Preliminary results on the implications of the Tripartite FTAPreliminary results on the implications of the Tripartite FTA

Stephen N. KaringiChief of Trade and International Negotiations

UN Economic Commission for Africa Addis Ababa, Ethiopia

Stephen N. KaringiChief of Trade and International Negotiations

UN Economic Commission for Africa Addis Ababa, Ethiopia

Outline of the Presentation Outline of the Presentation Outline of the Presentation Outline of the Presentation

1)Background2)Why is Africa integration different?3)Basic economic structure4)State of play in Eastern and

Southern Africa5)Methodology 6)Results 7)Concluding remarks

1)Background2)Why is Africa integration different?3)Basic economic structure4)State of play in Eastern and

Southern Africa5)Methodology 6)Results 7)Concluding remarks

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1. Background1. Background1. Background1. Background Economic and political justifications often cited for

regional and multilateral integration. Europe: Peace and stability Africa: Ideal of Pan-Africanism

UNECA (2006) identified the main driving forces in regional integration in Africa:

Geographical proximity and contiguity Political cooperation Continental and global institutions (e.g. NEPAD

and WTO)

The Abuja Treaty recognized five regions:North AfricaWest AfricaCentral Africa East Africa and Southern Africa

Economic and political justifications often cited for regional and multilateral integration.

Europe: Peace and stability Africa: Ideal of Pan-Africanism

UNECA (2006) identified the main driving forces in regional integration in Africa:

Geographical proximity and contiguity Political cooperation Continental and global institutions (e.g. NEPAD

and WTO)

The Abuja Treaty recognized five regions:North AfricaWest AfricaCentral Africa East Africa and Southern Africa

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2. Why Africa Integration is Different?2. Why Africa Integration is Different?2. Why Africa Integration is Different?2. Why Africa Integration is Different?

Currently, there are 14 RECs on the Africa continent. Of 53 Africa countries:

27 belongs to two RECs; 18 belongs to three RECs;One country belongs to at least four;Only 7 Africa countries hold membership to 1

RECs. The multiple membership:

Constraint to economic efficiency; Endanger collective vision of Africa Economic

Community;Fragmented economic spaces and approaches to RI;Increased cost of membership in RECs;Contradictory obligations/loyalties for member

countries;Inconsistent objectives & conflicting operational

mandates.

Currently, there are 14 RECs on the Africa continent. Of 53 Africa countries:

27 belongs to two RECs; 18 belongs to three RECs;One country belongs to at least four;Only 7 Africa countries hold membership to 1

RECs. The multiple membership:

Constraint to economic efficiency; Endanger collective vision of Africa Economic

Community;Fragmented economic spaces and approaches to RI;Increased cost of membership in RECs;Contradictory obligations/loyalties for member

countries;Inconsistent objectives & conflicting operational

mandates.

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2. Why Africa Integration is Different? (Cont’d)2. Why Africa Integration is Different? (Cont’d)2. Why Africa Integration is Different? (Cont’d)2. Why Africa Integration is Different? (Cont’d)

Membership in more than one Custom Union is technically impossible.

In addition to overlapping problem, the following points are identified as a problem in regional integration: Lack of complementarities;Limited market size;Inadequate infrastructure;Absence of a system composition for losers;Structural constraints;Lack of political commitments; Lack of effective supra-national institutions.

Does this mean lack of political will?

Membership in more than one Custom Union is technically impossible.

In addition to overlapping problem, the following points are identified as a problem in regional integration: Lack of complementarities;Limited market size;Inadequate infrastructure;Absence of a system composition for losers;Structural constraints;Lack of political commitments; Lack of effective supra-national institutions.

Does this mean lack of political will? 5

2. Why Africa Integration is Different? (Cont’d)2. Why Africa Integration is Different? (Cont’d)2. Why Africa Integration is Different? (Cont’d)2. Why Africa Integration is Different? (Cont’d)

The potential gains of rationalization includes: Efficient allocation of resources;Increased trade between member countries

and countries outside the region;Gain in the economies of scales;Strong negotiating positions;Welfare gains;Improved productivity; Higher wage;Policy credibility;More efficient provision of public goods;Fewer regional conflicts.

The potential gains of rationalization includes: Efficient allocation of resources;Increased trade between member countries

and countries outside the region;Gain in the economies of scales;Strong negotiating positions;Welfare gains;Improved productivity; Higher wage;Policy credibility;More efficient provision of public goods;Fewer regional conflicts. 6

3. State of Play in COMESA, EAC and SADC3. State of Play in COMESA, EAC and SADC3. State of Play in COMESA, EAC and SADC3. State of Play in COMESA, EAC and SADC

COMESA has 19 member states:14 member states participate in COMESA FTA4 are members of EAC8 are members of SADCAnnual intra-COMESA trade grew by 20% (2000-

06)Already a customs union

EAC has 5 member states:It’s is already a common market. Privilege Uganda and Tanzania to get access in

the Kenya market beginning to 2010 4 are members of COMESAOne member is part of SADCIntra-EAC trade increased by 42% (2004 to

2007).

