CET Takes Effect: Is Nigeria Ready?

Proshare

Wednesday, January 28, 2015 2.04 PM / FDC

 

The Economic Community of West African States (ECOWAS) at long last implements its common external tariff (CET), after 9 years of consultations and negotiations.

 

The CET was designed to facilitate economic integration and cooperation among the 15 member states, and an antecedent to the establishment of a free trade zone and economic union in West Africa. It is also a precursor to negotiating the European Partnership Agreement (EPA) with the European Union (EU), which is expected to be signed shortly by West African Countries and the EU. The CET has 4 categories of custom duty rates namely:

1. 0%: Essential social goods

2. 5%: Goods of primary necessity, raw materials and specific inputs

3. 10%: Intermediate goods

4. 20%: Final consumption goods

 

Merits & Demerits

A common tariff is expected to harmonize rates among member states. In addition, the objective is to ensure transparency and reduce or eliminate the bureaucracies associated with customs procedures that impede the free flow of trade. A customs union is quite popular in many economic regions. The Mercosur countries (Brazil, Argentina, Venezuela, Paraguay and Uruguay), Eurasian Economic Union (EEU), the European union, Central African Economic and Monetary Community, and Francophone West African Countries, etc., have similar uniform tariffs implemented to pro-mote trade among member nations.

 

The CET supports the concept of trade liberalization which entails the removal or reduction of official barriers to trade. Employing a CET and promoting trade liberalization improves the competitive position of exporters and encourages domestic producers to pur-sue productivity gains - through improved technology and best practices. A customs union also drives economic integration. Empirical studies have shown that economic integration usually boosts economic growth and productivity, intra-regional exports, foreign direct investment and reduces macro-economic volatility. Smuggling is ordinarily expected to reduce as the disparity in tar-iffs is what often drives it.

 

However, there are usually two sides to a story. A major short-coming of a customs union such as the CET, is the risk of dump-ing of substandard goods due to low tariffs. African economies are frequently victims of this. Other demerits include the loss of a na-tional trade policy and a decline in government revenue as custom and excise duties decrease.

 

What does Nigeria Stand to Gain?

There are some views that Nigeria is not ready for the CET or the proposed signing of the EPA with the EU. This is because of existing constraints in the business and regulatory environment in the economy.

 

Nonetheless, on the aggregate, Nigeria stands to benefit especially as a result of its huge market size and position as the largest economy in West Africa and Africa as a whole. We will elaborate on this below.

 

Impact on Nigeria’s Trade Flow

Nigeria currently operates a cumbersome trade policy system. The uniformity that accompanies a CET will be instrumental in simplifying the process and in reducing the incentive to smuggle goods across the borders. In addition, there is an anticipated decline in the import bill with the unification of all tariffs, which is expected to reduce the cost of consumption for individuals and input costs for the manufacturing and other import dependent industries.

 

Operating a customs union implies that Nigeria cannot charge more or less than the agree tariff for goods that pass through its border. This ultimately reduces government revenue earned from customs and excise duties. On the upside, Nigeria‘s reliance on tariff receipts is low, contributing 18.98% to aggregate fiscal rev-enue as at Q3‘14. To compensate for the anticipated shortfall in revenue, the government could better regulate the domestic tax system to ensure it meets the cannons of taxation, and increase the tax base to generate more proceeds for the government.

 

With respect to Nigeria‘s trade partners, trade with ECOWAS is negligible, especially in terms of imports into Nigeria. As at Q3‘14, import trade from ECOWAS accounted for 0.85% of Nigeria‘s total imports; Asia and Europe were the leading countries of origin ac-counting for 42.8% and 37.2% respectively of Nigeria‘s total im-ports. On the export side, ECOWAS accounted for 8.39% of total exports from Nigeria, with Europe and Asia accounting for 38.9% and 31.6% respectively on Nigeria‘s total export trade.

 

This data shows that the CET is unlikely to impact significantly on Nigeria‘s trade flow. However, the EPA will have significant implications as Europe is one of Nigeria‘s leading trade partners. It is important to note that Nigeria is surrounded by four francophone countries who have their currency, the CFA franc, pegged to the euro and are therefore subject to volatility of the currency. Any currency volatility with the euro will affect the CFA franc and could impact on the trade dynamics between these countries and Nigeria.

 

Impact on Manufacturing

The sector that will be most affected, whether positively or negatively, is the manufacturing sector. Although Nigeria has consistently pushed for the growth and development of the sector (real GDP growth in Q3‘14 was 16% with a contribution to GDP of 9.78%), these efforts are yet to transcend into significant gains due to the high cost of doing business in Nigeria.

 

The most recent report ranking 189 economies in terms of their business operating environment, positioned Nigeria at 170th, compared to 175th in 2014. Other constraints experienced within the sector and economy at large include high infrastructure gap, security challenges, high energy cost, high borrowing costs and regulatory charges, to name but a few.

 

Conclusion

The CET is a welcome development and Nigeria stands to benefit significantly from the resultant increase in trade and gains of economies of scale. However, this should be complemented with other reforms such as anti-dumping policies that will help protect the domestic industries and strengthen the competitiveness of Nigerian producers. Nigeria could be the biggest beneficiary of the union just like Russia and Brazil who leveraged on size, capacity and resources to be the leading and dominant economies in their regions.

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