South Africa approves Wal-Mart bid, govt could take action

South Africa approved Wal-Mart’s R16.5 billion (US$2.4 billion) bid for control of retailer Massmart with minimal conditions on Tuesday, giving the world’s top retailer a big boost in its plan to expand in fast-growing Africa.

South Africa’s Competition Tribunal told Wal-Mart not to cut jobs for two years, honor existing labor agreements, and work to develop local suppliers, concessions the US firm had earlier proposed itself.

The deal gives Wal-Mart a 51 percent stake of Massmart, a discount retailer that sells everything from liquor to televisions and has a presence in at least a dozen African countries.

The decision will be seen as a major advance for Wal-Mart, which had said it could drop its offer if the government imposed targets on using local suppliers.

“This is good news. It included concessions put forward by both parties so it’s a victory all round,” said Paul Theron, CEO of Johannesburg-based asset manager Vestact.


“It shows that South Africa is open for business, that large corporates are potential players for outside investment.”

Massmart must also “give preference” to reemploying 503 workers fired in 2010, set up a R100 million (US$15 million) fund to help develop local suppliers, and not challenge SACCAWU’s right to represent bargaining units for three years, the tribunal said.

The two companies said in a joint statement they were “pleased” with the decision and expected Massmart’s food business to grow by 50 percent over the next five years.

The decision was a victory for Wal-Mart, as it did not impose restrictions on where it sources it goods, said Brian Sozzi, a New York-based analyst at Wall Street Strategies.

“In two years it looks like they can go to town on labor costs,” he said.

“The whole thing with them is to get goods into the South African market as cheap as possible and sell them as cheap as possible.”

However, the ruling is a blow to South Africa’s influential labor unions, one of which is already considering an appeal.

“We are meeting with our legal representatives to explore legal options,” said Mike Abrahams, a spokesman for the South Africa Commercial, Catering and Allied Workers Union (SACCAWU), adding that the union could consider appealing to the Competition Appeals Court.

That could further delay the deal, which was first announced in September 2010.

The deal was a test case for major foreign investment in South Africa, which has the continent’s deepest capital markets but where unions are in a coalition with the ruling African National Congress.

Three government departments – economic development, trade and industry, and forestry and fisheries – and the unions had lined up against the deal, asking the tribunal to impose targets on local procurement and a freeze on job cuts.

The government and unions have said Wal-Mart’s global supply network could lead to a flood of cheap imports, sparking job losses and squeezing local companies.

“We would have hoped that the deal would be rejected or at least much more stringent conditions be imposed,” said Patrick Craven, a spokesman for the COSATU union federation.

“Our biggest concern remains completely unanswered, and that is the knock-on effect on jobs in other retailers and the manufacturing industry.”

The three departments said in a joint statement late on Tuesday they would need further study to determine whether the conditions were sufficient enough to prevent widespread job losses.

“Based on the outcome of the study of the conditions and the responses of Wal-Mart/Massmart, we will decide on the next steps to take. Government reserves its legal options at this stage,” the three departments said.


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Implementation of SADC Protocols

The highest decision-making body, the Summit of heads of State or Government, of the Southern African Development Community (SADC) met this week in Windhoek, Namibia to take stock among other things of the progress made in the implementation of various legal commitments. SADC was established in terms of the SADC Treaty which entered into force in 1993. One of the objectives of the Treaty is the adoption of policies aimed at the progressive elimination of obstacles to the free movement of labour and capital, goods and services, and of the people of the region among member states.

Consequently, in line with this objective member states adopted the SADC Trade Protocol in 1996. The Trade Protocol came into force in 2000 after ratification by two thirds of the member states. Angola (2003) and Madagascar (2006) acceded at a later stage. Three member states, Malawi, Angola and DR Congo are not currently implementing the SADC Trade Protocol even though Malawi ratified the Protocol in 1999 and Angola is party to it. The implementation of the SADC Free Trade Area started in 2000 and was officially launched in 2008 after a transition period of eight years. The regional block claims to have liberalised 85% of trade in goods that originates among its members. It is envisaged that the SADC FTA will be fully implemented in 2012 with the completion of tariff phase down schedules on trade in sensitive products.