COMESA has 19 member states:14 member states participate in COMESA FTA4 are members of EAC8 are members of SADCAnnual intra-COMESA trade grew by 20% (2000-

06)Already a customs union

EAC has 5 member states:It’s is already a common market. Privilege Uganda and Tanzania to get access in

the Kenya market beginning to 2010 4 are members of COMESAOne member is part of SADCIntra-EAC trade increased by 42% (2004 to

2007).

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3. State of Play in COMESA, EAC and SADC (cont’d…)3. State of Play in COMESA, EAC and SADC (cont’d…)3. State of Play in COMESA, EAC and SADC (cont’d…)3. State of Play in COMESA, EAC and SADC (cont’d…)

SADC has 15 member states:8 belongs to COMESA; 1 is member of

EAC and 5 are members of SACU Intra-SADC trade accounts 20% of

total SADC trade.South Africa accounts for majority of

the trade flow.

This paper assumes eliminating overlapping membership will significantly improve the effectiveness and efficiency of the RECs.

SADC has 15 member states:8 belongs to COMESA; 1 is member of

EAC and 5 are members of SACU Intra-SADC trade accounts 20% of

total SADC trade.South Africa accounts for majority of

the trade flow.

This paper assumes eliminating overlapping membership will significantly improve the effectiveness and efficiency of the RECs. 8

3. State of Play in COMESA, EAC and SADC (cont’d…)3. State of Play in COMESA, EAC and SADC (cont’d…)3. State of Play in COMESA, EAC and SADC (cont’d…)3. State of Play in COMESA, EAC and SADC (cont’d…)

Products Common External Tariff

Proposed date for

CET

Proposed date for common market

Proposed date for

monetary union

EAC

Raw materials

0% January 2005

Capital goods

0% January 2005

Intermediates

10% January 2005

Finished 25% January 2005

COMESA

Raw materials

0% June 2009

Capital goods

0% June 2009

Intermediates

10% June 2009

Finished 25% June 2009

SADC

2010 2015

2010 2015

2010 2015

4. Basic Economic Structure of the three RECs4. Basic Economic Structure of the three RECs4. Basic Economic Structure of the three RECs4. Basic Economic Structure of the three RECs

COMESA, EAC and SADC comprises nearly half of African States

Population: more than half billion (535.32 Million in 2006)

GDP per capita for COMESA-EAC-SADC: 1522 USD (2006 estimate) Highest ($): Libya (7067) and Seychelles (7005).Lowest ($): D.R.C. (91), Burundi (101) and Malawi

(144). On Average, between 2000-2006, (as a bloc):

COMESA GDP increased by 3.02%EAC GDP increased by 4.61%SADC GDP increased by 3.93% Best performance: Angola (10.6%), Sudan (7.5%),

Mozambique (7.4%)

COMESA, EAC and SADC comprises nearly half of African States

Population: more than half billion (535.32 Million in 2006)

GDP per capita for COMESA-EAC-SADC: 1522 USD (2006 estimate) Highest ($): Libya (7067) and Seychelles (7005).Lowest ($): D.R.C. (91), Burundi (101) and Malawi

(144). On Average, between 2000-2006, (as a bloc):

COMESA GDP increased by 3.02%EAC GDP increased by 4.61%SADC GDP increased by 3.93% Best performance: Angola (10.6%), Sudan (7.5%),

Mozambique (7.4%)

4. Basic Economic Structure of the three RECs (Cont’d…)4. Basic Economic Structure of the three RECs (Cont’d…)4. Basic Economic Structure of the three RECs (Cont’d…)4. Basic Economic Structure of the three RECs (Cont’d…)

Agriculture contributed 23% of COMESA-EAC-SADC GDP (2001-2006)Highly agriculture dependent economies:

D.R.C., Comoros and Ethiopia (> 45 per cent)Less dependent: Botswana, Seychelles, South

Africa, and Djibouti (< 4%) On average, industry contributed 26 per cent of

COMESA-EAC-SADC GDP (2001-2006)Highly dependent: Angola (68%) and Botswana

(55%) Least industrialized: Comoros (12%) and

Ethiopia (14%) Service contributed to 47% of GDP and grow by

4% (2000 – 2006).

