The African Continental Free Trade Area has been established; what now?

12 November 2020

INTRODUCTION

The agreement establishing the African Continental Free Trade Area (“AfCFTA”) came into force on 30 May 2019, after being ratified by 22 African countries. The operational phase commenced in July 2019. The AfCFTA was intended to start operating in terms of the agreement in July 2020, but as a result of the Covid-19 pandemic, the start is now planned for January 2021.

The inauguration of the AfCFTA headquarters in Accra, Ghana, took place in August 2020. The Ghanaian Government had decided to provide the office premises as well as the official residence for the Secretary-General. WamkeleKeabetsweMene, was elected to fill this post at the African Union Heads of State and Government meeting of February 2020. He is South African, having served as South Africa’s head of mission to the World Trade Organisation and as South Africa’s chief negotiator in the AfCFTA negotiations. According to press reports, he only emerged as the first head of the AfCFTA’s secretariat after seven rounds of voting by African heads of state and government, having defeated the Nigerian and DRC’s candidates in the final round.[1]

SUBSTANCE OF THE AFCFTA

The Agreement Establishing the African Continental Free Trade Area[2] includes amongst its general objectives, the creation of a liberalised market for goods and services and laying the foundation for the establishment of a continental customs union at a later stage. 

The specific objectives of this agreement are to boost intra-African trade in goods through the progressive elimination of tariffs and non-trade barriers, progressively liberalise the trade in services, cooperate on investment, intellectual property rights and competition policy, cooperate on trade-related issues, establish a mechanism for the settlement of disputes concerning rights and obligations and establish and maintain an institutional framework for the implementation and administration of the AfCFTA.

ECONOMIC IMPORTANCE OF THE AFCFTA AND THE CHALLENGES IT FACES

The importance of the AfCFTAhas to be assessed against the background of the current intra-African trade environment. 

What are the basic hurdles to intra-African trade? UNCTAD puts it as follows: 

“There are three major categories of obstacles to intra-African trade, namely, weak productive capacities and limited economic diversification, which constricts the range of intermediate and final goods that can be traded and potentially inhibits the fuller development of regional value chains; tariff-related trade costs, associated with the slow implementation of the tariff liberalization schedules underpinning free trade agreements; and high non-tariff-related trade costs that hamper the competitiveness of firms and economies in Africa. Such high trade costs, related to business and trade facilitation, can be explained in terms of the hard and soft infrastructure deficits in Africa that have an impact on transport and transit costs and at-the-border and behind-the-border costs.”[3]

The UNCTAD report stresses the importance of the rules of origin[4] which are to be implemented by the AfCFTA. The rules of origin will directly affect the size and distribution of economic benefits among member countries and, ultimately, the political will of members to advance regional integration to create an African economic community. UNCTAD’s position is that the degree of complexity and restrictiveness in rules of origin should consider the levels of product diversification, sophistication and competitiveness in member countries; too restrictive and complex rules of origin at low levels of regional productive capacities can provide incentives to member countries to trade outside the African Continental Free Trade Area rather than within.

The World Bank’s detailed analysis of the AfCFTA, makes the following points:[5]

The African Continental Free Trade Area (AfCFTA) agreement will create the largest free trade area in the world measured by the number of countries participating. The pact connects 1.3 billion people across 55 countries with a combined gross domestic product (GDP) valued at USD3.4 trillion. It has the potential to lift 30 million people out of extreme poverty, but achieving its full potential will depend on putting in place significant policy reforms and trade facilitation measures.

Real income gains from full implementation of AfCFTA could increase by 7 percent by 2035, or nearly USD 450 billion (in 2014 prices and market exchange rates). However, the aggregate numbers mask the heterogeneity of impacts across countries and sectors. At the very high end are Côte d’Ivoire and Zimbabwe with income gains of 14 percent each. At the low end, a few countries would see real income gains of around 2 percent—including Madagascar, Malawi, and Mozambique.

AfCFTA offers big opportunities for development in Africa, but implementation will be a significant challenge. Lowering and eliminating tariffs will be the relatively easy part, even if it comes, in some cases, with the challenge of how to replace tariff revenues. The hard part will be enacting the non-tariff and trade facilitation measures, which is where the largest potential economic gains are predicted. Such measures will require substantial policy reforms at the national level, indicating a long road ahead. Achieving AfCFTA’s full potential depends on agreeing to ambitious liberalization and implementing it in full. Partial reforms would lead to smaller effects.

Although deeper regional integration is one of the key trade policy objectives for countries in Africa, a large part of intra-Africa trade currently goes unrecorded. Cross-border transactions often take place on a small scale, and such consignments are not captured by the standard statistical recording of trade through customs declarations. Because the number of small shipments can be very large, the total unrecorded volume and value of trade can be substantial. Official trade statistics are incomplete and possibly misleading.

