The Benefits And Challenges Of Inter-Regional Trade

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The benefits of inter-regional trade, the challenges faced by the two RECs (SADC and EAC) and the way forward or recommendations on how further improve inter and intra-regional trades are illustrated below.

Informal trade constitutes a large portion of trade in Africa, about 40% of the total. According to the Food and Agriculture Organization (FAO), informal trade provides about 70% of employment in sub-Saharan Africa, which results in providing access to goods and services that are not available domestically to meet domestic demand.

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It also brings significant socio-economic benefits mostly to women who are involved in informal trading activities. FAO further indicated in its Report entitled Formalization of informal trade in Africa that in “SADC, the informal cross-border trade constitutes about 30-40% of total intra-SADC trade, amounting to USD17 billion”. While the Study on the Benefits and Challenges of free Movement of persons in Africa indicates that informal-cross border trade is larger than its formal trade in terms of gross domestic product and share.

The study further indicates that informal cross-border trade has more earnings than the formal trade. The main contributing factor to the escalation of informal trade is barriers to enter the formal sector such as cumbersome administrative procedures, lack of access to trade information, prolonged customs and official procedures and border checks, and lack of access to capital or trade finances. Due to these barriers to trade, informal traders are left with no option but to trade informally in order to earn a living. A few informal traders have graduated from informal to formal trading after some years of hard work and perseverance.

Notwithstanding the benefits driven from informal trading, it is also crucial to consider the challenges of informal trade such as increase in a number of counterfeit products. These products are sold at cheaper prices that are affordable to informal traders, while risking loss of revenue to the governments. Informal trading also brings unnecessary competition with national formal businesses and industries. Formalization of informal trade needs a thorough study to weigh the potential benefits and challenges thereof.

Trade Facilitation should be promoted through implementation of decisions and trade Agreements for the regional blocks to trade among themselves and deepen regional integration.

The benefits of inter-regional trade

Given the substantial progress recorded at the continental level, Africa, as the continent with the fastest growing population, 40% of which are young people, is on the move. This is mostly due to efforts by RECs such as SADC and EAC that lead on intra-regional trade and free movement of persons, and other priority projects of the African Union. Regional trade contributes significantly to economic growth, it helps to reduce poverty and ensure inclusive development, and it also helps to connect people and enhance the business environment.

The uniqueness of Members States of both SADC and EAC is that they share common history, languages and cultures. As indicated earlier, trade in Africa occurs more between neighboring countries, which could be related to the afore-mentioned attributes. In addition, trade negotiations are more efficient at the regional levels resulting in various Regional Trade Agreements (RTAs).

Inter-regional trade helps not only to advance integration agenda by transforming the regional economies and create reliable markets for the African products, but it also ensures the transmission of technological innovation exposes the domestic industries to international trade and helps the local markets to become competitive. It further helps to promote trade and attract Foreign Direct Investment (FDI) to African niche markets. It will help to boost trade between state parties, enhance transfer of knowledge and skills, employment creation, infrastructure development, improve production capacity and value addition and help to boost economic growth. Taken together, these forces will unleash the economic potential of Africa that would lift Africans out of poverty and propel the economic development of the continent. The outcome of this process will be a shift of Africa’s development from aid dependency to trade. It will further help the RECs to diversify their constituent economies and move away from agricultural based economies to economies with diversified and industrialized bases which will facilitate inter-regional trade. Additionally, inter-regional trade improves the well-being of the ordinary citizens as they will be able to access goods and services at affordable prices.

Challenges to inter and intra-regional trades

Cognizant of the achievements made by SADC and EAC in enhancing intra-regional trade, the following are the challenges associated with low level of trade volume between them. According to the research, some of the contributing factors to low trade between SADC and EAC include the intricacies associated with alignment of trade policies and regulations between the two regional blocks, while some are institutional, political and legal in nature. There is an asymmetrical level of individual states that constitute the two regional blocs. The inability of two or three states because of the disharmony in trade policies and regulations for example, can have a bearing on the effectiveness of trade between the two Regions. There are also issues of connectivity in terms of infrastructure such as road, rail, sea and air transport networks, and non-tariff barriers which still exist. Their presence affects trade volume and economic integration of both SADC and EAC.

There is lack of adequate political will to ratify and implement the decisions taken at the regional and continental levels, lack of proper, efficient and effective evaluation and monitoring mechanisms at the national levels, insufficient financial and human resources, lack of reliable physical integration infrastructures, lack of harmonized policies and procedures, high transportation costs, inefficiencies in customs and administrative procedures, limited or lack of capacities at the national levels to coordinate multi-dimensional trade policy frameworks, complicated border checks, excessive document requirements, slow implementation of regional integration agreements, restrictive trade policies, high tariffs on agricultural chemicals, ignorance of the WTO governing rules on global trade, such as imposing high import tariffs imports on goods to encourage local productions and lack of capacity to spearhead integration.

