The Free Trade Area of the Common Market for Eastern and Southern Africa

Victor Murinde

• Publisher: Routledge
• Year: 2017
• Print ISBN:
  9780754617327
• eBook ISBN:
  9781351889391
• Topic: Business
• Subtopic: Business General
• Index: Business

In the last ten years, while GATT and (later) WTO were actively advocating the doctrine of free trade, the world witnessed unprecedented formation of regional trading blocs. Focusing on the prospects and challenges of the free trade area of the Common Market for Eastern and Southern Africa (COMESA) and the question of regional trade integration, the book also combines in-depth theoretical and empirical analysis with leading edge discussion of institutional and policy issues from a variety of African economies. This text makes a timely contribution not only to our understanding of the prospects and challenges of regional trading arrangements in Africa but also to the paradigm of regional trade integration in developing countries. Systematically structured, with thematically linked chapters and rigorous referencing, it is an essential guide for an international audience of academics, researchers, students and practitioners in International Trade, International Economics, Development Finance and Development Economics.

1
Introductory overview

Victor Murinde

1.1 Background

Following the seminal work of Raul Prebisch (1950) and Hans Singer (1950), many developing countries started to voice their concern that world trade favours developed countries. The contribution of the Singer-Prebisch thesis was to provide empirical support to the argument that developing countries are faced with a secular tendency towards declining terms of trade.¹ But it was not until the establishment of the United Nations Conference on Trade and Development (UNCTAD) in 1964 that a forum was in place for developing countries to call for a change in the world trading system. Almost ten years thereafter, in 1973, these countries engineered the creation of a New International Economic Order (NIEO), under which they hoped to increase their role in world trade in order to achieve higher economic growth. Under the NIEO, developed countries were urged to give preferential treatment to imports of manufactured and processed products from developing countries, in order to move towards a more balanced world trade than was the status quo. However, the NIEO seems to have failed very badly in the sense that, as Chanthunya and Murinde (1998) show, there has been increased protectionism by developed countries against imports from developing countries, and in general the pattern of trade has remained imbalanced against developing countries.

Against this background, many developing countries have sought to encourage trade among themselves. The idea is that since developing countries are on a similar level of development, economic co-operation among themselves encourages competition which in turn increases efficiency in production and trade at the regional level. Some countries in Africa formed the Economic Community of West African States (ECOWAS), the Southern African Customs Union (SACU), the Customs and Economic Union of Central Africa (UDEAC), the East African Community (EAC), and the Preferential Trade Area (PTA) and its successor, the Common Market for Eastern and Southern Africa (COMESA). In this context, the formation of these regional trading arrangements is expected to ameliorate the economic fortunes of the participating African countries by increasing trade among the member countries and by fostering economic growth of the sub-region through economic co-operation.

In general, the world has witnessed unprecedented formation of regional preferential trading blocks, mainly involving developing countries on their own but also featuring developed countries either on their own or in partnership with their developing counterparts. In 1992, the US signed a free trading agreement with Canada and Mexico to form the North American Free Trade Area (NAFTA), pointing to a possibility of an American free trade zone spanning North and South America. In 1991, the South American nations of Brazil, Uruguay and Argentina formed a customs union, generally known as Mercosur. The Australia-New Zealand Free Trade Accord has been cemented, with arrangements set in motion for a Western Pacific trading block. In Asia, the formation of the Association of South East Asian Nations (ASEAN) has been an important step towards regional integration known as ASEAN Free Trade Area (AFTA). There are also discussions by some developed country members of the Asia Pacific Economic Co-operation (APEC) to form some partial trade preferences. The Single European Market was implemented in January 1993, paving the way for the European Union to move towards adopting a single currency, the Euro. Given that more than a third of world trade takes place within the European free trade area, preferential trading arrangements are an important real-world issue (see Krugman and Obstfeld, 1996; Panagariya, 2000).

