Lusaka: Zambia has actively participated in the COMESA and SADC regional integration programmes. Within SADC it is now reportedly a full participant in the SADC FTA, granting duty-free and quota-free access to goods originating from the SADC region. It is also a founding participant in the COMESA FTA and is now looking ahead to participate in the establishment of the COMESA Customs Union.
The country is also committed to participate in the recently announced Tripartite FTA, which will establish a free trade area and then eventually a customs union, consolidating the regional economic communities of COMESA EAC and SADC.
Quite often the actual or potential short-term or transitional impacts of the tariff reforms associated with regional integration are not well known. This is the case with respect to Zambia’s commitments to further integration under the forthcoming COMESA Customs Union and Tripartite FTA. ZIPAR therefore undertook a study to assess the potential effects for Zambia of the forthcoming trade reforms implied in both the COMESA Customs Union and the COMESA-EAC-SADC Tripartite Free Trade Area.
The study made two starting-point observations:
On the one hand, the Tripartite FTA is expected to consolidate the internal markets of the three RECs and facilitate duty- and quota-free trade within the common market, subject to rules of origin. This means the Tripartite FTA will define Zambia’s internal trade policy position with other Member States in the free trade area (FTA).
On the other hand, the COMESA Customs Union, with its Common Tariff Nomenclature (CTN), Common External Tariff (CET) structure and common Customs Management Regulations (CMR), will define Zambia and other COMESA Member States’ common external trade policy position.
Given Zambia’s ratification of these trade arrangements, it is important for policy-makers to understand the significance of the trade policy reforms implied in both the COMESA Customs Union and the Tripartite FTA.
- Conclusion and Recommendations (to the study)
In closing, this study has sought to establish the implications for Zambia of the trade reforms implied in adopting the COMESA Customs Union and the Tripartite FTA. It has elaborated Zambia’s bilateral, regional and multilateral trade policy arrangements as well as some of its trade policy intentions going forward. It has explained the country’s MFN tariff structure as well as the tariff structures under the SADC trade protocol in 2010 and currently. The implications of the COMESA CET for Zambia’s MNF tariff structure have also been described.
The assessment of Zambia’s trade performance suggests that the country’s share of world trade grew significantly during the latter part of the study’s reference period, albeit from a very small base. The openness of the economy to trade was found to be consistently high throughout the reference period. The trade balance became positive in 2005 and stayed that way until the close of the reference period. Zambia only took advantage of about 2.2 percent of its trade potential on the African continent.
It was observed that South Africa was Zambia’s main import trading partner, accounting for 37 percent of total trade in 2010. Other main trade partners in 2010 included Kuwait, DR Congo and China, which had replaced some of the more traditional partners like the UK and Zimbabwe. Imports were a significant part of the Zambian economy, accounting for about 32 percent of GDP or one and a half times the national budget in 2010. The total import trade tax revenues associated with 2010 imports were equivalent to about 41.2 percent of the total tax revenue of the government, excluding grants and other (non-tax) revenues. In the same year, Zambia granted exemptions amounting to about 8.6 percent of total tax revenue.
Against the actual outcomes highlighted above, the study estimated that the economy would have potentially lost total trade tax revenues equal to about 2.3 percent of total tax revenue due to the combined effect of consolidation of the COMESA FTA and then implementation of the COMESA CET under a Customs Union reform. On the other hand, pursuing tariff reforms under COMESA FTA consolidation and then a Tripartite FTA, Zambia would have potentially lost tax revenues equivalent to 4.5 percent of the total tax revenue. Revenue losses could naturally be expected to be higher in under the Tripartite FTA because this trade reform arrangement would involve liberalizing trade with South Africa, Zambia’s largest trading partner by far in 2010. Both avenues of tariff reform would be significantly less than the revenue of 8.6 percent of total trade taxes that the country actually lost due to exemptions in 2010. Indeed to overall or combined effects of consolidation of the COMESA FTA, implementation of the COMESA Customs Union and establishment of the Tripartite FTA would have been resulted in potential revenue losses of 6.9 percent of total tax revenue, amount to lesser losses than the duty exemption losses of 2010.
For the COMESA tariff reform route, options for mitigating the adverse effects were elaborated. More detailed analysis suggested that reductions in tariff protection, where they were likely to be significant, would generally favour the competitiveness of domestic industries.
From the marginal potential increases in imports observed in the simulation results, tariff reforms alone are unlikely to result in significant trade and competitiveness gains. Deeper regional cooperation that integrates the fragmented regional markets in African and effectively addresses NTBs will be required. Given Zambia’s early reformer status, the country is an advantageous position to negotiate for such cooperation, targeting regional support that promotes the economy as a preferred regional destination for FDI, preferential treatment in regional infrastructure support projects and so on.
In view of the forgoing, there are a few policy issues that will be important for national authorities to carefully consider and possibly pursue:
Firstly, as an important step towards deeper regional cooperation, Zambia should continue on its path of tariff reform and regional integration. Specifically, the country should move ahead with its commitment to fully participate in the COMESA Customs Union, particularly as the adjustment costs are likely to be relatively lower than the costs associated with other tariff reforms that the country has pursued.
Secondly, policy-makers must carefully use the evidence as well as further consultation with Zambia stakeholder to define a country policy position and a set of strategies on offensive and defensive trade interests that should, as a minimum, be included as part of regional trade policy. For instance the country’s bilateral trade ambitions with China, India, and other countries and trading blocs should be carefully articulated to the region and included in regional policy. Considering that tariff reform is a defensive trade strategy, Zambia could perhaps do well to focus on formulating trade offensive strategies. These should be underpinned by the common regional trade policies that Zambia has committed to but should clearly and explicitly state the economy’s trade, financial, investment and social cooperation interests in different countries and regions. As already emphasized severally, such trade offensives as well as the defensive trade positions (such as on sensitive products and exemptions lists) should be formulated in close consultation with the private sector.
Thirdly, using the revenue loss estimates of this study, Zambian policy makers should engage the COMESA Secretariat with a view to establishing if the country can benefit from partial or full revenue loss compensation under the COMESA Adjustment Facility, to mitigate the adverse effects of the reform. Zambian policy makers should also consider drawing on other safeguard measures in COMESA provisions such as the Council Regulations, including the provisions for countries to formulate sensitive products lists and exemptions lists from tariff adjustments. The empirical insights from this study could be used as a starting point in determining strategically important products that are revenue sensitive or of significance under bilateral trade agreements.
Finally, further work should be undertaken to quantify the costs of NTBs for Zambia specifically, towards understanding their drivers and how to use the drivers, as a trade facilitator, to eliminate or at least minimize the barriers. Discriminatory and often ineffective policies and strategies regarding NTBs are likely to limit the regional integration benefits of tariff reform and create an impression that trade liberalization is not worth it.
Ultimately, tariff reform should be viewed as simply one small step on the long and hard road to regional cooperation, competitiveness, trade expansion and diversification and overall economic development. Many other steps that facilitate trade expansion and diversification will have to be taken as the first steps, those of trade liberalization, begin to be concluded.
- The study, Implications of COMESA(CU)-EAC-SADC trade reforms for Zambia, 55 pages, can be accessed here.