As Nigeria ratifies the African Continental Free Trade Area (AfCFTA), Patrick Edmond examines the prospects for intra-continental African trade and the risks and opportunities associated with it.
African economies are not well interconnected, conducting only 16.6 percent of their trade with each other. By comparison, for most of the rest of the world that figure is above 55 percent. Despite vast agricultural potential, only around five percent of Africa’s grain importation comes from regional resources. The bulk of the rest comes from Asia. Plenty of manufactured products – from t-shirts to tomato paste – are imported into Africa, though made from raw materials sourced, or sourceable, in Africa. For a continent and those who invest in it, the dearth of intra-African trade brings a raft of troubles. First, it means that few sectors beyond extractives offer reliable investments. Oil, gas and mined ores make up half of Africa’s external exports, but only a third of its internal trade, whilst manufactured goods are 45 percent of internal trade and only 20 percent of trade to the outside. Second, fragmented economies are harder for outsiders to deal with. And finally, resource-dependent, undiversified economies are vulnerable to economic shocks, corruption and state capture, giving headaches to investors.
A problem with deep roots
Intra-continental trade is hampered by issues that have long troubled African countries: tricky operating environments, crippling infrastructure deficits, low education levels, and scant access to credit. For example, African countries have long been net food importers since they struggle to get perishables to market, or to efficiently produce processed or industrially farmed products.
Institutions also stand in the way. First, African countries charge high tariffs on imports, both to protect industries and to raise revenue. Second, uncoordinated, non-uniform regulations, standards, and licencing policies play a major role.
Institutional restrictions don’t entirely squash trade flows, but drive them into the shadows. Millions of dollars worth of gold and rare earth minerals such as coltan, tantalite and cassiterite are smuggled out of the Democratic Republic of Congo before entering global markets, creating major difficulties for international buyers to comply with origin tracing requirements. Meanwhile, intensive protectionism in Nigeria means that Benin – a country of only 11 million – is the world’s largest importer of rice from Thailand. Most of this rice is smuggled into Nigeria.
The promises of trade integration
Trade agreements offer some hope. Reducing tariffs can make margins for intra-African trade more viable. Enlarging available markets can allow the continent’s best firms to compete with outsiders on a continental stage, not just in their own countries. Other economic issues also get a nudge in the right direction. For example, extant informal and illicit cross border trades would be encouraged to formalise, while those in border regions far from national urban centres would have greater access to goods and services.
Most prominent – and topical – of such agreements, is the African Continental Free Trade Area (AfCFTA). Long in gestation, the project received a major boost in July this year when Nigeria – Africa’s largest economy – finally ratified the treaty.
The AfCFTA is ambitious but pragmatic. Its architects hope for it to hike intra-African trade to 25 percent within a decade, largely by cutting tariffs entirely in 90 percent of goods categories. The treaty will also establish common institutions and processes with practical mandates to facilitate trade integration, including a permanent AfCFTA general secretariat, an African Trade Observatory, a digital payments system, a comprehensive standard for rules of origin, and an online portal to collect industry complaints about non-tariff barriers. Negotiations are ongoing on many details, but all parties appear committed to making the project work.
Reason for doubt
Many remain sceptical, with good reason. Even key architects of the AfCFTA consider it weak and in need of work. The UN estimates only 0.2 percent GDP improvement under current plans. Even proposed tariff differentials between imports from Africa and imports from the rest of the world often won’t balance out efficiency differentials. At the very least, this agreement will bring no concrete impact on African trade for at least three years. And of course, the AfCFTA doesn’t directly address most barriers to intra-African trade.
Some point to the checkered history of African trade integration. Continental trade areas have been tried before, specifically with the Lagos Plan of Action in 1980 and the African Economic Community in 1991. Neither picked up any steam. The alphabet soup of African economic and political integration projects also has a history filled with grand dreams, prolific treaty signing, and weak institutions. Africa’s only well-functioning customs union is the Southern African Customs Union (SACU), an outflow of colonial customs integration, and serves mostly to provide South African firms with a larger market. The East African Community (EAC), West African Economic and Monetary Union (UEMOA), and Economic and Monetary Union of Central Africa (CEMAC) have had some successes in connecting member states, such as through work permit waivers, but lack effective common customs regimes. In 2008, SADC, the EAC, and the Common Market for Eastern and Southern Africa (COMESA) signed up to the Tripartite Free Trade Area (TFTA), but it only received full buy-in from South Africa – its largest member state – in 2018.
