AU Extraordinary Conference of Ministers of Trade on African .doc by zhaonedx

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									     AFRICAN UNION                                    UNION AFRICAINE
                                                      UNIÃO AFRICANA
Addis Ababa, ETHIOPIA   P. O. Box 3243   Telephone 517 700   Fax: +251-1-517844



2nd EXTRAORDINARY SESSION OF THE
CONFERENCE OF MINISTERS OF TRADE
21 - 24 NOVEMBER, 2005
ARUSHA, UNITED REPUBLIC OF TANZANIA



                                                 Ext/Exp/Trade/5 (a) (II)
                                                 Original: English




              TRENDS IN WORLD COMMODITY TRADE,
             ENHANCING AFRICA'S COMPETITIVENESS
             AND GENERATING DEVELOPMENT GAINS
        TRENDS IN WORLD COMMODITY TRADE, ENHANCING AFRICA'S
         COMPETITIVENESS AND GENERATING DEVELOPMENT GAINS

                               Report by the UNCTAD secretariat



                                       Executive summary

The contribution of commodity production and exports to economic growth and development in
African countries has been disappointing in the past. African countries have lost market shares
even for products where their comparative advantage is clear. Apart from supply side problems,
slow demand growth and declining real prices have led to slow or nonexistent revenue growth.
Developments over the past few years have produced new challenges and new opportunities for
African commodity producers. Commodity demand will in all likelihood grow at a healthy rate
in the foreseeable future, due partly to the fast growing demand from Asian countries, but also
to the resurgence of growth in Africa itself, which may turn domestic markets into a source of
dynamism.

In order to grasp the opportunities provided by expanding markets, African commodity
producers need to be competitive suppliers to those markets. This means first of all that the
playing field should be as level as possible. Market access has been improving, and tariffs are
unlikely to be the main constraint for African exporters in their main export. More needs to be
done, however, on reducing tariffs as well as non-tariff barriers to trade between trading blocs in
Africa, in order to exploit the full potential benefits from regional trade. Meanwhile, subsidies to
producers in developed countries continue to undermine efforts to increase the competitiveness
of developing country suppliers. Some reduction in subsidies can be expected from ongoing
negotiations, although they will most probably fall short of the outright abolition that would be
required if the playing field is to be really level. African countries should have the appropriate
policy space to improve the competitiveness of their commodity sectors. Efforts are needed on
the part of African countries to reduce supply side obstacles such as low and stagnating
productivity, inadequate infrastructure, lack of support services and difficult access to finance.

The need to improve the competitiveness of African commodity producers requires actions to be
taken by both the public and private sectors, and the support of the international community.
These actions should aim to improve productivity, reduce transaction costs and deepen markets.
A number of specific recommendations to this end are made to African Governments, the
African business sector and the international community.




                                                  2
                                             Contents

Chapter I     Introduction
Chapter II    Review of trends in the world commodity economy

              A. Global commodity trade
              1. Evolution of the world trade structure
              2. Africa's place in world commodity trade

              B. Developments and current policies influencing the structure of the commodity
              markets and African exports
              1. The increased dynamism of South-South trade
              2. The international trading system: developments and recent initiatives
              2.1. WTO issues
              2.2. Preferential schemes
              2.3. Regional arrangements

Chapter III   Enhancing the competitiveness of African exports and generating development gains

              A. The concept of competitiveness

              B. Realizing development gains from commodity production and trade

              C. The relationship between competitiveness and diversification

              D. Supply side obstacles to competitiveness
              1. Productivity
              2. Physical infrastructure
              3. Support services
              4. Access to finance

              E. Markets
              1. Internationalization of supply chains
              2. Local and national markets
              3. Regional markets
              3.1 Trade facilitation
              3.2 Tariffs and customs unions
              4. International markets

Chapter IV    Conclusions




                                                  3
I. Introduction
The international community has increasingly come to realize the importance of the relationship
between commodity production and poverty - both the incidence of poverty and the potential to reduce
it. The majority of the two billion people in the world who are employed in commodity production are
poor and efforts to improve their situation cannot ignore the need for reforms in the way that
commodities are produced and traded. While production and exports of commodities have provided a
platform for industrialization and economic growth in some countries, in many others dependence on a
few commodities for export revenues has trapped economies and people in a vicious circle of falling
incomes. Neither dependence on commodity exports nor poverty among rural farming populations is
limited to the poorest countries, but the situation of the least developed countries, most of which are in
Africa, provides a stark illustration of the problems (UNCTAD, 2004b).1 The incidence of one dollar a
day poverty in 1997-1999 was 82 per cent among mineral exporting LDCs and 63 per cent among
LDCs with predominantly agricultural exports, while for services exporters it was 43 per cent and for
manufactures exporters 25 per cent (UNCTAD, 2004b). 2 Thus, in many LDCs commodity exports
have failed to provide a way out of poverty.

Nowhere is the relationship between commodity dependence and poverty, and the need for commodity
trade to be turned into a positive force for development, more evident than in Africa. The share of
African countries in world exports of commodities has fallen, at the same time as the long term decline
in real commodity prices has eroded the purchasing power of these exports. The resources necessary
for economic development are not being generated by the commodity sector at present, and this
underscores the need for changes in the way that commodities are produced and traded.

The present report reviews the broad international trends and developments that are relevant to African
commodity production and trade, attempts to identify the obstacles to increased competitiveness for
African producers and suggest a number of actions that could be taken by African Governments and
companies and by the international community. Its main emphasis is on agriculture. The relationship
between mineral and oil production and development is mainly the concern of macro-economic policy
and international trade in these commodities raises far fewer and less controversial issues of trade
policy.

Chapter II reviews trends in world trade of commodities and describes recent developments with
respect to the international trading system that affect the conditions of African commodity exports.
Chapter III identifies supply side obstacles to expanded commodity exports and describes the effect of
market conditions on the competitiveness of African commodity production. Chapter IV presents the
conclusions and recommendations.




1
  Of 49 LDCs, 37 of which were in Africa, commodities are the major source of export earnings in 31, of which
four are oil exporters, seven predominantly mineral exporters and 20 predominantly agricultural exporters
(UNCTAD, 2004b, page 124).
2
  UNCTAD, op. cit. chart 19, page 132.


                                                     4
 II. Review of trends in the world commodity economy
 A. Global commodity trade

          1. Evolution of the world trade structure

 In 2003, total world merchandise exports amounted to $7'293 billion, 47 per cent more than in 1990.
 Manufactured goods accounted for most of exports, 74 per cent, while exports of all commodities,
 including ores and metals, were $863 billion, or 11.8 per cent (see table 1). 3 Trade in manufactures
 increased at a significantly higher rate (6.9 per cent per year) than all commodities trade (4.7 per cent
 per year). However, in order not to underestimate the importance of international trade in
 commodities, it should be noted that, due to the geographical dispersal of work within international
 supply chains, manufactured products may enter international trade several times at different stages of
 production. Accordingly, there is some "double counting" of manufactures trade. For manufactured
 products the gross value of trade thus tends to be higher in relation to value added than for
 commodities.

                                                Table 1
                                 World export structure (in million US$)

                                   1980                   1990                    2000                2003
                             Value      Share*        Value    Share         Value     Share     Value       Share
All food items              222105       11.1        319583     9.3         421 278     6.7     543 485       7.45
Agri. raw materials          74035        3.7        103091      3          113 179     1.8     130 408       1.78
Ores and metals              94044        4.7        123709     3.6         176 057     2.8     189 523        2.6
Fuels                       480228        24         378002     11          660 213    10.5     754 319      10.34
Manufactured goods         1084514       54.2       2422648    70.5        4 728 379   75.2    5 436 591     74.53

 (*) Share by major commodity groups in world exports

 Source: UNCTAD, Handbook of Statistics, 2004; WTO statistical database for 2003

 Behind the lower rate of growth in the value of commodities trade lies also another phenomenon, that
 of falling real commodity prices. From 1977 to 2001, the combined UNCTAD price index in US$ for
 all commodities declined by 53 per cent in real terms. The decline in prices was most severe for
 several commodities, particularly coffee, cocoa, sugar, rubber and some metals, during the period
 1998-2001. This period was followed by rapidly rising prices, albeit from very low levels, for most
 commodities, particularly industrial raw materials such as metals and rubber, due to the recovery of
 the world economy and fast increasing commodity demand in Asia, especially China (UNCTAD,
 2004c). The UNCTAD combined index rose by 28 per cent over the past four year period. However, if
 the depreciation of the US$ is taken into account, the price improvements were less impressive: the
 index in terms of special drawing rights (SDRs) increased by 12 per cent over the same period. Figure
 1 shows the development of prices for different groups of commodities since 1980.




 3
  Agricultural Commodities include SITC sections 0, 1, 2 (less divisions 27 and 28 and groups 233, 244, 266 and
 267) and 4. Fuels are SITC section 3, Minerals and metals include SITC divisions 27, 28 and 68 and item 522.56


                                                           5
                      Figure 1 Annual average prices and prices indices of selected commodity groups, 1980-
                                                  2004 (in current US dollars)


               200
               180
                                                                                             Combined index in terms of
               160
                                                                                             current dollars
               140                                                                           Combined index in terms of
               120                                                                           SDRs
    1985=100




                                                                                             All food
               100
               80                                                                            Agricultural raw materials
               60
                                                                                             Minerals, ores and metals
               40
               20
                0
                  80

                  82
                  84

                  86

                  88

                  90

                  92
                  94

                  96

                  98

                  00

                  02
                  04
               19

               19
               19

               19

               19

               19

               19
               19

               19

               19

               20

               20
               20


Source: UNCTAD, Commodity Price Bulletin

The share of developing countries in world exports was approximately 30 per cent in 2003, around 3
per cent more than in 1980 and 8 per cent more than in 1990 (see table 2). This positive development
has however mostly bypassed African countries, and Africa has continuously lost world market shares,
with its share of world exports declining from 5.9 per cent in 1980 to 3.1 per cent in 1990 and 2.3 per
cent in 2003, while that of Latin American countries fell only slightly (from 5.9 per cent in 1980 to 5.4
per cent in 2002) and that of developing Asia rose from 18.1 per cent to 23 per cent during the same
period. Africa's performance has resulted both from the composition of its exports, with a high
concentration in product groups with slow demand growth and weak price development, and from its
failure to significantly increase its share of the market for the products where it holds comparative
advantages. It should also be noted, however, that the high figure for 1980 was partly due to the very
high oil prices that year.


                                                   Table 2
                       Share of main regions in world exports and imports (percentages)

                                                           1980         1990          2000           2003
                                             Export        65.31        72.08        65.34          64.53
                     Developed economies
                                             Import        70.93        73.05        69.21          68.18

                                             Export        29.43        24.21        31.97          32.39
                 Developing economies
                                             Import        23.90        22.53        28.99          29.28

                                             Export        5.91          3.12         2.30           2.34
                           Africa
                                             Import        4.65          2.87         1.97           2.22

Source: UNCTAD, Handbook of Statistics database




                                                               6
The development of exports from developing regions reveals differences between Africa and the other
regions with respect to the composition of exports. As table 3 shows, manufactures still constitute a
relatively small share of African exports and while non-fuel commodities have a higher share in total
exports of Latin America than Africa, it has been declining faster than Africa's as manufactured
exports rise.

                                             Table 3
             Evolution of trade structures of developing country groups, 1989-2002

                                                              Share of total exports
                                                                    Non-fuel
                                                    Fuels                            Manufactures a/
                                                                  commodities
                                              1989-92 1999-02 1989-92 1999-02 1989-92 1999-02
Developing countries                            25        18     19           12      56        69
Of which:
   Latin America and the Caribbean                 25      16         42          25          33          58
   Africa                                          59      49         25          20          15          28
   West Asia                                       73      72         8           6           18          21
   East and South Asia                             7       5          13          8           79          86

a/ Defined as SITC 5 to 8, less 68, 661 and 667;
Source: UNCTAD Handbook of Statistics

Even within their areas of specialization, African exporters have been less than successful. Table 4
shows that the change in Africa's share of world commodity exports has been less positive than that of
the other main developing regions. Indeed, Africa lost market shares for both fuels and ores and metals
and improved its market share for agricultural products only slightly.

