International and Regional Trade

World trade grew at 2.5 percent in 2008, down from 7 percent in 2007, and was forecast by the OECD at end-March 2009 to contract by 13.1 percent in 2009 – the first decline in world trade in 60 years. In 2010, growth in world trade is expected to exhibit positive growth of 3.2 percent as a recovery in economic activity gets underway in the countries of the OECD. These figures are subject to considerable downside risk, however. A factor depressing trade beyond the impact of slowing demand has been the sharp contraction in trade credit in OECD countries, along with the freezing of bank lending in general. Progress in the Doha round of trade negotiations has stalled, but efforts to revive them may, at the very least, keep protectionist sentiment – which has been strengthening along with the deepening of the global recession – at bay.

The slower growth in the OECD and several large emerging economies in 2008 was reflected in the demand for African exports, which exhibited real growth of 7.9 per cent in 2007, but was estimated at only about 5 per cent in 2008. Nonetheless, the value of exports was sustained by the high prices for oil and many other primary commodities that persisted for most of 2008. Growth in import demand in OECD countries and in Asia is expected to slow dramatically in 2009 and to remain weak in 2010. Export growth is expected to receive an off-setting boost from the Economic Partnership Agreement (EPA) between African countries and the EU, interim agreements’ having been signed by most countries. However, little progress in these negotiations was registered in 2008.

Trends in Intra-African trade

Merchandise exports grew by 17.5 per cent in 2007 to reach USD 424.14 billion in 2007 compared to USD 360.9 billion in 2006. Intra-African merchandise trade was only 9.5 per cent of the total. Manufactured products accounted for 42.5 per cent of intra-Africa trade, fuels and mining products 35.4 per cent and agricultural products 17.1 per cent. North America and EU remained the major trading partners of Africa in 2007 with a cumulative share of exports of over 61 per cent. Asia is also becoming an increasingly important trading partner for African countries. African exports to Asia grew by nearly 50 per cent in 2005-07, but these exports remain concentrated in fuels and mining products that accounted for 78 per cent of total exports during this period. The low-level of intra-Africa trade illustrates weak continental integration, highlighting the urgency with which the continent should deal with the bottlenecks, both in terms of policy and investments especially in common infrastructure.

Important regional integration measures in 2008

African countries are increasingly realising the advantages of regional co-operation and integration as a strategy to achieve economic growth and collectively to play a more important role in the global economy. Through this process, the continent can pool its capacities, endowments and energies together to transform itself, and thereby help uplift the lives of millions of people. To this end, African countries and governments, through the regional economic communities (RECs) and the African Union (AU), are pursuing an agenda of continental integration along a road map of establishing Free Trade Areas, Customs Union and Common Markets.

Africa’s RECs’ integration process has focused more on market integration through the design and implementation of various partial trade liberalisation schemes. Full market integration however remains to be fully achieved in African sub-regions and intra-community trade remains impeded by inadequate production of goods and deficient capacities in transport, communications and energy.

RECs experiences with FTAs and Customs Unions

The experience so far shows that progress in the elimination of intra-REC tariffs has been mixed. Regional Integration in Africa (ARIA I), a joint publication of the ECA and the AU Commission, indicates that, as part of its Free Trade Arrangements, ECOWAS members began eliminating tariffs on unprocessed goods and traditional handicrafts in 1981 and adopted a scheme for eliminating duties on industrial goods during the 1990s. While trade liberalisation has not been fully implemented in all countries, ECOWAS was still expected to become a customs union by the end of 2008, this deadline has been pushed into 2009.

COMESA members began cutting tariffs in 1994, and by 2000 all tariffs were to have been eliminated. Nine countries out of the 19 members satisfied this requirement by October 2000, when the free trade area was declared in accordance with the terms of the trade protocol. Some of the countries have fully liberalised intra-regional trade; others have done so only partially. Burundi and Rwanda have already cut tariffs by 80 per cent and 90 per cent. Ethiopia has cut tariffs by just 10 per cent, while Seychelles and Swaziland have not cut any. Swaziland has been granted a special derogation, however. COMESA was expected to become a customs union at the end of 2008, but this deadline has slipped somewhat.

