Mega-regional trade agreements: Threat or opportunity for the future of African trade?

How can Africa mitigate the potential negative impacts of mega-regional trade agreements and support its structural transformation efforts through trade?

Since the early 2000s, regional trade agreements (RTAs) – allowed under WTO rules – have flourished. Interestingly, this development has taken place in the context of minimal progress in multilateral trade negotiations, thereby suggesting strong interest by many countries to consider regional markets as an important avenue for expanding trade. The emergence of mega-regional trade agreements (MRTAs), which gather together not just neighbouring countries and account for large shares of world GDP and population, attests to this trend.

Presently, three major MRTAs are envisaged: the Transatlantic Trade and Investment Partnership (TTIP) between the European Union and the United States; the recently concluded Trans-Pacific Partnership (TPP) between the United States and eleven other nations across the Pacific Rim; and the Regional Comprehensive Economic Partnership (RCEP) between sixteen economies from Asia and the Pacific. If these agreements are implemented, they would considerably modify the world trade landscape with systemic challenges for the multilateral trading system. In particular, MRTAs tend to be ahead on numerous issues discussed within the WTO framework and have contributed to divert talks away from traditional Doha matters, which are particularly essential to many developing countries, especially from the African continent. The final declaration from the tenth ministerial conference of the WTO, held on 15-19 December 2015, in Nairobi, Kenya, is in itself very consensual but somewhat elusive about future multilateral negotiations. It recognises that “many members want to carry out the work on the basis of the Doha structure, while some want to explore new architectures.” At the same time the declaration reaffirms “the need to ensure that Regional Trade Agreements (RTAs) remain complementary to, not a substitute for, the multilateral trading system.”[1]

The impacts that these mega-deals are expected to have on third countries remain fairly uncertain as all provisions of the agreements are not fully known, except for the TPP. However, it is apparent that African countries, which are not part of any of the three main mega-regional initiatives, are likely to be impacted by increased competition and preference erosion in MRTA markets. From a trade perspective, it is therefore essential to explore possible strategies that African countries could adopt to mitigate possible negative effects which could result from the formation of mega-regionals.

Establishing the CFTA: A top priority for Africa in the context of mega-regionals

Empirical evidence based on computable general equilibrium (CGE) analysis confirms that while the establishment of the three major MRTAs would create vast export opportunities for their members, especially in RCEP countries, African economies would be hurt by the trade reforms (Mevel and Mathieu, 2016)[2]. Results suggest that reductions in their exports towards India and China would be particularly significant.

Nevertheless, if African nations are able to concurrently implement the Continental Free Trade Area (CFTA) – Africa’s own mega trade deal which is expected to span all 54 African Union states and for which negotiations were officially launched in June 2015 –, then outcomes would radically change for Africa. Trade creation within the African continent brought about by continental integration reform would more than offset the trade losses generated by the MRTAs. All African economies, including the smallest ones, would be able to expand their trade with their African partners. It should be further stressed that the expansion in intra-African trade would benefit industrial sectors the most (e.g. electronics, machinery and transport equipment, chemicals, textile, metal products and processed food), thereby positively impacting Africa’s industrial development and structural transformation. The benefits would even be enhanced if measures to reduce trade costs are taken along with the CFTA.

Under this scenario, success in the ongoing CFTA negotiations, followed by speedy implementation of a continent-wide trade policy reform, is an imperative for Africa in order to mitigate the undesirable effects of mega-regionals. The CFTA will need to be ambitious and effectively phase out tariff barriers on trade in goods and services as well as vigorously combating non-tariff barriers which strongly impede intra-African exchanges. Of course, issues beyond strictly trade (e.g. investment, regulatory reforms, etc.) will also need to be tackled in the short to medium-term (as in the MRTAs) for the gains to be maximised. Yet, the continental market – even though full of potential – remains moderately small and is unlikely to provide trade opportunities that are ample enough to trigger a significant improvement of Africa’s position in the world trade landscape. Africa’s share in global trade is only about three percent today[3], which is almost the same as two decades ago. Therefore, Africa would have to look beyond its own market if it wants to play a greater role in international trade.

Reinforcing trade-related South-South cooperation

Findings from Mevel and Mathieu (2016) further suggest that if the CFTA and MRTAs are successfully established, deepening integration between African countries and MRTA members – from TPP and RCEP – would provide meaningful trade opportunities for African economies.

