RESEARCH » New Studies » GED Focus Paper: Boosting Intra-African Trade

GED Focus Paper: Boosting Intra-African Trade
Hindrances, Opportunities and the Continental Free Trade Area

 

Key Findings

  • Africa has the weakest regional trade performance of any (developing) region.
  • The CFTA has been underway since 1991.
  • Once launched, the CFTA would become the world’s largest common market as it includes all 54 African countries.
  • Trade between Africa and the ROTW quadrupled from US$197 billion in 1995 to US$852 billion in 2015.
  • Trade between Africa and the ROTW accounts for over 50 percent of its GDP.

 

“It was a dream of our founding fathers to create a continent where people can move freely (with) goods and services across the continent.” – John Dramani Mahama, Former President of the Republic of Ghana.

 

The Dream of  a Continental Free Trade Area

As several African countries gained independence from their colonisers, founding fathers sought to establish a pan-African block part of whose aim was the promotion of intra-African trade as a framework for addressing their disintegrated economies driven by lack of industrialisation, primary resource exploitation and resource dependency. Under the Organisation of African Unity (OAU) (est. 1963), the 1991 Abuja Treaty was initiated to serve as a guide for this purpose. Part of its aim is the establishment of Regional Economic Communities (RECs), which would become the building blocks of an African Economic Community (AEC) that promotes economic cooperation among OAU members in a common market called the Continental Free Trade Area (CFTA). While eight RECs have been created to cover integration in the various sub-regions of the continent; [1] the CFTA’s objective is to create a mutually beneficial trade agreement among all 54 African countries. Though the Treaty has been operational since 1994, the 26-year old dream of continental integration is yet to be realised as African borders remain thick.

High Intra-African Trade Costs

The thickness of African borders is as a result of the high tariffs and non-tariff barriers including, but not limited to, burdensome customs procedures, excessive documentation, inefficient ports, poor transport and energy infrastructure, all of which add to the cost of doing business regionally. Thus, it is no surprise that the continent has the weakest regional trade performance in the world. From the figure below, trade among sub-Saharan Africa (SSA) costs 39 percent higher than in East Asia, which is the highest intra-regional cost in any region. On average, exportation takes about 8 days and costs US$813 in SSA; that is 4 days and US$279 more than East Asia and the Pacific, 4 days and US$175 more than from Latin America and the Caribbean, and 2 days and US$254 more than South Asia.

Potential Areas of Improvement

Furthermore, intra-regional trade is estimated at about 10-12 percent of total trade in Africa, 30 percent in the Association of Southeast Asian Nations (ASEAN), 40 percent in North America, and over 60 percent in Western Europe. The associated cost is, in no small part, a contributor to Africa’s regional trade performance. Besides, its regional trade is further hindered by the weak productive and institutional capacities needed for trade. African countries must improve their manufacturing base and strengthen the institutional structures required for trade policy to optimally foster industrialisation and structural transformation. In order to improve regional trade, the institutions must ensure coherent national policies especially in the areas of trade and industrial policies and in the promotion of development strategies.

Increases in International Trade

On the other hand, trade in goods between Africa and the rest of the world (ROTW) has quadrupled in the last two decades. It increased from US$197 billion in 1995 to US$852 billion in 2015 reflecting an expansion of imports and exports. Though the continent plays a small role in world trade – it’s share of global export is about 2.4 percent – trade between Africa and the ROTW accounts for over 50 per cent of its gross domestic product (GDP).[2] And, as Kenya’s President, Uhuru Kenyatta, correctly reflects the reason for this trend, “there cannot be a good reason why it is easier for us to trade with Asia, Europe and the Americas, rather than with fellow Africans.” [3]

The Expansion of Intra-African Trade

The expansion of intra-African trade cannot be overstated. It is a key element of fostering sustainable growth and development. This is increasingly important for not only improving the continent’s business environment but also accelerating industrialisation, improving productivity, developing the infrastructure needed for industry competition, creating value chains that offer the scope to engage in global value chains, and promoting the structural transformation of African economies. When combined with the necessary institutions and trade facilitation measures needed for deepening market integration, the CFTA would increase job creation, reduce the costs and time required to move goods and people across borders, promote foreign direct investment, improve the continent’s position in global trade, as well as reduce its exposure to global commodity shocks. Moreover, the low level of (light) manufacturing in Africa means that the bulk of manufactured goods must be imported – this presents an opportunity for increased manufacturing activity whereby producers can access cheaper materials for finished products as a result of the effective implementation of the CFTA and improving business conditions that make trade possible.

Benefits of A Continental Free Trade Area

There is, therefore, the need to reduce the red tape and associated costs from trade barriers in order to unlock the benefits of regional integration and bolster development objectives. When launched, the CFTA would become the world’s largest trade agreement, as it will include all 54 African states, with a combined GDP of over US$2.19 trillion and about 1.2 billion people. According to the Economic Commission for Africa (ECA), the implementation of the common market would raise the share of intra-African trade from about 10 percent in 2010 to 15.5 per cent by 2022. This share may further increase to approximately 22 percent with the improvement of non-tariff measures such as transportation linkages. Furthermore, the ECA estimates that not only would the CFTA increase intra-African trade by as much as US$35 billion, an increase of more than 50 percent from current levels, it would additionally increase the continent’s export to the ROTW by 6 percent.

Opportunities of Trade Facilitation and Its Hindrances

Though the journey towards a better-integrated continent is in progress, the CFTA is still met with certain obstacles and challenges despite what is to be gained. The objective of the focus paper is to, therefore, critically analyse the opportunities of trade facilitation in Africa and its hindrances. It discusses the eight RECs and their impact on intra-African trade. It also discusses a broader approach to overcoming market segmentation, as well as advances policy lessons for addressing issues that may undermine the successful launch and implementation of the CFTA. More importantly, it identifies opportunities for partnerships that would not only foster intra-Africa integration but also promote sustainable growth and development.

 

[1] These RECs include the Economic Community of West African States (ECOWAS), the Common Market of Eastern and Southern Africa (COMESA), the East African Community (EAC), the Community of Sahel-Saharan States (CEN-SAD), the Economic Community of Central African States (ECCAS), the Southern African Development Community (SADC), the Arab Maghreb Union (UMA), and the Intergovernmental Authority on Development (IGAD)

[2] Calculations using World Bank data (Trade % of GDP).

[3] This statement was made at the Pan African Parliament meeting in Midrand, South Africa in 2015