In addition, the member states adopted a roadmap (Regional Indicative Strategic Development Plan) in 2003 for the achievement of deeper regional economic integration and propose the establishment of a customs union by 2010, common market by 2015 and an economic union by 2018. The establishment of the SADC Customs Union has not commenced and will in all likelihood be postponed. Nonetheless the important thing is that members started a process for the integration of their economies even though it might take longer than planned. Despite cooperation on the achievement of economic integration, the member states also cooperate on numerous other issues. This would not have been a problem had the members not allowed dual membership with other regional initiatives with similar aims, objectives and timeframes. This confused and complicated a seemingly clear approach to regional integration.

Countries are for example required to allocate scarce financial and human resources to the implementation of the various integration projects and to the establishment of new institutions in line with their obligations. Almost all government departments are in one way or another involved in the negotiation, implementation, monitoring and evaluation of regional commitments. It also places an additional burden on national legislatures to give effect to obligations through the adoption of new or amendment of existing legislation. The costs of belonging to a regional integration block are duplicated when a particular country is party to multiple initiatives. In some instances these regional arrangements have conflicting obligations creating an implementation nightmare for those individual countries with dual membership.

It is here where the root of the problem lies. The members of SADC have signed not less than 23 protocols and a number of declarations, charters and memoranda of understanding on various matters ranging from illicit drugs and control of firearms to trade, fisheries, mining and finance and investment. All of these protocols have entered into force, even the protocol on the establishment of a tribunal for the adjudication of disputes arising from the interpretation and application of obligations. Unfortunately, many member states do not view their legal obligations with the necessary earnest it deserves because very few, if any, consequences have ever flown from the non-implementation of commitments. Dispute resolution through the adjudicating body has only been used in exceptional cases. Regrettably, a rules-based dispensation has not yet come about. As a result, some states are very slack when it comes to the incorporation of their obligations into domestic law. However, it is important to acknowledge and address these technical problems in the functioning of the regional arrangement. The countries in southern Africa cannot prosper when they view and address problems in isolation. They need each other’s assistance to tackle problems of mutual concern. They also need effective secretariats that can oversee the implementation of regional policies and speak on behalf of the collective.

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Willemien Denner, a tralac Researcher, discusses trade policies and the global economic crisis: the Sub-Saharan Africa perspective.

The World Trade Organisation (WTO) estimates that world trade will expand by 9.5 percent during 2010 as the global economy starts to recover from the global financial and economic crisis. Exports from developed countries are expected to increase by 7.5 percent and exports from the rest of the world, including developing countries, by 11 percent in value terms. Although it is expected that it will take another year before world trade values reach, and even surpass the high trade values recorded for 2008, the expected recovery is a significant improvement over the 12.2 percent decline in value terms and 23 percent decline in terms of US dollars recorded for world trade in 2009.

It has been determined that the sharp decline in trade values during the global recession has not been due to an increase in protectionist measures, but rather due to a major decline in global demand. This was exacerbated by the type of products for which demand fell and the fact that the decrease in demand happened across countries and regions. However, some countries implemented more trade restrictive than trade liberalising policy measures and African countries have implemented more post-financial crisis protectionist policies than China. Thus far discriminatory measures have remained the most prominent post-crisis policy response for most African trading partners in 2010.

The 5th Global Trade Alert Report focuses on Sub-Saharan Africa and argues that most African countries have been successful in resisting the temptation to implement protectionist policies, while many of their trading partners have implemented trade restrictive and distortive measures. These include various policies ranging from financial bailouts and export subsidies to government procurement and local content requirements. However, relatively developed African countries, like South Africa, have been able to retaliate against these measures.

