The African Continental Free Trade Area will be the world’s largest free trade area since the formation of the WTO, and has the potential to boost intra-African trade by 53% by eliminating import duties. As the agreement enters its first phase, key issues around tariffs and rules of origin need addressing, writes Sarah Rundell.
The latest quarrel between Uganda and Rwanda underscores the challenges ahead for the African Continental Free Trade Area (AfCFTA), signed into life in Kigali a year ago. Cross-border trade between the two countries has ground to a halt following tit-for-tat accusations of blocking trade flows, flamed by deeper political grievances that have simmered for years.
But the measures detailed in the 253-page agreement to remove tariffs and tackle non-tariff barriers, regulate trade in services, harmonise standards and licences and even, one day, introduce free movement of people and a single currency, could also nourish the economic growth that puts these kinds of squabbles in the past. The African Export-Import Bank (Afreximbank) predicts that the value of intra-Africa trade could jump from US$170bn to US$400bn a year if AfCFTA is successful.
As this publication goes to press, 22 countries have now ratified the agreement, the number required to bring it into law. It’s much too soon to hail its launch given the first phase of negotiations around tariff schedules and rules of origin haven’t even begun. But the long-awaited process is finally getting underway.
First up is acting on plans to liberalise 90% of trade taking place between the member states, and for countries to determine which imports they will let in tariff-free and which they will not. Countries can continue to protect 10% of their trade to shield their most important and nascent industries from competition. Of the 10%, 7% of imports will be classed as “sensitive” and carry a tariff, and 3% “excluded” entirely, remaining on full tariffs.
Countries that have ratified the agreement are poised to come back in June this year with their tariff offers, but deciding which sectors to protect and which to liberalise is likely to be a longer and more protracted process.
“It comes down to which 10% you care about,” says Olu Fasan, a visiting fellow in the international relations department of the London School of Economics. “Countries will list all the items they want to protect and say, ‘on this 10% I will not reduce tariffs’.” The 10% rule also holds another challenge to the success of the agreement: because imports are often concentrated in a narrow range of goods, it could allow countries to leave duties unchanged on most of their current imports.
Agriculture is a prime example where things may not change very much. The sector’s economic importance across Africa, where it accounts for around 30% of GDP in most countries, rising to 60% in some, is likely to be put it in the 10% bucket.
“We have requested that the agreement focus on agriculture and incentives to expand trade, but we expect agriculture will remain protected,” says Anish Jain, chief treasury officer at pan-African company Export Trading Group (ETG), which buys crops from smallholders, adds value and sells across Africa and into global markets.
The idea of tariff reduction in agricultural products actually flies in the face of government policy in Nigeria, which has pledged to replace imports with domestic production. A 2015 import substitution strategy banned rice imports to drive up local production. “AfCFTA damages this aspiration,” says Fasan.
Countries keen to protect and nurture their manufacturing sectors are also unlikely to get rid of tariffs. Concerns about its manufacturers is one reason why Nigeria hasn’t even entered the starting blocks yet, one of three countries – along with Benin and Eritrea – to not sign in Kigali. Nigeria exports energy products, but its lacklustre domestic manufacturing base, weakened by supply-side constraints like intermittent power supply and difficult access to finance, is vulnerable to cheap imports. It leaves Nigeria’s manufacturers with little to gain from free trade because they aren’t in a position to export their wares around the continent anyway.
“We see the opportunity, but Nigerian manufactures have got to be able to make products that will go to, say, Côte d’Ivoire or Ghana and displace similar products in terms of quality and price and this will be difficult,” says director general of Manufacturers Association of Nigeria, Segun Ajayi-Kadir. Costly transport routes are also a hindrance, he says. Many Nigerian exports are shipped to Europe and exported back into Africa because of the absence of direct transport routes.
Zimbabwe’s fragile manufacturing sector is similarly not in a position to sell across the continent or compete with imports. The lack of foreign exchange to finance imports has forced manufacturers to shut down production. Witness Delta Beverages, Zimbabwe’s largest drinks manufacturer, closing production lines and asking customers to buy their Coca Cola with dollars. “Local manufacturers can’t even meet domestic demand,” says Omen Muza, the local representative of TFC Capital in Zimbabwe and who also runs SoundGarden, an information services company.
