Impact of Protectionism on Exports of African LDCs

Introduction

Trade is a powerful economic tool that can be used to tackle poverty, harness growth and generate employment. Exports are an integral part of trade and an access to a flourishing export market is very important for any country. Although these markets are easily accessible to well developed and developing countries, ensuring this access to the Least Developed Countries (LDCs) are of paramount importance, particularly in the case of agriculture. (United Nations Conference On Trade And Development, 2008). The economies of LDCs are not usually resilient to economic shocks and therefore, they often cannot adjust to changes in the market condition which makes them very vulnerable to any supply or demand shocks. Moreover, the GDP per capita of LDCs fell significantly after the Global Recession compared to Lower Middle Income Countries (LMICs) and especially Upper Middle Income Countries (UMICs) perhaps another indication of the lack of LDC resilience to global economic shocks. (Evenett & Fritz, 2015).

Figure 1: The rate of growth of per-capita incomes in LDCs is reduced by half in 2010–13 than 2000- 2008

Amongst all the economic communities like LMICs, UMICs and OECD, there is an economic community called the African Union (AU), which consists of 55 African countries and was established in 2002. Out of 47 countries, 37 of them (72%) are classified as LDCs and are located in Sub-Saharan Africa. (Evenett & Fritz, 2015) These will be the main focus of this paper.

In this era of globalisation, the African LDCs are gaining importance as many countries are looking to outsource production and manufacturing, and due to the rising costs of labor in Southeast Asia, they are now looking towards African LDCs in order to carry out production. (Moghalu, 2013)

Countries around the world have ratified several trade agreements like the AGOA (African Growth and Opportunity Act), EBA (Everything but Arms scheme) and in the Doha Round of Multilateral Talks, “Duty-free Quota-free” access was vouched for in order to improve the market access conditions for African LDCs

However many country governments are taking aggressive measures to shield their domestic/national markets from foreign suppliers. A large majority of these foreign suppliers are exporters of African LDCs.

This article will be discussing the impact of protectionist policies on the African LDCs, their cascading effects and how It impacts the exports and commercial interests of these very LDCs.

History of Performance of the African LDCs

Before the Global Financial Crisis in 2008–09, the African LDCs witnessed a promising real Gross Domestic Product (GDP) growth between 2002 and 2007. It continued to remain more than 7% per annum, with the growth remaining higher than other LDCs in 2008. During this period, imports and exports of the African LDCs expanded rapidly due to an increase in demand of primary commodities.

Figure 2: Comparison of GDP growth rates in LDCs before and during the recent crisis, 1991–2009

Following the financial crisis in 2008–09, the world economy witnessed a recession with LDCs being severely affected. Protectionism, in terms of trade-restrictive measures, represents a government-induced change in market conditions for traders from other countries. Protectionism often leads to restricted trade, and stunts growth, poverty alleviation and job creation (Evenett & Fritz, 2015). The financial crisis coupled with the protectionism led to a sharp decline in the exports from the African LDCs (Figure 2).

Figure 3: Pre-crisis export performance of LDCs

Economic growth in the African LDCs has steadily been declining since the year 2012. (Evenett & Fritz, 2015) Many believe it is due to the heavy dependency on exports of raw materials which comprise commodities like fuel, minerals and agriculture etc (Bayona, Martin, & Oladeji, 2018) .There has been a steady fall in the price of primary commodities, thus the lack of export diversification is one of the major problems

Figure 4: Global trade market shares for major regions

The figure shows how the entire African Union (AU) contributed only 2.4% of the global exports. Broken down intra-regionally as well as by subgroup, AU LDCs contributed around a fifth (22% or US$97.5 Billion) to overall AU exports in 2015, registering a significant contraction of 30 per cent from the previous year (Bayona, Martin, & Oladeji, 2018)

The following are the protectionist policies that negatively affect exports in African LDCs: –

1. TRM’s (Trade Restrictive Measures)

Following the 2008 financial crisis and the wave of protectionism, TRM’s have emerged as a big problem in international trade. TRMs particularly affect the exporters in African LDCs as these countries are already suffering from problems such as inaccessibility to sea trade routes, and lack of transport facilities and adequate infrastructure. (Bayona, Martin, & Oladeji, 2018)

2. Export Duties/Taxes

“Export duties consist of general or specific taxes on goods or services that become payable when the goods leave the economic territory or when the services are delivered to non-residents”. (OECD, 2001)

Levying export taxes on commodities often results in a huge increase in prices in the global markets since exporters now how to pay taxes to their domestic governments before exporting. This is often done to discourage exporters from exporting commodities, and forcing them to cater to their domestic markets by charging lower prices.

