Why do Africa and Europe trade so little?
🌍 / Africa 2 / #84
The latest Good Morning Europe mailing was about the low trading volume between Africa and Europe (EU exports as many goods and services to Switzerland as to Africa, comparing a total population of 8.6 million to 1.3 billion).
Today is about the Why.
Three reasons come to mind: size, barriers, economic underdevelopment.
The larger an area, the less foreign trade. It's in the nature of things. If you can trade a lot in your own country, you don't need to go abroad.
The size-relation proves the trade openness country ranking. Trade openness is measured by exports plus imports as per cent of GDP. The leading country in that ranking is Luxemburg, with 377 per cent, followed by Hongkong and Singapore. The USA ranks 151 with just 23 per cent.
Is the trade openness theory an explanation for our Africa-Europe-trade-phenomenon? If this was true, there had to be a lot of trade within each continent, right?
It is true for the European Union. Most member states have a share of intra-EU exports between 50 and 75 per cent of total exports.
This is different in Africa. UNCTAD, the part of the United Nations Secretariat dealing with trade, investment, and development issues, says that intra-African trade is currently low at 14.4 per cent of total African exports. Even if you consider that - as the organisation also says - informal cross-border trade can account for up to 90 per cent of official trade flows, this would still be a very small share.
That may change in the years and decades to come. 40 of the 55 African Union nations have created the African Continental Free Trade Area (AfCFTA), with trade commencing as of 1 January 2021. The agreement initially requires its members to remove tariffs from 90 per cent of goods, allowing free access to commodities, goods and services across the continent. The United Nations Economic Commission for Africa estimates that the agreement will boost intra-African trade by 52 per cent already this year.
So the reason for the low trade between Africa and the European Union is not because African countries trade especially among themselves.
Is it perhaps due to trade barriers?
EU has economic partnership agreements with the Economic Community of West African States and Eastern African Community. Also, 32 of the least developed countries of Africa enjoy duty-free and quota-free access to the EU market.
So it looks like there are few cross-border trade restrictions.
But one thing is puzzling. Extra-African exports are dominated by mineral fuels and raw products, whereas intra-African exports are more sophisticated than extra-African exports. More specific: 61 per cent of exports within Africa are processed and semi-processed compared to only 38 per cent of the exports to the rest of the world. This could lead one to assume that the richer countries might make their markets less accessible for those products they produce themselves.
3) ECONOMIC UNDERDEVELOPMENT
Maybe the main reason for the low level of trade between Africa and Europe is the weak economic development of the African continent.
With European colonisation and later on the Cold War, that has its reasons.
Whatever the reason, change is needed. There is a new book from the World Bank called "Africa in the New Trade Environment: Market Access in Troubled Times" that addresses the necessities:
"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."
For sure, Africa can have a great future. The continent has good prerequisites with a young population, English language skills (official in many Sub-Saharan countries), improving literacy and education, availability of splendid resources and cheaper labour force. More trade with the European Union would do both, encourage this development and follow from it.
Have a promising day,