'Protectionism limits AGOA at a time when its benefits need to be spread'

'Protectionism limits AGOA at a time when its benefits need to be spread'
Published
Tuesday, 31 July 2018 ~ MICHAEL ADE

Opinion piece: Concerns remain following a recently concluded two-day conclave on July 11-12 in Washington DC, in which delegates deliberated on mutually beneficial trade and investment opportunities under the banner of the 17th African Growth and Opportunity Act (AGOA) forum.

The forum, which brought together representatives from the US and eligible African countries to forge new strategies for deepening US-Africa trade and investment, occurred at a time when the international trade order is at a crossroads.

There are doubts about the effectiveness of the World Trade Organisation (WTO) in ensuring that multinational trade flows as smoothly, predictably and freely as possible, with advanced and developing economies alike increasingly pursuing enhanced inward-looking protectionist trade policies.

This is belligerent, with disregard for basic international trade principles (including the benefits of comparative costs advantage), and could negatively affect economic productivity in underdeveloped countries in the medium to long term.

As the ambassadors from eligible sub-Saharan African countries and appropriate regional organisations met with their counterparts from the US, including the US state and trade representatives, they must have been conscious of the elephant in the room. The obvious problem delegates may have only whispered in the corridors during tea or coffee breaks is the ongoing trade war initiated by the US, which is considered a principal initiator of both the Agoa legislation and its corollary, the Agoa forum.

The Agoa legislation provides duty-free access to the US market for almost 7,000 products from more than 40 eligible sub-Saharan African countries, including SA. It also aims to expand and deepen US trade and investment relations with the region, encourage regional economic growth, development and integration and facilitate the integration of the region into the global economy.

Given that an enhanced trade war may prompt large-scale capital outflows, destabilise global markets and reverse a promising global economic outlook, the US’s action in triggering such a potentially devastating tit-for-tat trade war really throws a spanner in the works. A trade war and resulting exogenous supply shock characterised by oil price shocks, commodity price shocks and currency crises, to name a few, are counterproductive to the objectives of the Agoa forum.

Given the important role played by the US over the years in guaranteeing international trade order and its global market power, the latest actions and utterances by President Donald Trump’s administration are cause for concern.

The fundamental questions to ponder over in the event of a US-triggered trade war are whether the Agoa forum still has any relevance to the region and whether there are any genuine plans to enable the forum to attain its objectives. These concerns are raised given the disproportionate and arguably irrational manner in which the US has proceeded with the implementation of import tariffs, tacitly supported by a bizarre and subtle diplomacy by the WTO.

Despite efforts by several countries to initiate a WTO dispute complaint against the US-imposed trade, steel and aluminium duties, it seems the rhetoric from Trump’s administration is gaining momentum. Consequently, and understandably, many countries have resorted to retaliatory or re-balancing tariffs to protect their interests, sometimes with undesired consequences, highlighting the demerits of egotistical protectionist trade policies on global value chains.

However, while affected countries retaliate by carefully ordering tariffs on American goods to cause economic or political pain, the negative consequences are not always equipollent, given the varied sizes of the economies involved and different economies of scales in production. Some countries will invariably suffer more than others. Given that there are few winners in an all-out trade war like the one that enveloped the global economy in the 1930s and intensified the Great Depression, stoking the war games will dilute existing comparative advantages in trade to African countries as the opportunity costs for producing a unit of output become higher, also negatively impacting on the Agoa objectives.

Despite SA being the largest non-oil exporting country among the top 10 ranked Agoa countries, its export volumes to the US from motor vehicles parts and accessories and metal products (including iron and steel products) will be affected by the US import tariffs. The remaining nine large non-oil exporting African countries, which generally export apparel and clothing, agricultural or other manufactured edible products, will also be affected via distortion in global trade flows and increasing input costs.

bday graphic

Source: Business Day newspaper graphic

 

Either way, Africa will be affected by the section 232 tariffs [see related infographic on S232 steel and aluminium tariffs] ignited by the US under the guise of safeguarding its national security, or by section 301 tariffs aimed at correcting unfair trade practices or trade against the US. The status quo compels SA exporters to seek new lucrative markets (with additional logistics constraints), completely absorb the costs arising from the tariffs increases, split the difference or pass on cost increases in the form of higher prices into the US market (in effect increasing their product prices), thereby rendering their products less price competitive in the US.

Moreover, the current situation may also undermine the global trade system, cause a possible distortion in trade flows and create uncertainty, which may lead to non-renewal of expiring contracts and purchase orders by buying companies in the US. This is because American industries that rely on steel and aluminium products as input may seek greater product certainty from other non-African producers.

Concurrently, the possible imposition of a 25% tariff on imported cars from Asia will affect the international supply chain of the local steel industry, which exports a large share of its products to Asia. Interestingly, despite the rest of Africa being the foremost exports destination for the broader metals and engineering cluster’s products, Asia remains the prime exports destination for SA’s iron and steel sub-industry products, with exports valued at R22.6bn recorded during the first five months of 2018. This excludes exports to the US during the first four months of 2018 from the sub-industry, of $77.6m.

Irrespective of the quandary arising from the trade and imports tariffs, the immediate challenge for both the US and Agoa beneficiary countries should be how to strengthen and deepen Agoa’s benefits beyond 2025. Given that the US is also facing a challenge on how to build on Agoa in a way that will increase American presence in African markets, it needs a comprehensive trade and investment strategy that ensures not only that Agoa achieves its full potential, but also that it supports American companies as they pursue commercial success in Africa.

With available statistics placing the US investment position in sub-Saharan Africa at less than 1% of US direct investment worldwide, it is evident that sustained import tariffs on African products will cause a reduction in economic productivity, reduce the buying power of African citizens and, ultimately, negatively affect the demand for imported US goods, among other imports, on the continent. A permanent imposition of import tariffs on exported products to the US will adversely affect the local steel industry and the broader SA economy and significantly constrain the economic development potential of most African countries with low market power (despite the existence of Agoa).

Although the winners in the short term are the US steel and aluminium industries and the US government, the benefits may not be the same in the long run as other countries retaliate and global demand tapers off.

The Agoa forum, therefore, provides an appropriate platform for enhanced co-operation, and access to the US market, credit and technical skills by African countries. Contemporaneously, Africa in effect presents great potential for increased demand for American goods, especially given that a small number of African countries currently account for a large share of the total for both imports and exports. Instead of limiting the progress of Agoa via import tariffs, more support is needed in diversifying its benefits to include more African countries and products, promoting a win-win scenario for both Africa and the US.

  • Dr Ade is chief economist at the Steel and Engineering Industries Federation of Southern Africa.

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