COLUMNS - 16 MAY 2019

What is wrong with importing toothpicks?

What is wrong with importing toothpicks?
Small items like toothpicks have become the subject of public attack, in an attempt to push Nigeria's export agenda. Source: Techpoint Africa

By now, you have probably seen the clip of Nigeria’s Minister of Agriculture, Audu Ogbeh, complaining about how Nigerians import pizza from London on their smartphones. The claim may have been ludicrous, but the minister was echoing a much more popular sentiment: that Nigeria’s import obsession is bad for the economy.

The Nigerian government characterises our tendency to import as a disease or moral failing; by their logic, our taste for foreign goods leads us to waste our foreign exchange by supporting other economies to the detriment of our own.

But if importation is a disease, Nigeria is only mildly afflicted as we do not import much. In 2017, Nigeria ranked 58th out of 221 countries with $34.2 billion in imports, compared to China ($1.54 trillion) and South Africa (81.9 billion). Furthermore, we export more than we import: we’ve run a trade surplus in all but one year (2016) since 1995.

 

The Case for Trade

More importantly, buying goods and services from other countries is not a bad thing. Many Nigerians cook with palm oil, but how often do we harvest palm fruits and extract the oil ourselves? Instead, we make money by producing or selling other things, then buy palm oil with our earnings. It would be inefficient to make every single thing we use on a daily basis from scratch; trading with other people allows each person to specialise, produce what they do best, and purchase everything else from others.

International trade is similar: it would be inefficient if every country tried to manufacture every single item its residents consumed. Most countries do not have crude oil, which is why Nigeria exports it, and we import toothpicks from China and Germany because they are able to produce large quantities at a lower cost.

Admittedly, the gains from trade come at a cost.

We get access to cheaper goods, but domestic producers who make the same product at a higher cost may have to lay off workers or even go out of business. Traditionally, economics assumed that these workers just move to thriving industries, but experience suggests that does not always happen. For example, in Nigeria, the oil sector, which drives most of our exports, is not labour-intensive, hiring less than 0.2% of the labour force despite producing about 10% of national output.

Knowing this, it may be reasonable to curb imports—at least temporarily—to help other industries expand. Alas, this idea of import substitution, while theoretically appealing, has not served Nigeria well in practice.

 

A Tale of Fruit Juices

The fruit juice industry is often held up as a poster child for import substitution in Nigeria. After the Obasanjo administration banned packaged fruit juice imports in 2002, domestic fruit juice production grew from 192 million litres and ₦26 billion in sales in 2004 to over 600 million litres worth about ₦280 billion last year (2018). 

But how strong has the industry become after almost two decades of protection? If the import ban was lifted tomorrow, could Nigerian fruit juice companies compete with foreign alternatives? The sector’s exports give us a clue: if our products are internationally competitive, then other countries would import from us. Nigeria’s fruit juice exports (including concentrate) have generally been below ₦1 billion. This is hardly a triumph: fruit juice exporters in Ghana have achieved five times higher sales without the help of an import ban.

Another way to look at it: protectionism in the industry has not led to an expansion of fruit production in the country. Instead, most packaged fruit juice in Nigeria is made by adding water to imported juice concentrates and packaging the mixture for retail. In short, the ban did not really reduce imports, it simply shifted the composition of imports from packaged fruit juice to juice concentrate. 

Some would argue that the next step would be to also restrict juice concentrate imports, in the hopes that it will force manufacturers to source from local providers. But let's pause for a moment and ask ourselves: why are fruit juice manufacturers importing concentrate instead of sourcing locally? They do so because local fruit production cannot meet the demand for fruit juice manufacturing, and poor transportation and handling facilities limit domestic juice concentrate production. Placing restrictions on imported juice concentrates without addressing these issues may cause fruit juice producers to shut down.

 

Costly Protection

The story is the same for many other products, from rice to textiles to tomato paste: foreign competition has not been the primary impediment to Nigeria’s domestic production. Our problems lie much closer to home. The Nigerian government’s overwhelming focus on protectionism merely masks its inability or unwillingness to tackle the more pressing problems that plague industrial development in the country: inadequate power and transportation infrastructure, insecurity and bureaucratic hurdles that the government itself imposes.

We need to recognise that the cost of import restrictions goes beyond higher prices for foreign goods. Every naira that customs spends chasing down smugglers is money that could be spent building railway infrastructure, improving port efficiency, and other strategies to meaningfully tip the scales in favour of business growth. Lowering tariffs and replacing import bans with tariffs would also reduce the loss of government revenues to smuggling.

Furthermore, by focusing too closely on avoiding imports, we miss out on opportunities to increase exports. Treaties like the AfCFTA could increase import competition but would also open up other African markets to our exports. Current import restrictions also introduce delays and create room for corruption in our ports, reducing the prospect of Nigeria becoming a trade hub in West Africa as Singapore has become for the world.

Instead, countries like Togo and Côte d’Ivoire are poised to reap these economic gains. Finally, promoting the idea that imports are bad hurts domestic businesses like fruit juice producers that hire thousands of people and rely on imported raw materials that they cannot reasonably obtain within Nigeria.

 

Smarter Trade Policy

At the same time, it would be naïve to pretend that trade protection is never necessary. Several countries subsidise production, giving their exporters additional advantages on the international market. For example, agricultural export subsidies in the EU and U.S. and more recently, China, Thailand, and India have depressed global commodity prices for foods such as livestock, corn, wheat, and rice. This means that even if producers in these countries are not more efficient than Nigerian farmers, they can charge lower prices on the international market because government subsidies make up for lost revenues.

However, our current approach to trade policy uses a sledgehammer where a scalpel will do. If some chicken exporters from the EU price their products below cost to undercut Nigerian domestic producers, it makes no sense to impose a tariff or ban on all chicken imports. Trade remedies such as anti-dumping and countervailing duties enable countries to target exporters who have unfair advantages without contravening trade agreements. Unfortunately, due to the technical expertise needed to use these measures, South Africa and Egypt have been the only African countries to apply them effectively.

In 2010, Nigeria took steps towards setting the necessary legislation with a proposed anti-dumping bill, but that process has since stalled. If we hope to compete in an era of globalisation, we need smarter trade policy that limits the downsides of trade exposure, without blocking the benefits.

 

Follow this Writer on Twitter @Ebehi_Iyoha. Subscribe to read more articles here

Ebehi Iyoha

Ebehi Iyoha

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