African Continental Free Trade Area Goes LIVE

AFCFTA

After four years of talk, the African Continental Free Trade Area (AfCFTA) agreement has come into effect and ushered in a new era in African development.

On May 30 2019 Africa made history as the agreement establishing the African Continental Free Trade Area (AfCFTA) officially entered into force. With 54 out of the 55 member states of the African Union signing the agreement, Africa brought into being the largest trading block since the formation of the World Trade Organisation. The entry into force of the AfCFTA is also marked by the speed at which African countries worked together within a year to establish a regional trading block to promote intra-African trade, following the adoption of the AfCFTA on March 21 2018 in Kigali, Rwanda.

Following the ratification and entry into force of the AfCFTA, five supporting operational instruments were launched during the AU Summit held in Niamey, Niger in July 2019. These instruments are the key tools that will support the launch of the operational phase of the AfCFTA, with start of trading scheduled for July 2020. The occasion also marked the announcement of the Republic of Ghana as the country to host the AfCFTA secretariat.

The operational instruments of the AfCFTA
The Rules of Origin: A regime governing the conditions under which a product or service can be traded duty free across the region.
The Tariff concessions: It has been agreed that there should be 90% tariff liberalisation and the deadline is July 1 2020. Over a 10-year period, with a five-year transition, there will be an additional 7% for “sensitive products” that must be liberalised. This will be supported by the AfCFTA Trade in Goods online portal, where Member States will upload their tariff offers covering 90% of the tariff lines.
The AfCFTA Online Negotiation Tool

This will:

Facilitate the negotiations on tariff liberalisation between state parties, customs unions or regional groupings under the AfCFTA;
Provide tools to ensure the technical quality of the offers made;
Increase transparency while safeguarding confidentiality; and
Provide tools for users/negotiating groups to interact.

The tool will be accessible to all parties to assist in their negotiations and will be a collaborative platform to exchange the lists of products defined at the tariff line level as well as the tariff that could be applied. The tool will allow each party to: define their own product lists; share lists with selected parties for discussion; comment on shared lists; and suggest counter proposals.

In order to facilitate the creation of initial product lists, a module will analyse various factors, among which are: fiscal revenues; employment by sector; production; potential trade; existing tariffs; commitments; and infant industries. Based on this methodology, the tool will automatically suggest product lists as a potential starting point for negotiation, taking into account the tariff-dismantling schedules.

3. The Continental Online Tool/Mechanism for monitoring, reporting and elimination of Non-tariff Barriers (NTBs): NTBs are a greater hindrance to intra-African Trade than Tariff Barriers. One of the key objectives of the AfCFTA is to progressively eliminate existing NTBs and refrain from introducing new ones in order to enhance and facilitate intra-Africa trade. The continental tool will ensure NTBs are monitored with a view to ensuring that they are eliminated.

4. The Pan-African Payments and Settlement System (PAPSS): Is a centralised payment and settlement infrastructure for intra-African trade and commerce payments. This project, which is being developed in collaboration with the African Export-Import Bank, Afreximbank, will facilitate payments as well as formalise some of the unrecorded trade due to prevalence of informal cross-border trade in Africa. It will also provide an alternative to current high-cost and lengthy correspondent banking relationships to facilitate trade and other economic activities among African countries through a simple, low-cost and risk-controlled payment clearing and settlement system.

The benefits of PAPPS for cross-border payments include cost reduction; reduction in duration and time variability; decreasing liquidity requirements of commercial banks; decreasing liquidity requirements of central banks for settlement as well as its own payments; and strengthening central banks’ oversight of cross-border payment systems.

5. The African Trade Observatory: A trade information portal that will address hindrances to trade in Africa due to lack of information about opportunities, trade statistics as well as information about exporters and importers in countries.

The lack of up-to-date and reliable trade data and statistics is one of the contributing factors to the low level of official intra-African trade. Instances abound of goods and services, which could have been sourced from other African countries being imported by African countries. According to ITC (2018), more than 40% of African companies identify lack of access to information and absence of inquiry points as factors affecting the business environment across the continent.

Where a number of African countries and Regional Economic Communities (RECs) have established trade information portals and systems, several challenges remain such as: outdated information; uniformity of data; absence of data and information on non-tariff measures and informal trade and limited collaboration between various government agencies as well as countries and RECs.

