Trade Profile: Nigeria's Strategy to Defend and Diversify

8 MINS READDec 4, 2017 | 09:15 GMT
A worker inspects a Total oil drilling platform near Port Harcourt in the Niger Delta.

A worker inspects a Total oil drilling platform near Port Harcourt in the Niger Delta. Nigeria has historically taken a defensive approach to global trade.

Editor's Note

Global trade is changing. The kinds of multilateral agreements that characterized the postwar years have stalled over the past two decades, prompting countries and economic blocs to try to negotiate smaller deals with fewer partners. Nations and blocs have more leeway under this new model to negotiate the trade agreements that best suit their interests and to avoid those that don't. Now, more than ever, the future of international trade depends on a country or bloc's defensive interests, offensive interests and underlying factors of production. Our fortnightly Trade Profiles aim to break down these factors to facilitate an understanding of where global trade stands today and where it's headed.

In the 15th installment, we focus on Nigeria.

A Snapshot of Nigeria

Economic Background

Nigeria has historically taken a defensive approach to global trade. In fact, the International Monetary Fund once declared that the country possessed one of the most restrictive trading regimes in the world. Nigeria's stance largely stems from its abundance of oil and natural gas reserves and its corresponding struggle to diversify its economy.

In the years following an uptick in global energy prices in the 1970s, Nigeria's economy became increasingly dependent on crude oil exports. As the country directed resources and attention toward boosting its cash cow, its manufacturing and agricultural capacities declined. Meanwhile, the nation began to drift toward military rule. Nigeria's leaders promoted a rigid model of economic protectionism to develop nascent industries at home, but often opaque implementation provided significant opportunities for corruption.

The lurch toward oil dependency and military rule soon produced a vicious cycle. When the country's main source of revenue (crude oil) dropped in value amid global downturns, the political class clamored for tough protectionist measures, such as import bans or quotas, to help foster the industrialization of the country's languid manufacturing sector. At the same time, the abrupt loss in funds made it difficult for Nigeria to pay for its imports, while the related need to obtain external financing forced the country to devote ever-larger sums of revenue to service its ballooning external debt. These payments constrained its ability to pursue economic development programs during periods of relative prosperity.

Though oil exports generated significant wealth, large swaths of the country missed out on economic development. This prompted rural Nigerians to migrate to the cities en masse, resulting in the creation of a huge informal sector. Protectionism in Nigeria remained deep-seated throughout the 1980s and 1990s as the successive administrations of Shehu Shagari, Muhammadu Buhari, Gen. Ibrahim Babangida (before he made an opening toward liberalism) and Gen. Sani Abacha imposed tough import barriers. Tariff rates of 100 percent on certain products were not uncommon, and during the term of Buhari — who has returned to power as the country's democratically elected president — Abuja placed all imports under licensing.

The return to civilian rule in 1999 did not presage an immediate liberalization of Nigeria's trade policy. In fact, the World Trade Organization noted in its 2005 trade policy review that the country had actually become more protectionist than it was in the runup to its 1998 review. Nevertheless, Nigeria has slightly loosened its trade measures in recent years. For example, while the government maintains two important prohibition lists, including the Absolute Import Prohibition List that bans items based on health, moral and security grounds, it has downsized the Import Prohibition list — which is designed to protect home industry — in recent years. In addition, Nigeria's move to rebase its gross domestic product in 2014 has helped to foster a better understanding of the economy. The improved standing of previously underreported or missed contributions from various sectors, especially services, has demonstrated that the economy is more diversified than previous estimates suggested.

Even so, the West African giant remains sub-Saharan Africa's leading oil exporter; overseas oil sales account for approximately 90 percent of its earnings and 70 percent of government revenue, underscoring a stubborn dependency. Consequently — and perhaps despite the best intentions of successive presidents, including the incumbent Buhari — Nigeria has struggled for decades to break free of its resource dependency and tame endemic corruption. Nigeria's failure to liberate itself from this reliance, especially if it means that sectors such as manufacturing remain moribund, will prompt the country's political class to continue pursuing protectionist measures.

