The case for greater economic integration in Africa

Dr. Rob Davies NEWS & ANALYSIS Trade, Industry & Investment

There have been many economic integration attempts in Africa over recent decades, resulting in the proliferation of regional economic communities. Despite geographic proximity, cultural affinity and these integration efforts, intra-Africa trade remains relatively low at approximately 16% of the total trade of member states.

The underlying rationale for economic integration is that welfare benefits can be gained from increased trade. By implication therefore, because such gains come through trade, the critical success factor for an integration effort is whether or not it results in increased trade. Trade agreements between developing countries are typically less successful in creating intra-community trade than that achieved in blocs of developed countries. The trade potential among countries that produce and export the same, mostly primary products, but necessarily need to import a wide range of manufactured goods, is very limited. Well developed and diversified manufacturing capacity is largely lacking in many member states of the Tripartite. It is therefore imperative that we address this lack if this integration initiative is to foster economic development. In the absence of trade potential, market integration does not constitute a sufficient step to achieving greater integration. Economic integration has to extend beyond mere market liberalisation.

Our experience with trade liberalization and market integration in the Southern African Development Community (SADC) has proven that removal of tariff barriers alone does not increase trade to its full potential. This is reflected in the level of intra-community exports as a share of the total exports of its members. In the case of the Tripartite communities, SADC and the East African Community (EAC) achieve rates of 15 to 16%; in the Common Market for Eastern and Southern Africa (COMESA), this is approximately 7%.

The COMESA-EAC-SADC Tripartite initiative is rooted in the African Union’s (AU) Lagos Plan of Action and the Abuja Treaty, which aim to establish an African Economic Community. As a first step towards achieving this, the AU identified eight building block communities amongst the proliferation of regional economic communities in Africa. These include the three Tripartite communities, which are making an effort to integrate their markets and economies in order to build towards the eventual AU goal of the establishment of the African Economic Community. It is a strategic response to the objective of the African Economic Community to rationalize and consolidate existing regional economic communities with a view to achieving a common market covering the African continent. Its establishment will mark a historical milestone in the integration of the African continent.

The newly launched Tripartite Free Trade Area as a vehicle to enhancing economic development, diversification and industrialization in Africa

Since the end of the colonial era, it has been necessary to mitigate economically for the fact that Africa was carved up in many small territories by integrating its various small markets. Over the years, we have made progress towards this end through the creation of several regional trade blocs. However, the Tripartite engagement places us on the brink of taking a major leap towards this long-standing, economically sound ideal. A large integrated market such as that envisaged in the Tripartite Free Trade Area (TFTA) makes its members more attractive as investment destinations, and offers improved economies of scale and the possibility of global competitiveness.

The TFTA, comprising the 26 countries of SADC, COMESA and the EAC, will contribute to building an African Common Market that will unleash enormous economic growth and the development potential of Africa. The 26 countries have a combined population of 632 million people and a combined Gross Domestic Product of US$1.3 trillion in 2014. The region accounts for half of the African Union in terms of membership, 58% of Africa’s GDP and 57% of the continent’s total population. It is a significant market indeed.

The importance of the Tripartite process cannot be overstated. Africa is seen by many as the next frontier for growth after China and India – the next “big growth story”. However, Africa will always have the unrealized dream of being the next frontier if we do not address the challenges of inadequate infrastructure, small and fragmented markets, little diversification in industrial output, similar product ranges resulting in relatively little trade potential, and lack of vertical integration in production, amongst others. The answer, I believe, lies in a developmental regional integration agenda that develops targeted programmes to address these fundamental constraints.

More important, therefore, than the increased market size is the fact that the Tripartite initiative follows the developmental integration approach. It is structured not merely as a market integration or trade liberalization event, but has two additional pillars: integration on the supply side of the economy through integrated industrial development; and coordinated infrastructure development. Furthermore, the market integration pillar will upon completion cover trade in both goods and services, as well as commitments in certain trade-related areas such as intellectual property and investment.

This industrial development work programme will assist in addressing the production capacity constraints facing the continent which reduces the ability of many countries to trade, which in turn explains the low-level of intra-Africa trade. If one looks at SADC alone, almost all SADC countries have upwards of 60% of their exports concentrated in no more than 10 tariff headings. The top 10 exports of a number of SADC countries are dominated by resource-based non-value added products. Clothing products feature prominently for some countries, followed by agriculture and fish products, mostly at the lower levels of processing. The picture is most likely the same for most African countries, and, coupling this with the similarity of products on offer by these countries, it explains the limited prospects for intra-Africa trade. This is why trade agreements at times yield limited results. It is therefore crucial for Africa to develop programmes that will promote industrial development through value addition and improvement of the commodities we have.

