Trade observations and Analyses
Negative Effects of Special and Differential Treatment
Special and differential treatment is not always good for developing Countries. As a trade negotiator, I have been pondering on whether the subject of special and differential treatment, which we in developing countries clamor for, is always good for us. Sometimes I fail to understand whether it is true that developing countries, most especially least developing countries, cannot competitively integrate into the global economy, without having to apply a special and differential treatment in all situations. I say this because the main objective of trade negotiations is to enable countries trade meaningfully and competitively in the global market without unnecessary barriers to trade.
Limitations on unnecessary barriers to trade does not mean that Governments have to waive their obligation to protect their people and the environment. In other words, countries still have to regulate to ensure; health, safety and security of their people. They still have to protect plant and animal life and environment. Countries that need to protect their cultural heritage, are liberty to do so. To achieve effective protection on these aspects, a WTO Member is required to adopt and implement measures that do not result into unnecessary barriers to trade in form of technical regulations and standards requirements.
These measures however still have a trade distorting effect. They result in what is referred to as non-tariff barriers to trade. At the World Trade Organization (WTO), these trade measures are governed under the Sanitary and Phytosanitary (SPS) agreement and technical barriers to trade (TBT) agreements. The SPS agreement concerned with the food safety and toxins as they to the protection of the environment and ensuring safety and life of humans, animals and plants. The TBT agreement has similar objectives but with a different scope. It is concerned with any other measure that is not covered by the SPS agreement aimed at protecting the environment and ensuring safety and life of humans, animals and plants.
The problem with these measures is that they are implemented differently by different nations with developed countries applying higher standards that are beyond compliance capacity of developing countries. Countries are obliged to implement international standards or any other which they can scientifically prove that it is the best alternative. Which ever measure employed should not unnecessarily hinder trade.
As a special and deferential treatment, Members of WTO, do not expect developing countries to implement international standards that are not appropriate to their development, financial and trade needs . Developed countries also expected to facilitate active and representative participation of developing countries in the standards development process by international standardizing bodies (Refer to Article 12.4-12.5 of TBT and artcile 10 of SPS Agreements).
Here come my concerns on Special and Differential Treatment. Are the above provisions in the interest of developing countries? If we appreciate that countries must protect their people and environment, what does this mean to developing countries if they do not comply with international standards under the guise that they are not appropriate with their development needs. Who loses competiveness in the international market? By the way, what are these standards meant for? If their objective is to protect life and environment, what does this mean if certain countries chose a lesser effective or no measure? What about the preference for quality standards by the citizens of developing countries, does this provide automatic market entry for products from developed economies? Can we, developing countries, then compete even in our own market?
Ok, this is what I think. The special and differential treatment under the SPS and TBT agreement was taken too far. If developing countries and especially least developing countries have to competitively integrate into the global economy sooner rather than later, they cannot afford to delay or fail to comply with international requirements. Delaying or failing to implement such requirements, developing countries are risking not just displacement from the international market but also in their own domestic market. One more thing, citizens, animals, plants and environment of developing countries, require equal protection as is for those of developed countries. Life is life irrespective of the location.
Global Production Sharing: Implications for Trade and Investment Policy for Developing Countries
Developing countries and particularly African countries need to borrow a leaf from the East Asian countries on how to benefit from Global production sharing. Global production sharing which in itself is the process of ‘splitting of the production process into discrete activities (tasks) which are then allocated across countries’, opens up new opportunities for export-led economies if they strategize and specialize in division of labour. A country can benefit from the growth of world demand for automobiles and become competitive in the production of just a single auto part. Economic integration into the global market that developing countries crave cannot be easily achieved if countries continue to aim at completing production domestically. Due to technological advancement resulting in easy, fast and less costly telecommunication and transport, it is no longer important to aim at exploiting the comparative advantage on a product as a whole. Examples from East Asia can help us understand why global production sharing is an alternative that developing countries should embrace.
Global production sharing which is sometimes referred to as; international production fragmentation or vertical specialization or slicing the value chain or outsourcing or offshoring can be exemplified in about three products.
The first example of global production sharing or international production fragmentation is the Boeing 787 Dreamliner whose manufacturing is accomplished by various countries. Prepreg composites, wing box, lavatories and tires are made in Japan, the software and wiring is made in France; engines flight deck seals in United kingdom; centre fuselage, horizontal stabilizer in Italy; raked wing tips in Korea and final assembly navigation and pilot control system in the US . Link to the picture
The second example of slicing the value chain or outsourcing or offshoring is the Barbie Doll a product of Mattel Inc, a US based company that is sold world-wide at the rate of two dolls per every second. This product is assembled in factories in China which also supplies the cotton component. Product designing, paints and decorations are done in US, hair is from Japan and the product is distributed worldwide from Hong Kong
The third example of global production sharing or outsourcing or offshoring is the Quanta and the Laptop Computer which is assembled by Quanta Computer Inc - a Taiwanese world’s biggest laptop assembler and a ‘contract manufacturer’ company on behalf of Hewlett-Packard, Dell and other computer systems companies. Quanta Computer Inc assembles roughly one-quarter of the world’s laptops which are sold by computer system companies such as Hewlett-Packard and Dell under their brand names at Quanta Shanghai Manufacturing City complex which employs about 40,000 workers. System development/product design is done by Hewlett-Packard, Dell at their headquarters in the USA. Quanta collects components from countries around the world and assemble them using Chinese labour. Intel microprocessors are made by Intel Corporations in Malaysia graphic chips designed by ATI Technologies Inc, Ontario, Canada and assembled inTaiwan. Lliquid-crystal-display screens and memory chips are produced by companies in Taiwan and Korea. Hard drives are sourced from Japan. The operating system is made by Microsoft, USA and China’s contributes labour at the final assembly stage.
The above examples show that Global production sharing opens up opportunities for countries to specialize in different slices (tasks) of the production process, depending on their relative cost advantage and other relevant economic fundamentals.
The conventional approach to trade flow analysis and trade policy making, which is based on the notion that countries trade in goods which are produced from start to finish in just one country, is becoming increasingly irrelevant.
Advancement in production technology has enabled industry sectors to slice up the value chain into finer components. Technological innovations in communication and transportation have contributed significantly to the reduction in the cost of ‘service links’ involved in coordinating international operations. More importantly trade liberalization and policy reforms in both home and host countries have reinforced the rapid expansion Global production sharing.