                                              Table 4
                        Commodity exports from developing regions 1990-2003
                                   (in per cent of world exports)

                                        Agricultural products       Fuels          Ores and metals
                                           1990        2003     1990    2003        1990     2003
               Africa                       3.9         4.1     13.6      8          4.5      3.1

               Developing Asia*              13.1       15.4    9.8        10.1        6.7         12.6

               Developing America            9.8        10.9    9.1        7.8         12.9        12.4

* Excludes Central and West Asia
Sources: UNCTAD Handbook of Statistics, UNCTAD secretariat computations based on UN Commodity Trade Statistics
Database (UN Comtrade) data

When looked at the share of African countries in relatively more and relatively less dynamic groups of
commodities in world trade, it is observed that Africa specializes in the latter. For example, as seen in
table 5, tropical beverages and fibres natural fibres where Africa has the highest share in world have
lost their importance in total agricultural exports of developing countries. In the case of fruit and
vegetables, fish and vegetable oils, which have become much more important export commodities for
the developing countries over the last twenty years, Africa's share is relatively modest. In spite of
some isolated success stories, African countries have not shared in the dynamism.




                                                           7
                                              Table 5
                     Product groups with decreasing and increasing importance
                             in developing country agricultural exports

                     Share in        Share in     Share in     Share of            Share of       Share of
                    developing      developing developing      Africa in           Africa in      Africa in
                      country         country      country       total               total          total
                    agricultural    agricultural agricultural developing          developing     developing
                      exports         exports      exports     countries           countries      countries
                      1982-83         1992-93      2002-03      1982-83             1992-93        2002-03
Decreasing
importance
Trop Beverage              15.6%           8.4%            6.5%          40.2%          29.6%          33.1%
Natural Fibers              6.3%           3.8%            2.1%          24.9%          35.2%          48.4%
Sugar                       5.3%           5.0%            4.5%          15.7%          11.8%          12.2%
Rubber                      4.5%           3.5%            3.7%          11.1%           4.7%           2.5%
Hides and
Skins                       2.4%           0.5%            0.7%          10.6%           3.6%            2.9%

Increasing
importance
Fruits and Veg             14.5%          16.6%           15.7%           9.7%          10.8%           9.9%
Fish                        8.6%          14.3%           14.5%          13.1%           9.4%          11.1%
Cereals                     7.8%           6.5%            7.6%           6.6%           3.8%           5.3%
Vegetable oils              6.6%           7.1%           10.4%          18.5%           6.4%           3.0%
Wood                        6.0%           7.1%            6.1%           3.9%           3.0%           3.5%
Tobacco                     3.9%           5.1%            3.5%           5.8%           3.7%           3.9%
Meat                        3.1%           4.3%            4.9%           5.1%           2.6%           3.7%


Source: UNCTAD secretariat computations based on UN Commodity Trade Statistics Database (UN Comtrade) data


The development of terms of trade for different developing regions reflects their relative dependence
on commodities and the declining real prices of these products (see table 6). Accordingly, while
developing Asia's terms of trade have been more or less constant, terms of trade of Latin American
and African countries have fallen significantly. The terms of trade measures the relationship between
export and import prices and it is of course perfectly possible for a country to experience rapidly
growing export incomes and economic growth despite falling relative export prices, due, for instance,
to increasing productivity. It is also possible under these circumstances to experience positive growth
in the capacity to import, that is, the total purchasing power of exports. Indeed, Asia's capacity to
import has increased rapidly, while its terms of trade have hardly changed, and the purchasing power
of Latin American exports has increased substantially in spite of falling terms of trade. In Africa, on
the other hand, capacity to import has grown by significantly less and the direction of change has been
less consistent, due to slower growth in the volume of exports.




                                                      8
                                        Table 6
      Terms of trade, export volume and purchasing power of developing countries,
                                 1980-2002 (2000=100)

                                          1980    1990   1995     1996   1997   1998   1999   2001   2002
       Developed economies
       Terms of trade                      97     103    105      104    103    105    105    101    102
       Volume indices of exports           36     53         70   73     81     85     89     100    102
       Purchasing power of exports         35     55         73   77     84     89     93     101    104


       Developing economies
       Terms of trade                     117     100    102      102    103    100    99     99     100
       Volume indices of exports           20     38         65   70     77     78     86     99     107
       Purchasing power of exports         23     39         66   71     79     78     85     97     106


       America
       Terms of trade                     140     88         99   98     101    96     95     98     98
       Volume indices of exports           20     41         60   68     76     82     89     102    102
       Purchasing power of exports         28     36         59   67     76     78     85     100    100


       Africa
       Terms of trade                     134     100        95   95     93     89     89     98     101
       Volume indices of exports           54     64         70   79     85     78     91     100    100
       Purchasing power of exports         72     64         67   75     79     69     80     98     102


       Asia
       Terms of trade                     101     104    104      103    104    103    101    99     100
       Volume indices of exports           16     35         65   69     76     78     85     98     108
       Purchasing power of exports         16     37         68   72     80     80     86     97     108

Source: UNCTAD, Handbook of Statistics database


                  2. Africa's place in world commodity trade

As has already been noted, Africa's loss of shares in total world trade is the result partly of the
composition of its exports and partly of loss of market shares also for the products which dominate its
exports. However, the dominance of fuel and manufactures exports and the apparent low dependence
on commodities at 20 per cent of exports seen in table 3 hide a more complex reality. In fact, as seen
from table 7, only 9 out of 48 African countries can be classified as mainly fuel exporters and the same
number of countries are manufactures exporters. The other African countries depend mainly on
exports of non-fuel commodities. One implication is of course that recent increases in oil prices
benefit only a small number of African countries while they lead to major deteriorations in the trade
balance for most of the others.




                                                         9
                                         Table 7
 Distribution of developing countries according to their export specialisation, 2002-2003
                                                                       Non-fuel           Manufactures
                                                        Fuels
                                                                     commodities              a/
                                                       Number
                                                                      Number of            Number of
                                                         of                                                      Total
                                                                      countries            countries
                                                      countries
                      Africa                             9                 30                     9                48
                      Latin America b/                   3                 11                     6                20
                      Caribbean c/                       2                 8                      6                16
                      South and East Asia                1                 2                     16                19
                      West Asia                          10                0                      3                13

                      Total                               25               52                    41               118

a/ Defined as SITC 5 to 8, less 68, 661 and 667; b/Includes Cuba, Dominican Republic and Haiti; c/ Includes Belize, Guyana
and Suriname.
Source: UNCTAD, 2004a

For the majority of African countries that depend on non-fuel commodities export diversification has
not improved noticeably over the past decades. Since 1992, the average number of products per
country, measured at the SITC 3 digit level, has risen from 116 to 123 (see table 8). African countries
on average export the smallest number of products among developing regions (although the average is
of course affected by the large number of relatively small African economies compared to, for
instance, Asia). The situation is more dramatic at the national level and some countries, for instance,
Rwanda, Sao Tome and Principe, Sierra Leone and Burundi, exported only around 10 products each in
2002. The same picture of dependence on a few commodities is given by the average diversification
and concentration indices, which differ significantly from those of Latin American and Asian
countries.

          Table 8 Average export concentration and diversification indices by region

                                                        1992                                                       2002
                               Number of                                                    Number of
                                                 Diversification      Concentration                          Diversification      Concentration
                              Commodities                                                  commodities
                                                    Index2               Index3                                  Index               index
                                exported1                                                    exported
World                             223                 0.422                0.139               224                 0.419               0.157

Developed economies                231                0.353                0.098                231                0.348               0.115

Developing economies               199                0.601                 0.25                210                0.545               0.234
America                            195                0.591                 0.23                213                 0.52               0.199
Africa                             116                0.818                0.569                123                0.788               0.492
Asia                               212                0.573                0.212                217                 0.53                0.22

LDCs                                42                0.8998               0.584                 69                0.876               0.526
HIPC                                76                 0.868               0.535                124                0.797               0.416

1
   Number of products (at the three-digit level of SITC, Rev2) exported by country; the figure includes only those products for which the
value is greater than 100,000 dollars or more than 0.3 per cent of the country's total exports. The SITC classification, Revision 2, includes
239 products at the three digit level.
2
  The diversification index, which ranges from 0 to 1, shows the extent of the difference between the structure of trade of the country and the
world average. An index value close to 1 indicates a large difference from the world average and a low degree of diversification.
3
  The Herfindahl-Hirschmann index is a measure of the degree of market concentration. It has been normalized to obtain values ranking
from 0 to 1 (maximum concentration).
Source: UNCTAD, 2004a



                                                                     10
In many African countries, one or a few commodities account for more than half of total export value.
For instance, precious stones (diamonds) account for almost 89 per cent of the total export value in
Botswana; cotton for 70 per cent in Burkina Faso and 51 per cent in Benin; tobacco represents 60 per
cent of Malawian exports and ores and metals (mainly bauxite and alumina, but also gold) constitute
52 per cent of Guinean total export value (see Appendix table 1). Such strong dependence on one or a
few commodities makes national economies very fragile and exposed to price shocks. Moreover, if the
commodities in question exhibit declining real prices in the long term, dependence can become a trap,
where falling incomes preclude options to diversify into products with more dynamic demand
characteristics.


B. Developments and current policies influencing the structure of the commodity markets and
African exports

          1. The increased dynamism of South-South trade

Developed countries account for two thirds of world non-fuel commodity imports, and they therefore
play a role in establishing conditions in international commodity markets that are crucial to developing
country commodity exporters. However, in recent years, the most rapidly growing element of
international trade, particularly of commodities, has been trade between developing countries. This is
due to rapid economic growth and resulting rising demand in many countries of the South. The value
of developing countries'4 commodities exports, including fuels, rose from $ 264,891million in 1990 to
$422,218 million in 2003, with the share of such trade in world commodities trade rising from 7 per
cent to 12 per cent. The share of developing country exports that goes to other developing countries
has increased from 25 per cent of the total in 1990 to 42 per cent in 2003. Imports originating in
developing countries are a higher proportion still, representing 48 per cent of developing country
imports in 2003, compared with 30 per cent in 1990. Table 9 summarizes the extent of South-South
trade in commodities. As is seen from the table, a very large portion of the trade is directed towards
Asia. China of course accounts for most of Asian commodity imports and has been one of the major
dynamic elements for international commodity markets in recent years. The commodities price
increase in 2003 and 2004 is also generally attributed to the rapid rise in Chinese demand. Chinese
agricultural imports from developing countries outside Asia increased by a total of 30 per cent from
1995 to 2002 and mineral imports from these countries (including fuels) almost tripled over the same
period. Since this was a period when commodity prices decreased substantially, the growth in volume
terms was considerably higher. African countries experienced a 10 per cent annual growth in total
commodity exports to China from 1995 to 2002 and for minerals, including fuels, the increase was 12
per cent.




4
    Excludes Central and West Asia


                                                  11
                                                  Table 9
                      South-South* regional and inter-regional commodities trade, 2003
                                       (Million dollars and per cent)

                                                                   Destination
                                                                                                              Total
                      Origin          Developing America Developing Africa Developing Asia

              Value (in US$)
              Developing America               29723                   3012                 14980             47715

              Developing Africa                3202                    7817                 10218             21237

              Developing Asia                  5482                    4051                 101700           111233
              Total                                                                                          180185
              Share of trade flows in total South-South commodities exports (in percentage)

              Developing America                 17.2                   1.7                 8.7                27.6

              Developing Africa                   1.9                   4.5                 5.9                12.3

              Developing Asia                     3.2                   2.3                56.5                 62

Sources: UNCTAD, 2004a, UNCTAD secretariat calculations based on UN Commodity Trade Statistics Database (UN Comtrade) data
* Excluding Central and West Asia



Asian demand, particularly from China but also from India, is likely to be an important dynamic
influence on commodity markets and on export opportunities of African countries in the medium to
long term for three reasons. First, China and India have a combined population of 2.3 billion people,
about 37 per cent of the world's population. An increase in per capita income of US$ 100 in these two
countries (which corresponds to an increase of 10 per cent for China and 20 per cent for India)
represents US$230 billion in additional demand, a large portion of which would be spent on
commodities. Second, both countries have large infrastructure investment needs, which will lead to
rising demand for construction materials and other industrial raw materials. Finally, rising incomes
will lead to life-style changes that affect the composition of demand, particularly for food products,
many of which will be imported. This is already evident in the composition of China's agricultural
imports, and to some extent also in India's. Among China's main agricultural imports are vegetable oils
and oilseeds, fish and seafood and animal feed. Other growth sectors include horticultural products
such as cut flowers and fruits and vegetables, which are important to African exporters. The fact that
both India and China have made great progress in reducing poverty is particularly important, since,
other things being equal, rising incomes for the poorer segments of the population tend to have a large
impact not only on the composition of food demand but also on total food consumption.