EAC members are currently implementing tariff reductions, with cuts of 90 per cent by Kenya and 80 per cent by Tanzania and Uganda. Rwanda and Burundi, which joined EAC in 2007, are expected to eliminate all forms of tariffs in conformity with the trade protocols of the community. Co-ordination and harmonisation of trade policies and programmes in the EAC are to be accomplished in tandem, and so much faster than would have been expected under a free trade area. The community is currently a customs union and negotiations are still under way to transform the community into a common market.

In 2008 SADC became a free trade area. However, the tariff reduction programme for the members of the community reflects the varying capacities of the economies concerned to face competition from other countries in the community. Mauritius agreed to allow 65 per cent of goods imports from South Africa to enter its economy duty free in 2000. But Tanzania could offer only 9 per cent that year, and the removal of its tariffs will be staggered—with 88 per cent lifted by 2008 and 100 per cent by 2012. Unlike more formal free trade areas, countries were able to choose which products to reduce duties on as long as the overall goal was attained. South Africa in particular and members of the Southern African Customs Union (SACU) in general are required to reduce tariffs on intra-SADC trade faster than other members.

UMA had trade liberalisation high on its agenda when the organisation was established in February 1989. In 1991 UMA countries signed a protocol under which goods originating in and traded among member states were to benefit from the elimination of tariffs and non-tariff barriers. Tariff elimination has yet to be fully implemented. Members trade more through bilateral arrangements than through the UMA trade protocol.

Challenges

Despite African countries’ determination to dismantle trade restrictions in order to create a common market within the framework of regional and sub-regional agreements, barriers to intra-community trade development are numerous. These barriers are mostly the consequences of the economic structure of the countries; their institutional policies and weak infrastructures; their weak financial and capital markets; and their failure to implement trade protocols. The economic structures of African countries, which are broadly similar, include low-capacity manufacturing sectors, lack of diversified production, and their production and marketing policies lack co-ordination and harmonisation. The weak infrastructure and institutional policies of many of the countries are partly responsible for poor intra-African trade. Furthermore, the numerous roadblocks and checkpoints on African highways contribute immensely to increasing the delays in the delivery of goods and to raising transport costs.

African customs administrations are generally inefficient, contributing to barriers to trade within and outside the continent. Customs regulations require excessive documentation, which must be done manually because the process is not automated and ICTs are absent in most of the custom offices. Furthermore, customs procedures are outdated and lack transparency, predictability and consistency. These inefficiencies result in delays in which tend to raise transaction costs. In addition to the barriers to intra-African trade, payment and insurance systems are also not well developed. Foreign trade financing, export credit facilities and export insurance systems are also not available in most African countries. There is no inter-convertibility of African currencies because monetary and financial regulations are not harmonised at the regional, sub-regional and national levels. There is a gap between the needs of exporters and the insurance services and products offered.

Proposed COMESA-EAC-SADC Free Trade Area

In October 2008 the three RECs in Eastern and Southern Africa, COMESA, EAC and the SADC agreed to form a free trade area. Should it be achieved such an FTA would deepen intra-African trade by involving 26 countries (almost half of the continent), with a combined population of 527 million people and a combined GDP of USD 624 billion.

One of the main challenges facing the partners is overlapping membership. Of the 26 countries, 17 (almost two-thirds) are either already in a customs union or negotiating another customs union, or are negotiating two separate customs unions. Hence the agreement to initiate an FTA to minimise and eventually eliminate the contradictions brought about by overlapping membership.

The priority areas for policy harmonization and co-ordination amongst EAC, COMESA, and SADC under the FTA include, among others, a common tariff regime, standard rules of origin, simplified customs procedures and documentation, harmonization of product standards, identification, removal, and monitoring of non-tariff barriers, the establishment of one-stop border posts, as well as safeguard measures and dispute settlement mechanism.