Botswana: Tripartite Free Trade Area plods along slowly in Africa

Trade between African nations has long been outstripped by intra-regional trade in other parts of the world – for Africa as a whole, intra-regional trade is between 10% and 13% of total trade. This is far lower than in regions such as the EU, where about 60% of trade is between member states, and the Association of South-east Asian Nations, which has a rate of about 25%. Intra-regional trade in North America is put at about 40%.

However, the ratification of the Tripartite Free Trade Sector(TFTA) – potentially later in 2017 – could help change that and push the development of additional intra-regional trade increase. A pan-regional free-trade zone, the TFTA stretches from Cairo to Cape Town and encompasses 26 African nations.

Africa’s Tripartite Free Trade Area would reduce regional tariffs and create a pan-African single market, to aid development and cash in on a growing middle class in the continent. But with member countries often belonging to multiple economic areas, progress is both complex and slow, as Kit Gillet reports.
 

The ratification comes at an significant time for the continent, with real gross domestic product (GDP) increase in sub-Saharan Africa in 2016 estimated to be the weakest since the 2008-09 financial crisis, and with concerns emerging over potential world trade tensions following Donald Trump’s election as US president.

Political message

In June 2015, African leaders officially launched the TFTA, a move that a lot of have described as a potential game changer for the continent, representing a strong political message that the adoption of a single trade regulatory regime and better economic integration in Africa are feasible.

The TFTA will comprise nations from three existing economic blocs: the Common Market for Eastern and Southern Africa (Comesa), established in 1994; the East African Community (EAC), which was revived in 2000; and the Southern African Development Community (SADC), which came into result in 1993. Some African nations are involved in multiple economic zones.

All in all, the TFTA will cover 26 of Africa’s 54 nations and could have a strong impact on the region, with the economies involved estimated to have a combined GDP of $1300bn – additional than half of the continent’s GDP – making it equivalent to the 11th major economy in the world, with a people of about 632 million.

The TFTA’s goal is to create a single African market with freer movement of goods and the progressive elimination of tariffs and other barriers to regional trade. From presently on the agreement goes beyond trade liberalisation, and some view it as additional of a developmental agreement, with programmes to help industries such as agriculture, chemicals and minerals to modernise, grow and achieve economies of scale.

Despite this, several issues still need to be resolved before ratification, with 2017 likely to be a key year for a project that could have a major impact on African trade.

Make or break

Francis Mangeni, director for trade, customs and monetary affairs at the Comesa Secretariat, says 2017 is “really critical”.

One reason is that at the same time as the agreement on the TFTA was initially signed in June 2015 there were some outstanding issues left open, chief part them market liberalisation and issues on rules of origin regarding goods.

These outstanding issues were supposed to be resolved by June 2016. However, at the same time as the deadline passed regional leaders extended it until April 2017. The negotiating parties again failed to meet this deadline, and the EAC postponed ratification to a new deadline of December 2017.

“It means that this year is the turning point,” says Mr Mangeni. “If we don\'t manage to finish these outstanding things, I think the Tripartite area may lose credibility, but on the other hand, if we manage to conclude these outstanding matters again the Tripartite will take off in earnest.”

He points out that only three annexes remain to be settled: rules of origin, trade remedies and dispute settlement. However, these are key issues and negotiations have moved slowly.

Without a full set of guidelines related to rules of origins – knowing which goods can benefit from tariff-free treatment – it is hard to have a functioning FTA. However, unlike in other FTAs, which have multiple classes of rules of origin depending on how much of the goods are manufactured or produced in-country, those creating the TFTA went for product-specific rules.

“So we have to comb through all tariff book – about 7000 tariffs lines – and acknowledge on a policy of origin for each one of them. This is time consuming,” says Mr Mangeni. “Political leaders, and a lot of of us, thought it was going to be very easy; it would just be a matter of merging the three FTAs. Instead, at the technical level things proved complicated. In my own view, we made some strategic mistakes, such as on the rules of origin, which complicated the process.”

High costs

While improving regional trade and integration within the continent has long been a strategic objective, costs are still far higher in Africa than in other developing regions.

In a statement for the fourth China-World Trade Organisation accessions roundtable in December 2015, Anabel Gonzalez, senior director of world practice on trade and competitiveness at the World Bank, said intra-African trade costs are about 50% higher than in east Asia, “and are the highest of intra-regional costs in any developing region”. The result is that Africa has integrated with the rest of the world faster than with itself, she added.

“The trick presently is for nations to open up to each other,” says David Luke, coordinator of the African Trade Policy Centre at the UN Economic Commission for Africa (Uneca). “The average tariff part African nations is 8%, while average the African tariff to the rest of the world is 2%, so there is clearly scope to bring those tariffs down – and that isn’t even mentioning non-tariff barriers.”

Simply removing existing tariffs is likely to have a strong and swift result on cross-border trade. According to Thembinkosi Mhlongo, deputy executive secretary responsible for regional integration at SADC, intra-SADC trade increased substantially following the implementation of the SADC protocol on trade, which laid the foundation for the SADC Free Trade Area in 2008. Trade additional than quadrupled between 2000, at the same time as implementation of the protocol began, and 2012, at the same time as most SADC members removed all remaining tariffs, inclunding on sensitive products.

