In brief

Trade under the African Continental Free Trade area is now underway and 36 countries, and counting, have ratified the agreement. Countries including South Africa and Ghana are early beneficiaries of the agreement due in part to their existing customs infrastructure. The agreement has many benefits and is expected to drastically boost the continent’s post-pandemic recovery, but there are still many challenges to overcome.


Contents

  1. Trade in manufactured goods
  2. Trade in services
  3. AfCFTAsopportunities
  4. RECs
  5. Challenges

As of April 2021, 36 countries in Africa had ratified the African Continental Free Trade Area (AfCFTA) agreement and 54 countries out of 55 in Africa have signed the agreement, with only Eritrea not being a signatory. Algeria and Somalia are expected to be the next countries to deposit their instruments of ratification. Countries that have already ratified the agreement include Angola, Côte d’Ivoire, Ghana, Kenya, Malawi, Namibia, Nigeria, South Africa, Uganda, Zambia and Zimbabwe. The first shipment of goods under AfCFTA took place in early January 2021, and most signatories have submitted their proposed rules of origin.

South Africa is already benefiting from AfCFTA with regard to future growth and further trade expansion, due to its existing strong connections across the continent and its already well-established manufacturing base. Smaller economies, such as those of Ghana and Côte d’Ivoire, are also benefitting, due to existing favorable conditions, such as having open economies, good infrastructure and supportive business environments.

Trade in manufactured goods

Recent Baker McKenzie research, compiled in conjunction with Oxford Economics, AfCFTA’s US$ 3 trillion Opportunity (report), looked at African imports from outside the continent and revealed that manufacturing products, industrial machinery and transport equipment constituted over 50% of Africa’s combined needs. Currently, Africa’s most important external suppliers of manufactured goods are Europe (35%), China (16%) and the rest of Asia including India (14%). By contrast, imports from other parts of Africa account for only 16% of total merchandise imports.

The report revealed that over three quarters of African exports to the rest of the world were heavily focused on natural resources, primarily raw materials. The report compared Africa’s 20 largest economies in terms of the share of exports destined for other economies on the continent. Some economies, such as Uganda and Zimbabwe, bucked the overall trend, trading more with their neighbors than other African nations do. Yet, their economies are small in contrast to those of Egypt, Nigeria and South Africa, which together represent more than half of the continent’s GDP. Egypt and Nigeria, for instance, have had very limited trade relationships with their African peers. As major fuel exporters, their focus has been on exports outside the continent.

Manufacturing GDP represents on average only 10% of GDP in Africa. This means that limited production capabilities within Africa are currently being compensated for through foreign imports. Yet, this manufacturing deficit could be eventually satisfied within the continent and enabled by AfCFTA. Manufactured products currently exported to African countries by their peers, primarily industrial machinery and motor vehicles, represent a third of the total trade flow in Africa. But a significant share of these intraregional exports of manufactured goods are re-exports of imported manufactured products from the rest of the world.

This shows that African nations do not trade with each other because of a misalignment between what various African countries need and what is produced on the continent. This misalignment signals missed opportunities to reduce foreign imports from outside Africa and increase trade flows within the continent. For AfCFTA to succeed fully, more countries need to diversify their production of goods to better match the import needs of their continental neighbors.

Trade in services

The African Union noted at the beginning of 2021 that AfCFTA negotiations would take place via the new African Virtual Trade-Diplomacy Platform, allowing parties from across many different timelines to meet in a secure online environment.

The physical constraints of doing deals during global lockdowns made negotiation and due diligence more difficult for all dealmakers, but virtual teleconferencing services have done much to address the logistical challenges and have provided the ability for parties to continue negotiations efficiently. Africa’s new virtual trade platform is a service that has been of great benefit in speeding up negotiations across vast regions, housing many different cultures, languages and legal frameworks. Its effective use is laying the foundation for more efficient cross-border negotiations in many other Africa-wide commercial and governmental trade initiatives going forward.

The trade in technology services is an especially pertinent area of focus for all countries in Africa that are in the process of adapting to a virtual, post-pandemic reality. Currently, services traded between African countries are mostly limited to the transport sector. Other notable sectors offering trade in services include energy, financial services, infrastructure development and tourism. These are largely contained between the continent’s main economic hubs: South Africa, Morocco, Egypt and Nigeria. In contrast, trade in services globally is oriented towards the information and communications technology and financial sectors.

Debates on trade liberalization are often focused on trade in goods, but the liberalization of trade in services can be equally important for the welfare of African countries. According to the report, Africa’s trade in services could represent a way to overcome the current production and industrialization limitations that threaten to hold up the Africa-wide trade in goods. Because a service can either be traded directly or serve as an input into the production process of a product, the liberalization of trade in services is not as hindered by current infrastructural or logistic deficits as the trade in goods. In this way, Africa’s service trade sector can benefit from bypassing the industrialization phase.

