Readers Question: What are the advantages and disadvantages of the WTO formally the General Agreement on Tariffs and Trade (GATT)?
As part of the trade integration awareness service and in light of the recently signed African Continental Free Trade Area we have been sharing articles that explain FREE TRADE and all the technicalities in this column. There is a lot to understand FREE TRADE AREA (FTA) as well as TRADE FACILITATION. As part of the awareness effort read below two articles that explains technicalities of FTA some practical experiences on the ground.
Advantages and disadvantages of WTO
Readers Question: What are the advantages and disadvantages of the WTO formally the General Agreement on Tariffs and Trade (GATT)?
The WTO is a body designed to promote free trade through organizing trade negotiations and act as an independent arbiter in settling trade disputes. To some extent the WTO has been successful in promoting greater free trade. The principles of the WTO are
- Promote free trade through gradual reduction of tariffs
- Provide legal framework for negotiation of trade disputes. This aims to provide greater stability and predictability in trade.
- Trade without discrimination - avoiding preferential trade agreements.
- WTO is not a completely free trade body. It allows tariffs and trade restrictions under certain conditions, e.g. protection against 'dumping' of cheap surplus goods.
- WTO is committed to protecting fair competition. There are rules on subsidies, dumping
- WTO is committed to economic development. For example, recent rounds have put pressure on developed countries to accelerate restrictions on imports from the least-developing countries.
Advantages of promoting free trade
- Lower prices for consumers. Removing tariffs enables us to buy cheaper imports
- Free trade encourages greater competitiveness. Through free trade, firms face a higher incentive to cut costs. For example, a domestic monopoly may now face competition from foreign firms.
- The law of comparative advantage states that free trade will enable an increase in economic welfare. This is because countries can specialise in producing goods where they have a lower opportunity cost.
- Economies of scale. By encouraging free trade, firms can specialise and produce a higher quantity. This enables more economies of scale, this is important for industries with high fixed costs, such as car and aeroplane manufacture. In new trade theory, it is this specialisation and exploitation of economies of scale that is most important factor in improving economic welfare.
To what extent has the WTO being able to promote free trade?
- The WTO has over 160 members representing 98 per cent of world trade. Over 20 countries are seeking to join the WTO.
- An increased number of trade disputes have been brought to the WTO, showing the WTO is a forum for helping to solve disputes.
- WTO regulations and co-operation helped avoid a major trade war; this was significant during 2008/09 global recession. We could compare this to 1930s, where trade wars broke out causing a fall in global trade. According to (Bagwell and Staiger 2002) the average tariff in 1930s was 50%. In 2000s, average tariff is 9%
- World exports as a % of GDP have increased from 22% of GDP in 1995 (when WTO formed to just under 30% in 2015. Indicating importance of trade to global economy.
Disadvantages of WTO
- However, the WTO has often been criticised for trade rules which are still unfavourable towards developing countries. Many developed countries went through a period of tariff protection; this enabled them to protect new, emerging domestic industries. Ha Joon Chang argues WTO trade rules are like 'pulling away the ladder they used themselves to climb up'
- Free trade may prevent developing economies develop their infant industries. For example, if a developing economy was trying to diversify their economy to develop a new manufacturing industry, they may be unable to do it without some tariff protection.
- WTO is being overshadowed by new TIPP trade deals. These deals are negotiated away from WTO and focuses mainly on US and EU. It excludes China, Russia, India, Brazil and South Africa. It threatens to diminish the global importance of WTO
- Difficulty of making progress. WTO trade deals have been quite difficult to form consensus. Various rounds have taken many years to slowly progress. It results in countries seeking alternatives such as TIPP or local bilateral deals.
- WTO trade deals still encompass a lot of protectionism in areas like agriculture. Protectionist tariffs which primarily benefit richer nations, such as the EU and US.
- WTO has implemented strong defense of TRIPs ‘Trade Related Intellectual Property’ rights These allow firms to implement patents and copyrights. In areas, such as life-saving drugs, it has raised the price and made it less affordable for developing countries.
- WTO has rules which favour multinationals. For example, 'most favoured nation' principle means countries should trade without discrimination. This has advantages but can mean developing countires cannot give preference to local contractors, but may have to choose foreign multinationals - whatever their history in repatriation of profit, investment in area.
- In response to this the WTO may say that free trade has been an important engine of growth for developing countries in Asia. Although there may be some short term pain, it is worth it in the long run.
