African nations sign historic free trade agreement: Why the rest of the world is watching closely
A common market would open more doors for Indian projects and investors, albeit with more competition.
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This week the Continental Free Trade Area (CFTA) was given a green light at a special African Union summit in Kigali, Rwanda.
Chaired by the current AU leader, President Paul Kagame of Rwanda and the chair of the AU Commission, Moussa Faki Mahamat, the session saw 44 of the 55 AU member states sign the deal.
The #AfCFTA will create a trade bloc of 1.2 billion people with a combined GDP of more than $2 trillion. It commits countries to removing tariffs on 90% of goods and to liberalize services.#AfCFTA2018 #CFTAhttps://t.co/lDH6jS6WYQ pic.twitter.com/7TtdcHPTU0— UNCTAD (@UNCTAD) March 21, 2018
In addition, 27-member states signed an agreement on the free movement of persons. This is like a visa free agreement for 90 days for all or designated categories of people.
Today, @TonyOElumelu was presented w the African Union Passport which allows him visit all 54 African Union nations, visa-free! This is a big step towards creating an enabling environment for cross-border trade for #AfricanEntrepreneurs & indeed a big win for African integration! pic.twitter.com/844UfediZY— Tony Elumelu FDN (@TonyElumeluFDN) March 19, 2018
The Single African Air Transport Market opened for signature earlier in January continues to attract more adherents as well. Ten countries did not sign - notably, Nigeria among Africa’s largest economies. Several others signed the Kigali declaration, but not the CFTA.
The CFTA is expected to fulfil a major part of the integration efforts under Project 2063 of the African Union. If it emerges, it will be the largest FTA since the emergence of the stilted WTO and connect nearly 1.2 billion people (just under the population of India) in a new trade order.
The United Nations Economic Commission for Africa (UNECA) estimated that the CFTA has the potential both to boost intra-African trade by 53.2 per cent by eliminating import duties, and to double this trade if non-tariff barriers are also reduced. CFTA proposes to reduce tariffs on 90 per cent of its products.
The AU commissioner for trade and industry has elucidated that the objectives of the CFTA include:
• Creation of a single continental market for goods and services, with free movement of business persons and investments, and pave the way for accelerating the establishment of the Continental Customs Union and the African customs union.
• Expand intra-African trade through better harmonisation and coordination of trade liberalisation and facilitation regimes and instruments across RECs and across Africa in general.
• Resolve the challenges of multiple and overlapping memberships and expedite the regional and continental integration processes.
• Enhance competitiveness at the industry- and enterprise-level through exploiting opportunities for scale production, continental market access and better reallocation of resources.
The African Union was itself born in 2002 through a reordering of the Organization of African Unity of 1963. It had faced the challenge of integration squarely. It had to contend with a vast multitude of regional institutions and groupings in Africa, but chose to engage with eight of them. Of these, the Common Market for East and Southern Africa (COMESA) was the true precursor of a preferential trade area.
It engaged with the efficiently run Southern Africa Development Community (SADC) and the East African Community (EAC) which jointly tried to negotiate common FTA and their joint Summit in 2008, started the negotiating process to bring all their three areas together.
By 2012, this had acquired sufficient momentum to have an endorsement by the AU summit in January, which adopted a decision to establish a Continental Free Trade Area (CFTA) by 2017.
Image: Reuters photo
The summit also endorsed the action plan on Boosting Intra-Africa Trade (BIAT), which identifies seven clusters: trade policy, trade facilitation, productive capacity, trade-related infrastructure, trade finance, trade information, and factor market integration.
This decision meant that other Regional Economic Communities like ECOEWAS, ECCAS IGAD Arab Maghreb Union and CENSAD all were brought into negotiations which nevertheless became more strategy sessions for the major economies of Africa.
Africa has largely been outside the value chains and trade facilitation measures of international organisations and businesses. It has often seen virtue in limited concessions like the EU trade concession mainly through the Lomé convention and the AGOA opportunities.
These did not create local value chains, but brought African producers into closer links with international buyers under whose vagaries they stayed. Trade expansion remained limited within Africa and was 8 per cent in 2008 and rising to 10 per cent by 2010.
By 2016, nearly 21 per cent of African trade is now intra-regional as more countries trade with each other and the limited success of the SADC and ECOWAS in particular emerge.
The SADC has nearly 21 per cent intra SADC trade due to the might of the South African economy.
The ECCAS in Central Africa has barely 2.1 per cent and AMU about 4 per cent. COMESA is about 8 per cent and the EAC at about 13 per cent. In comparison, EU has inter-regional trade of about 65 per cent and the ASEAN about 23 per cent.
The trade facilitation, lowering of internal barriers and better infrastructure are all well intentioned targets, but remain challenges as well.
Supporters argue that African economies are very small to support economic diversification and industrialisation by themselves and will gain from having a unity to negotiate trade agreements and seal investments from partners.
The African Union has reverted, after a hiatus of about five years, to a NEPAD-like approach of finding a big idea that could benefit many members, but also increase focused development cooperation with its international partners. The climate change and G20 aside meetings were such ideas and now the CFTA is the most ambitious of all as it does require sacrifices for greater common good.
The model of the factory economies of Asia and East Europe are now perhaps the objective of this new idea. Under this, African countries may want to have a better realisation of their own markets.
The median age of the African population is 27 and nearly 400 million are classified as middle class, but these are fragmented into narrow domestic walls.
The CFTA provides the light to unite these opportunities and make a real common market with better opportunities for infrastructure development, movement for people and trade and investment flows.
The growth of the idea of far shoring investment to seek lower labour costs, provided there is better logistics and infrastructure is increasingly attracting European, Chinese and Indian besides Turkish investment in African countries. The Chinese are also building industrial zones now as a change from the stadium and parliaments built earlier.
However, the absence of the big boys at the table remains a matter of concern. Nigeria has not signed while South Africa has clarified that it needs to get its domestic rules in order.
Nigeria is facing a protectionist backlash within as its oil revenues have dipped and it needs its manufacturing and services sectors to be protected. Some of the 10 absentees, however, did sign the Kigali declaration, which is the intent document, and this includes South Africa and Zambia.
There is a fear that some of the more efficient economies in North Africa, which have French and other EU investment, could sap the domestic manufacturing sectors in larger African countries.
Morocco which has now returned to the AU seems a likely big gainer. India could be a gainer if this succeeds.
India has already provided duty-free tariff preferences to African LDCs. This led to a spurt in Indian investment as well.
Indian investors have been seen positively as they contribute the most to regional and intra-African trade. Their strength now could be leveraged and a common market would open more doors for Indian projects and investors, albeit also attract more competition. Our trade could rise by 12 per cent to 15 per cent on such efforts and our project implementation will need to be spruced up if we are to take better advantage of emerging opportunities.
There is no doubt that this a beginning and the details will now be negotiated. The agreement needs national ratification and has six months to conclude.
It may be recalled that the SADC FTA took from 1996 to 2012 to negotiate. The results will emerge from there and then it will be seen if more sign in or those who signed now will remain.
In Asia, the Regional Comprehensive Economic Partnership (RCEP) was launched in 2012 and is still being negotiated. This manifests that the problems of the CFTA are perhaps now beginning, but full marks to the intention of the leaders of Africa to try for a big new idea in integration.