When North America goes low on trade policy, Africa aims high

The downshifting inherent in the fruits of the drama-filled NAFTA 2.0 deal concluded on October 1 is hardly inspiring, certainly for us veteran global trade negotiators. But more importantly for North American consumers, workers and firms, whose economic prospects won’t be measurably enhanced.

By contrast, the trade policy reform initiative underway among the more than 50 African countries — the African Continental Free Trade Agreement (ACTA) — has grand objectives. Although it surely will require Herculean efforts for negotiations to succeed, it does offer a genuine ray of hope for a continent whose economic development has long been cursed.

Washington’s gambit to force Mexico City and Ottawa to renegotiate the North American Free Trade Agreement (NAFTA) to “modernise” the 24-year-old pact, resulted in a newly branded accord — the US-Mexico-Canada Agreement (USMCA). But if it is passed by all three countries’ legislative branches, frankly it will likely do little to increase the volume of trade flows.

Rather its main effects will be to change the composition of three-way trade. In particular, a trade pattern slanted in favour of the US.

If African leaders can pull off negotiation of ACTA, the returns will be higher from the get-go.

The maladies plaguing the African continent are a confluence of factors: harsh climate- and weather-related catastrophes that result in famines, floods and other natural disasters; inadequate and underperforming health care and educational systems; sharp ethnic rivalries that engender civil wars and propagate havens for terrorist movements to take root; and the vestiges of ruinous colonial dictates that enable populations to give life to rulers who refuse to stand down.

While those afflictions can — at least in theory — be managed if not mitigated, Africa’s economic prospects are weighed down by an even more fundamental misfortune that is unalterable: it’s a continent comprised of a large number of small-sized states, and many nations that are landlocked.

Small geographies constrain realisation of economies of scale, and lack of access to waterways, especially oceans or bodies of water that spill into them, means not only must countries depend on neighbours to sell exports or buy imports, but overland shipping is far more expensive than transit over water.

The usual approach to address these structural handicaps, which, of course, are found in other regions of the world, though nowhere as extreme as in Africa, is for neighbouring countries to band together and jointly establish common trade and investment policies that create synthetically large markets and open up transit channels to more readily access global markets.

For decades, the 55 countries comprising the African continent took steps towards market integration by creating eight clusters of Regional Economic Communities (RECs). But the initiatives made only limited progress.

The reason is that many countries are members of more than one REC, resulting in a patchwork of rules and overlapping institutions.

In a large quantitative survey of businesses of varying nationalities operating on the continent that I undertook at the firm-level across a number of African countries several years ago, the vast majority of responses indicated that most of the RECs were often more of a hindrance than an incentive to achieve cross-country investment economies of scale, regionally-based supply chains, and stepped up export and import transactions outside the continent.

Today, 80 per cent of African businesses are locally-based small and medium enterprises. It is no surprise, therefore, that there is this anomaly — only slightly over 15 per cent of the average African country’s exports are sold in other African states. Put differently, about 85 per cent of exports from the average African country is sold outside the continent.

Worse still, the vast majority of Africa’s exports to the rest of the world are commodities — and often unprocessed ones at that. In other words, the location where value is added to these commodities — the source of profits — often occurs abroad rather than on the continent.

The reasons for this state of affairs is three-fold.

First, most African countries tend to have high statutory tariff rates, which, of course, make imports — regardless of whether the goods come from other African states or from outside the continent — more expensive. The continental average of each country’s weighted average applied tariff rate is 8.7 per cent, with Djibouti having a 17.6 per cent weighted average applied tariff rate. (The comparable rates for China, the EU, and the US are 3.5-, 2- and 1.7 per cent, respectively.)

Second, there are non-tariff barriers. These typically stem from domestic differences in regulatory regimes across African countries, such as variation in labelling requirements for the same product to be sold in differing countries, or differences in licensing protocols to engage in the same professional service in a neighbouring country on the continent.

And, third, it may well be the case that there isn’t cost-effective infrastructure in place to get goods to market at competitive rates. For example, there are instances on the continent where, as a result of variation in railway gauges across countries, it is necessary to offload shipments at the border and put them on either different rail cars or on trucks to get them to their final destination.

It is well-known that the average cost of shipping a product from, say, Johannesburg to Kigali can be a multiple of the expense of shipping the same good from Johannesburg to Beijing.

Projections indicate that under ACTA, reducing such barriers would increase intra-African trade of goods and services perhaps as much as one-third, and in turn, ultimately raise GDP by 1 per cent. Most significantly for a region that by global standards has a dearth of manufacturing, most of the increase in trade engendered by ACTA would be felt in the near-term in manufacturing.

This is because current trade between African states has a higher industrial content than what is exported to the rest of the world.

ACTA won’t remedy all of Africa’s deepest problems. But it would be an economic gamechanger for the continent.

Harry G. Broadman is CEO and Managing Partner of Proa Global Partners and a faculty member at Johns Hopkins University.