This will be a game-changer for African free trade

The AfCFTA is a vote of confidence in the value of international economic integration when trade conflicts are rife globally, writes Bohani Hlungwane

The countdown has begun towards the “go-live” date of the African Continental Free Trade Area (AfCFTA) on 1 July 2020, which will potentially be a game changer for the continent, with its consumer market of 1.2 billion people with a combined GDP of $2.5 trillion (R37 trillion).

The agreement establishing the AfCFTA is not only creating the biggest trade agreement since the World Trade Organization (WTO) was established in 1995, but also taking the most significant step towards economic integration for African economies.

It will create a single continental market for goods and services (with free movement of businesspeople and investments), expand intra-Africa trade across the regional economic communities, and enhance the competitiveness of African economies.

The establishment of the AfCFTA is one of the African Union’s (AU’s) Agenda 2063 flagship initiatives, another two being the establishment of a single African air-transport market and the free movement of people.

The free trade area agreement covers trade in goods and services, investment, intellectual property rights and competition policies.

Phase 1 of the agreement covers trade in goods and services and phase 2 covers investment, competition policy and intellectual property rights.

Over the next few months, a few key steps will have to be taken in order to successfully implement the AfCFTA by the set go-live date.

While 54 of the 55 African countries have already signed the agreement, only 28 countries (by recent count) have ratified the agreement through their Parliaments.

Ratification means the signatory country has obtained parliamentary approval to enter an international act that is binding between states, after which the executive branch of government can ratify the agreement.

The practical implementation of AfCFTA does not, however, immediately become possible on ratification – the tariff schedules and service sector commitments (which will form part of the protocols on trade in goods and trade in services) are still being negotiated.

The formation of the AfCFTA is a bold vote of confidence in the value of international economic integration at a time when trade conflicts around the world are rife, trade barriers are rising and the future of the WTO is under threat.

It is even more striking because African countries have often remained on the periphery of global trade liberalisation initiatives in the past.

Not only does it present a unique opportunity to significantly grow intra-Africa trade and diversify trade exports in the continent, but it also fosters structural transformation and attracts foreign direct investment, both of which facilitate the development of regional supply chains which are the engines of economic transformation.

Intra-Africa trade, a measure of how integrated African economies are, has remained in the low teens for much of the past decade and but has inched up to about 17% currently.

A key focus of phase 1 (trade in goods and services) will be on the application of zero tariffs on 90% of goods and services traded, as well as on the reduction of non-tariff barriers.

The successful implementation of phase 1 is expected to increase intra-Africa trade by around 50% by the mid-2020s.

This growth will ensure that an increasing proportion of Africa’s more than $2 trillion economy is traded within Africa, creating opportunities for growth in industries and building of new factories to meet the demand.

The anticipated overall growth in intra-African trade will generate an increasing need for trade finance.

The International Chamber of Commerce (ICC) estimates there is already a trade finance deficit of at least $100 billion, even before there is an increase in intra-African trade that should result from a successful implementation of the AfCFTA.

This will pose a significant challenge to African banks, as they will require flexibility in risk assessments and financing requirements, given the already very high trade finance deficit.

Regional banks, such as Absa Group, Standard Bank and Ecobank, will need more flexibility in their risk assessments for trade deals in order to support corporates as they take advantage of new growth and trade opportunities across the region.

This is important, as strong regional banks have proved to be critical in regional economic and trade development in other regions, such as Europe, North America and Asia.

The opening of the economies, reduction of non-tariff barriers, application of zero tariffs and increased integration will lead to more factories being built across the continent as industries develop.

This growth will require more investment in power generation, transport infrastructure and communications infrastructure.

In addition to trade finance, there is a huge infrastructure deficit that requires long-term capital finance.

Countries must take advantage of the standards that will be enforced under the AfCFTA to package projects in ways that will make them attractive to financial institutions, global asset managers and private equity.

This can be one of the most positive externalities of the AfCFTA.

In addition to trade and capital financing needs, the increase in payment volumes across the countries will require more efficient ways of making and receiving payments.

Afreximbank, in collaboration with the AU, has already launched the Pan-African Payment and Settlement System (PAPSS) which aims to “domesticate intraregional payments, save the continent more than $5 billion in payment transaction costs per annum and formalise the estimated $50 billion of informal intra-Africa trade”.

Regional and local commercial banks will need to join in the effort to make sure that cross-border payment challenges do not become a hindrance to the success of the AfCFTA.

With a GDP that is currently at $2.2 trillion, or $6.3 trillion in purchasing power parity terms, a successful implementation of the AfCFTA will generate an opportunity to both expand and diversify Africa’s export base.

Of the 17% intra-Africa trade, South Africa accounts for 34% of the intra-Africa trade exports, with Nigeria (9%), Egypt (6%), Ivory Coast (4%) and Zimbabwe (4%) being the other notable economies that contribute relatively significant export numbers to Africa’s intra-regional exports. South Africa also accounts for 20% of the intra-Africa trade imports.

The successful implementation of zero tariffs for 90% of goods and services traded intra-Africa, and, specifically, the removal of non-tariff barriers should diversify the economic benefits to other African economies, which may naturally have lower labour costs for labour-intensive industries compared with South Africa and other relatively developed African economies.

To achieve that diversification and spread the economic benefits across all African countries, removal of non-tariff barriers will be critical.

Transport costs, delays, port efficiency, and customs and border procedures can have a bigger impact on the trade of goods than any tariffs.

The elimination of tariffs could, over time, substantially increase intra-African trade.

However, the benefits of freer trade will not materialise unless accompanied by procedures and rules to remove Africa’s numerous non-tariff barriers (NTBs).

These include a wide range of restrictive practices that make trade difficult, inefficient and costly, for example, customs clearance delays, restrictive licensing processes, certification challenges, uncoordinated transport-related regulations and corruption.

The AU commission has already put in place the AfCFTA online mechanism for reporting, monitoring and elimination of NTBs.

This online tool enables reporting of identified non-tariff barriers. The reported NTBs and their status can be accessed publicly.

What will be key is how local authorities act on these reported NTBs to gradually reduce the impact of NTBs on African trade.

While the countries still must agree on the schedule of goods and services for zero tariffs, what is encouraging is that many of the African countries already trade under free-trade areas in their respective economic regional communities such as the Southern African Development Community, the Economic Community of West African States and East African Community.

Of all the issues that still need to be resolved, the rules of origin protocol are probably the thorniest of them all. Given the progress on all other issues, we are confident that significant progress will also be made on these rules.

Ultimately, the formation of AfCFTA is a bold vote of confidence in the value of international economic integration at a time when trade conflicts around the world are rife, trade barriers are rising and the future of the WTO is under threat.

It is even more striking because African countries have often remained on the periphery of global trade liberalisation initiatives in the past.

But, with the level of strong commitment that the AU member states have shown, we potentially stand on the edge of Africa’s stepping into her economic greatness by realizing that together is the best way to enhance prosperity.

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