8 Free Trade
In this entry, we describe the effect of trade on economic development and show how Africa can benefit from improved regional trade. We then present a free-trade scenario that shows the impact of the full implementation of the African Continental Free Trade Area.
- Trade and globalisation have made immense contributions to humanity’s prosperity and development. To date Africa has not capitalised fully on the opportunities, despite a number of international agreements and measures designed to boost African trade volumes, such as the General Agreement on Tariffs and Trade and preferential access agreements with the US and EU.
- Currently, China is Africa’s biggest trade partner. However, the large proportion of raw commodities rather than high-value products being exported is concerning.
- Well-considered and meaningful regional trade initiatives can boost trade volumes and value in Africa, given that Africans invest in the associated infrastructure and that non-tariff barriers to trade are removed.
- The African Continental Free Trade Area holds considerable promise for economic development in Africa, as modelled in the Free Trade scenario.
- Increased regional trade facilitated by trade agreements is imperative for building competitive productive capacity at scale and to offer sufficiently large markets to attract substantive foreign investment, owing to Africa’s relatively small individual economies and fragmented geography.
Trade and globalisation have made immense contributions to humanity’s prosperity and development — although less in Africa owing to a general hostility towards globalisation rooted in the negative impacts of slavery, imperialism and colonialism of the previous centuries. To a large degree, Europe and North America’s wealth came at the expense of Africa’s immiseration.
Africa has fared poorly in historical accounts of world trade, even when the monetary value of the slave trade is included in trade estimates. Although African exports grew rapidly during the second half of the 18th century owing to the regional production of gold, gum, ivory and palm oil, the relative prices of these products started a prolonged descent after the Berlin Conference. By 1940, Africa’s terms of trade were back at their 1800 levels.
Even the discovery of high-value minerals such as diamonds and gold in South Africa in the late 19th century did not alter this trend and a number of African colonies became increasingly dependent on the export of copper, and after independence, on oil. Africa remained poor because it specialised in activities that had diminishing returns: poverty was perpetuated by a trade regime (free trade) that reinforced the rich and kept the poor down.
The trendline for Africa held even during the first wave of modern trade globalisation, which peaked shortly before the First World War (the value of exports was around 12% of global gross domestic product (GDP)) before crashing down during the Great Depression of the 1930s and the Second World War to bottom out at 4% of GDP.
The second, much longer wave of trade globalisation started after the end of the Second World War in 1945. The world experienced unprecedented improvements in general wealth, health and wellbeing, with trade emerging as an important driver of improvements in national average incomes and productivity. The value of exports as a share of GDP rapidly advanced from below 5% in 1945 to 9% in 1960, 15% in 1990 and to 26% in 2008. After the global financial crisis of 2007/08, trade contracted to about 21% of global GDP, before slowly recovering until the impact of COVID-19 temporarily reversed these trends. Globally, pre-COVID-19 trade volumes were 40 times larger than at the end of the first wave of globalisation in 1913.[ ]
The second wave of trade globalisation was enabled by advances in technology such as commercial civil aviation, modern communication and improvements in shipping. There was also no war between the core states that lay at the heart of the bipolar system, such as between the US and the former Union of Soviet Socialist Republics (USSR), although a number of proxy conflicts were fought in Asia and Africa, particularly in the Horn of Africa and in Angola. In addition, China’s rapid integration into the global economy, including its eventual admission into the World Trade Organization (WTO) in 2001, the impact of the single European market and the opening up of the Russian and Indian economies also boosted trade. In 1979, trade represented 36% of global GDP; by 2019 the figure had grown to 60%.
As trade expanded, it had a significant positive impact on economic growth in participating countries, although the exact impact on wages, household incomes and poverty differ by country and sector. Generally, the growth in trade for industrialising countries was driven by trade liberalisation, with much of the increase in trade due to average tariffs reducing from around 22% of value during the 1940s to below 5% by the time that the WTO was established in 1995.
The extent to which trade globalisation has pushed for establishing factories where labour costs are low, resulting in sweatshop practices in developing countries, is another reason for the general negative views about globalisation in Africa. Whereas globalisation can be considered a ‘global good’, which has the potential to improve wellbeing in all countries, the timing at which countries open their economies up is important.
But the most important reason for a general hostility towards the policies generally known as neoliberalism is undoubtedly the impact of the structural adjustment programmes that the World Bank and International Monetary Fund (IMF) foisted on Africa during the 1980s and 1990s. Government was bad and the private sector, free trade and open markets were purported to be the answer to all of Africa’s challenges. Yet almost all of today’s advanced economies (e.g. the US and Germany) had grown their industries largely through subsidies and protectionism. Whereas development in countries as diverse as South Korea, Argentina, Mexico and Turkey had occurred by means of tariff barriers, quotas, industrial licensing and subsidies, Africa was not allowed to protect its new industries.
Generally, the continent has benefited little from trade globalisation. The share of Africa in the global merchandise export has declined from 7.4% in 1948 to 2.5% in 2018.[ ] No African country features in the list of the world’s 25 top trading countries between 1978 and 2020.
In 2007/08, the world economy experienced its most severe financial shock since the 1930s and the deepest economic downturn since the Second World War. Trade collapsed in tandem with the economic contraction, beginning in the third quarter of 2008 to the second quarter of 2009, even larger than during the first oil price shock and recession of 1973/74. It took several years for trade to recover and then, a decade later the COVID-19 pandemic led to an unprecedented disruption in the global economy as countries scaled back on production and consumption (although the WTO is of the opinion that ‘the pandemic will not have had a fundamental structural impact on the relationship between world trade and income’). In February 2022, Russia invaded Ukraine, events that have triggered widespread sanctions and disruptions on the global economy including in Africa, with, as yet, unclear implications.
Much has been made of Africa’s agricultural potential comparative advantage over its traditional trading partner, Europe. For decades no meeting on trade in Africa would start without reference to the large subsidies cattle farmers in the EU receive and the regulatory hurdles in Europe that effectively prohibit most agricultural imports. Then there are the massive subsidies for large commercial farmers in the US, most of which goes to large producers of corn (maize), soybeans, wheat, cotton and rice.[ ]
Actually, access to agricultural markets outside of Africa has served as an effective lightning rod to divert attention from other, more important matters relating to trade, namely schemes that would incentivise value-added exports, low-end manufacturing and the beneficiation of its vast mineral exports. To this end, some argue that developed countries should be allowed to protect their own agriculture while developing countries should be allowed to protect their manufacturing and advanced service sectors, consistent with the development model over the past 500 years.
The General Agreement on Tariffs and Trade (GATT) was signed by 23 countries in Geneva in 1947 as an initiative to boost trade. A series of subsequent negotiations aimed to expand and broaden the impact of trade but much of that was to the benefit of established trading nations. In 1995, GATT became the World Trade Organization (WTO) and with that the focus on the needs of developing countries ebbed. Eventually, at the conclusion of the so-called Uruguay Round of negotiations in 1994, WTO members agreed that the next round of negotiations, the Doha Round (dubbed the development round), would look towards the needs of poorer, developing countries.
That never materialised. The Doha Round was not concluded and the focus had decisively shifted away from global arrangements. In fact, in the decades since the Uruguay Round of negotiations that established the WTO, its only success was the conclusion of the Trade Facilitation Agreement that entered into force in 2017. Donald Trump’s presidency threatened the future of the WTO as economic nationalism and populist protectionism in the US ran their course, spilling over to other countries and labelling China as the great evil. Although concessions subsequently made by US President Joe Biden in an attempt to relieve the impasse caused with the WTO’s Appellate Body — the final arbiter on trade disputes — the US remains opposed to the resolution of the situation until its ‘systemic concerns’ with the appellate body have been resolved.[ ]
Regional agreements and so-called plurilateral negotiating structures emerged in recent years on the back of the mess in the rules-based trading system and as competition between the West and China intensified. These structures allow some countries to agree on specific issues beyond WTO rules but agreements are generally not inclusive enough to be considered multilateral. Examples include the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP).
The CPTPP was signed by 11 countries — including Canada, Australia, Vietnam and Japan — in Santiago, Chile, in March 2018, but excludes the USA and China. At the time, the participating economies represented about 15% of global GDP (approximately US$13.5 trillion). The US withdrew from the negotiations on its predecessor, the Trans-Pacific Partnership, after the election of Donald Trump and has not returned since.
