Trade has always been a very important issue for most nations. Countries exchange goods and services to gain access to products they would otherwise not have. Increased exports result in more output and more revenue, and contribute to achieving a healthy (positive) balance of payments, paving the way for gross domestic product (GDP) and employment growth.

International trade encourages the efficient use of production factors, neutralises the uneven distribution of resources, allows for the development of a wider range of products and also provides access to other markets. At a time when developed economies are experiencing a global downturn, it would be beneficial for Africa to tap into its US$ 2 trillion economy in order to boost the demand for African goods and services.⁽²⁾ The continent’s one billion consumers represent an untapped potential for Africa to exploit alongside international trade.⁽³⁾ Intra-regional trade is not necessarily more beneficial than international trade, but it does provide additional markets for African exports. This is especially valuable in the case of sub-Saharan African countries, as their composition of exports to the continent differs from their exports to the rest of the world.⁽⁴⁾ The trade potential within and outside of Africa must be exploited to ensure an efficient usage of countries’ resources. However, intra-African trade currently accounts for only 10% of Africa’s total trade, which is significantly lower than that of other continents. Intra-regional trade for Asia and Europe respectively stands at 47% and 70%.⁽⁵⁾

This CAI paper discusses the different barriers to intra-African trade which need to be overcome before a real increase in efficiency and trade are feasible. Inadequate trade-related infrastructure, including transportation, energy, and information and communication technologies (ICTs) need major improvements to allow intra-African trade to become efficient. Bureaucracy and the competitiveness of African countries are also discussed to bring to light the problems in these areas which hinder African countries from trading with each other.

Intra-African trade

Historically, African countries provided cheap raw materials to their colonial powers, which they in turn used to fuel their own industrial revolutions. Despite independence, most African countries’ export bases have remained unchanged. Africa continues to provide cheap raw materials to the rest of the world and has failed to increase intra-continental trade. African countries have been unsuccessful in moving up the value chain, as raw materials still account for the majority of their exports.

In addition, most countries on the continent have followed the same development pattern. Most African countries still rely heavily on sectors in which they are locally endowed, not paying as much attention to other sectors which could generate more revenue. African countries heavily import manufactured and other high value-added products due to the weakness of their industrial sectors. Diversification should therefore be pursued, and barriers to intra-African trade need to be addressed to ensure that gains from diversification are not reduced by an environment which is not supportive of intra-continental trade. 

A 1% increase in transportation and telecommunication infrastructure investment would result in a 3% increase in exports to other African countries.⁽⁶⁾ Africa’s current infrastructure has been hugely inadequate for the continent’s needs. This led to products being unable to reach markets and in turn significant unrealised revenues. Current infrastructure investment is between US$ 40-45 billion a year,⁽⁷⁾ in comparison to about US$ 93 billion a year required for adequate infrastructure.⁽⁸⁾ In addition, investment has been skewed in favour of Northern Africa and South Africa, which are already more accessible than the rest of the continent. As a result, the rest of Africa, which is already disadvantaged in this regard, remains severely affected by a detrimental lack of infrastructure. Transport, ICTs and energy are the sectors that require the most urgent attention from Governments.

Infrastructure as barriers to intra-African trade

The poor quality of road networks is one of the main hindrances to the movement of goods in Africa. It also drastically increases the cost of transportation. Transportation costs in Africa represent about 70% of the value of exports compared to 20% in the rest of the world.⁽⁹⁾ Although road transport accounts for about 80-90% of all freight and passenger movement in Africa, only 24% of the roads are paved. The remainder are made of gravel or earth surfaces, making access subject to weather conditions. African countries have also failed to prioritise the maintenance of existing road networks which led to African countries losing up to half of their road networks over the last 40 years. Maintenance is much more cost effective than (re)building new road networks and should therefore be prioritised by Governments. Besides, connectivity among existing road networks would allow for larger areas to be accessible by roads and facilitate trade.⁽¹⁰⁾

Maritime ports are also used to transport goods over long distances in Africa. However, road networks are still needed to reach final destinations. Inland waterways present an interesting potential for increasing accessibility among African countries. The continent has five major rivers (Nile, Zambezi, Congo, Niger and Senegal) and three main lakes (Malawi, Victoria, Tanganyika) that could be used for this purpose. This potential remains, however, mostly untapped due to political instability, social unrest and bureaucracy.

