KEY TRADE AND DEVELOPMENT ISSUES AND THE NEW REALITIES IN THE GEOGRAPHY OF THE WORLD ECONOMY By PROF. ADERIBIGBE S. OLOMOLA DIRECTOR, AGRICULTURE & RURAL DEVELOPMENT DEPARTMENT, NISER, IBADAN

OUTLINE OF PRESENTATION  OVERVIEW OF THE CURRENT TRADE AGENDA  CONCERNS AND IMPACTS OF THE CURRENT TRADE AGENDA  ROLE OF THE SOUTH IN PROMOTING NEW EXPORTS IN INTERNATIONAL ECON LANDSCAPE  PROSPECTS AND PROBLEMS OF THE SOUTH IN ACCESSING THE GLOBAL MARKET  POLICY MEASURES TO OVERCOME CONSTRAINTS IN ACCESSING THE GLOBAL MARKET  FOSTERING GREATER TRADE & ECONOMIC COOPERATION THROUGH BILATERAL, REGIONAL & INTERREGIONAL TRADE AGREEMENTS

OVERVIEW OF THE CURRENT TRADE AGENDA  The current trade agenda as reflected in the Doha Development Agenda (DDA) consist of important trade issues which have formed the basis of discussions and negotiations by WTO members in the last few years. The issues include:  -reductions of import tariffs on manufactured goods  -reductions in agricultural import tariffs  -export subsidies  -domestic support measures  -liberalization of barriers to trade in services  -anti-dumping and safeguard measures  -intellectual property rights protection  -dispute settlement

OVERVIEW CONT’D  THE MAJOR TASK AND TREND IN THE Doha Round is to have a consensus on rules, policies and guidelines for a liberalized international trade. These include:  -new rules covering investment, competition policy, government procurement policy and trade facilitation ( the so-called Singaporean issues)  -agricultural liberalization, changes in anti- dumping and countervailing duty rules  -the tariff-cutting rule to increase access to non-agricultural markets and further liberalization of the services sector.

OVERVIEW CONT’D  It has become increasingly difficult for nations to reach multi-lateral agreement on the rules, policies and guidelines in recent years in view of:  -the increased technical complexity of the issues being negotiated  -the disruptive domestic economic effects of the issues  -the increasing relative bargaining power of developing countries in the negotiation process  -the proliferation of bilateral and regional free trade agreements in contrast to multilateral agreements  -the increased emphasis on achieving “fairness” rather than reciprocity in trade liberalization

MAIN CONCERNS OF THE CURRENT TRADE AGENDA  EXPORT DUMPING  AGRICULTURAL SUBSIDIES  MARKET CONCENTRATION  EPA NEGOTIATIONS  NAMA NEGOTIATIONS

EXPORT DUMPING  Export Dumping. Despite the free trade era being championed by the World Trade Organisation, industrialized countries have protected themselves against the most dynamic exports of developing countries, including textiles and clothing, agriculture, and processed raw materials. The proportion by which the average prices of the commodities fell below the cost of production in 2003 stood at 28% in the case of wheat, 10% for soybeans, 10% for corn, 47% for cotton and 26% for rice (see The NewFarm, 2005). Huge surpluses of products like sugar, dairy and beef accumulated under high tariff walls in industrialized countries, are often disposed of by resorting to subsidized exports, to the detriment of African producers in particular, as they displace their products in third country (export) markets and in the domestic markets of African countries themselves. (ECA, 2000).

AGRICULTURAL SUBSIDIES  Agricultural Subsidies in Developed Countries. Enhancing competitiveness and export revenue in the face of fabulous agricultural subsidies in developed countries remains a major challenge. The agricultural subsidies provided to farmers in developed countries constitute an impediment for African farmers’ exports because consumers tend to favour the artificially cheaper products from developed countries. Subsidized imported products also often displace the locally produced products in African countries. While the Uruguay Round Agreement did encourage countries to shift from trade-distorting subsidies to non trade-distorting subsidies, more than 60% of the support provided to farmers in wealthy countries still distorts trade. The US spent $1.3 billion on income support for rice farmers in 1999–2000 when its total rice production was worth $1.2 billion. Japan’s subsidies to its farmers, on the other hand, are greater than the entire contribution made by agriculture to the nation’s economy. The total transfers to agriculture amounted to 1.4% of GDP in 2000, compared to the sector’s 1.1% share of GDP (Sharma, 2003).

AGRIC SUBSIDIES CONT’D  Despite the decoupling of subsidies by the rich countries and the reform of the common agricultural policy undertaken in the EU since 2003, the existing subsidies still cause considerable distortions in the global market and constitute barriers to developing countries’ exports. The EU spends about 40% of its budget (some $60 billion) in subsidies for farmers (Godoy, 2005). Effects of subsidization seem to be particularly severe in Africa. Indeed, studies have shown that EU agricultural policies have reduced African exports of milk products by more than 90%, livestock by nearly 70%, meat by about 60%, non-grain crops by 50% and grains by more than 40% (see Hassett and Shapiro, 2003). Cotton subsidies, for example, depress world prices by more than 20 percent, thus lowering the income of African farmers. Simulations suggest that overall OECD farm subsidies cost farmers in Sub-Saharan Africa US$1.8–1.9 billion per year in lost agricultural income (Chigunta et al, 2004).

