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Free trade doesn’t exist

27 Jul, 2018 - 00:07 0 Views

eBusiness Weekly

Dr Gift Mugano
Free trade by definition is a system in which goods, capital, and labour flow freely between nations, that is, without barriers which could hinder trade in the process.With free trade, one would expect a number of barriers to trade such as tariffs, import quotas, tax breaks, technical barriers to trade, subsidies and other forms of domestic support to producers stuck down.

Restrictions on the flow of the currency as well as regulations which are considered as a barrier to free trade are also lifted. So, what it means is that with free trade, foreign companies are enabled to trade just as efficiently, easily and more effectively as domestic producers.

Yes, the global economy has committed itself to the free trade agenda. In this regard, as noted by the World Trade Organisation, over 120 regional trading blocs were established with a view of pushing for the free trade agenda.

The sponsors of free trade or trade liberalisation were motivated by the belief that free trade is panacea – it will result in wealth creation coming out of expanded trade, job creation and increase in foreign direct investment to mention a few.

However, empirical evidence has shown that trade liberalisation is neither a panacea nor a strait jacket. As a matter of fact, because of the different configuration of various economies, countries have noted that free trade has more harm than benefits. And, because of this observation, a number of countries, powerful economies for that matter, have looked inwards. Hence, the essence of my article.

In order to avoid touching a storm on this matter, I will showcase evidence on renewed protectionism from the European Union, United States and Africa with a specific reference to the Southern African Development Community (SADC) to showcase that free trade doesn’t exist.

Trade Distorting Measures in the EU and US

Studies by one of the leading think tank in the EU shows that the main offenders for creating harmful trade policies are the US and EU. The think tank’s research  revealed that the world’s top 60 economies, contrary to the spirit of free trade mantra, have adopted more than 7 000 protectionist trade measures on a net basis since the financial crisis 2008/09. These measures have been established in order to shore up key industries, protect jobs and maintain a strategic international advantage in the wake of the financial crash. To buttress this, Britain is working on a framework aimed at leaving the EU completely because it was frustrated by the tenants of free trade and the impact of the same thereof.

Studies shows that since 2009, 49 percent of European countries have implemented restrictive trade policy measures which are harmful to international trade with countries outside the single market. The analysis shows that Britain stands on the edge of one of the world’s biggest protectionist blocs. Between 2009 and 2016, some 5 657 EU directives and measures can be seen as actively restrictive for trade.

Evidence has shown that trading with the EU is tough. There is compelling evidence which point to the fact that EU has been closing its borders to those outside its membership since 2009 thereby making it harder for countries outside the exclusive club to trade within it — which could be bad news for those seeking a post-Brexit deal between the EU and the UK.

With respect to the agricultural sector, evidence shows that the EU, in line with its Common Agricultural Policy (CAP), is spending close to $500 billion, that is, 38 percent of the EU budget as distorting subsidies to farmers. This situation makes a serious uneven playing field with exporting farmers from Africa.

America First Mantra

The US, according to latest research evidence, has the biggest protectionist stance across the world — and with Donald Trump at the helm, more protectionist measures are expected.

Since 2009, the US has passed 1 297 economic or trade measures deemed to be “harmful” to global trade, compared to just 206 regarded as liberalising, according to the research.

This can be seen in the recent move by US authorities to consider imposing duties of 300 percent on Bombardier’s C Series jets, which American rival Boeing insists receive improper government subsidies.

This leads to a net number of 1 085 US protectionist measures — compared to India, the next highest, with 438. The US is by far the most protectionist country when it comes to global trade yet it is the top preacher of the free trade gospel.

To exemplify the America first mantra, at a bilateral level, US trade war with China has seen US administration putting tariffs on $34 billion steel and aluminium imports from China. US is actually looking forward to escalate the war by imposing tax on imported cars and spare parts from China. China responded by setting aside $199 billion war chest with the US as it seek to save its companies from bankruptcy in the face of escalating tariff hikes and raised tariff on pork and soya beans imports from US. Already, US pork and soya beans farmers have suffered massive losses as China hit back on 6 July 2018 by raising tariffs by 25 percent. Because of the political sensitivities around these farmers, the US administration on 24July 2018, set aside $12 billion as aid to farmers. This is something which should not happen if free trade exist.

Non-Tariff Barriers, Rules of Origin and Regulatory Policies in Africa

In Africa, a web of non-tariff barriers (time delays and hassles involved in trade facilitation services) further constrains private business and trade and renders free trade deal useless. Constraints include complex and lengthy procedures regulating private business activity; complex customs arrangements; restrictive rules of origin; and limited regional harmonization of policies, regulations, and procedures. Poor transit systems and numerous informal roadblocks along trade corridors create additional obstacles that counters the free trade spirit.

All these contribute to the cost of trading across borders in sub-Saharan Africa which is the highest of all regions according to the World Bank survey of procedural requirements for exporting and importing goods published in Doing Business.

Sub-Saharan Africa is at the bottom in all categories of World Bank’s cross-border trade rankings (except in number of export and import documents, where it is second to bottom). For example, on average it takes sub-Saharan Africa over three times the number of days to export or to import goods it takes OECD countries. This could be due to complex and cumbersome procedural requirements for exporting and importing goods.

In summary, studies shows that in Southern Africa NTBs impacted $3,3 billion of regional trade yearly.

Illegal roadblocks are a pervasive problem in Central and West Africa. Most controls are carried out by police and sometimes by specialised government services (veterinary and agriculture.). The checkpoints are many since they are located at the entrance and exit of towns as well as at the borders between administrative districts.

Stringent local content requirements reflected in rules of origin (RoO) and high compliance costs reduce the utilization of tariff preferences offered by African RTAs. For example, SADC’s restrictive RoO on clothing and textile reduces the ability of countries to benefit from the agreements. Recent reports shows that Shoprite spends US$5,8 million per year in dealing with administrative requirements for certificates of origin to secure US$13,6 million in duty savings under SADC while Woolworths does not use SADC preferences at all because the administrative cost of securing certificates of origin is not worth the hassle. Similarly, in West Africa the ECOWAS trade liberalisation’s stringent rules of origin and the associated registration requirements have resulted in few companies registering under the Scheme.

These hassles are a clear testimony that free trade doesn’t exist.

For Zimbabwe, it is important that the country carefully consider its trade agreements with a view of coming up with strategies of countering the trade restrictions. In the same vein, we should come up with smart protectionism if we are to survive in this world where trade is largely a zero sum game, that is, kakara kununa kudya kamwe.

 

Dr Mugano is an Author and Expert in Trade and International Finance. He has successfully supervised four Doctorate candidates in the field of Trade and International finance, published over twenty — five articles and book chapters in peer reviewed journals. He is a Research Associate at Nelson Mandela University, Registrar at Zimbabwe Ezekiel Guti University and Director at Africa Economic Development Strategies. This article was extracted from  Dr Mugano’s upcoming Book titled: Trade liberalisation Paradox: How Africa Must Respond. Feedback: Cell: +263 772 541 209. Email: [email protected]

 

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