Nigeria, moreover, is also grappling with profound structural constraints that will not dissipate in the near future. Among them are a massive and growing population (projections indicate that Nigeria will be more populous than the United States by 2050); a dearth of arable land; security challenges such as the Boko Haram insurgency in the northeast and Niger Delta militancy in the southeast; institutionalized corruption; and the struggle to manage ethno-regional diversity, among other issues. Such massive internal challenges present constant distractions for Nigeria's leadership and result in the diversion of much-needed funds that could otherwise be allocated to long-term infrastructure and sectoral development.

Oil Production in Nigeria

Trade Implications

Offensive Interests

Nigeria's primary offensive interest is in maintaining the exports of its energy sector, particularly crude petroleum and petroleum gas. As noted above, the total weight of Nigeria's oil wealth comprises over 90 percent of the country's export earnings and 70 percent of government revenue. Fortunately for Nigeria, these energy exports are not often subject to protectionist measures by other countries, as tariffs on energy commodities are typically small. The lack of restrictions on oil exports has impacted Nigeria's trade strategy, ensuring that Abuja need not be as offensive in its trade strategy but can instead focus on protecting domestic industries.

Nigeria's services sector has gained a much higher profile in recent years, partly as a result of the 2014 GDP rebasing, which highlighted its relative strength in the economy. For example, areas such as telecommunications, banking and retail have grown despite an economic downturn. One pre-eminent component of the sector is Nigerian entertainment, which includes the country's famed Nollywood film industry — the third largest in the world. In fact, the World Bank has noted the relative and growing strength of Nigeria's services sector, pronouncing it one of the most open service markets on the continent. While this may bode well for some in Nigeria, because services generally pay much higher wages than manufacturing, the sector does not create as many jobs as manufacturing — something necessitated by Nigeria's demographic boom. Nevertheless, drastic improvements in infrastructure development and modernization, as well as in the ease of doing business, will become crucial in the years ahead to spur more growth.

While Nigeria retains a defensive and protectionist posture in many areas, the country maintains huge economic advantages over its much smaller African neighbors. Accordingly, Nigeria stands to be the primary benefactor of the Economic Community of West African States' (ECOWAS) Trade Liberalisation Scheme, the organization's main tool to promote West Africa as a free trade area. Currently, intraregional trade within the bloc is both low and highly informal. However, there is profound room for growth: The bloc is home to over 350 million people — or slightly less than double Nigeria's population — and is set to grow significantly in size and wealth in the years ahead. Therefore, any future efforts to increase and formalize trade would benefit Nigeria given its massive population, natural resources and expanding services sector.

Defensive Interests

Nigeria's long-standing dependence on crude oil exports has spurred leaders to pursue economic diversification policies for decades. One critical area in which these efforts have manifested themselves is in measures to protect the country's manufacturing industry, especially automotive assembly, cement and textiles.

Amid the country's recent financial woes, Buhari has argued that Nigeria's best way out of the crisis is to diversify the economy. But such sentiments have been a constant element of Nigeria's domestic policy for many years, yielding mixed results at best. Nevertheless, the drive to diversify still impacts Nigeria's trade policy. For example, Nigeria's tough stance on the prospective Economic Partnership Agreement between ECOWAS and the European Union underscores Nigeria's desire to protect its manufacturing. The deal, which has been in the works for over a decade, would compel Nigeria to gradually open its markets in five-year increments for the next two decades in exchange for immediate tariff-free access to the European bloc. Though nearly every other West African country indicated a willingness to move forward with the agreement, Nigeria balked at the possibility that its manufacturing industry would suffer from "unfair competition" from the European market. Finally, while Nigeria has been wary of outside competition, its manufacturing sector has also lagged behind due to woefully inadequate infrastructure and electrical supply, among other domestic factors.

Nigeria has sought to protect its agricultural sector as well. The country's massive population — half of which inhabits rural areas — is still largely employed in subsistence agriculture, meaning crop yields are not connected to global supply chains. Furthermore, the country has struggled to develop better infrastructure and pursue concerted investment efforts in the industry. Despite these issues, Nigeria's leaders have linked the country's ability to feed itself to national security, declaring that the agricultural sector will provide the best means of ensuring stable employment for the country's exploding population in the future. That said, there are certain areas in which Nigeria has been forced to relent in its stance in order to feed itself and maintain social stability, including by permitting imports of cheaper grain from abroad.

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