Europe’s current troubles with the Euro should not detract from its success in liberating intra-regional trade: this is a model worth Africa emulating. The issue is timely since the African Union has a summit on trade and regional integration later this month. Regional integration is the ideal topic for the European Commission in its relations with Africa. Yet paradoxically, in recent years it has been urging the opposite: trying to pressure African governments into individual trade deals that would fracture Africa’s regional trade groups. Fortunately the Commission now has an opportunity to get back to a more appropriate approach.
The heart of the problem is that some African countries are classified by the United Nations as ‘Least Developed’ while others are not. The criteria for being classified as ‘Least Developed’ lack economic justification, and are indeed so bizarre as to beggar belief. They have been adopted by the WTO only because they do not need to be negotiated. Under WTO rules, LDCs can benefit from non-reciprocated targeted market access concessions, but non-LDCs cannot.
In turn, the European Commission has been concerned to be WTO compliant in any of its negotiations with Africa. Its non-reciprocal scheme, ‘Everything but Arms’, applies only to LDCs, while its more general approach on trade relations with Africa, ‘Economic Partnership Agreements (EPA)’, requires reciprocity: Europe will only liberalize in favour of those African countries that liberalize preferentially in favour of Europe.
African countries typically have quite high protection, so liberalizing in favour of Europe would hand Europe a terms of trade gain: European companies would be able to price their goods at the world price plus the tariffs paid by non-European competitors. Hence, reciprocity is contentious and the negotiations have been stalled for years. Indeed those countries that also qualify for LDC status could get the same market access without offering reciprocity by staying out of EPAs. Understandably, Africa’s regional economic groupings are defined by geography, and so cut across the arbitrary distinction between LDCs and non-LDCs. By insisting on this distinction, the European Commission is carving fissures across Africa’s incipient replicas of the European Union.
Yet the ‘compliance’ with WTO rules with which the Commission is so concerned is not a simple matter: rules depend on interpretation and negotiation. When the USA devised its trade relations with Africa, it acted first and negotiated later. Its Africa Growth and Opportunity Act applied equally to both African LDCs and non-LDCs. Only post-enactment did it seek a WTO waiver, which it eventually achieved. The European Commission wants to avoid the need for a waiver, but this still leaves scope for approaches which break down this damaging distinction.
Europe’s current opportunity to rethink is the revision of its Generalized System of Preferences (GSP). Under WTO rules GSP concessions are not reciprocal. While they cannot discriminate on the basis of geography, they are by definition a system of preferences, and so need some defensible, non-geographic criterion for eligibility. It would not be difficult to devise criteria for eligibility that were more defensible than those that define LDC status.
A good start would be to ground the criterion for inclusion in a proper economic analysis of the role of trade preferences in fostering development. Asian experience has demonstrated that light manufacturing can be a major source of job creation. During the next decade China will be off-shoring its more labour-intensive manufacturing, creating a unique opportunity for late-comers to break into global markets for manufactures.
However, breaking-in remains difficult. Modern manufacturing is organized in clusters of firms, each cluster specializing in a narrowly defined task and reaping scale economies. Clusters are hard to form because the first firms will be uncompetitive until other firms join them. Europe’s market access program should be designed to pump-prime this process of cluster formation: it can do so by giving preferences to those countries that have yet to break into global markets for manufactures.
A cut-off threshold of manufactured exports per head of population below which DFQF (duty-free, quota-free) access would be granted would end the divisive and arbitrary distinction that the Commission is currently insisting on between LDCs and non-LDCs. Whether such a threshold would be compatible with WTO rules as a criterion for eligibility is currently a grey area: it has not been tried so nobody knows. However, it would be nigh-on impossible to justify the LDC criteria while denying the manufacturing threshold, since the latter is manifestly better analytically grounded in the economics of development.