Thursday, October 22, 2009

Regional integration: a discussion on the proposed tripartite FTA

by Taku Fundira

The main objective of Free Trade Agreements (FTAs) is to secure trade liberalisation. An advantage of FTAs is that market access concessions may be negotiated more easily and more quickly than in multilateral agreements because fewer parties are at the table. Thus parties can secure advantages that are harder to win in bigger forums. These sentiments seem to be shared by African leaders in the region, if one has to consider the decisions that they have taken lately at the regional level.

An example which is the key focus of this discussion is the proposed COMESA-EAC-SADC tripartite free trade area (FTA). This was conceived in October 2008 when Heads of State from the Common Market for East and Southern Africa (COMESA); the East African Community (EAC) and the Southern African Development Community (SADC) agreed on the establishment of a FTA. Discussions at Secretariat level have for some years been focusing on the harmonisation, coordination of programmes and policies in areas of common interest.

According to the official communiqué of the 2008 COMESA-EAC-SADC tripartite summit, the tripartite FTA “is a crucial building bloc towards achieving the African Economic Community as outlined by the Treaty of Abuja.” It is envisaged that apart from harmonisation and coordination of policies, the tripartite FTA will facilitate the “free movement of business persons, joint implementation of inter-regional infrastructure programmes as well as institutional arrangements on the basis of which the three RECs would foster cooperation.”

The tripartite FTA between the three regional economic communities (RECs) - would be an expanded trade bloc comprising 26 countries that make up half of the Africa Union’s (AU) membership. The new bloc will have a combined population and GDP of more than 500 million people and $624 billion respectively with a per capita GDP averaging $1,184 (RTFP, 2008).
It is important to note that the establishment of such an expanded RTA will have differing consequences for the foreign trade policy options available to participating countries depending on the scope, depth and coverage of the RTA created. Regional policy makers are therefore faced with several important challenges. Firstly, will the merger of the 3 RECs solve the problem of overlapping membership which has been on the table for more than a decade but never been seriously addressed? Secondly, is the FTA be a means of addressing the challenge of politically sensitive decisions of choosing one regional bloc over another? If history is anything to go by, we are faced with the reality that this tripartite FTA is not as simple as it looks on paper.

Past experience can reveal that decisions taken at the regional level by Heads of States have mainly been at a political level without any pragmatic economic considerations taken into account. And as such, there has been a tendency to set highly ambitious and unrealistic targets within limited timeframes and often with limited financial support for implementation. This has led to missed deadlines and postponements of set targets. Such an inherent precedent across all the 3 RECs has created a culture where member states are not held fully accountable and can easily renege on their commitments.

The question we pose then is what are the prospects for the Tripartite FTA? The idea, although quite noble faces a lot of challenges. What structure will it take and what is required for the successful implementation of the FTA?

These are hard questions that cannot be answered easily. However, there are some benefits that can come out of such an arrangement. These include:

i) Duty free access to an enlarged market
One of the main concerns raised in trade theory regarding FTAs is the issue of trade creation versus trade diversion. It is highly unlikely that any trade diversion will occur since market access is not really an issue as most countries currently enjoy preferential treatment of their goods in major markets. However, it is likely that there will be gains from an increase in intra-industry trade as trading partners trade goods that they are currently producing in their own countries. With greater specialisation and efficiency, trade creation is the likely outcome as demand for goods produced regionally increases.

ii) An opportunity to simplify the Rules of Origin requirements
Rules of origin (RoO) specify the conditions under which a good becomes eligible for lower (and even zero) tariffs in an FTA. While it is tempting to think of FTAs as liberalising, they are often not because of the RoO requirements. These can act as hidden protection measures which create tariff-like measures on imported intermediate inputs and affect the price of domestically made inputs as well (Krishna, 2004). Currently SADC has different RoO requirements to the COMESA – EAC RoO requirements and a simplification of especially the SADC RoO can bring benefits to many producers.

iii) Elimination of non-tariff barriers;
As tariffs have decreased, both in prevalence and importance, the importance of non-tariff barriers (NTBs), has increased. NTBs are any measures or interventions, other than tariffs, which distort or restrict trade in goods, services and factors of production. Examples of such measures include excessive health and safety regulations, costly customs procedures, and government procurement policies which favour domestic over imported goods or services (Sandrey et al, 2008).

On the downside several drawbacks can be highlighted that can emanate from an expanded FTA (Chauvin and Gaulier, 2002). These include:

i) The possibility of polarisation might be of concern, since the emergence of a few poles of industrialisation and the polarisation of investment towards the larger and more diversified economies of the region is possible. This might raise the issue of the setting up of compensatory payments like those currently operating within the Southern African Customs Union (SACU).
ii) Customs revenue represents a significant source of government revenue for most of the members in the tripartite. This suggests that any trade reforms will have to be accompanied by appropriate fiscal revenue policies to compensate for this loss of revenue.
iii) Short-term costs can include output and employment losses, as the removal of tariffs under the FTA will have differential effects on sectors, sub-sectors and firms in each country.
iv) Finally, the political tension existing in several SADC countries is also of concern as it can slow down the pace of the integration process. In recent years the cases of Zimbabwe and the DRC have been a cause of concern. It remains to be seen whether the current political effort to resolve the political crisis will yield positive outcomes.

Clearly the proposed tripartite FTA will require a lot of coordination and collaboration among the 3 RECs bearing in mind the challenges that are likely to be faced. The question is how will the larger FTA proceed on the road to deeper integration as envisaged in the agreements of the constituent entities?