Examining regional intensity of trade in Africa and implications for intra-Africa trade in the African Continental Free Trade Area (AfCFTA).

The African Continental Free Trade Area (AfCFTA) is a continent-wide free trade area that will pave the way for a continental customs union. This study conducts an assessment of the current state and extent of intra-Africa trade for the period 2001-2018. The results give some insights into the foundation which the current regional economic communities in Africa have put in place with regard to trade linkages between themselves. This is a foundation which the AfCFTA will have to utilise in an effort to achieve trade integration in a continent-wide economic integration arrangement that seeks to improve intra-Africa trade. Five economic integration arrangements in Africa are considered, i.e. Arab Maghreb Union, East African Community, the Economic Community of West Africa, Economic Community of Central Africa States, and the Southern African Development Community.

To examine intra-regional trade (the extent to which trade within regional integration arrangements is integrated/inward oriented), and inter-regional trade (the extent to which regional integration arrangements currently trade intensively with each other), trade introversion indexes (revealed trade preference indexes, RTPij) were computed. An introversion index is the most suitable indicator for various comparisons because, compared to the homogeneous trade intensity index, it is free from range asymmetry and dynamic ambiguity problems. Thus, introversion indices were computed and used to establish and describe the status of trade integration for each regional group (regional introversion) as well as introversion between regional groups so as to illustrate the current status of trade linkages between the five regional groups.

Trade introversion indexes results for the extent of inter-regional trade intensity show that except for trade between the Arab Maghreb Union and both the EAC and SADC, the other regional groups trade intensively with each other, albeit different trade intensity levels. With the proposed AfCFTA in place, trade resistances between regional groups are expected to be even lower as trade barriers will be reduced greatly. Thus, where regional groups already trade significantly, as evidenced by an intensive trading relationship, inter-regional and intra-Africa trade is bound to increase. This is in line with the volume of trade criteria, as argued in the Natural Trading Partners hypothesis; that where prospective members of an FTA are initially important trading partners and already trade disproportionately, (a disproportionate share of their trade is already with their prospective members); an FTA between such members would simply reinforce the existing underlying trade patterns and provide less scope for welfare reducing trade diversion.

Trade introversion indexes results for the extent of intra-regional trade intensity (regional introversion) show that trade within regional groups is to some degree oriented towards their respective member countries, although there is no evidence of increased inward orientation (or integrated) over the years. Given that regional groups have been in place for decades, their trade integration is not impressive (except for EAC, ECOWAS, and SADC), which means that their trade linkages with the rest of the world are still significant, and thus their trade continues to be oriented towards the rest of the world. Empirical evidence also shows that, except for the Arab Maghreb Union, regional groups trade intensively with the African Continent, although the levels of intensity of trade are moderate. Furthermore, results show that, intra-Africa trade (Africa’s overall trade towards itself) shows some degree of orientation towards its respective countries, but the level of trade integration is not impressive given several initiatives that have been put in place over many decades to improve, among other things, intra-African trade. While the current level of trade integration is neither good nor bad, it indicates that Africa’s trade linkage with the rest of the world is significant as its trade is still more oriented towards the rest of the world rather than its respective countries. Easier market access with the AfCFTA in place could help the Continent to build on its current levels of trade integration and improve intra-African trade.

Identifying sectors of comparative advantage is important as this has implications for both inter-regional and intra-regional trade. To identify sectors of comparative advantage, revealed comparative advantage (RCA) indexes were computed. Due to the limitations of the Balassa RCA measure, this research used the Normalised Revealed Comparative Advantage (NRCA). The NRCA index has the symmetrical distribution property, making it theoretically acceptable both as a cardinal/or ordinal measure with respect to a country/sector. Comparative advantages are computed for the five regional groups and not their individual member states. The results show that groups have similar comparative advantage profiles in fuel and non-fuel primary commodities and low value added resource-intensive manufactured goods. Trade theory argues that countries with similar comparative advantage profiles are unlikely to have high bilateral trade intensities unless intra-industry trade is involved. This therefore has implications for intra-AfCFTA trade as continued trade in predominantly low value added products would not deepen economic integration in the FTA

Trade complementarity indexes were used to examine the extent to which trade between the five regional groups is complementary, thus evaluating prospects for increased bilateral and regional trade opportunities. By computing trade complementarity indexes over a period, it can be determined whether trade between regional groups was becoming more or less complementary, over time. Where trade complementarity exists there are high opportunities for trade, but an absence of trade complementarity would lead to low opportunities for trade. Thus, a high degree of trade complementarity would be an indication for countries to increase bi-lateral trade with the formation of an economic integration arrangement. Results from the indexes computed show moderate to low levels of trade complementarity, and this result is expected given the similar comparative advantage profiles between the regional groups. This poses limitations on the extent to which trade and intra-regional trade in the AfCFTA would increase. Trade theory argues that, where current trade between countries is not (or less) complementary, a regional trade agreement between such countries would not necessarily significantly increase intra-regional trade, as member states would continue to look outside the grouping for trade partners whose exports and imports match theirs.