International Trade

B.Com Fiscal Studies

Regional Trade and Economic

Integration

Prepared by

Edson Mbedzi

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Outline
• Economic Regional Integration
• Brief History of Regional Integration in Africa
• Rationale for Regional Economic Integration – Case in Africa
• Status of economic integration in Africa
• Challenges for economic integration in Africa
• Strengthening Regional Integration in Africa: What next?

Recommended readings

UNCTAD 2009. Economic Development in Africa Report. Strengthening

Regional Economic Integration for Africa’s Development.

UNECA. Assessing Regional Integration in Africa (ARIA) I, II , III. IV

Check the website of UNECA.
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 Regional Trade and Economic Integration
• Every continental region has at least one major integration
movement.

• Europe has the European Community (EC); Asia has the

Association of South East Asian Nations (ASEAN), Central
America has the Central American Common Market (CACM).

• Africa has three major ones: the Southern African

Development Community (SADC); the Economic Community
of West African States (ECOWAS); and the Common Market
for Eastern and Southern Africa (COMESA) among others.

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 Goals of Regional Trade and Economic
Integration
• These regional blocs or economic groupings have the common goals:

1. Joint Economic transformation and development,

2. implicitly including eradication or reduction of poverty in the process.

3. Political and Policy Integration

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 Strengthening Regional Economic
Integration for Africa’s Development

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What is Regional Economic Integration?
• The formation of closer economic linkages among countries that are
geographically near each other, especially by forming preferential
trade agreements.

• Regional economic integration is not only about trade in goods,

covers other issues such as investment, services, labour etc.

• It encompasses regional co-operation on a wide range of matters.

• Different stages: PTA, FTA, Custom Union, Monetary Union,

common market, economic union (customs union plus common
market)

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 Levels of Regional Integration

1. Free- Trade Area

2. Customs Union
3. Common Market
4. Economic Union
5. Political Union

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 Levels of Regional Integration

• Free - Trade Area: Economic integration whereby countries seek to

remove all barriers to trade between themselves , but each country
determines its own barriers against nonmembers.

• Customs Union : Economic integration whereby country remove all

barriers to trade between themselves but erect a common trade
policy against nonmembers .

• Common Market: Economic integration whereby countries remove

all barriers to trade and the movement of labor and capital between
themselves but erect a common trade policy against nonmembers.

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 Levels of Regional Integration
• Economic Union : Economic integration whereby countries remove
barriers to trade and the movement of labor and capital, erect a
common trade policy against nonmembers, and coordinate their
economic policies.

• Political Union
Economic and political integration whereby countries coordinate aspects
of their economic and political systems.

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 Levels of Regional Integration
Gr
ea
te r Free-Trade Area
int
eg
ra t
i on Customs Union

Common Market

Economic Union

Political Union

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 Brief History of Regional Integration in
Africa
• The question of Africa’s regional integration has preoccupied many
African leaders since the early years of independence.

• Seen as a tool for promoting economic growth and sustainable

development and improving the living standards of the African
people.

• African leaders’ quest for unity clearly demonstrates their

commitment, which gave impetus to the formation of Organization of
African Unity (OAU) in 1963. The African Union Commission (AUC),
the Economic Commission for Africa (UNECA), the African
Development Bank (AfDB), and the Regional Economic Communities
(RECs) are among the key frontiers of regional integration.

• The formation of the OAU, now the African Union (AU) was the first
step towards promoting continental unity. Since its inception,
significant new efforts have been put in place.

• Nevertheless, Africa has comparatively few success stories to tell with

respect to regional integration. 11
Brief History of Regional Integration in Africa

• The Minimum Integration Programme (MIP) consists of different

activities on which the RECs and parties involved should agree upon
to speed up and bring to a successful conclusion the process of
regional and continental integration.

• The MIP is built on the virtues of variable geometry approach which

permits the RECs to progress at different pace in the process of
integration.

• To this end, the RECs will continue to implement their respective

programmes (considered as priority programmes) and at the same
time, attempt to carry out the activities contained in the MIP, the
contents of which were identified by the RECs themselves in close
collaboration with the AU.

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 Rationale for Regional Economic Integration: what
are the benefits?

Three major theoretical motivations for the formation of trade blocs are
the:

• A. Allocation effects

• B. Accumulation (or Growth) effects of free trade in regional trade blocs

• C. Location effects

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 Rationale for Regional Economic
Integration: what are the benefits?
A. Allocation effects

• With respect to the allocation effect, economic theory shows that,

in a competitive economy, the demand for a good directs
productive resources to the production of that good. Hence,
demand is an important signal between consumers and producers.

