William Mwanza, tralac Researcher, discusses the challenges posed by the EPA negotiations to the establishment of the Continental Free Trade Area (CFTA)

As negotiations towards free trade agreements continue between different regions across the globe, the focus of regional integration on the African continent is shifting to its own mega agreement, the Continental Free Trade Area (CFTA). This is pursuant to the decision of the African Union Summit held in January 2012 to fast-track the establishment of the CFTA by 2017, with the main aim of boosting intra-African trade.

In implementing this decision, the Boosting Intra-African Trade (BIAT) document was compiled by the African Union and the United Nations Economic Commission for Africa (UNECA). The document highlights some pertinent issues affecting intra-African trade. It also proposes an Action Plan for boosting intra-African trade and a framework for fast tracking the establishment of the Continental Free Trade Area.

Broadening Africa’s economic and market space is the first priority of the BIAT. Other priorities that it seeks to address in the short term include:

• addressing supply-side constraints and weak productive capacities;
• addressing infrastructural bottlenecks;
• improving trade facilitation;
• improving trade information networks;
• improving trade finance; and
• addressing adjustment costs associated with trade liberalisation.

A second group of priorities seen to be for the medium to long term include:

• addressing multiplicity and inconvertibility of currencies;
• promoting free movement of people; and
• enhancing trade in services.

Plans towards the establishment of the CFTA continue to garner pace, and negotiations are expected to commence next year. As these plans continue, one significant issue that is not explicitly mentioned in the BIAT, but which will be of concern to the process is that of the Economic Partnership Agreements (EPAs) between the European Union (EU) and African member states in different regional configurations. How the EPA process will pan out over the next few months and years will have important implications on the CFTA process, particularly on the economic and market space that is envisaged, and the ability for African countries to effectively build their productive capacities and to move from trading mostly in primary products, to higher value products such as manufactures.

EPA negotiations have been ongoing between the EU and different African regions since 2002. These negotiations aim at concluding agreements that will entail reciprocal trade preferences between the EU and African countries. Previous unilateral preferences offered by the EU to ACP countries expired in 2007, and since full EPAs were not concluded by then, individual countries that wanted to maintain their duty free access to the EU initialled interim EPAs. In 2013, the EU set 1 October 2014 as the deadline by which countries that initialled interim EPAs with the EU would have to take steps to ratify these agreements if their products are to continue accessing the EU market duty free. Although it has sometimes been perceived as such, this October deadline is not for the conclusion of full EPAs by all the regional configurations. Negotiations towards these full EPAs are set to continue and are not presently subject to a deadline.

How different countries will make progress in the EPA negotiations will have important implications for the promotion of intra-African trade within the context of the envisaged CFTA. Of immediate interest will be how the deadline of 1 October 2014 will play out for the countries concerned. This is likely to have implications on negotiations towards the full EPAs, and prospects for an effective CFTA.

According to the latest state of play of the EPA negotiations, 17 countries have since initialled interim EPAs and will need to have taken steps to ratify them by October this year. These are: Ivory Coast, Ghana, Cameroon, Mauritius, Seychelles, Zimbabwe, Madagascar, Burundi, Rwanda, Tanzania, Kenya, Uganda, Botswana, Lesotho, Swaziland, Mozambique, and Namibia.

Whether these countries will meet the October deadline so as to maintain duty free access to the EU will be telling for prospects in the wider continent.

If most of these countries meet the deadline, the interim EPAs will take effect in the respective countries. These countries will maintain their duty free access to the EU and will phase down tariffs on imports from the EU. This scenario may induce other countries into concluding the full EPA as early as possible through two possible avenues.

Firstly, developing countries that are in similar configurations as other developing countries party to the interim agreement may need to conclude the full EPA so as to limit the negative effects of their non-preferential market access to the EU, particularly for products that they also export to the EU. Such a scenario has been noted in Nigeria and Ghana, where the latter signed the interim EPA but the former did not. Nigeria’s exports of cocoa butter and cocoa liquor to the EU started attracting duties of 4.3% and 6.3% respectively, and beverage companies using cocoa started relocating their factories to Ghana. Although the EU-ECOWAS EPA was, in March this year, endorsed in principle by West African Heads of State and Government, efforts are still ongoing to deal with certain technical issues, after Nigeria expressed its reservations. Considering that the EU is an important market for some of Nigeria’s strategic products (e.g. 95% of its cocoa products are exported to the EU due to higher freight charges to other markets such as the US and Asia), it could be expected that the full EPA will be concluded.

The second avenue is through least developed countries (LDCs), most of who currently export duty free to the EU on the basis of the ‘Everything But Arms’ (EBA) initiative. It is worth noting that a number of LDCs such as Burundi, Mozambique, Lesotho, Rwanda, Tanzania, Uganda and Zambia, have initialled the interim EPA and may go ahead to ratify the agreement by October so as to protect their market access to the EU. This situation may underscore the fact that preferences under the EBA initiative are not guaranteed, and may induce other LDCs to follow suit and work to conclude the full EPA even if the EBA initiative continues to be available.

