Economic Research Forum (ERF)

Africa’s continental free trade area: a stepping-stone to integration?

1283
In a week that marks the anniversary of the treaty for an African continental free trade area, signed in Kigali on 18 March 2018, this column asks whether it is a turning point on the road towards economic integration. There are signs of progress: the inclusion of negotiations on trade in services; progress-tracking on removing barriers to trade in goods; easing the movement of persons; and improving hard and soft infrastructure to lower trade costs. But starting off with a small membership that does not include all the big players and the possibility of backsliding under the guise of indiscriminate promotion of regional value chains pose serious threats.

In a nutshell

Under African Union guidance, we are, for the first time, witnessing a continental debate about issues previously conducted only in regional economic communities.

There are several related signs of a move within the continent towards some delegation of authority to supranational bodies, as well as signs of greater attention to the provision of regional public goods.

But entry into force of the African continental free trade area before negotiations are completed – tariff schedules, rules of origin and dispute settlement are still under negotiation – creates many uncertainties since the treaty will only bind the signatories.

With Egypt’s parliamentary ratification, three weeks from the anniversary of the signing of the African continental free trade area (AfCFTA), 19 out of the required 22 ratifications are in hand, signalling that meeting the objective of ‘entry into force’ (30 days later) is within reach.

This is no mean feat given that less than two years have elapsed since the launch of negotiations and the signature in Kigali in March 2018. In contrast, there has been a decade-long process for the Tripartite FTA involving the Common Market for East and South Africa (COMESA), the Economic Community of West African States (ECOWAS) and the South Africa Development Cooperation (SADC). That process, which comprises 26 countries, is still lingering on, finalising tariff schedules and the applicable rules of origin.

Under African Union guidance, we are, for the first time, witnessing a continental debate about issues previously conducted only in regional economic communities (RECs). So 55 governments have reached an unprecedented degree of consensus leading them to adopt texts on: establishing the AfCFTA (articles 22 and 23); a protocol on trade in goods; a protocol on trade in services; and dispute settlement with 49 signatures obtained by July 2018.

So, this time may be different. Services, complementary to trade in goods, are included from the start in Phase I, rather than being left for a later Phase II covering ‘behind-the-border’ measures (such as competition policy, investment and intellectual property). Evidence indicates that regional trade agreements with deep legal commitments have more vertical foreign direct investment (FDI).

There is also greater effort at tracking compliance in the movement of capital, services and goods as in the East African Community’s (EAC) ’Common Market scorecard’, which might be replicated at a continental level. In spite of mismatches between labour mobility regulations and implementation, migration is also on the rise for those countries that have implemented the regional initiatives on the free movement of persons.

Likewise, if the Single African Air Transport Market initiative of January 2018 is progressively implemented, connectivity across Africa will be improved. With regionalised communication infrastructure, the associated networks can operate more efficiently.

Cooperation on security is also on the rise, with the African Standby Force operational since 2016. These are signs of a move towards some delegation of authority to supranational bodies and signs of greater attention to the provision of regional public goods.

But entry into force of the AfCFTA before negotiations are completed (tariff schedules, rules of origin and dispute settlement are still under negotiation) creates uncertainties since the treaty will only bind the signatories. And signatories will only be able to trade under the new agreement once the protocols on trade in goods and trade in services and the applicable rules of origin are completed.

Those countries that have not deposited instruments of ratification by the date of entry into force will not be parties to the agreement. If a powerful country like Nigeria joins later on, will the ‘acquis’ be up for renegotiation?

Other challenges also lie ahead. In the immediate future, reaching continental free trade with a minimal number of exceptions to zero tariffs is still work in progress for most RECs, as a large share of bilateral trade still takes place at non-preferential (‘most favoured nation’) rates. Free trade will also require harmonising rules of origin at the continental level since most countries still maintain different trade policies with extra-continental partners.

Designing simple and transparent rules of origin has proved elusive for the European Union and the United States. The word in policy circles is that African trade negotiators have already identified 800 products for specific rules of origin.

If so, the end result will be restrictive conditions for market access with conditions decided by powerful protectionist lobbies in the powerhouse economies. The upshot will be a denial of the intended preferences, as compliance costs will exceed gains from preferential margins so partners will not choose to export at the preferential tariff rate.

Down the road, the biggest challenge will be handling the ‘regional value chain’ motto: how to participate in supply chain trade by moving to downstream activities. So far, with the exception of ‘factory Asia’, other regions have barely participated in supply chains. Exports from Africa, for example, have lower shares of foreign value added while their exports are mostly embodied in exports of other regions, a sign of low downstream activity.

