Does the African Continental Free Trade Area mean business?
When a large number of sovereign states launch an ambitious new free trade project and conclude binding treaties to signal their resolve, we should pay attention. If these are African states and the launching ceremony is attended by several Heads of State and Government, the occasion merits closer attention. Certain questions need to be posed: What are they launching, why are they doing so, and how will this new arrangement work? What will change when?
The African Union (AU) decision to establish a Continental Free Trade Area was taken in January 2012. At that time the negotiations for the Tripartite Free Trade Area (TFTA), consisting of the member states of COMESA, the EAC and SADC, were well advanced. The TFTA held the initial promise (which subsequent developments showed was not a realistic prospect) to merge these three Regional Economic Communities (RECs) and to address one of the serious challenges faced by intra-African trade and integration, namely overlapping membership of trade blocks.
The TFTA process did provide a platform for renewed efforts to tackle Africa’s internal trade-related problems (only 17% of African trade is with other African trade partners) and to adopt agreements suitable for 21st century needs. For the first time trade in services was included. And it was recognized that tariffs were only one of several serious issues. Trade facilitation, infrastructural improvements and industrialization were also on the broader TFTA agenda.
The AU launched the AfCFTA negotiations in 2015. These negotiations (in which all 55 AU Members officially participate) proceeded at a brisk pace. On 21 March 2018 the texts of the founding Agreement and the Protocols on Trade in Goods, Trade in Services and Dispute Settlement were adopted at an Extraordinary Summit held in Kigali, Rwanda. Tariff reductions, rules of origin and specific commitments for the five priority services sectors were not finalized (and these negotiations are still ongoing) but governments signed up and the ratification process started. The 22 ratifications required for entry into force were soon deposited (they now stand at 27 and all but Eritrea have now signed) and the AfCFTA Agreement could enter into force. There is clearly a high level of political support for the AfCFTA.
The official objectives behind the AfCFTA are to boost intra-African trade, to create a single market for goods and services (through successive rounds of negotiations), to contribute to the movement of capital and natural persons, and to move the process to a point where a long-standing political ideal will materialize, namely to lay the foundation for the establishment of a Continental Customs Union. It will also “resolve the challenges of overlapping memberships”.
The achievement of these goals must, by necessity, be an incremental process. The Agreement says that for the purposes of realising the objectives of the AfCFTA, the State Parties shall progressively eliminate tariffs and non-tariff barriers to trade in goods, progressively liberalise trade in services, cooperate on investment, intellectual property rights and competition policy, cooperate on all trade-related areas and customs matters and the implementation of trade facilitation measures, establish a mechanism for the settlement of disputes (limited to inter-state disputes), and establish an institutional framework for the implementation and administration of the AfCFTA.
This institutional framework needs to be refined over time, to address the technical needs associated with trade and regional integration. Standards, trade remedies, investment promotion and protection, effective cooperation in competition, and the joint regulation of service providers are the underpinnings of successful regional integration arrangements. On this score Africa is still a fragmented economic and policy space. The Member States will hopefully be prepared to govern jointly.
The AfCFTA will have a Secretariat, to be headquartered in Ghana, as well as an African Trade Observatory; for capturing up-to-date trade and trade-related data. This specific matter is very important. Planning and the development of suitable policies depend on reliable data, which is often not available. Political guidance on future AfCFTA activities will be provided by the AU Assembly, while the Council of Ministers of the State Parties and the Committee of Senior Trade Officials will be responsible for technical oversight.
The statements issued at the 12th Extra-Ordinary AU Summit to launch the Operational Phase of the AfCFTA, held on 7 July 2019 in Niamey, provide indications of further plans to anchor this process effectively. The region’s largest trade bank – Afreximbank – has unveiled a $1bn financing facility. It will enable countries to adjust in an orderly manner to sudden tariff revenue losses as a result of the implementation of the AfCFTA Agreement. An Africa-wide digital payment infrastructure is to be developed in collaboration with the AU. It will be a platform to domesticate intra-regional payments, and save the continent more than $5 billion in payment transaction costs per annum. A pilot project on informal cross-border trade along the Abidjan-Lagos corridor has also been announced. A grant from Afreximbank was announced during a ceremony on the sidelines of the AfCFTA Business Forum. That would help to ensure harmonization and comparability across Africa. A simplified trade regime for the AfCFTA is also to be developed. This is a very important facility, particularly in view of the very substantial communities of informal traders, many of whom are women.
So, what is the AfCFTA formula about and how will it work? This is a member-driven endeavour. There will not be supra-national institutions as in e.g. the European Union. Implementation and trade benefits for private firms will happen via national measures. National tariff books will have to be updated and domestic rules must be adopted to give effect to the objectives underpinning this Agreement. The boosting of trade in services is a new challenge.
The two minimum requirements for a free trade area (FTA) are preferential tariff concessions (schedules of concessions made by the members of the FTA) and preferential rules of origin. It is too soon to comment on the exact detail of the tariff liberalisation – the aim is to have the tariff and rules of origin negotiations complete so that trade under the AfCFTA can begin in July 2020. Sector commitments for the priority services sectors may well take us beyond this timeline. There is considerable political buy-in, but individual States still face difficult choices. Africa’s economies are at very different levels of economic development, and all face notable challenges to create jobs, develop their industrial sectors and diversify their production capacity.
Not everyone stands to benefit in equal measure. And it is important to note that for many African countries, most of their trade is still with global trading partners. This will not change in the near future.
Southern Africa (boosted by South Africa’s higher degree of industrialization) accounts for more than 60% of intra African trade and may be quicker off the mark. President Ramaphosa (who will be the AU Chair in 2020) has signaled his support for the AfCFTA. Let us see how he will advance the AfCFTA agenda; in addition to positioning South Africa to benefit from new trading opportunities.
It is important to note that the existing RECs will not disappear. Intra-African trade will continue via multiple tracks. As the AfCFTA advances and becomes more consolidated, there should be more policy convergence and a simplification of rules.
A new trade agreement does not guarantee trade – but it does change the incentives to make trade with other partners to that agreement more accessible and attractive. The AfCFTA has the potential to put in place mechanisms to address many of the challenges bedeviling intra-African trade. It could do so in a manner which will provide more certainty and predictability.
The AfCFTA makes an important contribution in terms of focusing attention on the continent’s challenges. There is more clarity about the mechanisms required for boosting intra-African trade as part of a governance-improvement effort. This is good news and will involve an ongoing process. It is also important to acknowledge that it is providing impetus for a range of other initiatives, such as a continent-wide payments system and a facility to support adjustment and loss of revenue from tariff reductions. These related initiatives can provide strong support to make the AfCFTA work. International organizations and donors are promising more assistance, which is another positive development. There should be structures now to channel future assistance into more productive use. All these efforts should be welcomed and be supported. If they result in better trade governance at home and on the continent, and bring about more transparency, the AfCFTA will have made a major contribution.
 African Union press release: Operational phase of the African Continental Free Trade Area launched at Niger Summit of the African Union
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