Ask any world-class racing driver what they need in a car to be successful on the track, and they will probably agree on three ingredients: good aerodynamics, a great set of tires, and an efficient and powerful engine.
Sub-Saharan Africa (SSA) is like the driver and the global trade environment is the track the continent needs to navigate to reach the goal of reducing poverty and improving living standards for the region’s 1.2 billion inhabitants, of whom over 50% are youth. To achieve these goals, Africa must grapple with ever-evolving curve balls, such as the increased fragmentation of production across borders around the globe; the proliferation of regional trade agreements; the relative rise of east and south Asia as new economic frontiers; the digital revolution and the subsequent rise of labor-saving technologies; and, most recently, the COVID-19 global pandemic.
African countries’ effective participation in the ever-evolving international trade environment remains central to boosting the region’s growth and development.
A new book from the World Bank, Africa in the New Trade Environment: Market Access in Troubled Times, analyzes the trade track ahead of Africa and recommends the kind of aerodynamics, tires, and engine that the region needs to succeed. The book offers a three-pronged policy approach to bolster Africa’s market access in the current global trade environment: evaluate and re-engineer trade with traditional partners, the United States (US) and the European Union (EU); strategically diversify trade with Asia; and look inward to deepen regional trade integration.
The Aerodynamics: Evaluate and Re-Engineer Trade with Traditional Partners (US and EU)
There is a need to integrate unilateral trade preferences with other efforts to deepen trade and investment between African countries and advanced countries, mainly the US and the EU, addressing the structural challenges limiting the region’s export capacity. Additionally, the international community needs to shift from the current tangle of trade agreements that reinforce the economic and political fragmentation that has long choked the region’s prospects for increased integration. Adoption of a more streamlined “contract with African neighbourhoods” would facilitate subregional production networks, encourage subregional cooperation initiatives, and help to reduce the risk of cross-border conflicts by increasing the economic linkage of the member countries.
More importantly, African countries need to undertake bold domestic structural reforms to scale up the supply capacity of the region by improving digital connectivity, reforming fundamental institutions of legal frameworks, such as contract enforcement and property rights protection, maintaining stable and competitive exchange rates and low inflation, lightening the regulatory burden, improving access to imported inputs through low domestic tariffs, and enhancing access to infrastructure through the creation of effective special economic zones.
The Tires: Strategically Diversify Trade with Asia
Asia’s growing middle class and its voracious demand present an opportunity for Africa to expand trade with the region. The book’s findings indicate that exports to Asia raised labor productivity, wages, and capital intensity in Africa. Further, trade with Asia does not crowd out African countries’ exports to the rest of the world, nor does it cause specialization in material-intensive export. To deepen trade ties, the region must expand and utilize trade agreements, exploit emerging initiatives to boost Asia-Africa Trade, facilitate export promotion initiatives, assess the growing Asian middle class’s consumption patterns to inform export diversification, and promote “niche” industries geared towards the Asian export market.
The Engine: Deepening Regional Integration within Africa
Sub-Saharan Africa’s success in the global market rests on deepening regional integration to scale up supply capacity and build regional value chains. The establishment of the Africa Continental Free Trade Agreement (AfCFTA) presents opportunities to boost intra-African trade, strengthen the complementarities of production and exports, create employment, and limit the impact of commodity price volatility on the participants. It also provides for increased resilience to global shocks, promotes the exchange of a more diverse set of goods, and contributes to reducing conflicts. Greater regional integration is paramount for AfCFTA to succeed.
The region must improve physical integration – such as cross-border energy and transport infrastructure and connective infrastructure; strengthen political cooperation – such as harmonizing customs rules and procedures; and facilitate business integration – such as regional electronic settlement system, electronic cargo tracking system, and easing restrictions on services trade.
Africa is poised to race ahead in the global market and become a major global player, but bold reforms are needed to help Africa win the race against poverty and improve the lives of all of the continent’s dynamic citizens.