The Benefits of Trade Integration: How AfCFTA Can Learn From Other Trade Agreements

On 9 May 1950, almost exactly five years after the end of World War II, a global conflict which decimated Europe in particular, the French foreign minister, Robert Schuman, made a proposal. France was a major steel producer but relied a lot on imports for coal. Germany had most of the coal, but didn’t have a thriving steel industry, its economy decimated after the war. Schuman proposed that both countries enter a partnership, a trade agreement which would pool both markets and expand production in both countries, making them reliant on each other and rendering war between unlikely but also, unwise. German Chancellor, Konrad Adenauer, liked the proposal, as did the governments of the Netherlands, Belgium, Luxembourg, and Italy – all of whom had either coal or steel industries, or at least needed the resources to fuel other industries. 

On 18 April 1951, the Treaty of Paris was signed, establishing the European Coal and Steel Community (ECSC). This would turn out to be a precursor to the European Economic Community (EEC) and eventually, the European Union (EU). The common market the ECSC introduced featured freely set market prices and free movement of products, without customs duties or taxes subsidies, or restrictive practices, with an authority to monitor compliance. The end result of the ECSC, the European Union, retains the characteristics of the ECSC, along with the free movement of both people and capital. 

The existence of the European single market might be a contributing factor to the fact that in 2022, about 52.2 percent of all imports made by EU member countries were from other EU member countries. EU countries imported as much as $3.81tn worth of products from other EU countries, a favourable trade environment significantly reducing the cost of trade. 

A similar agreement can be found in the North American Free Trade Agreement (NAFTA), now the United States, Mexico, and Canada Agreement (USCMA). NAFTA eliminated tariffs and quotas on U.S. exports to Mexico and Canada, and the institution of USCMA added more products to the tariff waiver. Mexico and Canada are two of the U.S.’s three largest trade partners, with the other being China. In 2022, $1.61tn of NAFTA’s $3.24tn exports were to other NAFTA countries, accounting for 49.85% of all exports.

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Mustard Insights has investigated interregional trade within Africa in a previous article. Per data from the International Trade Centre, we found that African exports to other African countries accounted for only 13.8 percent of all exports from the continent in 2022, indicating low levels of international trade. Possible reasons for this poor intra-African trade include possible high tariffs, infrastructure deficits, and a market that is centered around the trade of raw materials. Let us briefly explore these issues. 

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Africa is a vast continent, with its 30.4 million square kilometer land mass being nearly three times the size of continental Europe. Its terrain varies greatly, from deserts to forests, mountains to swamps. Perhaps these contribute to the continent being lacking in all sorts of infrastructure from transport to telecommunication. The African Development Bank estimates that Africa’s infrastructure needs amount to between $130-$170 billion a year. 

Rail transport in the continent is disconnected and disjointed. Multi-state railways are few and there is little standardization. This can be seen in railway gauges. Nearly all of Europe uses the standard 1435 mm railway gauge. In Africa, different countries and regions favour different gauges. Southern African countries like Namibia, Zambia, South Africa, and Botswana use the 1067mm gauge, while Eastern Africa features a lot of 1000mm and some 1435mm railways. This means that a train carrying copper from, say, Zambia to Tanzania might have to transfer its cargo somewhere along the journey, possibly more than once. 

Africa’s road network cannot boast of being pristine either. Inter-state roads are often in some state of disrepair, making it difficult to transport people and goods. However, this isn’t why African countries are not trading enough with each other. We believe that two main factors drive low intra-African trade: tariffs and technology.

Various global trade zones such as ASEAN, the EU, and NAFTA reveal that trade is rapidly facilitated by the removal of trade tariffs – which is the tax imposed by governments for the import or export of goods. Tariffs can be a useful source of revenue for a country’s government; however, they can also be used as instruments of protectionism. These protectionist tariffs are levied when a country seeks to protect a domestic industry, making it harder and more expensive to import. An example is the Nigerian governments approach to rice importation. 

It is a near-unanimous consensus that tariffs will have a negative effect on trade, and secondarily, economic growth. Since tariffs tend to be a percentage of price imported or a constant sum per unit of imported goods, a high tariff rate will immediately dissuade trade. The Director-General of the World Trade Organization, Ngozi Okonjo-Iweala, is on record saying: “Cost of trading within and outside Africa is too high with tariffs hinging on 435 percent and 350 percent respectively., If this is not addressed it will be difficult to actualise a good implementation of the AfCFTA”.

The African Continental Free Trade Area (AfCFTA) is supposed to be Africa’s answer to the EU; Africa’s free trade area. Established in 2018, the operational phase was launched in July 2019 and trading under the agreement began in January 2021. It presently has 46 party members across the continent, and a few signatories.  

The United Nations Conference on Trade and Development (UNCTAD) estimates the AfCFTA could create a $3 trillion borderless market and boost intra-African trade by 33 percent. The IMF, in its paper titled “Trade Integration in Africa: Unleashing the Continent’s Potential in a Changing World”, describes the game-changing effects proper implementation of AfCFTA could bring about. They predict that large reductions in tariffs by 90 percent and nontariff measures (NTMs) by 50 percent could increase the median merchandise trade flow between African countries by 15 percent and median real GDP per capita by 1.25 percent. Presently, import tariffs within Africa average up to 6 percent, as opposed to barely 1 percent in the ASEAN trade bloc, about 0.2 percent in both NAFTA and the South American MERCOSUR trade area, and zero percent in the EU. 

Other nontariff measures (NTMs) may also hinder trade. These are at-the-border policy barriers to trade other than tariffs such as import and export licenses, price controls, or standardization differences. The IMF estimates that these are the equivalent of an 18 percent import tariff on average across Africa. They are a subset of nontariff barriers (NTBs), which may include other roadblocks such as quotas, levies, sanctions, trade embargoes, and transport and logistics costs. The IMF estimates that implementing tariff and NTMs reductions, as well as reforms to the trade environment (security, infrastructure) could bring about a 53 percent growth in median bilateral trade within Africa, raising real per capita GDP by 10.6 percent, and reducing extreme poverty by 30-50 million people. 

The technological hindrance to trade lies in Africa’s production deficit. Africa is a continent that largely produces raw material – lithium, oil and gas, cocoa, to name a few. Most of these raw materials are seen as sources of revenue for government as is and are rarely processed into finished products. Take cocoa, for instance. Four of the five highest cocoa producing nations are African – Ivory Coast, Ghana, Nigeria, and Cameroon – yet the continent does not have a chocolate-producing stalwart. Hence, most cocoa produced is exported outside the continent. 

It is, however, also pertinent to note that especially on the African continent, political will is essential in reaping the benefits that come with free trade. Nations must see each other as partners, not rivals. It is also for this reason that the Guided Trade Initiative (GTI) – a brainchild of the AfCFTA is aimed at testing the operational, institutional, legal and trade policy environment. One of the wins so far is that its eight member countries – Cameroon, Egypt, Ghana, Kenya, Mauritius, Rwanda, Tanzania and Tunisia – have all agreed to drop tariffs for certain products such as ceramic tiles, batteries, tea, coffee, processed meat products, corn starch, sugar, and dried fruits among others. 

How soon do you think it’ll take for Africa (AfCFTA) to reduce tariffs and increase exports significantly? Let us know.

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