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Pan-African trade bloc faces lengthy obstacle course

By Steve Johnson on 02/04/2018

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•African leaders during the signing of the AfCFTA in Kigali, Rwanda
•African leaders during the signing of the AfCFTA in Kigali, Rwanda

Last week, leaders of 44 African nations committed to launching an ambitious regional trade bloc, designed to sweep away barriers to intra-African commerce and provide a shot in the arm to economic growth.

But although the creation of the African Continental Free Trade Area (AfCFTA) is almost certainly good news for the world’s poorest continent, quite how beneficial it will prove to be is open to debate.

The African Union (AU) argues that the pact has the potential to increase intra-African trade by 53% by eliminating import duties, which average 6.1%, and to more than double trade if non-tariff barriers are also reduced.

As impressive as this sounds, though, Unctad, the UN’s trade and development arm, estimates the total annual welfare gain would be just $4.6bn, or 0.2% of continental GDP, even if all tariffs were scrapped, although this would rise to $16.1bn, 0.7% of GDP, if unfettered cross-border investment were also permitted.

Moreover, even the first of these scenarios is not guaranteed: the signatories have committed to cut tariffs on only 90% of goods, suggesting that some of the most onerous taxes may remain. Given that the complete abolition of tariffs would reduce pan-African government revenue by 9.1%, according to Unctad’s estimates, even that may prove ambitious.

The AU’s analysis is predicated on all of its 55 members signing up to the AfCFTA, but SA and Nigeria, the continent’s two largest economies, are among 10 countries that have not done so. In the latter’s case, at least, the absence could be long term, with the influential Nigeria Labour Congress reportedly warning that joining the free-trade bloc would devastate the country’s economy.

This is not to criticise what has been achieved, however.

“There is significant potential for further trade integration in Africa, which the AfCFTA could stimulate,” said Colin Ellis, MD for credit strategy at Moody’s, the rating agency. “This could improve the region’s credit profiles, given the greater stability and sophistication that intra-regional trade could offer compared with traditional commodity exports to the rest of the world.”

John Ashbourne, Africa economist at consultancy Capital Economics, added: “Boosting intra-regional links would bring down trade costs and help African firms access wider markets. Many African economies currently have stronger economic links with former colonial powers than with their immediate neighbours.”

Tackling problems

The pact, if successful, could tackle two related problems. First, absolute levels of trade within Africa are low by global standards. Only 19.9% of African exports are destined for other African nations, according to Ashbourne, citing International Monetary Fund (IMF) data. This is well below the 64% of the exports of EU nations that go to other members of that bloc, as well as the corresponding figures for the North American Free Trade Agreement (Nafta) and Asean blocs in North America and Southeast Asia respectively, although it is a little above the 16% of the Mercosur pact in South America, as the first chart shows.

Slightly different figures from Moody’s, sourced from the UN, show a lower figure still for Africa, but suggest intra-continental trade has at least been rising, and is now in line with that in developing America and emerging Europe, although still a far cry from the impressive levels of integration witnessed in developing Asia.

Indeed, over the past decade, intra-African trade has overtaken that with the US to become the largest single component of exports and imports, narrowly ahead of trade with China, as depicted in the third chart.

Intra-African trade

Intra-African trade has risen 11-fold since 1990, even as total African exports have only increased four-fold, according to Charles Robertson, chief economist at Renaissance Capital, an investment bank focused on emerging markets.

Intra-African trade has, in recent years, been equivalent to 7% of the continent’s GDP, up from 5% in the 1990s, according to Ellis, although he believes there is scope for it to rise far higher.

The second problem with the status quo is that low levels of intra-African trade worsen the export mix for many African states and render them more vulnerable to the vicissitudes of economic cycles.

More than 75% of Africa’s exports to non-African countries were extractive commodities, such as oil and minerals, between 2012 and 2014, according to the AU. In contrast, extractives accounted for less than 40% of intra-African trade over the same period.

Manufactured goods accounted for only 20% of the continent’s exports to the rest of the world during that time, but 43% of intra-African exports.

Thus, if the latter can be encouraged, “this will produce more jobs for Africa’s bulging youth population”, the AU says, given that extractive products are less labour-intensive than the manufactured and agricultural products that stand to benefit most from the AfCFTA.

Ellis argued that the volatility of the continent’s economic growth could also decline if local trade took off, given that manufactured products are not overly susceptible to commodity price swings.

Economies of scale

A successful African free-trade zone would be a particularly powerful stimulator of economies of scale, Ashbourne suggested, given the tiny size of many of the continent’s Balkanised markets. The median population of the 45 countries in Sub-Saharan Africa is just 12-million, he calculates, compared with 50-million in emerging Asia, even when China and India are stripped out.

Hurdles remain, however. Ashbourne argued that discussions within the EU and Asean blocs “often pit richer economies against poorer ones”. This could make it harder for the AfCFTA 44 to hold together while the detailed tariff schedules are worked out, given the “huge variation in the member states’ levels of development”, as indicated in the final chart.

Moreover, complex visa rules hinder the free movement of businesspeople across the continent, while the movement of goods is restricted by non-tariff barriers, such as poor infrastructure. Ashbourne quotes academic studies suggesting road transport costs in Africa are between 40% and 400% higher than in other low-income economies.

“It is often cheaper to trade goods between coastal Africa and Asia than within the continent, which prevents local industries from competing with more developed rivals,” he said. “Indeed, infrastructure probably imposes a bigger cost than tariffs. One study estimates that cutting intra-African land transport costs by just 10% could boost trade volumes by 25%.”

Ashbourne said that although the prospect of stronger intra-African trade flows could encourage investment in transcontinental infrastructure, meaningful improvements “would take years to materialise”.

Ellis draws attention to other non-tariff barriers, such as corruption, ineffective customs documentation and broader procedural approaches, noting that the World Bank estimates the costs for intra-African trade are the highest of any region, and about 50% higher than in east Asia.

Moreover, a lack of power generation, transmission and distribution is likely to constrain the development of a larger African manufacturing sector in Africa, given that more than 600-million people, half the continent’s population, currently live without electricity, he adds.

Despite the many obstacles, African leaders are nothing if not optimistic, however. A plan by 23 African states to launch a single aviation market got off the ground in January. Next on the drawing board are proposals for a common currency and an African passport.

© The Financial Times

Source News Express

Posted 02/04/2018 12:34:05 PM

 

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