OF FOREIGN RELATIONS AND ARAB-AFRICAN TRADE
Felix Oladeji argues the need for negotiation between Arab states and African countries for better market access
Historically, the Arab states and Africa have not had close-knit ties, despite the geographic, cultural and policy proximity between some of their subregions. Africa has not played a large role as a market for the exports of Arab states, and Arab states have only recently started to gain importance as a market for African exports. However, recent crises and related economic dynamics have highlighted the importance of economic collaboration between both regions to explore new opportunities for export growth.
Over the past decade, the high volatility of global energy and commodity prices has made it imperative for Arab states and African countries to diversify their exports. Their heavy reliance on energy and minerals exposes them to various risks, such as fluctuations in income, often limited job creation or low domestic value added, and the eventual depletion of finite resources. Africa presents a viable market for Arab states looking to diversify, as the current export profile to the continent is markedly different from that to other regions, with a lower concentration on energy. This shift in focus can help Arab states broaden their export base, reducing their vulnerability to external shocks and promoting economic stability. The African Continental Free Trade Area (AfCFTA) promises to enable this shift. With the establishment of this agreement, Africa is projected to become a unified emerging market, characterized by a growing demand.
As the continent continues to integrate its regional markets and streamline trade, it offers a unique opportunity for Arab states to expand their exports to African markets. On the other hand, while current African exports to Arab states rely heavily on minerals and metal products, Arab states offer room for diversification of African exports with promising export potential in other key sectors, for example horticulture and vegetal products. Since Arab states depend on food imports, increasing African exports to Arab states can also play a role in food security for Arab states.
The associated increase in non-mineral exports from Africa could enhance the continent’s economic growth. In this way, closer ties between both regions could be leveraged for mutual benefit. Lastly, Arab states are also looking to diversify their investments. For the growth promises of the AfCFTA to materialize, investment and financing is necessary that could be supplied by Arab investors aiming to channel their resources into sectors with potential for growth. By reinforcing their economic ties, the Arab states and Africa can seize these opportunities and diversify their export bases. In this way, both regions can reduce their reliance on a limited number of products, markets, and suppliers and enhance their resilience to external shocks.
However, frictions that hinder trade and are ultimately the cause of static (friction-based) untapped export potential can take a number of shapes and forms, from difficulties in finding buyers, to mismatches between product features and consumer tastes and insufficient information on markets and opportunities, among others. Many of these hurdles relate to non-tariff measures (NTMs), and the procedures associated with complying with them.
NTMs refer to policies, other than customs tariffs, that can have an impact on international trade—possibly affecting the price of traded products, the quantity traded, or both. Given the complex and wide-ranging nature of NTMs, it is crucial to have a comprehensive and global classification system that catalogues the various trade regulations. ITC uses an NTM Survey classification system, based on the International Classification of NTMs, with some adaptations to suit a business survey approach.
The International Classification of NTMs includes technical measures, such as sanitary or environmental protection measures, and others used as commercial policy instruments, like quotas, price controls, export restrictions, or contingent trade protective measures. It also covers behind-the-border measures, including competition, trade-related investment measures, government procurement, and distribution restrictions. The classification system does not evaluate the legitimacy, adequacy, or necessity of the measures; rather, it aims to enhance information on potential trade frictions. Evidence from the ITC Business Surveys on NTMs collected in nine Arab states and 17 countries in Africa suggests that regulatory and procedural obstacles can hinder trade between the Arab states and Africa. Over 95% of the exporting companies interviewed from Arab states reported experiencing restrictive regulations or procedural obstacles when exporting to Africa. The same is the case for almost 90% of interviewed African companies exporting to the Arab states.
More than half of the sector’s export opportunities to Africa are concentrated in the petrochemical products polyethylene and polypropylene. The results are not surprising, as the manufacturing process of these products relies heavily on natural gas, for which Arab states have a production advantage due to the abundant reserves of this resource. Identifying and addressing frictions could capture almost one-third of the unrealized export potential ($17 billion). Whereas the other two-thirds are driven by the expected growth in demand ($3 billion). The global demand for polyethylene and polypropylene products has been on the rise, driven by the growth of the electronics and automotive industries and the need for effective and lightweight plastic packaging solutions, particularly in the healthcare and food sectors.
Increasing investments in the production of petrochemicals to cater to the expected growing demand and identifying and addressing existing market frictions are crucial to tapping into export opportunities in Africa. Saudi Arabia, one of the leading exporters in the sector, has already recognized petrochemicals as a priority sector in its national development plan—the Vision 2030 strategy. This strategy aims to diversify the economy, diminish dependence on hydrocarbon revenue, and boost the production of value-added products.