Air transportation in Africa suffers very high intra-continental costs, which makes the trade of time-sensitive goods between African countries costly and difficult. The three major African airport hubs (Nairobi, Addis Ababa and Johannesburg) are mainly served by national airlines. The remaining African countries are generally served by weak, state-owned national airlines, or private airlines which operate under regulatory restrictions. Limited competition, in addition to high landing charges by international standards and connectivity problems, pushes up the costs of air travel in Africa.⁽¹¹⁾

Well developed ICT systems are also vital for the production of low cost goods that can compete globally and penetrate export markets. Compared to other developing regions, Africa is still lagging far behind in terms of ICT systems. Fixed telephone line penetration (which would allow for fixed broadband) remains inferior to 10% in most countries, far behind South America where Internet penetration is about 20%. Although Africa has the highest growth rate in terms of mobile penetration, this has not yet translated into a significant increase in Internet access.⁽¹²⁾ In today’s globalised economy, readily available, efficient and cheap access to ICT is a necessity to enable businesses to efficiently communicate, order materials or obtain information on potential trade opportunities. African countries need to make significant improvements in their ICT infrastructure as it remains mostly inefficient and very expensive, essentially due to the lack of competition.⁽¹³⁾ Besides competition, the majority of African countries do not have access to essential submarine fibre-optic infrastructure, which increases the costs of basic ICT service to the end users and limits the development of low cost ICT systems.⁽¹⁴⁾

Despite 20% of the global population residing in Africa, the continent only consumes about 3% of the world’s energy.⁽¹⁵⁾ This current energy consumption is insufficient to serve personal needs, let alone business. Rural areas, which are often the most underdeveloped areas, are also the most affected by the lack of access to electricity, making growth, development and business activities difficult. Africa has a long way to go with regards to increasing energy supply so that, for example, companies do not have to face extra operational costs such as generators. Many African countries are well endowed with natural gas and oil and should aim at bringing these resources to their people in addition to the rest of the world.

The role of red tape

The majority of African countries fall in the bottom half of the World Bank ‘Ease of Doing Business’ index.⁽¹⁶⁾ The regulatory environment in Africa particularly, is not conducive to doing business. The lengthy process of clearing goods through customs, which results in a 1% reduction of volume for every day of delay, is another key issue. Policies and procedures affecting exporting companies are also detrimental to trade. For example, a single truck, part of a grocery chain, operating in two neighbouring countries which are in the same regional block may need up to 1,600 documents to be able to cross a border.⁽¹⁷⁾ Countries like Uganda have a factory-to-ship time of almost two months. Reducing this time would allow for greater export volumes and generate more revenue.

Differing regulatory frameworks in different potential importing African countries also constitutes a hindrance. Nigeria, for example, has stringent local content requirements for goods, which means that to access the market easily, companies may have to look for local partners.⁽¹⁸⁾ In addition to making trade more complex, the lack of information about local companies makes business very difficult for small and medium-sized enterprises (SMEs).

While tariff barriers to intra-African trade were the first to be reduced, the wide presence of non-tariff barriers (NTBs) still hinders trade on the continent. The emergence of regional trade agreements (RTAs) has been instrumental in the reduction of tariffs, especially within RTAs. The reduction of tariff barriers, has, however, been offset by increased NTBs which often have the same effect as the tariffs would have if they were still present. Phasing out NTBs would pave the way for the genuine free movement of goods and would allow efficient producers to realise economies of scale (especially in countries party to trade agreements). In addition, this would increase competitiveness and allow for industrial specialisation and complementarity, in turn, increasing exports to Africa and the rest of the world.

RTAs may offer conditions conducive to trade. However, when a country is party to more than one RTA, as is the case of many African countries, the benefits might be reduced. Where RTAs have different entry requirements, production costs to meet these differing requirements may be a deterrent to export.⁽¹⁹⁾ Larger companies are generally able to overcome this extra cost, but SMEs may face more difficulties, which would in turn reduce their business development.

Competitiveness of African countries

Many African countries are unable to access trade finance in order to export to other African countries. The multiplicity and inconvertibility of currencies within the African continent also increases the cost of trading and hinders intra-African trade.⁽²⁰⁾ National, regional and continental institutions should be developed to support trade and provide finance, credit and guarantees for cross-border trade in Africa.