Amongst the challenges identified by AfCFTA’s newly appointed Secretary-General, in his inaugural speech of 17 August 2020, are the following:[6]

over reliance on the export of primary commodities to traditional markets;

narrow export bases, caused by shallow manufacturing capacity;

a lack of export specialisation;

under-developed industrial regional value chains; and

high regulatory and tariff barriers to intra-Africa trade.

He also referred to the very low percentage of intra-Africa trade of 18%. (This contrasts with intraregional trade in Europe and Asia of over 50%).

In his words:

“Africa continues to be trapped in a colonial economic model, which requires that we aggressively implement the AfCFTA as one of the tools for effecting a fundamental structural transformation of Africa’s economy. We have to take action now, to dismantle this colonial economic model.”

Other analyses point to the fact that African businesses face higher tariffs when they export within Africa that when they export outside it.[7]

An IMF analysis[8] refers to the one of the main challenges as that of reducing Africa’s large infrastructure deficit in roads and ports. It states that with relatively low road density, African countries need to extend their road network and upgrade existing roads to improve access to African and global markets. It points out that this effort could be particularly important for reducing trade costs in landlocked countries. Improving ports and their efficiency would also help reduce trade costs.

The IMF analysis also makes the following points:

Port development should be part of a coordinated African transportation strategy to ensure efficient use of resources and reduce costs and time at customs. At the same time, regulatory frameworks and institutional capacity should be strengthened to attract private sector participation in the construction, operation, and maintenance of transportation infrastructure. Improving trade facilitation is another priority area for reform.

Addressing onerous customs procedures and boosting efficiency could reduce costs and facilitate trade. This will require pressing forward with modernization processes, intensifying training, and implementing quality-based management.

African countries need to reduce the high costs of trading within the continent. The highest costs stem from non-tariff barriers, which must be substantially and strategically reduced. Among those that ought to be tackled first are inefficient customs and entry requirement procedures and technical barriers to trade. The reduction in the infrastructure deficit and the improvement of the low quality of trade logistics are also crucial to deepening continental free trade and integration.

CONCLUSION

The establishment of the AfCFTA is to be welcomed, as it addresses a very important issue which hampers intra-African trade: the lack of co-ordination of tariffs and official trade policy measures. However, putting in place a workable tariff system and deciding on sensible rules of origin are on their own, not going to solve the problem by themselves. The way in which analyses of the AfCFTA are worded tend to obscure the magnitude of the task, and often do not directly address one of the major problems which hinder intra-African trade: non-tariff aspects, especially those of transport infrastructure (especially roads and ports) and the general make-up of the economies (which continue to concentrate on raw material exports).

In considering the transport infrastructure issue from a continental perspective, it is clear that it requires a massive concerted effort by governments and the private sector. The significant financing required for such action is a huge challenge on its own, not to speak of the time and effort required to put in place an improved infrastructure. At the same time, one should not lose sight of the continuing African focus on raw material exports. Such exports, by their nature, often have little use in other African countries and unless the focus shifts at some stage to the production of products of increasing complexity and diversity which could have a market within the continent, the current situation will not change substantially. 

The rules of origin, sensibly defined, could encourage an intra-African market for goods of increasing complexity or beneficiation. But in the end, we need to be realistic: the AfCFTA is not a quick fix and it will take many years (or decades) of concerted efforts in several different spheres to see an appreciable rise in intra-African trade.

By Anton van Dalsen, Legal Counsellor, HSF, 12 November 2020,

[1] https://www.africannewspage.net/2020/02/wamkele-mene-the-young-south-african-diplomat-to-drive-afcftas-implementation/

[2] For a text of the full agreement, see: https://au.int/sites/default/files/treaties/36437-treaty-consolidated_text_on_cfta_-_en.pdf

[3] Economic Development in Africa, 2019, UNCTAD https://unctad.org/en/PublicationsLibrary/aldcafrica2019_en.pdf

[4] Rules of origin are the rules for determining the country of origin of goods. According to UNCTAD, “rules of origin are like a passport for a product to enter a free trade area and circulate without being imposed a duty”. UNCTAD, Economic Development in Africa.

[5] The African Continental Free Trade Area – Economic and Distributional Effects – World Bank Group, 2020, p.11. (https://openknowledge.worldbank.org/bitstream/handle/10986/34139/9781464815591.pdf) This publication provides a detailed analysis of the potential economic benefits that would flow from a comprehensive implementation of the AfCFTA.

[6] https://au.int/en/pressreleases/20200817/secretary-general-statement-handover-ceremony-afcfta-buildings

[7] https://au.int/sites/default/files/documents/36085-doc-qa_cfta_en_rev15march.pdf

[8] The African Continental Free Trade Area: Potential Economic Impact and Challenges, IMF Staff Discussion Note, May 2020, page 10 (https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2020/05/13/The-African-Continental-Free-Trade-Area-Potential-Economic-Impact-and-Challenges-46235)