Malawi in the Multilateral Trading System

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I. The problem in context 

Malawi is a land-locked country occupying the southern part of the Rift Valley in east Africa. It is bordered by Zambia to the west, Mozambique to the south and east and Tanzania to the north. In 2001, the estimated population in Malawi was 11 million (World Bank 2003). This relatively small sub-Saharan African country is one of the poorest in the world, with GDP per capita of US$163 in 2001 and over half of the poor population living in the rural area.

Malawi is an open economy, but trade openness has not fostered economic growth, as is indicated by the declining figures for economic growth (from 6% in 1990 to -1% in 2001). Merchandise trade has declined significantly over time, with exports decreasing from US$442 million in 1999 to US$310 million in 2001, and imports from US$698 million to US$550 million in the same period (World Bank 2003). Tobacco, tea, sugar and coffee account for 90% of merchandise exports, with tobacco as the main export. There have been some efforts to diversify to non-traditional products such as fruit and vegetables and spices. On the import side, the main imports are vehicles and parts, petroleum fuels, machinery, boilers and parts, electrical machinery, fertilizer, wheat flour, pharmaceuticals, iron and steel.

Agriculture contributes a little more than a third (34%) to Malawi’s GDP, while the manufacturing and service sectors account for 18% and 48% respectively (World Bank 2003). Most of the activities in the service sector are non-tradable. The importance of agriculture cannot be stressed enough: in addition to being the leading export earner, approximately half of Malawi’s citizens who are in paid employment work in the agricultural sector and 85% of the population are supported by it (SADC 2001).

From the mid-1980s Malawi made tremendous progress in trade liberalization under the structural adjustment programme and continued to do so through the 1990s. Tariffs still remain as the main trade policy instrument affecting trade. All tariffs are ad valorem. The maximum applied tariff rate under the two-digit Harmonized System (HS) is 25% and the average applied most-favoured-nation (MFN) tariff rate is 13.6% (see Table 1). The average rate in the agricultural sector is approximately 15% and in the manufacturing sector 13%. Malawi has a six-band tariff structure (0, 5, 10, 15, 20, 25), with 60% of the lines at 10% or less (WTO 2002). Tariffs between zero and 5% apply to ‘necessities’. High tariffs are imposed on commodities such as coffee extracts, butter, sugar, apples, tea and consumer goods. Malawi also shows some levels of tariff escalation. Tariffs on unprocessed products are 30% lower than those on fully processed products (MG and IAWG 2003). Malawi has bound all its agricultural products at 125%, except for a few products with bound rates of 50, 55 and 65%. Only 0.3% of non-agricultural products are bound.

 

Table 1
Tariffs at the end of 2000/2001(per cent)

Source: WTO, based on data provided by Malawian authorities.

Malawi has removed most of its non-tariff barriers. However, a few import licences and bans for environmental, health, safety and security reasons still exist. The Ministry of Agriculture provides phytosanitary regulations, and the Ministry of Commerce and Industry issues licences for wild animals and other import licences in general. Approximately 29% of all product lines continue to face non-tariff measures (UNCTAD 2001). In the case of live fish, for example, trout face a tariff equivalent of 100%. Imports of this product line require a licence from the Ministry of Commerce and Industry. Import of live animals faces non-tariff measures of 50%. In 2001, Malawi introduced import licences on sugar and import bans on dairy produce and vegetable cooking oil. Even though sanitary and phytosanitary requirements are applied, they are not used to curtail imports. Malawi, like other developing countries, is in the process of preparing new anti-dumping measures and introducing countervailing measures (MG and IAWG 2003). Looking at exports, Malawi is a relatively open country. Since the late-1990s, all trade taxes and quotas on exports have been eliminated (WTO 2002). Export surrender remains only on tobacco, tea and sugar. Export licences are required for a few commodities such as fuel and maize for environmental protection and food security reasons. Tea and raw tobacco are also subject to export licences.

In general, Malawi faces severe trade and economic problems, including declining commodity prices, weak infrastructure, lack of technology, high cost of inputs, lack of access to financing, weak institutional and human capacity, high external debt — all of these have a major impact on trade performance.

