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24 April 2018

A free trade future for Africa

by William Davidson

Originally published by Cap X.

While President Trump has been preparing to rock the global trading system with aggressive moves to impose tariffs on Chinese imports, African leaders have been moving in a very different direction.

In February, under the auspices of the African Union (AU), 44 of the continent’s 55 nations took a high-profile step towards integration by backing the African Continental Free Trade Area (AfCFTA) to create a single market in goods and services. The accord now needs ratification by 22 governments to become effective, which will then be followed with years, if not decades, of haggling over efforts to eliminate tariffs, remove regulatory obstacles, and agree investment, intellectual property and competition regimes.

With the continent’s two powerhouses, South Africa and Nigeria, lukewarm about the AU plan, which they fear will impede industrialisation, there is plenty of work to be done to turn the blueprint into a reality. But, eventually, the AfCFTA could become a bigger trade bloc than the EU’s Single Market or the Trans-Pacific Partnership.

The February agreement builds on decades of attempt to boost intra-African trade that were first clearly articulated in a 1991 declaration to construct an African Economic Community. Those steps have included efforts to create a common aviation market, which also took a lurch forward this year with 23 states signing an accord on a decision that was first taken in 1999.

In addition to Africa’s nation states, the building blocks of continental integration are the Regional Economic Communities (RECs), which involve some overlapping membership. The Common Market for Eastern and Southern Africa (COMESA) is a traditional free trade grouping, which aims to resolve disputes, lower tariffs, create a customs union with a common external tariff, and agree shared rules to facilitate cross-border transactions.

Others are less developed, like the Intergovernmental Authority on Development, and some more integrated like the West African Economic and Monetary Union, which has a currency pegged to the Euro. Meanwhile the East African Community aspires to full political integration for Burundi, Kenya, Tanzania, Uganda, Rwanda and South Sudan — a goal that is, admittedly, a long way off because of internal strife.

Another part of the picture is an ongoing effort to create a Tripartite Free Trade Area between three of the main RECs. While these efforts to boost trade are laudable, the process is tricky because of this convoluted structure, competing interests and institutions, governance challenges, and varied approaches to economic development. Although there are few who contend that freer trade is undesirable in principle, many governments are tempted by Trump-like measures to support strategic industries or protect their farmers from cheap imports.

Such debates stem from broader arguments about the history of economic development, with increasing emphasis on the fact that wealthy countries got rich partly by protecting their markets and industries before opening them to the rigours of competition. Additionally, the inequitable dynamics created by colonial exploitation are still evident in the predominance of raw material exports. That means much of the value added to products like industrial minerals, rare metals, or agricultural goods occurs outside the continent.

“If we look at the details of African trade, we know it’s still very much predominantly commodity trade; it’s not processed industrial products. It is therefore an absolutely legitimate concern to have on the agenda how we build industrial capacity and diversify economic activity,” says Trudi Hartzenberg, the Executive Director of Trade Law Centre in South Africa, which closely tracks integration efforts.

The consequence is that the AU’s focus is as much on themes like infrastructure development, education, and agricultural modernisation as it is on core trade issues such as rules of origin, regulatory standardisation or streamlining customs procedures.

Hartzenberg, however, sees a clear links between the two agendas, as liberalising service markets should mean boosting investment in sectors like energy, transport, telecommunications, and banking, all of which manufacturers rely on.

“These are the backbone of development and all economic activity, and those issues also come to the fore with the integration agenda. So, industrial policy must reference the trade in services agenda, otherwise its impact will be circumscribed,” she says.

The frictionless trade goal of the AfCFTA masks a great deal of complexity that can be seen in the position of COMESA, which is headquartered in the Zambian capital, Lusaka. The group has a free trade area that has removed most tariffs and many regulatory barriers. The only two of its 19 members that don’t participate in its FTA are Ethiopia and Eritrea, which run state-dominated, heavily guarded economies.

The bloc also largely contains the nations of the East African Community, which aspire to become a federation under a single political authority after following the EU route of a customs union, common market and single currency. Senior COMESA official Francis Mangeni lists only five areas where regulatory barriers remain, such as Egyptian companies being unable to export ceramic tiles to Sudan and Zambian concerns about Kenyan palm oil and milk quality.

According to Mangeni, the Director of Trade and Customs, 199 out of 204 such blockages have been resolved since 2008. With regards to AfCFTA, he was initially concerned that the AU initiative would unravel the progress made by the RECs but is satisfied that instead they will be the building blocks, as planned. “We now have an AfCFTA that says the higher level of integration achieved at regional level will not be reversed or rolled back, but we had to fight for this,” he explains.

Currently, AfCFTA plans to eliminate customs taxes on 90 percent of around 6,000 globally recognised tariff lines, which means a lesser degree of liberalisation than COMESA, or the Southern African Development Community. Because of the limited diversity of African economies, which sometimes rely heavily on commodities like cocoa or coffee, governments could comply with the stipulation, but still protect their most important markets by excluding up to 600, or 10 percent, of sensitive products. “This would make the AfCFTA irrelevant. There is a risk here that needs to be watched,” Mangeni says, although some states want the proportion lowered to 85 percent.

Such issues will have to be addressed as part of AfCFTA discussions, which also need to focus on consultations with parliamentarians, industry groups, workers’ associations and other civil society actors. An interesting anomaly is COMESA-member Ethiopia, which is neither a member of the World Trade Organisation, nor of the regional free trade zone, but did sign the CFTA. Even its arch-enemy Eritrea, which is internationally isolated, has lowered its tariffs to a much greater degree for COMESA partners. Yet Ethiopia has won praise for a credit-fuelled development model that has allowed it to build infrastructure like hydropower dams and railways, while also boosting education and health services. It has achieved high, state-engineered growth while keeping its banking sector closed to foreign investment, telecommunications monopolised by a state utility, and energy and transport sectors also well protected.

Rather than looking to boost low foreign exchange reserves through regional exports, Ethiopia, as a Least Developed Country, has tariff-free access to the U.S. under the African Growth and Opportunity Act, and to the EU via the Everything But Arms agreement. It has used those privileges to help attract Asian, Turkish and U.S. textile and clothing companies. This rejection of key planks of the free trade game contrasts with the attitude of multilateral institutions where there is still a strong advocacy for a more liberal approach. And as well as resistance from governments, there is also pushback from some African civil society organisations, who view it partly as an agenda promoted by Western multinationals.

A lack of African funding contributes to this perception. The AU’s gleaming headquarters in Addis Ababa, Ethiopia’s capital, were a Chinese gift, while Western donors largely fund its peacekeeping and programs. Accompanying the AfCFTA is therefore an effort to boost homegrown financing of AU activities with a 0.2 percent tax on imports. Mangeni admits currently the AfCFTA secretariat relies heavily on the United Nations Economic Commission for Africa and consultants, but says the AU’s governments still very much run the show. “It’s member states that take the final decisions,” he says.



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