A successful industrial policy will require agreement among partners in customs unions to select short lists. ECOWAS, for example, has five tariff bands in its common external tariff (CET) and a long list of exceptions, while the EAC, which currently has three bands, is contemplating a move to a four or five-band CET in the 0-35% range also with an exception list.

These difficult choices are compounded by the fact that the new technologies are skill-intensive with few possibilities of substitution with unskilled labour, leaving little room for low-income countries to offset their technological disadvantage in manufacturing activities with low-cost labour.

By raising the debate about integration to the continental level, the AfCFTA has, at the very least, made explicit the challenges that lie ahead. Steps along the road are now well defined.

Elements of the architecture, notably the simultaneous tackling of barriers to trade in goods and services, recognise that trade agreements with deep legal commitments are favourable to investment from both within and beyond the region. Beyond juggling the objectives of breadth, depth and solidarity, success will hinge on moving to downstream activities, avoiding capture by lobbies in the most powerful economies.

Most read

Labour market effects of robots: evidence from Turkey

Evidence from developed countries on the impact of automation on labour markets suggests that there can be negative effects on manufacturing jobs, but also mechanisms for workers to move into the services sector. But this narrative may not apply in developing economies. This column reports new evidence from Turkey on the effects of robots on labour displacement and job reallocation.

Global value chains and domestic innovation: evidence from MENA firms

Global interlinkages play a significant role in enhancing innovation by firms in developing countries. In particular, as this column explains, participation in global value chains fosters a variety of innovation activities. Since some countries in the Middle East and North Africa display a downward trend on measures of global innovation, facilitating the GVC participation of firms in the region is a prospective channel for stimulating underperforming innovation.

Food insecurity in Tunisia during and after the Covid-19 pandemic

Labour market instability, rising unemployment rates and soaring food prices due to Covid-19 are among the reasons for severe food insecurity across the world. This grim picture is evident in Tunisia, where the government continues to provide financial and food aid to vulnerable households after the pandemic. But as this column explains, the inadequacy of some public policies is another important factors causing food insecurity.

Sustaining entrepreneurship: lessons from Iran

Does entrepreneurial activity naturally return to long-term average levels after big economic disturbances? This column presents new evidence from Iran on trends in entrepreneurship among various categories of firm size, sector and location – and suggests policies that could be effective in promoting entrepreneurial activities.

Intimate partner violence: the impact on women’s empowerment in Egypt

Although intimate partner violence is a well-documented and widely recognised problem, empirical research on its prevalence and impact is scarce in developing countries, including those in the Middle East and North Africa. This column reports evidence from a study of intra-household disparities in Egypt, taking account of attitudes toward gender roles, women’s ownership of assets, and the domestic violence that wives may experience from their husbands.

Manufacturing firms in Egypt: trade participation and outcomes for workers

International trade can play a large and positive role in boosting economic growth, reducing poverty and making progress towards gender equality. These effects result in part from the extent to which trade is associated with favourable labour market outcomes. This column presents evidence of the effects of Egyptian manufacturing firms’ participation in exporting and importing on their workers’ productivity and average wages, and on women’s employment share.

Do capital inflows cause industrialisation or de-industrialisation?

There is a clear appeal for emerging and developing economies, including those in MENA, to finance investment in manufacturing industry at home with capital inflows from overseas. But as the evidence reported in this column indicates, this is a potentially risky strategy: rather than promoting industrialisation, capital flows can actually lead to lower manufacturing value added and/or a reallocation of resources towards industries with lower technology intensity.

Financial constraints on small firms’ growth: pandemic lessons from Iran

How does access to finance affect the growth of small businesses? This column presents new evidence from Iran before and during the Covid-19 pandemic – and lessons learned by micro, small and medium-sized enterprises.

The economics of Israeli war aims and strategies

Israel’s response to last October’s Hamas attack has led to widespread death and destruction. This column outlines the impact thus far, including the effects on food scarcity, migration and the Palestinian economy in both Gaza and the West Bank.

Happiness in the Arab world: should we be concerned?

Several Arab countries have low rankings in the latest comparative assessment of average happiness across the world. But as this column explains, the average is not a reliable summary statistic when applied to ordinal data. The evidence from more robust analysis of socio-economic inequality in happiness suggests that policy-makers should be less concerned about happiness indicators than the core development objective of more equitable social conditions for citizens.