By Imran Kanu
‘There's no such thing as a free lunch’. (Milton Friedman).
In a news story published on the 10th July 2017, on the official website of the government of United Kingdom (UK), GOV.UK, the UK’s High Commissioner to Sierra Leone, Guy Warrington, announced that the ‘UK [the United Kingdom of Great Britain and Northern Ireland] Commits to Free Trade with Sierra Leone after Brexit’. In the said story the High Commissioner is reported to have claimed that the ‘UK remains the biggest bilateral development partner of Sierra Leone’. He stated that the UK is fulfilling its “£240million pledge to helping Sierra Leone recover from Ebola, supporting new infrastructure and better public services as well as working with the Government of Sierra Leone to build capability, provide better education and healthcare”. Indeed, UK through the Department for International Development (DFID) is Sierra Leone’s largest official bilateral development state partner, providing needed budgetary support; and cementing the strong political, social and economic ties since the latter’s independence from Britain in 1961. However, in view of the UK’s free trade commitment, this article examines whether Sierra Leone is taking advantage of the already existing free market access to the UK via the European Union (EU) framework; and consequently, whether Sierra Leone is ready for free trade with the UK.
On the 23rd June 2016, Britain voted to withdraw from the EU, a process famously dubbed ‘Brexit’. The UK’s post-Brexit ‘Free Trade with Sierra Leone’ commitment (FT-with-SL) is premised on tariff-free access to UK market based on the EU’s ‘Everything But Arms’ (EBA) initiative; which the UK commits to retaining with 48 of the world’s poorest countries, including Sierra Leone, post-Brexit. The EU’s EBA arrangement “was born in 2001 to give all LDCs [least developed countries] full duty free and quota-free access to the EU for all their exports with the exception of arms and armaments”; and it is part of the EU Council Regulation (EC) No 980/2005 applying a scheme of generalized tariff preferences. Based on first impression, the EBA appears to be a generous and preferential treatment for LDCs, just like the FT-with-SL commitment.
Guy Warrington in the GOV.UK news story further noted that “for decades, the UK Government has stressed the importance of increasing developing countries’ trade as one of the most effective ways of reducing poverty. It’s working; the UK imported over £19.2 billion of goods from developing countries in 2015, including African staples such as coffee, cocoa, bananas and textiles. Helping African producers and exporters, supporting jobs, and reducing aid dependency.” (Emphasis mine). But what does the FT-with-SL commitment really mean for Sierra Leone? Given the imminence of Brexit, the UK Government is on a drive to rack up trade agreements to make up for exiting the most ‘successful’ and ‘prosperous’ global free trading block, the single European market. FT-with-SL, therefore, will not be an act of benevolence, but one of necessity. Given the need to change the narrative from aid (perhaps dead aid) to trade; negotiating a ‘fair deal’ will be an imperative for both parties. The onus will be on the Government of Sierra Leone to carefully consider the fine prints, and not hope on the moral conscience of UK to convict and constrain herself.
Ideally, trade negotiations and agreements must be based on actual ‘trade statistics’ to balance the ‘inequities’, i.e., trade imbalance. At this stage, it will be hard to gauge what a fair deal will look like. Brexit can be hard or soft. Conceptually, hard Brexit refers to a complete divorce with the EU; whilst soft Brexit means several things, from remaining in the EU Customs Union (EUCU), and remaining under the jurisdiction of the European Court of Justice (ECJ), to giving up immigration control etc., all impacting on a potential trade deal. The UK Government presently has no idea what Brexit means or will result to, save for Prime Minister Theresa May’s pronouncement that ‘Brexit means Brexit’. This uncertain state of affairs will have profound impact on trade agreements post-Brexit, including the FT-with-SL commitment.
To understand what FT-with-SL commitment really means for Sierra Leone, the following points must be underscored. Generally, it must be understood that international trade is the exchange of goods and services between countries. It is an avenue for countries to export surpluses and import in deficient areas, leading to the expansion of markets. Generally, this exchange or ‘international barter’ attracts tariffs or other measures of control (e.g. subsidies, quotas or prohibitions). The measures of control border on intervention by States to regulate the market, i.e., protectionism, as in the new ‘America First’ policy of the United States under President Trump. Free trade on the other hand follows the laissez-faire approach or ‘trade liberalization’ model, where the market regulates itself, with no or minimal restrictions on trade. However, trade without restrictions does not always result in ‘fair trade’, especially when one country has an absolute trade advantage over the other. In my view, the present free trade global paradigm means allowing developed countries to maintain their absolute or comparative global advantages allowing for both market inefficiencies and leaving developing countries compromised and dependent.
