THE ROLE OF PREFERENTIAL TRADE AGREEMENTS ON DIVERSIFYING
SUBSAHARAN AFRICA’S MANUFACTURING INDUSTRY
Samantha Maria Tom
201804190
Samanthamlk.tom@gmail.com
+26775211098
Supervisor - Mr. Tendy Matenge
matengetm@UB.AC.BW
1. INTRODUCTION
.1 Background
Economic growth through exporting is essential for the development of different economic
sectors in countries (Abou-Stait, 2005). Exporting of products, manufactured products in
particular, have contributed to growth of the economies of Sub-Saharan Africa and have been
made easier to export through use of Preferential Trade Agreements (UNCTAD, 2019).
The economies of Sub-Saharan Africa have gone through major changes over the last three
decades (2001 Dipak Mazumdar, Ata Mazaheri), with many countries including Botswana having
seen a rise in growth in its manufacturing sector and recognizing its importance to the economy.
Manufacturing production in SSA has more than doubled, from $73 billion in 2005 to $157 billion
in 2014(Balchin et al 2016). Diversity in manufacturing has also allowed for growth seen in
countries like Uganda, Zambia and South Africa as they stand out with a varied and large export
and manufacturing portfolio. This kind of diversity aids in times of economic crisis arising due to
over dependence on a specific sector, as may be the case in some countries such as Botswana
(Marobela, 2008), Zambia, and Angola.
However, many Sub-Saharan countries continue to remain dependent on a particular sector,
therefore, manufacturing has been identified as a possible vehicle for economic growth and
diversification (Mogapi, 2003). The manufacturing industry needs more attention to avoid the
vulnerability that comes with dependence a single commodity. Through domestic policy, soft
infrastructure and trade agreements, some industries have emerged under manufacturing
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namely textiles and chemical manufacturing which could aid in diversification of the economy to
increase growth.
.2 Statement of the Problem
International trade is the exchange of goods and services across international boundaries
(Mazorodze, 2019) and international trade agreements are an essential macroeconomic tool to
help erase the barriers to internationalisation. The total value of international trade in goods and
services has increased to around $24 trillion global trade in manufacturing products accounts for
more than half of this share - $13 trillion (Balchin et al. 2016) with developing countries taking
only a share of $5.4 Trillion. As exports are such an important contributor to economic growth,
domestic policies are in place and enforced alongside international trade policies. Trade
performance in Sub-Saharan Africa has been characterized by weak exports (Shapouri, 2003).
International trade agreements has been introduced to aid in lessening this problem and further
analysis of this would be required to examine if preferential trade agreements is one of the
international trade agreement types that are the driving forces behind growth of the Sub-Saharan
manufacturing industries or if they are an opportunity for the developed country’s benefit in
declaring another trade agreement to aid the developing country (Shapouri, 2003). Some of the
trade agreements provided do not even match the profile of the exports of the developing
countries (Shapouri, 2003)
A lot of trade that has occurred in Sub Saharan Africa is due to existence of trade agreements
whether reciprocal or non-Reciprocal. An example of one of the most prominent trade acts which
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is non-reciprocal and a preferential trade agreement existing for Sub-saharan Africa is AGOA –
African Growth and Opportunity Act. It arose from Sub Saharan Africa having been characterized
by weak export growth (Shapouri, Trueblood 2001) enacted towards the end of 2000, providing
duty-free access to the US market for a selected group of products from eligible sub-Saharan
African countries (Kassa, Coulibaly 2018). From Shapouri, Trueblood it can be seen that the
countries to benefit most from AGOA were countries with sufficient infrastructure and economic
stability which unfortunately resulted in the low income countries in the Sub-Saharan region not
being able to compete on a level playing field particularly due to factors such as their
infrastructure, start-up costs for businesses in the first place and the long administration
processes that their government could not aid companies with etc. This highlights how even
when trade policies are enacted upon on an international level, domestically the country must
have systems for financial and technical business support in place that can allow it to take
advantage of these opportunities.
With the presence of international policies, how well do they serve Sub-Saharan countries if there
remains a lack of diversity and development in manufacturing?
