The Role of Trade Policies in Building Regional Value Chains – Some Preliminary Evidence From Africa

• DOI: http://doi.org/10.1111/saje.12214
• Author: Anja Slany
• Published date: 01 September 2019
• Date: 01 September 2019

© 2019 Economic Society of Sout h Africa.

South African Journal of Economics Vol. 87:3 September 2019

doi : 10.1111/ saje .12214

326

THE ROLE OF TRADE POLICIES IN BUILDING REGIONAL

VALUE CHAINS – SOME PRELIMINARY EVIDENCE

FROM AFRICA

ANJA SLANY*

Abstract

Regional value chains (RVCs) are considered as an important step towards greater integration into

global value chains (GVCs), but African countries trade very little value added with each other.

Based on the UNCTAD-Eora GVC database this paper estimates a panel model from 2006 to

2012 for 37 African countries and sheds light on the role of trade costs in building RVCs in Africa.

First evidence is provided for a significantly negative effect on foreign value added of charged

tariffs on capital goods and higher time to trade. In addition, higher regulatory quality and a

stronger telecommunication infrastructure seem to be positively correlated with a country’s ability

to participate in RVCs.

JEL Classification: F13, F14, F15, C23

Keywords: Global val ue chains, regional production networks , panel data, tariff barriers

1. INTRODUCTION

With the agreement on the African Continental Free Trade Area (CFTA), signed in

Kigali in March 2018, regional integration in Africa has received a big impulse and new

attention. The member states agreed on liberalizing 90% of tariffs, but the countries a re

still expected to ratify. If effectively implemented, regional economic and political rela-

tions can boost intra-regional trade which could further trigger productivity increases

through spillovers and realization of economies of scale.1 The literature on the effects of

regional integration on bilateral trade withi n Africa vary from a skeptical view (e.g. Yang

and Gupta, 2005; Longo and Sekkat, 2004; Kirkpatrick and Watanabe, 2005) to a

rather optimistic view (e.g. Korinek and Melatos, 2009; Amurgo-Pacheco and Pierola,

2008; Musila, 2005; Carrère, 2004; Cernat, 2001; Iwanow and Kirkpatrick, 2009;

Portugal-Perez and Wilson, 2012), but the positive estimates dominate. In light of the

existence of international value chains intra-regionally applied tariffs may, however, be

even more restrictive to trade because goods have to cross borders several times. Trade in

parts and components also leads to a bias in international trade statistics which is called

1 The effect of regional integration on economic growth has already been empirically investi-

gated for developed countries a nd developing countries (e.g. Baldwin and Venables, 1995; Dion,

2004; Venables, 2003) and for Africa by Jones (2002), Hammouda et al. (2007) and Meyn and

te Velde (2008), but the evidence remains disputed.

* Corresponding author: Ru hr-Universität Bochum, Chair of Internationa l Economics,

Universitätstraße 150, 44801 Bochum, Germany. E-mail: a nja.slany@ru b.de

South African Journal

of Economics

327South African Journal of Economics Vol. 87:3 September 2019

© 2019 Economic Society of Sout h Africa.

“double counting” (Johnson and Noguera, 2012). There is a lack of research on the im-

pact of regional trade liberali zation on trade under consideration of trade in value added.

The study at hand attempts to close this gap in the literature.

In light of global fragmentation, small countries have an incentive to integrate re-

gionally in order to attract investments (Ethier, 1998). To date, Africa is integrated into

global value chains (GVCs) mainly through the export of primary commodities and is

largely excluded from high-standard value chains. Regional value chains (RVCs) play

a vital role in boosting manufacturing production given the fact that regional trade is

dominated by trade in manufactured goods compared to a dominance of global exports

of primary products with much lower benefits for employment and economic develop-

ment (UNCTAD, 2013b; Keane, 2016; ECA, 2015; Petersson, 2003). The smaller ben-

efits from global exports of primary goods is also due to consumer-driven food supply

chains and multinational firms which control global value chains and set high product

standards. From this perspective it is easier to coordinate regional value chains and de-

velop production capacity before integrating into GVCs. Domestic firms may have more

opportunities to brand and launch their products in regional markets either because of

better understanding of local markets or because domestic customers are less power-

ful than customers in industrialized countries (Keane, 2016). Moreover, the example

of Southern and Eastern Africa shows that regionally integrated regions are also more

attractive to multinational companies (ECA, 2015). However, African countries trade

very little value added with each ot her. The share of intra-African trade i n value added is

low at 9%, compared to 45% in Asia and 18% in Latin America.

Until recently, due to the limitation of data it was not possible to identify causal link-

ages and the effectiveness of regional integration in boosting trade in value added. Recent

initiatives by international organizations made it possible to quantify value chains. The

UNC TAD Eora2 database is the first database that includes estimated multi-regional in-

put-output tables of developing countries. Despite the recognition that RVCs can be an

important step towards greater integration in GVCs (Baldwi n, 2006), a very limited num-

ber of studies specifica lly looks at RVCs. Indeed, the empirical literature that aims to

quantify the determinants of value chains within Africa is exclusively about participation

in GVCs (Kowalski et al., 2015; IMF, 2016; Del Prete et al., 2016a; Del Prete et al., 2 016b).

To the best of my knowledge there is no study that empirically explores determinants of

RVCs in Africa. The study at hand closes this gap in the literature and provides prelimi-

nary evidence on determina nts of regional value chains i n Africa. International input-out-

put tables, obtained from the UNCTAD Eora GVC database, are used to quantify trade

in value added between African countries and to evaluate the foreign value added (FVA)

content in regional exports, a commonly used proxy for value chain integration.

A panel of 37 African countries from 2006 to 2012 is estimated using a fixed effects

(FE) estimator, controlling for auto-correlation and cross-sectional correlation among

standard errors. The results suggest that trade barriers are significant determinants

of a country’s ability to join and upgrade within RVCs. Among different tarif f rates,

the charged tariff on capital goods is most restrictive to imported FVA. The proxies

for non-tariff barriers (NTBs) also indicate a negative effect on RVC participation. In

2 Environmental Accounting Framework Using Externality Data and Input-Output Tools for

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