From Friday last week, the beginning of 2021, African governments were under a formal agreement to establish tariff-free trade among themselves and reduce trade barriers. The African Continental Free Trade Area (AfCFTA) agreement comes with commitments and plans and could give a spark to African growth and development. The aim of AfCFTA is the creation of single market for goods and services and the movement of persons as well as laying the foundation for a Continental Customs Union.
While the agreement has come into effect, it does not mean that African free trade has begun. Negotiations are still underway on the progressive elimination of 90 percent of tariff lines from intra-African trade as well as non-tariff barriers. Once that negotiation round is done, the poorest countries will have ten years in which to drop the required number of tariff lines, and the other African countries five years in which to do so.
Rules of origin
Rules of origin to prevent goods from outside the continent from gaining free access are also being discussed. One fear has been that China, as well as other countries, might take immense advantage of the new free trade area, without the proper enforcement of rules of origin. Many African countries do not currently have customs agencies that are able to enforce rules of origin, which means overall improved trade management will have to be a big part of any progress on a free trade area.
The sheer geographic scale and a population of 1.2 billion of the proposed African free trade area, as well as the enormous gains for growth from the deal, has attracted great attention. According to the World Bank, if implementation takes place, the agreement has the potential to lift 30 million out of extreme poverty and 68 million from moderate poverty by 2035, when the accord is supposed to be fully in effect.
Is Africa ready?
Despite the great interest and pressures for action, Africa is far from ready to implement continental free trade. The Secretary General of the African Continental Free Trade Area Secretariat, Wamkele Mene, told the Financial Times, “It’s going to take us a very long time” to implement the objective of the agreement. There are a host of problems including bad roads, poor customs administration, and much else that is needed to facilitate free trade. Many countries have not issued up to date books with their latest tariffs for a number of years.
The benefits of trade in inducing greater competition, rises in productivity, faster economic growth, and development is equivalent in economics to the law of gravity in physics. The success of China and East Asia, as well as that of post-war Germany and Japan is due in large measure to the growth of their export industries.
While many hard-line Brexiteers were prepared to leave the European Union (EU) without a free trade deal, in the end London was almost begging Brussels for a trade deal to allow tariff free access to the EU. A Brexit without access to the EU would have meant sizeable long-term costs to the British economy. As it is now outside the EU, the United Kingdom will have no say in the rules that the EU make on trade.
Little intra-African trade
By comparison with other regions around the world, there is very little intra-African trade. Free trade can help remedy this, but is only a necessary but not sufficient conditions as policy changes and better trade governance are also important.
African countries are mainly commodity exporters and for most, excepting South Africa and a few others, pushes towards industrialisation have been full of false starts. With mostly small individual country markets and not much demand for their goods from their neighbours, the continent’s exports to other African countries are only about 15 percent of their total exports. These are mostly manufactured goods and South Africa accounts for a sizeable share of them. By contrast, the share of European total exports to other European countries is nearly 70 percent and that of Asia, nearly 60 percent. The aim of the African free trade agreement is for intra-African trade to reach 60 percent of total exports.
Trudi Hartzenberg, the Executive Director of the Trade Law Centre, says that while there has been much emphasis on the tariff reduction dimensions of the deal, more important is the push the deal can give to better trade governance. This includes improving customs and border management to ensure waiting times at borders are cut. It also covers the harmonisation of various regulations that affect trade.
As much as a continental free trade area is desirable the questions has to arise of whether this project is yet another African Union, AU, initiative to show imagined political unity rather than one grounded in reality.
After many years Africa’s 13 Regional Economic Communities are at various stages of transformation into free trade areas or customs union. Only five of the Southern African Development Community’s 16 members are members of the Southern African Customs Union.
The free trade agreement’s objectives are a long way off, but they might well not be too far-fetched. Importantly, a number of drivers are at work that might bring about success.
There is a strong interest in the initiative from private investors. While Africa’s turn at massive industrialisation must come as it has elsewhere in the world, getting there will have to involve the creation of far larger unified markets. The minute economic size in global terms of most African countries and the trade restrictions in place in most cases mean that substantial economies of scale for investing in manufacturing are not widely present in Africa. The deal could change that as domestically produced goods would have tariff free access to larger markets. That alone could be the big game changer in African development. Investors are always on the lookout for a good story to justify expansion in new markets.
African governments may not be too resistant to dropping tariffs in many items in which they do not anyway trade. That means they would not lose customs revenue. But there are certain products such as garments, which are regarded as sensitive by some countries and the treaty allows these to be excluded from liberalisation as it allows exclusion of three percent of tariff lines. Further, there is pressure from the private sector to improve overall customs governance, including speed of processing at border crossings. Trucks being held up at borders for days, if not weeks, mean enormous losses, for business.
Gerhard Erasmus, an Emeritus Professor at Stellenbosch who specialises in trade law and has written about the legal aspects of the free trade agreement, says there are good reasons to be open-minded about the chances for success. One important factor is that it is not being driven by a supranational body which gives orders, but by the members themselves. There will have to be bottom-up buy-in at every step which will greatly help with implementation.
With the enormous upside, this is a chance the continent cannot afford to drop.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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