Given this picture, what do multilateral trade negotiations mean for Malawi? Trade negotiations in the WTO offer a multilateral forum for countries to take advantage of a rules-based system for trade and development. However, Malawi is facing major constraints even as the country is engaged in multilateral negotiations. The objective of this short paper is to reveal these challenges from the perspective of the stakeholders. The study does not focus on any particular sector because most of the issues facing Malawi are across the board. And once these challenges have been addressed, Malawi will be able to grapple with more sector specific issues. To meet the objective of this endeavour, representatives from different government ministries, the private sector, non-government organizations (NGOs) and donors were interviewed. These stakeholders are presented in section two. Section three discusses the challenges faced by stakeholders. Based on their experience, the last section offers lessons for others.

 
 

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II. The local and external players and their roles 

Prior to 1994, Malawi was a one-party state and the government handled trade issues. In recent years, with the introduction of the multi-party system, the new governing structure has made tremendous efforts to include the private sector and non-government organizations in having a say in trade issues. Who are the main local stakeholders? The main department responsible for trade and industry policy is the Ministry of Commerce and Industry. Even though trade issues have taken centre stage in the domestic area, it is disconcerting that the Poverty Reduction Strategy (PRS) does not have a sector-specific plan for trade, meaning that when resources are allocated trade does not feature as a major priority in the development agenda. The good news is that sector-specific trade issues have been addressed in the Malawi economic growth strategy, and part of the strategy will be incorporated in the revised PRS. Other government ministries involved in trade issues include the Ministry of Agriculture, Irrigation and Food Security, which has the main task of formulating agricultural policies and the Ministry of Finance and Economic Planning, the overseer of the overall government budget as well as expenditure and revenue measures; the Malawi Revenue Authority is responsible for tax and tariff administration. The Ministry of Foreign Affairs, the Copyright Society (under the Ministry of Sports and Culture) and the Patents Office (under the Ministry of Justice) also play an important role in trade matters.

Other important public-sector players include the Malawi Bureau of Standards (MBS), the Malawi Export Promotion Council (MEPC) and the Reserve Bank of Malawi. The MBS is the designated enquiry point for the Agreement on Technical Barriers to Trade (TBT) and for the food safety aspects of the Sanitary and Phytosanitary (SPS) Agreement. In addition, the MBS is one of the regulatory authorities to formulate and implement national standards for products and services; it needs better infrastructure and more trained staff to handle these heavy responsibilities. The MEPC’s major responsibility is to promote export diversification, as Malawi is overly reliant on a few commodities. In addition to the need for more skilled import and export officers, the MEPC is constrained by lack of information on foreign markets. The Reserve Bank of Malawi is responsible for monetary and exchange rate policies, as well as supervision of the financial services sector. The key private-sector stakeholders include the Chamber of Commerce and Industry, the Exporters’ Association of Malawi and Textiles and the Garment Manufacturers of Malawi. These public and private players form the National Working Group on Trade Policy, a sub-group of the National Action Group. The National Working Group on Trade Policy is chaired by a private-sector stakeholder. In addition to the participation of the private and public sectors, NGOs such as the Malawi Economic Justice Network and Action Aid Malawi also participate in WTO discussions.

Multilateral and bilateral donors such as the International Monetary Fund (IMF), the International Trade Centre (ITC), the United Nations Development Programme (UNDP), the World Bank, the WTO, the Norwegian embassy/NORAD, the Department of International Development (DFID) and the US Agency for International Development (USAID), among others, have been instrumental in assisting Malawi to address some of the capacity constraints. This is being done through programmes such as the Integrated Framework (IF), Joint Integrated Technical Assistance Programmes (JITAP) and country and regional programmes. These initiatives have led to a call from donors, for example the UNDP, for technical assistance to be provided to enable Malawi to integrate into the global system. Even though trade-related technical assistance is vital to Malawi, the UNDP has stressed that issues of sustainability and making sure that the country takes ownership of the programmes still need to be addressed. As part of the consultation process, external donors also attend the National Action Group meetings.

All the stakeholders welcome the multilateral trade negotiations under the WTO. They feel that there is room for Malawi to gain significantly from participating fully in the WTO negotiations. However, in spite of the existence of the National Group on Trade Policy, there has not been a strong interaction among stakeholders. In fact, as observed by a government official, no formal discussions on the way forward or any other WTO-related issues were discussed after the Cancún Ministerial Conference. Most important discussions, it appears, tend to be tabled as high-level WTO meetings approach.

