Investigating how realising export potential can contribute to regional trade in the Tripartite Free Trade Area

Abstract

One of the most compelling arguments for stronger regional trade and integration in Africa is that the African market is the most fragmented in the world. Comparatively little trade takes place among African countries, mainly due to various trade divisions that restrict market access among regional partners, from poor infrastructure to high transport costs. These trade divisions are not a new phenomenon; African countries have been grappling with them for many years. While regional trade and integration are priorities among African policymakers, little progress has been made in clearing the hurdles to stronger regional trade linkages. However, given the considerable evidence in the literature that regional trade and integration make an important contribution to countries’ economic development, African countries’ low level of connectedness is clearly a binding constraint that is limiting the continent’s economic potential. The issue, however, is not simply that African countries should pursue more robust regional trade. It is more complex than that, especially in view of the slow progress to date. Rather, it is how countries can effectively identify unrealised trade opportunities while also overcoming trade divisions, thereby improving trade efficiency and paving the way for deeper integration among regional partners. This thesis identifies unexploited intra-regional trade opportunities among the Tripartite Free Trade Area (TFTA) member countries and investigates how realising these opportunities can drive stronger intra-regional trade and development. The thesis contains three articles, each addressing a different aspect of the study. The articles are supplemented by a literature overview covering trade theories, models of integration and the integration status of Africa’s regional economic communities (RECs), which provides an important backdrop to and theoretical context for the articles. Article 1 discusses a targeted approach to increasing intra-regional trade, using selected parts of a market selection tool, the Decision Support Model (DSM), to identify specific, untapped trade opportunities among TFTA member countries. The trade opportunities are presented as a series of importer‒product‒exporter combinations. In the article, large and growing import demand is matched with consistently competitive export supply between the different countries on a detailed (HS 6-digit) product level. The results show that nearly 70 per cent of the identified trade opportunities in the region have not been exploited. These opportunities are mainly found in vegetable products, foodstuffs, metals, textiles and clothing, thus highlighting that there is significant potential for stronger intra-regional trade in processed goods. This would be a welcome departure from Africa’s longstanding dependence on traditional, non-African trading partners as destinations for its primary commodity exports and sources of its value-added imports. The information provided on these newly revealed trade opportunities could help policymakers and businesses to formulate and implement more targeted regional trade strategies and initiatives. Article 2 investigates trade divisions that have the potential to inhibit the realisation of trade opportunities among the country matches identified in Article 1. The method used for the investigation was desktop research. The findings show that high trade costs, time to trade, market concentration, tariffs and non-tariff measures (NTMs) explain why many of the identified opportunities are not being exploited. However, nearly a quarter of the untapped opportunities cannot be attributed to any specific trade divisions that were investigated. This finding appears to support the African Export-Import Bank’s view that one of the most serious hurdles to trade within Africa is the lack of information on trade opportunities. Article 3 comprises an empirical study that models the impact of realising the untapped intra-regional trade opportunities identified in Article 1. A dynamic CGE model is used to simulate (in addition to the elimination of all TFTA tariffs) a targeted approach to reducing other trade divisions specifically calculated to arrive at the potential trade values estimated for the unexploited intra-TFTA trade opportunities. The results show that how one structures a trade policy is important. For example, when a targeted increase in trade efficiency is phased in over a period of time, it will result in far greater gains for TFTA member countries than if a once-off efficiency shock were applied. The results also show that a phased-in, targeted approach benefits not only bigger, more advanced economies, but also smaller economies within the region. Given Africa’s poor track record to date in translating broad policies into visible improvements in terms of regional trade and integration, the identification of real, untapped intra-regional trade opportunities may be a crucial and long-overdue first step towards realising Africa’s potential as a regional powerhouse and a sustainable source of well-being for its people.