           2. The international trading system: developments and recent initiatives

2.1. WTO issues5

           Trade liberalization

The Doha work programme of the WTO, launched in November 2001, focuses mainly on a further
opening of markets and on reducing subsidies and distortions in the world market. As far as

5
    Although WTO issues are then main topic of another Ministerial meeting, a brief overview is presented here.


                                                              12
agricultural trade is concerned, the three pillars of negotiations are market access, domestic support
and export competition.

Market access, the issue where so far the least progress has been made and which is thus in most
urgent need of movement according to the former Chairman of the Trade Negotiations Committee,
will be improved by applying a tiered approach for tariff reductions so that deeper cuts are made in the
highest tariffs, but countries may select a number of sensitive products to be excluded from ambitious
cuts (WTO, 2005). In fact, average most-favoured-nation (MFN) agricultural tariffs in developed
countries have remained high. With respect to the MFN tariff applied by the European Communities,
the WTO reported in 2004 that "agricultural products (WTO definition) are the most tariff-protected
goods, with an average tariff rate of 16.5 per cent (more than twice the overall average); tariffs on non-
agricultural products average 4.1%. Using ISIC (Revision 2) definition6 agriculture remains the most
protected sector in the world, with an average tariff of 10 per cent, followed by manufacturing (6.4 per
cent), and mining and quarrying (0.2 per cent); 4 per cent of tariff lines in agriculture carry rates
higher than 50 per cent"(WTO, 2004).

Developing countries, including those in Africa, may be faced with a demand that they cut their MFN
tariffs on agricultural products. This could expose their agricultural sectors to severe competition,
particularly if developed countries do not have to undertake major reductions in export subsidies and
domestic producer support. It is worth mentioning, however, that African countries are cutting their
tariffs in the context of regional integration (discussed later in this report) outside the WTO context.
The poultry sector of several West African countries, for example, has encountered severe difficulties
as external tariffs have been cut in UEMOA. Given that developing countries have little possibility to
subsidize their producers, their main recourse for protecting their agriculture remains tariffs.

Tariffs on agricultural goods escalate according to the degree of processing. With some exceptions,
post Uruguay Round tariffs escalate not only between raw and semi-finished but also between semi-
finished and finished products.

It has been agreed in principle that export subsidies, including subsidy components in export credits
and food aid and certain activities of State exporting enterprises, should be eliminated, but the pace
and the exact measures for elimination remain to be defined.

Domestic support is possibly the most controversial part of the current negotiations, and also that
aspect that affects African countries most significantly. While it is true that the amount of subsidies
defined as trade distorting in the WTO Agreement on Agriculture (the amber box) has been reduced,
the increase in subsidies that are considered to be less distorting has more than offset this reduction. In
2004, total agricultural support, which includes subsidies and transfers from consumers via high
tariffs, in OECD countries was estimated at US$ 377,938 million (OECD, 2005, p. 12). Over the last
three years, total support has increased at the same rate as GDP. The subsidies often have considerable
distorting effects on international prices, to the detriment of developing country exporters. For
instance, according to estimates that Brazil commissioned when the country complained to the WTO
in 2003 about the United States cotton subsidies: without the subsidies, United States cotton
production would have fallen by 29 per cent in 2001-2002 and its cotton exports by 41 per cent; this
contraction would have led to rise in international cotton prices of 12.6 per cent (WTO, 2003b). On
average in OECD countries, producer support to rice producers corresponded to 80 per cent of farm
receipts, and support to producers of sheep meat, sugar and milk corresponded to 45 per cent or more
(WTO, 2003b). Whether the remaining negotiations achieve massive reductions in trade distorting
domestic support critically depends on the choice of the reduction formulas (for the amber box and
total trade distorting support, comprising amber box, de minimis and blue box support) and the
revision of the criteria for the blue box and green box.



6
    International Standards Industrial Classification (Revision 2)


                                                          13
The consequences of developed country agricultural subsidies are well-known: depressed world
market prices due to the export of surplus production, and non-subsidized producers from developing
countries having to compete with the subsidized ones not only on the home markets of the latter but
also on third country markets and on developing countries' domestic markets.

SPS requirements

Another challenge to developing countries exporting agricultural products is constituted by the
requirement to comply with the Sanitary and Phytosanitary (SPS) management of developed
countries7. Developing countries face enormous difficulties in meeting the standards imposed in the
markets of the latter countries. The standards are costly in terms of infrastructures, human skills
development, building national capacities, and of course updating capacities since standards change
frequently according to the development of agricultural production and evolution of consumer
concerns.

In order to estimate representative costs incurred by African countries, especially LDCs, to meet
agricultural and SPS standards, UNCTAD commissioned a field study in three countries (United
Republic of Tanzania, Mozambique and Guinea) in 2004. The costs of compliance with these
standards for public institutions were based on the requirements set by international legislation and
include costs incurred by public and semi-public agencies for legislation development, training,
infrastructure and equipment upgrading, inspection, testing, and other monitoring and control
mechanisms. The costs incurred by producers and exporters in order to comply with demands of
importing countries and private clients include changes in producing systems, infrastructure
construction and upgrading, training, consultancy services and certification costs. The estimates were
based on the requirements set by the EurepGap8 protocol. These costs are summarized in table 9 for
the public and private sectors in United Republic of Tanzania, Guinea and Mozambique.

While the public sector costs are high, it is conceivable that they could be met, provided that potential
agricultural exports are large enough. It is not evident, on the other hand, how most private sector
producers in African countries are going to find the funds needed to meet their own setup costs.

The growing concerns of African countries9 regarding their difficulties in meeting the international
requirements in agrifood safety and SPS compliance indicate their need to enhance capacities to meet
such requirements. An important issue then is how to ensure that the interests and capabilities of
African and other developing countries be taken into account when changes are made to standards.

                                                Table 9
                          Costs of compliance for the private and public sector
                           in Tanzania, Mozambique and Guinea, 2005, US$

                                          Mozambique             Tanzania                Guinea


         Public sector costs               9,250,000             2,520,500              5,936,600

         Private setup costs                109,400               98,690                2,197,200
         Private recurring costs             23,600               20,500                  27,000


7
  SPS management is divided into four aspects: food safety, quality assurance, plant health protection and animal
health protection.
8
  The EurepGap protocol is a private certification system developed by a group of 22 large European retailers to
encourage producers to implement quality standards. It was choose due to the comprehensiveness of the protocol
and the clarity of requirements.
9
  African Union, 2005.


                                                       14
Source: UNCTAD, 2005a

Disputes regarding trade policies

While negotiations over future rules are continuing, the application of existing rules by developed
countries with respect to commodities of interest to African countries has been successfully challenged
on a number of recent occasions, leading to a major overhaul and reform of these policies.

Following a complaint made in 1996 by the United States, Ecuador, Guatemala, Honduras, and
Mexico against the European Community regime for the import, sale and distribution of bananas, in
1999 the EC introduced changes in its bananas regime to comply with the recommendations and
rulings of the WTO Panel and Appellate Body. The complainants had asked for two points to be
modified to comply with WTO rules: differential tariff rates as between banana exporters and country-
specific allocation of tariff quotas. It was argued that the EC licensing scheme discriminated against
imports from Latin America and created highly unfavourable conditions of competition compared to
the simple arrangements for bananas from ACP countries. As a consequence, no later than 1 January
2006 the EC would introduce a tariff only regime for imports of bananas. In the interim (1 January
2001 - 31 December 2005), bananas are being imported into the EU under a tariff quota system
wherein bananas originating in ACP countries benefit from preferential tariffs; the system is operated
through import licences allocated on the basis of past trade. However, after 1st January 2006 all non-
preferential suppliers would be subject to an MFN tariff, while ACP bananas (as well as bananas
originating in the LDCs under the Everything But Arms Initiative) would continue to enter duty free.

In practice, the viability of the ACP trade will depend on the level of the MFN tariff to be applied. On
31 January 2005, the European Communities notified its intention to replace its concessions on
bananas with a bound duty of Euros 230 per metric ton. Many banana exporting Latin American
countries had urged that the tariff should not exceed Euros 75 per tonne, while the ACP countries had
called for a new single tariff of at least Euros 275 per tonne to offset the competitive margin enjoyed
by "dollar zone" bananas. On 1 August 2005 a WTO arbitrator ruled against the EU's proposed tariff,
arguing that 230 euros per tonne "would not preserve, at a minimum, the current market access
opportunities afforded to MFN suppliers - mostly in Latin-America". Therefore the EU has to change
the proposed tariff regime in order to make it more nearly acceptable to the complainants. It proposed
on 12 September a new most-favoured nation tariff of Euros 187 to replace the Euros 230 tariff.
Whether this will be acceptable remains questionable.

Another European trade regime was again called into question in July 2003 when Brazil, Australia and
Thailand requested the establishment of a Panel to statute on their complaints against the 2001
reformed Sugar Common Market Organisation (CMO). Complaints were specifically focused on the
export subsidies regime. Under pressure from its trading partners, in June 2005 the European
Commission redesigned its July 2004 sugar reform (a reduction by one third in the guaranteed EU
price by the end of 2007 and a reduction in EU production quotas), and proposes to replace price
support by a system based on direct decoupled payments to producers.

Cotton has also been the subject of a WTO dispute. In 2003, Brazil became the first country to submit
a formal complaint under the WTO dispute settlement mechanism about US cotton subsidies, claiming
that they depressed world cotton prices and injured Brazilian farmers. The dispute settlement Panel
sided with Brazil on certain major substantive claims, and specifically on US domestic support
measures that were contingent on prices (in particular, the marketing loan programme payments, user
marketing payments, market loss assistance payments and counter-cyclical payments). These measures
caused "serious prejudice" to Brazilian interests by unfairly depressing world cotton prices. The Panel
further held that export credit guarantees and payments to exporters of upland cotton were prohibited
export subsidies. Hence, these measures had to be withdrawn "without delay." Despite the fact that
West and Central African countries did not participate as complainants in the dispute although they are
heavily dependent on cotton for their export earnings, they continue to be actively engaged in the
negotiating process. The "cotton initiative" was originally launched in 2003 by Benin, Burkina Faso,


                                                  15
Chad and Mali. These countries called for (i) the phase-out of developed countries' subsidies for cotton
production and export (negotiations 'area) and (ii) a compensation mechanism to offset the income loss
experienced by LDCs pending the phase-out (financial assistance's area). More recently, WTO country
members agreed, in 2004, to make discussion on cotton an integral part of agriculture negotiations and
decided to establish a sub-committee under the Committee on Agriculture to facilitate dealing with the
issue of cotton specifically, expeditiously and ambitiously. Its work, which started in November 2004,
encompasses all trade-distorting policies affecting the sector in all of the three pillars: market access,
domestic support and export competition. It also discusses technical assistance to the four West
African countries.

Another important African initiative on commodities was taken in May 2003 by Kenya, Tanzania and
Uganda, who submitted a non-paper on commodity issues to the WTO Committee on Trade and
Development (WTO, 2003a). The paper brought to the attention of WTO Members the need to address
the crisis arising from the decline in prices of primary commodities faced by commodity dependent
African countries. The African delegations requested that a work programme for "joint action" be
drawn up. Such a programme would aim to find solutions to the problems related to commodity
dependence and the long-term declining trend in real prices in the ongoing negotiations. The initiative
focussed on the structural oversupply of some agricultural commodities and its impact on the
economies of commodity exporting countries, as well as on the barriers to the development of
processing industries in commodity producing countries, including tariff escalation. The African
initiative mentioned some possible measures that could be considered in order to resolve the problems,
including supply management arrangements among producing countries and export taxes to stabilize
export earnings. In response to the African initiative, the Committee on Trade and Development
decided to hold a Special Session of the Committee on Agriculture and the Negotiating Group on
Market Access for Non-Agricultural Products with specific mandates for negotiations10 taking into
account the proposals formulated in the African Initiative submission. In 2005, the same group of
countries, joined by Côte d'Ivoire, Rwanda and Zimbabwe, made a complementary submission, which
focused more specifically on the Doha Round negotiations. Among other things, they proposed that
products of export interest to developing countries should be singled out for a more favourable
treatment with respect to tariff and non-tariff measures and subsidies, and that countries exporting
these commodities should receive compensation from subsidizing countries for subsidy related losses
in export earnings.

