Taking stock of the proposed Continental Free Trade Area
Following the recent African Union (AU) Trade Ministers Conference held in Addis Ababa from December 4-5, 2014, we consider it opportune to discuss what 2015 may hold for progress towards establishing the Continental Free Trade Area.
The genesis of the accelerated intra-Africa trade agenda goes back to December 2010, when Africa trade ministers meeting in Kigali, Rwanda, agreed on a fast track agenda for a Continental Free Trade Area (CFTA) to address Africa’s low internal and external trade performances (at 13% and 2%, respectively). This in effect means that tariffs and quotas on the trade of most goods and services among African countries will be eliminated, bringing together 54 African countries with a combined population of more than one billion people and a combined gross domestic product of more than USD 1.2 trillion. The 18th African Union Summit of Heads of State, which convened on January 30, 2012, went a step further and approved an Action Plan for Boosting Intra-African Trade (BIAT). Both of these closely linked initiatives could easily lead to greater regional cooperation, trade and stability.
The projected numbers look impressive. A computable general equilibrium (CGE) analysis by Cheong, Jansen and Peters estimates that the CFTA could stimulate intra-African trade by up to USD 35 billion per year, or 52% (above the baseline) by 2022. It could also lead to a USD 10 billion decrease in imports from outside the continent, while boosting agriculture and industrial exports by up to USD 4 billion (7%) and USD 21 billion (5%) respectively. Gains in real income and employment could be even higher if the CFTA is complemented by trade facilitation reforms, reduction of non-tariff barriers, improved infrastructure and measures to counter-balance some of the negative effects associated with liberalization reforms such as loss of tariff revenue.
Key objectives of the CFTA
The raw materials for achieving these levels of growth already exist. McKinsey estimates that the continent’s gross domestic product will rise from USD 1.7 trillion (2010) to USD 2.6 trillion (2020) pushing up consumer spending from USD 860 billion (2010) to USD 1.4 trillion (2020) and thus potentially lifting millions out of poverty. The consultancy also estimates that by 2030 nearly 50% of Africa’s population will be living in cities while there will be nearly 1.1 billion Africans of working age by 2040.
Implementing the CFTA
Even though the potential benefits of a CFTA are fairly clear, its implementation and the potential negative effects are the more contentious issues, which is why the various existing regional integration initiatives form its building blocks. At the heart of the process is the COMESA-EAC-SADC Tripartite Free Trade Area Initiative covering 26 countries, with a combined population of 530 million (57% of Africa’s population) and a total GDP of USD 630 billion (53% of Africa’s total GDP).
Linking the CFTA to the Tripartite FTA seeks to build on successful negotiations in the Tripartite as it would mean that more than half of the continent’s economy is already in a free trade area. What would remain is to extend that coverage to the rest of the continent. Moreover, important lessons can be learnt from that process in negotiating the creation of the CFTA in terms of scope, coverage, negotiating modalities and other approaches to the negotiations.
Trade Ministers meeting in Addis Ababa noted with concern that developments outside the continent have highlighted the importance of hastening Africa’s economic integration to mitigate the risk of preference erosion. Among those developments were, most notably, the emergence of mega-regional trade agreements like the Transatlantic Trade and Investment Partnership (TTIP) negotiations between the EU and the USA and the Trans-Pacific Partnership (involving 12 countries from Asia, the Pacific and the Americas) and the operationalization of the Africa-EU Economic Partnership Agreements (EPAs).
These developments raise a few questions. For instance, what would be the relationship between the CFTA and the existing regional FTAs? Countries have varied commercial and other interests that underpin their ongoing engagement in regional FTAs. This includes the pursuit of deeper trade liberalization and the elimination of duties, non-tariff barriers and other restrictive regulations of commerce, while similarly pursuing trade between and amongst regional partners.
