Reducing non-tariff barriers to trade in Africa

4 July 2012

Africa ranks last in terms of intra-regional trade after Europe, Asia and North America according to a 2011 WTO report. Natural resources dominate Africa’s economy, leaving other sectors neglected and underdeveloped. Political and economic factors also contribute to Africa’s poor performance vis-à-vis the free flow of goods and services. These non-tariff obstacles to trade are the principal challenges to Africa’s development; they reduce the continent’s ability to benefit from intra-regional and international trade. These obstacles need to be significantly reduced by 2017 if African leaders are serious about establishing a Continental Free Trade Area (CFTA), but how can this be done?

Economic obstacles

The economic obstacles – also known as infrastructural obstacles – to intra-African trade are a consequence of Africa’s poor development.

Today, the biggest challenge faced by Africa is the lack of road infrastructure. There are fewer kilometers of road now than the continent had some decades ago, with about 70 percent of the rural population living more than 2 kilometers away from an all-season road. Consequently, the transportation of goods regionally is more expensive than with other regions of the world. In fact, transportation vehicles spend more time and money on the road than anywhere else. For instance, Shoprite spends US$20,000 per week on securing import permits to distribute its products to neighboring country Zambia, whereas other South African retailers take years to obtain the permission needed to export processed beef and pork from South Africa to Zambia. Moreover, flying from one country to another is expensive, and railway infrastructure barely links African countries. All of this contributes to high transportation costs and an increase in transport times, which in turn increases the overall cost of doing business on the continent, impedes private investment, and reduces Africa’s ability to benefit from international and regional trade.

Today, the overall quality and reliability of the Information and Communication Technology (ICT) infrastructure is a critical location factor for businesses across all sectors of an economy. A modern economy lacking a reliable ICT infrastructure will find it hard to either compete with others or benefit from international trade. This is the case for African countries, most of whom have inadequate, inefficient and very expensive telecommunication services.

African financial institutions find themselves unable to support intra-regional trade, mainly because of a weak capital base, limited knowledge and experience in managing counter-party risks, and limited correspondent banking relationships. The continent has multiple and non-convertible currencies, inefficient payment mechanisms, insurance requirements and customs guarantees. While currency conversion makes trade more expensive, the non-convertibility of some currencies makes many things tremendously time consuming.

Political obstacles

In Africa, policy-makers with limited market knowledge fail to consult with businesses as they implement programs intended to increase intra-regional trade.

Conflicts, terrorism, and political instability are also important obstacles to consider. Not many businessmen would happily send their goods to a country where the driver could be killed or taken hostage; few tourists would visit a country where terrorists are free to attack; nobody would want to establish a business in a country where the president has no legitimacy, and where people are killed or forced to flee their homes and property; and no one generally wants to trade with corrupt officials. All of this interrupts foreign direct investment (FDI) as well as intra-African trade.

Reducing the non-tariff obstacles to trade

In order to overcome these obstacles, decision-makers must focus on three important elements: financial industry (emphasis on insurance industry), conflict eradication, and the linkage of African countries (roads and fewer check points).

Africa also needs a financial system that can provide a means of transforming technical innovation into broad implementation. Without this, technological progress will not have a significant impact on economic development and growth in Africa. The financial system includes a wide array of firms vital for trade and growth such as banks, credits unions, investment banks, security trading, financial advisory services, and insurance companies that deal with the management, investment, transfer, and lending of money.

Insurance companies, for instance, play an important role in development because, together with mutual and pension funds, they are one of the biggest institutional investors. They play almost the same role as banks and capital markets, because they serve the needs of business units and private households in financial intermediation. In addition, they can invest in infrastructural construction (roads, airlines and information technology) and provide micro-finance (micro-insurance) by helping farmers through hard times. With a good financial system, Africa does not have to seek foreign aid for infrastructural development.

Less conflict, more stability
Africa is as rich in natural resources as it is politically unstable. Many African countries are among the most unstable in the world. These instabilities render trade relations almost unfeasible in certain regions of the continent. However, African leaders have not given attention to the fact that international trade can be used as a conflict resolution mechanism. International trade fosters mutual dependency.

If African countries increase intra-African trade, they will be motivated to take conflicts and terrorism more seriously. Indeed, it is striking that the African Union Action Plan for Boosting Intra‐African Trade makes no mention of conflict or instability; it completely ignores the cooperative benefits of increased regional trade.

With a sound financial system, peace and increased intra-regional trade, African countries would be constrained to take the above issues more seriously. African governments have to work with the private sector to develop those infrastructures and put aside the belief that only government can provide public services like roads and hospitals. Linking African countries together is as much a corporate responsibility as a government one; both stand to benefit from the development of Africa.

The privatisation of the major ICT service providers can lead to greater competition and lower prices. African leaders have to implement plans to increase competition in the services sector. They must understand that liberalising international trade means also liberalising services and establishing sound intellectual property laws, which are very important for the free movement of persons and inventions (new technologies and banking services et cetera).

It is inconceivable nowadays to have a plan that does not consider environment and climate change. These are among the principal causes of food insecurity in Africa and yet, African leaders do not mention them in a plan that they think will help develop Africa. Africa needs a sustainable and environmentally friendly FTA. Increasing intra-African trade also means increasing the trade in environmental goods and services. That is why, the AU has to work closely with the WTO and other regions on issues related to environment and the trade in environmental goods and services.

Conclusion

The fact that Africa ranks last in terms of regional trade is the consequence of the political and economic obstacles that impede the trade among African nations. The establishment of a successful CFTA rests on the significant reduction of those obstacles. Furthermore, African leaders should take conflicts and political instability more seriously in order to enhance regional trade.

Author: Henri Joel Nkuepo will occupy his new position as a Legal Associate at the World Bank on September, 10th 2012. He is currently a Research Scholar at the University of Iowa, College of Law as well as an Associate Fellow of the Centre for International Sustainable Development Law (CISDL), McGill University. He is also the Founder of African Trade Law Expertise (www.africantradexpert.com) and the author and editor of Africa’s Trade Law Newsletters.

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