The trade observatory will act as a central repository, providing exhaustive qualitative and quantitative trade data and information at the continental level to enable policymakers and the private sector to make evidenced-based policies and business decisions.

To find out more about Agenda 2063 and AfCFTA visit www.au.int

The African Trade Pact, which included 54 member states and signatories, came into effect when the African leaders met at Niger’s capital, Niamey, to sign the agreement into effect.

Niamey also becomes the trade zone headquarters for the AfCFTA while Ghana becomes the secretariat of the trade zone.

So far, only 27 states have ratified the agreement, Kenya being one of them. Ratification legally binds these countries by consent to the AfCFTA.

The World Bank ranks many countries in Africa among the hardest places to do business. However, the ambitious project is expected to ease trade between them is a step closer to reality.

AfCTA now becomes the largest free trade area, uniting 1.3B people, since the creation of the World Trade Organization in 1994 and is expected to unlock Africa’s potential by boosting intra-regional trade, strengthen supply chains, and spread expertise across countries.

Currently, Nigeria, Egypt, and South Africa account for over 50 percent of Africa’s cumulative GDP with island nations representing only 1 percent. Nigeria, the largest economy in Africa, signing the agreement was seen as a big boost.

According to Niger’s President, Mahamadou Issoufou:

“Nigeria is Africa’s biggest economy and most populous country. Without Nigeria, the free trade zone would’ve been handicapped.”

Current trading blocs stats as of 2017 are as follows:

17% – Intra-regional trade in Africa
69% – Intra-trade in Asia
69% – Intra-trade in Europe

The agreement will see the removal of trade tariffs on 90 percent of commodities and will take effect starting on July 1 2020.

There was spontaneous applause as Africa’s largest economy Nigeria signed up to a deal that experts say could provide far-reaching benefits, but only if it is implemented properly.
Nigeria’s President Muhammadu Buhari knew how much power the open folder before him carried. Inside, there was a raft of loosely held papers containing signatures.

A handful of officials behind him watched silently as a pen dangled between his fingers. As Buhari leaned forward from his seat and signed the paper before him, the audience clapped and cheered.

Handshakes exchanged and a delighted Buhari looked up proudly at the crowd gathered at the African Union summit for African heads of state, held in the Republic of Niger’s capital Niamey on July 7.

This step was, by any measure, a significant move. Nigeria, Africa’s largest economy, has finally accepted, after nearly four months of delay, to sign an agreement launching the African Continental Free Trade Area –– AfCFTA for short.

The AfCFTA aims to, among several other cardinal objectives, create a single market for goods and services and facilitate the free movement of people, capital, goods and services.

Nigeria had delayed signing the agreement, saying it needed to hold consultations with trade unions and local manufacturers.

President Buhari failed to attend a ceremony in the Rwandan capital Kigali in late March last year where 44 out 55 member states signed the agreement to open up their borders and eliminate barriers to trade.

“Without Nigeria, the leading economic power of the continent, there would have been a taste of unfinished business in the conclusion of this agreement,” Niger’s President Issoufou Mahamadou told the crowd at the 12th Extraordinary Summit of the Assembly of the Union on the AfCFTA.

The Republic of Benin also signed the agreement in Niamey, bringing the number of countries who have signed up to the agreement to 54. Only Eritrea is still to sign the pact, which makes the bloc the world’s largest free trade area.

Ambitious goals

Plans to get African countries to combine forces to promote regional integration and intra-continental economic cooperation are not new, with initiatives such as the Lagos Plan for Action for the Economic Development of Africa in 1980, and subsequently the Abuja Treaty establishing the African Economic Community in 1991.

But implementation and cross-border support for these initiatives were not strong enough to garner the substantial momentum that AfCFTA has achieved.

The approach makes the difference, says Tunde Ajileye, Consulting Partner at Lagos-based political and economic risk consultancy , SBM Intelligence.

“This agreement focuses on trade and not on creating a new economic zone that merges countries or compels them to, for example, meet this or that criteria to be part of that economic zone,” Ajileye tells TRT World.

“This focuses on trade that exists, that may exist, that will continue to exist and facilitate the movement of that trade across borders without all the cumbersome things that hamper trade like processes at the borders, and tariffs at the borders. It is a better approach that has a higher potential to succeed.”

