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Trade and investment for Growth: Supporting trade-induced growth for development, how?

Written by Jodie Keane

The release of the UK’s White Paper on trade comes at an anxious time as most recent economic data on growth for the final quarter of 2010 show much weaker performance than anticipated.  Pundits generally acknowledge that there is only so much one can blame on the weather. The new strategy document launched today outlines the UKs approach to supporting trade induced growth, not only domestically, but also internationally and regionally.

The foreword to the White Paper makes it clear that as the global economy recovers from the global financial crisis (GFC) –, the worst  crisis in many years (during which global trade declined more than at the time of the great depression) – trade and investment are central to re-generating strong, sustainable and balanced growth in the UK and overseas. It sets out to explain how, as the UK works to rebuild its own economy, efforts should be redoubled to enable developing countries to build their own paths to growth through trade and investment, and to help them develop the capacity to do so, especially in Africa.

Trade and development appears, on the face of it, to have been given due attention. However, it is not clear the extent to which the new coalition government considers increased trade as commensurate with development. The following sections briefly highlight some areas where other questions remain as to how trade-induced growth for development will be better supported by the UK.

Trade and growth
Trade removes the constraints placed on growth by the domestic market, but sustaining trade-induced growth requires the development of technological capabilities to facilitate the upgrading of human capital and create a self-reinforcing growth dynamic. This means that although trade may be a key driver of growth, sustaining trade-induced growth also depends on a range of complementary policies to develop capabilities. This advice has been propounded for decades by the development community. Some developing countries have heeded this advice, and the rise of the BRICs (Brazil, Russia, India and China) reflects this.

The acknowledgment that open trade and investment, underpinned by an effective framework of rules, delivers the best results for both developed and developing countries is important. ODI-led Case studies of 11 countries, including eight in sub-Saharan Africa, suggest that the impact of the GFC depended on the composition and direction of exports, but also on countries’ ability to absorb the trade shock, and thus on governments’ policy responses. Some government responses ruled out in previous crises have become more acceptable since the GFC (e.g. capital controls). The Executive Summary concludes with the statement that although trade is central to growth and poverty reduction, the shifting global environment necessitates a new approach, yet this isn’t discussed further. 

Regional integration
We are told that European and Asian economies have benefitted significantly from ‘open’ regional integration, particularly by using regional supply chains to import and produce exports more efficiently, and that Africa has the potential to achieve similar benefits – it has so far struggled to successfully integrate.

There is a commitment in the paper to ensure that ‘Europe’s Free Trade Agreements take into account the different stages of development of countries signing’. Furthermore we are also told that the UK Government will work with Economic Partnership Agreement (EPA) regions in order to implement new rules introduced as part of these agreements. However, with some African Regional Economic Communities (RECs) split during the process of negotiation of interim EPAs (IEPAs), practical support and a degree of harmonisation is required to remove the new obstacles. There is some recognition of this, which states that the UK is committed to flexibility in the remaining negotiations and will ensure that tariff schedules are coherent with regional integration commitments.

But there is also some uncertainty, for example the paper states that it welcomes recent improvements in the Rules of Origin (RoO) which the EU applies to both EPAs and the Generalised System of Preferences (GSP) scheme; that these ‘should help develop supply chains and promote regional Integration’. Moreover, it states that it will press for the new rules to be promptly included in all ratified EPAs. However, later on in the document it states that it will ‘press for new rules of origin to be included in all EPAs’.

Is this a typo? Or does it acknowledge some of the difficulties the new rules included in the IEPAs mean for regional supply chains, and hence, open regionalism, since cumulation is only allowed between countries that export under the same regime to the EU? In addition to how RoO may need to be much more generous in order to induce a supply-side response?

Flagship aid for trade programmes

On the UK’s ‘re-energised approach to regional integration’, the Paper talks mainly about sub-Saharan African RECs and lacks any in-depth discussion regarding other regions (for example, with the Association of South East Asian Nations (ASEAN)) – although in Chapter 4 on the ‘Trade and investment challenge’ it states UK objectives as including agreeing ambitious Free Trade Agreements (FTAs) with ASEAN countries (does this mean on an individual or regional basis?). Mention is made to the Tripartite Initiative and creation of a free trade area between the three RECs in Southern and Eastern Africa (COMESA-SADC-EAC).

The Trademark initiatives in East and Southern Africa, which are referred to in the paper, have become flagship projects; they adopt a  regional corridor approach that attempts to overcome challenges that individual countries are unable to address because they cannot expropriate full benefits, such as addressing infrastructure deficits and investing in trade facilitation. These are innovative approaches and include initiatives designed to reduce and harmonise non-tariff barriers across the three RECs.

It is important that such initiatives are situated within the broader agenda of the achievement of growth and structural change: roads do not bring development automatically, but can help if linked to strategies that prioritise trade in particular goods and sectors. Although studies may point to Africa’s infrastructure deficit as a binding constraint to growth, sustaining growth means investing in ‘soft’ infrastructure such as skills and paying due attention to the regulatory framework in addition to other conformity infrastructure, as well as ‘hard’ infrastructure such as roads.

Overall the White Paper recognises the importance of how deeper integration requires the mutual recognition of standards so as to facilitate easier access to cheap and competitive inputs, when it talks about the EU’s single market. It also refers to how the use of international standards increases trade, and that the interoperability of internationally accepted standards could facilitate the remaining obstacles to free circulation of products and give a major boost for trade in goods between EU Member States. So what about working with other developing regions such as in Eastern and Southern Africa?

Results from recent surveys across business associations in the Tripartite countries suggest that an increase in the involvement of regional business advisory services may be required in order to design and disseminate business-friendly RoO to be agreed as part of the region-wide FTA for products that exhibit the potential to sustain trade dynamism

Trade and climate change
Climate change poses a new challenge to traditional routes towards export diversification for low-income countries, in addition to those that result from changing north-south trade relations more generally. Lack of clarity at the multilateral level leaves open the scope for countries to resort to various unilateral trade measures, such as the use of carbon labeling that may exclude carbon efficient producers unable to cover costs of compliance.

What the trade White Paper does not refer to in detail is climate change. However, it does state that a new paper on trade and the environment is forthcoming. It’s publication is eagerly awaited. One  hopes that the physical and regulatory constraints, as well as opportunities and synergies that should be developed between the trade and climate change regimes (for example, in the relation to the use of Aid for Trade), for low-income countries will be given due consideration.