Although many developed countries, like Japan and the United States implemented trade restrictive and distorting policies, many emerging countries like Brazil, China and India followed suit. For the G8 countries alone there are 226 trade restrictive measures indicated in the Global Trade Alert database. These measures affect 181 trading partners and 674 tariff lines. In comparison less developed countries implemented only 21 trade restrictive measures which affect 31 trading partners and only 15 sectors.

Some African countries have also implemented fiscal stimulus plans, following in the footsteps of their developed and emerging counterparts. In Mauritius the Government provided a stimulus package for the increase in domestic demand and job creation, while Nigeria provided bailouts for 5 banks. In South Africa the Department of Trade and Industry (DTI) made loans available to distressed manufacturing sectors, including automotives and clothing and textiles while the Industrial Development Corporation (IDC) made funds available to firms in different sectors and approved loans to various companies. Some countries did not have the necessary funds available to provide fiscal packages, rather focussing on the revision of their budgets to generate additional revenue or targeted assistance programs to support only those sectors of economic importance.

Of those trade policy measures which were implemented by African countries, most have been highly discriminatory with South Africa being one of the most protectionist African countries. 65 percent of the measures South Africa implemented during and after the financial crisis have been highly discriminatory policies. Other African countries which are relatively protectionist include Egypt, Morocco, Tunisia and Kenya. What is worrying is that Africa’s traditional trade partners implemented more discriminatory and less liberalising measures. Discriminatory measures were also applied by emerging African countries and other emerging trade partners like Brazil. This can disrupt the sustainability and the real and potential benefits for African countries from their trading relationships with traditional and emerging country trading partners.

The restrictive and protectionist policies which have been followed by most of Africa’s trading partners have indicated that African countries need to broaden their production and exports. African countries were mostly affected by those measures which discriminated against their agricultural commodities entering the markets of their trade partners and third countries. The continuation and increased production and exportation of primary commodities will intensify the competitiveness problems African countries are already experiencing, while building capacity and diversifying exports to higher value products will provide countries with policy space to adapt to the impact of a financial and economic crisis and improve negotiating power in their trading relationships.

Another important consideration for African countries is the need to reduce supply-side and cost constraints. These constraints limit the ability of African countries to participate in international trade by increasing the cost of production and thus worsening the competitiveness of African countries in the global market. To increase the competitiveness of African countries urgent attention needs to be paid to infrastructural deficiencies, including roads, railroads and electricity. A reduction in these constraints can decrease the cost of production which in turn will improve market access for African goods and services.

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Source: WTO; 5th Global Trade Alert

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It takes two to tango in accessing development aid.

Before and after the recent G-8 meeting in L’Aquila, Italy, stinging criticism was levelled by NGOs and developing country politicians at the rich countries for tending not to meet their aid commitments. While such criticism is fully justified the question arises whether aid recipients are without blame in this aid failure, a failure which in many cases threatens the growth potential and even survival of some developing countries, notably in Africa.

No fewer than 34 of the 49 countries classified by the United Nations as least developed countries (LDCs) are in Sub-Saharan Africa. These countries by and large do not have the capacity to generate savings in sufficient quantities to fund growth-facilitating investment. Poverty reduces household saving, the corporate sector is weak and generates little saving, while a poorly developed and narrow tax base does not permit government saving.

In order to grow investment in physical and human capital (the latter through increased public spending on health, education and training) LDCs, and often other developing countries as well, have to access foreign savings. For many LDCs, especially those without significant mineral resources, foreign investment and commercial borrowing cannot fill the savings gap, which means that these economies are absolutely dependent on foreign aid to make ends meet as far as public spending and investment is concerned.

However, as the saying goes, it takes two to tango, and in channelling aid to these economies more than a mere commitment on the part of donor countries to provide the resources is required. The aid-receiving countries must have the capacity, institutions and structures in place to use aid productively. No self-respecting sovereign country would like to see aid donors effectively replacing functions of government.