The RCEP is an agreement between the member states of the Association of Southeast Asian Nations (ASEAN) and the Asia–Pacific states. Among the benefits of the agreement is a tariff elimination of at least 92% of traded goods among participating countries, as well as stronger provisions to address non-tariff measures, enhancements in areas such as online consumer and personal information protection, transparency, paperless trading and simplified customs procedures. India withdrew from participation during the course of negotiations.
RECP is the world’s largest regional free-trade agreement and includes 15 countries that make up one-third of the world’s population (around 2.2 billion people) and GDP (at US$26.2 trillion). Asia–Pacific nations, including China, Japan, Australia, New Zealand and South Korea, signed the Partnership on the final day of the 37th ASEAN Summit, and the agreement entered into force in January 2022. Although there will be little change in tariffs given the existing degree of trade liberalisation within ASEAN and under the ASEAN free-trade agreements, the challenge for Africa is that the harmonisation of supply-side factors could further drive investment into ASEAN, helping to diversify and integrate supply chains more effectively in that region rather than in Africa.
While the location of supply chains may be shifting due to the competition by Western nations with China, free trade continues to expand even among these competitors, and it will be interesting to see how reshoring of manufacturing and cost of production in a free-trade area coexist. Then there is the long-term impact of Western sanctions on Russia after its invasion of Ukraine in February 2022. Without the early implementation of the African Continental Free Trade Area (AfCFTA), Africa could further marginalise itself in the absence of trade integration on the continent even as the trend towards larger markets and trading areas accelerates and supply chains evolve in the wave of manufacturing. nationalism.
A number of agreements that provide greater access to the large domestic markets of the European Union (EU) and the US aim to further the integration of developing countries into the global economy and to unlock the potential inherent in export-driven growth.
The legal basis for these trade preferences is the Generalized System of Preferences (GSP), which provided for exemption on the basis of a list of criteria such as per capita gross national income and economic vulnerability to external shocks. The two most important ones that relate to Africa are the EU’s Everything But Arms initiative and the US’s African Growth and Opportunity Act (AGOA).[ ]
Africa is Europe’s third largest trading partner, after the US and China. The basis of the cooperation between the EU and the group of 79 African, Caribbean and Pacific (ACP) countries dates back to the 1975 Lomé Convention, which was replaced by the more expansive Cotonou Agreement in June 2000. The Cotonou Agreement gives a stronger political foundation to EU–ACP cooperation and includes matters such as good governance, peace and security, arms trade and migration. Most important is that it replaces the previous system of non-reciprocal trade preferences to ACP countries with reciprocal economic partnership agreements (EPAs). Aid is steadily being replaced with an emphasis on trade.
The EU’s current trade dispensation is progressive and consists of several layers:
- The Everything But Arms initiative, introduced in 2001, grants least developed countries duty- and quota-free access to the EU single market for selected products, excluding arms and armaments. The scheme has no expiry date and it includes access for processed agricultural products as well as textiles.[ ] Currently, 22 of Africa’s low- and lower middle-income countries benefit from Everything But Arms.[ ]
- The so-called ‘Standard GSP’ applies to low- and lower middle-income countries. The system reduces EU import duties for about two-thirds of all product tariff lines and currently applies to Kenya and Nigeria. Cape Verde is currently the only African country that benefits from GSP Plus, which is a special incentive arrangement for sustainable development and good governance that further slashes tariffs when countries implement 27 international conventions related to human rights, labour protection, protection of the environment and good governance.[ ]
- However, EU trade agreements with other developing countries eroded the preferences granted to Africa. The EU’s Carbon Border Adjustment Mechanism (CBAM) introduces further complexity in that prices of imported products should more accurately reflect their carbon footprint. Under this mechanism, importers pay if their product has a higher carbon footprint than their European counterparts. This implies that emerging economies and developing countries will need to invest in decarbonisation at their end to avoid the carbon border adjustment and will have to do so fast and bear the associated costs themselves. Trade in agriculture, fossil fuels and other natural resources between Africa and the EU could therefore be compromised, especially given that the demand for fossil fuels is set to decline while demand for cobalt, nickel and other critical minerals for the energy transition is expected to increase. These policies have recently been captured and extended with the European Green Deal, which aims to strengthen the capacity of trade to support both a climate and a digital transition and aims to make Europe carbon-neutral by 2050.[ ]
- Unlike Everything But Arms, the EPAs are not unilateral concessions by the EU. They also go beyond conventional free-trade agreements to include sustainable development and poverty reduction goals. However, they are controversial for two reasons:
- They stipulate explicit requirements for human rights, democratic principles, the rule of law and good governance, which are resisted by countries that do not meet these requirements.
- They require countries in the same region (such as Nigeria in West Africa) to provide at least the same advantages to each other as they do to the EU, as an incentive to grow regional trade. Future trade agreements between ACP countries or with other developing countries will automatically also apply to the EU, granting the latter ‘most favoured’ nation status.[ ] Some governments now baulk at the realisation that the agreements would initially reduce tariff revenues from trade with neighbouring countries — a challenge that will also face the AfCFTA.[ ] In response, the EU commissions a sustainability impact assessment (SIA) as part of trade negotiations to analyse the potential economic, social, human rights and environmental impacts of the agreement in the EU, partner countries or affected regions.[ ]
AGOA, which came into effect in May 2000, is based on progress in meeting criteria such as the establishment of a market-based economy, adherence to the rule of law, elimination of barriers to US trade, and investment and protection of workers’ rights. The US Congress determines annually which countries qualify for AGOA benefits. After its initial 15 years, AGOA was extended to 2025. It provides 39 countries tariff-free access to 6 500 products, ranging from oil and agricultural goods to textiles and handicrafts.
AGOA and the Everything But Arms initiative have modestly stimulated foreign direct investment flows to Africa as foreign investors produce in Africa and export to EU and US markets. For example, exports from AGOA countries to the US market rose from about US$8 billion in 2000 to roughly US$54 billion in 2011. The duty-free entry of apparel into the US market has been AGOA’s largest success. But the limits of unilateral arrangements such as AGOA soon became evident when quota restrictions on apparel from China and other Asian countries were phased out from 2005, eroding its impact.
AGOA and the Everything But Arms initiative are not trade agreements negotiated between two partners but a unilateral concession made by one party (the US or the EU) for the benefit of a developing country that meets certain minimum criteria. They imply temporary relief that can be revoked at any point, i.e. goods may be taken off the eligibility list or the entire arrangement can be cancelled, meaning that the beneficiary countries have no recourse to remedies or dispute resolution. The future intention is to negotiate reciprocal free-trade agreements with Africa, either bilaterally or regionally. These would eventually replace the non-reciprocal AGOA and a first, with Kenya, is under discussion. Such bilateral agreements present challenges as they could undermine continental and regional arrangements, such as the customs union of the East African Community (EAC), which operates a common external tariff. The first priority for the continent is to ensure that its rules of origin promote and support local production and value-addition in Africa.
In addition to AGOA, there have been US programmes to provide guarantees, some equity, local currency loans and investment advice to US companies. The Obama administration launched the Doing Business in Africa Campaign, Power Africa and Trade Africa, while the Trump Administration transformed the Overseas Private Investment Corporation into the Development Finance Corporation, began negotiations for a free-trade agreement with Kenya, and launched Prosper Africa — an initiative to increase trade and investment between the US and the continent.
Before the shale revolution (as discussed in Leapfrogging), the US–Africa trade surplus was historically in Africa’s favour because of oil or petroleum-based exports from countries such as Angola and Nigeria. But the US has largely lost economic interest in Africa since, except as an arena to assist in confronting Islamic terror and to compete with China. In 2020, the US did approximately $32.6 billion worth of trade in goods with the region, down from $36.8 billion in 2019, less than 1% of all US trade in goods.[ ] The downturn has been ascribed to the combination of the official pitch to US companies about why they should engage in Africa consistently failing to subvert long-standing biases and preconceived notions about the region, a lack of consistent and accessible support from the US government, and real concerns around navigating enabling environments in the region.[ ]
Chart 1 presents US–Africa trade from 2002 to 2019. The impact of the collapse of oil imports is particularly evident from 2015, following the shale revolution in the US and the reduction in imports from countries such as Angola and Nigeria.
