The impact of trade cost reduction due to digitalisation: a case study for SADC

Abstract

High trade costs have long been one of Africa’s biggest barriers to trade, with cumbersome border procedures and poor infrastructure leading to the slow movement of goods between countries. Intra-regional trade is a particular challenge in the Southern African Development Community (SADC) region. However, with the advent of the Fourth Industrial Revolution, technology and digitalisation has started to remove some of these barriers to trade. The World Trade Organisation estimates that technology has the potential to reduce trade cost in the Sub-Saharan Africa (SSA) region by 1.3%. In order to take full advantage of these new technologies, it is important to determine what the region’s most challenging areas are. Using the Doing Business Index, Enabling Trade Index and Logistics Performance Index, this study shows that border procedures and poor/lacking infrastructure remain some of the SADC region’s largest barriers to trade. An assessment of the Network Readiness Index shows that some SADC member states have started integrating various forms of digital trade technology. Unfortunately, the process has remained slow and unequally distributed across the region. This shows that there is still room for improvement in terms of both trade cost and digitalisation within the SADC region. This study’s main objective is to determine the impact a trade cost reduction due to digitalisation will have on intra-regional trade in the SADC region. A dynamic GTAP model is used to show how economic growth and global and intra-regional trade will be influenced by a trade cost reduction in the SADC region. The results show that a 1.3% technology related trade cost reduction will lead to improved intra-regional trade between SADC member states, with exports to Malawi, Lesotho and Eswatini showing some of the highest growth rates. The analysis shows that the SADC region will however remain somewhat reliant on trading in primary goods, while some regions show an increased movement towards services under a trade cost reduction. The results furthermore indicate that this trade cost reduction will lead to higher GDP growth levels during the period modelled. Thus, concluding that a trade cost reduction due to digitalisation will not only have a positive impact on the economic development and trade balance of SADC member states but will also lead to an increase in intra-regional trade in SADC.