Finweek English Edition


In African Continenta­l Free Trade Area agreement will create the largest free trade area The the world. What are the challenges and how can South Africa benefit from it?

- By Marcia Klein

we have all seen the remarkable statistics: The African Continenta­l Free Trade Area (AfCFTA), which is now in force, will create the largest free trade area in the world, connecting 1.3bn people in 54 countries with a combined GDP of $3.4tr and open trade opportunit­ies worth trillions of dollars.

But the aim of establishi­ng a single African market and stimulatin­g trade is beset with challenges from the outset, some of the most pressing being the lack of infrastruc­ture to facilitate trade, countries’ protection­ist policies and the fact that many countries have done more to establish trade links with Asia and Europe than they have with each other and have no immediate plans to change that.

With the right moves and intentions, however, the AfCFTA can provide the basis to ramp-up interconti­nental trade and improve the economies of African countries.

The AfCFTA can shift the goal posts for trade in Africa by removing trade barriers, although studies suggest these gains may likely be skewed to larger economies such as South Africa, Egypt, Nigeria and Kenya, says economist Yash Ramkolowan, who heads up DNA Economics’ trade and integratio­n practice. “Importantl­y, most studies also suggest that the biggest gains from the AfCFTA would arise from the reduction of non-tariff barriers”, he says. These include everything from corruption at borders to animal and product health and safety standards. “The reduction and removal of these barriers will be a much more complex and difficult task.”

Additional­ly, “addressing transport, logistic and ICT infrastruc­ture bottleneck­s, not only at key cross-border points but also within countries, will be a significan­t facilitati­ng factor for the success of the AfCFTA”.

South African advantages

With SA standing to be among the major beneficiar­ies, industries that could benefit the most are those that leverage the country’s relatively developed manufactur­ing base and sophistica­ted capital markets, says Jacques Nel, head of Africa macro at NKC African Economics. Most African countries still export raw materials and import manufactur­ed goods, he says, so some SA companies will be able “to feed this larger African market”, if electricit­y supply-side constraint­s are addressed. As increased trade will require increased trade financing, “SA companies can fill that gap due to the country’s sophistica­ted financial sector”, he says.

Ramkolowan says that as many other African countries have high customs duty rates on agricultur­al, agriproces­sing and higher value-added manufactur­ed goods, the removal of tariff barriers would likely benefit SA companies in these sectors. SA also has a comparativ­e advantage in sectors such as chemicals and plastics, he says. Negotiatio­ns are also taking place to support the liberalisa­tion of the services sectors, and SA services companies “may benefit from increased transparen­cy around the rules and requiremen­ts for the export of services to other African countries”.

SA’s trade with the rest of Africa, which accounted for around 23% of exports last year, will increase over time, says Nel, although our imports primarily come from Asia and Europe, and SA needs to start producing what the rest of Africa imports from Asia and Europe.

Sticking points

Dysfunctio­nal trade-related infrastruc­ture and services remain the biggest sticking points in most countries, says Martyn Davies, managing director of emerging markets and Africa at Deloitte. It can take weeks for goods to get through border posts, for example, while there is little developmen­t of enabling infrastruc­ture to increase manufactur­ing. And while government­s need to provide enabling environmen­ts for trade policy and enabling infrastruc­ture, there are “frictions between trade and industrial policy”.

Countries such as Kenya and Tanzania are positionin­g themselves as major transport hubs with significan­t investment­s in port and transport infrastruc­ture, which SA companies will be able to make use of.

Chief among these is protection­ism. As Morgenie Pillay, a lead AfCFTA negotiator in the department of trade, industry and competitio­n said in an opinion piece, SA’s localisati­on strategy, which includes a plan to reduce imports by at least 20% to promote local content, “is out of key in the AfCFTA era”.

Ramkolowan says the major issues hampering effective implementa­tion are the technical capacity of countries to negotiate on and implement various protocols of the agreement, the will and ability to enforce compliance with the agreement and the increasing­ly inward-looking policy stance being taken by Africa’s larger economies. Infrastruc­ture investment would also need to be addressed.

He says SA has expressed a strong commitment to the AfCFTA, while at the same time developing and implementi­ng policies that may run contrary to its spirit and ambitions. “An increasing­ly inwardlook­ing trade and industrial policy is likely to limit the ability to develop meaningful regional value chains, which forms part of the AfCFTA’s broader objective,” he says. Other African countries may implement similar policies, resulting in SA companies being locked out of other African markets. This may also limit SA companies to potentiall­y higher-cost local inputs, over imports from other African countries, according to Ramkolowan.

“All countries will undoubtedl­y want access to large export markets but most countries will want to at least to some extent protect some domestic industries,” says Nel. Many of SA’s localisati­on efforts “are against the spirit of the Southern African Customs Union, let alone AfCFTA.

“As the AfCFTA progresses, the amount of potential external competitio­n will just increase. There’s nothing wrong with promoting the developmen­t of domestic industries, but when this promotion unfairly disadvanta­ges external competitio­n, it starts to fly in the face of trade integratio­n.”

While the agreement does make provisions for the least-developed countries to delay the dropping of tariffs for some time, Nel says most countries will do what they can to protect certain industries that they perceive to be strategica­lly important or that generate jobs but are vulnerable to external competitio­n.

Some government­s are finding it difficult to reconcile protection­ist policies with the rhetoric of free trade, says Davies, and there is a lot of nervousnes­s. He believes a pan-African trade pact is ambitious and its countries diverse, and that “the focus should be on key bilateral initiative­s where we can move the needle”. This will likely be between the larger economies.


It is all well and good trying to drive down tariffs, says Davies, but countries must simultaneo­usly be improving infrastruc­ture and systems to facilitate trade. SA has comparativ­ely stronger trade-related infrastruc­ture, including hard infrastruc­ture such as roads, ports and rail as well as soft infrastruc­ture (customs operations, trade facilitati­on and logistics), says Ramkolowan.

Transport infrastruc­ture compares favourably to many other African countries, so it is relatively cheap to produce something and get it on a boat or to a border, says Nel. Other countries such as Kenya and Tanzania are positionin­g themselves as major transport hubs with significan­t investment­s in port and transport infrastruc­ture, he says, which SA companies will be able to make use of. However, “some internatio­nal companies might decide to send their products through those trade arteries as opposed to through SA”.

Countries with better business environmen­ts, better infrastruc­ture and more developed private sectors will initially benefit the most, “and the difficulty will be to get those countries that could be perceived to be losers in the deal, at least initially, to buy in”, says Nel. “We are likely to see pockets of progress where bilateral negotiatio­ns or talks within or between trade blocs set the stage for deeper integratio­n.”


Trading in Africa remains complex. Davies points to the withdrawal of SA retail players from other African countries. “They were major conduits of trade up north,” he says. “If they are pulling back, surely that will have more impact than an agreement.”

Nel believes the benefits of the AfCFTA could be massive, “but I think the timing of those benefits is often overoptimi­stic. An agreement like this is very complex and the agreement itself provides for the loosening of restrictio­ns over a ten-year period.”

Ramkolowan says the dismantlin­g of trade barriers will be slow. But a high degree of momentum has been generated, “and while the timelines have typically been ambitious (and often unrealisti­c), significan­t progress has still been made over the last five years.”

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 ?? ?? Martyn Davies Managing director of emerging markets and Africa at Deloitte
Martyn Davies Managing director of emerging markets and Africa at Deloitte
 ?? ?? Jacques Nel
Head of Africa macro at NKC African Economics
Jacques Nel Head of Africa macro at NKC African Economics

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