African free trade area faces challenges from within

Analysis

An agreement to establish the AfCFTA was signed in March 2018 by 44 of the African Union (AU)'s 55 member states. More have since signed on, leaving only Benin, Eritrea and Nigeria outside the agreement (see AFRICA: Implementation may slow free trade area plans - February 26, 2018).

On April 2, The Gambia became the 22nd country to ratify the agreement, the threshold for it to enter into force.

Unfinished business

AfCFTA negotiations were divided into two stages: the first covered trade in goods and services; the second will include investment, competition policy and intellectual property rights.

The first stage is largely complete. Outstanding issues include tariff schedules, rules of origin and some specific arrangements on trade in services.

Participating countries are expected to submit negotiated market access offers (import tariff commitments) by January 2020. Agreement already exists to liberalise 97% of tariff lines, accounting for over 90% of intra-African trade.

The timeframe for tariff liberalisation is five years (ten for 'least-developed countries'). Rules of origin are expected to be finalised by June 2019, with protocols on investment, intellectual property rights and competition policy to be developed by June 2020.

Welfare effects

Removing tariffs on intra-African trade, as the AfCFTA envisages, could reduce continental tariff revenues by 4.1 billion dollars (9.1% of current revenues) under full liberalisation, but exemptions mean the actual figure will be much lower.

The effects will not be even as tariff revenue represents a larger share of government revenue in some countries.

As percentages of current expenditure, the greatest losses will be experienced by Guinea (4.4%), Togo (3.5%) and Benin (2.0%). The greatest losses as a percentage of current tariff revenues will be in Burkina Faso (44%), Zimbabwe (36%), Malawi (22%) and Ghana (21%).

The ultimate effects of tariff removals are expected to be positive, as trade benefits offset tariff losses.

According to the African Development Bank, removing tariffs on intra-African trade should boost net real income at the continental level by 0.1% -- or 2.8 billion dollars -- per annum.

Removing the ad valorem tariff equivalents of non-tariff barriers on goods and services would result in a 1.25% increase in net real income, or 37 billion dollars. Implementation of the WTO's Trade Facilitation Agreement (TFA) would boost benefits even further, with an estimated aggregate real income gain of 3.5%, or some 100 billion dollars.

In terms of the impact on trade, intra-regional trade (within regional economic communities) is projected to increase by 14.6%. Intra-African trade, meanwhile, would increase by around 107%, while implementation of the TFA would grow intra-African trade by a further 51%.

Implementation challenges

Predictions of the AfCFTA's benefits, however, rely on several assumptions -- most notably, full implementation and adherence to the rules.

Such assumptions have rarely held true in the African context. Instead, domestic politics rather than economic rationality tends to dictate government policies.

For example, when Economic Partnership Agreements (EPAs) began to be negotiated with the EU in the 2000s, there was much speculation about the potential impacts. Over a decade later, it has become clear that most African countries are unlikely ever to implement the EPAs as expected.

National political dynamics will likely have an important bearing on AfCFTA implementation too.

National governments depend for political support on domestic groups, which in turn look to influence government policy in their favour. As such, negotiations over international trade are often also negotiations to satisfy domestic interests.

For example, domestic interest groups played a key role in Nigeria's decision to remain outside the AfCFTA -- by far the largest economy to do so.

Among others, a report by the Manufacturers Association of Nigeria warned that joining the AfCFTA would result in an import surge over the next 15 years ranging from 27.6% for the textile, apparel and footwear sectors to well over 2,000% for the motor vehicle assembly sector (see AFRICA: Trade pact advance will hasten Nigerian buy-in - September 21, 2018).

Key players in Nigeria, therefore, lobbied President Muhammadu Buhari not to sign the AfCFTA.

Such difficulties can extend into the implementation phase, especially if informal or clientelistic domestic interest groups essentially veto or complicate implementation of elements of an agreed regime that go against their interests, something that has been seen recurrently in the context of East African trade liberalisation.

There is a considerable risk that the AfCTFA could end up like the EPAs: signed but never implemented or -- worse -- with countries implementing provisions selectively or erratically.

Regional lessons

The AfCFTA is built upon the existing African model of regional integration. It may face some of the same dynamics that have characterised those processes.

The East African Community (EAC) is arguably Africa's most successful regional integration scheme. However, it has encountered several coordination and implementation issues that are highly likely to occur on a continental scale under the AfCTFA.

For example, regional political and trade disputes have created recurrent volatility in the application of tariff and trade rules nominally agreed by the community (see EAST AFRICA: Bilateral tensions threaten integration - March 15, 2019).

Member states have largely ignored EAC secretariat warnings of the effect this could have on trade and investment, due to the absence of any punitive measures.

Nevertheless, foreign direct investment inflows into the EAC decreased to 6.6 billion dollars last year from 8.8 billion dollars in 2016, mainly due to failures of tax and tariff coordination. The sectors with the greatest coordination problems (notably, agriculture and agro-processing) experienced the most severe declines.

The AU is currently discussing mechanisms, including a dispute settlement body, to ensure members implement the AfCFTA's rules, but it is too early to speculate on the impact, as few details yet exist.

A new bloc?

AfCFTA's establishment will complicate other trade commitments, not least because Africa will now be expected to negotiate as a single entity as opposed to the previous regional approach.

The 'post-Cotonou' negotiations are perhaps the most notable upcoming test, as the EU and African, Caribbean and Pacific (ACP) states seek to reach a new agreement after the Cotonou Agreement, the current framework for EU-ACP trade relations, expires in February 2020 (see AFRICA: Trade talks face diverging pressures - December 20, 2018).

If the EU and Africa now adopt a continent-to-continent approach, the progress (or otherwise) of the AfCFTA will affect the advancement of the post-Cotonou talks, just as that of African regional integration affected the EPA agreements.

Moreover, a continent-to-continent approach would need to involve North African countries (members of the AfCFTA but not the ACP group), but most have shown little enthusiasm about joining a post-Cotonou trade agreement.

Without North African countries, the negotiation would revert to African regions, potentially creating a new set of coordination problems between the regional post-Cotonou negotiations and the continental AfCFTA process.