African Free Trade

African Free Trade Agreement

Can it Help Africans Recover Quickly?

Africa accounts for 20Pct of the world population but only makes up three percent of the world GDP, at USD2.6 trillion. The implementation of the African Continental Free Trade Area (AfCFTA) would, however, set in motion the largest regional free trade area in the world. Signed by all African countries, except for neighboring Eritrea, the agreement was supposed to be put into practice next month. However, the Coronavirus pandemic rushed in to steal its light as it did to a number of other plans around the world. Against all odds, some argue that now is the best time to launch the agreement across the continent as global supply chains are disrupted and being reconsidered by countries across the world. Even some go far as to claim AfCFTA would help African countries quickly recover from the impacts of the pandemic. Nonetheless, many say this may not hold true for Ethiopia as a few export commodities mark its comparative advantage. Haimanot Ashenafi, in her special report to EBR, explores. With the formation of the Organization of African Unity (OAU) in May 1963, Africa declared itself liberated. It has been liberated ever since, but it has remained fragmented and isolated while the rest of the world was experimenting with globalization. July 1, 2020 was slated to end fragmentation by implementing the hugely hyped African Continental Free Trade Area (AfCFTA), which envisioned creating a single African market with a trade value of over USD1.2 trillion. Comprising of economies with a combined GDP of USD2.6 trillion and a population size of 1.3 billion, it will be the second largest market after the WTO, which comprises of 164 countries despite trailing AfCFTA in terms of population size.

Ethiopia, among first signatories of the agreement, integrated AfCFTA’s targets in its newly launched ten years Homegrown Economic plan. The homegrown economic plan has taken into consideration the free trade area’s perks to boost exports, create jobs and boost cross-border industrial value chains.

Nonetheless, the historic day is postponed due to the Coronavirus. “It is obviously not possible to commence trade as we had intended on 1 July under the current circumstances. It would be unreasonable for any government to direct resources to meet the deadline when public health is so gravely at stake,” said Wamkele Mene, first Secretary-General of AfCFTA.

“The matter of postponement of AfCFTA’s launch of trading and the date of the Extra-ordinary summit on the AfCFTA is being considered by the AU Assembly of Heads of States. For now, July 1st still remains the scheduled trading date until we get an announcement from the Heads of States. Of course, the Assembly of Heads of States will take into account the current conditions on the ground, such as the closure of borders during the time of Covid-19,” said Mene, in his email response to EBR.

It was expected that at this point the tariff negotiations and the rules of origin negotiations would be concluded, enabling trading to start next month. However, due to Covid-19, these negotiations could not be concluded. Remote negotiations through webinars were impossible not only because of connectivity problems but also the need to translate everything into the continent’s four official languages. Second, across Africa, 42 countries are either in full lockdown or in partial lockdown. This means that the closure of borders prohibits the transit of goods, having an adverse impact on the intended trading date.

The latest WTO forecast estimates world trade to fall by 13Pct to 32Pct in 2020 due to COVID-19. Global exports and imports of African countries are projected to drop by at least 35Pct from the level reached in 2019 with a loss in value estimated at around USD270 billion. According to the World Bank, Sub-Saharan economic growth is forecasted to contract by -5.1Pct in 2020.

Output is expected to contract by 1.6Pct in 2020. This will be the first recession in the region over 25 years. To make it worse, Global Trade Alert and WB said that trade restrictions imposed by developed countries would make it harder for African countries to secure essential goods during this crisis. Problems of debt burden, a fall-off in revenues and limited foreign exchange availability are additional challenges the countries have to endure.

This is why some argue that now is the opportune time for AfCFTA to save Africa from the plummeting global trade. People with this opinion insist AfCFTA should be implemented sooner to ensure accessibility of medical equipment, food and labor mobility as the way out of the COVID-19 induced economic crisis in Africa. Contrarily, others argue that opening borders during the time of COVID-19 will fuel the spread of the pandemic across Africa.

