Author : Ronak Gopaldas
Type of publication : Academic report
Date of publication : 2020
Africa’s most ambitious integration project, the African Continental Free Trade Agreement (AfCFTA) is nearing its commercial phase. Delayed, but not thwarted by the COVID-19 pandemic, an enormous joint effort between the African Union (AU), the AfCFTA Secretariat and deal signatories is underway in a final push to realise continental free trade at the start of 2021.
Complicating matters, the AfCFTA must also find its place in a world that is a great deal more socially and politically fractured than when the initial free trade discussion started. That said, Africa has an opportunity to exploit growing global fissures, both by learning from what did and did not work from past international trade deals as well as leveraging its natural endowments.
COVID-19’s impact on Africa’s integration agenda
African leaders remain committed to staying the AfCFTA course, underscored by their collaboration through the AU’s Medical Supplies Platform for the production and distribution of PPE. COVID-19 highlighted the need for the continent to reduce its reliance on remote world markets and produce more of what it consumes. AfCFTA can facilitate this. Undeterred by the challenges the pandemic created, the AU has embraced technological assistance from the private sector to keep the 1 January 2021 trade commencement date on track.
Business unusual: AfCFTA’s outstanding matters and revised timelines
Matters that are arguably at the very heart of AfCFTA, the schedules and tariff reductions for each country, rules of origin and the schedule of service commitments, are yet to be fully agreed. Nevertheless, these are set to be the most contentious matters to put to bed down. Agreeing these annexes will require reciprocity between states, some with opposing interests, and free trade cannot commence without them.
Each state must agree to exempt tariffs on 90% of imported goods from other African states, with a further 7% of goods phased in over a 10-year period for “sensitive products”. Currently, states are still independently identifying which items they will grant duty free entry to or more specifically, which items should not receive tariff exemption (exclusion list). This exclusion list is to be negotiated on a “request and offer basis” between countries, leaving plenty of scope for sticking points.
COVID-19 highlighted the need for the continent to reduce its reliance on remote world markets and produce more of what it consumes
The rules of origin clause define the conditions under which companies must comply in order to have their products deemed having originated in the free trade area, and thus eligible for preferential treatment. These goods must be “wholly produced or substantially transformed in Free Trade Agreement (FTA) member states” and not simply trans-shipped through that state in an attempt to receive duty exemption. Simply put, it is intended to promote African manufacturing value chains and production by making locally made goods more cost efficient to trade than goods imported from outside the FTA.
Amidst the setbacks and challenges facing AfCFTA’s ambitious launch, there are several measures countries can undertake domestically in parallel to official discussions to ensure they maximise the benefits of free trade when it ultimately begins. Some interventions are currently underway, including simplifying and dramatically reducing the required trade documentation and other bureaucratic processes that delay the movement of goods. Given the enormity of Africa’s informal economy (informal cross-border trade), the bulk of which is driven by women, such measures would go a long way to empowering informal operators and stimulating economic upliftment.
One of the other primary channels to be addressed over the coming months is how AfCFTA will merge with the eight existing regional organisations, some of which overlap. Some of the RECs are not necessarily trade focused, and will be superseded by AfCFTA, while other more developed trade blocs will remain in place for trade between member countries until AfCFTA has sufficient momentum and scale. The principle of the preservation of REC acquis (what has been achieved and implemented by RECs will continue to be respected) is key and widely accepted.
Despite only requiring a threshold of 22 ratifications in conformity with legal provisions, there are several notable countries that are yet to formally ratify. These include Nigeria, Algeria, Tanzania and Angola.
Can Africa benefit from the shift away from globalisation, towards localisation?
As China shut its economy to stem transmission rates, a critical link in the world’s supply chain went offline leading to supply shortages and economic disruption. The impact of these interruptions begs the question as to how ready several African countries are for greater self-sufficiency and trade competition through liberalisation.
Africa’s large consumer market, rich mineral wealth and agricultural potential has already attracted investment and trade advances from the US and UK. The shift away from Chinese dependence means that Africa will not be competing against a dominant China to attract business, but more likely Association of Southeast Asian Nations (ASEAN) and Eastern European countries. Despite the advantage AfCFTA may give Africa’s investment attractiveness chances, it is still far less industrially advanced and will have to leverage its natural attributes to become a preferred trade and investment alternative.
