PESA
Trade and Regional Integration in SADC

Trade and Regional Integration in SADC

The November 2019 issue focuses on providing an overview of trade performance in SADC – What are the levels of intra-regional trade in SADC? What are the main goods traded amongst SADC countries? Which products and value-chains have the greatest potential to underpin a deepening of regional integration? What are the main RECs and policies underpinning intra-regional trade in SADC? How do these get consolidated? What is the AU plan to consolidate the RECs as part of the CFTA? The PESA Regional Integration Monitor, Nov 2019 examines some of these questions.

 

 

 

Headline Story by Ken Kalala Ndalamba and Ross Douglas

Overview of Trade and Regional Integration in SADC

The 39th Summit of the Southern Africa Development Community (SADC) was held in Dar es Salaam during August 2019. The theme for the 39th Summit was, “A Conducive Environment of Inclusive and Sustainable Industrial Development, Increased Intra-Regional Trade and Job Creation”, and the central focus was how SADC would take its regional industrialisation agenda forward[1]. This was an apt theme given that the region has seen rising levels of unemployment, declining food production due recent droughts, and slow growth in intra-SADC trade due to poor implementation of the SADC Industrialisation Strategy[2]. Amongst the commitments made by SADC member states at the 39th Summit, the addition of kiSwahili as a fourth official language alongside English, French and Portuguese is a critical enabler to deepen regional integration in SADC and expanding regional integration neighbouring regional economic communities such as the East African Community[3].

 

At a continental level, African countries reached the required number of ratifications for the Africa Continental Free Trade Agreement (AfCFTA) to enter into force in May 2019[4]. The AfCFTA is objectives can be summed up as taking African regional integration to the next level. The AfCFTA aims to create a single market for goods and services, enable free movement of people and investment, prepare for the establishment of the African Customs Union, harmonise administration of trade and investment incentive regimes, resolve the challenge of multiple memberships in different regional economic communities, and expedite continental regional integration[5]. The objectives of the AfCFTA might seem quite ambitious but it is necessary in order to enable sustainable growth and development given the low positioning of SADC countries in global value chains which can only be resolved through industrialisation. SADC countries are under addition pressure to increase intra-regional trade and develop regional value-chains given the current geopolitical challenges such as the trade war between the United States and China, or Brexit and threats to the European Union (EU), which affect the traditional and emerging markets for SADC exports.

 

Regional integration is increasingly becoming a necessary factor in any country’s economic development. At an ideological level, the discourse of African and SADC regional integration is progressing towards economic integration which a welcomed change. The foundation of African and SADC integration has largely been driven by political cooperation for mutual benefit unlike economic cooperation which has been the foundation of integration in other regions like the EU and the Association of Southeast Asian Nations (ASEAN)[6]. The central difference in these approaches is that in SADC and Africa more broadly, the approach to regional integration has been based on political agreements at the African Union (AU) which were intended to translate to various stages of integration with set deadlines for specific milestones such as the transition from economic cooperation, to fiscal cooperation, and finally political cooperation[7]. Hence, the development of institutions has been directed by roadmaps and deadlines rather than economic expedience, which has been the fundamental basis of regional integration in the EU and ASEAN. Therefore, the SADC emphasis on regional industrialisation illustrates the progression in terms of how the regional integration agenda needs to be pursued from an economic basis which is clearly laid out in the SADC Industrialisation Strategy and Roadmap, 2015-2063[8].

 

However, progress has been slow with intraregional trade slowly declining since 2015. SADC intraregional trade has increased in nominal terms despite reducing in terms of total merchandise trade. SADC intraregional exports increased from USD 37.0 billion (approx. 19.8% of total merchandise exports) in 2018 from an annual average of USD 32.8 billion (approx. 20.8% of total merchandise exports) for 2015 to 2017[9]. Similarly, intraregional imports to USD 35.5 billion (approx. 20.3% of total merchandise imports) in 2018 from an annual average of USD 33.0 billion (approx. 20.7% of total merchandise imports) for 2015 to 2017[10]. Intuitively, these figures should not differ given that the same goods exported amongst SADC countries are the same goods imported amongst SADC countries. In practice these figures differ for a number of reasons such as: different times of recording, different treatment of transit trade, underreporting, measurement errors and mis-pricing or mis-invoicing[11]. In comparison to other African regional economic communities, the SADC region seems to be performing relatively well even though it remains far below the comparative levels in the EU and slightly less than the ASEAN regional economic communities.

 

 

Table 1:  Intraregional Exports in SADC, Africa and other Global Regional Economic Communities (2015-2018)

Intraregional Exports in SADC, Africa and other Global Regional

Source: UNCTAD 2019, UNCTADStat Database. Note: (*) Figures for CEMAC are in USD millions.