• Given that the imposition of tariff and non-tariff barriers between

countries interferes with this signal, the removal of such trade
barriers in the context of regional integration is thought to increase
efficiency in resource allocation effect.

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Rationale for Regional Economic Integration:
what are the benefits?

• A corollary of the allocation effect is the so-called “scale and variety

effects”(Baldwin, 1997).

• A. 1. Scale effects:
– Rationalization of inefficient industries through reallocation of
resources.

– Creation of large markets allowing small firms to reach optimal

size.

– Economies of scale, reduction in average costs of production

and lower consumer prices.

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 Rationale for Regional Economic
Integration: what are the benefits?
• A.2. Variety Effects
– Integrating a country’s economy into a wider market allows
consumers to choose from a varied array of goods, which should
increase their welfare.

– Increased competition across a wide range of products can also

lower consumer prices.

– From a firm’s perspective, the opportunity to choose from a

wider array of production factors would enable it to use the
most appropriate inputs, which could increase its productivity.

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 Rationale for Regional Economic
Integration: what are the benefits?
• B. Accumulation effects: Investment and Trade

• Greater opportunities to specialize, lower production costs, greater

returns to factors of production, greater returns to physical and
non-physical factor accumulation.

• Technological spill-overs resulting from regionalism lead to

increases in productivity and the reduction of production costs,
further attracting more investment, and hence, factor accumulation.

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 Rationale for Regional Economic
Integration: what are the benefits?
• C. Location : The formation of a trade bloc can have an influence
on the location decisions of foreign firms.

• 3 key location variables are:

(a) market size,
(b) the cost of production and the availability of relevant
production factors, and
(c) market access.

• Offering the most segmented market in the world, Africa’s trade

costs are much higher than in any other region which has
discouraged foreign investment while keeping trade flows at very
low levels. Market expansion through regional economic integration
can contribute to overcoming this constraint.

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 Rationale for Regional Economic
Integration: what are the benefits?
• Regional economic integration : more efficiency, faster
accumulation, larger trade: a positive effect on economic
growth.

• Considering that higher efficiency and faster accumulation are

ingredients of a competitive system, regional integration
could be a stepping stone for Africa’s integration in the
global economy.

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 Costs to regional economic integration?

• Regionalism v/s multilateralism debate: building blocks or stumbling

blocks?

• Trade diversion and trade creation debate

• Fiscal impact of regional economic integration

• Any other?

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 Status of regional economic integration
in Africa:
• There are 14 major regional economic groupings in
Africa with varying degrees of integration.

• The AU classifies these groupings into two:

1. RECs and,
2. Other integration blocs.

• Of the 53 countries, 27 are members of two regional

groupings, 18 belong to three, and one country is a
member of four. Only seven countries have maintained
membership in one bloc.

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 Status of regional economic integration in Africa:
Intra-African trade
• Intraregional trade as a proportion of total trade remains much
lower in African regional integration arrangements compared to
those of the Asian and Latin American regions.

• Some regional groupings in Africa have failed to boost the exports

of the areas covered.

• The benefits from regional integration are not the same for all
members of these groupings.

• In the ECOWAS regions for example, three countries (Nigeria, Côte

d’Ivoire and Senegal) account for almost 90 per cent of all
intraregional exports and almost 50 per cent of all intraregional
imports.

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 Status of regional economic integration in
Africa:Intra-african trade
Obstacles to intra-African trade

“Weak” attraction forces

(a) Small size of most African economies
(b) Low per capita income which is a proxy for level of demand.

Strong “opposing” forces

a) High “trade” costs: transport, border and behind the border costs.
b) Institutional factors: corruption, poor economic policy, political
tensions.

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 Status of regional economic integration in
Africa: Intra-African investment
• Data availability an issue.

• In the period 2002–2004, intra-African FDI was estimated at only $2

billion annually on average, which represented about 13 per cent of total
inward FDI.

• In comparison, intraregional FDI in countries from the Association of

South-east Asian Nations (ASEAN) is estimated at 30 per cent of total
FDI. In 2007 in Africa, the flow of intra-African investment amounted to
$6 billion, raising the accumulated stock to $73 billion.

• Intraregional FDI is geographically concentrated among the more

developed African countries, mainly in Southern Africa and North Africa.

• South Africa is the single most important African source of the continent’s
stock of foreign investment 26
 Challenges to Regional Economic
Integration: Reasons for failures

• Economic challenges: high dependence of most member

countries on export of primary commodities, strict rules of origin
emanating from trade liberalization schemes and poor quality of
infrastructure.

• Institutional challenges include bureaucratic and physical

hindrances, such as road charges, transit fees and administrative
delays at borders and ports. These hindrances raise transport costs
and render deliveries unreliable.

