Regional Integration, Trade and Industry in Africa (Advances in African Economic, Social and Political Development) 3030753654, 9783030753658

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Advances in African Economic, Social and Political Development

Helmut Asche

Regional Integration, Trade and Industry in Africa

Advances in African Economic, Social and Political Development Series Editors Diery Seck, CREPOL - Center for Research on Political Economy, Dakar, Senegal Juliet U. Elu, Morehouse College, Atlanta, GA, USA Yaw Nyarko, New York University, New York, NY, USA

Africa is emerging as a rapidly growing region, still facing major challenges, but with a potential for significant progress – a transformation that necessitates vigorous efforts in research and policy thinking. This book series focuses on three intricately related key aspects of modern-day Africa: economic, social and political development. Making use of recent theoretical and empirical advances, the series aims to provide fresh answers to Africa’s development challenges. All the socio-political dimensions of today’s Africa are incorporated as they unfold and new policy options are presented. The series aims to provide a broad and interactive forum of science at work for policymaking and to bring together African and international researchers and experts. The series welcomes monographs and contributed volumes for an academic and professional audience, as well as tightly edited conference proceedings. Relevant topics include, but are not limited to, economic policy and trade, regional integration, labor market policies, demographic development, social issues, political economy and political systems, and environmental and energy issues. All titles in the series are peer-reviewed.

More information about this series at http://www.springer.com/series/11885

Helmut Asche

Regional Integration, Trade and Industry in Africa

Helmut Asche Institute of Ethnology and African Studies Johannes Gutenberg University of Mainz Mainz, Germany

ISSN 2198-7262 ISSN 2198-7270 (electronic) Advances in African Economic, Social and Political Development ISBN 978-3-030-75365-8 ISBN 978-3-030-75366-5 (eBook) https://doi.org/10.1007/978-3-030-75366-5 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Acknowledgements

The author is grateful to numerous colleagues, among them Jonne Brücher, Heike Höffler, Stefan Kratzsch, Peter Lunenborg, Francis Matambalya, Francisco Mari and Georg Schäfer, who have critically read and commented on all or parts of the manuscript at various stages. Special thanks also go to my editors and proofreaders, in particular to Rebecca Henschel, whose numerous critical comments went beyond mere language correction to help make this text more comprehensible.

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Regional Economic Integration in Africa: An Introduction

Regional economic integration has always been perceived as a dry subject, generating little academic or political enthusiasm. Worse, its economic raison-d’être is still contested, and many regional communities in Africa or Europe have to defend their economic achievements against critique from very diverse origins. Often overlooked is the underlying struggle for peace, justice, cultural exchange, preservation of nature and development at large. Economic integration in smaller or larger country groups serves a greater purpose in the life of nations. It is thus crucial to understand the economic dimension of regional integration and to ensure that it is implemented smoothly, lest other worthy human goals be jeopardized. Indeed, regional unions are constantly engaged in a kind of soul-searching. The European Union provides the perfect illustration. Both the controversial introduction of the euro and the chaotic experiment known as Brexit demonstrate how economic integration can suddenly become the most divisive issue in the political arena of member countries—in particular when the centrifugal power and costs of economic, ecological and demographic adjustment are not addressed seriously enough. Similarly, the African Union and her most important Regional Economic Communities (RECs) have been on six decades long roller coaster. The ride has ranged from enthusiasm for pan-African unity in the immediate post-independence era, built with freshly formed or inherited regional unions, to times of bitter disillusionment, including the dismantling of numerous unions whose ephemeral existence and historic names are often barely remembered. The spatial turn in African studies has shown that the multiple dimensions of informal cross-border integration can be more relevant for peoples’ lives than formal integration. Today, history has come full circle. New hope is arising that the African Continental Free Trade Area (CFTA) launched in Kigali, Rwanda, in 2018 will rejuvenate feelings of pan-African identity and lift regional economic integration to a higher level. An intriguing pattern in the political economy of regional integration is that formal regional communities are difficult to ‘sell’ to their constituencies if they only focus on the economic advantages. Hence, the quest for a European identity that goes beyond sheer business is on—a cultural and political identity that could counter nationalist identity policies. Such an approach is, however, awkward on economic grounds. It should be possible to justify economic integration as such to member vii

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countries, unless specific economic (and social) policies in the respective union have gone terribly wrong, causing centrifugal tendencies to prevail and thus necessitating policy corrections. This points to a decisive weakness of the economic narrative on regional integration in general. African regional communities have an even bigger problem. In contrast to the situation in Europe or North America, REC internal trade remains low. Research has long established that a meaningful division of labour relies primarily on the existence of diversified manufacturing industries rather than on agriculture with its inherent limitations of product differentiation and specialization. Industry is thus critical. Globally, however, industry is undergoing fundamental changes in terms of both industrial production in general and the number of sectors in particular. The development of artificial intelligence and the technological trends associated with Industry 4.0—also known as the Fourth Industrial Revolution—are among the most noteworthy changes. Not less important among the drivers of the revolution is the emerging fundamental change in energy production and thus the energy mix that powers the manufacturing industry. The motor industry is just one essential branch being turned upside down in the wake of ecological and social development. Global trade patterns are changing along with industry, but the consequences are not yet clear: has globalization peaked, and what comes after the peak? Africa also has to cope with the emerging, new industrial era. However, with the exception of North and South Africa, the continent is in a very peculiar situation among the developing regions. Africa has yet to develop industry—in the sense of a densely integrated network of manufacturing and related logistical activities. In the course of the past two decades, greenfield investments have financed widespread construction of new factories, and traditional sectors such as textiles and garments have been revived on the continent—partly due to trade agreements with northern client countries, partly due to the proverbial flying geese who bring them in from the East. Evolution in Africa’s renewable energy production shows signs of technological leap-frogging, similar to what Africa has achieved in telecommunication and banking services. An entire range of creative industries along with a class of cultural entrepreneurs has taken root. These are bright spots that give reason for optimism about Africa’s wider industrial future. However, South of the Sahara and North of the Limpopo River, industrial production has not yet taken hold as a diverse and interlaced web, dotted with economic agglomerations which work as accelerator hubs for knowledge and technology production. Africa is not industrialized by any standard. Lists of the scattered manufacturing units are noticeably the same as in the 1960s (Ewing 1968). Even at the northern and southern extremes of the continent, established manufacturing industries acutely require restructuring at their intermediate productivity levels. In consequence, trade performance of most—though not all—African countries remains skewed to raw material exports and imports of mostly finished goods. It is essential to take new political action to correct this. At the beginning of the century, industrialization in Africa appeared to be dispensable in some academic and official development aid quarters. But more recently, a new debate on structural change and employment has made perfectly clear that the demographic challenge

Regional Economic Integration in Africa: An Introduction

ix

of a rapidly rising young workforce can only be harnessed by new employment opportunities which agriculture and services alone cannot provide. This elementary truth also applies to Arab North Africa and the Republic of South Africa. It is now wide recognized that all successful newcomers in the global division of labour need industry, in particular manufacturing, in the footsteps of their East Asian predecessors. In the new millennium, Africa has been good on growth but slow on structural transformation; to achieve the latter, agricultural modernization is required along with (re-)industrialization (Lopes 2019). This requires good industrial policy. The current situation in Africa clearly indicates that market forces alone will not bring coherent industrialization into the developing regions of this world. It is also apparent that all late industrializers, with the one and only exception of market-liberal Hong Kong, have achieved the task with the guidance and targeted sector support of their governments. Previous received wisdom in development economics masked this obvious fact by focusing on the importance of a market-liberal environment for ‘doing business’. Such investor-friendliness—so went the story—would fully suffice to trigger economic consolidation. This narrative sanguinely ignored that developing countries were already offering foreign investors every imaginable financial incentive. However, no modern processing industry has emerged from untargeted policy, just some agro-processing here and there and an oil and mining industry with few productive linkages in the host country, but with devastating environmental impact. Up until recently, mainstream economics vehemently rejected the idea that a good government can develop a workable plan for industry and implement it well by involving the private sector fully. This way of thinking always stood in contrast to the East Asian experience as much as to popular protest against governments that did nothing to ‘create jobs’, a demand which obviously assigns a proactive role to the state. Such thinking has now changed. The developmental state is readmitted to the scene, although a community of practice for good industrial policy has yet to emerge, not the least for want of new governments who do it. This book draws on the evolving academic consensus for new industrial policy. The following lessons stand out: • External trade orientation of industrial strategies is helpful. It is now a widely accepted idea—both scientifically and politically—that betting on import substitution alone is not a good strategy for advancing a less developed economy. • Mature ‘old’ industries are one strategic pillar in developing economies, especially with regard to labour intensity, but ‘new’ industries with technological spillover potential should be sought for as well. This makes for a ‘dual core’ industrial strategy. • Trade integration with neighbouring countries should be a perfect springboard for industry that is not ‘born global’. Most industry is not. Hence, regional integration matters. • A new perception is gaining ground that regional products are often ecologically, socially and economically preferable to globally scattered value chains. In this

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regard, well-integrated regions can become an economic end in themselves and a rightful platform for sustainable development at large. Therefore, ‘region’ and ‘industry’ should be a good match—especially for advancing economies. In trade theory and political practice, they are not. Regional economic integration has remained a contested area, even more so when enacted among developing countries which apparently have little to offer to each other. Some contend—with good reason but from very different perspectives—that African regional unions are economically not dynamic enough to justify a burdensome bureaucratic setting like ‘Brussels’. The search for developmental or transformative regionalism in Africa is still on. Finally, inter-regional trade agreements between the Global North and the South have remained as contested as RECs in the Global North or in the South. The field of trade and development economics is deeply divided on what to recommend in terms of asymmetric, symmetric, bilateral, multilateral or no trade deals at all. From the European vantage point, politicians are disappointed that African polity and public are rather ungrateful for the Economic Partnership Agreements offered. One can easily imagine the disarray when it comes to the complex dialectic of the two contested areas—regional and inter-regional economic integration. This book tries to sort out the interplay of regional integration (Part I), industry (Part II) and inter-regional trade agreements (Part III) in empirical terms and goes on to describe how this interplay should look like in Africa from a developmental perspective when supported by smart industrial strategies. In this triple regard, Africa is currently at a critical juncture: positive synergies can and will hopefully materialize, but there is an imminent danger that tensions at the South–South level intermingled with North–South negotiations will demolish the whole architecture of African regional economic organizations as we know it. This book is about how to defuse the conflict.

Contents

Part I 1

The Economic Regions in Africa

The State of the Unions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Regionalization and Regionalism—What Defines an Economic Region? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Empirics—the Panoply of Regional Organizations in Africa . . . .

3 8

2

The Logical Sequence of Regional Economic Integration . . . . . . . . . . 2.1 The Linear Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Mind Your Steps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Optimal Monetary Unions? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Non-Tariff Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Defining Common Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 A Simple Proposal to Amend the Linear Model . . . . . . . . . . . . . . . 2.7 A Model to Follow in Africa? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17 17 19 20 26 29 30 31

3

The Reality of African Trade Integration—Challenges of Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Domestication Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 What is a Free Trade Area ? Global Standards in Use . . . . . . . . . . 3.3 The Logic of Exception and Exclusion . . . . . . . . . . . . . . . . . . . . . . 3.4 Bilateral Treaties in the Midst of Regional Communities . . . . . . . 3.5 The Impact of REC Overlaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 Two Types of Customs Unions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7 Where African RECs Currently Stand—Key Indicators of Trade Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 Informal Trade and Neighbourhood Effects . . . . . . . . . . . . . . . . . . 3.9 Contested Regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4

Regional Integration in Trade Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Four Strands of Arguments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Trade Creation and Trade Diversion . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.1 Revisiting the Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.2 Diagrammatic Treatment of Tariff Effects . . . . . . . . . . .

3

35 35 36 37 39 39 42 43 48 54 57 57 58 58 60 xi

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Contents

4.2.3 4.2.4

The Developmental Case with Increasing Returns . . . . Diagrammatic Treatment of South-South Communities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Size of South-South Regional Markets . . . . . . . . . . . . . . . . . . . Concentration Effects in Regional Trade Agreements: Who Benefits? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.1 Regional Trade with Complete Specialization . . . . . . . . 4.4.2 Regional Trade with Incomplete Specialization . . . . . . Diversification and Specialization . . . . . . . . . . . . . . . . . . . . . . . . . . . Imperfect Trade in Homogeneous Goods . . . . . . . . . . . . . . . . . . . .

71 71 77 78 85

5

The Coordination Problem in Regional Integration . . . . . . . . . . . . . . . 5.1 Irregularities to Overcome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Trade Facilitation as Remedy? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Light Integration as the Alternative? . . . . . . . . . . . . . . . . . . . . . . . .

87 87 89 92

6

On the African Continental Free Trade Area . . . . . . . . . . . . . . . . . . . . 6.1 Grand Projects of Africa-Wide Economic Integration . . . . . . . . . . 6.2 Critical Assessment of the CFTA Project . . . . . . . . . . . . . . . . . . . . 6.2.1 Building Block Logic—Yet a Good One? . . . . . . . . . . . 6.2.2 Jumping over the Stumbling Blocks? . . . . . . . . . . . . . . . 6.2.3 A Generic Solution to Liberalize Trade in Africa? . . . . 6.3 The Political Economy of Implementation . . . . . . . . . . . . . . . . . . . 6.4 A Higher-Order Project of Regional Economic Integration . . . . . 6.5 Fundamental Choices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6 Transformative/Developmental Regionalism? . . . . . . . . . . . . . . . .

95 95 97 100 103 106 107 109 113 115

4.3 4.4

4.5 4.6

Part II 7

63 65 68

Industrial Policy in the African Regions

A Fourfold Justification of Common Industrial Policy . . . . . . . . . . . . 7.1 The Twin Problem of Industry and Region . . . . . . . . . . . . . . . . . . . 7.2 National Industrial Policies in the Region . . . . . . . . . . . . . . . . . . . . 7.3 Regional Imbalance and Divergence . . . . . . . . . . . . . . . . . . . . . . . . 7.3.1 Regionally Inclusive Industrial Growth . . . . . . . . . . . . . 7.3.2 Regional Compensation Policies . . . . . . . . . . . . . . . . . . . 7.3.3 Common Industrial Policy in African Regions . . . . . . . 7.4 Regional Integration Versus Industrial Nationalism . . . . . . . . . . . . 7.5 Industrialization Strategy Implicit in Trade Policy . . . . . . . . . . . . . 7.5.1 The Common External Tariff . . . . . . . . . . . . . . . . . . . . . . 7.5.2 Rules of Origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5.3 Inter-Regional Trade Negotiations . . . . . . . . . . . . . . . . . . 7.6 The Sum of Arguments: Why Common Industrial Policy? . . . . . . 7.7 The Region as Political Lock-In Mechanism? . . . . . . . . . . . . . . . . 7.8 The Formal Status of Common Industrial Policy . . . . . . . . . . . . . .

121 121 123 125 125 127 128 129 132 132 134 135 136 137 139

Contents

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8

Essentials of Common Industrial Policy . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 Design Principles of Industrial Policy in General . . . . . . . . . . . . . . 8.2 Regional Industrial Policy Design . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3 Making Sense of Regional Industries . . . . . . . . . . . . . . . . . . . . . . . . 8.4 Networks and Lighthouses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5 The Incentive System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6 Locational/Spatial Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.7 Conclusion: Easy Gains or Science Fiction? . . . . . . . . . . . . . . . . . .

143 144 147 149 152 156 159 162

9

Industrialization Strategies and Regional Actors . . . . . . . . . . . . . . . . . 9.1 Regional Industrial Policies and Strategies . . . . . . . . . . . . . . . . . . . 9.1.1 Case Study 1: West African Dairy Business—A Promising Regional Industry? . . . . . . . . . 9.1.2 Case Study 2: Regional Textile Industry—A Mirage? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 Conclusion: Sound Regional Strategies? . . . . . . . . . . . . . . . . . . . . . 9.3 Financial Institutions in the African Regions . . . . . . . . . . . . . . . . . 9.4 Regional Development Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4.1 Aid that Comes as ‘Private Sector Development’ (PSD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4.2 The New ‘Private Sector Engagement’ . . . . . . . . . . . . . . 9.5 Regional Business Associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.6 A Very Short Summary of Common Industrial Policy . . . . . . . . . .

165 165 169 172 174 176 179 179 182 183 186

Part III Global Dimensions of Regionalism 10 Shallow and Deep Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 10.1 Global Trade Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 10.2 Trade Deals Running and Trade Deals to Come . . . . . . . . . . . . . . . 196 11 The EU-Africa Trade Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 11.1 Initial Country Configurations in Africa . . . . . . . . . . . . . . . . . . . . . 201 11.2 Final Configuration and EU Preference Systems . . . . . . . . . . . . . . 204 12 The Content of Economic Partnership Agreements . . . . . . . . . . . . . . . 12.1 Initial Critique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1.1 Case Study 3: The Chicken Saga . . . . . . . . . . . . . . . . . . . 12.2 The Scope of the Final EPAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.3 The Trade-in-Goods Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.3.1 Policy Space in GATT/WTO and EPAs . . . . . . . . . . . . . 12.3.2 The WTO Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.3.3 Standstill Clauses—The Unidirectional Mode of EPAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.3.4 The Market Access Offer . . . . . . . . . . . . . . . . . . . . . . . . . 12.3.5 Impact Assessments of Trade Liberalization . . . . . . . . . 12.3.6 The Structural Problem of the African Market Access Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

211 211 212 214 215 215 216 217 218 219 222

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Contents

12.3.7 12.3.8 12.3.9 12.3.10 12.3.11 12.3.12 12.3.13 12.3.14 12.3.15 12.3.16 12.3.17 12.3.18

Fiscal Losses from the Liberalization Schedule . . . . . . . Prohibition of Quantitative Restrictions . . . . . . . . . . . . . The Exclusion Lists of Sensitive Products . . . . . . . . . . . Trade Remedies: Anti-dumping, Countervailing and Safeguard Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Infant Industry Protection . . . . . . . . . . . . . . . . . . . . . . . . . Export Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Case Study 4: Cashew Production and Mozambique’s Export Tax . . . . . . . . . . . . . . . . . . . . . National Treatment, Local Content Rules and Public Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . Export Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Most Favoured Nation Treatment . . . . . . . . . . . . . . . . . . Rules of Origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Economic Sanctions—The Right of Non-execution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13 Final Assessment of the EU-Africa Trade Deals—Ways Out? . . . . . . 13.1 The Political Impasse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.2 Grand Alternatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3 Repair Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4 New Areas for Strategic Dialogue . . . . . . . . . . . . . . . . . . . . . . . . . . 13.5 New Aid for Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

222 225 226 230 232 236 239 245 247 247 249 255 259 259 261 263 264 272

14 Conclusion and Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275 14.1 Conclusion—How to Achieve Africa’s Economic Unity . . . . . . . 275 14.2 Outlook—Sustainable Prospects for Regions, Trade and Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281

Abbreviations

ACP ADB AEC AEO AfDB AfT AGOA ALG AMU APEC ASEAN AU AUC BCEAO BDEAC BEAC BfdW BLNS BMO BRICS BWI CAADP CAP CARIFORUM CdE CEDEAO CEMAC CEN-SAD CEPGL CET CFTA

African, Caribbean and Pacific Group of States Asian Development Bank African Economic Community Authorized Economic Operator (EU/WCO) African Development Bank Aid for Trade African Growth and Opportunity Act (USA) Autorité de Développement Intégré des Etats du Liptako-Gourma Arab Maghreb Union (= UMA) Asia-Pacific Economic Cooperation Association of Southeast Asian Nations African Union African Union Commission Banque Centrale des Etats de l’Afrique de l’Ouest Banque de Développement des Etats de l’Afrique Centrale Banque des États de l’Afrique Centrale Brot für die Welt (German NGO) Botswana, Lesotho, Namibia, Eswatini Business Membership Organization Brazil, Russia, India, China, South Africa Bretton Woods Institutions (International Monetary Fund, World Bank) Comprehensive Africa Agriculture Development Programme (AU) Common Agricultural Policy (EU) Caribbean Forum of ACP Countries Conseil de l’Entente Communauté Economique des États de l’Afrique de l’Ouest Communauté Economique et Monétaire de l’Afrique Centrale Community of Sahel–Saharan States Communauté Economique des Pays des Grands Lacs Common External Tariff (= CCT, Common Customs Tariff) Continental Free Trade Area (also AfCFTA) xv

xvi

CILSS CIP CM CMA CoC COMESA CPA CSO CU DB DBSA DC DCED DD DfID DFQF EAC EADB EAGC EBA EC ECA ECCAS ECOMOG ECOWAS EPA EPZ ERP ESA ETLS FCFA FDI FEWSNET FSNWG FTA GAFTA GATT GDP GIZ GSP GVC HIC HS

Abbreviations

Comité Permanent Inter-État de Lutte contre la Sécheresse au Sahel Common Industrial Policy Common Market Common Monetary Area Chamber of Commerce Common Market for Eastern and Southern Africa Cotonou Partnership Agreement (ACP-EU) Civil Society Organization Customs Union Doing Business Development Bank of Southern Africa Developing Country Donor Committee for Enterprise Development Dutch Disease Department for International Development (UK) Duty-Free, Quota-Free (Trade Access) East African Community East African Development Bank Eastern Africa Grain Council Everything but Arms (EU) European Commission UN Economic Commission for Africa (= UNECA) Economic Community of Central African States Economic Community of West African States Monitoring Group Economic Community of West African States (= CEDEAO) Economic Partnership Agreement (EU, ACP) Export Processing Zone Effective Rate of Protection Eastern and Southern African Countries (EPA) ECOWAS Trade Liberalization Scheme Franc de la Communauté Financière Africaine; Franc de la Coopération Financière Foreign Direct Investment Famine Early Warning Systems Network Food Security and Nutrition Working Group Free Trade Agreement Greater Arab Free Trade Area General Agreement on Tariffs and Trade Gross Domestic Product Gesellschaft für Internationale Zusammenarbeit (formerly: GTZ) Generalized System of Preferences (GATT/WTO); Generalized Scheme of Preferences (EU) Global Value Chain High-Income Country Harmonized System (WCO)

Abbreviations

ICBT ICGLR ICT IGAD IMF IOC IPA IPCEI IPol IPR ISDS ISIC IWRM JV LCBC LCR LDC LIC LMIC MAN MDG MERCOSUR MFN MIC MNC MRP MRU MU MVA NBI NEG NEPAD NGO NIC NTB/NTM OACPS OAU OCA ODA OECD OMVS OSBP PPD PPP PSD

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Informal Cross-Border Trade International Conference on the Great Lakes Region Information and Communication Technology Intergovernmental Authority on Development International Monetary Fund Indian Ocean Commission Investment Promotion Agency Important Projects of Common European Interest (EU) Industrial Policy Intellectual Property Rights Investor State Dispute Settlement International Standard Industrial Classification (UN) International Water Resource Management Joint Venture Lake Chad Basin Commission Local Content Rules Least Developed Country Low-Income Country Lower Middle-Income Country Manufacturers Association of Nigeria Millennium Development Goal Mercado Común del Sur (Southern Common Market) Most Favoured Nation (Clause) Middle-Income Country Multinational Corporation Mutual Recognition Procedure (EAC) Mano River Union Monetary Union Manufacturing Value Added Nile Basin Initiative New Economic Geography New Partnership for Africa’s Development Non-Governmental Organization Newly Industrialized Country Non-Tariff Barriers/Non-Tariff Measures Organization of ACP States Organisation of African Unity Optimum Currency Area Official Development Assistance Organisation for Economic Co-operation and Development Organisation pour la mise en valeur du fleuve Sénégal One-Stop Border Post Public–Private Dialogue Public–Private Partnership Private Sector Development

xviii

PTA RCA RCR REC RER/REER RISDP RoO RoW RTA RVC SACU SADC SADCC SAP SEZ SITC SME SPS SQMT STI TBT TCF TDB TDCA TFA TFTA TNC TRIMs TRIPs UEMOA UMIC UNCTAD UNIDO USAID USMCA VAT VSOE WACIP WADB WAEMU WAMZ WB WCO

Abbreviations

Preferential Trade Agreement Revealed Comparative Advantage Regional Content Rule Regional Economic Community Real (Effective) Exchange Rate Regional Indicative Strategic Development Plan (SADC) Rules of Origin Rest of the World Regional Trade Agreement Regional Value Chain Southern African Customs Union Southern African Development Community, Successor of: Southern African Development Coordination Conference Structural Adjustment Programme Special Economic Zone Standard International Trade Classification Small and Medium (-sized) Enterprise Sanitary and Phytosanitary (Agreement/Measures) Standardization, Quality Assurance, Metrology and Testing Science, Technology and Innovation System Technical Barriers to Trade Third Country Fabric (Rule of Origin) Trade and Development Bank (COMESA, formerly known as PTA Bank) Trade, Development and Cooperation Agreement (EU, South Africa) Trade Facilitation Agreement (WTO) Tripartite Free Trade Area Transnational Corporation Trade-Related Investment Measures Trade-Related Intellectual Property Measures Union Economique et Monétaire Ouest Africaine Upper Middle-Income Country United Nations Conference on Trade and Development United Nations Industrial Development Organization United States Agency for International Development United States–Mexico–Canada Agreement Value-Added Tax Very Small Open Economies West African Common Industrial Policy (ECOWAS) West African Development Bank (= BOAD) West African Economic and Monetary Union (= UEMOA) West African Monetary Zone World Bank World Customs Organization

Abbreviations

WDR WITS WTO

xix

World Development Report (WB) World Integrated Trade Solution World Trade Organization

List of Figures

Fig. 1.1 Fig. 1.2

Fig. 2.1 Fig. 2.2 Fig. 4.1 Fig. 4.2 Fig. 4.3 Fig. 4.4 Fig. 4.5

Fig. 4.6 Fig. 4.7 Fig. 6.1 Fig. 10.1 Fig. 11.1

Fig. 12.1

Overlapping regional communities in Africa (mid-2000s). (Source Schiff/Winters (2003)) . . . . . . . . . . . . . . . . . . . . . . . . . . . A consolidated picture of African RECs (2021). (Source Author. The Union of the Comoros was admitted as the 16th SADC member at the summit of 19–20 August 2017. Somalia and Tunisia entered COMESA in July 2018.) . . . Non-tariff measures. (Source Own compilation) . . . . . . . . . . . . . Single market area on the amended linear path. (Source Own compilation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Standard diagram of tariff effects. Source Author . . . . . . . . . . . . Tariff effects with increasing returns. Source Author . . . . . . . . . . Tariff effects in a regional trade agreement. Source Author . . . . . Aggregate demand in a regional trade agreement. Source Author . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RTA demand and supply with increasing returns (Source (Brücher 2016: 126). Only the right part of the concave supply curve is shown.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Specialization, diversification and sophistication. Source UNIDO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . African exports in comparison. Source UNCTAD (2016: 24) . . . Structure of AfCFTA negotiations. Source Various AUC communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regional trade agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EU trade regimes with Africa, (Source European Commission, “Strengthening the EU’s partnership with Africa, Note of 12 September 2018) . . . . . . . . . . . . . . . . . . . Global raw cashew nut production (Source FAOSTAT data, following Sarabia (2017:87)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9

15 28 31 61 64 66 67

69 79 82 98 194

205 242

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xxii

Fig. 12.2

List of Figures

New triangular textile trade with Africa (Source Author. Legend: 1: Cotton exports from (West) Africa; 2: Yarn and cloth imports from China; 3: Apparel exports to US (AGOA) and EU; 4: Cheap apparel imports for final consumption) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

254

List of Tables

Table 3.1 Table 3.2 Table 4.1 Table 7.1 Table 8.1 Table 11.1

Intra-group trade as part of total trade . . . . . . . . . . . . . . . . . . . . . Uganda—recorded informal trade . . . . . . . . . . . . . . . . . . . . . . . . Export diversification of African countries 2012 . . . . . . . . . . . . ECOWAS/UEMOA common external tariff . . . . . . . . . . . . . . . . Design principles of industrial policy . . . . . . . . . . . . . . . . . . . . . Preference regimes of the European Union . . . . . . . . . . . . . . . .

45 52 80 133 146 207

xxiii

List of Textboxes

Box 3.1 Box 4.1 Box 5.1 Box 7.1 Box 8.1 Box 8.2 Box 8.3 Box 9.1 Box 12.1

The European Union as travelling model . . . . . . . . . . . . . . . . . . . The experience of the first EAC (1)—Divergence . . . . . . . . . . . . One-Stop Border Posts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The conundrum of industrial policy in an advanced economic union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regional industries in Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regional industries and how (not) to brand what they produce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Experience of the first EAC (2): Planned Redistribution . . . The Action Plan for the Accelerated Industrial Development in Africa (AIDA) . . . . . . . . . . . . . . . . . . . . . . . . . . . The controversy on fiscal losses from trade agreements . . . . . . .

55 73 90 130 154 158 160 167 223

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Part I

The Economic Regions in Africa

Chapter 1

The State of the Unions

Abstract What defines an economic region and distinguishes it from other spatial concepts? This fundamental question is addressed based on the dimensions of space, borders, action and time. An overview of the landscape of African Regional Economic Communities (RECs) follows. RECs are briefly portrayed, and the bewildering multitude of RECs is demystified to create a better understanding of the pattern of economic integration in Africa. The exercise is guided by a matrix of general-purpose versus functional/sectoral as well as effectual versus ineffectual/dormant economic unions. This analysis forms the basis for a critical discussion of the African Union’s practice of only granting official recognition to a subset of RECs. The ‘spaghetti bowl’ of African RECs is disentangled, and an orderly range of the economic unions relevant for general-purpose integration is established. The chapter concludes with a depiction of the factual landscape of economic integration in Africa, which is characterized by a great vertical rift and the challenge to achieve effective trade integration between Northern and Sub-Saharan Africa.

1.1 Regionalization and Regionalism—What Defines an Economic Region? Given the fact that modern industrial production needs large markets to succeed and that the African sub-regions represent a good testing ground for fledgling industries, regional economic integration in Africa appears to be a perfect match for industrialization. However, neither the contours of Regional Economic Communities (RECs) nor the economic and political interplay between industry and integration is sufficiently defined. A look at any plan for ‘regional industrial policy’ currently on display in Africa reveals blind spots. None of the related concepts of regionalization, regionalism, regional integration, regional cooperation or coordination are clearly defined in the economic or political sciences. Unfortunately, the term ‘region’ can have both a sub-national and supranational meaning. In this double context, the following formulation comes closest to a consensual definition: regionalization designates either empirically observable decentralizing, centrifugal processes within national or international confines, or © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 H. Asche, Regional Integration, Trade and Industry in Africa, Advances in African Economic, Social and Political Development, https://doi.org/10.1007/978-3-030-75366-5_1

3

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1 The State of the Unions

economic gravitation towards regional poles in the global arena which is not necessarily intentional or planned. Regionalism covers chiefly intentional activities of, inter alia, socio-economic or political grouping with a spatial dimension, including programmatic or ideological exercises calling for political autonomy or emphasizing alleged regional identities. Regionalism also includes the negotiation of regional trade agreements or the formation of Regional Economic Communities. In short, regionalization versus regionalism can be seen in terms of a contrast between spontaneous, social actor- or market-driven processes and consciously staged approaches that seek to define formal regions. However, the two terms are not always carefully distinguished. Before turning to the regional bodies often confused with the entirety of regional integration, we must clarify that economic regionalism encompasses at least three distinct processes in Africa and in other world regions: 1. 2.

3.

African intra-regional economic integration within and across the bodies of Regional Economic Communities (RECs) treated below. Inter-regional integration (arrangements like EPA or AGOA). In some of these processes, African Regional Economic Communities become the interlocutors of external partners, which in turn are either single nations or other RECs. Cross-national processes: Often informal and fairly intensive integration across formal national and regional borders that involves goods, services, labour, capital and various geographical configurations of land, including (a) regional corridors, (b) micro-regional clusters cutting across formal borders, thus called micro-regionalism, (c) regional networks, most noticeably the establishment of regional communication networks.

Outcomes of the first two processes are technically registered as regional trade agreement (RTA) with the WTO. Their dynamics are often lumped together under the term ‘new regionalism’, which refers to a global trend observable following the fall of the Berlin wall, although African RECs mostly date back further than 1989. The term has been introduced in the international relations literature and is still used in numerous contexts stretching from global to local trends.1 The third process, where actors often ignore or make a mockery of official rules and regulations, must be taken into consideration to get a complete picture of actual regionalization in African settings. In formal integration alone, as it will be examined below, Africa lags behind considerably in global comparison. Formalized processes under 1 and 2 have in general hardly favoured deep economic integration in Africa. In consequence, foreign investors are for the most part not attracted by the prospects of regional markets in Africa.2 Bi-regional arrangements such as the EU’s EPAs are even accused of running counter to regionalization. Therefore, it is important to stress that actual integration described under point 3 has led here and there to much more intense 1 For

some classic examples, see the writings of Söderbaum and Taylor (2008). is confirmed by the Africa Investor Report 2011 (UNIDO 2012): Regional market-seekers with a substantial proportion of their sales exported to Sub-Saharan Africa (excluding South Africa) accounted for just five per cent of domestic and 11.5 per cent of foreign firms.

2 This

1.1 Regionalization and Regionalism—What Defines an Economic Region?

5

region-building than formal arrangements and results in deep integration in terms of goods, services, capital, labour and land exchange. The picture of African regional integration would definitely be incomplete and far too gloomy if these activities were not considered.3 As a particular form of type 3 integration, informal cross-border networks of criminal and terrorist nature have gained ground in Africa over the last decade, particularly in the Sahara–Sahel region, mainly but not only between parts of Burkina Faso, Mali and Niger in what is known as the Liptako–Gourma region. Based on extended trade in drugs, weapons, gold and hostages, such networks represent a peculiar type of regional economic integration. Groups governing this kind of integration establish border controls which replace the public services that have deserted the region. They routinely raise Islamic tax (zakat) on economic activities, in particular on gold mining. Young men are recruited into military ‘service’ and paid by the taxes and ransoms collected. In order to describe the vast territory affected, this kind of terrorist regional integration has been called ‘Sahelistan’ or even ‘Africanistan’ in the literature, due to obvious parallels with the political situation in Afghanistan (Kwasi, Cilliers, Donnenfeld et al. 2019; Laurent 2013; Michailof 2015). If we had comparable figures, informal trade generated by this sort of regional economic integration would most likely turn out to be larger than formal trade in some officially recognized RECs in the Sahara–Sahel region. Regional economic integration covering the processes named under 1 and 2 as well as all related policies—in contrast to the spontaneous and informal clustering described under 3—has to have a precise technical meaning. Four key characteristics can be identified: space, borders, action/actors and time. Space Regional integration encompasses market and political forces that bring economic actors closer in geographic space. The space offered by regional integration has upper limits: it differs from globalization because it confines integration to a smaller area. This spatial limitation has led to an ongoing debate as to whether regional integration helps or hinders global trade integration. By the same token, regional integration schemes are obviously different from larger entities like empires, to name a particular setting in the global sphere, although they have their own hegemons. With regard to all related aspects, research on regional integration is considered to be part of the vast domain of Area Studies (Engel and Nugent 2010) and of Neofunctionalism applied to international relations and pioneered by Ernst Haas (Plenk 2015). The specific part of the spatial dimension that is of interest for economic integration is concerned with market size and production scale. At given GDP levels, most African markets are considered too small, already in geographical area size, and 3 For

West Africa, the most comprehensive and systematic analysis of both formal and informal cross-border cooperations is presented by the OECD jointly with the Sahel and West Africa Club (OECD/SWAC 2017), only that some of the milestones for cooperation have almost literally been overrun, increasingly since 2019, by cross-border violence and transnational extremist groups. The violent spatial turn is just briefly mentioned in the study although arguably not exogenous to the cross-border activities researched.

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1 The State of the Unions

for cutting-edge industries even increasingly so, although this has remained controversial as we will see below. Markets in Africa are, however, not simply too small. First, it is fierce import competition that keeps them small, and the way competition renders domestic producers and thus markets small is less banal than it may sound: domestic markets are not just too small in absolute terms, but also in proportional terms when investors contemplate providing production capacity for local demand. These proportions change, mainly to Africa’s disadvantage. Two classic examples are Nurkse’s steel-rolling mill4 and Rosenstein-Rodan’s shoe factory (1943). A sectorspecific measure of the ratio between minimum market and plant size stands behind this phenomenon. A modern car plant releasing less than 100,000 standard passenger cars annually is not globally competitive, and yet aside from South Africa and Nigeria, entire sub-regions of Africa do not absorb this much at given domestic purchasing power levels. In this regard, a region at the last frontier of economic development faces a particular historical challenge. During early industrialization, efficient minimum firm scale grew from artisanal production levels in tandem with domestic market size, and exports became available as a vent for surplus production, but in contemporary Africa, the minimum efficient scale of a single modern factory often exceeds the size of a large national market in both static and (realistic) dynamic terms, while exports are hampered by productivity differentials. For many industries in Africa, minimum scale has grown faster than accessible internal and external markets. Borders What differentiates the discussion of regional economic integration systematically from general spatial considerations is not the sheer magnitude of population and production, but rather the crossing of state borders. Regional integration becomes a distinct feature in economic policy because output and factor markets are integrated beyond borders, at which prices, taxes, etc., change. As area studies have shown, borders do not only hinder trade and other economic activities: they can also create trade precisely because they are political borders. In this regard, we will later refer repeatedly to the particular role which the border between Benin and Nigeria plays. Action The confines of a regional community also represent an arena for political action. Arena theories are an established concept in political and social sciences, and much of their methodology is suited to application to economic integration. Outer borders of regional economic groups define a unique territory for political action; otherwise, we would simply have international trade and factor movement, as among nations, along with the economic interests that drive them. Physical and non-physical (e.g. regulatory) borders are sought to be removed by political action within regional schemes and define a distinct arena of attracting and repelling forces. The international policy character of regional integration can make it a help or hindrance for the effective use of the combined space.

4 ‘In Chile, for example, it has been found that a modern rolling mill, which is standard equipment in

any industrial country, can produce in three hours a sufficient supply of a certain type of iron shapes to last the country for a year’ (Nurkse 1953: 7). Further to this development, we observe today that a steel-rolling mill is by no means profitable anymore in every bigger industrialized country.

1.1 Regionalization and Regionalism—What Defines an Economic Region?

7

Time Contrary to the basic geographical definition of regions, regional economic integration across borders does not represent an exogenous given, nor a socioeconomic steady state. Integration expands and intensifies or recedes over time, down to outright failures. Curiously, extensive as well as intensive integration has almost no endpoint in time. The enlargement of the European Union has been its raison d’être since the beginnings with six members in the 1950s; talks about EU extension continue, even though one member state opted out for the first time in 2016. Africa’s economic integration even officially aims to create a pan-African Economic Community, once a remote galaxy brought closer today by the project of a Continental Free Trade Area (AfCFTA). Intensification has its own linear or rather nonlinear time path. Regional economic integration hence introduces a comparative argument. By bringing actors in one or more regions closer to each other, economic exchange and interaction become more intense over time than they would without such integration. In economics, the subject mostly falls in the realm of comparative statics or dynamic analysis. When considered as an international policy approach, regional economic integration is usually said to belong to the family of strong policies. REC member states enter into binding commitments which bring them closer to each other than to partners in the rest of the world, in most cases. Weaker concepts are regional cooperation or coordination. The term ‘regional cooperation’ was long used by authors of the World Bank and the International Monetary Fund to denote policies below the threshold of exclusive measures in favour of the club and to the detriment of non-neighbours, hence linked to the idea of ‘open regionalism’.5 Out of these four characteristics, regional economic integration policy is, according to the exposition in Brücher (2016), marked by a double trade-off: a spatial trade-off between the local (or any national or sub-regional) and the global solution, and a trade-off between liberalization within the REC and some shielding or protection vis-à-vis the outer world. Because of its potential to foster competition, he argues that. “this combination of apparently antagonistic forces—liberalization and protection—in a dynamic perspective is in fact the single most important argument in favour of regionalism— if not even the only truly and substantially valid one.”(Brücher 2016: 13; emphasis in the original)

In the following, we will review how the dynamic potential of these antagonistic forces can be harnessed in African regional communities.

5 See Yusuf (2003: Chap. 3, Regional Cooperation in East Asia), one example of older WB/IMF publications that carefully avoided any mention of the term ‘regional integration’, while subscribing to open regionalism (p. 99).

8

1 The State of the Unions

1.2 Empirics—the Panoply of Regional Organizations in Africa Regional integration has been on the agenda of African policy-makers since independence, and Regional Economic Communities have mushroomed on the continent. The regionalism of African formal entities is mostly not ‘new’. The most important RECs by any standard predate the re-configuration of the global setting after 1989 which gave birth to the new regionalism. Regional integration, in the sense of interstate cooperation for common political and economic goals, has a long tradition in Africa and dates back to colonial times as well as to the pre-colonial configurations. Immediately following independence, a wave of regional cooperation agreements was launched among the newly created states, nourished by the insight of the new African leaders into the artificiality of borders and the limited developmental space of their states. This led to a whole series of regional organizations, some of which are hardly remembered today (Arnold (2005: 145–148) and sources in Bach (2016)). Another category of early RECs reflects the desire of former colonial powers to consolidate parts of their ex-colonies into coherent groups linked to the old colonial hegemon. The unmatched potential of RECs to offer trade preferences to various friends and to place political followers at influential posts adds another element of explanation for the mushrooming and multiple memberships of regional communities. The combined application of regime consolidation, desire for ‘club diplomacy’ and patronage to regional organizations explains much of the pattern in Africa and other developing regions (Bach 2016: 32–33). The so-called spaghetti bowl of wildly overlapping entities became the most famous graphical representation of regional integration in Africa (Fig. 1.1). A related pattern known as ‘box-in-the-box’ describes smaller communities that can be found within larger ones—a fact of considerable importance in political practice. The Bhagwati-style graphical representation is often used to make a mockery of regional integration in Africa, insinuating that the tangle of regional blocs denotes a lack of political seriousness and should be abandoned in favour of proper multilateral cooperation. However, this judgement is unfair for a number of reasons. First, similar ‘bowls’ exist for other regions and are similarly bewildering, which demonstrates that this is not a case of African exceptionalism. Second, one school of international trade economics recognizes the blossoming of RECs even as stepping stones to multilateral trade liberalization. Third, regional entities of certain types can actually overlap without detriment to their performance. They reflect preference for ‘club diplomacy’ among African heads of state. Africa’s regional economic integration schemes need demystification. Figure 1.1 is actually too confusing and therefore not representative of African regional economic endeavours. Presented in a more clearly arranged view, the organizations depicted represent a matrix of general economic versus functional (sectoral, issuerelated) integration, and of operative/effective versus inoperative ones. For a picture of general economic integration, only the first quadrant matters: broad economic

1.2 Empirics—the Panoply of Regional Organizations in Africa

9

Fig. 1.1 Overlapping regional communities in Africa (mid-2000s). (Source Schiff/Winters (2003))

schemes that work. However, a number of the communities shown are either not economic or not effective, or both. Some are unachieved political projects. Here are cases in point. Conseil de l’Entente Succeeding to a still older ephemeral organization and to the colonial Afrique-Occidentale Française, the Conseil de l’Entente (CdE) (in Fig. 1.1) brought together Côte d’Ivoire, Niger, and the countries now known as Burkina Faso and Benin in 1959, with the addition of Togo (interestingly not Mali) in 1966. Although founded with an economic agenda, the CdE has left no traces of regional integration.6 The diagram also includes the Organisation pour la mise en valeur du fleuve Sénégal (OMVS) and the Nile Basin Initiative (NBI), which both functionally deal with water distribution issues. If these communities were included in a panorama of African RECs, then it would be necessary to feature additional regional organs that focus on integrated water resource management (IWRM). Liptako–Gourma Authority Another such case is the Autorité de Développement Intégré des Etats du Liptako-Gourma (ALG). It comprises the three states sharing the Liptako-Gourma region: Burkina Faso, Mali and Niger. According to its website, the ALG undertakes multiple activities in sectoral and security areas, and has as usual multiple donors. Intriguingly, when looking at this website (last accessed: 6 Probably, the most noteworthy political moment in the lifetime of the Conseil de l’Entente was in the villas which the CdE had built in Ouagadougou (as in other capital cities), presumably for regional meetings. As they remained unused, subsequent Burkinabè governments had occupied them. On 15 October 1987, Burkina Faso’s Visionary President Thomas Sankara was murdered there.

10

1 The State of the Unions

1/2021), nothing worrying seems to happen in the Liptako–Gourma region, however the epicentre of the Sahelian crisis, and concrete security-related interventions are not reported. It is not a daring hypothesis to say that the Islamist insurrection reported above as terrorist form of regional integration holds more sway in this border region than the ALG. Lake Chad Basin Commission The LCBC with six member states (Cameroon, Chad, Niger, Nigeria, Central African Republic and Libya) has a double mandate for IWRM and security issues. The organization appears active in the latter domain, namely by its Multinational Joint Security Force (MNJSF) to fight Boko Haram. For details, see for this as well as for other West African RECs the interactive website of the European Council on Foreign Relations (ECFR) at https://ecfr.eu/special/afr ican-cooperation, with a focus on the multiple, overlapping regional initiatives in conflict regulation and peacekeeping, offering the African member states an attractive possibility of ‘forum shopping’. The site reports on still more regional security initiatives than enumerated here. CILSS Another community concerned with political or sectoral issues is the Comité permanent Inter-État de lutte contre la sécheresse au Sahel (CILSS), which has been involved in the fight against desertification since the drought of 1973. To a similar extent as the IWRM bodies, CILSS is one of many representative examples of Africa’s functional efforts towards international integration with some economic bearing, but little or no directly intended trade integration. IGAD Much the same applies to the Intergovernmental Authority on Development, in the light of its actual concentration on peace building and selected developmental issues. If IGAD (currently 8 member states) were retained as a Regional Economic Community in the East of the continent in a very broad understanding of what is ‘economic’, one would also have to consider the recent creations of G5 Sahel and Sahel Alliance in the West.7 West African Monetary Zone One of the most striking cases of an inoperative REC is the WAMZ, which was intended as a currency union of the five Anglophone Non-FCFA states Gambia, Ghana, Liberia (who joined in 2010), Nigeria and Sierra Leone, plus Guinea. The WAMZ appears on every second graph on the subject, lingering on for decades and missing deadline after deadline without making any real progress. Although it does have certain working institutions such as a convergence committee, WAMZ simply does not exist on the ground. For this reason, we will remove it from the picture. Things may change when the reform of the western FCFA zone announced in December 2019 becomes effective and is eventually extended to the non-FCFA countries (see chapter on the monetary unions below). It is more likely that WAMZ will never materialize because of Nigeria’s peculiar status. As an oil exporter, the country has to deal with different foreign exchange problems than most other countries in the region. As the economic giant in the region, it has difficulty understanding why it should submit its monetary regime to 7 Part of the G5 Sahel mandate with its five regional member states Burkina Faso, Mali, Mauritania,

Niger and Tchad is peace building and conflict resolution. This overlaps with the respective mandate of ECOWAS and the work of its military arm ECOMOG.

1.2 Empirics—the Panoply of Regional Organizations in Africa

11

the collective decision-making of far smaller economies, most of which are not—thus far—significant trading partners. CEN-SAD Another unachieved project is the Community of Sahel–Saharan States, a mirage institution originally initiated by Gaddafi with the sensible strategic aim of bringing the Arab North and Sub-Saharan Africa closer to each other. It has 28 member states, hence more than half the African total. However, a perceptible decision on trade integration has yet to materialize. CEN-SAD has no free trade arrangement and no other economic dimension which is attributable to the organization or to which it evidently contributed. The fact that the Africa regional integration index has it differently (at https://www.integrate-africa.org/rankings/reg ional-economic-communities/cen-sad) does not change matters, as long as no precise activities are reported.8 Arab Maghreb Union A similarly ineffective REC has been the AMU, which oversaw an era of mostly closed borders in North Africa and is considered dormant due to a lack of effectual decision-making on regional integration.9 It has four North African member states, plus Mauritania, but not Egypt. Economically, it has been replaced since 1 January 2015 by the Greater Arab Free Trade Area (GAFTA) of 19 member states, six of which are African. At the core of this trade area is the Agadir Agreement, initially between Egypt, Jordan, Morocco and Tunisia, which aims effectively at deeper integration of four GAFTA states. Great Lakes The formal economic groupings around the Great Lakes are interesting as well. There are in fact two, one huge and one small: • The International Conference of the Great Lakes Region (ICGLR), noteworthy because it stretches the notion of Great Lakes from Sudan in the North down to Angola and Zambia in the South, with 12 member states • The Communauté Economique des Pays des Grands Lacs (CEPGL), comprised of the three francophone countries DRC, Burundi and Rwanda, now also known as the Economic Community of the Great Lakes Countries (ECGLC). The smaller union appears operationally more relevant than the largely declaratory ICGLR, yet both are of limited economic importance and involve little institutional activity. Keeping all such communities in the diagram creates an overly confusing impression of regional economic integration in Africa. It would thus be more realistic to work with a smaller number of RECs relevant for economic integration, but how many? The counting method of the African Union should help. In the first attempts at African unity, the then Organisation of African Unity (OAU) and signatories to the Abuja Treaty foresaw just five (5) Regional Economic Communities, one for 8 As CEN-SAD (or CENSAD) was founded

in 1998 at the initiative of ‘Brother Colonel Muammar Al Kaddafi, Leader of the Great Al Fateh Revolution’ (AU website until about 2016), it will be interesting to observe how the AU will proceed with the heritage. The official website www.cen sad.org was maintained after Gaddafi’s death in 2011, but meetings were no longer reported on the site from 2014 onwards. The website is currently offline. 9 Recently, AMU was reported to do relatively well on ‘open reciprocity’ for travel visa (AfDB 2020).

12

1 The State of the Unions

each African sub-region, as building blocks for the imagined African Economic Community (AEC). Today’s African Union (AU) officially recognizes eight (8) RECs: CEN-SAD, COMESA, EAC, ECCAS, ECOWAS, IGAD, SADC and AMU. However, it is very difficult to discern the rationale behind this policy of official recognition. AMU, CEN-SAD, ECCAS and IGAD do not have any trade agreement in place. ECCAS at least aims at one and even at a customs union. In striking contrast, three of the most advanced communities are not among the ‘recognized’ ones: SACU, CEMAC and UEMOA. They do not officially exist. Southern African Customs Union A working customs union and the oldest in the world, SACU was created in 1910 along with the South African Union and is associated today with the Common Monetary Area (CMA), which pegs the currencies of Lesotho, Namibia and Eswatini to the South African Rand. CEMAC and UEMOA The mainly francophone organizations Communauté Economique et Monétaire de l’Afrique Centrale (CEMAC) and Union Economique et Monétaire Ouest Africaine (UEMOA) are two of world’s rare monetary unions, with the latter dating back to the post-colonial UMOA of 1962. CEMAC was founded in 1994, replacing the old Customs and Economic Union of Central Africa (UDEAC), and became operative in 1999. Both organizations are customs unions to varying degrees. They are boxes-in-the-box of ECCAS and ECOWAS, but have been more resolved to achieve regional integration than the larger unions. This has held true up until recently with regard to ECOWAS and still holds true for ECCAS. We will take a closer look at UEMOA in connection with ECOWAS below. CEMAC has six member states: Cameroon, Chad, Central African Republic, Congo (Republic), Equatorial Guinea and Gabon; the UEMOA has eight. At first glance, CEMAC and UEMOA look like near-identical twins with post-colonial parenthood. However, CEMAC is unique among African RECs in consisting exclusively of resource-rich economies. Five member states are predominantly oil exporters; the Central African Republic is a major exporter of industrial diamonds. Therefore, insights from the body of literature on the mineral resource ‘curse’ and ‘Dutch disease’ would have to be considered for the chances of economic integration among several such states.10 A World Bank working group has done some of the background work on several aspects by submitting CEMAC to detailed analysis, culminating in papers published in 2017 and 2018, of which the one by Fiess, Aguera and Calderon et al. (2018). With the partial exception of Cameroon, exports from CEMAC countries are extremely outward oriented and rely on very few products: mainly oil, gas, diamonds and tropical wood.11 In consequence, these countries trade extremely little within the region, even by African standards. Discipline in applying the zero-rate preferential tariff among member states and the CET is low, not counting 10 For advice on how to escape the mineral resource curse and arrive at a meaningful division of labour, the CEMAC commission and member states have to be referred to the modern structural policy literature as reviewed in Asche (2018a) and now to be applied to a region instead of a single country, as rolled out in Part II. The same applies to the larger ECCAS, which is comprised—with Angola and the Democratic Republic of Congo—of still more resource-dependent economies with identical problems. 11 See also chapter on export orientation and the Herfindahl measure of export diversification.

1.2 Empirics—the Panoply of Regional Organizations in Africa

13

what Fiess et al. cite as deep-rooted tracasseries at the border. As a whole, resolve towards economic integration is weaker in CEMAC than in UEMOA, which led the WB team to recommend a political decoupling the two topics of oil and integration: “For the regional integration in CEMAC to succeed the political will for integration needs to go beyond aspirations that ebb and rise counter-cyclically with oil prices.”(Fiess, Aguera et al. 2018: 102)

Considering that oil prices—still at a low ebb—will probably never again rise to former heights, the political will to more deeply integrate the exclusive club of oil exporters which constitutes CEMAC will possibly remain at a relative height. Given the resource dependence, it is all the more remarkable that CEMAC has already established and maintained the necessary institutions for an economic and a monetary union—formally it consists of both—and has started, similar to UEMOA, to give its commission supranational authority. CEMAC must be kept in the picture. Admittedly, all three unions—SACU, CEMAC and UEMOA—are undertakings initiated and still guaranteed by former colonial or mandate powers—France and South Africa. They represent what Bach calls ‘integration through hysteresis’.12 Yet, colonial past discriminates badly with regard to technical performance. The mechanics of the schemes function well because of their path dependence. Even the well-recognized EAC is the re-establishment of a union that was already in place from 1967 to 1977. It is still regarded by sceptics in the region as the fruition of a far older British colonial project: the customs union of 1917 between Kenya and Uganda to which Tanganyika was attached in 1927. The Southern African Development Community (SADC) used to be the anti-apartheid frontline organization SADCC; it was relabelled in 1994 and then opened to South Africa. SADC still has features from the old SADCC, among them heavy reliance on external donors for its day-to-day operations, but few question its relevance as a platform for the sub-region (Adelmann 2007). The UN Economic Commission for Africa (UNECA or ECA) along with the AU Commission (and later the AfDB) has established an extensive monitoring system of the African RECs and their economic activities by an insightful series of reports ‘Assessing Regional Integration in Africa’ (ARIA). In the context of these reports, UNECA once adopted a broader approach, recognizing fourteen (14) RECs (UNECA 2006: 48). In this definition, each sub-region would be home to an average of three to four organizations:

12 See

Bach (2016: 21 sqq.). While rightly pointing to the (post-)colonial legacy, the linking of regional integration to hysteresis needs qualification. Hysteresis in physics, economics, etc., refers to effects that persist after the initial cause that gave rise to these effects is removed. Formal colonial ties have certainly been severed in Africa, and in this respect, there is hysteresis. However, critics will strongly argue that the cause of economic dependence on the former colonial powers is still present. In the two FCFA schemes, the institutional ties to the French treasury are not even formally severed, so UEMOA and CEMAC are better termed path-dependent schemes in a wider sense. With the intended FCFA reform, this will only partly change.

14

1 The State of the Unions

• In West Africa, ECOWAS coexists with the West African Economic and Monetary Union (UEMOA), the Mano River Union (MRU), and—still—the Community of Sahel–Saharan States (CENSAD). • In Central Africa, the Economic Community of Central African States (ECCAS) coexists with the Central African Economic and Monetary Community (CEMAC) and the Economic Community of Great Lakes Countries (CEPGL). • In Southern Africa, the Southern African Development Community (SADC), the Southern African Customs Union (SACU) and the Indian Ocean Commission (IOC) exist alongside the Common Market for Eastern and Southern Africa (COMESA), which also covers East Africa and parts of North and Central Africa. • East Africa has the East African Community (EAC) and the Intergovernmental Authority on Development (IGAD). • North Africa is home to the Arab Maghreb Union (AMU/UMA). Although this definition correctly admits UEMOA, CEMAC and SACU to the REC scene, not all other communities added to the list are active agents of general trade integration (MRU, IOC, IGAD). This is not to deny their functional or sectoral importance. The CEPGL is arguably a borderline case. UNECA has since backtracked in joint publications with the AUC such as their regional integration index, which once again systematically refers only to the ‘official’ eight RECs without checking for the existence of operational activity relevant for economic integration (UNECA, African Development Bank and African Union 2019). The self-restriction is reproduced, e.g. in the Commonwealth Secretariat Handbook of Vickers (2017). The regional integration index attributes the eight respective RECs with performance in several dimensions without providing much evidence thereof. In doing so, it overlooks real economic integration in Africa where it actually exists and overstates what can truly be attributed to these ‘official’ RECs in statements like ‘REC XX excels in the macroeconomic dimension…’ (my emphasis). Given these shortcomings, the use of principal component analysis, useful to construct a multidimensional instrument, does not make the index more acceptable. The approach should not be followed. When we retain the three customs unions and CEPGL in the picture but drop AMU, CEN-SAD, and—with an inevitable pinch of arbitrariness—IGAD and ICGLR for lack of recognizable general trade integration activity, we arrive at a more clearly arranged diagram (Fig. 1.2). The three Common Monetary Areas are shaded in yellow. With regard to multiple and overlapping memberships, the situation looks considerably clearer as only the trade-relevant RECs are counted13 : just the three member states of the CEPGL on the shores of Lake Kivu and Tanganyika are a part of three RECs, which is not particularly trade-distorting. Rwanda also belongs to COMESA, the DRC to SADC, and both Burundi and Rwanda to the EAC. Contrary to other counts (African Union 2020), no countries are members of four RECs. The Sahrawi Arab Democratic Republic in the Western Sahara has not yet reached the state sovereignty it should have and does not belong to any REC. Following 13 The

whole FCFA zone and the CMA are not counted separately.

1.2 Empirics—the Panoply of Regional Organizations in Africa

Algeria Morocco

GAFTA

Benin Burkina Faso Côte d’Ivoire Guinea-Bissau Mali Niger Senegal Togo

CEMAC

Egypt Libya Sudan Tunisia

Sao Tome and Principe

FCFA Zone UEMOA

Cameroon Central Afr. Rep. Chad Rep. Congo Equat. Guinea Gabon

15

DjibouƟ Eritrea Ethiopia Somalia

ECCAS

EAC DR Congo

Angola

CEPGL

Burundi Rwanda

South Sudan

Kenya Uganda

ECOWAS Cape Verde Gambia Ghana Guinea Liberia Nigeria Sierra Leone Mauritania (associate)

Tanzania

COMESA Malawi Zambia Zimbabwe

Mozambique

SADC CMA

MauriƟus Madagascar Seychelles Comoros

EswaƟni

Lesotho Namibia South Africa

Botswana

SACU

Fig. 1.2 A consolidated picture of African RECs (2021). (Source Author. The Union of the Comoros was admitted as the 16th SADC member at the summit of 19–20 August 2017. Somalia and Tunisia entered COMESA in July 2018.)

Somalia’s accession to COMESA and South Sudan’s accession to the EAC, just one of the 54 sovereign African states still does not have any REC affiliation: Mauritania. Technically, Mauritania belongs to AMU and CEN-SAD, but as mentioned in the above, evidence provided by websites and the literature does not characterize either organization as anything other than dormant. While Mauritania was one of the founding states of ECOWAS in 1975, it decided to withdraw in December 2000, obviously torn between its Sub-Saharan African and Arab identities. The Mauritanian government is considering re-entry into ECOWAS after signing a new associate membership agreement in August 2017. In conclusion, the situation is not marked by the hopeless entanglement pictured in the spaghetti bowl theorem, and never quite was. Moreover, even with a broader coverage of mostly functionally or politically active communities such as CILSS, IGAD, IOC and others, this would not be the case. To use an analogy, similar diagrams could be created to illustrate the multiple club membership of individuals involved in sports, culture, politics, civic engagement and neighbourhoods—sometimes with the same, sometimes with different people. A sketch of their related and sometimes overlapping club memberships would not be interpreted as a scathing rendition of their

16

1 The State of the Unions

mental health.14 However, this has been the interpretation of multiple REC memberships in much of the economic literature, with the barely concealed aim of doing away with most of these organizations in favour of multilateral trade liberalization. As we will see below, multiple memberships do indeed have a critical impact on economic integration, but the situation has not become so knotted that an orderly solution is out of reach. To be sure, even with the reduced number of RECs, there are still relevant overlaps, namely in the East and South, and there are the boxes-in-thebox in West, Central and Southern Africa. The smaller boxes are better integrated and more advanced in REC status than the bigger ones, which is a problem insofar as it does not indicate a conscious integration at two speeds (‘variable geometry’), but points to the above-mentioned historical reasons. Equally important is the observation that North Africa and Sub-Saharan Africa are held together by very weak links, in spite of CEN-SAD. The same lack of linkage applies to West and Central Africa vis-à-vis East and Southern Africa, institutionally only connected by ECCAS. Subtract it from the picture, and no formal economic links are left to hold the two halves of the continent together. This reflects the reality of actual trade figures: the two halves of Africa hardly trade with each other, and no infrastructure apart from airways holds them together. Here in the heart of the continent, Africa faces a crucial ‘missing middle’ in terms of economic geography, a great vertical rift. At the single-country level, it also reflects the economic disintegration of the DR Congo. Even West and Central Africa hardly trade, despite the fact that fourteen countries share the same currency. Significantly, the CFA Franc is not used interchangeably in both CFA zones, nor will the new ECO be. It is thus apparent that the simplified diagram, along with all the interesting features it allows us to discover, actually belongs more to the realm of art than to exact science. So what would be objective criteria for determining whether the broader regional economic entities are relevant enough to deserve a place on the map? Several criteria come to mind: (a) (b) (c)

Size of the union Formal status and related processes Degree of actual trade integration and factor mobility.

Size in terms of aggregate GDP or population is significant, but not if integration remains completely superficial. Small but deeply integrated unions should be valued higher. Hence, a great deal depends on the status of the REC and the extent to which the formally achieved integration status has actually been implemented. A short review of REC status and actual integration will show why the economic relevance of African RECs is so difficult to pin down.

14 Pierre

Bourdieu’s sociological theory has similar diagrammatic representations of different and overlapping social belongings.

Chapter 2

The Logical Sequence of Regional Economic Integration

Abstract Globally, regional economic communities are classified in what is customarily called the linear model of integration. The question arises as to where African RECs stand on a stylized linear path of economic integration and to what extent this model can provide guidance for further integration steps. The factual nonlinearity of the ‘model’ is discussed and the ensuing challenges for economic integration are identified in terms of monetary unions, non-tariff measures/barriers (with a new typology) and harmonization of standards. In a final step, the ‘model’ itself is amended and critically discussed in the light of the question of whether a scheme largely inspired by the European experience can be followed in Africa.

2.1 The Linear Model All over the world, Regional Economic Communities are categorized along a stylized linear path using the following stages of integration: • Preferential Trade Area (PTA), offering members lower tariffs on goods than outsiders1 • Free Trade Area (FTA), with abolishment of tariffs and non-tariff barriers (NTB) in the interior while maintaining diverse tariff structures vis-à-vis non-members, and agreed rules of origin (RoO), still necessitating REC internal border controls • Customs Union (CU), with common external tariffs (CET), with or without unified customs revenue collection, and finally the abolition of border control in the interior • Common Market (CM), implying liberalization of services and factors (labour, capital and land acquisition) as well and approaching full harmonization of rules and standards • Monetary Union (MU), with common currency and monetary policy • Economic Union, with unified key economic policies, including key sectoral policies • Political Union, harmonizing and centralizing a number of other policies. 1 Note

that the WTO secretariat defines Preferential Trade Arrangements (same acronym PTA) differently, as a designation for unilateral notifications of preferences granted.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 H. Asche, Regional Integration, Trade and Industry in Africa, Advances in African Economic, Social and Political Development, https://doi.org/10.1007/978-3-030-75366-5_2

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2 The Logical Sequence of Regional Economic Integration

The sequence gives a rough indication of staged integration and internal trade liberalization. The further countries advance on the ladder of linear integration, the more deeply they appear to be linked to each other. Independent of the overarching judgement as to whether trade liberalization is always good for development—it actually is not—there is an intrinsic logic of advancement along the conventional steps of integration: Gradual progress from PTA to FTA is relatively straightforward, and the difference is not even a quantum leap as long as FTAs do not reach 100% internal liberalization— something few FTAs do and are not even required to do by WTO definition. It is important to note that not all members of COMESA and SADC belong to the respective FTA in place.2 The basic inconvenience of any FTA is that full internal freedom of trade is hampered by the need to maintain internal customs controls to avoid trade deflection, which occurs when goods enter the region via a neighbouring port at lower tariffs and are re-routed to another member state. When a member state of a geographically contingent FTA has (a) relatively high average tariffs for fiscal or structural reasons, and/or (b) many sensitive products with special duties, and (c) relies on the ports of neighbouring countries for many of its imports, particularly in the case of land-locked countries, then this state requires stringent controls. There is too much at stake. When, however, member states already have (a) lower average tariffs, (b) few, often identical sensitive products and (c) similar general tariff structures, typically arranged in three to four generic tariff bands, then they can have laxer internal border controls that focus mostly on the sensitive goods. But in such a case, the countries are already close to being a customs union with a common external tariff. This is why African countries also tend to advance from FTA to CU. In turn, any CU also requires the abolition of non-tariff barriers sooner or later to avoid wasting the advantage from tariff abolition—a first dimension of a common market which is in fact the next big step of its own, as we will see. If RECs do not venture out into this next dimension, they risk fall-backs to FTA/PTA levels. And so the process continues, step by step. Economic integration in Africa has roughly evolved along the lines of the linear model. Most African RECs started as PTAs and then moved to FTAs. Formally speaking, there are five African customs unions: SACU, CEMAC, ECOWAS since 2015 with UEMOA in its interior, and the EAC since 2010. All have Common External Tariffs (CET). None of them are completed or perfect, in particular not CEMAC. COMESA, despite its well-intentioned name, is a preferential trade area, certainly not a common market in the sense of the stylized trade policy model. Some RECs in Africa aim higher, at full-blown common markets which would have unified markets for products and factors. Beyond the formally achieved CU, the treaty of the EAC, for example, provides for a common market, a monetary union and a political federation.

2 Angola,

Comoros and the DRC have not yet ratified the SADC FTA protocol.

2.2 Mind Your Steps

19

2.2 Mind Your Steps However, the linear model has been criticized on all imaginable grounds. First and foremost, it does not emanate from trade theory but rather encapsulates empirical experience and applied trade law. In the first three stages, trade policy appears preoccupied with goods only, at the expense of trade in services even though they are growing far more rapidly. It does not take sectoral policies into consideration even though a number of real-world integration schemes have grown out of them. Further, the linear model is actually nonlinear. Higher stages from the common market onwards do a great deal to accelerate integration, and subsequent stages have feedback loops. This is why in practice, economic integration has rarely proceeded exactly along the stylized path, and the regional trade agreements have not slavishly followed the linear model anywhere in the world. It should be noted that the European Union did not quite emerge along these lines either. It has been observed that towards the upper end of the scale, the monetary union stage in the full sense of a common currency area requires important elements of joint economic policy in order to function properly. These elements are actually considered to belong to the next stage, economic union. This explains why the Eurozone is currently experiencing a series of frictions and crises. An orderly customs union, and even more so a common market, should have elements of a full-blown economic union, in particular in terms of fiscal policy, all unsurprising from a neofunctionalist point of view.3 In conventional trade philosophy, progress along the lines of the linear model is associated with what is known as the four freedoms of economic integration4 : the free movement of goods, services, persons/labour, and capital, along with the freedom of settlement, which in a way combines the two latter freedoms. Theoretically, they represent free circulation of the two main categories of products and of the two main factors of production. The third factor—land—should also be acquired freely across borders according to the underlying philosophy, but is immobile and considered as part of free capital movement. The achievement of the four freedoms should thus be used as a complementary criterion to measure the actual degree of integration. However, the relationship between the four freedoms with the aforementioned stages is not as simple as it may seem and is—like the linear model itself—more practically than theoretically anchored. Free circulation of goods starts stage 1 and culminates at stages 3 or 4. Free flow of service delivery could in principle also take off at the initial PTA and FTA stages, but has actually lagged everywhere, with a separate agenda. This lag is attributable to historical reasons, mainly: (1) the nontradability of most services, which is now more and more outdated; (2) the fact that the production of goods was not yet as deeply interlaced with services as today; 3 On

the cluster of policies from the last four levels of integration, required to produce the necessary economic convergence in African monetary unions see at the example of CEMAC and UEMOA/WAEMU: Elhiraika, Mukungu and Nyoike (2015). 4 Not to be confused with F.D. Roosevelt’s Four Freedoms of 1941, which are in fact fundamental political and social goals in themselves—something the freedoms of economic integration are not.

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2 The Logical Sequence of Regional Economic Integration

and (3) specific regulatory problems associated with liberalization of certain service categories, such as banking and communication. Due to the traditional permeability of its artificially drawn borders, Africa has also liberalized movement of persons at early stages of integration, but full freedom to establish and work in neighbouring countries is as much a late (and unachieved) result as in unions of rich countries. The same applies to free flow of capital. Generally speaking, it is expected that all four freedoms will materialize when the level of a common market is reached.

2.3 Optimal Monetary Unions? Towards the high end of integration, Africa has three monetary unions, introduced in the first chapters. Two of these have a single currency regime. One union has a fixed exchange rate regime with guaranteed convertibility of the currencies involved, though still not yet complete as a full monetary union, without a common central bank, foreign reserve pooling, etc. With strong rules, essentially unchanged for decades, the currency areas once appeared in an UNCTAD paper as the strongest pillar of regional cooperation in Africa: Monetary and exchange-rate policy has been by far the most developed area of regional cooperation and integration in Africa. With the two currency unions of CEMAC and UEMOA, nominal exchange-rate stabilization within CMA, and the prospective currency unions of SADC and WAMZ, Africa has taken the lead in the developing world in terms of regional monetary integration. (Metzger 2008: 26)

This enthusiastic statement describes the situation which prevailed in the mid2000s. The consolidation of some customs unions and the introduction of common market elements only set in at this time, followed by the dynamic which culminated in the launch of the AfCFTA. These events overtook monetary integration, whereas the projects for more common currencies such as those in SADC or WAMZ did not materialize. Nonetheless, the three monetary unions still represent a solid, rules-based pillar of regional integration in Africa. Africa’s three monetary unions obviously did not emanate from the presumed logical sequence along the linear integration path, either. All three follow a special historical track. CEMAC and UEMOA started historically as monetary zones conceived and implemented by the colonial hegemon France and technically anchored at the Treasury in the Ministry of Finance in Paris. Until 2020, the French Treasury guaranteed the convertibility of the currency and de facto determined the exchange rates and reserve holding requirements in both zones. In this regard, CEMAC and UEMOA are not purely regional, but inter-regional agreements since their director and final guarantor is not in Africa. In fact, the FCFA zone is the most striking case of a hub-and-spokes model between the global North and the South, which we will come to later. This notwithstanding, CEMAC and UEMOA are fully operational monetary unions. One has eight, the other six member states (see map above). Both unions

2.3 Optimal Monetary Unions?

21

use the Franc CFA as legal tender, with a fixed exchange rate historically pegged against the FF and now against the euro (1 Euro = 655.96 FCFA). However, the currency is labelled differently in the two regions,5 the banknotes and coins differ in appearance, and the two currencies are not directly interchangeable between each other or with third currencies. They have two reserve banks in the regions6 and an operations account at the French Treasury in Paris through which transactions with currencies other than the French Franc and the euro pass. Up until now, 50% of all foreign reserves of the fourteen FCFA countries are to be deposited at the French Treasury in exchange for the convertibility guarantee.7 In sum, the system relies on four main principles: 1. 2. 3. 4.

Fixed parity Free transfer of money for current and capital transactions Unlimited convertibility Centralization of foreign exchange reserves.

In addition to their status as monetary zones, the two RECs have been integrating into FTAs and customs unions for many years—for the UEMOA with more operational success than for the surrounding ECOWAS/CEDEAO, and for CEMAC with some more success than for the larger ECCAS. Although they also have historical remnants in long-defunct unions, these two customs unions are entirely independent from any extra-territorial force and are thus truly African integration projects. The Common Monetary Area (CMA) pegs the currencies of the three SACU countries Lesotho, Namibia and Eswatini—and until 1975 Botswana—to the South African rand. The rand is also legal tender in the three countries, but not vice versa. Through their strong affiliation to SACU and its revenue-sharing formula, member countries share a bundle of monetary and fiscal policies. The most important difference in comparison with the FCFA zone is that the currency anchor is in the region, not in Paris or Frankfurt, or put differently: one type of monetary union hinges on a global key currency, the other does not. The basic question now reads: Is this kind of monetary integration good, in a developmental sense, or even optimal? The three African country groups are early birds in forming Common Monetary Areas but arriving early at the stage of a monetary union is not progress in itself. The textbook discussion on Optimum Currency Areas (OCA) following Mundell and McKinnon provides a rigorous exposition in order to understand the conditions and parameters under which a monetary union in general makes economic sense (McKinnon 1963; Mundell 1961). The overarching question is whether exchange rates should be flexible or fixed—all at once or in groups of countries. The answer, simplified for our purpose, is: (a) Regional currency arrangements make sense 5 Franc de la Communauté Financière Africaine in the West, Franc de la Coopération Financière en

Afrique Centrale. Centrale des Etats de l’Afrique de l’Ouest (BCEAO) and Banque des États de l’Afrique Centrale (BEAC). 7 A third near-identical system for the Franc Comorien is the Banque Centrale des Comoros and a fixed parity of 1 Euro = 491.96 FC. 6 Banque

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2 The Logical Sequence of Regional Economic Integration

because they reduce transaction costs—the more countries in the region trade with each other, the higher the cost saving. (b) Currency areas can work optimally if member states are either economically quite homogeneous or if asymmetric external shocks can be countered by high internal factor mobility, e.g. labour in a position to move to the member states with better conditions. Internal factor mobility, normally a defining criterion for a national economy, replaces an adjustment via the exchange rate, which is possible only as a bloc but no longer within the region. Ideally, advantages and disadvantages under (a) and (b) would have to be weighed against each other. The classic OCA discussion came without specific reference to development economics. Yet in the opening of his seminal argument, Mundell interestingly refers—alongside the example of the European Economic Community—to the issue whether ‘the Ghan[a]ian pound [should] be freed to fluctuate against all currencies or ought the present sterling-area currencies remain pegged to the pound sterling?’ This was precisely the question for many African countries at the time of independence. The answer was different for Ghana than for most of the Francophone countries next door. Rightly so? The OCA framework is the equivalent in monetary economics to what Viner’s model is for regional integration in goods trade. Unfortunately, the two models never met, so to speak. In consequence, there is still no integrated theory of regional integration.8 Here we have to concentrate on the monetary argument alone. The Africa-related discussion had its first culmination point in the mid-2000s, arguably stirred by the successful launch of the euro on 1 January 2002. The literature includes the most comprehensive analysis of the monetary geography of Africa, written by Masson and Pattillo. Their conclusion based on an OCA framing for the existing and planned monetary areas was not optimistic: [C]ountries are often dependent on only a few export commodities, whose prices do not move together; intra-regional trade is low, so the scope for saving on transactions costs is limited; and the availability of shock absorbers such as labor mobility and financial transfers is inhibited by ethnic conflicts and a general lack of financial resources. This generally negative assessment of monetary unions leads us to consider other arguments that go beyond the optimum currency area approach. (Masson and Pattillo 2004: 36)

They hardly found such positive arguments, just another one that adds to the problem: asymmetries in fiscal policy. It is safe to say that the assessment is still valid today,9 although every further percentage of increase in export diversification, intra-regional trade, labour mobility, or the quality of fiscal policy contributes to the usefulness of a monetary union. 8 Yet they have interesting features in common. For example, supporting asymmetric shocks, the core

of OCA theory, will in some constellation only be possible with financial compensation—converging to a key issue in regional integration which will be treated in other parts of this volume. 9 The authors updated their findings in 2010 with a view to three projects of new monetary unions— in SADC, EAC, ECOWAS/WAMZ—indicating modest potential gains. Unfortunately, the projects never came to life, about which the authors would be the last to be surprised (Debrun, Masson and Pattillo 2010). Another analysis concluded that the CFA zones were optimal only for Cabo Verde, the smallest of all 14 countries (Loureiro, Martins and Ribeiro 2011).

2.3 Optimal Monetary Unions?

23

In regard to its performance and optimality, the last time the Common Monetary Area in Southern Africa was analysed in a comprehensive manner was in the mid2000s, too. The literature in the decade beginning in the mid-1990s had mostly concluded that the CMA was rather inappropriate in terms of the framework set forth by the OCA. Although the smaller member states were not exposed to the same shocks as South Africa, they nonetheless suffered along with them. The IMF, on the other hand, came to a more upbeat evaluation, mainly in terms of growth experience and adequate exchange rate policy based on South Africa’s inflation targeting (Wang, Masha, Shirono et al. 2007). Conclusions would obviously have to be nuanced in the light of the experience gained during the subsequent decade of ‘state capture’ in South Africa. For a full analysis of the FCFA zones, the North–South link, which implies that member states forego sovereign monetary policy in favour of an economic power residing out of area, must be systematically taken into account. Applying an OCA framework alone does not fully suffice in these cases. The McKinnon OCA version has an implicit developmental turn with an argument on small currency areas with a limited range of tradable goods. It would be better for these countries to anchor their own currency to a strong global key currency. However, this is not unconditional. The current strand of structuralist FCFA criticism essentially sets in here. A number of economic effects are invoked to justify why the FCFA zone has been construed as it is: low rates of inflation, protection against overindebtedness, unlimited exchangeability, protection against monetary speculation, reduced trade costs—in particular, elimination of exchange risks for investors and traders in the regions as well as with France and the wider Eurozone. These positive effects as such have remained largely uncontested, with the important exception of fiscal policy and public debt. As in the 1980s and 1990s, the 2019/2020 high debt spell in many African countries also included some of the 14 FCFA countries. However, it is mainly the issue of where to fix the exchange rate that has stirred the new debate. Since about 2014, the CFA countries have been facing a second period of overvaluation after the 1980s and early 1990s, and for the same reasons: weak commodity prices in contrast to the strength of the peg currency, along with fiscal problems. In the critical literature, four major constraints imposed by FCFA zones have been identified (Pigeaud and Sylla 2018: 168–186): 1.

2. 3. 4.

Over-rigidity of the fixed exchange regime, which does not allow the exchange rate to work as an economic shock absorber or to react to differential economic trends; Problematic anchoring to the euro as a highly valued currency as unsuitable for developing countries (and even for economically weaker countries in Europe); Monetary repression due to the restriction of internal credit caused by the legal need to cover monetary emission with a high level of foreign reserve; Drainage of financial resources towards the North via the guaranteed free transfer of capital and returns on capital, excluding any sovereign system of capital controls.