In December 2020, Kenya concluded a trade agreement deal with the UK shortly before the end of the Brexit transition period. The agreement gives duty-free access to Kenyan goods entering the UK as well as for British exporters shipping to Kenya. In accordance with the provisions of the EAC Customs Union Protocol, other members of the EAC can also accede to the agreement, which seeks to provide full duty-free and quota-free market access conditions for goods originating from an EAC partner state into the UK market and to liberalise progressively and gradually the EAC for goods originating from the UK. The Kenya–UK trade agreement borrows from the EU’s EPAs, allowing for the principle of variable geometry where member states can sign the agreement at different times depending on their readiness.
Although it appears as if preferential access does improve access to the American or European market, it is not clear whether the initiatives result in lasting improvements in export performance once countries exit from the deal. Lasting trade progress requires that preferential access should be complemented by domestic reforms such as improved access to imported inputs by reduction of tariffs, a lighter regulatory burden and enhanced access to infrastructure (such as through the creation of effective special economic zones), and flexible exchange rate regimes that lead to competitive exchange rates.
Despite the various efforts of Europe and the US to improve trade with Africa, China has been Africa’s largest single bilateral trading partner since 2009, having signed bilateral trade deals with more than 40 African countries.
In 1970, Europe represented nearly 70% of Africa’s total trade and North America accounted for much of the rest. By 2018, the EU was responsible for only 36% of Africa’s exports and 33% of imports. In that year, only 7% of Africa’s exports and 5% of its imports were with the US. By contrast African trade with countries and regions considered to be in the Global South has steadily increased over the last four decades, particularly with China.
As part of its trade policy towards Africa, the Chinese government implemented the Special Preferential Tariff Treatment (SPTT) in January 2005, removing tariffs for close to 200 items from 25 of the least-developed countries in Africa (however, countries that have diplomatic relations with Taiwan were excluded). In November 2006, it expanded the list of items to more than 440 to increase the range of Africa’s exports to China and to address the negative trade balance. Then, in 2019, China entered into a free-trade agreement with Mauritius, although to date no large Chinese firms located in Africa have expressed the intention to export to that country. That would be a game-changer.
Chart 2 shows the changes in trade between China and Africa. Bilateral trade steadily increased from US$10 billion in 2000 to US$203 billion in 2015, before contracting in 2016 as the Chinese economy rebalanced and it became less dependent on commodity imports for growth at a time when global commodity prices also weakened. From 2017, trade expanded, from US$154 billion to US$185 billion in 2018, and to US$192 billion in 2019.
China’s dual circulation strategy does not appear to further incentivise trade with Africa given its primary focus on expanding domestic consumption in China.
Today, China is Africa’s largest single-country trading partner in both exports and imports, at 9% and 13%, respectively. As China and India rise, they are dragging Africa along, for the continent has been able to maintain its relative trade position with both, albeit with an increased commodities content as opposed to higher-value goods and services. These numbers are considerably less than Africa’s trade with the EU countries, although, in 2018, Asia also overtook the EU as Africa’s largest regional trading partner, accounting for 29% of total African trade in 2019 (compared with 26% with the EU).[ ]
Africa’s political orientation will inevitably follow those shifts in economic power and influence, despite the uncomfortable reality that most of Africa’s trade with China consists of exports of unprocessed commodities, particularly crude oil, minerals ores, tobacco and wood. In contrast, China’s export profile to Africa largely consists of high-value goods and it is no wonder that the result is an ever-widening trade imbalance in China’s favour, shown in Chart 2.
Early in 2019, commentators forecast bilateral trade to surpass US$300 billion in the next three to five years, although the widening trade imbalance was noted as a concern.[ ] Before the COVID-19 pandemic, more than 40 African countries ran a trade deficit with China, with Kenya’s being particularly large. The largest volume of China–Africa trade is with South Africa, the country that is also the largest African investor in China. Trade with the DR Congo, Mozambique and Zambia was growing most rapidly before the pandemic.[ ]
From a political perspective, Africa is significantly more important to China than the 4% of trade suggests, given the sheer size of the African bloc in the context of multilateralism.
The problem is the declining value-added composition of Africa’s exports. The share of manufacturing in total African exports was close to 30% two decades ago, but it declined for several years before again increasing from 2012 to around 27% by 2016. Generally, the value of commodity exports has increased in line with the commodities supercycle (as discussed in Current Path).[ ]
Africa’s trade with the EU is more balanced than with other regions but even here the lack of high-value goods is glaring. The continent imported 70% manufactured goods from the EU in 2018 while its exports comprised 65% primary goods consisting of food and drink, raw materials and energy.
After recovering from the 2007/08 global financial crisis, the share of manufacturing as a portion of Africa’s trade increased again between 2012 and 2016, although, apart from Senegal, it has again declined recently, including from countries such as Botswana, South Africa, Madagascar and Namibia, which have a relatively high share of manufactured exports.
Although African countries benefited from trade agreements such as AGOA and Anything But Arms, preferential market access has not led to a stronger export performance or to more diversified economies. This state of affairs has been ascribed, in part, to: the design of those agreements; African firms’ lacklustre response to the opportunities; and the agreements concessional nature, which means they can be suspended or simply not renewed.
The power of geography is particularly strong when it comes to trade, and it is typical that countries first trade with their neighbourhood rather than with countries that are further away. As a result, the natural market of North African countries lies within the Mediterranean basin, especially given access to maritime transport of high-volume goods and that the Sahara Desert forms a substantial barrier to the south. Algeria and Egypt, and to a lesser extent Libya, are already significant exporters of liquefied natural gas to primarily European consumers. In addition, initiatives such as the Mediterranean Solar Plan could eventually help the EU to meet its renewable energy pledge as the pressures of climate change mount globally. The plan, launched in July 2008, envisages generating 50–100 GW of solar power generation in North Africa for potential export to Europe. However, it has come to a standstill since the Arab Spring uprisings.
The EU envisions a Euro-Mediterranean free-trade area with Algeria, Egypt, Israel, Jordan, Libya (negotiations are currently suspended), Morocco, Syria, Tunisia, the Palestinian Authority and Turkey. In 2016, the region represented 9.4% of total EU external trade but progress is hampered by politics, instability and the very low level of intraregional trade in North Africa. At some point stability will return to North Africa and its close geographical location to the EU could then offer significant potential.
Chart 4 shows the web of intra-African trade agreements, including eight regional economic communities (RECs) recognised by the African Union.
Africa has, until recently, done little to increase intra-regional trade, and as a result is considered to remain on the sidelines of global trade. In contrast with intra-continental trade elsewhere in the world (73% in Europe and 52% in Asia in 2019), trade between African countries made up only 14.4% of total trade on the continent.
The advantages of trade integration in Africa have long been recognised, yet real progress never materialised. Neither the 1980 Lagos Plan of Action, which was essentially Africa’s response to the World Bank’s structural adjustment programmes, nor the Treaty establishing the African Economic Community of 1991 (generally known as the Abuja Treaty) made much progress, yet the tradition of grand schemes continued. The African Union Development Agency–New Partnership for Africa’s Development (AUDA–NEPAD) provides an overall integration and development framework for the continent, which again assumes regional integration as one of its core objectives. This time, the prospects for progress are more real in the context of the AfCFTA.
To varying degrees, these continental schemes view the various subregional economic groupings, such as SADC, the EAC and the Economic Community for West African States (ECOWAS), as building blocks towards greater cooperation or as implementing agencies for the continental scheme.
Because formal trade volumes among African states are low, intra-African trade tariff revenue is much smaller than the tariffs on imports from the rest of the world. However, the large portion of informal cross-border trade is unrecorded, to such an extent that the 2020 African Trade Report from the African Export–Import Bank estimates that the formalisation of informal cross-border trade could potentially increase official trade numbers by 30%–50%, depending on the region.
But hefty tariffs, poor infrastructure, cumbersome customs procedures and so-called non-tariffs barriers invariably inhibit trade flows across borders and often also contribute to smuggling and the growth of the shadow economy if borders are not very well policed. Vast amounts of money can be made smuggling items such as petroleum and cigarettes where prices differ substantially between countries. This is particularly characteristic of economies in West Africa, the Sahel, North and Central Africa.
For example, in Tunisia, the informal and parallel economic sector is substantially larger than the average for other low- and middle-income countries when measured as a portion of the total economy. Many Tunisians are forced to engage in the informal sector despite their high levels of education; a situation that contributed to the overwhelming frustration that underpinned the Freedom and Dignity revolution that commenced at the end of 2010 and ignited the subsequent Arab Spring.
