Trading under the AfCFTA began on 1 January, but many issues must be solved before it can live up to its potential as the world’s largest free trade area.
Few intergovernmental projects are as ambitious as unifying 54 countries with a combined population of 1.2billion to create the world’s largest free trade area.
Yet the African Continental Free Trade Agreement (AfCFTA) has proved successful in rallying all of the African Union member states, except Eritrea, to sign the landmark accord. As of January 2021, 35 of the 54 signatories have ratified the agreement. Trading under its terms has begun, but much remains to be done before it reaches its full potential.
Hailed by AfCFTA secretary general Wamkele Mene as “a strong signal to the international investor community that Africa is open for business, based on a single rule-book for trade and investment,” the benefits of a free trade area are clear.
Eliminating burdensome trade tariffs, harmonising regulatory systems and establishing a single market for goods and services will pave the way for a reshaping of markets across the continent and enhance intra-Africa investment.
But the continuing impact of Covid-19 is complicating the already substantial challenges facing the AfCFTA. Due to the impact of the pandemic, the start of free trading under the agreement was postponed from 1 July 2020 to 1 January 2021. Virtually all African countries have faced major economic upheavals and threats to conventional ways of working due to Covid-19.
While launching the AfCFTA in the middle of a global pandemic entails risks, especially around trade readiness, experts believe that it was imperative to forge ahead rather than wait for countries to be better prepared.
“The risks and missed economic opportunities in not launching the AfCFTA now would be much greater than the risks in cautiously proceeding with implementation and negotiations,” says Dirk Willem te Velde, principal research fellow and head of the international economic group at the Overseas Development Institute (ODI).
The need for essential medical supplies and goods to move seamlessly across borders during Covid-19 highlights the importance of advancing regional integration and strengthening market linkages across the continent.
While the pandemic has so far been less lethal in Africa than other regions of the globe, it has jolted regional and global value chains. For example, Chinese imports into Kenya’s Mombasa Port fell by 20% in the immediate aftermath of the pandemic between January and February last year.
“Covid-19 and other shocks like drought and locust infestation have emphasised the need to diversify African economies away from the export of primary commodities, in order to achieve a more sustainable economic development across the continent, as well as avoid the next disruption of global value chains,” says Justin Bayili, executive secretary of Borderless Alliance, a partnership of private and public sector stakeholders to increase trade in West Africa and eliminate barriers to trade.
But despite the best attempts of policymakers to forge ahead, Covid-19 is still likely to complicate the early months of the launch. Undertaking negotiations on even non-contentious elements of the AfCFTA has been complicated, since physical restrictions make it almost impossible to arrange face-to-face meetings of policymakers.
While many AfCFTA negotiations have continued via video conferencing platforms, issues around infrastructure reliability and data security have limited the ability to carry out deliberations online.
“The disruption of negotiations and business processes due to Covid-19 has accelerated the development of digital solutions for business meetings, financial transactions and virtual discussion forums, which has paved the way for streamlining AfCFTA e-commerce negotiations with a sense of urgency,” adds Bayili.
The first few months of the trade agreement were already expected to be challenging, as friction traditionally mounts between parties as the practical and physical realities of cross-border trading differ from expectations under new trade deals. Even as customs officials begin to get used to trading under the AfCFTA, initial roadblocks will remain for some time.
“We continue to see a lot of challenges at border crossings because of government efforts to stop the spread of the transmission of the virus, especially the new variant that is advancing across the world,” says Stephen Karingi, director of the regional integration and trade division at the United Nations Economic Commission for Africa.
Nevertheless, the January launch ushers in changes long awaited by African businesses. Africa’s fragmented internal market has led to intra-African trade sitting at just 18% of total exports, up from a low of 9% in 2000, illustrating the uphill challenge in increasing cooperation on both trade and investment. Providing businesses with access to capital and markets, as well as other non-financial support, could immediately benefit African countries and open up growth possibilities outside of the larger economies.
Much technical work remains to be achieved over the next 12 months. The common denominator that all investors and traders seek is a comprehensive investment governance system, which will be vital for the success of the AfCFTA. While more effort is required to complete implementation across divergent nations, achieving the vital first step will be key to transforming trade and investment.
But it is yet to be seen exactly what investment agreements will be made by AfCFTA signatories, and which commitments will be binding and non-binding. The negotiations will be further complicated by numerous existing regional trade agreements and national regulations which offer a fragmented and often overlapping set of frameworks that need to be reconciled.
Nick Wilkinson, policy economist at the International Growth Centre at the London School of Economics, expects policymakers to attempt to make considerable progress on finalising negotiations around tariff schedules and the rules of origin for goods in 2021. As AfCFTA members are required to phase out 90% of tariffs over five to 10 years, this year will prove vital in setting the long-term goals for this agreement.
“This is an important process for member states, each of whom will be trying to ensure that liberalisation does not damage domestic industry, whilst also attaining access to markets that will spur growth. Rules of origin are interconnected to tariffs and are often complex matters in trade agreements, as the nationality of goods determine how they are subject to different trade policy measures,” he says.
The absence of uniform rules that give African investors certainty on disputes and how their investments will be governed remains a roadblock. The AfCFTA’s Investment Protocol, which has yet to be negotiated, has the potential to promote foreign direct investment through the removal of timely approval processes and improved cooperation.
Overcoming barriers
Despite the challenging circumstances that the AfCFTA launched in, business and political leaders have thrown their support behind this agreement and are working to make the landmark accord a success. Karen Taylor, CEO of Invest Africa, acknowledges issues remain around rules of origin and building legal alignment between countries in the AfCFTA.
“The positive news is that the will from business leaders to overcome these challenges is clear,” she says. “It will take continued commitment from Africa’s leaders at both a continental and a national level to overcome the legal and physical barriers to free movement of goods and people.
In the short term, it is important to support those countries that are less well positioned to take advantage of continental trade and may see some initial costs.”
The global economic turmoil triggered by Covid-19 has delayed many infrastructure projects that were expected to help facilitate the trade goals of the AfCFTA, but only temporarily.
“Ultimately these projects as well as the AfCFTA, with all its implications around legal alignment and reform, are projects for the next decade, not the next year. As the agreement comes into effect it is important that immediate economic frustration and accompanying social tensions do not derail the agreement as a whole,” says Taylor.
The AfCFTA may not be an immediate panacea for the challenges facing intra-Africa investment and trade. But there are countless valuable opportunities for African companies if progress can be forged over the next 12 months.