February 14, 2011

Shopping for raw materials: Should Africa be worried about the EU Raw Materials Initiative? ECDPM Discussion Paper.

Posted: 14:12 PM CET

by ECDPM Editorial Team

in Economic Governance, Extractive sectors

This new ECDPM Discussion Paper outlines the some key questions around this highly debated issue. The paper gives a general overview of the key initiatives currently taken by the European Union, the United States and China, amongst others. It further examines the likely implications for Africa, in terms of trade and development. It concludes by highlighting how African countries could best respond to resource-dependent countries’ strategies to access raw materials. See below to read an executive summary and access the full document.

Most African countries have entered into Economic Partnership Agreement (EPA) negotiations with the European Union (EU) since 2002 and the latter’s request to eliminate export restrictions was one of the main “contentious” issues in the negotiations. This has raised increasing concerns among many African countries who believe it could limit their policy space to respond to economic development challenges, including moving up the value chain and the development of downstream and infant industries. It was felt that EU’s particular inflexibility about this issue was linked to ensuring undistorted access to raw materials.

The seemingly inexhaustible rise in demand for some key raw materials has driven countries like China and India to increase their presence on the continent and strengthen their economic ties with African countries, thereby fundamentally and permanently changing the economic, diplomatic and geopolitical relationship between Africa and its traditional and historical trading partners.

In response, both resource-rich and resource-dependent countries have adopted strategies either to maintain their stock or to secure access from outside. While resource-dependent countries have multiplied raw material “diplomacy” actions, many resource-rich countries have taken measures, often of a protectionist nature, to keep their resources for themselves to ensure their own industrial development, often causing serious distortions in the world market. China’s recent measures to restrict exports of certain key raw materials, including rare earths are a case in point.

In November 2008, the European Commission presented a Communication to the European Parliament and the Council named “The Raw Materials Initiative – Meeting Our Critical Needs for Growth and Jobs in Europe”. It aimed at providing a policy response to Europe’s growing concerns regarding access to raw materials, given the increasing global demand from new emerging powers and the likely possible supply shortages that this could entail.

The Raw Materials Initiative outlined an integrated strategy to ensure sufficient market access to raw materials at fair and undistorted price and on non-discriminatory terms. It is based on three pillars: access to raw materials on world markets at undistorted conditions, sustainable supply of raw materials from European sources and reducing EU’s consumption of primary raw materials.

On 2 February 2011, a new Communication was unveiled, termed “Tackling the Challenges in Commodity Markets and on Raw Materials”, this time with a wider scope to address policies in areas of financial markets, development, trade, industry and external relations. The new Communication addresses issues linked to commodities markets, including energy (oil, gas and electricity), agriculture and security of food supply as well as raw materials. Regarding raw materials, while it presents the main achievements regarding the implementation of the 2008 Communication, it also thrashes out the future orientation of the 2008 Raw Materials Initiative in terms of actions the EU is likely to take in the three pillars already identified. The scope of the Initiative has now been enlarged beyond metals to include wood and natural rubber.

Although the purpose of this Paper is to focus on the EU’s strategy and its likely implications for Africa, it also outlines policies conducted in other resource-dependent countries, in particular, the United States, Japan, South Korea and China.

The case of China is particularly interesting. In the past few years, its tremendous economic growth has fuelled its appetite for raw materials, not only influencing world demand and supply but also making other countries react and take measures to ensure their access.

The rise of new emerging powers, and in particular China, and their growing appetite for raw materials has rang a wake up bell for both for developed countries and for Africa. In Europe in particular, the fear of an eventual supply shortfall, and more importantly, the fear of losing grip on a longstanding and relatively privileged access to raw materials abroad led to a series of analysis to define those raw materials that were critical to economic growth and employment, and therefore to take policy measures to ensure access to these key raw materials.

What does this imply for Africa?