But without the opaque insider/outsider economic system that constrains opportunity having sufficiently been displaced after 2010, Tunisia’s large informal and parallel economy is not merely survivalist; it involves considerable illicit activity. An important reason for the apparent low levels of intra-African trade is, therefore, that much of it is informal and not captured in formal trade statistics.[ ]
In addition to the various structural reasons for Africa’s poor growth, such as a declining demographic dividend until the late 1980s (as discussed in Demographics), its role as a proxy battleground during the Cold War, bad governance, poor policy and lack of implementation of agreements all played an important role. Structurally, the continent did not develop regional value chains and hence did not form part of the global value chains in goods and services that developed between parts of Asia, North America and Europe since the 1990s.
North Africa has done the worst. In fact, the Maghreb is the least economically integrated bloc in the world, with intraregional trade accounting for only about 5% of total trade. Instead of trading with its neighbours, where they could be competitive, North African countries trade with the EU.
The lack of regional integration is a significant obstacle to diversification and growth for countries in the region. For example, only 4% of Algeria’s trade is within the Maghreb and the 1 600 km border between Algeria and Morocco has been closed since 1994, reflecting the extent to which the fraught political relations (in this case the dispute over Morocco’s occupation of the Western Sahara) in the region determine economics.
A 2019 report by the IMF lists the manifold economic benefits that would flow from regional integration in the Maghreb, including attraction of foreign direct investment, ease of movement of capital and labour, more efficient resource allocation and the extent to which it would make the region more resilient to external shocks and market volatility. Countries could, on average, add one percentage point to growth rates with regional integration. However, instead of increasing, trade openness has steadily declined in every country in the region (except for Morocco) and traders face significant hurdles.
The result of limited regional integration is that Africa is essentially not part of the global discussions on trade. Outside Africa, analysis is no longer fixated only on the growth and structural change in individual economies but rather uses the lens of regional and global value chains — the complex network that ties the flows of goods, services, capital and technology together across national borders — to evaluate the strength of economies.
Global value chains continue to evolve and may do so more rapidly following the trade shocks associated with the global COVID-19 pandemic, the trade competition between the West and China and recently the effect of Russia’s invasion of Ukraine. This is because goods-producing value chains are becoming less trade intensive and trade in cross-border services is growing more rapidly than trade in goods. In addition, goods-producing value chains are becoming more regionally concentrated, especially within Asia and Europe. Companies are increasingly locating their production facilities in closer proximity to the market rather than closest to cheap labour. The general trend is towards regional instead of global value chains as trade integration in Asia gains momentum and Western countries step away from their previous heavy reliance on China and European dependence on oil and gas from Russia. This could, in time, offer advantages to Africa with its rapidly growing population and growing consumer base.
Africa’s lack of connecting infrastructure such as road and rail between neighbouring countries increases transport costs and creates delays. Poor infrastructure and bad maintenance of existing infrastructure reduces the competitiveness of business and undermines much-needed investment flows.
In some East African countries, for example, transport costs are estimated to be about five times more than in European countries and North America. With many states being landlocked (e.g. Ethiopia, Uganda, Rwanda, Burundi, Lesotho, Swaziland, Zimbabwe, Malawi, Uganda, Burundi, Rwanda and South Sudan), they are dependent on their neighbours for access to the sea.
According to the African Development Bank, Africa has an annual infrastructure funding gap of US$130–170 billion, with an annual financing gap of US$68–108 billion. The numbers speak for themselves. Africa has an average of 204 km of roads per 1 000 km², of which only one-quarter is paved. That density lags far behind the world average of 944 km per 1 000 km², of which more than half is paved. Most of the continent’s paved roads can also be found in a single country — South Africa — where they are seriously degrading due to corruption and lack of maintenance.[ ]
In April 2021, colleagues from the Brenthurst Foundation undertook a road trip from South Africa to Maputo and then to Malawi. ‘In the 1 833km from Maputo to the Malawian border at Dedza,’ they write, ‘we encountered 97 police and army roadblocks, being stopped at no fewer than 64 of them. Without fail they asked for water, sometimes food. There were nine speed traps between Maputo and Tete, at which we were stopped twice and forced to pay on-the-spot fines. With no signs, it’s virtually impossible to know what the speed limit is.’
Anyone who has had to travel around West and Central Africa can testify to the dire need for better connecting infrastructure, whether by roads, through ports, buses, planes or trains — although the situation is significantly better than even a few years ago. For example, Yaoundé, the capital city of Cameroon, and Nigeria’s capital, Abuja, are about 100 km closer to each other than Madrid is to Paris. Yet the estimated drive time from Yaoundé to Abuja is about five and a half hours longer than from Madrid to Paris.
There are direct flights from Yaoundé to Abuja only on Tuesdays and Thursdays. To avoid multiple stops on any other day, a traveller needs to fork out US$5 000 for a one-stop flight via Charles De Gaulle International Airport in France. Else, you have to fly across the continent to Addis Ababa and get a connecting flight from there. It is for these reasons that the various continental development agencies in Africa are promoting an open-skies agreement.
The Yamoussoukro Declaration of 1988 and the subsequent Decision of 1999, both named after the Ivorian city in which it was agreed, commits its 44 signatory countries to deregulate air services and promote regional air markets open to transnational competition. Although the Decision became binding in 2002, it was largely ignored. Then, in 2018, 23 countries created the Single African Air Transport Market (SAATM) to allow for the full liberalisation of African air travel and a true open-skies agreement. But progress remains painfully slow.
In 2015, the International Air Transport Association (IATA) estimated that cross-border deregulation among just 12 African countries would create 5 million new passengers, US$1.3 billion in annual GDP growth and 155 000 jobs. Instead, Africa’s aviation sector remains constrained by excessive bureaucracy, high costs and lack of an accommodating regulatory environment. Instead of facilitating business and tourism, access by air is a constraint, as many African countries restrict access to their skies to protect the share held by inefficient state-owned air carriers — with the lone exception of the thriving Ethiopian Airlines. Most African countries, such as South Africa, remain wedded to the notion that a national air carrier, owned by the government, is a non-negotiable signpost of independence instead of looking to the most cost-efficient way to connect.
However, there has been recent progress in building and financing infrastructure projects. This was largely spurred by the excess capacity to build infrastructure that became available from China some years ago as its economy restructured towards domestic consumption. In the process, China effectively exported the excess infrastructure-build capacity, which was eventually packaged as its Belt and Road Initiative, which intends to connect China to the rest of Asia, Africa and even Europe.
In addition to Africa’s infrastructure deficit, the so-called non-tariff barriers are a notable constraint to trade in Africa and African trade with the rest of the world.
Non-tariff barriers refers to onerous regulatory procedures, expensive visa requirements, corruption and inefficiency. It includes import prohibitions, quotas, export subsidies, export restrictions, technical barriers to trade (such as regulations, standards and assessment procedures), and rules about food safety and animal and plant health standards. Whereas free-trade agreements are subject to long and drawn-out processes associated with the negotiations, the removal of non-tariff barriers results from unilateral efforts and bilateral cooperation between neighbours. The power of removing non-tariff barriers was illustrated by a study from the Trade and Law Centre (TRALAC), which found that reducing the time it takes to move goods across borders by just 20% would be more economically advantageous for Africa than removing all import tariffs.[ ]
At Beitbridge, it takes a truck an average of 35 hours to clear the border from the South African side and into Zimbabwe. In response, the South African cabinet adopted a One-Stop Border Framework in 2018 and prospects for improvements may be on the horizon. Significant progress has already been made in East Africa, where border crossing times have reduced from several days to between three and six hours as part of the reforms associated with the EAC — a demonstration of potential progress possible elsewhere.
The World Bank’s ‘Ease of doing business’ index for 2019 includes only nine African countries in the top 100. The COMESA–EAC–SADC Tripartite Free Trade Area website lists examples of 25 non-tariff barriers to trade, which range from import bans and product classification to corruption. However, progress with eliminating these barriers is slow, for each non-tariff barrier reflects a vested interest or a local practice along a border region, sometimes spanning several generations, upon which the livelihoods of communities may depend.[ ]
In an effort to regularise such standards, the WTO’s Agreement on the Application of Sanitary and Phytosanitary Measures came into force in 1995. The agreement provides uniform rules for all laws, regulations and requirements regarding how a product is produced, processed, stored or transported to ensure that its import does not pose a risk to human, animal or plant health. Sanitary measures are aimed at safeguarding human and animal health, while phytosanitary ones are intended to protect plants.