While it should be recognised that good governance often requires scarce resources, there is much that the governments of even the poorest countries can do with existing meagre resources and without reverting to expensive consultants to improve the quality of governance, a requirement that President Obama forcefully conveyed during his post-L’Quila visit to Ghana. The ubiquitous problem of corruption comes to mind, as do improving administrative systems, easing the regulatory environment, committing to growth-enhancing policies, developing institutions such as security of property rights, and actively reforming systems of land tenure that prevent the productive use land.

The absence of an aid-friendly environment, while not absolving donor countries from their aid commitments (neither does it explain why some countries do much better than others in honouring their commitments), can be an obstacle in the flow of aid. Not only does it reduce the size of aid flows but it could also perversely encourage more aid for less deserving recipients who have the capacity to absorb aid effectively.

Colin McCarthy, a tralac Associate, comments that it takes two to tango in accessing development aid. http://www.tralac.org/cgi-bin/giga.cgi?c=1694


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Increased protectionism and the implication for developing countries

Since 1945 the world economy has shown high growth rates associated with the liberalization of goods and services and increased capital flows. However the current global financial crisis has raised concerns for many countries regarding present and potential losses that can be suffered in income and employment. The risk of protectionist policies has heightened as the financial crisis deepened and economic activity decreased with rising unemployment.

Since the start of the financial crisis the World Bank has estimated that 78 trade measures have been imposed or implemented. These trade measures include 66 trade restrictions of which 47 took effect. Several countries have raised border barriers, introduced subsidies or stimulus packages for export-orientated or import competing industries and increased the use of trade remedies. A pattern is beginning to emerge of an increase in import licensing, import tariffs and trade remedy utilization to support domestic industries.

Historical economic evidence also suggests a strong link between the increased use of import restrictive trade remedies such as anti-dumping measures and safeguards and an economic downturn associated with recessions. The Global Anti-dumping Database shows that the implementation of product level trade remedies increased by 34 percent in 2008 and in the first quarter of 2009 the utilization increased by 22.3 percent. The imposition of definitive measures in 2009 is projected to be 18.5 percent higher than in 2008.

A number of countries have implemented trade remedies, with South-South trade increasingly being affected by these measures. Developing countries have initiated 74 percent of trade remedy investigations in the period from the first quarter in 2008 to the same period in 2009 with the targeted exporters also primarily being located in other developing countries. However these inward-looking policies risk the retardation of market corrections, distorting trade and triggering retaliation by trade partners.

African countries have not played a major role in the current utilization of import restrictions even though some of these countries’ major trading partners have implemented different forms of import restrictions, investment and finance support and job protection measures. The increased implementation of protectionist policies by or against developing and least developing countries can jeopardise growth prospects and developmental goals, especially for African countries.

* Protectionism can lead to higher unemployment and prices with an increase in debt. Protectionist policies arguably lead to an increase in the cost of consumer goods and production inputs. Due to the protection of domestic industries, foreign competition is reduced which can have the undesired effect of inefficient domestic firms.

* Export subsidies are concentrated on few products, including dairy, beef and fruits and vegetables. These products can often be produced and exported more efficiently by developing countries. However an increase in export subsidies penalizes developing country producers which do not have access to subsidies and provide an incentive to over produce. This can lead to a surplus in the market leading to lower world prices and limiting the ability of developing countries to compete in local and export markets. African economies are dependant on agricultural exports thus an increase in subsidies can lead to a decrease in revenue and a deterioration of the trade balance for many African nations.

* If countries take advantage of the gap between applied and bound rates (water in the tariffs) the potential negative impact on world trade and welfare has been estimated at a decline of 7.7 percent in world trade and US $ 353 billion in world real income. The increase of tariffs on agricultural products will have a dramatic effect on exports and welfare for developing and least developed countries.

The World Trade Organisation (WTO) and the World Bank have indicated that the contribution of protectionist policies to the decline in trade has been limited to date, however looking forward there is a risk of a retreat from trade liberalization and open border policies which has been followed in the past decade. Although the level of trade affected by protectionist policies has thus far been small for most economies, these policies can have important welfare-distorting effects beyond the loss of imports and losses to domestic consumers.

