promoting african trade and regional integration: the tripartite fta and the role of development...

8/4/2019 Promoting African Trade and Regional Integration: The Tripartite FTA and the Role of Development Corridors

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Summary: As policymakers

work to increase trade’s use

as a catalyst for development

in Africa, one initiative that

has gained a lot of attention

in recent years is the pending

Tripartite free trade area (FTA)

between three African Regional

Economic Communities (RECs).If realized, this FTA would consist

of 26 nations, with nearly 600

million people and a combined

GDP of about US$1 trillion.

While undoubtedly important,

however, this initiative faces

a series of challenges on a

number of fronts. This policy

brief explores the status of and

obstacles facing the Tripartite

FTA, and discusses the ways

transatlantic partners may be

able to increase support for this ambitious effort, namely

through aid for trade intended

to bolster the three RECs and

the development corridors that

could help facilitate trade among

Tripartite countries.

The views expressed here are

the views of the authors alone

and do not necessarily reect

the stance of the German

Marshall Fund of the United

States.

Analysis

Connections

Promoting African Trade and Regional

Integration: The Tripartite FTA and the Role

of Development Corridors

By Greg Gajewski

1744 R Street NWWashington, DC 20009

T 1 202 683 2650F 1 202 265 1662E [email protected]

August 30, 2011 Number 6

Paper series on transatlantic trade and development policy issues

About the Tripartite

On June 12, 2011, the CommonMarket or Eastern and SouthernArica (COMESA),1 the EastArican Community (EAC),2 andthe Southern Arican DevelopmentCommunity (SADC)3 met in Johan-nesburg, South Arica, to declaretheir intention to orm a ree tradearea. Tis announcement was theexpected next step or the so-called

ripartite, which was ormed in 2005with regional integration as its key objective. Included in the ripartite’sagenda is to:

• Form a ree trade area;

• Lower trade and transport costs;

• Promote inrastructure develop-ment; and

• Promote trade-related mecha-nisms.

According to an economic simulation,most o the gains rom the ripartite,when realized as an FA, will go to

1 COMESA includes Burundi, Comoros, the Democratic

Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia,

Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda,

Seychelles, Sudan, Swaziland, Uganda, and Zambia.

2 The EAC includes Burundi, Kenya, Rwanda, Tanzania,

and Uganda.

3 SADC includes Angola, Botswana, the Democratic

Republic of Congo, Lesotho, Madagascar, Malawi, Mau-

ritius, Mozambique, Namibia, Seychelles, South Africa,

Swaziland, Tanzania, Zambia, and Zimbabwe.

South Arica and Mozambique. Egyptand Kenya also stand to gain rom theFA in their manuacturing sectors.4 Te largest gains, however, will berom the large common market.Tis will attract more investment inproductive sectors, creating valuechains in new upstream and down-stream industries to serve this vastnew market. While in regions likeemerging Asia, nearly hal o trade is

within the region, intra-regional tradein Arica is only about 10 percent o the continent’s total trade. Tis leavesa great deal o room or expandedintra-regional trade within the FA.

Removing trade barriers may not beas dicult as some think. wo o theblocs, COMESA and EAC, already have tari- and quota-ree tradewithin their blocs. SADC has tariso only 15 percent acing nonmem-

bers, and those are already slatedor removal in 2012. Pessimists,however, note that or COMESA,some members have not adoptedthe common external tari, whilein SADC, some members have alsonot adopted the common externaltari and/or have not integrated intoSADC’s FA.

4 From www.tralac.org.



Analysis

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2

The most important obstacles

include setting rules of origin, high

transit costs, nontariff barriers

to trade, nancing, and political

instability in and between somemembers.

Challenges Facing the Tripartite FTA

According to the 2011 ripartite Declaration, the FA isto be achieved by 2013. Some observers consider the goalo integration in two years to be unrealistic, while otherspoint out that the EAC is already a customs union, whileCOMESA is a ree trade area, as is most o SADC.5 None-theless, there are serious obstacles that need to be over-come. Te most important obstacles include setting ruleso origin, high transit costs, nontari barriers to trade,nancing, and political instability in and between somemembers.

