Sometimes, depending on the tax policy of a given country, a tariff could be set as high as 60%. Even though several factors influence trade value and volumes globally, tariffs on tradable goods and services rank highly.
For the benefit of all, tariffs are taxes imposed on imports and exports between countries with the aim of generating government revenues and protecting domestic industries.
Sometimes, depending on the tax policy of a given country, a tariff could be set as high as 60%. This is usually to protect a young, somewhat vulnerable yet very important industry to that state.
Other times tariffs are imposed by states, against products and services of another state, to settle scores. For example, the ongoing trade war between the United States and China is one such tariff war waged between countries.
In 2017, the United Nations Conference on Trade and Development (UNCTAD) reported that tariffs, on tradable goods and services, between the developed states averaged at 1.2%.
This is very low compared to the average tariffs, on tradable goods and services, between African countries, which stand at 8%. Moreover, tariffs remain relatively high in important sectors, including agriculture, apparel, textiles and leather products.
Unfortunately, these high tariffs make it easier for African countries to trade with Europe and the United States, at the expense of each other. As such, intra-Africa trade is just 15%.
Meanwhile, over 60% of total African trade is with countries that are oceans away from the continent. Compared to the rest of the world, this is unfortunate to say the least. For instance, intra-Asia and intra-Europe trade stands at 58% and 67% respectively.
A recent United Nations Economic Commission for Africa report indicated that if tariffs are significantly reduced, or totally eliminated, intra-Africa trade would increase to more than 50% of total trade on the continent.
That said, there is a legitimate concern that if tariffs are significantly reduced or totally dealt away with, there will be a reduction in government revenues. This in turn would curtail the governments’ ability to provide public goods and services to the general population.
Nevertheless, the reduction in government revenues, from tariffs, would be made up with an increase in income tax and value added tax. This is because a reduction in tariffs would lead to an increase in the value and volume of trade, profits, investment, productivity, employment and disposable income.
Come in AfCFTA!
With the coming into effect of the African Continental Free Trade Area (AfCFTA), which creates a single domestic market for goods and services of 1.2billion people, this is the opportune time to discuss the elimination of tariffs on continental trade.
The significance of the AfCFTA cannot be overstated. It will be the world’s largest free trade area since the establishment of the World Trade Organization (WTO) and it is estimated that if successfully implemented, Africa will have a combined consumer and business spending of USD6.7trillion by 2030.
The AfCFTA will have a big impact on manufacturing, tourism, intra-African cooperation, and economic transformation. The International Monetary Fund reports that, under the AfCFTA, Africa’s expanded, and more efficient goods and labor markets will increase the continent’s overall ranking on the global competitiveness index.
However, the immense potential of the AfCFTA will only be realized if tariffs are significantly reduced or totally eliminated. This must be prioritised at the very start of the implementation phase in 2020. The schedules of tariff concessions of member states must be submitted to the African Union and the negotiations on the rules of origin for goods completed.
The other main area of tariff elimination is in services, particularly, on investment, competition and intellectual property rights.
This is because services make a significant contribution to the manufacturing value chains and play a key role in logistics. Also, services make a larger contribution to poverty reduction than agriculture or manufacturing.
On the African continent, over 55% of the Gross Domestic Product (GDP) is generated by services. However, African service providers face barriers to export services. As a result, African services exports contribute just 2% of global trade in services.
Therefore, there is a great opportunity for the AfCFTA to expand competitiveness in African trade in services too by liberalizing the service sector through the elimination of tariffs on services.