24

2 The Logical Sequence of Regional Economic Integration

Judgement on the effectiveness of the FCFA zone obviously depends on the economic effects themselves, and on the question whether monetary policy is the best instrument available to reach certain goals. As a group, the FCFA countries have not witnessed higher economic growth than the rest of Sub-Saharan Africa, nor has the CMA. Critics therefore point out that a low inflation target has been privileged over more expansionary growth targets. Moreover, if there is anything consensual in development economics, then it is the thesis that maintaining a slightly undervalued exchange rate is the single most effective means to promote economic development. This measure supports competitive exports and provides a certain shield against unfair cheap imports. For the CMA, the literature concurs that overvaluation has not been much of an issue, but rather the volatility of the rand. However, the two Franc CFA zones are currently run in a way that precludes this practice of maintaining a mildly underrated currency because dominating French economic forces are interested in cheap imports of their goods and services into the CFA zones, not competitive exports from Africa. Whenever the common currency is overvalued to favour what a Marxist tradition would call unequal exchange—as has arguably been the case with the appreciation of the euro— the exchange rate is detrimental to agro-industrial progress on the ground and, by extension, to the two regional communities themselves in terms of their long-standing configuration.10 To bring this critique back into the OCA framework, it is equivalent to saying that the monetary union FCFA has proven unable to react to the terms-of-trade shocks that have hit the African member states but not the non-African anchor country. While OCA literature has placed an emphasis on appropriate adjustment to asymmetric shocks, the FCFA experience has consisted mainly in symmetric shocks—for exporters of agricultural staples in one group, for oil exporters in the other—but no adjustment at all. To make matters worse, the lack of currency adjustment has come without allowing the labour mobility which would theoretically be needed to counterbalance the shocks in the South, in plain words: regular migration to Europe. At least two axioms of an optimal currency area are thus violated. Regular re-adjustment of the FCFA would have been appropriate and technically feasible if the French government and the local elites had agreed. Yet the FCFA has only been devaluated once since its inception. This occurred when the IMF—in a rare instance of justified structural adjustment—rightly denounced the overvalued FCFA as a growth obstacle. The controversial debate surrounding the 1994 devaluation showed, however, how difficult it is to agree on an appropriate exchange rate. The main argument also raised by a number of development economists in defence of the old, high exchange rate vis-à-vis the Franc français went like this: if these countries have an inelastic export portfolio and little potential to diversify, a lowered exchange rate helps them little, while at the same time forcing them to forego the advantage of some cheap imports. Consequently, food staples become more expensive at a time when real incomes—in particular those of civil servants—are already under pressure, in this case during structural adjustment programmes. The argument was 10 See

the comprehensive discussion in Nubukpo, Ze Belinga, Tinel et al. (2016).

2.3 Optimal Monetary Unions?

25

static and largely wrong, at the very least with respect to agro-industrial exports actually competing with better-placed global suppliers. The difficulties of West African cotton producers had already become apparent at the time, as they had to compete with heavily subsidized cotton from the USA and Europe. The cotton case lingers on until today, especially in periods of an appreciating euro peg. Ivorian cocoa farmers suffer similarly. The reason why African governments accept an exchange rate manifestly fixed too high is related to the political economy of trade—here: import needs for cheap food staples and luxury goods consumed by local elites and urban middle classes. The collusion of governments and urban elites using an overvalued exchange rate against farmers has been classically described by Robert Bates (1981). The compound negative effects largely explain the controversy surrounding the Franc CFA until today. In recent years, the Franc CFA in the francophone countries, in particular in Senegal, has become the monetary incarnation of ongoing post-colonial dependence—of the infamous Françafrique (Verschave 2000). Locally, critics even link it to the strategic failure of a French-led coalition to come to terms with Islamist regional expansion (and integration) across several FCFA countries. France is under considerable political pressure in West Africa for this and other reasons, which helps explain a recent reform initiative. On 21 December 2019, after intensive negotiation within UEMOA, presidents Macron and Ouattara announced the most far-reaching reshuffle of the currency regime since its creation in 1945: the West African Franc CFA will be replaced by the Eco, with far looser ties to France. The obligation to deposit 50% of the countries’ foreign exchange reserves into the account at the French Treasury will end. Hence presumably in the future, all reserves will be held at the BCEAO, and France will no longer be represented on the currency board. However, the French government has announced that France will continue to guarantee the currency peg to the euro. Moreover, a devaluation of the new currency is not intended. The Central African FCFA plans to follow suit later. On May 20, 2020, the French cabinet passed a draft law enshrining the reform. As this book goes to print, the law has not yet been adopted by parliament, neither in France nor in the eight West African FCFA countries. It remains to be seen whether the proposed reform will actually take effect. Critique abounds. ECOWAS authorities were not amused that the reform highjacks the label ‘eco’ for the new currency. At the end of 2019, they had just confirmed their intention to use their own denomination Eco for the WAMZ or even ECOWAS as a whole. Because the mechanism by which the euro peg will be guaranteed has remained largely undisclosed, speculation abounds and others have criticized the ongoing overvaluation, as the exchange rate itself has not changed. While awaiting the outcome of the opaque reform process, it should be stressed that South-South monetary arrangements without a strong external lender of last resort can also offer some advantages to groups of developing countries—most notably organized common bloc floating as a means to reduce monetary instability (Fritz and Metzger 2006) and a higher degree of freedom to fix a ‘developmental’ exchange rate. In sum, the three monetary unions in Africa have jumped the linear model of integration in an astounding way. In the end, they may come out as the model’s unexpected confirmation: without a sufficient level of free intra-regional trade in goods

26

2 The Logical Sequence of Regional Economic Integration

and services facilitated at the first steps of the staircase, monetary integration is to little avail. Without a broad range of tradables and high factor mobility, the communities enjoy some stability but little development. In line with much of the literature, it appears unlikely that South-South monetary arrangements create a virtuous circle of closer integration of the real economy, even in the CMA. Or, in other terms used in the literature, it is unlikely that trade integration and stable institutions—normally a precondition to monetary integration—will be rendered endogenous by the monetary arrangement. The economic history of post-independence Africa has not proven it.

2.4 Non-Tariff Measures There is by definition a second stage of trade-in-goods liberalization which is wellknown in practice, but not quite singled out as a massive political undertaking of its own in the sequence of regional integration. Full liberalization of merchandise trade, in principle already at the stage of an FTA, requires removal of the non-tariff barriers to trade, either simultaneously or at a subsequent stage. The history of regional economic integration in Europe and elsewhere has systematically shown a countervailing trend. Where tariff barriers fell, old non-tariff trade barriers were maintained, new barriers erected and imaginative new rules imposed. Even in the presence of compensation programmes for weaker members of the regional community, member states had recourse to such technical barriers to trade (TBT) and other regulatory measures to protect ailing industries—to mention just one frequently occurring case. This happens naturally and is not Africa-specific although we observe it all too frequently in African RECs.11 At least for the EU, this adverse trend is textbook knowledge (Baldwin and Wyplosz 2015: 18). Policy-makers need to be aware of the complex reasons for this ‘natural’ contrarotating trend. The countervailing trend to ongoing tariff abolition comes as a composite, and this is what complicates matters. Many TBTs are maintained to protect domestic industries. But in the history of European unification and in other world regions, the stage of full tariff removal has also been a period marked by the introduction of more and more well-reasoned consumer, social and environmental standards. The more environmentally and socially aware societies become, the more related trade measures there are. Such standards are not ‘barriers’ at all. Contrary to established trade talk, non-tariff measures (NTM) are not non-tariff barriers (NTB)

11 See

Kalenga’s analysis of the 2011 SADC Secretariat Customs Audit (Kalenga 2012).

2.4 Non-Tariff Measures

27

per se.12 Otherwise, clauses such as Article 13 in the EAC protocol on the East African customs union would be outright nonsense: …each of the Partner States agrees to remove, with immediate effect, all the existing nontariff barriers to the importation into their respective territories of goods originating in the other Partner States and, thereafter, not to impose any new non-tariff barriers. (East African Community 2004)

Obviously, no regional community will remove all well-working non-tariff measures. It will introduce new non-tariff measures for regulatory purposes. The issue at stake here is those non-tariff measures that merely render trade complicated without having a higher-order justification. Developmental NTMs, on the other hand, can even create additional trade if foreign trade partners have better conditions for fulfilling consumer or environmental protection criteria. Removal of such ‘barriers’ is thus not always trade enhancing in itself even though conventional studies or ex-ante evaluations of trade deals conventionally treat them as such.13 When it comes to bringing order into the NTM panoply, it would seem most appropriate to make a basic distinction between technical and non-technical measures— with the former considered more harmless or acceptable than the latter. This was the approach followed by a multiagency support team led by UNCTAD (UNCTAD 2012). To classify imports, it defined three groups of technical measures (SPS, TBT, pre-inspection and other formalities), 12 groups of non-technical measures,14 and one relative to exports. The classification is thorough and useful as such, but many technical measures are not technical but eminently political. Non-technical measures often come with complex technicalities similar to those of TBT; many are introduced to regulate trade according to higher societal principles, others just create a mess which is convenient for vested interests. We therefore propose an alternative classification that is guided by the interest structure behind the introduction, maintenance or removal of NTMs: Are they based on intentional political decisions—either bad or good, or on the non-political, pecuniary motivation of powerful agents along the implementation chain—right down to 12 A leading German handbook co-authored by members of well-known law firms regularly engaged in ISDS begins by introducing non-tariff measures as non-tariff barriers, ‘generally opaque’, and ‘often introduced under the guise of consumer or environmental protection’. It reads GATT-related jurisdiction on NTM accordingly: ‘Reasons that led to applying a measure are irrelevant. It should be sufficient for the effect of the measure to be trade restricting. Therefore, import bans for products detrimental to health or produced with damage to the environment are prohibited by Art. XI:1’. (Prieß and Berrisch 2003: 114, 117; my translation). Fortunately, reality does not quite correspond to that rule, and more recent WTO rulings based on GATT Article XX have themselves become more lenient. 13 For a critical discussion of how conventional CGE modelling of the later aborted TTIP negotiations treated such NTM effects; see Asche (2015: 28 ff.). 14 Contingent trade-protective measures; licensing, quotas, prohibitions and quantity-control measures; price-control measures, including additional taxes and charges; finance measures; measures affecting competition; trade-related investment measures; distribution restriction; restriction on post-sales services; subsidies; government procurement restrictions; intellectual property rights; rules of origin.

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2 The Logical Sequence of Regional Economic Integration

Non-Tariī Measures

RegulaƟons/ Standards

Sanitary and Phytosanitary

Social/ Human Rights

PoliƟcal

Non-Poli cal / Informal (NTB)

Pure Tariff Equivalents or Bans (NTB)

"Generic" NTM of subsidy, procurement, etc.

Ecological

Technical Barriers to Trade

Fig. 2.1 Non-tariff measures. (Source Own compilation)

the customs agent at the boom barrier? By far not all NTBs are the result of political decisions. Many are called ‘non-political’, such as the myriad of roadblocks that grow out of the imaginative practice of controllers of all sorts at and behind borders. In Africa they often represent the worst impediments to trade. In parts, this reflects a deep-rooted principal-agent problem in non-tariff trade regulation, both at the national and the REC level. Establishing well-intentioned rules goes astray in their application; removal of trade obstacles is not followed through because agents along the chain do not necessarily implement them, not even when their political principals are dedicated to rules-based trade. The result of this classification is Fig. 2.1. Only the boxes in red contain cases that are NTBs by definition—the eternal ‘non-political’ roadblocks, etc., and the purposeful political contravention of tariff abolition. Related issues are addressed by imaginative web-based NTB reporting, monitoring and eliminating mechanisms through which traders can notify hindrances of all kinds to a secretariat which is supposed to deal with them. The first of two such mechanisms was the web-based reporting system on trade barriers in the COMESA-EACSADC tripartite coordination.15 It followed a NTB classification that was different from the work of UNCTAD and associated agencies (2012), but still comprehensive, with a breakdown into eight broad categories of barriers. It will probably be replaced by the new AfCFTA mechanism at https://tradebarriers.africa, which has a similar

15 With support from TradeMark Southern Africa. See: www.tradebarriers.org in preparation for the tripartite free trade area. Statistical data about the complaints list issues related to rules of origin as the second most important category, after lengthy customs procedures.

2.4 Non-Tariff Measures

29

NTB classification into seven categories and is just somewhat less comprehensive with regard to politically sensitive issues. Such aid for trade tools can help in practice, but at the same time they illustrate the disparity of NTM issues. The earlier TFTA-related mechanism has had a fantastic track record with more than 90% of the reported complaints resolved within two months’ time.16 If all NTB issues were handled so expeditiously, the bulk of Africa’s NTBs would long have disappeared. The success rate rather demonstrates what such a device can reasonably achieve in terms of trade facilitation. The excellent track record need not be questioned as such, but it suggests that cases that are reported and quickly resolved (a) do not have powerful vested interests behind them, (b) are not deeply entrenched across the entire region, (c) do not involve complex underlying harmonization and regulation needs.

2.5 Defining Common Standards In particular, product quality standards not approximated among RTA member states do indeed tend to work as powerful trade barriers. Because many such measures are not just technical, the mode of equalization is complicated and fundamentally political. By definition, this does not essentially imply the removal of national standards and regulations—in other words deregulation—but rather their mutual recognition or harmonization. The WTO agreements on TBT and SPS provide guidance on some types of such measures. Two possibilities present themselves: RECs can define unified product standards one-by-one and make them, for example, EAC standards; alternatively, RECs can move towards a realm of mutual recognition where different national standards become accepted equivalents. The main variants for aligning standards within and between regions are the following: a.

b. c. d.

Cases where product standards are different, yet high in both regions/countries and can be mutually acknowledged as equivalent. Drug regulations seem to be a good case in point. Rules of origin belong here. Cases where standards are equally high, but need to be harmonized, mostly at the given high level, in order to avoid a lowering of consumer (etc.) protection. Cases where standards diverge and one negotiating partner has stronger regulations. Theoretically one would expect upward normalization. Cases where standards of both parties are low. Food and agriculture can be singled out as a sphere where cases of appallingly weak regulations abound, in developing regions as much as, e.g. on both sides of the North Atlantic.

Regarding the task of equalizing NTM in African RECs, the bulk number of cases can be expected in groups c and d. National technical regulations and conformity

16 672

complaints resolved out of 732 reported, over an undisclosed period (last accessed in December 2020).

30

2 The Logical Sequence of Regional Economic Integration

assessments are to be adapted accordingly in order to make the standards implementable. Similarly, rules of origin can be harmonized one-by-one or by broad generic category.

2.6 A Simple Proposal to Amend the Linear Model In the linear model of economic integration, the stage of customs union is followed by the stage of a full-blown common market. In both theory and practice, this represents a quantum leap and thus hardly a linear move from stage 3 to stage 4. Quite a number of demanding integration steps are lumped together and buried in a single term. With the liberalization of services, a second category of outputs is subsumed here along with the liberalization of the production factors capital and labour—all very demanding agendas. The European Union and its departed member, the UK, have just painstakingly debated whether these factors are actually separable for a common market, and trade economics is inconclusive on the matter.17 Politically it seems clear that the two production factors capital and labour cannot be liberalized separately. Freeing the one—the flow of capital—without the other—the freedom of persons to move—will put the cohesion of any economic union under existential stress. However, long before this point of integration is reached, the political task of dealing appropriately with NTMs related to trade in goods, not to mention services, is so significant that it should be singled out as a sequential stage of its own. In the emerging European Community, the need for common standards has been a topic in the literature since Balassa made the EC the subject of his theory of economic integration (Balassa 1961). The first comprehensive practical attempt, at the initiative of Jacques Delors and Lord Cockfield,18 actually preceded other components of CM creation. As it later became part of the Single Market Programme, this attempt can be referred to as the stage of single market area (SMA) (Fig. 2.2). This stage requires its own share of political willingness, starting with a firm commitment to obliterate all tariff-replacing technical NTBs by making appeals for this kind of ‘help’ a sanctioned public offence in regional integration, and by mutually recognizing or harmonizing standards and putting equivalent technical regulations and SQMT institutions into place. As it is, the area of Standardization, Quality Assurance, Metrology and Testing (SQMT) is essential in the formulation of industrial policy, but it gains even more importance at the given stage of regional integration. In the end, an SMA requires a deep understanding and the selection of an underlying philosophy for defining 17 In fact, application of the Stolper–Samuelson theorem, a still dominant critique of the earlier Heckscher–Ohlin theorem, leads to a determined plea for free labour movement within an economic union—even more so when, with a common currency, exchange rate fluctuation is no longer an internal stabilizer. 18 A British Conservative whom Margaret Thatcher sent to Brussels in 1985 as Commissioner and who worked out, in a couple of months, a programme for the completion of the single market.

2.6 A Simple Proposal to Amend the Linear Model

PreferenƟal Trade Area

Free Trade Area

Customs Union

Single Market Area

Common Market

31

Monetary Union

Economic Union

PoliƟcal Union

Fig. 2.2 Single market area on the amended linear path. (Source Own compilation)

product standards.19 It should be noted that the definition of rules of origin (RoO) also belongs to the group of non-tariff measures that should be jointly defined to foster regional integration and not arrest it, as is presently the case in Africa (see chapter on RoO in Part III). In actual empirical terms, the amended integration path often takes on complex configurations, with higher-level integration coexisting with incomplete integration at more elementary levels.Considering that tariffs have been pervasively replaced by NTBs in African FTAs and CUs and that these NTBs are effectual tariff equivalents, it becomes even more questionable than in the case of pure tariff agendas and their lagging domestication whether any FTA effectively fulfils the 90% GATT criterion for free trade areas or, at the very least, any reasonable application of the Enabling Clause. In terms of internal trade liberalization, they all probably remain closer to stage 1—a preferential trade area. This even applies to RECs which are officially further along—those labelled either customs union or common market. Resisting the temptation to routinely replace tariffs with non-tariff barriers while solving the problems of genuine NTMs—so that they hold up legitimate trade as little as possible—thus remains an enormous undertaking. Achieving a single market area may co-define the need for a renewed political project of regional economic integration in Africa at both regional and continental levels, as we will discuss in the conclusion of Part I.

2.7 A Model to Follow in Africa? Finally, an economic union is an important underpinning of political unification, but elements of a political union can be enacted at far lower stages of economic 19 The European Union and the USA operate with two fundamentally different philosophies, the former based on the so-called precautionary principle, the latter on a corporate liability principle in the event of proven damage. The abandoned negotiations of the Transatlantic Trade and Investment Partnership (TTIP) demonstrated that the two principles are not commensurate and can therefore not be mutually recognized, let alone harmonized. This is one main content-related reason for the failure of TTIP. African regional communities—if not the African region as a whole—will arrive at the same crossroads at some stage.

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2 The Logical Sequence of Regional Economic Integration

integration. This in turn does not always help with economic affairs. Mismatches between the economic and the political mandate have a big influence on the day-today working of a community in Africa. For example, unlike the EAC, SADC has a component of mutual military assistance which materialized during the Second Congo War: SADC members Angola, Namibia and Zimbabwe actively supported their fellow member, the DRC government, against Rwanda and Uganda. The EAC (and SADC) member state Tanzania also supported Kinshasa—a coalition that still strains family relations in the EAC. Rwanda and Uganda fell out later in the course of the Congo wars, further undermining trust among EAC member states. Joint political and military action in ECOWAS to defend democracy and counter coup attempts works somewhat better at creating feelings of unity in support of economic cooperation. Nevertheless, political mistrust is no alien to ECOWAS either. It should be the other way round. A political vision and practical steps towards political integration should accompany or even overtake economic integration, provide positive feedback loops for the economic agenda, and help to create the necessary trust among economic agents. Another under-researched topic in international relations and specifically in the political economy of regional integration is the question as to why economically successful RECs encounter so much mistrust or disdain—even in areas or places where the negative side effects of liberalization are hardly felt. Economic integration encounters a fundamental problem speaking for itself. Obviously, negative social outcomes of economic globalization can be easily attributed to a visible regional bureaucracy (‘Brussels’) and so the reputation of the whole REC takes a blow, especially when the latter actually contributes to growing social cleavage. Even the economically successful European integration probably would have been grounded if it had been run merely as an economic project. Fortunately, it started as a measure for achieving political reconciliation together with some functional nucleus of economic integration. The superstructure of European institutions obviously does not serve economic purposes alone. Facing new economic difficulties from unresolved structural change, Europe is now looking for a new, higher-order project of political integration as well. The attitude of British governments encapsulates the problem: they perceived the EU exclusively as a project of economic interest, not political unification. This perception weakened the defence line against both homegrown adversaries of ‘Europe’ and forces on the radical political left claiming that the machinations of ‘global capitalist elites’ were driving the EU project. What does this mean for Africa? Arguably, a political vision and the building of mutual trust are even more important at low initial levels of national income, high inter-country income disparities and slow convergence among them. The regional political hegemons have to work as leaders of mutual confidence building, foregoing some of their advantages and using their financial means to help the weaker and more isolated members in the interior of the continent. In sum, the feedback loops among economic and political unification represent the ultimate proof of the model’s nonlinearity. Staged integration along with the four freedoms is often presented as the ‘EU model’ that should be followed by developing country groups in their own economic

2.7 A Model to Follow in Africa?

33

interest. The Treaty of Rome (1957) made all four freedoms the pillars of the European Economic Community. A number of RECs in Africa emulates it textually, for example the UEMOA / WAEMU in its founding document of 1994. The official philosophy of the European Model declares them inseparable for eternity.20 In the light of these fine achievements, it is important to note already at an early stage of analysis that advances towards such a model community do not contain a value judgement per se. Deeper integration is not always better, specifically when it does not increase trade levels and reduce divergence among member states and with the rest of the world. ‘Freedom’ of one sort can come at the expense of the welfare of many others if not accompanied by stringent regulation and appropriate economic policies. A good example is two Monetary Unions in Africa, as just seen. The schematized integration path has always been subject to the fundamental critique that the economic integration of a small country group does not necessarily bring socio-economic progress, especially not among developing countries. The EU should therefore not be considered a model. The main thrust of this long-standing critique was directed against the burden of cumbersome and costly regional institutions which are, however, not effective enough—in Africa—to guarantee the cohesion of ambitious schemes like customs unions, common markets or economic unions— all EU features. In the presence of rather weak states, the ‘European foundations’ of African regional integration should be rethought, as Peter Draper concludes (2010). Of late, a similar while more structuralist critique came as a quest for ‘Transformative Regionalism’, meaning that economic integration in Africa is often not (yet) transformative enough to be worth the institutional effort and the cost. We will deal with that later. The debate will be taken up again in Part III with the discussion of global trade agreements in which the depth of economic integration along North–South lines is seriously questioned in terms of the welfare effect in the global South. Despite the practical intermingling and jumping back and forth, it remains unquestionable that the formal steps of the ‘ladder’ represent economic deepening among countries. Therefore, they pragmatically work as a good yardstick for formal regional integration. If a group of countries claims to have reached a given stage of integration, for example that of a customs union, but is clearly missing important practical elements of that stage, then this in itself represents a first-round empirical critique of integration and provides the basis for an agenda of adjustment. The following subchapters will discuss this re-adjustment.

20 Despite the solemn declaration of 1957, the four economic freedoms have historically not been inseparable in Europe. It would be interesting to explore whether they have indeed become politically and/or economically inseparable at the present stage of the European Common Market and, in consequence, cannot be unbundled for the departing UK. The much-contested freedom of persons to move and settle in any member country, for example, represents the equivalent of lifting capital controls. It is often inseparable from cross-border service delivery and works as an economic stabilizer. The smaller Eurozone needs it even more as the exchange rate no longer works as a stabilizer, as is also the case in the African monetary areas.

Chapter 3

The Reality of African Trade Integration—Challenges of Implementation

Abstract In the course of their evolution on the stylized path of economic integration, African RECs face a number of implementation challenges, beginning with a range of typical domestication issues for trade agreements. A fundamental problem is that African regional trade arrangements (RTA) are all based on two GATT/WHO clauses which do not require full internal liberalization. The chapter analyses how RTA implementation on this basis has led to a general logic of exclusions and exemptions in Africa’s trade relations and traces how entrenched empirical practice meant to serve developmental purposes—protection of the weakest economic actors—often caters to vested interests. Inconsistency is aggravated by special features such as bilateral country-to-country agreements within and across RECs, REC overlaps, and the complicated architecture of customs unions. In view of these features, it is difficult to say where present-day African RECs basically stand in their evolution. Therefore, the chapter looks at key indicators in order to gauge trade integration statistically. It is determined that the degree of trade integration is still low by any measure. The continued and as yet under-researched importance of informal cross-border trade (ICBT) is discussed. All evidence considered, African RECs remain contested in theory and practice.

3.1 Domestication Issues Wherever the position of a REC on the ladder of regional integration, formal declarations of economic status cannot be taken at face value, in the first place because a number of subsequent requirements have to be accomplished by all member states, e.g. for free trade areas of any type: (1) (2) (3) (4) (5) (6)

Ratification of the respective treaty and the ensuing trade protocols by national parliaments Preparation of technical annexes Legal domestication Re-writing of customs manuals and software Training of customs officers Enforcement in customs offices.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 H. Asche, Regional Integration, Trade and Industry in Africa, Advances in African Economic, Social and Political Development, https://doi.org/10.1007/978-3-030-75366-5_3

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3 The Reality of African Trade Integration—Challenges of Implementation

Following step 1, preparing the technical annexes to the respective trade agreements often takes years, although this procedure should have come with the treaty itself and is a necessary prerequisite for domestication. Harmonization of the customs nomenclature among member states prior to step 4 can be tedious as well. Related problems of implementation are characteristic for all African RECs. Such requirements in themselves render assessments of effective integration very difficult.1 They should be kept in mind when reading bold statements like ‘the African Continental Free Trade Area has become fully operational’, on 1 January 2021’ (see below).

3.2 What is a Free Trade Area ? Global Standards in Use There is no established scientific rule on the minimum threshold in terms of liberalized trade quotas to qualify a group of countries as an FTA or a CU. In the WTO, a rule of thumb is used according to which the GATT principle in Art. XXIV of ‘liberalizing essentially all trade’ means in practice about 90% of trade (weighted or by tariff lines).2 SADC, for example, was formally notified on 2 August 2004 as an FTA to the WTO and aims at almost exactly this percentage of free trade (85%), and not— as one would have expected from an idealist vantage point—internal liberalization of 100%. Many other RECs of developing countries were not founded with reference to article XXIV, or GATS article V respectively, but rather according to the GATT/WTO Enabling Clause. This clause does not require member states to liberalize ‘essentially all trade’ in the end; it also gives them more leeway for incremental tariff abolition and for internal safeguard measures against imports from other member states.3 Indeed it is a paradoxical turn. While the Enabling Clause was designed in the WTO system to help developing countries, its continued application in this special manner has turned out to be detrimental for the noble project of commercial unification in the global South.4

1 About

fifteen years ago, the UN Economic Commission for Africe tried in the 2nd ARIA report to create a comprehensive picture of such implementation steps. Although the assessment does not exactly follow exactly the sequence given above, the picture of full, partial or unknown implementation appeared extremely varied and is expected to still be like that (UNECA 2006). 2 See below for the creative application of this rule of thumb in EU-ACP EPA negotiations. 3 See the full listing in the World Trade Organization’s Regional Trade Agreement Information System http://rtais.wto.org/UI/publicPreDefRepByWTOLegalCover.aspx. 4 Lunenborg has calculated for the ITC that 31.5% of tariff lines and 25.3% of import values of developing country FTAs notified to the WTO under the Enabling Clause after 2007 and until 2016 have remained dutiable, while the same quotas were 6.6 and 12.1% for FTAs under GATT Article XXIV (Lunenborg 2019). Even when assuming that dutiable intra-REC imports of the Enabling Clause FTAs will continue to fall over the lifetime of the agreements, they stretch the definition of a ‘free’ trade area.

3.3 The Logic of Exception and Exclusion

37

3.3 The Logic of Exception and Exclusion Because full tariff abolition was not agreed upon, tariffs repeatedly pop up, either as individual member state decisions or through the deliberation of trade minister councils with reference to variable REC internal lists of sensitive products. The socalled exclusion lists contain goods for which tariff reduction is halted or limited, or where tariffs can be re-introduced. These lists still play a tremendously critical role in African RECs. As a TRALAC working paper puts it: The existence of these sensitive products, together with other restrictive trade measures, means that the goal of a borderless single customs territory remains a distant dream. Traders in these products must take into account the different trade regimes that the partner states have put in place. (Omolo 2016: 2; my emphasis)

We will examine in a chapter below whether the great African Continental Free Trade—nominally a dream come true—is likely to bring the distant dream any closer. The entrenched logic of exception and exclusion which lies at the heart of the phenomenon will not make that an easy task. When looking at the history of African RECs, the sensitive products excluded from free trade and their listings5 have a number of typical characteristics: 1.

2.

3.

4. 5.

5 The

A list of sensitive products is fixed in a separate schedule of the respective CET, see for example Schedule II in the EAC tariff book (East African Community 2017: 492–495). The schedule is used externally vis-à-vis third parties as part of the REC’s trade policy. It is better to talk about schedules (plural) as, e.g., national tariffs in CEMAC deviate from the CET for several hundred tariff lines. However, up-to-date national schedules are not easy to find (Fiess, Aguera et al. 2018: 72). CET changes for sensitive products are frequent. They normally occur by changing applied tariffs in the limits of WTO bound tariffs. Theoretically they are jointly agreed upon at the request of single member states. RECs can even decide to remove or add goods to the sensitive products schedule as long as they are not bound by trade agreements with third parties. Actual practice is erratic. Customs practice by different member states does not always respect rules of joint decision-making. In consequence, applied external tariffs for sensitive products vary among member states, contrary to what is scheduled. In this respect, the common external tariff of an African REC is often simply not common.6 terms ‘sensitive’ and ‘excluded’ products are used interchangeably here.

6 The end of the last decade again saw this kind of unruly CET management in the EAC as member

states rediscovered needs for stronger protection of ‘local industry’. A council of ministers agreed in 2018 on massive external CET changes which have subsequently been implemented with more or less rigour, with Tanzania being as usual most protectionist in the EAC. This move occurred along with erratic internal protective moves, using rules of origins as non-tariff barriers. The issue continued into 2019 with cement, sugar and tobacco. Tanzania accused Kenya of using irregular

38

3 The Reality of African Trade Integration—Challenges of Implementation

6.

Variability of duties on sensitive products partly follows obligations of single member states vis-à-vis other African RECs or countries, normally by lowering tariffs far below the rate stipulated in the exclusion schedule as the MFN rate. It is thus a logical outcome of REC overlaps and bilateral agreements. Sensitive product lists are also used internally as a tool of asymmetric trade liberalization, not just in the initial transition periods but as regular practice. For instance, the renewed 2002 SACU protocol carried internal exceptions over from the original protocol. Taking the EAC as another example, tariffs on agricultural products are normally set to zero for other member states, although in practice, different handling of the external tariffs is replicated in the interior. Using the example of the EAC again, tariffs on manufactured products are applied differentially among the member states. In some cases, REC partner states still receive preferential treatment in comparison with the scheduled tariff, but in others they do not. The external sensitive product tariff becomes an internal and thus a general one.

7.

8.

9.

This exposition on sensitive products illustrates the difficulty to delimit boundaries between African PTAs, FTAs, CUs and higher order communities. Mostly they all coexist simultaneously, which does not pose a problem since GATT/WTO rules do not require FTAs to have 100% trade liberalization. It is more critical that exclusion lists with considerable leeway for individual member states formally preclude RECs from becoming full-blown customs unions even if they are declared as such. As long as the principle of external and internal exceptions is upheld, it is of little help when lists of sensitive manufactured products are short and contain mundane goods such as batteries, matches, or stoppers and ‘stop corks’—an almost literal designation for what these goods do to trade (Omolo 2016: 18–20). Why is doing away with the remaining REC internal hurdles so difficult? The obstacles are not just the sober empirical reality of what happens on the ground when noble free trade objectives are implemented without properly informing and training every administrative instance. Roadblocks and the like are not just the outcome of the agents’ petty interests, either. While the latter is a typical principal-agent problem and reflects widespread corruption at all levels of implementation, significant trade obstacles are retained as principled policies. One can safely impress observers from abroad with a description of how much Council of Trade Ministers’ sessions are still dominated by updating external and internal exclusions or dealing with unilateral ad-hoc measures of single member states. In consequence, changing policy principles must be at the core of a higher order project of regional economic integration introduced below.

duty-free imports from outside Africa to weaken its producers. As an extension of the sugar conflict, confectionery from Kenya was denied duty-free entry into Tanzania—a unilateral move in defiance of the findings of a joint verification mission. Confectionery is surprisingly important to demonstrate the absence of an essential ingredient: trust.

3.4 Bilateral Treaties in the Midst of Regional Communities

39

3.4 Bilateral Treaties in the Midst of Regional Communities There is a particularly strange feature of imperfect free trade agreements in Africa that must be considered. Since the foundation of the larger RECs, bilateral trade agreements in the region continue to be maintained or even newly signed between single pairs of member states, comprising specific quantitative and ad valorem regulations. This trait of African regional integration was first comprehensively described by Margaret Lee for the SADC and COMESA area (Lee 2003: 96 sqq.). It is as if the UK—after becoming an EU member—had additionally concluded a series of bilateral trade agreements with Belgium, France, the Netherlands, etc., a move that is even impossible for a UK outside the EU. If such bilateral trade agreements were added to the spaghetti bowl above, a graphical representation of regional trade integration in Africa would become unreadable. In Southern Africa in particular, those bilateral trade agreements became an awkward trend to deal with industrial imbalances among the member states (Asche and Brücher 2009). Lee rightly foresaw that a regional industrial strategy would be a more rational way to handle these imbalances. We will return to the issue at the end of this part. In consequence, actual tariff abolition, whether notified to the WTO under GATT Art. XXIV or the Enabling Clause, has taken a rather unexpected practical turn: tariffs among members of African RECs still exist after fading slowly and in stages, only to obstinately return. The EAC, for example, formally foresaw sequenced and differential tariff abolition among member states, favouring the other four constituent nations over the non-LDC Kenya, not one-off elimination. So did the SADC free trade area with four groups of goods, different tariff bands and varying liberalization schedules (Asche 2009: 77). Exceptions often hit precisely the products promising most trade. An early account summarized well the perverse attitude towards internal trade ‘liberalization’ which prevailed at the time, taking the case of SADC: [m] ost products that have some intraregional trade potential, such as consumer products (e.g. beverages, tobacco, leather and furniture, foodstuffs, textiles and clothing), have been declared import-sensitive and their trade liberalization has been postponed. (Metzger 2008)

The situation has essentially remained the same. Exempting precisely the most trade-relevant goods from free trade can only be explained by a bunch of reasons— fiscal considerations, vested interests, misguided food security concerns, etc. We deal with all of them in this volume.

3.5 The Impact of REC Overlaps In terms of trade integration, multiple memberships are technically feasible as long as the overlapping RECs in question do not exceed the stage of preferential or free trade areas. Already at the FTA stage, overlaps become inconvenient as they necessitate continuous controls at the internal borders for certificates of origin and customs duties for goods that entered the community at ports with different

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3 The Reality of African Trade Integration—Challenges of Implementation

external tariffs. Otherwise, internal border controls could be abolished for goods traded among members.7 When a regional community strives to become a customs union, overlapping trade arrangements become technically impossible. There can only be one common external tariff and export regime; this alone would necessitate the rationalization of REC memberships—even if there were no other reasons for streamlining. The mapping of RECs in the standard diagram represents a good but empirically under-researched measure of CU implementation. For example, Eswatini (the former Swaziland) within SACU and Tanzania in the EAC also belong to a common trade area of which their respective partner countries are not members—Eswatini to COMESA and Tanzania to SADC. It can be assumed that when it comes to imports, each of the two countries apply the CET of the smaller and more consolidated RECs, which are SACU and EAC. It would appear within the EAC that the trade pattern of Tanzania shows acquisition of higher value goods more oriented towards South Africa, while Kenya and Uganda—also COMESA members (which Tanzania left)— have a trade pattern more directed towards Egypt. The EAC common external tariff probably applies to all these imports. This practice is fine for the rest of the world, but almost certainly violates obligations towards free trade within COMESA and SADC, respectively, on which, e.g. Egyptian or South African manufacturers count. For East African exports into a country like Zimbabwe, which belongs to both COMESA and SADC, it is unclear which external tariff applies. Most likely, the COMESA schedule applies for all EAC members except Tanzania, which may benefit from SADC preferences unless they override bilateral trade agreements. Perhaps exporters/importers have the freedom of choice. West Africa has found a solution to the bigger part of its problem. After its creation in January 1994, the francophone UEMOA (WAEMU) went ahead with the decision to establish a CET (or Common Customs Tariffs; CCT) in 1997, with an enforcement date of 1 January 2000. It existed as such for exactly fifteen years. Later, the larger ECOWAS emulated the UEMOA CET and the printed customs form, but in the final stage, it also added a fifth tariff band at the insistence of Nigeria. The ECOWAS CET has formally been in place since 1 January 2015; the same date applies for the modified UEMOA CET, which has been extended to all ECOWAS countries. Although the official UEMOA document does not state it verbatim (UEMOA 2017), it can be assumed that the regional Harmonized System nomenclature at 10-digit level (2012 version) and the two tariff systems are now identical, not only for main tariffs, but also for two minor levies, the Statistics Tax and the Prélèvement Communautaire de Solidarité (PCS). This is a real achievement. However, even though the texts of the two schedules are identical, some important differences remained until 2020: The two distinct customs administrations and 7 In

order to give a realistic picture, it should be noted that in countries with imperfect internal tax administration REC-internal border checks also serve as convenient collection points for VAT and other national duties. Harmonized tax systems do not exist for communities very advanced on the ladder of economic integration, such as the EU, not even for VAT. Yet here, member states do not use border controls for revenue collection. At this stage, it becomes obvious how deficient internal revenue authorities mortgage the advancement of external trade integration, within an existing REC.

3.5 The Impact of REC Overlaps

41

customs books stayed in place, which is important because the CETs are subject to the constant changes and temporary exceptions described. Accompanying measures are written into the CET, such as (a) (b) (c) (d)

Safeguard Measures, with the aim of protecting specific industries (Regulation C/REG.4/06/13) Anti-Dumping Measures (Regulation C/REG. 6/06/13) Anti-Subsidy and Countervailing Measures (Regulation C/REG. 05/06/13) Supplementary Protection Measures (SPM) (Regulation C/REG. 1/09/13), allowing member states to alter up to 3% of tariff lines, including an Import Adjustment Tax (IAT) and a Supplementary Protection Tax (SPT).8

Some of these measures are temporary. If they are not fully synchronized, exceptional measures are taken by just one administrative committee and—if bold enough—immediately invite arbitrage by commercial actors. Member states Cape Verde and Liberia do not yet apply the ECOWAS CET. Otherwise it could be said that the UEMOA customs union—one of the best established in Africa—does no longer exist as a separate entity in the 2020s. Similar disentanglement of some African REC overlaps remains necessary, but is scarcely taking place. This is despite well-reasoned encouragement from authorities such as the UN Economic Commission for Africa, which already devoted an entire volume of its ARIA reports to the subject over a decade ago (UNECA 2006). The boldest move was actually the departure of Lesotho, Mozambique, Tanzania, Namibia and Angola from COMESA over the course of a decade between 1997 and 2007. With regard to effective tariff liberalization, the situation remains opaque at both intra- and inter-REC levels. To give another example: ECOWAS has introduced a certificate under the ECOWAS Trade Liberalisation Scheme (ETLS) which private firms of the formal sector have to obtain in order to be admitted to duty-free trade. (see https://etls.ecowas.int/) It resembles the European Union’s scheme of Authorized Economic Operators (AEO), which simplifies customs procedures. Obtaining the ETLS certificate is obligatory for participation in ECOWAS-internal duty-free trade. The ETLS is thus the instrument of implementation for the ECOWAS free trade area. This makes it possible to take ETLS approval of firms and their products as a measure for internal free trade. According to a TRALAC analysis, just 25% of tariff lines (NB: not volumes) for products under the ETLS are approved duty-free (less for Cape Verde, Liberia and Togo). For other CUs or FTAs—EAC, SADC/SACU, COMESA—the percentage of duty-free tariff lines in intra-REC trade appears to be nominally far higher, approaching 100%, but not all member states belong to the respective FTA, irrespective of other problems with the application of nominal zero tariffs (Viljoen 2020). We will see below why the grand project of a CFTA is unlikely to change this situation. On the contrary, problems of the sort are predicted to resurface with any

8 See

GIZ Factsheet “The Common External Tariff (CET)”, Abuja, undated.

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3 The Reality of African Trade Integration—Challenges of Implementation

attempt to effectually build an Africa-wide free trade area on the achievements of existing RECs.

3.6 Two Types of Customs Unions Among the RTAs mentioned, the few customs unions in Africa should be better off in one respect. They have a common external tariff and can hence forego internal border checks for goods imported into the trade zone. What would still be needed is checks for the few sensitive products traded among the member states and for other specific reasons. The appeal of regional economic integration largely emanates from the expectation that internal barriers will completely fall. Unfortunately, there are basically two types of customs unions in the world, and the second one is not conducive to abolition of internal border controls: a)

b)

The ideal-type CU without internal custom checks has a supranational mechanism of tariff collection for goods arriving in country A port but destined to country B, and an agreed formula for the redistribution of tariff duties among member states and the union (or simple transfer to the recipient country if duties are just collected at the port of entry). This results in a single customs territory (SCT). In Africa, SACU arguably comes closest to such a common customs territory.9 The EAC introduced the same project in 2013 and operates it as a combination of pilot tariff collection at entry and an electronic cargo tracking systems (ECTS) between some member states (EAC 2014). The African Economic Outlook claims that the EAC became a full-force common customs territory in 2015, with 90% of all goods cleared at the entry ports of Mombasa and Dar es Salaam (AfDB, OECD and UNDP 2017: 87). This category of CU is further sub-divided depending on whether the union has a common revenue pool or even a proper budget. When tariff revenues or other levies collected are not simply transmitted to the final destination countries of the taxed merchandise, the concept of net contributors and net recipients comes into play. For instance, South Africa is a net contributor in SACU. There is a second type of CU (and forms in-between) in which goods enter the region under bond at the port of arrival, and the tariff duties resulting from the CET are collected at the last intra-REC border crossing—for example at the border between Kenya and Uganda. This arrangement obviously requires full border controls between parts of the same CU. There is no common customs territory. The EAC worked like this in its first years. This system also has the obvious inconvenience that goods can be sold in the country of arrival illegally, without duties being paid, or that goods can enter the destination country with faked certificates as originating from within the REC. The system is far from perfect.

9 In this case, South African authorities carry out the task on behalf of SACU, though the new SACU

protocol of 2002 stipulates otherwise.

3.6 Two Types of Customs Unions

43

Even a full-blown CU with a single customs territory like the EU has border controls for reasons other than tariffs. This is caused inter alia by the variable geometry among member states. At the bottom line, however, a customs union ideally comes with the common customs territory in order to eliminate border checks for goods, if not altogether. The promise of a level customs territory also has the potential to create the important open bloc effects that will be examined below. However, as the few customs unions in Africa are somewhere on their way from type II to type I, the picture of actual regional economic integration becomes more and more blurred.10 Furthermore, there is a distinction between two types of CU depending on whether member states are represented by the regional authority in trade dealings with third parties, or whether trade deals with third parties are negotiated by the sum of member states, with or without the involvement of the REC secretariat or commission. The first type requires the willingness of member states to forego another piece of what analysts in the region call, with a sigh, the ‘cherished national policy space’.

3.7 Where African RECs Currently Stand—Key Indicators of Trade Integration In consequence, varying configurations of the enumerated challenges to free trade render the picture of where the respective RECs stand opaque. The frequently used formulation in the literature or in official statements that a certain Regional Economic Community has ‘launched’ its FTA, CU or Common Market at a given date does nothing to clarify the situation on the ground. In the meantime, REC overlaps and REC-internal tariff confusion continue; numerous tariff barriers, though formally abolished, continue to exist or are reerected on occasion. There is an abundance of anecdotal evidence about the messy situation this produces at African border posts, but a significant lack of solid quantitative evidence. We simply do not have a consolidated picture of percentages of goods that still carry intra- and inter-REC tariffs in Africa, and which ones. Important for economic research, such administrative and commercial peculiarities, put severe limits on the use of a right-hand variable ‘free trade area’ or ‘customs unions’ in econometric analysis of trade integration effects. It is not possible to determine with certainty whether the FTA entered into the equation is actually an FTA, and to which degree, or rather its opposite. Therefore, the impact of a vector of trade 10 Brexit negotiations provide a perfect example for the importance of a customs union with a single customs territory. As the Republic of Ireland and North Ireland were not only in the EU but also within a common customs territory, all border checks between the two parts of the island were abandoned. Reinstated border controls would not have presented a problem for countries in other customs unions in the world, however the situation in Ireland with its peculiar political heritage was different. Negotiators searched desperately for innovative solutions for maintaining a joint customs territory across the English Channel, but without a customs union.

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3 The Reality of African Trade Integration—Challenges of Implementation

barriers may be measured instead, not producing the expected signs for the coefficients. Such results can be particularly misleading when ‘Existence of an FTA’ or ‘Country belongs to customs union’ is econometrically introduced as a binary dummy variable and ‘0’ would come closer to the reality on the ground than ‘1’. REC overlaps in particular make quantitative attribution of trade and welfare effects almost impossible (at reasonable research cost). Against this backdrop, it is rather surprising that FTA dummies in gravity modelling exercises are always significant and positive. The general result of such difficulties with gravity models is less straightforward: As with all effects captured by dummy variables or composite indices […], one is not sure of the underlying links between the policy levers and the outcomes of interest captured in these results: having controlled for gravity covariates, is it better roads, rail, telecommunications, or a better-functioning regulatory environment that contributes most to the attributed increase in intraregional trade? (Melo and Tsikata 2015: 242)

Econometric difficulties appear thus as the ultimate reflection of the problem to grasp the actual degree of trade integration in African RECs. For all the reasons discussed, the formally declared status of a regional union cannot be taken as a robust criterion for its economic importance. To come to a last measure for REC relevance, the degree of recorded trade integration on the ground mirrors the opacity of legal and administrative implementation.11 Africa is known to be one of the least integrated world regions for merchandise trade. Conventionally, three main indices are calculated to give the degree of a region’s trade integration, lumping exports and imports together: 1. 2. 3.

The region’s share in world trade The intra-regional share of the region’s total trade The intra-REC share of REC members’ total trade.

To the first dimension: over the past several decades, Africa has captured an average of about 3% of world trade in goods, down from higher figures during the colonial epoch.12 As Africa’s export orientation increased to about a third of its GDP over the same decades, the constantly low share in world trade simply denotes that exports of other developing regions, notably Asia, have risen far more quickly. Regarding the second measure, as a rule of thumb, roughly 10% of its total trade has been exchanged in the African region including North Africa since 1995. In 2016, the figure for intra-African trade stood at 15% (See Table 3.1, below) and still stands there at the end of the decade: 12.6% of imports, 19.7% of exports, in 2019 (African Union 2020: Table 18). These numbers carry an ambiguous message: • On the one hand, a low and slowly rising level of intra-African trade inversely reflects the successful opening of all African country groups to global trade, which 11 At higher formal stages of integration, measures of trade in services and of actual labour and capital mobility would have to be added. Apart from the UNECA integration index, we are not aware of any such comprehensive statistics, except for estimates of worker migration. 12 Interestingly, Africa also attracts about 3% of world foreign direct investment—to the extent that real FDI is properly captured in statistics, which is extremely difficult as systematically analysed by Kratzsch (2018).

3.7 Where African RECs Currently Stand—Key Indicators of Trade Integration

45

Table 3.1 Intra-group trade as part of total trade Year

1995 (%) 2014 (%) 2015 (%) 2016 (%) Average 1995–2016 (%)

AMU

3.8

3.6

3.2

3.1

2.9

CEMAC

2.6

3.2

3.8

3.6

3.2

CEN-SAD

6.5

6.3

6.5

7.2

6.6

CEPGL

0.6

2.5

2.4

2.8

1.1

COMESA

4.8

7.2

7.6

6.9

5.9

12.9

11.1

11.5

10.9

12.3

ECCAS

1.8

2.0

2.7

2.6

2.2

ECOWAS

9.0

8.6

8.9

10.0

9.8

IGAD

8.6

6.4

6.7

6.2

7.5

MRU

2.1

0.8

1.8

1.1

2.4

SACU

9.2

14.7

16.8

15.6

10.3

SADC

14.8

19.3

21.3

21.1

16.6

UEMOA

10.1

12.8

10.6

11.0

11.6

Sub-Saharan Africa 14.1

17.8

18.9

18.8

16.2

Africa

14.4

15.3

15.1

12.6

EAC

11.3

(Merchandise Exports and Imports combined. Source UNCTADstat)

applies to both fuel exporters and non-fuel exporters. However, only about 5% of fuel exporters’ trade is within Africa, amounting to only a third of comparative figures for non-fuel exporters. • On the other hand, the ≥10–15% rule of thumb is an indication of Africa’s shallow internal trade integration, as most other developing regions have far higher figures, with ‘developing Asia’ at around 50%, not to mention Europe with 60–70% intraregional trade (whole of Europe). The tangle of overlapping RECs with widely exchanged trade favours does not manifestly help Africa in this regard. The low all-Africa average also reflects the particularly low trade level in and with North Africa. Sub-Saharan Africa alone trades a bit more with itself; the figure there has risen to more than 18%. It will be interesting to observe if the recent 18% internal trade quota will hold when global raw material trade resumes after its depression, which began in 2014, or if the quota will conversely decrease again. With respect to the third measure of how much sub-regions trade among themselves, exchange within the respective regional economic communities can be much higher than the continent-wide share of what African countries trade. It may seem puzzling that this share can be far higher than the ≥10–15% long-term intra-African average, and this theoretically for all African RECs. However, the true puzzle is that the intra-REC trade share does not actually rank higher for most of the groups, as Table 3.1 shows, accommodating some of the just nominal RECs.

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3 The Reality of African Trade Integration—Challenges of Implementation

The table gives the first year, the last three years and the average for all RECs in the UNCTADstat time series—five more than the eight RECs recognized by the African Union. The picture is bleak, with REC internal trade ranging from weak to virtually non-existent. For twelve of the thirteen reporting RECs, African intra-REC trade ranges below the all-Africa average, which appears counterintuitive, especially considering that significant double counting of trade in overlapping REC memberships is not even eliminated.13 One would have expected the opposite. The results defy gravity (models) since neighbourhood effects do not work as expected, and climbing the ladder of formal trade arrangements does not accelerate trade integration either. Further to this general finding, what do the detailed results for the REC in the database show? Two sub-regions barely trade at all in their interior, formally speaking. These are the same two that have the weakest links to the rest of Africa. This does not come as a surprise for North Africa as trade patterns of all five countries are northbound, across the Mediterranean Sea. Moreover, some common borders were or have been closed for many years, most notably between Algeria and Morocco. Hence, only 3% of the Arab Maghreb Union trade is internal. The same holds true for the African GAFTA members. CEN-SAD came into existence with the special vision to bring northern and Sub-Saharan Africa closer together. In trade terms, it does not. This is unsurprising considering that CEN-SAD was removed from the figure above as a mirage REC for want of any perceptible decision on economic integration. The same applies to IGAD, which is, however, relevant for political integration in the form of peace building. The Central Africa internal trade figure of barely 2% (ECCAS) adds to the picture of missing links in the heart of Africa. The same low figure is reported for the CEPGL. However, at least the community around the Great Lakes trades intensively, as much on a small scale as for globally relevant minerals, which are re-exported via Rwanda, Uganda and Kenya. Similarly, data for the Mano River Union do not reflect the existence of significant cross-border trade among the three member countries. Interestingly, communities that are relatively advanced in their formal trade regime such as EAC, ECOWAS, SACU, SADC or UEMOA just hover around the panAfrican average. Neighbourhood and CU effects do not produce the expected good result for the SACU within erratic, tariff- and NTB-riddled SADC. These effects cause trade to behave about as expected for the UEMOA within ECOWAS, although with a tiny positive margin. Call it the trade-proximity-paradox: the closer the countries are geographically, the less formally they appear to trade. The paradox also applies to pair-wise country analysis in West Africa. According to one key assumption of economic gravity analysis, two countries that share a border should trade more than geographically distant ones in the same region. Unfortunately, 13 Double (or triple) counting of bilateral trades inflates the intra-REC shares, as it drives the numerator more. For the reasons given above, it would seem nearly impossible to eliminate such double counts because it would necessitate attributing trade flows from A to B to just one REC, depending on the tariff regime applied. This notwithstanding, Chidede and Sandrey have tried to identify these double counts and arrive at sizeable amounts, albeit only for the eight AU-officialised RECs: 7% for intra-African exports and 9% for intra-African imports since 2001, slightly decreasing over the last years, probably because of the departures from COMESA (Chidede and Sandrey 2018).

3.7 Where African RECs Currently Stand—Key Indicators of Trade Integration

47

this does not seem to be the case for ECOWAS, as demonstrated by an econometric test at the University of Nigeria, Nsukka, which confirmed the results of earlier studies: Our empirical result shows that common border between any pair of ECOWAS trading countries becomes an impediment to increased trade flows. This finding may be considered another case of Lucas paradox. […] What happens is that common border aids informal cross-border trade that [is] hardly captured in trade records. (Agu, Dick and Nnamani 2016 : 12)

Again, the formal finding defies the expectations of gravity analysis. It appears as the intra-ECOWAS continuation of the conundrum among intra-Africa and intraREC trade recorded above. The figures for the three RECs with common currencies—again UEMOA, CEMAC and CMA, which is nearly identical to SACU—are hardly better for trade in goods. This leads to the conclusion that either the reasons for weak integration lie deeper and beyond a unified currency, or—as is claimed by African critics of the FCFA—that the very mechanics of these monetary unions work against agroindustrial exchange within the regions because they favour outward orientation (see chapter on monetary unions, above). The intra-REC trade of the East African Community already stood at 13% in the mid-1990s, indicating relatively high levels of exchange before the new EAC came into existence. The neighbourhood effect worked as expected, and the formal re-creation of the trade zone added little to recorded trade. On the contrary, the intra-trade share has fallen recently, reflecting among other things the accession of new member states with weak commercial links in the community. In an effort to provide evidence for the supposed EAC success story, another data series shows that in recent years, regional exports and their mirror statistic have risen to more than 20%. This would indicate the otherwise hidden causal chain from trade to RECdeepening that begins when the CU becomes effective. However, another factor is probably driving figures too high: analysis of Comtrade/WITS data indicates that re-exports are not properly excluded. If HS14 tariff line 27 (petroleum and gas) is subtracted from the recorded regional export—as is necessary since the region does not yet produce any oil or gas—intra-EAC trade figures fall by about 2% (Brücher 2016). If the EAC success story is not to be eliminated altogether, reference must be made for instance to Brücher’s more detailed analysis showing that initially weaker members like Tanzania and Uganda have seen bigger increases in intra-REC exports than powerhouse Kenya.15 There may be even more success in East Africa, as lagged domestication of the CU creation in 2010 does not yet give the full measure of trade liberalization effects. 14 HS

is the Harmonized System of the World Customs Union for classifying traded goods.

15 It is different for estimated effects of the sensitive products list of EAC. Kenya benefits most here.

The true problem is for Rwanda and Burundi. In particular Rwanda fully opened up to EAC trade, but the country had little to offer to the region, so only imports grew and created an ongoing crisis of the trade and current account balance which the government and Rwanda Development Board is trying to counter with a deliberate industrial policy effort.

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3 The Reality of African Trade Integration—Challenges of Implementation

In an understandable endeavour to keep up the good spirit of African economic integration, UNCTAD has finally calculated the share of the REC in the whole intraAfrican trade of the respective region. Once again, with the exception of ECCAS, shares are very high, hovering around more than half of total Africa trade, with SADC trading a record 78.4% of their African trade in the Southern African community, with the proportion for CEN-SAD at about two-thirds. Such figures lead the report to make a bold general statement: This confirms that the formation of regional blocs in Africa has facilitated the creation of trade among its member countries. (UNCTAD 2013: 19)

It certainly does, but statistically not in a sense commensurate to such high intraREC trade shares. In particular, the attempt to use this number to attribute importance to economically fictitious RECs like CEN-SAD is in vain. Taking a very small denominator—intra-African trade—to make values of the numerator look higher is not really pertinent. Any such causal argument advanced is about attribution of trade creation to bloc formation. Over time, low and at times even falling figures do not match well with the argument. Moreover, econometric demonstration of the causality works best with a counterfactual for newly created unions. Alas, this comes with an econometrically insurmountable endogeneity problem which is well known in the literature: countries that already trade intensively with each other are most likely to sign regional trade agreements (Melo and Tsikata 2015). Taking the second EAC again as an example, the three initial member states—under new leadership and in times of peace—had long resumed trade in the 1990s and hence were motivated to recreate the EAC. Therefore, all that can be demonstrated is a contribution of bloc formation to absolute and relative trade growth on the basis of qualitative observations regarding actual easing of border controls or harmonization of standards and their measurable costsaving effect. We expect this to be demonstrable for EAC, SACU, and perhaps for COMESA and ECOWAS. In sum, focusing on formal trade shares as a measure of REC importance gives an ambiguous picture, at best. Africa has certainly participated in the global trade surge of the 2000s, but mainly with distant regions. Taking trade growth as the backbone of regional cohesion, recorded intra-African trade remains low in comparison. What will happen when the global high trade growth spell definitely comes to an end and remains depressed for a longer period? Intra-African trade shares will probably rise further, giving the impression that regional integration has deepened while in reality, mostly traditional and relatively inelastic trade will have continued.

3.8 Informal Trade and Neighbourhood Effects Up until now we have only taken recorded trade into account. To come back to the last fundamental layer of regional integration mentioned in the beginning, UN bodies argue that Africa represents the global region with the highest degree of informal and

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unrecorded trade, which leads to underestimations of its actual trade integration in comparison with other developing regions. If statistics on informal trade were also factored in, intra-regional trade ratios for Africa would not differ significantly from similar regions. The basic assumption is true even in the absence of reliable numbers, and yet it is difficult to arrive at such a clear optimistic assessment. The informal exchange of goods, services, persons and capital also defines a preferred arena of non-economic African studies, namely in anthropology and international relations in political science. Studies from these fields provide rich empirical material from the realm of non-officialized trade and investment networks that attests to a world of open, rich and dynamic relations. Shadow regionalism or similarly, de facto regionalism, appears to be more genuine and livelier than de jure regionalism. A particular variant is Dark Regionalism—the type of Islamist or simply criminal regionalism as it occurs in the Sahara-Sahel region, discussed at the beginning of this part and covered by conflict studies. In the light of this considerable body of literature, at least half of the present volume should have been dedicated to this barely visible reality of African socio-economic integration. In fact, field work in this area of research is an invaluable source about the reality of cross-border socioeconomic interaction in Africa.16 This literature has traced, more clearly than any formal economic exercise, the manifestations by which such cross-border exchange does not simply ignore the ‘state’ or ‘border’, but also works in dialectical relation with formal structures. What area studies call trans-state networks do not actually bypass the states altogether, but rather operate in synergy with state-official structures (Bach 2016: 73–74). We will concentrate here specifically on what informal trade (and investment) relations reveal about officialised, de jure regional economic integration in Africa. This leads to the question of how to define Informal Cross-Border Trade (ICBT). Ever since Keith Hart coined the notion of an informal sector in developing countries, its characteristics have remained as elastic as its very subject (Hart 1973). Some definition criteria are less useful than others, and with questions such as whether to include agriculture (one should not), the realm of the informal sector has remained controversial. Based on the bulk of earlier research and reporting—including anthropological studies of pre-colonial and colonial-time African trade networks—both the ARIA IV report and Afrika/Ajumbo from the AfDB have suggested a definition of ICBT. The criteria set forth in these sources have remained the authoritative reference despite some obvious imperfections (Afrika and Ajumbo 2012; UNECA, Union and African Development Bank 2010). We retain the distinction between formal/informal actors, their actions and the reasons behind these actions: • Small informal actors are most likely to practise their trade or profession informally and go unrecorded.

16 The

rich work of Kate Meagher on cross-border networks and entrepreneurs in West Africa with a focus on Nigeria is testimony of this (Meagher 2007; 2010), and more recently (2015).

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• Some RECs in Africa such as the EAC formally allow otherwise informal actors to cross borders with simplified procedures for merchandise up to certain amounts or weights. In this way, small informal actors go formal. • Formally registered actors/firms can obviously exercise trade informally, both (a) to illegally avoid taxes and legitimate controls, such as controls to determine origin and to detect counterfeit or adulterated products, or (b) to circumvent red tape, corruption or illegitimate trade hurdles. • Mirroring this, official institutions, while formal by definition, obviously act both formally and informally—and even illegally, in particular customs officials. • Informal (or formal) trade intermediaries, such as handling agents, help fulfil or avoid formal procedures. • Trade may be informal on one side of the border while taking place formally on the other side, with informality being more frequent for imports than for exports, blurring the mirror statistic of external trade. These factors occur in all possible combinations. Hybridity is characteristic of the area. In this regard, it is useful to import the distinction between necessity and opportunity entrepreneurs from the more recent discussion of the informal sector in general. Small-scale traders mostly act informally and by necessity, while somewhat larger entrepreneurs need not always stay informal, seize opportunities where they arise and engage in hybrid economic behaviour. Attempts have been made to co-define ICBT by typical products that are informally traded. However, ICBT product categorizations undertaken by UNECA or AfDB display the whole bandwidth of traded goods, and the ICBT products reflect the full taxonomy of actors and activities: one category is traditional unprocessed goods, in particular agricultural staples, but there are other categories of semi-processed or processed goods, and these are not even predominantly artisanal but industrial goods. In particular, informal re-exports comprise manufactured goods of global origin. There is no typical category of informal products. What do we know about relative magnitudes of formal versus informal trade in Africa and about the importance of informal trade for African economies as a whole—and ultimately for economic growth? The answer is: not much. By definition, ICBT is not recorded at the border, at least not on both ends. However, this does not necessarily imply that no statistical estimate can be found on national records. Trade that fulfils all or some criteria of formality can go unrecorded; vice versa, recorded trade can have informal traits. This is part of a widely discussed problem with statistical institutions in Africa and their imperfect links with other institutions who gather primary data, such as customs offices at all levels. For GDP calculation, statistical offices are forced to record estimates of clandestine artisanal mining or subsistence agriculture lest their national accounts go completely off-target. There is a whole methodology on how to do this best, for example with sentinel sites to estimate harvests of traditional agriculture. In contrast, cross-country comparisons such as those carried out by Schneider suggest that important elements of a country’s informal underground economy do not appear in national accounts (2002).

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When it comes to external trade, we simply have no comprehensive Africa-wide study on the extent to which estimates of informal activity become statistical entries. Secondly, we do not know for sure whether estimates of informal activities are more accurately recorded in national accounts or in external trade statistics. Intuitively one would assume that cross-border trade is easier to count than other national aggregates because all actors have to pass through one border point. This would suggest that export/import to GDP ratios overestimate trade integration. Unfortunately, the assumption is not pertinent because borders invite circumvention by their dialectics—this is what ICBT is all about. To resume the trade-proximity paradox from the last sub-chapter, there appears to be a characteristic three-level pattern: The ratio of non-recorded trade in Africa increases with every lower level of analysis: from global to intra-African, to intra-REC trade and finally to pair-wise cross-border trade of immediate neighbours within one REC, where it seems to be highest.

The paradigmatic pair of countries for the last-mentioned configuration are neighbouring Benin and Nigeria. Benin’s informal cross-border exchange is estimated at 75% of its GDP, because of its long porous frontier with Nigeria. The warehousestate model which is characteristic of Benin’s economy relies on exploiting all sorts of tariff, tax and currency differentials with neighbouring Nigeria via the port of Cotonou as main entry point.17 For Nigeria, dysfunctional foreign-exchange and banking regulations alongside cumbersome and corrupted customs clearance push most smaller traders into the unregulated forex market (Hoffmann and Melly 2015). In consequence, little of the bilateral trade is recorded, as we have seen. Many systematic attempts are made in Africa to provide estimates for informal trade, in particular cross-border agricultural trade. These include the Famine Early Warning Systems Network (FEWSNET) in large parts of Africa and the Food Security and Nutrition Working Group (FSNWG) in eastern Africa, both with assistance from USAID. The collaborating Eastern Africa Grain Council (EAGC) states its purpose as follows: Informal trade represents commodity flows outside of the formal system, meaning that activity is not typically recorded in government statistics or inspected and taxed through official channels. These flows vary from very small quantities moved by bicycle to large volumes trucked over long distances. This report does not capture all informal cross-border trade in the region, just a representative sample. (EAGC website; my emphasis)

The key word here is ‘typically’. The reports do not provide a clear picture whether the important magnitudes recorded enter the official statistical systems of the respective countries only partially or not at all. In this case, trade figures would increase considerably if grain or livestock trade were either formalized and recorded or if estimated informal magnitudes were accounted for. An instructive example for the opposite case is Uganda’s trade statistics. The Uganda Bureau of Statistics (BoS) has carried out the arguably rare exercise—along 17 It is characteristic for the prevailing informality in West African trade that the warehouse-state of Benin (and other small West African states) was at times presented as an interesting ‘model’ to generate massive resources for developmental purposes see Bach (2016: 56 sqq.).

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Table 3.2 Uganda—recorded informal trade Formal and informal exports in thousand US dollar, 1996–2017 Mean 96–06 2007

2008

Mean 09–16 2017 563.952

Traditional exports

282.245

400.253

541.809

Non-traditional exports

320.139

936.415

1.990.195 2.050.112

2.707.643

743.038

Grand total

602.384

1.336.668 2.532.004 2.614.064

3.450.682

Source Uganda Bureau of Statistics, URA, UCDA, CAA, UETCL. Informal figures were only included in 2008–2017. 2017 Figures were provisional

with Rwanda—of estimating detailed physical volumes and values for informal trade alongside formal trade from 2008 onward. Results for exports are shown in the table (Table 3.2). Through this procedure, export values double from one year to the next and then stay at this level. The increase is mainly due to various items among ‘nontraditional’ exports, whereas coffee is the only of the four ‘traditional’ export goods (alongside cotton, tea and tobacco) that also seems to have a high share of informal trade. Oddly, import statistics show no such differences. This exercise as carried out by the BoS in Kampala was limited to Uganda’s five adjacent countries, plausibly assuming that most of the informal exports go to the neighbours. This is corroborated by the trade-proximity-paradox introduced above. Assuming that the corrected estimates enter the national statistical system and international databases, this procedure has approximately doubled Uganda’s shares of intra-REC trade and also boosted the share of intra-African trade until 2009, when the change was consumed. Further assuming that Uganda’s actual trade pattern is also a representative case for the majority of those African countries that do not put ICBT estimates on official record, their intra-REC or intra-African trade figures would indeed be much higher than reported—intra-REC trade by a magnitude of 2:1 or 3:1. Regional economic integration is definitely deeper than international trade figures show. Two important questions arise—one statistical, one in terms of content. Nowhere in the literature do we find an indication of how many countries fall in the Uganda basket and have put their available ICBT estimates on statistical record, how many are in the second basket and have not done so, and how many from both groups have proceeded coherently for trade statistics, balance of payments and national accounts. Whenever informal sector and traditional agriculture estimates only enter national accounting, trade to GDP ratios are distorted. We suppose the latter to be the typical case, but no coherent Africa-wide picture emerges. The second question is what the important magnitude of ICBT reveals about Africa’s formal RECs. Trade informality is in part caused by neighbourhood effects: the herdsman driving his cattle across a border which he and his ancestors always ignored to sell the animals next door; mostly women trading grain or vegetables in small quantities; or trade

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operating in the form of cross-border micro-clusters that pre-existed RECs but paradoxically reflect the opportunities of trading across borders. Another class of positive gravity effects from which the informal trader benefits alongside his registered colleague may stem from REC achievements in terms of cross-border infrastructure or services. Simplified Trade Regimes (STR) represent a kind of borderline case between formal and informal trade created by COMESA and EAC (Fundira 2018) or by Ethiopia in bilateral agreement with neighbouring states. STR allow small traders to pass the border regularly, provided they are not coerced into paying fees due to STR-specific corruption. The relatively free movement of persons achieved in some RECs also facilitates informal trade. Roaming-free mobile phones like in the EAC help with formal as well as informal trade. In all these dimensions, regional integration actually promotes informal trade and lifts some of it to formalized trade levels. We need a new category to grasp this phenomenon. To an unknown extent, the slightly rising intra-African and intra-REC trade shares may not exhibit trade creation but trade appearance—that is, exports and imports that were in existence but statistically invisible and now become manifest because of successful trade facilitation. The question of how much trade a REC creates has always been at the centre of the debate on regional integration. We should be able to distinguish what REC-internal and external trade liberalization has achieved in terms of trade appearance: hitherto unnoticed trade which has surfaced in the better trade environment. This represents a lesser achievement of the regional communities, but an achievement nevertheless. With respect to sweeping statements on what African RECs have facilitated, it is crucial to underline that they have contributed to trade creation and trade appearance (= formalization of trade), but also to some trade sent underground. Arguably, for the far bigger portion of related economic activities, informality purposefully circumvents trade regulation out of both positive and negative reasons with regard to the role played by the RECs: On the positive side: RECs regulate, with necessary documentary requirements for control of origins, SPS standards and the like. Formal or non-formal actors who avoid such procedures normally have something to hide. Well-functioning RECs create this category of ICBT for legitimate reasons. Suffice it to point to the vast interstate networks of criminal trade, in particular transcontinental drug trade, in order to understand the downside of informality. On the negative side: Informal trade reacts to incomplete tariff and non-tariff liberalization at and behind borders and thus embodies a harsh, real-life critique of intra-REC customs authorities and procedures. It often reacts to outright corruption and red tape at points of control. Less legitimately, informal trading also tries to avoid VAT imposition—a national tax not harmonized within the RECs which is also collected at border posts. We have even less precise information about coefficients for informal trade such as ‘good neighbourhood’, ‘trouble at border posts’, ‘tariff and tax avoidance’ or ‘corruption’ than we have about total figures for informal trade. Another type of cross-border micro-clusters actually came into existence partly because of the border, but also in order to circumvent it. The

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well-researched large settlement at Beitbridge on both sides of the South AfricaZimbabwe border post archetypically reflects the time and effort it takes either to comply to or to circumvent absurdly complex and corrupt border controls. All these REC-related or non-REC-related, and positive as well as negative causes of informal trade remain a fascinating topic for future research. Part of ICBT survives or even flourishes despite the presence of African RECs, and its legitimacy lies in the actors’ real-life trade liberalism. Unfortunately, we cannot conclusively differentiate between illegitimate and legitimate avoidance of border controls, despite the mass of empirical work on ICBT. This is even less so with regard to determine whether ICBT actors avoid national customs procedures or those that are genuinely REC-related. For the time being, it is not a good idea to point to the importance of informal trade in Africa in defence of African trade integration. The importance of informal cross-border trade marries badly with the efforts of the UN (or AU) to stress what African RECs have achieved in trade creation or trade appearance. The ambiguity of ICBT also has a bearing on the optimistic views of ‘new regionalism’ literature on the informal, spontaneous expressions of regional economic life. African economic, social and cultural life across borders is indubitably far richer than expressed in terms of formal RTA achievements. Yet economically speaking, the balance between wanted and unwanted trade clusters and networks remains unclear. A priori, informal or shadow regionalism is not the ‘true’ or ‘better’ regionalism, especially since the avoidance of modern product norms and regulations has a negative knock-on effect on attempts to upgrade the standard of agricultural and industrial production. The most convincing conclusion from the analysis of informal trade integration matches UNCTAD’s main message in its 2013 report: if Africa wants to close the gap between potential and actual intra-group trade, it will be crucial to engage the private sector differently and more thoroughly in order to dynamize trade as an essential part of transformative regionalism.18 Cross-Border Policy Dialogue is indeed an important arena to achieve exactly this, and at the same time, a chapter of the overarching public–private dialogue (PPD) for trade and industrial policy.

3.9 Contested Regions Despite this confusing and sobering picture, strands of continental European policymakers hold African RECs in high esteem on the premise that they are poised to replicate the success of the European Union. European aid agencies sink millions of euros in REC support at all levels to emulate traits of the EU model, often in accordance with trade officials in the REC secretariats. This represents the ultimate case of a ‘travelling model’ (Box 3.1): a blueprint of social engineering translated for African use and supported by massive development aid. 18 We

quote the lead author of UNCTAD 2013, Patrick Osakwe, with a more recent paper when it comes to the contours of transformative regionalism.

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Box 3.1: The European Union as travelling model. The term ‘travelling model’ was initially coined by anthropologists to describe types of externally supported conflict management in African countries (Behrends, Park and Rottenburg 2014). The analysis focused on the local ‘translation’ of the model imported. With regard to a number of development aid features, Bierschenk added that they qualify indeed as ‘travelling blueprints’, emphasizing the nexus to engineering practice—that is, social engineering (Bierschenk 2014). ‘Translation’, the repeated coding and decoding of the models or blueprints, is an essential feature of the paradigm. How the EU blueprint is actually ‘read’ in African quarters compared to European ones makes an interesting subject for further research. As a hypothesis, rejection of the ‘EU model’ in Africa is connected as much to opaque regional institutions that invite cronyism in Africa as to the neocolonial dimension perceived in Europe’s North–South action, including the engineering of the EPAs. The economic engineering model imposed by the structural adjustment programmes (SAP) and the Washington Consensus to deal with the economic crises of the 1980s and 1990s qualifies as another grand travelling blueprint. With regard to the prescribed mode of insertion into globalization, this blueprint is conspicuously different from the REC-based model discussed here. If they were better informed, aid and trade officials would grasp to what extent regional bodies in Africa are contested by economic theory as well as by an informed African public.19 Accordingly, the ‘EU model’ of regional integration is decoded and recoded very differently in northern and southern quarters. In fact, there is a deep intellectual divide between, on the one hand, the sanguine attitude towards regional economic integration in Africa as held by the European Commission, continental European aid agencies and African trade officials, and on the other hand, the critical assessment of African integration blueprints across economic schools, even those that support regional integration in general. The latter assessment amounts to massive regional trade pessimism for Africa. The Anglo-Saxon strand of trade theory commonly favours looser free trade areas and multilateral liberalization over heavy-handed customs unions.20 Inversely, a new and rising strand of critique in Africa emphasizes the need for transformative structural policies in order to render

19 One representative academic text at the time was the volume edited by Oyejide, Elbadawi and Collier (1997). 20 Among many: (Schiff and Winters 2003; Winters 2001; Yeats 2000), and earlier contributions of Schiff. The same pessimism about regional trade integration is tangible throughout the work of the eminent South African think tanks TRALAC and SAIIA. However, they have to maintain a constructive attitude, as they are constantly consulted for high-end expertise on practical questions regarding how to advance African RECs, most recently the CFTA. The resourceful series Monitoring Regional Integration in Southern Africa, now in its 15th edition, is a testimony of this (Hartzenberg, Erasmus, Kalenga et al. 2018).

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conventional regional integration useful. There is not much interest in an EU model anymore. Let us circumscribe the analytical tools designed to assess the problems more precisely. Disentanglement of REC overlaps and completion of internal trade liberalization in Africa are moving at a relatively slow pace. The basic question is why, and what can be done about it politically. Starting latest with Fouroutan/Pritchett (1993), various efforts have been made to explain why intra-African trade is low (UNCTAD 2009). There are number of key arguments as to why formalized regional integration among relatively poor countries remains imperfect. The abridged answer is: poverty. Poor countries have little to trade with one another. Of course, international economics provides a more detailed diagnostic of South-South regionalism. In the following, this narrative will be shortly reviewed in order to determine whether every aspect of the gloomy picture it paints is convincing. We will also consider why the entry points for countervailing industrial and agricultural policies are systematically neglected in the canonical treatment of intra-African trade. For REC-sceptics, the rent-seeking opportunities at all political and administrative levels of regional bodies first come to mind: granting licenses or arbitrary tariff protection to cronies; demanding fees for all reasons imaginable, irrespective of solemn engagements to liberalize the regional market; and placing political friends in highly paid jobs in REC secretariats. While rent-seeking and corruption are certainly significant, we will not consider them in the following for a fairly simple reason: if massive economic fundamentals or well-organized economic interest groups in favour of thorough integration were in place, they would arguably push such obstacles aside. Indeed, both anecdotal evidence and the general impression indicate that organized business in Africa, represented by its corporate business associations, has not decisively pushed the regional integration agenda. This issue is presently underresearched. Further investigation would probably reveal a range of entrepreneurial attitudes stretching from outright hostility vis-à-vis organs like SADC in Southern Africa to a decidedly pro-REC attitude by the East African Business Council. This stark contrast to the engagement of business communities in Europe, represented by Business Europe, as well as in North America and across the Atlantic and the Asia–Pacific region is likely to remain. (See chapter on regional business associations below.)

Chapter 4

Regional Integration in Trade Theory

Abstract Given widespread scepticism in trade economics about the value of RECs comprised of developing countries, the formal theory of regional economic integration is critically examined in four stylized configurations. Based on the overarching logic of trade creation and diversion, the usual diagrammatic treatment of tariff effects is critically discussed in terms of its numerous shortcomings. A single-country and REC-wise diagrammatic treatment of tariffs in the presence of increasing returns is proposed to allow quantitative assessment of the arguably most promising case for South-South RECs. Building on the literature, the cases of full and incomplete specialization within a regional group are discussed to capture concentration effects. This analysis is followed by an empirical investigation of the level which African economies have achieved with regard to diversification, specialization and sophistication of products. In addition, it is depicted what drives Africa’s cross-border agricultural trade in homogeneous products, where political concerns for food security intervene. It is concluded that South-South integration may be effective and useful, but it can only function with the help of strong policy coordination.

4.1 Four Strands of Arguments In light of the wide-spread REC scepticism and reluctance to full integration there must be deep-seated problems in the African regions, or put differently: internal trade barriers and slow political progress of integration are likely to be endogenous to the underlying production pattern in the respective region. Hence, they are not all external hurdles put up against willing economic actors; things arguably work out differently. Trade economics offers at least four different strands of arguments to show the limitations of RECs among developing countries in Africa: • • • •

One representative good: the logic of trade creation and diversion Still for one representative good: the small size of African RECs Two goods in Ricardian logic: regional imbalance and the role of hegemons Multiple goods: diversification, specialization and sophistication in regional perspective.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 H. Asche, Regional Integration, Trade and Industry in Africa, Advances in African Economic, Social and Political Development, https://doi.org/10.1007/978-3-030-75366-5_4

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The argument on specialization/sophistication—and the lack thereof—continues at the infra-goods level: In the presence of dominating trade in tasks in global value chains, developing countries would be best served when they concentrate on the limited productive tasks they can fulfil. The list could easily be continued into other arguments against any sort of proactive trade policy, e.g. the anti-export bias of import tariffs, which ostensibly matters a great deal in small RTAs, yet the arguments named above appear to have most bearing on southern regional integration. The arguments are not fully independent of each other, nor are they fully worked out in theory. Taken together, they constitute a major theoretical caveat, corroborating the empirical findings above. A sound political strategy in favour of regional economic integration must find a comprehensive answer to these challenges.

4.2 Trade Creation and Trade Diversion 4.2.1 Revisiting the Basics Regional trade agreements, in particular customs unions, are a form of preferential liberalization. They liberalize exchange among member states, but discriminate against the rest of the world, regardless of who would be the most efficient supplier. This is why they are considered fundamentally ambiguous in economic analysis. Economic analysis calls sanguine political attitudes about regional integration into question by focusing on this ambiguity. Hence, the question of whether RTAs are ‘stepping stones’ or ‘stumbling blocks’ to further global trade integration has been debated for decades. In the same sense, it is debatable for Africa whether carrying on with African RECs contributes to or hinders the emergence of a Continental Free Trade Area. The neoclassical assessment is undertaken in terms of trade creation (TC) and trade diversion (TD). Expressed in a very reduced form, it argues that trade creation must exceed trade diversion, going back to Jacob Viner (1950). Trade is ‘created’ inasmuch as tariff preferences in a new RTA encourage more efficient producers in neighbouring member countries to take over domestic market shares from less efficient national producers. Subsequently, what was once purely domestic business becomes international trade. This is welcome. Generally defined, trade ‘diversion’ involves supply switching in response to a change in the import price. Specifically, in preferential trade agreements, trade diversion refers to a situation in which globally inefficient but intra-REC competitive regional producers conquer market shares behind the tariff barrier from more productive world market suppliers. This is considered unwelcome. Originally, Viner’s model referred exclusively to trade volumes, mostly ignoring prices, terms of trade, balance of payments effects, etc. Prices were just markers to indicate trade efficiency, but no exact price or welfare effects were calculated. Scholars like Meade (1955) or Lipsey (1957) added a number of these effects to the initial thinking.