Imported goods should be from disease-free areas, inspected prior to export and should not exceed maximum levels of pesticide or insecticide use. Health risks posed by fresh foods and agricultural goods include salmonella poisoning, foot-and-mouth disease and sugar-plant pests.
The agreement is also meant to prevent countries from using rules and regulations simply to block trade, stating explicitly that the measures cannot be employed in a manner that would constitute a disguised restriction on international trade. But although importing countries are encouraged to use existing international standards, they are nevertheless allowed to adopt stricter regulations if they can scientifically justify their actions.
Much hope has been placed in the AfCFTA as a vehicle to boost trade and assist in the transformation of African economies towards the production of higher-value goods and services. The logic is compelling: medium- and high-tech manufactures account for 25% of intra-African trade but for only 14% of African countries’ exports to developed countries. Intra-African trade having a relatively higher value-added content than African countries’ trade with the rest of the world speaks to the advantage of regional over international trade. In fact, African countries face tariff escalation when it comes to the export of manufactured products. This situation is not unique to Africa but rather typical of the situation in other regions given the extent to which countries protect and subsidise their domestic industry. The AfCFTA is an opportunity to mitigate the constraint of tariff escalation, encouraging countries to focus on more value-added products, and hence diversify exports away from commodities.
African countries need to increase trade with one another while steadily expanding their participation in regional and global value chains. The numerous efforts at trade integration (see Chart 4) actually present the continent with something of a challenge to harmonise them with one another, given the vested interests and bureaucracy that has accompanied each.
The decision to establish the AfCFTA was taken at an AU summit in January 2012. The aim was to create a single market for goods and services, as originally envisioned in the 1991 Abuja Treaty. Although the original target date of 2017 was missed, the treaty crossed the 22 ratification milestone and entered into force on 30 May 2019.
The AfCFTA negotiations are scheduled in three phases. Phase I covers trade in goods and trade in services. Phase II covers intellectual property rights, investment and competition policy and Phase III covers e-commerce. Each is captured into a legally binding protocol that forms part of the AfCFTA Agreement upon adoption. Negotiations to finalise Phase I have been concluded and Phase II is planned to conclude by the end of 2022, despite the COVID-19 pandemic delaying things.
During an Extraordinary AU Assembly in December 2020, member states decided to start with an interim and symbolic arrangement according to which trade in some goods under the AfCFTA began on 1 January 2021. The arrangement relates to unilateral tariff offers and rules of origin proposals submitted by governments as part of the ongoing Phase I negotiations. It is based on reciprocal concessions and subsequent agreements between state parties and the intention is that this will last for a limited period only.
However, much work still remains, as the agreement is essentially a framework to ultimately eliminate tariffs and non-tariff barriers, liberalise trade in services and cooperate in matters of investment, intellectual property rights and so on. Although the AfCFTA does not yet provide for continental trade under a single preferential regime, the current agreement does allow countries to lever import tariffs for local industrialisation purposes, implement obligations through membership of earlier trade deals and conclude new free-trade agreements with third parties.
In accordance with the AfCFTA, an African Trade Observatory (ATO) will collect and analyse trade and trade-related data, establish a database for African trade, monitor implementation, and evaluate the implementation process and impact of the AfCFTA and the Action Plan for Boosting Intra-Africa Trade. It will also have a capacity-building function to equip national governments and businesses to analyse and use trade data.
The plan is that by 2034 Africa will have achieved tariff liberalisation on 97% of goods in a staged manner. Ninety per cent of goods will be liberalised over the course of five to eight years; 7% of goods will be classed as sensitive and liberalised over 10–13 years; and 3% of goods will be exempt from free trade entirely.
The agreement also provides for a Dispute Settlement Body (DSB) to respond to dumping of foreign products at a lower price than the normal value, allows for special and differential treatment to provide flexibility for states at different levels of economic development and infant-industry protection that allows states to impose measures to protect strategic infant industries. An assembly of state parties will provide strategic guidance supported by a council of ministers and committee of trade ministers.
Trade facilitation will be funded by the AU, member states and external investors, and will address transport infrastructure, customs clearance, technical assistance and capacity building.
Many obstacles remain in moving forward with implementing the AfCFTA. The most obvious is simply the ambition and diversity of its members. The AfCFTA includes countries with much bigger levels of income disparity than in blocs such as ASEAN and CARICOM. Agreeing on tariff liberalisation schedules with such large differences is going to require steadfast respect for special and differential treatment by all concerned. The experiences elsewhere, particularly in Europe, is that the inclusion of member states at different levels of development tends to benefit the more advanced members, while the weaker ones continue to fall behind, meaning that various counter-acting mechanisms need to be developed. To work, the AfCFTA would need to benefit producers in smaller, poorer countries, as well as the more industrialised parts of the continent. To this end, compensatory mechanisms need to be put in place for the losers since the AfCFTA will bring additional competition to domestic markets leading to heightened competition, firm closures and possibly higher unemployment. Addressing these negative externalities may require proactive policy approaches such as safety nets and training opportunities for those who will lose their jobs and shift them to other sectors.
An important feature of the AfCFTA is that it will build on rather than replace Africa’s several existing regional free trade areas. For example, in Southern Africa, SACU and SADC free-trade areas will continue. The general principle will be that where these regional free-trade areas offer better trade terms than the AfCFTA does, the former terms will apply. The same principle will apply to the Tripartite Free Trade Agreement mentioned previously. The result, as with most of these types of arrangements, will be complex.
Modelling trade in the IFs forecasting platform presents a number of challenges. The most important is that it uses a pooled model for trade, meaning that countries each trade with a pool that reflects the rest of the world and not directly with one another. Our approach is therefore to emulate the impact of the AfCFTA using the results from the studies and modelling done by others. For example:
- The UN Economic Commission for Africa estimates that the AfCFTA has ‘the potential to boost intra-African trade by 52.3% through the elimination of import duties, and by over 100% through the elimination of non-tariff barriers.’[ ]
- The UN Conference on Trade and Development (UNCTAD) modelled two scenarios reflecting full and partial elimination of tariffs in 2018 and concluded that employment rates grew most in the manufacturing industry and the service and agriculture subsectors, which is in line with the objective for structural transformation and industrialisation set out by the Continental Free Trade Area.[ ]
- According to the IMF, long-term income gains would be at least 2.1% with increased investment, innovation, and knowledge diffusion, with significant expansion of intraregional trade and limited adverse effects on trade with non-member countries (trade diversion). About US$60 billion could be added to African exports.[ ]
- Trade tariffs in Africa are actually already quite low and the short-term revenue losses that governments may suffer owing to tariff reductions (one estimate is US$4.1 billion) will be wiped out within a few years as trade increases and economies expand. UNCTAD concludes that ‘with adequate flanking policies and social safety measures, the AfCFTA has an immense potential to promote equitable and inclusive growth.’[ ] In a scenario that emulates the full AfCFTA implementation, where all tariffs are eliminated, UNCTAD estimates that the net welfare gains could be in the region of US$16 billion and almost 1% more rapid GDP growth than would otherwise be the case. Total employment improves by slightly more than 1%, intra-African trade is forecast to grow by one third and Africa’s total trade deficit is cut in half.[ ]
- During the African Economic Conference 2018 in Kigali, the African Development Bank indicated that it expected the AfCFTA to boost intra-African trade by up to US$35 billion per year, reflecting a 52% increase in trade by 2022, and a US$10 billion decrease in imports to Africa.[ ] The African Economic Outlook 2019 presented a scenario in which, if current bilateral tariffs are eliminated, Africa would gain US$2.8 billion in real income and intra-African trade would increase by 15%. In addition, removing non-tariff barriers could increase total real income gains by US$37 billion and intra-African trade by 107%.