The infrastructure pillar focuses on four main areas, with a view to enhancing connectivity and reduce costs of doing business in eastern and southern Africa, namely: transport, ICT, energy and water. Interventions are in the form of policy and regulatory harmonization, development of physical infrastructure and facilitation. The Tripartite engagement has adopted a corridor approach for developing and rolling out the transport and trade programmes. Infrastructure development focuses on the North-South Corridor with significant progress on upgrading surface links though a large number of projects for road, rail, bridges, border posts and port development.

The Tripartite Free Trade Agreement has been launched, but work continues

The negotiations towards the Tripartite Free Trade Agreement (TFTA) were launched in Johannesburg on 11 June, 2011. Now, four years later, Heads of State and Government of the 26 participating countries met in Egypt on 10 June, 2015 to launch the TFTA, thus signifying the conclusion of the negotiations on the agreement. It sets the rules and framework within which the tariff preferences and other commitments will be implemented. By agreeing on the legal text to underpin the TFTA, the three economic communities have reached an important milestone in integrating their markets and economies.

However, some core parts of the agreement are still being negotiated. In this regard, negotiations on tariff liberalization and rules of origin are ongoing with considerable progress achieved among some Tripartite Member States. The agreement can only be operationalized once tariff schedules and rules of origin have been agreed and Parliamentary ratification completed.

Each of the three communities has already achieved considerable market liberalization among their own members. These existing agreements will not be re-opened, but will be rolled into the TFTA. Tariff negotiations therefore only take place, mostly bi-laterally, between those members that do not yet have agreements with each other. The existing liberalization in the region therefore is being preserved, while the TFTA will add to it.

It is these new bi-lateral trade agreements that constitute the core of the outstanding work; few tariff offers have been exchanged as yet. As bilateral negotiations of offers are still underway, no new offers have yet been concluded. In addition, negotiations towards the product-specific rules of origin, which are critical for the implementation of tariff preferences, are an ongoing process. Significant progress has been made, but a substantial body of work still remains to be completed. Efforts also continue to design trade remedies that would be effective but suitable for implementation by the parties to the TFTA. These three topics, therefore, constitute a built-in agenda on which work will continue after the recent launch of the agreement. Once these have been completed and the entire agreement with all its annexes and tariff schedules ratified by at least a simple majority of the parties, we should see operationalization of the free trade area.

Long-term benefits of the Tripartite Free Trade Area

The main benefit of the TFTA is a larger, integrated and growing regional market that can increase the interest of foreign investment and provide a basis for enhanced intra-Africa trade. Investment and market size are two critical factors to enabling industrialization and competitiveness. The TFTA will therefore increase Africa’s prospects of stimulating industrialization, employment, income generation and poverty reduction. Importantly, by providing a larger market it offers the opportunity to improve economies of scale and efficiency, thereby improving Africa’s competitiveness both in its own markets and globally. The TFTA is an important initiative in accelerating industrialization and economic development across the region. The increased market size that comes through the TFTA is an essential component to achieving this.

The UNECA Economic Report on Africa, 2015, states that about two-thirds of intra-Africa trade is in manufactured products. As such, even though intra-Africa trade is low compared to other regions, the composition is of importance as it mainly comprises trade in value-added products, thus contributing to Africa’s industrialization efforts. Africa’s policy response in boosting intra-Africa trade should be to focus on addressing the supply-side and productive capacity constraints by improving trade-related infrastructure, enhancing trade facilitation and developing regional value chain, which will serve to reduce trade costs and improve general efficiencies in Africa’s trade. The dynamic effects of this integration initiative are considerable and are likely to improve even further the structure of intra-Africa trade to more manufactured goods as well as services.

The infrastructure pillar serves a dual purpose: firstly, it addresses the infrastructure gaps that hamper economic activity and contribute to make African economies uncompetitive; and secondly, it serves as a “kick start” for industrialization by manufacturing infrastructure inputs and components in the region.

The TFTA offers opportunities for development for its Member States and can be a springboard that catalyses a wave of growth in the manufacturing sector if properly utilized. The challenge for the Member States is to ensure that they take advantage of the opportunities and proximity to fast-growing African markets.

The establishment of the Tripartite integration initiative will provide a compelling and accessible marketplace for business, while opening up a host of developmental opportunities. There are enormous opportunities in the downstream development of the continent’s vast resources, and the creation of critical infrastructure in roads, railways, ports and utilities. I am very optimistic about the potential benefits of the Tripartite engagement for regional economic integration and development in southern and eastern Africa.

Written by

Dr. Rob Davies is serving his second term as Minister of Trade and Industry, South Africa, having been appointed to this portfolio in 2014. During his first term from 2009-2014, he oversaw the development and implementation of annual three year rolling Industrial Policy Action Plans, as well as steering South Africa’s participation in important trade relations, including the Tripartite SADC- COMESA-EAC Free Trade Area, BRICS, Economic Partnership Agreement with the EU, the US Africa Growth and Opportunity Act, and the World Trade Organisation Bali package.