FTA Continental Africa - What does it mean?

FTA Continental Africa – what does it mean?

Inside Africa’s new continental free trade agreement

In the African Union’s long-term strategy document, Agenda 2063, is a vision of utopia. A prosperous Africa, a peaceful Africa, a just Africa. One where Pan Africanism and individual cultural values embolden one another, global interactions are no rigged games, and its businesses and people alike reap the benefits of economic development. The African citizen who can travel freely, work freely, and earn and spend a common currency is not the model citizen but the average one in the African Union’s aspirational thriving, highly integrated continent.

The African Union is a considerable way of achieving all that it wants to, but the ball is certainly rolling. In March, the leaders of 44 African nations signed a landmark agreement to form a new continental free trade bloc. Covering 1.2 billion people and an approximate GDP of $2.3 trillion, the African Continental Free Trade Area (AfCFTA) is the largest agreement of its kind since the World Trade Organisation was formed and aims to establish “a single continental market for goods and services, with free movement of business persons and investments.”

If implemented successfully, this will greatly upheave the way trade is done in Africa. For the first time, Egyptian manufacturers will be able to sell their products in The Gambia without paying the tax per shipment across the border, a media agency in Tanzania can open a regional office in Angola without regulatory impediment, and African citizens will have the right to live and work across the continent.

It’s of symbolic weight that the agreement was signed in Kigali, Rwanda’s capital. Twenty years ago, the psychological and economic wounds of the Rwandan genocide were far from even beginning to heal. No reckoning from the public executions of genocide perpetrators met with cheering crowds in Kigali, could return the missing or killed, reverse the vicious spread of HIV or revive crumbling infrastructure and industries. The impetus to protect and empower Tutsi groups in Zaire (now the Democratic Republic of the Congo) in part motivated Rwanda’s involvement in the Second Congo War, the deadliest worldwide conflict since World War II. Today, Rwanda is regarded as one of safest countries in the world, among the least corrupt countries in Africa and has, on paper, experienced annual economic growth of 5.2% between 2005 and 2016.

A lot can change in 20 years – yet a lot can stay the same. Economic development alone has not proved a panacea for the continent-wide issues that have strangled intra-African trade: excessive bureaucracy, inefficient infrastructure, conflicting policies, underinvestment, and corruption. While the agreement is an ambitious step towards achieving a united and functional Africa, it’s important to look deeper at what the agreement involves, how it seeks to build on the current circumstances of trade in Africa, how the agreement seeks to build on them, and what the benefits and challenges are going forward.

What has been agreed?

The AfCFTA, as stated above, is essentially a common market for goods and services to move freely as well as a customs union for the free movement of capital and business travelers. It’s been in the making for several years: the African Union first agreed in January 2012 to develop the AfCFTA. Eight rounds of negotiations later, beginning in 2015, we’ve arrived at the agreement. Each country has 120 days after signing to formally ratify the deal in parliament. When twenty-two or more states do so, the AfCFTA will come into effect in 30 days.

Freedom of movement and residence, however, are not on the table for citizens of all countries that have signed the continental trade deal. The Protocol of Free Movement, signed in parallel to the AfCFTA, will bestow those rights to citizens of the 27 countries who joined this additional agreement.

Both deals were preceded by the launch of the Single African Air Transport Market, an agreement signed by 23 countries to increase Africa’s interconnecting flight links and reduce fares. In turn, this should boost economic growth by enabling intra-African tourism and creating more jobs in the aviation industry.

All three agreements are significant strides towards realizing a truly interconnected Africa, yet there are still some kinks to iron out. It’s notable that some of Africa’s biggest economic players – namely South Africa and Nigeria – have not signed the continental free trade deal. Both countries have joined the Single African Air Transport Market, indicating a certain will to integrate further with the rest of the continent, yet have expressed reservations towards the AfCFTA. South Africa has been outwardly supportive of the agreement’s initiatives yet has called for more thorough domestic consultation on the proposed trade deal before committing. It is widely expected that South Africa will eventually join the new free trade area after a period of contemplation and after completion of the required legal process, as has been the case with Africa’s model country, Botswana.

President Buhari of Nigeria has voiced a way more grievous concern: “We will not agree to anything that will undermine local manufacturers and entrepreneurs, or that may lead to Nigeria becoming a dumping ground for finished goods.” If Nigeria’s priority is to protect its industries, then its caution is not unjustified. The liberalization put forward by the AfCFTA, while certainly inviting for trade, can come at the cost of a domestic enterprise. As an example, the textile industry in South Africa has largely deteriorated as the country’s apparel companies have outsourced en masse to Lesotho, a fellow member of the Southern African Customs Union and an economy highly integrated with South Africa’s.

It’s perhaps inevitable that there will be both winners and losers thanks to the new agreement. Credit rating agency Moody’s has reported that countries such as South Africa, Egypt, and Kenya are the most likely to reap the benefits thanks to their large manufacturing bases, robust infrastructure and reliable access to electricity. Other countries will be let down by their poor infrastructure, corruption and ineffective customs documentation – a troubling sign for large swathes of Africa when considering the current circumstances of trade.

What was Africa’s trade situation before AfCFTA?

As Simon Allison puts it: ‘Africa’s entire population is roughly the size of India’s, but Africa is 55 countries, with 55-odd currencies and 55 regulatory environments and 55 different sets of red tape.’ This observation is not lost on African entities doing business – only 18% of the continent’s export value comes from intra-African trade, compared with 69% for that of the EU. In no small part is this because many African companies pay more customs duties when they export to their neighbors than to countries in Europe or Asia. In response, the continental free trade agreement has pledged to reduce 90% of all customs tariffs down to zero, a seismic crackdown from the current average of 6.1% zero-cost tariffs.