- Also the WTO has sought to give exemptions for developing countries; enabling in principle the idea developing countries should be allowed to limit imports more than developed countries.
Integration Efforts in the EAC
The East African Community (EAC) is an economic bloc formed by Kenya, Tanzania, Uganda, Rwanda and Burundi. The countries have a history of cooperation dating back to the early 20th century. In the recent years, they have started various infrastructure projects to improve the connection between its members, ultimately decreasing the cost of doing business and making the bloc more attractive to trade with foreign countries.
Singapore is enjoying this opportunity, with investments in the African continent growing at a compound rate of 12% per year; the city-state has traded more than US$400 million with the EAC alone in 2013. Singapore is currently involved in various businesses in the region, ranging from agriculture to digital logistics solutions, and is eager to expand its presence even more. This pace will increase as legal frameworks and institutions covering the whole EAC bloc gain strength and eliminate corruption in the region; and when basic infrastructure problems are solved and an easy flow of goods and services is reached in the region.
Surrounding the pristine Lake Victoria, Kenya, Tanzania and Uganda formed the original core of the East African Community (EAC), which came into force in July 2000. Neighbouring countries Rwanda and Burundi joined the Community in 2007. The 5 countries are home to 157 million citizens, have a combined Gross Domestic Product (GDP) of US$147 billion and an average annual GDP growth of over 6% projected for the coming 2 years. The EAC came together to establish a common trade bloc with open borders to free up the transit of capital and citizens, and an ultimate goal to have a common currency and turn the group into a political federation, with a single sovereign state.
With the motto “One People, One Destiny”, the Community has created the East African Customs Union, established the Common Market in 2010, and implemented the East African Monetary Union Protocol. These are just some of the steps the EAC has taken in order to attract investments, nurture economic growth and reduce poverty.
In all of its 5 countries, there is a sentiment of pride and hope that this union will keep bearing good fruits. There is a joint effort to make several changes to the national laws to allow the full implementation of the common market in areas such as immigration, labour and customs.
Challenges that the EAC faces are mostly related to poor infrastructure, such as inefficient border posts, road blocks, transit road weighbridges, long clearances at ports, and poor roads and railways. Corruption is also a problem, with 4 of the 5 countries ranking over the 100th position among the most corrupt in the world. Rwanda has the best score, with a ranking at 44. These challenges, however, in themselves constitute opportunities for companies understanding Africa and willing to engage in infrastructure development.
One of the main aims for the creation of the EAC bloc was to decrease or eliminate tariff barriers for trading goods among the members of the Community. Kenya largely benefits from bilateral trading agreements with other country members of the EAC. In 2014, Kenya exported goods worth more than US$900 million to Uganda, Tanzania and Rwanda. Uganda ranked as the main trading partner of Kenya, having imported more than US$470 million in Kenyan goods in 2014, according to the Kenya National Bureau of Statistics. Kenya traditionally exports lime, cement, fabricated construction materials and consumer goods to Uganda.
The bilateral relations between Kenya and Uganda also extend to the oil and gas sector. In August 2015, the countries decided on the crude oil pipeline that will transport oil from Albertine to Lokichar in Turkana County, the Hoima-Lokichar-Lamu oil pipeline. The agreement also includes the development of an oil refinery in Uganda. However, it does seem that Uganda is also exploring opportunities with Tanzania for the export of its oil via Dar es Salaam. Time will tell as to what option Uganda will eventually follow.
In 2015, Tanzania was Kenya’s second largest export destination within the EAC, with products like soap, foodstuffs, cleansing and polishing preparations as the major exports.
The decrease of tariff barriers incentivizes trading within the bloc. As trading and competition increase, buyers start demanding better quality products. The quality of some Ugandan products is now rivalling that of items, which for example, Rwanda previously imported from South Africa. The EAC integration means that Rwanda has to apply tariffs to products from the Southern Africa Development Community, while Ugandan goods are basically entering a domestic market. In the third quarter of 2015, Rwanda imported a total of US$126 million from other EAC countries, 26% of the total imports. Of these, 50% come from Uganda, making it Rwanda’s main trading partner in the bloc.
There is much to be done to interconnect the 5 countries of the EAC. The poor state of infrastructure across borders is one of the critical elements dragging down the economic growth in the region. The states have committed to improve road and railway systems, port conditions and electricity distribution grids in order to elevate the economies to a medium income level within the next decade. After addressing these basic infrastructure problems, the countries will be able to spark a rapid industrialization process. The final objective is to increase trade between the East African Community members, to reduce the cost of doing business, and to facilitate the movement of people, goods and services across borders.
