Why Africa Needs a New Trade Deal

 

These are turbulent times for trade and trade policy. Although global trade flows have proved resilient, trade growth has yet to return to pre-pandemic levels. According to the WTO, world trade has lost momentum under the weight of the `polycrises’ of war in Ukraine, inflation, monetary tightening, and widespread debt distress. Reassessments of investment destinations and the ‘reshoring’ of global supply chains highlight the ongoing tensions in geopolitical relations as the world transitions from unipolarity to multipolarity. Planetary unsustainability and climate change provide cover for the return of industrial policy with green goals and instruments such as localisation and subsidies for those who can afford them. In the US, there is waning commitment to multilateral trade disciplines as security and climate intersect with concerns about inequality and populism. Across the Atlantic in the EU, new tools such as the Carbon Border Adjustment Mechanism (CBAM) and the EU Deforestation Regulation (EUDR) have not sufficiently taken account of the negative impacts on poor countries.

In Africa, these trends and tensions come on top of high levels of poverty, weak growth, demographic and climate pressures, which provide a breeding ground for political instability as recent extra-constitutional changes in power demonstrate. Recurring cycles of debt distress underscore the inherent limitations of economies that are locked into the lowest levels of commodity value chains.

Trade Matters for Africa’s Development

Yet, trade matters for Africa’s development and must be an essential part of Africa’s response to these challenges. Trade flows are valuable beyond their monetary value. Embedded in them are the ideas, technology, and know-how needed to compete in world markets. The firms that export are likely to be more productive, offer higher wages, provide employment opportunities in the formal sector and pay taxes. They can have “spill-over” effect on other domestic firms in their supply chains, creating a virtuous cycle of productivity growth and economic upgrading. Not surprisingly, most of the economic success stories and rapid reductions in poverty in recent decades have been predicated on trade, from China’s integration into the global economy since 2001 to Bangladesh’s meeting the criteria to move from “Least Developed Country (LDC)” to “Middle Income Country (MIC)” status in 2021.

Africa, the world’s least developed region, is increasingly where the last vestiges of extreme poverty are to be found. 60 per cent of people living in extreme poverty now live within the continent. This is up from 21 per cent in 2000, as poverty rates have fallen elsewhere in the world, driven by growth underpinned by higher levels of trade performance. Unfortunately, Africa’s trade, performance is below average and does not live up to this developmental potential. Exports from Africa account for only 2.3 per cent of world, trade despite the continent accounting for almost 17 per cent of the world’s population. Africa’s share of world trade has stagnated for more than three and a half decades. It was in fact higher in the 1970s, at 5 per cent of world trade. What may be surprising, however, is the extent to which exports dominate the foreign exchange flows to African countries: before the pandemic in 2019, it was 421 billion USD. Exports eclipsed official development assistance (ODA) (31 billion USD), foreign direct investment inflows (FDI) (USD 40 billion) and remittances (84 billion USD). With ODA under pressure in 2023 due to an inflation crisis, a cost-of-living crisis and the reprioritisation of national security following Russia’s invasion of Ukraine, trade is – and will continue to be – an even more important source of revenue flows into African countries and a critical resource for development and sustainable debt management.

What Africa Trades is Disappointing

Africa’s trade performance is disappointing and continues to undermine its development. Fuels, ores, and metals have accounted for no less than 60 per cent of Africa’s exports in any year since 1995, and as much as 89 per cent at their relative peak in 2008. These commodities tend to be more capital-intensive and less labour-intensive to produce, creating fewer jobs - a problem as 120 million African youth enter the labour force over the next decade. Extraction is usually more reliant upon foreign capital and expertise, and the value extracted is more prone to diversion into illicit channels. The prices of extracted commodities tend to be volatile, exacerbating budget planning, and their rents are susceptible to elite capture. They are an unstable basis for development.