If tariffs are an easy burden to identify and propose a solution for, then bringing Africa’s competing regional economic areas together under a cohesive structure, with shared diplomatic aims, is sure to be a messier task. Africa is currently partitioned into numerous regional economic communities, some practically defunct – the Arab Maghreb Union, for instance, has not had a high-level meeting since 2008, thanks to ongoing territorial and intelligence disputes between its North African member states. That these nations – Morocco, Libya, Tunisia, Algeria, and Mauritania – have also signed the new continental free trade agreement is an encouraging sign. In this case, the proposed free trade area is apparently a compelling enough prospect for its members to put aside frosty diplomatic relations in the name of boosting stagnant trade.

This, however, is not the general picture. Rather than a collage of trading blocs that virtually don’t exist, lying in wait to be overwritten by the AfCFTA, the rest of Africa’s regional economic groups are very much active – and their structural deficiencies are bad omens for a trade project that is not properly managed. As it stands, many African countries belong to multiple regional economic communities, which can lead to challenges in promoting trade relationships that are of equal benefit to each regional and individual party. An example of this is Tanzania’s membership in both the Southern African Development Community (SADC) and East African Community (EAC). While Tanzania will generally have to apply external tariffs as set by the EAC, it enjoys free trade relations with other members of the SADC, diverting potential trade with SADC members away from other EAC countries, as Tanzania acts as their tariff-free conduit to the bloc. Policymakers charged with implementing the continental free trade area should be aware that more pronounced trade imbalances between African nations will succeed only in deepening inequality and poverty on the continent.

Trade ties alone also far from guarantee diplomacy. A trade war between members of the East African Community has flared up just weeks after the AfCFTA was signed. Membership of the EAC common market allows free movement of locally manufactured goods within the bloc, yet Uganda and Tanzania have imposed a 25% import duty on Kenyan confectionary products entering their countries following a dispute over the use of imported industrial sugar. The Kenyan Revenue Authority criticised the move – as East Africa does not produce industrial sugar, others in the bloc rely on imported sugar to produce goods and, under the same remission scheme, are also not liable to pay duty for it.

This is the latest escalation in a long-simmering trade dispute, which last year saw both Kenya and Tanzania heavily tax or outright ban various imports from one another. It’s unclear at present how exactly the AfCFTA’s affordances and regulations will differ from that of the EAC, but we can see in practice that liberalized trade circumstances do not pacify all hostile actions between states. For the agreement to fully realize the unified Africa of Agenda 2063, strategists will have to come up with initiatives that ensure compliance and cooperation to avoid future disputes.

A more worrying consistency across the continent is the presence of methods and structures that have constrained trade. The Financial Times gives an account of a common quandary: truckers at the border between Ghana and Ivory Coast, preparing to spend a ninth night sleeping in their trucks to persist with a delivery. This, they claim, is not an uncommon setback – and some cargo deliveries are even left in limbo for a month. Disarray over what time the borders close and on what duty to apply – even with both neighbors sharing membership of the Economic Community of West African States (ECoWAS) – further reinforces how much more clear and consistent in its regulations the AfCFTA needs to be.

The overpowering and inscrutable bureaucracy of this kind has led to pessimism towards the new agreement. Parfait Kouassi, an Ivorian businessman and deputy chairman of Ivory Coast’s chamber of commerce, told the FT he was “very skeptical” about the trade deal’s short-term prospects because of “so many officials’ narrow-minded thinking”. He recently wanted to build a medicine factory in Benin but “it just couldn’t happen because of the bureaucracy”, further revealing how pharmaceutical exports from Ivory Coast to neighboring Burkina Faso would have to first go through France.

Still, there are spots of productivity which the AfCFTA should look to emulate further afield. Kenya and Uganda have been able to drastically cut the time taken to process trade at the border by setting up a mutually managed border post in 2016. Officials from the two countries sit next to one another to ensure that no services are duplicated, a process so markedly efficient it is thought to have reduced clearance times from around six days in 2012 to 20 minutes today. The result has been a success: both the Kenyan and Ugandan revenue authorities say their income from this border post has increased by roughly 50%.

Going forwards

For the AfCFTA to be a success, the African Union should put a great deal of focus not just on liberalizing trade, but on strengthening the infrastructure that will support it. Projects such as the Cairo to Cape Town highway, the Mombasa-Lagos-Dakar highway and the transport corridor linking Lamu Port, South Sudan, and Ethiopia have all been proposed just to fall by the wayside.

Now is the time to reverse that. A vision of thriving intra-African trade cannot be realised without reliable intra-African connections. Africa’s huge landmass is logistical nightmare – it is thought to the point where transporting goods could be up to five times higher in some sub-Saharan African countries than in the US. The colonial appeasement of constructing transport infrastructure that is outward looking must be replaced by infrastructure that connects the interior populations rather than acts as a link to ports for external trade.

There must also be a dedicated effort for African nations largely dependent on agriculture and natural resources to diversify their economies. Not only will they suffer greatly from environmental volatility, but countries such as Chad, the Democratic Republic of Congo, and Zambia, could see limited income gains and risk losing their competitive advantages as economies better equipped to manufacture and provide services increase their productivity and human capital capabilities. The AfCFTA already has the greatest levels of income disparity of any continental free trade agreement, more than doubling the levels witnessed in ASEAN and CARICOM. Such inequality will only intensify if the appropriate action is not taken.

The African Union has an ambitious task ahead of it in realizing its unified and prosperous Africa. If the AfCFTA is executed well, it could seriously galvanize the development of nations that have long struggled to get a foothold, and thus it deserves only to succeed.

Leave a Reply

Your email address will not be published. Required fields are marked *