Expanding African Trade in 2016

Expanding African Trade in 2016

Many African countries rely disproportionately on exports of traditional cash crops and other natural resources. One popular approach to remedy this situation has been to discourage the exports of raw materials or primary commodities, and to promote domestic processing of those products before exporting them instead. Such value addition would presumably help create higher productivity jobs, energize local economic activity, and improve trade imbalances by providing more foreign exchange.

More recently, another approach has attracted the attention of policymakers and policy analysts. It is to encourage African firms to integrate into the so-called global value chains—in which each participating producer focuses and specializes in particular tasks or activities. Participation in global value chains is expected to accelerate Africa's economic transformation by encouraging technological transfer, fostering new economic activities, enhancing productivity, and promoting skills development.

Both approaches entail export diversification and a move into higher-value activities to seize a larger share of value in global markets—a massive effort. In order to successfully add value to their exports or to effectively participate in a given global value chain, African firms need to deliver higher-quality products at competitive prices and satisfy rigorous norms and standards set out by their trading partners. For many African firms, these tasks could be too challenging and may not fall within their capacity, at least in the short to medium run.

A third approach may be more pragmatic. Integrating into regional (instead of global) value chains can help generate economic gains in short run and facilitate the integration of African production into global value chains in the long run. By providing African firms access to the dynamic but more easily accessible African markets, regional integration offers a space for “learning to compete” and for “self discovery” to many firms and prepares them for the greater rigor and competition in global value chains. With fewer players, the competitive pressures on the regional value chains are likely to be lower than on the global chains. Also, domestic small and medium enterprises are more likely to succeed in regional markets first, where they are more familiar with the buyers’ tastes and the standard requirements. Many of the smaller economies with low levels of industrial development will benefit from stronger links with larger regional partners before trying to capture larger global markets.

Accelerating the ongoing negotiations, harmonization, and implementation of various African regional trade agreements (including the Tripartite FTA and the Continental FTA) in 2016 would greatly help African economies reduce their reliance on raw material or primary commodity exports and develop a greater capacity to compete on a global scale. More importantly, it will help them capture larger value from the global marketplace and efficiently participate in global value chains.