Trade Agreements and the African Economy

Trade Agreements and the African Economy

How effective has trade agreement been among African countries? 

Advancing trade in Africa offers tremendous opportunities for the economic growth and prosperity of the continent!

Without gainsaying, Africa is home to a vast number of countries rich in natural and human resources. So far, trade amongst countries and regions has provided an opportunity for these countries to leverage their strength and areas of competitive advantage to improve their economies and strengthen their relationships. 

Besides intra-African trade, the majority of African countries engage in global trade with countries outside the continent. As a result of this, a great percentage of countries in Africa are members of several International Trade Agreements. 

Against this background, it is important to examine the role that these trade agreements have played in improving the economy of member countries. We examined this from two perspectives: International Trade Agreements and Intra African Trade Agreements.

International Trade Agreements

A significant proportion of the trade conducted in Africa occurs internationally, largely with the European Union, China, and the United States. 

One of the international trade agreements that is designed to boost the economy of the continent is the Economic Partnership Agreements (EPAs) between the European Union (EU), the 16 West African states, and regional blocs of African countries. This partnership is focused on the integration of African economies into global markets through supporting African businesses to engage more in regional and global value chains. It is estimated that such advancements will lead to economic growth as the countries get involved in larger production chains with the opportunity of penetrating more markets. 

However, the benefits of such EPAs have not been fully actualized! According to European Centre for Development Policy Management (ECPM), EPAs have had an indirect impact on signatory countries and very little direct impact in terms of access to market for many African producers and services providers. They argued that for these agreements to be significantly beneficial there is a need for collaboration among various stakeholders focused on encouraging investment, capacity building, and providing the required support such as awareness building to boost the capacity of African producers and service providers to participate in regional and global value chains.

Besides the European Union, the United States (US) is a major trade partner with many African countries. The US engages in trade with 49 Sub-Saharan African countries under the African Growth and Opportunity Act signed in 2000, allowing duty-free exports of 6500 products from Africa to the United States. This has led to many benefits, ​​such as the creation of new jobs in 2019 in the automobile and agriculture sectors in South Africa worth $553 million and $364 million respectively. Also, Lesotho’s textile and apparel industry exported $250 million worth of garments to U.S brands, creating 40,000 jobs while Namibia is maximising this arrangement to export beef, duty-free to the U.S market. 

To consolidate on these gains, this act has been extended to 2025, however, there are threats over the past years such as the introduction of tariffs on key aluminum and steel products. More potential disruptions could affect the Sub-Saharan countries that benefit from this act, especially as most countries recover from the shocks of the COVID-19 pandemic.

Africa’s biggest trading partner is China, superseding the United States with trading relationships with almost all 53 countries in Africa. In 2019, the biggest export markets of China were South Africa ($16.6 million), Nigeria ($16.6 million), and Egypt ($12.2 million) with these countries receiving 14.6%, 14.6% and 10.7% of the total Chinese exports into Africa. Additionally, Chinese investments in African infrastructure such as ports, roads, airports, and railways have been beneficial to the continent, as they have improved the productive capacity of several countries. These improvements have been helpful in helping individuals and businesses within these countries to engage in trade efficiently. 

In order to protect the growth of indigenous companies and SMEs in Africa and essentially transform the African economy, there is a need for increased Intra-African trade. According to Orfonline, there are more than 1000 Chinese companies operating in almost all countries of the continent. This presence is beneficial to the economy, however, without considerable growth of SMEs within the continent, there will be no significant growth of the enterprise and entrepreneurship ecosystem needed to accelerate the economic growth and development of Africa.

Making a Case for Increased Intra-African Trade

Evaluating the agreements aforementioned, there is a high reliance on foreign countries for trade by African countries. Though these agreements bring much benefit and productivity across the continents, there are concerns such as monopolization by foreign firms, threats of agreements being ended and the sole interest in African countries with bigger economies leading to a neglect of the smaller countries.

In order to address these issues, African countries have agreed to have improved and increased trade among themselves. It is projected that this will create a single African market and allow for the growth and prosperity of all member countries. For instance, the implementation of the  AfCFTA agreement is projected to lift 30 million people out of extreme poverty and create decent and fulfilling jobs for many.

Continental Trade Agreements

The major continental trade agreement in Africa is the African Continental Free Trade Area (AfCFTA), developed within the African Union’s 2063 agenda to promote inclusive and sustainable development in Africa over the next 50 years. The members of this trade agreement leverage benefits such as the liberalization of trade of key services, elimination of tariffs by 90%, and dealing with non-tariff obstacles such as custom delays. Additional trade-related objectives of this agreement include:

·     cooperation in matters of investment, intellectual property rights, and competition policy;

·     cooperation in all trade-related areas;

·     cooperation in customs matters and the implementation of trade facilitation measures.