- In its estimate of the impact of the AfCFTA, the UN Department of Economic and Social Affairs (UNDESA) finds that growth in Africa could accelerate by 0.3–0.6 percentage points by 2040 compared to the baseline scenario. However, these forecasts likely substantially underestimate the economic benefits of the AfCFTA, as they do not take into account the impact of liberalisation in other areas, such as service and investment.[ ]
- The African Export–Import Bank estimates the export potential of intra-African trade at more than US$84 billion, which, if tapped, would take total intra-African trade to US$231 billion. The untapped proportion consists of sectors that are known to be internationally competitive and have good prospects for export success in regional markets. These included mineral commodities, machinery, food products, motor vehicles and parts, and plastics and rubber. At US$53 billion, most of the total untapped figure of US$84 billion sits in Southern Africa. This is followed by North Africa (US$13.4 billion), West Africa (US$9.5 billion) and East Africa (US$7.8 billion). Central Africa comes in last (US$840 million).[ ]
- Improvements in economic freedom (using the economic freedom index from the Fraser Institute) are taken as a proxy for the impact of the harmonisation of rules of trade within Africa.[ ]
- Exports are boosted for each of the sectors modelled in IFs (manufacturing, agriculture, service and ICT, and more modestly also for materials and energy), as the impact of the AfCFTA is to accelerate regional trade.
- As these two sets of interventions do not increase economic growth to the extent evident in the scenarios prepared by the UNCTAD, the UN Economic Commission for Africa or UNDESA, we improve multifactor productivity to make up for the shortfall.[ ]
We calibrate the combined impact in accordance with the lower end of the modelling done by others and the interventions differ by country. Collectively, these three interventions simulate the impact of the full implementation of the AfCFTA, if imperfectly so.
The Free Trade scenario assumes that the implementation of the AfCFTA starts in earnest in 2025, hence allowing for the impact of the COVID-19 pandemic to ease, and that tariffs are reduced over the subsequent ten-year period in line with current expectations. The interventions in IFs therefore ramp up from 2025 to 2035 and then level off to 2043.
This is an exceptionally optimistic forecast for an agreement as complex and politically fraught as the AfCFTA. However, if leaders manage to stick to their commitments and take African citizens, business, labour and other stakeholders along with them, the impact will be substantial, as shown in Chart 6:
- By 2043, Africa’s economy is expected to be steaming ahead at a 7% rate of economic growth compared with 5.6% in the Current Path.
- Across the entire forecast horizon — from 2020 to 2043 — the average economic growth rate for Africa would be 0.6 percentage points above that in the Current Path.
- The result is that the African economy is about US$1.3 trillion larger (in market exchange rates) in 2043 than it would be on the Current Path. This growth translates into more than 80 million fewer people living in extreme poverty by 2043 (using US$1.90 per day). By 2043, the GDP per capita in Africa is US$723 higher for a continent that would then be home to 2.2 billion people.
As more intra-African trade particularly will be beneficial to Africa’s productive sectors, the service and manufacturing sectors could, on average, be 2 and 0.8 percentage points larger in 2043 than in the Current Path forecast. The contribution of the agriculture and energy sectors will decline marginally as a portion of the total African economy, but not in absolute values as by 2043 the African economy will be significantly larger than otherwise expected. These sectoral shifts follow the natural and expected evolution of economies that become more productive over time.
Chart 7 presents the 2043 value of trade for each African country in the Current Path forecast and the additional trade that each will gain in the Free Trade scenario, ranging from an increase of US$1.1 billion in 2043 for São Tomé and Príncipe to US$921 billion for Nigeria.
By 2043, the value of Africa’s exports will be US$1.377 trillion larger and imports will be US$1.473 trillion larger in the Free Trade scenario indicating a deterioration in Africa’s trade balance towards the end of the forecast horizon. However, the cumulative value of exports from 2024 to 2043 exceeds that of imports by US$522 billion, becoming more negative only from 2041, as shown in Chart 8. Additional measures (scenarios) such as industrialisation (as discussed in Manufacturing) and boosting agriculture (as discussed in Agriculture) will further improve Africa’s trade balance. In general, the current account therefore improves, government debt reduces (by about 1.5 percentage points) and household saving rates improve.
Nigeria gains the most in the absolute increase in exports and imports, not unsurprising given the size of its economy, followed by South Africa and Egypt. However, measured in percentage point increase of exports and imports as a portion of GDP, Seychelles does significantly better than any other country in Africa, boosted by its status as Africa’s only high-income country. It is followed by Djibouti, Botswana, Mauritius and Cape Verde. South Sudan gains the least.
Chart 9 shows the improvements in the GDP per capita for each African country, arranged in descending order of impact. Seychelles gains most (US$1 613) and Somalia least (US$130).
The reduction in extreme poverty is presented in Chart 10. The primary y-axis shows the number of people living in extreme poverty and the secondary y-axis shows the proportional reduction relative to the Current Path forecast.
In 2043, extreme poverty in the DR Congo is expected to be 12.7 percentage points below the Current Path forecast — a reduction of 22 million people: instead of an extreme poverty count of 82 million people, the number will be 60 million. The country with the second largest reduction in extreme poverty is Nigeria, where 12 million fewer people are expected to be living in extreme poverty by 2043 compared with the Current Path forecast — a reduction of 3.1 percentage points. Nigeria is followed by Tanzania and Madagascar.
The result for Burundi, where the scenario increases extreme poverty, reflects that country’s manifold development challenges across all sectors and the challenges that it would experience in participating and gaining from the implementation of the AfCFTA.
This theme has set out the reasons why African countries need to deepen agreements with one another to grow trade, develop and diversify their economies and to progress up the value-add ladder. Most African economies are simply too small and Africa is currently too fragmented to build competitive productive capacity at scale, or to offer sufficiently large markets to attract substantive foreign investment without such agreements.
Intra-African trade is limited, with the result that countries trade more with the outside world than among themselves. This is ironic, as trade potential in goods inevitably diminishes with distance. African countries are best served by first trading with other countries on the continent.
Eventually the success of free trade will be determined by regional value chains with frictionless trade, fast customs procedures and cost-efficient multimodal transit corridors. Ultimately, success will come down to the actions of leadership and interests at the country level.
That said, the extent to which Africa will be able to leapfrog to higher-end value in trade will depend on the investments in education, technology and selected, well-targeted infrastructure that can support competitive industries and sectors in industrial parks and export-processing zones linked to regional and global markets. But more is required. Removing non-tariff barriers — the bureaucracy that keeps countries from trading with their neighbours — is important, as is the requirement to improve the quality of Africa’s human capital. For example, a recent study on the future of Ethiopia, globally one of the fastest growing economies in the last decade, found that the average of 2.7 years of education in the adult population over the age of 15 is still one of the lowest in the world. Along with low levels of overall attainment and poor quality outcomes, there is also a very pronounced gender gap in Ethiopia’s education system, with men receiving more than twice as much schooling as women. Structurally, Ethiopia needs to unlock this constraint, the first and most severe blockage in its education pipeline, if it wants to improve its human capital endowment and the productive structure of its economy.
Digital technologies can help overcome Africa’s large infrastructure deficit but will likely dampen trade in goods while further fuelling the growth in trade in services. The trend towards global value chains becoming more focused on services and less on goods is well established. A smaller share of the goods rolling off the world’s assembly lines is now traded across borders, while cross-border services are growing more rapidly as global value chains become more knowledge intensive and reliant on high-skill labour.
Trade integration can help African countries to prioritise investment in sectors where they have a comparative advantage. Comparative advantage is dynamic and changes over time, within and among sectors, and such an approach will require ongoing vigilance and adjustment of policies.
Trade increases for many reasons. The concentration of production of some goods in a particular country may benefit from the increasing returns that come from large-scale production, actually limiting the range of items produced in a country. As a result, trade may reflect increasing returns driven by economies of scale rather than specific country advantages. Irrespective of their comparative advantage, African countries need to enhance export diversification and reduce their vulnerability to external shocks by trading regionally and eventually globally. In addition, regional integration would improve the diversification of goods and the technology content of Africa’s exports.
In other words, trade liberalisation works only to the benefit of countries when they actively manage levels of openness to trade. For this reason, the support of a national government that invests in the quality of institutions and provides policy certainty is important.[ ] China is the poster child when it comes to how it has successfully managed access to its large domestic market, protected and nurtured its infant industry, and demanded technology transfer from foreign companies. Today it is the world’s factory.
Going up the product and service complexity curve requires that national and regional value chains be established where cities, regions and national economies can collaborate on a cost-competitive basis in bringing diverse skills together to produce ever more valuable products and services.
An initiative such as the AfCFTA is therefore crucial for growth and prosperity in Africa. It has the potential to trigger a virtuous cycle of expanded trade on the continent, which will, in turn, drive the structural transformation of economies. Negotiations are, however, likely to take a long time and a number of uncertainties, for instance about tariff schedules, remain.[x] For this reason the EAC, SADC, ECOWAS and the Tripartite Free Trade Area should continue to pursue trade facilitation reforms and integration, despite progress having been very slow.
