Trade agreements in East and Southern Africa

In East and Southern Africa, free trade agreements (FTAs) include COMESA (Common Market for East and Southern Africa), EAC (East African Community) & SADC (Southern African Development Community). The idea here is to solve nearby country crop deficits, whose crops may be less competitively priced than world market imports (when no duties are applied). FTAs also lean on the economic phrase ‘comparative advantage,’ which states that countries should export goods for which they have a lower cost of production (relative to other goods) and equally, countries should import goods for which they have a higher cost of production.

An example of this is Kenya, which is a deficit sugar region (i.e. its consumption is larger than its production) and therefore needs to import to balance this shortfall. Uganda is a key sugar-exporting country that helps to fill this demand, via COMESA and helps to support African growth. In this example, the assumption is that there are both surplus and deficit members within the FTA which will in theory correct each other’s balance sheets. This is a broad assumption, but this becomes apparent when countries suffer from production failures. This was seen this year in Kenya, a disaster crop which was around 330,000 tonnes lower year-on-year meant a greater need to import sugar. This, coupled with a poor crop in Uganda and also not enough surplus sugar among other COMESA member countries, meant that Kenya had to resort to the world market.

This ties in nicely with another ‘con’ of these FTAs which relates to the world market. FTAs rely on import duties on goods which are imported from countries not involved in the agreement, however, this becomes irrelevant should we see price disparity between local and world market prices. Whilst sticking with the Kenyan crop failure example, we saw an approximate $400/MT margin for world market importers given a low world market price relative to local price. This did come at a time when the Kenyan government granted duty-free import licenses yet the point remains that this price disparity was caused by a significant production reduction in Kenya followed by poor crops among the COMESA region. This was further exacerbated by a low world market price environment versus a strong local price. These viable imports were also seen last year in Rwanda, which imposes a 25% duty on top of the CFR (Cost & Freight) import price. A lack of availability within the COMESA region increased the price of (the little available) COMESA sugar to the point where it is over 1.25 times the price of world market imports.

FTAs, such as COMESA, can be effective when surplus/deficit members function normally. Yet in times of crises, as seen above, we see outside members (i.e. world market exporters) benefit from these markets. This counteracts the intent of an FTA, whereby a reliance on these imports was created. Coming back to this Kenya example, importers benefitted when margins were high but as more sugar comes into the country prices tend to fall - many importers may have felt the negative effects from this. One final point to quickly touch on is a depreciating currency which makes imports more expensive in dollar terms. This further emphasises the need for FTAs to correctly function so that deficit regions can alleviate the pressure from importing commodities priced in dollars.