Reduction in tariffs will boost intra-Africa trade.

African Leaders at the 2018 African Continent Free Trade Area Conference. 

Damali Ssali - Opinion first published by The Independent Magazine. 

There are several factors that influence the value and volume of trade. However, tariffs on tradeable goods and services are one of the most significant factors.

International trade grew dramatically in the second half of the 20th century. As an example, total global trade in 2000 was 22 times greater than it had been 1950. 

This increase in multilateral international trade occurred when trade barriers, especially tariffs, were significantly reduced or in some cases eliminated across large trade blocks in Asia, America and Europe.Tariffs are taxes levied on imports and exports between states with the aim of generating government revenues and protecting domestic industries.

Sometimes, depending on the tax policy of the country, a tariff could be set as high as 60%. This is usually to protect a young industry that is considered as very important to that state.

Other times tariffs are imposed by states, against products and services of another state, to settle scores. The current trade war currently going on between the United States and China is one such tariff war waged between states.  

In 2017, the United Nations Conference on Trade and Development reported that tariffs, on tradeable goods and services, between the developed states averaged at 1.2%.

This is low compared to the average tariffs, on tradeable goods and services, between African countries, which stand at 8%.  Moreover, tariffs remain relatively high in important sectors, including agriculture, apparel, textiles and leather products.

Unfortunately, these high tariffs make it easier for African countries to trade with Europe and the United States than to trade with each other.

As such, intra-Africa trade is just 15%. This means that of all total trade on the African continent, only 15% is between African countries.

On the other hand, over 60% of total African trade is with countries that are oceans away from the continent. By way of comparison, intra-trade levels in Asia stand at 58% and in Europe at 67%.

A recent United Nations Economic Commission for Africa report indicated that if tariffs are significantly reduced, or eliminated, intra-Africa trade would increase to more than 50% of total trade on the continent.

That said, there is a legitimate concern that if tariffs are significantly reduced or eliminated there will be a reduction in government revenues. This in turn would curtail the governments ability to provide public goods and services to the general population.

However, the reduction in government revenues, from tariffs, would be made up with an increase in income tax and value added tax. This is because a reduction in tariffs would lead to an increase in the value and volume of trade, profits, investment, productivity, employment and disposable income.

The positive knock on effects of revenue from other non-tariff revenue sources by far outweigh the loss in revenue from tariffs.

With the coming into effect of the African Continental Free Trade Area (AfCFTA), which creates a single domestic market for goods and services of 1.2billion people, this is the opportune time to discuss the elimination of tariffs on continental trade.  

The AfCFTA seeks to reduce tariffs between African countries by more 90%. This will help to reverse the trend where more than 75% of all exports from the continent are extractives, namely oil and minerals, in raw form. The goal is to secure sustainable economic growth by shifting away from the volatility related to exporting raw materials, to the stability of exporting industrialised goods.

The significance of the AfCFTA cannot be overstated. It will be the world’s largest free trade area since the establishment of the World Trade Organization and it is estimated that if successfully implemented, Africa will have a combined consumer and business spending of USD6.7trillion by 2030.

The AfCFTA will have a big impact on manufacturing, tourism, intra-African cooperation, and economic transformation. The International Monetary Fund reports that, under the AfCFTA, Africa’s expanded, and more efficient goods and labor markets will increase the continent’s overall ranking on the global competitiveness index.

However, the immense potential of the AfCFTA will only be realized if tariffs are eliminated or significantly reduced and this must be prioritised at the very start of the implementation phase in 2020. The schedules of tariff concessions of members states must be submitted to the African Union and the negotiations on the rules of origin, for goods, completed.

The other main area of tariff elimination is in services, particularly, on investment, competition and intellectual property rights.

This is because services make a significant contribution to the manufacturing value chains and play a key role in logistics. Also, services make a larger contribution to poverty reduction than agriculture or manufacturing.

On the African continent, over 55% of the Gross Domestic Product is generated by services. However, African service providers face barriers to export services. As a result, African services exports contribute just 2% of global trade in services.

Therefore, there is a great opportunity for the AfCFTA to expand competitiveness in African trade in services by liberalizing the service sector through the elimination of tariffs on services.