Many countries (e.g. the UK, US and China) are entering into bilateral free-trade agreements with individual African countries. For Africa the goal must be a more rapid diversification of African economies and the following three questions should be kept in mind:
- Do these agreements provide African countries with sufficient support for the development of agricultural and industrial value creation?
- Do they offer sufficient protection for our infant industries?
- Do they help or obstruct the implementation of the AfCFTA?
The major obstacles to regional trade in Africa are often political and are shaped by the short-term pain (loss of tariff income) that is required before the long-term gains (higher growth) offset these losses. Regional integration will eventually grow tax revenues as more rapid growth translates into more government revenues. But in the immediate future, governments will have to work hard to get domestic buy-in once the pain from loss in tariff income becomes evident.
If the political will exists to overcome the initial tariff losses, the biggest structural challenge will be to integrate extremely unequal partners, such as upper middle-income South Africa or Botswana, with surrounding low-income countries such as Mozambique, Eswatini and Lesotho.
Data on Africa is sparse, which compounds the low levels of associated commodity trade and the declining terms of trade. E Frankema, P Woltjer, A Dalrymple-Smith and L Bulambo, An introduction to the African Commodity Trade Database, 1930–2010, 2018.
E Frankema, P Woltjer, A Dalrymple-Smith and L Bulambo, An introduction to the African Commodity Trade Database, 1930–2010, 2018.
E Ortiz-Ospina, E Beltekian and M Roser, Trade and globalization, 2018.
E Ortiz-Ospina, E Beltekian and M Roser, Trade and globalization, 2018. The rates in IFs, calculated from the IMF World Economic Outlook 2017, World Bank national accounts data and OECD national accounts data are consistently about five percentage points lower.
E Ortiz-Ospina, E Beltekian and M Roser, Trade and globalization, 2018.
E Ortiz-Ospina, Does trade cause growth?, 2018; E Ortiz-Ospina, Is globalization an engine of economic development?, 2017.
N Verter, International trade: The position of Africa in global merchandise trade, in MJ Ibrahim (ed.), Emerging Issues in Economics and Development, IntechOpen, 2017.
Z Usman and D Landry, Economic diversification in Africa: How and why it matters, Washington DC: Carnegie Endowment for International Peace, 2021.
World Trade Organization, Global trade rebound beats expectations but marked by regional divergences, 4 October 2021.
The European Union’s (EU) Common Agricultural Policy (CAP) provides direct payments to European farmers in the form of a ‘basic income support’. It is therefore decoupled from production and payments amounting to 72% of the EU farming budget. On average, EU farmers receive €267 per eligible hectare and may be eligible for additional sources of funding. This effectively amounts to a blanket subsidy for farming, even in the absence of targeted subsidies for specific product categories. Furthermore, according to the EU website: ‘While the rules governing direct payments are set at EU level, their implementation is managed directly by each member state under the principle known as shared management. This means that national authorities are responsible for the administration and control of direct payments to farmers in their country.’ Each country also has a certain level of flexibility in the way they grant these payments to take account of national farming conditions, which vary greatly throughout the EU. European Commission, The basic payment.
C Edwards, Agricultural subsidies, 2018.
E Reinert, How Rich Countries Got Rich … and Why Poor Countries Stay Poor, London: Constable, 2007, xxvi.
In 1995, 124 countries agreed to the Marrakesh Agreement. E Reinert, How Rich Countries Got Rich … and Why Poor Countries Stay Poor, London: Constable, 2007, xxvi.
The agreement contains provisions for expediting the movement, release and clearance of goods, including goods in transit. It also sets out measures of effective cooperation between customs and other appropriate authorities on trade facilitation and customs compliance issues. Further, it contains provisions for technical assistance and capacity building in this area. See: World Trade Organization, Trade facilitation.
E Wragg, Slim chance for the WTO appellate body despite US return to multilateralism, Global Trade Review, 3 March 2021. To find a temporary solution to the impasse, the EU and a number of trade partners set up a multiparty interim appeal arbitration arrangement.
P Heijmans and ZQ Nguyen, Asia Pacific Nations sign biggest regional trade deal, Bloomberg, 15 November 2020.
These efforts are largely through granting least developed countries ‘special and differential treatment’. The Decision on Differential and More Favorable Treatment, Reciprocity and Fuller Participation of Developing Countries — called the Enabling Clause in trade jargon — was adopted under the Tokyo round of the GATT in 1979.
The principle of a GSP was agreed on at the UN World Trade Conference (UNCTAD II) in 1968 as a non-reciprocal facility that countries such as the US and those in the EU bestow on least developed countries. The former European Community first introduced a non-reciprocal scheme for developing countries in 1971, followed by the US in 1976.
Trade under AGOA quadrupled in value from 2002 to 2008, a year when it reached US$100 billion. However, it fell back to US$39 billion in 2017, according to figures compiled by the US Agency for International Development.
Finalisation of the EPAs has been complicated, as Nigeria, the largest African economy, is refusing to sign based on fears that it would jeopardise efforts at industrialisation.
European Commission, List of GSP beneficiary countries (as of 01 January 2019).
Countries in Northern Africa and some in Southern Africa are generally excluded as none are considered least developed countries.
European Commission, Generalised Scheme of Preferences (GSP).
SDG Knowledge Hub, European Commission Launches Green Deal to Reset Economic Growth for Carbon Neutrality, 19 December 2019; SDG Knowledge Hub, EU Trade Strategy Supports Climate Neutrality, 3 March 2021; E Schmieg, EU and Africa: Investment, trade, development, Berlin: Stiftung Wissenschaft und Politik, 2019.
European Commission, Economic Partnership Agreements (EPAs) September 2018, 2018.
S Mevel, G Valensisi and S Karingi, The Economic Partnership Agreements and Africa’s integration and transformation agenda: The cases of West Africa and Eastern and Southern Africa regions, 2015.
See, for example, Sustainability impact assessment: Angola’s accession to the EU-SADC EPA.
According to the WTO Agreement on Textiles and Clothing. See: AM Fernandes, H Maemir, A Mattoo and AF Rojas, Are trade preferences a panacea? The Export Impact of the African Growth and Opportunity Act, World Bank Group, 2018. Before the agreement took effect, a large portion of textiles and clothing exports from developing to developed countries was subject to quotas under a special regime outside of normal GATT rules. Under the agreement, WTO Members committed to remove the quotas by 1 January 2005 by integrating the sector fully into GATT rules. See: World Trade Organization, Textiles Monitoring Body (TMB) The Agreement on Textiles and Clothing.
H Holmes, UK-Kenya deal creates ‘huge risks to regional trade’, The Grocer, 5 November 2020.
J Devermont and M Harris, Getting it right: U.S. trade and investment in Sub-Saharan Africa, Center for Strategic and International Studies, 24 March 2021.
J Devermont and M Harris, Getting it right: U.S. trade and investment in Sub-Saharan Africa, Center for Strategic and International Studies, 24 March 2021.
J Anyanzwa, EAC secures unlimited access to Kenya-UK trade deal, The East African, 1 March 2021.
AM Fernandes, H Maemir, A Mattoo and AF Rojas, Are trade preferences a panacea? The Export Impact of the African Growth and Opportunity Act (AGOA) and African Exports, World Bank Group, 2018.
Analysis based on COMTRADE data.
S Freemantle and J Stevens, Placing the BRIC and Africa commercial partnership in a global perspective, Johannesburg: Standard Bank, 19 May 2010, 2, 6–7.
In 2017, prior to Brexit, the EU accounted for 38% of Africa’s exports and 37% of its imports. China followed with 14% of exports and 19% of imports. Eurostat, Africa-EU - international trade in goods statistics, 2018.
B Mureverwi, TRALAC, China-Africa trading relationship, July 2016.
The impact of the COVID-19 pandemic is expected to cause a sharp downturn of trade flows at least in 2020 and 2021.
J Stevens, China-Africa trade expanded by 20% in 2018, Standard Bank, 16 January 2019.
C Wenjun, Twenty years on, China-SA relations embrace a new chapter, Business Day, 25 September 2018.
AM Fernandes, H Maemir, A Mattoo and AF Rojas, Are trade preferences a panacea? The Export Impact of the African Growth and Opportunity Act (AGOA) and African Exports, World Bank Group, 2018
Most European trade is with North Africa; Spain, France, Italy and Germany are the top four countries trading with Africa. See: Eurostat, Africa-EU - international trade in goods statistics, 2018.