The increase in prices of commodities in global markets makes it very difficult for African LDCs to procure any type of commodity; this confers a cost advantage to domestic firms. (Solleder, 2013)

3. Trade Finance

Trade finance measures are often provided by governments or private parties. They help in financing the international trade flows and simultaneously mitigate any risks in the transaction. This helps both the exporters (who want to get paid for his goods as soon as possible) and the importers (who would first like to check the quality of the goods) by bridging the gap between them through credits or payment guarantees.

Many companies in the African LDCs are small and medium sized firms (SME’s) which face a lot of difficulties in obtaining these credit or payment guarantees.

The value of the trade finance gap in Africa is estimated at USD 91 billion in 2014. Banks report an average rejection rate for letters of credit applications of 6.1 percent in 2014. Weak credit history and insufficient client collateral is the major reason why banks reject trade finance requests from clients. (African Development Bank Group, 2017)

The Impact of the Protectionist Trade Policies

1. Reduction in Per- capita income

Figure 5: Breakdown of African Union’s Merchandise Trade

The following figure shows the commodities exported by the African LDCs. The region is very diverse; with some countries exporting oil (Chad, Angola, and Sudan etc.) while some exporting minerals (Mali, Mauritania, Zambia etc.). The biggest being petroleum fuels which accounts to almost half of the exports (54%) followed by manufactured goods (21%) and agricultural products (11%).

A large majority of people are working as labourers in these very sectors, and millions of people are entering the labor force of these sectors everyday

There are rising numbers of new entrants to the labor market, and those numbers will not even have peaked by 2050. In Ethiopia, there were 1.4 million new entrants in 2005, which should rise to 2.7 million by 2030 and 3.2 million by 2050 (United Nations Conference on Trade and Development, 2013)

African LDCs have an export concentration i.e. their countries export are limited to a few products or small number of trading partners. The top 25 countries with the highest concentration ratios were all developing countries with 10 of them LDCs and 10 from sub-Saharan Africa. (United Nations Development Programme, N.A)

Protectionist policies implemented by other countries often aim at limiting the exports of African LDCs. The exporters and companies/firms working in the exporting business of these LDCs a having high export concentration get significantly impacted due to loss of business. Many will file for insolvency and bankruptcy and will be forced to lay off workers, laborers and employees, thus impacting the per-capita income of the people working in these export sectors.

2. Delay in technology transfers will lead to low economic development

The African LDCs are still undergoing the process of industrialisation. Agricultural productivity is very low, and people are still practicing subsistence farming and have poor connectivity to market services and lack basic transport facilities (Organisation for Economic Cooperation and Development, 2007)Despite all of this there has been a very slow labor shift towards manufacturing and a very weak response to industrialisation has been recorded

Figure 6: Share of manufacturing in GDP, by country group, decade averages

LDCs in Africa remain on the margins of industrialisation, as exemplified in the very low and declining shares of their manufacturing value added (MVA) in GDP since the 1970s (figure 6) (United Nations Industrial Development Organisation, 2016)

The lack of industrialisation in the African LDCs is due to the fact that they have failed to leverage the cheap labor costs to push for more labor intensive manufacturing. This can be because of the two following reasons:

a. a combination of poor business environments, low institutional capacity, weak infrastructure and relatively high unit labor costs in manufacturing, which compare unfavourably with competitors in Asia

b. Lack of energy and information and communications technology infrastructure further constrain development (United Nations Industrial Development Organisation, 2016)

By the above explanation it is very clear that the access of technology is very imperative. If countries decide not to share technological resources with the African LDC and try to protect their own domestic industries by following protectionism, thus it will have a massive impact on the industrialisation speed of the African LDCs.This will eventually lead to them not able to export commodities to international markets.

3. Decline in productivity

Higher trade costs due to protectionism can raise a large amount of uncertainty in the market. This coupled with poor financing conditions can lead to a negative impact on investments. This can lead to lower productivity growth in the country.

Trade barriers can also lead to the misallocation of production factors across firms and countries (Guarino, 2018) Countries which protect their domestic markets pave the path for a poor global competition. This results in poor technological advancement and no innovation. Thus the firms in African LDC have become less productive. Thus aggregate productivity may decline.

4. Reduced Purchasing Power and inflation:

A lot of African LDCs are heavily dependent on food imports from other countries.

Figure 7 : African LDC’s being net food importers

The share of food in LDC imports is more than double the world average. In 2018, global food trade was worth US$1.5 trillion — or around 8% of merchandise trade — compared to 17% (or US$46 billion) of LDC merchandise imports. In relative terms, the largest importers were Kiribati (36%), The Gambia (34%) and Sierra Leone (30%).

