Gauging the full potential of Trade Agreements

As we navigate the second COVID – 19 wave and its associated impact, we remain optimistic as we soldier on to a better future. Our island’s unique geographic location positions it as a natural gateway between Asia and Africa and a logical extension, promoting investments into Africa forms one of the key focus areas of the MIFC. With the coming into effect of the 2 highly awaited trade agreements– the Mauritius-China Free Trade Agreement (FTA) and the Mauritius-India Comprehensive Economic Cooperation and Partnership Agreement (CECPA), which are effective since 1st January 2021 and 1st April 2021 respectively, global business transactions and international trade flows through the island are expected to increase exponentially.

Add the African Continental Free Trade Agreement (AfCFTA) to the mix and Mauritius is propelled further to the centre of regional economic activity. To explore the full potential of the trade agreements, our Chief Development and Commercial Officer, Kevin Bessoondyal, sat down with Sunil Boodhoo, Director of the International Trade Division at the Ministry of Foreign Affairs for an in – depth interview.

1. In this day and age, are bilateral agreements key to give the economy the boost it very much needs?

As modern commerce increasingly takes place at a global and regional level, businesses require greater certainty when operating within the international trading environment. International trade is an essential component of the development agenda to bolster growth. Trade can enhance productivity by promoting efficient allocation of resources, increasing competition, fostering the adoption of more advanced technologies, allowing economies of scale, and encouraging innovation. Trade can also be beneficial for consumers by increasing the variety of goods available to them at cheaper prices. Analysis conducted have proved that export gains can be higher for countries with smaller size, indicating that smaller countries can get a larger boost from trade agreements, possibly due to the greater opportunity to integrate the global and regional markets.

For a small country like Mauritius whereby trade stands at over 100% of its GDP, the conclusion of trade Agreements has become crucial to sustain its growth trajectory.

Striking bilateral deals are a logical response to expand Market opportunities and to remain competitive. With only 1.3 million inhabitants, our market is too small to sustain our economy. Moreover, the traditional markets such as EU and US which played a pivotal role in our economic development are no longer as attractive and alluring due to increasing competitive pressures and the evolving economic context.

To maintain a competitive edge, Mauritius has no other alternative than to develop a network of trade agreements or we run the risk of being overshadowed by new players such as Vietnam, Philippines, Indonesia, Bangladesh and several Central American countries. This is the reason why Mauritius is scaling up its effort to conclude trade Agreements with strategic partners and emerging economies.

For a small country like Mauritius, the signing of trade agreements with giants such as India, China and at the African Continental level first enhances our visibility and positions the island as a gateway between Asia and Africa. With the pandemic hitting the world as a whole, there is a need, now more than ever, for Mauritius to leverage on these trade agreements to increase exports and to attract more investment in the country.

 

2.What is a Free Trade and a Preferential Trade Agreement? How does it work?

A Free Trade Agreement (FTA) is an agreement between two or more countries where they agree on certain obligations that affect trade in goods and services, and protections for investors and intellectual property rights, among themselves.

For Mauritius, the main goal of having trade agreements is to reduce barriers to our exports of goods and services and expand market access in the other countries; negotiate more flexible rules of origin, address Non Tariff Barriers (NTBs), protect our interests when doing business abroad.

FTAs can help the business community to enter and compete more easily in the global marketplace through zero or reduced tariffs and less regulatory bottlenecks in the services sector. While the specifics of each FTA vary, they generally provide for the reduction of trade barriers and the creation of a more predictable and transparent trading and investment environment. In general, this makes it easier and cheaper for our companies to export their products and services abroad, while also opening up more diversified sourcing opportunities.

A free trade agreement is much broader in terms of trade coverage than a preferential trade agreement (PTA). In general, a PTA has a narrow product coverage and is negotiated on a selected number of products, mutually agreed. This implies that preferential treatment in terms of tariff reduction or elimination will affect only the products covered by the Agreement.  The time frame for the tariff reduction/elimination will have to be mutually agreed.  Usually it takes place between 5-7 years.

On the other hand, a FTA has to cover substantially all trade, i.e. at least 90% of trade in the goods sector and substantial sectoral coverage in the services sector.  In general, an FTA will comprise of several lists of products for which tariffs will be reduced/eliminated according to different categories, namely, immediately and gradually. There may be an exclusion list of products that are considered sensitive on which tariffs may be maintained.

3.What are the major opportunities unlocked by the Mauritius-China FTA?

