Reducing tariffs to boost regional trade — Imam

Capture.jpg

THE African Continental Free Trade Area (AfCFTA) is one of the key priorities of Africa’s Agenda 2063 and a flagship project for the continent. Zimbabwe Independent business reporter Kudzai Kuwaza (KK) spoke to the International Monetary Fund (IMF) representative to Zimbabwe Patrick Amir Imam (PI, pictured) on AfCFTA and on the timelines of the Staff-Monitored Programme (SMP) IMF has started implementing with government. Below are the interview excerpts:

KK: What has been the evolution of trade been in Africa over the last decades?

PI: I would argue that three facts stand out. First, intra-regional trade in Africa has expanded rapidly over the past three decades. Intra-regional trade, as a share of total imports, almost tripled from 1990 to 2017 to 12–14%, or about US$100 billion. This is comparable to regional trade flows in other developing regions. Second, African intra-regional trade is relatively more diversified and contains more higher value-added goods such as motor vehicles than African countries’ exports to the rest of the world, which mostly consist in primary commodities.

Finally, most of the regional trade occurs within existing sub-regional economic communities, which are dominated by a few regional hubs such as Cote d’Ivoire, Kenya, Senegal and South Africa in particular.

But despite the expansion in trade, we have seen in recent years, there is significant room for further regional trade integration. After controlling for the lower levels of income and economic size of African countries and generally longer distances compared with other regions, countries in the region still trade less than peers in other regions. This is due in part to structural features of the economies on the continent, which take a long time to change. Changing the economic structure of these economies will not occur overnight, whether it’s improving the quality of the labor force for instance.

Other impediments to regional trade are the result of policy, including tariff rates, trade regulations, and regulatory requirements. Removing these policy factors could significantly boost regional integration. The opportunities to expand intra-regional trade are particularly sizable for some agriculture-related commodities, such as food products and manufacturing industries, as well as in some African sub-regional economic communities that trade significantly less than their peers.

KK: What is the AfCFTA about?

PI: Under the African Continental Free Trade Area (AfCFTA), countries have agreed to eliminate tariffs on most goods, liberalise trade of key services, address non-tariff obstacles to intra-regional trade. Eventually, these measures will create a continental single market with free movement of labour and capital. The AfCFTA is coming into effect in 2019 and once operational, it will establish a market of 1,2 billion people with a combined GDP of US$2,5 trillion. This might be an economic game changer for the continent.

KK: How will the AfCFTA affect regional trade and what can it bring to African countries?

PI: An extensive reduction of tariffs will significantly boost regional trade. The overall effect of reducing tariffs on 90% of taxed intra-regional trade flows, as expected under the AfCFTA, would increase current intra-regional trade flows by about 16% or US$16 billion. More limited tariff reductions would of course have smaller overall effects on trade.

Policies addressing non-tariff bottlenecks such as logistics and infrastructure may have even larger effects. Poor trade logistics such as customs services, and to some extent, infrastructure represent major obstacles. The experiences for the sub-regional economic communities in Africa, such as the relatively highly integrated Sadc and the relatively poorly integrated Cemac, confirm that reducing tariffs alone is no guarantee to boost intra-regional trade. Recent work by the IMF finds that small improvements in trade logistics, such as customs services, and addressing poor infrastructure could be up to four times more effective in directly boosting trade than tariff reductions. Moreover, reducing non-tariff obstacles to trade would also indirectly boost trade by enhancing the effectiveness of tariff reductions on trade, especially in landlocked and low-income countries. In fact, we find a “threshold effect”. What I mean by this is that when the infrastructure is above a certain threshold level, tariff reductions become much more effective than when the infrastructure is below the threshold. In the long run, the AfCFTA could generate substantial income gains through increased efficiency and productivity from improved resource allocation, and higher cross-border investment flows and technology transfers. The literature estimates that it could represent an increase of up to 4% in countries’ welfare. Over the long-term, the free trade area could even amplify the potential for structural transformation in the region and deliver even larger effects.

KK: Would trade integration entail costs and what would they be?

PI: Overall, countries should see welfare gains, but it is true that deeper trade integration may unevenly affect countries in the region and have some short-term effects that need to be addressed. Fiscal revenue losses from tariff reductions are likely to be limited, on average, but they may be significant in a few countries that still apply high import tariffs. On average, the revenue loss would amount to about 0,5–0,8% of GDP.

