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Trade 11 November 2021

Trading under the AfCFTA: Growth opportunities

The AfCFTA is a bold move to ensure that trade between African states can grow without being unduly hindered by tariffs. The potential of the agreement is clear but the next steps are crucial to the growth of production industries as well as service industries.

For our clients to make the most of this opportunity, we need to understand three main things:

  • What has already been agreed
  • What is still to come
  • What is really preventing more trade between African partners

The positive headlines are so abbreviated that too many firms are still not clear what has changed and where the opportunities are. African states have committed to amend their tariffs so that 90% of all tariff lines reach zero after five years (or 10 years for some). The remaining tariff lines (10%) can be protected by each country and will differ from place to place. About 10% of tariff lines may be equal to 30% or more of the value of the trade in some cases.

What has already been agreed is a Free Trade Area. It is not a customs union and there is no common external tariff. Some firms think that Africa now has a common external tariff. The European Union, for example, is a customs union and many people wrongly assume that the AfCFTA has the same set-up. We do have a very successful customs union (SACU) but that is much smaller and has been around for 100 years already. Almost all of the largest trade relationships in Africa are already inside a customs area.

The African Continental FTA also functions on top of the foundation of the Regional Economic Communities – the RECs. SADC, Ecowas and the EAC remain in place and are in some ways strengthened by the recent agreement. The secretariat in Accra can do a lot but it will rely on the RECs for many areas of practical trade policy and administration.

What is still to come?

The ‘Rules of Origin’ have not yet been announced. Until we know more about these, we cannot accurately assess the FTA. A clear rule of origin is needed to determine the economic origin of a specific product. Products may have many imported sub-components and very few are ‘wholly obtained’ in one country or region. Sometimes a percentage threshold will be specified to determine the minimum local material content, the minimum local value added and the maximum imported content. Without this set of rules, other countries can simply tranship goods to obtain better market access. Of course, these rules are only as good as the state authorities that enforce them and we know that these already face skills shortages and administrative challenges.

What are the biggest obstacles to trade?

Tariffs are not the only barriers to trade in Africa. The high cost of logistics and delays at border posts are just two examples of non-tariff barriers (NTBs). On many trade routes, these NTBs need to be overcome long before the tariff even comes into play. The upgrading of Africa’s physical infrastructure (ports, rail, roads and bridges) will do a lot to promote trade by lowering the cost of transport.

There is also a little-known mechanism in the FTA that could have an outsize impact on future trade negotiations. Article 4 of the Protocol on Trade in Goods requires that all preferences granted to third countries (under a separate FTA) must also be granted to the African partners within the AfCFTA. This is the principle of reciprocity. Tariffs for trade with India and China (ie, ‘third countries’ outside Africa) must not be lower than those within Africa. This will affect all trade deals with the European Union, the US and China.