Under the Free Trade Agreement, in force since 01 January 2021, Mauritius benefits from duty free access on the Chinese market on 7,504 products as from that date. The remaining tariffs (around 700 products) would be eliminated over a 5 to 7-year period.  Mauritius on its part would eliminate tariffs on 148 tariff lines over a period of 5 years, representing 2.5% of its tariff lines.  The impact on the domestic industry is expected to be marginal.

Furthermore, Mauritius has been granted a Tariff-Rate Quota of 50,000 tonnes for special sugar at an in quota rate of 15% compared to tariff of 70%. The quota starting at 15,000 tonnes for 2021 will increase incrementally over 8 years.  Given that special sugar can be sold at a high price of 600-700 USD per tonne on the Chinese Market implies that export revenue between 30-35 million USD can be expected for this product alone.

Exports of goods from Mauritius have the potential to increase by at least USD 318 million per year and could be substantially higher if the right strategy is adopted to attract investment and develop additional supply capacity.

The FTA creates new investment opportunities in Mauritius targeting the Chinese market;

The FTA also provides a platform for leveraging Sino-Mauritian cooperation into mainland Africa, especially in the Special Economic Zones that Mauritius is setting up in countries such as Senegal, Ghana and Madagascar;

On the services front, the Chinese market would be open to Mauritius service providers in telecommunications, financial services, ICT, professional services, construction, distribution services, computer and computer related services and e-commerce, amongst others.

In April 2020, the World Bank conducted a high level data analysis outlining opportunities for Mauritius, in China.

As per the findings of the World Bank, 49 products with high preferential margin meet both the ‘feasibility’ and ‘desirability’ test on the Chinese market.  A few examples include:

Organic chemicals; Pharmaceutical products; Paints and varnishes; Essential oils, toilet preparations; Soap, washing preparations; Plastics and articles thereof; Rubber and articles thereof; Articles of leather; Man-made/synthetic filaments; Special woven fabrics; Knitted or crocheted fabrics and Tools, cutlery, spoons and forks, of base metal; parts thereof.

4.Described as a “Free Trade Pact”, CECPA has several objectives such as boosting, trade in goods and services. How will the agreement aid in positioning Mauritius centre stage in the India – Africa narrative?

The CECPA is the first Agreement of its kind that India has signed with an African country.  Therefore, it provides Mauritius a first mover advantage to tap the vast potential that India and Africa have to offer.

The Agreement provides unmatched opportunities for Indian businesses planning to do business in Africa. Indian manufacturers can move part of their manufacturing processes to Mauritius and using the cumulation rule, produce for the African Market.  The same principle also applies to the Services sector.  A service supplier from India can leverage on trade opportunities on the African continent by operating from Mauritius.

It is to be pointed out that Mauritius is a member of the Common Market for Eastern and Southern Africa (COMESA) and of the Southern African Development Community (SADC).  These Agreements provide duty free access on a market of 650 million inhabitants and it opens up the possibility for any interested investor targeting the African or India Market to use Mauritius as a production base.  It’s a combined Market of 2.6 billion people which can be accessed from Mauritius.

An analysis conducted by the World bank indicates that Mauritius enjoys a significant preference margin over competitors in selected products which are currently manufactured by India and which can be exported to Africa.  These include amongst others Medical devices, Pharmaceutical products, Paints, Fabric, Electric cables, Article of Aluminium, Article of glass amongst others.  We have also identified selected African countries on which we could focus.  These include Kenya, Madagascar, Mozambique, Botswana, Tanzania, South Africa and Seychelles.

5. Mauritius aspires to become a bridge through which trade and investment is conducted with Africa on one side and India/ China on the other? How do you see that happening in practise?

Through the CECPA, Mauritius offers Indian investors a legal framework to facilitate access in the African continent.

As indicated above, under trade in goods, the Indian investor can just relocate part of its production base in Mauritius to access the African continent.  The rules of origin are quite generous under the SADC and COMESA agreements, allowing the possibility for Indian businesses to do part of their processing in India and the rest in Mauritius.  For instance, we have only one spinning plant, while the demand for locally made fabrics to produce garments for both the African and Indian Markets is growing. India can invest in fabric production in Mauritius from Indian yarn and sell to companies producing garments on the African Market.  Our exports of garments have been on the increase especially to the SADC Market.  Mauritius is developing a pharmaceutical industry and the government has announced an equity participation of 25 million USD for the setting up of a pharmaceutical plant to produce vaccines.  India has both the technology and the knowhow in this sector and is increasingly targeting the African Market.  A joint partnership is therefore feasible and also desirable in this sector.  Africa imports pharmaceuticals to the tune of 12 billion USD per year and is therefore a lucrative market.  Other products imported in bulk with high tariffs from outside are automobile computers, garments, stationery, foodstuffs, chemicals, electronics.  These can be produced in Mauritius with Chinese or Indian investment and exported duty free.

