Teething trouble: Logistical logjams threaten to thwart the world's biggest free trade area
As Africa's policy translates to ground reality, sky-high transportation costs, coupled with unorganised regional networks, emerge as the biggest perils in the logistical landscape. So, will these challenges endanger a free trade area that can potentially revolutionise Africa's economy?
Shortly after the launch of the world's largest free trade area instrument – the African Continental Free Trade Area (AfCFTA) – the CEO of DHL Global Forwarding Middle East and Africa, Amadou Diallo, welcomed the initiative, calling it a "new baby". With the AfCFTA entering its terrible twos this year, LUA delves into its biggest roadblock – an unsteady logistics sector.
In our previous issue, we explored how Nigeria was missing out on reaping benefits from AfCFTA, launched in January 2021, due to poor transport and logistics infrastructure.
A short rewind for those who missed out, the AfCFTA is a trade liberalisation instrument that stitches together 54 of the total 55 African Union nations – making it the biggest free trade area in the world. The aim was to reduce trade barriers and drastically lower tariffs by about 90 percent.
However, once the policy hit the ground, high transportation costs and poorly developed regional logistical networks remain a challenge.
The AfCFTA in a nutshell
According to the World Bank data, the AfCFTA is expected to cater to a market of over 1.2 billion people and will raise the incomes of 68 million people. "Growth in West and Central Africa is expected at 3.2 percent in 2021, up from -0.8 percent in 2020 and estimated to grow further by 3.6 percent in 2022. The sub-region is expected to pick up momentum from last year's weak performance to 4.5 percent in 2021 and 5.3 percent in 2022. Nigeria is projected to grow from -1.8 percent in 2020 to 2.4 percent in 2021, thanks to better performance of both oil and non-oil sectors. Excluding Nigeria, The West African Economic and Monetary Union is projected to grow at 5.6 percent in 2021 and 6.1 percent in 2022, reflecting favourable terms of trade."
In December 2021, the United Nations Conference on Trade and Development's (UNCTAD) publication of a report entitled – Economic Development in Africa Report 2021 – revealed a growing inequality. The report stated that inclusive growth remained elusive for African nations, with the Covid-19 pandemic only adding to the situation. "Africa's unprecedented growth in the 2000s has not translated into significantly improved livelihoods for most Africans, as the income gap between the rich and the poor has widened…. The Covid-19 pandemic has exacerbated inequalities and vulnerabilities of marginalized groups, resulting in an additional 37 million people in sub-Saharan Africa living in extreme poverty (at the poverty line of $1.9 per day)."
As a solution, the report amplified the need for intra-African trade and trade liberalization policies. "Intra-African trade is currently low at 14.4% of total African exports. It comprises 61 percent processed and semi-processed goods, suggesting higher potential benefits from greater regional trade for transformative and inclusive growth…when considering informal cross-border trade, Africa records higher intra-regional trade, particularly in agriculture."
According to the report, "Informal cross-border trade can account for up to 90 percent of official trade flows in some countries and contribute to up to 40 percent of total trade within regional economic communities such as the Southern African Development Community (SADC) and the Common Market for Eastern and Southern Africa (COMESA)."
Apart from this, such intra-African trade "also functions as an employer of last resort for many vulnerable groups, making it an important source of income for the poorest segment of the population and marginalised groups like women and the youth."
The report also found that the continent's current untapped export potential amounts to $21.9 billion, equivalent to 43 percent of intra-African exports with an additional $9.2 billion of export potential that can be realised through partial tariff liberalization under the AfCFTA over the next five years.
During the launch of the report, Rebeca Grynspan, UNCTAD secretary-general, said the AfCFTA has immense potential to spur economic growth. "The AfCFTA has immense potential to spur economic growth and transform the continent's development prospects if additional measures are taken to realize and fairly distribute its many potential benefits, as these gains will not come automatically.
Through its trade liberalisation policies, the AfCFTA is set to revolutionise the way trade functions in Africa. It's no surprise that Free Trade Areas have long been hailed as the ultimate instrument to boost industrial productivity.
Daniel Sakyi, an associate professor at the department of economics at the Ghana-based Kwame Nkrumah University of Science and Technology, authored a paper – The Effects of Trade Facilitation on Trade Performance in Africa – published in the 2019 Journal of African Trade. In the paper, he outlines how reduced trade costs would augment productivity in the domestic industrial landscape. "The reduced trade costs would spur productivity growth of domestic firms more likely to export while existing ones would increase their trade volume…trade facilitation increases the chances of firms' participation in international trade. This outcome is crucial for Africa as improving trade facilitation within the continent can foster economic integration among African countries and give more impetus to the proposed African Continental Free Trade Area agreement."
Roadblocks in the logistics scenario
So, how deep is the link between an FTA and logistics infra? It's important to take a look at some academic literature.
