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CFTA: Africa positions for “the world’s largest free trade area”. What are the implications?

CFTA: Africa positions for “the world’s largest free trade area”. What are the implications?

As African heads of state and government meet in the Rwandan capital Kigali to formally sign the much-talked about Continental Free Trade Area (CFTA) this Wednesday, Rafiq Raji looks at what lies ahead. Is Africa ready?

More than two years after the signing of the Sharm-el-Sheikh Tripartite Free Trade Area (TFTA) agreement in June 2015 – which brought together member states of the Southern African Development Community (SADC), East African Community (EAC) and Common Market for Eastern and Southern Africa (COMESA) – trade ministers from all of Africa’s 54 countries, including those of the Economic Community of West African States (ECOWAS), which already have a common external tariff, met in Niamey, the capital of Niger, in early December last year to agree final terms for the African Union’s Continental Free Trade Area (CFTA).

By and large, they made good progress. However, there are still issues to iron out. Member states have yet to agree on tariffs on all goods, for instance although on services, they successfully closed the book.

Intra-African trade grew by 8% in the first nine months of 2017, with Guinea, Ethiopia, Burkina Faso, Equatorial Guinea, and Sierra Leone in the lead.

In order to make a meaningful impact, the CFTA will have to improve the quality as well as the quantity of intra-African trade. The objective of the CFTA is primarily to engender more intra-African trade, which currently comprises just 15% of the continent’s total merchandise trade. When compared with intra-regional trade in other continents – 67% in Europe, 58% in Asia and 48% in North America – this is quite low.

Efforts, thus far, at improving the low trade interactions within the continent, have clearly not been very effective. There are signs of improvement, though. According to most recent data from Cairo-based African Export-Import Bank (Afreximbank), intra-African trade grew by 8% in the first nine months of 2017, with Guinea, Ethiopia, Burkina Faso, Equatorial Guinea, and Sierra Leone in the lead. This is definitely better than the marginal 0.6% growth to $156.94bn recorded in 2016.

Even so, there is still much road to cover before intra-African trade recovers to the 2013 peak level of $174.9bn. And as recently as 2015, intra-African trade growth was almost 9%. Afreximbank attributes the latest recovery to rising commodity prices, “improved regional trade across regional economic communities and some countries’ increased focus on promoting intra-African trade.” This could be the start of a paradigm shift.

Trading within and keeping up

After the jamboree likely to herald the signing of the CFTA, the various heads of government may as usual go back to their capitals and do little to implement the accords. However, things could be different this time: the need for improved intra-regional trade relations is now almost existential.

With additive manufacturing, automation and other fourth industrial revolution innovations likely to maintain the insurmountable advantage of developed economies, African manufactures will only thrive if they are traded within the continent. And since it is only by trading more with each other that this could be achieved, African governments will need to ensure hassle-free market access for African-made goods. This is the underlying motivation behind the CFTA.

To meet the continent’s needs, however, more of African countries’ predominantly primary commodity international trade will have to be pared down. For example, instead of exporting so much of their cocoa to Europe and the US, Ghana and Côte d’Ivoire should keep more of the crop at home to produce chocolate and other cocoa-related manufactures. Batteries used to power electric vehicles could be manufactured in the Democratic Republic of Congo and Zambia, where the key input, cobalt, is found in abundance, instead of exporting the mineral to China.

Were the CFTA able to boost the quality of trade as much as the quantity, it could be truly groundbreaking. Considering how hard it has been to achieve even the slightest consensus on trade integration, however, this is probably too much to ask. But politicians cannot go on talking about the need for greater beneficiation without ever taking any concrete action.

To meet the continent’s needs, however, more of African countries’ predominantly primary commodity international trade will have to be pared down. For example, batteries used to power electric vehicles could be manufactured in the Democratic Republic of Congo and Zambia, where the key input, cobalt, is found in abundance, instead of exporting the mineral to China.

Strangely, the bulk of the small intra-African trade is in manufactures. But these tend to be goods like processed food products, cement, and so on, which are not complicated to manufacture. And even these supposedly simpler manufactures have to contend with cheaper imports in some African countries.

EPAs and other trade agreements

The CFTA signing will still be a work in progress. Negotiations on such important issues like intellectual property rights, tariffs for some goods, what constitutes proper competitive behaviour and so on, are still ongoing. Besides, there is the bigger issue of how African countries would extricate them selves from constraining bilateral and multilateral trade agreements with developed economies, which at first glance seem beneficial to African countries but on further scrutiny have been found to be ultimately detrimental to their long-term industrial development.

The European Union’s Economic Partnership Agreements (EPAs) top the list. In 2016, for instance, Africa’s trade with the European Union was valued at €262bn ($324bn), with a relatively small trade deficit of €28.6bn.

However, the fact that 62% of Africa’s exports were primary products and 71% of its imports were manufactures puts that deficit in a different light.

Thus, African countries will in addition to trading more with each other also need to exclude outsiders with as much zeal, at least for a while.

Vision to reality

When the CFTA vision becomes a reality, intra-African trade could increase by at least 50% over the next five years, according to some estimates. A market of more than 1.2bn people with a combined GDP of $2.2 trillion is a far stronger bulwark against limiting external trade forces than the tiny ones that inevitably get overwhelmed in negotiations with big countries – even as stand-alone economies – like the US, Britain and China.

Incidentally, even these countries which already trade a great deal within their own continents are becoming increasingly isolationist.

So, just as African countries are beginning to find trade unity, previously globalist and more integrated ones abroad are beginning to flirt with insularity. Benedict Oramah, president of Afreximbank, put it succinctly in remarks he made in early December:

When the CFTA vision becomes a reality, intra-African trade could increase by at least 50% over the next five years. A market of more than 1.2bn people with a combined GDP of $2.2 trillion is a far stronger bulwark against limiting external trade forces.

“While the speed with which the CFTA has been concluded appears to indicate Africa’s preference for unity, we have to be mindful that the attainment of the ultimate goal of the CFTA of strengthening Africa’s role in global trade may be more difficult to achieve under the wave of isolationism sweeping across other markets.”

In any case, the trade barriers that really require attention on the continent would barely surface in negotiations or be amenable to them. For instance, infrastructure – which with its terrible state and its huge financing deficit ($93bn per annum) adds to logistical costs and retail prices – is one of the reasons why African goods are not competitive.

Non-tariff barriers like that would require not just collaboration between African governments but a sense of initiative by each of them.

 

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Written by African Business Magazine

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