CLIMATE AND NERGY

www.ictsd.org

Regional choices, global context: Opportunities for Southern Africa

Vinaye Ancharaz, Senior Development Economist, ICTSD

28-29 JULY 2015| Johannesburg, South Africa

VINAYE ANCHARAZ

African Integration: Facing up to Emerging Challenges

CLIMATE AND NERGY

• The road travelled until now: From the Abuja Treaty to the launch of the TFTA

• Current state of regional integration in Africa• Challenges and opportunities

Outline

CLIMATE AND NERGY

• The road travelled until now: From the Abuja Treaty to the launch of the TFTA

• Current state of regional integration in Africa• Challenges and opportunities

CLIMATE AND NERGY

• The Abuja Treaty (1994) envisages the establishment of a complete African Economic Community (AEC) in 6 phases over 34 years by 2028• Largely on target• … even if some delay at the level of RECs

The road travelled so far

Week 1 2 3 4 5 61991 1994 1999 2000 2001 2007 2010 2015 2017 2019 2023 2028

Abuja Treaty

Entry into force of Abuja Treaty

1st stage – Strengthening existing/ creating new RECs

COMESA FTA established

SADC FTA established

2nd stage – Stabilization of tariffs and other barriers to reg. trade

EAC CU launched

ECOWAS CET enters into force

Tripartite FTA launched

3rd stage – Establishment of FTAs and Customs Union at REC level

4th stage – Establishment of Continental CU

5th stage – Establishment of African CM

6th stage – Establishment of African EMU

MILESTONES

OUTCOMES

Source: ICTSD5

1991 1992 1994 1996 1998 1999 2000 2001 2002 2004 2008 2011 2012 2014 2015 2017 2019

Abuja Treaty

Establishment of SADC

Entry into force of Abuja Treaty

Establishment of COMESA

Establishment of CEMAC

Establishment of IGAD

SADC Trade Protocol

Establishment of CENSAD

Sirté Declaration

Establishment of EACAdoption of AGOA

SADC FTA

AU Constitutive Act

Lomé Summit and Declaration

Adoption of AU Constitutive Act

Adoption of NEPAD

Start of EPA negotiations

South Africa joins SADC

First Tripartite Summit

Second Tripartite Summit

First Tripartite Negotiation Forum

Action Plan to boost Regional Integration

SADC – EU EPA

EAC – EU EPA

ECOWAS – EU EPA

11th Tripartite Trade Negotiations Forum

SADC industrial development policy

TFTA launched

Expected CFTA launch

Continental Customs Union

COMESA launches FTA

Source: ICTSD

6

Source: AfDB (2014)

REC implementation status • Varying levels of ambition and achievement• Delays in achieving key milestones

2008 2010 20162015

7

• The road travelled until now: From the Abuja Treaty to the launch of the TFTA

• Current state of regional integration in Africa• Challenges and opportunities

8

Intra-REC trade intensity*

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130%

5%

10%

15%

20%

25% Trade Intensity for select RECs: 2000-2013

ECOWAS, 5.7%

COMESA, 5.2%

SADC, 13.4%

EAC, 17.2%

• EAC – the best performer

• … followed by SADC… but SA polarization

• Intra-REC trade intensities in ECOWAS and COMESA below 6% in recent years

• Compare with intra-ASEAN export intensity of 26.4% (2011)

Source: ICTSD, using data from Comtrade

9

* Refers to the share of a REC’s total exports that takes place within itself. In computing the trade intensities, multiple membership is allowed. The numbers reported in the chart are averages over the period 2009-2013.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

5

10

15

20

25

30

35

40

45Intra-TFTA exports, 2000-2013

Intra-TFTA exportsIntra-TFTA exports excl. SAIntra-TFTA exports excl. SA, Egypt and Angola

USD

billi

on

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

10

20

30

40

50

60

70

80Intra-Africa trade, 2000-2013

Intra-Africa merchandise tradeIntra-Africa merchandise trade excl. SAIntra-Africa merchandise trade excl. SA, Egypt and Nigeria

USD

billi

onIntra-regional trade - trends

10

South Africa

Source: ICTSD, using data from Comtrade

Africa trade intensity

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20136%

7%

8%

9%

10%

11%

12%

13%

African Trade Intensity, 2000-2013

Africa

TFTA

• The TFTA region has a higher intra-regional trade intensity than the continent as a whole…

• … because the RECs with the deepest level of integration are in ESA.

