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17TASK FORCE 1. TRADE, INVESTMENT AND GROWTH
POLICY BRIEF
AFRICA’S DIVERSIFICATION
AND ITS TRADE POLICY
TRANSFORMATION
Task Force 1
TRADE, INVESTMENT AND GROWTH
Authors
NJUGUNA NDUNG’U, AXEL BERGER, CLARA BRANDI, URI DADUSH, FATIMA
OLANIKE KAREEM, OLAYINKA IDOWU KAREEM, DAVID LUKE, SIMON
MEVEL, RIM BEN AYED MOUELHI, ABEBE SHIMELES, FREDERIK STENDER,
WILSON WASIKE
2T20 SAUDI ARABIA
ABSTRACT
This policy brief discusses Africa’s diversification and trade policies for improved in-
tra-African and international trade, economic and social transformation, as well as
promoting win–win G20–Africa economic relations. The brief presents the impera-
tives to broaden Africa–G20 cooperation through improved trade and restructured
global value chains that will enhance competitive production, diversification, and
economic transformation. Ultimately, the G20 and African leadership are urged to
support effective implementation of the African Continental Free Trade Area, trade
policy reforms, and broadened partnerships. This will speed up Africa’s economic di-
versification and integration into regional and global value chains.
AfCFTA
3TASK FORCE 1. TRADE, INVESTMENT AND GROWTH
CHALLENGE
The recently established African Continental Free Trade Area (AfCFTA) is an African
initiative toward achieving pan-African economic integration. The AfCFTA also offers
a new entry point for cooperation with Africa, including at the multilateral level, under
the auspices of the G20. This free trade area raises hope for the expansion of intra-Af-
rican trade through better harmonization and coordination of trade liberalization
among its signatories. At the same time, it entails risks and challenges that include
policy and procedural constraints that might create bottlenecks at the regional lev-
el. For instance, while increasing intra-African trade will facilitate diversification and
economic transformation, it must also strike a balance to avoid “too much” trade di-
version with the rest of the world owing to further intra-African tariff cuts. At the same
time, it must create sufficient preferential treatment among African countries to al-
low for the establishment of regional value chains (RVCs) and diversification.1 The G20
should not only provide support to manage the downsides and leverage the potential
of the AfCFTA, but also use the integration project to leverage win–win G20–Africa
economic interdependencies and boost Africa–G20 cooperation.
The AfCFTA addresses a range of inter-related policies for African economies. Intra-Af-
rican trade liberalization could allow for the establishment of RVCs, thereby promot-
ing intra-African trade. In the long term, this could enable diversification of economic
activity and allow African economies to enter into global market arrangements. All
these are key elements of economic transformation wherein a region or a country
moves to a more diverse and complex production and trade structure. This transfor-
mation helps mitigate volatility; it also provides a more stable path for sustainable
growth, competitive production, and development. These elements are now espe-
cially critical, given the expected uncertain global growth owing to the COVID-19 pan-
demic as well as the imperative to increase the number and quality of jobs in devel-
oping countries. Thus, the goal is to foster sustainable and inclusive development in
line with Africa’s 2063 agenda and the 17 global goals enshrined in the 2030 Agenda
for Sustainable Development.
The main thrust of the policy brief is that Africa’s diversification strategies and trade
policy transformation are prerequisites for economic transformation, inclusive growth,
and stability as well as for deeper G20–Africa economic interdependencies. Effective
implementation of the AfCFTA would accelerate economic transformation (i.e., prod-
1. On the one hand, the global competitiveness of African firms and products will depend on access to the
most cost-effective services and products. On the other hand, Africa requires significant volumes of in-
vestment and competitive production; thus, intra-African investment will not be sufficient.
4T20 SAUDI ARABIA
uct diversification, competitive production, restructuring of the global value chain
mechanism, and geographic diversification of exports). The brief outlines the role of
the G20 and African countries in leveraging this endeavor. This is both in terms of col-
lective legitimate governance and as part of the G20’s efforts toward global rebalanc-
ing to promote capital flows from surplus countries to opportunities in sustainable
infrastructure and climate finance that have high returns. Most G20 core policies that
seek to rebalance economies (e.g., by improving services productivity or promoting
social protection) will affect African interests.