“Operationalizing AfCFTA at this time will not fuel the spread of COVID-19. Trade is already ongoing with the rest of the world. We, for instance, are importing from China and it is not inflating the spread. AfCFTA is already overdue and it must be kicked off as soon as possible,” said Abebe Abebayehu, Commissioner of Ethiopian Investment Commission.

According to the UNECA, reducing tariff-barriers alone will spur trade by 53Pct within Africa, while elimination of non-tariff barriers would double intra-African trade from the current 18Pct. Intra-continental trade stands at 70Pct in Europe, 30Pct in Asia and 50Pct in North America. The free movement of goods, services, people and investments will finally culminate in customs union and currency union.

A recent World Bank study shows the positive economic and distributional impacts of the AfCFTA. It shows that African women will greatly benefit as they constitute the majority of those engaged in intra-African trade; 68 million Africans will also be lifted out of poverty; and, real income gains from full implementation of the AfCFTA Agreement could increase by seven percent or nearly USD450 billion.

“The need for AfCFTA is more even under COVID-19. It will reduce the cost of trading with the outside world. The road to one currency, one economy and one foreign policy by 2063 should start now,” said Hailemelekot Asfaw, Director for East Africa Regional Office of the Center for International Private Enterprise.

Unfortunately, however, the infrastructural connectivity in Africa is an obstacle. Export items go from North Africa to West Africa through Europe. ICT and online transactions can boost continental transactions but more railway and highway networks are required. “Restrictions increased and mobility declined under COVID-19, but the pandemic also brought opportunities because people can transact from home, using ecommerce,” added Hailemelekot.

However, Director of Bilateral and Regional Integration, Trade Relation and Negotiation at the Ministry of Trade and Industry, Fikru Tadesse argues “AfCFTA must not be implemented under COVID-19. The pandemic damaged developed countries and Africa is relatively safe so far. But if borders are opened and free trade is launched under AfCFTA, the next tragedy will be in Africa,” he warned.

Mene disagrees. “Implementing the AfCFTA will not increase the pandemic. On the contrary, it will help address the pandemic and aid in the post-pandemic economic recovery process,” says Mene.

Due to the fact that Africa does the bulk of its trade with the outside world and exports are heavily concentrated on primary commodities, the continent has been particularly vulnerable to external shocks, slowdown in global economic activities and protectionist trade policies.

According to the UN Economic Commission for Africa (UNECA), this is evident from the COVID crisis which, although not of the making of African countries, has had adverse impact on the continent’s economic and trade performance. “Once again, the major lesson to be drawn from the systemic shocks in the global economy is the need for Africa to promote intra-regional trade. The AfCFTA is one of the instruments that the African countries can leverage to overcome some of the ravaging effects of the Coronavirus and possible future pandemics,” noted Batanai Chikwene, Programme Management Officer at the Economic Commission for Africa (ECA).

Who Runs Faster in AfCFTA?
Many argue Africa has little to trade to each other as the majority of countries produce similar agricultural commodities. Manufacturing constitutes 42Pct of the 18Pct intra-Africa trade. But that is only the half-truth as harmonizing regulations and continental joint venture would also contribute to make AfCFTA a game changer and new growth engine for Africa.

“Indeed, many African countries produce similar agricultural products but we spent over USD60 billion on food imports, largely from outside the continent. So, there is room for business. I see AfCFTA as a catalyst for growth for the private sector. Governments have to rush to overcome the existing challenges and diversify to manufacturing,” said kebour Ghenna, Executive Director of Pan African Chamber of Commerce and Industry.

Currently, Intra-African trade accounts for only 13Pct of the continent’s total trade. Reliance on intra-African imports is comparatively higher for beer, at 44Pct, and soft drinks at 39Pct. Likewise, the automotive industry in Africa remains extremely outward-oriented, especially in relation to passenger cars, where the regional market accounted for less than 10Pct of exports and two percent of imports.

“Some African commodities are exported to Europe and re-exported to the continent simply because Africans could not trade among each other directly. AfCFTA will solve this problem apart from diversifying Africa’s export towards manufacturing, which is highly critical for Africa to employ its rising youth segment,” said Girma Wake, former CEO and current Board Member of Ethiopian Airlines.

