argentina has trended gently upwards (with a sharper increase from 2002). But Ghana has merely marked time: GDP per head has remained flat for almost five decades. Figure 2 illustrates that there is no direct link between this differential GDP performance and the openness of each of the countries to trade. South Korea s imports and exports do, indeed, represent a relatively high and growing proportion of GDP, but so do Ghana s. What is critical is not how much a country trades (and especially not the relative scale of trade, which partly reflects a country s size all other things being equal big countries can produce more goods domestically than can small ones); it is what a country trades. As globalisation has accelerated in recent years, driven by technological progress, some countries have grown much faster than others, and the quality of their trade has played a part. 1 These include importantly upgrading production through learning by doing and reaching economies of scale that make viable production for which the domestic market alone is too small to absorb all the output of efficient production units which may have a minimum size that produces more than the consumers in the home country can absorb. 5

20 Trade and Trade Policy Figure 1. GDP per head (constant 2000 US$) Constant 2000 US$ 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, Argentina Ghana South Korea Source: Calculated from data obtained from World Development Indicators online. Figure 2. Trade in goods and services as a share of GDP Share of GDP (%) Argentina imports Ghana imports South Korea imports Argentina exports Ghana exports South Korea exports Source: World Development Indicators online Accounting for the differences What accounts for the difference in growth? How should parliamentarians use their legislative power to shift their country onto a higher trajectory? There are no simple answers. This is partly because much depends on the characteristics each country s economy, its natural and human resources, the geographical and policy environment for trade. Learning the lessons from the success of, say, the Newly Industrialised Countries (NICs) must also take account of the fact that what was possible for those countries at that time may no longer be a pathway to success (Box 2). Box 2. The Asian NICs as many questions as answers Blanket references to the modern export led growth successes of the Asian NICs mask remarkable differences in policy among them from Hong Kong s laissez faire environment, to Singapore s forced domestic saving and encouragement of foreign direct investment, to South Korea s government backed conglomerates (see Young, 1991). Although there are some commonalities among the first tier NICs (Hong Kong, South Korea, Singapore, Taiwan), there was also a significant degree of heterogeneity. This is also characteristic of the second tier NICs (Thailand, Malaysia, Indonesia), in some of which the pursuit of an export oriented growth strategy has in fact closely resembled the previous importsubstitution strategy because of the degree of state intervention involved. Despite this, there is broad agreement that the transition from agrarian societies to NICs has been fast. South Korea moved from being an imitator of foreign technologies to an innovator within just three decades. 6