In the context of the above, many countries in Africa and elsewhere in the developing world are looking to these preferential trading arrangements as a promising route to participating beneficiary in world trade. Many economists agree with this version of preferential trade liberalization. However, the current thrust of research in this direction seems to suggest that some economists are asking the question of whether, in Bhagwati’s (1991) words, these preferential trading blocs are working as “building blocks” or as “stumbling blocks” for a free world trading system. Panagariya (2000) seems to indicate that these trading blocs may be stumbling blocks in transition but are building blocks in the long run.

It is useful to emphasize that the current regional integration efforts in Africa offer a broad strategy for reversing the economic plight currently experienced by most African economies, and do not necessarily conflict with the international trading system under the World Trade Organisation (WTO).² Membership in the WTO is conditional on countries having schedules of concessions and commitments on market access in industrial and agricultural products. Market access also covers the services sector, as reflected in the establishment of the General Agreement on Trade in Services (GATS). For African economies, it would appear that the new WTO will lead to an expansion in trade, mainly due to the reductions in tariff and non-tariff barriers. African countries would thus stand to benefit from liberalization in agriculture and services as well as open market access to industrial countries. However, the impact of the WTO on African countries has been a subject of much controversy. While some analysts have raised concerns about the high costs for African countries of complying with the new obligations and the extent these may impede some development strategies, some analysts have pointed out the potential market losses for Africa arising from the possible erosion in the value of its preferences in its export markets following overall cuts in tariffs, and the possible terms-of-trade losses if net importers of food face higher food prices; see Sorsa (1996) and Chanthunya and Murinde (1998). Given that the most recent trade investigations that are bound to influence the behaviour of African countries in the new WTO are contained in the Uruguay Round 1994, it is important to point out that the commitments by African countries in WTO mainly relate to three sectors, namely agriculture, industry and services; see Chanthunya and Murinde (1998, p. 226-228) for a summary of the initial commitments in the three countries for all the member African countries. Clearly, some of the liberalization commitments in the Uruguay Round in the three sectors were not directly relevant to most African countries; for example, the Uruguay Round schedules discourage subsidies in agriculture, African countries actually tax (and not subsidise) the agriculture sector. In addition, given that the commitments will hold for the foreseeable future, some African countries have preferred not to lock themselves into non-negotiable commitments. As the economies develop, it will become very important to compete in the export market for light industrial goods and agriculture-based manufactured products. In the meantime, the life-boat for these economies lies in preferential trading liberalization under arrangements such as COMESA.

This chapter serves two purposes. First, it presents the motivation of the book. Second, it provides an accessible and brief survey of the theory of economic integration. The broad theory of preferential trading arrangements has been competently surveyed by Baldwin and Venables (1995), Bhagwati and Panagariya (1996a, 1996b), Winters (1996), Bhagwati, Greenaway and Panagariya (1998), Fernandez and Portes (1998) and Panagariya (2000). Thus, this chapter does not reproduce these surveys; rather, emphasis is placed on presenting an accessible version of the theories that relate to the main issues addressed in this book. We exclude the theory relating to some aspects of preferential trading arrangements; for example, direct foreign investment issues (which are considered by Bende-Nabende in Chapter 5), trade in services (which is considered by Murinde and Ryan in Chapter 7) as well as globalisation (which is addressed by Mahdi in Chapter 8).

1.2 The theory of economic integration

1.2.1 Six forms of economic integration

Economic integration may be defined as an attempt to link together the economies of two or more countries, typically with some geographical proximity, through the removal of economic barriers such as tariffs and immigration controls, aimed at raising the living standards as well as achieving peaceful relations among the participating countries.

