Winds of Trade

Judging from the headlines, 2015 appeared a poor year for African exporters. The World Trade Organisation’s Doha round of negotiations, launched with the intention of reforming international trade according to the “needs and interests” of least developed countries, ground to a halt in December after fourteen years of slow and fitful progress. This decline of multilateralism was accompanied by the rise of bilateral and mega-regional trade deals – most notably those between the United States and countries along the Pacific Rim (the Trans-Pacific Partnership or TPP) and the European Union (the Transatlantic Trade and Investment Partnership or TTIP). The TPP and TTIP will reduce the price competitiveness of African exports in key markets, and introduce stringent product standards to which Africa’s manufacturers may struggle to adhere, potentially excluding them from such markets altogether.

However, 2015 also brought about a quietly-heralded development, with more positive implications for African trade. The signing of the Tripartite Free Trade Agreement (TFTA) by three of Africa’s regional economic communities covering 26 east, central and southern African countries has the potential to compensate for any increasing difficulty experienced by exporters in gaining access to markets outside of Africa. Intra-continental trade has long been recognised as a deficiency: it currently accounts for just 11 percent of Africa’s total exports, significantly less than the corresponding proportions for Latin America (25 percent) and Asia (51 percent).

The TFTA was conceived of in 2008 as a partial solution to Africa’s many and overlapping regional economic communities, within and between which there are obstructively high tariff barriers. On average, tariffs among member countries will fall between 60 and 85 percent. Historically, such a reduction has been difficult to achieve, since African countries have seen little complementarity in their economies, as competing producers of similar primary products. Recent years, however, have seen the beginnings of diversification in intra-African exports, with growing trade in manufactured products such as flour, yarns and industrial alcohols. The African Development Bank notes that intra-African trade now comprises a surprisingly broad basket of goods, with the top ten product groups accounting for less than half of the total traded. Nevertheless, there remain large disparities in levels of industrialisation and economic specialisation across the continent.

Overcoming the defensive inclinations of all 26 signatories of the agreement – including the least industrialised such as Malawi and Sudan – represents a diplomatic coup. Agreement has been reached that increased competition for the TFTA’s poorest members is worthwhile, since intra-African trade is expected to facilitate Africa’s industrialisation and integration into global value chains. Since African markets tend to be less competitive and standards intensive, intra-African trade offers a breathing space for African businesses to raise their productivity and the quality of their products before exporting more widely. The recent expansion across borders of supermarkets such as South Africa’s Shoprite and Botswana’s Choppies is a promising example of this – these regional channels are a sign of the opportunity presented by rising African consumption, but also allow small African horticultural producers and manufacturers of processed foods to access new markets, upskill and upscale so that they have better prospects of exporting to Europe and beyond.

Despite its potential, immediate progress made in passing the TFTA is limited. The agreement has yet to be fully ratified, and is therefore some distance from implementation, which is expected in 2017. Even when that hurdle is cleared, significant non-tariff barriers to intra-African trade remain: bureaucratic, slow and expensive procedures to obtain import permits, difficulties in currency conversion, complex and varying rules of origin and sales tax conventions, as well as rent-seeking by police and customs officials en route. For example, even within the East African Community, where recent progress in reducing non-tariff barriers has been significant, truck drivers crossing the Rwanda-Tanzania border are estimated to wait on average 72 hours to obtain customs clearance. Some of these non-tariff barriers are no accident, having been introduced by governments retreating from the immediate economic and political costs of previous decisions to liberalise trade with their neighbours. Such obstructions combine with Africa’s sclerotic infrastructure to clog the movement of goods. Overall, the African Development Bank estimates that transport costs represent between 30 and 50 percent of total export value in Africa - higher than average tariff contributions to the total even before TFTA reform. Further, the TFTA addresses only three of Africa’s eight regional economic communities, the conspicuous absence being ECOWAS, West Africa’s regional economic community, and therefore Nigeria, Africa’s largest economy.

Development economists highlight a potentially larger problem: namely, that the TFTA does not transform its members’ trading relationships with the rest of the world. Unaccompanied by greater measures of protection for its signatories from non-African goods, the TFTA is arguably insufficient to truly be a catalyst for intra-regional trade. For example, the TFTA does not alter African countries’ obligations to progressively open their markets to European goods under bilateral Economic Partnership Agreements (EPAs) with the European Union. Reluctantly agreed to by African premiers in 2014 (though not yet ratified by a majority of African parliaments), the EPAs will reduce the costs of European goods in African markets over a transitional period, thereby undermining intra-African trade in manufactured goods. Admittedly, changes to the agreements made between 2008 and 2014 increased the number of products exempted from the EPAs, and the period of adjustment allowed, limiting the possible adverse effects. Nonetheless, commentators on international trade, including economists at the UN Economic Commission for Africa, make the case that efforts to reduce intra-African tariffs should be combined in future with a strategic rethink by TFTA members to include higher common external tariffs in some product categories, so-called ‘smart protection’.

While clearly not a panacea, the TFTA should be viewed as a significant step forward in intra-African trade - a historic agreement, made in spite of significant political challenges, which will provide impetus to further efforts to facilitate trade across borders. The path has now been laid for the conclusion of a Continental Free Trade Agreement (CFTA), Africa’s own mega-regional deal, negotiations for which will begin this month. By 2017, following the implementation of the TFTA and the expected conclusion of negotiations for the CFTA, Africa’s trading landscape has the potential to look substantially more vibrant.