Investment Inflows are not Generating Economic Change

Investment inflows into African countries are no better. They perpetuate an economic concentration in the extraction of fuels, ores, and metals. 40 per cent of EU net foreign direct investment in Africa between 2013 and 2020 went into the mining sector. This is in stark contrast to the EU`s net FDI elsewhere; only 7 per cent of the EU’s total global outward investment is in this sector. Similarly, 32 per cent of US FDI stock in Africa is in the mining sector, compared with just 3 per cent of US FDI. The energy sector is also the biggest destination for Chinese outward FDI in Africa, followed by transport and metals. Investments are reinforcing Africa’s unfavourable export concentrations.

Africa’s trade flows need to change, both in terms of volume and composition, and trade policy can be one of the instruments to achieve this. It is crucial to understand what works, and what does not, in African trade policy and how it interacts with partner countries in trade, investment, and development assistance policies.

A New Trade Deal for Africa will Help

Africa could do with a trade deal that incentivises and rewards trade diversification, the expansion of productive capacities, supply chain interconnectivity, and sustainable trade growth. Empirical evidence suggests that to achieve these goals, two complementary measures are required: first, a trade policy sequencing that prioritises intra-African trade (which is already more diversified than Africa’s external trade); and, second, liberalised trade between African countries with harmonised trade rules, as offered by the African Continental Free Trade (AfCFTA) initiative. In this context partner countries, much like doctors, should first of all ensure that they “do no harm.” But this is not always the current practice. Evidence from economic modelling suggests that the implementation of reciprocal agreements with the EU (such as the Economic Partnership Agreements, EPAs) and other developed countries before of Africa’s AfCFTA would lead to trade losses – or trade diversion – between African countries.

The problem is that such agreements force African countries to undertake divergent regulatory and other trade reforms rather than first consolidating better regionally. By contrast, if the AfCFTA is fully implemented before such reciprocal agreements, the negative effects would be mitigated. Trade gains for both African countries and the EU (or other countries) would be preserved, while intra-African trade would increase substantially, benefiting trade in industrial goods. African integration is in the interest of its trading partners. This points to the need for a strategic sequencing to prioritise the implementation of the AfCFTA.

What a New Trade Deal for Africa will Look like

A good developmental case can be made for Africa’s trading partners to offer unilateral duty-free, quota-free market access with cumulative rules of origin regime to all African countries for a transitional period, benchmarked against milestones in AfCFTA implementation and the resulting benefits. Granting concessions to Africa to allow non-reciprocal access to partner markets for goods and services for a transitional period is a strongly pro-development measure and poses little commercial and competitive risk to developed countries. By securing external market access for Africa’s exports, it incentivises African countries to seek trade opportunities with each other and mitigates the risks of trade diversion. Such a deliberate sequencing of the AfCFTA, this will help Africa to build productive capacities and realise its potential for strong and diversified growth in intra-African trade with inclusive and transformative effects.

It is recognised that what is proposed here will require a substantial change in partners’ trade policies towards Africa. However, even in this era of economic nationalism and geopolitical realignment, a new trade deal for Africa is justified both in terms of minimal systemic risk to the international trading system and as part of a strategic effort by partners to boost Africa’s development prospects. In just thirty years, by 2050, Africa will be home to more people than India and China combined. This demographic time bomb requires action to be taken now to improve the prospects for a more dynamic trade and investment regime in Africa. A growing and prosperous Africa is in everyone’s interest.

The ideal trade deal for Africa raises three immediate questions: (1) what might constitute a sufficient transition period, (2) how to justify the inclusion of North African countries, and (3) the obstacles to a WTO waiver allowing special treatment for Africa as a whole.

As for the transition period, the first clue is the AU’s Agenda 2063, which envisages a significant transformation of African economies by that year. The EU’s post-Cotonou framework provides another clue. This covers a period of twenty years from 2021. As regards the US’s African Growth and Opportunity Act (AGOA), twenty years from 2025 is understood to be the period under consideration for the renewal of this trade concession. Another indication comes from the UN Economic Commission for Africa’s (ECA) modelling, which projects that after full implementation of the AfCFTA, gains for Africa would be concentrated in intra-African trade, which could increase by 33.8 per cent by 2045 as compared to a baseline without the AfCFTA. The ECA projection and the year 2045 may be considered as a reasonable timeframe for the transition period.

