Reality check as Africa Free Trade Area opens its doors

Thursday, January 28th, 2021 00:00 |
A recent meeting of Africa Heads of State and government in Rwanda’s capital Kigali on the African Continental Free Trade Area. Photo/PD/File

Africa’s free-trade area became a reality on 1 January 2021, promising to make it easier to do business across the continent.

The idea, which has been talked about for years, is to create one of the world’s biggest free-trade areas, opening up a market of more than 1.2 billion people, with a combined Gross Domectic Product (GDP)  of more than $3 trillion (Sh300 trillion). 

This would create business opportunities - and jobs - across Africa, while reducing the cost of some goods in the shops and markets.

The launch of the African Continental Free Trade Area (AfCFTA) follows years of negotiations and preparations, and more recently faced months of delays due to the global coronavirus pandemic.

What happened on 1 January?

From that date, the 41 countries that had submitted their plans to reduce tariffs on imported goods, were able to trade goods under the new rules.

Each State or regional trade bloc makes their own plans and that information is eventually hosted on the Africa Trade Observatory (ATO) website.

Under the trade deal, tariffs on 90 per cent of goods will be phased out within 10 years and more for the remaining 10 per cent.

This is being done in stages and so could take up to 2035, according to the AfCFTA secretariat.

So has the price of goods in the shops changed?

No, not yet. For the prices in the shops and markets to change, the taxes on imported goods must go down first.

While many of the countries have officially reduced the taxes, and so some of the goods are eligible for the lower tariffs, this is yet to take effect. 

This is because countries are first required to gazette, the specific changes on tariffs and this information is published on the ATO website. Because this process is not yet complete, the duty or taxes being paid has largely not changed. 

Besides, not all countries that have offered to reduce the import taxes have finalised their customs processes, such as the procedures for presentation, identification and clearance of goods.

“In most cases,” David Luke, a trade policy expert at the United Nations Economic Commission for Africa (Uneca) says, “the duty will be refunded later since the process, including gazetting is in progress”.

But once the reduction in taxes does take effect, which depends on when individual countries complete their processes, the prices of goods should fall.

Andrew Mold, the head of regional integration and the AfCFTA cluster at the Uneca, reckons the price reduction will be quite modest for goods such as food and building materials but there will be more pressure to reduce service sector prices.

What difference will it make to traders?

It could potentially make a big difference to people trying to export goods from one African country to another.

Mabel Simpson is a creative fashion entrepreneur in Accra, Ghana, who makes items with African prints such as handmade laptop bags, hand bags and pillows.

Most of the raw materials she uses are imported and she says that taxes on them make the final products too expensive to sell elsewhere on the continent.

Her biggest export markets are currently the US and the UK, as factors such as import taxes and other costs make goods too expensive to sell elsewhere in Africa.

“If I need to ship an item that weighs one kilo to the US, it’s going to be $25 but if I need to ship the same item to Uganda, it’s going to be $60. So, which is cheaper? The USA.”

If she was able to sell her goods profitably in Uganda, and other African countries, she says she would, potentially be creating more jobs for her employees in Ghana, and those selling her products elsewhere.

She also says an African free trade area could make her products cheaper because she currently pays taxes on those goods she imports.

“This AfCFTA means we are going to be able to produce in numbers and more people are going to be able to afford our products,” she says.

What about bigger firms?

With a large and seamless market for goods, the free-trade area is expected to attract more domestic and foreign investment, fostering industrial growth in the continent.

This is one of the objectives of AfCFTA, which will be the world’s largest free trade area by number of countries once it is fully operational.

However, some smaller companies may be worried they will not be able to compete with continental giants and multinationals.

The AfCFTA is negotiating a protocol on competition policy this year which aims to create a level playing field for all firms.

The UN and World Trade Organization’s joint agency, the International Trade Centre, says that the free trade area could also make it easier for small companies to expand into neighbouring countries.

Small firms could find niche markets but can also specialise as part of the supply chain of larger firms. Some obstacles still remain, including poor physical infrastructure.

Why is the African Union so keen on a free-trade area?

Basically because trade between African countries is relatively low. For example, Kenya is a major flower exporter but Nigeria imports flowers from the Netherlands. Similarly, palm oil in Kenya is likely to come from Malaysia, rather than Nigeria.

The idea behind the free-trade area is to see Kenyan flowers on the streets of Lagos and Nigerian palm oil for sale in Nairobi.

Across the continent, just 2 per cent of trade was with other African countries in the period 2015-17, compared to 47 per cent in the US, 61 per cent in Asia, 67 per cent in Europe and 7 per cent in Oceania, according to UN trade agency, Unctad.

Many countries still do more trade with their former colonial power than they do with their neighbours.

The theory is that if African countries did more business with each other, they would all benefit, creating more jobs and so raising living standards across the continent.

The trade area also seeks to resolve the challenges of multiple and often overlapping membership of regional trade blocs, such as the Common Market for Eastern and Southern Africa (Comesa), Ecowas in West Africa, Sadc in the south and the East African Community.

So what happens next?

This is just the start of a journey, which could last up to 2035. The deal, signed by 54 of the African Union’s 55 member States, and ratified by 34 so far, commits countries to remove tariffs on 90 per cent of products within a five-year period.

Trade under AfCFTA cannot yet commence on the remaining 10 per cent of goods, whose negotiations are yet to be finalised, according to Mold of the Uneca.

He notes that the implementation of the free-trade area is a process rather than an event.

Negotiations continue this year, he says, before the negotiators move to the Phase II issues - such as rights of investors, competition police and intellectual property.

“All this is part of a gradual harmonisation of African trade and investment policies to facilitate greater levels of intra-African trade and investment,” he told BBC.  —BBC

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