As regards Services, Mauritius offers an appropriate platform to scale up investment activities. Mauritius has taken commitments to open up 120 services sub sectors, while India has committed some 94 sub sectors. Some of the key sectors are professional services, architectural services, engineering, education, audio-visual services, and logistic services.

The CECPA provides the possibility of opening campuses in Mauritius. Similarly, in the Health Sector, the CECPA allows the setting up of private hospitals including the practice of the Indian system of medicine and Complementary and Alternate Medicine.  India is widely known for its advanced medical services and equipment, whilst Mauritius is an attractive tourist destination.  We are attracting more and more African students to study in Mauritius.  The number of patients from the region coming for treatment in Mauritius is on the increase.  We are promoting health tourism.  These are all opportunities to be explored.

With regard to the Mauritius-China Free Trade Agreement (FTA), the agreement provides a basis for enhanced collaboration between China and Mauritius to engage jointly in Africa, especially in the Special Economic Zones that Mauritius is planning to set up in countries like Senegal, Ghana and Madagascar.

Under the FTA and through investments, Chinese manufactures and exporters may avail of opportunities and advantages that membership of Mauritius to COMESA and SADC, provide.

Given the rising importance of Information Technology Enabled Services/ Business Process Outsource in Mauritius, joint ventures between Chinese and Mauritian companies may be considered to tap the French speaking African countries market in the fields of knowledge process outsourcing, business process outsourcing, information and technology outsourcing. The bilingual skills of Mauritian human capital are all the more a bonus to do business with francophone Africa and Asia in parallel.

6.Free trade agreements don’t just reduce and eliminate tariffs, they also help address behind-the-border barriers that would otherwise impede the flow of goods and services; encourage investment; and improve the rules affecting such issues as intellectual property, e-commerce and government procurement. What according to you would be the impact of these recent trade agreements on the financial services in Mauritius and more specifically on further positioning Mauritius as an innovative financial centre for Africa?

India, China as well as Africa have a great opportunity to leverage on their respective assets with Mauritius being the alliance of this milestone.

AfCFTA

Mauritius has, over the years, built itself as an international financial services centre of substance and repute. Our financial services industry is characterized by strong regulation and a business friendly approach.

Investors choose Mauritius as a favourable holding company jurisdiction not only for commercial reasons but also for its high quality of service, its legal and regulatory frameworks as well its reputation. These have contributed in positioning Mauritius as an international financial centre.

Africa is a Continent which is growing fast. It is a Continent with a lot of potential and opportunities that still need to be explored. For example, Africa is the global leader in mobile money, which is increasingly becoming an important component of Africa’s financial services landscape. The competitive landscape is rapidly changing and increasing in complexity across the financial services industry.

More recently, fin-techs have established a solid footing in the market, and several banks are competing aggressively for the mobile banking customer. While some banks have chosen to move alone, others are forming partnerships in hopes of reaching the market faster.  We could develop partnership since we already have access to the COMESA Market on trade in services, for instance we are negotiating a similar agreement in SADC and within the Continent.

Mauritius has a favourable network of investment promotion and protection agreements and double taxation avoidance agreements. And we need to leverage on these agreements to take advantage on the African Continent.   Some 35 billion USD has already been channelled through Mauritius as investment on the continent.  In fact, Mauritius has the ecosystem, business facilitation environment and infrastructure for investors to plan their investment using the Mauritius jurisdiction.

CECPA

As mentioned earlier, the CECPA contains a comprehensive Chapter on Services as well as a specific Annex on Financial services aimed at improving bilateral trade in financial services.

Key sectors in which the Parties have taken commitments include both non-banking (e.g. insurance and insurance related services) and banking financial services.

By removing key barriers and providing service suppliers with more transparent and predictable operating conditions, the Agreement provides a platform for both countries to increase the value of services trade.

Regarding the impact of the CECPA on the financial services in Mauritius, it is important to point out firstly that the bilateral commitments taken within the framework of the CECPA to relax barriers (for instance in terms of lower entry requirements) on Financial services in Mauritius would allow Indian financial institutions to participate in the Mauritian market, improve competition as well as market efficiency. The efficiency gains in financial services would be in terms of economies of scale and scope.

Secondly, commitments taken at the level of CECPA on financial services will provide legal certainty to Indian investors to invest in Mauritius. The CECPA provides for transparency in the procedures necessary to supply financial services.  It also includes provisions on domestic regulation, recognition and dispute settlement along the lines of GATS.

