EU’s ‘aid for trade’ policy towards Africa

Both access to resources and market expansion have been at the forefront of Africa-EU trade relations, and closer trade activities are particularly developed between resource-rich African countries and the European Union. In 2012, mineral products accounted for 67.8% of the EU imports from African countries, while machinery (24.2%) dominated EU exports to Africa (Beets, 2013). The EU has been an important market for Africa’s exports, particularly during the colonial period. Countries like England, France, Belgium, Portugal and Spain had close trade ties with Africa due to colonisation, and trade activities between those European countries and Africa remain significant even after the African countries’ independence. African countries still primarily export raw materials to Europe and provide markets for European finished goods (Kohnert, 2008). Oil, mineral products, agricultural products, fish and to a lesser extent manufacturing products constitute African exports to the EU. On the other hand, the EU exports processed food, vehicles, machinery and pharmaceutical products to African countries.

Trade barriers imposed by European countries on African exports have been detrimental to Africa-EU trade. Although trade is recognised as one of the channels through which countries interact and relate economically through trade flows, this is not often the case (Kareem, 2011). In Africa-EU trade relations there are trade barriers to some key exports, especially those in which some developing countries, and particularly African countries, have a comparative advantage, restricting trade flows (Kareem, 2011). In this regard, while mineral products dominate EU imports from Africa, food, beverages, tobacco, textiles and clothing account for 7.4% (Beets, 2013). Africa’s comparative advantage in the production of primary products did not face trade barriers in developed countries in the 1950s and 1960s, and contributed well in terms of the trade volume and range of products. This type of trade has an impact on trade flows between developing countries (i.e. African countries) and developed countries (i.e. European countries) and results in a trade surplus or deficit.

In order to change this trade pattern between African countries and the EU, trade policies linked to development (e.g. aid for trade) have been developed. Following discussions through the WTO, the EU launched the EBA initiative to boost African countries’ exports to the EU market. Different principles (joint political dialogue on trade, peace building, conflict prevention and resolution and so on) apply to the EBA initiative launched by the EU in 2001, which was hailed as the most significant European trade initiative towards Africa since the first Lomé Convention in 1975 (Kohnert, 2008). Even though granted in order for African Least Developed Countries (LDCs) to access the European market, it quickly became doubtful whether the EBA could achieve its aims (Faber and Orbie, 2007; Wusheng Yu and Jensen, 2005).

While the EBA trade policy enables African countries to export to the European Union market, the Economic Partnership Agreement (EPA) is another policy which boosts European exports to African countries. Through the EPA, the EU aims to open African markets to European products. Such a policy comes with consequences for African markets and industries. It will create competition for African markets and industries and will not foster regional trade integration in Africa. The EU’s introduction of measures such as liberalisation on investments, competition rules and government procurement constrain African countries’ policies for enhancing their global trade. At the same time, imports from Europe will be a barrier for African industries to manufacture those value-added products which could contribute to the diversifying of their exports, exports mainly composed of natural resources.

While the primary objectives of the EBA trade policy are to change the trade pattern between African countries and the EU, enhance productivity and create a positive effect on employment, they may not be achieved due to trade measures (tariffs and preferential measures, for instance) by the EU. There have been a number of agreements on special preferences. Preferences for cheap options have been adopted by European countries in their trade relations with Africa. Many negotiations took place to change the EU’s preferences regarding Africa’s exports. But the EU-Africa negotiations are often made at a regional level, including negotiations with the Caribbean and the Pacific regions through the Africa, Caribbean and Pacific (ACP) trade agreement. Even in the case of the EPA, this has been the tendency. Instead of supporting multilateral trade with Africa, the EU trades bilaterally with African countries and negotiates at a regional level with the different Regional Economic Communities (RECs): SADC, ECOWAS, EAC, etc. While the European trade agreements and policies have aimed at contributing to growth through trade in African countries, trade negotiations have particularly been to the detriment of Africa’s trade.

As well, the EPA will not contribute to job creation and skills transfer in Africa. Some European observers already pointed out that the EPA is contrary to development cooperation. While in theory the EPA aims to create a trade and development partnership between African countries and the European Union, in practice, African exports to the EU will face technical barriers, sanitary and phytosanitary regulations and so on.

The growing interest among African countries to boost intra-African trade and ‘look east’ by developing and strengthening economic partnerships with Asian countries through trade and investments is a threat to EU’s trade with Africa, even though the EU is still a major economic partner for many African countries. At the same time, in a period of economic crisis, the EU is focusing on the EPA in order to re-launch its economy, enable the reactivation of its industries and create jobs. The EU is stressing the important contribution of trade to jobs, growth and economic recovery in Europe (Ramdoo, 2013).

EBA: What implications on Africa’s exports?

