Out of the starting blocks: One year of the AfCFTA

Just over a year has passed since the African Continental Free Trade Area (AfCFTA) officially started trading on 1st January 2021. The ambitious scheme to revolutionise trade on the continent comprises 54 out of 55 members of the African Union (AU), an area encompassing almost 1.3bn people.

In terms of the number of participating states, the AfCFTA is the largest single market since the creation of the World Trade Organisation. Over several decades, policymakers hope that the AfCFTA will deepen the economic integration of Africa by forging a trading region with a combined gross domestic product of around $3.4 trillion.

According to its ambitious plans, the trade area will reduce input costs, transport costs, and expensive delays for African exporters in reaching regional and global markets. It will reduce tariffs among members, cover policy areas such as trade facilitation and services, and double intra-African trade by 2035.

In a global economy dominated by large countries and blocs, often with competing trade interests, the case for an African trade area is undeniable. But while the AfCFTA will open markets, there will also be losers as well as winners from the arrangement, and the success of the free trade area will therefore depend on how members implement policy reforms and the trade facilitation measures that align with it.

The AU agreed on the AfCFTA in response to an acceptance that trade integration across the continent has long been stymied by poor border and transport infrastructure and regulation. Progress began quickly, with 44 of the AU’s 55 member states agreeing to participate in March 2018. Ten other states quickly followed suit. The only country that hasn’t signed the agreement yet is Eritrea, a largely closed economy.

Pandemic hurdle

But just over a year after the beginning of trading, it’s a good time to take stock of what has been achieved so far and where the scheme has fallen short. With negotiations around many issues needing to be resolved before the trade area can fully function, nobody is expecting such an ambitious scheme to be fully operational in just over a year.

The unforeseen challenge of the Covid-19 pandemic, which necessitated the delay of the trading start date from 1 July 2020 to 1st January 2021, has further dampened expectations of imminent success on several metrics.

Speaking at the Intra-African Trade Fair in Durban in November, AfCFTA secretary-general Wamkele Mene told African Business that Covid-19 has been the biggest challenge since he was elected.

“Covid-19 has really disrupted the work plan that we had for ourselves. What we have learned are two things: One, we have to accelerate Africa’s industrial development, because we were importing – at least during the very first six to nine months of the pandemic – ventilators, germ killing products, the equipment that is needed to fight the pandemic. The second lesson that we’ve learnt is that it’s important to establish Africa’s own supply chains and value chains,” Mene said.

Carlos Lopes, professor in the Mandela School of Public Governance at the University of Cape Town, said the trade area is “progressing well”, and pointed to a high level of political commitment.

“But the expectations were very high, and the momentum created just before the pandemic was so exceptional, that there is a bit of disappointment that we are lagging behind some of the targets that have been agreed upon by the governments.

“In particular, when it comes to negotiation, we have seen the dynamic changing from one of wanting to achieve results quickly, to one of wanting to wait more to see some of the benefits or impact at the national level by some of the countries that have the largest trading share.”

Lopes argues that the main obstacles to a successful AfCFTA are the interference of external actors pushing their agendas – particularly the European Union aggressively pushing bilateral and sub-regional trade deals with African countries – a lack of capacity at the AfCFTA Secretariat to implement the AfCFTA, and not enough consensus on how to re-work trade to meet climate change targets.

When it comes to implementation of the framework, Lopes says that Africa’s three largest economies – Egypt, Nigeria and South Africa – have played a key role in the negotiations, but have “certainly being a bit more circumspect about some of the aspects relating to rules of origin and intellectual property, which is the confluence of industrial policy and trade policy”.

Nigeria has to overcome domestic obstacles, including companies and unions that have “not been very favourable to the agreement,” which Lopes says is “reflected in the way the negotiators from Nigeria are behaving.”

“We are bogged down on these two issues: intellectual property and rules of origin, more than any others. The submission of schedules is acceptable, you have quite a large number of countries that have already submitted their schedules, ratifications are pretty much on target. You have a number of countries that have not yet ratified, but their share in the trade of the continent is not very large,” Lopes says.

Rules of origin prove a stumbling block

The rules of origin determine the national source of a product and will decide which goods will receive preferential treatment under the AfCFTA. The deadline for negotiations to conclude was originally June 2021, but the talks drag on today.   

Andrew Mold, chief of regional integration and the AfCFTA cluster in the Office for Eastern Africa at the United Nations Economic Commission for Africa, has been involved in the talks. He says finalising the rules of origin now boils down to only two sectors: automotive and textiles, with the rest already agreed.

“About 2% of the rules of origin are related to the automobiles and 10% is around textiles. The main stumbling block for finishing is the textiles sector and that’s because there’s a confronting view of whether to have double transformation or single transformation,” he tells African Business.