Currently the railway systems connecting the countries are old, lacking maintenance. In Kenya, the construction of a new railway system was started in October 2013 to provide a more efficient integration between two of the country’s most important cities: the capital Nairobi, and Mombasa, the largest port in East Africa. The Standard Gauge Railway (SGR), which is built to copy the most efficient railways in China, will be 609km long and is expected to be completed by the end of 2017. It will transport passengers and cargo. The project will cost US$3.8 billion, being 90% financed by the China Exim Bank and 10% by the Kenyan government. The new railway line constitutes the first phase of the SGR project that aims to connect Kenya, Uganda, Rwanda, Burundi and South Sudan.
The railway is the biggest transportation project in Kenya since its independence, and it will shorten the travel time between Mombasa and Nairobi from 10 to 4 hours. Freight trains will complete the journey in less than 8 hours. The railway line is designed to carry 22 million tonnes of cargo a year or a projected 40% of Mombasa Port throughput by 2035
More than 30,000 jobs are expected to be created during the construction. Today many Kenyan families can already thank the project for the economic growth the region is experiencing. The contract, signed by the local government and the construction company, China Road and Bridge Corporation (CRBC), has assured that a large percentage of the workers are locals, and not foreigners.
Besides direct employment, the construction of the SGR is also making room for many new openings in companies that provide supporting services, such as security, transportation, accommodation and catering. Currently, construction materials, fuel, equipment, vehicles, sub-contracting works and consulting services are provided by local suppliers, while steel rails, steel strands, and other steel components have to be imported. The local steel industry is evolving, but has not yet reached the internationally recognized safety and quality levels required for the project.
In addition to the Mombasa-Nairobi connection in Kenya, inter-nations agreements have been signed to extend the railway to the adjacent countries. The governments of Kenya and Uganda signed a memorandum of understanding (MoU) in October 2009 to construct the SGR line from Mombasa to Kampala, the capital of Uganda. The railway will reduce transportation costs of goods from Mombasa to Kampala by up to 58%.
In August 2013, Rwanda joined the agreement, which would extend the railway from Kampala in Uganda to Kigali, the capital of Rwanda. The SGR line from Mombasa to Kigali is expected to be completed by 2018.
The ports are also extremely important in the transportation system in the East African Community. The ports of Mombasa (Kenya) and Dar es Salaam (Tanzania) are vital for the region. The Port of Mombasa not only serves Kenya, but is also the main gateway to the Eastern African hinterland countries of Uganda, Rwanda, Burundi, Democratic Republic of Congo and South Sudan. It is the largest port in East Africa, currently receiving more than 22 million tons of cargo per year.
Kenya is working hard to benchmark the performance of its ports with that of highly efficient ports such as Singapore, Rotterdam and Hamburg. To achieve this, the country is harmonizing its sea and inland ports’ operational standards with a focus on international best practices, investing in new technologies, expanding and improving infrastructure, enhancing logistics processes and embracing automation of services. The developments will not only reduce cargo and container dwell times, but will play a greater role in reducing the overall cost of doing business in the region.
To the north of Mombasa, talks about the multi-billion dollar project, the Lamu Port Southern Sudan-Ethiopia Transport (LaPSSET) Corridor, are ongoing. The project will include an 880-megawatt liquid-natural-gas-fired power plant, an oil pipeline to transport crude finds in northern Kenya and neighbouring Uganda, 6 berths at a deepwater port in Lamu, and a desalinization plant. The port is expected to make Kenya a trans-shipment hub because of its deep waters and ability to accommodate large vessels.
Lamu port and adjacent infrastructure are the central pieces of the LaPSSET Corridor, but not the whole of it. The project also includes roads and railway connecting the port to Ethiopia and South Sudan. A Standard Gauge Railway with 1,720km will connect Lamu to Juba, capital of South Sudan, and a two-lane highway will link the port to the cities of Isiolo, in the heart of Kenya, and Nakodok, on the border with South Sudan. Airports will be built in Lamu, Isiolo and in Lokichogio.
The LaPSSET project, once completed, will link Kenya to its two northern neighbours, Ethiopia and South Sudan, opening up the region to immense socio-economic development, especially in the northern, eastern and north-eastern parts of the country, and promote cross-border trade. The whole LaPSSET Corridor is estimated to cost US$26 billion and will be fully completed by 2030.