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Nevertheless, the canonical TC/TD analysis remains surprisingly incomplete or skewed in its discussion of the benefits of regional economic integration. If a given ‘home’ country produces a good behind a high tariff wall, while the most efficient potential supplier is located somewhere in the ‘rest of the world’ (RoW), the assumed trade creation by relatively more productive neighbours within a new RTA is in reality nothing but ‘shadow trade diversion’ to a less efficient producer: Switching the comparison point from autarky to free trade uncovers that a good deal of trade creation is nothing but (shadow) trade diversion. Surprisingly, this argument has not been explicitly been put forward in the literature. (Brücher 2016: 41)

Trade diversion is a priori less damaging when integrating partners are of similar endowment and efficiency levels; accordingly, shadow trade diversion creates lesser efficiency losses when this applies to RoW suppliers as well, say between EU and NAFTA or with East Asian trade partners. However, exactly such a constellation is relevant in low-level South-South integration schemes like in Africa. So far, deepening the trade creation/trade diversion logic would add to the economic pessimism regarding RECs. As Vinerian logic is mainly interested in imports, another ambiguous case is also hardly considered: that REC member states give up extra-regional exports for the now easier intra-regional exports, also a kind of trade diversion. There can also be more positive outcomes for the rest of the world and for the regional community, and this at least is in the literature. The rest of the world incurs loss due to discriminatory liberalization in a RTA, but RoW producers might indeed gain from what has been coined as open bloc effects. A well-integrated and not completely fenced-off regional market may attract new trade from the rest of the world. Such effects occur systematically when RoW suppliers increase their exports to the REC, attributable to features of the REC such as (a) (b) (c)

lowered MFN tariffs positive signalling effects potential for economies of scale and scope.

We thus encounter something interchangeably called trade expansion or external/open bloc trade creation—considered efficient by definition. This is important because it represents exactly what African politicians are aiming at when they highlight the attractiveness of their regional trade areas for importers and investors from the outside world. In a different configuration, we even have trade redirected from intra-regional to RoW suppliers, as Brücher believes to have found in his analysis of EAC data. However, he rightly avoids calling it open bloc trade diversion since RoW producers like China do not appear less efficient (op cit.: 41, 91). Again, the welfare effects are ambiguous, and trade policy is invited to steer the development. Realistically, one would expect welfare-enhancing open bloc effects not so much in African RECs, but in huge common markets like the EU. Indeed, this is a topic in the economics of European integration. These positive effects are not limited to tariff effects. A similar effect has apparently arisen in the (smaller) Eurozone, as the

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common currency has lowered trade costs for RoW suppliers considerably and thus encouraged their exports (and investments) into the region: In this way, we can think of the euro – which otherwise might be thought of as a preferential economic integration – as a non-discriminatory removal of frictional barriers. This is ‘reverse trade diversion’. (Baldwin and Wyplosz 2015: 136; my emphasis)

Open bloc effects reverse earlier trade diversion, because benefitting Japanese producers, for example, may be efficient cutting-edge producers. One can call it external trade expansion, which in fact takes place in both directions. When looking for something similar in Africa, mainly the two FCFA zones come to mind, all the more as they are de facto attached to the euro by a fixed rate. In addition to the deterrent effect of being small markets, there are two reasons that call into question whether these zones will generate open bloc effects for CEMAC and UEMOA. Both have been debated above. Firstly, these currency areas most facilitate trade with France by virtue of their mechanics. Secondly, the Franc CFA is considered grossly overvalued. Consequently, the overall effect depends on whether the predominantly French exporters who automatically benefit are among the globally most efficient suppliers in these trade relationships—which is debatable in certain sectors, especially when they enjoy a quasi-monopolistic position. This situation also demonstrates how tariff effects with their potential trade-generating effects within a regional group can be cancelled out by adverse common currency effects, or as the authors of the volume quoted above put it: why a common currency can hinder regional integration instead of fostering it (Nubukpo et al. 2016).

4.2.2 Diagrammatic Treatment of Tariff Effects The narrative of expanded Vinerian analysis leaves the observer with a strong sense of the economic ambiguity of regional integration at large, and in South-South settings in particular. In order to get a more precise view of magnitudes of positive or negative welfare effects, we have to turn to a more formalized treatment. In this context, we will also get an indication of necessary agricultural or industrial policy measures in REC contexts, in particular where to set tariff levels. The workhorse for diagrammatic treatment of the case builds on the conventional supply and demand analysis of a tariff (Fig. 4.1). Effects are most commonly framed in terms of (a) partial analysis of supply and demand aggregates for one representative good, which can be analytically broken down to single-industry levels. Unlike CGE treatment, balance of payments or any other macroeconomic effects remain out of sight. However, some such links could however be singled out more clearly than they usually are—even in partial analysis, as we will point out below. All conventional neoclassical analysis of RECs is also framed in terms of (b) the ‘no imperfect competition and no increasing returns’ (NICNIR) framework to study the essential economic logic of regional integration. Our representative authors Baldwin and

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Fig. 4.1 Standard diagram of tariff effects. Source Author

Wyplosz aptly describe the framework as ‘monumentally unrealistic, [but] pedagogically convenient’. Such framing may be pedagogically convenient, but it is politically inconvenient as some major entry points for regional industrial strategizing are barricaded. Typically, the treatment is further simplified by using (c) the conditions of the Australian/small open economy model that is also used for the analysis of economic governance in mineral-rich countries: the REC is treated as a small, price-taking community. No one sells to them more cheaply than to other clients because their regional markets are not of a dimension that merits to be captured at all costs. While such an assumption would be unrealistic for the EU, the world’s largest single market, as it would exclude in fact one kind of open bloc effects, it is appropriate for Africa. In this regard, the relatively small African countries are almost without exception price-takers, and thus, import prices are set independently of their tariff policies. In the figure, the pfree trade line thus represents the invariable, infinitely elastic world supply. The diagrammatic treatment can be critically reviewed at two levels: within the given increasing marginal (home) cost framework, that is, with straight upward sloping supply curves; and—more realistically—beyond this framework. We recall a number of its features within the given marginalism: Firstly: The diagram displays four welfare effects of a tariff: a, b, c and d. Together, they also define the aggregate consumer loss from rising prices when a tariff is imposed on a good. By definition, the sum of the welfare effects of a tariff is always negative, as the total consumer loss a + b + c + d in all cases exceeds the positive

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producer rent d and the tax income b.1 The deadweight losses in the Harberger triangles a + c are responsible for the damage. Domestic factor resources used are always a cost and no contribution to welfare. Additional employment from formerly unused labour input as part of a and the rectangle below is normally not offset against the total negative consumer rent, although this could turn the story around for labourintensive industries or farms, even when considering that the higher-priced good may become part, for a certain percentage, of the household consumption of workers. The same applies to other social benefits, for example, learning effects that may arise from the increase of domestic production from Q1 to Q3 .2 Therefore, the analysis must start with countries with high customs barriers which are subsequently dismantled for the benefit of REC partners in order to capture the ambiguity of tariff-fenced regional communities with a remote chance of positive welfare effects. Otherwise, a positive outcome in the given setting would be unthinkable. The ‘deadweight losses’ of trade theory thus have an ideological charge similar to the ‘non-tariff barriers’. Empirically, the most prominent instance where such restricted consideration of welfare effects becomes egregiously out of touch with reality concerns the upholding of national or regional tariffs to maintain African dairy or poultry farmers in their small business in competition against pfree prices, which are not truly ‘free’ world market prices, but rather prices artificially lowered by politics to ease entry into certain markets. The anti-poverty effect that such agricultural tariffs or bans can undoubtedly have does not count as a positive welfare effect in standard trade economics.3 Moreover, the case grossly violates the assumption of small open economies—to which no one is supposed to sell at lower than equilibrium prices—because subsidies in the global North push them below equilibrium. Secondly: Otherwise, the diagram gives no economic indication as to where to set the tariff level, in other words: What would the optimum tariff be other than the lowest one possible unless your government is cash-stripped and badly needs the customs revenue because it lacks a modern tax system? Let us recall that the theory of the optimum tariff refers to a situation in which a country can, by setting tariffs appropriately, influence the terms of trade in its favour (Krugman, Obstfeld and Melitz 2012: Chap. 9). However, this does not represent the position of most countries, and certainly not those in Africa. By the same logic, the simply designed diagram makes it possible to equate every tariff imposition with ‘protectionism’. Thirdly: The supply curve typically sets in at point 0, well below the free world market price. Therefore, ‘home’ country in the stylized diagram always has something to offer up to point Q1 . This is unrealistic as a rule and pointless when tariffs are considered for developmental purposes. More precisely, infant protection has 1 Prepare for a still worse situation within a full customs union where all tariff revenue ‘b’ disappears

in the community’s coffers, and as a member states you cannot be sure to get the full amount back. See below. 2 In their textbook, Krugman and Obstfeld recognize these kinds of additional benefits and also present a small additional diagram, making it possible to offset the Harberger losses against marginal social benefits when moving from Q1 to Q3 in contexts of market failure. They mention that the magnitudes can be optimized, but do not elaborate (Krugman and Obstfeld 1994). 3 For a handbook treatment of the issue along these lines see McCulloch, Winters and Cirera (2001).

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no locus in the diagram: Why should any production level be protected? There is no need up to Q1 , and beyond this point only shielding for suppliers with steadily increasing marginal cost occurs. Some textbooks mention the tariff as a measure of infant protection in their discussion of the standard diagram, but they simply do not show the intended learning effect with a price-dependent, stubbornly upward sloping supply curve [see as an example Todaro and Smith (2009: 624)]. Fourthly, the demand curve remains unchanged in the standard diagram, and thus the market size is given and out of consideration, although it plays a big role in sectoral or single-industry treatment, even more so in formal treatment of regional integration. At least some formal treatment of tariff policy can be found within the given neoclassical framework. With special reference to develop countries and based on the above graphic representation, these discussions are amenable to empirical application, e.g. (1) Thirlwall (2006: Chap. 16), with the best adaptation for developing countries, although social/private cost difference-based arguments are difficult to comprehend; (2) Hemmer (2002: part IV) (in German); (3) Todaro/Smith, see above, rather abridged; (4) Perkins et al. (2001: Chap. 18), technically most thoroughly worked out and clearest; and (5) Krugman, Obstfeld et al. (2012), see above, with a small model on reinterpretation of producer welfare loss. However, none of them fully considers the model’s systematic shortcomings.

4.2.3 The Developmental Case with Increasing Returns When leaving the realm of constant or decreasing return assumptions, the supply curve of a given developing industry might level off or enter the negative somewhere between pfree and ptariff . This alters the whole scenario. The question then becomes whether and where the downward sloping supply curve intersects with the (first unaltered, then adapted) straight line of demand. By neglecting these arguably most relevant cases in a real developing world, the classical diagrammatic model provides little guidance for empirical case studies and policy planning. Now increasing returns analysis makes it possible to ground industrial policy design in formal treatment again. To capture the developmental case, let us assume that the supply curve does behave differently. Here we leave the world of ‘NICNIR’ for good.4 In this case, home supply has the following characteristics:

4 When leaving the realm of constant or decreasing returns to scale, in standard economics one also

enters the world of imperfect competition and feels uncomfortable. Cases of monopolistic supply are indeed empirically relevant in developing country RECs that are analysed here and deserve formal treatment with a view to competition policy measures. We neglect this twin dimension of increasing returns here, except for one special case below.

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(b)

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It sets in at 0 well above the free world market price for the bundle of goods. Contrary to the standard textbook case, home producers are not in the comfortable situation of supplying at least something in any given situation. It has decreasing rather than constant returns to scale at lower production levels, but from the point of inflection onwards outright increasing returns. The point of inflection represents minimum efficient scale. Once economies of scale are exhausted from a certain point, the supply line flattens out—ideally at world market prices—and may later even have decreasing returns again (not shown).

Results are straightforward, as shown in Fig. 4.2, with quantities again shown on the x-axis and prices on the y-axis. In autarky at PA ,—some would say ‘selfreliance’—home supply would cover the full domestic demand but at a terribly high price. At the well-known point P1 , homeland has nothing to supply, no a, b, c, d; everything is imported. In the case of an MFN tariff, ‘home’ contributes its small slice as usual. At this point everything depends on if and where the downward sloping home supply again crosses (1) the MFN supply line and (2) the (unchanged) demand line. There are two possibilities at the 2nd intersection with S MFN (= PMFN line) in P2 . Either nothing happens because demand stands still at P2 since home would only be able to deliver at PMFN prices at far higher demand levels, which is not the case. Or home exports the rest to a place willing to pay PMFN while covering the whole

Fig. 4.2 Tariff effects with increasing returns. Source Author

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national demand at P2 . Home capability to serve the internal market thus depends to the extent of P2’ − P2 on export performance. While it may appear far-fetched at this stage, the case becomes more interesting described below in a REC context. The rest of the story depends on the question whether S Home intersects again with DHome , to the left of P1 . In this case, the country is well advised to lower the tariff right away to PMFN2 . Home supply covers the whole of home demand at P3 , another case of autarky, but at far more favourable conditions than at PA . The theoretical tariff revenue (b + c ) is obviously none anymore, as no one imports. As we have two intersections of home supply with PMFN or S MFN, respectively, and in the former case two intersections with D, the outcome has become ambiguous. If actual production growth has to run along the curve to become performant with or without exporting, a relatively high initial MFN tariff near the point of inflection makes sense. This represents infant protection. Later it can be lowered. Otherwise the tariff can be set straight at PMFN2 and even be later abandoned when S Home intersects the constant returns world supply. We then have free trade, which is presently an unlikely immediate outcome in many African cases. In order to maintain pressure on home producers to reach world standards, the tariff should be set somewhere between Pfree and PMFN2 during the intervening period, thus attracting some imports. This represents the stylized figure of an educational tariff (Erziehungszoll) in the sense of List or Hamilton. Its fine-tuning would presuppose that changing marginal cost structures are known ex ante, not only to suppliers, but also to the home government. This is arguably not quite realistic. Instead, the government may want to keep an eye on import statistics for homogeneous goods: if for example cement or flour is still imported in certain quantities, pressure on national producers is duly upheld. The producers will not be happy about it, but this is good industrial policy. To capture another trade pattern, a flatter supply curve might be chosen. If home supply then reaches the global production frontier Pfree east of P1 and does not intersect with home demand anymore, exporting again becomes crucial. In real world terms, all these configurations at P2’ or an assumed P1’ east of P1 may require some export subsidy to enable home producers to cover part of home demand at competitive price levels. Rolled out this way, the diagrammatic representation clearly visualizes the developmental challenge—something the standard diagram definitely does not do—and makes it possible to locate key data for empirical analysis and policy-making.

4.2.4 Diagrammatic Treatment of South-South Communities Now we can apply the diagram to the case of a regional union. The standard supply and demand (S-D) diagram with RTA tariff and unchanged, constantly upward sloping supply lines, where the least productive supplier at the margin sets the price for all, certainly captures those empirical cases in Africa where regional tariffs are only imposed to please incumbent, as yet unproductive suppliers or the Exchequer, and have no worthwhile purposes. Sensitive product lists of African RECs overflow with

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Fig. 4.3 Tariff effects in a regional trade agreement. Source Author

both cases. Beyond such simple cases, which are amenable to the standard treatment, we would need to introduce a number of alterations—not the least in order to formally capture trade creation and trade diversion as well as external trade creation in both directions, which is inherent in the description above. The problem is that a good diagrammatic representation is simply not available. First, we have to introduce a distinction between partner country and RoW. Starting in Fig. 4.3 with a simple S-D diagram, we may then simply introduce a regional discriminatory tariff, which leads to the price PRTA , lower than the earlier MFN tariff, which had raised the border price to PMFN . The equilibrium is now at P3 . Home imports fall, the four welfare effects become a , b , c and d  . For all the rest, things depend on (1) the reference situation; and (2) the distribution of trade between REC partners and RoW for the new magnitude of imports which equals MRTA multiplied by PRTA . When home had earlier imported part of what is b at free world market prices from RoW, the portion of which is now captured by partner is trade diversion; part of the growing imports that are still captured by RoW is external trade creation. The import volume under a is supposed to be trade creation, taken over by the partner country. Note that only part of the new b carries a tariff, b .5 The division of labour between ‘partner’ and RoW cannot be determined in the summary diagram. For a full treatment, we would have to look at the import supply Baldwin/Wyplosz’s representation, the tariff revenue b would even comprise a section of the rectangle below the shaded b , but this is only due to the fact that the reduced import supply implies a downward move on the MSRoW curve, thus a higher difference between PRTA and Pfree , but this is entirely due to the assumed slope of the RoW supply, which is suddenly no longer considered infinitely elastic.

5 In

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Fig. 4.4 Aggregate demand in a regional trade agreement. Source Author

curves MS separately. Partner imports do not carry a tariff because the supply curve MSRTA runs below the import supply from the outer world MSRoW .6 As a consequence, the supply is no longer one straight line, as MSRoW just sets in at PRTA . Then we have the issue of what happens with demand. In some formal representations, Dhome is treated as identical, while others turn the demand curve upwards with the identical preferences of the member states summed up to one REC demand (see Fig. 4.4). When demand is considered unchanged, the whole issue of regional market size remains outside. The base case with straight supply and demand lines can be conveniently cut into two categories: diagrammatic treatment of new REC formation and accession of new members to an existing REC. The latter can be treated from the angle of either the old regional community or a new accession country, for which the welfare effects must not be identical.7 Analogous to the single-country case, the whole exercise would have to be extended to increasing returns to scale, at least for ‘home’ and ‘partner’ country. Then, 6 In

still more realistic treatment, one would have to lower the MSRoW supply line as well. REC creation typically comes not only with discriminatory tariff against the rest of the world, but also with lower MFN tariffs than the member states had at inception. This approach is also strongly recommended by the WTO. During EAC creation, only Kenya had to accept some higher common external tariffs because the country had previously been more liberal than some of the new fellows. Similarly, the new ECOWAS CET would force some member states to apply higher rates than they had before (if this is not countered by the ECOWAS EPA). We have left this complication out of the diagrams. 7 See Ribhegge (2011) for further references regarding the European Union and Turkey as a hypothetical accession country at that time. Treatment of the case for a REC of advanced countries allows a number of simplifications in the stylized diagrammatic treatment, among them identical supply curves of partner and RoW because similar technologies can be assumed within and outside the community.

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for every industry which becomes subject to this partial analysis, the outcome depends on where the downward sloping supply curve intersects with the new PRTA , and—as we are talking scale effects—how the new, upward rotating regional demand curve behaves. Industry by industry, the aggregate social outcome depends on the variation of the a, b, c and d magnitudes and on the rectangles beneath them, which indicate home and partner resource cost—that is, domestic and regional capital, labour and land use effects. While theoretically undecided, the empirical importance for African RECs could not be more glaring: trade areas with sizeable external tariffs come with losses for African consumers, contrary to large high-income countries and their RECs, which may safely consider optimum tariffs for themselves. When, after a number of years, no additional intraregional trade is created by relatively efficient suppliers in the region or—at least—diverted, and the community continues to import massively from RoW at costly PRTA instead of PFree levels, the whole exercise either does not make sense or has not seriously been tried. The persistent low intraregional trade in all African RECs and persistent NTBs points to the possibility of either explanation. The theoretical exposition demonstrates the basic ambiguity, even when the classical distinction between trade creation and diversion has been shown to be less fundamental.

4.3 The Size of South-South Regional Markets The limited size of African national markets is the intuitive starter for regional economic integration. Most markets in single African countries are too small for modern industries; innovation and technical progress are hampered by limited market size, while local monopolies (= imperfect markets)—often in place since colonial times—hold up technical progress instead of acting as innovative Schumpeterian monopolists who have a technological edge for a limited time. This idea was formally (re-)introduced as an overarching topic in modern growth theory by Romer (1994), along with the generally enhanced focus on technology in growth theory—a seminal contribution to connecting incentives for innovation and market size. The size of a Regional Economic Community already played a role in the basic neoclassical assessment of trade integration—with a negative sign for price-taking of a small producers’ group in the world market and a positive sign for trade which regional communities may newly create. Because the first effect is certain and the second one rather not, scholarly considerations of REC size did not play in favour of our African RECs—in stark contrast to official declarations in Africa which highlight their enormous market potential with population and GDP data. What does this look like formally? The case does not feature prominently in the few available textbook treatments since typically only single-country home demand is considered. In other words: DHome stays the same; only supply curves (may) change, with the aggregate import supply (MS) curve undergoing alternation along with the discriminatory tariff. Admittedly, it is difficult to accommodate all changes when

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demand and supply move simultaneously. Let us at least show what the most important aspect is. When former Dhome and Dpartner with assumed identical preferences (= same slope) and perfect substitution of goods merge, a familiar microeconomic pattern occurs, as in the small Fig. 4.4. In the standard triangular diagram (leaving a similar shift of the supply curve out), home suppliers have a bigger market to serve, but will not benefit much from it because their own supply is so inelastic. The same holds true for their partner suppliers, contrary to RoW. Therefore, once again, conventional neoclassical representation does not work in favour of African RECs. Obviously, size matters more when the NICNIR framework is transcended and imperfect markets as well as increasing returns to scale are admitted. Let us recall from above the hypothetical case of a dynamic supply curve that unfortunately turns down East of Dhome only. If things work out differently thanks to the upward turn of the new aggregate demand, domestic suppliers may benefit from their own dynamic. To show this graphically, another deviation from the worn-out NICNIR setting can be accommodated here (in Fig. 4.5). Monopolistic competition is commonplace in Africa and needs special policy attention. If increasing returns to scale exploited in RECs still come with monopolistic competition—a very realistic assumption indeed—then home supply may intersect twice with the regional demand curve. As Brücher has pointed out, the producer may then come to choose any point on the demand curve that maximizes his producer rent in the rectangle i , i, ii , ii at point i. To avoid such monopolistic effects, trade liberalization features as the obvious remedy for segmented markets too small in size, a severe constraint for exploiting economies of scale and innovation. However, calling for wholesale trade liberalization to correct the failure is problematic, too. Unconditional trade liberalization P

I i'

i

ii'

ii

II DA

D A+B

Q

Fig. 4.5 RTA demand and supply with increasing returns (Source (Brücher 2016: 126). Only the right part of the concave supply curve is shown.)

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does not make home markets any bigger per se; on the contrary, there is a risk that overwhelming import competition will keep a country’s markets too small. As could be witnessed already 30 years ago, structural adjustment imposed the wrong shortterm solution for the problem of small market size in urging African countries to roundly lower MFN tariffs. A better solution is obviously economic integration with full internal liberalization and some common external protection. Common external trade restrictions can thus be instrumental in generating the necessary market size. And an attractive market size can compensate for a mediocre business environment that stems from imperfect institutions, as FDI convergence towards China has shown. The usual counter points to the small magnitude of even the biggest RECs and the African market as a whole. The entire Sub-Saharan African GNI equals the combined GNI of Austria and Switzerland, and the two have never approached the project of an RTA, or as Collier has repeatedly pointed out, the economy of the whole of Sub-Saharan Africa is about the size of Belgium’s (Collier 2007; Collier and Venables 2008). However, the argument is less convincing than the comparison with small European countries suggests.8 In a number of industries, e.g. in the car or semiconductor industries, the threshold for scale economies has continuously risen over the last decades, another facet of the unfavourable change in the global environment. The efficiency threshold for these industries exceeds likely African REC market size, while fresh research on other industries has shown that scale actually matters less than flexibility (lead-time), quality, etc. The WDR 2009 devoted to new economic geography has gone as far as to say that scale economies are significant for just a third of industries. A typical example is apparel making, where it may be sufficient to put a couple of sewing machines under one roof, as opposed to large scale spinning and weaving. Minimum efficient firm scale varies among industries, and for quite a number of them REC size will be sufficient for economies of scale.9 A similarly ambiguous or case-dependent role is played by economies of scope with respect to regional integration. This type of economy has in fact a different role in small and large markets. In microeconomics, economies of scope are introduced as a firm strategy to deal with small magnitudes of product-specific demand. Production of a broader range of products with the same machinery enables the firm to distribute fixed costs between them and thus to lower average unit cost. When opening to a larger market, the stylized firm can operate a transition from such low-level economies of scope to superior economies of scale. Part of the literature on regional integration portrays the accession of small producers into a large regional market (like the EU) accordingly. Ribhegge, based on Hansen und Ulf-Møller, models the risk associated 8 Brücher

presents a number of arguments for why Collier’s suggestive comparison is simply not accurate at the aggregate level (Brücher 2016: 45, 63). 9 Consequently, the authors of the WDR 2009, in which the four-pronged literature on scale economies is evaluated in terms of their impact on economic geography, defended regional integration and refuted “a false choice between regional versus global integration. Both are necessary because they support different objectives. Regional integration helps small and remote countries scale up supply capacity in regional production networks. This, in turn, allows these countries to access global markets” (Deichmann and Indermit 2008: 45).

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with the integration from a scope- into a scale-efficient economy (Ribhegge 2011: 42). Yet economies of scope also matter in high-end production. Only in large markets are high-end producers able to present a broad range of products, which in turn enables them to satisfy a diversified demand, in part out of ‘love for variety’. Again, this practice is industry-dependent. For example, at the present stage of industrial evolution, economies of scope play an important role with regard to Industry 4.0 opportunities. Regional economic integration thus represents a springboard for such type of economies as well.

4.4 Concentration Effects in Regional Trade Agreements: Who Benefits? The argumentation in the preceding chapter has left the issue of who produces which range of products in a regional union and who benefits from the REC internal division of labour largely open. It was largely either us (= ‘home’) or them (= ‘rest of the world’). In fact, more recent consideration has been devoted to the division of labour and the differential income growth effect within South-South RECs. It has pushed the initial trade creation and diversion logic a step further in the sense of: How much trade creation can our developing home country be expected to achieve, and how much is created by or diverted to the partner country? Again, these considerations have a bearing on what can reasonably be expected from economic integration among developing countries. Formally speaking, this is nothing more than a special configuration of trade diversion which by definition involves supply switching from an efficient ‘rest of the world’ to a less efficient ‘partner’ country within a regional trade agreement, but it actually applies a Ricardian or Heckscher–Ohlin two goods case. The case can be conveniently subdivided into two broad categories: complete (= Ricardian) and incomplete (= Heckscher–Ohlin) sectoral specialization. The basic academic arguments have remained the same for more than two decades. We will see whether they have become any more convincing since then.

4.4.1 Regional Trade with Complete Specialization If complete specialization along the lines of classical comparative advantage logic were allowed to occur in a regional market of developing countries, what would be the likely outcome, especially in the weaker member states? Trade theory has looked more closely at the stylized pattern of specialization which might emerge in a two-goods/two-countries African REC with external protection (Venables 2003). Whereas a stylized ‘Uganda’ would be expected to specialize in low-cost agriculture, where it might have a valid comparative advantage particularly in tropical products,

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a stylized ‘Kenya’ would probably concentrate on manufacturing. It does not take much economic modelling to understand that while such a division of labour might be rational in terms of static allocative efficiency, it does not hold a huge growth potential for the agriculture-based partner country. The stylized case is accentuated by the fact that the important African RECs have at least one regional hegemon who historically has a certain number of industries with competitiveness markedly superior to the neighbours: South Africa, Kenya, Cameroon, Nigeria, Egypt or Côte d’Ivoire. Regional economic hegemons also exist elsewhere in the world, but in contrast to other regions, some African regional communities have experienced a trend towards full specialization in favour of the regional leaders—the first EAC for Kenya, the UEMOA in the heyday of Côte d’Ivoire, the CEMAC with Cameroon. Others are still anxious about such a concentration effect, namely SADC members after the accession of South Africa. Yet the hegemon’s productivity level is only second- or third-class in global comparison; this regional leader is globally in an intermediate position. ‘Kenya’ gains from access to more high-yielding agricultural products (than its own), while ‘Uganda’ is left only with this relatively low-skill and small income-generating agriculture. At the same time, ‘Uganda’ has to spend this small income on manufacturing goods out of trade diverted to Kenya, which have become more expensive in the customs union than before. In such a pattern and in the absence of any kind of compensatory policy, regional income divergence ensues instead of convergence. Even trade creation, the classical argument for customs unions, only benefits the better-off members, particularly the regional hegemon, thus increasing income disparities among adhering countries. This stands in contrast to practice in high-end RECs like the EU, where mid-level newcomers have regularly benefitted from duty-free access to cutting-edge producers of, e.g. Swedish trucks and German machinery, while at the same time getting the opportunity to create globally efficient trade in turn. Conversely, even South African car makers are said to produce well within global efficiency frontiers, and Botswana or Lesotho drivers thus have to pay dearly for their cars.10 The positioning of hegemon and subordinate member states in southern RECs vis-à-vis the global efficiency frontier thus adds an important element to regional trade pessimism. A similar claim can be based on the agglomeration logic with classical Marshallian externalities. In the absence of satisfactory infrastructure in the least developed member states, industry will tend even more to cluster in the relatively best-off country, especially when the overall business climate is market-friendly there. The post-colonial history of East Africa confirms the pattern (see Box 4.1). The still deficient transport infrastructure in the African regions asymmetrically favours such uneven trade gains. The phenomenon is also known as the hub-and-spokes effect,

10 Basically,

the case is identical to the formal treatment of the difference between discriminatory trade liberalization with high-productivity countries (the EU case) and with low-productivity countries (the African REC case), under the assumption of a small open economy in Baldwin/Wyplosz (2015: 144–146).

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with the somewhat more advanced regional leader in the hub position, for example with the configuration of air and sea traffic.11 Box 4.1: The experience of the first EAC (1)—Divergence The first EAC’s break-up in 1977 is usually attributed to political incompatibilities of the region’s heads of state—Kenyatta, Nyerere and Idi Amin—and to the diverging economic regimes, rather liberal in Kenya, socialist in Tanzania, nationalist-chaotic in Uganda. However, unintended concentration and even relocation of industries to Kenya is the hidden economic history and explanation of the EAC failure, expanding or creating outright regional monopolies even before business people of Indian descent were expelled from Uganda. The regional hegemon even benefitted disproportionately from common service provision in transport, etc.: Tanzania and Uganda complained that a majority of economic benefits of EACSO went to Kenya, which had a more advanced infrastructure than its two partners and a better developed industrial base. The majority of investment was in Kenya, mainly in Nairobi and Mombasa, with cement, tobacco products, brewing, textiles, food processing and petroleum refining the main components of the sector. (Arnold 2005: 263)

In broader analysis, Olatunde Ojo cites four reasons for the collapse of the EAC, whereas only the last two are widely recognized in political analyses: (1) polarization of national development and perception of uneven gain; (2) inadequacy of compensatory measures; (3) ideological differences and the rise of economic nationalism; 4. differential impact of foreign influences on the member states (West, China, Soviet Union) (Ojo 1985). In fact, regime divergence only accelerated polarization effects from agglomeration forces, which led to the collapse in the absence of sufficient compensation. Tragically, history may repeat itself with the new EAC. Personal and political incompatibilities of the region’s heads of state are again jeopardizing the coherence of the regional union. The same two economic fundamentals— uneven gains and absence of compensation—contribute their share to the looming political disaster. This comes in stark contrast to the bright picture painted of EAC achievements, sometimes within the same analysis (AfDB 2019). The new EAC is indeed far closer to a customs union than the old one ever was. It also has stronger institutions, a scorecard monitoring system of its implementation steps, and a monitor for political and non-political NTBs—all preconditions for avoiding historical repetition. For a full understanding of the case, we need to emphasize another element of new economic geography (NEG). One recommendation from the hub-and-spokes model or any centre-periphery model explains what the ‘spokes’ or satellite countries 11 See the comprehensive review of African transport systems, still astonishingly accurate, in Pedersen (2001).

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can do to alleviate the regional imbalance. In essence, the small countries should facilitate trade among themselves as much as possible in order to overcome the limitations from small market size with costly transport systems. Essentially there is nothing wrong with this basic recommendation. However, the high trade costs, such as deficient transport systems and frictions at borders, are in NEG logic not even a compelling cause of such regional imbalances. When regional clustering is in place and external economies of scale are playing their role, improvement of transport corridors and lowering of trade barriers within and beyond the region can pathdependently reinforce instead of removing the unequal division of labour among the regional hegemons and the followers. This kind of development is conditional on the difference between saved factor costs from firm-external advantages at the existing cluster and saved transport costs. It is by no means a natural outcome of market forces that an intraregional reduction of distance as cost factor leads to a diversified landscape of more dispersed industrial ventures. The opposite can materialize, and the hegemon still gains most from veritable ‘floodgate openings’ for its products. While this represents a bad argument for further neglect of infrastructure in Africa, it heightens the question of who benefits from South-South agreements. In the most realistic case in which transport costs only fall to some intermediate level, as Mold and Mukwaya point out, it is becoming more and more likely that the concentration of industry will remain in its current geographical location and that only market access will be facilitated (2016). Their analysis suggests that good regional strategizing should consider possible centrifugal improvements of trade/transport costs relative to industry-specific centripetal factors such as economies of scale, positive local externalities, proximity to main markets, etc. In consequence, one would have to calculate the relative costs necessary for policy to help equalize the named centripetal factors. But good industrial policy is not yet on the menu. At this stage, we have to jump to the global conclusion that many scholars in trade theory draw from the stylized exercise. They contend that if the REC internal centres, hubs or hegemons do not play much of a beneficial role for the economic community of poorer countries, then integration with a powerful hub in the global North should be sought instead: One implication […] seems to be that developing countries or groups of them should seek to integrate with countries or trade-blocs that are economically more advanced. Typical examples of such trade agreements are NAFTA, APEC and the various trade agreements that the EU has signed, for instance with Eastern Europe or the EU-Maghreb Agreement. These trade relations can probably best be described as ‘hub-and-spokes’ arrangement. (Qualmann 2008: 96), based on Baldwin (1995, 1997)

We referred above to the representative literature for the ensuing African REC pessimism in the 1990s. Qualmann revisits the proposal ten years later, without contradicting the eminent scholar she quoted. She mainly adds that the analysis should not be written solely in terms of static allocative efficiency, but also in view of dynamic effects which she largely associates with R&D cooperation and ensuing regional spill-over effects.

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Thus, developing countries may benefit substantially from technology spill-overs if they integrate with a technologically advanced partner that engages intensively in R&D. (op. cit.: 98, emphasis by herself)

Such integration may gradually qualify poorer member states for diversification into more human-resource intensive goods and services. But unfortunately, the proposition does not go much further than the one based on static allocation. In Africa, this sort of potential advanced partners is numbered. In terms of overall technological intensity, there is just one: South Africa, and even this economy lags globally with regard to essential research-intensive branches. Hence in what is presented here as a dynamic perspective, regional integration with South Africa makes some sense, but mainly in conjunction with advanced technological and trade hubs in the North. This leads to two superposed hub-and-spokes systems: The discussion yields more promising results as to the double hub-and-spoke structure, which characterises South African within SADC on the one hand and SADC vis-à-vis the EU on the other. In this perspective, South Africa can clearly serve the region, both by increasing critical market size and by raising the absorptive capacity for technological upgrading processes. (op. cit.: 100; my emphasis)

This role is obviously envisaged when a hegemon presents itself as the ‘regional gateway’ to new traders and investors, as the government of South Africa blissfully does. The other regional hubs—Cameroon, Côte d’Ivoire, Kenya, Nigeria—hardly work as technological intermediaries. Cases in point can rather be found in Latin America and developing Asia. Thus, the general conclusion of the trade-liberal string applies again: if you seek preferential trade integration at all, it would be better to integrate directly with the EU for your country’s benefit. Otherwise, you pay too much for trade diversion in favour of your globally mediocre regional hegemon. For SADC and South Africa, the double hub proposal conspicuously reflects what has happened on the ground anyway, first with the TDCA and now with the ‘SADC EPA’, both concluded with the EU. This attempt at ‘dynamic’ analysis does not alter the consequence from static analysis. Some conditionalities immediately come to mind in order for a double hub-andspokes system to produce the predicted benefits. The most important ones are actual transmission channels for technological spill-overs and R&D knowledge creation as well as a political willingness to use them effectively. Spill-overs among developing countries are barely automatic, and when the regional gatekeeper carefully preserves its regional monopoly, the proclaimed gateway remains a one-way-road for import goods into the wider region. Otherwise, the scholarly debate in trade theory has—in this respect—not made much progress for more than a decade.12 No other or better advice is available from aid for trade (AfT), either. Preferential trade integration in African regions does not seem to make much sense if not instantly combined with North–South integration. Trade 12 This applies except for interventions like Stiglitz, Cimoli and Dosi, as cited in Part III. They argue mainly for the preservation of national industrial policy space and not so much for regional economic communities of developing countries.

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advisors working on this conceptual platform consistently recommend North–South trade agreements along with the African RECs, whose existence they grudgingly accept, and more multilateral trade liberalization.13 Without already opening the discussion fully at this stage: Can we identify any general shortcomings in this analysis of trade benefits with complete specialization? We obviously can. In fact, politics is seemingly not able to alter the international rankings of allocative or dynamic efficiency. Intelligent sectoral and trade policies are conspicuously absent from the menu: First the obvious: When opening Africa to predominant North-South integration, market forces do not bring any industries to the poorer members of the southern groups, unless there are specific localized factors at play. Home production typically falls to zero or remains there. The poorer members just get industrial goods from the North at the best price. Second, national agricultural or industrial policy could systematically try to alter the competitiveness ranking that leads to this unpleasant outcome for a regional union of poorer countries. While it is unrealistic to change comparative advantage at the level of whole countries in the short and medium run, sectoral policy can target specific industries in both the hub and the spoke countries of the REC. Among other initiatives, policy can steer technology and knowledge transfer at industry or firm levels when no advanced technology hub exists at country level. This option is not mentioned in the REC-pessimistic discourse. Third, the critical assessment of pure South-South trade agreements rests on the assumption that these RECs discriminate relentlessly with high average tariffs or import bans against potential northern suppliers. When all the imports are struck by prohibitive border measures, the consumer losses from trade creation and diversion will indeed be monumental. However, this is no longer the tariff schedule of any African country or region. In Parts II and III, we discuss the details of the multiband tariff system in place. The aspect we need here: by allowing most capital and essential goods to be imported free of charge, the system emulates in these bands free trade with the northern hub and helps to avoid welfare losses from trade diversion while protecting some other sectors. In this case, it does not significantly matter whether the regional hegemon is globally in an ‘intermediate’ or some other position. The only thing that can be critically examined is how well such trade policy is articulated in practice with the underlying sector policies.—This is not mentioned in the REC-pessimistic discourse, either. In consequence, by readmitting sectoral steering of comparative advantages to the policy menu, an African group of countries can fully avoid concluding a preferential North–South agreement in tandem with own South-South agreements. The potential 13 The German development cooperation edited a volume on ‘development-friendly’ EPAs, which erroneously considered the trade-in-goods part as a done deal, already in 2009, and ventured out into the deep integration/ Singapore issues with the obvious intention of enticing unenthusiastic African negotiators to accept these issues for a second round of negotiations and AfT business (GTZ 2009). The issue will be discussed in Part III.

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benefits of North–South trade agreements must lie elsewhere or beyond the simple cases from trade theory reproduced here.

4.4.2 Regional Trade with Incomplete Specialization The comparative advantage logic explains divergence in South-South RECs by full sectoral specialization: ‘Kenya’ does manufacture, whereas ‘Uganda’ does agriculture. In reality, complete specialization seldom actually occurs. What is likely to happen? If factors (labour, capital) are not fully used, or if the two-country resource balance would result in comparatively efficient production which is, however, insufficient to satisfy demand for one good—e.g. ‘agriculture’—full specialization does not take place. With partial specialization, the regional leader retains nearly all the somewhat more modern industry and some of the primary agricultural production— an asymmetric pattern. The stylized ‘Kenya’ will also do agriculture in order to satisfy the total regional demand. The less developed members will be left with a bit of manufacturing industry—some scattered industrial units which are so typical for Sub-Saharan Africa. Examples include the solitary textile plant, as e.g. Burkina Faso had until structural adjustment in Koudougou, with second-hand machinery from Ivory Coast; a range of quite modern bakeries to provide fresh bread every morning14 ; one or two breweries and bottling plants in every country because of inconveniently high transport cost for long-distance trade. As agriculture and downstream agro-industrial processing remain relatively undiversified, all RTA members have essentially the same primary products on offer for each other. Even the industrial hegemon offers maize and wheat in grain or flour form; mangoes and tomatoes, fresh or concentrated; and with a bit of industrial treatment, cooking oil, confectionery, etc. There is fierce competition in identical or similar agricultural goods, and little modern manufacturing industry worth mentioning for the poorer members. Wheat flour is indeed an appropriate example from Southern Africa: it is traded not as part of a SADC free trade regime, but on non-preferential grounds, and no rule could be agreed upon (Kalenga 2012). As everyone has grain mills, including South Africa, reports on import bans imposed and re-imposed pop up over and again. Fortunately, as some would say, some sort of negative ‘Nigeria effect’ moderates the tendency towards industrial clustering with the regional hegemons in African RECs. When there is a rather unfavourable business environment offered by someone who is otherwise the economic hegemon, industries do not concentrate in the dominant country, but rather relocate to more business-friendly places in the region, still benefitting from the basic advantages of somewhat freer trade.

14 Bakeries count for much in the total of African enterprise surveys—a classic for the statistical confusion of ‘industrial’ and ‘artisanal’ activity. For details see the respective UNIDO Yearbook (2018).

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In West Africa, such instances have been in the limelight: the case of Unilever concentrating production of palm oil products in Ghana, and of Dunlop relocating tyre manufacturing to Ghana. The Nigerian tyre industry took off shortly after independence in 1960, with Dunlop Nigeria Plc and Michelin Nigeria Limited establishing their respective manufacturing outfits. By the year 2005, the combined annual local capacity was 2.25 million units, representing 75% of the Nigerian tyre market at that time. The tyre industry had local sources and suppliers for rubber (plantations), mineral oil, zinc oxide and carbon black. In 2006 and 2008, respectively, both Michelin and Dunlop shut down their factories permanently due to infrastructure deficiencies and a sudden slashing of Nigerian import tariffs to 10%. The domestic factories could no longer cover their high energy costs and other overheads, and yet the decision to lower tariffs was never reversed. Nigeria now imports all tyres. The case is typical. Such negative political mitigation effects may have also occurred in Kenya, where the repeated troubles during election periods potentially encourage a more even spread of investment in the region. In fact, EAC trade statistics show that recent intra-regional industrial export gains are more evenly distributed in favour of Tanzania and Uganda than within the old EAC. It remains to be seen whether South Africa will also undergo relocations of industry to neighbouring countries in the light of the country’s degraded infrastructure and governance. The bottom line is: If the regional hegemons were economic and political role models, intra-REC divergence in Africa would be far more pronounced. The basic imbalances remain, however, especially with regard to the weakest and the smallest member states, which are often land-locked as well. All other things being equal, small member states seem to have particularly little to gain from regional trade agreements because their own small production base renders beneficial trade creation unlikely [for a summary see Panagariya (1999)].

4.5 Diversification and Specialization In order to find out what the prevalent regional integration with incomplete specialization positively holds for economic development in Africa, we have to broaden the picture. RECs should allow all member states to meaningfully contribute to the REC internal and external division of labour a priori by diversifying into an increasing range of gainful products. The question is not trivial: regional unions among advanced economies also do not rely at all on complete specialization, and the fact that regional division of labour is not totally lopsided in favour of one country can be a good starter for upgrading in all member states. Indeed, the need for diversification and its prospects is all the talk among development economists. The trade-developmental debate of the last decade or so has in fact sought to newly combine the notional pair of specialization versus diversification regarding the question of the quality of goods produced—the ‘vertical’ differentiation of goods in terms of the adjacent debate on intra-industry trade. It reconnects with the question how far trade—and thus regional integration—supports economic transformation for

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the better. The aforementioned considerations in single- or two-goods models were already motivated by the key question as to whether the REC setting encourages productivity growth or progress in competitiveness. Today this same question is discussed in terms of product sophistication. On a stylized path, many countries start at low levels of national income with highly ‘specialized’, in fact narrowly restricted levels of production and trade. They have little on offer. With rising income and productivity, they diversify into a broader range of products until they reach a turning point where advanced economies start to re-specialize again. Imbs and Wacziarg (2003) worked out the stylized path on which a number of oil-producing countries with high GDP per capita levels obviously appear as extreme outliers, while the trajectory of many others is well captured on a U curve. UNIDO then associated the U curve with tentative levels of product sophistication—rendering Fig. 4.6—and tried to carve out four country groups: those countries reliant on one product and those with few products, then ‘early stage diversifiers’ and ‘leading diversifiers’, with different levels of country industrial performance associated (UNIDO 2009). What does the situation look like for Africa? Are African countries truly diversifying on a trajectory towards more sophisticated products? For the moment, we are still focusing on what African countries export in general, irrespective of whether the exports are within or outside their region. At the level of total exports, the picture is as given in Table 4.1. Using data from 2012, we look deliberately at the situation after the global financial crisis of 2007/2008 and before the commodities crash in 2014/2015, from

Fig. 4.6 Specialization, diversification and sophistication. Source UNIDO

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Table 4.1 Export diversification of African countries 2012 No of products Algeria

4

No of products Angola

1

Benin

9

Botswana

2

Burkina Faso

3

Burundi

3

Cabo Verde

8

Cameroon

6

Central African Republic

4

Chad

1

Comoros

2

Congo, Republic

Congo, Democratic Republic

4

Côte d’Ivoire

10

1

Djibouti

7

Egypt

60

Equatorial Guinea

2

Eritrea

1

Ethiopia

6

Gabon

1

Gambia

4

Ghana

6

Guinea

2

Guinea-Bissau

1

Kenya

56

Lesotho

6

Liberia Madagascar Mali Mauritius

8 30 2

Libya

1

Malawi

5

Mauritania

4

35

Morocco

63

Mozambique

9

Namibia

8

Niger

3

Nigeria

1

Rwanda

5

Sao Tome and Principe

6

Senegal

25

Seychelles

4

Somalia

4

Sierra Leone

4

South Africa

83

Sudan

2

South Sudan

1

Eswatini

21

Tanzania

27

Togo

11

Tunisia

93

Uganda

17

Zambia

3

Total Africa

Zimbabwe

9

24

[Number of products making up 75% of merchandise exports. Source: AfDB, OECD and UNDP (2014: Table 7)]

which a number of commodity prices have not yet recovered. The picture is surprisingly differentiated, and on average 24 different products comprise the bulk (3/4) of an African country’s exports. Various UN sources cite this as testimony of the ‘emerging trade diversification in Sub-Saharan Africa’—with the triple inference that it represents increased competitiveness, less exposure to shocks and more regional integration.

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However, this statistic is notoriously difficult to interpret. The classification follows the detailed six-digit HS subheadings.15 Using the trade or customs nomenclatures for the purpose is inevitably based on the assumption that HS or SITC chapters and headings are evenly spread so that counting goods with their six-digit subheadings in agriculture represents the same as in machinery.16 This works poorly at the bottom of the list. The statistic for Africa lists expected cases of extreme export concentration (in oil or diamonds) that appears to be outpaced by countries that display more ‘horizontal’ diversification among several basic agricultural products. Somalia often reports that alongside its bulk export good charcoal, goats and sheep each comprise 30% and live animals one-sixth of its total exports. With these four goods, poor Somalia overtakes Angola, Nigeria or Zambia in diversification. And Botswana appears less diversified than the Central African Republic. Yet, the picture is particularly puzzling in the middle range of countries, on which the thesis of emerging trade diversification in Sub-Saharan Africa is based: the number of exported goods is in the lower double digits for these countries. For the most part, the products are still concentrated in the SITC groups 1–4 (agricultural and mineral products) and 9. For example, Tanzania exhibits a relatively widespread range of goods exported (in 2012: 27), but more than 80% are in the named categories, with a third alone being SITC code 9 (gold). Only for countries with high double digits do the listings seem to indicate a true degree of nascent higher diversification (Egypt, Kenya, Mauritius, Morocco, South Africa and Tunisia), with a range of products in SITC groups 5–8 serving at least the regional market. Taking another statistical measure—less striking but more accurate—for the specialization versus diversification issue does not change anything. A Herfindahl (or Herfindahl-Hirschman) index is the score of squared market shares, here: in a country’s export basket. The formula is well known as: H=

N 

si2

i=1

The index runs from 0 to 1, and lower values inversely indicate higher export spreads.17 The index regularly produces pictures like the map for 2015 in Fig. 4.7. 15 The trade nomenclature of the Harmonized System administered by the World Customs Organization (WCO) is compatible yet not identical with the other often used UN System of International Trade Classification (SITC), since the latter’s revision 4.0. 16 Moreover, the AfDB/OECD/UNDP African Economic Outlook follows the rule that products are reported only when they account for more than 4% of total exports. While pragmatically understandable, this method of calculation can be misleading at both ends of the scale: both for countries that concentrate on one bulk commodity alongside a range of miscellaneous products, and for developed countries with a wide range of manufactured goods. 17 The best-known application of the Herfindahl index in political economy analysis is the ethnolinguistic fractionalization (ELF) index, where the inverse (1–H) is used to denote high fractionalization by high values (Easterly and Levine 1997). The results for Africa are as inconclusive as for the measure of economic diversification.

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Fig. 4.7 African exports in comparison. Source UNCTAD (2016: 24)

For Africa, the map shows expected high values for South Africa and three North African countries. However, it is difficult to grasp why Senegal, Togo or Uganda reach levels of diversification similar to Canada and thus surpass their neighbours. While they do report a relatively large range of export products, most of these are traded within the region, and one cannot help but suspect that the actual level of competitiveness is quite low. Indeed, the products typically comprise everything that can be milled—grain, vegetable oils and cement—and are not normally exported beyond the region. Obviously, we would like to know better whether products traded are the result of increasing quality of factor combination and, therefore, whether a recognizable trend towards diversification is underpinned by increased use of technology and know-how, which would represent productive structural change or ‘vertical’ progress. Unfortunately, looking at broad product categories in the aggregate is only partly helpful. Certain HS/SITC/ISIC groups indicate advanced factor combinations, but this is not the rule. Today crude oil production is always a modern industrial venture, but adjacent mineral mining can be extremely artisanal or hi-tech for the same product. Agricultural produce is just one group where products can be grown and exported in at least three stylized ways: traditional, industrial and sustainable green (‘post-industrial’), and hence, their product classification groups are equivocal in this respect. Related problems have led to two parallel research ventures at some stage in the last decade. Both abandon earlier approaches that single out broad product categories in themselves as carriers of development, instead identifying a relatively finegrained (HS 4) representative export portfolio of advanced economies as measured by their per capita income. Simply put: a typical sophisticated good is what ‘sophisticated’ economies produce. For Sanjaya Lall, this marked a departure from his own earlier approach, which defined competitiveness in terms of 10 developmental product groups—many of them machinery and equipment (Lall 2001a, b)—in favour of the new sophistication measure (Lall, Weiss and Zhang 2006). Hausmann, Hwang

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and Rodrik worked it out more thoroughly and coined the acronym EXPY—the GDP per capita level expected by a country’s export basket (and its inverse) (Hausmann, Hwang and Rodrik 2007; Klinger 2009). What now falls under the acronym EXPY is not satisfactory, either. Rich countries export rich-country goods, and when poorer countries occasionally export some of these goods, then EXPY produces maps that appear nearly as inconclusive as the ‘diversification’ map, only with other unlikely champions (UNCTAD 2016: 27). Hence we do not reproduce such a map here. The reason for the unsatisfactory outcome is simple: the new measure rather evacuates the problem of identical products producible with entirely different technologies—from backward to cutting edge—instead of solving it. There is another still indirect measure of sophistication. As seen above, at the stylized third stage of their developmental trajectory, countries may again specialize in a limited range of products. This specialized trade in goods and services in today’s industrialized countries comes with another twist. It consists mostly of intra-industry trade. It represents the exchange of similar goods, varieties of which are both exported and imported by a given country. New trade theory has worked on the economic fundamentals for a while now. As World Bank analysis showed a decade ago, such intra-industrial trade amounts to more than half of global trade, double the percentage in 1962. Today more than half of intermediate products, close to half of final consumption goods, and as much as a quarter of primary goods are traded intra-industrially: German cars are sold to France, French cars to Germany and so forth. The same pattern also occurs with regard to agricultural goods. This structural shift in the global trade pattern is considered ‘…perhaps the most important economic development since World War II’ (World Bank 2009: 171). It is needless to repeat at length that the new trade pattern runs counter to the classical Ricardian paradigm of full international specialization. The degree to which a country relies on intra-industry trade also represents an indirect measure of sophistication of its products. Presently, Africa as a whole does not even remotely take part in this new trend, with all five African sub-regions showing figures in the low single digits for intra-industry trade (as % of total trade in 2006) (ibidem) which have not budged since the World Bank’s initial analysis. This leads to an important conclusion about the stage of structural change currently reached in Africa. Sub-Saharan Africa, in the stylized pattern of (1) initial specialization, (2) broad and increasingly sophisticated diversification and (3) new, mainly intra-industrial specialization, lags behind not only by one but by two full stages of economic development.18 This finding has general implications for trade policy advice: Traditional textbooks have long argued that multilateral average tariff reductions lead to a shift from import-competing (and more or less protected) industries to export-oriented 18 The

frequent empirical finding that Africa exports mainly raw materials but trades manufactured goods in the interior does not contradict our summary. In fact, rather unsophisticated industrial goods are traded on the continent, frequently agricultural goods that have undergone just one or two transformation steps and thus appear to be manufactured.

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ones, alongside efficiency gains and intra-industrial specialization. Throughout the 1980s and 1990s, Africa dutifully participated in several rounds of tariff reductions, triggered by both multilateral negotiations and structural adjustment programmes. The intra-industry specialization and productivity jump predicted since Balassa’s early application to regional groups of industrialized countries has, on average, not taken place for Africa.19 Instead, we have seen a decline of entire industries (= ‘interindustry specialization’) and high adjustment costs. Something must be wrong with old textbooks and their application to lesser developed regions. It is all the more remarkable how much economic growth Africa has achieved over the last two-and-a-half decades without much diversification and re-specialization. Future growth potential is well foreseeable if next stage benefits can be reaped. This brings us back to regional integration. Based on the analysis of European unification and a few similar cases, it is commonly assumed that such integration has a better chance to succeed in the presence of diversified intra-industry trade. This leaves the less competitive members of the community with the opportunity to specialize in certain products within their respective industry without having to relinquish entire sectors. Hence, adjustment costs occur more at a firm- than at a whole-ofindustry level.20 When trade-in-tasks becomes a dominant trade pattern, adjustment may even be limited to an infra- or intra-firm level. In consequence, pressure for the protection of losers is relatively weaker—much less of the logic of exceptions and exclusions takes place. However, the updated ‘smooth adjustment hypothesis’ must be qualified by accounting for the difference between vertical versus horizontal intra-industry specialization (Qualmann 2008: 92, 154). Even when poor economies appear to diversify ‘horizontally’ on a range of (sub-)products, they remain particularly vulnerable when forced to specialize ‘vertically’ on simple tasks in global chains while the tasks higher up on the vertical axis are performed elsewhere. Although precise direct measures of trade sophistication are still difficult to come by, product enhancement associated with intra-industry trade appears to remain at relatively low levels in Africa. The growth period since 2000 shows that even a sustained export boom across a wider range of goods does not induce much agro-industrial deepening. For the deep-rooted problems of technological capability, the liberal paradigm suggests that a skill transfer embodied in import products is extremely limited for all members of a typical African REC. With the exception of South Africa and possibly Mauritius, the SSA countries remain in conclusion lowlevel diversifiers at best, with one or two dozen unsophisticated products or parts exported. Most do not even reach this stage.

19 See his seminal communication based on a statistical analysis of early EEC integration from 1958

to 1963 in Balassa (1966). 20 A good textbook summary of the related literature on smooth adjustment in the wake of Balassa was already available nearly two decades ago, see Hoekman and Kostecki (2001: 350) based on Greenaway and others.

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4.6 Imperfect Trade in Homogeneous Goods In consequence, African REC members all tend to protect their same old industries against each other—ailing textile factories, soap-making operations, cement plants and flour mills. Internal tariff barriers (or export bans) are maintained or haphazardly reintroduced even though African RECs have been proclaimed free trade areas, and non-tariff barriers are re-erected in imaginative ways. When relatively expensive cement from intra-regional suppliers hits the construction industry too hard, cheap cement imports are permitted despite the agreed external tariff—as was experienced in EAC in 2010 and 2015. A more promising picture seems to be emerging for just a few service categories, but this is another story. Limited capacity to benefit from an intra-industrial division of labour is the one long-standing argument against South-South trade agreements. However, a low level of intra-industrial diversification is not a sufficient or not the only constraint for regional trade. Member states can indeed gain from free trade in homogeneous products: in particular agricultural staples with little or no intra-sectoral sophistication, for example when national supply capacity falls short of food needs or a vent for surplus from bumper harvests is sought. The empirical problem in Africa is that trade in bulk goods is not allowed to work well, either. This has customarily been the case, as Pedersen observed two decades ago: Policies to increase intra-African trade have been on the African political agenda since independence. However, in reality they had low priority […] [T]rade with neighbouring countries was often seen as synonymous with smuggling in order to benefit from differences in the national pricing policies in agricultural products. It was generally argued that as the African countries largely produced the same products, there was limited basis for trade between them. (Pedersen 2001: 92)

In other words, both lack of meaningful diversification and mismanaged trade in homogenous staples hold up regional integration. The latter still occurs in African agricultural markets too often. A series of observations unveils a stylized pattern of everything that can go wrong in agricultural and similar bulk markets: • First, homogeneous products are not even properly identified as such for lack of established commodity standards and controls. Bags of wheat or rice are opened and reopened in cross-border trade, which delays transactions and adds trade cost. This points again to the need for norms and quality control.21 • Second, in an often-misguided drive to cater for food security, governments aggravate the problem by arbitrarily imposing quantitative barriers. This is not to deny the occurrence of food market failures after bad harvests. In particular for country combinations with markedly diverging purchasing power of households—say Nigeria and Niger, or South Africa and Zambia—misallocations in free trade situations do occur and aggravate food crises.

21 For

a graphic description, see Perry (2015: Chap. 12), who also contends that the emerging commodity exchanges in Africa can contribute to a solution for trade in homogenized goods.

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• Third, occasional tariff and non-tariff barriers are at times politically easier to erect and re-erect within the region than with the rest of the world. This is especially the case where countries are bound by far-reaching bi-regional trade agreements (e.g., EPAs).22 The equivalent problem for more sophisticated products are rules of origin that are less advantageous within the region than with northern trade blocs. In consequence, intra-regional trade in food staples remains limited, and it is often cheaper and faster to import from the global market. The contribution of intra-African and intra-REC trade to food supply thus remains constrained, which contributes in turn to food insecurity even though an intelligent combination of public policy measures and more confidence in the efficacy of regional markets could produce better results.23 The more sustainable solution across bumper and bust spells would be to carefully combine regional free trade with physical buffer stocks—a system that was unfortunately undermined by past structural adjustment policies. Similar problems regularly occur with other staple goods, including nonagricultural ones. Because African intra-regional trade is hampered by limited intraindustrial specialization and unnecessary interference with trade in homogenous, non-specialized goods, reform policies have to target both.

22 When the absence of trade agreements with third, extra-African parties leaves RECs with the option to place import products on exclusion lists, arbitrary treatment of bulk products for no obvious developmental reason is also observed in extra-regional trade. A critical assessment of the practice surrounding the EAC CET Sensitive Products List suggests that decision-making by the Council of Ministers often misjudges REC-internal production capacity, providing temporary relief for embattled domestic producers rather than strategically mounted developmental support (Shinyekwa and Katunze 2016). 23 For a concise review of the problem related to food staple market volatility and imperfect policy solutions, see Morrison and Sarris (2016). Interestingly, the policy recommendations of the authors focus on the need for increased political confidence in functional regional food markets in order to eliminate the innumerable NTBs in this segment. This supports the call for the political trust building mentioned above in order to push progress in climbing the imagined ladder of integration.

Chapter 5

The Coordination Problem in Regional Integration

Abstract A catch-22 situation or coordination failure between the slow creation of well-integrated regional markets and low economic diversification (plus sophistication and specialization) is unfolding in Africa. Ubiquitous trade barriers translate into a paradoxical tariff pattern by which African neighbours are treated worse than remote trade partners. In the face of widespread irregularities and high trade costs, ‘trade facilitation’ has become an important technical approach to easing trade with the support of donor agencies. This chapter examines the systemic potential and limits of trade facilitation programmes. As a general alternative to institution-heavy, imperfect integration along the trodden linear path, ‘light integration’ is suggested in parts of the economic literature. The extent to which light integration can avoid the pitfalls of the classical approach is investigated. Dynamic effects are invoked as the last line of defence for the classical model of economic unions but remain contested, as trade research cannot empirically identify them in South-South RECs. The chapter concludes by asking what kind of new economic policy is required to effectively realize such dynamic effects. The answer is given in Part II.

5.1 Irregularities to Overcome A catch-22 situation or a typical coordination failure unfolds from the trends identified in the last chapter: the creation of a sufficiently large regional market is hindered by a lack of diversification, sophistication and subsequent specialization; the lack of a truly integrated regional market is one factor that hinders product diversification. Hence, intra-regional competition takes place predominantly in homogeneous products—products on which trade-restrictive policy measures are then routinely imposed. In consequence, neither type of product markets evolves as projected. Red tape and corruption at and behind intra-regional borders add immaterial roadblocks to the problem. The political economy of regional rent-seeking provides a convenient explanation: no strong domestic constituency complains when customs or police officers place extra levies on traders and transporters from neighbouring states, and some member states (the resource-scarce inland states) have no means to

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 H. Asche, Regional Integration, Trade and Industry in Africa, Advances in African Economic, Social and Political Development, https://doi.org/10.1007/978-3-030-75366-5_5

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retaliate. An exact measure for this would be the additional levies charged to foreign economic actors as compared to the fees demanded of everyone else. Yet, the main contention here is different and considers high and irregular internal trade barriers as endogenous to trade. To some extent, they are rational answers to the underlying situation of low-level diversification and partial specialization in the region. The ubiquity of these internal barriers stems from the fact that hardly anyone is convinced that their removal would significantly increase net welfare: the poorer REC members fear competition in the same product lines and fiscal losses; the richer REC members do not recognize the opportunities of the small markets next door. What advantage does Kenya have to gain from allowing containers headed for Rwanda to pass free of transit bonds, with no complications at weighbridges etc.? What is obvious for a free container passage from Italian or French ports to Austria or Slovakia does not apply for Rwandan containers arriving in Dar es Salaam or Ugandan containers in Mombasa. In the end, it can be argued that no single free trade area or customs union in Africa is what it is officially declared to be, not even SACU. Essentially, they all remain closer to preferential trade areas, with perhaps the EAC slowly emerging to higher levels.1 Consider again the situation in Western Africa. At the insistence of Nigeria and the UEMOA farmers union, a fifth band had been introduced into the new ECOWAS CET and would be carried over into a trade agreement with the EU. The fifth band with an ad valorem tariff of 35% contains about 90% agricultural goods, while main agricultural staples—with an eye on food security—carry very low tariffs. The ECOWAS CET is the outcome of 10 years of negotiation, and in recent years, it has been informed by emerging regional agricultural policy, more or less the way trade policy should be defined (Roquefeuil, Plunkett and Ofei 2014). Yet, the regional hegemon Nigeria still has an inward-looking trade policy, even vis-à-vis its neighbours. Special duties and occasional import bans invite massive smuggle. Other West African countries deploy additional external means to support intra-regional trade. Simple import bans would be made difficult with an EPA-style trade agreement and through the ECOWAS CET, if in particular Nigeria played by the rules. If, however, rationalization of trade measures is not implemented, only negative consumer rents will prevail, and trade protection would best be scrapped. The World Bank pleads for this anyway—“a broad competitiveness strategy, rather than sector specific trade protection” (Coste and Von Uexkuell 2015)—because Bank analysts never believed in the latter model, nor in regional EPAs, especially not for Nigeria. Corresponding anecdotal reports from Southern Africa confirm that rules-based trade is regressing in wider SADC, and some argue that the regional hegemon South Africa is a driver of the rollback, in stark contrast to South Africa’s role as hegemon, where it accepted asymmetric SACU duty sharing and asymmetric trade opening in 1 Real-world regional integration is not consistently rules-based, not even in Europe. It is significant

that the EU customs union for merchandise trade has quickly become an orderly exercise, while for instance EU law on common fiscal policy is not strictly adhered to because the law (chiefly the 3% public deficit ceiling) would amount to pro-cyclical policy, which governments are recognizing as undesirable. Therefore, the contention above is clearly with regard to rules-based trade in goods.

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the run-up to the SADC FTA. In addition, the intra-REC Rules of Origin are still no better than those formerly imposed by the EC on importers from overseas: SADCinternal RoO require double-stage transformation for garments and textiles, and are so cumbersome that they lead to low usage of SADC preferences as reported over a period of years (Kalenga 2012). After AGOA third country derogation and the RoO reform in EU GSP, SADC preferences are now less advantageous within the REC than vis-à-vis America or Europe. Although ostensibly in place as a tool for balanced regional industrial development, this is bad industrial policy and practice, along with all sorts of road blocks. Against this backdrop, SADC heads of state de facto already shelved the SADC customs union in 2010 (Erasmus, Hartzenberg and Kalenga 2016), but even consolidation of an FTA appears ambitious. Empirical research has shown that in the highly irregular trade environments in Africa only a small fraction of traders is aware that exchange within a regional community should be free, for instance Nigeria’s cross-border trade (Hoffmann and Melly 2015). Trade that is free of harassments and hurdles is a totally unknown reality to them.2 Take this view together with the picture of the external protection of the regional community. De jure, African RECs strive to become CUs with external protection and internal free trade. De facto, the opposite is true. For what represents roughly 85– 90% of their trade—trade with the rest of the world—individual African countries and RECs increasingly accept low external barriers. At the same time, they maintain high internal tariff barriers or NTB tariff equivalents for the remaining 10–15% which is Africa-internal trade. The external situation is the long-term result of pressure from structural adjustment, and—increasingly—of the bi-regional trade agreements we will discuss in the last Part. In the stylized result, we encounter a paradoxical tariff landscape across Africa. Your African brother runs the risk of being treated less favourably and less predictably than the northern or far eastern salesman. The paradoxical pattern is one main justification for the Africa-wide free trade area that will be discussed in the next chapter.

5.2 Trade Facilitation as Remedy? In this difficult situation, donor agencies are inclined to focus aid for trade on elaborate technical programmes in order to help achieve at least some trade facilitation., Many larger donor agencies support trade facilitation as much as they give ‘value chain support’. In Africa, this is covered in Trade Facilitation Programmes (TFP) such as the one launched by SADC and the EU in 2019 and supported by German 2 This

is probably different for travelling persons. To quote a source from the realm of culture, the film ‘Frontières’(Burkina Faso 2017, Director Apolline Traoré) describes the experience of women travellers on a bus itinerary from Dakar to Lagos—portraying customs, police and other ‘service’ agents at and behind the frontiers who invent all sorts of impediments, fees and violence—in fact: ‘non-political NTBs’. The travellers are outraged because they are well aware of the ECOWAS right to free movement of persons and recite it repeatedly to the customs agents. Alas, in vain.

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technical cooperation. One-stop border posts (OSBP), enabled by another donor group, are among the technically most ambitious undertakings of the sort (Box 5.1). Box 5.1: One-Stop Border Posts Trade facilitation through OSBPs has been driven by a donor coalition of JICA, AfDB, World Bank, TradeMark East Africa, and others. The OSBPs are obviously all intended to ease trade, not obstruct it. However, this is not entirely evident because of the paradoxically complex procedures OSBPs can entail and, more importantly, because the political economy that surrounds the creation of an OSBP creates both winners and losers. This is what the longstanding experience of the first OSBP at Chirundu border between Zambia and Zimbabwe has shown. Of the 76 OSBPs identified in Africa by 2016, 10 were in operation and 12 under construction, while the others were still in the planning stages. There were no OSBPs in North and in Central Africa, reproducing the pattern of missing trade links in these subregions. Reporting on OSBP progress apparently stopped after 2016. The Chirundu border post is located on both sides of the Sambesi (see map). When crossing the Sambesi, border formalities are carried out only once on the Zambian side and once on the Zimbabwean side, however the long queues of trucks characteristic of African borders still occur.

(Source: courtesy of Google Maps)

This situation is indicative of the fact that even the oldest OSBPs still have to make technical progress. OSBPs have developed their own complex technology of trade facilitation, for which the OSBP handbook offers ample testimony (NEPAD 2016). And border management can only be as effective as the overarching liberalization of trade in the respective REC. This is also reflected by the OSBPs that have been established in customs unions. As long as internal liberalization and harmonization of external rules is not perfected, OSBPs have their place even in CUs. This is the far bigger issue.

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The multilateral Trade Facilitation Agreement (TFA) adopted at the WTO conference in Bali is the overarching framework for these kinds of administrative and technical undertakings. The TFA has focused on both NTMs at large and genuine NTBs. Since its entry into force in February 2017, the TFA has addressed the trade costs associated with non-tariff measures and other procedural issues ‘behind the border’. WTO member states make a firm commitment when they sign the TFA, but Part II of the agreement gives developing countries and LDCs the option to split their engagements into three categories: ‘A’ for immediate implementation, ‘B’ for implementation after a transitional period, and ‘C’ for implementation after transition ‘and upon the acquisition of implementation capacity through the provision of assistance and support for capacity building’. This is why the WTO Director General at the time, Roberto Azevêdo, boasted that for the first time in WTO history, the requirement to implement an agreement was directly linked to the capacity of a country to do so. In a comprehensive assessment based on WTO data, the commitments of the 41 African WTO member countries are listed as of 1 September 2019, for about 36 trade facilitation measures, and analysed as to their nature. The central findings are consistent with the pivotal role of capacity building written into the agreement: African countries are most advanced in TF measures related to physical movement or detention of goods, and least advanced with regard to measures that have high ICT requirements such as Single Windows (Hassan 2020). It is important to note that many politically sensitive issues that fall under regulations and standards in the diagram above are not covered by the TFA. In the view of TRALAC, the TFA might give a fresh boost to eliminating customs inefficiency and red tape in African RECs. African RECs may benefit as the TFA makes obligations legally binding for developing countries: In many ways trade facilitation in Africa is about long-standing issues of trade governance such as transparency, predictability, administrative efficiency, and a value chain of effective procedures, inter-agency cooperation, remedies, and getting rid of red tape and duplication. It would be wrong to view the Trade Facilitation Agreement as a new burden imposed on African nations as part of a particular multilateral consensus. The inability to effectively implement existing regional trade arrangements bears testimony to our long-standing failure to effectively deal with national and regional trade facilitation/governance challenges. And it is part of the explanation for why the rules-based nature of African trade agreements is a perennial issue. Dispute settlement is, for example, not pursued to enforce obligations; because the implementation of regional trade agreements is decentralized down to inefficient und under-capacitated domestic spheres of national government. (Erasmus 2014)

This perspective on the opportunities offered by trade facilitation (and related aid for trade) is reflected in the fresh empirical assessment of Odularu, Hassan and Babatunde (2020). The authors point to numerous trade hurdles in intra-African trade which hamper agricultural trade in particular. Yet, ambitious trade facilitation efforts have (a) their own complex technicalities, (b) their own political economy problem, and (c) cannot circumvent the underlying systemic REC imperfections. The situation for trade facilitation is similar to that for infrastructure: basically trade facilitation cannot be wrong, no more than improvements to Africa’s infrastructure can

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be. One simply cannot be against unbureaucratic and transparent customs management or better infrastructure at large. But neither resolves the underlying integration problem—the catch-22 described above. It is in this precise situation that they run the risk of disproportionately aiding the better-off countries and actors—and thus creating more divergence. This brings us back to the basics.

5.3 Light Integration as the Alternative? Some African regional communities make serious efforts to reverse the situation and complete the project of an orderly custom union while moving further up the ladder of linear integration. However, this comes at a special price. A full-blown customs union has high administrative costs (on top of possible costs for consumers). An old observation takes on a fresh meaning in the light of current trade negotiations: Functioning customs unions, however, are quite rare in the modern world. Customs unions require supranational decision-making capacity to keep all external tariffs in line despite changes in anti-dumping duties, special unilateral preferences to third nations (GSP, etc.) and tariff changes in multilateral trade talks. In fact, the groups of nations that manage such coordination fall into exactly two types: the EU and nations involved in super-hegemon relations (France and Monaco, Switzerland and Liechtenstein, and the South African Customs Union, etc). (Baldwin 2008: 26)

The cost of aligning the system to preferences of third nations is witnessed constantly by African REC members over EU-ACP negotiations. In consequence of such cost–benefit considerations, some analysts have long since called the whole paradigm of African regional integration along the linear model into question. In their view, African RECs concentrate on the wrong issue: external protection via border control of the trade in goods. The critics argue that such a union with a common customs tariff and revenue pool would be resource-consuming to administer and is not even properly implemented in the oldest of them, SACU. If there is little benefit to outweigh the cost, African regions should rather turn to a lighter model that is no longer chiefly concerned with tariffs on goods. The African REC architecture should build on a more liberal model, turn away from mere at-the-border to behindthe-border issues, and concentrate on the removal of the more binding constraints in infrastructure, services and the sort of NTBs you bump into throughout Africa. Attention should thus shift from protection at external borders to removal of hurdles in the interior. An essential part of the proposal is the argument that in order to benefit from a classic customs union, participating countries must have competitive goods to offer. Many do not. The relevance of an RIA [Regional Integration Arrangement – HA] and a formal commitment to the linear model become even more questionable considering the weak capacity of the typical African economy to produce goods and services that can be traded in the region. Moving a region through successive stages of deeper regional integration without developing

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the capacity in participating countries to produce tradable products that can be sold competitively in the regional market will be of little benefit. This seems to be the proverbial elephant in the room that is often either deliberately ignored or merely not recognized. (McCarthy 2010: 3)

The elephant in the room identified by Colin McCarthy must be captured. The effort of carrying a whole regional community through the tedious exercise of institutionally ambitious integration in a full-blown customs union and beyond is only justifiable if there is some operational regional strategy for new productive capacities that ultimately pays off. If not, the cost of the bulky institutional superstructure as well as the cost for the consumer would indeed be too high. In this case, a light-integration model without EU-style ‘heavy’ institutions would be preferable.3 At an empirical level, this observation reproduces much of the systematic exposition on the problems of South-South trade creation, above. Against the backdrop of the sobering SADC experience and South Africa’s maverick position in both trade and industrial policies, proponents of the light REC paradigm are unsurprisingly concentrated around South African think tanks, like TRALAC [see the Yearbook series, the latest of which is (Hartzenberg, Erasmus et al. 2018)] and SAIIA (Draper and Alves 2009; Draper and Khumalo 2009). Lighter projects of huge free trade areas are more to the liking of these trade experts than the umpteenth attempts at perfecting SACU, SADC, but also EAC or ECOWAS, with their obsession with tightly controlled trade at the border, overly specific rules of origin, and neglect of obstacles behind the border (Hartzenberg 2011). Observers from the trade-liberal bench, but also some structuralists like Davies have long considered existing RECs rather as stumbling blocks for trade integration and nourish the hope that many frustrating imperfections will find solutions at higher levels in the removal of trade barriers, especially by harmonizing rules of origin, and admitting services to the negotiations in sync with goods. There is also a call for more emphasis on removing infrastructure or investment barriers for the private sector. As representatives of the ‘stumbling block’ theory, they consider the African institution-intensive REC model to be inferior to multilateral integration (Draper 2010; Draper, Freytag and Doyaili 2013). Intriguingly, even UNCTAD has at times adopted the lighter, less formal process-focused vision of regional integration in Africa (UNCTAD 2013). The strategic objective is arguably a disguised dissolution of the stumbling and stuttering RECs into what is assumed to be a more favourable trade environment, in fact: into multilateral liberalization on the African continent. Since the negotiators and the text of the agreement of the African Continental Free Trade Area, which we will examine in the next chapter, insist on the RECs as building blocks, a strategic divide still looms behind the future of African regional integration as presently discussed. Note that these authors make a case for light integration, but technically their position is closer to the ‘deep’ integration agenda, as they recommend elements such as free services and capital movements. However, they want to abandon the idea 3 For

a more systematic treatment of the notional pair of ‘light’ versus ‘heavy’ integration in conjunction with ‘deep’ integration, see the beginning of Part III.

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of walking Africa through full regional trade integration with considerable external shielding and the full institutional setting. They are borne out by what has happened on the ground. As noted in our initial exposé on the triple dimension of economic integration in Africa, much of what links a region ‘deeply’ together does not require heavy supranational arrangement, but rather open corridors and fluidity. Much of what is achieved in Southern Africa—in particular along the Beira-, Maputo- and Walvis Bay-corridors, the deep integration of Lesotho, the Maputo area and the wider Namibian economy with South Africa, or the economic clustering at the AngolaNamibia border—has been accomplished on bilateral grounds, despite the lacklustre performance of SADC and regardless of the SACU. So, should we forget about African customs unions? Defenders of linear-style South-South RECs—or of infant industry protection more generally—have one remaining core argument: the light-integration model relies on static consideration and ignores the dynamics of new industries. Dynamic analysis would reveal foregone production possibilities that only come into being in a trade policy setting where such benefits can actually be realized. We already touched on part of the dynamic turn in trade analysis above, with respect to regional spillover effects. Panagariya commented for the market-liberal stream of thinking: Advocates of regional arrangements sometimes claim that the conventional static welfare analysis is too narrow a criterion to judge overall desirability of the arrangements. But this is not a defensible position since PTAs are the principal, often only, component of regional arrangements with serious economic effects of which the static welfare effect is a key and best understood component. It is no accident that economists evaluating regional arrangements, be it various EC extensions or NAFTA, have almost always focused on their static welfare effects. (Panagariya 1999: 482)

Whereas the dismissal is difficult to understand for the multifacetted European integration, which comprises a great deal more than a PTA, Panagariya had a point with regard to South-South, here: African RECs. In the same vein, Winters argued: Dynamics play an almost mystical role in many discussions of economic integration. Having found that the static benefits are usually rather small or possibly even negative, advocates of regional integration arrangements (RIAs) typically appeal to the dynamic benefits. However, what these constitute and how they come about are frequently rather vague, and the evidence linking dynamic benefits to particular instances of integration is very difficult to pin down. (Winters 2001: 125)

Two decades later, dynamics still play their mystical role in regional economic integration. Their creation remains as vague as ever. External tariff protection alone does not easily create new industry, even less so when accompanied by internal barriers to trade. If a PTA, FTA or CU tariff arrangement is the only living policy for nurturing modern agriculture or new industries, static analysis is by and large justified, and produces systematically disappointing results in the global South. In sum, South-South institution-heavy regional economic integration would make little sense. In market-liberal trade theory, the music stops here. What would be lighter alternatives to the costly and fragmented RECs? Grand scenarios have been on the rise on the African horizon for a few years now.

