Welcome to the tralac’s July 2020 newsletter. We’re focusing on the African Continental Free Trade Area (AfCFTA), providing an update on progress to date, and looking at the plans to complete outstanding work so that trade under the AfCFTA regime can begin, and the
AfCFTA institutions become operational.
The launch of the negotiations in June 2015 was followed by impressive progress; the Agreement establishing the African Continental Free Trade Area, the Protocol on Trade in Goods, the Protocol on Trade in Services and the Protocol on Dispute Settlement were concluded. Several annexes to these Protocols were also concluded. By 29 April 2019, the requisite 22 ratifications had been deposited with the African Union Commission (AUC), the designated depositary for the AfCFTA. As per the provisions in the AfCFTA, the Agreement entered into force 30 days later, on 30 May 2019.
Despite the fact that the AfCFTA Agreement is in force, it cannot be implemented. This situation has come about as a result of the fact that ratification of the AfCFTA has taken place before the finalisation of the negotiations. For trade in goods, tariff concessions and rules of origin, and for trade in services, specific commitments for the five priority services sectors, are not yet in place. A free trade area (FTA) needs at minimum tariff concessions covering substantially all trade, and preferential rules of origin to prevent trade deflection. These are still under negotiation, so no trade under the AfCFTA is possible yet. The aim was to have trade under the AfCFTA regime begin on 1 July 2020; this has now been moved forward to 1 January 2021.
The AfCFTA is designed to build on what has already been achieved by the regional economic communities (RECs). This is confirmed by the AfCFTA principle of the acquis and
Article 19 (2) of the Agreement establishing the AfCFTA. The RECs will continue to exist and member states of the trade regimes of the RECs (FTAs or customs unions) will continue to trade with one another on the terms of those trade arrangements. Some REC member states have yet to join the trade regimes of their RECs, and some of these FTAs or customs unions are still to be consolidated. It is not surprising that there is still a great deal of work in progress – integrating unequal partners is a complex and difficult process.
An important question is ‘who will be negotiating with whom’? Tariff concessions for the AfCFTA will be negotiated by member states of the African Union that are not, together, in an existing FTA or customs union. The preferential rules of origin (RoO) of the AfCFTA will be applicable to those tariff concessions. Much progress has been made in the RoO negotiations, but there is some outstanding work related to rules for clothing and textiles, automotive products, edible oils and sugar, reflecting the interests of some member states in protecting and developing these domestic industries. This means that the
AfCFTA will create an additional free trade area among those member states that are currently trading with each other on non-preferential (Most Favoured Nation – MFN) terms. We closely monitor the release of trade data by member states and study the applicable MFN tariffs. So far, 26 of the 55 African Union member states have updated their trade data for 2019 (see a summary
here). Our trade
data updates suggest that the AfCFTA stands to contribute meaningfully to liberalisng trade, for example, between the member states of the Southern African Customs Union (SACU), and the Economic Community of West Africa States (ECOWAS). SACU and ECOWAS are each making a collective tariff offer in the negotiations – as customs unions they are protecting their common external tariffs. At this stage though, not all of their respective members have ratified the AfCFTA. It is also important to note that while tariff concessions are important to promote trade amongst these countries, elimination of non-tariff barriers, and reducing the transaction costs of trade between the countries in these two fairly distant sub-regions, is essential. The availability and quality of trade data are essential for trade policy making and for trade negotiations. The establishment of the African Trade Observatory (ATO) is envisaged to become the repository for trade and trade-related data for AU member states. Once fully functional, and provided that member states submit data timeously and consistently to the ATO, it will be a very important resource for the continent.
Dispute resolution is an integral component of a robust rules-based system – this is true for trade too. The AfCFTA Protocol on Dispute Settlement provides for inter-state dispute resolution, modelled on the dispute settlement system of the World Trade Organisation. This means that only State Parties (those member states that have ratified or acceded to the AfCFTA Agreement) will have standing to enforce their rights. Private parties will not have standing, as they do in the Courts of Justice of the Common Market for East and Southern Africa (COMESA), the Economic Community of West African States (ECOWAS) and the East African Community (EAC).
This Blog examines the kind of disputes that the AfCFTA Dispute Settlement Mechanism could hear.
May State Parties of the AfCFTA conclude new agreements with third parties? This issue is usually covered in trade agreements to ensure that obligations of different agreements will be implemented in a consistent manner. The matter has recently featured prominently in the media with respect to the proposed FTA to be concluded by the
United States and Kenya. Article 4 (2) of the Protocol on Trade in Goods provides pragmatic recognition of the negotiation of trade agreements with third parties – providing that such agreements should not ‘impede or frustrate the objectives’ of the Protocol on Trade in Goods. Intra-Africa trade for 2019 accounted for 15% of Africa’s total trade. Global trade partners will continue to be important and it can be expected that member states of the AfCFTA will pursue national development objectives through the conclusion of trade agreements. What is important is that existing obligations be complied with.
A
World Bank report launched on 27 July concludes that most of the income gains from the AfCFTA are likely to come from the reduction of ‘red tape and simplification of customs procedures’. This resonates with a
tralac study from 2015, which suggests that a 20% reduction in time in transit (time at border posts and on the road – noting that approximately 80% of intra-Africa trade is transported by road) will yield greater welfare gains than complete elimination of tariffs across the continent. The impact of non-tariff barriers such as these is well recognised, and Annex 5 of the Protocol on Trade in Goods deals with NTBs, providing for institutions for the elimination of NTBs. The important question is, ‘
Does the AfCFTA have a formula to tackle Africa’s Non-Tariff Barriers?‘
The AfCFTA matters for Africa’s trade and sustainable development. While there are still prohibitive tariffs on trade in specific goods between select trading partners, COVID-19 is confirming that non-tariff barriers pose even more pernicious barriers to intra-Africa trade and also erode Africa’s trade competitiveness with global trade partners. Eliminating NTBs will not only reduce the transactions cost of trade irrespective of our trade partners but will also provide positive impetus to the development of regional and continental value chains. This is essential to achieve the dynamic benefits of the AfCFTA, which include the attraction of foreign direct investment to expand and diversify Africa’s productive capacity.
The pandemic has forced a slowdown in the negotiations; however, the processes are continuing. What the pandemic is also doing, is to prompt us to appraise where we stand in the negotiations process. What needs to be added or expedited to ensure that the AfCFTA is fit-for-purpose for a post-COVID-19 trading and economic environment to provide incentives for recovery, reconstruction and transformation of Africa’s economies? Indications are that e-commerce negotiations will be expedited – this is good news. Now it is important to look at the broader imperatives of the AfCFTA in the 21st century digital economy to ensure that what is on the negotiating agenda, will provide effective trade governance for Africa’s sustainable development.
We look forward to hearing from you
The tralac Team