Tanzania is also engaged in improving its ports capabilities. Dar es Salaam is the main port of the country, handling about 90% of Tanzania’s international trade, with an annual capacity of more than 14 million tons of cargo. The port’s performance is far from satisfactory though. According to the World Bank, trade costs are 60% higher between Tanzania and China than between Brazil and China, despite the distance being double.
The Dar es Salaam port situation has not just been a problem for Tanzania. It has also held back neighbouring landlocked countries Rwanda, Burundi, Zambia, Uganda, Malawi and the Democratic Republic of Congo. If the port of Dar es Salaam reaches the same level of efficiency as that of Mombasa, the Tanzanian economy will gain almost US$1.8 billion a year, according to a World Bank analysis, which also said that inefficiencies at Dar es Salaam cost Tanzania and its neighbours up to US$2.6 billion in 2014.
In order to reverse this situation, Tanzania Ports Authority, TradeMark East Africa, the World Bank and the UK’s Department for International Development (DFID), signed a Memorandum of Understanding in September 2015 for an expansion project that aims to increase Dar es Salaam’s cargo handling capacity to 28 million tonnes in 2020 and to 34 million tonnes by 2025. The project has a price tag of US$750 million.
Additionally, the construction of a new port in Bagamoyo, located 75km from Dar es Salaam, is expected to start in July 2016. The US$10 billion project includes roads and railways and will take 10 years to be completed. The project is financially backed by China Merchants Holdings, China’s largest port operator, who will also be responsible for much of the construction work. The other partner in financing the project is Oman’s State General Reserve Fund. The new port will be the largest in East Africa and will be able to handle 20 times more cargo than the Dar es Salaam Port.
Road transport projects taking place in Tanzania and Kenya are serving as examples to the other countries of the East African Community of how improvement in infrastructure can generate business and foster economic growth. The Bus Rapid Transit (BRT), operating since early January 2016 in Dar es Salaam, uses a surface metro-like system of roads dedicated to buses, extending for 21km on three trunk routes and with 76 servicing buses. The system is responsible for decreasing traffic jams and shortening the commuting time of passengers in the city.
In Kenya, the 50km Nairobi-Thika Superhighway, launched in November 2012, covers an area that lies within the Nairobi Metropolitan and Central Province, including large sections of the City and Thika district, and covers an area inhabited by more than 1 million people. The highway not only reduced the commuting time between Thika town and Nairobi, but also brought a large number of businesses to its vicinity. New residential and commercial real estate were built, including 7 shopping malls.
Near the border with Tanzania, the Kenyan government has started to invite companies to bid for the upgrade of the 172km highway connecting Ahero to Isebania. The project, traversing four counties – Migori, Kisii, Homa Bay and Kisumu, is expected to improve trade in the Lake Victoria basin, which currently struggles with the narrow and worn road. The new highway will be larger and will have special service roads at commercial centres to boost the uptake of goods.
On the electricity infrastructure flank, there is the Eastern Electricity Highway Project, that will have a total of 1,045km of 500kV power lines extending from WolyataSodo in Ethiopia, to Suswa in Kenya. The US$1.26 billion project will be financed by the World Bank, African Development Bank (AfDB), Agence Française de Developpment (AFD) and by the government of Kenya, and has an environmental and social management plan and a resettlement action plan to take care of the communities that will be affected by the construction works.
The project, which is planned to be completed by the end of 2017, has the objective to increase the volume and reduce the cost of electricity supply in Kenya due to the cheap hydro-power from Ethiopia. The interconnection will also offer alternate power supply to Kenya and Ethiopia in the dry season when hydro generation is dismal. In addition to that, it will develop the pathway to create a regional electricity grid interconnecting the Eastern African countries, including other members of the EAC bloc. This will facilitate power exchange and develop electricity trade in the region.
Services and Businesses
In the services arena, a new platform for money transfer between Rwanda and Kenya was launched in October 2015. Users will be able to send and receive money seamlessly and affordably between the two countries. This regional remittance will greatly reduce the cost of doing business across the border, improve trade and increase market competitiveness in the region.
Another example of a business that is crossing borders is the Java House, a Kenyan coffee shop franchise that owns 36 shops in Kenya. The company, with revenue of US$29.5 million in 2014, is planning a massive expansion to Nigeria, Ghana, Zambia and Tanzania, following the growing number of coffee drinkers and enthusiasts.