The theory of economic integration can take several forms, which are ultimate objectives in their own right and thus represent varying degrees of integration. Precisely, the seminal Balassa (1961) classification identifies six distinct forms of economic integration. The first of these forms is sectoral integration, which occurs when there is a removal of barriers to trade in one economic sector. A good historical example is the European Coal and Steel industry. The second is the free trade area, whereby member countries abolish all trade impediments among themselves but retain their individual trade policies and trade barriers with the outside world. For example, each member country retains the power to fix its own separate tariff rates on imports from non-member countries. In addition, member countries are equipped with “rules of origin” to ensure that preferential treatment is confined to commodities originating within the free trade area, in order to limit trade deflection i.e. a reduction of imports through the country with the largest tariff for the purpose of exploiting the tariff differential. A historical example is the European Free Trade Association. The third form is a customs union, which eliminates substantially all tariffs and other forms of trade restrictions among the participating countries and establishes union tariffs and other regulations on foreign trade with non-participating economies. Hence, there is substitution of a single customs territory for two or more customs territories. The first customs union in Europe was the Zollverein, 1830-1870, on which basis the German empire was founded in 1870, after which several attempts were made to integrate the economies of various European countries. The fourth is the common market. Common markets are also customs unions, but they have free factor mobility across national member boundaries so that capital, labour and enterprise move without hindrance among the member countries. The fifth form of economic integration is economic and monetary union, which essentially is a common market with a central authority which controls the economic policies of member countries; there is also a common currency. The European Union is moving towards this direction, with the adoption of the Euro as a common currency in some member countries at present, possibly extending to all member countries in future. Finally, the ultimate form of economic integration involves complete political integration in which there is a central authority whose sovereignty is that of a national government. Historically, the USSR was such an arrangements.

However, apart from the above six standard types of preferential trade arrangements, some international trade agreements involve a “non-discriminatory” reduction in tariff rates. For example, if South Africa agrees with the UK to lower its tariff on imported machinery, the new tariff rate applies to imported machinery from any country in the world. Thus, all countries pay the same rates, especially under a status formally known as that of “most favoured nation” (MFN) – a guarantee that exporters from those countries pay tariffs no higher than that of the nation that pays the lowest. As Krugman and Obstfeld (1996) point out, tariff reductions under GATT and WTO are always made on an MFN basis. In general, the main articles of GATT and WTO that relate to preferential trading arrangements under the multilateral trade policy framework, especially Article I and Article XXIV, are reviewed in Bhagwati and Panagariya (1996a, 1996b), Bhagwati, Greenaway and Panagariya (1998) and Panagariya (2000).

1.2.2 The theory of trade creation and trade diversion

The seminal work relating to preferential trading arrangements is Jacob Viner’s (1950) theory of trade creation and trade diversion. The theory represents some static welfare analysis. Suppose that two countries, Kenya and Uganda, form a customs union such that there are no quantitative restrictions on trade between them. The removal of tariffs makes it possible for a member country to replace high cost domestic production with lower cost production from another member. Thus, after the customs union, each country specialises in the production of commodities in which it has a comparative advantage, thus increasing productivity and welfare gains of the countries in the union. This is trade creation. A welfare gain is associated with trade creation.

Let us take a hypothetical example, shown in Table 1.1. The formation of the customs union implies that the rest of the world (ROW) will be discriminated against vis-a-vis the countries in the customs union. Suppose, as in Table 1.1, the ROW is a low-cost producer (US$16), Uganda is a medium-cost producer (US$20) and Kenya a high-cost producer (US$25), for a unit of a hypothetical product. Before the formation of the customs union, producers in the ROW face the same tariff b...

Table of contents

• Cover
• Half Title
• Dedication
• Title
• Copyright
• Contents
• List of figures
• List of tables
• List of boxes
• About the contributors
• About the editor
• Preface and acknowledgements
• 1. Introductory overview
• 2. The COMESA free trade area: concept, challenges and opportunities
• 3. An historical background to the formation of COMESA
• 4. The institutional framework of COMESA
• 5. Foreign direct investment, regional integration and economic growth: some lessons for Africa
• 6. Export promotion and economic growth: evidence on African economies
• 7. The implications of WTO and GATS for the banking sector in Africa
• 8. Globalization, economic restructuring, supply and policy responses in developing countries
• 9. The COMESA vision and strategy for integrating trade and development regionally into the 21st century
• References
• Index