TradesCape: the AfCFTA Agreement is set to enter into force by early 2019
South Africa signed the African Continental Free Trade Area Agreement (AfCFTA) on 1 July 2018. What does this mean in practical terms?
Wesgro recently hosted a seminar, in partnership with tralac (Trade Law Centre) and the Department of Trade and Industry (DTI), on the AfCFTA and the practical implications thereof for doing business on the Continent.
The African Continental Free Trade Area (AfCFTA)
The AfCFTA aims to establish a free trade area spanning the 55 Member States of the African Union (AU). It includes undertakings by Member States to progressively eliminate tariffs and non-tariff barriers to trade in goods and liberalise trade in services; cooperate on investment, intellectual property rights, competition policy, customs matters, and all other trade-related areas; and to establish a dispute settlement system. The continental trade agreement will build upon already existing regional economic communities, for example, SADC, COMESA, EAC, and ECOWAS and incorporate ongoing developments under the Tripartite Free Trade Area (TFTA).
Benefits for trade and investment in Africa
According to the Department of Trade and Industry, the AfCFTA holds many benefits, including:
Improving the movement of goods and services through better customs cooperation among countries in Africa. Harmonisation of customs documentation and processes will speed up border crossings.
Ensuring an effective and functional dispute settlement mechanism to deal with trade disputes arising under the AfCFTA.
Eliminating non-tariff barriers.
Improving investment prospects due to economies of scale associated with a larger market.
Advancing the complementary pillars of industrialisation and infrastructure development to boost Africa’s productive capacity and supply side constraints.
Legal certainty and predictability of a regional market.
The encouragement of a rules-based trading regime.
Opportunity to expand into new markets.
Investment protection and facilitation.
A fair and impartial dispute resolution mechanism.
The progressive elimination of tariffs, elimination of non-tariff barriers, customs cooperation, and cooperation on sanitary and phytosanitary measures will all boost intra-Africa trade.
Status of AfCFTA
The AfCFTA was launched in March 2018 when 44 AU countries signed the Agreement Establishing the AfCFTA. Since then 5 more countries, including South Africa have signed the agreement.
The Agreement Establishing the AfCFTA is the overall framework agreement to which the various protocols, annexes and appendices form an integral part. It is important to note that most of the details still need to be negotiated.
Thus far, what has been agreed upon are the objectives, principles, institutions and a workplan for completing the negotiation process. At this point the framework agreement includes a protocol on trade in goods, a protocol on trade in services, and a protocol on dispute settlement. Once complete, it will also include protocols on investment, intellectual property rights, and competition policy.
Negotiations are divided into Phase I and Phase II, Phase I is currently underway, and includes trade in goods, services, and dispute settlement. Phase II is set to be concluded by 2020 and will cover investment, intellectual property rights, and competition policy.
At this point, the final annexes to the protocol on trade in goods and the protocol on the rules and procedures for the settlement of disputes, as well as the list of identified trade in services priority sectors have been submitted to the AU Assembly of Heads of State and Government. Still underway in Phase I is the negotiation of tariff concessions and the rules of origin with regard to trade in goods; and specific commitments with regard to trade in services.
The deadline for submission of tariff commitments and specific services liberalisation commitments is January 2019.
The AfCFTA will not replace the current regional economic communities (RECs), but rather will build upon them and ensure greater harmonisation and coordination between them. South Africa is currently a member of both the Southern African Customs Union (SACU) and the Southern African Development Community (SADC). Currently SACU is also in the process of negotiating tariff reductions with the East African Community (EAC) (Kenya, Tanzania, Uganda, Rwanda, Burundi, and South Sudan) and with Egypt under the auspices of the Tripartite Free Trade Agreement (TFTA).
Other significant events in 2018, which do not form part of the AfCFTA agreement but are closely associated with it, include the launch of the Single African Air Transport Market (SAATM), the Protocol on the Free Movement of Persons, and the first meeting of the AfCFTA Business Forum.
Liberalisation of trade in services
One of the most significant aspects of the AfCFTA will be the progressive liberalisation of trade in services. This is especially important from a Western Cape perspective, where services make up approximately 75 percent of the economy.
Priority sectors for the first round of negotiation of services liberalisation have been agreed upon by the Ministers of Trade as follows:
- Business services
The top services exporters in Africa are Morocco, South Africa, and Egypt, and the top services importers are Egypt, South Africa, and Angola.