Chapter 6

On the African Continental Free Trade Area

Abstract Africa-wide integration projects have competed with step-wise regional integration since independence. This chapter examines the new project of an African Continental Free Trade Area (AfCFTA). The project’s potential to become an economic game-changer for Africa is analysed alongside the likely pitfalls of the arrangement. We conclude that while a well-staged AfCFTA can resolve a number of critical issues associated with intra-African integration, it cannot replace existing RECs, especially not with respect to negotiating extra-regional trade agreements. It is argued that to avoid undercutting the entire process, the entrenched logic of exceptions and exclusions from tariff liberalization must not be reproduced at the continental level, and a generic developmental set of rules of origin must be defined. The chapter closes with a description of the essential elements that must be included in a higher-order project of economic integration at both the regional and continental level in order to respond to what the literature calls transformative or developmental regionalism.

6.1 Grand Projects of Africa-Wide Economic Integration In the spirit of Africa’s historical leaders, regional integration always competed with the grand design of a pan-African union as much as North–South integration competed with African integration. Already Kwame Nkrumah’s Africa Must Unite challenged African leaders to think seriously about creating a common market for an African union instead of looking for questionable advantages of an association with the European Economic Community (Nkrumah 1963). The message has lost nothing of its relevance. The apex structure for the political integration of Africa is now the African Union (AU). However, while the organization is of paramount importance for Africa’s political representation in the world and for settling conflicts or maintaining peace, the AU’s role in economic integration remains largely an advisory one, not least with initiatives linked to the AU like NEPAD or CAADP, which supports agricultural development. For some years there were even two projects with the potential to economically underpin the historic ambitions of African unity: since 2014 the Tripartite Free Trade © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 H. Asche, Regional Integration, Trade and Industry in Africa, Advances in African Economic, Social and Political Development, https://doi.org/10.1007/978-3-030-75366-5_6

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Agreement (TFTA), coordinated by the COMESA secretariat between COMESA, EAC and SADC, and presently the Continental Free Trade Agreement (AfCFTA)— also known as CFTA—technically coordinated by a new, autonomous secretariat within the AU.1 Initially, the TFTA appeared to be the more advanced project. It was intended to cover the elimination of trade barriers for goods and (later) services as well as rules of origin, customs cooperation, other trade facilitation, technical and sanitary standards, safeguards and the settlement of disputes. In a way, the TFTA represented a logical approach to solving the problem of egregious trade hurdles at the frontier of a REC by taking three relatively well-established RECs and trying to eliminate their Africa-internal trade barriers before then moving on (Vickers 2017). However, observers questioned the agreement’s chances of success due to the different rules (of origin) in the three RECs, the lack of common infrastructure, the thickness of the inner-African borders with respect to trade and the low quality of business services (Bauer and Freytag 2015). And so it came. By summer 2019, 24 out of the 27 member countries of the three RECs had signed. The agreement was supposed to enter into force when more than 50% of the countries had officially ratified it (14). As of 2020, eight countries had actually done so, not the required quorum. The TFTA recently fell into oblivion at a surprising speed when negotiations got stuck, apparently in quarrels over tariffs for automotive production,2 and after the initiative for a continental agreement became the focus of public attention all over Africa and beyond. On 21 March 2018, representatives of 44 African governments gathered under the dome of Kigali’s international conference centre for an extraordinary AU summit to sign the agreement for the African CFTA along with additional protocols. It represents the first flagship project of the AU Agenda 2063 ‘The Africa We Want’, arguably the most advanced of the twelve big projects identified for the Agenda (African Union Commission 2015b, c). In the view of the African heads of state and numerous experts, the CFTA is destined to become nothing less than a decisive game changer in regard to Africa’s economic integration and its role in globalization (Fofack 2020). However, the CFTA’s potential as a game-changer will depend largely on the participants’ level of ambition in the areas of negotiation. By its nature, the CFTA is both a liberalization and a regulation scheme. On a continental scale, it foresees in its first phase progressive liberalization for 90% of the trade in goods (in terms of HS tariff lines). For sensitive products representing up to 7% of tariff lines, state parties have a longer timeframe to bring tariffs down. A maximum of 3% of tariff lines can remain altogether excluded from liberalization. Furthermore, the agreement foresees liberalization of services, enhanced customs cooperation, trade remedies, trade facilitation, etc. It formally enters into force when half of the initial signatory states have ratified it, meaning 22 states (African Union 2018). On 29 April 2019, the quorum was attained 1 See

https://au.int/en/cfta. Annex No. 11 (trade liberalization schedule) of all fifteen annexes remains under negotiation and is not publicly available.

2 Therefore,

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when the AU representatives of Sierra Leone and Saharawi Republic deposited their documents of ratification, although not even the protocols intended to be part and parcel of the phase I package (goods, services, disputes) were ready upon signature. By the end of 2020, 36 countries had ratified the agreement, and 32 countries had deposited the ratification documents with the depositary—the Chair of the African Union Commission. Eritrea has remained the only African state that had yet to sign the agreement.3 In sum and compared with the fate of the TFTA, the continental agreement has entered into force at an overwhelming speed. The CFTA is comprehensive and the calendar ambitious. In particular, the agreement foresees the liberalization of services4 in parallel with goods, which is arguably more appropriate than the usual sequencing for countries with approximately the same development level and with huge gaps in cross-border service provision.5 Remarkably, too, the protocol on the settlement of disputes has the same status as the protocols on goods and services in phase I, and the mechanism foreseen will be accessible to the private sector—contrary to what is possible in most RECs. The adjacent protocol on free movement of persons will support several modes of service cooperation. Furthermore, the AfCFTA foresees policy which will become an integral part of the pact in its phase II protocols on cooperation in investment, intellectual property rights and competition (Fig. 6.1). A protocol on E-Commerce is likely to be added to the phase II agenda or will be treated in a phase III.

6.2 Critical Assessment of the CFTA Project The CFTA as a whole is not out for light integration. The agreement combines all the schedules to aim at progressive South–South deep integration, catching up with and going beyond North–South integration, in line with the recommendation of critical development economics. According to a World Bank count, the CFTA agenda covers fourteen policy areas, more than most RECs (World Bank 2020a: 17). The most ambitious formula to that purpose is contained in Article 8.2 and calls for the protocols on Goods, Services, Investment, Intellectual Property Rights, Competition Policy and Settlement of Disputes to form a ‘single undertaking’. The concept is borrowed from global trade negotiations and ultimately implies that no part of the actual negotiation results may enter into force as long as the other parts are not yet concluded. Such a stipulation would be a bold move, but is probably not literally envisaged. 3 See

TRALAC AfCFTA Ratification Barometer. five priority sectors: business, communication, finance, transport, tourism. Education and health are also to be considered. There has been a debate since the launch of the CFTA as to which services to prioritize during negotiations. Some experts have pleaded for health in the exceptional circumstances of 2020/21. 5 We will see in Part III why the same parallel approach is generally not appropriate in North–South trade negotiations, where the most productive service providers are located in the North. 4 With

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Agreement Establishing the AfCFTA

Phase II

Phase I

Protocol on Trade in Goods

Annexes (9) Schedules of Tariī Concessions

Protocol on Trade in Services

Annexes (5)

Protocol on SeƩlement of Disputes

Customs CooperaƟon and Mutual AdministraƟve Assistance

Working Procedures of the Panel

MFN ExempƟons

Expert Review

Trade FacilitaƟon

List of Priority Sectors

Non-Tariī Barriers Technical Barriers to Trade Sanitary and Phytosanitary Measures

Air Transport Services

Framework Document on Regulatory CooperaƟon

Protocol on Intellectual Property Rights

Protocol on Investment

Annexes (3)

Schedules of Specific Commitments

Rules of Origin

Protocol on CompeƟƟon Policy

Code of Conduct for Arbitrators and Panellists

Transit Trade and Transit FacilitaƟon Trade Remedies

Fig. 6.1 Structure of AfCFTA negotiations. Source Various AUC communications

In its initial stage, the agreement marks an important and overdue initiative because African states and regional groups often do not have free trade arrangements among themselves—contrary to the situation with third parties such as the EU—and grant themselves fewer advantages on some trade in goods than they do to such third parties. Consider for instance a typical tariff constellation at an African border, e.g. Nigerian tariffs for imports from neighbouring Cameroon: applied tariffs cited in the WITS database are identical with the five-band MFN tariff system, including the high 35% band that hits any major global competitor if these tariffs are not lowered in a North–South trade arrangement. According to WITS, actual formal trade is close to zero. This was characterized above as a paradoxical tariff landscape and constitutes a classic post-colonial feature of unequal trade relations. In order to remedy the anomaly, the CFTA retains most-favoured-nation treatment in an adapted version6 and aims at better rules of origin among African signatory states. 6 The

application of the MFN principle is, however, negotiable among African signatories on a reciprocal basis. Furthermore, FTAs with third parties also contain MFN clauses which open the door to serious conflict if these legal documents do not legally privilege the treatment among African or ACP countries over the treatment of extra-African partners. We will report a case in which exactly such a loophole exists in Part III on trade arrangements with the European Union.

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The appeal of such a scheme also comes from the fact that it can possibly undo the tangle of overlapping regional communities—the ‘spaghetti bowl’—and theoretically create one single market area across the continent. By the same token, it would overcome the limits in market size of the sub-regional RECs and offer scope for diversification. It will involve an important number of African countries which in practice do not have any working regional trade agreement in place, aside from formally belonging to the one or the other REC (see Part I). Is the continental trade agreement likely to succeed in its quest to become the game changer in Africa’s economic modernization? Is it poised to become the powerful ‘stimulus package’ for Africa’s economic integration and recovery, as the AfCFTA’s Secretary General puts it? The first part of the answer pertains to the economic prospects of a continent-wide free trade area. Supporters point to the great potential which the AfCFTA has over and above what can be achieved by the African RECs. The potential is seen in seven areas: (1) encouragement of FDI, (2) dynamic gains through intensified competition, (3) increased innovation potential, (4) trade creation, albeit with some trade diversion, (5) higher growth in the LDCs, (6) long-term structural transformation and (7) intensified cooperation and communication between African governments (UNECA, African Development Bank and African Union 2017). What do we know about such economic prospects? Connecting with the classical trade creation versus trade diversion debate, modelling exercises built on gravity or CGE models demonstrate that grand free trade schemes may create considerable additional trade within Africa. Already for the ARIA V report in 2012, two scenarios grossly representing TFTA and CFTA design were calculated in a multicountry, multisector CGE model, supported by trade data from GTAP. Outcomes were roundly positive, but showed income gains unevenly distributed among countries (UNECA, African Union and African Development Bank 2012: 39–53). Although the model tried to reasonably capture likely negotiation outcomes, it could not—and will not in any updated version—arrest the essence of real-world trade flows and investment decisions in Africa. This is because these outcomes depend inter alia on difficultto-model agglomeration effects across Africa (see the NEG argument below), trade effects with third parties and discretionary national policies, all of which technically influence trade creation, diversion and deflection within Africa.7 Econometric modelling outcomes have not become more meaningful since then. Unsurprisingly, the latest World Bank exercise is positive on expected CFTA welfare gains, but comes with caveats on the results, literally: ‘because they do not capture (1) informal trade flows or new trade flows in sectors and countries that are not trading in the baseline; (2) dynamic gains from trade (such as productivity increases, economies of scale, and learning by doing); and (3) foreign direct investment (FDI)’—in other words, nearly everything that was just considered as making the CFTA attractive. 7 The Statistics Unit at the COMESA Secretariat has introduced national constituencies to look at the

impact of their proposed CFTA market access offers by using the World Bank’s Tariff Reform Impact Simulation Tool (TRIST). Such exercises can indeed help identify partial equilibrium outcomes of potential CFTA integration, including the identification of sensitive products for the CFTA exclusion lists.

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On the negative side, results do ‘not capture (1) the costs of lowering non-tariff barriers and trade facilitation measures; and (2) the transitional costs associated with trade-related structural change such as employment shifts and potentially stranded assets’—again the most critical aspects of the integration exercise (World Bank 2020a: 9). So much for the value of econometrics for assessing regional integration. Outcomes on the ground are influenced first and foremost by the mode of construction chosen for the CFTA and by the degree of faithful implementation. Therefore, the second part of the answer to the game-changer question refers to the architecture of the continent-wide trade agreement. The scaling-up operation can be mounted in two different ways: • Considering the existing RECs as fair beginnings, the expansion can build on what they have achieved so far in terms of economic integration and trade liberalization. The RECs would thus be considered as stepping stones for the large-scale community, as mentioned above. • Alternatively, the existing RECs could be pushed aside with their imperfections in order to start afresh at a higher level, with far more emphasis on multilateral trade facilitation and opening trade corridors to everyone. In systematic terms, the CFTA project would thus have to be examined along the line of arguments in the classic stepping stone versus stumbling block debate, as applied to RECs in the multilateral trade environment by Baldwin (2008). We will simplify for the purpose of clarity here: in actual policy practice, the CFTA scheme will likely be a mix of both approaches. The key question then becomes: are both practices—building on the achievements of existing RECs and departing from what they do not well—convincingly conceived?

6.2.1 Building Block Logic—Yet a Good One? The CFTA will indeed build on the achievements of sub-regional RECs. This is the logic already retained in the roadmap for the establishment of an African Economic Community (AEC) in the Abuja Treaty of 1991 and carried over into the formation of the CFTA. These achievements are even labelled in EU-style as the ‘REC acquis’. Consequently, Preamble and Article 5 of the CFTA retain verbatim the principle of treating RECs as ‘building bloc[k]s’ along with their ‘acquis’. The project is to take existing tariff and non-tariff schemes as starters and build on them. However, the CFTA will only become a free trade area progressively, defined by the 90% rule of thumb for liberalized trade, precisely as in the existing RECs. Technically, negotiations will proceed bilaterally at the level of member state(s)/customsterritory (= REC, where applicable) to member state(s)/customs-territory. A more systematic building-block approach would have been to either introduce a consolidated tariff schedule right from start, or to invite only the existing African RECs to submit tariff offers to other RECs. There are two obvious reasons why the latter solution is not feasible: the REC overlaps in Eastern and Southern Africa, and the

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‘AU-official’ but non-operative RECs named in Part I. For the latter it is a moment of truth: A regional community that has not demonstrated any efforts to arrange trade for its members can hardly be expected to awaken to life over CFTA negotiations. It can at least be expected that the four existing or emerging customs unions—EAC, ECOWAS/UEMOA, CEMAC, SACU+—have made collective offers, and thereby consolidated their CET. The bilateral approach carries the risk of adding to the existing REC-tangle and to the flurry of infra-REC bilateral trade agreements instead of doing away with them. TRALAC already predicted that the now vanishing TFTA would lead to more, not less FTAs in Africa (Erasmus, Hartzenberg et al. 2016: 85). The same is likely to occur for the CFTA. In the beginning of the negotiations, Lunenborg (South Centre) calculated the maximum number of bilateral tariff offers/trade arrangements based on the assumption that the four customs unions negotiate collectively, while all other member states negotiate individually. The resulting number of deals for 55 member states is 351, without CEMAC (or ECCAS) it is 496. Some factors tend to reduce the number, in particular copy and paste of existing bilateral deals and the alignment of some individual offers with collective offers made, thereby associating single countries such as Mauritania. The total will still be mind-boggling (Lunenborg 2019). Against this backdrop it is remarkable that by the end of 2020, 41 countries or customs unions had already submitted their schedules of tariff concessions. About 81% of the rules of origin have been arranged according to the CFTA’s Secretary General.8 A generic approach to trade liberalization, including generic rules of origin, would have been preferable in view of the strategic aim to undo the RTA tangle in Africa. The main reason for not doing so is the logic of exception(s) and exclusion which has been built into the CFTA, again carried over from the traditional RECs. It is about how to define the 90% free and 10% restricted trade. By retaining the concept of single goods excluded from internal liberalization, the CFTA project steps into the tradition of major African RECs more than it should. Quite conventionally, the CFTA project emulates the logic of exception: 7% of tariff lines allow state parties a longer timeframe for elimination, and 3% of tariff lines remain altogether excluded from liberalization. Liberalizing 90% of tariff lines is not the same as liberalizing 90% of trade volume. Here, vested interests come into play. It is generally feared that tariff offers for the 90% of HS lines will concentrate on the easy part—the lines with little or no trade—while classifying the bulk of the respective countries’ actual imports as sensitive or excluded. In anticipation of such a protective mood, an ‘anti-concentration clause’ or ‘double qualification’ is foreseen, stipulating that goods on the exclusion list (the 3%) shall amount to no more than 10% of the value of that country’s imports from within Africa in a reference period: A double qualification and anti-concentration approach (to avoid exempting entire sectors from tariff cuts) became imperative foremost because it assured that the strategic objective of liberalizing more trade within Africa than forced upon African states in agreements with 8 Communication

of Wamkele Mene to the Frankfurter Allgemeine Zeitung 2.1.2021.

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third parties, namely more than the about 80% of imports to be liberalized in EU EPAs, could be reached. Whether the peer pressure among African states will suffice in actual implementation to reach that goal and when, given the long transition periods in both types of agreements, remains to be observed. (UNECA 2018)

Given long transition periods of 5–10 years for the non-sensitive goods, and of 10–13 years for the 7% of sensitive products, tariff-stricken trade in Africa will likely amount to a far higher percentage for many years to come, even if the tariff concessions are implemented à la lettre—a heroic assumption. Taking exclusion lists as an African REC ‘acquis’ and carrying the practice on to the AfCFTA is not a good idea. In addition, the CFTA agreement foresees a number of far-reaching exceptions such as special and differential treatment (SDT) for LDCs, unilateral infant industry protection (Art. 23), export duties and other such devices in the interior of the new free trade area which complicate matters even further. Here again, the CFTA has started by emulating existing RECs. SDT is a noble principle of the World Trade Organization since such nations are systematically under higher economic stress from free competition (see Part III). There is a large number of LDCs among the CFTA signatory states, and GDP differentials in Africa are larger than in any other world region. Therefore, some differential treatment of least-favoured countries and their trades is obviously in order. Yet it should not be addressed by granting unilateral degrees of freedom to retain and renew numerous tariff and quota exceptions, unless during a very short, clearly defined transition period, with sanctions for non-compliance at the end. In the CFTA roadmap however, LDCs and non-LDCs are given differing timeframes for liberalization: • Non-sensitive products: 5 years for non-LDCs, 10 years for LDCs. • Sensitive products: 10 years for non-LDCs, 13 years for LDCs. A third country group with even longer timeframes is still under consideration. This is inadmissible even for the transition period as it technically undermines the CET of the participating customs unions, all composed of LDCs and non-LDCs.9 The need for developmental flexibility in the application of trade rules thus runs the high risk that the CFTA will reproduce another of the current REC shortcomings. The challenge for the CFTA is rather to avoid building too heavily on ‘flexibility’ and countless exceptions to the rule. Care for the least-advantaged countries in Africa and for their infant industries should take other forms. In the light of the aforementioned issues, Tutwa analysts conclude that the AfCFTA should be seen as a ‘WTO minus’ arrangement: A number of central issues remain unresolved: it is an agreement with a substantial sensitive/exclusion list for tariffs on goods, with strict product-specific rules of origin and institutions for remedying trade that could be abused to protect domestic lobbies. The regulatory content of the AfCFTA could be described as ‘WTO-minus’, although it does bring 9 For

the alternatives considered during negotiations to avoid violation of the CET, see again Lunenborg (2019).

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non-members of the World Trade Organization into the fold. (Draper, Edjigu and Freytag 2018)

Indeed, only 41 of the 54 African states are WTO members. The assessment rightly describes the bewildering range of one-by-one regulations that must be mastered before ‘free’ trade can set in. The unfinished business must be kept in mind when reading news that trade under the CFTA officially started on 1 January 2021. The event is being celebrated by some public voices with statements that the continental FTA has now become ‘fully operational’. It certainly has not. It will remain difficult to determine which part of external commerce will be traded under which regime for some time into the future. Legal and administrative domestication is definitely still outstanding. As the CFTA member states will continue to have substantially different tariffs among themselves and vis-à-vis third parties, comprehensive border checks for origin and destination will remain necessary. Despite the fanfare about African free trade everywhere, the contracting African governments thus accept the continent-wide reality of ongoing full border controls and just concentrate on easing the formalities and dismantle 90% of tariffs. There will be no Africa without borders. You may call this trade realism.

6.2.2 Jumping over the Stumbling Blocks? There are two strategic dimensions in which the CFTA fully departs from the logic and practice of the RECs. Treating the CFTA project as ‘WTO-minus’ would be slightly unfair considering that an array of ‘WTO-plus’ rules on matters such as investment, government procurement, intellectual property rights and digital trade are to be included in the CFTA phase I, while they are mostly relegated to later stages in the classical RECs. This may become the true game-changing part of the CFTA as a political project. In turn, the stage of becoming a customs union, considered a major stumbling block in parts of trade theory, is postponed. The CFTA is not designed to become a customs union in the foreseeable future, although the Abuja Treaty provided for the creation of a Continental Customs Union (CCU) by 2019. According to the text of the CFTA agreement, a customs union is foreseen only at a ‘later stage’ (not specified). Also, the creation of a single African market is considered to be a long-term objective only (Art. 3, AfCFTA Agreement), although a number of the planned protocols in phase I and II relate to single-marketarea and even common market features, in the definition of our Part I. However, all strategic options face the same obvious problem. How can continental trade liberalization succeed across existing RECs if it does not properly work within the RECs themselves? Taking the approach of jumping over the perceived stumbling blocks would make sense if the only reasons for the lack of trade integration within Africa were small size and overlaps between first-level RECs and their

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customs bureaucracy. This is not the case. The intrinsic reasons for lacking trade complementarity and endogenous reproduction of trade barriers apply at the continental level as well. Opportunities for rent-seeking from irregular trade modalities are not smaller, but greater at the continental scale. On paper, greater economies of scale and scope are among the most powerful arguments in favour of the AfCFTA. As even the larger African RECs are small in global comparison, economic interest and political thrust to overcome trade hurdles may be greater in the CFTA. However, the reasons for the continued existence of regular and irregular trade barriers go deeper. New deep-seated problems in this regard are already visible. The problems are systematic, and they are specific to the CFTA or at least considerably larger than in the small sub-regional RECs. Some of the problems threaten disproportionately the weaker economies: • There is a risk that a CFTA from Cairo to the Cape and from Dakar to Dar es Salaam would, under current conditions of trade costs, lead to an even higher concentration of industrial activity in the northern and southern centres, in South Africa and Egypt, and with some light spots in Ethiopia, Kenya and Nigeria. Existing hegemons would become the prime beneficiaries of the huge market created. This is an application of what agglomeration logic from Krugmanian New Economic Geography (NEG) to the African case suggests: for the whole of Africa in both vertical and horizontal directions, high internal trade and transport costs will continue to prevail in the long term even if physical and regulatory trade facilitation makes sensational progress. Hence, in this scenario, the NEG agglomeration argument will play out in sync with economies of scale. In consequence, industries and service providers will probably cluster where they already are.10 Therefore, it is possible that the problem with uncooperative regional hegemons, in particular with dominant South Africa, will be magnified in a CFTA setting and will also slow down deeper integration. In particular, this relates to liberalization of investment as South African capital (read: Nigerian or Kenyan capital for parts of Western and Eastern Africa) already dominates entire sectors, e.g. in food and beverages in the less advanced African countries. This poses problems for another pillar of the envisaged deep integration schedule—competition policy. • The problem will be compounded if new rules of origin, fixing a value-added threshold required for CFTA tariff preferences, can be met only by established bigger producers in more advanced African economies, not by SME in weaker economies, as Brookings experts have warned (Signé and Van der Ven 2019). We discuss the inverse problem below. • Relaxation of intellectual property rights (IPR) will become a problem wherever regional hegemons dominate IPR-dependent sectors, for example in pharmaceutical production. 10 Mold/Mukwaya from UNECA come to a different, more upbeat conclusion with CGE modelling

(based on GTAP 9), but this remains largely conditional on the very small increase of industrial output in the region, with no economies of scale (which is, however, one of the core arguments in NEG). Their research is nonetheless insightful as to likely sectoral consequences of large integration schemes (Mold and Mukwaya 2016).

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• The problem with fiscal revenue losses will be magnified for the weakest member states. At first glance, it would seem that taxes on the about 15% of total trade that is intra-African cannot be significant enough to slow down the implementation of the new trade regime, especially since many African governments have already foregone much of their respective customs revenue in the process of REC internal liberalization. It is understandable that potential loss of fiscal revenue represents a major issue in negotiations of new trade regimes with Europe, the US or China— but for intra-African trade? An African Export–Import Bank calculation shows that fiscal revenue from intra-African trade hovers at or above 1% of GDP for a number of mostly LDCs, mainly the countries already more than proportionally engaged in cross-border trade. For these countries, AfCFTA-related fiscal adjustment cost will be higher than for global exporters such as Mauritius, Nigeria, Egypt, Morocco or Algeria, for which intra-African customs revenue is already irrelevant. In this view, ‘early champions of intra-African trade should not be penalized’ (Fofack 2020), or worse, be instrumental in trade deflection. In other words: they should not be forced to resort to the warehouse model for neighbouring big markets, which would assure them at least some customs revenue from extra-African trade. This brings us back to the chagrin of the regional hegemons. The stronger economies in Africa have their own problem with trade integration in the CFTA. This problem precisely relates to the fact that the CFTA will not become a customs union vis-à-vis the rest of the world. While they benefit with regard to economic geography, South Africa and Nigeria are sceptical because they fear trade deflection: the CFTA would likely turn other African states with lower RoW-tariffs or weaker port authorities into gateways for duty-circumventing imports. These imports would then be trans-shipped to African destinations such as South Africa or Nigeria— regional hegemons who cannot protect their industrial production anymore, while in the current SACU setting, the Republic of South Africa effectively controls most port entries, much as Nigeria tries to do in ECOWAS with bold, while often irregular measures for the neighbouring port of Cotonou.11 It was illuminating that the presidents of Nigeria and South Africa refrained from travelling to Kigali for the CFTA ceremony in March 2018. The leaders of the two biggest economies in Africa both argued that they needed more time for consultations with economic stakeholders to gauge the risks of the agreement. Did they fear competition from Mali or Malawi? Obviously, they did not. Both presidents referred to potential risks for their industries from non-African competitors, in other words trans-shipment of goods from China, India or other origins, precisely because the CFTA will not become a customs union in any foreseeable future.12 The concern 11 South Africa’s position vis-à-vis the TFTA was already contradictory—to an extent necessarily so. Scholwin tries to portray the South African stance as applied developmental regionalism, although his evidence on the perceptions of South African officials points to deep-seated reluctance to liberalize trade in goods and, in particular, in services. In this sense the actual course of TFTA negotiations was a good predictor of what is likely to happen for the CFTA (Scholvin 2018). 12 South Africa later signed with four other countries at the regular AU summit in Nouakchott on 1 July 2018. Significantly, Nigeria and Tanzania signed the agreement with further delay—the same

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was raised by major African manufacturers associations, among them—and quite vigorously—the Manufacturers Association of Nigeria (MAN). A long-term South African Minister for Trade and Industry, Rob Davies frames the risk associated with the CFTA as even larger. Alluding to export interests from outside Africa, he speaks of an: ill-concealed ambition by some to see the AfCFTA to become an opportunity for them to supply more finished goods to the continent through weak ROO and ambitious bilateral FTAs. (Rob Davies, presentation at the 2020 Potsdam Winter Meetings of SEF, 15-12-2020)

Davies goes on to say that this kind of trade deflection will impede the emergence of new regional value chains. The consequence for him is that ‘external partners need to be encouraged to look to sustainable long-term benefits, rather than short term quick wins’. The challenge is actually double—avoiding classical trade deflection by simple re-routing of finished goods and trade deflection in disguise. The latter issue complicates the debate on rules of origin in the CFTA—a terrain on which one would otherwise have hoped for a departure from current REC practice as well.

6.2.3 A Generic Solution to Liberalize Trade in Africa? To speed up the negotiations, UNECA suggested early in the CFTA process a triple generic criterion to guide the choice of product lines for liberalization or exclusion— in order to avoid the tedious bilateral, tariff-by-tariff dealings. Because fiscal losses are expected to be the dominant preoccupation of government negotiators, tariff lines with the highest expected losses are the first criterion. Subsequently all intermediate and all ‘green’ goods imported from Africa should be moved into the fully liberalized category, even if they generate sizable custom revenue.13 While the first criterion is obviously not developmental and merely accepts what looms large in behind-thescenes-negotiations, the second and third have the advantage of being generic and developmental with regard to nascent industries. They must, however, be combined with rules of origin that are strong but generous for regional cumulation. If all intermediate goods were systematically duty-free and recognition of final goods as ‘Made in Africa’ with free circulation across the continent were possible with minimal value added to the intermediate products, this would in fact come as an invitation to trade deflection in disguise: Weak RoO could, of course, provide a point of entry for an influx of extra-regional imports masquerading, through screw-driver type operations in the territories of state parties, as locally manufactured products. (Davies 2019: 71)

two countries which blocked the West and East African Economic Partnership Agreement with the EU, not without good reason (see Part III). 13 The definition of green goods can be based on OECD and subsequent UNIDO work (Cantore and Cheng 2018; Steenblik 2005).

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Davies adds that ‘such an outcome would be difficult to measure and would likely be masked by statistics recording a higher volume of possibly seemingly less polarised intra-regional trade’. (ibidem: 73) This is, no doubt, correct. Buttons and labels can be fixed everywhere on the continent. However, the generic approach to tariffs and RoO is less evidently ‘unselfconscious’. In fact, it is guided by a paradigm different from the one the author suggests. First of all, a sweeping generic freeing of intermediates is only proposed in the interior of the continent, and secondly, sector-specific requirements of ‘substantive working and processing’—as it is called in trade jargon—can prevent shallow screw-driver type or button-fixing operations, as long as they do not produce the adverse effect for weaker economies, mentioned before.14 Combined with good rules of origin, generic liberalization of intermediates and green goods in the CFTA can make sense. Why not free all capital or investment goods as well? The ECA remained silent on this issue, but it can safely be assumed that in the foreseeable future, capital goods originating from Africa will fall mainly into the category of transport equipment—in other words, cars—a major source of fiscal revenue. Liberalizing these tariffs in the same generic way is arguably asking too much from African treasury departments. Nevertheless, it can be presumed that in actual negotiations, a sweeping novel approach has not been followed for intermediate and green goods either. To sum up, the same fundamental problems which trade theory identified for South–South RTAs haunt the grandiose free trade scheme. Some of these problems appear significantly less manageable than in the smaller communities which are customs unions. This is unsurprising from a theoretical point of view. Imbalances and structural imperfections are an invitation for the big and small countries at the extremes not to fully implement the CFTA, while middle-ground countries may go to great lengths to realize implementation as formally prescribed. Without additional features, in particular compensatory policies and funds, the CFTA is unlikely to become a more smoothly running scheme of trade liberalization than the old RECs. There must be powerful political economy arguments as to why typical integration problems occurring at the REC level as well as at the level of trade negotiations with third parties outside Africa can better be solved with 55 African member states.

6.3 The Political Economy of Implementation Of paramount importance here is that the African CFTA will not be supra-national institution. The agreement is not self-executing. Its realization will depend on the member states’ dedication to faithfully internalize rules and regulations (Erasmus 2020). For this to happen, there is a need for organized economic interest and political will to push the project through on a continental scale. Pointing to the huge economic

14 In

Part III, we come back to the issue and discuss why too low requirements of RoO for South– North trade are not developmental, either.

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potential of the AfCFTA does not sufficiently describe these drivers. Interest in rulesbased continental free trade must be more powerful than current vested interests in imperfect sub-regional trade. In addition to interest and will, better institutional arrangements must play their own role in stabilizing achievements. Such arguments and arrangements exist. The list starts with the assumed level of corporate interest in support of the AfCFTA and goes on with political factors: • • • • • • • • • • •

Organized Business Africa Peer pressure Role models Lock-in mechanisms Trust Sanctions Vision Social dialogue Broad and effective participation Leadership Communication.

To avoid reproducing the blatant imperfections of the smaller RECs in terms of implementation, corporate (and labour) interests must be better articulated at the continental level, peer pressure among governments must be higher, lock-in mechanisms must effectively lock decisions in, trust among economic and political actors must grow considerably and so on. However, the power of these political economy factors is far from proven. Some are simply absent from the AfCFTA mechanism (e.g. sanctions). In many cases, it is completely unclear where they should come from, and they are not explicitly mentioned in the text of the agreement. The CFTA Secretary General himself speaks of treaty fatigue among the African elite and of a crisis of communication and inspiration with regard to the AfCFTA. Recall that not everyone came to Kigali full of enthusiasm in March 2018. The CFTA Secretariat intends to counter these trends with its own communication strategy. In this regard, it should be recalled from the critical discussion of the linear model that a deepening of economic integration in the African RECs at both levels is unlikely to succeed without a new dimension of political integration. Few people are motivated to fight for a free trade area, even a continental one. Political vision and leadership appear quintessential to building the necessary economic trust and an identity of regional consumers and producers. Certainly, Africa 2063 ‘The Africa We Want’ represents a vision in itself and has its own communication strategy, including a popular version of the great project. Yet, the economic integration model more narrowly formulated appears unlikely to speak for itself out of fear of bureaucratic overregulation and underprotection of the weakest. Although a ‘model’ of deep economic integration can be well defended on purely economic grounds, support is strongest among those member countries where adhesion to the union is not driven by economic interests alone. African regional and continental unions may want to emulate such identity concepts. One element of communication might be: ‘African regional communities—the building blocks of an integrated continent’. In this way,

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the original idea of the OAU might finally gain the traction it never had. Promoting ‘Made in Africa’ has already been claimed for the CFTA, giving a label to its efforts in furthering regional value chains and their products.

6.4 A Higher-Order Project of Regional Economic Integration Despite the objections to the mode of construction, the Continental Free Trade Area can become the great project to raise economic cooperation in Africa to a higher level. Yet for the political economy to work well, a fundamental policy change beyond the items on the current CFTA agenda is needed. The principles of transformative regionalism or ‘development integration’ must guide all decisions on integration. For all formal integration steps, it must be asked whether they lead to broadening and deepening of the continent’s productive base. This translates into a question of division of labour. The change has to occur at both levels—continental and regional. There is no alternative to the existing regional communities—EAC, ECOWAS/WAEMU, CEMAC/ECCAS and SACU/SADC—as first tier and main arenas of organized economic integration. Some deeper integration topics can be delegated directly to the overarching CFTA scheme, others not. We are thus talking about a set of common principles and policies at two levels. The construction site of African economic integration is a two-tier exercise. Who is in the first tier? The AUC presents the usual organizations as one pillar for the Agenda 2063: Strong and well-functioning regional institutions: Africa’s sub regional institutions have been rationalized and the eight officially AU recognized Regional Economic Communities (RECs—CEN-SAD, COMESA, EAC, ECCAS, ECOWAS, IGAD, SADC and UMA) are today strong development and political institutions that citizens can count on and Agenda 2063 can stand on. (African Union Commission 2015a)

This assessment does not represent much reality, on either count—the ascribed strength or the number of RECs. A first element of a higher order project of integration reads thus: demystify the reality of ‘official’ RECs and recognize those that are economically relevant as pillars of the CFTA. Looking at who has actually participated in the CFTA tariff negotiations will be a good indicator. Secondly, the economically relevant overlaps between RECs must finally be eliminated. This task has not become superfluous with the advent of the CFTA, either. What matters here are the boxes-in-the-box identified in West, Central and South Africa. Arguably, ECOWAS and UEMOA are most advanced in this regard, but the lingering problem of FCFA and WAMZ among others gives a good measure of the distance still to go. Disentanglement of COMESA, EAC and SADC is not less important.

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Thirdly, a higher-order project of integration has to do away with the logic of exception and exclusion from internal trade liberalization, described above. Structural policy goals in both the interior and the exterior of a REC can be achieved by other means than myriads of tariff and RoO exceptions. As we will see in the following Part, modern industrial policy in particular is about targeting support for selected industrial ventures. While targeting means by definition ‘making exceptions’ in favour of some industries, it does not follow that the selection has to be operated by trade obstacles—worst: in the interior of an economic community. Credibility on the external front must be considerably enhanced by completing the CET along with common rules of origin and consolidated tariff books. A CET which has several hundred lines of national exceptions is still a construction site. A mature common external tariff is truly common and essentially cast in stone. Digitization of trade administration should help with the consolidation. The main political task to conclude internal merchandise and services liberalization represents more than simply wrapping up some unfinished business, but an important policy change in itself. African public and private elites should be aware of two crucial implications: (1)

(2)

An economic community whose members are all developing countries must define itself as a region where there are ultimately no internal tariffs at all so that border controls can be abolished. Consequently, all of the strange bilateral trade agreements within and across African RECs must be eliminated instead of creating new ones through CFTA negotiations. Different schedules and timeframes for liberalization must eventually go. At the most, very ambitious bilateral FTAs such as the one between Ethiopia and Sudan which aims at 100% tariff elimination will have their place, as long as the superior trade agreement—in this case of COMESA and the CFTA—has not yet reached that stage. The same applies to non-tariff barriers. Tariff-free trade areas induce an avalanche of new NTBs as a response. We saw above that this kind of a paradoxical turn is not an awkward African way to slow down regional trade integration, but rather a natural occurrence. Removing these obstacles requires political conviction and a bold programme.

Member states need to understand and assure each other that they are relinquishing the habitual use of tariffs and non-tariff measures for industrial protection, food security or fiscal revenue generation. Once the first years of transition into the new trade dispensation are over, REC internal barriers do not represent good agricultural or industrial policy practice. This applies to both the existing RECs and to the new CFTA. The AfCFTA will be based on twelve principles [Article 5 of the Agreement; (African Union 2018)]. The principles are generally good, but we have already seen which fundamental problems loom behind terms like flexibility and special and differential treatment. In this regard, the AfCFTA does not bring the distant dream of a borderless Africa any closer. One other principle deduced from the supposed need for

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flexibility is asymmetry. Asymmetric trade liberalization can be defended in North– South arrangements but in a South–South arrangement aimed at free trade within Africa asymmetric support must be achieved by other means than tariff variation. All such asymmetries and floating exceptions in the interior of an economic community should be recognized at best as short-lived transitory measures at the inception of RECs, and not as principles of South–South trade integration (contrary, e.g. to what is retained in the EAC Charter, the SACU Protocol and what is now foreseen as a CFTA principle), lest the free flow of goods be hampered forever. Similarly, the principle of variability (of goods on sensitive products’ or exclusion lists) plays a completely different role in the two instances. Internally, variability in tariffs and rules reduces the predictability of trade conditions among peers—normally an advantage of RTAs. Externally, the exemplary analysis of the EPA design in Part III contains a strong plea for some alterability of exclusion lists in North–South agreements—as a means of smart agricultural or industrial policy. At issue is rulesbased temporary protection in contrast to the rigid definition contained in the EPA documents. Short variable CET-related exclusion lists, when used with moderation, need not reduce the region’s reliability for producers. Where the old logic is not the outright expression of clientelism and corruption, it is habitually justified as a support for weak economic actors in the existing RECs or in the coming CFTA. The potential of the CFTA, much as that of the smaller RECs, needs to outweigh risks or adjustment costs/losses. In this regard, think tanks such as TRALAC or TUTWA have only modestly positive expectations (Draper, Edjigu et al. 2018). As a matter of fact, it is not obvious that the balance between expected gains from integration and the adjustment costs is positive for the smaller countries and their rudimentary industries. An earlier EPRC analysis of the impact which the sensitive products list in the EAC CET had on trade and welfare revealed two effects: intra-EAC trade creation in protected goods rose far more than trade diversion among external suppliers, demonstrating that it worked, but gains within the EAC were extremely uneven, with Kenya benefitting for 85% of the gains (Shinyekwa and Katunze 2016). Theory predicts such uneven gains when all member states in a new integration scheme produce well below the global productivity average. Not convergence, but divergence among members of South–South schemes will be the overall result. The internal trade defence, which is so stubbornly upheld in African RECs, is a response to imbalance and divergence among member states when unfettered trade would overpower agrarian and industrial structures in economies with weak supply responses. Given the risk of growing imbalances with AfCFTA implementation, deliberate creation of productive capacities in places where they have remained weak is called for, but not all sources elaborate on the modus operandi needed in Africa (Signé and Van der Ven 2019). Others pinpoint the mechanism precisely: it is ‘the absence of compensatory funds [why] integration efforts were abandoned’ (Melo and Tsikata 2015: 234, 243). In fact, the logic of exceptional trade defence must be replaced by a new logic of compensation for the weakest and most vulnerable countries. Again, this applies to both RECs and CFTA. A compensation fund is already under consideration: the AfCFTA Adjustment Facility is meant to compensate for

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loss of fiscal revenue and for shrinking sectors. This is a good way to begin, although funding of the adjustment facility was still unclear at the end of 2020. Donor funding will probably be solicited, along with contributions from member states. Similar adjustment support schemes are formally in place in some RECs but are not reported to work well. Not all shrinking industries are to be defended or compensated. To support rational choices, developmental policy has to step in. Here, the second-order integration project requires common sectoral policies. If and when a strong compensation fund is introduced as a tool for structural re-balancing of African economies, the African CFTA can really take a turn to transformative regionalism (see next chapter). If not, it runs the risk of returning to present-day integration and its pervasive imperfections. The strategic peculiarity of an adjustment facility can best be explained in comparison with the proposed World Bank approach to support CFTA implementation. In Bank logic, the facility is for ‘identifying most vulnerable sectors and types of firms’ and then assuring a smooth transition of labour and capital to other opportunities, which is the usual trade adjustment on the back of workers (World Bank 2020a: 124). The facility should not stop there. The facility correctly foresees compensation in order to—at least potentially—keep firms in place. And it should foresee active productivity enhancement of existing firms as much as measures to identify new sectors and firms to benefit from the CFTA environment and lend them support in their early stages. The difference is between a proactive approach and a market-liberal one which just admits cushioning against inevitable shocks. Development banks and donors should insist on the former. Is this plea for REC internal borderless trade despite given asymmetries just a doctrinaire argument, inspired by a free business environment that only a club of rich countries can afford? Arguably it is not. Otherwise, a number of positive effects will not fully materialize, notably trade theory’s (a) open-bloc and (b) domino effects. A zone without economic boundaries is the main draw that African RECs can have for investors, without which the correlation of FDI and regional integration will remain as insignificant as it is described in most current studies. Also welfare-enhancing open bloc effects for trade will only work in well-integrated markets, that is the willingness of RoW suppliers to lower prices for entry into the market. An enlargement of the African free trade area can be expected in the big sub-regional RECs from a domino or juggernaut effect: more countries are attracted into a sub-regional market, but this is conditional on providing an attractive trade environment. This is best known from European integration.15 Despite the imperfections of present-day RECs, the domino effect is already somewhat materializing in ECOWAS, with Mauritania and even Morocco considering renewed or new membership. It worked twice in EAC, with Burundi’s and Rwanda’s accession and later that of South Sudan.16 In the end, the 15 Some observers expected a kind of reverse domino effect with Brexit, with more member countries lured into independence from ‘Brussels’. Despite centrifugal tendencies in the EU which increased for other reasons, this kind of reverse domino effects appear unlikely. It is not even sure whether the Brexit process will undermine international confidence in deep regional integration, as the values of a common market become more obvious when a single member state negotiates its departure. 16 It definitely does not yet work out this way in Southern and Central Africa.

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regional enlargement may align itself with the dynamic of what will be achieved in the meantime at the continental level. Such a bold new move towards trade integration is not completely unrealistic. In contrast to the critical picture that this chapter paints of regional integration of merchandise trade, African RECs have made achievements in terms of political, and even military cooperation and citizens’ freedom to move across borders, e.g. by virtue of the ECOWAS and EAC passport. Moreover, EAC work permits have even been achieved for three member states, although such freedoms represent a sensitive issue, too. The complicated political economy of regional integration manifestly allows sweeping reforms such as the freedom to move—hence why not for trade integration? The CFTA project has potential to boost the continent-wide personal freedom of movement—all the more as AfCFTA signatory states have signed a respective protocol along with the main documents. The focus here is on the removal of visa requirements. In 2020 a record 54% of African countries offered African citizens ‘liberal access’—up by 9% since 2016—allowing travellers to enter visa-free or receive a visa upon entry. The African Development Bank monitors the trend in the Africa Visa Openness Index, which reveals the gradual emergence of Schengen-like areas [see https://www.visaopenness.org/ and the full report (AfDB 2020)]. If reliable data were available, it would be conceptually interesting to determine to what extent formally easing cross-border movement of people creates more rapid progress than facilitating free movement of goods in Africa. Politically, it is the dialectic between the two which will decide on popular support for the whole integration process, and it will be decisive whether a mutually reinforcing dialectic sets in between the REC/CFTA core business of easing trade and other dimensions of integration.

6.5 Fundamental Choices Pushed to its theoretical limits, the huge policy challenges raise the question whether such a thing as progressive South–South deep integration can exist at all without the creation of strong supranational institutions. The two sides might be described in terms of the Jeffersonian versus Hamiltonian divide, which dates back to the founding of the USA, but is still relevant for understanding a number of current global issues. A full building-block logic for the making of the AfCFTA would stand in the tradition of Alexander Hamilton if it favours strong central institutions with firm control of external borders. This is why Hamilton features along with Friedrich List as a founding father for the concept of customs unions. A Jefferson-style concept favours a lighter CFTA without much centralizing power in Addis Ababa and Accra along with loose controls at the external borders of the free trade area—a far more realistic model for an economic union in an Africa in which strong states are the exception to the rule and considerable intra-African tensions exist. In fact, African leaders and public opinion would be well advised to look still elsewhere for inspiration regarding the choice between wider and smaller schemes.

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The strategic alternative with which African states are confronted resembles the one Europeans had over the history of their post-war unification. Two political concepts competed from the very beginning: the vision of an ever-expanding free trade area which would ultimately comprise all European countries (except Russia), and another vision centred more on a smaller group of Western European states (‘the Carolingian Europe’) with more common traits and better chances for deep integration. Only the small European Free Trade Area (EFTA) survived out of the first concept. In accordance with the second vision, the comprehensive integration mode of the European Economic Community took precedence and incorporated in turn the principle of continental expansion. This expansion mode largely prevailed until Turkey took a repressive turn that precluded the country’s accession, and difficulties with new accession states in the Balkans ensued, with both developments urging caution regarding overly rapid expansion. Africa might want to adopt the light mode for continental integration and leave the deep and heavy integration exercise to the smaller regional communities. In recent times, the European Union has learned from experience that the economics (and politics) of a huge, internally borderless free trade zone and the requirements of a common market—in particular with free movement of labour, capital and services—are difficult to reconcile without essential features of an economic union (slotted in the simplistic linear model of integration at a still later stage). This relates especially to the need for harmonized public financial management. The already existing variable geometry of integration—for examples see the Schengen agreement and the Eurozone—will probably be reinforced by still smaller groups of core member states acting together. Any resemblance with African political choices is not coincidental, as the AfCFTA agreement also retains variable geometry and explicitly accepts that states which ‘have attained among themselves higher levels of regional integration’ than under the CFTA maintain such higher levels (Art. 20,2).17 As a matter of consequence, members of the African Union as well as international trade assistance agencies have to consider carefully which technical ‘service’ to sell in which market or at which level of African economic integration. There is no theoretical model established to judge which dimension of economic integration is best suited for a solution at the. (a) (b) (c)

multilateral level, regional level with the highest (politically) possible number of member states (= CFTA/TFTA), sub-regional level (= in Africa the level of existing RECs).

17 The term ‘variable geometry’ is sometimes erroneously applied to the situation in East and West Africa, where would-be customs unions deal differently with a proposed bi-regional trade agreement—in this case with the EU—with some members signing individually and others not. It is a misnomer in this case. Variable geometry cannot exist with regard to an essential issue which defines the whole REC at its given stage, as the think tank SEATINI has also criticized.

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It stands to reason that regionalism which intends to gradually lift industry and agriculture from protection to world market exposure needs close customs cooperation at level (c), similar to non-tariff measures which require a societal consensus on health or ecological standards. At the same time, certain service sectors like telecommunication or travel/tourism with visa-free movement of persons may be liberalized right away at level (b). Lack of cross-regional infrastructure is regularly identified as one of the most significant barriers not only to trade, but also to the movement of people across the continent. Recall in particular that there is no East–West corridor for land transport across central Africa. This absence creates what we called the great vertical trade rift on the continent. In the same spirit, the CFTA might stand to gain from the Single African Air Transport Market (SAATM), which was launched in 2018. In stark contrast to earlier fragmented landing rights, the initiative will allow airlines in 23 countries to fly between any of their airports, similar to the regulation in the European Union. So far, only 18 countries have implemented the agreement, although 34 are said to ‘have agreed to join’. The launch of the CFTA might introduce a new dynamic into the process, which will in turn help the existing regional communities. A number of trade facilitation issues are best settled at the multilateral level (a), as it is now being attempted with the WTO Trade Facilitation Agreement. Helping African authorities to work out a sound three-tier approach to economic integration will thus be an important function of strategically up-to-date aid for trade. Consequently, evaluation of impacts also has to take all three levels of integration into account: continental, regional and national.

6.6 Transformative/Developmental Regionalism? For many agencies and analysts, the grand scheme of the African Continental Free Trade Area stands for developmental regionalism, at least potentially, including the expectation of strategic trade liberalization combined with infrastructure and industrial development (UNCTAD 2013). But what are the precise implications of this kind of progressive regionalism? Some eight years ago, UNCTAD introduced the concept of Developmental Regionalism (2013: 95 sqq.) by comparing experience in Africa with schemes in the Greater Mekong region. It came as a critique of the EU-style linear integration model and started from the observation that the main constraints for regional integration of advancing economies are often not found at the border, but rather behind the border, where they need to be tackled.18 The concept suggested four key tools for the developmental turn: industrial policy, development corridors, special economic zones and regional value chains. The problem is obvious: Africa already has some such corridors, SEZs and a few regional chains. Many more are promoted and supported 18 Apart from the fact that customs unions, common markets, etc., do not at all build on border measures alone but on behind- and between-the-borders policy as well.

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by donors. Hence, these general proposals do not distinguish a structural approach to regional integration from a trade-liberal emphasis on behind-the-border measures, as will be discussed below. The first tool—industrial policy—is different in this regard, but at the time, the report did not discuss the intricacies of regional versus national industrial policy, which would have been crucial in the given context. Finally, UNCTAD optimistically declared that ‘EAC and ECOWAS do now have a regional industrial development policy’ (ibidem: 109). This was neither accurate in 2013 nor now, eight years down the road. Such a statement obfuscates rather the discrepancy between paper and practice—so common for regional integration in Africa. The main author of the UNCTAD report then redoubled the effort and introduced ‘transformative regionalism’ as a more extensive critique of the textbook model of integration. According to the critique, the linear model associates economic advances mostly with trade liberalization and ignores the fact that the relationship between trade and poverty is bidirectional: trade can reduce poverty, but poverty limits the capacity to produce valuable items for trade. Osakwe argues that while the textbook approach has worked in the European Model, its application to Africa ignores the fact that the continent lacks both the productive and institutional capacities to benefit from the linear liberalization steps. Instead, the emphasis should be squarely on building productive capacities alongside regional infrastructure and finance. As suggested by modern industrial policy, identifying and removing the most binding constraints will be crucial in this regard (Osakwe 2015). Soon after the UNCTAD report, an entire yearbook was dedicated to the subject of transformative regionalism (Gutowski, Knedlik, Osakwe et al. 2016). While there is a good deal of common ground between the yearbook and our work, there is one crucial conceptual difference. Unsurprisingly, it is related again to the linear model, and the difference comes out clearly in the editors’ introduction to the yearbook: The conventional integration approach focusses so much on the text-book model of integration which involves establishing a free trade area, a customs union, a common market and eventually a monetary and economic union. While this approach may have worked for some continental groups in the past, it is not the appropriate approach to integration for countries in Africa with very poor infrastructure, similar export structures and low productive capacities. (Osakwe and Wohlmuth 2016: 6)

Thus, structural transformation makes no headway, or as we would add: where it does make headway (in services for example), it is not attributable to formal regional integration. However, the strong opposition between the ‘linear’ integration blueprint à la EU and structuralist policies is not accurate. Suffice it to recall that PTA, FTA, customs union, etc., do not represent simple liberalization, but rather preferential liberalization, favouring member states over the rest of the world unless you transpose the scheme to a scale—the whole of Africa—where it can only work as a multilateral liberalization scheme. In particular, the discriminatory aspect of tariff policy against the RoW in a customs union has the potential to support structural transformation. It should also be recalled that starting with Lipsey, Meade or Viner, a customs union needs to be carefully assessed as to its economic benefits (Lipsey 1957; Meade 1955; Viner 1950). No one in the economic literature has ever contended that the

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inherent group-liberalization of PTA, FTA, CU, MU, etc., automatically generates such structural progress. Hence, from today’s vantage point, an enhanced model of regional economic integration among developing economies should combine steps on the formal ladder with cost–benefit plus constraints analyses, and subsequently deduce strong sectoral and spatial policies. This combination must be made compulsory in order to render conventional regional integration ‘developmental’. Instead of doing away with the linear model, the structuralist approach to regional integration is better described as a kind of double helix of trade and structural policy measures. Finally, completely rejecting the ‘European Model’ as unsuitable would be excessive for the same reason. From its beginnings in the 1950s, the formation of the European Economic Community comprised such a double helix combination of trade, sectoral and spatial policies with an overarching political project, the ‘European Idea.’ Otherwise, it would never have functioned, and definitely not by market forces alone. However, it should be noted that EU policy selected only a small number of sectors for targeted support and capacity building, especially not industry, and it got a number of things wrong in the most favoured sectors—agriculture and fishery. Hence while developing countries should not emulate EU policy with regard to these last two sectors, many of its basic principles apply well to their context. In all other respects, transformative regionalism effectively captures the essence of the arguments that are put forward in this volume, in particular with respect to structural policy, to which we now turn.

Part II

Industrial Policy in the African Regions

Chapter 7

A Fourfold Justification of Common Industrial Policy

Abstract Most industries need wider regions to flourish. Conversely, most regions need some industries to grow; few can live on agriculture or services alone. However, the interplay of industries and regions is not yet sufficiently developed in African economic practice. This chapter develops a fourfold technical argument for common industrial policy (CIP) in African RECs. Part of the argument is that African RECs already engage in such joint policies, but under different names and not in the required sequence. The opportunity for a regional union to act as a lock-in mechanism for such structural policies is also discussed. Up until now, advanced economy RECs have viewed CIP as a third-rank policy area. Little can be learnt from them, even after the recent turn towards a new European industrial policy, which is analysed for comparison’s sake. This chapter concludes by arguing that developing country RECs have a greater systemic need than advanced economies for such joint policies to avoid disintegration.

7.1 The Twin Problem of Industry and Region Let us recall where trade theory’s bandwagon stopped. Africa as a whole is not industrialized by any standard. Even lists of the manufacturing units dispersed across countries are conspicuously the same as in the 1960s, although Africa has achieved to establish, e.g. broad modern construction and hospitality industries. Creative and computer industries have been newly created but cannot play the same key role in an industrial ecosystem as manufacturing does. What role would Africa’s regions have to fulfil, on a way to overcome the depressed state of industry? In several respects, manufacturing industry requires the region to flourish. Regional integration in Africa appears to be a logical contribution to solving both the indivisibility (‘lumpiness’) problem of big industrial investments and the inter-industrial division of labour. Many (though not all) industries need a wider region as their spatial dimension. Even a small landlocked country may carve out industrial niches, but it needs the region to assure the project’s success. From the general exposition on regional economics, it follows that the inverse is also true: the region needs industry to strive—manufacturing industry, that is. Present trade integration in Africa is low, © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 H. Asche, Regional Integration, Trade and Industry in Africa, Advances in African Economic, Social and Political Development, https://doi.org/10.1007/978-3-030-75366-5_7

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and it appears empirically impossible for substantial regional trade deepening to rely on more diverse agricultural trade and on energy, communication and other service networks alone. The intra-industrial diversification and specialization needed for a meaningful regional division of labour requires manufacturing industry which obviously includes a number of surrounding modern services, among them the outsourced industrial functions which now feature in IT or logistics. However, regional communities comprising less advanced countries systematically display a number of shortcomings which prevent them from becoming the springboard for modern industries. Across all African regions, the share of manufacturing has declined for decades. Considering that so little is happening after years behind regional protective fencing—this is what we called ‘McCarthy’s Elephant’— Afro-Liberals recommend dropping heavy-handed regional integration and retracting to ‘light’ integration. Here is where trade theory’s bandwagon stopped. Light integration might indeed reduce trade costs and consumer losses, but is doomed to produce a doubly unwelcome outcome among industrial producers: it still creates little industry, and if it does, then in a spatially very unbalanced pattern. Attractive producer rents are not guaranteed, and they are very unevenly distributed within the region. Exponential employment growth as necessitated by Africa’s demographic dynamics remains a distant dream. Conversely, one can derive that the shallow economic integration on the continent stems from the lack of industrial complementarity, which in turn is unlikely to be brought about by market forces alone. It is a veritable catch-22 situation. Without diversified manufacturing industry and massive support for industrial policies, regional communities will sooner or later disintegrate. The fundamental question therefore is: Should these be national policies within a region, or should truly regional, i.e., common policies of member states be defined?

The one (regional policy) does not self-evidently follow from the other (regional problem). The issue is about as thorny as industrial policy in general was until some years ago.1 As we will see below, African RECs have drafted ambitious regional industrialization strategies, but their specific justification as regional is treated as a foregone conclusion, their policy status vis-à-vis national industrial strategies remains far from clear, and implementation is wanting in any case.

1 ECDPM

authors have raised the question in similar terms, based on empirical research about existing regional industrialization policies or strategies (Byiers, Karaki and Woolfrey 2018). In short, the provision of genuinely regional industrial commons appears to be the most convincing part of an answer to them.

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7.2 National Industrial Policies in the Region In the practical life of regional communities, most economic policies remain national endeavours of member states. Each state prepares its economy for the regional environment and negotiates adaptations of regional settings to the needs of its own economy. These are national policies in the region. This concept applies a fortiori to industrial policies. In all RECs, regardless of whether they are comprised of developed or developing countries, governments naturally support national producers in finding a place in the international market. Both stronger and weaker member states act in this way. All countries concentrate their efforts on the sectors where they believe to have a comparative or competitive advantage. At first glance, nothing appears to be more legitimate. Countries known as ‘accession countries’ in particular need such preparation and regional mapping of economic strengths. When South Africa joined SADC in 1994—economically at the top of the country group—it had to work out a vision of how national industries and services would reach out to the wider Southern African market. After Rwanda and Burundi joined the EAC in 2007, they had to determine which agricultural and industrial specialities might succeed in the regional market from a position of relative weakness, a process which continues to this day. To give another example, as Mauritania considers re-entering ECOWAS, it may want to find out if there are other products in regional demand beyond what its herdsmen have been trading across borders since centuries (while it ships its iron ore elsewhere). Conversely, Morocco is now applying for ECOWAS membership, again from the top economic position. Regional market discovery is first and foremost the task of entrepreneurs, but it may require support from national governments as well as technical assistance, especially for countries with a very small private sector, or for technologies that have regional potential but are not brought forward by market forces alone. There are other positive forward-looking approaches. Promotion of foreign direct investment (FDI) by a national Investment Promotion Agency (IPA) represents an important outward-looking element of this kind of policy. National IPAs promote the host country as an attractive location within the regional market. They make legitimate use of regional opportunities, e.g. advertising their country as a ‘gateway’ to the regional bloc, but they act essentially within a national framework. There are actually few regional investment promotion agencies.2 In principle, national industrialization efforts within the region should be sufficient. If the region supports national efforts, e.g. by sound external trade policy, this approach constitutes regionally embedded industrial policy. Ideally, member states’ policies add up to a concerted but competitive effort to promote industry all across the region. This is healthy in so far as it creates competition for the most conducive and sustainable business environment. Concerted industrial and/or service-provision efforts in countries like Botswana, Mauritius, Rwanda or Djibouti demonstrate that even very small open economies (VSOE) in Africa stand a fair chance in this part of the competition. 2 For

one example, see the COMESA Regional Investment Agency at: http://comesaria.org.

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However, there are critical issues associated with such an approach, some specific for developing countries, some also applicable to advanced economies. When VSOEs try to conceive proactive national support schemes—apart from offering a liberal business environment—they most often reproduce the limitations of their industry at the institutional level as political, technical and financial capacity constraints. Sweeping polemics against governments that believe to ‘know better’ than industry or to ‘pick winners’ are overdone, but they contain an element of truth with regard to very small developing countries. In this case, national policy faces the same range of problems as the industry itself. As much as many industries, industrial policy-making faces requirements of minimum efficient scale. Minimum steering capacity is scarcely available and the quorum for meaningful public–private dialogue, an essential prerequisite for meaningful industrial strategizing, will not be reached. In small member states, a proactive industrial strategy can thus barely overcome the binding institutional constraints in scale, scope and diversification to properly respond to differentiated industry needs. In modern economic history, Singapore represents the only case in which industrial policy in a small (city-)state has fully succeeded.3 This is why candidates such as Rwanda look at it. Yet, what can an outright national industrial policy of Burkina, Burundi or Malawi within their respective REC possibly mean? Even the industrialization strategy of Botswana cannot make much headway—except in the diamond value chain—as long as SACU or SADC do not take up the challenge at regional scale. What remains for very small economies is the chance to pick the items from the ‘Doing Business’ menu which can offer investors fiscal, legal and similar advantages. This does not yet amount to true industrial promotion, and more often than not it results in a race to the bottom. In practical terms, Estonia probably does not have much more institutional capacity to carry out an industrialization strategy than Ethiopia, but in principle this lack of institutional planning capacity represents a typical developing country constraint. We thus derive a first argument for common industrial policy from these kinds of capacity constraints for national industrial policy, the severity of which is characteristic for developing countries. Anyone familiar with African RECs knows that empirically speaking, capacity in African regional institutions, in particular in REC commissions or secretariats, is hardly bigger than in the small member states. For instance, when this author last attended a conference on industrial policy in the EAC in 2011, the meeting was

3 In

1994, the Indonesia-Malaysia-Singapore Growth Triangle (IMS-GT) was founded. In this context, the city state evolved into the financial and technological core structure of a regional industrial cluster that reaches out wide into the Malay peninsula and to Indonesia. Since 2007, the whole archipelago of Riau has taken on the status of a free trade zone. Economically speaking, Singapore is hardly a city state anymore. A similar symbiosis worked between Hong Kong and China’s Shenzhen and economically transcended Hong Kong’s status as a city state, yet with the characteristic difference that a deliberate industrialization strategy mainly worked on the Chinese side of the border, as the Shenzhen free trade zone became the testing ground for China’s new industrial policy at the end of the 1970s.

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largely organized by the one and only industry policy officer in the EAC Secretariat. He obviously cannot cater on his own for the lack of capacity at the level of the smaller and weaker member states. The empirical observation, however, does not represent a valid argument against the deduced need for a common regional structure that supports industrial policy-making. It simply describes a lacuna that the more advanced and resource-rich members should feel just as responsible for as development partners. There are more reasons why even comparatively well-organized VSOEs (like Rwanda with its RDB) should be interested in a common political solution for industrial support. For example, a key function for industrial development is knowledge creation and training. These areas often face the same economy of scale problem as the industry itself. Life sciences, engineering and other technical departments were long neglected at African universities and tertiary training schools. Several smaller African countries should normally share fully equipped departments in order to justify the costs or to establish lucrative partnerships with the private sector. The hospitality industry provides a good example outside of the realm of manufacturing. While established tourist destinations like Kenya or South Africa can afford an entire system of hotel management schools, smaller neighbours in the regions often cannot, reflecting this argument for CIP. As the then EAC Secretary General recalled in 2009, the absence of such institutions represents a historical relapse: following independence, the EAC enjoyed fully functional bodies of the sort, only to dismantle them with time. Therefore, the current weakness of regional industrial support institutions is not a good argument against the demonstrated economies of scale and scope that can be expected from regional industrialization strategy.

7.3 Regional Imbalance and Divergence 7.3.1 Regionally Inclusive Industrial Growth Institutional scarcity at the level of the weakest member states as the first reason for joint industrial policy is accompanied by a separate twin argument which is also related to regional imbalance. The argument is close to the rationale of developmental regionalism in general, in two ways: economic imbalances (1) between a group of countries and the rest of the world as well as (2) among these countries are far too big to be left to free market forces alone. Both imbalances require political steering to be reduced to acceptable levels. This implies sector-specific reasons for why the individual member states alone would not be able to cope with global competitive differentials, and by the same token, for why they will decisively benefit from an integrated and levelled playing field among themselves. The twofold rationale is not self-evident and plays out differently among sectors. Even the EU, albeit an economically advanced REC from start, combined both motivations. Consider for instance one of the most stringently protective regimes so

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far, the EU sugar protocol, not abandoned until 1 October 2017. The protocol was driven by two circumstances: that European sugar beet farming has never been a match for overseas sugar cane (and still is not), and that within Europe, particularly disadvantaged social classes and rural regions suffer most from global competition. Hence, the double motivation for protection. The better decision would arguably have been not to resort to agricultural protectionism, but rather to help European farmers give up uncompetitive sugar farming; yet it illustrates the working of the double principle. Advanced RECs like the EU recognize the compensation principle in agriculture and regional discrepancies in general, but not for manufacturing industry. For a long time, there was no explicit common industrial policy in the EU, let alone in EFTA or NAFTA (now replaced by the USMCA). Industrial divergence among advanced economies within a regional trade agreement obviously has not appeared critical enough to justify counter-balancing industrial policy even though the affected portion of the workforce is far larger than in agriculture. If we are to recommend a full-blown common industrial policy to sub-regions of the developing world, there must be an additional argument. As a reminder, ‘balanced growth’ as an inter-sectoral equilibrium between agriculture, light industry and heavy industries became a highly contested idea after an early career in development economics. Today, few researchers would argue that an industrial strategy should aim at balanced growth (Altenburg 2011: 21–25). Regional economic integration is about accepting imbalances and turning them into growth engines. It is nothing other than spatially unbalanced growth. This follows already from classic and new agglomeration theory. All that one can envisage is a relatively even distribution of industrial agglomerations and tasks among member states. Regionally inclusive industrial growth would be the more accurate designation of the desirable type of growth than the ‘balanced industrial growth’ that features in some African strategy documents. We saw that there are strings of systematic arguments why South–South regional trade agreements are rather unlikely to generate the synergies and convergence that can be expected from such trade arrangements among advanced economies. These arguments suggest (a) lower general levels of industrialization, (b) substantially higher degrees of regional industrial imbalance, (c) lower speed of convergence. More than in agriculture, industrial imbalance at low levels is the main expression of lopsided regional growth and often creates outright monopolies in Africa. In consequence, higher centrifugal forces in the region are observed because alternative economic opportunities are scarcer than in unions of advanced economies. Such regional imbalance cannot be tackled by a benevolent hegemon alone—aside from the fact that there is currently no such leader in Africa. It requires joint political action. The ambitious projects of regional economic communities on the continent imperatively need common industrial policies to succeed; otherwise, the cost of integration can barely be justified. This is the second argument for common industrial policy. It focuses less on differentials of institutional capacity than on principles for regional inclusiveness.

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7.3.2 Regional Compensation Policies The policy feature required becomes clearer after a short review of established compensation policies. In the presence of unbalanced economic growth, compensation mechanisms are the general policy feature for buying acceptance in economic communities. On a theoretical level, compensatory lump-sum transfer payments can potentially render almost any RTA welfare-enhancing, as it is classically summarized in the Kemp-Wan theorem (Kemp and Wan 1976), and further elaborated by Krugman for the tariff regimes which make such a net welfare increase possible (Krugman 1991). Compensation for regionally unbalanced growth effects can take various forms: 1. 2. 3.

Customs revenue pooling and asymmetric sharing for purposes of general public expenditure Countervailing sector support, namely for agriculture Asymmetric provision of regional public goods, in particular: social services and infrastructure.

Ad 1. There are a few cases of fiscal compensation in South–South RECs in general and in Africa in particular. Until today, the Republic of South Africa has a sufficiently broad domestic tax base to accept—albeit reluctantly—SACU customs revenue pooling and asymmetric redistribution with Botswana, Lesotho, Namibia and Eswatini—the BLNS states. This concession never precluded BLNS from occasionally erecting irregular tariffs and quotas, e.g. against South African flour. The WAEMU/UEMOA adopted a similar revenue sharing arrangement in 2000, with better-off Côte d’Ivoire and Senegal retaining only 12% while collecting 60% of the region’s customs proceeds (Deichmann and Indermit 2008: 47). In the same spirit, ECOWAS mounted a Fund for Cooperation, Compensation and Development right from its beginnings. This Fund was not to be supported by the ordinary community budget or customs revenue, but by contributions from member states and other possible sources. In addition to various sectoral tasks, the Fund was meant to asymmetrically compensate member states for customs revenue losses from REC internal liberalization. It worked badly in practice and was transformed by the mid-2000s into the ECOWAS Bank for Investment and Development (EBID), an independent financial institution (Gans 2006: 75–80). Ad 2. The Common Agricultural Policy (CAP) of the EU is the best-known mechanism which serves, among other purposes, to compensate weaker member states for the industrial superiority of a few neighbours. In static comparison, more agriculturebased EU partner states would not even have to be compensated inasmuch as they gain from cheaper access to first-class industrial products, and free movement of labour within a huge common market facilitates equalization. In contrast, African REC member states (a) do not gain such access to cutting-edge products within the REC, and (b) gain relatively little in market scale and scope. From a trade theory standpoint, weaker partners in African RECs should hence a fortiori expect to be compensated

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for their kind participation in such communities. However, such financial compensation is costly,4 compensates another sector instead of industry and basically requires financial resources from prior industrialization. African regional communities barely have such funds at their disposal. Their fiscal policy space for regional compensation programmes remains severely limited, except—theoretically—by inviting resourcerich member states as potential ‘net contributors’ or donor countries to financially assist. Ad 3. Compensatory provision of regional public goods, in particular access to social services and regional infrastructure, represents the third mode to manage spatially unbalanced growth. The European Structural Funds for disadvantaged subregions act much in the same manner. Many such mechanisms represent Common Social Policy (CSP) or Common Infrastructure provision. For African infrastructure, the widely accepted triple or quadruple classification in coastal, resource-rich and resource-scarce landlocked countries contains an explanation for the poor road and rail linkages that especially inland states have in African regional settings. Inland states depend on their coastal neighbours for transport connections, but coastal countries are usually not interested in infrastructure links right to the border of their poor landlocked neighbours (Collier and Venables 2008). Since Rwanda and Burundi joined the East African Community on 1 July 2007, both newcomers bet on the EAC spirit to help them overcome their problem of being landlocked by providing inland infrastructure, including Uganda. Since compensation through sequenced and asymmetric internal trade liberalization is consumed (at least nominally, since 1 January 2010), infrastructure funding in favour of the landlocked states would be one of the few effective compensation mechanisms left.

7.3.3 Common Industrial Policy in African Regions Although it is extremely important for African REC settings, compensation via the provision of social and physical infrastructure in the region has one systematic shortcoming. Lack of industry does not hinge on defective public infrastructure alone. Most modern industries still do not simply spring up of their own accord just because infrastructure is in place. New economic geography (NEG) argues that better infrastructure actually aggravates the geographically uneven distribution of industries in some constellations. For instance, transport corridors are a fine thing for landlocked countries. However, for South–South RTAs we learnt that lowering transport cost can also have a particularly detrimental effect by reinforcing pre-existing agglomeration and leave some member countries with almost no industry. Contrary to what donor agencies usually think, such projects of ‘horizontal’ infrastructure provision are thus not unmistakably positive for regional integration in the absence of other factors that

4 Apart from the fact that it is often a terrible financial waste, as Europe’s CAP has taught taxpayers.

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are essential for the spread of industry.5 Targeted (‘vertical’) industrial policy has to address the problem directly. Plans for joint industrial policy do feature on the menu of regional bodies. However, not everyone appears keen to carry out such Common Industrial Policy (CIP).6 Some regional unions like ECOWAS have harmonized industrial development policy in their founding treaty, but subsequent practical experience has been sobering (Gans 2006: 123–127). The literature on regional economic integration does not help either. Many economists will insist that such an animal does not exist—see any textbook. Why? For those who do not like industrial policy in general, the perspective of one ‘government picking winners’ multiplied by 5, 6, 15 or even 27 member states that would collectively select industries as well as ‘pick locations’ across the region inspires concern, not confidence. Perhaps it would be better to administer industrial policy on a national basis if it cannot be eschewed altogether? The few countries in Africa that actually implement targeted industrialization policies—Ethiopia, South Africa, Rwanda, Mauritius, Botswana—do it on their own, don’t they?7

7.4 Regional Integration Versus Industrial Nationalism In any case, the two arguments above suggest complementing national industrial policy efforts with a common policy, not replacing the one by the other. Industrialization strategies at the two levels should coexist and complete each other. So far, Africa only knows national policies in favour of industry and agriculture. However, their scope necessarily shrinks in the regional context, and this will provide us with another argument for joint policy-making. Largely out of capacity limits to implement truly innovative policies, REC member states across Africa often adopt a defensive stance, trying to shield their few factories

5 This

limitation may explain why even in a regional community with a generous compensation mechanism and fairly good transport corridors and communication, such as SACU, the smaller member states show little gratefulness to the hegemon and regularly resort to the mentioned irregular internal barriers and to irregular industrial imports from globally efficient suppliers. 6 We introduce the term Common Industrial Policy (CIP) for its equivalence with CAP—and also because the acronym for Regional Industrial Policy—RIP—might create unintended associations. 7 Ethiopia, currently the most advanced country case of applied industrial policy in Africa, is not a member of a deeper-integrating REC and is one of the few non-members of WTO in Africa. Ethiopia is a member of COMESA and IGAD—however the former is just a light-integration REC, and the latter is a political and developmental community. It is significant that Ethiopia has still to sign the COMESA Free Trade Area protocol, although the trade-data-basis for tariff reductions has been completed. Negotiations to join the World Trade Organization and the Economic Partnership Agreement with the European Union have not been concluded either. By emulating an unrestricted Chinese trade policy style, Ethiopia can thus afford to both attract FDI and protect national firms by differential policy measures. As a CFTA signatory party, Ethiopia will have to accept shrinking policy space for this former unfettered unilateralism.

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and many farms as well as they can against what they have agreed upon as a collective—the regional market. National industrial policy-makers might not have the clout and the means to promote new and better factories. Lacking institutional and financial capacities to actively promote new policies, they resort to protectionist means, even within their RECs. This is legitimate to some extent. Diversified industrial nations can afford to be generous and give up entire industrial sectors in the course of their industrial history. However, weaker accession states hardly have anything to offer to the region at the inception of RECs—unless you still believe in classical comparative advantage theory (or Heckscher–Ohlin logic). As a result, they defend the handful of (agro-)industrial producers they have: the grain or oil mill, the brewery, the cement factory, the textile mill. The REC internal deferred or staged tariff reductions and newly erected tariff- and non-tariff barriers are commonplace examples of such industrial defence. Narrowly defined national procurement rules or local content requirements are others. From a theoretical vantage point, such defensive industrial policies hardly come as a surprise. They react to the systemic limitations of industrial division of labour in regions mostly composed of very small open economies. However, after a relatively short inception stage following the conclusion of the trade agreement, such defensive policy is no longer conducive to regional integration and even runs counter to the very objective of regional integration. Here at low industrial levels, a vicious circle can set in, which is known from protectionist spells in the global economy. In addition to misguided food security strategy—which disturbs the agricultural market (see above)—shielding ‘sensitive’ products against competition from factories in the neighbouring countries is largely responsible for the pervasive regional market distortions. Something more fundamental is at work beyond these empirical observations. The general problem can best be gauged by looking closer at a regional community of advanced economies currently in deep trouble over related issues: the EU (Box 7.1). Box 7.1: The conundrum of industrial policy in an advanced economic union In the European Union, industrial policy remains largely a national prerogative so far (see below), but full-blown national strategy to boost industry has a muchreduced room for manoeuvre. Each of the four basic freedoms (free movement of goods, services, persons and capital, along with the freedom of settlement) shrinks the classical arsenal of protective industrial policy. EU competition and public procurement regimes restrict it still further by diminishing the policy space for targeted subsidies, at least when privileging national suppliers or defending national monopolies. Member states must be careful not to step over the European red line banning discriminatory national treatment when, e.g. subsidising renewable energy and domestic manufacturing of its components. Advanced regional integration contradicts most national industrial policy. The two policy vectors simply move in opposite directions: the more economic

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integration advances, the less political space remains for national industrial endeavour. This took a highly ironic turn in the context of the UK’s Brexit decision. Successive British governments of the last several decades despised industrial policy, a position which was largely coherent with the EU orientation. UK’s then Department for International Development conveyed the same message to developing countries in Africa. Now, with the departure from the EU, the British government appears satisfied to re-conquer policy space for sovereign industrial policy, and so does the Labour opposition with its programme of subsidies for ailing industries. Recall that pleas for a ‘left Brexit’ also stressed that the ban on discrimination or favourable treatment already contained in the Treaty of Rome and in liberal EU competition law prohibited most of the kind of structural policy that would help both declining and new industries. The question whether the exit advantages outweigh those enjoyed under a free European market brings us back to the core issue: the staged model of regional integration is based on the key assumption that the growth potential from free movement of factors and goods with no discrimination among firms in the region by far outweighs relinquishment of national policy space, here: for industrial support. If the effects of the two could be quantitatively measured against each other, the answer could be left to empirical evaluation. One critical consequence for unions of advanced economies remains. By their historic preference for agrarian over industrial sector support, both the European Union and the USA have delivered far more aid per farmer than per industrial worker, and close to nothing for fragile firms in declining industrial districts. Policy preference for a powerful Farm Act over a toothless Trade Adjustment Act and its European equivalents is contributing to the current collapse of societal cohesion and political stability on both sides of the Atlantic. This requires a collective policy redesign of its own. However, returning to national protectionist policy would be systematically the wrong answer, and thus not the take-home lesson for Africa from a US policy disaster and a European dispute. In order to demonstrate this as a matter of principle, let us recall an argument already presented above: if national industrial protection is (re-)admitted, a powerful economy like Great Britain can do a great deal on its own while at the same time losing overall. But within an economic union, the weaker member states—the archetypical resource-poor landlocked countries—have a priori less or no means for proactive support. Basic economic imbalance is reproduced at the level of fiscal leverage. This applies to Europe but a fortiori to unions of developing economies. In this respect, Botswana cannot compete with South Africa, any West African country not with Nigeria, and even Tanzania barely with Kenya. Their only means left would be recourse to REC internal trade barriers, simply outlawed in the EU and a deadly threat to the cohesion of African RECs.

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For developing country groups, a somewhat more nuanced stance may be in order, given (a) extreme initial discrepancy and (b) low expected convergence among member states. Offering its own and foreign investors a fully integrated goods and services market of sufficient size for economies of scale represents the paramount advantage of a regional community. Following a short transition period this advantage of a sizeable market must not to be undermined by endless exceptions to the rule. Protective industrial policy in the interior of a REC must be abandoned. Competition and procurement laws may, however, be modulated to fit proactive industrial (and other sectoral) policy needs of single member states. In the transition from stage No 4 (in our numbering) to stage No 5 (the Common Market), any southern REC may want to weigh up what to take on board from the menu of options for deep economic integration and what not, not to mention the menu of monetary integration (stage 6). Here it becomes a matter of degree. In the end, how much deviance from the idealtype of full regional integration any given REC can afford without jeopardizing the community’s attraction for investor remains an empirical question. In other words, the antagonistic trends of integration and industrial nationalism underline the ever-growing importance of a common industrial policy for an advancing REC as the margin for national efforts naturally shrinks. In comparison with other sectoral policies, the margin shrinks early in the integration process. This is the third argument for regional industrial policy.

