Continental Free Trade Area to boost domestic tax collections – AU official
Six years ago, African leaders decided to establish the Continental Free Trade Area (CFTA), a flagship project of the African Union’s (AU) Agenda 2063 aiming to fast-track the continent’s economic growth and development by creating one gigantic market of more than 1.2 billion people with a combined GDP of US$2.19 trillion.
Prudence Sebahizi, the Chief Technical Advisor and Head of the CFTA Unit at the AU Commission’s Department of Trade and Industry, spoke to The New Times’ James Karuhanga about the project’s progress ahead of the upcoming 30th AU Summit in Addis Ababa, Ethiopia later this month.
You say the CFTA is a game changer for Africa and its people. For readers who might not have followed developments, what is this CFTA and how is it a game changer for people on the continent?
The Continental Free Trade Area is a continental geographic zone where goods and services are supposed to move with no restrictions among member states. Once established, there shall be no administrative barriers at any country’s borders in regards to movement of goods and services. The CFTA will be established by a comprehensive agreement to be concluded by African Union Member States within the broader framework of continental integration agenda and the Abuja Treaty Establishing the African Economic Community. The CFTA aims to achieve a comprehensive and mutually beneficial trade agreement among member states covering trade in goods, trade in services, investment, intellectual property rights and competition policy.
It is a game changer in the sense that it will be transformative for Africa and her people. It is an agreement that will bring tremendous positive economic impact on people and the continent at large. Through the agreement, countries will create a single market that will spur industrialisation, economic diversification and trade. It will also be an instrument which will bring countries together to formulate a common agenda for Africa to speak with one voice and act in unison, thereby leveraging Africa’s strengths in her commercial and diplomatic engagements with the rest of the world.
According to you, during the last six months following last July’s AU Summit, tremendous progress was made in a bid to establish the CFTA. Bring us up to speed. What, precisely, has happened to date, and where do we go from here?
Since the launch of the CFTA negotiations in June 2015, there have been positive developments to prepare the ground for establishment of the CFTA. After successive rounds of negotiations, the fourth Meeting of AU Ministers of Trade that took place in Niamey, Niger, from December 1 to 2, 2017 considered and approved most of the provisions of the draft agreement establishing the African Continental Free Trade Area. The CFTA agreement includes three protocols namely; the protocol on trade in services, the protocol on trade in goods and the protocol on dispute settlement mechanism. The protocol on trade in services will have two annexes, namely, schedules of commitments and regulatory frameworks. The protocol on trade in goods will have nine annexes: tariff liberalisation schedules, rules of origin, customs procedures and cooperation, trade facilitation, transit and transit facilitation; non-tariff barriers, technical barriers to trade, sanitary and phytosanitary measures, and trade remedies.
On the overall progress in negotiations, the agreement establishing the CFTA and the protocol on trade in services were completed and endorsed by ministers responsible for Trade. It should be noted, however, that some final work is needed to complete the protocol on trade in goods and its annexes, as well as protocol on rules and procedures for settlement of disputes within the African CFTA. For that reason the roadmap has been modified and a calendar of meetings that run from January to March 2018 has been developed and agreed upon by ministers responsible for trade.
Given the loaded agenda of the upcoming AU Summit, where is the chance that the agreement establishing the CFTA will be signed?
Following completion of the pending work, the agreement establishing the CFTA and the three protocols will be ready for approval and signing by March 2018. The Heads of State and Government will decide on when and where to sign the Agreement Establishing the African Continental Free Trade Area.
Negotiations for the establishment of the CFTA were launched in June 2015. The eighth and final round of negotiations was done last November. Are you sure that the phased approach of negotiations gave countries enough room to build their internal capacities, mobilise stakeholders and adjust their national policies to continental objectives of creating a single market?
They were launched in 2015 but a Summit decision to establish the Continental Free Trade Area was made in January 2012. In parallel with organising CFTA negotiating sessions, the African Union Commission conducted technical studies to inform negotiators and organised capacity building activities for Member States. In addition, the CFTA Support Unit was established to provide technical, administrative and logistical support to the negotiations. The preparatory phase that preceded actual negotiations has allowed countries to build their internal capacities and mobilise stakeholders. However, the policy adjustment is a continuous process. Once the CFTA Agreement is signed, its implementation will be phased out over a period between five to 15 years depending on the specific economic circumstances of implementing countries. This is again an opportunity for those countries to adjust their national policies.
