Europe’s EPA’s and their potential harm to Africa’s industrialization

By Rick Rowden

In order for Africa to fulfil her economic potential, she needs to industrialize – a point that nearly everyone agrees with.

Yet despite this broad consensus, when it comes down to the specific policies needed there remains widespread disagreement. The recent refusals of Nigeria and Tanzania to sign on to the European Union(EU)’s “proposed free trade deals”, or Economic Partnership Agreements (EPAs), are the starkest manifestation of diverging agendas.

Nigeria has consistently opposed the EPA for west African regional grouping ECOWAS.
However Tanzania’s last minute decision in July to back away from the EPA for the East African Community (EAC) region stunned European negotiators.

Most African countries currently have duty free access to the EU single market for their goods under several iterations of the Lomé Convention. The new EPAs would, within a decade, give similar tariff-free access for about 80 percent of EU exports into African markets.

Europe has warned that African economies could lose Lomé preferences if EPA deals are not concluded.

Proposed EPAs undermine African industrialization strategies

Part of the answer links back to the drive for industrialization. Both Nigeria and Tanzania recently adopted ambitious industrialization plans, and new governments in both countries appear more genuine in their desire to implement them.

And in both, policymakers claim the rules and restrictions in the proposed EPAs would undermine these strategies.
The popularity of free trade over the last 30 years has made it standard for donor agencies and trade negotiators from rich countries to press developing countries to adopt free trade. The EPAs follow on these assumptions.

Nigeria and Tanzania appear to be questioning the prevailing wisdom. Instead, they are looking to the historical record.
Contrary to today’s free trade ethos, many economic historians point to a basic rule of thumb. In cases as diverse as the UK, Europe, the United States, Japan, South Korea and China, today’s rich countries only lowered their trade barriers once domestic manufacturing had become competitive in world markets – not before.

Contrary to the current popularity of the notion of comparative advantage for development – the idea that under free trade countries will benefit by specializing in producing goods they can offer at a lower cost than competitors – historical best practices from today’s rich countries show that it is not a good idea to only focus on agricultural and extractive industries. These tend to suffer from diminishing returns over time.

Diversifying into manufacturing and services can provide increasing returns. To do so successfully, many industrialized nations intervened aggressively in their economies and trade relations using a variety of industrial policy tools.

Many of these have since been discouraged or forbidden by today’s free trade consensus.

Today, industrial policy is still, in many circles, a dirty word. But industrial intervention cannot be fully written off as a failed concept. Industrial policies in Africa and Latin America in the 1960s and 1970s typically failed because they were applied inappropriately, driven by corruption or were too inwardly focused on small domestic markets, neglecting the need to develop international competitiveness.

By contrast, east Asian countries developed strong institutions that enforced strict rules for industry subsidies and trade protection. These got cut off from them when they failed to meet performance targets. Their industrialization strategies were internationally oriented.

These examples should tell global policymakers more about how industrial policies should be implemented – not if they should be implemented at all.

To get industrial policy right, Nigeria and Tanzania need to build new institutions with more independent actors empowered to play an enforcement role – as was done successfully in east Asia.

Of course, the world has changed dramatically since the UK, Europe and the United States industrialized in the 19th century. But evolving the policies that worked for the 21st century seems more beneficial than phasing them out altogether.

Protecting nascent industries

The main reason cited by Nigerian and Tanzanian officials for rejecting the EPAs – that they undermine local industrialization – are consistent with these historical lessons.

Not only do officials worry that the EPA’s proposed tariff reductions would pose a drain on vital revenues needed for annual budgets, but both countries are concerned that dropping tariffs would destroy local industries – a view supported by research by think tanks such as the Washington D.C.-based Wilson Center.

“Our experts have established that the way it has been crafted, the EPA will not benefit local industries in east Africa. Instead it will lead to their destruction as developed countries are likely to dominate the market,” Tanzania’s foreign affairs permanent secretary Aziz Mlim stated.

Tanzania also points to a rule in the proposed EPA that would outlaw its use of export taxes on raw materials. This would deny them a standard industrial policy that was used by all of the rich countries to keep raw materials at home and available for use by domestic manufacturers.
For example, Tanzania banned exports of mineral sands from gold mining on August 1. This is permitted under World Trade Organization (WTO) rules, but would not be allowed under the EPA.

Rather than exporting the sands – to be processed into tin, copper and silver abroad – Tanzania’s president John Magufuli called for processing plants to be built in Tanzania and to further develop markets for copper and silver, which in turn would create jobs for Tanzanians, and positively benefit the local economy.

Indeed, a number of EU trade policies are quite clear in their intent to use trade deals such as the EPAs to open up access to raw materials for use by European high-tech manufacturers.

EPA’s would undermine African regional economic integration

There is also the issue of African regional economic integration.
While the EU claims the EPAs would support the region’s integration, others disagree, including former Tanzanian president Benjamin Mkapa. He fears that locking in old North-South trade flows under the EPAs would undermine recent efforts at building new South-South regional trade ties.

Drawing on data that shows African countries buy more manufactured goods from one another than do others (most of the EAC’s exports to the EU are primary commodities), Mkapa says that intra-African trade is far more important for the region’s aspirations to industrialize. “The EU market plays almost no role in this,” he concludes.

Nigeria’s concerns are similar. President Muhammadu Buhari recently reiterated his belief that EPA rules work against the national industrialization strategy during a special session of the European Parliament in February.

Nigeria does not need an EPA “until it has been adequately industrialized and is able to trade industrial goods competitively”, Frank Jacobs, president of the Manufacturers Association of Nigeria, emphasized in a recent interview.

For now, it appears that the impasse is set to continue. Tanzania and Nigeria are determined to take a different approach – using trade protection first, then adopting free trade later. Their next moves will be watched closely.

Rick Rowden is a Doctoral Researcher with the Center for Economic Studies & Planning at the Jawaharlal Nehru University, in New Delhi, India. The original version of this article was published in This is Africa.