Trade agreements are an excellent way to strengthen relationship between countries especially on the economic ties which gives each other market access to various products. There are several trade agreements / treaties in place for many years among African countries to encourage African economic growth. Apart from regional agreements, trade ties between major economic powers such as the China, European Union, and the United States of America are also in place to name a few. China’s trade with Africa reached USD 208 billion in 2019, the largest trading partner with African nations compared to European Union and the United States of America.
There are several trade agreements in place with countries outside Africa. United States of America has trade agreement with several African countries under African Growth and Opportunity Act (AGOA) and the European Union has an agreement with South Africa on Trade Development and Cooperation Agreement (TDCA), to name a couple. Indonesia has also entered in negotiating a trade deal with Mozambique. While there is no agreement between Malaysia and African countries so far, Malaysia can take a deeper look into the local / regional treaties to gain mutual benefit. Such agreements would help Malaysia in increasing palm oil share in importing countries with advantages like preferential tariff. It is notable that high tariff rates in importing countries is a common challenge that the palm industry faces in African nations.
Regional Trade Agreements
Several regional trade agreements worth notable are as below.
The Economic Community of West African States (ECOWAS) Treaty
The Economic Community of West African States (ECOWAS) Treaty is a mutual agreement signed by the countries that made up the Economic Community of West African States. The initial treaty was signed by the Heads of States and Governments of 16 member states in 1975. The countries that are included in the treaty are Benin, Burkina Faso, Cape Verde, Cote D’Ivoire, Gambia, Ghana, Guinea, Guinea Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone, and Togo. The main aim of this economic community is to promote economic cooperation and development in the aim of raising standards of living of people. This treaty also aims to ensure food security and protect the export commodities in the international market. Under this treaty, palm oil enjoys zero tariff when exporting to a member state within ECOWAS.
East African Community (EAC) Treaty
On the other hand, the East African Community (EAC) is the economic community comprised of 6 countries from the eastern region of Africa, namely, Burundi, Kenya, Rwanda, South Sudan, Tanzania, and Uganda. This treaty was signed in 1999 and later came into force after Kenya, Tanzania and Uganda ratified the treaty. By the end of April 2016, all partner countries became full members. The EAC is home to 177 million citizens and a GDP of USD 193 billion.
The Customs Union under EAC has been established and in force since 2005 and it is regarded as an important milestone of this community. Through this customs union, zero tariff is agreed among the nations for all goods and services, and a Common External Tariff (CET) on imports from non-member states.
Besides the above mentioned regional economic communities, there are also Southern African Development Community (SADC), Common Market for Eastern and Southern Africa (COMESA) and, Economies Community of Central African States (ECCAS). These three communities are trying to form a Tripartite Free Trade Area (TFTA) which was expected to become fully operational this year, but assumption is that the formation of TFTA will be delayed. TFTA was first launched in 2015.
The African Continental Free Trade Area (AfCFTA)
The African Continental Free Trade Area (AfCFTA), an initiative of the African Union (AU) is a trade agreement encompassing the entire African continent. As of mid of last year, 54 out of 55 African countries had signed the agreement and, 28 countries have ratified the AfCFTA. Once the remaining countries have ratified, AfCFTA will cover more than 1.2 billion people and about US$3.4 trillion in combined GDP. Negotiations on the tariff schedule is still ongoing. Due to COVID-19, the targeted implementation date that was supposed to be in July 2020 has now been postponed.
AfCFTA is putting together action plans that focus on trade related issues that includes policy, facilitation, infrastructure, finance and market integration. According to United Nations’ Economic Commission for Africa (UNECA), AfCFTA has the potential to increase intra-African trade by 52% through elimination of import duties, and to increase the trade even higher if non-tariff barriers were to also reduce.
AfCTA is expected to create a single continental market for goods and services, with free movement of people and support investments. This is to then pave the way for Customs Union establishment. It is also expected to expand intra-African trade through better harmonization and management of trade liberalization and across Africa. Moreover, it is also expected to increase competitiveness in the business aspect. Once AfCFTA is implemented there also be more opportunity for foreign investments in this region.
Malaysia’s Trade Deal with ECOWAS
So far, there is no known preferential treatment for palm oil if traded outside a treaty / member country. If traded within the member countries, then palm oil enjoys zero tariff under ECOWAS as well as under EAC. While these treaties are aimed to protect and increase revenue through their local products and services, all their treaties and trade agreements are very much focused to protect products and services that are ‘made in Africa’. With the way the treaties are set up, it is challenging for countries outside the treaty, such as Malaysia to take advantage over the agreements that are in place.
Malaysia can look into making a trade agreement with an already established regional treaty to take advantage of covering a group of countries. West Africa is the largest palm oil market for Malaysian palm oil industry within Sub-Saharan Africa. Last year Malaysia exported a total of 979,610 MT of palm oil to the western region, which is almost half of entire Malaysian palm oil export to Sub-Saharan Africa.
Malaysian Palm Oil Export to Sub-Saharan Africa by Sub-Region
|Continent||Sum of 2019 Volume (Tonnes)||Sum of 2018 Volume (Tonnes)|
West African countries are also palm oil producers, and the palm oil is used for local consumption and exports within other African nations. Last year, west African region produced a total of 2.8 million metric tonnes of palm oil, of which 1.2 million metric tonnes were from Nigeria, the largest producer in the continent. To fill the ever-growing demand of palm oil due to increasing population, other major exporting countries like Indonesia and Malaysia exports palm oil to this region. Currently Indonesia holds about 43% of market share, while Malaysia holds 36% of market share. The rest of 21% of palm oil market share is held by the west African region.
By Malaysia entering into a trade agreement with ECOWAS countries, it can achieve a preferential tariff which can be beneficial in securing palm oil market share that would otherwise benefit other palm oil exporting countries due to price point advantage.
While Africa is seen as a land of opportunity for palm oil sector, Malaysia should proactively work together with the African nations to secure market share in the region. While Malaysia has limitations in terms of palm oil availability and cost over other major palm oil producers, namely Indonesia, getting into trade deal agreements would help our industry continue to be in the forefront.
Prepared by Karthigayen Selva Kumar
*Disclaimer: This document has been prepared based on information from sources believed to be reliable but we do not make any representations as to its accuracy. This document is for information only and opinion expressed may be subject to change without notice and we will not accept any responsibility and shall not be held responsible for any loss or damage arising from or in respect of any use or misuse or reliance on the contents. We reserve our right to delete or edit any information on this site at any time at our absolute discretion without giving any prior notice.