Market Analysis Tools for Trade Flow Analysis and Modeling Trade Negotiation Outcomes

1. Market Analysis Tools for Trade Flow Analysis and Modeling Trade Negotiation Outcomes Presented By Dr. Lovemore Rugube Presented at IDEP’ s Training Facility, Dakar Senegal, 26 to 30 April, 2010

2. The challenges facing agricultural export development in Africa • External constraints are mainly market access while the internal constraints can be categorized as supply-side constraints. • Market access has in particular contributed to concentration of African exports into specific markets (EU and USA) and concentration of exports into a few products. • High tariffs, tariff peaks and tariff escalations: discouraged value addition. • Supply side constraints are perhaps the most important constraints to export diversification.

3. The challenges facing agricultural export development in Africa • These constraints have led to inability of many African countries to take full advantage of preferential market access provisions, EBA, EU-ACP, AGOA. • Preferential market access provisions need to be accompanied with supply-side enhancing capacity to enable trade expansion and diversification of Africa countries’ exports. • The supply-side constraints: • Inadequate infrastructure, both physical and soft. • Freight charges far more restrictive barriers to African exports than tariffs. For example freight cost as a percentage of total import value in 2001 was 13% and 8.8% for Africa and developing countries respectively.

4. The challenges facing agricultural export development in Africa • Lack of coherent and supplementary policies. Such as the failure of governments to develop the energy sector. • Poor trade facilitation particularly inefficient customs services increase costs on exporters reducing competitiveness • Inability to conform to standards and other requirements in the international markets • Weak and inadequate institutions • Lack of appropriate institutional frameworks and systems for managing trade policy

5. The challenges facing agricultural export development in Africa • Weak private-public dialogue • Lack of information • Lack of credit institutions • Production structures. smallholder face challenges related to economies of scale investments and lack access to credit facilities • Drought or other adverse climatic conditions

6. Patterns of Agricultural Protection/Distortions • More than two-thirds of the Africa’s poor depend directly or indirectly on agriculture for their livelihood • Government policies, in the past at least, have depressed farm incomes in Developing Countries -D Cs • Anti-agric policies in D Cs themselves • Pro-agric policies in H I Cs, which lower int’l food prices and thereby some farm-gate prices in D Cs • The policy instruments chosen are not the most efficient for achieving governments’ stated objectives, in either D Cs or H I Cs

7. What are the patterns of government distortions to agricultural trade? • H I Cs protect agric relative to manufacturing, D Cs tend to do the opposite • Degree of agric protection is correlated with degree of agric comparative disadvantage • Countries tend to move towards protecting agric (and textiles and clothing) as they grow and industrialize

8. Types of instruments that distort trade • Market access: These include import tariffs and quotas that protect local producers from competing imports. Protection induces local production to be higher than would be the case at market prices, at the expense of international producers and exporters. • Export subsidies: These include government payments that cover some of the costs of exporters such as marketing expenses, special domestic transport charges, and payments to domestic exporters to make sourcing products from domestic producers competitive. • Domestic support: These include direct support to farmers linked to the type, price, and volume of production. Depending on the level of support, local production is usually higher and competing imports lower than in the absence of subsidies.

9. Traditional exports for selected African countries

10. High-value commodity markets

11. Export Strategies for SSA Countries Rational: • High dependency on very few commodities • (traditional tropical export commodities) • Risk due to price volatility for these commodities • Long term downward trend in the prices of these commodities • High-value commodities: higher income elasticity of demand • High-value commodities: lower price variability

12. Agricultural Exports • Coffee/tea/cocoa/spices: 30 percent of Africa’s ag exports • strongly dominated by five major players--Cote d’Ivoire, Ghana, Kenya, Cameroon, and Madagascar • SSA relatively minor global player (10 percent of the global market) • Share fluctuates (and declined) due to global price volatility • Share of fruits and vegetables increased from 4 percent in 1990 to more than 16 percent in 2004. • Dominated by South Africa (60 percent), Kenya (12 percent) and Cote d’Ivoire (9 percent) • Fish and shellfish and other seafood increased from 2 percent to 11 percent • Main players South Africa (20 percent), Namibia (17 percent), Senegal (15 percent), and Seychelles (11 percent)

13. Intra SSA import • Not much (18 percent) • Intra-African food and agricultural imports are less important • More for landlocked economies

15. Intra-regional trade • Relatively little (17 percent) intra African food and ag Exports • Landlocked African countries tend to undertake more intra-regional trade

16. Intra-regional trade

17. How have African agri-food export products performed? Revealed Comparative Advantage (RCA) Index • RCAij = market share of country i ‘s export of good j/market share of country i ‘s total export • Country i has revealed comparative advantage in good j if RCAij > 1 • This is more an indicator of export performance than a predictive number

18. Top 15 performers in terms of RCA

19. Bottom 10 performers in terms of RCA

20. RCA • Competitive performances of Africa’s major export commodities like tea, coffee, sugar, and tobacco has decreased significantly between 1990 and 2004 • However, RCA improvement for cocoa, cotton and wood chips • Plus, non-traditional high-value exports such as fresh fruits and vegetables and fish and shell fish products performed well  an indication of an increased degree of diversification of Africa’s food and agricultural exports?

