Tuesday, September 30, 2008

Comesa agrees to economic merger with Southern Africa

Written by Allan Odhiambo - September 26, 2008

The plan to merge 26 eastern and southern African states into a single trading bloc with a combined gross domestic product of $625 billion is complete and ready for heads of State to sign-off next month.

The economic merger will open borders throughout the eastern side of Africa, from Egypt to South Africa, upgrading the continent’s power in trade talks, and opening doors to both African and international producers to a hugely enlarged market.

For Kenyan producers, it is a merger that foreshadows the progressive end of protection from South African imports, and increased competition at home. 

But the pay-off, for all, will be much stronger representation of African interests at the world trade negotiating table. 

In recent trade talks, East Africa has struggled to get the best terms possible across the competing cuts of different regional groupings.

Last year, for instance, membership of Kenya, Tanzania and Uganda in different trading blocs nearly stalled the region’s negotiations with the European Union for a new Economic Partnership Agreement (EPA).

World Trade Organisation rules require any member states participating in such talks to belong to a single trading bloc to avoid duplication of benefits.

Eastern Africa’s participation in the EPA talks were complicated by the fact that Tanzania, a member of the East African Community (EAC) had three years earlier dropped its membership in Common Market for Eastern and Southern Africa (Comesa) in favour of Southern Africa Development Community (Sadc) while Uganda and Kenya are members of the EAC and Comesa. 

The proposed trading bloc that will bring together the Comesa, EAC and Sadc, is also expected to help member states overcome this dual trading bloc belonging that has become a thorny issue in Africa’s engagement with other trading blocs outside the continent. 

The merger should also add competitive pressure on Kenyan producers of goods and services, who will have to face unfettered rivalry from the much stronger South African firms.

But it is also expected to broaden the market for Kenya which is currently the top producer of goods and services in Comesa where it accounts for more than half the trade volumes.

Plans for the merger were agreed at a special meeting held in Nairobi, this week, ahead of a tripartite summit to be held in Kampala on October 20 to speed up economic and political integration in Africa under the Africa Union (AU).

The integration project is expected to enhance cooperation among trade, investments, and infrastructure, open transport corridors as well as promote joint projects to boost of industrialisation, agriculture and food security among member states.

It is also expected to provide a road map to the realisation of an enabling environment for free movement of people and goods among member states with the ultimate aim of creating a single market and investment area.

“The EAC, Sadc, Comesa summit is considered historic because for the first time, since the birth of the AU, key building blocks of the African economic community will deliberate on how to integrate their territories and start moving towards a wider integration platform based on the Abuja Treaty for the establishment of the African Economic Community,” the team that met in Nairobi says in their final document. 

Trade ministers from the EAC and Comesa have endorsed the merger plans and their counterparts from the southern bloc have similarly expressed optimism over an expanded regional market.

“Benefits of a bigger trading bloc are expected to come from the establishment of a Common External Tariff (CET) and related trade policy areas as well as overlapping membership,” a joint communique issued by Comesa Trade ministers last year said.

Deeper differences

The endorsement by the Comesa ministers came in the wake of a similar proposal by EAC’s trade experts who had earlier called for the formation of a grand Free Trade Area (FTA) comprising of the Comesa, Sadc and EAC as the best solution to the differences that have arisen among member states in the recent past.

These differences have deepened recently when Uganda indicated that it was considering leaving Comesa to pursue its interests in a single trading bloc —EAC. 

Tanzania left Comesa eight years ago, but remains a member of Sadc, a situation that has complicated EAC’s drive towards a unified market within Comesa.

Though the EAC states view the grand FTA as a solution to their differences, Comesa trade ministers said a seamless trade arrangement would boost plans to launch a Customs Union later this year.

“Creation of a larger market would enhance competitiveness of producers in the Comesa region, induce economies of scale as well as enhanced welfare implications arising from reduced consumer prices,” the Comesa ministers said. The 14-member Sadc formally launched its FTA in August. 

The move, among other things, removed tariffs on 85 per cent of all goods traded in the region and has set 2012 as the year of full liberalisation.

Sadc also plans to launch a Customs Union by 2010 before graduating to a common market in five years followed by a monetary union one year later and a single currency in three years.

EAC already has a Customs Union while Comesa plans to launch its own by December this year. A free trade area refers to a group of countries that have agreed to eliminate tariffs, quotas and preferences on most (if not all) goods trading among them. 

It is a form of economic integration that comes out of countries whose economies are complementary. Countries whose economies are competitive usually prefer a Customs Union. 

Unlike a Customs Union, members of an FTA do not have the same policies with respect to non-members and can therefore offer such non-members different quotas and customs preferences. 

Analysts, however, warned that even as EAC-Sadc -Comesa entered into the integration deals there should be caution to ensure that elements such as cross-border liberalisation yielded target fruits. 

The warning is based on a report by the UN Conference on Trade and Development , which showed that recent reforms in Kenya and other African countries have failed to boost their export trade, but have instead weakened the trade balance within the continent.

The UN Conference on Trade and Development (UNCTAD) said though the rapid liberalisation reforms carried out in the 1980s and 90s were aimed at encouraging intra-Africa trade, the traditional direction of exports remained unchanged.

“Overall, export performance in countries following trade liberalisation has been disappointing. Although there has been a positive effect of trade liberalisation on exports expressed as a percentage of GDP, this effect is weak and the overall trade balance in African countries has deteriorated since liberalisation,” UNCTAD says in a report titled Economic Development in Africa 2008.

The study revealed that though there was a marked increase in the share of intra-African trade in the 1980s and early 1990s, it has since stagnated with the intra-regional trade accounting for only eight per cent of total African exports in 2006 which is lower than other regions such as the EU and Asia where it accounted for 67 per cent and 46 per cent respectively. 

“This can be partly explained by tariff cuts, which reduce the preference margins given to other African countries and, therefore reduce the incentives for intra-regional trade,” the report said.

It said that similarity of Africa’s exports have limited trade while infrastructure for intra-African trade remains poor leading to high transaction costs.

“Despite the many regional agreements in place, these are generally slow to be implemented and there is little private sector involvement in them as compared with their equivalents in Europe, Latin America or Asia,” the agency said.