7.5 Industrialization Strategy Implicit in Trade Policy 7.5.1 The Common External Tariff For a final argument, we observe that African RECs have actually engaged in joint industrial policy for some time, but they do it under other headings, and rules of thumb replace explicit strategies. Most of this effort falls under trade policy vis-à-vis third parties. In customs unions, the common external tariff (CET) represents not in name but de facto a first package of joint agricultural and industrial sector policies. The implications can be discussed by taking another look at the tariff systems with their three- to five-band structure. The example of UEMOA and ECOWAS is fairly characteristic for the schemes in place, with the exception of the fourth (de facto: fifth) band, which originated from a Nigeria-driven debate in the larger ECOWAS about the need for some infant protection (Table 7.1). The EAC, for comparison’s sake, has only three bands with 0, 10 and 25% for consumer goods. The above-mentioned category of sensitive products carrying various tariffs, mostly higher than in the regular bands and at the discretion of member states, has to be added to the schemes. Such exclusion lists are part of the CET. What is characteristic for these schemes? They manifestly combine several criteria. The first is the degree of product transformation: basic, intermediate, final. The second is perceived social necessity, mainly between categories 0 and I, with

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Table 7.1 ECOWAS/UEMOA common external tariff Category Nr

Description

Tax rate (%)

Nr of tariff lines covered

Percentage of tariff lines (unweighted) (%)

0

Goods of essential social necessity

0

85

1.4

I

Goods of primary 5 necessity, basic raw materials, equipment, specific inputs

2146

36.4

II

Inputs and intermediate products

10

1373

23.3

III

Final consumption goods

20

2165

36.7

IV

Specific goods for economic development

35

130

2.2

Source UEMOA (2017)

agricultural staples mostly free of duty. The third criterion is a perception of the productive input structure, with a difficult-to-decipher assessment of basic inputs, intermediate goods and equipment (machinery and vehicles). It leads to classifications that can run counter to the first criterion. The fourth and last criterion is a one-by-one categorization of certain goods of higher complexity that member countries (should) produce themselves. When regional producers are not yet considered to be fully competitive, imports are hit by 35% duties. These schemes are not protectionist in any tangible sense. They are a political amalgam. Globally, they are the results of multilateral trade liberalization in the 1990s, often with structural adjustment programmes, hence of general tariff reduction, then concerns with food security or fiscal concerns, and most recently, ideas of industrial development via selected—and in actual fact quite limited—protection of the common market. In line with the three last motives, the typical tariff system has an additional sixth category comprising certain goods which are placed on a discretionary exclusion list of sensitive products, with still higher tariffs or quantitative restrictions. In the light of modern trade theory debates, the multiband structure of CETs can provide a practical answer to the long-standing objection against southern RECs, where even the fittest producer is globally at an intermediate level, at best, but can capture any potential gains only with important consumer losses. As mentioned in sub-chapter 4.1.1. ‘Regional trade with complete specialization’, the four-band structure, if managed properly, creates exemptions for import goods which are needed most in production or consumption, while shielding some products with a domestic

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production potential. In other words, a well-structured CET of African RECs represents an essential part of the practical alternative to the recommended hub-and-spokes model of free trade with a Northern industrial hegemon. Therefore, the tariff schemes represent a generic idea of how best to combine trade liberalization with some agro-industrial development under a moderate protective shield. Although these schemes resemble each other across Africa (and beyond), they do not originate in trade theory, despite some hints in early development economics. As no theoretical optimum-tariff assessment tells policy-makers whether tariff reduction goes too far (by near-total exemption) or not far enough (by a tariff of 35% for all ‘developmental’ goods), common regional policy stands to gain from making explicit the industrial policy assumptions and conditions which guide the confection of tariff lines in some sort of ‘Annotated Tariff Schedule’. This is why the UN Economic Commission for Africa has launched the idea of underpinning the management of the tariff band structure with two well-known elements from trade theory: (1) revealed comparative advantage (RCA)—or a more dynamic device—as a simple empirical measure for the sectors in which a country/region is competitive; (2) effective rate of protection (ERP) as a composite measure of the protection of an industry’s end product and its imported inputs (UNECA 2017b). There is a long-standing textbook discussion on effective protection in the context of the alleged anti-export bias of import protection that lies outside our purpose here. Since effective protection calculus often leads to policy recommendations to lower tariffs on imported inputs even further, the concept is contested,8 but it is a formal measure at least. Without any such corroboration of de facto industrial policy, regional organs regularly run the risk to fulfil the wishes of well-connected economic actors, defensive as they usually are—in particular in the sensitive product lists. Regional policies then routinely become the summation of national requests—a wish-list approach. Rendering the assumptions behind the tariff schemes explicit becomes all the more important, as these already fairly liberal schedules are now subject to interregional North–South trade negotiations which strive to further reduce tariffs in order to produce near-reciprocal free trade agreements. The EPA process, which will be discussed in Part III, is testimony of the trend. African REC administrators should know in all detail the strategic reasoning behind the schemes they have to defend (or abandon).

7.5.2 Rules of Origin Defining good rules of origin (RoO) is another example of actual CIP. Casuistic versus generic RoO definitions represent the main policy alternatives in Africa: SADC-style 8 See

the debate on the appropriate tariff structure in the AfCFTA, where UNECA has come forward with a similar plea, however for Africa-internal tariff liberalization, which is a priori less controversial.

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case-by-case, industry-by-industry fixing of rules is the defensive mode, whereas defining quotas for externally sourced inputs across industries with generous rules of cumulation can be a more promising approach to industrial development and to global division of labour.9 Another common policy layer is the tedious, industry-specific work of harmonization of product standards, at the level of the Single Market Area. Conceptually, such policy does not appear as industrial policy as the trade measures described hardly rely on elaborate industrial strategies. At best, they represent implicit regional industrial policy.

7.5.3 Inter-Regional Trade Negotiations The negotiation of inter-regional trade agreements also pursues common industrial development goals—again mostly tentative or implicit. Negotiation of bi-regional trade agreements such as the Economic Partnership Agreements with the EU represents infant common industrial policy, yet not, strictly speaking, a strategic one, as the negotiators found out ex post facto, in 2016, when Nigerian and Tanzanian presidents suddenly discovered that their national industrialization plans might suffer from what had been jointly agreed with the EU.10 This will be discussed in detail in Part III. Ideally, efforts to jointly conceive sustainable agricultural and industrial policies would precede trade negotiations both in Africa and in Europe, demonstrating that trade policy is subordinate to sectoral strategies for the real economy. In Europe, this relates mainly to the common agricultural policy which actually dominated trade policy—albeit not always in the right direction, mildly put. In Africa, a long external sensitive products list and an external infant industry protection clause make strategic sense when they are backed up by agro-industrial policy. The design of negotiations should be guided by a clear understanding of (a) (b) (c)

which national and regional industries and trades have matured for a competitive free trade environment, measured by their revealed comparative advantage which existing ones will need continuous trade support despite competitive efforts made which new ones are targeted for creation in an overarching framework of upto-date inclusive, innovative and sustainable growth strategies.

Without such comprehensive policy, there is no criterion for what to place, e.g. on the exclusion list, except those industries (1) who have been around for a long time, or (2) where imports generate important customs duties or (3) those that are designated 9 Read

G. Erasmus (in repeated TRALAC communications) on how the difference between the SADC- and the COMESA-style of setting rules of origin lingers on in the TFTA negotiations and actually holds them up. 10 The EAC recognized in an internal strategy paper at the end of the EPA negotiations that it would have been better to have an operational industrial strategy beforehand, and that future trade negotiations should be guided by such strategy.

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in lofty terms as new local industries. Current African malpractice typically violates an essential design principle of industrial policy by erecting protective barriers first, then waiting for industries to eventually spring up. Proper sequencing starts with a comprehensive look at the binding constraints for new industries and subsequently designs accompanying trade support measures, if necessary. Repeated attempts to ban imports of used clothes throughout the history of African trade policy exemplify rather an ad hoc approach than an organized strategy for reviving Africa’s garment industry. Ideally, North–South bi-regional trade negotiations should precede or, at least, be led in tandem with national and regional IP design and re-design. In the past, all this should have been based on broad public–private dialogue (PPD). Obviously, it was not this way round. In Europe, the subsequent CAP reforms were surrounded by some sort of PPD and had an immediate impact on trade policy—though again not always in the right direction. Most African countries have some form of agricultural strategy, conceived in the framework of CAADP; quite a few have industrial policy documents, but very few if any of these strategies and policies have been operational enough to guide trade negotiations. First spontaneous, then more and more organized non-governmental protest replaced a coordinated PPD around such policies. The fact that a Regional Economic Community which climbs the ladder of global trade integration must, by definition, conceive common traits of real economic strategy constitutes the fourth argument in favour of common industrial policy effort in RECs. Without this step, the REC will appear aimless in international trade policy. Understanding this sequence and rendering it operational testifies to successful Trade Negotiation Capacity Building (TNCB).

7.6 The Sum of Arguments: Why Common Industrial Policy? A common industrial strategy in an African region has remained a largely unknown species, at least as long as industrial policy in general has been anathema. Without any doubt, forward-looking industrial strategies are among the most challenging sectoral policies. This is why they are so rare in practice. It appears quite surrealistic to multiply the policy challenge by six or fifteen in an African REC considering all the harmonization issues among the member states. However, the fourfold argument advanced here implies that REC members in developing Africa are forced to take a common industrialization approach. Otherwise, they risk the very existence of their community—systematically more than in unions of advanced economies. Four items thus make for the needed transition from national industrial policy in the region to regional industrial policy: (1) (2)

capacity constraints for both national industry and national industrial policy in small developing economies need for regional compensation of industrial imbalances

7.6 The Sum of Arguments: Why Common Industrial Policy?

(3) (4)

137

shrinking policy space for industrial nationalism, in the sense of protectionist measures supporting policies that are regional by nature and need industrial strategizing as their underpinning.

In empirical terms, the commercial and industrial policy-making capacity at the regional level in Africa is still lower than at the national level, at least in comparison with the personal and institutional capabilities that regional hegemons can muster. But this is a poor argument for maintaining the status quo. Because manufacturing industry is more demanding in terms of infrastructure and service conditions than other sectors, in particular when forming value chains across the region, a regional industrial strategy may be used to trigger and fence in deep integration issues other than industry per se: electricity pools, transport corridors, communication networks and—most recently—common digitization strategies. An ambitious joint industrial strategy thus has cross-sectoral effects in the region. There is one final argument in favour of common industrial policy although it, much like the cross-sectoral effect, systematically ranks lower than the four key arguments.

7.7 The Region as Political Lock-In Mechanism? The last argument relates to decision-making. Industrial policy in the wider regional space is intricate because it tries to play at two levels simultaneously, national and supra-national. And yet, a true CIP project would have the advantage of not relying on the support of one government alone. This matters in particular for the type of economic policy, which is—by definition—selective and thus discretionary. Discretionary political action invites lobbying and corruption. When engaging in industrial policy, any single African government and administration is exposed to economically suboptimal rent-seeking behaviour, which for example may undermine trade protection for domestic industries or, conversely, maintain it for too long. Based on a mutually binding agreement, several REC member countries can neutralize such effects, especially if the approach is supported by the donor community or by binding schedules written into a trade agreement with extra-regional partners.11 11 What the EU is determined to do in EPA negotiations is, to a very large extent, nothing other than locking in far-reaching liberalization measures. Such a possible lock-in effect of RTAs between large/rich and small/poor countries was also described in Panagariya’s overview, see again (1999: 490). In the same context, World Bank analysts point to the example of the EU-Cameroon EPA and its numerous deep integration issues: ‘FTAs between large countries and smaller developing countries may serve as ‘policy anchors’ by acting as a mechanism for the smaller developing country to make credible commitments to policy reform in different areas which they might not otherwise make’ (Fiess, Aguera et al. 2018: 66). They also refer to the case of NAFTA and Mexico. This use of North–South trade agreements as a policy anchor is problematic, but anyone who regards it as a typical case of neo-colonial machinations is invited to consider progressive quests for human rights clauses in EU trade agreements—which are also policy anchors (see Part III).

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Since the new beginnings of economic integration in the 1950s, it has been known that regional unions can work as lock-in mechanisms. Already the Treaty of Rome effectively sealed inter alia the fundamentals of competition policy in Europe. In the following decades, European institutions have worked to a remarkable extent as ever-stronger anchors for policy changes and choices in many fields of regional cooperation, in particular consumer and environmental protection. In Africa, this has mainly worked in the purely political field. The rather firm stance of the African Union against military coup d’états has worked as a political ratchet. Based on this stance, ECOWAS has successfully embraced political lockin for democratic change and acceptance of election results in West Africa, also placing military power behind it.12 The experience can still inspire economic policymaking in Africa, in the present case: targeted sectoral strategizing. While national manufacturers or traders may tend to get around selective decisions in collusion with a few officials in their country, partner countries in the REC have no interest in maintaining subsidies or protection for single beneficiaries beyond rational limits or dropping them in favour of, say, import trader interests unless they are compensated, which in turn makes collusion costlier.13 Where national governance in Africa is marked by democratic by-partisan policymaking—as in Ghana, Nigeria or Kenya—the risks are high that decisions by one government will be nullified by the next one. Footloose industries can swiftly relocate, but such discretionary shifts are pernicious for long-term investment based on targeted incentives. For example, the Nigerian government of 2012 launched the National Automotive Industry Development Plan (NAIDP), which incentivized local car assembly and triggered some renaissance of the car industry. The Buhari government has not pursued the initiative and sent the industry into disarray. Ghana’s ‘One District One Factory’ (1D1F) initiative has avoided a similar fate just because the government stayed in power after the 2020 election. If such industrial policies were mounted regionally with a regional supply chain and binding regional agreements, things would look more convincing for investors. This kind of vision of joint responsibility for binding engagements looks distant for today’s RECs in Africa. At present, regional economic communities in Africa have little supranational authority and no collective mechanism for imposing economic sanctions. By consequence, regional integration seldom works as a joint economic policy anchor in Africa, not even in the FCFA monetary areas, where a third party has acted as custodian of its own economic interests up until now.

12 Fine and Yeo in (Oyejide, Elbadawi et al. 1997) pondered the importance of African RECs as political lock-in mechanisms compared to their economic benefits, namely provision of a wellintegrated regional market. Although the two dimensions are not exactly comparable, the authors were factually right: the REC ratchet works quite well when it comes to imposing respect for electoral outcomes and against military coups, namely in West Africa, but not so much yet in economic terms. 13 The obvious example to the contrary is the EU Common Agricultural Policy, which has jointly operated a lock-in of suboptimal and noxious incentives for decades, but the colossal financial resources required for such a joint government failure finally set substantial reforms into motion.

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139

7.8 The Formal Status of Common Industrial Policy Finally, to bring the argument for African CIP home, a comparison with the policy status of industry in other world regions and in particular in the EU might help. Regional communities across the world subdivide policies into several boxes labelled with terms such as exclusive, subsidiary or joint activities. Contrary to what was stipulated in the above, industrial development is normally pursued by every member country on its own, and it is the individual country which has the tools and offices for investment promotion at hand, unless there are also sub-national levels of administration like the US federal states or the German Länder. Among advanced economies, industrial policy must not normally be the prerogative of a regional body. The Lisbon Treaty of 2007, for example, subdivided the policies of the European Union into three categories: 1. 2.

3.

Exclusive competence of the Union, with management of the customs union, competition and the commercial policies as the most relevant areas Shared competence, exercised when the Union either pre-empts members from exercising theirs (best known example: the Common Agricultural Policy) or does not exclude members from carrying out theirs even when there is a common policy in place (well-known example: development aid, but also research and technological development) Supporting competence, where the Union can carry out actions to support, coordinate or supplement member states’ actions in areas such as education, (largely) health and industry.

Legislative and executive action of the Union in the areas 2 and 3 is governed by the principle of subsidiarity. Its foundation in economic theory reads: the higher the aggregation level of public service provision, the more individual bundles of preferences diverge. Therefore, the Union shall act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the member states at their own three administrative levels (central, regional, local) and should for reasons of scale be better achieved at the supranational level. As industry is in the third and least relevant box, an EU industrial policy initiative of 2010 mainly complemented national efforts and proposed voluntary coordination to the member states (European Commission 2010a). It led to few operational consequences. For a long time, the EU has had no common industrial policy whatsoever.14 In African RECs, industrial policies or strategies are similarly recognized as a national privilege. An example for this is SADC, nominally ‘moving industry centre stage’ some years ago. This move simply described the collective intention of the individual member states to give manufacturing industry more importance than before, but officially, the ‘formulation and implementation of industrial policy is essentially a national prerogative’ (Southern African Development Community 2012: 4). In 14 Again,

common EU trade policy is guided by sector policy elements—e.g. the imposition of safeguard tariffs on Chinese steel or solar panels, and the creation of Airbus Industries was a CIP exercise, yet just in the variable geometry of some member states who cooperated.

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contrast to this example and in the light of the four arguments above, we argue that regional industrial policy of a South–South community should not be categorized as just supplementing and should be lifted to the status which agricultural policy has had in the EU since inception: shared competence, with legislation at the REC level having precedence over national laws. In the emerging EU, the Common Agricultural Policy (CAP) became the first and now oldest joint policy because farming was considered to be one of the most vulnerable and yet essential sectors—something which in turn applies to both agriculture and industry in Africa. In South–South RECs, industrial policy gets a privileged status based on our arguments, as activities defined here are core to assure the economic cohesion of the union. In weakly industrialized regions, the regional industrial policy, though still subsidiary, is systematically more important than in industrial areas of the global North. By way of consequence, re-adaptation of national policies along the imperatives of the regional integration will become a mandatory, not a voluntary exercise. When we say that the EU has not had a common industrial policy, it must not be forgotten that the history of European unification started functionally with two sector policies. First came the European Coal and Steel Community, as coal and steel mining were considered strategic industries at the time. It was closely followed by joint nuclear industry support (EURATOM)—in the long run a monumental policy failure, but at least a common industrial policy. Later, when the emerging European Economic Community took precedence over the two sectoral bodies, bold industrial strategy withered away or subsisted in the area of harmonization of industrial norms and standards which marked the transition to the single market area. This has definitely changed again, although the status of ‘supporting competence’ for EU work on industry is unlikely to formally change. However, digitization issues, from creating a central European server structure (the European cloud) to regional digital networks that can accommodate Industry 4.0, give regional cooperation far more importance. Interestingly, the debate in the European Union which started in 2017 with proposals of the Juncker Commission on ‘A renewed EU Industrial Policy Strategy’ reflects the regained importance of joint industrial strategizing—even for a group of advanced economies (European Commission 2017b). In 2019, EU experts presented a comprehensive report with recommendations for Important Projects of Common European Interest (IPCEI) in six strategic areas. Based on this preparatory work, the new European Commission (2019–2024) swiftly issued a framework document entitled ‘A New Industrial Strategy for Europe’ in March 2020 (European Commission 2020). It explicitly introduces the need and contours of a EU common industrial policy. While careful not to overstep the lines drawn for ‘supporting competence’ and to present the EC mainly as an enabler and regulator for the private sector, the plan’s broad lines are bold. Departing from the need to jointly manage ‘the twin ecological and digital transitions’ it sketches the fundamentals of Europe’s industrial transformation, identifies core projects— essentially the IPCEI—and introduces specific joint policy and financing tools. With regard to the linear model it is relevant to note that the EC still recognizes a need for ‘single market Eeforcement’ by breaking down single market barriers, most acutely

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for cross-border services. Institutionally, the European Commission will ‘co-design and co-create solutions with industry itself, as well as with social partners and all other stakeholders’—thus in ‘industrial ecosystems’ driven by joint public–private policy-making. To make perfectly clear that the Commission intends to change the rules of the game, it announces a new framework for State Aid, read: for the strategic industries, in both the EU and at the WTO level—a strategic issue not among those covered by the AfCFTA. Indirectly, a still broader debate on regional deepening in Europe covers industrial topics as well. Initiated by president Macron, one key proposal is to deepen integration in the EU at large and in the Eurozone in particular with missing elements of an economic union. This is because the monetary and economic unions are more closely intertwined than the subsequent stages 6 and 7 of the linear model suggest, as has been emphasized by the French president. Regional investment is at the core of this development. Conservative integration sceptics located in Berlin argue against the entry into a ‘transfer union’ (which is polemical jargon for something the EU has long been). They have one cogent argument against additional financial transfers via a proper Eurozone household: that this will not directly address the massive EU internal differences in competitiveness regarding industry and productive services, which is nonetheless the root cause of dramatic regional divergence. Though not properly recognized as such, especially not by the German critics, differential support for industrial competitiveness is now de facto re-entering the stage among advanced economies on how to create youth employment in the South European member countries. In consequence, all sorts of strategic industrial and digital projects are being discussed. African RECs should take note.

Chapter 8

Essentials of Common Industrial Policy

Abstract A set of sixteen principles of modern industrial policy is derived from the literature for application to entire regions. Such policy strives to create industrial commons and to rectify market failures which cannot reasonably be expected to self-correct over time. This chapter creates a workable typology of genuine regional industries, distinguishing two main types: Type I is the outcome of targeted selection and Type II of broad investment promotion. A ‘dual core’ of both types is appropriate to most African industrial ecosystems. The chapter goes on to clarify the distinction between regional production networks and stand-alone ‘lighthouses’. The incentive system for regional industries is examined, and the distinction between national and regional incentives is elaborated. Practical conflict between allocative efficiency, which most often favours existing industrial hubs in the African regions, and distributive equity is examined. Cross-border policy dialogue has to identify the most binding constraints for new industries at both regional and national levels. This ideal-type policy is juxtaposed against the current practice of ‘buy national’ campaigns in East Africa.

Neither market forces, nor efforts at conventional regional economic integration have succeeded in bringing industrialization and cross-African trade decisively forward. This speaks for resolute industrial policy. However, African regions would not just benefit from having more industry and more (agro)-industrial value chains in their production patterns; arguably, deep-integrated regional communities will not even exist without an industrial transformation on a regional scale. In this sense, we have deduced the need for joint industrial policy in African RECs above. Regarding implementation, common industrial policy is twofold. It reproduces the main features of the emerging consensus on modern industrial policy in general and integrates specific regional policy features.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 H. Asche, Regional Integration, Trade and Industry in Africa, Advances in African Economic, Social and Political Development, https://doi.org/10.1007/978-3-030-75366-5_8

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8.1 Design Principles of Industrial Policy in General Good industrial policy is difficult to implement. Actual country cases are numbered, and they cluster in East Asia, not in Latin America or Africa. Therefore, scepticism has been the norm in economic science and advisory bodies. However, the old controversy on industrial policy has quieted down in the last 15 years or so. There are still the ritual objections: governments cannot pick winners; discretionary policy is prone to corruption; only white elephants remain, etc. Over the years, these objections have been countered with convincing rejoinders. In the light of this re-evaluation, an important body of literature has compiled essential ingredients for successful industrial policy.1 Although scientific production on the issue has recently shrunk considerably—as if the problem were settled—proponents of the debate tend to overestimate the degree of precision and rigour attained with respect to both justification and implementation of new industrial policy. One example may suffice. ‘Infant industry protection’ is widely accepted again as the time-honoured key argument for some industrial interventionism, dating back to Max Corden (1974) and even to John Stuart Mill (AfDB 2004). But closer examination reveals that it is no good reason in itself: some infant industries grow by themselves, others do not; they grow up in certain countries, in others they do not. ‘Infant industry’ is a proxy for a range of very different cases where markets often do not work properly for industrial development. This notwithstanding, there is now a tentative list of industrial policy essentials. At the top of the list is recognition that industrial policy-making aims at two main deliveries: • Industrial commons, that is: the creation of genuine public goods (such as the Internet or a global positioning system); • Correction of market failures that depress industries and are by definition not self-correcting. Industrial policy does not by definition need the observation of a market failure as its supreme justification. In advanced economies, the state has historically not concentrated on repair work for markets alone, but has initiated core industrial programmes in its own right, as research on modern industrial history has made clear (Block and Keller 2011/2016; Mazzucato 2013). Today, steering sustainable development along new lines of R&D is arguably the highest expression of the first goal. This notwithstanding, corrections of market coordination failures still represent the bigger part of actual industrial policy interventions. In pursuit of this double objective, governments are well-advised to look for allies in the private sector as early as possible and 1 See inter alia: (Altenburg and Lütkenhorst 2015; Chang 2002; Cimoli et al. 2009; Lall 2000, 2003,

2004, 2006; Page and Tarp 2017; Rodrik 2004, 2007; Weiss 2011; Whitfield, Therkildsen, Buur et al. 2015), building on the classical analyses of the East Asian ‘tiger’ experience in (Amsden 1989; 2001; Wade 1990, 2006). For the ensuing range of policy options, see Szirmai, Naudé and Alcorta (2013), and for a summary of where the debate currently stands, see Asche and Grimm (2017). For work on a taxonomy of industrial policies in Africa, including the attempts at CIP see African Union Commission and OECD Development Centre (2019).

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accept that most of industrial development should be private-sector driven anyway. This kind of thinking translates into Table 8.1 of design principles of industrial policy. Despite their apparent plausibility, the design principles still require further explanation and refinement,2 but the table enumerates most of what contributors over the last ten years or so meant by modern industrial policy. The table comes closest to a summary of both the historical success stories and a consensual definition of future policies. It has three main features: 1.

2.

3.

Literally all principles are necessary to create an effective national industrial strategy. If just one element is omitted from the design, purposeful industrial promotion risks going astray, in particular in developing countries. By the same token, the compilation can be used to examine available industrial policy/strategy documents as to the completeness of their design. For example, it has become commonplace in part of the literature to say that the state can do industrial policy in four different ways—as a regulator, financier, producer and/or consumer. Surprisingly three essential functions contained in the table are missing here: planning, coordination and evaluation. This makes for a total of seven. There may also be cases of heuristic, messy, opaque or ‘fuzzy industrial policy’3 that somehow work with fewer functions or principles, but this refers to a looser category of industrial units (Type II projects, below). The definition avoids the pitfall in the literature of defining modern industrial policy in terms of itself and its opposite. Providing an enabling business environment to all investors alike is crucially important for manufacturing, but it does not as such constitute industrial policy. The same applies to attempts at ‘horizontal industrial policy’ (Weiss 2011). Anything that helps all industries and agriculture across the board is well and good, but true industrial policy derived from the double objective to help create specific commons and to correct specific failures is ‘vertical’—and at best diagonal with regard to certain trajectories of industrial learning. An exception is represented by the numerous cases in the literature where ‘horizontal’ measures in infrastructure reveal themselves as ‘vertical’ because they target certain industries more than others. Industrial policy design along the lines retained encapsulates further operational consequences for (1) content, (2) actors and institutions, (3) process and (4) tools of industrial strategy-making.

Readers might, however, be surprised not to find any binding recommendations which are content-related in that they deduce a specific industry mix. A well-defined 2 To

give one example, sunset clauses (Principle No. 12) are built on forecasts when infant industry stages end and established industries have emerged (to avoid the term ‘mature’ industries, used differently). However, the definition of an established industry—an industry that does not need targeted policy support anymore—is not straightforward. Take the example of the flower industry in Ethiopia, which crucially relied on both industrial policy of the government of Ethiopia and targeted support from the Netherlands. With the whole value chain from packaging industry to competitive air transport now in place, has it now become an established industry even though profitability still hinges on wages near the international poverty line? 3 My expression, reflecting the empirical analyses of the four country cases Mozambique, Tanzania, Ghana and Uganda in Whitfield, Therkildsen et al. (2015).

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Table 8.1 Design principles of industrial policy Principle

Explanation

1. Develop a shared vision of the country’s industrial future

Joint task of highest authorities, parliaments and private sector. Defines the role of national industry in changing patterns of globalization and with respect to goals of sustainability

2. Try to anticipate structural change of industrial production, employment and resource use

Analysis of structural change as key tool for sound industrial planning which tries to define a developing country’s place in ongoing global change

3. Focus on industrial commons or market coordination failures that cannot be expected to self-correct over time

Proactive focus instead of purely reactive policy

4. Search collectively for competitive advantages/national self-discovery of hidden industrial strengths

Organized as structured and evidence-based public–private dialogue (PPD) aiming at rational choice of industries

5. Target selected industries, defined by their precise sector, size and space/location (‘triple-S specific’), not ‘industry’ or ‘manufacturing’ at large

Essential difference to standard PSD, Doing Business support or general infrastructure provision

6. Target mainly new production lines with Enables technological and economic learning, positive spill-over and demonstration effects albeit not as an exclusive focus in developing economies as mature industries matter as well (‘dual core’) 7. Identify most binding constraints (financial and non-financial) that cannot be overcome by market forces

Another result of applied research and structured PPD. Includes adaptation of other public policies, e.g. education

8. Design incentive system specifically for selected industries

Responds to identified constraints. Financial/ fiscal and non-financial advantages shall not be the same as for promotion of FDI in general or in EPZs

9. Establish social/labour, ecological/sustainability standards to be observed

Practical application of the sustainability goals enshrined in the national vision of industry

10. Clearly define benchmarks for success and Based on micro-economic and export failure, to be publicly communicated performance, possibly combined with benchmarks for job creation 11. Gradually expose new/renewed industries to international/global competition

In order to avoid unlimited protection, as in old industrial policy or fixed sensitive product lists

12. Built-in sunset clauses for public support, and support cycles to start over

idem

13. Autonomous steering agency with high technical (economic and engineering) competence

Ideally with able counterpart structures of private sector associations

14. Highest-level principal to provide leadership and to oversee implementing agents

Leader supported by steering agency, in order to avoid typical principal-agent problems

15. Organized channels of communication and Another function of ongoing PPD, including a feedback loops between government and formal error correction mode entrepreneurs (continued)

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Table 8.1 (continued) Principle

Explanation

16. Rigorous evaluation with transparent results, to allow learning from positive cases and to minimize costs from picking losers

Supports steering agency and national leader(s)

Source own compilation, inspired inter alia by Rodrik’s ten principles, in: (2004: 21–25), by (Hausmann, Rodrik and Sabel 2007), by broad UNIDO work, namely but not exclusively (Günther and Alcorta 2011; UNIDO 2013, 2016); a joint UNCTAD/UNIDO exercise for Africa (UNCTAD and UNIDO 2011); and Altenburg/Lütkenhorst’s five principles and seven key elements/lessons, in: (2015: 54, 180)

selection of an industrial bouquet does not follow straight from theory. Classical high-development theory had such lines of thinking—either as a sequence from light, middle to heavy industries or as a balanced growth pattern meant to contain consumer goods, intermediate goods and capital goods, from scratch. These patterns were associated with a policy sequence from import substitution to export orientation. Although the then newly industrializing countries Japan, South Korea, Taiwan (and South Africa) followed a balanced growth approach quite stringently, today development economics is hesitant to make it a prescription, given the blatant failures mainly in Latin America. Heuristic national self-discovery is favoured.4 Where the future of a whole industry is surrounded by mystery, as for today’s car manufacturers, a good measure of technology-openness needs to be built into the self-discovery. Behind the case of the car industry looms the most dramatic challenge for modern industry, which is somewhat timidly contained in the otherwise consensual principle ‘anticipate structural change’: overcome the historic opposition between industry and environment by greening extractive industries, manufacturing, construction, and energy production. Market-driven structural change does not necessarily work in this direction and should not be slavishly followed. The precept ‘ecologically desirable’ will encapsulate the principle since neutral technology-openness meets its natural limitations here.

8.2 Regional Industrial Policy Design The challenges of industrial policy reproduce themselves at the regional levels and become even more complicated. With regard to (1) content, (2) actors and institutions, (3) process and (4) tools, CIP has to reproduce the best practice of generic industrial policy in a region. As in national industrial policy, regional strategizing has to be selective with regard to the lines of business, firm size and location/space. The essential difference lies in the fact that regional policy coordination does not 4 Upon closer look, real or alleged historical failures do not provide sufficient theoretical arguments

to abandon such sequenced or balanced growth altogether.

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replace national industrial promotion, at least not entirely. Thus, another dimension of public–public and public–private policy coordination arises—between the regional and national level. In fulfilment of the region-specific policy requirements, three main layers of common industrial policy are to be recognized: (A) (B)

(C)

specific common policies targeted at particular sectors or industrial branches adaptation of other, cross-cutting policies to the needs of industrial development, in particular: macroeconomic, investment and trade policy, as well as transport, energy and education policies re-design of national industrial policy and its incentive system along the lines of the agreed regional strategy (‘domestication’).

This exercise in policy coherence rarely works fully in practice.5 Typically, national investment policy and regional trade policy are hardly coordinated with industrial strategizing, as modern industrial policy is still the new kid on the block, with lesser operational relevance than the two first policy areas. Re-design of national industrialization strategies—along with other sector policies according to regional agreements—represents a complex undertaking, still underrated in research and practice. This exercise has fundamental, near-constitutional and technical dimensions. It means acknowledging the superior status of common industrial policy and accepting its targets and prerogatives in the national policy (re)-design. After adaptation of content—that is: rearranging prioritized industries according to the regional hierarchy—the tools have to be adapted. Benefits granted to national or foreign investors must be brought in sync with the regional support structures. In turn, nationally identified industries or support structures may receive regional subsidies when flagged out as ‘regional’. The relationship to national policy efforts can be explained with the example of investment promotion: Any industrial strategy is essentially about investment, both local and foreign, but investment promotion is always a national task, carried out by the Investment Promotion Agencies (IPA) of which we find at least one in almost every African country. In this respect, African RECs are no different from other communities. In the European Union, member countries or even sub-national entities such as the German Länder also compete for the attraction of FDI through their own agencies—interestingly, a case also observable in African federal states such as Ethiopia. Consequently, regional industrial policy will have both a competitive element among member states and a complementary one. Possible contradictions have to be ironed out: the IPA of country X should not attract Brazilian or Chinese investors to an industry earmarked as regional industry for country Y.6 In turn, national policies forego important instruments altogether: firstly, tariffs and quotas; and secondly, other tools—subsidies (for production or export), export 5 For

comparison’s sake, the first two layers can be found in the 2010 EC industrial policy communication, although the EU has no superseding CIP (European Commission 2010a: 4). 6 Such tensions currently act as pull factors for Chinese investment among EU member states, with little overarching guidance from the regional institutions (Schüler-Zhou, Brod and Schüller 2011).

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taxes, selective public procurement (beyond certain thresholds of tenders). This has an intersection with regional competition policy. As an example, internal export taxes and subsidies are in principle outlawed in the EU, along WTO lines. Yet support for new industries and technologies is permitted, e.g. for renewable energies in the course of the Energiewende (‘energy revolution’). While this appears evident on paper, it is far less respected in practical policy design. South Africa’s Department for Trade and Industry spent years drafting ambitious industrial policy plans that contain no relevant mention of the wider Southern African region, let alone precise reference to mutual obligations from the SADC RISDP. The presumed regional hegemon—the regional equivalent to the high-ranking national leader identified in modern industrial policy design—stubbornly refused to play his role.

8.3 Making Sense of Regional Industries When it comes to selecting concrete lines of business for support, the discussion takes a peculiar turn in African regional communities. There is much debate about ‘regional industries’ in considerations about deeper economic integration. ‘Regional industries’ play an almost mythical role in the drafting of industrial strategies—quite similar to the myth around industrial ‘dynamics’ in customs unions. Strategic regional industries are said to play a crucial role in the advancement of African RECs. But what are regional industries? Firms selling products and buying inputs to a considerable extent across the region may be labelled regional industries at large. Encouraging firms to go regional still matters where the intra-regional exchange is low. In highly integrated unions of advanced economies, the term loses its appeal. Labelling all manufacturers who take part in dense intra-regional trade as ‘regional industries’ does not add much value. In African RECs, low rates of internal trade point rather to an idea which runs through this volume: that regionalization requires above all smart policy support and targeted assistance to generate a truly regional industrial tissue. The purposeful interplay of market forces and REC authorities is of upmost importance for what characterizes regional industries. The African sub-regions are home to what are known as ‘regional multinationals’, some even on a continental scale. They are emerging via market forces plus perhaps the general advantage of free trade areas. This is good for regional integration (as long as the multinationals do not become lasting monopolists), but these companies should not be confounded with eminent regional industries either. Analogously, ‘regional value chains’ that are merely sourcing inputs here and there in the wider region, but without politically engineered synergy do not justify the enthusiastic talk of the town entertained by trade and aid officials. In a more meaningful definition, the term refers to two elements: to industries that (a) collectively but not nationally have a competitive or comparative advantage in and beyond the region or whose existence is in the collective interest of the region and (b) are created or expanded as a result of a targeted regional policy effort, depending

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on specific devices such as tailored market access regulations and rules of origin. In comparison with the rest of the economy, they should perform better with regard to. • trade creation in the region • trade diversion to the region, preferably without huge consumer losses • extra-regional export creation, as the ultimate measure of success. Quite a few of these industries will not be competitive or have no comparative advantage revealed in the global market while they are at infant stages. Unmanaged externalities of otherwise competitive industries may lead to unwanted spatial configurations in the region. In this case, trade creation or diversion clusters at certain industrial poles without any regional spread. CIP can make compensatory sense here. Such projects are regional industries of Type I, with targeted support measures tailormade for the specific line of production. Specific REC advantages for ‘green’ and ‘fair’ industries work in the same sense. In the light of earlier protectionist errors in Africa, Latin America or South Asia, modern industrial policy-thinkers urge development countries to focus squarely on ‘new ventures’ which are technologically enabling and have demonstration as well as other spillover effects—in other words: no old industries, please! These are fine words that seem to encapsulate well what ‘Type I’ industries stand for. However, a narrowly understood policy recommendation of the sort is not just out of touch with reality. It is plainly wrong. In Africa, industrial policy cannot exclusively focus on the high end. The peculiar spatial turn of (re)-balancing industrial settlements across a region will not work with some technological leaders either. Therefore, it is still reasonable to rehabilitate existing firms if they are labourintensive, or bring them back to the country if new windows of opportunity open for them in reconfigured globalization. (See concluding chapter) Part of national and regional industrial policy will therefore consist of attracting mature labourintensive industries. For example, a number of African countries had textile or shoe industries prior to the structural adjustment programmes of the 1980s and 1990s, and the few factories that survived often date from the pre-adjustment era of import substitution (Mkandawire and Soludo 1999). Industrial strategy may comprise the rehabilitation and upgrading of ailing factories along the textile or leather chain that somehow survived in the country. Then ‘old’ industries become ‘new’ or renewed ones, alongside actual new firms that flying geese are kind enough to bring from the East to African countries. Most of them also rely on mature technologies. The political imperative is directly related to the demographic challenge in Africa and the need to provide about 20 million jobs per year for young workers. Considering that mass employment for un- and semi-skilled workers in the short- and medium-term ranks high in the target system, one priority will inevitably be set on such mature industries (Type Ia). There is one more good reason to keep such ripe industries on the menu of industrial strategizing. Matured as they might be, traditional manufacturing branches have to adapt to new realities of sustainable production. They have to become less polluting as well as thriftier in resource consumption, more respectful of workers’ and consumers’ rights, and become accustomed to intelligent production modes. Old

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industries also change, and government support will especially be needed in economically weaker countries. This is both a regulatory issue and a question of financial and technical support, where such support is effective, chances to attract industries to a country or a region grow. Add balance of payments constraints and a third reason to attract Type Ia industries appears: forex earnings. This is one more reason why they are often accommodated in EPZs or SEZs. Although industry-wide learning remains limited, light manufacturing can still help to develop basic industrial skills and discipline as well as to acquire some productive capabilities (Newman, Page, Rand et al. 2016). This segment of industries extends deep into the transformation of agricultural goods in the border area between agriculture and manufacturing. Beyond this exercise, truly ‘new’ industries which have the potential to foster skill deepening and acquisition of technological capabilities will be sought (Lall and Pietrobelli 2002). In the best cases, they will create the productive capability to advance into further cutting-edge industries as measured by the proximity index mentioned above (Klinger 2009). In theory they can come from various ends of the industrial classification. Paths to industrialization, which some authors distinguish as import-substituting, export-oriented, resource- or innovation-based, are in actual practice not that clearly distinguishable, with the exception of the resource-based path, which does indeed have specific challenges. When policy measures are put in place to help these technology- or knowledge-intensive industries emerge, one might call them Type Ib industries. Obviously, such firms come closest to what the literature on new industrial policy aims at. Yet, a number of industrial ventures will not be the result of selective political intervention, let alone CIP. They will only benefit from the common external tariff that allows duty-free imports of equipment, intermediate goods, and spare parts, or from generic rules of origin that are also appropriate for regional sourcing of inputs. Given the random element in foreign direct investment, heuristic policies that attract (almost) any willing investor by means of an investment code and an investment promotion agency (IPA) with a one-stop-counter are perfectly in order. As these random investments do not flock to every second African country, part of genuine industrial policy will have to be deployed here as well: identifying in dialogue with the potential investors their specific binding constraints, organizing tailored relief measures, and suggesting locations which are not always the industrial capital or the decades-old SEZ. This latter part of the exercise makes them Type II projects of industrial policy. The nucleus of advanced industries lured into an African country by Type Ib or Type II measures is likely to be small as well as capital- and skill-intensive rather than labour-intensive; and it is—with most intermediates missing—unlikely that the nucleus will form a coherent industrial tissue with the older industries. The nexus must be deliberately engineered. In an obvious allusion to the working of modern personal computers, we have called this a dual core strategy (Asche and Fritzen 2013). An industrial dual core appears desirable in many high-unemployment and forex-constrained settings in Africa. Many African countries need such a strategy for

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mature labour-intensive and new skill-intensive industries, with—among others— complex implications for the tariff structure. Recent World Bank research gives a far more detailed account of the opportunities for industrial policies between the poles of Industry 2.0 and Industry 4.0—including cases in which labour-intensive production to acquire Industry 2.0 capabilities appears to be a prerequisite for entry into 4.0 industries. Obviously, this makes targeting still more complex (Hallward-Driemeier and Nayyar 2018). Some countries actually have such a dual core strategy.7 Initially worked out as tentative policy design for individual countries, the dual core approach fits regional communities even better. Very small open economies hardly have the potential to establish the full range of mature and cutting-edge industries. All types are obvious candidates for the label ‘Regional Industries’ in capital letters that can be politically encouraged to spread somewhat evenly across the region.

8.4 Networks and Lighthouses The most attractive regional industries are obviously those with links across several member countries: production networks. But there are exceptions to the rule. A regional industry can also work in relative isolation, as a cluster or single unit chosen for REC support in an otherwise underprivileged part of the region, or perhaps in a border area where a potential investor volunteers to settle under certain regional privileges. In Hirschman’s nomenclature, such monoliths are enterprises that only have consumer or fiscal linkages but few forward or backward links. Boosting monolithic factories in a region is obviously dangerous. The economic history of African regions is littered with local monopolies that enjoy protracted shelter from global competition, and the exclusion lists in African CETs or biregional trade agreements are treasure troves for products of monopolistic firms that strangely enjoy endless special protection.8 Temporarily supporting a regional 7 South

Africa—without using the designation ‘dual core’—has tried to implement such a bipolar policy in the framework of its IPAP 2. As South African officials have stressed, supporting relatively labour-intensive sectors at least in the short to medium term—especially in the agricultural value chain, in basic services and in light manufacturing—requires a profound rethinking of the advanced industrial policy approach, which otherwise focuses on raising productivity as the basis for nontraditional exports of manufactures. Mauritius, both as an individual country and as an industrial investor across the south African region, constitutes another model: public and private leaders here steered sequencing from sugar cane farming (with a politically negotiated market in Europe) to textile industries and high-end consumer electronics. Today all three pillars can be found in parallel on the island. Parts have been relocated within the wider region. We also find this kind of dual strategy on Africa’s largest testing ground for industrial policies, Ethiopia—again without being designated as such (Oqubay 2015). 8 As Dangote’s cement production in Nigeria is often mentioned in this respect (not least by Aliko Dangote himself), it would be an interesting research topic whether this example indeed represents a good case in point for protection of local monopolies beyond their break-even point in a free trade

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monopoly must be justified by feasibility studies that demonstrate both economies of scale and scope within reach for the REC and a positive social benefit from the wage bill and other internal and external gains offset against consumer and further losses from the protection. This notwithstanding, factual examples for single units that can be justified as economically beneficial for an African regional community are not difficult to find: • Pharmaceutical industries in Africa have few forward and backward links, except for packaging and some active ingredients. • Suggested by the government as a genuine regional industry, a Ugandan oil refinery plant will not create any backward link in the region—the oil issues from Ugandan soil, and most equipment is imported from RoW—and yet the refinery will establish joint ownership and a scheme to serve the East African petrol market.9 • The joint cocoa processing and marketing in Côte d’Ivoire and Ghana, as designed in 2018, will represent a genuine regional industry, but may boil down to one or two processing plants, for which ‘regional value chain’ would be too big a word, unless milk and sugar from the region is added to make chocolate. • A regional shipyard on Lake Tanganyika which would have the potential to overcome the reliance on ships inherited from colonial times despite high demand in passenger and freight traffic Finally, there are mixed cases—industries which would need the scale of a whole region to break even, but start as small solitaires with the intention of gradually creating consumer and backward links, such as large-scale paper mills serving the whole regional market. Some countries in key African RECs have wood and water resources that others lack. They may be privileged as locations for the paper and pulp chain. Another classic example that has regained attention of late is the car industry. The current re-establishment of the passenger car industry in East Africa has lighthouse projects which Volkswagen opened in 2017 and 2018 in Thika, Kenya and in Kigali. Similar greenfield plants opened in Nigeria (again) and other locations. The new assembly plants initially have few if any links in the region. They copy an established model, importing all inputs as completely knocked down (CKD) kits. Development of local skills, of a broader supplier industry like in South Africa and of a sizeable end market is just an expectation—or, for skills development, a joint private–public project. Establishment of such assembly lines can make sense for the investor and the region. In doing so, firms circumvent spatial entry barriers from economies of scale. Volkswagen opened the production lines in Thika and Kigali zone with a short-run target of small passenger cars assembled in the low four digits, environment. This is not obvious in the distorted global market for cement. See also the discussion of the EPA sensitive product lists in Part III. 9 The planned Ugandan oil refinery will have access capacity beyond the size of Uganda’s domestic market. The government has consequently offered Kenya and Rwanda a participation in capital. The oil pipeline from Uganda to the coast has also been conceived as a regional project. Its re-routing from the initially foreseen terminal at Lamu port to Tanga has, however, rather created tension in the EAC, similar to disputes over the region-wide standard-gauge railway.

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way below the global minimum scale in the six digits. However, mounting cars from CKDs allows for a gradual expansion into semi-knocked down kits (SKD) and later full-fledged production. Assembling cars from CKD is not new and does not necessarily require industrial policy to succeed. And yet the recent approach is innovative with regard to market exploration, for example in Rwanda with an explicit perspective to discover new concepts for shared urban mobility in a society where very few people can afford brand-new cars. Since production is starting small, management explanations of why the company opened the new plants barely referred to the wider East African market. But the new factories validly feature as regional industrial policy outcomes because they are reacting to the typical EAC import tariff structure, which has high duties on built-up new cars and duties of up to 100 percent on second-hand cars, but low ones on intermediate products. Examples of both types—regional networks and chains or single units—and the cases in-between abound. Despite its low formal ranking as a policy field, EU industrial policy also has some regional industries and intends to create more such champions. The most prominent historical case is actually both—a regional network structure across several member states and the single producer of the sort in the whole region (see Box 8.1). Box 8.1: Regional industries in Europe Notwithstanding the low rank given to common industrial policy, strategic action has resulted in distinct results in the EU, e.g. the creation of Airbus industries, known as European Aeronautic Defence and Space (EADS) until 2013. Although its creation did not come out of EU REC structures, Airbus represents a genuine regional undertaking, created politically after intensive public–private dialogue. The deliberate regional distribution of production among locations in Hamburg and Toulouse (sites of the main assembly plants) down to Spain, with wings and engines brought in from Britain, requires the transport of giant aircraft components across Europe every other day, but these efforts assure political acceptance. Until today, Airbus has produced 12,000 commercial aircraft. More than a regional value chain, Airbus represents a regional industry with the textbook objective of using regional sourcing for competitiveness in the global market. It is not an example of ‘trade in tasks’; it is firm-internal pan-regional division of labour. The exercise not only represents targeted industrial policy; it was the creation of a state-controlled enterprise, though not a SOE proper, as the governments of France, Germany and Spain. and since 1979 also Britain, share a blocking minority stake of nearly 26%. Today Brexit demonstrates how crucially Airbus depends as a regional industry on the general achievements of the customs union and the single market area. Just-in-time delivery and by extension the entire segment of the production located in Great Britain has come under threat with the reintroduction of border controls, that is: 14,000 employees at 25 locations, with 6000 at

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the factory in the Welsh city Broughton, where most Airbus wings are made. Conversely, it shows the slim chances for fully integrated regional industries in Africa, where border controls are still omnipresent even if REC internal tariffs have been abolished. Regional just-in-time production thus appears nothing short of surrealistic. The same applies to common regulation. The European Aviation Safety Agency (EASA), an EU authority, is in charge of certifying security standards for planes and parts. If EASA ceases to be the regulator for sections of the value chain (here: the wings), the chain will crack. In Africa, entire regional industries will not come into existence in the first place without a common regulatory authority. Another genuine common industrial undertaking was the creation of Galileo at the beginning of this century, a common industrial good and service, sovereignly defined by the EU as a civilian Global Navigation Satellite System (GNSS) in contrast to US-military controlled GPS and other such geo-localization systems. According to Perragin/Renouard, Galileo demonstrated during its years of construction the difficulties of a European Union which lacked a clear strategy for implementing grand-design industrial policy (Perragin and Renouard 2019), but is now near completion. Back in 2018, the concept of politically creating more European industrial champions took centre stage in the debate. The inflationary use of the term ‘champion’ boosted an earlier trend towards defining CIP in the EU. A merger of the high-speed railway train production lines of Alstom and Siemens had been planned since 1999 and would have represented another production of something genuinely ‘Made in Europe’—a result of industrial policy in a less eminent form than Airbus, but still dependent on joint government decisions with regard to public procurement by their railroad SOEs and on tolerance by EU competition authorities. The creation of the next European champion was intended as a direct response to China’s successful industrial policy creature, her own high-speed train initially produced by foreign investors, but now largely transferred to national conglomerates. Comparing the train production merger to Airbus industries is instructive with regard to the notional pair of competition law versus champions. Airbus was created as a European champion to boost global competition; otherwise, the market for larger aircraft would have been left to a US monopoly—hence no contradiction between championship and competition. Similarly, the Alstom–Siemens train merger was initiated to counter an allegedly looming Chinese monopoly. However, the protagonists and the supporting French and German governments failed to convincingly demonstrate (a) that economies of scale necessitated the merger and (b) that competition would not be stifled vis-à-vis other European high-speed train manufacturers. The project became a textbook case on how not to do CIP. Last in line was the 2018 European Commission project to provide new very high-capacity IT centres in the EU, obviously exceeding the limits of single private sector firms. Until today, such centres are all located in the USA or in Asia, meaning

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that big data computing is physically outsourced, which is now considered a security threat. All these efforts are now likely to be superseded by the framework of the new EU industrial strategy introduced above. Important industrial projects of common European interest are scheduled, from clean, networked autonomous driving (smart mobility), clean hydrogen, intelligent health systems, industrial Internet of things, low-carbon emitting industries and cyber-security to cleaner, more sustainable batteries and even an industry as old as textiles. An overarching goal with regard to sustainability is to progressively introduce a circular economy. Obviously, all these projects have yet to materialize as joint industrial efforts in the competitive market-driven environment that the European Union will continue to be.

8.5 The Incentive System The definition of ‘Regional Industries’ with capital letters thus depends on the collective political will of a REC to create them and to deploy the necessary incentives. The problem is: an incentive system for such industries is both national and regional, and both parts do not work in unison, neither within themselves nor across the two policy levels, unless considerable policy coordination efforts are taken. Within the national sub-system, individual countries lose considerable policy space for selective interventions, as outlined above. In a CU/CM, this is most striking at the outer border of the economic union. If they respect their collective engagements, countries cannot systematically treat nationally favoured industries better than others by means of trade policy. However, countries retain national sovereignty over tax policy. Yet, benefits granted to selected type I industries, including fiscal benefits, must not be the same as for any other industry promoted. Prioritization has to result in staged incentives, otherwise it is none. New research has established that policy coherence in Africa still has a long way to go in this respect. In a sample of three representative African countries (Ghana, Kenya, Namibia), it was recently demonstrated that policy coherence is not a given among the benefits granted as: (a) (b) (c)

general FDI promotion as contained in the national investment code (our type II) EPZ/SEZ advantages (our type Ia) industrial policy proper for skill- or technology-intensive ventures (our type Ib)

Tax benefits overlap, outcompete each other, or simply lack transparency regarding the reasons for various degrees of fiscal generosity (Van der Ven 2017). The cocoa value chain can serve as example again: ‘origin grinding’ and further processing in Côte d’Ivoire or Ghana are not labour-intensive and do not facilitate across-industry learning, and yet they receive generous tax benefits (specific

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and EPZ-related), whereas the poor primary producers are heavily taxed for their laborious work (Asche 2018b: 31). Such cases of system failure have been corroborated of late by more evidence on the bewildering tax breaks or ‘tax expenditure’ in Africa by CGD (Forstater 2017) and ICTD (Moore, Prichard and Fjeldstad 2018). Authors lament that in fourfifths of sub-Saharan countries, governments have the discretion to grant tailored tax breaks to international companies. In our own argument, discretion as such is not the problem. Targeted sectoral policies and industrial policy in particular necessarily have a discretionary element. However, the advantages are to be part of a rational policy framework and subject to parliamentary oversight and to evaluation. Most often they are not.10 The regional part of the incentive system is straightforward at first sight, too. It is economically desirable (under the conditions discussed above) to complete economic unions by applying a reasoned CET, eliminating all remaining internal tariffs and NTBs, and then moving on to dimensions of a common market such as fully harmonized standards, but these steps are not a priori part of targeted industrial policy. Across Part I we have argued that selective internal protection, after a short initial phase, has no place in a CU/CM lest the economic region lose its basic appeal as a free trade area. Businesses are meant to benefit equitably as internal trade liberalization is designed to help all businesses. The ideal-type external tariff, too, is well organized in its three, four generic tariff bands and generic rules of origin, not selective ones. Almost all industries are meant to benefit, irrespective of the member state or the area in which they establish themselves. This is the preference erosion inherent to the transition from a mere free trade area to a CU. For an important example, firms that settle in any national export processing zone cannot be granted stronger import privileges than anyone else across the entire region unless the REC commonly decides to flag out the whole range of labour-intensive manufacturing in all EPZs as Type Ia regional industries. In that case, the generic tariff bands would have to adjust accordingly. Disregarding the said preference erosion is wide-spread in Africa and is tantamount to non-respect of the CET, but again this principle of the incentive system is clear. Therefore, the policy space for industries flagged out for regional support manifestly shrinks when REC principles are respected. By means of trade policy alone, RECs can use the exclusion or sensitive product lists or some other means treated in Part III to favour certain industries. To keep it manageable and to maintain the region’s appeal as a predictable economic environment, the number of such cases must be limited. Taking the example of exclusion lists, two cases of actual support to regional industries can be distinguished. Either individual member states nominate some national lines of business for special protection and the council of trade 10 The World Bank and IMF generally argue against discretionary economic policy, in particular against discretionary spending in a country configuration of mineral resource richness and bipartisan ‘factional’ democracy such as Nigeria or Ghana. Admittedly, discretionary tax exemptions and spending sprees are used in such cases to generate political support. Yet, exactly these countries face the specific challenges from the so-called resource curse and Dutch disease which require discretionary support for disadvantaged agriculture and manufacturing (Asche 2018a: 41).

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ministers decides, or the council collectively lifts an industry to a level of protection higher than the highest bound tariff band. The first case has a priori little to do with support for designated regional industries, the second case can. Negotiations around the first case can however amount to barter trade of locational priorities: ‘you protect mine, I protect yours’, and the REC secretariat can moderate the process as kind of compensatory industrial policy. Again, cases must be numbered. Non-trade policy support that jointly addresses other financial or non-financial constraints of the industries singled out as ‘regional’ is the more promising area. In the end, a coherently staged and sequenced amalgam of national and regional incentive systems should be the outcome—a monumental task for regional communities with limited administrative capacity. The eminent regional industries feature at the top of the unified preference system. New or extended regional industries at least of type I which benefit from specific advantages granted by the REC have to be benchmarked as to their performance. One form of collectively agreed benchmarks can be sequenced regional and global export targets. They are largely unexplored as an industrial policy tool except for the mundane version in EPZ, where firms export everything overseas. With African free trade areas coming of age—despite the myriad of NTBs still in place—exporting to FTA neighbours is becoming easier and therefore one of the strongest arguments in favour of setting export benchmarks to national industries. However, selling Tanzanian flip-flops in Uganda or Kenyan plastic chairs in Tanzania comes closer to selling in the domestic market than to establishing oneself in a competitive global market (depending on actual trade protection). Recall the textbook problem of RECs with most members producing below world standard. Success in export as the proxy measure for productivity growth does not work here, as it measures low-level trade creation or diversion. Consequentially, setting sequenced export targets for regional and world market is perhaps the intermediate step before fully exposing firms to the winds of global competition because such targets combine exports to extra-African and less competitive, neighbouring markets. Regional industries in the sense of fabrication units and regional production networks supported by regional authorities may be flagged out as regional champions (Box 8.2). Box 8.2: Regional industries and how (not) to brand what they produce Genuine regional products can be stamped, e.g. ‘Made in EAC’, or for want of overseas clients who know the EAC: ‘Made in East Africa’ or ‘Made in Southern Africa’, to avoid the ambiguity of ‘South Africa’. Regrettably, an ephemeral 2017 campaign ‘Buy East African, build East Africa’ (or: ‘Buy EAC—build EAC’) has left no trace, although it could have generated legitimate support for regional industrialization efforts. It would have been a programmatic step in the right direction, especially when combined with some control of standards, such as the basic CE marking. What occurred instead? Back in 2014, the Ugandan government approved a ‘Buy Uganda—Build Uganda’ initiative,

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which was launched in 2017 and continues today. Recently a colourful BUBU logo was created for use on products made in Uganda. In 2020 a first E-BUBU exposition was opened. BUBU is a branding, local content and public procurement exercise, confined to Ugandan producers. Unsurprisingly, the Kenyan government launched a ‘Buy Kenya—Build Kenya’ initiative shortly thereafter, intended above all to shelve prejudices against Kenyan products, as the Kenyan president explained. Even if these campaigns are not primarily directed against neighbouring countries, but rather against imports from China and consumer preference for fashionable global brands, the spirit of the campaigns is squarely opposed to what the preceding exercise in regional integration theory deduced to be necessary for integrated markets: common policies and regional champions. The case is used at the International Growth Centre to warn against a dangerous opposition between (national) industrial policy and regional integration and is commented as follows: [I]n East Africa, most governments recently embraced the idea of using government procurement to support domestic industries through local content bills and directives to give preference to domestic suppliers—a classic industrial policy tool. But this is in violation of the Common Market Protocol. The Buy Uganda, Build Uganda (BUBU) initiative even faced internal resistance—from the Central Bank—for this reason. There are now suggestions from some at the regional level to move from initiatives like BUBU towards “BEABEA” – Buy East African, Build East Africa. This certainly won’t happen overnight, but … it could be piloted within the pharmaceutical industry, where Uganda and Tanzania arguably hold significant productive capabilities that can compete with Kenya’s. Thus, the pharma industries in these three countries may all support a BEABEA approach. (Max Walter, “A delicate balance…”, IGC blog posted 19.1.2021)

So as much as ‘BUBU’ is instructive about the present state of the East African Community, a return to ‘BEABEA’ would mark a return to the spirit and letter of the EAC, as well as to a more rational industrialization strategy (Leipziger and Manwaring 2020). It would obviously also signal a realignment with the vision of an African CFTA with its emphasis on wider regional value chains.

8.6 Locational/Spatial Policies Now that we have, despite political confusion on the ground, a clearer picture of regional industry types, what are locational/spatial policy options? As previously mentioned, the spatial turn takes on an even higher importance in common sectoral policies within a REC. Typically, the primary task of spatial economic policies is to help create agglomerations by infrastructure and other promotional measures. In the expectation that the positive externalities associated with agglomerations will unfold, authorities deliberately create or boost spatial imbalance. In Africa, national

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EPZ or SEZ is the most important example for such policies where, unfortunately, the positive externalities rarely emerge as expected. This is largely due to trunked national industrial policy. The spatial turn of regional industrial policy refers a priori to the opposite—a search for spatially balanced growth. To be sure, spatial industrial policy has to avoid any mechanical spatial design such as ‘one country—one textile factory’ or the discretionary settlement of a region’s sole bicycle or shoe factory in a politically chosen location without any other economic argument. This is a feature through which early socialist-inspired industrial strategies acquired their solidly bad reputation. Textbook cases are early post-independence Ghana, Nigeria or East Africa (Box 8.3). Whether Ghana’s above-mentioned ‘One District One Factory’ (1D1F) policy represents a modern replication of such strategies cannot be safely judged from the experience thus far (see https://1d1f.gov.gh/). In contrast, smart regional policy manages the inherent tension between agglomeration and spatial equilibrium, at times searching for new agglomerations located in a more balanced distribution in the region. There are valid elements of locational policy, some working with the market, some helping to create units that the market does not bring up. They all amount to identifying either new tasks and components or nascent industries to be regionally supported and flagged out for infant protection and privileged access within the region: • Regional value chains conceived in a way that a priori disadvantaged locations in the region will also stand to gain • Investor choices for factory locations in smaller, less advanced member states encouraged • REC internal tariffs and NTBs that are designed to outcompete fledgling industries in disadvantaged member states scrapped • For single-location industrial units, regional public and private shareholders attracted to form joint ventures or public–private partnerships (PPP), along with REC-external FDI • For the same purpose, regional sourcing of inputs and factors encouraged, e.g. through free movement of labour, targeting border zones as factory location • Regional industrial parks mounted with investing partners from across the region, alongside REC-external FDI • Regional public goods specifically delivered for newly identified regional industries, to overcome private–public coordination failures, in particular targeted infrastructure.

Box 8.3: The Experience of the first EAC (2): Planned Redistribution Should regional strategies hence aim at planned creation and (re-)distribution of industries among member states? This may ring an old bell considering that the old East African community foresaw exactly this out of a kind of socialist spirit. In Box 4.1, the uneven gains from the first integration are recalled from

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historical sources. The first EAC sought to counter these adverse agglomeration effects: The Kampala Agreement of 1964 (amended at Mbale 1965) […] provided for industrial relocation of certain industries such as beer, shoes, cement; agreed quotas to protect new industries in Uganda and Tanzania from Kenyan competition; and agreed the allocation of a few new industries designed to cater for the overall East African markets. (Arnold 2005: 264)

In other words, the first EAC tried an approach of politically chosen locations for regional industries. Viewed in hindsight, the agreement rather contained a scheme on how not to do regional industrial policy. As Matambalya has put it, first EAC industrial policy combined dirigiste and internally protective measures, especially through EAC internal quotas, while otherwise being ‘characterised by a lack of holistic agenda—embracing all essential elements—to develop the necessary conditions for industrial transformation’ (2015a: 146), namely by not addressing the lack of indigenous entrepreneurship in member countries and the need for knowledge and technology capacity building. In addition to its industrial ambitions, the post-colonial East African Common Services Organisation (EACSO) provided regional infrastructure service from 1961 and the first EAC from 1967 onwards via the East African Railways, Harbours, Posts & Telecommunications and Airways Corporation, among others, with the intention to distribute community revenues disproportionately in favour of the two weaker member states. However, complaints that the majority of the industrial benefits went to Kenya stubbornly refused to go away (Arnold 2005: 147, 265). This is unsurprising in the light of the arguments above. As to the political intention, the new EAC Common Market Protocol in its Article 44 is as ambitious as the old EAC and intends inter alia to ‘promote sustainable and balanced industrialization in the Community to cater for the least industrialised Partner States’. We will examine below whether the new approach embraces all the necessary policy elements better than the old one. Over and beyond the concrete design proposals mentioned, common industrial policy must officially accept the principle of inter-country industrial convergence and contain a broad measure for such convergence. It defines both a realistic target range of industrial (= non-artisanal) manufacturing value added (MVA) and a spread of member states’ industries around the average, linked to a regional funding scheme. The exercise has to build on regionalized public–private dialogue, also known as cross-border policy dialogue, which identifies the most binding constraints at both regional and national levels in order to achieve the planned degree of convergence. An appellate body for cases of contravention against the agreed industrial compensation—impromptu non-tariff barriers, hidden national subsidies—must be constituted. Finally, political cross-country acceptance for the locational choices

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needs to be actively created, as national prejudice will be stoked and propaganda from vested interests will condemn such ‘socialist’ policy. Political guidance by a group of dedicated leaders is thus a mandatory requirement.

8.7 Conclusion: Easy Gains or Science Fiction? In order to effectively counteract both de-industrialization and divergence, South– South RECs need Common Industrial Policy (CIP) that purposefully helps to shape and reshape the region. However, considering the way a concept for regional industries is deduced here, it becomes perfectly clear that this kind of policy is among the most challenging ones that a regional body can possibly envisage. It implies difficult technical and locational choices that require acceptance of industrial opportunities foregone by others. A regional hegemon, itself suffering from high unemployment, may find it unacceptable to privilege factories in small, less-populated neighbour countries. The total unemployment in South Africa or Nigeria, even measured by a narrow criterion of those actively looking for jobs, exceeds the whole population in some neighbouring countries. In many branches, there will also be a short- to medium-term trade-off between static allocative efficiency, which favours a priori the better-off member states, and distributive equity, to which spatial policy aspires. Where industries traditionally exist in several member states producing homogeneous goods such as cement, basic steel, or paper and pulp, vested local interests will defend them at any price, all the more when all have large unused capacities. For all these reasons, a joint industrial strategy of African economic communities may appear to be pure science fiction: it relates to emerging technical and socioeconomic trends, but brings no certainty about the future and no clear-cut idea in advance on how to get there. The spatial dimension has a utopian air about it. In a realistic scenario, full-blown spatial industrial policy in African RECs—at least one that relates to regional (re-)distribution of entire industries—may indeed be unlikely. There are however, two instances when it will be accepted with greater ease: (1) Regional division of tasks in production networks will garner higher rates of acceptance because of likely win–win situations when several members retain parts of the chain and (2) completely new industries, on which industrial policy should concentrate on in the first place, will also obtain faster approval in the region even if their location leaves some member states disappointed. Very small countries in the region may accept a qualified range of immigrant workers from populous hegemons for their new greenfield industries. In East Africa, Rwanda already practices this kind of cooperation with Kenya and Uganda regarding production lines and services for which it does not yet have a workforce with the needed range of qualifications. Good structural policy by creating industrial commons and correcting market failures in a visionary way is the essential work of a developmental state. Therefore, the reasoning on the imperative need for common policies has a consequence for the concept of the developmental state, as well. The new kind of actor who will be best-suited to carry out the joint task is a Community of Developmental States.

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Admittedly, this definition of the best actor adds to the science fiction. Such a community has not yet been empirically observed, not even among the newly industrialized countries in East and South-east Asia who all succeeded on their own because the historic stage of globalization still allowed it. Africa has a number of cases that already qualify as developmental states, albeit constrained by their deficient regional condition. A Botswana or Rwanda cannot be fully developmental on its own. With allies, they may start as pairs of developmental states, emerging from successful completion of ambitious cross-border projects, in their respective regional community, and then look out for followers.

Chapter 9

Industrialization Strategies and Regional Actors

Abstract Against the backdrop of the partly normative, partly empirical policy framework, the major regional industrial policy documents of the African Union, EAC, ECOWAS, SACU and SADC are examined as to their applicability. The empirical cases of the West African dairy and textile value chains are used to discuss the difficulties of regional priority-setting. The precise roles of (a) regional financial institutions, (b) regional development aid, including the panoply of ‘private sector development’ (PSD) projects and (c) regional business associations are defined. A concise summary of the essentials of common industrial policy concludes the chapter.

9.1 Regional Industrial Policies and Strategies Challenging as it is, where do we actually find some beginnings of common industrial policy in Africa? Or is this merely a doctrinaire exercise? Indeed, the main African RECs have issued comprehensive papers on industrialization strategies, policies and implementation plans. One is even literally called a common industrial policy. Others were still avoiding the term ‘industrial policy’ following the former position of the AfDB, who considered the term to be compromised and circumvented it as much

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 H. Asche, Regional Integration, Trade and Industry in Africa, Advances in African Economic, Social and Political Development, https://doi.org/10.1007/978-3-030-75366-5_9

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as possible, contrary to UNECA.1 The papers from the most important RECs are as follows: • East African Community—Industrialization Policy 2012–2032 (EAC 2012) • SADC Industrial Development Policy Framework 2012, based on the Regional Indicative Strategic Development Plan (RISDP) 20032 • SADC Industrialization Strategy and Roadmap 2015–2063 (SADC 2015) • SACU Regional Industrial Development Policy, largely a work programme, based on Art. 38 of the SACU 2002 agreement3 • West African Common Industrial Policy (WACIP) of 2010 (ECOWAS 2010b), with an action plan (ECOWAS 2010a),4 building on the dispensation for harmonized industrial development already foreseen in Articles 29–32 of the 1975 Lagos Treaty • COMESA Industrialization Strategy (2017–2026) (COMESA 2017), based on the COMESA Industrialization Policy for the period 2015–2030 All these documents are inspired by the African Union’s overarching Action Plan for the Accelerated Industrial Development in Africa (AIDA). In both a policy and 1 The

situation has not improved in recent years:—An ambitious edited volume within the AfDB orbit quantitatively assesses the untapped potential of African RECs. The contributors find that intraAfrican trade integration increased with countries’ economic diversification, but that such causality has not occurred in reverse since regional integration has not caused any industrial diversification. While this is nearly identical with our own findings, the volume stops short of recommending any regional industrial policy as a remedy—it holds that better infrastructure and investment climate should basically do (Ncube et al. 2015). • In their joint report ‘ARIA VII’, UNECA, African Union and African Development Bank (2016) discuss the nexus between regional integration, industrial competitiveness and innovation but include only two peripheral mentions of industrial policy, none containing anything regional. • The African Economic Outlook 2017 explicitly aims at reintroducing industrialization policies, but still manages to avoid the term ‘industrial policy’ like the plague, even in its review of the earlier, failed industrialization strategies in Africa (AfDB, OECD et al. 2017). • In his insightful digest of pathways to Africa’s industrialization in an RTA setting, Matambalya pursues the same ostracism and in consequence does not mention a number of features which link new industrial policy and regional integration (Matambalya 2015b). The co-authors of his edited volume on African Industrial Development do the same, which results in strange lacunae in theory and country reviews, e.g. on Ethiopia—arguably the country with the most powerful national industrial policy in Africa (Belete 2015).

2 See

critically Mureverwi (2014). See also the revised SADC RISDP of April 2015. critically McCarthy (2013). With regard to Industrial Policy, the SACU Agreement states in Article 38.1: “Member States recognize the importance of balanced industrial development of the Common Customs Area as an important objective for economic development”, and in Article 38.2: “Pursuant to paragraph 1, Member States agree to develop common policies and strategies with respect to industrial development” (my emphases). 4 See https://ecotis.projects.ecowas.int/policy-development/west-africa-common-industrial-pol icy/. At some stage the document was to be updated as West African common industrial policy 2015–2020: Revised WACIP Strategy and the implementation governance framework of the Strategy. This has manifestly not come forward. Perhaps the consultancy for WACIP 2020–2025 will close the gap. 3 See

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a strategy document, the African Union proposed regional industrial policy as one of three layers at which industrialization should be promoted (Box 9.1). Box 9.1: The Action Plan for the Accelerated Industrial Development in Africa (AIDA) Major components of the industrialization strategy are: I. Policy on product and export diversification, natural resources management and development II. Infrastructure development III. Human capital development and sustainability, innovation, science and technology IV. Development of standards and compliance V. Development of legal, institutional and regulatory framework VI. Resource mobilization for industrial development. The plan aimed at promoting these major tenets of industrialization policy at continental (AU, NEPAD, ECA, AfDB), regional (REC) and national levels. Implementation clusters for the main components were foreseen. Source African Union (2007). AIDA was instrumental in making industry take centre stage again in the African political arena, in particular by sensitizing policymakers and other stakeholders for the window of opportunity that is presented to Africa (‘the time is now’). Although labelled as action plan, the AIDA document described the general dimension of industrialization on the continent and the main layers of supportive policies. As much as it was a treasure of ideas and initiatives for imaginative industrial policy, it needed further refinement and ideas for the prioritization mode. Although AIDA promoted industrialization at the three levels, it did not come forward with a substantial argument for what distinguishes continental, regional and national industrial policy—in other words, much of what this text tries to establish. In terms of content, AIDA did not differentiate between general features that help modern industry as much as agriculture or services—what some call ‘horizontal industrial policy’—and targeted approaches that are the essence of industrial policy. Regional communities and national governments may also wish to go beyond the scope of AIDA with regard to the process and institutions of industrial policy-making. AIDA clearly aimed too short in this area. For all programmes, almost the same small paragraph on ‘institutional arrangements for implementation’ was repeated, with a focus on various steering committees. While these arrangements may be an important institutional device, the outline fell short of expectations because AIDA foresaw private sector involvement only at policy implementation stages. However, kindly inviting the private sector and other non-governmental stakeholders to implement pre-conceived policies reflected neither the emerging consensus on collective search as essential for new industrial policy nor what AIDA otherwise aptly called industrial governance (ibidem: 24).

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It may not be necessary for a guiding AU document to go deeply into operational aspects. This is different for REC industrial strategy documents. In the interest of regional industrialization, they have to fulfil both general and region-specific requirements. With regard to (1) content, (2) actors and institutions, (3) process and (4) tools, CIP has to reproduce the best practice of generic industrial policy at the regional level. The EAC, ECOWAS, SADC/SACU and COMESA plans each have to improve with regard to essentials of NIP, in particular (a) on the needed selectivity and prioritization of industries, (b) on how to arrive at priorities, that is the mode of public–private dialogue, (c) on designing industry-specific support measures with the now widely accepted requirements of targeted incentives, time limits, success criteria, error correction mode, etc. and (d) on high-level steering authority and leadership. Look at prioritization, for example: • The current East African Industrialization Strategy (2012–2032)—introduced at https://www.eac.int/industry—prioritizes six strategic regional industries in its policy document: (1) agro-processing, (2) iron and steel processing, (3) other mineral processing, (4) chemicals (fertilizer and agro-chemicals), (5) pharmaceuticals and (6) energy, oil and gas processing.5 • The SADC Industrialization Strategy ‘identifies three clear-cut priorities’ among six main growth paths on offer: agriculture-led growth; natural resource-led growth including beneficiation; enhanced participation in domestic, regional and global value chains, without elaborating on the choice (SADC 2015: 14). • The COMESA strategy has nine to ten priority sectors. It is said to be guided by a natural resources-led and human resources-led model—an interesting conceptual difference with SADC which has about the same economic endowments in the region.6 • The revised WACIP strategy ‘…resolved to promote Four Regional Priority Sectors under the project, namely agro-industry and agribusiness, pharmaceutical industry, construction industry and automotive and machinery industries’. (ECOWAS, aid for trade website; when accessed in 2016)7 As for the other plans, all four industries are generic or phrased in ambiguous terms (‘agribusiness’). A good strategy must contain criteria by which these industries have been prioritized—either in the policy, the strategy or the implementation documents, all the more as industries prioritized may then become subject of harmonization of standards (UNECA 2020b). None of the strategy documents discloses how the priorities have been generated, not even in conjunction with the growth paths or growth models mentioned. Has prioritization been mainly a desk selection, in order to inform future stakeholder consultations, or has it already been the outcome of self-discovery in 5 Although

the document mentions six regional industries throughout, those numbered are seven. We have collapsed the last two into one for reasons of obvious similarity. 6 For a detailed comparison of the COMESA and SADC strategies, in the context of the respective TFTA policy, see UNECA (2020a). 7 It should be noted that the official 2010 strategy and policy documents do not mention any priority sectors. This is fine, provided a mechanism for collective search is concretely worked out and institutionalized.

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public–private dialogues and just needs deepening by analyses on comparative advantages? As Woolfrey reports in (Byiers et al. 2018), the COMESA strategic area of leather industry is but the only priority area that builds on manifest interest from private sector players in member states, supported since long by the Leather and Leather Products Institute. Yet, its work assists more national actors than anything specifically regional. Finally, a regional strategy must inform investors whether any further intra-industrial selection, and selection is foreseen along the different value chains (or is deliberately left open), as not all CIP documents are as specific as the COMESA one. This remains unclear, either. A strategy must also contain information on non-prioritized industries for which investor interest may nevertheless become manifest. Some are kinds of Type II industries—good to have, but not exactly a priority. Investors want to know whether these fall into one of the following categories: 1.

2. 3. 4.

5.

6.

Outright non-wanted industries or technologies considered unsustainable or detrimental to development and thus actively discouraged. These may be as follows: nuclear and ‘brown’ energy production, mono-cultural agro-industry with detrimental effect on the land Industries not selected because no present or potential competitive advantage can be identified (the classic case in Africa: aircraft industry) Industries not selected because they are matured and competitive without continuous public support Industries supported by conventional tariff, non-tariff or investment promotion measures, but not considered a strategic priority for the industrial tissue as a whole Industries with entry barriers related to GVC governance that are considered too high, e.g. when first-tier producers resist relocation of production steps to Africa Future industries for which distant R&D, TVET or IT requirements have to be fulfilled before industrial production can be envisaged.

Very little with regard to these selection issues is on record in present-day industrial strategies. Evidently, some of the critical cases can be turned around by appropriate industrial policy measures; others hardly can, as two case studies show.

9.1.1 Case Study 1: West African Dairy Business—A Promising Regional Industry? A notorious case of questionable EU-Africa trade relations, similar to the most illreputed one of frozen chicken parts (see case study 3), relates to European dairy produce, in particular milk powder exported to Africa. In the beginning, mainly criticized for its negative impact on child health under conditions of bad water supply, the focus of critique has shifted: milk powder exports to Africa are decried as the main obstacle to the establishment of national dairy value chains in the importing

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African countries. Most recently, the critique extends to a special type of foreign direct investment: prima facie a welcome trend, European firms (such as Arla, Friesland/Campina, Danone) have opened subsidiaries or joint ventures in West Africa to make dairy products like yoghurt, but largely from imported European milk powder instead of building on milk production in the region. Some have agreed to take up a limited local contingent of milk supply (Jakob and Schlindwein 2017: 243 ff.). This is an important agro-industry. But, does it represent one that ECOWAS member states should wish to support as part of the common industrial strategy? Or should ECOWAS states privilege a domestic value chain, built mainly on local fresh milk supply? Taking the German development policy scene as representative, the issue has turned into a disagreement between NGOs that are very critical of European mass milk powder exports into ‘countries with more heads of cattle than people’, and experts from GIZ. The latter have long engaged in value chain support but are sceptical with regard to the prospects of domestic dairy production in some African countries—including the business perspective of local dairies—and are thus less supportive of trade measures against milk powder imports. The problem arose at the turn from the 1970s to the 1980s as the diets of urban consumers in West African countries began to change, causing dairy imports to multiply—partly as commercial imports, partly as food aid. Traditional cattle-raising countries like Burkina Faso started to ask themselves whether they should strive for a local supply chain (Asche 1993: 176–178). In Sahelian countries, traditional cattle raising is mainly for beef. Milk production from Fulani/Peul cattle ranchers was always for own consumption and small local markets. Turning this into a fullblown domestic value chain has a number of productive prerequisites, the two most important being (1) cattle feed and (2) the cold chain. (1)

(2)

In the Sahel, availability of fodder is highly seasonal and is becoming increasingly irregular and precarious with climate change. One essential precondition for a national dairy chain is thus worsening over time. ECOWAS countries with more fertile ground to grow cattle feed would need to be identified for a growth perspective of the region’s milk production unless the region wants to repeat the ecologically critical EU experience of massive soya feed imports from Argentina, Brazil and Uruguay. An uninterrupted cold chain is difficult to master on a national or regional scale. Supply constraints thus intrinsically limit milk production in a number of West African countries.

