The performance of Tanzania in international trade

The performance of Tanzania in international trade There are six main theories that govern international trade namely; classical trade theory, factor proportion theory, product life cycle theory, foreign direct investment theories, international production theory and internationalization theory. 1.1 Classical trade theory Countries gain if each devotes resources to the production of goods and services Ricardo (1817) in which it has an advantage Smith (1776). 1.2 Factor proportion theory Countries will tend to specialize in the production of goods and services that Hecksher and Ohlin (1933) utilize their most abundant resources 1.3 Product life cycle theory The cycle follows that: a countrys export strength builds; foreign production Vernon (1971) starts; foreign production becomes competitive in export markets; and Wells (1968, 1969) import competition emerges in the countrys home market 1.4 Foreign direct investment theories Market imperfections theory firms decision to invest overseas is explained as a strategy to capitalize on Hymer (1970) certain capabilities not shared by competitors in foreign countries 1.5 International production theory The propensity of a firm to initiate foreign production will depend on the specific Dunning (1980) attractions of its home country compared with resource implications and Fayerweather (1982) advantages of locating in another country 1.6 Internalization theory Internalization concerns extending the direct operations of the firm and bringing Buckley (1982, 1988) under common ownership and control the activities conducted by intermediate Buckley and Casson markets that link the firm to customers. 2.0 THE IMPORTANCE OF INTERNATIONAL TRADE The importance of international trade to a nations economic welfare and development has been heavily documented in the economics literature since Adam Smiths (1776) inquiry into nature and causes of the wealth of nations. This suggests that economies need to export goods and services in order to generate revenue to finance imported goods and services which cannot be produced indigenously (Coutts and Godley, 1992). The main indicators of a nations economic strength can be gauged from its gross domestic product (GDP), as this measure is an estimate of the value of goods and services produced by an economy in a given period (Tayeb, 1992). The notion that international trade can influence GDP has been explored by several economic theorists (Marin, 1992; Meier, 1984) and culminated in the export-led growth thesis. As export sales increase, other things being equal, the GDP of a nation will rise and provide a stimulus to improved economic well-being and societal prosperity. The way in which this relationship can be interpreted suggests that export performance has a stimulating effect throughout a countrys economy in the form of technological spillovers and other related favourable externalities (Marin, 1992). Export activities may exert these influences because exposure to international markets demands improved efficiency, and supports product and process innovation activities, while increases in specialization encourage profitable exploitation of economies of scale (Temple, 1994). Thus, the export-led growth thesis predicts export growth will cause economy-wide productivity gains in the form of enhanced levels of GDP. Another mechanism through which exports are connected with sustainable rates of economic growth is the balance of payments. The balance of payments constraint can be expressed as follows. In general, economic growth creates a variety of demands which cannot be satisfied solely by domestic output. The faster the rate of domestic demand, the more accelerated the growth of imports (Abdel- Malek, 1969). However, any excess of imports from one country to another, over and above exports requires the trade deficit to be financed by either government borrowing from overseas or drawing on the economys stock of assets. If this situation is sustained, it becomes vital for the home government to address the issue of such a trade imbalance (de Jonquieres, 1994; Hornby, 1994). Classical trade theory dictates that the extent to which a country exports and imports has a direct relationship to the trading pattern of the country with other nations. That is, countries are able to gain if they devote a certain amount of their resources to the generation of goods and services in which they have an economic advantage (Ricardo, 1817). Therefore, classical trade theory argues that a country generates goods and services in which it has an advantage, for consumption indigenously, and subsequently exports the surplus. It is for countries to import goods and services in which they have an economic disadvantage. Economic advantages/ disadvantages may arise from country differences in factors such as resource endowments, labour, capital, technology or