What implementation challenges do you expect, and how can they be countered?
Normally, implementation challenges might be of two categories: the loss of government revenues when tariff on imports from within the continent is reduced or eliminated as well as competition that local industries might face as a result of market liberalisation. However, these challenges are always easy to mitigate. Countries implementing a trade agreement are allowed to develop their local industries through applying provisions on sensitive products that are subject to longer liberalisation or transition period and exclusion list which includes products that are not subject to liberalisation. In addition, other trade remedies such as safeguards, anti-dumping and countervailing measures are always provided to deal with adverse impact of liberalising trade. The CFTA Agreement also provides for measures to protect infant industries provided that such measures are applied on a non-discriminatory basis and for a specified period. The potential loss in tariff revenues can always be offset by gains in welfare as well as increase in internal taxes revenue collections that will result from trade creation.
What industrial policies will be needed to increase or maximise the CFTA’s impact on the continent?
Countries need to maximise on intra-industry integration. Intra-industry trade may entail horizontal or vertical specialisation. Horizontal specialisation reduces product variety in the national firms, leading to cost reduction through the lengthening of production runs and the exploitation of economies of scale. Vertical specialisation permits an exchange of parts, components, and accessories that in turn allows the exploitation of economies of scale in the manufacture of these inputs at various levels of fabrication. These considerations indicate the desirability of regional integration among countries at lower levels of development for the sake of efficient industrialisation through increased specialisation and greater competition. International vertical specialisation brings gains to all countries by permitting specialisation to take place according to the relative labour intensity of the production process. This is what I would recommend to countries that will implement the CFTA Agreement.
Please break down these complex economic terms. Intra-industry integration, horizontal specialisation, vertical specialisation, and economies of scale. What do they mean?
You are right! With intra-industry integration, I mean that producers belonging to the same industry may consider developing value chains where, for example, a company in country A may specialise in producing different parts of products and sell them to country B, that will then assemble them and export a final product. The latter is what I refer to as vertical specialisation. It refers to imported goods used as inputs to produce a country's export goods.
With horizontal specialisation, the same producer may consider establishing subsidiaries of the business in many countries and take advantage of economies of scale. As regards economies of scale, when more of a good or a service can be produced on a larger scale, yet with fewer input costs, economies of scale are said to be achieved.
Last year, you told us that the CFTA borrows experience from existing trade arrangements in Regional Economic Communities and builds on them. What particular best practices do you note here?
There are many best practices that can be cited, which the CFTA process has borrowed from Regional Economic Communities. First of all, it should be understood that from the institutional point of view, the Continental Task Force on the CFTA is composed of the AU Commission and Regional Economic Communities Secretariats, among others. This Task Force has met 10 times during the process of negotiating the CFTA and it was set up to provide technical assistance to the negotiations process. Secondly, the draft text that formed the basis for negotiating the agreement was based on already existing treaties, protocols and trade agreements of regional economic communities. Thirdly, CFTA negotiators have, to a large extent, been involved in negotiations in their respective regional organisations. In this regard, both the process and the substance of the CFTA are based on best practices of Regional Economic Communities.
Since 2008, a total 27 countries under the tripartite of the Common Market for Eastern and Southern Africa (COMESA), the East African Community (EAC), and the Southern Africa Development Community (SADC) have worked, or struggled, to form a free trade area of their own. The CFTA is bigger, involving all 55 African countries.
At this rate, once successful, won’t the CFTA make the 27-member TFTA project unnecessary and redundant? What’s your take?
I don’t think the success of the CFTA can make the TFTA redundant. If this assumption holds, then one would argue that the World Trade Organisation would have made Regional Economic Communities redundant! From the legal point of view, the CFTA Agreement shall not nullify, modify or revoke rights and obligations under preexisting trade agreements that members already concluded at regional level. In reality, the success of the CFTA will call for deeper integration at regional level for these regional bodies to remain relevant. However, you have to recall that the Treaty establishing the African Economic Community (Abuja Treaty) provides a roadmap for Africa’s integration agenda that will culminate into African Single market through stages. The formation and strengthening of Regional Economic Communities is one of those stages. There shall be a Continental Customs Union as well as Common Market that will see regional free trade areas cease to exist. Therefore, the CFTA is not an end in itself. It is a road to the vision of creating One African Market.