Many African countries face a dilemma in the World Trade Organization’s (WTO) current Doha Round of trade negotiations. On the one hand, they want industrial countries to open their markets further, and, on the other, they are apprehensive about losing preferential access to these markets as a result of multilateral liberalization. How can African countries deal with preference erosion and pursue their interests under the Doha Round? A new IMF Policy Discussion Paper argues that they should seek greater market access—not only in industrial countries but also in developing countries—and strengthen their commitment to liberalization.
Where should Africa seek greater market access and for which products? Part of the answer lies in the continent’s pattern of trade, which has shifted over the past 25 years. While industrial countries have remained the continent’s dominant export market and intra-African exports have remained low, developing countries, especially those in Asia, have become the continent’s fastest-growing export market. Equally significant is the increasing share of Africa’s imports that come from developing countries (see chart). Moreover, these countries have become an important source of foreign direct investment and technology transfer, which are closely linked to Africa’s export industries, such as commodities and clothing. Assuming that these trends continue, Africa has an ever-increasing interest in trade reform in these countries.
Africa’s export composition, dominated by primary commodities, also has a bearing on the continent’s negotiation strategy in the Doha Round. Agricultural products account for over one-fourth of its total exports. This implies, first, that because most-favored-nation tariffs on most industrial goods in developed countries are already low, most African countries will probably benefit more from agricultural liberalization, at least in the long run. Members of the Organization for Economic Cooperation and Development (OECD), except for the European Union (EU) members, still maintain high protection against African agricultural exports. Therefore, the potential benefits of market access in the full OECD can be large. However, benefits are likely to accrue mainly to current net exporters of agricultural products. Indeed, some net agricultural importers may lose, particularly in the short to medium term, as a result of rising world prices following trade liberalization.
In the industrial goods sector, Africa generally faces low tariffs in Canada, the EU, Japan, and the United States but much higher tariffs in developing countries and many other OECD member countries. Thus, the potential benefits of improved market access for manufactures in developing countries are significant.
Perhaps the largest potential benefits for African countries will come from liberalizing their own trade. Despite steady cuts over the past decades, Africa’s tariffs are higher than those in other developing regions. In addition, only a fraction of its tariffs are bound (committed in the WTO), and, where they are, they are often considerably higher than their applied rates.
Quantifying the benefits
To what extent can African countries derive benefits from the Doha Round by liberalizing their own trade and from demanding greater market opening by their trading partners? Drawing on a recent World Bank study by Kym Anderson, Will Martin, and Dominique van der Mensbrugghe, the paper examines the Doha Round’s possible impact on African countries. The study simulates four trade liberalization scenarios that progressively broaden country and sector coverage and deepen tariff cuts to show how liberalization would affect African countries in each country group (industrial and developing) and sector (agriculture and industry).
Scenario 1: Only agricultural trade is liberalized. The average agricultural tariff is cut by 44 percent for developed countries as a group and by 21 percent for developing countries. Agricultural export subsidies are eliminated completely.
Scenario 2: In addition to the liberalization under Scenario 1, nonagricultural tariffs are cut by 50 percent in high-income countries, 33 percent in developing countries, and not at all in the least developed countries.
Scenario 3: Developing countries (including the least developed ones) fully participate in the Doha Round by reducing their bound (not necessarily applied) tariffs by the same percentage as the high-income countries in Scenario 2.
Scenario 4: Full liberalization.
What happens? Under Scenario 1, the bulk of the increased world income accrues to high-income reforming countries, which recoup the efficiency losses from their own policy distortions. The gains (largely coming from terms of trade improvement) for sub-Saharan African (SSA) countries are only $0.4 billion, less than 1/10 of 1 percent of their initial income. This result highlights the limitations of SSA countries’ reliance on improved market access in industrial countries during the Doha Round—even in the highly distorted agricultural sector.
In Scenario 2, the gains nearly double for SSA as a group, but some countries suffer a small loss. The latter outcome points to the possibility that some African countries stand to lose if the resulting increases in preference erosion in industrial countries are not offset by improved market access elsewhere. At the same time, the overall outcome highlights the importance of developing country markets, in which even moderate tariff reductions would significantly increase market access for the continent as a whole.
Africa’s own liberalization, along with that of other developing countries, is critical if the poorer sub-Saharan African countries are to achieve a positive Doha Round outcome.
In Scenario 3, the gains to SSA countries more than quadruple—to nearly 0.3 percent of their income—even though their ambitious cuts of bound tariffs do not reduce applied tariffs by much.
In Scenario 4, SSA’s gains would more than quadruple again, to more than 1 percent of its initial income.
Clearly, Africa’s own liberalization, along with that of other developing countries, is critical if the poorer SSA countries are to achieve a positive Doha Round outcome. The negative effects of preference erosion can easily be overcome if SSA countries reduce their applied tariffs—even if only moderately—by substantially lowering their bound rates. Liberalization by industrial countries is also important, but its impact is perhaps best seen in terms of their influence over the overall liberalization commitments in the Doha Round, as well as the direct market access they can offer to African countries.
Africa’s trade with developing countries has grown markedly over the past two and a half decades.
Citation: 35, 6; 10.5089/9781451967951.023.A010
Data: IMF, Direction of Trade Statistics.
The importance of tariff cuts by developing countries outside SSA is also evident from their impact on Africa’s exports. In Scenario 2, without the combined expansion of agricultural and nonagricultural exports to developing countries, including SSA countries themselves, the increase in agricultural exports to high-income country markets would not be able to completely offset the decline in industrial goods exports—a result that reflects the effect of preference erosion. Equally important, developing countries would provide nearly half of the import increase that SSA countries need if they are to achieve the overall positive income result under this scenario.
What it all means
Preference erosion would be an inevitable result of Doha Round liberalization, but a defensive strategy to minimize erosion will provide no lasting solution. A comprehensive reduction in trade barriers across all WTO members would best serve Africa’s interests. To this end, African countries, including the least developed ones, which are not required to cut their own tariffs in the Doha Round, need to focus on reciprocal liberalization.
Africa’s firm and ambitious commitment to bind and reduce its own tariffs would help reduce the antiexport bias of its trade policies (since import tariffs are equivalent to a tax on exports) and create the more favorable investment climate that many African countries desperately need. It would also strengthen African countries’ position in the trade negotiations and enable them to demand the special and differential treatment they need to help smooth structural adjustment. Moreover, ambitious reforms would provide a more compelling basis for asking for aid for trade, which would help improve Africa’s ability to expand its export opportunities by improving its domestic supply response and increase its export competitiveness.
Copies of IMF Policy Discussion Paper No. 05/8, “Africa in the Doha Round: Dealing with Preference Erosion and Beyond,” by Yongzheng Yang, are available for $15.00 each from IMF Publication Services. Please see page 96 for ordering details. The full text is also available on the IMF’s website (www.imf.org).