Single transformation means that at least one textile-making process must take place in Africa for the product to be considered to be from the continent, while double transformation requires two processes within Africa.

“There’s even some that argue for triple transformation which is using African cotton, to African fabrics, to then be apparel,” Mold says.

“Different countries on the continent have different attitudes on this, and South Africa is the one that’s most adamant about double transformation. They see it in their best interests to have that double transformation criteria, while some of the other countries that have built up exports in textiles sectors under preferential market access like AGOA (the US African Growth and Opportunity Act) are happy with the single transformation because it allows them to source cheaply from outside.” 

Mold expects rules of origin negotiations to conclude in the first few months of 2022 and says there are several suggestions on the table to overcome the impasse between countries.

Alongside the ongoing debate over rules of origin, secretary-general Mene believes that transaction expenses between different African countries are also stifling progress as the AfCFTA reaches its first trading birthday.

With 42 different currencies on the continent, African countries will often have to convert payments into euros or US dollars and then back into their local currency to be able to make or receive a payment. Currency convertibility is estimated to cost Africa more than $5bn a year.

Small to medium enterprises on the continent bear the brunt of these costs, Mene says. While unified pan-African currency remains a pipe dream, smaller schemes may help to ease the burden.

Afreximbank is working with the AfCFTA Secretariat to establish the Pan-African Payments and Settlements System (PAPSS), allowing different African countries to transact in their local currencies quickly, without paying conversion fees. Afreximbank is providing more than a $1bn of liquidity to facilitate this and developing the technology and legal framework.

A question of leadership

Without incisive policymaking that caters for Africa’s most vulnerable economies, the AfCFTA could prove to be a force for economic divergence rather than a force for good. Francis Anatogu, executive secretary of Nigeria’s Secretariat of the National Action Committee on AfCFTA, believes that countries that consistently implement the framework of the AfCFTA will see benefits faster than those that are reluctantly dragged along in their wake.

“There will be national sentiments of course, especially where outcomes take longer to manifest. However, I struggle to see how AfCFTA in itself will become a force for economic divergence. What I foresee is that some countries will move faster than others,” Anatogu says.

For example, negotiations are under way to eliminate tariffs on 90% of goods over a five-year period. Mene said at a Chatham House seminar in November that Egypt, Kenya and potentially South Africa had already gazetted reduced import tariffs while others were still negotiating.

For some countries lacking political will or suffering capacity constraints, the process could prove long and arduous.  

 “Member countries have also been trying to get ‘AfCFTA-ready’, which is probably proving harder than they thought,” Teniola Tayo, researcher at the Institute for Security Studies, Dakar, says.

“A major challenge will be the lack of political leadership needed to guide its implementation. There’s a secretariat and a secretary-general, but those offices don’t hold any real power and I guess we’ll see how this affects implementation going forward. Another major challenge is that as things get to the nitty-gritty, the different ways in which the AfCFTA might clash with national plans and priorities are becoming more apparent.”

But there are some reasons for optimism. Anatogu says that during the first year of trading, much effort has been made to mobilise the business community and regulators in favour of the AfCFTA.

“Countries have also started reaching out to one another to discuss their priority products and services and to agree specific actions to promote trade on those products and services. Countries have also started profiling exporters that will lead the charge on intra-Africa trade. My expectation is that all the preparations of 2021 will translate into growth in actual trade in 2022.”

The AfCFTA Secretariat has also introduced online mechanisms which allow exporters and traders to report and resolve non-tariff barriers, such as quotas, embargoes, sanctions and levies.

But he stressed that the AfCFTA was a “long-term project”, and it was not likely that any of the obstacles would disappear within a year.

Collective success

While the pandemic has thrown a spanner in the works and internal political obstacles to progress remain high, it is clear that there still retains a groundswell of political support and goodwill for the trade zone. Botswana’s former trade minister, Bogolo Joy Kenewendo, says that in order to capitalise on the early gains, members need to continue working on the reforms in a spirit of cooperation.

While positive background noise will help, there is no substitute for detailed talks to resolve technical issues. Countries need to actively engage in phase two negotiations of the AfCFTA to make progress on cross-border capital and the protection of investments.

While Africa’s flourishing regional trade areas provide workable models of success, the scope of the AfCFTA means that many technical areas of negotiation will offer unique challenges that require creative solutions.

African countries, says Kenewendo, need to “try to start afresh and try not to base it in terms of what is already happening in regional areas.”

Countries must also ensure that Covid-19’s lessons about the importance of multilateral action are heeded if the AfCFTA is to reach its full potential.

“Countries are still looking more internally, especially with Covid. They need to really realise that it is only with collective action, that we will be able to industrialise faster and to recover faster,” Kenewendo says.