• Intra-Africa trade concentrated more in manufactures …

• … implications for Africa’s structural transformation.

11Source: ICTSD, using data from Comtrade

Intra-Africa investment flows

REC Period

FDI inflows (USD billion) Intra-regional

shareTotal Intra-regional

COMESA2003-05 17.9 0.2 1

2009-11 34.0 2.6 8

EAC2003-05 2.3 0.0 2

2009-11 9.9 1.4 14

SADC2003-05 23.0 1.0 4

2009-11 32.0 3.2 10

• Significant increase in volume, and especially share, of intra-regional FDI flows across RECs

• Led by SA. Kenya, Nigeria and North African countries – emerging sources of FDI since 2008.

• Driven by cross-border operations of MNCs based in major African economies.

• Focused on manufacturing and services.

• Major hosts: Nigeria, Ghana, Uganda, Zambia

12

Source: UNCTAD (2013)

Reasons for slow progress • Politics vs. economics of regional integration• Low levels of commitment because non-compliance is generally not

sanctioned.• Exception: Case of Polytol (Egypt v. Mauritius)

• Implementation costs, institutional weaknesses, overlapping memberships• “Treaties and protocols outline what should be done but not how to do

it.” (ADR ’14, p.10)• Reluctance of African states to cede sovereignty to regional level• Low levels of coordination• Polarization of trade

13

• The road travelled until now: From the Abuja Treaty to the launch of the TFTA

• Current state of regional integration in Africa• Challenges and opportunities

14

Current challenges and opportunities• Global context• Fragile economic recovery• Unfinished Doha Round (leading to MRs, plurilaterals, etc.)• Multiple external forces affecting regional trade and integration

• Challenges• EPAs, EPs, MRs

• Opportunities• AGOA, TFA, RVCs

• But challenges can be opportunities…

15

Challenges (1): EPAs• EPAs concluded:

• MMSZ (Aug. 2009)• ECOWAS (Jan. 2014)• SADC (July 2014)• EAC (Oct. 16, 2014)

• Why EPAs are important for Africa? EU remains Africa’s main market – by far.• Estimates of welfare effects of EPAs largely negative – across all configurations• The EPAs promised to strengthen regional integration, but had the opposite effect

at the outset• However, the EPAs are now incentivizing African RECs to deepen integration… • EPA RoO allow for regional cumulation – conducive to regional trade and

integration.• But the TFTA will need to adopt a common set of RoO. Will EPA RoO prevail?

16

Changing destinations of Africa’s exports

Africa's exports by major des-tination, 2000

EU49%

US19%

BRIC8%

Intra-Africa

6%

RoW18%

Africa's export destinations, 2000

EU36%

US8%

BRIC28%

Intra-Africa11%

RoW17%

Africa's export destinations, 2013

17

Trends in Africa’s global exports

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

50

100

150

200

250

USD

billi

on

BRIC

ROWUS

Intra-Africa

EU

18

Challenges (2): Africa’s emerging partners• BRIC’s share of Africa’s exports has increased from 8% in 2000 to 28% in 2013.• Evidence that:

• Africa’s exports to BRIC are heavily concentrated in extractives (oil, copper, iron ore, etc.) • Intra-Africa exports more intensive in manufactures than Africa’s exports to ROW

• Implications• This kind of ‘specialization’ can allow African countries to get the best of both worlds• Structural transformation• Deeper integration

• China’s industrialization strategy for Africa, SEZs and aid for infrastructure, and India’s investment and technology transfer can help enhance productive capacity in African countries and boost trade – both regional and international – and in a diverse range of products. • Countries with little scope besides primary commodities should use their export

proceeds to develop new industries19

Challenges (3): Rise of mega-regionals• TPP, TTIP, RCEP, etc.• Trade diversion effects on excluded partners likely to be small due to

already-low tariffs.• Flexible RoO would benefit excluded countries.• Services – effects will depend on meaningful liberalization of Mode 3.

Overall effects on excluded countries likely to be “small”, except BRICS.• Major impact on African economies likely to follow from

harmonization of standards. • If MR is extended to third parties, it could have a significant liberalizing

effect.

