Regional Trade Trends: Africa and East Asia-Pacific
In East Asia and the Pacific, trade liberalization has played an important role in driving regional trade. The Association of Southeast Asian Nations (ASEAN) was formed in 1967 to spur economic and social development within Southeast Asia. Over time, the ASEAN bloc reduced customs duties on products traded regionally and launched preferential trade treaties with other economies, including China. Intra-regional trade in East Asia and the Pacific has increased by $1.3 trillion in the last 20 years alone. The statistics suggest positive implications of Regional Trade Agreements (RTA) on East Asia’s intra-regional trade when combined with other factors.
An important factor in this trend was the initiative by bigger economies in the region to increase their imports from smaller economies in the same region. For instance, China imports machine parts and components from Singapore and South Korea, for further assembly and onward sale to global markets. This process of internalizing production within the region has increased value addition and helped support the growth of machinery production overall. Adding to that, the recently-enacted Regional Comprehensive Economic Partnership (RCEP) harmonizes trade liberalization between China and 14 other East Asia and Pacific nations and is expected to further advance intra-regional trade.
The story of the formation of RTAs is similar in Sub-Saharan Africa. There are several Regional Economic Communities (REC) in Africa, with each having its own trade agreement. Among them are the Economic Community of West African States (ECOWAS), the Common Market for Eastern and Southern Africa (COMESA), and the Southern African Development Committee (SADC). The story of regional trade growth in Africa, however, is quite different. Regional trade in Sub-Saharan Africa actually decreased by $15B from 2013 to 2019 (-20%), compared to a $315B increase (+26%) in East Asia and Pacific regional trade for the same period. Notably, much of Africa’s intra-regional trade depends on a single country: South Africa, which accounts for approximately 35% of total intra-regional imports.
Major factors responsible for the slow growth of African intra-regional trade include import and export tariffs. Tariffs within some African RECs are still as high as 7.4% with even higher tariffs imposed on imports from other RECs. Non-tariff barriers also persist, imposing different standards, regulations, and trade regimes country-by-country. Undiversified export production is also a major hindrance to intra-regional trade. In contrast with East Asian countries that were able to diversify exports quickly, most African countries still rely on the export of extracted commodities like gold, timber, cashew, and cocoa. With limited capacity to process these raw commodities on the continent and at scale, most African countries have not diversified their exports.
The African Continental Free Trade Agreement (AfCFTA) which commenced in January 2021 aims to reverse this trend. It intends to increase Africa’s regional trade by up to 50%, by removing tariffs on 90% of goods, progressively liberalizing trade, and addressing non-tariff barriers. On the issue of diversification, AfCFTA is expected to enable countries to diversify export goods and destinations by driving value-addition. Today, African businesses are more likely to sell value-added goods to each other than to importers in other regions. By changing the ‘whom’ Africa exports to, AfCFTA may play a role in transforming ‘what’ the continent exports, from raw commodities to value-added goods.
In order for AfCFTA to accomplish more than what has been achieved in the past, African countries must go further to develop harmonized strategies for trade, and invest in regional value chain development in order to open new opportunities for industrialization and diversification.