In consequence, GIZ experts do not see milk powder imports in direct competition with the (limited) local milk production potential and consider them rather as complementary in natural resource-constrained countries like Burkina (GIZ 2018a). The sober assessment is de facto reflected in external tariffs. Like the other member states, Burkina Faso applies a low 5% UEMOA tariff on milk powder imports (HS category 04.02) but the highest, fifth-band tariff of 35% on yoghurt (HS category

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04.03) (UEMOA 2017: 34).8 This is a developmental statement. The tariff treatment reveals a consideration of value chain potential which does not rely foremost on domestic raw milk supply but on imported powder. The implication for common industrial strategizing is thus: as purely national dairy supply chains have limited potential in a number of African countries, a genuine regional value chain should be pursued. For a sensible move to higher import tariffs on milk powder as part of the UEMOA/ECOWAS CET, a working regional supply chain has to be mounted in tandem, starting with the West African countries which have the preconditions for providing fodder or fresh milk. This can make a case for regional division of labour and thus regional industrial policy. Otherwise, the tariff schedules in the African EPAs (see in Part III: The market access offer) would severely limit the freedom to discourage such import-dependent dairy production via tariff measures, especially since milk powder with an add-on of vegetable fat no longer falls into the protected HS line. On condition that the policy space for trade defence measures in general is restored, another option may be more appropriate: as BfdW trade expert Mari suggests, import tariff-quotas will rather be the instrument of choice to ensure that local/regional milk supply maintains its share of the market while allowing low-duty powder imports to satisfy the exceeding demand. Still, the administration of tariff-quotas will have to deal with the seasonality of fresh milk availability. As international organizations disagree about the issue, the way in which African RECs reckon with the topic will be of crucial importance. For West Africa, it is largely unknown how high ECOWAS as a group rates the prospects of national or regional dairy production chains. A blanket statement in the ECOWAS regional industrial policy in favour of each and every ‘agro-industry’ does not solve the problem of such fragile value chains. Diverging views on the African side of the problem do not invalidate the other half of the critique. Milk production in the EU represents a longstanding, egregious case of agricultural policy failure. It needs correction one way or another, independent of the policy’s impact in West Africa. This has not changed with the lifting of milk quotas by 1 April 2015 but has become still more obvious. Since July 2015, the EU has bought and stocked 380,000 t of milk powder in order to stabilize prices. The manoeuvre has not worked; the price for milk powder came down by a third, and stock shedding would aggravate the situation further. The European system is broken, while the African one might grow in some places—if supported by the appropriate agro-industrial policy. The fledgling African dairy industry would thus gain from being flagged out for a strategic EU-Africa dialogue, as outlined in the concluding chapter of Part III. For the time being, the perspective of a regional dairy value chain in West Africa remains dim.

8 Unless ECOWAS member states with high dairy product imports such as Côte d’Ivoire and Senegal

diverge de facto from the common external tariff.

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The range of strategically critical issues is arguably still longer for the textile value chain in Africa, subject of the second case study, and broad-based (re)industrialization in this sector is again conditional on regional industrial policy, the outline of which one would expect to find in the regional strategy documents.

9.1.2 Case Study 2: Regional Textile Industry—A Mirage? Exemplified again at the West African case, the textile industry has not been explicitly prioritized by WACIP nor has it been ranked high by the other industrial policy programmes.9 However, Western, Eastern and Southern Africa have some important cotton producers, and the regions still have some operating ginneries. Almost all had downstream units of textile production in the past, before structural adjustment set in, and quite many still have factories left. Three factors work in favour of rehabilitating the textile chain: (1) (2) (3)

Globally competitive production of raw cotton in the regions Preferential access to US and EU markets for apparel made in Africa Potential to clothe one’s own population.

Currently, nearly all African raw cotton is exported, and nearly all garments for domestic use are imported (with the only considerable exception of South Africa), often as used clothes—a glaring disconnect in global perspective. In fact, growing and ginning cotton does not automatically speak in favour of further domestic transformation of cotton. It is a standard argument from the ‘beneficiation’ debate on raw materials that digging gold or mining diamonds does not in itself qualify any industry for all the steps further down the chain. Discomfort with countries that grow cotton and are unable to provide clothes for their own people may be an empathetic response, but it is not a hard economic argument in itself. At the final stage of apparel-making, new producers have shown considerable industrial dynamism by taking advantage of the preferences offered since the turn of the century by the US African Growth and Opportunity Act (AGOA), and to a lesser extent, by the EU to Africa. Just five countries—Lesotho, Kenya, Madagascar, Mauritius, Eswatini—have benefited by a large margin, earlier on also South Africa. None of these is among the major cotton-growing countries in Africa. The West African ‘Cotton 4’ countries Benin, Burkina, Chad and Mali have remained marginal. History continues with Ethiopia which opened (possibly with Rwanda) a new stage of garment industries relocating from South (East) Asia to Africa, but again, this is not based on its strength as primary producer. 9 The WACIP 2010 document has an instructive analysis of the lack of valorization of West Africa’s

cotton in global comparison (ibidem: 20/21). At the end of the section authors regret that ECOWAS has so far been “discarded” in regional efforts for the processing of local cotton. In 2020, furthering of the textiles and garments value chain is considered in the EU-funded West Africa Competitiveness Programme (WACOMP).

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On the other hand, (re-)establishing spinning and weaving as an input industry for garment-makers (and for a range of other industries) can still be a valid move to improve the trade balance, create labour and some skills (Barnes and Morris 2009). As the minimum efficient scale and scope of spinning and weaving exceed the market size of most single African countries by far, the whole textile industry looks like the archetypical case of a regional value chain, producing for a regional end market. If the textile industry is not selected for a regional strategy in the documents under review, REC leaders must have a good argument. Argument No. 2 above probably explains the silence on the case in West Africa: no apparent comparative advantage. The argument is correct from a static perspective. Africa’s economic potential in the global textile value chain has been thoroughly analysed by authors such as Gereffi, Gibbons, Morris and Kaplinsky, just to mention a few. The substance of their arguments is clear: In a global buyer-driven value chain, SSA has a realistic chance of obtaining a longer slot than just apparel-making in export zones for preferential overseas markets if and only if the ‘weak link’ in the chain, the absent or ailing spinning, knitting and weaving industry, is dramatically strengthened by efforts to improve entrepreneurship, productivity, skills and lead times. Yet, as firm owners are mostly foreign and integrated in triangular global networks (Asia, Africa, EU/US), they are not normally interested in regional sourcing of inputs or in the regional end markets unless the political context is changing (Staritz 2011: 64, 83 ff.). So far, the diagnostic is crystal clear. One key policy issue for input sourcing is the design of rules of origin (RoO) in major importing countries, but also in the African regions. RoO of the major importers USA, EU and Japan have long been criticized for being too stringent. Relaxation of RoO to a single transformational stage to be performed in Africa by the new EU General Scheme of Preferences (GSP) and the US Third Country Fabric abrogation (TCF) has been considered to be a huge advantage. Not being forced to use local/regional inputs makes life easier for garment-makers in Africa and has thus been welcomed. Paradoxically, it discourages full-length regional value chains, not to mention using local cotton. (See chapter on RoO in trade agreements, below) With the perverse effect of revamped RoO, establishing a whole new textile industry in African regions has definitely become an uphill battle. Nonetheless, some countries are still trying. In 2016, the EAC introduced a common initiative of gradually replacing imports of second-hand clothes and shoes by own production through customs measures. Unfortunately, the initiative of four member states—Kenya, Rwanda, Tanzania and Uganda—quickly degenerated. It was not launched as a genuine REC measure through joint modification of the CET; the import restrictions diverged instead. Compliance was quickly reduced when the country group came under attack from the American ‘Secondary Materials and Recycled Textiles Association’ (SMART, a tightly fitting name for this lobby group), prompting an out-of-cycle review of AGOA preferences by the US Government. The regional alliance collapsed, with Rwanda as last man standing, when the US president notified his intention to suspend Rwandan AGOA apparel preferences on 29 March, 2018. The regional approach of targeted industrialization was thus defeated. Some will classify the attempt as a relapse into old import substitution malpractice.

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Has the EAC been entirely wrong? Not necessarily. Supporting the policy-driven (re-)creation of a regional textile industry for the domestic end market by preannounced tariff measures makes sense as long as North-South trade agreements leave the REC with enough policy space. This was and still is the external problem. The internal problem in the EAC has been one of coordination and proper policy sequencing: not much public–private planning ever became known regarding key questions such as who in the private sector would be ready to take up what segment of the end market, and how much capacity at which stage of the chain would have to be created in addition. Second-hand clothes and shoes are diversified goods that satisfy all kinds of consumer tastes. Therefore, the importation of what is called mitumba in East Africa would have to be replaced not just by regional textile industry at large, but by apparel-making with high capacity to realize both economies of scale and scope, satisfying the love for variety perhaps more than in any other industry. Import bans alone do not generate such an industry unless there is a pre-existing industrial dynamic and unused capacity. Otherwise, the policy measure just drives mitumba prices (through smuggling) or creates room for cheap ready-made garment imports from Asia. In sum, the public–private (re-)creation of a regional value chain appears a priori feasible, but design of targeted market segments and related policy measures has been manifestly flawed.

9.2 Conclusion: Sound Regional Strategies? In the way sketched in the two case studies on dairy and textile production, a regional strategy can reasonably be expected to classify industrial candidates with regard to their potential as national, regional or global value chains. Internal and external factors favouring or hampering the projects can be written into SWOT matrices. Based on these, the most important constraints and specific support measures can be identified before detailed feasibility studies are conducted. Currently, such matrices are seldom found in the official documents. Regarding content issues carried over from national or general industrial policy, the regional strategy documents are virtually silent on key problems of NIP such as (a) the changing nature of ‘industry’ and blurred boundaries vis-à-vis services, in particular with respect to IT and logistics, and (b) the challenge of environmental sustainability. The East African strategy, for instance, aims at ‘a globally competitive, environment-friendly and sustainable industrial sector … by 2032,’ but as yet has nothing to display with reference to such green economic integration. It is, besides, not better for the AfCFTA. The agreement names sustainability as one of the general objectives but contains no specific arrangements. In contrast to practice in some of the important RECs, the CFTA agenda does not cover environmental laws and labour market regulations. The African RECs as much as the CFTA have the chance to gain enormously by contributing to the vision of a Green Industrial Africa. African regions will arguably look entirely different than the archetypical European coal and steel community because both industry and the environment have

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changed profoundly. Manufacturing activities are spreading into all sorts of logistics, software and other services and comprise new biotech uses in which African industries may want to look for a place that represents their biosphere. Jointly setting environmental targets (to be broken down into national ones) and designing environmentfriendly production modes have become a genuine common challenge for African sub-regions, too. As mentioned above, this is particularly relevant outside manufacturing for modes of energy production. The question whether African industrialization—after having been long held up by energy scarcity—will have to be coal-based first before turning to renewables later, or can leapfrog coal dependency, should not be left to the discretion of coal-rich countries in the sub-region—Nigeria, Mozambique, South Africa, to mention a few. Principles and key questions of Green Common Industrial Policy should be included as an obligatory part of strategy documents. So far, this part of the strategies is still hazy. On the process-related question of public–private dialogue: as with national industrial policy, regional inter-governmental organs have the latitude to set priorities of industrialization sovereignly. But as the private sector represents the main implementing actor, procedures for structured cross-border dialogue must be set out. To some extent, regional business councils, manufacturers’ association and similar groups have been consulted in the formulation of all the regional policy documents. However, none of the final documents, from AIDA downwards, clearly state that the identified regional industrial priorities reflect the views of the business community or sketch organized PPD along the industrial policy cycle. Frequent expressions like ‘the strategy identifies six priority sectors’ or ‘the common policy selects eight major interventions’ are nothing but linguistic sins of reification and most probably cover the lack of effective stakeholder dialogue on the subject.10 Hence, in spite of declarations to the contrary, the industrialization strategies remain top-down approaches and do not appear as living documents. Taking the West African strategy as representative example, we find that throughout the decade since the WACIP launch, industry does not even appear among the privileged ’ECOWAS sectors’ on the community’s website. This notwithstanding, the regional strategies do not appear to be pure paperwork. For an achievement, one can point to the list of regulatory and informational measures on the WACIP website. Karaki identifies SQAM likely to be the one among the ten regional industrial programmes that have made real progress, with harmonization of regional standards for more than 320 products and 40 industrial firms certified. According to the analysis, the success is due to the fact that the programme was ‘under the political radar’, responded to urgent private sector needs, and represents an area characteristic of win–win situations (Byiers et al. 2018: 12–13). These essentials of general industrial policy should be supplemented with regionspecific requirements. They are not fully recognized in the CIP documents either:

10 In ECOWAS, the initially foreseen WACIP Sectoral Council displays no signs of life and was probably never convened considering that there are almost no traces of the whole WACIP on the ECOWAS website.

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a.

b. c. d.

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Treating the regional imbalance as another elephant in the room, hence neglecting the question of how to deal with economic polarization between regional hegemons and their ‘satellites’ No clarification why the industries selected have a particular regional potential (or need), in other words: how the ‘regional industry’ aspect is to materialize Not clarifying the roles of national versus common industrial policies Not explaining the interplay of box-in-box REC policies, with SACU and UEMOA being subgroups of larger RECs, but having operational CETs as an important prerequisite for CIP, which SADC does not have and ECOWAS did not originally have and still does not fully have.

Here and there, the documents give some sense of justification for a specific regional approach in line with the four systematic arguments outlined above, e.g. to the need for balanced or ‘equitable’ industrialization in the region. Often there is indirect reference to national capacity constraints, and the need for capacity development in the regional institutions is mentioned. However, this is rarely with reference to the peculiar paradox that developing country RECs have very high needs for joint industrial and trade policymaking, but considerably less human and financial capacity than even at the level of some bigger member states—a far cry from the textbookstyle ‘autonomous steering agency with high technical (economic and engineering) competence’ without which such policy will simply not work. Even conventional aid for trade does not address the capacity problem as such, which is unsurprising considering that the regions’ own strategies do not identify it properly. In sum, regional industrial policy projects are already on the menu of the most important RECs in Africa, but they are conceived as one policy among many others and often pursued in a characteristic lacklustre manner. None contain a convincing expression of joint political will at the highest level to make the regional approach a reality. At times, they are even openly undermined by unilateral policy, as in Eastern and Southern Africa. None of the regional industrial policy documents acknowledge that the success for a regional community of less advanced economies crucially depends on a joint industrialization strategy. Like the need to cede elements of national economic oversight to the supranational level, this is not simply a policy option. This is the last turn of the catch-22: deep-seated reluctance among African leaders to seriously empower regional organs partly stems from concerns that effective regionalism would reduce space for neo-patrimonial patronage; it also stems from the fact that gains in regional division of labour are often non-obvious. Such meaningful division of labour however needs regional structural policy.

9.3 Financial Institutions in the African Regions The institutional design of regional economic communities evolves between the poles of a distinct supranational authority and mere coordination among peers. The EU is hybrid in this respect. As a consequence of the trade and industrial policy challenge

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described, African regional blocks face a double dilemma—lack of both supranational authority and regional funding structures. African countries, with the exception of the two FCFA monetary unions, have ceded little to supranational authority. Even member states of the oldest customs union (SACU) still accept—reluctantly—South African customs management as a surrogate for a supranational organ. However, regional trade and industrial policy beyond light free trade areas will not work without binding supranational authority or regulation, including a mechanism for sanctions. As discussed, such authority would have the advantage of introducing a lock-in mechanism into the working of the REC and thus give it considerably more credibility and stability than otherwise. Secondly, the regional incentive and compensation policy sketched above needs, by definition, a regional financial structure. Such Regional Development Funds are supposed to be set up along with the regional policy mechanism. In actual practice, they are not. In a number of cases, the respective sector policy documents do not even foresee a regional financial arm, which represents an interesting omission. The best window of opportunity, opened by high oil prices for some REC member states, has been closed for some time. Otherwise, a fair share of oil and mineral receipts could fill not just national but regional sovereign wealth funds, based on a formula which guarantees to the contributors some return for their contribution, possibly as a kind of venture capital fund. This will come in response to the well-known economic geography of Africa. All African RECs of major relevance contain both coastal and landlocked member states, which creates the need as well as prospects for regional infrastructure. Equally important, African RECs are heterogeneous with respect to mineral resource endowment—some members are resource-rich, some resource-poor, with the exception of CEMAC (all resource-rich). This has not always been the case and now applies to the EAC as well, although with limited prospects so far.11 Theoretically, Nigeria and other resource-rich countries represent a case where revenue from mineral resources (instead of tariff revenue) could be put to compensatory use in REC internal trade liberalization. The typical pattern of recourse curse and (more narrowly) Dutch disease within oil-producing countries should not prevent this type of regional compensation from being seriously considered on the REC agenda. This implies indeed introducing financial net contributors and net recipients fully into the concept and practice of African RECs, where it has largely remained absent thus far.12 Are there other institutional mechanisms at hand which should accompany genuine regional industrial policy? The natural solution to look for are the existing Regional Development Banks. There are actually three types of regional public financing institutions in Africa.

11 After

South Sudan’s accession and expectation that Uganda’s oil and Tanzania’s gas will be pumped. 12 Exceptions are the formulas of asymmetric customs revenue sharing in SACU and UEMOA.

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First, portfolio and policy analysis of the AfDB show that the bank has always embraced the idea of providing crucial regional financial packages, notably for infrastructure. However, as long as the bank upheld the political rejection of any industrial policy—in the ideological footsteps of the World Bank and in contrast to the UNECA—the AfDB was unlikely to adopt any explicit regional industrial portfolio, which, as we have seen, is industrial policy of still higher complexity. The setting may now have changed with president Adesina’s reintroduction of industrial policy and the developmental role of the state as well as a rise in the share of funding to the private sector—industry included—to 25% (Africa Confidential 2018). Nevertheless, the AfDB’s mandate for Africa-wide infrastructure funding will continue to dominate the portfolio, compared to something as exotic as regional agricultural or industrial policy. Also worthy of mention is the African Export Import Bank, which addresses the important bottleneck of trade finance (Fofack 2020). As seen in Part I, the Afreximbank recently introduced the AfCFTA Adjustment Facility, a financing scheme meant to create a cushion in weaker countries against fiscal and macroeconomic adjustment costs of trade integration (Fofack 2020)—one essential role that development banks can play in structural policies. Second, there are the two central banks underpinning the monetary areas of UEMOA and CEMAC (BCEAO and BEAC). They are regional, but not designed to carry out anything other than monetary policies. However, there is intensive debate in Western and Central Africa whether these two reserve banks should also align their policy with more development-centred goals (see sub-chapter on monetary unions above, and the literature quoted there). Third are the REC-affiliated development banks, at least one for every sub-region: a. b. c.

d. e.

East African Development Bank (EADB) West African Development Bank (WADB, better known by its French initials: BOAD) ECOWAS Bank for Investment and Development (EBID), with the ECOWAS Regional Investment Bank (ERIB) and the ECOWAS Regional Development Fund (ERDF) Development Bank of the Central African States, known by its French initials BDEAC Trade and Development Bank (TDB) of COMESA, formerly known as PTA Bank.

Functionally, the Development Bank of Southern Africa (DBSA) should also be considered here. It is wholly owned by the Republic of South Africa but with a claim to support the SADC region. The third group of banks would be pivotal for financially bolstering regionalized manufacturing sector support. Yet, the track record of the regional development banks is mixed at best, and some remain largely unknown even in the development community. In recent decades, they had to undergo rounds of severe restructuring to bring them back on the track of sound project funding. A new mandate as corollary for genuine regional sector policies, among them industry, would still have to be

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established. Their present mandate is somehow ‘regional’, but with no operationally relevant link to regional sector policies.

9.4 Regional Development Aid The regional development banks would thus have a new role to play in regional policy implementation. So has development aid. The international donor community officially rediscovered big infrastructure as an investment area beginning in the 2000s— after a period of false hopes in the exclusive role of the private sector (UNECA 2016)—and committed itself to help close ‘Africa’s infrastructure gap’ (Foster and Briceño-Garmendia 2010). Similarly, foreign donors would probably also shoulder the bulk of the financial burden for regional industrial policy if they recognized that although industries are vital for economic regions in Africa, they are not springing up quickly and broadly enough by the working of markets alone. Foreign donors would possibly act if there were a convincing and well-organized scheme by regional authorities. In fact, development aid could, under certain conditions, support asymmetric compensation among REC member countries even better than they can themselves, but to our knowledge, this is not explicitly practiced anywhere in Africa.13

9.4.1 Aid that Comes as ‘Private Sector Development’ (PSD) Many actual beginnings of CIP in Africa do not come as explicit industrial policy measures, and a broad range of aid projects do not explicitly feature as support to regional industrial policy either, although donor agencies grant extensive assistance to economic integration, including its agricultural and industrial dimension. Projects in support of regional value chains are among the most prominent ones. Insofar as they encourage targeted action in support of specific industries they promote de facto industrial policy. Without the name and without systematic reference to the overarching justification of industrial policy—the creation of genuine public goods and the correction of market coordination failures—we can call such projects ‘realist’ industrial development aid. Accepting a given African REC as it is, government and donor agencies try to make the best of it, in support of the entrepreneurs, farmers and workers in the region. In the positivist or realist mode, regional development and the corresponding aid for trade (AfT) come with activities that are mainly located on the meso level: 13 Even explicitly regional infrastructure makes slow progress. An example would be the Central Development Corridor which is among the spatial development initiatives (SDI) of the African Union’s New Partnership for Africa’s Development (NEPAD) (Africa–Asia Confidential 2010: 4– 5). It stretches from Dar es Salaam via Kigali to Kisangani in the DRC, but contrary to the successful Maputo corridor in the South the project has not yet seen operationalization.

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• Facilitating regional value chains (RVC) and their insertion into the global trade pattern • Supporting economic clusters at regional level, also in border areas • Providing regional infrastructure, such as transport corridors, power pools and IT connectivity • Helping with industrially relevant trade facilitation measures • Working for regulatory harmonization, including cross-cutting issues of (1) standardization, (2) quality assurance, (3) metrology and (4) testing (SQMT)14 • Lifting SME support projects to the regional level • Supporting regional research and development (R&D) programmes • Assisting with regional knowledge creation and innovation hubs/start-up structures • Coordinating entities in charge of Intellectual Property Rights (IPR) on a regional scale • Delivering institutional capacity building for both public and private regional organs, including private sector network structures. Every combination of the listed activities occurs—regional value chains combined with clusters, transport corridors with trade facilitation, SME support and start-ups, etc. Development aid agencies favour such projects of regional integration and host country governments gladly accommodate them, to an extent for good reason. They simply represent the regional variant of private sector development (PSD).15 However, effectiveness suffers as these projects are not embedded in both industrial dynamics and full-fledged regional industrialization strategies. Otherwise, the existing mass of value chain approaches, special economic zones, corridors and SME help measures would have fundamentally changed the industrial landscape in Africa long ago. Therefore, the potential of such meso programmes and projects has to be critically judged against a range of key CIP criteria: 1.

2. 3.

Do they reflect industrial targets that have been negotiated between the region, the member states, the regional private sector and its civil society, in other words: the results of private–public dialogue? As an industrial fabric is still largely absent in Africa, do they also aim at creating new industries with new regional linkages? As lack of funding or finance is often recognized as the most binding constraint, do they effectively provide access to finance or take over part of industrial core costs, here: with regional sourcing?

14 The EAC has packed these issues into the EAC SQMT Act. ECOWAS refers to it as its standardization, quality assurance, accreditation and metrology programme (SQAM), which amounts to the same. 15 A comprehensive catalogue of such measures is presented by one SADC toolbox with GIZ support (SADC 2016). It lists short-term and long-term measures to overcome constraints to agro-industrial integration in southern Africa. However, political support from SADC governments for its effective implementation is far from assured.

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4.

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As industrial imbalance is typical for the economic landscape in Africa and in the sub-regions, do they effectually counterbalance regional disparities? Is regional trade policy an operational part of the project, including—if need be—targeted infant industry protection, e.g. redesign of regional rules of origin?

5.

Such embeddedness in common industrial policy is far from obvious: • Many such projects do not specifically target industry, although they should. Much of value chain development, for example, only involves agriculture. Industrial support is added like an appendix, at a final transformation and packaging stage, although the challenges in the agricultural and manufacturing sections of the chain can be very different.16 • Others do not call for industrial policy support because they understand their role purely in terms of ‘making markets work’. In fact, we are not aware of any major industrial project for which aid for trade has helped with the writing of tailor-made trade policy in the context of an African REC. Conversely, there are a number of value chain projects that build on previous policy decisions of single country governments. For example, poultry value chain projects in Cameroon and West Africa critically depend on the existing protection against importation of frozen chicken parts in order to succeed. • Many such projects are carried out without the zeal and clout to change the basic pattern of economic integration or the regional division of labour. This section of private sector development does not normally create new manufacturing industry or new regional value chains, with the obvious exception of promoting transformation of some agricultural products. Some AfT advisors even make it a personal point of honour that aid and state agencies should refrain from taking any such creative initiative. This is the regional version of the old prejudice against ‘picking winners’. • Finally, such agro-industrial support does not clearly distinguish between national industrial policy within the region and genuinely regional industrial policy. Yet, when a regional hegemon is unwilling to become the leader of economic integration and does not consider a certain cross-national equilibrium, benefits may spread very unevenly. Against the background of thwarted greenfield investment in his country, Botswana’s then president hit the point: In June [2016], Mr Khama accused South Africa of stifling industrialization in the region by branding itself as a ‘regional gateway’ for investment and argued that it was treating its neighbours as little more than a marketplace for exports. [The Economist 14 January 2017]

It represents a paradox of value chain or cluster support in general that even where aid is focussed on the weakest links and the least-favoured locations, the strongest actors still benefit most. Regional industrial strategizing can be similarly paradoxical. The US-sponsored ‘Trade and Investment Hub’ concept or the ‘Gateway 16 For

the challenges along the cocoa value chain see Asche (2018b). Problems in cocoa growing, harvesting and post-harvest measures are entirely different from the challenges in manufacturing cocoa mass, let alone chocolate making, although a concern for sustainable cocoa may link all stages in the value chain.

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Southern Africa’ idea which has been worked out for World Bank consideration (Draper et al. 2016) reflect existing differentials in attractiveness that African locations have for multinational companies as entry points into a region. Putting such different endowments to good use can indeed help the whole of a region. But, as Draper and co-authors point out, making a gateway beneficial for the region presupposes a shared understanding of the prospects of insertion into GVCs, compared to the sum of tasks that can be carried out within RVCs. The promotional exercise takes a detrimental turn when an already advantaged industrial location—for instance South Africa—sells its place as regional ‘hub’ or ‘gateway’ to the world of investors, without managed division of labour among REC member states. Conspicuously, the multitude of these realist support schemes has not managed to contain the flurry of trade-defensive measures among African REC members, nor has it significantly boosted intra-regional trade. The ultimate expression of their shortcomings is the fact that implementing agencies and recipient countries are happy with the project mode—no matter how singularly inappropriate it is for dealing with the complex agency of global, regional and national policies and institutions that would be needed for industrialization. Nevertheless, a truly common industrial policy can build on the mass of these diverse support projects. They can usefully inform a concept of regional industrial prioritization and then become integrated into the implementation of an industrial strategy.

9.4.2 The New ‘Private Sector Engagement’ A number of non-African countries have new schemes to support investment on the African continent, inter alia, for sectors that are essential for sustainable development, for example, renewable energies. Initially a process steered by OECD, private sector engagement has received a considerable boost in the G20 context. This approach is based on the recognition that advancing private investment using innovative and stronger tools such as structured public/private funds and guarantee schemes is quintessential in order to come remotely near the levels of investment needed to absorb the fast-growing African labour force. I call this outbound industrial policy, as it features industry in the recipient, not the donor countries. In an as yet rudimentary fashion, it has indeed a surprising number of features akin to the public–private interplay inherent in smart agricultural or industrial strategies. These new initiatives can be harnessed for regional structural policies. They rarely are: ‘Compact countries’ and target sectors are preselected without much reference to African economic regions—notwithstanding the otherwise high esteem in which African RECs are held as landing zones for aid missions from the global North. Therefore, the G20 initiative should be turned from a country-specific approach to a ‘Compact with African

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neighbourhoods’, as a World Bank economist convincingly suggests with regard to ECOWAS and WAEMU.17 Every other year, donor governments rediscover developing country groups they currently want to concentrate on: well-governed countries, very poor and vulnerable countries, conflict-torn countries, transition countries, climate change-affected countries, fragile countries, out-migration countries or any imaginative combination of these. Strangely enough, resource-poor landlocked countries as a group have not yet been explicitly singled out for special support although their peculiar needs are well known in development economics. Admittedly, their specific need for infrastructure funding cum business-related support is addressed with the ‘corridor approaches’ of regional AfT in Western, Eastern and Southern Africa, but the sub-region where support for transport corridors and power interconnections has arguably achieved the relatively best physical results is Southern Africa—exactly the sub-region where we hardly find any country of the type ‘landlocked cum resource-poor’.18 Inland states in Africa’s other sub-regions still await the bold results of targeted programmes of the sort. Ethiopia has managed to overcome its problem via a new railway line to Djibouti solely with Chinese aid. In East Africa, the lacuna jeopardizes the ambitious developmental agenda of Rwanda, which cannot safely count on the perspective of reliable transport links to the coast and is meanwhile building virtual ICT links for its modernization (Asche and Fleischer 2011). Even more blatant, no donor or development bank is executing a bold initiative to overcome the perfect hinterland status of Burundi—an endogenous result of Burundi’s conflict-torn situation. When considering the special problem of resource-poor landlocked countries, donors along with REC secretariats should recall our point that targeting regional infrastructure must be accompanied by targeting the real producing economy in these countries—farms and factories—with agro-industrial support that goes beyond general improvements of the business environment. Otherwise, a perverse spatial turn could leave these countries with even fewer industrial ventures than before, as it has been established by new economic geography. Even the indestructible brewery or cement factory present in every country is then in jeopardy. Ricardo does not hold any obvious comparative advantage for resource-poor landlocked countries in the African interior.

9.5 Regional Business Associations As much as national industrial policies, regional strategizing depends crucially on a focussed public–private dialogue. Such PPD is notoriously difficult to entertain, 17 See Coulibaly (2017). Unfortunately, such a turn towards neighbourhoods, read: RECs, would quickly turn out to be incompatible with the current piecemeal European (and US) approach vis-à-vis ECOWAS and other communities. 18 Only Malawi is landlocked and mineral resource-poor. Nominal candidates Lesotho and Eswatini are in fact not locked away because of their embeddedness in the South African transport and communication network.

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and the regional dimension adds to the problem. Regional bodies for commerce and industry exist on the continent, but to judge from the experience in the EAC, the regional Business Associations (BA) or Business Membership Organizations (BMO) appear to be even less engaged in an organised dialogue with the authorities and parliaments—let alone in the systematic ‘self-discovery’ of modern industrial policy—than are institutions at national levels. This can be illustrated by the interaction of the East African Business Council (EABC), the East African Legislative Assembly (EALA) and the authorities in the EAC arena. The EALA, for example, was at some stage of the EPA negotiations very active in articulating sensible concerns on the endangered prospects of industrialization but was side-lined later in the process. The EABC was barely less audible, but the EAC secretariat was not the right address for concerns in the first place. The main reason is simple: commissions or secretariats of the African RECs do not have the authority to make industrial or trade policy. North–South trade negotiations, for instance, on the EPAs, are led by national ministers, not by REC secretariats, creating a regular cacophony of discordant voices, while their counterpart is the one and only European Commission. Regional business associations are thus even further away from decision-making authorities than national chambers, and they share the problem with regional or pan-African parliaments. Since 2004, the SADC Business Forum (sometimes also labelled Southern African Business Forum, SABF) has brought together a number of members that are themselves apex organizations, such as the Association of SADC Chambers of Commerce and Industry.19 However, it does not effectively represent business interests either. The reasons are various—multiplicity of overlapping organizations, underrepresentation of SME interests, and above all the fact that the forum would have to act at both national and supranational levels since, like in the EAC, SADC decisions are taken by national representatives and not by the secretariat (Shilimela 2008: 13). It is safe to say that a first priority for the national business associations would be to take up the regional dimension more pro-actively and to be less on the defensive against perceived threats from regional integration. Arguably out of the above-mentioned reasons, a SADC Business Council was established in 2019—hosted by the NEPAD Business Foundation—to push multiple aspects of regional integration, not least the SADC industrialization agenda.20 The relative weakness of regional BA’s has complex reasons and is therefore difficult to attack. First, organizational weakness reflects a dearth of entrepreneurship in the African member states (Wohlmuth et al. 2004). Liberalization policies under structural adjustment paradoxically reduced the number of entrepreneurs in African countries and had a secondary effect on their business associations—something the BA literature has long established (Kraus 2002; Moore and Hamalai 1993; Taylor 2007, 2012). 19 See:

https://www.sardc.net/en/southern-african-news-features/sadc-business-forum-launched/. https://www.sardc.net/en/southern-african-news-features/sadc-establishes-business-cou ncil/. No mention was made of a division of labour with the SADC Business Forum, or of whether the Council indeed intends to replace it. 20 See:

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The associations are still catching up. As a consequence, finding the critical mass of entrepreneurs for the dialogue on complex issues of industrial policy—say, the search for common industrial inputs, binding regional constraints, and definition of joint R&D needs—will be difficult in most African regions within national confines and more so at the level of a whole regional community. A regional association can hardly be stronger than the sum of its member associations, referred to as National Focal Points. Second, the scarcity of firm internal financial and human resources further limits capacity to participate in voluntary associations and programmes, a circumstance that also constrains SME owners and managers from fully taking part in national business development programmes. Third, regional organizations of all sorts in Africa also suffer from the long decried clientelism that places political friends and relatives in key positions, irrespective of their qualification. This practice of ‘disposing of’ weak elements from the respective political families and countries by sending them to the union was observed for decades in the EU as well, until it faded out in the last ten, twenty years. Such clientelism is arguably an intrinsic political economy pattern of regional integration in which the shift of power to the regional level is gradual. To some extent, it may actually affect regional membership associations in Africa. Fourth, the clout of regional BA’s is to a certain degree endogenous to the underlying trade pattern—here: the relative weakness of intra-African and intra-REC trade—thus no match for Business Europe. Where a pattern of REC-internal free trade is not firmly established, national BMOs are tempted to echo protectionist moves, as the last years have shown in the EAC, and the regional association sees its stance weakened. Fifth, the basic pattern of REC overlaps reproduces itself at the level of REC business associations and complicates the defining of common interests. The COMESA Business Council (CBC), for example, representing economic interests from 19 member countries—the highest number among African RECs and arguably one of the more active regional BMOs—does not operate within a customs union, contrary to the overlapping EAC or SACU. Hence, it can act on REC-internal customs procedures, infrastructure, as well as on trade liberalization and facilitation, but not much on problems with external tariffs. Finally, the regional BA capacity constraints have made them a pet subject of foreign technical and financial assistance. Yet the massive donor funding of almost every regional institution in Africa—from the AU Commission and REC secretariats to organizations such as the sub-regional parliaments and business associations— may well have the perverse effect of weakening both the adhesion of individual member firms and the efforts taken by their secretariats to nurture these memberships. This applies even to cases such as the EAC, where both the number and resources of domestic entrepreneurs would probably suffice to maintain a strong regional representation. Domestic, that is to say regional resource mobilization, arguably has to match extra-regional funding to a far greater extent than it currently does.

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In sum, the dialectics of regional membership organizations and the underlying dynamics of regional economic integration in Africa rather works against the emergence of effective private sector counterparts for the public–private dialogue on CIP and provides an interesting puzzle for further research on entrepreneurship and the feasibility of CIP.

9.6 A Very Short Summary of Common Industrial Policy The key elements of CIP are twofold—they reproduce the main features of the emerging consensus on modern industrial policy in general, as introduced in Table 8.1 above, and they consist of specific regional policy features. Together they read as follows: (1)

‘Philosophy’, with industry as the key contributor to accelerated inclusive and sustainable growth. This implies: (a)

(b) (2)

(3)

Regional industrialization as a market-oriented, mostly private sector-led endeavour, but needing selective public interventions based on the recognition of binding constraints that targeted industries are facing Twofold target system: (a) (b)

(4) (5)

Creation of genuine public goods for the region Correction of market coordination failures when certain sectors, spaces/locations, sizes of industries are neglected if markets are left to work alone.

Both philosophy and the target system have consequences for (a) content, (b) actors and institutions, (c) process, (d) tools Focus on a dual industrial core: (a) (b)

(6)

Inclusiveness with a double meaning: addressing all layers of society by providing decent employment at the wider regional scale; respecting the industrialization needs of all member states while considering compensation for those ‘left behind’ Green integration as a principle of modern economic communities who respect their own environment

Orientation on innovative industries, supported by ‘innovative commons’ in R&D Recognition that labour-intensive, forex-earning industries also deserve specific support.

The double rationale of regional strategizing: (a) (b)

Industry needs the region (for scale, scope, etc.) The region needs industry (for a functioning division of labour, in the final analysis: for the very existence of RECs).

9.6 A Very Short Summary of Common Industrial Policy

(7) (8)

(9)

Building of regional identity and trust: ‘Proudly (East, West, South…) African’ The relationship with national industrial policies: industrialization as an area with shared competence where CIP supersedes member states’ policies, but leaves some space for national policy The three main layers of CIP: (a) (b)

(c)

(10) (11) (12)

Specific policies targeted on particular sectors Adaptation of other, cross-cutting REC policies to meet the needs of industrial development, inter alia transport, energy, education and trade policies Domestication of regional strategy in adapting national policies, in particular the national industrial policy, its priorities and benefits granted.

A meaningful definition of ‘Regional Industries’ and their incentive system Outline of public–private dialogue as collective search at a regional level: Cross-border policy dialogue A set of essential regional institutions: (a) (b) (c)

(13) (14) (15)

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Executive, legislative and judicial Supportive, in particular: financial Consultative, like the REC Business Councils.

Need for regional funding mechanisms Mechanisms for transparent benchmarking and time horizon (sunset) System of monitoring, impact evaluation and error correction.

Part III

Global Dimensions of Regionalism

Chapter 10

Shallow and Deep Integration

Abstract The concepts of shallow and deep economic integration are introduced and discussed as to their pertinence. The conflicting results of successive rounds of global trade negotiations for developing and least developed countries are examined in the context of deep integration attempts in North-South agreements. It is established as a guiding principle that North-South agreements should normally not go deeper or run faster than South-South agreements. In light of observed global trends, upcoming inter-regional trade deals will differ from current preferential North-South trade agreements, and Northern partners will be adamant that future agreements should go deep, as the chapter critically discusses at the example of the three contested principles of comprehensiveness, reciprocity and irrevocability. A short look at the implications for the US–African AGOA arrangement and an introduction to the EU–Africa EPAs concludes.

10.1 Global Trade Negotiations Modern economic policies evolve not only in regional economic communities (REC) of neighbouring states but also in inter-regional agreements between distant partners. In trade policy language, both feature as regional trade agreements (RTA). In the current interplay between these two vectors, nothing less than the future of regional integration among the African states is now being negotiated globally, along with the regions’ agricultural and industrial perspectives. Numerous sources reckon that African industrialization and wider development strategies are jeopardized by inter-regional trade agreements. To understand why stakes are so high, we need to start off with the fairly established distinction between what is termed as ‘shallow’ and ‘deep’ integration. African countries have made substantial inroads into effective integration of their respective regions. At the political level, take, for instance, the transformation of the frontline state alliance SADCC into the cooperative SADC of today, or the repeated successes of ECOWAS in peace-making and conflict resolution in western Africa, or the historically extraordinary resuscitation of a failed and broken-down community

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 H. Asche, Regional Integration, Trade and Industry in Africa, Advances in African Economic, Social and Political Development, https://doi.org/10.1007/978-3-030-75366-5_10

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with the renewal of the EAC in 1997 and its subsequent enlargement.1 However, in the language of trade economics, the African RECs still represent a precarious intraAfrican ‘shallow integration’ among neighbours. This observation does not at all underplay growing intra-regional trade in Africa, but points to two characteristics: first, facilitation of economic activities other than trade in goods is making little headway (with the important exception of free movement of persons); and second, full functional integration still lags behind the declared formal status of the regional community. In contrast, ‘deep integration’ comprises economic issues ‘behind the border’, above all the facilitation of services and foreign investment which would in turn drive trade in goods.2 Long after its introduction by Lawrence (1997) the term ‘deep integration’ still lacks full clarity in international economics. Its definition conflates two distinct evolutions: (1) a shift in focus from what is eased at the physical boom barrier to the complexities of what is regulated behind the border and (2) a move to liberalize not just the movement of goods, but also services, investment and labour. In the end, the notion of deep integration captures all action that ultimately aims at harmonizing modes of production, private and public service delivery, of environmental and consumer protection, that is: society at large, across national or continental borders. This is the very reason why such endeavours are both fundamentally important and at times highly controversial, in particular when people discover that something flatly introduced as, say, a transatlantic ‘trade’ agreement may indeed ‘deeply’ alter their whole way of life. The notional pair of ‘shallow’ versus ‘deep’ integration is not to be confounded with the couple of ‘light’ versus ‘heavy’ integration also found in the literature and treated in preceding Part I and II, although the two pairs are not totally independent in practice. The latter antonyms juxtapose regional integration centred on common infrastructure and trade facilitation with low administration costs against the conventional CU model, which necessarily entails heavy bureaucracy in charge of administering the CET, collecting and redistributing taxes. ‘Shallow’ integration only liberalizes trade in goods (the less fully, the shallower), which can, however, be institution-heavy. ‘Deep’ integration includes services, capital, labour and the Singapore issues, but can somewhat paradoxically be conceived in a ‘light’ mode of global liberalization. Whether it should be is a different question. Global multilateralism as carried out during the first three decades of GATT essentially meant shallow integration, which is a miserable expression for a righteous endeavour. After the disaster of the highly protectionist pre-war period, cutting customs tariffs on traded goods to reasonable size and granting most of the advantages to all nations was the primary task, which was accomplished quite well. Further

1 For

the political dimensions in which EAC, ECOWAS or SADC have made more headway than in economic integration see in neo-functionalist comparative analysis Plenk (2015: 511–527). 2 For the consideration of deep versus shallow integration in the context of EU negotiations with Africa, see Claar and Nölke (2013).

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reaching integration issues were in the scope of some regional economic communities, essentially those among developed nations.3 Deep integration became a multilateral agenda starting with the 1979 Tokyo Round and formalized in the Uruguay Round’s Single Undertaking, which tied numerous integration issues together. However, after the four-year stalemate of the GATT negotiations in 1990, and even more following the protracted deadlock of the WTO Doha round, all global actors have increasingly turned from multilateral to ambitious bi-regional strategies, which they try to formalize in trade agreements. In the post-war history of global trade negotiations, we thus encounter a characteristic sequence: 1. 2. 3.

4.

5.

Initial shallow multilateralism, after the GATT’s foundation in 1947, although intended otherwise by Western initiating governments Deep regional integration, at first limited to some geographically contingent, developed country RECs—the European Economic Community above all The Tokyo, Uruguay and Doha rounds of renewed GATT/WTO multilateral deep integration endeavour, including what came to be known as the Singapore issues4 Bilateral or bi-regional, also called mega-regional deep integration, opening a second negotiation track among geographically distant partners/RECs, given the fact that multilateral talks slowed down or stalled at the beginning of the 1980s Ongoing shallow integration among developing country RECs, especially in Africa but also in Asia or Latin America.

As a late consequence of the multilateral approach, the long-stalled Doha talks produced a surprising result at the 9th WTO Ministerial Conference in Bali on 3– 7 December 2013 by concluding the WTO trade facilitation agreement (TFA). In November 2014, the talks resolved on the Protocol of Amendment, which formally made it part of the WTO rulebook. Now, we have: 6.

Continuation of multilateral trade-in-goods (and services) integration, such as the WTO TFA, with likely impact on bi-regional and regional RECs. Trade facilitation—everything in customs procedures that renders exports and imports harmonious and un-bureaucratic—hence survived the Doha round stalemate as a somewhat lighter agenda, although developing countries rightly fear high compliance costs for modernized customs systems, etc.5

Shifting the focus from multilateral, Doha-style integration to those bi-regional trade agreements is defended by the initiating parties in the global North and by 3 Baldwin

(2008: 38) only counts three: the EEC, EFTA and the Closer Economic Relationship (CER) between Australia and New Zealand. 4 Essentially four: (1) trade and investment, (2) competition policy, (3) public procurement and (4) trade facilitation, of which the first three brought the Doha negotiation round to a halt, as developing countries were afraid of deep cuts into the running of their economies. The same happened to the separately introduced agenda of free trade in services. For a detailed critical analysis of the planned inclusion of Singapore issues in EPAs, see Brücher (2008). 5 A critical analysis of the comprehensive trade facilitation agenda is presented by Grainger (2011).

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Fig. 10.1 Regional trade agreements

one school of trade theory by emphasising their contribution as stepping stones to further global liberalization. Market-liberal trade purists never really bought into this logic, neither for regional trade blocs e.g. in Africa, nor for the bi-regional trade agreements, rather considering them to be stumbling blocks to a still more integrated world economy (Brenton et al. 2008). Economic inter-regionalism blossomed so much globally that as of 20 September 2020, 306 RTAs notified to the WTO were in force, many of them concluded among geographically distant partners (Fig. 10.1).6 As the WTO secretariat noted earlier, RTAs among geographically non-contingent regions of the global North and the South are paradoxically often more in-depth than the geographically contingent regional economic communities (REC) of the South. The former agreements cover trade, investment, goods as well as services, free access of foreign suppliers to public procurement and the like, while the latter remain confined to imperfect liberalization of trade in goods.7 From a scholarly vantage point, it represents an ‘astounding contrast’ that developing nations accept such deep integration issues in bi-regional RTA negotiations which they refuse to discuss at the multilateral Doha round level (Baldwin 2008: 39), and it is fairly clear who pushes this agenda: in selective bi-regional negotiations, trade representatives from industrialized countries avoid meeting powerful emerging economies like Brazil, China or India over these issues, and re-impose thematic ‘Doha’ openings the

6 See WTO RTA gateway at https://www.wto.org/english/tratop_e/region_e/region_e.htm, retrieved

January 2021. 7 See (Burfisher et al. 2003; Fiorentino et al. 2007).

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BRICs would refuse to discuss. Conversely, the BRICs actually introduce deep integration issues in their own bi-regional negotiations with less developed blocs, as does China with Africa. While paradoxical with respect to geography, the deep-reaching integration among northern and southern producers is exactly what market-liberal trade theorists opt for: globally efficient producers of skill- and capital-intensive goods in the North—in short: industry—benefit the labour-, land- and resourceintensive producers in the South—in short: agriculture and mines—and this division of labour should be facilitated by free movement of services and capital (Baldwin 2008; Collier 2007; Venables 1999, 2003). In trade theory, the strategic choice which developing countries have to make was best represented by the polar extremes of Baldwin’s interventions in favour of huband-spokes integration (for hub read, namely: EU) or by Venables (2003) position: abandon South-South regional integration agreements altogether, in favour of NorthSouth arrangements (like EPA or AGOA), as ‘[d]eveloping countries are likely to be better served by “North-South” than by “South–South” agreements’, versus Stiglitz and others who argue conversely for the future of industrialization in developing countries: There are [..] things that must be avoided at all costs: among them, shy away from ‘bilateral’ agreements. In brief, ‘bilateral’ agreements are WTO-plus, and, and in terms of Intellectual Property Rights, ‘TRIPS-plus’ agreements, whose bottom line is to close the loopholes/exceptions/safeguard clauses of the original WTO and TRIPS agreements, freezing them in favour of companies and industries from the developed world. (Cimoli et al. 2009: 551-552).

The warning of the latter authors is motivated as much by hard economic arguments as by the fact that developing countries smaller than Brazil, China or India are regularly led up the garden path in bi-regional North-South trade negotiations.8 The opposition of S–S versus N-S arrangements will continue to be debated in academia. The subject is conceptually not exhausted. For its part, the international aid community has never systematically dealt with the issue—except that for some donors, classical developing country RECs are a pet recipient of aid, while the World Bank or DfID9 —influenced by the Anglo-Saxon mainstream—choose another course of action, preferring to support programmes of trade facilitation that are not intrinsically linked to the S–S REC in question. However, the dynamic arguments presented in the theoretical exposition pointed to net economic benefits of S–S trade arrangements. In that case, one has to worry that the one integration mode may jeopardize the other. Here, the future of Africa’s regional industrialization efforts is at stake again. As a matter of principle, NorthSouth pacts should support South-South pacts (and development at large) and not hinder or counteract them. In practical application, this arguably implies:

8 See

the testimony given by Tandon (2014). We will cite examples from EPA negotiations below, especially for attempts to deprive even LDCs from advantages of GATT special treatment in the bilateral or bi-regional deals. 9 Until its dissolution in September 2020.

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North–South agreements, as a rule, should not go deeper or run faster than South–South agreements.

Otherwise, emerging integration in geographic proximity will be put at risk by deep integration from a distance. This conclusion is logical even if one acknowledges some benefits from a hub-and-spokes concept of integration. Accepting this as basic rule for economic treaties may bridge the controversy between the two camps. Otherwise, as critics have it, colonial dependency patterns will reproduce themselves in modern trade negotiations.10 A good illustration is the special case of path-dependent integration in Africa mentioned above: the two monetary areas UEMOA and CEMAC. Institutionally, they run counter to the proposed rule; their stage-6 integration is ‘deep’, but not as deep among the African member states as it is with the northern partner, in this case the French Treasury and by extension the European Central Bank in Frankfurt. Although the common currency is only shared within the African country groups and is not legal tender in the North, sovereignty over the system is in the North, as the lender of last resort resides in Paris. This deprives African groups inter alia of the important decision-making power to revalue their currency. Unsurprisingly, critics have long called for such South-South arrangements with North-South legal backing to be reviewed as to their optimality.11 In that global perspective, the grand project of the African CFTA with its comprehensive agenda, reviewed in Part I, has the strategic potential to put things straight: negotiate the deep integration issues first in the South-South context before eventually arranging some of these topics with ‘Northern’ partners, including new industrial countries in Asia. Historically, it has been the other way round.

10.2 Trade Deals Running and Trade Deals to Come In actual fact, since the turn of the century, efforts to deepen regional integration across Africa have been accompanied by even more intensive efforts to achieve bi-regional integration among geographically distant partners. 10 For a critical depiction on how colonial dependency structures have been transformed into presentday trade regimes, including what comes as ‘preferences’ for certain country groups, see again (Tandon 2014). Tandon is particularly convincing in his description of how the international trade system classifies the treatment of developing countries according to earlier colonial ties (e.g. imperial preferences) and current northern trade interests. This author, however, does not share Tandon’s world view that “trade is war” by definition and that trade negotiations equal acts of war, nor does another author who was involved in person and delivers a very critical account of the subsequent trade rounds (Davies 2019). Blackmail and deceit still remain essential parts of trade negotiations, including EU- and US–Africa trade relations. And the world saw trade wars with the US presidency from 2017–2021. But in the global setting of 2020, it appears more essential than at any time since the 1930s to clearly distinguish between trade, trade war and war. 11 Historically the existing Common Monetary Area in southern Africa as much as SACU is also the path-dependent outcome of linking member states to the former colonial power UK via the Republic of South Africa.

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The train of events began with unilateral preference regimes on trade in goods. The EU had offered mostly duty-free, quota-free (DFQF) market access in the Cotonou Partnership Agreement (CPA) of 2000. Just before ‘Cotonou’, in 1998, the African Growth and Opportunity Act (AGOA) was launched as part of a new US-American policy offensive. When President Clinton touched down for a state visit in Accra in March of that year, he brought the freshly issued AGOA law, although 186 congressmen had voted against it because they saw little to expect from such an initiative. The 1998 US Africa offensive was in barely veiled competition not so much with the EU or China, but with France, against whose interests the US also militarily supported the rebel movement in Zaire. The initiative just coincided with the new Chinese Africa policy, which was also launched right before the turn of the century. However, it took until 2000 for AGOA to be officially signed into law, which is when formal record-keeping began.12 When casting a cursory look at the record of US–Africa trade relations, it stands out that the value of bilateral imports and exports has grown only moderately through the 2000s. China overtook the US in the aftermath of the global financial crisis as the single most important trade partner of Africa. However, the slump in US trade shares is not a sign of a protracted crisis. It mainly reflects the fall of US oil imports from Western Africa after the start of mass shale oil and gas exploitation in the USA. The current stagnation of US–Africa trade somewhat obscures the fact that African exports experience a considerable boost after 2002, and AGOA contributed considerably to the trade surge. The dramatic success story of AGOA was one of the reasons for Collier’s hint (2007) that the major part of good African trade policy should be made in the North. And there is still room for improvement: AGOA is more generous in country coverage than the EU’s Everything but Arms (EBA) initiative, which supplemented the CPA, while EBA is more generous in product coverage.13 AGOA has been limited all along to a number of goods that many African countries can export free of duty to the US—no reciprocity of trade liberalization, no deep integration beyond trade in goods so far. The same applies to the CPA and to the collection of duty- and quota-free tariff lines that China unilaterally offered to its African trade partners. Not much is known about informal reciprocity in Chinese trade concessions—they are a priori unilateral, too. All these schemes only served to liberalize exports from African or ACP countries to the North, not the inverse. A fundamental policy change only started to set in with the new round of negotiations which the EU opened in 2004. The Economic Partnership Agreements (EPA) that the European Union keeps concluding with the African, Caribbean and Pacific (ACP) countries are the most important cases of negotiating inter-regional deep integration. Most chapters in this Part III will be dedicated to a detailed assessment of the proposed EPAs with Africa’s sub-regions. From a global point of view, this may appear to be quite out of proportion. As a group, the European Union is Africa’s most important trade partner and will remain so, but the exclusive trade dependency of the immediate post-independence era no longer exists. Africa now has other partners as 12 For 13 On

all details, see the TRALAC website https://agoa.info/ (US-AID sponsored). the perspectives of US-Africa trade relations see Odularu (2020).

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well. This notwithstanding, both country configuration and content of the EU deals will set the precedent for other trade agreements to come. It is a risk-free prediction to assume that most of the contentious issues in EU trade agreements, starting with the high degree of African trade liberalization, will resurface in all dealings with third parties. Examples on the EU agenda are the trade agreements negotiated with Mexico and with the MERCOSUR. The profound policy change is centred on three key concepts: 1. 2. 3.

Comprehensiveness Reciprocity Irrevocability.

Comprehensiveness refers to all the deep integration issues on which the multilateral trade talks stalled, some of which were covered at best in true country-by-country agreements such as Bilateral Investment Treaties (BIT). We will see below how the European Commission failed in its attempt to force any such issue beyond trade in goods, but the topics will return to the fore and some of them—namely trade in services—will be brought to the table for good reason. Reciprocity as a principle has been more successful when introduced as part of the European march towards new trade relations. Asking African countries to liberalize most of their imports in response to ongoing DFQF access to Northern markets represents a sea change whose difficulty we will discuss below. This move towards reciprocal trade liberalization represents the first and foremost departure from the special treatment of developing countries which has been predominant in the GATT/WTO system up until now. As an immediate outcome of the EPA negotiations concluded in 2014, the US administration under President Obama considered a switch to reciprocal trade relations. Manifestly, the US administration and Congress regarded the EPA-style 90% degree of reciprocal liberalization as sufficiently important to consider the introduction of a similar component into a future AGOA. Rather fortunately for Africa, the time until September 2015 was much too short to load reciprocity on AGOA—something that took the EC twelve years to push through—and there was finally a rare bi-partisan understanding in the US Congress that AGOA should be renewed anyway (Schneidman 2015). Reciprocity will now be on the table again. A similar approach will most probably be pursued in the trade deals that Turkey, China, India, Brazil and others want to strike with African country groups. As an additional argument on their side, they are formally still considered as developing countries and now seek mutually beneficial agreements with African country groups in which some member states have a higher per capita income than themselves. Irrevocability is the third essential aspect of the constitutional change in trade agreements. Conceptually, it is a two-edged sword. Although advantageous for African exporters, EU and US trade regimes have been revocable so far, and thus provide no guarantee to traders and investors in Africa that access to northern markets will remain as it is. In addition, AGOA is not a permanent scheme. The law needs to

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be regularly revisited and renewed. On 29 June 2015, the AGOA legislation was extended by a further ten years to 2025. In contrast, full EPAs offer irrevocable access to European markets even if African trade partners graduate to middle-income countries—a substantial progress, as we discuss in other chapters. On the other hand, new generation treaties of the EPA-type abandon, once and for all, numerous special and differential clauses from which developing countries benefitted in the GATT/WTO system. This is the critical aspect of irrevocability, which is why all such clauses in the EPA texts matter well beyond Europe’s minority share in Africa’s trade relations. In particular, the disturbing trend of verbally copying special tariffication rights and safeguards from the WTO agreements into the EPAs—but without the latitude that developing countries have in their application at the WTO level—will have an impact on other upcoming trade agreements. In conclusion, the European trade regimes will entail a domino effect in Africa’s trade relations along the lines of the three key concepts. Systematically put, this will come as confirmation of the stepping-stone logic of regional agreements in global trade relations. By impacting re-negotiation of third country regimes, the EPAs will operate as building blocks of liberalized global trade—whether wanted or unwanted is in the eye of the beholder. As such they will shape the future of the all-African CFTA as well. Finally, the MFN clauses on which the European Commission insisted for the EPAs are the perfect indication of other trade deals looming. Without getting ahead of the detailed analysis further below, it is apparent that in insisting on being granted most-favoured nation treatment in bilateral agreements between Africa and Europe, the European Commission anticipated that Africa would conclude similar agreements with third parties and therefore made a strategic attempt to secure the best preferences from Africa, even in global comparison with other developing countries or regions.

Chapter 11

The EU-Africa Trade Agreements

Abstract This chapter scrutinizes the successive rounds of EU-Africa agreements and the four-tier preference system of the European Union for developing countries, with special attention to the Economic Partnership Agreements (EPA). Full EPAs and interim EPAs are reviewed in terms of the resulting country configurations in Africa and their impact on the officially intended consolidation of African regional communities. The analysis concludes that the artificial EPA configurations do not correspond to any existing REC in Africa. If they last, they will have a very critical effect on Africa’s regional economic integration, all the more as they start to be emulated in other trade agreements between African and Northern parties.

In order to grasp the critical dimension of North-South agreements for Africa, we have to look at the most important case in point, the four-tier EU preference system with special respect to the Economic Partnership Agreements (EPA). While these EU-ACP treaties have been heralded by many as the dawn of a new era for mutually beneficial cooperation since their introduction in the Cotonou Agreement of 2000, critical voices expected two kinds of damage: firstly, from the formal configuration of regional partner groups in Africa, and secondly, from the content of the agreements, possibly at odds with the policy space needed for proactive agricultural and industrial strategies in the African sub-regions.

11.1 Initial Country Configurations in Africa Natural partners for EU trade negotiations would have been the main African regional economic communities as defined by the African Union. Given the multiple overlaps between the regional groups in Africa, represented by the ‘spaghetti bowl’ of interlaced groups, difficult choices had to be made. When negotiations commenced in 2002, the European Commission resolved the problem of defining EPA groups by designating their regional partners in Africa ad libitum to obtain geographically distinct groups with no overlaps. The most obvious case was the configuration of the Eastern and Southern Africa (ESA) ‘region’, which consisted of Indian Ocean © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 H. Asche, Regional Integration, Trade and Industry in Africa, Advances in African Economic, Social and Political Development, https://doi.org/10.1007/978-3-030-75366-5_11

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islands (Comoros, Madagascar, Mauritius and Seychelles), Horn of Africa countries (Djibouti, Ethiopia, Eritrea and Sudan) and selected countries of Southern Africa (Malawi, Zambia and Zimbabwe)—not a region by any standard. The approach was largely perceived in African quarters as divisive. Informed political analysts paint a far more nuanced picture of who actually cut the negotiation groups to size, and scientific evidence on the dynamics of EPA group creation is scant.1 Whatever the reasons for the initial group composition were, in the actual beginning of the negotiations, none of the African groups at the table corresponded to an existing regional community. At a later stage, EPA negotiations worked as catalyst for clearing some of the overlaps, which became clear when the negotiations closed in 2014. Three agreements were prepared for signature and ratification: 1.

2. 3.

The ECOWAS EPA concluded 6 February 2014 and endorsed by ECOWAS Heads of State for signature on 10 July 2014. It involves all 15 ECOWAS member states and Mauritania The EAC EPA concluded on 16 October 2014 for all five EAC member states at the time The so-called SADC EPA concluded 15 July 2014. It includes all five SACU members Botswana, Lesotho, Namibia, Eswatini (the BLNS states) and South Africa, plus Mozambique

As nine of the fifteen SADC states are missing from the group of ‘SADC EPA states’, and the SADC as such is—in contrast to the EU—not a signing party alongside the member states, the agreement is anything but a SADC treaty and would be better termed ‘SACU-Plus’ EPA. Calling it ‘SADC EPA’ is camouflage for the underlying rift among the Southern African states. In terms of the process, a major difference was observed between the EU and the African side for all EPAs. While the European Commission negotiated on behalf of the EU, no African REC secretariat was given the mandate to negotiate on behalf of the respective community. In the end, EPA documents differ as well: only in the West African EPA are the ECOWAS and UEMOA as such co-signatories along with the member states (as it is on the European side)—not in the others. This is no minor default. There is no ‘Arusha’ or ‘Gaborone’ to function as a centralizing agent vis-àvis ‘Brussels’ at the signatory stage, nor in implementation either, as the composition of the new EPA Councils shows. In addition to the three full African EPAs, we have: 4.

A joint interim EPA with SADC members Mauritius, Seychelles, Zimbabwe and Madagascar of the initial ‘Eastern and Southern Africa’ (ESA) negotiation group, provisionally applied since May 2012. The Comoros, a member of the

1 According

to Yash Tandon, a trade expert who was close to the EPA negotiations all along, the main responsibility for why a genuine regional EPA approach did not materialize lies squarely with the EC. However, the unpreparedness and naivety of the African negotiators in Brussels was to blame as well. Unpreparedness also arose out of the reluctance of African governments to spend their own money on the necessary technical expertise (Tandon 2014: Chap. 3).

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5.

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original ESA grouping, joined again in 2019. The ESA5 group, legally nonexistent other than through the EU deal, is a political artefact—a European hub with five outmost spikes. Member countries are extremely diverse from HIC to LDC status, only share a few maritime borders, and trade between 0 and 10% with each other. In this case, a long list of topics has been out for negotiation since it was formed (Ramdoo and Bilal 2016). The market access offers were not identical and have never been harmonized with regard to the liberalization of EU imports (between 80 and 97% of trade volume). The same applies to the composition of exclusion lists, meaning that the ‘ESA’-agreement in terms of trade in goods is closer to five different individual EPAs2 An interim EPA with Cameroon, as the only signing member of the Central African negotiation group, provisionally in power since August 2014 because no regional agreement was seriously negotiated.

In light of the earlier debate, the first key question is thus: would ratification of the three full regional EPAs have cleared the picture, or would the ensuing country configuration have hindered the consolidation of African regional communities? It would actually not have been a hindrance, on the contrary. The country groupings of the three EPAs grossly correspond to rational delimitations. With a view to the overlapping RECs, the regional EPAs would contribute to a simplification of the REC panoply: • This is obvious for the EAC, initially not foreseen as an EPA negotiation group, with Tanzania (also a SADC member) resolved to participate where it arguably belongs, and with Burundi, Rwanda and South Sudan having joined EAC later. • It is important for the ECOWAS EPA. The box-in-the-box problem between the francophone UEMOA/WAEMU and the larger ECOWAS would be resolved for the purpose of merchandise trade in favour of the larger grouping. The EPA negotiations already played a catalytic role for the confection of the ECOWAS common external tariff (CET), aligned on the existing CET of the smaller UEMOA. The final offer of market opening to the EU was accompanied by the decision of ECOWAS ministers to make the CET effective by 1 January 2015.3 Left alone, Mauritania is not a member of any Sub-Saharan REC (see Fig. 1.2) and would now become well-hosted in the ECOWAS context, to which it wants to return anyway. • For the ‘SADC’-EPA, the judgement depends on the assessment of SADC as such. At present, the smaller SACU is the relevant custom union, whereas in actual practice, the SADC lingers somewhere between integration stage 1 (PTA) and stage 2 (FTA). If, however, prospects of economic integration within the 2 The

ESA EPA is out for ‘deepening’ in 2021 which can obviously have no effect on the ESA5 countries as a group, because it is fictitious as such. The preparatory Sustainability Impact Assessment provides nevertheless a rich body of information on the EPA and on every single country (LSE Consulting 2020). 3 The CET is not yet fully operational due to a number of serious implementation problems, among them the need for some member countries to renegotiate WTO bound tariff rates; see also Coste and Von Uexkuell (2015).

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larger SADC are rated higher than assumed here, the triple fragmentation of this community vis-à-vis Europe into a SACU+-EPA, an ESA-iEPA, and member states without any such agreement would appear very critical. Otherwise, the most important achievement of the ‘SACU+ ’-EPA is the correction of the original sin for African regional integration, the bilateral TDCA of 2004, by including South Africa into the new EPA configuration with an offer of fresh market access to Europe that comprises better terms for wine, sugar, fish, flowers and canned fruits for South Africa than in the TDCA.4 Irrespective of SACU’s severe internal problems, the new EPA would straighten the borderline. To this extent, the EU-ACP negotiations would have worked as a Hegelian ruse of history: despite initial split-ups, they would have helped three African regional economic communities to get their act together. Similarly, in Central Africa a full regional EPA instead of Cameroon—only would have allowed CEMAC to consolidate its situation. Specifically, the full regional EPAs would have locked in their common external tariffs and rules of origin for the most important trade partner, which is the European Union.

11.2 Final Configuration and EU Preference Systems Seven years after the close of negotiations the situation is totally different. As of 2020, EPA country configurations in Africa have come full circle. Among the full regional EPAs, only the ‘SADC EPA’ of SACU plus Mozambique has been signed, ratified and implemented. The ESA5 iEPA has also been implemented and is in practice no longer ‘interim’. However, ESA5 still does not represent any contingent region that stands to gain in integration by dealing jointly with Europe. In East and West Africa, some governments relentlessly reckon the concessions too high and refuse to sign— mainly Tanzania, Uganda, Burundi5 and Nigeria. This appears as an objection at the 13th hour, as the negotiations were officially concluded in 2014 and initialled by most governments. Most of the controversial clauses had long been bracketed by African negotiators, but the EC has not budged. At the centre of the controversy is industry, even more than agriculture. Critics in African governments and their supporters in civil society mainly assert that policy space for industrialization strategies is reduced in the treaties to an extent which would be extremely detrimental for the African side.

4 Source:

EC communication, 5 September 2014. However, South Africa is the only EPA country to which the EU only opens its market to 95%. 5 The government of Burundi voiced a fundamentalist critique of the EPA in reaction to EU sanctions imposed on it because of human rights violations.

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The question is again whether disaster is looming for the African RECs—by signing or by not signing. And again, this is as much an issue of the ensuing country configuration as of EPA treaty content. The EU Commission itself pictured the situation it helped produce in its strategic outline for a ‘New Africa-Europe Alliance’ (Fig. 11.1). The map visualizes the impossible patchwork that has been created in EU-Africa trade relations at the end of one-and-a-half decades of negotiation. The EC boasts that it has preferential trade agreements with 52 African countries in place while in fact delivering the portrait of a continent cut into pieces in its relations with Europe (European Commission 2018). In this regard, it should be underlined that the map actually portrays the situation too rosy: the countries in Northern and Southern Africa do not have one common

Fig. 11.1 EU trade regimes with Africa, ( Source European Commission, “Strengthening the EU’s partnership with Africa, Note of 12 September 2018)

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trade agreement with the EU, as suggested by the uniform colour-coding, but rather different ones—for instance, two EPAs in the South, with varying legal status. Least-developed countries (LDC) in the UN definition have little to fear from an EPA failure, as fallback on the duty-free and quota-free (DFQF) access to the European market via the Everything but Arms (EBA) scheme remains possible; similarly, GSP-covered oil exporters like Congo (Rep.) or Nigeria have little need to worry about their bulk exports.6 Cape Verde is the only country in Africa that benefits from the more generous GSP+ .7 Only upper middle-income country Gabon falls out of all preference regimes, back on MFN tariffs, worrying indeed for a country whose oil reserves are dwindling (Table 11.1). In particular, the export interests of advancing non-LDCs which are not oil-rich were in jeopardy. By not signing an EPA, they ran the risk of reverting back into the EU General Scheme of Preferences (GSP),8 which would force them pay considerable duties on their main agricultural exports. In consequence, single middle-income countries broke away from the regional discipline by signing individual EPAs. At the same time, the relevant African RECs all strive to become customs unions, or accommodate such customs unions within their confines. Such unions have a common external tariff (CET). As already mentioned, trade agreements with partners in the North which include tariff concessions on the African side should simply not be concluded bilaterally, but regionally. This should have already applied to the earlier EU-South African Trade, Development and Cooperation Agreement (TDCA), the actual ‘original sin’ with respect to the negotiation mode, as South Africa concluded the agreement bilaterally. While the interim EPA that Botswana, Lesotho and Swaziland initialled separately in June 2009 has been shelved with the ‘SADC EPA’, the separate four, now: five-country ESA-iEPA has been implemented, and the interim EPAs (iEPAs) that Côte d’Ivoire and Ghana signed individually have been ratified and implemented as well. As Côte d’Ivoire, Ghana or Cameroon stood to lose from becoming subject to EU import tariffs again, their governments surrendered a common toolbox of trade policy (import tariffs, subsidies, export taxes) most needed for industrial support in the region and for protection vis-à-vis non-African partners in exchange for their individual stakes in unfettered agrarian export to Europe, represented by Cameroon’s banana planters together with Côte d’Ivoire’s and Ghana’s cocoa farmers. This is an 6 The

observation refers strictly to oil and gas only. The Nigerian government refused to sign the ECOWAS-EPA with the argument that it would hold back national industrialization efforts. The argument is not unfounded (see chapter below), yet the fallback of Nigeria on the EU GSP regime will work in practice as an additional resource curse mechanism: while exports of gas, oil, and agricultural raw produce to Europe will encounter a zero entry tariff, treated agricultural goods such as cocoa butter and paste and industrial goods will face escalating import duties, something the European Commission did not forget to mention (European Commission 2017c). 7 In GSP+ , additional tariff reduction is granted to the 16 or so beneficiary countries that have signed key international conventions. This would have brought the EU in an awkward political position when full tariff removal was offered under TTIP to the USA, which has not signed important protocols, inter alia only 2 out of 8 ILO fundamental conventions on labour rights. 8 This is the EU version of the overarching GATT/WTO waiver of the MFN clause, the Generalized System of Preferences, with the same acronym GSP.

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Table 11.1 Preference regimes of the European Union Preference regime

Year

Country coverage

Revocable

1. General scheme of preferences (GSP) (reformed)

2014–2024

Low and lower middle-income developing countries, unless covered below

Yes, and time limit

2. GSP+ , formally part of since 2006 GSP

Vulnerable developing countries, implementing core international conventions on human and labour rights, environmental protection and good governance

Idem

3. Everything but Arms since 2001 (EBA), formally part of GSP, including transitional arrangements for bananas, sugar and rice (until 2009 at the latest)

Least-developed countries (LDC), unless concluding an EPA

Revocable, but no time limit. May be suspended for grave violationsa

4a. Cotonou preferences

2001–2007

All ACP countries (LDC + Non-LDC)

Yesb

4b. Market Access Regulation (MAR) 1528/2007, now 1076/2016, provisionally extending the Cotonou preferences

since 2007

EPA-eligible ACP countries, not yet part of a collective EPA

Yes

4c. Economic Partnership Agreements (EPA)

2008 et sqq.

Concluding ACP countries

No, except for single countries via the controversial Cotonou clause

(Source Own compilation, based on EU documents. a See Myanmar/Burma until July 2013. b See Fiji and Zimbabwe cases)

exercise in the political economy of trade interests.9 Since Kenya finds itself in a similar situation as non-LDC with an interest to preserve the duty-free access of its horticulture industry to the EU, the government had signed—alongside Rwanda— the EAC EPA, which has more political than legal importance as it triggered further MAR coverage for Kenya. Considerable problems remain elsewhere on the continent. Just 32 of the 49 SubSaharan countries would be covered by EPAs, if all the agreements were ratified, and it is not likely that the remaining third will join. Little is heard from vast central Africa. As reported above, Cameroon has signed the Interim EPA for Central Africa 9 Much

the same would have occurred had Botswana been forced to sign its iEPA into law, in the interest of Botswana’s ‘beefocracy’.

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as the only country in the region. Application has been provisional since 4 August 2014. Here, in CEMAC, overlapping with ECCAS, the much-criticized splitting of regional economic communities and their (actual or potential) CETs due to individual agreements with third partners had materialized early. It occurs to the arguably weakest of the four Sub-Saharan regional groupings, in terms of institutional capacity and intra-regional trade integration. According to EC overviews of the state of EPA negotiations, the crisis in the Central African Republic contributed to the impasse. As yet, nothing precise is known about the future of negotiations. ‘Peer pressure’ to catch up in CEMAC in order to arrive at a similar solution as in West Africa, where the sister monetary union UEMOA is included in the EPA, is manifestly weak. Secondly, four important countries of the Southern African region, all of which belong to SADC, are neither covered by the SACU + EPA nor by the ESA5 iEPA: Angola (although it participated in the SADC EPA negotiation group), DR Congo, Malawi and Zambia. Any sanguine assessment of the EPA outcome is hence conditional on important assumptions: that missing SADC states join either of the ‘SADC’ agreements, and that the CETs and market access offers of the two Southern African EPAs be harmonized. For the ESA group, this would continue northwards up to the Horn of Africa. Again, nothing precise is known about the future of this sub-group. Hence, a vast band of countries in eastern, central and Southern Africa is still not slotted in trade agreements with Europe. The many LDCs among them only have the fallback option to the Everything but arms regime which the EU unilaterally grants.10 In sum, the effectively implemented EPAs are the ‘SADC’ EPA (SACU+ ), the ESA5 EPA, and the single-country interim EPAs. Not one of them corresponds to an African REC, neither in the definition of the AU nor in the corrected and expanded definition in Part I. How critical one judges such an outcome obviously depends on the underlying assessment of the African RECs on their road to customs unions and beyond. The European Commission, its Directorate General of Trade, and the member states do not appear to be worried. The DG Trade let it be known all along that the EU will confidently implement the existing (partial and interim) EPAs and try to convince others to join in, but it will do so without getting back to the negotiation table. The situation is a disaster for Africa. Above all it petrifies the relapse from customs unions to free trade areas, the second lowest level of integration on the linear scale, because no customs union can have different external tariffs. If the prospect of the main African RECs achieving customs unions and common markets was just a pipe dream, the sanguine European attitude could be considered acceptable. Otherwise, 10 Rwanda represents an interesting case in this respect. As an LDC, it theoretically did not have much to worry about. The government ostentatiously signed the EAC EPA, which has little formal effect as long as the majority of other EAC member states did not. The then minister for trade and industry Francois Kanimba made it plain why the government signed: as Rwanda is seriously striving to become a middle-income country by the 2020s, it wants to underline its political will to secure irrevocable contractual free trade relations with the EU prior to such graduation to MIC status. The government considers this to be part of the foreign investment promotion package. Looming graduation remains for the African ‘lions’ or ‘gazelles’ indeed one key argument for replacing EBA by something like EPA, as we will discuss below.

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the frequent EC rejection of any nefarious EPA outcome for regional development in Africa and its claim that EPAs are solid building blocks for the AfCFTA are akin to denying climate change. Since the beginning of EPA negotiations, the late Malawian president Bingu wa Mutharika was not alone in castigating the setting as a ‘plan to divide Africa’. He promised to never sign an EPA while president. His younger brother, who followed him in State House, did not sign either. Similarly, former Tanzanian president Benjamin Mkapa, then President of the South Centre in Geneva,11 repeatedly castigated the making of EPAs as a ‘Second Berlin Conference’, cutting Africa to pieces again. Before the final turn in 2016/17, the statement was a gross exaggeration, and this author told him so. Firstly, the African countries were sitting at the negotiation table themselves—in contrast to Berlin in 1884/85—and they were very active as, inter alia, the successful reshaping of the whole agenda proves. Secondly, at least the East and West African EPAs would have consolidated the EAC and ECOWAS as a bloc, and by the same token would have opened an interesting perspective for Central Africa or for the numerous African countries that have not yet joined any negotiation group. If, however, the situation prevails as it has presented itself for the past years, it will indeed amount to cutting the major African RECs to pieces.12 The enduring disaster also reveals a fundamental ambiguity on the side of numerous advocacy NGOs and IGOs. By celebrating the refusal of Nigeria and Tanzania to sign an EPA, they tend to ignore or downplay the negative consequences of this refusal for regional unity. This is analytically and politically intolerable. And the new all-African CFTA cannot repair the damage because the organization is not in charge of the external border regulations vis-à-vis third parties, all the more as the new negotiation partner for future EU-Africa relations will be the OACPS, which excludes North Africa and by the same token sidelines the twin continental organizations and their operational structures (AUC and AfCFTA secretariat). The fragmented country configuration which now prevails is wreaking damage on regional unity. By extension, the described fragmentation mortgages the setting for negotiations with other global trade partners, such as China, India, Turkey or the US. The United Kingdom has set the stage. During Brexit negotiations, the UK Government aired the possibility of offering African countries better trade deals than the EPAs, which would be beneficial. However, it is revealing that two new trade agreements made by the UK government which came into force on 2 January 2021 are with the ‘ESA’ group, arguably the most problematic negotiation group and the most problematic of all EPAs, and another with the SACU plus Mozambique. These two are ‘rollover’ agreements because they simply replicate the respective EPAs, which cut the SADC to pieces. Another UK deal in the making is with the Cariforum group—the EU blueprint of which (=the EPA) is still not ratified in the region, although it has already been applied for years.

11 The

South Centre as an Inter-Governmental Organization (IGO) is the leading think tank which exclusively supports the developing countries in their trade negotiations. 12 For a very similar conclusion see UNECA authors (Luke, Mevel and Geboye Desta 2020).

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A headline ‘Enduring disaster’ also relates to content of the treaties as long as compromises on the main critical issues articulated by the Nigerian and Tanzanian Governments and civil society groups are not on the horizon. As a starter, let us note that market access offers contained in the ‘interim’ EPAs of Côte d’Ivoire and Ghana are worse from the African point of view (=involving more and quicker liberalization) than in the ECOWAS regional EPA.13

13 The attempts of the EC to help signature states harmonize market access offers in the iEPAs with the draft regional EPA do not in any way change the main conclusion: legally binding CETs no longer exist.

