Discussions

What does the Adoption of the African Continental Free Trade Agreement signify?

What does the Adoption of the African Continental Free Trade Agreement signify?

29 Mar 2018

Trudi Hartzenberg, tralac Executive Director, and Gerhard Erasmus, tralac Associate, discuss the significance of the launch of the AfCFTA

At the Extraordinary Summit of the African Union which convened in Kigali on 21 March, 44 of the 55 member states signed the text of a new African free trade agreement called the African Continental Free Trade Area (AfCFTA). The complete package of legal instruments includes a founding agreement, protocols on trade in goods and services, with annexes on trade-related rules and procedures, and a dispute settlement mechanism.

What does this development signal and what could change? A key objective of the AfCFTA is to boost intra-African trade. It is designed to do so by forging a single continental legal regime for all relevant trade disciplines. This will include lower tariffs, simplified rules of origin and customs procedures, regulations for trade in services and remedies available to affected private parties. This is a bold vison but vital for advancing Africa’s economic development and capacity also to integrate more effectively into the 21st century global economy.

There is still a lot of work to be done before the full arrangement will be in place but it is an important step in the right direction. Protocols on investment, competition and intellectual property are still to be negotiated, in the second phase of this initiative. Institutions, including a Secretariat, are also to be established before ratifications of the agreement by member states can be deposited. The agreement will enter into force once 22 states have ratified it. The Summit hinted that entry into force may happen within a year.

It is too early to count tangible benefits to Africa’s exporters, freighters, service providers, investors and consumers. If the participating governments implement the obligations agreed upon, the Kigali Summit will have produced a milestone event. What are the prospects?

The record regarding intra-African trade and the settlement of trade disputes is not impressive. Integrating unequal partners is difficult. Some are concerned about the loss of tariff revenue, and have limited options for expanding their domestic tax base. It is also true that intra-Africa trade is a small share of the continent’s total trade. For 2016, intra-trade was 17.6% of the Africa’s total trade. But what does Africa trade with the rest of the world? Most of that is commodity trade – agricultural products, metals, minerals and other primary products. These commodities are processed in complex value chain arrangements at various locations across the world. They feed into the early stages of global value chains, meaning that most value addition to these exports from Africa accrues to other players in the global economy. This makes it important for complementary and support initiatives to reduce the costs of doing business and cross border trade, to improve governance, and expand and diversify Africa’s industrial base. The African Union’s initiatives to Boost Intra-Africa Trade, the Programmes for Infrastructure Development for Africa and Accelerated Industrial Development for Africa are essential to realise the benefits of the AfCFTA.

The fact that the AfCFTA will be the first continent-wide African trade arrangement offers another potential advantage, to address the complications and duplication which characterizes the overlapping memberships of the existing eight Regional Economic Communities (which include SADC, the East African Community and COMESA). Matters could now be simplified and standardized for rules of origin, tariffs and standards for the same goods. Private parties will then face less fragmented sets of rules when doing business across African borders.

It will, however, be unrealistic to expect a sudden leap forward. Improvements will be incremental. That will already be significant. Judged by the statements delivered by the Heads of State and Government at this occasion, there does seem to be a new resolve to put intra-African trade on a sound footing. Sceptics will counter by pointing out that international agreements do not create trade. However, their adoption and implementation are vital for making rules-based trade and investment possible and to provide for certainty and predictability. Governments do not trade but they shape and control the rules of the game. A new trade agreement about how governments (and their officials) exercise jurisdiction and improve trade governance is a necessary first step to a thriving rules-based trade environment for Africa.

There were important political developments in Kigali, involving Africa’s two biggest economies. Nigeria had been a staunch supporter of the AfCFTA vision and driving force in the negotiations. However, at the last moment the Nigerian President cancelled his trip to Kigali to deal with complaints by local business that their interests are not accommodated. Nigeria’s absence in Kigali was an embarrassment. South Africa, on the other hand, was a constructive voice. President Ramaphosa appeared in person, supported the new vision, and promised that Pretoria will sign the AfCFTA as soon as domestic legal requirements have been attended to. Minister Rob Davies subsequently confirmed that “South Africa is very much part of this process. We are not holding back. We don’t have reservations or differences.[1] The AU aim is to have more signatures when the next regular AU summit convenes in July.

Pretoria’s support for the AfCFTA is a positive sign. It could boost South Africa’s position as the major African exporter of goods and services to the continent. This is a fresh new wind blowing.

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[1] See https://www.tralac.org/news/article/12878-sa-keen-to-sign-agreement-establishing-afcfta.html