21 A Guide for Commonwealth Parliamentarians in Sub Saharan Africa Trade theory can provide some help and there has been a lively debate in recent decades (Box 3). This has been stimulated in part by the need to account for substantial changes in the pattern of trade. The changes have been geographical, in particular the rise of the NICs, mainly but not exclusively in Asia, and more recently China. They have also been sectoral, with the relative growth of trade within rather than between sectors. And they have been institutional, with transnational corporations now accounting on some estimates for two thirds of world trade, half as intrafirm trade and half within global supply chains through outsourcing and inter firm trade (UNCTAD, 2008a) Implications for policymakers Unfortunately for parliamentarians, the analysis of new trade theory does not extend to offering policy prescriptions for trade, finance, or any other area of government policy. But a new lease of life has been given to the old arguments over Box 3. Some insights from theory The sharp shifts in patterns of global trade since the 1980s have been accompanied by an equally rapid evolution of what has been called new trade theory. 2 This emphasises as explanatory reasons for growth differentials (across countries/regions and time) certain variables that traditional theories had simply played down or taken as a given (such as geographical location and the free flow of knowledge and technology). The experiences of the NICs, and more recently China, with tradeinduced growth and the pursuit of an export oriented, as opposed to import substituting, strategy both supported and undermined traditional theories of trade induced growth as well as the associated policy prescriptions. There is a broad consensus on the importance in both determining and sustaining growth of fundamentals such as the role of human capital, learning and processes of technological upgrading. These may create a self reinforcing dynamic. Hence, sustaining dynamic trade induced growth requires the development of technological capabilities and maximising potential knowledge spillovers from lead firms to others (Lall, 1993 and 2000). The importance of geography and the location of firms (and labour) are increasingly recognised. The clustering and agglomeration of some activities for export and development of linkages backwards and forwards to a particular firm s suppliers and industrial consumers may serve to increase competitiveness. The ways in which firms access export markets and interact within the value chains in which they trade may also determine their ability to acquire information about new skills and technologies. infant industries. During the 1980s there was a tendency for development issues to be seen in black and white, market versus state terms. During the 1990s the approach softened, with a greater recognition that there are market as well as government failures. The case for giving infant industries special support now goes beyond the traditional Structuralist case that the terms of trade between primary products and manufactures will tend to deteriorate over time (so that an increasing volume of, say, coffee needs to be exported to pay for one imported lorry). The new case is based on a recognition that accessing new export markets may involve substantial costs, and that firms may need government assistance (for example to acquire and learn new methods of production) to do so and produce competitively. In this way new trade theory can be used to support a more active government role to assist infant industries than would result from the hands off, neutral stance recommended by more liberal trade theory (encapsulated in the Washington Consensus ) in order to move the economy towards a more dynamic trajectory. Despite giving new support to government intervention, theory does not answer the key practical policy question: how to do so in a way that maintains a healthy enabling environment, allowing existing firms to grow and attracting investment whilst also encouraging the economy in a more strategic direction (Box 4). Where it does help is in identifying the numerous barriers to entry that face new entrants to new markets and, in this way, indicating a wider range of policy tools than just tariffs to promote export oriented industries. Since there are no universal lessons, the task is to identify practical ways in which firms can maximise the potential gains from trade (this chapter) and how governments can help them (Chapter 3). Global markets change fast, so firms need to be able to shift into new products/ markets/niches or risk being left behind. To do this consistently and well requires, in turn, that a 2 Part of a branch of developments in economic theory which includes new growth theory, new economic geography, and new institutionalism. 7

22 Trade and Trade Policy country s economic actors be able to make sufficient profit from their activities today to invest in establishing new ones tomorrow, or that the country is able to attract inward investment (Box 5). Countries in which most firms are able merely to survive from their trading (earning just sufficient to cover their production costs) risk, if not absolute decline, then falling into the trap of immiserising growth (in which an increasing volume of resources is absorbed in production without shifting the country onto a higher trajectory where poverty can be sharply reduced). Box 4. A loss of the old certainties One effect of the new controversies has been to reveal as misleading some of the old certainties. This applies both to the types of policy most likely to succeed and to the types of product most likely to support growth. Claims that a liberal trade regime will tend to support sustained growth by promoting efficiency or, conversely, that governments should intervene to support infant industries are both over generalisations that obscure the need to frame policies to the circumstances of a particular state at a given time. The idea that exporting some broad types of goods (such as manufactures and processed products) will provide a sounder foundation for growth than others (such as agricultural or mineral primary products) no longer necessarily applies; for example some manufactures (such as T shirts) face more severely competitive markets than do some unprocessed agricultural goods (such as roses) at the present time; quite apart from the fact that the old idea overlooks the vital importance of services (both as an output and as an input into goods), it also misses the importance of creating a unique item that fits a market niche (through, for example, hi tech, design, or location). Because circumstances change over time the apparent lessons drawn from the success of the NICs must be tempered by the realisation that their growth, which included strong manufactured exports and technological upgrading, was possible at that time, in that region, within those particular value chains, accessing particular markets and that it may not be completely replicable. Box 5. The concept of rent One way to maximise the potential gains from trade is to earn what is known as a rent : the surplus element in a price that exceeds the minimum needed to bring about production. There are many ways to do this. Using technology is one: if a firm invents a new, cheaper way of producing an item it can sell at just below the price of its competitors but still make a larger profit. Another is branding: T shirts with designer labels can sell for much more than those without that are otherwise virtually identical. A third is organisation: in the 1960s and 1970s Japan s just in time production methods allowed its car firms to produce at lower cost than their European and United States (US) rivals. And a source that has been common in many Commonwealth countries is trade policy rent derived from the trade preferences offered to them in their traditional markets. A common feature of all rents is that they are transitory unless reinforced: eventually other firms catch up, a brand loses its shine, and existing preferences are eroded. They offer firms a temporary surplus that needs to be invested in the next wave of rents if the virtuous circle is to be sustained. This is of particular relevance to those Commonwealth states which have traditionally received trade policy rents but are seeing them eroded a point to which we revert in the chapters on multilateral and regional liberalisation. 2.2 Trade performance The global picture Whatever the reason, it is clear from Figure 1 that trade experience has varied widely among regions. This picture is reinforced by Table 1, which provides for a number of years since 1948 figures on the share in world trade of selected countries and regions. The shares of Latin America and Africa have gone downwards (though with a rise in the most recent period), as has that of the USA (though for much of the earlier period this can partly be explained as the other side of the statistical coin to the growth of other traders, notably Europe as it emerged from World War II). India s share has described a U shape, with falls in the earlier period (as a result of a deliberate economic policy to favour production for the domestic market) partly offset by an upswing in the later period. Japan s experience has been the opposite, with a stalling in the sharp growth of three decades from the 1950s as the East Asian NICs and, more recently, China took on the mantle of the fastest growing traders. 8

