De-fragmenting Africa: Regional trade integration in goods and services

24 September 2012
ITC News
Regional integration in Africa has long been recognized as essential to addressing issues related to the small economic size of many countries and the often arbitrarily drawn borders that pay little attention to the distribution of natural endowments.

But as is frequently noted, at least to the extent that it is recorded in official customs statistics, Africa trades minimally within itself. For example, according to a 2011 World Bank report by Acharya et al entitled Preferential Trade Agreement Policies for Development: A Handbook, the share of intraregional goods trade in total imports is around 5% in the Common Market for Eastern and Southern Africa, 10% in the Economic Community of West African States and 8% in the West African Economic and Monetary Union. This compares to over 20% in the Association of Southeast Asian Nations, around 35% in the North American Free Trade Agreement area and more than 60% in the European Union. On the other hand, intraregional trade in South America's Mercosur trading bloc is about 15% of total imports and less than 8% in the Central American Common Market.

It is often argued that regional integration can only play a limited role in Africa because of the similarity of endowments between countries. However, various contributions to the World Bank's 2012 report, De-fragmenting Africa: Deepening regional trade integration in goods and services, highlight the enormous scope for increased cross-border trade in Africa. Regional trade can bring staple foods from areas of surplus production across borders to growing urban markets and rural areas with food deficits. Similarly, rising incomes in Africa create emerging opportunities for cross-border trade in basic manufactured goods, such as metal and plastic products that are costly to import from the global market. The potential for regional production chains to drive global exports of these goods, such as those in East Asia, has yet to be exploited. Thus cross-border trade in services offers untapped opportunities for exports and better access for consumers and firms to goods and services that are cheaper and provide a wider variety than those currently available.

The question is: Why is Africa not achieving its potential for regional trade? While there has been some success in eliminating tariffs within regional communities, a range of non-tariff and regulatory barriers raise transaction costs and limit the movement of goods, services, people and capital across borders. The end result is that Africa has integrated with the rest of the world faster than within itself. This is of particular relevance as traditional markets in Europe and North America are stagnating and recent export growth in Africa is being driven primarily by commodities that have limited impact on employment and poverty.

The costs of non-tariff and regulatory barriers

Non-tariff and regulatory barriers to regional trade fall most heavily and disproportionately on poor, small traders, preventing them from earning a living in activities that give them a comparative advantage, such as catering for smaller, local markets across borders. Most small-scale, poor traders are women and their trading activities provide an essential source of income to their households. Profit margins are small and reduced by every delay or extra charge. These traders are also vulnerable to abuse. For example, and as noted in the World Bank's 2012 report, the majority of traders who cross from the Democratic Republic of Congo to Burundi, Rwanda and Uganda are women carrying staples. Some 85% report having to pay a bribe and more than 50% report physical and sexual harassment. One trader reports, 'I buy my eggs in Rwanda. As soon as I cross to Congo I give one egg to every official who asks me. Some days I give away more than 30 eggs!' This experience is not unique to this group of countries.

In southern Africa, a truck serving supermarkets across a border may need to carry up to 1,600 documents as a result of permits, licences and other requirements. Slow and costly customs procedures and delays caused by other agencies operating at the border, such as standards agencies, raise the costs of trading. For example, the supermarket chain Shoprite reports that each day one of its trucks is delayed at a border costs US$ 500 and it spends US$ 20,000 per week securing import permits to distribute meat, milk and plant-based goods to its stores in Zambia alone. Companies that have access to professional services, such as accountancy, engineering and legal services, tend to have higher productivity, but many governments in Africa limit the pool of services that are available to companies through restrictions on the movement of professionals across borders and regulations that constrain the conduct of service providers.

The non-tariff barriers associated with the design and implementation of regulations continue to limit trade growth throughout Africa, imposing unnecessary costs on exporters that curb trade and raise prices for consumers, undermine the predictability of the trade regime and reduce investment in the region. To deliver integrated regional markets that will attract investment in agro-processing, manufacturing and new services activities, policymakers need to move beyond simply signing agreements that reduce tariffs and drive a more holistic process towards deeper regional integration.

A regulatory reform agenda

An approach is needed that reforms policies that create non-tariff barriers, puts in place appropriate regulations that allow cross-border movement of service suppliers, delivers competitive, regionally integrated services markets, and builds the institutions necessary to allow small producers and traders to access open regional markets. This is different to an approach that proceeds through specific sequential steps to integration and creates a free trade area, customs union, common market or economic and monetary union. For example, there are enormous opportunities from trade in services in Africa that are not dependent on a common external tariff being in place. Countries can work to improve trade facilitation at the border and to remove non-tariff barriers with neighbours while free trade agreements are being designed and implemented. Countries that are not members of the same free trade agreements can work to disseminate information on market prices to producers and traders.

This approach is consistent with recent work that shows that the ingredients and recipe for successful regional integration in the 21st century are quite different from those used in the 20th century. The old regionalism focused on the mutual exchange of tariff preferences and trade in goods. The new regionalism concerns a wide range of regulatory issues and is about the 'trade-investment-services nexus', according to a 2011 World Trade Organization working paper by Richard Baldwin entitled 21st Century Regionalism: Filling the gap between 21st century trade and 20th century trade rules.

The returns from a regulatory reform agenda for trade will be substantial, while the direct financial costs are small relative to other Aid for Trade interventions and investments in infrastructure. However, a large information gathering and knowledge building agenda is needed to support regulatory reform. Better information on non-tariff barriers and their impact is required in many countries to identify priorities for reform. Effective regulation typically requires sector-specific knowledge. The knowledge required to regulate open markets for accountancy services is quite different to that required to define standards for milk. This knowledge agenda can be enhanced by learning from other countries and regions about what has and has not worked for them.

However, in addition to being sector specific, regulation must take into account local demand and supply conditions; simply importing standards from outside may not be appropriate. Finally, the regulatory reform process must be open and inclusive to ensure all stakeholders are involved and that regulatory outcomes are not unduly influenced by particular stakeholders, such as incumbent companies.

A successful policy reform programme that seeks to address these constraints to intraregional trade in Africa will have to confront powerful interests that may be adversely affected by any changes to the status quo. While measures to open up African markets to regional trade will increase opportunities for businessmen and women, and particularly help poor traders to earn higher returns from their activities and at the same time reduce prices for consumers, some often politically well-connected individuals will lose the high profits they are able to earn from the relative lack of competition. In some cases there may be important distribution impacts that will need to be addressed if poor people are employed in activities that were previously protected. At present, there is limited analysis of political economy issues and there are few mechanisms in existing agreements for supportive policies, such as retraining schemes for affected workers. The appropriate metric for successful regional integration is not the extent of tariff preferences, but rather reductions in the level of transaction costs that limit the capacity of Africans to move, invest in and trade goods and services across their borders.