Nigeria's Trade Facade

Every Nigerian entrepreneur dreams of one thing: seeing their products displayed across stores all over the world, patronised by locals and foreigners alike. Popular Hip Hop artist Wizkid captured this desire in the lyric, “my music travel, no visa.”

Unfortunately, for most entrepreneurs, especially of the small and medium variety (SMEs), the export dream remains just that: a dream. Many obstacles hamper the fulfilment of this dream; inadequate infrastructure, high cost of capital, steep access to market, among others.

Easing Trade Flows

To an extent, this pain is shared by entrepreneurs all over the world, an admission the World Trade Organisation (WTO) makes and attempts to rectify by creating the Trade Facilitation Agreement (TFA), an agreement to simplify, modernise and harmonise export, and import processes among member countries. Promisingly, Nigeria ratified the agreement in January 2017.

The WTO projects that the TFA would reduce total trade costs by over 13% across all income groups, simply by streamlining trade flows across borders. The agreement, the first of its kind, is the largest and first multilateral global trade deal in over two decades of the WTO’s existence. It seeks to accelerate the movement, release, and clearance of goods, both at their destination and in transit. Naturally, this requires support from Customs and similar national agencies.

The TFA should cut the average time to import goods by over a day and a half, while export time would be reduced by nearly two days, equivalent to a 47% and 91% improvement in import and export times respectively. Global merchandise exports should jump as a result – by $1 trillion, according to WTO estimates.

The TFA Challenge

By reducing the bottlenecks that obstruct trade flows, the TFA should help ease trade flows for countries like Nigeria, though it is not a silver bullet for unlocking our trade potential.

Most of Nigeria’s export proceeds come from crude oil sales – over 80% in 2016 – and even non-oil exports are largely primary commodities such as cocoa beans or crude products such as natural gas. In comparison, though refined petroleum products similarly dominate imports, Nigerians do spend foreign exchange on a more diverse range of goods. In 2016, mineral fuel imports accounted for 30% of imports while manufactured goods accounted for 10%. Further investigation also shows that Nigeria imports a bulk of raw materials for manufacturing, meaning the countries industrial base is reliant on secure trade flows.  

Realistically, Nigeria’s current trade profile may not be ideal for the TFA. As a positive, the cost of imported raw materials will reduce, potentially boosting domestic production and easing inflation in the country. However, the TFA could also encourage a stronger influx of imports to the detriment of local content and the efforts of Nigerian entrepreneurs. Whether you believe Nigerians consume too many imported goods or you are more sceptical about the case for “home-bias” in production, few countries have properly industrialised without a clear strategy to support local production when operating an open economy.  

Economists have begrudgingly accepted that trade openness has costs as well as benefits so implementing sensible policies – in tandem with the TFA – would limit the damage done by increased openness. In addition, developing countries are projected to increase the number of products they export by 20 percent with the TFA. For Nigeria, non-oil export should be the focus. For non-oil exports to increase, an inward commitment must be made by the government to increase the capacity of entrepreneurs to boost trade.

Developing the Undeveloped

The Made in Nigeria campaign pushed by the President Buhari administration and inadvertently satirised by the calls to #BuyNaijaToGrowNaira remains bovine given the current state of the business environment in the country. Some progress has been made, particularly, steps to improve the ease of doing business in the country by reducing bureaucracy and strengthening transparency. A lot more work is required as inadequate infrastructure, undetermined quality standards, and a harsh monetary and foreign exchange environment still make it a difficult time to be doing business in Nigeria.   

Although the TFA is a welcome development, efforts at home should be weighted towards sustainably stimulating local production by focusing on SMEs. Cheaper and more accessible credit, improved infrastructure, and more Research & Development are just some of the more obvious macroeconomic initiatives that could make a big difference here.  

The early successes of the Presidential Enabling Business Environment Council (PEBEC) show that Nigeria can indeed address some of these issues. This is heartening, but a more cynical mind would highlight the likely role of corruption as such initiatives are scaled up. For example, ordering the removal of illegal borders within a 40km radius to the border is one thing, but how about addressing the more informal yet more pervasive “checkpoints” set up by the Nigerian police?

What the TFA needs

The TFA might ease trade flows, but its benefits will be dampened if Nigeria does not diversify its exports. Meanwhile, an unchecked influx of foreign goods – “dumping” – could further weaken domestic industrial capacity. Put simply, the country needs to build a comparative advantage in industry in order to truly benefit from the TFA.

For too long, Nigeria has looked to improve trade without improving what it wants to trade. Creating competitive businesses by growing strategic industries should be the focus at the moment. The TFA faces the same fate of a two-sided scale; until exports become more competitive, the import side will keep winning, and all growth efforts will prove abortive.