• Other challenges are related to the lack of coordination and

harmonization of policies and regulations at the regional level, non-
implementation issues and overlapping membership.

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 COMESA

• Nine of the ten members of SADC are also part of the 22-member
COMESA.

. COMESA is the largest regional grouping in Africa, in terms of the number

of member states, almost half the total number of countries in Africa.

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 Formation of COMESA

The Common Market for Eastern and Southern Africa (COMESA).

Established in 1994 to replace the Preferential Trade Area (PTA) which had
been in existence since December 1981.

Member Countries:

COMESA has 22 member states, namely: Angola, Burundi, Comoros,

Djibouti, Ethiopia, Kenya, Lesotho, Madagascar, Malawi, Mauritius,
Mozambique, Namibia, Rwanda, Seychelles, Somalia, Sudan, Swaziland,
Tanzania, Uganda, DRC, Zambia, and Zimbabwe.

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 Specific objectives of COMESA

(a) Attainment of sustainable growth and development of member states

• by promoting a more balanced development
• Harmonizing production and marketing structures;

(b) Promotion of joint development in all fields of economic activity

• joint adoption of macro-economic policies and programs,
• raising the standard of living of its peoples;
• fostering closer relations among its member states;

(c) Economic co-operation

• Uniform foreign policies,
• Cross-border and domestic investment,
• Joint promotion of research and adaptation of ICT for development.

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 Specific objectives of COMESA…
d) Co-operation in the promotion of peace, security and stability among the
member states in order to enhance economic development in the region;

(e) Co-operation in strengthening the relations between COMESA and the

rest of the world and the adoption of common positions in international
forums; and,

(f) Working towards the establishment and realization of the objectives of

an African Economic Community.

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 Principles of COMESA
In addition to objectives, member states agreed to create and maintain:

• A full free trade area, guaranteeing free movement of goods and services.

• Removal of all tariffs and non-tariff barriers;

•
• A customs union - non-COMESA countries attract single tariff;
•
• Free movement of capital and investment;

• Establishment of a payments union, COMESA Clearing House and common

monetary union with a common currency; and

• Common visa arrangement - free movement of people within member

states.

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 Performance indicators of Trading Blocs
Based on objectives and principles of the trading bloc, it is
apparent that they encompass ultimate ideals of a free trade
area; such as :
1)Customs union involves free trade among partners, but
also the establishment of a common external tariff with the rest
of the world.
2)common market is a customs union with free factor
mobility.
3)economic union involves the adoption of both common
external trade policies and the free movement of primary
factors of production as well as goods within the union.
4)Finally, total economic integration involves the joint
pursuit of all macroeconomic functions by all member states.
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 Impediments to Integration and Achievement
of Trading Blocs in Africa
(a)Dependence on a few primary exports
• More than any other developing region, Africa depends on primary
commodities to generate the foreign exchange needed to buy imports.

• For historical/colonial reasons, Africa's major export markets are also

identical, a fact which causes its own problems.

• Primary commodities constitute an average of 82.6% of total export

earnings for these countries, of which 59.4% are from single commodities.

• Creates BOP problems if production of the single commodities is disrupted,

any slump in world commodity prices erodes the ability of regional
economies to maintain investment in infrastructure.

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 Impediments to Integration and Achievement
of Trading Blocs in Africa
(b) Underdevelopment of human capabilities

• With a combined population of about 1 billion, African economies are

potentially rich in human resources.

• People have been relatively neglected, badly educated and in poor health,
with their capacities frequently under-used.

• The consequence is low labor productivity and lack of competitiveness,

despite very low wages.

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 Impediments to Integration and Achievement
of Trading Blocs in Africa
(c) Parochialism
•
•Failure to internalize trading blocs agreements in their national
administrations and development plans.

•In many of the member states cooperation does not go far beyond the
signing of treaties and protocols.

•Moreover, some governments do not send to meetings those officials who

have the appropriate expertise on the issues to be discussed.

•Hence no action is taken to implement the decisions or to set aside funds

for the implementation of programs adopted.

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 Impediments to Integration and Achievement
of Trading Blocs in Africa

(d) Excessive dependency Africa on the developed West

Many African nations generally still depend on the West for imports of raw
material-supplies and manufactured products, even in cases where products
of comparable quality may be available in member states.

This runs counter to the rationale for creating bigger markets to facilitate
the growth of viable production ventures.

This makes regional economies particularly vulnerable to foreign exchange

availability.

As a result, inter-sectoral and intra-sectoral linkages are bound to be weak,

because firms buy their requirements from outside the regions, rather than
from within.

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 Impediments to Integration and Achievement
of Trading Blocs in Africa

(e) Proliferation of regional groupings

• Almost half of COMESA members are also members of SADC, and some are
also members of the Eastern African Community.