23 A Guide for Commonwealth Parliamentarians in Sub Saharan Africa Table 1. Share of world merchandise trade by region and selected economy, various years (%) World United States South and Central America Brazil Europe Africa Asia China Japan India Six East Asian traders Source: Kaplinsky and Messner, Part of the explanation for the different levels of developing country performance is hinted at in Figure 3. This shows the share in the total goods exports of four regions of three major product groups: fuels, non fuel primary commodities, and manufactures. The share of manufactures in exports is highest for South and East Asia and lowest for SSA, with Latin America and South Asia in the middle. Figure 3. Composition of merchandise exports in developing regions, averages Source: UNCTAD, 2008b. Given the important role of manufacturing upgrading in East Asia s economic success it is tempting to read into the figure both the explanation for the differential trade performance of the regions and the prescription for reversing the adverse trends: Africa should export more manufactures. But what is cause and what is effect? East Asia has few natural resources but strong human resources, so its export composition is not a surprise. And will what worked in the 1970s and 1980s work now? The NICs have long since moved on from low value manufacturing and, as the rest of the developing world has crowded in, any rents have been squeezed out. Parliamentarians, in dealing with these tricky questions, need to dig a bit deeper. Figure 4 shows that in the period since 1995 exporters of labour intensive manufactures experienced a more unfavourable movement in their terms of trade than any of the other four groups covered. The terms of trade for agricultural exporters did not improve significantly, but neither did they deteriorate. Countries endowed with oil and minerals have seen the largest rise in their terms of trade. But they also risk what has been called the resource curse a term often used in conjunction 9

24 Trade and Trade Policy with or interchangeably with 'Dutch disease'. This occurs when the net effect of a booming (often mineral) export that is not well managed (see Chapter 3) is to reduce the competitiveness of other productive activities, which in turn hinders export diversification efforts. Figure 4. Terms of trade indices of selected developing country groups (2000=100) Source: UNCTAD, 2008c. Figure 5 also provides food for thought: whilst non fuel primary products may account for a high proportion of SSA s exports, it can hardly be said that the performance of agriculture has been good. Despite the relative importance of manufactures in their exports, the agricultural exports of East Asia and Latin America have far exceeded, and grown more rapidly than, those of SSA. It is not just in manufactures that SSA has been marginalised, it is in agriculture too. Figure 5. Agricultural exports by value Note: Total exports of primary commodities by value, excluding fuels, ores and minerals. Source: UNCTAD, 2008b The regional picture Despite efforts made over the last 25 years to remove many of the policy barriers considered to impede export performance and inhibit diversification, the composition of SSA s exports has not changed substantially. Although a very small number of countries have been able to diversify significantly into manufactures (Mauritius, for example, has achieved fairly steady manufactures 10