A number of countries also have binding trade agreements with third parties like the economic partnership agreements (EPAs) with the EU and an assortment of bilateral investment treaties (BITs). It is important to establish a common understanding of how the systemic issues and multilateral system implication arising from these would be treated. Also, will the CFTA negotiations have sufficient depth to provide for flexible rules of origin, or for liberalization of trade in services and the free movement of persons? Will the negotiations provide for countries’ desire to purse an industrial policy? How will the CFTA ensure convergence on all or some of these issues which have proved contentious even within the Tripartite FTA?
There are no easy answers. Lessons from the Tripartite FTA process suggest that the AU Commission will need to strengthen its organizational and coordinating capabilities if it is to drive the CFTA negotiations. The Tripartite FTA process similarly faced resource challenges. Likewise the AU would have to mobilize sufficient funding, and the necessary technical expertise to manage negotiations of the size and scope of the CFTA. Apart from these basic issues, there is also the question of incentives and sanctions, especially if the deadline of 2017 will be met.
Whereas the resource discoveries, entrepreneurial revolution and abundant labour force are expected to drive growth in many African countries, the private sector in many jurisdictions are nascent, lack business support services and are besieged by high cost production environment. Trade policies in many African countries are characterized by protectionist trade regimes that are inimical to a CFTA. Judging from the resistance to the EPAs, it will not be a surprise in some countries if private sector lobbies are expected display resistance to the CFTA. Therefore, much more needs to be done to galvanize the private sector – both SMEs and large firms – to buy into the regional FTA and CFTA agenda.
Making it work
There are several FTAs in Africa which all aim to satisfy their members’ broad desire to increase market access opportunities and boost intra-regional trade volumes. For the most part, these FTAs have unfortunately been characterized by low levels of ambition, and have made limited progress in terms of: (i) full and timely implementation; (ii) eliminating non-tariff barriers; (iii) boosting a major increase in regional trade; and (iv) promoting regional industrialization. While there are certainly gains to be made in intra-African trade, the proposed CFTA may also compound some of the FTA implementation challenges experienced at a regional level.
The CFTA has to be carefully structured and synchronized in order to ensure broad based gains for member countries. This requires adoption of mechanisms to provide special and differential treatment for the least developed countries and to compensate them for certain negative effects associated with implementing the CFTA.
It is also important to understand that industry concentration and relocation may occur as the CFTA is implemented – meaning there will be winners and losers. Moreover, countries with better infrastructure and incentives may be more attractive to investors deciding where to locate. This has been the experience in other regions like the EU, East Asia and North America in the early transitions of their respective free trade arrangements.
A specialized body could be established to oversee the CFTA negotiations process. A comparable example is the Caribbean Community (CARICOM) Secretariat’s Office of Trade Negotiations, which is responsible for coordinating the 14-member CARICOM’s external trade negotiation resources and expertise. Technical issues such as non-tariff barriers, transit corridor issues, energy, transport, financial and logistics services can all be resolved by specialized institutions or agencies that do not have to be RECs. Such institutions could undertake inter-regional coordination and harmonization at a greater and more efficient pace than is achievable in individual RECs. Because nearly all the RECs have such institutions, it might be useful to spin them out of the RECs and create somewhat independent institutions that will take on the duties of these institutions.
In general, based on lessons from the Tripartite FTA process, we would recommend a sequential process, building on an incremental basis, i.e. sector by sector, covering Trade in Goods, Trade in Services, Investment, and other areas as applicable, as opposed rather than taking on a comprehensive agenda, given the challenges of capacity: skills, human, institutional, financial.
We also encourage the harmonization of regulatory frameworks (soft infrastructure), investments and cross-country infrastructure development projects that will facilitate freer movements of goods, services and persons across borders. However, such an approach should not lack ambition, in light of ambitious FTA developments taking place outside the continent.
Finally, it is important to recognize the role of the private sector as a major partner. Here, establishment of something like the African Business Council will provide the much-needed opportunity to effectively harness private sector inputs into continental trade policy making and the monitoring and evaluation on implementation processes.
The views expressed in this article are entirely those of the authors. They do not necessarily represent the views of the African Development Bank and its affiliated organizations, or those of the Executive Directors of the Bank or the governments they represent.