The Whitaker Group (Washington, DC)

Africa: Killing Growth with the Best of Intentions

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As Congress continues to drag its collective feet in passing three long-delayed Free Trade Agreements, as well as the long-overdue renewal of the Generalized System of Preferences (GSP), it is clear that international trade policy is one realm where numbers and politics rarely mix well.

When adding the morally-loaded, ambiguous term "poverty reduction" to an already adversarial mix, the righteous drive to do good can sometimes blind us to faulty logic and oversimplification.

The ongoing conversation over extending Duty-Free Quota-Free (DFQF) benefits to all Least Developed Countries (LDCs) provides a good example of this predicament.   Originally agreed to in principle during the 2005 Hong Kong WTO Ministerial Conference, the concept of extending preferential trade access to all of the world's poorest countries (rather than particular regions) has gained significant traction.   Indeed, it is a compelling concept – what better way to fight poverty and encourage economic development among what Paul Collier terms "the bottom billion," than to make it as easy and cheap as possible for all poor countries to trade with the US? Millions of people living in poverty stand to gain considerably if all of their products can access the US market duty-free, right?

Wrong.   To the contrary, DFQF access for all LDCs would be excessively harmful for many trying to escape the bottom billion, most notably in Africa.   To understand this reality, we must remember that the global trading system isn't simply made of one country against another – we must focus within the countries themselves, on individual sectors.

Let's start with the assumption that trade preferences for poor countries should be based on making uncompetitive economies more economically competitive.   They often do this by leveling the playing field and pursuing entry-level industries that allow for development along a value chain, to provide a buffer against more competitive economies (at least until both begin to converge).

The African Growth and Opportunity Act (AGOA) is one program that helps the poorest of the poor by providing duty-free access to US markets for almost all goods produced in Sub-Saharan Africa countries.   In terms of competitiveness, job creation, and broader economic growth, the results have been impressive.   The return on the AGOA investment has been hundreds of thousands of jobs created throughout Sub-Saharan Africa, and nearly $300 billion in non-oil exports to the US over the past 10 years.   Prior to the global recession, these non-oil exports had grown by nearly 240% since AGOA's passage.   The African apparel sector in particular is one of the largest industrialized sectors on the continent after natural resources, and is one of the true development success stories over the last decade.

So if poor people in Africa can benefit from these preferences, why not those in Asia?   Make no mistake – they are no less deserving of a helping hand than those in Africa.   Nevertheless we must remind ourselves that the true purpose of trade preference systems is to increase competitiveness of sectors.   As far as apparel is concerned, countries like Cambodia, Bangladesh and Vietnam are among the most competitive apparel producers in the world.   In 2010, each one of these countries exported more apparel than all of Sub-Saharan Africa during the same period.   Why, then, would we grant the same preferential access as AGOA to countries who don't need it to become competitive?

To make matters worse, the real beneficiaries of DFQF access for these hyper-competitive economies certainly won't be the millions of people living in poverty.   Rather, when trade preferences are granted to already-competitive economies, the benefits will instead accrue to multinational retailers whose input costs are slashed while the real wages paid to workers remain constant.   At the same time, the relative competitiveness of current beneficiaries (i.e. Sub-Saharan Africa) will plummet, shuttering factories across the continent and driving hundreds of thousands of Africans out of their jobs.   Will this really contribute to pulling the "bottom billion" out of poverty, as DFQF proponents suggests?   Hardly.

Finally, lest we forget the powerful agricultural lobby here in the United States, it is unlikely from the start that DFQF access on all imports from LDCs would ever make it through Congress.   In reality, the agricultural commodities that Africa could benefit from exporting – cotton, sugar, tobacco to name a few – are far too politically sensitive to be allowed into the US duty-free.   Thus, if Africa's meager industrial development is swallowed by Asian LDCs, and its major agricultural exports continue to be blocked... perhaps it is understandable that most African governments are viewing the DFQF proposal with grave concern.

Trade is far more complicated than many politicians like to put into soundbites, and subscribing to any and every trade policy can be as counterproductive as none at all.   It is incumbent upon DFQF proponents to recognize that we cannot lump "poor countries" into one basket that will collectively gain from a blanket trade preference system.   Rather, one needs to dig down past "poverty politics" to confront the fundamental economic forces that shape the competitiveness of individual sectors and the flow of the global trading system.   If our politicians fail to take these complexities into account, they risk devastating some of the poorest economies in the world… even with the best of intentions.

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