The continent does not have the luxury of time to naturally evolve from a predominantly agriculturally based economy to industrialisation and ultimately services. If anything, an inability to compete with low-cost Chinese production has borne witness to countries on the continent experiencing premature de-industrialisation, shut out of the natural industrial evolution and unable to find non-resources growth catalysts. Africa needs to find “smartcuts” to shorten the path to success. Paradoxically, Africa may need to move back a developmental stage in order to progress economically by pivoting to agriculture.
There is no more important attribute in an increasingly fractured world than food security. It allows regions to be independent of food imports and price volatility. If agricultural production across Africa can be sufficiently developed and modernised to help mitigate the ongoing challenges from climate change, it can make Africa a crucial agricultural production hub, which would give the continent significantly more bargaining power and leverage in trade.
Africa may be able to build its independence and self-sufficiency in key sectors such as food security and primary manufacturing, while at the same time developing value added industries in science and technology. The realisation of AfCFTA underpins these ambitions, as it provides the underlying framework for the transfer and movement of skills, products and capital throughout the world. Ultimately then, AfCFTA is the chassis on which agriculture, industrial and digital development can be built and scaled, making its realisation all the more important
Policymakers at national level must embrace public-private partnerships, reduce red tape and accept that virtually no country can be fully vertically integrated. Real economic advancement happens through beneficiation and value-added services by way of linking domestic and intra-regional value chains. While not all countries have a sufficiently developed manufacturing base, by collaborating with those that do, lesser developed economies typically begin moving up the value chain themselves.
The World Bank estimates the agreement could increase intra-regional manufacturing trade by as much as 30%.
Without the most rudimentary infrastructure in place, such as stable electricity grids, water reticulation and training facilities, however, these ambitions will remain elusive. There is, nevertheless, a strong case to be made for digital disruption that does not require the continent to realise full industrialisation before it can skip towards high-technology services growth where the continent has already shown its ability to lead.
The nature of fast-evolving technology makes it a sector that could allow the continent to leapfrog several steps in the development chain and generate immediate returns. More important is the reach such services can have given the potential for a global digital footprint with minimal fixed infrastructure. Trade in services under AfCFTA will greatly reduce their cost base, generating scale and allowing for the transfer of valuable goods, services and skills. Importantly, negotiations on e-commerce, initially set down for phase 3, is likely to be expedited and added to phase 2 discussions in order to harmonise digital governance issues (data protection, cybercrime and taxation), increase enforcement and boost growth.
By focusing on these key pillars, Africa may be able to build its independence and self-sufficiency in key sectors such as food security and primary manufacturing, while at the same time developing value added industries in science and technology. The realisation of AfCFTA underpins these ambitions, as it provides the underlying framework for the transfer and movement of skills, products and capital throughout the world. Ultimately then, AfCFTA is the chassis on which agriculture, industrial and digital development can be built and scaled, making its realisation all the more important.
Avoiding the pitfalls of integration: Lessons from the past
Africa’s integration agenda must be aspirational, but not to the extent that its ambitions are misaligned to reality, creating despondency. This is a particularly important lesson to bear in mind given the enormity and complexity of AfCFTA, whose timelines have been thrown into disarray by the pandemic.
To prevent the deal from being derailed by civil society and a private sector that feels it has not had its voice heard, the AU must do more to address business and labour fears and to outline the changes that can be expected for ordinary Africans. AfCFTA is merely a vehicle to improve and increase private sector trade.
The ultimate beneficiaries of any free trade area should be its citizens, not its business and political elite. These benefits should arise through greater labour opportunities, rising incomes, steady and lower inflation as well as general economic advancement. In Africa, where accusations of corruption, nepotism and the abuse of power regularly mar transactions, the overseers of AfCFTA and its member states will need to ensure that the fruits of trade uplifts its citizens or risk the rise of nationalism as has been the case in the US and UK.
The divide between Africa’s most developed economies and its poorest is greater than in any other area and poses significant challenges to the longevity and cohesion of AfCFTA. While the UK is hardly a smaller nation, Brexit is a timely reminder of what could transpire if countries and its citizens believe they are getting a raw deal. AfCFTA policymakers must ensure that smaller nations are not marginalised by larger, more powerful states and that they have a voice at the table.
Finally, and perhaps above all else is the need for political maturity and concessions for the greater collective good. Becoming a member of a free trade area is often seen as a compromise between inclusivity and autonomy, between integration and sovereignty. Becoming a participant in a free trade area, while by no means a panacea to all trade and economic ailments, is not the surrender of sovereignty but an opportunity to build and strengthen it.
