Trade policy for Nigeria? Focus on exports, not imports

Recently, the Nigerian Office for Trade Negotiations (NOTN) launched a “nation-wide” call for inputs into what it dubbed “A 21st century trade policy for Nigeria”, with the strapline: “A welfare and prosperity trade agenda that works for all”.In other words, the NOTN wants to preparea trade policy for Nigeriaand is inviting Nigerians to contribute to that process.

This should, of course, be welcomed. For far too long Nigeria has taken ad hoc trade decisions without a coherent trade policy, leading to criticism, perfectly justified, that its trade regime is opaque and unpredictable. This is due, in large part, to the lack of inter-ministerial coordination necessary to reach consensus on policy preferences. Bureaucratic politics can, of course, hinder policy-making. A few years ago, a director in the then federal ministry of commerce told me, during a visit to the ministry, that a trade policy document produced in 2001 wasabandoned because of “disagreements among the relevant ministries as to the appropriate policies”. Surely, trade policy is one of such policy issues that can’t be addressed without a Government-wide approach, given its cross-cutting impacts. Thus, NOTN should be commended for attempting to overcome these challenges with a bold initiative to prepare a trade policy for Nigeria.

But here is the substantive issue. If Nigeria wants to develop a modern trade policy that ensures the welfare and prosperity of the people, what should it look like? In other words, what kind of trade policy should Nigeria have? But before we address that normative question, it’s important, first of all, to establish the positive point that, looked at from the policymaker’s perspective, trade policy is an intellectual or ideational, issue. In other words, it’s about the ideas that policy makers and politicians have. As the economics Nobel prize winner Paul Krugman puts it, “If top government officials are strongly committed to a particular economic doctrine, the commitment inevitably sets the tone for policy-making”. So, if we are talking about whattrade policy Nigeria will have, rather than should have, we must recognise that the policy choice or preference cannot exist outside the conceptual frameworks, or the individual cognition, of the policymakers and the politicians. What, then, are the views of Nigerian key government officials and politicians on trade?

Well, the DG of NOTN and Nigeria’s chief trade negotiator, Ambassador Chiedu Osakwe, who is leading the process of preparing a trade policy for Nigeria, is an economic liberal. He believes in trade openness, albeit with necessary rules-based safeguards. The trade minister, Dr Okechukwu Enelamah, is also a liberal and reformer, who is at the forefront of improving the business environment in Nigeria and is particularly committed to trade facilitation. Both the minister and the chief trade negotiator were responsible for the successful conclusion of the negotiations on the African Continental Free Trade Area (AfCFTA). With both of them responsible for developing Nigeria’s trade policy, we should expect, based on Krugman’s formulation, a liberal trade policy. Or shouldn’t we? Well, don’t hold your breath fortrade policy is a divisive issue in Nigeria, even across the government. And, sadly, the protectionist forces are in control. Surely, when it comes to trade policy in Nigeria, Gresham’s Law is in force: bad ideas are driving out good!

And, of course, leading those bad ideas is President Buhari himself. Indeed, I once wrote a column, titled “Why Buhari’s economic ideas are bad”. President Buhari, to be sure, is a mercantilist, who detests imports. He once said, for instance, that “Under my watch, we will grow what we eat and consume what we make”. That’s the warped language of self-sufficiency, but no country can be self-sufficient, otherwise there is no such thing as comparative advantage. In one Budget speech, he said that “the underlying philosophy” of his government’s economic recovery strategy is to use trade policy instruments “to promote import substitution”. President Buhari has refused, at least at the time of writing this, to sign the AfCFTA agreement because he wants to protect Nigeria’simport-competing industries from foreign competition. He argues that imports cause unemployment in Nigeria, which betrays a failure to understand that unemployment is largely a macroeconomic problem, with tariffs, a microeconomic tool, contributing little to it. So,with a president that has nailed his protectionist colours to the mast so profoundly, what trade policy do you expect Nigeria to have?

Last year, the World Trade Organisation conducted Nigeria’s fifth Trade Policy Review. The result confirms Nigeria as a protectionist country. Nigeria maintains high tariff rates and imposes numerous additional duties and charges on imports; keepslongstanding import prohibition lists, including the infamous list of 41 categoriesof imports banned from access to foreign exchange; and imposes local content requirements, in addition to several other non-tariff barriers.

