In pursuit of industrialisation: Tanzania, Nigeria and free trade with the EU
Recent actions by Tanzania and Nigeria show how advocates of free trade as a development strategy are increasingly finding themselves on the defensive
Despite the fact that most economists still preach the virtues of free trade, Tanzania and Nigeria are decidedly ditching conventional wisdom and are instead opting for good, old-fashioned trade protection, and adding into the mix some classic industrial policies as well.
This has been on display most dramatically in the recent refusal by both countries to sign proposed free trade deals with the European Union known as Economic Partnership Agreements (EPAs). Although most African countries currently have duty-free access into the EU market, the new EPAs would gradually give similar tariff-free access to EU exports into African markets, amounting to conventional free trade agreements.
While Nigeria has opposed the EPA for the West African ECOWAS region for several years, Tanzania stunned observers with its last-minute decision in July to back away from the proposed EPA for the East African Community (EAC) region.
Both countries have new governments that have recently adopted ambitious plans for industrialisation. And both are rejecting the EPAs with the EU explicitly because of concerns that the rules and restrictions of the proposed agreements would undermine their new industrialisation strategies.
In rejecting the logic of reciprocal free trade, which has been ideologically dominant for the last 30 years, Tanzania and Nigeria are instead looking to the historical record of what the industrialised countries did in practice when they were first building their manufacturing sectors. And that history had little to do with free trade. In fact, in striking contrast to today’s free trade ethos, economic historians point to a basic rule of thumb learned by all of the industrialised countries from the UK, Germany and the US to Japan, Korea and China: that countries should only lower their trade barriers once their domestic industries have become competitive in world markets – not before.
Although many economists, trade negotiators and donor aid agencies often tell developing countries to just stick with their current comparative advantages in agricultural and extractive commodities, another key lesson from the historical best-practices of today’s rich countries is that such commodities actually tend to suffer from diminishing returns over time. This encourages diversification into manufacturing and services, which can provide increasing returns. But to do so successfully, the industrialised nations used a variety of industrial policy tools, even though many of these have since been discouraged or are forbidden by today’s free trade agreements.
Therefore, the reasons cited by Tanzanian and Nigerian officials for rejecting the EPAs – that they would block industrialisation in the future – are, in fact, consistent with the historical lessons learned and adopted by the rich countries when they industrialised.
Not only do they worry that the EPA’s proposed tariff reductions would pose a huge drain on vital revenues needed for their annual budgets, but both Tanzania and Nigeria are expressly concerned that the tariff reductions would lead to the destruction of local industries. Tanzanian officials contend that their manufacturers would be wiped out by floods of cheaper EU manufactured goods, and stifled from eventually climbing the ladder of higher value-added production.
This is not just an argument about how today’s manufacturers may be harmed but – more crucially – about how newer, higher value-added manufacturing industries that could exist in the future might never be able to even get started.
Tanzania’s President John Magufuli has also raised similar concerns about how imports of cheaper, subsidised EU agricultural produce into Tanzania would negatively impact its own small farmers, a sector that currently contributes the most to employment and GDP in the country.
Opponents also point to a rule in the proposed EPA that would outlaw Tanzania’s use of export taxes on raw materials, denying them the use of a standard industrial policy that was used by all of the rich countries. The industrialised countries all learned that such export tariffs were a vital policy tool to create incentives to keep raw materials at home for use by domestic manufacturers. Yet, in contrast, the EU’s 2008 Raw Materials Initiative, and its updated 2015 trade policy are quite clear that it intends to use trade deals like the EPAs to force open developing countries so that EU manufacturers can more easily access their raw materials and then export them to the EU for producing high-tech goods. According to Ambassador Dr. Aziz P. Mlima, Permanent Secretary at the Ministry of Foreign Affairs, this rule would deprive Tanzania’s domestic manufacturers of being able to use such natural resources in the future, and would leave the country as little more than ‘a source of raw materials for European industries.’
In fact, Tanzania established a ban on exports of vital mineral sands on August 1st, which is permitted under the WTO rules, but wouldn’t be allowed under the proposed EPA.
At least two members of the European Parliament’s Trade Committee, Marie Arena of Belgium and the UK’s Julie Ward, have come out in support of Tanzania’s position, arguing the proposed EPA would be harmful to its future prospects for industrialisation.
There is also the issue of African regional economic integration. While the EU claims the EPAs would support Africa’s regional integration, others disagree, including former Tanzanian president Benjamin Mkapa. He fears that locking in old North-South trade flows under the EPAs would undermine recent efforts at building new South-South regional trade ties. Drawing on data that shows African countries buy more manufactured goods from one another than do others (most of the exports from EAC countries to the EU are primary commodities), Mr Mkapa says that inter-African trade is far more important for the region’s aspirations to industrialize. ‘The EU market plays almost no role in this,’ he concludes.
Although the EU had wanted Tanzania and other EAC countries to sign and ratify the EPA before October 1st, the EAC heads of state met in Dar es Salaam on September 8th and agreed to put off any final decision about the EPA until January 2017. While Kenya and Rwanda have already signed, the EPA will not take effect until all 6 EAC members sign and ratify it.
Nigeria has been raising concerns similar to those raised Tanzania. For example, when Nigerian President Muhammadu Buhari addressed a special session of the European Parliament in February he reiterated concerns that the rules of the EPA would work against the goals of Nigeria’s industrialisation strategy. And Frank Jacobs, president of the Manufacturers Association of Nigeria, echoed the lessons of the historical best practices of the industrialised countries when he emphasized the sequencing issue, explaining that Nigeria does not need an EPA now ‘until it has been adequately industrialised and [is] able to trade industrial goods competitively.’
It seems that Tanzania and Nigeria are both determined to take a page from the historical best practices of the industrialised countries – using trade protection at first, then adopting free trade later. But they wouldn’t be able to do this if they adopted the EU’s proposed EPAs. The refusal of Tanzania and Nigeria to go along, as well as similar complaints emerging among African AGOA countries engaged in renewing their trade deal with the US, suggests that after dominating the debate for 30 years, the advocates of free trade as a development strategy are increasingly finding themselves on the defensive.
This article is updated from an earlier version published on This is Africa.Print page
Articles and comments posted on this blog reflect the views of the author(s) and not the position of SPERI or the University of Sheffield.