invest south africa trade

Intra-African Trade



“When spiders unite, they can tie up a lion.”

— Ethiopian Proverb

Intra-African trade represents a lowly 13% of the continent’s overall trade. Finding the key to accelerating cross-border trade would have a transformative effect on the African economy.

The vast majority of Africa’s 54 nations are members of at least one of what African Union officials disparagingly refer to as the “Spaghetti Bowl”, containing more than a dozen regional trade groups. Regional trade integration has long been a strategic objective for Africa, yet the African market remains highly fragmented.

While there has been some notable success recently in removing import duties within the panoply of these regional economic communities, there remains a thicket of non-tariff and regulatory barriers that raise transaction costs that often drastically cripple the movement of goods, services, capital and people across Africa.

The end result is an Africa that has integrated with the rest of the world far faster than with itself.

Effective regional integration is of particular pertinence now, especially considering so much uncertainty surrounding the global economy; stagnation will likely continue in Africa’s traditional export markets in Europe and North America, in part due to China’s policy aim of switching from an external demand-driven and export-led manufacturing to a more consumption driven economy.

Therefore, enormous opportunities for cross-border trade within Africa remain underexploited. Cross-border trade networks have been a salient feature of development in other regions, especially Asia, but has yet to fully materialize in Africa. It’s a self-inflicted wound, as deeper integration would provide a much-needed source of export diversification away from the commodities, minerals, and hydrocarbons that African countries are so disproportionately reliant upon.

Africa’s total trade has grown rapidly in value since 2002, nearly doubling between 2011 and 2016. Yet, intra-African trade as a proportion of the continent’s overall trade has been far slower to climb, growing from around 10% in 2002 to a meager 13% in 2016.

Compared to other regions, the intra-African trade still plays an insignificant role in the continent’s total trade picture. Bottlenecks in moving goods and services between African countries put a powerful brake on expansion plans of many businesses. African trading patterns established in colonial times had profound ramifications for Africa’s experience of globalization, with most of the continent remaining mired at the bottom of global value chains.

Therefore we have an Africa that is stuck with often decrepit infrastructure, compounded by patterns of trade, shaped by bilateral agreements between African countries and their major global trading partners, rather than between strong regional markets.

With 14 trade-blocks, Africa has no shortage of regional economic communities (RECs) and customs unions. Thus, there has been a dislocation between the political ambitions of African leaders and Africa’s harsh economic realities, with trade tending to flourish when countries produce what their trade partners are eager to buy.

With few exceptions, this simply hasn’t been the case in Africa, often producing what it doesn’t consume and consuming what it cannot produce. These weaknesses have frustrated policymakers and further complicates regional integration, as well as a key causal factor for the continually low intra-regional trade, with 80% of Africa’s exports shipped overseas.

Hampered by the continent’s expansive geography, it’s challenging to reach scattered rural communities cost-effectively. The complex and conflicting trade-rules, cross-border restrictions, woeful transportation networks and the structural challenges make exporting between African countries difficult.

These countries also mostly lack an industrial manufacturing base, as well as sufficiently differentiated trade in services. Thus, a limited number of products are often competing with those of a country’s neighbors.

It’s hardly surprising therefore that the levels of intra-African trade have barely grown over the past few decades. Yet, today Africa is viewed as a place of opportunity with companies generally not needing any persuasion in expanding their range of trans-national activities; on the contrary, they are simply waiting for the bureaucratic barriers to come down and the roads, railways, and bridges to be built.   

South Africa has long been at the frontline of this process. One example is the state-owned Public Investment Corporation (PIC), the behemoth of African pension fund managers, with more than R1, 000bn ($114bn) under management. They are planning to intensify investments across the continent with up to R50bn to deploy in other African states and will look to build on their $250m acquisition of a 20% stake in Ecobank, a pan-African group with operations in 32 countries.

Some of the reasoning is that some of South Africa’s growth will be dependent on the development of its continental peers. The Ecobank deal, PIC’s first significant direct non-South African deal, is a strategic acquisition which will enable the corporation to accelerate a broadening footprint across the continent.

South Africa’s banks have also accelerated their pace of expansion across the continent. Standard Bank – Africa’s largest bank by assets and which is 20% owned by China’s ICBC – had expanded its presence to 17 countries, excluding South Africa. This was, in part, was fuelled by global economic conditions as it reduces Standard Bank’s global operations and focuses on opportunities closer to home. But it also reflected a broader trend of South African entities looking to tap into the faster growth of other African countries and who wishes to diversify from their more developed home market.

Africa is the world’s most under-banked continent with infrastructure barriers, poverty, and poor education, meaning that just 20% of families have bank accounts, according to the African Development Bank. But it’s also home to some of the world’s fastest growing economies, vast natural resources, and a fast-growing middle class.