Investing in research and development of the sector and discussing with sector experts more sustainable ways to produce, use, and dispose the petrochemical products would be advisable. Notably, polypropylene products are a more sustainable choice than polyethylene products due to their relatively lower carbon footprint during production and a considerably faster degradation process—which typically takes around 20 to 30 years for polypropylene and over 500 years for polyethylene products. Since petrochemicals is a capital-intensive sector, some countries of the Gulf Cooperation Council (GCC) countries have recently emphasized the need to extend the value chain to more complex petrochemical products and the manufacturing of finished products in industrial parks—to create jobs and attract private sector and foreign direct investments.
Furthermore, Arab states have a potential of $6.4 billion for the export of products of the machinery and electronic equipment sector to Africa, of which $3.2 billion remains unrealized. The United Arab Emirates, as the Arab world’s lead manufacturing exporter, absorbs almost three-quarters of the region’s unrealized export potential to Africa. Tunisia and Egypt also hold substantial potential for exporting machinery and electronic equipment to Africa (8% and 6%, respectively). The labour-intensive sector plays a vital role in job creation, as noticeable in Tunisia, where machinery and electronics production employed over 95000 people in 2018— representing almost one-fifth of all industrial jobs. In 2018 alone, the sector created over 15000 jobs and was the second largest employer after the clothes and textiles’ sector.
The sector has already been identified as an export priority in the national development plans of some Arab states such as Egypt. Egypt prioritizes developing electronics and electronic equipment, marked by the launch of the ‘Egypt Makes Electronics’ initiative in 2015, aiming to provide jobs for researchers, engineers, skilled technicians, and workers. More specifically, the initiative focuses on adding high value to the design and production of electronic circuits and systems, backed with high-tech support, and creating a labour- intensive electronics manufacturing sector. However, the industry faces several hurdles, such as material shortages and red tape—which are crucial to address in order to fully tap into the export potential. For instance, new rules imposed in early 2022 requiring importers to use letters of credit to pay for imported production goods led to a shortage of inputs.
Hence, Arab-African trade is not yet at its full potential. Over the past decade, while African exports to Arab states performed strongly with an increase of 56%, Arab exports to Africa oscillated around $49 billion at the rhythm of global trade booms and busts. At the same time, over half of the two-way trade potential remains unrealized, offering room to grow annual bilateral exports by an additional $38 billion by 2027. Unlocking these potential promises to help Arab and African countries in efforts to diversify their economies.
While more than half of the Arab states’ global exports relate to energy and mineral products, in trade with Africa these sectors only account for one third of export revenues. Moreover, Arab exports to Africa have clearly shifted away from energy and mineral sectors in recent years, a trend that was not observed in exports to the rest of the world. This trade profile makes African markets particularly appealing for Arab states, especially in times when uncertain global conditions and volatile energy prices call for the diversification of their economies and exports. The single African market that the AfCFTA promises to create could serve as a steppingstone in this endeavour. African exports to Arab states in turn are more concentrated and more resource-dominated than African exports to the rest of the world. Yet, Arab markets are growing fast and lifestyle changes offer unique opportunities for Africa’s exporters to cater to emerging needs and remain on the growth path of the past decade.
But the opportunities also cater to emerging needs brought on by trends of urbanization, changing lifestyles and rising living standards in the region. Starter batteries and electronic conductors are two examples of promising products within the machinery and electronics equipment sector that has the potential to increase Arab exports to Africa by $3.2 billion. There, they can feed into Africa’s automotive value chain, which holds an unrealized export potential in Arab states worth $882 million.
To capitalize on the opportunities identified and increase Arab-African trade, policymakers may focus on three critical actions: trade policy, trade facilitation and targeted investment.
While bilateral and regional free trade agreements exist that link Arab African countries to other Arab countries, and to the rest of Africa, there are no agreements that fully cover the trade between the Arab states and Africa. As a consequence, non-African Arab states and non-Arab African countries find themselves at a tariff disadvantage across key sectors when exporting to some markets of the region. Current export patterns reflect this: Arab exports to the ten Arab states in Africa surpass those directed to the remaining 45 African nations. Negotiating better market access for these sectors, especially in non-Arab African markets, would enable economic diversification in line with Arab states’ production advantages while meeting the African continent’s growing demand.
Oladeji writes from Lagos
