Africa's
Terms of Trade and Their Impact on Economic Growth and Development
by Florizelle B. Liser, Assistant U.S. Trade Representative to Africa
International trade is important for boosting economic growth and reducing poverty in sub-Saharan Africa. However, the prices in the international market have not always been favorable to the products produced by African countries, making it difficult for African countries to maximize the benefits from trade. Commodity price fluctuations, other exogenous shocks, and the composition of trade have had adverse effects on African countries. The historic trend has been for African exports of lower valued primary products and African imports of more expensive manufactured goods. Trade in primary products is very volatile, affected by commodity price fluctuations, the unpredictability of crop harvests, and frequent changes in demand for primary products.
To counter these negative effects, many African governments pursued restrictive trade policies during the 1980s. After these policies failed to achieve sustained economic growth, African governments began to pursue more open trade policies in the 1990s, to promote economic growth by improving competitiveness and expanding trade. The result of these policies has been prolonged continent-wide economic growth, despite the fact that many of these countries continued to experience deteriorating terms of trade. Other factors - good governance, better functioning institutions, and improved infrastructure - also played an important role in improving the business climate, attracting investment, enhancing productivity and driving economic growth in these countries.
In the last year, prices for some of Africa's key commodities, such as cotton, gold, and platinum have risen sharply. In the past, African countries benefited from such commodity booms; however, they were usually followed by commodity busts that eroded any gains in economic growth. In order to break this boom-or-bust dynamic, African countries should seek opportunities to add value to primary commodities by processing these products.
Another issue often linked to the terms of trade is tariff escalation - where duties are low for primary and semi-processed commodities but rise for fully processed products, serving as a disincentive for countries to add value and move up the value chain.
The African Growth and Opportunity Act (AGOA) opened up the U.S. market to almost everything that sub-Saharan Africans export, and its impact has been noteworthy. AGOA-eligible African countries are now exporting to the United States a greater quantity and diversity of products than ever before. In 2007, 34 of 39 AGOA-eligible countries shipped products under AGOA and the Generalized System of Preferences (GSP).
AGOA provides incentives
for sub-Saharan African countries to add value by allowing processed fruits,
vegetables, apparel and other manufactured products to enter the United States
duty-free. In 2007, U.S. imports from sub-Saharan Africa under AGOA and GSP
totaled $51.1 billion, up 15 percent from 2006. Non-oil AGOA imports increased
by about 7 percent in 2007, to $3.4 billion - including increases in automobiles,
apparel, leather products, essential oils, plastic products, agricultural
produce (dried grapes, cocoa paste, orange juice), and specialty food items
(natural honey, jams, fruit jellies).
Another issue sometimes put forward as impacting the terms of trade for poor
developing countries, including sub-Saharan Africa, is the use by developed
countries of agricultural export subsidies and trade-distorting domestic supports.
Current World Trade Organization (WTO) rules allow countries, including the
EU, the United States, and others to continue such agricultural policies,
though negotiations are taking place under the WTO's Doha Round to eliminate
farm export subsidies and substantially scale back domestic supports. The
Doha Round will also address the high tariffs and tariff-rate quotas faced
by African countries on some of their leading agricultural exports.
The most effective way to address many of these international barriers, and improve the terms of trade for African exports, is through successful completion of the Doha Round. Lowering tariffs under Doha will encourage new markets for African products overseas. Reducing trade-distorting domestic support will improve the competitiveness of African farmers. Eliminating export subsidies will level the playing field and strengthen the hand of African farmers. In the long run, Africans stand to make the greatest market access gains via Doha - for both agricultural and manufactured goods -- in other developing countries, including China, Brazil and India, which are among the fastest growing markets for African goods and which also maintain some of the highest tariffs that African products encounter.
The United States is working with African countries in the WTO to achieve a successful, trade-expanding outcome to the Doha negotiations. We invite other countries with an interest in opening global agricultural trade to join us at the negotiating table in the WTO. Working together, we can develop better WTO trade rules and encourage increased global opportunities for agricultural trade.
African countries also need to do more to break down barriers to African regional trade. Compared to other regions of the world, sub-Saharan Africa has among the lowest levels of intra-regional trade. Expanded trade among sub-Saharan African countries could also enhance the quality and competitiveness of African products and position them to expand into the global marketplace.
In conclusion, sub-Saharan
African countries face challenges in the global trading system. A successful,
trade-expanding Doha agreement will help by improving market access for African
products, especially to large emerging markets, and by reducing trade-distorting
subsidies and domestic supports. But the greatest challenge for Africans will
be in bolstering their global competitiveness by adding value to their extensive
natural resources. This will happen not as a result of debates on "terms
of trade," but rather through domestic and regional policies that incentivize
private investment, facilitate trade, reduce production costs, improve access
to capital for small entrepreneurs, and promote value-added exports. The United
States is committed to working with our African partners, as well as other
bilateral and multilateral donors, to help achieve these goals and to help
Africans to participate more broadly and more effectively in the global trading
system.