Chapter 12

The Content of Economic Partnership Agreements

Abstract This chapter contains the second part of exemplary EPA critique related to the content of the treaties. All relevant economic aspects and clauses of the trade-ingoods agreements are critically examined, including the market access offer, quantitative restrictions, trade remedies, export duties and subsidies, national treatment and procurement, and rules of origin. The agreed and proposed clauses are submitted to scrutiny of whether the remaining policy space still allows sensible infant industry protection in Africa. The analysis concludes that some policy space is left for targeted developmental efforts by African governments but is made very difficult in the practical management of the new trade rules. The chapter contains two case studies on global poultry and cashew trade. The overall result of the EPA examination with regard to partnership, development orientation and sustainability is a mixed picture at best.

12.1 Initial Critique In terms of their content, the EPAs as deep bi-regional arrangements between geographically distant partners were suspected throughout the twelve years of negotiation (2002–2014) of decisively reducing policy space in Africa (Khumalo and Mulleta 2010). The academic controversy referred to in the beginning of this text explains how heroic the main EC assumption always was: South–South regional integration will be well supported by a North–South partnership with a comprehensive free trade agreement at its core. This was never self-evident, neither in theory nor in practice, as the EC eventually recognized itself (European Commission 2010b). With regard to industrialization, the post-colonial history of economic cooperation between Europe and Africa is encapsulated by the statement of a Tanzanian scholar: By the look of things, it is hard, even for the most optimistic supporter of SSA-EU cooperation agreements, to argue that co-operation between these groups of countries has been beneficial to Africa in connection with industrial development. (Matambalya 2015a: 262)

Almost all provisions contested in the inter-regional negotiations are meant to defend space for autonomous South–South development in either fiscal or agroindustrial policy: the right to impose export taxes on raw materials, infant industry © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 H. Asche, Regional Integration, Trade and Industry in Africa, Advances in African Economic, Social and Political Development, https://doi.org/10.1007/978-3-030-75366-5_12

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protection, national public procurement, etc. Twelve years of EC reluctance to make concessions on the majority of these items solidified the perception in Africa that the new North–South regionalism of the EPA type was intended to reduce their economic living space altogether. Environmental concerns were almost the only dimension not high on the list of worries. Popular resentment harboured against the EPAs was regularly fuelled by agricultural import surges which were eased by prior lowering of tariffs in Africa during the structural adjustment period and bound after WTO foundation. This facilitated EU access to African food markets, e.g. as a vent for surplus of European intensive livestock farming. Mass exports of frozen chicken parts to Western and Southern Africa have been the most prominent case for decades, alongside milk powder and tomato concentrate.

12.1.1 Case Study 3: The Chicken Saga Chicken plays a surprisingly large role in trade disputes, not only in Africa. In the early 1960s, chicken changed from a relative luxury into an internationally traded staple. Inexpensive chicken imports from the USA put European producers under such stress that the Dutch accused the US poultry industry of dumping, the French of hormone use and the Germans of fattening chicken with arsenic. Starting with France—the European customs union was not yet complete—tariffs and price controls were introduced in Europe. The USA retaliated in 1964 by raising a 25% tax on pickup trucks and vans, invoking a GATT anti-discrimination clause. The tax stymied in particular German and Japanese car exports to the American market. The tariff on cars is known as Chicken Tax and is still in place today.1 It became a subject of trade talks during the thwarted TTIP negotiations. Both the EU and the USA have continued to aggressively defend the interests of their chicken-raising industry—now mainly in the direction of Africa. The influx of frozen chicken wings and thighs mainly to Western and Southern Africa is above all characteristic as an offspring of EU and US consumer preferences for chicken filets, resulting in cross-subsidies for bone-in parts which become almost unbeatable by African producers. Yearly EU poultry exports to Africa amount to more than 500,000 tons (2016). For a thorough analysis of the case, namely of the dire consequences for the emerging peri-urban poultry industry in Africa, see Mari and Buntzel on behalf of the German NGO Brot für die Welt (Mari 2013; Mari and Buntzel 2007), who cite Cameroon as a prime example. It is as much an exercise in trade policy as in political economy because the interests of traders (cum trade officials) and urban consumers in cheap poultry imports held up countervailing policy as much as the complexity of trade defence measures did (Asche 2008). The Cameroonian case is instructive with regard to the administrative complexity. The country already had an established albeit limited poultry value chain before the 1 See

Wikipedia entry ‘Chicken Tax’ (accessed 30.11.2018).

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trade problems arose: numerous small-scale poultry farmers, one feed factory and one chick-producing factory. Reduction of import tariffs on poultry meat from 20 to 5% in the liberalization period responded to growing domestic demand, but created massive problems for the ‘old’ industry and the loss of about 100,000 jobs. Problems applying WTO dumping rules and agricultural safeguards also prevented the government from taking corrective action until the outbreak of bird flu in 2005/2006 provided a golden opportunity to introduce a near-complete import ban on uncontested SPS grounds. The instability of the cold chain known from many West African countries is added to the health concerns about the import of frozen meat. In the WTO, SPS measures are among the rare categories where unilateral action is technically relatively uncomplicated and remains uncontested. Today, the SPS ‘suspension’ of chicken imports is still in place although the flu has long receded. Cameroon is apparently not important enough to take it to the WTO courts. As a consequence of the ban, the domestic poultry value chain has considerably expanded and feeds the market. Technical assistance projects to strengthen capacities of actors all along the chain also critically depend on the prior ‘protectionist’ trade policy measure for their success (GIZ 2018b).2 Similarly, Côte d’Ivoire, Senegal and Nigeria have banned imports of frozen chicken parts, with a comparable effect on domestic production, whereas Ghana, for example, has no import restriction. In early 2018, this author found heaps of empty cartons of imported frozen chicken parts even in a remote village of Kumasi region, in a shed behind the village chief’s residence. With an EU meat export price of 0.72 e/kg in 2017, imported poultry sells at more than 2e in Ghana, now that the local chicken-rearing industry has almost been annihilated. The anecdote stands as one piece of evidence for a diverging developmental trend in the region. Protection of the domestic poultry market in the aforementioned countries represents successful pro-poor agricultural and industrial policy. However, the import surges induced by SAPs linger in the memory of West Africans. West African countries face abolition of all existing quantitative restrictions ‘after EPA’ (see sub-chapter Prohibition of Quantitative Restrictions, below), while the quantitative safeguard measures still allowed in EPAs are temporary and restricted. For the specific case of chicken, safeguards are difficult to apply due to the crosssubsidization, which is at the heart of the problem and escapes the standard definition of dumping. The protracted invoking of an SPS reason would be a breach of contract. South Africa has applied anti-dumping duties on bone-in chicken imports from the USA since around 2000, and duties are also in place on imports from Germany, the Netherlands and the UK. South Africa will be ‘reviewed’ for this practice with regard to its further eligibility under AGOA—parallel to consequences from EPA implementation. 2 The

then author of the import regulation at Cameroon’s Ministry of Agriculture adds a seemingly paradoxical aspect to the saga: the combination of the 100% FCFA devaluation in 1994 with the halving of public service salaries deprived numerous households of the purchasing power for imported poultry and accentuated the need for affordable domestic production (Communication at a GIZ-Humboldt University agricultural trade forum, Berlin, 4 May 2018).

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In East Africa, the chicken saga adds another chapter to the disruptive trade policy of Tanzania within the EAC. In 2016, Tanzania banned the importation of chicks and fresh chicken meat from the USA on the grounds of US subsidies, but also chick imports from other EAC countries, namely Kenya.3 In 2017, the protectionist move culminated in spectacular acts of destruction of thousands of chick imports at the Namanga border post and induced a countrywide shortage of broilers in 2018. The government of Tanzania then discovered the urgent need for industrial support measures in the sector—another example of having the industrial policy sequence wrong. A similar conflict arose between Uganda and Kenya from 2017 to 2018 onwards over a veterinary argument. In this context, it is no minor achievement that the EAC’s mutual recognition procedure (MRP) for veterinary products is now in place: in 2018, the EAC registered the first such products under the MRP. The frozen chicken part saga in Africa has its equivalent in the TTIP cockfight of US chlorine-washed chicken versus (worse) EU antibiotic-stuffed chicken and turkey across the Atlantic—a modern animal farm that teaches a great deal about global trade and the needs to change consumer behaviour along with trade policy. The import surges in the poultry sector evidenced situations in which normal tariff protection no longer works, and the multiplication of such cases was and still is dreaded after the conclusion of an EPA—so far for the core initial critique.

12.2 The Scope of the Final EPAs Recall the integration paradox outlined above: mega-regional agreements among distant, geographically non-contingent country groups aim at deep integration, while adjacent developing countries often achieve merchandise trade integration only. What is now the geopolitical outcome of EPA negotiations? The answer is clear: the EPAs confine themselves to establishing free trade areas between the EU and African regions for goods only. All the rest, mainly the bundle of Singapore and Cotonou issues, disappeared already in the run-up to final negotiations and was left to so-called rendezvous clauses: no agreement on that, but we will meet again. The three draft regional EPAs have deferred the following integration issues to future negotiations: 1. 2. 3. 4. 5. 6. 7.

Trade in services Rules for investment, including national treatment of investors and ISDS Protection of intellectual property rights (IPR) Competition policy Public procurement Sustainable development and the environment Capital movement (controls), data protection, consumer protection (in ECOWAS only).

3 Poultry

meat imports from the EU (fresh, chilled and frozen) to the whole EAC EPA group have remained insignificant over the period of 2015–2019 (see: EC Agri-Food Trade Statistical Factsheet, extracted 17–03–2020).

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See EAC EPA, rendezvous clause in Art. 134, ECOWAS EPA, rendezvous clause in Art. 106, SADC/SACU+ EPA, somewhat more elaborate in Articles 67, I-V and BIS. Confinement of the African EPAs to trade in goods marks an important distinction compared to the CARIFORUM EPA, which was concluded on 15 October 2008 between all its Caribbean member states (safe Haiti) and the EU and which encompasses these issues.4 Omission of rules for services, investment, IPR, etc., is not per se an advantage for African partner countries. However, given the fundamental bias in the global setting of trade negotiations, restricting the treaties to merchandise trade arguably represents the better deal, at the present stage. No bi-regional deep integration treaty with the EU jeopardizes—for the time being—intra-African integration. Now, nearly all the topics above, from services to deep integration issues, are being first addressed among the African countries themselves—in the CFTA negotiations. This is strategically correct. The potential challenge from deep integration has been deferred to the scheduled resumption of the negotiations at the rendezvous point which critics fear (SEATINI 2015). Clarifying that topics of any further negotiation schedule should be a matter of consensus between the EU and Africa will therefore be revisited below as one moot point for a potential EC re-negotiation offer.

12.3 The Trade-in-Goods Agreements 12.3.1 Policy Space in GATT/WTO and EPAs In consequence, the examination of the development friendliness of EPAs can presently be confined to the regulations for trade in goods. Throughout the twelve years of negotiation, there have been a number of major contentious issues. An impressive array of them was still on the list in the run-up to the last negotiation rounds: the degree of market opening by ACP states, export duties, food security and infant protection, the most favoured nation clause, a non-execution clause for human rights violations, additionality of EPA-related aid for trade and—in Southern Africa—the actual cut of the regional EPA group (Bilal and Ramdoo 2010; Schmieg 2014). Anyone who considered the issues to be too controversial to lead to a meaningful conclusion has been proved wrong. In the end, solutions for some of the problems have been found. In the light of the ongoing critique and resistance by a number of African countries and advocacy NGOs, the solutions have to be examined in terms of the agro-industrial policy space which they take away or rather leave for the African partner countries. The tedious critical examination of controversial EPA regulations amounts to a review of the classical arsenal of industrial policy tools and their usability in the 4 For

an analysis of the supposed development friendliness of deep integration issues in the CARIFORUM EPA, see (GTZ 2009).

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asymmetric power relations of modern North–South trade agreements. Recall the advice cited above that developing countries should avoid entering such arrangements at all costs. This is the strategic issue at stake. The analysis is guided by an overarching assessment of the policy space in the global trade system. Developing countries at large benefit (a) (b) (c) (d)

From traditional exemptions in Article XVIII GATT From the Uruguay Round in Part IV/GATT 1994 From the Tokyo Round via the Enabling Clause and special and differential treatment (SDT) in GATT From additional agreements such as GATS, SCM, TRIMs and TRIPs.

Importantly, the long GATT Article XVIII allows developing countries to introduce unilateral changes in listed bound tariffs and derogate from the interdiction of government subsidies provided that such exceptional measures serve the creation of a particular economic sector. Recall that the procedure of listing and binding tariffs normally excludes one-sided tariff increases beyond the upper limit notified to the WTO secretariat, but if countries in the process of economic development [want] to grant the governmental assistance required to promote the establishment of particular industries with a view to raising the general standard of living of its people (GATT 1986)

they can have recourse to special procedures in the quoted article to deviate from otherwise binding engagements, as rolled out in particular in Part C of Article XVIII. Least developed countries have still more leeway. Even investment incentives for industrial entities, say, in EPZ/SEZ that are de jure prohibited export subsidies under the Subsidies and Countervailing Measures Agreement (SCM) have de facto been tolerated within in the WTO system. Thus, contrary to other authors, we do not consider WTO rules to be a major constraint for industrial policy space in developing countries.5 However, it would represent a fundamental impediment to structural development policies if bi-regional EPAs were to take away WTO latitude for contracting ACP states by removing exceptions from the very same rules or making them subject to prior consent of the contracting party, again other than in WTO, or by applying identical WTO rules to all developing countries where this has not been the case for LDCs. This is the direction of search in the following paragraphs.

12.3.2 The WTO Waiver The Cotonou Agreement in power until 2020 was based on a WTO waiver—expired already in 2007 and constituting an exemption from the requirements of reciprocal 5 Here, we follow the best analysis to date on WTO compatibility of industrial policy by Colette van

de Ven. It focuses on Ghana, Kenya and Namibia, which are all three non-LDCs and thus already subjected to stricter rules in WTO (Van der Ven 2017).

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trade liberalization—for its basically asymmetric trade design: full import liberalization on the European side and partial liberalization on the ACP side. Since the launch of EPA negotiations, the primary question has always been why the EU has not sought to obtain a new or prolonged waiver in order to perpetuate the asymmetric trade design. Instead, it has sought to achieve near-symmetric relations. It is much like the well-known joke about a tourist in Ireland who asks one of the locals for directions to Dublin. The Irishman replies: ‘Well sir, if I were you, I wouldn’t start from here’. Similarly, the EU has yet to provide a convincing answer to the lingering question whether the journey should not have started from a new waiver. This is all the more intriguing because in 2015, the USA obtained an uncontested waiver from the WTO for its AGOA preferences for another ten years. Special regimes that put more advanced developing countries outside the ACP group on an unfavourable footing and thus incite them to object against a further EU-ACP waiver have been gradually abolished. There is only one credible answer to the question of why there is not a new waiver. As a matter of principle, a WTO waiver remains a temporary exception to the rule of free trade, while the EU seeks—appropriately— to establish a lasting solution for trade with its southern partner countries. For the contracting ACP countries, this will at least have the basic advantage that duty and quota-free access to the European market is guaranteed forever and no longer subject to unilateral ‘generosity’.

12.3.3 Standstill Clauses—The Unidirectional Mode of EPAs As most trade agreements are by nature about freeing trade, this is the dominant topic of Economic Partnership Agreements as well. It starts with the standstill clauses. As an overarching rule, the EPA treaties stipulate that no new import or export tariffs are introduced. Further, new quantitative restrictions such as outright trade bans, quotas or licences are also prohibited. Standstill clauses are shareware in trade agreements, and they make obvious sense between partners who basically have the same economic status. Trade relations, once contractually fixed, should not constantly be called into question. Strictly respecting standstill clauses among African REC member states would be an important step forward for regional integration in Africa—as we argued in Part I. The role of standstill clauses is much different in trade agreements between developed and developing countries since they should respect the special treatment which developing countries receive in the WTO setting. With regard to the EPAs, we find here at the very start a clause which binds developing countries more than, e.g., in GATT Article XXIV—an unexplained and unacceptable move. The only general exemption to the rule is a provision to preserve the prospect of the wider African regional integration processes,

in EAC EPA (Art. 12,2; oddly not in the others). It foresees a joint revision of the tariff schedules in the event that the TFTA or CFTA materializes. This is hardly appropriate. Our explication above shows that neither agreement is likely to create

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custom areas with a common external tariff vis-à-vis the EU and other trade partners. A future need for adaptation of the market access schedule to CET reforms of the extant REC groupings is operationally much more relevant and should be included in a revised EPA wording: In regard of the principle of asymmetry, the contracting African party may decide to reform its common external tariff and in consequence the EPA tariff schedule…….

The details will then be contained in the articles about exclusion of sensitive products, safeguards and infant industry protection.

12.3.4 The Market Access Offer In the EPAs, the European Union continues 100% duty-free, quota-free (DFQF) trade access for African exports from the earlier trade regimes, with a limited exception for South Africa. Contrary to the earlier EU regimes or US-American AGOA, this will not be a revocable unilateral concession like the EBA regulation for non-EPA LDCs. Economic Partnership Agreements will guarantee this free market access indefinitely. Therefore, it is still crucial to explain that the problems of a ‘Fortress Europe’ vis-à-vis Africa definitely do not stem from high tariff barriers or bans, or from tariff escalation for processed goods, but rather from non-tariff measures (NTMs) such as technical and sanitary barriers to trade or from behind-the-border obstacles such as EU agricultural policy, not to mention non-trade issues such as prohibitive immigration policy. Tariff escalation for goods from EPA countries, more precisely higher-than-zero tariffs for semi-manufactured goods and still higher for final manufactured exports, can occur when rules of origin (RoO) exclude goods with higher third country inputs form DFQF access (see discussion on RoO below). With the aim of achieving the WTO goal of liberalizing ‘essentially all trade’ in both directions, the EC considers about 85% of trade volume liberalization to constitute sufficient reciprocity on the African side for the full European abolition of duties. The 85% margin of liberalization has been criticized throughout negotiations as too high on both fiscal and structural grounds. Some say that the critical WTO clause is read in other official languages as the ‘main part of trade’, which intuitively suggests lower liberalization rates than ‘essentially all’. The prescription remains arbitrary in any case. At the eleventh hour in 2016, even five EU member states (unfortunately not Germany) had suggested accepting only 75% of trade volume liberalization on the African side. In the end, the 85% ratio is maintained on average in the three agreements: estimated at 85.6% for the SACU+ market access offer; 82.6% for EAC; and 82% for ECOWAS trade volume. At first glance, this round of trade liberalization would not be considered to be a serious additional impediment for African development given the degree of prior trade liberalization, as this author has argued earlier (Asche 2008). Average applied MFN tariffs are already low on average in African countries, mostly at 5, 10 or 20% of duty, and the EPA groups largely offered their existing zero and 5% tariff bands

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as initial market opening to the EU. Where sizeable tariffs still exist at EPA entry into force, there are long transition periods of 15, 20 or 25 years to full abolition, with grace periods of five, seven or twelve years before the reduction sets in, as the DG Trade had always underscored. At first sight, this is likely to mitigate both (a) potentially negative sectoral outcomes and (b) the negative fiscal impact of trade liberalization.

12.3.5 Impact Assessments of Trade Liberalization Examined more rigorously, the EPAs can be subjected to the classical analysis of trade creation and trade diversion effects, as these agreements create in essence new North–South free trade areas, with preferential treatment of the concluding parties vis-à-vis the rest of the world. Three main effects are distinguishable, and they are all on the African side, as EU imports from Africa are already fully liberalized for the contracting states: 1.

2.

3.

Consumption effects from import trade created at prices reduced through tariff removal, where the EU was already the dominant supplier already before the EPA Substitution effects from EU imports replacing earlier regional imports, which is welfare increasing trade diversion in the importing African countries— assuming that the EU is a more efficient supplier than the ACP countries Extra-regional trade diversion where the EU substitutes more efficient RoW suppliers, say from Asia. Protected by better than MFN tariffs, the EU induces as welfare loss in the importing countries.

Along these lines and based on a methodology introduced by Panagarya (1998), EPA negotiations have been accompanied by impact studies all along, including the following contributions from the earlier years (Busse and Großmann 2007; McKay et al. 2005; Milner et al. 2008; Vollmer, Martinez-Zarzosoy et al. 2009).6 These historical studies are limited by several major constraints: (a) methodological choice of partial equilibrium analysis, (b) severe data limitations, (c) numerous assumptions, in particular on import and production elasticities, d) limited treatment of substitution effects and (d) limited knowledge on how the final EPAs would actually look a decade later. The available studies can easily be criticized on these grounds, starting with the main characteristic: partial equilibrium. Partial equilibrium modelling, which is based on branch-by-branch estimates of EPA outcomes, obviously misses out on important macroeconomic effects and on wider production responses in the African RECs. However, it relies less on questionable assumptions and parameters imported from elsewhere than other models.

6 The last-mentioned analysis was produced as a background paper for the WDR 2009 on economic

geography.

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In more recent years, dynamic general equilibrium modelling has become the norm to obtain a fuller picture, starting with Fontagné et al. (2010). Three studies are commissioned by DG Trade, based on the actual group EPA negotiation results: the first two of them with CEPR-IFPRI (European Commission 2016a, b, 2017a); a UNECA study on the East African EPA (UNECA 2017a); and an ÖFSE study for German BMZ (Grumiller et al. 2018). The GTAP model, version 9, is their workhorse for modelling trade flows and their impact. With given data constraints, for example ageing or absent input–output tables, the assumptions made in these studies obviously become still more heroic than in partial equilibrium. However, in our judgement, there are in principle few if any trustworthy methodological alternatives for producing quantitative assessments of likely trade agreement impacts. Estimated results vary considerably, but on average, they do not appear dramatic for the contracting African countries, with the exception of the UNECA exercise: ECA modeling suggests that the implementation of new Economic Partnership Agreements in West Africa and the East and Southern Africa region would see a significant influx of European Union exports to African countries in almost all sectors (especially in industrial goods), a reduction in intra-African trade and tariff revenue loss (Mevel and Others 2015), as cited in (UNECA 2017b: 23)

Otherwise, no present danger, no disaster looming—or so it seems. Predictions on likely winners or losers on a country-by-country base appear rather unreliable, except that the somewhat more industrialized ACP countries stand to lose more from increased import competition. In one analysis, this led to the recommendation for ACP partners to adopt exclusion lists that actually took shape over the course of negotiations (Milner et al. 2008). Final results obviously depend on what is taken as baseline—the pre-EPA Cotonou preferences or the fallback of these countries on less advantageous EU schemes, against which EPAs look favourable. Contrary to the moderate aggregate consumption and production effects, the impact studies mostly converge in finding that ACP government revenue losses will be considerable and deduce a need for compensation in the adjustment period. Whatever the empirical variance, the studies in the logic of preferential trade analysis all identify one important stream of consumer gains from lowered prices and increased production efficiency in Africa. For some countries, products and social layers, the gains outweigh the losses. Such upbeat findings have encountered protest and en bloc refusal from critical advocacy IGOs/NGOs and UN agencies which sense the inherent bias well and agree with the standard findings only on the fiscal losses from EPA trade liberalization. The two camps communicate little with one another at the level of formal impact analyses.7 What are the more fundamental limitations of the standard impact analyses that lead to such deep division among the analysts? Translating part of the civil society concerns into methodological issues, the following aspects appear critical: 7 The

exception is Berthelot (2018: 81–110), who lists a number of critical aspects of GTAP-based modelling, not all reproduced here. Taken together, they point to an important lack of realism in the available CGE attempts.

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• All impact analyses or ex-ante evaluations that we know of make use of the standard trade model with an upward sloping domestic supply curve—the ‘monumentally unrealistic’ model dealt with earlier. It routinely produces increased consumer benefits from import liberalization. • They all treat increased agricultural and agro-industrial imports from the EU as efficient, thus as cases of desirable, welfare-enhancing trade creation or diversion, if not a vital contribution to food security in Africa. We will discuss below how unrealistic this assumption appears in the light of EU subsidies that are still tradedistorting. In the overall analysis discussed here, such import surges would, to the extent of the distorting subsidies, not have to enter as net gains but as arch-typical Vinerian trade diversion towards a less efficient supplier within a preferential trade zone. • The studies are implicitly all based on the assumption that full use of production factor capacities is made. They assume in Ricardian logic that domestic productive resources replaced within the concerned REC by more efficient EU imports will turn fully into new export or non-tradable opportunities, thus realizing specialization gains. Adjustment costs are only admitted in the abstract and considered transitory. As a by-product, no need arises to recapture domestic markets, e.g. by supporting remaining national suppliers with industrial policy measures. Domestic market losses will be offset elsewhere. Given that such trade adjustment costs have proven in many cases to be considerable and non-transitory, even in advanced economic regions like the EU and USA, and have led to populist uprisings in neglected states or sub-regions, the neglect is surprising. • No study estimates the welfare losses from modern farms and industries that were foregone due to aborted agricultural modernization and failed industrialization. Problems of existing farms and factories with increased import competition are tractable but economic losses from industries or plantations that never came into existence in the liberalized environment or that went bankrupt in earlier liberalization rounds are not calculable simply because production data are zero.8 Nevertheless, this marks the African reality of a missing Industrial Revolution on the ground. For these intrinsic reasons, the conventional impact assessments cannot provide the full and accurate picture of what such North–South trade arrangements bring about or arrest in terms of industrialization and agricultural modernization in Africa. At best, aid for trade can technically assist contracting governments by adding economic benefits from feasibility studies on possible new agro-industrial ventures to the overall balance stricken—depending on the policy space left to support them with trade defence measures.9 8 However,

no study considers the mitigating impact (and its limits) when the available safeguards and other trade remedies are actually used. 9 Our main critique of the safeguard measures and infant industry clauses in the EPAs corresponds to this problem. Where protection is allowed only for existing industries suffering from import shocks (which can be estimated provided there are known elasticities), a trade agreement obviously misses out on the configuration of new industries.

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12.3.6 The Structural Problem of the African Market Access Offer The overarching problem can be even better explained by the structure of typical tariff schedules in developing countries. Conventional trade policy in less developed countries grossly follows the three-/four-pronged schedule discussed in Parts I and II, according to which (a)

(b) (c)

Goods of immediate consumer necessity, raw materials (unless also produced in-country) and capital goods (machinery and equipment) are to be imported duty-free. Intermediate goods (e.g. chemical goods or knocked-down kits for equipment) have to carry a moderate duty. Finished goods carry the highest duty.

The schedule is also designed to cushion domestic producers against what is known as anti-export bias of import protection, as inputs into export production are mainly in brackets (a) and (b). This tariff structure only creates problems when developing countries later strive to produce some of the duty-exempted or intermediate goods themselves, and 0 or 5% import tariffs are suddenly no longer conducive to keeping imports at bay. The same schedule underpins the common external tariffs of the contracting RECs, which in the end would have to be harmonized with EPA market access offers. For example, the current EAC CET has a 25 pc tariff for finished goods, 10 pc for intermediate goods and 0 pc for raw materials, capital goods and ‘basic necessity’ products, plus the exclusion list, while the ECOWAS CET of 2015 has a higher taxed fourth band. A typical case is finished pharmaceuticals, considered products of basic necessity and thus duty-exempted, whereas individual ingredients for the same products still carry a duty. The schedule thus needs empirical modification as soon as dynamic considerations for import-substituting production come into play, but it still provides political guidance in very general terms. However, in the end, EPA trade liberalization flattens out the staged schedule to zero, except for the bracket of sensitive products excluded from tariff removal. EPA exceptions and safeguards will be examined below as to the limited leeway which is left for developmental tariffing.

12.3.7 Fiscal Losses from the Liberalization Schedule Important fiscal losses from reduced import tariff revenue will occur with EPA implementation. As a matter of principle, a critique of trade agreements should not be based foremost on fiscal gains or losses, but their magnitude will be considerable starting with year T 5 on the EPA timetable. This represents a long-known challenge for the

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contracting African governments. Estimates vary wildly, based on the same range of impact studies mentioned above. Earlier partial equilibrium estimates had very critical figures, but did not yet know in particular the final market access offers. The current estimates range from apparently dramatic figures for West Africa as quoted from the South Centre by Concord (2015), to the calculations in the above-quoted CGE studies. The first mentioned source estimates annual losses of e1.87 billion in 2035 (!) for the ECOWAS EPA countries, of which 40% would occur in Nigeria alone. The best available critical calculation is Berthelot’s actualization of earlier SOL-ASSO estimates (2018: 112 sqq.), according to which West Africa’s fiscal losses would amount in year T 20 to 18.1% of tariff duties on all trade compared to a situation without EPA. The other studies, including the one of otherwise EPA-critical UNECA for East Africa, come to more modest results, yet all with a negative sign. UNECA explains the result by pointing out that liberalization typically starts with the tariff lines that are already largely free of duties in the national or regional tariff books, and that the EU import share has declined considerably recently—to 12% in the case of the EAC. Complicated methodological issues and data problems hamper the delivery of reliable estimates, starting with the question of what the appropriate baseline is (Box 12.1). Box 12.1: The controversy on fiscal losses from trade agreements In a World Bank study for Nigeria (Von Uexkuell and Shui 2014), the implementation of the ECOWAS common external tariff was correctly taken as baseline for EPA impact assessment. The CET that formally became operational in 2015 implies a tariff revenue increase for Nigeria compared to the earlier national tariff book. From this higher base, the annual loss in 2035 in the event of EPA ratification would amount to a sixth of all import duties (−17.3%), the study finds, a considerable shortfall for the treasury. However, application of the ECOWAS CET does not represent the actual baseline, which is far lower. It starts with the fact that Nigeria frequently uses national import bans where no customs revenue is collected. Next, estimated tariff losses from smuggling via Benin or other neighbouring countries and at Nigerian ports could, if remedied, generate taxes of a considerable magnitude, the WB study reckons, along with potential recovery of the enormous tax losses on crude oil exports. At issue is thus an increase of tax collection rates, at given or declining trade tax rates. Based on these considerations, the WB study made the perfectly arbitrary assumption of a reasonable 3% annual growth in all fiscal aggregates (nota bene: in tax sum, not of tax rates) and arrived at the conclusion that the 2035 annual loss with an EPA would amount to just 0.8% of Nigerian government revenue. However, if tax collection rates are kept constant, the shortfall for the treasury would obviously be much higher, but comes with the depressing implication that the effectiveness of the country’s tax revenue authority will not improve over time.

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In any case, offsetting lower import tax rates from an EPA with higher tax discipline remains arbitrary and cannot be the final word on the matter. In the analysis quoted above, Berthelot (2018:88) importantly adds another factor—demography. According to the revised UN demographic projections, the population of West Africa will increase between 2015 and 2035—the end of the EPA liberalization schedule—by almost two-thirds (64.4%). This would generate an important growth in import tax revenue in the baseline scenario, based on a past population growth elasticity of imports of ≤2. Conversely, the fiscal losses from import liberalization will be far higher, all other things being equal, but are apparently not considered in the standard modelling exercises. Discounting of likely tariff losses to their net present value matters as well, though in the opposite sense, but is apparently not undertaken in most calculations, neither by EPA defenders nor by the critics, which is odd. Fiscal losses in 2035 obviously count for much less than current loss. Given the near-unpredictability of baseline and predicted tariff revenues in T 20 , the discount rate would also work as a reasonable measure of uncertainty. Altogether, this hypothetical exercise on Nigeria shows that while contraction of the fiscal revenue is an issue, very uncertain magnitudes should not dominate the assessment of a long-term trade agreement, here: an EPA. Nota bene: As of 2021, the Government of Nigeria still has not signed an EPA with the European Union, as discussed elsewhere in this volume. This renders the fiscal case study hypothetical, but generates a different problem: will Nigeria or any other ECOWAS country consistently apply the ECOWAS CET even though it is not in line with the tariff schedule agreed either in the (draft) regional EPA or in the respective iEPAs? In countries with fewer obvious opportunities to increase tax revenue than in Nigeria, the standard recommendation is to raise value-added tax (VAT) rates in order to stabilize the tax base. The recommendation is of very limited value. Certainly, time allows by 2035 the establishment of a modernized tax system which relies on other fiscal sources than customs revenue. Yet if there is a rule to go by, full substitution of lost tariff revenue by another indirect tax (VAT) on domestic sales is impossible in developing countries due to economic informality and tax collection problems. The span of fiscal estimates shows the need to launch a new round of reliable tax projections for all EPA countries as part of joint reassessment and public consultation, even more so as some ‘interim’ EPAs foresee more rapid import liberalization than the regional agreements. The EU has given assurances for some temporary coverage of the fiscal losses attributable to EPA implementation. Among the three main EPAs, the commitment comes in different forms and degrees. Therefore, critics suggest that the EC will have to offer a harmonized, binding formula of reimbursement, along with other EPA regulations that should be revised.

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In substance, this will represent a new form of budget aid. However, budget aid is controversial, to say the least. Direct transfers to the treasury can buttress developmental efforts of reform-oriented governments while at the same time dodging issues of aid fungibility. Problems of moral hazard arise in other countries. Essentially, a general issue with tax systems in Africa is raised at the ephemeral occasion of EPA implementation. The low tax rate of 13–15% of GDP, conspicuously unchanged over time, could have long been shifted upwards, for example, by direct taxes on property, in particular real estate. Once established, such direct taxes have convenient revenue collection features like customs duties, and yet they do not impose consumer losses. Rationalization of the excessive, overlapping and economically often ineffective import tax exemptions in Africa, which was discussed above as no good industrial policy, matters here as well. The discussion of how best to support the modernization of tax systems in Africa in the face of reduced average tariffs has not yet come to a conclusion. Arguably, full and lasting compensation by European budget aid cannot be the final result, as little as fiscal losses cannot be of paramount importance for the acceptance or rejection of trade agreements.

12.3.8 Prohibition of Quantitative Restrictions Faithful to the GATT letter and spirit, bilateral trade agreements also seek to eliminate all ‘quantitative restrictions’, which is trade law jargon for import/export bans, quotas or licences and refers to traded volumes. The GATT Article XI on ‘General Elimination of Quantitative Restrictions’ reads: No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party.

This article from the general agreement is copied nearly verbatim into all the EPAs—an arrangement that cannot be wrong at first sight: one block of genuine non-tariff barriers in Fig. 2.1 will be eliminated. Nevertheless, the EPA provisions against such NTB are among the boldest of all: quantitative restrictions on both import and export side are covered. And not only new quotas or bans are prohibited as is the case with some other trade policy tools; all volume-related provisions must go, old and new, without the general exceptions of the GATT for developing countries. As this theoretically amounts to 100% elimination for both contracting parties, the EPAs would insofar no longer be asymmetric trade agreements, contrary to what is written into their opening paragraphs. There is one general exemption to the provision, regarding bilateral or multilateral trade defence measures which can continue to work with quotas. However, these clauses have characteristic shortcomings of their own; see below under ‘Trade Defence’ and ‘Infant Protection’. Then, there are specific exemptions contained

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verbatim in the EPA article discussed here. Again, they are copied from GATT Art. XI and refer to (1) export restrictions to relieve shortage of foodstuffs and other essential goods and (2) import/export restrictions in view of standards and regulations—in substance a subgroup of safeguards in another box of NTM in Fig. 2.1. Copying from GATT stops here. In GATT Art. XI, a long exception clause on ‘import restrictions on any agricultural or fisheries product, imported in any form, necessary to the enforcement of government measures [specified hereafter]’ ensues—not so in the EPAs. This follows the global trend away from quantitative trade contingents, but some trade experts argue that tariff quotas will have to remain as an important steering tool for agricultural as well as manufacturing development. A development country or regional community may want to regulate its domestic market by letting duty-free imports in up to a certain quota to which domestic suppliers cannot realistically cater, say in dairy production, while placing sizeable duties on quantities that exceed the quotas (or vice versa).

12.3.9 The Exclusion Lists of Sensitive Products10 Let us recall the sweeping criticism according to which EPAs merely represent a second wave of enforced trade liberalization after what was imposed on developing countries with the structural adjustment programmes of the 1980s and 1990s. Defenders against such critique, mainly in Brussels, have always argued that the agreements contain two sets of instruments for trade protection: (1) the exclusion lists and (2) the special safeguard clauses against market disturbances. These two sets are basically supposed to be sufficient remedies for the African countries in the event of negative trade impacts on their economies, in particular with regard to fledgling agrarian and industrial structures. Is this the case? Between 3 and 20% of African imports from the EU in value terms are completely exempted from tariff liberalization.11 The European side points primarily to these exclusions to highlight the political latitude left to the African states regarding what to liberalize and what to protect. What is their actual function? Do they represent one of the remaining bulwarks in Africa against northern import surges? The answer is: no. The exclusion lists do not contain products banned from importation to Africa. Normally, there are no longer any bans because all quantitative restrictions have been removed. The lists simply exclude some sensitive items from further liberalization under the EPA market access schedule, and the lists contain some products destined to carry relatively important duties of up to 40, 60 or even 100 per cent permanently. 10 For the purpose of EPA analysis, the terms ‘exclusion’ and ‘sensitive’ refer to the range of same products. In the African CFTA design, the exclusion and the sensitive product lists refer to two different categories of goods. As seen in Part I, only the former are excluded permanently from intra-African trade liberalization. 11 The extreme cases are Seychelles (3%) and Zimbabwe (20%) in the ESA5 EPA; see LSE Consulting (2020: 47) based on EC information.

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The exclusion lists attached to the final EPAs predominantly ring-fence a range of agricultural goods, processed agricultural products and raw materials, among them: • • • • • • • • •

Beef and meat of other sorts Milk and milk powder Flour of wheat and maize Sugar Petroleum oils Cement Paper, plastic and rubber products Footwear and leather products, sometimes textiles Consumer electronic goods and vehicles.

These exclusions are likely to mitigate the trade, welfare, production and fiscal revenue effects from EPA liberalization, but the import duties permanently maintained on these products are mostly not very protective, let alone prohibitive. For instance, meat imports into the ECOWAS would continue to carry a fairly modest 35% import duty in all forms (including the much-discussed frozen chicken parts). Most categories of fish, sugar or milk and milk powder on the same West African exclusion list carry just 10–20% duty.12 In contrast, milk powder carries 60% duty in the EAC list and sugar is hit by 100% duties—one of the rare instances where this rate is imposed. For most agricultural and other products, the exclusion lists are not directly protective of the domestic market, but rather of fiscal revenue earned from an ongoing stream of imports from Europe. This is obvious for the exclusion of consumer electronics and vehicles, e.g. in the ESA5 EPA, and comes as no surprise. The exclusion lists freeze tariffs, many of which were lowered during earlier liberalization rounds, either unilaterally or in the context of structural adjustment. Consideration for food security may have led to moderate tariffs for imported agricultural staples as well. Why do agricultural goods dominate the ranking of sensitive products, apart from the aforementioned concern for tax revenue? Is it the mere fact that agriculture is still the predominant sector for employment in Africa, with 60% of the labour force? This is probably the main reason in terms of mitigating a negative employment impact of liberalized imports. There may be other reasons at the international political economy level. The EU refused to discuss issues of its common agricultural policy at the EPA negotiation table, yet European agricultural subsidies are still suspected of tilting the game against African competitors. This is reflected in the composition of African sensitive product listings. African negotiators have responded with some block protection of agriculture, as a matter of principle. This is no reason to celebrate, as a number of products with which African farmers would only be competitive with high rates of protection are still not taxed accordingly. Furthermore, in most EPAs, the listed rates cannot be unilaterally raised in case of commercial or social problems. 12 The

‘SADC EPA’ is particularly careful in also excluding milk powder blends from full liberalization, as add-ons are often used to circumvent protection against pure milk powder imports, but the actual tariff rates are not prohibitive either.

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The exclusion lists are thus not an effective African answer to European direct or indirect dumping or subsidizing.13 Some lines of industrial products remain tariff-protected in the exclusion basket of all three final regional EPAs, among them the effectively implemented ‘SADC EPA’ and also in the implemented ESA5 EPA.14 With the possible exception of some textiles, including used clothes,15 strategic choices to effectively protect key industries are barely visible to the naked eye. The ECOWAS exclusions comprise cement, pharmaceuticals, soaps and cosmetics; the EAC list contains mundane goods like matches, crown corks and batteries—all transpiring fiscal considerations or protection of vested interests. The most advanced industry on the continent for its part, the South African motor industry, has a very differentiated liberalization schedule, but little is on the exclusion list, mainly original equipment components with 100% duty—justifiable protection of the important car part fabrication in South Africa. While moderate as to the level of duties, the static nature of the exclusion list is more of a problem. Contrary to the three-/four-pronged schedule of tariffs mentioned above, no developmental rule governing a static exclusion list comes to mind. All we know is that the exclusion of sensitive products from liberalization must respect consumer welfare, domestic production, employment and customs revenue arguments.16 Yet why should some ‘sensitive’ products, apart from arms or toxic goods, remain shielded from liberalization for an indeterminate duration, and at what tariff level? The industrial or agricultural policy manual is silent on this point. Even under the assumption that long-term protection is rational for some product lines, the institution of a fixed exclusion list contains a double conundrum: • Contracting African parties are expected to know today which new agrarian or industrial products they may want to foster in future by means of enduring protection. • Import protection for some 15% of products will remain in place even if African countries have long become competitive in these product lines. To be sure, African contracting parties as a group have the right to unilaterally lower protection of sensitive goods or to remove goods from the exclusion lists altogether.17 In such a case, the European side would send notes of congratulation. But the fact that goods are listed as excluded from liberalization formally invites

13 In this respect, the author corrects his earlier assessment in Asche (2008, 2015). The final exclusion lists do not display much that would qualify as highly protected. 14 In the ‘SADC’ EPA and the ECOWAS EPA, products exempted from liberalization are not contained in a separate annex, but are denoted by an ‘X’ or a ‘D’, respectively, in the annexes of tariff duties on products originating in the EU (Official Journal of the European Union 2016: 1234) (ECOWAS—EU EPA 2017). 15 HS code 630900, taxed with moderate 45% on the EAC EPA exclusion list, given the fact that used clothes have nearly no value apart from transportation and distribution costs. 16 For an early estimate of exclusion lists’ mitigating impact, see Milner et al. (2008). 17 In some use of trade language, sensitive goods are even considered to be goods that are liberalized with delay, while goods on the exclusion list are by definition not liberalized at all.

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vested interests in Africa to defend their stance forever, and the African side has no right to raise tariffs on other goods. This is what makes the lists static.18 Time inconsistency between present and future policy is programmed. The abovequoted Ugandan study of the EAC CET exclusion list asks for a rational framework for inclusion/exclusion in order to avoid perpetual protection and suggests a quantitative measure: when goods excluded from liberalization continue to be imported in large quantities after some years, internal supply elasticity should be considered insufficient to meet full demand and tariffs should be lowered.19 Indeed, modern agro-industrial strategies do not require permanent protection, but rather something flexible. Temporary protection with clear sunset clauses represents one of the safest bets in new industrial policy. Some sensitive products may even be protected at higher levels than now foreseen but for a shorter duration, and the industrial policy cycle starts over with new things. Such ‘higher but shorter’ protection also runs counter to the static principle underlying the exclusion lists in the EPAs. Brought to its logical conclusion, it would lead to the abandonment of such once-and-for-good lists altogether. The appropriate tools would then mainly be the safeguards and infant industry measures discussed in the next two paragraphs. There may be one good reason to maintain the exclusion lists in revamped EPAs: they can be used as a trading platform for tariff swapping. It will already be difficult enough to convince the EU trade administration and the dominating business interests in Europe to accept reoccurring instances of new or considerably higher tariffs in African RECs. If new or higher tariffs are to be accepted, the exclusion lists would set an upper limit to such aspirations. When African states want to raise tariffs on a given volume of trade, they would have to consider liberalizing something else from the list in return—cement for instance, as Dangote’s factories will either have become competitive or are unlikely to fully meet internal demand. With a ceiling of about a sixth of all imports, the exclusion quota buys acceptance for reoccurring instances of effective protection on the African side, namely those that will be discussed below as infant industry protection. 18 Taking the ECOWAS CET as example, single REC member states have the right to manage up to 3% of tariff lines individually. This arrangement seeks to cater for very different initial conditions among member countries—compare Burkina Faso and Nigeria—and should be conceived as a transitory dispensation at early stages of an economic community. Yet, such exceptional permission would not have a place anymore in the ECOWAS EPA and not even within the exclusion basket, although the special protection needs of various member states are accommodated here. However, flexible, upward and downward management of tariffs in the 3% bracket would be excluded upon entry into force of the EPA, as it stood before the general stalemate (Personal communication of Francisco Mari, June 2018). 19 EPRC suggests, for example, removal from the exclusion list and zero tariffs for hard wheat or sugar, as long as there is no companion modernization programme rendering higher yields likely, contrary to well-performing milk and rice, which should remain protected for still some time and then exposed to the free market (Shinyekwa and Katunze 2016). Apart from the fact that the types of products, e.g. in West Africa, are different, the study does not take the indirect effect of EU or US agricultural subsidies into consideration. These subsidies make African farmers appear less competitive; however, European or American farmers would not be the most efficient suppliers on all fronts without these subsidies. We discuss the issue at the end of this volume.

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Under the heading ‘Is long-term binding desirable?’, this author criticized already in 2008 the idea of considering an exclusion list which fixes goods for unchanged protection over very long periods. Lock-in tariffs for the same goods in the long term are in fact the opposite of dynamic structural policy and an imposition for developing countries to declare in one year once and for all which industries they want to bring up in future. A flexible solution was suggested: What could be the solution? The only imaginable way is a developmental clause that gives all ACP developing countries a right to single previously liberalized items out for protection, for a given period of about five years, if there is a realistic perspective of local and/or international investors opening new production lines in the region. This would imply a common understanding to interpret SDT in general, and more precisely GATT Article XVIII, Parts A and C, in the original development-friendly sense. More practically, if WTO law compels partner regions to work with 80/20 or 70/30 rules, contracting parties should agree on the possibility to swap production lines from free to sensitive, in exchange for a sensitive line item to be freed. As this must be internationally notified and should be made part of public EPA monitoring, it prevents clientelistic networks from tinkering with the system (Asche 2008: 88).

Making the EPA-sensitive product lists dynamic would imply removal of old items of a certain import value from the list in exchange for new products up to an equivalent tariff quota. This would respect the interpretation according to which the WTO rule of freeing essentially all trade means about 85% (or more) in one direction. The calculation would have to be notified to the EPA Council. Confronted with such a suggestion, the EC would point to the regular joint review of the treaties in the respective EPA Councils as a fully sufficient provision. However, any change in the exclusion list would require the consent of the European side. Introducing a dynamic factor to the EPA-sensitive product list would amount to a formal procedure that makes the described product swapping a sovereign decision of the developing partner states, more precisely: of the concerned RECs as a group.

12.3.10 Trade Remedies: Anti-dumping, Countervailing and Safeguard Clauses Bilateral and multilateral countervailing and safeguard clauses have been borrowed from WTO law and extensively written into the EPAs. The DG Trade and supporting governments have argued all along that this range of emergency measures will suffice to deal with all imaginable disturbances and threats to African agriculture and industry, as the following proud statement demonstrates: The EPA also contains a large number of ‘safeguards’ or safety valves. EPA countries can activate these and increase the import duty in case imports from the EU increase so much or so quickly that they threaten to disrupt domestic production. There are no less than five bilateral safeguards in the agreement, a number not replicated in any other EU trade agreement. (European Commission, Fact sheet on the SADC-EPA, 10 October 2016)

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Basically, these clauses give permission—for the full 100% (85 and 15%) of imported goods—to temporarily suspend import tariff reduction under the EPA, raise tariffs to some higher level and even operate quantitative import restrictions as long as the problem persists. Are such clauses thus sufficient (a) to remedy market disturbances, especially in food markets, and (b) to accompany long-term industrial policy? Trade policy critics have long argued that proving dumping allegations with the required documentation is very difficult for developing countries with technical capacity constraints. Cases where LDCs have successfully defended anti-dumping measures under GATT Article XIX are apparently non-existent. The specific notion of dumping which the EU defends is particularly difficult to counter in practice. This definition takes the internal price level as yardstick, yet ignores the obvious reality that many EU internal agricultural reference prices are themselves already tilted by political means.20 This applies analogously to EPAs. Relevant problems of the sort which Africa is facing are mostly (a) (b) (c)

not dumping in the technical sense of under-pricing not the result of (immediate) prior tariff reductions not temporary phenomena.

For example, the import surges of frozen chicken parts, milk powder or secondhand clothes have long-standing structural reasons in the exporting advanced economies, either in the policy sphere or in established consumer preferences. They are remedied neither by anti-dumping nor by usual safeguard measures. A number of African countries have taken appropriate action with reference to these safeguards, but they had to stretch the rules to their needs and hope that no legal action in WTO instances would be taken against them. Sometimes it works, sometimes not (see again Box on poultry trade, above). This proves that some policy space for agro-industrial protection remains where the EPAs replicate GATT remedies, but this is informal action, and EPAs restrain the policy space more than the WTO does. Safeguard rules should be revised accordingly: • A textual link to immediate prior tariff reductions (see, e.g., SADC EPA Article 34,2: ‘as a result of the obligations under this agreement’) may be maintained to justify safeguards, but must not appear as an obligatory, exclusive reason for triggering safeguards. • The material trigger should not be increased quantities of imports alone, but also sudden drops in prices as a result of the intrinsic volatility of world market prices for agricultural goods. As falling prices precede quantitative import surges, they are a leading indicator for corrective measures needed. • For compensatory measures, the full use of policy space under WTO rules should remain intact, which means: restoration of the chance given to developing countries in the WTO agreement on safeguards to impose protection at least up to the level of WTO-bound MFN tariffs (in urgent cases beyond), not just to the level 20 See

namely Berthelot (2018: 66–68). We come back to the issue when the role of subsidies is discussed below.

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of applied MFN tariffs as all EPAs stipulate (e.g. EAC EPA Art. 50,3 (b)), and to impose new quantitative restrictions if need be—to be notified to the EPA Council but not to be decided there. • Temporal limitation of two to four years, renewable once, of tariff and non-tariff import restrictions should be maintained as a matter of principle. However, they should be given permanent status in the EPA Council as long as the European side cannot prove that causal subsidies have been removed or other factors invoked by the African side as market-distorting have no such impact. Importantly, action under the last item implies a reversal of the burden of proof for the African RECs which comprise least developed countries. This is a long-standing claim that international advocacy NGOs have made in WTO discussions in the light of the challenges LDC faces in obtaining the required comprehensive documentation from Western firms and analysing it. The EU would have the chance to demonstrate its willingness to better respect LDC concerns in its bi-regional treaties with Africa. For a change, the EPA clauses would be more and not less preferential for LDCs than GATT rules. Finally, it should be underlined that across all these regulations, the European Union, on its part, also preserves the right to impose import safeguards on the African states—also in reaction to price drops (for sugar). Theoretical as the case might appear at present, it is significant that disturbances in the domestic agricultural market are maintained as one reason to impose such sanctions. Given the sensitivity and volatility of European agricultural markets, the case can turn out to be far less theoretical in a future of reinvigorated farm production and export capacity in Africa. In this respect, the DFQF access to the EU market that the African countries have obtained will simply not be without limitations.

12.3.11 Infant Industry Protection The African negotiating parties have taken up the challenge of somewhat longerterm protection under two different headings—common sectoral policies and infant industry protection. They have rightly criticized the EC claim that the usual antidumping and safeguard clauses against sudden import spikes should be enough. Such emergency measures are difficult for developing countries to handle, and again, they are the opposite of strategic agricultural and industrial policy aimed at building new productive capacity. The African negotiators have thus insisted on the need to have a stand-alone provision for the treatment of infant industries, which would allow them the flexibility to take domestic policy measures to provide temporary support for their nascent industries. (Bilal and Ramdoo 2010: 24)

As a new consensus on modern industrial policy is still not firmly established, the time-honoured concept of ‘infant industry’ has remained fairly vague as well. This was already mentioned in Part II. What is meant by ‘infant’? Why exactly do

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(some) infant industries need public support? What are first best promotional policies compared to second-best tariff protection? How far can protection rationally go? How should success criteria and sunset clauses be defined? All of these questions have yet to be answered. Therefore, the term ‘infant industry’ is taken up in current trade negotiations with Africa essentially as a heuristic concept. We treat it this way as well. All three regional EPA texts finally contain explicit special reference to infant industry protection—prima facie a success. However, the clauses are awkwardly termed to various degrees. It is obvious between the lines that EC negotiators are reluctant to concede such protection, most obviously in the EAC EPA. In practice, the clauses are admitted—again—as temporary trade defence measures against trouble which occurs right after the abolition of tariffs during EPA implementation. Only with considerable stretching and arms-twisting can they serve the purpose when a new industry needs promoting. The planned ECOWAS EPA Article 12 allows tariff changes in support of common sectoral policies—agricultural, environmental or industrial policies, one might assume—a meaningful regulation. However, these changes must constitute a joint decision in the EPA Council, thus giving the EC discretion over ECOWAS or WAEMU sector policies. Article 22, 2 allows bilateral safeguards when inter alia injury to domestic industry or agriculture is identified, but again with restrictive consultation requirements. The agreement additionally has an Article 23 devoted entirely to an infant industry clause, with protection allowed unilaterally for 8 years: “The West Africa Party may temporarily suspend the reduction in the rate of customs duty or raise the rate of customs duty to a level not exceeding that of the duty applied to the other Members of the WTO if a product originating in the European Union, following a reduction in the rate of customs duty, is imported into its territory in quantities increased to such an amount and under such conditions that it poses a threat to the establishment of a fledgling industry or causes or threatens to cause disruption in a fledgling industry producing similar or directly competing products.” (ECOWAS - EU EPA 2017: article 23; my emphasis) Most importantly, action taken hereupon is not subject to Joint EPA Council assent. During the final polishing of the draft, the phrase ‘infant industry’ was replaced by ‘fledgling industry’, which obviously has no substantial justification, but shows how policy-laden the expression ‘infant industry’ still is—in Brussels at least. Be it ‘fledgling’ or ‘infant’, negotiators must have felt the need to explicitly mention the purpose of first establishment of an industry, in other words to stress the developmental aspect. Article 34 interdicts any new quantitative restriction, such as quotas, import/export bans or licences, but leaves even this subject to the aforementioned exception under trade defence (=Articles 20–24, in particular Art. 23).

As this was a common cause of African negotiators and civic organizations alike, one would expect the wording to be more or less verbally repeated in the other EPAs. The final “SADC EPA” (Official Journal of the European Union 2016) has indeed in its Article 38 nearly verbatim the same protection clause, for up to 8 years, here for “infant” industry. Remarkably, the regulation does not apply to South Africa, only to BNLS + Mozambique, which is copy and paste from the SACU agreement itself. The exclusion of South Africa might be acceptable. For the purpose of industrial policy, an advanced regional hegemon should rather not rely on tariff barriers, neither internally nor vis-à-vis the EU. In any case, tariffs are second class in trade and industrial policy – costly for consumers and indiscriminate in their

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production support. More critically, the levying of additional duties is limited exclusively to the individual SADC EPA states invoking this provision – thus never applicable by the SACU+ group as a whole. This restriction in turn bars tariff support for common sectoral policy as invoked in the ECOWAS EPA and reinforces the need for internal border controls, all the more as most goods enter the region via South Africa. The EAC EPA has a similar protection clause in Article 50 allowing the use of safeguards in case of serious injury from increased imports for the existing “domestic industry producing like or directly competitive products”, or creating social or agricultural market disturbance. Environmental damage is as usual not mentioned. Among the three safeguard measures allowed (suspension of tariff reduction, increase of tariffs, tariff quotas), raising a tariff is limited to the level applied to other WTO members. Without saying it expressly, EAC countries nevertheless preserve the right to also raise the applied tariff itself up to the level which is WTO-bound (or even beyond). Without clear delimitation to the case referred to in the above, an EAC EPA state (not excluding all EAC states acting together) may apply safeguards when as a result of a reduction of duties, disturbances to an “infant industry” [again:] “producing like or directly competitive products” (Article 50, 5b) are caused. Whatever the philosophical difference to “domestic industry” may be, this provision is limited to ten, maximum fifteen years after EPA entry into force – a general restriction not found in the other EPAs. A single protection measure is normally limited to eight (2 x 4) years, as in the other main EPAs. Since infant industry refers in common economic understanding to a new domestic industry – in this context one that was not yet around or still ‘fledgling’ when the EPA was concluded – it is tricky to invoke messy Article 50 successfully. The lag mentioned in all EPAs between import surges from the EU after a reduction of duty does not have a legally defined time limit. Hence, even the establishment of a new industry that lags many years behind the initial import surge can be supported. In the extreme, this might even be a historical import surge, preceding the EPA, if a domestic industry existed at the time – for instance prior to the sweeping liberalization under structural adjustment.

In sum, these special regulations appear cumbersome, but they may serve part of the purpose to support industrialization. EU producers, especially from former colonial powers, that historically hold a kind of monopoly in the African market represent a special case; without any prior tariff reduction and a subsequent import surge to blame for drowning a domestic industry, it is difficult to invoke EPA safeguard and infant protection rules. When domestic producers want to start fabricating, say, refrigerators, air cons or water taps, something they never did before in Africa or where the pre-existing factories have long been wiped out, as in much of the textile industry, policy space in the EPAs is severely constrained. African countries can still raise the CET vis-à-vis the rest of the world, say vis-à-vis China, up to WTO-bound rates or even beyond, but not for EU suppliers. This is not exactly helpful, to put things mildly. The assessment given probably comes closest to the Nigerian and Tanzanian critique that EPAs hinder their industrialization strategies. Rephrasing of (a) the infant industry protection and (b) the agricultural safeguard clauses is indicated. Revamped articles should contain the following elements: • Introduction of an option B ‘establishment of a new domestic industry whose support needs are not the result of prior import surges or emergency situations

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following the reduction of duties under the present EPA’, alongside what will become option A (=referring to the above surges and emergencies) • Right to newly introduce time-bound quantitative restrictions, tariff duties or tariff quotas, in line with prevailing WTO agreements (=up to or beyond WTO-bound rates, where developing WTO members are entitled to them under SDT) • Obligation to notify to the EPA Council (or similar organ in other EPAs) the precise fledgling/infant industries for support (at HS-6 level), of the precise duration (sunset) and schedule (if, e.g., with decreasing protection) • Optional: compensation by liberalization of an estimated equal amount of imports from the exclusion list, to stay within the bracket of 15–18% of sensitive import value. Note in addition that a provision which is more or less adequate for industrial promotion—clear sunset clauses, here: after eight years—is not always useful in the event of social and in particular environmental damage when the danger lasts as long as it lasts. The same problem applies for multilateral environmental safeguard provisions. It has also been criticized that multilateral safeguards and infant industry protection can only be used collectively and thus not by individual member states. Should this be reworded, too? The South Centre argues plausibly that it will be difficult to find rapidly a consensus and common practice among all signing West African states (Lunenborg 2017). As a matter of principle however, defining safeguards such as a collective right of all the signing African REC member states appears appropriate even if the support measure de facto benefits any lesser number of member states. This is necessary to contain the current flurry of single country measures of protection which haunt African RECs in their daily operations and undermine the CET in actual practice. Tellingly, no one doubts that the EU for its part will find a collective solution if industries in some member states are hurt. It should systematically be (or become) the same for the African economic unions. As a transitory measure, individual countries may retain the right to provisionally apply safeguards in case of pre-defined emergencies. Nonetheless, infant industry protection should generally become the outcome of common sector policy.21 It should be noted that all provisions discussed here would not exclusively serve naturalized ‘national’ African producers, but all investors producing in-country. The notion of domestic producers also comprises European foreign investors who may have to be compensated for higher initial production costs compared to where they come from. This applies in particular to sectors which are subject to special subsidies in Europe, as under the CAP. A number of investors from advanced economies may not need infant industry protection at all. They will prefer other industrial policy measures—conducive regulation, infrastructure or professional training. There will even be cases where tariff liberalization of inputs currently taxed will be asked for— the opposite of protection. This will be subject to a public–private dialogue that has all options on the table. 21 The

said critique further refers to the prescription for the REC to apply a set of non-preferential RoO, however not defined for the African RECs. We leave this aspect aside.

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12.3.12 Export Duties During the EPA negotiations, the European Commission long fought against the right to levy export duties as a matter of principle and arguably in order to strategically assure the EU’s cheap raw material supplies. The three regional EPAs finally granted the right to impose such export duties to the African party. Firstly, existing duties are permitted to stay. This is particularly important for fiscal reasons. For example, Guinea Bissau is reported to obtain 40% of its fiscal revenue from cashew nut exports. This would remain untouched by the West African EPA, contrary to what is foreseen with regard to import duties. Next, ECOWAS EPA Article 13, EAC EPA Article 14 and SADC EPA Article 26 each include similar but not identically worded agreements to ‘…not institute any new duties or taxes in connection with the exportation of goods to the other Party’. As for other clauses, this is copy and paste from GATT, now made contractually binding for developing countries, which is the general problem mentioned above. However, this phrase is followed by the all-important exceptional clause that the African Party ‘can impose a temporary duty’ on exports. The SADC EPA article is by far the longest and most detailed on the matter, indicating that considering export taxes preoccupied governments in the SACU+ group and the EC apparently more than elsewhere. The EPA articles mention the following arguments in loose order (=not all have the same mix) as possible justifications for temporary export taxes: • • • • • •

Government revenue needs Promotion of infant or fledgling domestic industry Defence of currency stability during export price fluctuations Counteraction on commodity speculation Need to assure food safety Protection of the environment.

These are all good reasons, although none of the texts explicitly acknowledges the main structural argument for export duties: strengthening the local processing of primary goods (‘beneficiation’). This can only be read between the few lines on the promotion of domestic industry. As with exceptional measures on the import side, cumbersome proceedings are required, in particular when it comes to prolongation, but as a matter of fact, export duties remain in the political arsenal of the African EPA states. Otherwise, there are some strange differences between the three EPA documents: • The EAC EPA is the only one that restricts the use of export duties—correctly—to those ‘that are in excess of those imposed on like products destined for internal sale’. Where an internal sales tax is equal to the export tax, no distortion is introduced in the first place. • The ECOWAS EPA for its part extends the restriction ‘to those [taxes] currently applied in trade between the Parties’ which are not to be increased. This is difficult

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to accept with a view to cases where the existing tax proves insufficient for fiscal or structural purposes. • The SADC EPA excludes South Africa from the right to impose any such duties—an obvious reference to the fact that South Africa is not a price-taker for some important minerals, so that an export tax would possibly affect European economies. These provisions should be harmonized to the least restrictive version. The aforementioned textual difference introduces an important distinction between trade measures to be taken by the African REC as a group (as suggested by the EAC and ECOWAS version) or by individual states within the contracting group (as suggested by the SADC version). The same fundamental distinction has already surfaced for import tariff protection. Although not fully elucidated in trade theory, such unbundling of state actors should be eradicated in favour of joint trade policy, as in the EU itself. A correct wording of the SACU + EPA would thus give six African signatories the collective right to impose export duties vis-à-vis Europe, including South African products.22 The theoretical argument can be found in the chapter on Common Industrial Policy, above. The next controversial issue is the time limit for new export taxes. Strangely again, the EAC EPA sets a sunset clause after 48 months that is, however, renewable; the SADC EPA sets none for general purpose taxes, but stipulates a 12-year maximum for export duties supporting ‘industrial development needs’.23 The ECOWAS text has no sunset at all, except very indirectly via reference to the EPA review (after 5 years). This textual variance among the EPAs is even less understandable than in the aforementioned cases. New industries in Eastern Africa need no lesser or shorter support than in Southern or Western Africa. As a general rule in modern industrial policy, clear time limits for export taxes that induce in-country industrial processing are even recommended, similar to those for infant import protection.24 Yet, they should be left to the discretion of the developing countries or its REC, respectively. EPAs may uniformly contain as a guideline the same infant industry sunset clause as for imports: eight years or whatever will be finally adopted. No attention is paid to the fact that at least two of the listed instances for temporary duties simply do not match with such time-bound restrictions: • The need for environmental protection may not end after four, eight or even more years, in particular when the export duty serves as a Pigovian tax, compensating negative externalities of the respective production line. The EPA time limit bluntly assumes that environmental damage occurring after sunset can be remedied in another manner. 22 Or

not, if the bargaining power of the SACU+ group will not suffice to defend the South African case. 23 In fact, the SADC EPA regulation for temporary export taxes in Article 26 is still more complicated, with exemptions that make the tax near-ungovernable. 24 Unless the global market remains distorted by third-party interventions, this is what the BWI ignored in the Mozambique cashew case.

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• None of the texts considers the fact that new mineral exporters are appearing on the global screen, among them new African oil and gas producers. New lasting export taxes will have to be accepted for these countries no matter what the trade agreements stipulate—be it GATT or EPAs—without forcing countries to choose only royalties or indirect levies. It would be hypocritical to prohibit ‘new’ export taxes for developing countries in the presence of ‘old’ oil, gas and mineral exporting neighbours whose fiscal authority relies heavily on such taxes and will continue to do so.25 One newly emerging exporter of gas is Tanzania, who finds in the interdiction of new durable export duties another valid argument for the refusal to sign the EAC EPA in its current form. ECOWAS and SADC EPA clauses on new export duties make them subject to prior consultation and eventually arbitration with the EU party. This can slow down the process considerably. In case of re-negotiation, it should be changed to prior notification only, as already fixed in the EAC EPA, delivering a good example for the ‘Best of EPA’ standard suggested if EPAs are revised. Finally, all three EPA articles on export taxes contain specific MFN rules in favour of the EU, e.g. Article 14, 4, EAC EPA. Why the highly developed EU reserves for itself the right to be treated as favourably as any other major trade partner of Africa will be discussed with regard to the general MFN clauses, in the sub-chapter below. Nonetheless, taken together, Article 14, 4 and Article 15, 4 of the EAC EPA assure that exports to all other African countries or regions (=including North Africa) are exempted from the MFN clause regardless of whether the respective countries have concluded an EPA with the EU. In plain words, the African parties can encourage processing of raw materials close-by, in other African countries, by imposing discriminatory while ‘temporary’ duties on exports to Europe. In sum, although EPA rules on export duties are restrictive and have obvious room for improvement, policies to encourage local manufacturing by imposing duties on exported raw produce remain possible, an important corollary to agro-industrial development and to good economic resource governance in agrarian and mineral-rich countries. In this respect, economic policy space for African governments has been defended. However, this does not come as a principled decision of the contracting parties to preserve the essential policy space that the GATT reserves for developing countries, as the aforementioned double exclusion of long-run export taxes and of new mineral exporters shows. It follows simply from the contractual opportunities to get by with exceptional duties whose time limits can be overrun with some ruse—a second-class argument at best. In actual practice, African governments would preserve a policy tool that mainly serves fiscal purposes. As for other trade defence measures, actual cases of export duties in Africa that serve a structural development purpose are rare. Better known are cases such as cocoa export taxes in Côte d’Ivoire, Ghana or Cameroon, which have served to exploit smallholders for decades. Fresh cases of successful mineral beneficiation—for instance, the way the diamond value chain has been extended in 25 The

present solution is as unsatisfactory as the AoA clause which allowed in 1992 to continue with existing agrarian export subsidies, while contracting parties relinquished new subsidies.

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Botswana and Namibia—do not essentially rely on tax leverage. No comprehensive analysis of export taxation practice in Africa is available to our knowledge. Put the other way round: the justification for structural export taxes in international trade negotiations would profit considerably by being built on more real-world agricultural or industrial policy projects in Africa. Nonetheless, there seem to be a few recent developmental applications of export duty. For example, Kenya raised export taxes on skins and hides explicitly to encourage local shoe and leather industry. Africa’s historical cause célèbre on the matter is the Mozambique cashew saga. The case shows both the premises on which the IMF and World Bank fought an exemplary export tax and the practical difficulties encountered when employing the tax as an instrument in agro-industrial development. Guided by the negative impact which export duties had on African agrarian smallholders since independence and by the market-radical ideology of the time, structural adjustment programmes of the 1980s and 1990s sought to eliminate export taxes altogether. In the wake of this way of thinking, the BWI enforced the abolition of Mozambique’s export duties on raw cashew nuts, which triggered the destruction of a local industry that has never fully recovered.

12.3.13 Case Study 4: Cashew Production and Mozambique’s Export Tax Cashew nut growing and processing were introduced in Mozambique by the Portuguese colonial power. By the early 1970s, the country was the largest cashew producer in the world, with about 40% of global raw cashew nut (RCN) production, albeit in a much smaller world market than today. Abundant supply encouraged the establishment of a processing industry. In 1973, there were twelve capital-intensive factories in operation, thus challenging India’s dominant position in this market segment. However, after independence in 1975 and the subsequent civil war, the industry fell into a steady decline, which the government tried to halt in the period from 1978 to 1990 by the nationalization of the processing factories and an export ban on raw cashew nuts. With the economic crisis of the 1980s and early 1990s, Mozambique—like most other African countries—was exposed to a structural adjustment programme by the IMF and the World Bank. The reform of the cashew sector was given centre stage in Mozambique’s SAP. Unfortunately, the World Bank insisted on privatization of the factories, followed by liberalization of the domestic and export markets. A stepwise abolition of cashew export quotas and subsequently of the export tax ensued. The rushed sequence of privatization and liberalization—more than the abolition of the export duty alone—proved fatal for the industry because the new Mozambican owners were fully exposed to world market conditions immediately following the acquisition of their ailing firms. By 1997, most of the factories had collapsed. The processing of Mozambican cashews moved to India, with Vietnam and by some

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distance Brazil having become its main global competitors. Camera walks through the empty factory buildings around Maputo were seen on television globally, including on the German public broadcaster ARD. At a trade conference in Berlin in 2004, the Swedish writer Henning Mankell, who spent half of every year in Mozambique, set the tone when he castigated the World Bank for its structural adjustment measures: In Mozambique the World Bank succeeded to scrap the only well-developed industrial sector. […] In support of the fragile industry the state had provided some economic support. The World Bank claimed that the industry should get by on its own and insisted on the removal of protective taxes. Today, the whole industry is gone. […] The standard bearers of liberal market economy celebrated a terrible victory. Although we can see today a change on the matter, the judgment of history will be harsh… (Speech at a global trade conference, organized by the German Green Party’s parliamentary group, Berlin 22nd /23rd October 2004).

The writer deemed that the bank should be brought to court for its ‘crime’, and it is not for want of economic knowledge that he put it in these terms. The case of forced deindustrialization had already stirred considerable political turmoil, forcing World Bank President James Wolfensohn to intervene personally. It also created much academic attention and critique [see as exemplary contributions (Cramer 1999; Hanlon 2000)]. In a seminal paper, McMillan and co-authors exposed the weak economic underpinnings of the imposed reform (McMillan et al. 2003). Typically, the forced abolition of regulated farm gate prices and export restrictions was introduced as a measure for poverty reduction because the World Bank and IMF assumed that small cashew farmers would get better prices on a free market, alongside efficiency gains at processing industry level. Neither fully materialized. The structural adjustment relied on terribly deficient market analysis by the two Bretton Woods Institutions (BWI). In the domestic market, it underrated the market power of middlemen. In the global market, it completely neglected the fact that trade structures were (and are) heavily distorted, mainly by India’s protective policies on both the export and import sides. As the main global cashew grower, India taxed its own exports and subsidized cashew processing. In other words, the principal competitor did (and does) what powerless Mozambique was no longer allowed to do. In its ideological belief in the working of free markets, what the SAP imposed on Mozambique was the perfect antithesis to the industrial policy exercise that the Mozambican government rightly deemed necessary, before and after the SAP. With hindsight and with the literature at hand, this is established wisdom. Nonetheless, the case still has fresh lessons for modern industrial policy design and for the role that export taxes can play because the political setting came full circle: in the end, the BWI had to backtrack and accept not only the restoration of an 18% export tax on the raw produce but also a complete export ban during the harvesting season. Can this policy device work again? Closer scrutiny reveals that the industry was already suffering at the time of adjustment from other, structural disadvantages, which were only tempered by the

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domestic price control and the export duty on the industry’s main input.26 First of all, there is a genuine technological challenge. Cashews are literally tough nuts to crack: fully mechanized production yields higher output, but lowers the share of highquality kernels, depending on the machinery. Partly mechanized, labour-intensive processing may be the more appropriate technology, which provides a rare industryspecific argument for the labour-intensive technology choice, even though worker exposure to the toxic cashew nut shell liquid (CNSL) poses a particular challenge in the semi-mechanized process. Mozambique’s large-scale factories of the time used a fully mechanized technology, not appropriate for best quality output, and were mainly located in the South, around Maputo, far from the main cashew-producing areas in the North. This kind of industry never recovered. Moreover, the cashewgrowing farmers were already facing serious problems. Hence by the time export control measures were reinstated, cashew culture had been degraded and the quality of the raw product along with it. In the meantime, a momentous change had occurred in the global cashew market. Cashew had become the most important tree nut in terms of production, and second in kernel exports (after almonds), according to FAOSTAT figures. World production had grown exponentially, and Africa’s share along with it. Accelerating in the early nineties—the historic moment when Mozambique’s own cashew culture dived— production increased tenfold over the 50 years from 1965 to 2015, and Vietnam overtook India as the world leader in cashew culture. If statistics are accurate, Nigeria and Côte d’Ivoire have become, respectively, the second and fourth biggest producers worldwide (Fig. 12.1). This has made RCN production one of the fairly numerous product-specific success stories in an African agriculture that otherwise has not yet undergone the fundamental modernization needed. These spells of dynamic, nonlinear growth from very low levels all have their idiosyncratic configuration of time, space and actors: (a) before/after independence or recent; (b) continent-wide or with a regional focus; and (c) with or without support of the colonial or post-colonial governments.27 In the case of cashew, it is marked by a continental shift from the South-East to the West, at the expense of Mozambique and Tanzania (see graph below). This is most remarkable for Nigeria because the boom in raw cashew cultivation occurs under conditions of Dutch disease, normally unfavourable to modern, market-oriented agriculture and industry (see Part II). Nota bene, Nigeria participates in the commerce mainly with RCN, not with marketing of processed kernels. Intriguingly, Mozambique ranked 12th among global RCN producers (2014) and is side-lined in cashew kernel production and export with only about 1% of market share. Even in comparison with its African peers, who have to cope with the same market power of the dominant India or Vietnam, the new Mozambican cashew industry remains marginal. Why?

26 In

large parts, these structural impediments were already identified by the World Bank, yet not addressed. 27 See the exemplary cases of cotton or cocoa elsewhere in this volume.

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Fig. 12.1 Global raw cashew nut production ( Source FAOSTAT data, following Sarabia (2017:87))

It is not evident what caused the global dynamic of RCN production in the first place and whether aid-financed technical assistance has played a significant role. Lack of international technical assistance can arguably not be the main reason for today’s divergence among producer countries. At least two major aid alliances— competing as usual—have included Mozambique in their support programme: the African Cashew Alliance (ACA), first organized in 2005 under the auspices of the US Agency for International Development, and the GIZ-led African Cashew Initiative (ACI)/Competitive Cashew Initiative (ComCashew). Involving inter alia the TechnoServe agency and covering Benin, Burkina Faso, Côte d’Ivoire, Ghana and Mozambique, the latter alliance is destined to improve the income situation of 400,000 cashew farmers. The technical support of the global value chain (GVC) covers improvement (1st) of the primary product quality, (2nd) of processing, (3rd) of the commercialization chain and (4th) of stakeholder organization and participation. Although the programmes strive to give policy advice, too, their websites are silent on the precise industrial policy measures that were at the centre of the historical cause célèbre in Mozambique and are hotly debated in today’s North–South trade negotiations: regulation and taxation of raw produce exports. This represents another example of the entrenched conceptual disconnect between aid-sponsored global value chain support and industrial policy. This disconnect is unfortunate for two reasons. Firstly, present-day Mozambican cashew industry demonstrates that it is everything but obvious whether such export policy measures are indeed the most effective stimuli. Secondly however, today’s configuration of the world market demonstrates that regulation of exports may still

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be needed to achieve greater participation of primary producing countries in cashew kernel production and final confection. At this point, a new small- to medium-size processing industry (with an output capacity of 800–3500 t/year) has established itself in Mozambique, closer to the cashew growing region, mainly in Nampula Province, with managers of non-ethnic Mozambican descent. In the most upbeat analysis, the recovery can be seen as the result of a concerted industrial policy effort by the state, private and external actors to use rents from export tariff protection as a developmental tool (Boys 2014). However, the policy package has not managed to recapture Mozambique’s earlier market position. This has various reasons—mainly from political economy28 : • The new export tax has been accompanied by a raw cashew export ban during the marketing season (September to January). Unsurprisingly, this invites hoarding by middlemen or export traders who have the financial power to do so. • Discrepancy between production and export figures suggests an informal processing sector in the country and considerable non-declared exports of about half the harvested raw cashew nut. This points to corruption at customs level. Economically, it shows again that overseas importers can still offer better prices than the fragile domestic industry. • A special government agency was founded to oversee the policy and to provide technical assistance to actors in the value chain, the Instituto de Fomento do Caju (INCAJU). It is financed by part of the export tax, while the other part goes to the development of cashew agriculture and processing.29 This could be straight from the industrial policy textbook. However, INCAJU has not been very effective in the upgrading of cashew growing and processing, but rejects any evaluation of its results. • AICAJU, the association of the industry, is also ineffective, and so are farmers’ associations. The industry’s workers are unorganized, too. As a result, an informed PPD and collective search with INCAJU and the government do not take place. • Effective sector dialogue would also be important because of high rates of workers’ absenteeism in the factories (around 20% in Nampula Province, the centre of the new industry), which remains ill-explained. Scarce information points to traditional social and seasonal (harvest) obligations among the workers. Arguably, low salaries force workers to look for secondary occupations. • Other African producers, for example, in Côte d’Ivoire, seem to do well with modern mechanized processing technology, which in turn points to the better business environment that the West African country offers modern industries. In combination with the other detrimental factors, the workforce and technology problems in particular call the whole industrial policy model into question: why protect a labour-intensive industry in Mozambique which is apparently not much 28 All

the information is based on Sarabia Palacio (2017). proceeds of the export tax have four spending categories: (a) production and distribution of grafted seedlings; (b) research and development; (c) integrated crop and pest management; and (d) a guarantee fund, through which processing companies can gain access to bank loans. 29 The

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appreciated for the job opportunities it creates and the low wages it pays—in an environment where, in Marxian terms, the worker has not yet been completely severed from the land. Even if governance-related factors that hold up the industry were under control, the Mozambican case indicates the complexity of the needed policy design and, by the same token, of aid-financed global value chain support. Even if the controversial export tax were properly implemented, taken alone, this measure would prove insufficient for sustainable progress of the in-country value chain. The competitive edge of Vietnam, India and West African producers relies manifestly on the range of firm’s internal and external resources, in line with strategic management and systemic competitiveness theories, and these countries mobilize their capabilities more fully. With regard to Mozambique, Sarabia therefore calls for: an ambitious vision, a mentality of change, a proactive approach, access to financial resources, and investment in research and development to associate the technological aspects with high productivity, good working conditions, highly motivated workers and African cultural values [as] steps to a revolutionary dynamic in the cashew sector. (Sarabia Palacio 2017: 159)

Much of this is obviously still missing in Mozambique. The question remains as to whether an export duty like the Mozambican one actually represents the single most effective industrial policy measure. In any case, the fact that other African countries are now doing consistently better than Mozambique is still not fully elucidated and calls for more comparative research. Furthermore, all African cashew producers taken together only perform well up to a certain stage in the GVC. They have conquered an important domestic market share for consumption-ready nuts, e.g. Nigeria, but remain altogether marginal with regard to selling processed and packaged nuts overseas. The reconfiguration of the rapidly growing world cashew market over the last twenty years has brought about a new global dependency structure. The structure is very similar to other post-colonial value chains in which Africa supplies the raw produce while processing takes place overseas, with the important difference that the two main, almost exclusive importers of the raw produce—India and Vietnam—are themselves developing economies. India gets 90 % of its raw cashew imports from Africa, largely from West Africa, while Vietnam has supply chain linkages with Cambodia, Indonesia, Philippines and additionally with Africa. As this configuration is not entirely market-driven and not based on competitive advantage alone but on government support overseas, an industrial policy project to get African primary producers organized as processors remains valid. In consequence, this allows for a defence of the policy case—agrarian export duties—as North–South trade negotiations continue. In any case, the export tax that was finally reinstated in Mozambique is not a new one by SADC EPA terms. It can remain for good—and fortunately so, depending on how effectively the tax supports the new medium-sized processing industry in the country.

