Africa In The Same Boat: Will it sail or sink?

Authors: Yong Hwee Shi, Ang Hui Min

Region Head: Yong Hwee Shi

Editor: Chok Geow

Abstract

54 African countries have united in a ship sailing for greater economic integration, amidst the murky waters of global trade and rising waves of protectionism. The African Continental Free Trade Area (AfCFTA) is a monumental agreement expected to yield substantial benefits. But for the ship to sail, its infrastructure must be strong enough for its smooth voyage. Political unity of members on board is critical as well, and any holes in the hull must be patched to prevent members from abandoning the ship due to their protectionist instincts.

Background

AfCFTA was built on a vision to turn Africa into a global economic powerhouse, by creating a harmonised market for intra-Africa trade (“What is the African Continental Free Trade Area?”, 2021). This dream is soon to be reality—AfCFTA is currently the Titanic of trade agreements.

Since the establishment of the World Trade Organization in 1995, AfCFTA is the next trade agreement with the most member countries. In fact, every African country, save for Eritrea, has ratified the agreement as of July 2019 (“What is the African Continental Free Trade Area?”, 2021). This January, AfCFTA trade activities have finally commenced, after months of negotiations and postponement due to the pandemic (Bavier, 2021).

The Rules that Countries Need to Abide on Board

A key agreement is the reduction of tariffs by 90%, and each nation is allowed to exclude 3% of their goods from their restriction (Signé et al, 2019). These regulations emerge from high tariffs that divided past regional trade agreements. For instance, the East African Community were imposed a tariff of 16%[1] on exports to the Arab Maghreb Union in North Africa (“What is the African Continental Free Trade Area?”, 2021).

Moreover, non-tariff barriers such as customs procedures, excessive bureaucracy and corruption have consistently hindered continental trade. Therefore, AfCFTA also includes the creation of an online portal where African businesses can report such problems to government officials, who are tasked to resolve those barriers (“What is the African Continental Free Trade Area?”, 2021).

AfCFTA is Expected to Contribute Positive Results

AfCFTA is estimated to boost Africa’s GDP by 7% by 2035 (Maliszewska et al, 2020). In fact, trade facilitation measures that cut red tape and simplify customs procedures would drive 65% of potential GDP gains (Fig. 1) (Maliszewska et al, 2020). It is also expected to lift 30 million people out of extreme poverty (Maliszewska et al, 2020).

Fig.1 GDP gains from AfCFTA in 2035 by country, % change with respect to baseline scenario (Source: The World Bank) (Maliszewska et al, 2020)

More importantly, AfCFTA would enhance industrial and enterprise competitiveness by driving scale production. According to the United Nations Economic Commission for Africa, AfCFTA is projected to help the continent grow intra-African trade by 52.3% (Ighobor, 2018). As of 2019, about only 16% of Africa’s trade is intra-regional, compared with about 60% for Asia and 68% for Europe (Fig. 2). This represents the large growth opportunity in achieving greater economic integration.

Fig. 2 Africa’s intra-regional merchandise trade compared to other regional blocs

(Signé et al, 2019)

Source: UNCTAD, “Merchandise: Intra-trade and extra-trade of country groups by product, annual,” 2017. Available at: https://unctadstat.unctad.org

Will AfCFTA Live Up to Expectations?

For AfCFTA to achieve its full potential, several obstacles need to be overcome. Firstly, the African economy is highly fragmented, as different countries’ economies vary in socio-economic development. Transport and communications infrastructure within Africa are not as advanced as those between Africa and foreign countries. For instance, the variation in railway gauges often causes shipment delays, as goods will need to be unloaded at borders (Bruzzone, 2020).

These are further compounded by inefficient custom procedures. Take the example of Mozambique—customs officers charge drivers a fee for vehicle inspections that are rarely performed (“What is the African Continental Free Trade Area?”, 2021). In a way, overseas air shipments would be more efficient than shipments between two landlocked African countries.

Bilateral relations between African countries have also been relatively low. For instance, while Nigeria is one of the world’s largest palm oil producers, Kenya instead imports their palm oil overseas from Malaysia (Bruzzone, 2020). In Morocco, only 3% of total imports and 5% of total exports are with other African countries (Bruzzone, 2020). All these result from a history of little economic integration, reminiscent of colonial-era trade systems (Bruzzone, 2020).

Evidently, improving the continent’s infrastructure is a crucial enabler for AfCFTA’s success. The problem is affording the investment needed—there is a financing gap of $68 billion to $108 billion annually (Bruzzone, 2020). That said, global investments have reduced this deficit. China’s contracts in sub-Saharan Africa in particular, have summed up to $300 billion across 2005 and 2019, and most of it was channelled to construction projects (Bruzzone, 2020). Kenya for example, undertook several projects to upgrade road and rail networks linking Nairobi to Mombasa, and connect East Africa’s Great Lakes region (Bruzzone, 2020). Even with notable headway, there is still much to be done in scaling up infrastructural developments.