Thus it can be clearly deduced that various African LDCs are dependent on food imports from other countries. However protectionism also impacts the choice of the consumer. In this case countries may exercise protectionism by placing quotas on food exports, thus leaving consumers in African LDCs with a very limited choice in terms of quality and quantity of food available to them

This can also lead to inflation as consumers will now have to pay more for the limited quantity of food, thus making it very difficult for consumers to purchase the commodity and ultimately, it leads to a decline in their purchasing power.

Protectionism can be also exercised by countries on food exports, where they decide not to export the surplus food and cater to their own domestic needs. This can lead to a rise in the global food prices making it even more difficult for African LDCs to procure food. Thus it can potentially lead to food shortages throughout the countries.

The Argument for African LDCs:

The above arguments show how trade protectionism negatively affects the African LDCs, however in some cases; protectionism has a positive impact towards the African LDCs. This is possible when they exercise protectionism themselves. This can be explained as follows -

1. Infant Industries :

A large number of firms and industries in Africa are infant/sunrise industries. “An infant industry is a new industry which in its early stages experiences relative difficulty or is absolutely incapable in competing with established competitors abroad” (Wikipedia, 2020). Other established industries can improve their technology and production capability; and thus make profits and at the same time keeping prices low. This is not the case with infant industries as they lack high end production technology and experience, thus would be producing less efficiently. If these industries are immediately forced to compete with developed ones, they will be easily pushed out of business. Thus protectionism will play an imperative role in survival of these infant industries by shielding them from the competition of developed industries in other countries. Figure 8 shows how tariff protection (a form of protectionism) helps infant industries to reduce average costs and be more efficient.

Figure 8

2. Dealing with High Production Costs:

Due to low efficiency, industries often have high production cost. Since protectionism helps in restricting foreign competition in domestic markets, consumers will have to buy the domestically produced commodities/products thus it makes the high costs sustainable for the industries. As these industries gradually develop and grow, there will be an increase in efficiency which will lead to lower costs.

Much of the international community has accepted the LDC need for protectionism for both “Infant Industries” and “High production costs”. Also part (IV) of General Agreement on Tariffs and Trade (GATT) includes provisions on the concept of non-reciprocal preferential treatment for developing countries, which explicitly state:

“When developed countries grant trade concessions to developing countries they should not expect the developing countries to make matching offers in return.”

Many LDC’s have construed this exemption from reciprocal concessions as a green signal to maintain restrictive import regimes.

Developed countries often claim that part (IV) of GATT has been without “Practical Value” as it does not contain any obligations of developing and Least Developing Countries. (WTO, 2019)

Nevertheless, countries round the globe recognise that reduction in protectionism will be possible only in later stages of economic recovery. (Central Investigation Agency, 1983)

Protectionism and African Union — The Covid-19 Perspective

Africa is not new to public-health crises and epidemics. The fragility of the health care system was very evident during the deadly Ebola disease outbreak. African countries were able to control this disease with the help and support of other governments and international organisations like WHO.

Ebola is a prime example of how international cooperation is necessary for saving lives and controlling life threatening epidemics. However seeing the mixed responses of Covid-19, it seems that the world did not learn its lesson.

As a natural response to the pandemic, country governments all over the world started focusing on their domestic situations and needs of citizens. Many of them closed their borders as a preventive measure in order to solve the health crisis in their respective nations. However they did not realise the consequences of the preventive measure on various developing and poor countries.

For example, 60 governments all over the world have imposed export restrictions on medical equipment such as personal protective equipment and ventilators. Some countries are limiting their exports for drugs that are essential for treating COVID-19 symptoms. Some countries are trying to ensure their food security by banning exports of food products like rice, wheat and eggs. (Mohamed, 2020)

Although WTO does allow its member countries to impose trade restrictions like export bans in certain cases, however if countries all over the world start adopting these restrictive trade policies then this would severely impact the food security of countries which depend on international trade for majority of their needs, i.e. the African LDC’s.

Due to African LDC’s high dependency on other nations, it is very vital for their economies to be connected with the outside world. This will not only help them to survive the pandemic, but also eventually recover and grow.

Countries should do away with unnecessary trade restrictions during this time, especially on medical equipment and food supplies. Not complying with this will hamper the long term efforts taken by African nations to improve their living standards and tackle poverty.

