AfCFTA Friday #7: Why is low Intra-African trade a problem?
Understanding the importance of increasing Intra-African trade through AfCFTA
Intra-European trade accounts for over 60% of all EU trade.
Intra-ASEAN + China trade accounts for over 45% of all ASEAN trade.
Intra-African trade accounts for only 16% of all African trade. 84.4% of Africa’s exports leave the continent.
Why is this a problem?
Because it hinders economic growth.
Low Intra-African limits the growth of markets necessary for economic growth
A bigger market increases the exchange of goods and services, which spurs economic growth.
Africa is made up of small domestic markets. More than that, the partitioning of Africa created many economically unviable states.
These countries must be linked to larger structures to become economically viable. The 16 landlocked African countries are a good example. Unless they connect with countries with a coast, exporting products to enlarge their market becomes problematic.
With low intra-African trade, African countries cannot grow beyond the small domestic markets, and the economically unviable states experience high poverty rates.
Think about four siblings that own four neighboring islands. The four islands have populations of 1000, 2000, 3000 and 4000 people, respectively. No matter how hard the citizens of the first island work, entrepreneurs will only ever be able to sell to a maximum of 1000 people. That is the limit of the island’s economic power.
If the four siblings decide to create trade routes among the four islands and ease movement from one island to the other, all of a sudden, the entrepreneurs in the four islands have a combined market of 10,000 people.
Someone making $1000 by selling pencils to 1000 people can now earn $10,000. How much economic growth do you think such margins would facilitate?
That entrepreneur would have to employ more people to handle the load, which would reduce unemployment. They would also pay more taxes which increases domestic revenue for the island.
That is the power of intra-African trade.
Low Intra-African trade limits economic diversity
Economic diversity refers to the different economic activities (such as agriculture and mining) in a region or a country.
Economic diversity creates employment, which facilitates economic growth.
Take the example of agriculture, mining and manufacturing. Mining (crude oil, gas or minerals) does not create many jobs because it depends on advanced technologies. Agriculture and manufacturing create a lot of jobs because they are labor-intensive.
Data shows that when Africans trade with each other, they exchange agricultural products and manufactured goods—In 2018, 60% of intra-African trade consisted of manufactured goods and agricultural commodities.
In contrast, when Africa exports to the rest of the world, 72% of the exports consist of minerals, crude oil and natural gas.
There is every reason to expect that increased intra-African trade will increase employment and economic growth because Africans will continue exchanging more agricultural and manufactured goods.
Intra-African trade will give Africa a diverse economic portfolio that is not solely dependent on the export of raw materials.
The opposite is also true. Low intra-African trade will lock Africa out of the advantages of economic diversity.
Beyond that, economic diversity provides multiple sources of revenue. Historically, African economies have primarily depended on one export. Nigeria exports crude oil, Ghana cocoa, Kenya tea and coffee, and DRC minerals.
It makes them vulnerable to global price fluctuations. When global prices fall sharply, a country may experience a revenue crisis that hinders growth.
Low Intra-African trade diminishes the bargaining power of the continent
A higher bargaining power facilitates better trade deals which increase economic growth. Contrast two entrepreneurs—a billionaire and a regular entrepreneur who makes six figures.
When the billionaire walks into the room, by virtue of their billions, they command more respect and can easily negotiate a trade deal that benefits them as much as the other party.
The entrepreneur will get some respect but cannot negotiate the same deal the billionaire did because they lack the bargaining power.
Similarly, Ghana, as an individual country, can only get so much when negotiating alone. However, when it is Ghana, Nigeria and Cameroon together, it becomes a combined GDP of 600 billion US dollars, eight times the size of Ghana’s GDP.
The African Continental Free Trade Area brings together all 54 African countries, which will increase their bargaining power thanks to a combined GDP of $3.4 trillion.
Takeaway
More than any other continent, Africa needs economic integration. The imperial powers made political compromises that made it impossible for individual African countries to thrive independently.
Think about it this way, if each African country could fully thrive on its own, the British or French would not have needed multiple colonies. Britain, for instance, would have been satisfied with Kenya and French with Algeria.
AfCFTA will facilitate the economic integration/intra-African trade necessary for economic growth and prosperity.
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