As in previous years, Africa noted poor progress in the DDR negotiations in the World Trade Organization (WTO) during 2010. Though the closure of the DDR was expected to be achieved by December 2005, discussions have advanced slowly since 2008. Negotiations in 2010 barely progressed beyond informal meetings, with the result of cross-sectoral negotiations being postponed. Nevertheless, 2010 saw some highlights, such as the “banana deal” (AfDB et al., 2010) and progress on cotton trade and non-tariff barriers negotiations, with notable engagement of the African Group in the latter (UNECA and AUC, 2011).

Despite renewed commitments at the highest level during the January 2011 World Economic Forum in Davos to seek closure to the DDR, it has become clear that no “early harvest” will be possible for least developed countries (LDCs),1 given the virtual halt of negotiations. This situation raises questions on the development gains that a large majority of African nations are foregoing, and it calls for a reassessment of how the DDR is dealing with development concerns in the current negotiations. Further, if policy space is not adequately afforded in the single undertaking through elements such as appropriate flexibilities, special and differential treatment, and deep market access commitments of relevance to Africa, the ability of African countries to work on economic transformation and industrialisation objectives through their trade agenda may be compromised severely in the future.

The stalemate in negotiations since 2005 has also shifted attention to other types of trade relations in Africa. Trade preference arrangements – such as the AGOA (see Box 3.1) and South‑South Co-operation with other developing economies such as China, India and Brazil – represent important mechanisms in the furtherance of Africa’s economic development and diversification agenda.

Box 3.1: Revisiting existing trade partnerships: A decade of trade preferences under the African Growth and Opportunity Act (AGOA)

The African Growth and Opportunity Act (AGOA) has ruled over US-Africa trade relations since 2000 with some measurable success. African exports to the United States increased from USD 23 billion in 2000 to USD 81 billion in 2008, despite exclusion of key African exports such as sugar, peanuts, dairy and tobacco. During that period, foreign direct investment (FDI) and employment also increased, with over 300 000 new jobs created in Africa.

Despite these highlights, it is often argued that AGOA has not been able to contribute to greater trade diversification, growth and development. The benefits of AGOA have been unevenly distributed across countries and sectors. Roughly half of the sub-Saharan eligible countries are currently benefiting, and only in a handful of sectors. Africa’s inability to diversify trade in agricultural products, which account for less than 1% of AGOA exports, is partly due to quotas on sugar, tobacco, dairy and peanuts. Further, although AGOA has been extended to 2015, the uncertainty of AGOA’s future has kept required investment levels at bay, leaving little time for Africa to raise its productive capacity and consolidate the gains of this preferential act.

An extension of AGOA beyond 2015 would afford investors sufficient time to recoup returns on investments and thereby take full advantage of AGOA. However, other challenges faced by AGOA beneficiaries also need to be addressed. For example, competition has increased since the elimination in 2005 of the Multi-Fibre Arrangement (MFA), which opened up the apparel sector to Asian countries. This led to a preference erosion, disinvestment, and unemployment in countries where AGOA had originally promoted some industrialisation in the textile sector. Further, AGOA fails to consider the impact a removal of an African country from the AGOA beneficiary list may have on other regional trading partners, destroying existing regional value chain creation. Finally, AGOA also lacks mechanisms for promoting innovative ideas for public-private partnerships for infrastructure investment, improving operating efficiency and locking in logistics services market reforms, especially pertaining to transport regulation in Africa.

Although AGOA may have had a positive impact in the past, it needs to be improved to accommodate these challenges. A revision of AGOA should focus on ensuring more inclusiveness, accessibility and permanence. Doing so will extend benefits to all of sub-Saharan Africa and promote a wider range of export products. A revised AGOA should also reorientate FDI away from oil, textiles and apparel and towards agriculture. It can do this by assisting beneficiaries in complying with standards and sanitary and phytosanitary (SPS) measures and by tackling supply-side constraints. Finally, targeted export diversification and sectoral carve-outs to avoid trade preference erosion in the future also need to be included.

Source: See ERA (2011) and Páez, et al. (2010).

