Countries sign the African free trade area agreement

Despite the battering that open markets have taken in recent times, African nations look set to create a prosperous and efficient trading network as they push ahead with the ambitious and far-reaching CFTA project

 

Hery Rajaonarimampianina, President of Madagascar, and Ethiopia’s Finance Minister, Ahmed Shide, attend the 2016 Summit of the Common Market for Eastern and Southern Africa 

The African continent is one of huge untapped potential. Despite its rich supply of natural resources and its large, youthful population, it continues to lag behind most of the world in terms of economic development. The combined GDP of Africa’s 50-plus countries, based on purchasing power parity, are equal to roughly a third of the US’.

The causes of Africa’s struggles are deep-rooted, varied and not easily solved

Recently, however, one particular challenge has received increased attention: trade. Back in March, at an African Union summit held in Rwanda, a major breakthrough was made that could revolutionize the continent’s economy. During the session, 44 countries signed up to a continent-wide free trade agreement that, if ratified, will create the largest single market in the world.

The African Continental Free Trade Area (CFTA) hopes to modernize a trading landscape that remains hampered by high tariffs, outdated (or non-existent) infrastructure and regional fragmentation. If it is successful, it will become the largest free trade zone in the world and could play a leading role in lifting millions out of poverty. Progress, however, will be hard-won. The first challenge is convincing the 11 national governments that refused to sign the CFTA to change their minds – including two of Africa’s largest economies: Nigeria and South Africa.

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Africa’s need for greater intercontinental trade is well documented. Existing trading networks range from the relatively liberal to the stubbornly protectionist. In the worst examples, exporters are forced to wait at border crossings for weeks and businesses choose to transport goods to neighboring countries via EU middlemen to avoid bureaucratic hurdles. Such inefficiencies cause delays and create an unfavorable business climate. If investors choose to put their money into markets elsewhere, few could blame them. 

The CFTA hopes to solve some of these issues by creating a single continental market for goods and services. Free movement is one of the project’s main aims, along with reducing tariffs on 90 percent of goods. Plans to create a customs union in the not-too-distant future will also help support and promote regional value chains.

Michael Kottoh, Chief Strategist of the Afro Champions Initiative, a pan-African platform aimed at boosting economic integration on the continent, believes that the CFTA will deliver a number of benefits to the region. “African businesses are now confronted with an average tariff of 6.1 percent,” Kottoh told World Finance. 

“These tariffs are often higher for intra-African exports than they are for exports outside the continent. By eliminating tariffs on intra-African trade, it will become easier for businesses to trade within the continent, and leverage opportunities from neighboring or more distant African countries.”

The CFTA should also foster closer collaboration between African countries, creating a more inclusive business environment. The free movement of goods, people and services will naturally lead to a spread of new ideas as well. By sharing data across borders, African entrepreneurs will have access to more detailed business intelligence, enabling them to scale up their own projects and accelerate the spread of technology across the continent.

Economic coordination will also create its own advantages. “The design of economic plans by African nations in isolation from one another has led to a complete lack of synergies between countries,” Kottoh said. “This has led to a climate of unnecessary and sometimes harmful competition between neighboring countries in their bid to attract foreign investment.” The CFTA will look to replace the existing spirit of economic rivalry with one of regional cooperation.

Despite its growing number of detractors in the West, free trade has been a significant driver of economic growth and – globally, at least – has reduced inequality on a huge scale. The UN’s Economic Commission on Africa predicts that the CFTA will increase intra-African trade by 52.3 percent, with this figure set to double upon the further removal of non-tariff barriers. A more liberal trading system would not only support existing businesses, it would drive investment and benefit people spread across the continent.

Existing trading networks range from the relatively liberal to the stubbornly protectionist

Same old, same old
If the CFTA is to have its desired impact, it will need to do more than simply replicate the meagre gains currently being provided by Africa’s existing intracontinental trade agreements. Presently, Africa is home to eight regional economic communities (RECs), many of which overlap and each of which possesses its own rules and objectives.

Two of the more successful trading areas – the Economic Community of West African States and the Common Market for Eastern and Southern Africa – have proved somewhat successful in their efforts to promote trade with markets further afield, but intra-African trade remains low. When compared with trading blocs in Europe, Asia and elsewhere, intra-African trade is modest at best. As of 2016, intra-EU trade represented 65 percent of the region’s total, while in Africa the respective figure stood at just 18 percent.

“The issue is, for any REC to succeed, there needs to be a multidimensional approach to economic integration,” Kottoh explained. “There has been too much of a focus on trade alone in the past without acknowledging the importance of trade enablers. Effective trade requires coordination on economic and monetary policies, financial alignment and some interoperability of various national instruments and legislation.”

