Boosting Intra-African Trade: What Role for External Trade Regime?

African Head of States and Governments will convene in Addis Ababa, Ethiopia later this month to launch a continent-wide free trade agreement (CFTA). The summit will focus on solutions to the numerous impediments that hinder intra-African trade: inefficient transit regimes and border crossings procedures for goods, services and people; poor implementation of regional integration commitments. The priority should be on this domestic agenda.  However, the differences in -- and uncertainty of -- access to major markets outside Africa could become a distraction and undermine the CFTA.  African Governments and the international community should ensure that this doesn’t happen, that attention is focused on fostering regional integration and boosting intra-regional trade.

Effective regional integration in Africa would not only enhance trade within Africa but it would also attract investment in manufacturing. Experience in many countries has demonstrated that light manufacturing can be a major source of job creation and economic growth. African countries remain highly fragmented, preventing investment by firms in the development of efficient supply chains on the continent. During the next decade China will be off-shoring some of its more labour-intensive manufacturing, creating a unique opportunity for producers in lower-income countries to break in. Market access programs in OECD and emerging market economies’ towards promoting African trade need to support greater exports of manufactured goods. Of particular importance are the inclusion of all products, rules of origin that are consistent with global sourcing of inputs, and eligibility criterion that support  cross-border production networks in Africa.

Africa’s Regional Economic Communities (RECs) are adopting uniform policies among their members.  But they are expected to trade with the rest of the World under various international trade regimes. This undermines regional integration and trade diversification. In 2005, high-income World Trade Organization (WTO) members agreed to provide least-developed countries (LDCs), most of which are in Africa, with duty-free, quota-free (DFQF) access for at least 97% of their tariff lines (product categories). Other developing countries (non-LDCs) are either granted General System of Preferences (GSP) – which are generally less generous than terms offered to LDCs– or they must negotiate reciprocal free trade agreements with higher-income trading partners to obtain DFQF access. In short, two neighbouring African countries, only one of which is an LDC, will face differential access to OECD markets, and in return offer different market access to their own markets, making it difficult for them to form a supply chain or production network.

There is a need to consolidate existing market access schemes into one that is consistent with a CFTA in order to foster regional integration and trade diversification. Failure to do so will keep the unhealthy divide between LDCs and non-LDCs in RECs that are aspiring to implement effective customs unions. The emerging trade regime also needs to be WTO compatible; to that effect, it is necessary that any preference scheme granting duty-free and quota-free access apply eligibility criteria that do not discriminate on the basis of geography. One such criterion that would support investment in manufacturing in Africa would be to use a cut-off threshold of manufactured exports per head of population.  As noted by the African Union Commission background paper for the Summit, such a threshold could be determined so as to include all members of African customs unions.

Granting DFQF access to all countries that fall below a manufactured exports threshold would obviate the need for least industrialised countries that are not LDCs to negotiate reciprocal FTAs such as the Economic Partnership Agreements (EPA) with the EU.  International partners and African countries should adopt a policy that revolves around access to high-income countries linked to progress in integration with neighbouring countries. This would be superior to the current approach embodied in EPAs, income-based GSP programs or geographically-based, temporary DFQF programs. Such a trade scheme will also help foster the realization of the CFTA.

Making this happen

Five specific actions are required. First, on the European side the ongoing process of revamping the European GSP regime should provide an alternative to the stalled EPA negotiations.  Second, on the USA side the best elements of the Africa Growth and Opportunity Act (AGOA) should be made less uncertain. Third, the African governments and the African Union Commission should push for the EU GSP and AGOA to be consolidated into an OECD-wide scheme to be considered in the G20 framework. Fourth, African governments should adopt a mechanism for building credibility and ensuring implementation; this could be done through a time-bound, monitored progress towards intra-regional trade liberalization through sub-regional organizations. Fifth, RECs and dominant economies such as Nigeria and South Africa, the private sector and the civil society should play lead roles.