Agriculture contributed 23% of COMESA-EAC-SADC GDP (2001-2006)Highly agriculture dependent economies:

D.R.C., Comoros and Ethiopia (> 45 per cent)Less dependent: Botswana, Seychelles, South

Africa, and Djibouti (< 4%) On average, industry contributed 26 per cent of

COMESA-EAC-SADC GDP (2001-2006)Highly dependent: Angola (68%) and Botswana

(55%) Least industrialized: Comoros (12%) and

Ethiopia (14%) Service contributed to 47% of GDP and grow by

4% (2000 – 2006).11

5. Methodology5. Methodology5. Methodology5. Methodology

Data and modelThe scenariosDescriptive results of the base

year

Data and modelThe scenariosDescriptive results of the base

year

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5.1. Data and Model5.1. Data and Model5.1. Data and Model5.1. Data and Model

GTAP model is used to investigate the cost-benefits of establishing a Grand COMESA-EAC-SADC (CES) and Grand CES-EU FTA.

GTAP Africa database employedA special version of GTAP 6 benchmarked to

2001Include 57 sectorsCover 39 regions Of which 30 of them Africa countries/regionsSignificantly improve the coverage of Africa

countries/statesConstructed by giving sufficient emphasis on

RECs in Africa, which facilitated our analysis.

GTAP model is used to investigate the cost-benefits of establishing a Grand COMESA-EAC-SADC (CES) and Grand CES-EU FTA.

GTAP Africa database employedA special version of GTAP 6 benchmarked to

2001Include 57 sectorsCover 39 regions Of which 30 of them Africa countries/regionsSignificantly improve the coverage of Africa

countries/statesConstructed by giving sufficient emphasis on

RECs in Africa, which facilitated our analysis.13

5.1. Data and Model (Cont’d…)5.1. Data and Model (Cont’d…)5.1. Data and Model (Cont’d…)5.1. Data and Model (Cont’d…)

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EAC COMESA SADCTanzania Egypt BotswanaKenya Ethiopia South AfricaUganda Sudan Rest of South Africa

CUMadagascar D.R.C.Rest of COMESA

Malawi

Madagascar MauritiusMozambique ZambiaZimbabwe Rest of SADC

5.2. Scenarios5.2. Scenarios5.2. Scenarios5.2. Scenarios

Two scenarios are constructed to simulate the possible impact of Grand CES and CES-FTA.Scenario I: Grand CES in which all tariffs among

the EAC, COMESA and SADC are removed for all traded commodities and standard GTAP closure is assumed.

Scenario II: Scenarios I but with unemployment closure.

Scenario III: Grand CES – EU FTA (unemployment closures). Under this scenario, all tariffs are removed with the exception of agricultural commodities in CES.

Two scenarios are constructed to simulate the possible impact of Grand CES and CES-FTA.Scenario I: Grand CES in which all tariffs among

the EAC, COMESA and SADC are removed for all traded commodities and standard GTAP closure is assumed.

Scenario II: Scenarios I but with unemployment closure.

Scenario III: Grand CES – EU FTA (unemployment closures). Under this scenario, all tariffs are removed with the exception of agricultural commodities in CES.

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6. Results – Income changes 6. Results – Income changes 6. Results – Income changes 6. Results – Income changes

Percentage Change in GDPPercentage Change in GDP

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-0.75

0.00

0.75

1.50

2.25

EAC COMESA SADC

Per

cent

age

Change in Percentage of GDP

CES FTA-1 CES FTA-2 CES-EU FTA

6. Results – Welfare results6. Results – Welfare results6. Results – Welfare results6. Results – Welfare results

Substantial welfare change is observed under the three scenarios.

For EAC: CES-FTA 2: EV increases by 90 Million USD CES-EU FTA: EV increases by 116 Million USDAs expected, the main gain comes from allocative

efficiency and endowment effectsThere is also an improvement in TOT under CES-FTA 2

For SADC: CES-FTA 2: EV increases by 966 Million USD CES-EU FTA: EV increases by 2401 Million USDPositive gain in allocative efficiency, endowment effects

and TOT.

Substantial welfare change is observed under the three scenarios.

For EAC: CES-FTA 2: EV increases by 90 Million USD CES-EU FTA: EV increases by 116 Million USDAs expected, the main gain comes from allocative

efficiency and endowment effectsThere is also an improvement in TOT under CES-FTA 2

For SADC: CES-FTA 2: EV increases by 966 Million USD CES-EU FTA: EV increases by 2401 Million USDPositive gain in allocative efficiency, endowment effects

and TOT.

6. Results – Welfare results contd…6. Results – Welfare results contd…6. Results – Welfare results contd…6. Results – Welfare results contd…

For COMESA: CES-FTA 2: EV decreases by 47 Million

USD CES-EU FTA: EV increases by 532 Million

USDResults indicate a likely decline in

allocative efficiency under CES-FTA 2 TOT deteriorates under CES-FTA 2 and

CES-EU FTAPositive gain allocative efficiency under

CES-EU FTA.Positive gain in endowment effect in

CES-FTA 2 and CES-EU FTA EU improves consumer welfare.

