Muddled priorities continue to plague EU-Africa trade policy
By David Luke, LSE, May 26th, 2023
May 28, 2023 - 10:52:52 AM

The EU is Africa’s most important trading partner and both Africa and Europe stand to gain from closer trade relations. Yet as David Luke explains, trade between the two continents suffers from a broad misalignment in trade policy priorities. Drawing on research for a new book on African trade, he argues that EU-Africa trade policy would benefit from a reset.

As geographical neighbours, Africa and Europe have a long trade history. But the current trade policy priorities of the two neighbours are in a muddle. This is due to the balkanising effect of the EU’s patchwork of trade agreements across the African continent at a time when African countries are pursuing an ambitious economic integration reform agenda through the African Continental Free Trade Area (AfCFTA). As shown in a new edited volume, fixing this misalignment in trade policy priorities requires a reset.

EU-Africa trade

The EU is Africa’s most important trading partner. As a source of imports, the EU accounts for 26 percent of all imports in terms of value into African countries, followed by China (16 percent), and intra-African imports (15 percent), on average between 2018 and 2020, according to IMF data. Other partners such as the US (5 percent) and the UK (2 percent) are important, but much less significant sources of imports into African countries.

The destination of Africa’s exports closely mirrors, in order of economic importance, Africa’s imports. The EU is Africa’s most important destination for exports – also accounting for 26 percent of all African exports in terms of value, followed by intra-African exports (18 per cent) and China (15 percent) between 2018 and 2020. India (6 per cent) the US (5 percent), Turkey, Brazil, UK, Japan, and Russia (each under 3 percent) are smaller export destinations.

Turning to the composition of trade, the EU’s imports from Africa are made up of fossil fuels (40.7%) and other primary commodities (ores, metals, and other minerals together accounting for 14.2% of the total) as well as food items (15.7%). This is highly concentrated in low value-added products, a reflection of Africa’s poor industrial base, which has not changed for decades. On the other hand, Africa’s imports from the EU are strongly dominated by manufactured goods.

The EU is also Africa’s most important investor but – much like with trade – EU investments are concentrated in the mining sector, including fossil fuels. Morocco, Egypt, Tunisia and South Africa are partial exceptions, and, in each case, more diversified trade is the outcome of significant European investment in non-extractive sectors.
An asymmetrical relationship

Africa’s trade relationship with Europe is highly asymmetrical. It reflects a persistent pattern since the independence era in the 1960s. But this pattern is also repeated in Africa’s trade with partners such as China, the US, the UK and emerging economies such as India and Turkey. The distinction is that the EU has a greater economic gravity to pull Africa’s trade – though not always in the most beneficial of directions. With this greater economic gravity, the trade policy of the EU can have a substantial impact on how trade emerges – or does not – as a lever for development in African countries.

Unlike rapid development cases in Asia, Africa is yet to wield trade as the policy tool it can be for development. Africa accounts for just 2.3 percent of world trade, and only 3 percent of global GDP, despite the continent being home to around 17 percent of the world’s population. The continent similarly accounts for just 2 percent of the EU’s trade (in terms of imports and exports). This creates a deeply unbalanced playing field in which the trade policy decisions of the EU matter considerably for Africa, but that of the continent matters relatively little for the EU.

Intra-African trade however presents a contrasting picture. Intra-African trade, which accounts for 15 per cent of Africa’s trade, tends to be more diversified with higher value-added content than Africa’s exports to trading partners outside the continent. Within the continent, manufactures are the largest type of export, accounting for 45 percent of all formal intra-African trade. Food exports are also more significant, amounting to a fifth of trade between African countries. These ‘formal’ figures miss much of Africa’s trade which flows across contiguous borders informally and is unrecorded. Recent estimates are that such informal trade flows account for the equivalent of between 7 and 16 percent of formal intra-African trade flows.

It will be clear that Africa’s trade with the EU (and other partners) is a tale of two patterns. The first is a pattern of commodity concentration in Africa’s exports to the EU and the rest of the world. The second is a pattern of a higher degree of diversification when Africa trades with itself. It is this second pattern that provides a viable pathway for Africa to use trade as a meaningful tool. Intra-African trade and economic integration can be an avenue for industrial development and transformation aspirations in Africa that will also entail more meaningful trade with the EU and the rest of the world.

European trade policy towards Africa remains at odds with the publicly expressed intention to champion AfCFTA-led integration of the African continent. In particular, the EU’s fragmented trade regimes result in hard borders for EU trade between African countries within the same customs union at the regional level. It is difficult to see how a continental customs union could emerge from the divisions created by the EU. On this basis, African and EU trade policy priorities are in a muddle.
How to get out of the muddle?

The answer points to the need for strategic sequencing of AfCFTA implementation first before reciprocal opening to the EU. Empirical evidence from the Economic Commission for Africa based on economic modelling for trade in goods found that implementation of the EU reciprocal agreements ahead of the AfCFTA would result in losses in trade – or trade diversion – between African countries.

On the other hand, if the AfCFTA was fully implemented before the reciprocal agreements, this negative impact would be mitigated. Trade gains by both African countries and the EU would be preserved, while intra-African trade would expand significantly benefitting trade in industrial goods. Further evidence from ECA modelling results which took liberalisation of trade in goods and services along with reduction of non-tariff measures into account affirms the need for correct sequencing. This study found that the current share of intra-African trade would nearly double following the AfCFTA reforms. Most of the gains will accrue to the industrial and agrifood sectors as well as services, which are critical for Africa’s transformation.

To get out of the muddle, a good development case can be made for the EU to grant unilateral market access that is duty-free and quota-free to all African countries, with a unified rules of origin regime for a transitional period benchmarked against milestones in AfCFTA implementation and the gains emerging from it. This will require multilateral legitimisation through a World Trade Organization (WTO) waiver.

Here it must be recognised that the WTO’s ‘one size fits all’ rules require reimagination to meet the 21st century realities and challenges facing late developers, such as African countries. Given the precedent established by the United States’ African Growth and Opportunity Act (AGOA) in obtaining a WTO waiver for non-reciprocal trade concessions, this should not be an insurmountable feat.

Concessions to Africa as the world’s least developed continent, accounting for only 2.3 per cent of world exports, poses no threat to the international trading system. Allowing non-reciprocal access to advanced country markets for a transitional period, is strongly pro-development. It incentivises African countries to seek trade opportunities with each other and mitigates the risks of trade diversion.

By ensuring the right sequencing for the AfCFTA, this will also help Africa to build productive capacities and achieve its potential for strong and diversified growth in intra-African trade with inclusive and transformational consequences. It will turn around the record of the last 60 years in which the structure of Africa’s external trade has not changed.

Source: Ocnus.net 2022