Thirdly, the CECPA promotes the movement of professionals.  It provides a framework for professional bodies to engage in dialogue on recognition of qualifications, licences and registration, and the development of mutual recognition agreements in professions of mutual interest including accounting and auditing, and company secretaries within one year from the entry into force of the Agreement.

Fourthly, the CECPA has a regional dimension providing a framework to Indian investors to use Mauritius as a gateway for the exports of their services to Africa.  Indian investors could use our non-banking activities to provide their services to Africa such as the Global Fund, Captive Insurance Licence and Global Advisory Services Licence.

Mauritius-China Free Trade Agreement (FTA)

Under the Mauritius-China FTA, both Mauritius and China have taken strong commitments to strengthen trade in financial services between both countries. We have created a transparent and predictable environment to facilitate trade in services.

For instance, we have secured access for non-life insurers of Mauritius on the Chinese market. They are permitted to establish as a branch or as a wholly-owned subsidiary; i.e., with no form of establishment restrictions. Life insurers of Mauritius are permitted 51% foreign ownership in a joint venture with the partner of their choice and as from 01 January 2024, the equity cap will be eliminated.

For brokerage for insurance of large scale commercial risks and brokerage for reinsurance and brokerage for international marine, aviation, and transport insurance and reinsurance, service suppliers of Mauritius are permitted to establish wholly foreign owned subsidiaries.

I also need to point out that licences under the ‘All Insurance and Insurance Related Services’ sub-sector, will be issued by Chinese authorities to Mauritian operators with no economic needs test or quantitative limits on licences.

Mauritius can carry out financial services in China on a progressive basis. Representative offices of Mauritian banks in China could indeed explore trade in financial services perspective to facilitate transactions of Chinese investors in Mauritius and in Africa. This would further position our country as an innovative financial centre for Africa. Similarly, we do have in Mauritius, local banks which already have an agreement with China Union Pay. Such local banks should consider the possibility to open branches in Guangzhou; Pudong area in Shanghai (major financial centre) or Shenzhen (large industrial city). They could focus on financial transactions between on one side, Mauritius and China and on the other side, between China and Africa.

Furthermore, the Agreement provides for the development of a Renminbi clearing and settlement facility in Mauritius. This would consolidate our reputation as a regional centre for trading in Renminbi.

7.The AfCFTA is by all means the largest trade agreement in the world. What are the significant impacts to be expected for Mauritius?

The AFCFTA opens up a market of 1.3 billion consumers, with 55 participating African countries.  It is the largest in the world and is expected to increase intra African trade by nearly 40% to over 50% with the sole removal of tariffs on goods as per a study by the ECA.

Our objective is to use the AfCFTA to diversify our export market, consolidate our trade and investment relations with Africa and position Mauritius as a business hub for the African Markets.

Services sector are of upmost importance to Mauritius and the AfCFTA would unlock opportunities which Mauritius can take advantage of. Negotiations are currently ongoing and we are looking forward for more opening in the sectors currently being negotiated which include Business services, Financial Services, Communication Services, Tourism and Transport Services. Other sectors are to be negotiated in the future.  Mauritius has already invested in the services sector such as banking, insurance and tourism sector in some African countries.  Our professionals in the accounting, auditing and computer related services are already operating in some African Markets, in particular in the COMESA region.  The AfCFTA will open up more opportunities on a broader scale.

In terms of goods, Mauritius will have preferential access on some specific markets such as the Northern, Western and central African countries, where we do not have any preferential market access.

8. Are there any upcoming, significant bilateral agreements in the pipeline for Mauritius?

Mauritius –Indonesia PTA

Mauritius has started negotiations of a Preferential Trade Agreement (PTA), covering trade in goods with Indonesia The proposed agreement is expected to increase bilateral trade and improve investment opportunities.

We are currently deepening the interim Economic Partnership Agreement with the EU by expanding its scope through the inclusion of new sectors, namely trade in services and investment, sustainable development, Intellectual Property and Agriculture, Government procurement, amongst others.  It will be a new generation trade agreement, very broad in scope and depth.  It will open up new opportunities in the sectors mentioned.  We would embark in a similar process with the UK in the near future.  We have already submitted a proposal to negotiate a Free Trade Agreement with the Eurasian Customs Union, and have signified our interest to negotiate one with the US to ensure continuity of trade post AGOA in 2025.

Our focus now is on developing and implementing strategies jointly with the Economic Development Board(EDB) and the private sector to maximise on the opportunities under the recently concluded FTAs.

Sunil Boodhoo

Director of the International Trade Division at the Ministry of Foreign Affairs