The Port of Banjul in The Gambia plays a vital role in the trade and distribution of cargo to neighboring countries, some of which are landlocked.
Africa faces a continuously changing global trade environment, bringing new challenges and opportunities for increasing growth and reducing poverty. The proliferation of regional trade agreements often at the expense of the global trading system (WTO), the fourth Industrial Revolution and the subsequent rise of labor-saving technologies, the rise of Asia as the new economic frontier, the increased fragmentation of production and rapid changes in global value chains (GVCs) dominate the emerging trends. More recently, supply chain disruptions, the war in Ukraine and commodity price shocks have exacerbated the vulnerabilities in the Africa region.
Sub-Saharan Africa (SSA) accounts for a mere 2% of production and 3% of trade, while accounting for 17% of the world’s population, a stark contrast. So, how can Africa expand its export market access and diversify markets to new regions and new products, while strengthening regional trade, in this new trade environment? The book Africa in The New Trade Environment: Market Access in Troubled Times focusses on three key themes to provide answers.
In this blog, we highlight the first of the three themes, the other two to be discussed in subsequent blogs.
Re-engineering Trade with the European Union and United States Requires Reform on Both Sides
The European Union (EU) and the United States (US) remain the largest trading partners to the Africa region. Revamping trade with the two regions is central to Africa’s participation in global value chains. Unilateral trade preferences such as the African Growth and Opportunity Act (AGOA) and the Everything But Arms (EBA) have the potential to promote economic transformation through exports. However, utilization rates of such schemes are systematically low. Natural resources, mainly oil, account for the bulk of African exports through such preferences. The next largest boost was for textile and apparel products’ exports. African apparel exports grew sharply in the first years of AGOA and leveled off after the end of Multi-Fiber Arrangement in 2005, with the relative erosion of the preference from competition in Asia. African countries have achieved only a limited success in manufacturing exports through these preferences.
There is a diversity of experience with respect to AGOA utilization across the region; ranging from those who have missed the opportunity completely (Central and West Africa), to those that registered robust growth at the onset with either a sharp decline or stagnation (many in Southern Africa); and latecomers who registered robust progress (East African countries, including Ethiopia and Kenya). Countries with better infrastructure, including transport and connectivity, stronger institutions of legal frameworks such as contract enforcement and property rights protection; and smart macroeconomic management with stable and competitive exchange rates and low inflation registered gains from such schemes; suggesting directions for reform.
There is also a need to revamp the schemes by the preference granting countries – the EU and the US. These include expanding the more liberal protocols (the second AGOA provision for example) to non- least-developed countries (LDCs) in the Africa region and expanding the preferential list of products to industries in which many African countries could have a comparative advantage. Industry and sector specific changes to AGOA and EBA that boost the competitiveness of exports from the region presents additional opportunities.
In addition, reducing uncertainties about the continuity of such preference schemes is central to attract long term foreign direct investment to the region aimed at exploiting their export potential. Abrupt revoking of preferences as seen in the past in Madagascar and Cote d’Ivoire and more recently in Ethiopia could reverse the gains made. It is essential to integrate preferences with other initiatives to deepen trade and investment between African countries and the US and the EU. This includes integrating preferences with foreign aid policy instruments to address the structural challenges limiting export capacity. Recent initiatives such as Compact with Africa (CwA) with a strong focus on improving the business environment, building infrastructure, and promoting effective regulations and institutions is in line with this comprehensive approach.
Beyond AGOA, changing the current tangle of crisscrossing trade agreements to a more streamlined contract with “African neighborhoods”— natural trading partners that are historically, sociologically, and geographically close—as an incentive for closer regional cooperation, is central. Existing trade agreements with individual African countries tend to reinforce the economic and political fragmentation that has long choked the region’s prospects for increased integration. Contracting with African neighborhoods would facilitate subregional production networks, incentivize subregional cooperation initiatives, and help reduce the risk of cross-border conflicts by increasing the economic interdependence of the member countries.
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