How Can Africa Better Participate in Global Value Chains? A Focus on Trade Facilitation
How does the entry into force of the WTO’s Trade Facilitation Agreement (TFA) in February 2017 affect African countries’ efforts to join and move up global value chains (GVCs)?
The WTO’s Trade Facilitation Agreement (TFA) provides a new global benchmark for customs and border procedures. Its objective is to provide countries with a framework for helping firms move goods more quickly, reliably, and cost-effectively across borders. Trade facilitation is particularly important in the context of global value chains (GVCs), as this business model requires producers to move intermediate inputs from one country to another multiple times during production. World Bank research shows that trade flows in intermediate goods of the type traded within GVCs are more sensitive to improvements in trade facilitation than flows of final goods. So the stakes are high for Africa: joining GVCs, which are still in the early stages of development across the continent, provides a new incentive for governments to move forward on trade facilitation.
The TFA: Benchmark or goal?
To date, 19 African countries have ratified the TFA. This relatively low figure is surprising given the innovative structure of the TFA. For developing countries, including those in Africa, only those provisions notified by each country under “Category A” take force in the short term as legally binding obligations. Provisions that a member is not ready to implement can be included in “Category B” or “Category C”, which gives access to extended implementation times, and provision of technical assistance, respectively. For African countries, this structure means that there is little disincentive for ratifying the TFA: any obligation not seen as being in the national interest can be included in categories B or C, with application delayed, perhaps for a long period.
Of course, from an economic standpoint, there is every incentive for African countries to be ambitious in their Category A notifications. However, of the total number of notifiable provisions, only 17 percent have to date been included under that heading; the largest proportion, 76 percent, is not yet notified. Although Figure 1 shows that performance varies by sub-region, there is a clear lag in Category A notifications in Africa with respect to other developing regions – with the exception of Northern Africa, which includes some higher income countries.
Figure 1: TFA Notifications by African sub-region and comparators
Source: WTO, Trade Facilitation Agreement Database.
The difficulties some African governments are experiencing in getting fully on board with the TFA is even more concerning since the agreement represents a set of basic standards for trade facilitation, not the frontier of current practice. World leaders like Singapore and South Korea are far ahead of the TFA’s disciplines. Competition among firms in the developing world to join light manufacturing value chains is fierce. As a result, it is more important than ever to move forward on trade facilitation in a comprehensive way by lowering trade costs at all points in the supply chain, not just customs and border procedures. High trade costs isolate African countries – particularly landlocked countries – from world markets, and make firms less competitive. The agenda for reducing them is far reaching, from infrastructure investment and maintenance, to connectivity, to policy reforms in backbone services markets like transport and telecommunications. Figure 2 shows that there is a clear association between lower trade costs (on the horizontal axis) and increased GVC participation (on the vertical axis) in the cross-country data.
Figure 2: Association between trade costs in manufacturing and GVC participation index, 2009
Source: WTO and OECD, Aid for Trade at a Glance, 2015.
GVCs in Africa: What are the stakes?
But all of this begs the question of what is at stake for Africa in terms of the ability to join GVCs. Can GVCs help African countries move forward on their sustainable development objectives? The answer is a qualified yes: qualified because the linkages between value chain trade on the one hand, and economic, social, and environmental objectives on the other is complex and ambiguous. The answer becomes an unqualified yes, however, if opening to GVC trade and investment is accompanied by complementary policies to deal with environmental and social stresses that may result in an effective and efficient way.
From an economic standpoint, participation in GVCs has clear potential to boost employment and ultimately incomes in labour surplus economies. This point is true even if the entry point into GVC participation is a low value-added task, like assembly using largely imported components. As labour markets tighten and wages rise, there is scope for countries to move up to higher value-added activities – provided they have invested in a skilled workforce that can move from simple assembly tasks to component manufacture and high value added services. This kind of process is at work in leading exponents of the GVC model like China and Vietnam. African countries are still at the early stages of participation, but at the same time as facilitating international linkages for local firms, governments need to pay close attention to education and training policies to ensure the basis for moving up is in place.
GVCs have a number of implications from a social point of view. On the one hand, light manufacturing activities – like apparel and clothing – are often an entry point for women into the formal labour market, which is positive from the point of view of social inclusion. The relationship between international linkages and inequality, however, is much more nuanced. The same is true of poverty: although most research shows that the net result of increased trade is decreased poverty, that does not mean that negative poverty impacts do not occur at a local level. The implication in both cases is that trade and investment policies are rarely the first-best instruments to pursue these important social objectives. Instead, tax policy, labour regulations, and social welfare need to be considered. This issue comes with its own complications in Africa, where government capacity is sometimes highly constrained. Addressing that problem is the starting point for reforms that can help leverage GVC participation to produce positive social outcomes.
By increasing productive activity, GVCs also have the potential to put additional strains on natural resources, both through use as inputs and through externalities like pollution. This problem is not unique to GVCs, but is associated with any economic activity. The solution here too lies in the area of complementary policies, typically regulations and taxes that promote sustainable resource use and limit pollution, including CO2 emissions, to acceptable levels. As in the case of social policies, these solutions are not simple to implement in environments of weak governance. The potential of GVCs to promote rapid increases in resource utilisation and production makes it all the more urgent to address governance and institutions as a condition prior to the enactment of effective and efficient regulation.
Overall, GVCs provide important development perspectives for Africa. As wages rise in East and Southeast Asia, GVC lead firms will be keen to find new production platforms. If African countries can reduce trade costs and reform policies to facilitate trade and investment, they stand to benefit from that movement. Over the longer term, improving governance to support effective and efficient environmental and social regulation will be key to ensuring that GVC participation enables sustainable development. The ability to move up value chains over time requires large-scale investments in human capital through education and training policies. Trade facilitation is only one part of the GVC agenda for Africa. Comprehensive action requires ambition – and donor support.
Author: Ben Shepherd, Principal at the Developing Trade Consultants