According to the Observatory of Economic Complexity, Sierra Leone was ranked as the 160th largest export economy in the world in 2015. Sierra Leone exported $582M worth of goods, mainly diamonds, iron, titanium and aluminium ores, and cocoa beans. She imported $1.9B of refined petroleum, cocoa and cashew nuts, rice, car and telephones as top imports (OEC - Sierra Leone Profile). In essence, Sierra Leone is a net importer globally with a huge trade imbalance. On the bilateral trade between UK and Sierra Leone, there exists a perpetual trade imbalance. In 2013 for example, just before the Ebola outbreak in Sierra Leone, the UK was Sierra Leone’s second top import country of origin, with imports totaling an estimated $103M. On the other hand, Sierra Leone’s export to the UK was estimated at a paltry $4M in the same year (UN Comtrade Analytics), thereby resulting to an almost $100M trade deficit. The figures are atrocious in the Ebola ravaged years, from 2014-2016. Sierra Leone trade flow to the UK, i.e., its trade value from 1995 to 2016 (22 years) is estimated by the United Nations to average $ 105M in exports; and $1.2B in imports, a trade imbalance of almost $1.1B (UN Comtrade Analytics). This model, unfortunately, isn’t working.
See illustration of Sierra Leone’s trade (import/export) with the UK from 2010 to 2016 in the graph below. © UN Comtrade Analytics (May 2017).
As the statistics illustrate, Sierra Leone, over two decades, represent a $1.1B trade market for the UK. This is where the imperative for a ‘fair deal’ emanates. The main aim of bilateral trade agreements is not only to expand market access between the two countries, but also to enhance the countries’ economic growth. What a free trade deal within the FT-with-SL context means, is a continuation of a trade imbalance and a market for UK businesses. Therefore, negotiating a new deal offers a glimmer of hope and timely opportunity for Sierra Leone. A trade agreement is needed with the UK, but it cannot be based on the EBA paradigm alone. Already the clustering of states in multilateral trade agreements, whether based on economic strength, geography or geopolitics, has proven to be inadequate, even though convenient. The EBA has been criticized for its failure to envisage long term trade challenges beyond market access for LCDs. Gains based on market access is based on country context; and for a country like Sierra Leone, such multilateral approach subordinates its economic plight and unique interests.
Sierra Leone has not positioned itself to take advantage of the present free market access. Thus, economic growth under a free trade agreement with UK will only be a mirage. The thrust of the argument is that maintaining the EBA’s duty free and quota free access may be good; however, more is needed to address the trade deficit. A direct swop from the EU’s EBA to the UK’s cloned EBA cannot work for Sierra Leone. Attention must be paid to eliminating the UK’s absolute advantage and minimizing the comparative advantage. Further, active trade specialization measures must be promoted in Sierra Leone through investments by UK businesses, supported by prohibition of dumping and unfair subsidies. Given the developmental needs of Sierra Leone, a new bilateral trade agreement must ensure support for quality control measures and capacity building. Incidentally, as a corollary to trade, the two countries have signed a bilateral investment treaty (BIT), which has been in force since 2001 (UNCTAD, IIA Navigator). It is a standard BIT which provides the necessary protection for UK businesses in Sierra Leone.
A failure to reach any agreement between UK and Sierra Leone will automatically lead to the application of the World Trade Organization (WTO) rules, with attendant tariffs and permissible controls. This may not seriously affect Sierra Leone (in trade terms) as importers will look for cheaper options elsewhere. However, both countries have had a long history of political, social and economic ties, and such ties will foster and outlive the next trade agreement to be negotiated. What is needed, however, is for the narrative to change. UK and Sierra Leone should be trading as partners - not the euphemistic ‘development partners’, i.e., former ‘colonialist and its colony’. Given the immediacy of the next general elections in Sierra Leone, it is fortuitous that the newly elected government will have the opportunity to negotiate the new trade agreement with the UK.
So far, FT-with-SL will be the reenactment of the ‘Marshall Plan’, wherein the development support to Sierra Leone will be recirculated to the UK by the huge trade deficit. Since most of the imported goods are not capital goods but consumables, UK’s development assistance will mainly stimulate spending in Sierra Leone, which will result in importation of goods and services from the UK, thereby promoting UK businesses. As in the Keynesian economic model, the FT-with-SL will lead to a trade paradigm wherein the benefits will be heavily scaled in favour of UK businesses and her economy. It will neither be generous nor benevolent. At least, this will be the case in the short to medium term, except where increase in imports would be driven by increased capital investment, technology transfer etc., to aid output and export. The FT-with-SL commitment may not produce the worst trade agreement Sierra Leone may have or will enter bilaterally or multilaterally; however, it offers a renewed opportunity for a good deal for once, albeit, the devil will be in the details.
About the Author:
Michael Imran Kanu is the Director of Economic Policy, Renaissance Movement Sierra Leone. He is a doctoral candidate (SJD) in International Business Law, Department of Legal Studies, Central European University in Budapest, Hungary; a legal practitioner in Sierra Leone, and a member of Sierra Leone Bar Association. Email: firstname.lastname@example.org