However, Mr Mhlongo says effective trade increase goes beyond the removal of tariff barriers “and requires the creation of integrated markets that address supply-side constraints and attract investment in agro-processing, price-added manufacturing and better services activities”.

One of the major barriers traditionally affecting the ability of those in African nations to trade cheaply and easily with each other is the poor infrastructure linking a lot of of the nations. Improving road and transportation infrastructure, inclunding reducing the costs and time taken to transport across borders, will be particularly significant to the success of the TFTA and better regional trade integration in general.

According to Uneca’s Mr Luke, there are a lot of infrastructure projects currently ongoing that are cross-border and that are obviously related to this trade potential. “I think the political momentum is there but one has to be cautious and not oversell,” he adds.

Trade breeds success

With a lot of nations in Africa overlapping on their principal exports, notably primary commodities and agricultural goods, there is some caution about opening up domestic markets too much to neighbours. At present, the TFTA is limited to liberalising the trade of merchandise, though there is a hope that a liberalisation of services and other areas of trade will come with subsequent free-trade agreements.

Intra-African trade could play a strong role in the spreading of learning, technology and processing abilities across the continent. “If you look at other parts of the world, particularly in Asia, trade has been fundamental to success there,” says Mr Luke. “I think there is much to learn from that. You have nations such as Malaysia and South Korea that have done so well, and this can be replicated in Africa if the same attention and importance is given to trade.”

He believes that intra-African trade shows plenty of promise compared to trade between Africa and the rest of the world, which is largely based on undeveloped commodities. “Just fighting over the proceeds of natural resources, as a lot of nations have been doing over the completed 60 years, isn’t going to change anything,” he says, adding that African nations are beginning to export consumer products ranging from leather goods to clothing, textiles and motor vehicle assembly.

Many experts as well see the TFTA as an opportunity to push for better integration in the region at the same time as it comes to cross-border supply chains.

“The development of additional intra-regional supply chains will be significant,” says Sarah Baynton-Glen, an Africa economist at Standard Chartered Bank. “There has been so much talk over the completed few years about the size of the consumer market in Africa, but outside of South Africa there isn’t a huge all of nations in the region making the majority out of exporting elsewhere within the region and developing their manufacturing bases to be able to do so.”

However, with about 350 million people in the region (and growing) presently classified as middle class, there is a ready market for regional companies targeting the local consumer market.

Global trade protectionism

The rollout of the TFTA has come at an significant time for Africa. Following decades of strong increase, the World Bank predicted in September 2016 that economic increase across the continent would fall to 1.6% for the year, the lowest level in additional than two decades.

Additionally, concerns are increasing over potential trade tensions caused by the new US government and other world developments. While Trump-induced protectionism is unlikely to be directed at Africa, the impact could still be felt there.

“In 2017 there’s been a lot of focus on Mr Trump and his focus on a additional protectionist policy,” says Ms Baynton-Glen. While she and her colleagues feel it is unlikely Africa will be the direct target of such protectionism, tensions could weaken confidence in emerging market prospects, with sub-Saharan African economies likely to be hit.

“A number of regions may need to start looking a bit additional internally in terms of their trade,” says Ms Baynton-Glen. “Mr Trump has made additional negative rhetoric in terms of emerging markets. If we see a slowdown in world trade in general that would obviously impact on Africa, as the economies broadly across the board are so open and trade very heavily with China and India, for example, so if those economies are affected you would see a knock-on impact on Africa as well.”

Also, with the US potentially embarking on a massive spending spree on infrastructure, African nations could find it difficult to get financing for large-scale projects.

“The impact could as well be felt at the same time as it comes to the ability of African nations to borrow money,” adds Ms Baynton-Glen. “If rates do increase in the US again obviously the cost for African governments to borrow will increase as well. There is a risk for access to external financing and cost of external financing.”

Going forward

In the completed, the patchwork of regional economic areas created a confusing mixture of overlapping preferential trade regimes that at times could be incompatible with each other – at the time the TFTA was launched, the African Union formally recognised eight different regional economic communities.

TFTA is seen as the initial step to rectifying this, but it is not the last. Negotiations for a continental free-trade sector(CFTA) began just five days next the TFTA was signed back in June 2015. The CFTA will build on the TFTA and other existing free-trade agreements, with the aim of creating a continent-wide framework agreement for the liberalisation of the services sector inclunding common rules on investment and the movement of people.

Like the TFTA, CFTA is still a work in process, and much of its success could lie in the final agreement put in place for the TFTA, and again the way in which it is rolled out.

Ratifying the TFTA

The TFTA will not come into force until 14 of the nations involved ratify it; at present none of the 18 nations that have signed on have gone one step further and ratified the agreement. According to those involved, there seems to be a reluctance to take this step before everything has been finalised, but a delay could set the whole process back.

“Nations have been saying they want everything neat and done before they take this step to ratification,” says Comesa’s Mr Mangeni.

He adds that if nations continue to want everything to be completed before ratification, it may take an extra year, “which would be really sad”. However, if they are critical about pushing forward, everything could be done much sooner. “Again other details could be done as ongoing work, as happens in other negotiations,” he says.

He is confident that the process will move forward, as are others involved in the free-trade agreement, such as SADC’s Mr Mhlongo. “By the end of the year, we should be [moving on] with the process of implementation of the TFTA,” he says.