The first of a series of webinars sponsored by Access Bank that focus on trade in Africa looked at the challenges of trade in services in Africa in the context of the African Continental Free Trade Area (AfCFTA). The webinar was presented by Donald MacKay, founder and director of XA International Trade Advisors, and Francois Fouche, founder and director of Growth Diagnostics and a research associate for Centre for African Markets and Management at GIBS Business School.
The challenge with trading services in Africa
While Africa’s population represents around 17% of the global population, the continent’s contribution from an economic and trade point of view is much less. Added to this is the fact that other parts of the world enjoy far more trade with many African countries than those African countries do with their immediate neighbours.
This comparatively low level of intra-Africa trade reflects the difficulty of trading within the continent. One reason for this is that while the average tariffs on product trade in Africa are not especially high, there are significant non-tariff barriers, such as lengthy customs procedures, product standards, licensing requirements and a lack of infrastructure.
This is something that the recently introduced African Continental Free Trade Area (AfCFTA) wishes to change. The AfCFTA’s primary promise is to make it easier to do business across the continent in order to encourage trade between Africa’s continental neighbours.
What is trade in services?
In its general agreement on trading in services, the World Trade Organisation (WTO) identifies 12 services of interest including tourism, transport, financial services, logistics, construction and energy.
Typically, services are delivered in one of four ways:
- Without moving capital or people into another country, such as with online training.
- People physically come to the country to buy the services, such as with tourism.
- People and capital move in order to enable the service, for example a bank that decides to open new premises and move staff to a new country.
- People come into the country to deliver the service. An example is logistics, where in order to get your product delivered into a country, drivers are needed to get a truck over a border.
The effect of trade in services on physical goods
In order for goods and services to be moved, there has to be some sense that your capital has to be safe and then that it will generate a return.
Using the logistics example above, every time a truck crosses the border, the owner has a risk on the capital invested in that truck. Should that truck come to harm (for example through civil unrest, bad roads or the driver is put at risk) that service is less likely to be delivered. As a result, the cost of the service increases, which drives up the cost of the physical goods moving across the border. If there is an environment where the movement of services is not well enabled, then trade in products will slow down as well.
Issues with African trade agreements
Trade agreements in Africa are nothing new and there are many other pre-existing agreements already in place across the continent. However, African states don’t easily trade with each other despite these agreements. So, why is this? There are several main issues:
- Dispute resolution. There needs to be recourse if the terms of the trade are not honoured, such as being able to go to court or having an arbitration process. Unfortunately dispute resolution simply does not work as well as it should within the African trade context. Until the continent can resolve its dispute resolution issues, the presence of a trade agreement becomes academic.
- Trade agreements are politicised. Businesses trade; governments don’t. Much of the contents of AfCFTA – as with other trade agreements on the continent – are purely political, in that no component looks at the actual business position within different regions. For this reason, there tends to be very little business participation, and there’s very little interaction at the aggregate level between businesses and negotiators.
- Africa has a productivity problem. A lack of productivity in African countries makes it more difficult to trade, as it becomes more appealing to trade with other more productive regions since their goods and services are cheaper.
- Laws are being imposed that restrict trade. Increasing numbers of laws are actively seeking to restrict the movement of goods and services between countries within Africa. For example, in response to recent unrest issues in South Africa, the Department of Transport has proposed legislation to prohibit foreign nationals without South African driving permits from driving South African trucks. However, there is already a mutual agreement between all SACU and SADC states to allow foreign drivers to move freely between them, so this new legislation would contradict the free flow of logistics services.
The bottom line
Until we understand why goods and services don’t move as freely within Africa as they should, it’s hard to see how things will change by adding another agreement such as AfCFTA to the mix.
Professor Milton Friedman said that one of the greatest mistakes is to judge policies and programmes by their intentions rather than their results. This applies to the African situation, where the economic realities we face on the continent are the result of past policies. Solving the current trade issues – especially when it comes to trade in services – is therefore not as much about a new trade agreement as it is about going back to basics and relooking at trade policy across the board.