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12.3.14 National Treatment, Local Content Rules and Public Procurement Trade agreements typically start off with articles that require ‘national treatment’ in the territory of one party for products originating in the other party. These articles refer to all sorts of internal charges, laws and regulations which intend to put imported products on an unequal footing with national products and act in this respect like trade duties or restrictions. National treatment clauses are informed by GATT Article III, which seeks to contain such internal barriers against foreign trade. While national treatment is an essential pillar of the international free trade architecture, there are three specific regulations that deserve a different handling in developing countries. First, local content rules (LCRs) require that a fixed percentage of inputs into the gross value of exports, in particular those produced by foreign investors, be domestically sourced, or that local manpower be used. In this respect, imports and domestic products are not treated ‘nationally’ to the same extent. LCRs were part of the standard arsenal of traditional development policy and were meant to foster involvement of domestic factors and firms. As a general policy device, they are outlawed in the said GATT Article III and in TRIMs. In practice, LCR fell into disrepute in developing countries (who were still allowed to use them) during the 1980s because required quotas for domestic inputs were often set much too high for the domestic sector’s potential, thus turning into an invitation to corruption and cronyism. All three regional EPAs ban such local content rules with identical wording, in EAC EPA Article 20, 3; ECOWAS Article 35, 3; and SADC Article 40, 4. More recently, affected African countries have issued smarter local content legislation which incentivizes foreign investors to source more supplies locally instead of imposing unrealistic draconian rules. Such modern rules have been introduced for instance by Ghana, Tanzania or Uganda for their emerging oil and gas industries. It is hard to understand why African countries have now collectively re-abandoned this opportunity in the trade agreements with Europe—it was probably part of the bargain. The EPA wording disconnects the trade agreements completely from new policy practice and economic debate on better LCR—an important part of good mineral resource governance (Asche 2018a) and the smaller sister of the regional value chain (RVC) debate. For a number of products and depending on the respective REC conditions, all such paragraphs should sooner or later become regional content rule (RCR) anyway, a corollary of regional economic integration in Africa. In fact, the ban of local content rules in North–South trade agreements is a provision of a different kind—of foreign investment protection, stealthily introduced into agreements otherwise confined to trade in goods. Admittedly, the transgression occurred already in GATT Article III, but was cushioned by the developing country privileges written into other parts of the general agreement. Nudging foreign investors in public–private dialogue to raise local content quota remains possible.30 Similarly, 30 The

milk processing value chain in Nigeria represents an interesting case of voluntary LCR with international investors such as ARLA to write local sourcing into the licence to operate. ARLA agreed to use a limited quota of local milk supply in addition to the bulk of milk powder imported

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measures with local content-equivalent effect can be used, e.g. in joint ventures, as China ingeniously did. This is under the condition that the respective African country has not concluded overly stringent bilateral investment treaties (BIT) which bind its hands by excluding LCR in country-to-country relations. Notwithstanding this window of escape, a restrictive local content clause in North–South trade agreements should be either barred altogether or associated with the special rights for developing countries. Second, enforcement of LCR or other domestic regulations through government procurement is explicitly allowed in GATT Article III, 8. It remains so ‘after EPA’, as the exemption clause for national government procurement is carried over into the EU-Africa agreements. In the same articles, Art. 20, 5 EAC EPA, Art. 35, 5 ECOWAS EPA and Art. 40, 6 SADC EPA, the latitude of governments in both parties is confirmed to privilege national suppliers over importers in public tenders, or perhaps ecologically correct suppliers over those disregarding the environment (though the latter case is not explicitly mentioned). Your government can safely buy all school desks locally, from suppliers who use ecologically certified wood. Sustainable procurement thus remains an option. Contrary to the local content rules, this corroborates our overall assessment of EPAs as no deep integration exercise. The situation would be different if a country were to sign the WTO Government Procurement Agreement (GPA). However, no African country has done so thus far, and only one has observer status to the GPA (Cameroon). This particular area of policy space is thus preserved. It now depends on the magnitude of government demand, globally around ten to fifteen per cent of GDP, as to whether public procurement will make an impact on product localization. As for other tools discussed here, no comprehensive critique of government tender and procurement practice in Africa is at hand. Many prominent country cases do not demonstrate a developmental or ecological function of government procurement, but rather the opposite: a symbiosis of vested firm interests with family and friends in government. In Kenya, the problem is known as ‘tenderpreneurship’ and decried by those entrepreneurs who do not have the required family or ethnic relations. In a wider sense, dependency of an important entrepreneurial fraction on opaque state contracts becomes a centrepiece in the argumentation that present-day capitalism in Africa has still not grown out of old patterns. Government procurement rules bravely defended in international trade agreements are therefore no obvious success. The right to privilege national suppliers shields some policy space which should normally be put to better use in many African instances. For the African Regional Economic Communities, the challenge with regard to economic localization policies is even different and relates to what is understood as ‘domestic’ or ‘local’ content. As discussed above, one can easily find in African RECs cases of misguided industrial policy with tariff and non-tariff barriers erected from Europa for the production of dairy products. In this case, LCRs do not actually restrict imports, but keep borders open for provision of the national market. It could hardly be otherwise, given the difficulties in mounting an entirely domestic dairy chain in many African countries (see case study above).

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against other REC member states. Instances of purely national public procurement should be treated analogously and confined—as in the European Union—to fewer and fewer tenders as integration advances. Third, African governments that want to support new national industries in cases where this would now be difficult to implement via import protection may still pay subsidies. Copied again from GATT, the EPAs explicitly allow ‘payment of subsidies exclusively to national producers’ (Art. 20, 4 EAC EPA; Art. 35, 4 ECOWAS EPA; Art. 40, 7 SADC EPA). This importantly includes instances where national firms intend to operate with higher labour intensity or eco-friendly techniques. The difference to tariffs is that subsidies are an expense, and cash-strapped governments will consider carefully whether to incur it or rather resort to indirect measures such as tax benefits.

12.3.15 Export Subsidies Direct export subsidies are generally to be phased out in conformity with the GATT and in pursuance of what the WTO ministerial rounds achieved. On the African side, they played a very minor role in the EPA negotiations, for the same financial reason as internal subsidies: they are above all an expense. The European side emphasized its intention to abolish own agricultural export subsidies altogether. For instance, the ECOWAS EPA in its Article 48, 6 reads: The European Union Party undertakes to refrain from the use of export subsidies for agricultural products exported to West Africa.

Therefore, there are no contested EPA regulations on this subject, narrowly taken. However, the critical view of the financial support that European farmers receive in general and its likely impact in Africa has indirectly shaped the stance of the African party, for example, with regard to agricultural imports excluded from liberalization. At the level of multilateral international trade negotiations, northern agricultural and agro-industrial export subsidies play a strategically important role. Arguably, the subsidies at the heart of Europe’s common agricultural policy should also become a key topic in new bilateral talks between the EU and Africa (see below).

12.3.16 Most Favoured Nation Treatment Most favoured nation (MFN) treatment means getting the same low duties, tariffs or regulations that a trading bloc grants to a third party with the best conditions. The MFN principle is shareware in global trade policy. However, as a matter of principle, general MFN clauses typify legal aliens in North–South trade agreements. Developing countries should have the possibility to treat other developing countries

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which have not yet become economic superpowers in their own right more favourably than advanced economies. Obviously, the BRICS are a borderline case in this regard. The European Commission has introduced MFN clauses into all EPA treaties with ACP countries, final or interim ones, with the argument that other trade partners of Africa had long become as competitive as the EU suppliers and that some of them now approach or exceed per capita income levels of poorer EU member states. Rejecting this initially, Africa defended its policy space for differential trade policy. In South–South trade relations, African negotiators wanted to retain the sovereign right to give the Brazils and Chinas or southern RECs better conditions than Europe. The formula now written into the EPAs is a compromise, focusing on major trading economies with more than a 1% share in world trade or 1.5% for regional blocs put at par with the EU for MFN treatment. By excluding all ACP and all other African states from the MFN request of the EU, preferential treatment by one EPA group, e.g. the CARIFORUM or other African countries or groupings, remains possible—which is good, but precise formulation diverges among EPAs for unknown reasons.31 Given the harsh critique of the EPAs that is aired in many quarters from a developmental point of view, starting with the forced 85% market access offer, it may seem very unlikely that African negotiators will offer to any other trade partner, developing or developed, still more generous conditions than the EU forced upon them. On the contrary, lasting surges in imports of manufactured products from China or India which are closer to African production possibilities than high-tech goods from Europe may bring African RECs to consider even comparatively higher protection rates, but also higher export taxes. (Recall where Mozambique’s cashew nuts go for processing.) So why bother about the EPA MFN rules? The true nefarious impact from the EPA MFN clauses comes with the inverse case: third parties will now all insist on introducing MFN clauses into their treaties with Africa, thus trying to get the same advantages as Europe got. The USA will be the first trade power to do so. In sum, these MFN clauses, contrary to their application in general WTO dealings, bind Africa’s hands. A still starker anomaly has been discovered by Berthelot. The interim EPAs of Côte d’Ivoire and Ghana and also Cameroon’s EPA do not exclude MFN treatment of the EU in comparison with other African or ACP countries, contrary to their regional EPAs, which are however not in force. By a well-established rule of thumb, Africa captures about 3% of world trade and would thus count as a major trading bloc against which the EU claims to be treated equally—a developmental absurdity. As discussed above, the African states agreed on the Continental Free Trade Area in 2018. It foresees a 90% liberalization of imports in goods. Submitted to an individual EPA, the middle-income countries in Africa would thus have to liberalize 90% of their imports with the EU—far more than the 75–80% requirements in their respective 31 The proposed West African regional EPA contains a doubly stronger requirement for European MFN treatment compared to third parties, stipulating that the latter should individually have ‘both a share of world trade in excess of 1.5 per cent and an industrialization rate, measured as the ratio of manufacturing value added to gross domestic product (GDP), in excess of 10 per cent in the year preceding the entry into force of the preferential agreement’. In other words, the EU wants to be treated equally with newly industrializing countries.

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EPAs. Trade impacts and customs revenue losses would thus have to be revised upwards (Berthelot 2018: 126). The CFTA would become a Trojan horse for full reciprocal trade liberalization—conventionally set at about 90% of trade—of the concerned African countries with the European Union, in fact for multilateral trade liberalization—something we suspected to be looming behind the good intentions of some CFTA believers anyway. The case shows from still another angle that the whole architecture of planned trade agreements is slanted to the detriment of African countries.

12.3.17 Rules of Origin 12.3.17.1

The Rules in EU Trade Schemes

Rules of origin (RoO) are an exclusive product of preferential trade agreements and not an attractive one. The rules make sure that only goods originating from the contracting parties of bi-regional or bilateral deals receive the preferential benefits of the RTA in question. While impossible to abandon as long as preferentialism prevails, rules of origin have a solid reputation in trade economics of being very dull a subject and a pest in practical trade, for both traders and customs officials. A particular problem is posed by the rules of origin for goods in all bi-regional arrangements between advanced and advancing economies, such as AGOA or EU schemes with the Global South. Rather irrelevant in the direction from North to South, such rules aim to protect the northern import market against redirected, unwarranted importations via the South from third countries, in particular from other advanced or emerging economies, e.g. from China or India via Africa. Systematically put, RoO in North–South trade agreements represent the inverse problematic of the MFN principle. The latter tries to attract the same advantages as for third parties, while the former try to impede access of third parties to the advantages granted to the selected partners, here: in Africa, even if those third parties are developing countries themselves. They have thus a problematic strategic role in North–South trade relations. The EU General Scheme of Preferences (GSP) and now the EPAs tend to defend this questionable reputation, but substantial progress has been made in recent years. Until 2010, for all products that were not wholly obtained (=entirely produced in the exporting country), the EU had restrictive RoO for all developing countries under its earlier General System of Preferences, with ‘double stage’ requirements for both the overall GSP and the least developed countries under the Everything but Arms (EBA) regime. The exporting country had to operate two substantial steps of transformation—say importing yarn from Asia, but weaving fabric and then making clothes at home. The theoretically possible regional sourcing in Africa was not accredited for preferential exports to the EU. A comparison with the US-American AGOA elucidates the problem. With regard to the textile industry, AGOA requires local sourcing of yarn and fabrics produced in

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the region (or in the USA). On paper, AGOA was more restrictive than old European RoO as it required three local stages of production. However, this restriction on third country provision of inputs was originally waived (Third Country Fabric (TCF) derogation) until 2007, but later extended under the Africa Investment Incentive Act (known as AGOA IV). The relaxing of rules caused the impressive surge of apparel exports to the USA from Southern and Eastern Africa (mainly by Chinese and Taiwanese firms), which has created hundreds of thousands of jobs and endured even after the expiration of the Multi Fibre Agreement in January 2005 since US tariff differentials still favour African over Asian producers. The initial EU provision was finally dropped via GSP reform, effective 1 January 2011. In the introductory justification, the commission refers to a critical impact assessment of the old rules. The evaluation had in fact shown that the actual use of the preferences granted was particularly low for products which are of most interest to LDCs—processed agricultural and textile goods—and that cumbersome rules of origin are one reason for this (European Commission 2007). Since 2011, RoO have been essentially relaxed to a single transformation stage, technically identified as substantial working or processing of imported raw material or intermediate goods by various criteria, depending on the product category, often the move of the product from one HS category to another. Already here, in the revised EU GSP regulation, the EBA countries achieved even less stringent rules for some products than all developing countries. Further, the GSP reform of the RoO contained new rules for cumulation when goods—again—are not wholly obtained in the exporting country, but receive the inputs from some special destinations. The GSP maintained what has been dubbed bilateral cumulation, the mutual recognition of manufacturing stages for products shipped back and forth between the EU and a developing country, up until now more relevant for North African than for Sub-Saharan countries. The regulation also relaxed rules for regional cumulation. While it involves a bit more than simple repackaging or affixing labels, no substantial working is required to get GSP preference for a regional product. Otherwise, all regionally processed goods are acknowledged as such and preferentially admitted to the EU market. Even the well-known button or zipper attached to a near-finished product now suffices for recognition as genuine African product. Over and beyond the recognition of regional groups, the regulation foresees extended cumulation between any number of countries with an EU free trade agreement at the request of the beneficiaries. In addition to these changes in substance, methodology and paperwork are simplified. However, what is considered a ‘region’ in the EU trade arrangements? The 2010 GSP reform did not recognize any ACP group or REC, just four other Asian and Latin American developing country groups (excluding China), and obviously not all tariff duties were lowered to zero.32 This was logical: the ACP countries were—and still 32 As

a motive for reluctance to conclude EPAs, it has always been remarked that African least developed countries had little to lose because the special EBA arrangement remained de facto irrevocable for them. While this was true after the 2011 GSP reform of RoO, even EBA countries will not benefit from the advantages of regional cumulation.

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are—nudged to collectively enter group advantages via EPAs. All those countries that signed interim EPAs in 2008 and 2009 benefitted first from the new rules, among them the continent’s five most important clothing exporters (Kenya, Lesotho, Madagascar, Mauritius and Swaziland). Before the dawn of the ‘SADC EPA’, South Africa still had to fulfil the double transformation rule, and therefore exported close to nothing to the EU, contrary to small neighbours Lesotho and Swaziland.33 All three African regional EPA drafts have incorporated the new EU rules of origin. The interminable annexes on substantive working and processing, product by product, are largely copy and paste of the 2010 EU GSP regulation for LDCs, which in the EPAs give duty-free access to the European market, beyond GSP. Regional cumulation is copied in as well. Under a new heading of diagonal cumulation, the preferences are extended to every minimal processing step in the EPA group, the EU, its overseas countries and territories (OCT), and other ACP EPA states. This means that even pan-African cumulation is facilitated—provided the third country has also concluded an EPA. Here, the not-so-subtle pressure is still on: all non-concluding states fall back on GSP substantive processing rules of origin. If these states are nonLDCs, they pay full GSP duties for regionally sourced products instead of being dutyand quota-free. In conclusion, pan-African trade integration is still not unequivocally encouraged by the current European regulation. This is also a statement on the new African Continental Free Trade Agreement. CFTA member states do not benefit automatically from the best RoO the EU has on offer.

12.3.17.2

The Developmental Effect of Rules of Origin

The EU opening on single-stage and cumulation rules in the EPAs entails welcome concessions for producers in Africa. Contrary to other clauses reviewed here, RoO cannot be considered a priori too restrictive for the African partner states. Cumbersome documentation requirements and the need for administrative cooperation in the respective sub-regions may be more of a hindrance.34 However, trade expert Francisco Mari (Brot für die Welt) points out that GSP-EBA rules of origin frame substantial working in a way that duty-free exports to the EU only apply to raw products—Africa’s traditional mainstay in exports—while processed products carry duties. Mari refers to the illuminating example of cocoa, which is exported dutyfree to Europe, while chocolate from Côte d’Ivoire or Ghana (under iEPA) from 33 Now South Africa is still at a disadvantage because special cumulative benefit of products sourced in the RSA and exported by another ACP EPA country to Europe is only granted if the final product would also benefit from direct DFQF export from South Africa to EU—another complex rule designed to counter trade deflection. 34 Like regional cumulation, the proper working of RoO requires a legal framework and administrative cooperation at the regional group level. Where contracting RECs such as SADC or EAC have themselves rules which are different from those in the EPAs, RoO management becomes overly complex, and related capacity building needs for EPA implementation are acute. The present level of analysis does not deal with the consequences for EPA-related AfT since aid must first and foremost deliver more strategic technical assistance. See the last chapter of this part.

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Togo (under EBA) and Nigeria (under GSP) with sugar and milk imported from regions other than Africa or the EU beyond 60% of its weight is no longer considered African and therefore fetches a tariff of 17% or 20% for Nigeria. If sugar is cheaply imported from Brazil, and if milk is imported from outside the EU,35 this tariff escalation causes a typical problem for the production of processed highervalue goods in Africa—nominally promoted by Western aid. Some adjustments in line-by-line RoO may therefore be necessary provided the illustrated inter-regional division of labour is considered to be developmental. One position in the international debate generalizes the problem with RoO in view of the prevailing global division of labour. A former Dutch development minister puts the analysis in historical perspective: Probably the most fundamental problem with current RoO is that they were created decades ago. Since that time, the world globalized: production of a good became fragmented between many countries, with each specializing in one narrow task. Comparative advantages are less and less at the level of whole products, but simply a specific transformation step. (Herfkens 2015: 8)

In view of the global trend, she concludes that the RoO concessions in EU-Africa trade arrangements still do not suffice. The historical contextualization is important, but is the suggested removal a pertinent proposal? In the supposed global transition from trade in goods to trade in tasks, relaxed RoO certainly help developing countries to maintain their position in global value chains (GVCs). Yet, Herfkens continues, when substantial added value is required, RoO can still be prohibitive for participation in value chains for these very specific tasks. Hence, is even the relaxed substantive working or processing asking too much of a ‘task’? This assessment depends on some important assumptions. First, it assumes the economic rationality of a global division of labour in which less developed countries have only two miserable choices: either carry out minor tasks in the value chain for which they supposedly have a tiny comparative advantage or—worse— be selected as the location for the final stage of production simply because they are LDCs and have an attractive trade agreement with some importer in the Global North. From a developmental point of view, more substantial participation of less developed countries in globally stretched production chains is of paramount importance. Moreover, neglecting the requirement for substantive working or processing would technically raise the risk of disrupting all differentiated preference systems, since trans-shipment of goods from advanced production centres to LDCs just to be re-labelled for or cosmetically processed would get out of control. Admittedly, the case has to be nuanced for countries that wish to process their own tropical or mining products with inputs from far away. In addition, one can safely assume that today’s low global transport costs—often associated with a ‘death of distance’ in trade—do not reflect the true social cost,

35 Given

the difficulties mounting a full dairy chain in Africa. If European milk powder is used for the chocolate, duty exemption is assured, but this has another flipside (see case study).

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especially not the socialized environmental cost.36 In this case, further alleviation of rules for the now admittedly dominant global division of labour is neither developmental nor ecological. Hence after ten years of acrimonious debate, the simplification of RoO in GSP and EPAs would have just reached the appropriate level, possibly even surpassing it. This author used to exemplify the problem in his undergraduate lecture on Africa in the world economy by placing a jar of orange marmalade on the desk. It was a Danish brand, bought in a South African-owned supermarket (Shoprite) in Maputo in the year 2005, obviously made from Southern European if not Moroccan oranges and manufactured, according to the label on the back, in Poland. It remained unclear if the marmalade had ever seen Denmark—one would hope not, in order to avoid at least one cross-European transport. However, with all due respect to consumer preferences of European expatriates or African middle classes, transporting it via South Africa to Mozambique is hard to rationally justify. The same problem can be approached from the angle of regional economic integration. The European Union maintains that EPAs are there to foster regional integration among ACP countries. In this respect, RoO also have a second, developmental aim as they should support substantial production linkages in developing regions—similar to local content rules in individual countries. As such, they have only worked to a very limited extent in Sub-Saharan Africa, mostly in Mauritius and South Africa (Staritz 2011: 61). The loosening of the rules thus appears plausible and welcome for exporters from African regional communities. The main problem is that the relaxed RoO as such do not privilege regional over global integration, even where this would arguably make sense. Take again the example of the clothing industry.37 Apparel producers will certainly benefit from liberalized rules. In substance, they reinforce the dispersed chain of production within the global triangle, as they facilitate the global sourcing of inputs from where they are produced most efficiently, for yarn and cloth largely in China (Fig. 12.2). The clothing sector in SSA relies to a limited extent on locally produced yarn, fabric and accessories. In static perspective, this may be market-efficient; in dynamic perspective, it leaves Africa with the locally disintegrated production stages of raw produce and the most labour-intensive stage of relatively unsophisticated apparel.38 The fundamental trade-off is: • On the one hand, the new RoO facilitate to a large extent African participation in value chains with global division of tasks. 36 This refers to the 85% of global freight transported by sea and to perishable goods delivered by air. Even when sea transport is below proportion for CO2 emission compared to road transport (which carries most goods in intra-regional trade), reducing its share in global environmental damage remains paramount; see OECD and ITF (2015) at: www.internationaltransportforum.org/pub/Tra nspOutlook.html. 37 For a detailed assessment of the RoO working in the African textiles and apparel sector, in particular in SADC, see also Grumiller et al. (2018: 60–72). 38 Authors of the African Economic Outlook 2014, otherwise in favour of the new globally fragmented value chains, interestingly refer to cases where regionally integrated chains are considered more efficient than the dispersed mode (AfDB, OECD et al. 2014).

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Fig. 12.2. New triangular textile trade with Africa ( Source Author. Legend: 1: Cotton exports from (West) Africa; 2: Yarn and cloth imports from China; 3: Apparel exports to US (AGOA) and EU; 4: Cheap apparel imports for final consumption)

• On the other hand, the lifting of double and triple transformation requirements largely removes pressure on lead firms in the global supply chain to make their African regional production chains longer or more integrated.39 Now recall the new facility for regional cumulation introduced into both GSP and EPAs with an extension to all covered non-LDCs. This works in the sense of regional integration as it further reduces processing requirements from one country to the other. Is this good enough? Arguably, this is no bold move. Let us stick to the textile case. Whereas full manufacture from (imported) fabric is required for apparel to get originating status in the ACP country, regional cumulation lowers requirements to little more than ironing and pressing or attaching labels to clothing. Analogous minimum requirements for some other product groups are written into the EPAs (again: copy and paste from GSP). Such minimum treatment in the final country of the regional chain must be proven; otherwise, another regulation applies: the value of the last step must be higher than all steps carried out previously in neighbouring states. If the reader or, worse, the actual African producer and customs officer finds this cumbersome, it arguably is.40 In this case, it would be much more appropriate to apply the Herfkens proposal for all African region(s): no matter how small the tasks carried out from one African EPA country to the next are, simply recognize the product as originating in the last country before shipped to Europe.

39 Such

pressure materialized in Southern Africa when Taiwanese firms feared the phase-out of the AGOA Third Country Fabric (TCF) derogation—in practice, of fabric imported from Asia—and brought stages of production closer to each other. 40 For instance, in the SADC EPA, special capacity building and training is foreseen for the purpose of mastering cumulation rules. Someone must have requested it.

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In 2008, this author proposed that the EU should go even further and grant a special tax advantage to ACP regional products that have undergone steps of transformation (of debatable length and value) within the REC. As all these products continue to enter the European economic space duty- and quota-free, positive tax exemption is no longer possible, however negative taxes are.41 A reward for a genuine, that is, East African Product©, would have to be a negative import tax, in other words: a premium for regional sourcing among ACP states. As customs paperwork documenting the stepwise origin of the produce is already necessary at EU entry port, administering such genuine aid for regional trade would create little additional bureaucratic burden, so it was argued. When the EU—and similarly other advanced economies—predictably remains unwilling to make such a truly bold move in development aid, innovative promotional measures (beyond the dropping of minimum requirements for regional cumulation) should be introduced. The terrain to explore is rather consumer preferences and geographical indications. (Sub-)Regional products (‘products from your region’) are increasingly favoured by European consumers and labelled as such. Similarly, products grown and fully manufactured in ACP partner RECs and respecting advanced rules for sustainable trade can be promoted by the EU and granted every non-tariff advantage imaginable. In this regard, the debate is still in its beginnings. By one UN count, fruits and nuts from Africa face about 40 standards and regulations upon their entry into the EU market. As in TTIP negotiations, Europe should not give way regarding its food safety or sanitary standards. However, a systematic attempt to simplify them— with a manageable risk for consumers—or reward efforts for sustainable production preferentially for African exporters awaits a chapter of its own in trade agreements.

12.3.18 Economic Sanctions—The Right of Non-execution One last item featuring on various lists of critical items for North–South trade negotiations refers to the right to impose economic sanctions. A mechanism against violation of the binding economic engagements under the agreements is built into the EPAs. Not only are such sanctions an obvious legal necessity. This mechanism—once again— goes deeper and further in the ‘vertical’ direction than among the member states of African RECs where the absence of effective sanctions represents a main impediment to effective economic integration. Although this imbalance contravenes our own rule according to which North–South integration must not go deeper than South–South

41 As all EPAs contain an interdiction of internal taxes and duties used differentially among products originating in the region or imported, positive discrimination of African regional produced by VAT or excise tax rebate is now theoretically barred. However, VAT is a non-harmonized national tax in EU. So, reopening room to move towards positive discrimination of African regional goods should be acceptable in a revamped EU-Africa trade arrangement.

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integration, we welcomed for instance the actual lock-in of the CETs via the agreement with a third party—here the EU—because it consolidates a basic ingredient of African integration in itself.42 However, the European Union—analogously to the USA—goes further and reserves the right to impose trade sanctions in the event of grave violations of human and democratic rights. This has political support in the European Parliament and among civil society organizations. Currently, this measure is contained in Article 96 of the Cotonou Partnership Agreement; the EU is taking legal opinion to assure that the rule will live on in the new trade dispensation even though the EPAs do not contain any such paragraph. The EU derives the legal right of non-execution of contractual obligations from the basic premise that EPAs are built on the acquis of the Cotonou Agreement (e.g. Art. 4 (a), EAC EPA). This right is contested on legal grounds. Trade conditionality is even more debatable as a matter of principle. Theoretically, such sanctions can be imposed by both sides, but in practice, it will remain a unidirectional prerogative. As such, the right to sanction is an expression of the ongoing post-colonial imbalance of power. In actual handling, sanctions are imposed inconsistently on states with lesser power and where lesser economic interests are at stake for the northern party. Not every state and every trade flow are treated equally before the ‘law’. Incidence of the sanctions is the next problem: not the actual offenders but economic actors are usually hit hardest, among them the weakest ones. Maintaining development aid conditionality is more meaningful, especially with regard to budget aid and its equivalents. Legally, this is also more appropriate, as development aid in general is no contractual right of the recipient country (although often fixed in contractual form), contrary to binding, irrevocable trade agreements such as EPAs. The main problem with a human rights clause in trade agreements is different from the treatment of concrete trade flows, e.g. conflict minerals, which are themselves generated by illicit economic practices and recognized as such by global standards. A rapidly expanding grey area is entered where the full range of global sustainability standards comes into play. Again, when the economic activity and the ensuing export flow gravely endanger world climate or global public goods, specific sanctions will be in order. Climate tariffs are one essential dispensation considered here. Three important caveats apply: • First, when one contracting party in the North withholds the right to impose sanctions related to ‘shared values’, the North–South RTA works as a vertical lock-in mechanism, while truly shared values would be jointly defended by both parties. Principles and sanction rights should thus be anchored simultaneously in the constitutional documents of both contracting RECs and, in consequence, be taken over in the North–South agreement. Such a procedure also respects an empirically observed political economy rule: regionally contingent unions work better as political lock-in mechanisms than agreements among distant partners, even in the presence of power imbalance. As mentioned early in this text, the 42 This

is obviously conditional on the highly desirable modifications of the whole market access offer (and thus CET), e.g. with regard to statutory changes in the exclusion lists, treated above.

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experience of the AU and some African RECs with regard to defending democracy against coup d’états is positive. Similarly, EU institutions are relatively effective at imposing environmental standards and sanctions against recalcitrant member states, even the most powerful ones such as climate policy laggard Germany. In some critical areas, regional lock-in or self-restraint works. • Second, the current EPA drafts and implemented iEPAs are textually sustainability-blind, despite some lyrics contained therein. European policy measures like climate tariffs would be extra legal with respect to the unconditional market access guaranteed to African partners. Neither joint mechanisms to receive complaints on grounds of human rights violations or wider sustainability issues, nor ensuing climate tariffs or similar sanctions are written into the agreements. It remains extremely unlikely that the African parties will agree to amend trade agreements with binding human rights, core labour rights and environmental standards, as they perceive such extended trade conditionality with good reason to be a new asymmetric non-tariff mechanism—asymmetric because it works only in one direction. • Therefore, thirdly, economic incentives are preferable to sanctions, also in this area. Mechanisms to incentivize exports from certified lines of production by negative import taxes, guaranteed quotas or coupled subsidies would have to be made contractual. No formal incentive of the sort features in the EPAs so far. Full introduction of (a) a common defence mechanism against human, political and social rights violation and (b) substantial ‘greening’ of the trade agreements will arguably require more political dialogue, resources and time than the limited renegotiation or reassessment of the EPAs outlined below. But the political intentions of a related second negotiation round should be written into the present texts—specifically into the Rendezvous clauses thus far dominated by mundane liberalization issues.

Chapter 13

Final Assessment of the EU-Africa Trade Deals—Ways Out?

Abstract Based on the emerging country configurations (EPA groups) and the content of the EU-Africa trade arrangements, the chapter reviews the political impasse between the EU and Africa following the highly contested implementation start of the bi-regional trade agreements. Regional economic integration in Africa is considered to be in present danger with regard to the engendered fragmentation of main African RECs, namely the emerging customs unions. Suggestions are reviewed on how these and other North-South agreements can be either replaced by treaties that will be more beneficial for African countries and regions (‘grand alternatives’) or at least substantially improved (‘repair work’). New areas for the intercontinental policy dialogue and for new and better aid for trade are identified.

13.1 The Political Impasse Summing up over all the critical factors, how are the EPA outcomes for Africa to be assessed? In an earlier paper, this author considered the big political battle over EPAs to be finished, leaving mainly implementation challenges to be solved (Asche 2015). This conclusion was based on the assessment at the time that some policy space for agro-industrial strategies had been preserved because EPAs had been down-sized to a relatively palatable trade-in-goods agenda. Moreover, at that time, a number of trade defence measures were still considered workable for the African party. Neither (1) structural industrial or agricultural policy, nor (2) good mineral resource governance, nor (3) deep regional integration would have been inevitably halted by EPAs wherever African governments were determined to pro-actively exploit the remaining policy space, in particular during the long transition periods until full liberalization of selected African imports from Europe could set in.1 The long-critical CSO participation in trade politics, above all in West Africa, would have paid off (Trommer 2014), although certain NGOs continued to attack

1 Namely

the ideas on regional industrial policy in the strategic documents of AU and UNECA (African Union 2007; UNECA 2015) could still have been implemented.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 H. Asche, Regional Integration, Trade and Industry in Africa, Advances in African Economic, Social and Political Development, https://doi.org/10.1007/978-3-030-75366-5_13

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the EPAs head-on.2 Room for further preferential South-South integration had also been preserved since not all trade preferences were also to be granted to the EU right away, as full application of the MFN principle would have required. In turn, exporters from Sub-Saharan territory would have attained irrevocable free access to the EU market of some 440 million inhabitants. Such was the situation as it presented itself with regard to EPA implementation half a decade ago. Now, it has become much clearer that the departure from the basic WTO architecture represented a sea change: on the one hand, extensive trade liberalization (by ‘copy-and-paste’ from GATT), and on the other hand, special and differential treatment of developing countries largely dropped in the EPAs. And the moderately positive assessment was particularly off-target regarding the actual impact on regional unity that we presently observe with the geographical configuration of EPA groups. Regional economic integration in Africa is indeed in present danger from EPAs. The resulting country configuration with single-country and sub-group agreements represents an obvious monumental disaster for regional integration. Contrary to the situation at the end of negotiations in 2014/2015, the EPA exercise may now indeed turn out to be a kind of second Berlin Conference, as prominent critics—former Tanzanian and South Centre president Benjamin Mkapa among them—had always feared in light of the divide-et-impera strategy pursued by the European Commission. The South-African cartoonist Zapiro famously caricatured this situation as an EU steam roller running over Africa.3 The situation that now prevails across the continent was triggered in West and East Africa by the refusal of the Nigerian and Tanzanian Governments to sign the respective regional EPA. This 13th-hour decision, albeit referring to important objections raised by the African negotiators, IGOs, NGOs and legislators, lacks strategy. The European Commission is still trying to convince recalcitrants to join in and may obtain some successes, such as the signature of Gambia in 2018. Technically, adapting market access offers in the interim-EPAs to regional ones and to the final regional CETs would somewhat reduce the damage since the earlier interim agreements are less advantageous than the final regional texts. Yet the basic facts remain. In particular, common agricultural and industrial policies behind the borders of African RECs would remain a distant dream and by extension their very existence as integrated economic entities. As we saw in Part I, the important African regional communities are all somewhere on the road from preferential trade areas to customs unions and beyond. If the current fragmentation of trade agreements with Europe endures, the 2 The

NGO conglomerate Concord is one example: they only mention in passing that EPAs had become obligations to liberalize ‘goods-only’ and that no North–South deep integration was immediately to be feared (Concord 2015). 3 The assessment is shared in its obvious results at the ECA: “The effect of the EU’s fragmented trade arrangements with Africa has been detrimental to Africa’s integration. …while EPAs were supposed to help advance Africa’s regional integration agenda, in practice they have often provided incentives, unintended though they may be, for many African countries to act contrary to their commitments at the level of the … RECs of which they are members.” (Luke, Mevel et al. 2020: 3) Follow all the cases of fragmentation which have been described here, too. Yet, our analysis calls into question whether the acts committed have been unintended.

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regional communities will effectively fall back to free trade areas, something that is now offered by the CFTA on a much larger scale. Therefore, African leaders are currently deciding not only trade relations with Europe, but the very future of their regional economic unions. The shining overlay of a united Continental Free Trade Area merely masks the underlying fragmentation, at least as long as no continent-wide trade agreement with the EU is concluded under better terms than the present ones. In fact, both the design of the AfCFTA, which builds on the existing customs unions, and the EC declaration to consider these unions as ‘building blocks’ for future continentto-continent trade relations confirm their importance in times of the AfCFTA. One should not cut building blocks to pieces. Yet this is currently being done in East and West Africa. Moreover, it is being emulated by the British bilateral rollover trade agreements on EU terms, which also pick the cherries Ghana and Kenya from the larger pies ECOWAS and EAC. The irrelevance of SADC for trade negotiations with third parties is confirmed. In Southern Africa, again, things would be considerably less dramatic if the CFTA as an institution (or OACPS) would, in the future, replace the underlying RECs in negotiations with all third parties, starting with the EU. But this is unlikely to be the case. Apart from all commercial technicalities of the fractured agreements, the political disappointment and disillusionment from failed club diplomacy in West, East and South Africa can hardly be overestimated. Anyone who participated in prep meetings or workshops in the regions in recent years could sense the unease of African officials because their negotiation groups were not able to come to terms with the challenges presented to them. This was before the advent of the CFTA injected a new dose of optimism into the ranks of African trade officials. Nonetheless, the earlier failure mortgages further attempts at joint economic policy-making within the main African RECs—striking most recently in East Africa—and on the continental scale. This is the reason why the alternatives considered as replacements for the skewed EPA approach still matter during CFTA times.

13.2 Grand Alternatives Throughout the second half of the last decade, various scenarios for dealing with the EPA problem in Africa were pondered. The DG trade attitude was to ‘confidently’ continue with EPA implementation and try to broaden adherence among African states, mainly by using the attached aid packages as a lure. Most analysts suggested a standstill: freezing the EPA implementation at the present stage of implementation or even re-instating the Cotonou conditions until a solution could be found at continental level. Some went further. The German chancellor’s Africa advisor Günter Nooke strived to figure out a more radical solution to the problem. At the EU-Africa summit of 29– 30 November 2017 in Abidjan, he went as far to suggest that the WTO rule of reciprocal liberalization should itself be subjected to renewed scrutiny. In consequence,

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he argued that asymmetric treaties with developing countries would systematically remain possible without having recourse to exceptional, time-bound WTO waivers. This goes back to the analysis of power relations in WTO undertaken above, but probably does not represent a realist scenario—at least as long as the concept of ‘developing countries’ who would benefit from renewed asymmetry is not restricted either. The final declaration of the 2017 summit bluntly retained in paragraph 67 the joint intention to ‘promote the full implementation of EPAs’, falling conspicuously short of what could have been expected as an outcome of the critical debate both in Africa and Europe. In 2018, the EC postponed a CFTA-related solution to the long term in its policy proposal for a new alliance: Building on the African Continental Free Trade Area implementation, the long-term perspective is to create a comprehensive continent-to-continent free trade agreement between the EU and Africa. To prepare this, Economic Partnership Agreements, Free Trade Agreements including the Deep and Comprehensive Free Trade Areas on offer to the countries of North Africa and other trade regimes with the EU should be exploited to the greatest extent, as building blocks to the benefit of the African Continental Free Trade Area. (European Commission 2018: 3)

Considering the CFTA as relevant for a trade arrangement only in the long term is realistic, but the perspective of using consolidated and improved sub-regional agreements as building blocks or ‘toolkits’ (alternative EC wording) is totally abstract and even hypocritical on the EC side considering that the main achievements of the last two decades of trade negotiations have been (a) the deconstruction of the subregional entities in Sub-Saharan Africa and (b) separate country-by-country deals with North African countries. While the CFTA is unlikely to ever become a working customs union, it could theoretically play its role as a counterpart in trade negotiations. A mere FTA can conclude trade agreements with third parties; this happens globally all the time. Theoretically, a very large FTA of up to 55 members can conclude a trade agreement which entail unified tariff scales and non-tariff rules for both imports and exports with an existing customs union (the EU) or with large single trade partners (China, India, US and UK)—emulating an African customs union for the trade partner in question. By definition, such a partial customs union cannot enjoy the advantages of a single customs territory. It will not be able to render internal border controls in Africa superfluous—even if imaginative customs cooperation introduces, e.g. simplified certificates of origin and verification for imports from Europe. Nonetheless, some have considered this a step towards a fully integrated and smartly protected African market—towards the CCU. It came otherwise. On 3 December 2020, negotiations between the OACPS and the EU reached a political deal on the text for a new ‘partnership agreement’ that shall succeed the Cotonou Agreement. Pending approval on both sides, application of the Cotonou Agreement is extended to 30 November 2021. The deal reconfirms the ACP configuration instead of a pan-African one. It excludes North Africa, as much as the subsequent regional protocol on Africa will do (along with one on the Caribbean and one on the Pacific region). As the precise text of the agreement was not known at the time of writing—with the exception of an enumeration of

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common values and key priority areas—a detailed analysis is not possible here. It is clear that the post-Cotonou Agreement cannot frame a future continental trade and investment agreement with the CFTA because it excludes North Africa, irrespective of whether compromise reached on substantial issues such as migration, investment or governance can be considered forward-looking. Even when Africa-wide continental trade agreements with external partners like the EU, USA, China or India are unlikely outcomes, the pan-African level could have an indirect bearing on trade and investment negotiations. The initially foreseen regional EPAs for West, East, South and Central Africa have all already faced an identical range of roughly a dozen critical issues treated in the chapters above, and it has become obvious over time that the European Commission has used the egregious lack of coordination among African negotiation groups to introduce different solutions for identical matters—some more, some decidedly less developmental. Therefore, the UN Economic Commission for Africa suggested raising the issue to the level of the African Union. Even without pan-African negotiations, establishing a common understanding and model clauses that can be copied into the (sub-)regional trade agreements would constitute decisive progress and a manifestation of the desired Africa-EU Postpost-Cotonou spirit. We will introduce it right after this as part of a ‘Best of EPA’ approach. The African problem is now an institutional one—a triple apex structure. The AfCFTA Secretariat has been separated from the AU Commission and is located in Accra. Based on a revised Georgetown Agreement, the former ACP country group became a new organization in April 2020. Representatives now united within the OACPS have carried out lengthy and detailed negotiations with the EU on a number of key strategic issues, including some also raised in the EPAs, but now fixed in the post-Cotonou text. Achieving a common Africa-wide understanding of overarching strategic or trade-related issues has become considerably more difficult in the present organizational setting. Trade and investment deals will remain sub-regional or singlecountry in any case. There is no good alternative in sight.

13.3 Repair Work A less radical suggestion—call it the ‘positivist scenario’ as it accepts EPAs below the CFTA layer in principle—would entail re-negotiation and comprise a number of key elements: 1.

Asking for a new WTO waiver for a duration of ten years or so is still possible. In order to avoid unrealistic shelving of the entire market access offer which the African side made at Europe’s request, a new waiver could be attained which would re-interpret the quota of essential trade liberalized down to, say, 65% for the Africa party. The request would have the obvious inconvenience of introducing a new time limit into the contractual relationship

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Rephrasing: Returning to the analysis of critical clauses and regulations above, some can easily be rephrased in a more developmental spirit. Significant overrestrictions, downright textual blunders and manifest incoherence point to the need for speedy revision of key EPA provisions. This should make it possible to dissipate the main objections of potential African signatories. In particular, the following clauses and regulations could become subject to re-negotiation and rapid amendment: • • • • • • • • •

3.

4.

Standstill or status-quo clauses Multilateral and bilateral safeguards Infant industry protection clauses Exclusion or sensitive product lists Most favoured nation (MFN) clauses Export duty regulations Local content regulations Rules of origin Rendezvous clauses.

With regard to EPA rephrasing, it is important that EPA texts are not identical. Some clauses are more advantageous for African contracting countries in one text than in the other (not to mention interim-EPAs). The EPA with the longest implementation history, the Cariforum EPA, can also be considered for what it reveals about workable and less workable regulations since evaluation is at hand. A ‘Best of EPA’-approach may thus help to dissipate scepticism. Updating the attached aid packages—the ‘EPA Development Programmes’— in light of conditions that have changed (inter alia: Brexit, with reduced UK contribution) or need to be more seriously assessed, in particular: the estimated fiscal losses from the liberalization schedule. Formulas which bind the EU to compensate fiscal losses from removed import taxes through aid payments are to be harmonized—another example for the Best of EPA approach.

This schedule is meant to bridge the differences between the political quarters in order to achieve a development outcome between the EU and Africa. It also represents a challenge for UN organizations, technical assistance agencies, think tanks and advocacy organizations in an attempt to help African governments (and to some extent, the EC) to set their agenda straight.

13.4 New Areas for Strategic Dialogue There are some areas where simple rephrasing and textual harmonization will not do. Already the next-to-last item on the list—turning EU rules of origin into a true incentive system for regional and sustainable African export products—goes well beyond re-formulation. Replacing a North-South system of economic sanctions with a ‘common defence system’ against human rights violations definitely does go

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further, but by definition such a measure would not have much to do with trade. Obviously, fundamental reform of European and African migration policy at the border and behind the border is of similar magnitude, but goes far beyond the scope of this text. Fundamental rethinking is also required for one area of European behindthe-border policy which has an immediate impact on trade and production. The EU Common Agricultural Policy (CAP) deserves special attention in this regard. Thinking out-of-the-box is needed here to overcome the long-standing distrust visà-vis European policy in Africa. The CAP remains a major impediment to the acceptance of such North-South trade agreements. EPA negotiations were initiated to assure better integration of Africa into trade with Europe but were skewed from start towards the opening of African markets. A strategic policy dialogue on the sustainability of the European growth model in conjunction with the African one was never opened. Otherwise, the sustainability of conventional European high-subsidy, highinput agriculture would have come under critical scrutiny. In this context, opening a true dialogue in EPA implementation is overdue. Although centred on agriculture, an innovative approach could have a significant positive impact on agro-industries in Africa and directly support the related industrial policy. The launch of a joint African-European search to find a binding commitment for innovative direct payment schemes, similar to those within CAP but in Africa, must not hold up implementation of—improved—EPAs. It amounts to no less than reconsidering the European and African agrarian development model in sync. Throughout EPA negotiations, the European side refused to make the EU Common Agricultural Policy a subject of discussion. With respect to its trade implications, European agricultural policy should be the exclusive subject of multilateral talks in the Doha round as long as this platform is maintained. This EU policy was countered by African demand for bloc protection of the African agricultural sector in the EPA exclusion lists. Instances of indirectly subsidised European agricultural exports from frozen chicken wings to tomato paste disturbing African markets—and generating mass protest in Africa—will still be possible wherever significant price differentials occur. Now, the European Union may want to finally adhere to the position that its Common Agricultural and Fisheries Policy has indeed a detrimental impact on the situation of African producers, contrary to what the EU Directorate General for Agriculture aired late in 2017 with respect to the CAP 2020 reform. The issue is so complex that it is more suitable as an innovative subject for negotiations with the new Organization of ACP States (OACPS) than under the EPA rendezvous clause let alone for short-term EPA re-negotiation.4 The most damaging direct EU agricultural export subsidies (‘export refunds’) were finally abolished in 2013. This important policy change has a long background story in trade relations and negotiations. The essential change was the departure from artificially high EU internal prices that necessitated an export subsidy to bring export prices down to lower world market levels. Most of the subsidies are now paid as direct payments to farm units, 4 However,

subject.

the rendezvous clauses themselves should immediately be amended by adding this as a

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and most are decoupled from production levels and simply paid per hectare. One exception to the new system of decoupled direct payments is cotton subsidies. The departure from direct export subsidies was cherished by analysts, not the least because of their detrimental impact on developing countries, mostly in Africa.5 The European Commission even introduced together with Brazil a proposal for the complete phasing-out of agrarian export subsidies in the Doha ministerial round. Other analysts appreciated the linking of CAP funding to environment-friendly farming measures, in particular in pillar II payments, although the true ecological dimension of these payments is widely called into question and needs further reform. However, to what extent EU agrarian subsidies are in actual fact decoupled from (export) production has remained highly controversial in academia and civil society think tanks. The extent of decoupling determines in the end whether CAP payments are still considered trade-distorting. In consequence, they are to be slotted in the WTO Green, Blue or Amber Boxes, the latter being the most distorting. The issue is technically complex and has to be analysed both in terms of trade law and by economic incidence. Deconstructing the so-called box shifting which advanced economies undertake to artificially reduce their WTO obligations is one first dimension of this. All observers agree that the complete decoupling of EU CAP subsidies is everything but a foregone conclusion given that farm production and their factor inputs are still subsidized. Taking two representative sorts of analysis, the one camp would question by means of tax incidence analysis that CAP subsidies actually have a major growth effect on (export) production. Some consider it to be rather an indirect subsidy for rents, mainly for large land-owners who are not even farmers. Positive ecological effects are also widely called into question, which is another crucial dimension of the 2020 CAP reform. Consequently, this camp argues that EU agricultural subsidies now have limited effects on developing countries, and campaigning groups should rather help to prevent any backsliding to coupled payments in CAP reform (Matthews 2017). The other camp, in contrast, argues that decoupling is essentially a masquerade for WTO purposes since an increase in agricultural production (and export) is still financially supported. Not much of the CAP payments should thus be accepted for the Green Box. In consequence, this camp calculates the total of direct CAP payments that fall on the exported part of EU agricultural produce as the effective amount of EU export subsidies (Berthelot 2001, 2013). This line of argumentation does not bother too much about economic modelling of subsidy incidence and its behavioural assumptions and therefore (over)simplifies the problem. Part of the CAP subsidies are explicitly designed not to increase, but to replace one part of conventional farm production by an eco-friendlier one, admittedly a minor and insufficient part. Whatever the precise export impact of the decoupled payments—no one knows it at present—the basic distortion remains by which advanced Northern economies can afford to pay their agricultural producers massive subsidies that African countries cannot. Even if the 2020 CAP payments were—after thorough reform—fully targeted on the ecological transformation of European agriculture and on the most 5 See

http://capreform.eu/the-eu-has-finally-agreed-to-eliminate-export-subsidies-three-cheers/.

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disadvantaged farmers and farming regions, they would still have some financial impact on farm production. Depending on the different products and their export quotas, this still has some negative impact on African farmers (while some consumer groups in the importing countries might gain). Notorious are cases such as the cotton subsidies still paid in EU, with one-third remaining linked to production. They are mainly paid to Greek and Spanish farmers and have a stabilizing effect for disadvantaged regions within the EU confines, in the logic of intra-REC compensation revisited above. Since 2003, the ‘Cotton 4’ countries in West Africa—Benin, Burkina Faso, Chad and Mali—have been fighting against this system of trade tilted against them, though mainly against the cotton subsidies written into the US Farm Bill. Along with the US agricultural policy, the whole image of CAP will therefore still negatively taint the acceptance of trade agreements with the global North. Over and beyond such cases, a politically innovative approach is needed. What can it reasonably comprise? There is a far-reaching fundamental alternative that is nevertheless reasonable and long overdue. Opening a completely new chapter of EU-Africa relations, the European Union could accept discussion of the long-term perspective of European agriculture and agro-industry in sync with a new agrarian perspective for African regions. The necessary structural transformation away from today’s ‘industrial agriculture’6 has the potential to reduce conventional overproduction and overexporting and can thus be conceived in terms of a new agro-industrial division of labour between Europe and Africa. A joint agrarian reform project would therefore become a perfect match for Green Industrial Policy in Africa. The radical opening would suddenly give substantial meaning to the sought post-Cotonou ACP or Africa-EU ‘partnership’, which has generated at best lukewarm support on both sides but could now assume true strategic importance and stir some shared enthusiasm. If the radical opening cannot be achieved via one big decision, there are ways and means to gradually introduce the shift. For example, the EU could consider derogating from some of the most harmful CAP provisions in Europe. If, however, derogation does not appear realistic given the centrifugal forces in the EU itself which make CAP 2020 reform perhaps the wrong moment to talk about abolition of major subsidies, the EU might eventually consider directly compensating some particularly disenfranchised African producer groups for the damage occurred. Taking EPA development envelope money to directly support, say, African cotton and dairy farmers would in some cases (clear for cotton) not disadvantage European farmers while at the same time enabling African partners to stand up directly to the competition from American, European and other farmers. Consider cotton again. The EU is a small producer and small net exporter of cotton, mainly to Turkey, which in turn exports textiles into the EU. Hence, aborting CAP 6 The

political term ‘industrial agriculture’ indicates a type of conventional farming and livestock rearing which over-relies on chemical inputs, restricted living space for animals, and over-production of agricultural waste, such as liquid manure. Although ‘industry’ is very negatively connotated here, departure towards a new type of agriculture does not denote a return to pre-industrial stages of peasantry.

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cotton subsidies would not rectify much for Africa. The US Farm Bill with its direct export credits and guarantees and China’s cotton subsidy have a far bigger impact. The charm of direct financial support to Africa’s Cotton 4 would be its enabling force vis-à-vis important non-European competitors. The financial implications for EU aid are remarkably modest in comparison with CAP payments: about 900,000 cotton farm units exist in the C4 countries. Applying the rule that subsidies should not directly support export production to fit into the appropriate WTO box, the subsidies should be paid per hectare. Supposing that each farmer cultivates between two and three hectares, and that the EU is willing to grant the same average direct payment as in Europe (300 e/ha/year), we arrive at a total subsidy of roughly one billion euros. The poverty incidence depends on the number of adult equivalents per farm, the margin at which the households live below the international poverty line of 1.90 US$ daily per capita but is expected to be considerable. Disbursement can be organized via the cotton marketing boards, which may receive a fee of 1% of the total per C4 country. Pushing the analogy with a reformed CAP system still further, part of the subsidy can be paid for purposes of ‘greening’ cotton farming in West Africa, with aid to complete the departure from GMO cotton (for Burkina Faso) and full transformation to ecocotton in perspective. Finally, taking up issues from the discussion about support for regional value chains above, textile products made in the region from ‘Cotton made in Africa’7 may receive a negative import tax at entry into the EU market. Since the elimination of milk quotas in 2015, which penalized exports beyond pre-established limits, Europe’s dairy farmers and industry are exposed to price changes in the world market. Given the resulting social tension after years of low milk prices, it is again unlikely that the EU can afford to further reduce support to farmers. It may rather take the form of supporting voluntary supply restraints, which indirectly helps African cows. Instead of meagre technical assistance, direct financial support for the African dairy value chain that targets the cold chain would obviously help to roll back EU milk powder exported to Africa, thus complementing the restraint measures at origin. Ironically, it could also help the same European firms that produce milk powder in Europe and invest in African markets for downstream production from imported milk powder. Contrary to attempts at stopping milk powder imports by means of raising regular import tariffs or applying safeguards, such direct payments would not raise consumer prices in Africa and thus contribute to poverty reduction. Any such provision has the potential to monumentally increase confidence in the sincerity of European trade negotiators and in the trade agreements themselves. Retaining the principle of direct compensation for the most affected African producer groups would in the short run make it possible to overcome resistance by some African governments as well as large quarters of civil society against entering 7 An

allusion to the label used by the German Otto group for a segment of its apparel—a CSR initiative anchored in the firm’s core business which goes in the same direction but is obviously limited in scope.

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comprehensive trade agreements with the European partners. The inevitable hint at the cost of such schemes appears unfounded given the fact that rising aid budgets hardly find the required number of fundable conventional aid projects. Here, money can be better spent. Given the massive inertia inherent in European bureaucracy and the political disarray in both European and African quarters, not even a portion of the good ideas listed here may ever materialize. The unfortunate current situation may linger on for quite some time. How disastrous one reckons the resulting trade liberalization impact and the fragmentation of intra-African RTAs to depend on the observer’s political and theoretical stance with regard to the basic prospects of such unions among less developed countries. As described in the introductory chapters, if you judge trade deepening behind customs borders of African RECs as futile, although it follows the EU travelling model, you will probably opt for light integration and unfettered multilateral trade liberalization. Recall for instance Draper’s call for ‘breaking free from Europe’, following on Baldwin’s ‘hub-and-spokes’ plea from the 1990s or Venable’s 2003 dictum on developing countries better served by agreements with the North than among themselves. From such vantage points, you are not terribly worried about the fissured landscape that will appear in Africa after the fog of trade war clears at the end of negotiation. This scenario would have a certain historic irony: that trade deals with Europe ultimately brought down efforts that claimed to seek integration in African sub-regions along the European model.8 However, if you see things differently, three massive dangers for African industrialization and economic development at large become imminent: 1.

2.

The long-criticized risks from near-symmetric market access for EU competitors to African markets which cannot be fully harnessed by the trade policy tools as they are currently phrased, in other words: what has been at the core of the critical mantra of advocacy groups The deadly danger for existing regional communities in Africa which are cut into pieces in their trade agreements with the most important Northern trade partner: this includes at least four single-country interim agreements, one group interim EPA, one partial REC EPA and two REC EPAs pending, with very different fallback options.

With regard to both dimensions—the content and the configuration of trade agreements—African RECs will be disarmed vis-à-vis third parties in forthcoming trade negotiations. BRIC countries, Japan, Korea, Turkey, etc., will reasonably except the same advantages as the EU and try to choose their African partners ad libitum. The two overarching risks from the EU-Africa trade arrangements compound the fundamental problem analysed as the domestic challenge for regional integration in the preceding chapters. We already noted that no African community declared ‘free 8 Some European advocacy NGOs and parliamentarians also dismiss the risks associated with REC

fragmentation, but with the opposite argument. They welcome the failure of the West, East and Central African group EPAs and insinuate that the African groups and individual countries may still harmonize their trade schedules among themselves, namely their CETs. They cannot. This position is analytically and politically untenable.

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trade area’ or ‘customs union’ has completely liberalized internal trade. All have (a) internally sequenced tariff liberalization schedules much like those in the EPAs, often differentiated between less and more advanced countries in the REC. And agreements like the SADC Treaty contain (b) almost every safeguard measure accepted in the EPAs, here: against thy African neighbour. The exception clauses are regularly invoked to re-erect tariff and non-tariff barriers (NTB) among member states, if (c) regulations are not simply disregarded to impose day-to-day trade impediments. It is this last phenomenon which generates. 3.

The danger of wide-spread Africa-internal trade irregularity and informality in contrast to rules-based, formal North-South trade, perpetuating patterns of low intra-African trade.9

African RECs must be careful not to perpetuate another paradox of North-South integration, here: the trade-only version in which distant suppliers are de facto privileged over one’s own African neighbours. It would constitute the classic post-colonial centre-periphery or hub-and-spokes model. It will not bring tangible productive gains for the ‘spokes’ if trade at the periphery of the model is not facilitated, as even proponents warned. This can have various facets: • Anger about an imposed EPA may provoke some African Governments not to implement the agreement as scheduled but to linger on or navigate with the old schedule. While traditional EPA critics will celebrate,10 EU-Africa trade will suffer in practice • Or conversely, the free and rules-based extra-African trade schedule will be implemented as signed and rendered less bureaucratic with programmes of trade facilitation becoming instrumental, while intra-African and intra-REC trade remains hampered by high and irregular informal barriers • Though formally playing by the rules, vested interests might entice African Governments to misuse the leeway acquired in the EPAs (especially the exclusion list) for protectionist rent-seeking policies instead of fostering new and productive industries. Among these critical phenomena, a pattern of orderly outward liberalization without proper inward liberalization of trade most probably represents a worst-case scenario for regional integration in Africa. The Continental Free Trade Area is a priori exactly the strategic project that takes care of inward liberalization across the

9 It

should well be noted that talking of ‘formal’ or ‘rules-based’ North–South trade which can be expected from EPA implementation refers just to the legal respect for agreed tariff or non-tariff schedules and for customs procedures that the EC will impose. The commonplace problems, e.g. of under-declaration and tax avoidance in North–South trade or disrespect for international norms, should definitely not be ignored, but they are subject to the said trade agreements mainly by good intentions—another complex for rethinking the whole system. Fair trade is indeed not much of a subject in EU- or US-Africa trade negotiations. 10 As they do over delays with the CARIFORUM EPA to implement the agreed tariff structure.

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continent. Yet, the fragmented mode of negotiating market access for the CFTA— among country pairs or in small groups—does not augur well for a sweeping removal of barriers. Avoiding this requires political leadership and will. Strategizing to counter these tendencies needs to be informed by sound technical advice, which is—as the example of how to organize cross-border exchange in food staples has shown—not always at hand. With leadership, vision and good technical knowledge, the prospects of African regional economic integration are by far not as gloomy as they appear at present. By extension, this applies to prospects of industrialization which rely on free movement of goods and factors across African borders. Based on this, African leaders may want to contemplate engaging in NorthSouth dialogue on new topics which have understandably been sidelined in the difficult arena of EPA negotiations or not yet even raised properly, such as green and sustainable trade. North-North treaties such as CETA, the EU-Japan agreement or the aborted TTIP imply very deep integration, including all topics sent to the EPA rendezvous clauses. On the one hand, this creates massive political acceptance problems since all these ‘trade’ agreements—by their content and clandestine negotiation mode—tend to impose a way of life that large parts of the concerned citizenship do not want. African negotiators are well advised not to march into the same policy trap. On the other hand, if some freeing of exchange in services, more incentives for foreign investment, and well-reasoned harmonization of decent standards are still reckoned as useful, then every region which at best runs free merchandise trade remains at a serious disadvantage in comparison with the EU, but potentially also with Europe and North America combined. One way or the other, the higher one climbs on the ladder of industrial sophistication, the more artificial the distinction between trade in goods and trade in services becomes. Modern logistics is the best example as its services hold together production of goods along value chains. Despite all the resistance mounted against EPA regulations on these topics, African regional communities should show up at the scheduled rendezvous. It is not a viable strategy to not talk at all about services or investment, and specifically not to talk at all about standards and regulations that still impede EU-Africa exchange, and just to hope for a positive fallout while the others negotiate deep integration. African negotiation group(s)—if not one single group—may want to carve out issues for replacement of the one-byone bilateral investment treaties in which they are incorporated anyway. The window of opportunity thus refers to preparing for the rendezvous, too. Systematically, trade policy efforts have to respond to three main challenges at the same time: 1.

2.

Preparing for risks and opportunities from actual EPA/iEPA implementation where applicable as these cannot be ignored even by those fundamentally opposed to the EPA approach Preparing for targeted re-negotiation/change of particularly harmful clauses in the agreements, which entails also convincing European policy-makers of the need for change

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Selecting and preparing for new negotiation rounds on topics like trade in services, investment, intellectual property rights, freedom to move and greening trade.

As the latter are the same topics that are on the agenda for the CFTA (in a SouthSouth environment) and are also interlinked with the migration problem (in North– South direction), trade policy will remain extremely challenging, as will be good trade policy advice, to which we now turn at the end.

13.5 New Aid for Trade At this point, a few words about the development cooperation agenda contained in the EPAs are in order. Few analysts ever believed in the additionality and demand orientation of Aid for Trade (AfT) as launched in the Doha Round to help developing countries cope with the challenges of further global liberalization. Prior meta-analyses of aid for trade and AfT-related evaluations found that the impact of such aid on DC trade growth was hardly ever operationalized or evaluated. And AfT, even under its subheading ‘building productive capacity’, largely neglects aid for new manufacturing industry at the firm level, except for some support to SMEs (Razzaque and te Velde 2013: 413).11 Completely revamped AfT which deliberately takes the new triangular North-North-South setting for global production chains into account and prepares actors for the associated opportunities and threats with regard to all product specifications and standards affected by both EPAs and eventual North-North agreements can meet real DC demand and make a change. There is also a multi-fold need for true joint industrial policy in African subregions, but institutional capacity for regional policy-making at the levels of REC commissions or secretariats is still weaker than at the level of some national governments in Africa, although it should be the other way round. Thus, there is a comprehensive need for productive and institutional capacity building—in a structuralist sense of ‘transformative regionalism’—that the EU and bilateral ODA hardly ever embraced and even actively fought. Financial requirements for infrastructural and industrial compensation policies, which are recognized as a basis prerequisite for African regionalism to succeed, also bring budget aid back to the agenda in a meaningful, regional form. The prospects of regional lock-in mechanisms for good financial governance may prevent some of the damage which brought budget aid from the previous generation into discredit. New AfT will have to take up another institutional aid reform proposal as well. Technical assistance for an African policy reaction to challenges from EPA (or AGOA, TPP, etc.) cannot credibly be delivered the classical way, with the European or American donor steering to whom the aid project will be delivered. However, 11 Limited exceptions to the rule are development finance institutions such as the ones regrouped in the EDFI partnership. However, aid for trade of, say, the German DEG cannot be properly evaluated because of significant information gaps (Kröger and Voionmaa 2015: 60).

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an open fund from which the recipient country or REC can put its demand for technical advice on open, competitive tender—including agencies from other developing countries—can help. Otherwise, the lengthy development chapters of the EPAs will be of limited interest. Accordingly, support for RTA Monitoring and Evaluation (M&E) will be crucial. The ECOWAS EPA rightly defines regular evaluation of the agreement’s implementation as one of five strategic axes of the EPA Development Programme, including assessments of competitiveness enhanced and production sectors strengthened. In the SADC EPA, only Annex X mentions joint evaluation of the private and public sector capacity to use the new rules of origin—indeed a critical issue.12 There may be more. The baseline of all M&E is the tiny percentage of 2–3% African trade in total EU exports and imports, despite the Cotonou preferences. Of paramount importance for EPA monitoring is the fundamental assumption on the basis of which the EC opened the negotiations for a change from unilateral, asymmetrical trade liberalization to a reciprocal, far less asymmetrical agreement: opening African markets to more European imports will lead to more competitive African exports. The assumption always was heroic, albeit corroborated by one (contested) trade theorem, the so-called anti-export bias of import protection and its reversal: cheaper imported inputs strengthen export competitiveness. Monitoring is crucial here. If the import– export nexus proves valid, fine; if not, search for remedial aid for trade better targeting African productive capacity would have to follow suit. Regular outcome monitoring and so-called formative evaluations that accompany the EPA implementation should now include ex-ante impact assessments of third-party RTAs. Given the obvious third country effects from North-North trade agreements such as CETA or JEFTA, these assessments need to be explicitly written into the mandate of EPA M&E. Rules for evaluation should be fixed in a way that assures institutional independence of evaluators and transparency of results found. For this last reason and also because identical problems are apparent for all NorthSouth trade agreements, the control function of M&E should be lifted to the level of the African Union Commission and the Secretariat of the Continental Free Trade Area, along with possible AfT projects. This will ensure independence from vested interests in the regions as well as comparability of results.

12 The

EAC EPA strangely has nothing on impact evaluation.

Chapter 14

Conclusion and Outlook

14.1 Conclusion—How to Achieve Africa’s Economic Unity The basic line of argument in this text is straightforward. Creating economic unity in Africa has preoccupied political leaders and economic actors since the years of independence. The continent presently has a varied landscape of regional economic communities which is difficult to map. A handful of unions stand out as consolidated institutions. However, all are largely imperfect as to their aspirations to become free trade areas, customs unions or more. A logic of exceptions and discretionary exclusions from trade in goods and services still prevails, pointing to an underlying tension between regional cooperation and agro-industrial competition. Yet in the presence of mostly small national markets and low per capita incomes, regional integration in Africa is needed for economic development, above all for modern industry. Higher levels of development have always come with manufacturing industry, not with agriculture or services alone. In this regard, Africa is currently stuck in a vicious circle: industry needs well-integrated regions, and regions need industry for a meaningful division of labour, but neither of the two is anywhere close to realization. As it stands now, only three or four large countries in Africa can reasonably expect to succeed on their own. In the face of limited industrial diversification and high inter-country divergence, regional division of labour and hence economic integration is very unlikely to succeed through market forces alone. Shifting efforts to the continental, pan-African level does not solve this problem either. A pan-African trade arrangement can eliminate trade barriers which are often higher on the continent than for the rest of the world, but it will not arrange the regional division of labour. Efforts that focus on improving regional and continental infrastructure will also help tremendously, but they may aggravate regional imbalances by improving conditions mainly for existing hegemons, clusters and hubs. Strategic political efforts to encourage regional industrialization are necessary to solve the inherent conflict between cooperation and competition, including an arsenal of smart protective and incentive measures as well as financial compensation for the weaker members in the regional economic communities. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 H. Asche, Regional Integration, Trade and Industry in Africa, Advances in African Economic, Social and Political Development, https://doi.org/10.1007/978-3-030-75366-5_14

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For the reasons given, such common policies are systematically more important for regional cohesion in Africa than for example in Europe or advanced Asia. However, they are considerably more difficult to realize among developing countries for want of financial means and institutional steering capacity—coupled with problems of political will, accountability and mutual trust. Strategizing about an industrialized Africa masterminded by joint policy-making of public and private forces comes close to science fiction. But as we saw in Part II, there are several reasons why such common industrial policies are not entirely utopian. Unlikely as it may seem, African regional communities already do some common agricultural and industrial policy. They do it under different names—in most cases trade policy—and rarely in full consciousness of a jointly identified industrial future, but they must do so lest the regional and global lags or imbalances destroy their economic unions. Such common industrial policy should not aim at simplistic industrial equalization across the region. While accepting some imbalance and agglomeration, it should aim at regionally inclusive growth. The global level complicates matters further. North–South trade agreements must not run counter to efforts for regionally inclusive development in Africa. Sovereign policy space for well-targeted programmes to transform African regions into sustainable platforms for modern production and trade must be preserved. The examination of Economic Partnership Agreements between the EU and African country groups has shown that while EPAs do not completely annihilate such policy space, they severely restrain it. EPAs do not define a fair-trade partnership among the continents. Rectification is in order: Revamped inter-continental trade agreements have to accept African regional communities as sustainable production and consumption platforms instead of undermining them in favour of post-colonial, market-radical ‘hub-andspokes’ models between the North and the South. Part III contains the necessary elements for the reworking of inter-regional trade agreements in order to restore the necessary economic policy space in Africa. Regarding the triple challenge linked to regionalism, industry and North–South relations, this text does not come as testimony of unfettered optimism. It soberly tries to explain the necessary interplay of market and government forces at the regional and bi-regional levels. More than in the comparison case of European integration, itself shattered by centrifugal forces, things are far more likely to go astray in Africa. Coupling weak market forces with conventional aid for trade does not help either, as it can address neither the political economy of centrifugal forces in RECs nor most of the binding constraints on industrial ventures in Africa, except for general infrastructure and technical trade facilitation. What economic research and technical assistance should modestly strive for is to define the best options for agro-industrial development under the assumption that joint industrial policy-making boldly addresses the specific constraints of manufacturing. In this way, cross-border public–private dialogue could gain strategic underpinnings which are currently missing.

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14.2 Outlook—Sustainable Prospects for Regions, Trade and Industry What the basic chain of our arguments still lacks is the full picture of the global environment and its implications for Africa. First, ‘industry’ has not been qualified in detail. How does manufacturing industry evolve, and how does the modern factory change? Second, what changes are socially and politically required to preserve sustainability of the global eco-system? Global climate change and natural resource scarcity fundamentally alter the setting, along with the foreseeable draconian policy measures needed to cope with these challenges. We thus have to take two trends on board: the expected future of market-driven globalization and ecologically required green trade. Both trends are not in pre-stabilized harmony. What modern industrial trends towards Industry 4.0 bring about with the Internet of things, applied artificial intelligence, and advanced robotics is not a priori developmental nor sustainable. The ‘integrated factory’ characteristic of Industry 4.0 does not necessarily integrate Africa. On the contrary, job losses from further automation are expected in the low-skill bracket of the global workforce and augur particularly badly for Africa, which is currently trying to catch some flying geese—that is, to fetch market segments for labour-intensive production from East and South-East Asia where wage costs are rising. And systemic lags in Africa-wide digitization render computerized integration of production beyond the factory gate very difficult (UNIDO 2019). Industry 4.0 is not in itself ‘green’ in any perceptible sense. Based on industrywide automation and digitization, the Fourth Industrial Revolution is not conventionally associated with a conversion of its energy base. This stands in contrast to the First and Second Industrial Revolution, which brought coal/steam power and electricity, respectively.1 The need for a fundamental shift to renewables in the energy base of production, transport and consumption introduces a sustainability factor into the equation—alongside sustainability’s other dimensions. What does this imply for Africa? The most radical and nevertheless not unrealistic variant of Green Growth in advanced economies is hardly an option for Africa. De-growth cum re-distribution of the existing mass of wealth is not feasible in a developing region like Africa, taken as a whole. Here the search is still for accelerated growth and the creation of new opportunities for mass employment. However, feasible African perspectives are not always obvious, and are barely elucidated by developmental economics. Should Africa make use of the privilege of an industrial latecomer with a small global footprint and exploit cheap fossil energies as long as possible, albeit in efficient modern power plants? Or should Africa, in the presence of abundant renewable energy sources, leap-frog the full-scale fossil era—much as it leap-frogged conventional telecommunication—all the more when nudged by international standards of sustainability? Arguably, Africa

1 An

exception is Jeremy Rifkin’s thinking about industrial revolutions where the present one links energy and communication in a fundamentally innovative way (Rifkin 2011).

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should opt for the latter. Technology openness, conditional on criteria of sustainability, is the general policy recommendation in a global situation where new trends are often not yet clearly discernible. In the sub-total, global industrial perspectives in the twin ecological and digital transition appear critically important, but also analytically demanding as to their consequences for Africa. An economic disconnect of still another dimension is looming unless well-targeted national and international policies are brought into play. The disconnect affects trade in itself. Fifteen years ago, two seminal texts summed up the global trends that marked the period. Grossman et al. coined the notion of ‘trade in tasks’,2 linked to the offshoring of industrial activities. Soon after, Baldwin diagnosed the second of two ‘great unbundlings’ (Baldwin 2006) as a dominant pattern of global trade within and beyond multinational corporations. While the first unbundling distanced production from consumption sites with the emerging industrial division of labour in the nineteenth century, the second one now unbundles the production chain into geographically distant task segments. The ensuing deepening of global trade integration, characterized by higher trade than GDP growth rates and growing intra-industrial trade, has been dubbed ‘hyperglobalization’ (Subramanian and Kessler 2013). Not more than two years after Grossman, Baldwin and others had—pertinently— accomplished the theoretical unbundling of the new global trade pattern and the term hyperglobalization gained intellectual hold, the tide turned. The exceptional trade growth rates faded out at around the time of the global financial crisis. The WTO observed a levelling off of trade growth at around this time, which with hindsight may well represent ‘peak trade’ (World Trade Organization 2014). Still more recently, it has somewhat mischievously been dubbed ‘slowbalization’.3 Several reasons for the change in globalization have been identified in the debate that followed.4 One thing seems clear: re-bundling of trade and production lines became a new mega-trend, not primarily because of new trade nationalisms, but because of new trends in manufacturing industry itself. This partially inverses earlier offshoring of production. Reshoring brings tasks and entire production lines back to where they came from—hence the alternative designation ‘backshoring’. According to still limited evidence (World Bank 2020b), reshoring reflects narrowing wage differentials, concerns for product quality, management of short lead times, etc.— largely the factors that define and drive Industry 4.0. UNIDO has found empirical evidence for the link between backshoring and the flexibility in global value chains that the Industrial Internet offers (Dachs and Seric 2019). Recall that reliance on export growth was the prime recommendation for Africa’s economic recovery, and that it worked to satisfaction for the two decades observed, from about 1995 to 2015. Beyond the pure raw materials boom which constituted 2 Final

version as Grossman and Rossi-Hansberg (2008). of April 20th, 2019, p. 67: “Everything to gain by their chains”. The continued in-depth reporting of this weekly newspaper on the dimensions of trade and industry covered here must be praised as a fine gauge of the tide of scholarship. 4 For a short summary see Asche (2016). 3 See The Economist

14.2 Outlook—Sustainable Prospects for Regions, Trade and Industry

279

the main part of the upswing, the insertion of Africa into global value chains (GVC) served as the main orientation for entrepreneurs, policy-makers and aid agencies, although critical accounts of ‘trading down’ African shares in GVCs had already been written into the logbook of value chain immersion.5 The apparently dominant trade in tasks has served as a call for modesty in Africa: concentrate on the limited tasks you can properly manage, and do not aim at having entire production lines. As we saw, related debates—for example on the proper design of rules of origin—evolved around this pattern. Today the opposite trend is all the talk. In a re-interpretation by IMF/World Bank authors, now that trade-driven growth has passed its peak, returns from performing GVC tasks may well diminish (Constantinescu, Mattoo and Ruta 2015). However, the debate continues as to how fundamental the sea change actually is, along with its underlying reasons. Regional concentration of manufacturing industry may receive a systematically more relevant status in a reshaped world economy than loose talk about fine regional value chains discerns. And this is not necessarily all negative for Africa—contrary to what threats of delinking the continent from global value chains and new integrated industries in the North suggest. In 2020, COVID-19 suddenly generated a serious debate in developed and developing regions, including Africa, about achieving greater pharmaceutical resilience by bringing production sites closer to home and by strengthening and shortening supply lines in disruptive times. Much the same will apply for agriculture and food security, where better organized regional agrifood trade may prove more resilient than some global supply lines. Obviously, such spatial concentration raises the status of regional economic communities. We can deepen the issue with regard to just one factor—transport costs. The strangely labelled ‘death of distance’—reflecting revolutions in sea, air and land transport—was once a corollary of hyperglobalization and unbundling of old divisions of labour. Transport costs no longer seemed to matter much in decisions about where to produce any particular manufactured good. This new situation also appeared to open new avenues for African participation in global trade, conditional on having the same modern infrastructure as other developing regions and on reducing transport costs from exceptionally high to the same seemingly negligible low level. While the task of closing Africa’s infrastructure gap is still high on the agenda, with particular importance for the landlocked countries, the global policy picture is about to change here, too. Negligibility was for private transport costs, not for social costs including all negative externalities. Climate change will enforce the accounting of true transport costs for all goods and some services, such as long-distance tourism, and will in turn accentuate all other trends converging towards new or re-regionalization. The long debate on new economic geography has shown that the aggregate outcome is not unequivocal. Parts of Africa will be cut off from some global value chains in which African producers are currently still invited to discover their share. For other lines of productions, African agglomerations may play a much larger role as economic hubs serving African regions with goods once shipped around the globe.

5 See

paradigmatically Gibbon and Ponte (2005).

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True regional value chains will gain in importance. The advisory task is to identify which ones. In fact, regional value chains are likely to change in character in both advanced and advancing economies at the same moment. Regional products are being re-discovered in a sense of ‘region’ far smaller than Europe’s or Africa’s regions. Perishable goods will increasingly come from closer by. On the other hand, new digital technologies like blockchains provide good prospects in global agricultural supply chains for ecological and social sustainability. Such systems are already tested by the coffee and cocoa industries. In terms of manufacturing, Africa’s chances to participate in modern just-intime (JIT) production have been slim given sub-Saharan lags in modern logistics, even when assuming the closure of the basic infrastructure gap. Today, supply chain management with its characteristic JIT pattern of minimizing and shifting storekeeping from warehouses to road, air and maritime transport will arguably also have to change in advanced economic regions—or pay for its true share of CO2 creation. Africa must not emulate a production and logistics model which is about to undergo fundamental change elsewhere, but should concentrate on catching up where it still has large gaps in sustainable forms of supply chain management. In sum, Green Regions with a massively increased emphasis on intermediate and final products from the region are likely to become the vision for the near future—as a result of both market-driven changes and politically enforced green trade. Seen from this vantage point, perspectives of deep regional economic integration in Africa— despite all their current imperfections—appear fundamentally promising, and joint regional policies appear to be the natural way to prepare economic stakeholders in African sub-regions for an industrial future that embraces sustainable development goals.

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