Asia which embraced Global production sharing has benefited immensely from this process. Asia‟s share in world exports of intermediate goods increased to about 35% in 2009. Intra-Asian trade is predominant and the continent imports more intermediate goods than it exports. More so the intermediate goods traded by Asian economies are more and more sophisticated. The continent is the “World manufacturer” with a high degree of industrial specialization. The sophisticated supply chains in Asia have boosted the regional markets.
East Asia’s specialization and performance on Global production sharing has been successful because of a combination of factors. The continent has taken advantage of the relatively low wages and wage differentials in in comparison to other export-oriented countries. For example China’s hourly production wage is just 3% of that of USA. The Asian countries have ensured favorable business climate conducive for trade and investment. Infrastructure development has been done and this contributed to lowering costs of production. The region developed and implemented measures most attractive to foreign direct investment.
From the above analysis we can conclude that Global production sharing opens up new opportunities for export-led industrialization through participation in a finer international division of labour. For example a country does not need to set up a motor vehicle plant to benefit from the growth of world demand for automobiles; it is enough to be competitive in the production of a single auto part.
Availability of labour and relatively low wages are not the only perquisite factors. Other factors impact on the overall investment environment. They include infrastructure and other trade-related logistics, political stability and policy certainty.
The ongoing process of global production sharing strengthens the case for non-discriminatory multilateral and unilateral trade liberalization that developing countries should emulate. However, as developing countries embrace regional economic integration, they should not undermine global production sharing. Natural’ expansion of production–sharing-based specialization across countries can be hindered by economic integration agreements and more specifically Free Trade Agreements (FTAs), which essentially liberalize trade among the member countries while maintaining trade barriers against non-members.
Global Production Sharing-Benefits to East Asia-Lessons to Developing Countries
The slicing of a production process into vertically separated stages that are carried out in different countries otherwise known as Global production sharing—has redefined the dynamics of the world trade over the past few decades. Developing countries aiming at industrializing but ignoring global production sharing or outsourcing system and its related benefits, risk not only failing their policy goals but also being displaced out of the global trading system.
According to the study by the Asian Development Bank (Chandra Athukorala and Jayant Menon, 2010) world trade in parts and components increased from about 18.9% to 22.3% of total exports between 1992/93 and 2005/06. Most of this growth originated from East Asia and as result the share of the subcontinent in total world exports increased from 27% to 39% over the same period. The share of developing East Asian countries increased from 17.8% to 32.3% in the same period. Countries like Japan which traditionally were in the leading position registered a decline in their share of world’s exports as emerging economies such as China gained importance at the global arena.
Product coverage under global production sharing is increasingly widening and rapidly spreading along a value chain system stemming from traditionally industrious countries to developing countries in a North-South relationship. Global production sharing which began modestly in electronics and garments in the late 1960s, has gradually evolved and spread to other products such as sports footwear, sewing machines, office equipment, automobiles, radio receivers, electrical machinery, power and machine tools, cameras, and watches. Countries embracing global production sharing have achieved economies of scale which has provided them with cost competitiveness, product innovation and a growth in share of world trade much faster than other developing still dragging their feet.
Global production sharing has enabled production closer to the consumer. As international supply networks of components became firmly established, producers in developed countries moved their final assembly plants for a range of consumer durables to overseas locations to be physically closer to final users and/or to take advantage of inexpensive labor. Products benefiting from global production include computers, cameras, televisions, and automobiles.
Countries hitherto uncompetitive in producing final products and trading in the global market have realized new opportunities from production sharing system. They are able to specialize just in the production of one or more components of a product. Advancement in technology, telecommunication and information technology has enabled faster, cheap and efficient mobility of parts and components, as well as capital thus facilitating global production networks. A whole range of other factors that impact business climate have also played part in attracting foreign direct investment. Asian countries have also exploited availability of appropriately skilled labor at relatively low wages.
Splitting up vertically integrated production processes has enabled firms to locate production blocks across borders according to each country’s comparative advantage. Producers have realized that a country does not necessary have a comparative advantage in the production of a whole (as assumed in the Ricardian comparative advantage model). In the production of a product, some countries have an advantage in producing a component than other countries. Comparative advantages resulting in the lowering of marginal costs of production may be in availability of labour in terms of skill differentials or other inputs. On the other hand production blocks differ from each other in the proportion of factors required, enabling firms to locate labor intensive production blocks in countries or regions where productivity-adjusted labor costs are relatively low (as in the Heckscher–Ohlin model).
Global production sharing has weakened the need for completing production domestically in order to attain export competitiveness. Firms are able to produce a given segment (slice) of a vertically integrated production process, and still export profitably depending not only on external demand and the domestic cost of production, but also on supply conditions in economies supplying components and their bilateral exchange rate.
Due to global production sharing, trade in parts and components expanded more rapidly than that of conventional final goods trade over the last few years. While global production sharing is now a global phenomenon, the degree of dependence on this new form of international specialization is disproportionately high in East Asia. This is due to a number of factors, including a more favorable policy environment for international production, agglomeration benefits arising from the early entry into this new form of specialization, and considerable cross-border wage differentials in the region.
Most of other developing countries including African have not taken advantage of global production sharing. Other developing countries need to embrace global production to achieve economies of scale and gain cost competitiveness. Given the level of high supply side constraints in the developing countries, it probably makes sense to specialize in the production of a component rather than completing a production process.
MARKETING THROUGH COMMERCIAL DIPLOMACY
1.0 Introduction
Marketing through Commercial Diplomacy is the strategy countries employ to market and position themselves in the outside world, to maximize their national gain in all fields of activity, including trade, investment and other forms of economic beneficial exchanges. It has bilateral, regional and multilateral dimensions each of which is equally important.
Economic Diplomacy has in the past been viewed as a peripheral activity best left to commercial attaches and other specialized institutions and departments. However with globalisation, the building of trade and economic relationships between countries has made the concept of marketing through commercial diplomacy much more relevant. Today, diplomatic services place virtually equal emphasis on political and economic work or relations between countries. Rich countries and developing nations alike consider the mobilization of inward foreign investments (FDI) and export promotion as the essence of advancing interests in foreign countries. As a result countries, have adopted the marketing through commercial diplomacy by employing commercial attaches and opening up commercial diplomatic offices in the targeted countries.