2.2     Preferential schemes

Developing country exports enjoy preferential access to developed countries' markets through
unilateral preferences schemes such as the Generalized System of Preferences (GSP), and more
recently the European Everything but Arms initiative and the United States African Growth
Opportunity Act, as well as the Cotonou Agreement that provides preferential access to ACP
countries.

The Generalized System of Preferences (GSP) provides preferential access for 178 developing
countries. Fifteen countries and the EU11 apply specific GSP schemes, which differ according to the
products covered by the special treatment, the rules of origin and the size of the preference.




10
   It was decided that the approach to conduct the negotiations on commodities issues should take place on an
"issue by issue" basis. This involved two steps: (i) identification of the problems facing primary commodities, (ii)
categorization of commodities according to the different problems that affect them. This approach "issue by
issue" has the advantage of facilitating the negotiations as the number of issues is much smaller than the number
of commodities.
11 The following countries grant GSP schemes: Australia, Belarus, Bulgaria, Canada, the Czech Republic, the
European Community, Hungary, Japan, New Zealand, Norway, Poland, the Russian Federation, the Slovak
Republic, Switzerland, Turkey and the United States of America.


                                                        16
African countries can also access the EU market under the Cotonou Agreement's trade provisions.
This agreement, signed in 2000, replaces the earlier Lomé Conventions as a new partnership between
the EU and the 77 ACP countries, of which 47 are Sub-Saharan African countries. Until December
2007, the trade regime inherited from the Lomé Conventions is still in place. It is non-reciprocal and
provides for quota and duty-free access to the EU for most products. African agricultural exports can
enter European markets under market access arrangements in the Agreement's Annex or under special
commodity protocols for sugar, meat and bananas.

The EU market for agricultural products from African countries is important for these countries. In
fact, EU is their main export market; 31 per cent of all African exports 12 go to the EU, while the
United States and China account for respectively 26 and 7 per cent. Primary products accounted for 69
per cent of African exports to the EU in 2004. Moreover, the share of agricultural products increased
in total Africa-EU trade from 2000 to 2004: agricultural exports recorded an average annual increase
of 5 per cent over this period whereas total African exports declined at an annual rate of 2.8 per cent.
Therefore in 2004, agricultural products represented 29 per cent of total African exports, up from 27
per cent in 2000.

The EBA initiative was introduced in 2001 by the European Union as an addition to its GSP scheme.
It provides quota and duty free access on a non-reciprocal basis for products from the world's 50
poorest countries, the Least Developed Countries (LDCs), of which 34 are African countries. This
preference applies to all products except arms and three sensitive products, namely fresh bananas, rice
and sugar, which go through gradual liberalization until 2009 (while all duties on banana imports will
be eliminated from January 2006, full liberalization for sugar and rice is scheduled for July and
September 2009 respectively). It has been argued that the initiative would have limited impacts on the
LDCs exports since "in 1997 some 2 939 items were exported to the EU market by at least one LDC,
however, for only 502 of these items did exports exceed €500,000 and of these 502 items only eleven13
did not enjoy duty-free access before the EBA initiative was launched" (Stevens et al., 2001). More
recently, a WIDER discussion paper has identified "moderate welfare gains from the EBA initiative
with the largest gains being recorded for Sub-Saharan Africa; [but] these gains largely arise from
access to the high-priced EU sugar regime" (Cernat et al., 2003). Since the planned changes in the EU
sugar regime will in all likelihood entail a drop in EU sugar prices, the least-developed countries
preferences will be considerably eroded.

The United States African Growth Opportunities Act (AGOA), which came into force in 2000, offered
some improvements in market access for 37 Sub-Saharan African countries. However, it has been
difficult for African countries to use the preferences offered, due to restrictive rules of origin and
complicated customs requirements, such as possession of an effective visa system and procedures for
preventing counterfeit documentation. Agricultural products face additional constraints: stringent
standards, especially regarding pests and diseases for fresh products. As a result, AGOA has benefited
only a small number of African countries, with four countries14 sharing 81.3 per cent of total AGOA
exports, and the benefits have been concentrated to a very limited range of commodities. Energy
related products (mainly oil) account for 80 per cent of the United States imports under the scheme,
and the remainder is mainly textiles and apparels, and precious metals and diamonds (see table 10).
Agricultural products account for less than 2 per cent of United States imports under the scheme.




12
   The figures refer to exports of African ACP countries, except South Africa, which, although an ACP member,
has a separate agreement with the European Union.
13
   These eleven items represent key exports for the LDCs. They fall into six products areas: beef, cheese, maize,
bananas, rice and sugar.
14
   The top AGOA beneficiary countries are Nigeria, Angola, Gabon and South Africa


                                                       17
                                              Table 10
                       Leading United States imports from Sub-Saharan Africa

                       Item                        2004 Import Value (US$ Millions)

                       Oil (Crude and non-Crude)                           26 124.9
                       Woven and Knit Apparel                               1 756.9
                       Platinum                                             1 746.8
                       Diamonds                                               934.6
                       Ferroalloys                                            536.5
                       Cocoa                                                  491.5
                       Motor Vehicles                                         423.5


Source: U.S. Dept. of Commerce, Bureau of Census



In June 2005, the United States announced that it would make available additional funds, $ 200
millions, under a new Initiative, the African Global Competitiveness Initiative, which will be created
to take advantage of trade opportunities afforded by the AGOA.

Large preferential margins may sometimes enable commodity dependent countries with adverse
resource endowments (such as some SIDS) to enter import markets. However, preferences with
prohibitively large margins also reinforce geographical and product dependence. For example,
production of Swaziland sugar, which benefits from preferential access to the European Union, has
risen considerably. However, for this increase to materialize, the area allocated to sugar has to expand
at the expense of other products, thus, according to some observers, “threatening the country’s ability
to feed itself” (Hall J., 2002). Such dependence, if not backed by competitiveness, can lead to
significant adjustment costs if the preferences are eliminated. Moreover, preferences are most valuable
in a high tariff trading environment. When tariffs in general are lower, preferences provide less of a
margin. When the trend is towards lower tariffs, as at present, preference erosion becomes an issue of
concern to the countries benefiting from preferences. Preference margins are eroded when preferences
themselves remain constant but MFN tariff rates are reduced - which may be about to happen with
agricultural products. The reduction of preferences themselves, of course also leads to smaller
preferential margins. As MFN tariffs for most commodities (except in their processed forms) are
already relatively low, preference erosion from a reduction in either MFN rates or specific preferences
might not result in large shifts in trading patterns for most products. Shifts, however, can be very
significant and have important negative impacts upon countries and producers of products enjoying
preferences when margins are very high, for example in the case of bananas and sugar. These negative
impacts, however, mean that some other countries will be taking their place.


2.3      Regional arrangements

The Cotonou Agreement between the EU and the ACP countries provides for Economic Partnership
Agreements (EPA), which are trade provisions aimed at implementing a free trade framework for
products, supported by other trade instruments. The Agreement will end the non-reciprocal treatment
in earlier EU-ACP agreements in order to be compatible with WTO rules and proposes to institutes a
free trade regime. Negotiations of six regional EPAs are underway, four of which are in Africa,
namely Central Africa, West Africa, Southern African Development Community (SADC) and ESA


                                                   18
(Eastern and Southern Africa Region (ESA). The negotiations on EPAs will be completed by
December 2007, and the prospective EPAs are to enter into force in January 2008. Until this date,
trade preferences inherited from the Lomé conventions are maintained, sanctioned by a WTO waiver
secured at the Doha (2001) Ministerial Conference.

One chief objective of the EPA is to build effective regional African markets. On 9 June 2005, African
Union ministers adopted a joint declaration which highlighted and recalled the EPA vocation, namely
"serve as instrument for development and poverty reduction […] and deepening of African trade"
(African Union, 2005). The African Union also emphasized the urgent need for "accessible substantial
additional resources for building supply capacity, infrastructures development, diversification,
competitiveness of African economies and to deal with anticipated adjustment costs."

Agricultural concerns and market access issues are at the heart of the EPA negotiations since the EPAs
are likely to change the African agricultural trade environment fundamentally. A key element of the
EPA project is the principle of reciprocity. Under the trade regime in the five Lomé Conventions, ACP
States were not required to treat imports from the EU differently from those sourced in other countries.
That will change under the EPAs, where ACP countries will be expected to remove tariffs on
"substantially all" imports from the EU. This requirement has raised concerns about the subsidized
European imports which might penetrate African markets even more easily than before. Some of these
concerns may be alleviated if the removal of barriers to intra-African trade were to result in more
competition for EU exports. This will require harmonization of national commercial legislation and
regulations in Africa. Moreover, the reduction in government revenues resulting from lower customs
receipts will have to be addressed.15

If the positive effects of the EPAs are to be fully exploited, capacity building is necessary. The African
Union has, for instance, stressed the need of "adequate resources to be made available to build
capacity to meet SPS and TBT requirements". The EPAs aim to enhance three types of capacity in
ACP States: (a) production capacity, (b) supply capacity and (c) trading capacity (UNCTAD, 2003).

Over the last several years, developing countries have concluded a large number of regional trade
agreements (RTAs) both with other developing regions/countries and with developed countries.
Indeed, 43 per cent of trade now falls under the umbrella of RTAs (UNCTAD, 2004b). Africa has
some 30 RTAs, including free trade agreements and customs unions, and most African countries
belong simultaneously to multiple RTAs (See annex table 1, for an overview of the membership in
African regional economic organizations). There are 14 Regional Economic Communities (REC) of
varying design, scope, and objectives. Of these 14 regional groupings, two have initiated trade
liberalization, SADC, which exhibits the highest level of integration, and COMESA. The most
advanced RTA regime is UEMOA, which has completed a FTA and customs union with a single CET.

The share of intra-African trade in total trade declined in the 1970s before it increased in the 1980s
and the 1990's to finally return to the level of the early 1970s. However, during the past decade, the
share of intra African trade has remained stable at around 10 percent of total trade (see figure 2).
Although it grew by 7 per cent per year from 1990 to 2003, overall intracommunity trade averaged
only 10.5 per cent of total exports and 10.1 per cent of imports.

Inter-African trade between regional economic community members and non-members fared even
more poorly—averaging 7.6 per cent of total exports and 9.0 per cent of imports16 (UN ECA, 2004).


15
   African States rely heavily on tariffs from government revenue. They would have to establish a list of
"substantially all" products included in the liberalization process taking into account the level of tariff structures
applied among the EPA's members. Therefore, regional organizations already in force would have to harmonize
their trade-integration policies before they commit themselves to an EPA.
16
     UN ECA, 2004


                                                         19
There are, however, considerable variations in performance among the regional economic
communities.




                                                  Figure 2
                      Intra African trade in total African trade, 1970-2003 (per cent)




Source: IFM, Direction of Trade Statistics, various years



Table 11 shows the shares of Africa’s regional economic communities in intracommunity trade, based
on the absolute values of exports and imports in 1990–2003. SADC has the largest shares of exports
(31 per cent) and imports (30 per cent), partly reflecting South Africa’s large economy. Other export-
oriented economies within SADC, such as Mauritius and Zimbabwe, also contributed. SADC tops the
other economic communities despite the fact that it began implementing a trade protocol only in
September 2000. As implementation of the protocol gathers momentum, intra-SADC trade is likely to
increase further.