 

At a continental level, African intraregional exports increased to USD 77.3 billion in 2018 which is equivalent to 15.9% of total merchandise exports, from an annual average of USD 66.4 billion (17.2% of total merchandise exports)[12]. African intraregional imports increased to USD 73.6 billion in 2018 which is equivalent to 13.3% of total merchandise imports, from an annual average of USD 65.7 billion (13.0% of total merchandise imports)[13]. In comparison, EU intraregional exports increased to USD 4.1 trillion in 2018 which is equivalent to 63.6% of total merchandise exports, from an annual average of USD 3.5 trillion (63.0% of total merchandise exports); whilst EU intraregional imports increased to USD 3.7 trillion (approx. 58.8% of total merchandise imports) in 2018 from an annual average of USD 3.2 trillion (59.1% of total merchandise imports)[14]. ASEAN intraregional exports increased to USD 341.0 billion in 2018 which is equivalent to 23.6% of total merchandise exports, from an annual average of USD 285.3 billion (23.6% of total merchandise exports); meanwhile ASEAN intraregional imports increased to USD 316.7 billion (approx. 22.2% of total merchandise imports) in 2018 from an annual average of USD 259.2 billion (22.5% of total merchandise imports)[15]. Therefore, SADC and African countries have significant room to increase intraregional trade hence the strong commitments of the AfCFTA.

 

Table 2:  Intraregional Imports in SADC, Africa and other Global Regional Economic Communities (2015-2018)

Intraregional Imports in SADC, Africa and other Global Regional

Source: UNCTAD 2019, UNCTADStat Database. Note: (*) Figures for CEMAC are in USD millions.

 

In comparison to other African regional economic communities, SADC performance in terms intraregional trade is relatively high. Other SADC regions such as the Common Market for Eastern and Southern Africa (COMESA), the East African Community (EAC) and the Economic Community of West African States (ECOWAS) have much lower levels of intraregional trade in both nominal and relative terms. In 2018 intraregional exports in COMESA (USD 12.4 billion; 10.5%), EAC (USD 2.9 billion; 20.4%) and ECOWAS (USD 9.1 billion; 8.2%) were all below USD 15.0 billion or 15.0% of total merchandise exports[16]. Similarly, intraregional imports in COMESA (USD 11.5 billion; 5.9%), EAC (USD 2.8 billion; 7.9%) and ECOWAS (USD 8.7 billion; 8.7%) were all below USD 15.0 billion or 10.0% of total merchandise imports[17]. The only competitor in terms of regional integration levels to SADC is the EAC which also seems to have the most harmonised trade administration given that has the least difference between its intraregional exports and imports figures. The difference between the relative measures is pure a function of differences in the regional import and export basket. Nevertheless, SADC still has room to increase intraregional trade and taking the next step in terms of the transition from a free trade area to a common monetary without achieving regional industrialisation may not result in higher intraregional trade.

 

Intraregional trade levels in the three more advanced regional economic communities are much lower than the SADC intraregional trade levels. The intraregional trade levels in Economic and Monetary Community of Central Africa (CEMAC) and the West African Economic and Monetary Union (WAEMU) illustrate the limits of extending intraregional trade through a common currency. In 2018 intraregional exports in CEMAC increased to USD 818.3 million or 2.8% of total merchandise exports (2015-’17: USD 789.0 million; 3.7%) and in the WAEMU intraregional exports increased to USD 3.4 billion or 12.0% of total merchandise exports (2015-’17: USD 3.2 billion; 13.3%)[18]. Meanwhile intraregional imports in CEMAC increased to USD 828.5 million or 4.8% of total merchandise exports (2015-’17: USD 1.1 billion; 6.0%) and in the WAEMU intraregional imports increased to USD 3.7 billion or 9.9% of total merchandise imports (2015-’17: USD 2.9 billion; 9.7%)[19]. Similarly, the challenges of deepening regional integration in the Southern African Customs Union (SACU) also illustrates the limits of increasing intraregional trade by simply removing intraregional tariffs without dealing with non-tariff barriers to trade and structural inequalities amongst member states. In 2018 intraregional exports in SACU remained at the medium-term average of USD 14.1 billion or 13.0% of total merchandise exports (2015-’17: USD 14.1 billion; 15.0%); and intraregional imports increased slightly to USD 15.2 billion or 13.7% of total merchandise imports (2015-’17: USD 15.1 billion; 15.4%)[20]. Therefore, simply deepening regional integration through a monetary or customs union does not guarantee greater intraregional trade in spite of the many benefits of decreasing transaction costs through a common currency or reducing tariffs.

 

Thus, SADC countries have significant room to increase intraregional trade because it’s been declining in relative terms in spite of the increase in nominal terms. The more important metric for evaluating intraregional trade is the relative measure a share of total merchandise imports or exports. Nevertheless, SADC is still performing amongst the top African regional economic communities with its only competitor being the EAC which has similar levels of intraregional imports. In addition, simply setting goals for regional integration such as milestones in the transition process and the establishment of institutions has its limits. In fact, all the “more advanced” regional economic communities that have achieved monetary and economic integration are still performing poorly in terms of regional integration. Therefore, the shift towards a dual focus emphasising the importance of greater intraregional trade and regional industrialisation is a welcome change that should set the SADC region apart in the process of African regional integration. Dealing with non-tariff barriers to trade and structural inequalities through regional industrialisation and the establishment of regional and continental value-chains is the only sustainable way to support SADC and African regional integration.