If this situation were to ensue for developing countries and LDCs across the continent, the drawn out EPA negotiations could soon end with the conclusion of full EPAs in most of the configurations. Preferential access to the EU for most African countries products will be maintained, and various products from the EU will also receive preferential access into the markets of these African countries.

An alternative scenario that is possible is where most countries affected by the October deadline do not manage to ratify the interim agreement by then due to envisaged negative effects such as tariff revenue losses and the prospect of current and potential domestic industries not being able to compete against increased imports from the EU. Such a failure to ratify the interim agreement could well lead to further protracted negotiations towards the full EPAs. Most countries would lose their preferential access to the EU (though some access may still be possible through the Generalised System of Preferences and the EBA for some countries). Meanwhile, tariffs on EU imports would still be maintained by the different African countries.

It is acknowledged that other scenarios are possible such as most countries ratifying the interim EPAs by October, but the negotiations towards full EPAs still being drawn out and hence having a situation where only a few countries are in a free trade area with the EU. Speculative as they are, none of these scenarios can be out rightly ruled out, and a clearer picture will emerge in coming months, starting with this October for the interim EPAs. The different possible outcomes are however important not only for regional integration processes within different Regional Economic Communities as has been pointed out by different quarters in the past, but also now for the Continental FTA process. This is mostly because of the different production and market dynamics that will ensue depending on which scenario prevails in the EPA process.

The first scenario would pose a challenge to efforts towards consolidating a CFTA that would boost intra-African trade. As has been noted, the conclusion of full EPAs in the short term would mean that efforts to increase productive capacity and to develop different industries would need to be done in the face of increased competition from EU imports, and this would be the case for most countries across the continent. Efforts to develop domestic industries in higher value products could be more difficult, and intra-African trade could be limited to lower value primary products, which most countries presently produce. Interestingly, this is a consideration that also extends to the CFTA process itself. Here too, there will be some countries that will have to negotiate with much more developed countries such as Nigeria, South Africa, Kenya, Egypt and Mauritius, and liberalising trade with these may have similar effects as EPAs with the EU. In this scenario, much thought would therefore need to go into how the productive capacity of less developed countries would be enhanced and industries developed in the face of increased competition from the EU and from other more developed African countries.

In the event that the interim and full EPAs are not concluded in the short term however, some African countries would lose preferential access to their main export market that is the EU (with some having market access to the EU, albeit not in a guaranteed form, through the GSP and EBA). These countries would be affected differently depending on which products they export to the EU and what tariff rates would then come into effect for such products. If such a scenario were to prevail, EU imports would still attract some tariffs and so efforts to boost intra-African trade through the CFTA could be slightly easier than in a situation of direct competition with more imports from the EU. This applies mostly to manufactured products from the EU. When other products such as machinery are considered, however, a challenge would still be posed for the effective development of the productive capacity of some African countries, due to the capital intensive nature of this exercise, particularly as far as imports from the EU of such products are concerned.

From the foregoing, it is clear that the EPA process poses significant challenges to the consolidation of an effective CFTA whether or not the interim and full EPAs are concluded by the respective countries. As preparations for negotiating the CFTA continue, therefore, some questions will be extremely important to consider:

• Firstly, given the different production and market dynamics that could possibly ensue, how will member states and other stakeholders in the regional integration process ensure that outcomes of the EPA process are optimal and compatible with the benefits that the CFTA seeks to create?

• Secondly, given that countries that will be negotiating the CFTA are also at different levels of development, how will value chains be strategically developed across the continent to ensure that the increased intra-African trade that comes about includes higher value products from the less developed countries rather than just more trade from the more developed countries? 

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Sources

AU and UNECA. (2012). Boosting Intra-African Trade: Issues Affecting Intra-African Trade, Proposed Action Plan for boosting intra-African Trade and Framework for the fast-tracking of a Continental Free Trade Area. [Online]. Available at: http://www.tralac.org/images/Resources/Continental_FTA/Boosting Intra-African Trade - AU 2012.pdf

EU. (2013). Economic Partnership Agreements (EPAs) – State of Play, Future Perspectives and Implementation. [Online]. Available at: http://europa.eu/rapid/press-release_SPEECH-13-812_en.htm

EU. (2014). Overview of EPA Negotiations (updated May 2014). [Online]. Available at: http://trade.ec.europa.eu/doclib/docs/2009/september/tradoc_144912.pdf

ICTSD. (2008). Nigeria and the challenge of the EPA. [Online]. Available at: http://www.ictsd.org/bridges-news/trade-negotiations-insights/news/nigeria-and-the-challenge-of-the-epa