Trade policy trends and its implications for Africa’s diversification and structural
transformation
Africa’s share in total world exports and imports has been relatively low but stable
over the past two decades, averaging only 2.7% for both exports and imports (United
Nations Conference on Trade and Development 2019; Mevel and Karingi 2012). This
diminished role of Africa in global trade can largely be explained by the poor diver-
sification of the continent’s trade. Between 1998 and 2018, more than 70% of Africa’s
exports to the world comprised fuels and other primary commodities. Such strong
concentration of exports in low-value products has severely undermined Africa’s de-
velopment potential. However, it should be noted that the composition of trade tends
to strongly vary by the destination of Africa’s exports—whether it is the African mar-
ket or the rest of the world. While primary commodities accounted for more than
75% of Africa’s exports outside the continent during 1998–2018, manufactured goods
dominated intra-African exports, with a share of about 45%, and primary commodi-
ties barely amounted to one-third. While the share of intra-African trade (exports) has
remained relatively low (compared with other main regions) at around 13% on aver-
age over the last 20 years, it nevertheless signals promising characteristics for Africa’s
industrialization and development.
The AfCFTA, once realized, is expected to become the largest trade integration proj-
ect in the world in terms of participating countries since the formation of the World
Trade Organization (WTO). The agreement establishing the AfCFTA has been signed
by 54 African Union member states, of which 30 have ratified it. Once implemented
and appropriately managed, the AfCFTA offers substantial potential in manufactur-
ing and industrial development, tourism, intra-African cooperation, and economic
transformation (Signé 2018). Among other benefits, the Agreement is bound to ex-
pand intra-African trade, enhance the net welfare of African households, economic
communities, and countries, as well as facilitate the harmonization and coordination
of trade-related measures within the continent by enabling coherent policy in Africa.
CHALLENGE
5TASK FORCE 1. TRADE, INVESTMENT AND GROWTH
Broadly, the expanded markets for African goods and services, coupled with unob-
structed factor movements, restructured global value chain processes, and the reallo-
cated resources, should promote economic diversification, structural transformation,
technological development, and the enhancement of human capital.
Promoting economic diversification and boosting intra-African trade would simul-
taneously function as drivers for eradicating poverty and fostering sustainable and
inclusive development of African countries, which is consistent with the agenda of
the African Union and the Sustainable Development Goals (Songwe 2020).
As demonstrated in the empirical assessment of the AfCFTA modalities on trade in
goods by the UN Economic Commission for Africa (ECA), intra-African trade could in-
crease by 15% ($50 billion) to 25% ($70 billion) in 2040, depending on the ambition of
the liberalization reform (Mevel and Karingi 2012). Indeed, the ECA’s analysis finds that
the current relatively low share of formal intra-African trade2 could increase by around
50% after the AfCFTA reform; more than two-thirds of the gains in intra-African trade
would be captured by industrial sectors, with textile, wearing apparel, leather, wood
and paper, vehicle and transport equipment, electronic, as well as other manufactur-
ing sectors expected to benefit the most. Gains in agriculture and food sectors would
also be substantial—particularly for meat products, milk and dairy products, sugar,
beverages and tobacco, vegetables/fruit/nuts, and paddy and processed rice.
An earlier empirical study by ECA (see Mevel and Karingi 2013)3 shows that once par-
allel reforms aimed at reducing trade costs through effective discipline of inefficient
border processes are implemented, they would amplify the expected trade and real
income benefits from the AfCFTA for all countries. This was confirmed in a recent
analysis by the United Nations Conference on Trade and Development.4 It estimated
that the gains following a reduction of non-tariff barriers could be three to four times
larger than the gains after only tariffs elimination within Africa. Trade facilitation mea-
sures are also essential to increase productivity; along with efficient services sectors
throughout Africa, they can facilitate the building and upgrading of RVCs and make
2. Informal trade is thought to be significant in Africa, but not captured in official trade statistics.
3. See https://www.ilo.org/wcmsp5/groups/public/---ed_emp/documents/genericdocument/wcms_212864.
pdf
4. See https://unctad.org/en/PublicationsLibrary/ser-rp-2017d14_en.pdf
CHALLENGE
6T20 SAUDI ARABIA
Africa competitive. Similarly, recent studies by the African Economic Research Con-
sortium5 find two salutary effects of AfCFTA implementation: (1) a positive effect on
new trade (or trade creation), including an increase in intra-Africa trade, and (2) im-
proved welfare in the Southern African Development Community and the Economic
Community of Central African States regions.
The level of diversification is unevenly distributed across African countries (Fosu and
Abass 2019). Further, the AfCFTA is likely to have an amplifying effect on this scenario.
