Intra-African Trade Not As Easy As it Seems

In a speech on U.S. policy toward Africa earlier this week, Secretary of State Hillary Clinton reiterated a point she made at the 2009 African Growth and Opportunity Act Ministerial in Kenya: African countries have not focused sufficiently on expanding intra-African trade and are missing out on an excellent method to grow their combined gross domestic product. Clinton offered American assistance in opening markets. “We stand ready to provide technical assistance, we stand ready to help, but we can’t help if nobody is asking for help or if nobody is accepting help.”

There should be no doubt that Secretary Clinton is sincere in this offer. The U.S. government has devoted hundreds of millions of dollars to trade capacity building in African since AGOA was signed into law in 2000. However, there does not seem to be a full understanding of the complexity of the issue of intra-African trade. Consequently, we are making little or no headway on this because we are not fully taking into account all the factors that have contributed to only 10% of African trade being internal to the continent.

Secretary Clinton mentioned tariffs and customs issues that hamper intra-African trade. She described it accurately as both a corruption problem and a capacity problem. Traders between countries acknowledge that they often are delayed long hours by customs officials, police and soldiers seeking to force them to pay bribes to pass through. Governments without the capacity to control far-flung officials, some of whom aren’t paid regularly, are hard-pressed to end this obstacle to intra-African trade. Until this situation can be reversed, it will continue to plague those who go back and forth between countries buying and selling goods.

The high tariffs Secretary Clinton mentioned also are a disincentive for cross-border trade. Not much progress has been made in eliminating these tariffs as required in the plan to establish the African Economic Community except in parts of a couple of regions. This is in part due to a miscalculation in which African governments used high tariffs to discourage imports and encourage local production. However, structural adjustment as demanded by international financial institutions and World Trade Organization requirements made that policy obsolete even though some governments still cling to this notion of development.Trade reform in Africa has taken hold.

Twenty years ago, the International Monetary Fund classified 75% of sub-Saharan African countries as having restrictive trade policies. A little more than a decade later, only 14% of these countries were considered to have restrictive trade policies. More needs to be done, but certainly African governments have responded and are not refusing to make reforms.

Secretary Clinton mentioned transportation as a major impediment o intra-African trade. Forty percent of African countries are islands or landlocked, so effective transportation links are critical for them to trade with other African countries. Under colonialism, transportation linkages served the needs of the colonial power so that what roads, rail lines and other infrastructure that existed were intended to carry goods to the ports so they could be sent to Europe. Roads that linked countries evidently were seen as promoting independence and therefore not desirable. Today, only 30% of African roads are paved because transportation within rural areas and between countries was not of interest to those who built the roads. Correcting this situation is estimated to cost many billions of dollars African governments don’t have.

The reason it’s easier to get from Lagos to London than from Lagos to Nairobi is that air linkages between the colony and colonial power were arranged that way because Nigeria and Kenya were intended to trade with the United Kingdom and not each other. This situation is slowly but surely being addressed, but old habits die hard, and African regional airlines have not been successful in competition with stronger European airlines.

It isn’t that there are no efforts to trade between African countries, but that trade which exists is plagued by four trends. First, there is a narrow pattern of trade involving unprocessed primary products. What incentive is there for one country to buy fruit from its neighbor that it already produces? Second, Europeans still dominate African trade. Gambia has historically traded almost exclusively with the United Kingdom even though it is surrounded by Senegal, whose major trading partner is France. If the former colonial power buys most of your products, how much do you have left to trade with your neighbors? Third, much of the intra-African trade that exists is done so informally and is untaxed and unregulated, so we really can’t say what the true level of intra-African trade is beyond estimates. Fourth, African payment systems are inefficient and costly. Electronic fund transfers taking minutes facilitate international transactions elsewhere, but checks for payment in Africa can take a month to clear. Given this discrepancy, who would you rather do business with?

One phenomenon that is involved in lower than possible intra-African trade may be the practice of transfer pricing. By over-pricing imports and under-pricing exports, multinational companies transfer profits, revenues or monies out of a country in order to evade taxes. This may seem to be solely a tax issue, but if neighboring countries aren’t in on these deals, wouldn’t they be locked out of trade in the goods in question? The OECD estimates that nearly two-thirds of global trade in goods and services takes place not on the free market, but rather between subsidiaries of the same multinational company. Global Financial Integrity, an organization that tracks illegal fund transfers, estimates that sub-Saharan African countries lost more than US$800 billion through techniques such as abusive transfer pricing between 1970 and 2008.

Incompatible legal systems, different currencies, regional conflicts and other issues add to Africa’s problems in establishing successful intra-African trade. I do not excuse African governments for not correcting this situation because these problems can be fixed, but a better explanation of the challenges they face would provide those who want to help with a more comprehensive understanding of what the problems truly are.

I believe the U.S. government wants to help, so I urge officials to take into consideration all the factors involved in low intra-African trade and provide targeted assistance to both governments and private sectors. When the help provided does not meet the need, it is bound to fail.