These factors combine to draw increased attention from international investors. South Africa’s top four banks – Standard, Nedbank, First National Bank (FNB), and Absa, in coordination with its majority shareholder, Barclays – are all actively pursuing Africa strategies. The international expansion of the South African financial services sector often follows where the breweries and retailers are going, because that’s often where there’s a developing middle market, with Africa now a top priority for future growth.

Today South Africa is the biggest African investor in the rest of the continent with a steady trickle of outflows from over the last 10 years. Although most of it has gone into the regional economy, the Southern African Development Community (SADC) and Nigeria are the two key focus areas. While South African money has long found its way into mining and natural resource projects, it’s now growing in many other sectors, such as telecoms where the vast Nigerian market helped turn MTN, once considered a perpetual second player to South African rival Vodacom, into the most valuable company on the Johannesburg Stock Exchange. MTN is the now world’s ninth largest mobile phone group, having expanded north into 20 additional markets in Africa and the Middle East.

There has also been an increasing global push by South Africa’s mining companies into other parts of Africa. South Africa’s AngloGold derives about a third of its production from South Africa but also has operations in Ghana, Guinea, Tanzania, Namibia and the Democratic Republic of Congo, while Gold Fields has reduced its exposure to South Africa in terms of production from about 90% 10 years ago to just below 50 % and is now operating two mines in Ghana and has exploration projects in Mali.

South African companies are increasingly tapping into the continental boom, looking to expand beyond their relatively mature domestic markets in search of new sources of profit to their north. Given domestic constraints such as rising labour and energy costs, gaping inequality, a failing education system and recurrent turmoil in the home mining sector, the surge in growth north of the Limpopo River now provides a vital opportunity for many South African businesses, particularly while South Africa struggles with sluggish growth of about 1.5%. By contrast, sub-Saharan Africa is on average expanding at a healthy 5%.

Many South African groups, therefore, see the continent’s growing consumer class as a key driver of growth. South Africa has indeed long promoted itself commercially and financially as a “gateway to Africa”, and diplomatically as both a champion of continental causes and a bridge to the rest of the world.

Continentally speaking, some of the more positive developments in recent years have been the increased prioritization of investment in infrastructure to boost trade and the setting-up of transport corridors. This is an increasingly common approach to accelerating cross-border investments, connecting regional arteries, rural communities and local industries to international markets.

African nations have adopted sub-regional economic blocks as stepping-stones towards a more unified continent. In 2016, three of Africa’s largest RECs –SADC, The East African Community (EAC) and The Common Market for Eastern and Southern Africa (COMESA) – came together under the Tripartite Free Trade Agreement with the ambitious goal of joining three of Africa’s major economic blocks, covering 26 countries with a combined population of some 625 million and an overall GDP of more than $1 trillion.

The African Export-Import Bank estimates that intra-African trade will be worth some $180bn this year. However, this figure is still only 19% of the continent’s $930bn total trade and they attribute it to low industrialisation, restricted movement of labour, poor infrastructure and the high dependence on the export of unprocessed commodities in many African countries.

Over the past decade, the combined regional trade of the EAC, COMESA, and SADC has grown more than 300%, from $30bn in 2004 to $126bn in 2015.

Yet the fortunes of the 5 major African economic communities have been mixed:

  1. The Arab Maghreb Union (AMU) has had little success in economic integration and has been bedeviled by political deadlock and chronic disagreement over the union’s structure.
  2. SADC has yet to establish a customs union, which would allow free trade among member countries and a common external tariff for the rest of the world. Five of the SADC members, however, are part of the South African Customs union, with the South African Rand as the de facto currency.
  3. COMESA established a customs union in 2009 with member states slowly implementing the required policy reforms.
  4. Economic Community of West African States (ECOWAS) is one of the few RECs to have a strong peace and security component, implemented visa-free travel for members in 1980 and introduced a common external tariff in January 2015. While some progress has also been made towards establishing a common currency, tied to the central bank of France. Leaders are hoping to establish a common currency by 2020. Linguistic divisions between Francophone and Anglophone member countries continue to challenge integration efforts, particularly given that Anglophone Nigeria is the dominant player in the ECOWAS community.
  5. EAC is perhaps the most integrated of all African RECs, which established a customs union in 2005 and a common market in 2010, eliminating barriers to free movement of people and capital. The EAC also announced the creation of East African passports in 1999, with their long-term goals being the establishment of a common monetary union and ultimately of creating a political federation.

Increased trade has the potential to transform the African continent. Home to 33 of the world’s least developed countries and who, according to UNCTAD, accounted for just 3% of global trade in 2016. The development trajectories of other regions of the world show that intra-regional trade is critical to sustained economic growth, with close regional ties likely to be especially important to the 30% of Africans who live in land-locked countries or those with scarce resources.

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