Beyond implementation o tari reductions, rules o origin

are very important to the success o the grand FA. Ruleso origin dene the process to be perormed or inputs thatare to be included in the nal good in order or that goodto receive preerential treatment in its export market — inthis case, or goods rom one ripartite member to enteranother ripartite member country duty-ree. Reasonablerules o origin will encourage oreign direct investment(FDI) and expansion o local markets to take advantage o the resources across the FA and establish cross-border value chains. I the rules o origin are set too tightly inorder to protect existing industries rom competition,however, then the common market will not attract the

same level o investments rom oreign multinationals.

Conversely, i the rules o origin are too liberal, this willattract many rms to make minimal or nominal invest-ments simply to gain access to the large common marketcreated by the FA. Loose rules o origin would allow thenal stages o production to be located in the FA with

5 SADC is waiting for the DRC and Angola to join the FTA.

minimal Arican labor inputs, blunting the agreement’s

development impact. As it stands, the EAC’s and COME-SA’s rules o origin are relatively liberal and comparable,meaning that SADC’s more stringent rules o origin may have to be liberalized as a compromise or the grand FAto be ormed.

rade reorm without lowering transport costs andaddressing nontari barriers to trade is not enough tospur growth in most Arican nations. Inadequate and poorroads, railways, ports, waterways, and airports, as wellas insucient energy and telecommunications systems,are serious obstacles to intra- and inter-regional trade in

Arica.

Railways provide an illustrative case study: they are gener-ally a ailure in the ripartite geographic area. Rail shouldbe more competitive or heavy loads and long-distancehauls compared to roads. Yet they carry less than 5 percento the region’s cargo, compared to 40 percent in the UnitedStates. Most are concessions (i.e. public-private partner-ships, or PPPs), and clearly many o the concessions needto be renegotiated because the investments needed to reha-bilitate/upgrade the tracks were not properly taken intoaccount. Indeed, some are being renegotiated now, as in

Kenya and Uganda, where the private company holding therail concession spanning both countries managed to attractnew unds and can now carry out some o the neededrehabilitation o track and procure additional rolling stock.Additionally, a rail track assessment is needed or mosto the rail links in the ripartite area. Locomotives willneed to be replaced and modern business practices imple-mented.6

A consequence o this underdeveloped rail system is thatroads are subject to vehicle overloading because heavy loads cannot be reliably sent by rail. Tere is a push by

Arican nations in the region to move to standard gaugerail track, but this is a hugely expensive proposition andunlikely to be realized beore 2020. Te best approach is toget the level o service up to par on existing lines, and then,say in 15 years, make the transition to standard gauge.

Tese and other inrastructure and transport barriersincrease the cost o doing business, making current invest-ments less protable than they otherwise could be anddeterring potential new investment. Tey also make it

6 PPP’s take many forms, and whether the government or the private sector pays for

improving tracks and locomotives depends on the specics of the PPP.



Analysis

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3

to major paved roads, combined with parallel railroads

and sometimes pipelines. Most people see the corridorapproach as the best way to reduce the time and cost o shipping reight on a regional as well as at the internationallevel.

I corridors are to play this role, it is critical to have acorridor governing body that is responsible or maintainingand improving the condition o the corridor as well as thelogistics along it. Some, such as the Maputo Corridor, areoperated as PPPs, meaning in this case that the govern-ment gives concessions to the private sector to operate theport and use tolls on the transit corridor to maintain it to a

predetermined high level o service. PPPs are not identicalin their structures: some have more public-sector involve-ment and others have more private sector involvement.Ideally the public sector remains the active regulator o monopolistic private sector-owned and/or operated inra-structure (i.e., the tolls are not set too high). But sometimesthe government retains ownership and then grants conces-sions to the private sector operations, or the governmentretains ownership and operates, or example, the road,while the concession allows the private sector to operatethe port. Te Walvis Bay Corridor Group, which includesthe rans-Kalahari, rans-Caprivi, the rans-Cunene, and

the rans-Oranje Corridors, is also operated as a PPP.

