By: Richmond Kwame FRIMPONG
Gone are the days when trade efficiency and stability could be maintained through deeply integrated bilateral relationships or regional partnerships.
In the face of supply chain disruptions, fluctuating economic conditions, and the fragmentation of global markets, diversifying trade partners is not merely an option but a necessity.
Concentrated trade partnerships, where countries rely heavily on one or a few trading partners for the bulk of their imports and exports, were once viewed as a model of efficiency.
Countries could capitalize on comparative advantages, achieving lower production costs and optimizing supply chains. However, this model exposes economies to significant risks, as reliance on a limited number of partners can quickly become a liability in times of crisis.
Consider the case of many African countries that have traditionally relied heavily on China for imports and exports. As of 2024, China was Africa’s largest trading partner, accounting for over 16.4% of Africa’s total trade volume.
The China-Africa trade relationship, which hit a record above $254 billion in 2023, has been beneficial in many ways, bringing infrastructure investments, technology, and a steady market for African raw materials.
The case of the covid era with China locking down its economy and experiencing supply chain disruptions, African countries experienced shortages in key imports, including medical supplies, electronics, and machinery. Exports of African commodities also slowed, affecting revenue streams critical for national budgets.
The crisis revealed a broader truth: economies dependent on limited trade partners are more susceptible to external shocks. Whether due to natural disasters, political instability, or economic downturns in the partner country, concentrated trade relationships leave economies without alternatives when their primary partner is unable to meet their trade needs.
Post covid, America’s AGOA program which provided eligible sub-Saharan African countries with duty-free access to the U.S. market for over 1,800 products, in addition to the more than 5,000 products that are eligible for duty-free access under the Generalized System of Preferences program is now being threatened with the emerging Tariff wars.
Geopolitical Tensions
The rise in global protectionism, as seen in the U.S.-China trade war, and now US-Global tariffs on all imports will disrupt global supply chains and introduced uncertainty into global markets.
Tariffs and retaliatory measures between two of the world’s largest economies have left smaller economies caught in the crossfire. Countries that heavily rely on China or the U.S. for trade have faced rising costs, fluctuating currency values, and unpredictable market conditions.
For example, the European Union (EU) and Africa have seen shifts in trade patterns as they navigate the impacts of U.S. protectionism and China’s strategic dominance. Africa, in particular, is seeking to diversify away from its reliance on both Western markets and China, exploring new partnerships with India, the Middle East, and intra-African trade opportunities.
The Africa Continental Free Trade Agreement (AfCFTA) — a landmark trade agreement that came into effect in January 2021 — is one such initiative aimed at reducing dependency on external markets by fostering trade within the continent.
If successfully implemented, the AfCFTA could increase intra-African trade by 52% by 2025, according to the United Nations Economic Commission for Africa (UNECA) and offer African economies a buffer against external shocks.
The ongoing war in Ukraine offers another stark example of how geopolitical tensions can upend trade relationships. Ukraine, once a major exporter of wheat, corn, and sunflower oil, has been unable to meet global demand since the Russian invasion, resulting in food shortages and price spikes across the globe.
African countries, many of which rely on imports of Ukrainian and Russian wheat, have felt the brunt of this disruption.
The World Food Programme (WFP) reported in 2023 that food insecurity in Africa had worsened due to the sharp increase in food prices. As geopolitical tensions continue to strain global trade networks, the importance of having diversified trade partners cannot be overstated.
The Role of Climate Change in Disrupting Global Trade
Climate change has become a pivotal factor in global trade disruptions, particularly in industries heavily dependent on natural resources.
Extreme weather events, rising temperatures, and shifting precipitation patterns are impacting agricultural productivity, fisheries, and water availability. These changes not only threaten food security but also disrupt supply chains for raw materials and commodities.
A poignant example is the case of coffee production in East Africa. Countries like Ethiopia, Uganda, and Kenya have long been global leaders in coffee exports.
However, rising temperatures and changing rainfall patterns are threatening coffee yields, with some studies suggesting that up to 60% of Africa’s coffee-growing areas could become unsuitable for cultivation by the end of the century.
Countries that rely on a limited set of trade partners for coffee exports are particularly vulnerable to the economic fallout of reduced agricultural output, as they may struggle to find alternative markets or products to offset these losses.
Similarly, supply chain disruptions due to climate-related disasters — such as floods, hurricanes, and droughts — have become more frequent, highlighting the vulnerability of concentrated trade relationships.
The World Bank estimates that climate-related disasters have cost the global economy more than $2.5 trillion in the last two decades alone. Businesses and governments that do not diversify their trade relationships risk facing severe economic consequences when their primary partners are hit by climate-induced disruptions.
Diversifying trade partners can mitigate these risks by enabling countries and businesses to pivot to alternative markets or suppliers when climate disruptions occur.
For example, countries that have diversified their food import sources, such as those in Southeast Asia, have been better able to withstand the impact of climate change on agricultural productivity.
