Africa is becoming a new emerging continent

The Pan-African Free Trade Area AfCFTA - the way to an integrated, emerging and more peaceful Africa?

The African Continental Free Trade Area (AfCFTA) is the groundbreaking project of the African Union (AU) for the economic and political development of the African continent. The main goal of this pan-African free trade area is the free movement of goods and services between all African states. While the concrete contents of the trade agreement are still being worked on, the negotiations are already raising high hopes among African and European companies.

With the African Continental Free Trade Area, AfCFTA for short, the African Union (AU) is pursuing the goal of creating a pan-African free trade area for goods and services. The aim is to create a common African market for 1.3 billion people with a combined economic output of more than 2.3 trillion US dollars. The AfCFTA has the potential to be a milestone for the economic and political development of the African continent. The planned trade facilitations are intended to increase the comparatively low intra-African trade. The intra-African trade in goods accounts for just under 16 percent of the total African trade in goods and, at a good 160 billion US dollars, corresponds to around half of the African trade in goods with the EU (see Figure 1). For comparison: In Europe, the share traded within Europe is around 70 percent (see Figure 2).

Removing trade barriers should increase prosperity

In its latest discussion paper, the International Monetary Fund (IMF) predicts that by abolishing intra-African tariffs and reducing non-tariff trade barriers, prosperity gains of almost four percent can be achieved for the continent, that the total African trade volume will increase by around eight percent and that the intra-African trade increases by 82 percent (Abrego et al., 2019). It is to be expected, however, that these effects will vary in strength depending on the country. In addition to increasing prosperity through the growing volume of intra-African trade, accelerating structural change through greater diversification and industrialization can also be expected. The founding of the AfCFTA can thus help to achieve some of the goals for sustainable development (Sustainable Development Goals) formulated by the United Nations, in particular the goal of economic development (Goal 8) and the industrialization of the economy to build a modern infrastructure (Goal 9), to reach. Further studies (Tanyi, 2015; Saygili et al., 2017) predict rising real incomes, higher productivity rates and an improved business climate. In addition, the AfCFTA can contribute to greater independence for African producers from the world market and world market prices.

New market opportunities not only for African companies

Not only African companies can benefit from the planned free trade area. European companies are also hoping for new market opportunities. Because so far the small size of individual African markets in connection with a lack of regional integration has inhibited the economic activities of European companies in Africa. A pan-African market will make investment and trade more attractive to European companies. However, different customs regulations between the EU and the individual African countries will initially remain in place despite the AfCFTA. Although the AU is striving for an African customs union in the long term, no uniform African external tariff is to be expected in the short and medium term. In addition, the increasing intra-African trade in goods can lead to imports from the EU being replaced. The possible effects of the AfCFTA on European companies therefore remain to be seen for the time being.

AfCFTA as a flagship project of the African Union

For the AU, the pan-African free trade area is the flagship project for the implementation of its Agenda 2063, in which it formulates the vision of an “integrated, emerging and peaceful Africa”. This vision represents the starting point and driving force for the planned free trade area as well as for the parallel negotiations to create a common air transport market. In the context of the AfCFTA, an additional protocol was signed with the aim of enabling free movement of people within Africa. The AU thus has a pioneering and advisory role as a coordinator and mediator in the ongoing negotiations between the member states on the AfCFTA. The AU hopes to strengthen its position in negotiations on a global level in the long term through a joint approach by the African states to the economic networking of the continent. Ultimately, the economic integration of the African states is also a clear political signal against protectionism and national solo efforts as well as a contribution to securing peace.

Negotiations to create the AfCFTA: Ambitious roadmap with many question marks

The framework agreement negotiated from 2015 to 2018 to create the AfCFTA was signed by all African states except Eritrea. In the meantime, around half of the signatory countries have ratified the framework agreement (see map), which came into force under international law in May 2019.

The further negotiations on the specific design of the common market are to take place in two phases: During phase I, which has already begun, the focus is on the protocols on trade in goods and services and regulations on dispute settlement procedures. The most important result so far is the agreement to abolish intra-African tariffs on 90 percent of all product categories within the next five years. The remaining tariffs are to be abolished within ten years, with the exception of a few tariff lines that will be permanently excluded from liberalization. This ten-year period has been extended to 13 years for the least developed countries (LDCs) so that they can better prepare their economies for increasing intra-African competition. The negotiations on the liberalization of trade in services focus on five sectors: transport, communications, tourism, financial services and business-related services. In phase II, the protocols on investment and competition policy as well as intellectual property issues are to be negotiated.