 

By Ken Kalala Ndalamba and Ross Douglas

 


[1] SADC 2019. Communique of the 39th SADC Summit of Heads of State and Government Julius Nyerere International Convention Centre Dar Es Salaam, United Republic of Tanzania, Southern African Development Community: Gaborone. Available At: https://www.sadc.int/ [Last Accessed: 31 October 2019].
[2] SADC 2019. Communique of the 39th SADC Summit of Heads of State and Government Julius Nyerere International Convention Centre Dar Es Salaam, United Republic of Tanzania, ibid.
[3] SADC 2019. Communique of the 39th SADC Summit of Heads of State and Government Julius Nyerere International Convention Centre Dar Es Salaam, United Republic of Tanzania, ibid.
[4] AU 2019a. List of Countries Which Have Signed, Ratified/Acceded to the Agreement Establishing the African Continental Free Trade Area, African Union: Addis Ababa. Available At: https://au.int/ [Last Accessed: 31 October 2019].
[5] AU 2019b. CFTA – Continental Free Trade Area, on the African Union Website, viewed on 31 October 2019, from https://au.int/.
[6] ECB 1998. The Stability-Oriented Monetary Policy Strategy of the European System of Central Banks and the International Role of the Euro, on the European Central Bank Website, viewed on 31 October 2019, from https://www.ecb.europa.eu/.
[7] UNCTAD 2016. African Continental Free Trade Area: Policy and Negotiation Options for Trade in Goods, United Nations Conference on Trade and Development: New York and Geneva. Available At: https://unctadstat.unctad.org/ [Last Accessed: 31 October 2019].
[8] SADC 2014.  SADC Industrialisation Strategy Roadmap, 2015-2063, South African Development Community: Gaborone. Available At: https://www.sadc.int/ [Last Accessed: 20 October 2019].
[9] UNCTAD 2019. UNCTADStat Database, United Nations Conference on Trade and Development: Geneva. Available At: https://unctadstat.unctad.org/ [Last Accessed: 31 October 2019].
[10] UNCTAD 2019. UNCTADStat Database, ibid.
[11] UNCTAD 2018. Trade Structure by Partner, on the United Nations Conference on Trade and Development Website, viewed on 31 October 2019, from https://stats.unctad.org/. For the individual the performance of SADC and other African countries in terms of regional integration, see https://politicaleconomy.org.za/.
[12] UNCTAD 2019. UNCTADStat Database, ibid.
[13] UNCTAD 2019. UNCTADStat Database, ibid.
[14] UNCTAD 2019. UNCTADStat Database, ibid.
[15] UNCTAD 2019. UNCTADStat Database, ibid.
[16] UNCTAD 2019. UNCTADStat Database, ibid.
[17] UNCTAD 2019. UNCTADStat Database, ibid.
[18] UNCTAD 2019. UNCTADStat Database, ibid.
[19] UNCTAD 2019. UNCTADStat Database, ibid.
[20] UNCTAD 2019. UNCTADStat Database, ibid.

 

Industry Spotlight by Serge Hadisi and Charl Swart

Industry Spotlight: Intraregional Trade and Value-Chains in SADC

Intraregional trade in the Southern African Development Community (SADC) is key to achieving regional integration and sustainable economic development. Promoting and enabling the movement of goods, services, capital and people across borders, expanding markets, and fostering value-chains within the region will speed up the regional integration process. The SADC Trade Protocol seeks to foster a free trade area in the region in order to further develop trade, industrialisation, and competitiveness through value added products and create a SADC common market[1]. But establishing a free trade area is not enough to enable intraregional trade which requires regional economic communities to deal with non-tariff and structural barriers to trade amongst member states as part of the trade harmonisation and broader regional integration process. In addition, this requires a thorough understanding the fundamental nature of intraregional trade and the potential value-chains that can be supported in order to increase SADC intraregional trade.

 

Total merchandise exports from SADC increased to USD 187.7 billion in 2018 from an annual average of USD 157.4 billion for 2015 to 2017[2]. SADC intraregional merchandise exports also increased to USD 33.6 billion in 2018 (17.9% of total merchandise exports) from an annual average of USD 32.7 billion (20.8% of total merchandise exports) from 2015 to 2017[3]. Total merchandise imports to SADC increased to USD 175.8 billion in 2018 from an annual average of USD 159.4 billion for 2015 to 2017[4].  SADC intraregional merchandise imports also increased to USD 36.8 billion in 2018 (20.9% of total merchandise exports) from an annual average of USD 32.9 billion (20.7% of total merchandise exports) from 2015 to 2017[5]. There are various practical reasons for the counterintuitive difference between intraregional export and import figures such as differences in treatment of transiting goods or illicit financial practices such under-pricing and trade mispricing[6]. Nevertheless, the data suggests that SADC intraregional trade has been declining in relative terms in spite of the nominal growth; which is more important because it is a relative measure of trade self-sufficiency within the regional economic community. At a continental level, intra-Africa exports were 16.6% of total exports in 2017, compared with 68.1% in Europe, 59.4% in Asia, 55.0% in America, and 7.0% in Oceania[7]. African intraregional trade defined as the average of exports and imports was the lowest at an annual average of 2.0% from 2015 to 2017 compared to America (47.0%), Asia (61.0%) and Europe (67.0%) and Oceania (7.0%)[8].

