Economic Research Forum (ERF)

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

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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.

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