entrepreneurship. Classical trade theory contends that the basis for international trade can be sourced to differences in production characteristics and resource endowments which are founded on domestic differences in natural and acquired economic advantages. However, over and above such a general insight into international trade, classical trade theory is unable to offer any explanation as to what causes differences in relative advantages. The factor proportion theory, in contrast to classical trade theory, is able to provide an explanation for the differences in advantage exhibited by trading countries. According to this theory, countries will tend to generate and export goods and services that harness large amounts of abundant production factors that they possess, and import goods that require large amounts of production factors which are scarce (Heckscher and Ohlin, 1933). Both of these theories stated above have been shown to be deficient in explaining more recent patterns of international trade. For example, the 1960s witnessed significant technological progress and the rise of the multinational enterprise, which resulted in a call for new theories of international trade to reflect changing commercial realities (Leontief, 1966). At that time, the product life cycle theory of international trade was found to be a useful framework for explaining and predicting international trade patterns as well as multinational enterprise expansion. This theory suggested that a trade cycle emerges where a product is produced by a parent firm, then by its foreign subsidiaries and finally anywhere in the world where costs are at their lowest possible (Vernon, 1966). Furthermore, it explains how a product may emerge as a countrys export and work through the life cycle to ultimately become an import. The essence of the international product life cycle is that technological innovation and market expansion are critical issues in explaining patterns of international trade. That is, technology is a key factor in creating and developing new products. Market size and structure are influential in determining the extent and type of international trade. While these theories are insightful, a number of modern international trade theories have emerged recently which take account of other important considerations such as government involvement and regulation. However, these theories make assumptions which detract from their potential significance and contribution to international business. For instance, they assume that: factors of production are immobile between countries; perfect information for international trade opportunities exists; and, traditional importing and exporting are the only mechanisms for transferring goods and services across national boundaries (Bradley, 1991). The market imperfections theory states that firms constantly seek market opportunities and their decision to invest overseas is explained as a strategy to capitalize on certain capabilities not shared by competitors in foreign countries (Hymer, 1970). The capabilities or advantages of firms are explained by market imperfections for products and factors of production. That is, the theory of perfect competition dictates that firms produce homogeneous products and enjoy the same level of access to factors of production. However, the reality of imperfect competition, which is reflected in industrial organization theory (Porter, 1985), determines that firms gain different types of competitive advantages and each to varying degrees. Nonetheless, market imperfections theory does not explain why foreign production is considered the most desirable means of harnessing the firms advantage. Dunning (1980) and Fayerweather (1982) have addressed this issue and developed what can be described as international production theory. International production theory suggests that the propensity of a firm to initiate foreign production depend on the specific attractions of its home country compared with resource implications and advantages of locating in another country. This theory makes it explicit that not only do resource differentials and the advantages of the firm play a part in determining overseas investment activities, but foreign government actions may significantly influence the piecemeal attractiveness and entry conditions for firms. This was extensively investigated by Buckley (1982, 1988) and Buckley and Casson (1976, 1985). Internalization theory centers on the notion that firms aspire to develop their own internal markets whenever transactions can be made at lower cost within the firm. Thus, internalization involves a form of vertical integration bringing new operations and activities, formerly carried out by intermediate markets, under the ownership and governance of the firm. 3.0 PERFORMANCE OF TANZANIA IN INTERNATIONAL TRADE AFTER JOINING REGIONAL TRADE PROTOCOLS. 