TWN Info Service on WTO Issues (Oct03/9)

28 October 2003

Third World Network

Dear friends and colleagues


At the recent Trade and Development Board meeting of UNCTAD, the UNCTAD Secretariat distributed an interesting report on the recent trade performance of  Africa, highlighting several serious problems.

Below is a article on this report, written by Kanaga Raja.  It was published in the South North Development Monitor (SUNS) of 15 October and is reproduced here with permission of the SUNS.

With best wishes

Martin Khor



African trade performance bleak, says UNCTAD report

By Kanaga Raja, South-North Development Monitor, Geneva, 15 October 2003

Africa’s share in world trade has been falling consistently since 1980 and the continent remains heavily dependent on the export of a few primary commodities, most of which have suffered a decline in prices leading to large terms-of-trade losses, a report on economic development in Africa has brought out.

The report (TD/B/50/6) by the UN Conference on Trade and Development (UNCTAD) has been presented to the agency’s Trade and Development Board meeting here till 17 October.

Unlike other developing regions, Africa has by and large not been able to diversify into manufactures or market-dynamic products and has even lost market shares for its traditional exports, the report noted, adding that “market-oriented policies have not been able to reverse the situation.”

The report suggests that in addition to the provision of better market access and reductions in subsidies for products competing with African exports, external resources are required to compensate for losses and to fill the resource gap in order to ensure adequate investment in the development of human and physical infrastructure, institution building and diversification.

While trade (merchandise imports plus exports) as a share of GDP for Africa (excluding South Africa and Nigeria) increased from 45% to 50.4% between 1980/1981 and 2000/2001, on the whole, however, Africa’s share in world exports fell from about 6% in 1980 to 2% in 2002, and its share of world imports from 4.6% in 1980 to 2.1% in 2002.

UNCTAD says that this phenomenon has as much to do with the structure of international trade as with the composition of merchandise trade of Africa, the trade policies applied there in the past 20 years, and market access and agricultural policies in industrial countries.

While the structure of developing country exports has changed significantly over the past two decades - where 70% of these exports are manufactures - Africa has hardly benefited from the boom in manufactured exports.

Its share in world merchandise exports fell from 6.3% in 1980 to 2.5% in 2000 in value terms. Similarly, its share of total developing country merchandise exports fell to almost 8% in 2000, while its share in manufactures remained at below 1%.

By comparison, Asia’s share of global merchandise exports increased from 18% in 1980 to 22% in 2000, while its share of total developing country merchandise exports increased from almost 60% to 72% over the same period. Similarly, its share in global manufactures trade increased threefold, reaching 21.5% in 2000.

Even though Africa has remained commodity-dependent, it has fallen behind other regions in the world in exports of non-fuel primary commodities.

The report said that these trends indicate that most African countries have been losing market shares in commodity exports to other developing countries, while at the same time most have been unable to diversify into manufactured exports.

The report attributes Africa’s difficulties to its inability to overcome structural constraints and modernize its agricultural sector, combined with the high cost of trading, as well as low investment in the agriculture sector resulting in it being unable to increase agricultural productivity.

As a result, it has lost its competitive advantage in producing cocoa, tea and coffee vis-a-vis the new and more efficient producers in Asia and Latin America. Moreover, the loss of market shares for cotton and sugar is largely due to high subsidies and domestic support for less competitive producers in the US and EU.

In Africa, the only important export item among manufactures in world trade is undergarments. Even then, its share in total African exports is only 1.7% with Mauritius and Swaziland accounting for over 85% of total exports of this product.  Seventeen of the 20 most important export items of Africa are primary commodities and resources-based manufactures.

The report notes that market access remains a problem for African exports, as most of the tariff peaks are in agriculture, including processed products. For example, coffee beans and final processed coffee are subject to tariffs of 7.3% and 12.1% respectively in the EU, 0.1% and 10.1% in the US and 6% and 18.8% in Japan.

Moreover, average agricultural tariffs are also much higher than tariffs on manufactures despite conversion of NTBs to tariffs during the Uruguay Round. In the Quad countries (the US, EU, Canada and Japan), of tariffs covering 86.1% of tariff lines, agricultural tariffs average 11% compared to 4% for manufactures.  Furthermore, industrial country tariffs display high peaks (or high protection) for specific products. Tariffs peak at about 1,000% in South Korea, 506% in the EU and 350% in the US.

While the report said that the US’ African Growth and Opportunities Act (AGOA) in 2000 and the EU’s “Everything But Arms’ (EBA) initiative in 2001 is a welcome development in market access for Africa, it also pointed out that an analysis of the EBA in 2001 revealed little use of the scheme owing in part to the fact that the beneficiaries continued utilizing Lome protocols which arguably have less restrictive rules of origin than the EBA.

