Compiled by Ntsako Khosa
The past two issues of Cold Link Africa looked at the export and import of goods globally, in this issue we look at intra-Africa trade.
In 2019 South Africa ratified the African Continental Free Trade Area (AfCTA) agreement showing a commit to promoting intra-Africa trade. Of the 55 African Union (AU) member states to date, 28 countries have both signed and ratified the AfCFTA Agreement.
Although in its early stages, the United Nations estimates that the intra-Africa trade is expected to grow to 53% by mid-2020s contributing USD70-billion (over a trillion rand) to the continents Gross Domestic Product (GDP). The agreement commits countries to removing tariffs on 90% of goods and to liberalise services.
According to researcher, Michael Khorommbi, theoretically, the AfCTA has the potential not only to increase intra-African trade but to act as a catalyst for economic growth. “If fully implemented the African Continental Free Trade Area will create a trade bloc that is estimated to bring together a market of 1.2 billion people – the population of the entire continent – with a combined gross domestic product going into the trillions.”
Origins of AfCTA
Initial talks of implementing the Agreement started in 2013, gaining momentum and negotiations held through various AU summits. According the AU briefs, the first negotiation forum was held in February 2016 and held eight meetings until the Summit in March 2018 in Kigali.
In February 2017 the technical working groups held four meetings, where technical issues were discussed and implemented in the draft. In March 2018 the AU Ministers of Trade approved the draft.
At the Summit of the Assembly of the African Union in March 2018 in Kigali the Agreement establishing the African Continental Free Trade Area was signed, along with the Kigali Declaration and the Protocol of Free Movement.
Negotiations continued in 2018 with Phase II, including policies of investment, competition and intellectual property rights. In January 2020, AU Assembly negotiations are envisaged to be concluded.
Objectives of the AfCTA
- Establish a single continental market for goods and services, with free movement of business professionals and investments, accelerating the establishment of the Continental Customs Union and the African customs union.
- Expand intra-African trade through better harmonisation and coordination of trade liberalisation and facilitation across Regional Economic Communities (RECs) and across Africa.
- Resolve the challenges of multiple and overlapping memberships and expedite the integration processes.
- Enhance competitiveness at the industry and enterprise level by exploiting opportunities for scale production, continental market access and better reallocation of resources.
Benefits vs. challenges of the AfCTA
The UN Economic Commission for Africa (UNECA) estimates that the implementation of the agreement will double the share of intra-African trade (currently around 13% of Africa’s exports) by the start of the next decade.
According to a research paper published by the United Nations Conference on Trade and Development (UNCTAD) in February 2018, the CFTA offers many opportunities for sustainable development and economic growth in the African economies. However, not all countries will benefit to the same extent, and the gain of welfare benefits also implicates relevant costs and commitments.
Most of the benefits of further trade integration (i.e. welfare benefits from lower import prices, production efficiency and increase in outputs, higher value-added jobs and exports, technological specialisation, and so on) will materialise in the long term, while most of the associated costs of adjustment and integration (i.e. loss in trade tariff revenue, local SMEs vanishing in front of stronger competition, adjusting unemployment, required investment in infrastructure, political and regulatory reforms) will be incurred in the short term.
Using the Global Trade Analysis Project (GTAP) computable general equilibrium (CGE) model, UNCTAD has estimated the quantitative effects of the CFTA according to two long-term scenarios: a full Free Trade Agreement (FTA) and Special Product Categorisation (SPC).
A full Free Trade Agreement (FTA) eliminating all tariffs in the CFTA could generate welfare gains of USD16.1-billion (R236-billion), at the cost of USD4.1-billion (R60.3-billion) in trade revenue losses (representing 9.1% of current tariff revenues). GDP and employment are expected to grow by 0.97% and 1.17% respectively. Intra-African trade growth is estimated at 33% and the continent’s trade deficit is expected to drop by 50.9%.
Special Product Categorisation (SPC) permanently exempts sensitive products from liberalisation. In a scenario in which the sector with the highest current tariff revenue would be exempted from liberalisation, UNCTAD simulations estimate a welfare gain of USD10.7-billion (R15.7-billion) in the long term. Tariff revenue losses are expected at USD3.2-billion (R4.7-billion), representing 7.2% of current tariff revenues. GDP and employment growth are expected to grow by 0.66% and 0.82% respectively. Intra-African trade is expected to grow by 24%, while, Africa’s trade deficit only shrinks by 3.8%.
The agriculture sector is extremely relevant for the African economies since it employed about 53% of the continent’s labour force in 2016. Governments are worried about possible adverse impacts of the CFTA on the agriculture sector’s economic growth, which would massively affect employment across the continent. Even though the largest employment growth rates are found in manufacturing and services sectors, agriculture sub-sectors are also expected to grow.
Despite the benefits projected, Khorommbi says that it is too early to “evaluate whether the agreement will be feasible or if it offers the economic prospects the African Union Commission claims it will yield considering the current transcontinental infrastructural position. Worthy of note is that, at present, there is a ‘basket’ of several multilateral, regional and bilateral trade agreements in sub-Saharan Africa, which have lowered trade tariffs among countries and regions. However, due to overlapping membership, some of these agreements are not yielding the envisioned economic and trade-related-outcomes”.