Also, in view of the imminent implementation phase, member states must build the capacity of their trade missions and ministries to negotiate trade tariffs. This capacity building can start with the individual countries, to the regional economic blocks, such as the East African Community, and then consolidated at the AfCFTA secretariat.

The focus on tariff elimination will, not only, promote African development and catalyse the growth in the manufacturing and services sectors, but also, provide employment opportunities for the continent’s burgeoning youthful population. 

Damali Ssali is a Trade Development Expert at TradeMark East Africa.

 damali.ssali@trademarkea.com  

The Independent URL - https://www.independent.co.ug/comment-tariffs-and-intra-africa-trade/

EAC Joint Investment in Rail Transport Must be accelerated.

Opinion as published by The New Vision on 30th September 2019. 

Damali Ssali.

The need, cost and quality of multimodal transport is increasingly becoming relevant for the participation of developing countries in the globalized economy.

A general conclusion drawn from research on transport trends worldwide is that a doubling of transport costs leads to a drop in the economic growth. This is mainly because the prices of imported products increase, and export revenues decrease.

Further, empirical analysis of any economy’s ability to manage complex multimodal linkages indicates that a 1% improvement in the land transport performance index would lead to a 0.5% increase in overall trade and a 3% increase in exports. 

Therefore, the main task of transport decision makers is to cause improvements to multimodal transport performance so that national economies benefit from the significant trade and export gains.

An effective multimodal transport system is one where there is integration, and cross interplay, by the various modes of transport including air transport, marine transport and land transport. Land transport comprises of road, rail and pipeline transport. 

Almost all major East African Community (EAC) economies are currently well serviced by air transport and have functioning state carriers, such as Kenya Airways, Tanzania Air, Rwanda Air and most recently Uganda Airlines.

In respect to international marine transport, the EAC is well served by the two main ports of Mombasa and Dar-es-Salaam even though the inland water transport system is largely underdeveloped. Similarly, when it comes to inland transport, rail transport continues to substantially lag behind road transport.

The above situation analysis makes it very difficult for the EAC to reap the substantial benefits of a multimodal transport system largely due to an absent of a competitive regional rail system.

Each transport mode is characterised by a set of technical, operational and commercial characteristics that give it both a competitive advantage and complementary role to other modes.

Technical characteristics relate to attributes such as speed, capacity and motive technology while operational characteristics involve the context in which modes are operated, including speed limits, safety conditions or operating hours.

Rail transport for example is traditionally linked with heavy industry. Containerisation has improved its flexibility, by linking it with road and maritime transport modes. Rail transport is by far the best inland transport mode for trade offering the highest capacity with a 23,000 tons fully loaded coal unit train being the heaviest load ever carried.

The continued under-development of the rail transport mode means that road transport is burdened by a disproportionate share of bulk trade movement. This results in not only transportation inefficiencies but also in premature road damage from these heavy loads calling for avoidable capital investments in maintenance and rehabilitation. This inevitably results in higher transport costs that diminish the economic potential of the EAC.

After many years of decline, due to neglect and underinvestment, the railway sector has the potential to play an important role in the future development of the EAC not only for long distance freight and bulk cargo but also for urban transport in major cities.

However, the capacity of the existing railway network is limited by several factors including the low velocity at which the trains can operate, limits to the permissible axle loads and gauge differences between the standard gauge and meter gauge.

According to the East African Railway master plan, with investment, the current traffic on the existing network has the potential to increase to over 21 million tonnes by 2030, with an annual growth rate of over 6.7%. This growth is going to be driven partly by the growth in GDP of the member states and partly from new traffic from the oil sector developments in both Uganda and Kenya.

Investment in the railways of Uganda, Kenya and Tanzania therefore will have a big positive impact on the economic development and social environment of these countries. The consequential benefits of reducing road maintenance and rehabilitation costs, road accidents and road congestion alone will jolt up the regional GDP.

Further, regional connectivity will be enhanced through improved access to the ports of Mombasa and Dar-es-salaam, and additional modal connections to say Rwanda, South Sudan, Burundi and Eastern Democratic Republic of Congo.

Therefore, if the EAC is to remain the most integrated regional block with some of the world’s fastest growing economies, it must develop a framework to attract joint investment in rail transport development.

New Vision Link - EAC joint investment in rail transport must be accelerated.

Damali Ssali is a Trade Development Expert.

damali.ssali@gmail.com