Truth is, if Nigeria was applying to join the WTO today, it would need radical, far-reaching reforms to scale through therigorous accession process. The fact that WTO members sent 270 advance written questions to Nigeria ahead of the trade policy review shows how concerned the country’s trading partners are about its trade policy regime. But farmore worrying, in terms of policy outcomes, is the WTO’s conclusion that all the protectionist measures “have more significantly reduced exports than imports”, adding: “and the importance of trade for Nigeria has decreased, with a trade (in goods and services) to GDP ratio of 21.1% in 2015, down from 52.8% in 2011”.

Which brings me to the question: imports or exports, which should be Nigeria’s main concern? This question is important because of the confusion in government circles. Very often, President Buhari and his officials talk about import substitution being Nigeria’s trade policy goal. But, at the same time, there is a lot of talk about export promotion. Segun Awolowo, the chief executive of the Nigerian Export Promotion Council, has been doing a good job talking up Nigeria’s non-oil export potentials. In fact, he once said that Nigeria has “over 100 globally export-ready commodities” waiting to be produced and projected that Nigeria could earn “$100bn annually from non-oil exports”.

But here lies the policy confusion. Import-substitution and export-orientation are mutually exclusive; the policies you need to achieve the former are different from, and contradictory to, those you need to achieve the latter. To achieve import-substitution, you need protectionist policies, the kinds that Nigeria currently pursues; but to achieve export-orientation, you need open and liberal trade and economic policies. The first sign that a country is export-oriented is its trade openness. But Nigeria is too fixatedon import restrictionsto be export-oriented.

This, of course, reflects a complete failure to understand that imports and exports are the flip side of the same coin, and that restrictions on imports act as restrictions on exports. This is known as the Lerner symmetry theorem, which says that when you restrict imports, particularly of raw materials, you raise production costs in industries that use them, and hamper their ability to compete and export. Secondly, protectionism creates an anti-export bias. Why would any company bother to produce for the export markets when they have a protected domestic market? Yet, as the saying goes, “industries that can compete globally will thrive locally”. But industries can only compete globally if 1) they operate in an enabling environment and 2) they face competitive pressures. The role of any government, therefore, is to create an enabling business environment and to expose their industries to fair international competition.

Now, this may seem controversial, but as Paul Krugman rightly pointed out in his superb book Pop Internationalism, the primary purpose of international trade is imports. It is to enable a country’s people and industries to enjoy the three benefits of trade, namely choice, quality and price: choice, to be able to buy from a variety of products anywhere in the world; quality, to have access to the best quality products globally; and price, to be able to buy products at the cheapest prices globally. This combination of choice, quality and price is what increases the welfare and prosperity of the people, and the productivity of industries, which, for instance, can access not only the best quality and cheapest inputs but also take advantage of the diffusion of technologies and ideas. A country that is restricting imports and says it wants to tackle poverty or raise the productivity of its industries is, therefore, misguided.

Butimports have to be paid for, and that’s where exports come in. Furthermore, being able to sell to people of other countries not only increases the revenues of a company, it also boosts its productivity and international competitiveness. So, exports matter.Yet, as I argued above, you cannot promote exports with protectionist tools, not least because that could lead to tit-for-tat retaliation from your trading partners, who can restrict your own exports. But, more importantly, because, according to the Lerner symmetry theorem shows, a tax or restriction on imports is a tax or restriction on exports.

Surely, when 95% of a country’s total exports is dominated by oil and gas, as Nigeria’s is, it is not rocket science to conclude that what it needs is export-orientation. As I argued in a previous piece, contrary to what some people say, Nigeria’s economy is diversified, it is its export base that is not. The aim of Nigeria’s trade and industrial policies must, therefore, be to diversify the country’s export base by ensuring that those sectorswhich contribute a lot to the GDP, such as agriculture (38.5%) and manufacturing (15.6) but very little to exports can be export-oriented.Those sectors must be encouraged to produce for the export markets, with specific focus on standards and quality infrastructure. Furthermore, Nigeria cannot be exported-oriented if it’s not negotiating and securing market access deals for its industries. This is why it must sign the AfCFTA agreement and seriously consider signing the EU-West Africa Economic Partnership Agreement (EPA).

Surely, if Nigeria truly wants to be export-oriented, as it desperately needs to be, then its trade policy must promote an open and liberal trade regime. That’s the“21st century trade policy” and the “welfare and prosperity trade agenda that works for all. Fingers crossed!

Olu Fasan