There are several explanations for this state of affairs says tralac: the dependence of African economies on commodity production and exports, a lack of diversification resulting in a mismatch between supply and demand, tariffs and non-tariff barriers (NTBs), inefficient transport infrastructure, poor trade logistics and high security risks. NTBs are another obstacle to intra-Africa trade. Infrastructural, policy and procedural constraints create trade bottlenecks – complex clearance procedures, cumbersome documentation requirements and unpredictable trade policies contribute to high intra-Africa trade costs. Reductions in NTBs can increase economic growth and raise the volume of intra-Africa imports and exports and improve terms of trade across the continent. The EAC, SADC, COMESA, ECOWAS and UEMOA have initiated measures to address the NTB problem and the effect on intra-REC trade. Most notably are the COMESA-EAC-SADC and Borderless Alliance (for ECOWAS and UEMOA) NTBs Reporting, Monitoring and Eliminating mechanisms. A similar mechanism is envisaged in the AfCFTA. However, the AfCFTA NTB mechanism can only be utilised once NTB complaint procedures at REC level have been exhausted (and failed to provide a solution) or if an NTB complaint arises from trade between different RECs.
South Africa trading within
A report published by the Trade Law Centre (tralac) states that in 2018, South Africa exported and imported goods to and from the rest of Africa to the value of USD25-billion (R367-billion) and USD11.5 billion (R16.9-billion), respectively. Intra-Africa exports account for 26% of South Africa’s total exports and imports for 12% of total imports for 2018. Between 2017 and 2018, South Africa’s intra-Africa exports increased by 7%, while intra-Africa imports increased by 35%. Increased imports are mainly due to a 73% and 28% growth in imports of petroleum oil and petroleum gas. South Africa’s main intra-Africa export products are petroleum oils, goods and passenger motor vehicles, coal and chromium ores and concentrates. The Top 10 intra-Africa export products accounts for 26% of South Africa’s total exports to other African countries.
Fifty percent of South Africa’s intra-Africa imports are crude petroleum oils. 87% of which are imported from Nigeria and Angola. Other main import products are petroleum gas, mixtures of odoriferous substances (a beverage additive), semi-manufactured gold and electric energy. The top 10 products South Africa imports from the rest of Africa accounts for 69% of South Africa’s total intra-Africa imports. South Africa mainly trades with neighbouring countries (except for Zambia as a destination market and Nigeria and Angola as source countries).
In terms of South Africa’s total trade (exports and imports) with the rest of the continent;
- Namibia (13%),
- Botswana (12%)
- Nigeria (12%) and
- Mozambique (12%)
These are South Africa’s main African trading partners.
The main destination markets for South African exports are Botswana, Namibia, Mozambique and Zambia. South Africa mainly sources intra-Africa imports from Nigeria, Angola, eSwatini and Namibia.
At a Parliamentary session discussing the Free Trade Agreement Deputy President David Mabuza encouraged looking at technology to further improve trading, saying, “We can for example make major advances in upscaling of our value-added exports taking advantage of rapid technological advances to achieve new efficiencies along product value chains.”
Costs of trade
Most of the goods imported into South Africa from other Southern African Development Community (SADC) member states enter duty-free. The only exceptions are wheat flour, sugar, second-hand clothes and tyres.
South Africa’s highest ad valorem import duties are levied on imports of whole frozen chicken, prepared or preserved pineapples, and uncooked pasta not containing eggs, to name a few.
Thirteen percent of South Africa’s intra-Africa exports are to countries that are not members of Southern African Customs Union (SACU) or SADC. South Africa sources 42% of its intra-Africa imports from countries outside SACU and SADC. About 93% of these imports are crude petroleum oils from Nigeria and Ghana. Other imports include frozen sardines, technically specified natural rubber, liquefied propane, ammonia and cocoa paste. Apart from Nigeria and Ghana, other source countries are Egypt, Togo and Morocco. Of the top 20 products (97% of products imported from outside SACU and SADC) South Africa imports, only four tariff lines have non-zero tariffs. These are non-woven synthetics, oilcake, ignition wiring and fresh grapes.
Experts say that the Agreement is not only creating the biggest trade agreement since the World Trade Organisation was established in 1994 but is also the most significant step towards economic integration which has already been achieved in other regions in Africa. According to the UN Conference on Trade and Development, regional intra-trade accounts for 59% of Asia’s exports and 69% in Europe.
Although perishables haven’t seen a good import and export relationship continentally, AfCTA is expected to change the way trade is done. Great strides can be expected to occur as soon as challenges relating to cross-border travelling, corruption, political instability and so on are solved. We will be looking very closely as to how things pan out regarding the Agreement but we remain optimistic.
Making it work
The effective implementation of the AfCFTA commitments (on trade facilitation, customs cooperation, transit, sanitary and phytosanitary measures and technical barriers to trade) and infrastructure development will determine how successful the AfCFTA NTB complaint mechanism will be. Without effective remedial action and better infrastructure, recurring and non-actionable NTBs will not be eliminated.
The AfCFTA’s NTB complaint mechanism has the potential to highlight those NTB related aspects of intra-African trade policy and practice which pose obstacles to increasing intra-Africa trade. Trade policy changes, improved cross-border procedures and new remedial measures should follow. The AfCFTA State Parties should tackle these problems as a matter of urgency. The proposed arrangement is only a starting point.
Sources:
- UNECA
- Wikipedia
- AU Commission
- tralac