20

Challenges (3): Rise of mega-regionals/2

Less ambitious Ambitious

EU 68,274 (0.27)

119,212 (0.48)

US 49,543 (0.21)

94,904 (0.39)

All other countries

46,636 (0.07)

99,171 (0.14)

Of which: LICs 1,064 (0.09)

2,366 (0.20)

GDP effects of TTIP (USD million and %)

Source: Francois et al. (2013)

• Small but positive effect on other countries

• No separate results for Africa, but the LIC group could be a good proxy.

21

Options for excluded countries• Turn protectionist? (Bad idea!)• Liberalize? (Always a sensible thing to do.)• Create rival RTAs or strengthen existing ones? (Domino effect)• Adopt standards from mega-regionals or press for international

standards?• Complain… and seek compensation (AfT)?• Go back to the WTO?• Seek “MFN extension” to Government Procurement• Modalities to harmonize over FTAs?• Revisit SDT?

Challenges (3): Rise of mega-regionals/3

22

Opportunities (1): AGOA• AGOA (adopted in 2000) was renewed in May 2015 for another 10 years• AGOA, and its flexible RoO, including the Third-Country Fabric derogation,

spurred development of an apparel industry in Lesotho, Swaziland, Madagascar (?), Mauritius, Kenya, Cote d’Ivoire… and of RVCs in ESA• Duty-free treatment to 1835 products. Yet, African exports limited to apparel

and oil (46% of US imports under AGOA in 2014)• AGOA excludes a number of products in which African countries are known

to be competitive. Agricultural products subject to TRQs• Products like sugar, peanuts and tobacco face prohibitive tariffs• Restrictions on sugar and dairy content prevent agro-processing (e.g. cocoa)• But can AGOA be leveraged and the negative trend of African exports to US

reversed? 23

Opportunities (2): TFA• TFA signed off in Nov. 2014• But lack of appetite (esp. among LDCs and African economies) to

implement the Agreement…• …despite evidence of the benefits of TF• About $600 billion to developing countries (WB)• Trade costs of up to 15% of the value of traded goods for landlocked countries • A dollar of AfT spent on “trade policy and regulation” has a higher trade-

creation effect than similar investments in “economic infrastructure” or “trade development” (Helble, Mann and Wilson, 2009)

• Yet a number of countries are implementing TF measures – independently of TFA

24

Opportunities (2): TFA/2• TF provisions exist in most trade treaties – e.g. EAC, COMESA and

SADC have explicit provisions on customs cooperation, use of international standards and simplification of formalities/procedures• However, implementation has remained patchy.• Regional projects such as OSBPs along the NSC, customs

harmonization and cooperation amply demonstrate the impact of TF on regional trade.• Therefore, African countries and RECs should implement the TFA as a

self-interested act. If properly sequenced, TF can pay for itself.

25

Opportunities (3): Regional Value Chains• RVCs – a key determinant of intra-regional trade flows…and vice versa • ESA – most integrated in value chains• Africa dominated by commodity value chains, but significant opportunities exist

in agro-processing (additive VCs)• Outside of commodities, apparel is a rare example of vertically specialized value

chains• But let’s not forget services – call centres, transport, financial, retail trade, etc.• RVCs in apparel spurred by AGOA – e.g. cotton from Zambia, fabrics from Lesotho

and Mauritius, zippers from Swaziland, assembly in Madagascar • EPA provisions on regional cumulation can have similar effects (esp. in ESA)• “Widening” integration can boost RVC development through favourable RoO and

real liberalization• In addition to the “usual suspects”, strategic policies, including “new” industrial

policy, critical to VC development in Africa 26

Conclusion• Interesting times for African integration• Integration efforts at the level of RECs have lagged.• But there are significant opportunities to strengthen regional integration.• Moreover, challenges can be turned into opportunities• But many questions remain:

• Can the TFTA be yet another opportunity to boost integration (given that efforts at the level of the RECs have lagged)?

• Or will it be another piece in the spaghetti bowl?• Will the TFTA liberalize “substantially all the trade…”? (GATT Art. XXIV)• Will the TFTA make the RECs redundant?• What will be the balance of power among member-states of the TFTA? Is it being driven by

SA (as the stand-off on the question of RoO seems to suggest)?• And what about the CFTA? How will we get there when the processes haven’t been defined?

• Let us keep in mind that the TFTA is just the beginning… and it is yet to take off…27