Sunday, 30 July 2017

Tinkering with tariffs is no salvation

Some will be wondering why the frequency of posts on this blog have dropped off. Being it silly season and virtually bugger all to report on, one feel less obliged than others to fill space. I am instead hitting the books. There is no point trying to cut through the Brexit noise. There is now a wealth of knowledge on Brexit in the public domain for our politicians to ignore - and restating points is becoming tiresome and robotic.

Instead I think it more valuable, for moment, to look at some of the challenges ahead for trade policy post-Brexit. As readers of this blog will be aware, I am hugely sceptical of what new FTAs can achieve and there are ways, through existing channels, that we can enhance existing value chains. That brings us to this report from the International Trade Centre.
Kenyan avocado farmers traditionally sell their fruits directly to local brokers. These brokers then sell them on to domestic exporting companies. These firms, many of which are small or medium-sized, in turn sell the avocados to international trading companies operating out of the port city of Mombasa. Only then are the avocados shipped abroad, destined for supermarket shelves.

Farmers sell to brokers on a one-off basis, often at low prices. The general absence of enduring, multi-year relationships with purchasers means that farmers are left with little understanding about market requirements wherever their avocados might end up. Farmers therefore have little incentive to invest in greater quality, nor do they get financial support to do so.

This business model has downsides for SME exporters too. Because the fruit that they purchase from brokers is often of middling quality, they can only sell into lower-value markets or market segments in Asia, Europe and the Middle East. And since these firms do not have a direct link to farmers, they cannot easily invest in improved production methods.

To tap into the most lucrative market niches – such as major European supermarket chains – avocados need to be formally certified for quality. The most prevalent certification for the European market is a private standard called GLOBALG.A.P., which sets out requirements for farming processes and food safety. Complying – and proving compliance – with the requirements of such standards requires farmers and companies to spend time and money. Obtaining GLOBALG.A.P certification, however, opens doors for Kenyan SMEs to build long-lasting relationships with trading firms that sell to higher-end retailers in Europe and offer consistently higher prices.
This adds further weight to the overall consensus that the EU diverts a large amount of trade. The barriers to trade are structural. Brexiteers often cite "punitive" tariffs on third world exporters, but tariffs are really not the issue. Remainers, however, have got things wrong too. They would cite the EU's Everything But Arms Agreement, which is an argument I also like to deploy just to rattle the cages of ultra-Brexiteers, but it is far from the full picture. For starters, Kenya, for example, is not a Least Developed Country.

One of the talking points of the week has been tariffs on coffee - but one should always be cautious when looking at any headline tariffs in that there are a web of exceptions and special rules where you'd have to do a far more in depth analysis to get the full picture.

The International Coffee Organisation says that "Tariffs in importing countries have been steadily reduced through multilateral, regional and bilateral trade arrangements, and many developing countries now benefit from duty‐free access to major markets. This access is not uniformly granted, though, and some countries benefit more than others, creating an unequal trading system. Furthermore, tariff escalation on roasted coffee is a real concern for exporters, as it discourages value addition and protects domestic industries in consumer countries. Higher taxes on processed products, such as roasted, decaffeinated or soluble coffee increase dependence on raw commodity exports by developing countries and impede diversification".

So while tariffs are worthy of examination, it would appear there is more scope for restructuring supply chains and using our aid budget to invest in quality systems in partner countries. This has to happen in tandem with trade facilitation measures on customs cooperation. This is where Codex Alimentarius does some excellent work. These such initiatives are what the UK needs to be financing. Codex is limited by budgetary constraints.

This is something trade wonks tend to ignore in that their fullest exposure to Codex is its relationship to WTO SPS measures - being largely ignorant of the scale and scope of Codex. Since trade wonks tend to obsess about US trade, the significance of Codex worldwide is misunderstood and underestimated.

But then what is also needed is some considerable business expertise working to reform the structural problems in African markets. Returning to avocados, the ITC found that "In 2014, when the [ITC] project started, the Kenyan avocado exporters associated with the project reported exports totalling 6,143 tons. This figure reached 9,334 tons the following year and 12,141 tons in 2016, representing a 98% increase over the two-year period. Thanks to the new business connections with international trading firms facilitated by the project, SMEs reported 90 new orders during that time, mainly from traders selling into the European market. Higher sales have meant greater job creation at the companies as they hired 49 permanent and 508 casual workers in 2016, a 128% increase from the year before.

This is where domestic efforts can also help. For reasons that escape me, avocados have become a hipster superfood for London's well-to-do. I'm quite sure this is not by accident. Marketing companies are perfectly capable of stimulating demands for all manner of obscure luxury products. A similar effort on Afghan pomegranates probably wouldn't go amiss. It's more profitable than poppy - hence why trade is also a foreign policy tool.

The obvious advantage to this is that British importers get a larger say in the processes and consequently any technical areas for improvement presents an opportunity for UK business to business services.

This is where the Department of International Trade needs to get busy identifying those opportunities and advertising them. It should be using DfID as its special projects arm, inviting business specialists into the process. We also need agricultural specialists looking at the problems. If we are exporting quality system it follows there will be a market for grading machines and agricultural robotics.

If the UK wants to enhance trade then it will have to do more than simply tinker with tariffs. It will have to invest and build up institutional expertise - and considerably beef up our diplomatic resources. In some respects we are already committed to this but there is a disconnect between the DIT and DfID, and though what we are engaged in is good, we need to do considerably more of it. We have a number of projects running concurrently but there is no apparent cohesive strategy.

As much as this is key to our commercial interests it should also be a cornerstone of our overall foreign policy, an objective of which is slowing the rate of migration. Commercial hubs in Africa have their own gravitational pull so it is in our best interests to stimulate jobs and growth wherever we can - and that means building up a global consensus to end a number of destructive EU trade policies.

There seems to be a complacency among Tory free trade proponents that all we need do is sign a few pieces of paper to get the trucks rolling. Evidence tends to suggest that the elimination of tariffs alone still doesn't stimulate trade. It's going to take a much more active foreign policy and a lot of investment. This is why we should be cautious of populists like Rees-Mogg who talk up the merits of raiding the aid budget for domestic spending. It takes money to make money and we cannot take anything for granted.

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