.3 Significance of the Study
The study is important because Sub-Saharan Africa countries such as Botswana and Mauritius
have been in pursuit of export-led growth for some time (Ministry of Finance and Economic
Development, 2020; Yee-Ee, 2015). Therefore it becomes necessary to analyse the trade
agreements that are already in place, their weaknesses and what can be improved as well as the
government would need to do further negotiations internationally to aid these objectives that
3
they have set out to diversify the economy. Sub-Saharan African countries enjoy enviable
preferential market access provisions to the world’s main markets such as AGOA (African Growth
and Opportunity Act) with America, (EPA) Economic Partnership Agreement with Europe
(Mashayekhi, 2017; Naumann, 2015).
Analysis of the trade policies in place internationally would also need for introspection of
domestic policies as perhaps the government would need to stimulate the economy and provide
more investment opportunities for the manufacturing industry to increase the number of
manufacturers producing and therefore exporting. Local innovation is a critical factor for export
success in developing countries as this could enhance product acceptance in advanced
economies. (Gereffi 1995)
It is important that this study on the manufacturing industry be done to analyse efficiency of the
policies in place as they can allow for greater and further integration into global markets as well
as success in exporting once countries are more aware of what is inhibiting their growth or even
accelerating it and the importance of the presence of a diverse manufacturing sector.
.4 Research Purpose and Objectives
The purpose of this research would be to
1. Seek out if the provisions from the preferential trade policies are well suited to increase
diversity in the manufacturing industries in Sub-Sahara Africa.
2. How truly beneficial and or problematic these policies may be for developing countries’
industries.
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3. To see if trade agreements cause neglect on industries that do not directly benefit from
trade agreements.
.5 Scope of the Study
The scope of the study will cover the economy of Botswana and its manufacturing industry – in
analysing its diversity. With chemical and textiles manufacturing which can be described as
emerging markets in Botswana and have been identified as potential markets for growth (Growth
Commission, 2008) with the latter being a beneficiary under numerous agreements.
It will cover the development of the various manufacturing industries in Botswana as well as their
potential. It will also be covering the barriers hindering Botswana’s manufacturing sector’s export
growth under international trade policies – ranging from infrastructure and knowledge ability of
those in the trade and market entry issues to logistics. As well as contributors to its growth such
as greater market access through trade agreements and economies of scale etc. and how focus
on existing sectors is starving potential for others and therefore starving diversification.
2 LITERATURE REVIEW
The literature revealed the importance of preferential trade agreements (Naumann, 2015 Kassa,
Coulibaly, 2018) but highlighted that they required domestic policy with both soft and hard
infrastructure to be of good standard in order to be effective. (Portugal-Perez, Wilson, 2010)
There however remains a gap in the literature and that is how even though international trade
agreements help increase volume of exports, they result in manufacturers’ only producing goods
that fall under the benefit of the trade agreements which are often goods that the nation was
already producing even if it was not on a larger scale. The outcome of this is a focus on pre5
existing goods and commodities and a hesitation to enter new industries to diversify the
economy since there is a preference to enter a secure industry that firms are sure there will be a
market for due to market access within the domestic market and preferential market access
gained from accessing overseas markets.
2.1 Preferential Trade Agreement Importance
It has been established that international trade agreements have significantly increased exports
for Sub-Saharan African countries (Naumann, 2015). Exports having access to a market are key
to economic growth especially in the manufacturing sector. What good is presence of
manufactured goods if they do not have a big enough market that can be accessed? Most
domestic markets in Africa are small and cannot sustain the high levels of growth required to
reduce poverty and inequality (Bhorat ET. Al 2017) this is the case in countries with low
populations such as Botswana of 2.2 million, Swaziland of 1.1 million and Lesotho of 2.1 million
(World Bank, 2018). These 3 countries in particular benefit from gaining preferential access to
markets through trade agreements as they gain from economies of scale in their production
process, reducing its costs, which a landlocked country such as Lesotho may need as it incurs
extra logistical costs due to not having direct access to a port to export its goods to overseas
countries such as America resulting in their goods being in transit for longer which essentially
affects the efficient logistics of these time sensitive products (Olaitan, Hubbard, 2017).