In 1995, during the World Trade Organisation’s (WTO) ministerial conference in Singapore, developed countries agreed to open their markets to exports from 48 LDCs, as defined by the United Nations. Therefore the presence of LDCs at the WTO conference in Seattle, the UN conference on LDCs and the WTO conference in Qatar in 2001 have led the EU to launch the ‘Everything But Arms’ (EBA) initiative. In the framework of trade, growth and development, trade policies like the EBA and the AGOA, among others, have been introduced to enhance Africa’s global trade pattern.

By linking development and trade policies together, the EU in the framework of its Aid for Trade (AfT) strategy has started providing more targeted and systematic development assistance to build and support developing countries’ productive and trading capacities (Makhan, 2012). But while the EBA arrangement, alongside the Uruguay Round of trade negotiations, is meant to facilitate trade opportunities between the LDCs and the EU market, there will probably be indirect gains from non-LDCs, particularly emerging economies (China, India, Brazil and so on) which today increasingly invest in LDCs in Africa.

Following the Uruguay Round of trade negotiations, analysis indicated that most of the gains to developing countries had gone to the more advanced countries (in particular the clothing exporters of Asia and some natural resources exporters in Latin America), while some poor countries, including many Least Developed, had actually lost because of the indirect effect of gains made by others (Hewitt and Page, 2002). Tariff jumping could be one of the motives behind the increasing delocalisation of foreign companies to Africa, i.e. Chinese companies.

By delocalising their production to Africa, Chinese manufacturers could benefit from tax advantages or access to particular forms of exports facilitation measures which exist between European and African countries.

In 1970, initial preference schemes were introduced under the Generalised System of Preferences (GSP). In 2001, assessments of such preferences proved that the exports of some developing countries, particularly those in East Asia, had grown strongly (Brenton, 2003). But for Africa’s LDCs, the story was different. Therefore initiatives such as Everything But Arms (EBA) and the African Growth and Opportunity Act (AGOA), brought forward by the EU and the United States respectively, have been launched in order to improve Africa’s exports and its integration in the global trade system. Those initiatives, particularly the EBA, are thought to have boosted declining LDC exports to Europe in the 1990s.

Through the EBA arrangement, the European Union has launched initiatives to integrate LDCs (of which 33 are African countries) into the global economy. Initiated in 2001, the arrangement gives LDCs full duty free and quota-free access to the EU market for all their exports, excluding arms and armaments. In January 2014, the EBA scheme was strengthened to reduce competitive pressure on LDCs and make the preferences more meaningful for them—providing much more opportunity to export (European Commission, 2013). The EBA initiative gives the LDCs the possibility of increasing their market share with regards to the EU and enables them to have a wide range of exports. The conditions of this development will depend on the ability of the LDCs’ production capacity to satisfy the demand and also adjust to the requirements of the EU market. Brenton (2003) argues that the key issue for LDCs is to what extent the EU scheme of preferences can assist in stimulating diversification into a broader range of exports.

EBA: Implications on the delocalisation of Chinese companies to Africa

The delocalisation of Chinese companies to Africa is not only motivated by the rising costs of labour and production but also by the Chinese government’s incentives to boost overseas foreign direct investment (OFDI).

The state-to-state relations between China and African countries at the macro-level have driven more Chinese enterprises into Africa. Usually, Chinese investments in Africa are linked to Chinese State Owned Enterprises (SOEs), mainly in the resources sector. The relationship between China and African countries is growing, mainly underpinned by trade and investments since the end of the 1990s with the ‘go out’ policy and the establishment of the Forum on China Africa Cooperation (FOCAC) in 2000. Increasingly, however, Chinese investments in Africa are shifting from SOEs to private companies.

Chinese private entrepreneurs and Small and Medium Sized Enterprises (SMEs) have been pushed to eye other markets due to the level of competition in different sectors of the Chinese economy, the lack of financial support (credits and loans) from the government, which particularly supports the state-owned companies, and rising labour and production costs due to socio-economic reforms in the past few years. These new markets have been sought in those African countries that provide business opportunities.

Targeted are African countries with lower salaries (Ethiopia), established manufacturing industries (South Africa), potential sizable markets (Nigeria) and strong business regulations and environments. Clarke (2013) states that even though energy investments and infrastructure contracts remain prominent in China’s Africa engagement, investment in manufacturing makes up a significant proportion of Chinese overseas foreign direct investment (OFDI).

New developments in Africa’s manufacturing industry will enable Africa to diversify its exports, which until now heavily relied on resources rather than manufactured products. The EBA arrangement could contribute to overcoming trade deficits between Africa and its European trading partners. But at the same time, China’s growing presence in Africa plays an important role for Chinese enterprises to reach out to developed markets, i.e. the European market which receives the majority of African exports through the EBA arrangements. Such arrangements which enable African LDCs to export to Europe could be an advantage for Chinese companies which sometimes find it difficult to operate in developed countries in general and European markets in particular due to investment regulations related to norms and standards of production as well as barriers imposed on Chinese exports to the EU.