Although socio-economic conditions and public health is a matter of paramount importance all around the world, attaining these standards in LDCs is a big challenge. With more than two-thirds of the people in LDCs living in rural areas, they live in overcrowded settlements which are devoid of basic services. Poverty reduction over the last decade has been extremely sluggish. The number of people living in extreme poverty (i.e. below $1.90/day) in the LDCs has increased from 340 million people in 2010 to an estimated 349 million in 2018. This was largely due to the situation in African LDCs. (Valensisi, G., & Akiwumi, P,2020)

The contraction in demand due to COVID-19 in major LDCs trading markets and fall in international commodity prices, will impact the “poverty reduction” agenda in African LDCs to a large extent.

Figure 9 : The worsening economic outlook following the emergence of COVID-19 entails an increase of over three percentage points in LDC poverty headcount, with more than 33 million additional people living in extreme poverty

CONCLUSION:

Before the global economic crisis of 2008, in the period 2000–2008, the African LDCs along with other LDCs witnessed a lot of export led growth. Although they still were marginalised, however the level of marginalisation decreased due to their share in world exports on a continuous rise. After the financial crisis, the economy of the African LDCs collapsed. Although they did recover in 2010, however the world witnessed a wave of protectionism. It is very surprising to know that during the five years from 2009 to 2013, LDC exports would have been 31.5% higher in the absence of trade distortions imposed around the world (Evenett & Fritz, 2015). The African LDCs still suffer with poor trade finance facilities, trade restrictive measures and tax based export incentives from other countries. We can also conclude that protectionism has both positive and negative impacts on the LDCs. The negative effects are ranging from reduction in per-capita income of people, to rise in inflation, reduction in purchasing power and delay in technology transfers. Protectionism is also leveraged by LDCs to protect their own infant industries and sustain high production costs. Protectionism is thus a very powerful economic tool, which can only be justified when the time period for which it is exercised is explicitly stated, and the industries/firms are fully aware of the objectives and targets they have to achieve in the given time frame.

Bibliography

African Development Bank Group. (2017). Trade Finance In Africa: Overcoming Challenges. African Development Bank Group.

AZEVÊDO, R. (2014, December 8). World Trade Organisation. Retrieved from wto Web Site: https://www.wto.org/english/news_e/spra_e/spra44_e.htm

Bayona, P. A., Martin, V., & Oladeji, O. (2018). WHAT HOLDS AFRICAN LDC EXPORTS BACK? Centre for Trade and Economic Integration.

Central Investigation Agency. (1983). Global Protectionism : Trends and Implications. CIA.

Evenett, S. J., & Fritz, J. (2015). Throwing Sand in the Wheels: How Trade Distortions Slowed LDC Export-Led Growth. CEPR Press.

Guarino, A. S. (2018, March 1). Focus Economics. Retrieved from focus-economics.com: https://www.focus-economics.com/blog/effects-of-trade-protectionism-on-economy

Moghalu, K. (2013, August 15). Wilson Center. Retrieved from wilsoncenter.org: https://www.wilsoncenter.org/event/africa-the-last-frontier-why-it-matters-the-global-economy

Mohamed, A. (2020, April 28). weforum.org. Retrieved from https://www.weforum.org/agenda/2020/04/protectionism-africa-pandemic-coronavirus-covid19

OECD. (2001, September 25). OECD Glossary Of Staistical Terms. Retrieved from stats.oecd.org: https://stats.oecd.org/glossary/detail.asp?ID=910#:~:text=Export%20duties%20consist%20of%20general,multiple%20exchange%20rates%20are%20excluded.

Organisation for Economic Cooperation and Development. (2007). Promoting Pro-Poor Growth. OECD.

Solleder, O. (2013). Three Essays on Export Taxes.

United Nations Conference On Trade And Development. (2008). Export competitiveness and development in LDCs: policies,issues and priorities for least developed countries for action during and beyond UNCTAD XII . UNCTAD.

United Nations Conference On Trade And Development. (2013). Growth with employment for inclusive and sustainable development. United Nations Conference On Trade And Development.

United Nations Development Programme. (N.A). Export Dependence And Export Concentration. UNDP.

United Nations Industrial Development Organisation. (2016). Industrialization in Africa and Least Developed Countries. United Nations Industrial Development Organisation.

Wikipedia. (2020, September 28). Wikipedia. Retrieved from Wikipedia.org: https://en.wikipedia.org/wiki/Infant_industry

WTO. (2019). Retrieved from wto.org: https://www.wto.org/english/tratop_e/devel_e/dev_special_differential_provisions_e.htm

Valensisi, G., & Akiwumi, P. (2020, May 4). When it rains it pours: COVID-19 exacerbates poverty risks in the poorest countries | UNCTAD. Unctad.Org. Retrieved December 25, 2021, from https://unctad.org/news/when-it-rains-it-pours-covid-19-exacerbates-poverty-risks-poorest-countries