Could a UK-EU divorce work in Africa’s favour? Sanne Wass investigates.
From the outset, experts were quick to label Africa as the unexpected victim of Brexit.
Peter Worthington, a senior economist at Barclays Africa, for one, warned in a research note of Brexit’s damaging impact on Africa’s burgeoning development. A slump in demand for African exports could lead to slower growth and wider current account deficits, he forecast. And heightened uncertainty and increased risk aversion would likely increase financing costs and shrink capital flows into the continent.
Today, more than a year into Brexit negotiations, the first signs are beginning to show that the UK’s decision to leave the European bloc is indeed being felt far beyond its own shores: uncertainty around the future business environment has put a brake on investment appetite, which is being felt particularly in Africa, where the UK is a large investor, and the pound’s plunge has hit British demand for imported goods.
But looking at the long-term prospects for Africa in a post-Brexit world, the story, whilst complex, also hints at new opportunities.
Tearing up old trade deals
For African firms, perhaps the most urgent issue for those exporting to the UK is of the uncertainty around tariffs and quotas that they will face after Brexit.
Today, most African countries enjoy preferential access to the EU market for their exports under a myriad of trade agreements – all of which the UK will soon cease to be part of.
Certain schemes are, however, expected to continue after Brexit, such as the preferential access to the UK market for the least developed countries (LDCs), at least if the British government keeps its promise. In its whitepaper on future UK trade policy, released in October, the government says it is committed to establishing a UK-specific “unilateral trade preferences scheme to support economic and sustainable development in developing countries”, which would essentially see it roll over the everything but arms (EBA) scheme and generalised scheme of preferences (GSP) to English law (see fact box).
These two arrangements can easily be replicated because they are one-way measures that are compatible with WTO rules.
The future for Africa’s non-LDCs, countries like Kenya, Ghana, Côte d’Ivoire, Mauritius and South Africa, on the other hand, is more uncertain. Some of them currently benefit from so-called economic partnership agreements (EPAs) with the EU, treaties that will have to be renegotiated with the UK after Brexit. Although the UK government in its whitepaper says its first priority is to “deliver continuity” in its trading agreements with developing countries, which includes aiming “to maintain the preferential access of non-LDC developing countries” and seeking “to replicate existing EPAs”, the renegotiation of new trade accords with Africa could be a complicated task.
First of all, African EPAs will likely be low on the UK’s to-do list when the country begins the renegotiations of more than 100 trade agreements around the world after Brexit. Then comes the challenge that these renegotiations are likely to be a cumbersome and lengthy process.
To illustrate this complexity, take the Southern African Development Community EPA as an example. In an article about future UK-Southern Africa relations, Peg Murray-Evans, a research associate at the University of York, points to a range of factors that will make the replication of the current EPA an intricate task. Among the various challenges, she highlights the varying levels of these countries’ dependence on the UK market as a potential bump in the road: the UK’s share of Botswana’s global exports was 13.5% between 2013 and 2016, for example, whereas this figure was only 0.1% for Lesotho.
“This means that some members of the group may feel a more urgent need to secure access to the UK market than others,” she writes.
This uncertainty around the future of the EPAs could be devastating for some African economies. Until a replacement arrangement is in place, it would mean those African exporters that are not covered by another trade scheme would need to pay full duties, which could price some of them out of the UK market.
“It’s only a few countries in Africa that have EPAs, but these are terribly important,” says Edwin Laurent, director of the Ramphal Institute, a not-for-profit organisation under King’s College London which researches issues of concern to the Commonwealth, and the former head of trade at the Commonwealth Secretariat. “That is the area of trade where there is the most immediate danger. If nothing is done, there could be a serious damage to Africa-UK trade.”
Most vulnerable to these duties, he adds, are those products that face tough competition from other countries in the African, Caribbean and Pacific Group of States (ACP), such as sugar, beef and veal.
“Trade would not take place without preferences,” Laurent says about Africa-UK trade in these sectors. “In the case of sugar, for instance, Brazil is the dominant exporter, and most competitive – so Swaziland and Mauritius would not be able to compete.”
Bananas, too, face some heavy competition. Without preferential access to the UK market, Laurent adds, countries like Côte d’Ivoire, Cameroon and Ghana would be outcompeted by Ecuador, the world’s largest exporter of the fruit.
It means that African exporters will not only be interested to learn what tariffs they themselves will face after Brexit – they will also closely follow the tariffs their competitors in other ACP countries become subject to.
“If the UK chose to extend unilateral preferences to all middle-income countries, including agricultural market leaders like Brazil, then beef producers in Botswana and Namibia would lose their preferential margin and it is unlikely they would be able to compete in the UK market,” Murray-Evans cites as an example.
