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FTA Series – Part 1: What you need to know

A population estimated at 1.3 billion predominantly made up of young people and with an abundance of natural resources, Africa presents market opportunities, a growing labour force and raw materials for manufacturing. A lot of investments flowing into the continent had been focused in the extractives sector; however, this is changing. Countries in the North are now cognizant and appreciate other opportunities which lie within agriculture, banking, consumer goods, infrastructure, mining, oil and gas, and telecommunications.


Although Africa’s growth prospects are bright, they differ not only country by country but also sector by sector. It is no longer in question that Africa is one of the fastest-growing consumer markets in the world presenting exciting opportunities to global businesses for expansion in retail and distribution. It is no wonder then that there is an increasing rush from Northern and Eastern countries to strengthen diplomatic, strategic and commercial ties- dubbed “the new scramble for Africa”.


Some of the mechanisms being used to do this is through bilateral trade agreements and Trade and Investment Agreements (TIFAs). TIFAs merely “provide strategic frameworks and principles for dialogue on trade and investment issues “while bilateral trade agreements confer favored trading status between two nations. By giving them access to each other’s markets, it increases trade and economic growth.

Why They Matter

Free trade policies in general provides for free movement of goods and services between countries. This approach is based on the argument that more trade makes us wealthier and is therefore a good thing. On the other hand, protectionism states that we should restrict trade (importations) in order to protect jobs; and local/ indigenous industries from outside/ foreign competition. The purpose of this restriction in most cases is to shield local industry players from being undercut while in some instances it is done to protect consumers from goods/ services offered at a lower standard.

Many economists agree that some restrictions on trade are desirable, but that we should be careful, as such restrictions can be overall harmful. For example, limits on agricultural imports may be good for farmers, but they may also increase food prices. In the coming weeks, Vellum will provide summaries, insights and brief analyses on the various impeding trade agreements that Kenya has or is in the process of entering while exploring the foreseeable impact not only nationally but on a continental scale.

The series will provide sectoral highlights based on the areas of interest as well as the prioritization which have been given in the different trade agreements. Notably, Vellum will focus on the Africa Continental Free Trade Area, the ongoing negotiations for a Free Trade Area between Kenya and the US; and Kenya and the UK.

To kick off the series, Part 1 provides some quick highlights on the arguments for and against free trade as provided by the the Citizen’s Assembly on Brexit: https://citizensassembly.co.uk/background-citizens-assembly/).

FREE TRADE VERSUS PROTECTIONISM


Key considerations to take into account in Arguments for Free Trade

  • Free trade increases the size of the economy as a whole. It allows goods and services to be produced more efficiently. That’s because it encourages goods or services to be produced where natural resources, infrastructure, or skills and expertise are best suited to them. It increases productivity, which can lead to higher wages in the long term. There is widespread agreement that rising global trade in recent decades has increased economic growth.
  • Free trade is good for consumers. It reduces prices by eliminating tariffs and increasing competition. Greater competition is also likely to improve quality and choice. Some things, such as tropical fruit, would not be available in the UK without trade.
  • Reducing non-tariff barriers can remove red tape, thus reducing the cost of trading. If companies that trade in several countries have to work with only one set of regulations, their costs of ‘compliance’ come down. In principle, this will make goods and services cheaper.
  • In contrast, protectionism can result in destructive trade wars that increase costs and uncertainty as each side attempts to protect its own economy. Protectionist rules can tend to favour big business and vested interests, as they have the resources to lobby most effectively.

Arguments for Protectionism:
While free trade increases the size of the economy as a whole, it isn’t always good for
everyone:

  • As more countries experience industrial development, traditional domestic industries can decline. In the UK, for example, the shipbuilding industry has declined in the face of international competition since the 1950s and currently steel production faces increasing competition. Protectionism can help preserve jobs in these sectors, or at least slow the process of change.
  • Protectionism can also help build up new industries. In sectors with high start-up costs, new firms might find it difficult to compete if there is not support from government in the form of tariffs or subsidies. Once they have become competitive, such barriers can be removed.
  • Protectionism can be used to safeguard ‘strategic’ industries such as energy, water, steel, armaments and food. For example, ‘food security’ may be seen as important so that we can feed ourselves if something terrible happens to disrupt the system of world trade.
  • Some people worry that free trade deals can lead to a lowering of standards. Such deals might require us to let in goods and services even though they don’t meet our standards, which might then be cheaper than those made by domestic industries. For example, some people have been worried recently that a free trade deal with the US might let in imports of chlorine-washed chicken. There might also be pressure to reduce our standards for workers’ rights or environmental protection so that our companies can compete with companies in countries that have lower standards.


As countries such as Kenya embark on its negotiations with the UK and the USA against the backdrop of the set operationalization of the Africa Continental Free Trade Area (AfCFTA) pundits from both isles will live to offer opinions and advisories aimed at influencing/ swaying stakeholders and public opinion.

However, in so doing, this should be done with a clear understanding of the frameworks and operational context informing the policy decisions taken.

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