Ethiopia’s export to Africa declined from a record high USD590 million in 2014 to USD507 million in 2018. The average share of African exports to the total export stood at 20Pct over the last decade. Ethiopia’s import from African countries jumped from USD341 million in 2013 to USD942 million in 2017 and down to USD654 million in 2018. The patterns depict that Ethiopia imports more from African countries at times of internal economic shock, and export more to Africa when the domestic politics as well as economy is performing well.

Ethiopia has stronger trade with IGAD and CENSAD. Trade with these regional blocs constitutes two third of Ethiopia’s intra-Africa trade. Ethiopia’s trade with COMESA and other Regional Economic Communities (REC) is almost insignificant, according to data from MoTI. “Too many economic communities and too much politicking made the blocs weak and progress irregular. ECOWAS and SADC seem to be doing well; the others are struggling with conflicts or weak institutions. In short, I will say the results remain rather mixed,” said Kebour.

For Fikru, on the other hand, Ethiopia did not benefit much from the economic communities because it liberalized tariff only on 10Pct goods and services. “We would not have ratified AfCFTA, had we not believed in its role to boost trade and industrialization.” Tea (largely by Kenya), Portland cement, copper ores and concentrates and tobacco are the most traded in COMESA, while Ethiopia largely exports Khat to Somalia and import oil from Sudan.

“The regional economic communities are building blocks towards achieving full African trade integration. A lot of work has been done already in establishing systems to eliminate non-tariff barriers, customs harmonization, develop border posts and border markets and infrastructure interconnectivity to enhance trade performance. This will complement the efforts of the AfCFTA implementations process,” added Mene.

In fact, regional trade blocs came into being mainly because the AU failed, since its establishment, to discharge its duties of launching a continental economy. For instance, IGAD was created to integrate the East African economy but ended up as a conflict resolution and peace and security organization. If AU implements AfCFTA, introduces one currency, one passport and customs union, the importance of regional blocs is expected to wane. This is why experts argue that regional blocs were created to facilitate AfCFTA but not to replace its role.

The African Integration Index (ARII) gives Ethiopia a rank of ‘average’ for macroeconomic, infrastructural and trade integrations, while it denotes ‘very low’ ranking for productive integration and free movement of people. Kenya, Rwanda, Zambia, Egypt and Djibouti are the high performers in COMESA. Ethiopia is an average performer in IGAD, while Uganda, Kenya, and Djibouti are high performers.

“Ethiopian officials do not consult the business community before signing major agreements under AfCFTA negotiations. The private sector, the supposed primary owners of the issue, do not know about AfCFTA at all. The Ethiopian private sector needs to be aware, engaged, prepared and know the advantages and impacts of AfCFTA,” said Hailemelekot.

Ethiopia, Lesotho, Egypt and Nigeria are aiming to use the textile and apparel sectors to boost their economies when AfCFTA goes into practice. “Ethiopia has better competitive edge in textile, leather and leather products. If the agriculture and livestock sector could ensure quality and surplus input supply, there is already built huge capacity in factories, including industrial parks,” said Kiflu Gedefe (PhD), Coordinator of Trade policy Research center at the Policy Studies Institute (PSI). “Ethiopia has better prospect because it has been pursuing comprehensive industrialization policy. If Ethiopia’s import shifts from the rest of the world to Africa under zero tariffs, customs revenue will decline, but it will definitely boost industrialization and import substitution,” he argued.

However, sources at the Ministry of Trade & Industry indicate, Ethiopia will lose over ETB900 million in customs revenue due to 10Pct tariff liberalization each year. “The trade flow and structure determine which countries will benefit most. Ethiopia has been generating significant custom tax from import. Now that will decline under free tariff,” said a senior official at the National Bank of Ethiopia who spoke to EBR on condition of anonymity. “In order to benefit, Ethiopia must be able to produce more and generate more profit. In fact, countries with small output will benefit from the competition and cheaper price under AfCFTA, but they will have to capacitate themselves to produce more.”

