Intraregional trade in Africa revisited

International Business News – On January 1, 2021, the African Continental Free Trade Area was officially launched. According to the plan, tariffs on 97% of goods between African countries will be phased out by 2034. It is widely expected that the free trade area will bring significant economic growth to the African continent. According to the World Bank’s 2020 study, trade between African countries will increase by 81% by 2035, and output will increase by $450 billion. But every time people discuss the prospects of the African Free Trade Area, people seem to forget to mention that intra-African trade accounts for only about 17% of Africa’s total exports. This compares to 59% in Asia and 69% in Europe. Why does this happen? How to increase the level of intra-African trade within the framework of the African Continental Free Trade Area Agreement? Around these issues, experts in African studies have given their views and suggestions.

Intraregional trade in Africa is undervalued

Andrew Mold, head of the East Africa Office of the United Nations Economic Commission for Africa, said in an article on the official website of the Brookings Institution on August 12 that the economic significance of intra-African trade is often underestimated. Correcting this misunderstanding is important because it can influence judgments about the future of the African Free Trade Area. Accelerating intra-African intraregional trade growth will be difficult if prejudices like “there is nothing to trade between African countries” prevail. In fact, intra-regional trade in Africa is very active. From this understanding, the prospects of the African Free Trade Area will be much better.

Molde points out that intra-African trade is not only affected by statistical errors, but also by a range of cognitive biases and omissions. Specifically, there are roughly three reasons for the misconception that intra-regional trade on the African continent is low.

First, comparisons of Africa with other regional groups are often misleading and no like-for-like comparisons are made. The discussion on intraregional trade depends in part on how “regional” or “subregional” is viewed. For example, while Central Africa appears to be the least geographically integrated subregion in the world, the picture for Central America, Central Asia and South Asia is not optimistic either. Likewise, in terms of geographic subregions, Southern Europe is no more integrated than East Africa, and Northern Europe is only marginally better than sub-Saharan Africa as a whole.

Second, the export of high-value goods to destinations beyond the continent distorts the picture of intra-African trade. For example, some African economies are significantly more dependent on the import and export trade within the African continent than in other regions. In many countries, intraregional exports are also substantial relative to the size of their economies. This is the case in Zimbabwe, Botswana, Lesotho and Namibia, where intraregional exports account for about 20% of GDP.

However, the average level of intraregional trade in Africa is influenced by the continent’s larger economies, notably Egypt and Nigeria, followed by South Africa. The reasons for their low reliance on African markets vary: Egypt, which has a long-standing market access agreement with the European Union, has in the past prioritized the Middle East and European markets; Nigeria’s oil and gas are mainly exported to Europe and Asia; Historical reasons make its economy less dependent on the markets of its neighbors within the region. As a result, a small but extremely important number of African countries are extremely dependent on commodity exports, while most of the natural resources are sold to markets outside the continent, driving down the share of intra-regional African exports. Angola is a good example. Although most of the oil and its by-products are exported abroad, excluding this part of the trade, intra-African exports would account for about three-quarters of Angola’s total exports.

Finally, perceptions of the scale of informal cross-border trade are systematically biased. The prevalence of informal cross-border trade means that intraregional trade is much more developed than can be obtained from official trade data alone. While informal cross-border trade is a global phenomenon, several studies have shown that informal cross-border trade is far more prevalent on the African continent than in other regions. For example, a 2020 study by the Food and Agriculture Organization of the United Nations and the African Export-Import Bank found that “informal cross-border trade is nearly $18 billion annually, accounting for more than two-thirds of trade flows for some African countries”. Moreover, almost all informal trade is intracontinental. Some scholars have summarized existing research and believe that intra-African trade is systematically underestimated by 11% to 40%, while others believe that this figure should be higher, even closer to 50%.

