New foreign and trade agreements to strengthen Algeria's regional and international relations

Algeria has long had complicated foreign relations, having tense ties with neighbouring Morocco, which has held back regional integration, while at the same time having strong trade relations with the EU, with which it signed a free trade accord in 2002. However, its international profile is in the midst of a gradual shift, as it seeks to reduce industrial imports from traditional trading partners, such as the EU, and develop stronger trade, investment and strategic alliances with sub-Saharan Africa and China.

North Africa 

Algeria is an active member of the Arab League and is also part of both the Arab Free Trade Zone and the Arab Maghreb Union (AMU). Despite this, Algerian trade relations with its immediate neighbours have historically been weak. This is in part a result of long-running tensions with Morocco over multiple issues, including border disputes that led to a brief war between the two countries in 1963; Morocco’s annexation of the Western Sahara in 1976, which Algeria opposes; and Algeria’s consequent position as the main backer of the Sahrawi independence movement in the region, the Polisario Front. The latest eruption of tensions came in late October 2017, when Morocco recalled its ambassador after Algeria’s minister of foreign affairs, Abdelkader Messahel, claimed that Moroccan banks laundered money from the cannabis trade and appeared to suggest that Morocco’s national carrier Royal Air Maroc also trafficked cannabis.

In effect, persistent diplomatic tensions have prevented the implementation of the AMU, which foresees a free trade zone in the region. As a result, regional trade levels are low, and Algerian exports to other Maghreb countries were worth just 4.5% of total exports in 2015, though this is up substantially on levels seen a decade ago, as the figure stood at just 0.9% in 2005. Tunisia represents the country’s main export destination in the region, at 2.4% of total exports in 2015, followed by Morocco at 1.8%.

Sub-Saharan Africa

Economic relations with sub-Saharan Africa are currently limited, with only 0.2% of Algeria’s exports going to the region in 2015, unchanged on the previous year. Meanwhile, 0.7% of imports hailed from sub-Saharan countries, down from 0.8% a year earlier and 1.5% in 2012. The largest export market in sub-Saharan Africa for Algeria was Senegal, with AD853.4m (€7.1m) worth of exports. The figure was up from the insignificant levels seen the previous year, when Sudan was the country’s main sub-Saharan export destination.

Generally, trade flows to the region are highly erratic from year to year. However, the authorities are keen to foster more stable economic ties with sub-Saharan neighbours, viewing them as promising potential markets for various sectors, particularly agriculture and manufacturing. Improvements in infrastructure connections are likely to help with this, for example the Trans-Saharan Highway that connects Algiers to Lagos in Nigeria via Mali and Niger is due to enter into service in 2018, following the completion of a final 220-km stretch in Niger.

Alexandre Kateb, founder of consultancy firm Competence Finances, said that further reforms would be needed to boost Algeria’s engagement in Africa. “Some current banking and finance regulations make it difficult for Algerian firms to take capital out of the country in order to establish activities abroad,” Kateb told OBG. “There is also a lack of Algerian financial institutions in these countries that could support Algerian firms, the way Moroccan banks do for Moroccan companies, though Algeria will get there in the end,” he added.

Ali Boumediene, CEO of Algerian electronic goods producer Bomare, said that despite efforts to increase trade, transport and logistics issues continue to pose significant obstacles. “To ship to Africa you generally have to go via Europe, which adds to the time and cost. Furthermore, in Africa, price-conscious customers generally want a low-cost product and tend to immediately look to China for that, rather than considering other suppliers, such as Algerian firms,” Boumediene added.

Europe 

The EU is Algeria’s main trading partner, accounting for 54.1% of the value of total Algerian foreign trade in 2016, representing 44.2% of Algerian imports and 67% of its exports, according to European Commission statistics. Algeria is an important energy partner for the bloc, ranking as its third-largest foreign provider of energy, which together with mining products accounted for 94% of EU imports from the country. However, it is worth noting that Algerian mining exports are small, so the overwhelming bulk of this was oil and gas.

The 2002 Association Agreement signed between Algeria and the EU came into effect in 2005, providing for the establishment of free trade of industrial goods within 12 years, meaning that in theory the zone should now be fully in effect. In practice, however, this is not yet the case. In fact, recent years have seen Algeria seeking to restrict industrial imports to help develop its own manufacturing base and reduce its trade and current account deficits, as these are increasingly placing pressure on foreign currency reserves. The country has taken both formal and informal measures to do so, including the introduction of import licences for various categories of imported goods, additionally setting import quotas for some of these products.

The EU views some of these moves as imposing new trade barriers, which arguably counters the Association Agreement. Algeria is indeed entitled to make use of a balance-of-payments derogation clause under the agreement to suspend some of its provisions, though the EU has argued that it has not formerly invoked this so far. While this has been viewed with irritation in some EU capitals, Algeria is also important to the bloc in a number of domains, such as counter-terrorism, migration control and energy security. As a result, the bloc does not appear interested in entering into a dispute or undertaking retaliatory measures over the issue for the time being. From Algeria’s side, press reports in recent years have suggested that the government wants to suspend or renegotiate the agreement, but it has not yet made any formal request to the EU to do so.

In other areas, the two parties have been making efforts to cement ties. In 2016 they conducted a joint evaluation of the Association Agreement, which resulted in the decision to conduct a series of follow-up actions, centrally aimed at providing Algeria with the technical expertise needed to pursue a variety of economic reforms. In addition, a new Partnership Priorities agreement was signed in March 2017, which is intended to establish a renewed framework for cooperation over the period to 2020. However, unlike neighbouring Morocco and Tunisia, which have both started negotiations with the EU on the creation of Deep and Comprehensive Trade Agreements, Algeria is not expected to move towards a substantially closer economic relationship with the bloc than that set out in the existing Association Agreement for the foreseeable future.

China

An increasingly important economic and strategic partner is China. The country was Algeria’s second-largest trade partner in 2016, behind the EU, accounting for 10.2% of total foreign trade. China represented 15.8% of Algerian imports, ranking it the second-largest import partner behind the EU as a whole, and received 0.9% of Algeria’s exports, ranking it 10th, according to European Commission figures. When such trade flows are broken down into figures for individual countries, rather than treating the EU as a single bloc, China is the largest exporter to Algeria, according to 2015 data from the National Statistics Office, accounting for 16% of the total, coming ahead of France in second place at 10.5%. Chinese companies have also played a fundamental role in the financing and construction of multiple infrastructure projects in recent years, leading to the development of a sizeable community of Chinese residents in the country. Key Chinese-backed projects currently under way include the new $3.3bn deepwater port at El Hamdania, near the town of Cherchell, to the west of Algiers.

“What is important is to encourage Chinese companies to invest more in the country, especially in industrial segments, such as textiles and automobiles, where they could have a real impact on development,” Kateb told OBG. Arguably, the government could work to encourage such investments through multifaceted initiatives, such as the creation of free zones in partnership with Chinese firms. “If Algeria can create a fully functioning ecosystem in areas such as electronics manufacturing, we may see Chinese firms implant themselves in the country, as they can export from here to Europe and Africa,” Boumediene told OBG, adding that this would benefit the country by providing for technology transfer.