 

Hence, there is room to significantly increase intraregional trade in SADC and Africa more broadly. Intraregional trade levels in SADC are slightly above the continental average at 19.4% in 2018 from an annual average of 20.8% from 2015 to 2017[9]. But this is still much lower than rest of the world. So, what types of goods are traded amongst SADC countries and what does this suggest about the potential value-chains that could be supported to expand intraregional trade?

 

The top five intraregional merchandise exports in SADC are petroleum oils, copper, diamonds, electricity and metallic ores. The value of the top-five merchandise exports amongst SADC increased to USD 10.2 billion in 2018 (approx. 30.3% of total intraregional exports) from an annual average of USD 7.0 billion from 2015 to 2017 (approx. 21.4% of total intraregional exports)[10]. Intraregional petroleum oils exports increased to USD 3.3 billion in 2018, from an annual average of USD 2.9 billion from 2015 to 2017[11]. Diamond intraregional exports decreased to USD 1.4 billion in 2018, from an annual average of USD 1.9 billion from 2015 to 2017[12]. Intraregional copper exports increased to USD 3.5 billion in 2018, from an annual average of USD 833.4 million from 2015 to 2017[13]. Electricity intraregional exports increased to USD 1.1 billion in 2018, from an annual average of USD 940.9 million from 2015 to 2017[14]. Metallic ores intraregional exports increased to USD 833.2 million in 2018, from an annual average of USD 446.4 million from 2015 to 2017[15]. Therefore, the top-five products have been growing faster than the rest of the intraregional merchandise exports in SADC with the exception of diamonds which have decreased.

 

However, raw commodities are the main contributors to approximately a third of intraregional exports. Given the limited refining capacity in key oil producing SADC countries like Angola, this suggests a significant part of intraregional trade are re-exports. Similarly, the narrow manufacturing capacity in the SADC region suggests that the other commodities like copper and metallic ores are also mainly re-exported given their concentration in landlocked countries like Zambia and the Democratic Republic of Congo (DRC). Similarly, the trade in diamonds is largely re-exports given the concentration of the diamond market in Botswana as the headquarters of De Beers which accounted for 20.0% of global diamond production in 2016[16]. In addition, the concentration of commodities in SADC intraregional trade reflects significant challenge of low domestic beneficiation or productive capacity in the region[17].

 

In the top-five intraregional imports in SADC are petroleum oils, nickel, copper, diamonds and commercial vehicles. The value of the top-five imports amongst SADC increased to USD 8.9 billion in 2018 (approx. 24.2% of total intraregional imports) from an annual average of USD 6.0 billion from 2015 to 2017 (approx. 18.4% of total intraregional imports)[18]. Similarly, intraregional petroleum oils imports increased to USD 2.4 billion in 2018 from an annual average of USD 2.0 billion from 2015 to 2017[19]. Nickel intraregional imports increased to USD 1.6 billion in 2018 from an annual average of USD 209.9 million from 2015 to 2017[20]. Intraregional copper imports increased to USD 2.5 billion in 2018 from an annual average of USD 1.1 billion from 2015 to 2017[21]. Diamonds intraregional imports decreased to USD 1.4 billion in 2018, from an annual average of USD 1.9 billion from 2015 to 2017[22]. Commercial vehicle intraregional imports increased to USD 875.7 million in 2018 from an annual average of USD 839.5 million from 2015 to 2017[23]. Therefore, in spite of the concentration in raw commodity intraregional exports, SADC countries have the potential to develop a number of value-chains linked to beneficiation of mineral and commercial vehicles.

 

The automotive industry presents a number of potential regional value-chains given the many number of inputs across different sectors in the automotive value-chain. The often-cited example to illustrate the potential of the automotive industry is the expansion of Lesotho’s leather and hides industry due to rising demand for automotive trim used by the South African automotive industry[24]. In addition, the South African automotive industry has benefitted other domestic and regional industries in platinum group metals, logistics, finance, retail and advertising[25]. However, the unequal distribution of productive capacity in the SADC region and South Africa’s competitive advantage in manufacturing means there is limited potential to integrate other SADC countries in the automotive value-chain.

 

The dependence on raw mineral commodities is a challenge an opportunity for SADC countries. It is a challenge in that high dependence on raw mineral commodity exports exposes countries to volatility in commodity price. For example, Brent crude oil prices declined by an annual average of -24.0% from USD 98.9 per barrel in 2014 to USD 44.0 per barrel in 2016, before recovering to USD 54.4 per barrel in 2017[26]. Crude oil contributed 95.6% of Angola’s total export earnings in 2018 which has remained largely unchanged from the average of 95.4% from 2015 to 2017 (2014: 96.2% of exports)[27]. During this period, the AOA depreciated by an annual average of -22.6% in 2015 and 2016 from AOA 98.0 per USD in 2014 to AOA 164.0 per USD in 2016[28]. Copper prices declined by an annual average of -12.6% from USD 6863.4 per MT in 2014 to USD 4867.9 per MT in 2016, before recovering to USD 6169.9 per MT in 2017[29]. Copper contributed 69.9% of Zambia’s total export earnings in 2018 which has increased from the average of 67.2% from 2015 to 2017 (2014: 67.1% of exports)[30]. During this period, the ZMW depreciated by an annual average of -22.5% in 2015 and 2016 from ZMW 6.2 per USD in 2014 to ZMW 10.3 per USD in 2016[31]. Nickel prices declined by an annual average of -12.2% from USD 15,030.0 per MT in 2014 to USD 9,595.2 per MT in 2016, before recovering to USD 10,409.6 per MT in 2017[32]. Nickel contributed 16.1% of Zimbabwe’s total export earnings in 2018 which has increased from the average of 8.8% from 2015 to 2017 (2014: 5.5% of exports)[33]. Therefore, the high dependence on raw commodity exports has a significant impact due to the volatility of commodity prices which necessitates beneficiation of minerals.