3.1 Factors hindering performance of Tanzania in International trade Tanzania has not benefited as much as would be possible from the generous concessions offered by regional trade protocols. There are several factors that can be attributed to Tanzanias poor performance in international trade one of them being domestic supply constraints. Another factor is poor capacity to negotiate in international trade meetings due to lack of awareness. The issue of awareness is significant because successful participation in international trade matters requires knowledge of global developments in trade issues. Awareness helps to improve effectiveness of trade policy for Tanzania. Also, high level of awareness provides a benchmark based on which the effectiveness of agreements and negotiations can be measured. It has been revealed that many officials who represent Tanzania in international trade negotiations are not aware of some important regional trade protocol issues and thus fail to take advantage of preferences and opportunities that can increase the performance of Tanzania in international trade. Lack of awareness on regional trade protocols leads to poor performance of Tanzania in international trade. The table below shows the extent of awareness on regional trade protocols. Level of awareness among stakeholders on regional trade protocols Type of regional trade protocol Percentage of awareness SADC 18.3% AGOA 14.3% WTO 2.0% COMESA 9.9% EAC 2.0% EU-ACP 7.9% Source: Economic and Social Research Foundation (ESRF, 2008). The data above shows that the level of awareness on regional trade protocols among stakeholders is highest at 18.3% for SADC and lowest for WTO and EAC at 2.0%. These findings show that the level of awareness on regional trade protocols among stakeholders in Tanzania is very low and this hinders the performance of Tanzania in international trade and FDI. In most cases, the preparations for negotiations are poorly made, including poor consultation and coordination. Negotiators go in the negotiation table with a pre-determined position, a tendency that limits their flexibility to maximize gains from such negotiations. Another problem relates to insufficient analytical work before attending the negotiations. Another reason for poor performance of Tanzania in international trade negotiations is that the coordination of international trade is not centralized. For instance, negotiations and agreements for EAC are handled by the Ministry of Foreign Affairs and International Cooperation while those of SADC are handled by under the Ministry of Industry and Trade that is also responsible for all multilateral trade issues. Another reason for poor performance of Tanzania in international trade is that the private sector in Tanzania has limited participation in international trade negotiations. Also, the private sector in Tanzania is not involved in formulation of international trade policies , hence limiting their experience and level of awareness on international trade issues compared to other countries which involve their private sectors. For instance, Tanzania Chamber of Commerce and Agriculture (TCCIA), Chamber of Industry and Trade (CTI) and Tanzania Private Sector Foundation (TPSF) are not involved in international trade negotiations, thus limiting the performance of Tanzania in international trade. Due to poor preparation with regard to international trade, Tanzania fails to benefit from international trade agreements. The poor participation of the private sector in Tanzania in regional trade protocols is mainly caused by lack of financial and human resources. To deal with the issue of lack of financial resources among the private sector, the government sometimes includes delegates from the private sector in trade missions especially when the delegations involve high-level government officials. Recently, the government has started to involve the private sector in regional trade negotiations. For instance, the private sector was involved in the EAC negotiations from the very beginning. Also, although CTI was partially involved in the EAC policy formulation, their participation was limited due to lack of awareness and willingness on part of the government. 3.2 Performance of Tanzania in FDI after joining regional trade protocols Among the objectives of Tanzania in joining regional trade protocols is facilitating Foreign Direct Investment (FDI). Along with expansion of market opportunities, regional trade protocols encourage FDI because investors are attracted to larger market and may thus anticipate enjoying larger economy of scale. Investors take advantage of wider market and expect their investments to expand. The East African Community for example has put in place a shared investment policy among member states with harmonized investment incentives for investors. The performance of Tanzania with regard to FDI has been much effective especially during the 1990S when the country underwent privatization after Structural