ECONOMY - 07 MAY 2018

To Trade with our Brothers or Not

To Trade with our Brothers or Not
President Kagame of Rwanda was one of the African Heads of State who supported the Africa Free Trade Area on March 21st.

Economic theory and real-world experience have taught us one thing: countries can trade their way to prosperity. Examples of this abound. From South Korea's industrial revolution as the world started buying Samsung electronics and driving Hyundai cars, to the superpowered growth of steel and ICT in modern China, and Singapore's transition to a first world country by trading electronic machinery and aircrafts components

For long, Africa has craved the same. In 2012, the African Union (AU) latched onto the idea of a trade-driven approach to development when the African Continental Free Trade Area (CFTA) was birthed. The agreement would dismantle barriers to trade by turning Africa into a single market; 1.2 billion people freely trading goods and services worth $2 trillion. Under the CFTA, nearly 90% of the commodities produced on the continent would be sold tariff-free within Africa. 

The CFTA was badly needed. African businesses trading within the continent are faced with high tariffs – roughly 9 percent compared to 3 percent overseas. This stifles intra-African trade and explains why trade among African countries amounts to only 12 percent of their trading activity.

Nigeria was one of the early supporters of the CFTA. Chiedu Osakwe, Nigeria’s chief negotiator, suggested, “The CFTA offers massive opportunity to escape the colonial legacy.” Farmers would tap into the nation’s unused arable land (40 percent) and expand agricultural production to the rest of the continent. Manufacturers would leverage on Africa’s poor industrial base and flood the continent with “Made in Nigeria” goods.

When the CFTA was initially signed in March 2018, however, Nigeria was absent. Presumably, the implications of joining the CFTA had not been properly examined. Were high tariffs the primary reason for low intra-Africa trade? Does the Nigerian economy have a competitive advantage in an industry? What exactly is Nigeria’s development agenda as it relates to trade?

Your Nigerian Economist is of the opinion that high trade tariffs are not the primary impediment to trade between Nigeria and her African countries. After all, 93 percent of what we export, i.e. crude oil, is tariff-free. Meanwhile, few African countries have sophisticated manufacturing sectors, so Nigeria would likely be importing raw materials and semi-finished goods. The net benefit would be minimal. Nonetheless, free trade areas have been known to expand the export base of the countries involved, as well as create more jobs and induce higher economic growth. We cannot discount the possibility that the CFTA would encourage Nigeria to finally diversify its exports and drive the production of non-oil products. 

However, to truly benefit from an agreement like the CFTA, Your Nigerian Economist opines that Nigeria would have to materially bridge its infrastructure deficit and develop its institutions. Manufacturers have pointed to the country's electricity challenges and restricted access to credit as severe impediments to doing business. The poor road network further increases the cost of transporting goods to end-users. Thus, building infrastructure should be considered a priority to better prepare us for open markets and free competition. Without that, we handicap our local industries as they compete in the global market.

Nigeria can also take a cue from China by protecting infant industries and "picking winners". Although this approach requires a clear development agenda and continuity in economic policy, it underpins the principle that freer trade should not come at the expense of local industry. The recent backlash to globalisation in even the wealthiest countries shows the damage this can cause. 

But Your Nigerian Economist also suspects that establishing trade-friendly institutions is critical. For example, travelling to Europe remains more attractive due to the Schengen agreement, in contrast to the difficulty of travelling across Africa. Promoting free trade in a meaningful way often means permitting freer movement of people and capital, so it would have been a waste for Nigeria to sign the CFTA and still stay outside the African Economic Community on Free Movement of Persons, Right of Residence and Right of Establishment.

Still, on movement, a Nigerian businessman may be more inclined to export his services to the UK where there is a direct flight, rather than neighbouring Congo where he’ll need to change planes at least once and still pay about the same amount for the trip. Along with signing the CFTA, having open skies with our African counterparts will increase the competition in our air transport market, leading to lower ticket prices and an increase in the number of operating airlines. On this note, Nigeria should strongly consider ratifying the Single African Air Transport Market (Africa’s open sky policy) as a step towards improving trade.

We can build a stronger supply capacity, produce more competitive goods and bring home the spoils of trade. But first, we must bridge the infrastructure gap, protect local industries and join our brothers to build continent-wide systems upon which trade can thrive. The CFTA has come and gone, but Nigeria still has the opportunity to expand trade with her brothers.

 

Follow this writer on Twitter @Mmakeruch. Subscribe to read more articles here.

Mma Amara Ekeruche

Mma Amara Ekeruche

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