The report shows that the trade in services is especially promising, considering the services sector currently accounts for over half of gross value added in Africa. The increasing importance of services across the continent also suggests Africa could accelerate this growth in the future through AfCFTA. However, there needs to be a better understanding among policymakers of the important role that services can play in regional value chains in order to fully realize such benefits. This will allow the continent to address the structural constraints on growth in these sectors. The report notes that easing restrictions on foreign government policy throughout the continent will increase the flow of service trade between countries. For example, allowing more access to the information and telecommunications systems would encourage companies to enter new markets.

The report shows, for example, that lowering the cost of access and usage of communication and fortifying network security will encourage businesses to set up or ramp up operations in the continent. According to the report, currently more than 22% of African countries have higher data costs for 1GB of mobile data than the average for the rest of the world, with a Cable report in 2019 noting particularly high data costs in Zimbabwe, Equatorial Guinea, Saint Helena and Djibouti, for example. The high costs and limited availability or reliability of data connectivity pose a barrier to players entering the technology services market and increase the risk of unreliability and lack of efficiency for those in the market.

AfCFTA’s opportunities

AfCFTA’s successful implementation is vital to assist in Africa’s recovery and renewal after COVID-19. At a high level, AfCFTA is focused on stimulating growth, creating employment and diversifying economies across the African continent, through the creation of a single African market for goods and services.

According to the report, AfCFTA’s implementation means there are now unprecedented opportunities for Africa to reap economic and social benefits on the back of the possible future improvements in transport infrastructure, reduction of red tape for cross-border dealings, renewed funding and improved liquidity.

AfCFTA is providing the opportunity for African countries to diversify their economies, scale production capacity and widen the range of products made in Africa, in particular boosting the production of manufactured goods. Closer integration of neighboring economies is one potential avenue for creating scale and competitiveness through domestic market enlargement, thereby promoting development through greater efficiency. This relates to both intraregional trade and trade with non-African nations.

Taking a longer view, regional trade cooperation could potentially become a successful bridge for connecting the region’s wealthier and poorer nations, promoting the growth of value chains and laying the foundations for increased international exports, especially given existing strong trade ties with the European Union (EU) and Asia, for example.

RECs

The report shows that regional integration in Africa has been largely an unattained goal, despite the continent’s Regional Economic Communities (RECs). Overall, the RECs have complex and often conflicting policies and have achieved very different levels of integration to date. And while African nations may trade within their respective RECs under preferential terms, trade beyond these regional agreements is generally subject to most-favored nation (MFN) tariffs, which are much higher and have acted as a disincentive to trade integration.

Despite the challenges, however, some RECs have successfully created effective trade bridges between member countries. For example, Côte d’Ivoire, Kenya, Morocco, Senegal and South Africa have become regional trading hubs, having leveraged the alliances they established through their RECs. One of the ways forward for African economies to further implement effective intraregional trade has been to draw on the lessons learned from the successful RECs.

Challenges

The report also underscores the importance of not only lowering tariff barriers but also addressing non-tariff barriers to intra-regional trade. Some of the most significant obstacles to AfCFTA are inadequate infrastructure, poor trade logistics, onerous regulatory requirements, volatile financial markets, regional conflict and complex and corrupt customs procedures. These can be even more detrimental to trade expansion than tariff measure.

There is a strong consensus that the vast infrastructure gap in Africa, including transport and utilities infrastructure, must be urgently addressed so as not to restrict increased trade integration. Developing infrastructure is also key to addressing the devastating economic impact of COVID-19. 

According to the report, reliable transport infrastructure is vital for businesses to be able to scale up production for regional export or to develop manufacturing bases. The continent also needs to redouble efforts to ensure that an adequate supply of water and electricity is available so that free trade across borders in Africa is successful. Additional investments in utility infrastructure will also incentivize foreign companies to set up production facilities on the continent. Post-COVID-19, investors will be looking at countries where it is easy to do business and transport goods to other African markets. 

The impact of COVID-19 has provided further impetus for African governments to overhaul regulation relating to tariffs, bilateral trade, cross-border initiatives as well as capital flows – which will allow for the full and successful implementation of AfCFTA. Domestic policies will also play a crucial role in alleviating some of the current trade barriers that are not related to tariffs (such as corruption, infrastructure development and security threats). 

Further, the substantially increased focus on the already essential role of digitization means that the development and harmonization of a regulatory framework to integrate Africa’s digital economies is now essential. A sophisticated legal and regulatory framework that enables digital transactions is vital for full participation in global digital trade, which is expected to play a leading role in a post-COVID-19 trade environment

Content is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee similar outcomes. For more information, please visit: www.bakermckenzie.com/en/disclaimers.



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