What does it take to meet Africa’s trade integration target?
27 May 2016
By Degol Hailu, Senior Advisor and Chinpihoi Kipgen, Research Associate, UNDP
The target of Agenda 2063 of the African Union is to see: “intra-Africa trade growing from less than 12% in 2013 to approaching 50% by 2045”. To meet this target, intra-regional trade not only needs to grow, but the sophistication of the products traded must be enhanced.
For instance, from 1965 to 1990, intra-regional trade among the Asian Tigers plus China, Indonesia, Japan and Malaysia averaged 29% of their total trade. Intra-regional trade actually grew at a slightly higher average rate of 18% per year compared to 15% for extra-regional trade (trade with countries outside the group). Currently, extra-regional trade from this group of countries is just 1.7 times greater than intra-regional trade. Moreover, as a result of developed regional value chains and industrial networks, intra-regional imports of intermediate goods represent more than 50% of total imports.
Intra-regional trade between the Asian countries also grew in sophistication. Today, manufactured goods make up about 70% of the total trade. Intra-regional trade in high-skill and technology intensive manufactures is among the highest in the world, accounting for 50% of regional trade.
Can African economies achieve such remarkable integration? The good news is that, between 2000 and 2014, the total value of Africa’s intra-regional trade grew at an annual average rate of 13%, increasing from US$30 billion to US$178 billion.
Yet, Africa’s trade with the rest of the world continues to account for more than 85% of total trade. For instance, since the mid-1990s, imports sourced within the region have not exceeded 15% of total imports.
Few countries also dominate intra-African trade. Between 2010 and 2014, Botswana, Côte d’Ivoire, Namibia, Nigeria, South Africa and Zambia purchased 40% of the intra-regional exports. About 50% of the imports were sourced from Cote d’Ivoire, Nigeria and South Africa.
The ratio of extra- to intra-regional imports of manufactures remains at 9:1. In addition, more than a third of Africa’s exports of high and medium technology intensive manufactures - which are low in terms of value - are exported outside the region.
The chief mechanism through which intra-African trade will be facilitated is the Continental Free Trade Area (CFTA), to be endorsed by the African Union member states in 2017. The CFTA aims to achieve a single common market for goods and services. According to the UN Economic Commission for Africa (UNECA), the CFTA has the potential to increase intra-African trade by 52% in 2022.
With a rapidly rising middle class, Africa’s consumer spending is expected to reach US$1.4 trillion by 2020. Along with this, demand for manufactures, particularly those that are technology intensive, will rise. The CFTA can meet this demand by deepening trade integration.
However, meeting the Agenda 2063 target requires policy space for countries to implement industrial policies and build their manufacturing capacity, while liberalising tariffs gradually. These measures will ensure intra-regional trade will not be controlled by few countries with relatively advanced manufacturing capacity.