Somalia Is Missing in The Global Trade Ecosystem

Finance
Typography

We know trade works as an engine to growth and prosperity. Trade is simply the voluntary exchange of goods and services to mutual advantage; however, there is a morality in trade as a commerce.

In The Theory of Moral Sentiments, Adam Smith states,

“the basis of commerce is morality. Every transaction is a moral transaction because it gives each of the people a chance to honor the other and not cheat them which leads to a win-win situation which is necessary in a civil society.”

Adam Smith’s capitalism has been distorted – particularly in matters of trade which is very different than the mercantile or Ayn Rand’s capitalism. After all, this is someone who was famously quoted as saying,

“it is not very unreasonable that the rich should contribute to the public expense, not only in the proportion of their revenue, but something more than that in that proportion.”

Trade as a productive model to alleviate poverty and creating various entrepreneurs and private enterprises is well documented. However, the imbalances to the access and execution in the world trade markets remains. The World Economic Forum (WEF) states "trade's potential to drive growth and development is far from fulfilled. Many developing countries, especially smaller and poorer ones, remain on the margins of the world markets. For them, implementing trade facilitation measures is a great opportunity to increase economic growth - one that remains largely untapped." (WEF, 2015) According to the World Trade Organization,

“trade between African nations accounts for around 10% of the 54-nation continents total commerce, a ratio that has been in gradual decline over the past decade and which compares unfavorably to the 25% in Southeast Asia.”

African countries face the highest challenges in achieving open trade and intra-trade within Africa. The main reasons are due to the high costs of trading which prevent African exporters to compete on both regional and global markets. These costs are not necessarily higher tariffs but barriers behind the border along the value chain in responding to various bottlenecks. There are still issues with policy integration across borders and some pro-intra-trade reforms to facilitate trade have yet to be implemented.

According to the Brookings Institute,

“How Africa responds to and addresses the changing international trade environment from the rise of mega-regionals trade agreements should be a key focus for the region’s leaders in 2016. The most significant of these trade agreements is the Trans-Pacific Partnership (TPP) agreement that was concluded on October 5, 2015. Comprising 12 countries (United States, Japan, Canada, Mexico, Australia, Vietnam, Malaysia, and Chile), the TPP countries represents 40% of global GDP, 25% of global exports, and 30% of global imports.”

(Brooking Institute, 2016) This list comprises most notably some of the major importers of African products. Also according to the Brookings Institute,

“same time, little progress is being achieved on completing the WTO Doha Round multilateral trade negotiations. This means that there is currently no large global trade negotiation where Africa’s views can be considered and progress can be made. The risk for Africa in this is that new rules and market access preferences agreed under the mega-regional FTAs will make it increasingly difficult for African businesses to compete globally, confining Africa to a shrinking share of international trade and diminish its attractiveness as a destination for investment.”

(Brookings Institute, 2016) To make matters even worse,

“The U.S. is also negotiating with the European Union the Transatlantic Trade and Investment Partnership (TTIP) agreement, which, combined with the TPP, will cover nearly 60% of global GDP.”

Africa will be isolated and will have to look inwards.

Africa’s response to these trade deals is the Tripartite Free Trade Agreement (TFTA) which was signed into existence in Cairo mid July 2015. This trade pact which is a consolidation of the current three major trading blocs: Southern Africa Development Community (SADC), the East African Community (EAC) and the Common Market for Eastern and Southern Africa (COMESA) is the most ambitious yet. The main idea behind this agreement is to simplify Africa’s overlapping trade zone rules, boost extremely low levels of intra-regional trade which are all key to the continent economic well-being. Although the TFTA does not include Nigeria - Africa's biggest economy after revisions to its GDP calculations last year - the inclusion of Angola, Kenya, Egypt and South Africa account for 60% of the continental output. Last month negotiations to broaden the new bloc to incorporate West African countries commenced and is expected to be completed in two years. The TFTA is also the building block towards a Continental FTA (CFTA). As stated by the African Union,

“we are committed to completing the CFTA by 2017, incorporating 54 African countries representing over 1 billion people and $3 trillion in GDP. In fact, successfully finishing the CFTA could stimulate intra-African trade by around 50 percent ($35 billion) by 2022.”