2.0 Relevance and Importance of Economic Diplomacy
In the same way that law was considered the foundation of diplomatic studies in the past, economics is now the sine qua non of contemporary training in diplomatic studies. For instance Germany which has been at the forefront of marketing through commercial diplomacy now attracts more economists than law graduates in its diplomatic services. Today no diplomat can afford not to master economic diplomacy, both to understand the dynamics of world affairs, and to integrate economics their work. Politics and economics are intertwined in bilateral and multilateral work. In the embassy, every diplomatic official, regardless of work domain, must weave into his or her job the economic perspective in the same manner that he or she also keeps an eye on the political dimension.
A vivid example is the manner, in which US–China relationship has developed in the past 20 years, is one outstanding example of the way economics becomes a driving force in shaping political relations. Each time the US administration or the Congress has considered human rights issues or the Taiwan issue in a manner that is contrary to the interests of Beijing, US business lobbies that are targeting on that country’s immense market potential, become active to “safeguard” their export interests. This is a clear example of the way economics is driver of political relationships.
There is also the larger task of country promotion and marketing through commercial diplomacy, which supports all the above, and blends into image building, as well as tourism promotion. Enhancement of the image of the home country is one of the essential tasks of diplomacy that underpins and relates to a wide range of external activities. Three concrete examples are investment mobilization, tourism promotion and management of the country image. Each of these three is relevant to Commercial diplomacy, as concrete activity that official representatives today undertake in external relation building. And each of them provides feedback into other elements of the diplomatic process.
All aspects of economic work are subsumed under commercial diplomacy promotional activities, (trade, investments, and technology). This activity also reaches into other areas, like building positive media and public images, destination promotion for attracting tourists, and for activities that may even include building institutional links in research & development or education cooperation..
An “image audit” is also regarded as a fundamental prerequisite for establishing a base line and a reference point, for image building through economic or commercial diplomacy marketing, but the tool is seldom used in practice. This is an expensive tool that can be undertaken only by rich countries. But for the individual embassy this does not reduce the responsibility for making a good assessment of the local challenges in country promotion.
The home country’s image underpins most diplomatic activities. There is no aspect of external relations, bilateral, regional or global that is not affected by “image” of a country. A country must therefore undertake commercial diplomacy marketing to improve its image to the outside world. China used image consultants in marketing Beijing as the venue for the 2008 Olympics and Shagahai did the same in presenting itself as the a “ world city” . South Africa did the same to win the 2010 FIFA world cup. The success tourism destination countries have also made focused use of branding as a marketing tool in Economic and Commercial Diplomacy.
3.0 Models of Economic Diplomacy Marketing
There are different models of how economic diplomacy is practiced or enhanced as a marketing tool and these are:
3.1 Unified.
Examples of Countries which have combined foreign affairs with external Trade are Caribbean Countries of Barbados, Dominica, Grenada, Santa Lucia, and Scandinavian countries of Denmark, Finland, Iceland, Norway and Sweden some countries in the South Pacific ( Fiji, Marshal Islands, Samoa, Solomon Islands, Vanuatu) and a few other countries such Australia, Brunei,, Canada Mauritius, New Zealand, South Korea and Swaziland).
Some developed countries, such as Australia, Canada and New Zealand, make a distinction between trade policy issues which are combined with foreign affairs and trade promotion activity which is handled by a separate agency outside the foreign ministry orbit. Another method is to establish a special coordination mechanism to handle external economic work, such as joined-up’ oversight as practiced by the UK or through entrusting trade and investment promotion to dedicated agencies as in the case of Singapore.
A different integration method especially for small states is through a joint foreign trade negotiation mechanism, as established by the 15 –Member Caricom; their single negotiator at the EU, who handles issues relating to preferences, delivers considerable value. The EAC has taken a similar approach in negotiating the EPAs with the EU.
3.2 Part unification.
The best instance is UK who in pursuit of marketing through economic diplomacy created two special units in the Foreign Office, jointly with the Department of Trade & Industry, to handle trade and investments, manned by a unified diplomatic service.
3.3 Third agency.
This is the Singapore method marketing through economic or commercial diplomacy, where the MFA largely keeps out of economic work, and the operational tasks are handled by two special entities, the Singapore Trade Board and the Singapore Economic Development Board, under the supervision of the Ministry of Trade and Industry. Each Board posts its own representatives at key locations, placed within the embassy or consulate general. The ambassador and other diplomats work closely with them in what is known as “Team Singapore” .
3.4 Competition.
This is the relatively confused situation in many countries, with the Ministry of Foreign Affairs and economic ministries engaged in turf battles over responsibility not only for export promotion and investment mobilization, but also over the handling of WTO affairs, and some other economic groupings. Examples are India, Thailand. One direct consequence is that the diplomatic machinery does not make a full contribution to advancement of economic interests.
3.5 Renunciation.
The Ministry of Foreign Affairs does not play an active role in bilateral economic work but hands over the work to another ministry. Examples are China, Germany. This does not optimize resources; even through there is little outward evidence of disharmony.
4.0 Practical Components of Economic Diplomacy
A diplomat should have at worst a basic understanding of economics, international marketing, and also accept the logic of complete integration economic diplomacy into his mainstream work. Some practical components of marketing through economic diplomacy are given below. This list is illustrative, and may vary from country to country or from time to time:
4.1 Analysis.
Marketing through economic or commercial diplomacy requires clear understanding of the economic dynamics of the target country. It includes: insight into the principal elements of the local economy; analysis of the export and import basket of the country and its chief regions; the foreign investment profile; technology strengths; and the activities of competitors, actual and potential, gauged against one’s own exports and other ongoing economic activities in that country. It is assumed that the diplomat fully understands the economic needs of his or her own country, and that this knowledge is kept updated. This will require the diplomat to be well acquitted with the vision and goals and of his own country interests as elaborated in the constitution, National Development Plan and translate it into the foreign policy context.
4.2 Basic guiding notes.
Economic or commercial diplomacy marketing involves use of an essential tool commonly known as a “commercial note”. This is briefing guide on the target country and is useful on several counts. First, it necessitates understanding the basic economic profile of the country, its principal indicators, the organization of the economy, tax, tariff and customs policy, the banking and related structures, system of business dispute settlement, the pattern of the business organizations, the principal import and export players, and the like. Second, such a guide responds to general commercial inquiries from home. The commercial note can be posted on the mission’s website on the Internet, and the feedback used to improve the Note. Third, one’s own note can be compared against those prepared by foreign embassies, again for self-improvement. There are other commercial briefing notes to be written, like market reports on individual products, plus analysis covering competitors and their market share, plus the marketing strategies used by them.