As before, many details and the exact schedule remain open. Nevertheless, the AU is ambitious and emphasized at the special meeting in July 2019 that trading according to the rules of the AfCFTA should take place from July 1st, 2020. Whether this will succeed depends, among other things, on the question of whether the African states have sufficient capacities to negotiate and implement the AfCFTA. In this context, the question of the institutional division of labor between the planned organs of the AfCFTA is also decisive. Even if responsibilities for these have already been defined in the framework agreement, the specific working methods still have to be established. So it remains to be seen whether this ambitious roadmap can be kept.

Designing the AfCFTA: a demanding task

Designing the agreement in concrete terms is like a Herculean task with a lot of potential for conflict. The heterogeneity of the contracting states with regard to size, income level and openness of the national economies poses a major challenge. Possible exceptions to certain customs lines and protective measures for sensitive industries or young branches of industry are at the top of the list of possible points of conflict.

In order to avoid renegotiations and later disputes, it is necessary to make the trading rules transparent, understandable and unambiguous.
This applies in particular to the rules of origin. These provide information on which products are subject to the AfCFTA regulations due to their origin for further processing within Africa. The stricter and more complex these rules are, the easier it is to ensure that only African products and services benefit from the agreement. Since many states in Africa first have to build up the capacities in order to effectively enforce strict rules of origin, the United Nations (UNCTAD, 2019) recommend that the negotiating partners choose less restrictive rules of origin in the initial implementation phase.

National implementation: Challenges in particular in reducing non-tariff barriers to trade

In order to implement the AfCFTA successfully, coherent and adequate measures must be taken at national level. There is no supra-national body that is directly responsible for the implementation of the new trade rules. The AU supports and coordinates the establishment of the AfCFTA, but ultimately national laws and regulations must be passed to ensure the effectiveness of the trade rules.

Measures at national level are also necessary to dismantle non-tariff trade barriers. In Africa, these trade barriers are a bigger barrier to cross-border trade than tariffs. Long waiting times at border crossings, corruption and bureaucratic hurdles have hindered intra-African trade immensely. The missing or ailing infrastructure, such as congested roads or bridges that are too small, often represents an obstacle to cross-border trade. Transport from Lagos to Hamburg can cost less than transport from Lagos to Tema in neighboring Ghana. In order to successfully implement the AfCFTA, it is therefore just as necessary to create a trade-friendly legal system as to modernize the infrastructure.

The EU and Germany support the AU's efforts

The European Union (EU) and Germany are promoting the AU's efforts through a number of measures. Specifically, the EU is supporting the AfCFTA negotiations with 50 million euros for the period from 2018 to 2020. A first project with a volume of three million euros was started in December 2018 in cooperation with the United Nations Economic Commission for Africa (UNECA). In the same year, the EU helped African countries with five million euros to implement global customs standards and other trade facilitations. In addition, the federal government supports the AfCFTA through the Society for International Cooperation (GIZ) and the Physikalisch-Technische Bundesanstalt (PTB).

EU Commission President Juncker announced in September 2018 that he would strive for a continent-to-continent agreement between the EU and AU in the long term. In the long term, this agreement could build on the AfCFTA, but on the African side it requires the actual implementation of the AfCFTA and a customs union with a common external tariff. Since this hardly seems realistic in the next few years, the implementation of the Economic Partnership Agreements (EPAs) of the EU with regional groups of states in Africa is central for the time being.

In summary, the efforts of the African states to establish a pan-African free trade area are proving to be a further step on the way to an integrated, emerging and more peaceful Africa. A common African market will not only offer African but also European companies new market opportunities. However, despite the impressive speed of the past negotiations, it remains to be seen how serious the African governments are in implementing this vision.

Contact: Alessandro Hörmann, Dr. Ulrike Zirpel
Presentation: Sub-Saharan Africa

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Literature:

Abrego, M. L., Amado, M. A., Gursoy, T., Nicholls, G. P., & PerezSaiz, H. (2019). The African Continental Free Trade Agreement: Welfare Gains Estimates from a General Equilibrium Model. International Monetary Fund.

Saygili, M., Peters, R., & Knebel, C. (2017). African continental free trade area: Challenges and opportunities of tariff reductions. U.N.

Tanyi, K. T. (2015). Assessing Africa’s two billion populated market by 2063: The facts and fallacies of a Continental Free Trade Area (CFTA). Business and Economics Journal, 6 (3), 1.

UNCTAD (2019). Economic Development in Africa Report 2019 (Made in Africa - Rules of Origin for Enhanced Intra-African Trade).