In a 2019 academic paper published in the Journal of Shipping and Trade, authors Kee-hung Lai, Yu Pang, Christina W. Y. Wong, Y. H. Venus Lun and Y. N. Eppie Ng, examined Free Trade Agreements templating the effects of the same on the Association of Southeast Asian Nations (ASEAN) countries. Their findings revealed that trade liberalisation through instruments like Free Trade Agreements only helps to bolster regional as well as global trade development. "…trade liberalisation and transport logistics development are mutually reinforced."
The paper titled – Are trade and transport logistics activities mutually reinforcing? Some empirical evidence from ASEAN countries – further stated that FTAs led to a proportional spike in demand for transport logistics. "Elimination of internal tariff in the free trade area facilitates trade, thereby increasing the demand for transport logistics. Transport logistics development generates a spill-over effect to promote trade with non-members. The findings of this paper indicate that a country's transport logistics development will bolster both of its regional and global trade development."
Logistics is, therefore, a vital component when it comes to AfCFTA.
However, closer home, Africa is still currently facing troubled times when it comes to trade logistics. According to a World Bank report – Africa in the New Trade Environment: Market Access in Troubled Times – published in 2022, "The relatively high cost of trading across borders in Africa is partly driven by the region's poor performance in trade logistics (check figure). Sub-Saharan Africa's logistics performance index scores are, on average, 25 percent lower than those of countries in Europe and Central Asia."
The six core performance parameters on which countries were graded as part of the World Bank's Logistics Performance Index were customs, infrastructure, international shipment, logistics quality and competence, tracking and tracing, and timeliness.
The World Bank further stated that although the AfCFTA is expected to benefit all members, the expected welfare gains by 2030 range from 0.2 per cent to 16 per cent. "Thus, the impact of the agreement will depend on its depth and the extent to which it covers non-tariff barriers and services—especially in backbone sectors like transportation and logistics—and the respective export basket and economic structure of each country."
The report states that trade directly decreases with distance, suggesting that policies, institutions, and infrastructure such as transportation and communications, which reduce the trade costs of distance, would ease the challenges of intraregional trade.
Another major challenge when it comes to logistics and the AfCFTA is regional fragmentation and geography. "Africa is the most fragmented region in the world and is characterised by thick borders that pose significant challenges for regional trade and integration. With a population slightly smaller than that of China or India, Africa is home to 54 countries, more than any other continent, and the high fragmentation presents a significant geopolitical challenge for the AfCFTA. Most of the economies are small, half with GDP less than $10 billion. In addition, close to 30 percent of the countries (16 countries) are landlocked. The high cost of trading faced by landlocked countries is well documented. Trading costs for an average landlocked low- or middle-income economy are 40–50 percent higher than those for a representative coastal country (Radelet and Sachs 1998)."
This in turn affects regional trade networks that remained poorly developed. "Infrastructure and trade networks were designed with the goals of transferring natural resources outside the continent. As a result, the regional transportation networks are poorly developed. Most transportation networks, including rail lines, run from the location of a mine or agricultural production hotspot to a port, with a focus on exports to the rest of the world."
Ultimately, this translates to steep prices in intra-regional trade networks, with transportation costs in Africa around 136 percent higher. "This situation still characterises most of the region's countries and is reflected in the higher costs of trading within Africa. Transportation costs in Africa are, on average, 136 percent higher than in other low- to middle-income regions…. The persistent cost of the deep fragmentation goes beyond the transportation costs."
A hopeful future
However, the future looks optimistic as Africa already has robust regional economic communities (RECs) that facilitate a thriving trade scenario in the continent. The AfCFTA is expected to smoothen and fine-tune this network through the integration of RECs. The report recommends further strengthening of regional links leading to a large-scale concentration of economic activities that would eventually ease the challenge. "Expanding economies of scale through the AfCFTA could address the problem of small size that restricts trade in the region. Hence, regional integration is also the solution to the current low levels of intraregional trade. The high level of trade within the current regional economic communities (RECs) provides an optimistic picture for the AfCFTA's future in promoting intraregional trade."
In 2021, shortly after it was announced, most logistics firms seemed hesitant to speak on the merits of the AfCFTA, saying it was still too soon to talk about the same. However, all firms remained optimistic that the policy would boost intra-African trade, provide greater employment and augment African market competencies due to free movement of labour.
Amadou Diallo, CEO of DHL Global Forwarding Middle East and Africa, had hailed the initiative calling it a "new baby". "It's a new baby, it needs to grow, learn to walk and talk. The intention is great, but it's completely in its infancy. Its success totally depends on the implementation of its measures."
Diallo had also said that visa applications across Africa were demanding. "It's easier to travel to Kenya from Paris or from China than it is from Senegal. Visa applications are very difficult across Africa; many countries don't have representation in others."
Hennie Heymans, CEO of DHL Express Sub-Saharan Africa had also welcomed the initiative, saying, "Between 2012 and 2014, more than 75 percent of the continent's exports were extractives, yet less than 40 percent of intra-African trade was extractives during the same period, according to the African Union (AU), further underscoring the need to boost trade within the continent. There is also an enormous opportunity for services under this agreement. In addition, the free movement of labour will be critical as this will strongly complement the objective of the free trade agreement."