Question

According to international business researchers, only 19% of Arica’s foreign trade is with other countries on the African Continent. Explain four reasons why African countries are more likely to trade with Europe and America than they are with each other. the solution must be well explain.

Answer 1

In the era of globalization, a country which can participate in the world trade significantly will obviously gain major economic benefits. Greater share in the international trade leads to the economic development & prosperity of a nation. The African continent has large reservoir of resources like oil. Diamonds, gold, iron ore and different types of other minerals. It is also rich is different valuable agricultural products like coffee. Cocoa, tea, rubber etc. But still, Africa’s share in the international trade is roughly around 2%. Other advanced economies of Asia, Europe & America have greater manufacturing capacities, modern technical know-how & better access to the financial markets. Hence, they have greater proportion of world trade share. Whereas African countries for last few decades have struggling with these advanced economies to achieve a greater share in the world trade. Their share of exports consists mainly of primary & intermediate merchandise (like gold, minerals, cocoa beans etc.). The prices & demands of these products in the international markets are highly volatile & seasonal. African countries contribution in the export of finished goods is significantly low due to their lesser developed manufacturing & technology sector.

It is also true that intra – African trade is least as compared to the other continents. Since, the manufacturing sector & technological know-how are lacking in African nations, hence despite having huge resources they are lagging behind in terms of trade. It been said that the countries which do trade regionally are unlikely to be competitive in the global market. Thus it’s important to boost the intra continent trade. For example, Tanzania is rich in cotton production, still its share of apparel exports is significantly low due to the lack of manufacturing facilities. The reason behind this is that the amount domestic as well as foreign investments in the industrial sector of the various African countries are low. The African governments need to significantly increase their investments in the infrastructure that supports trade.

Recently there have been lots of regional trade agreements among the various trading blocs of Africa for the reduction of trade tariffs. However there are other factors that hinder the intra-Africa trade like – the non-tariff barriers, red tapism, infrastructural bottlenecks. The African nations which are outside the trade agreements have high tariff barriers that discourage the other African trade blocs to trade with them. Intra continent trade will generate large economic benefits for Africa. Hence they have gradually started thinking of promoting continental free trade area. It has also been reported that the large proportion of the Intra-Africa trade is informal and unaccounted for. The cross border trade in Africa is largely done informally (around 30-40%) to avoid customs or are not officially recorded, which makes it difficult to measure the actual volume of trade among the African nations. Informal trade is done in both the agricultural & industrial goods. Large section of the traders is not registered to escape trade regulations and duties. This makes the overall trade policy more problematic. One survey showed that the informal trade between Nigeria and Benin amounts to nearly 60-70%. These estimates show that the intra-continent trade statistics in Africa suffers from severe discrepancies. Reasons for this trade informality are the non-tariff barriers like sanitary and non-sanitary regulations, regulations relating to the labelling & quality standards etc. The traders want to avoid these compliance costs hence they go for informal route.

The trade costs are excessively high in the African nations due to inadequate infrastructure, excessive customs regulations & requirements, bribery & harassments by the customs officials. Hence, the continent needs a free trade agreement where these informal traders can gain greater access to simplified trade regimes and the compliance costs are reduced considerably.

It has been widely reported by the independent traders and entrepreneurs of almost all the African nations from Lagos, Ghana, Nigeria, Togo, Benin & Senegal that they have to go through arduous border checks, customs officials harassments & demand for bribes, while doing cross-border trade. The customs officials & border police make them unpack each & every package in order to create unnecessary delay & extract kickbacks from the traders. These officials deliberately violate the basic principle of the free movements of goods and people within the 15 member Economic community Western African States (ECOWAS).

The different African political regimes are also reluctant and very slow in implementing the regional trade integration agreements aiming to eliminate various tariff & non tariff barriers. Starting from the colonial era the various African nations are more inclined to trade with the European & American nations. For example, Senegal & Gambia are two neighbours but Senegal’s biggest trading partner is France whereas that of Gambia is UK and their cross border trade amt. is minimal. The African continent’s railways & road infrastructure are more developed in linking to ports rather than among the various African nations. It is easier to fly from African country to another through Europe.

The European & the US markets impose lower tariffs on the African goods which make exports to these industrialized and developed countries for the African business houses more lucrative rather than doing trade with the neighbouring African nations. Tunisia & Cameroon exports more to the France rather than to the Sub –Saharan African nations.

Cross border Trade among the African nations only constitute 10% of the total external trade of Africa. The African trade mostly consist of the primary & intermediate raw materials. They don’t export processed goods much. Hence they are not interested in importing these products from one another. Intra – African trade is restricted to limited no. of countries & products. The Ivory Coast, Ghana, Kenya, Nigeria, & Zimbabwe consist of ¾ th of the Intra African trade. Agricultural products like fish, vegetable, live animals, maize, cocoa, tea, sugar & petroleum products are the main products that are being traded among them. Manufactured goods only account for 15%. Some countries are even there who mainly exports only a single item. For example 90% of the total Angola’s exports consist of the petroleum products. Whereas 98% Seychelles exports consist of fresh fish. Hence the diversity in the exports is hugely lacking.

Higher trade taxes in the African regions compared to the other continents is another discouraging factor. Reductions n trade tariffs to boost cross border trade have been implemented in only few African nations. Whereas, the different structural adjustment programmes offered by the World Bank & the IMF to boost international trade in the Africa, have encouraged the African nations to do trade more with the Europe & America. The African tariffs on the raw materials like fibre, chemical fertilizers, pesticides & other farm inputs are very high, thus discouraging their exports to other African nations & also impedes the growth of the manufacturing sector. These high tariffs have neither increased trade nor boosted production.

Excessive document requirements, inefficient intra – continent infrastructure, burdensome customs procedures, and poor port linkages among the African nations add only to the cost of cross-border trade. Hence as per the World bank reports intra regional trade in Africa is only 10% as compared to 40% in North America & 60% in Europe. The reduction of red tapes and tariffs can reduce the costs of the cross border trade from 12% to 17%, while making it cheaper for the firms to import raw materials from the neighbouring African nations and transform them into finished goods efficiently for sale to the international markets. Hence, now a few African countries have started working towards implementing a single- window system (i.e. collaborating & coordinating all the govt. entities involved in the trade regulations) to ease out the various bottlenecks in the intra-region trade. For example, Ghana initiated a single window operation from 2002 to look into the various procedural aspects and complaints relating to trade. Another example is one-stop border post between Zambia & Zimbabwe which is the Chirundu border post. The goal is to significantly reduce the time to cross the border between two countries.