•This may tend to weaken the integration process.

• It leads to costly competition (even for attention and resources); conflict;

inconsistencies in policy formulation and implementation; unnecessary
duplication of functions and efforts; fragmentation of markets and restriction
in the growth potential of the sub-region.

• E.g. SADC was formed in 1980 to reduce member countries' dependence

on the then apartheid South Africa. Since May 1994 South Africa apartheid is
officially over, throwing into serious question SADC's legal purpose, talks of
merging SADC and COMESA have not yielded any results.

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39
 Impediments to Integration and Achievement
of Trading Blocs in Africa

(f) Africa's debt burden

Africa, generally has experienced mounting external indebtedness

accompanied by very high debt service ratios which have diverted a
significant portion of export earnings from development programs to debt
servicing.

Of the 9 countries in the world whose 1996 debt is unsustainable, 5 are in

COMESA: Zambia, Mozambique, Burundi, Zaire and Sudan.

These countries do not have the capacity to service existing debt from
export earnings, capital and aid flows without undue burden on their people.

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 Impediments to Integration and Achievement
of Trading Blocs in Africa
(g) Poor Infrastructure

The transport infrastructure for intra-regional trade (including roads, rail

systems, air and some shipping) is not only inadequate, but in many cases
non-existent.

Countries like Burundi, Comoros, Lesotho, Mauritius, Rwanda and Somalia,

for instance, have no railway systems.

Individual systems may also not always be fully compatible, especially in

terms of intermodal transfer of goods.

In some cases, parts of the network (especially in war-torn states such as

Sudan, Angola, DRC, Somalia and Burundi) need urgent rehabilitation and
upgrading.

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 Impediments to Integration and Achievement
of Trading Blocs in Africa
(h) Lack of information

Most African nations are traditionally linked to former colonizing nations and,
as a consequence, there is an acute lack of awareness of what other African
countries can offer to substitute for the products currently being sourced
from the developed countries.

Lack of information is also a direct result of inadequate economic

infrastructure in the regions, especially in telecommunications and
transportation facilities, databases directly hindering interaction among
regional countries.

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Impediments to Integration and Achievement of
Trading Blocs in Africa
(j) War damage, Disease and Drought

Africa has the most distressing list of nations (of any African regional
grouping) that have effectively ceased to function as modern nation states.

Burundi, Rwanda, Mozambique, Sudan, Ethiopia, Somalia, Angola and DRC

faced enormous and expensive reconstruction problems from years of civil
wars.
• left them desperately short of skills and infrastructure that will take a
generation to rehabilitate.

They cannot, therefore, be expected to be equal and effective participants in

a regional economic grouping.

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 Regional Economic Communities (RECs) and
Poverty Reduction
• REC enables neighbouring African countries to link their small
economies to create relatively larger markets, thus allowing for
benefits from economies of scale - larger markets;

• The trade creation and diversion effects resulting from the

preferential reduction in tariffs.

• Member countries of a RIA can present themselves as a united and

credible group in international trade negotiations.

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 RECs and Poverty Reduction

• Enhances the potential for sub-regional specialization and

cooperation in a variety of economic and social spheres;

• The deepening of integration within a sub-region may minimize the

potential for hostilities between neighbouring countries - toning
down political rivalry.

• National-level reforms and other economic policies gain more

credibility if closely coordinated and harmonized within regions.
•

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 European Union (EU) Comparison

The EU is an economic and political partnership between 27 European

countries that together cover much of the continent.

The EU is based on the rule of law. This means that everything that it does
is founded on treaties, voluntarily and democratically agreed by all member
countries.

These agreements set out the EU's goals in its many areas of economic
activity mainly:

1)The single market is the EU's main economic engine, enabling most goods,
services, money and people to move freely.

2)Develop huge resource base to ensure that Europeans can collectively

draw maximum benefit.

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 EU Institutions
There are 5 main institutions involved in EU legislation:

1.The Council of the European Union, which represents the governments of

the individual member countries. The Presidency of the Council is shared by
the member states on a rotating basis.

2.The European Parliament, which represents the EU’s citizens and is directly
elected by them;

3.The European Commission, which represents the interests of the Union as

a whole.

4.The Court of Justice upholds the rule of European law.

5.The Court of Auditors checks the financing of the EU's

activities.

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 EU Institutions
Together, these institutions produce through the "Ordinary Legislative
Procedure" the policies and laws that apply throughout the EU.

In principle, the Commission proposes new laws, and the Parliament and
Council adopt them.

The Commission and the member countries then implement them, and the
Commission ensures that the laws are properly applied and implemented.

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END

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