Introduction for Africa and Preferential Trade

INTRODUCTION

ACCORDING TO A FAMOUS PROVERB, “Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.” Nonreciprocal preferential trade arrangements neither “give a man a fish” nor “teach a man how to fish.” Rather, they offer the promise of a market in which to sell one’s fish. That is, these arrangements encourage preference-receiving countries to “teach themselves how to fish” and to “go fishing on their own,” with the nonbinding promise that they will have a market for the fish they are able to catch and sell. Nonreciprocal preferential trade arrangements are thus a form of foreign aid—aid through trade. In addition, a preference-receiving country might receive some assistance to buy a boat and nets as part of “aid for trade,” but it cannot count on such assistance.

Nonreciprocal preferential trade arrangements have been a defining feature of the relationship between developed and developing countries, dating back to the colonial era for African countries. In the late 1950s, preferential trade arrangements started to take a multilateral form when the European Economic Community (EEC) was founded and its members, collectively, decided to establish special trade arrangements with their colonies. Since then, a number of preferential trade agreements have featured African countries among the preference-receiving countries.

It is often taken for granted that preferential trade arrangements are important stimuli for African development. They are seen as a positive form of “aid”—not a handout, but rather aid that takes advantage of the strengths of the preference-receiving countries. Countries such as Lesotho and Mauritius have indeed benefited considerably from preferential treatment (ECA, 2007; Belay, 2007).

Yet it is not always clear: (a) how preferential these arrangements actually are; (b) to what extent African countries are able to take advantage of them; and (c) whether these arrangements in fact help African countries or instead lead them to perpetual dependence on specific markets and products. Moreover, preferential trade agreements are often unpredictable, since the duration and magnitude of preferences are at the discretion of the preference-giving countries.

This book explores the impact of trade on development and the salient features of nonreciprocal preferential trade programs. Special attention is given to the trade relationship between the EU and African countries. In addition to considering the history and objectives of preferential trade arrangements, the book examines systems and procedures used in African countries to take advantage of these programs.

African countries receive preferential treatment for their exports to developed countries and some middle-income countries. In part, this special favor has its background in Africa’s colonial history, but it continues to be provided and justified by the relatively poor economic development of most African countries. As of 2023, 33 of the 46 least developed countries (LDCs) in the world were in Africa.

The most widely used program under which developed countries provide a nonreciprocal preferential reduction of trade barriers for goods coming from developing countries is the Generalized System of Preferences (GSP). This program was established in 1971 under the auspices of the General Agreement on Tariffs and Trade (GATT), and it continues to operate under its successor, the World Trade Organization (WTO). It is important to note that the GSP program is not one collective program in which preference-giving countries join together to give uniform preferential treatment. Rather, there are thirteen independent GSP programs, established by Australia, Belarus, Canada, the EU, Iceland, Japan, Kazakhstan, New Zealand, Norway, Russia, Switzerland, Turkey, and the U.S. (UNCTAD, 2015). As such, preference-receiving countries engage with many GSP programs, each with its own unique features and requirements. Table 0.1 shows African beneficiary countries for five of those programs.

In addition to the GSP programs, other special trade arrangements have also given nonreciprocal preferential treatment to African and other developing countries. These include the transient Cotonou Agreement between the EU and the African, Caribbean, and Pacific (ACP) countries, the EU Everything But Arms (EBA) program between the EU and LDCs, the U.S. African Growth and Opportunity Act (AGOA) between the U.S. and Sub-Saharan African countries, and the preferential tariff schemes of China and South Korea for LDCs.

It would be naïve to assume that nonreciprocal preferences are extended by preference-giving countries based purely on altruistic motives. Consumers in those countries benefit from imported goods (from the preference-receiving countries) that cost less, due to the reduction or removal of tariffs altogether. However, there is more to it than that. These nonreciprocal preferences enhance the global political power and leverage that large economies already have. They serve as an important diplomatic “currency” that can be used to advance alliances and mitigate the influence of rival powers.

