A deal has just been signed between 26 African nations to form a new free trade area, the Tripartite Free Trade Area (TFTA). The countries have a population of 625 million (56% of Africa’s total) and a GDP of $1.6 trillion (63% of Africa’s total). The deal effectively combines three existing free trade areas: the Common Market for Eastern and Southern Africa, the Southern African Development Community and the East African Community.
Although the deal has been signed by the nations’ leaders, it still needs parliamentary approval from each of the countries. It is hoped that this will be achieved by 2017. If it is, it will mark a major step forward in encouraging intra-African trade.
The deal will involve the removal of trade barriers on most goods and lead to a reduction in overall tariffs by more than 50%. The expectation of the leaders is that this will generate $1 trillion worth of economic activity across the 26 countries through a process of trade creation, investment, increased competition and the encouragement of infrastructure development. 
But given the current poor state of infrastructure and the lack of manufacturing capacity in many of the countries, the agreement will also encourage co-operation to promote co-ordinated industrial and infrastructure development.
Up to now, the development of intra-African trade has been relatively slow because of poor road and rail networks and a high average protection rate – 8.7% on exports to other African countries compared with 2.5% on exports to non-African countries. As a result, intra-African trade currently accounts for just 12% of total African trade. It is hoped that the development of TFTA will result in this rising to over 30%.
Much of the gains will come from economies of scale. As Kenyan academic Calestous Juma says:
“By having larger markets, it signals the possibility of being able to manufacture products at a scale that is cost-effective. For example, where you need large-scale investments like $200m to create a pharmaceutical factory, you couldn’t do that if you were only selling the products in one country.”
The question is whether the agreement signed on the 10 June will lead to the member countries fully taking advantage of the opportunities for trade creation. Agreeing on a deal is one thing; having genuinely free trade and investing in infrastructure and new efficient industries is another.
Videos and audio
African leaders ink trade deal Deutsche Welle (11/6/15)
African leaders sign pact to create ‘Cape to Cairo’ free trade bloc euronews (10/6/15)
Africa Free Trade Analysis BBC Africa, Calestous Juma (9/6/15)
Articles
African Leaders To Sign Free Trade Agreement To Create Common Market International Business Times, Aditya Tejas (10.6.15)
EAC, COMESA and SADC Blocs Ink ‘Historic’ Trade Deal allAfrica, James Karuhanga (11/6/15)
Tripartite Free Trade Area an Opportunity Not a Threat allAfrica, Sindiso Ngwenya (9/6/15)
Africa a step closer to free trade area Business Report (South Africa), Rob Davies (11/6/15)
The Cape to Cairo trade ‘super bloc’ is here; 15 surprising – and shocking – facts on trade within Africa Mail & Guardian (Kenya), Christine Mungai (8/6/15)
The tripartite free trade area agreement in Africa is bound to disappoint Quartz Africa, Hilary Matfess (10/6/15)
Africa creates TFTA – Cape to Cairo free-trade zone BBC News Africa (10/6/15)
Will the Cape to Cairo free-trade zone work? BBC News Africa, Lerato Mbele (10/6/15)
African free trade still some way off BBC News, Matthew Davies (10/6/15)
Zambia not to benefit from Africa’s TFTA Medafrica, Geraldine Boechat (10/6/15)
Questions
- Distinguish between a free trade area, a customs union and a common market.
- What does the law of comparative advantage imply about the gains from forming a free trade area?
- Distinguish between trade creation and trade diversion.
- Why is it likely that there will be considerable trade creation from TFTA? Would there be any trade diversion?
- Why are small countries with a relatively low level of economic development likely to experience more trade creation than larger, richer ones?
- What barriers might remain in trade between the TFTA countries?
- Why might smaller, less developed members of TFTA be worried about the removal of trade barriers?
- Why might concentrating on developing local capacity, rather than just lowering tariffs, be a more effective way of developing intra-African trade
- What ‘informal’ barriers to trade exist in many African countries?
- Why is it that ‘Ordinary Africans are most probably not holding their breath’ about the gains from TFTA?
The period from the end of the Second World War until the financial crisis of 2007–8 was one of increasing globalisation. World trade rose considerably faster than world GDP. The average annual growth in world GDP from 1950 to 2007 was 4.2%; the average annual growth in world merchandise exports was 6.7%.
And there were other ways in which the world was becoming increasingly interconnected. Cross-border financial flows grew strongly, especially in the 1990s and up to 2007. In the early 1990s, global cross-border capital flows were around 4% of world annual GDP; by 2007, they had risen to over 20%. The increasing spread of multinational corporations, improvements in transport, greater international movement of labour and improved communications were all factors that contributed to a deepening of globalisation.