The contrast between Zimbabwe, Chad and the DRC at one end of the spectrum and Africa’s fast growing, increasingly export-orientated economies with all the economic advantages like Kenya, Ghana, Côte d’Ivoire and Senegal on the other, illustrates the challenge at the heart of the agreement, says Robert Besseling, executive director of EXX Africa, a specialist intelligence company. “Some African economies have low growth and are heavily indebted; they aren’t diversified and are stuck in resource cycles. Others are some of the fastest growing economies in world with growth rates of between 6-7%,” he says.
If progress towards free trade in goods is stop-start, liberalisation in services could be a smoother ride. Zimbabwe’s stronger services sector, which includes financial services and communications, is in better shape to compete on a continent-wide level when regulation and licences are harmonised in a future phase. “Zimbabwe’s manufacturing sector isn’t ready for free trade but here is an opportunity,” says Muza. Moreover, Zimbabwe could also benefit because trade in services isn’t as advanced in many economies as trade in goods.
When countries decide what to put in their 10% protected bucket, it is more likely to be goods, predicts Fasan. “Because trade in services is not as developed as trade in goods, countries may well decide to liberalise insurance and banking services but protect, say, their auto and textile sectors.” In 2017, agriculture contributed 10.5% to Zimbabwe’s GPD, industry contributed 21.5% and the services sector contributed 56.3%.
Africa’s financial services is one sector keenly anticipating that increased trade volumes will boost demand for trade finance products and services. Banks’ appetite to finance trade is also bound to rise if the risk of stranded cargos and lost business recedes. “When barriers come down it creates more demand for lending, and this will trigger growth in trade finance,” says Kefa Muga, senior economist at the African Trade Insurance Agency (ATI).
Made in Africa
In these early stages, AfCFTA’s architects also need to resolve rules of origin. Some countries with a developed manufacturing base want tight rules of origin, worried that goods not really made in Africa will unfairly compete. Others are calling for flexibility on the rules that govern to what extent a product can say ‘Made in Africa’ if only one element is added locally. Rules of origin could be particularly problematic for goods coming out of special economic and industrial zones in countries like Mauritius and Kenya. The status of bilateral trade agreements, like Morocco’s agreement with the EU, its largest trading partner accounting for 56.5% of total imports, blur the lines further and need clarification. Rules of origin are another sticking point for Nigeria’s manufacturers, says Ajayi-Kadir, who identifies tomato paste originating in China and pharmaceutical products with French origins trading freely through the Economic Community of West African States (Ecowas) as some of the culprits. “If rules of origin are not properly defined, our market will be exposed to an influx of third-country products. The cart cannot go before the horse,” he says.
Getting through this stage will be tough. But the real work begins with implementation. Worryingly, the track record of Africa’s eight regional trading blocs in implementing free trade doesn’t bode well because liberalisation remains shallow in all the blocs apart from the East African Community (EAC). According to data from the African Union and the African Development Bank detailing the extent of regional integration, the Southern African Development Community and Ecowas have only liberalised 15% and 10% of their tariff lines respectively. Within the Ecowas bloc, the average tariff is still 5.6%. “If countries don’t do what they are meant to do, it will just be a useless piece of paper,” says Fasan.
Success also depends on co-operation between the regional economic communities and AfCFTA. The idea is that AfCFTA absorbs the trading blocs, but they may “dig in” and refuse to be taken over, says Fasan. Another challenge around implementation includes the wave of poor reporting and misreporting of economic and financial indicators by some countries. Tanzania, Mozambique and the DRC are all guilty of hiding debts and misreporting loans, says Besseling. “If you are going into a trade union with countries manipulating economic and financial indicators, it can’t bode well. A country reporting accurately won’t want to work with a country artificially inflating these statistics.”
Progress is also frustratingly slow. “As a corporate we would like the work to go a bit faster,” says ETG’s Jain. That slow pace comes against the backdrop of Africa’s free trade ambitions being steadily watered down from the original 1991 Abuja Treaty. It detailed a six-stage roadmap to full economic integration, including the establishment of a customs union, a single market and an economic and monetary union. By now Africa should have created a Continental Customs Union and be on course for a Continental Common Market in 2023, yet AfCFTA is only a free trade area. “A single market is 100% liberalisation; you can’t have carve-outs in a single market because there are no tariffs: African isn’t ready to move towards a single market,” says Fasan. The question remains whether Africa is ready to move towards a free trade agreement.