Adjustment Programs. The table below shows the performance of FDI after regional trade protocols; FDI inflows to Tanzania from various regional trade protocols in US$ Millions 2004 2005 2006 2007 2008 2009 EAC 54.1 22.9 6.9 12.5 94.4 3.3 SADC 122.1 70.5 139.3 181 513 17.6 AGOA 325 151.4 31.6 52.1 560 19.3 EU-ACP 677 86.7 95.8 183 106 36.7 Source: Tanzania Investment Centre (TIC, 2008) The findings above show that Tanzania has attracted FDI mostly through EU-ACP countries followed by FDI from AGOA and SADC. Thus, it can be generalized that EE-ACP and AGOA have been the main source of FDI to Tanzania compared to other regional trade protocols that Tanzania has joined namely; EAC and SADC. This can be explained due to the fact that the African countries have low capital formation. 3.3 Performance of Tanzania under AGOA Regime The performance of Tanzania in AGOA is poor compared to the performance of other countries. For instance, during the first year of AGOA, Tanzania exported goods worth $ 899,000, mostly agricultural and forestry, handicrafts, horticulture and fish products. On the other hand, Kenya exported goods worth $57.1 million mostly textiles and apparel. The main reason for this poor performance is because Tanzania delayed to register for AGOA. On the issue of investments from USA which is also part of the AGOA trade protocol, Tanzania has failed to register meaningful investments from the United States due to several factors such as; corruption, poor infrastructures, high electricity cost and bureaucracy. Another reason is complicated laws regarding land ownership surrounding investment projects. The table below shows the performance of Tanzania under AGOA compared to other countries that participate in AGOA namely; Uganda, Kenya, Nigeria, South Africa and Lesotho. The data shows that, besides Uganda, Tanzania has had the worst performance in AGOA. This shows that regional trade protocols have had little impact on participation of Tanzania in international trade. Trade under AGOA for selected countries 000 US$ (2000-2008) Country Total exports to US AGOA export Tanzania 16594 716 Uganda 7282 22 Kenya 120,421 74963 Nigeria 3636192 3366165 South Africa 2646359 831805 Lesotho 208756 206349 Total 8927183 5723216 Source: BOT (2008). 3.4 Market Access and Technical Assistance Tanzanias participation in the WTO issues is through the Least Developed Countries (LDC) group. The countries forming the LDCs group are eligible to receive the special treatment under the WTO rules so as to enhance market access. However, Tanzanias participation in WTO has had little impact on the volume of their trade due to low export volume. On the other hand, Tanzania has benefited from technical assistance through various initiatives such as; Joint Integrated Technical Assistance Program (JITAP), which involves UNCTAD, WTO and ITC. The objectives of such assistance were to improve the performance and capacity stakeholders to understand regional trade protocols. Special and differential treatment has been useful for poor countries such as Tanzania. 3.5 Performance of Tanzania in international trade after joining regional trade protocols. The tables below show the performance of Tanzania in international trade after four regional trade protocols namely EU-ACP, SADC, EAC and AGOA. The findings are shown in terms of exports made by Tanzania to other countries and imports made by Tanzania as shown below; Tanzania exports to different countries in US$ Millions 2003 2004 2005 2006 2007 2008 EU-ACP 226 241 214 362 432 474 SADC 22.3 15.1 13.8 18.4 21 51.3 EAC 22.4 32.8 28.7 40.7 43.6 40.8 USA 21.4 12.8 18 15.2 15.1 13.5 Source: Bank of Tanzania (BOT, 2008). The findings above show that exports from Tanzania to other countries have been mainly to EU-ACP countries followed by exports to EAC countries, SADC countries and to a little extent to the United States of America. This shows that regional trade protocols have had little impact on international trade in Tanzania because exports to EU countries have been there even before Tanzania joined regional trade protocols. Tanzania imports from different countries in US$ Millions 2003 2004 2005 2006 2007 2008 EU-ACP 367.1 514 413 344 389 391 SADC 139 179 196 194 221 211 EAC 87.8 108 101 98.9 107 97.8 USA 52.6 81.3 99.2 58.9 65 91 Source: Bank of Tanzania (BOT, 2008). The findings shown in the table above show that imports from Tanzania to other countries have been mostly to EU-ACP countries; followed by those from SADC countries, EAC countries and the United States. These findings again show that regional trade protocols have had little impact on international trade because imports from EU countries were there even before Tanzania joined regional trade protocols. 4.0 THE STATUS OF TANZANIAS IMPLEMENTATION OF REGIONAL TRADE PROTOCOLS Below is a description of the status for Tanzania in the following key issues regarding regional trade protocols. 