Following rounds of negotiations, which began four years ago, huge progress was recorded in April this year after 22 countries ratified the agreement, meeting the minimum threshold for the pact to come into force in May. Currently 27 countries have ratified the agreement seeking to liberalise trade, boost intra-African trade, develop regional value chains and gradually build the foundation for a continental customs union.

The African Union has long acknowledged that regional economic communities such as the Southern African Development Community (SADC), the East African Community (EAC) and the Economic Community of West African States (ECOWAS) are vital foundations upon which a more united Africa with a strong position in global trade can be built.

At the end of the summit in Niger last weekend, African leaders launched the “operational phase” of the free trade agreement.

The key instruments that will govern this phase include cooperation on rules of origin, the monitoring and elimination of non-tariff barriers, a digital payments system, and a trade observatory dashboard. These measures are essential in improving the connectivity and efficiency of trade and would eventually increase the benefits accruable to member states.

Ghana was selected as the host for the headquarters of the zone from where further work would be done to implement the agreement, beating Egypt, Eswatini, Ethiopia, Kenya, Madagascar and Senegal, all of whom also bid to host the secretariat.

Trade as a tool for growth

For African leaders, trade represents not just a major driver of growth but also a tool for economic cooperation and integration.

The trade pact has the potential to transform the continent, analysts say, arguing that it would, if successfully implemented, create a market of about 1.27 billion people with a combined gross domestic product (GDP) of $2.14 trillion. This market is expected to grow to about 2.5 billion consumers by 2050.

Intra-African exports represent around 18 percent of total exports, amounting to $62 billion in 2016. This means trading among African nations is lower than other continents like Europe (69 percent), Asia (59 percent) and North America (31 percent).

The removal of tariffs and non-tariff barriers will, the UN Economic Commission for Africa (ECA) estimates, increase intra-African trade by 52.3 percent by 2020. This will increase employment, facilitate better use of local resources for manufacturing and agriculture and increase access to cheaper products.

But there are challenges to overcome.

Trade between African countries has been held back by several bottlenecks such as poor infrastructure, cumbersome border procedures, trade regulations, tariffs, and high cost of transactions.

The AfCFTA wants to break down these barriers, as member countries ratifying the agreement must cut some 90 percent of tariffs on goods they produce.

Analysts say the trade bloc will boost intra-continental trade, help local businesses to expand and grow, create jobs and facilitate industrialization, competition and innovation.

What lies ahead

The agreement has the potential to become a “game changer” in the drive to promote continent-wide trade in Africa, argued Vera Songwe, Executive Secretary of the United Nations Economic Commission for Africa.

“Recent evidence by ECA shows that when African countries trade with themselves they exchange more manufactured and processed goods, have more knowledge transfer, and create more value,” explained Songwe, a nonresident senior fellow at the Brookings Institution, a think tank based in Washington, DC.

“In fact, manufactured goods make up a much higher proportion of regional exports than those leaving the continent—41.9 compared to 14.8 percent in 2014. The real test of the AfCFTA, however, will be how quickly African countries can accelerate export diversification and product sophistication and make trade more inclusive.”

The AfCFTA is one of the flagship initiatives of the African Union’s Agenda 2063 blueprint, which aims to drive Africa’s economic growth and development and transform the continent into a global powerhouse.

For the agreement to work efficiently, the AU must strive to successfully implement other initiatives under the blueprint such as the Single African Air Transport Market, which was launched last year, to promote connectivity between African cities and the African Passport, launched in July 2016, to remove visa restrictions.

“The challenge is still very much present; how will this agreement be implemented on the ground without the necessary infrastructure being built, without the procedural issues that make corruption very possible at the borders?” asked Ajileye of SBM Intelligence.

Ajileye of SBM Intelligence believes African countries will begin to see the benefits of the free trade agreement if corruption, lack of infrastructure and cumbersome border processes are addressed urgently.

“This initiative will require strong political will and the formulation of enabling policies and instruments to guide it,” said Chris Macoloo, Africa Director for World Neighbors, an international nonprofit working to alleviate hunger, poverty and disease.

“Most important, the challenge of poor infrastructure connecting the countries will have to be given priority. In the long run, this initiative should provide Africa with the opportunity to benefit from international trade and to improve the living standards of its people and to attract direct foreign investment to create jobs and transfer technology.”

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