AM Fernandes, H Maemir, A Mattoo and AF Rojas, Are trade preferences a panacea? The Export Impact of the African Growth and Opportunity Act (AGOA) and African Exports, World Bank Group, 2018
A Mold, The case for an integrated African market — the costs of ‘non-AfCFTA’, 12 August 2018.
C Stoffaës, The Mediterranean solar, 2016.
The Euro-Mediterranean Partnership (previously the Barcelona Process) was relaunched in 2008 as the Union for the Mediterranean.
African Export-Import Bank, African Trade Report 2020: Informal Cross-Border Trade in Africa in the Context of the AfCFTA, Cairo, 2020.
In spite of the limited impact of early regional trade communities in Africa, the South African Customs Union accounts for more than 50% of the continent’s intraregional trade and the Southern African Development Community (SADC) for approximately 70%. The launch of a SADC free-trade area in 2008 was an important stepping stone towards the SADC common market envisaged by 2015 and a common currency by 2018. These two goals have been missed by a large margin. Despite a well-defined socio-economic roadmap, with a harmonised and legally binding protocol on trade liberalisation, intraregional trade in SADC remains low (about 20%), although there is some movement such as a regional power pool, transport corridors and integrated payment systems.
Africa.com, Informal trade and dynamics of African trade in the wake of Covid-19: Key features of 2020 African Trade Report, 14 December 2020.
S Kwasi, J Cilliers and L Welborn, The rebirth: Tunisia’s potential development pathways to 2040, Institute for Security Studies, 31 August 2020.
About 25% of fuel consumed in Tunisia is estimated to be smuggled from Algeria, where fuel is cheaper. See: L Ayadi, N Benjamin, S Bensassi and G Rablland, Estimating informal trade across Tunisia's land borders, Washington DC: World Bank, 2013; S Quillen, Informal economy presents Tunisia with thorny issue, The Arab Weekly, 30 June 2017.
The low level of intra-African trade is a consequence of largely unrecorded informal cross-border trade, a prominent feature in intra-African trade not accounted for in balance of payment and national account statistics.’ See: Africa Export–Import Bank, African Trade Report: Informal cross-border trade in Africa in the context of the AfCFTA, Cairo: Afreximbank, 2020, 11.
AP Kireyev et al, Economic integration in the Maghreb: An untapped source of growth, Washington DC: International Monetary Fund, 2019.
AP Kireyev et al, Economic integration in the Maghreb: An untapped source of growth, Washington DC: International Monetary Fund, 2019.
S Lund et al, Globalization in Transition: The Future of Trade and Value Chains, New York: McKinsey Global Institute, 2019, 1.
African Development Bank Group, Eastern Africa Regional Integration Strategy Paper 2018–2022, Abidjan: African Development Bank Group, 2018.
African Development Bank Group, African Economic Outlook 2018, Abidjan: African Development Bank Group, 2018, 63.
Ashurst, Road infrastructure in Africa, 2016.
G Mills, G Harper and M du Toit, The low road to economic ruin, as illustrated by a trip through Mozambique, Daily Maverick, 25 April 2021.
TM Johnson, Looking skyward towards African economic integration, Daily Maverick, 11 March 2018, www.dailymaverick.co.za/article/2018-03-11-op-ed-looking-skyward-towards-african-economic-integration/.
C Schlumberger, Open Skies for Africa: Implementing the Yamoussoukro Decision, Washington DC: World Bank, 2010.
The World Trade Organization tries to address these barriers through the Technical Barriers to Trade Agreement and the separate agreement on food safety and animal and plant health standards (the Sanitary and Phytosanitary Measures Agreement).
J Grinsted and R Sandrey, The Continental Free Trade Area - A GTAP assessment, Stellenbosch: Trade Law Centre, 2015.
C du Plessis, African Free Trade Area kicks off, but with reminders of major obstacles at borders, News24, 4 January 2021.
Rankings are as follows: Mauritius – 13; Rwanda – 38; Morocco – 53; Kenya – 56; South Africa – 84; Zambia – 85; Botswana – 87; Togo – at 97; Seychelles – 100. See: World Bank, Ease of doing business rank – South Africa.
See: COMESA, EAC & SADC, Non-tariff barriers to trade.
African Export-Import Bank, African Trade Report 2018: Boosting Intra-African Trade: Implications of the African Continental Free Trade Area Agreement, 2018, 28.
Tralac, Newsletter, Issue 26, December 2020.
United Nations Economic Commission for Africa, African Union, African Development Bank and United Nations Conference on Trade and Development, Assessing regional integration in Africa: ARIA IX: Next steps for the African Continental Free Trade Area, 2018.
African Union, AfCFTA.
African Union, AfCFTA.
However, the dispute resolution mechanism does not provide for private parties.
African Union, Agreement: Establishing the African Continental Free Trade Area, Addis Ababa: AU, 2019, 20, 26, 52.
R Akeyewale, Who are the winners and losers in Africa’s Continental Free Trade area?, 17 October 2018.
United Nations Economic Commission for Africa, African Continental Free Trade Area: Questions & Answers, Addis Ababa: UNECA, 2018.
M Saygili, R Peters and C Knebel, African Continental Free Trade Area: Challenges and opportunities of tariff reductions, Geneva: UNCTAD, 2017.
L Abrego et al, The African Continental Free Trade Area: Potential economic impact and challenges, Washington DC: International Monetary Fund, 2020, 7.
L Abrego et al, The African Continental Free Trade Area: Potential economic impact and challenges, Washington DC: International Monetary Fund, 2020, 7; United Nations Department of Economic and Social Affairs, World Economic Situation and Prospects 2019, New York: United Nations, 2019, 124.
United Nations Department of Economic and Social Affairs, World Economic Situation and Prospects 2019, New York: United Nations, 2019, 124.
Tralac, AEC2018: Africa must focus on its big resource – its young people, experts urge, 4 December 2018.
United Nations Department of Economic and Social Affairs, World Economic Situation and Prospects 2019, New York: United Nations, 2019, 124.
African Export-Import Bank, Africa Trade Report 2018: Boosting Intra-African Trade: Implications of the African Continental Free Trade Area Agreement, 2018, 28.
The intervention improves economic freedom by 2%–12.5% by 2034. Average economic freedom in Africa improves from being close to South America in 2023 to being close to the average for South Asia by 2034.
In IFs the intervention increases the contribution of multifactor productivity to GDP growth by 2%–6% by 2034.
Only five African countries have a GDP of more than US$100 billion (Nigeria, South Africa, Egypt, Algeria and Morocco)
However, given the intervening reality of the Sahara Desert, the natural trading relationship for North Africa is with Europe and the Middle East rather than sub-Saharan Africa. Similarly, one could also speculate that the Horn of Africa is likely more closely linked to the Arabian peninsula and with emerging India than with the rest of Africa, given access to ocean-based transport and the currently limited rail and road infrastructure in the region.
Z Donnnenfeld, J Cilliers, S Kwasi and L Welborn, Emerging giant: Potential pathways for Ethiopia to 2040, Institute for Security Studies, 17 January 2020.
J Somé, African Economic Conference 2018: Industrial policy, institutions and performance of the manufacturing sector in Africa, Kigali: United Nations Development Program, Economic Commission for Africa and the African Development Bank, 2018.
P Zahonogo, Trade and economic growth in developing countries: Evidence from Sub-Saharan Africa, Journal of African Trade, 3:1–2, 2016, 41–56.
A Ogunniyi et al, African Economic Conference 2018: Regional economic integration, governance quality and tax revenue in Sub-Saharan African countries: Linkages and pathways, Kigali, July 2018.
Donors and sponsors
Reuse our work
- All visualizations, data, and text produced by African Futures are completely open access under the Creative Commons BY license. You have the permission to use, distribute, and reproduce these in any medium, provided the source and authors are credited.
- The data produced by third parties and made available by African Futures is subject to the license terms from the original third-party authors. We will always indicate the original source of the data in our documentation, so you should always check the license of any such third-party data before use and redistribution.
- All of our charts can be embedded in any site.
Cite this research
Jakkie Cilliers (2023) Free Trade. Published online at futures.issafrica.org. Retrieved from https://futures.issafrica.org/thematic/08-free-trade/ [Online Resource] Updated 17 October 2022.