As the financial crisis puts increase pressure on African economies the question remains whether governments will resist political pressure to utilize the implementation of protectionist measures to protect domestic industry and employment? South Africa has already indicated that they are considering raising import tariffs on garments to maximum levels agreed to by South Africa in the WTO. Is this an indication of policy measures to come by African countries as economic activity decrease due to the global recession?

Willemien Denner, a tralac Researcher, On increased protectionism and the implication for developing countries.

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Southern Africa - Interim Economic Partnership Agreement

On 4 June 2009 the State Representatives of Botswana, Lesotho, Mozambique and Swaziland (BLMS) signed an Interim Economic Partnership Agreement (IEPA) with the Member States of the European Union after years of negotiations. The Agreement provides in article 105 that signature and ratification or approval are required to express the Party’s consent to be bound. The terms signature and ratification bear specific legal meaning.

Signature is one of the first steps in the process of becoming a party to a treaty. The IEPA provides in art 105 that a signatory State will become a party to the agreement through ratification or approval. In addition article 18(a) of the Vienna Convention on the Law of Treaties 1969 determine that the signature of an agreement confers an obligation on the contracting parties to refrain from acts which would defeat the object and purpose of the agreement in the period prior to its entry into force. Once a State signs an agreement it is barred from taking action which may undermine its entry into force.

The ratification or approval of an agreement represents an international act whereby a State establishes on the international plane its consent to be bound by a treaty. In this instance, the parties are required to deposit an instrument of ratification or approval to the Secretary General of the Council of the European Union. This institution will function as depositary of the Agreement and shall be responsible for the proper execution of the provisions of the treaty. The Agreement shall enter into force one month after the depositary receives the last instrument of ratification or approval. This will mark the moment on which the treaty becomes legally binding and enforceable on the State parties. In the case of the BLNS countries this will only happen once the final EPA is in force. These States agreed to continue negotiations to extend the scope of the agreement beyond trade in goods. Article 67 of the IEPA provides that the second stage of negotiations will include trade in services, investment, competition and government procurement.

Notwithstanding ongoing negotiations article 105 of the IEPA determines that pending its entry into force the States shall provisionally apply the provisions of the Agreement. The provisional application of an agreement entails giving effect to its provisions notwithstanding the fact that constitutional or internal rules and procedures on ratification or approval have not been concluded.

Additionally provisional application will be effected 10 days after the last notification of provisional application is made to the depositary. However nothing prevents a State from unilaterally applying the Agreement before provisional application.

The case of Namibia is more complicated. Namibia decided not to sign the IEPA due to the inability of the negotiating partners to address the concerns it had raised upon initialing the IEPA text. If Namibia should decide not to join the second stage of negotiations it would have to start the process of ratification.

In addition, article 19(1) of the IEPA determines that the agreement establishes a free trade agreement between the Parties in conformity with article XXIV of the General Agreement on Tariffs and Trade. Thus the agreement must respect and abide by the principles of the World Trade Organisation (WTO). In this regard, paragraph 1(a) of the Transparency Mechanism for Regional Trade Agreements provides:

(a) Members parties to a newly signed RTA shall convey to the WTO, in so far as and when it is publicly available, information on the RTA, including its official name, scope and date of signature, any foreseen timetable for its entry into force or provisional application, relevant contact points and/or website addresses, and any other relevant unrestricted information.
Therefore the IEPA must be notified to and considered by the WTO Committee on Regional Trade Agreements. The Transparency Mechanism explicitly requires notification before the provisional application of an agreement. This provision is particularly important considering the agreement between the parties to apply the provisions of the IEPA pending its entry into force. The Transparency Mechanism also makes provision for the notification of subsequent changes to a notified agreement.