Few African countries like South Africa have competitive advantage in the manufacturing sector. Before exporting cars overseas, for example, large automobile manufacturers in South Africa source inputs, including leather for seats from Botswana and fabrics from Lesotho, under SACU. “International car makers have factory lines in South Africa. They can simply conquer the growing car market in Africa,” stated Tilahun Abay, Planning Director at Metals Industry Development Institute (MIDI).

Ethiopia’s recent ban on import of used cars creates an ideal opportunity for African car makers, for instance, shifting from the old cars industry in the Middle East. “These factories in South Africa or elsewhere in Africa can also outsource components for manufacturers across Africa. Ethiopia would also get big opportunity to import raw materials such as iron ore from West Africa or even Eritrea,” said Tilahun Abay.

Tilahun’s major concern is the logistics cost across Africa. “For an Ethiopian company, it is cheaper to import car from Rwanda than Europe or China; due to logistic hurdles though, the reverse is true. For instance, the price of a car increases by USD400 due to the logistics cost between South Africa and Rwanda,” he remarked.

Most of the existing infrastructure in Africa was either configured by colonizers to take raw material out of Africa, or built by states to facilitate trade with countries outside Africa. According to the first report launched in February 2020 on the progress of Agenda 2063, progress on African high-speed rail network stood at eight percent, progress on opening African skies was at 16Pct and progress on trans-African highway missing link was at 29Pct. ICT and mobile penetration in Africa is improving faster.

Of the total USD130 billion to USD170 billion required to finance Africa’s infrastructure, USD52 billion to USD92 billion is still not met. Once AfCFTA is launched, public private partnerships will be launched to develop infrastructural network. Additional commitment on funding infrastructure is also expected from States.

“The single African air transport market envisaged under AfCFTA is ideal to solve this dysconnectivity. National flag carriers could not fulfill the transport demand in Africa so far because they are protected,” said Girma. He went on to stat: “Some national flag carriers have few planes; hence, hiking the price of air transport. Opening up the air transport market will increase competition and reduce price for customers.”

The internationally recognized aviation guru, Girma, believes Ethiopian Airlines is in better position to connect Africa. He noted, however, ET should not be involved in short distance flights under AfCFTA. He remarked: “This market should be left for smaller aviation companies in Africa. ET should focus on global competition with British, Qatar and other big airways.” He noted that once small aviation companies collect from small tributary markets and accumulate passengers and cargo in major airports, ET can transport that to the next long distance.

E-commerce has a big potential under COVID-19. Continental Infrastructures like the highway from Cairo to Johannesburg, and from Senegal to Djibouti, are delayed because not all countries are committed equally. However, this can be compensated by creating a reliable telecom sector in Africa, which also needs huge investment.

“AfCFTA will send 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 key to moving away from the export of primary commodities to exporting value added goods is to upscale Africa’s industrial development,” added Mene.
The Fist of Regionalization and Globalization

Under a seismic shift, the share of developing countries in global trade jumped to 39Pct in 2018, up from 20Pct in 1992. Africa’s share in global trade, however, dwindled to 2.3Pct in 2018, down from 4Pct in 1980 and 8Pct in 1948. Before COVID-19, Africa’s marginalization was mainly due to inability to transition from extractives and primary commodities to manufacturing products.

According to the China-Africa Research Initiative at Johns Hopkins University, China’s export to Africa skyrocketed from USD10 billion in 2003 to its peak USD155 billion in 2015, before it declined to USD104 billion in 2018. The west, who waged a global trade war with China under the trump administration, want to keep China away from African markets.

Some experts argue that the launching of AfCFTA can raise concerns among the west. For instance, USA has been providing African countries with a tariff free quota of exports under the African Growth and Opportunity Act (AGOA) to encourage African exporters. The performance remained meagre because African manufacturers failed to meet the standards and produce in bulk.

