What negotiating modalities should be adopted to achieve CFTA objectives?
JB Cronjé, tralac Researcher, discusses how CFTA objectives supported by modalities and guiding principles should inform the development of negotiating texts on trade in services
The third Continental Free Trade Area (CFTA) Negotiating Forum meeting will take place from 3 to 7 October 2016 and is expected to consider draft modalities for the negotiations on trade in goods and services; and, the terms of reference for the technical working groups on rules of origin, sanitary and phytosanitary measures, trade remedies and customs procedures and trade facilitation. At the previous African Union (AU) Ministers of Trade meeting in May 2016, Members adopted the rules of procedure for the CFTA negotiating institutions; definitions of the guiding principles for the CFTA negotiations; and, terms of reference for the technical working groups on legal and institutional affairs, trade in services, and technical barriers to trade and non-tariff barriers. The African Union Commission was also requested by the Member States to undertake a study on options for the notification of the CFTA to the World Trade Organization (WTO) under Article XXIV:7 of the General Agreement on Tariffs and Trade (GATT) or paragraph 2(c) of the Enabling Clause, and Economic Integration Agreements under Article V:7 of the General Agreement on Trade in Services (GATS).
The negotiations, launched in June 2015, are fast approaching a critical juncture that will determine the CFTA’s success. In July 2016, the AU Assembly decided the AU Commission must “draft negotiating texts on trade in goods and in services to be used for national consultations with a view to soliciting inputs from governments and to guide the work of the CFTA Negotiating Forum in order to fast track the negotiations of the CFTA” (Assembly/AU/Dec.608 (XXVII)). This decision by the political leadership points to a high level of urgency to conclude the CFTA negotiations by the indicative date of 2017. The negotiating texts must reflect the objectives of the CFTA; informed by the adopted roadmap, guiding principles and (yet to be adopted) modalities. The purpose of negotiating modalities is to provide the ways or methods (in terms of formulas, targets or specific measures) to achieve the negotiating objectives. The objectives of the CFTA negotiations are to conclude a comprehensive and mutually beneficial trade agreement to enhance competitiveness; overcome dependence on exportation of primary products and promote social and economic transformation for inclusive growth, industrialisation and sustainable development in line with AU Agenda 2063; resolve the challenges of multiple and overlapping membership; and, to increase intra-African trade.
A CFTA Agreement on Trade in Services can assist to achieve these broader objectives by creating new opportunities for cross-border sourcing and supplying of services or services inputs; strengthening transparency and legal certainty of domestic laws and regulation affecting trade in services; assisting small and medium size businesses to engage in cross-border trade and participate in regional or global value chains; enhancing competitiveness by increasing opportunities to exploit economies of scale; and, developing regulation that supports competitiveness and inclusive growth and development.
The modalities for trade in services must be carefully formulated in order to achieve the intended results within the agreed timeframe for the conclusion of the negotiations. They must facilitate the negotiation of a trade in services agreement in terms of sectoral coverage and elimination of substantially all trade restrictions (such as market access limitations, national treatment conditions, unnecessary compliance related measures and obstructive implementation methods). In particular, the negotiations should focus on the removal of measures negatively affecting trade through all modes of services supply including cross-border trade, foreign direct investment, and the temporary cross-border movement of persons to facilitate trade and investment. While often in trade negotiations, the focus is on removing barriers, in most services areas cases a lack of appropriate regulation (for example the protection of consumer privacy and personal information, and combatting of money laundering and terrorist financing) will have a negative effect on trade. Many of these challenges can be addressed successfully through international agreements and cooperation.
To begin with, Members will need to identify priority sectors for CFTA negotiations and adopt appropriate and current nomenclature. Other services sectors can follow in future rounds of negotiations. The CFTA negotiations should focus on economic backbone sectors and those imbedded in virtually all economic activities such as financial, communication, transport and business services. These sectors have been identified as priority sectors for initial liberalisation and cooperation by most regional economic communities including the Southern African Development Community (SADC), East African Community (EAC), Common Market for Eastern and Southern Africa (COMESA), and Tripartite FTA. These services sectors can also be selected to support other AU initiatives to enhance industrial development including the Action Plan for Accelerated Industrial Development for Africa (AIDA), the Action Plan for Boosting Intra-African Trade (BIAT), and the Program for Infrastructure Development in Africa (PIDA).
The modalities for trade in services should be guided by the negotiating principles and facilitate (1) progressive liberalisation in the priority sectors accompanied by (2) sector-specific disciplines. Liberalisation alone will not realise the aims and objectives of inclusive economic growth and sustainable development of the negotiations. In terms of sequence, sector-specific disciplines dealing with behind the border regulatory challenges must precede and underpin negotiations on liberalisation. This could offer a sensible approach to integration.
1. Progressive liberalisation
In preparation for any negotiation, regardless of the negotiating approach, each Member State must conduct an audit of all relevant laws and regulation to identify existing restrictions affecting trade in services. In the spirit of transparency, this information should be compiled in a document and shared with other negotiating parties. The negotiations will eventually revolve around the elimination of these restrictions, where they are unjustifiable. Members should, with the assistance of the AU Commission and other organisations, develop a template reflecting the regulatory status quo for each priority sector of every Member State. The sharing of information reflecting the regulatory status quo in a standardised format is crucial to determine the current level of liberalisation and to compare and measure the level of liberalisation afterwards. The negotiated results must be captured in national schedules of commitments in whatever format (positive, negative or hybrid) the members deem fit. Whatever the case may be, the pre-negotiation national regulatory audit is a precondition for successful negotiations and cannot be overemphasised.