MARKET CONCENTRATION  The international market especially for agricultural commodities have become much more concentrated. Large trading companies dealing in many commodities have replaced smaller and specialized companies while the total share of all trading companies has fallen relative to direct purchases by processors or final sellers. A highly concentrated commodity market has a strong influence on prices and will not allow free expression of the forces of demand and supply. The concentration of the markets for certain commodities imply that fewer larger companies can dictate the prices they are willing to pay to producers.

MARKET CONCENTRATION CONT’D  Producers in Sub-Saharan African countries are mainly smallholders who are largely unorganized and in no way capable of negotiating commodity prices. For instance, about 50% of world’s coffee beans are purchased by only five companies (Nestle, Kraft, Proctor and Gamble, Sara Lee and Tchibo (Brown and Gibson, 2006). Thus, even when prices are rising, the level may not be high enough to provide farmers with adequate returns on their investment due mainly to imposition by powerful buyers. The situation is worsened by the abolition of commodity boards in many SSA countries. The boards should have been a useful intermediary that could improve farmers’ bargaining power with large corporate buyers. Some of the services formerly provided by the boards (financing, stockholding) are now provided by foreign companies, thus decreasing the share of commodity income remaining in the producing country.

THE EPA NEGOTIATIONS  Basically the EU demands nothing less than the elimination of tariffs of the countries involved for most of their trade with the EU.

THE NAMA NEGOTIATIONS  In the “non-agricultural market access” negotiations, which deal with industrial, forest, fisheries and mining products the EU is demanding “real market access” for its exports. To obtain this the EU demands a uniform mathematical reduction formula that would cut tariffs to very low levels in countries like Fiji, Papua New Guinea, Ghana, Central African Republic, Swaziland, Barbados, Jamaica, etc. The EU is consistently but misleadingly referring to this group as “the emerging developing countries like India and Brazil.

POSSIBLE IMPACTS OF EPA AND NAMA  Such radical and lopsided liberalizations as in NAMA and EPAs may lead to  -substantial loss in government revenue  -industrial decline  -unemployment  -increasing poverty  Furthermore, as all natural resources are covered in the NAMA-negotiations, countries’ natural resources and environmental policies are also likely to be adversely affected.

ROLE OF THE SOUTH IN PROMOTING NEW EXPORTS IN INTERNATIONAL ECON LANDSCAPE  The world economy is growing at an unprecedented pace reflecting the cessation of the Cold War and expansion of new global technologies. In what appears to be a reversal of historical trends, economic growth today is fastest in developing countries where 74% of the world’s 6.1 billion people live. Arguably, the developing countries are growing fast enough that they are now causing a restructuring of the world economy especially world commodity markets – a trend that may continue and even accelerate in the foreseeable future. Economic growth and agricultural trade have been projected to remain much more rapid in developing countries such as China, India, the Middle East and parts of Africa than in Europe, the United States and Japan. These trends are being stimulated by shifts in economic policies that are successfully attracting international investment and supporting rapid development largely focused on export growth and investment in training and education of the work force. These are opportunities that sharply stimulate food demand.

ROLE OF SOUTH CONT’D  Policy shifts in many developing countries. Economic policy reforms in developing counties have led to the collapse of the former self-sufficiency policies and have resulted in aggressive pursuit of competition and reliance on world markets. This pattern has boosted world trade in recent times. In view of the enormous size of many of these countries (especially China, India, Vietnam, etc) and their rapid growth, considerable pressure is being brought to bear on the structure and conduct of world commodity and transportation markets. And this seems to be driving the inflationary trends now affecting every major commodity market. There is no indication of a reversal of the policies in the foreseeable future thus the opportunity for growth in the demand for agricultural commodities should continue for some time.

ROLE OF SOUTH CONT’D  -China and India, with 2.4 billion people have been growing at historically unprecedented rates. As noted earlier, countries that were marginalized and excluded from the global economy are closing the gap between them and advanced industrial countries  -China at close to 10% growth for 30 years  -India recently at more than 8% grow  -Global growth at 5% for past couple of years has been almost historically unprecedented  -Increased demand for commodities has helped developing countries  SOME OF THEIR SUCCESS FACTORS  -high investment in education and skill development  -high investment in technology development  -high investment in infrastructure

ROLE OF SOUTH CONT’D *global landscape has changed in recent years as evidenced by the changing role of developing countries in international trade  CONSEQUENCES  -Emergence of new geo-politics in international trade  -Prospects for South South cooperation  As evidenced by: new power of developing countries and resolve to use. Also evidenced in China’s new role in Africa e.g. more assistance to infrastructure loans than African Development Bank and World Bank combined. (see Stiglitz, 2007)

ROLE OF SOUTH CONT’D  BUT PROBLEMS REMAIN  -Weak infrastructure  -Low level of competitiveness arising from ( low productivity, high cost of conducting business etc)  -High cost of conducting trade. Studies Have Shown That Exporters Could Gain 5-8% Market Share If They Could Lower Their Shipping Costs By Only 1%. Improvements In Transport Infrastructure May Help To Reduce Transport Costs By Up To 60% While Policies Regulating Market Power In Shipping And Liberalizing Port Services May Also Lead Toa Reduction In Trapsport Costs By Up To 30%. Expensive trade procedures and documentation can become major impediments to trade. Estimates show that the costs of complying with various customs procedures and other requirements amount to between 5 and 10% of the value of global trade (see ESCAP, 2004). In some countries, these costs can amount to over 20% of the value of the products and services traded.