25 A Guide for Commonwealth Parliamentarians in Sub Saharan Africa growth), for most SSA states manufactured goods exports remain low. 3 The continent as a whole remains the most dependent on primary commodity exports as a proportion of total exports in the world, More seriously, for most countries the dependence is on a very small number of primaries. Figure 6 shows for each country the number of products that account for 75% of goods exports. 4 Apart from South Africa (which has over 100 products in its top 75% ) the figure for most states is less than ten, and for a good number it is only a very few. Figure 6. Number of products accounting for more than 75% of exports South Africa Kenya All Africa * Tanzania Senegal Madagascar Swaziland Mauritius Uganda Zimbabwe São Tomé and Principe Gambia Ghana Cape Verde Cote d'ivoire Togo Sierra Leone Ethiopia Namibia Somalia Burundi Congo Democratic Republic Lesotho Malawi Benin Cameroon Mozambique Seychelles Central African Republic Comoros Djibouti Mauritania Rwanda Zambia Guinea Liberia Sudan Botswana Burkina Faso Eritrea Gabon Mali Angola Chad Congo Equatorial Guinea Guinea Bissau Niger Nigeria * Including North Africa. Source: Adapted from OECD, There has been more progress in diversifying markets than products. As Figure 7 shows, whilst the EU retains its historical position as the major destination market for African exports, the share destined for Asian markets is increasing. Given that the products destined for rapidly growing markets in Asia are mainly commodities, this is not going to directly assist product diversification, unless the revenue is used to finance the development of new products. There has also been some increase in exports to the North Atlantic Free Trade Area (NAFTA). This reflects trade policy developments between SSA and the USA particularly the impact of the African Growth and Opportunity Act (AGOA), which includes preferential access for new and non traditional exports from the continent, such as clothing. In this case, therefore, there may be both market and product diversification. 3 4 See Appendix 2, Table A.1. See also Appendix 2, Table A.2. 11

26 Trade and Trade Policy Figure 7. Top African export destinations Source: UNCTAD, 2008b. 2.3 Lessons from the Global Financial Crisis The GFC deserves special attention, both because its effects on all Commonwealth countries are still being felt and because it has revealed in sharp relief the weaknesses of many of them that trade policy must attempt to tackle. Trade has been an important transmission belt conveying the effects of a financial crisis in the rich world into the economies of all countries. One lesson has been to flag the inter connectedness of the world economy (and the downsides as well as the upsides of this). Another result has been to expose some of the structural problems of poor, vulnerable countries. There are two avenues along which the GFC flows through into adverse effects on least developed countries (LDCs), small and vulnerable economies (SVEs) and other poor, open economies: lower demand for their exports as a result of actual income cuts in their markets and of a loss of confidence, which predominantly affects demand for capital goods and those where inventory changes can be large (such as fuel and minerals); and the potential for rising protectionism in their markets. Most developing countries have been affected by the cut in global income and losses of confidence. According to the WTO (2010), global trade volumes collapsed by 12.2% in 2009, making it the sharpest fall in world trade in more than 70 years. International Trade Centre (ITC) data for the first three quarters of 2009 indicate that the exports of all developing countries fell by as much as 25% relative to 2008, although those of the LDC sub group fell by only 12% (ITC, 2010). The effects on Africa may have been particularly severe because of the commodity composition of African exports. Figure 8 provides an estimate of the potential medium term impact of the GFC on 25 SSA states. All but seven are expected to experience a fall in GDP as a result of the crisis, which in eight cases could be 5% or more. The reason for this disproportionate effect is that demand for fuel and minerals is particularly responsive to global income changes, and since production is fixed in the short run supply cannot adjust, thus prices may fall sharply. Dependence on a single commodity for a large share of exports always exposes countries to the risk of price shocks and instability in earnings. 5 Simple manufactured goods, for which global competition was already very high, have also been badly hit not only because demand is very responsive to changes in income but also because producers are highly dependent on imported inputs which may be severely affected by depreciated currencies and restrictive trade finance conditions. Data on services trade are less detailed and take longer to appear than those on goods, but early figures suggested that although 5 12 See Grynberg and Newton, 2007.