4.3 Outreach.
Economic or commercial diplomacy marketing requires undertaking of outreach activities. This involves engagement of the obvious economic partners, like the local enterprises engaged in bilateral trade and investments, or others that have a potential interest. There are also the associations of business, individual enterprises that enjoy clout, and other pressure groups, as well as parliamentarians, academics, the media, specialists in science and technology, plus local constituents like regional and other subsidiary political entities that have a direct stake in stronger economic exchanges. The latter types of local groups are especially important, for reaching out to local businesses, when employment generation and other local economic benefits are involved. A distinction should be made between companies and entrepreneurs who are the prime actors in economic relations, and the commerce chambers and the like who are the intermediaries because both have their role and value.
4.4 Teamwork.
Marketing through economic or commercial diplomacy can be successful if it is based on a team work approach. It may go against the grain of internal work allocation, but a “task force” method is often useful, which involves the entire mission team in handling specified economic tasks (such as export promotion of priority products). Some believe that such wide distribution of tasks treads into the work domain of the commercial or the economic officials, but the advantage is full engagement of the entire team. Outside the mission, advantage can also be taken of own nationals in key positions, like experts on technical cooperation assignments, business representatives stationed in the country, and others, for brainstorming and participation in different kinds of outreach activities. This acknowledges the reality that relationship building is not the exclusive job of the official representatives; others can contribute, if only they are asked! And leadership has to be provided for such teamwork by the head of mission, through personal example.
4.5 Delegations.
Dispatch of business mission in both directions is a classic method of marketing trough commercial diplomacy with a view of promoting trade, investments and all other forms of economic exchanges. Careful preparation is indispensable for good results, consisting of scrupulous program preparation, and pre-arrival match-making, to identify serious interest among businessmen on both sides. This is possible only when comprehensive information is gathered and distributed on specific interests and targets of each participant. No less vital is post-visit follow-up, to gauge results and draw lessons for the future.
4.6 Multilateral Issues.
Officers involved in marketing through commercial diplomacy need to have a basic understanding of the WTO process, and the manner in which it operates in the country of assignment (local attitudes, policy on “dumping” issues, the dispute settlement mechanism, and positions on different subjects in the multilateral debates), are required information for all diplomats, not just the ones handling economic work. Multilateral diplomacy constantly demands support actions at the bilateral level. The purpose is not just to canvas support from the target country, but also engage in real two-way dialogue.
4.7 Innovation.
Economic work offers scope for innovation and needs a proactive mindset, perhaps more than any other aspect of diplomatic work. Beyond the list of tried and tested methods, involvement of the full mission team has the advantage of producing new approaches and inventiveness.
5.0 Examples of Countries that have Successfully Pursued Marketing through Economic and Commercial Diplomacy
5.1 Himalayan Kingdom Bhutan
The tiny Himalayan Kingdom Bhutan has few resources it has used on commercial diplomacy marketing activities especially with aim of privileging its relations with India so as to implement its hydropower capacity .Bhutan produces nearly 2000MW of hydro power and use it sells to electricity- deficient India earning for the Country over 50% of its GNP. Contrast this with Nepal which has a capacity of 80,000 MW but supplies much less hydropower to India owing to inhibitions in its relationship with India.
5. 2 Mauritius
The Island of Mauritius has also been innovative on its economic or commercial diplomacy marketing and protecting its vital interests. In the 1970s it led in working out the sugar preferences given to the ACP countries by the European Community under the 1976 Lome Convention. Taking an example of the textile preferences that the EU extended to ACP as a case of economic diplomacy. A study by the World Bank noted that while the preferences where available to almost 70 countries, the island -state of Mauritius accounted for almost 90% of the textiles that entered the EC under this umbrella. In mid 1980 Mauritius noting that a big population of its nationals lived in India, persuaded India to give it exceptional treatment in a double taxation avoidance agreement, exempting Mauritian registered companies from capital gains tax. Mauritius also persuaded Chain to sign a similar treaty.
5.3 Singapore
Singapore harnessed marketing through economic diplomacy as a major instrument to transformation. At the time of its separation from Malaysia and independence it had no hinterland or resources today it enjoys Asia’s highest per capita GDP. Singapore used its Economic Development Board specializing in pursuing targeted investors. The International Enterprise Singapore specializes in promoting exports of products and services. Singapore hallmark has been an inclusive approach that mobilizes all stakeholders on a ‘team Singapore” formula; long-term vision and thinking out of the box.
5.4 Thailand
In 2004 Thailand approached the concept of marketing through economic of commercial diplomacy by advancing what the program termed as the “CEO Ambassador” which initially involved a pilot project and thereafter passed into law, which mandates that its envoys abroad are to exercise full control over the representatives of Ministries and agencies located abroad, to function as chief executives to advance Thai interests.
6.0 What Model can developing countries Use?
Because of the level of skills and competencies required in marketing through economic diplomacy a developing country cannot integrate the work of commercial and economic diplomacy under one roof say in the foreign affairs. There are different technical competencies both at the regional, bilateral and multilateral level that are required and can be found in different Government Ministries Departments and Agencies. The recommended approach in is to build a strong and smooth cooperation between the different MDAs to deliver balanced economic diplomacy that will ensure the protection and advancement of countries interests abroad and within.
7.0 Conclusion
It is important to keep in mind that any countries economic interests are numerous and cross –cutting and it is not possible not even the richest country to adequately facilitate or be able to sufficiently cater for all its interests because of the limitation of resources and the very nature of the complexity of the interests. There is therefore need for prioritization when undertaking marketing through economic diplomacy activities by paying particular attention to the most demanding and rewarding areas.