However, in a few countries, notably in Zimbabwe, revenue losses may reach up to 3-5% of GDP. Deeper trade integration may have some adverse effects on countries’ income distribution, particularly in countries with more diversified economies and large shares of skilled labour. However, the effects tend to be limited and fade away over time. And finally, small countries, more diversified economies, and established regional trade hubs, already relatively open to international competition, are likely to benefit more from deeper regional trade integration than economies dominated by agriculture and natural resources.

KK: What does the IMF recommend to African countries to fully reap the benefits of the AfCFTA and cope with possible adjustment costs?

PI: Tariff reductions should be applied to a large proportion of trade flows to be able to play a significant role in fostering intra-regional trade. But more importantly, tariff reductions should be complemented by policies to reduce non-tariff bottlenecks to trade. Such policies should take centre-stage in the effort to foster regional trade integration in Africa. Infrastructure and trade logistics, including customs services and clearance procedures should be improved. Addressing these bottlenecks would be particularly beneficial for landlocked and low-income countries.

Moreover, establishing a mechanism to identify and monitor the removal of other non-tariff barriers, such as quotas, licenses, subsidies, and restrictive application of non-tariff measures such as rules of origin and sanitary measures, would greatly enhance the effectiveness of the AfCFTA.

I would also argue that it’s important to integrate financial services further by expanding regional payment systems and introducing swap arrangements across central banks, as well as a multi-currency clearing centre could support trade integration. Generally, the experience from the European Union suggests that liberalising trade in services may require coordinating trade policies and domestic regulatory reforms. In this context, the AfCFTA could be the catalyst that will spur efforts to tackle such bottlenecks and coordination issues at both the national and sub-regional levels. It is key to the success of AFCFTA that authorities enact policies at national levels to address the adjustment costs that integration may entail. Specifically, to fully reap the benefits of deeper trade integration, agriculture-based and less diversified countries should combine trade policies with structural reforms that boost agricultural productivity to better leverage existing comparative advantages. Countries that may experience larger revenue losses will need to design domestic revenue-raising tax strategies while being mindful of possible growth and distributional effects. While limited and temporary in time, countries should mitigate the possible adverse effects of trade integration on income distribution, particularly in the more diversified economies, through targeted social programmes such as income support, and training programmes to ease workers’ mobility across industries and promote employment.

KK: Does AfCFTA involve large benefits and few costs?

PI: I would qualify this statement. AfCFTA will likely have important macroeconomic and distributional effects. It can significantly boost intra-African trade, particularly if countries tackle non-tariff bottlenecks to trade, whether we talk about physical infrastructure, logistical costs, and other trade facilitation hurdles. In most cases, fiscal revenue losses from tariff reductions are likely to be limited on average. And policy efforts to boost regional trade should focus, in addition to tariff reductions, on reforms to address country-specific non-tariff bottlenecks.

However, deeper trade integration may be associated with adjustment costs, including a temporary increase in income inequality. Alleviating these costs will require policies to facilitate the re-allocation of labour and capital across sectors. This can include an active labour market programmes such as training and job-search assistance, and measures that enhance competitiveness and productivity or bolstering safety nets, such as income support and social insurance programmes.

KK: And what does this imply for Zimbabwe?

PI: For Zimbabwe, the AfCFTA, which was ratified in April 2019, fits into the existing development and trade strategy. In their Transitional Stabilisation Programme, the authorities are already committed to deepening regional integration initiatives under the African Union, Comesa and Sadc. As trade is dominated by South Africa further geographical diversification brought about by the AfCFTA is likely to open up new markets on the continent and will hence be beneficial.

However, for the country to fully reap the rewards from trade liberalisation, achieving macro-economic stability is a priority, and solving the currency issue is a condition sine qua non. In addition, the country must address the structural bottlenecks faced by the private sector and improve the business climate. This includes infrastructural deficits and property right issues for instance. Costs to exporters are large, thus streamlining export administrative requirements would also go a long way in improving export performance. The operationalisation of one-stop border posts with neighbours will augment trade further. Frankly, with or without AfCFTA, Zimbabwe should implement these reforms as it would benefit from them, but AfCFTA will boost the rewards further. As Zimbabwe is more dependent than other countries in the region on trade revenues, there is a need to mobilise domestic tax revenue to offset the expected revenue losses from AfCFTA. But overall, Zimbabwe will benefit from AfCFTA.

KK: The IMF and government have recently agreed on the implementation of an SMP. When is its first review?

PI: The first review of the SMP will be based on the end of June targets. As there is, typically, and this is not unique to Zimbabwe, a lag of six-eight weeks in compiling the data, the team will come in early September.

KK: So would you say you are now on course with the programme?

PI: I cannot say if we are on course, we will have to wait for the numbers.

Top