(African Union, 2016) This trade pact is particularly timed for Africa because of the potential adverse impact the Trans-Pacific Partnership (TPP) and Trans-Atlantic Trade and Investment Partnership (TTIP) and the Regional Comprehensive Economic Partnership in Asia will have on the global trading system – impacting Africa very hard. These trade pacts have the potential to divert trade and investments from Sub-Saharan African countries completely and setting new global standards for traded goods and services that African countries may not be able to adhere.

These particular trade deals leave Somalia extremely vulnerable as the country’s status and relationship with these regional trade blocs – COMESA and EAC is elusive at best. According to the EAC,

“Africa’s deepest free-trade zone which has seen immense success – a removal of trade barrier tariffs or tariff cuts could increase trade by close to 22%.”

(EAC, 2015) Although these changes will take time to implement, they could dramatically change the landscape of doing business. The EAC – East African Corridor of trade currently consists of: Kenya, Tanzania, Uganda, Rwanda and South Sudan (newly admitted). Somalia’s exclusion illustrates the country’s financial vulnerability in creating further expansion markets for its goods and services and the political benefit from trade. Free trade/trade ties amongst countries creates less passion for war. It creates powerful lobbying groups on all sides that demand the preservation of peace and promote diplomacy over friction; therefore, trade is also a potent political tool for peace. Although Somalia has applied to become a member of the EAC, verification and communication of that status is not yet public.

Observing Somalia’s current trading patterns – the country is a net importer. According to the OEC,

“in 2014, Somalia exported $266M and imported $1.88B, resulting in a negative trade balance of $1.61B. In 2014 the GDP of Somalia was $5.71B and its GDP per capita was $542.

The top exports of Somalia are Sheep and Goats ($94.7M), Other Oily Seeds ($75.6M), Bovine ($61.4M), Tanned Goat Hides ($5.66M) and Other Hides and Skins ($4.6M), using the 1992 revision of the HS (Harmonized System) classification. Its top imports are Other Vegetables ($471M), Raw Sugar ($192M), Bovine ($133M), Wheat Flours ($98.8M) and Rice ($93.3M). The top export destinations of Somalia are Oman ($136M), India ($47.6M), China ($28.6M), Yemen ($23.9M) and Pakistan ($8.4M). The top import origins are Ethiopia ($675M), India ($335M), China ($204M), Oman ($162M) and Malaysia ($69.3M). (OEC, 2014) Somalia’s export reliance on non-African countries is evident and its importing of products such as vegetables, wheat, rice and bovine is quite distressing since it has plenty of arable land. Appropriate policies need to be taken to reverse the negative trade balance. Once exporting, there should be policies in place for Somalia to be an active member of these regional blocs to take advantage of those market before exporting their goods abroad. It’s a Pan-African that will pay off in the long term as the country builds the necessary capacities and reliance to trade with its counterparts in a mutually beneficial manner. Trade is beneficial when a country is able to maximize the gains from trade. Somalia’s government has to create a plan to enter these trade associations in a reputable manner. The government should have a dual policy of augmenting intra trade within Somalia and to the neighboring countries. Instead of relying disproportionately on exports of resources, the government should discourage raw material export and promote domestic processing, scaling and finishing of these products to create value addition which will energize the youth, stimulate the local economy, create higher productivity of jobs and improve trade imbalances (through forex). An alternate policy is to encourage Somali firms to enter the global value chains and specialize in a particular task. This would have a ripple effect on the industry and encourage technological and know-how transfer, enhance productivity and promote skill development.

Even though there are many critics of the TFTA with claims that the main three countries with scalable manufacturing bases (South Africa, Kenya, and Egypt) will be the main beneficiaries of these trade – this is an important step to boost co-operation on a Pan-African level giving credence and legitimacy to a flailing AU that needs a real boost in executing on continent-wide economic solutions. Somalia should have its rightful place in these initiatives.

By: Sagal B.H. Musa

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