 

The price of diamonds is slightly different given the concentration of the market and dominance of De Beers which benefits Botswana where the aggregation and sorting takes place. There is little domestic value-addition outside of Botswana. Diamonds contributed 89.8% of Botswana’s total export earnings in 2018 which has increased from the average of 86.6% from 2015 to 2017 (2014: 83.7% of exports). But due to the different market structure Botswana has been able to ensure sustainable growth and development from its diamonds. Hence, Botswana has a competitive advantage in diamonds the same way South Africa has a competitive advantage in the automotive industry. Therefore, the regional potential of the automotive and diamond value-chains will depend on the good-will of South Africa and Botswana to share their productive capacity with the region. Firms in other countries will find it near impossible to be integrated in automotive or diamond value-chains unless they are more competitive that South African or Botswana firms; and they must be located strategically close enough to overcome non-tariff barriers or logistical challenge. Hence, the only real potential for industrialisation is minerals beneficiation and down-stream processing of minerals to increase intraregional trade in SADC.

 

However, none of this can be achieved without ensuring energy self-sufficiency which is a challenge in SADC. There are significant differences in terms of energy self-sufficiency in SADC given the importance of electricity in intraregional trade. Countries like Angola, Zambia and Zimbabwe cannot take advantage of mineral beneficiation to refine the crude oil in the case of Angola, or beneficiate copper in the case of Zambia or nickel in the case of Zimbabwe without resolving energy supply constraints. In 2017/18 Zambia’s peak demand was 3,177.0 MW and the national utility ZESCO Limited had an operating capacity of 2,734 MW[34]. Similarly, Zimbabwe’s peak demand was 2,083.0 MW and the national utility Zimbabwe Electricity Supply Authority (ZESA) had an operating capacity of 1,555.0 MW[35]. Angola is a slight anomaly in that its peak demand was 1,872.0 MW and the national utility Rede Nacional de Transporte de Electricidade (RNT) had an operating capacity of 2,500.0 MW[36]. Angola has faced the challenges of the so-called “Dutch disease” which has restricted diversification outside of oil and raising dependency on imports; the same way Botswana has failed to diversify outside of diamonds. Therefore, simply resolving the energy constraints will not solve the challenge of mineral beneficiation without strategic industrial policy and supported by regional cooperation to develop the copper, nickel and petroleum value-chains.

 

In relation with SADC’s regional strategy and roadmap in terms of fostering industrialisation it remains a long road which needs more precise actions to be taken, particularly in the implementations of the policies at national levels of each member states, and aligning regional policies to support diversification and export promotion[37]. As much as national value-chain development is important, the link between regional and global value chain will also play a vital role for competitiveness, deepening regional integration and increasing intraregional trade in SADC[38]. The SADC Industrialisation Strategy and Roadmap: 2015-2063 identifies the importance of regional value-chains to induce structural change and industrialisation in the region[39]. The strategy also identifies agro-processing, minerals beneficiation, pharmaceutical products, manufacturing, machinery and equipment, and services as the six key focus sectors that have been identified as potential drivers to deepen regional integration and increase intraregional trade in SADC[40]. Although minerals beneficiation, manufacturing and machinery and equipment present the highest potential given the SADC intraregional trade patterns; the strategy also identifies agro-processing, pharmaceuticals and services (mainly tourism, health care and education). These three addition sectors can bridge the gap caused by the unequal endowment of mineral resources across the SADC region. Typically, SADC countries either rely on raw mineral or agricultural commodity exports even though these are less important for intraregional trade. Therefore, the inclusion of agro-processing and pharmaceuticals presents an opportunity for the agriculture-dependent SADC countries to increase domestic value-addition and expand intraregional trade by locating the entire value-chains within the SADC region.

