How Well is Africa Integrated Into World Trade?

This post first appeared on Agrilinks and was authored by Antoine Bouet (IFPRI), Lionel Cosnard (University of Bordeaux) and David Laborde (IFPRI). 

In the Malabo Declaration of June 2014, African countries committed to tripling the level of intra-African trade in agricultural products and services by 2025, fast-tracking the establishment of a Continental Free Trade Area and adopting a continent-wide common external tariff. To accomplish these goals, African governments will need to consistently and accurately measure their participation in international trade.

So where does Africa’s trade integration currently stand?

Experts continue to hotly debate the issue of under-trading by Africa. Some have found Africa’s participation in world trade to be low. However, a relatively well-developed literature argues that Africa’s trade has been in line with predicted trends and that the continent’s participation in international trade reflects its level of economic activity. This continuing debate clearly shows that we need a solid benchmark to determine whether Africa is trading normally or is under-trading.

Let us proceed in three steps.

First, we examine recent trends. Africa’s participation in world trade is clearly decreasing. Figure 1 shows the share of Africa and Sub-Saharan Africa in world trade of goods and services from 1960 to 2016. The share for Africa as a whole was around 5.5 percent in 1960; it is now around 2.5 percent. The trend equation indicates that for every decade, Africa’s overall share in world trade of goods and services declines by approximatively 0.5 percent.

Figure 1: Share of Africa and Sub-Saharan Africa in world trade of goods and services - 1960-2016

Second, we attempt to define a benchmark of trade to which we can compare Africa’s actual level of trade. Through this comparison, we can determine whether Africa’s level of trade is abnormally low or high. Gravity models offer a theoretical way to define a norm of trade between two countries. In a simple and symmetric form, a gravity equation relates bilateral trade to each country’s economic activity and geographic distance. We can then use econometrics to estimate this reference of trade by evaluating the importance of the link between the explained variable (trade) and the explanatory variables (GDP, distance).

Using annual trade data from 2005 to 2013 from BACI (CEPII, 2015), GDP data from the World Development Indicators (World Bank, 2017), and distance data from CEPII (2011), we evaluate countries’ coefficients of multilateral trade resistance in Figure 2. These indicate whether countries’ participation in world trade is abnormally high or low.

Small Pacific islands have positive coefficients, indicating that these countries trade more than the norm defined by GDP and geographic distance. For African countries, the coefficients of countries’ fixed effects are often negative and significant, indicating that these countries trade less than the norm defined by GDP and geographic distance. Compared with the rest of the world, most African countries have a higher resistance to trade, with the exception of coastal western African countries and southeastern Africa. Thus, the gravity equation confirms that African countries are globally under-trading, meaning that their actual level of trade is generally less than the norm defined by GDP and distance.

Figure 2: World map of multilateral trade resistance coefficients - 2005-2013

Third, we examine the potential causes behind Africa’s under-trading. The continent’s low participation in global trade may be the result of import duties, export taxes, non-tariff measures (NTMs) and/or high administrative costs at the border, particularly compliance and documentary costs. It is possible to find data regarding tariffs, export taxes and non-tariff measures implemented by countries at their borders, as well as data regarding the costs and time of border and documentary compliance (Doing Business 2016). Using these data, we can compute (or estimate) the ad valorem equivalents for all of these barriers in order to present every measure in a comparable unit (see Bouët, Cosnard and Laborde 2017).

Figure 3 displays these results for the export costs of all products and of only agricultural products, respectively, for 56 African countries. The figure shows that the African countries with the greatest number of impediments to their exports are Guinea, Madagascar, Sierra Leone, DR Congo, Liberia and Mauritania, while those with the fewest impediments are Eritrea, Sudan, Niger, Morocco and Tunisia. We also see an important heterogeneity across African countries, with ad valorem equivalents of the global export cost ranging from one percent to 78 percent. Overall, export costs appear to be very high in Africa, averaging 17 percent. Only 16 percent of the other countries in the world have export costs greater than this average.

A high degree of heterogeneity also appears in the structure of these costs. For example, exports from Guinea, Madagascar and Sierra Leone are greatly penalized by the direct costs of border and documentary compliance; however, for DR Congo, those costs are relatively low. Similarly, export restrictions are important in Côte d’Ivoire’s global export costs, particularly for agricultural products.

Countries’ rankings can also change substantially when it comes to export costs for agricultural products only. For example, overall, South Africa has small export costs, but the country ends up in the top half of the table for export costs for agricultural products.

Figure 3 also shows that the time costs associated with border and documentary compliance can be a massive impediment to exports for many African economies. For instance, for exports from DR Congo, border compliance requires 515 hours and documentary compliance requires 698 hours (that is, 50 days); these time costs result in a total ad valorem-equivalent export tax of more than 156 percent for agricultural products. The costs associated with these compliance times depend to a great extent on the product considered, but they represent a massive barrier to the trade of edible products.

We reach similar conclusions when looking at import costs. The countries with the highest import costs are Madagascar, DR Congo, Tanzania, Algeria, Nigeria, and Congo. Again, African countries have high import costs, averaging 60 percent. Outside of Africa, only eight percent of countries have import costs that top this average. The structure of these costs, as well as their importance, is quite heterogeneous, with overall costs ranging from six percent to 200 percent. NTMs play an important role in some countries, such as Algeria, Egypt, Nigeria, Tanzania and Sudan. Madagascar also appears as an outlier, with massive estimates for direct costs associated with border and documentary compliance.

From these analyses, we conclude that trading costs in Africa are relatively high, particularly import duties, transportation costs, documentary compliance costs and border compliance costs. These costs appear to be a major limitation for the realization of trade integration in the region.

Figure 3: Combination of all available export costs in ad valorem equivalents

Source:  Authors’ calculations using data from BACI (CEPII 2015), Doing Business 2016 (World Bank 2016); MAcMap-HS6 2010 (CEPII 2011); Kee, Nicita, and Olarreaga (2009); and Laborde, Estrades, and Bouët (2013).

Click to read: Measuring Trade Integration in Africa