China’s government has both domestic and foreign policy reasons for lending official support to Chinese manufacturing companies which set up production sites in Africa; this policy reduces trade frictions associated with cheap Chinese exports by exchanging a ‘made in China’ stamp for a ‘made in Ethiopia’ one (Clarke, 2013). For instance, a Chinese shoe factory in Ethiopia which enjoys a competitive advantage of low labour and leather costs sells its production to the United States and Europe. By only representing 1% of the world manufacturing output, Africa could benefit from Chinese industries for the modernisation and the diversification of its manufacturing industries (Taleb, 2012). According to Zheng Yuewen, president of the China Africa Business Council (CABC), with the delocalisation of Chinese companies, Africa could become a major manufacturer of products rather than an exporter of resources overseas (China Daily, 13 June 2013). Therefore, under the EBA initiative, rules of origin are required to prevent trade deflection, whereby products from non-beneficiary countries are re-directed through LDCs to exploit the preferences that are available (Brenton, 2003).

While global manufactured trade continues to be concentrated within the developed world, South-South trade increased its share in world trade by 4% in only five years between 2004-2009 accounting for 14.5% of global trade in 2009 (UNIDO report, 2009). Between 2000 and 2005, trade in manufactured goods within the developing world grew at 16% per annum (UNIDO, 2009). Such a shift in export patterns indicates that there is room for new countries (particularly LDCs) to join the ranks of exporters, especially in the less industrialised world (Eliassen, 2012).

Conclusion

Since the 1990s and early 2000s, trade policies (AGOA and EBA) from the United States and Europe have been developed and have aimed at enabling LDCs to export certain products (substitution of imports) to the US and European markets. Such policies fall under the aid for trade framework. As well, China has also granted zero-tariff treatment to African countries which export products to the Chinese market.

Market access and openness alone are not enough to boost trade. Trade openness is a necessary condition which contributes to development. Trade-driven growth has enabled a number of countries (India, China, Brazil among others) to enhance economic growth. Policy mechanisms and institutions should be put in place to support such trade-driven growth. Policies to diversify trade, industrial policies (for instance, to enhance the manufacturing sector) and institutional reforms are crucial to achieving trade growth and sustainable development in the long run.

Even though the EBA initiative is to improve Africa’s trade relations with Europe through exports, it remains difficult to prevent dumping via re-exporting African products from other countries. The EBA arrangement made by the EU to enable African countries to export ‘everything but arms’ to Europe coincided with China’s increasing role in Africa. Growing trade and investment ties between China and Africa have given African countries an opportunity to export to China and have access to the Chinese market. In 2005, China announced it would grant zero-tariff treatment to 25 LDCs in Africa, allowing them to export their products to China, based on a list of 190 specified commodities.

These new developments in Africa’s reciprocal relations with emerging partners somehow do not guarantee the objectives of the EU trade policy. While trade has contributed to some countries’ economic development, as mentioned by specialists, it is far from contributing to changing Africa’s economic environment. The share of Africa’s global trade remains insignificant. Yet, Africa’s trade faces numerous challenges: customs procedures, a lack of infrastructure and information as well as market integration. While there were expectations that the EU trade policy and the WTO round of negotiations would improve Africa’s trade, there is an increasing need for African countries to consider other alternatives for trade performance.

The EU should assess the real impact of the EBA initiative, which in the first place was intended to increase investment and trade for LDCs.

To revise the EBA arrangement, the EU has decided to extend the range of products under the GSP to include some raw metals (for example, aluminum oxide, lead and cadmium) which are of particular value to countries under the GSP scheme. However, such an extension of the EU trade policy to resources does not favour economic development through trade for LDCs, as intended in their earlier arrangement in 2001. Even for LDCs richly endowed with resources, resources trade did not enable economic changes leading to growth.

Through the GSP, the EU should rethink its policy in order to create a better trading relationship with African countries, enhancing the LDCs’ trade and economic benefits. On their own, trade preferences granted to African LDCs will not be enough to enhance Africa’s exports performance. The EU should take into account the growing presence of Africa’s other economic partners, particularly emerging economies, such as China, India, Brazil among others, which today invest in Africa’s manufacturing industries and agricultural sector to enhance production.

However, if African countries don’t develop their manufacturing industries in order to diversify and increase their export volume to overseas markets, emerging economies’ manufacturing bases in Africa will take advantage of policies meant to change LDCs’ trade patterns.

* DAOUDA CISSÉ is an independent researcher based in Montreal, Canada. He was a postdoctoral research fellow at the China Institute, University of Alberta, Edmonton, Canada and at the Centre for Chines Studies, University of Stellenbosch, South Africa. His research explores China's domestic and overseas political economy with a particular interest in Africa-China relations. He can be contacted at: [email protected]

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