4.1 Conformity to the WTO rules: Tanzania needs good and timely information about WTO decisions (and their interpretation) and a capacity to influence the new agenda of the WTO at an early stage. The WTO is member-driven and reacts only to member initiatives. 4.2 Import liberalization issues: This is a requirement that the country should comply with the WTO agreement on removal of trade barriers by cutting down tariffs and other non-tariff barriers. Tanzania has already complied with most of the Uruguay Round (UR) requirement on its imports licensing and tariff regimes. The remaining challenge is to transform such reforms into institutions by drafting legislation to support them. 4.3 Agriculture trade: Tanzania is in compliance with the negotiations and agreements on agriculture (subsidies and market access). However, the country needs to closely monitor the forthcoming negotiations on agriculture as the requirements could be tightened. 4.4 Treatment of Non-Tariff Barriers: Since Non Tariff Barriers (NTB) are varied by country own economic measures to control trade, an important issue is whether the NTBs contradict WTO rules. Another one is the extent through which NTB are source of trade disputes between countries. 4.5 Subsidies: As with NTBs, United Republic of Tanzania needs to re-examine all Government measures to see if they are in conflict with the new provisions on subsidies. 4.6 Anti-dumping rules, countervailing actions and safeguards: For formal compliance with the WTO, United Republic of Tanzania must see that the national and regional (EAC and SADC) rules and procedures on anti-dumping, countervailing, and safeguards are reformed to fit the WTO rules, and this appears to be underway. 4.7 Customs valuation and other custom rules: United Republic of Tanzania is fast thriving to complete its customs valuation reforms that should make it conformable to the WTO rule on customs valuation. According to the interview with the officials in the MIT, it is hoped that this exercise will be complete by July 2004. This also includes measures to remove the Pre-shipment inspection procedure to enhance efficiency in custom administration. 4.8 Trade Related Investment Measures (TRIMS): Under GATT 1947, investment law had not been central to its rules, and countries have been able to ignore the rules. Tanzania needs at least to be aware of the rules and its vulnerabilities if it does not adapt to them, given the wide variety of types of investment regime that are used by different countries. 4.9 Standards: International standards are becoming more common, and for countries, which have not yet set their own, adopting these at an early stage may be a particularly efficient step. An alternative for United Republic of Tanzania in a region like the EAC or SADC is to shift to regional standards. However; while this may be cost saving, it still leaves the future costs of adapting such standards when an international standard is eventually set. Notifications of regional standards have been made for the EAC. These need to be made by Tanzania because EAC is not yet a recognized region in the WTO. 4.10 Services: As there were effectively no minimum requirements for services offers in the Uruguay Round, Tanzania formally complied. But there will be much more pressure in the next round to make substantive offers. The WTO has made provision for technical assistance to be availed to the LDCs regarding services liberalization, but for Tanzania has not yet been a clear indication of the type of assistance to be requested. Yet, in future requirements for more offers for service trade liberalization, Tanzania, among other countries, may not have a benchmark upon which to make offers. Even where the WTO may offer one, it may not necessarily be suitable for Tanzania as least developed country. 4.11 Trade Related Intellectual Property (TRIPS): Tanzania must comply with the TRIPS rules within the 2003-2010 period. Tanzania has legal systems that are likely to be adaptable to the standard forms and so the costs of adoption to the TRIPS will not be substantial. 4.12 Government Procurement: There is no obligation to join agreement on Government Procurement, and a few developing countries have. Whether Tanzania should join depends on whether it wants to export to government purchasers who have joined the agreement, and whether it wants to give preference to any local suppliers who would be in competition with potential foreign suppliers. If a substantial proportion of a countrys government expenditure is financed by aid, there may be other constraints on its purchasing. 4.13 Labour and the Environment: There is no need for immediate action on labour or environmental issues to meet international standards (except for the existing environmental protocols and obligations under ILO Conventions). But there will be opportunities for Tanzania to use environmental arguments in trade negotiations, especially when such arguments are useful for some products. 