The disclosed regulatory audits will set the scene for the negotiations. In line with the recent AU Assembly decision to fast-track the negotiations (the AU Commission is also obliged to come up with options to eliminate non-trade barriers) Members could consider the formulation of liberalisation benchmarks linked to sector development priorities. For example, based on the regulatory audit information, each Member must remove a certain percentage of existing restrictions over a certain period of time. In accordance with the principle of variable geometry, certain Members like least developed countries could, for example, be afforded longer implementation periods than others. Commitments to carry out reforms could be linked to technical support or capacity building programmes. Sectors that have already been liberalised or those that might be liberalised autonomously in future should be automatically captured in the national schedules of specific commitments and receive recognition in terms of the predetermined liberalisation targets. In the end this must amount to substantial liberalisation, in accordance with the negotiating principles. The GATS Article V requirements for the conclusion of economic integration agreements offer more flexibility in terms of sectoral coverage and elimination of discriminatory measures in the case of an agreement involving only developing countries.
In line with the principles of flexibility and special and differential treatment, Members should, depending on their levels of development, developmental priorities and policy objectives, be allowed to determine which restrictions to remove and when. Of course, the guiding principle of reciprocity gives Members the right to request Members to remove certain restrictions before others or to eliminate certain restrictions within shorter periods than initially offered. However, this process must occur within a strict time limit because the CFTA negotiating process cannot afford to get stuck in endless rounds of requests and offers. Experience from GATS-type request-offer negotiating approaches in the regional economic communities shows such a negotiating approach can drag on for years and years. A more realistic approach would be for Members to undertake commitments at current levels of liberalisation. It also illustrates the importance of reaching common understanding on sector development strategies before negotiations on liberalisation are launched. Members can commit to enter into successive rounds of negotiations with a view to achieve progressively higher levels of liberalisation.
All liberalisation commitments should, according to the Most-Favoured-Nation treatment principle, be extended immediately and automatically to all other Members. This should include all liberalisation measures autonomously taken by a Member or those taken in accordance with an agreement with a third party in future. If any Member do not wish to extent any existing liberalisation commitments with third parties (whether outside the CFTA or inside RECs) to other CFTA Members, those commitments must be listed in a MFN exemption list and annexed to its national schedule of commitments; their removal will remain subject to negotiation in future rounds of negotiation. Care should be taken to prevent this negotiating objective from being diluted. The MFN treatment principle should apply automatically to all liberalisation commitments whether it’s extended to another Member (i.e. intra-CFTA) or third party (i.e. extra-CFTA) without any additional negotiating effort from any other CFTA Member. In particular, the purpose of the MFN treatment principle is to protect the politically and economically small and vulnerable Members from undue influence and treatment by the larger and more dominant Members but also to guarantee they enjoy the benefits of the enlarged market.
2. Sector-specific disciplines
The second main objective of the CFTA services negotiations, namely the development of priority sectors, requires consideration of the unique characteristics of each sector; the reasons for regulatory intervention; the regulatory/trade interface; and, the potential role of the CFTA.
For example, network sectors are characterised by natural monopoly situations because costs associated with infrastructure development and its duplication are prohibitively high. Competition law plays an important role to monitor conduct of dominant players because they can frustrate new market entry and access to essential facilities. In many business services and financial services the potential for unethical and fraudulent behaviour is high. As a result, regulatory responses focus on addressing market failures associated with natural monopolies, information asymmetries and other public policy goals such as universal access and inclusion.
With the creation of a larger market the challenges requiring regulatory intervention at the national level will remain. Liberalisation commitments alone cannot address challenges associated with international market failure without international regulatory cooperation. Certain measures and the way in which they are applied can have a negative effect on cross-border trade. Variances between regulations of different Members create compliance costs, making it difficult and in some cases unaffordable for businesses to offer their services in a foreign market. In other cases, Members cannot address negative externalities through their own devices. Therefore, as a precondition to liberalisation sector-specific development strategies in the CFTA should concentrate on addressing these cross-border regulatory challenges and develop disciplines relating to:
The initiation, formulation, and adoption of domestic laws and regulation;
This could include principles requiring public participation, transparency and due process in policy and law making, regulatory impact assessments before adoption of new legislation, consultation with cross-border regulatory counterparts before new legislation is adopted; mandatory cross-border regulatory cooperation; and consideration of cross-border regulatory effects of proposed national legislation.
The creation of a larger, seamless market; and
This could include the development of mechanisms to ensure mutual recognition of professional and business operating licences, qualifications and standards or adoption of best practices in line with AU and REC acquis or international standards on how to tackle regulatory challenges associated with market failure, establishment and maintenance of competition or achievement of certain policy goals.
The implementation, application and enforcement of rules.
This could include the adoption of principles requiring transparent, objective and non-discriminatory application of regulation; trade facilitation principles addressing procedural aspects to services; obligations on reporting, monitoring and evaluation of implementation; and, principles ensuring fair, effective and efficient administrative justice.
The CFTA modalities for trade in services negotiations must give effect to the accepted principles guiding the negotiations and facilitate the conclusion of an ambitious agreement that will accomplish its objectives by the indicative date of 2017. This will require innovative thinking and willingness to adopt new approaches.