Apart from the lack of a more cohesive interaction among stakeholders, Malawi’s participation is largely affected by concerns about the large financial costs that may be incurred as Malawi creates the institutions and implements the standards demanded by the trading system, as well as by capacity constraints arising from trade negotiations. These and other issues will be discussed in the next section.

 
 

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III. Challenges faced and the outcome 

This section presents the views and challenges faced by some key stakeholders. To start with, the Ministry of Agriculture, Irrigation and Food Security, one of the key stakeholders, considering that the country is an agriculture-based economy, recognizes the importance of Malawi’s participation in the WTO. However for Malawi to benefit from the WTO process, Mr Lungu, a senior ministry official, argued that the country has to overcome some of the major domestic bottlenecks because ‘if developed countries were to grant Malawi free access to their market, supply-side constraints would hinder the country from enjoying significant gains from the full access’. He went on to say that the first thing Malawi needed to do was to address the overarching issues of ‘low productivity and profitability of smallholder farmers’ in the agricultural sector. Productivity has been greatly affected by low-level development, poor varietal selection, declining soil fertility and poor agricultural practices. The main cause of low profitability is weak links to input and output markets. Farmers are handicapped by lack of information and weak infrastructure, resulting in high input costs and low output prices. Mr Lungu suggested that the way to deal with these challenges was to ‘pursue targeted investments to improve on production frequency, yields and strengthening market linkages’.

With regard to developed countries, Mr Kabambe, a senior ministry official at the time he was interviewed (but now a permanent secretary in charge of poverty alleviation), considered that there was a need to ‘level the playing field’ in multilateral trade negotiations in order for developing countries to trust the system. The use of trade distorting subsidies and high tariffs on products of interest to Malawi are examples of developed countries ‘not playing fair’. While there is this increased pressure for developed countries to reduce high tariffs, Dr Daudi, a senior ministry official specializing in standards at the time he was interviewed (but now a permanent secretary in the Ministry of Agriculture), cautioned that non-tariff barriers such as standards are on the rise. The challenge for Malawi, as an exporter of mainly agricultural products and venturing into exporting more processed products, is that it lacks trained manpower and equipment to address these non-tariff barriers and to comply with WTO commitments. This point was also reiterated by Dr Daudi’s son at the Malawi Bureau of Standards (MBS), the designated enquiry point for the Agreement on TBT and for food safety aspects of the SPS Measures.

In addition to the constraints described above, Mr Daudi said that even though the MBS was considered an enquiry point, for effective operation they ‘needed assistance in setting up and operating an enquiry point’. This could be done by learning from other established enquiry points in the region or abroad. The MBS also requires more information in order to understand TBT and SPS agreements and their obligations. Such information is also not available to other regulatory bodies which play a role in the implementation of the WTO Agreements. Another factor affecting MBS operations as a fully functioning enquiry point is its weak infrastructure. MBS is in desperate need of an effective modern information technology system for effective communication, storage and retrieval of information and reproduction of documents. Also in the area of infrastructure, the MBS lacks sufficient laboratory equipment to implement regulations effectively within the framework of the WTO Agreements.

Turning to the Ministry of Trade and Industry as the main co-ordinating body for WTO issues, the first thing that came out in interviews was that the ministry was understaffed and could not handle the massive coverage of WTO issues. Ms Musonzo, an economist in charge of WTO issues, stated that ‘one staff member may be assigned to work on two or three WTO agreements on top of other assigned duties in the Ministry’. This lack of specialization, she continued, ‘makes it impossible for us to fully grasp and interpret complex WTO agreements as well as submit notifications’. Mr Hara, a senior economist and a newcomer to WTO issues, commented that ‘we are not sufficiently equipped in terms of manpower to carry out rigorous analytical work to analyze WTO proposals’. These in-house capacity constraints are also affected by the lack of representation in Geneva, a concern raised by all the stakeholders interviewed. As a result of the lack of representation, the ministry is not able to obtain all the information on issues discussed in meetings in Geneva. On the implications of the WTO in relation to Malawi, Mr Hara pointed out that Malawi has lower average tariff (about 15%) compared with many WTO members. However, with the lack of a proper safeguard mechanism and countervailing measures further tariff reduction can lead to dumping. Therefore, there is the need to have effective mechanisms to detect injury in case of surges of imports. Another concern, as reflected in the ministry’s position papers, is the erosion of preferences due to lower MFN tariffs. According to the figures given by the ministry, Malawi is expected to lose 11% of its export earnings due to preference erosion. The ministry has begun to think about what Malawi should do when the erosion of preferences occurs. So far there is talk about preserving preferences, even if it is inevitable that preferences will be eroded due to liberalization. If the preferences cannot to be preserved, Malawi will request compensation for loss of preferences. This is also the position of the Africa group.