It can be seen that the impression of low intraregional trade in Africa is wrong. In most parts of the African continent, intraregional trade accounts for a high proportion of its total trade. There is nothing to trade between African countries. Perceptions must be reversed in order to provide a promising starting point for the development of the African Free Trade Area. Molde stressed that recently some countries are trying to persuade African countries to sign bilateral trade agreements with them. For example, the UK wants to replicate Economic Partnership Agreement-type agreements across the continent, and the US is negotiating free trade agreements with Kenya and Ghana. But at a time of accelerated integration on the continent, such bilateral agreements could distract African governments from the more important African Free Trade Area agreement.

The reasons for the blockage of intra-regional trade in Africa

In an interview with this reporter, Evans Osabuohien, a professor of economics at Covenant University in Nigeria, said that the downturn in trade between African countries is mainly related to the backward value chain systems of many African countries. For example, Nigeria, which exports raw cocoa beans, has little trade with Ghana, which also exports raw cocoa beans. However, if the cocoa beans can be processed into finished products, such as chocolate or other beverages, there will be different brands. At this time, the two countries can carry out trade of their own brands. There is a good example of this in Europe, where countries produce different brands of wine and there is a very close trade between them. Therefore, African countries solve this problem by processing, packaging and branding the raw materials.

Landry Signé, senior fellow at the Brookings Institution’s Global Economy and Development Program and professor and managing director of the Thunderbird School of Global Management, believes that the length of time it takes to clear customs between African countries is a major obstacle to trade development. According to World Bank statistics, only four documents are needed to export goods from France, while in Angola nine to 10 documents are needed. For imports, 4 documents are needed in France and 11 in the Central African Republic. Prior to the Continental Free Trade Area Agreement, companies throughout the continent reported increased delays in getting goods through customs. Over the past 10 years or so, the average time to clear goods for export increased from 8.5 days to 10.3 days, while the average time to clear imported goods increased from 13.9 days to 16.8 days.

Astrid Haas, a researcher at the Institute for Infrastructure Studies at the University of Toronto’s City College, said in an interview that poor infrastructure is one of the main factors hindering intra-regional trade in Africa. Despite improvements in port and road conditions, infrastructure conditions in many parts of Africa are still very poor, and poor road infrastructure has undoubtedly raised the cost of trade in Africa.

Multiple initiatives to increase intra-regional trade in Africa

Osabxin believes that the role of the African Continental Free Trade Area Agreement in promoting intra-African trade cannot be underestimated, but its short-term impact is not yet significant. As long as there is a concerted effort and multi-sectoral involvement, people will see positive changes in the past two or three years. For example, the growth and transformation of Rwanda’s economy is obvious to all, and when more African countries rise up with the hope of development, the future of the entire African continent will be brighter. Osabkhin expects the trade agreement to boost the continent’s development, strengthening regional value chains for agricultural products and their associated light industries. Using regional advantages to improve competitiveness, diversify product supply and export high value-added products can help Africa withstand future economic shocks. Recent years have witnessed booming trade in services between African countries, which will continue to develop further under trade agreements.

Cameroon, Egypt, Kenya, Mauritius, Rwanda, Tanzania, Tunisia and Ghana will be the first to start working on the African Continental Free Trade Area, Herbert Krapa, Ghana’s Deputy Minister of Trade and Industry, said at an event. Trade under the Agreement and put the dream of continental integration into practice. The eight countries will diversify the exports of African countries through export trading companies, increase the total export volume, and at the same time demonstrate the advantages of the African Free Trade Area to foreign investors.

Benedict Oramah, president and chairman of the Export-Import Bank of Africa, believes that criticism of intra-African trade and the AfCFTA needs to go back to its roots and find solutions rather than simply criticizing the state of affairs . Specifically, in order to accelerate trade and commerce within the African region, the continent should leverage its own resources to promote investment and development through human capital and technological potential. He emphasized that the industrial revolution in other countries is largely due to the young and capable labor force, so the youth should also become an important force in promoting the development of the African Free Trade Area. Therefore, it is necessary to provide them with intellectual property protection, reduce the cost of doing business, develop supportive policies to enter the single African market, and unleash their entrepreneurial drive. In turn, a vibrant single market will open doors of new opportunities and increase choices for young people, enabling them to reach their full potential.