Moreover, each individual party will ultimately (after the conclusion of the full EPA) have to seek domestic approval of the agreement in accordance with its own constitutional provisions. The procedure for transplanting treaty commitments into the domestic legal regime might vary considerably among the Parties depending on their constitutional orders. It may involve the enactment of national legislation to enable the domestic implementation of the agreement. Once the agreement has entered into force the real challenge to State Parties will be to ensure that treaty obligations are continuously and effectively met.

JB Cronjé, a Tralac Researcher, comments on the signing of the Interim Economic Partnership Agreement.

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Southern Africa - Trade Policy

In recent press reports the South African Minister of Trade and Industry and a senior trade official warned about trade barriers and border controls between South Africa and those SACU members which had signed an EPA with the EU. They claim that the common external tariff would actually cease to exist; bringing about the end of SACU in the technical sense. There would be separate tariff regimes and the Common Revenue Pool would be another victim. The latter development may be viewed by some in South Africa as good news; with billions more to spend locally.

These issues have been around for some time and have not been attended to at the highest levels in SACU. Now they threaten the region with potentially catastrophic consequences; should public revenue sources in neighbouring states evaporate and border controls be enforced. It will be a mistake to think that South Africa would be left intact. The concomitant regional turmoil will spill across borders; as events in Zimbabwe have taught us. There will be instability, retaliations and perhaps a mini trade war. Not bad for the oldest customs union in the world.

The diplomatic fallout will go wider. The AU may have a new crisis on its agenda as its plans for deeper regional integration in Africa (all the way to an African common market) are threatened. It would be forgiven if confused by the fickleness of Ubuntu in Africa. Others may want to read up again on the promises made when Nepad was launched. Closer home there may be question marks about recently announced plans for a Tripartite FTA between SADC, COMESA and the EAC. Will it face the same challenges a few years down the road when problems typically associated with regional and global integration have to be faced? Is this a sign of deep seated weaknesses in the institutions underpinning regional arrangements in Africa when exposed to multilateral rules?

These developments should not become a regional crisis and should be attended to at the highest levels. The Minister’s statements were not contained in an official communiqué issued by the South African Government. What is the official South African policy? The BLNS countries, SACU and eventually the EU are all involved and should eventually play a role in defusing matters. This is a complicated package of different issues and should not be dealt with further via press interviews.

Before the various legal, trade related and tariff angles are tackled important preparatory discussions should first be held; at the right level and in the appropriate forum. There should be a plan of action on how to resolve this looming crisis. This requires a strategy and a distinction between procedure and substance. There are several technical issues to sort out, but that requires the resolve to do so. Do the SACU Members have the necessary commitment to work out a joint solution? The recent press reports unfortunately create the impression that Pretoria has already decided what should happen and that it will unilaterally implement its views.

Technically complicated matters (about which there are no agreement ) such as Article 31 of the SACU Agreement, how tariffs may converge by 2012 when the TDCA will be implemented, how the EU should accommodate SA and Namibian concerns (as it should) and other issues cannot be resolved through unilateral statements. When discussions about a solution have been started it may even become necessary to opt for mediation.

Who will set the ball rolling and display the leadership now required?

Gerhard Erasmus, a tralac Associate, asks the question: What is happening to SACU?

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Africa - South- South Cooperation and Trade Relations – the magic bullet for African economies?

The current global economic crisis has brought home the fact that “fairness” is not a word than can describe international economic relations and development. African economies, like other developing economies, did not contribute to the ultimate causes of the severe economic recession, but through the mechanism of international trade in goods and financial flows they have been affected by the down turn.

For example, who would ever have thought that Botswana, an example of a fast-growing economy known for the good macro-economic management of the mineral rents generated by the ultimate in gem stones, diamonds, would find itself in economic difficulties and a need to resort to foreign borrowing? Also, in southern African the dominant economy, South Africa, has sharply dipped into recession with two consecutive quarters of negative growth with no return to positive growth anticipated in the immediate future, and all of this largely because of the pernicious impact of the global recession on the demand for and financing of exports.

