Trade routes: Preparation meets opportunity

As we journey into the final stretch of 2019, it is looking more certain that the year will be remembered as the year that trade turned the global economy sour. The ongoing trade dispute between the United States and the People’s Republic of China (the PRC) has already scrambled and remapped existing trade routes, trade alliances, and trade networks. And there is more to come. And because the issue at stake between the US and the PRC is much more than balance of trade and current account deficit, no one should expect a quick resolution to this ongoing dispute.

Indeed, it will be years before we can truly tally the full economic impact as well as the winners and losers of this trade dispute. However, many companies, economists and other close observers of international trade already know who some of the winners are – more on that shortly.

On a positive note, 2019 will also be remembered as the year that Africa “got” trade. With the recently ratified Africa Continental Free Trade Agreement (AFCFTA), Africa commenced a bold journey that will stitch together currently disparate trade practices and rules and make it easier for goods and services to flow among more than 50 countries on the continent. It is indeed a monumental commitment to creating the largest free trade area in the world, which if executed according to plan, will no doubt boost economic growth, produce employment, create and improve infrastructure, and foster the positive socio-cultural externalities that usually emanate from economic connectedness and integration.

Yes, some observers will say AFCFTA should have happened years ago. Maybe so. But an arrangement of this magnitude only happens when the conditions are right. And I say, better late than never. Other observers don’t give the agreement much chance of reaching even a small portion of its potential. But who count out Africa’s determination should just read about the renaissance happening in Rwanda and other parts of the continent.

The most important work now begins…the work of creating the modalities of the agreement and the various rules that will undergird it. The negotiations will be hard and complex as rule makers seek to balance the interest of the smaller economies against the larger economies, and it will therefore take time. And that’s exactly why all the stakeholders should get to work immediately. As they seek to balance multiple interests and concerns, they should understand that good is better, and perfect is rarely ever on the menu.

One of the lessons of the Us-china trade dispute is that success in trade policy does not happen by pure luck. In my book, success is what happens when preparation meets opportunity. In this instance, the one country that exemplifies the preparation required for success to happen in trade is Vietnam.

Most trade observers now count Vietnam as one of the most significant beneficiaries of the Us-china trade dispute. A report published in June by Nomura, indicated that Vietnam gained 7.9 percent of GDP from trade diversion as western manufacturers sought alternatives to China. That is a significant economic benefit whether temporary or not, and many trade economists will tell you that the positive externalities of even a short-term benefit of this nature can be significant.

More importantly, some of the benefits will become permanent because companies that are now scrambling to find alternatives to China are now fully aware of the risk of concentration. Their intent to mitigate that risk means once they establish presence in Vietnam, they are likely to remain in one shape or form depending on how quickly Vietnam climbs the production value chain.

To a casual observer, Vietnam’s proximity to China would seem to be the primary reason why it is now a trade dispute winner. But as someone who has visited Vietnam many times, met with their government officials, and consulted with western companies that do business in the country, I have had the opportunity to witness Vietnam’s painstaking preparation for this opportunity that finally came.

Vietnam prepared by implementing a policy of close coordination between central and regional governments; fostering an environment in language and actions that welcomes rather than bashes investment, investing in infrastructure, including roads and power generation. In addition to focusing on developing the skills required by employers; improving transparency and focusing on creating a regulatory climate, including tax and incentives policies that make it easier for investors to make and commit to long term plans as well as lowering barriers to foster trade. In short, Vietnam focused on the items one will typically find on the World Bank’s ease of doing business index.

All is not perfect, and Vietnam still has ways to go on this journey. But from my interactions with government officials, I can attest to their commitment to do more. For me, in addition to other countries, Vietnam is a blueprint for African governments as they seek to reap the rewards of trade. Vietnam’s story is the strongest reminder yet, that growth and development seldom happen by accident. Yes, globalisation has its faults, but no reasonable person would dispute that fact that many Asian countries tapped into globalisation to lift millions of their citizenry out poverty, and to create economic opportunities that would make it easier for the next generation to remain home rather than emigrate. Without trade, there is no telling where the Chinese economy would have been today.

But the fact is, Vietnam is not special or unique. Indeed, many African countries provide more compelling rationale for Western companies to divert production to Africa. In addition to cultural and political affinity and proximity to Western end markets, many African countries already enjoy preferential trade arrangements with the US and European Union, for example, under the Africa Growth and Opportunity Act (AGOA) and the Economic Partnership Agreement (EPA). That is to say, under the right environment, Africa should be a winner in the context of the current Us-china trade dispute. And it is never too late.

The rest of this article continues in the online edition of Business Day @https://businessday.ng

is EY Africa tax leader