Summary: Africa Continental Free Trade Agreement

Professor Jacob Viner, the Canadian born American Economist, posited that free trade agreements have been shown to have trade creation effects among member countries and trade diversion effects with non-member countries. In the case of Africa, the problem of logistics (soft infrastructure), regional dynamics, and rules of origin mean that the Africa Continental Free Trade Agreement (AfCFTA) faces great but surmountable challenges for the trade creation benefits to materialize. Intra-African trade currently accounts for between 16%-18% of African trade, and the success of the AfCFTA will be dependent on its ability to increase this share.

The emergence of South Africa’s Chief trade negotiator as the Secretary-General of the Secretariat of the AfCFTA showcased the expected horse-trading between regional powers, which needs to be modeled to competitive advantage to provide best outcomes for the process.

Kenya was also recently announced to be in advanced discussions with the United States for a bilateral trade agreement. The definition of rules of origin, standard-setting procedures for goods and services, and monetary policy issues will likely become burning issues to this process.

In December 2019, the Ivorian President announced the transition of Francophone countries from the CFA Francs to the ECO, which had hitherto been planned as a West African regional currency. The announcement left West African regional powers like Nigeria and Ghana in limbo, and the impact has not yet been seen.

Intra-continental trade and tariff liberalization alone is not sufficient to ensure market access. The importance of nontariff measures that impede market access and competition will become even more pronounced in the following months. Nontariff measures may be intended to influence competition in export and import markets, as tariffs do (such as quotas, subsidies, and export restrictions), or they may have public policy aims, such as protecting health, safety, and the environment (technical barriers to trade).

For the Africa Continental Free Trade Agreement (AfCFTA) to achieve its intended impact, the hard and soft infrastructure across the continent must be developed, trade with existing trade partners deepened, general rules of origin rather than product-specific measures must be followed, and currency implications on trade have to be taken into consideration.

Other far-reaching considerations including regulatory arbitrage, Intellectual property rights, the role of Regional Economic Communities (REC’s) must all be carefully integrated into the implementation process. Labor mobility and the impact of tariff liberalization measures on individual country tariffs and revenues will also need to be considered.

The AfCFTA provides significant benefits to the Continent, and individual countries will have to surrender self-interest and make significant sacrifices for collective interest.

RECOMMENDATIONS

Integration policymakers are advised by the African Development Bank (AfDB) not to:

• Overly worry about ceding national sovereignty to a supranational authority because toning this down facilitates harmonized regulatory policies, builds trust, and checks the political pressure to nontariff barriers.
• Neglect the soft infrastructure (logistics), which are considered essential to getting the gains from investments in hard infrastructure (roads, rails, bridges, ports).
• Believe that integration will necessarily concentrate even more economic activity in big countries because trade facilitation has spread economic activity all along the corridors.
• Underestimate how poor households are hit most by high-tariff sensitive lists for products like rice and sugar, as the common external tariffs do in ECOWAS and (less) in the East African Community.
• Impose sector-specific or product-specific rules of origin. Word in policy circles, however, has it that African trade negotiators already have identified 800 products for specific treatment.

The bank and the United Nations Economic Commission for Africa (UNECA) also recommends the following to maximize the benefits of the Free Trade Area:

• Monitor progress in reducing bilateral tariffs and nontariff barriers, as the East African Community does with Common Market Scorecard by tracking compliance in the free movement of capital, services, and goods.
• Monitoring the implementation of regional integration is critical. The development of the African Regional Integration Index by ECA in collaboration with the African Union Commission and the African Development Bank is a powerful tool for monitoring integration.
• Eliminate all of today’s applied bilateral tariffs in Africa and keep rules of origin simple, flexible, and transparent.
• Remove all nontariff barriers on goods and services trade on a most favored nation basis, since they apply overwhelmingly to all partners for trade across Africa.
• Competition regimes across Africa should be harmonized. To consolidate the efforts of regional economic communities—such as the East African Community, the Economic Community of West African States, the Common Market for Eastern and Southern Africa, the Economic and Monetary Community of Central Africa and the West African Economic and Monetary Union—a continent-wide competition regime to regulate quality and costs across the continent should be included under the AfCFTA framework.
• Implement the WTO’s Trade Facilitation Agreement to reduce the time it takes to cross borders and the transaction costs tied to nontariff measures.
• Consider the effect of other developing countries reducing by half their tariffs and nontariff barriers on a most favored nation basis. That could bring Africa’s gains to 4.5 percent of its GDP, an additional $31 billion.
• Also, consider a 0.2% tariff on imports from high-income countries. That could bring in $850 million a year to finance trade facilitation projects.
• Then, put much more emphasis on regional public goods especially for the benefit of the low-income countries.
• Synchronize financial governance frameworks across Africa and tighten prudential frameworks for supervising financial flows, while removing any remaining legal restrictions to cross-border financial flows and transactions.
• Pool power to tap the enormous potential of cross-border trade in electricity. And as the Nord Power Pool in northern Europe shows, start with a small number of countries, rely on external finance to increase capacity, combine generation with transmission, and have enough transmission capacity to stabilize supply and promote competition.
• Open African skies to the competition. The African Union’s Single African Air Transport Market, launched in January 2019, has so far been signed by 22 countries with 75 percent of intra-African air transport. Morocco’s open skies policy shows how lowering airfares and opening new routes can increase the seats offered by half and boost the share of low-cost airlines.
• Open African borders to encourage free movements of people—say, by ratifying and implementing the African Union Passport, launched in 2016 and expected to be fully rolled out by 2020.

CONCLUSION

The political economy resulting from heterogeneity along economic, cultural, and institutional dimensions will have an impact on the level of integration resulting from the AfCFTA.

The European Economic Area has adopted elements of a Customs Union whilst allowing some countries within a single market outside the Customs Union. African countries will be undergoing significant negotiations in the coming months, which may not be final but will require common ground, sacrifices, commitment, and room for upgrades in light of events. The Regional Economic blocks will also have to be carried along in these negotiations as their relevance may become disadvantaged in the long run.

An effective preferential trade agreement will increase trade among members by reducing tariffs between members, eliminating most nontariff barriers promoting trade facilitation. Of these three, the trade facilitation component is the most difficult to accomplish, especially if the level of integration is shallow.

At a deeper level, integration requires cooperation between governments and people: to foster peace and security, conserve shared natural resources, develop and manage regional infrastructure, and share systems of rules and policy regimes. Integration thus provides regional public goods. These forms of cooperation call for collective action, which requires trust and some supranational delegation of authority.

Written by: Ebuka Emebinah MPA-EPM 2020 Candidate