In the these circumstances it is not surprising that re-newed calls are made in official circles for more emphasis to be placed on South-South cooperation, away for the North-South axis, in developing a fairer system of international trade and financial management. Since the current difficulties have their origin in the developed North this change in orientation would seem to be a logical option.

But is this really a magic bullet? Perhaps not.

The first point to consider is the heterogeneity of the South. How, for example, can one compare the large economies of Brazil, China and India and their substantial degree of economic diversification and sophisticated manufacturing sectors with the predominantly primary-producing small African economies? Even South Africa, the industrial powerhouse of Africa, is small in size compared to these economies and lacks their diversified manufacturing capacity. Considering trade and development interests there is not much qualitative and size difference between a typical African LDC and Brazil on the one hand and between the LDC and Germany on the other.

This heterogeneity leads to the next point. African economies require diversifying economic growth to escape their current hub-and-spoke trade patterns of exporting a limited range of primary commodities while importing manufactured goods from a few industrialised countries. A South-South perspective propagates expanding trade with economies in the South as growth engine. But can this have a real impact if note is taken of the fact that the larger, more industrialised economies of the South have a competitive advantage in precisely those goods that would be the prime candidates for export-oriented African industrialization? Can any African country, for example, compete with the capacity and ability of India and China to produce low-cost, labour-intensive goods? Even if nominal wage levels are lower in the African economy, productivity enters the equation in determining much lower levels of unit labour cost in India and China that will severely impede exports to these markets.

South Africa, a middle-income economy with substantial industrial capacity, provides a good example of the problem in building trade relations on a South-South axis. South Africa’s manufactured exports have grown on the basis of exports to the rest of Africa, primarily because of geography and the ability to produce tradable goods competitively for these markets. However, the African market is too small to allow a quantum change in industrial growth. But can South Africa, under current conditions, really compete in the likes of China’s, India’s and Brazil’s markets? Apart from niche markets it is difficult to think of South African manufactured products that can compete in these markets, where in some instances domestic producers also derive benefits from extensive government support. And if South Africa will face problems, how much more difficult will the situation be for an African LDC?

Calling for expanding South-South trade relations should not be based on a perception that it is a magic bullet. If there is one truth that the theory of comparative conveys it is that in the end each economy’s comparative advantage exists in trade with the rest of the world, including the South and North. Furthermore, comparative advantage can be interpreted in a dynamic sense that provides for diversifying economic growth.

By Colin McCarthy - Tralac

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The financial crisis, economic slow down and international trade

The financial crisis, economic slow down and international trade... an unhappy mix of developments.

The tumultuous changes in the world’s financial markets and sharp down turn in the availability of credit and liquidity will provide economists and financial analysts with experiences that will serve as a fertile source of subjects for topical research for years to come. Policy makers, including regulators, will also spend much effort in diagnosing the financial disease in order to find a cure and design preventative measures that, once the crisis like all past crises is something of the past, will prevent a recurrence. While analyzing the present crisis two observations demand serious consideration.

The first deals with the conventional wisdom that markets can fail and that market failure justifies intervention by governments and government agencies. What the current crisis, however, clearly illustrates is that markets can fail spectacularly with devastating results for economies in general. It also illustrates that a failure in a particular market such as that of the USA has a contagious impact on other markets; what we have is a stark reminder that we live in the clichéd global village.

Market failure of the current degree and scope demands serious and innovative reactions by the authorities. A good illustration of unusual action taken is the decision of the American Federal Reserve to move beyond the central bank function of acting as last resort to commercial banks and not only to come to the assistance of investment banks but now also to act as lender to companies through the purchase of the commercial paper of companies. The seriousness with which governments is acting is fortunately so totally different from the advice which Andrew Mellon, at the time Secretary of the US Treasury, gave President Herbert Hoover on how to deal with Great Depression: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

Comments in the media and the degree and nature of government intervention to address the crisis are signals that in the post-crisis phase a major re-design of regulatory structures can be expected. A reaction to overzealous deregulation in the past is appropriate but important conditions or warnings should be flagged. Governments also fail and the consequences can be as serious as those of market failure. Furthermore, efficient markets are a prerequisite for economic growth and financial stability and in redesigning regulatory structures care should be taken not to rid the baby with the bath water. The architects of the new regulations will have to avoid structures that stifle the ability of markets to allocate credit and resources efficiently.