 

Thus, SADC countries have significant room to increase intraregional trade because it’s been declining in relative terms in spite of the increase in nominal terms. The more important metric for evaluating intraregional trade is the relative measure a share of total merchandise imports or exports because this reflects the relative self-sufficiency of the region. The top-traded intraregional merchandise is in nickel, electricity and commercial vehicles. The other top-traded intraregional merchandise like petroleum oils, diamonds, metallic ores and copper reflect re-exports and re-imports in the SADC region given the market structures, regional productive capacity and concentration of these commodities in specific countries. In addition, the competitive advantage of Botswana in diamonds and South Africa in automotive means that there is limited room to integrate other SADC countries and expand the value-chains in the region. Nevertheless, mineral beneficiation and down-stream processing of raw minerals presents the high potential for regional industrialisation and growing intraregional trade. However, none of this can be achieved without resolving the significant energy supply constraints affecting many national utilities in the region. Therefore, taking advantage of these potential value-chains and increasing intraregional trade requires more than simply reducing tariffs to trade. Regional industrialisation requires effective coordination of national industrial policy and regional cooperation on the key sectors to develop regional value-chains and increase intraregional trade.

 

By Serge Hadisi and Charl Swart

 


[1] SADC 2012. Regional Indicative Strategic Development Plan, Southern African Development Community: Gaborone. Available At: https://www.sadc.int/ [Last Accessed: 5 September 2019]; SADC 2019a. Free Trade Area, on the Southern African Development Community Website, viewed on 9 September 2019, from https://www.sadc.int/.
[2] UNCTAD 2019a. UNCTADStat Database, United Nations Conference on Trade and Development: Geneva. Available At: https://unctadstat.unctad.org/ [Last Accessed: 10 September 2019].
[3] UNCTAD 2019a. UNCTADStat Database, ibid.
[4] UNCTAD 2019a. UNCTADStat Database, ibid.
[5] UNCTAD 2019a. UNCTADStat Database, ibid.
[6] UNCTAD 2018. Trade Structure by Partner, on the United Nations Conference on Trade and Development Website, viewed on 31 October 2019, from https://stats.unctad.org/. For the full list of reasons for this difference in the intraregional exports and imports, see the Headline Story on this issue of the PESA Regional Integration Monitor.
[7] UNCTAD 2019b. Facts and Figures, on the United Nations Conference on Trade and Development Website, viewed on 31 October 2019, from https://unctad.org/.
[8] UNCTAD 2019b. Facts and Figures, ibid.
[9] UNCTAD 2019a. Statistics and Database, ibid.
[10] UNCTAD 2019a. Statistics and Database, ibid.
[11] UNCTAD 2019a. Statistics and Database, ibid.
[12] UNCTAD 2019a. Statistics and Database, ibid.
[13] UNCTAD 2019a. Statistics and Database, ibid.
[14] UNCTAD 2019a. Statistics and Database, ibid.
[15] UNCTAD 2019a. Statistics and Database, ibid.
[16] Alrosa, 2019. World Diamond Market, on the Alrosa Website, viewed on 16 September 2019, from http://eng.alrosa.ru/.
[17] Chauvin, S. and Gaulier, G.2002. Prospects for Increasing Trade among SADC Countries, Trade & Industrial Policy Strategies: Pretoria. Available At: http://www.tips.org.za/ [Last Accessed: 10 September 2019]; Kalaba, M. and Tsedu, M. 2008. Regional Trade Agreements, Effects and Opportunities: Southern African Development Research Network, Trade & Industrial Policy Strategies: Pretoria. Available At: http://www.tips.org.za/  [Last Accessed: 10 September 2019].
[18] UNCTAD 2019a. Statistics and Database, ibid.
[19] UNCTAD 2019a. Statistics and Database, ibid.
[20] UNCTAD 2019a. Statistics and Database, ibid.
[21] UNCTAD 2019a. Statistics and Database, ibid.
[22] UNCTAD 2019a. Statistics and Database, ibid.
[23] UNCTAD 2019a. Statistics and Database, ibid.
[24] Biniza, S. 2015. How is the South African State Promoting Investments that Increase Local Content in the Production of Automobiles? A Critical Evaluation of Investment Promotion and Industrial Policy (1994-2014), University of the Witwatersrand: Johannesburg. Available At: http://wiredspace.wits.ac.za/ [Last Accessed: 31 October 2019].
[25] Biniza, S. 2015. How is the South African State Promoting Investments that Increase Local Content in the Production of Automobiles? A Critical Evaluation of Investment Promotion and Industrial Policy (1994-2014), ibid.
[26] IMF 2019. IMF Primary Commodity Prices, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 4 October 2019].
[27] UNCTAD 2019a. UNCTADStat Database, ibid.
[28] IMF 2018. Angola Request for An Extended Arrangement Under the Extended Fund Facility, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 26 September 2019].
[29] IMF 2019. IMF Primary Commodity Prices, ibid.
[30] UNCTAD 2019a. UNCTADStat Database, ibid.
[31] BoZ 2019. Historical Series of Exchange Rates Between ZMK/ZMW Against Other Currencies, Bank of Zambia: Lusaka. Available At: https://www.rbm.mw/ [Last Accessed: 15 October 2019].
[32] IMF 2019. IMF Primary Commodity Prices, ibid.
[33] UNCTAD 2019a. UNCTADStat Database, ibid.
[34] SAPP 2019. SAPP Annual Report 2018, Southern African Power Pool: Harare. Available At: http://www.sapp.co.zw/ [Last Accessed: 23 October 2019].
[35] SAPP 2019. SAPP Annual Report 2018, ibid.
[36] SAPP 2019. SAPP Annual Report 2018, ibid.
[37] SADC 2015. SADC Industrialisation Strategy and Roadmap 2015 – 2063, Southern African Development Community: Gaborone. Available At: https://www.sadc.int/ [Last Accessed: 23 October 2019]; SADC 2017. Action Plan for SADC Industrialisation Strategy and Roadmap, Southern African Development Community: Gaborone. Available At: https://www.sadc.int/f [Last Accessed: 23 October 2019].
[38] SADC 2015. SADC Industrialisation Strategy and Roadmap 2015 – 2063, ibid; SADC 2017. Action Plan for SADC Industrialisation Strategy and Roadmap, ibid.
[39] SADC 2019b. SADC ES Urges Private Sector to Invest in Regional Value Chains, on the Southern African Development Community Website, viewed on 5 September 2019, from https://www.sadc.int/; SADC 2019c. SADC for Increased Intra – Regional and International Trade, on the Southern African Development Community Website, viewed on 5 September 2019, from https://www.sadc.int/; Paremoer, T. 2018. Regional Value Chains: Exploring Linkages and Opportunities in the Agro-processing Sector Across Five SADC Countries, The South African Institute of International Affairs: Johannesburg. Available At: https://saiia.org.za/ [Last Accessed: 4 September 2019].
[40] SADC 2017. Action Plan for SADC Industrialisation Strategy and Roadmap, ibid; Paremoer, T. 2018. Regional Value Chains: Exploring Linkages and Opportunities in the Agro-processing Sector Across Five SADC Countries, ibid.