Despite having faced difficulty as a landlocked country, Lesotho is a prime example of a country
that received the AGOA agreement well. It was an incredible boost to their export of textiles
which has resulted in them quickly rising to become one of the biggest apparel exporters through
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the agreement and led to the improved performance of exports in Lesotho during the past
decade (Mokhethi and Vögel, 2015). Kenya has also built a very substantial presence in garment
assembly, supplying the US market (Balchin et al). Madagascar is a country that was a member
of AGOA and lost its eligibility in 2010 after the political turmoil that occurred in 2009 (Takahiro,
2013). Total exports from Lesotho and Madagascar had doubled in the post-AGOA period relative
to 1999-2000 and yet immediately after loss of eligibility experienced a significant drop in exports
to the USA resulting in a collapse of its $600-million-a-year textile and apparel industries and a
74% reduction subsequent to the suspension from AGOA. Despite this preferential trade
agreement boosting exports and increasing the market size, it also presented how risky it can be
to develop on a single large market from which accessibility can easily be revoked due to noncompliance with objectives of the importing country. This shows how as beneficial as trade
agreements are, developing countries are still subjected to comply with the importer’s terms
which can even still be used to the exporter’s advantage, as AGOA eligibility includes features like
a market based economy, poverty eradication policies etc. (U.S. Trade Representative (USTR),
2019) besides attractiveness from preferential trade agreements, this can also present them as
attractive to local and foreign investors since a conducive environment is provided which
therefore leads to importance of domestic policy and soft infrastructure.
2.2 Domestic Policy Contribution alongside Preferential Trade Agreement Importance
The literature acknowledges that access to markets through trade agreements is not the only
element that contributes to ability to diversify markets (Portugal-Perez, Wilson 2010; Olaitan,
Hubbard, 2017). The starting point, being the exporting country, has to have a level of foundation
7
itself to supplement the aid from international policies. This can be done with ensuring presence
of “soft infrastructure” (Portugal- Perez, 2010)
The impact of domestic policy regulations and standards on trade has been an important global
policy issue during the past decade (Babool, 2007). Regulations and standards, in principle, are
designed to facilitate production, guarantee quality of products, reduce transaction costs and
enhance competitiveness in the market. Once this is realized, it can push countries to introspect
and ensure that their soft infrastructure and domestic policy aids their industries to improve in
commitment to investment in manufacturing as well as uphold the strict requirements. (Jaffee
and Henson, 2005). Even Lesotho had to take a liberal trade policy approach in order to enable
them to best take advantage of the trade agreements made. (Malefane and Odhiambo, 2016).
This is key for exporters as to be able to compete in the global market, their goods need to be of
global standard which if through implementation of international trade standards are adopted
as their own can increase their competitiveness. Preferential trade policies help enforce this as
seen in Section 104 AGOA 19 USC 3703 requires that eligible members must have sufficient
economic policies in place alongside protection of individual rights.
A drawback from lack of soft infrastructure to aid in business development can be seen in a case
study approach (Olaitan, Hubbard, 2017) where one of the members of the agricultural global
value chains in Nigeria stated “We have issues about working together and developing synergy;
everybody is just doing their own. On the part of the government, on the part of the stakeholder,
there should be a deliberate policy, a deliberate effort from both sides to make sure things are
being done properly (Deputy Director at GOV6).”
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This is a contrast to more developed Sub-Saharan countries like South Africa who are one of the
greatest beneficiaries of AGOA with an extremely diverse portfolio of total – motor vehicles
(75%), iron and steel products (10.6%), and spirits and beverages (3%) (Naumann, 2015) with a
vast amount of business development agencies, consultants and with an existence of a total of
26 LEDAs (Local Economic Development Agencies) operational in South Africa in 2016 across
eight of the country’s nine provinces. Chad’s primary focus as an exporter through AGOA is crude
oil (Williams, 2015). If investment and infrastructure for businesses was focused on improving
the infrastructure quality of Chad halfway to the level of South Africa, trade levels of Chad would
increase by 79.3 percent (Portugal-Perez, Williams 2010).
