The AfCFTA: It’s not just about the tariffs

By Ashly Hope
14 Feb 2018
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The AfCFTA: It’s not just about the tariffs

Africa’s Continental Free Trade Area (AfCFTA) is part of a broader program for African integration. But integration is not an end in itself. The expectation is that this integration will improve the lives of people on the continent.

For economists, improvements in life are measured in ‘welfare gains’, within which, welfare means prosperity, and is measured in dollars. So, without joining the debate as to whether this is the best way of measuring improved lives, we can agree that more prosperity – i.e. more welfare gains – are better than fewer.

This is why it is interesting that recent UNCTAD modelling shows that the welfare gains from the reduction of ‘non-tariff barriers’ (NTBs) in the continental free trade area dwarf the potential welfare gains of tariff reduction, even in a scenario where tariffs are completely eliminated among the 55 members states. This is consistent with tralac’s own 2015 GTAP modelling, which showed similar results in relation to non-tariff barriers.

This is both a cause for excitement about the potential of the AfCFTA to increase welfare in Africa and also a cause for concern.

A cause for concern, because so much of the conversation about the AfCFTA is dominated by tariffs. But a cause for excitement, because there is clearly so much that can be achieved, even if tariffs are not completely eliminated.

Of course, tariffs are important. We know that tariff costs for African countries importing from other African countries can be much higher than tariff costs for non-African countries exporting to African countries. It seems unjustifiable that African countries place higher tariffs on some goods imported from their neighbours than from far away countries, and the AfCFTA should address this.

However, this new UNCTAD modelling reinforces the fact that the real gains will not come from the elimination of tariffs. The authors of the study model a scenario where 25% of the cost effect of non-tariff measures is removed, based on other work[1] suggesting that this is the realistic amount that can be reduced through regulatory cooperation. The model also assumes that any outright non‑tariff barriers like quotas or price controls are fully eliminated.

What the UNCTAD modelling shows is no small difference. While the total welfare gains for the continent are estimated at around $3.6 billion for complete elimination of tariffs, the reduction of NTMs will mean gains of around $21 billion.

In addition to the overall welfare gain being almost six times larger, a second positive impact is that for all countries in the AfCFTA, the modelling shows a welfare gain associated with reducing NTMs, while the tariff reductions have an uneven impact, with some countries or regions experiencing a loss. That is, while the gains from the reduction in NTMs may not be spread equally, there are no negative effects among countries. This is in contrast with modelling for the tariff reductions, which shows some countries are worse off. Which countries are worse off also depends on what percentage of tariff lines are liberalised.

This kind of analysis should send a strong message to AfCFTA negotiators that although the tariffs are important, more might be gained in other areas of the agreement.

Tariff elimination, while politically challenging, is technically simple. A tariff should be straightforward to understand, and commitments should be easy to monitor. Non-tariff barriers to trade are more complex. They require cooperation between members. They often also require judgments about the necessity or effectiveness of such measures. This is made more challenging by the fact that non-tariff measures can be legitimately in place for policy reasons, but they can also become, or indeed be explicitly implemented as protectionist measures.

Non-tariff barriers are also less visible than their tariff counterparts. Even detecting and identifying these barriers can be difficult. Members need to do the work to identify regulations, standards technical requirements, licensing rules etc that affect trade – particularly within Africa. Monitoring implementation of commitments is also much more complex – especially when ‘commitments’ are not binding.

Trade governance in the 21st century is not just about the tariffs. Goods, services and investment are all deeply integrated, and the regulatory environment in trading countries has a significant effect on how both goods and services are traded.

The lack of visibility of non-tariff barriers also perhaps means that their reduction and elimination may be more politically feasible to achieve for some members than the reduction of tariffs in very sensitive areas.

While ultimately significant (90%) tariff reduction may be the goal, if tariffs on sensitive goods can give political cover for the reduction in other barriers to trade, it is likely that the net welfare gain will be higher than a scenario in which tariffs are considered to be the only game in town.

If AfCFTA members treat one another not with suspicion, but act in a spirit of cooperation, the reductions of non-tariff barriers to trading on the continent could be the real advantage the AfCFTA brings to intra-African cooperation.

However, eliminating unnecessary non-tariff barriers and harmonising or aligning regulations require a deeper, more nuanced kind of cooperation. Let’s hope AfCFTA members are up for the challenge.

[1] This is a forthcoming paper referenced by the authors: Knebel and Peters (forthcoming). “Regulatory convergence matters: A differentiated analysis of the impact of non-tariff measures”, Mimeo

About the Author(s)

Ashly Hope

Ashly Hope

Ashly is a professional volunteer with the Australian Government’s Australian Volunteers for International Development Program, and currently serves as Research Coordinator (Trade in Services and Regulation) at tralac. Ashly has experience in policy advice and analysis in financial regulation, international economic governance and international tax. She holds a BA (Political Science)/LLM from the University of Tasmania, and an LLM (Government and Commercial) from the Australian National University.

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