If AfCFTA becomes operational, African Products will be diverted to huge domestic markets than being exported to other continents. The reliance on this huge domestic market would spell less Western policy influence over Africa. Africa’s bargaining power in the unfair globalization driven by western multinational corporations will also rise. Some experts argue that the possibility of such changes are the reason behind the desire of developed countries to delay AfCFTA. “Africa will have more negotiation power with big global economies like the USA and china, which are currently twisting the hands of African countries through debt. Individually, no African country is able to negotiate with the superpowers,” said an expert.

Mene and Cyril Ramaphosa, both South Africans whose country currently holds the AU rotating Presidency, will therefore be tested. With a lot more yet to be done, putting the agreement into practice does not seem to be happening this year, let alone a month later.

“The postponement of the launching date of AfCFTA is understandable as it is due to the disruption caused by the pandemic. But much work remains; for example, ratification is not yet complete, technical issues like rules of origin, tariff concessions and services commitments are still pending; the same is true for issues of investment, intellectual property, and competition,” said Kebour.

Vera Songwe, Executive Secretary of the UNECA, is less worried about the launching time of AfCFTA. “Kenya selling to Uganda, we’re doing that already to some extent. What we need is for Kenya to sell to the DRC with no borders,” she noted. “That still needs some time. There is still a lot of work that needs to be done for AfCFTA to succeed.”

Muse Mindaye, Multilateral Trade Relation and Negotiation Director at MoTI, agrees. “Under COVID-19, states are focusing on self-sufficiency in all aspects. Although regionalism is Africa’s only tool to tackle the pressure of globalization, it is not the time. Both globalization and regionalism are less effective under COVID-19. Launching AfCFTA under COVID-19 will have insignificant impact,” he argued.

Songwe also said AfCFTA does not mean the most industrialized countries would necessarily reap all the benefits. “When you look at Europe, probably the biggest two beneficiaries of the EU agreement are the Netherlands and Ireland. They are not big countries,” she argued. “They are small countries that were able to take advantage because they fixed their ‘doing business’ environment.”

Kiflu argued that the success of AfCFTA depends on a bottom up approach in participating SMES, household producers, small scale farmers and small businesses to access markets, finance and technology. “Whether AfCFTA is launched now or next year, it will take over ten years to fully liberalize the sensitive and non-sensitive items. Let us take advantage of the idle time under COVID-19 as an opportunity to re-configure our production systems and how to reduce dependence on import from other continents,” he remarked.

“The next launching date will be decided at the AU summit on industrialization in November,” said Ambassador Albert Muchanga, commissioner of Trade and Industry at the AUC. For Muchanga, who skillfully oversaw the formation of the African single market, everybody is a winner in AfCFTA.

If a vaccine for the Coronavirus is not discovered and AfCFTA has to be launched under the presence of COVID-19, African countries can use “trade corridors” or “green lanes” to expedite and ensure the free flow of essential commodities. Experts also note that such a scheme can be used as a quarantine area to mitigate the impact of the pandemic.

Nonetheless, for Kebour, the contribution of AfCFTA to the Ethiopian economy is going to be insignificant in the short term. “It will surely lead to numerous policy reforms. For the mid-to-long term period, a politically stable Ethiopia will be able to have access to newer markets and can attract investors interested in expanding their exports to countries such as Kenya, Sudan, Tanzania and West Africa, with whom it does very little trade,” Kebour said.

Mene, however, is very confident AfCFTA would still go forward. “The political commitment remains to integrate Africa’s market and implement the agreement as was intended,” he said. He stressed as African governments do not have the firepower to launch the same type of economic stimulus packages that the United States and Europe are putting forward to mitigate the economic damage from COVID-19, intra-African trade could serve the same purpose. “That’s our stimulus package. That’s how we’re going to get back on track as Africa. Implementing AfCFTA promises to re-inject growth and dynamism in African economies. In the medium to long term, implementation of AfCFTA should be Africa’s recovery plan for the post Covid-19 period,” Mene stressed.

Chikwene from UNCEA agrees. “Through the AfCFTA and other supplementary policies, the continent can begin the process of building supply chains to minimise the impact of future pandemics on supply chains,” he noted.EBR

9th Year • Jun.16 – July.15 2020 • No. 87

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