On a population basis, AfCFTA is the largest free trade area in the world expected to cover all 55 African countries (currently 54 as Eritrea is not a signatory member yet) with a combined population of over 1.2 billion and GDP of $2.5 trillion. Intra-African exports currently constitute 17% of all African exports. However, this is still low in comparison with other continents with levels such as 69% in Europe, 59% in Asia and 31% in North America.The implementation of this free trade area aims to increase the contribution of intra-African exports to total exports, adding value to member countries and providing employment opportunities across the continent. With participation by all members in this free trade area, Africa could eventually have export levels within the range of other continents in the world.

 In the same vein, the AfCFTA agreement is expected to expand intra-regional trade in Africa by 80%. An increase of trade by such a high amount would lead to the benefits such as an income boost of $450 billion by 2035, an increase of Africa’s exports by $560 billion, and a great decline in poverty continent-wide. With the maximization of efforts from all African countries, these gains are projected to occur, improving its economy and aiding in the recovery from the COVID-19 pandemic.

Regional Trade Agreements

Besides the widespread trade in the country, regional trade occurs between blocs of nations in Africa. As recognized by the African Union, there are 8 regional economic communities (RECs), with the aim of promoting economic integration between member countries, through the fostering of free trade and the mutual economic development of ratified countries. These RECs are stated in the diagram below:

Each regional community targeted specific developmental challenges such as: peace and security by ECOWAS, digitization of available programs  by COMESA and addressing inequality challenges through infrastructure and industrialization by SADC. The focus of each community on a specific thing plays an important role in the development of Africa. The African Development Bank states that the RECs have made progress in areas of infrastructure, trade liberalization and facilitation in Africa, though it has been slow and steady. This can be attributed to the fact that infrastructure issues and lack of proper involvement from member countries hinders the efficiency of the formed community.

In addition to these, there are multiple regional trade agreements in Africa, with the membership of the countries overlapping. Some of these trade agreements are:

·     Economic Community of the Great Lakes Countries: 3 member countries

·     Indian Ocean Commission: 3 member countries

·     African Financial Community Franc Zone: 15 member countries

With a high number of regional communities, certain memberships tend to overlap. Therefore, policy instruments across regions, especially for overlapping members, need to be harmonised to ensure growth for all parties involved. Ensuring this will prevent the occurrence of policy clashes which would further hinder trade.

Challenges of Trade Agreement 

There are 2 major challenges that affect trade within Africa, namely, the inefficiency of service of border officials and the poor transport/logistics infrastructure across the continent. The poor service by some officials at the borders discourages potential traders from engaging in cross-border trade. This is the experience for traders that travel along the route from Lagos, Nigeria to Accra, Ghana and similar routes like this one. With each journey, they are faced with challenges such as vigorous checks, harassment, and requests for bribes from officials. Such issues eventually increase costs of production either through wasted time or the financial extortion of traders, discouraging many from still engaging in trade. 

Also, Africa is lacking in the essential infrastructure required for effective trade to occur. The current infrastructure gap has to be closed to encourage trade. At the moment, it is currently cheaper for African goods to be exported to the EU and US markets before re-entry into another African country. An example of this is the movement of some goods between Tunisia and Cameroon, where they are first sent to French warehouses before being re-sent to the markets of either country. Developing the necessary infrastructure will stop the lengthy process of moving goods, leveraging the shorter distance between the countries involved.

From an international perspective, there is a threat of potential loss suffered by local firms in Africa as they may not possess the level of resources and technical know-how required to compete with foreign companies. The provision of cheaper prices by international companies coupled with the inability of the domestic companies to match these prices could lead to the loss of market share to the foreign entities. If this occurs on a long-term basis, certain sectors or industries are at the risk of being monopolized by foreign countries, thereby limiting the growth of indigenous businesses.

Opportunities for Growth

Though challenges exist, a major opportunity for growth is seen with the implementation of the AfCFTA agreement. This agreement involves countries across all regions, enabling a wider level of trade internally. With proper involvement of all member countries, the gains and benefits aforementioned are bound to occur, leading to great economic growth in Africa. Job creation, development of domestic capital markets and reduction in poverty are some of the many benefits that will become evident as a result of the growth and development that will occur across the continent through trade.

One of the biggest beneficiaries of trade development is the informal sector which constitutes 60-80% of the labor force. The tariff implementation coupled with developed infrastructure will greatly reduce the cost of trade, enabling more people in the informal sector to engage in cross-border trade. With greater participation of this group, the African economy will experience significant growth and transformation as more jobs are created and the livelihood of the populace significantly improves.

This article was jointly written with Ememobong Etim

Omotayo Abraham

Omotayo is an International Development Expert with a demonstrated history of excellence in Project Management, Research, Human Capital Development, and Monitoring and Evaluation. He is passionate about enterprising Africa and connecting talent to opportunities

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