21. Protection is Still High and Mostly at the Border(rate of protection, percent )

22. OECD Protection is still High(percent)

23. Border Protection is non-Transparent(Tariff lines that are not Ad-Valorem,percent of total tariff lines)

24. Tariffs Escalate in Final Products

25. EU US Japan Tropical Products Coffee raw 7.3 0.1 6.0 final 12.1 10.1 18.8 Cocoa raw 0.5 0.0 0.0 intermediate 9.7 0.2 7.0 final 30.6 15.3 21.7 Expanding Commodities Fruits raw 9.2 4.6 8.7 intermediate 13.3 5.5 13.2 final 22.5 1 0.2 16.7 Vegetables raw 9.9 4.4 5.0 intermediate 18.5 4.4 10.6 final 18.0 6.5 11.6 Seafood raw Examples of Tariff Escalation

26. Downward trend in applied tariffs(simple average, %)

28. Effects of full global lib’n on SSA agric

29. Key elements of the Doha Agenda • 3 agricultural pillars (including cotton) • Non-agricultural market access • Services • Lesser tariff and subsidy cuts for developing countries (DCs) and zero cuts for least-developed countries (LDCs)

30. What’s on the table? Market access • Elimination or sharp reduction of use of the Special Safeguard (SSG-- currently permits many developed countries to impose duties above their Uruguay Round bindings) • New Special Safeguard Mechanism (SSM) with both price and quantity triggers for developing countries. • Import duties of up to 25 percentage points could be imposed when imports exceeded 110 percent of a three year moving average • A price-based measure could be invoked if the price of imports falls below 85 percent of a three-year moving average of import prices, with a duty up to 85 percent of the gap between current import prices and the three year moving average.

31. What’s on the table? Export Subsidies • Draft agreement involves abolition of all export subsidies. • Very little impact in the short run—because current export subsidy levels are negligible • Rules out a return to the disruptive situation of the 1980s, when world prices were severely depressed by high levels of export subsidies that displaced efficient producers. • Will reduce the uncertainty faced by producers in developing countries, and should help promote needed investment.

32. What’s on the table? Domestic Support • Traditional Aggregate Measure of Support (AMS) to be reduced using a tiered formula: • 70 percent cuts in the EU; 60 percent in members with intermediate amounts of support (including the USA); and 45 percent in other members. • Additional constraint applied on Overall Trade Distorting Support (OTDS)-- the total of AMS, de Minimis, and Blue Box support. • cut by between 75 and 85 percent in the EU; 66 to 73 percent in the USA and 50 to 60 percent in smaller industrial economies. • Blue box support limited to 2.5 percent (5 percent) of the value of production for developed (developing) members. • Product-specific limits introduced on AMS and on the blue box, with the cap on support to cotton being lowered very sharply and under an accelerated timetable.

33. Implications for Sub-Saharan Africa • Doha would give SSA only a small fraction of their potential gains from a move to global free trade • If DCs (including LDCs) were to fully participate, their gain more than doubles • To gain more, SSA DCs have to reduce bound tariffs further, so that applied tariffs fall more • Isn’t it better to do that under Doha, so as to get reciprocity and/or more aid, rather than unilaterally – especially as that would lead to less trade diversion when EPAs are signed with the EU?

34. Why Exclude Certain Products from Tariff Reduction Negotiations • Significance of local production • Food Security • Fiscal revenue • Protection of infant industry • Balance of payments • Health reasons

35. A List of offers by Product for Market Access Negotiations

36. Agricultural trade in RTAs (N-N) • Agricultural trade within developed countries, - exports account for some 80%, imports 70% of total developed countries agricultural trade • 70 % EU agricultural exports, 60% of imports are within EU. • Agricultural trade among the EU countries represents 30 % of total world agricultural trade. • Agricultural trade in S-S RTAs? - SSA – 9%

37. 1. Intra regional agricultural and food exports and imports- low2. Intra- regional market access issues

38. Agriculture is relatively protected • COMESA countries have protected their agricultural sectors as compared to their industrial sectors. • Kenya and Uganda, (EAC), have tariffs higher than CET level of 25% for some agricultural commodities, which are the regions sensitive products. • Within the framework of the ongoing EPA negotiations, countries have developed ‘a sensitive list’ of their agricultural products

39. Why low regional agricultural trade • Similar products • Limited transformation and value addition Most of traded agricultural commodities are in their raw form- while imports are in their processed form. • Underdeveloped value chain and linkages -There are limited industries inter-linkages in the region as well as limited or poor dissemination of market information

40. Why low regional agricultural trade (cont’d) • Inadequate trade facilitation -Customs documentation requirements and procedures continue to be a hindrance to smooth regional trade despite the FTA status and various initiatives to facilitate regional trade. • Limited demand in some commodities -The region in some cases is producing some commodities whose demand in the region is (such as cut flowers). • TBTS: Need for harmonized food safety standards. • Unpredictable Trade Environment -Adhoc measures always taken to restrict trade, measures are not communicated to traders in advance

41. Potential for intra-regional COMESA trade For COMESA and SADC, -product complementarities and levels of intra-regional trade are low -Complementarily index measures similarities between the export basket -Low complementarity between products of different countries means that products from the two countries are relatively similar and therefore there is a likely to be polarisation in the regional market -Complementarity is high between products of relatively higher developed member countries and those that of less developed (Egypt)

42. Overlapping African Regional Agreements… • Too much Regional Trade Agreements • Logistical Constraints • Loss of Identity