Africa’s free trade and global value chain

THE WORLD’S LARGEST free trade area is now in Africa. This, presumably, is based on the fulfilment of African Union’s time table stipulating, under Article 23 of the African Continental Free Trade Area (AfCFTA) Agreement, that the AfCFTA Agreement would become operational after 30 days of securing a minimum threshold of 22 ratifications. That happened on Thursday May30, 2019, a month after April 29, 2019. It was on that April 29 that the AU received the twenty second deposit, made by the Saharawi Republic. So, now, the AfCFTA Agreement could be assumed, on this basis, to have entered into force.

But, before we roll out the drums, the prospects of this new status is worth examining. To begin with, what will Africa trade in, how, where and when? Recent experiences might provide sufficient insights. As recently as in 2016, intra-African exports made up 18 per cent of total exports. And, so far, African economies have been mostly dependent on commodities, with all the highs and lows and cycles of good and bad. Volatile world commodity prices are believed to have been a major factor causing instability in total export earnings in commodity-dependent economies. Historically, primary commodity export, for which Africa has become popular, has been experiencing periodic booms and busts. These have created problems for its commodity-dependent economies in Africa and elsewhere. But Africa tops the list.

According to the UN’s Food and Agriculture Organisation (FAO), “countries with high dependence on a single export commodity are concentrated in certain regions: 21 in Sub-Saharan Africa, 14 in Latin America and the Caribbean, and six in the South Pacific Islands. Thirty-two of these countries are least developed countries (LDCs) and/or small island developing states (SIDS).” Relatively few commodities have been identified as those that account for a large share of total export earnings. Many depend, and continue to depend, on a single agricultural commodity for their merchandise export revenues. The countries’ pattern of exports makes them particularly vulnerable to commodity price shocks.

Between 2010 and 2014, fuels, ores, and metals accounted for more than 60 per cent of the region’s total exports, compared with 16 per cent for manufactured goods. Africa has thus been adversely exposed as unstable commodity prices and export earnings are well known to make development planning more difficult and to generate adverse short-term effects on income, investment and employment. Benin, Chad and Mali gained as much as 30 per cent in their total export proceeds following the increase in world prices of cotton from 1994 to 1996 and lost as much as 20 per cent with the drop in cotton prices for 1997 to 1999. According to the United Nations Conference on Trade and Development (UNCTAD), African countries export just 0.3 per cent of world’s high-tech products

Without major cost or quality advantage over competitors, countries specialising in production of primary commodities can be rightly expected to have a declining share in world trade.  Fluctuations in the revenues from any commodity could turn high dependence on a single commodity to a nightmare, during unstable and generally declining commodity prices. This could bring misery to the rural sectors. Made in Africa: Learning to Compete in Industry, is a recently published book. It disclosed that, although industry and business interests have moved increasingly from the developed to the developing world, Africa’s share of global manufacturing has fallen from about three per cent in 1970 to less than two per cent in 2014.

In particular, the Brookings Institution lamented Africa’s missed opportunities. It pointed out that “Africa’s failure to industrialize is striking,” citing the average share of manufacturing in GDP in sub-Saharan Africa in 2013 as about 10 per cent, half of what would be expected from the region’s level of development. “Africa’s share of global manufacturing fell from about 3 per cent in 1970 to less than 2 per cent in 2013. Manufacturing output per person is about a third of the average for all developing countries and manufactured exports per person – a key measure of success in global markets – are about 10 per cent of the global average for low-income countries.

These are periods of widespread decline in the shares of manufacturing value added to commodities.  The conventional structural change process, which involved de-industrialisation, is happening globally at unprecedented rates. The manufacturing landscape is undergoing a sea change. Manufacturing outputs may be rising, but their shares of domestic GDP is shrinking, due to the more rapid rise of services in the affected countries. The shares of manufacturing value added in global GDP has been declining for decades as services have grown relatively faster. It needs to be stated, however, that the declining share of manufacturing is relative, not absolute as more populations avail themselves of more consumer goods, mostly manufactured.

The export-to-output ratio of goods from Africa is lower than of goods made in industrialised countries. In Africa, countries with some modest levels of manufacturing operate within the categories of labour-intensive tradables and commodity-based regional processing. Many jobs within the labour-intensive tradables entail wood, plastic products, food, beverages and tobacco products, paper and related products, publishing and printing as well as non-metallic mineral products (like cement products).  Such a category of products has low export values.

The labour-intensive regional processing category involves furniture, textile, apparel and leather products. This makes a small part of the economy. Although the tradables and commodity processing sectors can provide more opportunities for the Least and Medium Income Countries (LMICs) – of which Africa has a huge proportion – the commodity processing sectors are the least global value chain (GVC) intensive, ranking the lowest in the terms of both the GVC length and the share of stages located abroad. The relative positions of African countries within the GVC can easily be discerned from their manufacturing profiles and economic structures.

A World Bank’s publication on The Future of Manufacturing-led Development indicated that the level of global manufacturing value added rose from $7.8 trillion in 1997 to $11.6 trillion in 2015 – a 49 per cent rise over an 18 year period or an annual average of 2.3 per cent. At the same time, the service sector’s share of global GDP rose to $47.1 trillion in 2015 by 62.8 per cent from a modest $28.2 trillion in 1997 at 2.8 per cent annual growth. To further illustrate the restricted opportunities in commodity trade, the World Bank report noted that commodity-based regional processing is generally linked to the use of agricultural raw materials or mining products. These groups are less traded internationally, either because of they are bulky to transport (as that of cement) within the non-metallic minerals sector, or because they require proximity to raw materials (an example is food processing).

An ambitious Africa must therefore be a determined one. The hurdles are high and many: the non-tariff barriers to trade, national or continental quality infrastructure, competence and skills in trade negotiations, price competitiveness, harmony among participating nations and many more are waiting to be surmounted. The speed at which Africa benefits from AfCFTA, and the extent to which it benefits, will determine the measure of gains accruing to the continent henceforth. As Africa looks towards using trade as a tool for prosperity, interesting times are ahead with a functional AfCFTA and its unfolding agenda. The largest free trade area is about to set sail. It is hoped that this will turn Africa into a prosperous continent, sooner than later.