 

Policy Spotlight by Tsepiso Ranto and Thabo Thandokuhle Sacolo

Policy Spotlight: RECs and the Future of African and SADC Integration

Regional economic communities (RECs) are the building blocks of African regional integration but multiple memberships in different RECs is one of main obstacles to deepening regional integration. The African Continental Free Trade Area (AfCFTA) Agreement is primarily aimed at resolving the challenge of multiple memberships whilst establishing a common market to encourage intraregional trade growth. The signing of the AfCFTA, which entered into force in May 2019, is a slight change from the original conception of deepening regional integration. The ideas of a common continental market, boosting intra-African cooperation and economic integration at a continental level have been espoused since the inception of the Organisation for African Unity (OAU) in 1963 but the approach of how this will be achieved has changed over time.

 

Initially, the Lagos Plan of Action for the Economic Development of Africa: 1980-2000 under the OAU envisaged the creation of an African Common Market through establishment of institutions for cooperation[1]. Although there were many programmes and institutions that were established, the levels and speed of integration in the RECs declined. In 1991, the UOA adopted the Abuja Treaty Establishing the African Economic Community which envisaged a continental free trade area as the stepping stone towards achieving the African Economic Community[2]. Progress towards the continental free trade area gathered momentum with the establishment of the African Union (AU) which replace the OAU in 2002 in order to accelerate political and socioeconomic integration. Although the number of programmes and institutions increased with the establishment of more RECs in the early 2000s, the levels of intra-Africa trade and the pace of implementing reforms slowed down again[3]. Finally, in 2012 the AU Summit of Heads of State and Government adopted another shift in the approach by encouraging continental economic integration through trade integration[4].

 

This is a significant and fundamental shift in African integration away from the OAU’s top-down approach towards the AU’s bottom-up approach. In this new approach, the regional integration would be achieved through a two-pronged strategy of establishing a common market through time-bound milestones such as the signing and ratification of the AfCFTA and continually increasing intraregional trade through the implementation of the Action Plan on Boosting Intra-Africa Trade (BIAT). BIAT identifies seven clusters which are the focal areas for cooperation and increasing intraregional trade, namely: trade policy, trade facilitation, productive capacity, trade-related infrastructure, trade finance, trade information, and factor market integration[5].

 

There are approximately 14 RECs on the African continent but only 8 of them are formally recognised by the AU.  The recognised RECs include the East African Community (EAC), the Intergovernmental Authority on Development (IGAD), the Arab Maghreb Union (AMU), the Common Market for Eastern and Southern Africa (COMESA), the Economic Community of Central African States (ECCAS), the Economic Community of West African States (ECOWAS), the Southern African Development Community (SADC) and the Community of Sahel-Saharan States (CEN-SAD)[6]. Of the 8 recognised RECs, SADC is the most affected by overlapping memberships with COMESA and the EAC. This is worsened by members of the Southern African Customs Union (SACU) even though the REC is not recognised by the AU due to the Most-Favoured Nation (MFN) principle and the Enabling Clause under the General Agreement on Trade and Tariffs (GATT) and the General Agreement on Trade in Services (GATS).

 

The AfCFTA and regional integration process in Africa and SADC needs to comply with these WTO principles as and the GATT and GATS. The MFN principle means that countries cannot discriminate in terms of preferential treatment amongst its trade partners without providing the same preferential treatment to all its other trade partners. However, there are specific provisions for customs unions and trade unions under GATT and GATS which pose a challenge in terms of trade harmonisation in SADC and Africa more broadly. These provisions allow for members of a customs union or free trade area to be treated as one party[7]. As a result, SACU can establish a system of preferential or zero tar amongst its members whilst implementing a different common set of tariffs for non-members. But members to a free trade area or customs union cannot discriminate amongst other non-member trading partners in terms of the common external tariff. This implies that countries cannot be members to more than one free trade area or customs union if the RECs are notified to the WTO under the GATT Article XXIV without expanding the preferential tariffs across both RECs. However, the Enabling Clause to the GATT and GATS allows for derogations to the MFN principle in favour of developing countries.