The overlapping and competing interests of the various RECs do not help simplify trade in a part of the world that is already rife with complexity. Currently, 31 African countries are members of two RECs and nine are members of three. The fragmentary nature of Africa’s trading network discourages legitimate economic activity and is partly responsible for the growth of informal cross-border trade – estimated to be worth 43 percent of Africa’s GDP.

The CFTA will undoubtedly streamline Africa’s trading landscape, but creating a rules-based business environment is one thing; adhering to it is another. The East African Community, another of the continent’s RECs, has had some success in creating a common market, but even so, it’s not unheard of for Tanzanian border officials to seize Kenyan imports seemingly without reason. If a civilized trading system cannot be maintained in a six-country bloc, then what hope is there for a continent-wide agreement?

Supplanting the RECs with the CFTA is not a panacea. Infrastructural development and investment facilitation, both of which are in drastic need of reform in many African nations, must be improved. The lack of a developed manufacturing industry in many states will also limit the benefits available.

However, Kottoh believes that these issues “depend more on the policies of individual states than RECs”. The CFTA will need to build on the work of RECs by pushing countries to engage in closer economic and regulatory alignment. National governments cannot simply rely on the CFTA and the African Union to clear all their trading hurdles for them. Promoting intracontinental trade will require a concerted effort on the part of politicians, NGOs and entrepreneurs alike.

A model to follow

March’s CFTA summit saw 44 signatories commit to introducing the free trade area within 18 months. In order for this to occur, at least 22 countries must formally ratify the agreement through their national parliaments. Kenya became the first to do so in early May, but it is already apparent that some nations will take more persuading than others.

During the aforementioned African Union meeting, Nigeria and South Africa were the most noteworthy states to reject the CFTA outright. With their combined GDP figures equaling almost a third of the entire continent’s, encouraging these two countries to sign on the dotted line would provide a huge boost for free trade in Africa.

South African trade minister Rob Davies has expressed reservations about the agreement, and has asked for some of its more vague areas to be fleshed out. Even so, the national government in Cape Town has shown every intention of joining the CFTA. However, President of Nigeria Muhammadu Buhari provided less cause for optimism when he used his official Twitter account to rail against anything that would “lead to Nigeria becoming a dumping ground for finished goods.”

The Nigerian Government is perhaps concerned that its export strength, outside of its robust petroleum industry, remains too underdeveloped to open its borders up to further competition. More generally, the huge economic disparity across Africa could deter the continent’s stronger economies from joining. Still, it is Kottoh’s view that “convincing reluctant countries is largely about giving them more time to evaluate the details of the agreement”.

Even if the African economies that have so far abstained from the pact do change their minds, challenges will remain for the CFTA. Fortunately, there already exists a free trade area that could serve as a model for Africa’s own. The EU has demonstrated the many benefits that single markets can deliver and, just as Europeans have benefitted from cross-border innovation for decades now, it is hoped that the CFTA will give individuals from Cairo to Kinshasa the opportunity to enjoy the same advantages.

“The overlapping and competing interests of the various RECs do not help simplify trade in a part of the world that is already rife with complexity”

Part of the reason why the EU provides such a good example for the CFTA to follow is because of its well-established frameworks, systems and institutions. Through regulatory alignment, it provides rules for businesses to follow and sanctions for those that fail to do so. Through the European Commission and the European Court of Justice, the EU has created a rules-based trading system that is just as important for the bloc’s economic wellbeing as the single market or customs union.

“The EU judicial system has been instrumental in facilitating the mutual recognition of goods and services and defining rules of origins,” Kottoh explained. “So, creating a strong incentive for compliance within the CFTA is something we will have to think about. What we can learn from the EU and other free trade areas is that you need to consider all dimensions of economic integration if you really want it to succeed.”

The EU, of course, is not perfect. Wage depression resulting from free movement could be negatively replicated in Africa, and national economies may bristle at having to shape their domestic policies to fit within supranational frameworks. But the EU is also not static: it is constantly evolving and adapting to the needs of its member states. There is no reason that the CFTA could not do the same.

If Nigeria is worried that a lack of strong controls around the CFTA’s outer border will allow unscrupulous companies to flood its market with cheap imports, then it is the job of the African Union to convince it otherwise. Rules need to be discussed and properly enforced at the local level if, as Kottoh believes; the CFTA is to be viewed “as a good and fair deal for all countries”. Only then can Africa’s potential be unlocked, without free trade descending into a free-for-all.