At the other extreme, due to the relative lack o private-sector involvement, is the Northern Corridor (NC),which spans Kenya, through Uganda, down into Rwandaand Burundi. Out o Uganda, the NC stretches out intothe DRC and Southern Sudan. When complete, it willprovide seamless service to Kisangani in the DRC, whichis a gateway to the Congo River. At best, the corridor is40 percent complete, when considering the condition o the railroads. Te NC is governed by a corridor authority,the Northern Corridor ransit ransport Coordination

Regional integration effort must

be African-led, yet the African

regional institutions lack the

capacity and the budget needed

for meaningful progress.

more physically dicult and costly to move goods and

labor across borders. Unless these barriers to trade arelifed, regional integration will remain a dream.

Te same is true o the nontari barriers ofen ound atborder crossings or in ports. Currently, much trade isblocked at borders as truckers wait or inspections, ofenpaying inormal ees to have the inspections waived. Muchwork has gone into creating one-stop border crossings by the Japanese International Cooperation Agency (JICA) andother donors, but much remains to be done to make bordercrossings less o an impediment to trade. Work is alsobeing done in ports to introduce single window clearances

and modern customs inspection techniques.

Lack o progress in orming the RECs and the slow prog-ress in removing nontari barriers to trade mean that thedonors are lef in a quandary. Te regional integrationeort must be Arican-led, yet the Arican regional institu-tions lack the capacity and the budget needed or mean-ingul progress. Donors are willing to support institutionalstrengthening at the national level, but support or regionalinstitutions is less signicant, in part because the money must be driven by the stated need o the host countries.Arican leaders spend their time on national concerns, and

have less time or regional integration work. Furthermore,a signicant part o the regional agreements are actually not entered into national legislation and are thereore notimplemented.

Strengthened RECs would ease the negotiations or realiza-tion o the ripartite’s primary goal o orming the grandFA. Strengthened corridor authorities (discussed below)would promote lower transit costs as well as regionaleconomic development. Support rom the top is criticali regional integration is to make more progress. Suchsupport was critical in orming the Maputo Corridor, or

example.Tough they are not addressed urther in this paper,macroeconomic policies such as a heavy reliance on tari revenues and political instability and civil strie also hinderor block trade integration. Tese considerations must beaccounted or when designing the projects and interven-tions described below.

The Transit Corridors: Multitude of Initiatives

Tere appear to be over 60 transit corridors in variousstages o development in Arica. ransit corridors reer



Analysis

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4

Authority (NCCA), which is supported nancially by

the member countries. Te NCCA has the mission o lowering the cost and improving logistics or those usingthe corridor to move reight, and developing the corridorinto an economic development zone under the SpatialDevelopment Initiative (SDI).

Te SDI was a vision o Nelson Mandela, and was imple-mented or the Maputo Corridor rst. Large projects,named anchor projects, support the development o thetransit inrastructure that orms the “trunk” o the corridor.Secondary and tertiary roads are then built out to reachotherwise isolated resource bases or economic develop-

ment. Tis is the dierence between a transit corridor,which has a more strictly trade ocus, and a developmentcorridor, which is intended to maximize the number o beneciaries o increased trade. By linking the strandedresources via road or rail, developers are attracted to other-wise remote locations and will develop mining, manuac-turing, or expanded agricultural production. Agriculturaldevelopment along the corridors can provide criticalbusiness opportunities or Arica’s smallholder armers,possibly encouraged and acilitated by the corridor authori-ties. Some believe that all transit corridors should be trans-ormed into economic development zones using the SDI.

