When Nigeria tarried in signing the African Continental Free Trade Area (AfCFTA) Agreement, many misunderstood the delay. A few negative comments were made about the government’s capacity, or the lack of it, to protect Nigerians from any adverse consequences of signing the bill. Many, largely out of misconception and a bit of ignorance, criticized the government for not immediately signing the agreement. Eventually she signed.
As time went by, and the issues embedded in the agreement began to turn up on the surface, many are beginning to see the wisdom in Nigeria’s circumspection with signing the agreement. Much as it is almost impossible to contemplate a free trading Africa without Nigeria, the need to do a good job in the negotiations subsequent to signing the agreement cannot be overemphasized. There is more than meets the eye beneath the surface of the open economy macroeconomics of free trade in Africa. As circumstances vary among participants each member’s optimal reaction should be different.
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Export promotion may not be new in Nigeria but committed SME export incentive may be new, and this is the time for radical ones
Those who expected Nigeria to be among the first signatories to the agreement may have been influenced by some of those trade theories that give credit to size as a factor in international trade, especially the Trade Gravity argument. Proponents of the Trade Gravity Model believe that size is relevant in bilateral trade flows and that distance, which in international trade terms manifests in different forms, including a range of variables, such as language, cultural and political differences between trading nations, could significantly promote or inhibit trade flows. The proposition followed the 1962 thesis of Jan Tinbergen, who suggested that trade between two nations can be explained by the force of gravity acting on them. They explain trade within the Newtonian model of gravitational pull, whereby relative economic size pulls countries to trade with each other. Therefore, just as planets are attracted to each other in proportion to their sizes and proximity, countries also pull towards each other in that sense. In this regard, size is measured by the Gross Domestic Product of each country. Accordingly, Nigeria being the undisputed champion of Africa, in GDP terms, should control a significant share of trade in the continent. Besides, it is plausible thinking that trading freely in Africa, and with contiguity advantages, relative to trade with her present leading trading partners, Nigeria should benefit more from her foreign trade than it does currently.
The above arguments may well hold good water. We may as well include the fact that there is a possibility of Nigeria, based on her considerable financial deepening indices, could become the financial hub for the AfCFTA. However, trade is a function of many factors of which gravitational pull may just be one. Trading freely increases the sharpness of competition. Beneficial trade rests on the similarity of circumstances. That is why many economic blocks insist of some level of macroeconomic convergence before they become effective. Cost variations and differences in key economic indices makes it difficult for the pains and gains of free trade to be equitably distributed.
Granted that it is difficult to find any economic grouping in which every participant is on the same economic footing, some measure of macroeconomic convergence is gainful for economic integration. The European union did not achieve macroeconomic convergence before takeoff, yet it is one of the most successful economic unions. However, for countries with serious economic divergence, amplified especially by factors like huge infrastructure deficit and political instability of the magnitude being ramped up in Nigeria, costs become so high that competition becomes unequal. Such will be the fate of many countries in Africa under the AfCFTA, especially those that have little or nothing to trade.
Competing on the basis of costs is ordinarily very difficult. It begins by economic agents doing everything legal, and sometimes a combination of the legal and the not-so-legal, to be cost efficient. Cost containment becomes a virtue. Unfortunately, with inefficiencies built into their operations due to factors mostly outside their control, companies suddenly find that cost containment, especially by cost-cutting means, has become a permanent feature of their operations, increasing in intensity overtime. This would further damage the competitive ability of the companies as they cut from flesh to the bone and go down on vital future investments.
Nigeria, and indeed all participants in the free trade regime, must make more serious effort to improve their internal operating environments. Special programmes of support for SME operators, especially in the export space, should be given serious attention. Export promotion may not be new in Nigeria but committed SME export incentive may be new, and this is the time for radical ones.
