How Will Future Trade Affect Africa?

CLICK HERE TO READ THE FULL STUDY!

Our new GED Study Series “How do Mega-Regional Trade Agreements Affect Emerging Markets” sheds light on the effects such pervasive changes in the global trading game will have on various regions around the world.

Part three of this three-part series analyses the effects of TTIP, TPP and FTAAP on 30 African countries and regions.

This Post in Bullet Points:

• Africa is the second most densely populated continent with the fastest growing population. It is also by far the poorest continent.
• Exclusion from any external mega-regionals is met with a consolidation of economic partnerships within Africa.
• Western agreements like the TTIP, but also the part western part eastern TPP show only very small, usually positive effects on African economies.
• An eastern agreement like the FTAAP could have a profoundly positive income effect on African economies due to their high raw material exports to China.
• Still, this says nothing about the distribution of any such potential wealth increases and any negative effects might hit the already poorest parts of the population the hardest.

Africa’s Place in Global Trade – The Forgotten Continent

Africa’s history of international trade is not a pretty one. Under colonial rule, it was exploited for its natural resources and manpower and even today Africa’s role as raw material supplier for the rest of the world has changed little. Still Africa’s economies are on the rise with the annual growth rate of the continent having exceeded the global average throughout the first 15 years of this century.

Now, however, Africa is facing a new landscape of international trade. All around the globe countries are banding together in large mega-regional trading partnerships – with the exception of Africa. While both west and east find themselves in different planning stages of deals like the Transatlantic Trade and Investment Partnership (TTIP), the Trans-Pacific Partnership (TPP) and the Free Trade Area of the Asia Pacific (FTAAP), so far any African economies have notably been excluded from any such negotiations.

Africa’s answer up till now has been the consolidation of its interior economic zones. With the planned merging of three of the largest zones – the Southern African Development Community (SADC), the Common Market for Eastern and Southern Africa (COMESA) and the East African Community (WAC) – Africa is one step closer to achieving a continent wide African free trade zone. Still the developments of the outside world will have their effects on Africa, too. Let’s see what they are.

All Quiet on the Western Front

The sheer size of agreements like the TTIP dictates that not just member states, but non-member states, too, will be affected by their implementation. This can happen in two distinct ways. On the one hand, trade diversion will lead to a rerouting of trade from non-member states to member states, leading to a decrease in trade – and thus income – in African economies. At the same time, rising income levels in the member states’ economies can lead to higher investments in African states while the harmonization of standards can facilitate trade between member states and outsiders leading to spillover effects and a potential rise in income in African countries.

Our results show that for the TTIP agreement these two effects roughly seem to equal each other out with regards to Africa. In most countries the positive income effect slightly surpasses negative trade diversion effects leading to a small positive effect on overall income in the most likely scenario of a deep TTIP agreement. If direct and indirect spillovers are taken into account these positive effects can reach up to three to five percent positive income change for small trading economies like Benin or Togo. To foster such spillover effects the EU and the US will have to strive for a most inclusive version of their planned agreement.

Eastern Promises

If we are dealing with the scale and magnitude of a TTIP, two additional mega-regional free trade initiatives fall into our focus. There is the recently negotiated and concluded Trans-Pacific Partnership (TPP) and then there is the Free Trade Area of the Asia Pacific (FTAAP), a proposal still in its infancy.

While both agreements focus on a combination of Asian and American pacific states, there is one distinct difference which makes the FTAAP of much greater interest to us. It includes China.

Over the past 15 years China has shown an increased interest in African trade and in 2009 it overtook the US as Africa’s single largest trading partner. China also shows no signs of slowing down on its African trade expansion. According to China’s premier, Li Kequiang, the People’s Republic’s current trade volume with the African continent of almost $200 billion per year should be doubled to $400 billion by 2020.

Africa is also deeply integrated into Chinese supply chains. From African exporters, China primarily procures raw materials and natural resources such as various metals, rare earth elements and crude oil, which are then further processed in China before being exported again to the global market in a different form. As such, there are only minimal trade diversion effects between Africa and China in case of a FTAAP and in fact Chinese demand for African raw material exports increases drastically in order to meet China’s own increased export levels. As a result, even a more likely shallow FTAAP agreement can have significant positive income effects on pretty much all African economies.

Conclusion

Our calculations show that external mega-regional trade agreements for the most parts have positive overall income effects on the African economies. Especially Africa’s growing connectedness with the east seems to bear fruits in the form of high export increases in case of a potential FTAAP. Countries like South Africa, once considered Africa’s model economy, but now decreasing in growth, could get the growth push they need from such an agreement.

Still, it cannot be denied that there are still many structural problems and burdens to trade in most African countries, which at this point could turn an increase in more external trade from a blessing into a curse just as well. Our numbers do not give any indication on the distribution of any such sudden wealth increase. With corruption being a major problem in many African states, significant shares of such export revenues would likely be taken up by already wealthy corporations and individuals while the truly poor parts of the population might have to shoulder the costs. Furthermore, increased raw material exports for the African continent might foster an unhealthy singular focus on this sector, neglecting other crucial sectors of the economy, reducing overall innovation and progress on the continent and damaging development in the long run.

Seen from this point of view, Africa’s focus on itself, for now, might not be a bad decision given it is open to change from within before opening up further to trade from the outside.