As pointed out by an anonymous reviewer, nonreciprocal preferential trade arrangements are “intimately bound up with questions of power and agency.” The distinction between “agency” and “power” is rather subtle. Some sociologists describe agency as “an actor’s ability to initiate and maintain a program of action while [power is] an actor’s ability to act independently of the constraining power of social structure” (Campbell, 2009: 407).¹ The discussion in this book uses the term power in its broadest sense to mean all the ways in which a nation is able to act and react independently.

Since nonreciprocal preferential trade arrangements are voluntary, African countries have hardly any power in the negotiations. Negotiations are usually conducted within the confines of the domestic constituencies in the preference-giving countries. Even when African representatives are invited to these discussions, they come from a weak position because of their dependence on foreign markets and insufficient knowledge of all the intricacies involved in the negotiations. A few African countries have business associations in the capitals of the rich economies in order to stay abreast of any developments that could impact their countries and to advocate for their countries’ interests. For example, Mauritius and South Africa have business associations in Washington, D.C., the Mauritius-U.S. Business Association, and the South African Business Council, respectively. These associations usually seek the support of importing companies in the U.S. to build their case for easier access to the U.S. market.

TABLE 0.1. Beneficiary countries of five GSP programs, GSP+, EBA, and AGOA (as of 2023) Sources: U.S. Congressional Research Service (2022), EU’s EBA, and GSP websites of respective countries.

Kragelund and Carmody (2015) explain how the long-term dependence on resources has made some African countries vulnerable and, therefore, weakened their negotiating powers, except at times when resource prices are on the rise. At the same time, economic differences and interests within African regional economic blocs, which are magnified at the continent-wide level, limit the capacity of African countries to participate and negotiate as a unified group.²

It is important to point out that the emergence of China as an economic power has changed the dynamics of global power. The competition for alliances between China (and other emerging markets) and the West has given African countries alternatives and some leverage in negotiations. Still, this point must not be overstated. As Taylor (2011:101) cautions:

Africa’s leadership has, in general, promoted and fostered dependent relationships with Western capitalist powers and there is a danger that FOCAC [the Forum on China-Africa Cooperation] may simply reproduce this dependency. An Africa where external actors consume the continent’s resources and add little to Africa’s self-development is something which has staked out much of post-colonial Africa’s trajectory. In these circumstances, African elites attending forums such as FOCAC can, from a particular perspective, be seen as characters reduced to beggars angling for some Chinese largesse, rather than development-conscious participants, and certainly not partners.

Given that most African countries are relatively poor, they are inherently predisposed to being seen as “beggars,” even at times when they are simply asking rich countries for a level playing field. For example, the colonial system and the global trading system subjected some African countries to being overly dependent on exporting raw natural resources. To free them from this, they do need assistance. Thus one can describe nonreciprocal preferential trade arrangements as a form of affirmative action.

In many ways, it is easy to make strong arguments for nonreciprocal preferential trade policy toward African countries. African countries suffered under the exploitation of colonialism by European countries for eight decades. They were also affected in negative ways by the Cold War. During the Cold War era, many African dictators were given protection and financial “aid” to maintain their allegiance. The so-called “development aid” often went into the personal accounts of those dictators and their cronies, instead of helping to grow their economies. This apparently happened with the full knowledge of the donor countries, some of which are now the ones with preferential trade policies.³ Even where there was no outright misappropriation of public funds, there were still issues:

[F]or much of the period between independence and 1994, African governments were more directly responsible to external donors, in setting public sector priorities and delivering public services, than they were to their own populations. For practical purposes, the prioritization and delivery of collective goods was either absent or in external hands. (O’Connell and Dolan, 2012)

In addition, during GATT’s entire existence (1948–94), two sectors important to developing countries, (1) agriculture and (2) textiles and apparel, were excluded from multilateral rules and were highly protected in developed countries. Although they are now included in the WTO surveillance and negotiations, domestic support and protection of these sectors in developed countries are still substantial. The preferential trade policy in favor of LDCs is a way to give these countries a reprieve from such obstacles.