The role of non-governmental players
As much as AfCFTA is an African solution to African problems, it will not be able to succeed without assistance from outside the continent and from society at large. Indeed, placing the success or failure for the deal’s implementation squarely at the feet of policy makers will not yield the desired results. The challenge will be to get the buy-in from broader society – both from an advocacy and accountability perspective and achieve a social compact around the agreement’s aspirations.
In Africa, as in many other regions, informal traders and civil society in general are increasingly empowered to form groupings to collectively defend their rights, livelihoods and interests, whether in the form of petitions, lobbying, marches or protests. This will readily happen if the voices and concerns of ordinary citizens are marginalised. Policymakers must ensure that it doesn’t come to this and actively seek ongoing engagement and feedback
For donor countries, there are both reactive and proactive incentives at play. For one, donor countries would like to be top of mind in securing favourable trade terms with the continent in the event that the cost of trade with traditional developed partners escalates under protectionism. Inward migration is also becoming a contentious political topic. For both political and economic reasons, donor countries want to prevent a surge of inward migration of immigrants from Africa. The success of AfCFTA could go a long way in preventing this, and alleviate the need for aid to stem immigrant flow.
Further, a more independent and prosperous Africa would greatly reduce their dependence on donor funding and development at a time when these donor countries are forced to concentrate their resources on the domestic economy
Increased competition is a threat to many existing companies that have been sheltered by their monopoly or by government-imposed tariffs on cheaper imports. Smaller scale traders cannot be crowded out by big business if the fruits of free trade are to be equitably distributed. Here the role of advocacy groups become enormously important in building consensus.
In Africa, as in many other regions, informal traders and civil society in general are increasingly empowered to form groupings to collectively defend their rights, livelihoods and interests, whether in the form of petitions, lobbying, marches or protests. This will readily happen if the voices and concerns of ordinary citizens are marginalised. Policymakers must ensure that it doesn’t come to this and actively seek ongoing engagement and feedback.
The winners and losers
Not all countries, industries and businesses will benefit equally or immediately from the AfCFTA. Distributing the rising benefits from a very low intra-African trade base will be an important litmus test for the efficacy and success of the free trade area. As there are several matters outstanding in the finalisation of the agreement and many goods and services schedules yet to be deposited, it is too soon to say with conviction which sectors will be the greatest beneficiaries of free trade.
Despite the expected tailwinds for most industries, it must be remembered that some individual players will be disproportionately affected by the new regime. The scale and resources of larger companies give them a productivity advantage and the ability to set pricing, particularly in sectors that are highly concentrated among only a few players. The expected disparity among small- and large- scale players extends equally to that between the continent’s less developed and economically stronger countries.
Larger, more developed economies such as South Africa, Nigeria, Kenya and Egypt have an immediate advantage given their more developed and diversified manufacturing and services base. Ethiopia, Rwanda and Côte d’Ivoire too, while smaller, have highly diversified economies that act as a natural hedge against a downturn in any one sector and are set to benefit the most under AfCFTA. Countries like Zambia, Chad and the Democratic Republic of the Congo that are heavily commodity export dependent and those with low levels of development will remain particularly vulnerable to the threat of new entrants looking to gain market dominance. Countries like Guinea, Togo and Benin, Burkina Faso, Zimbabwe and Malawi, all of whom receive one fifth or more of their tariff revenue from Africa trade could well face worsening fiscal pressure from the losses.
Despite the expected tailwinds for most industries, it must be remembered that some individual players will be disproportionately affected by the new regime. The scale and resources of larger companies give them a productivity advantage and the ability to set pricing, particularly in sectors that are highly concentrated among only a few players
As such, there is a risk that AfCFTA inadvertently becomes a force of divergence rather than mutual benefit, and the Secretariat will have to closely monitor and mediate, lest growing imbalances lead to disillusionment with the deal. It should also be remembered by the bigger players, that the sustainability of their growth and success depends on economically and politically stable and prosperous peers on the continent, for abusing their disproportionate trade advantage may necessitate fiscal and humanitarian assistance over the longer term.
Conclusion
To be sure, the realisation of AfCFTA faces innumerable challenges, far more than mentioned above, but almost none that can’t be overcome with the right political will and commitment. Finalising the deal, as big a task as it is, simply gets Africa to the starting line. Despite having overcome many of the significant obstacles COVID-19 has precipitated, many still lie ahead and there is a still some way to go before reaching the starting blocks.
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