Also, an assessment of AGOA reveals that the additional benefits represent a modest expansion over the preferential treatment that sub-Saharan Africa already enjoys under the GSP. It is also contended that had it not been for the restrictive rules of origin governing market access under AGOA, its medium-term benefits would have been five times greater.

African countries depend heavily on a few commodities, which have suffered from both price volatility and secular decline since the 1960s. UNCTAD’s analysis of real commodity prices of 15 products of export interest to Africa between 1960 and 2000 suggests that bananas, copra, copper, coconut, coffee, cocoa, fish-meal, gold, sugar, tea and white pepper suffer from high price volatility.

Volatility of commodity prices aggravates difficulties in macroeconomic management and frustrates investment efforts because of uncertainty about overall economic conditions, including exchange rates, return on investments and import capacity, the report notes.

Between 1997 and 2001, the UNCTAD combined price index in US dollars fell by 53%; that is, commodities lost more than half of their purchasing power in terms of manufactured goods.

UNCTAD notes that a major explanation for the poor economic performance of the region in the past two decades is a significant loss of resources due to adverse terms of trade. The World Bank suggests that the cumulative loss resulting from adverse terms of trade over a period of almost three decades (1970-1997) for African non-oil-exporting countries (excluding South Africa) amounted to 119% of combined GDP of these countries in 1997, 51% of cumulative net resource flows, and 68% of net resource transfers to the region.

UNCTAD research indicates that if sub-Saharan Africa terms of trade had remained at 1980 levels, the share of the sub-continent in world exports would have been double its current level.

Coffee and sugar producing countries would have earned an additional $19 billion and $1.4 billion respectively, and West African cotton-producing countries would have earned an additional $1 billion if prices for these products during 1999-2002 had remained at 1998 levels, the report said.

Furthermore, terms-of trade losses have also contributed to the debt overhang of African countries. According to the IMF, “almost all countries hit hardest by falling commodity prices are also among the world’s poorest. All but two (Brazil and Chile) are classified as low-income countries by the World Bank; over half are [in] sub-Saharan Africa; and sixteen are Heavily Indebted Poor Countries.”

The UNCTAD report also notes that while African producers have incurred losses in foreign exchange earnings, traders and firms in the higher steps of the value chain have been reaping significant benefits.

In coffee, for example, the International Coffee Organization found that in the early 1990s earnings by coffee-producing countries were some $10-12 billion, while the value of retail sales was about $30 billion. Today, the value of retail sales is $70 billion while producers receive only $5.5 billion.

The asymmetrical character of power in the coffee value chain explains the unequal distribution of total incomes, the UNCTAD report emphasized.

In cotton, the World Bank estimates that in 2002, the world market price of cotton would have been more than 25% higher but for the direct support of the US for its cotton producers. Other estimates suggest that in 2002, cotton subsidies by the US and the EU have caused a loss of up to $300 million in revenue to Africa as a whole, which is more than the total debt relief of $230 million approved by the World Bank and IMF under the advanced HIPC initiative to nine countries in West and Central Africa in the same year.

The report goes on to suggest several policy measures that African countries could undertake to overcome the hurdles that they are currently facing.

Among these measures, the report suggests a bigger role for the state than is currently recognized in addressing commodity dependence in African countries. Governments have a critical role to play in providing extension services and reducing dependence by creating conditions that promote horizontal and vertical diversification towards higher-value-added products (such as fruits, vegetables, fish and seafood, grains and meats).

Similarly, governments are best placed to coordinate an integrated programme of “supply-side responses” effectively, as well as undertaking quality control.

To the extent that more advanced developing countries in Asia and Latin America with a relatively diversified economic base move from low-value agricultural commodities towards labour-intensive manufactures and higher-value-added dynamic products, a space would be created for the poorer countries in the production and export of agricultural commodities, and this depends, inter alia, on increased market access for these products.

Furthermore, non-tariff measures such as sanitary and phytosanitary technical barriers to trade, requirements and other contingency trade-protection measures should be applied in a manner that does not necessarily hinder the exports of African countries.

Such a process would be facilitated by greater liberalization of OECD domestic agricultural markets through a significant reduction, and finally elimination, of massive agricultural subsidies and support for commodities such as cotton, groundnuts and sugar, which are of export interest to Africa.

In the meantime, a mechanism is required at the international level to ensure that countries providing subsidies to their producers should compensate African countries for income losses arising from such subsidies on a pro rata basis, the report said.