On the second question of the inclusion of North African countries, the US Strategy Towards Sub-Saharan Africa announced by the Biden Administration in August 2022 calls for the US to “address the artificial bureaucratic division between North Africa and Sub-Saharan Africa”. The EU, for example, has also raised the prospect of a “continent-to-continent free trade agreement as an economic partnership between equals” in Jean-Claude Juncker’s 2018 State of the Union address. This recognises that the value chains developing across the continent are outstripping artificial divisions and that trade integration for the continent as a whole will create a more dynamic market for both imports and exports. Egypt and Tunisia are already members of the Common Market for Eastern and Southern Africa (COMESA), Mauritania is a member of the Economic Community of the West African States (ECOWAS), while Morocco has applied for ECOWAS membership. Algeria, Egypt, Mauritania, Morocco, and Tunisia have ratified the AfCFTA Agreement (while Libya has signed but not yet ratified). The ECA and other economic models forecasting the transformative impact of the AfCFTA assume continent-wide implementation, not a Sub-Saharan rump.

On the third question of multilateral legitimacy through a WTO waiver, the precedent of the US’s AGOA – which received a WTO waiver – suggests that this is not insurmountable. Africa’s small share of global trade flows, at 2.3 per cent in 2020, according to IMF data - poses little competitive threat to the commercial interests of countries around the world. The international trading system can accommodate a special trade deal for Africa with negligible systemic effect.

A New Trade Deal will Require a Broader Framework of Trade Support

Trade preferences alone are an important but insufficient part of the solution. The experience of trade under AGOA, the EU’s various regimes, and China’s duty-free, quota-free regime for LDCs shows that more is needed. African businesses struggle with non-tariff barriers, such as product standards, and trade facilitation constraints. Germany has provided much-needed support to improve Africa’s quality and standards infrastructure, including through its technical assistance to the African Organisation for Standardisation (ARSO). The policy environment in African countries themselves is often not supportive either. Many African countries suffer macroeconomic instability and deficits in trade infrastructure, trade facilitation efforts, and institutional quality.

Africa’s trading partners can help by underpinning a special trade deal for Africa with a number of complementary measures. The first would be a deliberate effort to boost investment in African countries and to improve the type of investment, diversifying away from disproportionate focus on extractive industries to encourage green approaches to agriculture and industry. Second, initiatives are needed to assist African businesses to overcome non-tariff barriers. The third area is the alignment of development assistance with trade. In programmes such as the EU’s Global Gateway, Africa’s partners have recognized the need for investment to help reduce supply-side constraints in areas such as infrastructure, clean energy, transport, education, health, research, and digitalisation. In clean energy for example, the Federal Ministry for Economic Cooperation and Development (BMZ) is supporting the development of pilot plants for the production of green hydrogen. The European Investment Bank (EIB) is supporting the expansion of geothermal energy production in Kenya and across East Africa. Germany, the EU, France, the UK and the US are partnering with South Africa to implement a Just Energy Transition Programme (JETP). Yet Africa’s deficits in these areas remain and more support is needed. Africa’s development partners should take deliberate action to harness trade for sustainable development, extreme poverty reduction, and greater integration of the continent into the global economy. Backed by complementary support measures, Africa’s development partners can help to unlock trade as a driver of African socio-economic transformation even in these turbulent times for trade and trade policy. Within the EU, Germany is well placed to make the case that a new trade deal for Africa is in everyone’s interest.

David Luke is currently Professor in Practice and Strategic Director at the Firoz Lalji Institute for Africa at the London School of Economics and Political Science (LSE). His analysis draws upon his recent edited book, How Africa Trades.

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