Nonreciprocal preferential trade policy is also seen as a more effective form of aid than direct financial aid. Growth in the export sector as a result of easy market access can increase jobs and incomes in the broader economy. It essentially becomes a form of aid disbursed to millions of people, unlike direct financial aid that can easily be misappropriated.

Notwithstanding these arguments for potential benefits, nonreciprocal preferential trade policy can raise significant concerns. First, there is the question about whether the beneficiary countries have the administration and production capacity to utilize the market access. Can preferential trade policy be effective without supplementary direct aid? The impetus for the “Aid for Trade” initiative in the WTO was mainly to address domestic supply constraints in African and other developing countries and thus enable them to take advantage of market opportunities.

Second, a preferential trade policy may make beneficiary countries overly dependent on a few markets and products and thus unmotivated to explore other markets and diversify their export sector. Preferential arrangements may also be biased in favor of raw materials, thus discouraging industrialization in the preference-receiving countries.

Third, by its very nature, preferential trade policy is nonbinding. Because it is voluntary, it is unpredictable and temporary. As can be expected, negotiations between the preference-giving and preference-receiving countries are common. However, the ultimate decisions as to which countries and which goods will receive preferential treatment, what level of preferential treatment will be given, and how long the preferential treatment will last, rest on the donor country. Even when the motive is to help a developing country to grow, the donor country is informed and constrained by its own self-interest and values. A preferential trade policy can be suspended for any reason deemed legitimate by the preference-giving country. For example, Central African Republic, Cote d’Ivoire, the Democratic Republic of the Congo, Eritrea, Eswatini, Ethiopia, the Gambia, Guinea, Madagascar, Mauritania, Rwanda, and South Sudan have been removed from the U.S. African Growth and Opportunity Act (AGOA) at one point or another.

Fourth, like any other forms of aid, preferential trade policy reduces whatever little leverage a preference-receiving country might have had in negotiating in other areas, for fear of losing the benefit. This is especially true because the preference-giving country or region is the one that sets the criteria for eligibility. It is partly because they are aid recipients that African countries have been relatively passive in the dispute settlement system in the WTO.

Fifth, none of the programs that provide nonreciprocal preferential trade treatment cover all African countries. This is due in part to the economic diversity of African countries in terms of their economic development and their structures of exports. It is also due to the discretion enjoyed by the donor countries. As such, these programs can create tension among African countries and hurt their efforts to strengthen regional economic integration. These tensions have become even more apparent as the Cotonou Agreement, signed in 2000, is being replaced by Economic Partnership Agreements (EPAs), that is, reciprocal preferential trade agreements between the EU and ACP countries.

These issues are addressed to various degrees in this book. Nonreciprocal preferential trade arrangements can be likened to lending a tool to relatively poor neighbors or acquaintances to help them grow their economic capacity. You determine the size and quality of the tool to lend and how long they can have it, aware that the tool can increase their potential to compete against you. The usefulness of the tool depends on what other tools they have.

A borrowed tool is just what it is, even when one is allowed to use it for a long time. You cannot make long-term projections of your economic development based on it. As such, nonreciprocal preferential trade arrangements cannot be used to plan or predict long-term paths for development. They provide short-term opportunities that, when used effectively, can enable a country to develop a more diverse economic structure that is less dependent on preferential treatment. But the fact that many African countries are still dependent on preferential trade arrangements, and seem startled every time the margin of preference decreases, suggests that these arrangements have not strengthened African economies to the point of giving them adequate resilience.