The enhanced integration efforts may enable comparatively mature hubs, such as
Kenya or South Africa, to attract the bulk of intra-African manufacturing production
in the short run at the least. The periphery would be limited to export activities that
are less beneficial for economic development. This way, the gap between “winners”
and “losers” of regional integration is expected to increase. If such patterns in roles
are reinforced, it would ultimately undermine the acceptance of the AfCFTA among
members. Thus, mechanisms for structural adjustment facilitation and policy mea-
sures that support economic transformation appear to be vital for equal and sustain-
able participation.
Beyond the invaluable opportunities for industrialization and development for mem-
ber states, successfully establishing the AfCFTA could reshape trade relations with
the G20 by ascribing more importance to the African market. The Agreement offers
the G20 a vehicle for reciprocal and mutually advantageous trade and investment
frameworks. For instance, around 83% of Africa’s total exports are currently directed
outside the African continent (particularly to EU countries, China, India, the US, and
the UAE).6 With a combined GDP of over $2.3 trillion and a population of 1.2 billion—of
which most are below the age of 30—African countries would be part of the G20’s
efforts toward global rebalancing to promote capital flows from surplus countries to-
ward profitable opportunities in sustainable infrastructure, climate finance, services
productivity improvements, and social protections that affect African interests. Given
these tangible trade and investment benefits for all parties involved, external part-
ners should play a reciprocal role in supporting the AfCFTA implementation process.
In this policy brief, we focus on the role of the G20. Notably, the AfCFTA is a vehicle for
upgrading and intensifying cooperation between Africa and the G20.
5. The African Economic Research Consortium network has completed three studies under the auspices of
a collaborative research project on “Rethinking Regional Integration in Africa for Inclusive and Sustain-
able Development.” The studies were undertaken by researchers from the European Centre for Develop-
ment Policy Management, Addis Ababa University, and University of Zimbabwe.
6. ECA’s computations based on UNCTADStat (accessed March 24, 2020); average for 2016–18.
CHALLENGE
7TASK FORCE 1. TRADE, INVESTMENT AND GROWTH
7. See recent international policy discourse and recommendations by T20 at https://www.g20-insights.org/
wp-content/uploads/2017/05/Policy-Brief-Africa_final.pdf and https://t20argentina.org/wp-content/up-
loads/2018/07/TF5-5-4-Africas-partnership-with-G20-and-others_final.pdf.
8. See https://ycsg.yale.edu/sites/default/files/files/Murky_Protectionism.pdf and other recent Global Trade
Alert reports.
PROPOSAL
Africa–G20 cooperation is currently limited to a few single initiatives and an observ-
er status for the African Union and New Partnership for Africa's Development. This
level of engagement should be enhanced to focus on the current global challenges
and strong economic interdependencies between African and G20 countries.7 With
a focus on “beyond aid” issues, the AfCFTA presents opportunities for both G20 and
African leadership to add value to African development and boost their legitimacy,
credibility, and relevance to global development. Further, the economic interdepen-
dencies among African and G20 countries imply that G20 policies such as rebalanc-
ing trade and consumption have mutually reinforcing development effects. Clearly,
Africa–G20 cooperation should go beyond the current state of play and, in light of the
AfCFTA, renew attention toward shaping the future of trade relations characterized
by strong linkages to competitive production, economic diversification, and econom-
ic transformation.
Promoting AfCFTA implementation
The G20 should promote AfCFTA implementation, and, through it, strengthen in-
tra-continental trade flows. This can be realized through two measures: first, by boost-
ing financial and technical support for building the capacities of African member
states to implement AfCFTA; and second, through investments in physical infrastruc-
ture (roads, railways, ports, and airports), services, and logistics to reduce transporta-
tion and transaction costs, facilitate trade by more strongly orienting G20 expertise
and aid programs toward trade facilitation in Africa, and potentially substitute reve-
nue losses.
