Most trade today happens under preferential arrangements — free-trade areas, customs unions, and preference schemes — rather than pure MFN terms. This module covers the economics of preferential trade (which is not always beneficial), the complexity it creates, and the specific arrangements that shape African trade: the non-reciprocal preferences like AGOA and the controversial reciprocal EPAs. It sets up the dedicated AfCFTA course.
Levels of integration
- Free-trade area (FTA) — members remove tariffs among themselves but keep their OWN external tariffs against non-members (requiring rules of origin to prevent trans-shipment).
- Customs union — an FTA plus a COMMON external tariff against non-members (no rules of origin needed among members; the EAC and ECOWAS aspire to this).
- Common market — a customs union plus free movement of factors (labour, capital).
- Economic/monetary union — a common market plus harmonised policies and/or a shared currency (the euro, the CFA — the International Macro course).
Trade creation versus trade diversion
Why preferential trade isn't always good (Viner)
Jacob Viner's crucial insight (1950): forming a preferential bloc has two opposing effects on welfare. • Trade creation — production shifts from a high-cost domestic producer to a lower-cost PARTNER producer (because the partner's goods are now tariff-free). This is GOOD: it's efficiency-improving, replacing expensive home production with cheaper partner production. • Trade diversion — production shifts from the lowest-cost WORLD producer to a higher-cost PARTNER producer (because the partner gets the tariff preference while the efficient outside producer still faces the tariff). This is BAD: it diverts trade away from the efficient world source to a less-efficient partner, and the government also loses the tariff revenue it used to collect. The net welfare effect of a preferential bloc depends on whether trade creation or diversion dominates — so preferential trade is NOT unambiguously good (unlike multilateral free trade). It is more likely to be beneficial (creation dominates) when the partners are low-cost, competitive economies and when the external tariff is low. It is more likely to be harmful (diversion dominates) when integrating among high-cost producers behind a high external tariff — a real risk for South-South integration among similar high-cost developing economies (a key caution for the AfCFTA course). The choice of partners and the height of the external tariff determine whether a bloc helps or hurts.
The spaghetti bowl
Bhagwati's warning
As FTAs proliferate, they create what Jagdish Bhagwati called the 'spaghetti bowl' (or 'noodle bowl' in Asia): a tangle of overlapping agreements, each with different tariff schedules, rules of origin, and standards, so that the same product faces different rules depending on which agreement it's traded under. This complexity is itself a trade barrier — firms (especially small ones) struggle to navigate the maze of overlapping rules, and the administrative cost can exceed the preference benefit. Bhagwati argued that proliferating preferential deals are 'termites in the trading system', undermining the simplicity and non-discrimination of multilateralism (MFN). For Africa the problem is acute: countries belong to multiple overlapping Regional Economic Communities (EAC, COMESA, SADC) with conflicting rules — the spaghetti bowl applied to a continent — which is one of the problems AfCFTA must resolve by harmonising into a single continental framework (the AfCFTA course).
Non-reciprocal preferences: GSP and AGOA
Rich countries grant developing-country exports better-than-MFN access without demanding reciprocity, through the Generalized System of Preferences (GSP) and, for Africa specifically, the US African Growth and Opportunity Act (AGOA) — which gives eligible African countries duty-free access to the US market for thousands of products. The benefits are real (AGOA boosted African apparel and other exports, creating jobs). But the limitations are significant: the preferences are unilateral and discretionary (the US decides eligibility and can revoke it — a political dependency), temporary and uncertain (AGOA must be periodically renewed, creating investment uncertainty), often under-utilised (because of strict rules of origin and supply constraints), and erode over time (as MFN tariffs fall, the preference margin shrinks). Non-reciprocal preferences are a gift that can be withdrawn — useful but unreliable, and no substitute for the country's own competitiveness and for reliable, rules-based access.
Reciprocal EPAs and the controversy
The Economic Partnership Agreements (EPAs) between the EU and African (and other ACP) regions are reciprocal FTAs — the EU grants African exports access, but African countries must in return open THEIR markets to EU goods. They are deeply controversial. The case for: WTO-compatibility (non-reciprocal preferences violate MFN and needed a waiver; reciprocal FTAs are WTO-legal) and deeper integration. The case against (from African critics): forcing weaker economies to open to powerful EU competitors threatens nascent African industries (the infant-industry concern), causes tariff-revenue loss (a major fiscal hit — the Tax course), and can UNDERMINE regional integration (by splitting African RECs into different EPA configurations and locking in trade with Europe rather than with African neighbours — cutting against AfCFTA). The EPA debate crystallises the tension between WTO rules, EU interests, and African development and integration — and it is a major reason Africa is pursuing its own continental integration (AfCFTA) as an alternative to a hub-and-spoke dependence on European and other external markets.
Exercise
A group of similar, relatively high-cost African economies behind moderate external tariffs forms a free-trade area among themselves. Separately, they each enjoy AGOA access to the US and are being pressed to sign reciprocal EPAs with the EU. (1) Assess whether their mutual FTA is likely to be net trade-creating or trade-diverting, and why. (2) Explain the spaghetti-bowl risk they face. (3) Compare AGOA (non-reciprocal) and the EPA (reciprocal) for these countries. (4) Explain how the EPAs could undermine their own regional integration, and advise.