Whereas Africa’s export growth towards the countries of North, Central and South America would be generally dominated by traditional products (i.e. energy and mining), expansion of Africa’s exports to Asian nations, especially China, would show more potential to support Africa’s industrialisation efforts. Moreover, as the quasi totality of the trade deflection for Africa following the establishment of the MRTAs would be with RCEP countries, mainly India and China, closer trade ties between Africa and Asian economies would counterbalance the trade diversion effect triggered by mega-regional deals.

Nonetheless, as far as supporting Africa’s structural transformation is concerned, it would be if Africa enters into profound trade integration with Asian countries beyond just RCEP that the outcomes would appear to be the most promising. Indeed, the potential for diversifying Africa’s goods exports to Western Asian economies – which includes the Middle East – would be noteworthy. Almost the entire surge of Africa’s exports towards the United Arab Emirates and Saudi Arabia, which are already well sourced in energy commodities, would benefit industrial products. The share of industrial goods would also dominate Africa’s exports to Turkey and be substantial regarding its exports to the rest of Western Asia. Yet, Africa’s exports of agricultural and food products – in particular cereals, crops and meat products – would also be significantly enhanced, especially towards Turkey and the rest of Western Asia. These countries would also have a sizeable demand in energy and mining products from Africa.

In such a scenario where African economies tighten their commercial ties with Western Asia, it should be highlighted that the gains coming from Africa’s trade expansion would not just be shared among those African countries having already close trade relationships with partners from the Middle East (e.g. North Africa nations and other members of the Arab League). Benefits would be fairly distributed across different countries from the five main African regions. Countries such as Nigeria, Kenya, Ghana, Côte d’Ivoire, Mauritius, Cameroon, and Zambia would even be expected to expand their exports to Asia and the Middle East by over two-thirds (as compared to a situation without further integration between Africa, Asia, and the Middle East), with a wide range of both industrial and agricultural exports being significantly stimulated.

Furthermore, it must be emphasised that deepening integration between Africa and its partners from the South is not just in Africa’s interest, as it would also strongly stimulate both imports and exports of its counterparts. Even the few third countries that could possibly be hurt following increased engagement between Africa and developing economies could easily mitigate their losses by undertaking trade facilitation reforms – in line with the WTO Trade Facilitation Agreement (TFA) – expected to create new trade opportunities and strengthen existing ones.

Conclusion and policy recommendations

In the context of the emergence of mega-regional trade agreements such as TTIP, TPP, and RCEP, Africa’s top priority should be to establish its Continental Free Trade Area (CFTA). This would not only help African economies to mitigate trade losses caused by the formation of major trade blocs, but also enhance trade policy coherence within the continent. An ambitious and inclusive continental-wide trade policy reform would allow for a better alignment of the multiple existing trade regimes across Africa, while addressing the issue of overlapping memberships among the African Regional Economic Communities (RECs). At a time when African countries are engaged in reciprocal – albeit asymmetrical – trade deals with external partners, such as the Economic Partnership Agreements (EPAs) with the European Union, the CFTA should ensure that any African country does not disadvantage its continental counterparts over external partners in terms of market access.

That being said, even a CFTA that is anticipated to boost intra-African trade and its industrial content will likely not suffice to improve Africa’s current marginal position in the global and rapidly evolving trade landscape. Although the CFTA constitutes a critical step towards the establishment of successful value chains and the promotion of upgrading processes that are much needed to enhance African economies’ competitiveness, the continent must strategically explore meaningful trade opportunities beyond its own regional market. Deeper trade and investment ties with developing and emerging economies from Asia, and most particularly from the Middle East, could well allow for promoting the industrialisation of African economies and the diversification of their exports. Such an outcome would make a substantial contribution towards achieving Africa’s structural transformation objective and elevating its standing on the world trade scene.

Therefore, Africa needs to promptly adjust its efforts and re-prioritise its engagement with various trade platforms. All the energies throughout the African continent must be better catalysed and dedicated towards negotiating and effectively implementing the reforms that best support Africa’s priorities, that is to say, deepening regional integration first and then strategically engaging in trade-related cooperation with partners from the South. Capacity building aiming at improving African negotiators’ skills to design, negotiate and implement such trade agreements must be reinforced, which requires strong support from international organisations and development partners.

Written by Simon Mevel, 18 April 2016  for ICST. Edited by Amy Smith (NIAS).