As with the DDR negotiations, EPA negotiations saw little progress during 2010. Discussions appear to revolve around the same contentious issues of previous years. These issues include the development dimension of the EPAs, definitions of “substantially all trade” (SAT) and “most favoured nation” (MFN), export taxes, regional integration, quantitative restrictions, special agricultural safeguards, a rendezvous clause and rules of origin, among others (African Union, 2010a).

As with multilateral trade negotiations, how a final agreement deals with these contentious issues will condition the strategic use of trade policies to address development and industrialisation concerns in Africa. For example, a prohibition on export taxes in the EPAs will mean that some African countries may not have sufficient policy space to confront revenue and value additional concerns lying at the heart of their fiscal and industrial policy objectives. These countries may thus need to broaden their tax base to account for revenue loss. Equally, a narrowly based definition of substantially all trade and the most favoured nation may sever opportunities of future trade agreements with third parties. Thus, these narrowly based definitions may hinder lock in economic transformation policies targeting export-led growth. Finally, rules of origin that do not allow for cumulation across African LDCs, regardless of membership to a particular EPA, will impinge on regional value chain creation. These rules will also lessen the impact of regional integration policies that target landlockness through trade facilitation, among other measures.

Considering the challenges, agreeing on comprehensive EPAs in the near future seems unlikely. African countries have indicated through an EPA position paper (African Union, 2010b) their willingness to consider the viability of an EPA deal in relation to other alternatives. Such alternatives include: i) deferring and sequencing EPAs to regional integration processes; ii) postponing EPA negotiations until after WTO negotiations on the General Agreement on Tariffs and Trade (GATT) Article XXIV conclude; iii) instead of EPAs, extending the “Everything but Arms” (EBA) initiative to all African countries; iv) improving the European Union’s generalised scheme of tariff preferences (GSP) regime, or v) discontinuing EPAs and focusing on regional integration and South‑South Co‑operation instead. In particular, the last option once again indicates the rising interest in trade and investment partnerships with Asian economies, such as China (see Box 3.2).

Box 3.2: South-South co-operation: The rising importance of Africa-China partnerships

Africa-China co-operation partnerships are mainly taking place through trade, investment and aid. Often these three modalities appear to be inter-related, reflecting complementary and/or competitiveness relationships between both parties. For example, Chinese resource-seeking FDI (e.g. minerals and oil to be exported to China) has an aid component through infrastructure  development, which has been the case in countries such as Sudan and Angola. Though needed, infrastructure development should not come at the expense of resource depletion and environmental degradation. Policies targeting sustainable development and linking industrial activities with the local economy will help strike a balance between resource exploitation and industrialisation in Africa.

Chinese FDI in retail trade is another example of complementary/competitive relations through local presence and commercialisation of Chinese products in Africa. In some African countries, such as Nigeria and Ghana, this has translated into a preference for Chinese (manufactured and food) products. This preference, in turn, has led to a crowding out of local and regional products, even in cases where the former may be of lower quality than the latter, owing to price considerations. The trade balance has thus skewed in favour of China. Clear rules promoting regional diversification, value chain creation and safeguarding against preference erosion could help maximise the benefits from China-Africa trade relations without undermining regional integration and consumer protection considerations.

Learning-seeking and market-seeking FDI is exemplary in the field of services, which is also becoming an important target of Chinese FDI in Africa. For example, South Africa is benefiting from complementarities because Chinese financial firms have large markets and capital but lack the world-class skills in financial markets that South Africa possesses. South African financial firms gain in their capital base from Chinese investment, enabling them to expand into Africa and also globally into other developing country financial markets.

South-South co-operation between China and Africa faces several major challenges. First, there is the need to ensure that as Chinese trade and FDI increase, they also build (backward) linkages into the economy through local capacity building and partnerships. Concerning aid, Africa needs to formulate concrete aid needs based on sustainable development impacts rather than simply target the volume of aid flowing to the continent. Finally, Africa’s economic space could replicate Chinese market conditions, if the continent is taken as a common market. Win-win opportunities for goods, services and capital exchanges between these two markets could be identified, especially if African leaders emphasise development in their dialogue with Chinese counterparts.

Source: AERC (2010) and see Part II of this report.