Public participation and consultation
The AfCFTA negotiations are led by the DTI with the support of the Department of Agriculture, Forestry and Fisheries; the South African Revenue Service; the Department of International Relations and Cooperation; as well as the Department of Justice and Constitutional Development.
One of the most pertinent issues raised during the seminar was the process of private sector engagement with government with regard to the AfCFTA negotiations. Formal processes for engagement exist through NEDLAC, however, there are many companies and even industries that feel that they are not sufficiently represented through NEDLAC, in which case representations can also be made to the DTI on an ad hoc basis. In particular, there may be room for services industries to be better organised in terms getting a broader segment of their voices heard while negotiations are still underway.
The commitments that South Africa makes under the AfCFTA will be binding, and it is therefore very important that this agreement is workable and effective. In order to achieve the objective of boosting intra-African trade the agreement needs to make trading easier, and this will only be effectively achieved if the private sector, i.e. the traders, have effective input in the negotiation process.
Entry into force and binding in law
The AfCFTA will enter into force when 22 countries have ratified the agreement. The aim at the African Union is to see the AfCFTA enter into force at the end of December 2018. So far 6 countries have ratified the agreement.
South Africa’s constitution provides that the negotiation and signing of international agreements (such as the AfCFTA) is the responsibility of the national executive, i.e. the president and his cabinet, but that such agreements will only be binding once approved by resolution in Parliament. Ratification of the AfCFTA therefore depends on Parliament approving the AfCFTA.
The aim of the South African government is be one of the first 22 countries to ratify the AfCFTA, and therefore to have the agreement approved by Parliament by the end of the year or in early 2019.
Importance of the African Market
The African market consists of about 1.2 billion people, projected to reach 2.5 billion by 2050, and a combined gross domestic product (GDP) of more than US$3.4 trillion. According to Harvard’s Centre for International Development, five of the ten countries projected to have the fastest growing economies by 2026 are situated in Africa.
Intra-Africa trade is very low compared to other regions. Only about 17 percent of all African trade is intra-Africa, while intra-Europe trade is 67 percent, and intra-Asia trade is 58 percent of all Asian trade.
Of the 17 percent of intra-Africa trade, South Africa takes up the lion’s share; 35 percent of exports were from South Africa in 2016, with Nigeria following at 8 percent. South Africa is also the top importer of African goods, importing 21 percent of all African exports in 2016, with Namibia following with 8 percent. South Africa largely imports raw materials from the Continent and exports manufactured goods to the Continent.
The rest of Africa is the top destination for exports from the Western Cape, followed by Europe. In 2017, the Western Cape exported R45 billion worth of goods to Africa. The Continent is also the top destination for investment by Western Cape companies, accounting for more than 50 percent of outward investment. According to a Wesgro survey, an estimated 51 percent of international companies investing in the Western Cape have indicated that they had motives for expanding into the rest of Africa from a Western Cape base.
In terms of exports, the Continent is a particularly important market for manufactured goods from South Africa. While only 27 percent of South Africa’s total exports go to the rest of Africa, 64 percent of all manufactured goods exported from South Africa are destined for the Continent.
The top three African countries for exports from South Africa are Botswana (20 percent), Namibia (18 percent), and Mozambique (15 percent). For exports from the Western Cape, the top destination in Africa is Namibia (31 percent), followed by Botswana (19 percent), and Kenya and Zambia (8 percent).
The top ten exports from South Africa to the rest of Africa in 2017 were: refined petroleum oils, vehicles for goods transport, electrical energy, chromium ores and concentrates, coal, diamonds, cars, parts for moving machinery, maize, and steel.
The top five imports to South Africa from the rest of Africa in 2017 were: crude petroleum oils, scents used in manufacturing, gold, petroleum and gaseous hydrocarbons, and refined petroleum oils (Trademap, 2018).
The top ten exports from the Western Cape to the rest of Africa in 2017 were: Refined petroleum oils, steel, cigarettes and cigars, fruit juices, apples and pears, wine, ethanol, sulphur, packaging articles, and fermented beverages e.g. cider.
The top five imports to the Western Cape from the rest of Africa in 2017 were: crude petroleum oils, frozen fish, t-shirts and vests, beer, and male clothing (Quantec, 2018).
This article was originally published by Wesgro. Read the original article.