The four pillars of economic work are:
a) Trade promotion, with prime but not exclusive focus on exports.
b) Investment promotion, mainly focused on inward investments, but not excluding the home country’s outbound investments, where appropriate.
c) Attracting suitable technologies, plus technology “harvesting”.
d) Management of economic aid, which is important for most developing countries as a “recipient”, and for as a “donor” developed nations
An African Country Needs to Establish a an Economic or Commercial Diplomacy Startegy
Pursuant to the Policy guidelines an African country needs to establish a an economic or commercial diplomacy startegy that will help it to optimally harness available international market opportunities. A number of countries in Africa are signatories to a number of trade and trade-related agreements and is also are beneficiaries of non-reciprocal unilateral trade preferences which provide the country with varying levels of improved market access opportunities into the respective markets. These include the East African Community Customs Union, the COMESA, ECOWAS, SADC, IGAD ACP/EU, EPA Frameowrk Agreements, WTO, and the AU. The non-reciprocal unilateral trade preferences are Everything But Arms (EBA) by the European Union, the African Growth and Opportunity Act (AGOA) of the United States and offers by Canada, Japan and China under the Generalized System of Preferences (GSP).
The Economic Diplomacy Strategy involves activities designed to influence foreign government policies and regulatory policies that affect global trade and investment (through, multilateral trade negotiations, trade consultations and dispute settlement). Activities also involve Missions rendering government services to the business community which are aimed at developing beneficial international business ventures[1].
Government through the Ministry responsible for Trade in close collaboration with the Ministry of Foreign Affairs through the Economic Diplomacy strategy should ensure effective management of the country’s external trade relations with foreign authorities and publics, as well as the process of negotiations and networking. Economic diplomatic activities should take place at both international level (bilateral, regional or multilateral) or within the country by enhancing with government engagements with the diplomatic missions accredited to the home country.
Objectives of an Economic or Commercial Diplomacy Strategy
An Economic Diplomacy Strategy should be a major component of the country’s trade development policy aimed at achieving the following objective:
1. Trade promotion, with prime focus on export marketing and positioning
2. Investment promotion, mainly focused on both inward and outbound investments
3. Attracting suitable technologies, plus technology “harvesting”
4. Management of economic aid an important element to the country’s trade and investment development agenda
5. Attracting tourist to the country
6. Promotion of Intellectual Property Rights especially on the country’s products in the foreign markets
7. Promotion of knowledge sharing between the domestic enterprises and those aboard especially in the aspects that promote small scale entrepreneur development and cooperative movement
8. Development of country promotional programmes that support all the above, and blend into country image building.
Specific Trade Development Challenges in Africa that should be addressed through an Economic or Commercial Diplomacy the Strategy
a)The Strategy will be helpful in coordinating mobilisation of technical and financial assistance to specific interventions required to address capacity limitations which characterised many of the African countries. The specific capacity areas that the country should focus on are highlighted below
- Most of the entrepreneurs in African countries do not have relevant knowledge and capacity to ensure conformity to laboratory analysis and quality assurance procedures. There is generally limited capacity in the country for producing quality goods that conform to international standard requirements e.g. Sanitary and Phytosanitary (SPS) measures and technical regulations.
- The trade sector is constrained by the lack of adequate well developed infrastructure such as transport, postharvest handling facilities, cold chain facilities which are necessary to facilitate the movement of goods from production areas to the point of embarkation to the export markets. As a result, the transaction costs become very high thereby rendering products expensive and thus less competitive in the international markets. For example a World Bank study[2] found out that a 10% reduction in transaction costs on the continent would lead to a 25% increase in trade. The study indicates that while transport prices in East Africa are lower than in West or Central Africa, it is still twice as expensive as it is in the United States, even with the low cost of labor[3].
- Many producers and traders in a number of African countries lack technical skills to comply with international market requirements which include; the Sanitary and Phytosanitary (SPS) standards and regulations, the intellectual property rights, rules of origin and traceability issues. They have limited entrepreneurial skills in product development, business planning, capital management, procurement of products and services, formulation of export plans and development of appropriate bankable projects (access to credit). These render them uncompetitive in the international markets.
- A number of trade development support institutions have limited capacity to effectively carryout their mandates. Institutions do not have adequate equipment, manpower and facilitation to effectively provide required services to the private sector. This institutional weakness manifests in form of bureaucratic inefficiency and inadequate service delivery.
b) The Economic or Commercial Diplomacy should facilitate identification of policies in the host country that home country needs to align with in order to attain competitiveness in that market. The global setting dynamism requires that a number of domestic policies be reviewed, updated domesticated in order to match production and competitive trade in a multifaceted market like that of developed countries. Thus the need for a country to review and streamline her domestic practices and policies against related international obligations especially the Sanitary and Phytosanitary (SPS) standards regulations, intellectual property rights (IPRs), rules of origin (ROOs) and traceability issues.
c) Commercial Diplomacy Strategy is essential in facilitating the identification of product markets and dissemination of such information from the markets to firm level beneficiaries. Such challenges faced by a number of African countries that need to be addressed include;
- Majority of players in the production system remain unaware of the potential inherent in the international markets both negotiated (EAC, ECOWAS, EPAs, COMESA, SADC) and unilateral offers under the Generalised System of Referees like AGOA, EBA and others by China, India, Japan, e.t.c . Countries have limited institutional collaboration frameworks to enable information smooth flow of relevant information from the markets to producers. African countries have export potential in many agricultural products but the public does not know much about the market potential of these products.
- In addition, a number of producers and traders have limited access to appropriate market information and business contacts needed for them to effectively respond to specific market demands by improving on the product design and packaging and developing appropriate marketing strategies. Producers lack knowledge of consumer tastes and preferences, and other marketing and international trade practices. Even when they have such information, they have limited technical capacity to evaluate it, plan and develop strategies that can enable them position themselves and trade competitively in a multifaceted market.
- Countries have limited interventions that promote profitable trading in highly developed markets. There is need for interventions that emphasize the importance of real-time market information on pricing and consumer preferences, the ability to identify and produce export-ready competitive products.
- There are limited mechanisms for enhancing demand driven production and effective market entry and positioning. Production needs to conform to the dynamics in the export markets relating to consumer tests and preferences, distribution channels and other market portfolios. It is important for producers to access, understand and exploit these dynamics in the production process.