Transparency and enhancing the business environment, matter in facilitating trade. AGOA
ensures this by making part of its criteria for eligibility firm in economic, political and human
rights providing a market based economy to allow for competitive production (Naumann, 2015)
.3 Gap in Literature
As helpful as trade agreements are, the reality is that due to focus on commodities that benefit
directly from the trade agreements, emerging markets, if not within the criteria of goods to be
exported and have an access to a market through preferential trade agreements, may lead to the
presence of a market that is saturated with pre-existing goods therefore stunt chances of
diversifying the market in the way the preferential trade agreement was meant to. The literature
addresses dependency on a single sector can prove to be challenging for an economy (Malefane
and Odhiambo, 2016) as well as the lucrative results from preferential trade agreements yet fails
to address that trade policies may in fact be the ones to limit a country’s exports, not in volume
9
of exports but rather in variation of exports and production. Preferential trade agreements have
seldom resulted in a formation of a new market.
Once trade agreements are available to countries, they often focus on existing primary
commodities, (especially in Africa) commodities that they’re going to knowingly benefit from
(Balchin et al, 2016). This leads to manufacturers only entering the market where there already
exists overdependence on the product or related products to it. E.g. Botswana exports Diamonds,
copper and textiles. Manufacturers might have the inclination to either dive into this market in
particular or markets complimentary to the products that are already being focused on which
can lead to neglect of other sectors within manufacturing and exporting.
Aside from South-Africa with its diverse export portfolio, this lack of diversity is evident with
Zambia and copper which is a non-renewable resource and can cause the economy to become
volatile in the event that market demand changes, Nigeria and its focus on oil as the primary
export product. As a result of its sole reliance on oil, the country has not engaged in other local
innovations. (Olaitan, Hubbard, 2017) which could be provided with access to a larger market
through AGOA but due to focus on the market that is perceived to be performing well, there may
be some neglect. In Botswana, out of 1690 manufacturing companies in Botswana (Appendix
Attached) the manufacturing sector still continues to account for very little, with all
manufactured products accounting for between 1% and 5% (Botswana AGOA Response Strategy,
2017) with diamonds which are not even AGOA eligible contributing to over 79% of Botswana’s
exports. As more countries gain access to preferential trade agreements, it lessens the
competitive edge the trade agreements once provided for members.
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3. Research Methodology
3.1 Research Design
The methodology to be used in this study will be qualitative and of an exploratory research
design. As the main aim of exploratory research is to identify boundaries of the environment in
which problems or opportunities are likely to reside as is the case within the manufacturing
industry and how international trade agreements influence it Qualitative research is also a
suitable approach since it will be making use of the views of the key informants high quality
standard of validity and reliability (Cohen, 2007) in their manufacturing industries and for the
qualitative research.
The data will be collected through semi-structured interviews with key informants in the chemical
and textile manufacturing industry in Botswana. Since they provide access to perceptions and
opinions, they are effective for gaining insight into problems that are not immediately perceptible
but that nonetheless cause concern (La Forest, 2009) for the target population which in this case
are manufacturers in Botswana.
3.2 Sampling
It will consist of manufacturers, whose particular industries benefit from preferential market
access when exporting to other countries, such as textile manufacturing and those whose
industries do not benefit from preferential market access in unilateral trade agreements.
A list of manufacturers who export within preferential trade agreements is available from the
BITC website which can be analysed to allow for drawing up of the sampling frame. A non-
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probability sampling technique of snowballing will be implemented for manufacturers whose
industries ‘products do not have access to preferential trade agreements.
3.3
Data Collection
Upon selection of companies, they will be divided into the 2 groups, industries with access to
preferential market access and industries without access to preferential market access. It will
consist of 10 manufacturers from each group. Information shall be extracted through use of semistructured interviews with key informants in the respective industries. The data shall be
transcribed and recorded as well with use of a recording medium.(Interview Questions Appendix
Attached)
3.4
Data Analysis
Data analysis will be done through thematic analysis as it provides insightful, rich, and
trustworthy research findings (Nowell et al, 2017). The following phases will follow in order to
carry out thematic analysis:
Phase 1 – Familiarising one’s self with the data (Braun and Clarke, 2006). As the data would have
been transcribed during the structured interview, afterwards it will be important to read through
the data set prior to generation of codes.