But have things begun to change? Have we entered into an era of ‘deglobalisation’? Certainly some indicators would suggest this. In the three years 2012–14, world exports grew more slowly than world GDP. Global cross-border financial flows remain at about one-third of their 2007 peak. Increased banking regulations are making it harder for financial institutions to engage in international speculative activities.
What is more, with political turmoil in many countries, multinational corporations are more cautious about investing in such markets. Many countries are seeking to contain immigration. Fears of global instability are encouraging many firms to look inwards. After more than 13 years, settlement of the Doha round of international trade negotiations still seems a long way off. Protectionist measures abound, often amount to giving favourable treatment to domestic firms.
The Observer article considers whether the process of increased globalisation is now dead. Or will better banking regulations ultimately encourage capital flows to grow again; and will the inexorable march of technological progress give international trade and investment a renewed boost? Will lower energy and commodity prices help to reboot the global economy? Will the ‘Great Recession’ have resulted in what turns out to be merely a blip in the continued integration of the global economy? Is it, as the Huffington Post article states, that ‘globalization has a gravitational pull that is hard to resist’? See what the articles and speech have to say and what they conclude.
Articles
Borders are closing and banks are in retreat. Is globalisation dead? The Observer, Heather Stewart (23/5/15)
Is Globalization Finally Dead? Huffington Post, Peter Hall (6/5/14)
Speech
Financial “deglobalization”?: capital flows, banks, and the Beatles Bank of England, Kristin Forbes (18/11/14)
Questions
- Define globalisation.
- How does globalisation affect the distribution of income (a) between countries; (b) within countries?
- Why has the Doha round of trade negotiations stalled?
- Examine the factors that might be leading to deglobalisation.
- What are the implications of banking deglobalisation for the UK?
- Are protectionist measures always undesirable in terms of increasing global GDP?
- What forces of globalisation are hard to resist?
Interest rates are the main tool of monetary policy and crucially affect investment. There has been much discussion since the end of the financial crisis concerning when UK interest rates would eventually rise. Uncertainty over just when, and by how much, interest rates will rise affects business confidence and hence investment. Businesses therefore listen carefully to what the Bank of England says about future movements in Bank Rate. But Mark Carney has now spoken about another cause of uncertainty and its impct on investment. This is the uncertainty over the outcome of the referendum on whether the UK should leave the EU.
By 2017, the Prime Minister has promised a referendum on staying in the EU, but Mark Carney has urged for this to be held ‘as soon as possible’. Whether or not the UK remains in the EU will have a big effect on businesses and with the uncertainty surrounding the UK’s future, this may soon turn to a lack of investment. 
As yet, businesses have not responded to this uncertainty, but the longer the delay for the referendum, the more inclined firms will be to postpone investment. As Mark Carney said:
“We talk to a lot of bosses and there has been an awareness of some of this political uncertainty – whether because of the election or because of the referendum … What they’ve been telling us, and we see it in the statistics, is they have not yet acted on that uncertainty – or to put it another way, they are continuing to invest, they are continuing to hire.”
Leaving the EU will have big effects on consumers and businesses, given that the EU is the UK’s largest market, trading partner and investor. With a referendum sooner rather than later, uncertainty will be more limited and any reaction by businesses will take place over a shorter time period. There are many other factors that affect business investment, some of which are related to the UK’s relationship with the EU and the following articles consider these issues.
EU referendum should be held ‘as soon as necessary’, says Mark Carney BBC News (14/5/15)
Business want an early EU referendum, Mark Carney indicates The Telegraph, Ben Riley-Smith (14/5/15)
EU poll should take place ‘as soon as necessary’, says Bank of England Chief The Guardian, Angela Monaghan (14/5/15)
Threat of business leaving the EU is fuelling business ‘uncertainty’, says Bank of England governor Mark Carney Mail Online, Matt Chorley (14/5/15)
Bank of England’s Mark Carney urges speedy EU referendum Financial Times, George Parker (14/5/15)
Questions
- Why is the EU important to the UK’s economic performance?
- If the UK were to leave the EU, what impact would this have on UK consumers?
- What would be the impact on UK firms if the UK were to leave the EU?
- Consider an AD/AS diagram and use this to explain the potential impact on the macroeconomic variables if the UK were to leave the EU.
- Why is uncertainty over the UK’s referendum likely to have an adverse effect on investment?
A new group of economies, known as MINT, are seen as strong current and future emerging markets. We’ve had the BRICS (Brazil, Russia, India, China and South Africa) and now we have the MINTs (Mexico, Indonesia, Nigeria and Turkey).
In 2014, Nigeria became Africa’s fastest growing nation. A large part of Nigeria’s success has to do with growth in some of its key industries.