Entrenched protectionism raises another roadblock. As enticing as a unified regional bloc is, there are still costs associated with greater trade liberalisation such as uneven distribution of benefits and structural constraints to meeting the demands of increased competitiveness. In fact, the reason for Nigeria’s initial hesitation to sign AfCFTA, and their closure of land borders just three months after signing AfCFTA, is to protect their domestic businesses (Refer to next section).

Nonetheless, as much as countries are tempted to jump off the ship, remaining on board is safer than fending the waves alone, as the benefits of free trade are undeniable. Effective instruments are thus needed to cope with the shift to free trade, such as trade adjustment programmes and social policies to prevent structural unemployment. Furthermore, full compliance to tariff reduction schedules must be ensured, and dispute settlement mechanisms are essential to overcome the politics of trade protection. Such a mechanism is established in Article 20 of the AfCFTA Agreement (Erasmus, 2020).

However, despite AfCFTA’s efforts to address their many obstacles, there are some that seem insurmountable. Corruption and excessive bureaucracy may impede certain measures, especially for the online portal managed by government officials[2]. Moreover, the sheer size of the agreement is likely to slow the speed of settlement regarding non-tariff barrier complaints and trade negotiations. Even until January 2021, the annex to the agreement that outlines the Rules of Origin[3] and the finalized tariff reduction schedules by all members, have not been completed yet (Bavier, 2021).

Case Study: Nigeria’s Hesitation

Among the last nations to sign was Nigeria, Africa’s most populous country (Worldometer, 2021). Nigeria also accounts for about 20% of Africa’s economy (International Monetary Fund, 2020). While the Nigerian government has clearly stated that they see great potential in AfCFTA, it had protectionist tendencies and concerns regarding potential loss of revenue due to tariff reductions. It was only astute to conduct further consultations with relevant stakeholders and establish a panel to weigh the cost and benefits of Nigeria’s participation (Akinkugbe, 2018).

At the time of signing, Nigeria’s President Buhari faced an impending election and there was a need to satisfy strong interest groups, especially labour unions who were displeased at the possible foreign interference and concerns at imports undermining Nigerian businesses ("Why Africa's two biggest economies did not sign", 2018).

Moreover, tariff reductions may contradict Nigeria’s fiscal policies. Nigeria’s long-standing trend of granting tax incentives to exports whilst refusing the same for imports will be reversed under AfCFTA rules, leading to a price increase in imports and disadvantages to local producers (Etim, 2020). It is uncertain if an increase in government investments directed at incubating local industries will compensate for the loss in tariff revenues as the expected level of expansion may not be achieved. As such, Nigeria’s concerns were not unfounded.

On 7th July 2019, Nigeria ratified the AfCFTA and the operational phase of AfCFTA was launched on that very day (Geldenhuys, 2019). This came after the Nigerian Office for Trade Negotiations held discussions with over 27 groups including trade unions (Jones, 2019).

Nigeria is poised to gain about US$13 million in welfare as a result of greater access to lower product prices available via AfCFTA trade (Oyelami, 2021). Prospective investments into the supply chain infrastructure as a result of AfCTA and the possibility of cheaper labour due to the free movement of people and services would enable Nigeria to gain long term benefits and exacerbate its lift out of poverty, making it a sound decision to participate in AfCFTA.

Conclusion: A rocky but hopeful voyage for Africa

While AfCFTA has shown much potential, its success hinges largely on regional cooperation amidst all obstacles and conflicts. However, with the pandemic comes not just further delays in implementation, but also a stronger impetus to board the AfCFTA ship—especially after many African countries suffered import disruptions. The fact that AfCFTA has been actualised at such a scale also represents the political will to boost intra-AfCFTA integration. Such economic integration does not occur overnight to guarantee the success of AfCFTA.

But if member countries possess the discipline to keep to the regulations, consistently develop progressive and adaptive programmes, and maintain strong regional cooperation, the process to greater economic integration will be more successful. Such efforts to patch the holes in the hull of Africa’s trade system will ensure AfCFTA’s smooth voyage, even through rough winds and waves.

[1] This is an average percentage. [2] The online portal is trade barriers.africa, which helps African governments monitor and eliminate non-tariff barriers. [3] Rules of origin are criteria that determine the origin of a product and, by doing so, establish which products are eligible to receive preferential tariffs (Signé et al, 2019).

References

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2. Bavier, J. (2021, January 01). African free trade BLOC opens for business, but challenges remain. Retrieved May 07, 2021, from https://www.reuters.com/world/middle-east-africa/african-free-trade-bloc-opens-business-challenges-remain-2021-01-01/

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