 

In this regard, SADC is notified under GATT Article XXIV whilst COMESA and the EAC are notified un the Enabling Clause. Therefore, the African integration is faced with the challenge of reconciling both of these principles and consolidating all the RECs into one consistent African Common Market. Initially the AU intended to consolidate SADC integration through the Tripartite Free Trade Area (TFTA) which includes COMESA and the EAC.  However, progress in terms of ratification of the TFTA Agreement has been slow and the TFTA Agreement has not entered into force even though negotiations were concluded in May 2017. Thus far only 5 countries have ratified the TFTA out of the 14 countries required for the Agreement to enter into force[8]. Hence, AU member states have taken a different tack through the AfCFTA which allows member states to negotiate and add additional annexes to for MFN exemptions[9]. However, this does not necessarily resolve the challenge of multiple memberships to RECs.

 

Moving forward the process of tariff liberalisation will need to be guided by the agreed upon modalities of liberalising trade in goods and services. Currently, the AfCFTA allows for reduction of 90.0% of tariffs to 0.0% within the next five years (10 years for Least Developed Countries) and an additional 7.0% of sensitive tariffs will be liberalised over the next ten years (13 years for Least Developed Countries)[10]. Hence, as discussed above, the AfCFTA sets out clear milestones with deadlines whilst the BAIT approach sets out the areas of focus to support the transition to an African Common Market. If the liberalisation process occurs as planned this would reduce the tensions in between the MFN principle and the Enabling Clause as tariffs are liberalised. SADC member states in SACU will also have an imperative to safeguard the common external tariff with non-African trading partners until the African Customs Union has been established. Therefore, the future of unrecognised RECs remains uncertain.

 

By Tsepiso Rantsoa and Thabo Thandokuhle Sacolo

 


[1] UNCTAD 2016. African Continental Free Trade Area: Policy and Negotiation Options for Trade in Goods, United Nations Conference on Trade and Development: New York and Geneva. Available At: https://unctadstat.unctad.org/ [Last Accessed: 31 October 2019].
[2] UNCTAD 2016. African Continental Free Trade Area: Policy and Negotiation Options for Trade in Goods, ibid.
[3] UNCTAD 2016. African Continental Free Trade Area: Policy and Negotiation Options for Trade in Goods, ibid.
[4] UNCTAD 2016. African Continental Free Trade Area: Policy and Negotiation Options for Trade in Goods, ibid.
[5] AU 2019b. CFTA – Continental Free Trade Area, on the African Union Website, viewed on 31 October 2019, from https://au.int/.
[6] Mengistu, M. 2015. ‘Multiplicity of African Regional Economic Communities and Overlapping Memberships: A Challenge for African Integration’, International Journal of Economics, Finance and Management Sciences, Vol. 3, No. 5, pp.: 417 – 425. Available At: https://pdfs.semanticscholar.org/ [Last Accessed: 31 October 2019].
[7] WTO 2019. Article XXIV of the General Agreement on Tariffs and Trade, on the World Trade Organisation Website, viewed on 31 October 2019, from https://www.wto.org/.
[8] DTI 2019. Status Report on South Africa’s Trade Negotiations: 11 September 2019, Department of Trade and Industry: Pretoria. Available At: http://www.thedti.gov.za/ [Last Accessed: 31 October 2019].
[9] AU 2019. Agreement Establishing the African Continental Free Trade Area, African Union: Addis Ababa. Available At: https://au.int/ [Last Accessed: 31 October 2019].
[10] DTI 2019. Status Report on South Africa’s Trade Negotiations: 11 September 2019, ibid.

 

Ken Kalala Ndalamba

Role: Research Associate
Contact: ken@politicaleconomy.org.za
Ken is a Researcher specialising in strategic management, organisational development and leadership...

Serge Hadisi

Role: Research Associate
Contact: serge@politicaleconomy.org.za
Serge is an Economist with extensive research and publications on sustainable economic development focusing on social development in sub-Saharan Africa...

Tsepiso Augustinus Rantso

Role: Research Associate
Contact: tsepiso@politicaleconomy.org.za
Tsepiso is a Development Practitioner specialising in cross-sectional research, agricultural and rural development...

Ross Oliver Douglas

Role: Editing and Research Specialist
Contact: ross@politicaleconomy.org.za
Ross is a Writer, Editor and Historian specialising in rural development in South African history...

Charl Swart

Role: Editing and Research Specialist
Contact: charl@politicaleconomy.org.za
Charl is a Political Scientist specialising in constitutional democracy...

Thabo Thandokuhle Sacolo

Role: Editing and Research Specialist
Contact: thabo@politicaleconomy.org.za
Thabo is an Economist specialising in applied economics, environmental economics and agricultural economist...

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