A senior official at the Ministry of Economic Planning and Development, Mr Mtonya, raised an important point on the cost of compliance with WTO commitments when he stressed that ‘by accepting the WTO commitments Malawi takes up obligations that may impose a huge burden on the development budget. For Malawi to comply with WTO agreements it would mean the government setting aside over 50% of its budget, something not feasible considering that the country already faces budget constraints in order to meet its expenditure in many other areas. Therefore, there is need for financial and technical assistance from donors to meet the cost of compliance of WTO commitments.’ To add to this concern, Mr Zimpita, also at the Ministry of Finance, expressed his concern about the revenue implications of tariff reduction as ‘tariff revenue constitutes a major portion of government revenue and the reduction in collection could have serious consequences on the budget’. He felt, therefore, that rigorous analysis of WTO proposals was needed in order to assess the cost and the benefits. These sentiments were shared by the Malawi Revenue Authority.

The Malawi Confederation of Chambers of Commerce and Industry (MCCI), representing the private sector, is pushing for more public-private sector consultation. Mr Mtonakutha of the MCCI indicated that the establishment of the Trade Policy National Working Group, a body which brings together the public sector and the private sector, was a major step forward; however, he said that more still needed to be done considering that stakeholder co-ordination was a recent development. Outside Malawi, the Chamber of Commerce also widely consults with the Southern African Development Community (SADC) and the Associations of Chambers of Commerce of the Common Market of Southern and Eastern Africa (COMESA).

On the NGO side, Action Aid Malawi shared some of their documents on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Action Aid formed part of the delegation of NGOs that went to the Ministerial Conference in Cancún. Action Aid’s position papers on agriculture made a significant contribution to Malawi’s position. Their position paper on TRIPS focused on the Agreement and its potential threat to food security and farmers’ rights. The group feels that ‘patents on genetic resources for food and agriculture pose a potential threat to the food security and the livelihoods of small-scale farmers. Patents will reduce access to seeds and genetic resources for farmers and breeders … They could also make seeds expensive due to royalty payments, restrictive contracts and increased commercialization.’ This position paper by Action Aid Malawi supports the position of the Africa Aid group on ‘no patents on life’. Also under TRIPS, given the public health crisis, especially in the face of HIV/AIDS, malaria and tuberculosis, Malawi is pushing for access to essential drugs on affordable terms.

Most of the stakeholders, both local and external, emphasized the importance of trade-related technical assistance. However for technical assistance to be more effective, external donors felt that several things have to be addressed. First, there was a need for close collaboration among donors in order to avoid any conflicts in policy recommendations. Second, workshops/seminars should be attended by participants working in the departments directly linked to trade negotiations. In other words, there is need for a filtering process for technical assistance to be more effective. Third, there should be a monitoring or a follow-up mechanism to track the progress of participants. Last, experts should spend enough time in the country to understand fully the problems that need to be addressed, as well as build reasonable institutional capacity so that the government can continue the process beyond the technical assistance life span.

  
  

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IV. Lessons for others (the players’ views) 

This paper has presented some of the views held by stakeholders and the challenges faced by Malawi as it participates in the multilateral trading system. Do small countries such as Malawi need the WTO? Yes, given the size of the country and resource constraints, the stakeholders are aware that the multilateral trading system offers many opportunities in terms of gains from trade and provides a strong rules-based structure to protect them against more powerful countries. And the importance of the multilateral trading system will become even greater as Malawi continues to integrate into the global economy.

So what are the lessons for others, and the areas to which Malawi should give priority in order to participate effectively? From Malawi’s experience, lessons can be drawn on how to bring trade into development; how countries may effectively utilize technical assistance; the use of the safeguard mechanism and countervailing measures as liberalization prevails; how to address some of the constraints beyond tariffs and other border measures; and how to handle the issue of preference erosion.

