African Trade Integration in a Changing World
By Beru Lilako
The State of Trade and Trade Integration in Africa
In recent years, the continent has seen an increase in merchandise trade, which has been characterised by the expansion of trade in unprocessed merchandise and fuel.
The relatively modest level of manufacturing trade reflects the fragmented trade policy landscape on the continent and an overall trade environment that has constrained greater non-commodity trade within the continent and with the rest of the world. Accordingly, the composition of trade also reflects lower integration in regional and global value chains.
This holds the promise that Africa can make the scaling up of trade and moving up the value chain a key pillar of a successful growth lift-off strategy that significantly increases living standards and employment for a rapidly growing labor force in coming decades.
From the analysis done by Feyrer J. (2019) in “Trade and Income – Exploiting Time Series in Geography.“, a reform agenda aimed at lowering both tariffs and NTMs, combined with substantial improvements in the trade environment, has the potential to boost Africa’s intra-regional and overall merchandise trade substantially. This would lead to large gains in income and living standards. A strengthening of the overall trade environment would boost trade of services as well, which would be further enhanced by services trade liberalisation.
Implementation of the AfCFTA and improving the trade environment would also support integration into global value chains (GVCs) offering opportunities for strengthening manufacturing and achieving economies of scale, promoting economic diversification and generating improved economic dynamism. Furthermore, progress towards the objective of making the AfCFTA a deep trade agreement through regulatory alignment on goods and services provision would open up additional opportunities for trade.
All these steps should be part of broader efforts to overcome long standing barriers to integration such as the use of import tariffs for import substitution or as a substantial source of revenue.
Challenges and Opportunities
As we look at the trends in trade in Africa over past decades, a key question remains around what role policies and institutions have played in the evolution of trade on the continent. It is noteworthy that policymakers have made efforts spanning decades to boost trade. For example, several regional economic communities (RECs) were established in Africa. All African countries are members of at least one REC and some are members of two or more RECs. However, the effectiveness of RECs in boosting trade has been uneven. The RECs’ limited impact reflects challenges in their design, lax enforcement (for example, insufficient and inconsistent application) and the fact that the multiple and overlapping memberships in regional trade arrangements have led to complexity and uncertainty impeding implementation.
Looking more broadly at the ease of trading, NTMs are also seen as relatively high in Africa. For intra-African trade, NTMs are estimated to be equivalent to an import tariff of 18 percent on average thus posing a substantially larger obstacle to trade than tariffs. Beyond restrictive trade policies, the largest factor weighing on intra-African trade is the challenging trade environment wherein transport infrastructure (including trans-border road, rail, port and air transport networks and border and customs procedures) is sub-par, as well as telecommunication infrastructure, financial development, human capital, institutions and product and labour market regulations are restrictive.
Based on a subset of these features, the (non-tariff-related) cost of trading across borders in Africa is estimated to be about double that in East Asia and Organisation for Economic Co-operation and Development (OECD) countries.
The evolution of trade on the African continent as reviewed above and the overall policy and institutional backdrop suggest that addressing the key barriers to trade by implementing the AfCFTA and improving the broader trade environment could provide a substantial boost to trade and lead to narrowing the gap with other regions in terms of the role that trade can play in lifting growth, living standards and employment.
Overall, for complete AfCFTA implementation and strengthening of the trade environment to happen, the continent’s inclusive efforts will be needed over the coming years and trade openness needs to become a core feature of policy frameworks.
As we look towards trade integration, eventually lifting the income levels of all countries on the continent, it is important to be mindful that the pace of progress may differ across countries and the impacts on households and workers may vary. It is therefore critical to modernise social safety nets to support the most vulnerable and enhance vocational training and job search assistance during the transition. To reap the full benefits of trade integration, African countries will need to ensure a favourable business environment and macroeconomic stability, complemented by efforts at improving governance, education, efficiency and productivity of physical capital and strengthening financial development.
Regional trade integration could become the vehicle for economies on the continent to transition to higher growth and job creation in a changing global environment. In particular, it can help to make countries more resilient to climate change and risks of geopolitical fragmentation. Trade can also help Africa take advantage of the opportunities from technological progress and a growing working-age population with the appropriate investment in human capital and in the context of a modernised and efficient social safety net.
Beru Lilako is a policy analyst specializing in Regional Integration, Investment and Trade