Reliving comparative advantage disputes in East Africa

21Nov 2018
Financial Times
Reliving comparative advantage disputes in East Africa

TRADE disputes between East African countries keep recurring just when they appear to have been ironed out, as the East African Customs Union Protocol seems to be working for tariffs on imported goods, while there is a bigger problem that is cropping up, free trade for internally produced goods.

As the EAC Secretariat nears 20 years from the time it was being set up in 1999, around 23 years after it collapsed late 1976 and was reignited early 1996 at the initiative of incoming Tanzanian president Benjamin Mkapa, it seems to be turning a corner.

Trade relationships appeared to be working well as the level of contentious goods was fairly low; now that is apparently being eclipsed.

Contention arises when competition is higher than before, when industries are less complementary and more ‘zero sum’ in character, especially as each country (or the less industrialized, at first) near a situation where they can rely on their own industries for most goods traded across borders.

Earlier on local production for most goods was low and imports were needed on a big scale to fulfil needs, but that is diminishing, and pressures for creating jobs via industries increase.

This is in actual fact the most important source of pressure for protectionism, so that industries are located at home and offer jobs to local job seekers, not be imported and sustain jobs in neighbouring countries.

Still this line of action is not without its costs, as Europe went through that period in early industrialization, and at least in Britain solved it early on, followed by France in opting for a market economy, while the US fought wars with the old colonial power, Britain, starting with the Boston Tea Party uprising in 1774 that took the US onward to independence in1776.

Recent events where US President Donald Trump was elected on a platform of cutting back the trade deficit with China and pull industries back home to ensure a healthier level of availability of jobs is a reminder that the problem is never really resolved.

So Tanzania isn’t protectionist because it is backward, not at all. What seems to be at issue is that this situation frustrates industrialists both in the country and in neighbouring countries, despite that business communities in either country or in whichever member state in the East African Community (EAC) and the EACU protocol zone knows the basics of the problem.

  The question is how far this frustration encountered by businessmen and at times by whole sectors in a particular country can engage this or any of the governments to change the rules, in the sense of such a change working in the interests of that country.

It would firstly mean that protectionism was wrong in the first place, whereas it isn’t entirely mistaken, in principle.

There is a way in which the EACU zone may still need to reaffirm the free trade area assumption underlying the work of the EAC Secretariat, and on the basis of which an additional goal of an East African Common Market was set up, and now seems to be increasingly uncertain.

The reason this intention may still be reaffirmed isn’t because protectionism is simply wrong but that East Africa needs capital investments not just from local sources but from abroad, and quite often it is funds from these same countries that are stashed abroad.

They need economies of scale to choose to invest, which means the East African market as a whole, not just the respective national market as such.

Listening to remarks of a strategic kind in various instances where investment agreements are being inked, this need is not always prevalent, but it true that most capital that flowed to industries in East Africa sought to gain a foothold in the wider market.

In the Kenyan case investors merely sought to expand as they had the regional reach already, and many investment groups in Tanzania have a similar reach embedded in their strategies from day one.

So, while a nationalist outlook makes plenty of sense in natural resources as they are not extended, the concessions are limited to specific zones not bringing countries together, industrial investment is a different matter altogether.

Companies are being asked to target the local market and basically be protected from competition. But Tanzania will gain from a regional strategy as its currency and wage labour conditions are more feasible for capital to set foot than for instance in Kenya.

Regulators and policy makers think of pleasing manufacturers sitting at a round table in the Tanzania Business Council or elsewhere, with a promise for effective protection of industries but end up hampering the flow of capital for industries destined for regional markets.

Indeed, with a standard gauge railway, a sharp increase in manufacturing makes sense via a regional strategy, and not devoting it just for transit trade needs.