Few African countries, such as South Africa and Egypt, export substantial amounts of manufactured goods. The potential to increase intra-African trade is however present. This potential must be examined with regards to the international competitiveness of these countries (in comparison to African countries’ traditional suppliers). African suppliers, even South Africa and Egypt (the most competitive countries on the continent), still remain behind their non-African counterparts. It is therefore more expensive for African countries to import from the continent than from non-African countries.⁽²¹⁾

Conclusion

Owing to low intra-African trade, the continent has missed opportunities for growth and development and has had limited participation in global value chains compared to emerging and other developing economies.

The African Union has recently released an action plan to boost intra-African trade. It is an ambitious document which, if implemented, would without doubt boost trade on the continent and increase economic growth. Ultimately, current plans are, however, largely reliant on individual country actions. Political drive will be central to the implementation of this plan to overcome the barriers to intra-African trade. If African Governments succeed, the continent should reap the benefits and enjoy better infrastructure and services, higher economic growth and more employment in the future.

Written by Tapiwa Mhute ⁽¹⁾

NOTES:

(1) Contact Tapiwa Mhute through Consultancy Africa Intelligence’s Finance and Economy Unit ( finance.economy@consultancyafrica.com).
(2) Richardson, P. and Davison, W., ‘African Union urges more intra-regional trade to aid growth’, Bloomberg News, 30 January 2012, http://www.businessweek.com.
(3) Ezekwesili, O., ‘Can Africa trade with Africa?’, 10 September 2012, http://blogs.worldbank.org.
(4) Behar, A. and Edwards, L., ‘How integrated is SADC? Trends in intra-regional and extra-regional trade flows and policy’, World Bank, 2010, http://www.freit.org.
(5) Rugwbiza, V., ‘Africa should trade more with Africa to secure future growth’, World Trade Organisation, 2012, http://www.wto.org.
(6) ‘Is there potential for intra-African trade’, United Nations Economic Commission for Africa, ATPC briefing paper no. 13, 2010, http://new.uneca.org.
(7) Guiebo, M. and Kgengwe-Nyane, N., ‘Infrastructure and intra-African trade’, United Nations Economic Commission for Africa, ATPC briefing paper no. 14, 2010, http://new.uneca.org.
(8) Rugwbiza, V., ‘Africa should trade more with Africa to secure future growth’, World Trade Organisation, 2012, http://www.wto.org.
(9) ‘Action plan to boost intra-African trade’, African Union, 2012, http://www.au.int.
(10) Taiwo, O. and Moyo, N., ‘Eliminating barriers to internal commerce to facilitate intraregional trade’, Brookings Africa Growth Initiative, 2012, http://www.brookings.edu.
(11) African Development Bank Group website, http://www.infrastructureafrica.org.
(12) International Telecommunication Union website, http://www.itu.int.
(13) Taiwo, O. and Moyo, N., ‘Eliminating barriers to internal commerce to facilitate intraregional trade’, Brookings Africa Growth Initiative, 2012, http://www.brookings.edu.
(14) ‘Lack of competitive access to submarine cables keeps the price of international voice calls and internet connectivity high’, African Development Bank Group, 2011, http://www.infrastructureafrica.org.
(15) ‘Action plan to boost intra-African trade’, African Union, 2012, http://www.au.int.
(16) World Bank website, http://data.worldbank.org.
(17) Wroughton, L., ‘Barriers blunt trade within Africa: World Bank’, Reuters Africa, 8 February 2012, http://www.reuters.com.
(18) Wadi, P., ‘Barriers to intra-African trade’, Engineering News, 10 August 2012, https://www.engineeringnews.co.za.
(19) Keane, J., Cali, M. and Kennan, J., ‘Impediments to intra-regional trade in sub-Saharan Africa’, Overseas Development Institute, 2010, http://www.odi.org.uk.
(20) ‘Action plan to boost intra-African trade’, African Union, 2012, http://www.au.int.
(21) ‘Is there a potential for intra-African trade’, United Nations Economic Commission for Africa, ATPC briefing paper no. 13, 2010, http://new.uneca.org.