The second observation that the current crisis elicits is the demonstration of the close link between financial markets and the so-called real economy. The dichotomy of neoclassical economics does not apply. Developments in the financial markets, especially as radical as those of the current situation, have a negative impact on real economic activity. The causal link also runs in the opposite direction from the real economy to financial markets. What the current crisis illustrates is that the credit squeeze and the illiquidity that constrain banking activity are in all likelihood bound to exacerbate the cyclical downturn in economic activity. The outcome could be a deeper and more prolonged recession than what would have been the case otherwise.

Observers who are concerned about the impact on real economic activity and the consequences this hold for international trade relations need to note three possible developments. All three, but the first two in particular, call for special vigilance if the idea of international trade as welfare-enhancing is to remain alive and reflected in policy decisions at the national and international level.

First, a sharp and prolonged downturn in economic activity is not conducive to a revival of multilateral negotiations on trade liberalization. Recessionary conditions have a negative impact on world trade through the positive link between real income and imports, the latter for one country being the exports of a trading partner. Under these conditions protectionist thinking could thrive, as they did in the aftermath of the 1929-32 depression. These conditions are not favourable for the resuscitation of the Doha Round of negotiations.

Second, in a policy environment that favors protectionist thinking a fortunate source of discipline will be the principle of non-discrimination embodied in Article 1 of the General Agreement on Tariffs and Trade (GATT) and the security and transparency provided by WTO tariff bindings. These principles guide trade relations within the framework of the WTO Agreements. However, it is not impossible and perhaps even likely that protectionism will enter through the backdoor, with firms and governments utilizing WTO acceptable exceptions to non-discrimination and tariff bindings. In a protectionist environment with little possibility of import tariff amendments because of the WTO Agreements, it is likely that we will see an increase in the number of anti-dumping cases. Experience has shown that it is not difficult to use this mechanism, provided for by Article VI of GATT 1994 and further regulated through the Anti-Dumping Agreement, as a protectionist measure.

But it is not only anti-dumping action that could provide room for protectionism posing as contingent protection. In severe recessionary conditions it would even be possible to invoke the safeguard protection provided for in Article XIX of GATT, further clarified and regulated by the Agreement on Safeguards. Safeguard action allows emergency protection on a temporary basis against ‘serious injury’ caused by a surge in the imports of a particular product. However, the surge need not manifest as an absolute increase in imports; it can also be a relative increase in the share of imports of a shrinking market. It does not take much imagination to see how this can be used as a means of industrial protection in a situation of recession plagued markets.

In the third place, it should be noted that reaction to the financial crisis has demonstrated that even an advanced regional integration arrangement such as that of the European Union (EU) does not ensure collective action. Within the EU not even a single currency and regional central bank could provide the basis for collective action. The Irish, a Euro country, led the way in doing their own thing with the introduction of a deposit guarantee scheme and since then other countries have followed, regardless of high-level meetings to coordinate and plan reactions. What this illustrates is that in the end national interests reign supreme and if collective action is to be achieved, post-crisis planning will have to bring banking regulation into the realm of the regional integration arrangement.

By Colin McCarthy - The author is an Associate at The Trade Law Centre For Southern Africa - tralac is a not-for-profit organisation, building trade law capacity in the southern Africa region; in governments, the private sector and civil society. http://www.tralac.org/cgi-bin/giga.cgi?cmd=cause_dir_cause&cause_id=1694

US EXPORT COUNCIL PROVIDES ASSISTANCE TO US COMPANIES SEEKING ACCESS TO HIGH GROWTH MARKETS OVERSEAS. http://usexportcouncil.com/