Corruption affects inter-regional trade because in some instances resources that could be utilised for programs that are beneficial to the citizens are being diverted for personal gains. Furthermore, potential traders have to pay bribes to get access to business information. This will drain the poor ordinary citizens who cannot afford to pay bribes and enrich the existing business and industries that can afford bribes and are well connected within the system. Lacks of human development, through the provision of quality education, vocational training and tailor made courses for traders, are some of the challenges that lead to corruption activities.

Economic rivalries, especially among the larger economies in the two regions, hobbles trade between SADC and EAC. South Africa and Kenya are the major economies in the two regions, and the two countries compete on production of common products. In addition, Member States of the two regional blocks are not ready for competition.

Political rivalries also affect trade between the two regions. EAC, for example, did not sign the Economic Partnership Agreement (EPAs) with the European Union because Tanzania is reluctant to sign, as the latter benefits from the EPAs within the SADC Framework, being a common member of both regional blocs.

Gender disparity and low level of education among African women are also barriers to trade as women are the main caregivers but not regarded equally and not considered to be a priority. Women should be given an opportunity to occupy leadership positions to promote regional integration agenda.

Fear of venturing into the unknown is another factor that contributes to low trade level because African countries fear competition among themselves and do not trust products of their neighbors as opposed to the ones imported from outside the continent.

Xenophobia attacks in South Africa, for example, does not affect Chinese businesses as they mainly target fellow Africans or African businesses. Lack of trust and confidence among Africans themselves and the quality of African products are some of the impediments to trade. Africans need to accept each other and their products to be able to trade with each other. This requires more broad-based and focused steps that are carefully implemented at the national levels.

On the other hand, fear of opening up the borders to allow free movement of persons is another impediment as African countries do not welcome migrants who are perceived as potential rivalries for the jobs and businesses. It is very cumbersome to increase the level of trade if traders do not move freely from one country to another.

Conflicts in the two Regions, particularly in the horn of Africa also affect the business environment. Conflict does not only have a huge toll on human’s life, but there is also a connection between conflict and trade. Insecurities by conflict can disrupt economic activities in any given country. Depending on the degree of intensity of the conflict, that can be affected by way of disrupting foreign direct investment, affecting or stopping the free movement of persons, goods and services, disruption and destruction of infrastructures such as roads and rail networks, air services and sea routes. It also causes migration and forced displacement of people and reduced volumes of capital inflows which can affect or result in deficit in the balance of payments (export and import) and reduced agricultural productivity. Conflict also causes destruction of production and manufacturing industries which would result in raising commodity prices. It negatively affects trade which can have a direct bearing on economic growth and regional integration. Conflicts have the potential to spillover to neighboring countries, thus causing direct harm to regional trade.

Member States deviation from trade agreements due to national interests also impede trade efforts as Agreements remain unsigned and not ratified for some years from adoption. Countries need to scrutinize the trade agreements before engaging themselves in ambitious agreements without implementation.

The existing legal Frameworks of SADC and EAC have not facilitated the increased volume of trade and intra-regional integration. These legal instruments have not helped to liberalize trade among states. Despite the launch of SADC Free Trade Area (SADC FTA) and the EAC Customs Union, the level of trade remains relatively low owing to the failure by states to eliminate tariff barriers.

In addition, both SADC and EAC Legal Frameworks have initiatives to harmonize their national policies, laws and regulations in order to develop common standards to create a uniform business environment for investment, for example, the Africa Mining Vision. However, these legal instruments do not have legally binding enforcement mechanisms to eliminate trade barriers.

The variances between SACU and the EAC Customs Union are that the EAC has developed a framework to manage accessions while SACU does not have such in place. SACU needs to develop its own framework to manage accessions. SACU has a common monetary are by four of its five (5) members while EAC does not have such. Both customs should move towards establishing a fully functional monetary area for ease of trade and business.

SACU has an in-built compensation mechanism through its revenue sharing scheme for the less advanced economies and the EAC does not have such mechanism in place. It would benefit members of each Customs Union if such mechanisms were in place. The EAC is one of the eight RECs recognized by the African Union and has therefore more political and economic clout. In contrast, SACU is not recognized by the African Union but it is recognized by the WTO. SACU therefore, needs to align its integration agenda with that of SADC as a recognized REC by the AU. The EAC’s progress is grounded on a fully functional and capable Secretariat with the necessary capability to monitor its processes. By contrast, one cannot say the same about SACU’s Secretariat. Both Customs Union need to have fully functional Secretariats in order to fast-track integration.