The issues above require having a presence in the targeted export markets, carrying out a market analysis and using the results to feed necessary information into the domestic production systems. Commercial or economic diplomacy is therefore of paramount importance to promoting trade and investment in international markets.
d) The Economic or Commercial Diplomacy should help the country in identifying and coordinating access to convenient and affordable trade and investment finance from the host markets. Diplomats should also coordinate and mobilise technical assistance on developing bankable projects. Access to credit and other trade finance services is still limited in developing countries due to; high interest rates and collateral requirements by the financial institutions, limited information awareness on the available products and limited skills to develop bankable projects. Using commercial diplomacy can help home market players access to international trade and investment finance at affordable rates and better repayment mechanism.
e)The Economic or Commercial Diplomacy Strategy should facilitate identification and transfer of feasible technologies and inputs needed for enhancing value addition in targeted products of export interest to the country. The strategy should also in mobilising for Foreign Direct Investments along the value chain. Under the strategy SMEs should be enabled to learn from host countries best practices including cooperative movements. The Commercial Diplomacy strategy should therefore address the following challenges
- Most of the African counties continue to export low value semi-finished products due to limited vertical integration along the value chain. There are limited value addition investments along the value chain and where value addition is done, processors have to import middle level semi processed raw materials. Due to lack of appropriate technology countries have limited interventions aimed at promoting export of finished products by pursuing investment, production and trade linkages in order to enhance value addition approaches based on the entire chain of the product process.
- The production sector is dominated by small producers, who produce on subsistence basis without major consideration of the quality of their harvests. They are not well organized for them to benefit from economies of scale of larger groups. They lack adequate technology to enable them produce massively.
The commercial diplomacy strategy can be used in the identification and adoption of the required technologies and related investments along the value chain.
f) Continuous engagements in trade negotiations for enabling visa regimes and market access for products of exports interest to a country should be a cornerstone of an Economic or Commercial Diplomacy Strategy.
- Continuous engagements in trade negotiations is needed because the international markets are characterised by policies and regulations that hinder market access of products of export interest to African countries. Even where quarter free duty free market access has been provided, the potential inherent in such offers like AGOA, EBA and those offered by China, Japan India and others continue to be hindered by their limited lifespan which brings with it unpredictability. The situation is further worsened delay in concluding the Doha Development Agenda at the World Trade Organisation which enshrine in a new predictable trade regime. The unpredictability of these regimes poses a dilemma in the investor’s and Government’s planning processes and thus the need to a commercial diplomacy strategy so as to to continue engaging the trading partners for a predictable and favourable regime for trade and investment in the home country.
- The Economic Diplomacy can be used in negotiating for a favourable immigration regime especially for the business community. The private sector in many of the developing countries is further constrained by the lengthy and stringent visa requirements for travelling to the developed countries. People intending to travel, including those for business purposes, are subjected to various documentations and scrutiny when requesting for visas. This consumes time and increases costs of trade missions to international markets which in a way discourage them from focusing on highly rewarding markets and thus the need to engage concerned to countries to provide for faster and favourable visa regimes.
Requisites for Successful Implementation of an Economic or Commercial Diplomacy Strategy
Governments adopting an economic or commercial diplomacy strategy need to;
i. Ensure that commercial diplomacy services are mainstreamed into country’s foreign policy; the national policies especially those relating to trade, investment, tourism, cooperative development, intellectual property and industrial developemnt.
ii. To address constraints right from firm level to national and targeted export markets so as to attain competitiveness which requires efficient production and marketing of products along the value chain. This involves value chain analysis which is important in ensuring that the whole cycle of production, including that governing connectedness to final markets is efficient. Thus countries should ensure that the value chain is analysed and support is provided not just to promote efficiency at the production level but also at all levels along the value chain up to the final markets.
iii. Develop skills and motivate the team involved in the implementation of the strategy right from the economic diplomats to the beneficiaries. Governments and business beneficiaries need to work together in creating value to fulfil the business expectations between the home country and the foreign country.
iv. Put in place measures to ensure that commercial diplomats have adequate understanding of their expected deliverables. Countries should ensure that the content and quality of the services reflect the needs and demands of the beneficiaries. Orientation and training should be an integral part of a commercial diplomacy strategy
v. Ensure adequate capacity in form of resources and expertise for the missions to effectively run commercial activities, make certain of action consistency, and institutionalization of procedures. Although Missions some time depend on their own initiatives, deliberate support should come from the capital.
vi. Ensure Stakeholder involvement and buy-in for effective delivery of the strategy. Government should ensure close collaboration between the government agencies involved in trade and investment promotion, the private sector and academic institutions and the missions.
The Broad Deliverables of Missions operating under the Economic or Commercial Diplomacy Strategy
In implementing the Economic or Commercial Diplomacy Strategy, Missions should have the following broad deliverables;
A. Market Analysis: Missions should be charged with a responsibility of studying and understanding the economic dynamics of their host country including having; insight into the principal elements of the local economy; analysis of the export and import basket of the country and its chief regions; the foreign investment profile; technology strengths; and the activities of competitors, actual and potential, gauged against home country’s exports and other ongoing economic activities in that country.
The home Government should ensure that Missions staff in charge of economic diplomacy have a good knowledge of the economic needs of home country, and keep updating this knowledge by among other means continuously enabling them to undertake familiarization tours at home.
B. Production of Commercial Guiding Notes: Missions should write and regularly update a “commercial note” or briefing guide on the host country and ensure that it is publicly available to stakeholders by way of sending it back home directly and posting it on the mission’s website. The Commercial Note should address stakeholder needs in the following ways;
- It should facilitate understanding of the basic economic profile of the host country, its principal indicators, the organization of her economy in terms of; tax, tariff and customs policy, the banking and related structures, system of business dispute settlement, the pattern of the business organizations, the principal import and export players, among others.
- The note should respond to general commercial inquiries especially by the home country private sector.
- It should enable profile comparisons against those prepared by other Missions in other countries. This allows the home country to determine niche export markets where it has a competitive advantage. The Commercial Note is of great help if it also includes market reports on individual products and competitors analysis; their market share, plus their marketing strategies. Missions should get this information by meeting host country and home country businessmen, gathering information from the public institutions and media of the host country and getting involved into familiarization projects.
C. Outreach: This involve engaging economic partners, like the host country local enterprises engaged in bilateral trade and investments, or others that have a potential interest. Engagements should include business associations, individual enterprises that enjoy clout, and other pressure groups, as well as parliamentarians, academia, the media, specialists in science and technology, plus local constituents like regional and other subsidiary political entities that have a direct stake in stronger economic cooperation. The latter types of local groups are especially important, for reaching out to local businesses, when employment generation and other local economic benefits are involved. A distinction should be made between companies and entrepreneurs who are the prime actors in economic relations, and the likes of chambers commerce who are the intermediaries. Both have their role and value, they should thus be treated as such.
