African Continental Free Trade Area: Towards the finalization of modalities on goods – Toolkit
African Union member States have agreed to remove 90 per cent of their tariffs on goods over a period of between 5 and 15 years, depending on whether a country is classified as developing or least developed, with special and differentiated treatment for the group of seven countries, which are, as mentioned previously, Djibouti, Ethiopia, Madagascar, Malawi, the Sudan, Zambia and Zimbabwe.
It has not yet been determined, however, whether the 90 per cent of tariffs (also referred to as non-sensitive) that is to be completely liberalized relates to the percentage of total product lines or to the share in the country’s total value of imported products.
Moreover, there are uncertainties regarding how the remaining 10 per cent of tariffs will be treated. According to the modalities agreed at the African Union Ministers of Trade meeting in Niamey in June 2017, the remaining 10 per cent is to be split between sensitive and excluded products. Sensitive tariffs are to be accorded a longer time frame for liberalization while excluded tariffs are not subject to liberalization. However, the exact share of tariffs accorded to either group has not yet been determined.
Against that background, the present toolkit aims to provide guidance for African policymakers and negotiators on how they could possibly resolve the above mentioned issues that remain to be addressed under the AfCFTA negotiations in relation to the modalities on goods, with a view to bringing that aspect of the negotiations to a successful conclusion.
On 21 March 2018 in Kigali, 44 Member States of the African Union signed the pdf Agreement Establishing the African Continental Free Trade Area (AfCFTA) (973 KB) . An additional 6 Member States of the African Union signed the pdf Kigali Declaration (209 KB) by which they committed to sign the Agreement of the African Continental Free Trade Area once they had undertaken necessary national consultations.
One of the key steps beyond the ratification of the Agreement is to prepare and submit tariff offers, under the modalities on goods, that will determine the liberalization efforts to be undertaken between the States parties to the Agreement.
In the modalities for the liberalization of trade in goods that were adopted during the negotiation process, African Union member States agreed to remove at least 90 per cent of tariffs on goods imported from other States parties.
It remains unclear, however, whether the 90 per cent of tariffs refers to 90 per cent of total tariff lines only or a combination of a minimum of 90 per cent of total tariff lines and not less than 90 per cent of total value of imports, also known as double qualification.
In addition, there are uncertainties over the remaining 10 per cent tariffs and how these are to be approached in relation to exempted and sensitive products, and how those tariffs are to be liberalized, whether partially or in full, and over what time frames.
In order to shed light on unresolved issues and to assist African Union member States to prepare tariff offers, the Economic Commission for Africa (ECA) has undertaken a comparative analysis of two possible approaches or scenarios, namely, the tariff line approach (scenario 1) and the double qualification approach (scenario 2), as follows:
Scenario 1 – the tariff line approach
Under the tariff line approach, it is assumed that 90 per cent of the total tariff lines are non-sensitive, that is, that the tariff lines are to be fully liberalized and at an early stage: within 5 years for non-least developed countries (non-LDCs), 10 years for LDCs and 15 years for a group of seven selected countries, namely, Djibouti, Ethiopia, Madagascar, Malawi, the Sudan, Zambia and Zimbabwe;
The remaining 10 per cent is divided into two groups: sensitive products, that is, 9 per cent of total tariff lines to be fully liberalized but over longer periods of time than non-sensitive products (within 10 years for non-LDCs and 13 years for LDCs as well as the group of seven countries); and non-liberalized or excluded products, that is, 1 per cent;
Scenario 2 – the double qualification approach Under the double qualification approach, it is assumed that non-sensitive products correspond to at least 90 per cent of tariff lines and not less than 90 per cent of the total value of imports, with the remainder split between sensitive (7 per cent) and excluded (3 per cent) products.
Shares of excluded products are kept relatively small, in line with a possible anti-concentration clause under the AfCFTA agreements to avoid exempting entire sectors from tariff cuts. Scenario 1 is expected to be less aggressive than scenario 2, hence the smaller apparent share of excluded products under scenario 1. In particular, any share greater than 1 per cent under a tariff line approach could potentially make the liberalization implied under the AfCFTA agreements less ambitious than the commitments made under Economic Partnership Agreements (EPAs) with the European Union, thereby undermining policy coherence within Africa.