Reforming G20 members’ trade policies and broadening partnerships
The G20 could support and leverage the potential of the AfCFTA by influencing its
members’ trade policies and broadening trade partnerships with Africa. First, the
G20 ought to spearhead world trading system reforms to promote the diversification
of exports and trade-related support for African countries. Second, there is a need
for capacity development with respect to African trade policies in order to address
concerns over G20 protectionist tariffs (Kareem 2019a, 2019b; Evenett and Fritz 2019).8
8T20 SAUDI ARABIA
PROPOSAL
Third, the G20 should maintain and extend existing preferential trade measures and
aid-for-trade assurances to the entire African continent (e.g., existing trade partner-
ships through the Economic Partnership Agreements with the EU, African Growth
and Opportunity Acts by the US, and preferential schemes offered by China and In-
dia to Africa). Lastly, it is important to strengthen innovative trade and investment
partnerships with Africa’s main external trading partners—both traditional partners,
such as the EU and the US, and emerging countries, such as China and the Republic
of Korea. The G20 countries must also start considering Africa as “one” (e.g., trade and
investment partnerships with external partners to be negotiated at the level of the Af-
rican Union). It is also important to enhance coordination between the G20 and Africa
for coherent policies toward regional and international economic integration, includ-
ing the removal of the G20 and individual member policies that impede development
in Africa. At the least, a “do no harm” approach should be guaranteed.
Economic diversification and integration into regional and global value chains
To increase Africa’s diversification and integration into extant value chains (both re-
gional and global), several strategies ought to be adopted by the African bloc, the G20,
and private sectors. First, it is crucial to develop and implement harmonized techni-
cal standards or customs procedures. Second, there is a need to review and improve
G20 trade policies, in particular tariffs and non-tariff measures, to increase Africa’s ex-
port competitiveness. G20 countries’ regulatory frameworks and the corresponding
non-tariff measures (NTMs), such as Sanitary and Phytosanitary/Technical Barriers to
Trade requirements, alter relative competitiveness in favor of exporters that are ca-
pable of efficient compliance with NTMs. This, in turn, penalizes exports originating
in Africa and other least developed countries. Mutume (2006) argues that Africa’s
exports are prevented from reaching most G20 markets because of additional regula-
tory barriers, despite Africa’s efforts to raise the quality of their commodities. The pres-
ence of NTMs has undermined Africa’s potential to gain from exports, particularly the
opportunity to create wealth and employment in the agricultural sector and among
rural household producers (Fugazza 2013; UNCTAD 2013, 2016). Clearly, developing ca-
pacities and capabilities both on bilateral and multilateral levels would help minimize
Africa’s costs of compliance with stricter technical regulations. Other NTMs would be
essential to facilitate the integration of African economies in the global economy. Fi-
nally, Africa should adopt internationally accepted trade facilitation standards as well
as immigration rules and practices to develop RVCs that benefit from the higher end
of major global value chains.
9TASK FORCE 1. TRADE, INVESTMENT AND GROWTH
A key catalytic role for the G20 here would include the following: (1) Upgrading of
production infrastructure and technical expertise to raise the quality of outputs for
export, particularly to sophisticated advanced markets; (2) investment in research and
development to propel innovations that are necessary for and sufficient to guarantee
market access; (3) strengthening institutional capacities for enforcing product quality
standards for entry into targeted export markets; and (4) an effort to reform the glob-
al value chain and balance the value toward producing centers of primary exports.
The G20 countries should also support the productive capacity of African countries
in order to benefit from the new AfCFTA opportunities. This can be done inter alia
through G20 buyers, consumer preferences, and domestic incentives to restructure
and focus the global supply chains in favor of African producers in an environmentally
friendly and sustainable manner. Finally, the G20–Africa partnership ought to priori-
tize a strategy for engagement with the private sector in Africa’s quest for economic
diversification through trade transformation.
PROPOSAL
10T20 SAUDI ARABIA
Disclaimer
This policy brief was developed and written by the authors and has undergone a peer
review process. The views and opinions expressed in this policy brief are those of the
authors and do not necessarily reflect the official policy or position of the authors’ or-
ganizations or the T20 Secretariat.
11TASK FORCE 1. TRADE, INVESTMENT AND GROWTH
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12T20 SAUDI ARABIA
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REFERENCES
AUTHORS
Njuguna Ndung’u
African Economic Research Consortium
Axel Berger
German Development Institute
Clara Brandi
German Development Institute
Uri Dadush
Policy Center for the New South
Fatima Olanike Kareem
University of Goettingen
Olayinka Idowu Kareem
University of Hohenheim
David Luke
United Nations Economic Commission for Africa
Simon Mevel
United Nations Economic Commission for Africa
Rim Ben Ayed Mouelhi
Euro-Med Economists Association
Abebe Shimeles
African Economic Research Consortium
Frederik Stender
German Development Institute
Wilson Wasike
African Economic Research Consortium