Africa is well endowed with abundant natural resources. However, its share in worldwide production is relatively small compared to large emerging economies such as China, Russia or Brazil. As it currently stands, its overall share in global production and exports of critical raw materials to the EU is rather limited, although many African countries have the potential to produce more of these raw materials. This situation is however likely to evolve: the overdependence of Europe on China for most of its critical raw materials has proved particularly ‘painful’ recently, in particular with China’s decision to restrict the export of some of those critical raw materials, such as rare earths.

Despite Africa’s low share in exports of critical raw materials, the EU is likely to increase pressure on all its trading partners to secure access to raw materials, notably by pursuing a very offensive agenda through autonomous preferences and bilateral trade agreements, by asking countries to remove exports restrictions and seeking to conclude far reaching investment agreements that cover pre- as well as post-establishment rights. Although Africa might not be the main target of the EU for the moment, its potential for future EU’s access might however cause the EU to act as a matter of prevention. The EU might also seek to maintain a coherent approach to accessing raw material world wide, and thus not be willing to create a precedent by providing a special – more flexible – treatment in favour of Africa.

What is in the EU approach?

The Raw Materials Initiative has triggered wide-ranging and passionate debates around the motives and the likely implications the Initiative could have for resource-rich countries, in particular in Africa. Critics have rightly outlined the challenges, linked to the somewhat self-interested approach of the EU related to trade and investment, where the EU intends to ban the use of export taxes and other trade-related restrictions in the context of its trade agreements, notably in the EPAs. Equally worrying is the request from the EU to African countries to take market access commitments in non-services investment sector and to grant pre and post establishment rights in the context of EPAs.

In its 2008 Communication, the EU has signalled its intention to use trade instruments to secure access to raw materials. It intends to use of trade defence instruments to protect its markets and industries from unfair; to pursue trade negotiations with all its key trading partners. In the context of the EPA, the export taxes clause was one of the main contentious issues, in particular among African countries; to work towards stronger disciplines at the World Trade Organization (WTO); and given inter-dependence and complementarity between trade and FDI, to work towards better international rules on FDI as a means to improve the business climate.

How can African countries best respond strategies to access raw materials?

Just as raw materials are essential for the development of the EU, they are equally essential, and even more so for Africa, considering the development needs of the continent. While African countries acknowledge and fully understand the need of the EU to ensure adequate supply of raw materials for its own legitimate economic development, ultimately, the choice of economic and trade policies that are needed for industrialisation and development needs should rest in the hands of individual African countries.

At the national level, reducing dependence on raw materials for revenue generation will require profound structural economic transformation in many African countries. These would include economic reforms to encourage diversification both within the mining sector, by moving up the value chain and outside the mining sector, by using revenue generated from the mining sector to invest in other productive sectors. Decreasing dependence on raw materials and increasing revenue from taxation, including through trade measures, are considered.

At the regional level, regional integration has been, for decades, a central element of the African development strategy. Numerous efforts are being made to harmonise and integrate regulations, namely in SADC, UEMOA and ECOWAS.

At the continental level, the African Union has taken the lead on the question of resource management, with its vision on mineral management regarding ownership, transformation and value addition. The Africa Mining Vision 2030 and the Joint Africa-EU Summit held in November 2010 define actions to be taken in relations to raw materials.

At the multilateral level, discussions at the WTO regarding the treatment of export taxes are likely to be high on the agenda of those countries that have a high demand for critical raw materials. In this context, African countries need to ensure that they participate fully in the negotiations so that their interests and concerns are reflected in the outcomes of the negotiations.

There is no doubt that the race for raw materials still has a long way to go and more competitors are likely to join the contest. Africa is likely to remain at the forefront of attention on the part of those that are heavily reliant on its riches for their own development. The EU is likely to continue to push hard to ensure it can secure access to raw materials, so will the US and all the other emerging economies. Undistorted access is essential to ensure that our goods remain affordable. But that should not come at any price, and not at the price of the development of an indigenous African industry. Africa has the potential to create employment and wealth for its own people and therefore lift many out of poverty. Providing raw materials is important for the rest of the world but this should not be done at the expense of Africa’s own development.

To access the full document, click here:

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