A key set o corridors or the ripartite FA alls under therubric o the North-South Corridor (NSC). Te NSC is anetwork o roads and rail systems that link the copper beltin the Democratic Republic o Congo and Zambia with theport at Dar es Salaam in anzania and ports in southernArica. Te corridor, with its spurs, serves eight countries:anzania, the Democratic Republic o Congo, Zambia,Malawi, Botswana, Zimbabwe, Mozambique, and SouthArica. Parts o the corridor are quite old; AZARA, therail line rom the copper belt in Zambia to Dar es Salaam,was built by the Chinese in the 1960s. Recently, this

Some believe that all transit

corridors should be transformed

into economic development zones

using the Spatial Development

Initiative (SDI).

network o corridors as an aid or trade initiative has gener-ated a great deal o support rom donors, who pledged $1.2billion in 2009 or its development. Tis program high-lights improved logistics and removing nontari barriersto trade, such as the complications o crossing borders. Teripartite champions this initiative and views it as a pilotor developing other corridors.

At least two o Arica’s corridors, both agricultural in

nature, should soon show the benets o applying the SDI:the Southern Agricultural Corridor o anzania and theBeria Agricultural Corridor o Mozambique, which alsoserves Malawi, Zambia, Zimbabwe, and the DRC. Tesecorridors both have corridor authorities, whose purposeis to attract and coordinate outside investors, usingdonor money to acilitate investment where necessary by providing the tertiary road network that is missing. Teinvestments attracted are to be all along the agricultural value chain, rom supplying arm inputs to processingand packaging product or sale overseas, and are meant toprovide strong and direct benets to smallholder armers.Diagnostics have ound, however, that there is very limitedinvestment in agriculture along these corridors. Operatingcosts remain higher than competitors, such as rom Asia;arming areas lack the last link in the road network — romthe arm to the rst secondary road — to be commercially viable. Tere is also a lack o credit or armers.7 But allthese obstacles can be overcome with well-targeted interventions.

7 From “Agricultural Growth Corridors: Making it Happen,” presentation by Sean de

Cleene, Vice President Global Business Development and Public Affairs, IFA Africa

Forum, June 3, 2010.

Diagnostics have found that

there is very limited investment in

agriculture along these corridors.

Operating costs remain higher

than competitors; farming areas

lack the last link in the road

network to be commercially viable.



Analysis

Connections

5

Policy: Need for Coordination

Aid or trade plays a large role in helping the ripartiterealize its primary goal o establishing a unctioning FA.Simply put, aid or trade is aid to nations that explicitly put trade liberalization in their policy reorm agendas, andthat is meant to help those nations capture the benets o trade liberalization. Aid or trade encompasses making thenecessary policy reorms and acilitating trade throughimproving logistics and investments in inrastructure,including along the corridors. Some examples o promisingaid or trade and related projects are described below.

As a caveat, however, policymakers need to recognize that

there is a risk that an expanded FA will cause economicdisruptions between some member countries. Kenya andSouth Arica, which both already have export-orientedindustrial sectors, are likely to benet more rom a tradeagreement than Malawi or Burundi, or instance, which are very ar rom having strong low-cost productive sectors.Liberalization o trade may actually constrain the develop-ment eorts o these less advanced countries, because itwill be cheaper to import than to produce domestically.Ethiopia delayed its de acto accession to COMESA or thisreason. Donor-assisted interventions must not intererewith the proper timing o integration i it is to work.

Donor coordination, in order to leverage dierentstrengths among donors and avoid duplication, is criticalto making aid or trade more eective. Te Paris Declara-tion on Aid Eectiveness and the Accra Agenda or Actioncall strongly or donor coordination. Donors pledged towork with host country governments and, where possible,manage aid through the host country government’s budget.Tese are lofy goals, but moderate progress has been madeto achieve them, as can be seen rom the donor projectmatrix available on the ripartite website. For example, theEU is implementing the Regional Inrastructure Develop-

ment Plan, while the U.K. Department or InternationalDevelopment (DID) is implementing the rademark

Southern Arica Programme and the rademark Eastern

Arica Programme. Even just assigning and publishing adivision o labor is an encouraging sign.