By contrast, countries with concentrated trade relationships often face shortages, price spikes, and economic instability when their main trade partners are affected by climate events.
The Economics of Diversification
While diversifying trade partners is essential for reducing risk, it also requires significant investment and strategic planning.
Building new trade relationships involves navigating trade agreements, adjusting supply chains, and potentially absorbing higher costs in the short term. However, the long-term benefits of diversification far outweigh these initial expenses, particularly in an increasingly volatile global economy.
A 2023 study by the International Monetary Fund (IMF) highlights the economic benefits of trade diversification. The study found that countries with diversified trade portfolios tend to experience higher and more stable growth rates, as well as greater resilience to external shocks.
The report also noted that economies with a wider range of trade partners were better able to recover from the COVID-19 pandemic and other global disruptions, as they were less reliant on any single market or sector.
The success of South Korea’s trade strategy provides a powerful example of the benefits of diversification. South Korea, once heavily dependent on the U.S. for trade, has systematically diversified its trade relationships over the past few decades.
Today, South Korea has robust trade partnerships with countries across Asia, Europe, and North America. This diversification has enabled South Korea to weather global disruptions, such as the 2008 financial crisis and the U.S.-China trade war, more effectively than many other economies.
For African countries, trade diversification presents a path to sustainable economic growth. By expanding trade partnerships with other emerging markets, such as India, Brazil, and Southeast Asian nations, African economies can reduce their reliance on traditional trade partners and tap into new markets for their goods and services.
Additionally, increased intra-African trade under the AfCFTA offers opportunities for diversification within the continent, creating a more resilient and interconnected African economy.
The Role of Technology in Facilitating Trade Diversification
Technology plays a crucial role in facilitating trade diversification by reducing barriers to entry and enabling faster, more efficient trade.
In Ghana, the Dawa Industrial Zone exemplifies how industrial parks can leverage technology to facilitate trade diversification by providing businesses with the necessary infrastructure and support to access new markets.
Digital platforms, e-commerce, and advanced logistics systems allow businesses to access new markets with greater ease than ever before.
For African businesses, technology offers a way to connect with buyers and suppliers in regions previously out of reach, creating opportunities for trade diversification beyond traditional partners.
One notable example is the rise of e-commerce in Africa, which has created new avenues for trade with markets in Europe, Asia, and the Americas.
Platforms like Jumia and Alibaba have enabled African businesses to sell products directly to consumers around the world, bypassing traditional trade channels and expanding their customer base.
This has been particularly important during the COVID-19 pandemic, as digital trade has helped African businesses maintain revenue streams despite disruptions to physical trade.
Moreover, technology is transforming industries such as agriculture, manufacturing, and services, making it easier for African countries to diversify their export portfolios.
For example, the use of precision agriculture technologies in countries like Kenya and South Africa is helping farmers increase productivity and adapt to climate change, enabling them to export to a wider range of markets.
Similarly, advancements in manufacturing technology are enabling African businesses to produce goods that meet the standards of global markets, opening up new trade opportunities in industries such as textiles, automotive components, and pharmaceuticals.
The Strategic Imperative for Policymakers
For policymakers, the challenge is to create an enabling environment that supports trade diversification. This requires a combination of trade policies, infrastructure investments, and capacity-building initiatives that empower businesses to explore new markets and forge new trade relationships.
Trade agreements, such as those being negotiated under the AfCFTA, are essential for creating the legal and regulatory frameworks that facilitate diversified trade.
In addition to trade agreements, policymakers must invest in infrastructure that supports trade diversification. This includes physical infrastructure, such as ports, roads, and telecommunications networks, as well as digital infrastructure, such as broadband connectivity and e-commerce platforms.
Without these investments, businesses will struggle to reach new markets and take advantage of the opportunities that trade diversification presents.
Capacity-building initiatives are also critical for helping businesses adapt to the demands of new markets. Governments and trade organizations must provide training and resources to help businesses understand the regulations, standards, and market dynamics of potential trade partners.
By equipping businesses with the knowledge and tools they need to succeed in new markets, policymakers can accelerate the process of trade diversification and ensure that it delivers long-term benefits for the economy.
Conclusion
Countries that previously depended on a few key partners now face heightened risks due to supply chain disruptions, geopolitical tensions, and the impacts of climate change.
Examples from Africa underscore the dangers of concentrated trade relationships, as reliance on singular markets can lead to significant economic vulnerabilities during crises. Embracing trade diversification not only mitigates these risks but also opens up pathways for sustainable economic growth, resilience, and innovation.
Policymakers can enable businesses to enter new markets by utilizing technology, supporting intraregional agreements such as the AfCFTA, and investing in infrastructure. This will increase economic stability and promote a more interconnected global trade environment.
The writer is an award-winning “growth and turnaround” business leader with nearly two decades of multi-industry expertise across Europe, the Middle East and Africa. Specialized in Upstream financial Advisory, International Trade & Development, Economic Integration & Digitalization, Industrial Ecosystems & Special Economic Zones.