Nigerian’s reliance on the oil and gas industry created an attractive economy for further development and it now has high growth in a diverse range of sectors, including mobile phones, champagne, private jets and ‘Nollywood’. Despite the uncertainty and political unrest caused by Boko Haram, Nigeria is attracting a significant amount of Foreign Direct Investment (FDI) in a range of sectors, indicating its growing diversity and attractiveness to some of the world’s largest multinational companies.
Boko Haram has certainly had a dampening effect on Nigeria’s growth, as has the lower oil price, but this may create opportunities for further diversification. Furthermore there are concerns about how the wealth of the nation is concentrated, given that poverty is still prevalent across the country. However, Nigeria is certainly emerging as a success story of Africa and surely the question that will be asked is will other African nations follow suit?
The following article from BBC News considers the Nigerian economy.
Nigeria’s ‘champagne’ economy bucks Boko Haram effect BBC News, Vishala Sri-Pathma (27/3/15)
Questions
- Is a falling oil price necessarily bad for the Nigerian economy?
- Explain why Boko Haram is likely to have a dampening effect on economic growth in Nigeria.
- Do you think other African nations will be able to replicate the success of Nigeria? Which factors may prevent this?
- If the number of millionaires is increasing significantly, but poverty is persisting, does this tell us anything about what is happening to inequality in Nigeria?
- Is is possible to reduce inequality in Nigeria while maintaining economic growth? Might it even be posible for greater equality to be a driver of economic growth?
- The Nigerian currency is weakening. What has caused this and why may this be a cause for concern?
With an election approaching in the UK, uncertainty is a term we will hear frequently over the next few weeks. Until we know which party or parties will be in power and hence which policies will be implemented, planning anything is difficult. This is just one of the factors that has caused the British pound sterling to fall last week by 2% to an almost five year low against the dollar.
In the last election, uncertainty also prevailed and continued even after the election before the Coalition was formed. Given how close this election appears to be at present, another Coalition may have to be formed and this is adding to the current election uncertainty. A currency strategist at Standard Bank said:
“A $1.40 level for sterling/dollar is certainly not out of reach if the election aftermath turns ugly”
With such uncertainty, investors are refraining from putting their money into the UK and this has contributed towards the deprecation of the British pound against the dollar.
Another factor adding to this downward pressure on the pound is the latest data on industrial output. Although economic growth figures for the UK in 2014 were very positive, there are some suggestions that 2015 will not be as good as expected, though still a strong performance. The first quarter data will not be available until just before the election, but data from the ONS on industrial output shows very minimal growth at just 0.1% from January to February. Chris Williams at Markit said:
“Clearly this all bodes ill for economic growth in the opening quarter of the year. It’s now looking like the economy slowed, and possibly quite markedly, compared to the 0.6% expansion seen in the closing quarter of 2014 … The trend should improve in March, however, according to survey data.”
These two factors have combined to push the pound down, with investors preferring to hold their money in dollars, despite the weak US unemployment data. However, it is not only against the dollar that we must consider sterling’s performance. Against the euro, it has performed better, rising by 1.5%. Whether this is positive for the UK or very negative for the Eurozone is another question. The following articles consider the performance of the British pound.
Sterling falls to five-year low Financial Times, Neil Dennis (10/4/15)
Sterling plummets to five year low as economic slowdown looms The Telegraph, Mehreen Khan (10/4/15)
Pound at five-year low against dollar on weak output BBC News (10/4/15)
Sterling falls after Bank of England’s Haldane says even chances of rate cut or rise Reuters (10/4/15)
Pound falls to five-year low as volatility jumps before election Bloomberg, Anooja Debnath and David Goodman (11/4/15)
Pound falls to a five-year low against the dollar as polls suggest election will create economic uncertainty Mail Online, Matt Chorley (10/4/15)
Questions
- Draw a diagram illustrating the way in which the $/£ exchange rate is determined.
- Explain why the election is causing economic uncertainty in the UK.
- How would uncertainty affect the demand and supply of sterling and hence the exchange rate?
- US job data is worse than expected. Shouldn’t this have caused the dollar to depreciate against the pound and not appreciate?
- Industrial output data for the UK economy is lower than expected. What has caused this?
- Why does slower growth in industrial output cause the exchange rate to depreciate?
- In order to keep the UK’s inflation rate on target, Haldane has said that we could expect a cut or rise in interest rates and policy should be prepared for both. How has this affected the exchange rate?
- Are there any advantages of having a lower pound?
A deal has just been signed between 26 African nations to form a new free trade area, the Tripartite Free Trade Area (TFTA). The countries have a population of 625 million (56% of Africa’s total) and a GDP of $1.6 trillion (63% of Africa’s total). The deal effectively combines three existing free trade areas: the Common Market for Eastern and Southern Africa, the Southern African Development Community and the East African Community.
But given the current poor state of infrastructure and the lack of manufacturing capacity in many of the countries, the agreement will also encourage co-operation to promote co-ordinated industrial and infrastructure development.