Better deals for Africa
Whether or not Africans even want the EPAs replicated is another question entirely.
“The reality is that the EU has been negotiating the EPAs with Africa for probably a decade now, and the fact is they haven’t concluded,” says Edward George, head of group research at the pan-African bank Ecobank, referring to a process that was started back in 2000 with the so-called Cotonou agreement. “The problem is that the partnership agreements offered by the EU were viewed by many African markets as invalid and not really in their interest.”
Experts have long suggested that the EU’s EPAs with Africa could be damaging for the African signatories in the long run, as the agreements force them to gradually open 80% of their markets to European imports. This could flood domestic markets with European goods, endangering existing indigenous industries. Meanwhile, many of the countries involved already have guaranteed duty and quota-free access to the EU under the EBA.
Some now hope that Brexit could lead to better trade deals for Africa.
“We expect to be able to strike an even better deal with the UK,” says Jane Ngige, CEO of the Kenya Flower Council, an association for floriculture growers and exporters in Kenya. “Given our historical engagement with the UK, we think it will be a friendlier discussion than those with the EU have been. We’d be looking for better policies than we have with the EU at the moment, but we are alert to the fact that we have to sit down and discuss with the UK.”
Ngige refers to the UK as a “significant trade partner”: it takes more than 25% of Kenya’s total volumes of flowers.
This trade is currently carried out under the EU-East African Community EPA. Ngige notes that while Brexit creates huge unpredictability and anxiety for Kenyan flower exporters, the prospect of tariffs doesn’t necessarily mean that business will be interrupted.
“When we have had issues with the EPA in the past, most companies were able to negotiate how they were going to deal with the tariffs, by sharing the pain, or by adding value to their products,” she says.
Africa’s agriculture sector could also find new opportunities, should their governments manage to negotiate more favourable trade treaties with the UK. So says Lodewyk Meyer, a Johannesburg-based banking and finance partner at Hogan Lovells.
“It’s very difficult for African exporters to compete with Europe because of barriers and because of the EU support that the farming community gets,” he says. “So the lessening of those barriers could prove to be very positive for the African agricultural sector.”
The UK could, for instance, decide to remove some of the non-tariff barriers that African exporters currently face, such as the strict EU food production rules, and instead adopt its own regulatory food standards and environmental safety protocols.
The EU’s strict controls in relation to the fungal infection ‘citrus black spot’, for example, has been seen by South African citrus exporters as a controversial protectionist measure.
“The South African citrus exporters have often accused the EU of using these strict conditions as a form of protection, especially as EU countries import from Spain, for instance, which is getting more favourable terms. There is now potential for a level playing field,” Meyer says.
The UK could also decide to lower certain tariffs, says Paul Goodison, an independent consultant with over 30 years of experience in monitoring and analysing EU policy developments in the agro-food sector. This would be relevant in areas where the EU maintains high tariffs, but where the UK has no domestic production, such as bananas.
While there is hope that changes will boost Africa’s exports to the UK, there’s also the understanding that favourable trade treaties could improve the amount of trade finance available to support this activity, explains Meyer.
“Having strong treaties may be an interesting derisking tool in the context of African trade finance. It could be more favourable for a trade finance transaction to be funded out of London if there is a strong treaty network,” he says. “If trade between the UK importer and the African exporter is governed by a treaty then there is more legal certainty. You can look to your UK importer as a source of credit and the source of repayment of, for instance, facilities that you make available to an African exporter.”
Forced to find new markets
Exactly how the divorce will be handled by the UK is still highly speculative at this point. Yet there are early signs that the UK government is keen to strengthen its trade relations with Africa.
At Hogan Lovells, Meyer senses a growing effort from the UK’s export credit agency, UK Export Finance (UKEF), to boost UK trade projects outside of the EU, including Africa, as a result of the Brexit vote.
“UKEF towards the end of last year announced support for the new airport financing in Uganda, which shows commitment,” he says, referring to UKEF’s €270mn direct lending facility for the construction of a new airport in the Kabale region. The deal, signed in December 2017, is the UKEF’s largest-ever loan to an African government.
“We’ve seen them on other transactions, in West Africa for instance, where we’ve not necessarily seen them in the past. So certainly we have seen an uptick in the talk around how UKEF can assist UK exporters into Africa,” he continues. “Initially I think we all had a knee-jerk reaction and thought that the impact of Brexit is that the UK is going to be much more inward looking. But it seems that it’s actually quite the opposite.”
His comments are echoed by George at Ecobank, who expects that more UK firms will start to look to African markets for exporting opportunities.