It should be noted that the lists of non-sensitive, sensitive, or excluded products are determined by country, except for the members of the East African Community (EAC), Economic Community of Central African States (ECCAS), Economic Community of West African States (ECOWAS) and the Southern African Customs Union (SACU). A common list is determined for the members of each of the latter four regional groupings.
For ranking the lines from the most sensitive to the least sensitive and ultimately determining the lists of products under each of the three categories (that is, excluded, sensitive, non-sensitive) for the two scenarios, the following three options are suggested:
Option 1: delaying or limiting tariff revenue losses; with the most sensitive tariff lines generating the largest tariff revenues;
Option 2: delaying or limiting tariff revenue losses and promoting industrialization; with the most sensitive tariff lines generating the largest tariff revenues but all intermediate products are considered as non-sensitive;
Option 3: delaying or limiting tariff revenue losses and promoting industrialization, including green industrialization; with the most sensitive tariff lines generating the largest tariff revenues but all intermediates and green products are considered as non-sensitive.
It should be noted that green products which can generally be considered as products from the nascent industry can be classified as sensitive (options 1 and 2) but cannot be excluded from trade liberalization, whatever the option, as nascent industry protection should not be permanent.
ECOWAS has a common external tariff with a fifth band (for “specific goods for economic development”), the products of which bear a 35 per cent tariff and are deemed most sensitive, is treated in a slightly different manner. Specifically, within each of the above three options, product lines classified under the fifth band of the ECOWAS common external tariff are prioritized as the most sensitive.
As expected, and using ECCAS as an example of model tariff offers, the findings confirm the pronounced differences between approaches and scenarios:
The 90 per cent non-sensitive tariff lines under scenario 1 would account for considerably less than 90 per cent of the value of imports, whichever option is chosen. It will be below 15 per cent of the value of imports in option 1 and just above 60 per cent in options 2 and 3. This implies that under scenario 1, the first tariff phase-down would entail a relatively marginal and non-substantial liberalization of ECCAS imports compared to scenario 2 (accounting for not less than 90 per cent of the value of imports, whatever the option);
The 9 per cent sensitive tariff lines liberalized but over longer time frames under scenario 1 would amount to significantly more than 9 per cent of the value of imports, whatever the option considered. It will be over 35 per cent of the value of imports in option 1, slightly less than 16 per cent in option 2, and 14 per cent in option 3. This implies that a non-negligible share of the liberalization efforts by ECCAS countries would be done in a second phase, potentially delaying and diminishing the expected benefits from trade liberalization;
The remaining 1 per cent of excluded products under option 1 would account for substantial shares of value of imports that would be exempted from any tariff liberalization, whatever the option. More than 50 per cent of the value of imports would be excluded in option 1, when nearly one quarter would be excluded in options 2 and 3.
In sum, and in most cases beyond the example of ECCAS, it can be expected that exclusions would amount for considerably larger proportions of total imports under the percentage of the tariff line approach than under the double qualification. This suggests that a tariff line approach for liberalization of goods under the AfCFTA agreements could lead to at least four important consequences:
The risk that less will be offered to African counterparts than what has been agreed with the members of the European Union under EPAs (generally 80 per cent of imports to be liberalized);
The risk of censure through the World Trade Organization (WTO) regional trade agreement surveillance process, if all trade is not liberalized substantially. The necessity to liberalize substantially all trade was also a negotiating guiding principle set out by the African Union Ministers of Trade meeting in May 2016;
Uneven liberalization efforts across countries and regions (90 per cent of tariff lines resulting in different values of imports to be liberalized across countries and regions);
Limited economic gains from unambitious liberalization (limiting tariff revenue loss rather than substantial trade creation and additional revenue gains).
ECA analysis indicate that a double qualification approach (scenario 2) will deliver greater and more balanced outcomes for African countries than an approach through tariff lines only.