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Countries that trade together grow together

Rita Babihuga-Nsanze
By Rita Babihuga-Nsanze
Sub-Saharan Africa Macro Research, Barclays Investment Bank

Posted on Thursday, 4 April 2019 19:35, updated on Monday, 8 April 2019 15:37

African governments need to reduce tariffs and non-tariff barriers in order to increase regional trade. REUTERS/Thomas Mukoya

Tech and intra-regional trade could drive the next SSA growth cycle.

Over the past three decades, sub-Saharan Africa (SSA) has seen a major restructuring in its trading relationships. Some countries, through regional communities such as the East African Community (EAC) and Economic Community of West African States (ECOWAS), have deepened trade and economic ties with their neighbors, resulting in faster and more sustained growth.

Until the early-1990s, almost 90% of the SSA region’s trading counterparts were extra-regional and predominantly advanced economies, with SSA mainly exporting undiversified primary commodity products and importing consumption and capital goods. Beginning in the early 1990s, trade with advanced economies began declining rapidly and was increasingly replaced with countries in emerging Asia, including but not limited to China. Over the same period, intra-SSA trade also rose sharply and is now at its highest since records began, making the SSA region’s trade with itself the third-most important regional export destination.

Despite the increase of recent decades, it is generally accepted that intra-SSA trade is still low and has significant scope for growth. Like SSA, the trading relationships of other developing regions of the world are predominantly outward looking. In 2018, intra-SSA exports accounted for 21% of total exports to the world; in developing Asian countries, that figure was also 21%. But it was lower for countries of the Western hemisphere (16%) and the Middle East and North Africa (14%). Compare this to advanced economies – which trade more with each other – with exports to other advanced economies accounting for 64% of total exports in 2018, whilst imports were 60% of the total.

Significant barriers to trade

Physical and geographical barriers coupled with significant tariff and non-tariff barriers such as poor infrastructure and weak connectivity are continued hindrances to intra-SSA trade. The World Bank estimates that the costs associated with intra-SSA trade are the highest among developing regions and around 50% higher than in East Asia.

Despite these constraints, there are pockets of relative success. For example, the EAC is the most integrated SSA regional economic zone, with intra-EAC trade accounting for 19.4% of total exports. It also leads the way on three out of five dimensions of integration set out by the Africa Regional Integration Index: trade integration, productive integration (which matters for creating an economic base that is more resilient and more diverse) and regional infrastructure development with respect to such indicators as the proportion of intra-regional flights, total regional electricity trade per capita and transport, electricity and ICT investment.

The benefits of greater integration

In theory, greater integration can deliver positive results for member countries by promoting higher growth and productivity, and raising incomes. And those gains are potentially larger for landlocked countries that are highly dependent on resource-based exports, as the majority of SSA countries are. There is evidence that greater EAC integration—reflected in terms of the increased cross-border flows of labor, capital and technology—has in turn lifted all boats, making Kenya, Uganda, Tanzania and Rwanda some of the SSA region’s fastest-growing economies.

Growing regional trade also provides the opportunity to diversify the SSA region’s export base, which is important for strengthening economic resilience to commodity price drops. Whilst extra-regional exports are predominantly primary commodities, manufacturing products account for 60% of intra-regional trade, which could provide a crucial buffer against the sudden drops in global demand. Moreover, according to the World Bank, greater intra-African trade of goods and services would support more employment-intensive activity than exports from extractive industries. That is therefore likely to have a more direct impact on poverty by creating opportunities for the poor who both produce and trade the foodstuffs that are traded across borders.

A potential game changer

The soon-to-be-ratified African Continental Free Trade Area Agreement (AfCFTA) has been described by the UN as a potential game changer that could create the world’s largest free trade area of 55 countries. They would create a single market with a combined GDP of $2.5trn and 1.2 billion consumers. AfCFTA goes beyond the scope of existing trade agreements on the continent, aiming to create a continent-wide single market in goods and services, free movement of people and investment, and eventually a customs union with a common external tariff. According to the African Union, the AfCFTA has the potential to increase intra-African trade by 53% by eliminating import duties and to more than double trade by also reducing non-tariff barriers. Because of the SSA region’s low share of trade in GDP, the scope for stimulating economic growth through greater intra-regional trade is significant and AfCFTA seeks to tap into this immense potential.

At the same time and like elsewhere, the rise of innovative digital technologies has the potential to transform the SSA region’s economies from commodity dependency to more services-driven economies, while boosting growth. If successful, the confluence of these two forces could create the perfect storm for a new growth cycle across the continent, driving what could be a more durable and more resilient growth cycle.

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