Of course, even under the best circumstances, nonreciprocal preferential trade arrangements alone cannot be expected to be a panacea for the many challenges that developing countries face in growing their export sectors, let alone their economies in general. The challenges include a narrow export base, poor and unreliable infrastructure, low levels of education, and, in some countries, poor governance, corruption, and political instability. Even where preferential trade arrangements have attracted foreign direct investment, most foreign investors have relied on inputs from their home countries, thus limiting the potential for backward linkages. Moreover, some of the investors, particularly those in the textiles and apparel industry, are opportunistic and, therefore, nomadic in nature. They cannot necessarily be relied on for long-run projections.

Chapter 1 addresses questions related to the impact of trade on development in African countries. Needless to say, the ultimate objective in promoting trade is to bring about development, that is, to improve people’s lives. Given that this book focuses on preferential trade arrangements, it is important first to discuss trade itself, to understand this link between trade and economic development. Trade models, from the simple, general equilibrium, Ricardian model, to what are called “new trade models,” show that there are benefits to trade. This chapter examines some of these models. Careful attention is paid to some of the assumptions made and their relevance, specifically, to African economies. Trade is not a zero-sum game; that is, one nation does not gain only by another losing. Both trading partners can gain from trade. However, the distribution of those gains can be skewed. Which external and domestic factors determine the distribution of gains from trade to a country? Analysis of the market structures and the terms of trade can shed some light on this question. When realized, how are the gains from trade used to promote real development? What exactly are the linkages between trade and development? These questions call for a careful analysis of the structure of imports, exports, domestic economic structures and policies, and the international trading system.

Chapter 2 presents and analyzes the evolution of trade relations between European countries and the ACP countries, from the 1960s to the early 2000s. Needless to say, trade relations between these groups of countries arose from, and were informed by, their colonial history. In 1963, the European Economic Community and African countries signed the Yaoundé Convention, which allowed most dutiable imports from African countries to enter the European market duty-free. The Lomé Convention, signed in 1975, replaced the Yaoundé Convention and formalized all nonreciprocal preferential treatment of imports by the European countries from the ACP countries. Subsequently, in 2000, the Lomé Convention was replaced by the Cotonou Agreement between the EU and ACP countries with the understanding that the arrangement would evolve into Economic Partnership Agreements (EPAs), that is, reciprocal preferential trade agreements between the EU and ACP countries.

Chapter 3 presents a systematic analysis of EPA negotiations for each negotiating group in Africa by examining the specific features of countries in each group. It discusses why some countries have been quick to embrace EPAs while others have been ambivalent or outright against them. The chapter also presents results of empirical studies that have estimated the impact of EPAs on ACP countries. Manger and Shadlen (2014) describe how nonreciprocal preferential arrangements create “political trade dependence” for preference-receiving countries. Preference-receiving countries continually face uncertainty because the preferential treatment can be removed unilaterally at any time. Political trade dependence is determined by the uncertainty of the preferential treatment and the importance of the preference-giving country as a market. The greater the “political trade dependence,” the more likely a developing country will be motivated to pursue predictable, reciprocal trade arrangements with developed countries. This phenomenon can be seen in the EPA negotiations. However, LDCs have more assurance of receiving nonreciprocal preferential treatment and, therefore, have generally not been ready for EPAs.

The nonreciprocal preferential trade arrangements that the EU had established with former colonies appear to have become a prototype for subsequent similar arrangements to support developing countries. Chapter 4 analyzes the key features of the GSP programs and other nonreciprocal preferential trade programs that favor African products. Special attention is given to such programs offered by China, the EU, and the U.S., as these are the most important trade partners of African countries. These preferential programs are generally similar to each other.

Chapter 5 examines the extent to which preferences are actually used by African countries. It provides information on actual preference utilization by a sample of exporting firms, and it considers the overall utilization of the EBA and AGOA programs. The chapter also discusses the potential benefits of these preferential trade arrangements to preference-receiving countries.

The conclusion provides a summary of the major findings and recommendations.

Notes

1. See also Kragelund and Carmody (2015).

2. This is also the challenge African countries face in negotiations in the World Trade Organization (Mshomba, 2009).

3. The World Bank (1998) makes rather revealing observations about the dynamics of aid during the Cold War era.