                                              Table 11
              Shares and rankings of regional economic communities in intracommunity
                             exports and imports, 1990–2003 (per cent)

                 Regional Organization          Share of Export   Rank   Share of Import   Rank
                SADC                                 31.1           1         30.2          1
                ECOWAS                               19.8           2         20.9          2
                CEN-SAD                              12.8           3         13.3          3
                COMESA                                9.3           4          9.5          4
                UMA                                   8.6           5          8.8          5
                UEMOA                                 5.9           6          5.6          6
                EAC                                   4.7           7          4.2          8
                IGAD                                  4.4           8          4.6          7
                ECCAS                                 1.3           9          1.3          9
                CEMAC                                 1.1          10          1.1          10
                IOC                                   0.7          11          0.3          11
                CEPGL                                 0.1          12          0.1          12
                MRU                                   0.1          12          0.1          12
                Total                                 100                      100


                                                            20
Source: UNCTAD, 2004a, UNCTAD secretariat calculations based on IMF data.
ECOWAS ranks second on both exports (almost 20 per cent of the intracommunity total) and imports
(21 per cent). Considering that ECOWAS was established nearly three decades ago, its performance
might have been expected to be more impressive. CEN-SAD’s share of internal trade ranks third
(about 13 per cent of both exports and imports). Of fairly recent creation, with members straddling
several regional economic communities, CEN-SAD appears to offer a broadened market space that
most UMA countries can take advantage of and will likely provide a vital trade bridge between the
North African subregion (made up primarily of UMA countries) and Sub-Saharan Africa. COMESA
ranks fourth in internal trade (about 9.5 per cent of both exports and imports). The expansion and
deepening of its free trade area now under way is expected to generate substantial trade in the
subregion.

During the period 1900–2003 the value of intracommunity agricultural trade fluctuated, with no
regional economic community showing either steady growth or constant decline. Sharp slumps in food
trade have often been followed by large increases. In intraregional trade SADC ranks first on
agricultural exports and imports, followed by COMESA. SADC is home to large food producers,
particularly South Africa and Zimbabwe. Most economies in the region are agricultural based and
depend on exports of traditional agricultural products. They import most of their manufactured goods,
including agricultural inputs such as machinery and fertilizer. Recently, trade between SADC member
countries has been rising. Trade between the Southern African Customs Union (SACU), which
comprises Botswana, Lesotho, Namibia, South Africa and Swaziland, and the non-SACU members of
the Southern African Development Community (SADC) Angola, Malawi, Mauritius, Mozambique,
the United Republic of Tanzania, Zambia and Zimbabwe, has greater potential for expansion than
trade among other sub-Saharan African countries. This is because of the substantially greater
differences in per capita GDP and in current production and export structures between the two groups
of countries. Given the overlap in the product composition of exports by non-SACU members of
SADC to the rest of the world with SACU imports from the rest of the world, there is an untapped
potential for trade between the two groups. Apart from petroleum, where the overlap is greatest, this
potential mainly concerns primary agricultural products (including meat, tropical beverages, cotton)
and a few resource-intensive basic manufactures (such as cotton yarn and some types of woven
fabrics). Several African countries could do so to benefit more from interregional trade among
developing countries.




                                                 21
III. Enhancing the competitiveness of African exports and generating
development gains
As is seen from the foregoing, African commodity producers have lost market shares and the
commodity sector has contributed less to economic growth and development than could have been
hoped. Nevertheless, expected higher growth in demand and the possibility of a more level playing
field in international trade mean that prospects for African agriculture may be brighter now than in the
past. In order to profit from these favourable circumstances, however, African commodity producers
will need to enhance their competitiveness on international markets.


A. The concept of competitiveness

Competitiveness is, by definition, a relative concept. It depends not only on the conditions in a given
country and what is done by a given enterprise, but also on what the competitors do. It requires not
only doing something well but doing it better than others, and doing it better not only in export
markets but also in the home market. Abstracting from the impact of market access conditions, such as
tariffs and subsidies, it depends on the ability to supply a product of a given quality more cheaply than
the competition or providing a better-quality product than others can at a given price. Price
competitiveness is relatively more important for homogeneous commodities traded in bulk and those
entering as inputs into manufactured goods. Although in most cases the share of the primary product
in the value of the final product is small, competition between substitutes is often fierce. While
ultimately the relative efficiency and business skills of the supplying enterprise determine its
competitiveness, Governments have an important role in providing the appropriate environment and
incentives for inducing enterprises to undertake the necessary steps.

For commodities, two levels of competitiveness can be ascertained. 17 At the macro level is the
competitiveness of a certain product with respect to others. This can be competition between natural
and synthetic items, as for cotton, or between different natural products, such as the sugar and corn
syrup and cocoa butter and other fats used in chocolate. Macro level competitiveness is influenced by
production costs and by other factors such as taste. It can be raised through promotion efforts that
emphasize the positive characteristics of a particular commodity, for instance, from the point of view
of health concerns. Micro-level competitiveness exists among different suppliers of the same
commodity. Within the framework set by macro-level competitiveness, the micro-level
competitiveness of specific producers and exporters determines who participates in the supply chain,
and how. Competitiveness at the micro level can also be examined from two points of view: costs and
product quality. The focus of the following discussion is on the micro-level competitiveness of
African commodity producers and exporters and on how it can be enhanced.

Micro-level competitiveness is an important concern mainly for producers of agricultural commodities
in Africa. While cost competitiveness is certainly essential to mineral and oil producers, the challenges
facing African producers in these sectors are less formidable than those encountered by farmers. In
recent years, following a long period during which Africa lost market shares for mineral commodities,
African countries have again been relatively successful in attracting mining investment. The new
mining operations have low costs and are competitive on world markets. Moreover, while efforts to
improve micro-level competitiveness in mining can focus on a handful of enterprises and a well
defined area of government regulation, competitiveness in agriculture involves millions of producers
and a vast range of public services and regulations. The effects of improved agricultural
competitiveness are also more pervasive. Agriculture employs the majority of the population in most

17
  Apart from macro- and micro-level competitiveness, there is also competition – particularly relevant for
commodities composed of natural resources, such as minerals – where countries compete for investment
resources. Competitiveness in this respect is determined both by the quality of the countries’ natural resources
and by the attractiveness of their investment climate, including political risk, taxation and other legislation on
natural resource exploitation.


                                                         22
African countries. It contributes an average of 30 per cent of GDP in Sub-Saharan Africa (excluding
South Africa), and over 40 per cent in one-third of African countries. Agribusinesses, which
themselves depend on agricultural growth, are responsible for an additional 20 per cent of GDP and
about 25 per cent of total rural incomes. Raising the productivity and competitiveness of these
agricultural and related businesses would profoundly affect the rate of economic growth for the
majority of African countries and make a substantial contribution to reducing poverty over the next ten
to fifteen years.

Micro-level competitiveness is strongly influenced by more general policies at the national level. The
development of agriculture in many African countries has been slowed down by policies that have
placed a low priority on agricultural growth. Such policies include heavy taxation on agriculture in
order to mobilize resources for industrialization, overvalued exchange rates and controlled output
prices.

 In the following, supply side obstacles that impede competitiveness and raise costs for producers are
discussed first. Following that, the influence of market characteristics, ranging from local to
international markets, on African agricultural producers is reviewed. First, however, two other subjects
are briefly discussed: the challenge of converting commodity export earnings into development and
how enhanced competitiveness can aid diversification.


B. Realizing development gains from commodity production and trade

While improved international competitiveness will result in increased earnings from commodities,
there are no guarantees that higher export earnings will automatically be converted into broad-based
economic and social development. How difficult this will be depends on the nature of the sector. In
several countries, export earnings from energy production and mining, while raising GDP, have failed
to spur significant improvements in other measures of development, including those related to the
prevalence of poverty and social indicators. Moreover, surges in export revenues in countries
dependent on energy or mineral commodity exports have often resulted in excess liquidity and
consequent real exchange rate appreciation, reducing the competitiveness of other sectors exposed to
international competition and curtailing economic growth once the initial stimulus has passed.

The fact that the state normally receives directly a large share of the revenues from mineral or energy
exports constitutes both an opportunity and a risk. If Governments can spend the receipts wisely,
allocating resources to the accumulation of physical and human capital without straining the
absorptive capacity of the economy, the growth potential of the economy will increase. If, on the other
hand, they succumb to the temptation to acquire political advantages through superficially popular
measures or patronage, or if they fail to control expenditure growth, rents will be dissipated and future
growth may be compromised. While several countries have failed in striking the right balance, some
have succeeded. In Africa, Botswana, the only country to "graduate" from LDC status, is a good
example of how to achieve rapid growth and god performance on socio-economic development
indicators based on mineral revenues.18

Large-scale export oriented agriculture shares some of the characteristics of energy production or
mining, insofar as it may generate massive volumes of foreign exchange and its linkages to other
sectors of the economy may be relatively weak. However, the rents involved in agriculture are usually
an order of magnitude smaller than those involved in extractive industries. Moreover, agriculture is
more labour intensive, "learning by doing" effects are likely to be more important and linkages are
usually more easily built up. Accordingly, the "trickle down" effects of large-scale agriculture may
constitute significant contributions to poverty reduction.



18
     For a review of the factors behind Botswana's experience, see Modise, 2000.


                                                        23
C. The relationship between competitiveness and diversification

As has already been described, dependence on a small number of commodities for export earnings
makes the economies of many developing countries very vulnerable to external shocks. For similar
reasons, lack of diversification may inhibit investment and productivity growth at the micro level.
Diversification carries its own risks, however, and these risks must be reduced in order for them to be
acceptable to producers. Production techniques and business practices in a new area can be different
from the traditional activity and difficult to adopt. Small producers, in particular, need to be prepared
for and assisted in entering into new spheres of activity since their own resources are severely limited.
Moreover, in the absence of additional resources from other sources, diversification and improved
competitiveness in the traditional activity must in most cases be pursued in parallel, in order to
generate the necessary resources for diversification. This again underlines the importance of raising
the competitiveness of traditional commodity sectors.


D. Supply side obstacles to competitiveness

1. Productivity

Low productivity limits cost advantages and low productivity growth erodes initial competitive
advantages. Insufficient productivity is an important obstacle to the achievement of international
competitiveness in African agriculture. Agricultural productivity per worker for Africa as a whole has
stagnated during the past ten years at an estimated US$375 per worker (constant 1995 US$). This is 12
per cent lower than in 1980, when value-added per worker was US$42419 (World Bank, 2004). Yields
have also stagnated or fallen for a wide range of crops in many countries. Significantly, yields of the
most important food grains, tuber and legumes (maize, millet, sorghum, yams, cassava, groundnuts) in
most African countries are no higher today than in 1980. This has made the challenge of attaining food
security even more formidable. Low productivity has seriously eroded the competitiveness of African
agricultural products on world markets.

The regional trends mask considerable country variation in performance. For instance, Benin managed
to increase agricultural productivity per worker by over 40 per cent during 1980-1998, from about
US$400 in 1990 to US$575 in 1998. Average yields of tea in Kenya doubled between 1980 and 1990,
helping Kenya to become the world's largest exporter of tea. Yields of cotton in Benin, Togo, Mali,
Central African Republic, Chad, Senegal and other countries rose between 1980 and 1990, allowing
them to become significant exporters of cotton fiber. However, even countries that have been able to
increase production and exports of agricultural products during the 1990s experienced little increase in
yields during the decade, with production increases being mainly the result of increases in areas under
cultivation.

Low productivity has effects beyond the agricultural sector itself. In addition to providing a
competitive edge, increasing productivity helps to fuel economic growth by generating surplus that
can be used for investment within the sector itself or outside it. Historically, it has been a critical
element in the development and industrialization process.

While it is recognized that part of the difference between agricultural yields in Africa and other
regions is due to differences in the quality of soils, it is also clear that productivity could be improved.
Inadequate inputs and low capital investment explain a large part of the difference between potential
and actual productivity. For instance, despite variable rainfall and frequent drought periods in large
parts of Africa, only about 7 per cent of land under cultivation in Africa is irrigated, compared to 13
per cent in the Latin American and Caribbean region, which has similar population densities and
resource endowments. Fertilizer application did not increase from 1980 to the late 1990s (Kabbaj,
1997), and the number of tractors per worker is lower than in any other region.