D. Teamwork: Countries should establish Task Force composed of the mission team handling economic tasks, domestic experts from public, private sector, civil society and academic institutions. The Task Force should regularly meet and discuss on the implementation of this economic or commercial diplomacy strategy and advise the Government on the way forward. The Task Force should oversee the implementation of the strategy and will regularly participate in different kinds of outreach activities. Effective operations of the Task Force will help build relationship, enhance institutional synergies and provide for ownership of the resulting activities.
E. Initiating, coordinating and receiving Business Delegations: Missions should initiate, coordinate and receive business delegations from host country on a mission to promote trade, investments and all other forms of economic exchanges. In implementing this activity Missions should conscientiously and adequately prepare for the delegations in order for them to obtain good results. Preparations should also consist of pre-arrival match-making sessions aimed at identifying serious interest among businessmen on both sides. Missions should then use the comprehensive information gathered and distribute it to specific interests and targets of each participant. Where necessary the Missions should arrange post-visit follow-ups, to gauge results and draw lessons for the future. In all the endeavors Missions should make use of the Internet, to enable virtual delegation which should not however be seen as substitute to the real visits.
F. Promotion of Multilateral, Regional and Bilateral Corporation Issues: Missions should, canvas for support from the host country, negotiate on behalf of home country Government in all the Multilateral, Regional and Bilateral negotiations. Through the negotiations, Missions should ensure that home country’s economic and commercial interests are an integral part of the work programme and outcomes of such negotiations. In promoting multilateral, regional integration and bilateral corporation, the Missions need to regularly consult and reinforced with capital experts from institutions responsible with the subject at hand.
To affectively carryout this activity, experts from the institutions involved in the negations including the Missions need to have a basic understanding of the WTO, Regional Integration and Bilateral corporation processes, and the manner in which these influence domestic policies.
G. Missions Consultative Meetings. Missions should conduct regular consultative meetings with foreign ambassadors accredited to the host country with the aim of pursuing further their economic interest. Similar meetings should also be held at the capital in which targeted embassies accredited to the home country are consulted on how to enhance corporation on trade and investment promotion with respective countries. Economic diplomacy work offers scope for innovation and needs a proactive mindset, thus diplomatic cooperation’s offer opportunities for mutual learning, on a basis of confidentiality and credibility; this in turn hinges on making constructive use of opportunity[4].
H. Building of the Home Country Image and Visibility: Missions should build positive country image for the home country with a solo purpose of attracting inward and outward businesses, attracting tourists and technology transfer. Activities should include also building institutional links in research & development and educational cooperation. Home country’s Foreign Missions should be responsible for the projection of a “correct” image of their country. They should help in distributing economic promotional brochures and other distribution material produced by home agencies to stakeholders in their host countries.
[1] (Curzon 1965, Saner & Yiu 2003)
[2] World Bank, Doing Business, 2006a
[3] USIAD (The Competitiveness Trade Programme-COMPTETE) - Reducing Barriers to Trade
[4] Commercial Diplomacy and International Business, Michel Kostecki and Olivier Naray, April 2007
Underlying Factors for the Level of Underdevelopment in Africa
I have been traversing across Africa, but i am baffled by the level of underdevelopment in Africa. I find it ironical that Africa, which I can regard as the most reach continent under the universe is the least developed among others. I have tried to understand the reasons that explain this kind of irony but I am yet to find the answers.
Some theorists have argued that the Level of Underdevelopment Africa can be explained by slavery and colonization because these led to not only Africa losing variety of its energetic and intelligent persons, but also to political instability, weakening of states, political and ethnic fragmentation and a deterioration of legal institutions. Supportive theorists such as Rodney say that the level of underdevelopment in Africa is traced to the effect of colonial exploitation. Others argue that the export of an estimated 12 million people across the Atlantic, and possibly a similar number to the Arab world lowered the population growth in Africa and led to devastating conflicts that the curtailed trade, income generation and development.
Some studies however have indicated that slavery and colonization are not the main factor for the level of underdevelopment in Africa. P.T. Bauer says that (in Equality, The Third World, and Economic Delusion, 1981) that colonialism alone cannot be used to explain the level of underdevelopment in Africa because even “Some of the most backward countries such as Afghanistan, Tibet, Nepal, Liberia, and Ethiopia were never colonized. In any case, countries like Zimbabwe, South Africa Nigeria, Ghana and Kenya which incurred a higher impact of colonization seem to be progressing better than those which had less impact or were never colonized.
Colonization also seems to have ushered in developmental changes that were not characteristic of the then pre-colonial systems. Bauer acknowledges that the West paved the way for state-controlled economies and totalitarian states which helped to bring about the sharp decline in mortality and increase in literacy rates. Rodney using UN comparative UN data noted that some countries like South Africa and Zimbabwe that remained under white minority rule until a few decades ago have the highest literacy in Africa. In other words, we cannot attribute the level of under development in Africa cannot be explained by the impact of colonization. In any case there is no evidence that without colonization, the continent would have developed better than it is today. But there is evidence that some countries that were colonized have developed better than those that were not colonized.
Another school of thought says that actually the factor for the level underdevelopment in Africa can be explained by neocolonialism and not in colonialism itself. Proponents of this view argue that after independence African states continued and even advanced the colonial legacy of high level of protectionism and became what Frederick Cooper calls “gatekeeper states” that acquired most of their revenue from customs duties, concessions to foreign companies, visas, foreign exchange control, and foreign aid”. This situation resulted in fierce political competition for control of the state apparatus, and the rise of authoritarian regimes whose primary focus were not development of their economies and ensure enhanced functional institutions but rather to consolidate tighten control of political power and resources. This was supported by the former President of Nigeria, H.E President Umaru Yar’Adua who said that the absence of peace, security and stability are the major challenges hindering growth of sustainable development in the continent.
