In the second instalment of our analysis of South-South trade, we take a look at the controversial issue of protectionism, the importance of global trade agreements and discuss what should be done to further develop South-South trade.

To read the first instalment of this feature article please click here.

Protectionism rears its head

It is still too early to assess the true extent of the damage the financial crisis has inflicted on the developing world. However, one term that seems to be appearing with alarming regularity is that of protectionism.

While there are many issues facing developing countries, such as lack of access to trade finance and dwindling supplies of aid, it is growing protectionism that could yet wreak the worst havoc, and it is an issue that developing countries can do little to avoid

Mark Halle, global director of trade and investment with the International Institute for Sustainable Development, says “the best that can be expected is if developing countries can work on trade facilitation and lower the barriers to trade so that it will be easier for South-South trade to develop.”

Halle notes, however, that more open markets will also likely lead to more North-South trade as well, which would subsequently sway the balance back in favour of the North.

Leaders in the West, such as America’s Barack Obama and the UK’s Gordon Brown, have been calling on countries not to begin reverting to protectionist measures in a bid to protect their economies. However these same leaders have used slogans such as ‘buy local’ and ‘British jobs for British workers’.

They are also responsible for some of the biggest bail-outs the world has ever seen. In an interview before his promotion to the role of Trade & Industry Minister in Zuma’s new cabinet, Dr Rob Davies said that while the developed world might not be using tariff policies, their bail-out packages were linked to messages about “buying local”.

Davies said countries like South Africa can’t compete with such measures, adding that the government may seriously consider reversing some of its tariff cuts. He added that subsidies employed in the West will have the same effect as a tariff.

Dr Mills Soko, senior lecturer at UCT Graduate School of Business and founding director of Mthente Research & Consulting Services, says there remains a great deal of skepticism about liberalisation in many countries, including South Africa, noting that there has also been a surge in protectionist interests.

“I think the big concern that African countries have is the rise in protectionism will undermine their economic prospects. A lot of these countries are so heavily dependent on exports that to conclude the Doha round and maintain open markets is in their interests,” says Dr Soko.

Anne Krueger, former deputy managing director of the International Monetary Fund (IMF), writes in her article Protectionism and the Crisis, that protectionist measures have already begun to appear.

Following America’s support for the auto industry, other countries have planned similar levels of support. She says that since the auto industry’s problem is an excess of capacity, the support simply maintains that excess rather than improving the industry.

“Protection is much harder to remove than it is to impose. It has taken over fifty years to bring it down to current levels, and there is still hope that the conclusion of the Doha round would reduce protectionism still further, to the advantage of all,” says Krueger.

The importance of global trade agreements

The Doha round, first started in 2001, has continually stalled with divisions between the West and developing countries on issues such as agriculture, tariffs and non-tariff barriers.

Last year the talks ended, again without an agreement, after the US and India failed to agree on a special safeguard mechanism – which would have allowed developing countries such as India and China to protect farmers from surges in imports.

The talks failed despite the US having signed in a new five-year programme of agricultural subsidies just two months earlier that even the EU trade commissioner Peter Mandelson called ”one of the most reactionary farm bills in the history of the US”.

Mark Halle says that a conclusion to Doha on favourable conditions for the developing world is one of the best measures to minimise the effect of the financial crisis. “In concluding the round, I would minimize the demands on most of the developing world, arguing for concessions only from the economies that are truly competitive in their own right,” he says.

The EU is currently negotiating economic partnership agreements (EPAs) with developing countries to create a Free Trade Area (FTA) between the EU and the Group of African, Caribbean and Pacific (ACP) countries.

Dr Mills Soko notes that developing countries need to be careful with bilateral negotiations, saying “these major powers [EU and US] have now decided to use bilateral trade negotiations to smuggle through issues that have not been resolved at a multilateral level, such as services.

“In the case of EPAs South Africa refused to include these issues because it believes they have to be correctly resolved at a multilateral level. But in terms of its bargaining power, vis-à-vis the EU, South Africa is in a stronger position than the other countries,” Soko adds.

Botswana is dependent on two main exports - beef and diamonds - with between 80% and 90% of the beef having duty free access to the EU. Were the EU to pull the plug on the beef exports it would undermine Botswana's economy, says Soko, as it is not as diversified as South Africa's.

“At the same time they (southern African nations) also have a gripe too against South Africa which they accuse of undermining regional integration. The EPA negotiations have demonstrated the fragility of the regional integration,” he says.

Aileen Kwa, coordinator of the Trade for Development Programme at the South Centre in Geneva, says the way the EPAs have been conceived is likely to bring more losses than gains for Africa. 

“This is because the EU is already negotiating Free Trade Agreements (FTAs) with Central America, Andean countries, ASEAN, India and others. Therefore, for preferences that will last 5 or at most 10 years, African countries are being asked to sign away their trade policy space,” says Kwa.

Looking ahead for South-South trade

Since the advent of the financial crisis last year countries have been increasingly talking of protectionist measures, whether in thinly veiled terms to ward off criticism of closing markets, or more openly as was demonstrated by South Africa’s then deputy trade minister Rob Davies.

Despite protectionist talk, many trade analysts agree with the concept that liberalising markets further could help to head off the worst of the current crisis, with the short-term benefits of protectionism actually having more harmful longer-term effects.

Within the developing world itself there have also been calls for increased South-South trade, particularly with demand from crucial Western markets falling, not only due to protectionist pressures but also to a decline in consumption.

As Dr Soko points out, if the credit crunch has taught the developing world anything, it should be the need to diversify, not just the products a country exports but also the markets that it exports to. The greater diversification an economy has, the stronger it is.

If the credit crunch has taught the developing world anything, it should be the need to diversify. The greater diversification an economy has, the stronger it is – Dr Mills Soko

Pascal Lamy, director-general of the World Trade Organisation (WTO), said recently that a Doha deal could be in sight by the end of the year but urged that African countries should also be trading more with each other and establishing uniform customs regulations.

Lamy said 90% of Africa’s trade is with countries outside of Africa, adding that this is a legacy of colonialism. He notes that local African markets are not large enough, or integrated enough, which discourages direct foreign investments.

There is a beacon of light in this regard with $1.4-billion recently being pledged by the World Bank, Africa Development Bank, European Union and Britain to help upgrade transport and trade routes in eastern and southern Africa, also known as the North-South Corridor.

The agreement, which also saw leaders across eastern and southern Africa agree to work together to improve trade routes, is aimed at speeding up transport links, especially for landlocked countries.

Whether the reason behind such an agreement is a genuine desire to assist the development of trade in Africa, or an eleventh hour move to secure its own position on the continent as China’s efforts to improve infrastructure make it a more attractive partner for many countries, is unclear.

Either way, such moves are critical for the future of Africa. As long as the infrastructure is not in place, trade will be held back by unnecessarily high logistics costs.