19
     Figures mentioned in this and the following paragraph are from the World Bank, 2004.


                                                        24
Another important limitation on productivity growth is the difficulty of realizing economies of scale in
African agriculture. The scaling up of production encounters several types of risk, which have been
summarized in terms of rent seeking, coordination and opportunism (see Dorward et al., 2004).
Coordination risks are the risk of an investment failing because of the absence of complementary
investments by other players in a supply chain. Such investments, for instance, in providing logistic
support services to agriculture, are unlikely to materialize automatically under the prevailing
conditions in many African countries, with their small and unorganized markets, and may require the
coordinating efforts of either a private sector agent or the Government. Opportunism and rent seeking
risks are both associated with the monopolistic control by other parties over a complementary
investment or service, for instance, irrigation facilities, where these agents can remove or threaten to
remove it from the supply chain after a player has made an investment that depends upon it, thereby
expropriating income or assets from the investor. Where these risks are high compared to the potential
returns to investment, investors in a supply chain may find the investments too risky and thus the
supply chain may not develop even if it were otherwise profitable. Uncertain land tenure, sometimes
resulting from a conflict between traditional land tenure and new systems of individual ownership,
may also undermine farmers' incentives to invest in order to realize economies of scale. As was
mentioned in the discussion of costs of compliance with the SPS Agreement in section 2.1 of chapter
II, insufficient scale also affects producers' possibilities of meeting product standards, particularly
since this may necessitate investment that cannot be borne by a small production volume. The
possibility of meeting other market requirements, for instance, the ability to commit to regular
deliveries of a certain size, is also related to scale.


2. Physical infrastructure

The absence of adequate infrastructure is a major obstacle to commodity producers and exporters in
many African countries since it increases transaction costs and introduces risks, particularly with
respect to producers' ability to meet delivery commitments. Mining and oil production usually carry
their own infrastructure costs and, indeed, infrastructure often accounts for the major share of total
investment cost in these industries. Agriculture has a completely different financing and production
structure, with limited possibilities of attracting loan finance and production spread over large areas
and multiple producers, making it impossible to finance infrastructure investment against proceeds of
future production.

Exorbitant transportation costs affect the competitiveness in many African countries, especially
landlocked countries. In Uganda, for example, 70 per cent of the value of exports has gone into
transportation and insurance payments. This is an extreme case. But it is not unusual in Africa for as
much as 40 per cent of national export earnings to be diverted into international transport services. In
the United Republic of Tanzania, transport costs account for 60 per cent of the total marketing cost for
maize, and losses due to inadequate storage facilities are estimated to be 30-40 per cent of production
(UNCTAD, 2001).

Rural feeder roads constitute perhaps the most important factor in the physical transformation of rural
Africa. Yet, less than 10 per cent of Africa's rural roads are all-season roads, with serious implications
for post-harvest losses and inter-seasonal variations in farm producer prices and, therefore, farm
incomes. Absence of communications also results in segmented rural markets and poor information
flow that adversely affect the performance of rural markets.

Given the fluctuations of rainfall in many parts of Africa, more widespread use of irrigation could
have an important positive effect on agricultural productivity, thereby increasing and stabilizing
agricultural production and incomes. However, as already mentioned, only seven per cent of the total
cultivable land in Africa has been put under irrigation. Unfortunately, most investments in irrigation in



                                                   25
Africa appear to have favoured relatively large-scale, capital and management intensive schemes, with
often disappointing results. A stronger emphasis on alternative small-scale, easy to manage irrigation
schemes might lead to larger increases in productivity and would also directly benefit the rural poor.

Lack of adequate storage facilities is a major source of loss in African agriculture and another
impediment to competitiveness. After harvest losses could be easily reduced in many countries
through better storage facilities.

As illustrated by the case of irrigation, investment in infrastructure would not only have beneficial
effects o productivity, but would also improve the quality of rural life and, thereby, assist in containing
rural-urban migration. For instance, although water is a basic necessity, over 70 per cent of Africa's
rural population does not have easy access to safe drinking water. Most rural communities do not have
electric power. Supply of sufficient potable water and electric power can raise the quality of life and
play an important role in increasing productivity and competitiveness, especially in places where small
industries need to process and add value to their raw agricultural products.


3. Support services

Competitiveness requires access to a number of support services, such as provision of seeds, fertilizer
and other inputs, advice and extension services, logistics services and quality control. Many of these
services were in the past provided by state or parastatal institutions, including marketing boards. The
dismantling of such institutions, which took place during the 1980s and 1990s in many African
countries, was carried out in the expectation that the private sector would fill the resulting gap and do
it more efficiently. However, in most cases, the private sector has proved unable to do so for a variety
of reasons, including the absence of a sufficiently investment friendly environment and the fact that
national markets are often too small or insufficiently organized for private sector service providers to
realize economies of scale. Accordingly, transaction costs increase and producers encounter
difficulties in integrating themselves into supply chains.

Buyers may be suppliers of support services, as is often the case in contract farming, where the buyer
provides seeds and other inputs. Contract farming tends to promote productivity increases and reduce
farmers' exposure to risk, and has been successful in many African countries, particularly for labour
intensive export crops, such as vegetables. However, it is not necessarily the best alternative for all
crops or for all farmers. Another way of facilitating the effective distribution of support services is to
exploit economies of scale through local specialization. Under the "one village, one product" scheme,
which originated in Japan and appears to have been successfully applied in Malawi, a village
specializes in growing one crop for sale, thereby making possible savings in purchasing inputs and
accessing services such as irrigation expertise.

Nevertheless, Governments are in most cases the most effective providers of support services, not least
because they are in a position to establish national networks for service delivery. Allocating the
necessary resources for the (re)establishment of networks for delivery of extension services and
necessary inputs is therefore a matter of high priority. These networks can also serve as transmission
mechanisms for improved technologies. In this context, the need to invest more in agricultural
research deserves to be noted.


4. Access to finance

Finance is crucial for the development of the commodity sector in developing countries and lack of
access to finance is probably the single most important obstacle to the development of the agricultural
sector in many African countries. If farmers do not have access to finance on reasonable terms they are
unlikely to take the risks associated with diversification into new crops, application of new farming
methods or investment in machinery or irrigation. The bottleneck is in most cases not a lack of finance at


                                                    26
the national level, but rather the difficulties that most banks have in lending to agriculture. Since
commodity finance is the subject of a separate report prepared for the present conference, it is not
necessary to go into detail here, except to note that access to finance is intimately linked to all the other
supply side obstacles mentioned.


E. Markets

1. Internationalization of supply chains

In the following, characteristics and requirements of local, regional and international markets are
discussed. The distinction between these different levels of markets is, however, becoming
increasingly less important, as access to markets is liberalized and entry barriers are broken down.
Local markets in developing countries are being penetrated by international suppliers of commodities
and local producers are becoming more exposed to international competition. As supply chains
become more internationalized, it also becomes more important for producers at the early stages of
these chains to identify ways that they can integrate their activities with the chains and meet the
associated requirements.


2. Local and national markets

Competitiveness is always defined in the context of a particular market. Different markets impose
different requirements on the participants and reward different aspects of competitiveness.
Notwithstanding what was just said about the internationalization of supply chains, these requirements
still tend to be more stringent in international markets than in local ones. Accordingly, local and
national markets fill an important function as a steppingstone to international ones, allowing producers
to hone their commercial practices before launching their products on export markets. The efficient
functioning of national markets is also important for several other reasons. Efficient markets reduce
transaction costs. Since national markets are often the first link in the international supply chain, it is
important that they function efficiently, particularly by eliminating opportunities for rent seeking that
unduly handicap domestic producers and lower their incomes.

Markets in Africa are often thin, with small volumes traded and with large variability in both supply
and demand. Accordingly, market participants are exposed to considerable risk and high transaction
costs. The most important condition for efficiently functioning markets - aside from the need for
liquidity to reach sufficient volume - is access to information. Producers who have access to
information about prices and other market conditions are able to reduce the risk associated with
decisions concerning production choices. Their bargaining power is strengthened and they can
increase their income by selling where and when prices are high. An UNCTAD project (Infoshare)
that is being carried out in pilot scale in Cameroon aims to establish a local database on farm gate
prices and other price series (e.g. export and auction prices when they exist) as well as on intermediate
costs such as inputs, storage and domestic transport, with the final aim of enhancing transparency and
improving the information available to local producers. In other similar projects, local radio stations
have been used to disseminate information about prices. Possibly the most important recent
development in this respect has been the introduction of cellular telephones, which are widely used by
traders, often on a rental basis with one telephone serving a large group of people. Accordingly, one of
the most important ways that Governments can facilitate the creation of efficient markets is by
promoting competition on telephone markets and thereby ensure that costs of telecommunication are
kept low.




                                                     27
3. Regional markets

The development of regional markets can help African countries overcome constraints arising from
small domestic markets, allowing them to reap the benefits of scale economies, stronger competition,
and more private cross-border investments and foreign direct investment. Enlarged regional markets
should generate faster growth and income convergence in regional economic communities. Integration
of subregional markets should create subregional growth poles that can generate sufficient
externalities for the less developed members. The development impact of South Africa on the smaller
member states of SADC is a case in point.

Such developments can raise productivity and facilitate the diversification of production and exports.
The combination of a stable investment climate, transport and communication infrastructure, and
sound regional economic policy could provide adequate incentives for large-scale investment in
manufacturing and service projects subject to economies of scale. Regional market arrangements can
provide a framework for coordinating policies and regulations and help to ensure compliance.


3.1 Trade facilitation

Among African economic communities COMESA has the most extensive programme for trade
facilitation and promotion. Because two-thirds of EAC members also belong to COMESA, EAC
applies many of COMESA’s trade facilitation and promotion measures. EAC has also developed a
protocol for cooperation on standardization, quality assurance, metrology, and testing. EAC is
supplementing COMESA’s trade facilitation measures with a regional database of trade and
investment opportunities, laying the groundwork for a regional investment promotion centre. EAC is
also developing a comprehensive plan to strengthen the role of the private sector and associated bodies
such as the East African Business Council. Central to the plan is adopting a common competition
policy to promote investment and development in the community. EAC members hope to reach
agreement on this policy in tandem with the establishment of their customs union. The collective
regulatory framework will also cover harmonized principles to govern investment incentives and
promote domestic and foreign investment.

SADC’s Sub-Committee on Trade Facilitation is responsible for harmonizing trade documentation and
procedures. It is studying COMESA rules to minimize confusion for the nine SADC members that
also belong to COMESA. Half of SADC members use the Automated System for Customs Data, and
the community has set up institutions to eliminate technical barriers to trade, promote quality
production, and increase cooperation on standardization, quality assurance, accreditation, and
metrology.


3.2 Tariffs20 and customs unions

Regional organizations have yet some way to go to eliminate barriers to intraregional trade. Tariff
reductions pose difficulties for several countries because of the impact on revenue. Other difficulties
come from the uneven distribution of benefits and costs because of differences in the size and
capabilities of member states. In almost all of the regional organizations, intra-regional trade has been
dominated by a few economies. There is also need to ensure development interface between such
regional trade agreements and the multilateral trading system.21

Members of the Economic Community of West African States (ECOWAS) began eliminating tariffs
on unprocessed goods and traditional handicrafts in 1981 and adopted a scheme for eliminating duties

20
  On tariffs, see UN ECA, 2004
21
  For a discussion of such interface, see UNCTAD, Multilateralism and regionalism: The new interface
(UNCTAD/DITC/TNCD/2004/7) (forthcoming), United Nations, 2005.


                                                    28
on industrial goods in 1990–2000. But trade liberalization has not been fully implemented in all
countries. While all member states except Liberia have eliminated tariffs on unprocessed products,
only Benin has done so for industrial goods. Efforts to revitalize trade liberalization have begun with a
fast-track initiative between Ghana and Nigeria.

Members of the West African Economic and Monetary Union (UEMOA) have committed to creating
a free trade area, gradually eliminating tariffs during 1994–2000. All member states are in full
compliance with this plan. The Central African Economic and Monetary Community’s (CEMAC)
tariff reduction programme was also implemented on schedule. By 1994 all members had eliminated
tariffs, thus fulfilling requirements for the creation of a customs union. The CEMAC customs union
was initiated in 1993, and UEMOA’s in 1998. Similar to the features of their free trade areas, there is a
striking convergence between the two customs unions both in the classification of goods imported
from third states and the applicable tariff rate.