The cost of compliance with WTO commitments is certainly a major issue for Malawi and many less developed countries (LDCs). Therefore it calls for more financial resources to assist in the compliance process. Countries must be aware that the WTO is not an international financial institution. Therefore there is need to bring trade into the development agenda. This could be done by linking sector-specific trade policies with development strategies and objectives, as well as linking assistance from international financial institutions such as the World Bank to the trade agenda. Mr Mtonya at the Ministry of Economic Planning and Development pointed out that Malawi’s new Economic Growth Strategy includes a sector-specific agenda for trade which will be linked to development assistance.

Malawi has a valid concern that developed countries should reduce high tariffs and trade distorting subsidies. However, the stakeholders are aware that gains from trade will not only depend on the goodwill of the other members, but will also greatly depend on what Malawi does. As pointed out by the staff at the Ministry of Agriculture, ‘aggressively improving the transport system, marketing systems, storage and distribution facilities, technology, addressing factors affecting the cost of inputs, access to trade and investment financing and exchange rate management’ will assure even more gains.

Technical assistance to strengthen the institutional capacity of Malawi, including the development of human resource; strengthening the training of government officials; the training of trainers; and the retention of government staff who work on WTO issues are critical for Malawi to participate effectively. As iterated by staff, Malawi needs well-trained and specialist staff to cover each agreement. Technical assistance, however, should not be viewed as ‘a form of financing’, but there should be a mechanism to make sure that sustainability can be achieved and that trained employees are retained. Otherwise, countries will continue to receive technical assistance for the next ten to twenty years and nothing much will come out of the programmes. One important suggestion from local stakeholders is for donor agencies to assign personnel to spend a significant amount of time in relevant government departments to build sufficient institutional and human capacity. The sentiment of the local stakeholders is that the ‘fly-in-fly-out’ works up to a point but does not often leave much on the ground. And the funds used to pay consultants and personnel flying in and out of the country can be channelled to other activities on the ground. Also, given the understaffing situation in most of the government, more technical assistance in-house would lessen the staff shortages faced by government departments when staff members attend much needed trade policy courses and workshops.

Another point is that while the stakeholders welcome the fact that liberalization is here to stay, Malawi should also take serious precautions to make sure that their domestic markets are not wiped out. Mr Lungu at the Ministry of Agriculture gave an interesting example of what happened to the textiles and clothing industry. With the liberalization of the second-hand clothing market, the already deteriorating textiles and clothing industry was severely affected. The garments produced in Malawi have been found to be more expensive than second-hand clothing, and as a result, some of the major factories could not compete with the cheaper prices offered by the second-hand clothing industry and they were forced to close. Initially, the influx of second-hand clothing was seen as ‘the best thing that ever happened to Malawi’, but the consequences to the clothing industry were devastating. Although to some the closure of the major textiles and clothing factories can be viewed as ‘injury’, Malawi at the moment does apply anti-dumping measures to protect domestic industries and sensitive products. The good news is that Malawi is now in a process of preparing a new anti-dumping law and safeguard and countervailing measures.

In the case of trade preference, Malawi should focus its energy on how the country will adjust to the erosion brought about by the liberalization process. As mentioned earlier, there is a suggestion by some of the stakeholders that they should preserve preferences and if that fails, they should ask for some form of compensation for any loss of preference. Although these points are noble, countries should recognize that this could also be an opportunity to sell their commodities to other countries. Mr Banda at the Ministry of Trade and Industry pointed out that Malawi was already exporting more tobacco to Egypt and sugar to Kenya, a sign of market diversification.

Other lessons that Malawi could provide to other LDCs are to extend tariff bindings beyond agriculture to the manufacturing sector; increase programmes to enhance the participation of the private sector and other stakeholders so that supply-side constraints are addressed; and most importantly, to make sure that countries have missions at the WTO in Geneva.

 
 

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References 

Malawi Government (2003), Draft Issues Paper for the Fifth WTO Ministerial Conference, Lilongwe: Ministry of Commerce and Industry
 
Malawi Government and the Integrated Framework Inter-Agency Working Group (MG and IAWG) (2003), Malawi-Integrated Framework: Diagnostic Trade Integration Study (draft)
 
SADC (2001). Official SADC Trade, Industry and Investment Review, Gaborone: SADC
 
UNCTAD (2001), TRAINS Database, Geneva: WTO
 
World Bank (2003), World Development Indicators 2003 (CD), Washington, DC: World Bank
 
WTO (2002), Malawi: Trade Policy Review, Geneva: WTO