5.0 MEASURES TAKEN TO IMPROVE INTERNATIONAL TRADE Several measures have been taken to improve the performance of Tanzania in international trade with regard to regional trade protocols. Such measures include seeking assistance from donors to facilitate international trade. Donors support regional integration programs and activities under COMESA and SADC and this has benefited members States including Tanzania. Among such donors include; United States Agency for International Development (USAID), GTZ, UNCTAD, UNDP and UNIDO. Also, the European Union is funding a number of projects aimed at improving international trade. Within EAC, projects aimed at improving international trade include; cooperation with UNCTAD, of ASYCUDA (automated system for customs data) and Euro trace. The European Union also supports international trade by offering EAC latest computer hardware, setting up internet networks and offering expert advice in preparing the region for Common External Tariff. EU also provides EAC staff with training regarding WTO matters for member. Support has also been offered to assist in developing the finance and Investment Protocol of EAC. On the other hand, USAID has also assisted SADC in the ratification and implementation process for the SADC trade Protocol. UNCTAD has provided technical assistance for the Trade Negotiation Forum process devoted to the preparation of the SADC trade liberalization program leading to the formation of the desired free trade area. Assistance has also been given to SADC by the Commonwealth Secretariat in such areas as development of a regional industrial policy. 6.0 CONCLUSION This study has analysed characteristics and status of Tanzanias participation in regional trade protocols and its impact on international trade. It also explains the rationale for Tanzania to join regional trade protocols, level of participation and performance in international trade. The study also highlighted issues affecting the performance of Tanzania in international trade. The study found that although Tanzania participates in many regional trade protocols, they have had little impact on Tanzanias participation in international trade. For example, majority of regional trade protocols in which Tanzania is involved had little participation of key actors because of poor participation of the private sector. Another factor is lack of proper trade policy. Other factors that affect the impact of regional trade protocols on the performance of Tanzania in international trade include; poor administration of trade negotiations and agreements, lack of a centralized mechanism to monitor, follow-up nor appraise the performance of Tanzania in regional trade protocols, and multiple handling of international trade issues by different departments/ministries which make it difficult. Another factor that hinder effective participation of Tanzania in regional trade protocols and hence, poor performance in international trade is lack of capacity and awareness of negotiation skills among representatives of Tanzania is regional trade protocols. Due to poor negotiation skills, Tanzania has failed to take advantage of opportunities that arise from international trade. Despite the fact that Tanzania is interested in regional trade protocols, pursuances of such interests are not linked to the objective of widening market access. Often, negotiators adopt a pre-emptive approach to negotiation making the whole strategy less flexible. In addition, the interests of Tanzania are actively negotiated but not actively realized on the ground during negotiations. From the findings above, this study concludes that participation and performance of Tanzania is regional trade protocols has been poor due to various hindrances especially due to poor export capacity and lack of market access due to quality issues Hence, most of the regional trade protocols in which Tanzania has participated have had little or little impact on international trade. 7.0 RECOMMENDATIONS From the findings of the study, the following are recommendations made;  ·Ã¢â€š ¬Ã‚  Tanzanian government should centralize issues related to regional trade protocols so as to enhance the positive impact of the trade protocols on international trade.  ·Ã¢â€š ¬Ã‚  The government should promote public debate and discussion in the area of international trade protocols.  ·Ã¢â€š ¬Ã‚  The government should intervene by offering training on negotiation skills so as to improve the performance of Tanzania in international trade.  ·Ã¢â€š ¬Ã‚  The government in collaboration with stakeholders should take measures to increase production so as to increase the volume of exports and hence, more participation in international trade.  ·Ã¢â€š ¬Ã‚  Regional trade protocols have high impact on attracting FDI, thus, the government should follow up on regional trade protocols for investment opportunities.