Members of the Common Market for Eastern and Southern Africa (COMESA) began cutting tariffs in
1994, and by 2000 all tariffs were to have been eliminated. Nine of the 20 members of COMESA
satisfied this requirement by October 2000, when the free trade area was declared in accordance with
the terms of the trade protocol. Some countries have fully liberalized intraregional trade, others only
partially. East African Community (EAC) members are implementing tariff reductions, with cuts of
90% by Kenya and 80% by Tanzania and Uganda. Coordination and harmonization of trade policies
and programmes in the EAC are to be accomplished in tandem, much faster than would have been
expected under a free trade area.

The date for the introduction of a customs union has been fixed by COMESA (2004) and ECOWAS
(2005). Whereas the structure of common external tariff has been approved by COMESA, it is
pending in ECOWAS. The launch of the ECOWAS customs union had been previously planned for
2003, but was later deferred by three more years to harmonize the common external tariffs of UEMOA
and the rest of the ECOWAS. COMESA has made some notable progress towards the formation of a
customs union by adopting a timetable for the introduction of a common external tariff and launching
a common tariff nomenclature. The implementation of a common external tariff is planned for 2004.
Under the COMESA common external tariff, goods imported from third states are classified into four
groups: capital goods, raw materials, intermediate goods and finished goods.

Within the framework of the EAC Second Development Strategy, the introduction of a customs union
was planned for 2001, but the establishment of common external tariffs is pending the conclusion of
the negotiations on the related protocol. Short of endorsement, the member states of the EAC have
reached a consensus on the structure of their common external tariff, which classifies customs duty on
imports from third states into three groups, varying from a minimum of 0 percent, a medium of 10
percent, to a maximum in the range of 20 to 25 percent.

The tariff reduction programme for the South African Development Community (SADC) members
reflects the varying capacities of those economies to face competition from other countries in the
community. Unlike in more formal free trade areas, countries were able to choose the products on
which to reduce duties so long as the overall goal was attained. South African Customs Union (SACU)
members of SADC, particularly South Africa, are required to reduce tariffs on intra-SADC trade faster
than other members. SACU’s offer provides duty-free entry for 77% of non-SACU imports from
SADC members by 2000, and 97% by 2008. South Africa will eliminate all tariffs by 2012. Because
the SADC trade protocol is new, the tariff reduction programme has not been finalized. SACU
activities are limited to implementation of a customs union. Every member has accepted South
Africa’s external tariff, and there are no duties on trade between group members. SADC has not
adopted any timetable for the introduction of common external tariffs.

The South African Customs Union was formally established in 1969, although its informal existence
goes much further back. One of the most prominent features of SACU is the Southern African



                                                   29
National Revenue Fund: a common pool of customs revenue distributed among the member states
according to a formula and making up the major share of the fiscal revenue of the poorer members.

While ambitious goals, including the promotion of economic prosperity, enlargement of local market,
trade liberalization, encouragement of investment etc, are some common features of African RTAs,
the intraregional tariff reduction remains, in most cases, a primary focus. But with the exception of
SACU, current African RTAs have not succeeded in reducing tariffs on sensitive products and none of
the RTAs has reached the point of making all regional trade tariff-free. Moreover, national African
trade policies have lead to new non-tariff barriers which could prevent Africa from benefiting from the
opportunities offered by intraregional trade. For instance, unofficial fees at border crossings,
administrative delays at ports, cumbersome customs formalities, and multiple interstate checkpoints
and roadblocks are common in western Africa as shown in table 12.


4. International markets

Both the possibility of entering foreign markets and the ability to do so are essential for exports. The
possibility of entering depends on market access conditions, which are determined by the legal and
administrative conditions imposed by the importing countries under internationally agreed trade rules.
The ability to enter a market, however, is a function both of the competitiveness of the exporter, which
in turn is determined by the relative cost and quality of the product, and the characteristics of supply
chains and the structure of markets (e.g the degree of oligopoly). One important conceptual difference
between competitiveness and market access or entry is that, while the exporting side can do a lot by
itself to improve its competitiveness, market access conditions, market exigencies and the
characteristics of supply chains are to a large extent exogenous to developing-country exporters, which
are often small and wield little power. Naturally, international trade rules broadening market access
are the result of intergovernmental negotiations, and therefore all States Members of WTO have the
right, if not the power, to affect the scope and content of these rules.


                                               Table 12
                 Official checkpoints on selected routes of western African highways,
                                            December 2000

                                                                Distance        Number        No. of checkpoints
                        Highway
                                                              (kilometers)   of checkpoints   per 100 kilometers
                                                                  992             69                  7
 Lagos, Nigeria to Abidjan, Côte d'Ivoire
                                                                  989             34                  4
 Lome, Togo to Ouagadougou, Burkina Faso
                                                                  529             20                  4
 Niamey, Niger to Ouagadougou, Burkina Faso

 Abidjan, Côte d'Ivoire to Ouagadougou, Burkina                  1122             37                  3
 Faso
                                                                 1036             34                  3
 Cotonou, Benin to Niamey, Niger
                                                                  972             15                  2
 Accra, Ghana to Ouagadougou, Burkina Faso

Source: COMESA secretariat (2001), cited in ECA (2004)

Governments, however, have neither direct involvement nor much leeway in influencing the
characteristics of market structures and supply chains, apart from implementing rules for competition.
Here, large firms determine the modus operandi of supply chains and, thus, effectively the distribution
of value added and who gains how much from trade. Especially since the withdrawal of the state from



                                                         30
commodity-exporting activities in many developing countries, these large firms are almost exclusively
those of the industrialized countries. These firms are active in the trade, processing and distribution of
products. Smaller firms can influence the functioning of the supply chains and the distribution of total
value added only if they have specialized and differentiated products – in other words, if they can turn
the value chain into a producer-driven one.22 A new phenomenon that is radically changing market
entry conditions, particularly in the case of agro-food, is the recent growth of international
supermarket chains.23

While market access barriers and international trade measures implemented by Governments comprise
the first hurdle to selling in international markets, clearing this hurdle does not guarantee that a
product will appear on retailers’ shelves. For instance, SPS requirements define the necessary but not
sufficient conditions for being able to export. Many, and in most cases much more stringent, quality
and labeling requirements, as well as conditions regarding production and processing practices, are
imposed by importing firms themselves. Particularly in the case of food items, meeting the
requirements of importing firms and distribution and retailing channels is the ultimate prerequisite for
success. Moreover, these requirements are usually more stringent than the government regulations
reflected in measures undertaken in accordance with the requirements of the SPS Agreement. When
requirements are made by private enterprises, there is no way to contest them legally, except in
situations where rules of competition are violated.

The requirements set by Governments and firms go beyond product specifications to cover the way in
which the product is produced. Competitiveness in many instances depends more on the production
process than on the product itself. Not only do small producers lack the financial means and technical
skills to meet these requirements, but when they do meet them, they have significant disadvantages.
Traceability is important: buyers want to know for sure how production has been carried out by all
suppliers. This is of course particularly important in markets where the production process itself is a
sales argument, as with organic products (see When a large number of small producers are involved,
the transaction costs incurred by the buyer are significantly bigger than those involved in dealing with
a small number of large producers. A rational buyer would like to avoid these extra costs by using
large suppliers.

These requirements are ultimately dictated by consumer concerns. Particularly for fresh products,
these concerns are often transmitted through supermarket chains, which are internationalized and
shape not only international but also national trade. For tropical beverages and processed foods (and
inputs used to produce these), large transnational trading and processing firms are the key actors in
defining the conditions to be met by producers.

Even small producers with disproportionately little bargaining power have to enter into direct
transactions with these large firms. These relationships, however, have an important positive aspect
when they involve technical assistance to upgrade production processes, product quality and
management practices, with the result being improved competitiveness. They may also involve
assistance in entering new areas of production, which contributes to diversification (UNCTAD,
2002b).24 On the other hand, the creation of dependency relations for the producers can be considered
a negative consequence of this situation.




22
   For more information on value chains, see Gereffi G, The organisation of buyer-driven global commodity
chains: How U.S. retailers shape overseas production networks, and Gereffi G, Korzeniewicz M and
Korzeniewicz R, Introduction: Global commodity chains, in Gereffi G and Korzeniewicz M, eds., Commodity
Chains and Global Capitalism, Westport, Conn., Praeger, 1994; Strategies for diversification and adding value
to food exports: A value chain perspective, UNCTAD/DITC/COM/TM/1,UNCTAD/ITE/MISC.23, 14
November 2000.
23
   For a discussion of the role of supermarkets, see UNCTAD, 2003b.
24
   For examples, see UNCTAD, 2002b, especially pp. 154–157.


                                                      31
IV. Conclusions
Developments over the past few years have produced new challenges for African commodity
producers. If these challenges can be met, the prospects for increased production, incomes and poverty
reduction are better than they have been in a very long time. Commodity demand will in all likelihood
grow at a healthy rate for many years to come, due partly to the fast growing demand from Asian
countries, but also to the resurgence of growth in Africa itself, which may turn domestic markets into a
source of dynamism.

In order to grasp the opportunities provided by expanding markets, African commodity producers need
to be competitive suppliers to those markets. This means first of all that the playing field should be as
level as possible. Market access has improved, and African producers will mostly face low or no
tariffs in their main export markets in a few years. More needs to be done, however, on reducing tariffs
as well as non-tariff barriers to trade between trading blocs in Africa, in order to exploit the full
potential benefits from regional trade. Meanwhile, subsidies to producers in developed countries
continue to undermine efforts to increase the competitiveness of developing country suppliers. Some
reduction in subsidies can be expected from ongoing negotiations, although they will most probably
fall short of the outright abolition that would be required if the playing field is to be really level.

African producers also need to improve their own competitiveness, particularly to make up for the
advantage held by their subsidized developed country competitors and more advanced developing
countries with better access to agricultural and processing technology and with better capacity to use
it. The improvement requires actions to be taken by both the public and private sectors, and the
support of the international community. These actions should aim to improve productivity, reduce
transaction costs and deepen markets. The objective is to create a situation where African farmers can
confidently expect to be able to sell their crops, on domestic markets as well as abroad, where they
have a reasonable idea of what their costs will be and of the going market price for their products,
where they can meet the formal and informal market requirements, where they can afford to take the
risks associated with diversification and where they earn enough to invest in better equipment. The
following recommendations are formulated with a view to achieve that situation:

AFRICAN GOVERNMENTS SHOULD:

       Integrate measures to raise productivity and improve competitiveness of agriculture into
        poverty reduction strategies and, vice versa, integrate poverty reduction as an objective of
        programmes to raise agricultural competitiveness;
       Invest in infrastructure, particularly in rural areas, including in facilities that improve the
        logistics of commodity production and trade;
       Improve support services to agriculture, including extension services and advice, testing
        facilities and laboratories, veterinarian services, development of new strains of plants,
        provision of seeds, and support to irrigation projects;
       Support the organization of small-scale producers to achieve a better integration into
        international supply chains and increase value added;
       Enhance the capacity of small-scale producers, in particular, to absorb new technologies;
       Reduce the risks to producers associated with diversification, including through measures
        aimed at facilitating access to appropriate technologies;
       Reform land tenure systems with a view to minimizing conflicts between traditional and
        modern systems and ensuring that farmers have clearly defined titles to land;
       Invest in measures needed for producers to comply with SPS related and other product and
        process standards of both government and private sector origin;
       Participate actively in the activities of standard setting organizations, to ensure that new
        standards do not impose unrealistic requirements on African producers;
       Participate actively in generic product promotion activities to expand markets, as well as in
        activities aiming at quality improvement and product and market development;


                                                   32
        Facilitate and support the creation of deep and liquid domestic markets for agricultural
         products and for inputs to agriculture, inter alia through removal of regulatory obstacles and
         through the introduction of competition legislation;
        Facilitate and support the dissemination of market information to producers, particularly
         small-scale farmers;
        Engage in exchange experiences of commodity related policy options in order to identify best
         practices;
        Eliminate tariff and non-tariff barriers to regional trade in commodities; and
        Consider possible coordinated actions to reduce excess supplies of commodities for which
         African countries are key exporters.