Corridor assistance is becoming better coordinated amongdonors as well as among donors and the host countries andthe RECs. Te World Bank is limited to dealing with indi- vidual nations, but has established a mechanism to tran-scend borders through its Sub-Saharan Arica ransportPolicy team. Tis team works on an important subset o the corridors. Still, the World Bank could play a larger rolein corridor development: examine, or instance, the donormatrix or the ripartite and note that the World Bank is

not among the donors listed.

DID, JICA, the EU, and the U.S. Agency or InternationalDevelopment (USAID), however, are listed as the majordonors. DID is taking the lead on the NSC development.For that corridor, the nancing rom DID is to the tuneo £67 million in addition to unds rom the DevelopmentBank o Southern Arica (DBSA) to orm a ripartite rustAccount (A); other donors are interested in addingunds to this account. Te Arican Development Bank isalso quite active in promoting regional projects, as is theArican Union, especially through its New Partnership or

Arica’s Development (NEPAD) program. Tere is alsothe COMESA Development Fund and a COMESA Inra-structure Fund, and the SADC Project Preparation andDevelopment Fund, which should soon be operational andis intended to help und project development, according torademark Southern Arica.

Much work has gone into creating one-stop border cross-ings by JICA and other donors, but much remains to bedone to make border crossings less o an impediment totrade. More could be done by USAID in this arena.

New public-private partnerships have a large role to play,

especially or port development. Te World Bank couldstep in here and help these ports transition rom the publicsector (where many are today) to be concessioned andoperated by private sector entities, as the port o Maputohas done. Te World Bank has a tool kit or this type o transormation, which can be useul when applied with theright technical assistance.

When it comes to roads, tolling the highways is gener-ally only an option with the high level o trac oundon some corridors and at some choke points. One such

Donor-assisted interventions

must not interfere with the proper

timing of integration if it is to

work.



Analysis

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6

About the Author

Greg Gajewski is vice president, economic development, o the Louis

Berger Group, Inc. He has worked in over 25 countries and holds a

Ph.D. in economics rom the George Washington University.

About GMF

Te German Marshall Fund o the United States (GMF) is a non-

partisan American public policy and grantmaking institution dedi-

cated to promoting better understanding and cooperation between

North America and Europe on transatlantic and global issues. GMF

does this by supporting individuals and institutions working in the

transatlantic sphere, by convening leaders and members o the policy

and business communities, by contributing research and analysis

on transatlantic topics, and by providing exchange opportunities to

oster renewed commitment to the transatlantic relationship. In addi-

tion, GMF supports a number o initiatives to strengthen democra-

cies. Founded in 1972 through a gif rom Germany as a permanent

memorial to Marshall Plan assistance, GMF maintains a strong

presence on both sides o the Atlantic. In addition to its headquarters

in Washington, DC, GMF has seven oces in Europe: Berlin, Paris,

Brussels, Belgrade, Ankara, Bucharest, and Warsaw. GMF also has

smaller representations in Bratislava, urin, and Stockholm.

choke point is the entry to Nairobi rom Mombasa. Once

a bypass road is completed as an alternate route, entry intoNairobi should be tolled to reduce congestion to manage-able levels.8 Other roads in the corridor network need to beassessed at their choke points or the applicability o tolls.Tis type o assessment must be done or all corridors andtolls applied where there is heavy trac or are choke pointsleading to major urban areas. Again, the technical expertiseavailable at the World Bank and the EU would be enor-mously helpul in setting this up.

Te absorptive capacity o the transnational Aricaninstitutions is also a constraint to increasing aid to them.

More skilled civil servants rom Arican nations mustbe seconded to the REC governing bodies. Ultimately,however, the only solution is more long-term, that is,to build up the capacity o more Arican civil servantsthrough additional schooling and on-the-job training. Hereis another area where transatlantic aid — in the orm o technical training and support or specialized education— could step in. USAID would be a good institution to llthis gap.

8 Nairobi also needs a much improved public transport system to reduce congestion, as

do many African cities.

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