Other Neocolonialism theorist’s say that the Level of Underdevelopment in Africa cannot explained by just the gatekeeper states but it also by the continued control of the economies of the former colonies by the colonial powers even in post-colonial era. Proponents of this view like Rodney and Amin argue that colonial masters continued the system of exploitation they had instituted in their colonies in which African raw materials, particularly cash crops and minerals, were expropriated and exported in raw form and of lesser values to the sole benefit of the colonizing power. This continued exploitation resulted in the underdevelopment of African economies, while Western industries thrived. A good example of this process is the West African cocoa, cotton from Togo, Benin, Uganda and others, coffee and tea in East Africa and minerals such as copper, diamond and gold from countries such as Angola, DR.Congo, Uganda, Zambia and ivory coast and of course oil from the likes of Sudan, Libya and Nigeria: After many of these countries gained independence, production and exportation of these commodities increased as the world price was falling. In his book (Neo-Colonialism, the last Stage of Imperialism), Nkwame Nkrumah the former President of Ghana and one of the Greatest Pan Africanist stated that “Neo-colonialism provides enormous profits as did colonialism before it”. To him President Nkrumah the West controls the prices of commodities by lowering the prices they pay and extracting billion of dollars in form of profits from their former colonies.
I am a strong believer and contributor to this theory of Neocolonialism exploitation of the African states why this explains the level of underdeveloment in Africa. I believe that the Level of Underdevelopment in Africa has been caused greatly by the Neocolonialism exploitation of the continent. It is ironical that African countries had to continue to export raw products even when world prices were falling. Why didn’t the African States think of and invest in export of high value processed products? I cannot believe that the African Governments did not understand that the extraction and export of commodities would not help them develop their economies given that these raw products shipped to west were turned into manufactured goods, and then resold to them at higher prices. Simple accounting shows that selling at less than the purchase price automatically results in a balance of payment problem. But did Africa have a choice? No they did not because colonial masters ensured that they established tariff escalations and tariff peaks on imports from their former colonies. Tariff escalations ensured that the lesser the value addition on the imported products, the lower the tariff and the higher the value addition on to the imported product, the higher the tariff it will attract. The peaks ensured that the difference between the lowest tariff which of course was on the imported commodity was so big from that of the highest tariff put on the imported processed products. It therefore did not make business sense to add value to exportable products because of protectionist tariffs. The option was to continue exporting the commodities or donating the raw material as President Museveni likes to say.
One would argue then that was the west the only export destination for products from Africa? Couldn’t the African diversify the market and most especially trade amongst each other? No, this could not be possible because African states were very busy involved in infighting for power and as such, no organized trade would take place. But why did they continue fighting when actually they already had attained independence from their colonialists? Well, at face value the reasons are advanced as egoistic struggle for power and resources. But a closer look at the chronology of events one observes some trend and deduces that a colonial hand was and is still at play. The first observation is stressed from the African Heroes the likes Kwame Nkrumah, Julius Nyerere, Kinyata, who identified the colonial hand that went on even after African countries got independence. The group of these brave men through their struggle they were able to form the African Union. The role of the African Union in not only reducing the conflicts in the continent but also promoting intra-regional trade cannot be understated.
Fanon believed that the Africans who took power at the time of independence had been favored by European powers because they were willing to effect a smooth transition from colonialism to neocolonialism. He accuses African collaborators who betrayed the masses to benefit themselves and their neocolonialism masters. Fanon is supported by by Prof. Gaudens P. Mpangala who in his paper “Origins of Political Conflicts and Peace Building in The Great Lakes Region” identified neocolonialism interests on the African continent as part of historical root causes of the civil strife on the continent. Prof. Gaudens observed that stability on the continent was unwanted by the neocolonialism interests because it meant economic stability, growth and independence from the West. The colonial masters needed continued access to African riches and way was to keep the continent under confusion.
Africa has very high agricultural potential because of her fertile soils, and favorable climate for the production of both food and cash crops. The continent has huge forests with rich valuable tropical timber and has the richest mineral deposits in the world. In order to continue accessing these products, neocolonialism forces, worked out the overthrow and assassination of key and non allying African Leaders and promoted those willing to be puppet actors by way of serving neocolonialism interests. Neo-colonialists worked out strategies which would make their sponsored parties as well as parties backed financially by them to take over power.
Another neocolonialism hand responsible for the underdevelopment level in Africa can be sighted in the coincidental reduction in the level of conflicts in Africa just immediately after the end of the Cold War. In their book “How the End of the Cold War Shaped Internal Conflict”, STATHIS N. KALYVAS and LAIA BALCELLS revealed that the end of the Cold War was associated with the decline of rebel capacity, the decline of state capacity, and (3) the emergence of new postcommunist States and this posed distinct implications on the rebellions in the continent. According to Hale and Kienle (1997, 5) after the Soviet threat was gone, the United States lost interest in propping up client states in the developing world and divested itself from many weak states, thus weakening them further.
A second method of neocolonialism that explains the underdevelopment level in Africa is foreign aid. The inability of their economies to develop after independence soon led many African countries to enlist this aid. Believers in the effects of neocolonialism feel that accepting loans from Europe or America proved the link between independent African governments and the exploitative forces of former colonizers. They note as evidence that most foreign aid has been given in the form of loans, bearing high rates of interest; repayment of these loans contributed to the underdevelopment of African economies because the collection of interest ultimately impoverished African peoples. It is believed America’s increase in aid and intervention in the affairs of independent African states was designed to keep African countries within the capitalist camp and prevent them from aligning with the Soviet Union.
However Neocolonialism can only explain the level of under development in African to certain extent. Colonialism took place at the time when many Africans we not educated and the concept of development was not well understood by many. Today we have a good number of Africans who are educated and have a good understanding the need for pursuing development for their countries. What then explains the continued level of underdeveloped in Africa? Is the West still having an upper hand? To me, yes, the west still has an upper hand. They still control the corridors of powers of most of the African states. Through Aid and international agreements, they are still able to lock in the economies of Africa.
So what is the way forward for Africa? Africa needs complete and final independence. Africa must build infrastructure and ensure interconnectedness of the states. My hope is in the ongoing regional trade integration process. Although the West continues to influence decision making at regional level, its influence is limited as compared to the national level. Africa needs to add value to the products of her export interest and diversify its markets to the emerging economies. Africa needs to develop it internal market. The concept that Africa produces same staff and thus cannot trade internally is myth. Developed countries too produce similar staff but they trade with other. What can we learn from them and apply that in our economies. Operational institutional are a must. Africa must come up with supranational institutions to that enable the continent to get interconnected. Such institutions will help develop internal markets and tradable products. These measures together with continued peace and stability devoid of corruption tendencies will deliver to Africa a complete and final independence. Until then development in the continent will remain a challenge.