Phase 2 – Generating Codes – familiarized themselves with the data, having ideas about what is
in the data and what is interesting about them (Braun & Clarke, 2006) and to allow simplification
of the data.
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Phase 3 – Search for Themes – After having done first round of coding, the codes that have been
generated will then be sorted into themes. As themes bring together components or fragments
of ideas or experiences which are meaningless on their own. (Aronson, 1994)
Phase 4 – Reviewing Themes - The validity of individual themes will be considered to determine
whether the themes accurately reflect the meanings evident in the data set as a whole (Nowell
et al, 2017)
Phase 5 – Defining and Naming Themes - Themes selected in the previous 2 stages may require
more refining, here is where researchers capture what are the matters of most interest and why.
(Nowell et al, 2017)
Phase 6 – Report Production – Once the themes are established, analysis can take place so the
final report production can take place. As the data has been thoroughly analysed in the previous
steps, here it can be compiled more precisely in the report.
3.5 Limitations
Limitations may exist for this research in the form of time constraints as well as that it is in
particular to the manufacturing industry in Botswana therefore exclusion of other industries such
as agricultural, retail, mining and quarrying exports etc. in this research..
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Appendices
Appendix A
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Table 15: Number of Establishments in the Manufacturing Industry
Industry Number, of Establishments & Percentage Contribution
Manufacture of Food products
Manufacture of Beverages
Manufacture of Tobacco
Manufacture of Textiles
Manufacturer of Wearing Apparel
Manufacture of Leather and Leather Related
Manufacture of Wood Products
368
15
1
94
286
20
30
21.8
0.9
0.1
5.6
16.9
1.2
1
Manufacture of Paper & Paper Products
17
1.0
Printing and Reproduction of Recorded Media
166 9.8
Manufacture of Chemical and Chemical Products
48
2.8
Manufacture of Pharmaceuticals, Medical and Botanical
3
0.2
Manufacture of Rubber and Plastic Products
24
1.4
Manufacture of Non-Metallic Minerals
163 9.6
Manufacture of Basic Metals
40
2.4
Manufacture of Fabricated Metal Products (except Machinery Equipment)
129 7.6
Manufacturer of Computer, Electronic & Optical Products
9
0.5
Manufacturer of Electrical Equipment
18
1.1
Manufacturer of Machinery and Equipment
21
1.2
Manufacturer of Vehicles, Trailers and Semi-Trailers
16
0.9
Manufacturer of Other Vehicles
2
0.1
Manufacturer of Furniture
41
2.4
Other Manufacturing
28
1.7
Repair and Installation of Machinery and Equipment
151 8.9
Total
1690 100
Table by Statistics Botswana 2016 - CENSUS OF ENTERPRISES AND ESTABLISHMENTS 2016
REPORT: PHASE 1
Appendix B
Interview Questions
1. Are you a Manufacturer?
2. How many years have you been a manufacturer?
3. What industry do you manufacture under?
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4. Are you an exporter?
5. How many years have you been exporting?
6. How has exporting benefited or affected your business?
7. Is there sufficient soft infrastructure available to aid your
8.
9. Are you knowledgeable about preferential trade agreements particular to your industry?
10. Are there any other trade agreement types that you are knowledgeable about that are
particular to your industry
11. If present, how have these trade agreements influenced your exports?
12. Did the presence trade agreements influence your decision to go into that specific
industry?
13. Would you enter a new industry if there became a trade agreement specific to that
industry?
A lack of new productive skills have affected the ability of Sub-Saharan countries to export
manufactured goods competitively. Manufacturing exports in most African countries still tend to
be focused on resource-based or low-tech manufactures (Balchin et al, 2016) e.g. the mining
industry. This may be what is preventing entry into higher tech industries, even with soft
infrastructure and trade policies present, this may be the gap preventing industry diversification
because of the lack of knowledge and knowledge management in new industries which could
diversify the economy. ). Firstly, countries with individuals and firms that possess more
productive knowledge can produce a more diverse set of products (Bhorat et al, 2017). Majority
19
of Sub-Saharan African exports lie in primary commodities which do not require as much skill or
value added to them in their production process.
20