Free trade in Africa will need more than just a treaty

Amaka Anku
By Amaka Anku
Director and Practice Head, Africa at Eurasia Group

Posted on Wednesday, 19 June 2019 17:27

Ships lie at anchor outside the harbour at Durban, South Africa REUTERS/Howard Burditt HB/AA

Until we engage with the political ramifications of dropping protection, and remove the other barriers to trade, the benefits of Africa's Free Trade Zone will be limited.

If, like me, you’ve been wondering what the empirical evidence says about the likely impact of the African Continental Free Trade Area (AfCFTA) on regional African trade, you should read this IMF paper [launches download].

Generally, non-tariff barriers (NTBs) play a much stronger role than tariffs in hindering intra-regional trade in Africa.

These include:

  • quality of infrastructure,
  • poor trade/customs logistics,
  • access to credit/finance,
  • poor education/human capital,
  • the business climate.

So, for example, if you remove all tariffs, you can grow intra-regional trade by 15-25% (with the risk of tariff revenue losses offsetting these gains for certain countries).

But if you reduce NTBs by just 50%, you can grow intra-trade by 35-55%, with a much reduced risk of fiscal impact.

Side note: for some countries like Cote d’Ivoire, Zimbabwe, Zambia, Malawi, intra-regional imports exceed 35% of total imports and form a large part of their revenue base (import duties), suggesting a risk of large revenue losses from tarif liberalization.

  1. Removing NTBs should be central to boosting intraregional trade in Africa. This is critical to keep in mind as there has been very little public focus on this in the general public excitement/discussion of the AfCFTA.
  2. Trade liberalization entails winners and losers, and some countries are better placed to win than others (so it is too simplistic to assume this is a good thing for the continent without accompanying structural adjustments).

More diversified and manufacturing-oriented economies are more likely to benefit from trade integration than agricultural and resource-based economies. That means you need significant structural reforms in the latter group to boost efficiency in areas where there is a competitive advantage.

  • For example, you need to invest in supporting productivity gains, and in helping local firms position to export. This needs to be done before or in conjunction with implementation, otherwise the entire thing will quickly become politically unfeasible

Another area where political caution is needed: the evidence consistently shows that greater trade liberalization comes with an increase in inequality in the short term (arguably also in long term, see current ‘Trumpian backlash’ in the US) as well as a possible decline in income accruing to the poor.

  • That could exacerbate instability in many countries and eliminate other gains of trade. So again, structural and policy adjustments are really critical to support losers and encourage winners.

Bottom line: How will Africa fund the infrastructure it needs for the AfCFTA to be successful? Or even the tremendous policy coordination required to reduce NTBs? Until and unless we engage with these questions, any real benefits of this agreement will be elusive.

This opinion was first featured on Twitter – For Amaka Anku’s profile, please click here

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