For COMESA: CES-FTA 2: EV decreases by 47 Million

USD CES-EU FTA: EV increases by 532 Million

USDResults indicate a likely decline in

allocative efficiency under CES-FTA 2 TOT deteriorates under CES-FTA 2 and

CES-EU FTAPositive gain allocative efficiency under

CES-EU FTA.Positive gain in endowment effect in

CES-FTA 2 and CES-EU FTA EU improves consumer welfare.

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6. Results – Sectoral VA in EAC6. Results – Sectoral VA in EAC6. Results – Sectoral VA in EAC6. Results – Sectoral VA in EAC

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Percentage change in sectoral value added, EAC

-3.60

-2.60

-1.60

-0.60

0.40

1.40

2.40

Gra

insC

rops

Mea

tLst

k

Ext

ract

ion

Pro

cFood

Tex

tWap

p

Lig

htM

nfc

Hea

vyM

nfc

Util_

Cons

Tra

nsC

om

m

Oth

Serv

ices

Per

centa

ge

CES FTA-1 CES FTA-2 CES-EU FTA

6. Results – Sectoral VA in COMESA6. Results – Sectoral VA in COMESA6. Results – Sectoral VA in COMESA6. Results – Sectoral VA in COMESA

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6. Results – Sectoral VA in SADC6. Results – Sectoral VA in SADC6. Results – Sectoral VA in SADC6. Results – Sectoral VA in SADC

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6. Results – Export view6. Results – Export view6. Results – Export view6. Results – Export view

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Percentage change in export

CES FTA-2 CES-EU FTA CES FTA-2 CES-EU FTA CES FTA-2 CES-EU FTAGrainsCrops 1.7 5.01 1.33 10.9 0.32 7.54MeatLstk 3.08 6.18 1.47 24.88 1 77.53Extraction -1.76 0.41 0.2 2.85 -1.8 -2.29ProcFood 2.89 10.5 1.27 8.57 6.72 50.72TextWapp 10.92 15.76 1.04 8.46 8.15 5.7LightMnfc 14.08 14.13 3.8 15.66 0.86 -0.83HeavyMnfc 11.66 11.62 1.89 15.29 2.34 -1.48Util_Cons -0.17 3.94 0.33 6.65 -0.92 -1.78TransComm -1.11 1.1 0.25 3.49 -2.52 -4.65OthServices -1.17 1.3 0.3 3.5 -3.17 -5.7

EAC COMESA SADC

6. Results – Import view6. Results – Import view6. Results – Import view6. Results – Import view

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Percentage change in import

CES FTA-2 CES-EU FTA CES FTA-2 CES-EU FTA CES FTA-2 CES-EU FTAGrainsCrops 7.64 6.78 0.18 -0.76 5.87 12.27MeatLstk 10.4 8.48 0.08 -0.89 3.84 9.2Extraction 1.73 -1.39 1.44 8.82 1.31 -0.85ProcFood 9.51 15.76 0.93 9.74 6.19 13.56TextWapp 3.86 5.19 4.54 29.73 5.4 9.8LightMnfc 2.4 6.26 0.26 5.75 3.65 14.3HeavyMnfc 2.77 5.72 0.3 5.58 3.52 8.07Util_Cons 1.05 -0.75 -0.1 -1.23 1.13 1.94TransComm 0.95 0.13 -0.09 -1.46 1.9 3.87OthServices 0.83 0.06 -0.07 -1.17 2.08 4.2

EAC COMESA SADC

7. Concluding remarks7. Concluding remarks7. Concluding remarks7. Concluding remarks

Overall, for the group of 26 countries, the formation of Grand CES FTA might have substantial benefits.

However, the benefit might not benefits the groups equally.

SADC appears to drive most of the benefits followed by EAC and then COMESA.

This might be partly due to the initial conditions SADC has (e.g. relatively least protected)

This imbalance suggests that as the three RECs moves towards the creation of Grand CES, they should also initiate cooperation in other areas.

Overall, for the group of 26 countries, the formation of Grand CES FTA might have substantial benefits.

However, the benefit might not benefits the groups equally.

SADC appears to drive most of the benefits followed by EAC and then COMESA.

This might be partly due to the initial conditions SADC has (e.g. relatively least protected)

This imbalance suggests that as the three RECs moves towards the creation of Grand CES, they should also initiate cooperation in other areas.

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7. Concluding remarks7. Concluding remarks7. Concluding remarks7. Concluding remarks

In other words, the CES Tripartite Framework should not only focus on the realisation of a harmonized trade regime, but should work towards measures that would address supply side constraints in each of the RECs, e.g. through joint infrastructure projects among other measures.

In other words, the CES Tripartite Framework should not only focus on the realisation of a harmonized trade regime, but should work towards measures that would address supply side constraints in each of the RECs, e.g. through joint infrastructure projects among other measures.

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