“The one undeniable conclusion of the Brexit vote, whether you like it or not, is that British companies need to do more business with countries that are not in the EU. It’s just a simple, undeniable fact. And so for Africa, that’s very good,” he says.
George acknowledges that Brexit’s short-term impact on British demand for overseas goods has been tough for many African exporters. “If you have countries that have frequently been exporting to the UK, and suddenly the pound is 12 or 15% less valuable, you might find that there are less exports that you can make to the UK. That might hurt. If you were very competitive beforehand, you’re not as competitive now,” he says.
But in the medium to long term, he adds, Brexit is a “huge opportunity for Africa”.
“Now UK firms have got a gun to their head: go out and get some African deals. And so, what I hope is, with our presence here in the UK, and other institutions like us, we will reach out to the British businesses saying: ‘Let us help you find those opportunities, those markets that you are comfortable with,” he ends.
Triangular supply chains
Whatever eventual deal comes out of the discussions between the EU27 and the UK will be of vital importance for supply chains with roots in Africa, in particular in the agro-food sector. Brexit could leave African exporters will additional logistical challenges and costs should the EU and UK not agree on a free trade agreement.
Much of the fruit, horticulture and floriculture imported to the UK from Africa is routed via third-party countries in the EU, such as the Netherlands and Belgium. As such, the future of UK customs and security checks on consignments imported through channel ports will not only become a concern for fresh produce middle-men in mainland Europe, but African suppliers too.
Paul Goodison, an independent consultant with over 30 years of experience in monitoring and analysing EU policy developments in the agro-food sector, explains the impact on African flower exports:
“All the major European flower auctions are in the Netherlands. So a lot of ACP exports go first to the Netherlands, and then on to the UK. If there is a hard Brexit in the agro-food sector, which is highly likely, those supply chains will be profoundly disrupted. It’s not just a question of tariffs, it’s a question of port congestion and the fact that the delivery of these products is time sensitive.”
This makes a country like Kenya highly vulnerable to trade disruption – regardless of whether or not the country manages to reconsolidate its duty-free access to UK markets. Goodison’s research shows that in 2015 the Netherlands accounted for 77% of UK cut flower imports. Some 71% of Kenya’s cut flower exports to the EU were destined for Dutch ports of entry, compared to a mere 17% exported directly to the UK. This suggests substantial onward trade from the Netherlands to the UK. The trend is similar for other products, such as mangoes and onions.
Sometimes this rerouting is linked to adding value, such as in the case of cocoa. Goodison notes that 97% of cocoa beans imported to the UK were sourced from Ghana and Côte d’Ivoire in 2015. Yet, the majority of UK cocoa paste, cocoa butter and cocoa powder came from EU states – countries with no domestic production of the raw material, which import, process and then trade the goods across the entire region.
On the flipside, however, is the chance for larger exporters such as Ghana and Côte d’Ivoire to move up the value chain by expanding their production and export of cocoa butter and cocoa paste to the UK market.
Kenya too could be a winner, Goodison explains: “If EU export supply chains to the UK are disrupted, and the supply chains through EU27 are disrupted, then countries like Kenya may be able to identify areas where they can develop direct exports to the UK of higher value products. Particularly if the migration dimension of Brexit leads to labour shortages in the horticulture sector, then you may find that Kenya can export more pre-packaged, bar-coded to retailer requirements of horticulture products, because the labour costs in Kenya are much lower than they will be in the UK,” he says.
Fact box: Trade schemes under which Sub-Saharan African countries trade with the EU
- The everything but arms (EBA) scheme is a unilateral EU measure that offers duty-free, quota-free access on all goods other than arms and ammunition for the world’s 49 least developed countries. 32 of them are in Africa.
- The generalised scheme of preferences (GSP) covers lower-middle income countries. It offers a mix of reductions and full removal of tariffs on about two-thirds of tariff lines. According to the European Commission, two African countries (Nigeria and Congo-Brazzaville) currently benefit under the scheme.
- The EU has been negotiating bilateral economic partnership agreements (EPAs) with groups of developing countries in Africa, the Caribbean and the Pacific (ACP), which allow participants to gain duty-free, quota-free access to the EU market in return for gradual and partial opening of their own markets. These include the EU’s agreement with the Eastern African Community (Burundi, Kenya, Rwanda, Tanzania, and Uganda) and with countries in the Southern African Development Community (Botswana, Lesotho, Mozambique, Namibia, South Africa and Swaziland). 12 Sub-Saharan countries are currently beneficiaries of this scheme, with 15 signatories awaiting regional adoption, according to the European Commission.