FOSTERING GREATER TRADE & ECONOMIC COOPERATION THROUGH BILATERAL, REGIONAL & INTERREGIONAL TRADE AGREEMENTS  In July 2004, the WTO member countries agreed on a framework that is intended to provide the basis for DDA negotiations. However, the long delay in the conclusion of the Uruguay Round and the long and contentious negotiations that were required before the DDA framework for future negotiations, have led many countries to actively pursue regional and bilateral free trade agreements even as they continue to be involved in efforts to forge a multilateral trade agenda at WTO. BUT NOT WITH THE SAME DEGREE OF INTENSITY IN AFRICA

MAIN ISSUES  INTRA-REGIONAL TRADE PROMOTION  INTERREGIONAL TRADE AGREEMENTS  EFFECTS OF FTAs – THE EPAs

EFFECTS OF EPAs  TRADE EFFECTS – trade creation, trade diversion.  FISCAL EFFECTS  TERMS OF TRADE EFFECTS  DYNAMIC EFFECTS – GAINS FROM INCREASED COMPETITION, CAPITAL INFLOWS, TRANSFER OF EXTERNAL TECHNOLOGY  WELFARE EFFECTS

LIKELY IMPACT OF EPAs IN WEST AFRICA  MODERATE TRADE, EFFECTS with increases in preferred imports from the EU of up to some 21%. Trade creation dominates trade diversion in all West African countries.  DECLINE IN IMPORT DUTIES WORRISOME e.g. for Cape Verde and Gambia losses in customs revenue amount to about 20% of total government revenue.  In other West African countries, decline in overall government revenues is in the range of between 5 & 10%. (Busse and Grossman, 2004).

IMPACT OF TRADE AGREEMENTS CONT’D  Bussolo (1999) analyzed the welfare impact of trade agreements and found in the case of SADC that a unilateral trade liberalization by SADC would be better by far in terms of real GDP growth rates than a regional EPA with the EU.  For Eastern Africa, McKay et al (2000) estimated the welfare impact of a regional EPA with the EU. It was found that in the case of a complete trade liberalization vis-à-vis the EU, Tanzania and Uganda are both likely to encounter a decline in welfare levels, though falling consumer prices, due to lower import prices and increased competition, are benefiting consumers in East Africa. Their results are driven mainly by loss of tariff revenue on EU imports.

POLICY MEASURES TO OVERCOME CONSTRAINTS IN ACCESSING GLOBAL MARKETS?  -Press for the dropping of the reciprocity demands in the EPA negotiations.  -Diversify export capacity  -Strengthen internal liberalization and follow with external liberalization and not vice versa  -Avoid domination of the financial sector by foreign banks otherwise efforts of the government to ensure flow of credit to domestic SMEs not engaged in international trade may be undermined  -Invest heavily in infrastructural development (transport- good roads, railways and ports-, energy, ICT ETC)  -Reduce cost of doing business. (information and contracting costs including control and enforcement costs), trade financing costs, transportation costs as well as administrative and procedural costs.

POLICY MEASURES CONT’D  Simplify or abolish cumbersome regulatory procedures. Remedies required in key areas such as (i) trade and customs legislation, (ii) trade documentation and procedures, (iii) customs clearance procedures, (iv) trade and customs enforcement practices and (v) the use of ICT. i.e. computerization and automation of trade and customs procedures.  Government should encourage supply-chain mechanisms to link SMEs to the international trade system. E.g. by enhancing backward and forward linkages between foreign and domestic enterprises, as well as between large and small domestic enterprises including clusters and incubators.  Improvement of standards and certification procedures.  Strengthen operations of specialized trade finance institutions such as NEXIM, AFREXIM)

CONCLUSIONS  CURRENT TRADE AGENDA MUST RECOGNIZE THE CHANGING STRUCTURE AND GEOGRAPHY OF THE WORLD ECONOMY IN WHICH DEVELOPING NATIONS ARE EXPECTED TO PLAY SIGNIFICANT ROLE  THE DETERMINATION OF RULES AND ENFORCEMENT OF SUCH RULES MUST FOLLOW AN INCLUSIVE PROCESS  INTERNAL LIBERALIZATION MUST BE PURSUED SUCCESSFULLY TO PAVE WAY FOR EXTERNAL LIBERALIZATION  CURRENT TRADE AGENDA MUST NOT BE AN INSTRUMENT OF IMPOSING PERPETUAL DEVELOPMENT BARRIER ON DEVELOPING NATIONS