Intra-African trade policies face long odds from the start. African economies are not always complimentary, producing many of the same products. The benefits of tariff reductions might be restricted to narrow sectors, such as producers of simple manufactured goods like steel rebar, ceramic roofing or plastic pipes. Meanwhile, African elites pay only nominal loyalty to the supra-national bodies that support regional integration, and only when it suits them. In practice, they privilege the interests of their own states over those of regional blocs. For good reason, many African governments are wary of genuinely opening up. For some in natural-resource dependent states, the prospect of a diversified economy is of little interest. For others, integration offers a threat to power. Industries that would suffer under increased competition can be crucial to their power bases, and disruptions can be more tangible than the benefits brought by liberalisation, bringing social unrest. Still others rely heavily on tariffs to keep solvent. Big players are scared their clout will be diminished by integration, and small ones fear being overwhelmed by bigger neighbours. Equally many governments, particularly those of an authoritarian bent, are already deeply suspicious of their neighbours. This means mutual trust – essential for shared rules – can be hard to come by.
Past attempts have also suffered from being too reliant on big ideas and the repetition of best-practice mantras, while avoiding hard politics and practical policy. African leaders are drawn to integration by the warm light – simultaneously pan-African and economically liberal – it sheds, ingratiating them with domestic audiences and international donors alike. But sacrificing customs revenues, permitting the disruption that comes with economic competition, and sharing power with rivals, is a bitter pill for African leaders to swallow.
As a result, countries often ignore regional trade rules, and regional institutions aren’t given the teeth they need for enforcement. The East African Community was racked this year by a breakdown in trust. Tanzania and Kenya locked horns over product standards and rules of origin. And crossing points on the border between Rwanda and Uganda have been closed since February, stalling mutual trade, over mutual accusations – particularly between presidents Kagame and Museveni – of nefarious intelligence activity and political interference.
Smaller, more focussed projects often have a greater chance of concrete impact. One Stop Border Posts, which significantly reduce import and export processing times, are being identified across Africa, and dozens have so far been completed or are under construction. The West Africa Power Pool (WAPP) recently began to buy and sell electricity between its member states, balancing surpluses and shortages. But small projects are equally beset by the political inertia. The Single African Air Transport Market (SAATM) launched last year, has only 23 signatories out of 55 African Union members, many backing out for fear that inefficient government-owned airlines will crumble in a liberalised marketplace.
Reasons for hope
Nonetheless, there is cause for optimism. Decades-worth of projects, however clumsy, have made an impact. States within the TFTA have managed to hit 25 percent intra-bloc trade in some years, significantly above the continental average. This shows that regional trade blocs assist integration even when their tariff regimes don’t work. They provide essential coordination mechanisms, expertise pooling, and unified – therefore more weighty – negotiating platforms, such as for trade deals or infrastructure projects. They also form vital building blocks for more ambitious projects such as the AfCFTA.
The AfCFTA itself also looks hopeful. Lowered barriers are a step in the right direction, and will encourage diversification and specialisation. Equally integration at the institutional level is crucial to provide national governments with the confidence that efforts to reduce non-tariff barriers will be reciprocated by neighbours. Further, integration offers the opportunity for foreign investment to deal with larger, more cohesive markets, with centralised rules. Finally, multilateral institutions can increase investor confidence. For example, the AfCFTA, if successful, might pave the way for an continental arbitration court, and centralised, digitised administrative systems may reduce corruption and other regulatory issues. And while it won’t directly address most non-tariff barriers or other economic issues that hamper intra-continental trade, its institutional arrangements will greatly assist in the long process of doing so.
Its designers appear to have taken on board many of the lessons from regional blocs, and have learned to face the hard process of negotiation and compromise. Strategic tariff cut exemptions are built into the deal. There are no criteria on zone membership, meaning states remain as sovereign as possible. And a mechanism for budget support will be established to ease the pain of inevitable revenue deficits. As a result, the AfCFTA has broad commitment from businesses and governments, and has been structured in a pragmatic manner that might – unlike its predecessors – meet its goals.
The transformation of Africa’s trade relations with itself will not be quick. Past efforts have been littered with empty gestures and dysfunctional institutions. But the wind appears to be shifting. Important efforts are being made to change the terms on which trade is done, and there are positive signs that African governments understand the hard choices and tough compromises necessary to bring change. Knowing where these winds will carry the continent, and at what speeds, will be a crucial part of taking advantage of trade opportunities in the short and medium term.