Discussions
The rationale for boosting intra-African trade
Sean Woolfrey, tralac Researcher, discusses the rationale for boosting intra-African trade
This past weekend saw African leaders meeting in Addis Ababa for the 18th African Union Summit, which focused on the theme of ‘Boosting Intra-African Trade’. This choice of theme highlights the increasing emphasis being placed on addressing the relatively low volumes of trade between African countries. While this increased attention on issues of trade promotion should be welcomed, it must also be recognised that boosting intra-African trade should not be considered as an ultimate goal of regional integration and cooperation, but rather as a means to achieving structural change and economic development on the continent.
Recognising this distinction can serve to promote clearer thinking on the often complex issues of trade and development in Africa, something that is not always evident in political pronouncements concerning these issues. In a Q&A document prepared for the Summit, the African Union highlights the fact that only around 10-12% of African countries’ trade is with other African countries while around 40% of North American countries’ trade and 63% of Western European countries’ trade is conducted within their respective regions. The document then goes on to make the claim that “intra-African trade should move from the current rate of 10-12% [of total African trade] to 20-25% in the next decade”. Even if one ignores questions relating to the determination of this target, the thinking behind these points appears somewhat confused for at least two reasons.
First, comparing levels of intra-regional trade in Africa to those of North America and Western Europe is highly misleading, as the latter regions represent much larger and wealthier economies with significantly greater capacity to produce and consume goods and services. The gravity model of international trade – which has proven highly accurate for predicting trade flows – hypothesizes that trade between two countries is proportional to the product of their respective GDPs (which generally reflect both productive capacity and buying power), and diminishes with the distance between them (which increases the cost of transporting goods). Therefore, given that Africa is characterised by countries with very small GDPs, while Western European countries tend to have much larger GDPs, it is to be expected that the proportion of African countries’ trade conducted with other African countries is significantly lower than the proportion of Western European countries’ trade conducted with other Western European countries.
This is not to say that levels of intra-African trade are where they should be. In fact, work done by the Economic Commission for Africa as part of its Assessing Regional Integration in Africa IV publication suggests that levels of intra-African trade may well be less than would be predicted by a gravity model. This would seem to indicate that addressing existing barriers to intra-regional trade, such as the lack of adequate infrastructure in the region, would result in an increase in intra-African trade. In the absence of decades of rapid and sustained economic growth, however, it is unlikely that intra-regional trade in Africa will reach the levels of North America and Western Europe.
The second example of woolly thinking on boosting intra-regional trade concerns the goal specified by the African Union. Even given a strong justification for attempting to increase trade between African countries, setting a goal of increasing the proportion of intra-regional trade appears misguided. This is because such a goal could be achieved by simply reducing trade with the rest of the world, or by introducing costly measures which bias intra-regional over external trade. Neither of these actions would be beneficial for economies in the region though. It makes more sense, therefore, to seek to boost the volume of intra-regional trade, while also ensuring that increased volumes are not simply the result of trade diversion.
This second point touches on a well-established debate in the economic development literature over the respective benefits of regional trade liberalization versus unilateral liberalization. Boosting intra-regional trade through more comprehensive economic integration is supposed to benefit African economies by providing, inter alia, larger markets, increased economies of scale, lower transaction costs, greater scope for technology transfer, opportunities for cross-border value chains, a more attractive environment for FDI and increased competitive pressures on inefficient domestic firms. In theory though, these positive outcomes for African economies would also be generated through increased extra-regional trade achieved through unilateral trade opening. Indeed, given the possibility of trade diversion caused by regional liberalization, it is possible that the gains for African countries from unilateral liberalization would be greater than those from a more integrated region.
This does not mean, however, that emerging regional initiatives on trade and economic integration are misguided. There are a number of factors that suggest that regional cooperation to improve intra-African trade could serve as an important engine for sustained economic growth and industrial development on the continent. For instance, the region includes many of the world’s fastest growing economies and could be poised to reap the benefits of a demographic dividend and a rapidly increasing consumer market. In addition African countries’ trade with one another has the potential to be far more diversified than the current composition of African trade with the rest of the world.
The real value in focusing on boosting intra-regional trade, however, lies in the fact that by addressing many of the constraints to such trade, such as inefficient customs procedures, poor infrastructure, complex domestic regulation and a lack of productive capacity, African countries will improve their ability to engage in both intra- and extra-regional trade and to reap the benefits of economic globalisation. In so doing, African countries will significantly improve their growth and development prospects. Intra-regional trade should therefore be seen as a complement to extra-regional trade, and not as an alternative. Furthermore, it should be promoted as a means to achieve the goals of economic growth and development in Africa, and not simply as end in itself.