After much anticipation, the African Continental Free Trade Area (AfCFTA) came into effect on January 1, eliminating tariffs on 90% of goods produced on the continent. But for the agreement to be successful, countries must address more nuanced non-tariff barriers and build regional value chains.
Having been pushed back six months from its initial implementation date, trading under the AfCFTA has commenced. All African Union members but one, Eritrea, have signed the deal, and 34 out of 54 signatories have ratified the agreement.
“Africa is now trading under new rules, new preferences, because we want to build a single, integrated market on the African continent,” Wamkele Mene, secretary general of the AfCFTA, told a press conference on January 12.
“And I know that in some parts of the world, we get criticism. We are criticised, we are told that we are rushing things, that we’re actually not quite ready. But I want to ask those who hold that view, tell me of a trade agreement where all countries were ready at the same time? I don’t know it.”
Mene stated that he is working with banks in Africa to launch a US$1bn trade finance facility, primarily for SMEs. He is also collaborating with the African Export-Import Bank (Afreximbank) on a pan-African payments and settlement platform, for which the bank will provide US$500mn.
If successfully implemented, the AfCFTA could boost regional income by 7% or US$450bn by 2035, according to the World Bank.
Corporates in Africa are optimistic about the trade pact. “The fruit industry is hoping that this will create a regional boost. East and West Africa are strong markets, and free access to those will be attractive to South African producers,” Antonella Da Cunha, group risk manager at Capespan, a South Africa-based fruit exporter, tells GTR.
“These agreements are mutually beneficial as importers have, over the years, struggled to import due to duties and costs created by their governments.”
Bankers are also welcoming the agreement because it will make issuing finance simpler. Bohani Hlungwane, regional head of trade and working capital at Absa, tells GTR: “What is critical, and this is one of the most important issues around the free trade area, is that because we are now talking about the creation of similar standards, banks and financiers will find it easier to conduct due diligence around trades, making it more straightforward for them to offer finance.”
“Nuanced” non-tariff barriers
In order for the ambitions of the AfCFTA to be realised, African markets must address non-tariff barriers (NTBs) such as import restrictions and quotas that make trade more difficult and costly.
An online tool, tradebarriers.africa, launched by the United Nations Conference on Trade and Development (UNCTAD) and the African Union in January 2020 to support the AfCFTA aims to track and settle NTBs by allowing complaints to be submitted by users. For example, in December, a complaint was logged by a glass manufacturer accusing Kenyan authorities of having “denied importation of glass products from Tanzania Company Kioo limited”.
While the AfCFTA does tackle NTBs in its goods trade protocol available on tradebarriers.africa, research published this month by Fitch Ratings suggests that the removal of NTBs under the AfCFTA is likely to lag behind the agreement’s ambitions, potentially blunting its effect.
“The impact of the East African Community customs union, for example, has been limited by a lack of integration and removal of non-tariff barriers, despite its 15-year history,” reads the report.
Carl Chirwa, head of international banking at Bank One, tells GTR that NTBs are “more hidden and more nuanced. To break those will take a lot of political will because you can reduce tariffs on everything, but when you get to a border, there may still be a lot of admin and documentation to do, which increases cost”.
Some African governments may be reluctant to fully support the AfCFTA and liberalise trade with particular countries if that requires politically unpopular decisions or impacts the domestic market for certain goods.
Chirwa says that there is still not yet full co-operation and trust between countries; he gives the example of rivalry between Kenya and Tanzania. “Tanzania does not want to import goods from Kenya because people believe that once it does, the local market will be overrun by Kenyan products. A similar thing is happening in Nigeria, where it has essentially banned rice imports from neighbouring countries.”
Another country that may struggle with embracing trade liberalisation is South Africa. He points to a local political culture that can be unaccepting of other Africans that come to the country for work.
Much of African trade involves exporting raw commodities outside of the continent, and then importing the finished products. It has long been said that to create an internal market for African products, African markets must begin to manufacture value-added goods and deepen their regional value chains.
“What will have to happen before we see any real inter-African trade is specialisation and value addition locally. Industries will have to pivot from exporting agri-processed or semi-finished goods into actual value-added products, which can be traded across borders,” says Chirwa.
He explains that each country will have to find its own niche in terms of what it is good at. Ethiopia could specialise in leather and Egypt could focus on cotton, while the southern African countries, says Chirwa, have a great opportunity in terms of food production, “if they can get it right.”
To be able to manufacture higher value goods in Africa, investment in low-cost, reliable power is essential. According to the World Bank, less than half of Sub-Saharan Africa has access to electricity.
Absa’s Hlungwane says: “After power, investment will be made in intra-regional transport infrastructure in the form of rail and roads. One of the key dependencies for the free trade area’s success is ensuring that road and rail infrastructure is adequate. There also needs to be continued investment in the ICT sector.”
Upgrading logistics infrastructure is “vital” to lowering transport costs, says Chirwa. To ship a container from China to Beira, Mozambique costs approximately US$2,000, and to transport that same container from Beira to Malawi, which is 500 kilometres inland, costs US$5,000, he explains.
“Freeing up airspace and allowing open skies are also really, really key challenges. It can be difficult to fly between capitals sometimes; if I fly to Côte d’Ivoire from Mauritius, I have to go via Dubai, for example. Businesspeople only do business with people that they know and trust, so to build this they need to be able to visit each other.”
While the free trade area requires the elimination of NTBs and an increase in investment to be successful, both Chirwa and Hlungwane say that it will take five to 10 years for any real growth to be made under the AfCFTA.