SOUTH-SOUTH COOPERATION IN COMMODITIES SHOULD BE STRENGTHENED
BY:25

        Improving market access and market entry conditions on a South-South and North-South
         basis, and at the interregional level based on the GSTP.
        Developing and expanding input markets and infrastructure systems.
        Promoting technological advances in communication, large distribution systems and storage
         facilities.
        Strengthening financial services for South-South trade.
        Creating an Action Group on South-South commodities trade in the International Task Force
         on Commodities.

THE AFRICAN BUSINESS SECTOR SHOULD:

        Incorporate concerns related to the dissemination of the benefits of commodity-related
         activities to the disadvantaged sections of the population in their corporate responsibility
         commitments;
        Form partnerships with the public sector to support the establishment of institutions providing
         services to commodity producers and exporters;
        Engage in improving the supply capacity of small-scale producers and their capability to met
         quality, quantity and continuity requirements;
        Focus not only on overseas export markets but actively exploit regional markets;
        Form partnerships with customers in export markets, with a view to building commercial
         networks and improve competitiveness; and
        Articulate clearly its requirements and needs with respect to regulations and governmental
         support services.

THE INTERNATIONAL COMMUNITY SHOULD:

        In the context of the Doha round negotiations on agriculture, agree on (i) drastic and speedy
         reductions in domestic producer support, (ii) the immediate abolition of export subsidies and
         other support to agricultural exports, (iii) strengthened rules for notification of non-tariff
         barriers and more stringent criteria for their use, (iv) procedures for the establishment of
         product and process standards that take clearer into account the interests and capabilities of
         developing countries, (v) provide duty-free, quota-free treatment to all products of LDCs and
         bind such treatment in the WTO; (vi) elaborate adjustment mechanism to address the erosion
         of preferences and revenue losses


25
  For details, see Lakshmi Puri, "Increasing South-South Cooperation and Trade in Commodities" in Some Key
Issues in South-South Trade and Economic Cooperation: Outcome and Papers presented to the Workshop on
Trade, Doha High-Level Forum on Trade and Investment, Doha, Qatar, 5-6 December 2004
(UNCTAD/DITC/TNCD/2005/6).


                                                   33
   Consider compensation for developing country exporters for export earnings losses due to
    subsidies
   Explore and define the modalities for the establishment of an Export Enhancement Fund
    focusing on developing private sector capacity, including the development of strong producer
    associations and development of key infrastructure;
   Facilitate and support actions by developing countries with a view to reducing excess supplies
    of commodities to the world market; and
   Increase resources for commodity specific trade related technical assistance, particularly for
    capacity building related to the formulation and implementation of strategies for commodity
    based development and diversification, including for improving the competitiveness and
    supply capacity of African commodity producers.
   Support the UNCTAD initiative on an International Task Force on Commodities.




                                             34
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                                                  36
                                                       Appendix

                  Table A-1. Commodity dependence in Africa - by commodity
                                                       Growth rate
 SITC                                                                  Top three leading exporting countries
                    Leading exports                    (percentage)
 code                                                                   and share in their total export value
                                                        1990-2002
                                                                      Botswana (83.8)
         Pearls, precious and semi-precious
  667                                                      7.1        Namibia (31.9)
         stones, unworked or worked
                                                                      South Africa (13.2)
                                                                      Côte d'Ivoire (37.1)
  72     Cocoa                                             2.3        Ghana (18.2)
                                                                      Cameroon (10.6)
                                                                      Burkina Faso (60.8)
  263    Cotton                                            -1.9       Benin (50.8)
                                                                      Mali (47.7)
                                                                      Mauritania (27.2)
         Fish, fresh (live or dead), chilled or
  34                                                       3.7        Namibia (20.9)
         frozen
                                                                      Uganda (17.47)
                                                                      Ethiopia (37.3)
  71     Coffee and coffee substitutes                     -0.1       Rwanda (28.60)
                                                                      Uganda (21.17)
                                                                      Central African Rep. (14.9)
  247    Wood in the rough or roughly squared              0.9        Gabon (11.2)
                                                                      Congo (6.07)
                                                                      Malawi (59.72)
         Tobacco, unmanufactured ; tobacco
  121                                                      0.9        Zimbabwe (21.46)
         refuse
                                                                      Uganda (8.27)
                                                                      Guinea (51.54)
         Ores and concentrates of base metales,
  287                                                      2.1        Zimbabwe (4.34)
         n.e.s.
                                                                      Botswana (4.09)
                                                                      Mauritius (17.42)
  61     Sugar, molasses and honey                         0.2        Malawi (12.02)
                                                                      Swaziland (8.24)
                                                                      Cameroon (12.12)
         Wood, simply worked, and railway
  248                                                      2.7        Ghana (4.93)
         sleepers of wood
                                                                      Côte d'Ivoire (4.73)
                                                                      Rwanda (27.93)
  74     Tea and maté                                       -         Malawi (8.64)
                                                                      Uganda (6.71)
                                                                      UR of Tanzania (6.39)
         Fruit and nuts (not including oil nuts),
  57                                                       3.4        Côte d'Ivoire (4.11)
         fresh or dried
                                                                      Cameroon (2.61)
                                                                      Mauritania (22.37)
         Crustaceans and molluscs, fresh,
  36                                                        3         Senegal (6.39)
         chilled, frozen, salted,, in brine or dried
                                                                      Mozambique (13.43)



Source: UNCTAD, Handbook of Statistics, 2004




                                                           37
                Table A-2. Commodity dependence in Africa - by country

African countries - rate of dependency on commodities with and without fuels
                                             1991                                2003
                                                   Dependency                          Dependency
                               Dependency on             on        Dependency on             on
                                commodities       commodities,      commodities       commodities,
                                except fuels      fuels included    except fuels      fuels included
Algeria                                   0.9%              97.8%             0.6%              98.7%
Angola                                    5.2%             100.0%             0.3%              96.4%
Benin                                    71.0%              92.2%            82.4%              82.8%
Botswana                                    n.a                n.a            9.1%               9.1%
Burkina Faso                             84.7%              84.7%            81.0%              81.0%
Burundi                                  95.7%              95.7%            85.8%              85.8%
Cameroon                                 41.6%              91.5%            43.7%              93.1%
Cape Verde                               53.3%              53.4%             3.5%               3.5%
Central African Republic                 59.3%              59.4%            62.9%              62.9%
Chad                                     94.8%              94.9%            73.0%              92.0%
Congo                                     3.1%              97.6%            14.6%              96.8%
Côte d'Ivoire                            82.0%              87.8%            65.0%              77.8%
Dem. Rep. of the Congo                   56.0%              67.2%            28.8%              42.4%
Djibouti                                 32.6%              32.7%            70.0%              78.8%
Egypt                                    15.4%              69.4%            18.4%              61.5%
Equatorial Guinea                        94.6%              94.6%             4.4%              94.4%
Eritrea                                     n.a                n.a           85.3%              85.3%
Ethiopia                                    n.a                n.a           88.6%              88.6%
Ethiopia (former)                        84.4%              85.4%               n.a                n.a
Fiji                                     55.3%              64.9%            52.1%              52.1%
Gabon                                     9.3%              98.6%             7.0%              95.4%
Gambia                                   64.8%              64.8%            47.0%              47.3%
Ghana                                    47.6%              53.0%            46.5%              53.6%
Guinea                                   85.9%              85.9%            56.0%              56.1%
Guinea-Bissau                            97.3%              97.3%            92.1%              95.0%
Kenya                                    60.5%              77.1%            56.2%              75.3%
Lesotho                                     n.a                n.a           12.2%              12.2%
Liberia                                  64.6%              93.6%            20.8%              25.6%
Libyan Arab Jamahiriya                    0.7%              96.1%             0.3%              95.2%
Madagascar                               78.4%              78.9%            60.6%              60.9%
Malawi                                   94.3%              94.4%            88.2%              88.2%
Mali                                     98.4%              98.4%               n.a                n.a
Mauritania                               96.4%              99.1%            96.8%              96.8%
Mauritius                                31.7%              33.4%            25.5%              25.6%
Morocco                                  43.3%              45.8%            30.3%              32.9%
Mozambique                               49.7%              53.1%            81.9%              91.4%
Namibia                                     n.a                n.a           55.9%              56.9%
Niger                                    80.0%              82.2%            89.0%              90.6%
Nigeria                                   2.0%              98.7%             0.0%              97.9%
Rwanda                                   89.4%              89.4%            82.9%              89.7%
Senegal                                  62.9%              78.9%            44.0%              64.1%
Sierra Leone                             82.2%              82.2%            92.5%              92.5%
Somalia                                  94.4%              94.4%            96.6%              96.6%
South Africa                                n.a                n.a           32.2%              42.0%
South Africa (Customs
Union)                                   21.9%              29.2%               n.a                n.a
Sudan                                    98.1%              98.1%            23.0%              92.2%


                                               38
Swaziland                        n.a       n.a   22.7%   23.4%
Togo                          91.3%     93.6%    38.0%   38.6%
Tunisia                       16.8%     31.1%     9.9%   18.5%
Uganda                        96.8%     97.3%    85.1%   85.2%
United Republic of Tanzania   64.1%     66.0%    51.1%   52.4%
Western Sahara                   n.a       n.a   80.3%   80.5%
Yemen                         10.3%     99.8%     8.2%   98.3%
Zambia                        94.5%     94.7%    75.6%   77.7%
Zimbabwe                      68.9%     69.3%    54.6%   55.6%




                                   39
                                      Table 2: Membership in African Regional Economic Organizations

              Region    North            Central                    West                East       E/South     Southern    Multi-Reg Island
No               No       1       2         3        4       5        6      7      8          9     10       11      12      13       14     Total
              Country   UMA     CEMAC    CEPGL     ECCAS   ECOWAS   MRU    UEMOA   EAC    IGAD     COMESA    SACU   SADC   CEN-SAD    IOC
1 Algeria                X                                                                                                                     1
 2 Angola                                           X                                                X                X                        3
 3 Benin                                                     X               X                                                X                3
 4 Botswana                                                                                                   X       X                        2
 5 Burkina Faso                                              X               X                                                X                3
 6 Burundi                                  X       X                                                X                                         3
 7 Cameroon                       X                 X                                                                                          2
 8 Cape Verde                                                X                                                                                 1
 9 CA Republic                    X                 X                                                                         X                3
10 Chad                           X                 X                                                                         X                3
11 Comoros                                                                                           X                                 X       2
12 Congo                          X                 X                                                                                          2
13 Côte d'Ivoire                                             X               X                                                                 2
14 D.R.Congo                                X       X                                                X                X                        4
15 Djibouti                                                                                    X     X                        X                3
16 Egypt                                                                                             X                        X                2
17 Eq. Guinea                     X                 X                                                                                          2
18 Eritrea                                                                                     X     X                        X                3
19 Ethiopia                                                                                    X     X                                         2
20 Gabon                          X                 X                                                                                          2
21 Gambia                                                    X                                                                                 1
22 Ghana                                                     X                                                                                 1
23 Guinea                                                    X        X                                                                        2
24 Gui.-Bissau                                               X               X                                                                 2
25 Kenya                                                                           X           X     X                                         3




                                                                     40
26 Lesotho                                                       X   X              2
27 Liberia                            X    X                                        2
28 Libya             X                                                    X         2
29 Madagascar                                               X                  X    2
30 Malawi                                                   X        X              2
31 Mali                               X         X                         X         3
32 Mauritania        X                                                              1
33 Mauritius                                                X        X         X    3
34 Morocco           X                                                    X         2
35 Mozambique                                                        X              1
36 Namibia                                                  X    X   X              3
37 Niger                              X         X                         X         3
38 Nigeria                            X                                   X         2
39 Rwanda                    X   X                          X                       3
40 ST and Principe               X                                                  1
4X Senegal                            X         X                         X         3
42 Seychelles                                               X        X         X    3
43 Sierra Leone                       X    X                                        2
44 Somalia                                              X                 X         2
45 South Africa                                                  X   X              2
46 Sudan                                                X   X             X         3
47 Swaziland                                                X    X   X              3
48 Tanzania                                         X                X              2
49 Togo                               X         X                         X         3
50 Tunisia           X                                                    X         2
51 Uganda                                           X   X   X                       3
52 Zambia                                                   X        X    X         3
53 Zimbabwe                                                 X        X              2
   TOTAL             5   6   3   11   15    3   8   3   7   20   5   14   18   4   122




                                           41

								
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