Business in Ghana

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Adopting A Common External Tariff, Ecowas States Move Closer To Customs Union

Posted by Business in Ghana on May 4, 2013

By Joe Lamport

Once a month or so, an employee of Mamma Mia’s pizzeria in Accra, Ghana, drives three hours to Lomé in neighboring Togo to stock up on supplies for the popular restaurant. The reason is simple, and one that almost every business owner (and most consumers) understands: lower prices.

“The prices are usually much lower in Lomé than Accra,” the employee said, “so we go there to stock up on cheese and other ingredients.”

Stories of wide price variations across the region are common, according to Lori Brock, an international trade expert who has studied the region’s economy.

“I was amazed that you could buy batteries in, say, Nigeria or Senegal for about 50 cents and the same batteries in Accra would cost two or three dollars,” she said. Likewise bicycle tires in Ghana cost about 4 GHS ($2), while in Senegal they cost about 7,000 CFA ($14) and in Nigeria cost about 5,000 Naira ($31).

However, the days of finding widely different prices on imported goods in West Africa may have been dealt a serious blow: in March, the regional body ECOWAS announced that finance ministers from its 15 member states had agreed to adopt a Common External Tariff (CET), which would mean each country will apply identical tariffs on goods, according to five classifications or tariff bands. Read the press release.

This approach to tariffs coincides with recommendations previously made to ECOWAS by an unpublished USAID West Africa Trade Hub study, which suggested that the five-band tariff system used by the Francophone West African trading and monetary union UEMOA could be successfully replicated by ECOWAS.

Wide price differences might still very well occur – there are many reasons a product is more expensive in one place compared to another – but the CET is important for other reasons, and is already being hailed by economists as a historic step.

A daily activity across West Africa, customs officers at the Port of Dakar assess the value of imported goods. When implemented, the CET will harmonize tariffs across West Africa.

“It’s another rung on the ladder of making the broader West Africa free trade area into a customs union,” said David Tanenbaum, an international trade expert who has worked with ECOWAS on the CET. “Ultimately, it should improve the economic picture for both importers and consumers, both of whom should pay lower prices – but there’s still a lot to do.”

“Every step toward a customs union is important,” said Dr. Sola Afolabi, the USAID Trade Hub’s Business Environment Director. “Implementation will be key, and the USAID Trade Hub and the USAID Trade Hub-supported Borderless Alliance will continue working closely with ECOWAS and member states to push for full implementation across the region.”

The ECOWAS CET assigns products to one of five tariff bands. The first, the lowest, is designated for “essential social goods,” and exempts the product from any tariffs at all. The tariffs then occur at 5% on 2,146 products, at 10% on 1,373 products, and at 20% on 2,165 products. See graphic.

The fifth, the highest, applies a 35% tariff rate and is designated for “sensitive products” – which is another way of saying products made by local industries that countries want to protect, said Lori Brock, who prepared a study for ECOWAS on the CET and developed software that allowed member states to test various tariff scenarios.

“Putting goods in the fifth band really is a form of protectionism,” said Brock, who prepared the USAID Trade Hub study for ECOWAS on the CET and developed software that allowed member states to test various tariff scenarios. “Using tariffs to protect industries – that’s the easiest way to do it.

“The problem is that it doesn’t provide for those industries to modernize and grow. It’s a balance between bringing those industries up to modern standards, and secondarily offering consumers a variety of choices on those products.”

A CET also discourages smuggling. Consider the bike tires mentioned above. A trader might very well be tempted to surreptitiously take bike tires from Ghana to Nigeria given that she could sell them there for so much more. The CET eliminates the difference.

In this way, just as countries do independently now, the region can impose tariffs in a strategic fashion. Under the new CET, for example, the tariff on rice is 5%, rice  being in the second band, “goods of primary necessity.” However, milled rice is in the third band (“intermediate goods”) with a 10% tariff, which effectively helps protect West African rice producers from having to compete with imports.

Palm oil, meanwhile, is, like many other vegetable oils, a fifth-band “sensitive product” with a 35% tariff – this reflects governments’ desires to protect their domestic palm oil industries from international competition.

Member states were expected to adopt the CET more than five years ago, but it was delayed over negotiations concerning what products to place in what band, Brock explained.

Still, the adoption of the CET may not be as momentous an occasion as it seems, according to Daniel W. Bromley, Professor of Applied Economics at the University of Wisconsin in the U.S.

“We must be grateful for tiny steps taken to create vibrant economies in the region,” Professor Bromley writes in a column for Tradewinds in response to the CET. “But small steps often fail to get us where we need to go before something really bad happens to us. Baby steps are insufficient.”

Bromley said that the regional CET will only be truly effective if it proceeds in tandem with national-level efforts to address specific economic problems in individual countries – you can read Professor Bromley’s full analysis of the CET here.

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