Nigeria’s border closure: a road block or a speed bump on the road to a successful AfCFTA?

(with Albert Zeufack)

Original blog appeared here: Nigeria’s border closure: a road block or a speed bump on the road to a successful AfCFTA? (with Albert Zeufack). January 23, 2020

In August 2019, Nigeria partially closed its land borders, and since October 2019, it has halted all trade via land borders. This was triggered by Nigerian authorities’ frustration with the smuggling in of rice and illicit exports of locally subsidized petrol to neighboring countries.

Let’s zoom in on the rice issue. In 2018, Benin, a country of 11 million people, was the sixth largest importer of rice in the world and the largest rice importer from Thailand. More recently, Benin’s rice imports have been steadily rising while Nigeria’s have been falling at a similar pace, suggesting large re-exports of rice from Benin to Nigeria (Figure 1). Why might that be the case? Because import tariffs in the two countries are widely different. In 2013, Nigeria’s tariff on rice imports was set at 70%. In 2014, Benin reduced its tariff on rice imports from 35% to 7%.  This makes the practice of re-exporting extremely attractive to both formal and informal operators. They can import rice to Benin at a low cost and smuggle it into Nigeria to sell at a much higher profit margin.  

One of the most straighforward ways to combat this behavior would be to agree on a common external tariff, which could help make re-exporting less profitable. But this incident between Nigeria and Benin highlights some of the other non-tariff trade barriers that could still provide incentives for re-exporting. Below, we focus on three of the major technical challenges that need serious consideration as governments negotiate the terms of their participation in the Africa Continental Free Trade Agreement (AfCFTA).  Image

Total Rice Imports to Benin and Nigeria (2000-17) (Qty.)

Total Rice Imports to Benin and Nigeria (2000-17) (Qty.) Source: COMTRADE 2019.

Tension between national industrial policies and AfCFTA ambitions

Nigeria’s policy of food import substitution, a form of industrial policy, is often at odds with the idea of regional integration. The Nigerian president has voiced legitimate concerns that AfCFTA could undermine local production activity and Nigeria could be a “dumping ground” for cheap imports from outside the free trade area. Nigeria, the country with the largest number of poor people in Africa, accounting for about a quarter of Africa’s poor, has been trying to encourage local production of rice and other agricultural goods, using a mix of policies including foreign exchange restrictions on food imports, tax on rice imports, and support to local producers.

At low income levels, agriculture has long been key in reducing poverty. A recent World Bank study indicates “Africa’s rising food import bill poses a burden on the external balances and signifies an important missed opportunity for accelerating poverty reduction through food import substitution.” Wheat and rice hold especially significant potential for income growth and poverty reduction. The high volume of cheap rice imports moving through Benin from outside the region threatens this potential in Nigeria, and this will become an issue far beyond Nigeria as countries across Africa ease restrictions on the movement of goods, services, and people.

The AfCFTA will only succeed if member countries make the regional strategy part of their national policy and proactively address the tensions that arise between the two. Countries should find the sweet spot that reinforces national economic goals and ensures maximum gains from increased integration, looking beyond a static assessment of their priorities. In addition, countries need to make the case to their people as to why integration is useful in the long term – this is particularly important in the larger countries, which may have greater influence on regional decisions.

Lack of capacity to monitor and safeguard against illicit practices, including smuggling, dumping, and violation of the rules of origin

Nigeria’s decision to close its land borders came about partly from the lack of a national or regional institutional framework that can monitor and ensure compliance with the rules of the game. This becomes particularly important with respect to verification, certification, and monitoring of the rules or agreements either in ECOWAS or the AfCFTA. Given the African Union’s ambitious industrialization agenda, we expect to see even more of these types of disputes on rules, particularly the rules of origin, once trade under AfCFTA becomes more widespread. With this on the horizon, countries need to think through how to address origin fraud, setting clear and simple rules that are monitored and enforced at the national and regional levels.

Trade dispute settlement mechanisms (DSMs)

One of the key challenges to the AfCFTA we identify in our forthcoming book, is the need for an effective dispute resolution mechanism with the authority and institutional capacity to mediate and enforce decisions within and across countries in Africa and with parties outside the continent. This body should be complementary to the traditional diplomatic/political approach to resolve disputes. Africa faces particular challenges when enforcing border and customs rules for a number of reasons, including the somewhat arbitrary nature of colonial borders coupled with strong ethnic connections between communities across borders. Large disparities in countries’ economic size and political clout can also make enforcement and dispute resolution tricky, as evidenced by the unilateral Nigerian measure. As the African Union works on DSMs, we need to make sure that they are widely adopted and used, and that their decisions are respected by all parties.

It’s important to acknowledge that while the rest of the developed world is raising barriers, Africa has resolutely decided to embrace free trade. But ratifying AfCFTA is just the first step on a long journey. Nigeria’s border closing gives us an opportunity to reevaluate the tools of engagement as Africa moves forward in its decision to create the world’s largest single market. Trade disputes are neither new nor an African phenomenon (see map below), and this one should be examined in the context of an Africa that has clearly stated in “Vision 2063,” its aspiration to industrialize, feed itself, create jobs for its youth and reduce poverty. With the right steps in place, Africa can realize that vision.

Recent disputes between advanced economies are cases in point. The map shows the extent of trade disputes across the world. Source: WTO 2020

Is there an optimal FVA share good for growth?

The rise of global value chains (GVCs) is one of the most important developments in international trade in the last few decades. Following this, developing economies ranging from Africa to Asia are actively pursuing policies to position themselves to attach their production activities to GVCs. It is now well established that integrating in the GVCs is critical to their economic growth prospects. However, there is a debate on the nature and extent of this engagement and its implications on export performance growth and the dynamic gains from trade. Often, there is a tendency to associate higher crude GVC participation (fva and dva) with increasing growth and development outcomes from trade. This could be misleading, however. For example, a simple look of the gross GVC participation of many African countries is very similar to even the best performing East and South Asian economies with relatively more advanced manufacturing. While a predominant share of the GVC participation for many African countries is driven by their indirect value addition of natural resources to other countries’ exports. This calls for extreme caution in associating higher GVC participation with better performance.

Even if we ignore the natural resource rich economies, there is another debate on what level of FVA content is good r optimal to foster growth and reinforce the dynamic gains that we often associate with exports and trade. Though this could vary across sectors (food, textile, machinery, services, etc.), it poses an important question. Economies such as China and South Korea have clearly defined increasing the FVA content of exports and continuous upgrading as the ultimate goal of their national economic strategies. On the other hand, there is a good amount of literature that highlights the importance of importing intermediate inputs in either productivity or export performance and hence growth of economies. This suggests that there could be some optimal, “not too high, not too low” (with some range) FVA content of exports that is conducive to promote growth and enable reaping the dynamic gains from such trade.

I am working on a very small paper on identifying this optimal FVA content
in exports across sectors by examining the historical trends of FVA content of exports in economies across the development spectrum. This may provide insights into policy for newly developing economies on whether, for example, the share of the FVA content of their textile exports is too high or too low, either to promote gains or restrict the benefits from trade.