Finweek English Edition
TRADING IN AFRICA
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?
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.
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.”